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AC 210 Lecture Notes - Lecture 28: Capital Account, Trial Balance, Income Statement

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5 Jun 2018

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Inventory Adjustments

On a work sheet, the beginning inventory balance in the trial balance columns combines

with the two inventory adjustments to produce the ending inventory balance in the

adjusted trial balance columns. This balance carries across to the work sheet's balance

sheet columns.

Income summary, which appears on the work sheet whenever adjusting entries are

used to update inventory, is always placed at the bottom of the work sheet's list of

accounts. The two adjustments to income summary receive special treatment on the

work sheet. Instead of combining the adjustments and placing the result in one of the

adjusted trial balance columns, both adjustments are transferred to the adjusted trial

balance columns and then to the income statement columns. Income summary's debit

entry on the work sheet is used to report the beginning inventory balance on the income

statement, and income summary's credit entry is used to report the ending inventory

balance on the income statement. Each of these amounts is needed to calculate cost of

goods sold.

Although merchandising and service companies use the same four closing entries,

merchandising companies usually have more temporary accounts to close. The

additional accounts include sales, sales returns and allowances, sales discounts,

purchases, purchases returns and allowances, purchases discounts, and freight‐in.

Consider Music World's four closing entries.

1. Close all income statement accounts with credit balances to the income

summary account. The entry shown below assumes the inventory account was

updated with adjusting entries and, therefore, does not include it.

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Related Questions

Accounting is an information and measurement system thatidentifies, records, and communicates relevant, reliable, andcomparable information about an organization's businessactivities.

We use the accounting equation to identify what a company ownsand owes. The accounting equation is:

Assets = Liabilities + Equity

Assets = Liabilities â Equity

Assets = Liabilities + Revenues

Equity = Liabilities + Revenues

______ are beliefs that distinguish right from wrong. Thesebeliefs are accepted standards of gauging good and dishonestbehavior.

Accounting Standards

Generally Accepted Accounting Principles

The _____ is a collection of all accounts within a companyâsaccounting system.

General Journal

Chart of Accounts

We use the accounting equation to identify what a company ownsand owes. _____ are resources a company owns or controls, _____ areclaims creditors have against a companyâs assets, and _____ is theownerâs claim on a companyâs assets.

In double entry accounting a credit to an asset account willrepresent an increase in the asset account balance; and a debitwill represent a decrease in the asset account balance.

The purchase of supplies on credit will ____ assets and ____liabilities.

Increase, decrease

Decrease, increase

Decrease, decrease

Increase, increase

During the accounting cycle, we analyze transactions toprepare statements.

The supplies account for a company has a $1,000 debit balanceat the beginning of the year. Supplies of $2,000 were purchasedduring the year and debited to the Supplies account. A December 31physical count shows $500 of supplies remaining at the end of theyear. Assume no other adjusting entries are made during the year.Using the 3-step process for creating adjusting entries, calculatethe adjustment amount for supplies (no journal entry isrequired).

$1,000 adjustment

$2,000 adjustment

$2,500 adjustment

$3,000 adjustment

During the accounting cycle, to complete step 7 youwould:

Prepare post-closing trial balance--Test clerical accuracy ofthe closing procedures.

Prepare adjusted trial balance--Summarize adjusted ledgeraccounts and amounts.

Prepare statements--Use adjusted trial balance to preparefinancial statements.

Close--Journalize and post entries to close temporaryaccounts.

The three financial statements that should be prepared duringthe accounting cycle are the:

Balance sheet, adjusted trial balance, income statement

Balance sheet, unadjusted trial balance, Statement of OwnerâsEquity

Income statement, adjusted trial balance, Statement of OwnerâsEquity

Balance sheet, Income statement, Statement of OwnerâsEquity

An optional working paper, which is not a required report oran accounting record, but is used to prepare a company's unadjustedtrial balance, adjusting entries, adjusted trial balance, andfinancial statements is a(n):

Adjusted trial balance

Post-closing trial balance

Unadjusted trial balance

The two goals for completing the closing process are:

To identify accounts for closing and record the closingentries

To journalize and post transactions

To post transactions and prepare post-closing trialbalance

To reset revenues, expenses, and withdrawal account balancesto zero at the end of each period, and help summarize an accountingperiodâs revenues and expenses.

Fill in the Blank: The _____ describes a companyâs financialposition â by the types and amounts of assets, liabilities, andequity -- at a point in time.

Return on Assets is useful in evaluating management, analyzingand forecasting profits, and planning activities.

The Income Statement:

Identifies cash inflows (receipts) and cash outflows(payments) over a period-of-time.

Summarize adjusted ledger accounts and amounts

Describes a companyâs revenues and expenses along with theresulting net income or net loss -- over a period-of-time due toearnings activities

Resets revenues, expenses, and withdrawal account balances tozero at the end of each period.

An internal control system consists of the policies andprocedures used to:

Protect assets and Ensure reliable accounting

Urge adherence to company policies and Promote efficientoperations

All of the above

None of the above.

The cost-benefit principle is the second limitation of_______.

Bank reconciliations

Petty cash controls

Voucher system of controls

Internal controls

The Unadjusted Trial Balance columns of a company's work sheetshows the Store Supplies account with a balance of $750. TheAdjustments columns shows a credit of $425 for supplies used duringthe period. The amount shown as Store Supplies in the Balance Sheetcolumns of the work sheet is:

A company shows a $600 balance in Prepaid Rent in theUnadjusted Trial Balance columns of the work sheet. The Adjustmentscolumns show expired rent of $200. This adjusting entry resultsin:

$200 decrease to net income

$200 increase to net income

$200 different between the debit and credit columns of theUnadjusted Trial Balance

An error in the Balance Sheet

This semester we have discussed four major financialstatements. List the 4 financial statements and describe them. Makesure to include how they flow together.

Explain the purpose of adjusting entries at the end of aperiod.

peararmadillo281

Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 â Dec. 31 financial year.

Exercise for Inventory:

TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.

Account Debit Credit

Accounts Receivable 17,607,500

Allowance for Doubtful Accounts 20,000

Purchases 85,832,500

Inventory 2,500,000

TechTone Sales Revenue 134,500,000

TechTone Sales Returns 2,017,500

Cost of TechTone Equipment Sold 0

Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:

Purchases for 2016 (normal operations)
Beginning:	5,000	units @	$500	each
Purchases:
Apr-May	40,000	units @	$500	each
Jun-Jul	35,000	units @	$505	each
Aug-Sep	48,500	units @	$515	each
Oct	24,000	units @	$520	each
Nov-Dec	20,000	units @	$535	each

Year-End Physical Inventory Count	38,000	units

Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.

Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.

Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!

Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layersânot based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.

DV LIFO	Ending Inventory at Year-End Cost	Index	Ending Inventory at Base-Yr Cost	Inventory Layers at Base-Yr Cost	Inventory Layers at Acq.-Yr Cost	Ending Inventory at DV LIFO Cost	LIFO Reserve Adjustment
2015

2016
2016

Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!

Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.

		FIFO Method	DVLIFO Method
Income Statement	Cost of TechTone Equipment Sold

Balance Sheet	Inventory

Which method gives higher net income?

Which method gives higher assets?

limekangaroo380

Background: This is a continuation of the activities at TECHNOGYM in January, 2017. As in past activities, TECHNOGYM uses a Jan. 1 â Dec. 31 financial year.

Exercise for Inventory:

TECHNOGYM uses a periodic inventory system for its normal operations. Following are the unadjusted account balances as of Dec. 31, 2016 for all accounts related to sales and inventory of TechTone products.

Account Debit Credit

Accounts Receivable 17,607,500

Allowance for Doubtful Accounts 20,000

Purchases 85,832,500

Inventory. 2,500,000

TechTone Sales Revenue 134,500,000

TechTone Sales Returns 2,017,500

Cost of TechTone Equipment Sold 0

Upper management is contemplating changing the method used to report the cost of goods sold. They will choose the method (either FIFO or DVLIFO) that maximizes operating cash flow. The general ledger has historically been kept on a FIFO basis. Following is the inventory purchases information for 2016:

Purchases for 2016 (normal operations)

Beginning: 5,000 units @ $500 each

Apr-May 40,000 units @ $500 each

Jun-Jul 35,000 units @ $505 each

Aug-Sep 48,500 units @ $515 each

Oct 24,000 units @ $520 each

Nov-Dec 20,000 units @ $535 each

Year-End Physical Inventory Count 38,000 units

Note: For full credit, you must show documentation for both DVLIFO and FIFO calculations, with indication and reasoning for your choice.

Requirement 1: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using FIFO for 2016.

Requirement 2: Show the adjusting journal entry(ies) (if any) that is/are needed on Dec. 31, 2016 related to FIFO inventory. Remember to show the journal entry in proper form!

Requirement 3: Develop a detailed schedule showing the calculation of Ending Inventory and Cost of Goods Sold using DVLIFO for 2016. Hint: DVLIFO adjustments are calculated at the end of the year, using annual layersânot based on each individual purchase. TECHNOGYM used 1.07 as its DVLIFO index.

Requirement 4: Show the adjusting journal entry(ies) (if any) that would be needed on Dec. 31, 2016 if management decides to adopt the DVLIFO inventory method. Remember to show the journal entry in proper form!

Requirement 5: Using the table below, show the amounts that would appear on indicated line items of the Income Statement and Balance Sheet under the two methods.

FIFO Method DVLIFO Method

Income Statement Cost of TechTone Equipment Sold

Balance Sheet Inventory

Which method gives higher net income?

Which method gives higher assets?