financial accounting assignment questions and answers pdf

• Introduction to Financial Accounting

(4 reviews)

David Annand, Athabasca University

Henry Dauderis

Copyright Year: 2017

Last Update: 2021

Publisher: Lyryx

Language: English

Formats Available

Conditions of use.

Learn more about reviews.

Reviewed by Katheryn Zielinski, Assistant Professor, Minnesota State University Mankato on 6/14/23

The text reading follows typical financial accounting flow. Beginning with the foundational introduction to what accounting is through the full accounting cycle, while including financial statement analysis towards the end of the book. Students... read more

Comprehensiveness rating: 5 see less

The text reading follows typical financial accounting flow. Beginning with the foundational introduction to what accounting is through the full accounting cycle, while including financial statement analysis towards the end of the book. Students will find the format helpful; the voice is student-friendly. There is online homework help for students. Instructors will find the text format friendly to semester-long class as concepts broken down into 13 chapters. The chapters explain the learning outcomes, use examples to express concepts, with chapter summary at end. The topics included are consistent with intro accounting courses.

Content Accuracy rating: 5

No issues noticed with accuracy. The text includes accurate financial accounting information.

Relevance/Longevity rating: 5

For an introductory accounting class with focus on US the concepts covered are typical.

Clarity rating: 5

The content is presented in a student friendly manner. Answers are provided. The extra information is helpful for students wanting extra practice.

Consistency rating: 5

The format and layout of the book chapters are consistent. All users will quickly understand the format as it is applied the same to each chapter. This helps provide consistency for students learning introductory accounting.

Modularity rating: 5

The content within the chapters can be broken-down and assigned as instructor plans for the course length. The manner is which the material is presented flows easily as reading.

Organization/Structure/Flow rating: 5

The text organization is consistent and coherent. Each chapter is presented in same manner.

Interface rating: 5

No observed tech issues. PDF downloaded and used with ease.

Grammatical Errors rating: 5

No grammar or language issues.

Cultural Relevance rating: 5

No cultural insensitive or offensive context noted.

This is a student friendly text. However, students might find a glossary helpful, as well as an index.

Reviewed by Lawrence Overlan, Part-time Professor, Bunker Hill Community College on 6/4/20

I appreciate how the Statement of Cash Flows has a separate chapter towards the end of the book. Might be better to wait until that chapter instead of also discussing it in Chapter One.....lots of material for opening week.... read more

Comprehensiveness rating: 4 see less

I appreciate how the Statement of Cash Flows has a separate chapter towards the end of the book. Might be better to wait until that chapter instead of also discussing it in Chapter One.....lots of material for opening week....

I sampled several problems...all correct.

Hard to make accounting obsolete. All the required material is present.

Problems are presented clearly and with good font size. Excellent color schemes and graphics.

Yes....no problems detected in this area. Very straightforward.

Chapters contain the right amount of content. Not too long with out breakup diagrams or examples etc.

Standard flow of chapters with excellent subdivisions.

To the contrary, the graphics and flow charts break up the material very nicely.

No issues noticed in this area.

Nice work! I will definitely consider adopting.

Reviewed by Patty Goedl, Associate Professor, University of Cincinnati Clermont College on 3/27/18

The text covers all of the topics normally found in an introductory financial accounting (principles of accounting I) text. The table of contents essentially mirrors the table of contents found in the leading texts in this field. I like that... read more

The text covers all of the topics normally found in an introductory financial accounting (principles of accounting I) text. The table of contents essentially mirrors the table of contents found in the leading texts in this field. I like that this text also covers the classified balance sheet, financial disclosures and partnerships.

Content is error-free, accurate, and unbiased.

Relevance/Longevity rating: 4

The content is up-to-date. Introductory accounting does not change often so future updates should be minimal. The authors used the year 2015 in most of the problem and examples. This might make the text "seem" out-of-date in a few years.

The book is clear and concise. The topics are clearly explained and the technical terminology is appropriate for an introductory level.

The writing, style, and formatting are consistent throughout this text.

The text is divided into topical chapters, which is appropriate considering that the concepts build on each other. The chapters are further subdivided into sub-topics. This makes it easy for an instructor to pick which sub-topics to cover.

Excellent organization and flow. The concepts logically build upon each other and the material is presented in a clear fashion.

The HTML interface is excellent. The book has good graphics, end of chapter content, and even video examples.

I did not notice grammatical errors.

The text is not culturally insensitive or offensive in any way

Excellent book that is comparable to any of the leading financial accounting titles. The authors even provide end of chapter problems, videos, and interactive Excel problems for students. Overall, a great resource! I commend the authors for making something of this caliber freely available.

Reviewed by Margarita Maria Lenk, Associate Professor, Colorado State University on 1/7/16

The content of this textbook matches the content and organization of most introductory financial accounting textbooks. It is written by Canadian authors, but is relevant to US students. The text begins by explaining the role of financial... read more

The content of this textbook matches the content and organization of most introductory financial accounting textbooks. It is written by Canadian authors, but is relevant to US students. The text begins by explaining the role of financial accounting in society, and then describes the underlying structure of double entry accounting systems and the process of recording economic events that impact the value of the organization through the journals and the ledger. The records of these events are then summarized into the primary financial statements. The numeric subtotals and totals on these statements are used to calculate standard financial measures and ratios used to evaluate the organization's performance. The text's organization then proceeds sequentially through the balance sheet accounts, explaining in more detail how the accounting for each category of economic value is recorded and reported. The author's decision to move the most complex content to the end of the book matches how most faculty choose to organize their coverage of these topics.

My reviewed resulted in highest marks regarding accuracy. The only possible concern I would mention here is that the authors use a commonly used technique in chapter two which sometimes leads to students misunderstanding that revenues and expenses are not part of owners' equity until the revenues and expenses are closed at year end to retained earnings. It is my preference to teach introductory students that revenues and expenses are distinct and separate from equity, and then explain that revenues and expenses ultimately get closed to equity. So, this is not an inaccuracy by the authors, just a point that some instructors may want to know before adopting the textbook.

It is my opinion that the content of this textbook will be relevant and current for at least a decade. Any changes made to accounting principles, Canadian or International, will be very easy and straightforward to update.

It is my opinion that the clarity of this text is very high. The authors are succinct and use visuals often to highlight the theoretical structures.

This test is very consistent with the framework that is set up by the authors in the beginning of the text.

The textbook is very clearly divided into separable modules, making it easy for both students to read and for instructors to choose which modules to include in their course.

The content of this textbook matches the content and organization of most introductory financial accounting textbooks. It begins by explaining the role of financial accounting in society, and then describes the underlying structure of double entry accounting systems and the process of recording economic events that impact the value of the organization through the journals and the ledger. The records of these events are then summarized into the primary financial statements. The numeric subtotals and totals on these statements are used to calculate standard financial measures and ratios used to evaluate the organization's performance. The text's organization then proceeds sequentially through the balance sheet accounts, explaining in more detail how the accounting for each category of economic value is recorded and reported. The author's decision to move the most complex content to the end of the book matches how most faculty choose to organize their coverage of these topics.

The online text worked perfectly in my Chrome browser. The end of chapter exercises and problems are perfectly formatted on the screen. All assessment materials (quizzes, exams, etc.) are located on a different site that requires registration to have access.

I found the grammar to be very clear, concise and very effective. Because the book is written by Canadians, expenses are sometimes referred to as revenue expenditures, which does not match how US textbooks refer to expenses, but is perhaps a better learning tool, as the expenses are always recorded in the period in which they match the revenue generation, so I support the authors' choices regarding how they refer to the difference between assets (capital expenditures) and expenses (revenue expenditures).

The textbook adequately refers to the international accounting standards. That is the only cultural relevance which is relevant to introductory financial accounting.

I found this textbook and its exercises to be a useful teaching and learning tool. Instructors and students have access to pre-made PowerPoint slides, exercises and problems, and there is the option to enrol in an online service for online assessments, which seem to have student feedback capabilities in addition to assessment gathering capabilities.

Table of Contents

• The Accounting Process
• Financial Accounting and Adjusting Entries
• The Classified Balance Sheet and Related Disclosures
• Accounting for the Sale of Goods
• Assigning Costs to Merchandise
• Cash and Receivables
• Long-lived Assets
• Debt Financing: Current and Long-term Liabilities
• Equity Financing
• The Statement of Cash Flows
• Financial Statement Analysis
• Proprietorships and Partnerships

Ancillary Material

About the book.

This textbook is an adaptation by Athabasca University of the original text written by D. Annand and H. Dauderis. It is intended for use in entry-level college and university courses in financial accounting. A corporate approach is utilized consistently throughout the book.

The adapted textbook includes multiple ancillary student and instructor resources. Student aids include solutions to all end-of-chapter questions and problems, and randomly-generated spreadsheet problems that cover key concepts of each chapter. These provide unlimited practice and feedback for students. Instructor aids include an exam bank, lecture slides, and a comprehensive end-of-term case assignment. This requires students to prepare 18 different year-end adjusting entries and all four types of financial statements, and to calculate and analyze 16 different financial statement ratios. Unique versions can be created for any number of individual students or groups. Tailored solutions are provided for instructors.

The original Annand/Dauderis version of the textbook including .docx files and ancillary material remains available upon request to D. Annand ([email protected]).

About the Contributors

David Annand, EdD, MBA, CA, is a Professor of Accounting in the Faculty of Business at Athabasca University. His research interests include the educational applications of computer-based instruction and computer mediated communications to distance learning, the effects of online learning on the organization of distance-based universities, and the experiences of instructors in graduate-level computer conferences.

David completed his Doctorate in Education in 1998. His thesis deals with the experiences of instructors in graduate-level computer conferences.

Contribute to this Page

• Skip to primary navigation
• Skip to main content

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for June 2024 exams, Get your discount code >>

ACCA Past Papers – ACCA Past Exams – Questions and Answers

Links to all acca past papers, fundamentals.

(ACCA does not publish past AB, MA and FA exams – to practice you need to buy Revision Kit for these exams)

AB Accountant in Business Specimen Exam Paper

See also AB Revision Mock exam  

MA Management Accounting Specimen Exam Paper

See also MA Mock exam  

FA Financial Accounting Specimen Exam Paper

See also  FA Mock exam  

LW Specimen Exam Paper  (ENG & GLO)

Questions: Corporate and Business Law-LW(ENG) – LW(ENG) Answers

Questions: Corporate and Business Law-LW(GLO) – LW(GLO) Answers

Paper LW Past Exams ENG (Q&A)  |  Paper LW Past Exams GLO (Q&A)

See also: ACCA LW Mock Exam (ENG)  |  ACCA LW Mock Exam (GLO)

Pm specimen exam |  pm past exams, see also   pm cbe mock exam  | pm revision kit live, tx specimen exam | tx past exam papers, (these exams are out of date, you need to get updated revision kit), fr specimen exam  |  fr past exam papers, see also fr objective test exam (section a)   |   fr revision kit live, aa specimen exam  |  aa past exam papers, see also:  aa mock exam  | aa practice questions |  aa revision kit live, fm specimen exam  |  fm past exam papers, see also  fm practice test (section a)   | fm revision kit live, professional level, sbr corporate reporting.

SBR  International variant questions  |  SBR  UK variant questions

SBR UK Specimen Exam

SBL Specimen exam  |  SBL Past exam papers

See also   SBL revision lectures  solving past ACCA questions ]

AFM Specimen Exam |  AFM past exam papers

See also  afm revision lectires based on past questions, apm specimen exam |  apm past exam papers.

[See also APM revision lectures based on ACCA questions]

ATX Advanced Taxation

(These exams are out of date,  you need to get updated Revision kit)

AAA Past  exam papers:    International variant | UK variant

Free acca lectures  |  free acca  notes  | acca exams dates.

How to pass exams  |  The Most Common Mistakes in the Exam Hall

Reader Interactions

August 19, 2021 at 6:57 am

Hello, where can I find past exam papers for Fundamental papers F1 to F4 for ACCA course ? Thank you.

Leave a Reply Cancel reply

You must be logged in to post a comment.

Academia.edu no longer supports Internet Explorer.

To browse Academia.edu and the wider internet faster and more securely, please take a few seconds to  upgrade your browser .

Enter the email address you signed up with and we'll email you a reset link.

• We're Hiring!
• Help Center

Selected Questions and Answers On Financial Accounting II

Related Papers

Anup Kumar Saha

Course Objective: This course aims at exposing students of accounting to the theory and practice of management, which has already attained the status of a profession and has been recognized as the fifth factor of production. Teaching method: The traditional one way lecture deliberation method of teaching will be discouraged. Prior study of reading assignments will be a must. Students in a group should distribute discussion topics and reading materials among them to present those in the class. Discussion reasonable arguments and counter arguments will be encouraged. The teacher will play a supervisory role. English will be the medium of communication in the class.

Gregory T Papanikos

This abstract book includes all the abstracts of the papers presented at the 14th International Conference on Accounting, 4-7 July 2016, Athens Greece, organized by the Athens Institute for Education and Research. In total there were 36 papers and 38 presenters, coming from 19 different countries (Belgium, Canada, Finland, Germany, France, India, Indonesia, Japan, Lebanon, Poland, New Zealand, Russia, Saudi Arabia, South Africa, Taiwan, Turkey, UAE, UK, and USA). The conference was organized into ten sessions that included areas of Accounting. As it is the publication policy of the Institute, the papers presented in this conference will be considered for publication in one of the books and/or journals of ATINER.

Maxizo Mizotakexi

This book includes the abstracts of all the papers presented at the 15th Annual International Conference on Accounting, 3-6 July 2017, organized by the Athens Institute for Education and Research (ATINER). In total 35 papers submitted by 39 presenters, coming from 15 different countries (Australia, Canada, China, France, India, Mongolia, the Netherlands, Russia, Singapore, South Africa, South Korea, Taiwan, Turkey, UK and USA). The conference was organized into 11 sessions that included a variety of topic areas such as managerial accounting, social responsibility, international finance and more. A full conference program can be found before the relevant abstracts. In accordance with ATINER’s Publication Policy, the papers presented during this conference will be considered for inclusion in one of ATINER’s many publications.

laxmikant avhad

Accounting: "the fairest invention of the human mind." (Goethe) 2.1 Introduction As intimated by its title, this thesis proposes the inclusion of information on flexibility as a means of enhancing the accounting information systems of business organisations. However, the inclusion of such information would be incomplete without a prior discussion of the purpose of Accounting and its product, accounting information. In this chapter the nature and role of Accounting is considered and the classification of information as management accounting information and financial accounting information is discussed. The purpose of providing accounting information, as well as the qualitative characteristics of decision-useful information, is addressed. In the conclusion the users of accounting information are identified and their needs summarised. 2.2 The nature of Accounting Before the nature of Accounting can be addressed, the field of study must first be delineated. This entails an identification of the area of interest and of the borders of the discipline in relation to neighbouring disciplines. Thus a successful definition of Accounting should clearly delineate the boundaries of the discipline at a point in time, give a precise statement of its essential nature, and be flexible so that innovation and growth in the discipline can be accommodated. A number of definitions of Accounting have appeared in the literature, each attempting to demarcate its field of study. Developing a single definition of Accounting is however beset with difficulties. The first difficulty stems from the dynamic nature of Accounting. Glautier and Underdown (1986, p.3) point out that the University of Pretoria.etd

This abstract book includes all the abstracts of the papers presented at the 12th Annual International Conference on Accounting & Finance, 26-29 May 2014, organized by the Athens Institute for Education and Research. In total there were 37 papers and 42 presenters, coming from 19 different countries (Australia, Canada, Egypt, France, Indonesia, Iran, Israel, Libya, Malaysia, Poland, Russia, Singapore, South Africa, Sweden, Taiwan, Tunisia, U.K., Ukraine, USA). The conference was organized into VIII sessions that included areas such as Accounting and Finance: Banking and Finance, Financial Reporting, Tax and Auditing, Innovation and Knowledge Systems, Standards. As it is the publication policy of the Institute, the papers presented in this conference will be considered for publication in one of the books of ATINER.

Arjun Manandhar

Lunatic Sun

European Accounting Review

Hannu Schadewitz

RELATED PAPERS

Deeds and Days

Erika Sausverde

Romanian journal of morphology and embryology = Revue roumaine de morphologie et embryologie

Mugurel Constantin Rusu

… and Engineering. S …

Marcin Horbowicz

JualObatpembesaralatvitalpriamrptitangelaslidiMojokerto

Jual Obat pembesar alat vital pria mr p titan gel asli di medan

Pakistan Journal of Commerce and Social Sciences

Journal of Korean Endocrine Society

Ramiro Vicente

Journal of the Marine Biological Association of the United Kingdom

Isabel Pinto

Journal of Surface Engineered Materials and Advanced Technology

Sufyan Azam

Adele Vivacqua

Journal of Environmental and Agricultural Sciences

Dr. Asad Ali Khan

Chemical Geology

Peter Heaney

Revista Brasileira de Meteorologia

Fábio Diniz

Kriterion: Revista de Filosofia

Desiderio Parrilla Martínez

Advances in Mathematics

Maria Alberich-Carramiñana

Queueing Systems

J. George Shanthikumar

II International Symposium on Pomegranate and Minor - including Mediterranean - Fruits: ISPMMF2009

Lobsang Wangchu

IOP Conference Series: Earth and Environmental Science

Aida Heriati

Bulletin of Electrical Engineering and Informatics

Abdulmalik Muhammad

Kerupuk Telur Asin Kota Salatiga

krupuk telur acin

Mindfulness

Journal of the American Association of Nurse Practitioners

Susan Sterrett

Journal of Entomology

FEDERICO del Río-Portilla

Anthony Maciejewski

Social Science Research Network

Richard Levich

•   We're Hiring!
•   Help Center
• Find new research papers in:
• Health Sciences
• Earth Sciences
• Cognitive Science
• Mathematics
• Computer Science
• Academia ©2024

Course Resources

Assignments.

The assignments in this course are openly licensed, and are available as-is, or can be modified to suit your students’ needs. Answer keys are available to faculty who adopt Lumen Learning courses with paid support. This approach helps us protect the academic integrity of these materials by ensuring they are shared only with authorized and institution-affiliated faculty and staff.

If you import this course into your learning management system (Blackboard, Canvas, etc.), the assignments will automatically be loaded into the assignment tool.

You can view them below or throughout the course.

• Module 0: Personal Accounting— Assignment: Creating a Budget
• Module 1: The Role of Accounting in Business— Assignment: Lopez Consulting
• Module 2: Accounting Principles— Assignment: Accounting Principles
• Module 3: Recording Business Transactions— Assignment: Recording Business Transactions
• Module 4: Completing the Accounting Cycle— Assignment: Completing the Accounting Cycle
• Module 5: Accounting for Cash— Assignment: Accounting for Cash
• Module 6: Receivables and Revenue— Assignment: Manilow Aging Analysis
• Module 7: Merchandising Operations— Assignment: Merchandising Operations
• Module 8: Inventory Valuation Methods— Assignment: Inventory Valuation Methods
• Module 9: Property, Plant, and Equipment— Assignment: Property, Plant, and Equipment
• Module 10: Other Assets— Assignment: Other Current and Noncurrent Assets
• Module 11: Current Liabilities— Assignment: Calculating Payroll at Kipley Co
• Module 12: Non-Current Liabilities— Assignment: Non-Current Liabilities
• Module 13: Accounting for Corporations— Assignment: Collins Mfg Stockholders’ Equity
• Module 14: Statement of Cash Flows— Assignment: Kachina Sports Company Cash Flows
• Module 15: Financial Statement Analysis— Assignment: Coca Cola FSA

Discussions

The following discussion assignments will also be preloaded (into the discussion-board tool) in your learning management system if you import the course. They can be used as is, modified, or removed. You can view them below or throughout the course.

• Module 0: Personal Accounting— Discussion: Winning the Lottery
• Module 1: The Role of Accounting in Business— Discussion: The Crafty Coffee Crook
• Module 2: Accounting Principles— Discussion: SoftSheets
• Module 3: Recording Business Transactions— Discussion: Baker’s Breakfast Bars
• Module 4: Completing the Accounting Cycle— Discussion: Closing the Books in QuickBooks
• Module 5: Accounting for Cash— Discussion: Counter Culture Cafe
• Module 6: Receivables and Revenue— Discussion: Maximizing Revenue
• Module 7: Merchandising Operations— Discussion: Inventory Controls
• Module 8: Inventory Valuation Methods— Discussion: LIFO, FIFO, Specific Identification, and Weighted Average
• Module 9: Property, Plant, and Equipment— Discussion: Cooking the Books
• Module 10: Other Assets— Discussion: Other Assets
• Module 11: Current Liabilities— Discussion: Current Liabilities
• Module 12: Non-Current Liabilities— Discussion: Off-Balance Sheet Financing
• Module 13: Accounting for Corporations— Discussion: Home Depot
• Module 14: Statement of Cash Flows— Discussion: Facebook, Inc.
• Module 15: Financial Statement Analysis— Discussion: Financial Statement Analysis

Alternative Excel-Based Assignments

For Modules 3–15, additional excel-based assignments are available below.

Module 3: Recording Business Transactions

• Module 3 Excel Assignment A
• Module 3 Excel Assignment B

Module 4: The Accounting Cycle

• Module 4 Excel Assignment A
• Module 4 Excel Assignment B
• Module 4 Excel Assignment C
• Module 4 Excel Assignment D

Module 5: Accounting for Cash

• Module 5 Excel Assignment

Module 6: Receivables and Revenue

• Module 6 Excel Assignment A
• Module 6 Excel Assignment B

Module 7: Merchandising Operations

• Module 7 Excel Assignment

Module 8: Inventory Valuation Methods

• Module 8 Excel Assignment A
• Module 8 Excel Assignment B
• Module 8 Excel Assignment C

Module 9: Property, Plant, and Equipment

• Module 9 Excel Assignment A
• Module 9 Excel Assignment B

Module 10: Other Assets

• Module 10 Excel Assignment

Module 11: Current Liabilities

• Module 11 Excel Assignment

Module 12: Non-Current Liabilities

• Module 12 Excel Assignment A
• Module 12 Excel Assignment B

Module 13: Accounting for Corporations

• Module 13 Excel Assignment A
• Module 13 Excel Assignment B
• Module 13 Excel Assignment C

Module 14: Statement of Cash Flows

• Module 14 Excel Assignment A
• Module 14 Excel Assignment B

Module 15: Financial Statement Analysis

• Module 15 Excel Assignment

Review Problems

There are also three unit review assignments and a final review. These reviews include a document which sets up the problems and an excel worksheet.

Unit 1 Review Problem (After Module 6)

• Review Problem Document

Unit 2 Review Problem (After Module 8)

Unit 3 review problem (after module 9), final review (after module 15).

• Assignments. Authored by : Cindy Moore and Joe Cooke. Provided by : Lumen Learning. License : CC BY: Attribution

BUS202: Principles of Finance

Unit 2 Financial Statement Analysis Exercises

Complete these exercises and problems and then check your work.

The income statement captures all activity related to revenues and expenses over a particular time period. For instance, the quarterly income statement includes all revenue and expense items for that quarter. The beginning of the quarter is treated the same as the end of the quarter. The same applies for annual income statements. However, balance sheets represent a firm's assets, liabilities, and owners' equity at a particular point in time. The quarterly balance sheet only reflects the last day of that quarter and the annual balance sheet only reflects the last day of the year. As such, the balance sheet is more open to seasonality issues and short-term fluctuations. For instance, if the balance sheet is prepared 1 day prior to a large cash payment the cash account will appear artificially large. On the other hand, if it is prepared 1 day after the payment the cash account will appear artificially small.

The firm has $60 million in total liabilities.

A = L + OE $100M = L + $40M $60M = L

Depreciation is a noncash expense. While it lowers net income, the firm is not actually paying anything for depreciation so it has no impact on cash flows (ignoring taxes…when considering taxes, depreciation lowers net income but increases cash flows as less cash is paid in taxes). The cash flow impact of an asset purchase from a finance perspective occurs when the asset is purchased. Spreading the cost equally over the assets useful life ignores the time value of money and understates the true cost of the purchase. A few other issues that may create a difference between cash flows and earnings include (this is not a complete list) –

• Revenue recognition
• Inventory accounting method
• Prepaid expenses
• Accounts Payable/Receivable

While many people use ratio analysis, the primary parties interested are

• Competitors
• Stockholders (and potential stockholders)
• Long-Term Creditors
• Short-Term Creditors

When analyzing  Liquidity Ratios , the most interested parties are management and short-term creditors. Management needs to understand the firm's liquidity position in order to properly manage the firm. Short-term creditors typically do not care much about the long-term health of the firm, but only if they have enough liquid capital to meet the short-term obligations. Long-term creditors and stockholders would also be interested, but primarily only if the liquidity ratios were weak enough to damage the long-term health of the firm.

When analyzing  Asset Management Ratios , the most interested parties are management, competitors, and stockholders. Again, management must be interested in all the ratios as they must manage all aspects of the firms operations. Competitors are interested as a gauge of their own performance. If our competition has a total asset turnover of 2.50 and ours is only 1.95 we must understand what they are doing to outperform us in this measure. By identifying our weaknesses, we can address them. Stockholders have some interest in that often asset management ratios impact a firm's ability to generate profits and increase firm value. Long-term and short-term creditors are typically not significantly concerned with these measures as they do not share in any “extra” profits the company generates. As long as the firm is able to meet interest and principle obligations, debt holders are happy.

Management, long-term creditors, short-term creditors, and stockholders are all focused on  Debt Management Ratios . These ratios measure a firm's ability to meet their debt obligations, so creditors want to see these ratios strong in order to be confident of receiving their full interest and principle payments. Long-term creditors are probably more focused on this as short-term creditors hope to be repaid quickly enough that they are more concerned about the liquidity issues. Stockholders are concerned because if the firm is unable to meet its debt obligations it will be forced into bankruptcy and the stockholders will likely lose all of their investment.

Profitability Ratios  are a concern primarily for management, competitors, and stockholders. Creditors, both LT and ST, do not participate in profits so their only concern with profitability ratios is if they are negative and threaten the ability of the firm to meet interest and principal payments. Like asset management ratios, competitors use profitability ratios as a method to gauge their strengths and weaknesses. Since stockholders “own” the business, the profits belong to them. Therefore, the stronger the profitability ratios, the happier the stockholders are.

Market Value Ratios  are looked at by stockholders and management. These ratios measure how “cheap” or “expensive” the stock is. Management typically wants these ratios to be high as it is a sign that they are maximizing firm value. Potential stockholders typically want them low as that is an indication that the stock may be cheap (except for dividend yield). As a side note, market value ratios are often much more difficult to analyze than many people would like.

The key to this question recognizing the role of the equation A = L + OE in these two ratios. Because all firms use some degree of liabilities (long-term debt, accounts payable, accruals, etc.), we know that Assets must be larger than Owners' Equity. The greater the amount of debt financing (liabilities), the greater the difference between Assets and Owners Equity will be. Also, since the difference between ROA and ROE is the denominator (ROA is NI/Assets while ROE is NI/OE), ROE will always be higher than ROE (for firms with positive NI). Finally, the greater the amount of debt financing (liabilities), the greater the difference between ROA and ROE will be.

When considering the above paragraph, we can now comment on the specific ROA and ROE numbers for Company A and B. Since Company B has a lower ROA and a higher ROE (relative to Company A), we know that Company B is using more leverage (debt financing) than Company A.

Neither approach is necessarily “better” or “worse” than the other. They are just different. Company B is using a more aggressive (riskier) strategy of financing. The higher level of debt increases the risk, but also means stockholders earn a greater return on their money when the company does well. However, if the company does poorly, the higher leverage (debt financing) will magnify the losses (as the interest must still be paid and the loss is spread over less shareholder capital). Thus, higher amounts of debt financing are riskier, but also increase the potential return. Which approach is better depends on the level of risk aversion for each shareholder.

The DSO ratio does provide an indication of how long it is taking a firm to collect its credit sales. Thus, a high DSO ratio can be an indication of a problem in managing a firm's accounts receivables. However, one must be very careful in jumping to conclusions. First, DSO can be very industry dependent. Second, and the issue in this question, is that DSO uses both balance sheet and income statement values to calculate the ratio. As the Annual Income statement is not subject to seasonality while the Annual Balance Sheet is, there is the potential for seasonality issues to distort the ratio. Specifically, Company A has larger accounts receivable on their annual balance sheet due to the seasonal nature of their sales. This inflates their DSO ratio. Company B has had plenty of time to collect their accounts receivable. This is a prime example of why you need to consider seasonality when evaluating ratios.

If we think of the inventory turnover ratio, Company A should appear to be doing better. Specifically, they will have less inventory on hand at the end of the year (as their heavy sales season is winding down and they approach seasonally lower sales). Alternatively, Company B's inventory will be high to meet their seasonally high 1st and 2nd quarter sales that are right around the corner.

Subject to Seasonality – Quarterly Income Statement, Quarterly Balance Sheet, Annual Balance Sheet

Not Subject to Seasonality – Annual Income Statement

This is a FALSE statement. While it is true that everything else equal, a higher profit margin is better than a lower profit margin there is not enough information to make this a true statement. We are ignoring both trend analysis and comparative analysis, so we don't have the necessary context to evaluate the profit margin number. For instance company A could be in a low profit margin industry (such as banking or retail) while company B could be in a high profit margin industry (such as software or pharmaceuticals). Also, profit margin is only one ratio and to label one company as outperforming another based on a single ratio is shortsighted. We need to consider the larger picture before making such a statement. The purpose of this question is to illustrate that one ratio without context is close to meaningless.

Trend Analysis refers to looking at a firm's ratios over a period of 3-5 years to identify whether specific areas are strengthening or weakening. Comparative analysis refers to looking at a firm's ratios relative to other firms in the same industry to evaluate whether they are better or worse than industry averages. Trend/comparative analysis provides us some of the necessary context to properly interpret the ratios.

QUESTION 10

Potential problems with trend analysis include

Potential problems with comparative analysis include

QUESTION 11

A very low quick ratio may be cause for concern because it could indicate liquidity concerns. A low level of cash and accounts receivable relative to our current liabilities could indicate that we will have a hard time paying those current liabilities when they are due. A very high quick ratio may be cause for concern because it indicates an inefficient allocation of resources. Cash and accounts receivable are not high return assets. We would likely be better off allocating our assets to areas with higher rates of return.

QUESTION 12

The primary objective of financial statement analysis from the perspective of management is to identify potential strengths and weaknesses of our firm relative to our competitors so we can take full advantage of our strengths and work on fixing our weaknesses.

There are several difficulties that management might encounter in conducting a complete financial statement analysis. Some are mentioned in the question on potential problems with trend analysis and comparative analysis above. Other problems include comparability of financial statements across firms in the industry due to different fiscal years and/or different accounting procedures. Also, the need to dig beyond the numbers is critical. For example, is a high ROE due to a well-run company or due to too much leverage that could cause significant problems if we hit a small rough patch? Another issue is that financial statement analysis may help us identify potential strengths and weaknesses. However, even after confirming them by digging deeper, the financial statement analysis often does not recommend HOW we can fix the weakness or exploit the strength.

The primary objective of financial statement analysis from the perspective or the stockholder is to identify companies to invest in (potential stockholders) or evaluate the companies the stockholder currently owns (current stockholders).

Stockholders face many of the same problems discussed above with management. However, an important challenge for stockholders is that they must not only analyze the company's financial health, but also evaluate how much they are paying for it. There may be situations where buying stock in a company with poor financial health is a good opportunity (the stock price is “cheap” enough and there is a chance for the company to rebound). There may also be situations where selling shares of stock in a company with strong financial health is good (the stock price is so expensive that the firm's success is already more than fully reflected in the stock price). Too often stockholders get caught up in what they are buying and don't think enough about how much they are paying for it.

CR = CA/CL = 7,000,000/4,500,000 = 1.56 QR = (CA – Inv)/CL = (7,000,000 – 2,000,000)/4,500,000 = 1.11 ITR = CGS/Inv = 6,000,000/2,000,000 = 3 times DSO = AR/(Sales/365) = 2,000,000/(15,000,000/365) = 48.67 days FAT = Sales/Fixed Asst = 15,000,000/10,000,000 = 1.5 times TAT = Sales/Total Asst = 15,000,000/17,000,000 = 0.88 times TD/TA = 10,000,000/17,000,000 = 58.8% TD/OE = 10,000,000/7,000,000 = 142.86% TIE = EBIT/Int = 4,000,000/1,000,000 = 4 times GPM = (Sales – CGS)/Sales = (15,000,000 – 6,000,000)/15,000,000 = 60% NPM = NI/Sales = 2,100,000/15,000,000 = 14.0% ROA = NI/Asst = 2,100,000/17,000,000 = 12.4% ROE = NI/OE = 2,100,000/7,000,000 = 30.0% PE = Price/EPS = 25/1.05 = 23.81 M/B = Price/BV = 25/(7,000,000/2,000,000) = 7.14 DY = Div/Price = $0.50/$25 = 2.00%

CR = CA/CL = 11,050,000/7,000,000 = 1.58 QR = (CA – Inv)/CL = (11,050,000 – 4,000,000)/7,000,000 = 1.01 ITR = CGS/Inv = 11,000,000/4,000,000 = 2.75 times DSO = AR/(Sales/365) = 4,000,000/(20,000,000/365) = 73 days FAT = Sales/Fixed Asst = 20,000,000/11,000,000 = 1.82 times TAT = Sales/Total Asst = 20,000,000/22,050,000 = 0.91 times TD/TA = 15,000,000/22,050,000 = 68.0% TD/OE = 15,000,000/7,050,000 = 212.77% TIE = EBIT/Int = 3,000,000/1,500,000 = 2 times GPM = (Sales – CGS)/Sales = (20,000,000 – 11,000,000)/20,000,000 = 45% NPM = NI/Sales = 1,050,000/20,000,000 = 5.25% ROA = NI/Asst = 1,050,000/22,050,000 = 4.76% ROE = NI/OE = 1,050,000/7,050,000 = 14.89% PE = Price/EPS = 17.5/0.525 = 33.33 M/B = Price/BV = 17.5/(7,050,000/2,000,000) = 4.96 DY = Div/Price = $0.50/$17.50 = 2.86%

Each item in the income statement is expressed as a percentage of sales (revenues) and each item in the balance sheet is presented as a percentage of total assets.

To start the analysis of finding strengths and weaknesses, I started with the common size statements. The first thing that I noticed was the increase in Cost of Goods Sold from 40% of sales in 2015 to 55% of sales in 2017. This indicates that our production costs jumped significantly and will act to lower our net income. Selling and Administrative expenses dropped slightly from 20% of sales to 17.5% of sales. This is a strength, but is not a very large change so I don't place much emphasis on it. The declines in EBIT and Net Income as a % of sales are due to the increase in CGS, so do not need further analysis. Thus, from the Common Size Income statement, I focus on the increase in CGS as a significant weakness and would classify the decline in S&A Expenses as a small strength.

Next I proceed to the Common Size balance sheet. The first things I notice are the increases in accounts receivable and inventory as a % of total assets. This is a concern that needs more analysis before I declare it a weakness. Consider accounts receivable first. AR could increase due to higher sales levels. If 25% of my sales are done on credit and sales increase, my AR will automatically increase as well. This could result in AR being a bigger portion of my firm's assets and would not be seen as a negative. On the other hand, AR may be increasing because fewer customers are paying their bills on time. This could lead to more bad debt expense or higher collection costs. I can not tell which explanation is causing the increase in AR from the CS balance sheet, so I will make a note of it and look more at the issue as I move through my analysis. Like AR, inventory increases may or may not be a weakness. If sales increase, I will need more inventory on hand to handle the increase in sales which is likely to cause inventory to make up a larger portion of my firm's assets. Alternatively, if I am getting stuck with more out-of-date inventory it will also make up a larger portion of my firm's assets until I am forced to do a write down and take the loss. From the CS balance sheet I can't tell which scenario is taking place so this is also something to investigate further.

Net PPE shows a large drop in the CS Balance sheet, but that is primarily a result of the increase in current assets caused by the jump in AR and Inv which have already been discussed, so I will not pay much attention to the decline in Net PPE. Notes Payable shows a large jump, however that could just be a function of me financing some of my increase in current assets so again that is not something that would concern me too much. I would probably want to note it and make sure I find out the reason for the increase but it likely is not a strength/weakness. The jump in Total Liabilities as a % of total assets is something that might concern me. Higher levels of liabilities as a % of total assets indicates higher risk levels. The firm has a greater chance of serious financial problems is there is a slowdown. This is not necessarily bad as the higher debt levels also have the chance to increase our profits if things go well, however it is something to note with a degree of caution due to the higher risk. Finally, the drop in OE is merely the flip side to the increase in TL, so needs no further analysis.

Next I move on to the ratio analysis. My liquidity ratios appear to be sound as both are stable from year to year and similar to the industry averages. Next is my Inv. Turnover Ratio. This, combined with the increase in inventory on the CS balance sheet indicates a problem. If my inventory increase was merely a result of increased sales, the inventory turnover ratio would hold steady or increase slightly. Instead it has decreased slightly and is noticeably lower than the industry average. This means that I am tying up more of my capital as inventory and probably ending up with older inventory that will need to be marked down and sold at a loss.

I also notice problems with my Days Sales Outstanding ratio. The significant jump in the DSO ratio tells me its taking me an about 24 days longer on average to collect each dollar in sales. Since this is also much higher than the industry average it means one of two things. Either I have a lot of customers that aren't paying on time and may end up with higher levels of bad debts or that I have to offer more favorable credit terms to my customers to keep sales from dropping. Both of these possibilities are bad, so my accounts receivable situation is a definite cause for concern.

Fixed Asset Turnover and Total Asset Turnover both look good. FAT is up and both are higher than the industry average. This is a sign that I am doing a good job overall of using my assets (especially my LT assets) to generate sales.

The debt management ratios are troublesome. My TD/TA and TD/OE ratios have increased by quite a bit and are higher than the industry averages. Also, my TIE ratio has dropped and is lower than the industry average. This means that our firm is using more debt financing and has less margin for error. If we experience an off year or two our firm is likely to run into severe financial problems and could face bankruptcy. On the other hand, if we have a couple of strong years, we will make higher returns for our shareholders due to the leverage provided by debt. This is not necessarily a strength/weakness but is a sign of high financial risk.

The profitability ratios are all showing an interesting pattern that ties back into my CGS observation from the CS income statement. My profitability (PM, ROA, ROE) is down due to the increase in CGS. However, all three ratios are consistent with the industry average. This might be an indication that the increase in CGS is more of an industry issue rather than firm specific. If a key input had a price increase, this is likely to impact all firms in the industry equally. For example, if grain prices jumped significantly both Kellogg's and General Mills may see a jump in their CGS and a decline in their profit margins. It doesn't indicate a management problem, but an industry issue. If my profitability ratios declined significantly AND were lower than the industry average I would be more concerned about company specific problems.

Finally we have the market value ratios which are difficult to interpret in this instance. The PE ratio has increased significantly as my stock price fell, but earnings fell faster. It is also higher than the industry average which indicates the stock is more expensive in terms of what investors pay for each dollar of earnings (possibly indicating that they believe the earnings drop is not permanent). The MV/BV ratio has decreased significantly which indicates the stock is cheaper. This is because book value is less sensitive to the recent earnings decline which lowered the stock price (making the stock cheaper relative to its book value). However, the stock is still slightly more expensive than the industry average. While our dividend yield increased and is higher than the industry average (which is good), there is a danger sign here. If earnings drop any further, we may have to cut our dividend which would cause the yield to drop.

To summarize, our financial statement analysis indicates

• The firm needs to address the CGS issue, but that it is probably an industry issue instead of a company specific problem. This doesn't mean we can ignore it, just that it will be more difficult to fix.
• The firm needs to get control of its credit policies and improve its collections process.
• The firm needs to get control of its inventory concerns
• The firm is doing a good job at generating sales from its LT Assets.
• The firm has a high degree of financial risk
• The firm does not appear to have any major liquidity constraints.
• The stock is relatively expensive relative to the industry average and the dividend yield (while attractive) should be viewed with caution as it may not be sustainable.

You know that you need the current stock price and the book value per share in order to get the MV/BV ratio. To get current stock price, you can use the PE ratio: PE = Price/EPS ⇒ Price = (PE)×(EPS)

To get EPS, you need Net Income which you can get from the net profit margin: Net Profit Margin = Net Income/Sales ⇒ Net Income = Net Profit Margin×Sales

You have the Profit Margin, so you need Sales. You can get Sales from the Total Asset Turnover Ratio: Total Asset Turnover = Sales /Assets ⇒ Sales = TA Turnover×Assets

Sales = (1.5)×($6,000,000) = $9,000,000 Net Income = (0.05)×($9,000,000) = $450,000 EPS = ($450,000)/(600,000 shares) = $0.75 per share Stock Price = (13)×(0.75) = $9.75

Now you need to solve for Book Value which is Owners' Equity per Share. We know the Return on Equity, so we can use that (along with Net Income) to get Owners' Equity: ROE = Net Income/Owners Equity ⇒ Owners Equity = NI/ROE

Owners' Equity = ($450,000)/(0.14) = $3,214,285.71 Book Value = $3,214,285.71)/(600,000 shares) = $5.36 per share MV/BV = ($9.75)/($5.36) = 1.82

Our MV/BV ratio is 1.82. This is a tough problem as it not only tests your knowledge of ratios, but your problem solving skills. Don't worry if you didn't get it at first, but hopefully once you see the solution it makes sense.

5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business

We have gone through the entire accounting cycle for Printing Plus with the steps spread over three chapters. Let’s go through the complete accounting cycle for another company here. The full accounting cycle diagram is presented in Figure 5.14 .

We next take a look at a comprehensive example that works through the entire accounting cycle for Clip’em Cliff. Clifford Girard retired from the US Marine Corps after 20 years of active duty. Cliff decides it would be fun to become a barber and open his own shop called “Clip’em Cliff.” He will run the barber shop out of his home for the first couple of months while he identifies a new location for his shop.

Since his Marines career included several years of logistics, he is also going to operate a consulting practice where he will help budding barbers create a barbering practice. He will charge a flat fee or a per hour charge. His consulting practice will be recognized as service revenue and will provide additional revenue while he develops his barbering practice.

He obtains a barber’s license after the required training and is ready to open his shop on August 1. Table 5.2 shows his transactions from the first month of business.

Transaction 1: On August 1, 2019, Cliff issues $70,000 shares of common stock for cash.

• Clip’em Cliff now has more cash. Cash is an asset, which is increasing on the debit side.
• When the company issues stock, this yields a higher common stock figure than before issuance. The common stock account is increasing on the credit side.

Transaction 2: On August 3, 2019, Cliff purchases barbering equipment for $45,000; $37,500 was paid immediately with cash, and the remaining $7,500 was billed to Cliff with payment due in 30 days.

• Clip’em Cliff now has more equipment than before. Equipment is an asset, which is increasing on the debit side for $45,000.
• Cash is used to pay for $37,500. Cash is an asset, decreasing on the credit side.
• Cliff asked to be billed, which means he did not pay cash immediately for $7,500 of the equipment. Accounts Payable is used to signal this short-term liability. Accounts payable is increasing on the credit side.

Transaction 3: On August 6, 2019, Cliff purchases supplies for $300 cash.

• Clip’em Cliff now has less cash. Cash is an asset, which is decreasing on the credit side.
• Supplies, an asset account, is increasing on the debit side.

Transaction 4: On August 10, 2019, provides $4,000 in services to a customer who asks to be billed for the services.

• Clip’em Cliff provided service, thus earning revenue. Revenue impacts equity, and increases on the credit side.
• The customer did not pay immediately for the service and owes Cliff payment. This is an Accounts Receivable for Cliff. Accounts Receivable is an asset that is increasing on the debit side.

Transaction 5: On August 13, 2019, Cliff pays a $75 utility bill with cash.

• Clip’em Cliff now has less cash than before. Cash is an asset that is decreasing on the credit side.
• Utility payments are billed expenses. Utility Expense negatively impacts equity, and increases on the debit side.

Transaction 6: On August 14, 2019, Cliff receives $3,200 cash in advance from a customer for services to be rendered.

• The customer has not yet received services but already paid the company. This means the company owes the customer the service. This creates a liability to the customer, and revenue cannot yet be recognized. Unearned Revenue is the liability account, which is increasing on the credit side.

Transaction 7: On August 16, 2019, Cliff distributed $150 cash in dividends to stockholders.

• When the company pays out dividends, this decreases equity and increases the dividends account. Dividends increases on the debit side.

Transaction 8: On August 17, 2019, Cliff receives $5,200 cash from a customer for services rendered.

• Clip’em Cliff now has more cash than before. Cash is an asset, which is increasing on the debit side.
• Service was provided, which means revenue can be recognized. Service Revenue increases equity. Service Revenue is increasing on the credit side.

Transaction 9: On August 19, 2019, Cliff paid $2,000 toward the outstanding liability from the August 3 transaction.

• Accounts Payable is a liability account, decreasing on the debit side.

Transaction 10: On August 22, 2019, Cliff paid $4,600 cash in salaries expense to employees.

• When the company pays salaries, this is an expense to the business. Salaries Expense reduces equity by increasing on the debit side.

Transaction 11: On August 28, 2019, the customer from the August 10 transaction pays $1,500 cash toward Cliff’s account.

• The customer made a partial payment on their outstanding account. This reduces Accounts Receivable. Accounts Receivable is an asset account decreasing on the credit side.
• Cash is an asset, increasing on the debit side.

The complete journal for August is presented in Figure 5.15 .

Once all journal entries have been created, the next step in the accounting cycle is to post journal information to the ledger. The ledger is visually represented by T-accounts. Cliff will go through each transaction and transfer the account information into the debit or credit side of that ledger account. Any account that has more than one transaction needs to have a final balance calculated. This happens by taking the difference between the debits and credits in an account.

Clip’em Cliff’s ledger represented by T-accounts is presented in Figure 5.16 .

You will notice that the sum of the asset account balances in Cliff’s ledger equals the sum of the liability and equity account balances at $83,075. The final debit or credit balance in each account is transferred to the unadjusted trial balance in the corresponding debit or credit column as illustrated in Figure 5.17 .

Once all of the account balances are transferred to the correct columns, each column is totaled. The total in the debit column must match the total in the credit column to remain balanced. The unadjusted trial balance for Clip’em Cliff appears in Figure 5.18 .

The unadjusted trial balance shows a debit and credit balance of $87,900. Remember, the unadjusted trial balance is prepared before any period-end adjustments are made.

On August 31, Cliff has the transactions shown in Table 5.3 requiring adjustment.

Adjusting Transaction 1: Cliff took an inventory of supplies and discovered that $250 of supplies remain unused at the end of the month.

• $250 of supplies remain at the end of August. The company began the month with $300 worth of supplies. Therefore, $50 of supplies were used during the month and must be recorded (300 – 250). Supplies is an asset that is decreasing (credit).
• Supplies is a type of prepaid expense, that when used, becomes an expense. Supplies Expense would increase (debit) for the $50 of supplies used during August.

Adjusting Transaction 2: The equipment purchased on August 3 depreciated $2,500 during the month of August.

• Equipment cost of $2,500 was allocated during August. This depreciation will affect the Accumulated Depreciation–Equipment account and the Depreciation Expense–Equipment account. While we are not doing depreciation calculations here, you will come across more complex calculations, such as depreciation in Long-Term Assets .
• Accumulated Depreciation–Equipment is a contra asset account (contrary to Equipment) and increases (credit) for $2,500.
• Depreciation Expense–Equipment is an expense account that is increasing (debit) for $2,500.

Adjusting Transaction 3: Clip’em Cliff performed $1,100 of services during August for the customer from the August 14 transaction.

• The customer from the August 14 transaction gave the company $3,200 in advanced payment for services. By the end of August the company had earned $1,100 of the advanced payment. This means that the company still has yet to provide $2,100 in services to that customer.
• Since some of the unearned revenue is now earned, Unearned Revenue would decrease. Unearned Revenue is a liability account and decreases on the debit side.
• The company can now recognize the $1,100 as earned revenue. Service Revenue increases (credit) for $1,100.

Adjusting Transaction 4: Reviewing the company bank statement, Clip’em Cliff identifies $350 of interest earned during the month of August that was previously unrecorded.

• Interest is revenue for the company on money kept in a money market account at the bank. The company only sees the bank statement at the end of the month and needs to record as received interest revenue reflected on the bank statement.
• Interest Revenue is a revenue account that increases (credit) for $350.
• Since Clip’em Cliff has yet to collect this interest revenue, it is considered a receivable. Interest Receivable increases (debit) for $350.

Adjusting Transaction 5: Unpaid and previously unrecorded income taxes for the month are $3,400.

• Income taxes are an expense to the business that accumulate during the period but are only paid at predetermined times throughout the year. This period did not require payment but did accumulate income tax.
• Income Tax Expense is an expense account that negatively affects equity. Income Tax Expense increases on the debit side.
• The company owes the tax money but has not yet paid, signaling a liability. Income Tax Payable is a liability that is increasing on the credit side.

The summary of adjusting journal entries for Clip’em Cliff is presented in Figure 5.19 .

Now that all of the adjusting entries are journalized, they must be posted to the ledger. Posting adjusting entries is the same process as posting the general journal entries. Each journalized account figure will transfer to the corresponding ledger account on either the debit or credit side as illustrated in Figure 5.20 .

We would normally use a general ledger, but for illustrative purposes, we are using T-accounts to represent the ledgers. The T-accounts after the adjusting entries are posted are presented in Figure 5.21 .

You will notice that the sum of the asset account balances equals the sum of the liability and equity account balances at $80,875. The final debit or credit balance in each account is transferred to the adjusted trial balance, the same way the general ledger transferred to the unadjusted trial balance.

The next step in the cycle is to prepare the adjusted trial balance. Clip’em Cliff’s adjusted trial balance is shown in Figure 5.22 .

The adjusted trial balance shows a debit and credit balance of $94,150. Once the adjusted trial balance is prepared, Cliff can prepare his financial statements (step 7 in the cycle). We only prepare the income statement, statement of retained earnings, and the balance sheet. The statement of cash flows is discussed in detail in Statement of Cash Flows .

To prepare your financial statements, you want to work with your adjusted trial balance.

Remember, revenues and expenses go on an income statement. Dividends, net income (loss), and retained earnings balances go on the statement of retained earnings. On a balance sheet you find assets, contra assets, liabilities, and stockholders’ equity accounts.

The income statement for Clip’em Cliff is shown in Figure 5.23 .

Note that expenses were only $25 less than revenues. For the first month of operations, Cliff welcomes any income. Cliff will want to increase income in the next period to show growth for investors and lenders.

Next, Cliff prepares the following statement of retained earnings ( Figure 5.24 ).

The beginning retained earnings balance is zero because Cliff just began operations and does not have a balance to carry over to a future period. The ending retained earnings balance is –$125. You probably never want to have a negative value on your retained earnings statement, but this situation is not totally unusual for an organization in its initial operations. Cliff will want to improve this outcome going forward. It might make sense for Cliff to not pay dividends until he increases his net income.

Cliff then prepares the balance sheet for Clip’em Cliff as shown in Figure 5.25 .

The balance sheet shows total assets of $80,875, which equals total liabilities and equity. Now that the financial statements are complete, Cliff will go to the next step in the accounting cycle, preparing and posting closing entries. To do this, Cliff needs his adjusted trial balance information.

Cliff will only close temporary accounts, which include revenues, expenses, income summary, and dividends. The first entry closes revenue accounts to income summary. To close revenues, Cliff will debit revenue accounts and credit income summary.

The second entry closes expense accounts to income summary. To close expenses, Cliff will credit expense accounts and debit income summary.

The third entry closes income summary to retained earnings. To find the balance, take the difference between the income summary amount in the first and second entries (10,650 – 10,625). To close income summary, Cliff would debit Income Summary and credit Retained Earnings.

The fourth closing entry closes dividends to retained earnings. To close dividends, Cliff will credit Dividends, and debit Retained Earnings.

Once all of the closing entries are journalized, Cliff will post this information to the ledger. The closed accounts with their final balances, as well as Retained Earnings, are presented in Figure 5.26 .

Now that the temporary accounts are closed, they are ready for accumulation in the next period.

The last step for the month of August is step 9, preparing the post-closing trial balance. The post-closing trial balance should only contain permanent account information. No temporary accounts should appear on this trial balance. Clip’em Cliff’s post-closing trial balance is presented in Figure 5.27 .

At this point, Cliff has completed the accounting cycle for August. He is now ready to begin the process again for September, and future periods.

Concepts In Practice

Reversing entries.

One step in the accounting cycle that we did not cover is reversing entries. Reversing entries can be made at the beginning of a new period to certain accruals. The company will reverse adjusting entries made in the prior period to the revenue and expense accruals.

It can be difficult to keep track of accruals from prior periods, as support documentation may not be readily available in current or future periods. This requires an accountant to remember when these accruals came from. By reversing these accruals, there is a reduced risk for counting revenues and expenses twice. The support documentation received in the current or future period for an accrual will be easier to match to prior revenues and expenses with the reversal.

Link to Learning

As we have learned, the current ratio shows how well a company can cover short-term debt with short-term assets. Look through the balance sheet in the 2017 Annual Report for Target and calculate the current ratio. What does the outcome mean for Target ?

Think It Through

Using liquidity ratios to evaluate financial performance.

You own a landscaping business that has just begun operations. You made several expensive equipment purchases in your first month to get your business started. These purchases very much reduced your cash-on-hand, and in turn your liquidity suffered in the following months with a low working capital and current ratio.

Your business is now in its eighth month of operation, and while you are starting to see a growth in sales, you are not seeing a significant change in your working capital or current ratio from the low numbers in your early months. What could you attribute to this stagnancy in liquidity? Is there anything you can do as a business owner to better these liquidity measurements? What will happen if you cannot change your liquidity or it gets worse?

As an Amazon Associate we earn from qualifying purchases.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution-NonCommercial-ShareAlike License and you must attribute OpenStax.

Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters

• Authors: Mitchell Franklin, Patty Graybeal, Dixon Cooper
• Publisher/website: OpenStax
• Book title: Principles of Accounting, Volume 1: Financial Accounting
• Publication date: Apr 11, 2019
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters
• Section URL: https://openstax.org/books/principles-financial-accounting/pages/5-4-appendix-complete-a-comprehensive-accounting-cycle-for-a-business

© Dec 13, 2023 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.