13-1 Skyline College Chapter 13. 13-2 At the end of the period, Simpson Antiques prepares three...

13-1

Skyline College

Chapter

13

13-2

At the end of the period, Simpson Antiques prepares three financial statements:

Classified Financial Statements

Income statement Statement of owner's equity Balance sheet

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The the balance sheet is arranged in a classified format.

This makes the financial statement more useful to the readers.

A classified Balance Sheet is formatted where accounts are divided into groups of similar accounts and a subtotal is given for each group.

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The Multiple-StepIncome Statement

A multiple-step income statement is a type of income statement on which several subtotals are computed before the net income is calculated.

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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)

The Single-StepIncome Statement

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The format lists all revenues in one section and all expenses in another section.

Single-step Income Statement

JT Consulting ServicesIncome Statement

Month Ended December 31, 2007

Revenue Fees Income 28,000 Expenses Salaries Expense 5,000 Utilities Expense 600 Supplies Expense 500 Rent Expense 3,000 Depreciation Expense - Equipment 583 Total Expenses 9,683

Net Income for the Month 18,317

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The first section of the multiple-step income statement contains the revenue from operations.

This is the revenue earned from normal business activities.

Other income is presented separately near the bottom of the statement.

Operating Revenue

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The operating revenue for Simpson Antiques is net sales of merchandise.

Operating Revenue

Sales <Sales Returns and Allowances><Sales Discounts>

This is an internal calculation which does not appear on the income statement

Net Sales

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Operating RevenueNet Sales 549,150.00

Cost of Goods Sold

Income StatementYear Ended December 31, 2007

Operating Revenue

Net sales for Simpson Antiques

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Three elements are needed to compute the cost of goods sold:

The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period.

Cost of Goods Sold

Beginning inventory Net delivered cost of purchases Ending inventory

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Purchases+ Freight In <Purchases Returns and Allowances> <Purchases Discounts>

Net Delivered Cost of Purchases

Net Delivered Cost of Purchases

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<Ending Merchandise Inventory>

Cost of Goods Sold

Schedule of Cost of Goods Sold

Beginning Merchandise Inventory+ Net Delivered Cost of Purchases

Total Merchandise Available for Sale

This is usually footnoted in the financial statements rather

than appearing on the income statement

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Cost of Goods Sold 330,120.00

Simpson AntiquesIncome Statement

Year Ended December 31, 2007

Cost of Goods Sold

Cost of goods sold

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Gross profit is the difference between net sales and the cost of goods sold.

Gross Profit on Sales

For Simpson Antiques net sales is the revenue earned from selling clothes.

Cost of goods sold is what Simpson Antiques paid for the clothes that were sold during the fiscal period.

Gross profit is what is left to cover operating expenses and provide a profit.

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Operating RevenueNet Sales 549,150.00Cost of Goods Sold 330,120.00

Gross Profit on Sales 219,030.00Net Nonoperating Expense 100.00Net Income for Year 48,302.25



Gross profit on sales for Simpson Antiques

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Operating expenses are expenses that arise from normal business activities.

Operating Expenses

Simpson Antiques separates operating expenses into two categories:

Selling Expenses General and Administrative Expenses

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Gross Profit on Sales 219,030.00Operating Expenses Selling Expenses

Salaries Expense - Sales 79,690.00Advertising Expense 7,425.00Cash Short or Over 125.00Supplies Expense 4,975.00Depreciation Expense - Store Equipment 2,400.00

Total Selling Expenses 94,615.00General and Administrative Expenses

Rent Expense 27,600.00Salaries Expense - Office 26,500.00Insurance Expense 2,450.00Payroll Taxes Expense 7,371.20Telephone Expense 1,875.00Uncollectible Accounts Expense 800.00Utilities Expense 5,925.00Depreciation Expense - Office Equipment 700.00

Total General and Administrative Expenses 73,221.20Total Operating Expenses 167836.2



Salaries for salespersons and advertising are examples of selling expenses.

Operating Expenses

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Total General and Administrative Expenses 73,221.20Total Operating Expenses 167836.2



Operating Expenses

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

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Net Income or Net Loss from Operations

The format for determining net income (or net loss) from operations is:

Net Income (or Net Loss) from Operations

Gross Profit on Sales

(Total Operating Expenses)

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Operating RevenueNet Sales 549,150.00Cost of Goods Sold 330,120.00





Total General and Administrative Expenses 73,221.20Total Operating Expenses 167,836.20

Net Income from Operations 51,193.80Net Income for Year 48,302.25



Net income from operations

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Other Income and Other Expenses Income that is earned from sources other than normal business

activities appears in the Other Income section.

For Simpson Antiques other income includes interest on notes receivable and one miscellaneous income item.

Expenses that are not directly connected with business operations appear in the Other Expenses section.

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Operating ExpensesNet Income from Operations 51,143.80Other Income

Interest Income 166.00Miscellaneous Income 582.00

Total Other Income 748.00Other Expenses

Interest Expense 770.00Net Nonoperating Expense 22.00



Other Income and Other Expenses

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Net Income or Net Loss

Net income is all the revenue minus all the expenses.

If there is a net loss, it appears in parentheses. Net income or net loss is used to prepare the

statement of owner's equity.

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Cost of Goods Sold 330,120.00Gross Profit on Sales 219,030.00Operating Expenses

Total Selling Expenses 94,615.00Total Operating Expenses 167,836.20

Net Income from Operations 51,193.80Other Income

Interest Income 166.00Miscellaneous Income 582.00

Total Other Income 748.00Other Expenses

Interest Expense 770.00Net Nonoperating Expense 22.00Net Income for Year 51,171.80



Net income for Simpson Antiques

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The Statement of Owner's EquityThe Statement of Owner's Equity 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 Patricia Simpson, $84,792.80, is

used to prepare the balance sheet.

Patricia Simpson, Capital, January 1, 2007 61,221.00Net Income for Year 51,171.80Less Withdrawals for the Year 27,600.00Increase in Capital 23,571.80Patricia Simpson, Capital, December 31, 2007 84,792.80

Simpson AntiquesStatement of Owner's Equity


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Current assets are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year.

Current Assets

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Current AssetsCurrent Assets

Liquidity is the ease with which an item can be converted into cash.

Current assets are listed in the order of liquidity.

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Current AssetsCurrent Assets

Assets Current Assets Cash 13,136.00 Petty Cash Fund 100.00 Notes Receivable 1,200.00 Accounts Receivable 32,000.00 Less Allow. for Doubtful Accounts 1,050.00 30,950.00 Interest Receivable 30.00 Merchandise Inventory 47,000.00 Prepaid Expenses Supplies 1,325.00 Prepaid Insurance 4,900.00 Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00

Simpson AntiquesBalance Sheet


Current assets for Simpson Antiques

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Property, Plant & Equipment

Property, Plant & Equipment (PP&E) is property that will be used in the business for longer than one year.

The balance sheet shows three amounts for each category of plant and equipment :

(Accumulated depreciation) Book value

Asset

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Plant and EquipmentPlant and Equipment

Assets Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00Property, Plant and Equipment Store Equipment 30,000.00 Less Accumulated Depreciation 2,400.00 27,600.00 Office Equipment 5,000.00 Less Accumulated Depreciation 700.00 4,300.00 Total Property, Plant and Equipment 31,900.00 Total Assets 130,616.00 Total Liability and Owner’s Equity 130,616.00



Total property, plant and equipment

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Current Liabilities

Current liabilities are debts that must be paid within one year using current assets.

Current liabilities are usually listed in order of priority of payment.

Management must ensure that funds are available to pay current liabilities when they become due in order to maintain the firm's good credit reputation.

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Current Liabilities Current Liabilities

Assets Prepaid Interest 75.00 6,300.00

Total Current Assets 98,716.00 Total Plant and Equipment 31,900.00 Total Assets 130,616.00

Liabilities and Owner’s Equity Current Liabilities Notes Payable-Trade 2,000.00 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 6,984.00

Total Current Liabilities 45,823.20



Total current liabilities

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Long-Term Liabilities

Long-term liabilities are any debts that are not considered current.

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.

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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.

61,221.0051,171.8027,600.00

23,571.8084,792.80

Net Income for YearLess Withdrawals for the YearIncrease in CapitalPatricia Simpson, Capital, December 31, 2007

Simpson AntiquesStatement of Owner's Equity

Year Ended December 31, 2007Patricia Simpson, Capital, January 1, 2007

Assets Owner’s Equity

Patricia Simpson, Capital 84,792.80Total Liabilities and Owner's Equity 130,616.00



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Adjusting EntriesAdjusting Entries

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.

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Journalizing the Adjusting EntriesJournalizing the Adjusting Entries

Each adjusting entry shows how the adjustment was calculated.

Supervisors and auditors need to understand, without additional explanation, why the adjustment was made.

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Adjusting Entries

Type of Adjustment

Worksheet Reference

Purpose

Inventory (a – b) Removes beginning inventory and adds ending inventory to the accounting records.

Expense (c – e) Matches expense to revenue for the period; the credit is to a contra asset account.

Accrued Expense (f – i) Matches expense to revenue for the period; the credit is to a liability account.

Prepaid Expense (j – l) Matches expense to revenue for the period; the credit is to an asset account.

Accrued Income (m – n) Recognizes income earned in the period. The debit is to an asset account (Interest Receivable) or a liability account (Sales Tax Payable).

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GENERAL JOURNAL PAGE 25

DATE DESCRIPTION POST. DEBIT CREDIT REF.

Income Summary 52,000.00Merchandise Inventory 52,000.00

To transfer beginning inventory to Income Summary

Merchandise Inventory 47,000.00

Income Summary 47,000.00

To record ending inventory

(Adjustment a)

(Adjustment b)

31

Adjusting Entries2007

Dec. 31

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Uncollectible Accounts Expense 800.00Allowance for Doubtful Accounts 800.00

To record estimated loss from uncollectible amounts based on 0.8% of net credit sales of $100,000

Depreciation Expense – Store Equip. 2,400.00

Accum. Depreciation - Store Equip. 2,400.00

To record depreciation for 2007 as shown by schedule on file.

(Adjustment c)

(Adjustment d)

Depreciation Expense – Office Equip. 700.00

Accum. Depreciation - Office Equip. 700.00

To record depreciation for 2007 as shown by schedule on file.

(Adjustment e)

31

31


Dec. 31

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Salaries Expense - Sales 1,200.00Salaries Payable 1,200.00

To record accrued salaries of part-time sales clerks for Dec. 28-31

Payroll Taxes Expense 91.80Social Security Tax Payable 74.40

To record accrued payroll tax on accrued salaries for Dec. 28-31

(Adjustment g)

Medicare Tax Payable 17.40

(Adjustment f)

31


Dec. 31

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Adjusting Entries

Interest Expense 20.00Interest Payable 20.00

(Adjustment i)

(Adjustment h)Payroll Taxes Expense 74.40

Fed. Unemployment Tax Payable 9.60

To record accrued payroll tax on accrued salaries for Dec. 28-31

State Unemployment Tax Payable 64.80

31

2007

Dec. 31

To record interest on a 2-month, $2,000, 12% note payable dated Dec. 1, 2007

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2007

Dec. 31 Supplies Expense 4,975.00Supplies 4,975.00

To record supplies used

Insurance Expense 2,450.00Prepaid Insurance 2,450.00

To record expired insurance on 3-year policy purchased for $7,350 on Jan. 2, 2007

(Adjustment j)

(Adjustment k)

(Adjustment l)Interest Expense 150.00

Prepaid Interest 150.00To record transfer of 2/3 of prepaid interest of $225 for a 3-month, 10% note payable issued to bank on Nov. 1, 2007

31

31

Adjusting Entries

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2007

Dec. 31(Adjustment m)

Interest Receivable 30.00Interest Income 30.00

To record accrued interest earned on a 4-month, 15% note receivable dated Nov. 1, 2007($1,200 x 0.15 x 2/12)

Sales Tax Payable 216.00

Miscellaneous Income 216.00

To record accrued commission earned on sales tax owed for fourth quarter of 2007:Sales Tax Payable $7,200Commission rate x 0.03 Commission due $ 216

(Adjustment n)

31

Adjusting Entries

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Posting the Adjusting EntriesPosting the Adjusting Entries

After the adjustments have been recorded in the general journal, they are promptly posted to the general ledger.

The word Adjusting is entered in the Description column of each general ledger account.

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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

Journalizing and Posting the Closing Entries

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There are four steps in the closing process.There are four steps in the closing process.

1. Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary.

2. Close expense accounts and cost of goods sold accounts with debit balances to Income Summary.

3. Close Income Summary, which now reflects the net income or loss for the period, to owner's capital.

4. Close the drawing account to owner's capital.

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2007

Dec. 31Closing Entries


Sales 561,650.00Interest Income 166.00Miscellaneous Income 582.00Purchases Returns and Allowances 3,050.00Purchases Discounts 3,130.00

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.

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Dec. 31Sales Returns and Allowances 13,000.00


Purchases 321,500.00

Salaries Expense – Sales 79,990.00Advertising Expense 7,425.00Cash Short or Over 125.00 Supplies Expense 4,975.00 Depreciation Expense - Store Equip 2,400.00Rent Expense 27,600.00

Freight In 9,800.00

Salaries Expense - Office 26,500.00

Telephone Expense 1,875.00Uncollectible Accounts Expense 800.00Utilities Expense 5,925.00Depreciation Expense - Office Equip. 700.00 Interest Expense 770.00

Payroll Taxes Expense 7,371.20Insurance Expense 2,450.00

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.

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Income Summary

12/31 47,000.0012/31 568,578.00 615,578.00

Bal. 51,171.80

Adjusting Entries (a-b) 12/31 52,000.00Closing Entries 12/31 512,406.20

564,406.20



Dec. 31 Income Summary 51,171.80Patricia Simpson, Capital 51,171.80

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 Simpson Antiques, the third closing entry is as follows:

Step 3: Closing the Income Summary Account.

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Dec. 31 Patricia Simpson, Capital 27,600.00Patricia Simpson, Drawing 27,600.00

Step 4: Closing the Drawing account.

This entry closes the drawing account and updates the capital account.

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Posting the Closing EntriesPosting 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.

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Preparing a Postclosing Trial Balance

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.

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Cash 13,136.00Petty Cash Fund 100.00Notes Receivable 1,200.00Accounts Receivable 32,000.00Allowance for Doubtful Accounts 1,050.00Interest Receivable 30.00Merchandise Inventory 47,000.00Supplies 1,325.00Prepaid Insurance 4,900.00Prepaid Interest 75.00Store Equipment 30,000.00Accumulated Depreciation - Store Equipment 2,400.00Office Equipment 5,000.00Accumulated Depreciation - Office Equipment 700.00Notes Payable - Trade 2,000.00Notes Payable - Bank 9,000.00Accounts Payable 24,129.00Interest Payable 20.00Social Security Tax Payable 1,158.40Medicare Tax Payable 267.40Employees Income Taxes Payable 990.00Federal Unemployment Tax Payable 9.60State Unemployment Tax Payable 64.80Salaries Payable 1,200.00Sales Tax Payable 6,984.00Patricia Simpson, Capital 84,792.80Totals 134,766.00 134,766.00

Simpson AntiquesPostclosing Trial Balance

December 31, 2007 Assets Current Assets Cash 13,136.00 Petty Cash Fund 100.00 Notes Receivable 1,200.00 Accounts Receivable 32,000.00 Less Allow. for Doubtful Accounts 1,050.00 30,950.00 Interest Receivable 30.00 Merchandise Inventory 47,000.00 Prepaid Expenses Supplies 1,325.00 Prepaid Insurance 4,900.00 Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00 Plant and Equipment Store Equipment 30,000.00 Less Accumulated Depreciation 2,400.00 27,600.00 Office Equipment 5,000.00 Less Accumulated Depreciation 700.00 4,300.00 Total Plant and Equipment 31,900.00 Total Assets 130,616.00



Only the accounts that have balances—the asset, liability and owner's capital accounts—appear on the postclosing trial balance.

Asset Accounts

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December 31, 2007

To verify this, compare the postclosing trial balance with the balance sheet.

Owner’s Equity

Patricia Simpson, Capital 84,792.00 Total Liability and Owner’s Equity 130,616.00



Capital Account

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Revenue

Preparing a Postclosing Trial Balance

Cost of Goods Sold

Expenses Withdrawals

Temporary accounts do not appear on the postclosing trial balance.



December 31, 2007

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Gross profit percentage Current ratio

Ratios and other measurements are used to analyze and interpret financial statements.

Two such measurements are used by Simpson Antiques:

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Gross Profit Percentage

The gross profit percentage is calculated by dividing gross profit by net sales.

For Simpson Antiques, for every dollar of net sales, gross profit was almost 40 cents.

Gross profit $219,030Net sales $549,150

= = 0.3988 = 39.9%

The gross profit percentage is the amount of gross profit from each dollar of sales.

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Current Ratio

Simpson Antiques has $2.15 in current assets for every dollar of current liabilities.

The current ratio is calculated in the following manner:

= 2.15 to 1Current assets $98,716.00 Current liabilities $45,823.20

=

The current ratio provides a measure of a firm's liquidity or ability to pay its current debts.

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Journalizing and Posting Reversing Entries

Reversing entries are journal entries made to reverse the effect of certain adjusting entries involving accrued income or accrued expenses.

Only accruals are reversed.

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2007

Dec. 31 Salaries Expense—Sales 602 1,200.00Salaries Payable 229 1,200.00

(Adjustment f)Adjusting Entries



2008 Jan. 1 Salaries Payable 1,200.00

Salaries Expense—Sales 1,200.00

Reversing Entries

Reversing EntryAt the beginning of the year, a reversing entry is made. This will simplify recordkeeping when the paychecks are issued.

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2008 Jan. 3 Salaries Expense 1,700.00

Cash 1,700.00

On January 3 the payment of $1,700 of salaries is recorded in the normal manner.

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The credit balance in Salaries Expense is unusual because the normal balance of an expense account is a debit.

Salaries Expense Salaries Payable

12/31 1,200 12/31 1,200Closing 1,200

Bal. 1,200 Bal. 0

Reversing Accrued Salaries Expense

1/1 1,2001/1 1,200

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Salaries Expense Salaries Payable

12/31 1,200 12/31 1,2001/1 1,200

Closing 1,2001/1 1,200

Cash

1/3 1,700

After this entry is posted, the expense is properly divided between two periods.

December = $1,200 last periodJanuary = $ 500 this periodTotal = $1,700

1/3 1,700

Bal. 500

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The Accounting Cycle

Step 1 Analyze

transactions

Step 2 Journalize the

data about transactions

Step 3 Post the


Step 4 Prepare

a worksheet

Step 5Prepare financial

statements

Step 6 Journalize and post adjusting

entriesStep 7

Journalize and post closing

entries

Step 8 Prepare a

postclosing trial balance

Step 9 Interpret

the financial information

Step 9 Interpret

the financial information Step 8

Prepare a postclosing trial balance

Step 5Prepare financial

statements

Step 4 Prepare

a worksheet

Step 3 Post the


Step 2 Journalize the


Step 1 Analyze

transactions

Step 6 Journalize and post adjusting

entriesStep 7

Journalize and post closing

entries

13-1 Skyline College Chapter 13. 13-2 At the end of the period, Simpson Antiques prepares three...

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