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Chapter

Financial Statements 13
and Closing Procedures

Section 1: Preparing
the Financial Statements
Section Objectives
1. Prepare a classified income statement
from the worksheet.
2. Prepare a statement of owner’s equity
from the worksheet.
3. Prepare a classified balance sheet from
the worksheet.

McGraw-Hill © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

The Classified Balance Sheet

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Objective 3

Prepare a classified balance

sheet from the worksheet.

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Current Assets

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QUESTION:

What are current assets?

ANSWER:

Current assets are assets consisting

of cash, items that normally will be
converted into cash within one year,
or items that will be used up within
one year.

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 Current Assets

Current assets are usually listed in order of

liquidity.

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QUESTION:

What is liquidity?

ANSWER:

Liquidity is the ease with which an

item can be converted into cash.

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 Current Assets
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Current Assets
Cash 13,136.00
Petty Cash Fund 100.00
Notes Receivable 1,200.00
Accounts Receivable 32,000.00
Less Allow. for Doubtful Accounts 1,050.00 30,950.00
Interest Receivable 30.00
Merchandise Inventory 47,000.00
Prepaid Expenses
Supplies 1,325.00
Prepaid Insurance 4,900.00
Prepaid Interest 75.00 6,300.00
Total Current Assets 98,716.00

Current assets for Simpson Antiques

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Plant and Equipment

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QUESTION:

What is plant and equipment?

ANSWER:

Plant and equipment is property that

will be used in the business for
longer than one year.

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 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.

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 Plant and Equipment

The balance sheet shows three amounts for each

category of plant and equipment :

Asset
(Accumulated depreciation)
Book value

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 Plant and Equipment
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Prepaid Interest 75.00 6,300.00
Total Current Assets 98,716.00
Plant and Equipment
Store Equipment 30,000.00
Less Accumulated Depreciation 2,400.00 27,600.00
Office Equipment 5,000.00
Less Accumulated Depreciation 700.00 4,300.00
Total Plant and Equipment 31,900.00
Total Assets 130,616.00
Total Liability and Owner’s Equity 130,616.00

Total plant and equipment

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Current Liabilities

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QUESTION:

What are current liabilities?

ANSWER:

Current liabilities are debts that must

be paid within one year.

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 Current Liabilities
 Current liabilities are usually listed in order of priority of payment.
 Management must ensure that funds are available to pay current
liabilities when they become due in order to maintain the firm's good
credit reputation.

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 Current Liabilities
Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Prepaid Interest 75.00 6,300.00
Total Current Assets 98,716.00
Total Plant and Equipment 31,900.00
Total Assets 130,616.00

Liabilities and Owner’s Equity

Current Liabilities
Total current liabilities
Notes Payable-Trade 2,000.00
Notes Payable-Bank 9,000.00
Accounts Payable 24,129.00
Interest Payable 20.00
Social Security Tax Payable 1,158.40
Medicare Tax Payable 267.40
Employee Income Tax Payable 990.00
Fed. Unemployment Tax Pay. 9.60
State Unemployment Tax Pay. 64.80
Salaries Payable 1,200.00
Sales Tax Payable 6,984.00
Total Current Liabilities 45,823.20

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Long-Term Liabilities

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QUESTION:

What are long-term liabilities?

ANSWER:

Long-term liabilities are debts of a

business that are due more than one
year in the future.

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 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.

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Owner's Equity

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 Owner's Equity

Simpson Antiques prepares a separate

statement of owner's equity that reports all
information about changes that occurred in the
owner's financial interest during the period.

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 Owner's Equity
Simpson Antiques
Statement of Owner's Equity
Year Ended December 31, 2007
Patricia Simpson, Capital, January 1, 2007 61,221.00
Net Income for Year 51,171.80
Less Withdrawals for the Year 27,600.00
Increase in Capital 23,571.80
Patricia Simpson, Capital, December 31, 2007 84,792.80

Simpson Antiques
Balance Sheet
Year Ended December 31, 2007
Assets
Owner’s Equity
Patricia Simpson, Capital 84,792.80
Total Liabilities and Owner's Equity 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.

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SECTION Complete the following sentences:
R
A classified income statement is also
called a(n) multiple-step income statement
___________________________.
E

V
Gross profit is the difference between net
___________
I sales and the cost of goods sold.

E Current assets are assets consisting of

_____________
cash, items that normally will be
W converted into cash within one year, or
items that will be used up within one year.
SECTION Complete the following sentences:
R
Current liabilities are debts that must be
_______________
paid within one year.
E

V
Liquidity is the ease with which an item
________
can be converted into cash.
I

E Long-term liabilities are debts of a

_________________
business that are due more than one year
W in the future.
 Thank You
for using

College Accounting, 11th Edition

Price • Haddock • Brock

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