Financial Accounting, Ninth Edition

Front Cover......Page 1
Financial Accounting, Ninth Edition......Page 2
ISBN 13: 9780618626762......Page 3
Brief Contents
......Page 4
Contents......Page 6
Preface......Page 14
User's Guide to Financial Accounting......Page 20
Check Figures......Page 28
About the Authors......Page 30
CHAPTER 1 Uses of Accounting Information and the Financial Statements......Page 33
DECISION POINT: A USER'S FOCUS CVS CORPORATION......Page 34
Accounting as an Information System......Page 35
Business Goals, Activities, and Performance Measures......Page 36
FOCUS ON BUSINESS PRACTICE: Cash Bonuses Depend on Accounting Numbers!......Page 37
Processing Accounting Information......Page 38
Ethical Financial Reporting......Page 39
Management......Page 41
FOCUS ON BUSINESS PRACTICE: What Do CFOs Do?......Page 42
Users with an Indirect Financial Interest......Page 43
Accounting Measurement......Page 44
Money Measure......Page 45
The Corporate Form of Business......Page 46
FOCUS ON BUSINESS PRACTICE: Are Most Corporations Big or Small Businesses?......Page 47
Organization of a Corporation......Page 48
Financial Position and the Accounting Equation......Page 50
Stockholders' Equity......Page 51
Statement of Retained Earnings......Page 54
Statement of Cash Flows......Page 55
Relationships Among the Financial Statements......Page 56
Generally Accepted Accounting Principles......Page 58
GAAP and the Independent CPA's Report......Page 59
Organizations That Influence GAAP......Page 60
Professional Ethics......Page 61
A LOOK BACK AT CVS CORPORATION......Page 62
CHAPTER REVIEW......Page 64
CHAPTER ASSIGNMENTS......Page 70
Letter to the Stockholders......Page 86
Financial Statements......Page 87
Notes to the Financial Statements......Page 92
Reports of Management's Responsibilities......Page 93
Reports of Certified Public Accountants......Page 94
CVS Corporation 2004 Annual Report......Page 96
Financial Statements of Southwest Airlines Co.......Page 126
CHAPTER 2 Analyzing Business Transactions......Page 135
DECISION POINT: A USER'S FOCUS SINGAPORE AIRLINES AND THE BOEING CO.......Page 136
FOCUS ON BUSINESS PRACTICE: Accounting Policies: Where Do You Find Them?......Page 137
FOCUS ON BUSINESS PRACTICE: No Dollar Amount: How Can That Be?......Page 139
Ethics and Measurement Issues......Page 140
Double-Entry System......Page 141
The T Account Illustrated......Page 142
Rules of Double-Entry Accounting......Page 143
Stockholders' Equity Accounts......Page 144
Business Transaction Analysis......Page 146
Prepayment of Expenses in Cash......Page 147
Purchase of an Asset Partly in Cash and Partly on Credit......Page 148
Revenue in Cash......Page 149
Collection on Account......Page 150
Expense to Be Paid Later......Page 151
Summary of Transactions......Page 152
Preparation and Use of a Trial Balance......Page 154
Finding Trial Balance Errors......Page 155
Cash Flows and the Timing of Transactions......Page 156
Chart of Accounts......Page 158
General Journal......Page 159
General Ledger......Page 161
Some Notes on Presentation......Page 163
A LOOK BACK AT SINGAPORE AIRLINES AND THE BOEING COMPANY......Page 164
CHAPTER REVIEW......Page 166
CHAPTER ASSIGNMENTS......Page 170
CHAPTER 3 Measuring Business Income......Page 187
DECISION POINT: A USER'S FOCUS YAHOO! INC.......Page 188
Income Measurement Assumptions......Page 189
FOCUS ON BUSINESS PRACTICE: Fiscal Years Vary......Page 190
Ethics and the Matching Rule......Page 191
FOCUS ON BUSINESS PRACTICE: Are Misstatements of Earnings Always Overstatements?......Page 192
Adjusting the Accounts......Page 193
Adjustments and Ethics......Page 194
The Adjustment Process......Page 195
Type 1 Adjustment: Allocating Recorded Costs (Deferred Expenses)......Page 196
Type 2 Adjustment: Recognizing Unrecorded Expenses (Accrued Expenses)......Page 200
Type 3 Adjustment: Allocating Recorded, Unearned Revenues (Deferred Revenues)......Page 202
Type 4 Adjustment: Recognizing Unrecorded, Earned Revenues (Accrued Revenues)......Page 203
A Note About Journal Entries......Page 205
Using the Adjusted Trial Balance to Prepare Financial Statements......Page 206
Closing Entries......Page 208
The Post-Closing Trial Balance......Page 210
FOCUS ON BUSINESS PRACTICE: Entering Adjustments with the Touch of a Button......Page 211
Cash Flows from Accrual-Based Information......Page 212
A LOOK BACK AT YAHOO! INC.......Page 214
CHAPTER REVIEW......Page 215
CHAPTER ASSIGNMENTS......Page 222
Step 2: Closing the Debit Balances......Page 240
The Accounts After Closing......Page 243
Preparing the Work Sheet......Page 244
Using the Work Sheet......Page 247
SUPPLEMENT ASSIGNMENTS......Page 248
CHAPTER 4 Financial Reporting and Analysis......Page 255
DECISION POINT: A USER'S FOCUS DELL COMPUTER CORPORATION......Page 256
Qualitative Characteristics of Accounting Information......Page 257
Management's Certification of the Financial Statements......Page 259
Comparability and Consistency......Page 260
FOCUS ON BUSINESS PRACTICE: Are Yahoo! and Google Comparable? Can an Internet Company Be Conservative?......Page 261
Full Disclosure......Page 262
FOCUS ON BUSINESS PRACTICE: When Is "Full Disclosure" Too Much? It's a Matter of Cost and Benefits......Page 263
Classified Balance Sheet......Page 264
FOCUS ON BUSINESS PRACTICE: There's More Than One Way to Balance a Balance Sheet......Page 265
Owner's Equity and Partners' Equity......Page 268
Dell's Balance Sheets......Page 270
Multistep Income Statement......Page 271
Single-Step Income Statement......Page 276
Evaluation of Liquidity......Page 278
Evaluation of Profitability......Page 279
FOCUS ON BUSINESS PRACTICE: Who Is Right: The Credit-Worthiness Analyst or the Profitability Analyst?......Page 280
FOCUS ON BUSINESS PRACTICE: To What Level of Profitability Should a Company Aspire?......Page 283
A LOOK BACK AT DELL COMPUTER CORPORATION......Page 285
CHAPTER REVIEW......Page 288
CHAPTER ASSIGNMENTS......Page 292
SUPPLEMENT TO CHAPTER 4 The Annual Report Project......Page 308
CHAPTER 5 The Operating Cycle and Merchandising Operations......Page 311
DECISION POINT: A USER'S FOCUS COSTCO WHOLESALE CORPORATION......Page 312
Operating Cycle......Page 313
Choice of Inventory System......Page 314
FOCUS ON BUSINESS PRACTICE: How Have Bar Codes Influenced the Choice of Inventory Systems?......Page 315
The Need for Internal Controls......Page 316
FOCUS ON BUSINESS PRACTICE: How Hard Is Financial Fraud to Detect When Its Effects Are Not Material?......Page 318
Sales and Purchases Discounts......Page 319
Transportation Costs......Page 320
FOCUS ON BUSINESS PRACTICE: How Are Buying Habits Changing?......Page 321
Purchases of Merchandise......Page 322
FOCUS ON BUSINESS PRACTICE: Are Purchase Allowances Revenues?......Page 323
Sales of Merchandise......Page 324
FOCUS ON BUSINESS PRACTICE: How Are Web Sales Doing?......Page 325
Periodic Inventory System......Page 326
Purchases of Merchandise......Page 328
Sales of Merchandise......Page 329
FOCUS ON BUSINESS PRACTICE: Are Sales Returns Worth Accounting For?......Page 330
Internal Control:Components,Activities, and Limitations......Page 331
Control Activities......Page 332
Internal Control over Merchandising Transactions......Page 334
Internal Control and Management Goals......Page 335
Control of Cash Sales Receipts......Page 336
Control of Purchases and Cash Disbursements......Page 337
A LOOK BACK AT COSTCO WHOLESALE CORPORATION......Page 342
CHAPTER REVIEW......Page 343
CHAPTER ASSIGNMENTS......Page 347
CHAPTER 6 Inventories......Page 363
DECISION POINT: A USER'S FOCUS CISCO SYSTEMS, INC.......Page 364
Inventory Decisions......Page 365
FOCUS ON BUSINESS PRACTICE: A Whirlwind Inventory Turnover-How Does Dell Do It?......Page 366
Effects of Inventory Misstatements on Income Measurement......Page 368
FOCUS ON BUSINESS PRACTICE: What Do You Do to Cure Bottleneck Headache?......Page 369
Inventory Cost and Valuation......Page 371
Goods Flow and Cost Flows......Page 372
Disclosure of Inventory Methods......Page 373
Specific Identification Method......Page 375
First-In, First-Out (FIFO) Method......Page 376
FOCUS ON BUSINESS PRACTICE: What's a "Category Killer"?......Page 377
Impact of Inventory Decisions......Page 378
Effects on the Financial Statements......Page 379
Effects on Income Taxes......Page 380
Effects on Cash Flows......Page 381
Inventory Cost Under the Perpetual Inventory System......Page 382
FOCUS ON BUSINESS PRACTICE: More Companies Enjoy LIFO!......Page 383
Retail Method......Page 384
Gross Profit Method......Page 385
A LOOK BACK AT CISCO SYSTEMS, INC.......Page 386
CHAPTER REVIEW......Page 388
CHAPTER ASSIGNMENTS......Page 392
CHAPTER 7 Cash and Receivables......Page 405
DECISION POINT: A USER'S FOCUS NIKE, INC.......Page 406
FOCUS ON BUSINESS PRACTICE: How Do Good Companies Deal with Bad Times?......Page 407
Accounts Receivables and Credit Policies......Page 408
FOCUS ON BUSINESS PRACTICE: How Do Powerful Buyers Cause Problems for Small Suppliers?......Page 410
Financing Receivables......Page 411
Ethics and Estimates in Accounting for Receivables......Page 413
Cash Control Methods......Page 415
Bank Reconciliations......Page 416
The Allowance Method......Page 419
Estimating Uncollectible Accounts Expense......Page 420
FOCUS ON BUSINESS PRACTICE: Why Are Estimates Difficult to Make?......Page 421
Writing Off Uncollectible Accounts......Page 425
Maturity Date......Page 427
Duration of a Note......Page 428
Accrued Interest......Page 429
Dishonored Note......Page 430
A LOOK BACK AT NIKE, INC.......Page 431
CHAPTER REVIEW......Page 432
CHAPTER ASSIGNMENTS......Page 434
CHAPTER 8 Current Liabilities and the Time Value of Money......Page 447
DECISION POINT: A USER'S FOCUS AMAZON.COM, INC.......Page 448
Evaluating Accounts Payable......Page 449
FOCUS ON BUSINESS PRACTICE: Debt Problems Can Plague Even Well-Known Companies......Page 450
Reporting Liabilities......Page 451
Definitely Determinable Liabilities......Page 453
FOCUS ON BUSINESS PRACTICE: Small Businesses Offer Benefits, Too......Page 456
Estimated Liabilities......Page 460
FOCUS ON BUSINESS PRACTICE: Those Little Coupons Can Add Up......Page 461
FOCUS ON BUSINESS PRACTICE: What Is the Cost of Frequent Flyer Miles?......Page 462
Contingent Liabilities and Commitments......Page 464
The Time Value of Money......Page 465
Future Value......Page 466
Present Value......Page 468
Valuing an Asset......Page 471
Deferred Payment......Page 472
Accumulation of a Fund for Loan Repayment......Page 473
Other Applications......Page 474
A LOOK BACK AT AMAZON.COM, INC.......Page 475
CHAPTER REVIEW......Page 476
CHAPTER ASSIGNMENTS......Page 479
CHAPTER 9 Long-Term Assets......Page 493
DECISION POINT: A USER'S FOCUS APPLE COMPUTER, INC.......Page 494
Management Issues Related to Long-Term Assets......Page 495
Acquiring Long-Term Assets......Page 497
Financing Long-Term Assets......Page 498
Applying the Matching Rule......Page 499
Acquisition Cost of Property,Plant, and Equipment......Page 500
General Approach to Acquisition Costs......Page 501
Specific Applications......Page 502
Depreciation......Page 505
Methods of Computing Depreciation......Page 506
FOCUS ON BUSINESS PRACTICE: Accelerated Methods Save Money!......Page 509
Special Issues in Depreciation......Page 510
Discarded Plant Assets......Page 512
Plant Assets Sold for Cash......Page 513
Natural Resources......Page 514
Depletion......Page 515
FOCUS ON BUSINESS PRACTICE: How Do You Measure What's Underground? With a Good Guess......Page 516
Intangible Assets......Page 517
FOCUS ON BUSINESS PRACTICE: Who's Number One in Brands?......Page 519
Research and Development Costs......Page 520
FOCUS ON BUSINESS PRACTICE: Wake Up, Goodwill Is Growing!......Page 521
A LOOK BACK AT APPLE COMPUTER, INC.......Page 522
CHAPTER REVIEW......Page 524
CHAPTER ASSIGNMENTS......Page 528
CHAPTER 10 Long-Term Liabilities......Page 543
DECISION POINT: A USER'S FOCUS McDONALD'S CORPORATION......Page 544
Deciding to Issue Long-Term Debt......Page 545
Evaluating Long-Term Debt......Page 546
FOCUS ON BUSINESS PRACTICE: How Does Debt Affect a Company's Ability to Borrow?......Page 547
Types of Long-Term Debt......Page 548
The Nature of Bonds......Page 553
Bond Issue: Prices and Interest Rates......Page 554
Characteristics of Bonds......Page 555
FOCUS ON BUSINESS: Some Companies Are Saying "Yes-Yes" to "No-Nos"......Page 556
Bonds Issued at Face Value......Page 557
FOCUS ON BUSINESS PRACTICE: 100-Year Bonds Are Not for Everyone......Page 558
Bond Issue Costs......Page 559
Case 1: Market Rate Above Face Rate......Page 560
Case 2: Market Rate Below Face Rate......Page 561
Amortizing a Bond Discount......Page 562
Amortizing a Bond Premium......Page 566
FOCUS ON BUSINESS: Speed Up the Calculations!......Page 568
Calling Bonds......Page 571
Sale of Bonds Between Interest Dates......Page 572
Year-End Accrual of Bond Interest Expense......Page 574
A LOOK BACK AT McDONALD'S CORPORATION......Page 575
CHAPTER REVIEW......Page 577
CHAPTER ASSIGNMENTS......Page 581
CHAPTER 11 Contributed Capital......Page 597
DECISION POINT: A USER'S FOCUS GOOGLE, INC.......Page 598
The Corporate Form of Business......Page 599
Equity Financing......Page 601
Dividend Policies......Page 603
Using Return on Equity to Measure Performance......Page 605
Stock Options as Compensation......Page 606
Components of Stockholders'Equity......Page 607
FOCUS ON BUSINESS PRACTICE: Are You a First-Class or Second-Class Stockholder?......Page 608
Preference as to Dividends......Page 611
Preference as to Assets......Page 612
Convertible Preferred Stock......Page 613
Callable Preferred Stock......Page 614
Par Value Stock......Page 615
No-Par Stock......Page 616
Issuance of Stock for Noncash Assets......Page 617
Purchase of Treasury Stock......Page 618
Sale of Treasury Stock......Page 619
Retirement of Treasury Stock......Page 621
A LOOK BACK AT GOOGLE, INC.......Page 622
CHAPTER REVIEW......Page 623
CHAPTER ASSIGNMENTS......Page 627
CHAPTER 12 The Corporate Income Statement and the Statement of Stockholders'Equity......Page 641
DECISION POINT: A USER'S FOCUS MOTOROLA, INC.......Page 642
FOCUS ON BUSINESS PRACTICE: Why Do Investors Study Quality of Earnings?......Page 643
The Effect of Accounting Estimates and Methods......Page 644
Write-downs and Restructurings......Page 646
Quality of Earnings and Cash Flows......Page 647
Income Taxes......Page 649
Deferred Income Taxes......Page 650
Net of Taxes......Page 651
Extraordinary Items......Page 653
Basic Earnings per Share......Page 654
Diluted Earnings Per Share......Page 656
The Statement of Stockholders' Equity......Page 657
Retained Earnings......Page 659
Stock Dividends......Page 660
Stock Splits......Page 662
FOCUS ON BUSINESS PRACTICE: Do Stock Splits Help Increase a Company's Market Price?......Page 663
Book Value......Page 665
A LOOK BACK AT MOTOROLA, INC.......Page 666
CHAPTER REVIEW......Page 667
CHAPTER ASSIGNMENTS......Page 671
CHAPTER 13 The Statement of Cash Flows......Page 687
DECISION POINT: A USER'S FOCUS MARRIOTT INTERNATIONAL, INC.......Page 688
Uses of the Statement of Cash Flows......Page 689
Classification of Cash Flows......Page 690
Format of the Statement of Cash Flows......Page 691
Ethical Considerations and the Statement of Cash Flows......Page 693
Cash-Generating Efficiency......Page 694
FOCUS ON BUSINESS PRACTICE: Cash Flows Tell All......Page 695
FOCUS ON BUSINESS PRACTICE: What Do You Mean, "Free Cash Flow"?......Page 696
Operating Activities......Page 697
Depreciation......Page 699
Gains and Losses......Page 700
Changes in Current Liabilities......Page 701
Schedule of Cash Flows from Operating Activities......Page 702
Investments......Page 704
Plant Assets......Page 705
Financing Activities......Page 707
Common Stock......Page 708
Retained Earnings......Page 709
Treasury Stock......Page 710
A LOOK BACK AT MARRIOTT INTERNATIONAL, INC.......Page 712
CHAPTER REVIEW......Page 713
CHAPTER ASSIGNMENTS......Page 717
CHAPTER 14 Financial Performance Measurement......Page 735
DECISION POINT: A USER'S FOCUS STARBUCKS CORPORATION......Page 736
Financial Performance Measurement: Creditors' and Investors' Objectives......Page 737
Standards of Comparison......Page 738
FOCUS ON BUSINESS PRACTICE: Take the Numbers with a Grain of Salt......Page 739
Sources of Information......Page 741
Executive Compensation......Page 742
Horizontal Analysis......Page 745
Trend Analysis......Page 748
Vertical Analysis......Page 749
Comprehensive Illustration of Ratio Analysis......Page 752
Evaluating Liquidity......Page 753
Evaluating Profitability......Page 755
Evaluating Long-term Solvency......Page 756
Evaluating the Adequacy of Cash Flows......Page 757
Evaluating Market Strength......Page 759
A LOOK BACK AT STARBUCKS CORPORATION......Page 761
CHAPTER REVIEW......Page 762
CHAPTER ASSIGNMENTS......Page 768
CHAPTER 15 Investments......Page 785
DECISION POINT: A USER'S FOCUS eBAY, INC.......Page 786
Classification......Page 787
FOCUS ON BUSINESS PRACTICE: What Are Special- Purpose Entities?......Page 789
Trading Securities......Page 791
FOCUS ON BUSINESS PRACTICE: How Can Even a Big Company Make an Accounting Mistake?......Page 792
Noninfluential and Noncontrolling Investment......Page 794
Influential but Noncontrolling Investment......Page 797
FOCUS ON BUSINESS PRACTICE: Accounting for International Joint Ventures......Page 798
Consolidated Financial Statements......Page 799
Consolidated Balance Sheet......Page 800
Consolidated Income Statement......Page 805
Restatement of Foreign Subsidiary Financial Statements......Page 806
Investments in Debt Securities......Page 807
Long-Term Investments in Bonds......Page 808
A LOOK BACK AT eBAY, INC.......Page 809
CHAPTER REVIEW......Page 811
CHAPTER ASSIGNMENTS......Page 814
Appendix A: Accounting for Unincorporated Businesses......Page 829
Appendix B: Future Value and Present Value Tables......Page 839
Answers to Stop, Review, and Apply Questions......Page 846
Endnotes......Page 864
Company Name Index......Page 868
Subject Index......Page 870