Closing the Books An Accountant s Guide Steven M. Bragg
Chapter 1 The General Ledger and Other Ledgers... 1 Learning Objectives... 1 Introduction... 1 The Ledger Concept... 1 General Ledger Overview... 3 The Accounts Receivable Ledger... 4 The Purchase Ledger... 4 Summary... 5 Review Questions... 6 Review Answers... 7 Chapter 2 The Trial Balance... 8 Learning Objectives... 8 Introduction... 8 Overview of the Trial Balance... 8 The Trial Balance Format... 8 The Extended Trial Balance... 10 Trial Balance Error Correction... 10 The Post-Closing Trial Balance... 11 Evaluation of the Trial Balance... 12 Summary... 12 Review Questions... 13 Review Answers... 14 Chapter 3 Journal Entries... 15 Learning Objectives... 15 Introduction... 15 The Accruals Concept... 15 Adjusting Entries... 15 Reversing Entries... 16 Common Adjusting Entries... 17 Depreciation... 17 Allowance for Doubtful Accounts... 18 Accrued Revenue... 19 Accrued Expenses... 19 Prepaid Assets... 19 Closing Entries... 20 Journal Entry Efficiencies... 21 Immaterial Journal Entries... 21 Reversing Entries... 22 Journal Entry Templates... 22 Recurring Journal Entries... 22 Standard Journal Entry Checklist... 23 Journal Entry Responsibility... 24 Avoid Journal Entries Entirely... 24 Standardize Accounts... 24 Summary... 25 Review Questions... 26 Review Answers... 27 Chapter 4 The Closing Process... 28 Learning Objectives... 28 Introduction... 28
Prior Steps: Update Reserves... 28 Core Steps: Issue Customer Invoices... 29 Core Steps: Value Inventory... 29 Core Steps: Calculate Depreciation... 30 Core Steps: Accrue Expenses... 30 Core Steps: Consolidate Division Results... 30 Core Steps: Eliminate Intercompany Transactions... 30 Core Steps: Review Journal Entries... 31 Core Steps: Reconcile Accounts... 31 Core Steps: Close Subsidiary Ledgers... 33 Core Steps: Create Financial Statements... 33 Core Steps: Review Financial Statements... 33 Core Steps: Accrue Tax Liabilities... 34 Core Steps: Close the Month... 34 Core Steps: Calculate Earnings per Share... 34 Core Steps: Add Disclosures... 35 Core Steps: Write Cover Letter... 35 Core Steps: Issue Financial Statements... 36 Delayed Steps: Issue Customer Invoices... 36 Delayed Steps: Closing Metrics... 37 Delayed Steps: Document Future Closing Changes... 37 Delayed Steps: Update Closing Procedures... 37 Summary... 38 Review Questions... 39 Review Answers... 40 Chapter 5 Fine-Tune the Closing Process... 41 Learning Objectives... 41 Introduction... 41 Task Interdependency Analysis... 41 Correct Errors Early... 42 Reconcile Accounts Early... 43 Adjust Reserves Early... 43 Alter Overhead Allocations Early... 43 Review the Shipping Log Early... 44 Review Billable Hours Early... 44 Accrue Early... 44 Accelerate Depreciation Calculations... 45 Examine Commissions Early... 45 Standardize the Accounting System... 46 Centralize the Accounting System... 46 Centralize Travel Bookings... 48 Process Centering... 48 Mitigate Information Dependencies... 49 Standardize the Report Layout... 49 Reduce the Financial Statements... 49 Collect Report Information Early... 50 Electronic Delivery... 51 Defer Activities... 51 Automation Solutions... 51 Intercompany Transactions... 52 Consolidation Software... 52 Enterprise Resources Planning Systems... 52 Workflow Management Systems... 52 Incremental Automation... 53 Automation Summary... 53 ii
Ongoing Process Improvements... 53 Summary... 54 Review Questions... 56 Review Answers... 57 Chapter 6 Closing Cash... 58 Learning Objectives... 58 Introduction... 58 Overview of the Bank Reconciliation... 58 The Bank Reconciliation Procedure... 59 Bank Reconciliation Problems... 60 The Bank Reconciliation Statement... 61 The Timing of the Bank Reconciliation... 61 Negative Cash on the Balance Sheet... 61 Closing Petty Cash... 62 Summary... 63 Review Questions... 64 Review Answers... 65 Chapter 7 Closing Accounts Receivable... 66 Learning Objectives... 66 Introduction... 66 The Shipping Log Interface... 66 Revenue Accruals... 66 Revenue Recognition Rules... 67 Treatment of Deferred Revenue... 68 Issues with Subcontractors... 68 Recurring Invoices... 69 Rebillable Expenses... 69 Reconciling Accounts Receivable... 71 Non-Trade Receivables... 71 The Allowance for Doubtful Accounts... 71 Recording Contra Revenue... 72 Summary... 73 Review Questions... 74 Review Answers... 75 Chapter 8 Closing Inventory... 76 Learning Objectives... 76 Introduction... 76 Valuation Step 1: The Quantity of Inventory on Hand... 76 The Periodic Inventory System... 76 The Perpetual Inventory System... 77 The Gross Profit Method... 78 Valuation Step 2: Inventory Costing... 79 The First In, First Out Method... 79 The Last In, First Out Method... 80 The Weighted Average Method... 82 Standard Costing... 83 The Retail Inventory Method... 84 Valuation Step 3: Overhead Allocation... 84 The Lower of Cost or Market Rule... 87 The Lower of Cost or Market Rule... 87 Obsolete Inventory Accounting... 88 Summary... 89 Review Questions... 91 iii
Review Answers... 92 Chapter 9 Closing Fixed Assets... 93 Learning Objectives... 93 Introduction... 93 Initial Asset Recognition... 93 The Depreciation Entry... 94 Interest Capitalization... 95 Asset Impairment... 97 Reconciling Fixed Assets... 98 Summary... 98 Review Questions... 99 Review Answers... 100 Chapter 10 Closing Accounts Payable... 101 Learning Objectives... 101 Introduction... 101 Accounts Payable Accruals... 101 Invoice Approval Delays... 102 Expense Reports... 103 Issues with the Credit Card Close... 104 Accounts Payable Suspense Items... 105 Issues with Subcontractors... 106 Reconciling Accounts Payable... 106 Summary... 107 Review Questions... 108 Review Answers... 109 Chapter 11 Closing Payroll... 110 Learning Objectives... 110 Introduction... 110 The Wage Accrual... 110 The Commission Accrual... 112 The Bonus Accrual... 113 The Payroll Tax Accrual... 113 The Benefits Accrual... 114 The Vacation Accrual... 114 Reconciling Compensation Accruals... 116 Summary... 116 Review Questions... 117 Review Answers... 118 Chapter 12 The Income Statement... 119 Learning Objectives... 119 Introduction... 119 Income Statement Overview... 119 The Single-Step Income Statement... 121 The Multi-Step Income Statement... 122 The Condensed Income Statement... 123 The Contribution Margin Income Statement... 123 The Multi-Period Income Statement... 124 How to Construct the Income Statement... 125 Summary... 126 Review Questions... 127 Review Answers... 128 iv
Chapter 13 The Balance Sheet... 129 Learning Objectives... 129 Introduction... 129 Overview of the Balance Sheet... 129 The Common Size Balance Sheet... 131 The Comparative Balance Sheet... 132 How to Construct the Balance Sheet... 133 Summary... 135 Review Questions... 136 Review Answers... 137 Chapter 14 The Statement of Cash Flows... 138 Learning Objectives... 138 Introduction... 138 Overview of the Statement of Cash Flows... 138 The Direct Method... 139 The Indirect Method... 140 How to Prepare the Statement of Cash Flows... 141 Summary... 142 Review Questions... 143 Review Answers... 144 Chapter 15 The Statement of Retained Earnings... 145 Learning Objectives... 145 Introduction... 145 Overview of the Statement of Retained Earnings... 145 How to Prepare the Statement of Retained Earnings... 146 Summary... 146 Review Questions... 147 Review Answers... 148 Chapter 16 Financial Statement Disclosures... 149 Learning Objectives... 149 Introduction... 149 Accounting Disclosures... 149 Summary... 155 Review Questions... 157 Review Answers... 158 Chapter 17 Segment Reporting... 159 Learning Objectives... 159 Introduction... 159 Primary Segment Reporting Issues... 159 The Segment Report... 161 Summary... 161 Review Questions... 162 Review Answers... 163 Chapter 18 Interim Reporting... 164 Learning Objectives... 164 Introduction... 164 The Integral View... 164 The Discrete View... 165 Comparison of the Integral and Discrete Views... 165 Changes in Accounting Principle... 166 Changes in Accounting Estimate... 166 v
Interim Reporting Issues... 166 Summary... 167 Review Questions... 168 Review Answers... 169 Chapter 19 Earnings per Share... 170 Learning Objectives... 170 Introduction... 170 Basic Earnings per Share... 170 Diluted Earnings per Share... 171 Presentation of Earnings per Share... 174 Summary... 175 Review Questions... 176 Review Answers... 177 Chapter 20 The Public Company Close... 178 Learning Objectives... 178 Introduction... 178 The Public Company Closing Process... 178 The Form 10-Q... 180 The Form 10-K... 181 Summary... 183 Review Questions... 184 Review Answers... 185 Chapter 21 Controls for Closing the Books... 186 Learning Objectives... 186 Introduction... 186 Basic Controls... 186 Basic Controls... 186 Additional Controls for Public Companies... 188 Balancing Controls against Speed... 189 Summary... 189 Review Questions... 190 Review Answers... 191 Chapter 22 Record Keeping... 192 Learning Objectives... 192 Introduction... 192 Month-End Record Keeping... 192 Year-End Record Keeping... 192 Public Company Record Keeping... 193 Summary... 194 Review Questions... 195 Review Answers... 196 Appendix A Selected Topics... 197 Appendix B The Closing Checklist... 202 Appendix C Case Study... 206 Glossary... 213 Index... 219 vi