Explain the importance of periodic reporting and the time period principle. The value of information is often linked to its timeliness. To provide timely information, accounting systems prepare periodic reports at regular intervals. The time period principle assumes that an organization's activities can be divided into specific time periods for periodic reporting.

Explain accrual accounting and how it improves financial statements. Accrual accounting recognizes revenue when earned and expenses when incurred—not necessarily when cash inflows and outflows occur. This information is valuable in assessing a company's financial position and performance.

Identify steps in the accounting cycle. The accounting cycle consists of 10 steps: (1) analyze transactions, (2) journalize, (3) post, (4) prepare an unadjusted trial balance, (5) adjust accounts, (6) prepare an adjusted trial balance, (7) prepare statements, (8) close, (9) prepare a post-closing trial balance, and (10) prepare (optional) reversing entries.

Explain and prepare a classified balance sheet. Classified balance sheets report assets and liabilities in two categories: current and noncurrent. Noncurrent assets often include long-term investments, plant assets, and intangible assets. A corporation separates equity into common stock and retained earnings.

Explain how accounting adjustments link to financial statements. Accounting adjustments bring an asset or liability account balance to its correct amount. They also update related expense or revenue accounts. Every adjusting entry affects one or more income statement accounts and one or more balance sheet accounts. An adjusting entry never affects cash.

Compute profit margin and describe its use in analyzing company performance. Profit margin is defined as the reporting period's net income divided by its net sales. Profit margin reflects on a company's earnings activities by showing how much income is in each dollar of sales.

Compute the current ratio and describe what it reveals about a company's financial condition. A company's current ratio is defined as current assets divided by current liabilities. We use it to evaluate a company's ability to pay its current liabilities out of current assets.

Prepare and explain adjusting entries. Prepaid expenses refer to items paid for in advance of receiving their benefits. Prepaid expenses are assets. Adjusting entries for prepaids involve increasing (debiting) expenses and decreasing (crediting) assets. Unearned (or prepaid) revenues refer to cash received in advance of providing products and services. Unearned revenues are liabilities. Adjusting entries for unearned revenues involves increasing (crediting) revenues and decreasing (debiting) unearned revenues. Accrued expenses refer to costs incurred in a period that are both unpaid and unrecorded. Adjusting entries for recording accrued expenses involve increasing (debiting) expenses and increasing (crediting) liabilities. Accrued revenues refer to revenues earned in a period that are both unrecorded and not yet received in cash. Adjusting entries for recording accrued revenues involve increasing (debiting) assets and increasing (crediting) revenues.

Explain and prepare an adjusted trial balance. An adjusted trial balance is a list of accounts and balances prepared after recording and posting adjusting entries. Financial statements are often prepared from the adjusted trial balance.

Prepare financial statements from an adjusted trial balance. Revenue and expense balances are reported on the income statement. Asset, liability, and equity balances are reported on the balance sheet. We usually prepare statements in the following order: income statement, statement of retained earnings, balance sheet, and statement of cash flows.

Describe and prepare closing entries. Closing entries involve four steps: (1) close credit balances in revenue (and gain) accounts to Income Summary, (2) close debit balances in expense (and loss) accounts to Income Summary, (3) close Income Summary to Retained Earnings, and (4) close Dividends account to Retained Earnings.

Explain and prepare a post-closing trial balance. A postclosing trial balance is a list of permanent accounts and their balances after all closing entries have been journalized and posted. Its purpose is to verify that (1) total debits equal total credits for permanent accounts and (2) all temporary accounts have zero balances.

Explain the alternatives in accounting for prepaids. Charging all prepaid expenses to expense accounts when they are purchased is acceptable. When this is done, adjusting entries must transfer any unexpired amounts from expense accounts to asset accounts. Crediting all unearned revenues to revenue accounts when cash is received is also acceptable. In this case, the adjusting entries must transfer any unearned amounts from revenue accounts to unearned revenue accounts.

Prepare a work sheet and explain its usefulness. A work sheet can be a useful tool in preparing and analyzing financial statements. It is helpful at the end of a period in preparing adjusting entries, an adjusted trial balance, and financial statements. A work sheet usually contains five pairs of columns: Unadjusted Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, and Balance Sheet.