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Reporting and Preparing Financial Statements
UAA – ACCT 201 Principles of Financial
Accounting Dr. Fred Barbee
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What Have We Learned?
I have some bad news . . .
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What Have We Learned?
I have some good news . . .
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We Have Learned . . .
The basic accounting equation - and the definition of each of its components
Assets =
Liabilities +
Owners’ Equity
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We Have Learned . . .
Double-entry accounting
Assets = Liabilities + Owners’
Equity
Debits=Credits
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We Have Learned . . .
The debit/credit rules and how each impacts accounting.
ssets
ncrease
ebits
xpenses
Debit = “Left” side of an account -
Nothing more, nothing less.Acronym:
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We Have Learned . . .
The debit/credit rules and how each impacts accounting.
redits
ncrease
iabilities
quity
evenue Credit = “Right” side of
an account - Nothing more, nothing less.
Acronym:
We Have Learned . . .
About the basic financial statements and how they interrelate.
IncomeStatement
Stmt of Retained Earnings
BalanceSheet
Net Income
Retained Earnings
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We Have Learned . . .
The first five steps in the accounting cycle.
Examine Source Documents
Analyze Transactions
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Record Transactions
Post Transactions
Prepare Trial Balance
Analyze Transactions
Preparing Financial Statements
Examine Source Documents
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Record Transactions
Post Transactions
Financial Statements Prepare
Trial Balance
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Problems in Accounting Measurements
The identification of the accounting period.
The proper point in time to recognize revenue.
The appropriate moment to record an expense.
Identification of the Accounting Period
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Time Period Principle
For reporting purposes, an organization’s life can be divided into separate accounting periods
months, quarters, years, etc.
BEGINNING
Time Period Principle
Life of the Firm
96 97 98 99 00 01 02 03 04 05
ENDING
Discrete (separate) accounting periods.
1 2 3 4 5 6 7 8 9 10 11 12
1 2 3 4
Annual
1 2
Month
Quarter
Semiannual
The Accounting PeriodExh.3.1
The proper point in time to recognize revenues.
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Revenue Recognition . . .
Revenues are recorded when two main criteria have been met:
The earnings process is substantially complete (a sale has taken place or service has been rendered); and
An exchange has taken place.
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Revenue Recognition . . .
Revenue is generally recognized
At the time services are performed; or
When goods are sold and delivered to a customer.
The proper point in time to recognize expenses.
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The Matching Principle
The matching principle requires that all expenses incurred to generate the revenues recognized in an accounting period be matched with those revenues.
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The Matching Principle
Another view . . .
Let the expense follow the revenue.
First the revenue . . .
Then the expense.
Sometimes referred to as “The Expense Recognition Principle.”
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Accrual Basis Accounting
Revenue Recognition
Matching Principle
Accrual Basis Accounting
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Yikes!! What is Accrual Basis
Accounting?
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Accrual Basis Accounting
Revenues are recognized (recorded) when earned, without regard to when cash is received;
Expenses are recorded as incurred without regard to when they are paid.
The time period principle
Gives rise to the need for
The Revenue Recognition Principle and the Matching Principle
Resulting in . . .
The accrual basis of accounting
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Whoa! Let’s back up a bit here -- this really does
make sense?
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96 97 98 99 00 01 02 03 04 05
? ? ? ? ? ?
How do we recognize revenues?
The Revenue Recognition Principle
How do we recognize expenses?
The Matching Principle
Peri
od
icit
y
Assu
mp
tion
Accrual Basis Accounting
Accrual Accounting . . .
EOP
Recognized Revenues
Matched Expenses
Recognized Revenues
Matched Expenses
Accrual Net Income
BOP
Bertha, are there any
other bases for
accounting?
Yikes! I don’t know Claude. We probably
better ask the professor!
Absolutely. You don’t think we
would make it that easy,
do you?
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Cash Basis Accounting
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Cash Basis Accounting
With the cash basis . . .
Revenues are recognized in the period cash is received; and
Expenses are recognized in the period when cash is paid out.
Cash Basis Accounting . . .
BOP EOP
Revenue (Cash)
Expenses (Cash)
Revenue (Cash)
Expenses (Cash)
Cash Basis Net Income
Ahhh, but there is
yet another
one! Fun! Fun!
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Modified Cash Basis Accounting
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Modified Cash Basis Accounting
With the Modified Cash Basis . . .
Current period revenues and expenses are treated exactly as in the cash basis;
Expenses covering more than one accounting period are allocated over the useful life of the asset.
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Adjusting Accounts
An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.
Exh.3.4
Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
Transactions where cash is paid orreceived before a related expense
or revenue is recognized.
Framework for Adjustments
Transactions where cash is paid orreceived after a related expense
or revenue is recognized.
Exh.3.4
Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
Framework for AdjustmentsExh.3.4
Transaction where cash is paid before a related expense
is recognized.
Here is the checkfor my first
6 months’ rent.
Resources paid for prior to
receiving the actual benefits.
Asset Expense
UnadjustedBalance
CreditAdjustment
DebitAdjustment
Adjusting Prepaid Expenses
GENERAL JOURNAL Page 34Date Description PR Debit Credit
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Rent Expense 2,000
Prepaid Rent 2,000
to record monthly rent
Adjusting Prepaid ExpensesOn December 1, 2001, Scott Company paid $12,000 to cover rent for December 2001 through May 2002.
Let’s look at the adjusting journal entry needed on December 31, 2001.
Prepaid Rent Rent Expense12/1 $12,000 12/31 $2,00012/31 $2,000
After posting, the accounts involved look like this:
Adjusting Prepaid Expenses
Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
Framework for AdjustmentsExh.3.4
Transaction where cash is paid before a related expense
is recognized.
Adjusting for Depreciation
Depreciation is the process of computing expense from allocating the cost of plant and equipment over its expected useful lives.
Straight-Line Depreciation
=Asset Cost – Salvage Value
Useful Life
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Adjusting for Depreciation
On January 1, 2002, Monroe, Inc. purchased oil pumping equipment for $62,000 cash.
The equipment has an estimated useful life of 5 years.
Monroe expects to sell the equipment at the end of its life for $2,000 cash.
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Adjusting for Depreciation
Let’s compute depreciation expense for the year ended December 31, 2002.
2002 Depreciation Expense
=
$62,000 - $2,000
5
= $12,000
Prepare the journal entry.
GENERAL JOURNAL Page 2Date Description PR Debit Credit
Dec. 31 Depreciation Exp. 12,000
Accum. Depreciation 12,000
To record annual depreciation
Accumulated depreciation isa contra asset account.
Adjusting for Depreciation
Equipment Depreciation Expense
1/1 $62,000 12/31 $12,000
Accumulated Depreciation
12/31 $12,000
After posting, the accounts involved look like this:
Adjusting for Depreciation
The equipment account is shown on
the balance sheet like
this.
Adjusting for Depreciation
Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
Framework for AdjustmentsExh.3.4
Transaction where cash is received before a related
revenue is recognized.
Buy your season tickets forall home basketball games NOW!
“GO SEAWOLVES”
Adjusting Unearned Revenue
Cash received in advance of providing
products or services.
Liability RevenueUnadjusted
BalanceCredit
AdjustmentDebit
Adjustment
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Oct. 1 Cash 100,000
Unearned Basketball Revenue 100,000
Receipts for 1,000 season tickets
On October 1, 2002, UAA sold 1,000 season tickets to its 20 home
basketball games for $100 each. UAA makes the following entry:
Adjusting Unearned Revenue
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31
On December 31, UAA has played 10 of its regular home games, winning
8 and losing 2.
Prepare the appropriate Adjusting Entry on December 31
Prepare the appropriate Adjusting Entry on December 31
Adjusting Unearned Revenue
On December 31, UAA has played 10 of its regular home games, winning
8 and losing 2.
Adjusting Unearned Revenue
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Unearned Basketball Revenue 50,000
Basketball Revenue 50,000
to recognize basketball revenue
Unearned BasketballRevenue Basketball Revenue
10/1 $100,000 12/31 $50,00012/31 $50,000
Adjusting Unearned Revenue
After posting, the accounts involved look like this
Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
Framework for AdjustmentsExh.3.4
Transaction where cash is paid after a related expense
is recognized.
We’re about one-halfdone with this job and
want to be paid!
Costs incurred in a period that are
both unpaid and unrecorded.
Adjusting for Accrued Expenses
Expense LiabilityCredit
AdjustmentDebit
Adjustment
12/1/02 12/31/02Year end
Last paydate
12/26/02
Next paydate
1/2/03
Record adjustingjournal entry.
Denton, Inc. pays its employees every Friday. Year-end, 12/31/02, falls on a Wednesday. As of 12/31/02, the employees have earned salaries of $47,250 for Monday through Wednesday of the
week ended 1/02/03.
Adjusting for Accrued Expenses
Denton, Inc. pays its employees every Friday. Year-end, 12/31/02, falls on a Wednesday. As of 12/31/02, the employees have earned salaries of $47,250 for Monday through Wednesday of the
week ended 1/02/03.
Adjusting for Accrued Expenses
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Salaries Expense 47,250
Salaries Payable 47,250
to record salary accrual
Salaries Expense Salaries Payable12/31 $47,250 12/31 $47,250
After posting, the accounts involved will look like this . . .
Adjusting for Accrued Expenses
Fra m ew ork for Adjustm ents
PrepaidExpenses
Depreciation UnearnedRevenues
AccruedExpenses
AccruedRevenues
Adjustm ents
Framework for AdjustmentsExh.3.4
Transaction where cash is received after a related revenue is recognized.
Yes, you can pay mefor your tax return
when I finish the work.
Adjusting for Accrued Revenues
Revenues earned in a period that
are both unrecorded and not yet received.
Asset Revenue
CreditAdjustment
DebitAdjustment
Smith & Jones, CPAs, had $31,200 of work completed but not yet billed to clients. Let’s make the adjusting entry
necessary on December 31, 2002, the end of the company’s fiscal year.
Adjusting for Accrued Revenues
GENERAL JOURNAL Page 34Date Description PR Debit Credit
Dec. 31 Accounts Receivable 31,200
Service Revenues 31,200
Revenues earned but not received
After posting, the accounts involved will look like this . . .
Adjusting for Accrued Revenues
Accounts Receivable Service Revenue
12/31 $31,20012/31 $31,200
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Exh.3.18
CategoryBefore Adjusting
Adjusting EntryB/S I/S
Prepaid Expense
Asset ExpenseDr. Expense Cr. Asset
Unearned Revenue
Liability RevenueDr. Liability Cr. Revenue
Accrued Expenses
Liability ExpenseDr. Expense Cr. Liability
Accrued Revenues
Asset RevenueDr. Asset Cr. Revenue
Exhibit 3.18
Summary of Adjustments and
Financial Statement Links
Overstated
Understated
FastForwardTrial Balance
December 31, 2001
Exh.3.19
First, the initial
unadjusted amounts are added to the worksheet.
First, the initial
unadjusted amounts are added to the worksheet.
Next, FastForward’s adjustments are added.
Next, FastForward’s adjustments are added.
FastForwardTrial Balance
December 31, 2001
Exh.3.19
FastForwardTrial Balance
December 31, 2001Finally, the totals are determined.
Finally, the totals are determined.
Exh.3.19
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Preparing Financial Statements
Let’s use FastForward’s adjusted trial balance to prepare the company’s financial statements.
Step One:Prepare the IncomeStatement.
Exh.3.20
Step Two:Prepare the Statement of Retained Earnings.
Note: The Net Income from the Income Statement carries to the Statement of Retained Earnings.
Exh.3.20
Step Three:Prepare the BalanceSheet.
FastForwardBalance Sheet
December 31, 2001
AssetsCash 3,950$ Accounts receivable 1,800 Supplies 8,670 Prepaid insurance 2,300 Equipment 26,000 Less: accum. depr. (375) 25,625 Total assets 42,345$
LiabilitiesAccounts payable 6,200$ Salaries payable 210 Unearned revenue 2,750 Total liabilities 9,160$
Owner's EquityCommon Stock 30,000 Retained Earnings 3,185 Total liabilities and equity 42,345$
Exh.3.20