Prepaid insurance Current assets statement debit R. Rental costs Operating costs Income statement Debit. Salaries and Wages Expenses Operating Expenses Income Statement Debit Payable Salaries and Wages Current Debt Statement of Financial Position Credit.
In the text, the new Review and Practice section includes
Review and Practice
WileyPLUS with ORION
Updated Content and Design
Student Practice and Solutions
Real World Context
A Look at U.S. GAAP
Excel
What’s New?
- Equity 13
- The Trial Balance 72
- Liabilities 480
- Operating Activities 652
- Operating Activities 665
- Investing and Financing Activities 669 Step 3: Net Change in Cash 671
Reversing Entries—An Optional Step 175 Correcting Entries—An Avoidable Step 175 The Classified Statement of Financial. Format of the Statement of Cash Flows 648 Preparation of the Statement of Cash Flows 650 Indirect and Direct Methods 651.
Payroll Accounting I-1
Third Edition
Ancillary Authors, Contributors, Proofers,
Acknowledgments
If you don't know how to read financial statements, you can't really know your business. In this book, you will learn how to read and prepare financial statements and how to use basic tools to evaluate financial results.
FEATURE STORY Knowing the Numbers
Many companies spend significant resources teaching their employees the basics of accounting so they can read financial statements and understand how their actions affect the company's financial results. As a result, by learning these basic principles presented in this textbook, you will be well equipped to understand the financial results of companies around the world.
LEARNING OBJECTIVES
Throughout this textbook, we increase your familiarity with financial reporting by providing numerous references, questions, and exercises that encourage you to explore these financial statements. By examining the financial reports of these three companies, you will see that the accounting practices of companies in specific countries that follow IFRS sometimes differ in particular details.
3PREVIEW OF CHAPTER 1
ACCOUNTING IN ACTION
Accounting consists of three basic activities—it identifies, records, and communicates the economic events of an organization to interested users.
Three Activities
What Is Accounting?
Who Uses Accounting Data?
Learning Objective 2
External users are individuals and organizations outside a company who want fi nancial information about the company. The two most common types of exter-
The three steps in the accounting process are identifi cation, recording, and com- munication
Bookkeeping encompasses all steps in the accounting process
Accountants prepare, but do not interpret, fi nancial reports
The two most common types of external users are investors and company offi cers
Managerial accounting activities focus on reports for internal users
Basic Concepts
ALT #1 ALT #2
Identify and analyze the principal elements
Identify the alternatives, and weigh the impact of
Recognize an ethical situation and the ethical
Ethics in Financial Reporting
A number of the Feature Stories and other parts of the textbook discuss the central importance of ethical behavior to fi nancial reporting
Many of the People, Planet, and Profi t Insight boxes focus on ethical issues that companies face in measuring and reporting social and environmental
At the end of each chapter, an Ethics Case simulates a business situation and asks you to put yourself in the position of a decision-maker in that case
Learning Objective 3
The Building Blocks of Accounting
Accounting Standards
Measurement Principles
The fair value principle states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability). Fair value information may be more useful than historical cost for certain types of assets and liabilities.
Assumptions
For example, certain investment securities are reported at fair value because market value information for these types of assets is generally readily available. Only in situations where assets are actively traded, such as investment securities, do companies apply the fair value principle extensively.
Learning Objective 5
But what will Gazprom do if, by the end of next year, the fair value of the land has increased to P400,000. Like a proprietorship, for accounting purposes, partnership transactions must be kept separate from the personal activities of the partners.
Ethics Note
The economic entity assumption requires that the activities of the entity are separate and distinct from those of its owner and all other economic entities. The owner (proprietor) receives the profits, suffers any losses and is personally liable for all the debts of the company.
Accounting Across the Organization Spinning the Career Wheel
- Convergence refers to efforts to reduce differences between IFRS and U.S. GAAP
- The primary accounting standard-setting body headquartered in London is the Interna- tional Accounting Standards Board (IASB)
- Relevance means that fi nancial information matches what really happened; the infor- mation is factual
- A business owner’s personal expenses must be separated from expenses of the business to comply with accounting’s economic entity assumption
The ease with which ownership can be changed increases the attractiveness of investing in a company. Because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life.
Building Blocks of Accounting
Although the combined number of proprietorships and partnerships in the world greatly exceeds the number of corporations, the income produced by corporations is much greater. The accounting equation applies to all economic entities, regardless of size, nature of business or form of business organization.
Assets
Fair presentation means that the financial information matches what actually happened; the information is true. It applies to small businesses like the corner grocery store as well as giant corporations like adidas.
Liabilities
Learning Objective 6
The Basic Accounting Equation
Taipai Pizza also has a note to First National Bank for the money borrowed to buy the delivery truck. Taipai Pizza may also owe salaries and wages to employees and sales and property taxes due to the local government.
Equity
All of these persons or entities to whom Taipai Pizza owes money are its creditors.
Retained earnings is determined by three items: revenues, expenses, and dividends
EXPENSES Expenses are the cost of assets consumed or services used in the process of earning revenue. They are decreases in equity that result from
A corporation first determines its revenues and expenses and then calculates its net profit or net loss. If it has net income and decides that it cannot put that income to better use, the company may decide to distribute a dividend to its owners (shareholders).
Equity Effects
Learning Objective 7
Using the Accounting Equation
The company must analyze each event to find out whether it affects the components of the accounting equation. For example, if one asset increases, there must be a corresponding decrease (1) in another asset, (2) increase in a specific liability, or (3) increase in equity.
Transaction Analysis
- INVESTMENT BY SHAREHOLDERS Ray and Barbara Neal decide to start a smartphone app development company that they incorporate as
- PURCHASE OF SUPPLIES ON CREDIT Softbyte SA pur- chases for € 1,600 from Mobile Solutions Company headsets and other computer
- SERVICES PERFORMED FOR CASH Softbyte SA receives
- PURCHASE OF ADVERTISING ON CREDIT Softbyte SA receives a bill for € 250 from Programming News for advertising on its website but
- PAYMENT OF EXPENSES Softbyte SA pays the following expenses in cash for September: offi ce rent € 600, salaries and wages of employ-
- PAYMENT OF ACCOUNTS PAYABLE Softbyte SA pays its
- RECEIPT OF CASH ON ACCOUNT Softbyte SA receives
- does not change total assets, but it changes the composition of those assets
SERVICES PROVIDED FOR CASH AND CREDIT Softbyte SA provides €3,500 worth of program development services for clients. DIVIDENDS The corporation pays a dividend of €1,300 in cash to Ray and Barbara Neal, the shareholders of Softbyte SA.
Summary of Transactions
- Each transaction must be analyzed in terms of its effect on
- The two sides of the equation must always be equal
- The Share Capital—Ordinary and Retained Earnings columns indicate the causes of each change in the shareholders’ claim on assets
- An income statement presents the revenues and expenses and resulting net income or net loss for a specifi c period of time
- A retained earnings statement summarizes the changes in retained earnings for a specifi c period of time
- A statement of fi nancial position (sometimes referred to as a balance sheet) reports the assets, liabilities, and equity of a company at a specifi c date
- A statement of cash fl ows summarizes information about the cash infl ows (receipts) and outfl ows (payments) for a specifi c period of time
- A comprehensive income statement presents other comprehensive income items that are not included in the determination of net income
- Net income of € 2,750 on the income statement is added to the beginning balance of retained earnings in the retained earnings statement
- Retained earnings of € 1,450 at the end of the reporting period shown in the retained earnings statement is reported on the statement of fi nancial
- Cash of € 8,050 on the statement of fi nancial position is reported on the statement of cash fl ows
The net income of €2,750 in the income statement is added to the beginning retained earnings surplus in the retained earnings statement. The amount of €8,050 in the statement of financial position is reported in the statement of cash flows.
Income Statement
A statement of financial position (sometimes referred to as a balance sheet) reports the assets, liabilities and equity of a company at a specific date. Retained earnings of €1,450 at the end of the reporting period shown in the statement of retained earnings are reported on the statement of financial retained earnings statement are reported on the statement of financial position.
Learning Objective 8
A statement of cash flows summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period. receipts) and outflows (payments) for a specific period. Explanatory notes and supporting schedules are also an integral part of every set of financial statements.
Financial Statements
The closing balance in retained earnings is needed when preparing the statement of financial position. The cash and cash equivalents that appear in the statement of financial position are needed when preparing the cash flow statement.
Retained Earnings Statement
Statement of Financial Position
Accounting Across the Organization A Wise End Vodafone (GBR)
Statement of Cash Flows
Where did cash come from during the period?
What was cash used for during the period?
What was the change in the cash balance during the period?
Comprehensive Income Statement
People, Planet, and Profi t Insight Beyond Financial Statements
Financial
Statement Items
Note that it is not possible to determine the company's equity in any other way because the opening total for equity is not provided.
Accounting Career Opportunities
Public Accounting
APPENDIX 1A
Learning Objective *9
Private Accounting
Governmental Accounting
LEARNING OBJECTIVES REVIEW
REVIEW AND PRACTICE
Statement of Comprehensive Income A financial statement that presents items not included in the determination of net income, referred to as other comprehensive income. Income Statement A financial statement that presents the income and expenses and resulting net income or net loss of a company for a specific period.
GLOSSARY REVIEW
- Which of the following is not a step in the accounting process?
- Which of the following statements about users of accounting information is incorrect?
- Which of the following statements about basic as- sumptions is correct?
- Net income will result during a time period when
- As of December 31, 2017, Stoneland AG has assets of
- Which of the following events is not recorded in the accounting records?
Retained Earnings Statement A financial statement that summarizes changes in retained earnings for a specific period. Cash flow statement A financial statement that summarizes information about cash inflows (receipts) and cash outflows (payments) for a specific period.
PRACTICE MULTIPLE-CHOICE QUESTIONS
Payment of an account payable affects the compo- nents of the accounting equation in the following way
A cash flow statement is a summary of information about inflows (receipts) and outflows (payments) over a period of time. A statement of financial position reports the assets, liabilities, and equity as of a specific date.
Services performed by a public accountant include
The other choices are incorrect because this transaction (a) will have no effect on the income statement, (c) will have no effect on the income statement or statement of retained earnings, and (d) will affect the statement of financial position , but not the income statement or the statement of retained earnings. c) The statement of financial position is the statement that reports assets, liabilities and equity. The other choices are incorrect because (a) the income statement reports revenues and expenses, (b) the statement of retained earnings reports details of stockholders' equity, and (d) the statement of cash flows reports inflows and outflows of cash. a) Auditing, taxation and management consulting are all services performed by public accountants.
Selected transactions for Greene Garden Centre are listed below
The other choices are incorrect because public accountants do not perform budgeting or cost accounting.
PRACTICE EXERCISES
Hayes Computer Timeshare Company entered into the following transactions during May 2017
A decrease in assets and a decrease in liabilities. f) An increase in liabilities and a decrease in capital. g) Increase in capital and decrease in liabilities. Prepare using NT$ in thousands.) (b) Prepare the income statement, retained earnings statement and financial statement. position on July 31 for legal services company ltd.
PRACTICE PROBLEM
Identify and describe the steps in the accounting process
QUESTIONS
What uses of fi nancial accounting information are made by (a) investors and (b) creditors?
Jackie Remmers Travel Agency purchased land for
What is the monetary unit assumption?
What is the economic entity assumption?
What are the three basic forms of profi t-oriented business organizations?
What is the basic accounting equation?
Which of the following items are liabilities of Designer Jewelry Stores?
Can a business enter into a transaction in which only the left side of the basic accounting equation is aff ected?
Are the following events recorded in the accounting records? Explain your answer in each case
Indicate how the following business transactions affect the basic accounting equation
Listed below are some items found in the fi nancial statements of Alex Greenway Co. Indicate in which
In February 2017, Paula Klink invested an additional
BRIEF EXERCISES
If total assets decreased by €80,000 and equity increased by €120,000 during the year, what is the amount of total liabilities at the end of the year. Use the accounting equation to answer each of the following questions. a) The obligations of Alli Company Ltd.
Identify the users as external users (E) or internal users (I). b) The following questions can be asked by an internal user or an external user. E1-3 Leon Manternach, president of Manternach SE, has instructed Carla Ruden, the head of the accounting department of Manternach SE, to report the company's recently acquired land in the company's accounting reports at fair value of €170,000 instead of the cost price of € 100,000.
EXERCISES
Total Assets Total Liabilities
Lynn has been trying to balance the financial position of Sanculi Company SpA. -14 Bear Park Ltd., a Lake District campsite, has compiled the following financial information as at 31 December 2017.
PROBLEMS: SET A
Analyze transactions and prepare income statement, retained earnings. statement and statement of financial position. No further investments were made in May, but the company paid a dividend of W480,000 during the month. a) Prepare an income statement and a statement of retained earnings for the month of May and a statement of financial position as of 31 May. Show figures in thousands.) (b) Prepare an income statement and a statement of retained earnings for May assuming.
PROBLEMS: SET B
The company paid a cash dividend of ¥900,000 during the month. a) Prepare an income statement and a statement of retained earnings for the month of June and a statement of financial position at 30 June 2017. Show numbers in thousands.) (b) Prepare an income statement and a statement of retained earnings on for June assuming that the.
MATCHA CREATIONS
MC1 Mei-ling Lee spent much of her childhood learning the art of cookie making from her grandmother. After a series of brainstorming sessions, Mei-ling settles on the idea of running a cookie school.
BROADENING YOUR PERSPECTIVE
They were probably worried about losing their job or not being promoted in the organization. However, another important standard-setter resides in the United States: the Financial Accounting Standards Board (FASB).
Learning Objective 10
He scheduled the interviews for both firms on the same day, one in the morning and one in the afternoon. As indicated in the chapter, IFRSs, which are issued by the IASB, are used by most countries in the world.
Similarities
As communication barriers continue to break down due to advances in technology, businesses and individuals in different countries and markets are becoming more comfortable buying and selling goods and services from one another.
Differences
GAAP Self-Test Questions
- Which of the following is not a reason why a single set of high-quality international accounting standards would be benefi cial?
- The Sarbanes-Oxley Act determines
- IFRS is considered to be more
- Which of the following statements is false?
- Which of the following is true?
Which of the following statements is false? a) GAAP is based on a conceptual framework that is similar to that used to develop IFRS. Which of the following is true? a) Financial fraud has not occurred in US companies because GAAP has detailed accounting and disclosure requirements.
GAAP Exercises
GAAP Financial Reporting Problem: Apple Inc. (USA)
Do you wait for your payment card to decline before checking your balance status? If you think it's hard to keep track of the many transactions that make up your life, just imagine what it's like for a large corporation like Bank of Taiwan (BOT) (TWN).
FEATURE STORY Accidents Happen
Does your wallet contain so many debit card receipts that you've been declared a walking fire hazard? To ensure the accuracy of your balance and the security of your funds, BOT, like all other companies large and small, relies on a sophisticated accounting information system.
53PREVIEW OF CHAPTER 2
THE RECORDING PROCESS
An account is an individual accounting record of increases and decreases in a specific asset, liability or equity item. Because the format of an account resembles the letter T, we refer to it as a T account.
Learning Objective 1
For example, Softbyte SA (the company discussed in Chapter 1) will have separate accounts for cash, accounts receivable, accounts payable, service revenue, salaries and wages, and so on. (Note that when we refer to a specific account, we capitalize the name.) In its simplest form, an account consists of three parts: (1) a title, (2) a left or debit side, and (3) a right or credit page.
The Account
Debits and Credits
The normal balance of an account is on the side where an increase in the account is recorded. USEFUL HINT The rules for debit and credit and the normal share capital balances—.
Equity Relationships
Summary of Debit/Credit Rules
Kate Browne, president of Hair It Is Company SA, has just rented a space in a shopping center where she will open and operate a beauty salon. Identify the statement of financial position accounts that Hair It Is Company is likely to use to record the transactions required to incorporate and open the business.
Normal Account Balances
Analyze each transaction for its effects on the accounts
A friend has advised Kate to set up a double-entry set of accounting records in which she can record all her business transactions.
Enter the transaction information in a journal
Steps in the Recording Process
The Journal
It discloses in one place the complete effects of a transaction
It provides a chronological record of transactions
It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared
Learning Objective 4
It is important to use correct and specifi c account titles in journalizing
Recording Business
The Ledger
Accounting Across the Organization What Would Sam Do?
Posting
- In the ledger, enter, in the appropriate columns of the account(s) debited, the date, journal page, and debit amount shown in the journal
- In the reference column of the journal, write the account number to which the debit amount was posted
- In the ledger, enter, in the appropriate columns of the account(s) credited, the date, journal page, and credit amount shown in the journal
- In the reference column of the journal, write the account number to which the credit amount was posted
HELPFUL TIPS You will also find an extended chart of accounts on the end papers of the textbook. You will notice that there are gaps in the numbering system in the chart of accounts for Yazici Advertising A.S¸.
The Recording Process Illustrated
Transaction On October 20, the board of directors of Yazici Advertising declares and pays a 500 cash dividend to shareholders. October 31 Transaction Yazici Advertising receives 10,000 in cash from Copa for advertising services performed in October.
Summary Illustration of Journalizing and Posting
In the double entry system, this equality occurs when the sum of the balances of the debit accounts is equal to the sum of the balances of the credit accounts.
A trial balance may also uncover errors in journalizing and posting. For example, a trial balance may well have detected the error at Fidelity Investments
List the account titles and their balances
Total the debit and credit columns
Prove the equality of the two columns
The Trial Balance
For example, if only the debit portion of the journal entry was posted, the trial balance would reveal this error.
Limitations of a Trial Balance
Locating Errors
If the error is divisible by 2, scan the trial balance to see whether a balance equal to half the error has been entered in the wrong column
If the error is not divisible by 2 or 9, scan the ledger to see if an account balance the size of the error has been omitted from the proof.
Currency Signs and Underlining
Trial Balance
Which of the following statements about an account is true?
An account is an individual accounting record of increases and decreases in assets, liabilities and capital items.
Debits
A revenue account
Accounts that normally have debit balances are
The expanded accounting equation is
Which of the following is not part of the recording process?
Which of the following statements about a journal is false?
The purchase of supplies on account should result in
A ledger
Posting
A trial balance
A trial balance will not balance if
The T-accounts below summarize the ledger of Garfunkle Landscaping Company at the end of the fi rst month of operations
Presented below is information related to Conan Real Estate Agency plc
The T-accounts below summarize the ledger of Garfunkle Landscaping Company at the end of the first month of operations. The account card for the company is the same as for Yazici Advertising A.S¸. Journalize transactions, post and prepare a trial balance.
Describe the parts of a T-account
Jason Hilbert, a fellow student, contends that the double-entry system means each transaction must be
Sandra Browne, a beginning accounting student, believes debit balances are favorable and credit bal-
State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, and (c) equity accounts
Indicate whether each of the following accounts is an asset, a liability, or an equity account and whether
For the following transactions, indicate the account debited and the account credited
Indicate whether the following accounts generally will have (a) debit entries only, (b) credit entries only,
What are the basic steps in the recording process?
What are the advantages of using a journal in the recording process?
Describe a compound entry, and provide an example
The account number is entered as the last step in posting the amounts from the journal to the ledger
Journalize the following business transactions
What is a trial balance and what are its purposes?
Two students are discussing the use of a trial balance
What are the normal balances for TSMC’s Cash, Accounts Payable, and Interest Expense accounts?
In addition to the accounts identified above, the chart of accounts contains a) Enter opening balances in the general ledger. Based on the information in the financial statements, determine the normal balance of the listed accounts for each company.
Which statement is correct regarding GAAP?
The statement of financial position is often called the balance sheet in the United States. As stated in the textbook, currency symbols are typically only used in the trial balance and the financial statements.
The expanded accounting equation under GAAP is as follows
A trial balance
One difference between GAAP and IFRS is that
The accuracy of a financial reporting system depends on the answers to a few fundamental questions: When revenues were recognized. In fact, diverting income and expenses is one of the most common misuses of financial accounting.
FEATURE STORY What Was Your Profi t?
Perhaps one of the most unusual cases of expenses in the wrong period was revealed by Olympus Corporation (JPN). It is no wonder that a survey of wealthy investors reported that 85% of respondents believe that there should be stricter regulation of financial disclosures; 66% said they do not trust the management of listed companies.
101PREVIEW OF CHAPTER 3
If we could wait to prepare financial statements until a company went out of business, no adjustments would be necessary. For example, management usually wants monthly financial statements, and tax authorities require all businesses to file annual tax returns.
Fiscal and Calendar Years
At that point, we could easily determine its final statement of financial position and the amount of lifetime income it had earned. For example, the aircraft that Cathay Pacifi c (HKG) bought five years ago are still in use today.
Accrual- versus Cash-Basis Accounting
Timing Issues
Recognizing Revenues and Expenses
In order for income to be booked in the period in which the services are performed, and for costs to be recognized in the period in which they are incurred, companies make adjusting entries.
The Basics of Adjusting Entries
Timing Concepts
Some events are not recorded daily because it is not effi cient to do so. Examples are the use of supplies and the earning of wages by employees
Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily trans-
Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period
Adjusting entries are required every time a company prepares fi nancial statements. The company analyzes each account in the trial balance to deter-
Every adjusting entry will include one income statement account and one statement of fi nancial position account
Types of Adjusting Entries
- Prepaid expenses: Expenses paid in cash before they are used or consumed
- Unearned revenues: Cash received before services are performed
- Accrued revenues: Revenues for services performed but not yet received in cash or recorded
- Accrued expenses: Expenses incurred but not yet paid in cash or recorded
Some costs are not recorded in the accounting period because these costs expire over time rather than as a result of recurring daily trans-.
Adjusting Entries for Deferrals
The Accumulated Depreciation - Equipment account balance will increase by 40 each month, but the equipment balance remains at 5,000. Book value is the difference between the cost of any depreciable asset and the accumulated depreciation associated with it.
Next, the company makes an adjustment entry to record revenue for services performed during the period and to demonstrate the liability that remains at the end of the accounting period. Reason for Bills Before Adjustment Examples Adjustment Adjustment Booking Rent, Magazine Unearned Income Excessive Liabilities.
Accounting Across the Organization Turning Gift Cards into Revenue
Adjusting Entries for
Adjusting Entries for Accruals
It also reduces equity by increasing an expense account, Salaries and Wages Expense, as shown in Illustration 3-20. 1,200 The expense Salaries and Wages Expense is increased 1,200; the liability Salaries and Wages Payable is increased by 1,200.
People, Planet, and Profi t Insight Got Junk?
Summary of Basic Relationships
The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the general ledger after all adjustments. Because the financial statements contain all the data necessary for financial statements, the adjusted trial balance is the primary basis for preparing the financial statements.
Preparing the Adjusted Trial Balance
The Adjusted Trial Balance and Financial Statements
Preparing Financial Statements
The adjusted trial balance amounts at June 30 are shown below. a) Determine the net income for the quarter April 1 to June 30. b) Determine the total assets and total liabilities at June 30, 2017, for Kang Company. Net income is calculated as follows (in millions). b) Total assets and liabilities are calculated as follows (in millions).
Alternative Treatment of Prepaid Expenses and Unearned Revenues
APPENDIX 3A
Learning Objective *8
This alternative treatment of prepaid expenses and unearned income has the same effect on the financial statements as the procedures described in this chapter.
Prepaid Expenses
Unearned Revenues
For simplicity, we have ignored the costs in Service Revenue related to the immediate revenue recognition ( 10,000) and the accrued income adjustment item ( 200).
Summary of Additional Adjustment Relationships
Concepts in Action
Qualities of Useful Information
APPENDIX 3B
Assumptions in Financial Reporting
Principles in Financial Reporting
The revenue recognition principle requires companies to recognize revenue in the accounting period in which the performance obligation is fulfilled. The expense recognition principle (often referred to as the matching principle, discussed earlier in the chapter) dictates that efforts (expenses) match results (revenues).
Cost Constraint
The time period assumption states that
The revenue recognition principle states that
Which of the following statements about the accrual basis of accounting is false?
The principle or assumption dictating that efforts (expenses) be matched with accomplishments (rev-
Adjusting entries are made to ensure that
Each of the following is a major type (or category) of adjusting entries except
Adjustments for prepaid expenses
Accumulated Depreciation is
Queenan Company computes depreciation on deliv- ery equipment at HK$10,000 for the month of June
Adjustments for unearned revenues
Adjustments for accrued revenues
Kathy Siska earned a salary of R$400 for the last week of September. She will be paid on October 1
Which of the following statements is incorrect con- cerning the adjusted trial balance?
The other choices are incorrect because accumulated depreciation is not (b) an expense account or placed on the income statement, (c) an equity account, or (d) a liability account. c) The adjusting entry is to debit Depreciation Expense and credit Accumulated Depreciation-Equipment. Choice (c) is incorrect because these adjustments will increase, not decrease, both assets and income. b) The adjusting entry should be to debit Salaries and Wages Payable for R$400 and credit Salaries and Wages Payable for R$400.
Defi ne two IFRS principles that relate to adjusting the accounts
Gabe Corts, a lawyer, accepts a legal engagement in March, performs the work in April, and is paid in
Why do accrual-basis fi nancial statements provide more useful information than cash-basis statements?
Why may a trial balance not contain up-to-date and complete fi nancial information?
Distinguish between the two categories of adjusting entries, and identify the types of adjustments appli-
What is the debit/credit effect of a prepaid expense adjusting entry?
Explain the differences between depreciation expense and accumulated depreciation
Jain Company purchased equipment for Rs18,000,000
What is the debit/credit effect of an unearned revenue adjusting entry?
A company fails to recognize revenue for services performed but not yet received in cash or recorded
Which of the following accounts is involved in the adjusting entry: (a) asset, (b) liability, (c) revenue or (d) expense. For the accounts selected, indicate whether they will be debited or credited in the entry.
A company fails to recognize an expense incurred but not paid. Indicate which of the following accounts is
A company makes an accrued revenue adjusting en- try for NT$27,000 and an accrued expense adjust-
On January 9, a company pays €6,000 for salaries and wages, of which € 2,000 was reported as Salaries
For each of the following items before adjustment, indicate the type of adjusting entry (prepaid expense,
Why is it possible to prepare fi nancial statements di- rectly from an adjusted trial balance?
For each of the above items, indicate the following. a) Type of adjustment (prepaid expense, unearned income, accrued income or accrued expenses). E3-9 Trial balance for Yazici Advertising A.S¸. Instead of the adjusting entries shown in the text on October 31, assume the following adjusting entries.
- GAAP
- Which of the following statements is false?
- As a result of the revenue recognition project by the FASB and IASB
- Which of the following is false?
- Accrual-basis accounting
If the company's significant liabilities are not reported in the statement of financial position, the company's net worth (its equity) will be overstated. The form and content of financial statements are very similar under GAAP and IFRS.
GAAP Financial Reporting Problem: Apple Inc
Recent events in global capital markets underline the importance of financial disclosure and transparency in markets around the world. Taking into account the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); And.
FEATURE STORY Speaking the Same Language
As indicated in the chart on this page, financial regulators in more than 120 countries now use the IFRSs issued by the International Accounting Standards Board (IASB). However, users of financial statements have already benefited from greater comparability resulting from efforts to minimize differences in accounting standards.
161PREVIEW OF CHAPTER 4
A worksheet is a multi-column form used in the adjustment process and in the preparation of financial statements. A worksheet is simply a device used in the preparation of accounting records and financial statements.
Using a Worksheet
When a company chooses to use it, it prepares financial statements directly from the worksheet. He enters the adjustments in the worksheet columns and then records and posts the adjustments after he has prepared the financial statements.
Steps in Preparing a Worksheet
PREPARE A TRIAL BALANCE ON THE WORKSHEET
ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS
ENTER ADJUSTED BALANCES IN THE ADJUSTED TRIAL BALANCE COLUMNS
The difference between the sums of the two columns of the income statement determines the net profit or net loss. Net income is expanded to the credit column of the statement of financial position columns.
EXTEND ADJUSTED TRIAL BALANCE AMOUNTS TO APPROPRIATE FINANCIAL STATEMENT COLUMNS
TOTAL THE STATEMENT COLUMNS, COMPUTE THE NET INCOME (OR NET LOSS), AND COMPLETE THE WORKSHEET
Preparing Financial Statements from a Worksheet
The data format in the financial statement columns on the worksheet is not the same as the financial statement format. A worksheet is basically an accountant's work tool; companies do not distribute to management and other customers.
Preparing Adjusting Entries from a Worksheet
The amount shown for Share Capital – Ordinary on the worksheet does not change from the beginning to the end of the period unless the company issues additional common stock during the period. Only after dividends and net income (or losses) have been posted to retained earnings will this account have a balance at the end of the first year of operation.
Worksheet
Closing the Books
Instead, the company carries over the balances of the permanent accounts to the next accounting period.
Preparing Closing Entries
- Debit each revenue account for its balance, and credit Income Summary for total revenues
- Debit Income Summary for total expenses, and credit each expense account for its balance
- Debit Income Summary and credit Retained Earnings for the amount of net income
- Debit Retained Earnings for the balance in the Dividends account, and credit Dividends for the same amount
If there was a net loss (because expenses exceeded income), entry 3 in Illustration 4-5 would be reversed: There would be a credit to Income Statement and a debit to Retained Earnings. The dividend account is closed directly to retained earnings and not to the income statement, because dividends are not an expense.
Posting Closing Entries
Note that the amounts for Income Summary in entries (1) and (2) are the totals of the income statement credit and debit columns, respectively, in the worksheet.
Accounting Across the Organization Performing the Virtual Close
Preparing a Post-Closing Trial Balance
Closing Entries
The permanent accounts for Yazici Advertising A.S¸. is shown here; the temporary accounts are shown in Illustration 4-10. Both permanent and temporary accounts are part of the general ledger; we have separated them here to help with learning.
Summary of the Accounting Cycle
Permanent and temporary accounts are part of the general ledger; they are separated here to aid learning. You can see that the cycle starts with the analysis of business transactions and ends with the preparation of the post-closing trial balance.
Reversing Entries—An Optional Step
As you have seen, businesses can use a worksheet to prepare adjusting entries and financial statements.
Correcting Entries—An Avoidable Step
A payment of Salaries and Wages Expense of $600 was debited to Supplies and credited to Cash, both for $600
A collection of $3,000 from a client on account was debited to Cash $200 and credited to Service Revenue $200
The purchase of supplies on account for $860 was debited to Supplies $680 and credited to Accounts Payable $680
Correcting Entries
These groups help readers of financial statements determine such things as (1) the claims of long-term and short-term creditors on the company's total assets, and (2) whether the company has sufficient funds to pay its debts as they fall due. Many of these groups can be seen in the statement of financial position of Cheng Ltd.
Intangible Assets
The Classifi ed Statement of Financial Position
Property, Plant, and Equipment
Long-Term Investments
Current Assets
For example, accounts receivable are current assets because the company will collect them within a year and convert them into cash. Unless otherwise stated, we assume that companies use one year to determine whether an asset or liability is current or non-current.
People, Planet, and Profi t Insight Creating Value Nestlé SA (CHE)
Inventories are short-term assets because the company expects to use them in operations within a year. In the statement of financial position, companies usually list these items in the reverse order in which they expect to convert them into cash.
Non-Current Liabilities
Corporations combine share capital—. Ordinary and retained earnings accounts and report them on the statement of financial position as equity.
Current Liabilities
