Chapter 4 Mechanics of Financial Information

Transcription

1 BUS Chapter 4 Mechanics of Financial Information

2 Before Class starts.(make sure your name is on all submissions) First Homework 14 Fall Emory Inc. Due 9/17 before class; No EXCEPTIONS Help Session 9/14 1:00-3:30pm in GBS130. Second Homework 14 Fall Inc. due 9/29. Help Session 9/21 1:00-3:30pm in GBS130. First Exam Thursday 10/2 6pm-9pm ALL ALTERNATE ARRANGEMENTS DEADLINE 9/18! What questions do you have for me? TA Office Hours & Accounting Lab Hours on File cabinet downstairs should now contain your mail folder and name cards

3 What do you remember?

4 Economic Events--> Transactions Reducing events to numbers

5 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.

6 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.

7 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).

8 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)

9 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.]

10 Adjusting Entries: 4 Kinds

11 Adjusting Entries: 4 Kinds

12 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 1,200 Insurance Expense 5,000 Prepaid Insurance 5,000 Depreciation Expense 20,000 Accumulated Depreciation 20,000 Interest Receivable 1,500 Interest Revenue 1,500 Unearned Revenue 200 Fees Earned 200

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14 P4-8 Preparing adjusting journal entries a. The 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 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 the company collected $18,000 in customer advances for the subsequent performance of a service. As of 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

15 P4-8 Preparing adjusting journal entries e. The company borrowed $10,000 at an annual interest rate of 12% on The first interest payment will be made Interest Exp 600 Interest Pay 600 f. The company placed several ads in newspapers during the month. On 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 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

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19 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

20 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, ,800 4,700