Skyline College

1. Chapter 13 Skyline College

2. Classified Financial Statements At the end of the period, Simpson Antiques prepares three financial statements: • Income statement • Statement of owner's equity • Balance sheet

3. A classified Balance Sheet is formatted where accounts are divided into groups of similar accounts and a subtotal is given for each group. The the balance sheet is arranged in a classified format. This makes the financial statement more useful to the readers.

4. A multiple-step income statement is a type of income statement on which several subtotals are computed before the net income is calculated. The Multiple-Step Income Statement

5. A single-step income statement is a format in which only one computation is needed to determine the net income. The Single-Step Income Statement (Total Revenue – Total Expenses = Net Income)

6. JT Consulting Services Income Statement Month Ended December 31, 2007 Revenue Fees Income 28,000 Expenses Salaries Expense 5,000 Utilities Expense 600 Supplies Expense 500 Rent Expense 3,000 Depreciation Expense - Equipment 583 Total Expenses 9,683 Net Income for the Month 18,317 Single-step Income Statement The format lists all revenues in one section and all expenses in another section.

7. Operating Revenue The first section of the multiple-step income statement contains the revenue from operations. This is the revenue earned from normal business activities. Other income is presented separately near the bottom of the statement.

8. Operating Revenue The operating revenue for Simpson Antiques is net sales of merchandise. Sales <Sales Returns and Allowances> <Sales Discounts> Net Sales This is an internal calculation which does not appear on the income statement

9. Operating Revenue Net sales for Simpson Antiques

10. Cost of Goods Sold The Cost of Goods Sold section contains information about the cost of the merchandise that was sold during the period. Three elements are needed to compute the cost of goods sold: • Beginning inventory • Net delivered cost of purchases • Ending inventory

11. Purchases + Freight In <Purchases Returns and Allowances> <Purchases Discounts> Net Delivered Cost of Purchases Net Delivered Cost of Purchases

12. <Ending Merchandise Inventory> Cost of Goods Sold Beginning Merchandise Inventory + Net Delivered Cost of Purchases Total Merchandise Available for Sale Schedule of Cost of Goods Sold This is usually footnoted in the financial statements rather than appearing on the income statement

13. Cost of Goods Sold Cost of goods sold

14. Gross profit is the difference between net sales and the cost of goods sold. Gross Profit on Sales • For Simpson Antiques net sales is the revenue earned from selling clothes. • Cost of goods sold is what Simpson Antiques paid for the clothes that were sold during the fiscal period. • Gross profit is what is left to cover operating expenses and provide a profit.

15. Gross profit on sales for Simpson Antiques

16. Operating Expenses Operating expenses are expenses that arise from normal business activities. Simpson Antiques separates operating expenses into two categories: • Selling Expenses • General and Administrative Expenses

17. Operating Expenses Salaries for salespersons and advertising are examples of selling expenses.

18. Operating Expenses Rent, utilities, and salaries for office employees are examples of general and administrative expenses.

19. Net Income or Net Loss from Operations The format for determining net income (or net loss) from operations is: Gross Profit on Sales (Total Operating Expenses) Net Income (or Net Loss) from Operations

20. Net income from operations

21. Other Income and Other Expenses • Income that is earned from sources other than normal business activities appears in the Other Income section. • For Simpson Antiques other income includes interest on notes receivable and one miscellaneous income item. • Expenses that are not directly connected with business operations appear in the Other Expenses section.

22. Other Income and Other Expenses

23. Net Income or Net Loss • Net income is all the revenue minus all the expenses. • If there is a net loss, it appears in parentheses. • Net income or net loss is used to prepare the statement of owner's equity.

24. Net income for Simpson Antiques

25. The Statement of Owner's Equity • The statement of owner's equity reports the changes that occurred in the owner's financial interest during the period. • The ending capital balance for Patricia Simpson, $84,792.80, is used to prepare the balance sheet.

26. Current assets are assets consisting of cash, items that normally will be converted into cash within one year, or items that will be used up within one year. Current Assets

27. Liquidity is the ease with which an item can be converted into cash. Current Assets Current assets are listed in the order of liquidity.

28. Current Assets Current assets for Simpson Antiques

29. Property, Plant & Equipment (PP&E) is property that will be used in the business for longer than one year. Property, Plant & Equipment The balance sheet shows three amounts for each category of plant and equipment : Asset (Accumulated depreciation) Book value

30. Plant and Equipment Total property, plant and equipment

31. Current liabilities are debts that must be paid within one year using current assets. Current Liabilities • Current liabilities are usually listed in order of priority of payment. • Management must ensure that funds are available to pay current liabilities when they become due in order to maintain the firm's good credit reputation.

32. Simpson Antiques Balance Sheet Year Ended December 31, 2007 Assets Prepaid Interest 75.00 6,300.00 Total Current Assets 98,716.00 Total Plant and Equipment 31,900.00 Total Assets 130,616.00 Liabilities and Owner’s Equity Current Liabilities Notes Payable-Trade 2,000.00 Notes Payable-Bank 9,000.00 Accounts Payable 24,129.00 Interest Payable 20.00 Social Security Tax Payable 1,158.40 Medicare Tax Payable 267.40 Employee Income Tax Payable 990.00 Fed. Unemployment Tax Pay. 9.60 State Unemployment Tax Pay. 64.80 Salaries Payable 1,200.00 Sales Tax Payable 6,984.00 Total Current Liabilities 45,823.20 Current Liabilities Total current liabilities

33. Long-term liabilities are any debts that are not considered current. Long-Term Liabilities • Although repayment of long-term liabilities might not be due for several years, management must make sure that periodic interest is paid promptly. • Long-term liabilities include mortgages, notes payable, and loans payable.

34. Owner's Equity The ending balance from the statement of owner’s equity is transferred to the Owner's Equity section of the balance sheet.

35. Adjusting Entries • All adjustments are shown on the worksheet. • After the financial statements have been prepared, the adjustments are made a permanent part of the accounting records. • They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.

36. Journalizing the Adjusting Entries • Each adjusting entry shows how the adjustment was calculated. • Supervisors and auditors need to understand, without additional explanation, why the adjustment was made.

37. Adjusting Entries Accrued Income (m – n) Recognizes income earned in the period. The debit is to an asset account (Interest Receivable) or a liability account (Sales Tax Payable).

38. GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 2007 Dec.31 (Adjustment a) Income Summary 52,000.00 Merchandise Inventory 52,000.00 To transfer beginning inventory to Income Summary (Adjustment b) Merchandise Inventory 47,000.00 31 Income Summary 47,000.00 To record ending inventory

39. GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 2007 Dec.31 (Adjustment c) Uncollectible Accounts Expense 800.00 Allowance for Doubtful Accounts 800.00 To record estimated loss from uncollectible amounts based on 0.8% of net credit sales of $100,000 (Adjustment d) Depreciation Expense – Store Equip. 2,400.00 31 Accum. Depreciation - Store Equip. 2,400.00 To record depreciation for 2007 as shown by schedule on file. (Adjustment e) 31 Depreciation Expense – Office Equip. 700.00 Accum. Depreciation - Office Equip. 700.00 To record depreciation for 2007 as shown by schedule on file.

40. GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 2007 Dec.31 (Adjustment f) Salaries Expense - Sales 1,200.00 Salaries Payable 1,200.00 To record accrued salaries of part-time sales clerks for Dec. 28-31 (Adjustment g) Payroll Taxes Expense 91.80 31 Social Security Tax Payable 74.40 Medicare Tax Payable 17.40 To record accrued payroll tax on accrued salaries for Dec. 28-31

41. GENERAL JOURNAL PAGE 25 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 2007 Dec.31 (Adjustment h) Payroll Taxes Expense 74.40 Fed. Unemployment Tax Payable 9.60 State Unemployment Tax Payable 64.80 To record accrued payroll tax on accrued salaries for Dec. 28-31 (Adjustment i) 31 Interest Expense 20.00 Interest Payable 20.00 To record interest on a 2-month, $2,000, 12% note payable dated Dec. 1, 2007

42. GENERAL JOURNAL PAGE 26 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 2007 Dec.31 (Adjustment j) Supplies Expense 4,975.00 Supplies 4,975.00 To record supplies used (Adjustment k) Insurance Expense 2,450.00 31 Prepaid Insurance 2,450.00 To record expired insurance on 3-year policy purchased for $7,350 on Jan. 2, 2007 (Adjustment l) 31 Interest Expense 150.00 Prepaid Interest 150.00 To record transfer of 2/3 of prepaid interest of $225 for a 3-month, 10% note payable issued to bank on Nov. 1, 2007

43. GENERAL JOURNAL PAGE 27 DATE DESCRIPTION POST. DEBIT CREDIT REF. Adjusting Entries 2007 Dec.31 (Adjustment m) Interest Receivable 30.00 Interest Income 30.00 To record accrued interest earned on a 4-month, 15% note receivable dated Nov. 1, 2007($1,200 x 0.15 x 2/12) (Adjustment n) Sales Tax Payable 216.00 31 Miscellaneous Income 216.00 To record accrued commission earned on sales tax owed for fourth quarter of 2007:Sales Tax Payable $7,200Commission rate x 0.03 Commission due $ 216

44. Posting the Adjusting Entries • After the adjustments have been recorded in the general journal, they are promptly posted to the general ledger. • The word Adjusting is entered in the Description column of each general ledger account.

45. Journalizing and Posting the Closing Entries • At the end of the period, the temporary accounts are closed. • The temporary accounts are: • Revenue accounts • Cost of goods sold accounts • Expense accounts • Drawing account

46. There are four steps in the closing process. • Close revenue accounts and cost of goods sold accounts with credit balances to Income Summary. • Close expense accounts and cost of goods sold accounts with debit balances to Income Summary. • Close Income Summary, which now reflects the net income or loss for the period, to owner's capital. • Close the drawing account to owner's capital.

47. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Closing Entries 2007 Dec. 31 Sales 561,650.00 Interest Income 166.00 Miscellaneous Income 582.00 Purchases Returns and Allowances 3,050.00 Purchases Discounts 3,130.00 Income Summary 568,578.00 Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with credit balances. Debit each account, except Income Summary, for its balance. Credit Income Summary for the total.

48. Income Summary 512,406.20 Sales Returns and Allowances 13,000.00 Purchases 321,500.00 Freight In 9,800.00 Salaries Expense – Sales 79,990.00 Advertising Expense 7,425.00 Cash Short or Over 125.00 Supplies Expense 4,975.00 Depreciation Expense - Store Equip 2,400.00 Rent Expense 27,600.00 Salaries Expense - Office 26,500.00 Insurance Expense 2,450.00 Payroll Taxes Expense 7,371.20 Telephone Expense 1,875.00 Uncollectible Accounts Expense 800.00 Utilities Expense 5,925.00 Depreciation Expense - Office Equip. 700.00 Interest Expense 770.00 Step 2: Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec. 31 Credit each account, except Income Summary, for its balance. Debit Income Summary for the total.

49. Step 3: Closing the Income Summary Account. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec.31 Income Summary 51,171.80 Patricia Simpson, Capital 51,171.80 • The third closing entry transfers the Income Summary balance to the owner's capital account. • This closes the Income Summary account, which remains closed until it is used in the end-of-period process for the next year. • For Simpson Antiques, the third closing entry is as follows: Income Summary Adjusting Entries (a-b) 12/31 52,000.00Closing Entries 12/31 512,406.20564,406.20 12/31 47,000.00 12/31 568,578.00615,578.00Bal. 51,171.80

50. Step 4: Closing the Drawing account. GENERAL JOURNAL PAGE 28 DATE DESCRIPTION POST. DEBIT CREDIT REF. Dec.31 Patricia Simpson, Capital 27,600.00 Patricia Simpson, Drawing 27,600.00 This entry closes the drawing account and updates the capital account.