Reporting in Action — BTN 4-1
1. The revenue items from its income statement must be identified, and
those would be credited to Income Summary as step 1 in the closing
2. The total expenses that would be debited to Income Summary as step 2
in the closing entry process must be computed. Polaris’ total expenses
for the year ended December 31, 2011, are (in thousands):
Cost of sales ………………………………………………………… $ 1,916,366
Selling and marketing …………………………………………… 178,725
Total expenses ……………………………………………………… $2,454,155
3. The balance of Income Summary before it is closed as of December 31,
2011, equals the net income for Polaris of $227,575 ($ thousands).
4. From the cash flow statement, we see that Polaris paid $61,585 ($ in
thousands) in cash dividends.
Comparative Analysis — BTN 4-2
1. Polaris’s current ratios: ($ in thousands)
Current year …….. $878,676 / $615,531 = 1.43
Prior year …………. $808,145 / $584,210 = 1.38
Prior year …………. $201,015 / $75,320 = 2.67
2. In both years, Arctic Cat has the higher current ratio (2.65 vs 1.43 for
3. Polaris’s current ratio improved, increasing from 1.38 to 1.43. Arctic
4. Arctic Cat’s current ratio is above (better than) the industry average for
Ethics Challenge — BTN 4-3
1. There are several courses of action that Tamira could have taken. Two
possibilities follow:
a. She could have consulted with the president and told him that
finalized financial statements would not be ready by the time of the
b. The estimation decision was not a bad choice in itself, but she
should have informed the president. Tamira probably should have
2. Students may offer one of the above alternatives or another response
Communicating in Practice — BTN 4-4
TO: _____________________
FROM: _____________________
DATE: ______________________
SUBJECT: CLARIFICATIONS—OBJECTIVE OF THE CLOSING PROCESS
clearly.
Scoreboards are used to temporarily hold information that will allow us to
determine who won or lost in an athletic game or event. When the athletic
event is over, the result of the game is permanently recorded elsewhere—
probably in the team’s record book. If the scoreboard was not cleared before
The revenue and expense accounts temporarily hold the information to
determine if the owner(s) won or lost in the game of business. Each fiscal
period should be viewed as a separate game. After the data in these accounts
has allowed us to determine if the owner(s) won or lost, in other words, the net
income or loss, these accounts must be cleared to accumulate data for the
requires explaining the concept, not the procedure.]
Taking It to the Net — BTN 4-5
1. The Motley Fool states that a benchmark of 1.5 is generally regarded as
sufficient to meet near-term operating needs.
2. One should always check a company’s current ratio (as well as any
3. A current ratio that is too high can suggest that a company is hoarding
inefficient use of resources that can potentially impair long-term returns.
Teamwork in Action — BTN 4-6
[Note: Each team member will be working on a different component of the solution and will
ultimately combine information and verify the final check figures using the accounting equation.]
1. Accounts and adjusted balances to be extended to Balance Sheet columns
Trial Balance
Adjustments
Balance Sheet
Account Title
Debit
Credit
Debit
Cash …………………………..
$16,000
Accounts receivable ……...
(d) 800
800
Supplies ……………………....
(c) 7,000
5,000
Prepaid insurance ………...
(a) 2,200
800
Equipment …………………...
25,000
Acc. deprec—Equip ……....
(b) 4,000
Accounts payable ………....
D. Noseworthy, Capital …..
D. Noseworthy,
Withdrawals ………………..
6,000
Total Assets = $47,600 – $11,000 = $36,600
(Cash + AR + Supplies + Prepaid Ins. + Equipment – Accum. Depreciation)
Total Liabilities = $3,000 (only accounts payable)
Teamwork in Action (Continued)
2. Adjusted revenue account balance
Trial Balance
Adjustments
Income
Statement
Title
Debit
Credit
Debit
Credit
Debit
Credit
Investigation Fees
Earned ……………………….….
33,000
(d) 800
33,800
Closing entry
Account Titles and Explanation
Debit
Credit
Investigation Fees Earned ……………………………………………
33,800
Income Summary ……………………………………….…
33,800
To close revenue accounts to Income Summary.
3. Adjusted balances of expense accounts
Title
Trial Balance
Adjustments
Income
Statement
Debit
Credit
Debit
Credit
Debit
Credit
Rent Expense ………………..
15,000
15,000
Insurance Expense ………..
(a) 2,200
2,200
Depreciation Expense …...
(b) 4,000
4,000
Supplies Expense ………....
(c) 7,000
7,000
Closing entry
Account Titles and Explanation
Debit
Credit
Income Summary ……………………………………………………....
28,200
Rent Expense ……………………………………………..…
15,000
Insurance Expense ……………………………………..…
2,200
Depreciation Expense ……………………………………
4,000
Supplies Expense ……………………………………….…
7,000
To close expense accounts to Income Summary.
Teamwork in Action (Concluded)
4.
D. Noseworthy, Capital
Income Summary
(4)
6,000
34,000
(2)
28,200
33,800
(1)
5,600
(3)
(3)
5,600
33,600
Ending
Third and Fourth closing entries
Account Titles and Explanation
Debit
Credit
Income Summary ……………………………………………………....
5,600
D. Noseworthy, Capital ……………………………….…
5,600
To close Income Summary to Capital.
D. Noseworthy, Capital ……………………………………………..…
6,000
D. Noseworthy, Withdrawals ……………………….…
6,000
To close Withdrawals to Capital.
5. Proving the Accounting Equation
ASSETS = LIABILITIES + OWNER’S EQUITY
Entrepreneurial Decision — BTN 4-7
1. A classified balance sheet classifies liabilities into current and non–
current. The current liabilities are those that are due in the short-term,
2. To better understand the company’s operations, she must make sure
that all revenues earned in a particular accounting period are included
in that period’s income statement. In addition, she must match
current accounting period’s activities.
3. Closing procedures will accomplish two objectives for Arynetta. First,
Hitting the Road — BTN 4-8
There is no formal solution to this field activity. The instructor may wish to
tally students’ findings to show results across companies as to use of work
financial statements.
Global Decision — BTN 4-9
1. Current ratio (in thousands Euro)
2. Analysis: Piaggio’s current ratio declined (is worse) for the current year.