APIPA 20101 PREPARING COMPONENTS UNITS FOR THE FINANCIAL STATEMENT YEAR END CLOSE Jeanne H. Yamamura CPA, MIM, PhD

APIPA 2010 1

PREPARING COMPONENTS UNITS FOR THE FINANCIAL

STATEMENT YEAR END CLOSE

Jeanne H. Yamamura

CPA, MIM, PhD

APIPA 2010 2

REVIEW OF TERMINOLOGY AND CONCEPTS

1. The set of accounts used by an entity to which transactions are posted is:

A. The book of original entry.B. The general ledger.C. A subsidiary ledger.D. A t-account.

2. The book of original entry used to record cash receipts is known as:

A. The Cash account.B. The general ledger.C. The cash receipts journal.D. The sales invoice.

APIPA 2010 3


3. The five types of accounts include:A. Cash, Fixed Assets, Accounts Payable, Fund Balance,

Sales.B. Debit, Credit, Contra-Asset, Contra-Liability,

Miscellaneous.C. Revenues, Expenses, Gains, Losses, Net Income.D. Assets, Liabilities, Equity, Revenue, Expenses.

4. Accounts Payable is:A. An Asset.B. A Liability.C. A Revenue.D. An Expense.

APIPA 2010 4


5. The set of rules followed by accountants in recording transactions and preparing financial statements is known as:

A. Accounting Rules for Dummies.B. Debits and credits.C. Generally accepted accounting principles.D. PCAOB auditing standards.

6. The rule that has expenses attached to the revenues they produce is known as:

A. The Revenue Recognition Principle.B. The Matching Principle.C. The Time Period Assumption.D. Accrual Accounting.

APIPA 2010 5

ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

DR CR CR

+ REVENUES CR

- EXPENSES DRNormal balances

Increase

APIPA 2010 6

GASB 34• GASB Statement No. 34 “Basic Financial

Statements and Management Discussion and Analysis for State and Local Governments”

• Establishes standards for external financial reporting for state and local governments

• Requires that resources be classified for accounting and reporting purposes into certain categories

APIPA 2010 7

EQUITY – COMPONENT UNITS

• Equity – governmental funds – Fund Balance

• Equity – component units – Net Assets– Invested in Capital Assets

• Net of related debt

– Restricted Net Assets

– Unrestricted Net Assets

APIPA 2010 8

INVESTMENT IN CAPITAL ASSETS

• Capital assets– Net of accumulated depreciation– Net of outstanding principal balances of

related debt• Acquisition, construction, or improvement

APIPA 2010 9

RESTRICTED ASSETS

• Nonexpendable– Net assets subject to externally imposed

stipulations that require the entity to maintain them permanently

• Expendable– Net assets whose use by the entity is subject

to externally imposed stipulations that can be fulfilled by actions taken by the entity or that expire over time

APIPA 2010 10

UNRESTRICTED NET ASSETS

• Unrestricted Net Assets– Net assets that are not subject to externally

imposed stipulations– May be designated for specific purposes by

action of management or the Board of Directors

– May be limited by contractual agreements with outside parties

APIPA 2010 11

ACCOUNTING JOURNALS

• Where transactions are originally recorded• Books of original entry

– Cash receipts journal– Cash disbursements journal– Payroll journal– Revenue journal– Purchases journal– General journal

Complete Exercise No. 1 in the Workbook

APIPA 2010 12

MICRONESIAN FISHING CORPORATION

• Component unit of State Government

• Supports local fisheries

• Purchases and sells fish

• Purchases and sells fishing supplies

• Owns building

• Rents space to Micronesian Development Authority

APIPA 2010 13

ACCOUNTING CYCLE

Analyze transactions &verify documentation

Post toGeneralLedger

Journalize & post AJEs

Record inJournal

Prepare TB

Prepare & analyze FS

Prepare adjusted TB

Journalize & post

closing JEs

ACCOUNTING CYCLEPrepare

post closing TB

APIPA 2010 14

EXAMPLE: TRIAL BALANCE 12/31/09

AC# Account Name DR CR

101 Cash in Bank – Gen. Checking 15,400

110 Accounts Receivable 10,600

200 Accounts Payable 9,300

211 Withholding Taxes Payable 500

310 Unrestricted Net Assets 14,200

410 Grant Revenue 19,200

601 Salaries Expense 12,500

616 Travel Expense 4,700

TOTAL 43,200 43,200

APIPA 2010 15

ADJUSTING ENTRIES• Help ensure that the financial statements are

presented on an accrual basis. • Required every time the financial statements are

prepared.• Ensure revenue recognition and matching

principles are followed.– Record revenues in the period in which they are

earned.– Recognize expenses in the period in which they

are incurred and match against revenues earned

APIPA 2010 16

ADJUSTING ENTRIES• Adjusting entries are necessary because:

– Inefficient to record certain transactions daily (e.g., S&W)

– Certain costs occur over time and need to be recognized periodically (e.g., Insurance)

– Certain costs incurred but unknown until following period (e.g., Utilities)

APIPA 2010 17

PREPAYMENTS

Prepaid Expenses – Expenses originally paid in cash and initially recorded

as assets – Will benefit more than one accounting period. – Examples: Prepaid Insurance, Prepaid Rent, Office

Supplies, Fixed Assets (Depreciation). Unearned Revenues

– Revenues originally received in cash and initially recorded as liabilities

– Will be earned over more than one accounting period– Examples: Unearned Service Revenue, Unearned

Membership Revenue.

APIPA 2010 18

PREPAID EXPENSES

• Cash already paid

• Expense benefits more than one period

• Initially set up as an asset

• Expire over time through use

• Recognize expense through AJEs

APIPA 2010 19

PREPAID INSURANCE

• 7/31/08 TB - $1,200 Prepaid Insurance

• Annual premium for fire insurance on building

• Originally paid 7/1/08 – need to expense 1 month

• AJE needed– DR Insurance Expense 100– CR Prepaid Insurance 100

APIPA 2010 20

T-ACCOUNTS

Prepaid Insurance Insurance Expense 1200 100 100

1100 100

EFFECT ON ACCOUNTING EQUATION?

ASSETS = LIAB + EQUITY

APIPA 2010 21

SUPPLIES

• 7/31/08 TB - $750 Office Supplies

• Physical count at 7/31 = $500

• AJE needed– DR Office Supplies Expense 250– CR Office Supplies 250

• Note: What is the difference between Office Supplies Expense and Office Supplies?

APIPA 2010 22

T-ACCOUNTS

Office Supplies Office Supplies Expense

750

250 250

500 250



APIPA 2010 23

SUPPLIES

• 7/31/08 TB - Office Supplies Expense $750 (originally expensed)

• Physical count at 7/31 = $500

• AJE needed– DR Office Supplies 500– CR Office Supplies Expense

500

APIPA 2010 24

T-ACCOUNTS

Office Supplies Office Supplies Expense

750

500 500

500 250



APIPA 2010 25

DEPRECIATION

• Straight-line method• Depreciable Cost

Estimated Useful Life– Where depreciable cost = cost – salvage value

• 7/31/08 TB Building $25,000, 25 year life• Monthly depreciation expense

25,000 / 25 years = 1,000 per year/12 months

• DR Depreciation Expense 83

CR Accum. Deprec. Bldg. 83

Note: No pennies

necessary –

would imply more

accuracy than really

exists

APIPA 2010 26

T-ACCOUNTS

Accum. Depr.- Bldg. Depreciation Expense

1,000

83 83

1,083 83



APIPA 2010 27

UNEARNED REVENUES

• Cash already received

• Revenue earned in the future

• Initially set up as a liability

• Recognize revenues when earned through AJEs

APIPA 2010 28

UNEARNED REVENUES

• 7/31/08 TB - $4,200 Unearned Revenue

• Annual dues payments of $600 for 7 members

• 600 per year / 12 months = 50 per month * 7 members = 350

• AJE needed– DR Unearned Revenue 350– CR Membership Dues Revenue 350

APIPA 2010 29

T-ACCOUNTS

Unearned Revenues Membership Dues Revenue

4,200

350 350

3,850 350



APIPA 2010 30

ACCRUALSAccrued Revenues

– Revenues earned but not received or recorded

– Examples: Services performed but not yet billed.

• Accrued Expenses– Expenses incurred but not yet been paid in

cash or recorded– Examples: Interest expense, salaries and

wages expense, tax expense.

APIPA 2010 31

ACCRUED REVENUES

• 7/31/08 TB - $15,000 in advertising earned but not yet billed or paid

• AJE needed– DR Accounts Receivable 15,000– CR Advertising Revenue 15,000

APIPA 2010 32

T-ACCOUNTS

Accounts Receivable Advertising Revenue

29,330

15,000 15,000

44,330 15,000



APIPA 2010 33

ACCRUED INTEREST EXPENSE

• 7/31/08 TB - $20,000 Note Payable, 10% interest, dated 7/1/08, due 9/29/08

• Need to accrue 1 month of interest

20,000 * 10% * 1/12 = 167 (rounded)

• AJE needed– DR Interest Expense 167– CR Interest Payable 167

APIPA 2010 34

T-ACCOUNTS

Interest Payable Interest Expense

167 167

167 167



APIPA 2010 35

ACCRUED WAGES EXPENSE

• 7/31/08 TB – Need to accrue wages earned but unpaid as of 7/31/08 PPE 7/25/08 paid 8/1 1,000

7/28-7/31 paid 8/15

1,000 / 10 = 100 * 4 = 400

• AJE needed– DR Wages Expense 1,400– CR Wages Payable 1,400

APIPA 2010 36

T-ACCOUNTS

Wages Payable Wages Expense

2,000

1,400 1,400

7/31 1,400 7/31 3,400



APIPA 2010 37

REVERSING ENTRIES

• AJEs for accruals (revenues and expenses) can be reversed as of the beginning of the following period

• Why? To make it easier to record ongoing transactions

• What is a reversing entry?

• Exactly what it sounds like! A reversal of the AJE.

APIPA 2010 38

REVERSING ENTRY FOR ACCRUED WAGES EXPENSE

• Reversing entry 8/1/08– DR Wages Payable 1,400– CR Wages Expense 1,400

Wages Payable Wages Expense

8/1 1,400 2,000

RJE 1,400 1,400

600

APIPA 2010 39

REVIEW OF SHIPPING TERMS

• FOB Shipping Point – ownership passes when goods shipped by seller

• FOB Destination – ownership passes when goods received by buyer

• Inventory in Transit– Asset account– Inventory owned but not yet received

APIPA 2010 40

RECONCILIATIONS

• Performed at least monthly

• For– Cash, Accounts Receivable, Accounts

Payable, Fixed Assets– Any account supported by a subsidiary ledger

• Detects errors and unrecorded transactions

APIPA 2010 41

CASH AND BANK ACCOUNTS

• Cash and cash equivalents include:– Coins, currency on hand– Checks, money orders– Balances in checking and savings accounts

• Having sufficient cash is critical to the successful operation of ALL entities

APIPA 2010 42

BANK RECONCILIATION

• Agreement of two independently maintained sets of records– Bank (bank statement)– Books (CDJ, CRJ, GL)

• Why aren’t these the same?– Timing – check clearing, deposit clearing– Errors and omissions – bank or books

APIPA 2010 43

IN BOOKS BUT NOT BANK

• Outstanding checks: Issued and recorded but have not yet cleared the bank

• Deposits in transit: Mailed or taken to the bank but not recorded on the bank statement; Also includes deposits prepared but not yet taken to bank

APIPA 2010 44

IN BANK BUT NOT BOOKS

• Require adjusting entries because not yet in books

• Service charges: Bank fees– DR Bank Charges– CR Cash in Bank

• NSF (nonsufficient funds) checks: Checks deposited that are returned by the bank because of insufficient funds in the account of the check writer– DR NSF Checks Receivable– CR Cash in Bank

APIPA 2010 45

IN BANK BUT NOT BOOKS

• Interest income: Interest paid by the bank– DR Cash in Bank– CR Interest Income

• Miscellaneous charges and credits: – Bank charges for other services such as printing

checks or stopping payment. • DR Misc. Expense (Bank Charges)• CR Cash in Bank

– Bank receipt of direct deposit.• DR Cash in Bank• CR Grants from State

APIPA 2010 46

RECONCILIATION PROCESS

• Start with book balance and adjust for unrecorded items per the bank statement and any errors or corrections.

• Then adjust the bank balance for deposits in transit, outstanding checks, and any errors or corrections.

• When the two adjusted balances agree, the reconciliation process is complete.

APIPA 2010 47

DETAILED STEPS

1. Begin with the balance per the bank. This is the ending balance on the bank statement.

2. Identify deposits in transit as of the end of the period. Trace each of the deposits per the CRJ to the bank statement.

a. Any deposits in transit from last month should appear on the bank statement (at the beginning of the month).

b. New deposits in transit will usually be the latest deposits for the current month.

APIPA 2010 48

DEPOSITS IN TRANSIT

7/31/08 2,305.00

TOTAL 2,305.00

APIPA 2010 49

DETAILED STEPS3. Identify outstanding checks as of the end

of the period. Trace each of the checks per the CDJ to the bank statement identifying which checks have cleared the bank. Those that have not cleared the bank are outstanding.

a. Checks that cleared at the beginning of the bank statement that are not listed in this period’s CDJ were most likely issued in the prior period (and were outstanding in the last bank reconciliation).

APIPA 2010 50

OUTSTANDING CHECKS

#596 135.00#602 408.00 #603 515.96#604 267.60TOTAL 1,326.56

APIPA 2010 51

DETAILED STEPS

4. Now you are ready to compute the adjusted bank balance.

a. Enter a total for deposits in transit.

b. Enter a total for outstanding checks.

c. Compute: Bank balance plus deposits in transit minus outstanding checks = Adjusted bank balance

d. If there were any bank errors, include them as “other.”

APIPA 2010 52

BANK RECONCILIATIONGENERAL CHECKING ACCOUNT

7/31/08

Balance per bank: 15,607.25

Adjustments:

Add: Deposits in transit 2,305.00

Less: Outstanding checks (1,326.56)

Add: Bank error ________

Adjusted balance per bank: $16,585.69

APIPA 2010 53

DETAILED STEPS

5. Enter the balance per the books. This is the ending balance in the Cash account in the general ledger.

APIPA 2010 54

GENERAL LEDGER – CASH

Account Title: CASH – GEN. CHECKING ACCOUNT Account Number:

Date Description Ref Debit Credit Balance

6/30/08 Ending balance 6,034.55

7/11/08 Sales CRJ-7 1,715.00

7/15/08 Checks #598-601 CDJ-7 2,967.30

7/25/08 Sales CRJ-7 1,050.00

7/31/08 Checks #602-605 CDJ-7 1,826.56

7/31/08 Sales CRJ-7 2,305.00 6,310.69

This is the balance per

books

APIPA 2010 55

DETAILED STEPS

6. Now based on the comparisons performed earlier, identify any bank charges (service charges, debit memos) or bank credits (direct deposits, interest income) that appear on the bank statement but not in the books.

7. Compute the adjusted book balance

APIPA 2010 56

BANK RECONCILIATIONGENERAL CHECKING ACCOUNT

7/31/08Balance per books: $6,310.69Adjustments: Add: 7/7 Direct deposit 10,500.00 Add: Error – 7/11 deposit 100.00 Less: NSF check – FIT (275.00) Less: NSF check fee (15.00)

Less: Service charge (35.00)Adjusted balance per books: $16,585.69

APIPA 2010 57

DETAILED STEPS

8. When the two adjusted balances (adjusted balance per bank and

adjusted balance per books) agree, the account is reconciled.9. Prepare an adjusting journal entry for each reconciling item used to compute the adjusted balance per books.

APIPA 2010 58

JOURNAL ENTRIES

DR Cash in Bank 10,500

CR Grant Revenue 10,500

To record federal grant direct deposit 7/7/08

DR Cash in Bank 100

CR Sales Revenue 100

To correct deposit 7/11/08

APIPA 2010 59

JOURNAL ENTRIES

DR NSF Checks Receivable 290CR Cash in Bank 290To record NSF check from FIT Corp. plus

NSF fee (275 + 15 = 290)

DR Misc. Expense 35CR Cash in Bank 35To record bank service charge 7/8/08

APIPA 2010 60

THE END RESULT

The final cash balance will then appear as follows after the adjusting entries are recorded and posted.

Note that the final cash balance will be equal to the adjusted balance per bank and per books.

APIPA 2010 61

GENERAL LEDGER – CASH

Account Title: CASH – GEN. CHECKING ACCOUNT Account Number:


7/31/08 Balance 6,310.69

7/31/08 Fed. Grant DD GJ-7 10,500.00

7/31/08 Correction to 7/11 GJ-7 100.00

7/31/08 NSF check GJ-7 290.00

7/31/08 Bank service chg. GJ-7 35.00

7/31/08 16,585.69

APIPA 2010 62

ACCOUNTS RECEIVABLE

• Agreement of two independently maintained sets of records– General Ledger Control Account– Subsidiary Ledger

• Why aren’t these the same?– Errors and omissions

APIPA 2010 63

RECONCILIATION PROCESS

• Prepare a schedule of customer accounts in Accounts Receivable subsidiary ledger.

• Compare to the balance in the Accounts Receivable account in the General Ledger.

• If the two amounts do not agree, prepare a 4-column reconciliation to reconcile the activity in the two records

APIPA 2010 64

GENERAL LEDGER – ACCOUNTS RECEIVABLE

Account Title: ACCOUNTS RECEIVABLE

Account Number:


6/30/08 Balance 12,005

7/19/08 Sunset Restaurant account written off due to bankruptcy

GJ-7 1,905

7/31/08 July sales SJ-7 31,560

7/31/08 July collections CRJ-7 9,600

7/31/08 32,060

31,560 11,505

APIPA 2010 65

ACCOUNTS RECEIVABLE – SUBSIDIARY LEDGER

Customer: Abacus Hotel


6/30/08 Balance 5,450

7/10/08 Adj. for spoiled fish 500

7/31/08 July payment CRJ-7 4,950

7/31/08 July sale SJ-7 10,560 10,560

Customer: Nikko Restaurant

6/30/08 Balance 1,500


7/31/08 July sale SJ-7 6,700

7/31/08 6,700

APIPA 2010 66

ACCOUNTS RECEIVABLE – SUBSIDIARY LEDGER

Customer: Sunset Restaurant


6/30/08 Balance 1,905

Customer: Hotel Zero

6/30/08 Balance 3,150


7/31/08 July sale SJ-7 14,300 14,300

31,560 10,100 33,465

APIPA 2010 67

4-COLUMN RECONCILIATION

Balance 6/30/08

DR CR Balance 7/31/08

Per General Ledger

12,005 31,560 11,505 32,060

Account adjusted per SL, not posted to GL

500 (500)

Adjusted GL balance

12,005 31,560 10,100 31,560

APIPA 2010 68

4-COLUMN RECONCILIATION

Balance 6/30/08

DR CR Balance 7/31/08

Per Subsidiary

Ledger

12,005 31,560 10,100 33,465

Account W/O due to bankruptcy, not posted to SL

1,905 (1,905)

Adjusted GL balance

12,005 31,560 12,005 31,560

APIPA 2010 69

JOURNAL ENTRIES

DR Sales R&A - Fish 500

CR AR: Abacus Hotel 500

To record spoiled fish returned by Abacus Hotel for credit

APIPA 2010 70

JOURNAL ENTRIES

DR Accounts Payable 300

CR Purchase Returns and

Allowances – Fish. Supplies 300

To record adjustment for damaged merchandise returned to CHS, Inc.

APIPA 2010 71

SCHEDULE OF ACCOUNTS PAYABLE(AFTER ADJUSTMENTS)

Bait and Switch, Inc. $ 2,700Boggle Corp. 3,000CHS Inc. -0-General Fishing Supplies 3,125Marx Company 2,500Sanders, Inc. 1,375

TOTAL Per S/L $12,700Year end accruals: Unpaid invoices 1,205 Inventory in transit 1,500 TOTAL per G/L $15,405

APIPA 2010 72

INVENTORY

• Merchandise for resale or being manufactured for sale

• If merchandising entity: only 1 inventory account – Merchandise Inventory or Inventory

• If manufacturer: 3 inventory accounts– Raw Materials Inventory– Work in Process Inventory– Finished Goods Inventory

APIPA 2010 73

PHYSICAL INVENTORY

• Complete count of goods on hand

• At least annually

• Preferable for business operations to be stopped during count

APIPA 2010 74

INVENTORY IN TRANSIT

• When does ownership pass?– FOB Shipping Point – when goods leave

shipper– FOB Destination – when goods arrive at buyer

• If inventory in transit at YE and terms of sale are FOB Shipping Point – must accrue

APIPA 2010 75

CONSIGNMENT INVENTORY

• Still owned by vendor but held by entity

• EXCLUDE from physical inventory and from ending inventory balance

APIPA 2010 76

PERIODIC VS. PERPETUAL

• Whether or not inventory balances updated as sales/purchases occur

• Periodic – only at period end– “Purchases” account used– “Cost of Goods Sold” only at period end

• Perpetual – as sales/purchases occur– No “Purchases” account– “Cost of Goods Sold” updated as sales occur

APIPA 2010 77

COST FLOW ASSUMPTIONS• When sales are made, which inventory item is

being sold?• Note: Cost flow assumptions made for

recordkeeping purposes. Not actual physical flow of merchandise.

• Four methods– Specific identification– First-in, First-out (FIFO)– Last-in, Last-out (LIFO)– Average

APIPA 2010 78

SPECIFIC IDENTIFICATION

• Requires individually identifiable items

• Automobiles, real estate, antiques

APIPA 2010 79

FIFO

• Assumes that first items purchased are the first ones sold

• Cost of goods sold = “older” costs

• Ending inventory = “newer” costs

APIPA 2010 80

LIFO

• Assumes that last items purchased are the first ones sold

• Cost of goods sold = “newer” costs

• Ending inventory = “older” costs

APIPA 2010 81

AVERAGE

• Weighted average cost computed and applied

• Cost of goods sold = weighted average cost * # units sold

• Ending inventory = weighted average cost * # units in ending inventory

APIPA 2010 82

EXAMPLEINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost

6/30/07 Beg. Inv. 0 0

8/1/07 Purchase 100 $5 $500

9/3/07 Purchase 200 $7 $1,400

10/15/07 Purchase 100 $8 $800

12/5/07 Purchase 100 $8 $800

3/17/08 Purchase 400 $9 $3,600

6/9/08 Purchase 100 $10 $1,000

TOTAL 1,000 $8,100

APIPA 2010 83

ENDING INVENTORY

• 845 books sold during FY 6/30/08

• Physical inventory 6/30/08 = 155 books

APIPA 2010 84

FIFO – ENDING INVENTORYINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost

6/9/08 Purchase 100 $10 $1,000

3/17/08 Purchase 55 $9 $495

TOTAL $1,495

APIPA 2010 85

JOURNAL ENTRIESDR Inventory (ending) 1,495DR Cost of Goods Sold 6,605CR Inventory (beg.) -0-CR Purchases 8,100

To record cost of goods sold and ending inventory at 6/30/08.

Note: JE only required under periodic method.

APIPA 2010 86

LIFO – ENDING INVENTORYINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost

8/1/07 Purchase 100 $5 $500

9/3/07 Purchase 55 $7 $385

TOTAL $885

APIPA 2010 87

JOURNAL ENTRIESDR Inventory (ending) 885DR Cost of Goods Sold 7,215CR Inventory (beg.) -0-CR Purchases 8,100



APIPA 2010 88

EFFECT ON TOTAL ASSETS AND NET INCOME

FIFO LIFO

Inventory (ending) 1,495 885

Total Assets ++++ ------

Cost of Goods Sold 6,605 7,215

Net Income ++++ ------

Note: In example, prices were rising.

APIPA 2010 89

AVERAGEINVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost

TOTAL 1,000 $8,100

APIPA 2010 90

AVERAGE

INVENTORY – BOOK – TAHOE HIKING TRAILSDate Description Units Unit Cost Total Cost

TOTAL 1,000 $8,100

Total cost / Total units = $8,100 / 1,000 = $8.10 weighted average cost per unit

Total ending inventory 155 8.10 $1,256

Total cost of goods sold

845 8.10 $6,844

APIPA 2010 91

JOURNAL ENTRIESDR Inventory (ending) 1,256DR Cost of Goods Sold 6,844CR Inventory (beg.) -0-CR Purchases 8,100



APIPA 2010 92

BAD DEBTS

• Estimation of uncollectible accounts• Allowance method required by GAAP• Two estimation methods

– Income statement method• % of credit sales• Determines bad debt expense

– Balance sheet method• Aging of AR balances and est. collectibility of each

aging category• Determines allowance for bad debts

APIPA 2010 93

ISLAND UTILITY CORPORATIONSCHEDULE OF ACCOUNTS RECEIVABLE

7/31/08Debtor Balance

Antioch Hotel 254

Black, Antonio 97

Camacho, Evelyn 43

Davis, Edward 35

Fresh Fish Restaurant 156

Lyle, Cynthia 32

Monterey Bakery 123

Smith, Fred 78

Tyler, Caitlin 39

TOTAL 857

APIPA 2010 94

AGED SCHEDULE OF ACCOUNTS RECEIVABLE - 7/31/08

Debtor Balance Current 31-60 61-90 >90

Antioch Hotel 254 254

Black, Antonio 97 32 35 30

Camacho, Evelyn 43 43

Davis, Edward 35 10 10 15

Fresh Fish Rest. 156 35 30 32 59

Lyle, Cynthia 32 32

Monterey Bakery 123 47 30 29 17

Smith, Fred 78 18 40 20

Tyler, Caitlin 39 39

TOTAL 857 439 145 165 128

APIPA 2010 95

ALLOWANCE COMPUTATIONAging Category Amount % Uncollectible Total

Current 439 0 0

31-60 145 5% 7.25

61-90 165 10% 16.5

>90 108 50% 54

TOTAL ALLOWANCE 78

Balance per GL 120

Entry needed (42)

APIPA 2010 96

BAD DEBT AJE NEEDED

DR Allowance for Bad Debts $42

CR Bad Debts Expense $42

To adjust allowance at 7/31/08.

Note: The current Allowance balance was larger than needed so the AJE reduced the Allowance.

APIPA 2010 97

GENERAL LEDGER – ALLOWANCE FOR BAD DEBTS, BAD DEBTS

EXPENSE

Account Title: ALLOWANCE FOR BAD DEBTS


7/31/08 Ending balance 120

7/31/08 AJE per analysis GJ-7 42 78

Account Title: BAD DEBTS EXPENSE



APIPA 2010 98

BALANCE SHEET 7/31/08

ASSETS

Accounts Receivable $ 857

Allowance for Bad Debts ( 78)

Accounts Receivable, net $779

APIPA 2010 99

WRITE OFF OF ACCOUNT

Adjusting entry to write off account

DR Allowance for Bad Debts $32

CR AR – Cynthia Lyle $32

To write off account for Cynthia Lyle on 8/5/08

APIPA 2010 100

GENERAL LEDGER – ACCOUNTS RECEIVABLE

Account Title: ACCOUNTS RECEIVABLE Account Number: 110


7/31/08 Ending balance

857

8/5/08 Write off Cynthia Lyle

GJ-7 32 825

APIPA 2010 101

GENERAL LEDGER – ALLOWANCE FOR BAD DEBTS

Account Title: ALLOWANCE FOR BAD DEBTS




8/5/08 Write off Cynthia Lyle

GJ-7 32 46

APIPA 2010 102

SUBSEQUENT COLLECTION OF A/C WRITTEN OFF

Entries to record subsequent collectionDR AR – Cynthia Lyle $32CR Allowance for Bad Debts $32DR Cash $32CR AR – Cynthia Lyle. $32

To reinstate Cynthia Lyle and record subsequent receipt

APIPA 2010 103

ASSET DISPOSITIONS

• When a capital asset is sold:– Update depreciation– Calculate gain or loss on disposition

APIPA 2010 104

UPDATE DEPRECIATION

• Calculation of annual depreciation using straight-line method

Cost – Estimated Residual Value

Estimated Useful Life• Determine depreciation for current period

APIPA 2010 105

GAIN OR LOSS CALCULATION

Selling price (sales proceeds)

Carrying value (book value)

Cost

Less accumulated depreciation

Gain (loss) on disposal

APIPA 2010 106

DISPOSAL OF CAPITAL ASSET - EXAMPLE

Sale of truck for $9,000 on 7/1/08

Originally purchased 7/3/05 for $25,000

Depreciated over 5 year life with SV $500

Annual depreciation:

25,000 – 500 = 4,900

5

APIPA 2010 107


Accum. Depreciation through 6/30/08 = 3 years = 4,900 * 3 = 14,700

Note: If sale had occurred mid-year, calculation of partial year depreciation might have been needed.

Sales proceeds 9,000Cost 25,000Accum. Deprec. (14,700) 10,300Loss on disposal (1,300)

APIPA 2010 108


Entry to record sale of asset

DR Cash $ 9,000

DR Accum. Deprec.-Vehicles 14,700

DR Loss on disposal 1,300

CR Vehicles $25,000

To record disposal of asset

APIPA 2010 109

WRITEOFF OF CAPITAL ASSET - EXAMPLE

Water pump determined unusable as of 7/31/08

Originally purchased 1/31/06 for $5,000

Depreciated over 5 year life with zero SV

Annual depreciation:

5,000 – 0 = 1,000

5

APIPA 2010 110

UPDATE DEPRECIATION• Assume entity has calendar year end

• Accum. Depreciation as of 12/31/07

– 1/31/06 to 12/31/07 = 23 months

– 1,000 / 12 * 23 = $1,917

• Depreciation for current period

– 12/31/07 to 7/31/08 = 7 months

– 1,000 / 12 * 7 = $583

APIPA 2010 111

DEPRECIATION AJE NEEDED

DR Depreciation Expense $583

CR Accum. Deprec. $583

To record depreciation on asset to date determined unusable.

APIPA 2010 112

CALCULATION OF LOSS ON WRITE OFF

Cost 5,000

Accum. Deprec.

As of 12/31/07 1,917

To 7/31/08 583 2,500

Loss on writeoff (2,500)

APIPA 2010 113

WRITE OFF OF CAPITAL ASSET - AJE

Entry to record writeoff of asset

DR Accum. Deprec. – Equip. $2,500

DR Loss on writeoff 2,500

CR Equipment $5,000

To record writeoff of asset

APIPA 2010 114

WRITE-OFF OF CAPITAL ASSET NO LONGER IN USE

Entry to record write off of asset

DR Accum. Deprec.-Equip. $5,000

CR Equipment $5,000

To record write off of fully depreciated asset

APIPA 2010 115

WORKSHEET• Used to draft financial statements• Start by entering unadjusted TB numbers (done

in Exercise 2)• Identify adjustments needed (done in Exercises

3 to 9)• Determine the adjusted TB numbers• Extend the adjusted TB numbers to the IS and

BS columns• Draft financial statements• Journalize adjusting entries

APIPA 2010 116

WORKSHEET

A/C

Unadj.TB AJEs Adj. TB Income Stmt.

Stmt. of Net

Assets

DR CR DR CR DR CR DR CR DR CR

APIPA 2010 117

OTHER AJES NEEDED

DR Investment in Capital

Assets 10,350

CR Unrestricted Net Assets 10,350

To adjust balance in Investment in Capital Assets for current year activity.

APIPA 2010 118

OTHER AJES NEEDED

DR Restricted NA – Expendable 3,500

CR Unrestricted Net Assets 3,500

To adjust restricted net asset balance for grant revenue earned.

APIPA 2010 119

OTHER AJES NEEDED

DR Unrestricted Net Assets 22,500

CR Restricted NA - Expendable 22,500

To adjust restricted net asset balance for grant revenue received but unearned.

APIPA 2010 120

CLOSING

• Occurs at end of fiscal period

• “Closes out” nominal accounts, leaving zero balances

• May close directly to Unrestricted Net Assets or to temporary holding account, Income Summary

APIPA 2010 121

CLOSING ENTRIES

DR Revenue and gain accounts

CR Income Summary

To close revenue and gain accounts

DR Income Summary

CR Expense and loss accounts

To close expense and loss accounts

APIPA 2010 122

CLOSING ENTRIES

DR Income Summary

CR Unrestricted Net Assets

To close change in net assets to unrestricted net assets (net increase)

DR Unrestricted Net Assets

CR Income Summary

To close change in net assets to unrestricted net assets (net decrease)

APIPA 2010 123

POST CLOSING TRIAL BALANCE

• Verifies proper closing of all nominal accounts

• Verifies DR = CR

• Displays balances in real accounts only (balance sheet accounts)

APIPA 2010 124

FINANCIAL STATEMENT ANALYSIS

• Trend analysis– Evaluation of financial data over time– Two years is not enough!

• Common size analysis– Each item expressed as a % of base amount– Enables comparison of different sized entities

• Ratio analysis– Can be used for many analytical purposes– Must compare over time and with industry and

competitors– Can be computed differently by different

services/analysts

APIPA 2010 125

LIQUIDITY AND SOLVENCY

• Liquidity - Identify entity’s ability to meet short-term obligations

• Solvency – Ability of entity to survive in the long run

APIPA 2010 126

LIQUIDITY

• Current ratio: Current assets

Current liabilities

• Quick ratio: Quick assets

Current liabilities

where quick assets = Cash, receivables,

and short term investments

APIPA 2010 127

SOLVENCY

• Working capital to total assets:

Current assets - Current liabilities

Total assets

• Defensive interval:

Quick assets

Projected daily operational expenditures

APIPA 2010 128

SOLVENCY

• Debt to total assets:

Total liabilities

Total assets

APIPA 2010 129

OPERATIONAL EFFICIENCY

• How effectively and efficiently the entity is using its resources

• Receivables turnover:

Net credit sales

Average gross accounts receivable

• Average collection period:

365 days / receivables turnover ratio

APIPA 2010 130

OPERATIONAL EFFICIENCY

• Inventory turnover:

Cost of goods sold

Average inventory

• Days in inventory:

365 days / inventory turnover ratio

APIPA 2010 131

PROFITABILITY

• How well the entity has performed operationally

• Profit margin on sales: Net income / net sales

• Return on assets:Net income / Average total assets

• Asset turnover:Net sales / Average total assets

APIPA 2010 132

QUESTIONS?

[email protected]

mailto:[email protected]

APIPA 2010 133

POST TEST

• Circle your best guess at the right answer (A, B, C or D)

• Don’t worry – you may not know all the answers – but, hopefully, you know more than when you started!

APIPA 2010 134

THE END!!

Documents

APIPA 20101 PREPARING COMPONENTS UNITS FOR THE FINANCIAL STATEMENT YEAR END CLOSE Jeanne H. Yamamura CPA, MIM, PhD