Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013.

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Financial and Managerial Accounting Wild, Shaw, and Chiappetta Fifth Edition Wild, Shaw, and Chiappetta Fifth Edition McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 3 Adjusting Accounts and Preparing Financial Statements

Conceptual Chapter Objectives C1: Explain the importance of periodic reporting and the time period assumption. C2: Explain accrual accounting and how it improves financial statements. C3: Identify steps in the accounting cycle. C4: Explain and prepare a classified balance sheet. 3-3

Analytical Chapter Objectives A1: Explain how accounting adjustments link to financial statements. A2: Compute profit margin and describe its use in analyzing company performance. A3: Compute the current ratio and describe what it reveals about a company’s financial condition. 3-4

Procedural Chapter Objectives P1: Prepare and explain adjusting entries. P2: Explain and prepare an adjusted trial balance. P3: Prepare financial statements from an adjusted trial balance. P4: Describe and prepare closing entries. P5: Explain and prepare a post-closing trial balance. 3-5

Procedural Chapter Objectives (Continued) P6: Appendix 3A – Explain the alternatives in accounting for prepaids (see text for details). P7: Appendix 3B – Prepare a work sheet and explain its usefulness (see text for details). P8: Appendix 3C – Prepare reversing entries and explain their purpose (see text for details). 3-6

Adjustments An adjusting entry is recorded to bring an asset or liability account balance to its proper amount as well as update any related revenue or expense account. Adjusting Accounts Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Prepaid (Deferred) expenses* Unearned (Deferred) revenues Accrued expenses Accrued revenues Framework for Adjustments * including depreciation C2, P1 3-7

Links to Financial Statements A1 3-8

FastForward – Computing the Adjusted Trial Balance - December 31, 2013 P2 3-9 The adjusted trial balance combines the unadjusted trial balance account balances with the adjustments we make.

1.Prepare Income Statement P3 3-10

2.Prepare Statement of Retained Earnings Note that net income from the Income Statement carries to the Statement of Retained Earnings. P3 3-11

3.Prepare Balance Sheet P3 3-12

Recording Closing Entries 1. Close revenue accounts. 2. Close expense accounts. 3. Close income summary account. 4. Close dividends account. P4 3-13

The Accounting Cycle Start 1. Analyze transactions 2. Journalize 3. Post 4. Prepare unadjusted trial balance 5. Adjust 6. Prepare adjusted trial balance 7. Prepare statements 8. Close 9. Prepare post-closing trial balance C3 10. Reverse (optional) 3-14

End of Chapter