Participation Questions Chap.

3 due 2/8/15
Which publicly traded Company is used as an example in class for the revenue recognition principle?

Apple Computers, JC Penney, Sears, or Walmart

The second example for the revenue recognition principle discusses Calvin actually taking a cruise in
which month?

April 2013, November 2012, March 2013, or May 2013

Which depreciation method did we discuss for the $24,000 in Equipment purchased by Eagle Golf
Academy, where the depreciation expense equals $1,000 per month if the useful life of the equipment is
24 months?

Straight-line, Double declining balance, or Activity based depreciation

After all of the adjusting entries were completed for Eagle Golf Academy and the Income statement was
prepared, was the income for Golf Eagle positive or negative?

Positive or Negative
The example of Eagle Golf Academy showed that companies can pay dividends even when there is a net
loss for the month.

True or False

Announcements 1/29/15

Handout for todayChapter 3 PowerPoints Pg. 76 & Chapter 1 3 Review PowerPoint pg. 18 (Also, in the
Class Materials under Chapter 3 handout).

Assignments

Due 2/1/15
Homework Assignment #2 (Connect) unlimited attempts
Participation Questions for Chapter #2 questions (Webcourses) 1 attempt
Definitions Quiz (Webcourses) 2 attempts

Due 2/8/15
Chapter 3 Homework (Connect) unlimited attempts
Participation questions for Chapter 3 (Webcourses) 1 attempt
Accounting Cycle Project (Connect) unlimited attempts.
This assignment will take extra time 2 to 3 hours, plan accordingly.

Exam 1 February 9-11 @ CBA Testing Center BA2 room #104

Learn Smart 5 points Extra Credit for Block 1 ends February 11th at 11:59 PM

Announcements 2/3/15

Handout for todayChapter 3 PowerPoints Pg. 94 & Review PowerPoint pg. 18

Assignments

Due 2/8/15
Chapter 3 Homework (Connect) unlimited attempts
Participation questions for Chapter 3 (Webcourses) 1 attempt
Accounting Cycle Project (Connect) unlimited attempts.
This assignment will take extra time 2 to 3 hours, plan accordingly.

Due 2/15/15
SEC Financial Statement Project (Webcourses) 1 attempt

Exam 1 February 9-11 @ CBA Testing Center BA2 room #104

Learn Smart 5 points Extra Credit for Block 1 ends February 11th at 11:59 PM

Exam Review session during regular class time on 2/5/14

Questions to be Answered
Overall - What is financial reportings role
in todays American society?
Chapter 3 Once we have all of the
transactions aggregated, how do we
communicate this information to decisionmakers?

3-5

Chapter 03
The Financial Reporting
Process
PART A - Accrual-Basis
Accounting
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

LO1 Revenue and Expense Reporting

Accrual-basis accounting records revenues when
earned (the revenue recognition principle) and
expenses with related revenues (the matching
principle).

3-7

Revenue Recognition Principle

When to record

Amount to record

After revenue is
earned:
When good or
service has been
delivered to
customer

Cash value of
goods or
services
transferred to
customer

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

Walmart
Statement of Income

Walmart Revenue Recognition

Sales
Walmart recognizes sales revenue, net of sales taxes and estimated
sales returns, at the time it sells merchandise to the customer.
Membership Fee Revenue
Walmart recognizes membership fee revenue both in the United States
and internationally over the term of the membership, which is typically
12 months.
Membership fee revenue is included in membership and other income
in Walmart's Consolidated Statements of Income. The deferred
membership fee is included in accrued liabilities in Walmart's
Consolidated Balance Sheets.
Shopping Cards
Customer purchases of shopping cards are not recognized as revenue
until the card is redeemed and the customer purchases merchandise
using the shopping card

Revenue Recognition Principle

Recognize revenue when it is earned
Calvin books a cruise with Carnival Cruise Lines,
the worlds largest cruise line. He makes
reservations and pays for the cruise in November
2014, but the cruise is not scheduled to sail until
April 2015.
When does Carnival report revenue from the
ticket sale?
3-11

Revenue Recognition Principle

1. In November 2014???
No.
Because it has not substantially fulfilled its obligation
to Calvin.
2. In April 2015???
Yes.
Because it is in April 2015 that the cruise occurs.
3-12

Revenue Recognition Principle

Suppose that, anticipating the cruise, Calvin buys
a Jimmy Buffet CD from Best Buy.
Rather than paying cash, Calvin uses his Best
Buy card to buy the CD on account.
When does Best Buy recognize revenue?

3-13

3-13

Revenue Recognition Principle

Even though Best Buy doesnt receive cash
immediately from Calvin, it still records the
revenue at the time it sells the CD.

3-14

3-14

Matching Principle
Recognize expenses in the same period as the
revenue they help generate.

3-15

3-15

Matching Principle

Identify
expenses
incurred

Measure the
expenses

Match against
revenues
earned

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

16

LO2 AccrualBasis Compared with

CashBasis Accounting

There are no receivables or payables in the cash basis of accounting.

3-18

Special Bonus Material

What is an extroverted accountant like?

Hell look at your shoes while talking to you instead of his own.
Two accountants are in a bank when armed robbers burst in. While several of the
robbers take the money from the tellers, others line the customers up against a
wall and proceed to take their wallets, watches, and other valuables. In the midst
of the chaos, accountant No. 1 jams something in accountant No. 2s hand.
Without looking down, accountant No. 2 whispers, "What is this?" to which
accountant number one replies, "It's that $50 I owe you."
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Part B The Measurement Process

LO3 Adjusting Entries

Closing Process

Reporting Process

3-21

3-21

External Transactions of Eagle Golf Academy

Page 43

2-22

Unadjusted Trial Balance of Eagle Golf Academy

2-23

Purpose of Adjusting Entries

To record events that have occurred but we have not
yet recorded.
To record revenues in the period earned.
To record expenses in the period they are incurred in the
generation of those revenues.
Financial statements issued at end of period

Several accounts on unadjusted trial balance need to be brought upto-date

3-24

3-24

Adjusting Entries - Classifications

Prepayments:

Prepaid expenses we paid cash (or had an obligation to pay cash) for
the purchase of an asset before we incurred the expense.

Depreciation - The process of allocating the cost of plant assets to

expense over estimated useful lives

Unearned revenues we received cash and recorded a liability before we

earned the revenue.

Accruals:

Accrued expenses we paid cash after we incurred the expense and

recorded a liability.

Accrued revenues we received cash after we earned the revenue and

recorded an asset.
3-25

3-25

Prepayments - Prepaid Expenses

Costs of assets acquired in one period that will be
expensed in a future period.
Business has paid cash first before the asset was used to
generate revenue
Examples: Purchase of equipment or supplies, payment of
rent in advance, payment of insurance in advance.
Adjusting Entry:
Debit expense account (increase an expense)
Credit asset account (decrease an asset)
3-26

3-26

Prepaid Expenses - Future Benefit

Recorded as assets when purchased

JOURNAL
Date

Accounts and explanation

Jan 1

Prepaid rent

Debit
6,000

Cash

Jan 6

Supplies
Cash

Credit

6,000

2,300
2,300

Example: Prepaid Rent

$6,000
Cash paid for
prepaid rent
Jan. 1

$5,500
Remaining
prepaid rent
Jan. 31
Prepaid rent
expires
$500

Adjusting
entry

3-28

3-28

Example: Supplies
$2,300
Cash paid for
Supplies
Jan. 6

$1,100
Supplies
On-hand
Jan. 31
Supplies used
during January
$1,200

Adjusting
entry

3-29

3-29

Prepaid Expenses - Benefit Received

Expensed when expired or used

JOURNAL

Date

Accounts and explanation

Jan 31

Rent expense

Debit

Credit
500

Prepaid rent

Jan 31

Supplies expense
Supplies

500

1,200
1,200

Prepaid Rent

Jan 1

Prepaid rent
$6,000 $500

Jan 31

Jan 31

Rent expense
$500

$5,500
Amount
remaining

Amount expired

Balance
Sheet

Income
Statement

Supplies

Jan 6

Supplies
$2,300 $1,200

Jan 31

Jan 31

Supplies expense
$1,200

$1,100
Amount on hand

Amount used

Balance
Sheet

Income
Statement

Prepayments - Depreciation Expense

As the Asset is used, the cost is transferred

to
Depreciation
Expense

Matching
principle
Examples of plant assets:

Buildings, Equipment, Furniture

Accumulated Depreciation

Sum of all depreciation expense

Increases over plant assets life
Contra-asset
Normal credit balance
Always has a companion account
Normal balance is opposite the companion account
Book value
Cost of plant asset less accumulated depreciation

Apartment Investment
& Management (AIV)

AIV Income Statement

Depreciation Equipment has a useful life of

24 months Straight-line Depreciation
JOURNAL
Date

Accounts and explanation

Jan 1

Equipment

Debit
24,000

Cash

Jan 31

Depreciation expense
Accumulated depreciation

Credit

24,000

1,000
1,000

Depreciation Straight Line

Equipment
Jan 1

$24,000

Jan 31

Balance
Sheet

Accumulated Depreciation
$1,000 Jan 31

Depreciation Expense
$1,000
Income
Statement

Book Value
Balance Sheet
January 31, 2012
Equipment
Less: Accumulated Depreciation
Book value

$24,000
(1,000)
$23,000

Prepayments - Unearned Revenues

Received cash first from customer before revenue
is earned.

Once a company has provided products or services,

they can record revenue earned and reduce the
obligation to the customer. Recorded as a liability when
payment is received

Adjusting entry:
Debit liability account (decrease a liability)
Credit revenue account (increase a revenue)
3-40

3-40

Southwest Airlines
Revenue recognition
Tickets sold for Passenger air travel are
initially deferred as Air traffic liability.
Passenger revenue is recognized and Air
traffic liability is reduced when the service
is provided (i.e., when the flight takes
place). Air traffic liability primarily
represents tickets sold for future travel
dates and estimated future refunds and
exchanges of tickets sold for past travel
dates. The balance in Air traffic liability,
which includes a portion of the Companys
liability associated with its frequent flyer
program, fluctuates throughout the year
based on seasonal travel patterns, fare
sale activity, and activity associated with
the Companys frequent flyer programs.
3-41

Unearned Revenue - Cash Received

for 10 golf lessons

Receive cash before revenue is earned

Creates a liability

Business owes customer a good or service

Business has to repay cash received from

customer if good/service not delivered
JOURNAL

Date

Accounts and explanation

Jan 23

Cash
Unearned revenue

Debit

Credit
600
600

Example: Unearned Training Revenue

$?
Unearned
revenue
remains
Jan. 31

$600
Cash
received in
advance
Jan. 26

Services
provided
2 Lessons

Adjusting
entry

3-43

3-43

Unearned Revenue - Good/Service Delivered

(2 golf lessons taken)
When revenue is earned (i.e. good/service delivered)
Liability for unearned revenue is reduced
Revenue is increased
JOURNAL
Date
Jan 31

Accounts and explanation

Unearned Revenue
Service Revenue

Debit

Credit
120
120

Adjusting Entries - Classifications

Prepayments:

Prepaid expenses we paid cash (or had an obligation to pay cash) for
the purchase of an asset before we incurred the expense.

Depreciation - The process of allocating the cost of plant assets to

expense over estimated useful lives

Unearned revenues we received cash and recorded a liability before we

earned the revenue.

Accruals:

Accrued expenses we paid cash after we incurred the expense and

recorded a liability.

Accrued revenues we received cash after we earned the revenue and

recorded an asset.
3-45

3-45

Accrued Expenses
Record before paying cash
When a company has incurred an expense but hasnt
yet paid cash or recorded an obligation to pay, it still
should record the expense.
Examples: Accrued salaries, accrued interest.

Adjusting entry:
Debit expense account (increase an expense)
Credit liability account (increase a liability)
3-46

3-46

Accrued Salaries
$2,800 weekly salaries

$1,680
1-29
Monday

1-30
Tuesday

1-31
Wednesday

$1,120

2-1
Thursday

2-2
Friday

JOURNAL
Date

Accounts and explanation

Jan 31

Salaries expense
Salaries payable

Debit

Credit

1,680
1,680

Example: Accrued Interest

Costs
$100
Interest
owed
Jan. 31

Jan. 1

Bank Loan
$10,000

Interest $100

$100
Cash paid
for Interest
Feb 15

Adjusting
entry

3-48

3-48

Interest Calculation Pg 90

3-49

3-49

Example: Accrued Interest Costs

JOURNAL
Date

Accounts and explanation

Jan 31

Interest Expense

Debit

Credit
100

Interest Payable

100

3-50

3-50

Accrued Revenues
When a company has earned revenue but hasnt yet
received cash or recorded an amount receivable, it still
should record the revenue. This is referred to as an
accrued revenue.
Examples: Interest receivable,
Adjusting entry:
Debit asset account (increase an asset)
Credit revenue account (increase a revenue)
3-51

3-51

Summary of the Adjusting

Process

Two purposes of adjusting process

Measure income (Revenues and

Expenses)
Update balance sheet

Every adjusting entry affects at least

one:

Revenue or expense
Asset or liability

Prepaids and Accruals PREPAIDS CASH FIRST

FIRST

LATER

Prepaid
expenses

Prepaid expense

Expense

Unearned
revenues

Cash

Cash

Prepaid expense
Unearned revenue

Unearned revenue

Revenue

ACCRUALS CASH LATER

FIRST

LATER

Accrued
expenses

Expense

Payable

Accrued
revenues

Receivable

Payable

Revenue

Cash
Cash
Receivable

Summary of Adjusting Entries

Recording the Adjustment
Category of Adjustment

Debit

Credit

Prepaid expense

Expense

Asset

Depreciation
Accrued expense

Expense
Expense

Contra asset
Liability

Accrued revenue

Asset

Revenue

Unearned revenue

Liability

Revenue

Unadjusted Trial Balance of Eagle Golf Academy

2-55

LO4 Post Adjusting Entries

Post adjusting entries to the T-accounts in the general ledger to update

the account balances.

Prepare an adjusted trial balance.

An adjusted trial balance is a list of all accounts and their balances after
we have updated account balances for adjusting entries.

3-56

3-56

Unadjusted Trial Balance and Adjusted Trial

Balance of Eagle Golf Academy

3-57

3-57

Unadjusted Trial Balance and Adjusted Trial

Balance of Eagle Golf Academy

3-58

3-58

Part C
The Reporting Process

LO5 Financial Statements

3-60

3-60

Income Statement

3-61

3-61

Statement of Stockholders Equity

3-62

3-62

Classifying Assets & Liabilities

Classified as current or long-term term based

on liquidity (assets) or order of liquidation
(liabilities)

How quickly an item can be converted to cash

(assets) or liquidated using cash (liabilities)
Cash

Most liquid

Accounts receivable

Very liquid

Inventory

Somewhat liquid

Plant assets

Not liquid

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

63

Current assets

Converted to cash, sold or consumed

in the next year

Long-term
assets

Held for longer than one year

Includes plant assets

Current
liabilities

Must be paid within one year

Long-term
liabilities

Due date more than one year from

balance sheet date

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

Classified Balance Sheet

Categorizes and subtotals assets and

liabilities by current and long-term

Assets

Liabilities

Current assets

Current liabilities

Long-term investments

Long-term liabilities

Property, plant and equipment

Other assets

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

65

Classified Balance SheetSheet

January 31

EAGLE GOLF ACADEMY

Classified Balance

Assets

Liabilities

Current assets:
Cash

Current liabilities:
$6,200

Accounts payable

$2,300

Accounts receivable

2,700

Supplies

1,100

Salaries payable

1680

Prepaid rent

5,500

Utilities payable

960

15,500

Interest payable

100

Total current assets

Unearned revenue

480

Total current liabilities

$5,520

Long-term assets:
Equipment
Less: Accum. depr., equip.

24,000
(1,000)

Long-term liabilities:
Notes payable

3-66

10,000

3-66

Part D
The Closing Process

LO6 Closing Entries

Prepares the accounts for next period

Temporary accounts are set to zero and closed
into Retained earnings

Increase the retained earnings account by the

amount of revenues and decrease retained earnings
by the amount of expenses and dividends.
Does not affect the balances of permanent accounts
other than retained earnings.

3-68

Closing Entries (Zero out temporary accounts)

Close
Revenues
Debit each revenue account
Credit Retained earnings
Close
Expenses
Debit Retained earnings
Credit each expense account
Close Dividends
Debit Retained earnings

Credit Dividends
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

69

JOURNAL
Date

Accounts and explanation

Debit

Sales revenue

Credit

6,420

Retained earnings
Retained earnings
Supplies Expense
Rent expense

6,420
8,240
1,200
500

Depreciation expense

1,000

Salaries expense

4,480

Utilities expense

960

Interest expense

100

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

70

JOURNAL
Date

Accounts and explanation

Debit

Retained earnings
Dividends

Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

Credit
200
200

71

Close to Retained Earnings

3-72

3-72

LO7 Post Closing Entries and

Prepare PostClosing Trial Balance

3-73

3-73

Income
Statement

Statement of
Retained
Earnings

Balance
Sheet

Statement of
Cash Flows

Accounting Equation: Assets = Liabilities +

Owners Equity

GAAP (Rules) formulated by FASB

Principles
Revenue Recognition
Matching Principle
Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

3-76

3-77

3-78

3-79

3-80

3-81

3-82

3-83

3-84

3-85

3-86

3-87