The Accounting Cycle. Cycle. The Accounting Cycle SUA Reference p.10. Overview. The Accounting Cycle. 6 Major Subcycles. Subcycle (transaction cycle):

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Everything you ever wanted to know

about...

The

Accounting

Cycle

Overview



Review of the manual Accounting Cycle



6 Major Subcycles



Begin the SUA

The Accounting Cycle

SUA Reference p.10 Transactions Occur Prepare Documents Record in Journals Post to Ledgers Prepare Unadjusted Trial Balance Prepare and Post Adjusting Entries Prepare Adjusted Trial Balance Prepare Financial Statements Prepare Closing Entries

The Accounting Cycle

Subcycle (transaction cycle):

Group of related business activities

that result in repetitive patterns of

transactions

6 Major Subcycles

Revenue Cycle Expenditure Cycle Human Resources Cycle General Ledger and Reporting Cycle Production Cycle Financing Cycle

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Revenue Cycle in SUA

Instructions pp. 18-21

Consists of:

Credit Sales Cash Sales

Bad Debt Write-offs Sales Returns Cash Receipts

Revenue Cycle

Revenue Cycle in SUA

Credit Sale

1. Customer Purchase Order 2. Approve Credit

3. Bill of Lading 4. Sales Invoice 5. Pack and ship order

6. Review and approve documents 7. Mail invoice to customer

8. Make the entry in the Sales Journal and then update the A/R Subsidiary Ledger

Introduction to SUA

Waren Sports Supply



SUA package materials



Course packet supplemental materials



Worksheet

Introduction to SUA

SUA package materials



Reference book



Documents Folder



Other file tabs



Journal book



Instructions/Flowcharts/Ledgers book

Introduction to SUA

Course packet supplemental materials



Assigment Schedule



Check Figures



File System page



Grade sheet



Transactions list



Price lists

Introduction to SUA

Worksheet



Worksheet is already prepared as Excel

spreadsheet



Download this spreadsheet from the 474

web site under “Homework” (you don’t need

the spreadsheet worksheet until SUA 3)

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Alter the SUA package!!!

From your Documents File, throw away: the blue Transactions List

the green Transactions List the 1 blue Price List page

Replace them with Transactions List and Price List pages from your course packet!!!

Alter the SUA package!!!

Also, from your Documents File, throw away: 1 green Worksheet

1 green Post-closing Trial Balance

We will use the Excel spreadsheet worksheet instead (in SUA 3).

Waren’s Subcycles

Revenue cycle(Waren: “Sales and cash receipts cycle”)

_{Expenditure cycle}(Waren: “Purchases and cash disbursements cycle”)

Human resources cycle(Waren: “Payroll cycle”) General Ledger and Reporting cycle(Waren:

not specifically mentioned)

Production cycle(doesn’t apply to Waren) Financing cycle(Waren doesn’t have much

external financing)

Waren’s Subcycles

Revenue cycle(Waren: “Sales and cash receipts cycle”)

_{Expenditure cycle}(Waren: “Purchases and cash disbursements cycle”)

Human resources cycle(Waren: “Payroll cycle”) General Ledger and Reporting cycle (Waren:

not specifically mentioned)

Production cycle (doesn’t apply to Waren) Financing cycle (Waren doesn’t have much

external financing)

SUA Assignments



SUA 1 -

Sales and cash receipts cycle



SUA 2 -

Purchases and cash disbursements

cycle



SUA 3 -

Payroll cycle and G/L cycle

Waren Personnel



Ray Kramer –

Salaried manager



Jim Adams –

Hourly accounting clerk



Nancy Ford –

Hourly production and billing

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Use this semester’s transaction

set and your own numbers

Let’s get started...



Label the transactions



9 S&CR, 8 P&CD, 2 Payroll



SUA 1



SUA reference - chapter 3



Flowcharts - pp. 18-21



Review all S&CR transactions



Do December 19 S&CR transaction – credit

sale to University of Southern Iowa

December 19

th

_transaction

_{Working with flowcharts}

How do you know how far to go when following the flowchart?

A flowchart may have one or several branches. Follow the chart until all of the branches come to an end.

A flowchart branch comes to an end (or a temporary end) when you reach a file symbol . A branch comes to a permanent end when you come to a terminal symbol .

At the end of SUA 1...



All documents in S&CR are properly

processed and filed



All necessary entries are made in journals

and Subsidiary Ledgers



A/R aged trial balance (p. 45) is complete

(Exclude zero balances!)



Monthly statement for customer is

complete

A/R Aged Trial Balance

(Reference Manual p.45 )

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Overview



Review SUA 1



Review Expenditure Cycle



Inventory Systems



Begin SUA 2



Internal Controls & Auditing

At the end of SUA 1...



All documents in S&CR are properly

processed and filed



All necessary entries are made in Journals

and Subsidiary Ledgers



A/R aged trial balance (p. 45) is complete



Monthly statement for customer is

complete

A/R Aged Trial Balance

(Reference Manual p.45 )

Expenditure Cycle in SUA

Instructions pp. 22-24

Consists of:

Credit Purchases Cash Purchases Purchase Returns Cash Disbursements Expenditure Cycle

Expenditure Cycle in SUA

Credit Purchase

1. Prepare purchase order (p.o.)

2. Approve purchase order

3. Send p.o. to vendor

4. Receive goods, prepare receiving report

5. Receive vendor invoice

6. Match documents and approve for payment

7. Make the entry in the Purchases Journal

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Inventory Systems

There are two basic types of inventory

systems:

1) Perpetual Inventory

2) Periodic Inventory

Which one is becoming more common?

Perpetual

Inventory Systems

Perpetual Inventory

In

Perpetual Inventory

:

1) Use an Inventory Subsidiary Ledger

2) No Purchases account

3) Count inventory to determine shrinkage

(not necessarily every period)

Inventory Systems

Perpetual Inventory - Entries

Sales Entries: A/R xxx Sales xxx COGS xx Inventory xx Purchases Entry: Inventory xx A/P xx A/P xx Purchase Returns xx A/P xxx Cash xx Purchase Discounts xx

Inventory Systems

Perpetual Inventory

Advantages:

1) Better control over inventory

2) Essential for JIT

3) Becoming essential to be competitive

Disadvantages:

More costly than periodic, though costs

are decreasing with better

technology.

Inventory Systems

Periodic Inventory

In

Periodic Inventory (Waren’s method):

1) No Inventory Subsidiary Ledger

2) Use Purchases account

3) At end of period count inventory to

determine COGS at end of every period

(shrinkage will be included)

Inventory Systems

Periodic Inventory - Entries Purchases Entry: Purchases xx A/P xx A/P xx Purchase Returns xx A/P xxx Cash xx Purchase Discounts xx Sales Entries: A/R xxx Sales xxx

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Inventory Systems

Periodic Inventory - Calculating Ending Inventory

1) Count the inventory items (# of units) 2) Calculate ending inventory:

(# of units)(cost per unit) = Ending Inv. Value 3) In an adjusting entry, replace old inventory

balance with new balance, close out purchases accounts and Freight-In, and record (plug) COGS

(You do this in SUA 3 , an example entry is in the Reference book p. 75)

Inventory Systems

Periodic Inventory

Advantages:

1) Cheaper recordkeeping

Disadvantages:

1) Less control over inventory

2) Can’t be used with JIT

3) Less competitive strategy in high tech

environment

Waren’s System

Notes:

Waren uses the periodic system, they have a Purchases account

The Purchases journalis used for any kind of purchase, (fixed assets, small expenses, inventory), but only inventory purchases are debited to the Purchases account

In the purchase of laptop computers on 12/31/09, only process the purchase, do not pay the invoice, even though the payment terms state: “Due on receipt of invoice”.

Accounts Payable Trial Balance

Waren Sports Supply Accounts Payable Trial Balance

December 31, 2005

Vendor No. Name Amount Payable 503 Sears $ 356.30 510 Brown & Root 3,496.00 545 Lapland & Co. 2,450.00

TOTAL $ 6,302.30

At the end of SUA 2...



All documents in P&CD are properly

processed and filed



All necessary entries are made in journals

and Subsidiary Ledgers

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SUA 3



Payroll Cycle - 2 transactions



General Ledger and Reporting Cycle

Do end of period procedures AJE’s

_{Financial Statements} _{Closing entries}



Prepare SUA for submission

Payroll Cycle in SUA

Instructions p. 24

Consists of:

Timekeeping Payments Payroll Cycle

Payroll Cycle in SUA

1. Hourly Employees work and fill in time cards 2. Approve hours on time cards and give to

accounting department 3. Calculate payroll amounts

4. Record in Payroll Journal and Employee Earnings Subsidiary Ledger

5. Generate paychecks 6. Review and sign paychecks

7. Distribute paychecks to employees

8. Make the entry in the Cash Disbursements Journal

Let’s do a Payroll Clinic…

http://www.irs.gov/pub/irs-pdf/p15.pdf

Notes on Payroll Cycle

The pay increase on Dec. 20thapplies to the

whole pay period, ie. from Dec. 16th

Be careful with Time Card calculation

Hours are calculated in hundredths (1/100) of an hour, not minutes (1/60).

SUTA & FUTA percentages (2.7%, 0.8%) are given in instruction manual page 13. Apply to only first $7000 of annual income.

(NF only – Employee Subsidiary Ledger)

Notes on Payroll Cycle

The withholding amounts for employees’ income

taxes are given to you in the Dec. 20th

transaction; you don’t have to calculate them. The payroll check numbers can be in any order as

long as you have all of them.

_{Ray Kramer signs all the checks, including his own} paycheck.

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Notes on Payroll Cycle

FICA tax is 6.2% + 1.45% = 7.65%.

 (p. 8 of Instructions book)

6.2% Social Security – wages up to $102,000 1.45% Medicare - all wages

So, per employee:

For first $102,000 x 7.65% For amounts over $102,000 x 1.45%

No Waren employee has earned over $102,000, so use combined rate of 7.65%

End of Period Procedures

_{Follow instructions in project - do all procedures}

not done in previous parts of SUA (follow the Assignment Schedule)

Month-end procedures 1-7

Bank reconciliation, unemployment taxes, etc.

Note: These are not “adjusting entries”, they are normal entries of the period

Year-end procedures 1-7

worksheet

Adjusting entries – 5 AJE’s (4 + 1)

Closing entries – 3 Closing entries (no Dividends)

Adjusting Journal Entry Notes

Depreciation policy is the half-year convention.

Bad Debts method is given on last page of Transaction List

Ending Inventory figure given on last page of Transaction List

The form of Inventory AJE is shown on p. 75 of the Reference book. (next slide)

AJE for Inventory

DR CR Inventory xx or xx Purchase Discounts xx Purchase Returns xx Cost of Goods Sold PLUG

Purchases xx

Freight-In xx

AJE for Inventory

DR CR Inventory xx or xx DR CR Inventory xx or xx Purchase Discounts xx Purchase Returns xx Purchases xx Freight-In xx DR CR Inventory xx or xx Purchase Discounts xx Purchase Returns xx Cost of Goods Sold PLUG

Purchases xx

Freight-In xx

End of Period Procedures



Closing Entries

1. Close Revenues & Gains to Income Summary 2. Close Expenses & Losses to Income Summary 3. Close Income Summary to Retained Earnings 4. Close Dividends to Retained Earnings

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End of Period Procedures



Notes:

Use worksheet spreadsheet on web site AJE for income tax accrual: Use worksheet Financial Statements automatically prepared

on spreadsheet

The only columns you need to fill in on the worksheet are the Unadjusted Trial Balance and the Adjustments (green columns)

End of Period Procedures

Finding Errors in the worksheet



Calculate the difference between DR and CR

and:

1. Look for that number in your entries and posting (you may have forgotten to post the number) 2. Look for an amount that is exactly half of that

difference (you may have posted a debit as a credit or vice versa)

3. Divide the difference by 9 and see if it divides with no remainder (indicates a transposition error)

Postings include: Cash

25 A/R

25

Resulting Post-Closing Trial Balance:

DR CR Cash 50 A/R 100 A/P 75 Common Stock 75 150 150 If you mispost: Cash 25 A/R 25

DR CR Cash 50 A/R 125 A/P 100 Common Stock 75 150 150 As: Cash 25 A/P 25 No Difference!!! If you mispost: Cash 25 A/R 25

DR CR Cash 50 A/R 150 A/P 75 Common Stock 75 200 150 As: Cash 25 A/R 25 200 – 150 = 50 / 2 = $25 error If you mispost: Cash 25 A/R 25

DR CR Cash 50 A/R 73 A/P 75 Common Stock 75 123 150 As: Cash 25 A/R 52 150 – 123 = 27 / 9 = 3.000 – no remainder must be a TRANSPOSITION ERROR

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Fixed Asset Trial Balance

(Do after depreciation AJE is made and posted)

Waren Sports Supply Fixed Asset Trial Balance

December 31, 2005

ASSET Cost Accumulated Net Depreciation Book Value Computers $ 15,000.00 $12,000.00 $ 3,000.00 Furniture 10,000.00 10,000.00 0.00 Equipment 25,000.00 8,000.00 17,000.00

TOTALS $ 50,000.00 $ 30,000.00 $ 20,000.00

SUA 3 - Completing the project

Notes:

All AJE’s and Closing entries are made in General Journal and are posted to G/L Foot all journals and ledgers

From the spreadsheet, print off the Worksheet, the Income Statement, and the Balance Sheet and put in SUA envelope Total manual G/L balances and make sure they

agree with the worksheet balances DO NOT DO A STATEMENT OF CASH FLOWS

SUA 3 - Completing the project

A/R Trial Balance

A/P Trial Balance Fixed Asset Trial Balance

Bank Reconciliation

MUST BE TYPED AND IN GOOD FORM HANDWRITTEN WORK WILL NOT RECEIVE

CREDIT

Creating the schedules



Type up in Excel



Line up numbers in columns



Show pennies, even when .00



Use “Accounting” number format



Underline columns, double underline totals

Use this semester’s transaction

set and your own numbers

Prepare project for submission

Tape grading sheet to front of envelope and

fill in name and section time

Make sure that your documents are all filed according to the File System page

Remove the Reference Manual Tape envelope shut

Hand in Have a beer

(12)

Internal Controls & Auditing

What is Internal Control?

Internal Control is aprocessimplemented by the

BOD and management that gives reasonable assurance that these objectivesare achieved:

Safeguard assets

Ensure accurate and reliable accounting (and other) information

Improve operational efficiency

Promote adherence to managerial policies Financial statements are prepared using GAAP Comply with laws and regulations

What is Internal Control?

Internal Control is a processimplemented by the

BOD and management that gives reasonable assurance that these objectivesare achieved:

Safeguard assets

Ensure accurate and reliable accounting (and

other) information

Improve operational efficiency

Promote adherence to managerial policies

Financial statements are prepared using GAAP

Comply with laws and regulations

Financial Statement Assertions

Who owns the financial

statements of a company?

Financial Statement Assertions

Who owns the financial

statements of a company?

Management

Every number on the financial

statements represents a set of claims being made by

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Financial Statement Assertions

“Sales $ 1,500,000.00”

This statement asserts:

1. All sales are properly included, you have left none out

2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of

returns, allowances, discounts 4. You have proper claim to revenue

generated, sales belong to you

Financial Statement Assertions

“Sales $ 1,500,000.00”

COMPLETENESS

Financial Statement Assertions

“Sales $ 1,500,000.00”

COMPLETENESS

EXISTENCE

Financial Statement Assertions

“Sales $ 1,500,000.00”

COMPLETENESS EXISTENCE

VALUATION

Financial Statement Assertions

“Sales $ 1,500,000.00”

COMPLETENESS EXISTENCE VALUATION RIGHTS/ OBLIGATIONS

Computerization

does

not change the

assertions!!!

What changes in a

computerized system is

the design of the

internal controls.

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Auditing and Risk

_{Auditors must give an opinion about the fairness} of the financial statements.

To do this they use their knowledge of

transaction cycles, assertions and the audit trail Auditors cannot review every transaction, they

must focus their audit work with an assessment of risk

Auditing and Risk

To audit Sales:

1. What is the risk of misstatement with Sales? 2. Which assertions may be false?

3. Use the Sales audit trail to design audit testing of Sales

“Sales $ 1,500,000.00”

Auditing Sales

Credit Sale

1. Customer Purchase Order

2. Approve Credit 3. Bill of Lading

4. Sales Invoice

5. Pack and ship order

6. Review and approve documents 7. Mail invoice to customer

8. Make the entry in the Sales Journaland then update the A/R Subsidiary Ledger

G/L

F/S

Auditing Sales

Credit Sale



Overstatement risk

Existence assertion must be investigated Test by vouching backup the audit trail

ie. Sample entries in sales journal and look for matching customer p.o.s and sales invoices



Understatement risk

Completeness assertion must be investigated Test by tracing forwarddown the audit trail

ie. Sample customer p.o.s and sales invoices and look for matching entries in sales journal

Very Common Audit Tests



Sales - Existence



A/P - Completeness



Fixed assets - Valuation

