CONTENTS IN BRIEF

PART I FUNDAMENTALS 1

1 An Introduction to the Role of Accounting in the Business World 2 2 Concepts and Elements Underlying Accounting 20 3 The Mechanics of Double-Entry Accounting 44 PART II ACCOUNTING FOR 89

4 , Short-Term Investments, and Accounts Receivable 90 5 Inventory 116 6 Long-Term Assets: Property, Plant and Equipment, and Intangibles 144 PART III ACCOUNTING FOR LIABILITIES AND OWNERSHIP INTERESTS 171

7 Liabilities 172 8 Stockholders’ 206 PART IV ANALYSIS OF ACCOUNTING DATA 235

9 The Corporate and Analysis 236 10 Statement of CashCOPYRIGHTED Flows 272 MATERIAL PART V MANAGERIAL ACCOUNTING 299

11 Fundamental Managerial Accounting Concepts 300 12 Cost-Volume-Profit Analysis 326 13 The Master and Standard Costing 348 14 Activity-Based Management and Performance Measurement 376 CONTENTS

Preface xvi About the Author xx

PART I ACCOUNTING FUNDAMENTALS 1

1 An Introduction to the Role of Accounting in the Business World 2

INTRODUCTION 3 MAJOR TYPES OF BUSINESS ENTITIES 3 Common Legal Forms of Business Organizations 4 Internal Functions of Business Organizations 5 THE NATURE AND ROLE OF ACCOUNTING IN BUSINESS 6 Internal Decision Makers 6 External Decision Makers 7 FINANCIAL STATEMENT DEFINITIONS 7 8 Income Statement 8 Statement of Cash Flows 9 Statement of Stockholders’ Equity 10 Financial Statement Footnotes 11 AN OVERVIEW OF THE ACCOUNTING PROFESSION 11 Private Accounting 11 Public Accounting 12 Certifications 12 Regulation of the Accounting Profession 14 Challenges Facing the Accounting Profession 14 Summary 15 Key Terms 16 Questions 16 Exercises 17 Problems 18 v Cases 19 vi CORE CONCEPTS OF ACCOUNTING

2 Concepts and Elements Underlying Accounting 20

INTRODUCTION 21 COMPOSITION OF FINANCIAL STATEMENTS 21 Balance Sheet 21 Income Statement 27 OBJECTIVES OF FINANCIAL REPORTING 29 KEY ATTRIBUTES OF ACCOUNTING INFORMATION 30 Understandability 30 Relevance 31 Reliability 31 FUNDAMENTAL ACCOUNTING CONCEPTS 32 Concept 33 Principle 33 Unit of Measurement Concept 34 Going Concern Assumption 34 Entity Concept 34 Recognition Rules 35 Recognition Rules 35 Full Disclosure Principle 36 AN INTRODUCTION TO THE ACCOUNTING SYSTEM 36 Accounts 37 The and General 37 Summary 38 Key Terms 38 Questions 39 Exercises 39 Problems 41 Cases 43

3 The Mechanics of Double-Entry Accounting 44

INTRODUCTION 45 CAPTURING ACCOUNTING DATA 45 RECORDING TRANSACTIONS: DOUBLE-ENTRY 46 47 Using Debits and Credits 49 Contra-Accounts 50 THE ACCOUNTING CYCLE 50 Step 1: Collect, Examine, and Process Transactions 51 CONTENTS vii

Step 2: Adjust Account Balances as Necessary 58 Step 3: Prepare Financial Statements 67 Step 4: Close Temporary Accounts 70 Summary 76 Key Terms 78 Questions 78 Exercises 78 Problems 82 Cases 85 Supplemental Problems 86

PART II ACCOUNTING FOR ASSETS 89

4 Cash, Short-Term Investments, and Accounts Receivable 90

INTRODUCTION 91 CASH AND CASH EQUIVALENTS 91 Petty Cash 92 Bank Reconciliations 93 SHORT-TERM INVESTMENTS 97 ACCOUNTS RECEIVABLE 98 Accounting for Accounts Receivable 98 Credit Card Receivables 103 Notes Receivable 103 ACCOUNTING INFORMATION FOR DECISION MAKING 105 Quick Ratio 106 Age of Accounts Receivable 106 Summary 107 Key Terms 108 Questions 108 Exercises 109 Problems 110 Cases 113 Supplemental Problems 114

5 Inventory 116

INTRODUCTION 117 PERPETUAL AND PERIODIC INVENTORY SYSTEMS 117 viii CORE CONCEPTS OF ACCOUNTING

ACCOUNTING FOR COMMON INVENTORY TRANSACTIONS 118 Purchasing Inventory from a Supplier 119 PayingforFreight-InonPurchases 119 Returning Inventory to a Supplier 120 Selling Inventory to a Customer 120 Accepting Returns of Inventory from a Customer 121 Paying on Account for Purchases of Inventory 121 INVENTORY COSTING METHODS 122 Specific Identification Method 124 FIFO Method 125 LIFO Method 126 Moving-Average Method 127 Comparison of Income Statements Effects of Inventory Costing Methods 128 Balance Sheet Valuation versus Income Determination 129 FIFO versus LIFO: Tax Consequences 130 VALUING INVENTORY AT OTHER THAN COST 130 Retail Inventory 130 Lower-of-Cost-or-Market 131 INVENTORY ERRORS 132 ACCOUNTING INFORMATION FOR DECISION MAKING 134 Summary 135 Key Terms 136 Questions 136 Exercises 136 Problems 139 Cases 141 Supplemental Problems 142

6 Long-Term Assets: Property, Plant and Equipment, and Intangibles 144

INTRODUCTION 145 PROPERTY, PLANT AND EQUIPMENT 145 Acquisition of PP&E 145 of PP&E 146 Disposal of PP&E 150 NATURAL RESOURCES 152 Intangible Assets 153 CONTENTS ix

Goodwill 156 Disposal of Intangibles 156 ACCOUNTING INFORMATION FOR DECISION MAKING 157 Valuation 157 Capitalization versus Expensing 157 Disclosures 158 Ratio Analysis 159 Summary 160 Key Terms 161 Questions 161 Exercises 162 Problems 164 Cases 167 Supplemental Problems 168

PART III ACCOUNTING FOR LIABILITIES AND OWNERSHIP INTERESTS 171

7 Liabilities 172

INTRODUCTION 173 CURRENT LIABILITIES 173 Accounts Payable 173 Notes Payable 173 Installment Notes Payable 175 Accrued Liabilities 176 Deferred Liabilities 178 Contingent Liabilities 179 LONG-TERM LIABILITIES 180 Bonds Payable 180 Long-Term Liabilities Other Than Bonds 183 ACCOUNTING INFORMATION FOR DECISION MAKING 185 Completeness 186 Valuation Methods 186 Unusual Circumstances 186 Analyzing Liabilities 187 Summary 188 x CORE CONCEPTS OF ACCOUNTING

APPENDIX: ACCOUNTING FOR BONDS 189 Accounting for Bonds Issued at a Discount 190 Accounting for Bonds Issued at a Premium 192 Key Terms 194 Questions 194 Exercises 194 Problems 198 Cases 201 Supplemental Problems 204

8 Stockholders’ Equity 206

INTRODUCTION 207 THE CORPORATION 207 Key Advantages of the Corporation 208 Key Disadvantages of the Corporation 209 CORPORATE STOCK 209 Right and Privileges of Common Stockholders 210 Rights and Privileges of Preferred Stockholders 211 Par Value and No-Par Value Stock 212 STOCK ISSUANCES 212 TREASURY STOCK 214 DIVIDENDS 214 Cash Dividends 217 Stock Dividends 217 STOCK SPLITS 219 RETAINED EARNINGS 220 ACCOUNTING INFORMATION FOR DECISION MAKING 221 Dividend Payouts 221 Ratios 222 Summary 223 Key Terms 224 Questions 224 Exercises 224 Problems 228 Cases 230 Supplemental Problems 231 CONTENTS xi

PART IV ANALYSIS OF ACCOUNTING DATA 235

9 The Corporate Income Statement and Financial Statement Analysis 236

INTRODUCTION 237 INCOME STATEMENT 237 Earnings from Investments 237 Corporate Income Taxes 240 Nonrecurring Items 243 Earnings per Share 245 MAKING INFORMED ECONOMIC DECISIONS 246 Objectives of Financial Statement Analysis 246 Information Sources for Financial Statement Analysis 246 ANALYTICAL TECHNIQUES 247 Trend Analysis 247 Common-Sized Financial Statements 249 Ratio Analysis 250 ASSESSING EARNINGS QUALITY 254 Summary 259 Key Terms 260 Questions 260 Exercises 260 Problems 263 Cases 267 Supplemental Problems 269

10 Statement of Cash Flows 272

INTRODUCTION 273 THREE PRIMARY TYPES OF BUSINESS ACTIVITIES AND CASH FLOWS 273 DIRECT VERSUS INDIRECT METHOD OF PREPARING A STATEMENT OF CASH FLOWS 275 PREPARING A STATEMENT OF CASH FLOWS: INDIRECT METHOD 277 Analyzing Transactions for a SCF—Operating Activities 278 xii CORE CONCEPTS OF ACCOUNTING

Analyzing Transactions for a SCF—Investing and Financing Activities 281 Completing the Analysis 282 Noncash Investing and Financing Activities 285 ACCOUNTING INFORMATION FOR DECISION MAKING 285 Cash Flow Ratios 286 Cash Flow per Share 286 Free Cash Flow 287 Summary 288 Key Terms 288 Questions 289 Exercises 289 Problems 292 Cases 295 Supplemental Problems 296

PART V MANAGERIAL ACCOUNTING 299

11 Fundamental Managerial Accounting Concepts 300

INTRODUCTION 301 COMPARISON OF FINANCIAL AND MANAGERIAL ACCOUNTING 301 TYPES OF COSTS 301 Product and Period Costs 302 Direct and Indirect Costs 303 Controllable and Noncontrollable Costs 303 Variable and Fixed Costs 304 COMPONENTS OF PRODUCT COST FOR MANUFACTURING COMPANIES 305 Direct Material Cost 306 Direct Labor Cost 306 Overhead Cost 307 INVENTORY COSTING SYSTEMS 307 Job Order Costing 307 Processing Costing and Equivalent Units of Production 308 VALUING INVENTORY 308 Inventory Valuation Methods 308 Predetermined Overhead Rate 309 FLOW OF PRODUCT COSTS 310 CONTENTS xiii

COST OF GOODS MANUFACTURED AND SOLD 311 COSTS IN SERVICE COMPANIES 314 Summary 316 Key Terms 317 Questions 317 Exercises 317 Problems 321 Cases 322 Supplemental Problems 324

12 Cost-Volume-Profit Analysis 326

INTRODUCTION 327 ASSUMPTIONS OF BREAK-EVEN AND CVP ANALYSIS 327 BREAK-EVEN POINT 328 CVP ANALYSIS 329 Before-Tax Profit 330 After-Tax Profit 330 Other Considerations 331 USING INCREMENTAL ANALYSIS 332 Increase in Fixed Cost 333 Decrease in Selling Price 333 Increase in Sales Volume and Costs (1) 333 Increase in Sales Volume and Costs (2) 334 CVP ANALYSIS IN A MULTIPRODUCT ENVIRONMENT 335 GRAPHIC APPROACHES TO BEP AND CVP PROBLEMS 336 Break-Even Graph 336 Profit-Volume Graph 337 OPERATING ABOVE BREAK-EVEN 338 Margin of Safety 338 Degree of Operating Leverage 339 Summary 340 Key Terms 341 Questions 341 Exercises 341 Problems 343 Cases 345 Supplemental Problems 346 xiv CORE CONCEPTS OF ACCOUNTING

13 The Master Budget and Standard Costing 348

INTRODUCTION 349 THE BUDGETING PROCESS 349 THE MASTER BUDGET 349 Preparing a Master Budget 350 Sales Budget 351 Production Budget 352 Purchases Budget 352 Direct Labor Budget 353 Overhead Budget 353 Capital Budget 354 Cash Budget 355 Budgeted Financial Statements 357 THE ROLLING BUDGET 360 STANDARD COSTS 361 Material Variances 361 Labor Variances 363 Understanding Variances 364 Summary 364 Key Terms 365 Questions 365 Exercises 366 Problems 368 Cases 372 Supplemental Problems 373

14 Activity-Based Management and Performance Measurement 376

INTRODUCTION 377 ACTIVITY-BASED MANAGEMENT 377 Analyzing Activities 377 Value-Added and Non-Value-Added Activities 378 COST DRIVERS 379 LEVELS OF COST INCURRENCE 379 ACTIVITY-BASED COSTING 380 CONTENTS xv

MEASURING SHORT-RUN PERFORMANCE 384 Cost Center 384 Profit Center 385 Investment Center 386 MEASURING LONG-RUN PERFORMANCE 387 Balanced Scorecard 387 Benchmarking 389 DECIDING ON PERFORMANCE MEASURES 389 REWARDING PERFORMANCE 389 Summary 392 Key Terms 392 Questions 392 Exercises 393 Problems 394 Cases 397 Supplemental Problems 398

Appendix 400

Glossary 403

Index 413

Photo Credits 426