Chapter 13 - Financial Statements and Closing Procedures
Chapter 13 • Financial Statements and Closing Procedures
TEACHING OBJECTIVES
13-1)
13-2)
13-3)
13-4)
13-5)
13-6)
13-7)
13-8)
Prepare a classified income statement from the worksheet.
Prepare a statement of owner’s equity from the worksheet.
Prepare a classified balance sheet from the workbook.
Journalize and post the adjusting entries.
Journalize and post the closing entries.
Prepare a postclosing trial balance.
Journalize and post reversing entries.
Define the accounting terms new to the chapter.
SECTIONS
1.
2.
Preparing the Financial Statements
Completing the Accounting Cycle
______________________________________________________________________
CHAPTER OVERVIEW/ LEARNING OBJECTIVES
Learning Link: Chapter 12 discussed accrual accounting and completion of a worksheet
for a merchandising business. Chapter 13 explains how to use worksheets to prepare and
record adjusting and closing entries, to prepare a post-closing trial balance, and to prepare
financial statements.
13-1)
This chapter explains how to prepare a classified income statement. A classified
income statement for a merchandising business usually includes these sections:
Operating Revenue, Cost of Goods Sold, Gross Profit on Sales, Operating Expenses, and
Net Income.
13-2)
The chapter explains that a statement of owner’s equity is prepared to provide
detailed information about the changes in the owner’s financial interest during the period.
The ending owner’s capital balance is used to prepare the balance sheet.
13-3)
In preparing a Classified Balance Sheet from the worksheet:
Assets are usually presented in two groups—current assets, and plant and equipment.
Current assets consist of cash, items to be converted into cash within one year, and
items to be used up within one year. Plant and equipment consists of property that
will be used for a long time in the operations of the business.
Liabilities are also divided into two groups—current liabilities and long-term
liabilities. Current liabilities will normally be paid within one year. Long-term
liabilities are due in more than one year.
13-1
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Chapter 13 - Financial Statements and Closing Procedures
13-5) When the year-end worksheet and financial statements have been completed, adjusting
entries are recorded in the general journal and posted to the general ledger. The data comes
from the worksheet ADJUSTMENTS columns.
13-5) The chapter describes the journalizing and posting of the closing entries. The data in the
INCOME STATEMENT section of the worksheet can be used to journalize the closing
entries.
13-5) To confirm that the general ledger is still in balance after the adjusting and closing entries
have been posted, a postclosing trial balance is prepared.
13-6) Lastly, the chapter introduces reversing entries. At the start of each new period, many
firms follow the practice of reversing certain adjustments that were made in the previous
period. This is an optional procedure but with reversing entries there is no need to examine
each transaction to see whether a portion applies to the past period and then divide the
amount of the transaction between the two periods.
13-2
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POWER POINT
Section
Lecture/ Discussion
At the beginning of the chapter, there is a short
paragraph about Whole Foods Market. Let’s read this
together…
Ask… “If you owned stock in Whole Foods
Market, what type of financial information would be
most important to you?”
Answer-- Students should realize information such as
stock prices, dividend earnings, net income, gross
profit, net sales, and changes in stockholders’ equity
are all indicators of the financial strength of a company.
• FAST FACTS: Founded in 1980 in Austin, TX,
Whole Foods Market is the world’s leading retailer of
natural and organic foods.
• In early 2007, Whole Foods Market entered into a
merger agreement with Wild Oats, a competitor.
• Total sales for the year 2012 were approximately
$12 billion
• The company operates 340 stores in the United
States, Canada, and the United Kingdom.
13-3
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POWER POINT
Section
Lecture/ Discussion
Section 1. PREPARING THE
FINANCIAL STATEMENTS
Chapter
13
Financial Statements
and Closing Procedures
Section 1: Preparing
the Financial Statements
Section Objectives
13-1 Prepare a classified income statement
from the worksheet.
Ask, “If you were looking for a job, in what
part of the newspaper would you look?”
13-2 Prepare a statement of owner’s equity
from the worksheet.
13-3 Prepare a classified balance sheet from
the worksheet.
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“How about if you were looking for a used
car; in what part of the newspaper would you
look?”
• Point out that the newspaper’s classified
section is similar to a business’s classified
financial statements.
• All of the accounts are classified into certain
sections and so would appear in only those
sections of the Classified Income Statement,
Classified Balance Sheet or Statement of
Owner’s Equity.
Objective 13-1 Prepare a classified income
statement from the worksheet.
The Classified Income Statement

A classified income statement is sometimes
called a multiple-step income statement. Items
are divided into groups of similar accounts.
 There are subtotals within groups.
 The classification and order of information
depends on the type of business and the
expected use of the statement.
13-3
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QUESTION:
What is a single-step income statement?
ANSWER:
A single-step income statement is a
format in which only one computation
is needed to determine the net income.
(Total Revenue – Total Expenses = Net Income)
13-4
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Objective 1
A. The Classified Income Statement
• Point out that classifying like information
together on financial statements makes them
easier to interpret.
• Explain that classification and order of
information depends on the type of business
and the expected use of the statement
• Direct students’ attention to Figure 13-1. Trace
the major sections of the income statement:
I. Operating Revenue
(sales section)
13-4
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POWER POINT
Section
Lecture/ Discussion
II. Cost of Goods Sold
section
III. Operating Expenses
section
IV. Other Income and
Other Expense
section
Operating Revenue
Net sales for Whiteside Antiques
13-5
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Cost of Goods Sold
The Cost of Goods Sold section contains information
about the cost of the merchandise that was sold during
the period.
Three elements are needed to compute the cost of
goods sold:



Beginning inventory
Net delivered cost of purchases
Ending inventory
13-6
Purchases
Freight In
(Purchases Returns and Allowances)
(Purchases Discounts)
Net Delivered Cost of Purchases
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Total Merchandise Available for Sale
Beginning Merchandise Inventory
+ Net Delivered Cost of Purchases
Total Merchandise Available for Sale
13-8
• A single step income statement, is where
total revenues - total expenses = net income.
(i.e. only one subtraction.)
♦ Operating Revenue
• Explain that the first section of a classified
income statement contains the operating
revenue or normal revenue of a business.
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Net Delivered Cost of Purchases
13-7
• Point out that a classified income statement
is sometimes called a multiple-step income
statement because it has multiple
subtractions.
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Ask, “What would be the normal revenue
of a merchandiser? Of a bakery? How about
an attorney?”
Refer to Figure13-1
• Point out that because Whiteside Antiques is
a retailer, its operating revenue section
would contain:
Sales
(Sales Returns and Allowances)
(Sales Discounts)
Net Sales
13-5
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POWER POINT
Section
Lecture/ Discussion
♦ Cost of Goods Sold
Cost of Goods Sold
Beginning Merchandise Inventory
Plus Net Delivered Cost of Purchases
• Refer to Figure 13-1 and review this section.
Cost of Goods Available for Sale
Less Ending Inventory
Cost of Goods Sold
13-9
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Merchandise Inventory Account

Merchandise Inventory is the one account that appears on both
the income statement and the balance sheet.

Beginning and ending merchandise inventory balances appear on
the income statement.

Ending merchandise inventory also appears on the balance sheet
in the Assets section.
13-10
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Cost of Goods Sold
Merchandise available for sale
Cost of goods sold
13-11
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• Indicate that the Cost of Goods Sold section
contains information about the cost of the
merchandise that was sold during the
period.
♦ Gross Profit on Sales
• Explain that the gross profit on sales is the
difference between the net sales and the
cost of goods sold.
• Point out that gross profit is what is left to
cover operating expenses and provide a
profit.
Gross Profit on Sales

For Whiteside Antiques, net sales is the revenue earned from
selling antique items.

Cost of goods sold is what Whiteside Antiques paid for the
antiques that were sold during the fiscal period.

Gross profit is what is left to cover operating expenses and
provide a profit.

Gross profit is the difference between the net sales and the cost
of goods sold.
13-12
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Gross profit on sales for Whiteside Antiques
13-13
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Operating Expenses
♦ Operating Expenses
• Refer to Figure 13-1 and review this section.
• Point out that operating expenses are
expenses that arise from normal business
activities.
• Explain that they are separated into two
categories: (1) Selling Expenses & (2)
General and Administrative Expenses.
♦ Net Income or Net Loss from
Operations
Salaries for salespersons and advertising are examples of selling expenses
13-14
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• Point out that keeping operating and nonoperating income separate helps financial
statement users learn about the operating
efficiency of the firm:
13-6
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POWER POINT
Operating Expenses
Rent, utilities, and salaries for office employees are examples of general and administrative expenses
13-15
Lecture/ Discussion
Gross Profit on Sales
- Total Operating Expenses
= Net Income (or Net Loss) from Operations
♦ Other Income and Other Expenses
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Other Income and Other Expenses
13-17
Section
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• Explain that income that is earned from
sources unrelated to the normal business
activity is classified as “other income” and
would appear in the Other Income section.
• Point out that expenses which are incurred
but not directly connected with business
operations appear in the Other Expenses
section. (ex. Interest expense.)
♦ Net Income or Net Loss
Net income from operations
13-18
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Ask, “Can anyone tell me the definition
of Net income? How about Net Loss?”
Objective 2
Objective 13-2 Prepare a statement of owner’s
equity from the worksheet.

The statement of owner's equity reports the changes that
occurred in the owner's financial interest during the period.

The ending capital balance for Bill Whiteside, $84,576.80, is
used to prepare the balance sheet.
B. The Statement of Owner’s
Equity
• Emphasize that the Statement of Owner’s
13-19
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Equity reflects changes that have occurred in
the owner’s financial interest during the
reporting period.
• Refer students to Figure 13-2, Statement of
Owner’s Equity
13-7
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POWER POINT
Section
Lecture/ Discussion
Ask, “Can anyone explain to me in plain
language what the Statement of Owner’s Equity
reports?”
• Emphasize that many students fail to notice
that the first line of the statement is dated with
the first day of the period and the last line is
dated as of the last day of the period.
Objective 3
Objective 13-3
Prepare a classified balance
sheet from the worksheet
QUESTION:
What are current assets?
ANSWER:
Current assets are assets consisting
of cash, items that normally will be
converted into cash within one year,
and items that will be used up within
one year.
13-20
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Current Assets
Current assets for Whiteside Antiques
13-21
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C. The Classified Balance Sheet
• Point out that a Classified Balance Sheet is
very similar to the Balance Sheets they have
already prepared in the past except the assets
and liabilities are classified into separate
categories.
♦ Current Assets
• Explain that current assets consist of cash,
items that will normally be converted into
cash within one year, and items that will be
used within one year. (Cash, accounts
receivables, merchandise inventory, etc.)
• Point out that current assets are usually
listed in the order of liquidity.
• Emphasize that current assets are vital to
the survival of a business because they
provide the funds needed to pay bills and
meet expenses.
13-8
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POWER POINT
Section
Lecture/ Discussion
♦ Plant and Equipment
• Explain that plant and equipment is property
that will be used over a long period of time to
conduct business operations.
Plant and Equipment

Noncurrent assets are called long-term assets.

An important category of long-term assets is plant and equipment.

For many businesses plant and equipment represents a sizable
investment.
13-22
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• They are non-current (long-term) assets
because they have a life greater than one
year.
• Point out that any accumulated depreciation
accounts are shown below their respective
accounts.
Ask, “Can anyone tell me what the
second number to the right of the accumulated
depreciation accounts represent?” (book
value of the asset)
♦ Current Liabilities
Current Liabilities
Whiteside Antiques
Partial Balance Sheet
December 31, 2016
Assets
Prepaid Interest
Total Current Assets
Total Plant and Equipment
Total Assets
75.00
Total current liabilities
Liabilities and Owner’s Equity
Current Liabilities
Notes Payable-Trade
Notes Payable-Bank
Accounts Payable
Interest Payable
Social Security Tax Payable
Medicare Tax Payable
Employee Income Tax Payable
Fed. Unemployment Tax Pay.
State Unemployment Tax Pay.
Salaries Payable
Sales Tax Payable
Total Current Liabilities
6,300.00
98,716.00
31,900.00
130,616.00
2,000.00
9,000.00
24,129.00
20.00
1,158.40
267.40
990.00
9.60
64.80
1,200.00
7,200.00
46,039.20
13-23
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Long-Term Liabilities

Although repayment of long-term liabilities might not be due
for several years, management must make sure that periodic
interest is paid promptly.

Long-term liabilities include mortgages, notes payable, and
loans payable.
13-24
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• Point out that liabilities are classified in only
two categories.
• Those debts which must be paid off within
one year are current liabilities.
♦ Long-Term Liabilities
• Debts that are not due to be paid within a
year are classified as long-term liabilities.
♦ Owner’s Equity
•
The ending balance from the Statement of
Owner’s Equity is transferred to the Owner’s
Equity section of the Balance Sheet.
13-9
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POWER POINT
Section
Chapter
13
Financial Statements
and Closing Procedures
Lecture/ Discussion
Section 2. COMPLETING THE
ACCOUNTING CYCLE
• Remind students that the complete accounting
cycle for a business was covered in chapter 6.
Section 2: Completing the
Accounting Cycle
Section Objectives
13-4 Journalize and post the adjusting entries.
13-5 Journalize and post the closing entries.
13-6 Prepare a postclosing trial balance.
13-7 Journalize and post reversing entries.
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Journalize and post the
adjusting entries
Objective 13-4
 All
adjustments are shown on the worksheet.
 After
the financial statements have been prepared,
the adjustments are made a permanent part of the
accounting records.
 They
are recorded in the general journal as
adjusting journal entries and are posted to the
general ledger.
13-27
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Adjusting Entries
Type of
Adjustment
Worksheet
Reference
Purpose
Inventory
(a – b)
Removes beginning inventory and adds ending
inventory to the accounting records.
Expense
(c – e)
Matches expense to revenue for the period; the
credit is to a contra asset account.
Accrued Expense
(f – i)
Matches expense to revenue for the period; the
credit is to a liability account.
Prepaid Expense
(j –l)
Matches expense to revenue for the period; the
credit is to an asset account.
Accrued Interest
(m)
Recognizes interest earned in the period. The
debit is to an asset account, (interest
receivable) and the credit is to a revenue
account.
13-28
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•
Point out that the accounting cycle is reviewed
again in this chapter except we are working
with a retailer instead of a service business.
Objective 4
A. Journalizing and Posting the
Adjusting Entries
• Remind students that all of the adjustments
listed on the worksheet still need to be
journalized in the general journal and posted to
the general ledger accounts.
♦ Journalizing the Adjusting Entries
• Tell students to refer to Figure 13-4 to see
the adjusting journal entries made using the
information off of the worksheet.
• Remind students that “Adjusting Entries”
should be written on the journal page right
above the first adjusting entry.
• Tell your students that good explanations
are a vital part of a business’s financial
record.
Ask, “Why are journal entry explanations
so important?”
13-10
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POWER POINT
Section
Lecture/ Discussion
♦ Posting the Adjusting Entries
• Remind students that the posting process is
the same as covered in Chapter 5.
• Note that the words “Adjusting entry” is
recorded in the Description column of the
general ledger account.
• Explain that after all adjusting entries have
been posted, the balances of the general
ledger accounts should match the
ADJUSTED TRIAL BALANCE section of the
worksheet.
Objective 5
B. Journalizing and Posting the
Closing Entries
• Remind students that the closing process is
Objective 13-5
Journalize and Post the
Closing Entries.

At the end of the period, the temporary
accounts are closed.

The temporary accounts are:




Revenue accounts
Cost of goods sold
Expense accounts
Drawing account
where all the temporary accounts are closed to
$0 so that:
(1)
13-29
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(2)
The business can “start fresh” in the next
accounting period and
So that the changes in the temporary
owner equity accounts can be
transferred to the permanent owner’s
capital account.
♦ Journalizing the Closing Entries
There are four steps in the closing process:
1.
Close revenue accounts and cost of goods sold accounts
with credit balances to Income Summary.
2.
Close expense accounts, cost of goods sold accounts with
debit balances, and any contra revenue accounts with debit
balances to Income Summary.
3.
Close Income Summary, which now reflects the net income
or loss for the period, to owner's capital.
4.
Close the drawing account to owner's capital.
13-30
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• Indicate that the INCOME STATEMENT
section of the worksheet in Figure 12-2 (of
the last chapter) provides the data needed to
prepare the closing entries.
13-11
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POWER POINT
Section
Lecture/ Discussion
• Point out that the words “closing entries”
should be written on the journal page right
before the first closing entry.
• Indicate that the temporary Income
Summary account is also used in the
closing process of a merchandiser.
Step 1: Closing the Revenue Accounts and the Cost of Goods Sold
Accounts with credit balances.
GENERAL JOURNAL
DATE
2016
Dec. 31
DESCRIPTION
POST.
REF.
PAGE
DEBIT
28
CREDIT
Closing Entries
Sales
Interest Income
Miscellaneous Income
Purchases Returns and Allowances
Purchases Discounts
Income Summary
561,650.00
166.00
366.00
3,050.00
3,130.00
568,362.00
When viewing the work sheet, debit each account, except Income
Summary, for its balance. Credit Income Summary for the total.
13-31
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Step 2: When looking at the worksheet, close the expense accounts and the
Cost of Goods Sold Accounts with debit Balances, as well as any contra
revenue accounts with debit balances, to Income Summary.
Credit each account, except Income Summary, for its
balance. Debit Income Summary for the total.
13-32
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 Step 1: Closing the Revenue Accounts
and the Cost of Goods Sold Accounts
with Credit Balances.
 Tell students to refer to the
illustration of the first closing entry
in the book.
 Remind them that this first closing
entry closes the revenue accounts
and other temporary income
statement accounts with credit
balances.
 Step 2: Closing the Expense Accounts
and the Cost of Goods Sold Accounts
with Debit Balances
 Tell students to refer to the
illustration of the second closing
entry in the book.
 Remind them that this second
closing entry closes the expense
accounts and other temporary
income statement accounts with
debit balances.
13-12
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POWER POINT
Section
Step 3: Closing the Income Summary Account

The third closing entry transfers the Income Summary balance to the
owner's capital account.
 This closes the Income Summary account, which remains closed until it is
used in the end-of-period process for the next year.
 For Whiteside Antiques, the third closing entry is as follows:
Income Summary
Adjusting Entries (a-b)
Closing Entries
12/31
12/31
52,000.00
512,406.20
564,406.20
12/31
12/31
Bal.
47,000.00
568,362.00
615,362.00
50,955.80
GENERAL JOURNAL
DATE
DESCRIPTION
Dec. 31
POST.
REF.
28
PAGE
DEBIT
Income Summary
Bill Whiteside, Capital
CREDIT
50,955.80
50,955.80
13-33
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Lecture/ Discussion
 Step 3: Closing the Income Summary
Account
 Remind students that after the first
two closing entries have been
posted, the balance of the Income
Summary account is net income or
net loss for the period.
 This third closing entry will transfer
the net income or net loss into the
owner’s capital account.
Step 4: Closing the Drawing account
This entry closes the drawing account and updates the capital account
GENERAL JOURNAL
DATE
DESCRIPTION
Dec. 31
POST.
REF.
PAGE
DEBIT
Bill Whiteside, Capital
Bill Whiteside, Drawing
28
CREDIT
27,600.00
27,600.00
13-34
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Posting the Closing Entries

The closing entries are posted from the general journal to the
general ledger.

This process brings the temporary account balances to zero.

The word Closing is entered in the Description column.
13-35
Objective 13-6
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Preparing a Postclosing Trial
Balance

Prepare a postclosing trial balance to confirm
that the general ledger is in balance.

Only the accounts that have balances – the asset,
liability and owner's capital accounts – appear on
the postclosing trial balance.

The postclosing trial balance matches the
amounts reported on the balance sheet.

To verify this, compare the postclosing trial
balance with the balance sheet.
13-36
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Only the accounts that have balances—the asset, liability and
owner's capital accounts—appear on the postclosing trial balance
Cost of
Goods Sold
Expenses
Withdrawals
13-37
♦ Posting the Closing Entries
• Remind students that the posting process is
the same as covered in Chapter 6.
• Note that the words “Closing entry” is
recorded in the Description column of the
general ledger account when the entry is
posted.
Objective 6
C. Preparing a Post-closing Trial
Balance
• Remind students that we prepare a postclosing trial balance to confirm that the general
ledger is in balance.
Temporary accounts do
not appear on the
postclosing trial balance
Revenue
 Step 4: Closing the Drawing Account
 This entry closes the drawing
account into the capital account.
 Point out that the Income Summary
is not used in this last closing entry.
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13-13
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POWER POINT
Preparing a Postclosing Trial Balance
Section
Lecture/ Discussion
• Point out that only permanent accounts will
exist on this trial balance because all
temporary accounts were closed.
• Review with students the difference between a
trial balance, an adjusted trial balance and the
post-closing trial balance.
13-38
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D. Interpreting the Financial
Statements
• Review the basic procedure for calculating a
ratio. (One number is divided by another
number. The result is the ratio of the
numerator, or top number, to the denominator,
or bottom number.)
Teaching Tip: Poll students and write on the
chalkboard the number of students who are (1)
male, (2) female, (3) like pepperoni pizza, (4) don’t
like pepperoni pizza, (5) like scary movies, (6)
don’t like scary movies, (7) married, and (8) single.
• Then have students calculate the ratios of the
following:
(1) males to females
(2) students who like pepperoni pizza to
students who don’t like pepperoni pizza
(3) students who like scary movies to students
who don’t like scary movies; and
(4) married students to single students.
• Have students draw conclusions about the
ratios.
• Point out that businesses also use ratios to
draw conclusions about their operations.
13-14
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POWER POINT
Section
Lecture/ Discussion
• Review with students the three ratios (gross
profit percentage, current ratio, and inventory
turnover).
• Then direct students’ attention to Figures 13-1
and 13-3 in order to point out the locations of
the numbers used for each of the three ratios.
• Explain that ratios alone are not as meaningful
as current ratios compared to past ratios and
to ratios of other similar companies.
• These comparisons show how well a company
is operating in relation to its past and to other
companies.
L1
Objective 13-7
Journalize and post
reversing entries
QUESTION:
What are reversing entries?
ANSWER:
Reversing entries are journal entries
made to reverse the effect of certain
adjusting entries involving accrued
income or accrued expenses.
13-39
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The Accounting Cycle
Step 1
Analyze
transactions
Step 2
Journalize the
data about
transactions
Step 3
Post the
data about
transactions
Step 4
Prepare
a
worksheet
Step 5
Prepare
financial
statements
Step 9
Interpret
the financial
information
Step 8
Prepare a
postclosing
trial balance
Step 7
Journalize and
post closing
entries
13-40
Step 6
Journalize and
post adjusting
entries
© 2015 McGraw-Hill Education. All rights reserved.
Objective 7
E. Journalizing and Posting
Reversing Entries
• Explain that reversing entries are made to
reverse the effect of certain adjustments. This
helps prevent errors in recording payments or
cash receipts in the new accounting period.
♦ Identifying Items for Reversal
• Explain that reversing entries are journal
entries made at the beginning of an accounting
period that are the opposite of certain adjusting
entries, particularly those for accrued
expenses and income.
• Point out that normally the adjustments
requiring reversal are:
13-15
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POWER POINT
Section
Lecture/ Discussion
1. accrued expense items that will involve
future payments of cash.
2. accrued future items that will involve
future receipts of cash.
3. prepaid expense items that were
initially treated as expenses, the endof-period adjustments for those items
must be reversed.
♦ Journalizing Reversing Entries
• Review the reversing journal entries for
Whiteside Antiques using a calendar time-line
to illustrate the events.
• Note that the reversing entries involve cash
that will be paid or received in the future.
• Point out that not all companies use reversing
entries. In many small companies, accounting
records are simple and accountants can easily
recall adjustments made in the prior period.
13-16
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Education.
POWER POINT
Section
Lecture/ Discussion
F. Review of the Accounting Cycle
Flow of Financial Data through an Accounting System
13-41
© 2015 McGraw-Hill Education. All rights reserved.
• Emphasize that, regardless of the type of
business organization (merchandising or
service), there is a flow of data that takes place
in the accounting system. Also, the same basic
nine steps that make up the accounting cycle
must be performed:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Analyze transactions.
Journalize the data about transactions.
Post the data about transactions to the
General Ledger.
Prepare a worksheet.
Prepare financial statements.
Journalize and post adjusting entries.
Journalize and post closing entries.
Prepare a post-closing trial balance.
Interpret the financial information.
Managerial Implications:
Ask, “How can managers use financial
statements to learn about a company’s operating
efficiency?”
Answer—Managers can use financial statements
to learn about a company’s operating efficiency
by using ratios and measurements to analyze
the financial statement results and compare
them to those measurements of prior periods
and to similar businesses in the same industry.
13-17
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