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Brief
Exercises
B. Ex. 5.1
B. Ex. 5.2
B. Ex. 5.3
B. Ex. 5.4 Analysis
B. Ex. 5.5
B. Ex. 5.6
B. Ex. 5.7
B. Ex. 5.8
B. Ex. 5.9
B. Ex. *5.10
Learnin
g
Ob
j
ectives
5.1 5-1-5-7
5.2 5-1, 5-2, 5-6
5.3 5-1, 5-2, 5-6
5.4 5-2, 5-4, 5-5
5.5 5-2, 5-4, 5-5
5.6 5-3
5.7 2, 4
5.8 2, 4
5.9 2, 4
5.10 5-6 Analysis
5.11 5-6 Analysis
5.12 Interim results 5-1, 5-2, 5-7 Analysis
5.13 Interim results 5-1, 5-2, 5-7 Analysis
5.14 Effects of accounting errors 5-2, 5-3 Analysis
5.15 5-3, 5-6
*Supplemental Topic, " The Worksheet."
Real World: Best Buy Adequate
Disclosure
Closing entries of unprofitable
firms
Adjusting versus closing entries
Closing and after-closing trial
b
alance
Exercises
5-1, 5-2 AnalysisClassifying balance sheet
accounts
Analysis
Judgment,
communication, analysis
Analysis
5-4 Analysis
5-4
5-4Closing entries of unprofitable
firms
Profitability and liquidity
Measuring interim revenue
Closing entries of profitable firms
The worksheet
5-7
Closing and after-closing trial
balance
Accounting terminolog
y
Financial statement preparation
Analysis
Analysis, communication
To
p
ic
Profitability and liquidity
measures
Financial statement preparation
Analysis, communication
Analysis, communication
Analysis
CHAPTER 5
THE ACCOUNTING CYCLE:
REPORTING FINANCIAL RESULTS
Topic Skills
Analysis
Analysis
After-closing trial balance 5-5
Closing temporary accounts
5-8
Analysis
5-6
Learning
Balancing the accounting 5-1, 5-2
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS AND CRITICAL
THINKING CASES
Objectives Analysis
Financial statement relationships 5-1, 5-2
Analysis
Analysis Skills
Analysis, communication
AnalysisClosing entries of profitable firms
Profitability and liquidity
measures
Real World: Home Depot, Inc. Using
an annual report Communication, analysis
Education.
Problems Learning
Sets A, B Objectives Skills
5.1 A,B 5-1, 5-2, 5-4,
5-6 Analysis,
communication
5.2 A,B Analysis,
5.3 A,B 5-1-5-4, 5-6 Analysis,
5.4 A,B 5-1, 5-2, 5-7 Analysis,
5.5 A,B 5-1-5-4, 5-6 Analysis,
5-1-5-4, 5-6
5.6 A,B 5-1-5-4, 5-6 Analysis,
*5.7 A,B 5-8 Analysis,
5.8 A,B 5-6 Analysis,
Critical Thinkin
g
Cases
5.1 5-3
5.2 5-1
5.3 5-3
5.4 5-3
(Internet)
Correcting classification errors
5-1, 5-2, 5-4,
5-5, 5-6
Communication, technology,
research
Analysis, judgment,
communication
Analysis, communication
Communication, judgment,
analysis, research
*Supplemental Topic, "The Worksheet."
(Ethics, fraud & corporate governance)
Conflicts of interest
Adequate disclosure
Annual report disclosures
Real World: Ford Motor Company
Sarbanes-Oxley Act: CEO and CFO
personal certifications
Real World: hhgregg/The Gap
Evaluating profitability and liquidity
Comprehensive problem combining
Chapter 4 and Chapter 5
Comprehensive problem combining
Chapter 4 and Chapter 5
Comprehensive problem combining
Chapter 4 and Chapter 5
Topic
Statement preparation and closing
process of an unprofitable firm
Interim financial statements
Statement preparation and closing
process of a profitable firm
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASE
S
Problems (Sets A and B)
20 Easy
5.2 A,B 30 Medium
5.3 A,B 45 Strong
5.4 A,B
5.5 A,B 70 Strong
5.6 A,B 70 Strong
*5.7 A,B 50 Strong
*Supplemental Topic, "The Worksheet."
5.8 A,B 15 Medium
Brushstroke Art Studio, Inc./Touchtone Talent Agency
This is a comprehensive problem that requires students to combine
Chapter 4 material with that of Chapter 5. From an unadjusted trial
balance, students are asked to complete a 10-column worksheet.
hhgregg/The Gap, Inc.
Information from an actual annual report is used to evaluate
profitability and solvency.
This is a comprehensive problem combining elements of Chapter 4
and Chapter 5. It is similar in format to Problem 5.5 A,B.
Internet Consulting Service, Inc./Campus Theater
This is a comprehensive problem that requires students to combine
Chapter 4 material with that of Chapter 5. An unadjusted trial balance
is presented. Students are required to prepare adjusting entries and an
adjusted trial balance. From their adjusted trial balance they are asked
to prepare a set of financial statements, closing entries, an after-closing
trial balance, and a brief financial analysis.
5.1 A,B Party Wagon, Inc./Strong Knot, Inc.
Affordable Lawn Care, Inc./Garden Wizards
Silver Lining, Inc./Next Job, Inc.
Students are required to correct errors in a set of financial statements.
Upon completion of the corrected financial statements, closing entries
and a brief financial analysis are required.
Guardian Insurance Agency/Howard Realty 25 Easy
Interim financial statements are required for a company that adjusts
monthly, but closes at year-end. This problem generates good class
discussion.
Mystic Masters, Inc./Debit Doctors, Inc.
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates
assume use of the partially filled-in working papers.
Students are required to prepare a set of financial statements for a
profitable company from an adjusted trial balance. Closing entries, an
after-closing trial balance, and a brief financial analysis are also
required.
Students are required to prepare a set of financial statements for an
unprofitable company from an adjusted trial balance. Closing entries,
an after-closing trial balance, a brief financial analysis, and likely
disclosures are also required.
Critical Thinking Cases
Adequate Disclosure
5.2 Ethics, Fraud & Corporate Governance
5.3 Sarbanes-Oxle
y
Act and CEO/CFO Certifications 5 Eas
y
Annual Report Disclosures
Internet
No time estimateWorking for the Competition
25 Strong
15 Easy
5.4
5.1 Students are asked to analyze five items that may (or may not) require
disclosure in the notes accompanying the financial statements. Students
must defend their position.
This is a group assignment focusing on the following issues: "Is it
ethical for a CPA to provide accounting services to companies that
compete with each other?" Interviews are required.
Working in groups, students are required to discuss the meaning,
purpose, and impact of CEO/CFO personal certifications required
under the Sarbanes-Oxley Act.
Students must identify and discuss topics disclosed in a company's
financial statements. This is a good problem to assign in conjunction
with Case 5.1.
SUGGESTED ANSWERS TO DISCUSSION QUESTION
S
1.
2.
3.
4.
An annual report generally includes comparative financial statements, supporting
information about the company’s financial position, its business operations, and a discussion
by management concerning the company’s future prospects. Before the annual report is
The income statement, statement of retained earnings, and balance sheet are prepared
directly from the amounts shown in the adjusted trial balance. The income statement reports
revenue earned during the period less expenses incurred in generating that revenue. When
Earnings balance to be reported in the balance sheet at the end of the period.
Items that may require disclosure include, but are not limited to: pending lawsuits, scheduled
plant closings, certain governmental investigations, significant events occurring after the
balance sheet date but before the statements are issued, specific customers that account for a
Retained earnings is that portion of stockholders’ equity created by earning income and
retaining all or part of the resources created in the business. Income is a function of revenue
less expenses. We have learned that cash is not always received at the exact time that
5.
6.
7.
8.
9.
10.
11.
12.
Temporary (or nominal) accounts include revenue, expenses, and dividend accounts. These
are the accounts involved in the closing process at the end of the year. Generally speaking, all
A company may close its accounts annually, but prepare financial reports monthly or
quarterly. These monthly (or quarterly) statements are referred to as interim financial
Adequate disclosure means that financial statements should include whatever supplemental
Unlike most other operating expenses, depreciation does not require regular periodic outlays
Permanent (or real) accounts include assets, liability, and stockholders’ equity accounts. These
accounts are not involved in the closing process at the end of the year. Generally speaking, all
Dividends declared, which will be paid to stockholders, are not considered an expense of the
After all revenue, expense, and dividend accounts have been closed, the only accounts that
remain are the permanent (or real) accounts appearing in the balance sheet. In comparison to
A company can be both profitable and insolvent. For instance, the company’s sales might be
made only on account. If customers delay in paying what they owe, the average number of
days that accounts receivable remain outstanding could be very high (say, 120 days). At the
13.
14.
*15.
*Supplemental Topic, "The Worksheet."
Return on equity is a measure of net income relative to a company's average stockholders'
equity throughout the year. Thus, it conveys the amount of income generated for every dollar of
income.
Revenue, expense, and dividend accounts are called temporary accounts, or nominal accounts,
because they accumulate the transactions of only one accounting period. At the end of the
period, the changes in owners’ equity accumulated in these temporary accounts need to be
transferred to the Retained Earnings account, and the temporary accounts need to have zero
Retained Earnings account.
A worksheet (or spreadsheet software):
Provides a “scratch pad” for working out adjusting entries prior to actually entering these
SOLUTIONS TO BRIEF EXERCISES
B. Ex. 5.1 Decrease in assets during the year………………….. (60,000)$
Decrease in liabilities durin
g
the
y
ear………………. (300,000)
B. Ex. 5.2 150,000$ 80,000
230,000$
B. Ex. 5.3 a.
b.
B. Ex. 5.4 a.
b.
c.
d.
which is included in the ending retained earnings given.
Likewise, the dividend is also included in the ending retained
earnings figure given.
CA
CL
N
C
* Accumulated depreciation is a contra asset classified in the non current asset
section of the balance sheet.
D
C
Capital stock (December 31, 2015)………………..
Capital stock (January 1, 2015)…………………….
Capital stock issued during the year………………
B. Ex. 5.5 25,600
Income Summary ………………………… 25,600
23,340
Supplies Expense…………………………… 730
Dividends………………………………….. 800
B. Ex. 5.6 26,000
Interest Revenue…………………………………………… 300
Income Summary………………………….. 26,300
34,700
Insurance Expense……………………….. 1,900
Rent Expense…………………………….. 10,800
400
Dividends………………………………….. 400
To close dividends to retained earnin
g
s.
To close dividends to retained earnings.
Retained Earnings…………………………………………..
Income Summary……………………………………………..
To close revenue to income summary.
Consulting Fees Earned…………………………………….
Service Revenue ………………………………………………
…
Income Summary……………………….……………………..
To close revenue to income summary.
B. Ex. 5.7 a.
b.
l. C
B. Ex. 5.8 a. Net Income ($45,000) ÷ Total Revenue ($125,000)…. 36%
b. Net Income ($45,000) ÷ Avera
g
e E
q
uit
y
($75,000)…. 60%
c. 4-to-1
Avera
g
e stockholders' e
q
uit
y
in 2015 75,000$
B. Ex. 5.9 a. A
p
ril throu
g
h Se
p
tember ($450,000 - $140,000)…. 310,000$
*B. Ex.5.1
0
a. Net income ($540,000 - $410,000)………………… 130,000$ 1
b. Income statement debits ($380,000 - $130,000)…. 250,000$ 2
*Supplemental Topic, "The Worksheet."
C
C
Current Assets ($32,000) ÷ Current Liab. ($8,000)
