Bruno SpA Statement of Financials Positions Decembers 31, 2019.pptx

Bruno SpA
Statement of Financials Positions
Decembers 31, 2019Bruno SpA
Statement of Financials Positions
Decembers 31, 2019

1. Prepared by Coby Harmon University of California, Santa Barbara Westmont College

2. Describe the basic accounting information system. Record and summarize basic transactions. Identify and prepare adjusting entries. Prepare financial statements from the adjusted trial balance and prepare closing entries. Prepare financial statements for a merchandising company. After studying this chapter, you should be able to: The Accounting Information System CHAPTER 3 LEARNING OBJECTIVES

3. PREVIEW OF CHAPTER 3 Intermediate Accounting IFRS 3rd Edition Kieso ● Weygandt ● Warfield

4. Collects and processes transaction data. Disseminates financial information to interested parties. Varies widely from business to business. Nature of business Type of transactions Size of business Volume of data to be handled Informational demands Accounting Information System Accounting Information System LO 1 LEARNING OBJECTIVE 1 Describe the basic accounting information system.

5. Helps management answer such questions as: How much and what kind of debt is outstanding? Were our sales higher this period than last? What assets do we have? What were our cash inflows and outflows? Did we make a profit last period? Are any of our product lines or divisions operating at a loss? Can we safely increase our dividends to shareholders? Is our rate of return on net assets increasing? LO 1 Accounting Information System

6. Event Transaction Account Real Account Nominal Account Ledger Journal Posting Trial Balance Adjusting Entries Financial Statements Closing Entries LO 1 Basic Terminology Accounting Information System

7. An a ccount shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Double-entry accounting system (two-sided effect). Recording done by debiting at least o ne account and crediting another. DEBITS must equal CREDITS . Debits and Credits LO 1 Accounting Information System

8. Debits and Credits An arrangement that shows the effect of transactions on an account. Debit = “Left” Credit = “Right” Account An Account can be illustrated in a T-Account form. LO 1

9. $10,000 Transaction #2 $3,000 8,000 Balance Transaction #1 Transaction #3 If the sum of Debit entries are greater than the sum of Credit entries, the account will have a debit balance. Debits and Credits LO 1 $15,000

10. $10,000 Transaction #2 $3,000 8,000 Balance Transaction #1 Transaction #3 If the sum of Debit entries are less than the sum of Credit entries, the account will have a credit balance. Debits and Credits LO 1 $1,000

11. Normal Balance Credit Normal Balance Debit Debits and Credits Summary LO 1

12. Statement of Financial Position = + - Asset Liability Equity Revenue Expense Debit Credit Debits and Credits Summary Income Statement LO 1

13. Relationship among the assets, liabilities and equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit . ILLUSTRATION 3.3 Expanded Equation and Debit/Credit Rules and Effects The Accounting Equation LO 1

14. Assets Liabilities Equity = + Owners invest $40,000 in exchange for ordinary shares. + 40,000 + 40,000 Double-Entry System LO 1

15. Assets Liabilities = + 2. Disburse $600 cash for secretarial wages. - 600 - 600 (expense) Equity Double-Entry System LO 1

16. Assets Liabilities = + 3. Purchase office equipment priced at $5,200, giving a 6 percent promissory note in exchange. + 5,200 + 5,200 Equity Double-Entry System LO 1

17. Double-Entry System Assets Liabilities = + 4. Received $4,000 cash for services performed. + 4,000 + 4,000 (revenue) Equity LO 1

18. Double-Entry System Assets Liabilities = + 5. Pay off a short-term liability of $7,000. - 7,000 - 7,000 Equity LO 1

19. Assets Liabilities = + 6. Declared a cash dividend of $5,000. + 5,000 - 5,000 Double-Entry System Equity LO 1

20. Double-Entry System Assets Liabilities = + 7. Convert a non-current liability of $80,000 into ordinary shares. - 80,000 + 80,000 Equity LO 1

21. Double-Entry System Assets Liabilities = + 8. Pay cash of $16,000 for a delivery van. - 16,000 + 16,000 Note that the accounting equation equality is maintained after recording each transaction. Equity LO 1

22. Ownership structure dictates the types of accounts that are part of the equity section. Proprietorship or Partnership Corporation Share capital Share premium Dividends Retained Earnings Financial Statements and Ownership Structure Owner’s Capital Owner’s Drawing LO 1

23. Financial Statements and Ownership Structure Investments by shareholders Net income retained in the business ILLUSTRATION 3.4 Income Statement and Equity Relationships LO 1

24. Financial Statements and Ownership Structure ILLUSTRATION 3.5 Effects of Transactions on Equity Accounts LO 1

25. Transactions Journalization Statement preparation Closing Post-closing trail balance Reversing entries Trial balance Posting Adjusted trial balance Adjustments Work Sheet ILLUSTRATION 3.6 THE ACCOUNTING CYCLE LO 1

26. An item should be recognized in the financial statements if such recognition provides users of financial statements with relevant information about the asset or the liability and about any income, expenses, or changes in equity and a faithful representation of the asset or the liability and of any income, expenses, or changes in equity. THE ACCOUNTING CYCLE Identifying and Recording Transactions and Other Events LO 1

27. Record and Summarize Basic Transactions Journalizing LO 2 LEARNING OBJECTIVE 2 Record and summarize basic transactions. Recording transactions and events that effect particular asset, liability, equity, revenue, and expense accounts. September 1 : Shareholders invested ₺ 15,000 cash in the corporation in exchange for ordinary shares. ILLUSTRATION 3.7 Technique of Journalizing

28. Posting – The process of transferring amounts from the journal to the ledger accounts. Posting ILLUSTRATION 3.7 LO 2 ILLUSTRATION 3.8 Posting a Journal Entry

29. ILLUSTRATION 3.8 Posting a Journal Entry LO 2

30. Chart of accounts lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the statement of financial position accounts and follows with the income statement accounts. Chart of Accounts LO 2

31. Chart of accounts lists the accounts and the account numbers that identify their location in the ledger. The numbering system that identifies the accounts usually starts with the statement of financial position accounts and follows with the income statement accounts. Chart of Accounts LO 2 ILLUSTRATION 3.9 Chart of Accounts for Yazici Advertising A.Ş.

32. ILLUSTRATIONS 3.10 through 3.19 show the basic steps in the recording process, using the October transactions of Yazici Advertising A.Ş. Yazici’s accounting period is a month. A basic analysis and a debit-credit analysis precede the journalizing and posting of each transaction. For simplicity, we use the T-account form in the illustrations instead of the standard account form. The Recording Process Illustrated LO 2

33. LO 2 ILLUSTRATION 3.10

34. LO 2 ILLUSTRATION 3.11

35. LO 2 ILLUSTRATION 3.12

36. LO 2 ILLUSTRATION 3.13

37. LO 2 ILLUSTRATION 3.14

38. LO 2 ILLUSTRATION 3.15

39. LO 2 ILLUSTRATION 3.17

40. LO 2 ILLUSTRATION 3.18

41. LO 2 ILLUSTRATION 3.19

42. A Trial Balance List of each account and its balance in the order in which they appear in the ledger. Debit balances listed in the left column and credit balance in the right column. Used to prove the mathematical equality of debit and credit balances. Uncovers errors in journalizing and posting. Trial Balance LO 2

43. ILLUSTRATION 3.20 Trial Balance (Unadjusted) LO 2

44. Identify and Prepare Adjusting Entries LO 3 LEARNING OBJECTIVE 3 Identify and prepare adjusting entries. Makes it possible to: Report on the statement of financial position the appropriate assets, liabilities, and equity at the statement date. Report on the income statement the proper revenues and expenses for the period. Adjusting entries are required every time a company, prepares financial statements. Companies date the entries as of the statement of financial position date.

45. Identify and Prepare Adjusting Entries 1. Prepaid Expenses. Expenses paid in cash before they are used or consumed. Deferrals 3. Accrued Revenues. Revenues for services performed but not yet received in cash or recorded. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. 2. Unearned Revenues. Cash received before services are performed. Accruals ILLUSTRATION 3.21 Categories of Adjusting Entries Types of Adjusting Entries LO 3

46. Deferrals are expenses or revenues that are recognized at a date later than the point when cash was originally exchanged. Two types of deferrals Prepaid expenses Unearned revenues If a company does not make an adjustment for these deferrals, the asset and liability are overstated, and the related expense and revenue are understated. Adjusting Entries for Deferrals LO 3

47. ILLUSTRATION 3.22 Adjusting Entries for Deferrals LO 3

48. Prepaid Expenses. Assets paid for and recorded before a company uses them. Insurance Supplies Advertising Cash Payment Expense Recorded BEFORE Rent Buildings and equipment Prepayments often occur in regard to: LO 3 Adjusting Entries for Deferrals

49. Supplies. Yazici Advertising purchased advertising supplies costing ₺ 25,000 on October 5. Prepare the journal entry to record the purchase of the supplies. Cash 25,000 Supplies 25,000 Oct. 5 Debit Credit Supplies 25,000 25,000 Debit Credit Cash LO 3 Adjusting Entries for Deferrals

50. Supplies . An inventory count at the close of business on October 31 reveals that ₺ 10,000 of supplies are still on hand. Supplies 15,000 Supplies Expense 15,000 Oct. 31 Debit Credit Supplies 25,000 15,000 Debit Credit Supplies Expense 15,000 10,000 LO 3 Adjusting Entries for Deferrals

51. LO 3 ILLUSTRATION 3.23 Adjustment for Supplies

52. Adjusting Entries for Deferrals Statement Presentation: Supplies identifies that portion of the asset’s cost that will provide future economic benefit. ILLUSTRATION 3.37

53. Statement Presentation: Supplies expense shows a balance of ₺ 15,000, which equals the cost of supplies used in October. ILLUSTRATION 3.36 LO 3 Adjusting Entries for Deferrals

54. Insurance. On Oct. 4 th , Yazici Advertising paid ₺ 6,000 for a one-year fire insurance policy, beginning October 1. Show the entry to record the purchase of the insurance. Cash 6,000 Prepaid Insurance 6,000 Oct. 4 Debit Credit Prepaid Insurance 6,000 6,000 Debit Credit Cash LO 3 Adjusting Entries for Deferrals

55. Insurance . An analysis of the policy reveals that ₺ 500 ( ₺ 6,000 ÷ 12) of insurance expires each month. Thus, Yazici makes the following adjusting entry. Prepaid Insurance 500 Insurance Expense 500 Oct. 31 Debit Credit Prepaid Insurance 6,000 500 Debit Credit Insurance Expense 500 5,500 LO 3 Adjusting Entries for Deferrals

56. LO 3 ILLUSTRATION 3.24 Adjustment for Insurance

57. Statement Presentation: Prepaid Insurance represents the unexpired cost for the remaining 11 months of coverage. ILLUSTRATION 3.37 Adjusting Entries for Deferrals

58. Statement Presentation: Insurance expense identifies that portion of the asset’s cost that expired in October. ILLUSTRATION 3.36 LO 3 Adjusting Entries for Deferrals

59. Depreciation. Yazici Advertising estimates depreciation on its office equipment to be ₺ 400 per month. Yazici recognizes depreciation for October by the following adjusting entry. Accumulated Depreciation 400 Depreciation Expense 400 Oct. 31 Debit Credit Depreciation Expense 400 400 Debit Credit Accumulated Depreciation LO 3 Adjusting Entries for Deferrals

60. LO 3 ILLUSTRATION 3.25 Adjustment for Depreciation

61. Statement Presentation: Accumulated Depreciation—is a contra asset account. Adjusting Entries for Deferrals ILLUSTRATION 3.37

62. Statement Presentation: Depreciation expense identifies that portion of the asset’s cost that expired in October. ILLUSTRATION 3.35 LO 3 Adjusting Entries for Deferrals

63. Receipt of cash before the services are performed is recorded as a liability called unearned revenues . Rent Airline tickets Tuition Cash Receipt Revenue Recorded BEFORE Magazine subscriptions Customer deposits Unearned revenues often occur in regard to: LO 3 Adjusting Entries for Deferrals

64. Unearned Revenue. Yazici Advertising received ₺12,000 on October 2 from KC for advertising services expected to be completed by December 31. Show the journal entry to record the receipt on Oct. 2nd. Unearned Service Revenue 12,000 Cash 12,000 Oct. 2 Debit Credit Cash 12,000 12,000 Debit Credit Unearned Service Revenue Adjusting Entries for Deferrals LO 3

65. Debit Credit Service Revenue 100,000 12,000 Debit Credit Unearned Service Revenue 4,000 8,000 Unearned Revenues. A n evaluation of the service Yazici performed for KC during October, the company determines that it should recognize ₺4,000 of revenue in October. Service Revenue 4,000 Unearned Service Revenue 4,000 Oct. 31 4,000 LO 3 Adjusting Entries for Deferrals 104,000

66. LO 3 ILLUSTRATION 3.27 Adjustment for Unearned Service Revenue

67. Statement Presentation: Unearned service revenue represents the remaining advertising services expected to be performed in the future. Adjusting Entries for Deferrals ILLUSTRATION 3.37

68. Statement Presentation: Service revenue shows total revenue recognized in October. ILLUSTRATION 3.36 LO 3 Adjusting Entries for Deferrals

69. Accruals are made to record revenues for services performed and expenses incurred in the current accounting period. Without an accrual adjustment, the revenue account (and the related asset account) or the expense account (and the related liability account) are understated. Adjusting Entries for Accruals LO 3

70. ILLUSTRATION 3.28 Adjusting Entries for Accruals LO 3

71. Revenues recorded for services performed for which cash has yet to be received at statement date are accrued revenues . Rent Interest Services performed BEFORE Accrued revenues often occur in regard to: Cash Receipt Revenue Recorded Adjusting entry results in: LO 3 Adjusting Entries for Accruals

72. Accrued Revenues. In October Yazici Advertising performed services worth ₺ 2,000 that were not billed to clients on or before October 31. Yazici makes the following adjusting entry. Service Revenue 2,000 Accounts Receivable 2,000 Oct. 31 Debit Credit Accounts Receivable 72,000 Debit Credit Service Revenue 100,000 4,000 2,000 106,000 2,000 74,000 Adjusting Entries for Accruals LO 3

73. LO 3 ILLUSTRATION 3.29 Accrual Adjustment for Receivable and Revenue Accounts

74. ILLUSTRATION 3.36 ILLUSTRATION 3.37 Adjusting Entries for Accruals LO 3

75. Expenses incurred but not yet paid in cash or recorded. Rent Interest BEFORE Accrued expenses often occur in regard to: Cash Payment Expense Recorded Taxes Salaries Adjusting entry results in: LO 3 Adjusting Entries for Accruals

76. Accrued Interest. Yazici Advertising signed a three-month note payable in the amount of ₺ 50,000 on October 1. The note requires interest at an annual rate of 12 percent. Three factors determine the amount of the interest accumulation: 1 2 3 ILLUSTRATION 3.30 Formula for Computing Interest for One Month LO 3 Adjusting Entries for Accruals

77. Accrued Interest. Yazici Advertising signed a three-month, 12%, note payable in the amount of ₺ 50,000 on October 1. Prepare the adjusting entry on Oct. 31 to record the accrual of interest. Interest Payable 500 Interest Expense 500 Oct. 31 Debit Credit Interest Expense 500 500 Debit Credit Interest Payable LO 3 Adjusting Entries for Accruals

78. LO 3 ILLUSTRATION 3.31 Adjustment for Interest

79. ILLUSTRATION 3.36 ILLUSTRATION 3.37 Adjusting Entries for Accruals LO 3

80. Accrued Salaries. At October 31, the salaries and wages for these days represent an accrued expense and a related liability to Yazici. The employees receive total salaries of ₺ 10,000 for a five-day work week, or ₺ 2,000 per day. LO 3 Adjusting Entries for Accruals ILLUSTRATION 3.32 Accrued Salaries and Wages

81. Salaries and Wages Payable 6,000 Salaries and Wages Expense 6,000 Oct. 31 Debit Credit Salaries and Wages Expense 40,000 6,000 Debit Credit Salaries and Wages Payable Accrued Salaries. Employees receive total salaries of ₺10,000 for a five-day work week, or ₺2,000 per day. Prepare the adjusting entry on Oct. 31 to record accrual for salaries. 6,000 46,000 Adjusting Entries for Accruals LO 3

82. LO 3 ILLUSTRATION 3.33 Adjustment for Salaries and Wages Expense

83. ILLUSTRATION 3.36 ILLUSTRATION 3.37 Adjusting Entries for Accruals LO 3

84. Salaries and Wages Expense 34,000 Salaries and Wages Payable 6,000 Nov. 23 34,000 6,000 Accrued Salaries. On November 23, Yazici Advertising will again pay total salaries of ₺40,000. Prepare the entry to record the payment of salaries on November 23. Cash 40,000 6,000 Debit Credit Salaries and Wages Expense Debit Credit Salaries and Wages Payable LO 3 Adjusting Entries for Accruals

85. Bad Debts. Assume Yazici Advertising reasonably estimates a bad debt expense for the month of ₺ 1,600. It makes the adjusting entry for bad debts as follows. Allowance for Doubtful Accounts Bad Debt Expense Oct. 31 1,600 1,600 ILLUSTRATION 3.34 Adjustment for Bad Debt Expense LO 3 Adjusting Entries for Accruals

86. ILLUSTRATION 3.36 ILLUSTRATION 3.37 Adjusting Entries for Accruals LO 3

87. Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. Proves the equality of the total debit and credit balances ILLUSTRATION 3.35 Adjusted Trial Balance

88. Financial Statements are prepared directly from the Adjusted Trial Balance. Statement of Financial Position Income Statement Retained Earnings Statement LO 4 Preparing Financial Statements LEARNING OBJECTIVE 4 Prepare financial statements from the adjusted trial balance and prepare closing entries.

89. ILLUSTRATION 3.36 Preparation of the Income Statement and Retained Earnings Statement from the Adjusted Trial Balance

90. ILLUSTRATION 3.37 Preparation of the Statement of Financial Position from the Adjusted Trial Balance LO 4

91. Closing Reduce the balance of nominal (temporary) accounts to zero in preparation for the next period’s transactions. Transfer all revenue and expense account balances (income statement accounts) to an account called Income Summary. Income Summary balance is then transferred Retained Earnings. Statement of financial position ( asset , liability , and equity ) accounts are not closed. Dividends are closed directly to Retained Earnings. Closing Process LO 4

92. Closing Entries ILLUSTRATION 3.35 LO 4 Service Revenue 106,000 Income Summary 106,000 Income Summary 73,000 Salaries & Wages Expense 46,000 Supplies Expense 15,000 Rent Expense 9,000 Insurance Expense 500 Interest Expense 500 Depreciation Expense 400 Bad Debt Expense 1,600 Income Summary 33,000 Retained Earnings 33,000 Retained Earnings 5,000 Dividends 5,000 Closing Journal Entries

93. LO 4 ILLUSTRATION 3.39 Posting of Closing Entries

94. LO 4 ILLUSTRATION 3.40

95. The Accounting Cycle Summarized Enter the transactions of the period in appropriate journals. Post from the journals to the ledger (or ledgers). Prepare an unadjusted trial balance (trial balance). Prepare adjusting journal entries and post to the ledger(s). Prepare a trial balance after adjusting (adjusted trial balance). Prepare the financial statements from the adjusted trial balance. Prepare closing journal entries and post to the ledger(s). Prepare a trial balance after closing (post-closing trial balance). Prepare reversing entries (optional) and post to the ledger(s). LO 4

96. Financial Statements for a Merchandising Company LO 5 LEARNING OBJECTIVE 5 Prepare financial statements for a merchandising company. The income statement for Ciner is shown in Illustration 3.41. The income statement classifies amounts into such categories as gross profit on sales, income from operations , income before income taxes , and net income . Earnings per share information is required to be shown on the face of the income statement for a company, although we omit this item here.

97. Merchandising Company ILLUSTRATION 3.41 LO 5

98. ILLUSTRATION 3.42 LO 5 Retained Earnings Statement

99. ILLUSTRATION 3.43 Statement of Financial Position

100. Most companies use accrual-basis accounting . They recognize revenue when the performance obligation is satisfied and expenses in the period incurred, without regard to the time of receipt or payment of cash. Under the strict cash-basis , companies record revenue only when they receive cash, and record expenses only when they disperse cash. Cash basis financial statements are not in conformity with IFRS. Cash-Basis Accounting Versus Accrual-Basis Accounting LEARNING OBJECTIVE 6 Differentiate the cash basis of accounting from the accrual basis of accounting. APPENDIX 3A LO 6

101. Illustration: Eser Contractor signs an agreement to construct a garage for ₺ 22,000. In January, Eser begins construction, incurs costs of ₺ 18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Eser collects ₺ 22,000 cash from the customer. In March, Eser pays the ₺ 18,000 due the creditors. ILLUSTRATION 3A.1 APPENDIX 3A LO 6 Cash-Basis Accounting Versus Accrual-Basis Accounting

102. Illustration: Eser Contractor signs an agreement to construct a garage for ₺ 22,000. In January, Eser begins construction, incurs costs of ₺ 18,000 on credit, and by the end of January delivers a finished garage to the buyer. In February, Eser collects ₺ 22,000 cash from the customer. In March, Eser pays the ₺ 18,000 due the creditors. ILLUSTRATION 3A.2 LO 6 APPENDIX 3A Cash-Basis Accounting Versus Accrual-Basis Accounting

103. Conversion from Cash to Accrual Basis Illustration: Dr. L. Liwan, like many small business owners, keeps her accounting records on a cash basis. In the year 2019, Dr. Liwan received ₺ 300,000 from her patients and paid ₺ 170,000 for operating expenses, resulting in an excess of cash receipts over disbursements of ₺ 130,000 ( ₺ 300,000 - ₺ 170,000). At January 1 and December 31, 2019, she has accounts receivable, unearned service revenue, accrued liabilities, and prepaid expenses as shown below. ILLUSTRATION 3A.5 APPENDIX 3A LO 6 Cash-Basis Accounting Versus Accrual-Basis Accounting

104. ILLUSTRATION 3A.8 Service Revenue Computation LO 6 To convert the amount of cash received from patients to service revenue on an accrual basis, we must consider changes in accounts receivable and unearned service revenue during the year. ILLUSTRATION 3A.5 APPENDIX 3A

105. LO 6 To convert cash paid for operating expenses during the year to operating expenses on an accrual basis, we must consider changes in prepaid expenses and accrued liabilities. Operating Expense Computation ILLUSTRATION 3A.5 APPENDIX 3A ILLUSTRATION 3A.11

106. LO 6 ILLUSTRATION 3A.12

107. Theoretical Weaknesses of the Cash Basis Today’s economy is considerably more lubricated by credit than by cash. The accrual basis, not the cash basis, recognizes all aspects of the credit phenomenon. Investors, creditors, and other decision makers seek timely information about a company’s future cash flows. LO 6 APPENDIX 3A Cash-Basis Accounting Versus Accrual-Basis Accounting

108. APPENDIX 3B Using Reversing Entries A company most often uses reversing entries to reverse two types of adjusting entries: accrued revenues and accrued expenses. LEARNING OBJECTIVE 7 Identify adjusting entries that may be reversed. LO 7

109. ILLUSTRATION 3B.1 APPENDIX 3B Using Reversing Entries Illustration of Reversing Entries—Accruals LO 7

110. APPENDIX 3B ILLUSTRATION 3B.2 LO 7 Using Reversing Entries Illustration of Reversing Entries—Deferrals

111. All accruals should be reversed. All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed. Adjusting entries for depreciation and bad debts are not reversed. Reversing entries do not have to be used. APPENDIX 3B Summary of Reversing Entries LO 7 Using Reversing Entries

112. A company prepares a worksheet either on columnar paper or within a computer spreadsheet. A company uses the worksheet to adjust account balances and to prepare financial statements. APPENDIX 3C Using A Worksheet: The Accounting Cycle Revisited LO 8 LEARNING OBJECTIVE 8 Prepare a 10-column worksheet.

113. Trial Balance Columns Adjustment Columns Adjustments Entered on the Worksheet APPENDIX 3C Worksheet Columns LO 8 Using A Worksheet: The Accounting Cycle Revisited

114. APPENDIX 3C ILLUSTRATION 3C.1 (Partial) Use of a Worksheet LO 8 Using A Worksheet: The Accounting Cycle Revisited

115. ILLUSTRATION 3C.1 Use of a Worksheet APPENDIX 3C Using A Worksheet: The Accounting Cycle Revisited

116. The Worksheet: provides information needed for preparation of the financial statements. Sorts data into appropriate columns, which facilitates the preparation of the statements. APPENDIX 3C Preparing Financial Statements from a Worksheet LO 8 Using A Worksheet: The Accounting Cycle Revisited

117. LEARNING OBJECTIVE 9 Compare the accounting information systems under IFRS and U.S. GAAP. As indicated in this chapter, companies must have an effective accounting system. In the wake of accounting scandals at U.S. companies like Sunbeam , Rite-Aid , Xerox , and WorldCom , U.S. lawmakers demanded higher assurance on the quality of accounting reports. Since the passage of the Sarbanes-Oxley Act (SOX), companies that trade on U.S. exchanges are required to place renewed focus on their accounting systems to ensure accurate reporting. GLOBAL ACCOUNTING INSIGHTS LO 9

118. Relevant Facts Following are the key similarities and differences between U.S. GAAP and IFRS related to accounting information systems. Similarities International companies use the same set of procedures and records to keep track of transaction data. Thus, the material in Chapter 3 dealing with the account, general rules of debit and credit, and steps in the recording process—the journal, ledger, and chart of accounts—is the same under both U.S. GAAP and IFRS. Transaction analysis is the same under U.S. GAAP and IFRS but, as you will see in later chapters, different standards sometimes impact how transactions are recorded. GLOBAL ACCOUNTING INSIGHTS LO 9

119. Relevant Facts Similarities Both the FASB and IASB go beyond the basic definitions provided in this textbook for the key elements of financial statements, that is, assets, liabilities, equity, revenues, and expenses. A trial balance under U.S. GAAP follows the same format as shown in the textbook. As shown in the textbook, currency signs are typically used only in the trial balance and the financial statements. The same practice is followed under U.S. GAAP. GLOBAL ACCOUNTING INSIGHTS LO 9

120. Relevant Facts Differences Rules for accounting for specific events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double- entry accounting system is the basis of accounting systems worldwide. Internal controls are a system of checks and balances designed to prevent and detect fraud and errors. While most public U.S. companies have these systems in place, many non-U.S. companies have never completely documented them nor had an independent auditor attest to their effectiveness. Both of these actions are required under SOX. Enhanced internal control standards apply only to large public companies listed on U.S. exchanges. GLOBAL ACCOUNTING INSIGHTS LO 9

121. On the Horizon High-quality international accounting requires both high-quality accounting standards and high-quality auditing. Similar to the convergence of U.S. GAAP and IFRS, there is a movement to improve international auditing standards. The International Auditing and Assurance Standards Board (IAASB) functions as an independent standard-setting body. It works to establish high-quality auditing and assurance and quality-control standards throughout the world. Whether the IAASB adopts internal control provisions similar to those in SOX remains to be seen. You can follow developments in the international audit arena at http:// www.ifac.org/iaasb/ . GLOBAL ACCOUNTING INSIGHTS LO 9

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