CHAPTER F4COMPLETING THE ACCOUNTING CYCLE
CLASS discussion questions
127
1. No. The work sheet is a device used by the accountant to facilitate the preparation of statements and the recording of adjusting and closing entries.
2. Net loss. The expenses exceed the revenues.
3. Net income. The revenues exceed the expenses by $68,500.
4. (a) Current assets are composed of cash and other assets that may reasonably be expected to be realized in cash or sold or consumed in the near future through the normal operations of the business.
(b) Property, plant, and equipment is composed of assets used in the business that are of a permanent or relatively fixed nature.
5. Current liabilities are liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets. Liabilities that will not be due for a comparatively long time (usually more than one year) are called long-term liabilities.
6. Revenue, expense, and dividends accounts are generally referred to as temporary accounts.
7. Closing entries are necessary at the end of an accounting period (1) to transfer the balances in temporary accounts to permanent accounts and (2) to prepare the temporary accounts for use in accumulating data for the following accounting period.
8. Adjusting entries bring the accounts up to date, while closing entries reduce the revenue, expense, and dividends accounts to zero balances for use in accumulating data for the following accounting period.
9. (a) The first entry closes all income statement accounts with credit balances by transferring the total to the credit side of Income Summary.
(b) The second entry closes all income statement accounts with debit balances by transferring the total to the debit side of Income Summary.
(c) The third entry closes Income Summary by transferring its balance, the net income or net loss for the year, to the retained earnings account.
(d) The fourth entry closes the dividends account by transferring its balance to the retained earnings account.
10. (a) Expense accounts
(b) Revenue accounts
11. Retained earnings account
12. Retained earnings account
13. The purpose of the post-closing trial balance is to make sure that the ledger is in balance at the beginning of the next period.
14. The natural business year is the fiscal year that ends when business activities have reached the lowest point in the annual operating cycle.
15. January is more likely to have a lower level of business activity than is December for a department store. Therefore, the additional work to adjust and close the accounts and prepare the financial statements can more easily be performed at the end of January than at the end of December.
16. All the companies listed are general merchandisers whose busiest time of the year is during the holiday season, which extends through most of December. Traditionally, the lowest point of business activity for general merchandisers will be near the end of January and the beginning of February. Thus, these companies have chosen their natural business year for their fiscal years.
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Exercises
Ex. 4–1
a. Income statement: 3, 8, 9
b. Balance sheet: 1, 2, 4, 5, 6, 7, 10
Ex. 4–2
a. Asset: 1, 4, 5, 6, 10
b. Liability: 9, 12
c. Revenue: 2, 7
d. Expense: 3, 8, 11
Ex. 4–3
1. c
2. i
3. j
4. h
5. g
6. f
7. e
8. d
9. a
10. b
Ex. 4–4
FRANCESCA SERVICES CO.
Work Sheet
For the Year Ended December 31, 2003
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
1 Cash 4 4 1
2 Accounts Receivable 25 (a) 3 28 2
3 Supplies 4 (b) 3 1 3
4 Prepaid Insurance 6 (c) 5 1 4
5 Land 25 25 5
6 Equipment 16 16 6
7 Accum. Depr.—Equip. 1 (d) 2 3 7
8 Accounts Payable 13 13 8
9 Wages Payable 0 (e) 1 1 9
10 Capital Stock 7 7 10
11 Retained Earnings 49 49 11
12 Dividends 4 4 12
13 Fees Earned 30 (a) 3 33 13
14 Wages Expense 8 (e) 1 9 14
15 Rent Expense 4 4 15
16 Insurance Expense 0 (c) 5 5 16
17 Utilities Expense 2 2 17
18 Depreciation Expense 0 (d) 2 2 18
19 Supplies Expense 0 (b) 3 3 19
20 Miscellaneous Expense 2 2 20
21 Totals 100 100 14 14 106 106 21
Ex. 4–5
FRANCESCA SERVICES CO.
Work Sheet
For the Year Ended December 31, 2003
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
1 Cash 4 4 1
2 Accounts Receivable 28 28 2
3 Supplies 1 1 3
4 Prepaid Insurance 1 1 4
5 Land 25 25 5
6 Equipment 16 16 6
7 Accum. Depr.—Equip. 3 3 7
8 Accounts Payable 13 13 8
9 Wages Payable 1 1 9
10 Capital Stock 7 7 10
11 Retained Earnings 49 49 11
12 Dividends 4 4 12
13 Fees Earned 33 33 13
14 Wages Expense 9 9 14
15 Rent Expense 4 4 15
16 Insurance Expense 5 5 16
17 Utilities Expense 2 2 17
18 Depreciation Expense 2 2 18
19 Supplies Expense 3 3 19
20 Miscellaneous Expense 2 2 20
21 Totals 106 106 27 33 79 73 21
22 Net income (loss) 6 6 22
23 33 33 79 79 23
Ex. 4–6
FRANCESCA SERVICES CO.
Income Statement
For the Year Ended December 31, 2003
Fees earned $33
Expenses:
Wages expense $9
Insurance expense 5
Rent expense 4
Supplies expense 3
Utilities expense 2
Depreciation expense 2
Miscellaneous expense 2
Total expenses 27
Net income $ 6
FRANCESCA SERVICES CO.
Retained Earnings Statement
For the Year Ended December 31, 2003
Retained earnings, January 1, 2003 $49
Net income for the year $6
Less dividends 4
Increase in retained earnings 2
Retained earnings, December 31, 2003 $51
FRANCESCA SERVICES CO.
Balance Sheet
December 31, 2003
Assets Liabilities
Current assets: Current liabilities:
Cash $ 4 Accounts payable $13
Accounts receivable 28 Wages payable 1
Supplies 1 Total liabilities $14
Prepaid insurance 1
Total current assets $34
Property, plant, and Stockholders’ Equity
equipment: Capital stock $ 7
Land $25 Retained earnings 51 58
Equipment $16
Less accum. depr. 3 13
Total property, plant,
and equipment 38 Total liabilities and
Total assets $72 stockholders’ equity $72
Ex. 4–7
2003
Dec. 31 Accounts Receivable 3
Fees Earned 3
31 Supplies Expense 3
Supplies 3
31 Insurance Expense 5
Prepaid Insurance 5
31 Depreciation Expense 2
Accumulated Depreciation—Equipment 2
31 Wages Expense 1
Wages Payable 1
Ex. 4–8
2003
Dec. 31 Fees Earned 33
Income Summary 33
31 Income Summary 27
Wages Expense 9
Rent Expense 4
Insurance Expense 5
Utilities Expense 2
Depreciation Expense 2
Supplies Expense 3
Miscellaneous Expense 2
31 Income Summary 6
Retained Earnings 6
31 Retained Earnings 4
Dividends 4
Ex. 4–9
SPEEDY MESSENGER SERVICE
Income Statement
For the Year Ended April 30, 2003
Fees earned $173,700
Operating expenses:
Salaries expense $37,100
Rent expense 12,500
Utilities expense 7,500
Depreciation expense 4,200
Supplies expense 2,750
Insurance expense 1,500
Miscellaneous expense 1,350
Total operating expenses 66,900
Net income $106,800
Ex. 4–10
PANDA SERVICES CO.
Income Statement
For the Year Ended January 31, 2003
Service revenue $101,125
Operating expenses:
Wages expense $46,800
Rent expense 31,270
Utilities expense 8,500
Depreciation expense 7,500
Insurance expense 3,500
Supplies expense 3,100
Miscellaneous expense 2,250
Total operating expenses 102,920
Net loss $ (1,795)
Ex. 4–11
a.
FEDEX CORPORATION
Income Statement
For the Year Ended May 31, 1999
(in thousands)
Revenues $16,773,400
Operating expenses:
Salaries and employee benefits $7,087,728
Purchased transportation 1,537,785
Rentals and landing fees 1,396,694
Depreciation and amortization 1,035,118
Maintenance and repairs 958,873
Fuel 604,929
Other operating expenses 2,989,257
Total operating expenses 15,610,384
Income from operations $ 1,163,016
Interest expense $ 98,191
Other expenses 3,831 102,022
Net income before income tax $ 1,060,994
Less provision for income taxes 429,731
Net income $ 631,263
b. The income statements are very similar. The actual statement includes some additional information (i.e., earnings per share).
Ex. 4–12
GREENHORN SERVICES CO.
Retained Earnings Statement
For the Year Ended July 31, 2003
Retained earnings, August 1, 2002 $183,750
Net income for year $44,250
Less dividends 11,000
Increase in retained earnings 33,250
Retained earnings, July 31, 2003 $217,000
Ex. 4–13
YANKEE SPORTS
Retained Earnings Statement
For the Year Ended October 31, 2003
Retained earnings, November 1, 2002 $310,300
Net loss for year $48,150
Plus dividends 6,000
Decrease in retained earnings 54,150
Retained earnings, October 31, 2003 $256,150
Ex. 4–14
a. Current asset: 1, 3, 5, 6
b. Property, plant, and equipment: 2, 4
Ex. 4–15
Since current liabilities are usually due within one year, $150,000 ($12,500 × 12 months) would be reported as a current liability on the balance sheet. The remainder of $225,000 ($375,000 – $150,000) would be reported as a long-term liability on the balance sheet.
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Ex. 4–16
SHOSHONE CO.
Balance Sheet
June 30, 2003
Assets Liabilities
Current assets: Current liabilities:
Cash $ 2,150 Accounts payable $ 8,750
Accounts receivable 18,725 Salaries payable 1,750
Supplies 675 Unearned fees 1,200
Prepaid insurance 3,100 Total liabilities $11,700
Prepaid rent 2,400
Total current assets $27,050 Stockholders’ Equity
Property, plant, and equipment: Capital stock $25,000
Equipment $90,600 Retained earnings 59,850 84,850
Less accumulated depreciation 21,100 69,500 Total liabilities and
Total assets $96,550 stockholders’ equity $96,550
127
Ex. 4–17
1. The date of the statement should be "March 31, 2003" and not "For the Year Ended March 31, 2003."
2. Accounts payable should be a current liability.
3. Land should be classified as property, plant, and equipment.
4. "Accumulated depreciation" should be deducted from the related fixed asset.
5. An adding error was made in determining the amount of the total property, plant, and equipment.
6. Accounts receivable should be a current asset.
7. Net loss should be reported on the income statement.
8. Wages payable should be a current liability.
A corrected balance sheet would be as follows:
127
Ex. 4–17 Concluded
ZIGZAG SERVICES CO.
Balance Sheet
March 31, 2003
Assets Liabilities
Current assets: Current liabilities:
Cash $ 3,170 Accounts payable $ 4,390
Accounts receivable 8,390 Wages payable 975
Supplies 750 Total liabilities $ 5,365
Prepaid insurance 1,600
Total current assets $ 13,910
Property, plant, and equipment:
Land $100,000 Stockholders’ Equity
Building $55,500 Capital stock $ 40,000
Less accum. depreciation 23,000 32,500 Retained earnings 113,295 153,295
Equipment $28,250
Less accum. depreciation 16,000 12,250
Total property, plant, and
equipment 144,750 Total liabilities and
Total assets $158,660 stockholders’ equity $158,660
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Ex. 4–18
Accounts Receivable 5,100
Fees Earned 5,100
Supplies Expense 1,225
Supplies 1,225
Insurance Expense 1,000
Prepaid Insurance 1,000
Depreciation Expense 1,800
Accumulated Depreciation—Equipment 1,800
Wages Expense 900
Wages Payable 900
Unearned Rent 2,500
Rent Revenue 2,500
Ex. 4–19
d. Depreciation Expense—Buildings
g. Fees Earned
i. Salaries Expense
l. Supplies Expense
Ex. 4–20
The income summary account is used to close the revenue and expense accounts, and it aids in detecting and correcting errors. The $631,335 represents expense account balances, and the $812,575 represents revenue account balances that have been closed.
Ex. 4–21
a. Income Summary 216,450
Retained Earnings 216,450
Retained Earnings 40,000
Dividends 40,000
b. $582,150 ($405,700 + $216,450 – $40,000)
Ex. 4–22
Jan. 31 Fees Earned 380,700
Income Summary 380,700
31 Income Summary 299,300
Wages Expense 205,300
Rent Expense 74,000
Supplies Expense 15,500
Miscellaneous Expense 4,500
31 Income Summary 81,400
Retained Earnings 81,400
31 Retained Earnings 45,000
Dividends 45,000
Ex. 4–23
a. Accounts Receivable
b. Accumulated Depreciation
c. Cash
e. Equipment
f. Capital Stock
i. Supplies
k. Wages Payable
Ex. 4–24
BUCHANAN REPAIRS CO.
Post-Closing Trial Balance
July 31, 2003
Cash 5,125
Accounts Receivable 18,500
Supplies 1,100
Equipment 35,000
Accumulated Depreciation—Equipment 11,100
Accounts Payable 6,250
Salaries Payable 1,500
Unearned Rent 3,000
Capital Stock 8,000
Retained Earnings 29,875
59,725 59,725
Ex. 4–25
e, f, g, a, c, b, d
Ex. 4–26
a. 2000 working capital: $5,914,000,000 ($11,110,000,000 – $5,196,000,000)
1999 working capital: $1,723,000,000 ($4,761,000,000 – $3,038,000,000)
2000 current ratio: 2.14 ($11,110,000,000 ÷ $5,196,000,000)
1999 current ratio: 1.57 ($4,761,000,000 ÷ $3,038,000,000)
b. The working capital and the current ratio increased during 2000, a favorable trend. Before reaching a more definitive conclusion concerning Cisco Systems’ ability to meet its current obligations, the working capital and current ratio should be compared with past years, industry averages, and similar firms in the industry. It appears, however, that Cisco Systems’ 2000 working capital and current ratio are adequate.
Appendix Ex. 4–27
a. (1) Sales Salaries Expense 2,700
Salaries Payable 2,700
(2) Accounts Receivable 8,175
Fees Earned 8,175
b. (1) Salaries Payable 2,700
Sales Salaries Expense 2,700
(2) Fees Earned 8,175
Accounts Receivable 8,175
Appendix Ex. 4–28
a. (1) Payment (last payday in year)
(2) Adjusting (accrual of wages at end of year)
(3) Closing
(4) Reversing
(5) Payment (first payday in following year)
b. (1) Wages Expense 25,000
Cash 25,000
(2) Wages Expense 15,000
Wages Payable 15,000
(3) Income Summary 1,290,000
Wages Expense 1,290,000
(4) Wages Payable 15,000
Wages Expense 15,000
(5) Wages Expense 25,000
Cash 25,000
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Problems
Prob. 4–1A
1. THE PICKEREL LAUNDROMAT
Work Sheet
For the Year Ended July 31, 2003
Adjusted Income Balance
Trial Balance Adjustments Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
1 Cash 3,290 3,290 3,290 1
2 Laundry Supplies 5,850 (a) 4,710 1,140 1,140 2