Closing the Books 4th 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... 5 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... 21 Closing Entries... 21 Correcting Entries... 22 Journal Entry Efficiencies... 23 Immaterial Journal Entries... 23 Reversing Entries... 23 Journal Entry Templates... 23 Recurring Journal Entries... 24 Standard Journal Entry Checklist... 24 Journal Entry Responsibility... 25 Avoid Journal Entries Entirely... 26 Standardize Accounts... 26 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... 31 Core Steps: Accrue Expenses... 31 Core Steps: Consolidate Division Results... 31 Core Steps: Eliminate Intercompany Transactions... 31 Core Steps: Review Journal Entries... 32 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... 35 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... 38 Delayed Steps: Update Closing Procedures... 38 Case Study... 39 Closing Checklist... 45 Customer Billings... 45 Accounts Payable... 45 Fixed Assets... 46 Inventory... 46 Journal Entries... 46 Balance Sheet Reconciliations... 46 Consolidate Results... 47 Error Checking... 47 Preparation of the Financial Statements Private Company... 47 Preparation of the Financial Statements Public Company... 48 Final Tasks Month-End... 48 Final Tasks Year-End... 48 Chapter Summary... 49 Review Questions... 50 Review Answers... 51 Chapter 5 Fine-Tune the Closing Process... 53 Learning Objectives... 53 Introduction... 53 Task Interdependency Analysis... 53 Correct Errors Early... 54 Reconcile Accounts Early... 55 Adjust Reserves Early... 55 Alter Overhead Allocations Early... 55 Review the Shipping Log Early... 55 Review Billable Hours Early... 56 Accrue Early... 56 Accelerate Depreciation Calculations... 57 Examine Commissions Early... 57 Standardize the Accounting System... 57 Centralize the Accounting System... 58 Standardize Exception Handling... 59 Centralize Travel Bookings... 60 ii
Process Centering... 60 Mitigate Information Dependencies... 61 Standardize the Report Layout... 61 Reduce the Financial Statements... 61 Collect Report Information Early... 62 Electronic Delivery... 63 Defer Activities... 63 Automation Solutions... 63 Intercompany Transactions... 63 Consolidation Software... 64 Enterprise Resources Planning Systems... 64 Workflow Management Systems... 64 Incremental Automation... 65 Automation Summary... 65 Ongoing Process Improvements... 65 Chapter Summary... 66 Review Questions... 68 Review Answers... 69 Chapter 6 Closing Cash... 71 Learning Objectives... 71 Introduction... 71 Overview of the Bank Reconciliation... 71 The Bank Reconciliation Procedure... 71 Bank Reconciliation Problems... 72 The Bank Reconciliation Statement... 73 The Timing of the Bank Reconciliation... 73 Negative Cash on the Balance Sheet... 74 Closing Petty Cash... 74 Chapter Summary... 75 Review Questions... 76 Review Answers... 77 Chapter 7 Closing Accounts Receivable... 79 Learning Objectives... 79 Introduction... 79 The Shipping Log Interface... 79 Revenue Accruals... 79 Revenue Recognition Rules... 80 Treatment of Deferred Revenue... 81 Issues with Subcontractors... 81 Recurring Invoices... 82 Rebillable Expenses... 82 Reconciling Accounts Receivable... 83 Non-Trade Receivables... 84 The Allowance for Doubtful Accounts... 84 Recording Contra Revenue... 85 Chapter Summary... 85 Review Questions... 86 Review Answers... 87 Chapter 8 Closing Inventory... 89 Learning Objectives... 89 Introduction... 89 Valuation Step 1: The Quantity of Inventory on Hand... 89 The Periodic Inventory System... 89 The Perpetual Inventory System... 90 iii
The Gross Profit Method... 91 Valuation Step 2: Inventory Costing (Typical Inventory)... 92 The First In, First Out Method... 92 The Last In, First Out Method... 93 The Weighted Average Method... 94 Standard Costing... 95 The Retail Inventory Method... 96 Valuation Step 3: Overhead Allocation... 97 Valuation Step 4: Inventory Valuation... 99 The Lower of Cost or Market Rule... 99 Obsolete Inventory Accounting... 101 Chapter Summary... 102 Review Questions... 103 Review Answers... 104 Chapter 9 Closing Fixed Assets... 105 Learning Objectives... 105 Introduction... 105 Initial Asset Recognition... 105 The Depreciation Entry... 106 Interest Capitalization... 107 Asset Impairment... 108 Reconciling Fixed Assets... 110 Chapter Summary... 110 Review Questions... 111 Review Answers... 112 Chapter 10 Closing Accounts Payable... 113 Learning Objectives... 113 Introduction... 113 Accounts Payable Accruals... 113 Invoice Approval Delays... 114 Expense Reports... 115 Issues with the Credit Card Close... 116 Accounts Payable Suspense Items... 116 Reconciling Accounts Payable... 117 Chapter Summary... 118 Review Questions... 119 Review Answers... 120 Chapter 11 Closing Payroll... 121 Learning Objectives... 121 Introduction... 121 The Wage Accrual... 121 The Commission Accrual... 123 The Bonus Accrual... 124 The Payroll Tax Accrual... 124 The Benefits Accrual... 125 The Vacation Accrual... 125 Reconciling Compensation Accruals... 126 Chapter Summary... 126 Review Questions... 127 Review Answers... 128 Chapter 12 The Income Statement... 129 Learning Objectives... 129 Introduction... 129 iv
Income Statement Overview... 129 The Single-Step Income Statement... 131 The Multi-Step Income Statement... 132 The Condensed Income Statement... 132 The Contribution Margin Income Statement... 133 The Multi-Period Income Statement... 133 The Statement of Activities... 134 How to Construct the Income Statement... 136 Other Income Statement Topics... 137 What is a Cash Basis Income Statement?... 137 What is a Partial Income Statement?... 138 What are Headline Earnings?... 138 Chapter Summary... 139 Review Questions... 140 Review Answers... 141 Chapter 13 The Balance Sheet... 143 Learning Objectives... 143 Introduction... 143 Overview of the Balance Sheet... 143 The Common Size Balance Sheet... 145 The Comparative Balance Sheet... 146 The Nonprofit Balance Sheet... 147 Unrestricted Net Assets... 148 Temporarily Restricted Net Assets... 148 Permanently Restricted Net Assets... 148 How to Construct the Balance Sheet... 149 Other Balance Sheet Topics... 150 Does an Expense Appear on the Balance Sheet?... 150 Where do Accruals Appear on the Balance Sheet?... 150 What is Order of Liquidity?... 150 Chapter Summary... 151 Review Questions... 152 Review Answers... 153 Chapter 14 The Statement of Cash Flows... 155 Learning Objectives... 155 Introduction... 155 Overview of the Statement of Cash Flows... 155 The Direct Method... 158 The Indirect Method... 159 Information Sources... 161 Chapter Summary... 164 Review Questions... 165 Review Answers... 166 Chapter 15 The Statement of Retained Earnings... 167 Learning Objectives... 167 Introduction... 167 Overview of the Statement of Retained Earnings... 167 How to Prepare the Statement of Retained Earnings... 168 Chapter Summary... 168 Review Questions... 169 Review Answers... 170 Chapter 16 Financial Statement Disclosures... 171 Learning Objectives... 171 v
Introduction... 171 Accounting Disclosures... 171 Chapter Summary... 177 Review Questions... 178 Review Answers... 179 Chapter 17 Segment Reporting... 181 Learning Objectives... 181 Introduction... 181 Overview of Segment Reporting... 181 Segment Disclosure... 183 Segment Disclosure... 183 Products, Services, and Customer Disclosure... 185 Geographic Area Disclosure... 185 Chapter Summary... 186 Review Questions... 187 Review Answers... 188 Chapter 18 Interim Reporting... 189 Learning Objectives... 189 Introduction... 189 Overview of Interim Reporting... 189 General Interim Reporting Rule... 189 Variations from the Interim Reporting Rule... 190 Changes in Accounting Principle in Interim Periods... 191 Changes in Accounting Estimate in Interim Periods... 191 Error Correction in Interim Periods... 191 Adjustments to Prior Interim Periods... 192 The Integral View... 192 The Discrete View... 193 Comparison of the Integral and Discrete Views... 193 Disclosures for Interim Reporting... 194 Chapter Summary... 194 Review Questions... 195 Review Answers... 196 Chapter 19 Earnings per Share... 197 Learning Objectives... 197 Introduction... 197 Basic Earnings per Share... 197 Diluted Earnings per Share... 198 Presentation of Earnings per Share... 201 Chapter Summary... 202 Review Questions... 203 Review Answers... 204 Chapter 20 The Public Company Close... 205 Learning Objectives... 205 Introduction... 205 The Public Company Closing Process... 205 The Form 10-Q... 207 The Form 10-K... 208 Chapter Summary... 209 Review Questions... 210 Review Answers... 211 vi
Chapter 21 Controls for Closing the Books... 213 Learning Objectives... 213 Introduction... 213 Preventive and Detective Controls... 213 Basic Controls... 213 Additional Controls for Public Companies... 216 Balancing Controls against Speed... 216 Chapter Summary... 217 Review Questions... 218 Review Answers... 219 Chapter 22 Record Keeping... 221 Learning Objectives... 221 Introduction... 221 Month-End Record Keeping... 221 Year-End Record Keeping... 221 Public Company Record Keeping... 222 Chapter Summary... 223 Review Questions... 224 Review Answers... 225 Chapter 23 Soft Close and Virtual Close... 227 Learning Objectives... 227 Introduction... 227 The Soft Close... 227 The Virtual Close... 228 The Reporting Package... 229 Chapter Summary... 230 Review Questions... 231 Review Answers... 232 Glossary... 233 Index... 239 vii