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This 5 page Class Notes was uploaded by Tala Rafii on Saturday October 1, 2016. The Class Notes belongs to ACCN 2010 at Tulane University taught by Christine Smith in Summer 2015. Since its upload, it has received 4 views. For similar materials see Financial Accounting in Business at Tulane University.
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Date Created: 10/01/16
Financial Accounting Week 5 Tuesday, September 27 th After preparing the Financial Statements, we will close the nominal/ Income Statement accounts è we want them to be equal to 0 so we can measure next period how successful we were. The Closing Process follows the same steps: General Journal Trans.date Transaction# Account Debit Credit Closing Entries 7/31/14 CE1 Fees Earned 11,000 Income Summary 11,000 1 7/31/14 CE2 Income Summary 9,770 Wages Expense 6,000 Maintenance 450 Rent 1,000 Insurance 100 Supplies 2,100 DeprExpense-Equipment 50 DeprExpense-Van 70 7/31/14 CE3 Income Summary 1,230 CSmith, Capital 1,230 7/31/14 CE4 CSmith, Capital 750 Drawing 750 Comments: CE1: We start with our revenue account, which has a Credit balance. à Since our goal is to close it/ make it 0, we will debit it. We will create a temporary account called Income Summary, which will help us insure we did things right. We are going to put a new T-account called Income Summary in the General Ledger (it does not matter where). CE2: We close the expense accounts. Now on our General Ledger, all temporary accounts are 0. CE3: We have to close Income Summary. It has a Credit balance of 1,230. This is the net increase of owner’s equity caused by what they do for a living. We post this transaction to the General Ledgerà we added income/retained earnings to CSmith, Capital. CE4: Drawing is a contra-equity account that shows how much money we withdrawed during the period. We post in the General Ledger, making the drawing account equal to 0. 1 This is the total of expenses as written in our Income Statement. Financial Accounting Week 5 à We need to make sure that in the posting process, we did not defy the rules of Debit and Credit. We will make our last Trial Balance called the Post-Closing Trial Balance. Christine’s Catering Services Post-Closing stial Balance July 31 , 2014 Account Debit Credit Cash $ 150 Supplies 1,200 Equipment 2,400 AccumulatedDepr-Equipment $ 50 Delivery Van 4,200 AccumulatedDepr-Van 70 Prepaid Rent 3,000 Prepaid Insurance 1,100 Accounts Receivable 5,300 Unearned Catering Fees 3,600 Accounts Payable 2,250 Accrued Wages 900 CSmith, Capital 10,480 TOTAL $ 17,350 $ 17,350 à There are no Income Statement accounts. This Post-Closing Trial Balance tells us that: we successfully rolled equity/owner’s claims because the existing number in the General Ledger equals Owner’s Equity in the Balance Sheet and in the Statement of Owner’s Equity. è We finished the cycle. We can categorize all the transactions we have seen in 3 different categories: Business Activities 3 principal types of business activity: v Financing activities: activities that get the business in business. Insure the company has investments and initial resources. A company needs to obtain cash to start and grow its business. 2 primary sources of outside funds for corporations: - Borrowing money = debt financing. Amounts owed to credits (in the form of debt and other obligations) are called liabilities. - Issuing (selling) shares of stock in exchange for cash = equity financing. Financial Accounting Week 5 The total amount paid in by stockholders for the shares they purchase is called Common Stock. Cash payments to stockholders are called Dividends. v Investing activities: they represent the purchase of the resources a company needs to operate. A growing company purchases many resources, called assets. If a company has an excess of cash that it does not need for a while, it might choose to invest in securities (Stocks or bonds) of other corporations. v Operating activities: once a company has the assets it needs to get started, it begins operations. Operating activities are all the day-to-day transactions in the pursuit of the company’s goal. The company purchases its long-term assets through investing activities. However, assets with shorter lives result from operating activities. Examples of current assets: supplies, inventory, and accounts receivable. à This is the natural chronology followed by newly opened businesses. The Statement of Cash Flows is divided in 3 parts: Ø Cash flows for operating activities Ø Cash flows for investing activities Ø Cash flows for financing activities Ratio Analysis Looking at absolute information (in the Balance Sheet for instance) and comparing does not allow us to tell which company is better to invest in. This is why we have a ration analysis. § Profitability Ratios: they target –relatively speaking- how well we did at what we decided to do for a living. Example: Earnings Per Share (EPS) = net income/ average outstanding common shares. It is the amount of earnings per individual ownership share. It is a standard ratio which GAAP requires public companies to disclose every quarter. Another example: Gross Profit. § Liquidity Rations: shows how equipped the company is to meet its short-term obligations. 2 common liquidity rations: - Working capital= Current assets - Current liabilities - Current ratio = Current assets/ Current liabilities. For CCS, it’s 1,59: it’s a better indicator of our liquidity because it tells us that for $1 of liabilities, we have $1,59 to cover it. Liquidity Rations help us address our short-term obligations and our ability to meet them. § Solvency Ratios: Example: debt to asset ratio= Total liabilities/Total assets. For CCS, it’s 39% à every $1 of assets is financed by 39 cents of debt. The debt to asset ratio changes based on the industry. We should not rely on numbers without the context! Financial Accounting Week 5 Analyzing/Comparing Ratios: 1. Intracompany: compare my current ratio to my previous one: it involves the same company but different periods. 2. Intercompany: compare my company and a competitor in the same period (because of the concept of seasonality). 3. Industry averages: compare our company against industry averages. Financial Accounting Week 5 Additional information: o Although the Drawing account is temporary, we did not put it under the double lines in our ledgers because this spaced is reserved for operations. o From a business standpoint, a company has to incur debt sometimes. It is not necessarily bad. Companies must always think about the Opportunity Costs of their decisions.
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