CheckPoint
Reversing Entries Post your answers to BE4-12 on p. 176 of Financial Accounting.
14
2
Chapter
4
Completing the
Accounting Cycle
Scan Study Objectives ■
Read Feature Story ■
Read Preview ■
Read text and answer Before You Go On
p. 150 ■ p. 160 ■ p. 168 ■
Work Demonstration Problem ■
Review Summary of Study Objectives ■
Answer Self-Study Questions ■
Complete Assignments ■
After studying this chapter, you should be
able to:
1
Prepare a worksheet.
2
books.
3 Describe the content and purpose of a
post-closing trial balance.
4 State the required steps in the
accounting cycle.
5 Explain the approaches to preparing
correcting entries.
6
balance sheet.
The NavigatorS T U D Y O B J E C T I V E S ✓
Feature Story
EVERYONE LIKES TO WIN
When Ted Castle was a hockey coach at the University of Vermont, his play-
ers were self-motivated by their desire to win. Hockey was a game you
either won or lost. But at Rhino Foods, Inc., a bakery-foods company he
founded in Burlington, Vermont, he discovered that manufacturing-line work-
ers were not so self-motivated. Ted thought, what if he turned the food-
making business into a game, with rules, strategies, and trophies?
Ted knew that in a game knowing the score is all-important. He felt that
only if the employees know the score—know exactly how the business is
doing daily, weekly, monthly—could he turn food-making into a game. But
Rhino is a closely held, family-owned business, and its financial statements
The Navigator✓
Explain the process of closing the
Identify the sections of a classified
14
3
and profits were confidential. Ted
wondered, should he open Rhino’s books
to the employees?
A consultant put Ted’s concerns in per-
spective when he said, “Imagine you’re
playing touch football. You play for an
hour or two, and the whole time I’m sit-
ting there with a book, keeping score. All
of a sudden I blow the whistle, and I say,
‘OK, that’s it. Everybody go home.’ I
close my book and walk away. Ho
w
would you feel?” Ted opened his books
and revealed the financial statements to
his employees.
The next step was to teach employees
the rules and strategies of how to “win”
at making food. The first lesson: “Your
opponent at Rhino is expenses. You must cut and control expenses.” Ted
and his staff distilled those lessons into daily scorecards—production reports
and income statements—that keep Rhino’s employees up-to-date on the
game. At noon each day, Ted posts the previous day’s results at the
entrance to the production room. Everyone checks whether they made or
lost money on what they produced the day before. And it’s not just an
academic exercise: There’s a bonus check for each employee at the end of
every four-week “game” that meets profitability guidelines.
Rhino has flourished since the first game. Employment has increased from
20 to 130 people, while both revenues and profits have grown dramatically.
The Navigator✓
Inside Chapter 4
• Cisco Performs the Virtual Close (p. 155)
• Yale Express Loses Some Transportation Bills (p. 160)
• Big Changes Are Coming to Chinese Balance Sheets (p. 165)
• All About You: Your Personal Balance Sheet (p.
167
)
Preview of Chapter 4
At Rhino Foods, Inc., financial statements help employees understand what is happening in the business. In
Chapter 3, we prepared financial statements directly from the adjusted trial balance. However, with so many
details involved in the end-of-period accounting procedures, it is easy to make errors. One way to minimize
errors in the records and to simplify the end-of-period procedures is to use a worksheet.
In this chapter we will explain the role of the worksheet in accounting. We also will study the remaining steps
in the accounting cycle, especially the closing process, again using Pioneer Advertising Agency Inc. as an
example. Then we will consider correcting entries and classified balance sheets. The content and organiza-
tion of Chapter 4 are as follows.
Closing the Books
• Preparing closing
entries
• Posting closing entries
• Preparing a post-closing
trial balance
Using a
Worksheet
• Steps in preparation
• Preparing financial
statements
• Preparing adjusting
entries
Summary of
Accounting Cycle
• Reversing entries—An
optional step
• Correcting entries—An
avoidable step
Classified Balance Sheet
• Current assets
• Long-term investments
• Property, plant, and
equipment
• Intangible assets
• Current liabilities
• Long-term liabilities
•
Stockholders’ equity
The Navigator✓
USING A WORKSHEET
Completing the Accounting Cycle
A worksheet is a multiple-column form that companies use in the adjust-
ment process and in preparing financial statements. As its name suggests,
the worksheet is a working tool. It is not a permanent accounting record;
it is neither a journal nor a part of the general ledger. The worksheet is merely a
device used in preparing adjusting entries and the financial statements. Companies
generally computerize worksheets using an electronic spreadsheet program such as
Excel.
Illustration 4-1 shows the basic form of a worksheet and the five steps for
preparing it. Each step is performed in sequence. The use of a worksheet is
optional. When a company chooses to use one, it prepares financial statements
from the worksheet. It enters the adjustments in the worksheet columns and then
journalizes and posts the adjustments after it has prepared the financial state-
ments. Thus, worksheets make it possible to provide the financial statements to
management and other interested parties at an earlier date.
Steps in Preparing a Worksheet
We will use the October 31 trial balance and adjustment data of Pioneer
Advertising Inc., from Chapter 3, to illustrate how to prepare a worksheet. We
144
Prepare a worksheet.
S T U D Y O B J E C T I V E 1
describe each step of the process and demonstrate these steps in Illustration 4-2
and transparencies 4-3A, B, C, and D.
STEP 1. PREPARE A TRIAL BALANCE ON THE WORKSHEET
Enter all ledger accounts with balances in the account titles space. Enter debit and
credit amounts from the ledger in the trial balance columns. Illustration 4-2 shows
the worksheet trial balance for Pioneer Advertising Agency Inc.
STEP 2. ENTER THE ADJUSTMENTS IN THE
ADJUSTMENTS COLUMNS
Turn over the first transparency, Illustration 4-3A. When using a worksheet, enter
all adjustments in the adjustments columns. In entering the adjustments, use appli-
cable trial balance accounts. If additional accounts are needed, insert them on the
lines immediately below the trial balance totals. A different letter identifies the
debit and credit for each adjusting entry. The term used to describe this process is
keying. Companies do not journalize the adjustments until after they complete the
worksheet and prepare the financial statements.
Using a Worksheet 14
5
Worksheet.xls
File Edit View Insert Format Tools Data Window Help
B C D E F G H I J K
Trial Balance
Adjustments
Adjusted
Trial Balance
Income
Statement
Balance
Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Account Titles
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
A
Trial Balance Adjustments
Adjusted
Trial Balance
Income
Statement
Balance
Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Account Titles
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
Worksheet
Extend adjusted
balances to appropriate
statement columns
Total the statement columns,
compute net income
(or net loss), and
complete worksheet
Enter
adjustment
data
2 4
5
Prepare a
trial balance
on the
worksheet
1
Enter
adjusted
balances
3
Illustration 4-1
Form and procedure for a
worksheet
(Note: Text continues on
page 147, following acetate
overlays.)
Pioneer Advertising.xls
B C D E F G H I J K
Trial Balance Adjustments
Adjusted
Trial Balance
Income
Statement
Balance
Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.Account Titles
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
A
Cash
Advertising Supplies
Prepaid Insurance
Office Equipment
Notes Payable
Accounts Payable
Unearned Revenue
Common Stock
Dividends
Service Revenue
Salaries Expense
Rent Expense
Totals
1
5,200
2,
500
600
5,000
500
4,000
900
28,700
5,000
2,500
1,200
10,000
10,000
28,700
Include all accounts with
balances from ledger.
Trial balance amounts come
directly from ledger
accounts.
PIONEER ADVERTISING AGENCY INC.
Worksheet
For the Month Ended
October 31, 2008
File Edit View Insert Format Tools Data Window Help
Illustration 4-2
Preparing a trial balance
Illustration 4-3A
Entering the adjustments in the adjustments columns
Advertising
Supplies Expense
Insurance Expense
Accum. Depreciation—Office
Equipment
Depreciation Expense
Interest Expense
Accounts Receivable
Interest Payable
Salaries Payable
Totals
400
1,200
1,500
50
40
200
50
3,440
1,500
50
400
200
40
50
1,200
3,440
Add additional accounts
as needed to complete
the adjustments:
(a) Supplies Used.
(b) Insurance Expired.
(c)
Depreciation Expensed.
(d) Service Revenue Earned.
(e) Service Revenue Accrued.
(f) Interest Accrued.
(g) Salaries Accrued.
Enter adjustment amounts
in appropriate columns,
and use letters to cross-
reference the debit and
credit adjustments.
Total adjustments columns
and check for equality.
(d)
(g)
(a)
(b)
(c)
( e )
(f)
(a)
(b)
(d)
(e)
(c)
( f )
(g)
Illustration 4-3B
Entering adjusted balances in the adjusted trial balance columns
15,200
1,000
5
50
5,000
500
5,
200
900
1,500
50
40
200
50
30,190
5,000
2,500
800
10,000
10,600
40
50
1,200
30,190
Combine trial balance
amounts with adjustment
amounts to obtain the
adjusted trial balance.
Total adjusted trial
balance columns and
check for equality.
Illustration 4-3C
Extending the adjusted trial balance amounts to appropriate financial statement columns
5,200
900
1,500
50
40
50
10,600
15,200
1,000
550
5,000
500
200
5,000
2,500
800
10,000
40
50
1,200
Extend all revenue
and expense account
balances to the
income statement
columns.
Extend all asset and
liability account
balances, as well as
common stock and
dividends account
balances, to the balance
sheet columns.
Illustration 4-3D
Computing net income or net loss and completing the worksheet
7,740
2,860
10,600
10,600
10,600
22,450
22,450
19,590
2,860
22,450
The difference between
the totals of the two
income statement
columns determines
net income or net loss.
Net income is extended
to the credit column of
the balance sheet
columns. (Net loss
would be extended
to the debit column.)
Net Income
Totals
Using a Worksheet 147
The adjustments for Pioneer Advertising Agency Inc. are the same as the adjust-
ments illustrated on page 110. They are keyed in the adjustments columns of the
worksheet as follows.
(a) Pioneer debits an additional account, Advertising Supplies Expense, $1,500 for
the cost of supplies used, and credits Advertising Supplies $1,500.
(b) Pioneer debits an additional account, Insurance Expense, $50 for the insurance
that has expired, and credits Prepaid Insurance $50.
(c) The company needs two additional depreciation accounts. It debits Depreciation
Expense $40 for the month’s depreciation, and credits Accumulated
Depreciation—Office Equipment $40.
(d) Pioneer debits Unearned Revenue $400 for services provided, and credits
Service Revenue $400.
(e) Pioneer debits an additional account, Accounts Receivable, $200 for services
provided but not billed, and credits Service Revenue $200.
(f) The company needs two additional accounts relating to interest. It debits
Interest Expense $50 for accrued interest, and credits Interest Payable $50.
(g) Pioneer debits Salaries Expense $1,200 for accrued salaries, and credits an ad-
ditional account, Salaries Payable, $1,200.
After Pioneer has entered all the adjustments, the adjustments columns are totaled
to prove their equality.
STEP 3. ENTER ADJUSTED BALANCES IN THE ADJUSTED TRIAL
BALANCE COLUMNS
Turn over the second transparency, Illustration 4-3B. Pioneer determines the ad-
justed balance of an account by combining the amounts entered in the first four
columns of the worksheet for each account. For example, the Prepaid Insurance
account in the trial balance columns has a $600 debit balance and a $50 credit in the
adjustments columns. The result is a $550 debit balance recorded in the adjusted
trial balance columns. For each account, the amount in the adjusted trial balance
columns is the balance that will appear in the ledger after journalizing and posting
the adjusting entries. The balances in these columns are the same as those in the
adjusted trial balance in Illustration 3-24 (page 112).
After Pioneer has entered all account balances in the adjusted trial balance
columns, the columns are totaled to prove their equality. If the column totals do not
agree, the financial statement columns will not balance and the financial state-
ments will be incorrect.
STEP 4. EXTEND ADJUSTED TRIAL BALANCE AMOUNTS TO
APPROPRIATE FINANCIAL STATEMENT COLUMNS
Turn over the third transparency, Illustration 4-3C. The fourth step is to extend ad-
justed trial balance amounts to the income statement and balance sheet columns of
the worksheet. Pioneer enters balance sheet accounts in the appropriate balance
sheet debit and credit columns. For instance, it enters Cash in the balance sheet
debit column, and Notes Payable in the credit column. Pioneer extends
Accumulated Depreciation to the balance sheet credit column; the reason is that
accumulated depreciation is a contra-asset account with a credit balance.
Because the worksheet does not have columns for the retained earnings state-
ment, Pioneer extends the balances in Common Stock and Retained Earnings, if
any, to the balance sheet credit column. In addition, it extends the balance in
Dividends to the balance sheet debit column because it is a stockholders’ equity ac-
count with a debit balance.
The company enters the expense and revenue accounts such as Salaries
Expense and Service Revenue in the appropriate income statement columns.
Illustration 4-3C shows all of these extensions.
H E L P F U L H I N T
Every adjusted trial
balance amount must be
extended to one of the
four statement columns.
STEP 5. TOTAL THE STATEMENT COLUMNS, COMPUTE THE NET
INCOME (OR NET LOSS), AND COMPLETE THE WORKSHEET
Turn over the fourth transparency, Illustration 4-3D. The company now must total
each of the financial statement columns. The net income or loss for the period is the
difference between the totals of the two income statement columns. If total credits
exceed total debits, the result is net income. In such a case, as shown in Illustration
4-3D, the company inserts the words “Net Income” in the account titles space. It
then enters the amount in the income statement debit column and the balance sheet
credit column. The debit amount balances the income statement columns; the credit
amount balances the balance sheet columns. In addition, the credit in the balance
sheet column indicates the increase in stockholders’ equity resulting from net income.
What if total debits in the income statement columns exceed total credits? In
that case, the company has a net loss. It enters the amount of the net loss in the in-
come statement credit column and the balance sheet debit column.
After entering the net income or net loss, the company determines new col-
umn totals. The totals shown in the debit and credit income statement columns
will match. So will the totals shown in the debit and credit balance sheet columns.
If either the income statement columns or the balance sheet columns are not
equal after the net income or net loss has been entered, there is an error in the
worksheet. Illustration 4-3D shows the completed work sheet for Pioneer
Advertising Agency Inc.
Preparing Financial Statements from a
Worksheet
After a company has completed a worksheet, it has at hand all the data required for
preparation of financial statements. The income statement is prepared from the
income statement columns. The balance sheet and retained earnings statement are
prepared from the balance sheet columns. Illustration 4-4 shows the financial state-
ments prepared from Pioneer’s worksheet. At this point, the company has not
journalized or posted adjusting entries. Therefore, ledger balances for some accounts
are not the same as the financial statement amounts.
The amount shown for common stock on the worksheet does not change from
the beginning to the end of the period unless the company issues additional stock
during the period. Because there was no balance in Pioneer’s retained earnings, the
account is not listed on the worksheet. Only after dividends and net income (or
loss) are posted to retained earnings does this account have a balance at the end of
the first year of the business.
Using a worksheet, companies can prepare financial statements before they
journalize and post adjusting entries. However, the completed worksheet is not a
substitute for formal financial statements. The format of the data in the financial
statement columns of the worksheet is not the same as the format of the financial
statements. A worksheet is essentially a working tool of the accountant; companies
do not distribute it to management and other parties.
Preparing Adjusting Entries from a
Worksheet
A worksheet is not a journal, and it cannot be used as a basis for posting to ledger
accounts. To adjust the accounts, the company must journalize the adjustments and
post them to the ledger. The adjusting entries are prepared from the adjustments
columns of the worksheet. The reference letters in the adjustments columns and
the explanations of the adjustments at the bottom of the worksheet help identify
148 Chapter 4 Completing the Accounting Cycle
Accounting Cycle Tutorial—
Preparing Financial
Statements and Closing the
Books
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H E L P F U L H I N T
Note that writing the
explanation to the ad-
justment at the bottom
of the worksheet is not
required.
Using a Worksheet 149
Illustration 4-4
Financial statements from a
worksheet
PIONEER ADVERTISING AGENCY INC.
Income Statement
For the Month Ended October 31, 2008
Revenues
Service revenue $10,600
Expenses
Salaries expense $5,200
Advertising supplies expense 1,500
Rent expense 900
Insurance expense 50
Interest expense 50
Depreciation expense 40
Total expenses 7,740
Net income $ 2,860
PIONEER ADVERTISING AGENCY INC.
Retained Earnings Statement
For the Month Ended October 31, 2008
Retained earnings, October 1 $ –0–
Add: Net income 2,860
2,860
Less: Dividends 500
Retained earnings, October 31 $2,360
PIONEER ADVERTISING AGENCY INC.
Balance Sheet
October 31, 2008
Assets
Cash $15,200
Accounts receivable 200
Advertising supplies 1,000
Prepaid insurance 550
Office equipment $5,000
Less: Accumulated depreciation 40 4,960
Total assets $21,910
Liabilities and Stockholders’ Equity
Liabilities
Notes payable $ 5,000
Accounts payable 2,500
Interest payable 50
Unearned revenue 800
Salaries payable 1,200
Total liabilities 9,550
Stockholders’ equity
Common stock 10,000
Retained earnings 2,360
Total liabilities and stockholders’ equity $21,910
CLOSING THE BOOKS
150 Chapter 4 Completing the Accounting Cycle
At the end of the accounting period, the company makes the accounts
ready for the next period. This is called closing the books. In closing the
books, the company distinguishes between temporary and permanent
accounts.
Temporary accounts relate only to a given accounting period. They include all
income statement accounts and the dividends account. The company closes all
temporary accounts at the end of the period.
In contrast, permanent accounts relate to one or more future accounting peri-
ods. They consist of all balance sheet accounts, including the stockholders’ equity
accounts. Permanent accounts are not closed from period to period. Instead, the
REVIEW IT
1. What are the five steps in preparing a worksheet?
2. How is net income or net loss shown in a worksheet?
3. How does a worksheet relate to preparing financial statements and adjusting
entries?
DO IT
Susan Elbe is preparing a worksheet. Explain to Susan how she should extend
the following adjusted trial balance accounts to the financial statement columns
of the worksheet:
Cash Dividends
Accumulated Depreciation Service Revenue
Accounts Payable Salaries Expense
Action Plan
■ Extend asset balances to the balance sheet debit column. Extend liability bal-
ances to the balance sheet credit column. Extend accumulated depreciation
to the balance sheet credit column.
■ Extend the Dividends account to the balance sheet debit column.
■ Extend expenses to the income statement debit column.
■ Extend revenue accounts to the income statement credit column.
Solution
Balance sheet debit column—Cash; Dividends
Balance sheet credit column—Accumulated Depreciation; Accounts Payable
Income statement debit column—Salaries Expense
Income statement credit column—Service Revenue
Related exercise material: BE4-1, BE4-2, BE4-3, E4-1, E4-2, E4-5, and E4-6.
Before You Go On…
The Navigator✓
Explain the process of closing
the books.
S T U D Y O B J E C T I V E 2
the adjusting entries. The journalizing and posting of adjusting entries follows the
preparation of financial statements when a worksheet is used. The adjusting entries
on October 31 for Pioneer Advertising Agency Inc. are the same as those shown in
Illustration 3-22 (page 110).
A L T E R N A T I V E
T E R M I N O L O G Y
Temporary accounts are
sometimes called nominal
accounts, and permanent
accounts are sometimes
called real accounts.
Preparing Closing Entries
At the end of the accounting period, the company transfers temporary account bal-
ances to the permanent stockholders’ equity account, Retained Earnings, by means
of closing entries.
Closing entries formally recognize in the ledger the transfer of net income (or
net loss) and Dividends to Retained Earnings. The retained earnings statement
shows the results of these entries. Closing entries also produce a zero balance in
each temporary account. The temporary accounts are then ready to accumulate
data in the next accounting period separate from the data of prior periods.
Permanent accounts are not closed.
Journalizing and posting closing entries is a required step in the accounting
cycle. (See Illustration 4-12 on page 158.) The company performs this step after it
has prepared financial statements. In contrast to the steps in the cycle that you have
already studied, companies generally journalize and post closing entries only at the
end of the annual accounting period. Thus, all temporary accounts will contain data
for the entire year.
In preparing closing entries, companies could close each income statement
account directly to Retained Earnings. However, to do so would result in exces-
sive detail in the Retained Earnings account. Instead, companies close the rev-
enue and expense accounts to another temporary account, Income Summary, and
they transfer the resulting net income or net loss from this account to Retained
Earnings.
Companies record closing entries in the general journal. A center caption,
Closing Entries, inserted in the journal between the last adjusting entry and the
first closing entry, identifies these entries. Then the company posts the closing en-
tries to the ledger accounts.
Companies generally prepare closing entries directly from the adjusted
balances in the ledger. They could prepare separate closing entries for each
nominal account, but the following four entries accomplish the desired result
more efficiently:
1. Debit each revenue account for its balance, and credit Income Summary for to-
tal revenues.
Closing the Books 151
PERMANENT
These accounts are not closed
TEMPORARY
These accounts are closed
Dividends
All expense accounts
All revenue accounts
Stockholders’ equity
All liability accounts
All asset accounts
Illustration 4-5
Temporary versus permanent
accounts
H E L P F U L H I N T
A contra-asset account,
such as accumulated
depreciation, is a perma-
nent account also.
company carries forward the balances of permanent accounts into the next
accounting period. Illustration 4-5 identifies the accounts in each category.
2. Debit Income Summary for total expenses, and credit each expense account
for its balance.
3. Debit Income Summary and credit Retained Earnings for the amount of net
income.
4. Debit Retained Earnings for the balance in the Dividends account, and credit
Dividends for the same amount.
Illustration 4-6 presents a diagram of the closing process. In it, the boxed numbers
refer to the four entries required in the closing process.
152 Chapter 4 Completing the Accounting Cycle
Retained Earnings is a
permanent account;
all other accounts are
temporary accounts.
(Individual)
Revenues
Income
Summary
2 1
(Individual)
Expenses
Retained
Earnings
3
Dividends
4
Key:
Close Revenues to Income Summary.
Close Expenses to Income Summary.
Close Income Summary to Retained Earnings.
Close Dividends to Retained Earnings.
2
4
1
3
Illustration 4-6
Diagram of closing process
H E L P F U L H I N T
Dividends is closed
directly to Retained
Earnings and not to In-
come Summary because
Dividends is not an
expense.
If there were a net loss (because expenses exceeded revenues), entry 3 in
Illustration 4-6 would be reversed: there would be a credit to Income Summary and
a debit to Retained Earnings.
CLOSING ENTRIES ILLUSTRATED
In practice, companies generally prepare closing entries only at the end of the an-
nual accounting period. However, to illustrate the journalizing and posting of clos-
ing entries, we will assume that Pioneer Advertising Agency Inc. closes its books
monthly. Illustration 4-7 shows the closing entries at October 31. (The numbers in
parentheses before each entry correspond to the four entries diagrammed in
Illustration 4-6.)
Closing the Books 153
GENERAL JOURNAL J3
Date Account Titles and Explanation Ref.
Debit Credit
Closing Entries
2008
(1)
Oct. 31 Service Revenue 400 10,600
Income Summary 350 10,600
(To close revenue account)
(2)
31 Income Summary 350 7,740
Advertising Supplies Expense 631 1,500
Depreciation Expense 711 40
Insurance Expense 722 50
Salaries Expense 726 5,200
Rent Expense 729 900
Interest Expense 905 50
(To close expense accounts)
(3)
31 Income Summary 350 2,860
Retained Earnings 320 2,860
(To close net income to retained earnings)
(4)
31 Retained Earnings 320 500
Dividends 332 500
(To close dividends to capital)
Illustration 4-7
Closing entries journalized
Note that the amounts for Income Summary in entries (1) and (2) are the totals of
the income statement credit and debit columns, respectively, in the worksheet.
A couple of cautions in preparing closing entries: (1) Avoid unintentionally
doubling the revenue and expense balances rather than zeroing them. (2) Do not
close Dividends through the Income Summary account. Dividends are not an
expense, and they are not a factor in determining net income.
Posting Closing Entries
Illustration 4-8 shows the posting of the closing entries and the ruling of the ac-
counts. Note that all temporary accounts have zero balances after posting the clos-
ing entries. In addition, you should realize that the balance in
Retained Earnings
represents the accumulated undistributed earnings of the corporation at the end of
the accounting period. This balance is shown on the balance sheet and is the ending
amount reported on the retained earnings statement, as shown in Illustration 4-4.
4,000
1,200
Salaries
Expense
5,200
5,200
5,200
(2)
726
900
Rent
Expense
900(2)
729
50
Insurance
Expense
50(2)
722
40
Depreciation
Expense
40(2)
711
50
Interest
Expense
50(2)
905
1,500
Advertising
Supplies Expense
1,500(2)
631
500
Retained
Earnings
2,860
Bal. 2,360
(3)
320
(4)
10,600
Service
Revenue
10,600
10,000
400
200
10,600
400
(1)
500
Dividends
500(4)
332
7,740
2,860
Income
Summary
10,600
10,600
10,600
(1)
350
(2)
(3)
2
2
3
4
1
Illustration 4-8
Posting of closing entries
The Income Summary account is used only in closing. Companies do not journal-
ize and post entries to this account during the year.
As part of the closing process, companies total, balance, and double-rule the
temporary accounts—revenues, expenses, and Dividends—in T-account form, as
shown in Illustration 4-8. The permanent accounts—assets, liabilities, and stock-
holders’ equity (Common Stock and Retained Earnings)—are not closed. A single
rule is drawn beneath the current-period entries, and the account balance carried
forward to the next period is entered below the single rule. (For example, see
Retained Earnings.)
154 Chapter 4 Completing the Accounting Cycle
H E L P F U L H I N T
The balance in Income
Summary before it is
closed must equal the
net income or net loss
for the period.
Closing the Books 155
PIONEER ADVERTISING AGENCY INC.
Post-Closing Trial Balance
October 31, 2008
Debit Credit
Cash $15,200
Accounts Receivable 200
Advertising Supplies 1,000
Prepaid Insurance 550
Office Equipment 5,000
Accumulated Depreciation—Office Equipment $ 40
Notes Payable 5,000
Accounts Payable 2,500
Unearned Revenue 800
Salaries Payable 1,200
Interest Payable 50
Common Stock 10,000
Retained Earnings 2,360
$21,950 $21,950
Illustration 4-9
Post-closing trial balance
Preparing a Post-Closing Trial Balance
After Pioneer has journalized and posted all closing entries, it prepares
another trial balance, called a post-closing trial balance, from the ledger.
The post-closing trial balance lists permanent accounts and their balances
after journalizing and posting of closing entries. The purpose of the post-
closing trial balance is to prove the equality of the permanent account bal-
ances carried forward into the next accounting period. Since all temporary
accounts will have zero balances, the post-closing trial balance will contain only
permanent—balance sheet—accounts.
Illustration 4-9 shows the post-closing trial balance for Pioneer Advertising
Agency Inc.
Describe the content and
purpose of a post-closing trial
balance.
S T U D Y O B J E C T I V E 3
ACCOUNTING ACROSS THE ORGANIZATION
Cisco Performs the Virtual Close
Technology has dramatically shortened the closing process. Recent surveys have
reported that the average company now takes only six to seven days to close,
rather than 20 days. But a few companies do much better. Cisco Systems can perform a
“virtual close”—closing within 24 hours on any day in the quarter. The same is true at
Lockheed Martin Corp., which improved its closing time by 85% in just the last few years. Not
very long ago it took 14 to 16 days. Managers at these companies emphasize that this in-
creased speed has not reduced the accuracy and completeness of the data.
This is not just showing off. Knowing exactly where you are financially all of the time allows
the company to respond faster than competitors. It also means that the hundreds of people who
used to spend 10 to 20 days a quarter tracking transactions can now be more usefully employed
on things such as mining data for business intelligence to find new business opportunities.
Source: “Reporting Practices: Few Do It All,” Financial Executive, November 2003, p. 11.
Who else benefits from a shorter closing process?
Pioneer prepares the post-closing trial balance from the permanent accounts in
the ledger. Illustration 4-10 shows the permanent accounts in Pioneer’s general
ledger.
A post-closing trial balance provides evidence that the company has properly
journalized and posted the closing entries. It also shows that the accounting equa-
tion is in balance at the end of the accounting period. However, like the trial bal-
ance, it does not prove that Pioneer has recorded all transactions or that the ledger
is correct. For example, the post-closing trial balance will balance if a transaction is
not journalized and posted or if a transaction is journalized and posted twice.
156 Chapter 4 Completing the Accounting Cycle
Illustration 4-10
General ledger, permanent
accounts (Permanent Accounts Only)
GENERAL LEDGER
Cash No. 101
Date Explanation Ref. Debit Credit Balance
2008
Oct. 1 J1 10,000 10,000
2 J1 1,200 11,200
3 J1 900 10,300
4 J1 600 9,700
20 J1 500 9,200
26 J1 4,000 5,200
31 J1 10,000 15,200
Accounts Receivable No. 112
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 200 200
Advertising Supplies No. 126
Date Explanation Ref. Debit Credit Balance
2008
Oct. 5 J1 2,500 2,500
31 Adj. entry J2 1,500 1,000
Prepaid Insurance No. 130
Date Explanation Ref. Debit Credit Balance
2008
Oct. 4 J1 600 600
31 Adj. entry J2 50 550
Office Equipment No. 157
Date Explanation Ref. Debit Credit Balance
2008
Oct. 1 J1 5,000 5,000
Accumulated Depreciation—Office Equipment No. 158
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 40 40
Notes Payable No. 200
Date Explanation Ref. Debit Credit Balance
2008
Oct. 1 J1 5,000 5,000
Accounts Payable No. 201
Date Explanation Ref. Debit Credit Balance
2008
Oct. 5 J1 2,500 2,500
Unearned Revenue No. 209
Date Explanation Ref. Debit Credit Balance
2008
Oct. 2 J1 1,200 1,200
31 Adj. entry J2 400 800
Salaries Payable No. 212
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 1,200 1,200
Interest Payable No. 230
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 50 50
Common Stock No. 311
Date Explanation Ref. Debit Credit Balance
2008
Oct. 1 J1 10,000 10,000
Retained Earnings No. 320
Date Explanation Ref. Debit Credit Balance
2008
Oct. 1 –0–
31 Closing entry J3 2,860 2,860
31 Closing entry J3 500 2,360
Note: The permanent accounts for Pioneer Advertising Agency
Inc. are shown here; the temporary accounts are shown in Illus-
tration 4-11. Both permanent and temporary accounts are part of
the general ledger; we segregate them here to aid in learning.
The remaining accounts in the general ledger are temporary accounts, shown in
Illustration 4-11. After Pioneer correctly posts the closing entries, each temporary
account has a zero balance. These accounts are double-ruled to finalize the closing
process.
Summary of the Accounting Cycle 157
Illustration 4-11
General ledger, temporary
accounts
SUMMARY OF THE ACCOUNTING CYCLE
Illustration 4-12 (page 158) summarizes the steps in the accounting cycle.
You can see that the cycle begins with the analysis of business transactions
and ends with the preparation of a post-closing trial balance. Companies
perform the steps in the cycle in sequence and repeat these steps in each
accounting period.
Steps 1–3 may occur daily during the accounting period, as explained in
Chapter 2. Companies perform Steps 4–7 on a periodic basis, such as monthly,
quarterly, or annually. Steps 8 and 9—closing entries, and a post-closing trial
balance—usually take place only at the end of a company’s annual accounting
period.
State the required steps in the
accounting cycle.
S T U D Y O B J E C T I V E 4
(Temporary Accounts Only)
GENERAL LEDGER
Dividends No. 332
Date Explanation Ref. Debit Credit Balance
2008
Oct. 20 J1 500 500
31 Closing entry J3 500 –0–
Income Summary No. 350
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Closing entry J3 10,600 10,600
31 Closing entry J3 7,740 2,860
31 Closing entry J3 2,860 –0–
Service Revenue No. 400
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 J1 10,000 10,000
31 Adj. entry J2 400 10,400
31 Adj. entry J2 200 10,600
31 Closing entry J3 10,600 –0–
Advertising Supplies Expense No. 631
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 1,500 1,500
31 Closing entry J3 1,500 –0–
Depreciation Expense No. 711
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 40 40
31 Closing entry J3 40 –0–
Insurance Expense No. 722
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 50 50
31 Closing entry J3 50 –0–
Salaries Expense No. 726
Date Explanation Ref. Debit Credit Balance
2008
Oct. 26 J1 4,000 4,000
31 Adj. entry J2 1,200 5,200
31 Closing entry J3 5,200 –0–
Rent Expense No. 729
Date Explanation Ref. Debit Credit Balance
2008
Oct. 3 J1 900 900
31 Closing entry J3 900 –0–
Interest Expense No. 905
Date Explanation Ref. Debit Credit Balance
2008
Oct. 31 Adj. entry J2 50 50
31 Closing entry J3 50 –0–
Note: The temporary accounts for Pioneer Advertising Agency
Inc. are shown here; Illustration 4-10 shows the permanent
accounts. Both permanent and temporary accounts are part of
the general ledger; we segregate them here to aid in learning.
There are also two optional steps in the accounting cycle. As you have seen,
companies may use a worksheet in preparing adjusting entries and financial state-
ments. In addition, they may use reversing entries, as explained below.
Reversing Entries—An Optional Step
Some accountants prefer to reverse certain adjusting entries by making a reversing
entry at the beginning of the next accounting period. A reversing entry is the exact
opposite of the adjusting entry made in the previous period. Use of reversing
entries is an optional bookkeeping procedure; it is not a required step in the
accounting cycle. Accordingly, we have chosen to cover this topic in an appendix at
the end of the chapter.
Correcting Entries—An Avoidable Step
Unfortunately, errors may occur in the recording process. Companies
should correct errors, as soon as they discover them, by journalizing and
posting correcting entries. If the accounting records are free of errors, no
correcting entries are needed.
158 Chapter 4 Completing the Accounting Cycle
7
Prepare financial
statements:
Income statement
Retained earnings statement
Balance sheet
5
Journalize and post
adjusting entries:
Prepayments/Accruals
6
Prepare an adjusted
trial balance
Optional steps: If a worksheet is prepared, steps 4, 5, and 6 are incorporated in the worksheet.
If reversing entries are prepared, they occur between steps 9 and 1 as discussed below.
4
Prepare a
trial balance
3
Post to
ledger accounts
2
Journalize the
transactions
1
Analyze business
transactions
9
Prepare a post-closing
trial balance
8
Journalize and
post closing entries
Illustration 4-12
Steps in the accounting
cycle
Explain the approaches to
preparing correcting entries.
S T U D Y O B J E C T I V E 5
You should recognize several differences between correcting entries
and adjusting entries. First, adjusting entries are an integral part of the ac-
counting cycle. Correcting entries, on the other hand, are unnecessary if
the records are error-free. Second, companies journalize and post adjust-
ments only at the end of an accounting period. In contrast, companies
make correcting entries whenever they discover an error. Finally, adjusting
entries always affect at least one balance sheet account and one income
statement account. In contrast, correcting entries may involve any combi-
nation of accounts in need of correction. Correcting entries must be
posted before closing entries.
To determine the correcting entry, it is useful to compare the incorrect entry
with the correct entry. Doing so helps identify the accounts and amounts that
should—and should not—be corrected. After comparison, the accountant makes
an entry to correct the accounts. The following two cases for Mercato Co. illustrate
this approach.
CASE 1
On May 10, Mercato Co. journalized and posted a $50 cash collection on account
from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The
company discovered the error on May 20, when the customer paid the remaining
balance in full.
Summary of the Accounting Cycle 159
E T H I C S N O T E
When companies find errors
in previously released in-
come statements, they restate
those numbers. Perhaps because
of the increased scrutiny caused
by Sarbanes-Oxley, in 2005
companies filed a record 1,195
restatements.
Illustration 4-13
Comparison of entries
Illustration 4-14
Correcting entry
Illustration 4-15
Comparison of entries
CASE 2
On May 18, Mercato purchased on account office equipment costing $450. The
transaction was journalized and posted as a debit to Delivery Equipment $45 and
a credit to Accounts Payable $45. The error was discovered on June 3, when
Mercato received the monthly statement for May from the creditor.
Comparison of the incorrect entry with the correct entry reveals that the debit
to Cash $50 is correct. However, the $50 credit to Service Revenue should have
been credited to Accounts Receivable. As a result, both Service Revenue and
Accounts Receivable are overstated in the ledger. Mercato makes the following
correcting entry.
A � L � SE
�50 Rev
�50
Cash Flows
no effect
Incorrect Entry (May 10) Correct Entry (May 10)
Cash 50 Cash 50
Service Revenue 50 Accounts Receivable 50
Correcting Entry
May 20 Service Revenue 50
Accounts Receivable 50
(To correct entry of May 10)
Incorrect Entry (May 18) Correct Entry (May 18)
Delivery Equipment 45 Office Equipment 450
Accounts Payable 45 Accounts Payable 450
Instead of preparing a correcting entry, it is possible to reverse the incorrect en-
try and then prepare the correct entry. This approach will result in more entries and
postings than a correcting entry, but it will accomplish the desired result.
160 Chapter 4 Completing the Accounting Cycle
Illustration 4-16
Correcting entry
Cash Flows
no effect
A � L � SE
�450
�45
�405
Comparison of the two entries shows that three accounts are incorrect. Delivery
Equipment is overstated $45; Office Equipment is understated $450; and Accounts
Payable is understated $405. Mercato makes the following correcting entry.
ACCOUNTING ACROSS THE ORGANIZATION
Yale Express Loses Some Transportation Bills
Yale Express, a short-haul trucking firm, turned over much of its cargo to local
truckers to complete deliveries. Yale collected the entire delivery charge;
when billed by the local trucker, Yale sent payment for the final phase to the local trucker.
Yale used a cutoff period of 20 days into the next accounting period in making its adjust-
ing entries for accrued liabilities. That is, it waited 20 days to receive the local truckers’ bills
to determine the amount of the unpaid but incurred delivery charges as of the balance
sheet date.
On the other hand, Republic Carloading, a nationwide, long-distance freight forwarder,
frequently did not receive transportation bills from truckers to whom it passed on cargo until
months after the year-end. In making its year-end adjusting entries, Republic waited for
months in order to include all of these outstanding transportation bills.
When Yale Express merged with Republic Carloading, Yale’s vice president employed the
20-day cutoff procedure for both firms. As a result, millions of dollars of Republic’s accrued
transportation bills went unrecorded. When the company detected the error and made cor-
recting entries, these and other errors changed a reported profit of $1.14 million into a loss of
$1.88 million!
What might Yale Express’s vice president have done to produce more accurate financial
statements without waiting months for Republic’s outstanding transportation bills?
REVIEW IT
1. How do permanent accounts differ from temporary accounts?
2. What four different types of entries do companies make in closing the books?
3. What are the content and purpose of a post-closing trial balance?
4. What are the required and optional steps in the accounting cycle?
Before You Go On…
Correcting Entry
June 3 Office Equipment 450
Delivery Equipment 45
Accounts Payable 405
(To correct entry of May 18)
The balance sheet presents a snapshot of a company’s financial position at
a point in time. To improve users’ understanding of a company’s financial
position, companies often group similar assets and similar liabilities to-
gether. This is useful because it tells you that items within a group have
similar economic characteristics. A classified balance sheet generally contains the
standard classifications listed in Illustration 4-17.
The Classified Balance Sheet 161
DO IT
The worksheet for Hancock Company shows the following in the financial state-
ment columns:
Dividends $15,000
Common Stock $42,000
Net income $18,000
Prepare the closing entries at December 31 that affect owner’s capital.
Action Plan
■ Remember to make closing entries in the correct sequence.
■ Make the first two entries to close revenues and expenses.
■ Make the third entry to close net income to retained earnings.
■ Make the final entry to close dividends to retained earnings.
Solution
Dec. 31 Income Summary 18,000
Retained Earnings 18,000
(To close net income to retained earnings)
31 Retained Earnings 15,000
Dividends 15,000
(To close dividends to retained earnings)
Related exercise material: BE4-4, BE4-5, BE4-6, BE4-7, BE4-8, E4-4, E4-7, E4-8, E4-10, and E4-11.
The Navigator✓
THE CLASSIFIED BALANCE SHEET
Identify the sections of a classified
balance sheet.
S T U D Y O B J E C T I V E 6
Illustration 4-17
Standard balance sheet
classifications
Assets
Liabilities and Owner’s Equity
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant, and equipment Stockholders’ equity
Intangible assets
These groupings help readers determine such things as (1) whether the com-
pany has enough assets to pay its debts as they come due, and (2) the claims of
short- and long-term creditors on the company’s total assets. Many of these group-
ings can be seen in the balance sheet of Franklin Corporation shown in Illustration
4-18 (page 162). In the sections that follow, we explain each of these groupings.
Current Assets
Current assets are assets that a company expects to convert to cash or use up
within one year. In Illustration 4-18, Franklin Corporation had current assets of
$22,100. For most businesses the cutoff for classification as current assets is one
year from the balance sheet date. For example, accounts receivable are current
assets because the company will collect them and convert them to cash within one
year. Supplies is a current asset because the company expects to use it up in oper-
ations within one year.
162 Chapter 4 Completing the Accounting Cycle
FRANKLIN CORPORATION
Balance Sheet
October 31, 2008
Assets
Current assets
Cash $ 6,600
Short-term investments 2,000
Accounts receivable 7,000
Notes receivable 1,000
Inventories 3,000
Supplies 2,100
Prepaid insurance 400
Total current assets $22,100
Long-term investments
Investment in stock of Walters Corp. 5,200
Investment in real estate 2,000 7,200
Property, plant, and equipment
Land 10,000
Office equipment $24,000
Less: Accumulated depreciation 5,000 19,000 29,000
Intangible assets
Patents 3,100
Total assets $61,400
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable $11,000
Accounts payable 2,100
Salaries payable 1,600
Unearned revenue 900
Interest payable 450
Total current liabilities $16,050
Long-term liabilities
Mortgage note payable 10,000
Notes payable 1,300
Total long-term liabilities 11,300
Total liabilities 27,350
Stockholders’ equity
Common stock 20,000
Retained earnings 14,050
Total stockholders’ equity 34,050
Total liabilities and stockholders’ equity $61,400
Illustration 4-18
Classified balance sheet
H E L P F U L H I N T
Recall that the accounting
equation is Assets � Lia-
bilities � Stockholders’
Equity.
Some companies use a period longer than one year to classify assets and liabil-
ities as current because they have an operating cycle longer than one year. The
operating cycle of a company is the average time that it takes to purchase inven-
tory, sell it on account, and then collect cash from customers. For most businesses
this cycle takes less than a year, so they use a one-year cutoff. But, for some busi-
nesses, such as vineyards or airplane manufacturers, this period may be longer than
a year. Except where noted, we will assume that companies use one year to deter-
mine whether an asset or liability is current or long-term.
Common types of current assets are (1) cash, (2) short-term investments (such
as short-term U.S. government securities), (3) receivables (notes receivable, ac-
counts receivable, and interest receivable), (4) inventories, and (5) prepaid ex-
penses (insurance and supplies). On the balance sheet, companies usually list
these items in the order in which they expect to convert them into cash.
Illustration 4-19 presents the current assets of The Coca-Cola Company.
The Classified Balance Sheet 163
THE COCA-COLA COMPANY
Balance Sheet (partial)
(in millions)
Current assets
Cash and cash equivalents $ 6,707
Short-term investments 61
Trade accounts receivable 2,171
Inventories 1,420
Prepaid expenses and other assets 1,735
Total current assets $12,094
As explained later in the chapter, a company’s current assets are important in
assessing its short-term debt-paying ability.
Long-Term Investments
Long-term investments are generally investments in stocks and bonds of other
companies that are normally held for many years. This category also includes
investments in long-term assets such as land or buildings that a company is not
currently using in its operating activities. In Illustration 4-18 Franklin Corporation
reported total long-term investments of $7,200 on its balance sheet.
Yahoo! Inc. reported long-term investments in its balance sheet as shown in
Illustration 4-20.
A L T E R N A T I V E
T E R M I N O L O G Y
Long-term investments
are often referred to
simply as investments.
Illustration 4-19
Current assets section
YAHOO! INC.
Balance Sheet (partial)
(in thousands)
Long-term investments
Long-term marketable debt securities $1,042,575
Illustration 4-20
Long-term investments
section
Property, Plant, and Equipment
Property, plant, and equipment are assets with relatively long useful lives that a
company is currently using in operating the business. This category includes land,
buildings, machinery and equipment, delivery equipment, and furniture. In
Illustration 4-18 Franklin Corporation reported property, plant, and equipment of
$29,000.
Depreciation is the practice of allocating the cost of assets to a number of
years. Companies do this by systematically assigning a portion of an asset’s cost as
an expense each year (rather than expensing the full purchase price in the year of
purchase). The assets that the company depreciates are reported on the balance
sheet at cost less accumulated depreciation. The accumulated depreciation account
shows the total amount of depreciation that the company has expensed thus far in
the asset’s life. In Illustration 4-18 Franklin Corporation reported accumulated de-
preciation of $5,000.
Illustration 4-21 presents the property, plant, and equipment of ski and sport-
ing goods manufacturer K2, Inc.
164 Chapter 4 Completing the Accounting Cycle
K2, INC.
Balance Sheet (partial)
(in thousands)
Property, plant, and equipment
Land and land improvements $ 6,794
Buildings and leasehold improvements 55,900
Machinery and equipment 204,651
Construction in process 5,614 $272,959
Less: Accumulated depreciation 131,995
$140,964
Illustration 4-21
Property, plant, and
equipment section
TIME WARNER, INC.
Balance Sheet (partial)
(in millions)
Intangible assets
Film library $ 3,361
Customer lists 868
Cable television franchises 29,751
Sports franchises 262
Brands, trademarks, and other intangible assets 9,643
$43,885
Illustration 4-22
Intangible assets section
Intangible Assets
Many companies have assets that do not have physical substance yet often are very
valuable. We call these assets intangible assets. One common intangible asset is
goodwill. Other intangibles include patents, copyrights, and trademarks or trade
names that give the company exclusive right of use for a specified period of time.
Franklin Corporation reported intangible assets of $3,100.
Illustration 4-22 shows how media giant Time Warner, Inc. reported its intangi-
ble assets.
A L T E R N A T I V E
T E R M I N O L O G Y
Property, plant, and equip-
ment is sometimes called
fixed assets.
H E L P F U L H I N T
Sometimes intangible
assets are reported un-
der a broader heading
called “Other assets.”
Current Liabilities
In the liabilities and stockholders’ equity section of the balance sheet, the first
grouping is current liabilities. Current liabilities are obligations that the company
is to pay within the coming year. Common examples are accounts payable, wages
payable, bank loans payable, interest payable, and taxes payable. Also included
as current liabilities are current maturities of long-term obligations—payments to
be made within the next year on long-term obligations. In Illustration 4-18 Franklin
Corporation reported five different types of current liabilities, for a total of
$16,050.
Within the current liabilities section, companies usually list notes payable first,
followed by accounts payable. Other items then follow in the order of their magni-
tude. In your homework, you should present notes payable first, followed by ac-
counts payable, and then other liabilities in order of magnitude.
Illustration 4-23 shows the current liabilities section adapted from the balance
sheet of Marcus Corporation.
The Classified Balance Sheet 165
Big Changes Are Coming to Chinese Balance Sheets
Beginning in 2007 many Chinese companies will be following International
Financial Reporting Standards to prepare financial statements. Many people say that the
largest change will occur on Chinese balance sheets. The new standards will require the
companies to report a market value for many assets, including things like plant and equip-
ment. (This, of course, is not in accordance with the cost principle, which U.S. GAAP
follows.)
Chinese authorities hope that adopting international standards will give investors more
confidence in the validity of Chinese financial reports.
Source: James T. Areddy, “Adding Up Chinese Data”, Wall Street Journal, February 27, 2006, p. C10.
I N T E R N A T I O N A L I N S I G H T
What are the potential benefits and challenges presented by reporting assets like plant
and equipment at their market value rather than historical cost?
MARCUS CORPORATION
Balance Sheet (partial)
(in thousands)
Current liabilities
Notes payable $ 2,066
Accounts payable 17,516
Current maturities of long-term debt 26,321
Taxes payable 14,889
Other current liabilities 14,809
Accrued compensation payable 8,614
Total current liabilities $84,215
Illustration 4-23
Current liabilities section
Users of financial statements look closely at the relationship between current as-
sets and current liabilities. This relationship is important in evaluating a company’s
liquidity—its ability to pay obligations expected to be due within the next year.
When current assets exceed current liabilities at the balance sheet date, the likeli-
hood for paying the liabilities is favorable. When the reverse is true, short-term cred-
itors may not be paid, and the company may ultimately be forced into bankruptcy.
Long-Term Liabilities
Long-term liabilities are obligations that a company expects to pay after one year.
Liabilities in this category include bonds payable, mortgages payable, long-term
notes payable, lease liabilities, and pension liabilities. Many companies report long-
term debt maturing after one year as a single amount in the balance sheet and show
the details of the debt in notes that accompany the financial statements. Others list
the various types of long-term liabilities. In Illustration 4-18 Franklin Corporation
reported long-term liabilities of $11,300. In your homework, list long-term liabilities
in the order of their magnitude.
Illustration 4-24 shows the long-term liabilities that Northwest Airlines
Corporation reported in its balance sheet.
166 Chapter 4 Completing the Accounting Cycle
S.S. Ongoing
Liquidity
S.S. Bankruptcy
Illiquidity
NORTHWEST AIRLINES CORPORATION
Balance Sheet (partial)
(in millions)
Long-term liabilities
Long-term debt $ 7,715
Other liabilities 4,346
Long-term obligations under capital leases 308
Total long-term liabilities $12,369
Illustration 4-24
Long-term liabilities section
NORDSTROM, INC.
Balance Sheet (partial)
($ in thousands)
Stockholders’ equity
Common stock, 271,331 shares $ 685,934
Retained earnings 1,406,747
Total stockholders’ equity $2,092,681
Illustration 4-25
Stockholders’ equity section
Stockholders’ (Owners’) Equity
The content of the owners’ equity section varies with the form of business organi-
zation. In a proprietorship, there is one capital account. In a partnership, there is a
capital account for each partner. Corporations divide owners’ equity into two
accounts—Common Stock and Retained Earnings. Corporations record stock-
holders’ investments in the company by debiting an asset account and crediting the
Common Stock account. They record in the Retained Earnings account income re-
tained for use in the business. Corporations combine the Common Stock and
Retained Earnings accounts and report them on the balance sheet as stockholders’
equity. (We’ll learn more about these corporation accounts in later chapters.)
Nordstrom, Inc. recently reported its stockholders’ equity section as follows.
Be sure to read ALL ABOUT YOU: Your Personal Balance Sheet on the next
page for information on how topics in this chapter apply to you.*
all about Y U*all about Y U
*
Your Personal Balance Sheet
*
Some Facts*
About the Numbers*
* 48% of Americans think they know how much
wealth they have.
* 2005 was the first year since the Depression when
Americans spent more money than they made.
* The total net worth of U.S. households hit a record of
$51.09 trillion during 2005.
* Economists note that a rise in house prices actually
results in a fall in individual savings. It has been
documented that a $1,000 rise in the value of a
home results in a $50 fall in savings per year,
presumably because homeowners feel more wealthy
and therefore spend more (save less).
* When asked about very important wealth-building
strategies for all Americans, 16% said “win the
lottery.”
Your ability to make good financial decisions is often influenced by your attitudes
toward saving versus spending. The authors of a recent study conclude that “people
commonly fall prey to psychologically driven impulses that affect their financial de-
cisions.” For example, when individuals were asked whether could they save 20% of
their household income, nearly half said they couldn’t. But, when asked if they
could spend less, well more than half (71%) said they could live comfortably on
80% of their income. This clearly is inconsistent thinking: If you can live on 80% of
your current income, you can save 20% of your current income.
The authors’ comments on this situation appear on page 193.
BBy now you should be pretty comfortable with how toprepare a company’s balance sheet. Maybe it is time
for us to look at your personal financial position.
What are your personal assets? These are the
items of value that you own. Some of your assets are
liquid —cash or items that are easily converted to
cash. Others, like cars, real estate, and some types of
investments, are less liquid. Some assets, like houses
and investments, tend to rise in value over time,
which increases your net worth. Other assets, such as
cars, tend to fall in value over time, decreasing your
net worth.
What are your personal liabilities—the amounts
that you owe to others? Student loans, car loans,
credit card bills, and amounts owed to relatives are all
personal liabilities. These liabilities are either current
(to be repaid within 12 months) or long-term.
The difference between your assets and
liabilities is, to use the terminology of the accounting
equation, your “owner’s equity.” In personal finance
terminology, this is your net worth. Having a high net
worth does not guarantee happiness—but most
believe that it is better than being broke. By
monitoring your personal balance sheet, you can
begin to take control of your financial future. Source: Northwestern Mutual Life, www.nmfn.com/contentassets/pdfs/fin_misbehav , p. 6.
What Do You Think?*
Should you prepare a personal balance sheet?
YES: In order to attain your desired financial objectives, you need to set
goals early. The personal balance sheet provides a benchmark by which you
can measure progress toward your financial goals. You need to do it now so
that you begin to develop good financial habits. It provides a mechanism so
that you don’t allow your finances to get too “out-of-whack” while you are in
school. That is, you don’t want to dig too deep a hole.
NO: Your financial situation right now bears very little resemblance to what
it will look like after you graduate. At that point, you will have a better job,
and you won’t have to pay tuition. Right now, you’re just “bleeding cash.”
Sources: Andrew Blackman, “How to Calculate Your Savings Rate; For Americans in 2005,
Earnings Didn’t Keep Pace with Boom in Spending,” Wall Street Journal, January 3, 2006, p. D2;
“Financial Planners Share Views on Saving,” Consumer Federation of America and Financial
Planning Association, January 2006.
“How much could you save?”
Nearly half could
not comfortably save
20% of household’s
annual income at
this point in life.
71% said they could
comfortably live on
80% of household’s
annual income at
this point in life.
BUT
Could not
save 20%
Could
save 20%
Could live
on 80%
Could
not live
on 80%
167
168 Chapter 4 Completing the Accounting Cycle
REVIEW IT
1. What are the major sections in a classified balance sheet?
2. Using the PepsiCo annual report, determine its current liabilities at
December 31, 2005, and December 25, 2004. Were current liabilities higher or
lower than current assets in these two years? The answer to this question
appears on page 193.
Before You Go On…
The Navigator✓
Demonstration Problem
At the end of its first month of operations, Watson Answering Service Inc. has the
following unadjusted trial balance.
WATSON ANSWERING SERVICE INC.
August 31, 2008
Trial Balance
Debit Credit
Cash $ 5,400
Accounts Receivable 2,800
Prepaid Insurance 2,400
Supplies 1,300
Equipment 60,000
Notes Payable $40,000
Accounts Payable 2,400
Common Stock 30,000
Dividends 1,000
Service Revenue 4,900
Salaries Expense 3,200
Utilities Expense 800
Advertising Expense 400
$77,300 $77,300
Other data:
1. Insurance expires at the rate of $200 per month.
2. $1,000 of supplies are on hand at August 31.
3. Monthly depreciation on the equipment is $900.
4. Interest of $500 on the notes payable has accrued during August.
Instructions
(a) Prepare a worksheet.
(b) Prepare a classified balance sheet assuming $35,000 of the notes payable are
long-term.
(c) Journalize the closing entries.
action plan
✔ In completing the
worksheet, be sure to
(a) key the adjustments;
(b) start at the top of the
adjusted trial balance
columns and extend
adjusted balances to the
correct statement columns;
and (c) enter net income
(or net loss) in the proper
columns.
✔ In preparing a classified
balance sheet, know the
contents of each of the
sections.
✔ In journalizing closing
entries, remember that
there are only four entries
and that Dividends are
closed to Retained Earnings.
Demonstration Problem 169
Solution
(a) WATSON ANSWERING SERVICE INC.
Worksheet
For the Month Ended August 31, 2008
Adjusted Trial Income
Trial Balance Adjustments Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Dr. Cr. Dr. Cr.
Cash 5,400 5,400 5,400
Accounts Receivable 2,800 2,800 2,800
Supplies 1,300 (b) 300 1,000 1,000
Prepaid Insurance 2,400 (a) 200 2,200 2,200
Equipment 60,000 60,000 60,000
Notes Payable 40,000 40,000 40,000
Accounts Payable 2,400
2,400 2,400
Common Stock 30,000 30,000 30,000
Dividends 1,000 1,000 1,000
Service Revenue 4,900 4,900 4,900
Salaries Expense 3,200 3,200 3,200
Utilities Expense 800 800 800
Advertising Expense 400 400 400
Totals 77,300 77,300
Insurance Expense (a) 200 200 200
Supplies Expense (b) 300 300 300
Depreciation Expense (c) 900 900 900
Accumulated Depreciation—
Equipment (c) 900 900 900
Interest Expense (d) 500 500 500
Interest Payable (d) 500 500 500
Totals 1,900 1,900 78,700 78,700 6,300 4,900 72,400 73,800
Net Loss 1,400 1,400
Totals 6,300 6,300 73,800 73,800
(b) WATSON ANSWERING SERVICE INC.
Balance Sheet
August 31, 2008
Assets
Current assets
Cash $ 5,400
Accounts receivable 2,800
Supplies 1,000
Prepaid insurance 2,200
Total current assets $11,400
Property, plant, and equipment
Equipment 60,000
Less: Accumulated depreciation—equipment 900 59,100
Total assets $70,500
Explanation: (a) Insurance expired, (b) Supplies used, (c) Depreciation expensed, (d) Interest accrued.
170 Chapter 4 Completing the Accounting Cycle
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable $ 5,000
Accounts payable 2,400
Interest payable 500
Total current liabilities $7,900
Long-term liabilities
Notes payable 35,000
Total liabilities 42,900
Stockholders’ equity
Common stock 30,000
Retained earnings (2,400)*
Total stockholders’ equity 27,600
Total liabilities and stockholders’ equity $70,500
*Net loss of $1,400 plus dividends of $1,000.
Aug. 31 Service Revenue 4,900
Income Summary 4,900
(To close revenue account)
31 Income Summary 6,300
Salaries Expense 3,200
Depreciation Expense 900
Utilities Expense 800
Interest Expense 500
Advertising Expense 400
Supplies Expense 300
Insurance Expense 200
(To close expense accounts)
31 Retained Earnings 1,400
Income Summary 1,400
(To close net loss to retained earnings)
31 Retained Earnings 1,000
Dividends 1,000
(To close dividends to retained earnings)
The Navigator✓
SUMMARY OF STUDY OBJECTIVES
1 Prepare a worksheet. The steps in preparing a worksheet
are: (a) Prepare a trial balance on the worksheet. (b) Enter
the adjustments in the adjustments columns. (c) Enter
adjusted balances in the adjusted trial balance columns.
(d) Extend adjusted trial balance amounts to appropriate
financial statement columns. (e) Total the statement columns,
compute net income (or net loss), and complete the work-
sheet.
2 Explain the process of closing the books. Closing the
books occurs at the end of an accounting period. The process
is to journalize and post closing entries and then rule and
balance all accounts. In closing the books, companies make
separate entries to close revenues and expenses to Income
Summary, Income Summary to Retained Earnings, and
Dividends to Retained Earnings. Only temporary accounts
are closed.
3 Describe the content and purpose of a post-closing
trial balance. A post-closing trial balance contains the
balances in permanent accounts that are carried forward to
the next accounting period. The purpose of this trial bal-
ance is to prove the equality of these balances.
4 State the required steps in the accounting cycle. The
required steps in the accounting cycle are: (1) analyze busi-
ness transactions, (2) journalize the transactions, (3) post to
ledger accounts, (4) prepare a trial balance, (5) journalize
and post adjusting entries, (6) prepare an adjusted trial
balance, (7) prepare financial statements, (8) journalize
and post closing entries, and (9) prepare a post-closing
trial balance.
5 Explain the approaches to preparing correcting entries.
One way to determine the correcting entry is to compare the
incorrect entry with the correct entry. After comparison, the
(c)
Appendix Reversing Entries 171
company makes a correcting entry to correct the accounts.
An alternative to a correcting entry is to reverse the incor-
rect entry and then prepare the correct entry.
6 Identify the sections of a classified balance sheet. A
classified balance sheet categorizes assets as current assets;
long-term investments; property, plant, and equipment; and
intangibles. Liabilities are classified as either current or
long-term. There is also a stockholders’ (owners’) equity
section, which varies with the form of business organization.
GLOSSARY
The Navigator✓
Classified balance sheet A balance sheet that contains a
number of standard classifications or sections. (p. 161).
Closing entries Entries made at the end of an accounting
period to transfer the balances of temporary accounts
to a permanent stockholders’ equity account, Retained
Earnings. (p. 151).
Correcting entries Entries to correct errors made in
recording transactions. (p. 158).
Current assets Assets that a company expects to convert to
cash or use up within one year. (p. 162).
Current liabilities Obligations that a company expects to pay
from existing current assets within the coming year. (p. 165).
Income Summary A temporary account used in closing rev-
enue and expense accounts. (p. 151).
Intangible assets Noncurrent assets that do not have phys-
ical substance. (p. 164).
Liquidity The ability of a company to pay obligations
expected to be due within the next year. (p. 166).
Long-term investments Generally, investments in stocks
and bonds of other companies that companies normally
hold for many years. Also includes long-term assets, such as
land and buildings, not currently being used in operations.
(p. 163).
Long-term liabilities Obligations that a company expects to
pay after one year. (p. 166).
Operating cycle The average time that it takes to go from
cash to cash in producing revenues. (p. 163).
Permanent (real) accounts Accounts that relate to one
or more accounting periods. Consist of all balance sheet
accounts. Balances are carried forward to next accounting
period. (p. 150).
Post-closing trial balance A list of permanent accounts
and their balances after a company has journalized and
posted closing entries. (p. 155).
Property, plant, and equipment Assets with relatively long
useful lives, currently being used in operations. (p. 164).
Reversing entry An entry, made at the beginning of the
next accounting period, that is the exact opposite of the
adjusting entry made in the previous period. (p. 158).
Stockholders’ equity The ownership claim of shareholders
on total assets. It is to a corporation what owner’s equity is
to a proprietorship. (p. 166).
Temporary (nominal) accounts Accounts that relate only
to a given accounting period. Consist of all income state-
ment accounts and the Dividends account. All temporary
accounts are closed at end of accounting period. (p. 150).
Worksheet A multiple-column form that may be used in
making adjusting entries and in preparing financial state-
ments. (p. 144).
APPENDIX Reversing Entries
After preparing the financial statements and closing the books, it is often
helpful to reverse some of the adjusting entries before recording the regular
transactions of the next period. Such entries are reversing entries.
Companies make a reversing entry at the beginning of the next accounting period.
Each reversing entry is the exact opposite of the adjusting entry made in the previ-
ous period. The recording of reversing entries is an optional step in the accounting
cycle.
The purpose of reversing entries is to simplify the recording of a subsequent
transaction related to an adjusting entry. For example, in Chapter 3 (page 109), the
payment of salaries after an adjusting entry resulted in two debits: one to Salaries
Payable and the other to Salaries Expense. With reversing entries, the company can
debit the entire subsequent payment to Salaries Expense. The use of reversing
entries does not change the amounts reported in the financial statements. What it
does is simplify the recording of subsequent transactions.
Prepare reversing entries.
S T U D Y O B J E C T I V E 7
Reversing Entries Example
Companies most often use reversing entries to reverse two types of adjusting
entries: accrued revenues and accrued expenses. To illustrate the optional use of
reversing entries for accrued expenses, we will use the salaries expense transac-
tions for Pioneer Advertising Agency Inc. The transaction and adjustment data
are as follows.
1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries earned be-
tween October 15 and October 26.
2. October 31 (adjusting entry): Salaries earned between October 29 and
October 31 are $1,200. The company will pay these in the November 9
payroll.
3. November 9 (subsequent salary entry): Salaries paid are $4,000. Of this
amount, $1,200 applied to accrued wages payable and $2,800 was earned be-
tween November 1 and November 9.
Illustration 4A-1 shows the entries with and without reversing entries.
172 Chapter 4 Completing the Accounting Cycle
Without Reversing Entries
(per chapter)
Initial Salary Entry
Oct. 26 Salaries Expense 4,000
Cash 4,000
Adjusting Entry
Oct. 31 Salaries Expense 1,200
Salaries Payable 1,200
Closing Entry
Oct. 31 Income Summary 5,200
Salaries Expense 5,200
Reversing Entry
Nov. 1 No reversing entry is made.
Subsequent Salary Entry
Nov. 9 Salaries Payable 1,200
Salaries Expense 2,800
Cash 4,000
With Reversing Entries
(per appendix)
Initial Salary Entry
Oct. 26 (Same entry)
Adjusting Entry
Oct. 31 (Same entry)
Closing Entry
Oct. 31 (Same entry)
Reversing Entry
Nov. 1 Salaries Payable 1,200
Salaries Expense 1,200
Subsequent Salary Entry
Nov. 9 Salaries Expense 4,000
Cash 4,000
The first three entries are the same whether or not Pioneer uses reversing
entries. The last two entries are different. The November 1 reversing entry elimi-
nates the $1,200 balance in Salaries Payable created by the October 31 adjusting
entry. The reversing entry also creates a $1,200 credit balance in the Salaries
Expense account. As you know, it is unusual for an expense account to have a credit
balance. The balance is correct in this instance, though, because it anticipates that
the entire amount of the first salary payment in the new accounting period will
be debited to Salaries Expense. This debit will eliminate the credit balance. The
resulting debit balance in the expense account will equal the salaries expense
incurred in the new accounting period ($2,800 in this example).
Illustration 4A-1
Comparative entries—not
reversing vs. reversing
If Pioneer makes reversing entries, it can debit all cash payments of expenses
to the expense account. This means that on November 9 (and every payday)
Pioneer can debit Salaries Expense for the amount paid, without regard to any ac-
crued salaries payable. Being able to make the same entry each time simplifies the
recording process: The company can record subsequent transactions as if the re-
lated adjusting entry had never been made.
Illustration 4A-2 shows the posting of the entries with reversing entries.
Self-Study Questions 173
Illustration 4A-2
Postings with reversing
entries
A company can also use reversing entries for accrued revenue adjusting en-
tries. For Pioneer Advertising, the adjusting entry was: Accounts Receivable (Dr.)
$200 and Service Revenue (Cr.) $200. Thus, the reversing entry on November 1 is:
Nov. 1 Service Revenue 200
Accounts Receivable 200
(To reverse October 31 adjusting entry)
When Pioneer collects the accrued service revenue, it debits Cash and credits
Service Revenue.
Salaries Expense
10/26 Paid 4,000 10/31 Closing 5,200
31 Adjusting 1,200
5,200 5,200
11/9 Paid 4,000 11/1 Reversing 1,200
Salaries Payable
11/1 Reversing 1,200 10/31 Adjusting 1,200
SUMMARY OF STUDY OBJECTIVE FOR APPENDIX
*Note: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the
chapter.
Cash Flows
no effect
A � L � SE
�200 Rev
�200
7 Prepare reversing entries. Reversing entries are the
opposite of the adjusting entries made in the preceding
period. Some companies choose to make reversing entries
at the beginning of a new accounting period to simplify the
recording of later transactions related to the adjusting
entries. In most cases, only accrued adjusting entries are
reversed.
SELF-STUDY QUESTIONS
Answers are at the end of the chapter.
1. Which of the following statements is incorrect concern-
ing the worksheet?
a. The worksheet is essentially a working tool of the
accountant.
b. The worksheet is distributed to management and
other interested parties.
c. The worksheet cannot be used as a basis for posting to
ledger accounts.
d. Financial statements can be prepared directly from
the worksheet before journalizing and posting the
adjusting entries.
2. In a worksheet, net income is entered in the following
columns:
a. income statement (Dr) and balance sheet (Dr).
b. income statement (Cr) and balance sheet (Dr).
c. income statement (Dr) and balance sheet (Cr).
d. income statement (Cr) and balance sheet (Cr).
3. An account that will have a zero balance after closing
entries have been journalized and posted is:
a. Service Revenue.
b. Advertising Supplies.
c. Prepaid Insurance.
d. Accumulated Depreciation.
(SO 1)
(SO 1)
(SO 2)
174 Chapter 4 Completing the Accounting Cycle
4. When a net loss has occurred, Income Summary is:
a. debited and Retained Earnings is credited.
b. credited and Retained Earnings is debited.
c. debited and Common Stock is credited.
d. credited and Common Stock is debited.
5. The closing process involves separate entries to close (1)
expenses, (2) dividends, (3) revenues, and (4) income
summary. The correct sequencing of the entries is:
a. (4), (3), (2), (1)
b. (1), (2), (3), (4)
c. (3), (1), (4), (2)
d. (3), (2), (1), (4)
6. Which types of accounts will appear in the post-closing
trial balance?
a. Permanent (real) accounts.
b. Temporary (nominal) accounts.
c. Accounts shown in the income statement columns of
a work sheet.
d. None of the above.
7. All of the following are required steps in the accounting
cycle except:
a. journalizing and posting closing entries.
b. preparing financial statements.
c. journalizing the transactions.
d. preparing a work sheet.
8. Cash of $100 received at the time the service was pro-
vided was journalized and posted as a debit to Cash $100
and a credit to Accounts Receivable $100. Assuming the
incorrect entry is not reversed, the correcting entry is:
a. debit Service Revenue $100 and credit Accounts
Receivable $100.
b. debit Accounts Receivable $100 and credit Service
Revenue $100.
c. debit Cash $100 and credit Service Revenue $100.
d. debit Accounts Receivable $100 and credit Cash $100.
9. In a classified balance sheet, assets are usually classified
using the following categories:
a. current assets; long-term assets; property, plant, and
equipment; and intangible assets.
b. current assets; long-term investments; property, plant,
and equipment; and other assets.
c. current assets; long-term investments; tangible assets;
and intangible assets.
d. current assets; long-term investments; property, plant,
and equipment; and intangible assets.
10. Current assets are listed:
a. by liquidity.
b. by importance.
c. by longevity.
d. alphabetically.
*11. On December 31, Frank Voris Company correctly made
an adjusting entry to recognize $2,000 of accrued salaries
payable. On January 8 of the next year, total salaries of
$3,400 were paid. Assuming the correct reversing entry
was made on January 1, the entry on January 8 will result
in a credit to Cash $3,400 and the following debit(s):
a. Salaries Payable $1,400, and Salaries Expense $2,000.
b. Salaries Payable $2,000 and Salaries Expense $1,400.
c. Salaries Expense $3,400.
d. Salaries Payable $3,400.
Go to the book’s website,
www.wiley.com/college/weygandt,
for Additional Self-Study questions.
The Navigator✓
QUESTIONS
1. “A worksheet is a permanent accounting record and its
use is required in the accounting cycle.” Do you agree?
Explain.
2. Explain the purpose of the worksheet.
3. What is the relationship, if any, between the amount
shown in the adjusted trial balance column for an ac-
count and that account’s ledger balance?
4. If a company’s revenues are $125,000 and its expenses
are $113,000, in which financial statement columns of the
worksheet will the net income of $12,000 appear? When
expenses exceed revenues, in which columns will the dif-
ference appear?
5. Why is it necessary to prepare formal financial state-
ments if all of the data are in the statement columns of
the worksheet?
6. Identify the account(s) debited and credited in each of
the four closing entries, assuming the company has net
income for the year.
7. Describe the nature of the Income Summary account
and identify the types of summary data that may be
posted to this account.
8. What are the content and purpose of a post-closing trial
balance?
9. Which of the following accounts would not appear in the
post-closing trial balance? Interest Payable; Equipment;
Depreciation Expense; Dividends; Unearned Revenue;
Accumulated Depreciation—Equipment; and Service
Revenue.
10. Distinguish between a reversing entry and an adjusting
entry. Are reversing entries required?
11. Indicate, in the sequence in which they are made, the
three required steps in the accounting cycle that involve
journalizing.
12. Identify, in the sequence in which they are prepared, the
three trial balances that are often used to report financial
information about a company.
13. How do correcting entries differ from adjusting entries?
14. What standard classifications are used in preparing a
classified balance sheet?
15. What is meant by the term “operating cycle?”
16. Define current assets. What basis is used for arranging
individual items within the current assets section?
(SO 2)
(SO 2)
(SO 3)
(SO 4)
(SO 5)
(SO 6)
(SO 6)
(SO 7)
BE4-1 The steps in using a worksheet are presented in random order below. List the steps in
the proper order by placing numbers 1–5 in the blank spaces.
(a) _____ Prepare a trial balance on the worksheet.
(b) _____ Enter adjusted balances.
(c) _____ Extend adjusted balances to appropriate statement columns.
(d) _____ Total the statement columns, compute net income (loss), and complete the worksheet.
(e) _____ Enter adjustment data.
BE4-2 The ledger of Ley Company includes the following unadjusted balances: Prepaid
Insurance $3,000, Service Revenue $58,000, and Salaries Expense $25,000. Adjusting entries are
required for (a) expired insurance $1,200; (b) services provided $1,100, but unbilled and uncol-
lected; and (c) accrued salaries payable $800. Enter the unadjusted balances and adjustments
into a worksheet and complete the worksheet for all accounts. Note: You will need to add the fol-
lowing accounts: Accounts Receivable, Salaries Payable, and Insurance Expense.
BE4-3 The following selected accounts appear in the adjusted trial balance columns of the
worksheet for Batan Company: Accumulated Depreciation; Depreciation Expense; Common
Stock; Dividends; Service Revenue; Supplies; and Accounts Payable. Indicate the financial state-
ment column (income statement Dr., balance sheet Cr., etc.) to which each balance should be
extended.
BE4-4 The ledger of Swann Company contains the following balances: Retained Earnings
$30,000; Dividends $2,000; Service Revenue $50,000; Salaries Expense $27,000; and Supplies
Expense $4,000. Prepare the closing entries at December 31.
BE4-5 Using the data in BE4-4, enter the balances in T accounts, post the closing entries, and
rule and balance the accounts.
BE4-6 The income statement for Crestwood Golf Club for the month ending July 31 shows
Green Fee Revenue $13,600, Salaries Expense $8,200, Maintenance Expense $2,500, and Net
Income $2,900. Prepare the entries to close the revenue and expense accounts. Post the entries to
the revenue and expense accounts, and complete the closing process for these accounts using the
three-column form of account.
BE4-7 Using the data in BE4-3, identify the accounts that would be included in a post-closing
trial balance.
BE4-8 The steps in the accounting cycle are listed in random order below. List the steps in
proper sequence, assuming no worksheet is prepared, by placing numbers 1–9 in the blank
spaces.
(a) _____ Prepare a trial balance.
(b) _____ Journalize the transactions.
(c) _____ Journalize and post closing entries.
(d) _____
Prepare financial statements.
(e) _____ Journalize and post adjusting entries.
(f) _____ Post to ledger accounts.
(g) _____ Prepare a post-closing trial balance.
(h) _____ Prepare an adjusted trial balance.
(i) _____ Analyze business transactions.
Brief Exercises 175
17. Distinguish between long-term investments and prop-
erty, plant, and equipment.
18. (a) What is the term used to describe the owner’s equity
section of a corporation? (b) Identify the two owners’
equity accounts in a corporation and indicate the pur-
pose of each.
*19. Sanchez Company prepares reversing entries. If the ad-
justing entry for interest payable is reversed, what type of
an account balance, if any, will there be in Interest Payable
and Interest Expense after the reversing entry is posted?
*20. At December 31, accrued salaries payable totaled $3,500.
On January 10, total salaries of $8,000 are paid. (a) Assume
that reversing entries are made at January 1. Give the
January 10 entry, and indicate the Salaries Expense ac-
count balance after the entry is posted. (b) Repeat part
(a) assuming reversing entries are not made.
BRIEF EXERCISES
List the steps in preparing a
worksheet.
(SO 1)
Prepare partial worksheet.
(SO 1)
Identify worksheet columns for
selected accounts.
(SO 1)
Prepare closing entries from
ledger balances.
(SO 2)
Post closing entries; rule and
balance T accounts.
(SO 2)
Journalize and post closing
entries using the three-column
form of account.
(SO 2)
Identify post-closing trial
balance accounts.
(SO 3)
List the required steps in the
accounting cycle in sequence.
(SO 4)
BE4-9 At Batavia Company, the following errors were discovered after the transactions had
been journalized and posted. Prepare the correcting entries.
1. A collection on account from a customer for $780 was recorded as a debit to Cash $780 and a
credit to Service Revenue $780.
2. The purchase of store supplies on account for $1,570 was recorded as a debit to Store Supplies
$1,750 and a credit to Accounts Payable $1,750.
BE4-10 The balance sheet debit column of the worksheet for Diaz Company includes the fol-
lowing accounts: Accounts Receivable $12,500; Prepaid Insurance $3,600; Cash $15,400; Supplies
$5,200, and Short-term Investments $6,700. Prepare the current assets section of the balance
sheet, listing the accounts in proper sequence.
BE4-11 The following are the major balance sheet classifications:
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Stockholders’ equity (SE)
Intangible assets (IA)
Match each of the following accounts to its proper balance sheet classification.
_____ Accounts payable _____ Income tax payable
_____ Accounts receivable _____ Investment in long-term bonds
_____ Accumulated depreciation _____ Land
_____ Building _____ Merchandise inventory
_____ Cash _____ Patent
_____ Copyrights _____ Supplies
*BE4-12 At October 31, Nathan Company made an accrued expense adjusting entry of $1,400
for salaries. Prepare the reversing entry on November 1, and indicate the balances in Salaries
Payable and Salaries Expense after posting the reversing entry.
176 Chapter 4 Completing the Accounting Cycle
Prepare correcting entries.
(SO 5)
Prepare the current assets
section of a balance sheet.
(SO 6)
Classify accounts on balance
sheet.
(SO 6)
Prepare reversing entries.
(SO 7)
Complete the worksheet.
(SO 1)
EXERCISES
E4-1 The trial balance columns of the worksheet for Briscoe Company at June 30, 2008, are as
follows.
BRISCOE COMPANY
Worksheet
For the Month Ended June 30, 2008
Trial Balance
Account Titles Dr. Cr.
Cash $2,320
Accounts Receivable 2,440
Supplies 1,880
Accounts Payable $1,120
Unearned Revenue 240
Common Stock 3,600
Service Revenue 2,400
Salaries Expense 560
Miscellaneous Expense 160
$7,360 $7,360
Other data:
1. A physical count reveals $300 of supplies on hand.
2. $100 of the unearned revenue is still unearned at month-end.
3. Accrued salaries are $280.
Instructions
Enter the trial balance on a worksheet and complete the worksheet.
E4-2 The adjusted trial balance columns of the worksheet for Goode Company are as follows.
GOODE COMPANY
Worksheet (partial)
For the Month Ended
April 30, 2008
Adjusted Trial Income
Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 13,752
Accounts Receivable 7,840
Prepaid Rent 2,280
Equipment 23,050
Accumulated Depreciation 4,921
Notes Payable 5,700
Accounts Payable 5,672
Common Stock 25,000
Retained Earnings 5,960
Dividends 3,650
Service Revenue 15,590
Salaries Expense 10,840
Rent Expense 760
Depreciation Expense 671
Interest Expense 57
Interest Payable 57
Totals 62,900 62,900
Instructions
Complete the worksheet.
E4-3 Worksheet data for Goode Company are presented in E4-2. No common stock was is-
sued during April.
Instructions
Prepare an income statement, a retained earnings statement, and a classified balance sheet.
E4-4 Worksheet data for Goode Company are presented in E4-2.
Instructions
(a) Journalize the closing entries at April 30.
(b) Post the closing entries to Income Summary and Retained Earnings. Use T accounts.
(c) Prepare a post-closing trial balance at April 30.
E4-5 The adjustments columns of the worksheet for Mears Company are shown below.
Adjustments
Account Titles Debit Credit
Accounts Receivable 600
Prepaid Insurance 400
Accumulated Depreciation 900
Salaries Payable 500
Service Revenue 600
Salaries Expense 500
Insurance Expense 400
Depreciation Expense 900
2,400 2,400
Exercises 177
Complete the worksheet.
(SO 1)
Prepare financial statements
from worksheet.
(SO 1, 6)
Journalize and post closing
entries and prepare a post-
closing trial balance.
(SO 2, 3)
Prepare adjusting entries from
a worksheet, and extend balances
to worksheet columns.
(SO 1)
Instructions
(a) Prepare the adjusting entries.
(b) Assuming the adjusted trial balance amount for each account is normal, indicate the finan-
cial statement column to which each balance should be extended.
E4-6 Selected worksheet data for Nicholson Company are presented below.
178 Chapter 4 Completing the Accounting Cycle
Prepare closing entries, and
prepare a post-closing trial
balance.
(SO 2, 3)
Derive adjusting entries from
worksheet data.
(SO 1)
Journalize and post closing
entries, and prepare a post-
closing trial balance.
(SO 2, 3)
Adjusted
Account Titles Trial Balance Trial Balance
Dr. Cr. Dr. Cr.
Accounts Receivable ? 34,000
Prepaid Insurance 26,000 20,000
Supplies 7,000 ?
Accumulated Depreciation 12,000 ?
Salaries Payable ? 5,000
Service Revenue 88,000 97,000
Insurance Expense ?
Depreciation Expense 10,000
Supplies Expense 5,000
Salaries Expense ? 49,000
Instructions
(a) Fill in the missing amounts.
(b) Prepare the adjusting entries that were made.
E4-7 Emil Skoda Company had the following adjusted trial balance.
EMIL SKODA COMPANY
Adjusted Trial Balance
For the Month Ended June 30, 2008
Adjusted Trial Balance
Account Titles Debits Credits
Cash $3,712
Accounts Receivable 3,904
Supplies 480
Accounts Payable $1,792
Unearned Revenue 160
Common Stock 5,000
Retained Earnings 760
Dividends 300
Service Revenue 4,064
Salaries Expense 1,344
Miscellaneous Expense 256
Supplies Expense 2,228
Salaries Payable 448
$12,224 $12,224
Instructions
(a) Prepare closing entries at June 30, 2008.
(b) Prepare a post-closing trial balance.
E4-8 Apachi Company ended its fiscal year on July 31, 2008. The company’s adjusted trial
balance as of the end of its fiscal year is as shown at the top of page 179.
APACHI COMPANY
Adjusted Trial Balance
July 31, 2008
No. Account Titles Debits Credits
101 Cash $ 14,840
112 Accounts Receivable 8,780
157 Equipment 15,900
167 Accumulated Depreciation $ 7,400
201 Accounts Payable 4,220
208 Unearned Rent Revenue 1,800
311 Common Stock 20,000
320 Retained Earnings 25,200
332 Dividends 16,000
404 Commission Revenue 65,000
429 Rent Revenue 6,500
711 Depreciation Expense 4,000
720 Salaries Expense 55,700
732 Utilities Expense 14,900
$130,120 $130,120
Instructions
(a) Prepare the closing entries using page J15.
(b) Post to Retained Earnings and No. 350 Income Summary accounts. (Use the three-column
form.)
(c) Prepare a post-closing trial balance at July 31.
E4-9 The adjusted trial balance for Apachi Company is presented in E4-8.
Instructions
(a) Prepare an income statement and a retained earnings statement for the year. There were no
issuances of common stock during the year.
(b) Prepare a classified balance sheet at July 31.
E4-10 Josh Borke has prepared the following list of statements about the accounting cycle.
1. “Journalize the transactions” is the first step in the accounting cycle.
2. Reversing entries are a required step in the accounting cycle.
3. Correcting entries do not have to be part of the accounting cycle.
4. If a worksheet is prepared, some steps of the accounting cycle are incorporated into the
worksheet.
5. The accounting cycle begins with the analysis of business transactions and ends with the
preparation of a post-closing trial balance.
6. All steps of the accounting cycle occur daily during the accounting period.
7. The step of “post to the ledger accounts” occurs before the step of “journalize the
transactions.”
8. Closing entries must be prepared before financial statements can be prepared.
Instructions
Identify each statement as true of false. If false, indicate how to correct the statement.
E4-11 Selected accounts for Nina’s Salon are presented below. All June 30 postings are from
closing entries.
Exercises 179
Answer questions related to the
accounting cycle.
(SO 4)
Prepare closing entries.
(SO 2)
Prepare financial statements.
(SO 6)
Salaries Expense
6/10 3,200 6/30 8,800
6/28 5,600
Supplies Expense
6/12 600 6/30 1,300
6/24 700
Service Revenue
6/30 15,100 6/15 6,700
6/24 8,400
Rent Expense
6/1 3,000 6/30 3,000
Retained Earnings
6/30 2,500 6/1 12,000
6/30 2,000
Bal. 11,500
Dividends
6/13 1,000 6/30 2,500
6/25 1,500
Instructions
(a) Prepare the closing entries that were made.
(b) Post the closing entries to Income Summary.
E4-12 Max Weinberg Company discovered the following errors made in January 2008.
1. A payment of Salaries Expense of $600 was debited to Equipment and credited to Cash,
both for $600.
2. A collection of $1,000 from a client on account was debited to Cash $100 and credited to
Service Revenue $100.
3. The purchase of equipment on account for $980 was debited to Equipment $890 and
credited to Accounts Payable $890.
Instructions
(a) Correct the errors by reversing the incorrect entry and preparing the correct entry.
(b) Correct the errors without reversing the incorrect entry.
E4-13 Mason Company has an inexperienced accountant. During the first 2 weeks on the job,
the accountant made the following errors in journalizing transactions. All entries were posted as
made.
1. A payment on account of $630 to a creditor was debited to Accounts Payable $360 and cred-
ited to Cash $360.
2. The purchase of supplies on account for $560 was debited to Equipment $56 and credited to
Accounts Payable $56.
3. A $400 cash dividend was debited to Salaries Expense $400 and credited to Cash $400.
Instructions
Prepare the correcting entries.
E4-14 The adjusted trial balance for Karr Bowling Alley at December 31, 2008, contains the
following accounts.
180 Chapter 4 Completing the Accounting Cycle
Prepare correcting entries.
(SO 5)
Prepare correcting entries.
(SO 5)
Prepare a classified balance
sheet.
(SO 6)
Classify accounts on balance
sheet.
(SO 6)
Debits Credits
Building $128,800 Common Stock $100,000
Accounts Receivable 14,520 Retained Earnings 15,000
Prepaid Insurance 4,680 Accumulated Depreciation—Building 42,600
Cash 18,040 Accounts Payable 12,300
Equipment 62,400 Note Payable 97,780
Land 64,000 Accumulated Depreciation—Equipment 18,720
Insurance Expense 780 Interest Payable 2,600
Depreciation Expense 7,360 Bowling Revenues 14,180
Interest Expense 2,600
$303,180
$303,180
Instructions
(a) Prepare a classified balance sheet; assume that $13,900 of the note payable will be paid
in 2009.
(b) Comment on the liquidity of the company.
E4-15 The following are the major balance sheet classifications.
Current assets (CA) Current liabilities (CL)
Long-term investments (LTI) Long-term liabilities (LTL)
Property, plant, and equipment (PPE) Stockholders’ equity (SE)
Intangible assets (IA)
Instructions
Classify each of the following accounts taken from Roberts Company’s balance sheet.
______ Accounts payable ______ Accumulated depreciation
______ Accounts receivable ______ Buildings.
______ Cash ______ Land
______ Common Stock ______ Long-term debt
______ Patents ______ Supplies
______ Salaries payable ______ Office equipment
______ Inventories ______ Prepaid expenses
______ Investments
E4-16 The following items were taken from the financial statements of R. Stevens Company.
(All dollars are in thousands.)
Long-term debt $ 943 Accumulated depreciation $ 5,655
Prepaid expenses 880 Accounts payable 1,444
Property, plant, and equipment 11,500 Notes payable after 2009 368
Long-term investments 264 Common stock 10,000
Short-term investments 3,690 Retained earnings 3,063
Notes payable in 2009 481 Accounts receivable 1,696
Cash 2,668 Inventories 1,256
Instructions
Prepare a classified balance sheet in good form as of December 31, 2008.
E4-17 These financial statement items are for B. Snyder Company Inc. at year-end, July 31, 2008.
Salaries payable $ 2,080 Note payable (long-term) $ 1,800
Salaries expense 51,700 Cash 24,200
Utilities expense 22,600 Accounts receivable 9,780
Equipment 18,500 Accumulated depreciation 6,000
Accounts payable 4,100 Dividends 4,000
Commission revenue 61,100 Depreciation expense 4,000
Rent revenue 8,500 Retained earnings (beginning 21,200
Common stock 30,000 of the year)
Instructions
(a) Prepare an income statement and a retained earnings statement for the year.
(b) Prepare a classified balance sheet at July 31.
*E4-18 LaBamba Company pays salaries of $10,000 every Monday for the preceding 5-day
week (Monday through Friday). Assume December 31 falls on a Tuesday, so LaBamba’s em-
ployes have worked 2 days without being paid.
Instructions
(a) Assume the company does not use reversing entries. Prepare the December 31 adjusting en-
try and the entry on Monday, January 6, when LaBamba pays the payroll.
(b) Assume the company does use reversing entries. Prepare the December 31 adjusting entry,
the January 1 reversing entry, and the entry on Monday, January 6, when LaBamba pays the
payroll.
*E4-19 On December 31, the adjusted trial balance of Oslo Employment Agency shows the fol-
lowing selected data.
Accounts Receivable $24,000 Commission Revenue $92,000
Interest Expense 7,800 Interest Payable 1,500
Analysis shows that adjusting entries were made to (1) accrue $4,500 of commission revenue and
(2) accrue $1,500 interest expense.
Instructions
(a) Prepare the closing entries for the temporary accounts at December 31.
(b) Prepare the reversing entries on January 1.
(c) Post the entries in (a) and (b). Rule and balance the accounts. (Use T accounts.)
(d) Prepare the entries to record (1) the collection of the accrued commissions on January 10
and (2) the payment of all interest due ($2,500) on January 15.
(e) Post the entries in (d) to the temporary accounts.
Exercises 181
Prepare a classified balance
sheet.
(SO 6)
Prepare financial statements.
(SO 1, 6)
Use reversing entries.
(SO 7)
Prepare closing and reversing
entries.
(SO 2, 4, 7)
EXERCISES: SET B
182 Chapter 4 Completing the Accounting Cycle
Visit the book’s website at www.wiley.com/college/weygandt, and choose the Student
Companion site, to access Exercise Set B.
PROBLEMS: SET A
P4-1A Thomas Magnum began operations as a private investigator on January 1, 2008. The
trial balance columns of the worksheet for Thomas Magnum, P.I. at March 31 are as follows.
THOMAS MAGNUM, P.I., INC.
Worksheet
For the Quarter Ended March 31, 2008
Trial Balance
Account Titles Dr. Cr.
Cash 11,400
Accounts Receivable 5,620
Supplies 1,050
Prepaid Insurance 2,400
Equipment 30,000
Notes Payable 10,000
Accounts Payable 12,350
Common Stock 20,000
Dividends 600
Service Revenue 13,620
Salaries Expense 2,200
Travel Expense 1,300
Rent Expense 1,200
Miscellaneous Expense 200
55,970 55,970
Other data:
1. Supplies on hand total $380.
2. Depreciation is $1,000 per quarter.
3. Interest accrued on 6-month note payable, issued January 1, $300.
4. Insurance expires at the rate of $200 per month.
5. Services provided but unbilled at March 31 total $530.
Instructions
(a) Enter the trial balance on a worksheet and complete the worksheet.
(b) Prepare an income statement and a retained earnings statement for the quarter and a classi-
fied balance sheet at March 31. No additional common stock was issued during the quarter
ended March 31, 2008.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.
P4-2A The adjusted trial balance columns of the worksheet for Porter Company are as follows.
PORTER COMPANY
Worksheet
For the Year Ended
December 31, 2008
Adjusted
Account Trial Balance
No. Account Titles Dr. Cr.
101 Cash 18,800
112 Accounts Receivable 16,200
126 Supplies 2,300
Prepare worksheet, financial
statements, and adjusting and
closing entries.
(SO 1, 2, 6)
(a) Adjusted trial balance
$57,800
(b) Net income $6,680
Total assets $48,730
Complete worksheet; prepare
financial statements, closing
entries, and post-closing trial
balance.
(SO 1, 2, 3, 6)
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Instructions
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Prepare an income statement, a retained earnings statement, and a classified balance sheet.
$10,000 of the notes payable become due in 2009. No additional issuance of common stock
occurred during 2008.
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three-column form of account. Income Summary is account
No. 350.
(e) Prepare a post-closing trial balance.
P4-3A The completed financial statement columns of the worksheet for Woods Company, Inc.
are shown below.
Problems: Set A 183
Adjusted
Account Trial Balance
No. Account Titles Dr. Cr.
130 Prepaid Insurance 4,400
151 Office Equipment 44,000
152 Accumulated Depreciation—Office Equipment 20,000
200 Notes Payable 20,000
201 Accounts Payable 8,000
212 Salaries Payable 2,600
230 Interest Payable 1,000
311 Common Stock 30,000
320 Retained Earnings 6,000
332 Dividends 12,000
400 Service Revenue 77,800
610 Advertising Expense 12,000
631 Supplies Expense 3,700
711 Depreciation Expense 8,000
722 Insurance Expense 4,000
726 Salaries Expense 39,000
905 Interest Expense 1,000
Totals 165,400 165,400
WOODS COMPANY, INC.
Worksheet
For the Year Ended December 31, 2008
Account Income Statement Balance Sheet
No.
Account Titles Dr. Cr. Dr. Cr.
101 Cash 8,200
112 Accounts Receivable 7,500
130 Prepaid Insurance 1,800
157 Equipment 28,000
167 Accumulated Depreciation 8,600
201 Accounts Payable 11,700
212 Salaries Payable 3,000
311 Common Stock 20,000
320 Retained Earnings 14,000
332 Dividends 7,200
400 Service Revenue 44,000
622 Repair Expense 5,400
711 Depreciation Expense 2,800
722 Insurance Expense 1,200
726 Salaries Expense 35,200
732 Utilities Expense 4,000
Totals 48,600 44,000 52,700 57,300
Net Loss 4,600 4,600
48,600 48,600 57,300 57,300
(a) Net income $10,100
(b) Current assets $41,700
Current liabilities $21,600
(e) Post-closing trial balance
$85,700
Prepare financial statements,
closing entries, and post-closing
trial balance.
(SO 1, 2, 3, 6)
Instructions
(a) Prepare an income statement, a retained earnings statement, and a classified balance sheet.
No additional common stock was issued during 2008.
(b) Prepare the closing entries.
(c) Post the closing entries and rule and balance the accounts. Use T accounts. Income Summary
is account No. 350.
(d) Prepare a post-closing trial balance.
P4-4A Disney Amusement Park, Inc. has a fiscal year ending on September 30. Selected data
from the September 30 worksheet are presented below.
184 Chapter 4 Completing the Accounting Cycle
DISNEY AMUSEMENT PARK, INC.
Worksheet
For the Year Ended September 30, 2008
Adjusted
Trial Balance Trial Balance
Dr. Cr. Dr. Cr.
Cash 41,400 41,400
Supplies 18,600 1,200
Prepaid Insurance 31,900 8,900
Land 80,000 80,000
Equipment 120,000 120,000
Accumulated Depreciation 36,200 42,200
Accounts Payable 14,600 14,600
Unearned Admissions Revenue 3,700 2,000
Mortgage Note Payable 50,000 50,000
Common Stock 100,000 100,000
Retained Earnings 9,700 9,700
Dividends 14,000 14,000
Admissions Revenue 277,500 279,200
Salaries Expense 105,000 105,000
Repair Expense 30,500 30,500
Advertising Expense 9,400 9,400
Utilities Expense 16,900 16,900
Property Taxes Expense 18,000 21,000
Interest Expense 6,000 10,000
Totals 491,700 491,700
Insurance Expense 23,000
Supplies Expense 17,400
Interest Payable 4,000
Depreciation Expense 6,000
Property Taxes Payable 3,000
Totals 504,700 504,700
Instructions
(a) Prepare a complete worksheet.
(b) Prepare a classified balance sheet. (Note: $10,000 of the mortgage note payable is due for
payment in the next fiscal year.)
(c) Journalize the adjusting entries using the worksheet as a basis.
(d) Journalize the closing entries using the worksheet as a basis.
(e) Prepare a post-closing trial balance.
P4-5A Laura Eddy opened Eddy’s Carpet Cleaners Inc. on March 1. During March, the fol-
lowing transactions were completed.
Mar. 1 Issued stock for $10,000 in cash.
1 Purchased used truck for $6,000, paying $3,000 cash and the balance on account.
3 Purchased cleaning supplies for $1,200 on account.
5 Paid $1,200 cash on one-year insurance policy effective March 1.
(a) Net loss $4,600
Ending retained
earnings $2,200
Total assets $36,900
(d) Post-closing trial balance
$45,500
Complete worksheet; prepare
classified balance sheet, entries,
and post-closing trial balance.
(SO 1, 2, 3, 6)
(a) Net income $40,000
(b) Total current assets
$51,500
(e) Post-closing trial balance
$251,500
Complete all steps in account-
ing cycle.
(SO 1, 2, 3, 4, 6)
14 Billed customers $4,800 for cleaning services.
18 Paid $1,500 cash on amount owed on truck and $500 on amount owed on cleaning
supplies.
20 Paid $1,800 cash for employee salaries.
21 Collected $1,400 cash from customers billed on March 14.
28 Billed customers $2,500 for cleaning services.
31 Paid gas and oil for month on truck $200.
31 Declared and paid a $700 cash dividend.
The chart of accounts for Eddy’s Carpet Cleaners contains the following accounts: No. 101
Cash, No. 112 Accounts Receivable, No. 128 Cleaning Supplies, No. 130 Prepaid Insurance, No.
157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable,
No. 212 Salaries Payable, No. 311 Common Stock, No. 320 Retained Earnings, No. 332
Dividends, No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gas & Oil Expense,
No. 634 Cleaning Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance
Expense, and No. 726 Salaries Expense.
Instructions
(a) Journalize and post the March transactions. Use page J1 for the journal and the three-column
form of account.
(b) Prepare a trial balance at March 31 on a worksheet.
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Earned but unbilled revenue at March 31 was $700.
(2) Depreciation on equipment for the month was $250.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $400 of cleaning supplies on hand at March 31.
(5) Accrued but unpaid employee salaries were $500.
(d) Prepare the income statement and a retained earnings statement for March and a classified
balance sheet at March 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the
journal.
(g) Prepare a post-closing trial balance at March 31.
P4-6A Joe Edmonds, CPA, was retained by Clark Cable Inc. to prepare financial statements
for April 2008. Edmonds accumulated all the ledger balances per Clark’s records and found
the following.
Problems: Set A 185
(b) Trial balance $19,500
(c) Adjusted trial balance
$20,950
(d) Net income $4,350
Total assets $16,350
(g) Post-closing trial balance
$16,600
CLARK CABLE INC.
Trial Balance
April 30, 2008
Debit Credit
Cash $ 4,100
Accounts Receivable 3,200
Supplies 800
Equipment 10,600
Accumulated Depreciation $ 1,350
Accounts Payable 2,100
Salaries Payable 700
Unearned Revenue 890
Common Stock 10,000
Retained Earnings 2,900
Service Revenue 5,450
Salaries Expense 3,300
Advertising Expense 600
Miscellaneous Expense 290
Depreciation Expense 500
$23,390 $23,390
Analyze errors and prepare
correcting entries and trial
balance.
(SO 5)
Joe Edmonds reviewed the records and found the following errors.
1. Cash received from a customer on account was recorded as $960 instead of $690.
2. A payment of $65 for advertising expense was entered as a debit to Miscellaneous Expense
$65 and a credit to Cash $65.
3. The first salary payment this month was for $1,900, which included $700 of salaries payable
on March 31. The payment was recorded as a debit to Salaries Expense $1,900 and a credit
to Cash $1,900. (No reversing entries were made on April 1.)
4. The purchase on account of a printer costing $290 was recorded as a debit to Supplies and a
credit to Accounts Payable for $290.
5. A cash payment of repair expense on equipment for $95 was recorded as a debit to
Equipment $59 and a credit to Cash $59.
Instructions
(a) Prepare an analysis of each error showing (1) the incorrect entry, (2) the correct entry, and
(3) the correcting entry. Items 4 and 5 occurred on April 30, 2008.
(b) Prepare a correct trial balance.
186 Chapter 4 Completing the Accounting Cycle
Trial balance $22,690
PROBLEMS: SET B
P4-1B The trial balance columns of the worksheet for Everlast Roofing Inc. at March 31, 2008,
are as follows.
EVERLAST ROOFING INC.
Worksheet
For the Month Ended March 31, 2008
Trial Balance
Account Titles Dr. Cr.
Cash 2,500
Accounts Receivable 1,800
Roofing Supplies 1,100
Equipment 6,000
Accumulated Depreciation—Equipment 700
Accounts Payable 1,400
Unearned Revenue 300
Common Stock 7,000
Dividends 600
Service Revenue 3,500
Salaries Expense 700
Miscellaneous Expense 200
12,900 12,900
Other data:
1. A physical count reveals only $240 of roofing supplies on hand.
2. Depreciation for March is $200.
3. Unearned revenue amounted to $130 after adjustment on March 31.
4. Accrued salaries are $350.
Instructions
(a) Enter the trial balance on a worksheet and complete the worksheet.
(b) Prepare an income statement and a retained earnings statement for the month of March and
a classified balance sheet at March 31. Common stock of $7,000 was issued for cash at the
beginning of March.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.
Prepare a worksheet, financial
statements, and adjusting and
closing entries.
(SO 1, 2, 6)
(a) Adjusted trial balance
$13,450
(b) Net income $1,360
Total assets $9,640
P4-2B The adjusted trial balance columns of the worksheet for Sparks Company Inc. owned
by Billy Sparks, are as follows.
Problems: Set B 187
SPARKS COMPANY INC.
Worksheet
For the Year Ended December 31, 2008
Adjusted
Account Trial Balance
No. Account Titles Dr. Cr.
101 Cash 11,600
112 Accounts Receivable 15,400
126 Supplies 2,000
130 Prepaid Insurance 2,800
151 Office Equipment 34,000
152 Accumulated Depreciation—Office Equipment 8,000
200 Notes Payable 20,000
201 Accounts Payable 9,000
212 Salaries Payable 3,500
230 Interest Payable 800
311 Common Stock 15,000
320 Retained Earnings 10,000
332 Dividends 10,000
400 Service Revenue 85,000
610 Advertising Expense 12,000
631 Supplies Expense 5,700
711 Depreciation Expense 8,000
722 Insurance Expense 5,000
726 Salaries Expense 44,000
905 Interest Expense 800
Totals 151,300 151,300
Instructions
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Prepare an income statement, a retained earnings statement, and a classified balance sheet.
(Note: $10,000 of the notes payable become due in 2009.) No additional common stock was
issued during the year.
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three-column form of account. Income Summary is No. 350.
(e) Prepare a post-closing trial balance.
P4-3B The completed financial statement columns of the worksheet for Molinda Company
are shown below and on the next page.
MOLINDA COMPANY
Worksheet
For the Year Ended December 31, 2008
Account Income Statement Balance Sheet
No. Account Titles Dr. Cr. Dr. Cr.
101 Cash 22,400
112 Accounts Receivable 13,500
130 Prepaid Insurance 3,500
157 Equipment 26,000
167 Accumulated Depreciation 5,600
201 Accounts Payable 11,300
212 Salaries Payable 3,000
311 Common Stock 20,000
320 Retained Earnings 16,000
332 Dividends 14,000
400 Service Revenue 69,000
622 Repair Expense 2,000
Complete worksheet; prepare
financial statements, closing
entries, and post-closing trial
balance.
(SO 1, 2, 3, 6)
(a) Net income $9,500
(b) Current assets $31,800;
Current liabilities $23,300
(e) Post-closing trial balance
$65,800
Prepare financial statements,
closing entries, and post-closing
trial balance.
(SO 1, 2, 3, 6)
Instructions
(a) Prepare an income statement, a retained earnings statement, and a classified balance sheet.
(b) Prepare the closing entries. No additional issuance of common stock occurred during the year.
(c) Post the closing entries and rule and balance the accounts. Use T accounts. Income Summary
is account No. 350.
(d) Prepare a post-closing trial balance.
P4-4B Pettengill Management Services Inc. began business on January 1, 2008, with an invest-
ment of $100,000. The company manages condominiums for owners (Service Revenue) and rents
space in its own office building (Rent Revenue). The trial balance and adjusted trial balance
columns of the worksheet at the end of the first year are as follows.
188 Chapter 4 Completing the Accounting Cycle
Account Income Statement Balance Sheet
No. Account Titles Dr. Cr. Dr. Cr.
711 Depreciation Expense 2,600
722 Insurance Expense 2,200
726 Salaries Expense 37,000
732 Utilities Expense 1,700
Totals 45,500 69,000 79,400 55,900
Net Income 23,500 23,500
69,000 69,000 79,400 79,400
PETTENGILL MANAGEMENT SERVICES INC.
Worksheet
For the Year Ended December 31, 2008
Adjusted
Trial Balance Trial Balance
Account Titles Dr. Cr. Dr. Cr.
Cash 11,500 11,500
Accounts Receivable 23,600 23,600
Prepaid Insurance 3,100 1,400
Land 56,000 56,000
Building 106,000 106,000
Equipment 49,000 49,000
Accounts Payable 10,400 10,400
Unearned Rent Revenue 5,000 2,800
Mortgage Note Payable 100,000 100,000
Common Stock 100,000 100,000
Retained Earnings 20,000 20,000
Dividends 18,000 18,000
Service Revenue 75,600 75,600
Rent Revenue 24,000 26,200
Salaries Expense 35,000 35,000
Advertising Expense 17,000 17,000
Utilities Expense 15,800 15,800
Totals 335,000 335,000
Insurance Expense 1,700
Depreciation Expense—Building 2,500
Accumulated Depreciation—Building 2,500
Depreciation Expense—Equipment 3,900
Accumulated Depreciation—Equipment 3,900
Interest Expense 9,000
Interest Payable 9,000
Totals 350,400 350,400
(a) Ending retained earnings
$25,500; Total current
assets $39,400
(d) Post-closing trial balance
$65,400
Complete worksheet; prepare
classified balance sheet, entries,
and post-closing trial balance.
(SO 1, 2, 3, 6)
(a) Net income $16,900
(b) Total current assets
$36,500
Instructions
(a) Prepare a complete worksheet.
(b) Prepare a classified balance sheet. (Note: $10,000 of the mortgage note payable is due for
payment next year.)
(c) Journalize the adjusting entries.
(d) Journalize the closing entries.
(e) Prepare a post-closing trial balance.
P4-5B Lee Choi opened Choi’s Window Washing, Inc. on July 1, 2008. During July the follow-
ing transactions were completed.
July 1 Issued $12,000 of common stock for $12,000 cash.
1 Purchased used truck for $6,000, paying $3,000 cash and the balance on account.
3 Purchased cleaning supplies for $1,300 on account.
5 Paid $2,400 cash on one-year insurance policy effective July 1.
12 Billed customers $2,500 for cleaning services.
18 Paid $1,000 cash on amount owed on truck and $800 on amount owed on cleaning
supplies.
20 Paid $1,200 cash for employee salaries.
21 Collected $1,400 cash from customers billed on July 12.
25 Billed customers $5,000 for cleaning services.
31 Paid gas and oil for month on truck $200.
31 Declared and paid $900 cash dividend.
The chart of accounts for Choi’s Window Washing contains the following accounts: No. 101 Cash,
No. 112 Accounts Receivable, No. 128 Cleaning Supplies, No. 130 Prepaid Insurance, No. 157
Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212
Salaries Payable, No. 311 Common Stock, No. 320 Retained Earnings, No. 332 Dividends, No. 350
Income Summary, No. 400 Service Revenue, No. 633 Gas & Oil Expense, No. 634 Cleaning Supplies
Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal and the three-column
form of account.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Services provided but unbilled and uncollected at July 31 were $1,500.
(2) Depreciation on equipment for the month was $300.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $400 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $600.
(d) Prepare the income statement and a retained earnings statement for July and a classified bal-
ance sheet at July 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the
journal.
(g) Prepare a post-closing trial balance at July 31.
Comprehensive Problem: Chapters 2 to 4 189
PROBLEMS: SET C
Visit the book’s website at www.wiley.com/college/weygandt, and choose the Student
Companion site, to access Problem Set C.
(e) Post-closing trial balance
$247,500
Complete all steps in account-
ing cycle.
(SO 1, 2, 3, 4, 6)
(b) Trial balance $22,000
(c) Adjusted trial balance
$24,400
(d) Net income $5,600;
Total assets $19,800
(g) Post-closing trial balance
$20,100
COMPREHENSIVE PROBLEM: CHAPTERS 2 TO 4
Julie Molony opened Julie’s Maids Cleaning Service Inc. on July 1, 2008. During July, the com-
pany completed the following transactions.
July 1 Issued $14,000 of common stock for $14,000 cash.
1 Purchased a used truck for $10,000, paying $3,000 cash and the balance on account.
3 Purchased cleaning supplies for $800 on account.
5 Paid $1,800 on a one-year insurance policy, effective July 1.
12 Billed customers $3,800 for cleaning services.
18 Paid $1,000 of amount owed on truck, and $400 of amount owed on cleaning supplies.
20 Paid $1,600 for employee salaries.
21 Collected $1,400 from customers billed on July 12.
25 Billed customers $1,500 for cleaning services.
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Financial Reporting Problem
PepsiCo, Inc.
BYP4-1 Appendix A at the end of this textbook presents the financial statements of PepsiCo.
Instructions
Answer the following questions using the Consolidated Balance Sheet and the Notes to Con-
solidated Financial Statements section.
(a) What were PepsiCo’s total current assets at December 31, 2005 and December 25, 2004?
(b) Are assets that PepsiCo included under current assets listed in proper order? Explain.
(c) How are PepsiCo’s assets classified?
B R O A D E N I N G Y O U R P E R S P E C T I V E
FINANCIAL REPORTING AND ANALYSIS
190 Chapter 4 Completing the Accounting Cycle
CONTINUING COOKIE CHRONICLE
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 3.)
CCC4 Natalie had a very busy December. At the end of the month after journalizing and post-
ing the December transactions and adjusting entries, Natalie prepared an adjusted trial balance.
Using that information, she wants to prepare financial statements for the year-end, closing entries,
and a post-closing trial balance.
31 Paid gas and oil for the month on the truck, $400.
31 Paid a $600 cash dividend.
The chart of accounts for Julie’s Maids Cleaning Service contains the following accounts: No. 101
Cash, No. 112 Accounts Receivable, No. 128 Cleaning Supplies, No. 130 Prepaid Insurance, No.
157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable,
No. 212 Salaries Payable, No. 311 Common Stock, No. 320 Retained Earnings, No. 332 Dividends,
No. 350 Income Summary, No. 400 Service Revenue, No. 633 Gas & Oil Expense, No. 634
Cleaning Supplies Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and
No. 726 Salaries Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet, and complete the worksheet.
(1) Earned but unbilled fees at July 31 were $1,300.
(2) Depreciation on equipment for the month was $200.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $100 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $500.
(d) Prepare the income statement and a retained earnings statement for July, and a classified
balance sheet at July 31, 2008.
(e) Journalize and post the adjusting entries. Use page J2 for the journal.
(f ) Journalize and post the closing entries, and complete the closing process. Use page J3 for the
journal.
(g) Prepare a post-closing trial balance at July 31.
(b) Trial balance totals
$25,700
(d) Net income $3,050
Total assets $23,350
(g) Trial balance totals
$23,550
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www.wiley.com/college/weygandt,
to see the completion of this problem.
Broadening Your Perspective 191
CRITICAL THINKING
Decision Making Across the Organization
BYP4-4 Whitegloves Janitorial Service Inc. was started 2 years ago by Nancy Kohl. Because
business has been exceptionally good, Nancy decided on July 1, 2008, to expand operations by
acquiring an additional truck and hiring two more assistants. To finance the expansion, Nancy
obtained on July 1, 2008, a $25,000, 10% bank loan, payable $10,000 on July 1, 2009, and the
balance on July 1, 2010. The terms of the loan require the borrower to have $10,000 more cur-
rent assets than current liabilities at December 31, 2008. If these terms are not met, the bank
loan will be refinanced at 15% interest. At December 31, 2008, the accountant for Whitegloves
Janitorial Service Inc. prepared the balance sheet shown on page 192.
Nancy presented the balance sheet to the bank’s loan officer on January 2, 2009, con-
fident that the company had met the terms of the loan. The loan officer was not impressed.
She said, “We need financial statements audited by a CPA.” A CPA was hired and imme-
diately realized that the balance sheet had been prepared from a trial balance and not from
an adjusted trial balance. The adjustment data at the balance sheet date consisted of the
following.
(1) Earned but unbilled janitorial services were $3,700.
(2) Janitorial supplies on hand were $2,500.
(3) Prepaid insurance was a 3-year policy dated January 1, 2008.
(4) December expenses incurred but unpaid at December 31, $500.
(5) Interest on the bank loan was not recorded.
(6) The amounts for property, plant, and equipment presented in the balance sheet were re-
ported net of accumulated depreciation (cost less accumulated depreciation). These
amounts were $4,000 for cleaning equipment and $5,000 for delivery trucks as of January 1,
2008. Depreciation for 2008 was $2,000 for cleaning equipment and $5,000 for delivery
trucks.
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(d) What are “cash equivalents”?
(e) What were PepsiCo ’s total current liabilities at December 31, 2005 and December 25, 2004?
Comparative Analysis Problem
PepsiCo, Inc. vs. The Coca-Cola Company
BYP4-2 Appendix A presents PepsiCo’s financial statements. Appendix B presents Coca-
Cola’s financial statements.
Instructions
(a) Based on the information contained in these financial statements, determine each of the fol-
lowing for PepsiCo at December 31, 2005, and for Coca-Cola at December 31, 2005.
(1) Total current assets.
(2) Net amount of property, plant, and equipment (land, buildings, and equipment).
(3) Total current liabilities.
(4) Total stockholders’ (shareholders’) equity.
(b) What conclusions concerning the companies’ respective financial positions can be drawn?
Exploring the Web
BYP4-3 Numerous companies have established home pages on the Internet, e.g., Capt’n Eli
Root Beer Company (www.captneli.com/rootbeer.php) and Kodak (www.kodak.com).
Instructions
Examine the home pages of any two companies and answer the following questions.
(a) What type of information is available?
(b) Is any accounting-related information presented?
(c) Would you describe the home page as informative, promotional, or both? Why?
192 Chapter 4 Completing the Accounting Cycle
WHITEGLOVES JANITORIAL SERVICE INC.
Balance Sheet
December 31, 2008
Assets
Current assets
Cash $ 6,500
Accounts receivable 9,000
Janitorial supplies 5,200
Prepaid insurance 4,800
Total current assets 25,500
Property, plant, and equipment
Cleaning equipment (net) 22,000
Delivery trucks (net) 34,000
Total property, plant, and equipment 56,000
Total assets $81,500
Liabilities and Owner’s Equity
Current liabilities
Notes payable $10,000
Accounts payable 2,500
Total current liabilities 12,500
Long-term liability
Notes payable 15,000
Total liabilities 27,500
Stockholders’ equity
Common stock 40,000
Retained earnings 14,000
Total stockholders’ equity 54,000
Total liabilities and stockholders’ equity $81,500
Instructions
With the class divided into groups, answer the following.
(a) Prepare a correct balance sheet.
(b) Were the terms of the bank loan met? Explain.
Communication Activity
BYP4-5 The accounting cycle is important in understanding the accounting process.
Instructions
Write a memo to your instructor that lists the steps of the accounting cycle in the order they
should be completed. End with a paragraph that explains the optional steps in the cycle.
Ethics Case
BYP4-6 As the controller of Breathless Perfume Company, you discover a misstatement that
overstated net income in the prior year’s financial statements. The misleading financial state-
ments appear in the company’s annual report which was issued to banks and other creditors
less than a month ago. After much thought about the consequences of telling the president,
Jerry McNabb, about this misstatement, you gather your courage to inform him. Jerry says, “Hey!
What they don’t know won’t hurt them. But, just so we set the record straight, we’ll adjust this
year’s financial statements for last year’s misstatement. We can absorb that misstatement bet-
ter in this year than in last year anyway! Just don’t make such a mistake again.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this situation?
(c) What would you do as a controller in this situation?
”All About You” Activity
BYP4-7 Companies prepare balance sheets in order to know their financial position at a
specific point in time. This enables them to make a comparison to their position at previous
points in time, and gives them a basis for planning for the future. As discussed in the “All About
You” feature in this chapter, in order to evaluate your financial position you need to prepare
a personal balance sheet. Assume that you have compiled the following information regard-
ing your finances. (Hint: Some of the items might not be used in your personal balance sheet.)
Amount owed on student loan balance (long-term) $ 5,000
Balance in checking account 1,200
Certificate of deposit (6-month) 3,000
Annual earnings from part-time job 11,300
Automobile 7,000
Balance on automobile loan (current portion) 1,500
Balance on automobile loan (long-term portion) 4,000
Home computer 800
Amount owed to you by younger brother 300
Balance in money market account 1,800
Annual tuition 6,400
Video and stereo equipment 1,250
Balance owed on credit card (current portion) 150
Balance owed on credit card (long-term portion) 1,650
Instructions
Prepare a personal balance sheet using the format you have learned for a classified balance
sheet for a company. For the owner’s equity account, use M. Y. Own, Capital.
Answers to Insight and Accounting Across the
Organization Questions
Cisco Performs the Virtual Close, p. 155
Q: Who else benefits from a shorter closing process?
A: Investors and creditors benefit from a shorter closing process. The shorter the closing, the
sooner the company can report its financial results. This means that the financial information is
more timely, and therefore more relevant to investors and creditors.
Yale Express Loses Some Transportation Bills, p. 160
Q: What might Yale Express’s vice president have done to produce more accurate financial
statements without waiting months for Republic’s outstanding transportation bills?
A: Yale’s vice president could have engaged his accountants and auditors to prepare an adjusting
entry based on an estimate of the outstanding transportation bills. (The estimate could have
been made using past experience and the current volume of business.)
Big Changes Are Coming to Chinese Balance Sheets, p. 165
Q: What are the potential benefits and challenges presented by reporting assets like plant and
equipment at market value rather than historical cost?
A: Reporting assets at market value will provide investors with more relevant information. Most
investors are more interested in what an asset is currently worth than in what it originally cost.
However, determining the market value of some assets can be very subjective. Some companies
may take advantage of this in order to obtain more desirable accounting results.
Authors’ Comments on All About You: Your Personal
Balance Sheet, p. 167
By deciding to go to school after high school, you have taken a big step toward improving your
long-term personal finances. Post-high-school education increases your job opportunities, which
increases your earning potential.
Although it is true that your earnings will probably increase considerably when you gradu-
ate, you should not wait until graduation to lay the groundwork for a sound financial plan. If you
do not monitor your finances closely while you are in school, you could easily dig a deep hole that
would be difficult to get out of. Controlling your spending now will give you better control of your
personal finances by the time you graduate. A first step toward taking control of your finances is
preparing a personal balance sheet. In later chapters we discuss topics that will give you the tools
that you need to improve your financial position.
Software is available to help you identify your assets and liabilities and determine your
net worth. See for example the net worth calculator at http://www.bygpub.com/finance/
NetWorthCalc.htm.
Answers to PepsiCo Review It Question 2, p. 168
PepsiCo’s current liabilities in 2005 were $9,406 million. Current liabilities in 2004 were $6,752
million. In both 2005 and 2004, current liabilities were less than current assets.
Answers to Self-Study Questions
1. b 2. c 3. a 4. b 5. c 6. a 7. d 8. b 9. d 10. a 11. c
Broadening Your Perspective 193
Remember to go back to the Navigator box on the chapter-opening page and check off your completed work.✓
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