Analysis Of Adjustment, And The Quality Of Earnings

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ADJUSTMENTS,
FINANCIAL STATEMENTS,
AND THE QUALITY OF EARNINGS

CHAPTER CONTENTS

Chapter 4 4.1

WHAT’S NEW IN THIS EDITION 4.2

CHAPTER SUMMARY 4.2

CHAPTER LEARNING OBJECTIVES 4.3

CHAPTER LECTURE OUTLINE 4.4

ADDITIONAL TEACHING NOTES 4.8

TEACHING RESOURCES CHART 4.18

IDEAS FOR INCORPORATING THE STUDY GUIDE 4.19

END OF CHAPTER MATERIALS CHART 4.20

END OF CHAPTER MATERIALS COMPARISON CHART 4.20

KEY WORDS 4.22

POWERPOINT SLIDE SHOW 4.23

Chapter 4: Adjustments, Financial Statements, and the Quality of Earnings

WHAT’S NEW IN THIS EDITION

▪ Updated opening discussion for Papa John’s International ▪ New section on Analysis of Adjusting Entries o New art integrated into discussion of deferrals and accruals o Realigned discussion by Revenues (deferred and accrued) and Expenses (deferred and accrued) in 5e draft versus Deferrals (revenues and expenses) and Accruals (revenues and expenses) in 4e. o Added new summary exhibits—Exhibits 4.3 and 4.4—for deferrals and accruals to highlight the differences in the earning of revenue (or incurring of expense) versus cash receipts (or payments). ▪ Expanded introductory summary of accounts to be adjusted in the Papa John’s illustration to emphasize the identification of deferrals and accruals and the timing of cash receipts and payments. o Simplified account titles to follow more closely with end-of-chapter account titles (e.g., Supplies Expense instead of General and Administrative Expense). ▪ Updated articles and ratio comparisons. ▪ Substantially revised end-of-chapter exercises and problems using new real-world companies and numbers ▪ Upgraded Team Project at end of EOC to follow concept of a continuous project from prior and subsequent chapters. ▪ New annual report cases

CHAPTER SUMMARY

An accounting system is designed to collect, process, and report financial information. During each period, an accounting information processing cycle starts with analyzing and recording transactions (data collection) and ends with the preparation of the required financial statements. It is also necessary for the nominal (temporary) accounts to be closed.

Adjustments to some accounts are necessary because of the timing differences of recording cash receipts and payments versus proper recognition of revenues and expenses. The accounting model from Chapters 2 & 3 provides the basic framework for the adjustment process. At the end of the accounting period, accounts must be analyzed to determine if adjustments are required. Accrual and deferral accounts must be updated to reflect revenues earned and expenses incurred during the period to comply with the revenue recognition and matching principles. Adjusting journal entries are posted to the ledger, and an adjusted trial balance is prepared. The adjusted trial balance is the primary source of data for the preparation of the formal financial statements.

The formal financial statements are related. The Income Statement must be prepared first because net income flows to the Statement of Stockholders’ Equity. Ending retained earnings from the Statement of Stockholders’ Equity is carried to the Balance Sheet.

Revenue and expense accounts are temporary accounts. They reflect activities for a single accounting period. The balances in these accounts must be zero at the beginning of each accounting period. At the end of the accounting period, the temporary accounts have to be emptied out so that they will have zero balances at the start of the next period. Balances from these accounts are transferred to retained earnings.

Balance sheet accounts are permanent accounts. Their balances carry from one accounting period to the next, so it is not necessary to close these accounts.

A post-closing trial balance is the last step. It is a final check of accuracy.

CHAPTER LEARNING OBJECTIVES

LO1 Explain the purpose of a trial
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