Adjustments, Financial Statements, And The Quality Of Earnings
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Adjustments, Financial Statements, and the Quality of Earnings Chapter 4
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Accounting Cycle Start of Period
During During the the period: period: ● ● Analyze Analyze transactions. transactions. ● ● Record Record journal journal entries. entries. ● ● Post Post amounts amounts to to general general ledger. ledger.
● ●
● ●
At At the the end end of of the the period: period: ● ● Adjust Adjust revenues revenues and and expenses. expenses.
● ●
Close Close revenues, revenues, gains, gains, expenses, expenses, and and losses losses to to Retained Retained Earnings. Earnings.
Prepare Prepare financial financial statements. statements. Disseminate Disseminate statements statements to to users. users.
Types of Adjustments There are four types of adjustments. Revenues Revenues 1. 1. Unearned Unearned Revenues. Revenues.
Expenses Expenses 3. 3. Prepaid Prepaid Expenses. Expenses.
2. 2. Accrued Accrued Revenues. Revenues.
4. 4. Accrued Accrued Expenses. Expenses.
McGraw-Hill/Irwin
Slide 3
Unearned Revenues End of accounting period.
Cash received.
Revenues earned.
Example Example includes includes rent rent received received in in advance advance (an (an unearned unearned revenue). revenue).
McGraw-Hill/Irwin
Slide 4
Accrued Revenue End of accounting period.
Revenues earned
Cash received
Example Example includes includes interest interest earned earned during during the the period period (accrued (accrued revenue). revenue).
McGraw-Hill/Irwin
Slide 5
Prepaid Expenses End of accounting period.
Cash paid.
Expense incurred.
Examples Examples include include prepaid prepaid rent, rent, advertising, advertising, and and insurance. insurance.
McGraw-Hill/Irwin
Slide 6
Accrued Expenses As of 12/27/09, Denton, Inc. had already paid $1,900,000 in wages for the year. Denton pays its employees every Friday. Year-end, 12/31/09, falls on a Wednesday. The employees have earned total wages of $50,000 for Monday through Wednesday of the week ending 1/02/10.
McGraw-Hill/Irwin
Slide 7
Accrued Expenses Involving Estimates Certain Certain circumstances circumstances require require
adjusting adjusting entries entries to to record record accounting accounting estimates. estimates. Examples Examples include include .. .. .. Depreciation Depreciation Bad Bad debts debts Income Income taxes taxes
The The income income statement statement contains contains revenues revenues and and expenses. expenses. Earnings Earnings Per Per Share Share (EPS) (EPS) must must be be reported reported on on the the income income statement. statement.
Statement of Stockholders’ Equity Net income appears on the statement of stockholders’ equity as an increase in Retained Earnings.
From the Income Statement
McGraw-Hill/Irwin
Slide 10
Balance Sheet – Liabilities & Stockholders’ Equity From From the the Statement Statement of of Stockholders’ Stockholders’ Equity. Equity.
McGraw-Hill/Irwin
Slide 11
Closing the Books Closing entries: Closing entries: Even though the 1. 1. Transfer Transfer net net income income (or (or balance sheet loss) loss) to to Retained Retained account balances Earnings. Earnings. carry forward from 2. 2. Establish Establish aa zero zero balance balance period to period, in in each each of of the the the income temporary temporary accounts accounts to to statement accounts start start the the next next accounting accounting do not. period. period.
McGraw-Hill/Irwin
Slide 12
Closing the Books Two steps are used in the closing process . . . 1. Close revenues and gains to Retained Earnings. 2. Close expenses and losses to Retained Earnings.
McGraw-Hill/Irwin
Slide 13
Post-Closing Trial Balance After all temporary accounts have been closed, we prepare a post-closing trial balance. Only assets, liabilities, and stockholders’ equity accounts will appear. All revenue, expense, gain and loss accounts will have a zero balance.
McGraw-Hill/Irwin
Slide 14
End of Chapter 4
© 2009 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
© 2009 The McGraw-Hill Companies, Inc.
Accounting Cycle Start of Period
During During the the period: period: ● ● Analyze Analyze transactions. transactions. ● ● Record Record journal journal entries. entries. ● ● Post Post amounts amounts to to general general ledger. ledger.
● ●
● ●
At At the the end end of of the the period: period: ● ● Adjust Adjust revenues revenues and and expenses. expenses.
● ●
Close Close revenues, revenues, gains, gains, expenses, expenses, and and losses losses to to Retained Retained Earnings. Earnings.
Prepare Prepare financial financial statements. statements. Disseminate Disseminate statements statements to to users. users.
Types of Adjustments There are four types of adjustments. Revenues Revenues 1. 1. Unearned Unearned Revenues. Revenues.
Expenses Expenses 3. 3. Prepaid Prepaid Expenses. Expenses.
2. 2. Accrued Accrued Revenues. Revenues.
4. 4. Accrued Accrued Expenses. Expenses.
McGraw-Hill/Irwin
Slide 3
Unearned Revenues End of accounting period.
Cash received.
Revenues earned.
Example Example includes includes rent rent received received in in advance advance (an (an unearned unearned revenue). revenue).
McGraw-Hill/Irwin
Slide 4
Accrued Revenue End of accounting period.
Revenues earned
Cash received
Example Example includes includes interest interest earned earned during during the the period period (accrued (accrued revenue). revenue).
McGraw-Hill/Irwin
Slide 5
Prepaid Expenses End of accounting period.
Cash paid.
Expense incurred.
Examples Examples include include prepaid prepaid rent, rent, advertising, advertising, and and insurance. insurance.
McGraw-Hill/Irwin
Slide 6
Accrued Expenses As of 12/27/09, Denton, Inc. had already paid $1,900,000 in wages for the year. Denton pays its employees every Friday. Year-end, 12/31/09, falls on a Wednesday. The employees have earned total wages of $50,000 for Monday through Wednesday of the week ending 1/02/10.
McGraw-Hill/Irwin
Slide 7
Accrued Expenses Involving Estimates Certain Certain circumstances circumstances require require
adjusting adjusting entries entries to to record record accounting accounting estimates. estimates. Examples Examples include include .. .. .. Depreciation Depreciation Bad Bad debts debts Income Income taxes taxes
The The income income statement statement contains contains revenues revenues and and expenses. expenses. Earnings Earnings Per Per Share Share (EPS) (EPS) must must be be reported reported on on the the income income statement. statement.
Statement of Stockholders’ Equity Net income appears on the statement of stockholders’ equity as an increase in Retained Earnings.
From the Income Statement
McGraw-Hill/Irwin
Slide 10
Balance Sheet – Liabilities & Stockholders’ Equity From From the the Statement Statement of of Stockholders’ Stockholders’ Equity. Equity.
McGraw-Hill/Irwin
Slide 11
Closing the Books Closing entries: Closing entries: Even though the 1. 1. Transfer Transfer net net income income (or (or balance sheet loss) loss) to to Retained Retained account balances Earnings. Earnings. carry forward from 2. 2. Establish Establish aa zero zero balance balance period to period, in in each each of of the the the income temporary temporary accounts accounts to to statement accounts start start the the next next accounting accounting do not. period. period.
McGraw-Hill/Irwin
Slide 12
Closing the Books Two steps are used in the closing process . . . 1. Close revenues and gains to Retained Earnings. 2. Close expenses and losses to Retained Earnings.
McGraw-Hill/Irwin
Slide 13
Post-Closing Trial Balance After all temporary accounts have been closed, we prepare a post-closing trial balance. Only assets, liabilities, and stockholders’ equity accounts will appear. All revenue, expense, gain and loss accounts will have a zero balance.
McGraw-Hill/Irwin
Slide 14
End of Chapter 4
© 2009 The McGraw-Hill Companies, Inc.
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