FinancialAccounting8e-iSites.doc

Chapter 3 Accrual Accounting Income Short Exercises (10 min.) S 3-1 Millions Sales revenue……………………………………………. 850 Cost of goods sold……………………………………… (290) All other expenses……………………………………… (325) Net income……………………………………………….. $ 235 Beginning cash………………………………………….. $ 75 Collections ($850 ? $27)……………………………….. 823 Payments for: inventory………………………………. (380) everything else………………………. (255) Ending cash……………………………………………… $ 263 (10 min.) S 3-2 Statement Reports (Amounts in millions) Income statement Interest expense……………………… $ .8 Balance sheet Notes payable ($4.1 + $1.7 ? $1.6)…. $4.2 Interest payable………………………. 0.3 (10 min.) S 3-3 At the end of each accounting period, the business reports its performance through the preparation of financial statements. In order to be useful to the various users of financial statements they must be up-to-date. Accounts such as cash, Equipment, Accounts Payable, Common Stock and Dividends are up-to date and require no adjustment at the end of the accounting period. Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be up to date as of the last day of the accounting period. Why? Because certain transactions that took place during the month may not have been recorded. The accrued salaries, which are owed to the employees but have not been paid, are an expense related to the current period but also represent a liability or debt that is owed by the business. The business must make an adjusting entry to record the accrued salary owed as both an increase in Salary Expense and an increase in Salaries Payable. If the business does not make this adjustment, the expenses will be understated, net income will be overstated, and liabilities will be understated. (10 min.) S 3-4 The large auto manufacturer should record sales revenue when the revenue is earned by delivering automobiles to Budget or Hertz. The large auto manufactu