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Adjusted Trial Balance

Objective 4: Adjusted Trial Balance
- Prepared after adjusting entries are posted.
- Verifies the equality of total debit and credit balances before financial statements.
- If the adjusted trial balance doesn't balance, an error occurred.
- Errors can still occur even if the adjusted trial balance agrees (e.g., omitting an adjusting entry).
- Exhibit 11 shows an example for NetSolutions as of December 31, 2015.
- Financial statements are prepared using classified balance sheets.

Effect of Errors on Adjusted Trial Balance

Objective 4: Effect of Errors
Errors can cause adjusted trial balance totals to be unequal.
Example Exercise 3-9:
- Accrued fees adjustment of 5,340 journalized as a debit to Accounts Payable instead of Accounts Receivable.
Depreciation adjustment of 3,260 journalized with an incorrect debit amount of 3,620 to Depreciation Expense.

Financial Analysis and Interpretation: Vertical Analysis

Objective 5: Vertical Analysis
- Compares each item in a financial statement with a total amount from the same statement.
- Useful for analyzing relationships within the financial statement.
Balance Sheet: Each asset item is stated as a percentage of total assets.
Each liability and owners' equity item is stated as a percentage of total liabilities and owners' equity.
Income Statement: Each item is stated as a percentage of revenues or fees earned.
Vertical analysis is useful for analyzing changes in financial statements over time.

*Example with J. Holmes, Attorney-at-Law:
* Increase in wages expense (2%) is unfavorable.
* Increase in utilities expense (0.7%) is unfavorable.
* Decrease in supplies expense (0.6%) is favorable.
* Net income decreased as a percentage of fees earned from 52.8% to 50.7%.

Comparisons with industry averages can enhance analysis.

*Example with Pandora Media, Inc.:
* Vertical analysis reveals that advertising revenue as a percent of total revenue increased 0.9% from Year 1 to Year 2.
* Subscription revenues fell by the same percent.
* Expenses as a percent of total revenues increased 3.8% from Year 1 to Year 2.
* Marketing and selling expenses declined from 26.3% to 23.7%.
* General and administrative expenses increased from 10.3% to 12.9%.
* Content acquisition costs increased from 50.3% to 54.2%.
* Loss from operations increased from (0.2%) to (4.0%).

Example Exercise 3-10: Vertical Analysis Example
- Vertical analysis may indicate favorable or unfavorable trends.

Key Points

Accrual Basis of Accounting: Revenues are reported in the period earned, and expenses are matched with revenues.
Adjusting Process: Updating accounts at the end of the accounting period.
Each adjusting entry affects an income statement and balance sheet account.
The four types of accounts requiring adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

Adjusting Entries

Adjusting entries are needed for:
- Prepaid expenses
- Unearned revenues
- Accrued revenues
- Accrued expenses
An adjusting entry is necessary to record depreciation on fixed assets.

Adjustment Process Summary

Exhibit 8: Summary of adjustments, including type, reason, adjusting entry, and effect of omitting the adjustment.
Adjusted Trial Balance
- Verifies equality of debit and credit balances after posting adjusting entries.

Vertical Analysis

Compares each item on a financial statement with a total amount from the same statement.
Balance Sheet: Each asset is expressed as a percentage of total assets; each liability and owners' equity item, as a percentage of total liabilities and owners' equity.
Income Statement: Each revenue and expense is expressed as a percentage of total revenues or fees earned.