Your goals for this "reporting cycle" chapter are to learn about:
• Preparation of financial statements.
• The accounting cycle and closing process.
• The nature of "optional" reversing entries.
• Classified balance sheets.
• The importance of business liquidity and the concept of an operating cycle.
PREPARING FINANCIAL STATEMENTS
THE TOUGH WORK IS DONE: In the previous chapter, you learned all about adjustments that might be needed at the end of each accounting period. These adjustments were necessary to bring a company's books and records current in anticipation of calculating and reporting its income and financial ...view middle of the document...
If England had prepared its financial statements based only on the unadjusted trial balance at left, the reported information would be incomplete and incorrect. Instead, it is necessary to utilize the adjusted trial balance at right because it has been updated to reflect the year-end adjusting entries.
CONSIDERING THE ACTUAL PROCESS FOR ADJUSTMENTS: Most of the time, a company will prepare its trial balance, analyze the trial balance for potential adjustments, and develop a list of necessary adjusting entries. Knowing what to adjust is not necessarily intuitive. It usually requires hands-on review by someone who is very knowledgeable about the business and accounting. As a practical matter, a company should not allow anyone and everyone to have access to the accounting system for purposes of entering year-end adjustments; too many errors and rogue entries will appear. Instead, a company will usually have a defined process where proposed entries are documented on a form (sometimes called a journal voucher). These forms are submitted to a chief accountant/controller who reviews and approves such proposed entries. The approved journal vouchers then serve as supporting documents to authorize data entry into the accounting system. The adjusting entries are entered in the journal, posted to the appropriate ledger accounts, and then the adjusted trial balance can be prepared from the up-to-date ledger.
FINANCIAL STATEMENTS: The adjusted trial balance is ordinarily sufficient to facilitate preparation of financial statements. You should take time to trace the amounts from England's adjusted trial balance to the financial statements that follow:
COMPUTERIZATION: The financial statement preparation process is mostly mechanical, and easily automated. Once the adjusting entries have been prepared and entered, every accounting software package will race through the steps of processing the data to produce the financial statements. As such, you may be inclined to discount your need to understand how to move amounts from an adjusted trial balance into a set of financial statements. In some respects that is true, just as it is true that you do not need to know how to add and subtract if you own a calculator. Of course, you probably see the value of understanding addition and subtraction even if you use a calculator. In the same light, please consider that understanding the flow of transactions into financial statements is an essential foundation for furthering your knowledge of accounting.
A WORKSHEET APPROACH: Occasionally, one may desire to prepare financial statements that take into account necessary adjustments, but without actually updating journals and ledgers. Why? A manager may desire monthly financial reports even though the business may not formally prepare and book adjusting entries every month. A worksheet approach can be used for this purpose. Or, an auditor may use a worksheet to prepare financial statements that...