Chapter 14
Merchandiser’s Financial Statements
and the Closing Process
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
LO1
Learning Objective 1
Prepare a work sheet for a merchandising business.
Step 1: Enter unadjusted trial balance.
Step 2: Enter adjustments.
Step 3: Prepare adjusted trial balance.
Step 4: Sort adjusted trial balance amounts to
financial statements.
Step 5: Total statement columns, compute
income or loss, and balance columns.
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Learning Objective 2
LO2
Define and prepare multiple-step and single-step income statements.
Multiple-Step Income Statement
The multi-step format has multiple subtotals before arriving at net income. This provides more detailed
information for users.
A multiple-step income statement has three main parts:
1. Gross profit, determined by subtracting cost of goods sold from net sales.
2. Income from operations, determined by subtracting operating expenses from gross profit.
3. Net income, determined by adjusting income from operations for nonoperating items. When a
company has no reportable nonoperating activities, such as SuperSub, its income from operations is
simple labeled net income.
Operating expenses are classified into selling expenses and general and administrative expenses.
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LO2
Multiple-Step Income Statement
Nonoperating activities consist of other expenses, revenues, losses, and gains that
are unrelated to a company’s operations. They are reported in two sections:
1. Other revenues and gains, which often include interest revenue, dividend
revenue, rent revenue, and gains from asset disposals.
2. Other expenses and losses, which often include interest expense, losses from
asset disposals, and casualty losses.
Partial Income Statement Showing Nonoperating Activities
Income from operations
Other revenues and gains (expenses and losses)
Interest revenue
$ 1,000.00
Gain on sale of building
2,500.00
Interest expense
(1,500.00)
Total other revenues and gains (expenses and losses)
Net income
$ 12,900.00
2,000.00
$ 14,900.00
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LO2
Single-Step Income Statement
This is the same information for Z-MART presented as a single-step income statement. In a
single-step income statement, all revenues are grouped together and totaled and all the
expenses are grouped together and totaled. Then, a single step is needed to subtract total
expenses from total revenues to arrive at Net Income.
As you can see, the Net Income is the same whether the multi-step or the single-step is
used. The only difference is in the amount of detail that is provided on the income
statement.
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Learning Objective 3
LO3
Prepare a statement of owner’s equity.
The statement of owner’s equity summarizes changes in the
owner’s equity account during the
year due to:
The owner’s capital
account is updated
during the year for
additional owner
investments.
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Learning Objective 4
LO4
Explain and prepare a classified balance sheet.
A classified balance sheet lists current assets before noncurrent assets and current
liabilities before noncurrent liabilities. This consistency in presentation allows users to
quickly identify current assets that are most easily converted to cash and current
liabilities that are shortly coming due. Items in current assets and current liabilities are
listed in the order of how quickly they will be converted to, or paid in cash.
Categories for assets :
Plant
Assets
Current
Assets
Long-term
Investments
Intangible
Assets
Categories for liabilities :
Current
Liabilities
Long-Term
Liabilities
Equity:
Equity
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LO5
Learning Objective 5
Prepare journal entries to close temporary accounts.


Resets revenue,
expense, and
withdrawal account
balances to zero at
the end of the period.
Helps summarize a
period’s revenues
and expenses in the
Income Summary
account.
Identify accounts for
closing.
Record and post closing
entries.
Prepare post-closing trial
balance.
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LO5
Closing Entries
 Close expense accounts to Income
Summary.
a. Close inventory and purchase-
Expenses
Summary.
Income
Summary
related accounts to Income
Summary.
Assets
 Close Withdrawals to owner’s
capital.
Liabilities
owner’s capital.
Permanent
Accounts
Owner’s Capital
b. Close other expense accounts to
Income Summary.
 Close Income Summary account to
Temporary
Accounts
Withdrawals
 Close revenue accounts to Income
Revenues
The closing process applies
only to temporary accounts.
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Learning Objective 6
LO6
Prepare a post-closing trial balance.
After journalizing and posting the closing entries
a post-closing trial balance is prepared using
only the balances in the permanent accounts
from the work sheet.
Since all the temporary accounts have
been closed, they have zero balances and do
not appear on the post-closing trial balance.
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LO7
Learning Objective 7
Prepare reversing entries and explain their purpose.
Reversing entries
are optional and are intended
to simplify a company’s
bookkeeping.
As a general rule, adjusting entries that
create new asset or liability accounts
are likely candidates for reversing entries.
The following adjusting entry is made to accrue
earned but unpaid salaries on December 31:
Dec. 31 Salaries Expense
Salaries Payable
210
210
Employees are paid $700 on January 9. The $700
includes the $210 accrued on December 31.
Jan. 9
Salaries Expense
Salaries Payable
Cash
490
210
700
A reversing entry was not made on January 1.
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LO7
Accounting without Reversing Entries
General Ledger
Salaries Payable
Date
Debit
Credit Balance
Dec. 31
210
210
General Ledger
Salaries Expense
Date
Debit
Credit Balance
Dec. 12
700
700
26
700
1,400
31
210
1,610
December 31 adjusting entry
General Ledger
Salaries Expense
Date
Debit
Credit Balance
Jan. 9
490
490
General Ledger
Salaries Payable
Date
Debit
Credit Balance
Dec. 31
210
210
Jan. 9
210
-
January 9 payment entry
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LO7
Accounting with Reversing Entries
The following adjusting entry is made to accrue
earned but unpaid salaries on December 31:
Dec. 31 Salaries Expense
Salaries Payable
210
210
The adjusting entry made on December 31
is reversed on January 1.
Jan. 1
Salaries Payable
Salaries Expense
210
210
Employees are paid $700 on January 9. The $700
includes the $210 accrued on December 31.
Jan. 9
Salaries Expense
Cash
700
700
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LO7
Accounting with Reversing Entries
General Ledger
Salaries Expense
Date
Debit
Credit Balance
Dec. 12
700
700
26
700
1,400
31
210
1,610
General Ledger
Salaries Expense
Date
Debit
Credit Balance
Jan. 1
210
(210)
General Ledger
Salaries Payable
Date
Debit
Credit Balance
Dec. 31
210
210
December 31 adjusting entry
General Ledger
Salaries Payable
Date
Debit
Credit Balance
Dec. 31
210
210
Jan.
1
210
-
January 1 reversing entry
General Ledger
Salaries Expense
Date
Debit
Credit Balance
Jan.
1
210
(210)
9
700
490
January 9 payment entry
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End of Chapter 14
14-15