Using the information from the adjusted trial balance, complete the tasks below.
BBA 2201, Principles of Accounting I 1 Cou rse Learning Outcomes for Unit IV Upon completion of this unit, students should be able to: 1. Examine the accounting cycle. 1.1 Explain the steps in the accounting cycle. 2. Identify business transactions. 2.1 Prepare an income statement and balance sheet. 2.2 Prepare closing entries. 2.3 Prepare a post -trial balance sheet. Course/Unit Learning Outcomes Learning Activity 1.1 , 2.1, 2.2, 2.3 Unit Lesson Chapter 4, pp. 4 -1 to 4 -61 Unit IV Case Study Required Unit Resources Chapter 4: Completing the Accounting Cycle, pp . 4-1 to 4-61 Unit Lesson Completing the Accounting Cycle Have you ever wondered how the public acquires accounting information from businesses? Companies such as Coca -Cola, McDonald ‘s, Dell, Apple, and Honda Automotive use a process called financial reporting to communicate their financial position and profitability to external users, such as investors, creditors, and the government. UNIT IV STUDY GUIDE Completing the Accounting Cycle BBA 2201, Principles of Accounting I 2 UNIT x STUDY GUIDE Title External financial reporting is done mainly through a set of financial statem ents. The four financial statem ents that the generally accepted accounting principles (GAAP) require are listed below: income statement, statem ent of changes i n equity, balance sheet, and statem ent of cash flows. An income statement reports revenue and expenses and calculates net income or net loss for the time period (W eygandt et al., 2018). For example, the income statement reports the profitability of a company for a period of tim e.
W ithout a sustainable profit over a period of years, a company would not be able to continue. Other names for an incom e statement that you might also run across are statem ent of operations, earnings statem ent, or a profit and loss statement (P/L). The statement of changes in equity shows all changes in owner ’s equity for a period of time (W eygandt et al., 2018). An easy way to understand the statement of e quity is to consider that it simply tracks the contributions from the owner to the company, any distributions made to the owner from the company, and the amount of net incom e or net loss that increases or decreases the owner ’s equity. This statement may al so be referred to as an owner ’s equity statement . At some point in your career, you may have heard or used the term balance sheet . The balance sheet reports assets, liabilities, and owner’s equity as of the last day of the period (W eygandt et al., 2018). The balance sheet is useful to determine the financial health of a company. The balance sheet simply reports the accounting equation (Assets – Liabilities = Owner’s Equity) in a simple -to-read format. The lower the debt to equity ratio, the healthier the company will be and the better prepared it will be to handle future financial crises. The balance sheet could also report on a specific date. Another term com monly used for a balance sheet is a statement of financial position . The classified balance sheet groups assets that are similar and liabilities that are similar. This format presents the balance sheet into groupings, which allow readers of the financial statem ent to see if the company has enough assets to pay debts as they come due and any claims on short -term and long -term creditors. The standard balance sheet and classified balance sheet present the same figures; the differences are seen in the way that the information is grouped or categorized (W eygandt et al., 2018). A cash flow sta tement summarizes information about cash outflows (paym ents) and inflows (receipts) (W eygandt et al., 2018). Pay close attention to the information within this statem ent, as some of it may not be associated with the actual cash flows. Rochelle Bailis (2014 ), in her work with the massive Quickbooks Company , simply states that one of the four significant financial statements is the statem ent of cash flow, and it is used to show the cash flowing into and out of the business during an accounting period. It is s ometim es referred to the statem ent that shows sources and uses of cash. She summarizes that the cash flow analysis is so important to sm all businesses that it should be evaluated on an ongoing and regular basis. There is another component to the financia l statem ents —the footnote disclosures (also referred to as the notes to the financial statements ). The notes include additional information regarding the balances that are reported on the face of the financial statements. W hile the overall information requ ired by GAAP is the same for all companies, the presentation of the information may differ from one company to another. However, the purpose of the notes is still the same —to add clarity and transparency to the financial statements. Many Certified Public Accountant s ( CPAs ) have found that it is more efficient to arrange the financial statem ents in the following order: (1) incom e statement , (2) statement of changes in equity , (3) balance sheet , and (4) cash flow statement. The reasoning for the suggested o rdering of the financial statements above is that they are all tied to one another. The incom e statement reports the incom e (or loss) of the period, which is BBA 2201, Principles of Accounting I 3 UNIT x STUDY GUIDE Title used to compute the change in equity. The equity balance is reported in the balance sheet. The sta tement of cash flows reports the change in cash from the beginning of the period to the end of the period, and both of these balances are reported on the balance sheet. As noted in Illustration 4 .7, on p. 4-10 of your textbook and as shown below , the inco me statem ent is prepared to arrive at the net income or net loss for the period. The net incom e is then carried over to the owner’s equity statem ent as an increase in equity for the period. The ending equity balance is then carried over to the balance shee t and reported in the equity section. The statement of cash flow s is not covered in this course, but it reconciles the income reported on the incom e statement to the beginning and ending balances of cash (with the ending cash balance being reported on the balance sheet as an asset). BBA 2201, Principles of Accounting I 4 UNIT x STUDY GUIDE Title Types of Accounts The types of accounts used in accounting are (1) assets , (2) liabilities , (3) equity , (4) revenue , and (5) expense. A company’s balance sheet accounts ( i.e., assets, liabilities , and equity) are referred to as permanent accounts. These account balances carry over from one year to the next. For example, the company’s cash balance at the end of the year becom es the company’s beginning cash balance for the following year.
Likewise, t he ending inventory balance for one year is the beginning inventory balance for the next year. However, a company’s income statem ent accounts are commonly referred to as temporary accounts. The account balances must be closed at the end of each year. For example, the revenue accounts must be closed so that the account balance is zero at the beginning of the following year. In this way, the net income or loss can be reported separately from year to year. Today, the revenue and expense accounts are closed directly to the equity account. In years past, the revenue and expense accounts were closed to an account called income summary , and then this account was closed to the equity account. Any contributions or distributions made by the owner during the year are also closed to the equity account. These equity accounts are closed so that contributions and distributions made by the owner can be distinguished from one year to the next. The process of closing out th e revenue, expense, and equity accounts is referred to as the completion of the accounting cycle . The balance sheet reports the financial position of a company as of a specific date. In other words, the balance sheet reports what is owned by the company (assets) and then the claim s to those assets (liabilities or equity). All of the company’s assets are either acquired through profits , acquired through capital contributions (equity) , or financed through creditors (liabilities). Therefore, assets, liabilit ies, and equity are reported on the balance sheet. The income statem ent reports the profit or loss of the company over a period of time ( i.e., month, quarter, or year). This profit, or loss, is determined by whether or not the revenue for the period excee ds the expenses for the sam e period. If revenue exceed s the expenses, then the company would report a profit. If the expenses exceed the revenue, then the company would report a loss. As you can im agine, the profitability and financial position of a compa ny are very important to both creditors and investors. It speaks to the need for honesty and integrity in the reporting of financial statements. The accounting profession has been charged with maintaining the integrity of financial reporting to outside use rs of the financial statements. Reference s Bailis, R. (2014). The 6 essentials of a basic cash flow statem ent. http://quickbooks.intuit.com/r/cash -flow/6 – essentials -basic -cash -flow -statement W eygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Accou nting principles (13th ed.) [VitalSource Bookshelf version]. https://online.vitalsource.com/#/books/978119411017 Suggested Unit Resources In order to access the following resources, click the links below. A transcript and closed captioning are available once you access the video s. Th e following video discusses a classified balance sheet and explains how it is different from a regular balance sheet. BBA 2201, Principles of Accounting I 5 UNIT x STUDY GUIDE Title Accounting Videos. (2015, September 30). Classified balance sheet [Video] . https://c24.page/453mka5ta78t5dvk7enjwujaet Th e video below explains reversing entries and illustrates examples that can be applied to real -world situations . Michael D. (2017, September 5). Reversing entries [Video] . https://c24.page/pvfvkzew2ngm xjmzaxwzw75b67 Th e following video illustrates how and when to prepare closing entries . Notepirate. (2013, December 20). How to prepare closing entries (fi nancial accounting tutorial #27) [Video] . https://c24.page/wuuvqjvak8z3ws4q6gtsgygtsn Th e following video will dem onstrate how to complete the year -end worksheet. Phillips, R. (2014, January 27). Completing the worksh eet [Video] . https://c24.page/4gfk2m78r2kffhnj3f7tdtyes3 Learning Activities (Nong raded) Nongraded Learning Activities are provided to aid students in their course of study. You do not have to submit them. If you have questions, contact your instructor for further guidance and information. This is an opportunity for you to express your thoug hts about the material you are studying by writing about it. Conceptual thinking is a great way to study because it gives you a chance to process what you have learned , and it increases your ability to rem ember it. In order to practice what you have learn ed, please attempt the exercises below, which can be found in your textbook. DO IT! 1 | W orksheet, p . 4-11 DO IT! 2 | Closing Entries, p . 4-18 DO IT! 3 | Correcting Entries, p. 4-22 DO IT! 4 | Balance Sheet Classifications, p . 4-28 You are also encouraged to complete the following end -of-chapter exercises and problems, which can be found in your textbook. Practice Multiple Choice Questions and Solutions, p p. 4-31 to 4 -33 Practice Brief Exercises and Exercises, p p. 4-33 to 4 -37 Practice Problem, pp. 4-37 to 4 -39 If you have any questions or do not understand a concept, contact your professor for clarification. Completing these practice exercises and problems will give you practice, which will be helpful as you complete the assignment for this uni t.