PREPARING COMPONENTS
UNITS FOR THE
FINANCIAL STATEMENT
YEAR END CLOSE
Jeanne H.
Yamamura
CPA, MIM, PhD
APIPA 2010
1
REVIEW OF TERMINOLOGY
AND CONCEPTS
1.
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.
2.
The book of original entry used to record cash receipts
is known as:
A.
B.
C.
D.
APIPA 2010
The Cash account.
The general ledger.
The cash receipts journal.
The sales invoice.
2
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:
A.
B.
C.
D.
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An Asset.
A Liability.
A Revenue.
An Expense.
3
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:
A.
B.
C.
D.
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The Revenue Recognition Principle.
The Matching Principle.
The Time Period Assumption.
Accrual Accounting.
4
ACCOUNTING EQUATION
ASSETS = LIABILITIES + EQUITY
DR
CR
CR
+ REVENUES CR
- EXPENSES DR
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5
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
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6
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
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7
INVESTMENT IN CAPITAL
ASSETS
• Capital assets
– Net of accumulated depreciation
– Net of outstanding principal balances of
related debt
• Acquisition, construction, or improvement
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8
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
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9
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
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10
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
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11
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
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12
ACCOUNTING CYCLE
Analyze transactions &
verify documentation
Prepare
post
closing TB
Journalize &
post
closing JEs
Prepare &
analyze FS
Record in
Journal
Prepare
adjusted TB
Post to
General
Ledger
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Prepare TB
Journalize
& post AJEs
13
EXAMPLE: TRIAL BALANCE
12/31/09
AC#
Account Name
DR
101
Cash in Bank – Gen. Checking
15,400
110
Accounts Receivable
10,600
200
Accounts Payable
211
Withholding Taxes Payable
310
Unrestricted Net Assets
14,200
410
Grant Revenue
19,200
601
Salaries Expense
616
Travel Expense
TOTAL
APIPA 2010
CR
9,300
500
12,500
4,700
43,200
43,200
14
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
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ADJUSTING ENTRIES
• Adjusting entries are necessary because:
– Inefficient to record certain transactions
daily (e.g., S&W)
– 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)
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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.
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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
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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
– CR Prepaid Insurance
APIPA 2010
100
100
19
T-ACCOUNTS
Prepaid Insurance
1200
100
1100
Insurance Expense
100
100
EFFECT ON ACCOUNTING EQUATION?
ASSETS =
LIAB + EQUITY
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SUPPLIES
• 7/31/08 TB - $750 Office Supplies
• Physical count at 7/31 = $500
• AJE needed
– DR Office Supplies Expense
– CR Office Supplies
250
250
• Note: What is the difference between
Office Supplies Expense and Office
Supplies?
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T-ACCOUNTS
Office Supplies
750
250
500
Office Supplies Expense
250
250
EFFECT ON ACCOUNTING EQUATION?
ASSETS =
LIAB + EQUITY
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SUPPLIES
• 7/31/08 TB - Office Supplies Expense
$750 (originally expensed)
• Physical count at 7/31 = $500
• AJE needed
– DR Office Supplies
– CR Office Supplies Expense
APIPA 2010
500
500
23
T-ACCOUNTS
Office Supplies
500
500
Office Supplies Expense
750
500
250
EFFECT ON ACCOUNTING EQUATION?
ASSETS =
LIAB + EQUITY
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DEPRECIATION
• 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
CR Accum. Deprec. Bldg.
APIPA 2010
83
83
25
T-ACCOUNTS
Accum. Depr.- Bldg.
1,000
83
1,083
Depreciation Expense
83
83
EFFECT ON ACCOUNTING EQUATION?
ASSETS =
LIAB + EQUITY
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UNEARNED REVENUES
•
•
•
•
Cash already received
Revenue earned in the future
Initially set up as a liability
Recognize revenues when earned through
AJEs
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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
– CR Membership Dues Revenue
APIPA 2010
350
350
28
T-ACCOUNTS
Unearned Revenues
4,200
350
3,850
Membership Dues Revenue
350
350
EFFECT ON ACCOUNTING EQUATION?
ASSETS =
LIAB + EQUITY
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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.
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ACCRUED REVENUES
• 7/31/08 TB - $15,000 in advertising earned
but not yet billed or paid
• AJE needed
– DR Accounts Receivable
– CR Advertising Revenue
APIPA 2010
15,000
15,000
31
T-ACCOUNTS
Accounts Receivable
29,330
15,000
44,330
Advertising Revenue
15,000
15,000
EFFECT ON ACCOUNTING EQUATION?
ASSETS =
LIAB + EQUITY
APIPA 2010
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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
– CR Interest Payable
APIPA 2010
167
167
33
T-ACCOUNTS
Interest Payable
Interest Expense
167
167
167
167
EFFECT ON ACCOUNTING EQUATION?
ASSETS =
LIAB + EQUITY
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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
7/28-7/31 paid 8/15
1,000 / 10 = 100 * 4 =
1,000
400
• AJE needed
– DR Wages Expense
– CR Wages Payable
APIPA 2010
1,400
1,400
35
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
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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.
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REVERSING ENTRY FOR
ACCRUED WAGES EXPENSE
• Reversing entry 8/1/08
– DR Wages Payable
– CR Wages Expense
Wages Payable
8/1
1,400
RJE 1,400
1,400
1,400
Wages Expense
2,000
1,400
600
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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
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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
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40
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
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41
BANK RECONCILIATION
• Agreement of two independently
maintained sets of records
– Bank (bank statement)
– Books (CDJ, CRJ, GL)
• Why aren’t these the same?
– Timing – check clearing, deposit clearing
– Errors and omissions – bank or books
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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
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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
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44
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
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45
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.
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DETAILED STEPS
1. Begin with the balance per the bank. This is
the ending balance on the bank statement.
2. Identify deposits in transit as of the end of the
period. Trace each of the deposits per the CRJ
to the bank statement.
a. Any deposits in transit from last month should
appear on the bank statement (at the beginning of
the month).
b. New deposits in transit will usually be the latest
deposits for the current month.
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47
DEPOSITS IN TRANSIT
7/31/08
TOTAL
APIPA 2010
2,305.00
2,305.00
48
DETAILED STEPS
3. 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.
a. Checks that cleared at the beginning of the
bank statement that are not listed in this
period’s CDJ were most likely issued in the
prior period (and were outstanding in the last
bank reconciliation).
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49
OUTSTANDING CHECKS
#596
#602
#603
#604
TOTAL
APIPA 2010
135.00
408.00
515.96
267.60
1,326.56
50
DETAILED STEPS
4. Now you are ready to compute the
adjusted bank balance.
a. Enter a total for deposits in transit.
b. Enter a total for outstanding checks.
c. Compute: Bank balance plus deposits in
transit minus outstanding checks = Adjusted
bank balance
d. If there were any bank errors, include them
as “other.”
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51
BANK RECONCILIATION
GENERAL CHECKING ACCOUNT
7/31/08
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
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DETAILED STEPS
5. Enter the balance per the books. This is
the ending balance in the Cash account
in the general ledger.
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53
GENERAL LEDGER – CASH
Account Title: CASH – GEN. CHECKING ACCOUNT
Account Number:
Date
Description
Ref
6/30/08
Ending balance
7/11/08
Sales
CRJ-7
7/15/08
Checks #598-601
CDJ-7
7/25/08
Sales
CRJ-7
7/31/08
Checks #602-605
CDJ-7
7/31/08
Sales
CRJ-7
APIPA 2010
Debit
Credit
Balance
6,034.55
1,715.00
2,967.30
1,050.00
1,826.56
2,305.00
6,310.69
54
DETAILED STEPS
6. 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.
7. Compute the adjusted book balance
APIPA 2010
55
BANK RECONCILIATION
GENERAL CHECKING ACCOUNT
7/31/08
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
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56
DETAILED STEPS
8. When the two adjusted balances
(adjusted balance per bank and
adjusted balance per books)
agree, the account is reconciled.
9. Prepare an adjusting journal entry
for each reconciling item used to
compute the adjusted balance
per books.
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57
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
To correct deposit 7/11/08
APIPA 2010
100
58
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
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59
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.
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60
GENERAL LEDGER – CASH
Account Title: CASH – GEN. CHECKING ACCOUNT
Account Number:
Date
Description
Ref
Debit
Credit
7/31/08
Balance
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
APIPA 2010
Balance
6,310.69
16,585.69
61
ACCOUNTS RECEIVABLE
• Agreement of two independently
maintained sets of records
– General Ledger Control Account
– Subsidiary Ledger
• Why aren’t these the same?
– Errors and omissions
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62
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
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63
GENERAL LEDGER – ACCOUNTS
RECEIVABLE
Account Title: ACCOUNTS RECEIVABLE
Account Number:
Date
Description
Ref
6/30/08
Balance
7/19/08
Sunset Restaurant
account written off
due to bankruptcy
GJ-7
7/31/08
July sales
SJ-7
7/31/08
July collections
Debit
Credit
12,005
1,905
31,560
CRJ-7
9,600
7/31/08
32,060
31,560
APIPA 2010
Balance
11,505
64
ACCOUNTS RECEIVABLE –
SUBSIDIARY LEDGER
Customer: Abacus Hotel
Date
Description
6/30/08
Balance
7/10/08
Adj. for spoiled fish
7/31/08
July payment
7/31/08
July sale
Ref
Debit
Credit
Balance
5,450
500
CRJ-7
SJ-7
4,950
10,560
10,560
Customer: Nikko Restaurant
6/30/08
Balance
7/31/08
July payment
7/31/08
July sale
7/31/08
APIPA 2010
1,500
CRJ-7
SJ-7
1,500
6,700
6,700
65
ACCOUNTS RECEIVABLE –
SUBSIDIARY LEDGER
Customer: Sunset Restaurant
Date
6/30/08
Description
Ref
Debit
Credit
Balance
Balance
1,905
Customer: Hotel Zero
6/30/08
Balance
7/31/08
July payment
7/31/08
July sale
3,150
CRJ-7
SJ-7
3,150
14,300
31,560
APIPA 2010
14,300
10,100
33,465
66
4-COLUMN RECONCILIATION
Per General
Ledger
Balance
6/30/08
DR
CR
Balance
7/31/08
12,005
31,560
11,505
32,060
500
(500)
10,100
31,560
Account
adjusted per
SL, not
posted to GL
Adjusted GL
balance
APIPA 2010
12,005
31,560
67
4-COLUMN RECONCILIATION
Per
Subsidiary
Ledger
Balance
6/30/08
DR
CR
Balance
7/31/08
12,005
31,560
10,100
33,465
1,905
(1,905)
12,005
31,560
Account
W/O due to
bankruptcy,
not posted
to SL
Adjusted GL
balance
APIPA 2010
12,005
31,560
68
JOURNAL ENTRIES
DR Sales R&A - Fish
500
CR AR: Abacus Hotel
500
To record spoiled fish returned by Abacus
Hotel for credit
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69
JOURNAL ENTRIES
DR Accounts Payable
300
CR Purchase Returns and
Allowances – Fish. Supplies
300
To record adjustment for damaged
merchandise returned to CHS, Inc.
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SCHEDULE OF ACCOUNTS PAYABLE
(AFTER ADJUSTMENTS)
Bait and Switch, Inc.
Boggle Corp.
CHS Inc.
General Fishing Supplies
Marx Company
Sanders, Inc.
TOTAL Per S/L
Year end accruals:
Unpaid invoices
Inventory in transit
TOTAL per G/L
APIPA 2010
$
2,700
3,000
-03,125
2,500
1,375
$12,700
1,205
1,500
$15,405
71
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
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72
PHYSICAL INVENTORY
• Complete count of goods on hand
• At least annually
• Preferable for business operations to be
stopped during count
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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
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CONSIGNMENT INVENTORY
• Still owned by vendor but held by entity
• EXCLUDE from physical inventory and
from ending inventory balance
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75
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
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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
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77
SPECIFIC IDENTIFICATION
• Requires individually identifiable items
• Automobiles, real estate, antiques
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78
FIFO
• Assumes that first items purchased are the
first ones sold
• Cost of goods sold = “older” costs
• Ending inventory = “newer” costs
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LIFO
• Assumes that last items purchased are the
first ones sold
• Cost of goods sold = “newer” costs
• Ending inventory = “older” costs
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80
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
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81
EXAMPLE
INVENTORY – BOOK – TAHOE HIKING TRAILS
Date
Description
Units
Unit Cost
Total Cost
6/30/07
8/1/07
9/3/07
Beg. Inv.
Purchase
Purchase
0
100
200
$5
$7
0
$500
$1,400
10/15/07
12/5/07
Purchase
Purchase
100
100
$8
$8
$800
$800
3/17/08
6/9/08
Purchase
Purchase
400
100
$9
$10
$3,600
$1,000
TOTAL
APIPA 2010
1,000
$8,100
82
ENDING INVENTORY
• 845 books sold during FY 6/30/08
• Physical inventory 6/30/08 = 155 books
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83
FIFO – ENDING INVENTORY
INVENTORY – BOOK – TAHOE HIKING TRAILS
Date
Description
Units
Unit Cost
Total Cost
6/9/08
3/17/08
Purchase
Purchase
TOTAL
100
55
$10
$9
$1,000
$495
$1,495
APIPA 2010
84
JOURNAL ENTRIES
DR
DR
CR
CR
Inventory (ending)
Cost of Goods Sold
Inventory (beg.)
Purchases
1,495
6,605
-08,100
To record cost of goods sold and ending
inventory at 6/30/08.
Note: JE only required under periodic
method.
APIPA 2010
85
LIFO – ENDING INVENTORY
INVENTORY – BOOK – TAHOE HIKING TRAILS
Date
Description
Units
Unit Cost
Total Cost
8/1/07
9/3/07
Purchase
Purchase
TOTAL
100
55
$5
$7
$500
$385
$885
APIPA 2010
86
JOURNAL ENTRIES
DR
DR
CR
CR
Inventory (ending)
Cost of Goods Sold
Inventory (beg.)
Purchases
885
7,215
-08,100
To record cost of goods sold and ending
inventory at 6/30/08.
Note: JE only required under periodic
method.
APIPA 2010
87
EFFECT ON TOTAL ASSETS
AND NET INCOME
Inventory (ending)
Total Assets
Cost of Goods Sold
Net Income
FIFO
1,495
++++
6,605
++++
LIFO
885
-----7,215
------
Note: In example, prices were rising.
APIPA 2010
88
AVERAGE
INVENTORY – BOOK – TAHOE HIKING TRAILS
Date
APIPA 2010
Description
Units
TOTAL
1,000
Unit Cost
Total Cost
$8,100
89
AVERAGE
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 ending inventory
Total cost of goods
sold
APIPA 2010
155
845
8.10
8.10
$1,256
$6,844
90
JOURNAL ENTRIES
DR
DR
CR
CR
Inventory (ending)
Cost of Goods Sold
Inventory (beg.)
Purchases
1,256
6,844
-08,100
To record cost of goods sold and ending
inventory at 6/30/08.
Note: JE only required under periodic
method.
APIPA 2010
91
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
APIPA 2010
92
ISLAND UTILITY CORPORATION
SCHEDULE OF ACCOUNTS RECEIVABLE
7/31/08
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
APIPA 2010
93
AGED SCHEDULE OF
ACCOUNTS RECEIVABLE - 7/31/08
Debtor
Balance Current
Antioch Hotel
254 254
Black, Antonio
97
32
Camacho, Evelyn 43
43
Davis, Edward
35
10
Fresh Fish Rest. 156
35
Lyle, Cynthia
32
Monterey Bakery 123
47
Smith, Fred
78
18
Tyler, Caitlin
39
TOTAL
857 439
APIPA 2010
31-60 61-90
35
30
10
30
15
32
30
40
29
20
39
165
145
>90
59
32
17
128
94
ALLOWANCE COMPUTATION
Aging
Category
Amount
% Uncollectible
Total
Current
439
0
0
31-60
145
5%
7.25
61-90
165
>90
108
TOTAL ALLOWANCE
10%
50%
16.5
54
78
Balance per GL
120
Entry needed
(42)
APIPA 2010
95
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.
APIPA 2010
96
GENERAL LEDGER – ALLOWANCE
FOR BAD DEBTS, BAD DEBTS
EXPENSE
Account Title: ALLOWANCE FOR BAD DEBTS
Date
Description
7/31/08
Ending balance
7/31/08
AJE per analysis
Ref
Debit
Credit
Balance
120
GJ-7
42
78
Account Title: BAD DEBTS EXPENSE
7/31/08
Ending balance
7/31/08
AJE per analysis
APIPA 2010
150
GJ-7
42
108
97
BALANCE SHEET 7/31/08
ASSETS
Accounts Receivable
$ 857
Allowance for Bad Debts ( 78)
Accounts Receivable, net
$779
APIPA 2010
98
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
APIPA 2010
99
GENERAL LEDGER –
ACCOUNTS RECEIVABLE
Account Title: ACCOUNTS RECEIVABLE
Date
Description
7/31/08
Ending
balance
8/5/08
Write off
Cynthia Lyle
APIPA 2010
Ref
Debit
Account Number: 110
Credit
Balance
857
GJ-7
32
825
100
GENERAL LEDGER – ALLOWANCE
FOR BAD DEBTS
Account Title: ALLOWANCE FOR BAD DEBTS
Date
Description
7/31/08
Ending balance
7/31/08
AJE per analysis
GJ-7
42
78
8/5/08
Write off Cynthia
Lyle
GJ-7
32
46
APIPA 2010
Ref
Debit
Credit
Balance
120
101
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
APIPA 2010
102
ASSET DISPOSITIONS
• When a capital asset is sold:
– Update depreciation
– Calculate gain or loss on disposition
APIPA 2010
103
UPDATE DEPRECIATION
• Calculation of annual depreciation using
straight-line method
Cost – Estimated Residual Value
Estimated Useful Life
• Determine depreciation for current period
APIPA 2010
104
GAIN OR LOSS
CALCULATION
Selling price (sales proceeds)
Carrying value (book value)
Cost
Less accumulated depreciation
Gain (loss) on disposal
APIPA 2010
105
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
APIPA 2010
106
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)
APIPA 2010
107
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
APIPA 2010
108
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
APIPA 2010
109
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
APIPA 2010
110
DEPRECIATION AJE NEEDED
DR Depreciation Expense
CR Accum. Deprec.
$583
$583
To record depreciation on asset to date
determined unusable.
APIPA 2010
111
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)
APIPA 2010
112
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
APIPA 2010
113
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
APIPA 2010
114
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
APIPA 2010
115
WORKSHEET
Unadj.TB
A/C
DR
APIPA 2010
CR
AJEs
DR
CR
Adj. TB
Income
Stmt.
Stmt. of
Net
Assets
DR
DR
DR
CR
CR
CR
116
OTHER AJES NEEDED
DR Investment in Capital
Assets
CR Unrestricted Net Assets
10,350
10,350
To adjust balance in Investment in Capital
Assets for current year activity.
APIPA 2010
117
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.
APIPA 2010
118
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.
APIPA 2010
119
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
APIPA 2010
120
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
APIPA 2010
121
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)
APIPA 2010
122
POST CLOSING TRIAL
BALANCE
• Verifies proper closing of all nominal
accounts
• Verifies DR = CR
• Displays balances in real accounts only
(balance sheet accounts)
APIPA 2010
123
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
APIPA 2010
124
LIQUIDITY AND SOLVENCY
• Liquidity - Identify entity’s
ability to meet short-term
obligations
• Solvency – Ability of entity to survive in the long
run
APIPA 2010
125
LIQUIDITY
• Current ratio: Current assets
Current liabilities
• Quick ratio: Quick assets
Current liabilities
where quick assets = Cash, receivables,
and short term investments
APIPA 2010
126
SOLVENCY
• Working capital to total assets:
Current assets - Current liabilities
Total assets
• Defensive interval:
Quick assets
Projected daily operational expenditures
APIPA 2010
127
SOLVENCY
• Debt to total assets:
Total liabilities
Total assets
APIPA 2010
128
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
APIPA 2010
129
OPERATIONAL EFFICIENCY
• Inventory turnover:
Cost of goods sold
Average inventory
• Days in inventory:
365 days / inventory turnover ratio
APIPA 2010
130
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
APIPA 2010
131
QUESTIONS?
yamamura@unr.edu
APIPA 2010
132
POST TEST
• Circle your best guess at the right answer
(A, B, C or D)
• Don’t worry – you may not know all the
answers – but, hopefully, you know more
than when you started!
APIPA 2010
133
THE END!!
APIPA 2010
134