Module 3: Accounting Adjustments and Constructing Financial Statements

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Module 3 Accounting Adjustments and
Constructing Financial Statements
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The Accounting Cycle
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T-Accounts and Journal Entries
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Capital Investment
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Asset (Inventory) Transaction
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Cash Dividends

• All transactions between the company and its
  shareholders are considered financing
  transactions. This includes payment of dividends,
  the issuance of stock, and any subsequent stock
  repurchase.
• Financing transactions affect only the balance
  sheet they do not affect the income statement.

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Adjusting Accounts
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Types of Adjustments

• Cash received or paid before recognition of
  revenue or expense
• Prepaid expenses
• Unearned revenues
• Cash received or paid after recognition of
  revenue or expense
• Accrued expenses
• Accrued revenues

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Prepaid Expenses (Assets)

• Assume that Apple pays 200 to purchase time on
  MTV for future i ads.
• Apples cash account decreases by 200, and an
  asset called prepaid advertising increases by the
  same amount.
• When the ad is aired, the prepaid asset is used
  up and is removed from the balance sheet and
  recognizing the cost as an expense.

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Unearned Revenues (Liabilities)

• Assume that Apple receives 400 cash from a
  customer as advance payment on a multi-unit iPod
  sale to be delivered next month.

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Recognition of Unearned Revenue as Earned Revenue

• Assume that Apple delivers the iPods a month
  later (but still within the fiscal quarter).

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Accrued Expenses (Liabilities)

• Assume that Apples sales staff earns 100 of
  sales commissions this period that will not be
  paid until next period.
• When paid, the liability is reduced as is cash.

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Accrued Revenues (Assets)

• Assume that Apple delivers iPods to a customer in
  Germany who will pay next quarter. The sales
  price for those units is 500 and the cost is
  400.

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Trial Balance

• The trial balance is a listing of all accounts
  and their balances at a point in time.
• Its purpose is to prove the mathematical equality
  of debits and credits, provide a useful tool to
  uncover any accounting errors, and help prepare
  the financial statements.

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Adjusted Trial Balance For Apple
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Preparation of the Financial Statements

• Income Statement

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Preparation of the Financial Statements

• Retained Earnings Computation

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Preparation of the Financial Statements

• Balance Sheet

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Preparation of the Financial Statements

• Statement of Stockholders Equity

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Statement of Cash Flows Indirect Method

• Operating cash flows

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Changes to Working Capital Accounts
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Formal Presentation of Apples SCF
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Closing Process

• The closing process refers to the zeroing out
  of revenue and expense accounts (the temporary
  accounts) by transferring their ending balances
  to retained earnings.
• Balance sheet accounts carry over from period to
  period and are called permanent accounts.)
• The result is that all income statement accounts
  begin the next period with zero balances.

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Closing Process Journal Entries