Chapter 05—The Accounting Cycle: Reporting Financial Results
Financial and Managerial Accounting, 18e 5-1
5 THE ACCOUNTING CYCLE: REPORTING FINANCIAL RESULTS
Chapter Summary
Chapter 5 completes the treatment of the accounting cycle for service type businesses. It
focuses on the year-end activities culminating in the annual report. These include the preparation
of the financial statements, adequate disclosure, closing the accounts, and preparing for the audit.
These topics form the content of Chapter 5.
The preparation of the statements from an adjusted trial balance is explained and
illustrated. Added to this coverage are a discussion of adequate disclosure and the preparation of
footnotes to the statements. The closing process is described in detail and illustrated for the
Overnight Auto Service Case. Overnight’s financial results are analyzed briefly in terms of
profitability and liquidity.
The chapter ends with a discussion of how interim financial statements are prepared by a
business that closes its accounts only at year-end.
Our Supplemental Topic on the worksheet is repeated from the prior edition. We
approach the worksheet as a pedagogical tool intended to provide the student with a better grasp
of the year-end procedures.
Learning Objectives
1. Prepare an income statement, a statement of retained earnings, and a balance sheet.
2. Explain how the income statement and the statement of retained earnings relate to the
balance sheet.
3. Explain the concept of adequate disclosure.
4. Explain the purpose of closing entries; prepare these entries.
5. Prepare an after-closing trial balance.
6. Use financial statement information to evaluate profitability and liquidity.
7. Explain how interim financial statements are prepared in a business that closes its accounts
only at year-end.
8. Prepare a worksheet and explain its uses.* (Supplemental Topic)
Chapter 05—The Accounting Cycle: Reporting Financial Results
5-2 Instructor’s Resource Manual
Brief Topical Outline
A. Preparing financial statements
1. The income statement
2. The statement of retained earnings
a. A word about dividends
3. The balance sheet
a. Separate balance sheet subtotals—see International Case in Point (page
202)
B. Relationships among the financial statements
1. Drafting the notes that accompany financial statements
2. What types of information must be disclosed?—see Your Turn (page 204)
C. Closing the temporary accounts
1. Closing entries for revenue accounts
2. Closing entries for expense accounts
3. Closing the income summary account
4. Closing the dividends account
D. Summary of the closing process
E. After-closing trial balance
1. A last look at Overnight: was 2018 a good year?
a. Evaluating profitability—see Pathways Connection (page 210)
b. Evaluating liquidity
2. Preparing financial statements covering different periods of time—see Ethics,
Fraud, & Corporate Governance (page 212)
F. Concluding remarks
G. *The worksheet (supplemental topic)
1. Isn’t this really a spreadsheet?
2. How is a worksheet used?
3. The mechanics: how it’s done
a. Computers do the pencil-pushing
4. What-if: a special application of worksheet software
Chapter 05—The Accounting Cycle: Reporting Financial Results
Financial and Managerial Accounting, 18e 5-3
Topical Coverage and Suggested Assignments
Class
Meetings
on Chapter
Topical
Outline
Coverage
Discussion
Questions*
Brief
Exercises*
Exercises*
Problems*
Critical
Thinking
Cases*
1
A – C
2, 3, 4
1, 3
2, 3
1
1
2
D – F
5, 6, 7, 13
4, 6
4, 7, 9, 10
2, 3, 5, 8
2
3
G – ‡H
‡15
10
4, 6
*Homework assignment (to be completed prior to class)
‡Optional assignment, time permitting.
Comments and Observations
Teaching Objectives for Chapter 5
In Chapter 5 we cover the numerous accounting activities, both analytical and procedural, that
take place at the end of a fiscal year. The worksheet is discussed in a Supplemental Topic
section, which we view as optional. In covering this chapter, our teaching objectives are to:
1. Show how the financial statements may be prepared from the adjusted trial balance.
2. Explain relationships among the financial statements.
3. Discuss drafting of the notes that accompany the financial statements.
4. Present closing entries and an after-closing trial balance.
5. *Explain and illustrate the use of a worksheet (optional topic).
General Comments
We consider our emphasis on adequate disclosure and the preparation of footnotes a
significant feature of Chapter 5. This material is clearly important to the user of financial
statements and should be given sufficient time for class discussion. We find Case 1 well suited to
this purpose.
We then spend quite a bit of class time on closing entries and preparing an after-closing
trial balance. The chapter has several good assignments on closing entries, including Discussion
Questions 5 and 8, Exercise 5, and Problem 2. We always assign at least two of these and discuss
them in class.
How much time, if any, should you spend covering the worksheet? There is no question
that the importance of a worksheet in actual accounting practice has declined significantly. Most
computer-based systems do not print out a 10-column worksheet. Rather, they print the various
elements of the worksheet—trial balances, adjusting entries, and financial statements—as a
series of separate schedules. In manual accounting systems, many accountants carry the
worksheet only through the adjusted trial balance columns and then prepare formal financial
Chapter 05—The Accounting Cycle: Reporting Financial Results
5-4 Instructor’s Resource Manual
statements. Thus, one might argue that today’s students are not likely to see a 10-column
worksheet outside of their accounting class.
Still, we find the worksheet to be a valuable pedagogical tool, and have therefore retained
it in this edition as a Supplemental Topic. Preparing a worksheet gives students a better
understanding of the end-of-period adjusting and closing procedures. It helps them to see the
relationships between the trial balance and financial statements, as well as the relationship
between the income statement and the balance sheet. In short, we now view a 10-column
worksheet as a teaching device: a flowchart with numbers, rather than a schedule that students
should learn to prepare. Thorough coverage can be achieved by assigning Problem 7.
Supplemental Exercise
Group Exercise
This exercise modifies Case 5-2. Have the groups follow the same instructions given in
the case but now use the question: Is it ethical for a CPA (or a CPA firm) to provide both
consulting services and audits to the same companies?
Internet Exercise
Visit the Ford home page. Access the most recent annual report. Locate the note titled
“Summary of Significant Accounting Policies.” Review the explanation of the company’s
policies related to Revenue Recognition. How does this compare with the basic concept of
revenue recognition that you have learned in the chapter readings?
Chapter 05—The Accounting Cycle: Reporting Financial Results
Financial and Managerial Accounting, 18e 5-5
CHAPTER 5 NAME #
10-MINUTE QUIZ A SECTION
The accountant for Sheldrake Consulting prepared the following “Adjusted” Trial Balance at December
31, 2017, after one year of operations:
Credit
Cash ……………………………………………………………………
Accounts Receivable ……………………………………………..
Unexpired Insurance ……………………………………………..
Office Equipment ………………………………………………….
Accumulated Depreciation: Office Equipment ………….
$ 450
Unearned Consulting Fees ……………………………………..
4,230
Capital Stock ………………………………………………………..
21,030
Retained Earnings, January 1, 2017 …………………………
3,390
Dividends …………………………………………………………….
Consulting Fees Earned …………………………………………
28,150
Salaries Expense …………………………………………………..
Utilities Expense …………………………………………………..
Rent Expense ……………………………………………………….
Depreciation Expense ……………………………………………
______
$57,250
Prepare closing entries for Sheldrake Consulting.
Chapter 05—The Accounting Cycle: Reporting Financial Results
5-6 Instructor’s Resource Manual
CHAPTER 5 NAME #
10-MINUTE QUIZ B SECTION
SUNDIAL Inc.
Trial Balance
December 31
Credit
Cash ……………………………………………………………………
Accounts Receivable ……………………………………………..
Equipment ……………………………………………………………
Accounts Payable ………………………………………………….
$ 21
Capital Stock ………………………………………………………..
106
Retained Earnings …………………………………………………
56
Dividends …………………………………………………………….
Service Revenue……………………………………………………
189
Salaries Expense …………………………………………………..
Depreciation …………………………………………………………
Supplies Expense ………………………………………………….
____
$372
1 What is the balance in Income Summary before it is closed to Retained Earnings?
a $61.
b $50.
c $73.
d $145.
2 What is the balance in Retained Earnings after posting closing entries at December 31?
a $117.
b $106.
c $61.
d $45.
3 What is the total debits on the after-closing trial balance?
a $222.
b $372.
c $233.
d $161.
4 Which accounts are closed to Income Summary?
a All accounts.
b Revenue and expenses.
c Revenue, expenses, and dividends.
d All accounts that are not nominal.
5 Which accounts will appear on the balance sheet?
a Retained earnings of $56.
b Dividends of $11.
c Net income of $60.
d None of the above.
Chapter 05—The Accounting Cycle: Reporting Financial Results
Financial and Managerial Accounting, 18e 5-7
CHAPTER 5 NAME #
10-MINUTE QUIZ C SECTION
The accountant for Successful Consulting prepared the following “Adjusted” Trial Balance at December
31, 20__ after one year of operations:
Credit
Cash ……………………………………………………………………
Accounts Receivable ……………………………………………..
Unexpired Insurance ……………………………………………..
Office Equipment ………………………………………………….
Accumulated Depreciation: Office Equipment ………….
$ 600
Unearned Consulting Fees ……………………………………..
3,600
Capital Stock ………………………………………………………..
15,300
Retained Earnings, January 1, 20__ …………………………
2,700
Dividends …………………………………………………………….
Consulting Fees Earned …………………………………………
21,200
Salaries Expense …………………………………………………..
Utilities Expense …………………………………………………..
Rent Expense ……………………………………………………….
Depreciation Expense ……………………………………………
______
$43,400
Prepare an After-Closing Trial Balance.
Chapter 05—The Accounting Cycle: Reporting Financial Results
5-8 Instructor’s Resource Manual
CHAPTER 5 NAME #
10-MINUTE QUIZ D SECTION
DAVID’S, INC.
Trial Balance
December 31
Credit
Cash ……………………………………………………………………
Accounts Receivable ……………………………………………..
Equipment ……………………………………………………………
Accounts Payable ………………………………………………….
$ 27
Capital Stock ………………………………………………………..
117
Retained Earnings …………………………………………………
39
Dividends …………………………………………………………….
Service Revenue……………………………………………………
203
Salaries Expense …………………………………………………..
Depreciation …………………………………………………………
Advertising Expense ……………………………………………..
____
$386
Prepare the closing entries.
Chapter 05—The Accounting Cycle: Reporting Financial Results
Financial and Managerial Accounting, 18e 5-9
SOLUTIONS TO CHAPTER 5 10-MINUTE QUIZZES
QUIZ A
CR
Consulting Fees Earned ………………………………………..
Income Summary
28,150
Learning Objective: 4
QUIZ B
QUIZ C
Cash ……………………………………………………………………
Accounts Receivable ……………………………………………..
Unexpired Insurance ……………………………………………..
Office Equipment ………………………………………………….
Accumulated Depreciation: Office Equipment ………….
Unearned Consulting Fees ……………………………………..
Capital Stock ………………………………………………………..
15,300
Retained Earnings, December 31, 20__ ……………………
To close the revenue account.
Income Summary
Salaries Expense …………………………………..
Utilities Expense …………………………………..
Rent Expense ……………………………………….
Depreciation Expense ……………………………
To close the expense accounts.
Income Summary ………………………………………………….
Retained Earnings …………………………………
13,330
To close the income summary account.
Retained Earnings …………………………………………………
Dividends …………………………………………….
To close the dividends account.
Chapter 05—The Accounting Cycle: Reporting Financial Results
5-10 Instructor’s Resource Manual
QUIZ D
Chapter 05—The Accounting Cycle: Reporting Financial Results
Financial and Managerial Accounting, 18e 5-11
Assignment Guide to Chapter 5
Brief
Exercises
Exercises
Problems
Cases
Net
Item Number
1 – 10
1 – 15
1
2
3
4
5
6
7
8
1
2
3
4
Time Estimate (in minutes)
<10
<15
20
30
45
25
70
70
50
15
25
n/a
5
15
Difficulty Rating
E
E
E
M
S
E
S
S
S
M
S
n/a
E
E
Learning Objectives:
1. Prepare an income statement, a
statement of retained earnings, and a
relate to the balance sheet.
that closes its accounts only at year-