The Financial Reporting Process: Study Notes. Well Written.

Chapter Opener p. 102 Learning Objectives AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO: ▪ LO1 Record revenues using the revenue recognition principle and expenses using the matching principle. ▪ LO2 Distingui ...

Chapter Opener p. 102 Learning Objectives AFTER STUDYING THIS CHAPTER, YOU SHOULD BE ABLE TO: ▪ LO1 Record revenues using the revenue recognition principle and expenses using the matching principle. ▪ LO2 Distinguish between accrual-basis and cash-basis accounting. ▪ LO3 Demonstrate the purposes and recording of adjusting entries. ▪ LO4 Post adjusting entries and prepare an adjusted trial balance. ▪ LO5 Prepare financial statements using the adjusted trial balance. ▪ LO6 Demonstrate the purposes and recording of closing entries. ▪ LO7 Post closing entries and prepare a post-closing trial balance. ET INCOME: AN INVESTOR’S BEST FRIEND Wouldn’t it be great to put $1,000 into the stock market and watch your investment really grow? As a student, you may not have a lot of extra money right now, but someday you will. Which stock should you buy? Where should you buy it? ET INCOME: AN INVESTOR’S BEST FRIEND Wouldn’t it be great to put $1,000 into the stock market and watch your investment really grow? As a student, you may not have a lot of extra money right now, but someday you will. Which stock should you buy? Where should you buy it? AP3–7 You are a tutor for introductory financial accounting. You tell the students, “Recording adjusting entries is a critical step in the accounting cycle, and the two major classifications of adjusting entries are prepayments and accruals.” Chris, one of the students in the class, says, “I don’t understand.” Required: Respond to Chris. 1. When do prepayments occur? When do accruals occur? 2. Describe the appropriate adjusting entry for prepaid expenses and for unearned revenues. What is the effect on net income, assets, liabilities, and stockholders’ equity of not recording a required adjusting entry for prepayments? 3. Describe the required adjusting entry for accrued expenses and for accrued revenues. What is the effect on net income, assets, liabilities, and shareholders’ equity of not recording a required adjusting entry for accruals? AP3–6 Obtain a copy of the annual report of McDonald’s Corporation for the most recent year. You can find the annual report at the company’s website (www.mcdonalds.com) in the investor information section or at the Securities and Exchange Commission’s website (www.sec.gov) using EDGAR (Electronic Data Gathering, Analysis, and Retrieval). Form 10-K, which includes the annual report, is required to be filed on EDGAR. Search or scroll within the annual report to find the financial statements. Required: Determine the following from the company’s financial statements: 1. Do the company’s revenues exceed expenses? What is the amount of net income? 2. Did net income increase in the most recent year compared to the previous year? 3. Which assets are listed as current assets? Why are other assets not listed as current assets? 4. Which liabilities are listed as current liabilities? Why are other liabilities not listed as current liabilities? 5. By how much did retained earnings increase/decrease in the most recent year compared to the previous year? 6. What is the amount of dividends paid to common stockholders? This information can be found in the statement of shareholders’ equity or the statement of cash flows. 7. Explain the relationship between the change in retainedearnings, net income, and dividends. AP3–4 Financial information for American Eagle is presented in Appendix A at the end of the book and financial information for The Buckle is presented in Appendix B at the end of the book. Required: 1. Determine which company maintains a higher ratio of current assets to total assets. How might this be an advantage for the company? 2. Determine which company maintains a higher ratio of current liabilities to total liabilities. How might this be a disadvantage for the company? 3. The dividend payout ratio equals dividends paid during the year divided by net income. Determine which company has a higher dividend payout ratio. Why might this be the case? American Eagle Outfitters, Inc. AP3–2 Financial information for American Eagle is presented in Appendix A at the end of the book. Required: 1. For the most recent year, what amount does American Eagle report for current assets? What assets are listed as current assets? What is the ratio of current assets to total assets? 2. For the most recent year, what amount does American Eagle report for current liabilities? What liabilities are listed as current liabilities? What is the ratio of current liabilities to total liabilities? Financial Analysis3. List any current assets or current liabilities which likely relate to adjusting entries. 4. What is the change in retained earnings reported in the balance sheet? 5. For the most recent year, what is the amount of net income reported in the income statement? 6. Using your answers in 4 and 5, calculate the amount of dividends paid during the year. Verify your answer by looking at the retained earnings column in the statement of stockholders’ equity. The Buckle, Inc. p. 154 AP3–3 Financial information for The Buckle is presented in Appendix B at the end of the book. Required: 1. For the most recent year, what amount does The Buckle, Inc., report for current assets? What assets are listed as current assets? What is the ratio of current assets to total assets? 2. For the most recent year, what amount does The Buckle, Inc., report for current liabilities? What liabilities are listed as current liabilities? What is the ratio of current liabilities to total liabilities? 3. List any current assets or current liabilities which likely relate to adjusting entries. 4. For the most recent year, what is the change in retained earnings reported in the balance sheet? 5. For the most recent year, what is the amount of net income reported in the income statement? 6. Using your answers in 4 and 5, calculate the amount of dividends paid during the year. Verify your answer by looking at the retained earnings column in the statement of stockholders’ equity.