Closing the Accounting Cycle and Financial Analysis

Closing the Accounting
Cycle
MR RICK COMPANY
ADJUSTED TRIAL BALANCE
FOR THE MONTH ENDED JUNE 30, 2020
ACCOUNTS
DEBIT CREDIT
CASH 160,000.00
ACCOUNTS RECEIVABLES 65,000.00
SUPPLIES 2,000.00
FURNITURE 80,000.00
EQUIPMENT 180,000.00
ACCOUNTS PAYABLE 50,000.00
BANK LOAN 50,000.00
DICK CAPITAL 360,000.00
SALES 122,000.00
PURCHASES 100,000.00
SALARIES EXPENSE 8,000.00
UTILITIES EXPENSE 6,000.00
RENT RECEIVABLE 5,000.00
RENT INCOME 5,000.00
SALARIES PAYABLE 4,000.00
INTEREST EXPENSES 1,000.00
INTEREST PAYALE 1,000.00
UNEARNED SALES 18,000.00
SUPPLIES EXPENSE 3,000.00
BAD DEBTS EXPENSE 6,500.00
ALLOWANCE FOR BAD DEBTS 6,500.00
DEPRECIATION EXPENSES 3,833.00
ACCUMU,ATED DEPRECIATION FURNITURE 833.00
ACCUMU,ATED DEPRECIATION EQUIPMENT 3,000.00
620,333.00 620,333.00
Closing the Accounts
Close the revenue, expense, and
withdrawal accounts.
Closing the accounts is the end of
period process that prepares the
accounts for recording transactions
during the next period.
Revenues and Expense
accounts are closed to Income
Summary.
Income Summary is closed to
Capital.
Withdrawals are closed to
Capital.
GENERAL JOURNAL
Date Particulars F Debit Credit

June 30 SALES 122,000.00
RENT INCOME 5,000.00
MERCHANDISE INVENTORY 41,000.00
PURCHASES 100,000.00
SALARIES EXPENSE 8,000.00
UTILITIES EXPENSE 6,000.00
INTEREST EXPENSES 1,000.00
SUPPLIES EXPENSE 3,000.00
BAD DEBTS EXPENSE 6,500.00
DEPRECIATION EXPENSES 3,833.00
INCOME AND EXPENSE SUMMARY 39,667.00
To close all nominal account
to Income & Expense Summary
June 30 INCOME AND EXPENSE SUMMARY 39,667.00

RICK CAPIAL 39,667.00
To close income & expense summary to capital
MR RICK COMPANY
POST CLOSING TRIAL BALANCE
FOR THE MONTH ENDED JUNE 30, 2020
ACCOUNTS
DEBIT CREDIT
CASH 160,000.00
ACCOUNTS RECEIVABLES 65,000.00
MERCHANDISE INVENTORY 41,000.00
SUPPLIES 2,000.00
FURNITURE 80,000.00
EQUIPMENT 180,000.00
RENT RECEIVABLE 5,000.00
ACCOUNTS PAYABLE 50,000.00
BANK LOAN 50,000.00
RICK CAPITAL 399,667.00
SALARIES PAYABLE 4,000.00
INTEREST PAYABLE 1,000.00
UNEARNED SALES 18,000.00
ALLOWANCE FOR BAD DEBTS 6,500.00
ACCUMU,ATED DEPRECIATION FURNITURE 833.00
ACCUMU,ATED DEPRECIATION EQUIPMENT 3,000.00
533,000.00 533,000.00
Income Summary
A debit balance A credit balance

represents net represents net
loss. income.
(Close Revenue Account)
Income
Sales Summary
122,000 120,000 Close Expense
Accounts) 17,000 122,000
2,000
39,667
Salary Exp (Close Income
Summary)
8,000 8,000 Capital
Account
Utilities Exp
0 39,667
6.000 6,000 (Close
Supplies Exp Withdrawals Withdrawals
Account) 0 0
3,000 3,000
Post Closing Trial Balance
The accounting cycle ends with the post closing trial
balance.
The post closing trial balance is dated as of the end of
the period for which the statements have been
prepared.
The post closing trial balance contains real accounts
only.
Real Accounts
What accounts never close?
– Assets
– Liabilities
– Owner’s equity
Balances of real accounts carry over to the next period.
Reversing Entries
Reversing entries are made on the first day of an
accounting period to remove accrual adjusting entries
that were made at the end of the previous accounting
period. Two benefits of using reversing entries are:
It greatly reduces the chance of double-counting
revenues and/or expenses, and
It allows for more efficient processing of the actual
invoices that will be processed in the new
accounting period
2-11
Items that should be reversed
Accrued Income
Accrued Expenses
Deferred Income-
Income method of recognition
Prepaid Expenses
Expense Method
GENERAL JOURNAL
Date Particulars F Debit Credit
July 1 Rent Income 5,000.00
Rent Receivable 5,000.00
To reverse accrued income
July 31 Cash 10,000.00
Rent Income 10,000.00
To record rent for June & July

GENERAL LEDGERS
RENT INCOME
Date Explaination F Debit Date Explaination F Credit
July1 reverse GJ4 5,000.00 July 31 10,000.00
5,000.00
RENT RECEIVABLE
June 30 Beg bal. GJ2 5,000.00 July 1 reverse GJ4 5,000.00

GENERAL JOURNAL
July 1 Salaries Payable 4,000.00

Salaries Expense 4,000.00
To reverse accrued salaries
July 1 Accrued Interest Expense 1,000.00

Interest Expenses 1,000.00
To reverse accrued interest
July 4 Salaries Expense 4,000.00

Cash 4,000.00
To record salaries payment
July 5 Interest Expense 1,000.00

Cash 1,000.00
To record interest payment
GENERAL LEDGERS
SALARIES EXPESES
July 4 payment GJ5 4,000.00 July 1 reversing 4,000.00
SALARIES PAYABLE
July 1 reversing GJ5 4,000.00 June 30 Beg Bal GJ2 4,000.00

GENERAL JOURNAL
July 1 Unearned Sales 18,000.00
Sales 18,000.00
To reverse unearned sales
July 5 NO MORE ENTRY UPON DELIVERY OF RICE

UNEARNED SALES
July 1 reversing GJ6 18,000.00 June 30 Beg Balance GJ2 18,000.00
SALES
July 1 reversing GJ6 18,000.00

Financial Statements
and Analysis
Using Financial Ratios:
Interested Parties
Ratio analysis involves methods of calculating and
interpreting financial ratios to assess a firm’s financial
condition
and performance.
It is of interest to shareholders, creditors, and the
firm’s own management.
2-20
Types of Ratio Comparisons
Trend or time-series analysis
Used to evaluate a firm’s performance
over time
2-21
Types of Ratio Comparisons (cont.)
Cross-sectional analysis
Used to compare different firms at the same point in
time
Copyright © 2006 Pearson Addison-Wesley. All

rights reserved. 2-22
Industry comparative analysis
 One specific type of cross sectional analysis. Used to compare
one firm’s financial performance to the industry’s average
performance

Benchmarking
 A type of cross sectional analysis in which the firm’s ratio
values are compared to those of a key competitor or group of
competitors that it wishes
to emulate

Combined Analysis
Combined analysis simply uses a combination of both
time series analysis and cross-sectional analysis



Cautions for Doing Ratio Analysis
Ratios must be considered together; a single ratio
by itself means relatively little.
Financial statements that are being compared
should be dated at the same point in time.
Use audited financial statements when possible.
The financial data being compared should have
been developed in the same way.
Be wary of inflation distortions.

Ratio Analysis
Liquidity Ratios
Current Ratio
Current ratio = total current assets

total current liabilities
Current ratio = $1,233,000 = 1.97

$620,000
Ratio Analysis (cont.)
Liquidity Ratios
Current Ratio
Quick Ratio
Quick ratio = Total Current Assets - Inventory

total current liabilities
Quick ratio = $1,233,000 - $289,000 = 1.51

$620,000
Liquidity Ratios
Activity Ratios
Inventory Turnover
Inventory Turnover = Cost of Goods Sold

Inventory
Inventory Turnover = $2,088,000 = 7.2

$289,000
Liquidity Ratios
Activity Ratios
Average Age of Inventory
Average Age of Inventory = 365

Inventory Turnover
Inventory Turnover = 365 = 50.7 days

7.2
Liquidity Ratios
Activity Ratios
Average Collection Period
ACP = Accounts Receivable

Net Sales/365
ACP = $503,000 = 59.7 days

$3,074,000/365
Liquidity Ratios
Activity Ratios
Average Payment Period
APP = Accounts Payable

Annual Purchases/365
APP = $382,000 = 95.4 days

(.70 x $2,088,000)/365
Liquidity Ratios
Activity Ratios
Total Asset Turnover
Total Asset Turnover = Net Sales

Total Assets
Total Asset Turnover = $3,074,000 = .85

$3,597,000
Insert Table 2.6 here

Liquidity Ratios
Activity Ratios
Financial Leverage Ratios
Debt Ratio
Debt Ratio = Total Liabilities/Total Assets
Debt Ratio = $1,643,000/$3,597,000 = 45.7%

Liquidity Ratios
Activity Ratios
Leverage Ratios
Times Interest Earned Ratio
Times Interest Earned = EBIT/Interest
Times Interest Earned = $418,000/$93,000 = 4.5

Liquidity Ratios
Activity Ratios
Leverage Ratios
Fixed-Payment coverage Ratio (FPCR)
FPCR = EBIT + Lease Payments
Interest + Lease Pymts + {(Princ Pymts + PSD) x [1/(1-t)]}

FPCR = $418,000 + $35,000 = 1.9
$93,000 + $35,000 + {($71,000 + $10,000) x [1/(1-.29)]}
Liquidity Ratios
Activity Ratios
Leverage Ratios
Profitability Ratios
Common-Size Income Statements


Liquidity Ratios
Activity Ratios
Leverage Ratios
Gross Profit Margin
GPM = Gross Profit/Net Sales
GPM = $986,000/$3,074,000 = 32.1%

Liquidity Ratios
Activity Ratios
Leverage Ratios
Operating Profit Margin (OPM)
OPM = EBIT/Net Sales
OPM = $418,000/$3,074,000 = 13.6%

Liquidity Ratios
Activity Ratios
Leverage Ratios
Net Profit Margin (NPM)
NPM = Earnings Available to Common Stockholders

Sales
NPM = $221,000/$3,074,000 = 7.2%
Liquidity Ratios
Activity Ratios
Leverage Ratios
Earnings Per Share (EPS)
EPS = Earnings Available to Common Stockholders

Number of Shares Outstanding
EPS = $221,000/76,262 = $2.90

2-45
Liquidity Ratios
Activity Ratios
Leverage Ratios
Return on Total Assets (ROA)
ROA = Earnings Available to Common Stockholders

Total Assets
ROA = $221,000/$3,597,000 = 6.1%

Liquidity Ratios
Activity Ratios
Leverage Ratios
Return on Equity (ROE)
ROE = Earnings Available to Common Stockholders

Total Equity
ROE = $221,000/$1,754,000 = 12.6%

Liquidity Ratios
Activity Ratios
Leverage Ratios
Market Ratios
 Price Earnings (P/E) Ratio
P/E = Market Price Per Share of Common Stock

Earnings Per Share
P/E = $32.25/$2.90 = 11.1

Liquidity Ratios
Activity Ratios
Leverage Ratios
Market Ratios
 Market/Book (M/B) Ratio
BV/Share = Common Stock Equity

Number of Shares of Common Stock
BV/Share = $1,754,000/72,262 = $23.00

Liquidity Ratios
Activity Ratios
Leverage Ratios
Market Ratios
 Market/Book (M/B) Ratio
M/B Ratio = Market Price/Share of Common Stock

Book Value/Share of Common Stock
M/B Ratio = $32.25/$23.00 = 1.40

Summarizing All Ratios

Summarizing All Ratios (cont.)

2-53
2-54

Closing the Accounting Cycle and Financial Analysis

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Closing the Accounting

Date Particulars F Debit Credit

June 30 INCOME AND EXPENSE SUMMARY 39,667.00

A debit balance A credit balance

Date Particulars F Debit Credit

July 1 Rent Income 5,000.00

Rent Receivable 5,000.00

To reverse accrued income

July 31 Cash 10,000.00

Rent Income 10,000.00

To record rent for June & July

Date Explaination F Debit Date Explaination F Credit

July1 reverse GJ4 5,000.00 July 31 10,000.00

Date Explaination F Debit Date Explaination F Credit

June 30 Beg bal. GJ2 5,000.00 July 1 reverse GJ4 5,000.00

July 1 Salaries Payable 4,000.00

July 1 Accrued Interest Expense 1,000.00

July 4 Salaries Expense 4,000.00

July 5 Interest Expense 1,000.00

Date Explaination F Debit Date Explaination F Credit

July 4 payment GJ5 4,000.00 July 1 reversing 4,000.00

Date Explaination F Debit Date Explaination F Credit

July 1 reversing GJ5 4,000.00 June 30 Beg Bal GJ2 4,000.00

July 1 Unearned Sales 18,000.00

To reverse unearned sales

July 5 NO MORE ENTRY UPON DELIVERY OF RICE

Date Explaination F Debit Date Explaination F Credit

July 1 reversing GJ6 18,000.00 June 30 Beg Balance GJ2 18,000.00

Date Explaination F Debit Date Explaination F Credit

July 1 reversing GJ6 18,000.00

Copyright © 2006 Pearson Addison-Wesley. All

Copyright © 2006 Pearson Addison-Wesley. All

Copyright © 2006 Pearson Addison-Wesley. All

Copyright © 2006 Pearson Addison-Wesley. All

Copyright © 2006 Pearson Addison-Wesley. All

Copyright © 2006 Pearson Addison-Wesley. All

Copyright © 2006 Pearson Addison-Wesley. All

Current ratio = total current assets

Current ratio = $1,233,000 = 1.97

Quick ratio = Total Current Assets - Inventory

Quick ratio = $1,233,000 - $289,000 = 1.51

Inventory Turnover = Cost of Goods Sold

Inventory Turnover = $2,088,000 = 7.2

Average Age of Inventory = 365

Inventory Turnover = 365 = 50.7 days

ACP = Accounts Receivable

ACP = $503,000 = 59.7 days

APP = Accounts Payable

APP = $382,000 = 95.4 days

Total Asset Turnover = Net Sales

Total Asset Turnover = $3,074,000 = .85

Insert Table 2.6 here

Copyright © 2006 Pearson Addison-Wesley. All

Debt Ratio = Total Liabilities/Total Assets

Debt Ratio = $1,643,000/$3,597,000 = 45.7%

Copyright © 2006 Pearson Addison-Wesley. All

Times Interest Earned = EBIT/Interest

Times Interest Earned = $418,000/$93,000 = 4.5

Copyright © 2006 Pearson Addison-Wesley. All

FPCR = EBIT + Lease Payments

Interest + Lease Pymts + {(Princ Pymts + PSD) x [1/(1-t)]}

Copyright © 2006 Pearson Addison-Wesley. All

Copyright © 2006 Pearson Addison-Wesley. All

GPM = Gross Profit/Net Sales