Module 3:
Constructing Financial Statements and Analyzing Transactions
The Accounting Cycle
T-Accounts and Journal Entries
Asset (Inventory) Transaction
Cash Dividends
• All transactions between the company and its shareholders are considered financing transactions. This includes payment of dividends, the issuance of stock, and any subsequent stock repurchase. • Financing transactions affect only the balance sheet; they do not affect the income statement.
Adjusting Accounts
Types of Adjustments
Cash received or paid before recognition of revenue or expense:
Prepaid expenses Unearned revenues
Cash received or paid after recognition of revenue or expense
Accrued expenses Accrued revenues
Prepaid Expenses (Assets)
Assume that Apple pays $200 to purchase time on MTV for future iPod ads. Apple’s cash account decreases by $200, and an asset called prepaid advertising increases by the same amount.
Unearned Revenues (Liabilities)
Assume that Apple receives $400 cash from a customer as advance payment on a multi-unit iPod sale to be delivered next month.
Recognition of Unearned Revenue as Earned Revenue
Assume that Apple delivers the iPods a month later (but still within the fiscal quarter).
Accrued Expenses (Liabilities)
Assume that Apple’s sales staff earns $100 of sales commissions this period that will not be paid until next period.
Accrued Revenues (Assets)
Assume that Apple delivers iPods to a customer in Germany who will pay next quarter. The sales price for those units is $500 and the cost is $400.
Apple’s transactions thus far …
Unadjusted Trial Balance (not 100% Accrual Basis) Adjustin g Entries Adjusted Trial Balance (100% Accrual Basis)
Create Financial Statement s
I/S B/S SCF SE
Trial Balance
The trial balance is a listing of all accounts and their balances at a point in time. Its purpose is to prove the mathematical equality of debits and credits, provide a useful tool to uncover any accounting errors, and help prepare the financial statements.
Adjusted Trial Balance For Apple
Preparation of the Financial Statements
Income Statement
Preparation of the Financial Statements
Retained Earnings Computation
Preparation of the Financial Statements
Balance Sheet
Preparation of the Financial Statements
Statement of Stockholders’ Equity
Preparation of the Financial Statements
Statement of Cash Flows (from cash column)
Statement of Cash Flows – Indirect Method
Operating cash flows:
Cash Generated (Used) from changes in Balance Sheet Accounts
ASSET A/R Beg balance Accrual Basis # Credit Sales Ending balance xx xxx xx xxx Cash Collections Cash Basis #
Cash Generated (Used) from changes in Balance Sheet Accounts
LIABLITY A/P xx Beg balance Cash Basis # Cash Payments xxx xxx Purchases on Credit xx Ending balance Accrual Basis #
Formal Presentation of Apple’s SCF
Closing Process
The closing process refers to the ‘zeroing out’ of revenue and expense accounts (the temporary accounts) by transferring their ending balances to retained earnings. Balance sheet accounts carry over from period to period and are called permanent accounts.) The result is that all income statement accounts begin the next period with zero balances.
Closing Process Journal Entries
Closing Process Journal Entries
Closing Process Journal Entries