Chapter 4 Notes-Mgmt - Summary Fundamental Accounting Principles PDF

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Mgmt 1A Chapter 4—Completing the Accounting Cycle Intro 

Ready revenue, expense, and withdrawal accounts for the next reporting period

Work Sheet as a Tool  

Internal documents are called working papers and one example is a work sheet which is a tool for preparers in working with accounting information Benefits of a Work Sheet (Spreadsheet) o Aids in preparation of financial statements o Reduces possibility of errors when working with many accounts and adjustments Links accounts and adjustments to their impacts in financial statements Assists in planning and organizing an audit of financial statements (used to reflect any adjustments necessary) o Helps preparing interim financial statements when the journalizing and posting of AJE are postponed until year-end Use of a Work Sheet o Enter Unadjusted Trial Balance (straight from general ledger) o Enter Adjustments  After writing in work sheet, the adjustments must be posted to general journal and ledger o Prepare Adjusted Trial Balance—combining adjustments with unadjusted balances for each account o Sort adjusted Trial Balance Amounts to Financial Statements  Expenses and revenue to Income statement  Assets, withdrawals, liabilities, and owners capital to balance sheet o Total Statements Columns, Compute Income or Loss, and Balance Columns  Difference between Dr and Cr on Income statement is net income  If Cr is greater than Dr, the it is a net income (if opposite, then loss) Work Sheet Applications and Analysis o Pro forma financial statements—show the statements as if the proposed transactions occurred (“what if transactions” o o

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Closing Process  

Closing Process—prepares accounts for recording transactions and the events of the next period o Only done after the financial statements have been completed Temporary and Permanent Accounts o The closing process applies only to temporary accounts o Include income statement accounts, withdrawal account, and Income Summary account

Mgmt 1A Permanent accounts carry their ending balances into the next period (consist of balance sheet accounts) Recording Closing Entries o To record closing entries is to transfer the end-of-period balances in revenue, expense, and withdrawals to permanent capital accounts o Purpose  Revenue, expenses, and withdrawals must begin each period with zero balance  Owner’s capital must reflect prior periods’ revenue, expenses, and withdrawals o Income summary—a temporary account that contains a credit for the sum of all revenues (and gains) and a debit for the sum of all expenses (and losses). Its balance (net income) is transferred to the capital account. Move withdrawals to capital. Then income summary moved to capital with a credit o Steps of Closing  Close credit balances in revenue accounts to income summary (Dr revenue)  Close Debit balances in Expense Accounts to Income Summary (Cr expense)  Close Income Summary to Owner’s Capital  Close Withdrawals account to Owner’s Capital Post-Closing Trial Balance o Post-Closing Trial Balance—a list of permanent accounts and their balances from the ledgers after all closing entries have been journalized and posted  Lists balances for all accounts not closed o

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Accounting Cycle  

Accounting cycle—steps in preparing financial statements that repeat after each reporting period Steps o Analyze transactionjournalizepost to ledgerprepare unbalanced trial balanceadjustprepare adjusted trial balanceprepare statementsclose temporary accountsprepare post-closing trial balance

Classified Balance Sheet  

A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers Classification Structure o Current items are expected to come due (either collected or owed) within one year o Operating cycle—time span from when cash is used to acquire goods/services and cash is received from sale of good/services  Cycle is the circular flow of cash used for company inputs and then cash received from its outputs (most are one year)

Mgmt 1A 

Classification Categories o Current assets—cash and other resources expected to be sold, collected, or used within one year or the company’s operating cycle  Ex. Cash, short-term investments, A/R, merchandise inventory, prepaid expense o Long-Term Investments—expected to be held for more than one year (ex. N/R and investments in stocks and bonds) o Plant Assets—tangible assets that are long-lived and used to produce products/services  Ex. equipment, machinery, buildings, land o Intangible Assets—long-term resources that benefit business operations, lacking physical form and have uncertain benefits. Their value comes from the privileges or rights granted to/held by the owner  Ex. patents, trademarks, copyrights, franchises, and goodwill o Current Liabilities—obligations due to be paid or settled within one year (payables and unearned revenue). They are settled by paying out cash o Long Term Liabilities—not due within a year (N/P, lease obligations, mortgages payable) o Equity—owner’s claims on assets...