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Chapter 2 & 3 - Comprehensive Accounting Cycle Problem

These chapters cover the entire accounting cycle, which includes recording financial transactions, adjusting entries, preparing financial statements, and closing the books. The following steps will guide you through these processes.

1. Journal Entries

What to know: You must be able to recognize and record various transactions in the general journal. Journal entries are used to record the financial effects of business transactions. Each entry will typically involve at least one debit and one credit.

Key Concepts:

• Debits: Increase assets, decrease liabilities and equity.

• Credits: Decrease assets, increase liabilities and equity.

Example:

• Purchase of inventory: Inventory (debit) 10,000Accounts Payable (credit) 10,000\text{Inventory} \, (debit) \, \text{10,000} \quad \text{Accounts Payable} \, (credit) \, \text{10,000}Inventory(debit)10,000Accounts Payable(credit)10,000

2. T-Accounts

T-accounts are used to visualize the effects of transactions on individual accounts. For each journal entry, record the corresponding amounts in T-accounts to keep track of the balances.

How to Set Up:

• Draw a "T" for each account.

• Record the debits on the left and credits on the right.

Example: For the journal entry above:

• Inventory T-account:

  • Debit 10,000 (left side)

• Accounts Payable T-account:

  • Credit 10,000 (right side)

3. Adjusting Entries

What to know: Adjusting entries are necessary at the end of an accounting period to bring accounts up to date before preparing financial statements. Common adjustments include accruals, deferrals, depreciation, and allowances for uncollectible accounts.

Example: Adjusting for prepaid expenses:

• Prepaid insurance is originally recorded as an asset, but as time passes, part of it is used up. Insurance Expense (debit) 500Prepaid Insurance (credit) 500\text{Insurance Expense} \, (debit) \, \text{500} \quad \text{Prepaid Insurance} \, (credit) \, \text{500}Insurance Expense(debit)500Prepaid Insurance(credit)500

4. Closing Entries

What to know: After the accounting period ends, closing entries are made to transfer balances from temporary accounts (revenues, expenses) to permanent accounts (retained earnings).

Steps:

1. Close revenues to Income Summary:

   • Debit revenue accounts and credit Income Summary.

2. Close expenses to Income Summary:

   • Credit expense accounts and debit Income Summary.

3. Close Income Summary to Retained Earnings:

   • The balance in Income Summary is transferred to Retained Earnings.

4. Close dividends to Retained Earnings:

   • Debit Retained Earnings and credit Dividends.

Example:

• Closing revenue: Service Revenue (debit) 5,000Income Summary (credit) 5,000\text{Service Revenue} \, (debit) \, \text{5,000} \quad \text{Income Summary} \, (credit) \, \text{5,000}Service Revenue(debit)5,000Income Summary(credit)5,000

5. Preparing Financial Statements

The core financial statements prepared after journalizing, adjusting, and closing entries are:

Balance Sheet

The balance sheet shows the company’s assets, liabilities, and equity at a specific point in time. It must balance, meaning assets = liabilities + equity.

Format:

• Assets (Current Assets + Non-Current Assets)

• Liabilities (Current Liabilities + Long-Term Liabilities)

• Equity (Common Stock, Retained Earnings)

Example:

Assets=100,000\text{Assets} = 100,000Assets=100,000Liabilities=50,000\text{Liabilities} = 50,000Liabilities=50,000Equity=50,000(Assets = Liabilities + Equity)\text{Equity} = 50,000 \quad \text{(Assets = Liabilities + Equity)}Equity=50,000(Assets = Liabilities + Equity)

Income Statement

The income statement summarizes a company’s revenues, expenses, and profits over a period.

Format:

• Revenues: Total income from sales of goods or services.

• Expenses: Costs incurred to generate revenue.

• Net Income: Revenue - Expenses.

Example:

Revenue=10,000\text{Revenue} = 10,000Revenue=10,000Expenses=7,000\text{Expenses} = 7,000Expenses=7,000Net Income=3,000\text{Net Income} = 3,000Net Income=3,000

Statement of Retained Earnings

This statement shows changes in retained earnings over a period.

Format:

Beginning Retained Earnings+Net Income−Dividends=Ending Retained Earnings\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends} = \text{Ending Retained Earnings}Beginning Retained Earnings+Net Income−Dividends=Ending Retained Earnings

Example:

Beginning Retained Earnings=20,000\text{Beginning Retained Earnings} = 20,000Beginning Retained Earnings=20,000Net Income=3,000\text{Net Income} = 3,000Net Income=3,000Dividends=1,000\text{Dividends} = 1,000Dividends=1,000Ending Retained Earnings=22,000\text{Ending Retained Earnings} = 22,000Ending Retained Earnings=22,000

Chapter 10
Here's a detailed and in-depth guide for Chapters 2 and 3 covering the accounting cycle, financial statement preparation, and concepts related to journal entries, T-accounts, adjusting entries, closing entries, and all the steps for preparing balance sheets, income statements, and statement of retained earnings. I’ll also include key concepts for Chapter 10 (Stock Issuances, Dividends, and Preferred Dividends), Chapter 11 (Cash Flow Statements), and Chapter 12 (Financial Ratios and Analysis).

Chapter 10 - Stock Issuance, Treasury Stock, Dividends

1. Journal Entries for Issuance of Stock

Issuing Common Stock:

• When stock is issued at par value: Cash (debit) AmountCommon Stock (credit) Par Value\text{Cash} \, (debit) \, \text{Amount} \quad \text{Common Stock} \, (credit) \, \text{Par Value}Cash(debit)AmountCommon Stock(credit)Par Value

• When issued above par (at premium): Cash (debit) AmountCommon Stock (credit) Par ValueAdditional Paid-In Capital (credit) Premium\text{Cash} \, (debit) \, \text{Amount} \quad \text{Common Stock} \, (credit) \, \text{Par Value} \quad \text{Additional Paid-In Capital} \, (credit) \, \text{Premium}Cash(debit)AmountCommon Stock(credit)Par ValueAdditional Paid-In Capital(credit)Premium

2. Journal Entries for Treasury Stock

• When treasury stock is purchased: Treasury Stock (debit) Amount PaidCash (credit) Amount Paid\text{Treasury Stock} \, (debit) \, \text{Amount Paid} \quad \text{Cash} \, (credit) \, \text{Amount Paid}Treasury Stock(debit)Amount PaidCash(credit)Amount Paid

• When treasury stock is resold: Cash (debit) Amount ReceivedTreasury Stock (credit) Cost of Stock\text{Cash} \, (debit) \, \text{Amount Received} \quad \text{Treasury Stock} \, (credit) \, \text{Cost of Stock}Cash(debit)Amount ReceivedTreasury Stock(credit)Cost of Stock

  • If sold for more than cost: Additional Paid-In Capital (credit) Excess\text{Additional Paid-In Capital} \, (credit) \, \text{Excess}Additional Paid-In Capital(credit)Excess

3. Journal Entries for Dividends

• For cash dividends: Retained Earnings (debit) Dividend AmountCash (credit) Dividend Amount\text{Retained Earnings} \, (debit) \, \text{Dividend Amount} \quad \text{Cash} \, (credit) \, \text{Dividend Amount}Retained Earnings(debit)Dividend AmountCash(credit)Dividend Amount

• For stock dividends: Retained Earnings (debit) Market ValueCommon Stock (credit) Par ValueAdditional Paid-In Capital (credit) Excess\text{Retained Earnings} \, (debit) \, \text{Market Value} \quad \text{Common Stock} \, (credit) \, \text{Par Value} \quad \text{Additional Paid-In Capital} \, (credit) \, \text{Excess}Retained Earnings(debit)Market ValueCommon Stock(credit)Par ValueAdditional Paid-In Capital(credit)Excess
  
  
  Chapter 11
  Chapter 11 - Cash Flow Statements (Direct and Indirect Methods)

  Direct Method

  • Operating Activities: Cash inflows and outflows from operating activities
    Recipets
    payments
    net cash

  • Investing Activities: Cash inflows and outflows related to long-term assets (purchase/sale of property, equipment, investments).

  • Financing Activities: Cash inflows and outflows related to debt and equity (issuing stock, repaying debt).
    

  • Chapter 11 - Cash Flow Statements (Direct and Indirect Methods)

    Indirect Method

    • Operating Activities: Cash inflows and outflows from operating activities (receipts from customers, payments to suppliers, etc.).
      Net income
      adjustments
      
      net cash

    • Investing Activities: Cash inflows and outflows related to long-term assets (purchase/sale of property, equipment, investments).

    • Financing Activities: Cash inflows and outflows related to debt and equity (issuing stock, repaying debt).
      

    • chapter 12

    • Chapter 12 - Financial Ratios and Analysis

      Key Ratios and What They Tell You:

      1. Current Ratio:

         Current Ratio=Current AssetsCurrent Liabilities\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}Current Ratio=Current LiabilitiesCurrent Assets​

         • Measures the ability to pay short-term obligations.

      2. Inventory Turnover:

         Inventory Turnover=COGSAverage Inventory\text{Inventory Turnover} = \frac{\text{COGS}}{\text{Average Inventory}}Inventory Turnover=Average InventoryCOGS​

         • Shows how many times inventory is sold and replaced during a period.

      3. Days Inventory Outstanding:

         DIO=365Inventory Turnover\text{DIO} = \frac{365}{\text{Inventory Turnover}}DIO=Inventory Turnover365​

         • Measures how many days inventory sits before being sold.

      4. Accounts Receivable Turnover:

         Receivables Turnover=Net Credit SalesAverage Accounts Receivable\text{Receivables Turnover} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}Receivables Turnover=Average Accounts ReceivableNet Credit Sales​

         • Measures how efficiently receivables are collected.

      5. Debt Ratio:

         Debt Ratio=Total LiabilitiesTotal Assets\text{Debt Ratio} = \frac{\text{Total Liabilities}}{\text{Total Assets}}Debt Ratio=Total AssetsTotal Liabilities​

         • Indicates the proportion of assets financed by debt.

      6. Times-Interest-Earned Ratio:

         TIE=EBITInterest Expense\text{TIE} = \frac{\text{EBIT}}{\text{Interest Expense}}TIE=Interest ExpenseEBIT​

         • Measures the ability to cover interest payments with operating income.

      7. Return on Assets (ROA):

         ROA=Net IncomeTotal Assets\text{ROA} = \frac{\text{Net Income}}{\text{Total Assets}}ROA=Total AssetsNet Income​

         • Shows how well assets are used to generate profit.

      8. Return on Equity (ROE):

         ROE=Net IncomeShareholder’s Equity\text{ROE} = \frac{\text{Net Income}}{\text{Shareholder's Equity}}ROE=Shareholder’s EquityNet Income​

         • Measures profitability relative to shareholders' equity.