1.
Flow of Accounting Information (5 points):
o Describe the flow of accounting information from the unadjusted trial balance through to
the adjusted trial balance and finally into the financial statements.
o Provide a brief explanation of how each step in this process is crucial for accurate financial
reporting.
The flow of accounting information begins with the unadjusted trial balance, which lists all account
balances before any adjustments. Adjusting entries are then made to account for accruals and
deferrals, ensuring revenues and expenses are recognized in the correct period. Once
adjustments are posted, the adjusted trial balance reflects updated balances, which are used to
prepare the financial statements.
Each step in this process is vital for accurate financial reporting. The unadjusted trial balance
ensures that total debits and credits are in balance, while adjusting entries correct any
discrepancies. The adjusted trial balance provides the accurate account balances needed to
prepare reliable financial statements, which present the company’s financial position and
performance.
2. Preparation of Financial Statements (7 points):
o Using the adjusted trial balance provided (or create one based on a hypothetical
company), prepare the following financial statements:
• Income Statement
• Statement of Stockholders’ Equity
• Balance Sheet
o Ensure that the financial statements are accurately prepared and formatted according to
GAAP principles.
• Income Statement
CHRIS&CLARK GENERAL MERCHANDISE INC.
Statement of Income
December 31,2024
Revenue 100,000
Cost of goods sold 75,000
Gross profit 25,000
Operating Expenses
Selling Expenses
Advertising Expense 2,000
Commission Expense 5,000 7,000
Administrative Expenses
Office Supplies Expense 3,500
Office Equipment Expense 2,500 6,000
Total Operating Expenses 13,000
Operating Income 12,000
Non-Operating or Other
Interest Revenue 5,000
Gain on Sale of Investments 3,000
Interest Expense (500)
Loss from Lawsuit (1,500)
Total Non-Operating 6,000
Net Income 18,000
• Statement of Stockholders’ Equity
CHRIS&CLARK GENERAL MERCHANDISE INC.
Statement of Stockholder’s Equity
For the Year Ended December 31,2024
Particulars Common Stock Retained Earnings Total Stockholder’s
Equity
Capital – Beginning 50,000 20,000 70,000
Add
Net Income 18,000 18,000
Less
Dividends (5,000) (5,000)
Ending Balance 50,000 33,000 83,000
• Balance Sheet
CHRIS&CLARK GENERAL MERCHANDISE INC.
Balance Sheet
As of December 31,2024
Assets
Current Assets
Cash 30,000
Accounts Receivable 20,000
Inventory 15,000
Prepaid Expenses 5,000
Total Current Assets 70,000
Non-Current Assets
Property, Plant & Equipment 50,000
Accumulated Depreciation (10,000)
Investments 25,000
Total Non-Current Assets 65,000
Total Assets 135,000
Liabilities
Current Liabilities
Accounts Payable 15,000
Accrued Expenses 5,000
Short-Term Loans 10,000
Total Current Liabilities 30,000
Non-Current Liabilities
Long Term Debt 22,000
Total Non-Current Liabilities 22,000
Total Liabilities 52,000
Stockholder’s Equity
Common Stock 50,000
Retained Earnings 33,000
Total Stockholder’s Equity 83,000
Total Liabilities & Stockholder’s
Equity
135,000
3. Journalizing Closing Entries (3 points):
o Explain the purpose of closing entries and their significance in the accounting cycle.
o Journalize the closing entries for the hypothetical company used in Task 2.
Closing entries are an essential part of the accounting cycle, and their primary purpose is to
transfer the balances of temporary accounts (revenues, expenses, and dividends) to permanent
accounts, specifically the Retained Earnings account. This process ensures that these temporary
accounts are reset to zero for the next accounting period, so that only transactions for the new
period are recorded. The closing process serves the following purposes: it clears temporary
accounts by resetting revenue, expense, and dividend accounts to zero at the beginning of the
next period; it updates Retained Earnings by transferring net income (or loss) and dividends to
reflect changes in equity due to the company’s operations; and it finalizes financial statements,
ensuring that the company's financial statements accurately reflect its equity and enabling the
preparation of the Post-Closing Trial Balance to verify that debits equal credits after closing.
CHRIS&CLARK GENERAL MERCHANDISE INC.
Journal Entries
As of December 31,2024
Date Account Title Debit Credit
Dec 31 Revenue 100,000
Income Summary 100,000
To close revenue accounts
Dec 31 Income Summary 90,000
Cost of Goods Sold 75,000
Selling Expenses 7,000
Administrative Exp 6,000
Interest expense 500
Loss from Lawsuit 1,500
To close expense accounts
Dec 31 Income Summary 5,000
Retained Earnings 5,000
To close Income Summary to
Retained Earnings
Dec 31 Retained Earnings 5,000
Dividends 5,000
To close Dividends to Retained
Earnings
4. Post-Closing Trial Balance (3 points):
o Prepare a post-closing trial balance using the ledger balances after the closing entries
have been posted.
o Discuss the importance of this trial balance in ensuring the accuracy of financial records
at the start of the next accounting period.
CHRIS&CLARK GENERAL MERCHANDISE INC.
Post -Closing Trial Balance
As of December 31,2024
Account Title Debit Credit
Assets
Cash 30,000
Accounts Receivable 20,000
Inventory 15,000
Prepaid Expenses 5,000
Property, Plant & Equipment 50,000
Accumulated Depreciation 10,000
Investments 25,000
Total Assets 145,000 10,000
Liabilities
Accounts Payable 15,000
Accrued Expenses 5,000
Short-Term Loans 10,000
Long-Term Debt 22,000
Total Liabilities 52,000
Stockholder’s Equity
Common Stock 50,000
Retained Earnings 33,000
Total Stockholder’s Equity 83,000
Total Liabilities & 135,000
Stockholder’s Equity
5. Accrual Basis of Accounting (2 points):
o Discuss why the accrual basis of accounting is required by GAAP, and contrast it with
the cash basis of accounting.
o Provide examples of how the accrual basis affects the reporting of revenues and
expenses.
The accrual basis of accounting, required by Generally Accepted Accounting Principles (GAAP),
offers a more accurate and comprehensive view of a company’s financial position and
performance by recognizing revenues when they are earned and expenses when they are
incurred, regardless of cash transactions. This approach adheres to the matching principle,
aligning revenues with the expenses incurred to generate them within the same period, which
ensures that financial statements reflect the true performance of the business.
In contrast, the cash basis of accounting records revenues only when cash is received and
expenses only when cash is paid, lacking the matching principle and offering a simpler but less
accurate depiction of financial performance. Consequently, the accrual basis provides a clearer
and more timely reflection of a company’s financial activities by aligning revenues and expenses
with the periods in which they occur, thus enhancing the reliability and relevance of financial
statements.
