Lecture financial and managerial accounting (4:e) chapter 3 wild, shaw, chiappetta

Financial and Managerial
Accounting

Wild, Shaw, and Chiappetta

Fourth Edition
McGraw-Hill/Irwin

Copyright © 2011 by The McGraw-Hill Companies, Inc. All


Chapter 3
Adjusting Accounts and
Preparing Financial
Statements


Conceptual Chapter Objectives
C1: Explain the importance of periodic
reporting and the time period
assumption.
C2: Explain accrual accounting and how
it improves financial statements.
C3: Identify steps in the accounting cycle.
C4: Explain and prepare a classified
balance sheet.
3-3


Analytical Chapter Objectives
A1: Explain how accounting adjustments

link to financial statements.
A2: Compute profit margin and describe
its use in analyzing company
performance.
A3: Compute the current ratio and
describe what it reveals about a
company’s financial condition.
3-4


Procedural Chapter Objectives
P1: Prepare and explain adjusting
entries.
P2: Explain and prepare an adjusted trial
balance.
P3: Prepare financial statements from an
adjusted trial balance.
P4: Describe and prepare closing entries.
P5: Explain and prepare a post-closing trial
balance.
3-5


Procedural Chapter Objectives
(Continued)
P6: Appendix 3A – Explain the
alternatives in accounting for
prepaids (see text for details).
P7: Appendix 3B – Prepare a work sheet
and explain its usefulness (see text

for details).
P8: Appendix 3C – Prepare reversing
entries and explain their purpose (see
text for details).
3-6


C2, P1

Adjusting Accounts
An adjusting entry is recorded to bring an asset or
liability account balance to its proper amount.

Framework for Adjustments
Adjustments
Paid
Paid (or
(or received)
received) cash
cash before
before
expense
expense (or
(or revenue)
revenue) recognized
recognized

Prepaid
Unearned
Prepaid

Unearned
(Deferred)
(Deferred)
(Deferred)
(Deferred)
expenses*
revenues
expenses*
revenues
*including depreciation

Paid
Paid (or
(or received)
received) cash
cash after
after
expense
expense (or
(or revenue)
revenue) recognized
recognized

Accrued
Accrued
expenses
expenses

Accrued
Accrued

revenues
revenues

3-7


A1

Links to Financial Statements

3-8


P2

FastForward – Computing the Adjusted
Trial Balance - December 31, 2011

Finally, the
totals are
determined.

3-9


P3

1. Prepare Income Statement

3-10

P3

2. Prepare Statement of Retained
Earnings
Note that net income from the Income Statement
carries to the Statement of Retained Earnings.

3-11


P3

3. Prepare Balance Sheet

3-12


P4

Recording Closing Entries
1.
2.
3.
4.

Close revenue accounts.
Close expense accounts.
Close income summary account.

Close dividends account.

3-13


The Accounting Cycle

C3

Start

1. Analyze
transactions

10. Reverse
(optional)

9. Prepare
post-closing
trial balance
8. Close

2. Journalize
3. Post

7. Prepare
statements

4. Prepare
unadjusted

trial balance

6. Prepare
adjusted
trial balance

5. Adjust

3-14


End of Chapter 3

3-15