BUS210
Chapter 4
Sessions 4, 5, 6, & 7
Mechanics of Financial Information
Before Class starts….(make sure your name is on all submissions)
 First Homework due TODAY BEFORE CLASS; No
EXCEPTIONS
 Second Homework due 2/11
Help Session 2/9 1:30-3pm in GBS130.
 First Exam Thursday 2/13 6pm-9pm
ALL ALTERNATE ARRANGEMENTS have been made!
 Optional Review 2/13, come to either class: 10 in
room 331 or 1 in room 304
What questions do you have for me?
– TA Office Hours 6-7 T&R in GBS401 & Accounting Lab
Hours on http://bus.emory.edu/scrosso
– File cabinet downstairs should now contain your mail
folder and name cards
Quiz– Daily Journal
Entries
Listed below are
accounts, which
are numbered for
identification,
followed by a list of
transactions. For
each transaction,
determine what
account (or
accounts) should
be debited and
credited, and place
the number
associated with
that account in the
appropriate debit
or credit column.
1.
Accounts receivable
6.
Depreciation expense
11.
Prepaid rent
2.
Accounts payable
7.
Property, plant, and
12.
Rent expense
equipment
3.
Accumulated depreciation
8.
Inventory
13.
Sales
4.
Cash
9.
Notes payable
14.
Wages expense
5.
Cost of goods sold
10.
Common stock
15.
Unearned fees
16.
Utility expense
List of Transactions
a.
Collected cash from customers on account.
b.
Sold inventory on account; sales price is above cost.
c.
Sold shares of common stock for cash.
d.
Paid 6 months’ rent in advance.
e.
Incurred and paid wages to employees.
f.
Purchased a fixed asset by signing a note payable.
g.
Received current period’s utility bill in the mail.
h.
Paid the current period’s utility bill.
i.
Purchased inventory on account.
j.
Signed a 90 day note to pay off an account that was due.
k.
Received cash from a customer, services will be performed next
month.
Debit
Credit
Matching & Accrual Accounting
• Basic to financial reporting of corporations.
• Concerned with the timing of revenue and expense
recognition.
• Purpose is to accurately measure revenues and
expenses (and profits) for each accounting period.
• Accrual accounting’s Income Statement attempts
to match revenues earned and the expenses
incurred, NOT cash flows.
• Accrual accounting’s Statement of Cash Flows
reports the cash inflows and outflows for the
period.
Accrual Income Statement
Reported revenues include:
• Revenues collected in a prior period deferred to
the current period (reported previously on the
balance sheet as a liability, Unearned Revenues)
• Revenues collected in the current period that
were also earned currently.
• Revenues earned (and accrued) currently that will
be collected in future periods (reported currently
on the balance sheet as an asset, Accounts
Receivable.
Accrual Income Statement
Reported expenses include:
• The cost of goods or services consumed in the current
period that were paid for in a prior period, but
deferred to the current period (reported previously on
the balance sheet as an asset; i.e., Inventories, Prepaid
Expenses).
• The cost of goods or services consumed in the current
period that were also paid for in the current period.
• The cost of goods or services consumed in the current
period that will be paid for in future periods (reported
on the current balance sheet as a liability; i.e.,
Accounts Payable).
Accrual Balance Sheet
Assets on the Balance Sheet include:
• Something that has future or potential value.
• Future expenses for which cash has already been paid.
(Prepaid—i.e., deferred—Expenses)
• Past revenues for which cash has not been collected.
(Accounts Receivable –i.e., accrued revenues)
Liabilities on the Balance Sheet include:
• Responsibilities or promises to others
• Past expenses for which cash has not been paid. (Accrued
Expenses Payable)
• Future revenues for which cash has already been
collected. (Deferred or Unearned Revenues)
Accruals and Deferrals
• A deferral asset or liability is created on the
balance sheet anytime cash is collected or paid
BEFORE the associated expense or revenue is
recognized (deferred). Examples: Inventories,
Prepaid expenses, Equipment, Unearned revenues.
• An accrual asset or liability is created on the
balance sheet any time revenue or expense is
recognized (accrued) BEFORE the associated cash
flow is received or paid. Examples: Accounts
Receivable, Interest Receivable, Accounts Payable,
Taxes Payable.[Expense now, Pay later. OR Receive
later, Revenue now.]
Adjusting Entries: 4 Kinds
Adjusting Entries: 4 Kinds
E4-12 Adjusting journal entries
Explain each of the entries and classify each of the entries as
either a deferral (cost expiration) AJE or an accrual AJE.
Rent Expense
1,200
Rent Payable
Insurance Expense
5,000
Prepaid Insurance
Depreciation Expense
20,000
Accumulated Depreciation
Interest Receivable
1,500
Interest Revenue
Unearned Revenue
200
Fees Earned
1,200
5,000
20,000
1,500
200
P4-8 Preparing adjusting journal entries
a.
The 12.31.11 supplies balance is $85,000. A count of supplies reveals that
the company actually has $30,000 of supplies on hand.
Supplies Exp 55,000
Supplies 55,000
b. As of 12.31.11 the company had not paid the rent for the month. The
monthly rent is $2,400.
Rent Exp 2,400
Rent Pay 2,400
c. On 12.20.11 the company collected $18,000 in customer advances for the
subsequent performance of a service. As of 12.31.11 two-thirds of the service
had been performed.
Unearned Service Rev 12,000
Fees Earned
12,000
d. The total cost of fixed assets is $500,000. The company estimates that the
assets have a useful life of ten years and used straight-line depreciation.
DE 50,000
AD 50,000
P4-8 Preparing adjusting journal entries
e. The company borrowed $10,000 at an annual interest rate of
12% on 7.1.11. The first interest payment will be made 1.1.12.
Interest Exp 600
Interest Pay 600
f. The company placed several ads in newspapers during the month.
On 12.31.11 the company received a $28,000 bill for the ads, which
was not recorded at the time.
Adv Exp 28,000
Adv Pay 28,000
g. On 7.1.11 the company paid the premium for a one-year life
insurance policy. The $350 cost of the premium was capitalized
when paid.
Insurance Exp 175
Prepaid Insurance 175
P4-9 Inferring adjusting journal entries from
changes in T-account balances
Account
Balance before AJE
Prepaid rent
14,500
Prepaid insurance
8,500
Accum. Deprec.
36,000
Rent expense
6,500
Insurance expense
5,500
Depreciation expense
0
Balance after AJE
11,800
7,800
38,400
9,200
6,200
2,400
P4-9 Inferring adjusting journal entries from
changes in T-account balances
Account
Balance before AJE
Salaries payable
1,300
Unearned revenues
800
Fees earned
87,600
Salary expense
3,500
Balance after AJE
2,500
600
87,800
4,700
E4-21 Reverse T-account analysis
1. Compute the 12.31.11 wages payable:
Wages
Cash payments during 2012
Wages Payable as of 12.31.12
Wages Expense on the 2012 IS
$35,000
$17,000
$39,000
E4-21 Reverse T-account analysis
2. the 2012 cash payments for rent:
Rent
Prepaid Rent 12.31.11
Prepaid Rent 12.31.12
Rent Expense on the 2012 IS
$12,000
$15,000
$21,000
E4-21 Reverse T-account analysis
3. the accounts receivable as of 12.31.12:
Accounts Receivable
Cash collected from customers during 2012 $38,000
Accounts Receivable as of 12.31.11
$14,000
Sales Revenue on the 2012 IS
$45,000
P4-20 Reverse T-account analysis
You are a credit analyst for a bank. Badger Business has applied for a loan. The company
claims to have more than tripled profits from 2011 to 2012 and believes that it should be
given prime credit terms. In addition, you note that Badger has expanded its operations,
recently paying $37,000 for new equipment that replaced old equipment, which was sold
that same year. No other transactions affected the company’s equipment account.
Excerpts from the 2012 financial statements are provided below.
Balance sheet:
2012
2011
Equipment
$97,400
$84,800
Acc. Depreciation
(26,400)
(24,300)
Income statement:
Net income
$5,200
$1,500
Depreciation expense
$8,700
$7,600
Statement of cash flows:
Proceeds from equipment sale
$23,400
0
E4-16 The difference between cash and accrual accounting
Washington Forest Products began operations on January 1, 2011. On December 31, 2011,
the company accountant ascertains that the following amounts should be reported as
expenses on the income statement: Insurance Expense $20,000; Supplies Expense
$11,000; Rent Expense $14,000.
A Review of the company’s cash disbursements indicates the company made related cash
payments during 2011 as follows:
Insurance $29,000; Supplies $27,000; Rent $8,000
Explain why the amounts shown as expenses do not equal the cash paid.
For each expense account, compute the amount that should be shown in the related
balance sheet account as of December 31, 2011 (remember the company begin operations
this year).
4 Closing Entries: Income Statement and Dividend Accounts
2 Closing Entries: Income Statement and Dividend Accounts
Accounts Payable
Accounts Receivable
Accumulated Depreciation
Building
Cash
Common Stock
Depreciation Expense
Design Income
Dividends
Income Taxes Expense
Income Taxes Payable
Office Supplies
Office Supplies Expense
Prepaid Rent
Rent Expense
Unearned Income
Utilities Expense
Wages Expense
Wages Payable
$62,800
$50,000
$3,000
$163,200
$220,480
$400,000
$3,000
$140,000
$30,000
$8,000
$8,000
$36,600
$15,400
$16,000
$16,000
$1,680
$6,800
$55,200
$7,200
Prepare closing entries from the adjusted trial balance shown above.
Dr Design Income 140,000
Cr Retained Earnings
35,600
Cr Depreciation Exp 3,000; Inc Tx Exp 8,000; Off Supp Exp 15,400; Rent Exp 16,000;
Util Exp 6,800; Wages Exp 55,200 104,400
Dr Retained Earnings 30,000
Cr Dividends
30,000
E4-7 Preparing financial statements
Taken from the 2008 annual report of Bristol-Myers Squibb, a world-leading
drug company (dollars in millions), reconstruct the financials.
Cost of goods sold $ 6,396
Net cash from operations 3,707
Accounts receivable 3,710
Restructuring expense 218
Net cash from financing (2,582)
Shareholders’ equity 12,241
Net cash from investing 5,079
Research & dev. expense 3,585
Other noncurrent assets 9,384
Other expenses 901
Marketable securities 289
Cash and equivalents $ 7,976
Short-term borrowings 154
Adv. & product expense 1,550
Accounts payable 1,535
Long-term liabilities 10,601
Net sales 20,597
Property, plant, & equip. 5,405
Other current assets 2,788
Other current liabilities 2,085
Sell. & adm. expenses 4,792
Accrued payables 2,936