WEBVTT NOTE session-03 1 00:00:00.000 --> 00:00:18.987 Welcome. Before class begins, the Accounting and Information Systems External Advisory Board meeting is on Friday, September 18. The screen has the time, room, registration link, and required attire. 2 00:00:18.987 --> 00:00:26.333 The trivia question asks for the tallest building in the world. Make a guess. 3 00:00:32.333 --> 00:00:45.333 Today we start with an adjusted trial balance, build the linked financial statements, and close the temporary accounts. The result is a ledger ready for the next reporting period. 4 00:00:45.333 --> 00:00:58.185 The first two classes moved transactions through journal entries, ledger accounts, and period-end adjustments. Today those adjusted balances become financial statements. 5 00:00:58.185 --> 00:01:02.900 Closing then separates the completed period from the next one. 6 00:01:02.900 --> 00:01:20.233 Retrieve the wage adjustment from Class 2. Wages Expense already has a 2,100 dollar debit balance, and Wages Payable is zero. Post the 900 dollar adjustment and determine both ending balances before moving on. 7 00:01:28.233 --> 00:01:46.133 Wages Expense increases from 2,100 dollars to a 3,000 dollar debit balance. Wages Payable increases from zero to a 900 dollar credit balance. Those are the amounts carried into the adjusted trial balance. 8 00:01:46.133 --> 00:02:03.233 We are at steps 7 through 9 of the accounting cycle. Prepare the statements, close the temporary accounts, and prepare a post-closing trial balance. The remaining balances become the starting point for the next period. 9 00:02:03.233 --> 00:02:19.133 The goal is to build statements and closing entries from an adjusted trial balance. The main checks are the repeated amounts: net income must connect to equity, and ending equity must connect to the balance sheet. 10 00:02:19.133 --> 00:02:31.090 One practical sequence begins with the income statement because it produces net income. The equity statement uses that amount to calculate ending equity. 11 00:02:31.090 --> 00:02:42.733 The balance sheet then uses ending equity and checks the accounting equation. This is a useful workflow, not a required drafting order under US GAAP. 12 00:02:42.733 --> 00:02:55.473 Red Cedar's adjusted trial balance contains the balances needed for the statements. The 63,500 dollar debit and credit totals establish arithmetic equality. 13 00:02:55.473 --> 00:03:02.333 They do not tell us where each account belongs or calculate the statement subtotals. 14 00:03:02.333 --> 00:03:18.145 The income statement reports performance for a period. Revenue and gains increase the result, while expenses and losses reduce it. Assets, liabilities, and equity accounts do not belong here. 15 00:03:18.145 --> 00:03:24.933 Dividends are distributions to owners, so they also stay off the income statement. 16 00:03:24.933 --> 00:03:38.974 Red Cedar has 11,100 dollars of Service Revenue and 5,000 dollars of total expenses. Subtracting the expenses produces 6,100 dollars of net income. 17 00:03:38.974 --> 00:03:51.200 That calculated amount is not a separate account on the adjusted trial balance. It will become an input to the equity statement. 18 00:03:51.200 --> 00:04:06.800 Which income-statement line is calculated instead of copied from one adjusted trial balance account? Choose Service Revenue, Wages Expense, Interest Expense, or net income. 19 00:04:16.800 --> 00:04:34.233 The answer is D, net income. Revenue and expense lines come from individual account balances. Net income is the result after combining revenue and gains and subtracting expenses and losses. 20 00:04:34.233 --> 00:04:47.093 A statement of stockholders' equity reconciles each equity component from beginning balance to ending balance. Red Cedar uses Common Stock and Retained Earnings here. 21 00:04:47.093 --> 00:04:53.833 Other comprehensive income and additional equity components return later in the course. 22 00:04:53.833 --> 00:05:04.491 A rollforward explains how a balance changed. Net income increases Retained Earnings, while a net loss and dividends reduce it. 23 00:05:04.491 --> 00:05:20.100 Other comprehensive income follows a separate path into accumulated other comprehensive income, abbreviated A O C I. A debit balance can arise when cumulative decreases exceed increases. 24 00:05:20.100 --> 00:05:33.851 Red Cedar began with zero Retained Earnings. Add 6,100 dollars of net income and subtract 600 dollars of dividends. Ending Retained Earnings is 5,500 dollars. 25 00:05:33.851 --> 00:05:40.900 The equity statement reports this change before the closing entries are recorded. 26 00:05:40.900 --> 00:05:55.797 Contributed capital combines Common Stock and additional paid-in capital, abbreviated A P I C. Share issuances generally increase these accounts, and some share retirements reduce them. 27 00:05:55.797 --> 00:06:02.400 Each component still needs its own beginning balance, changes, and ending balance. 28 00:06:02.400 --> 00:06:16.947 Red Cedar issued 30,000 dollars of Common Stock during June. Net income adds 6,100 dollars to Retained Earnings, and dividends reduce it by 600 dollars. 29 00:06:16.947 --> 00:06:26.900 Ending equity is 35,500 dollars: 30,000 dollars of Common Stock plus 5,500 dollars of Retained Earnings. 30 00:06:26.900 --> 00:06:45.286 The balance sheet uses ending assets, liabilities, and equity at June 30. Accumulated Depreciation reduces Equipment in the asset section. Total assets are 57,400 dollars. 31 00:06:45.286 --> 00:06:54.533 Liabilities of 21,900 dollars plus equity of 35,500 dollars also equal 57,400 dollars. 32 00:06:54.533 --> 00:07:14.067 Suppose a student reports Red Cedar's 30,000 dollar Equipment balance as an expense instead of an asset. Trace that one error through net income, ending equity, and total assets. Which answer describes all three effects? 33 00:07:24.067 --> 00:07:40.437 The answer is A. The false expense understates net income by 30,000 dollars, which also understates ending equity. Omitting Equipment from assets understates total assets by the same amount. 34 00:07:40.437 --> 00:07:44.400 The linked statements carry the error forward. 35 00:07:44.400 --> 00:08:02.211 Financial statement articulation means the statements connect. Red Cedar's 6,100 dollar net income enters the Retained Earnings rollforward. Ending Retained Earnings of 5,500 dollars enters the balance sheet. 36 00:08:02.211 --> 00:08:13.000 Matching these amounts catches some transfer or calculation errors, but it cannot reveal an event that was omitted everywhere. 37 00:08:13.000 --> 00:08:24.875 A complete set extends beyond the three statements just prepared. It also includes cash-flow information, comprehensive-income information, and notes. 38 00:08:24.875 --> 00:08:33.267 The notes explain accounting policies and other required details that the face of a statement cannot hold. 39 00:08:33.267 --> 00:08:51.551 A multiple-step income statement organizes unchanged account balances into useful sections and subtotals. Gross profit separates sales from product cost. Operating income then subtracts operating expenses. 40 00:08:51.551 --> 00:08:59.400 Other items and income tax lead to net income. Chapter 6 develops these classifications. 41 00:08:59.400 --> 00:09:16.839 Capitol Sign provides a second fact pattern. Its adjusted trial balance has equal 66,000 dollar totals. Beginning Retained Earnings is 7,000 dollars, and Common Stock stayed at 20,000 dollars during 2025. 42 00:09:16.839 --> 00:09:22.567 Those beginning balances matter when we build the equity statement. 43 00:09:22.567 --> 00:09:36.338 Build Capitol Sign's income statement, statement of stockholders' equity, and balance sheet. Select the right accounts, calculate each subtotal, and use the correct period or date heading. 44 00:09:36.338 --> 00:09:41.100 Work through the statements before checking the next three pages. 45 00:09:53.100 --> 00:10:09.639 Capitol Sign reports 22,000 dollars of Service Revenue. Rent Expense of 9,000 dollars plus Wages Expense of 6,500 dollars gives total expenses of 15,500 dollars. 46 00:10:09.639 --> 00:10:15.700 Net income is 6,500 dollars for the year ended December 31. 47 00:10:15.700 --> 00:10:32.761 Common Stock remains 20,000 dollars. Retained Earnings begins at 7,000 dollars, increases by 6,500 dollars of net income, and decreases by 3,000 dollars of dividends. 48 00:10:32.761 --> 00:10:41.600 Ending Retained Earnings is 10,500 dollars, and total ending equity is 30,500 dollars. 49 00:10:41.600 --> 00:11:00.450 Capitol Sign reports 43,500 dollars of total assets after subtracting 4,000 dollars of Accumulated Depreciation from Equipment. Liabilities are 13,000 dollars and ending equity is 30,500 dollars. 50 00:11:00.450 --> 00:11:03.833 Their sum agrees with total assets. 51 00:11:03.833 --> 00:11:21.441 The statement of cash flows groups cash by the activity that produced it. Operating activities generally cover the cash effects of net-income activities. Investing activities include buying or selling long-term assets. 52 00:11:21.441 --> 00:11:33.233 Financing activities include borrowing, repaying principal, and transactions with owners. The net change reconciles beginning cash to ending cash. 53 00:11:33.233 --> 00:11:49.933 For a nonfinancial company under US GAAP, which payment is operating: debt principal, interest on debt, equipment, or a stock repurchase? Classify each choice before selecting one. 54 00:11:59.933 --> 00:12:17.367 The answer is B. Interest paid is an operating cash flow under US GAAP for this company. Repaying principal and repurchasing stock are financing cash flows. Buying equipment is an investing cash flow. 55 00:12:17.367 --> 00:12:31.402 Closing separates period activity from continuing balances. Revenue, gain, expense, loss, and dividend accounts are temporary and reset to zero. 56 00:12:31.402 --> 00:12:40.467 Assets, liabilities, and permanent equity accounts carry their balances into the next period. 57 00:12:40.467 --> 00:12:54.599 For each temporary account, identify its ending balance and record the opposite amount to reset it to zero. The other side transfers the period's net effect to Retained Earnings. 58 00:12:54.599 --> 00:13:02.300 This course closes directly to Retained Earnings, although Income Summary is another valid route. 59 00:13:02.300 --> 00:13:21.800 Service Revenue has an 11,100 dollar credit balance. Debit it for 11,100 dollars to reach zero, and credit Retained Earnings. This transfers the revenue's effect into permanent equity without changing cash. 60 00:13:21.800 --> 00:13:35.436 Red Cedar's expense accounts have 5,000 dollars of total debit balances. Credit each expense for its balance to reset it. Debit Retained Earnings for 5,000 dollars. 61 00:13:35.436 --> 00:13:44.333 Together with the revenue close, these entries transfer 6,100 dollars of net income into Retained Earnings. 62 00:13:44.333 --> 00:13:59.450 Dividends has a 600 dollar debit balance. Credit Dividends and debit Retained Earnings for 600 dollars. This entry records no new distribution and changes no cash. 63 00:13:59.450 --> 00:14:07.333 It resets the temporary account and leaves ending Retained Earnings at 5,500 dollars. 64 00:14:07.333 --> 00:14:24.933 Now close Capitol Sign's temporary accounts. Identify the balances that reset, prepare the closing entries, and calculate Retained Earnings after closing. Then list the permanent balances that carry forward. 65 00:14:36.933 --> 00:14:50.723 Debit Service Revenue for 22,000 dollars and credit Retained Earnings. Credit the two expense accounts for 15,500 dollars and debit Retained Earnings. 66 00:14:50.723 --> 00:15:03.133 Finally, credit Dividends for 3,000 dollars and debit Retained Earnings. The ending Retained Earnings credit balance is 10,500 dollars. 67 00:15:03.133 --> 00:15:16.633 Which account is permanent and therefore survives closing: Advertising Expense, Interest Revenue, Loss on Sale of Equipment, or Unearned Service Revenue? 68 00:15:25.633 --> 00:15:43.667 The answer is D, Unearned Service Revenue. It is a liability for service still owed after the reporting period ends. The expense, revenue, and loss accounts measure completed-period activity and close to zero. 69 00:15:43.667 --> 00:16:03.400 Capitol Sign's post-closing trial balance contains only permanent accounts. The debit and credit totals are both 47,500 dollars. Retained Earnings is 10,500 dollars, matching the equity statement and closing calculation. 70 00:16:03.400 --> 00:16:18.098 The December 31 permanent balances become the January 1 opening balances on the same debit or credit sides. Revenue, expense, and dividend accounts begin the new period at zero. 71 00:16:18.098 --> 00:16:27.067 Closing does not erase the completed-period records; it resets the accounts used to measure the next period. 72 00:16:27.067 --> 00:16:46.400 Revenue and expenses are closed, leaving an 18,400 dollar credit balance in Retained Earnings. Dividends still has a 2,700 dollar debit balance. Decide what must happen before the 2026 ledger opens. 73 00:16:56.400 --> 00:17:11.820 The answer is B. Debit Retained Earnings and credit Dividends for 2,700 dollars. Retained Earnings becomes 15,700 dollars, Dividends becomes zero, and cash is unchanged. 74 00:17:11.820 --> 00:17:17.933 Equal trial balance totals did not prove that closing was complete. 75 00:17:17.933 --> 00:17:30.241 The cycle is now complete. Adjusted balances produced the statements. Closing moved period activity into Retained Earnings and reset temporary accounts. 76 00:17:30.241 --> 00:17:39.633 The post-closing trial balance confirms that the continuing debit and credit balances are equal for the next period. 77 00:17:39.633 --> 00:17:55.651 Before Thursday, read Chapter 3 on the course site. Optional practice is available with the chapter. The Unit 1 review assignment is due in D 2 L on Monday, September 14, at 11:59 P M. 78 00:17:55.651 --> 00:18:03.312 The next meeting asks where US GAAP rules come from and how to evaluate their authority.