Financial Accounting: The Impact on Decision Makers

Front Cover......Page 1
Title Page......Page 3
Copyright......Page 4
Preface......Page 7
Brief Contents......Page 21
Contents......Page 22
CHAPTER 1: Accounting as a Form of Communication......Page 30
Kellogg Company: Making Business Decisions......Page 31
What Is Business?......Page 32
Business Entities......Page 34
Nonbusiness Entities......Page 35
Financing Activities......Page 36
Operating Activities......Page 37
External Users......Page 39
Using Financial Accounting Information......Page 40
The Accounting Equation......Page 42
The Balance Sheet......Page 43
The Income Statement......Page 44
The Statement of Retained Earnings......Page 45
Relationships Among the Financial Statements......Page 46
Looking at Financial Statements for a Real Company: Kellogg’s......Page 47
Kellogg’s Balance Sheet......Page 48
Kellogg’s Income Statement......Page 49
Cost Principle......Page 50
Accounting as a Social Science......Page 51
Who Determines the Rules of the Game?......Page 52
The Audit of Financial Statements......Page 53
Why Should Accountants Be Concerned with Ethics?......Page 54
The Changing Face of the Accounting Profession......Page 57
KEY TERMS QUIZ......Page 59
WARMUP EXERCISES & SOLUTIONS......Page 60
REVIEW PROBLEM & SOLUTION......Page 61
QUESTIONS......Page 62
BRIEF EXERCISES......Page 63
EXERCISES......Page 64
MULTICONCEPT EXERCISES......Page 67
PROBLEMS......Page 68
ALTERNATE PROBLEMS......Page 71
ALTERNATE MULTICONCEPT PROBLEMS......Page 74
DECISION CASES......Page 75
SOLUTIONS TO KEY TERMS QUIZ......Page 78
ANSWERS TO POD REVIEW......Page 79
CHAPTER 2: Financial Statements and the Annual Report......Page 80
General Mills: Making Business Decisions......Page 81
Objectives of Financial Reporting......Page 82
Secondary Objectives of Financial Reporting......Page 83
Reliability......Page 85
Comparability and Consistency......Page 86
Conservatism......Page 87
An International Perspective on Qualitative Characteristics......Page 88
What are the Parts of the Balance Sheet? Understanding the Operating Cycle......Page 89
Current Assets......Page 90
Noncurrent Assets......Page 91
Long-Term Liabilities......Page 92
Stockholders’ Equity......Page 93
Working Capital......Page 95
Current Ratio......Page 96
What Appears on the Income Statement?......Page 97
Format of the Income Statement......Page 98
Using an Income Statement......Page 100
The Statement of Retained Earnings......Page 101
The Statement of Cash Flows......Page 102
General Mills’s Income Statement......Page 105
Using the Ratio Decision Model: Analyzing the Current Ratio......Page 107
Using the Ratio Decision Model: Analyzing the Profit Margin......Page 108
Hot Topics: Who Will Reign Supreme over the Breakfast Table?......Page 109
Other Elements of an Annual Report......Page 110
RATIO REVIEW......Page 112
KEY TERMS QUIZ......Page 113
WARMUP EXERCISES & SOLUTIONS......Page 114
REVIEW PROBLEM & SOLUTION......Page 115
QUESTIONS......Page 116
BRIEF EXERCISES......Page 117
EXERCISES......Page 118
PROBLEMS......Page 120
MULTICONCEPT PROBLEMS......Page 123
ALTERNATE PROBLEMS......Page 124
ALTERNATE MULTICONCEPT PROBLEMS......Page 127
DECISION CASES......Page 129
SOLUTIONS TO KEY TERMS QUIZ......Page 130
ANSWERS TO POD REVIEW......Page 131
CHAPTER 3: Processing Accounting Information......Page 132
Southwest Airlines: Making Business Decisions......Page 133
External and Internal Events......Page 134
The Role of Source Documents in Recording Transactions......Page 135
Analyzing the Effects of Transactions on the Accounting Equation......Page 136
Balance Sheet and Income Statement for Glengarry Health Club......Page 139
What Is an Account?......Page 141
The General Ledger......Page 142
The T Account......Page 143
Debits and Credits for Revenues, Expenses, and Dividends......Page 144
Normal Account Balances......Page 145
Transactions for Glengarry Health Club......Page 146
The Journal: The Firm’s Chronological Record of Transactions......Page 149
The Trial Balance......Page 152
A Final Note: Processing Account Information......Page 153
KEY TERMS QUIZ......Page 154
WARMUP EXERCISES & SOLUTIONS......Page 155
REVIEW PROBLEM & SOLUTION......Page 156
BRIEF EXERCISES......Page 157
EXERCISES......Page 158
MULTICONCEPT EXERCISES......Page 161
PROBLEMS......Page 162
MULTICONCEPT PROBLEMS......Page 164
ALTERNATE PROBLEMS......Page 168
ALTERNATE MULTICONCEPT PROBLEMS......Page 170
DECISION CASES......Page 173
SOLUTIONS TO KEY TERMS QUIZ......Page 176
ANSWERS TO POD REVIEW......Page 177
CHAPTER 4: Income Measurement and Accrual Accounting......Page 178
Nordstrom, Inc.: Making Business Decisions......Page 179
Recognition......Page 180
Measurement......Page 181
Summary of Recognition and Measurement in Financial Statements......Page 182
Comparing the Cash and Accrual Bases of Accounting......Page 183
What the Income Statement and the Statement of Cash Flows Reveal......Page 185
Accrual Accounting and Time Periods......Page 186
The Revenue Recognition Principle......Page 187
Expense Recognition and the Matching Principle......Page 188
Types of Adjusting Entries......Page 190
Hot Topics: What to Do with an Extra $1.5 Billion?......Page 194
Accruals and Deferrals......Page 198
Comprehensive Example of Adjusting Entries......Page 199
Adjusting Entries at the End of January......Page 200
Ethical Considerations for a Company on the Accrual Basis......Page 204
The Use of a Work Sheet......Page 205
The Closing Process......Page 206
Interim Financial Statements......Page 208
APPENDIX: Accounting Tools: Work Sheets......Page 209
SOLUTIONS TO KEY TERMS QUIZ......Page 244
KEY TERMS QUIZ......Page 213
WARMUP EXERCISES & SOLUTIONS......Page 214
REVIEW PROBLEM & SOLUTION......Page 215
APPENDIX REVIEW PROBLEM......Page 217
BRIEF EXERCISES......Page 219
EXERCISES......Page 220
MULTICONCEPT EXERCISES......Page 227
PROBLEMS......Page 228
MULTICONCEPT PROBLEMS......Page 232
ALTERNATE PROBLEMS......Page 234
ALTERNATE MULTICONCEPT PROBLEMS......Page 238
DECISION CASES......Page 240
ANSWERS TO POD REVIEWS......Page 245
CHAPTER 5: Inventories and Cost of Goods Sold......Page 246
Gap Inc.: Making Business Decisions......Page 247
The Nature of Inventory......Page 248
Three Types of Inventory Cost and Three Forms of Inventory......Page 249
Net Sales of Merchandise......Page 251
Credit Terms and Sales Discounts......Page 252
The Cost of Goods Sold Model......Page 253
Inventory Systems: Perpetual and Periodic......Page 255
Beginning and Ending Inventories in a Periodic System......Page 256
The Cost of Goods Purchased......Page 257
Using the Ratio Decision Model: Analyzing the Gross Profit Ratio......Page 261
Inventory Costs: What Should Be Included?......Page 263
Inventory Costing Methods with a Periodic System......Page 264
Specific Identification Method......Page 265
Weighted Average Cost Method......Page 266
Last-in, First-out Method (LIFO)......Page 267
Costing Methods and Cash Flow......Page 269
The LIFO Conformity Rule......Page 270
Costing Methods and Inventory Profits......Page 271
Inventory Valuation in Other Countries......Page 272
Inventory Errors......Page 273
Valuing Inventory at Lower of Cost or Market......Page 276
Why Replacement Cost Is Used as a Measure of Market......Page 277
Application of the LCM Rule......Page 278
Methods for Estimating Inventory Value......Page 279
Gross Profit Method......Page 280
Retail Inventory Method......Page 281
Analyzing the Management of Inventory......Page 282
Using the Ratio Decision Model: Analyzing the Management of Inventory......Page 283
How Inventories Affect the Cash Flows Statement......Page 285
APPENDIX: Accounting Tools: Inventory Costing Methods with the Use of a Perpetual Inventory System......Page 287
RATIO REVIEW......Page 290
KEY TERMS QUIZ......Page 291
ALTERNATE TERMS......Page 292
WARMUP EXERCISES & SOLUTIONS......Page 293
REVIEW PROBLEM & SOLUTION......Page 295
QUESTIONS......Page 296
BRIEF EXERCISES......Page 297
EXERCISES......Page 298
MULTICONCEPT EXERCISES......Page 303
PROBLEMS......Page 305
MULTICONCEPT PROBLEMS......Page 308
ALTERNATE PROBLEMS......Page 311
ALTERNATE MULTICONCEPT PROBLEMS......Page 313
DECISION CASES......Page 316
ANSWERS TO POD REVIEW......Page 320
CHAPTER 6: Cash and Internal Control......Page 322
Sears Holdings Corporation: Making Business Decisions......Page 323
Cash Equivalents and the Statement of Cash Flows......Page 324
Hot Topics: A $53 Billion Start-Up......Page 325
Reading a Bank Statement......Page 327
The Bank Reconciliation......Page 328
The Bank Reconciliation and the Need for Adjustments to the Records......Page 330
Establishing a Petty Cash Fund......Page 332
An Example of a Petty Cash Fund......Page 333
The Sarbanes-Oxley Act of 2002......Page 335
The Accounting System......Page 338
Internal Control Procedures......Page 339
Limitations on Internal Control......Page 341
Control Over Cash Receipts......Page 342
The Role of Computerized Business Documents in Controlling Cash Disbursements......Page 343
KEY TERMS QUIZ......Page 350
WARMUP EXERCISES & SOLUTIONS......Page 351
QUESTIONS......Page 352
BRIEF EXERCISES......Page 353
EXERCISES......Page 354
MULTICONCEPT EXERCISE......Page 355
PROBLEMS......Page 356
ALTERNATE PROBLEMS......Page 357
ALTERNATE MULTICONCEPT PROBLEMS......Page 358
DECISION CASES......Page 359
ANSWERS TO POD REVIEW......Page 360
CHAPTER 7: Receivables and Investments......Page 362
Apple Inc.: Making Business Decisions......Page 363
The Use of a Subsidiary Ledger......Page 364
The Valuation of Accounts Receivable......Page 365
Two Methods to Account for Bad Debts......Page 366
Write-Offs of Uncollectible Accounts with the Allowance Method......Page 367
Two Approaches to the Allowance Method of Accounting for Bad Debts......Page 368
The Accounts Receivable Turnover Ratio......Page 371
Using the Ratio Decision Model: Analyzing the Accounts Receivable Rate of Collection......Page 372
Notes Receivable......Page 374
Important Terms Connected with Promissory Notes......Page 375
Accelerating the Inflow of Cash from Sales......Page 376
Credit Card Sales......Page 377
Discounting Notes Receivable......Page 378
Investments in Highly Liquid Financial Instruments......Page 379
Investments in Stocks and Bonds......Page 381
Valuation and Reporting for Investments on the Financial Statements......Page 384
How Liquid Assets Affect the Statement of Cash Flows......Page 385
ACCOUNTS HIGHLIGHTED......Page 387
WARMUP EXERCISES......Page 388
REVIEW PROBLEM......Page 389
BRIEF EXERCISES......Page 391
EXERCISES......Page 392
PROBLEMS......Page 395
MULTICONCEPT PROBLEM......Page 397
ALTERNATE PROBLEMS......Page 398
DECISION CASES......Page 400
ANSWERS TO POD REVIEW......Page 402
CHAPTER 8: Operating Assets: Property, Plant, and Equipment, and Intangibles......Page 404
Nike: Making Business Decisions......Page 405
Balance Sheet Presentation......Page 406
Acquisition of Property, Plant, and Equipment......Page 407
Use and Depreciation of Property, Plant, and Equipment......Page 410
Capital versus Revenue Expenditures......Page 417
Disposal of Property, Plant, and Equipment......Page 419
Operating Assets: Intangible Assets......Page 421
Balance Sheet Presentation......Page 422
Acquisition Cost of Intangible Assets......Page 423
Amortization of Intangibles......Page 424
How Long-Term Assets Affect the Statement of Cash Flows......Page 427
Analyzing Long-Term Assets for Average Life and Asset Turnover......Page 429
Using the Ratio Decision Model: Analyzing Average Life and Asset Turnover......Page 430
KEY TERMS QUIZ......Page 432
WARMUP EXERCISES......Page 433
REVIEW PROBLEM......Page 434
QUESTIONS......Page 435
BRIEF EXERCISES......Page 436
EXERCISES......Page 438
MULTICONCEPT EXERCISES......Page 440
PROBLEMS......Page 441
MULTICONCEPT PROBLEMS......Page 442
ALTERNATE PROBLEMS......Page 444
ALTERNATE MULTICONCEPT PROBLEMS......Page 446
DECISION CASES......Page 448
SOLUTIONS TO KEY TERMS QUIZ......Page 449
INTEGRATIVE PROBLEM......Page 450
ANSWERS TO POD REVIEW......Page 451
CHAPTER 9: Current Liabilities, Contingencies, and the Time Value of Money......Page 452
Starbucks Corporation: Making Business Decisions......Page 453
Current Liabilities......Page 454
Notes Payable......Page 455
Current Maturities of Long-Term Debt......Page 457
Taxes Payable......Page 458
Other Accrued Liabilities......Page 459
Reading the Statement of Cash Flows for Changes in Current Liabilities......Page 460
Contingent Liabilities That Are Recorded......Page 462
Hot Topics: Starbuck’s Liability for Products......Page 464
Contingent Liabilities versus Contingent Assets......Page 465
Time Value of Money Concepts......Page 466
Simple Interest......Page 467
Interest Compounding......Page 468
Future Value of a Single Amount......Page 469
Present Value of a Single Amount......Page 470
Future Value of an Annuity......Page 471
Present Value of an Annuity......Page 473
Solving for Unknowns......Page 474
APPENDIX: Accounting Tools: Using Excel® for Problems Involving Interest Calculations......Page 480
KEY TERMS QUIZ......Page 485
WARMUP EXERCISES......Page 486
REVIEW PROBLEM......Page 488
BRIEF EXERCISES......Page 490
EXERCISES......Page 491
PROBLEMS......Page 495
MULTICONCEPT PROBLEMS......Page 497
ALTERNATE PROBLEMS......Page 499
ALTERNATE MULTICONCEPT PROBLEMS......Page 501
DECISION CASES......Page 502
ANSWERS TO POD REVIEW......Page 505
CHAPTER 10: Long-Term Liabilities......Page 506
Coca-Cola: Making Business Decisions......Page 507
Balance Sheet Presentation......Page 508
Hot Topics: Coca-Cola versus Pepsi......Page 509
Characteristics of Bonds......Page 510
Factors Affecting Bond Price......Page 512
Premium or Discount on Bonds......Page 514
Bond Amortization......Page 517
Redemption of Bonds......Page 521
Leases......Page 523
Analyzing Debt to Assess a Firm’s Ability to Pay Its Liabilities......Page 527
Using the Ratio Decision Model: Analyzing the Debt-to-Equity and Times Interest Earned Ratios......Page 528
How Long-Term Liabilities Affect the Statement of Cash Flows......Page 530
APPENDIX: Accounting Tools: Other Liabilities......Page 532
KEY TERMS QUIZ......Page 535
WARMUP EXERCISES & SOLUTIONS......Page 536
REVIEW PROBLEM & SOLUTION......Page 537
BRIEF EXERCISES......Page 539
EXERCISES......Page 541
PROBLEMS......Page 544
MULTICONCEPT PROBLEMS......Page 546
ALTERNATE PROBLEMS......Page 547
ALTERNATE MULTICONCEPT PROBLEMS......Page 548
DECISION CASES......Page 549
ANSWERS TO POD REVIEW......Page 551
CHAPTER 11: Stockholders’ Equity......Page 552
Southwest Airlines: Making Business Decisions......Page 553
Equity as a Source of Financing......Page 554
Stockholders’ Equity on the Balance Sheet......Page 555
Identifying the Components of the Stockholders’ Equity Section of the Balance Sheet......Page 556
What Is Preferred Stock?......Page 558
Stock Issued for Noncash Consideration......Page 560
What Is Treasury Stock?......Page 561
Cash Dividends......Page 564
Cash Dividends for Preferred and Common Stock......Page 565
Stock Dividends......Page 566
Stock Splits......Page 569
What Is Comprehensive Income?......Page 571
Book Value per Share......Page 573
Using the Ratio Decision Model: Analyzing Book Value per Share......Page 574
Calculating Book Value When Preferred Stock Is Present......Page 575
Market Value per Share......Page 576
How Changes in Stockholders’ Equity Affect the Statement of Cash Flows......Page 577
APPENDIX: Accounting Tools: Unincorporated Businesses......Page 579
INTEGRATIVE PROBLEM......Page 608
ACCOUNTS HIGHLIGHTED......Page 584
KEY TERMS QUIZ......Page 585
WARMUP EXERCISES & SOLUTIONS......Page 586
REVIEW PROBLEM & SOLUTION......Page 587
QUESTIONS......Page 589
BRIEF EXERCISES......Page 590
EXERCISES......Page 592
PROBLEMS......Page 597
MULTICONCEPT PROBLEMS......Page 600
ALTERNATE PROBLEMS......Page 601
ALTERNATE MULTICONCEPT PROBLEMS......Page 604
DECISION CASES......Page 605
SOLUTIONS TO KEY TERMS QUIZ......Page 607
ANSWERS TO POD REVIEW......Page 609
CHAPTER 12: The Statement of Cash Flows......Page 610
Best Buy: Making Business Decisions......Page 611
Cash Flows and Accrual Accounting......Page 613
An Example......Page 614
The Definition of Cash: Cash and Cash Equivalents......Page 616
Classification of Cash Flows......Page 618
Hot Topics: Spending Money to Make Money......Page 620
Two Methods of Reporting Cash Flow From Operating Activities......Page 622
Noncash Investing and Financing Activities......Page 624
The Accounting Equation and the Statement of Cash Flows......Page 626
A Master T-Account Approach to Preparing the Statement of Cash Flows: Direct Method......Page 627
Compare Net Income with Net Cash Flow From Operating Activities......Page 635
A Master T-Account Approach to Preparing the Statement of Cash Flows: Indirect Method......Page 642
Comparison of the Indirect and Direct Methods......Page 645
The Use of Cash Flow Information......Page 646
Creditors and Cash Flow Adequacy......Page 647
Using the Ratio Decision Model: Analyzing Cash Flow Adequacy......Page 648
Stockholders and Cash Flow per Share......Page 649
APPENDIX: Accounting Tools: A Work-Sheet Approach to the Statement of Cash Flows......Page 650
KEY TERMS QUIZ......Page 652
WARMUP EXERCISES & SOLUTIONS......Page 653
REVIEW PROBLEM & SOLUTION......Page 654
BRIEF EXERCISES......Page 656
EXERCISES......Page 658
MULTICONCEPT EXERCISES......Page 662
PROBLEMS......Page 664
MULTICONCEPT PROBLEMS......Page 668
ALTERNATE PROBLEMS......Page 670
ALTERNATE MULTICONCEPT PROBLEMS......Page 674
DECISION CASES......Page 676
ANSWERS TO POD REVIEW......Page 680
CHAPTER 13: Financial Statement Analysis......Page 682
Wm. Wrigley Jr. Company: Making Business Decisions......Page 683
Watch for Alternative Accounting Principles......Page 684
Understand the Possible Effects of Inflation......Page 685
Horizontal Analysis......Page 686
Vertical Analysis......Page 692
Working Capital......Page 695
Acid-Test Ratio......Page 696
Accounts Receivable Analysis......Page 697
Cash Operating Cycle......Page 699
Debt-to-Equity Ratio......Page 700
Debt Service Coverage......Page 701
Cash Flow from Operations to Capital Expenditures Ratio......Page 702
Rate of Return on Assets......Page 703
Components of Return on Assets......Page 704
Return on Common Stockholders’ Equity......Page 705
Earnings per Share......Page 706
Price/Earnings Ratio......Page 707
Summary of Selected Financial Ratios......Page 708
APPENDIX: Accounting Tools: Reporting and Analyzing Other Income Statement Items......Page 710
KEY TERMS QUIZ......Page 712
INTEGRATIVE PROBLEM......Page 745
ALTERNATE TERMS......Page 713
WARMUP EXERCISES & SOLUTIONS......Page 714
REVIEW PROBLEM & SOLUTION......Page 715
QUESTIONS......Page 718
BRIEF EXERCISES......Page 719
EXERCISES......Page 720
MULTICONCEPT EXERCISES......Page 725
PROBLEMS......Page 727
MULTICONCEPT PROBLEMS......Page 730
ALTERNATE PROBLEMS......Page 734
ALTERNATE MULTICONCEPT PROBLEMS......Page 736
DECISION CASES......Page 740
SOLUTIONS TO KEY TERMS QUIZ......Page 744
ANSWERS TO POD REVIEW......Page 746
APPENDIX A: THE ACCOUNTING PROFESSION......Page 749
APPENDIX B: EXCERPTS FROM KELLOGG’S FORM 10-K FOR 2006......Page 753
APPENDIX C: EXCERPTS FROM GENERAL MILLS’S FORM 10-K FOR 2006......Page 785
Glossary......Page 825
Comprehensive Index......Page 831