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Module 3: Constructing Financial Statements and Analyzing Transactions

Module 3: Constructing Financial Statements and Analyzing Transactions. The Accounting Cycle. T-Accounts and Journal Entries. Cash Dividends.

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Module 3: Constructing Financial Statements and Analyzing Transactions

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  1. Module 3:Constructing Financial Statements and Analyzing Transactions

  2. The Accounting Cycle

  3. T-Accounts and Journal Entries

  4. Cash Dividends • All transactions between the company and its shareholders are considered financing transactions. This includes payment of dividends, the issuance of stock, and any subsequent stock repurchase. • Financing transactions affect only the balance sheet; they do not affect the income statement.

  5. Adjusting Accounts

  6. Types of Adjustments • Cash received or paid before recognition of revenue or expense: • Prepaid expenses • Unearned revenues • Cash received or paid after recognition of revenue or expense • Accrued expenses • Accrued revenues

  7. Prepaid Expenses (Assets) • Assume that Apple pays $200 to purchase time on MTV for future iPod ads. Apple’s cash account decreases by $200, and an asset called prepaid advertising increases by the same amount.

  8. Unearned Revenues (Liabilities) • Assume that Apple receives $400 cash from a customer as advance payment on a multi-unit iPod sale to be delivered next month.

  9. Recognition of Unearned Revenue as Earned Revenue • Assume that Apple delivers the iPods a month later (but still within the fiscal quarter).

  10. Accrued Expenses (Liabilities) • Assume that Apple’s sales staff earns $100 of sales commissions this period that will not be paid until next period.

  11. Accrued Revenues (Assets) • Assume that Apple delivers iPods to a customer in Germany who will pay next quarter. The sales price for those units is $500 and the cost is $400.

  12. Unadjusted Trial Balance (not 100% Accrual Basis) Adjusting Entries Adjusted Trial Balance (100% Accrual Basis) Create Financial Statements I/S B/S SCF SE Apple’s transactions thus far …

  13. Trial Balance • The trial balance is a listing of all accounts and their balances at a point in time. • Its purpose is to prove the mathematical equality of debits and credits, provide a useful tool to uncover any accounting errors, and help prepare the financial statements.

  14. Adjusted Trial Balance For Apple

  15. Preparation of the Financial Statements • Income Statement

  16. Preparation of the Financial Statements • Retained Earnings Computation

  17. Preparation of the Financial Statements • Balance Sheet

  18. Preparation of the Financial Statements • Statement of Stockholders’ Equity

  19. Preparation of the Financial Statements • Statement of Cash Flows (from cash column)

  20. Statement of Cash Flows – Indirect Method • Operating cash flows:

  21. ASSET A/R Beg balance xx xxx Cash Collections Credit Sales xxx Ending balance xx Cash Generated (Used) from changes in Balance Sheet Accounts Cash Basis # Accrual Basis #

  22. Cash Generated (Used) from changes in Balance Sheet Accounts LIABLITY A/P xx Beg balance Cash Basis # Accrual Basis # Cash Payments xxx xxx Purchases on Credit xx Ending balance

  23. Formal Presentation of Apple’s SCF

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