NIAT

Certified Bookkeepers Exam


Review

Module 3

Module 4
 INTERNAL CONTROL
➢ is … policies, practices, procedures
… designed to …
➢safeguard assets
➢ensure accuracy and reliability of
reporting
➢promote efficiency
➢measure compliance with policies
 THE P-D-C MODEL
➢Preventive controls
➢Detective controls
➢Corrective controls
➢Which is most cost effective?
➢Which one tends to be proactive measures?
➢Can you give an example of each?
➢Predictive controls
SAS 78

(#5: Control Activities)
➢ Physical Controls (1-3)
➢Transaction authorization
➢Example:
➢ Sales only to authorized customer
➢ Sales only if available credit limit
➢Segregation of duties
➢Examples of incompatible duties:
➢ Authorization vs. processing [e.g., Sales vs. Auth. Cust.]
➢Custody vs. recordkeeping [e.g., custody of inventory vs. DP
of inventory]
➢Fraud requires collusion [e.g., separate various steps in
process]
➢Supervision
➢Serves as compensating control when lack of segregation
of duties exists by necessity
➢ Physical Controls (4-6)
➢Accounting records (audit trails; examples)
➢Access controls
➢Direct (the assets)
➢Indirect (documents that control the assets)
➢Fraud
➢Disaster Recovery
➢Independent verification
➢Management can assess:
➢ The performance of individuals
➢ The integrity of the AIS
➢The integrity of the data in the records
➢ Examples
 Clues to Potential Problems
Warning signs with regard to people:
1. Abrupt changes in lifestyle.
2. Close social relationships with suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other employees.
5. Excessive use of alcohol or drugs.
 Clues to Potential Problems
Warning signs from the accounting system:
1. Missing documents or gaps in transaction
numbers.
2. An unusual increase in customer refunds.
3. Differences between daily cash receipts and
bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
 Control Procedures
▪ Competent Personnel
▪ Rotating Duties
▪ Mandatory Vacations
▪ Separating Responsibilities for
Related Operations
▪ Separating Operations, Custody of
Assets, and Accounting
▪ Proofs and Security Measures
 Separating Responsibilities for
Otherwise, the following
Related Operations
abuses are possible:
1. Orders may be placed on the basis of friendship
with a supplier, rather than on price, quality, and
other objective factors.
2. The quantity and quality of supplies received may
not be verified, thus causing payment for supplies
not received or poor-quality supplies.
3. Supplies may be stolen by the employee.
4. The validity and accuracy of invoices may be
verified carelessly.
 Internal Control - Cash
Bank Overdrafts
When a company writes a check for more than the
amount in its cash account.

Generally reported as a current liability.

Offset against cash account only when available cash is

present in another account in the same bank on which
the overdraft occurred.

LO 2 Indicate how to report cash and related items.

 Cash
Summary of Cash-Related Items

LO 2
Management faces two problems in accounting for cash
transactions:

1. Establish proper controls to prevent any unauthorized

transactions by officers or employees.

2. Provide information necessary to properly manage cash on

hand and cash transactions.

LO 10 Explain common techniques employed to control cash.

Using Bank Accounts

To obtain desired control objectives, a company can vary the

number and location of banks and the types of accounts.
► General checking account

► Collection float.

► Lockbox accounts

► Imprest bank accounts

LO 10 Explain common techniques employed to control cash.

The Imprest Petty Cash System

To pay small amounts for miscellaneous expenses.

Steps:

1. Record $300 transfer of funds to petty cash:

Petty Cash 300

Cash 300

2. Petty cash custodian obtains signed receipts from each

individual to whom he or she pays cash.

LO 10 Explain common techniques employed to control cash.

The Imprest Petty Cash System

Steps:

3. Custodian receives a company check to replenish the fund.

Office Supplies Expense 42

Postage Expense 53
Entertainment Expense 76
Cash Over and Short 2
Cash 173

LO 10 Explain common techniques employed to control cash.

The Imprest Petty Cash System

Steps:

4. If the company decides that the amount of cash in the petty

cash fund is excessive by $50, it lowers the fund balance
as follows.

Cash 50
Petty cash 50

LO 10 Explain common techniques employed to control cash.

Physical Protection of Cash Balances

Company should
➢ Minimize the cash on hand.
➢ Only have on hand petty cash and current day’s receipts.
➢ Keep funds in a vault, safe, or locked cash drawer.
➢ Transmit each day’s receipts to the bank as soon as practicable.
➢ Periodically prove (reconcile) the balance shown in the general
ledger.

LO 10 Explain common techniques employed to control cash.

Reconciliation of Bank Balances

Schedule explaining any differences between the

bank’s and the company’s records of cash.
Reconciling Items:
1. Deposits in transit.
2. Outstanding checks.
3. Bank charges and credits. Time Lags

4. Bank or Depositor errors.

LO 10 Explain common techniques employed to control cash.

Reconciliation of Bank Balances Illustration 7A-1
Bank Reconciliation
Form and Content

LO 10 Explain common techniques employed to control cash.

Reconciliation of Bank Balances

LO 10
 Illustration 7A-2

LO 10 Explain common techniques employed to control cash.

Illustration: Journalize the adjusting entries at November 30 on
the books of Nugget Mining Company.

Nov. 30 Cash 542

Office expense 18
Accounts receivable 220
Accounts payable 180
Interest revenue 600

LO 10 Explain common techniques employed to control cash.

Review Question

The reconciling item in a bank reconciliation that will result

in an adjusting entry by the depositor is:
a. outstanding checks.
b. deposit in transit.
c. a bank error.
d. bank service charges.

LO 10 Explain common techniques employed to control cash.

SINGLE ENTRY METHOD OF
BOOKKEEPING
 Single Entry Method
• Double entry (debit/credit) not applied
• Informal records are maintained for Cash, AP,
AR, PPE and expenses paid.
• Normally employed by small enterprises
Problems encountered in Single entry System

• Determining net income/loss

• Preparation of Statement of Comprehensive
Income
• Preparation of Statement of Financial
Condition
 Net Income Computation in Single Entry
Bookkeeping
Sole Proprietorship/
Corporation
Partnership

Capital, ending xxx Retained Earnings, ending xxx

Add: Dividends declared/
Add: Withdrawals xxx paid xxx
Total xxx
Total xxx
Less: Capital beginning xxx Less: Retained Earnings,
Additional Investment xxx xxx beginning xxx
Net Income (Net Loss) xxx Net Income (Net Loss) xxx
 Cash Basis vs. 

Accrual Basis of Accounting
Most companies use accrual-basis accounting
➢ recognize revenue when it is earned 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.

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
Illustration: Quality Contractor signs an agreement to construct a
garage for $22,000. In January, Quality begins construction, incurs
costs of $18,000 on credit, and by the end of January delivers a
finished garage to the buyer. In February, Quality collects $22,000
cash from the customer. In March, Quality pays the $18,000 due the
creditors.
Illustration 3A-1

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
Illustration: Quality Contractor signs an agreement to construct a
garage for $22,000. In January, Quality begins construction, incurs
costs of $18,000 on credit, and by the end of January delivers a
finished garage to the buyer. In February, Quality collects $22,000
cash from the customer. In March, Quality pays the $18,000 due the
creditors.
Illustration 3A-2

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
Conversion From Cash Basis To Accrual Basis
Illustration: Dr. Diane Windsor, like many small business owners,
keeps her accounting records on a cash basis. In the year 2010, Dr.
Windsor 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, 2010, she has accounts receivable, unearned service
revenue, accrued liabilities, and prepaid expenses as shown in
Illustration 3A-5.
Illustration 3A-5

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
Conversion From Cash Basis To Accrual Basis
Illustration: Calculate service revenue on an accrual basis.
Illustration 3A-8

Illustration 3A-5

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
Conversion From Cash Basis To Accrual Basis
Illustration: Calculate operating expenses on an accrual basis.
Illustration 3A-11

Illustration 3A-5

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
Conversion From Cash Basis To Accrual Basis
Illustration 3A-12

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
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 an enterprise’s future cash flows.

LO 8 Differentiate the cash basis of accounting

from the accrual basis of accounting.
 Cash Basis vs. Accrual Basis
Item Cash Basis Accrual Basis
Sales Cash sales plus collection of Cash sales plus sales on account
trade receivables
Purchases Cash purchases plus payments Cash purchases plus purchases
to trade creditors on account
Income other than Items received are considered Items earned are considered as
sales as income regardless of when income regardless of when
earned received
Expenses, in Items paid are treated as Items incurred are treated as
general expenses regardless of when expenses regardless of when
incurred. paid.
Depreciation Depreciation is provided Depreciation is provided
normally normally
Bad debts No bad debts are recorded Doubtful accounts are treated
as bad debts
 Illustration
The following data constitute a condensed description of the business of ABC
Company for its first year of operations ending December 31, 2007:
Cash sales 500,000
Sales on account 3,000,000
Collections from customers 2,800,000
Cash purchases 300,000
Purchases on account 2,000,000
Payment to trade creditors 1,600,000
Salaries paid 650,000
Office supplies paid 200,000
Other expenses paid 50,000
Interest received 40,000
Equipment 400,000
 Illustration – cont...
Additional Information:
The equipment was acquired on January 1 and has an
estimated useful life of 10 years with no residual value.
On December 31, the following items are properly
determined:
Accrued salaries payable 70,000
Office supplies unused 50,000
Accrued interest receivable 10,000
Doubtful accounts 90,000
Ending inventory 400,000
 Comparative Income Statement
Cash Basis Accrual Basis
Sales P 3,300,000 P 3,500,000
Cost of sales:
Purchases 1,900,000 2,300,000
Less: Ending inventory 400,000 400,000
Cost of sales 1,500,000 1,900,000
Gross Income 1,800,000 1,600,000
Interest Income 40,000 50,000
Total Income 1,840,000 1,650,000
Expenses:
Salaries 650,000 720,000
Office supplies 200,000 150,000
Other expenses 50,000 50,000
Doubtful accounts 90,000
Depreciation 40,000 40,000
Total Expenses 940,000 1,050,000
Net Income P 900,000 P 600,000
 Computation of sales

Cash sales XX
Sales on account:
Trade accounts and notes receivable, end XX
Collection of trade accounts and notes receivable XX
Sales returns, discounts, and allowances XX
Accounts and notes receivable written off XX
Trade notes receivable discounted (NR directly credited) XX
Total XX
Less: Trade accounts and notes receivable, beginning XX XX
Total sales XX
 Computation of Purchases
Cash purchases XX
Purchases on account: XX
Trade accounts payable and notes payable, end XX
Payment and trade accounts and notes payable XX
Purchases returns, discounts and allowances XX
Total XX
Less: Trade accounts and notes payable, beginning XX XX
Total purchases XX
 Income Other than Sales
Income received XX
Add: Deferred income – beginning XX
Accrued income – ending XX
Total XX
Less: Deferred income – ending XX
Accrued income – beginning XX XX
Income for the current year XX
 Expenses in General
Expenses paid XX
Add: Prepaid expenses - beginning XX
Accrued expenses – ending XX
Total XX
Less: Prepaid expenses – ending XX
Accrued expenses – beginning XX XX
Total Expenses XX
• See problem 3.4
CORRECTION OF ERRORS (PRIOR
PERIOD)
 Kinds of Errors
• Clerical Errors – errors that are normally detected in the
performance of the accounting procedures are immediately
corrected. E.g. arithmetical errors, posting errors, omission.
• Statement of Financial Position errors – affecting only real
accounts, e.g. wrong classification of account as current or non-
current.
• Statement of Comprehensive Income Errors – affecting only
nominal accounts, e.g. wrong classification of expense
• Errors affecting both Financial Position and Comprehensive Income
– affecting both nominal and real accounts and are classified into:
✓ Counterbalancing error – automatically corrected in the next accounting
period even w/o correcting entry.
✓ Non-counterbalancing error – does not automatically correct in the next
accounting period and requires correcting entry.
 Effects of errors when discovered
Counterbalancing Non-counterbalancing

Books are closed No correcting entry is Correcting entry is

necessary. necessary to adjust the
current balance of capital
or retained earnings.

Books are not closed Correcting entry is needed Correcting entry is needed
to correct the current to correct the current
period and to adjust the period and to adjust the
beginning balance of beginning balance of
capital or retained capital or retained
earnings. earnings.
• See illustration on Page 137.
The Special Journals
Manual Accounting
Systems
General Ledger and Subsidiary Ledgers
General Ledger

Cash 11 Accounts Receivable

Subsidiary Ledger

Accts. Rec. 12 Customer Accounts

A B C D

Supplies 14 Accounts Payable

Subsidiary Ledger

Accts. Pay. 21 Creditor Accounts

A B C D
 Special Journals
SELLING
Providing services on account
recorded in Revenue journal
Receipt of cash from any source
recorded in Cash receipts journal

BUYING
Purchase of items on account
recorded in Purchases journal
Payment of cash for any purpose
recorded in Cash payments journal
The Revenue Journal
 The Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
1 1
2 2
3 3
4 4
5 5
6 6

All sales on account are recorded in

this journal. Each sales invoice is
listed in numerical order.
 The Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 2
3 3
4 4
5 5
6 6

Performed services on credit to

MyMusic.com, $2,200.
 The Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 2
3 3
4 4
5 5
6 6

Notice that only one line is

required to make the entry.
 Posting from the Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 2
3 3
4 4
5 5
6 6

To update the MyMusicClub.com account,

the $2,200 debit is posted to the accounts
receivable subsidiary ledger.
 Posting from the Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 2
3 3
4 4
Accounts Receivable Subsidiary Ledger
5 5
MyMusicClub.com
6 6
Date Item P.R. Debit Credit Balance
2006
Mar. 2 R35 2,200 2,200
 Posting from the Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 2
3 3
4 4
Accounts Receivable Subsidiary Ledger
5 5
MyMusicClub.com
6 6
Date Item P.R. Debit Credit Balance
2006
Mar. 2 R35 2,200 2,200

This procedure is repeated for each posting

to the accounts receivable subsidiary ledger.
 Posting from the Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2003
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
6 6

Assume that similar entries were

journalized and posted during the
month of March.
 Posting from the Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 31 9 6 0 0 00 5
6 6

On March 31, the revenue journal is

totaled and ruled.
 Posting the Revenue Journal Total
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 31 9 6 0 0 00 5
6 6

Next, the revenue journal’s total ($9,600)

is posted to the general ledger.
 Posting the Revenue Journal Total

GENERAL LEDGER

ACCOUNT Accounts Receivable Account No. 12

Post. Balance
Date Item Ref. Dr. Cr.
Dr. Cr.
2006
Mar. 1 Balance 3 400 00

31 R35 9 600 00 13 000 00

Revenue Journal, page 35

 Posting the Revenue Journal Total
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 31 9 6 0 0 00 5
6 6
(12)(41)

By placing the account number here, we

indicate that $9,600 has been debited to
Accounts Receivable in the general ledger.
 Posting the Revenue Journal Total

GENERAL LEDGER

ACCOUNT Fees Earned Account No. 41

Post. Balance
Date Item Ref. Dr. Cr.
Dr. Cr.
2006
Mar. 31 R35 9 600 00 9 600 00
 Posting the Revenue Journal Total
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 31 9 6 0 0 00 5
6 6
(12)(41)

Placing “41” here indicates that $9,600 has

been posted to the credit side of Fees
Earned in the general ledger.
The Cash Receipts Journal
The Cash Receipts Journal
All transactions that involve
the receipt of cash are
recorded in the cash receipts
journal.
 The Cash Receipts Journal

CASH RECEIPTS JOURNAL Page 14

Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400

NetSolutions received $400 cash

on March 1 for the month’s rent.
 The Cash Receipts Journal

CASH RECEIPTS JOURNAL Page 14

Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina 3,400 3,400
28 MyMusicClub.com 2,200 2,200
30 RapZone.com 1,750 1,750

During March, NetSolutions collected

cash from three customers.
 Posting the Cash Receipts Journal

CASH RECEIPTS JOURNAL Page 14

Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina 3,400 3,400
28 MyMusicClub.com 2,200 2,200
30 RapZone.com 1,750 1,750

Each account under “Accounts

Receivable Cr.” is posted to the accounts
receivable subsidiary ledger.
 Posting the Cash Receipts Journal

CASH RECEIPTS JOURNAL Page 14

Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina 3,400 3,400
28 MyMusicClub.com 2,200 2,200
30 RapZone.com 1,750 1,750

Accounts Receivable Subsidiary Ledger

Web Cantina
Date Item P.R. Debit Credit Balance
2006
Mar. 1 Bal. 3,400
18 R35 2,650 6,050
19 3,400 2,650
 Posting the Cash Receipts Journal

CASH RECEIPTS JOURNAL Page 14

Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina √ 3,400 3,400
28 MyMusicClub.com 2,200 2,200
30 RapZone.com 1,750 1,750

Accounts Receivable Subsidiary Ledger

Web Cantina
Date Item P.R. Debit Credit Balance
2006
Mar. 1 Bal. 3,400
18 R35 2,650 6,050
19 CR14 3,400 2,650
 The Cash Receipts Journal
After all journalizing and posting
to the accounts receivable
subsidiary ledger for the month is
complete, the columns are
totalled.
 The Cash Receipts Journal
CASH RECEIPTS JOURNAL Page 14
Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina √ 3,400 3,400
28 MyMusicClub.com √ 2,200 2,200
30 RapZone.com √ 1,750 1,750
31 400 7,350 7,750

The total “Cash Dr.” column

equals the total of the two
credit columns.
 Posting the Cash Receipts Journal
CASH RECEIPTS JOURNAL Page 14
Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina √ 3,400 3,400
28 MyMusicClub.com √ 2,200 2,200
30 RapZone.com √ 1,750 1,750
31 400 7,350 7,750

GENERAL LEDGER
Account: Accounts Receivable No. 12
The three circled
DateItem items
P.R. Debit areBalance
Credit
posted
Mar.to
1 the
Bal general
2006
√ ledger. 3,400
Let’s post31Accounts
R35 9,600
Receivable. 13,000
 Posting the Cash Receipts Journal
CASH RECEIPTS JOURNAL Page 14
Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina √ 3,400 3,400
28 MyMusicClub.com √ 2,200 2,200
30 RapZone.com √ 1,750 1,750
31 400 7,350 7,750

GENERAL LEDGER
Account: Accounts Receivable No. 12
DateItem P.R. Debit Credit Balance
2006
Mar. 1 Bal √ 3,400
31 R35 9,600 13,000
31 CR14 7,350 5,650
 Posting the Cash Receipts Journal
CASH RECEIPTS JOURNAL Page 14
Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
19 Web Cantina √ 3,400 3,400
28 MyMusicClub.com √ 2,200 2,200
30 RapZone.com √ 1,750 1,750
31 400 7,350 7,750
( √) (12)
Posting the Cash Receipts Journal

The $7,750 total in the Cash

Debit column is posted to
Cash in a similar manner.
Posting the Cash Receipts Journal
The $400 credit to Rent Revenue
could have been posted earlier, but
posting it at the same time as other
general ledger accounts is proper.
Posting the Cash Receipts Journal

A completely posted cash

receipts journal is shown in
the next slide.
 Posted Cash Receipts Journal
CASH RECEIPTS JOURNAL Page 14
Other Accounts
PostAccounts Receivable Cash
DateAccount Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 42 400 400
19 Web Cantina √ 3,400 3,400
28 MyMusicClub.com √ 2,200 2,200
30 RapZone.com √ 1,750 1,750
31 400 7,350 7,750
( √) (12) (11)
 GENERAL LEDGER
Accounts ACCOUNT Accounts Receivable No. 12
Receivable DateItem P.R. Debit Credit Balance
Mar. 1 Bal 3,400
Control 31 R35
√
9,600 13,000
Account 31 CR14 7,350 5,650

If the accounts receivable

account in the general ledger
only shows summary totals,
where are the individual
customer balances?
 GENERAL LEDGER
Accounts ACCOUNT Accounts Receivable No. 12
Receivable DateItem P.R. Debit Credit Balance
Mar. 1 Bal 3,400
Control 31 R35
√
9,600 13,000
Account 31 CR14 7,350 5,650
MyMusicClub.com
Date Item P.R. Debit Credit Balance
3/2 R35 2,200 2,200
3/27 R35 3,000 5,200
Accounts 3/28 CR14 2,200 3,000

Receivable RapZone.com
Date Item P.R. Debit Credit Balance

Subsidiary 3/6 R35 1,750 1,750

3/30 CR14 1,750 --
Ledger Web Cantina
Date Item P.R. Debit Credit Balance
3/1 Bal. ✓ 3,400
3/18 R35 2,650 6,050
3/19 CR14 3,400 2,650
The Purchases Journal
 The purchases journal is
designed for recording all
purchases on account.
 Journalizing in the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600

On March 3, 2003, NetSolutions

purchased supplies from Howard
Supplies, $600.
 Posting the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600

Accounts Payable Subsidiary Ledger

Howard Supplies
Date Item P.R. Dr. Cr. Balance

2006
Mar 3 600 600
To keep the accounts payable
subsidiary ledger current, this entry
is posted on March 3.
 Posting the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600

Accounts Payable and Supplies will

be posted as totals.
 Journalizing in the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420

On March 7, NetSolutions
purchased supplies from Donnelly
Supplies, $420.
 Journalizing in the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
 Journalizing in the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800

OnBecause
March 12,
there
NetSolutions
isn’t a special
purchased
columnoffice
for
equipment
Office Equipment,
from Jewettthis
Business
purchaseSystems,
was
recorded under$2,800.
“Other Accounts Dr.”
 Journalizing in the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960

Now, let’s look at the rest of March’s entries

(assume that all postings to the accounts payable
subsidiary ledger have been made).
 Totaling the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
31 6,230 3,430 2,800

At the end of March, all columns are totaled

$6,230 = $3,430 + $ 2,800
and equality of debits and credits is verified.
 Posting the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
31 6,230 3,430 2,800

The next step is to post to the

general journal.
 PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
31 6,230 3,430 2,800

GENERAL LEDGER
ACCOUNT Accounts Payable No. 21
DateItem P.R. Debit Credit Balance
Mar. 1 Bal 1,230
31 P11 6,230 7,460
 PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2003
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
31 6,230 3,430 2,800
(21)

GENERAL LEDGER
ACCOUNT Accounts Payable No. 21
DateItem P.R. Debit Credit Balance
Mar. 1 Bal 1,230
31 P11 6,230 7,460
 PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2003
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 18 2,800
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
31 6,230 3,430 2,800
(21) (14)

Supplies is posted as a total of $3,430

to general ledger account 21. Office
Equipment is posted individually.
 PURCHASES JOURNAL Page 11
Accts. Other
PostPayable Supplies Accounts Post
DateAccount Credited Ref. Cr. Dr. Dr. Ref.Amount
2006
Mar. 3 Howard Supplies 600 600
7 Donnelly Supplies 420 420
12 Jewett Bus. Sys. 2,800 Off. Equip. 18 2,800
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
31 6,230 3,430 2,800
(21) (14) ( )

NetSolutions had only one entry in the

“Other Accounts Dr.” column. If there were
others, they would be posted individually.
Therefore, the total is not posted. A check
mark indicates that the total was not posted.
The Cash Payments
Journal
 All payments are
recorded in the cash
payments journal.
NetSolutions makes all
payments by check.
Let’s make all of the cash
payment journal entries
for March.
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600

On March 2, NetSolutions paid

the rent for March by issuing
Check No. 150 for $1,600.
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
15 151 Grayco Supplies 1,230 1,230

On March 15, issued Check No. 151 to

Grayco Supplies on account, $1,230.
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
15 151 Grayco Supplies √ 1,230 1,230

Accounts Payable Subsidiary Ledger

Let’s post to the accounts
Grayco Supplies
payable
Date Item P.R. Dr. Cr. Balance
subsidiary Mar.
ledger
3 Bal.
at this time to keep1,230
the creditor’s
15 account current.
CP7 1,230 ---
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
15 151 Grayco Supplies √ 1,230 1,230
21 152 Jewett Business Sys. 2,800 2,800

On March 21, issued Check No. 152

as payment on account to Jewett
Business Systems, $2,800.
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
15 151 Grayco Supplies √ 1,230 1,230
21 152 Jewett Business Sys. √ 2,800 2,800
22 153 Donnelly Supplies. 420 420

On March 22, issued Check No.

153 as payment on account to
Donnelly Supplies, $420.
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
15 151 Grayco Supplies √ 1,230 1,230
21 152 Jewett Business Sys. √ 2,800 2,800
22 153 Donnelly Supplies. √ 420 420
30 154 Utilities Expense 1,050 1,050

On March 30, issued Check No. 154 as

payment for utility bill, $1,050.
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
15 151 Grayco Supplies √ 1,230 1,230
21 152 Jewett Business Sys. √ 2,800 2,800
22 153 Donnelly Supplies. √ 420 420
30 154 Utilities Expense 1,050 1,050
31 155 Howard Supplies 600 600

On March 31, issued Check No.

155 on account to Howard
Supplies, $600
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
15 151 Grayco Supplies √ 1,230 1,230
21 152 Jewett Business Sys. √ 2,800 2,800
22 153 Donnelly Supplies. √ 420 420
30 154 Utilities Expense 1,050 1,050
31 155 Howard Supplies √ 600 600
31 2,650 5,050 7,700

The journal is ruled, summed, and

verified for equality of debits and
the “Cash Cr.” column.
 CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. PostAccounts Payable Cash
Date No.Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 52 1,600 1,600
15 151 Grayco Supplies √ 1,230 1,230
21 152 Jewett Business Sys. √ 2,800 2,800
22 153 Donnelly Supplies. √ 420 420
30 154 Utilities Expense 54 1,050 1,050
31 155 Howard Supplies √ 600 600
31 2,650 5,050 7,700
(√ ) (21) (11)

Individual items in the “Other Accounts Dr.”

column are posted. Then the totals for “Accounts
Payable Dr.” and “Cash Cr.” are posted.
Accounts Payable
Control

Accounts Payable
 GENERAL LEDGER
Accounts Payable ACCOUNT Accounts Payable No. 12
DateItem P.R. Debit Credit Balance
(Controlling) Mar. 1 Bal 1,230
31 P11 6,230 7,460
31 CP7 5,050 2,410
Donnelly Supplies
Date Item P.R. Debit Credit Balance
Mar 2 P11 420 420
19 P11 1,450 1,870

Accounts 22 CP7 420 1,450

Jewett Business
Payable Grayco Supplies
Date Item P.R. Debit Credit Balance
Systems Subsidiary
also has a Mar 1 Bal.
15 ✔CP7 1,230
1,230
0
zero balance, so
Ledger --
Howard Supplies
that account was Date Item P.R. Debit Credit Balance

omitted for space Mar 3

27
P11
P11
600
960
600
1,560
reasons. 31 CP7 600 960
THE VOUCHER SYSTEM
• Voucher System: A control technique that requires
every transaction and subsequent payment be
supported by an approved voucher.
• Usually includes:
✓ Vouchers
✓ Voucher Register
✓ Voucher Payable Account
✓ Voucher Checks
✓ Check Register
 Elements of Internal Control in a Voucher
System
• Segregation of duties of employees
• Authorization procedures and related
responsibilities
• Accounting procedures that require pre-
numbering and accounting for supporting
document.
 Voucher System is best used when…

1. Invoices are paid in full when due rather than

in partial payment
2. Controls over expenditures are needed
because there are a large number of
transactions.
3. It is desirable to record invoices when
received rather than when payment is made.
 The Purchasing Process
• See diagram
Voucher System Payment Process
 Combination Journal
• Is a journal with special and general columns.
Computerized Accounting
Systems
 Advantages of a Computerized
Accounting System Over a
Manual Accounting System

1. Computerized systems simplify the record-

keeping process.
2. Computerized systems are generally more
accurate.
3. Computerized systems provide management
current account balance information to
support decision making.
 The Revenue and Collection Cycle
in QuickBooks
From Exhibit 10, page 203 of textbook

Mail invoice to
customer
The Revenue and Collection Cycle
in QuickBooks Continued
From Exhibit 10, page 203 of textbook
The Revenue and Collection Cycle
in QuickBooks Continued
From Exhibit 10, page 203 of textbook
 Advanced Areas Where the
Internet is Being Used for
Business Purposes
✓Supply chain management (SCM)
✓Customer relationship management (CRM)
✓Product life-cycle management (PLM)
Financial Statements Analysis
Horizontal Analysis
It’s an analysis of the percentage
increases and decreases of related
items in comparative financial
statements.
 Lincoln Company

Comparative Balance Sheet
 Balance Sheet
December 31, 2006 and 2005
Increase (Decrease)
Assets 2006 2005
Amount Percent
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000
—
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)

Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%)
Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
 Lincoln Company

Comparative Balance Sheet

December 31, 2006 and 2005
Increase (Decrease)
Assets 2006 2005 Amount
Percent
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 Analysis:
Horizontal 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets Difference
$1,139,500 $1,230,500 $17,000
$ (91,000) (7.4%)
Liabilities = 3.2%
Base year (2005) $533,000
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%)
Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
 Lincoln Company

Comparative Balance Sheet

December 31, 2006 and 2005
Increase (Decrease)
Assets 2006 2005 Amount
Percent
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Horizontal Analysis:
Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)
Difference $(82,500)
Long-term liabilities 100,000 200,000 (100,000) (50.0%)
= (46.5%)
Total liabilities Base year (2005)
$ 310,000 $177,500
$ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
 Lincoln Company

Comparative Balance Sheet

December 31, 2006 and 2005
Okay, go 2006
to the next slideIncrease (Decrease)
2005 Amount Percent
Assets
Current assets and calculate the percentage
$ 550,000 $ 533,000 $ 17,000 3.2%
change for 95,000
Long-term investments fixed assets.
177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Liabilities
Current liabilities Horizontal
$ 210,000 Analysis:
$ 243,000 $ (33,000) (13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%)
Total liabilities Difference $ 443,000 ? $(133,000)
$ 310,000 (30.0%)
Stockholders’ Equity = ?
Base year (2005) ?
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
 Lincoln Company

Comparative Balance Sheet

December 31, 2006 and 2005
Increase (Decrease)
Assets 2006 2005 Amount
Percent
Current assets $ 550,000 $ 533,000 $ 17,000 3.2%
Long-term investments 95,000 177,500 (82,500) (46.5%)
Fixed assets (net) 444,500 470,000 (25,500) (5.4%)
Intangible assets 50,000 50,000 —
Total assets $1,139,500 $1,230,500 $ (91,000) (7.4%)
Liabilities
Current liabilities $ 210,000 $ 243,000 $ (33,000)
(5.4%)
(13.6%)
Long-term liabilities 100,000 200,000 (100,000) (50.0%)
Total liabilities $ 310,000 $ 443,000 $(133,000) (30.0%)
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 $ 150,000 —
Common stock, $10 par 500,000 500,000 —
Retained earnings 179,500 137,500 $42,000 30.5%
Total stockholders’ equity $ 829,500 $ 787,500 $42,000 5.3%
Total liab. & SE $1,139,500 $1230,500 $(91,000) (7.4%)
 Lincoln Company

Comparative Income Statement
 Income Statement
December 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Sales $1,530,500 $1,234,000 $296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8%
Total operating expenses $ 295,000 $ 244,400 $ 50,600 20.7%
Operating income $ 160,000 $ 135,600 $ 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
$ 168,500 $ 146,600 $ 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income $ 91,000 $ 76,500 $ 14,500 19.0%
 Lincoln Company

Comparative Income Statement
December 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Sales $1,530,500 $1,234,000 $296,500 24.0%
24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000 24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Horizontal Analysis:
Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%
Administrative expenses 104,000
Increase amount 97,400
$296,500 6,600 6.8%
Total operating expenses $ 295,000 $ 244,400 $ 50,600
= 24.0%20.7%
Operating income Base year (2005)
$ 160,000 $1,234,000
$ 135,600 $ 24,400 18.0%
Other income 8,500 11,000 (2,500) (22.7%)
$ 168,500 $ 146,600 $ 21,900 14.9%
Other expense 6,000 12,000 (6,000) (50.0%)
Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income $ 91,000 $ 76,500 $ 14,500 19.0%
 Lincoln Company

Comparative Income Statement
December 31, 2006 and 2005
Increase (Decrease)
2006 2005 Amount Percent
Sales $1,530,500 $1,234,000 $296,500 24.0%
Sales returns 32,500 34,000 (1,500) (4.4%)
Net sales $1,498,000 $1,200,000 $298,000 24.8%
24.8%
Cost of goods sold 1,043,000 820,000 223,000 27.2%
Gross profit $ 455,000 $ 380,000 $ 75,000 19.7%
Selling expenses $ 191,000 $ 147,000 $ 44,000 29.9%
Administrative expenses 104,000 97,400 6,600 6.8%
Total operating expenses Horizontal
$ 295,000 $ 244,400 $ 50,600 20.7%
Analysis:
Operating income $ 160,000 $ 135,600 $ 24,400 18.0%
Other income Increase 8,500
amount 11,000
$298,000(2,500) (22.7%)
= 24.8%14.9%
$ 168,500 $ 146,600 $ 21,900
Other expense Base year (2005) 12,000
6,000 $1,200,000(6,000) (50.0%)
Income before income tax $ 162,500 $ 134,600 $ 27,900 20.7%
Income tax 71,500 58,100 13,400 23.1%
Net income $ 91,000 $ 76,500 $ 14,500 19.0%
Vertical Analysis
A percentage analysis can be
used to show the relationship of
each component to a total within
a single statement.
Vertical Analysis

The total, or 100% item,

on the balance sheet is
“total assets.”
 Lincoln Company
 Balance
Comparative Balance Sheet

December 31, 2006 Sheet
December 31, 2005
AmountPercent Amount Percent
Assets
Current assets $ 550,000 48.3%
48.3% $ 533,000 43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1
Total assets $1,139,500 100.0% $1,230,500 100.0%
Liabilities
Current liabilities $ 210,000 18.4% $ 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities $ 310,000 27.2% $ 443,000 36.0%
Stockholders’ Equity
Vertical Analysis:
Preferred stock, 6%, $100 par $ 150,000 13.2% $ 150,000 12.2%
Current
Common stock,assets
$10 par $550,000500,000 43.9 500,000 40.6
Retained earnings 179,500 = 48.3%
15.7 137,500 11.2
Total
Total assets equity
stockholders’ $1,139,500
$ 829,500 72.8% $ 787,500 64.0%
Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%
 Lincoln Company

Comparative Balance Sheet

December 31, 2006 December 31, 2005
AmountPercent Amount Percent
Assets
Current assets $ 550,000 48.3% $ 533,000 43.3%
43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1
Total assets $1,139,500 100.0% $1,230,500 100.0%
Liabilities
Current liabilities $ 210,000 18.4% $ 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities $ 310,000
Vertical Analysis:27.2% $ 443,000 36.0%
Stockholders’ Equity
Preferred 6% stock, $100Current assets 13.2%
par $ 150,000 $533,000$ 150,000 12.2%
Common stock, $10 par Total assets 500,000 43.9 = 43.3%
500,000 40.6
$1,230,500
Retained earnings 179,500 15.7 137,500 11.2
Total stockholders’ equity $ 829,500 72.8% $ 787,500 64.0%
Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%
 Lincoln Company

Comparative Balance Sheet

December 31, 2006 December 31, 2005
AmountPercent Amount Percent
Assets
Current assets $ 550,000 48.3% $ 533,000 43.3%
Long-term investments 95,000 8.3 177,500 14.4
Property, plant, & equip. (net) 444,500 39.0 470,000 38.2
Intangible assets 50,000 4.4 50,000 4.1
Total assets $1,139,500 100.0% $1,230,500 100.0%
Liabilities
Current liabilities $ 210,000 18.4% $ 243,000 19.7%
Long-term liabilities 100,000 8.8 200,000 16.3
Total liabilities $ 310,000 27.2% $ 443,000 36.0%
Stockholders’ Equity
Preferred 6% stock, $100 par $ 150,000 13.2% $ 150,000 12.2%
Common stock, $10 par 500,000 43.9 500,000 40.6
Retained earnings 179,500 15.7 137,500 11.2
Total stockholders’ equity $ 829,500 72.8% $ 787,500 64.0%
Total liab. & SE $1,139,500 100.0% $1,230,500 100.0%
 Lincoln Company
 Income
Comparative Income Statement

For the Years Ended December 31, 2006 and 2005 Statement
2006 2005
Amount Percent Amount Percent
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000Net sales
6.9 is 97,400 8.1
Total operating expenses $ 295,000100.0%
19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%
 Lincoln Company

Comparative Income Statement

For the Years Ended December 31, 2006 and 2005
2006 2005
Amount Percent Amount Percent
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8%
12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
Vertical Analysis: $ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Selling
Income beforeexpenses
income tax $191,000
$ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500= 12.8%
4.8 58,100 4.8
Net sales $1,498,000
Net income $ 91,000 6.1% $ 76,500 6.4%
 Lincoln Company

Comparative Income Statement

For the Years Ended December 31, 2006 and 2005
2006 2005
Amount Percent Amount Percent
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%
 Lincoln Company

Comparative Income Statement

For the Years Ended December 31, 2006 and 2005
2006 2005
Amount Percent Amount Percent
Sales $1,530,500 102.2% $1,234,000 102.8%
Sales returns 32,500 2.2 34,000 2.8
Net sales $1,498,000 100.0% $1,200,000 100.0%
Cost of goods sold 1,043,000 69.6 820,000 68.3
Gross profit $ 455,000 30.4% $ 380,000 31.7%
Selling expenses $ 191,000 12.8% $ 147,000 12.3%
Administrative expenses 104,000 6.9 97,400 8.1
Total operating expenses $ 295,000 19.7% $ 244,400 20.4%
Income from operations $ 160,000 10.7 $ 135,600 11.3%
Other income 8,500 0.6 11,000 0.9
$ 168,500 11.3% $ 146,600 12.2%
Other expense 6,000 0.4 12,000 1.0
Income before income tax $ 162,500 10.9% $ 134,600 11.2%
Income tax expense 71,500 4.8 58,100 4.8
Net income $ 91,000 6.1% $ 76,500 6.4%
Common Size Statements

Vertical analysis with both dollar and

percentage amounts is also useful in
comparing one company with another or
with industry averages. Such
comparisons are easier to make with the
use of common-size statements in which
all items are expressed in percentages.
Common-Size Income Statement
 Solvency Analysis
▪ Solvency is the ability of a business to meet
its financial obligations (debts) as they are
due.
▪ Solvency analysis focuses on the ability of a
business to pay or otherwise satisfy its
current and noncurrent liabilities.
▪ This ability is normally assessed by
examining balance sheet relationships.
Current Position Analysis
Working Capital and Current Ratio
2006 2005
Current assets $550,000 $533,000
Current liabilities 210,000 243,000
Working capital $340,000 $290,000
Current ratio 2.6 2.2

Use: To indicate the ability to meet

Divide
currently maturing obligations.
current
assets by
current
liabilities
Current Position Analysis
Quick Ratio
2006 2005
Quick assets:
Cash $ 90,500 $ 64,700
Marketable securities 75,000 60,000
Accounts receivable (net) 115,000 120,000
Total $280,500 $244,700
Current liabilities $210,000 $243,000
Quick ratio 1.3 1.0

Use: To indicate instant debt-paying ability.

Accounts Receivable Analysis
Accounts Receivable Turnover
2006 2005
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average (Total ÷ 2) $ 117,500 $ 130,000

Net sales on account

Average accounts receivable
Accounts Receivable Analysis
Accounts Receivable Turnover
2006 2005
Net sales on account $1,498,000 $1,200,000
Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000
End of year 115,500 120,000
Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accounts receivable turnover 12.7 9.2

Use: To assess the efficiency in collecting

receivables and in the management of credit.
Accounts Receivable Analysis
Number of Days’ Sales in Receivables
2006 2005
Accounts receivable (net),
end of year $ 115,000 $ 120,000
Net sales on account $1,498,000 $1,200,000
Average daily sales on
account (sales ÷ 365) $ 4,104 $ 3,288

Accounts receivable, end of year

Average daily sales on account
Accounts Receivable Analysis
Number of Days’ Sales in Receivables
2006 2005
Accounts receivable (net),
end of year $ 115,000 $ 120,000
Net sales on account $1,498,000 $1,200,000
Average daily sales on
account (sales ÷ 365) $ 4,104 $ 3,288

Number of days’ sales in

receivables 28.0 36.5

Use: To assess the efficiency in collecting

receivables and in the management of credit.
Inventory Analysis
Inventory Turnover
2006 2005
Cost of goods sold $1,043,000 $ 820,000
Inventories:
Beginning of year $ 283,000 $ 311,000
End of year 264,000 283,000
Total $ 547,000 $ 594,000
Average (Total ÷ 2) $ 273,500 $ 297,000

Cost of goods sold

Inventory turnover =
Average inventory
Inventory Analysis
Inventory Turnover
2006 2005
Cost of goods sold $1,043,000 $ 820,000
Inventories:
Beginning of year $ 283,000 $ 311,000
End of year 264,000 283,000
Total $ 547,000 $ 594,000
Average (Total ÷ 2) $ 273,500 $ 297,000
Inventory turnover 3.8 2.8

Use: To assess the efficiency in the

management of inventory.
Inventory Analysis
Number of Days’ Sales in Inventory

2006 2005
Inventories, end of year $ 264,000 $283,000
Cost of goods sold $1,043,000 $820,000
Average daily cost of
goods sold
(COGS ÷ 365) $ 2,858 $ 2,247

Number of Inventories, end of year

Days’ Sales in=
Inventory Average daily cost of goods sold
Inventory Analysis
Number of Days’ Sales in Inventory

2006 2005
Inventories, end of year $ 264,000 $283,000
Cost of goods sold $1,043,000 $820,000
Average daily cost of
goods sold
(COGS ÷ 365) $ 2,858 $ 2,247
Number of days’ sales
in inventory 92.4 125.9

Use: To assess the efficiency in the

management of inventory.
Long-Term Creditors
Ratio of Fixed Assets to Long-Term Liabilities

2006 2005
Fixed assets (net) $444,500 $470,000
Long-term liabilities $100,000 $200,000
Ratio of fixed assets to
long-term liabilities 4.4 2.4

Use: To indicate the margin of safety

to long-term creditors.
Long-Term Creditors
Ratio of Liabilities to Stockholders’ Equity
2006 2005
Total liabilities $310,000 $443,000
Total stockholders’ equity $829,500 $787,500
Ratio of liabilities to
stockholders’ equity 0.37 0.56

Use: To indicate the margin of safety to

creditors.
Long-Term Creditors
Number of Times Interest Charges Earned
2006 2005
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000

Number of Income before

Times Interest = income tax + interest expense
Charges Earned Interest expense
Long-Term Creditors
Number of Times Interest Charges Earned
2006 2005
Income before income tax $ 900,000 $ 800,000
Add interest expense 300,000 250,000
Amount available for interest $1,200,000 $1,050,000
Number of times earned 4.0 4.2

Use: To assess the risk to debt holders in

terms of number of times interest
charges were earned.
 Profitability Analysis
▪ Profitability is the ability of an entity to
earn profits.
▪ This ability to earn profits depends on the
effectiveness and efficiency of operations
as well as resources available.
▪ Profitability analysis focuses primarily on
the relationship between operating results
reported in the income statement and
resources reported in the balance sheet.
The Common Stockholder
Ratio of Net Sales to Assets
2006 2005
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average (Total ÷ 2) $1,048,750 $1,031,500

Excludes long-term investments

The Common Stockholder
Ratio of Net Sales to Assets
2006 2005
Net sales $1,498,000 $1,200,000
Total assets:
Beginning of year $1,053,000 $1,010,000
End of year 1,044,500 1,053,000
Total $2,097,500 $2,063,000
Average (Total ÷ 2) $1,048,750 $1,031,500
Ratio of net sales to assets 1.4 1.2

Use: To assess the effectiveness of

the use of assets.
The Common Stockholder
Rate Earned on Total Assets
2006 2005
Net income $ 91,000 $ 76,500
Plus interest expense 6,000 12,000
Total $ 97,000 $ 88,500
Total assets:
Beginning of year $1,230,500 $1,187,500
End of year 1,139,500 1,230,500
Total $2,370,000 $2,418,000
Average (Total ÷ 2) $1,185,000 $1,209,000

Rate earned on total assets 8.2% 7.3%

Use: To assess the profitability of the assets.

The Common Stockholder
Rate Earned on Stockholders’ Equity
2006 2005
Net income $ 91,000 $ 76,500
Stockholders’ equity:
Beginning of year $ 787,500 $ 750,000
End of year 829,500 787,500
Total $1,617,000 $1,537,500
Average (Total ÷ 2) $ 808,500 $ 768,750

Rate earned on stockholders’

equity 11.3% 10.0%

Use: To assess the profitability of the

investment by stockholders.
The Common Stockholder
Rate Earned on Common Stockholders’ Equity
2006 2005
Net income $ 91,000 $ 76,500
Less preferred dividends 9,000 9,000
Remainder—common stock $ 82,000 $ 67,500
Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000
End of year 679,500 637,500
Total $1,317,000 $1,237,500
Average (Total ÷ 2) $ 658,500 $ 618,750
The Common Stockholder
Rate Earned on Common Stockholders’ Equity
2006 2005
Net income $ 91,000 $ 76,500
Less preferred dividends 9,000 9,000
Remainder—common stock $ 82,000 $ 67,500
Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000
End of year 679,500 637,500
Total $1,317,000 $1,237,500
Average (Total ÷ 2) $ 658,500 $ 618,750

Rate earned on common

stockholders’ equity 12.5% 10.9%
Use: To assess the profitability of the
investment by common stockholders.
The Common Stockholder
Earnings Per Share on Common Stock
2006 2005
Net income $ 91,000 $ 76,500
Less preferred dividends 9,000 9,000
Remainder—common stock $ 82,000 $ 67,500
Shares of common stock 50,000 50,000
Earnings per share on common stock $1.64 $1.35

Use: To assess the profitability of the

investment by common stockholders.
The Common Stockholder
Price-Earnings Ratio
2006 2005
Market price per share of common $41.00 $27.00
Earnings per share on common ÷ 1.64 ÷ 1.35
Price-earnings ratio on common stock 25 20

Use: To indicate future earnings

prospects, based on the relationship
between market value of common
stock and earnings.
The Common Stockholder

Dividend Yield on Common Stock

2006 2005
Dividends per share of common $ 0.80 $ 0.60
Market price per share of common ÷ 41.00 ÷ 27.00
Dividend yield on common stock 1.95% 2.22%

Use: To indicate the rate of return to common

stockholders in terms of dividends.
End of Presentation

Thank you ☺