Closing the Books 5th Edition Steven M. Bragg
Chapter 1 The General Ledger and Other Ledgers... 1 Learning Objectives... 1 Introduction... 1 The Ledger Concept... 1 General Ledger Overview... 2 The Accounts Receivable Ledger... 3 The Purchase Ledger... 4 Chapter Summary... 4 Review Questions... 6 Review Answers... 7 Chapter 2 The Trial Balance... 9 Learning Objectives... 9 Introduction... 9 Overview of the Trial Balance... 9 The Trial Balance Format... 9 The Extended Trial Balance... 10 Trial Balance Error Correction... 11 The Post-Closing Trial Balance... 12 Evaluation of the Trial Balance... 12 Chapter Summary... 13 Review Questions... 14 Review Answers... 15 Chapter 3 Journal Entries... 17 Learning Objectives... 17 Introduction... 17 The Accruals Concept... 17 Adjusting Entries... 17 Reversing Entries... 18 Common Adjusting Entries... 19 Depreciation... 19 Allowance for Doubtful Accounts... 20 Accrued Revenue... 20 Accrued Expenses... 20 Prepaid Assets... 20 Closing Entries... 21 Correcting Entries... 22 Journal Entry Efficiencies... 22 Immaterial Journal Entries... 22 Reversing Entries... 23 Journal Entry Templates... 23 Recurring Journal Entries... 23 Standard Journal Entry Checklist... 24 Journal Entry Responsibility... 25 Avoid Journal Entries Entirely... 25 Standardize Accounts... 25 Chapter Summary... 26 Review Questions... 27 Review Answers... 28 Chapter 4 The Closing Process... 29 Learning Objectives... 29 Introduction... 29
Prior Steps: Update Reserves... 29 Core Steps: Issue Customer Invoices... 30 Core Steps: Value Inventory... 30 Core Steps: Calculate Depreciation... 30 Core Steps: Accrue Expenses... 31 Core Steps: Consolidate Division Results... 31 Core Steps: Eliminate Intercompany Transactions... 31 Core Steps: Review Journal Entries... 31 Core Steps: Reconcile Accounts... 32 Core Steps: Close Subsidiary Ledgers... 34 Core Steps: Create Financial Statements... 34 Core Steps: Review Financial Statements... 34 Core Steps: Accrue Tax Liabilities... 34 Core Steps: Close the Month... 35 Core Steps: Calculate Earnings per Share... 35 Core Steps: Add Disclosures... 35 Core Steps: Write Cover Letter... 36 Core Steps: Issue Financial Statements... 37 Delayed Steps: Issue Customer Invoices... 37 Delayed Steps: Closing Metrics... 37 Delayed Steps: Document Future Closing Changes... 37 Delayed Steps: Update Closing Procedures... 38 Case Study... 38 Closing Checklist... 45 Customer Billings... 45 Accounts Payable... 45 Fixed Assets... 45 Inventory... 45 Journal Entries... 45 Balance Sheet Reconciliations... 46 Consolidate Results... 46 Error Checking... 47 Preparation of the Financial Statements Private Company... 47 Preparation of the Financial Statements Public Company... 47 Final Tasks Month-End... 47 Final Tasks Year-End... 48 Chapter Summary... 48 Review Questions... 49 Review Answers... 50 Chapter 5 Fine-Tune the Closing Process... 51 Learning Objectives... 51 Introduction... 51 Task Interdependency Analysis... 51 Correct Errors Early... 52 Reconcile Accounts Early... 53 Adjust Reserves Early... 53 Alter Overhead Allocations Early... 53 Review the Shipping Log Early... 53 Review Billable Hours Early... 54 Accrue Early... 54 Accelerate Depreciation Calculations... 54 Examine Commissions Early... 55 Standardize the Accounting System... 55 Centralize the Accounting System... 56 Standardize Exception Handling... 57 Centralize Travel Bookings... 57 ii
Process Centering... 58 Mitigate Information Dependencies... 58 Standardize the Report Layout... 59 Reduce the Financial Statements... 59 Collect Report Information Early... 60 Electronic Delivery... 60 Defer Activities... 60 Automation Solutions... 61 Intercompany Transactions... 61 Consolidation Software... 61 Enterprise Resources Planning Systems... 62 Workflow Management Systems... 62 Incremental Automation... 62 Automation Summary... 62 Ongoing Process Improvements... 63 Chapter Summary... 64 Review Questions... 65 Review Answers... 66 Chapter 6 Closing Cash... 67 Learning Objectives... 67 Introduction... 67 Overview of the Bank Reconciliation... 67 The Bank Reconciliation Procedure... 67 Bank Reconciliation Problems... 68 The Bank Reconciliation Statement... 69 The Timing of the Bank Reconciliation... 69 Negative Cash on the Balance Sheet... 70 Closing Petty Cash... 70 Chapter Summary... 71 Review Questions... 72 Review Answers... 73 Chapter 7 Closing Accounts Receivable... 75 Learning Objectives... 75 Introduction... 75 The Shipping Log Interface... 75 Revenue Accruals... 75 Revenue Recognition Rules... 76 Treatment of Deferred Revenue... 77 Issues with Subcontractors... 77 Recurring Invoices... 77 Rebillable Expenses... 78 Reconciling Accounts Receivable... 79 Non-Trade Receivables... 79 The Allowance for Doubtful Accounts... 80 Recording Contra Revenue... 81 Chapter Summary... 81 Review Questions... 82 Review Answers... 83 Chapter 8 Closing Inventory... 85 Learning Objectives... 85 Introduction... 85 Valuation Step 1: The Quantity of Inventory on Hand... 85 The Periodic Inventory System... 85 The Perpetual Inventory System... 86 iii
The Gross Profit Method... 87 Valuation Step 2: Inventory Costing... 88 The First In, First Out Method... 88 The Last In, First Out Method... 89 The Weighted Average Method... 90 Standard Costing... 91 The Retail Inventory Method... 92 Valuation Step 3: Overhead Allocation... 93 Valuation Step 4: Inventory Valuation... 95 The Lower of Cost or Market Rule... 95 Obsolete Inventory Accounting... 97 Chapter Summary... 98 Review Questions... 99 Review Answers... 100 Chapter 9 Closing Fixed Assets... 101 Learning Objectives... 101 Introduction... 101 Initial Asset Recognition... 101 The Depreciation Entry... 102 Interest Capitalization... 103 Asset Impairment... 104 Reconciling Fixed Assets... 105 Chapter Summary... 106 Review Questions... 107 Review Answers... 108 Chapter 10 Closing Accounts Payable... 109 Learning Objectives... 109 Introduction... 109 Accounts Payable Accruals... 109 Invoice Approval Delays... 110 Expense Reports... 111 Issues with the Credit Card Close... 112 Accounts Payable Suspense Items... 112 Reconciling Accounts Payable... 113 Chapter Summary... 114 Review Questions... 115 Review Answers... 116 Chapter 11 Closing Payroll... 117 Learning Objectives... 117 Introduction... 117 The Wage Accrual... 117 The Commission Accrual... 119 The Bonus Accrual... 120 The Payroll Tax Accrual... 120 The Benefits Accrual... 121 The Vacation Accrual... 121 Reconciling Compensation Accruals... 122 Chapter Summary... 122 Review Questions... 123 Review Answers... 124 Chapter 12 The Income Statement... 125 Learning Objectives... 125 Introduction... 125 iv
Income Statement Overview... 125 The Single-Step Income Statement... 127 The Multi-Step Income Statement... 128 The Condensed Income Statement... 128 The Contribution Margin Income Statement... 128 The Multi-Period Income Statement... 129 Presentation of Selling, General and Administrative Expenses... 130 The Statement of Activities... 131 How to Construct the Income Statement... 132 Other Income Statement Topics... 134 The Cash Basis Income Statement... 134 The Partial Income Statement... 134 Headline Earnings... 135 Chapter Summary... 135 Review Questions... 136 Review Answers... 137 Chapter 13 The Balance Sheet... 139 Learning Objectives... 139 Introduction... 139 Overview of the Balance Sheet... 139 The Common Size Balance Sheet... 141 The Comparative Balance Sheet... 142 The Nonprofit Balance Sheet... 143 How to Construct the Balance Sheet... 144 Other Balance Sheet Topics... 145 Does an Expense Appear on the Balance Sheet?... 145 Where do Accruals Appear on the Balance Sheet?... 145 The Order of Liquidity... 146 Chapter Summary... 146 Review Questions... 147 Review Answers... 148 Chapter 14 The Statement of Cash Flows... 149 Learning Objectives... 149 Introduction... 149 Overview of the Statement of Cash Flows... 149 Statement Objectives... 149 Statement Requirements... 149 Reporting Classifications... 150 The Direct Method... 151 The Indirect Method... 153 Presentation Variations... 154 Information Sources... 155 Illustration of the Preparation of a Statement of Cash Flows... 157 Chapter Summary... 158 Review Questions... 159 Review Answers... 160 Chapter 15 The Statement of Retained Earnings... 161 Learning Objectives... 161 Introduction... 161 Overview of the Statement of Retained Earnings... 161 How to Prepare the Statement of Retained Earnings... 162 Chapter Summary... 162 Review Questions... 163 Review Answers... 164 v
Chapter 16 Financial Statement Disclosures... 165 Learning Objectives... 165 Introduction... 165 Accounting Disclosures... 165 Chapter Summary... 171 Review Questions... 172 Review Answers... 173 Chapter 17 Segment Reporting... 175 Learning Objectives... 175 Introduction... 175 Overview of Segment Reporting... 175 Segment Disclosure... 177 Segment Disclosure... 177 Products, Services, and Customer Disclosure... 179 Geographic Area Disclosure... 179 Chapter Summary... 180 Review Questions... 181 Review Answers... 182 Chapter 18 Interim Reporting... 183 Learning Objectives... 183 Introduction... 183 Overview of Interim Reporting... 183 General Interim Reporting Rule... 183 Variations from the Interim Reporting Rule... 184 Changes in Accounting Principle in Interim Periods... 185 Changes in Accounting Estimate in Interim Periods... 185 Error Correction in Interim Periods... 185 Adjustments to Prior Interim Periods... 186 The Integral View... 186 The Discrete View... 187 Comparison of the Integral and Discrete Views... 187 Disclosures for Interim Reporting... 187 Chapter Summary... 188 Review Questions... 189 Review Answers... 190 Chapter 19 Earnings per Share... 191 Learning Objectives... 191 Introduction... 191 Basic Earnings per Share... 191 Diluted Earnings per Share... 192 Presentation of Earnings per Share... 195 Chapter Summary... 196 Review Questions... 197 Review Answers... 198 Chapter 20 The Public Company Close... 199 Learning Objectives... 199 Introduction... 199 The Public Company Closing Process... 199 The Form 10-Q... 201 The Form 10-K... 202 Chapter Summary... 203 Review Questions... 204 Review Answers... 205 vi
Chapter 21 Controls for Closing the Books... 207 Learning Objectives... 207 Introduction... 207 Preventive and Detective Controls... 207 Basic Controls... 207 Additional Controls for Public Companies... 210 Balancing Controls against Speed... 210 Chapter Summary... 211 Review Questions... 212 Review Answers... 213 Chapter 22 Record Keeping... 215 Learning Objectives... 215 Introduction... 215 Month-End Record Keeping... 215 Year-End Record Keeping... 215 Public Company Record Keeping... 216 Chapter Summary... 217 Review Questions... 218 Review Answers... 219 Chapter 23 The Soft Close and Virtual Close... 221 Learning Objectives... 221 Introduction... 221 The Soft Close... 221 The Virtual Close... 222 The Reporting Package... 223 Chapter Summary... 224 Review Questions... 225 Review Answers... 226 Glossary... 227 Index... 233 vii