Department of Accountancy

Review of Accounting
Process

Greg Davis, Accountancy Lecturer

 Week 2 Learning Objectives

Use the accounting equation

while completing the
accounting cycle
Types of adjusting entries
(cash to accrual basis)
Understanding the basic
financial statements
2
Lesson 1

Using the Accounting Equation

During the Processing Cycle
The Accounting Equation

Assets = Liabilities +
Shareholders’ Equity
A = L + SE
Account Relationships
Permanent accounts: Balance
Sheet (A, L, & SE)
Balances are carried over into
next period
Temporary accounts: Income
Statement
Balances are closed out at
year-end
Accounting Processing Cycle
During the accounting period:
Step 1: Obtain source
documents
Step 2: Analyze each
transaction
Step 3: Journal the transaction
Step 4: Post to general ledger
Accounting Processing Cycle
End of the accounting period:
Step 5: Prepare Unadjusted
Trial Balance (UTB) (DR = CR)
Step 6: Prepare adjusting
entries (cash to accrual basis)
Step 7: Prepare Adjusted Trial
Balance (ATB)
Step 8: Prepare financial
statements (from ATB)
Accounting Processing Cycle

End of the year:

Step 9: Closing entries (zero
temporary accounts)
Step 10: Post-closing trial
balance (permanent accounts)
 Steps 1-5 of Accounting Processing Cycle

Basic monthly transaction

analysis before end of period
Prepare Unadjusted Trial
Balance (UTB)
Ensure that debits = credits
(SCREAM if they don’t!)

9
Lesson 2

Adjusting Entries
Accounting Processing Cycle

Unadjusted Trial Balance

(UTB)
Step 6: Prepare adjusting
entries (cash to accrual basis)
Prepare the Adjusted Trial
Balance (ATB)
Types of Month-End Adjusting Entries
Prepayments
1. Prepaid expenses
2. Deferred (unearned)
revenues
Accruals
1. Accrued receivables
2. Accrued liabilities
Types of Month-End Adjusting Entries

Examples of prepayments:
1. Prepaid rent or insurance
2. Gift cards
Types of Month-End Adjusting Entries

Examples of accruals:
1. Interest receivable
2. Accrued payroll
 Types of Month-End Adjusting Entries

Estimates
1. Bad debt expense
2. Depreciation expense

15
 Closing Process at Year-End

Serves a dual purpose:

1. Temporary accounts are
zeroed out
2. Temporary accounts are
closed to retained earnings
as net income

16
Lesson 3

Financial Statements
 Order of Preparation
Income Statement
Statement of Shareholders’
Equity
Balance Sheet
Statement of Cash Flows
Statement of Comprehensive
Income
18
 Income Statement

Reports the revenues less the

related expenses for the period
See next slide for Apple Inc.
Income Statement

19
 Income Statement
Years Ended ($ Millions)
9/26/2015 9/27/2014
Net sales $ 233,715 $ 182,795
Cost of sales 140,089 112,258

Gross margin 93,626 70,537

Operating expenses:
Research and development 8,067 6,041
Selling, general and administrative 14,329 11,993

Total operating expenses 22,396 18,034

Operating income 71,230 52,503

Other income/(expense), net 1,285 980

Income before provision for income taxes 72,515 53,483

Provision for income taxes 19,121 13,973

Net income $ 53,394 $ 39,510

20
Apple Inc. Form 10-K Annual Report
 Statement of Shareholders’ Equity

Discloses the change for the

period in key SE accounts:
Common stock

Retained earnings

AOCI

See next slide for Apple Inc.

21
Statement of SE
 Statement of Shareholders’ Equity
C/S & PIC R/E AOCI Total SE
Balances as of September 27, 2014 23,313 87,152 1,082 111,547

Net income - 53,394 - 53,394

Other comprehensive income/(loss) - - (1,427) (1,427)
Dividends and dividend equivalents declared - (11,627) - (11,627)
Repurchase of common stock - (36,026) - (36,026)
Share-based compensation 3,586 - - 3,586
Common stock issued, net (231) (609) - (840)
Tax benefit from equity awards 748 - - 748

Balances as of September 26, 2015 27,416 92,284 (345) 119,355

Apple Inc. 10-K Annual Report

 Balance Sheet

Reports the balances in ACCY

equation (A = L + SE) at a point
in time
See next slides for Apple Inc.
Balance Sheet

23
 Balance Sheet
9/26/2015 9/27/2014
Current assets:
Cash and cash equivalents $ 21,120 $ 13,844
Short-term marketable securities 20,481 11,233
Accounts receivable, net of allowances 16,849 17,460
Inventories 2,349 2,111
Deferred tax assets 5,546 4,318
Vendor non-trade receivables 13,494 9,759
Other current assets 9,539 9,806

Total current assets 89,378 68,531

Long-term marketable securities 164,065 130,162
Property, plant and equipment, net 22,471 20,624
Goodwill 5,116 4,616
Acquired intangible assets, net 3,893 4,142
Other assets 5,556 3,764

Total assets $ 290,479 $ 231,839

Apple Inc. 10-K Annual Report

 Balance Sheet
Current liabilities: 9/26/2015 9/27/2014
Accounts payable $ 35,490 $ 30,196
Accrued expenses 25,181 18,453
Deferred revenue 8,940 8,491
Commercial paper 8,499 6,308
Current portion of long-term debt 2,500 0
Total current liabilities 80,610 63,448
Deferred revenue, non-current 3,624 3,031
Long-term debt 53,463 28,987
Other non-current liabilities 33,427 24,826
Total liabilities 171,124 120,292

Shareholders’ equity:
Common stock and additional paid-in capital 27,416 23,313
Retained earnings 92,284 87,152
Accumulated other comprehensive income (345) 1,082
Total shareholders’ equity 119,355 111,547

Total liabilities and shareholders’ equity $ 290,479 $ 231,839

Apple Inc. 10-K Annual Report

 Statement of Cash Flows (SCF)

Explains change in cash on

Balance Sheet
Stay tuned for a later course
where SCF is covered

26
 Statement of Comprehensive Income

Reports the change in SE for

the period that was NOT part of
net income
We will further discuss the
Statement of Comprehensive
Income later in the course.

27
Wrap-Up

Accounting equation:
A = L + SE
Accounting processing cycle
Financial statements & their
relationships