Chapter03 The Financial Reporting Process McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

Part A Accrual-Basis Accounting 3-2

LO1 Revenue and Expense Reporting oAccounting information – necessary for decision making. oTo be useful in decision making – accountants must report revenues and expenses in a way that reflects the ability of the company to create value for its owners. oAccrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle). 3-3

Revenue Recognition Principle Recognize revenue when it is earned oCalvin books a cruise with Carnival Cruise Lines, the world’s largest cruise line. He makes reservations and pays for the cruise in November 2012, but the cruise is not scheduled to sail until April oWhen does Carnival report revenue from the ticket sale? 3-4

Matching Principle Expenses are reported with the revenues they help to generate 3-5

3-6

LO2 Accrual–Basis Compared with Cash–Basis Accounting 3-7

Part B The Measurement Process 3-8

Closing Process LO3 Adjusting Entries Reporting Process 3-9

LO4 Post Adjusting Entries oPost adjusting entries to the T-accounts in the general ledger to update the account balances. oPrepare an adjusted trial balance. oAn adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries. 3-10

Part C The Reporting Process 3-11

LO5 Financial Statement1s 3-12

Income Statement 3-13

Statement of Stockholders’ Equity 3-14

Classified Balance Sheet EAGLE GOLF ACADEMY Classified Balance Sheet January 31 Assets Liabilities Current assets: Current liabilities: Cash$ 6,200 Accounts payable$ 2,300 Accounts receivable2,700 Unearned revenue540 Supplies1,500Salaries payable300 Prepaid rent5,500Utilities payable960 Total current assets15,900Interest payable100 Total current liabilities4,200 Long-term assets: Equipment 24,000 Long-term liabilities: Accum. depr., equip. (400) Notes payable10,000 Total long-term assets23,600 Total liabilities 14,200 Stockholders’ Equity Common stock25,000 Retained earnings300 Total stockholders’ equity$ 25,300 Total liabilities and stockholders’ equity$ 39,500 Total assets$ 39,500 Total assets equal current plus long- term assets. Total liabilities equal current plus long-term liabilities. Total stockholders’ equity includes common stock and retained earnings from the statement of stockholders’ equity. Total assets must equal total liabilities plus stockholders’ equity. 3-15

Part D The Closing Process 3-16

LO6 Closing Entries oTransfer the balance of all revenue, expense, and dividend accounts to the balance of retained earnings. oIncrease the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends. oThe balance of each revenue, expense, and dividend account equals zero after closing entries. oDo not affect the balances of permanent accounts other than retained earnings. 3-17

Close to Retained Earnings 3-18

LO7 Post Closing Entries and Prepare Post–Closing Trial Balance 3-19

End of Chapter