Fundamental accounting principles

Cover......Page 1
Title Page......Page 3
Copyright......Page 4
Helping Students Achieve Peak Performance......Page 6
Acknowledgments......Page 22
Brief Contents......Page 24
Contents......Page 25
1 Accounting in Business......Page 34
Importance of Accounting......Page 36
Users of Accounting Information......Page 37
Opportunities in Accounting......Page 38
Generally Accepted Accounting Principles......Page 40
Conceptual Framework and Convergence......Page 41
Sarbanes–Oxley (SOX)......Page 44
Accounting Equation......Page 46
Transaction Analysis......Page 47
Summary of Transactions......Page 50
Statement of Owner’s Equity......Page 51
Global View......Page 53
Decision Analysis—Return on Assets......Page 54
Appendix 1B: Business Activities and the Accounting Equation......Page 58
2 Analyzing and Recording Transactions......Page 80
Source Documents......Page 82
The Account and Its Analysis......Page 83
Ledger and Chart of Accounts......Page 86
Double-Entry Accounting......Page 87
Journalizing and Posting Transactions......Page 88
Analyzing Transactions—An Illustration......Page 91
Accounting Equation Analysis......Page 95
Preparing a Trial Balance......Page 97
Using a Trial Balance to Prepare Financial Statements......Page 98
Global View......Page 100
Decision Analysis—Debt Ratio......Page 101
3 Adjusting Accounts and Preparing Financial Statements......Page 124
The Accounting Period......Page 126
Accrual Basis versus Cash Basis......Page 127
Framework for Adjustments......Page 128
Prepaid (Deferred) Expenses......Page 129
Unearned (Deferred) Revenues......Page 132
Accrued Expenses......Page 133
Accrued Revenues......Page 135
Links to Financial Statements......Page 137
Preparing Financial Statements......Page 138
Global View......Page 140
Decision Analysis—Profit Margin......Page 141
Appendix 3A: Alternative Accounting for Prepayments......Page 145
4 Completing the Accounting Cycle......Page 168
Use of a Work Sheet......Page 170
Temporary and Permanent Accounts......Page 178
Recording Closing Entries......Page 179
Post-Closing Trial Balance......Page 180
Accounting Cycle......Page 182
Classification Structure......Page 183
Classification Categories......Page 184
Decision Analysis—Current Ratio......Page 186
Appendix 4A: Reversing Entries......Page 190
5 Accounting for Merchandising Operations......Page 214
Reporting Income for a Merchandiser......Page 216
Inventory Systems......Page 217
Accounting for Merchandise Purchases......Page 218
Purchase Discounts......Page 219
Purchase Returns and Allowances......Page 220
Transportation Costs and Ownership Transfer......Page 221
Sales of Merchandise......Page 223
Sales Returns and Allowances......Page 224
Adjusting Entries for Merchandisers......Page 226
Summary of Merchandising Entries......Page 227
Financial Statement Formats......Page 228
Multiple-Step Income Statement......Page 229
Classified Balance Sheet......Page 230
Global View......Page 231
Decision Analysis—Acid-Test and Gross Margin Ratios......Page 232
Appendix 5A: Periodic Inventory System......Page 237
Appendix 5B: Work Sheet—Perpetual System......Page 241
6 Inventories and Cost of Sales......Page 262
Determining Inventory Items......Page 264
Inventory Costing under a Perpetual System......Page 265
Inventory Cost Flow Assumptions......Page 266
Specific Identification......Page 267
Last-In, First-Out......Page 269
Weighted Average......Page 270
Financial Statement Effects of Costing Methods......Page 272
Lower of Cost or Market......Page 273
Financial Statement Effects of Inventory Errors......Page 274
Global View......Page 276
Decision Analysis—Inventory Turnover and Days’ Sales in Inventory......Page 277
Appendix 6A: Inventory Costing under a Periodic System......Page 282
Appendix 6B: Inventory Estimation Methods......Page 287
7 Accounting Information Systems......Page 306
Relevance Principle......Page 308
Components of Accounting Systems......Page 309
Information Storage......Page 310
Special Journals in Accounting......Page 311
Subsidiary Ledgers......Page 312
Sales Journal......Page 314
Cash Receipts Journal......Page 317
Purchases Journal......Page 319
Cash Disbursements Journal......Page 320
General Journal Transactions......Page 321
Computer Networks in Accounting......Page 322
Global View......Page 323
Decision Analysis—Segment Return on Assets......Page 324
Appendix 7A: Special Journals under a Periodic System......Page 328
8 Cash and Internal Controls......Page 350
Purpose of Internal Control......Page 352
Principles of Internal Control......Page 353
Technology and Internal Control......Page 355
Limitations of Internal Control......Page 356
Cash Management......Page 357
Control of Cash Receipts......Page 358
Control of Cash Disbursements......Page 360
Basic Bank Services......Page 364
Bank Statement......Page 366
Bank Reconciliation......Page 367
Global View......Page 370
Decision Analysis—Days’ Sales Uncollected......Page 371
Appendix 8A: Documentation and Verification......Page 374
Appendix 8B: Control of Purchase Discounts......Page 377
9 Accounting for Receivables......Page 394
Recognizing Accounts Receivable......Page 396
Valuing Accounts Receivable—Direct Write-Off Method......Page 399
Valuing Accounts Receivable—Allowance Method......Page 400
Estimating Bad Debts—Percent of Sales Method......Page 402
Estimating Bad Debts—Percent of Receivables Method......Page 403
Estimating Bad Debts—Aging of Receivables Method......Page 404
Computing Maturity and Interest......Page 406
Recognizing Notes Receivable......Page 407
Valuing and Settling Notes......Page 408
Pledging Receivables......Page 409
Global View......Page 410
Decision Analysis—Accounts Receivable Turnover......Page 411
10 Plant Assets, Natural Resources, and Intangibles......Page 428
SECTION 1—PLANT ASSETS......Page 430
Land......Page 431
Lump-Sum Purchase......Page 432
Factors in Computing Depreciation......Page 433
Depreciation Methods......Page 434
Partial-Year Depreciation......Page 438
Reporting Depreciation......Page 439
Ordinary Repairs......Page 440
Disposals of Plant Assets......Page 441
Selling Plant Assets......Page 442
Cost Determination and Depletion......Page 444
Cost Determination and Amortization......Page 445
Types of Intangibles......Page 446
Global View......Page 448
Decision Analysis—Total Asset Turnover......Page 449
Appendix 10A: Exchanging Plant Assets......Page 452
11 Current Liabilities and Payroll Accounting......Page 470
Classifying Liabilities......Page 472
Uncertainty in Liabilities......Page 473
Sales Taxes Payable......Page 474
Short-Term Notes Payable......Page 475
Payroll Liabilities......Page 477
Multi-Period Known Liabilities......Page 480
Health and Pension Benefits......Page 481
Warranty Liabilities......Page 482
Multi-Period Estimated Liabilities......Page 483
Reasonably Possible Contingent Liabilities......Page 484
Global View......Page 485
Decision Analysis—Times Interest Earned Ratio......Page 486
Appendix 11A: Payroll Reports, Records, and Procedures......Page 489
Appendix 11B: Corporate Income Taxes......Page 495
12 Accounting for Partnerships......Page 514
Characteristics of Partnerships......Page 516
Organizations with Partnership Characteristics......Page 517
Choosing a Business Form......Page 518
Dividing Income or Loss......Page 519
Partnership Financial Statements......Page 521
Admission of a Partner......Page 522
Withdrawal of a Partner......Page 524
Liquidation of a Partnership......Page 525
No Capital Deficiency......Page 526
Capital Deficiency......Page 527
Decision Analysis—Partner Return on Equity......Page 528
13 Accounting for Corporations......Page 542
Characteristics of Corporations......Page 544
Corporate Organization and Management......Page 545
Stockholders of Corporations......Page 546
Basics of Capital Stock......Page 547
Issuing Par Value Stock......Page 548
Issuing No-Par Value Stock......Page 549
Issuing Stock for Noncash Assets......Page 550
Cash Dividends......Page 551
Stock Dividends......Page 552
Preferred Stock......Page 554
Dividend Preference of Preferred Stock......Page 555
Convertible Preferred Stock......Page 556
Reasons for Issuing Preferred Stock......Page 557
Purchasing Treasury Stock......Page 558
Reissuing Treasury Stock......Page 559
Statement of Retained Earnings......Page 560
Reporting Stock Options......Page 561
Global View......Page 562
Decision Analysis—Earnings per Share, Price- Earnings Ratio, Dividend Yield, and Book Value per Share......Page 563
14 Long-Term Liabilities......Page 586
Bond Financing......Page 588
Bond Trading......Page 589
Issuing Bonds at Par......Page 590
Issuing Bonds at a Discount......Page 591
Issuing Bonds at a Premium......Page 594
Bond Pricing......Page 596
Bond Retirement before Maturity......Page 597
Installment Notes......Page 598
Mortgage Notes and Bonds......Page 600
Global View......Page 601
Decision Analysis—Debt Features and the Debt-to- Equity Ratio......Page 602
Appendix 14A: Present Values of Bonds and Notes......Page 606
Appendix 14B: Effective Interest Amortization......Page 608
Appendix 14C: Issuing Bonds between Interest Dates......Page 610
Appendix 14D: Leases and Pensions......Page 612
15 Investments and International Operations......Page 630
Motivation for Investments......Page 632
Debt Securities: Accounting Basics......Page 633
Equity Securities: Accounting Basics......Page 634
Trading Securities......Page 635
Available-for-Sale Securities......Page 636
Investment in Securities with Significant Influence......Page 638
Accounting Summary for Investments in Securities......Page 639
Decision Analysis—Components of Return on Total Assets......Page 641
Appendix 15A: Investments in International Operations......Page 646
16 Reporting the Statement of Cash Flows......Page 666
Importance of Cash Flows......Page 668
Classifi cation of Cash Flows......Page 669
Format of the Statement of Cash Flows......Page 671
Preparing the Statement of Cash Flows......Page 672
Indirect and Direct Methods of Reporting......Page 674
Application of the Indirect Method of Reporting......Page 675
Summary of Adjustments for Indirect Method......Page 680
Analysis of Noncurrent Assets......Page 681
Analysis of Other Assets......Page 682
Analysis of Noncurrent Liabilities......Page 683
Analysis of Equity......Page 684
Global View......Page 685
Decision Analysis—Cash Flow Analysis......Page 686
Appendix 16A: Spreadsheet Preparation of the Statement of Cash Flows......Page 690
Appendix 16B: Direct Method of Reporting Operating Cash Flows......Page 693
17 Analysis of Financial Statements......Page 720
Purpose of Analysis......Page 722
Information for Analysis......Page 723
Comparative Statements......Page 724
Trend Analysis......Page 727
Common-Size Statements......Page 729
Common-Size Graphics......Page 731
Ratio Analysis......Page 732
Liquidity and Efficiency......Page 733
Solvency......Page 737
Profitability......Page 738
Market Prospects......Page 739
Summary of Ratios......Page 740
Decision Analysis—Analysis Reporting......Page 742
Appendix 17A: Sustainable Income......Page 746
18 Managerial Accounting Concepts and Principles......Page 766
Purpose of Managerial Accounting......Page 768
Nature of Managerial Accounting......Page 769
Fraud and Ethics in Managerial Accounting......Page 771
Types of Cost Classifications......Page 772
Cost Concepts for Service Companies......Page 775
Manufacturer’s Balance Sheet......Page 776
Manufacturer’s Income Statement......Page 777
Flow of Manufacturing Activities......Page 780
Manufacturing Statement......Page 781
Trends in Managerial Accounting......Page 783
Decision Analysis—Cycle Time and Cycle Efficiency......Page 785
19 Job Order Cost Accounting......Page 810
Job Order Production......Page 812
Events in Job Order Costing......Page 813
Job Cost Sheet......Page 814
Materials Cost Flows and Documents......Page 816
Labor Cost Flows and Documents......Page 818
Overhead Cost Flows and Documents......Page 819
Summary of Cost Flows......Page 821
Factory Overhead T-Account......Page 823
Global View......Page 824
Decision Analysis—Pricing for Services......Page 825
20 Process Cost Accounting......Page 848
Process Operations......Page 850
GenX Company—An Illustration......Page 851
Direct and Indirect Costs......Page 853
Accounting for Materials Costs......Page 854
Accounting for Factory Overhead......Page 855
Differences in Equivalent Units for Materials, Labor, and Overhead......Page 857
Process Costing Illustration......Page 858
Step 2: Compute Equivalent Units of Production......Page 859
Step 4: Assign and Reconcile Costs......Page 860
Transfers to Finished Goods Inventory and Cost of Goods Sold......Page 863
Decision Analysis—Hybrid Costing System......Page 865
Appendix 20A: FIFO Method of Process Costing......Page 869
21 Cost Allocation and Performance Measurement......Page 892
Two-Stage Cost Allocation......Page 894
Activity-Based Cost Allocation......Page 896
Comparison of Two-Stage and Activity-Based Cost Allocation......Page 899
Departmental Evaluation......Page 900
Direct and Indirect Expenses......Page 901
Allocation of Indirect Expenses......Page 902
Departmental Income Statements......Page 903
Departmental Contribution to Overhead......Page 907
Financial Performance Evaluation Measures......Page 909
Nonfinancial Performance Evaluation Measures......Page 910
Controllable versus Direct Costs......Page 911
Responsibility Accounting System......Page 912
Summary of Cost Allocation......Page 913
Decision Analysis—Investment Center Profit Margin and Investment Turnover......Page 914
Appendix 21A: Transfer Pricing......Page 918
Appendix 21B: Joint Costs and Their Allocation......Page 919
22 Cost-Volume-Profit Analysis......Page 942
Fixed Costs......Page 944
Mixed Costs......Page 945
Curvilinear Costs......Page 946
Scatter Diagrams......Page 947
High-Low Method......Page 948
Comparison of Cost Estimation Methods......Page 949
Contribution Margin and Its Measures......Page 950
Computing the Break-Even Point......Page 951
Preparing a Cost-Volume-Profit Chart......Page 952
Making Assumptions in Cost-Volume-Profit Analysis......Page 953
Applying Cost-Volume-Profit Analysis......Page 954
Computing Sales for a Target Income......Page 955
Computing the Margin of Safety......Page 956
Computing a Multiproduct Break-Even Point......Page 957
Decision Analysis—Degree of Operating Leverage......Page 960
Appendix 22A: Using Excel to Estimate Least-Squares Regression......Page 962
23 Master Budgets and Planning......Page 980
Benchmarking Budgets......Page 982
Budgeting Communication......Page 983
Budget Reporting......Page 984
Budget Timing......Page 985
Master Budget Components......Page 986
Operating Budgets......Page 988
Financial Budgets......Page 992
Decision Analysis—Activity-Based Budgeting......Page 996
Appendix 23A: Production and Manufacturing Budgets......Page 1002
24 Flexible Budgets and Standard Costs......Page 1024
Budgetary Control and Reporting......Page 1026
Fixed Budget Performance Report......Page 1027
Preparation of Flexible Budgets......Page 1028
Flexible Budget Performance Report......Page 1030
SECTION 2—STANDARD COSTS......Page 1031
Setting Standard Costs......Page 1032
Cost Variance Computation......Page 1033
Computing Materials and Labor Variances......Page 1034
Setting Overhead Standards......Page 1037
Total Overhead Cost Variance......Page 1038
Global View......Page 1040
Decision Analysis—Sales Variances......Page 1041
Appendix 24A: Expanded Overhead Variances and Standard Cost Accounting System......Page 1046
25 Capital Budgeting and Managerial Decisions......Page 1070
SECTION 1—CAPITAL BUDGETING......Page 1072
Payback Period......Page 1073
Accounting Rate of Return......Page 1075
Methods Using Time Value of Money......Page 1076
Net Present Value......Page 1077
Internal Rate of Return......Page 1079
Comparison of Capital Budgeting Methods......Page 1081
SECTION 2—MANAGERIAL DECISIONS......Page 1082
Relevant Costs......Page 1083
Additional Business......Page 1084
Make or Buy......Page 1085
Scrap or Rework......Page 1086
Sell or Process......Page 1087
Sales Mix Selection......Page 1088
Segment Elimination......Page 1089
Keep or Replace Equipment......Page 1090
Decision Analysis—Break-Even Time......Page 1091
Appendix 25A: Using Excel to Compute Net Present Value and Internal Rate of Return......Page 1096
Appendix A: Financial Statement Information......Page 1115
Research in Motion......Page 1116
Apple......Page 1133
Palm......Page 1138
Nokia......Page 1143
Appendix B: Time Value of Money......Page 1148
Glossary......Page 1160
Credits......Page 1176
Index......Page 1178
Chart of Accounts......Page 1206