PREPARING COMPONENTS UNITS FOR THE FINANCIAL STATEMENT YEAR END CLOSE

1
PREPARING COMPONENTS UNITS FOR THE FINANCIAL
STATEMENT YEAR END CLOSE

• Jeanne H. Yamamura
• CPA, MIM, PhD

2
REVIEW OF TERMINOLOGY AND CONCEPTS

• The set of accounts used by an entity to which
  transactions are posted is
• A. The book of original entry.
• B. The general ledger.
• C. A subsidiary ledger.
• D. A t-account.
• The book of original entry used to record cash
  receipts is known as
• The Cash account.
• The general ledger.
• The cash receipts journal.
• The sales invoice.

3
REVIEW OF TERMINOLOGY AND CONCEPTS

• 3. The five types of accounts include
• A. Cash, Fixed Assets, Accounts Payable, Fund
  Balance, Sales.
• B. Debit, Credit, Contra-Asset,
  Contra-Liability, Miscellaneous.
• C. Revenues, Expenses, Gains, Losses, Net
  Income.
• D. Assets, Liabilities, Equity, Revenue,
  Expenses.
• 4. Accounts Payable is
• An Asset.
• A Liability.
• A Revenue.
• An Expense.

4
REVIEW OF TERMINOLOGY AND CONCEPTS

• 5. The set of rules followed by accountants in
  recording transactions and preparing financial
  statements is known as
• A. Accounting Rules for Dummies.
• B. Debits and credits.
• C. Generally accepted accounting principles.
• D. PCAOB auditing standards.
• 6. The rule that has expenses attached to the
  revenues they produce is known as
• The Revenue Recognition Principle.
• The Matching Principle.
• The Time Period Assumption.
• Accrual Accounting.

5
ACCOUNTING EQUATION

• ASSETS LIABILITIES EQUITY
• DR CR CR
• REVENUES CR
• - EXPENSES DR

Normal balances Increase
6
GASB 34

• GASB Statement No. 34 Basic Financial Statements
  and Management Discussion and Analysis for State
  and Local Governments
• Establishes standards for external financial
  reporting for state and local governments
• Requires that resources be classified for
  accounting and reporting purposes into certain
  categories

7
EQUITY COMPONENT UNITS

• Equity governmental funds Fund Balance
• Equity component units Net Assets
• Invested in Capital Assets
• Net of related debt
• Restricted Net Assets
• Unrestricted Net Assets

8
INVESTMENT IN CAPITAL ASSETS

• Capital assets
• Net of accumulated depreciation
• Net of outstanding principal balances of related
  debt
• Acquisition, construction, or improvement

9
RESTRICTED ASSETS

• Nonexpendable
• Net assets subject to externally imposed
  stipulations that require the entity to maintain
  them permanently
• Expendable
• Net assets whose use by the entity is subject to
  externally imposed stipulations that can be
  fulfilled by actions taken by the entity or that
  expire over time

10
UNRESTRICTED NET ASSETS

• Unrestricted Net Assets
• Net assets that are not subject to externally
  imposed stipulations
• May be designated for specific purposes by action
  of management or the Board of Directors
• May be limited by contractual agreements with
  outside parties

11
ACCOUNTING JOURNALS

• Where transactions are originally recorded
• Books of original entry
• Cash receipts journal
• Cash disbursements journal
• Payroll journal
• Revenue journal
• Purchases journal
• General journal
• Complete Exercise No. 1 in the Workbook

12
MICRONESIAN FISHING CORPORATION

• Component unit of State Government
• Supports local fisheries
• Purchases and sells fish
• Purchases and sells fishing supplies
• Owns building
• Rents space to Micronesian Development Authority

13
ACCOUNTING CYCLE
ACCOUNTING CYCLE
Prepare post closing TB
Journalize post closing JEs
Analyze transactions verify documentation
Prepare analyze FS
Record in Journal
Prepare adjusted TB
Post to General Ledger

• Prepare TB

Journalize post AJEs
14
EXAMPLE TRIAL BALANCE 12/31/09
AC Account Name DR CR
101 Cash in Bank Gen. Checking 15,400
110 Accounts Receivable 10,600
200 Accounts Payable 9,300
211 Withholding Taxes Payable 500
310 Unrestricted Net Assets 14,200
410 Grant Revenue 19,200
601 Salaries Expense 12,500
616 Travel Expense 4,700
TOTAL 43,200 43,200
15
ADJUSTING ENTRIES

• Help ensure that the financial statements are
  presented on an accrual basis.
• Required every time the financial statements are
  prepared.
• Ensure revenue recognition and matching
  principles are followed.
• Record revenues in the period in which they are
  earned.
• Recognize expenses in the period in which they
  are incurred and match against revenues earned

16
ADJUSTING ENTRIES

• Adjusting entries are necessary because
• Inefficient to record certain transactions daily
  (e.g., SW)
• Certain costs occur over time and need to be
  recognized periodically (e.g., Insurance)
• Certain costs incurred but unknown until
  following period (e.g., Utilities)

17
PREPAYMENTS

• Prepaid Expenses
• Expenses originally paid in cash and initially
  recorded as assets
• Will benefit more than one accounting period.
• Examples Prepaid Insurance, Prepaid Rent,
  Office Supplies, Fixed Assets (Depreciation).
• Unearned Revenues
• Revenues originally received in cash and
  initially recorded as liabilities
• Will be earned over more than one accounting
  period
• Examples Unearned Service Revenue, Unearned
  Membership Revenue.

18
PREPAID EXPENSES

• Cash already paid
• Expense benefits more than one period
• Initially set up as an asset
• Expire over time through use
• Recognize expense through AJEs

19
PREPAID INSURANCE

• 7/31/08 TB - 1,200 Prepaid Insurance
• Annual premium for fire insurance on building
• Originally paid 7/1/08 need to expense 1 month
• AJE needed
• DR Insurance Expense 100
• CR Prepaid Insurance 100

20
T-ACCOUNTS

• Prepaid Insurance Insurance
  Expense
• 1200
• 100
  100
• 1100
  100
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

21
SUPPLIES

• 7/31/08 TB - 750 Office Supplies
• Physical count at 7/31 500
• AJE needed
• DR Office Supplies Expense 250
• CR Office Supplies 250
• Note What is the difference between Office
  Supplies Expense and Office Supplies?

22
T-ACCOUNTS

• Office Supplies
  Office Supplies Expense
• 750
• 250
  250
• 500
  250
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

23
SUPPLIES

• 7/31/08 TB - Office Supplies Expense 750
  (originally expensed)
• Physical count at 7/31 500
• AJE needed
• DR Office Supplies 500
• CR Office Supplies Expense 500

24
T-ACCOUNTS

• Office Supplies
  Office Supplies Expense
• 
  750
• 500
  500
• 500
  250
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

25
DEPRECIATION
Note No pennies necessary would imply more
accuracy than really exists

• Straight-line method
• Depreciable Cost
• Estimated Useful Life
• Where depreciable cost cost salvage value
• 7/31/08 TB Building 25,000, 25 year life
• Monthly depreciation expense
• 25,000 / 25 years 1,000 per year/12 months
• DR Depreciation Expense 83
• CR Accum. Deprec. Bldg. 83

26
T-ACCOUNTS

• Accum. Depr.- Bldg.
  Depreciation Expense
• 1,000
• 83
  83
• 1,083
  83
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

27
UNEARNED REVENUES

• Cash already received
• Revenue earned in the future
• Initially set up as a liability
• Recognize revenues when earned through AJEs

28
UNEARNED REVENUES

• 7/31/08 TB - 4,200 Unearned Revenue
• Annual dues payments of 600 for 7 members
• 600 per year / 12 months 50 per month 7
  members 350
• AJE needed
• DR Unearned Revenue 350
• CR Membership Dues Revenue 350

29
T-ACCOUNTS

• Unearned Revenues Membership Dues
  Revenue
• 4,200
• 350
  350
• 3,850
  350
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

30
ACCRUALS

• Accrued Revenues
• Revenues earned but not received or recorded
• Examples Services performed but not yet billed.
• Accrued Expenses
• Expenses incurred but not yet been paid in cash
  or recorded
• Examples Interest expense, salaries and wages
  expense, tax expense.

31
ACCRUED REVENUES

• 7/31/08 TB - 15,000 in advertising earned but
  not yet billed or paid
• AJE needed
• DR Accounts Receivable 15,000
• CR Advertising Revenue 15,000

32
T-ACCOUNTS

• Accounts Receivable
  Advertising Revenue
• 29,330
• 15,000
  15,000
• 44,330
  15,000
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

33
ACCRUED INTEREST EXPENSE

• 7/31/08 TB - 20,000 Note Payable, 10 interest,
  dated 7/1/08, due 9/29/08
• Need to accrue 1 month of interest
• 20,000 10 1/12 167 (rounded)
• AJE needed
• DR Interest Expense 167
• CR Interest Payable 167

34
T-ACCOUNTS

• Interest Payable Interest
  Expense
• 167
  167
• 167
  167
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

35
ACCRUED WAGES EXPENSE

• 7/31/08 TB Need to accrue wages earned but
  unpaid as of 7/31/08
• PPE 7/25/08 paid 8/1 1,000
• 7/28-7/31 paid 8/15
• 1,000 / 10 100 4 400
• AJE needed
• DR Wages Expense 1,400
• CR Wages Payable 1,400

36
T-ACCOUNTS

• Wages Payable Wages
  Expense
• 
  2,000
• 1,400
  1,400
• 7/31 1,400 7/31 3,400
  
• EFFECT ON ACCOUNTING EQUATION?
• ASSETS LIAB EQUITY

37
REVERSING ENTRIES

• AJEs for accruals (revenues and expenses) can be
  reversed as of the beginning of the following
  period
• Why? To make it easier to record ongoing
  transactions
• What is a reversing entry?
• Exactly what it sounds like! A reversal of the
  AJE.

38
REVERSING ENTRY FOR ACCRUED WAGES EXPENSE

• Reversing entry 8/1/08
• DR Wages Payable 1,400
• CR Wages Expense 1,400
• Wages Payable Wages
  Expense
• 8/1 1,400
  2,000
• RJE 1,400
  1,400
• 
  
• 600
  

39
REVIEW OF SHIPPING TERMS

• FOB Shipping Point ownership passes when goods
  shipped by seller
• FOB Destination ownership passes when goods
  received by buyer
• Inventory in Transit
• Asset account
• Inventory owned but not yet received

40
RECONCILIATIONS

• Performed at least monthly
• For
• Cash, Accounts Receivable, Accounts Payable,
  Fixed Assets
• Any account supported by a subsidiary ledger
• Detects errors and unrecorded transactions

41
CASH AND BANK ACCOUNTS

• Cash and cash equivalents include
• Coins, currency on hand
• Checks, money orders
• Balances in checking and savings accounts
• Having sufficient cash is critical to the
  successful operation of ALL entities

42
BANK RECONCILIATION

• Agreement of two independently maintained sets of
  records
• Bank (bank statement)
• Books (CDJ, CRJ, GL)
• Why arent these the same?
• Timing check clearing, deposit clearing
• Errors and omissions bank or books

43
IN BOOKS BUT NOT BANK

• Outstanding checks Issued and recorded but have
  not yet cleared the bank
• Deposits in transit Mailed or taken to the bank
  but not recorded on the bank statement Also
  includes deposits prepared but not yet taken to
  bank

44
IN BANK BUT NOT BOOKS

• Require adjusting entries because not yet in
  books
• Service charges Bank fees
• DR Bank Charges
• CR Cash in Bank
• NSF (nonsufficient funds) checks Checks
  deposited that are returned by the bank because
  of insufficient funds in the account of the check
  writer
• DR NSF Checks Receivable
• CR Cash in Bank

45
IN BANK BUT NOT BOOKS

• Interest income Interest paid by the bank
• DR Cash in Bank
• CR Interest Income
• Miscellaneous charges and credits
• Bank charges for other services such as printing
  checks or stopping payment.
• DR Misc. Expense (Bank Charges)
• CR Cash in Bank
• Bank receipt of direct deposit.
• DR Cash in Bank
• CR Grants from State

46
RECONCILIATION PROCESS

• Start with book balance and adjust for unrecorded
  items per the bank statement and any errors or
  corrections.
• Then adjust the bank balance for deposits in
  transit, outstanding checks, and any errors or
  corrections.
• When the two adjusted balances agree, the
  reconciliation process is complete.

47
DETAILED STEPS

• Begin with the balance per the bank. This is the
  ending balance on the bank statement.
• Identify deposits in transit as of the end of the
  period. Trace each of the deposits per the CRJ to
  the bank statement.
• Any deposits in transit from last month should
  appear on the bank statement (at the beginning of
  the month).
• New deposits in transit will usually be the
  latest deposits for the current month.

48
DEPOSITS IN TRANSIT

• 7/31/08 2,305.00
• TOTAL 2,305.00

49
DETAILED STEPS

• Identify outstanding checks as of the end of the
  period. Trace each of the checks per the CDJ to
  the bank statement identifying which checks have
  cleared the bank. Those that have not cleared the
  bank are outstanding.
• Checks that cleared at the beginning of the bank
  statement that are not listed in this periods
  CDJ were most likely issued in the prior period
  (and were outstanding in the last bank
  reconciliation).

50
OUTSTANDING CHECKS

• 596 135.00
• 602 408.00
• 603 515.96
• 604 267.60
• TOTAL 1,326.56

51
DETAILED STEPS

• Now you are ready to compute the adjusted bank
  balance.
• Enter a total for deposits in transit.
• Enter a total for outstanding checks.
• Compute Bank balance plus deposits in transit
  minus outstanding checks Adjusted bank balance
• If there were any bank errors, include them as
  other.

52
BANK RECONCILIATIONGENERAL CHECKING
ACCOUNT7/31/08

• Balance per bank 15,607.25
• Adjustments
• Add Deposits in transit 2,305.00
• Less Outstanding checks (1,326.56)
• Add Bank error ________
• Adjusted balance per bank 16,585.69

53
DETAILED STEPS

1. Enter the balance per the books. This is the
   ending balance in the Cash account in the general
   ledger.

54
GENERAL LEDGER CASH
Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number
Date Description Ref Debit Credit Balance
6/30/08 Ending balance 6,034.55
7/11/08 Sales CRJ-7 1,715.00
7/15/08 Checks 598-601 CDJ-7 2,967.30
7/25/08 Sales CRJ-7 1,050.00
7/31/08 Checks 602-605 CDJ-7 1,826.56
7/31/08 Sales CRJ-7 2,305.00 6,310.69

This is the balance per books
55
DETAILED STEPS

1. Now based on the comparisons performed earlier,
   identify any bank charges (service charges, debit
   memos) or bank credits (direct deposits, interest
   income) that appear on the bank statement but not
   in the books.
2. Compute the adjusted book balance

56
BANK RECONCILIATIONGENERAL CHECKING
ACCOUNT7/31/08

• Balance per books 6,310.69
• Adjustments
• Add 7/7 Direct deposit 10,500.00
• Add Error 7/11 deposit 100.00
• Less NSF check FIT (275.00)
• Less NSF check fee (15.00)
• Less Service charge (35.00)
• Adjusted balance per books 16,585.69

57
DETAILED STEPS

• When the two adjusted balances (adjusted balance
  per bank and
• adjusted balance per books)
• agree, the account is reconciled.
• Prepare an adjusting journal entry
• for each reconciling item used to
• compute the adjusted balance
• per books.

58
JOURNAL ENTRIES

• DR Cash in Bank 10,500
• CR Grant Revenue 10,500
• To record federal grant direct deposit 7/7/08
• DR Cash in Bank 100
• CR Sales Revenue 100
• To correct deposit 7/11/08

59
JOURNAL ENTRIES

• DR NSF Checks Receivable 290
• CR Cash in Bank 290
• To record NSF check from FIT Corp. plus NSF fee
  (275 15 290)
• DR Misc. Expense 35
• CR Cash in Bank 35
• To record bank service charge 7/8/08

60
THE END RESULT

• The final cash balance will then appear as
  follows after the adjusting entries are recorded
  and posted.
• Note that the final cash balance will be equal to
  the adjusted balance per bank and per books.

61
GENERAL LEDGER CASH
Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number Account Title CASH GEN. CHECKING ACCOUNT Account Number
Date Description Ref Debit Credit Balance
7/31/08 Balance 6,310.69
7/31/08 Fed. Grant DD GJ-7 10,500.00
7/31/08 Correction to 7/11 GJ-7 100.00
7/31/08 NSF check GJ-7 290.00
7/31/08 Bank service chg. GJ-7 35.00
7/31/08 16,585.69

62
ACCOUNTS RECEIVABLE

• Agreement of two independently maintained sets of
  records
• General Ledger Control Account
• Subsidiary Ledger
• Why arent these the same?
• Errors and omissions

63
RECONCILIATION PROCESS

• Prepare a schedule of customer accounts in
  Accounts Receivable subsidiary ledger.
• Compare to the balance in the Accounts Receivable
  account in the General Ledger.
• If the two amounts do not agree, prepare a
  4-column reconciliation to reconcile the activity
  in the two records

64
GENERAL LEDGER ACCOUNTS RECEIVABLE
Account Title ACCOUNTS RECEIVABLE Account Number Account Title ACCOUNTS RECEIVABLE Account Number Account Title ACCOUNTS RECEIVABLE Account Number Account Title ACCOUNTS RECEIVABLE Account Number Account Title ACCOUNTS RECEIVABLE Account Number Account Title ACCOUNTS RECEIVABLE Account Number
Date Description Ref Debit Credit Balance
6/30/08 Balance 12,005
7/19/08 Sunset Restaurant account written off due to bankruptcy GJ-7 1,905
7/31/08 July sales SJ-7 31,560
7/31/08 July collections CRJ-7 9,600
7/31/08 32,060
31,560 11,505
65
ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER
Customer Abacus Hotel Customer Abacus Hotel Customer Abacus Hotel Customer Abacus Hotel Customer Abacus Hotel Customer Abacus Hotel
Date Description Ref Debit Credit Balance
6/30/08 Balance 5,450
7/10/08 Adj. for spoiled fish 500
7/31/08 July payment CRJ-7 4,950
7/31/08 July sale SJ-7 10,560 10,560
Customer Nikko Restaurant Customer Nikko Restaurant Customer Nikko Restaurant Customer Nikko Restaurant Customer Nikko Restaurant Customer Nikko Restaurant
6/30/08 Balance 1,500
7/31/08 July payment CRJ-7 1,500
7/31/08 July sale SJ-7 6,700
7/31/08 6,700
66
ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER
Customer Sunset Restaurant Customer Sunset Restaurant Customer Sunset Restaurant Customer Sunset Restaurant Customer Sunset Restaurant Customer Sunset Restaurant
Date Description Ref Debit Credit Balance
6/30/08 Balance 1,905
Customer Hotel Zero Customer Hotel Zero Customer Hotel Zero Customer Hotel Zero Customer Hotel Zero Customer Hotel Zero
6/30/08 Balance 3,150
7/31/08 July payment CRJ-7 3,150
7/31/08 July sale SJ-7 14,300 14,300

31,560 10,100 33,465
67
4-COLUMN RECONCILIATION
Balance 6/30/08 DR CR Balance 7/31/08
Per General Ledger 12,005 31,560 11,505 32,060
Account adjusted per SL, not posted to GL 500 (500)
Adjusted GL balance 12,005 31,560 10,100 31,560
68
4-COLUMN RECONCILIATION
Balance 6/30/08 DR CR Balance 7/31/08
Per Subsidiary Ledger 12,005 31,560 10,100 33,465
Account W/O due to bankruptcy, not posted to SL 1,905 (1,905)
Adjusted GL balance 12,005 31,560 12,005 31,560
69
JOURNAL ENTRIES

• DR Sales RA - Fish 500
• CR AR Abacus Hotel 500
• To record spoiled fish returned by Abacus Hotel
  for credit

70
JOURNAL ENTRIES

• DR Accounts Payable 300
• CR Purchase Returns and
• Allowances Fish. Supplies 300
• To record adjustment for damaged merchandise
  returned to CHS, Inc.

71
SCHEDULE OF ACCOUNTS PAYABLE(AFTER ADJUSTMENTS)

• Bait and Switch, Inc. 2,700
• Boggle Corp. 3,000
• CHS Inc. -0-
• General Fishing Supplies 3,125
• Marx Company 2,500
• Sanders, Inc. 1,375
• TOTAL Per S/L 12,700
• Year end accruals
• Unpaid invoices 1,205
• Inventory in transit 1,500
• TOTAL per G/L 15,405

72
INVENTORY

• Merchandise for resale or being manufactured for
  sale
• If merchandising entity only 1 inventory
  account
• Merchandise Inventory or Inventory
• If manufacturer 3 inventory accounts
• Raw Materials Inventory
• Work in Process Inventory
• Finished Goods Inventory

73
PHYSICAL INVENTORY

• Complete count of goods on hand
• At least annually
• Preferable for business operations to be stopped
  during count

74
INVENTORY IN TRANSIT

• When does ownership pass?
• FOB Shipping Point when goods leave shipper
• FOB Destination when goods arrive at buyer
• If inventory in transit at YE and terms of sale
  are FOB Shipping Point must accrue

75
CONSIGNMENT INVENTORY

• Still owned by vendor but held by entity
• EXCLUDE from physical inventory and from ending
  inventory balance

76
PERIODIC VS. PERPETUAL

• Whether or not inventory balances updated as
  sales/purchases occur
• Periodic only at period end
• Purchases account used
• Cost of Goods Sold only at period end
• Perpetual as sales/purchases occur
• No Purchases account
• Cost of Goods Sold updated as sales occur

77
COST FLOW ASSUMPTIONS

• When sales are made, which inventory item is
  being sold?
• Note Cost flow assumptions made for
  recordkeeping purposes. Not actual physical flow
  of merchandise.
• Four methods
• Specific identification
• First-in, First-out (FIFO)
• Last-in, Last-out (LIFO)
• Average

78
SPECIFIC IDENTIFICATION

• Requires individually identifiable items
• Automobiles, real estate, antiques

79
FIFO

• Assumes that first items purchased are the first
  ones sold
• Cost of goods sold older costs
• Ending inventory newer costs

80
LIFO

• Assumes that last items purchased are the first
  ones sold
• Cost of goods sold newer costs
• Ending inventory older costs

81
AVERAGE

• Weighted average cost computed and applied
• Cost of goods sold weighted average cost
  units sold
• Ending inventory weighted average cost
  units in ending inventory

82
EXAMPLE
INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS
Date Description Units Unit Cost Total Cost
6/30/07 Beg. Inv. 0 0
8/1/07 Purchase 100 5 500
9/3/07 Purchase 200 7 1,400
10/15/07 Purchase 100 8 800
12/5/07 Purchase 100 8 800
3/17/08 Purchase 400 9 3,600
6/9/08 Purchase 100 10 1,000
TOTAL 1,000 8,100
83
ENDING INVENTORY

• 845 books sold during FY 6/30/08
• Physical inventory 6/30/08 155 books

84
FIFO ENDING INVENTORY
INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS
Date Description Units Unit Cost Total Cost
6/9/08 Purchase 100 10 1,000
3/17/08 Purchase 55 9 495
TOTAL 1,495
85
JOURNAL ENTRIES

• DR Inventory (ending) 1,495
• DR Cost of Goods Sold 6,605
• CR Inventory (beg.) -0-
• CR Purchases
  8,100
• To record cost of goods sold and ending inventory
  at 6/30/08.
• Note JE only required under periodic method.

86
LIFO ENDING INVENTORY
INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS
Date Description Units Unit Cost Total Cost
8/1/07 Purchase 100 5 500
9/3/07 Purchase 55 7 385
TOTAL 885
87
JOURNAL ENTRIES

• DR Inventory (ending) 885
• DR Cost of Goods Sold 7,215
• CR Inventory (beg.) -0-
• CR Purchases
  8,100
• To record cost of goods sold and ending inventory
  at 6/30/08.
• Note JE only required under periodic method.

88
EFFECT ON TOTAL ASSETS AND NET INCOME

• FIFO LIFO
• Inventory (ending) 1,495 885
• Total Assets ------
• Cost of Goods Sold 6,605 7,215
• Net Income ------
• Note In example, prices were rising.

89
AVERAGE
INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS
Date Description Units Unit Cost Total Cost
TOTAL 1,000 8,100
90
AVERAGE
INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS INVENTORY BOOK TAHOE HIKING TRAILS
Date Description Units Unit Cost Total Cost
TOTAL 1,000 8,100
Total cost / Total units 8,100 / 1,000 8.10 weighted average cost per unit Total cost / Total units 8,100 / 1,000 8.10 weighted average cost per unit Total cost / Total units 8,100 / 1,000 8.10 weighted average cost per unit Total cost / Total units 8,100 / 1,000 8.10 weighted average cost per unit Total cost / Total units 8,100 / 1,000 8.10 weighted average cost per unit
Total ending inventory Total ending inventory 155 8.10 1,256
Total cost of goods sold Total cost of goods sold 845 8.10 6,844
91
JOURNAL ENTRIES

• DR Inventory (ending) 1,256
• DR Cost of Goods Sold 6,844
• CR Inventory (beg.) -0-
• CR Purchases
  8,100
• To record cost of goods sold and ending inventory
  at 6/30/08.
• Note JE only required under periodic method.

92
BAD DEBTS

• Estimation of uncollectible accounts
• Allowance method required by GAAP
• Two estimation methods
• Income statement method
• of credit sales
• Determines bad debt expense
• Balance sheet method
• Aging of AR balances and est. collectibility of
  each aging category
• Determines allowance for bad debts

93
ISLAND UTILITY CORPORATIONSCHEDULE OF ACCOUNTS
RECEIVABLE7/31/08

• Debtor Balance
• Antioch Hotel 254
• Black, Antonio 97
• Camacho, Evelyn 43
• Davis, Edward 35
• Fresh Fish Restaurant 156
• Lyle, Cynthia 32
• Monterey Bakery 123
• Smith, Fred 78
• Tyler, Caitlin 39
• TOTAL 857

94
AGED SCHEDULE OF ACCOUNTS RECEIVABLE - 7/31/08

• Debtor Balance Current 31-60
  61-90 gt90
• Antioch Hotel 254 254
• Black, Antonio 97 32 35 30
• Camacho, Evelyn 43 43
• Davis, Edward 35 10 10 15
• Fresh Fish Rest. 156 35 30 32 59
• Lyle, Cynthia 32 32
• Monterey Bakery 123 47 30 29 17
• Smith, Fred 78 18 40 20
• Tyler, Caitlin 39 39
  
• TOTAL 857 439 145 165
  128

95
ALLOWANCE COMPUTATION
Aging Category Amount Uncollectible Total
Current 439 0 0
31-60 145 5 7.25
61-90 165 10 16.5
gt90 108 50 54
TOTAL ALLOWANCE TOTAL ALLOWANCE TOTAL ALLOWANCE 78
Balance per GL Balance per GL Balance per GL 120
Entry needed Entry needed Entry needed (42)
96
BAD DEBT AJE NEEDED

• DR Allowance for Bad Debts 42
• CR Bad Debts Expense 42
• To adjust allowance at 7/31/08.
• Note The current Allowance balance was larger
  than needed so the AJE reduced the Allowance.

97
GENERAL LEDGER ALLOWANCE FOR BAD DEBTS, BAD
DEBTS EXPENSE
Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS
Date Description Ref Debit Credit Balance
7/31/08 Ending balance 120
7/31/08 AJE per analysis GJ-7 42 78
Account Title BAD DEBTS EXPENSE Account Title BAD DEBTS EXPENSE Account Title BAD DEBTS EXPENSE Account Title BAD DEBTS EXPENSE Account Title BAD DEBTS EXPENSE Account Title BAD DEBTS EXPENSE
7/31/08 Ending balance 150
7/31/08 AJE per analysis GJ-7 42 108
98
BALANCE SHEET 7/31/08

• ASSETS
• Accounts Receivable 857
• Allowance for Bad Debts ( 78)
• Accounts Receivable, net 779

99
WRITE OFF OF ACCOUNT

• Adjusting entry to write off account
• DR Allowance for Bad Debts 32
• CR AR Cynthia Lyle 32
• To write off account for Cynthia Lyle on 8/5/08

100
GENERAL LEDGER ACCOUNTS RECEIVABLE
Account Title ACCOUNTS RECEIVABLE Account Number 110 Account Title ACCOUNTS RECEIVABLE Account Number 110 Account Title ACCOUNTS RECEIVABLE Account Number 110 Account Title ACCOUNTS RECEIVABLE Account Number 110 Account Title ACCOUNTS RECEIVABLE Account Number 110 Account Title ACCOUNTS RECEIVABLE Account Number 110
Date Description Ref Debit Credit Balance
7/31/08 Ending balance 857
8/5/08 Write off Cynthia Lyle GJ-7 32 825



101
GENERAL LEDGER ALLOWANCE FOR BAD DEBTS
Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS Account Title ALLOWANCE FOR BAD DEBTS
Date Description Ref Debit Credit Balance
7/31/08 Ending balance 120
7/31/08 AJE per analysis GJ-7 42 78
8/5/08 Write off Cynthia Lyle GJ-7 32 46
102
SUBSEQUENT COLLECTION OF A/C WRITTEN OFF

• Entries to record subsequent collection
• DR AR Cynthia Lyle 32
• CR Allowance for Bad Debts 32
• DR Cash 32
• CR AR Cynthia Lyle. 32
• To reinstate Cynthia Lyle and record subsequent
  receipt

103
ASSET DISPOSITIONS

• When a capital asset is sold
• Update depreciation
• Calculate gain or loss on disposition

104
UPDATE DEPRECIATION

• Calculation of annual depreciation using
  straight-line method
• Cost Estimated Residual Value
• Estimated Useful Life
• Determine depreciation for current period

105
GAIN OR LOSS CALCULATION

• Selling price (sales proceeds)
• Carrying value (book value)
• Cost
• Less accumulated depreciation
• Gain (loss) on disposal

106
DISPOSAL OF CAPITAL ASSET - EXAMPLE

• Sale of truck for 9,000 on 7/1/08
• Originally purchased 7/3/05 for 25,000
• Depreciated over 5 year life with SV 500
• Annual depreciation
• 25,000 500 4,900
• 5

107
DISPOSAL OF CAPITAL ASSET - EXAMPLE

• Accum. Depreciation through 6/30/08 3 years
  4,900 3 14,700
• Note If sale had occurred mid-year, calculation
  of partial year depreciation might have been
  needed.
• Sales proceeds 9,000
• Cost 25,000
• Accum. Deprec. (14,700) 10,300
• Loss on disposal (1,300)

108
DISPOSAL OF CAPITAL ASSET - EXAMPLE

• Entry to record sale of asset
• DR Cash 9,000
• DR Accum. Deprec.-Vehicles 14,700
• DR Loss on disposal 1,300
• CR Vehicles 25,000
• To record disposal of asset

109
WRITEOFF OF CAPITAL ASSET - EXAMPLE

• Water pump determined unusable as of 7/31/08
• Originally purchased 1/31/06 for 5,000
• Depreciated over 5 year life with zero SV
• Annual depreciation
• 5,000 0 1,000
• 5

110
UPDATE DEPRECIATION

• Assume entity has calendar year end
• Accum. Depreciation as of 12/31/07
• 1/31/06 to 12/31/07 23 months
• 1,000 / 12 23 1,917
• Depreciation for current period
• 12/31/07 to 7/31/08 7 months
• 1,000 / 12 7 583

111
DEPRECIATION AJE NEEDED

• DR Depreciation Expense 583
• CR Accum. Deprec. 583
• To record depreciation on asset to date
  determined unusable.

112
CALCULATION OF LOSS ON WRITE OFF

• Cost 5,000
• Accum. Deprec.
• As of 12/31/07 1,917
• To 7/31/08 583 2,500
• Loss on writeoff (2,500)

113
WRITE OFF OF CAPITAL ASSET - AJE

• Entry to record writeoff of asset
• DR Accum. Deprec. Equip. 2,500
• DR Loss on writeoff 2,500
• CR Equipment 5,000
• To record writeoff of asset

114
WRITE-OFF OF CAPITAL ASSET NO LONGER IN USE

• Entry to record write off of asset
• DR Accum. Deprec.-Equip. 5,000
• CR Equipment 5,000
  
• To record write off of fully depreciated asset

115
WORKSHEET

• Used to draft financial statements
• Start by entering unadjusted TB numbers (done in
  Exercise 2)
• Identify adjustments needed (done in Exercises 3
  to 9)
• Determine the adjusted TB numbers
• Extend the adjusted TB numbers to the IS and BS
  columns
• Draft financial statements
• Journalize adjusting entries

116
WORKSHEET
A/C Unadj.TB Unadj.TB AJEs AJEs Adj. TB Adj. TB Income Stmt. Income Stmt. Stmt. of Net Assets Stmt. of Net Assets
A/C DR CR DR CR DR CR DR CR DR CR


117
OTHER AJES NEEDED

• DR Investment in Capital
• Assets 10,350
• CR Unrestricted Net Assets 10,350
• To adjust balance in Investment in Capital Assets
  for current year activity.

118
OTHER AJES NEEDED

• DR Restricted NA Expendable 3,500
• CR Unrestricted Net Assets 3,500
• To adjust restricted net asset balance for grant
  revenue earned.

119
OTHER AJES NEEDED

• DR Unrestricted Net Assets 22,500
• CR Restricted NA - Expendable 22,500
• To adjust restricted net asset balance for grant
  revenue received but unearned.

120
CLOSING

• Occurs at end of fiscal period
• Closes out nominal accounts, leaving zero
  balances
• May close directly to Unrestricted Net Assets or
  to temporary holding account, Income Summary

121
CLOSING ENTRIES

• DR Revenue and gain accounts
• CR Income Summary
• To close revenue and gain accounts
• DR Income Summary
• CR Expense and loss accounts
• To close expense and loss accounts

122
CLOSING ENTRIES

• DR Income Summary
• CR Unrestricted Net Assets
• To close change in net assets to unrestricted net
  assets (net increase)
• DR Unrestricted Net Assets
• CR Income Summary
• To close change in net assets to unrestricted net
  assets (net decrease)

123
POST CLOSING TRIAL BALANCE

• Verifies proper closing of all nominal accounts
• Verifies DR CR
• Displays balances in real accounts only (balance
  sheet accounts)

124
FINANCIAL STATEMENT ANALYSIS

• Trend analysis
• Evaluation of financial data over time
• Two years is not enough!
• Common size analysis
• Each item expressed as a of base amount
• Enables comparison of different sized entities
• Ratio analysis
• Can be used for many analytical purposes
• Must compare over time and with industry and
  competitors
• Can be computed differently by different
  services/analysts

125
LIQUIDITY AND SOLVENCY

• Liquidity - Identify entitys
• ability to meet short-term
• obligations
• Solvency Ability of entity to survive in the
  long run

126
LIQUIDITY

• Current ratio Current assets
• Current liabilities
• Quick ratio Quick assets
• Current liabilities
• where quick assets Cash, receivables,
• and short term investments

127
SOLVENCY

• Working capital to total assets
• Current assets - Current liabilities
• Total assets
• Defensive interval
• Quick assets
• Projected daily operational expenditures

128
SOLVENCY

• Debt to total assets
• Total liabilities
• Total assets

129
OPERATIONAL EFFICIENCY

• How effectively and efficiently the entity is
  using its resources
• Receivables turnover
• Net credit sales
• Average gross accounts receivable
• Average collection period
• 365 days / receivables turnover ratio

130
OPERATIONAL EFFICIENCY

• Inventory turnover
• Cost of goods sold
• Average inventory
• Days in inventory
• 365 days / inventory turnover ratio

131
PROFITABILITY

• How well the entity has performed operationally
• Profit margin on sales
• Net income / net sales
• Return on assets
• Net income / Average total assets
• Asset turnover
• Net sales / Average total assets

132
QUESTIONS?

• yamamura_at_unr.edu

133
POST TEST

• Circle your best guess at the right answer (A, B,
  C or D)
• Dont worry you may not know all the answers
  but, hopefully, you know more than when you
  started!

134
THE END!!