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 in accounts receivables also occurs. When payment for the product is received, an adjustment is made that reflects a net in receivables.
iii. “Accrued payroll.” - Adjustments to this account would occur due to the matching principle. A company must recognize or record wages earned by employees in the period in which the employees earned the wage. If employees earn wages but do not get paid until the next period, then an adjustment must be paid in the following period to reflect payment of the wage. Cash assets and Liabilities must both be reduced.
iv. “Unearned revenues.” – Adjustments to this account would occur if, for example, a company receives payment for products or services before delivery, and subsequently, the company fulfills the order through delivery. For instance, if Company A receives $200 cash from a customer as advance payment, the company must record this as an addition to cash assets and liabilities. Upon delivery of the goods or services, the company must then recognize the $200 as revenue because it is now earned.
v. “Land, buildings and equipment, net.” – Adjustments occur, for example, if a company rents office space (or land or equipment) for 3 months and has pre-paid $3,000 for those months....
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