Lecture 4-Completing the Account Cycle

Question 1

The Worksheet

Answer 1

Multiple-column form used in preparing financial statements
* Not a permanent accounting record
* May be a computerized worksheet
* Prepared using a five step process
* Use of worksheet is optional

Question 2

Preparing Financial Statements from a Worksheet

Answer 2

Income statement is prepared from the income statement columns
* Statement of financial position and retained earnings statement are prepared from the statement of financial position columns
* Companies can prepare financial statements before they journalize and post adjusting entries

Question 3

Preparing Adjusting Entries from a Worksheet

Answer 3

-Adjusting entries are prepared from the adjustments columns of worksheet
* Journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used

Question 4

Closing the Books

Answer 4

At the end of the accounting period, the company makes the accounts ready for the next period.

Question 5

Preparing Closing Entries

Answer 5

Closing entries formally recognize in the ledger the transfer of:
* Net income (or net loss) to owner’s capital
* Dividends to retained earnings Produce a zero balance in each temporary account. Companies generally journalize and post closing entries only at end of the annual accounting period.

Question 6

Correcting Entries—Avoidable Step

Answer 6

• Unnecessary if accounting records are free of errors
• Made whenever an error is discovered
• Must be posted before closing entries Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry

Question 7

Classified Statement of Financial Position

Answer 7

• Presents a snapshot at a point in time
• To improve understanding, companies group similar assets and similar liabilities together

Question 8

Classified Statement of Financial Position

Answer 8

Current assets are listed:
a. in the reverse order of expected conversion to cash.
b. by importance.
c. by longevity.
d. by size.

Question 9

Property, Plant, and Equipment

Answer 9

Long useful lives
* Currently used in operations
* Depreciation - allocating the cost of assets to a number of years
* Accumulated depreciation - total amount of depreciation expensed thus far in the asset’s life * Sometimes called fixed assets or plant assets

Question 10

Long-Term Investments

Answer 10

Investments in stocks and bonds of other companies
* Investments in long-term assets such as land or buildings that are not currently being used in operating activities
* Long-term notes receivable

Question 11

Current Assets

Answer 11

Assets that a company expects to convert to cash or use up within one year or the operating cycle, whichever is longer

• Operating cycle is the average time that it takes to
   purchase inventory,
   sell it on account, and
   collect cash from customers

Question 12

Current Assets

Answer 12

The correct order of presentation in a classified statement of financial position for the following current assets is:
a. accounts receivable, cash, prepaid insurance, inventory.
b. prepaid insurance, inventory, accounts receivable, cash.
c. cash, accounts receivable, inventory, prepaid insurance.
d. inventory, cash, accounts receivable, prepaid insurance.

Question 13

Equity

Answer 13

Proprietorship - one capital account * Partnership - capital account for each partner * Corporation – Share Capital—Ordinary and Retained Earnings

Question 14

Non-Current Liabilities

Answer 14

Obligations a company expects to pay after one year.

Question 15

Current Liabilities

Answer 15

-Obligations company has to pay within coming year or its operating cycle, whichever is longer
* Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, income taxes payable, and current maturities of longterm obligations
* Liquidity- ability to pay obligations expected to be due within the next year

Question 16

Statement of Financial Position

Answer 16

Current liabilities are listed:
a. in the reverse order of expected conversion to cash.
b. by importance.
c. by longevity.
d. by size.

Question 17

Reversing Entries

Answer 17

It is often helpful to reverse some adjusting entries before recording regular transactions of the next period
* Companies make a reversing entry at beginning of next accounting period
* Each reversing entry is exact opposite of adjusting entry made in previous period
* Use of reversing entries does not change amounts reported in the financial statements

Question 18

Reversing Entries Example

Answer 18

We use the salaries expense transactions for Yazici Advertising as illustrated in Chapters 2, 3, and 4.

1. October 26 (initial salary entry): Yazici pays ₺4,000 of salaries and wages earned between October 15 and October 26.
2. October 31 (adjusting entry): Salaries and wages earned between October 29 and October 31 are ₺1,200. The company will pay these in the November 9 payroll.
3. November 9 (subsequent salary entry): Salaries and wages paid are ₺4,000. Of this amount, ₺1,200 applied to accrued salaries and wages payable and ₺2,800 was earned between November 1 and November 9.

Question 18

A look at IFRS

Answer 18

In general, G A A P follows the similar guidelines as this text for presenting items in the current asset section, except that under G A A P items are listed in order of liquidity, while under I F R S they are often listed in reverse order of liquidity. For example, under G A A P cash is listed first, but under I F R S it is listed last.
* Both G A A P and I F R S are increasing the use of fair value to report assets. However, at this point I F R S has adopted it more broadly. As examples, under I F R S companies can apply fair value to property, plant, and equipment; natural resources; and in some cases intangible assets.

Question 19

A look at IFRS- Similarities

Answer 19

Both I F R S and G A A P require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
* Comparative prior-period information must be presented and financial statements must be prepared annually.

Question 20

A look at IFRS-Differences

Answer 20

I F R S officially uses the term statement of financial position in its literature, while in the United States it is often referred to as the balance sheet.
* I F R S requires that specific items be reported on the statement of financial position, whereas no such general standard exists in G A A P. However, under G A A P, public companies must follow U.S. Securities and Exchange Commission (S E C) regulations, which require specific line items as well. In addition, specific G A A P standards mandate certain forms of reporting statement of financial position information. The S E C guidelines are more detailed than I F R S
While I FRS companies often report non-current assets before current assets in their statements of financial position, this is never seen under G A A P. Also, some I F R S companies report the subtotal “net assets,” which equals total assets minus total liabilities. This practice is also not seen under G A A P.
* Akey difference in valuation is that under I F R S , companies, under certain conditions, can report property, plant, and equipment at cost or at fair value, whereas under G A A P this practice is not allowed.
-G A A P has many differences in terminology from what are shown in your textbook. For example, in the investment category shares are called stock. Also note that Share Capital— Ordinary is referred to as Common Stock. In addition, the format used for statement of financial position presentation is often different between G A A P and I F R S .

Question 21

A look at IFRS-looking to the future

Answer 21

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.