Chapter

McGraw-Hill/Irwin

THE ACCOUNTING
CYCLE:
Reporting Financial Results

The McGraw-Hill Companies, Inc.

JJ's Lawn Care Service

Adjusted Trial Balance
May 31, 2003
Cash
$ 3,925
Accounts receivable
75
Tools & equipment
2,650
Accumulated depr.:
tools & eq.
$
50
Truck
15,000
Accumulated depr.:
truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Dividends
200
Sales revenue
750
Gasoline expense
50
Depr. exp.: tools &
eq.
50
Depr. exp.: truck
250
Total
$ 22,200 $ 22,200
McGraw-Hill/Irwin

This
This is
is the
the
Adjusted
Adjusted Trial
Trial
Balance
Balance for
for JJs.
JJs.

Now,
Now, lets
lets
prepare
prepare the
the
financial
financial
statements
statements for
for
JJs
JJs Lawn
Lawn Care
Care
Service
Service for
for May.
May.

The McGraw-Hill Companies, Inc.

JJ's Lawn Care Service

Income Statement
For the month ending May 31, 2003
Sales revenue
Operating expenses:
Gasoline expense
$ 50
Depr. exp.: tools & eq.
50
Depr. exp.: truck
250
Net income

$ 750

350
$ 400

Net
Net income
income also
also appears
appears on
on the
the
Statement
of
Owners
Equity.
Statement
of
Owners
Equity.
The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin

Statement
Statement of
of Retained
Retained Earnings
Earnings
This statement summarizes the increases
and decreases in Retained Earnings during
the period.
Business
Earnings

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Dividends
Business
Losses

The McGraw-Hill Companies, Inc.

Now, lets prepare the Balance Sheet.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

JJ's Lawn Care Service

Balance Sheet
May 31, 2003
Assets
Cash
Accounts receivable
Tools & equipment
$ 2,650
Less: Accum. depr.: tools & eq.
50
Truck
$ 15,000
Less: Accum. depr.: truck
250
Total assets
Liabilities & Stockholders' Equity
Liabilities:
Notes payable
Accounts payable
Total liabilities
Stockholders' equity:
Capital stock
$ 8,000
Retained earnings
200
Total stockholders' equity
Total liabilities & stockholders' equity
McGraw-Hill/Irwin

3,925
75
2,600

14,750
$ 21,350

$ 13,000
150
$ 13,150

8,200
$ 21,350

Next,
Next, lets
lets
prepare
prepare the
the
Statement
Statement of
of
Cash
Cash Flows
Flows
for
for JJs
JJs Lawn
Lawn
Care
Care Service
Service
for
for May.
May.

The McGraw-Hill Companies, Inc.

JJ's Lawn Care Service

Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions $
750
Cash paid for expenses
(50)
Net cash provided by operating activities
$
700
Cash flows from investing activities:
Purchase of lawn mower
$ (2,500)
Purchase of truck
(2,000)
Collection for sale of repair parts
75
Payment for repair parts
(150)
Net cash used by investing activities
(4,575)
Cash flows from financing activities:
Investment by owners
$ 8,000
Dividends
(200)
Net cash provided by financing activities
7,800
Increase in cash for month
$ 3,925
Cash balance, May 1, 2003
Cash balance, May 31, 2003
$ 3,925
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Drafting
Drafting Notes
Notes to
to the
the Financial
Financial
Statements
Statements
Notes to the
Financial Statements

Examples
Examplesof
of Items
ItemsDisclosed
Disclosed
Lawsuits
Lawsuits pending
pending
Scheduled
Scheduledplant
plantclosings
closings
Governmental
Governmentalinvestigations
investigations
Significant
Significant events
eventsoccurring
occurring
after
afterthe
thebalance
balancesheet
sheetdate
date
Specific
Specific customers
customersthat
that
account
account for
foraalarge
largeportion
portionof
of
revenue
revenue
Unusual
Unusual transactions
transactions and
and
related
relatedparty
partytransactions
transactions

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Closing
Closing the
the Temporary
Temporary Equity
Equity
Accounts
Accounts
Close Revenue accounts
to Income Summary.

Close Expense accounts

to Income Summary.

The closing process

gets the temporary
accounts ready for the
next accounting
period.

Close Income Summary

account to Retained
Earnings.

Close Dividends to
Retained Earnings.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts
Since
Since Sales
Sales Revenue
Revenue has
has 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
Date

Account Titles and Explanation

May 31 Sales Reveune

Income Summary

P
RDebit

Credit

750
750

To close the revenue account.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts

Income Summary
750

Sales Revenue
750
750

750

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Closing
Closing Entries
Entries for
for Expense
Expense Accounts
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
Date

P
RDebit

Account Titles and Explanation

May 31 Income Summary

Credit

350

Gasoline Expense

50

Depreciation Exp.: Tools & Equipment

50

Depreciation Exp.: Truck

To close the expense accounts.

McGraw-Hill/Irwin

250

The McGraw-Hill Companies, Inc.

Closing
Closing Entries
Entries for
for Expense
Expense Accounts
Accounts
Gasoline Exp.
50
50
Depr. Exp.: Tools &
Equipment
50
50
Depr. Exp.: Truck
250
250
McGraw-Hill/Irwin

Income Summary
350
750

400
Net Income

The McGraw-Hill Companies, Inc.

Closing
Closing the
the Income
Income Summary
Summary Account
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
Date

Account Titles and Explanation

May 31 Income Summary

Retained Earnings

P
RDebit Credit
400
400

To close Income Summary.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Closing
Closing the
the Income
Income Summary
Summary Account
Account

Retained
Earnings
400
400

McGraw-Hill/Irwin

Income Summary
350
750
400

The balance in Income

Summary is now zero.

The McGraw-Hill Companies, Inc.

Closing
Closing the
the Dividends
Dividends Account
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
Date

Account Titles and Explanation

May 31 Retained Earnings

Dividends

P
RDebit Credit
200
200

To close the Dividends account.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Closing
Closing the
the Dividends
Dividends Account
Account
Dividends
200
200

McGraw-Hill/Irwin

Retained
Earnings
200
400
200

The McGraw-Hill Companies, Inc.

JJ's Lawn Care Service

After-Closing Trial Balance
May 31, 2003
Cash
Accounts receivable
Tools & equipment
Accumulated depr.:
tools & equipment
Truck
Accumulated depr.:
truck
Notes payable
Accounts payable
Capital stock
Retained earnings
Total
McGraw-Hill/Irwin

$ 3,925
75
2,650
$
15,000

After
After all
all
closing
closing
entries
entries are
are
made,
made, JJs
JJs
After-Closing
After-Closing
Trial
Trial Balance
Balance
looks
looks like
like
50
this.
this.

250
13,000
150
8,000
200
$ 21,650 $ 21,650 The McGraw-Hill Companies, Inc.

Evaluating
Evaluating the
the Business
Business
Evaluating
Evaluating
Profitability
Profitability

Evaluating
Evaluating
Solvency
Solvency

Did the business earn a

profit or loss in the
current period?

Does the business have

assets available to pay
debts as they are due?

What is the businesss

future potential for a
profit?
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Evaluating
Evaluating the
the Business
Business

Focusing
Focusing
Managements
Managements
Attention
Attention

McGraw-Hill/Irwin

Are product lines

profitable?
Are resources being
used efficiently?
Are production
processes efficient?

The McGraw-Hill Companies, Inc.

Preparing
Preparing Financial
Financial Statements
Statements
Covering
Covering Different
Different Periods
Periods of
of Time
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
Financial
Statements

Quarterly
Monthly

Jan. 1
McGraw-Hill/Irwin

Dec. 31

The McGraw-Hill Companies, Inc.

End
End of
of Chapter
Chapter 55

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.