5-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2012 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin The Accounting Cycle Reporting Financial Results Chapter 5

5-2 THE ACCOUNTING CYCLE Process by which accountants prepare financial statements for an entity for a specific period of time

5-3 Accounting Cycle Journalize Transaction Post to Accounts Adjust Accounts Close Accounts Prepare Financial Statements

5-4 Review – Accounting Cycle 1. Analyze transactions. 2. Prepare general journal entries, and post to general ledger. 3. Prepare unadjusted trial balance. 4. Prepare adjusting journal entries, and post to general ledger. 5. Prepare adjusted trial balance. 6. Prepare financial statements. 7. Prepare closing journal entries, and post to general ledger. 8. Prepare post-closing trial balance.

5-5 A) Preparing Financial Statements Publicly owned companies – those with shares listed on a stock exchange – have obligations to release annual and quarterly information to their stockholders and to the public. The annual report includes comparative financial statements and other information relating to the company’s financial position, business operations, and future prospects. The financial statements contained in the annual report must be audited by a firm of certified public accountants (CPAs).

5-6 Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May.

5-7 Net income also appears on the Statement of Retained Earnings. 1) The Income Statement

5-8 Business Earnings Dividends Business Losses Summarizes the increases and decreases in Retained Earnings during the period. 2) The Statement of Retained Earnings

5-9 Now, let’s prepare the Balance Sheet. The Statement of Retained Earnings

5-10 3) The Balance Sheet

5-11 Relationships Among the Financial Statements

5-12 Notes to the Financial Statements Examples of Items Disclosed  Lawsuits pending  Scheduled plant closings  Governmental investigations  Significant events occurring after the balance sheet date  Specific customers that account for a large portion of revenue  Unusual transactions and related party transactions Examples of Items Disclosed  Lawsuits pending  Scheduled plant closings  Governmental investigations  Significant events occurring after the balance sheet date  Specific customers that account for a large portion of revenue  Unusual transactions and related party transactions Drafting the Notes that Accompany Financial Statements

5-13 B) Closing the Temporary Accounts 1.Close Revenue accounts to Income Summary. 2.Close Expense accounts to Income Summary. 3.Close Income Summary account to Retained Earnings. 4.Close Dividends to Retained Earnings. The closing process gets the temporary accounts ready for the next accounting period.

5-14 Closing the Temporary Accounts

5-15 Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue account. Closing Entries for Revenue Accounts

5-16 Closing Entries for Revenue Accounts

5-17 Since expense accounts have a debit balance, the closing entry requires a credit to the expense accounts. Closing Entries for Expense Accounts

5-18 Closing Entries for Expense Accounts Net Income

5-19 Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income Summary. Closing the Income Summary Account

5-20 The balance in Income Summary is now zero. Closing the Income Summary Account

5-21 Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends account. Closing the Dividends Account

5-22 Closing the Dividends Account

C) AFTER-CLOSING TRIAL BALANCE The final Trial Balance after closing will display only permanent, balance sheet accounts. The Retained Earnings in this Trial Balance is the ENDING retained earnings for the period and includes the effects of all the revenues, expenses, and dividends for the period.

After-Closing Trial Balance List of permanent accounts and their balances after posting closing entries Total debits and credits must be equal

5-25 After-Closing Trial Balance

5-26 Evaluating Profitability Evaluating Liquidity EVALUATING THE BUSINESS Net Income Percentage Net Income Total Revenue = Return on Equity Net Income Avg. Stockholders’ Equity = Current Ratio Current Assets Current Liabilities = Working Capital Current Assets – Current Liabilities =

5-27 Monthly Quarterly Jan. 1 Dec. 31 Annually Many companies prepare financial statements at various points throughout the year. Interim Financial Statements Preparing Financial Statements Covering Different Periods of Time

5-28 End of Chapter 5