2. 6 - 1 © 2005 Accounting 1/e, Terrell/Terrell Completing the Accounting Cycle and Preparing Financial Statements Chapter 6

3. 6 - 2 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 1 Reconcile a bank statement.

4. 6 - 3 © 2005 Accounting 1/e, Terrell/Terrell Cash in Bank It is difficult to relate the Cash in Bank account to any single account. cash inflows can be related to revenues, borrowings, and capital contributions. Outflows relate to expenses, liability repayments, and dividends.

5. 6 - 4 © 2005 Accounting 1/e, Terrell/Terrell Cash in Bank The bank refers to debits and credits from the bank’s perspective. from the bank’s perspective. On June 3, 2004, Elevation Sports, Inc., received its bank statement from Vail National Bank.

6. 6 - 5 © 2005 Accounting 1/e, Terrell/Terrell Cash in Bank Vail National Bank Account Name:Account Number: 105833842 Elevation Sports, Inc. 500 North Aspen StreetDate:May 31, 2004 Vail, Colorado Previous statement balance 04-30-04$105,452.00 42 checks or other debits totaling 89,000.00 Bank service charge 45.00 Current balance as of statement date 05-31-04$145,986.00

7. 6 - 6 © 2005 Accounting 1/e, Terrell/Terrell Reconciling the Bank Account Balance per bank Balance per bank + Deposits + Deposits in transit – Outstanding – Outstandingchecks = Balance = Balance The bank balance and the book balance may not agree.

8. 6 - 7 © 2005 Accounting 1/e, Terrell/Terrell Reconciling the Bank Account Bank service charges Transposition errors NSF checks Bank errors

9. 6 - 8 © 2005 Accounting 1/e, Terrell/Terrell Reconciling the Bank Account Balance per bank statement, May 31:$145,986 Deposits in transit:$ 11,559 Outstanding checks:$ 29,161 Service charges:$ 45 Merchants fee:$ 732 Balance per books:$129,161 Prepare a bank reconciliation and journal entries.

10. 6 - 9 © 2005 Accounting 1/e, Terrell/Terrell Reconciling the Bank Account Balance per bank statement, May 31$145,986 Additions: Deposits in transit 11,559 Deductions: Outstanding checks 29,161 Corrected bank balance $128,384 Balance per books, May 31 $129.161 Deductions: Service charges$ 45 Merchants Fee 732 777 Corrected book balance $128,384

11. 6 - 10 © 2005 Accounting 1/e, Terrell/Terrell Reconciling the Bank Account Bank Service Charges 45 Credit Card Merchant Discount732 Cash in Bank 777 To correct bank balance per bank reconciliation

12. 6 - 11 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 2 Adjust the accounts to apply the matching principle.

13. 6 - 12 © 2005 Accounting 1/e, Terrell/Terrell Aged Accounts Receivable Schedule 100548102453148921OtherTotals $ 270 2,700 2,700 900 900 6,030 6,030$9,900 $ 270 2,700 2,700 6,030 6,030$9,0000 0 $ 900 0$9,90000000 00000 Elevation Sports, Inc. Aged Accounts Receivable Schedule May 31, 2004 CustomernumberAmount0-30days30-60days60-90daysOver 90 days

14. 6 - 13 © 2005 Accounting 1/e, Terrell/Terrell Uncollectible Accounts Assume that only one-half the amount owed for over 90 days could be collected. What is the journal entry? Doubtful Account Expense450 Allowance for Doubtful Accounts450 To record potential doubtful accounts

15. 6 - 14 © 2005 Accounting 1/e, Terrell/Terrell Merchandise Inventory Cost of Other Goods Sold 30,890 Merchandise Inventory 30,890 To record the cost of purchased merchandise sold Inventory$35,287 Ending balance– 4,397 Cost of goods sold$30,890

16. 6 - 15 © 2005 Accounting 1/e, Terrell/Terrell Components of Manufacturing Costs DirectmaterialsDirectlabor Indirectlabor IndirectmaterialsFactoryoverhead

17. 6 - 16 © 2005 Accounting 1/e, Terrell/Terrell The Flow of Manufacturing Costs Raw materials inventoryDirectlaborManufacturingoverhead Work-in-processinventoryMaterialrequisition Finished goods inventory Transfer when completed Cost of goods sold Transfer when sold

18. 6 - 17 © 2005 Accounting 1/e, Terrell/Terrell Statement of Cost of Goods Manufactured June 1, 2003 to May 31, 2004: June 1, 2003 to May 31, 2004: Raw materials purchased$ 38,655 Direct labor$101,250 Manufacturing overhead$155,852 Beginning Ending Beginning Ending Raw materials-0-$ 2,315 Work in process-0-$14,864 Finished goods-0-$13,634

19. 6 - 18 © 2005 Accounting 1/e, Terrell/Terrell Statement of Cost of Goods Manufactured Beginning inventory$ 0 Add: Purchases 38,655 Materials available for use$ 38,655 Less: Ending inventory 2,315 Direct materials used$ 36,340 Direct labor 101,250 Manufacturing overhead 155,852 Costs transferred to WIP$293,442 Elevation Sports, Inc. Statement of Cost of Goods Manufactured For the Year Ended May 31, 2004

20. 6 - 19 © 2005 Accounting 1/e, Terrell/Terrell Statement of Cost of Goods Manufactured Costs transferred to WIP$293,442 Add: Beginning WIP inventory 0 Total work in process$293,442 Less: Ending WIP inventory 14,864 Total costs of goods manufactured and transferred to finished goods$278,578 and transferred to finished goods$278,578 Elevation Sports, Inc. Statement of Cost of Goods Manufactured For the Year Ended May 31, 2004

21. 6 - 20 © 2005 Accounting 1/e, Terrell/Terrell Finished Goods Inventory and Cost of Goods Sold Beginning finished goods inventory$ 0 +Cost of goods manufactured 278,578 =Goods available for sale$278,578 –Ending finished goods inventory 13,634 =Cost of manufactured goods sold$264,944

22. 6 - 21 © 2005 Accounting 1/e, Terrell/Terrell Supplies Inventory Example The account shows $1,330; however, only $593 of supplies were still on hand. What is the adjusting entry? Office Supplies Expenses737 Supplies Inventory737 To record office supplies used

23. 6 - 22 © 2005 Accounting 1/e, Terrell/Terrell Learning Objectives 3 and 4 Prepare classified income statements. Compute basic earnings per share.

24. 6 - 23 © 2005 Accounting 1/e, Terrell/Terrell Preparing Financial Statements To compute income taxes, multiply the before-tax income by the tax rate of 40%. This tax will be an expense on the income statement and a liability on the balance sheet.

25. 6 - 24 © 2005 Accounting 1/e, Terrell/Terrell Earnings per Share EPS is a ratio which reveals how much of a company’s net earnings is attributable to each share of common stock. To comply with GAAP, income statements must disclose the firm’s earnings per share.

26. 6 - 25 © 2005 Accounting 1/e, Terrell/Terrell Earnings per Share EPS = Net income ÷ Number of shares of common stock outstanding Elevation Sports, Inc. EPS = $63,181 ÷ 4,000 = $15.79

27. 6 - 26 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Income Statement For the Year Ended May 31, 2004 Net sales$527,146 Cost of goods sold 295,834 Gross profit$231,312 Selling expenses$48,334 Administrative expenses 72,189 Total operating expenses 120,523 Operating income$110,789 Other revenues and expenses (5,488) Income before income taxes$105,301 Income taxes 42,120 Net income$ 63,181 Earnings per share$ 15.79 Must be reported on the income statement.

28. 6 - 27 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 5 Prepare statement of equity.

29. 6 - 28 © 2005 Accounting 1/e, Terrell/Terrell Statement of Stockholders’ Equity Elevation Sports, Inc. Statement of Stockholders’ Equity For the Year Ended May 31, 2004 Balance, June 1, 2003 Add:Sale of common stock common stock Net income Deduct: Dividends Balance, May 31, 2004 $ -0- 40,000 40,000$40,000 $ -0- 60,000 60,000$60,000 -0- -0- 63,181 63,181 (4,000) (4,000)$59,181 $ -0- 100,000 100,000 63,181 63,181 (4,000) (4,000)$159,181 Common stock Paid-in capital Retained earnings Total

30. 6 - 29 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 6 Prepare classified balance sheets.

31. 6 - 30 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Balance Sheet May 31, 2004 Assets: Current assets Cash$128,834 Accounts receivable$9,900 Less: Allowance for doubtful accounts 450 9,450 Merchandise inventory 4,397 Raw materials inventory 2,315 Work-in-process inventory 14,864 Finished goods inventory 13,634 Supplies inventory 593 Prepaid rent 12,000 Prepaid insurance 5,000 Total current assets$190,637

32. 6 - 31 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Balance Sheet May 31, 2004 Property, plant, and equipment Administrative equipment$ 5,100 Selling furniture and fixtures 8,400 Production equipment 89,600$103,100 Less: Accumulated depreciation 17,800 Total property, plant, and equipment$ 85,300 Intangible assets Patents$ 10,083 Copyrights 570 Trademarks 1,425 Total intangible assets$ 12,078 Total assets$288,015

33. 6 - 32 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Balance Sheet May 31, 2004 Liabilities and stockholders’ equity: Current liabilities Accounts payable$ 6,942 Other accounts payable 11,812 Interest payable 6,000 Payroll taxes payable 1,400 Sales taxes payable 560 Income taxes payable 42,120 Current portion of long-term note payable 15,000 Total current liabilities$ 83,834 Long-term liabilities: Note payable – Vail National Bank$ 60,000 Less: Current portion 15,000 Total long-term liabilities 45,000 Total liabilities$128,834

34. 6 - 33 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Balance Sheet May 31, 2004 Stockholders’ equity Paid-in capital: Common stock, $10 par value, 100,000 shares authorized, 4,000 100,000 shares authorized, 4,000 shares issued and outstanding$ 60,000 shares issued and outstanding$ 60,000 Paid-in capital in excess of par – common stock 40,000 – common stock 40,000 Total paid-in capital$100,000 Retained earnings 59,181 Total stockholders’ equity 159,181 Total liabilities and stockholders’ equity$288,015

35. 6 - 34 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 7 Close the temporary accounts.

36. 6 - 35 © 2005 Accounting 1/e, Terrell/Terrell Closing the Accounts To close the books, the temporary or nominal accounts are closed to the Income Summary account. A fiscal year is a year that differs from the calendar year but normally coincides with the end of the normal business cycle for its industry.

37. 6 - 36 © 2005 Accounting 1/e, Terrell/Terrell Closing the Accounts 1. Close the revenue and gain accounts to Income Summary. 2. Close the expense and loss accounts to Income Summary.

38. 6 - 37 © 2005 Accounting 1/e, Terrell/Terrell Closing the Accounts 3. Close the Dividend account to Retained Earnings. 4. Close the Income Summary account to Retained Earnings.

39. 6 - 38 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. General Journal Retail Sales – Snowboards330,750 Wholesale Sales – Snowboards151,650 Retail Sales – Other 52,385 Interest Revenue 512 Sales Returns 5,213 Sales Discounts 2,426 Income Summary527,658 To close revenue accounts

40. 6 - 39 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. General Journal Income Summary$464,477 Cost of Snowboards Sold264,944 Cost of Other Goods Sold 30,890 Total of 600 expense accounts 48,334 Total of 700 expense accounts 72,189 Total of 800 expense accounts 48,120 To close the expense accounts

41. 6 - 40 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. General Journal Retained Earnings 4,000 Dividends 4,000 To close to Retained Earnings Income Summary63,181 Retained Earnings63,181

42. 6 - 41 © 2005 Accounting 1/e, Terrell/Terrell Learning Objective 8 Prepare a post-closing trial balance.

43. 6 - 42 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Post-Closing Trial Balance May 31, 2004 101Cash in bank$128,384 110Accounts receivable 9,900 111Allowance for doubtful accounts$ 450 130Merchandise inventory 4,397 131Raw materials inventory 2,315 132Work-in-process inventory 14,864 133Finished goods inventory 13,634 134Supplies inventory 593 140Prepaid rent 12,000 141Prepaid insurance 5,000 154Admin. equipment and furniture 5,100 156Selling furniture and fixtures 8,400 158Production equipment 89,600 160Accumulated depreciation 17,800

44. 6 - 43 © 2005 Accounting 1/e, Terrell/Terrell Elevation Sports, Inc. Post-Closing Trial Balance May 31, 2004 180Patents 10,083 185Copyrights 570 190Trademarks 1,425 201Accounts payable 6,942 205Other accounts payable 11,812 210Interest payable 6,000 212Payroll taxes payable 1,400 213Sales taxes payable 560 214Income taxes payable 42,120 250Notes payable – Vail Bank 60,000 310Common stock 40,000 311Paid-in capital – common stock 60,000 320Retained earnings 59,181 Totals$306,265$306,265

45. 6 - 44 © 2005 Accounting 1/e, Terrell/Terrell End of Chapter 6