Principles of Financial Accounting, 11th Edition

Front Cover......Page 0
Title Page......Page 4
Copyright......Page 5
Brief Contents\n......Page 6
Contents......Page 8
Preface......Page 16
Acknowledgements......Page 26
About the Authors......Page 30
CHAPTER 1 Uses of Accounting Information and the Financial Statements......Page 33
DECISION POINT A USER’S FOCUS KEEP-FIT CENTER......Page 34
Business Goals, Activities, and Performance Measures......Page 35
Processing Accounting Information......Page 38
Ethical Financial Reporting......Page 39
Management......Page 41
Users with a Direct Financial Interest......Page 42
Governmental and Not-for-Profit Organizations......Page 43
Accounting Measurement......Page 44
Money Measure......Page 45
Characteristics of Corporations, Sole Proprietorships, and Partnerships......Page 46
Financial Position and the Accounting Equation......Page 48
Owner’s Equity......Page 49
Income Statement......Page 50
The Balance Sheet......Page 51
Relationships Among the Financial Statements......Page 52
Generally Accepted Accounting Principles......Page 55
GAAP and the Independent CPA’s Report......Page 56
Other Organizations That Influence GAAP......Page 57
Corporate Governance......Page 58
KEEP-FIT CENTER: REVIEW PROBLEM......Page 59
STOP & REVIEW......Page 62
CHAPTER ASSIGNMENTS......Page 64
CHAPTER 2 Analyzing Business Transactions......Page 79
DECISION POINT   A USER’S FOCUS PAWS AND HOOFS CLINIC......Page 80
Recognition......Page 81
Valuation......Page 82
Ethics and Measurement Issues......Page 84
The T Account......Page 85
Rules of Double-Entry Accounting......Page 86
Owner’s Equity Accounts......Page 87
Owner’s Investment to Form the Business......Page 89
Purchase of an Asset on Credit......Page 90
Payment of a Liability......Page 91
Revenue Collected in Advance......Page 92
Expense Paid in Cash......Page 93
Withdrawals......Page 94
Preparation and Use of a Trial Balance......Page 96
Finding Trial Balance Errors......Page 98
Cash Flows and the Timing\n\nof Transactions......Page 99
General Journal......Page 101
General Ledger......Page 103
Some Notes on Presentation......Page 104
PAWS AND HOOFS CLINIC: REVIEW PROBLEM......Page 106
STOP & REVIEW......Page 110
CHAPTER ASSIGNMENTS......Page 112
CHAPTER 3 Measuring Business Income......Page 129
DECISION POINT   A USER’S FOCUS RELIABLE ANSWERING SERVICE 99......Page 130
Net Income......Page 131
Income Measurement Assumptions......Page 132
Ethics and the Matching Rule......Page 133
Recognizing Revenues......Page 135
Adjusting the Accounts......Page 136
Adjustments and Ethics......Page 137
Type 1 Adjustment: Allocating Recorded Costs (Deferred Expenses)......Page 138
Type 2 Adjustment: Recognizing Unrecorded, Incurred Expenses (Accrued Expenses)......Page 142
Type 3 Adjustment: Allocating Recorded, Unearned Revenues (Deferred Revenues)......Page 144
Type 4 Adjustment: Recognizing Unrecorded, Earned Revenues (Accrued Revenues)......Page 145
A Note About Journal Entries......Page 146
Using the Adjusted Trial Balance to Prepare Financial Statements......Page 147
Cash Flows from Accrual-Based Information......Page 150
RELIABLE ANSWERING SERVICE: REVIEW PROBLEM......Page 152
STOP & REVIEW......Page 156
CHAPTER ASSIGNMENTS......Page 158
CHAPTER 4 Completing the Accounting Cycle......Page 173
DECISION POINT   A USER’S FOCUS WESTWOOD MOVERS......Page 174
Closing Entries......Page 175
Step 4: Closing the Withdrawals Account Balance......Page 178
The Accounts After Posting......Page 179
The Post-Closing Trial Balance......Page 181
Reversing Entries: An Optional First Step......Page 183
Preparing the Work Sheet......Page 185
Using the Work Sheet......Page 188
WESTWOOD MOVERS: REVIEW PROBLEM......Page 189
STOP & REVIEW......Page 191
CHAPTER ASSIGNMENTS......Page 193
CHAPTER 5 Financial Reporting and Analysis......Page 211
DECISION POINT   A USER’S FOCUS FUN-FOR-FEET COMPANY......Page 212
Qualitative Characteristics of Accounting Information......Page 213
Ethical Financial Reporting......Page 215
Conservatism......Page 216
Full Disclosure (Transparency)......Page 217
Materiality......Page 218
Cost-Benefit......Page 219
Assets......Page 221
Liabilities......Page 223
Owner’s Equity......Page 224
Dell’s Balance Sheets......Page 225
Multistep Income Statement......Page 227
Dell’s Income Statements......Page 230
Single-Step Income Statement......Page 231
Evaluation of Liquidity......Page 232
Evaluation of Profitability......Page 233
FUN-FOR-FEET COMPANY: REVIEW PROBLEM......Page 239
STOP & REVIEW......Page 241
CHAPTER ASSIGNMENTS......Page 243
The Components of an Annual Report......Page 257
Management’s Discussion and Analysis......Page 258
Financial Statements......Page 259
Notes to the Financial Statements......Page 264
Reports of Certified Public Accountants......Page 265
CHAPTER 6 The Operating Cycle and Merchandising Operations......Page 297
DECISION POINT   A USER’S FOCUS FONG COMPANY......Page 298
Operating Cycle......Page 299
Foreign Business Transactions......Page 301
Sales and Purchases Discounts......Page 303
Transportation Costs......Page 304
Terms of Debit and Credit Card Sales......Page 305
Purchases of Merchandise......Page 306
Sales of Merchandise......Page 308
Periodic Inventory System......Page 312
Purchases of Merchandise......Page 313
Sales of Merchandise......Page 315
FONG COMPANY: REVIEW PROBLEM......Page 317
STOP & REVIEW......Page 320
CHAPTER ASSIGNMENTS......Page 321
Sales Journal......Page 333
Purchases Journal......Page 337
Cash Receipts Journal......Page 339
Cash Payments Journal......Page 342
CHAPTER 7 Internal Control......Page 349
DECISION POINT   A USER’S FOCUS FISHER’S GRILL......Page 350
The Need for Internal Controls......Page 351
Management’s Responsibility for Internal Control......Page 352
Components of Internal Control......Page 353
Control Activities......Page 354
Limitations of Internal Control......Page 355
Internal Control and Management Goals......Page 356
Control of Cash Receipts......Page 357
Control of Purchases and Cash Disbursements......Page 358
Establishing the Petty Cash Fund......Page 363
Reimbursing the Petty Cash Fund......Page 364
FISHER’S GRILL: REVIEW PROBLEM......Page 366
STOP & REVIEW......Page 368
CHAPTER ASSIGNMENTS......Page 369
CHAPTER 8 Inventories......Page 381
DECISION POINT   A USER’S FOCUS SNUGS COMPANY......Page 382
Inventory Decisions......Page 383
Evaluating the Level of Inventory......Page 384
Effects of Inventory Misstatements on Income Measurement......Page 386
Specific Identification Method......Page 392
Goods Flows and Cost Flows......Page 389
Lower-of-Cost-or-Market (LCM) Rule......Page 390
Disclosure of Inventory Methods......Page 391
Average-Cost Method......Page 393
Effects on Income Taxes......Page 396
Last-In, First-Out (LIFO) Method......Page 394
Summary of Inventory Costing Methods......Page 395
Inventory Cost Under the Perpetual Inventory System......Page 398
Retail Method......Page 401
Gross Profit Method......Page 402
SNUGS COMPANY: REVIEW PROBLEM......Page 404
STOP & REVIEW......Page 407
Common Stock......Page 409
CHAPTER 9 Cash and Receivables......Page 421
DECISION POINT   A USER’S FOCUS PENTE COMPUTER COMPANY......Page 422
Cash Management......Page 423
Accounts Receivable and Credit Policies......Page 424
Evaluating the Level of Accounts Receivable......Page 425
Financing Receivables......Page 427
Ethics and Estimates in Accounting for Receivables......Page 429
Fair Value of Cash and Cash Equivalents......Page 430
Cash Control Methods......Page 431
Bank Reconciliations......Page 432
Uncollectible Accounts......Page 434
Disclosure of Uncollectible Accounts......Page 435
Estimating Uncollectible Accounts Expense......Page 436
Writing Off Uncollectible Accounts......Page 440
Notes Receivable......Page 442
Maturity Date......Page 443
Interest and Interest Rate......Page 444
Dishonored Note......Page 445
PENTE COMPUTER COMPANY: REVIEW PROBLEM......Page 446
STOP & REVIEW......Page 448
CHAPTER ASSIGNMENTS......Page 450
CHAPTER 10 Current Liabilities and Fair Value Accounting......Page 461
DECISION POINT   A USER’S FOCUS MEGGIE’S FITNESS CENTER......Page 462
Evaluating Accounts Payable......Page 463
Reporting Liabilities......Page 465
Definitely Determinable Liabilities......Page 467
Estimated Liabilities......Page 474
Contingent Liabilities and Commitments......Page 478
Interest and the Time Value of Money......Page 479
Calculating Present Value......Page 480
Valuing an Asset......Page 484
Deferred Payment......Page 485
Other Applications......Page 486
MEGGIE’S FITNESS CENTER: REVIEW PROBLEM......Page 487
STOP & REVIEW......Page 489
CHAPTER ASSIGNMENTS......Page 491
CHAPTER 11 Long-Term Assets......Page 503
DECISION POINT   A USER’S FOCUS CAMPUS CLEANERS......Page 504
Management Issues Related to Long-Term Assets......Page 505
Acquiring Long-Term Assets......Page 507
Financing Long-Term Assets......Page 508
Applying the Matching Rule......Page 509
Acquisition Cost of Property, Plant, and Equipment......Page 510
Specific Applications......Page 511
Depreciation......Page 514
Methods of Computing Depreciation......Page 515
Special Issues in Depreciation......Page 519
Disposal of Depreciable Assets......Page 521
Plant Assets Sold for Cash......Page 522
Exchanges of Plant Assets......Page 524
Depletion......Page 525
Development and Exploration Costs in the Oil and Gas Industry......Page 526
Intangible Assets......Page 528
Goodwill......Page 531
CAMPUS CLEANERS: REVIEW PROBLEM......Page 533
STOP & REVIEW......Page 536
CHAPTER ASSIGNMENTS......Page 538
CHAPTER 12 Contributed Capital......Page 549
DECISION POINT   A USER’S FOCUS GAMMON, INC.......Page 550
The Corporate Form of Business......Page 551
Advantages and Disadvantages of Incorporation......Page 552
Equity Financing......Page 553
Dividend Policies......Page 555
Using Return on Equity to Measure Performance 526......Page 557
Cash Flow Information......Page 558
Components of Stockholders’ Equity......Page 559
Preference as to Dividends......Page 562
Convertible Preferred Stock......Page 563
Callable Preferred Stock......Page 564
Issuance of Common Stock......Page 565
Par Value Stock......Page 566
No-Par Stock......Page 567
Issuance of Stock for Noncash Assets......Page 568
Purchase of Treasury Stock......Page 570
Sale of Treasury Stock......Page 571
Retirement of Treasury Stock......Page 573
  GAMMON, INC.: REVIEW PROBLEM......Page 575
STOP & REVIEW......Page 578
CHAPTER ASSIGNMENTS......Page 580
CHAPTER 13 Long-Term Liabilities......Page 593
DECISION POINT   A USER’S FOCUS WILSON MANUFACTURING COMPANY......Page 594
Deciding to Issue Long-Term Debt......Page 595
Evaluating Long-Term Debt......Page 596
Types of Long-Term Debt......Page 597
Cash Flow Information......Page 603
Bond Issue: Prices and Interest Rates......Page 604
Characteristics of Bonds......Page 605
Bonds Issued at Face Value......Page 606
Bonds Issued at a Discount......Page 607
Bonds Issued at a Premium......Page 608
Bond Issue Costs......Page 609
Case 1: Market Rate Above Face Rate......Page 610
Case 2: Market Rate Below Face Rate......Page 611
Amortizing a Bond Discount......Page 612
Amortizing a Bond Premium......Page 617
Calling Bonds......Page 621
Converting Bonds......Page 622
Sale of Bonds Between Interest Dates......Page 623
Year-End Accrual of Bond Interest Expense......Page 624
WILSON MANUFACTURING COMPANY: REVIEW PROBLEM......Page 627
STOP & REVIEW......Page 630
CHAPTER ASSIGNMENTS......Page 633
CHAPTER 14 The Corporate Income Statement and the Statement of Stockholders’ Equity......Page 645
DECISION POINT   A USER’S FOCUS KOWALSKI, INC.......Page 646
Performance Measurement: Quality of Earnings Issues......Page 647
The Effect of Accounting Estimates and Methods......Page 648
Write-Downs and Restructurings......Page 650
Nonoperating Items......Page 651
Income Taxes......Page 652
Deferred Income Taxes......Page 653
Net of Taxes......Page 654
Earnings per Share......Page 656
Diluted Earnings per Share......Page 657
Comprehensive Income......Page 658
Retained Earnings......Page 660
Stock Dividends......Page 661
Stock Splits......Page 664
Book Value......Page 666
KOWALSKI, INC.: REVIEW PROBLEM......Page 668
STOP & REVIEW......Page 671
CHAPTER ASSIGNMENTS......Page 673
CHAPTER 15 The Statement of Cash Flows......Page 687
DECISION POINT   A USER’S FOCUS LOPATA CORPORATION......Page 688
Classification of Cash Flows......Page 689
Format of the Statement of Cash Flows......Page 691
Ethical Considerations and the Statement of Cash Flows......Page 693
Cash-Generating Efficiency......Page 694
Free Cash Flow......Page 696
Operating Activities......Page 699
Depreciation......Page 701
Changes in Current Assets......Page 702
Changes in Current Liabilities......Page 703
Schedule of Cash Flows from Operating Activities......Page 704
Investing Activities......Page 705
Plant Assets......Page 706
Bonds Payable......Page 709
Retained Earnings......Page 710
Treasury Stock......Page 712
LOPATA CORPORATION: REVIEW PROBLEM......Page 713
STOP & REVIEW......Page 717
CHAPTER ASSIGNMENTS......Page 719
CHAPTER 16 Financial Performance Measurement......Page 737
DECISION POINT   A USER’S FOCUS WASHINGTON INVESTMENTS......Page 738
Financial Performance Measurement: Creditors’ and Investors’ Objectives......Page 739
Standards of Comparison......Page 740
Sources of Information......Page 742
Executive Compensation......Page 743
Horizontal Analysis......Page 746
Vertical Analysis......Page 749
Ratio Analysis......Page 752
Comprehensive Illustration of Ratio Analysis......Page 753
Evaluating Profitability......Page 754
Evaluating Long-Term Solvency......Page 757
Evaluating the Adequacy of Cash Flows......Page 758
Evaluating Market Strength......Page 760
WASHINGTON INVESTMENTS: REVIEW PROBLEM......Page 762
STOP & REVIEW......Page 766
CHAPTER ASSIGNMENTS......Page 768
CHAPTER 17 Partnerships......Page 785
DECISION POINT   A USER’S FOCUS HOLDER AND WILLIAMS PARTNERSHIP......Page 786
Characteristics of Partnerships......Page 787
Limited Partnerships and Joint Ventures......Page 788
Accounting for Partners’ Equity......Page 790
Stated Ratios......Page 792
Capital Balance Ratios......Page 793
Salaries, Interest, and Stated Ratios......Page 794
Admission of a New Partner......Page 798
Withdrawal of a Partner......Page 801
Liquidation of a Partnership......Page 803
Gain on Sale of Assets......Page 804
Loss on Sale of Assets......Page 806
HOLDER AND WILLIAMS PARTNERSHIP: REVIEW PROBLEM......Page 809
STOP & REVIEW......Page 812
CHAPTER ASSIGNMENTS......Page 814
Management Issues Related to Investments......Page 825
Trading Securities......Page 827
Long-Term Investments in Equity Securities......Page 830
Investments in Debt Securities......Page 834
Long-Term Investments in Bonds......Page 835
STOP & REVIEW......Page 836
APPENDIX B: Present Value Tables......Page 839
Endnotes......Page 843
Company Index......Page 847
Subject Index......Page 848