5-1

Chapter
(a)THE ACCOUNTING
5(a) CYCLE: REPORTING
FINANCIAL RESULTS
(b) MERCHANDISING
ACTIVITIES

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 JJ's Lawn Care Service
Adjusted Trial Balance
This is the 5-2

May 31, 2005 Adjusted Trial

Cash
Accounts receivable
$ 3,925
75
Balance for JJ’s.
Tools & equipment 2,650
Accum. depreciation: tools & eq. $ 50
Truck 15,000
Accum. depreciation: truck 250
Notes payable 13,000
Accounts payable 150
Capital stock 8,000
Dividends
Sales revenue
200
750
Now, let’s
Gasoline expense 50 prepare the
Depreciation exp.: tools & eq. 50
Depreciation exp.: truck 250
financial
Total $ 22,200 $ 22,200 statements for
JJ’s Lawn Care
Service for May.

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 5-3

JJ's Lawn Care Service

Income Statement
For the month ending May 31, 2005
Sales revenue $ 750
Operating expenses:
Gasoline expense $ 50
Depr. exp.: tools & eq. 50
Depr. exp.: truck 250 350
Net income $ 400
Net income also appears on the
Statement of Retained Earnings.
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 5-4

Statement of Retained Earnings

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

•Business •Dividends
Earnings •Business
Losses

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 5-5

Now, let’s prepare the Balance Sheet.

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 JJ's Lawn Care Service
5-6
Balance Sheet
May 31, 2005

Assets
Cash $ 3,925
Accounts receivable 75
Tools & equipment $ 2,650
Next, let’s
Less: Accum. depr.: tools & eq. 50 2,600 prepare the
Truck $ 15,000 Statement of
Less: Accum. depr.: truck 250 14,750
Total assets $ 21,350 Cash Flows
Liabilities & Stockholders' Equity for JJ’s Lawn
Liabilities:
Notes payable $ 13,000
Care Service
Accounts payable 150 for May.
Total liabilities $ 13,150
Stockholders' equity:
Capital stock $ 8,000
Retained earnings 200
Total stockholders' equity 8,200
Total liabilities & stockholders' equity $ 21,350
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 JJ's Lawn Care Service 5-7
Statement of Cash Flows
For the Month Ended May 31, 2005
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, 2005 -
Cash balance, May 31, 2005 $ 3,925
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 Drafting Notes to the Financial 5-8

Statements
Examples of Items Disclosed
Lawsuits pending
Notes to the
Financial Statements Scheduled plant closings
Governmental investigations
Significant events occurring
after the balance sheet date
Specific customers that
account for a large portion of
revenue
Unusual transactions and
related party transactions
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 5-9

Closing the Temporary Equity 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.

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 5-10

Closing the Temporary Equity Accounts

JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2005
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 Let’s prepare the
Accounts payable 150
Capital stock 8,000
closing entries
Dividends 200 for JJ’s Lawn
Sales revenue 750
Gasoline expense 50 Care Service.
Depreciation exp.: tools & eq. 50
Depreciation exp.: truck 250
Total $ 22,200 $ 22,200

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 5-11

Closing Entries for Revenue Accounts

Since Sales Revenue has a credit balance, the

closing entry requires a debit to the Sales Revenue
account.

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

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 5-12

Closing Entries for Revenue Accounts

Income Summary Sales Revenue

750 750 750

750

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 5-13

Closing Entries for Expense Accounts

Since expense accounts have a debit balance, the

closing entry requires a credit to the expense
accounts.

GENERAL JOURNAL
P
Date Account Titles and Explanation RDebit Credit
May 31 Income Summary 350
Gasoline Expense 50
Depreciation Exp.: Tools & Equipment 50
Depreciation Exp.: Truck 250
To close the expense accounts. © The McGraw-Hill Companies, Inc., 2005
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 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
- Net Income

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 5-15

Closing the Income Summary Account

Since Income Summary has a $400 credit balance,

the closing entry requires a debit to Income
Summary.

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

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 5-16

Closing the Income Summary Account

Income Summary
350 750
Retained Earnings 400
400

-
400
The balance in Income
Summary is now zero.

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 5-17

Closing the Dividends Account

Since the Dividends account has a debit balance,
the closing entry requires a credit to the Dividends
account.

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

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 5-18

Closing the Dividends Account

Dividends Retained Earnings

200 200 200 400

- 200

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 JJ's Lawn Care Service After all 5-19

After-Closing Trial Balance closing

May 31, 2005
Cash $ 3,925
entries are
Accounts receivable 75 made, JJ’s
Tools & equipment 2,650 After-Closing
Accum. depreciation: tools & eq. $ 50 Trial Balance
Truck 15,000
Accum. depreciation: truck 250
looks like
Notes payable 13,000 this.
Accounts payable 150
Capital stock 8,000
Retained earnings 200
Total $ 21,650 $ 21,650

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 5-20

Evaluating the Business

Evaluating Evaluating
Profitability Liquidity

Did the business earn a Does the business have

profit or loss in the assets available to pay
current period? debts as they become
due?
What is the business’s
future potential for a
profit?
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 5-21

Evaluating the Business

Evaluating Evaluating
Profitability Liquidity

Net Income Net Income Working Current Assets –

= =
Percentage Total Revenue Capital Current Liabilities

Return on Net Income Current Current Assets

= =
Equity Avg. Stockholders’ Ratio Current Liabilities
Equity

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 5-22

Preparing Financial Statements Covering

Different Periods of Time

Many companies prepare financial statements at

various points throughout the year.

Annually

Quarterly
Interim
Financial Monthly
Statements

Jan. 1 Dec. 31
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 (b) MERCHANDISING 5-23

ACTIVITIES

Operating Cycle of a Merchandising

Company

Comparing Merchandising Activities

with Manufacturing Activities

Retailers and Wholesalers

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