Fundamental Accounting Principles

Cover
Title Page
Copyright Page
Preface
About the Authors
Acknowledgments
Brief Contents
Contents
1 Accounting in Business
	Importance of Accounting
		Users of Accounting Information
		Opportunities in Accounting
	Fundamentals of Accounting
		Ethics—A Key Concept
		Fraud Triangle
		Generally Accepted Accounting Principles
		International Standards
		Conceptual Framework and Convergence
		Sarbanes-Oxley (SOX)
		Dodd-Frank
	Transaction Analysis and the Accounting Equation
		Accounting Equation
		Transaction Analysis
		Summary of Transactions
	Financial Statements
		Income Statement
		Statement of Owner\'s Equity
		Balance Sheet
		Statement of Cash Flows
	Global View
	Decision Analysis—Return on Assets
	Appendix 1A Return and Risk Analysis
	Appendix 1B Business Activities and the Accounting Equation
2 Analyzing and Recording Transactions
	Analyzing and Reporting Accounts
		Source Documents
		The Account and Its Analysis
	Analyzing and Processing Transactions
		Ledger and Chart of Accounts
		Debits and Credits
		Double-Entry Accounting
		Journalizing and Posting Transactions
		Analyzing Transactions—An Illustration
		Accounting Equation Analysis
	Trial Balance
		Preparing a Trial Balance
		Using a Trial Balance to Prepare Financial Statements
	Global View
	Decision Analysis—Debt Ratio
3 Adjusting Accounts and Preparing Financial Statements
	Timing and Reporting
		The Accounting Period
		Accrual Basis versus Cash Basis
		Recognizing Revenues and Expenses
	Adjusting Accounts
		Framework for Adjustments
		Prepaid (Deferred) Expenses
		Unearned (Deferred) Revenues
		Accrued Expenses
		Accrued Revenues
		Links to Financial Statements
		Adjusted Trial Balance
	Preparing Financial Statements
	Global View
	Decision Analysis—Profit Margin
	Appendix 3A Alternative Accounting for Prepayments
4 Completing the Accounting Cycle
	Work Sheet as a Tool
		Benefits of a Work Sheet (Spreadsheet)
		Use of a Work Sheet
		Work Sheet Applications and Analysis
	Closing Process
		Temporary and Permanent Accounts
		Recording Closing Entries
		Post-Closing Trial Balance
	Accounting Cycle
	Classified Balance Sheet
		Classification Structure
		Classification Categories
	Global View
	Decision Analysis—Current Ratio
	Appendix 4A Reversing Entries
5 Accounting for Merchandising Operations
	Merchandising Activities
		Reporting Income for a Merchandiser
		Reporting Inventory for a Merchandiser
		Operating Cycle for a Merchandiser
		Inventory Systems
	Accounting for Merchandise Purchases
		Purchase Discounts
		Purchase Returns and Allowances
		Transportation Costs and Ownership Transfer
	Accounting for Merchandise Sales
		Sales of Merchandise
		Sales Discounts
		Sales Returns and Allowances
	Completing the Accounting Cycle
		Adjusting Entries for Merchandisers
		Preparing Financial Statements
		Closing Entries for Merchandisers
		Summary of Merchandising Entries
	Financial Statement Formats
		Multiple-Step Income Statement
		Single-Step Income Statement
		Classified Balance Sheet
	Global View
	Decision Analysis—Acid-Test and Gross Margin Ratios
	Appendix 5A Periodic Inventory System
	Appendix 5B Work Sheet—Perpetual System
6 Inventories and Cost of Sales
	Inventory Basics
		Determining Inventory Items
		Determining Inventory Costs
		Internal Controls and Taking a Physical Count
	Inventory Costing under a Perpetual System
		Inventory Cost Flow Assumptions
		Inventory Costing Illustration
		Specific Identification
		First-In, First-Out
		Last-In, First-Out
		Weighted Average
		Financial Statement Effects of Costing Methods
		Consistency in Using Costing Methods
	Valuing Inventory at LCM and the Effects of Inventory Errors
		Lower of Cost or Market
		Financial Statement Effects of Inventory Errors
	Global View
	Decision Analysis—Inventory Turnover and Days\' Sales in Inventory
	Appendix 6A Inventory Costing under a Periodic System
	Appendix 6B Inventory Estimation Methods
7 Accounting Information Systems
	Fundamental System Principles
		Control Principle
		Relevance Principle
		Compatibility Principle
		Flexibility Principle
		Cost-Benefit Principle
	Components of Accounting Systems
		Source Documents
		Input Devices
		Information Processors
		Information Storage
		Output Devices
	Special Journals in Accounting
		Basics of Special Journals
		Subsidiary Ledgers
		Sales Journal
		Cash Receipts Journal
		Purchases Journal
		Cash Disbursements Journal
		General Journal Transactions
	Technology-Based Accounting Systems
		Computer Technology in Accounting
		Data Processing in Accounting
		Computer Networks in Accounting
		Enterprise Resource Planning Software
		Cloud Computing
	Global View
	Decision Analysis—Segment Return on Assets
8 Cash and Internal Controls
	Internal Control
		Purpose of Internal Control
		Principles of Internal Control
		Technology and Internal Control
		Limitations of Internal Control
	Control of Cash
		Cash, Cash Equivalents, and Liquidity
		Cash Management
		Control of Cash Receipts
		Control of Cash Disbursements
	Banking Activities as Controls
		Basic Bank Services
		Bank Statement
		Bank Reconciliation
	Global View
	Decision Analysis—Days\' Sales Uncollected
	Appendix 8A Documentation and Verification
	Appendix 8B Control of Purchase Discounts
9 Accounting for Receivables
	Accounts Receivable
		Recognizing Accounts Receivable
		Valuing Accounts Receivable—Direct Write-Off Method
		Valuing Accounts Receivable—Allowance Method
		Estimating Bad Debts—Percent of Sales Method
		Estimating Bad Debts—Percent of Receivables Method
		Estimating Bad Debts—Aging of Receivables Method
	Notes Receivable
		Computing Maturity and Interest
		Recognizing Notes Receivable
		Valuing and Settling Notes
	Disposal of Receivables
		Selling Receivables
		Pledging Receivables
	Global View
	Decision Analysis—Accounts Receivable Turnover
10 Plant Assets, Natural Resources, and Intangibles
	SECTION 1—PLANT ASSETS
	Cost Determination
		Machinery and Equipment
		Buildings
		Land Improvements
		Land
		Lump-Sum Purchase
	Depreciation
		Factors in Computing Depreciation
		Depreciation Methods
		Partial-Year Depreciation
		Change in Estimates for Depreciation
		Reporting Depreciation
	Additional Expenditures
		Ordinary Repairs
		Betterments and Extraordinary Repairs
	Disposals of Plant Assets
		Discarding Plant Assets
		Selling Plant Assets
	SECTION 2—NATURAL RESOURCES
		Cost Determination and Depletion
		Plant Assets Tied into Extracting
	SECTION 3—INTANGIBLE ASSETS
		Cost Determination and Amortization
		Types of Intangibles
	Global View
	Decision Analysis—Total Asset Turnover
	Appendix 10A Exchanging Plant Assets
11 Current Liabilities and Payroll Accounting
	Characteristics of Liabilities
		Defining Liabilities
		Classifying Liabilities
		Uncertainty in Liabilities
	Known Liabilities
		Accounts Payable
		Sales Taxes Payable
		Unearned Revenues
		Short-Term Notes Payable
		Payroll Liabilities
		Multi-Period Known Liabilities
	Estimated Liabilities
		Health and Pension Benefits
		Vacation Benefits
		Bonus Plans
		Warranty Liabilities
		Multi-Period Estimated Liabilities
	Contingent Liabilities
		Accounting for Contingent Liabilities
		Reasonably Possible Contingent Liabilities
		Uncertainties That Are Not Contingencies
	Global View
	Decision Analysis—Times Interest Earned Ratio
	Appendix 11A Payroll Reports, Records, and Procedures
	Appendix 11B Corporate Income Taxes
12 Accounting for Partnerships
	Partnership Form of Organization
		Characteristics of Partnerships
		Organizations with Partnership Characteristics
		Choosing a Business Form
	Basic Partnership Accounting
		Organizing a Partnership
		Dividing Income or Loss
		Partnership Financial Statements
	Admission and Withdrawal of Partners
		Admission of a Partner
		Withdrawal of a Partner
		Death of a Partner
	Liquidation of a Partnership
		No Capital Deficiency
		Capital Deficiency
	Global View
	Decision Analysis—Partner Return on Equity
13 Accounting for Corporations
	Corporate Form of Organization
		Characteristics of Corporations
		Corporate Organization and Management
		Stockholders of Corporations
		Basics of Capital Stock
	Common Stock
		Issuing Par Value Stock
		Issuing No-Par Value Stock
		Issuing Stated Value Stock
		Issuing Stock for Noncash Assets
	Dividends
		Cash Dividends
		Stock Dividends
		Stock Splits
	Preferred Stock
		Issuance of Preferred Stock
		Dividend Preference of Preferred Stock
		Convertible Preferred Stock
		Callable Preferred Stock
		Reasons for Issuing Preferred Stock
	Treasury Stock
		Purchasing Treasury Stock
		Reissuing Treasury Stock
		Retiring Stock
	Reporting of Equity
		Statement of Retained Earnings
		Statement of Stockholders\' Equity
		Reporting Stock Options
	Global View
	Decision Analysis—Earnings per Share, Price-Earnings Ratio, Dividend Yield, and Book Value per Share
14 Long-Term Liabilities
	Basics of Bonds
		Bond Financing
		Bond Trading
		Bond-Issuing Procedures
	Bond Issuances
		Issuing Bonds at Par
		Bond Discount or Premium
		Issuing Bonds at a Discount
		Issuing Bonds at a Premium
		Bond Pricing
	Bond Retirement
		Bond Retirement at Maturity
		Bond Retirement before Maturity
		Bond Retirement by Conversion
	Long-Term Notes Payable
		Installment Notes
		Mortgage Notes and Bonds
	Global View
	Decision Analysis—Debt Features and the Debt-to-Equity Ratio
	Appendix 14A Present Values of Bonds and Notes
	Appendix 14B Effective Interest Amortization
	Appendix 14C Issuing Bonds between Interest Dates
	Appendix 14D Leases and Pensions
15 Investments and International Operations
	Basics of Investments
		Motivation for Investments
		Classification and Reporting
		Debt Securities: Accounting Basics
		Equity Securities: Accounting Basics
	Reporting of Noninfluential Investments
		Trading Securities
		Held-to-Maturity Securities
		Available-for-Sale Securities
	Reporting of Influential Investments
		Investment in Securities with Significant Influence
		Investment in Securities with Controlling Influence
		Accounting Summary for Investments in Securities
	Global View
	Decision Analysis—Components of Return on Total Assets
	Appendix 15A Investments in International Operations
16 Reporting the Statement of Cash Flows
	Basics of Cash Flow Reporting
		Purpose of the Statement of Cash Flows
		Importance of Cash Flows
		Measurement of Cash Flows
		Classification of Cash Flows
		Noncash Investing and Financing
		Format of the Statement of Cash Flows
		Preparing the Statement of Cash Flows
	Cash Flows from Operating
		Indirect and Direct Methods of Reporting
		Applying the Indirect Method of Reporting
		Summary Adjustments for Operating Activities—Indirect Method
	Cash Flows from Investing
		Three-Stage Process of Analysis
		Analyzing Noncurrent Assets
		Analyzing Additional Assets
	Cash Flows from Financing
		Three-Stage Process of Analysis
		Analyzing Noncurrent Liabilities
		Analyzing Equity
		Proving Cash Balances
	Overall Summary Using T-Accounts
	Global View
	Decision Analysis—Cash Flow Analysis
	Appendix 16A Spreadsheet Preparation of the Statement of Cash Flows
	Appendix 16B Direct Method of Reporting Operating Cash Flows
17 Analysis of Financial Statements
	Basics of Analysis
		Purpose of Analysis
		Building Blocks of Analysis
		Information for Analysis
		Standards for Comparisons
		Tools of Analysis
	Horizontal Analysis
		Comparative Statements
		Trend Analysis
	Vertical Analysis
		Common-Size Statements
		Common-Size Graphics
	Ratio Analysis
		Liquidity and Efficiency
		Solvency
		Profitability
		Market Prospects
		Summary of Ratios
	Global View
	Decision Analysis—Analysis Reporting
	Appendix 17A Sustainable Income
18 Managerial Accounting Concepts and Principles
	Managerial Accounting Basics
		Purpose of Managerial Accounting
		Nature of Managerial Accounting
		Managerial Decision Making
		Fraud and Ethics in Managerial Accounting
	Managerial Cost Concepts
		Types of Cost Classifications
		Identification of Cost Classifications
		Cost Concepts for Service Companies
	Reporting
		Manufacturers\' Costs
		Balance Sheet
		Income Statement
		Flow of Manufacturing Activities
		Schedule of Cost of Goods Manufactured
		Trends in Managerial Accounting
	Global View
	Decision Analysis—Raw Materials Inventory Turnover and Days\' Sales of Raw Materials Inventory
19 Job Order Costing
	Job Order Costing
		Cost Accounting System
		Job Order Production
		Comparing Job Order and Process Operations
		Production Activities in Job Order Costing
		Cost Flows
		Job Cost Sheet
	Job Order Cost Flows and Reports
		Materials Cost Flows and Documents
		Labor Cost Flows and Documents
		Overhead Cost Flows and Documents
		Recording Actual Overhead
		Summary of Cost Flows
		Schedule of Cost of Goods Manufactured
	Adjusting Factory Overhead
		Factory Overhead T-Account
		Underapplied or Overapplied Overhead
		Job Order Costing of Services
	Global View
	Decision Analysis—Pricing for Services
20 Process Costing
	Process Operations
		Organization of Process Operations
		Comparing Process and Job Order Costing Systems
		Equivalent Units of Production
	Process Costing Illustration
		Overview of GenX Company\'s Process Operation
		Step 1: Determine Physical Flow of Units
		Step 2: Compute Equivalent Units of Production
		Step 3: Compute Cost per Equivalent Unit
		Step 4: Assign and Reconcile Costs
		Process Cost Summary
	Accounting and Reporting for Process Costing
		Accounting for Materials Costs
		Accounting for Labor Costs
		Accounting for Factory Overhead
		Accounting for Transfers
		Trends in Process Operations
	Global View
		Decision Analysis—Hybrid Costing System
	Appendix 20A FIFO Method of Process Costing
21 Cost-Volume-Profit Analysis
	Identifying Cost Behavior
		Fixed Costs
		Variable Costs
		Mixed Costs
		Step-wise Costs and the Relevant Range
		Curvilinear Costs
	Measuring Cost Behavior
		Scatter Diagrams
		High-Low Method
		Least-Squares Regression
		Comparison of Cost Estimation Methods
	Contribution Margin and Break-Even Analysis
		Contribution Margin and Its Measures
		Computing the Break-Even Point
		Computing the Margin of Safety
		Preparing a Cost-Volume-Profit Chart
		Working with Changes in Estimates
	Applying Cost-Volume-Profit Analysis
		Computing Income from Sales and Costs
		Computing Sales for a Target Income
		Using Sensitivity Analysis
		Computing a Multiproduct Break-Even Point
		Making Assumptions in Cost-Volume-Profit Analysis
	Global View
	Decision Analysis—Degree of Operating Leverage
	Appendix 21A Using Excel to Estimate Least-Squares Regression
	Appendix 21B Variable Costing and Performance Reporting
22 Master Budgets and Planning
	Budget Process and Administration
		Budgeting as a Management Tool
		Benefits of Budgeting
		Budgeting and Human Behavior
		Budget Reporting and Timing
		Budget Committee
	The Master Budget
		Master Budget Components
		Operating Budgets
		Cash Budget
	Budgeted Financial Statements
		Budgeted Income Statement
		Budgeted Balance Sheet
		Using the Master Budget
	Global View
	Decision Analysis—Activity-Based Budgeting
	Appendix 22A Merchandise Purchases Budget
23 Flexible Budgets and Standard Costs
	SECTION 1—FLEXIBLE BUDGETS
	Fixed Budget Reports
		Fixed Budget Performance Report
		Budget Reports for Evaluation
	Flexible Budget Reports
		Purpose of Flexible Budgets
		Preparation of Flexible Budgets
		Flexible Budget Performance Report
	SECTION 2—STANDARD COSTS
	Materials and Labor Standards
		Identifying Standard Costs
		Setting Standard Costs
	Cost Variance Analysis
		Cost Variance Computation
		Computing Materials and Labor Variances
	Overhead Standards and Variances
		Flexible Overhead Budgets
		Setting Overhead Standards
		Computing Overhead Cost Variances
	Global View
	Decision Analysis—Sales Variances
	Appendix 23A Expanded Overhead Variances and Standard Cost Accounting System
24 Performance Measurement and Responsibility Accounting
	Decentralization
		Advantages of Decentralization
		Disadvantages of Decentralization
		Performance Evaluation
	Responsibility Accounting
		Controllable versus Uncontrollable Costs
		Responsibility Accounting System
		Responsibility Accounting Report
	Profit Centers
		Direct and Indirect Expenses
		Allocation of Indirect Expenses
		Departmental Income Statements
		Departmental Contribution to Overhead
	Evaluating Investment Center Performance
		Financial Performance Evaluation Measures
		Nonfinancial Performance Evaluation Measures
	Global View
	Decision Analysis—Cycle Time and Cycle Efficiency
	Appendix 24A Transfer Pricing
	Appendix 24B Joint Costs and Their Allocation
25 Capital Budgeting and Managerial Decisions
	SECTION 1—CAPITAL BUDGETING
	Methods Not Using Time Value of Money
		Payback Period
		Accounting Rate of Return
	Methods Using Time Value of Money
		Net Present Value
		Internal Rate of Return
		Comparison of Capital Budgeting Methods
	SECTION 2—MANAGERIAL DECISIONS
	Decisions and Information
		Decision Making
		Relevant Costs and Benefits
	Managerial Decision Scenarios
		Additional Business
		Make or Buy
		Scrap or Rework
		Sell or Process Further
		Sales Mix Selection When Resources Are Constrained
		Segment Elimination
		Keep or Replace Equipment
	Global View
	Decision Analysis—Break-Even Time
	Appendix 25A Using Excel to Compute Net Present Value and Internal Rate of Return
Appendix A Financial Statement Information
	Apple
	Google
	Samsung
Appendix B Time Value of Money
Appendix C Activity-Based Costing
Index
Chart of Accounts