ACCT 209 1nd Edition Lecture 5 Outline of Last Lecture I. What is accounting?II. What is a Business?A. ClassificationsB. FormsC. OrganizationIII. Generally accepted accounting principlesIV. Objectives and characteristics of accountingV. Recognition and measurement criteriaVI. Financial statementsVII. Other elements of 10-k (Annual reports)VIII. Analyzing Financial statementsIX. How Transactions affect the accounting equationX. Filling in a transaction gridXI. Transaction AnalysisXII. Rules of Debit/CreditXIII. Steps in the Recording ProcessXIV.Creating T AccountsXV. Preparing a Trial BalanceXVI. Adjusting EntriesXVII. Preparing an adjusted Trial BalanceOutline of Current Lecture I. The Accounting CycleII. Closing EntriesIII. Financial StatementsIV. Using the Financial StatementsCurrent LectureThe Accounting CycleThese 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, preparetransactions in journal and post to a trial balance before ledger (“T”) accounts adjustments8. Prepare post- 4. ADJUST balances by closing trial balance; recording adjusting entries instart new accounting period journal and posting to ledger7. Prepare for next 6. REPORT with financial 5. Prepare adjustedaccounting period with statements prepared from trial balanceclosing entries adjusted account balances(in journal and ledger)Closing EntriesReal (Permanent) Accounts: balance sheets accounts Period 1 ending balance = Period 2 beginning balanceNominal (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 REReasons 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 earningExample: Closing entriesA company’s trial balance after adjustments showed the following accounts and balances. Debit CreditCash $14,000Accounts receivable 1,200Supplies 600Office equipment 6,500Accumulated depreciation $ 1,500Accounts payable 5,200Unearned revenue 1,600Common stock 2,000Retained earnings 8,000Dividends 3,200Revenue 25,050Salaries expense 16,800Supplies expense 550Depreciation expense 500Permanent AccountsTemp. AccountsIncome statementRevenue 25050Expenses 17850Net income 7200Statement of Retained EarningsBeginning Retained Earnings 8000Net Income 7200(Dividends) (3200)End Retained Earnings 12000Using the T accounts below, enter the necessary closing entries directly into the T accounts.Financial Statements: Another lookIncome statement: Revenue – expenses = net incomeSingle step - All Revenue – all expenses = net incomeSingle step because you only subtract onceMulti step -Has subtotals and lots of categoriesBal: 12000 = Retained earningsBal: 7200 = Net income(2)500(2) 550(2) 16800(1) 25050(2)17850(4) 3200(3)7200(4)3200(1) 25050EX:Statement of Net IncomeSales Revenue 200(Cost of goods sold) (80)Gross Profit 120(operating expenses) (75)Income from operations 45Other revenue and gain 5(Other expenses and gain) (3)Income before Taxes 47Tax Expenses (10)Net Income 37Classified balance sheet: Assets = Liabilities + Shareholders EquityCurrent assets – Expected to be used or converted to cash in 1 yearPlace in order of liquidity (How easily it is to convert it to cash) Easy -> HardExamples:CashMarketable securitiesAccounts ReceivableInventoriesPrepaid expensesSuppliesNon-current assets – Everything elseExamples: Property, plant, and equipmentIntangible assetsInvestmentsOther AssetsCurrent liabilities – Debt expected to be paid within 1 yearListed in order of maturity - Soonest -> LatestExamplesUnearned revenueAccrued liabilitiesAccounts PayableShort Term notes payableCurrent maturity of long term debt Non-current liabilities – Debt that will be paid later than a yearUsing the financial statementsWorking Capital: Current Assets – Current LiabilitiesCurrent ratio: Current Assets / Current LiabilitiesRatio of liabilities to Assets: Total Liabilities/ Total assetsExampleComparative balance sheets for Palo Pinto Company are shown below. Assets 2014 2013Cash $ 25,000 $ 35,000Marketable securities 15,000 12,000 Accounts receivable (net) 20,000 50,000Inventory 55,000 50,000Supplies 10,000 3,000Property, Plant, and Equipment (net) 200,000 160,000Total assets $325,000 $310,000Liabilities and Stockholders’ EquityAccounts payable $ 15,000 $ 25,000Short-term notes payable 30,000 24,000 Accrued liabilities 5,000 6,000Bonds payable 28,000 20,000Common stock 200,000 200,000Retained earnings 47,000 35,000Total liabilities and stockholders’ equity $325,000 $310,000Required:1. Determine Palo Pinto Company’s working capital, current ratio, and debt to total assets ratio for 2013 and 2014. 2013Working Capital: 150 – 55 = 95Current Ratio = 150/55 = 2.73Total Assets ratio = 75/310 = .24192014Working Capital: 125 – 50 = 75Current Ratio = 150/50 = 2.5Total Assets ratio = 78/320 = .242. 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