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Financial Managerial Accounting: For Mbas

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Financial Managerial Accounting: For Mbas

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omar
Copyright
© © All Rights Reserved
Available Formats
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Financial

Managerial
&
Accounting
for MBAs Sixth Edition

Peter D. Easton
Robert F. Halsey
Mary Lea McAnally
Module 3
Transactions, Adjustments, and
Financial Statements

© Cambridge Business Publishers, 2021


Learning Objective 1
Explain the accounting cycle, and
construct the financial statement effects
template.

© Cambridge Business Publishers, 2021


Accounting Cycle

 Step 1 Record transactions in the accounting records


 Step 2 Prepare accounting adjustments
 Step 3 Prepare financial statements
 Step 4 Close the books in anticipation of the start of a new accounting
cycle
© Cambridge Business Publishers, 2021 4
Accounting Cycle Tools

 Financial Statement Effects Template (FSET)


 Provides a convenient way to represent relatively complex financial
accounting transactions and events in a simple, concise manner
 Captures transaction on all four financial statements
 Facilitates analysis and interpretation, especially “What if” scenarios

 T-Accounts
 Expands each account into increases and decreases and can be used to keep
running totals
 Journal entries
 Classic debits and credits

© Cambridge Business Publishers, 2021 5


Financial Statement Effects Template
(FSET)

The FSET captures the transaction on the:


 Balance sheet
 Income statement
 Statement of stockholders’ equity
 Statement of cash flows

© Cambridge Business Publishers, 2021 6


T-Accounts

 T-accounts capture increases and decreases to individual balance


sheet and income statement accounts.
 T-accounts illustrate the effect of each transaction.
 Assets’ normal balance is on the left. Asset T-accounts record increases on
the left and decreases on the right.
 Liabilities’ normal balance is on the right. Liability T-accounts record
increases on the right and decreases on the left.

© Cambridge Business Publishers, 2021 7


Journal Entries

 Journal entries capture the effects of transactions.


 Journal entries reflect increases and decreases to accounts using
the language of debits and credits .
 Debits and credits simply refer to the left or right side of a T-
account, respectively.

© Cambridge Business Publishers, 2021 8


Learning Objective 2
Apply the financial statement effects
template to analyze accounting
transactions.

© Cambridge Business Publishers, 2021


Apple FSET
2017-2018

For each transaction, we ask these three questions:


 What accounts are affected?
 What is the direction of the effect?
 What is the amount of the effect?

© Cambridge Business Publishers, 2021 10


Learning Objective 3
Prepare and explain accounting
adjustments and their financial
statement effects.

© Cambridge Business Publishers, 2021


Accounting Adjustments

Companies make accounting adjustments so that financial


statements are accurate and complete.
 For example, employees might have earned wages during an accounting
period but not been paid before the end of the period.
 Failure to recognize the wages owed would understate liabilities
(because wages payable would be too low) and would overstate net
income for the period.
(because wages expense would be too low)
 Both the balance sheet and the income statement
would be inaccurate.
 SO, the company makes an accounting adjustment.

© Cambridge Business Publishers, 2021 12


Four Types
of Accounting Adjustments

 Prepaid expenses―advance cash payments that will ultimately become


expenses
 Unearned revenues―cash received from customers before any services or
goods are provided
 Accrued expenses―expenses incurred and recognized on the income
statement even though cash has not been paid yet
 Accrued revenues―revenues earned and recognized on the income statement
even though cash is not received yet
© Cambridge Business Publishers, 2021 13
Prepaid Expenses

© Cambridge Business Publishers, 2021 14


Unearned Revenues

© Cambridge Business Publishers, 2021 15


Accrued Expenses

© Cambridge Business Publishers, 2021 16


Accrued Revenues

© Cambridge Business Publishers, 2021 17


Four Types
of Accounting Adjustments

 Prepaid expenses―advance cash payments that will ultimately become


expenses
 Unearned revenues―cash received from customers before any services or
goods are provided
 Accrued expenses―expenses incurred and recognized on the income
statement even though cash has not been paid yet
 Accrued revenues―revenues earned and recognized on the income statement
even though cash is not received yet
© Cambridge Business Publishers, 2021 18
Learning Objective 4
Construct financial statements from the
accounting records.

© Cambridge Business Publishers, 2021


Constructing
the Financial Statements

 When all transactions and adjustments have been recorded in the


FSET, sum each column to obtain ending balances.
 Prepare financial statements in this order:
1. Income statement
2. Statement of stockholders’ equity―including the retained earnings
reconciliation
3. Balance sheet
4. Statement of cash flows

© Cambridge Business Publishers, 2021 20


Apple’s Income Statement

 Apple’s income statement accounts are in the last three columns


of the FSET.
 We use the data from those columns to prepare the income
statement.
© Cambridge Business Publishers, 2021 21
Apple’s
Retained Earnings Reconciliation

Update the retained earnings balance:


 Add net income
 Subtract dividends
 Subtract any stock repurchased and retired

© Cambridge Business Publishers, 2021 22


Apple’s
Statement of Stockholders’ Equity

We use the information from the contributed capital and earned


capital columns in the FSET to prepare the statement of
stockholders’ equity.

© Cambridge Business Publishers, 2021 23


Apple’s Balance Sheet

 Use the ending balances


from the last row in the
FSET.

 Balance sheet accounts


are called permanent
accounts because their
respective balances carry
over from one period to
the next.

© Cambridge Business Publishers, 2021 24


Learning Objective 5
Explain and apply
the closing process.

© Cambridge Business Publishers, 2021


The Closing Process

AKA: Closing the books

 The closing process―“zeroing out” of the temporary accounts


by transferring their ending balances to retained earnings
 Revenues, expenses, and dividends are temporary accounts
because the balance at the start of each accounting period is $0 so
that only the current period’s activities are included in the total
amount.
 Balance sheet accounts are permanent accounts and do NOT
CLOSE each period.

© Cambridge Business Publishers, 2021 26


The Closing Process
FSET vs. Practice
Closing Process: FSET
 The FSET and T-accounts are pedagogical tools that represent transactions’ effects on
financial statements.
 The FSET is highly stylized, but its simplicity is instructive.

 Each transaction and adjustment is automatically transferred to retained earnings―no


additional closing process.

Closing Process: Practice


 Journal entries capture transactions and adjustments.

 Retained earnings are not continuously updated.

 Companies use a formal “closing process” at the end of each reporting period.

© Cambridge Business Publishers, 2021 27


Journal Entries

Debit Credit Debit Credit Debit Credit

© Cambridge Business Publishers, 2021 28


1. Close Revenue and Gain Accounts

© Cambridge Business Publishers, 2021 29


2. Close Expense and Loss Accounts

© Cambridge Business Publishers, 2021 30


3. Close Dividend Accounts

© Cambridge Business Publishers, 2021 31


Financial
Managerial
&
Accounting
for MBAs Sixth Edition

Cambridge Business Publishers


www.cambridgepub.com

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