6 - 1 © 2005 Accounting 1/e, Terrell/Terrell Completing the Accounting Cycle and Preparing...

6 - 6 - 11© 2005 © 2005 Accounting 1/eAccounting 1/e, Terrell/Terrell, Terrell/Terrell

Completing the Completing the

AccountingAccounting

Cycle and PreparingCycle and Preparing

Financial StatementsFinancial StatementsChapter 6Chapter 6


Learning Objective 1Learning Objective 1

Reconcile a bank Reconcile a bank

statement.statement.


Cash in BankCash in Bank

It is difficult to relate the Cash in BankIt is difficult to relate the Cash in Bankaccount to any single account.account to any single account.

cash inflows can be related to revenues,cash inflows can be related to revenues,borrowings, and capital contributions.borrowings, and capital contributions.

Outflows relate to expenses, liabilityOutflows relate to expenses, liabilityrepayments, and dividends.repayments, and dividends.



The bank refers to debits and creditsThe bank refers to debits and credits from the bank’s perspective.from the bank’s perspective.

On June 3, 2004, Elevation Sports, Inc.,On June 3, 2004, Elevation Sports, Inc.,received its bank statementreceived its bank statement

from Vail National Bank.from Vail National Bank.



Vail National BankVail National Bank

Account Name:Account Name: Account Number: 105833842Account Number: 105833842Elevation Sports, Inc.Elevation Sports, Inc.500 North Aspen Street500 North Aspen Street Date:Date: May 31, 2004May 31, 2004Vail, ColoradoVail, Colorado

Previous statement balance 04-30-04Previous statement balance 04-30-04 $105,452.00$105,452.0042 checks or other debits totaling42 checks or other debits totaling 89,000.00 89,000.00Bank service chargeBank service charge 45.00 45.00Current balance as of statement date 05-31-04Current balance as of statement date 05-31-04 $145,986.00$145,986.00


Reconciling the Bank Reconciling the Bank AccountAccount

Balance per bankBalance per bank

+ Deposits+ Depositsin transitin transit

– – OutstandingOutstandingcheckschecks

= Balance= Balance

The bank balanceThe bank balanceand theand the

book balancebook balancemay not agree.may not agree.



Bank service chargesBank service charges

Transposition errorsTransposition errors

NSF checksNSF checks

Bank errorsBank errors



Balance per bank statement, May 31:Balance per bank statement, May 31: $145,986$145,986Deposits in transit:Deposits in transit: $ 11,559$ 11,559Outstanding checks:Outstanding checks: $ 29,161$ 29,161Service charges:Service charges: $ 45$ 45Merchants fee:Merchants fee: $ 732$ 732Balance per books:Balance per books: $129,161$129,161

Prepare a bank reconciliation and journal entries.Prepare a bank reconciliation and journal entries.



Balance per bank statement, May 31Balance per bank statement, May 31 $145,986$145,986Additions:Additions:

Deposits in transitDeposits in transit 11,559 11,559Deductions:Deductions:

Outstanding checksOutstanding checks 29,161 29,161Corrected bank balanceCorrected bank balance $128,384 $128,384

Balance per books, May 31Balance per books, May 31 $129.161 $129.161Deductions:Deductions:

Service chargesService charges $ 45$ 45Merchants FeeMerchants Fee 732 732 777 777

Corrected book balanceCorrected book balance $128,384 $128,384



Bank Service ChargesBank Service Charges 45 45Credit Card Merchant DiscountCredit Card Merchant Discount 732732

Cash in Bank Cash in Bank 777777To correct bank balance per bank reconciliationTo correct bank balance per bank reconciliation



Adjust the accounts to Adjust the accounts to

applyapply

the matching principle.the matching principle.


Aged AccountsAged AccountsReceivable ScheduleReceivable Schedule

100548100548102453102453148921148921OtherOtherTotalsTotals

$ 270$ 270 2,7002,700 900900 6,0306,030$9,900$9,900

$ 270$ 270 2,7002,700

6,0306,030 $9,000$9,000

00 00

$ 900$ 900 00

$9,900$9,900

0000000000

0000000000

Elevation Sports, Inc.Elevation Sports, Inc.Aged Accounts Receivable ScheduleAged Accounts Receivable Schedule

May 31, 2004May 31, 2004

CustomerCustomernumbernumber AmountAmount

0-300-30daysdays

30-6030-60daysdays

60-9060-90daysdays

OverOver90 days90 days


Uncollectible AccountsUncollectible Accounts

Assume that only one-half the amount owedAssume that only one-half the amount owedfor over 90 days could be collected.for over 90 days could be collected.

What is the journal entry?What is the journal entry?

Doubtful Account ExpenseDoubtful Account Expense 450450Allowance for Doubtful AccountsAllowance for Doubtful Accounts 450450

To record potential doubtful accountsTo record potential doubtful accounts


Merchandise InventoryMerchandise Inventory

Cost of Other Goods SoldCost of Other Goods Sold 30,890 30,890Merchandise InventoryMerchandise Inventory 30,890 30,890

To record the cost of purchasedTo record the cost of purchasedmerchandise soldmerchandise sold

InventoryInventory $35,287$35,287Ending balanceEnding balance – 4,397– 4,397Cost of goods soldCost of goods sold $30,890$30,890


Components ofComponents ofManufacturing CostsManufacturing Costs

DirectDirectmaterials materials

DirectDirectlaborlabor

IndirectIndirectlaborlabor

IndirectIndirectmaterialsmaterials

FactoryFactoryoverheadoverhead


The Flow ofThe Flow ofManufacturing CostsManufacturing Costs

Raw materialsRaw materialsinventoryinventory

DirectDirectlaborlabor

ManufacturingManufacturingoverheadoverhead

Work-in-processWork-in-processinventoryinventory

MaterialMaterialrequisitionrequisition

Finished goodsFinished goodsinventoryinventory

Transfer whenTransfer whencompletedcompleted

Cost of goods soldCost of goods sold

Transfer whenTransfer whensoldsold


Statement of Cost ofStatement of Cost ofGoods ManufacturedGoods Manufactured

June 1, 2003 to May 31, 2004:June 1, 2003 to May 31, 2004:

Raw materials purchasedRaw materials purchased $ 38,655$ 38,655Direct laborDirect labor $101,250$101,250Manufacturing overheadManufacturing overhead $155,852$155,852

BeginningBeginning EndingEndingRaw materialsRaw materials -0--0- $ 2,315$ 2,315Work in processWork in process -0--0- $14,864$14,864

Finished goodsFinished goods -0--0- $13,634$13,634



Beginning inventoryBeginning inventory $ 0$ 0Add: PurchasesAdd: Purchases 38,655 38,655Materials available for useMaterials available for use $ 38,655$ 38,655Less: Ending inventoryLess: Ending inventory 2,315 2,315Direct materials usedDirect materials used $ 36,340$ 36,340Direct laborDirect labor 101,250 101,250Manufacturing overheadManufacturing overhead 155,852 155,852Costs transferred to WIPCosts transferred to WIP $293,442$293,442

Elevation Sports, Inc.Statement of Cost of Goods Manufactured

For the Year Ended May 31, 2004



Costs transferred to WIPCosts transferred to WIP $293,442$293,442Add: Beginning WIP inventoryAdd: Beginning WIP inventory 0 0Total work in processTotal work in process $293,442$293,442Less: Ending WIP inventoryLess: Ending WIP inventory 14,864 14,864Total costs of goods manufacturedTotal costs of goods manufactured and transferred to finished goodsand transferred to finished goods $278,578$278,578

Elevation Sports, Inc.Statement of Cost of Goods Manufactured

For the Year Ended May 31, 2004


Finished Goods InventoryFinished Goods Inventoryand Cost of Goods Soldand Cost of Goods Sold

Beginning finished goods inventoryBeginning finished goods inventory $ 0$ 0++ Cost of goods manufacturedCost of goods manufactured 278,578 278,578== Goods available for saleGoods available for sale $278,578$278,578–– Ending finished goods inventoryEnding finished goods inventory 13,634 13,634== Cost of manufactured goods soldCost of manufactured goods sold $264,944$264,944


Supplies Inventory ExampleSupplies Inventory Example

The account shows $1,330; however, onlyThe account shows $1,330; however, only$593 of supplies were still on hand.$593 of supplies were still on hand.

What is the adjusting entry?What is the adjusting entry?

Office Supplies ExpensesOffice Supplies Expenses 737737Supplies InventorySupplies Inventory 737737

To record office supplies usedTo record office supplies used


Learning Objectives 3 Learning Objectives 3 and 4and 4

Prepare classifiedPrepare classified

income statements.income statements.

Compute basic Compute basic

earnings per earnings per

share.share.


Preparing Financial Preparing Financial StatementsStatements

To compute income taxes,To compute income taxes,multiply the before-tax incomemultiply the before-tax income

by the tax rate of 40%.by the tax rate of 40%.

This tax will be an expense onThis tax will be an expense onthe income statement and athe income statement and aliability on the balance sheet.liability on the balance sheet.


Earnings per ShareEarnings per Share

EPS is a ratio which reveals how much ofEPS is a ratio which reveals how much ofa company’s net earnings is attributablea company’s net earnings is attributable

to each share of common stock.to each share of common stock.

To comply with GAAP, income statements mustTo comply with GAAP, income statements mustdisclose the firm’s earnings per share.disclose the firm’s earnings per share.


Earnings per ShareEarnings per Share

EPS = Net income ÷ EPS = Net income ÷ Number of shares of common stock outstandingNumber of shares of common stock outstanding

Elevation Sports, Inc.Elevation Sports, Inc.EPS = $63,181 ÷ 4,000 = $15.79 EPS = $63,181 ÷ 4,000 = $15.79


Elevation Sports, Inc.Elevation Sports, Inc.Income StatementIncome Statement

For the Year Ended May 31, For the Year Ended May 31, 20042004

Net salesNet sales $527,146$527,146Cost of goods soldCost of goods sold 295,834 295,834Gross profitGross profit $231,312$231,312Selling expensesSelling expenses $48,334$48,334Administrative expensesAdministrative expenses 72,189 72,189Total operating expensesTotal operating expenses 120,523 120,523Operating incomeOperating income $110,789$110,789Other revenues and expensesOther revenues and expenses (5,488) (5,488)Income before income taxesIncome before income taxes $105,301$105,301Income taxesIncome taxes 42,120 42,120Net incomeNet income $ 63,181$ 63,181Earnings per shareEarnings per share $ 15.79$ 15.79

Must be reported on the income statement.Must be reported on the income statement.



Prepare statement of Prepare statement of

equity.equity.


Statement ofStatement ofStockholders’ EquityStockholders’ Equity

Elevation Sports, Inc.Statement of Stockholders’ EquityFor the Year Ended May 31, 2004

Balance, June 1, 2003Balance, June 1, 2003Add:Add: Sale ofSale of

common stockcommon stockNet incomeNet income

Deduct: DividendsDeduct: DividendsBalance, May 31, 2004Balance, May 31, 2004

$ -0-$ -0-

40,00040,000

$40,000$40,000

$ -0-$ -0-

60,00060,000

$60,000$60,000

-0--0-

63,18163,181 (4,000)(4,000)$59,181$59,181

$ -0-$ -0-

100,000100,000 63,18163,181 (4,000)(4,000)$159,181$159,181

Commonstock

Paid-incapital

Retainedearnings Total



Prepare classifiedPrepare classified

balance sheets.balance sheets.


Elevation Sports, Inc.Elevation Sports, Inc.Balance SheetBalance SheetMay 31, 2004May 31, 2004

Assets:Assets:Current assetsCurrent assets

CashCash $128,834$128,834Accounts receivableAccounts receivable $9,900$9,900Less: Allowance for doubtful accountsLess: Allowance for doubtful accounts 450 450 9,450 9,450Merchandise inventoryMerchandise inventory 4,397 4,397Raw materials inventoryRaw materials inventory 2,315 2,315Work-in-process inventoryWork-in-process inventory 14,864 14,864Finished goods inventoryFinished goods inventory 13,634 13,634Supplies inventorySupplies inventory 593 593Prepaid rentPrepaid rent 12,000 12,000Prepaid insurancePrepaid insurance 5,000 5,000

Total current assetsTotal current assets $190,637$190,637



Property, plant, and equipmentProperty, plant, and equipmentAdministrative equipmentAdministrative equipment $ 5,100$ 5,100Selling furniture and fixturesSelling furniture and fixtures 8,400 8,400Production equipmentProduction equipment 89,600 89,600 $103,100$103,100Less: Accumulated depreciationLess: Accumulated depreciation 17,800 17,800

Total property, plant, and equipmentTotal property, plant, and equipment $ 85,300$ 85,300Intangible assetsIntangible assets

PatentsPatents $ 10,083$ 10,083CopyrightsCopyrights 570 570TrademarksTrademarks 1,425 1,425

Total intangible assetsTotal intangible assets $$ 12,078 12,078Total assetsTotal assets $288,015$288,015



Liabilities and stockholders’ equity:Liabilities and stockholders’ equity:Current liabilitiesCurrent liabilities

Accounts payableAccounts payable $ 6,942$ 6,942Other accounts payableOther accounts payable 11,812 11,812Interest payableInterest payable 6,000 6,000Payroll taxes payablePayroll taxes payable 1,400 1,400Sales taxes payableSales taxes payable 560 560Income taxes payableIncome taxes payable 42,120 42,120Current portion of long-term note payableCurrent portion of long-term note payable 15,000 15,000Total current liabilitiesTotal current liabilities $ 83,834$ 83,834

Long-term liabilities:Long-term liabilities:Note payable – Vail National BankNote payable – Vail National Bank $ 60,000$ 60,000Less: Current portionLess: Current portion 15,000 15,000Total long-term liabilitiesTotal long-term liabilities 45,000 45,000

Total liabilitiesTotal liabilities $128,834$128,834



Stockholders’ equityStockholders’ equityPaid-in capital:Paid-in capital:Common stock, $10 par value,Common stock, $10 par value, 100,000 shares authorized, 4,000100,000 shares authorized, 4,000 shares issued and outstandingshares issued and outstanding $ 60,000$ 60,000Paid-in capital in excess of parPaid-in capital in excess of par – – common stockcommon stock 40,000 40,000

Total paid-in capitalTotal paid-in capital $100,000$100,000Retained earningsRetained earnings 59,181 59,181

Total stockholders’ equityTotal stockholders’ equity 159,181 159,181Total liabilities and stockholders’ equityTotal liabilities and stockholders’ equity $288,015$288,015



Close the temporary Close the temporary

accounts.accounts.


Closing the AccountsClosing the Accounts

To close the books, the temporaryTo close the books, the temporaryor nominal accounts are closed toor nominal accounts are closed to

the Income Summary account.the Income Summary account.

A fiscal year is a year that differs from theA fiscal year is a year that differs from thecalendar year but normally coincides with thecalendar year but normally coincides with the

end of the normal business cycle for its industry.end of the normal business cycle for its industry.



1. Close the revenue and gain1. Close the revenue and gainaccounts to Income Summary.accounts to Income Summary.

2. Close the expense and loss2. Close the expense and lossaccounts to Income Summary.accounts to Income Summary.



3. Close the Dividend account3. Close the Dividend accountto Retained Earnings.to Retained Earnings.

4. Close the Income Summary4. Close the Income Summaryaccount to Retained Earnings.account to Retained Earnings.


Elevation Sports, Inc.Elevation Sports, Inc.General JournalGeneral Journal

Retail Sales – SnowboardsRetail Sales – Snowboards 330,750330,750Wholesale Sales – SnowboardsWholesale Sales – Snowboards 151,650151,650Retail Sales – OtherRetail Sales – Other 52,385 52,385Interest RevenueInterest Revenue 512 512

Sales ReturnsSales Returns 5,213 5,213Sales DiscountsSales Discounts 2,426 2,426Income SummaryIncome Summary 527,658527,658

To close revenue accountsTo close revenue accounts



Income SummaryIncome Summary $464,477$464,477Cost of Snowboards SoldCost of Snowboards Sold 264,944264,944Cost of Other Goods SoldCost of Other Goods Sold 30,890 30,890Total of 600 expense accountsTotal of 600 expense accounts 48,334 48,334Total of 700 expense accountsTotal of 700 expense accounts 72,189 72,189Total of 800 expense accountsTotal of 800 expense accounts 48,120 48,120

To close the expense accountsTo close the expense accounts



Retained EarningsRetained Earnings 4,000 4,000DividendsDividends 4,000 4,000

To close to Retained EarningsTo close to Retained Earnings

Income SummaryIncome Summary 63,18163,181Retained EarningsRetained Earnings 63,18163,181



Prepare a post-closingPrepare a post-closing

trial balance.trial balance.


Elevation Sports, Inc.Elevation Sports, Inc.Post-Closing Trial BalancePost-Closing Trial Balance

May 31, 2004May 31, 2004

101101 Cash in bankCash in bank $128,384$128,384110110 Accounts receivableAccounts receivable 9,900 9,900111111 Allowance for doubtful accountsAllowance for doubtful accounts $ 450$ 450130130 Merchandise inventoryMerchandise inventory 4,397 4,397131131 Raw materials inventoryRaw materials inventory 2,315 2,315132132 Work-in-process inventoryWork-in-process inventory 14,864 14,864133133 Finished goods inventoryFinished goods inventory 13,634 13,634134134 Supplies inventorySupplies inventory 593 593140140 Prepaid rentPrepaid rent 12,000 12,000141141 Prepaid insurancePrepaid insurance 5,000 5,000154154 Admin. equipment and furnitureAdmin. equipment and furniture 5,100 5,100156156 Selling furniture and fixturesSelling furniture and fixtures 8,400 8,400158158 Production equipmentProduction equipment 89,600 89,600160160 Accumulated depreciationAccumulated depreciation 17,800 17,800


Elevation Sports, Inc.Elevation Sports, Inc.Post-Closing Trial BalancePost-Closing Trial Balance

May 31, 2004May 31, 2004

180180 PatentsPatents 10,083 10,083185185 CopyrightsCopyrights 570 570190190 TrademarksTrademarks 1,425 1,425201201 Accounts payableAccounts payable 6,942 6,942205205 Other accounts payableOther accounts payable 11,812 11,812210210 Interest payableInterest payable 6,000 6,000212212 Payroll taxes payablePayroll taxes payable 1,400 1,400213213 Sales taxes payableSales taxes payable 560 560214214 Income taxes payableIncome taxes payable 42,120 42,120250250 Notes payable – Vail BankNotes payable – Vail Bank 60,000 60,000310310 Common stockCommon stock 40,000 40,000311311 Paid-in capital – common stockPaid-in capital – common stock 60,000 60,000320320 Retained earningsRetained earnings 59,181 59,181

TotalsTotals $306,265$306,265 $306,265$306,265


End of Chapter 6End of Chapter 6

6 - 1 © 2005 Accounting 1/e, Terrell/Terrell Completing the Accounting Cycle and Preparing...

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Transcript of 6 - 1 © 2005 Accounting 1/e, Terrell/Terrell Completing the Accounting Cycle and Preparing...