Question

PART 2: Essay (30 Pts) 1. Discuss the steps involved in the accounting cycle (10 pts) 2. Identify 1 limitation (out of the three) of Internal Controls Program and explain. (10 pts) 3. Below is a Comparative Income Statement of Max's and Gerry's Corporation. Comparative Income Statements For the Year Ended December 31, 2018 (in '000) Max's Corp Gerry's Corp Net Sales Less: Cost of Sales Gross Profit Less: Operation Expenses Operating Income Less: Interest Expense Income before Income Tax Less: Income Tax Net Income 200,000.00 160,000.00 40,000.00 10,000.00 30,000.00 3,000.00 27,000.00 10,800.00 16,200.00 3,000.00 1,000.00 2,000.00 500.00 1,500.00 200.00 1,300.00 520.00 780.00 Provide a high level analysis of its performance in the areas of profitability, cost management, interest expense, and return on sales. (10 pts)

Answer 1

ANSWER-1)

The steps involved in accounting cycle are as follows:

1) Identification of financial transactions: The initial step in the accounting cycle is identification of the transaction that includes any financial transaction involving the exchange or use of a company's assets

2) Record transactions in a journal: In accounting cycle the second step is the recording of these entries in the company’s journal in chronological manner. The transactions are recorded in journal entries which includes at least two accounts (one credited and one debited).

3) Posting to the Ledger: The transaction that were recorded as journal entries need to be posted to their appropriate account in the general ledger. After all transactions are posted to their respective ledger, the balances of each account can be determined

4) Preparing the unadjusted trial balance: To ensure the equality of debits and credits as done in the general ledger, the company prepares an unadjusted trial balance. This is an approach to investigate and determine any fault or prove the accuracy of the previous steps before moving to the next step

5) Recording Adjusting Entries: Adjusting entries are made for accrual of expenses, accrual of income, prepayments (expense method or asset method), deferrals (liability method or income method), depreciation, and allowances. These are prepared for the updating of accounts before summarizing in the financial statements.

6) Preparing the adjusted Trial Balance: After adjusting entries are made the adjusted trial balance is prepared to test if company's debits and credits match

7) Financial Statements: These are termed to be the end-products of an accounting system. The balance sheet, cash flow statement and income statement can be prepared using the accurate balances.

8) Closing the books: The expense and revenue accounts are zeroed and closed out for the next accounting cycle. The reason is that the expense and revenue accounts are income statement