The Accounting Cycle:

Reporting Financial Results

Chapter 5

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Preparing Financial Statements
Publicly owned companies – those with shares listed on a stock
exchange – have obligations to release annual and interim
information to their shareholders and to the public.

The annual report includes comparative financial statements and

other information relating to the company’s financial position,
business operations, and future prospects.

The financial statements contained in the annual report must be

audited by a firm of certified public accountants (CPAs).
5-2
 JJ's Lawn Care Service
Adjusted Trial Balance
31 May 2009
Cash $ 3,925
Accounts receivable 75
Tools & equipm ent 2,650
Accum ulated depreciation: tools &
equipm ent $ 50
Truck 15,000
Accum um lated depreciation: truck 250
Notes payable 13,000
Accounts payable 150
Share capital 8,000
Dividends 200
Sales revenue 750
Gasoline expense 50
Depreciation expense: tools & equipm ent 50
Depreciation expense: truck 250
Total $ 22,200 $ 22,200

Now, let’s prepare the financial statements

for JJ’s Lawn Care Service for May.
5-3
The Income Statement
JJ's Lawn Care Service
Income Statement
For the month ending 31 May 2009
Sales revenue $ 750
Operating expenses:
Gasoline expense $ 50
Depreciation: tools & equipment 50
Depreciation: truck 250 350
Profit for the period $ 400

Profit
Profitalso
alsoappears
appearson
onthe
the Statement
Statement
of
ofChanges
Changesin
inEquity.
Equity. 5-4
The Statement of Retained
Earnings
Summarizes the increases and decreases
in Retained Earnings during the period.

Business Dividends
Earnings
Business
Losses

5-5
The Statement of Retained
Earnings

Now, let’s prepare the Balance Sheet.

5-6
The Balance Sheet
JJ's Lawn Care Service
Balance Sheet
31 May 2009

Assets
Tools & equipment $ 2,650
Less: Accumulated depreciation 50 2,600
Truck $ 15,000
Less: Accumulated depreciation 250 14,750
Accounts receivable 75
Cash 3,925
Total assets $ 21,350
Liabilities & Shareholders' Equity
Liabilities:
Notes payable $ 13,000
Accounts payable 150
Total liabilities $ 13,150
Shareholders' equity:
Share capital $ 8,000
Retained earnings 200
Total shareholders' equity 8,200
Total liabilities & shareholders' equity $ 21,350
5-7
 Relationships among the Financial
Statements
JJ's Lawn Care Service JJ's Lawn Care Service
Income Statement Balance Sheet
For the month ending 31 May 2009 31 May 2009
Sales revenue $ 750
Assets
Operating expenses:
Tools & equipment $ 2,650
Gasoline expense $ 50
Less: Accumulated depreciation 50 $ 2,600
Depreciation: tools & equipment 50
Truck $ 15,000
Depreciation: truck 250 350
Less: Accumulated depreciation 250 14,750
Profit for the period $ 400
Accounts receivable 75
Cash 3,925
Total assets $ 21,350
Liabilities & Shareholders' Equity
Liabilities:
Notes payable $ 13,000
Accounts payable 150
Total liabilities $ 13,150
Shareholders' equity:
Share capital $ 8,000
Retained earnings 200
Total shareholders' equity 8,200
Total liabilities & shareholders' equity $ 21,350

5-8
Drafting the Notes that Accompany
Financial Statements

Examples
ExamplesofofItems
ItemsDisclosed
Disclosed
Notes to the 
Lawsuits
Lawsuitspending
pending
Financial Statements 
Scheduled
Scheduledplant
plantclosings
closings

Governmental
Governmentalinvestigations
investigations
Significant
Significantevents
eventsoccurring
occurring
after
afterthe
thebalance
balancesheet
sheetdate
date
Specific
Specificcustomers
customersthat
that
account
accountfor
foraalarge
largeportion
portionof
of
revenue
revenue
Unusual
Unusualtransactions
transactionsand
and
related
relatedparty
partytransactions
transactions

5-9
Closing the Temporary Accounts
The closing process
Close Revenue accounts
gets the temporary
to Income Summary.
accounts ready for the
Close Expense accounts next accounting
to Income Summary. period.

 Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.

5-10
Closing the Temporary Accounts
JJ's Lawn Care Service
Adjusted Trial Balance
31 May 2009
Cash $ 3,925
Accounts receivable 75
Tools & equipment 2,650
Accum. depreciation: tools & eq. $ 50
Truck 15,000
Accum. depreciation: truck 250
Notes payable 13,000
Accounts payable 150
Share capital 8,000
Dividends 200
Sales revenue 750
Gasoline expense 50
Depreciation exp.: tools & eq. 50
Depreciation exp.: truck 250
Total $ 22,200 $ 22,200

5-11
 Closing Entries for Revenue
Accounts
Since
Since Sales
Sales Revenue
Revenue hashas aa credit
credit balance,
balance,
the
the closing
closing entry
entry requires
requires aa debit
debit to
to the
the Sales
Sales
Revenue
Revenue account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
31 May Sales Reveune 750
Income Summary 750
To close the revenue account.

5-12
Closing Entries for Revenue
Accounts

Income Summary Sales Revenue

750 750 750

750

5-13
 Closing Entries for Expense
Accounts
Since
Since expense
expense accounts
accounts have
have aa debit
debit
balance,
balance, the
the closing
closing entry
entry requires
requires aa credit
credit to
to
the
the expense
expense accounts.
accounts.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
31 May Income Summary 350
Gasoline Expense 50
Depreciation Exp.: Tools & Equipment 50
Depreciation Exp.: Truck 250
To close the expense accounts.
5-14
Closing Entries for Expense
Accounts
Gasoline Exp.
50 50
-
Income Summary
Depr. Exp.: Tools & 350 750
Equipment
50 50
-

Depr. Exp.: Truck 400

250 250
Profit
-
5-15
 Closing the Income Summary
Account
Since
Since Income
Income Summary
Summary has
has aa $400
$400 credit
credit
balance,
balance, the
the closing
closing entry
entry requires
requires aa debit
debit to
to
Income
Income Summary.
Summary.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
31 May Income Summary 400
Retained Earnings 400
To close Income Summary.

5-16
Closing the Income Summary
Account

Income Summary
350 750
Retained Earnings 400
400

-
400 The balance in Income
Summary is now zero.

5-17
 Closing the Dividends Account
Since
Since the
the Dividends
Dividends account
account has
has aa debit
debit
balance,
balance, the
the closing
closing entry
entry requires
requires aa credit
credit to
to
the
the Dividends
Dividends account.
account.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
31 May Retained Earnings 200
Dividends 200
To close the Dividends account.

5-18
Closing the Dividends Account

Dividends Retained Earnings

200 200 200 400

- 200

5-19
After-Closing Trial Balance
JJ's Lawn Care Service
After-Closing Trial Balance
31 May 2009
Cash $ 3,925
Accounts receivable 75
Tools & equipment 2,650
Accum. depreciation: tools & eq. $ 50
Truck 15,000
Accum. depreciation: truck 250
Notes payable 13,000
Accounts payable 150
Share capital 8,000
Retained earnings 200
Total $ 21,650 $ 21,650

5-20
Evaluating the Business

Evaluating
Evaluating Evaluating
Evaluating
Profitability
Profitability Liquidity
Liquidity

Profit Profit Working Current Assets –

= =
Percentage Total Revenue Capital Current Liabilities

Return on Profit Current Current Assets

= =
Equity Avg. Shareholders’ Ratio Current Liabilities
Equity

5-21
 Preparing Financial Statements Covering
Different Periods of Time

Many
Many companies
companies prepare
prepare financial
financial
statements
statements at
at various
various points
points throughout
throughout
the
the year.
year.
Annually

Interim
Quarterly
Financial
Statements Monthly

1 Jan 31 Dec
5-22
Ethics, Fraud, and
Corporate Governance
A company should disclose any facts that an
intelligent person would consider necessary for
the statements to be interpreted properly.

Public companies are required to file annual reports

with the relevant authorities, e.g. HK Stock Exchange
and US SEC. Normally, the authority requires that
companies include a section labeled “Management
Discussion and Analysis” (MD&A) because the
financial statements and related notes may be
inadequate for assessing the quantity and
sustainability of a company’s earnings.

5-23
 Supplemental Topic: The
Worksheet
OVERNIGHT AUTO SERVICES
Worksheet
For the Year Ended December 31, 2009

Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Balance Sheet Accounts Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr
Cash 18,592 18,592 18,592
Accounts Receivable 6,500 (h) 750 7,250 7,250
Shop Supplies 1,800 (a) 600 1,200 1,200
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes Payable 4,000 4,000 4,000
Accounts Payable 2,690 2,690 2,690
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Statement Accounts
Repair Service Revenue 171,250 (h) 750 172,000 172,000
Advertising Expense 3,900 3,900 3,900
Wages Expense 56,800 (f) 1,950 58,750 58,750
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
272,000 272,000 12,200 12,200 279,100 279,100 135,058 175,000 144,042 104,100
Profit 39,942 39,942
Totals 175,000 175,000 144,042 144,042

5-24
End of Chapter 5

5-25