ACCT 209 1nd Edition Lecture 5 Outline of Last Lecture I What is accounting II What is a Business A Classifications B Forms C Organization III Generally accepted accounting principles IV Objectives and characteristics of accounting V Recognition and measurement criteria VI Financial statements VII Other elements of 10 k Annual reports VIII Analyzing Financial statements IX How Transactions affect the accounting equation X Filling in a transaction grid XI Transaction Analysis XII Rules of Debit Credit XIII Steps in the Recording Process XIV Creating T Accounts XV Preparing a Trial Balance XVI Adjusting Entries XVII Preparing an adjusted Trial Balance Outline of Current Lecture I The Accounting Cycle II Closing Entries III Financial Statements IV Using the Financial Statements Current Lecture The Accounting Cycle These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute 1 ANALYZE 2 RECORD transactions 3 From ledger info prepare transactions in journal and post to a trial balance before ledger T accounts adjustments 8 Prepare post 4 ADJUST balances by closing trial balance recording adjusting entries in start new accounting period journal and posting to ledger 7 Prepare for next 6 REPORT with financial 5 Prepare adjusted accounting period with statements prepared from trial balance closing entries adjusted account balances in journal and ledger Closing Entries Real Permanent Accounts balance sheets accounts Period 1 ending balance Period 2 beginning balance Nominal Temporary Accounts revenues expenses dividends accounts that affect RE At end of each period account balance must be set to zero by transferring balance amount to RE Reasons for recording closing entries Zero out temporary accounts Set the balance to zero in order to begin new accounting period Update retained earnings change the retained earnings from beginning retained earnings to end by transferring balances of temporary accounts into Retained earning Example Closing entries A company s trial balance after adjustments showed the following accounts and balances Debit Cash Accounts receivable Supplies Office equipment Credit 14 000 1 200 Permanent Accounts 600 6 500 Accumulated depreciation 1 500 Accounts payable 5 200 Unearned revenue 1 600 Common stock 2 000 Retained earnings Dividends 8 000 3 200 Revenue 25 050 Salaries expense 16 800 Supplies expense 550 Depreciation expense 500 Temp Accounts Income statement Revenue Expenses 25050 17850 Net income 7200 Statement of Retained Earnings Beginning Retained Earnings Net Income Dividends 8000 7200 3200 End Retained Earnings 12000 Using the T accounts below enter the necessary closing entries directly into the T accounts 4 3200 4 3200 1 25050 3 7200 2 17850 Bal 12000 Retained earnings Bal 7200 Net income 2 16800 1 25050 Financial Statements Another look Income statement Revenue expenses net income Single step All Revenue all expenses net income Single step because you only subtract once Multi step Has subtotals and lots of categories 2 550 2 500 EX Statement of Net Income Sales Revenue Cost of goods sold 200 80 Gross Profit operating expenses 120 75 Income from operations Other revenue and gain Other expenses and gain 45 5 3 Income before Taxes Tax Expenses 47 10 Net Income 37 Classified balance sheet Assets Liabilities Shareholders Equity Current assets Expected to be used or converted to cash in 1 year Place in order of liquidity How easily it is to convert it to cash Easy Hard Examples Cash Marketable securities Accounts Receivable Inventories Prepaid expenses Supplies Non current assets Everything else Examples Property plant and equipment Intangible assets Investments Other Assets Current liabilities Debt expected to be paid within 1 year Listed in order of maturity Soonest Latest Examples Unearned revenue Accrued liabilities Accounts Payable Short Term notes payable Current maturity of long term debt Non current liabilities Debt that will be paid later than a year Using the financial statements Working Capital Current Assets Current Liabilities Current ratio Current Assets Current Liabilities Ratio of liabilities to Assets Total Liabilities Total assets Example Comparative balance sheets for Palo Pinto Company are shown below Assets 2014 2013 25 000 35 000 Marketable securities 15 000 12 000 Accounts receivable net 20 000 50 000 Inventory 55 000 50 000 Supplies 10 000 3 000 200 000 160 000 325 000 310 000 Cash Property Plant and Equipment net Total assets Liabilities and Stockholders Equity Accounts payable 15 000 25 000 30 000 24 000 5 000 6 000 Bonds payable 28 000 20 000 Common stock 200 000 200 000 47 000 35 000 325 000 310 000 Short term notes payable Accrued liabilities Retained earnings Total liabilities and stockholders equity Required 1 Determine Palo Pinto Company s working capital current ratio and debt to total assets ratio for 2013 and 2014 2013 Working Capital 150 55 95 Current Ratio 150 55 2 73 Total Assets ratio 75 310 2419 2014 Working Capital 125 50 75 Current Ratio 150 50 2 5 Total Assets ratio 78 320 24 2 Did these ratios improve or decline All declined This is not necessarily a bad thing These numbers are just a starting point to assess how the company is doing