13-1
© 2010 The McGraw-Hill Companies, Inc. All rights reserved
Chapter
13
Financial Statements
and Closing Procedures
Section 1: Preparing
the Financial Statements
Section Objectives
1.
2.
3.
Prepare a classified income statement
from the worksheet.
Prepare a statement of owner’s equity
from the worksheet.
Prepare a classified balance sheet from
the worksheet.
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Objective 1
Prepare a classified income
statement from the worksheet
The Classified Income Statement
A classified income statement is sometimes
called a multiple-step income statement.
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QUESTION:
What is a single-step income statement?
ANSWER:
A single-step income statement is a
format in which only one computation
is needed to determine the net income.
(Total Revenue – Total Expenses = Net Income)
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Operating Revenue
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2010
561,650.00
12,500.00
549,150.00
52,000.00
Net sales for Whiteside Antiques
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Cost of Goods Sold
The Cost of Goods Sold section contains information
about the cost of the merchandise that was sold during
the period.
Three elements are needed to compute the cost of
goods sold:

Beginning inventory
 Net delivered cost of purchases
 Ending inventory
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Net Delivered Cost of Purchases
Purchases
+ Freight In
(Purchases Returns and Allowances)
(Purchases Discounts)
Net Delivered Cost of Purchases
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Total Merchandise Available for Sale
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
13-8
Cost of Goods Sold
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
(Ending Merchandise Inventory)
Cost of Goods Sold
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
Merchandise Inventory is the one account that appears on both
the income statement and the balance sheet.

Beginning and ending merchandise inventory balances appear on
the income statement.

Ending merchandise inventory also appears on the balance sheet
in the Assets section.
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Cost of Goods Sold
Whiteside Antiques
Income Statement
Year Ended December 31, 2010
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2010
Purchases
Freight In
Delivered Cost of Purchases
Less Purchases Returns and Allowances
3,050.00
Purchases Discounts
3,130.00
Net Delivered Cost of Purchases
Total Merchandise Available for Sale
Less Merchandise Inventory, Dec. 31, 2010
Cost of Goods Sold
Merchandise available for sale
Cost of goods sold
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52,000.00
321,500.00
9,800.00
331,300.00
6,180.00
325,120.00
377,120.00
47,000.00
330,120.00
Gross Profit on Sales

For Whiteside Antiques net sales is the revenue earned from
selling antique items.

Cost of goods sold is what Whiteside Antiques paid for the
antiques that were sold during the fiscal period.

Gross profit is what is left to cover operating expenses and
provide a profit.

Gross profit is the difference between the net sales and the cost
of goods sold
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Gross profit on sales for Whiteside Antiques
Whiteside Antiques
Income Statement
Year Ended December 31, 2010
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Merchandise Inventory, Jan. 1, 2010
Purchases
Freight In
Delivered Cost of Purchases
Less Purchases Returns and Allowances
3,050.00
Purchases Discounts
3,130.00
Net Delivered Cost of Purchases
Total Merchandise Available for Sale
Less Merchandise Inventory, Dec. 31, 2010
Cost of Goods Sold
Gross Profit on Sales
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561,650.00
12,500.00
549,150.00
52,000.00
321,500.00
9,800.00
331,300.00
6,180.00
325,120.00
377,120.00
47,000.00
330,120.00
219,030.00
Operating Expenses
Whiteside Antiques
Income Statement
Year Ended December 31, 2010
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
219,030.00
79,690.00
7,425.00
125.00
4,975.00
2,400.00
94,615.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
Salaries for salespersons and advertising are examples of selling expenses
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167836.2
Operating Expenses
Whiteside Antiques
Income Statement
Year Ended December 31, 2010
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
219,030.00
79,690.00
7,425.00
125.00
4,975.00
2,400.00
94,615.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167836.2
Rent, utilities, and salaries for office employees are examples of general and administrative expenses
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Whiteside Antiques
Income Statement
Year Ended December 31, 2010
Operating Revenue
Sales
Less Sales Returns and Allowances
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Selling Expenses
Salaries Expense - Sales
Advertising Expense
Cash Short or Over
Supplies Expense
Depreciation Expense - Store Equipment
Total Selling Expenses
General and Administrative Expenses
Rent Expense
Salaries Expense - Office
Insurance Expense
Payroll Taxes Expense
Telephone Expense
Uncollectible Accounts Expense
Utilities Expense
Depreciation Expense - Office Equipment
Total General and Administrative Expenses
Total Operating Expenses
Net Income from Operations
561,650.00
12,500.00
549,150.00
330,120.00
219,030.00
79,690.00
7,425.00
125.00
4,975.00
2,400.00
Net income from operations
94,615.00
27,600.00
26,500.00
2,450.00
7,371.20
1,875.00
800.00
5,925.00
700.00
73,221.20
167,836.20
51,193.80
13-16
Other Income and Other Expenses
Whiteside Antiques
Income Statement
Year Ended December 31, 2010
Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
51,193.80
166.00
366.00
532.00
770.00
238.00
13-17
Net income for Whiteside Antiques
Whiteside Antiques
Income Statement
Year Ended December 31, 2010
Operating Revenue
Net Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses
Total Selling Expenses
Total Operating Expenses
Net Income from Operations
Other Income
Interest Income
Miscellaneous Income
Total Other Income
Other Expenses
Interest Expense
Net Nonoperating Expense
Net Income for Year
549,150.00
330,120.00
219,030.00
94,615.00
167,836.20
51,193.80
166.00
366.00
532.00
770.00
238.00
50,955.80
13-18
Objective 2
Prepare a Statement of Owner’s
Equity from the worksheet

The statement of owner's equity reports the changes that
occurred in the owner's financial interest during the period.

The ending capital balance for Bill Whiteside, $84,576.80, is
used to prepare the balance sheet.
Whiteside Antiques
Statement of Owner's Equity
Year Ended December 31, 2010
Bill Whiteside, Capital, January 1, 2010
Net Income for Year
50,955.80
Less Withdrawals for the Year
27,600.00
Increase in Capital
Bill Whiteside, Capital, December 31, 2010
13-19
61,221.00
23,355.80
84,567.80
Objective 3
Prepare a classified balance
sheet from the worksheet
QUESTION:
What are current assets?
ANSWER:
Current assets are assets consisting
of cash, items that normally will be
converted into cash within one year,
and items that will be used up within
one year.
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Current Assets
Whiteside Antiques
Balance Sheet
December 31, 2010
Assets
Current Assets
Cash
Petty Cash Fund
Notes Receivable
Accounts Receivable
Less Allow. for Doubtful Accounts
Interest Receivable
Merchandise Inventory
Prepaid Expenses
Supplies
Prepaid Insurance
Prepaid Interest
Total Current Assets
13,136.00
100.00
1,200.00
32,000.00
1,050.00
1,325.00
4,900.00
75.00
Current assets for Whiteside Antiques
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30,950.00
30.00
47,000.00
6,300.00
98,716.00
Plant and Equipment

Noncurrent assets are called long-term assets.

An important category of long-term assets is plant and equipment.

For many businesses plant and equipment represents a sizable
investment.
Whiteside Antiques
Balance Sheet
December 31, 2010
Assets
Prepaid Interest
Total Current Assets
Plant and Equipment
Store Equipment
Less Accumulated Depreciation
Office Equipment
Less Accumulated Depreciation
Total Plant and Equipment
Total Assets
75.00
30,000.00
2,400.00
5,000.00
700.00
6,300.00
98,716.00
27,600.00
4,300.00
31,900.00
130,616.00
13-22
Current Liabilities
Whiteside Antiques
Balance Sheet
December 31, 2010
Assets
Prepaid Interest
Total Current Assets
Total Plant and Equipment
Total Assets
75.00
Total current liabilities
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable-Trade
Notes Payable-Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employee Income Tax Payable
Fed. Unemployment Tax Pay.
State Unemployment Tax Pay.
Salaries Payable
Sales Tax Payable
Total Current Liabilities
2,000.00
9,000.00
24,129.00
20.00
1,158.40
267.40
990.00
9.60
64.80
1,200.00
7,200.00
46,039.20
13-23
6,300.00
98,716.00
31,900.00
130,616.00
Long-Term Liabilities

Although repayment of long-term liabilities might not be due
for several years, management must make sure that periodic
interest is paid promptly.

Long-term liabilities include mortgages, notes payable, and
loans payable.
13-24
Owner's Equity
Statement of Owner's Equity
Year Ended December 31, 2010
Bill Whiteside, Capital, January 1, 2010
61,221.00
Net Income for Year
50,955.80
Less Withdrawals for the Year
27,600.00
Increase in Capital
23,355.80
Bill Whiteside, Capital, December 31, 2010
84,576.80
Whiteside Antiques
Balance Sheet
December 31, 2010
Assets
Owner’s Equity
Bill Whiteside, Capital
Total Liabilities and Owner's Equity
84,576.80
130,616.00
The ending balance from the statement of owner’s equity is
transferred to the Owner's Equity section of the balance sheet.
13-25
Chapter
13
Financial Statements
and Closing Procedures
Section 2: Completing the
Accounting Cycle
Section Objectives
McGraw-Hill
4.
Journalize and post the adjusting entries.
5.
Journalize and post the closing entries.
6.
Prepare a postclosing trial balance.
7.
Journalize and post reversing entries.
© 2010 The McGraw-Hill Companies, Inc. All rights reserved.
Objective 4
 All
Journalize and post the
adjusting entries
adjustments are shown on the worksheet.
 After
the financial statements have been prepared,
the adjustments are made a permanent part of the
accounting records.
 They
are recorded in the general journal as
adjusting journal entries and are posted to the
general ledger.
13-27
Adjusting Entries
Type of
Adjustment
Worksheet
Reference
Purpose
Inventory
(a – b)
Removes beginning inventory and adds ending
inventory to the accounting records.
Expense
(c – e)
Matches expense to revenue for the period; the
credit is to a contra asset account.
Accrued Expense
(f – i)
Matches expense to revenue for the period; the
credit is to a liability account.
Prepaid Expense
(j – l)
Matches expense to revenue for the period; the
credit is to an asset account.
Accrued Income
(m – n)
Recognizes income earned in the period. The
debit is to an asset account (Interest
Receivable)
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Objective 5
Journalize and Post the
Closing Entries

At the end of the period, the temporary
accounts are closed.

The temporary accounts are:

Revenue accounts
 Cost of goods sold accounts
 Expense accounts
 Drawing account
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There are four steps in the closing process:
1.
Close revenue accounts and cost of goods sold accounts
with credit balances to Income Summary.
2.
Close expense accounts and cost of goods sold accounts
with debit balances to Income Summary.
3.
Close Income Summary, which now reflects the net income
or loss for the period, to owner's capital.
4.
Close the drawing account to owner's capital.
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Step 1: Closing the Revenue Accounts and the Cost of Goods Sold
Accounts with credit balances.
GENERAL JOURNAL
DATE
DESCRIPTION
POST.
REF.
2010
Closing Entries
Dec. 31 Sales
Interest Income
Miscellaneous Income
Purchases Returns and Allowances
Purchases Discounts
Income Summary
28
PAGE
DEBIT
CREDIT
561,650.00
166.00
366.00
3,050.00
3,130.00
568,362.00
Debit each account, except Income Summary, for its balance. Credit
Income Summary for the total.
13-31
Step 2: Closing the Expense Accounts and the Cost of Goods Sold
Accounts with Debit Balances
Credit each account, except Income Summary, for its
balance. Debit Income Summary for the total.
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Step 3: Closing the Income Summary Account

The third closing entry transfers the Income Summary balance to the
owner's capital account.
 This closes the Income Summary account, which remains closed until it is
used in the end-of-period process for the next year.
 For Whiteside Antiques, the third closing entry is as follows:
Income Summary
Adjusting Entries (a-b)
Closing Entries
12/31
12/31
52,000.00
512,406.20
564,406.20
12/31
12/31
Bal.
47,000.00
568,362.00
615,362.00
50,955.80
GENERAL JOURNAL
DATE
Dec. 31
DESCRIPTION
POST.
REF.
Income Summary
Bill Whiteside, Capital
PAGE
DEBIT
28
CREDIT
50,955.80
50,955.80
13-33
Step 4: Closing the Drawing account
This entry closes the drawing account and updates the capital account
GENERAL JOURNAL
DATE
Dec. 31
DESCRIPTION
POST.
REF.
Bill Whiteside, Capital
Bill Whiteside, Drawing
PAGE
DEBIT
28
CREDIT
27,600.00
27,600.00
13-34
Posting the Closing Entries

The closing entries are posted from the general journal to the
general ledger.

This process brings the temporary account balances to zero.

The word Closing is entered in the Description column.
13-35
Objective 6
Preparing a Postclosing Trial
Balance

Prepare a postclosing trial balance to confirm
that the general ledger is in balance.

Only the accounts that have balances – the asset,
liability and owner's capital accounts – appear on
the postclosing trial balance.

The postclosing trial balance matches the
amounts reported on the balance sheet.

To verify this, compare the postclosing trial
balance with the balance sheet.
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Only the accounts that have balances—the asset, liability and
owner's capital accounts—appear on the postclosing trial balance
Temporary accounts do
not appear on the
postclosing trial balance
Revenue
Cost of
Goods Sold
Expenses
Withdrawals
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Preparing a Postclosing Trial Balance
13-38
Objective 7
Journalize and post
reversing entries
QUESTION:
What are reversing entries?
ANSWER:
Reversing entries are journal entries
made to reverse the effect of certain
adjusting entries involving accrued
income or accrued expenses.
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The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
13-40
Step 6
Journalize and
post adjusting
entries
Thank You
for using
College Accounting
A Contemporary Approach, 1ST Edition
Haddock • Price • Farina
13-41