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Dec. 31 Changes Dec. 31
2015 Debits Credits 2016
Income Statement
Revenues:
Sales revenue 100
Investment revenue 3
Gain on sale of land 8
Expenses:
Cost of goods sold (60)
Statement of Cash Flows
Operating activities:
Net cash flows
Investing activities:
21-22 Intermediate Accounting, 8/e
ANALYZING ELEMENTS OF THE FINANCIAL
STATEMENTS TO DETERMINE SPREADSHEET
ENTRIES
The cash effects of income statement elements can be
discerned by referring to changes in the balances of the
balance sheet accounts that are directly related to those
elements.
Accounts Receivable
Beginning balance 30
Credit sales 100 ? Cash received
T21-12
SUMMARY ENTRY FOR SALES AND COLLECTION
ACTIVITIES
Note that even if some of the year's sales were cash sales, say
$40 million cash sales and $60 million credit sales, the result
is the same:
Accounts Receivable
Beg. bal. 30 Cash sales $40
Summary entry (1) explains the changes in two account balances –
accounts receivable and sales revenue:
($ in millions)
Entry (1) Cash (received from customers) ............ 98
T21-12 (continued)
21-24 Intermediate Accounting, 8/e
INVESTMENT REVENUE
Since neither an investment revenue receivable account nor a
Entry (2) on the spreadsheet is:
T21-13
GAIN ON THE SALE OF LAND
The accounting records indicate that land that originally cost
$10 million was sold for $18 million. The entry recorded in
the journal when the land was sold also serves as our
summary entry:
The sale of land is an investing activity, so this cash inflow is
listed under that heading of the spreadsheet. The entry also
accounts for the $8 million gain on sale of land. The $10
million credit to land explains part of the $20 million increase
in that account.
Note: The gain is simply the difference between cash received
T21-14
21-26 Intermediate Accounting, 8/e
COST OF GOODS SOLD
During the year UBC sold goods that had cost $60 million.
This does not necessarily indicate that $60 million cash was
The summary entry that summarizes merchandise acquisitions
and sales is:
SALARIES
Only $11 million cash was paid to employees; the remaining
The summary entry that summarizes salary expense incurred
and paid is:
T21-16
21-28 Intermediate Accounting, 8/e
DEPRECIATION
The income statement reports depreciation expense of $3
million. The entry used to record depreciation, which also
serves as our summary entry, is:
Depreciation is a noncash expense. It is merely an allocation
in the current period of a prior cash expenditure (for the
depreciable asset).
T21-17
BOND INTEREST
Since we know that bond interest expense is $5 million and
that $2 million of the discount was reduced in 2016, we can
determine that $3 million cash was paid to bondholders by
Recording this entry on the spreadsheet explains the change in
both the bond interest expense and discount on bonds payable
T21-18
21-30 Intermediate Accounting, 8/e
INSURANCE
A decrease of $3 million in the prepaid insurance account
indicates that cash paid for insurance coverage was $3 million
less than the $7 million insurance expense for the year.
LOSS ON SALE OF EQUIPMENT
Recreating the journal entry for the sale of equipment gives us
the following summary entry:
($ in millions)
Entry (9) Cash (from sale of equipment) ................. 5
The sale of equipment is an investing activity, so this cash
inflow is listed under that heading of the spreadsheet.
T21-20
21-32 Intermediate Accounting, 8/e
INCOME TAXES
($ in millions)
Entry (10) Income tax expense ($9 - 0) .................... 9
T21-21
INCOME TAXES
Additional Consideration
Entry (10) would require modification in either of the
two independent situations described below.
Deferred Income Taxes
($ in millions)
Entry (10) Income tax expense ($9 - 0) ..................... 9
Extraordinary Gain or an Extraordinary Loss
If UBC's loss on the sale of equipment had been due to an
(continued)
T21-22
21-34 Intermediate Accounting, 8/e
INCOME TAXES
Additional Consideration
Extraordinary Gain or an Extraordinary Loss
(continued)
ORDINARY LOSS EXTRAORDINARY LOSS
Income tax expense (10)
Income before E.O. items $13
Without the tax savings produced by the loss, income tax
If the loss is extraordinary, entry (10) would be modified as
follows:
($ in millions)
Entry (10) Income tax expense [on ordinary income] ..... 10
T21-23
NET INCOME
The balance in the retained earnings account at the end of the
year includes an increase due to net income.
If we are to account for all changes in each of the accounts,
This entry does not affect amounts reported on the statement
T21-24
21-36 Intermediate Accounting, 8/e
SHORT-TERM INVESTMENTS
The balance in short-term investments increased from zero to
The entry to record the investment and our summary entry is:
T21-25
LAND
We discovered in a previous transaction that a sale of land
The unexplained increase of $30 million was due to a
purchase of land, portrayed in the following summary entry:
($ in millions)
Entry (13) Land (given) ............................................ 30
Cash (purchase of land) ................... 30
T21-26
21-38 Intermediate Accounting, 8/e
BUILDINGS AND EQUIPMENT
We determined earlier that the buildings and equipment
account was reduced by $14 million from the sale of used
The journal entry used to record the transaction when the
equipment was acquired also serves as our summary entry:
Although this is a noncash transaction, it represents both an
BONDS PAYABLE
The balance in the bonds payable account decreased during
the year by $15 million. Cash was paid to retire $15 million
face value of bonds. The summary entry that duplicates the
journal entry that was recorded when the bonds were retired
is:
T21-28
21-40 Intermediate Accounting, 8/e
COMMON STOCK
The common stock account balance increased by $30 million.
1. To record a "small" stock dividend, we “capitalize” retained
earnings for the market value of the shares distributed – in this
case, 1 million shares times $13 per share, or $13 million. The
entry is:
2. The sale of 2 million shares of common stock at $13 per share
is represented by the following summary entry:
($ in millions)
Entry (17) Cash (from sale of common stock) ....... 26
