CHAPTER 8 FINANCIAL STATEMENT PRESENTATION, |, CLOSING T BOOKS AND FINANCIAL ANALYSIS a LEARNING OUTCOMES ‘After studying this chapter, you should be able to: prepare properly classified financial statements. prepare closing eames: and ready the accounts for the next reporting period. prepare post-closing ‘aia balance to confirm equality of debits and credits of real accounts. prepare opening entries to start another accounting period. : prepare reversing entries and explain why reversing entries are needed. discuss financial analysis and compute for liquidity, solvency and profitability. assess and draw a conchision. with regards entity’s financial position and economic performance. emeae sp Realize that the working paper in Chapter 7 is not a substitute for financial statements. ‘Although financial statements may be prepared directly using the working paper, in actual practice after the worksheet preparation, the accountant must still perform the recording and posting of the adjusting entries and the preparation of the adjusted trial balance. Formal reports are prepared using the adjusted trial balance. This chapter will go over the preparation of the financial statements taking into consideration the required content, classification and format under PAS 1 or PFRS 1. ‘Additionally, the chapter discusses the last three steps of the accounting cycle: closing the books, preparing a post closing trial balance, and preparing the reversing entries. The procedure on how to journalize and post the opening entry and make the books ready for the next accounting period, are also included herein. The last part of the chapter carries a discussion on how to analyze the financial statements which will prove useful to the stakeholders before they can make informed judgment. PAS 1- GENERAL PURPOSE FINANCIAL STATEMENTS financial reports and financial information were already are those intended to meet the common needs of all the financial position, financial performance Recall that as early as in Chapter 1, the discussed, General purpose financial statements users, Its objective is to provide information about L and changes in the financial position of an enterprise, as well sits cash flows. : 3 is The Income Statement provides information regarding the financial performance of tl business or its profitability ernie ie important as this will enhance the resources of the busitess and its capacity to generate cash and cash equivalents. A high profitability is marked by a high ROE (net income divides by owner's equity)- The Statement of Changes in Equity shows the changes in the interest of the owner(s) for a sole-proprietor owned business, partners in a partnership and shareholders in a corporation. 183The statement of financial position lists down the economic Tesources bein by the fim. It helps predictability ofthe frm to pay for its obligations ast ghoye tes the asets of the firm are being funded by the creditors and by the invegy "a information, the liquidity and solvency of the firm can be determined, Fn ‘The statement of cash flows shows how cash was affected by the erating and financing activities of the business, I also helps asses ability ofthe busines : or manage cash of the entity and ensures adequacy of cash through proper ting inflows and outflows of cash. fie LIMITATIONS OF THE FINANCIAL STATEMENTS Itis emphasized at this point thatthe financial statements carry certain limitations uy . 1) the information contained herein are largely financial in nature, 2) they do not contain non- financial information such as competitivenes: Products, company’s leading market position, or that the head of the fi Bill Gates or Steve Jobs which will also greatly influence decisions of p 3) ‘some information are not factual and objective but results from esti judgment. 4) current fair values are not Teported. 8 Of the ents irm is a genivg rimary users. imation and use o INTEGRITY OF THE FINANCIAL STATEMENTS IAS | requires an entity to make an expl the preparation of the reports. Entity mu: rational judgment, and ethical behavior, formulated by an authoritative body called Teports are also ‘audited by an indepen certifies to the faimess of its presentati reliable, complete and in accordance with cit and unreserved statement of complianceia ist ensure that 1) preparer possesses competence, 2) the financial statements are based on standards the Financial Reporting Standards Council and 3) dent Certified Public Accountant (CPA) who ion. Fairness means the financial statements a generally accepted accounting principles. FEATURES OF THE FINANCIAL STATEMENTS 1) Accrual is the basis of reporting except for the cash flow statement. 2) Consistency of presentation should be observed from one period to the next unless a change is justified which information should be disclosed. 3) Comparability requires that previous inform current information more meaningful, 4) Going concer requires that manage lation must be’ presented to make the ‘ment must assess ability of the firm ! ue n lunder a quitting concer must be prepare 5) Materiality of information requires that Teports are expected to reasonably influence decisions that primary users make, PREPARING THE FINANCIAL STATEMENTS We ended Chapter 7 with the adjusted trial balance a We ready to prepa! financial Statements as the next step in the accounting. sible. The adjusted tial balance 5 ‘eproduced in Figure 8.1, to help us go over the la four steps of the accounting cycle. ; 184CARLA AUTO REPAIR SHOP ADJUSTED TRIAL BALANCE December 31, 2022 Cash On Hand . ons Credit Cash In Bank 45,000 ‘Accounts Receivable 3000 ‘Allowance for Bad Debts : Pifsaun Notes Receivable 30,000 . Interest Receivable : 450 Prepaid Insurance 5,000 Prepaid Supplies ; 200 Machinery & Equipment 150,000 ‘Accumulated Depreciation - Machinery & Equipment : 7,500 Fumiture & Fixtures 25,000 Accumulated Depreciation - Furniture & Fixture : 2,250 ‘Accounts Payable P 26,000 Notes Payable 50,000 Interest Payable 750 Taxes Payable 1,500 Bella, Capital 132,850 Bella, Personal 5,000 Repair Income 275,000 Referral Income 15,000 Interest Income 450 Depreciation Expense - Machinery & Equipment 7,500 Depreciation Expense - Furniture & Fixtures 2,250 Doubtful Accounts 4,900 Insurance Expense 10,000 Salaries Expense 45,000 Supplies Expense 400 Rent Expense 55,000 Taxes & Licenses Expense 8,750 Utilities Expense 46,750 Interest Expense 1.000. ___ Totals P516,200 —P516,200 Figure 8.1 Adjusted Trial Balance INCOME STATEMENT The income statement is usually presented first because from this one can determine the Profit which is needed to be able to prepare the capital statement. The ending capital is then Presented in the statement of financial position. _ An income statement (also known as the result of operation of an entity) is a summary of income eamed and a incurred for a certain period of time. Income may, be Geilvided into two: regular or operating income and other income. This was explained i tad 4. There are two presentation forms for cost and expenses: 1) based on its nature o On its function. (PAS 1.02-1.03) 185e of Expense. The first form presents the expenses according tp ‘i sora, advertising: transportation, employee beaeti This normally used my business, such as that of a service provider. To simplify e format, two eed fora formed, one for revenues and the other for expenses. This form wi ich is called “im form makes a single step of deducting the total expenses om the total revenug singe the profit or loss. The income statement for Carla Auto Repair Shop using the oe expense form is given in Figure 8.2. ' ion of Expense. This second form of income statement called. Function of aes the eae according to its function or use: cost of sales, istibutin administrative cost and financial cost, to name a few. This is demonstrated in Cha 14, A comprehensive discussion for this is given in Chapter 9 for a merchandiser. aj CARLA AUTO REPAIR SHOP INCOME STATEMENT For the year ended December 31, 2022 Revenue: Repair Income P.275,000 Other Operating Income (note 1) 15,450 Expenses: sg Rent expense P. 55,000 Utilities Expense 46,750 Salaries Expense 45,000 Depreciation Expense (note 2) 9,750 Other Expenses (note 3) 24,050 (180,550) Interest Expense (1,000) Profit for the year 108,900 Note 1: Other Income Referral Income P 15,000 Interest Income __450 Total P 15,450 Note2: Depreciation Expense 3 Depreciation - Machinery & Equipment P 7,500 | Depreciation - Furniture & Fixtures 2,250 Total P _9,750 Note 3: Other Expenses : Insurance Expense 10,000 Taxes & Licenses 8,750 Bad Debts Expense 4,900 Supplies Expense ‘400 Total 24,050 Figure 8.2, Nature of Expense Form of Income Statement The International Accounting Standards states that as a minimum, the face of income statement should include only line item i or pene 8. I more similar in economic characteristics t means that items that are 186ition, fiveline items are presented to show aggregated cas inery and equipment and trade and other payables west __etigare shown in the supporting notes, Refer td Free ha A detailed presentation, however, is acceptable if there are only few i resen inthe face ofthe statement a8 in the case of a Happy Tour and Travel Genes ee ented in nthe illustration here for Carla Auto Repair Shor’ —ae Posi bles, prepaid expenses, Nsaggregated when the Observe the following rules in preparing the income statement: 1. Note that the statement consists of four parts: heading, e and net income or profit. 2. The third line in the heading must always be for a time period. 3, Margin on the left side - the extreme margi the é in is used to describe the major sections and th inner margin is used.to describe the accounts contained in the major section, . 4, Money columns on the right side - the extreme margin is for the major amounts and the inner money column is for the amounts of the described accourtts. . 5. Peso. signs in the final money column (extreme right) are placed on the first and last amounts. 4. A single tule is placed under the last figure rule is placed under the final figure. 5. Income from the principal line of operation called Operating revenue is always presented first followed by other income. Expenses may be Presented from the highest amount to the lowest amount (descending order) in which case other expenses may be presented first in the expense section: of the income statement. Or these may be arranged alphabetically, Interest expense being a financial cost is always presented last. The rule is also the same in the arrangement of the expenses in the supporting notes. Tevenues earned, expenses incurred to be added or subtracted and a double line or STATEMENT OF CHANGES IN EQUITY. Changes in the owner's capital or owner's equity are summarized in this statement also known as the capital statement. It explains what happened to the capital or claim of the owner: This statement is presented for a period of one year as illustrated in Fig. 8.3 below: CARLA AUTO REPAIR.SHOP STATEMENT OF CHANGES IN OWNER’S EQUITY For the year ended December 31, 2022 Carla, Capital, January 1 P 100,000 Additional Investment 32,850 Add Profit 108,900 Total 4 P241,750 Less Withdrawals 5,000 Carla, Capital, December 31 P236,750 Figure 8.3 Statement of Changes in Owner’s Equity STATEMENT OF FINANCIAL POSITION i iti business and shows the __ This statement lists in detail the assets and liabilities of the tal nee ofthe owner as af sess dnt: Th ee ys te aco port Form, The account form, as demonstrated in follows the accounting Squation where asset: listed on the left-hand column of the report with the lial 2 es equity Histed on the right-hand column. The Report Form shows in one straight Column the assets followed by the liabilities and owner's equity. 187igure 8.4 presents a properly classified statement of financial position y.. Panay patoes is povisions of the International Accounting Stan ards CARLA AUTO REPAIR SHOP ): Statement of Financial Position December 31, 2022 ASSETS nt Assets: ore ~ @ote 1) P 70,000 Trade and Other Receivable (Note 2) 74,550 Prepaid Expenses (Note 3) 5.200 Total 149.759 Non-Current Assets: Property & Equipment (Note 4) . 165.259 Total Assets P 315,000 LIABILITIES AND OWNER'S EQUITY Current Liabilities: Trade and Other Payables (Note 5) ‘ P 78,250 Owner's Equity: Carla, Capital 236.750 Total Liabilities & Owner's Equity e 315,000 Note 1: Cash On Hand ‘ 25,000 Cash In bank 45.000 Total P70,000 Note 2: Accounts Receivable 49,000 Less Allowance for Bad Debts 4,900. 44,100 Notes Receivable 30,000 Interest Receivable : 450 Total P74,550 Note 3: Prepaid Insurance P 5,000 Prepaid Supplies 200 Total P 5,200 Note 4: Machinery & Equipment P150,000 “Less Accumulated Depreciation 7,500 P 142,500 Furniture & Fixtures P 25,000 Less Accumulated Depreciation 2,250 22,150 Total. P165,250 Note 5:Accounts Payable 26,000 Notes Payable 50,000 Interest Payable 750 Taxes Payable 1,500 Total P78.250 Figure 8.4 Statement of Financial Position 188Itis Sere cea of the assets and liabilities be shown on the face of the sutement jus ei sine The stan ial Position presented in Chapter 4 if there are only a few items to be considered. The statement presented in figure 8.4 shows only line i ft the details explained in supporting notes. 5 ee Observe the following rules in presenting the state: 1. The heading consists of three lines: a) Name of the Business b) Title of the Report c) Date "ment of financial position: 2, Margin on the left side for the major classifications: The extreme left margin is used for describing the major ck assets of current liabilities and the inner margin is used for describis like cash, accounts receivable and supplies. ifications like current ing the accounts herein 3, Money columns on the right side The placement of the amounts usually follows the margin on the left side: extreme ° right money column for the major amounts following the major classifications like P149,750, P165,250 and P315,000 and an inner money column for the amounts of the described accounts like P70,000, P74,550 and PS,200. 4, In the final money column, the peso sign is placed on the first and last amounts per accounting value; while in the inner money column, the peso sign is placed on the first amount of every column of figures. 5. A single line or rule is placed under the last figure to be added or subtracted and a double line or rule is placed under the final figure. These rules are to be followed whether the format used is a report format or account format. The International Accounting Standards does not prescribe the order or form in which items are to be presented in the statement. It simply states that it should be according to the nature of the enterprise and:its transactions and that the information is necessary for an overall understanding of the enterprise’s financial position (PFRS 1. 71/PAS 1.57). The format is therefore a, matter of choice by management for as long as information are clearly presented taking into consideration the users who make decisions. Formats of foreign countries are discussed at the last part of this chapter to give reader the idea that different countries have different sets of standards and until the national standards of all countries are aligned to the Intemational Accounting Standards, we expect a difference in the preparation and presentation of financial statements. CURRENT AND NON-CURRENT CLASSIFICATION ified i ts. (PAS 1.57). Current Assets are classified into current assets and non-current asse Assets include eash and cash equivalents which are not restricted in use, as well as other assets expected to be realized into cash, or sold or consumed within the normal operating cycle of the usiness or one year, whichever is longer. The following are the current assets: |. Cash - includes currencies or coins or negotiable instruments such as a bank check or @ Postal money order used as a medium of exchange. Two account titles ne be eet instead of one: Cash on Hand for cash items in the custody of the officer-in-c arg, and Cash in Bank for cash deposited in the bank under a current or savings accoun 189“equivalents are short term, highly liquid investments such as a three-month wat ora three-month government treasury bill. say ae 2, Marketable securities- these are highly tra bi si ss € the srt S Lu hased by the enterprise that are to be hel for a sho m duration, [3.2% tag Pyuivalens, they are usually purchased when the enterprise has temporary ide or gx llectibles fom customers, clients and other pero, *°% ivables - these are co! ni 3: Pah eae cor money given by the business. Accounts Receivable jg Used if fry aor implied promise i received from the client or customer. Notes Regs crtionced by a promissory note issued by the debtor. Other Receivables te ti Receivable when interest is collectible on promissory notes Teceived from ¢ cag customers or Rent Receivable for rent collectible from tenants. Dividends Receivapiet ‘a dividend collectible by a shareholder from a corporation. ley 5, Merchandise Inventory is an account title used to represent the stock of goods avai for sale by the business. This is applicable only for a merchandising business, 6. Prepaid Expenses - these represent advance payments made for benefits or services gy received by: the business ‘in the future. Examples of these are Supplies, Prepay Insurance and Prepaid Rent. 7. Deductions from current assets are called contra asset accounts. An example of thisis te Allowance for Bad Debts which represents customers’ accounts doubtful of collect, This is deducted from accounts receivable to arrive at its net realizable value. Non-current assets are those assets not included as current assets such as the long-tem investments, property, plant and equipment and intangibles. Long Term Investments held for wealth accretjon, regular income, capital appreciation, conto, 1. . Investments in Securities such as stocks or bonds 2. Investment in Subsidiaries/Associates- equity method Property, Plant and Equipnient or Plant Assets are assets not intended for sale but ar acquired since they are needed to operate the business. The following are some examples: 1. Land - lot or real estate owned and used by the business on which a building could by constructed. ‘ 2. Building- structure used to house the office, store or factory. 3. Equipment - typewriter, air conditioner, calculator, filing cabinet, computer, electric fan, tucks or cars. Specific titles: Office Equipment, Store Equipment, and Delivery Equipment. 4. Furniture and Fixtures - tables, chairs, curtains, lighting fixtures and wall decors. Specific titles: Office Furniture and Fixtures and Store Furniture and Fixtures. 5. Leasehold or Lease Right- for a-fee, lessee is given the right to use the property of | lessor over a long period of time. Most often improvements are made herein such ® | Painting, walling, fencing, hence it is usually called Leasehold Improvements, which also subject to depreciation. 6 Accumulated Depreciation - contra asset or off-set account representing expired cos! the plant, property or equipment becaus i ; ¢ of usage and passage of time. This is # from the property, plant and equipment account meg jest cepatenetatY assets, no physical substance, with future ae be . aie panei, separable Pa le of being sold or transferred such as Patents. Or it m2 ights such as a Franchi i omen ise or Copyright. am *sets are Advances to Employees (long term), Deposits for Utilities or Contain®* | 190Liabilities are also classified into current and non-current. (PERS 1.60) Current Liabilities are those debts or obligations Teasonably expected to be liquidated in the normal course of the enterprise’s operating cycle or paid within a period of one year usin, nt assets or the creation of other e Te pies: Current liabilities. The following are examples of Ct if r 1, Accounts Payable to trade creditors for purchase of goods or services on credit oo ‘ 4 supported by the oral or implied promise of the business. Note payable is a liability supported bya promissory note issued by the business to the creditor, . 2. Loan Payable is a liability to pay a bank or a financing instituti Lecowed bi iis busiagse, ‘ing institution for amount of money Utilities Payable is a liability to pay utility companies like PLDT, Meralco’and Manila Water for telephone, electricity and water services received from then, Other payables include Interest Payable which represents additional charge and obligation to pay for interest-bearing promissory notes issued by the business and Salaries Payable which represents obligation to pay employees for services received from them and Taxes Payable which are obligations due to the government for sales, earnings, gains and value of property owned/sold by the business. Non-current liabilities are long term liabilities or obligations which are payable longer than one year such as:- 1. Note Payable which is issued to the creditor and evidenced by a promissory note. 2. Mortgage Payable which is an obligation secured by the real property of the business. 3. Bond Payable which is a long-term promise usually from five to ten or twenty years supported by a formal contract containing the face value of the bond, the interest rate, the interest payment date and the maturity date. ADEQUATE DISCLOSURES This principle requires the inclusion of significant information that will help enhance the fimm’s financial statements. It also means that the users are informed of additional facts that Will ad them in properly interpreting the financial statements. PFRS 1/PAS 1.97-98 describes. and enumerates the significant information that must be disclosed either in the body of the financial statements or in notes/supporting schedules to the financial statements. Aside from the notes supporting the line items presented in the financial statements, other notes are given below for the Carla problem: Notes to Financial Statements: 1. Financial statements are presented in accordance with generally accepted accounting Principles, al > Se 2. Revenues and expenses are recognized based on the Realization Principle and the Matching Principle. » Machinery and equipment are presented at depreciation, : » Depreciation is computed using straight line Accounts receivables are presented at net real for doubtful accounts, Pr i * Doubtful accounts are estimated using an aging of accounts receivables, * Merchandise is valued based on net realizable value which is lower book value based on cost less accumulated method. lizable value based on cost less allowance cost. 191\ er information that should be disclosed include major liabilities ang their igen esos and liabilities, subsequent se tat ey, af the resourses fe & presented in the statement of financial position. sates at ntity should ath Piformation that a reasonably informed person wou ier necessary fy ee interpretation of the financial statements. Pie STATEMENT OF CASH FLOWS ‘Some questions cannot. be answered just by reading the income Statement gy statement of financial position such as: i ty a) How was cash obtained by the business? b) How was cash spent? : c) What caused the increase or decrease in cash? ) Why was the cash only P50,000 when the net income was P100,000? Relevance of this statement: 8) It will enlighten you on how cash is being managed. A business should be abe generate positive net cash flow specially from operating activities so that obligations may be paid including cash withdrawals of owners. Revenues should easily be converted ing cash so that disbursements could easily be paid. aX b). Cash flows are vital to the financial health of the business. Too little cash or too much cash will affect the smooth flow of financial operation. . It is good for business to be able to generate cash from operation much more than from financing or from investing activities. For short-run planning, management strictly monitors the cash to ensure that cash inflow from operating activities is always more than its cash outflow. ©) Some businesses. fail because of its inability to maintain a proper balance betwea receipts and disbursements. Cash flow is either an inflow (source or receipt) or an outflow (use or disbursement) and are classified as: operating activities, investing activities, financing activities. A summary of cash flows is given below: Activities Inflows Outflows Operating | revenue collections payment for expenses. Investing sale of securities, plant, property | acquisition of securities, plant and equipment property and equipment. Financing loans extended by creditors or. | cash paid to creditors or contributions of investors withdrawn by investors. DIRECT METHOD OF DETERMINING CASH FLOW ‘The cash flow statement for the year ended December 31, 2022 appears in Fi 83. Additional information are need it ‘ -d such as: sh 00,000 wi" additional investment fpr cash on January 1, 2022 was P100¥ purchase of machine. 2,850 in cash during the year. Accounts payable 192CARLA AUTO REPAIR SHO] IP ‘ STATEMENT OF CASH FLOWS ‘or the year ended December 31, 2022 Cash flows from operating activities: Collections from customers Collections for referrals made (Schedule 1) P196,000 Payment for rent ( Beau Payment for utilities ; ceoso. Payment for salaries ( ban Payment for insurance (echedule 2) Ciao Payment for taxes (Schedule 3) (7250) Payment for supplies (schedule 4) (600) Payment for interest expense (schedule 5) (_250) Net cash inflows from operating activities Cash flows from investing activities: Purchase of machinery and equipment (Schedule 6) _P(124,000) ‘Acquisition of furniture (25.000) Net cash outflows from investing activities Cash flows from financing activities: Investment by the owner P 32,850 Cash withdrawals (5,000) Loan from Republic Finance 50,000 Decrease incash Cash, January 1 ¢ Cash, December 31 Schedule 1: Repair Income P 275,000 ‘Accounts Receivable, December 31 (49,000) Notes Receivable, December 31 (30,000) Collections from customers P 196,000 Schedule 2: Insurance Expense P 10,000 Prepaid Insurance, December 31 5,000 Insurance paid P_15,000 Schedule 3: Taxes and Licenses Expense P 8,750 Taxes Payable : (1500) Taxes & Licenses paid P7250 Schedule 4: Supplies expense P BY : Prepaid supplies —200 Supplies paid P__600 Schedule 5: Interest Expense P ee Interest Payable ce Taxes & Licenses paid aa 7 Schedule 6; Machinery & Equipment Econ ‘Accounts Payable ae) rn 124,000 Payment for machinery Figure 8.5 Statement of Cash Flows P 41,150 (149,000) 193i \d financing activities are “Note that the cash flows from operating and finar inadequ investing activities of the business such as acquisition of needed property Gute to 3 eatin The following rules are to be observed: 1) Determine the increases or decreases in the statement of financial Position acco, to revenue and expense accounts. Since this is the first year of | operation, the ns quite simple. All items appearing in the statement are deemed to be increases St; at the end of the year represent increases in uncollected accounts hence ‘it ial deducted from income to arrive at the cash actually collected. The same rule cia payables. Ending balances represent increases in unpaid accounts and should 427 les from expenses reported in the income statement to arrive at expenses actually ve tha For investing activities - go over the property and equipment accounts; increase in represents acquisition of property and paid in cash if there is no increase in payable ‘ decrease in property represents sale or disposl of propery but you must adhe pin ng (or less loss on disposal) to arrive at the total proceeds representing cash inflow, 3) For financing activities go over the loans and owner's activities (invetmens aj withdrawals). Increase in loan and investment represent cash inflows from Decrease in loan and owner's drawing represent payment or cash outflow from finan activities. To prove that you got the correct cash flows, the cash balance in this ‘statement should reconcile with what was reported in the statement of financial Position. 2 The statement of cash flows for the second reporting period will be more diffcul a prepare since the differences of the amounts in the statement of financial position account fr two years will have to be determined first before making the analysis for the increases « decreases that took place as previously illustrated. Author used only one method of determining cash flows from operating activities: direct method. The other method called tie indirect method is discussed in higher accounting. CLOSING ENTRIES After all the adjustments have been journalized and posted and the financial statement Prepared, the income and expense accounts and owner’s drawing account must be closed Closing the books means bringing the temporary or nominal accounts to zero balance by transferring them to the capital account or owner’s equity. Remember profit or loss goes tt owner. After the closing entries, the books are "cleared" of these accounts so that inthe eporting period, the books are ready for a new set of temporary or nominal accounts. Ths the the reason why the income statement accounts are called nominal or temporary and that heading of the income statement is only for one accounting period. On the other hand, we carry forward the balances of the assets, liabilities, and =“ Geary co the next accounting period since these are real or permanent accounts ea don't close these accounts unless the assets ate disposed, the liabilities are Paid ™ Capital (representing claim over the remaining assets) is retumed to the owner. 194In making * sibsing entries, the income statement column of the worksheet should be used a8 8 guide. es title Income Summary is an accoiint used to close the nominal values and bring-them to the capital account. The following are the steps in making the closing 1) The revenue accounts such as Rep: credit balances should’ be clo: Summary account. The expense accounts such as Salaries Ex , spense and Taxes Expense which normally are debit balances should be closed on the credit side and debited to the Income Summary account. ait Income and Interest Income which normally are sed on the debit side and credited to the Income 2 3) Determine the balance of the Income Summary account which is a net income or a net loss, If a credit balance, representing a net income, close by debiting the Income Summary account and credit to increase the Owner's Capital account. If a debit balance, representing a net loss, close by crediting the Income Summary account and debit to decrease the Owner's Capital Account. 4) The drawing account which normally is a debit balance is credited to close and debited to the capital account to bring a reduction, _ In diagram format, it will appear as follows: Each Expense Account Each Revenue Account Normal debit | Credit to Debit to close | Normal credit balance close balance ) 2) Income Summary Expenses Debit to close if net income 3) 7 Carla, Capital Carla, Drawiny - Normal debit Cah to Withdrawals | Normal credit balance Palace close: Net Income 4)| 195‘At this point, the capital account shows an ending balanop of. shown in the statement of financial position. Take note that Repair Income, Supplies Expense, Carla, Drawing) are all/zero or ¢] following are some of accounts appearing in the general ledger: Closing Entries: 1) Repair Income Referral Income Interest Income Income Summary To close the credit accounts. 2) Income Summary Salaries Expense Supplies Expense Taxes & Licenses Rent Expenses Utilities Interest Expense Bad Debts Insurance Expense Depreciation Expense - Machinery - Depreciation Expense - Furniture To close the debit accounts. 3) Income Summary Carla, Capital To close profit to capital 4) Carla, Capital Carla, Drawing To close'drawing to capital. 108 900 5.000 'P236,750 the same amoutl the nomigal accounts (such ss feared accounts. Carla, Capital Date Explanation Ref | _ Debit 2022 Jan.1 | Beginning balance Dee. 31 | Net income CE3 Personal drawings __ | CE4 |-_ 5.000 Income Summary Date Explanation it pee ple Ref_| Debi Dec.31 | To close income accounts CEL To close expenses CE2 | 181550 Close net income to capital | CE3 | 108 900 196Repair Income 3 Acct. No. 501 Explanation Ref. | Debit | Credit Balance 7022 Credit peo.31 CE 1 | 275 000 vp vi Supplies Expense Acct. Die Explanation Ref. | Debit Credit ae re 2022 ‘ Dec.31 | Supplies used. AE3 400 To close nominal account. | CE2 | 400 400 After the closing entries have been recorded and posted, note that all accounts in the general ledger must be double-ruled to show the end of the accounting period. PREPARING A POST CLOSING TRIAL BALANCE After accomplishing so many accounting steps, there is a need to prepare another trial balance to prove the equality of the debits and credits. The Post Closing Trial Balance is prepared after closing the books and contains only real accounts with balances. It has the same accounts as those found in the statement of financial position. _ AUTO REPAIR AND PAINT SHOP. POST CLOSING TRIAL BALANCE December 31, 2022 Cash On Hand 25,000 Cash In Bank 43,000 Accounts Receivable 49,000 Allowance for Bad Debts P 4,900 Notes Receivable 30,000 Interest Receivable 450 Prepaid Insurance 5,000 Prepaid Supplies 200 Machinery & Equipment . 150,000 Accumulated Depreciation - Machinery & Equipment 7,500 Fumiture & Fixtures : 25,000 a0 Accumulated Depreciation - Furniture & Fixtures aren Accounts Payable aie Notes Payable ae Interest Payable 1500 Take Payable 236,750 Tony iGO 2.650 Figure 8.6 Post Closing Trial Balance 197OPENING ENTRY : To bring forward the accounts with balances to the next accounting nea an, entry should be prepared Ea Jan. 1] Cash On Hand ticulars Sy Accounts Receivable Notes Receivable Interest Receivable Prepaid Insurance Prepaid Supplies Machinery and Equipment Furniture and Fixtures Allowance for Bad Debts Accounts Payable Notes Payable Interest Payable Taxes Payable ~ Carla, Capital To open the books with the beginning balances. based on the post closing trial balance. Accumulated Depreciation- Mach and Equipment Accumulated Dépreciation- Furniture & Fixtures like at the start of the next accounting period: To illustrate, using one nominal account and one real account, this is how it will loot Prepaid Supplies Acct. No. 108 Date Explanation Ref | Debit | Credit Balance 2022 Feb.8 | Supplies purchased. Gr2 600 Dec. 31 | Supplies used up. pa AE3 | 600 400 200 Jan.1 | Opening balance Gu13 | 200 200 Supplies Expense Acot No Date Explanation Ref | Debit Credit Balance 2022 Dec. 31 | Supplies used. AE3 400 To close nominal account. | CE 2 | 400 400 4 2023 Le Nominal accounts do not have beginning balances, 198REVERSING ENTRIES These are the opposite of adjustin; x 5 F : justing entries and are succeeding reporting period. Prepaid Expenses under the ethos gate cal Becks and Deferred Income under the income method are the only it i a one ly items being reversed. The reasons for making 1) To close out the accounts created when the adjusti ‘ le adjusting entri prepaid expense (under the expense met! ies were prepared such as the income method). thod) and the unearned income (under the 2) To recognize the expired/ income portion appli en ’ ipplicable for the succeeding peri 3) To simplify the bookkeeping entries in the following accounting a od. No revering entry is needed for the Carla Repai i Se ae ee eee liability method. Prepaid supplies is a real account regularly maintained if, ea aset method, Any balance is catied forvard the following accounting petiod Soe again to decrease when supplies is used up. The rule is the same for advance collection Wind the liability method. Unearned income is a real account regularly maintained, any balance is forwarded to the next accounting period and adjusted to decrease when income is again earned. What if the expense method was used for the purchase of supplies? The foll i will be prepared for 2022 and 2023: = ee [ Date Particulars F Debit Credit 2022 T e Feb. 8 | Supplies Expense 602 600 Cash on Hand 102 600 Purchased supplies for cash. Dec. 31} Prepaid Supplies 108 200 Supplies Expense 602 200 ‘Adjust for the unused portion 2023 Jan, 1 | Supplies Expense 108 200 Prepaid Supplies 602 an Reverse prepaid supplies. Effect of the reversing entry: adjustment purposes will be Jn was created only for ed in 2023 since it is ex] 23 will be recorded as al 2023. This way there is ipected that the supplies will n expense and then consistency in the The prepaid supplies account whic tlosed, supplies expense will be recogni: then be used up, Any prepayment again in 20 ‘usted again for the prepaid at the end of bookkeeping process. 199Another illustration: Commission income of P3,000 was received in advance a ‘good for three months. On December 31 only one-month commission was , Dey, income method entries will be: atte, Xd ; Dec. 1 Cash on Hand P3 00000 ' Commission Income P3 40 9 31 Commission Income 2.000 00 , Unearned Commission Income 200% fs Jan. 1 Unearned Commission Income 2.000 00 i Commission Income 2.000 0) The adjusting entry on December 31 takes out from income the uncamed por 2,000 and recognizes a liability for this. On January 1 of the following year, the gt’ entry will bring the uneamed commission forward, then this will be reversed to che’ liability and recognize the income which is expected to be earned for the months of fg and February. NO NEED TO PREPARE REVERSING ENTRY FOR ACCRUALS In accruals, the adjusting accounts created are Accrued Income (asset account) aj Accrued Expense (liability account). Reversing entries need not be prepared for thse anymore. These real accounts will be brought forward with an opening entry, and oxz payment or collection is made, the entry will appear as follows.on maturity date: Jan. 15 Cash on Hand 30 600 Interest Income (30,000 x .12 x 15/360) » 150 Interest Receivable 450 Notes Receivable 30.000 Note that aside from the principal amount (represented by the note receivable), be interest income is also credited to recognize current income eared and the infett + receivable is credited to close’ the receivable for the income that was recognized in te previous year. This is also applicable for interest payable and taxes payable: Notes Payable $0,000 Interest Payable 750 Interest Expense (50,000 x .18 x 30/360) 750 Cash In bank 51,500 Taxes and Licenses Payable 130 Cash on Hand 130 Aside from the principal amount (re interes “ : c “presented by the note able) the intel the is also debited to recognize current expense facasrea ahd aot payed wo ct ability for the previous interest, 200Maturity value (amount to be Paid) in both cases total interest eamed or incurred for the holding period. t™ Of the Principal value plus FINANCIAL ANALYSIS Just looking at the financial statements wil i i ser tpt sd op et 3 le of amounts into ratios, turnovers and percentages. Although it is important to ay oie figures (the figures in the financial statements), it also becomes more aaah. ie ‘the figures are “standardized” or reduced into a cominon size by using ratios and cea : specially when comparing two companies which have different scales of eperitica, os An analysis of the previous year financial statements is a stepping stone to forecasting the company’s future financial position and performance. The financial data contained in the financial statements should be evaluated primarily to assess strength in financial Position and success in the operating perforinance of the business based on liquidity, profitability and solvency. For these reasons, financial statement analysis becomes a powerful and effective tool which will assist all users in obtaining meaningful knowledge and in making informed judgment and decision. COMPARATIVE FINANCIAL STATEMENTS, Comparative financial statements and analysis assists users in making economic decisions relevant to an understanding of the current period financial statements. Except for the first accounting period, accountants usually prepare comparative financial statements by presenting side by side the data for two periods. This is called intracomparability. The comparison may also be made between two companies. This is called intercomparability or benchmarking. Recall that this is also one of the: qualitative characteristics of financial statements as discussed in Chapter 3. An example of comparative financial statements, assuming the company has operated for two years ending 2022, are presented in Figures 8.7. This time the reports are presented without line items: 201HAPPY TOUR & TRAVEL Comparative Statement of Financial Position December 31 2022 ASSETS Current Assets: Cash P 155,750 Accounts Receivable 25,000 Supplies 4.500 Total Current Assets 185,250 Property, Plant and Equipment: Cars 350,000 Less Accumulated Depreciation — Cars 60,000 ¥ 290,000 Equipment 45,000 Less Accumulated Depreciation - Equipment 3,500 ALS Fumiture & Fixtures 25,000 Less Accumulated Depreciation—Furniture &Fixture 3,000 22,000 Total Property, Plant & Equipment 353,500 TOTAL ASSETS P 538,750 LIABILITIES & OWNER’S EQUITY Current Liabilities Accounts Payable P. 1,000 ‘Loans Payable 25,000 Rent Payable 10,000 Utilities Payable 1,500 Total Current Liabilities 37,500 Owner's Equity: Gomez, Capital 501,250 TOTAL LIABILITIES & OWNER’S EQUITY 538,750 Figure 8.7a Comparative Statement of Financial Position 202HAPPY TOUR AND TRAVEL COMPARATIVE INCOME STATEMENTS For the year ended December 31 2 REVENUES EARNED: a a Service Fees Income ‘ P455,250 - P364, LESS OPERATING EXPENSES: ae Rent Expense 120,000 108,000 Salary Expense 90,000 76,000 Gas & Oil Expense’ 46,520 35,500 Depreciation Expense 34,000 32,500 Utilities Expense 19,000 ‘15,500 Repair Expense 11,500 10,000 Supplies Expense < 4330 __7,500 Total 325,350 285,000 NET INCOME 129,900 —P_Z2,200 Figure 8.7b Comparative Income Statements PROFITABILITY. Profitability is the ability of the company to enhance owner's equity through profit. The relevant information are the revenues eamed, the net income obtained, the assets used in the operation, the investment made by the owner. The owner will be interested in the following ratios: Profit Margin, Retum on Assets and Retum on Equity. To illustrate, using the Happy Tour Comparative Financial Statements: Profit Margin: Net Income / Revenues 2022 2021 129,900/455,250 = .2853 or 28.53% 79,200 / 364,200 = .2175 or 21.75% This shows the adequacy of the revenue to earn profit. In 2022, 28.53% of revenues earned Went to profit while in 2021, it was only 21.75%. Or for a PI of service rendered, the business camed P.2853 profit in 2022 and P.2175 profit in 2021. The higher. the ratio the more Profitable the business is. Return on Total Assets: Net Income / Average Total Assets Average Total Assets 538,750 + 514,700 = 526,725 514,700 + as 000* = 449,850 2 Rate of Return 129,900/526,725= .2466 or 24.66% 79,200 / 449,850 = .1761 or 17.61% *Assume that P385,000 is the initial investment of Gomez at the start of the year. The rate of i ed by the business based on assets invested. A high return shows the income earned by s "te means the asets are being used profitably by the business. In 2022, the rate of retum or "et income eamed by the resources was 24.66% compared to 17.61% in 2021. 203Rate of return on Equity: Net Income / Average Owner's Equity Aveige Omer’ Enuty SO1250+-459.200~ 480225 459.2004 55 2 2a Re Rate of Return 129,900/480,225=.2705 or 27.05% 79,200/ 422,100 = 1876 or ty, This means that the owner earned 27.05% on her investment in 2022 compa ‘ 4 2021. Based on the above three computations, the business is a profitable yet 87%, profitability has improved from 2021 to 2022. Sate a LIQUIDITY Liquidity i the ability ofthe business to pay for its short-term obligation Shy creditors such as suppliers and lenders (banks) are.interested in this information ra the relevant figures are the current assets and current liabilities. The ratios used are 7 capital, the curent ratio and the quick assets ratio. Again, using the Happy Tour comer’ statements, the computations are: Working Capital: Current Assets - Current Liabilities 2022 2021 P185,250 - P37,500= P147,750 P142,200 - P55,500 = P86,700 Working capital was higher in 2022 at P147,750 against P86,700 in 2021. A horiamid analysis of the assets will show that working capital is building up. Current Ratio: Current Assets / Current Liabilities 185,250/37,500 = 4.95 142,200 / 55,500 = 2.56:1 This means that the business has P4.95 current assets to pay for a peso of cure | liability in 2022 against P2.56 current assets to pay for a peso of current liability in 2021. Th tule of thumb is a ratio of 2:1. Both periods show liquidity with 2022 showing it is very liga. Quick Ratio or Acid Test Ratio: Quick Assets / Current Liabilities 180,750/37,500 = 4.87:1 141,500 / 55,500 = 2.55 :1 This is a stricter measurement of liquidity since only the quick assets are in reality usd to pay for the firm’s obligations. Note that this ratio is lower than the current rato Deca the absence of some current assets such as inventories. This means that the business bel duck assets to pay for a peso of current liability in 2022 against quick assets of P25 + Peso of current liability in 2021. The rule of thumb is a 1:1 ratio, Both periods sho" 'iquidity more so in 2022. If the company is going to use this for growth such as NeW P the and new markets, then itis wise to build up current assets or working capital. But if 3 ay and re the idle funds must be moved and used for profitable ventures or else profitability 2 on owner's investment will be adversely affected. 204SOLVENCY solvency is long term liquidity and is measured bas : saa d on ability of the busi ybligations when they fall hued based.o ity of the business to pay for long term 0” y fall due. This is determined bs ey reo ag mane eal arate ova is cdi eh owner. A redite i m bargesets to the business. ors and investors contributed an equal proportion 2 2022 2021 pebt Ratio: Total liabilities / Total assets 37,500/538,750 = .0696 or 6.96% 55,500 / 514,700= .1078 or 10.78% Equity Ratio: Total Owner's Equity/Total Asset 501,250/538,750 = .9304 or 93.04% 459,200/514,700= .8922 or 89.22% In 202, only 6.96 % of the assets were provided by the credit i 2022, only 6.96 % of creditors down from 10.78% 2021. Using the equity Fao, it eat ae most of the assets were provided by eon aa ortion of 93.04% in 2022 up from 89.22% in 2021. Thi but very conservative. : \is makes the company very solvent To facilitate interpretation of the financial statements éne must consider the following: 1) use ratios, trends and percentages to standardize data. 2) compare two or mere periods, say 2021 against 2022 3) compare your company against a competitor, say Shoe Mart against Robinson. 3) compare data from the income statement (sales) against data from the statement of financial position (owner’s equity). ‘A discussion on Financial Analysis is in Chapter 11 with illustrations on how to analyze the financial statements of a merchandiser. FINANCIAL STATEMENTS PREPARED IN OTHER COUNTRIES The financial statements format (report form and account form) being used in the Philippines follows the FASB of the ‘American Institute of Public Accountants. In Figure 8.8 don’t be surprised the cash is at the bottom of the assets. Why? Because European countries current assets. While we present the assets in the present the non-current assets before the c th order of liquidity, their assets are presented in the reverse order, from the asset hardest to turn into cash to the most liquid assets. Non-Current Assets: Machine 350,000 Equipment 200,000 550,000 Current Assets: ‘Accounts Receivable 150,000 Cash 20,000 720,000 it 320,000 Owner’s Capital 320, Non-Current Liabilit Bonds Payable 300,00 Current Liabilities: ‘Accounts Payable 25, Taxes Payable 5,000 720,000 Figure 8.8 Anglo Saxon Format followed in United Kingdom 205EXERCISES 1. The following is a list of accounts Appearing in the . : firm ison its second year of operation ending Decemhes s1 ot Mathie Works. The ‘A. Identify the financial statement and the section boas hy following letter choices: a. financial position - current assets ¥ i ‘ ‘ b. financial position - non-current assets f insane ann See eed ¢. financial position - current liabilities 8 income statementexpenses d. financial position —Jong term liabilities h, ‘penses ‘here these should appear by using the TD ison capital statement epreciation Expense 11) Insurance E: 2) 10% Bonds Payable Due 2030 1 i ae 3 Mente 1B Prepaid insurance Repair Fees Revenue 14) Accounts Receivable 5) Marketable Securities 15) Investment in Associates 9 Marquez Cepitl, Dee 31 16) Investment Income counts Payable 1 hore 'T) Rent Expense i 18) Marquez, Drawin, 3) Marquez, Capital-January 1,2022 19) _ Notes Recehahireiue March 2023 10) Allowance for Bad Debts 20) Deposit for Containers B. Ifnon-current assets identify whether intangibles, Jong term investments, plant assets The follovring are selected information for My Own Way as of December 31, 2022: Liabilities P240,000 out of which P200,000 is evidenced by a three - year note, the balance representing accounts with suppliers. Owner’s original investment, P200,000. Additional investment in equipment P160,000. Capital at year end P420,000, cash drawings P5,000. The other assets are the following: Due from Clients P75,000; Supplies PS,000, Cash? Car costing P450,000 with a market value of P350,000 and book value of 300,000, Required: a) Determine profit or loss by preparing a statement of owner's equity. b) Prepare a properly classified statement of financial position, Amounts shown below are presumed to be correct, but some are missing: = ae Accumulated Depreciation 2 6% Notes Payable due 2025 2 Land 2? Green, Capital, January 1 80,000 Cash 7,000 Accounts Payable 3000. 2 Interest Payable ¥ oe Peeaeeiine 2? Green, Drawing 30,000 You discovered the following information which might help you prepare reports for 2022: 4) Records show that cnstbnpers owe the firm P40,000 but P5,000 of this came from Custor ‘he now insolvent, b . ©) The car cost 180,000 new but a used car dealer said that itis now worth P50,000. ©) Green estimates that the car has already been depreciated at one-third of its cost. 4 The land cost P150,000 on Jan 1 but was recently assessed at a value St P150,000. ©) Green issued the note on June 30, 2022. There is an accrued interest of P3,000. ) Net income totaled P155,000. 8) Prove if the accrued interest is correct. i ee Required: i tion a), c) and e) prepare adjusting : eee acne nekigwimeobewed add 3) Pi ’a statement of owner’s equity to arrive at the ending capital, 4 Prepare a properly classified statement of financial position, 207> 4. The following financial statement information are from five separate ggm,~_ Company A CompanyB Company@ December 31, 2021: Compa Assets ‘50,000 P40,000 P30,000 pray: Liabilities 23,500 22,500 14,000 P8009) December 31, 2022: 38.00) Assets 53,000 44,000 4 Liabilities 2 27,500 25,000 250m During year 2022 4000 Owner's investments 5,000 1,500 7,750 Net income (loss) 7,500 2 9,000 inst Owner’s drawings 3,000 5,000 4,000 oq Required: @) Compute for the missing items in question mark. 5 ») Prepare a statement of owner’s equity for the year ending December 31, 2022. 5. The following are selected accounts from the books Luna Rental Agency for 2022. Prepaid Insurance 2,000 Wages Payable P500 Doubtful Accounts pay Unearned Rental Fees” 8,000 Advertising Expense 800_Depreciation Expense ~ 7 Interest Income 1,250 Unused Supplies 300 Luna, Capital June 1 ~ 75009) Deferred Tax 5,000 ' Luna, Drawing 6,000 Rental Fees Revenue 93.519 Interest Expense 500 Insurance Expense 8,000 Gain on Sale of Cars 1510 Required: a) Prepare a single step income statement supported by four closing entries b) Prepare a statement of owner’s equity for the year ended December 31. 6. The ledgers of Billiard and Bowling Plaza at the end of its first year of operation in 2022 revealed the following balances: Cash on Hand and In Bank P450,000 Due from Customers 25,000 Accumulated Depreciation. 2,500 Fumiture & Equipment 250,000 Accounts Payable —Delta Equipment 28,000 Notes Payable to PNB 60,000 Wages Payable 5,000 Supplies Expense 2,250 Taxes Payable 3,700 Depreciation Expense 2,500 The bookkeeper prepared an income statement showing a net income meri financial position showing the owner's capital as 316,050. The why it is only P150,000 when and 4 statement of | wondering what happened to the cash and 268,950. Required: Billiard Revenue 50,000 Bowling Revenue 95,000 Prepaid Supplies 2130 Rent Expense 22,000 Advertising Expense 15m Utilities Expense Ba Wages Expense 4 750 Utilities Payable aos Taxes Expense 5000 Ramona, Drawings j of P5210 she inves ed: i tal 4) Verify if the net income reported by the bookkeeper is correct by preparin8 et income statement and a capital statement to explain the changes iD capital, b) Explain why the cash is only P150;000 by showing the: a) cash received from customers, 208b) cash paid for expenses, ) cash paid for furniture and equi 4)- cash borrowed from the bank Pt ¢) cash invested by the ownen 7, The following is a list of balances of Sure j owed and operated by Demi Estrella: ® 88 of December 31, 2022. which is Accounts ‘Ana! Coteotindandln Bank P2078" cota, eas Ams Supplies Un 3 mn r Depreciation Expense-Equipment 500 See — rast Accumulated Depreciation-Truck 10,000 Utilities Expense ee Accounts Receivable 6,000 Utilities Payable 1,500 Bquipment : 60,000 Rent Expense 90;000 ‘Accounts Payable for supplies 10,000. Supplies Expensé 35, Bank Loan due July 31, 2023 50,000 Depreciation Expense Truck 10,000 Estrella, Capital, January 1, 2022. 270,000 Accum Demea ion-Equipment 5,000 Delivery Truck 500,000 Notes Payable due July 12025 400,000 Interest Expense 2,000 Interest Payable 2,000 SSS & EC Premiums Payable 10,620 SS & EC Premium Expense 7245 PhilHealth Premiums Payable 3,000 PhilHealth Premium Expense 1,500 Pag-ibig Premiums Payable 800 Pag-ibig Premium Expense 400 Investment in Pag-ibig Bonds 200,000 Interest Income 50,000 Instruction: Prepare -a single step ‘income statement with line items and notes for depreciation, payroll contributions and other operating expenses; a statement of owner's equity and a properly classified report form of financial position for Speed Padala with line items and notes for plant assets, accrued liabilities and payroll liabilities Refer to Exercise 7. Was there a positive net cash flow from the operating activities? Prepare a statement of cash flow from operating activities considering the following: 4) Collections from customers (revenues less accounts receivable) : ) Payments for supplies (compute for purchases first by adding supplies unused and supplies expense and then deduct accounts payable). 2 t ©) Other operating expenses (total expenses except depreciation, salaries and premium expenses and then deduct the accrued liabilities such as interest and utilities) 4) Salaries, SS & EC, Philhealth and Pag-big premium expenses less all payroll liabilities. Remember only nominal accounts will affect operating activities including interest. Refer to Exercise 7. 4) Make closing entries and prepare a post-closing trial balance. 5). Show T ‘Acces with postings for Estrella, Capital and Income Summary. < Is the balance of the Income Summary which Le closed to the capi same as the profit (or loss) in the income statement? ; ng: Refer to Exercise 7. Using financial ratios compute forthe following: | ater iquidity of the business. Compare the firm’s liquidity 2 a Loe, Was Sure Sa Padala, which has a current ratio of 1.60:1 and a quic : iPadala more liquid? 209b) Solvency of the firm. Using solvency ratios, does the firm have a tat structure or is it of a conservative type leaning more on owner’s equity ‘ ¢) Profitability ofthe firm. Is the company profitable? Compute for prog rate of return on equity (ROE). Given arate of 5% investment in BDO yrs more attractive? ds, ig! . Using the adjusted trial balance of Timothy Law Office from Chapter 7 Exers: prepare the following: Tei a) Single step income statement with line items for depreciation and other expenses supported by notes. Petey b) Closing entries. c) Post closing trial balance. ; d) Is the business profitable considering bank’s prime rate being 8%? e) Is the business liquid considering a ratio of 1:1? f) Prepare the opening entry at the start of 2023. 12, Refer to Exercise 11 and assess financial performance and financial postion ing y following ratios: a) for profitability- profit margin, return on assets and return on equity. b) for liquidity- current ratio and quick ratio. .¢) for solvency- debt ratio and equity ratio. 13. The unadjusted trial balancé showed on December 31, 2022 Uneamed Subscription Revenue of P382,500 and a table of subscription contracts which is reproduced below: a No. of Quarterly _ | No. of Semi-Annual Subscription Date Stepan “| Subscriptions September 1 100 October 1 200 200 November]: 300 150 Required: : a. Open two T Accounts on January 1, 2022: Subscription Income with no begining balance and Uneared Subscription for 2022 based on September, October and November collections. b. Give the adjusting entry, post to the T Accounts. Also post the closing entry, rule and double rule. c. Open two T Accounts again. This time use the income method to post collection adjust and post. Post also the closing entry. In 2023, create two T accounts agait Po opening entry and also the reversing entry. Batangas Placement Agency issued a 20% P500,000, 120-day promissory note to Manila Skill Trade Center on October 2, 2022 for services received training its contract Required: Entry to record issuance on October 2, entry to adjust on December 31. a. b. Set up two T Accounts: Interest Receivable and Interest Income. Post entries ¢. Post the closing entry. Rule and double rule. e. f, > Post the opening entry. Give the entry of Batangas Placement A; i rt : gency'on maturity date and post. Determine the balances to be presented in 2022 and 2023 income statements. 210se following are the balances of th 18 med and operated by Ronnie Marcelo, after 2 years 2022: Supplies Expense ‘Transport Buses Cash (on hand is P15,500) Gas & Oil Expense ‘Accounts Payable Notes Payable (due 2023) Depreciation Expenses Mortgage Payable (due 2025) Salaries Payable Repairs & Maintenance Marcelo Drawings Fumiture & Fixtures Passenger Fares Earned Accumulated Depreciation ~ Furniture & Fixtures Utilities Expense Fumiture & Fixtures Utilities Expense Tools Prepaid Insurance Cargo Fares Eamed Rent Expense Marcelo Capital January 1, 2022 Salary Expense Interest Expense Insurance Expense Tools Expense Office Supplies Unused Due from-Customers Accumulated Depreciations - Transport Buses Required: Prepare the following: adjusted trial balance. ne statement with line item for operating expenses a) b) 9 4 ®) p 9 4) nature of expense form of inco! except for salaries and depreciation. capital statement eet with line items for prepaid expenses and for teport form of balance sht ledger accounts of Marcelo Transport Services Of operation ending December 31, 8,000 17,300,000 153,500 150,000 23,400 2,550,000 585,400 9,885,000 4,500, 38,000 15,000 180,500 2,460,000 13,400 140,000 13,400 140,000 875,000 55,000 125,900 120,000 4,647,700 450,000 70,000 11,250 14,750 5,500 60,000 572,000 other payables with supporting notes. counting policies. additional notes to describe the firm’s acc closing entries. i Postings to the general ledger for Marcelo, capital determine the profit margin and ROE to assess Is the ROE attractive considering that time depos! I 6. Refer to Exercise 17 of Chapter 7: ) Pr Prepare an adjusted trial balance. Prepare financial statements th fepare closing entries. Set up t0 T acco! Owner’s Capital and Drawing acco it rate on inves unts and make the ne and Income Summary. "s profitability. ms Pin investment is only 5%? 2 Income and Expense Summa .cessary postings trade and ry and 21