CASE STUDY #2 – DARDEN RESTAURANTS, INC. – TRANSACTIONS AND ADJUSTMENTS
Concepts
a. To prepare accrual-based financial statements, a company must adjust its accounts. This is accomplished with periodic adjustments (also known as adjusting journal entries or accounting adjustments). For each account below, explain the types of transactions or events that necessitate periodic adjustments to the account for the typical company.
i. “Inventories, net.” – If a company purchases products to be resold, there is an adjustment on the balance sheet to reflect this net inventory.
ii. “Receivables, net.” – If a company sells a product on credit, they do not receive cash, and thus although in increase in retained earnings occurs, and increase
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b. In general, what other accounts typically require periodic adjustments? In general, the other accounts that typically require periodic adjustments are prepaid expenses, accrued expenses, and accrued revenues.
c. Why do companies close their books at the end of each accounting period? What types of accounts are close in this process?
Companies close their books at the end of each accounting period in order to transfer the balance in temporary accounts into retained earnings. The closing process brings the retained earnings account up to date so that it accurately reflects the current period’s income statement activity and dividends so that the balance sheet can be prepared. The types of accounts that are closed in the process are all the income statement accounts and any dividend account.
Process
d. For each item in quotations, provide the year-end total disclosed in Darden’s 2007 income statement. Write a journal entry to record the activity for the year. Assume that the company recorded a single (summary) journal entry. i. “Sales.” Assume that 5% of sales are on account, 3% of sales represent gift card redemption, and the rest are cash sales.
AR 278.36
Cash 5,121.73
UR 167.01 Liabilities 167.01 Sales 5,567.10
ii. “Interest, net” expense. Assume that all these costs were paid in cash. Interest, net
The third pair of columns on a 10-column work sheet prepared at the end of the period would be the
investors, auditors, executives of the business, etc.) an overview of the financial results and condition of the company. The major financial statements that come out of the accounting cycle are income statements, balance sheets, Statement of cash flows and Statement of retained earnings. Income statements are considered the most important of all the financial statements since it presents the operating results of an entity , e.g. revenues, expenses, and profits/losses generated during the reporting period (Bragg, 2017). Balance sheets provide reports of assets, liabilities, and equity of the entity as of the reporting date and can be considered the second most important statement because it provides information/figures about the liquidity, as well as the capitalization of a company (Bragg, 2017). Statement of cash flows exhibits the cash inflows and outflows that occur during a reporting period, which provides a useful comparison to the income statement, particularly when the amount of profit or loss reported does not reflect cash flows encountered by the businesses (Bragg, 2017). Statement of retained earnings is the least used financial statement that provides information regarding changes in equity during the reporting period and can include information such as: sale or repurchase of stock, dividend payments, and changes caused by reported profits or losses. Statements of retained earnings are often
As a creditor or lender it is of utmost importance that they have all the information necessary to make a sound decision as to whether or not they will lend money to a company. The retained earnings statement, balance sheet, and statement of cash flows will paint that picture for a creditor due to the fact that they will see where the company’s money is being earned and spent through the statement of cash flows, they will see how they are either paying out dividends to investors or reinvesting the money into the business through the retained earning statements, and how solvent the business is by looking at the balance sheet.
The process requires Peyton Approved to discover how much inventory is sold and what the cost of goods will result in. The process requires the business to review three forms of merchandise inventory to determine which summary benefits the business’s operational behavior. One will discover when assuming that first inventory purchased by the store is the first to be sold, it is determined that the FIFO method displays the best financial outcome for the business. During the process of updating journal entries, one must enter the information proved appropriately into the T-accounts to add the balance under each record. Once the T-accounts for transactions and adjusted transactions are balanced, the next step is to enter the information provided on the balance sheet. The balance sheet will list Peyton Approved assets, liabilities and stockholders equity after added during the T-account process (Nobles, 2014). Once the balance sheet is completed the income statement, statement of retained earnings, and closing entries can be filled with the information proved. This will give the business a full review from journal entry to closing entries of the business for the six month accounting
balance sheet and income statement (Yes. Accounts receivable will be on the balance sheet and the advertising expenses on the income statement)
Accounting is commonly described as the language of business. It is very important for all business owners to have very good understanding of their finances. Having the knowledge of your business finance, you will know where the money is going. Every business owner should have a good understanding of finance. To have a good understanding business owners needs to understand basic accounting steeps, how does accounting play a role in their business, how to define a financial statement and how the omission of any of these steps would affect the success of a business. Once you have an understanding of accounting/finance and the how it plays
7. Prepare the 3 financial statements for the year ended June 30, 2013 (multi step income statement, classified balance sheet, and statement of retained earnings). Even though you are preparing a multi-step income statement, you still need to list the various expenses individually on the income statement for consideration of full credit. These 3 statements must be typed. Also you must include appropriate dollar signs and appropriate underlines and correct formatting for the statements to receive full credit.
Accounts Receivable, Other Receivables, Allowance for Doubtful Accounts, Bad Debt ExpenseInventories and Reserve for Inventory Obsolescence
The company accounts for these transactions as sales in accordance with Statement of Financial Accounting Standards No. 77, ‘’Reporting
Retained Earnings Statement shows amounts and causes of changes in retained earnings during the period. Time period is the same as that covered by the income statement. Users can evaluate dividend payment practices. This statement shows the changes in the shareholders’ equity account. The first line item is the beginning balance for common stock. The amount of newly issued common stock is added to the
The retained earnings general ledger account is adjusted every time a journal entry is made to an income or expense account
It is critical to understand that the transaction events which give rise to timing differences are economic in nature and therefore have economic consequences. The question then becomes how to best reflect those economic consequences in the financial statements. Inter-period income tax allocation considers the tax consequences of transaction events such as revenue, expenses, gains, and losses and associates these items with the period in which these events are recognized. In other words, inter-period tax allocation is consistent with the basic tenets of accrual accounting. Underlying this method is the understanding that there is a direct economic relationship between identifiable transactions reflected in the financial statements and related income tax effects (Arthur et al., 1984). Therefore, each transaction has a tax effect.
Transactions such as Purchases and sales are recorded in the period given under accruals concept.
Accounting period concept requires that all transactions must be of regular period or interval upon which the accounting records are to be assessed. Usually the intervals range between quarterly, semi-annually and annually reporting periods. An accounting period lasting twelve months is normally referred
In accounting, the accounts that record the values of individual items and phenomenons can be divided into either real or nominal accounts. Real accounts are used to keep up to date on lasting items such as assets, liabilities, and equities. In contrast, nominal accounts are used to keep up to date on certain phenomenon such as revenues and expenses within a set time period. At the end of each period, nominal accounts are wiped clean and their values relegated to real accounts.