Chapter 5 – The accounting cycle: Reporting financial results. When you finish this chapter, you should: Prepare an Income statement, a statement of retained earnings, and a balance sheet; explain how the Income statement and the statement of retained earnings relate to the balance sheet; explain the concept of adequate disclosure;. | Chapter 5 THE ACCOUNTING CYCLE: Reporting Financial Results 2 This is the Adjusted Trial Balance for JJ’s. Now, let’s prepare the financial statements for JJ’s Lawn Care Service for May. 4 Net income also appears on the Statement of Owner’s Equity. 4 Business Earnings Dividends Business Losses This statement summarizes the increases and decreases in Retained Earnings during the period. Statement of Retained Earnings 4 Now, let’s prepare the Balance Sheet. 4 Next, let’s prepare the Statement of Cash Flows for JJ’s Lawn Care Service for May. 4 4 Notes to the Financial Statements Examples of Items Disclosed Lawsuits pending Scheduled plant closings Governmental investigations Significant events occurring after the balance sheet date Specific customers that account for a large portion of revenue Unusual transactions and related party transactions Drafting Notes to the Financial Statements Closing the Temporary Equity Accounts Close Revenue accounts to Income Summary. Close Expense accounts to Income Summary. Close Income Summary account to Retained Earnings. Close Dividends to Retained Earnings. The closing process gets the temporary accounts ready for the next accounting period. 4 Since Sales Revenue has a credit balance, the closing entry requires a debit to the Sales Revenue account. Closing Entries for Revenue Accounts 4 Closing Entries for Revenue Accounts Since expense accounts have a debit balance, the closing entry requires a credit to the expense accounts. Closing Entries for Expense Accounts 4 Closing Entries for Expense Accounts Net Income Since Income Summary has a $400 credit balance, the closing entry requires a debit to Income Summary. Closing the Income Summary Account 4 The balance in Income Summary is now zero. Closing the Income Summary Account Since the Dividends account has a debit balance, the closing entry requires a credit to the Dividends account. Closing the Dividends Account 4 Closing the Dividends Account After all closing entries are made, JJ’s After-Closing Trial Balance looks like this. 4 Did the business earn a profit or loss in the current period? What is the business’s future potential for a profit? Evaluating Profitability Does the business have assets available to pay debts as they are due? Evaluating Solvency Evaluating the Business Are product lines profitable? Are resources being used efficiently? Are production processes efficient? Focusing Management’s Attention Evaluating the Business Monthly Quarterly Jan. 1 Dec. 31 Annually Many companies prepare financial statements at various points throughout the year. Interim Financial Statements Preparing Financial Statements Covering Different Periods of Time 3 End of Chapter 5 4
