TGS Year 2 Financial Statement Preparation

Introduction to TGS Year 2
The Garden Spot Year 2

• Mary Jo just completed her second year of operation
• Several things happened during the year
• We have:
 recorded transactions
 prepared an income statement for the second year of
operations
 prepared a balance sheet as of the end of the second year
• We need to prepare a statement of cash flow for the
second year
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TGS Year 2: Transactions 1-7
Case: The Garden Spot Year 2

• Mary Jo just completed her second year of operations
• Several things happened during the year that Mary Jo needed to
account for
 Some transactions were similar to those she encountered in her first year of
operations
 Some transactions were things she had not encountered, but based on her
knowledge of accounting she had developed from year 1, she could figure out how
to handle them
 Some transactions were things she had not encountered, and she would probably
need some help in how to record them
• She needs to prepare financial statements for the second year
Transaction 1
Mary Jo’s colleague, Jake Lawrence, invested $20,000 in The Garden Spot in exchange for shares
of common stock.
Cash (A) (inc) $20,000

Capital Stock (OE) (inc) $20,000
Cash (A) Capital Stock (OE)

BB 3,010 60,000 BB
(1) 20,000 20,000 (1)
Transaction 2
Company purchased parcel of land adjacent to their property on July 1 for $100,000. Company
financed purchase with $90,000 loan from National Bank, paying remaining $10,000 with cash.
Loan was to be repaid in equal principal payments over ten years. Interest rate was 8%, and
interest was payable at end of each year when principal payment was made.
Land (A) (inc) $100,000
Cash (A) (dec) $10,000
Loan Payable for Land (L) (inc) $90,000
Cash (A) Land (A) Loan Payable for Land (L)

BB 3,010 BB 0 0 BB
(1) 20,000 10,000 (2) (2) 100,000 90,000 (2)
Transaction 3
Purchases of inventory throughout the year costing $310,000, $240,000 of which was paid in cash
and $70,000 was purchased on account.
Inventory (A) (inc) $310,000

Cash (A) (dec) $240,000
Accounts Payable (L) (inc) $70,000
Cash (A) Inventory (A) Accounts Payable (L)

BB 3,010 BB 20,000 25,000 BB
(1) 20,000 10,000 (2) (3) 310,000 70,000 (3)

240,000 (3)
Transaction 4
Sales of $500,000, $400,000 of which were cash sales and $100,000 of which were sales on
account. The inventory sold had originally cost a total of $300,000.
Cash (A) (inc) $400,000

Accounts Receivable (A) (inc) $100,000
Retained Earnings (OE) (revenues) (inc) $500,000
Cash (A) Accounts Receivable (A) Retained Earnings (OE)

BB 3,010 BB 85,000 5,610 BB
(1) 20,000 10,000 (2) (4a) 100,000 500,000 (4a) Revenues

(4a) 400,000 240,000 (3)
Transaction 4
Sales of $500,000, $400,000 of which were cash sales and $100,000 of which were sales on
account. The inventory sold had originally cost a total of $300,000.
Retained Earnings (OE) (COGS) (dec) $300,000

Inventory (A) (dec) $300,000
Inventory (A) Retained Earnings (OE)

BB 20,000 5,610 BB
(3) 310,000 300,000 (4b) COGS (4b) 300,000 500,000 (4a) Revenues
Transaction 5
Incurred operating expenses of $150,000, all paid in cash.
Retained Earnings (OE) (operating expenses) (dec) $150,000

Cash (A) (dec) $150,000
Cash (A) Retained Earnings (OE)

BB 3,010 5,610 BB
(1) 20,000 10,000 (2) COGS (4b) 300,000 500,000 (4a) Revenues
(4a) 400,000 240,000 (3) Op Exp (5) 150,000
150,000 (5)
Transaction 6
Made payment to National Bank $13,000, $10,000 of which was for repayment of the loan
principal and $3,000 of which was for payment of interest. These payments were related to the
loan the company had obtained on January 1 of its first year of operation.
Loan Payable (L) (dec) $10,000
Retained Earnings (OE) (interest expense) (dec) $3,000
Cash (A) (dec) $13,000
Cash (A) Loan Payable (L) Retained Earnings (OE)

BB 3,010 30,000 BB 5,610 BB
(1) 20,000 10,000 (2) (6) 10,000 40,000 (2) COGS (4b) 300,000 500,000 (4a) Revenues
(4a) 400,000 240,000 (3) Op Exp (5) 150,000
150,000 (5) Int Exp (6) 3,000
13,000 (6)
Transaction 7
As planned, the $5,000 of wages payable from the prior December were included in employees’
paychecks in January of the current year. Payment for all work that employees did in December of
the current year was included in employees’ paychecks during December.
Wages Payable (L) (dec) $5,000
Cash (A) (dec) $5,000
Cash (A) Wages Payable (L)

BB 3,010 5,000 BB
(1) 20,000 10,000 (2) (7) 5,000

(4a) 400,000 240,000 (3)
150,000 (5)
13,000 (6)
5,000 (7)
TGS Year 2: Transactions 8-11
Transaction 8
Collections from customers on account totaled $60,000 during the year.
Cash (A) (inc) $60,000

Accounts Receivable (A) (dec) $60,000
Cash (A) Accounts Receivable (A)

BB 3,010 BB 85,000
(1) 20,000 10,000 (2) (4a) 100,000 60,000 (8)

(4a) 400,000 240,000 (3)
(8) 60,000 150,000 (5)
13,000 (6)
5,000 (7)
Transaction 9
On July 1, Mary Jo paid $5,000 to a local marketing firm for a series of ads that would run through
June 30 of the following year.
Prepaid Advertising (A) (inc) $5,000
Cash (A) (dec) $5,000
Cash (A) Prepaid Advertising (A)

BB 3,010 BB 0
(1) 20,000 10,000 (2) (9) 5,000

(4a) 400,000 240,000 (3)
(8) 60,000 150,000 (5)
13,000 (6)
5,000 (7)
5,000 (9)
Transaction 10
The amount the company still owed to suppliers as of December 31 totaled $35,000.
Accounts Payable (L) (dec) $60,000

Cash (A) (dec) $60,000
Cash (A) Accounts Payable (L)

BB 3,010 25,000 BB
(1) 20,000 10,000 (2) (10) 60,000 70,000 (3)

(4a) 400,000 240,000 (3)
(8) 60,000 150,000 (5)
13,000 (6)
5,000 (7) 35,000 EB
5,000 (9)
60,000 (10)
Transaction 11
In November, the company received a $10,000 deposit from a customer for plants to be delivered
the following February.
Cash (A) (inc) $10,000
Deferred Revenue (L) (inc) $10,000
Cash (A) Deferred Revenue (L)

BB 3,010 0 BB
(1) 20,000 10,000 (2) 10,000 (11)

(4a) 400,000 240,000 (3)
(8) 60,000 150,000 (5)
(11) 10,000 13,000 (6)
5,000 (7)
5,000 (9)
60,000 (10)
TGS Year 2:
Transactions 12-16
Transaction 12
In November, the company signed a contract with a customer for $20,000 of plants to be delivered
the following February.
No Entry
Transaction 13
In reviewing the list of customers that still owed the company, Mary Jo recalled a conversation she
had with one of those customers, who owed The Garden Spot $2,000, during which the customer
discussed challenges he was facing in paying bills. Mary Jo did not think The Garden Spot would be
able to collect the $2,000.
Retained Earnings (OE) (bad debt expense) (dec) $2,000

Accounts Receivable (A) (dec) $2,000
Accounts Receivable (A) Retained Earnings (OE)

BB 85,000 5,610 BB
(4a) 100,000 60,000 (8) COGS (4b) 300,000 500,000 (4a) Revenues
2,000 (13) Op Exp (5) 150,000
Int Exp (6) 3,000
BDE (13) 2,000
Transaction 14
On January 1, Mary Jo had sold some of the equipment for $600 cash. The equipment that was
sold had originally cost $1,000 and had a net book value of $800 at the time of sale ($200 in
depreciation for this equipment had been recorded in Year 1).
Cash (A) (inc) $600
Retained Earnings (OE) (loss on sale of equipment) (dec) $200
Equipment (A) (dec) $800
Cash (A) Retained Earnings (OE)
Equipment (A)
BB 3,010
BB 0 5,610 BB
(1) 20,000 10,000 (2)
(4) 10,000 2,000 (10) COGS (4b) 300,000 500,000 (4a) Revenues
(4a) 400,000 240,000 (3)
800 (14) Op Exp (5) 150,000
(8) 60,000 150,000 (5)
13,000 (6) Int Exp (6) 3,000
5,000 (7) BDE (13) 2,000
5,000 (9) Loss (14) 200
60,000 (10)
Transaction 15
In December, Mary Jo was approached by a real estate developer, who offered her $120,000 for
the land she had purchased at the beginning of the year. She decided not to sell the property, but
was pleased that the land she had bought had appreciated so quickly and was now worth more
than she had paid for it.
No Entry
Transaction 16
On December 31, the company declared that it would pay dividends of $8,000 on January 31 of
the following year.
Transaction 16
On December 31, the company declared that it would pay dividends of $8,000 on January 31 of
the following year.
Retained Earnings (OE) (dividends) (dec) $8,000
Dividends Payable (L) (inc) $8,000
Dividends Payable (L) Retained Earnings (OE)
0 BB 5,610 BB
8,000 (16) COGS (4b) 300,000 500,000 (4a) Revenues

Op Exp (5) 150,000
Int Exp (6) 3,000
BDE (13) 2,000
Loss (14) 200
Divs (16) 8,000
TGS Year 2:
Transactions 17-22
Transaction 17
Did she need to record depreciation on truck and equipment? She recalled doing do during her first
year of operations.
Retained Earnings (OE) (depreciation expense) (dec) $4,400
Truck (A) (dec) $2,400
Equipment (A) (dec) $1,800
Retained Earnings (OE)
Truck (A) Equipment (A) 5,610 BB
BB 9,600 BB 8,000 COGS (4b) 300,000 500,000 (4a) Revenues

200 (14) Op Exp (5) 150,000
2,400 (17) 1,800 (17) Int Exp (6) 3,000
BDE (13) 2,000
Loss (14) 200
Dep Exp (17) 4,200
Divs (16) 8,000
Transaction 18
Did she need to record depreciation on the land she had purchased during the year?
No Entry
Transaction 19
Did she need to record any interest expense on the loan she had obtained to help finance the
purchase of the land?
Retained Earnings (OE) (interest expense) (dec) $3,600
Interest Payable (L) (inc) $3,600
Interest Payable (L) 5,610 BB
0 BB
COGS (4b) 300,000 500,000 (4a) Revenues
Op Exp (5) 150,000
3,600 (19)
Int Exp (6) 3,000
BDE (13) 2,000
Loss (14) 200
Dep Exp (17) 4,200
Int Exp (19) 3,600
Divs (15) 8,000
Transaction 20
Did she need to make any adjustments to the prepaid advertising account?
Retained Earnings (OE) (advertising expense) (dec) $2,500
Prepaid Advertising (A) (dec) $2,500
5,610 BB
Prepaid Advertising (A)
COGS (4b) 300,000 500,000 (4a) Revenues
BB 0 Op Exp (5) 150,000
Int Exp (6) 3,000
(9) 5,000 2,500 (20) BDE (13) 2,000
Loss (14) 200
Dep Exp (17) 4,200
Int Exp (19) 3,600
Ad Exp (20) 2,500
Divs (16) 8,000
Transaction 21
Did she need to make any adjustments to the deferred revenue account?
No Entry
Transaction 22
Did she need to record anything related to this year’s income taxes? The company’s income tax
rate was 15%, but Mary Jo wouldn’t pay the current year’s income taxes until April 15.
Retained Earnings (OE) (tax expense) (dec) $5,175 Retained Earnings (OE)
Taxes Payable (L) (inc) $5,175 5,610 BB
Taxes Payable (L) COGS (4b) 300,000 500,000 (4a) Revenues

Op Exp (5) 150,000
0 BB
Int Exp (6) 3,000
5,175 (22) BDE (13) 2,000
Loss (14) 200
Dep Exp (17) 4,200
Int Exp (19) 3,600
Ad Exp (20) 2,500
Tax Exp (22) 5,175
Divs (16) 8,000
TGS Year 2:
The Financial Statements
The Income
Statement for Year 2
5,610 BB Revenues 500,000
COGS (4b) 300,000 500,000 (4a) Revenues COGS 300,000

Op Exp (5) 150,000 Operating Expenses 150,000
Int Exp (6) 3,000
Interest Expense 7,600
BDE (13) 2,000
Loss (14) 200 Bad Debt Expense 2,000
Dep Exp (17) 4,200
Depreciation Expense 4,200
Int Exp (19) 3,600
Ad Exp (20) 2,500 Advertising Expense 2,500
Tax Exp (22) 5,175 Loss on Sale of Equipment 200
Tax Expense 5,175
Divs (16) 8,000
Net Earnings 29,325
26,935 EB
The Balance Sheet Assets:

Cash 10,610
at End of Year 2 Accounts receivable

Inventory
123,000
30,000
Prepaid advertising 2,500
Cash (A) PP&E 112,600
Total assets 278,710
BB 3,010
Liabilities:
(1)
20,000 10,000 (2) Accounts payable 35,000
Wages payable 0
(4a)
400,000 240,000 (3)
Interest payable 3,600
(8)
60,000 150,000 (5) Dividends payable 8,000
(12)
10,000 13,000 (6) Taxes payable 5,175
(14) 600 5,000 (7) Deferred revenue 10,000
Loan payable 20,000
5,000 (9)
Loan payable for land 90,000
60,000 (10) Total liabilities 171,775
EB 10,610
Owners’ equity:
Capital stock 80,000
Retained earnings 26,935
Total owners’ equity 106,935
Total liabilities and owners’ equity 278,710
The Second Year at the Garden Spot
Jan 1 During the Year Dec 31
Income Statement
Balance Sheet Revenues Balance Sheet
A L A L
-Expenses
Cash Cash
=Net Earnings
OE OE
RE RE
Assets: Beg End

Cash 3,010 10,610
Operating Activities:
Accounts receivable 85,000 123,000
Net income
Inventory 20,000 30,000
+ depreciation Prepaid advertising 0 2,500
- Increase in AR PP&E 17,600 112,600
- Increase in inventory
Total assets 125,610 278,710
- Increase in prepaid advertising
- Increase in AP
- Decrease in wages payable Liabilities:
- Increase in dividends payable Accounts payable 25,000 35,000
- Increase in interest payable Wages payable 5,000 0
- Increase in deferred revenue Interest payable 0 3,600
CFO
Dividends payable 0 8,000
Investing Activities: Taxes payable 0 5,175
- Purchase of land Deferred revenue 0 10,000
CFI Loan payable 30,000 20,000
Loan payable for land 0 90,000
Financing Activities:
- Proceeds from issuing stock Total liabilities 60,000 171,775
- Proceeds from loan for land
- Repayment of loan principal Owners’ equity:
CFF Capital stock 60,000 80,000
Retained earnings 5,610 26,935
ΔCash
Total owners’ equity 65,610 106,935
Total liabilities and owners’ equity 125,610 278,710
Financial Statement Framework
Beginning End
of Period of Period
Income Statement
Revenues
Balance Sheet -Expenses Balance Sheet

A L A L
Cash =Net Earnings Cash
OE Change in Cash OE
RE Statement of Cash Flow Dividends RE

TGS Year 2 Financial Statement Preparation

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Introduction to TGS Year 2

The Garden Spot Year 2

Case: The Garden Spot Year 2

Cash (A) (inc) $20,000

Cash (A) Capital Stock (OE)

(1) 20,000 20,000 (1)

Cash (A) Land (A) Loan Payable for Land (L)

(1) 20,000 10,000 (2) (2) 100,000 90,000 (2)

Inventory (A) (inc) $310,000

Cash (A) Inventory (A) Accounts Payable (L)

(1) 20,000 10,000 (2) (3) 310,000 70,000 (3)

Cash (A) (inc) $400,000

Cash (A) Accounts Receivable (A) Retained Earnings (OE)

(1) 20,000 10,000 (2) (4a) 100,000 500,000 (4a) Revenues

Retained Earnings (OE) (COGS) (dec) $300,000

Inventory (A) Retained Earnings (OE)

Retained Earnings (OE) (operating expenses) (dec) $150,000

Cash (A) Retained Earnings (OE)

Cash (A) Loan Payable (L) Retained Earnings (OE)

Cash (A) Wages Payable (L)

(1) 20,000 10,000 (2) (7) 5,000

Cash (A) (inc) $60,000

Cash (A) Accounts Receivable (A)

(1) 20,000 10,000 (2) (4a) 100,000 60,000 (8)

Cash (A) Prepaid Advertising (A)

(1) 20,000 10,000 (2) (9) 5,000

Accounts Payable (L) (dec) $60,000

Cash (A) Accounts Payable (L)

(1) 20,000 10,000 (2) (10) 60,000 70,000 (3)

Cash (A) Deferred Revenue (L)

(1) 20,000 10,000 (2) 10,000 (11)

Retained Earnings (OE) (bad debt expense) (dec) $2,000

Accounts Receivable (A) Retained Earnings (OE)

Dividends Payable (L) Retained Earnings (OE)

8,000 (16) COGS (4b) 300,000 500,000 (4a) Revenues

Divs (16) 8,000

Truck (A) Equipment (A) 5,610 BB

BB 9,600 BB 8,000 COGS (4b) 300,000 500,000 (4a) Revenues

Divs (16) 8,000

Divs (15) 8,000

Divs (16) 8,000

Taxes Payable (L) COGS (4b) 300,000 500,000 (4a) Revenues

Divs (16) 8,000

COGS (4b) 300,000 500,000 (4a) Revenues COGS 300,000

The Balance Sheet Assets:

at End of Year 2 Accounts receivable

Jan 1 During the Year Dec 31

Assets: Beg End

Balance Sheet -Expenses Balance Sheet

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