Year-end accounting for merchandising busines Chapter 15

Income statement (easy version) p. 571 Revenues: Net sales $100 Interest revenue 100 Rent revenue 100 Subscription revenue 100 Total revenues 500 Expenses: Cost of goods sold 100 Wages expense….. 100 Total expenses 200 Net Income 300

Income statement (Multiple-step) Check out page 572 (too long to put here!)

Statement of owners’ equity p. 573 Owner, capital, January 1, 20xx $500,000 Add additional investments 50,000 Total investment 550,000 Net income (loss) for the year $25,000 Less (Plus) withdrawals for the year 3,000 Increase (Decrease) in capital 22,000 Owner, capital, December 31, 20xx $572,000

Balance sheet p. 574 Current assets – assets expected to be used up or converted to cash within one year Examples – cash, accounts receivable, notes receivable, supplies, prepaid insurance Current liabilities – liabilities expected to be paid/addressed within one year Examples – accounts payable, notes payable, wages payable, sales tax payable, FICA tax payable Working capital – difference between current assets and current liabilities Practicality – a business’s ability to meet day to day operations Useful to investors (i.e. – Shark Tank)

Balance sheet analysis Current ratio – measure of ability to pay current liabilities Current assets / current liabilities Quick ratio – measure of ability to raise cash quickly (money not tied up) Quick assets / current liabilities Quick assets = cash, accounts receivable, temporary investments that can be cashed in quickly

Interstatement analysis Return on owner’s equity – net income relative to owner’s investment in the company Net income / average owner’s equity Accounts receivable turnover – how many times accounts receivable were collected during the accounting period Net credit sales for the period / average accounts receivable Average accounts receivable – the average that customers owe you at any time (Beginning balance + ending balance) / 2 Average collection period – how long it takes customers to pay 365 / accounts receivable turnover

More Interstatement analysis Inventory turnover – how often you sold your inventory Cost of goods sold for the period / average inventory Average days to sell– how long you keep your inventory on the shelf before it’s sold 365 days / inventory turnover

Closing entries Purpose – to close out all temporary accounts (income statement accounts, owner’s drawing account) and prepare the ledger ready for another, brand new accounting period. Steps: 1. All income statement accounts with credit balances are debited -> Income Summary. 2. All income statement accounts with debit balances are credited -> Income Summary. 3. Resulting balance in Income Summary (Net Income/Loss) transferred to owner’s capital. 4. Balance in owner’s drawing account is transferred to owner’s capital account. Post-Closing Trial Balance Purpose – to prove the general ledger is in balance (debits = credits).

Reversing entries Purpose – to avoid the double counting of revenues or expenses and to allow for the efficient processing of documents. It is simply the reversal of some adjusting entries, done on the first day of the year. Wages Payable and Interest Payable are two good examples.

Reversing entries Example: You owe employees $5,000 for the last week of the year, payable Friday evening. December 31, however is on Wednesday. Adjusting entry: Wages Expense 3,000 (December 31) Wages Payable 3,000 Closing entry: Income Summary 3,000 (December 31) Wages Expense 3,000 Reversing entry: Wages Payable 3,000 (January 1) Wages Expense 3,000 Payment: Wages Expense 5,000 (January 2) Cash 5,000

assignments Read pages 568 – 583 Exercises 3, 4, 7 Problems 8A, 9A, 10A Pages 601-603