© 2010 The McGraw-Hill Companies, Inc. All rights reserved

1. © 2010 The McGraw-Hill Companies, Inc. All rights reserved

2. Chapter 13 Financial Statementsand Closing Procedures Section 1: Preparing the Financial Statements Section Objectives • Prepare a classified income statement from the worksheet. • Prepare a statement of owner’s equity from the worksheet. • Prepare a classified balance sheet from the worksheet. © 2010 The McGraw-Hill Companies, Inc. All rights reserved.

3. Prepare a classified income statement from the worksheet Objective 1 The Classified Income Statement A classified income statement is sometimes called a multiple-step income statement.

4. QUESTION: What is a single-step income statement? ANSWER: A single-step income statement is a format in which only one computation is needed to determine the net income. (Total Revenue – Total Expenses = Net Income)

5. Operating Revenue Net sales for Whiteside Antiques

6. Cost of Goods Sold The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: • Beginning inventory • Net delivered cost of purchases • Ending inventory

7. Net Delivered Cost of Purchases Purchases + Freight In (Purchases Returns and Allowances) (Purchases Discounts) Net Delivered Cost of Purchases

8. Total Merchandise Available for Sale Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale

9. (Ending Merchandise Inventory) Cost of Goods Sold Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale Cost of Goods Sold

10. Merchandise Inventory is the one account that appears on both the income statement and the balance sheet. • Beginning and ending merchandise inventory balances appear on the income statement. • Ending merchandise inventory also appears on the balance sheet in the Assets section.

11. Cost of Goods Sold Merchandise available for sale Cost of goods sold

12. Gross Profit on Sales • For Whiteside Antiques net sales is the revenue earned from selling antique items. • Cost of goods sold is what Whiteside Antiques paid for the antiques that were sold during the fiscal period. • Gross profit is what is left to cover operating expenses and provide a profit. • Gross profit is the difference between the net sales and the cost of goods sold

13. Gross profit on sales for Whiteside Antiques

14. Operating Expenses Salaries for salespersons and advertising are examples of selling expenses

15. Operating Expenses Rent, utilities, and salaries for office employees are examples of general and administrative expenses

16. Net income from operations

17. Other Income and Other Expenses

18. Net income for Whiteside Antiques

19. Objective 2 Prepare a Statement of Owner’s Equity from the worksheet • The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period. • The ending capital balance for Bill Whiteside, $84,576.80, is used to prepare the balance sheet.

20. Prepare a classified balancesheet from the worksheet QUESTION: What are current assets? ANSWER: Current assets are assets consisting of cash, items that normally will be converted into cash within one year, and items that will be used up within one year. Objective 3

21. Current Assets Current assets for Whiteside Antiques

22. Plant and Equipment • Noncurrent assets are called long-term assets. • An important category of long-term assets is plant and equipment. • For many businesses plant and equipment represents a sizable investment.

23. Current Liabilities Whiteside Antiques Balance Sheet December 31, 2010 Assets Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00 Total Plant and Equipment 31,900.00 Total current liabilities Total Assets 130,616.00 Liabilities and Owner’s Equity Current Liabilities 2,000.00 Notes Payable-Trade Notes Payable-Bank 9,000.00 Accounts Payable 24,129.00 Interest Payable 20.00 Social Security Tax Payable 1,158.40 Medicare Tax Payable 267.40 Employee Income Tax Payable 990.00 Fed. Unemployment Tax Pay. 9.60 State Unemployment Tax Pay. 64.80 Salaries Payable 1,200.00 Sales Tax Payable 7,200.00 Total Current Liabilities 46,039.20

24. Long-Term Liabilities • Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly. • Long-term liabilities include mortgages, notes payable, and loans payable.

25. Owner's Equity The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet.

26. Chapter 13 Financial Statementsand Closing Procedures Section 2: Completing the Accounting Cycle Section Objectives • Journalize and post the adjusting entries. • Journalize and post the closing entries. • Prepare a postclosing trial balance. • Journalize and post reversing entries. McGraw-Hill © 2010 The McGraw-Hill Companies, Inc. All rights reserved.

27. Journalize and post the adjusting entries Objective 4 • All adjustments are shown on the worksheet. • After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. • They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.

28. Adjusting Entries Recognizes income earned in the period. The debit is to an asset account (Interest Receivable) Accrued Income (m – n)

29. Journalize and Post the Closing Entries Objective 5 • At the end of the period, the temporary accounts are closed. • The temporary accounts are: • Revenue accounts • Cost of goods sold accounts • Expense accounts • Drawing account

30. Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary. • Close expense accounts and cost of goods sold accounts with debit balances to Income Summary. • Close Income Summary, which now reflects the net income or loss for the period, to owner's capital. • Close the drawing account to owner's capital. There are four steps in the closing process:

31. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries 2010 Dec. 31 Sales 561,650.00 Interest Income 166.00 Miscellaneous Income 366.00 Purchases Returns and Allowances 3,050.00 Purchases Discounts 3,130.00 Income Summary 568,362.00 Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances. Debit each account, except Income Summary, for its balance. Credit Income Summary for the total.

32. Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.

33. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec.31 Income Summary 50,955.80 Bill Whiteside, Capital 50,955.80 Step 3: Closing the Income Summary Account • The third closing entry transfers the Income Summary balance to the owner's capital account. • This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year. • For Whiteside Antiques, the third closing entry is as follows: Income Summary 12/31 47,000.00 12/31 568,362.00 615,362.00Bal. 50,955.80 Adjusting Entries (a-b) 12/31 52,000.00Closing Entries 12/31 512,406.20564,406.20

34. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec.31 Bill Whiteside, Capital 27,600.00 Bill Whiteside, Drawing 27,600.00 Step 4: Closing the Drawing account This entry closes the drawing account and updates the capital account

35. Posting the Closing Entries • The closing entries are posted from the general journal to the general ledger. • This process brings the temporary account balances to zero. • The word Closing is entered in the Description column.

36. Preparing a Postclosing Trial Balance Objective 6 • Prepare a postclosing trial balance to confirm that the general ledger is in balance. • Only the accounts that have balances – the asset, liability and owner's capital accounts – appear on the postclosing trial balance. • The postclosing trial balance matches the amounts reported on the balance sheet. • To verify this, compare the postclosing trial balance with the balance sheet.

37. Only the accounts that have balances—the asset, liability and owner's capital accounts—appear on the postclosing trial balance Temporary accounts do not appear on the postclosing trial balance Revenue Cost of Goods Sold Expenses Withdrawals

38. Preparing a Postclosing Trial Balance

39. Journalize and post reversing entries QUESTION: What are reversing entries? ANSWER: Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses. Objective 7

40. Step 2Journalize the data about transactions Step 3Post the data about transactions Step 4 Prepare a worksheet Step 1Analyze transactions Step 5Prepare financial statements Step 6Journalize and post adjusting entries Step 9Interpret the financial information Step 7Journalize and post closing entries Step 8Prepare a postclosing trial balance The Accounting Cycle Step 3Post the data about transactions Step 2 Journalize the data about transactions Step 4Prepare a worksheet Step 1 Analyze transactions Step 5Prepare financial statements Step 6 Journalize and post adjusting entries Step 9 Interpret the financial information Step 7 Journalize and post closing entries Step 8 Prepare a postclosing trial balance

41. Thank You for using College Accounting A Contemporary Approach, 1ST Edition Haddock • Price • Farina