Accounting Cycle

The accounting process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance is called the accounting cycle. The steps in the accounting cycle are as follows: Transactions are analyzed and recorded in the journal. Transactions are posted to the ledger. An unadjusted trial balance is prepared. Adjustment data are

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Illustration of the Accounting Cycle

In this section, the complete accounting cycle for one period is illustrated. Assume cycle for one period– that for several years Kelly Pitney has operated a part-time consulting business from her home. As of April 1, 2014, Kelly decided to move to rented quarters and to oper­ate the business on a full-time basis as

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Fiscal Year

The annual accounting period adopted by a business is known as its fiscal year. Fis­cal years begin with the first day of the month selected and end on the last day of the following twelfth month. The period most commonly used is the calendar year. Other periods are not unusual, especially for businesses organized

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Financial Analysis and Interpretation: Working Capital and Current Ratio

The ability to convert assets into cash is called liquidity, while the ability of a busi­ness to pay its debts is called solvency. Two financial measures for evaluating a business’s short-term liquidity and solvency are working capital and the current ratio. Working capital is the excess of the current assets of a business over

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End-of-Period Spreadsheet (Work Sheet)

Accountants often use working papers for analyzing and summarizing data. Such working papers are not a formal part of the accounting records. This is in contrast to the chart of accounts, the journal, and the ledger, which are essential parts of an accounting system. Working papers are usually prepared by using a computer spreadsheet

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Nature of Merchandising Businesses

The activities of a service business differ from those of a merchandising business. These differences are illustrated in the following condensed income statements: The revenue activities of a service business involve providing services to custom­ers. On the income statement for a service business, the revenues from services are reported as fees earned. The operating

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Merchandising Transactions

This section illustrates merchandise transactions for NetSolutions after it becomes a retailer of computer hardware and software. During 2013, Chris Clark implemented the second phase of NetSolutions’ business plan. In doing so, Chris notified clients that beginning July 1, 2014, NetSolutions would no longer offer consulting services. Instead, it would become a retailer. NetSolutions’

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Financial Statements for a Merchandising Business

Although merchandising transactions affect the balance sheet in reporting inventory, they primarily affect the income statement. An income statement for a merchandis­ing business is normally prepared using either a multiple-step or single-step format. 1. Multiple-Step Income Statement The 2015 income statement for NetSolutions is shown in Exhibit 8.6 This form of income statement, called

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The Adjusting and Closing Process

Thus far, the recording of transactions, chart of accounts, and financial statements for a merchandising business (NetSolutions) have been described and illustrated. In the remainder of this chapter, the adjusting and closing process for a merchandising business will be described. In this discussion, the focus will be on the elements of the accounting cycle

Financial Analysis and Interpretation: Ratio of Net Sales to Assets

The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. A high ratio indicates an effective use of assets. The assets used in computing the ratio may be the total assets at the end of the year, the aver­age of the total assets at the

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The Periodic Inventory System

Throughout this chapter, the perpetual inventory system was used to record pur­chases and sales of merchandise. Not all merchandise businesses, however, use the perpetual inventory system. For example, small merchandise businesses, such as a local hardware store, may use a manual accounting system. A manual perpetual in­ventory system is time consuming and costly to

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Control of Inventory

Two primary objectives of control over inventory are as follows:1 Safeguarding the inventory from damage or theft. Reporting inventory in the financial statements. 1. Safeguarding Inventory Controls for safeguarding inventory begin as soon as the inventory is ordered. The following documents are often used for inventory control: Purchase order Receiving report Vendor’s invoice The

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Inventory Cost Flow Assumptions

An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to deter­mine its cost using a cost flow assumption and related inventory costing method. Three common cost flow assumptions and related inventory costing methods are

Inventory Costing Methods Under a Perpetual Inventory System

As illustrated in the prior section, when identical units of an item are purchased at different unit costs, an inventory cost flow method must be used. This is true regard­less of whether the perpetual or periodic inventory system is used. In this section, the FIFO, LIFO, and weighted average cost methods are illustrated under

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Inventory Costing Methods Under a Periodic Inventory System

When the periodic inventory system is used, only revenue is recorded each time a sale is made. No entry is made at the time of the sale to record the cost of the mer­chandise sold. At the end of the accounting period, a physical inventory is taken to determine the cost of the inventory

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Comparing Inventory Costing Methods

A different cost flow is assumed for the FIFO, LIFO, and weighted average inventory cost flow methods. As a result, the three methods normally yield different amounts for the following: Cost of merchandise sold Gross profit Net income Ending merchandise inventory Using the perpetual inventory system illustration with sales of $39,000 (1,300 units x

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Reporting Merchandise Inventory in the Financial Statements

Cost is the primary basis for valuing and reporting inventories in the financial state- statements. ments. However, inventory may be valued at other than cost in the following cases: The cost of replacing items in inventory is below the recorded cost. The inventory cannot be sold at normal prices due to imperfections, style changes,

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Financial Analysis and Interpretation: Inventory Turnover and Number of Days’ Sales in Inventory

A merchandising business should keep enough inventory on hand to meet its custom­ers’ needs. A failure to do so may result in lost sales. However, too much inventory ties up funds that could be used to improve operations. Also, excess inventory increases expenses such as storage and property taxes. Finally, excess inventory increases the

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Estimating Inventory Cost

A business may need to estimate the amount of inventory for the following reasons: Perpetual inventory records are not maintained. A disaster such as a fire or flood has destroyed the inventory records and the inventory. Monthly or quarterly financial statements are needed, but a physical inventory is taken only once a year. This

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Sarbanes-Oxley Act of 2002

During the financial scandals of the early 2000s, stockholders, creditors, and other inves­tors lost billions of dollars.1 As a result, the U.S. Congress passed the Sarbanes-Oxley Act of 2002. This act, often referred to as Sarbanes-Oxley, is one of the most important laws affecting U.S. companies in recent history. The purpose of Sarbanes-Oxley is

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