© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Accounting Cycle Reporting Financial Results Chapter 5

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 To prepare an income statement, a statement of retained earnings, and a balance sheet.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin This is the Adjusted Trial Balance for JJ’s. Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Net income also appears on the Statement of Retained Earnings.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Business Earnings Dividends Business Losses This statement summarizes the increases and decreases in Retained Earnings during the period. Statement of Retained Earnings

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Now, let’s prepare the Balance Sheet.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 To explain how the income statement and the statement of retained earnings relate to the balance sheet.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Preparing Financial Statements

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 To explain the concept of adequate disclosure.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 Notes to the Financial Statements

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 To explain the purposes of closing entries; prepare these entries.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Closing the Temporary Accounts  Close Revenue accounts to Income Summary.  Close Expense accounts to Income Summary.  Close Income Summary account to Retained Earnings.  Close Dividends to Retained Earnings. The closing process gets the temporary accounts ready for the next accounting period.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Let’s prepare the closing entries for JJ’s Lawn Care Service. Closing the Temporary Accounts

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue account. Closing Entries for Revenue Accounts

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Closing Entries for Revenue Accounts

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Since expense accounts have a debit balance, the closing entry requires a credit to the expense accounts. Closing Entries for Expense Accounts

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Closing Entries for Expense Accounts Net Income

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income Summary. Closing the Income Summary Account

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The balance in Income Summary is now zero. Closing the Income Summary Account

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends account. Closing the Dividends Account

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Closing the Dividends Account

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To prepare an after- closing trial balance.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin After all closing entries are made, JJ’s After-Closing Trial Balance looks like this.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To use financial statement information to evaluate profitability and liquidity.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Did the business earn a profit or loss in the current period? What is the business’s future potential for a profit? Evaluating Profitability Evaluating the Business Does the business have assets available to pay debts as they become due? Evaluating Liquidity

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 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 =

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO7 To explain how interim financial statements are prepared in a business that closes its accounts only at year-end.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Monthly Quarterly Jan. 1Dec. 31 Annually Many companies prepare financial statements at various points throughout the year. Interim Financial Statements Preparing Financial Statements Covering Different Periods of Time

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Ethics, Fraud, and Corporate Governance A company should disclose any facts that an intelligent person would consider necessary for the statements to be interpreted properly. Public companies are required to file annual reports with the Securities and Exchange Commission (SEC). The SEC requires that companies include a section labeled “Management Discussion and Analysis” (MD&A) because the financial statements and related notes may be inadequate for assessing the quantity and sustainability of a company’s earnings.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO8 To prepare a worksheet and explain its uses.

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Worksheet

© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 5