A lr.

lrBrch
Chapter 3 explained the timing of
A lal, alTl'aAk{tu"
This chapter emphasizes the final steps in the ac-
A t .l,Ak l
Chapter 5 looks at accountin8
reports.We described why adlust- counting process and reviews the enlire accountinS formerchandising activities. We
ing accounts is key for recognizing cycle.We explain the closinS process, including ac- describe the sale and purchase of
revenues and expenses in the counting procedures and the use of a post-closing merchandise and their implications
proper period.We prepared an trial balance.We show how a work sheet aids in for preparing and analfzing linancial
adjusted trial balance and used it preparing fi nancial statements. statements.
to prepare financial statements.

Completing the
Accounting Cycle
Chapter

CAP
Conceptual Analytical Procedural

/a 1 Explain why emporary accounts are [ | Compute the current ralio and DI Prepare a work sheet and explain its
UI closed each period. (P. i40)
1\l d.r.rib" what it reveals about a I I usef,.rlness. /D. 136)
company! financial .ond:ftion. (p. 147)
ldentit steps in the accounting Describe and prepare closing
c2 cycle. (p. 144)
P2 entries. (P. ,4,)

n2 ID2
Explain and prepare a classified balance Explain and prepare a post-closing lrial
UJ sheet. (p. / 45) J tzrtance. (p. 142)

D1a Appendix 4A-Prepare reversing

B r r entries and explain their purpose.
LP4 (p. t s3)
 "Stoy true to your vision ond your mission"
Walk in Her Shoes -Kathryn
Kerrigan

CHICAGO-As a teenager Kathryn Kerrigan wore a Kathryn has successfully controlled materials costs while monitor-
size I I shoe and found shopping for shoes grueling."l ing both revenues and customer needs. She uses the accounaing sys-
remember driving wirh my dad to every shopping mall tem and closing entries to help identify and match costs with rev-
looking for shoes," recalls Kathryn. "lt! embarrassing and it doesnt enues for specific time periods. Kathryn says she relies on classified
have to be." Kathryn decided to do something about it. She wrote a balance sheets co know when to pay bills. But what pulls her through,
business plan for a college project and executed that plan with her admits Kathryn, is knowing that "we're putring our a product thats
dad! encouragement. Her start-up company, Kathryn Kerrigan missing in the marketplace."
(KathrvnKerrigan,com), now provides stylish women! shoes Kathryn is on a mission. "What keeps me going," explains Kathryn,
through size 14. "are all the women who keep coming up to me ... asking for shoes
Success, however, requires Kathryn to monitor costs. "\ y'e had to that fit." To make that happen, she tracks the accounting numbers to
create the molds for every shoe size;'explains Kathryn."These cos! be sure it is a money-making venture. "lt's important for entrepre-
about $2,000 each." She set up an accountinS system to track rev- neurs to be realistic;'insists Kathryn.Yet she adds,"A great pair of
enues and control costs, but it is a constant struggle as her business shoes can make all the difference!"
grows. Kathryn says that properly applying the accounting cycle,
[Sources: Kofiryn Kerrigon Websrte, ]anuary 2009; Success Mogozine, February 2008i
preparing classified financial statements, and acting on that information
lnc.com, luly 700L Beep, October 2007; Chicogo Sun-Times, February 20081
increase the odds of success. However, at times, admits Kathryn,"l
had to find humiliry and ask for help."
Hany of the important steps leading to financial statements period and updates the capital account. A work sheet is
were explained in earlier chapters.We described how trans- shown to be a useful tool for these final steps and in prepar-
actions and eyents are analyzed, journalized, and posted.This ing financial statements. lt also explains how accounts are
chapter explains the closing process that readies revenue, classified on a balance sheet to increase their usefulness
expense, and withdrawal accounts for the next reporting to decision makers.

. Benerits of a work . Temporary and . Definition of . Classification

sheet Permanent accounts accounting cycle structure
. Use of a work sheet . Closing entries . ReYiew of . Classilication
. Post-closing trial balance accounting cycle categories

Work Sheet as a Tool

Information preparers use various analyses and internal documents when organizing infor-
mation for internal and external decision makers. Internal documents are often called work-
ing papers. One widely used working paper is the work sheet, which is a useful tool for
preparers in working with accounting infbrmation. It is usually not available to external
decision makers.

Benefits of a Work Sheet

A work sheet is rzot a required report, yet using a manual or electronic work sheet has several
pl Prepare.a.work sheet
potential benefits. Specifically, a work sheet
and explarn rts
usefulness. I Aids the preparation of financial statements.
I Reduces the possibility of errors when working with many accounts and adjustments.
I Links accounts and adjustments to their impacts in financial statements.
I Assists in planning and organizing an audit of financial statements-as it can be used to
reflect any adjustments necessary.
I Helps in preparing intedm (monthly and quarterly) financial statements when the joumal-
izing and posting of adjusting entries are postponed until year-end.
I Shows the effects of proposed or "what-if" transactions.

m{}ci$}sn &n::!gt!'it
HiSh-Tech Work Sheet An electronic work sheet using spreadsheet software such as Excel allows
us !o easily chan8e numbers, assess the impact of alternalive strategies, and quickly prepare financaal
statements at less cost. lt can also increase the available time for analysis and interpretation.

Use of aWork Sheet

When a work sheet is used to prepare financial statements, it is constructed at the end of a
Point: S nce a wo.k sheer s not a period before the adjusting process. The complete work sheet includes a Iist of the accounts,
_..r .ei report o, an accounLing
-....c irs format is flexible and can their balances and adjustments, and their sorting into financial statement columns. It provides
:. Todiled by its user to fit his/her two columns each for the unadjusted trial balance, the adjustments, the adjusted trial balance,
the income statement, and the balance sheet (including the statement of owner's equity). To
 Chapter 4 Compledng fie Accounring Cycle tt7
describe and interpret the work sheet, we use the information from FastForward. preparing
the work sheet has five impotant steps. Each step, I through 5, is color-coded and expiainei
with ret'erence to Exhibits 4.1 and 4.2.

1 Step 1. Enter Unadjusted Tfial Balance

Refer to Exhibit 4.1. The tirst step in preparing a work sheet is to list the title of every account
and its account number that is expected to appear on its financial statements. This includes all
accounts in the ledger pius any new ones from adjusting entries. Most adjusting entries-
inc]uding expenses fiom salaries, suppries, depreciation, and insurance-are predictable and
recurring. The unadjusted balance for each account is then entered in the appropriate Debit or
credit column of the unadjusted trial balance columns. The totals of these two columns must
be equal. Exhibit 4.1 shows FastForward's work sheet after completing this first step. sometimes
blank lines are left on the work sheet based on past experience to indicate where lines will be
needed for adjustments to certain accounts. Exhibit 4.1 shows Consulting Revenue as one ex-
ample. An altemative is to squeeze adjustments on one line or to combine the effects of two
or more adjustments in one amount. In the unusual case when an account is not predicted, we
can add a new line for such an account following the Tbtqls line.

S Step Z. Enter Adjustments

Refer to Exhibit 4.l a (turn over lirst transpurency). The second step in preparing a work sheet
is to enter adjustments in the Adjustments columrs. The adjustmenis shown arelhe same ones Point! A recordkeeper often can com
shown in Exhibit 3.13. An identifying letter links the debir and credit of each adjusting entry. plere the proced!rrl task of lournaliztng
and posring adj!stin8 enries by usinS a
This is called keying the adjustments. After preparing a work sheet, adjusting entiies
-i,rt .titt
be entered in the journal and posted to the ledger. The Adjustments columiis provide the in-
work sheer and $e guidance rhat key,ns

formation for those entries.

3 Step 3. Prepare Adjusted Ttial Balance

ReJer to Exhibit 1.lb (turn over second transp,rency). The adjusted trial balance is prepared
by combining the adjustments with the unadjusted balances for each account. As an ixample,
the Prepaid Insurance account has a $2,400 debit balance in the unadjusted rr.ial Balance Pointl To avoid omit.lng fie rransfer
of an accounL balance. start whh ihe
columns. This 1i2,400 debit is combined with the gl00 credit in the Adjustments columns to
fil5r line (.ash) and conrinue in accounr
give Prepaid Insurance a $2,300 debit in the Adjusted rrial Balance columns. The totals of the
Adjusted Trial Balance columns confirm the equality of debits and credits.

& Step l. Sort Adjusted Trial Balance Amounts to Financial Statements

Refer to Exhibir 4.1c (turn over third transparency). This step involves sorting account balances
from the adjusted fial balance to their proper financial statement columns. Expenses go to the
Income statement Debit column and revenues to the lncome statement Credit column. Assets
and withdrawals go to the Balance Sheet & statement of owner's Equity Debit column. Liabilities
and owner's capital go to the Balance Sheet & Statement of Owner,s Equity Credit column.

5 Step 5. Total Statement Columns, Compute Income or Loss, and Balance Columns
Refer to Exhibit 4.1 tl (ntrn over fourth transparency). Each financial statement column (from
step 4) is totaled. The difference between the totals of the Income sratement columns is ner
income or net loss. This occurs because revenues are entered in the credit column anrr ex-
penses in the Debit column. If the Credit total exceeds the Debit totat. there is
net income- If
the Debit total exceeds the Credit total, there is a net loss. For FastForward, the credit total
exceeds the Debir rotal, giving a 93,785 net income.
The net income from the Income Statement columns is then entered in the Balance Sheet
& statement of owner's Equity Credit column. Adding net income to the last Credit column
implies that it is to be added to owner's capital. If a loss occurs, it is attded to the Debit column.
This implies that it is to be subtracted from owner's capital. The ending balance of owner's
capital does not appear in the last two columns as a single amount, but it is computed in the
[continued on p. 140]
EXHIBIT 4.I
Work Sheet with Unadiusted Trial Balance

lI

List all accounts from the A work sheet collects and summaTizes
ledger and those expected information used to prepare adiusting
to arise from adiusting entries, financial stacements, and closing
entries. entries-

Enter all amounts available

from ledger accounts.
Column totals must be equal.
E,(HIBIT 4.II
Cdmpste 6rd Er,r[er Arno!h'6 {or tlEAdiusled Trial Balance

t
I

Gor,nbine,unadiusted trial balance

arrcqrrdts. wi(h tfie adiustments to get
the adpEted trid balance amounts.
Column totals must be equal.
E)(HIEIT 4.IG
Extend the Adjusted Trial Balance Amounts to the Financial Statement Columns

l lI
I I

Extend all revenue Extend all asset,

and expense liability, capital,
amounts to the and withdrawals
income statement amounts to
columns. these columns.

These column totals will differ by the

amount of net income or loss.
EXltlEtT 4. r D
Compute and Enter the Net lncome o. Loss and Complete the Work Sheet

Net income
Totals

I
I

I
Net income (loss) is
Enter two new lines for the extended to the credit
net income or loss and for (debit) column of these
the toels. columns.
 Chapter 4 Completing rhe Accounring Cycle t 19

EXHIBIT 4.2
Financial Statements Prepared
from the Work Sheet

ConsJhing revenue $ 7,850

Renral reverue 300
Total reverues $ 8, rs0
Expenses
DepreLiac,o r elpense
-EqLrpnerl ......... 175
S, afler e\pe1se 1,510
lnsuranre erpense r00
Rent experse t,000
Supples expense t,050
UtiiLies e\pe'rse 230
Tocal expense, 4,365
\eL rn.ome $ 3,78s

C.Taylor. Capiral. Deceroer L. .. .... $0

Add. lnvest-nent oy owner . . $30,000
Net income 3,785 33,785
13,78s
Less:Withdrawals by owner .. 200
C.Taylor, Capital, December 3l $31,585

$ 4.3s0
Accoun(s receivable t,800
Supplies . . 8,670
Prepaid r,rsl,ance 2.300
Equipment. .. . $26,000
Accurirulated depreciation-Equipment . . . . . . . . (375) 25,625
Total assets. \ $42,745
Liabilities
$ 6,200
2t0
2.750
9,160

Equity
C Ia/lor. Capira 33,585
Total hrbrl'tres ard equicy ..... .. . $42,745
t40 Chapter 4 Completing $e AccounrinS Cycle

statement of owner's equity using these account balances. When net income or net loss is added
to the proper Balance Sheet & Statement of Owner's Equity columr, the lotals of the last two
columns must balance. If they do not, one or more errors have been nrade. The eror can eithet
be mathematical or ilvolve solting one or more amounts to incorrect columns.

I Decision Maker
Entrepreneur You make a prinlout of rhe elecrronic work sheet used to prepare financial slatements
There is no depreciation adlusrment, yet you own a large amount of equipment. Does the absence of
depreciation adjustment concern you? lAnswer p. l53l

Work Sheet Applications and Analysis

A work sheet does not substitute tbr frnancial statements. tt is a tool we Call use at the end of
an accounting period to help organize data and prcpare financial statemerts. FastForward's fi-
nancial statements are shown in Exhibit 4.2. tts income statement amounts ale taken tiom the
Incorne Statement columns of the work sheet. Similar'ly, amounts fbr its balance sheet and its
statement of ownet's equity are taken from the Balance Sheet & Statement of Owner's Equity
columns of the work sheet.
Infbr[ration frorn the Adjustments columns of a work sheet can be used to journalize ad-
tr:
t'ol iusting entries. It is important to remember that a work sheet is not a journal. This mears that
Video4.l even when a work sheet is prepiued, it is necessary to both journalize adjustments and post
them to the ledger.
Work sheets are also useful in analyzing the effects of proposed, or what-if. transactions. This
is done by ente ng financial statement amounts in the Unadjusted (what-if) columns Proposecl
transactiors arc then entered in the Adjustments columns. \rye then compute "adjusted" amounts
tt-on these proposed transactions. The extended amounts in the financial statement Colulnns show
the effects of these ptoposed transactions. These ltnancial statement columns yield pro forma
financial statements because they Show the Statements.rJ rf the proposed transactions occurred.

l. where do we get the amounts to enter in the Unadjusted Trial Balance columns of a work sheetl
2. Wha! are the advantages of using a work sheet to help PrePare adjustinS entries?
3, What are the overall benefils of a work sheetl

Closing Process
The closing process is an impulant step at the end of an accounting period rrfier lina[cial
Explain why temporary
C 1 accounts are closed eacn
. statements have been cornpleted. It prepares accounts tbl recording the trarsactions and the
period. events of the /?e-rl period. In the closing process we must (1) identify accounts for closing'
(2) record and post the closing entries. and (3) prepare a post-closing trial balance The put
pose of the closing process is twofold. First. it resets revenue, expense, and withdrawals account
balarnces to zero at the end of each perio.I. This is done so that these accounts can properly
measure income ancl withchawals fbr the next period. Second, it helps in summadzing a period's
revenues and expenses. This section explains the closing plocess.

Temporary and Permanent Accounts

Temporary (or rutruinul) accounts accumulate data related to one accounting period They
include all income statement accounts, the withdrawals account, and the Income Summaly
i'Permanent Accounts account. They are temporary because the accounts are opened at the beginnin-q of a period,
I Assets used to lecord tlansactions and events fol that period, and then closed at the end of the pedod'
I Liabitit es The closirtg ptocess opplies onb to temllorqry occotl[tt. Permanent (or t"ll1) accounts report
,' Owner Capjtal on activities related to one or more future accounting periods. They can'y their ending balances
into the next periocl and generally consist of all balance sheet lccounts. These asset, Jiability,
and equity accounts ale not closed.
 Chapter 4 Completing the Accounting Cycle t4t

Recording Closing Entries

To record and post closing entries is to transfer the end-of-period balances in revenue, ex-
pense. and withdrawals accounts to the permanent capital account. Closing entries are neces-
sary at the end of each period after financial statements are prepared because

I Revenue, expense, and withdrawals accounts must begin each period with zero balances.
I Owner's capital must reflect pl'ior periods' revenues, expenses, and withdrawals.
An income statement aims to reporl revenues and expenses for a specirtc accounting period.The Point: To understand the closlnS
statement of owner's equity repofis similar infbrmation, including withdrawals. Since revenue, process, focus on its outcomes Updorrns
expense, and withdrawals accounts must accumulate information separately for each period, they the .apiral ac.o!nt balairce to lts proper
ending balance, and gett ng temporor),
must start each period with zero balances. To close these accounts, we transt'er their balances first
o.courts ro show zero bolon.es for pur-
to an account called Income Summary. Income Summary is a temporary account (only used for. poses o{ accumularing dara for the next
the closing process) that contains a credit for the sum of all revenues (and gains) and a debit for
the sum of all expenses (and losses). Its balance equals net income or net loss and it is trans-
f'ered to the capital account. Next the withdrawals account balance is transferred to the capital
account. After these closing entries are posted. the levenue, expense, withdrawals, and lncome
Summary accounts have zero balances. These accounts are then said to be closetl or cleqred.
Exhibit 4.3 uses the adjusted account balances of FastForward (from the Adjusted Trial
Balance columns of Exhibit 4.1 or from the left side of Exhibit 4.4) to show the four steps nec-
essary to close its temporary accounts. We explain each step.

EXHIBIT 4.3
Four-Step Closing Process
@ Close revenue accounts

@ Close expense accounts

@ Close income summary

@ Close withdrawals account

Consulting Revenue
7,8501 Balance 7.850
lncome Summary

C. Taylor, Capital
Balance 30,000
I'
Point! C.Tay of, Cap ral s rhe on y
J in
Pernrdnenr o..ounr Exh bir 4.3.

Step I! Close Credit Balances in Revenue Accounts to Income Summary The

Describe and prepare
first closing ently transfers credit balances in revenue (and gain) accounts to the Income Summary P2 closrnS entfles.
account. We bring accounts with credit balances to zero by debiting them. For FastForward, this
joumal entry is step I in Exhibit 4.4. This entry closes revenue accounts and Ieaves them with zero
balances. The accounts are now ready to record revenues when they occur in the next period. The
$8,150 credit entry to Income SummtLry equals total revenues for the period.

Step 2! Close Debit Balances in Expense Accounts to lncome Summary

The second closing entry transfers debit ba)ances in expense (and loss) accounts to the Income Point: k is possible to c ose revenle
and expense a.counls directly ro
Summary account. We bring expense accounts'debit balances to zero by crediting them. With ow.er! capita. Compurerlzed acco!n.
a balance of zero, these accounts are ready to accumulate a record of expenses for the next

jil
142 Chapter 4 Completint lhe Accounling Cycle

Dec. 31- 1- ConsultingRevenue..............................-. 7,850

Renlal Revenue................,..,................. 300
Cash ............... .... ............................... $ 4,350 lncome Summary....... 8,150
AccoLrnts receivab1e............................ 1,800 To close revenue accounts.
Supplies .............................................. 8,670 Step 2:
Prepaid insurance.............................. 2,300
Equipment........................................... 26,000 Dec. 31 1ncome Summary..,................. ......... .... 4,365

Accumulaled depreciation-Equip...... $ 375 Depreciation Expense-Equipment.. 375

Accounts payable..... 6,200 Salaries Expense....... 1,610
Salaries payable........ 210 lnsurance Expense..... 100
UnearnedconsultingrevenLle............. 2,750 Rent Expense............. 1,000
C. Taylor, Capital 30,000 Supplies Expense...,.. 1,050
C. Taylor, Withdrawals...........-............ 20O Utilities Expense........ 23o
...
Consulting 'evenue 17.850 To close ex?ense accounts.
Rental revenue.......... | 300 Step 3:
Depreciationexpense-Equip.........-... 375
Salaries expense..........-...................... 1,610 Dec.31 1ncomeSummary............... .............. 3,785
lnsurance expense.... 100 C. Taylor, Capital.. .... 3,785
Rentexpense...................................... 1,000 To close lncome Summary account.
Supp1iesexpense.........................- ...
1,050 Step 4:
Utilities expense..........................-....... 230
Totals .................................................. $47-Q!! Dec.31 C.Tay1or,Capital.................................. 200
C. Taylor, Withdrawals 2oo
To close the withdrawals account.

EXHIBIT 4.4
Preparing Closing Entries
period. This second closing entry for FastForward is step 2 in Exhibit 4.4. Exhibit 4.3 shows
that posting this entry gives each expense account a zero balance.

Step 3: Close Income Summary to Owner's CaPital After steps 1 and 2, the bal-
anc; of Income Summary is equal to December's net income of $3,785. The third closing en-
try transfers the balance ofthe Income Summary account to the capital account. ThiS entry closes
the Income Summary account-see step 3 in Exhibit 4.4. The Income Summary account has a
zero balance after posting this entry. It continues to have a zero balance until the closing process
again occurs at th; end of the next period. (If a net loss occurred because expenses exceeded
revenues, the third entry is reversed: debit Owner Capital and credit Income Summary )

Step 4: Glose Withdrawals Account to Owner's Capital The fourth closing en-
try transt'ers any debit balance in the withdrawals account to the owner's capital account see
step 4 in Exhibit 4.4. This entry gives the withdrawals account a zelo balance, and the account
is now ready to accumulate next period's withdrawals. This entry also reduces the capital
account balance to the $33,585 amount reported on the balance sheet
We could also have selected the accounts and amounts needing to be closed by identifying
individual revenue, expense, and withclrawals accounts in the ledger. This is illustrated in Exhibit
4.4 where *. pr.por" closing entries using the acljusted trial balance.r (lnformation lbr clos-
ing entries is also in the financial statement columns of a work sheet.)

Post-Closing Trial Balance

Exhibit 4.5 shows the entire Iedger of FastForward as of December 3l after adjusting and clos-
D?
tJ Explain and prepare a
ing entries are posted. (The transaction and adjusting entries are in Chapters 2 and 3 ) The tem-
post-closing trial balance.
porary accounts (revenues, expenses, and withdrawals) have ending balances equal to zero'

r The closing process has focused on proprietorships. It is identical for partnershiPs with the excePiion that each
owner has sieparate capital and h.ithdrawals ac.ounts (for steps 3 and 4). The closing Process for a colporation is
similar with the excepiion ihat it uses a Retained Earnings account instead oI a CaPital account, and a Dividend
account instead of a Withdmwals account.
EXHIBIT 4.5
General Ledger after the Closing process for FastForward

Acct. No. l0l Accounr! Receivable Acct. No. 106 Prepaid lnsurance Acct. No. 128

2009 2009

Dec. I GI 30,000 30,000 Dec. l2 t.900

2 GI 2,s00 27,500 22 0
3 GI 26,000 r,500 3t Adi. t,800 Equipmenr Acct. No. 167
5 GI 5,700
Supplies Acct. No. 126
6 Date Explan. PR Debit Credit Balance
GI 2,400 3,300
t2 2009
GI t,000 2,300
1009 Dec,
t2 GI 700 r,600 G 26,000
22 GI
Dec. 2 GI 2,500 2,500
3,500 Accumulated Depreciation-
24
6 GI 7, r00 9,600 Equipment Acct. No. 168
GI 900 2,600
24
26 GI t20 9,720
GI 200 2,400 Date Explan. PR Debit Credit Balance
3t Adj. GI r,050 8,670
26 GI 3,000 5,400 200t
26 GI t20 5,280 Dec. 3l Adi. G 375 7S
26 GI 230 5,0s0
26 GI 700 4,350

A(counts Pa/able Accr. No.20l Unearn€d Consulting C.Taylor, Capital AccL No. l0l
Revenue Acct. No.235

2009
30,0001 10,000
Dec. 26 3,000 3,000 3,785 | 33,78s
3t Ad,. 2,750
Salaries Payable Acct. No. 209 3llclosinslGtl 200 33,585
Date Explan. PR Debit Credit Balan.e C.Taylor,Withdrawals Acct. No. 302
2009

Dec.3l Adj GI 2t0 0

Dec.24
3t

Consuhlng Revenue Acct. No.403 Salaries Expense Acct. No 522 Supplies Expense Ac(t. No 652

2009

Dec. 5 4,200 4,200 700 700

t2 t,600 5,800 700 t,400
3t Adj. iGr 250 6,050 Adj. I Gr 2r0 t,6t0
Utilities Expense Acct. No.690
3t t,800 7,850
3t 0
lnsurance Expense Acct. No. 637
Rental Revenue Acct. No.406

Adj. lGr r00

lncome Summary Acct. No. 901
300 0
0
Rent Expense Acct. No. 640
Depreciation Expense-
Equipment Acct. No.6l2
ClosinS lGl 8,r50 8,t50
Closing lGl 4,165 3,785
0

Adj. lGr
144 Chapter 4 Completing the AccountinS Cycle

A post-closing trial balance is a list of permanent accounts and their balances from
the ledger after all closing entries have been journalized and posted. It lists the balances for all
accounts not closed. These accounts comprise a company's assets, liabilities, and equity, which
are identical to those in the balance sheet. The aim of a post-closing trial balance is to verify
that (l) total debits equal total credits for permanent accounts and (2) all temporary accounts
have zero balances. FastForward's post-closing trial balance is shown in Exhibit 4.6. The posl
closing trial balance usually is the last step in the accounting process.

EXHIBIT 4.6
Post-ClosingTrial Balance

$ 4,3s0
Accounts receiYable . . t,800
Supplies . . . 8,670
Prepaid insumnce 2,300
Equipmenr . 25,000
Accumulared deprecraoon-Equipment ....... $ 37s
Accounts payable 6,200
Salaries payable 2t0
Unearned consuhinB re 2,750
C. Ta/lor, Capital 33,585
Totals..... $43,r20 $43,t20

Accounting Cycle
The term accounting cycle reters to the steps in preparing financial statements. It is called a
ldentiff steps in the
f f, accounfing cycle.
cycle because the steps are repeated each repofiing period. Exhibit 4.7 shows the l0 steps in
the cycle, beginning with analyzing transactions and ending with a post-closing trial balance

EXHIBIT 4.7 .1o.9,:'^

Sreps in the Accounting Cycle+ .: --, ,','-----,-,-
tansacltons *i Reverse +. Prepare post- +:
Anatvze
^
' {optonaD clostng trlal oalance
^i'.
utor

v \ ---'r-- t
2, / ,-\ 7.
Accounting
Journalize \ _ ,/ ,,: proDare
Propare sti
sta'tements
=_/

^!4.-6. .+!
-E Prepare unadjusted "''-.
-:-;^;.^;::'-:*- "> Prepare adjJsted
i:,
Post o.i,*
Adiust
Adjust
trial balance

EI l. Analyze ransactions AnalFe tEnsactions to prepare for journalizing.

lol Record accounts, includinS debits and crediti, in a journal.
Vide04 .t Transfer debits and.redits from the journalto the ledger.
4. Prepare unantusted trial balan.e Summarize unadjosted led8er accounts and amounts.
Record adjustments to brint acco!nt balances up to datei journalize and post adjuslments.
6. Prepare adiusted trial balance Summarize adiusred ledter accounts and amounts.
7. Prepare starements Use adjusled trial balance to p.epare fi.ancial statements.
8.
Close loornalize and posr entries ro close temporar/ accounts.
Prepare post{losiit
9. tial balance Tes! clerical accura.y olthe closint procedores.
10. Reverse (oplional) Reverse cenain adjustments in the next period<ptional slepr see APPendix 4A.

* Steps 4, 6, and 9 can be done on a work sheet. A work sheet is useful n pLanninr adiustments, but adiustments Gtep 5) must always be
journalized and posted. Steps 3, 4, 6, and I are automati< with a compoterized system.
 Chapter 4 Completing rhe AccountinS Cycle t4t
or reversing entries. steps I through 3 usually occur regularly as a company enters inro trans-
actions. steps 4 through 9 are done at the end of a period. Reversing entries in step l0 are
optional and are explained in Appendix 4A..

4. What are fie maior steps in preparing closing entriesl

5. Why are revenue and expense accounts called temporory? ldentify and list the types of temporary
accounts.
6. What accounrs are listed on the post-closing trial balance?

Classified Balance Sheet

our discussion to this point has been limited to unclassified financial statements. This section de-
scribes a classified balance sheet. The next chapter describes a classified income statement. An |aI Explain and prepare a
-J classifled balance sheet.
unclassified balance sheet is one whose items are broadly groupecl into assets, liabilities, and eq-
uity. one example is FastForward's balance sheet in Exhibit 4.2. A classified balance sheet oi-
ganizes assets and liabilities into important subgroups that provide more information to decision
makers.

CIassifi cation Structu re

A classified balance sheet has no required layout, but it usually contains the categories in
Exhibit 4.8. one of the more important classifications is the separation between current ancl
noncurent items for both assets and liabilities. curent items are those expected to come due ts
Vide04-
(either collected or owed) within one year or the company,s operating cycle, whichever is
longer The operating cycle is the time span from when cash is used to acquire goods and
services until cash is received ftom the sale of goods and services. "operating;' refeis to com-
pany operations and "cycle" refers to the circular flow of cash used for company inputs and
then cash received from its outputs. The length of a company's operating cycle depends on its
activities. For a service company, the operating cycle is the time span between ( l ) paying em-
ployees who perform the services and (2) receiving cash from customers. For a merchandiser
selling products, the operating cycle is the time span between (l) paying suppliers for mer_
chandise and (2) receiving cash from customers.

EXHIBIT 4.8
Typical Categories in a Classified
Current assets Current liabilities
Balance Sheet
Noncurrent assets Noncurrent liabiliries
Long-t€rm investments Equity
Plant assets
lntangibl€ assers

Most operating cycles are less than one year This means most companies use c one_year
period in deciding which assets and liabilities are cuffent. A few companies have an operating
cycle longer than one year. For instance, producers of certain beverages (wine) ancl producti
(ginseng) that require aging for several years have operating cycles longer than one year A
balance sheet lists current assets before noncufient assets and current liabilities befoie non-
current liabilities. This consistency in presentation allows users to quickly identify current as-
sets that are most easily converled to cash and current liabilities that are shortly ioming due.
Items in current assets and current liabilities are listed in the orcler of how quickly they will
be converted to, or paid in, cash.

Classifi cation Categories

This section describes the most common categories in a classified balance sheet. The balance
sheet for Snowboarding components in Exhibit 4.9 shows the typical categories. Its assets are

t
146 Chapter 4 Completing the Accounting Cycle

EXHIBIT 4.9
Example of a Classified
Balance Sheet

As3ets
Current assets
Cash..... $ 6,s00
Shofi-rerm investments 2, t00
Accounts receivable,net .,.,,... 4lo0
Merchandise inventory . . 27,s00
Prepaid expenses 2,400
Total (urrent a5seB $ 42,900
Long"term investments
Notes receivable t,500
lnveltments in stocks and bonds 18,000
Land held for fuure expansion . . . 48,000
Total lonS-rerm investments . 67,500
Plant assets
Equipment and buildints 203,200
Less accumulared depreciation 53,000 t50,200
Land..... 73,200
Total plant assets 223,400
lntantible assets 10,000
Total assets ,
9l1tE99
Liabilities
Current liabilities
Accounts payable $ 15,300
Wa8es payable . 3,200
Notes payable 3,000
Currenr portion of long-term liabilkies 7,500
Toral currenr liabilities $ 29,000
Lonfterm liabilities (net of current portion) ....... t50,000
Total liabilities t79,000

Equit!,
I Hawk, CapiEl t64,800
Total liabilides and equiry . . . . . $343,800

classified as either current or noncunent. Its noncurrent assets include three main categories:
long-term invesftnents, plant assets, and intangible assets. Its liabilities are classified as either
current or long{erm. Not all companies use the same categories of assets and liabilities for
their balance sheets. K2 Inc.'s balance sheet lists only three asset classes: cunent assets; prop-
erty, plant and equipment; and other assets.

Current Assets Current assets are cash and other resources that are expected to be sold,
collected, or used within one yer[ or the company's operating cycle, whichever is longer.
Examples are cash, short-term investments, accounts receivable, short-term notes receivable,
goods for sale (called merchandise or inventory), and prepaid expenses. The individual pre-
paid expenses of a company are usually small in amount compared to many other assets
and are often combined and shown as a single item. The prepaid expenses in Exhibit 4.9 likely
Point! Cur.ent k also called shor!-
include items such as prepaid insurance, prepaid rent, office supplies, and store supplies.
term, and noncurrenr is ako called Prepaid expenses are usually listed last because they will not be converted to cash (instead,
they are used).
 Chapter 4 Complering theAccounting Cycle 147

Long-Term lnvestments A second major balance sheet classification is long-term (or

noncuryent) inyestments. Notes receivable and investments in stocks and bonds are long{erm
assets when they are expected to be held for more than the longer of one year or the operat-
ing cycle. Land held for future expansion is a long-term inyestment because it is not used in
operations.

Plant Assets Plant assets rLre tangible assets that are both long-lived and usecl to protluce or
sell proclucts antl senrlces. Examples are equipment, machinery buildings, and land that are used Point: Pnn. asse.s a.c also ca led ,xed
to produce or sell products and services. The order listing for plant assets is usually from most p/dhrcnd equrpmenr or
dsseisr property,

liquid to least liquid such as equipmenr and machinery to buildings and land.

lntangible Assets Intangible assets are long-term resources that benefit business oper-
ations, usually lack physical form, and have uncertain benefits. Examples are patents, trade-
marks, copyrights, franchises, and goodwill. Their value comes from the privileges or rights
granted to or held by the owner. K2, lnc., repo s intangible assets of $228 million, which is
neatly 20 percent of its total assets. Its intangibles include trademarks, patents, and licensing
agreements.

current Liabilities current liabilities are obligations due to be paid or settled within one
year or the operating cycle, whichever is longer They are usually settled by paying out curent
assets such as cash. Current liabilities often include accounts payable, notes payable, wages
payable, taxes payable, interest payable, and unearned revenues. Also, any portion of a long-
term liability due to be paid within one year or the operating cycle, whichever is longe1 is a
curent liability. Unearned revenues are curent liabilities when they will be senled by delivering Point: l"lany llnancialratos are disrorrcd
products or services within one year or the operating cycle, whichever is longer Cunent liabil- f a..oun.s are no. class fied corre.tly.
ities are reported in the order of those to be settled first.

Long-Term Liabilities Long-term liabilities are obligations nor due within one year or
the operating cycle, whichever is longer. Notes payable, mortgages payable, bonds payable,
and lease obligations are common long-term liabilities. If a company has both short- and long,
term items in each of these categories, they are commonly separated into two accounts in the
ledger

Equity Equity is the owner's claim on assets. For a proprietorship, this claim is reported in
the equity section with an owner's capital account. (For a partnership, the equity section re-
pofis a capital account for each partner. For a corporation, the equity section is divided into
two main subsections, common stock and retained eamings.)

Classit the following asse$ as (l) current assets, (2) plant assets, or (3) intangible assers:
(o) land used in operations, (6) office supplies, (c) receivables from customers due in l0 months,
(d) insurance protection for the next 9 months, (e) trucks used to provide services to customers,
(f) trademarks.
8, Cite two examples of assets classified as investments on the balance sheet.
9. Explain the operating cycle for a service company.

An important use of financial statements is to help assess a company's ability to pay its debts ill the Comeute the currenc
near future. Such analysis affects decisions by suppliers when allowing a company to buy on credit. Il ratto and descflbe what
It also affects decisions by creditars when lending money to a company, including loan terms such it reveals about a
as irterest mte, due date, and collateral requirements. It can also affect a maaager's decisiqns about company's financial
using cash to pay debts when they come due. The current ratio is one measure of a company,s ability condition.
148 Chapter 4 Completing the Accounting Cycle

to pay its shorGterm obligations. lt is defined in Exhibit 4.10 as cuffent assets divided by current
liabilities.

EXHIBIT 4. IO Current assets

Current ratio =
Current Ratio Current liabilities

Using financial information from l,imitcd llrands, Inc., we compute its curent mtio for the recent four-
year period. The results are in Exhibit 4.11.

EXHtBtr 4.t I
Limited Brands' Current Ratio
Currentassets ............ $2,771 $2,784 $2,684 $4,4r1
Currentliabilities ........... $1,709 $r.s75 $1,45r $ r,388

Current ratio .. 1.6 1.8 t.8 3.2

lndustry current ratio . . . . . . . 7-3 )4 2.5 2.7

Limited Bmnds' current ratio averaged 2.1 for 2004 through 2007. The current ratio for each of these
years suggests that the company's short-term obligations can be covered with its sho term assets.
However, if its ratio would approach 1.0, Limited would expect to face challenges in covering liabili-
iu,r.oi.t,-, o* ro -"**o, c*n*l ties. If the ratio were less than 1.0, current liabilities would exceed curent assets, and the company's
ability to pay short-term obligations could be in doubt.

t oeclsion Maker
Analyst You are analyzing rhe linancial condition of a company to assess its ability to meet uPcomin8
loan payments. You compute its current ratio as 1.2- You also find lhat a maior portion of accounts receivable
is due from one clien! who has no! made any payments in lhe past 12 months. Removing this receivable
from current assets lowers the current ratio to 0.7. What do you conclude? IAnswe.-p. l53l

Demonstration Problem
The partial work sheet ol Midtown Repair Company at December 3I . 2009. follows
E
DP4

Cash . . .. 95,600
Nores receivable (currenr) . . 50,000
Prepard r']slrance t5,000
Prepaid rent 4,000
Equ pmerr . t70.000
AccumJlaleddeprecrario,r Equipmenr .... 57.000
Ac.ourrs payable s2,000
Lon8-rerm nores oayable . . 53,000
C.Trour. Caprtal 178.500
C.T ou(,Wirl-drawals 10.000
Repair servr(es revenue . . . 180,800
lnLerest revenue 7,500
Depre.racior expense-Equipmenr .. .. 28,s00
WaSes expe']se 85,000
Renr expense 48,000
lnsurdnce erpense 6,000
lnrcresi expense 5,700
Totak .... 538,800 518_800
 Chapte. 4 Completing the Accounting Cycle 149

Required
l. Complete the work sheet by extending the adjusted trial balance totals to the appropriate financial
statement columns.
2. Prepare closing entries for Midtown Repair Company.
3. Set up the Income Summary and the C. Trout, Capital account in the general ledger (in balance
column format) and post the closing ent es to these accounts.
Determine the balance of the C. Trout, Capital account to be reported on the December 31, 2009,
balance sheet,
5. Prcparc an income statement, statement of owner's equity, and classified balance sheet (in report
form) as of Decemb er 3l , 2009 .

Planning the Solution

Extend the adjusted trial balance account balances to the appropriate financial statement columns.
Prepare entries to close the revenue accounts to Income Summary, to close the expense accounts to
Income Summary to close Income Summary to the capital account, and to close the withdrawals
account to the capital account.
Post the first and second closing entries to the Income Summary account. Examine the balance of
income summary and vedfy that it agees with the net income shown on the work sheet.
Post the third and fourth closing entries to the capital account.
Use the work sheet's two right-most columns and your answer in part 4 to prepare the classified
balance sheet.

Solution to Demonstration Problem

l. Completing the work sheet.

Cash....... 95,600 95,600

Notes receivable (curre"t)............. 50,000 50,000
Prepaid insurance t6.000 t6,000
Prepard rent 4.000 4,000
Equipmenr. t70,000 170,000
Accumulated depreciation-Equipment . . . 57,000 57,000
Accounts payable s2,000 52,000
LonS-term notes payable . . . 63,000 63,000
C.Trout. Capi(al t78,500 t78,500
C.TrouqWichdrawals 30,000 30,000
Repair services revenue . . , t80,800 t80,800
lnterest revenue 7,500 7,500
Depreciation expense-Equipmenr ...... 28,500 28,s00
\ /ages expense 85,000 85,000
Rena expense 48,000 48,000
Insurance expense 5,000 6,000
lnterest expense 5,700 5,700
Torah..... 538,800 538.800 t73,200 t88.300 365,600 350,500
Net income t5, t00 t5,t00
ToBls..... t88,300 188,300 355,600 365,600

2. Closing enties.

Dec. 3l Repair Services Revenue. . . t80,900

lnterest Revenue 7,500
Income Summary t88,300
To close rcvenue occounts.

lcontinued on next pagel

Chapter 4 Completing theAccounting Cycle

lcontinued from pr€vious Pagel

Dec.3l lncome Summary, r73,200

Depreciation Expense-Equipment. 28,500

WaSes Expense. 85,000

Rent Expense . 48,000

lnsurance Expense, 6,000

lnterest Expense. 5,700

70 close expense dccounts.

Dec. 3l lncome Summary..... !5, t00

C.Trout, Capiul r5, t00

Io close dre /nrome Summory occount

Dec. 3l C.Trou( Capi6l. 30,000
c. Trout. Withdrawals 30,000

To close the wihdrowols occount

3. Set up the Income Summary and the capital ledger accounts and post the closing entries'

BetinninS balance 0

Close revenue accounts 188,300

Close expense accounts t5,r00

Close income summary 0

4. The final capital balance of $163,600 (from part 3) will be reported on the December 31, 2009, bal-
ance sheet. ihe final capital balance reflects the increase due to the net income eamed dudng the
year and the decrease for the owner's withdrawals during the year.

Repair services revenue . , . $ 180,800

Inreresr revenue 7,500
Total revenues $188,300
Expenses
Depreciadon expense-Equipment ....... 28,500
Wages expense 85,000
Rent expense 48,000
lnsurance expense 6,000
lnteresr expense 5,700

Total expenses 173,200

Net income $ r5, r00

 Chapter 4 Completing the Accoun[ing Cycle t5t

$178,s00
Add: ow
lnyescment by .......-....... $ O

Net income t5,100 15. tOO

trrSoo
Less: Withdrawals by owner . 3O,OOO

C. Trout, Capital, December I l, 2009 $153,500

Current assets
Cash .. ........ $ 95,600
50,000
t5,000
4,000
t65.600

Equipment . $t70,000
Less:Accumulateddepreciation-Equipmenr ....... (57.000)
Toul planL rsse(s ll],000
Total assers .
$rzq4g
Liabitities
Current liabilities
A.(ounts payable $ 52,000
LonS-term liabilities
Long-Lerrn notes payable . .. . 6r.000
Toul liabrlises r t5,000

Equity
C. Trout, Capital r63,600
Tocal liabilitie, and equity $278,600

Reversing Entries
4A
ReYersing entries are optional. They are recoded in Iesponse to accrued assets and accrued liabilities
that were created by adjusting entries at the end of a reporting period. The purpose of revcrsing entries
is to simplily a company's recordkeeping. Exhibit 4A.l shows an exarnple of FastForwar.d,s i.eversing
entries. The top of the exhibit shows the adjusting entry FastForward recorded on December 3 I for its
Point: As . Eenen , fs .i
rle. adiusr
emplo),ee's earned but unpaid salary. The entry recorded rhree days' salary of $210, which increased t es thar crea.e new asse: or jibiiry
December's total salary expense to 5i1,610. The entry also recognized a liability of $210. The expense kely.indidrres ior
is reported on December's income statement. The expense account is then closed. The ledger on January l,
152 Chapter 4 Completing the Accounting Cycle

EXHIBIT 4A. I
Reversing Entries for an Salaries Expense 21O
Accrued Expense SalariesPayable ... .210

Dec. 12 | (7) 700

26 | (16) 700

No reversing entry recorded on , o** A Reversing entry recorded on

January 1,2010
Salaries Payable 210
Expense
Salaries 210

Pay the accrued and current salaries on January 9, the fi6t payday in 2010
t
Salaries Expense. 49o SalariesExpense 700
Salaries Payable 210 Cash 7OO
Cash .. .700

3'"'L rl l*o Jan. 11 21ol I 0

Under both approaches, the expense and liability accounts have

identical balances after the cash payment on January 9.
Salaries Expense . .. $490
Salaries Payable .. . $ 0
'Circled nunrbers in the Balarce column indicate abnormalbaances

2010, shows a $210 liability and a zero balance in the Salaries Expense account. At this point, the choice
is mude berueen using or not using reversing entries.

Accounting without Reversing Entries

The path down the left side of Exhibit 4A.l is described in the chapter To summarize here, when the
next payday occurs on January 9, we record payment with a compound entry that debits both the ex-
pense and liability accounts and credits Cash. Posting that entry creates a $490 balance in the expense
account and reduces the liability account balance to zero because the debt has been settled. The disad
vantage of this approach is the slightly more complex entry required on January 9. Paying the accrued
 Chapter 4 Completing the Accounring Cycle 133

liability means that this entry differs from the routine entdes made on all other paydays. To construct
the proper entry on January 9, we must recall the effect of the December 3l adjusting entry. Reversing
entdes overcome this disadvantage.

Accounting with Reversing Entries

The right side of Exhibit 4A.l shows how a reversing entry on January I overcomes the disadvantage p4[ Prepare reversing enrries
of the January 9 entry when not using reversing entries. A reversing entry is the exact opposite of an ad- ,
and exPlarn therr
justing entry. For FastForward, the Salaries Payable liabiliry account is debited for $210, meaning that purpose.
this account now has a zero balance after the entry is posted. The Salaries Payable account temporarily
understates the liability, but this is not a problem since financial statements are not prepared before the
liability is settled on January 9. The credit to the Salaries Expense account is unusual because it gives
lhe accowt at abnomal credit balance. We highlight an abnormal balance by circling it. Because of the
reversing enty, the January 9 entry to record payment is staightforward. This entry debits the Salafies
Expense account and credits Cash for the full $700 paid. It is the same as all other entries made to rccord
l0 days' salary for the employee. Notice that after the payment entry is posted, the Salaries Expense ac-
count has a $490 balance that reflects seven days' salary of $70 per day (see the lower right side of
Exhibit 4A.l). The zero balance in rhe Salaries Payable account is now correct. The lower section of
Exhibit 4A.1 shows that the expense and liability accounts have exactly the same balances whether
reversing entries are used or not. This means that both approaches yield identical rcsults.

f,l Explain why temporary accounts are closed each period. Pl Prepare a work sheet and explain its usefulness. A work
Temporary accounts are closed at the end of each accounting sheet can be a useful tool in preparing and analyzing finan-
period for two main reasons. First, the closing process updates the cial statements. It is helpful at the end of a period in preparing
capital account to include the effects of all transactions and events adjusting entries, an adjusted trial balance, and financial state-
recorded for the period. Second, it prepares revenue, expense, and ments. A work sheet usually contains five pairs of columns:
withdrawals accounts for the next reporting pedod by giving them Unadjusted Trial Balance, Adjustments, Adjusted Tdal Balance,
zero balances. Income Statement, and Balance Sheet & Statement of Owner's
(]f, Identify steps in the accounting cycle. The accounting cycle Equity.
consists of 10 steps: (l) analyze tansactions, (2) joumalize, Describe and prepare closing entries. Closing entries in-
(3) post, (4) prepare an unadjusted trial balance, (5) adjust accounts,
P2
volve four steps: (1) close credit balances in revenue (and
(6) prepare an adjusted trial balance, (7) prepare statements, (8) close, gain) accounts to Income Summary, (2) close debit balances in
(9) prepare a post-closing trial balance, and (10) preparc (optional) expense (and loss) accounts to Income Summary, (3) close Income
reversing entries. Summary to the capital account, and (4) close withdmwals account
(]1, Explain and prepare a classified balance sheet. Classified to owner's capital.
balance sheels repon assets and liabilities in two categories: P3 Exptain and prepare a post-closing trial balance. A post-
cufient and noncuffent. Noncunent assets often include long-term closing trial balance is a list of permanent accounts and
investments, plant assets, and intangible assets. Owner's equity their balances after all closing entries have been journalized and
for prcprieto$hips (and partnerships) rcport the capital account posted. Its purpose is to verify that (1) total debits equal total
balance. A corporation separates equity into common stock and credits for permanent accounts and (2) aU temporary accounts have
retained eamings. zeto balances.
,{l Compute the curr€nt ratio and describe what it reveals p{A Prepare reversing entries and explain their purpose.
about a company's financial condition. A company's cur- Reversing ent es are an optional step. They arc applied to
rent ratio is defined as curent assets divided by current liabilities. accrued expenses and revenues. The purpose of revening entries
We use it to evaluate a company's ability to pay its current liabili- is to simplify subsequent joumal entdes. Financial statements are
ties out of curent assets. unalTected by the choice to use or nol use rerersing entries.

GuidanceAnswerstoDeGisionMakerandDeGisionEthiGs+
Entrepreneur Yes, you are concerned about the absence of a de- Analyst A curlellt ratio of 1.2 suggests that cuflerlt assets are suf-
preciation adjustment. Equipment does depreciate, and financial state- ficient to cover current liabilities, but it implies a minimal buffer in
ments must rccognize this occu[ence. Its absence suggests an error case of erro$ in measuring current assets or current liabilities.
or a misrepresentation (there is also the possibility that equipment is Removing the past due receivable reduces the current mtio to 0.7.
fully depreciated). Your assessment is that the company will have some difficulty meet-
ing its loan payments.
|54 Chapter 4 Completing the Accounting Cycle

Guidance Answers to Quick Checks

l. Amounts in the Unad.justed Trial Balance columns are takcn liom 5. Revenue (and gain) and expense (and loss) accounts are called
curent account balanccs in the ledger. The balances lbr new ac- tenporaN beca\sc they are opened and closed each period. The
counts expected to arise liom adjusted entrics can be left blank Income Summary and owner's withdrawals accounts are also
or set [t zero. tempomry.
2. A work sheet offers thc advanlage of listing on one page all nec- 6. Pennanent accounts rnake up the post-closing trial balance, which
c..i1r) rnforrrrrliun tu milke ild,ll.lins cnlri(\. consist ol asset. liability. and equity accounts.
3. A work sheet can help in (a) accounting efficiency and avoiding 7. Current assets: (b), (.), (d). Plant assets: (.r), Gr. Item (.1) is an
errors, (b) linking transactions and events to their effccts ir fl- intangible asset.
nancial statcnlents, (c) showing adjustments for audit pLrryoses. 8. Invesrment in common stock- invcstment in bonds. and land held
(d) prcparing interim financial statements, and (e) sltowing effects for futu.e expansion.
fiom proposed, or what il. transactions. 9. For a service company. the operating cycle is the usual time
4. The maior steps in preparing closing entlies arc to close (1) crcdit between (l)paying employees who do the services and (2) re-
balances in revenuc accoullts to lncomc Summary. (2) debit bal ceiving cash from customers for services provided.
ances in expense accounts to Income Summary, (3) Income
Summary to owncr's capilal, and (4) any withdrawals account to
owner's capital.

Key Terms mhhe.com/wildFAP l9e

Key Terms are available at the book's Website for learning and testing in an online Flashcard Format.

Accounting cycle (p. 144) Income Summary (p. 141) Pro forma financial statements (p. 140)
Classified balance sheet (p. 145) Intangible assets (p. 147) ReYersing entries (p. 151)
Closing entries (p. 141) Long-term investments (p. 147) Temporary accounts (p. 140)
Closing process (p. 140) Long-term liabilities (p. 147) Unclassified balance sheet (p. 145)
Current assets (p. 146) Operating cycle (p. 1,15) Working papers (p. 136)
Current liabilities (p. 1,17) Permanent accounts (p. 140) Work sheet (p. 136)
Current ratio (p. 147) Post-closing trial balance (p. 144)

Multiple Choice Quiz Answers on p. 175 mhhe.com/wildFAP l9e

Additional Quiz Questions are available at the book's Website.

l. G. Venda. owner of Venda Services, withdlew $25,000 from 2, The following information is available for
the lEl
the business during the current year. The entry to close the R. Kandamil Company before closing the accounts.
lol
uithdraual. accounl 3l lhe enLl of the yexr i.: After all of the closing entries are made, what will be
Quiz4
the balance in the R. Kandamil, Capital account?

a. G.Venda,Withdrawals ... .... 25,000

G.Venda, Capital 25,000
TotalreYenues ..... $300,000
b. lncome Summary .. 25,000
Totalexpenses 195,000
G.Venda, Capital 25,000
R. Kandamil, Capital 100,000
c. G.Venda.Withdrawals .. ... .. ..... 25,000
R.Kandamil.Withdrawals .....-. 45,000
Cash.. .. 25,000

d, G.Venda, Capital 25,000

Salary Expense 25,000
a. $360.000 d. $150,000
e, G.Venda, Capital 25,000
G.Venda.Withdrav/als . . . . . . . . . 25,000
b. $250.000 e. $60,000
c. $160.000
 Chapter 4 Completing rhe Accounting Cycle t 5J

3. Which of the following errors would cause the balance sheet c. Income Summary account-
and statement of owner's equity columns of a work sheet to d. Balance Column account.
be out of balance? e. Contra account.
a. Eltering a rcvenue amount in the balance sheet and state- 5. Based on the following information from Repicor Company's
ment of owner's equity debit column. balance sheet, what is Repicor Company's current ratio?
b. Entering a liability amount in the balance sheet and state-
ment of owner's equity credit column. Current assets $ 7s,000
c. Entering an expense account in the balance sheet and state, lnvestments . 30,000
ment of owner's equity debit column.
Plant assets . 300,000
d. Entering ar asset account in the income statement debit
coirrmn.
Current liabilities . . .. .. .. . 50.000

e. Entering a liability amount in the income statement credit Long-t€rm liabilities ....... 60,000

column. D. Repicor, Capital ........ 29s,000

4. The temporary account used only in dte closing process to hold

the amounts of revenues and expenses before the net difference is a. 2.10 d. 0.95
added or subracted from the owner's capital account is called the b. 1.50 e. 0.67
a. Closing account. c. 1.00
b. Nominal account-

Superscipt /etter' denotes ossrgrmerts bosed on Appendix 4A.

Discussion Questions
l. What accounts arc affected by closing entries? What accounts I 23How do reveming entries simplify recordkeeping?
are not affected?
I 33If a company recorded accrued salaries expense of $500 at the
2. I What two purposes are accomplished by recording closing end of its fiscal year, what reversing entry could be made?
entries? When would it be made?
3. What are the steps in recording closing entries?
4. What is the purpose of the Income Summary account? '"Irffi ,.'1.$",i"liT:"::","i"i::,l#:"H1,,::@
5. I Explain whether an error has occured if a post-closing trial are used on its classified balance sheet?
balance includes c Deprecietion E\pense account. 15. Refer to Cilr[il ( itr'\ balance sheer in Appendi\ /n
t
6. What tasks are aided by a work sheet? A. ldenlil"y lhe accounts lisred a\ currenl liabilirie.. $)r
7. Why are the debit and credit entries in the Adjustments 16. t nefer to Radioshack's bala
columns of the work sheet identified with letters? sheet in Appendix A. ra.rtiry tr1.'Xll @ RaaioStract"
8. What is a company's operating cycle? counts listed as curent assets.

9. What classes of assets and liabilities are shown on a typical

classified balance sheet?
'' ffi ,'::fi )'g;; Hliil : i
;ix'.ffi l.,'ll,f
30. 2006. to close its lncome Summary accounl?
!llll,x,t; Q
I O. How is uneamed revenue classified on the balance sheet?
I l. What arc the characteristics of plant assets?

Denotes Discussion
t decision moking.

HOME\,l/ORK
MANAG€R6 Available with McGraw-Hill's Homework Manager
Irvine Company began the cuffent period with a $35,000 credit balance in rhe M. Irvine, Capiral account.
At the end of the period, the company's adjusted account balances include the following tempomry ac- QUICK STUDY
counts with nomal balances.
QS 4-t
Determining effects of
Service fees earned ........ $42,000 lnterest revenue $8,000 closing entries
Salaries expense 31,000 M. lrvine,Withdrawak
Depreciationexpense ....... 11,000 Utilities expense
9.200
5,000
cl P2
I
After closing the revenue and expense accounts, what will be the balance of the Income Summary account?
After all closing entries are journalized and posted, what will be the balance of rhe M. Irvine, Capital
accounr?
156 Chapter 4 Completing the Accounting Cycle

QS 4-2 List the following of the accounting cycle in their proper order
steps
ldentifyinS the accounting cycle a. Preparing the financial statements. l. Journalizing and posting adjusting entries.
c,2 b. Preparing the unadjusted trial balance. g. Prepadng the adjusted trial balance.
c. Joumalizing transactions and events. h. Journalizing and posting closing entries.
d. Preparing the post-closing trial balance. i. Analyzing transactions and events.
e. Posting the ioumal entries.

QS 4-3 The following are common categories on a classified balalce sheet.

Classifing balance sheet items A. Curent assets D. Intangible assets
r.J B. Long-terminveshnents E. Cunent liabilities
C. Plant assets F. Long-termliabilities
For each of the following items, select the letter that identifies the balance sheet category where the item
typically would appear.
l. Accounts payablc 5. Land not curently used in operations
2. Store equipment 6. Notes payable (due in tfuee years)
- 3. Wages payable - 7. Accounts rcceivable
- 4. Cash - 8. Trademarks
- -

QS 4-4 Compute Palmolive Company's curent ratio using the following information.
ldentifying current accounts and
computlng the current ratio $ r 8,000 Long-term notes payable ......... $21,000
c3 A1 I I ,000 Officesupplies. 2,860
4s,000 Prepaid insurance 3,500
7,000 Unearned services revenue .. . .. . . 3,000

QS 4-5 The following selected information is taken from the work sheet for Fischer Company as of December
lnterpreting a work sheet 31,2009. Using this infomation, determine the amount for J. Fischer, Capital, that should be rcported
,, I on its December 31,2009, balance sheet.

Cr. Dr. Cr.

t8,000

6r,000 90,000

QS 4-6 In preparing a work sheet, indicate the financial statement Debit column to which a normal balance in
Applying a work sheet the following accounts should be extended. Use I for the Income Statement Debit column and B for the
P1 Balance Sheet and Statement of Owner's Equity Debit colurnn.
a. Depreciation expense-Equipment d. Equipment
b. Accounts receivable _e. Owneq Withdrawals
- c. Insumnce expense - f. Prepaid rent
-
-
 Chapter 4 Complering the Accounting Cycle tg7

List the following steps in preparing a work sheet in their proper order by wriring numbers l-5 in the 4-7
QS
blank spaces provided. Ordering work sheer steps
a. Prcpare an unadjusted trial balance on the work sheet.
P1
b. Prepare an adjusted trial balance on the work sheet.
c. - Enter adjustments data on the work sheet.
d. - Total the statement columns, compute net income (loss), and complete work sheet.
e. - Extend adjusted balances to appropdate finarcial statement columns.
-
-
The ledger ofEdgardo company includes the folrowing unadjusted normar balances: prepaid Rent $4,000, 4-8
QS
Services Revenue $65,000, and Wages Expense $30,000. Adjusting entries are required for (a) prepaid Preparing a parrial work sheet
rent expense expired, $800; (b) accrued services revenue $950; and (c) accrued wag"s expensi $750.
Enter these unadjusted balances and the necessary adjustments on a work sheet and iomplete the work
sheet for these accounts. Nore. Also include the following accounts: Accounts Receivable, *ages payable,
,, I
and Rent Expense.

The Iedger of simms company includes the following accounts with normal balances: p simms, capital
QS 4-e
$18,000; P Simms, Withdrawals $1,600; Services Revenue g26,000; Wages Expense $16,g00; and Rent Prepare closing entries from
Expense $3,200. Prepare the necessary closing entries from the available information at December 31. the ledger P2

Identify the accounts listed in QS 4-9 that would be included in a post-closing t al balance. QS 4-rO
ldentify post-closing accounts Pj

on December 31, 2008, Yates co. prepared an adjusting entry for $24,000 of eamed but unrecorded man- 4- I I a es
agement fees. On January 16, 2009, Yates received $37,500 cash in management fees, which included Rlversing
entries
the accrued fees earned in 2008. Assuming the company uses reversing entries, prepare the January l,
p4
2009, reversing entry and the January 16, 2009, cash receipt entry.

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use the March 31 fiscal year end information from the following ledger accounts (assume that all ac-
counts have normal balances) to prepare closing joumal entries and then post those entries to the
EXERCISES
appropriate ledger accounts.
Exercase 4- I
Preparint and posring
closing entries
R. Cruz, Capital Acct. No. 301 Salaries Expense Acct. No. 622 P2

Dat€ PR Debit Credit Balance Date PR Debit Credit Balance

Mar 3l G7 5s,000 Mar 3l G2 12,500

R. Cruz, Withdrawals Acct. No. 302 lnsurance Expense Acct. No.637

Date PR Debit Credit Balance Date PR Debit Credit Balanre
Mar. 3l G2 46,770 Mar 3l G7 4, 420

Services Revenue Acct. No.40l Rent Expens€ Acct. No. 640 Check R. Cruz, Cap tal (endi|g
balance), 969,400
Date PR Debit Credit Balance Date PR Debit Credit Balance

Mar. 3l G2 4,530 Ma': 3l G7 440

Depreciation Exp€nse Acct. No. 603 lncome Summary Acct. No. 901

Date PR Debit Credit Balance

Mar. 3l G2 ,000
t58 Chapter 4 Completing the AccountinS Cycle

Exercise 4-2 The adjusted tdal balance for Santam Marketing Co. follows. Complete the four right-most columns of
\aring closing entnes and a the table by first entering information for the four closing entries (keyed 1 through 4) and second by
;!ost-closing trial balance completing the post-closing trial balance.
P] P.3

l0l Ca5h . .... $ r r,900

106 A..ountsreceivable 24,000
153 Equipment . 4t,000
154 Accumulateddepreciation-Equipment ....... $ t6,500
193 Fran(hise .. 30,000
201 Accoun(s payable r4,000
709 Salaries payable 3,200
233 Unearned fees 2,600
301 T Santara, Capical 66,701
102 TSantara,withdrawals r4,400
401 Marketing fees earned . . . . 83.000
6ll Depreciation expense-Equipment . . . . . . . . . . . I I ,000

622 Salaries expense 33,034

640 Rent expense 12,6t6
677 Miscellaneous expenses . . 8,05t
901 ln(ome summary

Exer€ise 4-3 The following adjusted trial balance contains the accounts and balances of Ferara Company as of
Preparing closing entries and a December 31, 2009, rhe end of its fiscal year. (l) Preparc the December 31, 2009, closing entries for
posr-closing trial balance Fenara Company. (2) Prepare the December 31, 2009, post-closing trial balance for Fenara Company.
CI P2 P5

l0l Cash ..... ....... $18,000

126 Supplies . . .. 13,900
128 Prepaid insurance 2,000
167 Equipment .. 23,000
168 Accumulated depreciation-Equipment. .. .. . .. $ 6,s00
301 N. Ferrara. Capital 48,r68
302 N. Ferrara,Withdrawals 6,000
404 Services revenue 37,700
612 Depreciationexpense-Equipment. 2,000
622 Salaries expense 2t,687
637 lnsurance expense t,562
640 Renr expense
check (2) N. Ferrara, Cap tal 652 Supplies expense t,227
lenniis), $50,400iTotal debits, $55.900 Tocals..... $9r,868 $9r,868
 Chapter 4 Completing rhe Accounting Cycle 159

Use the following adjusted trial balance of Resource Trucking compaly to prepare
the (l ) income state- Exercise 4-4
ment, and (2) statement of owner's equity, for the year ended December 3i, ZOOS. fhe
f. Reso, Capiral Preparing the financial statements
account balance is $161,901 at December 31.2008.
c2

Cash...... $ s,800
Accounts receivable r7,500
Office supphes 3,000
Trucks.... r56,000
Accumulated depre(arion-Truck . .. ..... $ 12,136
1and...... 85,000
Accouncs payable 9,800
lnterest payable 4,000
Long-term notes pafabl 53,000
J. Reso, CapiEl t6 t ,90 t

J. Reso.Withdrawals 20,000
Trucking fees earned t21,000
Depreciarion expense- Truck 20,727
Salaries expense 56,749
Oftice supplies expense . . . 6,655
Repairs expense-Trucks . . . . . , ,..., ,, .. t0,405
ToBls.... $38 t,837 $38t,837

Use the information in the adjusted trial balance repofied in Exercise 4-4 to prepare Resource
Trucking Exerclse 4-5
Company's classified balance sheet as of December 31. 2009-
Preparing a classified balance
sheet C3
Check Tota asers, 9235,164rJ. Reso,
Capital, $ 158,364

use lhe information in the adjusted triar barance rcported in Exercise 4-4 to compute the cuffent mtio Exercise 4-6
as of the balance sheet date (round the ratio to one decimal). Interpret the cuffent ratio fbr the Resource
Computing the current ratio
Trucking Company. (Assume that the industry average for the current ratio is 1.5.)
a,
I
Calculate the cuffent ratio in each of the following separate cases (rcund the ratio to two
decimals). Exercise 4-7
Identify the company case with the strongest liquidity position. (These cases reprcsent competing Computing and analyzing the
companies in the same industry.)
current ratio

Case
n,
I
I $ 76,000 $76,666
Case 2 10t,080 64,351
Case 3 42,863 4t,2M
Case 4 82,308 69,r56
Case 5 58,444 84,638

use the following information from the Adjustments columns of a rO-column work sheet
to prepare the Exercise 4-8
necessary adjusting joumal entries (d) through (e).
Preparing adjusting entries from a
work sheet
PI

t09
124 Office supplies (b) $t,72e
t28 Prepaid insurance (o) 979

Icontinued on ne\t patel

t60 Chapter 4 Completing rhe A(counting Cycle

lcontinued from previous pate]

164 Accumulated depreciation-Office equipment . . .. .. . (c) 3,300

209 Salales payable (e) 716
409 lnterest revenue (d) 636
612 Depreciation expense-Office equipment .. ... .. .. . (c) 3,300
620 Offi(e salaries expense . . . (e) 7t6
636 lnsuranceexpense-Officeequipment @) 470
637 lnsurance expense Store equipment (o) s09
650 Offce supplies expense . . . (b) (,72e

Torals..... $7,350 $7,350

Exercise 4-9 These 16 accounts are from the Adjusted Trial Balance columns of a company's l0-column work sheet.
Exrending adjusled account In the blank space beside each account, w te the letter of the appropriate financial statement column (A'
balances on a work sheet B, C, or D) to which a normal account balance is extended.
PI A. Debit column for the lncome Statement columns.
B. Credit column for the Income Statement columns.
C. Debit column for the Balance Sheet and Statement of Owner's Equity columns.
D. Credit column for the Balance Sheet and Statement of Owner's Equity columns.
l. Accounts Receivable 9. Interest Revenue
2. Accumulated Deprcciation I O. Machinery
3. Office Supplies - ll. Owner, Withdrawals
4. Insurance Expense - 12. Depreciation Expense
5. Interest Receivable - 13. Accounts Payable
6. Cash - 14. Service Fees Revenue
7. Rent Expense 15. Owner, Capital
8. Wages Payable - 16. Interest Expense
-
-

Exercise 4- l o The Adjusted Trial Balance columns of a 10 column work sheet for Linn Company follow. Complete
Extending accounts in a the work sheet by extending the account balances into the appropriate financial statement columns and
by entering the amount of net income for the reporting period.
PI

l0t Cash.... $ 8,200

I05 A(counB receNable 35,834
r53 Truck .... 4t,500
t54 Ac(umulated depreciation-Trucks ....... $ 16,683

i83 tand..... 30,000

20t Accounts payable t9, t06
209 Salafles payable 4,370
233 Unearned fees 3,170
30t D. Linn, Cap'tal 69,012
302 D Linn,Wirhdrawals t5,534
40t Plumbing fees earned 84,000
6lt Depreciaiion expense-Tru(k 5,56t
622 Salanes expense 39,312
640 Rent expense 12,768
677 Miscellaneous expenses 8,232
Che.k Ner r..hc S 8127 Totals..... $ 196,941 $t96,94r
 Chapter 4 Completing rhe Accounring Cycle I6l

These partially completed lncome statement columns from a l0 column work sheet are for Johnson's 4]{Er.tise 4* I {
Bike Rental company. ( l) use the information to determine the amount rhat should be entercd on the Completing the income statement
net income line of thc work sheet. (2) Prepare the company's closi,,g entries. The owner, C. Johnson, columns and preparing closing
did not make any withdrawals rhis period. entries
PI P]

Rent earned
Salaries expense 39,950
lnsurance expense 5,670
Ofiice supplies expense -........... r3,230
Bike repair expense 2,790
Depreciation expense-Bikes ........ t7,t90
Totals . .. .

Net income (hcck ller ,.one $ . 60

Totals ....

The following unadjusted trial balance contains the accounts and balances of Santaga Delivery company fir.ei"riiie ,{* r 2
as of December 31, 2009, its lirst year of operations. Preparing a work sheet and
(l) Use the following infomation about the company's adjustments to complete a lo-column work sheet recording closing entries
for Dylan. PI P2
a. Unrecorded depreciation on the rrucks at the end ol rhe year is $16,000.
b. The total amount of accrued interest expense at year end is $8,000.
c. The cost of unused office supplies still available at the year-end is $500.
(2) Prcpare the year,end closing ent es for this company, and determine the capital amount to be re-
ported on its year-end balance sheet.

DEEI gB

I Accounts payable
I lnterest payable
10 Long-term notes payable
11 D. Saniaga, Capital
j2 D. Santaga, Withdrawals
13 Delivery fees earned
14 Deprec ation expense-Truck
15 Salaries expense
16 Office supplies expense
17 lnterest expense
Che(k A,l L,,i h.r,n.. rori s.
58 !r670 l!.1
$792,670 'iro,r., $40. 80
$e.i!iiiaJq;!q/ ,.
lit

The following two events occured for Tankwell Co. on October 31. 2009, the end of irs fiscal year. Px4r,{ise 4- ! 3A
a, Tankwell rents a building from its owner for.53,300 per month. By a preafangement, the company Preparing reversing entries
delayed paying October's renr unril November 5. On this date, the company paid the rent fbr both
l)J
October and November
162. Chapter 4 Completing the Accounting Cycle

b. Tankwell rcnts space in a building it owns to a tenant for $1,050 per month. By prearangement, the
tenant delayed paying the October rent until November 8 On this date, the tenant paid the rent lbr
both October and November.

Required
l. Prepare adjusting entlies that the company must rccord for these events as of October 31
2. Assuming Tankwell does nol use reversing entries, prepare joumal entlies to record Tankwell's pay-
lDent of rent on November 5 and the collection of rent on November 8 from Tankwell's tenant'
3. Assuning that the company uses reversing entries, prepare reve$ing entries on November I and the
jour-nal cntries to recor.d Tankwell s payment of rent on November 5 and the collection of rent on
Novemher' 8 fiom Tankwell's tenant.

Exercise 4- l 4a Scholl Company rccolds prepaid assets and uneamed revenues in balance sheet accounts. The following
preparing reversing entries informalion was use.l 10 prepare adjusting entries for the company as ofAugust 31, the end of the com-
pany's fiscal year.
P4
a. The comp?rny has earned 54,500 in unrecorded service fees.
b. The expired portion of prepaid insurance is $3,750.
c. The company has earned $2,100 of its Uneamed Service Fees account halance.
d. Depreciation expense for office equipment is $2,600.
e. Employees have earned but have not been paid salafies of $2,700.
Preparc any necessary r.eversing entries for the accounting adjustments n through e assuming that the
\'umprn) u\es t'<rer'ing cnlrics in it\ accL,unling .)\lem.
HoM' wORn .-

, ' McGraw-Hill! Homework Manager iAiiiCsf' '

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PROBLEM SET A In the blank space besidc each numbered balance sheet iten. enter the letter of its balance sheet classi-
fication. lI the item should not appear on the balance sheet, enter a Z in the blank
Probl€m 4- I A A. Cuffent assets D. lntangible assets F. Long-term liabilities
Determining balance sheet B. Long-term investments E. Cunent liabilities G' Equity
classifications c. Plant assets
C3 I. Accumulated depreciation- lO. Uneamed services revenue
Trucks I l. Long-tenn investment in stock
- 2. Cash - 17.. Depreciation expense-Building
3. Buildjngs - 13. Prepaid rent
- 4. Store supplies - 14. Interest receivable
- 5. Office equipmcnt - 15. Taxes payable
- 6. Land (uscd in operations) - 16. Automobiles
- 7, Repairs expense - 17. Notes payable (due in 3 Years)
- A. Oflice supplies - la. Accourts payable
- 9. Current pofiion oI lonS-term - 19' Plepaid insurance
- note PaYable - 2o. Owner, Capital
- -
-
problein /t-2A On April 1, 2009, JiIo Nozomi created a new travel agency, Adventure Travel. The following transac
Applying the accounting cycle tions occufied during the company's fitst month-
Cl (2 P2 Pi I April 1 Nozomi invested $32,000 cash and computer equipment worth $26,000 in the company.

excet
ge
1 T[:::,]iy;ff$',j:i$:if:?T$::Jl",#ff?j;1o"oj:'n""nenrs'lmonth's(Apr,)ren'l
mhhe.com/wildFAPl 10 The company paid $2,502 cash for the premium on a l2-month insurance policy. Coverage
bcgins on April 11.
l4 The company paid $2,300 cash for two weeks'salaries earned by employees.
24 The company collected $16,000 cash on commissions from airlines on tickets obtained fbr
customers.
28 The company paid $2,400 cash for two weeks'salaries earned by employees.
29 The company paid $750 cash for minor repairs to the company's computer.
30 Thc conpany paid $550 cash for this month's telephone bill.
30 Nozomi withdlew $1,200 cash from the company for personal use.
 Chapter 4 Complering the Accounring Cycle t63

The company's chart of accounts follows:

l0l Cash 405 Commissions Earned

106 AccountsReceivable 512 Depreciation Expense-ComputerEquip.
124 Ofilce Supplies 622 Salaries Expense
128 Prepaid lnsurance 637 lnsurance Expense
157 Compurer Equipment 640 Rent Expense
I68 Accumulated Depre.iation-Computer Equip. 550 Office Supplies Expense
209 Salaries Payable 684 Repairs Expense
301 J. Nozomi. Capital 588 Telephone Expense
302 J.Nozomi,Withdrawals 901 lncome Summary

Required
1. Use the balancc coiumn format to cha of accounts.
set up each redger account risted in its
2. Prepare joumal entries to record the transactions for Apr
and post thern to th,. redger accounts. The
company records prepaid and unearned items in balance sheet accounts.
Check (3) Unadj !.al baan.e ro.als,
3, Prepale an unadjusted trial balance as ofApril 30.
$7.1.000
4. Use the following information to joumalize and post adjustiog entries tbr the month:
(4d) Dr fs!ran.e Expense.
a. Two-thirds of one month's insurance coverage has expired. $39
b. At the end of the month, {i700 of office supplies are still available.
c. This month's depreciation on the computer equipment is $500.
d. Employees earned $720 of unpaid and unrecorded salaries as of month_end.
e. The company eamed $3,050 of commissions that are not yet billed at month_end.
(5) N.r ricomc. $8,s91;
5. Prepare the income statement a,.d the statement ofowner's equity for the month ofApril and the bal-
ance sheet at April 30, 2009.
I Nozoh. Cap ml (1/30/2009), g5s,39ll
Totil .sse.s 966 I I

6. Prcpare joumal entries to close the temporary accounts and post these entries to the ledger
(7) P-C i, ia br.nce.orxts,
7. Prepare a post closing trial balance.
6
$66 |

The adjusted trial balance of Charon Repairs on December 3I , 2009, follows.

P!,eblem 4-3A
Preparang trial balances, closing
entries. and financial sotements

ci
# t P2 Pi

r0t
t24
Cash . .. .

Offrce supplies
$ r6,100
t,300
g
t28 Prepaid rnsuran(e 2,800
eXce,
t67 Equipmenr 50,000 mhhe.com/wildFAPl9e
t68 Accumulared depre(rarion -Equrpmenr ....... s,000
20t Accounts payable t2,000
2t0 Wages payable t.400
30r L. Charon. Capiral 33,000
302 L. Charon. VVrrhdrawals t6,000
40t Reparr fees earned 98,600
6t2 Depreciarion expense
-Equipmenr 5,000
623 Wages expense 39,000
637 lnsurance expense. 800
640 Rent erpense t3,000
650 Office supphes expense . . . 3, t00
690 Utrlitjes eYpense 2,900
Torals ..... $ r50,000 $ r50,000
t64 Chapter 4 Compleling fie Accounting Cycle

Required
Check (l) Efd ng captil bii.nce I . Prepare an income statement and a statement of owner's equity for the year 2009, and a classitied
$5 .800iner ncome, $3'1.800 halance sheet at December 31.2009. Thele a1.e no owner investments in 2009.
(2) P-C u al ba ai.e roti s, 2. Enter the adjusted trial balance in the first two columns of a six-column table. Use colunlns threc
$70.200 and four for closjng entry infonnation and the last two columns for a post closing trial balance. Insert
an Income Summary account as the last item in the trial balance.
3. Enter closing entry information in the six-column table and plepare journal entries for it.

Analysis Component
4. Assume fbr this pafi only that
a. None oI the $800 insrLrance cxpensc had cxpired duing the year. Instead, assume it is a prepay
rnent ol lhc nc\t period \ in.urance ptoleclion.
b. Therc are no eamcd and unpaid wages at the end of the year (Hilt: Reverse thc $1,'100 wages
payable accrual.)
Describe the linancial statement changes that would result from these two assumptions.

Problem 4-4A The adjusted rial balance for Tamar Constructior as ol December 31, 2009, follows.
Preparing closing entries. fi nancial
statements. and Tatios

tij \1 P]

g*
l0l Cash .....
104 Short-term investments
....... $ 7,000
23,500
126 Supplies ... 8,200
128 Prepaid insurance 7.500
167 Equipm€nt . 45,000
168 Accumulated depreciation-Equipment ....... $ 22,500
173 BuildinS ... 162,000
174 Ac.umulated depreciation-Building . -....... 54,000
183 Land..... 66,770
2Ol Accounts pqable 17,000
203 lnterest payable 2,900
208 Rent payable 3 500

2lO Wages payable 2,100

213 Property taxes payable 900
233 Unearned professional fe 7,100
251 Long-term notes payable . . . 66'000
30 I E.Tamar, Capital 131,700
302 E. Tamar,Withdrawals I 1,000
4Ol Professional fees earned 102.000
406 Rent earned l5,oo0
407 Dividends earned 3,000
409 lnterest earned 2,200
505 Depreciation expense Building .. I 1,880
617 Depreciation expense-Equipment ....... -.. 6.750
623 waSes expense 30,500
633 lnterest expense 4,700
637 lnsurance expense 8,900
640 Renr expense 10,900
652 Supplies expense 5,500
6a2 Postage expense 2,500
683 Property taxes expense . . . 5,000
684 Repairs expense 6,200
588 Telephone expense .. 3,100
690 Utilities expense .... 3,000
Totals..... ....... $429,900 $429,900
-
 Chapter 4 Completing rhe Accounling Cycle r65

E. Tana' invested $7,000 cash irl the business during year 2009 (the December 31. 2001i, cr.cdit balance
oI the E. Tamar. capital account was $ l2z[,700). Tarrar construcrion is requi.ed ro makc a $7,500 paynlenr
on ils long-term notcs payable during 2010.

Required
l. Prepare the income sratcment and the statement of owner's equity lbl the caleidar yeiu 2009 and the Check (l)Tora rssets ( 2il /2009),
classitied balance sheet at Decembcr 3l- 2009. $241,470: Net ncome, $23.270
2. Prepiuc the necessary closing entries at December 31, 2009.
3. usc the inlonnation in the llnancial statemcnts to colllpute thesc ratios: (d) relum on assets (total
assets at December 3I, 2008. was $200,000), (b) dcbt ratio, k) protit margin ratio (r.rsc roral revenues
i\ the dcnomtnilnrr. rnd 1/1 cur'rent rurio.

The following unadjusted trial balance is for Archer Construction Co. as ol thc cnd ol irs 2009 fiscal Problem 4-5A
year. The Junc 30. 2008, credit balance of the owner's capital account was $55.800. and thc owncr Preparing a worl< sheet, adjusling
invelted $27,000 cash in the company cluring rhe 2009 fiscal year. and closing entries, and financial
slatements
ciPrP2 I

Cash
Supplies
Prepaid insurance
Equipment
Accumulated depreciation-Equipment
Accounts payable
lnterest payab e
Bent payable
11 210 Wages payab e
12 213 Property taxes payable
Long-ierm notes payable
G. Archer, Capital
G. Archer. Withdrawals
Construction fees earned
Depreciation expense-Equipment
Wages expense
lnterest expense
lnsurance expense
Rent expense
Supplies expense
Propedy taxes expense
Bepairs expense
Utilit es expense
Tota s

Required
I' Prepare a l0-column work sheet for fiscal year 2009, starling with the unadjustcd trial halancc anil
including adjustments based on these additional lacts.
a. The supplies availablc at rhe eIrd of fisca] year 2009 had a cosl of 52,-520.
b. Thc cost of expired insurance fbr rhe fiscal year is $3,465.
c. Annual depreciation on equipment is 98,300.
d. The June utilities expense of $560 is not included in the unad.justed trial balance bccause rhe bill
arrived alicr the tl-ial balance was prcpared. The $560 amount owed needs to be rccorclcil.
e. The company's entployees have carned S1,900 of accrued wages at fiscal year eDd.
f. Thc rent expense incurred and not yet paid or recorded al liscal year end is $500.
g. Additional property taxes ol $700 have becn assessed ibr this llscal ycar bLrt have not been prid
or recorded in the accorrnts
t66 Chapter 4 Completing the AccountinS Cycle

h. The long-term note Payablc bcars interest al l2a/c pet year. The unadjLrsted lntercst Expense
account equals the amount paid for the first I I months oI the 2009 fiscal year The Sl00 accrued
ilterest tbr Junc has not yet bcen paid ot recordcd. (Note that the company is requircd to make
a $4.500 payment toward tlte note payablc during the 2010 fisca1 ycar.)
2. Use thc work sheet to enter thc ad.justing and closing ent es; then journalizc them.
Check (3) To$ issets. $ 136.955i 3. Prepare the income statement and the statement of ownei's equity for the year cnded Junc 30 and
C!rreit i.b lrics, $ 3,560rNet icone. the classified halance shcct at June 30- 2009.
$56.595
Analysis Component
4. Analyze the following separate enots and describe how each would atlect the 1(lcolumn work sheet.
Explain whcther the error is likcly to bc discovcred in completing thc work sheet and. if not. the
effect of the effor on the financial statenents-
a. Assume thal the adjustDent fot supplies uscd consistcd of a ctedit to Supplies for 52,520 and a
dcbil lbr $2.520 ttr SnJ'plics frpcn.e.
b. When thc adj sted trial balancc in the work sheet is completed, assume that the $17.000 Cash
halance is incoucctlv entered in the Credit column.

Problem 4-6Aa The following six-column table for Hunter Golf Range includes the unadjusted trial balance as of
Preparing adiusting, reversing, and December 31. 2009.
next perlod enlries
P.1

Cash ... .. $ r0,000

Accounts receivable 0
Supplies ... 4.230
Equipment - r02,000
Accumulated depreciation-
Equipment. $ t9.584
lnterest payable 0
Salaries payable .............. 0

Unearned member fees ........ t0,770

Notes payable 57,000
A.l. Hunter, Capital 28,893
A. j.Hunter,Withdrawals ....... t5.000
Memb€r fees earned 40,800
Depreciation expense
Equipment. 0

Salaries expense 2t,547

lnterest expense 4,175
Supplies expense 0
Torals $rs7,047 $ rs7,047

Required
l. Complete ihe six colun table by entering adjustrnents that retlect the foilowing inlomation.
a. As of December 31,2009, employees had earned 5689 of unpaid and unrecordcd salaries The
next payday is January 4, at which timc $1,226 of salaries will be paid.
b. The cost of supplies still available at December 31, 2009, is $2,076.
c. The notes payable requires an intelest payment to be made every three months. The amount of
umecorded accrued interest at December 31,2009, is $1,'125. The nexl intercst payment. at an
amount of Xi1,710, is due on January 15, 2010.
d. Analysis ol'the uncarned mcmber fees account shows $4,308 remaining unearned at Deccmber
3I . 2009.
 Chapter 4 Completing rhe Accounting Cycle 167

e. In addition to the member fees included in the revenue account balance, the company has eamed
another $6,936 in unrecorded fees that will be collected on January 31,2010. ihe company is
also expected to collect $8,000 on that same day for new fees eamed in January 2010.
Check (l) Adjlsted trial balance
f. Depreciation expense for the year is $9,792. totals, $ 175,889
2. Prepare joumal entries for the adjustments entered in the six-column table for part 1.
3. Prepare journal enries to rcverse the effects of the adjusting entries that involve accruals.
4. Prepare joumal entries to record the cash payments and cash collections described for January.

In the blank space beside each numbered balance sheet item, enter the letter of its balance sheet classi-
fication. If the item should not appear on the balance sheet, enter a Z in the blank.
PROBLEM SET B
A. Current assets E. Current liabilities Problem 4- I B
B. Long-term investments F. Long-tem liabilities Determining balance sheet
C. Plant assets G. Equity classifications
D. Intangible assets c3
l. Rent receivable t2. Interest receivable
2. Salaries payable t 3. Long-term investment in stock
3. Income taxes payable 14, Prepaid insurance
4. Owner, Capital 15. Machinery
5. Office supplies _ 16. Notes payable (due in
6. Interest payable 15 years)
7. Rent revenue 17. Copy ghts
8. Notes receivable (due in 120 18. Current portion of lollg-term note
days) payable
9.
Land (used in operations) 19. Accumulateddepreciation Trucks
I O. Depreciation expense-Trucks 20. Office equipment
I l. Commissions eamed

On July 1, 2009, Carl Park created a new self-storage business, Safe Storage Co. The following trans- Problem 4-28
actions occurred during the company's fust month. Applying the accounting cycle
July I Park invested $34,000 cash and buildings worth $175,000 in the company. cl c2P2nL
2 The company rented equipment by paying $1,500 cash for the firsr monrh,s (July) rent.
5 The company purchased $1,300 of office supplies for cash.
l0 The company paid $3,600 cash for the premium on a l2-month insurance policy. Coverage
begins on July 1 1.
14 The company paid an employee $1,280 cash for two weeks' salary earned.
24 The compa-ny collected $11,500 cash for stonge fees from customers.
28 The company paid $1,320 cash for two weeks'salary eamed by an employee.
29 The company paid $250 cash for minor repairs to a leaking roof.
30 The company paid $850 cash for this monrh's telephone bill.
3i Park withdrew $2,400 cash from the company for personal use.
The company's chan of accounts follows:

l0l Cash ,l0l StoraSe Fees Earned

106 AccountsReceivable 605 Depreciation Expense-BuildinSs
124 Office Supplies 622 Salaries Expense
128 Prepaid lnsurance 637 lnsurance Expense
173 Buildings 640 Rent Expense
174 Accumulated Depreciarion-Buildinss 650 Oftice Supplies Expense
209 Salaries Pq/able 684 Repairs Expense
301 C. Park Capital 688 Telephone Expense
302 C. Parkwithdrawals 901 lncome Summary
Required
I . Use the balance column format to set up each ledger account listed in its cha.rt of accounts.
2. Preparejournal entries to rccord the transactions for July and post them to the ledger accounts. Record
prepaid and unearned items in balance sheet accounts.
r6a Chapter 4 Completing the Accounling Cycle

Check (31 Uirl t r trrr.. trlr! 3. Prepare an unadjusted trial balance as of July 31.
9220.500 4. Use thc lbllowing information to journalize and post adjusting cntries for the month:
1,1.) D ,s!! af.. Eipe,,5E a. Twothirds of one month's insurance coverage has expiled.
$200 b. At the end of thc month. $800 of office supplies are still availablc.
G. This month's depreciation on the buildings is $1,750.
d. An employee earned $570 of unpaid and unrecorded salary as ol month-end.
l5) N.t f.orr. 55.4,10i
e. The compary earned $2,350 of storage fees that are not yet billed at month-ct'Id.
C Pad<. Cepi.r iTrl'70C9).$l ?.23Ci 5. Prepare the income statement and the statement of owner's equity for the month oI July and the bal-
Tohl assets. $2 I800 ance sheet at July 31, 2009.
6. Prepare journal entries to close the temporary accounts and post these entries to the ledger
17) P-C o i br ri.c rorr !. 7. Prepare a post closing trial balance.
.1
tr2 550

Probleril 4-3 ti Goldsmith Company's adjusted tlial balance on December 31, 2009, follows.
Preparing trial balances, closing
entries, and financial statements
GP2P.iI

l0l Cash..... $ 10,300

125 Srcre supplies t,400
128 Prepaid insurance 2,200
167 Fqu'pment . 52,000
168 Accumulated depreciation Equipment . . . .. . . $ 9,000
201 Accounrs pdyable r7,000
210 WaSes payable t,300
301 N. Goldsmirh. Caprtal 33,400
102 N Goldsmirh,Withdrawals ...... t6,500
401 Repair fees earned 9t,500
612 Depre.radonexpense-Equipmen( ........ 8,500
623 waSes expens€ 4t,500
637 lnsurance expense r,000
640 Rent expense I I ,400

651 Srore supp|e: expense . . . 4,400

690 ULrlirtes erpense 1.000
Totals..-.. $ r52,200 $rs2,200

Required
Check ( ) Enniit ..p i., Li rn... I . Prepare an income statement and a statement of owner's equity tbr the year 2009, and a classified
$38 600 halance sheet at Decembcr 3I . 2009. There are no owncr investments in 2009.
12) P-C r rl brhn.. tori 5 2. Enter the adjusted trial balance in the li$t two columns of a six column table. Use the middle two
$65.900 columns lbr closing entry information and the last two columns for a post closing trial balance. lnsert
an Income Summary account (No. 901) as thc last item in the trial balance.
3. Enter closing entry inlbDnation in the six-column table and preparc joumal entries for it-

Analysis Component
4. Assume for this part only that
a. None of the $ I ,000 insurance expense had expired during the year. Iostead, assume it is a pre-
la)mcnt ol rhe nert pcrioJ.,n\urance proleclion.
b. There are no eamed and unpaid wages at the end ofthe year (Hit1t: Reverse the $1,300 wages
payable accrual.)
Describe the financial statement changes that would result from these two assumptions.
 Chapter 4 Completint the Accounting Cycle t60

The adjusted hial balance for Myra Co. as of December 31, 2009, follows. Problem 4-48
Preparing closing entries, fi nancial
statements, and ratios

c3 \l P2

l0l Cash...... $ 7,s00

104 Short-terminvestments 23,500
126 Supplies ... 8, t00
128 Prepaid insurance 8,600
167 Equipment . 40,000
168 Accumulateddepreciation-Equipment ....... $ 20,000
173 Buildins ... r77,000
174 Accumulated depreciation-Building . . . .. . .. . 59,000
l8l Land ..... 68,t20
201 Accounts payable t7,000
203 lnreres( payable 3,000
208 Rent payable 3,500
210 Wates payable 2,500
2ll Propefty taxes payable . . . r,300
233 Unearnedprofessionalfees ...... 7,900
251 Long-term nores payable ........ 64,500
l0l S. Myra. Capital t32,500
302 S.Myra,Wirhdrawals t0,300
401 Professional fees earned t04,000
406 Rent earned t8,000
407 Dividends earned 2,500
409 lnterest earned 2,300
606 Depreciationexpense-Building ............ t2,980
617 Depreciarionexpense- Equipment 6,000
623 Wages expense 27,500
533 Interesr expense 3,800
637 lnsurance expense . 7,700
640 Renr expense I t,300
652 Supplies expense 6,t00
682 Postage expense 2,800
683 Property taxes expense . . . 3,400
684 Repairs expense 6,900
688 Telephone expense 3,200
690 Utilicies expense 3,300
Totals..... $438,r00 $438,t00

s. Myra invested $7,500 cash in the business during year 2009 (the December 31, 2008, credit balance
of the S. Mym, Capital account was $125,100). Myra Company is required to make a $6,000 payment on
its long-term notes payable during 2010.

Required
l. Prcpare the income statement and the statement of owner's equity for the calendar year 2009 and the check (t)rora assets (t2l}/2009),
classified balance sheet at December 31, 2009. gzs3,820i Ner income, gl t,820
2. Prepare the necessary closing entries at December 31, 2009.
3. Use the infomation in the financial statements to calculate these mtios: (a) rcturn on assets (total as-
sets at December 31, 2008, were $200,000), (D) debt ratio, (c) profit margin mtio (use total revenues
as the denominator), and (d) cufient ratio.
 Chaprer 4 Completing the Accounting Cycle

Problern 4-58 The tbllowing unacljrLstccl rrjal balance is fbr Brirwn Demolition Company as of the end of its April -j0'
2009. fiscal 1LaL. The Aplil 30, 2008, crcdit balance of thc owner's capital account was $51'6l0'
and the
Preparing a work sheeq adjusting
and closinE entries, and financial orvncl invested S30,000 cash in the coDlpany during the 2009 liscal year'
slatementS

c3PrP2 I adIl aa7 IlhFt -- - (}?:r.

Cash
Supplies
Prepaid insurance
Equipment
Accumulated depreciation-Equipment
Accounts payable
lnterest payable
Rent payable
Wages payab e
Property taxes payable
Long-term notes Payable
J. Brawn, CapitaL
J. Brawn, Wlthdrawals
Demo ltlon fees earned
Depreciation exPense- EquiPment
Wages expense
lnterest expense
lnsurance expense
Rent expense
Supplies expense
Propefty taxes expense
Bepairs expense
Utilities expense
Tota!s

Required
l. prep.ue a lo-colLunn work sheet for tiscal year 2009, stafting with the unadjusted trial balance and
including adiustments bascd on these additional lacts.
a. l hc slrpplics available al the end of tiscal year 2009 had a cost of $3.420'
b. The cost of cxpiied insurance for the fisca] year is $i4,095.
c. Annu.rl deprccialion on equipment is $11,000.
d. The April ulilities expense o1 $580 is not inclLrded in the unadiusted trial balance because the bill
[] rived aftcr the tt'ial balance was prepirled. The $580 amount owed needs to be recodcd'
e. Thc colnpany's employees have earnctl $1,500 of accrued wages at tiscal year-end'
l. The rcnt expense incurred and not yet paid or recorded at iiscal year-end is $J,400
fiscal year but have not been paid
8. Additional propcrly taxes of $500 have been assessed for thjs
or'recorded in lhe accollrts.
h. The long tenn nole piryablc bears interest at 127. per year. The unad.justed Intcrest Expensc ac
counr e{uals the rmoLrnt paid for thc first ll months of the 2009 liscal year' The $250 accrued
interesr ior has not yet been paid or recorded. (Nofe that the corrpany is reqrrired 1o makc
Aplil
r $5.000 paymcnt to\lard lhe note payable during the 2010 fiscal yea )
2. Enler lhe adjLtsting ancl ciosing ertry iilb!-mation in thc wolk sheet: then
journalizc it'

Check (3)Tota asseis, $130.28s1 3. Prepare the income slatenlent and thc stateDent of orvner's equity for the year ended April 30 and

cufuenr liabi ltes, $15,230i Net income. the classitlcd balance shect at April 30, 2(X)9.
$38.945
Analysis comPonent
4. Analyze the ibllo$ ing separate elors and describc how each would affect the l0 column work sheet'
Explain whether thciiror is likely to be discovered in complcting the work sheet and' if not' the
cflect 01'lhe en'or on thc linancial slatements.
 Chaprer 4 Completing rhe Accounting Cycle t7t
Assume thc adjustment lbr expiration of the insurance coverage consisted of a credit lo prcpaid
Insurance tbr $2,405 and a debit for 92.105 to Insr.uancc Expense.
b. When the adjustcd trial balancc in rhe $ork shcct is completed, assune thar the $2.100 Repairs
Expense account balance is e\tendcd to the Debit column of the balance sheet columns.

The following six-column table lor Oberst Co. irrcludes thc unad,usted trial balance as of Deccmber 31, Problem 4-6Ea
2009. Preparing adjusting, reversing, and
next period entries
P+

Dr.
Cash...... $ r8.s00
Accounts receivable 0
Supplies . . 7,825
lYachinery. r88,700
Accumulated depreciation-
Machinery . $ 36,230
lnterest payable 0
Salaries payable 0
Unearned rental fees t9.974
Notes payable 54,000
B. Oberst, Capital t01.044
B. Oberst,Withdrawals 77.750
Rental fees earned 75,480
Depreciation expense-
Machinery. 0
Salaries expense 39,851
lnterest expense 4,050
Supplies expense 0
Totak ... . $286,678 $285,578

Required
l. Complete the six-columr table by entering adjuslments that rellect thc lollowing inforrnation:
a. As of Dcccmber 31, 2009, employccs had eanred $1,27-5 ol unpaid and unrccorded wages. The
next payday is January 4, at which time $2,269 in wages will be paid.
b. The cost of supplics stiil available at December 3 I , 2009, is $3,842.
c. The notcs payabie requires an intercst payment to bc madc cvct.y threc months. Thc amount of
unrccorded accrued intercst at Decembcr 31,2009, is $1,350. Thc nexl jntcre\t faynlent. Jt Jn
arnount of li1,620, is due on January I5, 2010.
d. Analysis of the uneamed rcntal fees shows that $7,969 remains uneaned at December 31.
2.009.
e. In addition to thc machinery rcntal fees inclLrdcd in thc tcvcnue account baltncc, the compary has
eamed anothcr'$12.831 in unrecordcd fees rhat will bc collected on January 31,2010. The company
is also expectcd to collect $8,000 on that same day ibr ncw fccs carned in January 2010.
Check ( )Adluslen !ril ba.nce
f. Deprcciation expense for the yeff is Xi18.ll-5. .otals. $320,249
2. Prepac journal entries for the adjustmenls entelcd in thc six-coluinn table fbr part l.
3. Prcparc joumal entries to rcverse the ellects ol thc ldjusting ertries that invo]vc accruals.
4. Preparc joulnal entrics to lecord the cash paymcrts and cirsh collections described lbr January.
172 Chapter 4 Completing the Accounting Cycle

SERIAL PROBLEM (Tltir .ttrittl ptobletr began itt Chdpter I ord totttinues IlltoLtgh most ttJ the book. IJ Pl?tit,Lts <lluPler
r(,gfite ts \tct'c tiot (oltlpl?|ed, rhe seiol Ptoblen c(1n begin 4t tllis point. It is helPJitL' but not necessun.
10 us? llte W)rking Papers llrtt ut'cornpatl\'lhe book.)
Success Systems l)-l Pj

SP 4 The December 31.2009, adiusted llial balancc ol Success Systems (reflecting its traflsactions
ll-om Octobcr through Dccemher of 2009) ibllows.

l0l Cash.. .. $ s8, r60

106 Ac.ountsreceivable 5,668

t26 Compu(er supp'ies 580

128 P epaid insu-an(e t,665

l3l Prepaid rent 825

,63 Offi.e equipmenr 8,000
164 Accunulared depreciarion Offtce equ pn'ent $ 400
167 Conputer equipment 20,000

168 Accumulated depreciation Computer equipment .-.-. . r,250

20 AccoLnLs payable I, t00
210 W.rges payable 500

236 Unearned computer services revenue t.500

301 A. Lopez. Cap,ral 83.000

102 A Iopez.withd :wals 7, t00

401 Corrpurer serviLes 3 t,284

617 Depreciation expense-O6ice equipment - 400

bl3 Deprec,acon expense Computer equip 'en( ..... . t,250
623 Wages expense 1.875

637 li<Lrrnce e\perle 555

644 Rerr expenre . . 2,475

652 ConpJrer s,,pPlies eiPense . . 3.065

655 Advernsi'rge>'penqe 2.965

676 MiledSe eipense 896
677 M scellareous e,penses 250

684 Repairse(pense-Comou(er..... r,305

901 lrcone sLnarary 0

Torals . .. .... . $ ll9,034 $ ll9.034

Required
Check Posr closing ff1 biancc l. Rccold ancl post lhe eccssary closing entlies for Success Systerns.
cotr s, $9'1.898 2. Prcparc a posGclosiDg trial bnlance as ol December 3I , 2009.

REPORTITT{G IN B'fN 4- I Rclcr to Rcst llttl''s financial statements in Appendix A to answel the following.
ACTION Required
cl P2
I (BEfiF_r l. For the fiscal year cndcd March 3. 2007, what amount is credited to Income Summary to summarize
its l-cvenues earned?
2. For thc liscal year ended March 3, 2007. what amount is debited to Income Summary to summarize
its expenses incLured i
 Chapter 4 Completing theAccounting Cycle 17,

3. For the fiscal year ended March 3. 2007. what is rhe balance of its Income Summary account before
it is closed?
4. In its statement of cash flows for the year ended March 3, 2007, what amount of cash is paid in div-
idends to common stockholders?

Fast Forward
5. Access Best Buy's annual report for fiscal years ending after March 3, 2007, at its Website
(Bestlluy.com) or the SEC's EDGAR database @l[w.sEe.Csy). How has the amount of net income
closed to Income Summary changed in the fiscal years ending after March 3, 2007? How has the
amount of cash paid as dividends changed in the fiscal yeals ending after March 3, 2007?

BTN 4-2 Key figures for the recent two yea$ of Best Buy and RadioShack follow. COMPARATIVE
ANALYS!S
I
n,

Current assets..
Current liabilities
.. .,.
... -..
..
-.
. $9,081
5,301
$7,98s
6,056
$ r,600
9U
$t,627
986
@
Required
@Radioshack,
I . Compute the current latio for both years for both companies.
2. Which company has the better ability to pay shoft-term obligations according to the current ratio?
3. Analyze and comment on each company's current ratios for the past two years.
4. How do Best Buy's and Radioshack's cunent ratios compare to their industry avemge ratio of 1.6?

BTN 4-3
On January 20,2009, Tamira Nelson, the accountant for Picton Enterprises, is feeling pres, ETHICS
sure to complete the annual financial statements. The company president has said he needs up-to-date
CHALLENGE
financial statements to share with the bank on January 2l at a dinner meeting that has been called to dis-
cuss Picton's obtaining loan financing for a special building project. Tamira knows that she will not be CIl
able to gather all the needed infomation in the next 24 hours to prepare the entire set of adjusting en-
tries that must be posted before the financial statements accumtely porbay the company's performance
and financial position for the fiscal period ended December 31, 2008. Tamim ultimately decides to esti-
mate s€veml expense accruals at the last minute. When deciding on estimates for the expenses, she uses
low estimates because she does not want to make the financial statements look worse than they are.
Tamira finishes the financial statements before the deadline and gives them to the president without men-
tioning that several account balances are estimates that she provided.

Required
l. Identify several courses of action that Tamira could have taken instead of the one she took.
2. If you were in Tamira's situation, what would you have done? Bdefly justify your response.

BTN 4-4
Assume that one of your classmates states that a company's books should be ongoing and COMMUNICATING
therefore not closed until that business is terminated. Wdte a half-page memo to this classmate explaining
the concept of the closing process by drawing analogies between (1) a scoreboard for an athletic event
IN PRACTICE
and the revenue and expense accounts of a business or (2) a sports team's record book and the capital CI P2
account. (I{tarr Think about what would happen if the scoreboard is not cleared before the start of a new
game.)
174 Chapter 4 Completing rhe Accounting Cycle

TAKING IT TO BTN 4-5 Access \lotlc\ Itool's discussion of the current ratio at Fool.conr/School/\'altr2ltild
(qrrent,\ntf Ouicklli{p-.[r!4. (If the page changed, search that site for the curre t rdtio.)

ol
TF{E NET

'' Required
l. What level for thc cufent ratio is general]y rcgarded as sufficient to lreet near term operating needs?
2. Once you have calculated the cufent ratio for a company, what shou]d you compare it against?
3. What are the implications 1br a company that has a cufent ratio that is too high?

TEAMWORK XN BT!{ 4-6 The unadjusted trialbalancc and infbrmation fol the accounting adjustments ofNoseworthy
ACTION lnvestigators tbllow. Each team member involved in this projcct is to assume one oI the four responsi-
bilities listed. Aftcr completing each of these responsibilities. the team should wolk together to prove
PI P2 PJ the accounting equation urilizing information frcm teammates (1 and'1). lf your equation does not bal
ance, you are to work as a team to resolve the error. The team's goal is to complete the task as quickly
and accurately as possible.

Cash .. .. $16,000
Supplies ... 12,000
Prepaid insurance 3.000
Equipment . 25,000
Ac(Jm rraceo depre(arion Equipmenr . ... .. . $ 7,000
ALcoun(s payable 3.000
D. Noseworrhy. Capiral 34,000
DNoseworthy,Withdrawals ...........-... 6,000
lnvesdSa on 'ees earned . 31.000
Rerre:pense..... t5,000
Totals . . . $77,000 $77,000

additional Year-End lnformation

a. Insurance that expired in the current period amounts to $2,200.
b. Equipment dcprcciation for the period is 54,000.
c. Unused supplies total $5,000 at period end.
d. Services in the amount of Xi800 have been provided but have not been billed or collected.

Responsibilities for lndavidual Team Members

l. Determine the accounts and adjusted balances to be extendcd to the balance sheet columns of the
work sheet for Noseworthy. Also determine total assets and total liabilities.
2. Detcrmine the adiusted revenue account balancc and prepare the entry to close this account.
,. Determine the adjusted account balances for expenses and prepare the entry to close these accounts.
4. Prepal€ T:accounts tbr both D. Nosewonhy, Capital (reflccting the unadjusted trial balance amount)
and Incorne SummarJ. Prepale the third and foufih closing entrics. Ask teammates assigned to pa s 2
and 3 for the postings for Income Summary. Obtain amounts to complete the third closing entry and
post both the thid and fourth closing entries. Provide the team with the ending capital account balance.
5. The entirc team should prove the accounting equation using post-closing balances.

ENTREPRENEURIAL BTN 4-Z Revieu,this chapter's opcning fcaturc itlvolving Kathryn Kerrigan and her shoe business.
DECTSTON l. Explain how a classified balancc sheet can help Kathryn Kerrigan know wh,t hills are drre when. and

\r ciP2tl whether she has thc resources to pay those bills.

 Chapter 4 Completing the Accounling Cycle 175

2. Why is it important for Kathryn Kerrigan to match costs and revenues in a specific time period? How
do closing entries help her in this regard?
What objectives are met when Kathryn Kerrigan applies closing procedures each fiscal year-end?

BTN 4-8 Select a company that you can visit in person or inteNiew on the ielephone. Call ahead to the HITTING THE
compaly to anange a time when you can interview an employee (prefsmbly an accountant) who helps pre-
pare the armual financial statements. Inquire about the following aspects of its accounting cycle:
ROAD
l. Does the company prcpare interim financial statements? What time period(s) is used for interim
c2 \4'
€
statements?
2. Does the company use the cash or accrual basis of accounting?
3. Does the company use a work sheet in prcpadng financial statements? Why or why not?
4. Does the company use a spreadsheet program? If so, which software program is used?
5. How long does it take after the end of its reporting period to complete annual statements?

BTN 4-9 DSG international plc is the United Kingdom's largest rctailq of consumer electonics. GLOBAL DECISION
Access its financial statements for the year ended April 28,2007, at the company's Website
(www.Dsciplc,com). The following selected information is available from DSG's financial statements. o,
I
EEEI
Currentassets ......,., {2,067 {2,094
Current liabilities . .. . ... t,859 |,749

Required
I . Compute DSC's curlent rutio for both the current year and the pdor year.
2. Comment on any chalge from the prior year to the current year for the curent ratio.

ANSWERS TO MULTIPTE CHOICE QUIZ

l. e 4.c
2.c 5.b
3. a