Fundamental Accounting Principles

Cover
Title Page
Copyright Page
About the Authors
Preface
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
		Generally Accepted Accounting Principles
		Conceptual Framework
	Business Transactions and Accounting
		Accounting Equation
		Transaction Analysis
		Summary of Transactions
	Communicating with Users
		Income Statement
		Statement of Owner’s Equity
		Balance Sheet
		Statement of Cash Flows
	Decision Analysis—Return on Assets
	Appendix 1A Return and Risk
	Appendix 1B Business Activities
2 Analyzing and Recording Transactions
	Basis of Financial Statements
		Source Documents
		The “Account” Underlying Financial Statements
		Ledger and Chart of Accounts
	Double-Entry Accounting
		Debits and Credits
		Double-Entry System
	Analyzing and Processing Transactions
		Journalizing and Posting Transactions
		Processing Transactions—An Example
		Summarizing Transactions in a Ledger
	Trial Balance
		Preparing a Trial Balance
		Financial Statements Prepared from Trial Balance
	Decision Analysis—Debt Ratio
3 Adjusting Accounts for Financial Statements
	Timing and Reporting
		The Accounting Period
		Accrual Basis versus Cash Basis
		Recognizing Revenues and Expenses
		Framework for Adjustments
	Deferral of Expense
		Prepaid Insurance
		Supplies
		Other Prepaid Expenses
		Depreciation
	Deferral of Revenue
		Unearned Consulting Revenue
	Accrued Expense
		Accrued Salaries Expense
		Accrued Interest Expense
		Future Cash Payment of Accrued Expenses
	Accrued Revenue
		Accrued Services Revenue
		Accrued Interest Revenue
		Future Cash Receipt of Accrued Revenues
		Links to Financial Statements
	Trial Balance and Financial Statements
		Adjusted Trial Balance
		Preparing Financial Statements
	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
	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
		Purchases without Cash Discounts
		Purchases with Cash Discounts
		Purchases with Returns and Allowances
		Purchases and Transportation Costs
	Accounting for Merchandise Sales
		Sales without Cash Discounts
		Sales with Cash Discounts
		Sales with Returns and Allowances
	Adjusting and Closing for Merchandisers
		Adjusting Entries for Merchandisers
		Preparing Financial Statements
		Closing Entries for Merchandisers
		Summary of Merchandising Entries
	More on Financial Statement Formats
		Multiple-Step Income Statement
		Single-Step Income Statement
		Classified Balance Sheet
	Decision Analysis—Acid-Test and Gross Margin Ratios
	Appendix 5A Periodic Inventory System
	Appendix 5B Adjusting Entries under New Revenue Recognition Rules
	Appendix 5C Net Method for Inventory
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
		Tax Effects of Costing Methods
	Valuing Inventory at LCM and the Effects of Inventory Errors
		Lower of Cost or Market
		Financial Statement Effects of Inventory Errors
	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
	System Principles
	System Components
	Special Journals and Subsidiary Ledgers
		Basics of Special Journals
		Subsidiary Ledgers
	Sales Journal
	Cash Receipts Journal
	Purchases Journal
	Cash Payments (Disbursements) Journal
		General Journal Transactions
	Technology-Based Accounting Systems
		Technology in Accounting
		Data Processing in Accounting
		Computer Networks in Accounting
		Enterprise Resource Planning Software
		Data Analytics and Data Visualization
		Cloud Computing
	Decision Analysis—Days’ Payable Outstanding
8 Cash, Fraud, and Internal Control
	Fraud and Internal Control
		Purpose of Internal Control
		Principles of Internal Control
		Technology, Fraud, and Internal Control
		Limitations of Internal Control
	Control of Cash
		Cash, Cash Equivalents, and Liquidity
		Cash Management
		Control of Cash Receipts
		Control of Cash Payments
	Banking Activities as Controls
		Basic Bank Services
		Bank Statement
		Bank Reconciliation
	Decision Analysis—Days’ Sales Uncollected
	Appendix 8A Documentation and Verification
9 Accounting for Receivables
	Valuing Accounts Receivable
	Direct Write-Off Method
	Allowance Method
	Estimating Bad Debts
		Percent of Sales Method
		Percent of Receivables Method
		Aging of Receivables Method
	Notes Receivable
		Computing Maturity and Interest
		Recording Notes Receivable
		Valuing and Settling Notes
		Disposal of Receivables
	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
		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
	Decision Analysis—Total Asset Turnover
	Appendix 10A Exchanging Plant Assets
11 Current Liabilities and Payroll Accounting
	Known Liabilities
		Characteristics of Liabilities
		Examples of Known Liabilities
		Accounts Payable
		Sales Taxes Payable
		Unearned Revenues
		Short-Term Notes Payable
	Payroll Liabilities
		Employee Payroll and Deductions
		Employer Payroll Taxes
		Internal Control of Payroll
		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
		Applying Rules of Contingent Liabilities
		Uncertainties That Are Not Contingencies
	Decision Analysis—Times Interest Earned Ratio
	Appendix 11A Payroll Reports, Records, and Procedures
	Appendix 11B Corporate Income Taxes
12 Accounting for Partnerships
	Partnership Formation
		Characteristics of Partnerships
		Organizations with Partnership Characteristics
		Choosing a Business Form
		Accounting for Partnership Formation
	Dividing Partnership Income or Loss
		Partnership Financial Statements
	Partner Admission
		Purchase of Partnership Interest
		Investing Assets in a Partnership
	Partner Withdrawal
		No Bonus
		Bonus to Remaining Partners
		Bonus to Withdrawing Partner
		Death of a Partner
	Liquidation of a Partnership
		No Capital Deficiency
		Capital Deficiency
	Decision Analysis—Partner Return on Equity
13 Accounting for Corporations
	Corporate Form of Organization
		Corporate Advantages
		Corporate Disadvantages
		Corporate Organization and Management
		Corporate Stockholders
		Corporate 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
		Financial Statement Effects of Dividends and Splits
	Preferred Stock
		Issuance of Preferred Stock
		Dividend Preference of Preferred Stock
		Reasons for Issuing Preferred Stock
	Treasury Stock
		Purchasing Treasury Stock
		Reissuing Treasury Stock
	Reporting of Equity
		Statement of Retained Earnings
		Statement of Stockholders’ Equity
	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 Issuing
		Bond Trading
	Par Bonds
	Discount Bonds
		Bond Discount or Premium
		Issuing Bonds at a Discount
	Premium Bonds
		Issuing Bonds at a Premium
		Bond Retirement
	Long-Term Notes Payable
		Installment Notes
		Mortgage Notes and Bonds
	Decision Analysis—Debt Features and the Debt-to-Equity Ratio
	Appendix 14A Bond Pricing
	Appendix 14B Effective Interest Amortization
	Appendix 14C Leases and Pensions
15 Investments
	Basics of Investments
		Purposes and Types of Investments
		Classification and Reporting
	Debt Investments
		Debt Investments—Basics
	Debt Investments—Trading
	Debt Investments—Held-to-Maturity
	Debt Investments—Available-for-Sale
	Equity Investments
	Equity Investments—Insignificant Influence, Under 20%
	Equity Investments—Significant Influence, 20% to 50%
	Equity Investments—Controlling Influence, More Than 50%
	Accounting Summary for Debt and Equity Investments
	Decision Analysis—Components of Return on Total Assets
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
		Summary of Adjustments for Indirect Method
	Cash Flows from Investing
		Three-Step Analysis
		Analyzing Noncurrent Assets
	Cash Flows from Financing
		Three-Step Analysis
		Analyzing Noncurrent Liabilities
		Analyzing Equity
		Proving Cash Balances
	Summary Using T-Accounts
	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
	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
		Fraud and Ethics in Managerial Accounting
		Career Paths
	Managerial Cost Concepts
		Types of Cost Classifications
		Identification of Cost Classifications
		Cost Concepts for Service Companies
	Managerial Reporting
		Manufacturing Costs
		Nonmanufacturing Costs
		Prime and Conversion Costs
		Costs and the Balance Sheet
		Costs and the Income Statement
	Cost Flows and Cost of Goods Manufactured
		Flow of Manufacturing Activities
		Schedule of Cost of Goods Manufactured
		Trends in Managerial Accounting
	Decision Analysis—Raw Materials Inventory Turnover and Days’ Sales in Raw Materials Inventory
19 Job Order Costing
	Job Order Costing
		Cost Accounting System
		Job Order Production
		Job Order vs. Process Operations
		Production Activities in Job Order Costing
		Cost Flows
		Job Cost Sheet
	Materials and Labor Cost
		Materials Cost Flows and Documents
		Labor Cost Flows and Documents
	Overhead Cost
		Set Predetermined Overhead Rate
		Apply Estimated Overhead
		Record Actual Overhead
		Summary of Cost Flows
		Using Job Cost Sheets for Managerial Decisions
		Schedule of Cost of Goods Manufactured
	Adjusting Overhead
		Factory Overhead Account
		Adjust Underapplied or Overapplied Overhead
		Job Order Costing of Services
	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
		Pre-Step: Collect Production and Cost Data
		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 for Process Costing
		Accounting for Materials Costs
		Accounting for Labor Costs
		Accounting for Factory Overhead
		Accounting for Transfers
		Trends in Process Operations
	Decision Analysis—Hybrid Costing System
	Appendix 20A FIFO Method of Process Costing
21 Cost-Volume-Profit Analysis
	Identifying Cost Behavior
		Fixed Costs
		Variable Costs
		Graphing Fixed and Variable Costs against Volume
		Mixed Costs
		Step-wise Costs
		Curvilinear Costs
	Measuring Cost Behavior
		Scatter Diagram
		High-Low Method
		Regression
		Comparing Cost Estimation Methods
	Contribution Margin and Break-Even Analysis
		Contribution Margin and Its Measures
		Break-Even Point
		Cost-Volume-Profit Chart
		Changes in Estimates
	Applying Cost-Volume-Profit Analysis
		Margin of Safety
		Computing Income from Sales and Costs
		Computing Sales for a Target Income
		Evaluating Strategies
		Sales Mix and Break-Even
		Assumptions in Cost-Volume-Profit Analysis
	Decision Analysis—Degree of Operating Leverage
	Appendix 21A Using Excel for Cost Estimation
	Appendix 21B Variable Costing and Performance Reporting
	Appendix 21C Preparing a CVP Chart
22 Master Budgets and Planning
	Budget Process and Administration
		Budgeting Process
		Benefits of Budgeting
		Budgeting and Human Behavior
		Budget Reporting and Timing
		Master Budget Components
	Operating Budgets
		Sales Budget
		Production Budget
		Direct Materials Budget
		Direct Labor Budget
		Factory Overhead Budget
		Selling Expense Budget
		General and Administrative Expense Budget
	Investing and Financing Budgets
		Capital Expenditures Budget
		Cash Budget
	Budgeted Financial Statements
		Budgeted Income Statement
		Budgeted Balance Sheet
		Using the Master Budget
		Budgeting for Service Companies
	Decision Analysis—Activity-Based Budgeting
	Appendix 22A Merchandise Purchases Budget
23 Flexible Budgets and Standard Costs
	Fixed and Flexible Budgets
		Fixed Budget Reports
		Budget Reports for Evaluation
		Flexible Budget Reports
	Standard Costing
		Standard Costs
		Setting Standard Costs
		Cost Variance Analysis
	Materials and Labor Variances
		Materials Variances
		Labor Variances
	Overhead Standards and Variances
		Flexible Overhead Budgets
		Standard Overhead Rate
		Computing Overhead Cost Variances
		Standard Costing—Management Considerations
	Decision Analysis—Sales Variances
	Appendix 23A Expanded Overhead Variances and Standard Cost Accounting System
24 Performance Measurement and Responsibility Accounting
	Responsibility Accounting
		Performance Evaluation
		Controllable versus Uncontrollable Costs
		Responsibility Accounting for Cost Centers
	Profit Centers
		Direct and Indirect Expenses
		Expense Allocations
		Departmental Income Statements
		Departmental Contribution to Overhead
	Investment Centers
		Return-on-Investment and Residual Income
		Investment Center Profit Margin and Investment Turnover
	Nonfinancial Performance Evaluation Measures
		Balanced Scorecard
		Transfer Pricing
	Decision Analysis—Cash Conversion Cycle
	Appendix 24A Cost Allocations
	Appendix 24B Transfer Pricing
	Appendix 24C Joint Costs and Their Allocation
25 Relevant Costing for Managerial Decisions
	Decisions and Information
		Decision Making
		Relevant Costs and Benefits
	Production Decisions
		Make or Buy
		Sell or Process Further
		Sales Mix Selection When Resources Are Constrained
	Capacity Decisions
		Segment Elimination
		Keep or Replace Equipment
	Pricing Decisions
		Normal Pricing
		Special Offers
	Decision Analysis—Time and Materials Pricing
26 Capital Budgeting and Investment Analysis
	Capital Budgeting
		Capital Budgeting Process
		Capital Investment Cash Flows
	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
		Postaudit
	Decision Analysis—Break-Even Time
	Appendix 26A 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
Appendix D Lean Principles and Accounting
Index
Chart of Accounts
Brief Review Managerial Analyses and Reports
	Financial Reports and Tables
	Selected Transactions and Relations
	Fundamentals and Analyses