Completing the Accounting
Cycle and Preparing
Financial Statements
Chapter 6
© 2005 Accounting 1/e, Terrell/Terrell
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Learning Objective 1
Reconcile a bank statement.
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Cash in Bank
It is difficult to relate the Cash in Bank
account to any single account.
cash inflows can be related to revenues,
borrowings, and capital contributions.
Outflows relate to expenses, liability
repayments, and dividends.
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Cash in Bank
The bank refers to debits and credits
from the bank’s perspective.
On June 3, 2004, Elevation Sports, Inc.,
received its bank statement
from Vail National Bank.
© 2005 Accounting 1/e, Terrell/Terrell
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Cash in Bank
Vail National Bank
Account Name:
Elevation Sports, Inc.
500 North Aspen Street
Vail, Colorado
Account Number: 105833842
Date: May 31, 2004
Previous statement balance 04-30-04
42 checks or other debits totaling
Bank service charge
Current balance as of statement date 05-31-04
© 2005 Accounting 1/e, Terrell/Terrell
$105,452.00
89,000.00
45.00
$145,986.00
6-5
Reconciling the Bank Account
Balance per bank
+ Deposits
in transit
– Outstanding
checks
The bank balance
and the
book balance
may not agree.
= Balance
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Reconciling the Bank Account
Bank service charges
Transposition errors
NSF checks
Bank errors
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Reconciling the Bank Account
Balance per bank statement, May 31: $145,986
Deposits in transit:
$ 11,559
Outstanding checks:
$ 29,161
Service charges:
$
45
Merchants fee:
$
732
Balance per books:
$129,161
Prepare a bank reconciliation and journal entries.
© 2005 Accounting 1/e, Terrell/Terrell
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Reconciling the Bank Account
Balance per bank statement, May 31
Additions:
Deposits in transit
Deductions:
Outstanding checks
Corrected bank balance
Balance per books, May 31
Deductions:
Service charges
Merchants Fee
Corrected book balance
© 2005 Accounting 1/e, Terrell/Terrell
$145,986
11,559
29,161
$128,384
$129.161
$
45
732
777
$128,384
6-9
Reconciling the Bank Account
Bank Service Charges
45
Credit Card Merchant Discount
732
Cash in Bank
777
To correct bank balance per bank reconciliation
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Learning Objective 2
Adjust the accounts to apply
the matching principle.
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Aged Accounts
Receivable Schedule
Elevation Sports, Inc.
Aged Accounts Receivable Schedule
May 31, 2004
Customer
number
Amount
100548
102453
148921
Other
Totals
$ 270 $ 270
2,700
2,700
900
6,030 6,030
$9,900 $9,000
© 2005 Accounting 1/e, Terrell/Terrell
0-30
days
30-60
days
60-90
days
Over
90 days
0
0
0
0
0
0
0
0
0
0
0
0
$ 900
0
$9,900
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Uncollectible Accounts
Assume that only one-half the amount owed
for over 90 days could be collected.
What is the journal entry?
Doubtful Account Expense
450
Allowance for Doubtful Accounts
To record potential doubtful accounts
© 2005 Accounting 1/e, Terrell/Terrell
450
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Merchandise Inventory
Inventory
Ending balance
Cost of goods sold
$35,287
– 4,397
$30,890
Cost of Other Goods Sold
30,890
Merchandise Inventory
To record the cost of purchased
merchandise sold
© 2005 Accounting 1/e, Terrell/Terrell
30,890
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Components of
Manufacturing Costs
Direct
materials
Direct
labor
Factory
overhead
Indirect
materials
Indirect
labor
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The Flow of
Manufacturing Costs
Raw materials
inventory
Direct
labor
Manufacturing
overhead
Material
requisition
Work-in-process
inventory
Transfer when
completed
Finished goods
inventory
Transfer when
sold
Cost of goods sold
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Statement of Cost of
Goods Manufactured
June 1, 2003 to May 31, 2004:
Raw materials purchased
Direct labor
Manufacturing overhead
Raw materials
Work in process
Finished goods
© 2005 Accounting 1/e, Terrell/Terrell
Beginning
-0-0-0-
$ 38,655
$101,250
$155,852
Ending
$ 2,315
$14,864
$13,634
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Statement of Cost of
Goods Manufactured
Elevation Sports, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended May 31, 2004
Beginning inventory
Add: Purchases
Materials available for use
Less: Ending inventory
Direct materials used
Direct labor
Manufacturing overhead
Costs transferred to WIP
© 2005 Accounting 1/e, Terrell/Terrell
$
0
38,655
$ 38,655
2,315
$ 36,340
101,250
155,852
$293,442
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Statement of Cost of
Goods Manufactured
Elevation Sports, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended May 31, 2004
Costs transferred to WIP
Add: Beginning WIP inventory
Total work in process
Less: Ending WIP inventory
Total costs of goods manufactured
and transferred to finished goods
© 2005 Accounting 1/e, Terrell/Terrell
$293,442
0
$293,442
14,864
$278,578
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Finished Goods Inventory
and Cost of Goods Sold
+
=
–
=
Beginning finished goods inventory
Cost of goods manufactured
Goods available for sale
Ending finished goods inventory
Cost of manufactured goods sold
© 2005 Accounting 1/e, Terrell/Terrell
$
0
278,578
$278,578
13,634
$264,944
6 - 20
Supplies Inventory Example
The account shows $1,330; however, only
$593 of supplies were still on hand.
What is the adjusting entry?
Office Supplies Expenses
737
Supplies Inventory
To record office supplies used
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Learning Objectives 3 and 4
Prepare classified
income statements.
Compute basic
earnings per share.
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Preparing Financial Statements
To compute income taxes,
multiply the before-tax income
by the tax rate of 40%.
This tax will be an expense on
the income statement and a
liability on the balance sheet.
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Earnings per Share
EPS is a ratio which reveals how much of
a company’s net earnings is attributable
to each share of common stock.
To comply with GAAP, income statements must
disclose the firm’s earnings per share.
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Earnings per Share
EPS = Net income ÷
Number of shares of common stock outstanding
Elevation Sports, Inc.
EPS = $63,181 ÷ 4,000 = $15.79
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Elevation Sports, Inc.
Income Statement
For the Year Ended May 31, 2004
Net sales
Cost of goods sold
Gross profit
Selling expenses
$48,334
Administrative expenses
72,189
Total operating expenses
Operating income
Other revenues and expenses
Income before income taxes
Income taxes
Net income
Earnings per share
$527,146
295,834
$231,312
120,523
$110,789
(5,488)
$105,301
42,120
$ 63,181
$ 15.79
Must be reported on the income statement.
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Learning Objective 5
Prepare statement of equity.
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Statement of
Stockholders’ Equity
Elevation Sports, Inc.
Statement of Stockholders’ Equity
For the Year Ended May 31, 2004
Common
stock
Balance, June 1, 2003
Add: Sale of
common stock
Net income
Deduct: Dividends
Balance, May 31, 2004
© 2005 Accounting 1/e, Terrell/Terrell
$ -0-
40,000
Paid-in
capital
$ -0-
Retained
earnings
-0-
Total
$
-0-
60,000
100,000
63,181
63,181
(4,000)
(4,000)
$40,000 $60,000 $59,181 $159,181
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Learning Objective 6
Prepare classified
balance sheets.
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Elevation Sports, Inc.
Balance Sheet
May 31, 2004
Assets:
Current assets
Cash
Accounts receivable
Less: Allowance for doubtful accounts
Merchandise inventory
Raw materials inventory
Work-in-process inventory
Finished goods inventory
Supplies inventory
Prepaid rent
Prepaid insurance
Total current assets
© 2005 Accounting 1/e, Terrell/Terrell
$9,900
450
$128,834
9,450
4,397
2,315
14,864
13,634
593
12,000
5,000
$190,637
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Elevation Sports, Inc.
Balance Sheet
May 31, 2004
Property, plant, and equipment
Administrative equipment
$ 5,100
Selling furniture and fixtures 8,400
Production equipment
89,600
Less: Accumulated depreciation
Total property, plant, and equipment
Intangible assets
Patents
Copyrights
Trademarks
Total intangible assets
Total assets
© 2005 Accounting 1/e, Terrell/Terrell
$103,100
17,800
$ 10,083
570
1,425
$ 85,300
$ 12,078
$288,015
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Elevation Sports, Inc.
Balance Sheet
May 31, 2004
Liabilities and stockholders’ equity:
Current liabilities
Accounts payable
Other accounts payable
Interest payable
Payroll taxes payable
Sales taxes payable
Income taxes payable
Current portion of long-term note payable
Total current liabilities
Long-term liabilities:
Note payable – Vail National Bank $ 60,000
Less: Current portion
15,000
Total long-term liabilities
Total liabilities
© 2005 Accounting 1/e, Terrell/Terrell
$
6,942
11,812
6,000
1,400
560
42,120
15,000
$ 83,834
45,000
$128,834
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Elevation Sports, Inc.
Balance Sheet
May 31, 2004
Stockholders’ equity
Paid-in capital:
Common stock, $10 par value,
100,000 shares authorized, 4,000
shares issued and outstanding
$ 60,000
Paid-in capital in excess of par
– common stock
40,000
Total paid-in capital
$100,000
Retained earnings
59,181
Total stockholders’ equity
Total liabilities and stockholders’ equity
© 2005 Accounting 1/e, Terrell/Terrell
159,181
$288,015
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Learning Objective 7
Close the temporary accounts.
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Closing the Accounts
To close the books, the temporary
or nominal accounts are closed to
the Income Summary account.
A fiscal year is a year that differs from the
calendar year but normally coincides with the
end of the normal business cycle for its industry.
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Closing the Accounts
1. Close the revenue and gain
accounts to Income Summary.
2. Close the expense and loss
accounts to Income Summary.
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Closing the Accounts
3. Close the Dividend account
to Retained Earnings.
4. Close the Income Summary
account to Retained Earnings.
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Elevation Sports, Inc.
General Journal
Retail Sales – Snowboards
Wholesale Sales – Snowboards
Retail Sales – Other
Interest Revenue
Sales Returns
Sales Discounts
Income Summary
To close revenue accounts
© 2005 Accounting 1/e, Terrell/Terrell
330,750
151,650
52,385
512
5,213
2,426
527,658
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Elevation Sports, Inc.
General Journal
Income Summary
$464,477
Cost of Snowboards Sold
Cost of Other Goods Sold
Total of 600 expense accounts
Total of 700 expense accounts
Total of 800 expense accounts
To close the expense accounts
© 2005 Accounting 1/e, Terrell/Terrell
264,944
30,890
48,334
72,189
48,120
6 - 39
Elevation Sports, Inc.
General Journal
Retained Earnings
Dividends
To close to Retained Earnings
Income Summary
Retained Earnings
© 2005 Accounting 1/e, Terrell/Terrell
4,000
63,181
4,000
63,181
6 - 40
Learning Objective 8
Prepare a post-closing
trial balance.
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Elevation Sports, Inc.
Post-Closing Trial Balance
May 31, 2004
101
110
111
130
131
132
133
134
140
141
154
156
158
160
Cash in bank
Accounts receivable
Allowance for doubtful accounts
Merchandise inventory
Raw materials inventory
Work-in-process inventory
Finished goods inventory
Supplies inventory
Prepaid rent
Prepaid insurance
Admin. equipment and furniture
Selling furniture and fixtures
Production equipment
Accumulated depreciation
© 2005 Accounting 1/e, Terrell/Terrell
$128,384
9,900
4,397
2,315
14,864
13,634
593
12,000
5,000
5,100
8,400
89,600
$
450
17,800
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Elevation Sports, Inc.
Post-Closing Trial Balance
May 31, 2004
180
185
190
201
205
210
212
213
214
250
310
311
320
Patents
Copyrights
Trademarks
Accounts payable
Other accounts payable
Interest payable
Payroll taxes payable
Sales taxes payable
Income taxes payable
Notes payable – Vail Bank
Common stock
Paid-in capital – common stock
Retained earnings
Totals
© 2005 Accounting 1/e, Terrell/Terrell
10,083
570
1,425
$306,265
6,942
11,812
6,000
1,400
560
42,120
60,000
40,000
60,000
59,181
$306,265
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End of Chapter 6
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