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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

Chapter 13 • Financial Statements and Closing Procedures Related Assignment Materials Student Learning Objectives

Section Section Problem Critical GL Mini Review 1 Review 2 Exercises* Set A & B* Thinking Problems* Practice Problems* Set

13-1 Prepare a classified income 1.1, 1.2, statement from the 1.3, 1.5, worksheet 1.6 1.7 13-2 Prepare a statement of owner’s equity from the worksheet 13-3 Prepare a classified 1.4, 1.8 balance sheet from the worksheet 13-4 Journalize and post the adjusting entries 13-5 Journalize and post the closing entries 13-6 Prepare a postclosing trial balance and calculate various financial ratios 13-7 Journalize and post reversing entries

2.2

13.1, 13.3 13.1, 13.2, 13.1 13.3

13.1

MPS2

13.4

13.2

MPS2

13.2, 13.5 13.1, 13.2, 13.1, 13.2 13.3 13.3

MPS2

13.4, 13.5 13.1

13.2

MPS2

13.4

13.2

13.6

13.1, 13.2, 13.1 13.3

2.1, 2.3, 13.8, 13.9, 2.5, 2.6 13.10 2.4

13.7

13.1 13.1

13.4, 13.5 13.1

13.2

*See additional information below that pertains to these Exercises, Problems, Critical Thinking Problems, GL Problems, and Mini Practice Set. GL refers to General Ledger Problems Questions with Guided Example videos

Additional Information on Related Assignment Material See Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text available in Connect. Connect Available on the instructor’s course-specific website, Connect:  Section Review questions, Exercises, Problem Set A, Critical Thinking Problems, General Ledger Problems, and Mini Practice Set. o Connect also provides algorithmic versions for select Exercises, Problem Set A, Critical Thinking Problems, and General Ledger Problems.  Guided Examples  LearnSmart/SmartBook Hints/Guided Examples

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

Please note that the Guided Examples are labeled as “Hints” in Connect assignments. The animated PowerPoints without the video and audio functions for the Guided Examples are also available in the Connect Instructor Library and Exercise Presentations. These are indicated in the Related Assignment Materials grid on page 1 in blue bold font.

TEACHING OBJECTIVES 13-1. Prepare a classified income statement from the worksheet. 13-2. Prepare a statement of owner’s equity from the worksheet. 13-3. Prepare a classified balance sheet from the worksheet. 13-4. Journalize and post the adjusting entries. 13-5. Journalize and post the closing entries. 13-6. Prepare a postclosing trial balance and calculate various financial ratios. 13-7. Journalize and post reversing entries. 13-8. Define the accounting terms new to this chapter.

SECTIONS 1. Preparing the Financial Statements 2. Completing the Accounting Cycle ______________________________________________________________________ CHAPTER OVERVIEW/ LEARNING OBJECTIVES Learning Link: Chapter 12 discussed accrual accounting and completion of a worksheet for a merchandising business. Chapter 13 explains how to use worksheets to prepare and record adjusting and closing entries, to prepare a postclosing trial balance, and to prepare financial statements. 13-1. This chapter explains how to prepare a classified income statement. A classified income statement for a merchandising business usually includes these sections: Operating Revenue, Cost of Goods Sold, Gross Profit on Sales, Operating Expenses, and Net Income. 13-2. The chapter explains that a statement of owner’s equity is prepared to provide detailed information about the changes in the owner’s financial interest during the period. The ending owner’s capital balance is used to prepare the balance sheet. 13-3. In preparing a Classified Balance Sheet from the worksheet: a.

b.

Assets are usually presented in two groups—current assets, and plant and equipment. Current assets consist of cash, items to be converted into cash within one year, and items to be used up within one year. Plant and equipment consists of property that will be used for a long time in the operations of the business. Liabilities are also divided into two groups—current liabilities and long-term liabilities. Current liabilities will normally be paid within one year. Long-term liabilities are due in more than one year.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

13-4. When the year-end worksheet and financial statements have been completed, adjusting entries are recorded in the general journal and posted to the general ledger. The data comes from the worksheet ADJUSTMENTS columns. 13-5. The chapter describes the journalizing and posting of the closing entries. The data in the INCOME STATEMENT section of the worksheet can be used to journalize the closing entries. 13-6. To confirm that the general ledger is still in balance after the adjusting and closing entries have been posted, a postclosing trial balance is prepared. 13-7. Lastly, the chapter introduces reversing entries. At the start of each new period, many firms follow the practice of reversing certain adjustments that were made in the previous period. This is an optional procedure but with reversing entries there is no need to examine each transaction to see whether a portion applies to the past period and then divide the amount of the transaction between the two periods.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

Chapter Opener: Thinking Critically At the beginning of the chapter, there are a few short paragraphs about Vitamin Shoppe, Inc. Let’s read these together… Ask students, “What types of revenues and expenses do you think Vitamin Shoppe would include on its income statement that would be typical for a grocery store? Answer—A nutritional store chain will have many of the same revenue and expense items that you would see on income statements of companies in other industries. For example, the Sales account is a common revenue account but Vitamin Shoppe will report detailed revenue from Specialty Supplements, Sports Nutrition, etc. The company also has very similar expense accounts, including Wages Expense, Rent Expense, Depreciation Expense, Advertising Expense, and Insurance Expense. However, they may also report some unique expenses like Perishable-Food Waste.

Section 1. PREPARING THE FINANCIAL STATEMENTS Ask students, “If you were looking for a job, in what part of the newspaper would you look?” Ask students, “How about if you were looking for a used car; in what part of the newspaper would you look?” 

Point out that the newspaper’s classified section is similar to a business’s classified financial statements.



All of the accounts are classified into certain sections and so would appear in only those sections of the Classified Income Statement, Classified Balance Sheet or Statement of Owner’s Equity. Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13-4

Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

Objective 13-1 – Prepare a classified income statement from the worksheet The Classified Income Statement  Point out that classifying like information together on financial statements makes them easier to interpret.  Explain that classification and order of information depends on the type of business and the expected use of the statement  Direct students’ attention to Figure 13.1. Trace the major sections of the income statement: I. Operating Revenue (sales section) II. Cost of Goods Sold section III. Operating Expenses section IV. Other Income and Other Expenses section  Point out that a classified income statement is sometimes called a multiple-step income statement because it has multiple subtractions.  A single step income statement is where total revenues total expenses = net income (i.e., only one subtraction).

 Operating Revenue  Explain that the first section of a classified income statement contains the operating revenue or normal revenue of a business. Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13-5

Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

Ask students, “What would be the normal revenue of a merchandiser? Of a bakery? How about an attorney?” Refer to Figure13.1  Point out that because Whiteside Antiques is a retailer, its operating revenue section would contain: Sales (Sales Returns and Allowances) (Sales Discounts) Net Sales  Cost of Goods Sold  Refer to Figure 13.1 and review this section.  Indicate that the Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period.

 Gross Profit on Sales  Explain that the gross profit on sales is the difference between the net sales and the cost of goods sold.  Point out that gross profit is what is left to cover operating expenses and provide a profit.

 Operating Expenses  Refer to Figure 13.1 and review this section.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

 Point out that operating expenses are expenses that arise from normal business activities.  Explain that they are separated into two categories: (1) Selling Expenses & (2) General and Administrative Expenses.

 Net Income or Net Loss from Operations  Point out that keeping operating and non-operating income separate helps financial statement users learn about the operating efficiency of the firm: Gross Profit on Sales - Total Operating Expenses = Net Income (or Net Loss) from Operations

 Other Income and Other Expenses

 Explain that income that is earned from sources unrelated to the normal business activity is classified as “other income” and would appear in the Other Income section.  Point out that expenses which are incurred but not directly connected with business operations appear in the Other Expenses section (ex. Interest expense).

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

 Net Income or Net Loss Ask students, “Can anyone tell me the definition of Net income? How about Net Loss?”

 Condensed Income Statement  Explain that many companies provide condensed financial statements to vendors and creditors. A condensed income statement summarizes much of the detail into a few lines of information

Objective 13-2 – Prepare a statement of owner’s equity from the worksheet  The Statement of Owner’s Equity  Emphasize that the Statement of Owner’s Equity reflects changes that have occurred in the owner’s financial interest during the reporting period.

 Refer students to Figure 13.2, Statement of Owner’s Equity Ask students, “Can anyone explain to me in plain language what the Statement of Owner’s Equity reports?”  Emphasize that many students fail to notice that the first line of the statement is dated with the first day of the period and the last line is dated as of the last day of the period.

Objective 13-3 – Prepare a classified balance sheet from the worksheet Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 13-8

Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

 The Classified Balance Sheet  Point out that a Classified Balance Sheet is very similar to the Balance Sheets they have already prepared in the past except the assets and liabilities are classified into separate categories.

 Current Assets  Explain that current assets consist of cash, items that will normally be converted into cash within one year, and items that will be used within one year (cash, accounts receivables, merchandise inventory, etc.).  Point out that current assets are usually listed in the order of liquidity.  Emphasize that current assets are vital to the survival of a business because they provide the funds needed to pay bills and meet expenses.

 Plant and Equipment  Explain that plant and equipment is property that will be used over a long period of time to conduct business operations.  They are non-current (long-term) assets because they have a life greater than one year.  Point out that any accumulated depreciation accounts are shown below their respective accounts.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

Ask students, “Can anyone tell me what the second number to the right of the accumulated depreciation accounts represent?” (book value of the asset)

 Current Liabilities  Point out that liabilities are classified in only two categories.  Those debts which must be paid off within one year are current liabilities.

 Long-Term Liabilities  Debts that are not due to be paid within a year are classified as long-term liabilities.

 Owner’s Equity  The ending balance from the Statement of Owner’s Equity is transferred to the Owner’s Equity section of the Balance Sheet.

Section 2. COMPLETING THE ACCOUNTING CYCLE  Remind students that the complete accounting cycle for a business was covered in chapter 6.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

 Point out that the accounting cycle is reviewed again in this chapter except we are working with a retailer instead of a service business. Objective 13-4 – Journalize and post the adjusting entries Journalizing and Posting the Adjusting Entries  Remind students that all of the adjustments listed on the worksheet still need to be journalized in the general journal and posted to the general ledger accounts.

 Journalizing the Adjusting Entries  Tell students to refer to Figure 13.4 to see the adjusting journal entries made using the information off of the worksheet.  Remind students that “Adjusting Entries” should be written on the journal page right above the first adjusting entry.  Tell students that good explanations are a vital part of a business’s financial record. Ask students, “Why are journal entry explanations so important?”

 Posting the Adjusting Entries  Remind students that the posting process is the same as covered in Chapter 5.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

 Note that the words “Adjusting” is recorded in the Description column of the general ledger account.  Explain that after all adjusting entries have been posted, the balances of the general ledger accounts should match the ADJUSTED TRIAL BALANCE section of the worksheet.

Objective 13-5 – Journalize and post the closing entries Journalizing and Posting the Closing Entries  Remind students that the closing process is where all the temporary accounts are closed to $0 so that: (1)

The business can “start fresh” in the next accounting period and

(2)

So that the changes in the temporary owner equity accounts can be transferred to the permanent owner’s capital account.

Journalizing the Closing Entries  Indicate that the INCOME STATEMENT section of the worksheet in Figure 12.2 (of the last chapter) provides the data needed to prepare the closing entries.  Point out that the words “Closing Entries” should be written on the journal page right before the first closing entry.  Indicate that the temporary Income Summary account is also used in the closing process of a merchandiser.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

 Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with Credit Balances.  Tell students to refer to the illustration of the first closing entry in the book.  Remind them that this first closing entry closes the revenue accounts and other temporary income statement accounts with credit balances.  Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances  Tell students to refer to the illustration of the second closing entry in the book.  Remind them that this second closing entry closes the expense accounts and other temporary income statement accounts with debit balances.  Step 3: Closing the Income Summary Account  Remind students that after the first two closing entries have been posted, the balance of the Income Summary account is net income or net loss for the period.  This third closing entry will transfer the net income or net loss into the owner’s capital account.  Step 4: Closing the Drawing Account  This entry closes the drawing account into the capital account.

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Haddock, Price, Farina, College Accounting: A Contemporary Approach, 5e

 Point out that the Income Summary is not used in this last closing entry.

 Posting the Closing Entries  Remind students that the posting process is the same as covered in Chapter 6.  Note that the words “Closing” is recorded in the Description column of the general ledger account when the entry is posted.

Objective 13-6 – Prepare a postclosing trial balance and calculate various financial ratios Preparing a Postclosing Trial Balance  Remind students that we prepare a postclosing trial balance to confirm that the general ledger is in balance.  Point out that only permanent accounts will exist on this trial balance because all temporary accounts were closed.  Review with students the difference between a trial balance, an adjusted trial balance and the postclosing trial balance.

Interpreting the Financial Statements  Review the basic procedure for calculating a ratio: One number is divided by another number. The result is the ratio of the numerator, or top number, to the denominator, or bottom number. Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior writ...