Chapter 04
Chapter 04
Chapter 04
Accounting Cycle
Learning Objectives
1 Prepare a worksheet.
4-1
LEARNING
OBJECTIVE
1 Prepare a worksheet.
Worksheet
◆ Multiple-column form used in preparing financial
statements.
4-2 LO 1
Steps in Preparing a Worksheet
Illustration 4-1
4-3
Steps in Preparing a Worksheet Illustration 4-2
4-4 LO 1
Steps in Preparing a Worksheet
Illustration 3-23
General journal
showing adjusting
entries
Adjusting
Journal
Entries
(Chapter 3)
4-5
LO 1
Steps in Preparing a Worksheet Illustration 4-2
Question
Net income is shown on a worksheet in the:
4-10 LO 1
Preparing Financial Statements from a
Worksheet
4-11 LO 1
Preparing Statements from a Worksheet
Illustration 4-3
Financial statements
from a worksheet
4-12 LO 1
Preparing Statements from a Worksheet
Illustration 4-3
Financial statements
from a worksheet
4-13 LO 1
Illustration 4-3
Illustration 4-3
4-14 LO 1
Preparing Adjusting Entries from a
Worksheet
4-15 LO 1
DO IT! 1 Worksheet
4-16 LO 1
LEARNING Prepare closing entries and a post-
OBJECTIVE
2
closing trial balance.
Illustration 4-4
Temporary versus permanent accounts
4-17 LO 2
Preparing Closing Entries
to Retained Earnings.
4-18 LO 2
Preparing Closing Entries
Illustration 4-5
Diagram of closing
process—corporation
Retained earnings is a
permanent account.
All other accounts are
temporary accounts.
4-19 LO 2
Preparing Closing Entries
CLOSING
ENTRIES
ILLUSTRATED
Illustration 4-6
Closing entries
4-20 journalized
Posting
Closing
Entries
Illustration 4-7
4-21 LO 2
4-22 LO 2
Preparing a Post-Closing Trial Balance
Purpose is to prove the equality of the permanent account balances
carried forward into the next accounting period. Illustration 4-8
Post-closing trial balance
Illustration 4-8
4-23 LO 2
DO IT! 2 Closing Entries
Illustration 4-11
1. Analyze business transactions
7. Prepare financial
4. Prepare a trial balance
statements
4-25
LO 3
Correcting Entries—An Avoidable Step
4-26 LO 3
Correcting Entries—An Avoidable Step
CASE 1: On May 10, Mercato Co. journalized and posted a $50 cash
collection on account from a customer as a debit to Cash $50 and a
credit to Service Revenue $50. The company discovered the error on
May 20, when the customer paid the remaining balance in full.
Incorrect Cash 50
entry
Service Revenue 50
Correct Cash 50
entry
Accounts Receivable 50
Correcting Service Revenue 50
entry Accounts Receivable 50
4-27 LO 3
Correcting Entries—An Avoidable Step
Incorrect Equipment 45
entry
Accounts Payable 45
Correct Equipment 450
entry
Accounts Payable 450
Correcting Equipment 405
entry Accounts Payable 405
4-28 LO 3
4-29 LO 3
DO IT! 3 Correcting Entries
4-30 LO 3
DO IT! 3 Correcting Entries
4-31 LO 3
DO IT! 3 Correcting Entries
4-32 LO 3
DO IT! 3 Correcting Entries
4-33 LO 3
LEARNING Identify the sections of a classified
OBJECTIVE
4
balance sheet.
4-34 LO 4
The Classified Balance Sheet
Illustration 4-17
4-35 LO 4
The Classified Balance Sheet
Illustration 4-17
4-36 LO 4
Current Assets
4-37 LO 4
Current Assets
Illustration 4-18
Usually listed in the order they expect to convert them into cash.
4-38 LO 4
Current Assets
Question
The correct order of presentation in a classified balance sheet
for the following current assets is:
4-39 LO 4
Long-Term Investments
4-40 LO 4
Property, Plant, and Equipment
4-41 LO 4
Property, Plant, and Equipment
Illustration 4-20
4-42 LO 4
Intangible Assets
Illustration 4-21
4-43 LO 4
The Classified Balance Sheet
Question
Patents and copyrights are
a. Current assets.
b. Intangible assets.
c. Long-term investments.
4-44 LO 4
4-45 LO 4
Current Liabilities
4-46 LO 4
Current Liabilities
Illustration 4-22
4-47 LO 4
4-48 LO 4
Long-Term Liabilities
Illustration 4-23
4-49 LO 4
The Classified Balance Sheet
Question
Which of the following is not a long-term liability?
a. Bonds payable
d. Mortgages payable
4-50 LO 4
Stockholders’ (Owner’s) Equity
Illustration 4-24
4-51 LO 4
DO IT! 4 Balance Sheet Classifications
The following accounts were taken from the financial statements of Callahan
Company.
4-52 LO 4
LEARNING
OBJECTIVE
5 APPENDIX 4A: Prepare reversing entries.
Reversing Entries
◆ It is often helpful to reverse some of the adjusting entries
before recording the regular transactions of the next period.
4-53 LO 5
Reversing Entries Example
4-54 LO 5
Reversing Entries Example
Illustration 4A-1
Adjusting Entry
Oct. 31 Same entry
Closing Entry
Oct. 31 Same entry
Reversing Entry
Nov. 1 Salaries and Wages Payable 1,200
Salaries and Wages Expense 1,200
4-55 LO 5
Reversing Entries Example
Illustration 4A-2
Postings with
reversing
entries
4-56 LO 5
LEARNING Compare the procedures for the closing
OBJECTIVE
6 process under GAAP and IFRS.
Key Points
Similarities
◆ The procedures of the closing process are applicable to all
companies, whether they are using IFRS or GAAP.
◆ IFRS generally requires a classified statement of financial position
similar to the classified balance sheet under GAAP.
◆ IFRS follows the same guidelines as this textbook for distinguishing
between current and noncurrent assets and liabilities.
4-57 LO 6
Key Points
Differences
◆ IFRS recommends but does not require the use of the title
“statement of financial position” rather than balance sheet.
◆ The format of statement of financial position information is often
presented differently under IFRS.
◆ Although no specific format is required, many companies that
follow IFRS present statement of financial position information in
this order:
◆ Non-current assets ◆ Non-current liabilities
◆ Current assets ◆ Current liabilities
◆ Equity
4-58 LO 6
Key Points
Differences
◆ Under IFRS, current assets are usually listed in the reverse order
of liquidity. For example, under GAAP cash is listed first, but
under IFRS it is listed last.
◆ Both GAAP and IFRS are increasing the use of fair value to report
assets. However, at this point IFRS has adopted it more broadly.
As examples, under IFRS companies can apply fair value to
property, plant, and equipment , and in some cases intangible
assets.
4-59 LO 6
Looking to the Future
The IASB and the FASB are working on a project to converge their
standards related to financial statement presentation. A key feature of
the proposed framework is that each of the statements will be organized
in the same format, to separate an entity’s financing activities from its
operating and investing activities and, further, to separate financing
activities into transactions with owners and creditors. Thus, the same
classifications used in the statement of financial position would also be
used in the income statement and the statement of cash flows. The
project has three phases. You can follow the joint financial presentation
project at the following link: http://www.fasb.org/project/
financial_statement_presentation.shtml .
4-60 LO 6
IFRS Self-Test Questions
Companies that use IFRS:
b) may offset assets against liabilities and show net assets and net
liabilities on their statements of financial position, rather than the
underlying detailed line items.
a) land expense.
c) an intangible asset.
d) a long-term investment.
4-62 LO 6
IFRS Self-Test Questions
Current assets under IFRS are listed generally:
a) by importance.
c) by longevity.
d) alphabetically.
4-63 LO 6