4-1

Chapter 3

Adjusting Accounts and Preparing

Financial Statements
 4-2

C1

THE ACCOUNTING PERIOD

 4-3

C3

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

Prepaid
Prepaid Unearned
Unearned Accrued
Accrued Accrued
Accrued
(Deferred)
(Deferred) (Deferred)
(Deferred) expense
expense revenues
revenues
expenses*
expenses* revenues
revenues
*including depreciation
 4-4

Adjustments
Earned or When cash is paid or When earned or When cash is paid or
Accounts Cash
Incurred received incurred received in the future
Prepaid Prepaid
Paid Not incurred Expenses
expenses expenses
Prepaid
Cash
expenses
Unearned Unearned
Received Not earned Cash
revenues revenue
Unearned
Revenue
revenue
Accrued
Not paid Incurred Expenses Payable
expenses
Payable Cash
Accrued
Not received Earned Receivable Cash
revenues
Revenue Receivable
 4-5

P1

PREPAID INSURANCE
(a) On 12/1/11, FastForward paid $2,400 for insurance for
2-years (24-months, December 2011 through November
2013). FastForward recorded the expenditure as Prepaid
Insurance on 12/31/11.
What adjustment is required?

Dec. 31 Insurance Expense 100

Prepaid Insurance 100
To record first month's expired insurance

Prepaid Insurance 637 Insurance Expense 128

Dec. 1 2,400 Dec. 31 100 Dec. 31 100
Bal. 2,300
 4-6

P1 UNEARNED (DEFERRED)
REVENUES
On December 26, 2011, FastForward agrees to
provide consulting services to a client for a fixed fee
of $3,000 for 60 days. On this date, the client pays
the entire consulting fee in advance. FastForward
makes the following entry:

Dec. 26 Cash 3,000

Unearned Revenue 3,000
Consulting fees received in advance

Unearned Revenue
Dec. 26 3,000
 4-7

P1 UNEARNED (DEFERRED)
REVENUES
(d) On December 31, FastForward earns 5-days of
consulting fees. Each day that passes results in
consulting fees of $50 ($3,000 ÷ 60), so FastForward
earned ($50 × 5 days) $250.

Dec. 31 Unearned Revenue 250

Consulting Revenue 250
To recognize 5-days of consulting fees

Unearned Revenue Consulting Revenue

Dec 31 250 Dec 26 3,000 Dec. 31 250
Bal 2,750
 4-8

P1

ACCRUED EXPENSES
We’re about one-half
Costs
Costs incurred
incurred in
in done with this job and
aa period
period that
that are
are want to be paid for
our work!
both
both unpaid
unpaid and
and
unrecorded.
unrecorded.
 4-9

P1

ACCRUED SALARIES EXPENSES

FastForward’s
FastForward’s employee
employee earnsearns $70
$70 per
per dayday and
and is
is paid
paid
every
every two
two weeks
weeks on
on Friday.
Friday. Year-end,
Year-end, 12/31/11,
12/31/11, falls
falls on
on aa
Wednesday.
Wednesday. The
The last
last payday
payday of of 2011,
2011, is
is Friday,
Friday, 12/26/11.
12/26/11.
From
From 12/26
12/26 until
until year-end
year-end isis three
three working
working days.
days. The
The
employee
employee has
has earned
earned salaries
salaries of
of $210
$210 for
for Monday
Monday through
through
Wednesday.
Wednesday. They
They will
will not
not be
be paid
paid until
until the
the next
next Friday.
Friday.
 4 - 10

P1

ACCRUED SALARIES EXPENSES

(e) FastForward’s employee has earned but not been paid
on December 31, 2011, $210.

Dec. 31 Salaries Expense 210

Salaries Payable 210
To accrue 3 days' salary (3 x $70)

Salaries Expense Salaries Payable

Dec.12 700 Dec. 31 210
Dec.26 700
Dec. 31 210
Bal. 1,610
 4 - 11

P1 FUTURE PAYMENT OF
ACCRUED EXPENSES
On January 9, 2012, FastForward will pay the payroll for
the two weeks from December 26, 2011 through January
9, 2012. Here is the journal entry for the payroll:

Jan 9 Salaries Payable (3 days @ $70) 210

Salaries Expense (7 days @ $70) 490
Cash (10 days @ $70) 700
Paid two-week salary
 4 - 12

P1

ACCRUED INTEREST EXPENSES

FastForward
FastForward borrowed
borrowed $6,000
$6,000 from
from First
First National
National Bank
Bank on
on
December
December 1, 1, 2011.
2011. The
The note
note bears
bears interest
interest at
at the
the annual
annual
rate
rate of
of 6%
6% and
and is
is due
due toto be
be repaid
repaid in
in one
one year.
year. Let’s
Let’s accrue
accrue
interest
interest for
for the
the month
month ended
ended 12/31/11.
12/31/11.

Dec. 31 Interest Expense 30

Interest Payable 30
To accrue interest ($6,000 × 6% × 30/360)

Interest Expense Interest Payable

Dec. 31 30 Dec. 31 30
 4 - 13

P1

ACCRUED REVENUES
Revenues
Revenues earned
earned Yes,
Yes, I’ve
I’ve completed
completed youryour
in
in aa period
period that
that consulting
consulting job,
job, but
but have
have not
not
had
had time
time to
to bill
bill you
you yet.
yet.
are
are both
both
unrecorded
unrecorded and and not
not
yet
yet received.
received.
 4 - 14

ACCRUED SERVICE REVENUE

P1

(f)
(f) On
On December
December 12, 12, 2011,
2011, FastForward
FastForward agrees
agrees to to
render
render consulting
consulting services
services under
under aa 30-day
30-day fixed
fixed fee
fee
contract
contract for
for $2,700
$2,700 ($90
($90 per
per day).
day). All
All services
services are
are to
to be
be
completed
completed by by January
January 10,
10, 2012,
2012, when
when the
the client
client will
will pay
pay
in
in full.
full.

Dec. 31 Accounts Receivable 1,800

Consulting Revenue 1,800
To accrue revenue (20-days @ $90 per day)

Accounts Receivable Consulting Revenue

Other receivables Other revenues
1,900 Receipts 1,900 6,050
Dec. 31 1,800 Dec. 31 1,800
Bal. 1,800 Bal . 7,850
 4 - 15

P1 FUTURE RECEIPT OF
SERVICE REVENUES
On
On January
January 10,
10, 2012,
2012, FastForward
FastForward completed
completed itsits
obligation
obligation under
under the
the consulting
consulting contract.
contract. The
The client
client was
was
billed
billed $2,700
$2,700 and
and FastForward
FastForward received
received $2,700
$2,700 in
in cash.
cash.

Jan 10 Cash 2,700

Accounts Receivable 1,800
Consulting Revenue 900
To record completion of contract and cash collection

Revenue in January
10 days @ $90 = $900
 4 - 16

Adjustments
Earned or When cash is paid or When earned or When cash is paid or
Accounts Cash
Incurred received incurred received in the future
Prepaid Prepaid
Paid Not incurred Expenses
expenses expenses
Prepaid
Cash
expenses
Unearned Unearned
Received Not earned Cash
revenues revenue
Unearned
Revenue
revenue
Accrued
Not paid Incurred Expenses Payable
expenses
Payable Cash
Accrued
Not received Earned Receivable Cash
revenues
Revenue Receivable
 4 - 17

Chapter 4

Completing the Accounting Cycle

 4 - 18
Year 1 Year 2 Year 3 …

Q. After we are done with preparing financial statements for Year 1,

what would happen to accounts?

Cash 1000 ↑200 1200

Supplies 50 ↑10 60
Accounts payable 300 ↑100 400
Service revenue 400 ↑500 900
Salaries expense 250 ↑300 550
200
10
100
500
300
Q. Given the two options, which of the two will provide more useful
information for assets, liabilities, and equity accounts?
First option (accumulated) - Assets, Liabilities, Owner's capital
Second option (current) - Revenues, Expenses
We should make ending balances of revenues and expenses
equal to ZERO!
 4 - 19

C1 TEMPORARY AND
PERMANENT ACCOUNTS
Revenues Assets

Withdrawals

Liabilities
Expenses

Owner’s
Capital
Temporary Permanent
Accounts Accounts

Income
Summary The
The closing
closing process
process
applies
applies only
only to
to
temporary
temporary accounts.
accounts.
 4 - 20

C1

RECORDING CLOSING ENTRIES

1. Resets revenue,
expense and Identify accounts
withdrawal account for closing.
balances to zero at
the end of the
Record and post
period.
closing entries.
2. Helps summarize a
period’s revenues
and expenses in the Prepare post-closing
Income Summary trial balance.
account.
 4 - 21

P2

RECORDING CLOSING ENTRIES

Close Credit Balances in
Revenue Accounts to IncomeLet’s see how
Summary. the closing
Close Debit Balances in Expense
process works!
accounts to Income Summary.
Close Income Summary account
to Owner’s Capital.
Close Withdrawals to Owner’s
Capital.
 4 - 22

P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies
Prepaid insurance
8,670
2,300
Using the
Equipment
Accumulated depreciation-Equip.
26,000
$ 375
adjusted trial
Accounts payable 6,200 balance, let’s
Salaries payable 210
Unearned consulting revenue 2,750 prepare the
C. Taylor, Capital
C. Taylor, Withdrawals 200
30,000
closing
Consulting revenue
Rental revenue
7,850
300
entries for
Depreciation expense-Equipment 375 FastForward.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 4 - 23

P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
1. Close Credit
Accounts payable 6,200 Balances in
Salaries payable 210
Unearned consulting revenue 2,750
Revenue
C. Taylor, Capital 30,000 Accounts to
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Income
Rental revenue 300 Summary.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
  CLOSE CREDIT BALANCES IN
4 - 24

P2

REVENUE ACCOUNTS TO INCOME

SUMMARY
Dr. Cr.
Dec. 31 Consulting revenue 7,850
Rental revenue 300
Income summary 8,150

Now, let’s look at the ledger accounts after

posting this closing entry.
 4 - 25

P2
 CLOSE CREDIT BALANCES IN
REVENUE ACCOUNTS TO INCOME
SUMMARY
Consulting Revenue
7,850 7,850

Income Summary
8,150
Rental Revenue
300 300

-
 4 - 26

P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 2. Close Debit
Accounts payable 6,200
Salaries payable 210
Balances in
Unearned consulting revenue 2,750 Expense Accounts
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
to Income
Consulting revenue 7,850 Summary.
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
  CLOSE DEBIT BALANCES IN
4 - 27

P2

EXPENSE ACCOUNTS TO INCOME

SUMMARY
Dr. Cr.
Dec. 31 Income summary 4,365
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230

Now, let’s look at the ledger accounts

after posting this closing entry.
  CLOSE DEBIT BALANCES IN
4 - 28

P2

EXPENSE ACCOUNTS TO INCOME

SUMMARY
Depreciation
Rent Expense
Expense- Eq.
1,000 1,000
375 375
-
-

Salaries Expense Supplies Expense Income Summary

4,365 8,150
1,610 1,610 1,050 1,050
- - 3,785

Insurance Expense Utilities Expense Net Income

100 100 230 230
- -
 4 - 29

P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 3. Close Income
Accounts payable 6,200
Salaries payable 210
Summary to
Unearned consulting revenue 2,750 Owner’s Capital.
C. Taylor, Capital 30,000
C. Taylor, Withdrawals 200
Consulting revenue 7,850
Rental revenue 300
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 4 - 30

P2  CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL

Dr. Cr.
Dec. 31 Income summary 3,785
C. Taylor, Capital 3,785

Now, let’s look at the ledger accounts

after posting this closing entry.
 4 - 31

P2  CLOSE INCOME SUMMARY

TO OWNER’S CAPITAL

C. Taylor, Capital Income Summary

30,000 4,365 8,150
3,785 3,785
-
33,785
 4 - 32

P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375 4. Close
Accounts payable 6,200
Salaries payable 210 Withdrawals
Unearned consulting revenue
C. Taylor, Capital
2,750
30,000
Account to
C. Taylor, Withdrawals 200 Owner’s
Consulting revenue 7,850
Rental revenue 300 Capital.
Depreciation expense-Equipment 375
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 4 - 33

P2  CLOSE WITHDRAWALS ACCOUNT

TO OWNER’S CAPITAL

Dr. Cr.
Dec. 31 C. Taylor, Capital 200
C. Taylor, Withdrawals 200

Now, let’s look at the ledger accounts

after posting this closing entry.
 4 - 34

P2  CLOSE WITHDRAWALS ACCOUNT

TO OWNER’S CAPITAL

C. Taylor,
Withdrawals C. Taylor, Capital
200 200 200 30,000
3,785

- 33,585
 4 - 35

SUMMARY OF THE CLOSING

PROCESS
1. Close Credit Balances in Revenue Accounts
to Income Summary.
2. Close Debit Balances in Expense Accounts to
Income Summary.
3. Close Income Summary to Owner’s Capital.
4. Close Withdrawals Account to Owner’s
Capital.
 4 - 36

P3

POST-CLOSING TRIAL BALANCE

List of permanent accounts and

their balances after posting
closing entries.

Totaldebits and credits must be

equal.
 4 - 37

POST-CLOSING TRIAL BALANCE

P3

FastForward
Post-Closing Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies 8,670
Prepaid insurance 2,300
Equipment 26,000
Accumulated depreciation-Equip. $ 375
Accounts payable 6,200
Salaries payable 210
Unearned consulting revenue 2,750
C. Taylor, Capital 33,585
C. Taylor, Withdrawals -
Consulting revenue -
Rental revenue -
Depreciation expense-Equipment -
Salaries expense -
Insurance expense -
Rent expense -
Supplies expense -
Utilities expense -
Totals $ 43,120 $ 43,120
 4 - 38

P2

FastForward
Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash $ 4,350
Accounts receivable 1,800
Supplies
Prepaid insurance
8,670
2,300
Using the
Equipment
Accumulated depreciation-Equip.
26,000
$ 375
adjusted trial
Accounts payable 6,200 balance, let’s
Salaries payable 210
Unearned consulting revenue 2,750 prepare the
C. Taylor, Capital
C. Taylor, Withdrawals 200
30,000
closing
Consulting revenue
Rental revenue
7,850
300
entries for
Depreciation expense-Equipment 375 FastForward.
Salaries expense 1,610
Insurance expense 100
Rent expense 1,000
Supplies expense 1,050
Utilities expense 230
Totals $ 47,685 $ 47,685
 4 - 39

C2

ACCOUNTING CYCLE
 4 - 40

Q1. Closing entries

a. are prepared before the financial statements.
b. reduce the number of permanent accounts.
c. cause the revenue and expense accounts to have zero balances.
d. summarize the activity in every account.

Ans: c

Q2. The balance in the income summary account before it is

closed will be equal to
a. the net income or loss on the income statement.
b. the beginning balance in the Owner’s capital account.
c. the ending balance in the Owner’s capital account.
d. zero.

Ans: a
 4 - 41

Q3. The income statement for June 2024 of Taylor Enterprises is as

follows:
Revenues $16,000
Expenses:
Salaries and Wages Expense $4,000
Rent Expense 3,000
Supplies Expense 600
Advertising Expense 400
Insurance Expense 200
Total expenses 8,200
Net income $ 7,800

The entry to close Income Summary to C. Taylor, Capital includes

a. a debit to Revenue for $16,000.
b. credits to Expenses totaling $8,200.
c. a credit to Income Summary for $7,800.
d. a credit to C. Taylor, Capital for $7,800.

Ans: d
 4 - 42

Q. Presented below are the year-end balances at December 31 of Laura's

Laundry Service. (All accounts have normal balances.)

Account Receivable $ 12,000

Accounts Payable 25,000
Accumulated depreciation-Catering equipment.... 30,000
Advertising expense 4,000
Cash 42,000
Depreciation expense-Catering equipment........... 12,000
Insurance expense 3,000
Catering Equipment 125,000
Catering service revenue 200,000
Notes payable 65,000
Laura Bow, Capital 17,000
Laura Bow, Withdrawals 18,000
Prepaid insurance 1,500
Salaries payable 4,000
Salary expense 97,000
Supplies 1,500
Supplies Expense 9,000
Repair expense 7,000
Unearned catering service revenues...................... 500
Utilities expense 9,500

(a) Prepare the necessary closing entries at December 31.

(b) Prepare a post-closing trial balance at December 31.
 4 - 43

a) Closing entries

Dec. 31 Catering Service Revenues................ 200,000

Income Summary........................ 200,000
Income Summary........................ 141,500
Advertising Expense................... 4,000
Depreciation Expense-Catering equipment 12,000
Insurance Expense 3,000
Salaries Expense......................... 97,000
Supplies Expense........................ 9,000
Repair Expense 7,000
Utilities Expense 9,500
31 Income Summary........................ 58,500
Laura Bow, Capital..................... 58,500
31 Laura Bow, Capital..................... 18,000
Laura Bow, Withdrawals 18,000
 4 - 44

b) Post-closing trial balance

Laura's Catering Service

Post-Closing Trial Balance
December 31
Account Debit Credit
Cash............................................................................. $ 42,000
Accounts receivable................................................. 12,000
Prepaid insurance............................................. 1,500
Supplies..................................................................... 1,500
Catering equipment........................................... 125,000
Accumulated depreciation-catering equipment.......... $ 30,000
Notes payable........................................................... 65,000
Accounts payable............................................ 25,000
Salaries payable.............................................. 4,000
Unearned service revenues................................. 500
Laura Bow, Capital ($17,000 + $58,500 - $18,000).... 57,500
Totals....................................................... $182,000 $182,000
 4 - 45

C3

CLASSIFIED BALANCE SHEET

Current items are those expected to come due (both

collected and owed) within the longer of one year or the
company’s normal operating cycle.
 4 - 46

C3

Current assets are expected to be sold,

collected, or used within one year or the
company’s operating cycle.
 4 - 47

C3

Long-term financial assets or investments are

expected to be held for more than one year or
the operating cycle.
 4 - 48

C3

Property, plant and equipment are tangible

long-term assets used to produce or sell
products and services.
 4 - 49

C3

Intangible assets are long-term resources

used to produce or sell products and services
and that lack physical form.
 4 - 50

C3

Current liabilities are obligations due within the

longer of one year or the company’s operating
cycle.
 4 - 51

C3

Noncurrent liabilities are obligations not due

within the longer of one year or the company’s
operating cycle.
 4 - 52

C3

Equity
Equity is
is the
the owner’s
owner’s claim
claim on
on the
the assets.
assets.
 4 - 53

Mini Quiz – Chapter 4

Q1. The following information is available for the Travis Travel

Agency. After these closing entries what will be the balance in the Jay
Travis, Capital account?

A. $65,000.
B. $80,000.
C. $130,000.
D. $145,000.
E. $280,000.

Answer: C
$80,000 + $125,000 - $60,000 - $15,000 = $130,000
 4 - 54

Q2. A company's ledger accounts and their end-of-period balances

before closing entries are posted are shown below. What amount will
be posted to Tricia DeBarre, Capital in the process of closing the
Income Summary account?

A. $16,780 debit.
B. $7,180 credit.
C. $16,780 credit.
D. $18,280 credit.
E. $23,780 credit.

Answer: C
 4 - 55

Q3. Use the following adjusted trial balance for HEEL-TO-TOE SHOES
Inc. to solve three required questions below.
HEEL-TO-TOE SHOES
Adjusted Trial Balance
December 31, 2011
Account Title Debit Credit
Cash $13,450
Store supplies 4,140
Prepaid insurance 2,200
Equipment 33,000
Accumulated depreciation-Equipment $9,000
Accounts payable 1,000
Wages payable 3,200
P. Holt, Capital 31,650
P. Holt, Withdrawals 16,000
Repair fees earned 62,000
Depreciation expense-Equipment 3,000
Wages expense 28,400
Insurance expense 1,100
Rent expense 2,400
Store supplies expense 1,300
Utilities expense 1,860
Totals $106,850 $106,850
 4 - 56

Required

1. Prepare an income statement, statement of changes in owner’s

equity, statement of financial position (i.e., balance sheet) at
December 31, 2011.

2. Prepare the necessary closing entries at December 31, 2011.

3. Assume for this part only that

a. None of the $1,100 insurance expense had expired
during the year. Instead, assume it is a prepayment of the
next period's insurance protection.
b. There are no earned and unpaid wages at the end of the
year.

Describe the financial statement changes that would result from

these two assumptions.
 HEEL-TO-TOE SHOES 4 - 57

Adjusted Trial Balance

December 31, 2011
Account Title Debit Credit
Cash $13,450
Store supplies 4,140
Prepaid insurance 2,200
Equipment 33,000
Accumulated depreciation-Equipment $9,000
Accounts payable 1,000
Wages payable 3,200
P. Holt, Capital 31,650
P. Holt, Withdrawals 16,000
Repair fees earned 62,000
Depreciation expense-Equipment 3,000
Wages expense 28,400
Insurance expense 1,100
Rent expense 2,400
Store supplies expense 1,300
Utilities expense 1,860
Totals $106,850 $106,850
 4 - 58

HEEL-TO-TOE SHOES
Income Statement
For Year Ended December 31, 2011
Repair fees earned $62,000
Expenses
Depreciation expense-Equipment $3,000
Wages expense 28,400
Insurance expense 1,100
Rent expense 2,400
Store supplies expense 1,300
Utilities expense 1,860
Total expenses 38,060
Net Income $23,940
 4 - 59

HEEL-TO-TOE SHOES
Statement of Changes in Equity
For Year Ended December 31, 2011
P. Holt, Capital, December 31, 2010 $31,650
Add: Net Income 23,940
55,590
Less: Owner withdrawals (16,000)
P. Holt, Capital, December 31, 2011 $39,590
 HEEL-TO-TOE SHOES 4 - 60

Balance Sheet
December 31, 2011
Assets
Current assets
Cash $13,450
Store supplies 4,140
Prepaid insurance 2,200
Total current assets $19,790
Property, plant and equipment
Equipment 33,000
Accumulated depreciation-Equipment (9,000) 24,000
Total assets $43,790
Liabilities
Current liabilities
Accounts payable $1,000
Wages payable 3,200
Total current liabilities 4,200
Equity
P. Holt, Capital 39,590
Total liabilities and equity $43,790
 4 - 61

Closing entries
Repair Fees Earned 62,000
Income Summary 62,000

Income Summary 38,060

Depreciation expense-Equipment 3,000
Wages expense 28,400
Insurance expense 1,100
Rent expense 2,400
Store supplies expensee 1,300
Utilities expense 1,860

Income Summary 23,940

P. Holt, Capital 23,940

P. Holt, Capital 16,000

P. Holt, Withdrawals 16,000
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Assume for this part only that

a. None of the $1,100 insurance expense had expired during the year.
Instead, assume it is a prepayment of the next period's insurance
protection.
b. There are no earned and unpaid wages at the end of the year.

Describe the financial statement changes that would result from these two
assumptions.

(a) If none of the $1,100 insurance expense had expired, the income
statement would not report any insurance expense and net income would
be increased by $1,100.

(b) If there were no earned and unpaid wages (meaning Wages Payable
equals zero), wages expense would be $3,200 less and net income would
be $3,200 higher.
 4 - 63

Assume for this part only that

a. None of the $1,100 insurance expense had expired during the year.
Instead, assume it is a prepayment of the next period's insurance
protection.
b. There are no earned and unpaid wages at the end of the year.

Describe the financial statement changes that would result from these two
assumptions.

Financial Statement Changes:

The income statement would reflect the following:

• Net income would be increased by $1,100 + $3,200 = $4,300.

The balance sheet would reflect the following:

• Prepaid insurance and total assets would be increased by $1,100.
• There would not be any wages payable.
• Total liabilities would be decreased by $3,200.
• Owner's equity would be increased by $4,300.
• Total liabilities and owner's equity would be increased by $1,100.
 4 - 64

END OF CHAPTER 4
 4 - 65

Why do you need to learn about accounting?

•GAAP EPS vs Non-GAAP EPS

•“non-gaap”, “nongaap”, “adjusted earn”, “adjusted ebi”, “ebitda”,

“ebit”, “adjusted net inc”, “adjusted net loss”, “cash earnings”, “cash
net income”, “core earnings”, “core net income”, “pro-forma”,
“proforma”, “earnings adjusted”, “net income adjusted”, “net loss
adjusted”, “adjusted eps”, “adjusted diluted eps”, “income excluding”,
“loss excluding”, “income (loss) excluding”, “earnings excluding”, “eps
excluding”, and “earnings per share excluding”

- Which of the two would you use in your decision making?

EDGAR Entity Landing Page (sec.gov)

sec.gov/Archives/edgar/data/1318605/000095017024007073/tsla-ex9
9_1.htm

Tesla, Inc. (TSLA) Stock Price, News, Quote & History - Yahoo Financ
e
 4 - 66

The following information is obtained from Skyworks solutions, Inc’s 8-K filing

Hmm,, why did managers of Skyworks add back some of R&D expenditures to
GAAP earnings?
 4 - 67

Managers add back some of research and development (R&D) expenditures

when calculating non-GAAP earnings because they view these costs as
investments in future growth rather than immediate expenses.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4766822

Rather than disclosing “new information,” non-GAAP performance

metrics actually remove earnings components from the GAAP
number. However, the items that managers “exclude” could convey
new information about what items managers deem to be (1) non-
recurring, (2) non-cash, (3) non-relevant or mismeasured due to GAAP
rules
limiting managers discretion to disclose useful information. This
information could help stakeholders better predict future
performance. Nevertheless, managers could also exclude income
statement items primarily to inflate perceptions of performance. This
possibility is why regulators have remained skeptical about non-GAAP
performance
metrics. However, since financial reporting is a multi-period game and
managers cannot mislead investors using the same tricks repeatedly,
prior empirical evidence indicates that properly-reconciled non-GAAP
numbers are generally informative to financial statement users
(Zhang and Zheng 2011).
 4 - 68

2008 Financial Crisis

The Next Financial Crisis