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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
Learning
Objectives
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."
Analysis
Analysis
Skills
Analysis, communication
Analysis
Closing entries of profitable firms
Profitability and liquidity
measures
Real World: Home Depot, Inc. Using an
annual report
Communication, analysis
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 equation
5-1, 5-2
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS AND CRITICAL
THINKING CASES
Objectives
Analysis
Financial statement relationships
5-1, 5-2
Closing and after-closing trial
balance
Accounting terminology
Financial statement preparation
Analysis
Analysis, communication
Topic
Profitability and liquidity
measures
Financial statement preparation
5-1, 5-2
Analysis
Classifying balance sheet accounts
Analysis
Judgment,
communication, analysis
Analysis
5-4
Analysis
5-4
5-4
Closing entries of unprofitable firms
Profitability and liquidity measures
Measuring interim revenue
Closing entries of profitable firms
The worksheet
5-7
Real World: Best Buy Adequate
Disclosure
Closing entries of unprofitable firms
Adjusting versus closing entries
Closing and after-closing trial
balance
Exercises
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, communication
5.3 A,B 5-1-5-4, 5-6 Analysis, communication
5.4 A,B 5-1, 5-2, 5-7 Analysis, communication
5.5 A,B 5-1-5-4, 5-6 Analysis, communication
5-1-5-4, 5-6
5.6 A,B 5-1-5-4, 5-6 Analysis, communication
*5.7 A,B 5-8 Analysis, communication
5.8 A,B 5-6 Analysis, communication
Critical Thinking Cases
5.1 5-3
5.2 5-1
5.3 5-3
5.4 5-3
(Internet)
Real World: Best Buy/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
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
Correcting classification errors
5-1, 5-2, 5-4,
5-5, 5-6
DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES
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."
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.
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
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.
Best Buy/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
Critical Thinking Cases
Adequate Disclosure
5.2
Ethics, Fraud & Corporate Governance
5.3 Sarbanes-Oxley Act and CEO/CFO Certifications 5 Easy
Annual Report Disclosures
Internet
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.
No time estimate
Working for the Competition
25 Strong
15 Easy
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
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
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
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
5.
6.
7.
8.
9.
10.
11.
12.
Temporary (or nominal) accounts include revenue, expenses, and dividend accounts. These
A company may close its accounts annually, but prepare financial reports monthly or quarterly.
Adequate disclosure means that financial statements should include whatever supplemental
Unlike most other operating expenses, depreciation does not require regular periodic outlays of
Permanent (or real) accounts include assets, liability, and stockholders’ equity accounts. These
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
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
13.
14.
*15.
*
Return on equity is a measure of net income relative to a company's average stockholders' equity
Revenue, expense, and dividend accounts are called temporary accounts, or nominal accounts,
A worksheet (or spreadsheet software):
Provides a “scratch pad” for working out adjusting entries prior to actually entering these
items in the accounts.
SOLUTIONS TO BRIEF EXERCISES
B. Ex. 5.1 Decrease in assets during the year………………….. (60,000)$
Decrease in liabilities during the year………………. (300,000)
B. Ex. 5.3 a.
l. C
CA
B. Ex. 5.5 30,720
Income Summary …………………………
30,720
B. Ex. 5.6 26,000
Interest Revenue……………………………………………
300
Income Summary…………………………..
26,300
Service Revenue ……………………………………………………..
To close revenue to income summary.
Consulting Fees Earned…………………………………….
Computations:
Total revenue………………………………… 150,000$
1
*Supplemental Topic, " The Worksheet."
The amount needed to make the columns of the balance sheet equal is net
income for the period.
Ex. 5.2
a.
230,400$
108,000$
SOLUTIONS TO EXERCISES
GREEN LAWNS, INC.
GREEN LAWNS, INC.
Expenses:
Lawn care revenue earned
Revenues:
For the Year Ended December 31, Current Year
Income Statement
Retained earnings (1/1)
For the Year Ended December 31, Current Year
Statement of Retained Earnings
Ex. 5.2 (concluded)
Cash $ 218,640
10,800
720
$ 28,800
12,000 16,800
GREEN LAWNS, INC.
December 31, Current Year
Equipment
Balance Sheet
Supplies
Assets
Accounts receivable
The $108,000 credit Retained Earnings balance reported in the company’s adjusted trial
b.
c.
The company appears to be extremely liquid. Cash and accounts receivable comprise 93%
Less: Accumulated depreciation: equipment
Ex. 5.3
a.
$ 102,000
$ 15,000
WILDERNESS GUIDE SERVICES, INC.
Retained earnings (1/1)
For the Year Ended December 31, Current Year
Statement of Retained Earnings
WILDERNESS GUIDE SERVICES, INC.
For the Year Ended December 31, Current Year
Income Statement
Revenues:
Guide revenue earned
Ex. 5.3 (Concluded)
Assets
$ 12,200
$ 18,000
9,500
$ 27,500
WILDERNESS GUIDE SERVICES, INC.
December 31, Current Year
Balance Sheet
Cash
c.
Total liabilities
The company was not profitable in the current period as evidenced by the $3,000 net loss
The company appears to be liquid. Cash and accounts receivable comprise 68% of the
b.
Accounts payable
Liabilities
Notes payable (due 4/1/Next Year)
Ex. 5.4
a.
Dec. 31 230,400
Income Summary 230,400
31 158,640
31 71,760
Retained Earnings 71,760
GREEN LAWNS, INC.
12/31/Current Year
(1)
General Journal
Lawn Care Revenue earned
To close Lawn Care Revenue Earned.
Income Summary
(2)
(3)
Income Summary
Ex. 5.4 (Concluded)
b.
$ 218,640
10,800
720
c.
The $174,960 Retained Earnings balance reported in the after-closing trial balance is
GREEN LAWNS, INC.
December 31, Current Year
After-Closing Trial Balance
Cash
Supplies
Accounts receivable
Ex. 5.5
a.
Dec. 31 102,000
Income Summary 102,000
31 3,000
Income Summary 3,000
Guide Revenue Earned
To close Guide Revenue Earned.
To close all expense accounts.
Retained Earnings
(3)
(2)
WILDERNESS GUIDE SERVICES, INC.
12/31/Current Year
(1)
General Journal
Ex. 5.5 (Concluded)
b.
$ 12,200
31,000
7,900
2,400
WILDERNESS GUIDE SERVICES, INC.
December 31, Current Year
After-Closing Trial Balance
Cash
Camping supplies
Unexpired insurance policies
Accounts receivable
c.
The $11,000 Retained Earnings balance reported in the after-closing trial balance is $4,000
Ex. 5.6 a. 1.
2.
3.
4.
b. 1.
Cash…………………………………………………
500
Unredeemed Gift Card Liability ………… 500
c.
Best Buy matches advertising expense to revenue in the period in which the
The company matches the cost of property and equipment to the periods in
Best Buy recognizes revenue when the sales price is fixed or determinable,
The earnings process is not complete when the company first receives cash for
The company records advertising expense in the period the ad first runs. In
Ex. 5.7 a. 270,000
270,000
b. 110,400$
Counseling Revenue………………………………………………..
To close counseling revenue earned.
Income Summary………………………………………….
Retained Earnings, January 1, Current Year
