Financial

Financial &
& Managerial
Managerial
Accounting
Accounting
The Basis for Business Decisions

Williams
McGraw-Hill/Irwin

Haka

Bettner

Carcello

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Chapter

5
The Accounting Cycle
Reporting Financial Results

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Learning
Learning Objective
Objective

To prepare an income
statement, a statement
of retained earnings,
and a balance sheet.

LO1
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This
This is
is the
the
Adjusted
Adjusted Trial
Trial
Balance
Balance for
for JJs.
JJs.

JJ's Lawn Care Service

Adjusted Trial Balance
May 31, 2007
Cash

Accounts receivable

3,925
75

Tools & equipm ent

Accumulated depreciation: tools &
equipm ent

2,650
$

Truck

15,000

Accumumlated depreciation: truck

250

Notes payable

13,000

Accounts payable

150

Capital stock

8,000

Dividends

200

Sales revenue

750

Gasoline expense

50

Depreciation expense: tools & equipm ent

50

Depreciation expense: truck

Total

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50

250
$

22,200

22,200

Now,
Now, lets
lets
prepare
prepare the
the
financial
financial
statements
statements for
for
JJs
JJs Lawn
Lawn Care
Care
Service
Service for
for May.
May.

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JJ's Lawn Care Service

Income Statement
For the month ending May 31, 2007
Sales revenue

750

Operating expenses:
Gasoline expense
Depreciation: tools & equipment
Depreciation: truck
Net income

50
50
250

350
$

400

Net
Net income
income also
also appears
appears on
on the
the
Statement
of
Retained
Earnings.
Statement
of
Retained
Earnings.
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Statement
Statement of
of Retained
Retained Earnings
Earnings
This statement summarizes the increases
and decreases in Retained Earnings during
the period.
Business
Earnings

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Dividends
Business
Losses

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Now, lets prepare the Balance Sheet.

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JJ's Lawn Care Service

Balance Sheet
May 31, 2007
Assets
Cash
Accounts receivable
Tools & equipment
$ 2,650
Less: Accumulated depreciation
50
Truck
$ 15,000
Less: Accumulated depreciation
250
Total assets
Liabilities & Stockholders' Equity
Liabilities:
Notes payable
Accounts payable
Total liabilities
Stockholders' equity:
Capital stock
$ 8,000
Retained earnings
200
Total stockholders' equity
Total liabilities & stockholders' equity
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3,925
75
2,600

14,750
$ 21,350

$ 13,000
150
$ 13,150

8,200
$ 21,350

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Learning
Learning Objective
Objective
To explain how the
income statement and
the statement of
retained earnings relate
to the balance sheet.

LO2
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Preparing
Preparing Financial
Financial Statements
Statements
JJ's Lawn Care Service
Balance Sheet
May 31, 2007

JJ's Lawn Care Service

Income Statement
For the month ending May 31, 2007

Assets
Cash
Accounts receivable
Tools & equipment
$ 2,650
Less: Accumulated depreciation
50
Truck
$ 15,000
Less: Accumulated depreciation
250
Total assets
Liabilities & Stockholders' Equity
Liabilities:
Notes payable
Accounts payable
Total liabilities
Stockholders' equity:
Capital stock
$ 8,000
Retained earnings
200
Total stockholders' equity
Total liabilities & stockholders' equity

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3,925
75
2,600

Sales revenue
Operating expenses:
Gasoline expense
Depreciation: tools & equipment
Depreciation: truck
Net income

$ 750
$

50
50
250

350
$ 400

14,750
$ 21,350

$ 13,000
150
$ 13,150

8,200
$ 21,350

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Learning
Learning Objective
Objective

To explain the concept

of adequate disclosure.

LO3
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Drafting
Drafting Notes
Notes to
to the
the Financial
Financial
Statements
Statements

Notes to the
Financial Statements

Examples
Examplesof
of Items
ItemsDisclosed
Disclosed
Lawsuits
Lawsuits pending
pending
Scheduled
Scheduledplant
plantclosings
closings
Governmental
Governmentalinvestigations
investigations
Significant
Significant events
eventsoccurring
occurring
after
afterthe
thebalance
balancesheet
sheetdate
date
Specific
Specific customers
customersthat
that
account
account for
foraalarge
largeportion
portionof
of
revenue
revenue
Unusual
Unusual transactions
transactions and
and
related
relatedparty
partytransactions
transactions

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Learning
Learning Objective
Objective

To explain the purposes

of closing entries;
prepare these entries.

LO4
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Closing
Closing the
the Temporary
Temporary Accounts
Accounts
Close Revenue accounts
to Income Summary.

Close Expense accounts

to Income Summary.

The closing process

gets the temporary
accounts ready for the
next accounting
period.

Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.
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Closing
Closing the
the Temporary
Temporary Accounts
Accounts
JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2007
Cash
$ 3,925
Accounts receivable
75
Tools & equipment
2,650
Accum. depreciation: tools & eq.
$
50
Truck
15,000
Accum. depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Dividends
200
Sales revenue
750
Gasoline expense
50
Depreciation exp.: tools & eq.
50
Depreciation exp.: truck
250
Total
$ 22,200 $ 22,200
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Lets
Lets prepare
prepare the
the
closing
closing entries
entries
for
for JJs
JJs Lawn
Lawn
Care
Care Service.
Service.

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Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts
Since
Since Sales
Sales Revenue
Revenue has
has aa credit
credit balance,
balance, the
the
closing
closing entry
entry requires
requires aa debit
debit to
to the
the Sales
Sales Revenue
Revenue
account.
account.
GENERAL JOURNAL
Date

Account Titles and Explanation

May 31 Sales Reveune

Income Summary

P
RDebit

Credit

750
750

To close the revenue account.

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Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts

Income Summary
750

Sales Revenue
750
750

750

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Closing
Closing Entries
Entries for
for Expense
Expense Accounts
Accounts
Since
Since expense
expense accounts
accounts have
have aa debit
debit balance,
balance, the
the
closing
closing entry
entry requires
requires aa credit
credit to
to the
the expense
expense
accounts.
accounts.
GENERAL JOURNAL
Date

P
RDebit

Account Titles and Explanation

May 31 Income Summary

Credit

350

Gasoline Expense

50

Depreciation Exp.: Tools & Equipment

50

Depreciation Exp.: Truck

To close the expense accounts.

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250

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Closing
Closing Entries
Entries for
for Expense
Expense Accounts
Accounts
Gasoline Exp.
50
50
Depr. Exp.: Tools &
Equipment
50
50
Depr. Exp.: Truck
250
250
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Income Summary
350
750

400
Net Income

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Closing
Closing the
the Income
Income Summary
Summary Account
Account
Since
Since Income
Income Summary
Summary has
has aa $400
$400 credit
credit balance,
balance,
the
the closing
closing entry
entry requires
requires aa debit
debit to
to Income
Income
Summary.
Summary.
GENERAL JOURNAL
Date

Account Titles and Explanation

May 31 Income Summary

Retained Earnings

P
RDebit Credit
400
400

To close Income Summary.

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Closing
Closing the
the Income
Income Summary
Summary Account
Account

Retained Earnings
400

Income Summary
350
750
400

400

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The balance in Income

Summary is now zero.

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Closing
Closing the
the Dividends
Dividends Account
Account
Since
Since the
the Dividends
Dividends account
account has
has aa debit
debit balance,
balance,
the
the closing
closing entry
entry requires
requires aa credit
credit to
to the
the Dividends
Dividends
account.
account.
GENERAL JOURNAL
Date

Account Titles and Explanation

May 31 Retained Earnings

Dividends

P
RDebit Credit
200
200

To close the Dividends account.

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Closing
Closing the
the Dividends
Dividends Account
Account
Dividends
200
200

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Retained Earnings
200
400

200

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Learning
Learning Objective
Objective

To prepare an afterclosing trial balance.

LO5
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JJ's Lawn Care Service

After-Closing Trial Balance
May 31, 2007
Cash
$ 3,925
Accounts receivable
75
Tools & equipment
2,650
Accum. depreciation: tools & eq.
$
50
Truck
15,000
Accum. depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Retained earnings
200
Total
$ 21,650 $ 21,650

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After
After all
all
closing
closing
entries
entries are
are
made,
made, JJs
JJs
After-Closing
After-Closing
Trial
Trial Balance
Balance
looks
looks like
like
this.
this.

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Learning
Learning Objective
Objective

To use financial
statement information to
evaluate profitability and
liquidity.

LO6
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Evaluating
Evaluating the
the Business
Business
Evaluating
Evaluating
Profitability
Profitability

Evaluating
Evaluating
Liquidity
Liquidity

Did the business earn a

profit or loss in the
current period?

Does the business have

assets available to pay
debts as they become
due?

What is the businesss

future potential for a
profit?
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Evaluating
Evaluating the
the Business
Business
Evaluating
Evaluating
Profitability
Profitability

Evaluating
Evaluating
Liquidity
Liquidity

Net Income
Net Income
=
Percentage
Total Revenue

Working
Current Assets
=
Capital
Current Liabilities

Return on
Equity

Current
Current Assets
=
Ratio
Current Liabilities

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Net Income
Avg. Stockholders
Equity

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Learning
Learning Objective
Objective
To explain how interim
financial statements are
prepared in a business
that closes its accounts
only at year-end.

LO7
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Preparing
Preparing Financial
Financial Statements
Statements
Covering
Covering Different
Different Periods
Periods of
of Time
Time
Many
Many companies
companies prepare
prepare financial
financial statements
statements at
at
various
various points
points throughout
throughout the
the year.
year.
Annually
Interim
Financial
Statements

Quarterly
Monthly

Jan. 1
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Ethics,
Ethics, Fraud,
Fraud, and
and
Corporate
Corporate Governance
Governance
A company should disclose any facts that an
intelligent person would consider necessary for the
statements to be interpreted properly.
Public companies are required to file annual reports
with the Securities and Exchange Commission
(SEC). The SEC requires that companies include a
section labeled Management Discussion and
Analysis (MD&A) because the financial statements
and related notes may be inadequate for assessing
the quantity and sustainability of a companys
earnings.
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Learning
Learning Objective
Objective

To prepare a worksheet
and explain its uses.

LO8
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The
The Worksheet
Worksheet

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End
End of
of Chapter
Chapter 55

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