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ACCT 100 - Intro to Acct.
Chapter 13 - Financial Statements, Closing Entries
and Reversing Entries
Prof. Johnson
Where we have been : We are almost finished learning a complete accounting cycle for a merchandising enterprise. We have learned how to record buy and sell transactions. We have reviewed the adjustment process and learned quite a few new adjusting entries. We then reviewed the preparation of the worksheet. This brings us to the summarizing process of the accounting function. Where we are going : This chapter will introduce you the financial statements for a merchandiser and how to prepare the closing entries for a merchandiser. It will also introduce you to reversing entries, which we will not cover.
Financial Statements
The same three financial statements that we learned for a service-oriented enterprise will also be used for a merchandiser. However, they will look different. The main difference and the main challenge will be the preparation of a multi-step income statement. See the separate handout of the skeleton based multi-step income statement for additional help. To refresh your memory, the three main financial statements that you will need to prepare are: The Income Statement The Statement of Owner's Equity The Balance Sheet As you will recall, they need to be prepared in this prescribed order, because the contents of one follows the next. Don’t forget, the source for your financial statement will be from the worksheet!
Income Statement
You should pull your final numbers for the income statement from the worksheet columns. As discussed previously, a vast majority of merchandising companies use the multi-step format of an income statement. The Cost of Good Sold will be the
most challenging part of this worksheet. This Income Statement in its skeleton form looks like this: Net Sales Less: Cost of Goods Sold
Gross Profit Less: Operating Expenses
Income from Operations +- Other Income or Expense Net Income Your need to know how to compute each part of the income statement before you can attempt to compute a full blown one. We will practice these parts in depth in the class: Net Sales = Sales - Sales Discounts - Sales Ret. & Allow. COGS = Beg Inv + Net Purchases + Freight In - Ending Inventory (Everything that you bought) COGS shown in detail : Beginning Inventory Add: Net Purchases XXX Purchases XXX Less Purch Ret/Allo (xxx) Less Purch Discount (xxx) Net Purchases XXX
As stated previously, you MUST KNOW HOW TO PREPARE this multi-step income statement. You need to practice, practice, and practice. You will also prepare this many times over in your next accounting class, ACCT 101. Statement of Owner's Equity No change here. The statement of looks exactly the same for both types of businesses. Remember format: Beginning Capital XXX Add: Additional investments, if any XXX Subtotal XXX Add: Net Income XXX Less: Withdrawals (XXX) Net Increase XXX Ending Capital XXX The Balance Sheet The Balance sheet will look very much the same. The only change is now you will be required to classify your balance sheet. (Almost all companies - even service enterprises - do this. This text just waited to introduce the concept of classification until now. What does a classified balance sheet look like? The assets are classified into current assets and plant assets. A current asset is an asset that turns over or is realized within a year. As you know, these assets are listed in order of liquidity, or how fast they can be converted to cash. Plant assets are those long-lived assets that we have been talking about. Common plant assets are Buildings, Land, Autos, Equipment, Machinery, and the like. Some people also call these plant assets "fixed assets. Liabilities are classified into current liabilities and non-current or long-term liabilities. Current liabilities are those liabilities that are due and payable within a
one-year time frame. Accounts Payable, most notes payable, salaries payable are common examples of current liabilities. Long-term liabilities are those liabilities that do not come due during the next 12 months. Most mortgage payables, some loans and some notes are considered long term.
Why bother with these new-fangled
statements?
Well, there are several good reasons to learn these: 1) To pass the next test, 2) because that's what the financial statements in real world look like, 3) because many common financial ratios and analyses will use components from these statements, 4) because you will have money to invest someday and need to learn what some key ratios mean so you can make an informed investment choice.
Some Common financial analysis stuff
Gross Profit percentage shows the amount of gross profit earned per each sales dollar. Gross Profit = Net Sales - COGS and shown as a percentage would be Gross Profit/Net Sales Working Capital is the difference between current assets and current liabilities. (See why we need a classified balance sheet?) The amount of working capital is of key concern to management and to anyone loaning the company money. It tells whether the company has sufficient day-to-day resources to run its operations. This can be expressed in two ways: In dollars: Working Capital = Current Assets - Current Liabilities OR As a percentage (which is called the current ratio) which is much more meaningful: Current Ratio Current Ratio = CA / CL Bankers like to see a ratio of 2 to 1. This means that the company has 2 dollars in current assets for each 1 dollar of current debt.
That’s It. As usual, we will demonstrate all of this in class. There are a lot of terms in this chapter. Be sure you go over them. The most important part of this chapter is your ability to prepare a set of financial statements for a merchandiser. Reversing Entries - Not covered
