CH 4 Classpack With Solutions

Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CHAPTER 4
ADJUSTMENTS, FINANCIAL STATEMENTS,
AND THE QUALITY OF EARNINGS
Chapter Take-Aways
4-1 Explain and purpose of adjustments and analyze the adjustments necessary at the end of the
period to update balance sheet and income statements accounts.
Adjusting entries are necessary at the end of the accounting period to measure income properly,
correct errors, and provide for adequate valuation of balance sheet accounts. There are four types:
 Deferred revenues – previously recorded liabilities created when cash was received before being
earned that must be adjusted for the amount of revenue earned during the period.
 Accrued revenues – revenues that were earned during the period but have not yet been recorded
(cash will be received in the future).
 Deferred expenses – previously recorded assets (Prepaid Rent, Supplies, and Equipment) that must
be adjusted for the amount of expense incurred during the period.
 Accrued expenses – expenses that were incurred during the period but have not yet been recorded
(cash will be paid in the future).
The analysis involves:
Step 1: Determining if revenue was earned or an expense was incurred. Record an increase in the
revenue or expense account.
Step 2: Determining whether cash was received or paid in the past or will be received or paid in the
future. If in the past, the existing asset or liability is overstated and needs to be reduced. If in
the future, the related receivable or payable account needs to be increased.
Step 3: Computing the amount of revenue earned or expense incurred in the period.
 Recording adjusting entries has no effect on the Cash account.
4-2 Present an income statement with earnings per share, a statement of stockholders’ equity, and a
balance sheet.
Adjusted account balances are used in preparing the following financial statements:
 Income Statement: Revenues – Expenses = Net Income (including earnings per share, computed
as net income divided by the average number of shares of common stock outstanding during the
period). It may be classified into a section on operating revenues and expenses followed by a
section on other items (primarily interest revenue, interest expense, and gains and losses on
investments).
 Statement of Stockholders’ Equity: (Beginning Contributed Capital + Stock Issuances – Stock
Repurchases) + (Beginning Retained Earnings + Net Income – Dividends Declared) = Ending
Total Stockholders’ Equity.
 Balance Sheet: Assets = Liabilities + Stockholders’ Equity. It is often classified into current assets
followed by noncurrent assets and current liabilities followed by noncurrent liabilities.
4-1
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Chapter Take-Aways, continued
4-3 Compute and interpret the total asset turnover ratio.

The total asset turnover ratio [Net Sales (or Operating Revenues)  Average Total Assets] measures
sales generated per dollar of assets. A rising total asset turnover signals more efficient management of
assets.
4-4 Explain the closing process.
Temporary accounts (revenues, expenses, gains, and losses) are closed to a zero balance at the end of
the accounting period to allow for the accumulation of income items in the following period and to
update Retained Earnings for the period’s net income. To close these accounts, debit each revenue
and gain account, credit each expense and loss account, and record the difference (equal to net
income) to Retained Earnings.
Key Ratio
Total asset turnover measures sales generated per dollar of assets. A high or rising ratio suggests that the
company is managing its assets more efficiently. It is computed as follows:
Total Asset Turnover = Net Sales (or Operating Revenues)  Average Total Assets
Finding Financial Information
BALANCE SHEET INCOME STATEMENT

Current Assets Current Liabilities Revenues
Accrued revenues Accrued expenses Increased by adjusting entries
include: include:
Interest receivable Interest payable Expenses
Rent receivable Wages payable Increased by adjusting entries
Deferred expenses Utilities payable
include: Income tax Pretax Income
Supplies payable Income tax expense
Prepaid insurance, Deferred revenues
rent, and advertising include: Net Income
Noncurrent Assets Unearned revenue
Deferred expenses
include:
Buildings
Equipment
Intangible assets
STATEMENT OF CASH FLOWS NOTES

Adjusting Entries Do Not Affect Cash In Various Notes
(if not on the balance sheet)
Details of accrued expenses payable
Interest paid and income taxes paid
4-2
HANDOUT 4 – 1
ADJUSTING ENTRIES AND

POSTING TO T-ACCOUNTS
Prepare the required adjusting journal entry for each situation as of December 31 of the current year. See
the last page for the unadjusted account balances shown in T-accounts.
(a) Suppose Deana’s had received a $1,800 shipment of supplies in September of the current year. When
counting the supplies on December 31 of the current year, Deana’s found only $800 worth of supplies
on hand.
Debit and credit the accounts affected.

Dec. 31
Ensure the equation still balances and debits = credits.

Assets = Liabilities + Stockholders’ Equity
(b) Suppose Deana’s had paid $12,000 for six months’ rent on November 1 of the current year. As of
December, 31 of the current year, two months’ (November & December) prepaid rent has expired.

Dec. 31

(c) Suppose Deana’s had paid $6,000 for one year’s insurance on June 1 of the current year.

Dec. 31

4-3
HANDOUT 4 – 1, continued
(d) The company had acquired equipment costing $40,000 on January 1 of the current year. Suppose that
the depreciation on this equipment was calculated to be $2,000 for the current year.

(e) On December 1 of the current year, the company had sold $500 in gift certificates for decorating
services to a customer. On December 31 of the current year, the accountant received an envelope
containing $400 worth of redeemed gift certificates, not yet recorded in the company’s books.

Dec. 31

(f) Investments owned by the company earned $1,200 in additional interest revenue for the year; the cash
will be received in January.

Dec. 31

4-4
(g) The company borrowed using a note payable from the bank for $30,000 on January 1 of the current
year, due with all interest on June 30 of the following year. The note payable requires 10% interest.

Dec. 31

(h) The company calculated its income taxes as $26,110 for the current year ended December 31.

Dec. 31

(i) On December 15 of the current year, the company declared a $750 dividend, payable January 15 of the
following year.

Dec. 31

Post the adjusting entries above to the T-accounts on the following page.
4-5
Assets Liabilities Stockholders’ Equity, continued
+ Cash – – Accounts Payable + – Retained Earnings +
Unadj. 43,450 250 Unadj. 0 Unadj.
+ Accounts Receivable – – Dividend Payable +

Unadj. 4,000 0 Unadj.
– Decorating Revenue +
120,000 Unadj.
+ Interest Receivable – – Unearned Revenue +

Unadj. 0 500 Unadj.
– Interest Revenue +
+ Supplies – – Short-Term + Wage Expense –

Unadj. 1,800 Notes Payable + Unadj. 32,000
30,000 Unadj.
+ Utilities Expense –
Unadj. 1,000
+ Prepaid Insurance – – Interest Payable +
Unadj. 6,000 0 Unadj. + Telephone Expense –
Unadj. 500
+ Supplies Expense –
+ Prepaid Rent – – Income Taxes Payable +
+ Rent Expense –
+ Equipment – Stockholders’ Equity + Insurance Expense –

Unadj. 40,000
– Common Stock +
1,000 Unadj. + Depreciation Expense –
– Accumulated Depr. +
0 Unadj. + Interest Expense –
– Additional Paid-In
Capital +
9,000 Unadj. + Income Tax Expense –
+ Long-Term Investments –
Unadj. 20,000
4-6
HANDOUT 4 – 1 SOLUTION
ADJUSTING ENTRIES AND

POSTING TO T-ACCOUNTS
Prepare the required adjusting journal entry for each situation as of December 31 of the current year. See
the last page for the unadjusted account balances shown in T-accounts.
(a) Suppose Deana’s had received a $1,800 shipment of supplies in September of the current year. When
counting the supplies on December 31 of the current year, Deana’s found only $800 worth of supplies
on hand.

Dec. 31 Supplies Expense (+E, –SE) 1,000
Supplies (–A) 1,000

Supplies –1,000 Supplies Exp. –1,000
(–A) (+E)
(b) Suppose Deana’s had paid $12,000 for six months’ rent on November 1 of the current year. As of
December, 31 of the current year, two months’ (November & December) prepaid rent has expired.

Dec. 31 Rent Expense (+E, –SE) 4,000
Prepaid Rent (–A) 4,000

Prepaid –4,000 Rent Exp. –4,000
Rent (+E)
(–A)
(c) Suppose Deana’s had paid $6,000 for one year’s insurance on June 1 of the current year.

Dec. 31 Insurance Expense (+E, –SE) 3,500
Prepaid Insurance (–A) 3,500
Prepaid –3,500 Insurance –3,500
Insurance Exp. (+E)
(–A)
4-7
HANDOUT 4 – 1 SOLUTION, continued
(d) The company had acquired equipment costing $40,000 on January 1 of the current year. Suppose that
the depreciation on this equipment was calculated to be $2,000 for the current year.

Dec. 31 Depreciation Expense (+E, –SE) 2,000
Accumulated Depreciation (+xA, –A) 2,000

Accumulated –2,000 Depreciation –2,000
Depreciation Exp. (+E)
(+xA)
(e) On December 1 of the current year, the company had sold $500 in gift certificates for decorating
services to a customer. On December 31 of the current year, the accountant received an envelope
containing $400 worth of redeemed gift certificates, not yet recorded in the company’s books.

Dec. 31 Unearned Revenue (–L) 400
Decorating Revenue (+R, +SE) 400

Unearned –400 Revenue +400
Revenue (+R)
(–L)
(f) Investments owned by the company earned $1,200 in additional interest revenue for the year; the cash
will be received in January.

Dec. 31 Interest Receivable (+A) 1,200
Interest Revenue (+R, +SE) 1,200

Interest +1,200 Interest +1,200
Receivable Revenue
(+A) (+R)
4-8
(g) The company borrowed using a note payable from the bank for $30,000 on January 1 of the current
year, due with all interest on June 30 of the following year. The note payable requires 10% interest.

Dec. 31 Interest Expense (+E, –SE) 3,000
Interest Payable (+L) 3,000
Interest +3,000 Interest –3,000
Payable Expense (+E)
(+L)
(h) The company calculated its income taxes as $26,110 for the current year ended December 31.

Dec. 31 Income Tax Expense (+E, –SE) 26,110
Income Taxes Payable (+L) 26,110

Income +26,110 Income Tax –26,110
Taxes Expense (+E)
Payable
(+L)
(i) On December 15 of the current year, the company declared a $750 dividend, payable January 15 of the
following year.

Dec. 31 Retained Earnings (–SE) 750
Dividend Payable (+L) 750
ensure the equation still balances and debits = credits.
Dividend +750 Retained –750
Payable Earnings
(+L) (–SE)
4-9

Assets Liabilities Stockholders’ Equity
+ Cash – – Accounts Payable + – Retained Earnings +
Unadj. 43,450 250 Unadj. 0 Unadj.
(i) 750
+ Accounts Receivable – – Dividend Payable + Adj. 750
750 (i) – Decorating Revenue +
Adj. 4,000 750 Adj. 120,000 Unadj.
400 (e)
+ Interest Receivable – – Unearned Revenue + 120,400 Adj.
Unadj. 0 500 Unadj.
(f) 1,200 (e) 400 – Interest Revenue +
Adj. 1,200 100 Adj. 1,200 (f)
+ Supplies – – Short-Term + Wage Expense –

Unadj. 1,800 Note Payable + Unadj. 32,000
1,000 (a) 30,000 Unadj.
Adj. 800 + Utilities Expense –
– Interest Payable + Unadj. 1,000
+ Prepaid Insurance – 0 Unadj.
Unadj. 6,000 3,000 (g) + Telephone Expense –
3,500 (c) 3,000 Adj. Unadj. 500
Adj. 2,500
– Income Taxes Payable + + Supplies Expense –
+ Prepaid Rent – 0 Unadj. (a) 1,000
Unadj. 12,000 26,110 (h)
4,000 (b) 26,110 Adj. + Rent Expense –
Adj. 8,000 (b) 4,000
Stockholders’ Equity
+ Equipment – + Insurance Expense –
Unadj. 40,000 – Common Stock + (c) 3,500
1,000 Unadj.
Adj. 40,000 + Depreciation Expense –
1,000 Adj. (d) 2,000
– Accumulated Depr. +
0 Unadj. – Additional Paid-In + Interest Expense –
2,000 (d) Capital + (g) 3,000
2,000 Adj. 9,000 Unadj.
+ Income Tax Expense –
+ Long-Term Investments – 9,000 Adj. (h) 26,110
Unadj. 20,000
Adj. 20,000
4-10
HANDOUT 4 – 2
PREPARE AN ADJUSTED TRIAL BALANCE

Use the adjusted balances from the T-accounts in Handout 4-1 to prepare an adjusted trial balance for
Deana’s Decorators as of December 31 of the current year.
Deana’s Decorators
Adjusted Trial Balance
December 31, Current Year
Debit Credit
Cash
Accounts Receivable
Interest Receivable
Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Accumulated Depreciation
Long-Term Investments
Accounts Payable
Dividend Payable
Unearned Revenue
Short-Term Notes Payable
Interest Payable
Income Taxes Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
4-11
PREPARE AN ADJUSTED TRIAL BALANCE

Use the adjusted balances from the T-accounts in Handout 4-1 to prepare an adjusted trial balance for
Deana’s Decorators as of December 31 of the current year.
Adjusted Trial Balance
Debit Credit
Cash $ 43,450
Accounts Receivable 4,000
Interest Receivable 1,200
Supplies 800
Prepaid Insurance 2,500
Prepaid Rent 8,000
Equipment 40,000
Accumulated Depreciation $ 2,000
Long-Term Investments 20,000
Accounts Payable 250
Dividend Payable 750
Unearned Revenue 100
Short-Term Notes Payable 30,000
Interest Payable 3,000
Income Taxes Payable 26,110
Common Stock ($1 par value) 1,000
Additional Paid-in Capital 9,000
Retained Earnings 750
Decorating Revenue 120,400
Investment Income 1,200
Wage Expense 32,000
Utilities Expense 1,000
Telephone Expense 500
Supplies Expense 1,000
Rent Expense 4,000
Insurance Expense 3,500
Depreciation Expense 2,000
Interest Expense 3,000
Income Tax Expense 26,110
Totals $193,810 $193,810
4-12
HANDOUT 4 – 3
FINANCIAL STATEMENTS
Use the balances from the trial balance in Handout 4-2 to prepare (1) an income statement for Deana’s
Decorators for the year ended December 31 of the current year and (2) a balance sheet as of December 31
of the current year.
Income Statement
For the year ended December 31, Current Year
4-13
Balance Sheet
Assets
Liabilities
4-14
FINANCIAL STATEMENTS
Use the balances from the trial balance in Handout 4-2 to prepare (1) an income statement for Deana’s
Decorators for the year ended December 31 of the current year and (2) a balance sheet as of December 31
of the current year.
Income Statement
For the year ended December 31, Current Year
Operating revenues:
Decorating revenue $120,400
Operating expenses:
Wage expense 32,000
Utilities expense 1,000
Telephone expense 500
Supplies expense 1,000
Rent expense 4,000
Insurance expense 3,500
Depreciation expense 2,000
Interest expense 3,000
Total operating expenses 47,000
Operating income (or Income from operations) 73,400
Other items:
Interest revenue 1,200
Income before income taxes (or Pretax income) 74,600
Income tax expense 26,110
Net income $ 48,490
4-15
Balance Sheet
Assets
Current Assets
Cash $ 43,450
Accounts receivable 4,000
Interest receivables 1,200
Supplies 800
Prepaid insurance 2,500
Prepaid rent 8,000
Total Current Assets 59,950
Property, Plant & Equipment:
Equipment 40,000
Accumulated depreciation 38,000
Net Property, Plant, and Equipment 2,000
Long-term investments 20,000
Total Assets $117,950
Liabilities
Current Liabilities:
Accounts payable $ 250
Dividends payable 750
Unearned revenue 100
Short-term note payable 30,000
Interest payable 3,000
Income taxes payable 26 110
Total Current Liabilities 60,210
Common stock ($1 per share) 1,000
Additional paid-in capital 9,000
Retained earnings* 47,740
Total Stockholders’ Equity 57,740
Total Liabilities and Stockholders’ Equity $117,950
* Beginning balance of $0 + Net income of $48,490 - Dividends of $750 = Ending balance of $47,740
4-16
HANDOUT 4 – 4
TOTAL ASSET TURNOVER RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Deana’s
Decorators for the year ending December 31of the current year. Assume that assets totaled $110,000 at
January 1 of the current year. Then, indicate what this ratio measures and how you would interpret the
results.
Calculation:
What it measures and how to interpret:
4-17
HANDOUT 4 – 4
TOTAL ASSET TURNOVER RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Deana’s
Decorators for the year ending December 31of the current year. Assume that assets totaled $110,000 at
January 1 of the current year. Then, indicate what this ratio measures and how you would interpret the
results.
Calculation:
Average Total Assets = (Beginning balance + Ending balance) ÷ 2
Average Total Assets = ($110,000 + $117,950) ÷ 2 = $113,975
Total Asset Turnover Ratio = Net Sales (or Operating Revenues) ÷ Average Total Assets
Total Asset Turnover Ratio = $120,400 ÷ $113,975 = 1.06
What it measures and how to interpret:
The total asset turnover ratio measures the sales generated per dollar of assets. Deana’s Decorators
generated $1.06 of sales per dollar of assets.
The total asset turnover ratio would be interpreted by comparison to that of prior periods and to that of
the company’s competitors.
A high asset turnover ratio signifies efficient management of assets; a low asset turnover ratio signifies
less efficient management. A company’s products or services and business strategy contribute
significantly to its asset turnover ratio. However, when competitors are similar, management’s ability
to control the firm’s assets is vital in determining its success. Stronger financial performance improves
the asset turnover ratio.
4-18
HANDOUT 4 – 5
CLOSING ENTRIES, POSTING TO T-ACCOUNTS,

PREPARATION OF POST-CLOSING TRIAL BALANCE
Refer to the adjusted trial balance in Handout 4-2 for Deana’s Decorators and prepare the required closing
entries as of December 31 of the current year. Post the entries to the T-accounts shown on the next page.
Then, prepare a post-closing trial balance as of December 31 of the current year.
Date Accounts Debit Credit
4-19
+ Cash – – Accounts Payable + – Decorating Revenue +
Unadj. 43,450 250 Unadj. 120,000 Unadj.
400 (e)
+ Accounts Receivable – – Dividend Payable + 120,400 Adj.
750 (i)
Adj. 4,000 750 Adj. – Interest Revenue +
1,200 (f)
+ Interest Receivable – – Unearned Revenue +
Unadj. 0 500 Unadj.
(f) 1,200 (e) 400 + Wage Expense –
Adj. 1,200 100 Adj. Unadj. 32,000
+ Supplies – – Notes Payable +

Unadj. 1,800 30,000 Unadj. + Utilities Expense –
1,000 (a) 30,000 Adj. Unadj. 1,000
Adj. 800
– Interest Payable +
+ Prepaid Insurance – 0 Unadj. + Telephone Expense –
Unadj. 6,000 3,000 (g) Unadj. 500
3,500 (c) 3,000 Adj.
Adj. 2,500
+ Prepaid Rent – 0 Unadj. (a) 1,000
Unadj. 12,000 26,110 (h)
4,000 (b) 26,110 Adj.
Adj. 8,000 + Rent Expense –
Stockholders’ Equity (b) 4,000
+ Equipment –
Unadj. 40,000 – Common Stock +
1,000 Adj. + Insurance Expense –
Adj. 40,000 (c) 3,500
– Accumulated Depreciation + – Additional Paid-in

0 Unadj. Capital + + Depreciation Expense –
2,000 (d) 9,000 Adj. (d) 2,000
2,000
+ Long-Term Investments – – Retained Earnings + + Interest Expense –

Unadj. 20,000 0 Unadj. (g) 3,000
(i) 750
Adj. 20,000
(h) 26,110
4-20
Post-Closing Trial Balance
Account Debit Credit

Cash
Accounts Receivable
Interest Receivable
Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Accumulated Depreciation
Long-Term Investments
Accounts Payable
Dividend Payable
Unearned Revenue
Notes Payable
Interest Payable
Income Taxes Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
4-21
CLOSING ENTRIES, POSTING TO T-ACCOUNTS,

PREPARATION OF POST-CLOSING TRIAL BALANCE
Refer to the adjusted trial balance in Handout 4-2 for Deana’s Decorators and prepare the required closing
entries as of December 31 of the current year. Post the entries to the T-accounts shown on the next page.
Then, prepare a post-closing trial balance as of December 31 of the current year.
Date Accounts Debit Credit

Dec. 31 Decorating Revenue (–R) 120,400
Interest Revenue (–R) 1,200
Wage Expense (–E) 32,000
Utilities Expense (–E) 1,000
Telephone Expense (–E) 500
Supplies Expense (–E) 1,000
Rent Expense (–E) 4,000
Insurance Expense (–E) 3,500
Depreciation Expense (–E) 2,000
Interest Expense (–E) 3,000
Income Tax Expense (–E) 26,110
Retained Earnings (+SE) 48,490
4-22

+ Cash – – Accounts Payable + – Decorating Revenue +
Unadj. 43,450 250 Unadj. 120,000 Unadj.
400 (e)
+ Accounts Receivable – – Dividend Payable + Close 120,400 120,400 Adj.
Unadj. 4,000 0 Unadj. 0 Bal
750 (i)
Adj. 4,000 750 Adj. – Interest Revenue +
Close 1,200 1,200 (f)
+ Interest Receivable – – Unearned Revenue + 0 Bal
Unadj. 0 500 Unadj.
(f) 1,200 (e) 400 + Wage Expense –
Adj. 1,200 100 Adj. Unadj. 32,000 32,000 Close
Bal 0
+ Supplies – – Notes Payable +
Unadj. 1,800 30,000 Unadj. + Utilities Expense –
1,000 (a) 30,000 Adj. Unadj. 1,000 1,000 Close
Adj. 800 Bal 0
– Interest Payable +
+ Prepaid Insurance – 0 Unadj. + Telephone Expense –
Unadj. 6,000 3,000 (g) Unadj. 500 500 Close
3,500 (c) 3,000 Adj. Bal 0
Adj. 2,500
+ Prepaid Rent – 0 Unadj. (a) 1,000 1,000 Close
Unadj. 12,000 26,110 (h) Bal 0
4,000 (b) 26,110 Adj.
Adj. 8,000 + Rent Expense –
Stockholders’ Equity (b) 4,000 4,000 Close
+ Equipment – Bal 0
Unadj. 40,000 – Common Stock +
1,000 Adj. + Insurance Expense –
Adj. 40,000 (c) 3,500 3,500 Close
Bal 0
– Accumulated Depreciation + – Additional Paid-in
0 Unadj. Capital + + Depreciation Expense –
2,000 (d) 9,000 Adj. (d) 2,000 2,000 Close
2,000 Bal 0
+ Long-Term Investments – – Retained Earnings + + Interest Expense –

Unadj. 20,000 0 Unadj. (g) 3,000 3,000 Close
(i) 750 48,490 Close Bal 0
Adj. 20,000 47,740
(h) 26,110 26,110 Close
Bal 0
4-23

Post-Closing Trial Balance
Account Debit Credit

Cash $ 43,450
Accounts Receivable 4,000
Interest Receivable 1,200
Supplies 800
Prepaid Insurance 2,500
Prepaid Rent 8,000
Equipment 40,000
Accumulated Depreciation $ 2,000
Long-Term Investments 20,000
Accounts Payable 250
Dividend Payable 750
Unearned Revenue 100
Notes Payable 30,000
Interest Payable 3,000
Income Taxes Payable 26,110
Common Stock ($1 par value) 1,000
Additional Paid-in Capital 9,000
Retained Earnings 47,740
Decorating Revenue 0
Investment Income 0
Wage Expense 0
Utilities Expense 0
Telephone Expense 0
Supplies Expense 0
Rent Expense 0
Insurance Expense 0
Depreciation Expense 0
Interest Expense 0
Income Tax Expense 0
Totals $119,950 $119,950
Note:
Revenue and expense accounts are listed here for illustrative purposes only. Often, a post-closing trial
balance will list only balance sheet accounts with balances.
4-24

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Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings

Chapter Take-Aways, continued

4-3 Compute and interpret the total asset turnover ratio.

Finding Financial Information

BALANCE SHEET INCOME STATEMENT

STATEMENT OF CASH FLOWS NOTES

ADJUSTING ENTRIES AND

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

+ Accounts Receivable – – Dividend Payable +

+ Interest Receivable – – Unearned Revenue +

+ Supplies – – Short-Term + Wage Expense –

+ Equipment – Stockholders’ Equity + Insurance Expense –

ADJUSTING ENTRIES AND

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

HANDOUT 4 – 1 SOLUTION, continued

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

HANDOUT 4 – 1 SOLUTION, continued

Debit and credit the accounts affected.

Debit and credit the accounts affected.

Ensure the equation still balances and debits = credits.

Debit and credit the accounts affected.

HANDOUT 4 – 1 SOLUTION, continued

+ Supplies – – Short-Term + Wage Expense –

PREPARE AN ADJUSTED TRIAL BALANCE

PREPARE AN ADJUSTED TRIAL BALANCE

HANDOUT 4 – 3 SOLUTION, continued

TOTAL ASSET TURNOVER RATIO

What it measures and how to interpret:

TOTAL ASSET TURNOVER RATIO

Average Total Assets = (Beginning balance + Ending balance) ÷ 2

Average Total Assets = ($110,000 + $117,950) ÷ 2 = $113,975

Total Asset Turnover Ratio = $120,400 ÷ $113,975 = 1.06

What it measures and how to interpret:

CLOSING ENTRIES, POSTING TO T-ACCOUNTS,

Date Accounts Debit Credit

+ Supplies – – Notes Payable +

– Accumulated Depreciation + – Additional Paid-in