ntermediate Accounting

Transcription

1 ntermediate Accounting FIFTH EDITION J. DAVID SPICELAND University of Memphis JAMES F. SEPE Santa Clara University MARK W. NELSON Cornell University LAWRENCE A. TOMASSINI The Ohio State University McGraw-Hill Irwin Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

2 Contents The Role of Accounting as an Information System 1 Environment and Theoretical Structure of Financial Accounting, 2 Part A: Financial Accounting Environment, 4 The Economic Environment and Financial Reporting, 5 The Investment Credit Decision A Cash Flow Perspective, 6 Cash versus Accrual Accounting, 7 The Development of Financial Accounting and Reporting Standards, 9 Historical Perspective and Standards, 9 The Establishment of Accounting Standards A Political Process, 12 Our Global Marketplace, 13 The Role of the Auditor, 15 Financial Reporting Reform, 16 A Move Away from Rules-Based Standards? 18 Ethics in Accounting, 19 Ethics and Professionalism, 19 Analytical Model for Ethical Decisions, 19 Part B: The Conceptual Framework, 20 Objectives of Financial Reporting, 22 Qualitative Characteristics of Accounting Information, 22 Primary Qualitative Characteristics, 23 Secondary Qualitative Characteristics, 24 Practical Boundaries (Constraints) to Achieving Desired Qualitative Characteristics, 25 Cost Effectiveness, 25 Materiality, 25 Conservatism, 26 Elements of Financial Statements, 26 Recognition and Measurement Concepts, 27 Recognition, 27 Measurement, 28 Underlying Assumptions, 28 Accounting Principles, 29 Evolution of Accounting Principles, 32 The Asset/Liability Approach, 32 XXX The Move toward Fair Value, 33 Questions for Review of Key Topics, 37 Brief Exercises, 37 Exercises, 38 CPA/CMA Review Questions, 43 Broaden Your Perspective, 44 2 Review of the Accounting Process, 50 The Basic Model, 52 The Accounting Equation, 52 Account Relationships, 53 The Accounting Processing Cycle, 55 Concept Review Exercise: Journal Entries for External Transactions, 64 Adjusting Entries, 66 Prepayments, 67 Accruals, 70 Estimates, 72 Concept Review Exercise: Adjusting Entries, 74 Preparing the Financial Statements, 76 The Income Statement, 76 The Balance Sheet, 77 The Statement of Cash Flows, 78 The Statement of Shareholders' Equity, 79 The Closing Process, 79 Concept Review Exercise: Financial Statement Preparation and Closing, 81 Conversion from Cash Basis to Accrual Basis, 83 Appendix 2A: Use of a Worksheet, 87 Appendix 2B: Reversing Entries, 88 Appendix 2C: Subsidiary Ledgers and Special Journals, 89 Questions for Review of Key Topics, 91 Brief Exercises, 92 Exercises, 93 s CPA/CMA Review Questions, 99 Problems, 101 Broaden Your Perspective, 107

3 3 The Balance Sheet and Financial Disclosures, 110 Part A: The Balance Sheet, 113 Usefulness and Limitations, 113 Classifications, 114 Assets, 115 Liabilities, 118 Shareholders'Equity, 119 Concept Review Exercise: Balance Sheet Classification, 120 Part B: Financial Disclosures, 122 Disclosure Notes, 122 Summary of Significant Accounting Policies, 122 Subsequent Events, 123 Noteworthy Events and Transactions, 123 Management Discussion and Analysis, 125 Management's Responsibilities, 125 Auditors' Report, 126 Compensation of Directors and Top Executives, 128 Part C: Risk Analysis, 129 Using Financial Statement Information, 129 Liquidity Ratios, 130 Financing Ratios, 132 Appendix 3: Reporting Segment Information, 137 Questions for Review of Key Topics, 140 Brief Exercises, 140 Exercises, 142 : CPA/CMA Review Questions, 148 Problems, 150 Broaden Your Perspective, The Income Statement and Statement of Cash Flows, 164 Part A: The Income Statement and Comprehensive Income, 166 Income from Continuing Operations, 166 Revenues, Expenses, Gains, and Losses, 168 Income Tax Expense, 168 Operating versus Nonoperating Income, 168 Income Statement Formats, 169 Earnings Quality, 171 Manipulating Income and Income Smoothing, 171 Operating Income and Earnings Quality, 172 Nonoperating Income and Earnings Quality, 175 Separately Reported Items, 176 Intraperiod Income Tax Allocation, 177 Discontinued Operations, 179 Extraordinary Items, 183 Unusual or Infrequent Items, 185 Accounting Changes, 185 Change in Accounting Principle, 185 Change in Depreciation, Amortization, or Depletion Method, 186 Change in Accounting Estimate, 187 Change in Reporting Entity, 188 Correction of Accounting Errors, 189 Prior Period Adjustments, 189 Earnings per Share Disclosures, 189 Comprehensive Income, 190 Other Comprehensive Income, 191 Flexibility in Reporting, 191 Accumulated Other Comprehensive Income, 192 Concept Review Exercise: Income Statement Presentation, 194 Part B: The Statement of Cash Flows, 195 Usefulness of the Statement of Cash Flows, 195 Classifying Cash Flows, 195 Operating Activities, 195 Investing Activities, 199 Financing Activities, 199 Noncash Investing and Financing Activities, 199 Concept Review Exercise: Statement of Cash Flows, 200 Questions for Review of Key Topics, 204 Brief Exercises, 204 Exercises, 206 CPA/CMA Review Questions, 211 Problems, 213 Broaden Your Perspective, 218 CPA Simulation 4-1, Income Measurement and Profitability Analysis, 226 Part A: Revenue Recognition, 228 Completion of the Earnings Process within a Single Reporting Period, 231 When Collectibility Is Reasonably Certain, 231 Significant Uncertainty of Collectibility, 233 Concept Review Exercise: Installment Sales, 236 Completion of the Earnings Process over Multiple Reporting Periods, 238 Service Revenue Earned over Time, 238 Long-Term Contracts, 239 A Comparison of the Two Methods, 245 Concept Review Exercise: Long-Term Construction Contracts, 250 Industry-Specific Revenue Issues, 252 Software and Other Multiple-Deliverable Arrangements, 252 Franchise Sales, 253 Part B: Profitability Analysis, 255 Activity Ratios, 255 Profitability Ratios, 257 Profitability Analysis An Illustration, 259 Appendix 5: Interim Reporting, 262 x XXXI

4 Questions for Review of Key Topics, 264 Brief Exercises, 265 Exercises, 267 CPA/CMA Review Questions, 273 Problems, 275 Broaden Your Perspective, 281 CPA Simulation 5-1, Time Value of Money Concepts, 288 Part A: Basic Concepts, 290 Time Value of Money, 290 Simple versus Compound Interest, 290 Valuing a Single Cash Flow Amount, 291 Future Value of a Single Amount, 291 Present Value of a Single Amount, 292 Solving for Other Values When FV and PV Are Known, 294 Concept Review Exercise: Valuing a Single Cash Flow Amount, 295 Preview of Accounting Applications of Present Value Techniques Single Cash Amount, 296 Expected Cash Flow Approach, 298 Part B: Basic Annuities, 299 Future Value of an Annuity, 300 Future Value of an Ordinary Annuity, 300 Future Value of an Annuity Due, 301 Present Value of an Annuity, 302 Present Value of an Ordinary Annuity, 302 Present Value of an Annuity Due, 303 Present Value of a Deferred Annuity, 304 Financial Calculators and Excel, 306 Solving for Unknown Values in Present Value Situations, 306 Concept Review Exercise: Annuities, 309 Preview of Accounting Applications of Present Value Techniques Annuities, 310 Valuation of Long-Term Bonds, 310 Valuation of Long-Term Leases, 311 Valuation of Pension Obligations, 311 Summary of Time Value of Money Concepts, 312 Questions for Review of Key Topics, 314 Brief Exercises, 315 Exercises, 316 CPA/CMA Review Questions, 319 Problems, 321 Broaden Your Perspective, 324 Economic Resources SECTIO 7 Cash and Receivables, 326 Part A: Cash and Cash Equivalents, 328 Internal Control, 328 Internal Control Procedures Cash Receipts, 329 Internal Control Procedures Cash Disbursements, 329 Restricted Cash and Compensating Balances, 330 Decision Makers' Perspective, 331 Part B: Current Receivables, 331 Accounts Receivable, 332 Initial Valuation of Accounts Receivable, 332 Subsequent Valuation of Accounts Receivable, 334 Concept Review Exercise: Uncollectible Accounts Receivable, 340 Notes Receivable, 341 Interest-Bearing Notes, 342 Noninterest-Bearing Notes, 342 Subsequent Valuation of Notes Receivable, 344 Financing with Receivables, 345 Secured Borrowing, 346 Sale of Receivables, 347 Discounting a Note, 349 Concept Review Exercise: Financing with Receivables, 349 Decision Makers' Perspective, 351 Appendix 7: Cash Controls, 354 Questions for Review of Key Topics, 357 Brief Exercises, 358 Exercises, 359 CPA/CMA Review Questions, 364 Problems, 366 Broaden Your Perspective, 371 xxxii

5 8 Inventories: Measurement, 374 Part A: Recording and Measuring Inventory, 376 Types of Inventory, 376 Merchandising Inventory, 376 Manufacturing Inventories, 376 Perpetual Inventory System, 377 Periodic Inventory System, 378 A Comparison of the Perpetual and Periodic Inventory Systems, 379 What Is Included in Inventory? 380 Physical Quantities Included in Inventory, 380 Expenditures Included in Inventory, 381 Inventory Cost Flow Assumptions, 383 Specific Identification, 385 Average Cost, 385 First-ln, First-Out (FIFO), 386 Last-In, First-Out (LIFO), 387 Comparison of Cost Flow Methods, 389 Decision Makers' Perspective Factors Influencing Method Choice, 391 Concept Review Exercise: Inventory Cost Flow Methods, 394 Decision Makers' Perspective, 396 Inventory Management, 396 Earnings Quality, 399 Part B: Methods of Simplifying LIFO, 399 LIFO Inventory Pools, 399 / Dollar-Value LIFO, 400 Advantages of DVL, 401 Cost Indexes, 401 The DVL Inventory Estimation Technique, 401 Concept Review Exercise: Dollar-Value LIFO, 402 Questions for Review of Key Topics, 404 Brief Exercises, 405 Exercises, 406 CPA/CMA Review Questions, 411 Problems, 413 Broaden Your Perspective, Inventories: Additional Issues, 424 Part A: Reporting Lower of Cost or Market, 426 Determining Market Value, 427 Applying Lower of Cost or Market, 429 Adjusting Cost to Market, 430 Concept Review Exercise: Lower of Cost or Market, 431 Part B: Inventory Estimation Techniques, 433 The Gross Profit Method, 433 A Word of Caution, 433 The Retail Inventory Method, 435 Retail Terminology, 436 Cost Flow Methods, 437 Other Issues Pertaining to the Retail Method, 440 Concept Review Exercise: Retail Inventory Method, 441 Part C: Dollar-Value LIFO Retail, 443 Concept Review Exercise: Dollar-Value LIFO Retail Method, 445 Part D: Change in Inventory Method and Inventory Errors, 446 Change in Inventory Method, 446 Most Inventor/ Changes, 447 Change to the LIFO Method, 448 Inventory Errors, 449 When the Inventory Error Is Discovered the Following Year, 450 When the Inventory Error Is Discovered Subsequent to the Following Year, 451 Concept Review Exercise: Inventory Errors, 451 Earnings Quality, 452 Appendix 9: Purchase Commitments, 453 Questions for Review of Key Topics, 455 Brief Exercises, 456 Exercises, 458 CPA/CMA Review Questions, 464 Problems 465 Broaden Your Perspective, 471 CPA Simulation 9-1, 474 CPA Simulation 9-2, Operational Assets: Acquisition and Disposition, 476 Part A: Valuation at Acquisition, 478 Types of Operational Assets, 478 Costs to Be Capitalized, 480 Property, Plant, and Equipment, 480 Intangible Assets, 484 Lump-Sum Purchases, 488 Noncash Acquisitions, 489 Deferred Payments, 489 Issuance of Equity Securities, 491 Donated Assets, 492 Decision Makers' Perspective, 493 Part B: Dispositions and Exchanges, 493 Dispositions, 494 Exchanges, 494 Fair Value Not Determinable, 496 Exchange Lacks Commercial Substance, 496 Concept Review Exercise: Exchanges, 497 Part C: Self-Constructed Assets and Research and Development, 498 Self-Constructed Assets, 498 Overhead Allocation, 498 xxxiii

6 Interest Capitalization, 498 Research and Development (R & D), 503 Appendix 10: Oil and Gas Accounting, 511 Questions for Review of Key Topics, 512 Brief Exercises, 512 Exercises, 514 CPA/CMA Review Questions, 519 Problems, 522 Broaden Your Perspective, Operational Assets: Utilization and Impairment, 532 Part A: Depreciation, Depletion, and Amortization, 534 Cost Allocation An Overview, 534 Measuring Cost Allocation, 535 Service Life, 535 Allocation Base, 535 Allocation Method, 536 Depreciation of Operational Assets, 536 Time-Based Depreciation Methods, 536 Activity-Based Depreciation Methods, 538 Decision Makers' Perspective Selecting a Depreciation Method, 539 Concept Review Exercise: Depreciation Methods, 541 Group and Composite Depreciation Methods, 542 Depletion of Natural Resources, 543 Amortization of Intangible Assets, 545 Intangible Assets Subject to Amortization, 545 Intangible Assets Not Subject to Amortization, 546 Part B: Additional Issues, 547 Partial Periods, 547 Concept Review Exercise: Depletion and Amortization, 548 Changes in Estimates, 549 Change in Depreciation, Amortization, or Depletion Method, 550 Error Correction, 551 Impairment of Value, 553 Operational Assets to Be Held and Used, 553 Operational Assets to Be Sold, 558 Impairment Losses and Earnings Quality, 559 Part C: Subsequent Expenditures, 560 Expenditures Subsequent to Acquisition, 560 Repairs and Maintenance, 560 Additions, 561 Improvements, 561 Rearrangements, 561 Costs of Defending Intangible Rights, 562 Appendix 11 A: Comparison with MACRS (Tax Depreciation), 564 Appendix 11B: Retirement and Replacement Methods of Depreciation, 565 Questions for Review of Key Topics, 566 Brief Exercises, 566 Exercises, 568 CPA/CMA Review Questions, 573 Problems, 575 Broaden Your Perspective, 580 CPA Simulation 11-1, 584 Financial Instruments and Liabilities SECTION 12 Investments, 586 Part A: Investor Lacks Significant Influence, 589 Securities to Be Held to Maturity, 590 Trading Securities, 593 Securities Available-for-Sale, 596 Impairment of Investments, 602 Comparison of HTM, TS, and AFS Approaches, 603 Transfers between Reporting Categories, 604 Fair Value Options, 604 Concept Review Exercise: Various Investment Securities, 605 Financial Statement Presentation and Disclosure, 608 Part B: Investor Has Significant Influence, 609 How the Equity Method Relates to Consolidated Financial Statements, 610 What Is Significant Influence? 610 A Single Entity Concept, 611 Further Adjustments, 612 Reporting the Investment, 614 What If Conditions Change? 616 If an Equity Method Investment Is Sold, 617 xxxiv

7 Comparison of Fair Value and Equity Methods, 617 Fair Value Option, 618 Concept Review Exercise: The Equity Method, 619 Decision Makers' Perspective, 620 Financial Instruments and Investment Derivatives, 622 Appendix 12A: Other Investments (Special Purpose Funds, Investments in Life Insurance Policies), 624 Appendix 12B: Impairment of a Receivable Due to a Troubled Debt Restructuring, 625 Questions for Review of Key Topics, 626 Brief Exercises, 627 Exercises, 629 CPA/CMA Review Questions, 634 Problems, 637 Broaden Your Perspective, 642 CPA Simulation 12-1, Current Liabilities and Contingencies, 650 Part A: Current Liabilities, 652 Characteristics of Liabilities,. 652 What Is a Current Liability? 653 Open Accounts and Notes, 654, Accounts Payable and Trade Notes-Payable, 654 Short-Term Notes Payable, 655 Commercial Paper, 657 Accrued Liabilities, 657 Accrued Interest Payable, 657 Salaries, Commissions, and Bonuses, 658 Liabilities from Advance Collections, 660 Deposits and Advances from Customers, 660 Collections for Third Parties, 661 A Closer Look at the Current and Noncurrent Classification, 662 Current Maturities of Long-Term Debt, 662 Obligations Callable by the Creditor, 662 When Short-Term Obligations Are Expected to Be Refinanced, 662 Concept Review Exercise: Current Liabilities, 664 Part B: Contingencies, 665 Loss Contingencies, 665 Product Warranties and Guarantees, 667 Premiums, 670 Litigation Claims, 671 Subsequent Events, 672 Unasserted Claims and Assessments, 673 Gain Contingencies, 674 Concept Review Exercise: Contingencies, 674 Decision Makers' Perspective, 676 Appendix 13: Payroll-Related Liabilities, 678 Questions for Review of Key Topics, 680 Brief Exercises, 680 Exercises, 682 CPA/CMA Review Questions, 687 Problems, 689 Broaden Your Perspective, Bonds and Long- Term Notes, 702 The Nature of Long-Term Debt, 703 Part A: Bonds, 704 The Bond Indenture, 704 Recording Bonds at Issuance, 705 Determining the Selling Price, 706 Determining Interest Effective Interest Method, 708 Zero-Coupon Bonds, 710 Bonds Sold at a Premium, 710 When Financial Statements Are Prepared between'interest Dates, 711 The Straight-Line Method A Practical Expediency, 713 Concept Review Exercise: Issuing Bonds and Recording Interest, 714 Debt Issue Costs, 715 Option to Report Liabilities at Fair Value, 716 Determining Fair Value, 716 Reporting Changes in Fair Value, 717 Mix and Match, 718 Part B: Long-Term Notes, 719 Note Issued for Cash, 719 Note Exchanged for Assets or Services, 720 Installment Notes, 721 Financial Statement Disclosures, 723 Decision Makers' Perspective, 724 Concept Review Exercise: Note with an Unrealistic Interest Rate, 726 Part C: Debt Retired Early, Convertible into Stock, or Providing an Option to Buy Stock, 728 Early Extinguishment of Debt, 728 Convertible Bonds, 728 When the Conversion Option Is Exercised, 729 Induced Conversion, 730 Bonds with Detachable Warrants, 730 Concept Review Exercise: Issuance and Early Extinguishment of Debt 732 Appendix 14A: Bonds Issued Between Interest Dates, 734 Appendix 14B: Troubled Debt Restructuring, 735 Questions for Review of Key Topics, 738 Brief Exercises, 739 Exercises, 740 CPA/CMA Review Questions, 746 Problems, 747 Broaden Your Perspective, 753 CPA Simulation 14-1, 757 xxxv

8 15 Leases, 758 Part A: Accounting by the Lessor and Lessee, 760 Decision Makers' Perspective Advantages of Leasing, 760 Capital Leases and Installment Notes Compared, 761 Lease Classification, 762 Classification Criteria, 763 Additional Lessor Conditions, 764 Operating Leases, 765 Advance Payments, 765 Leasehold Improvements, 767 Nonoperating Leases Lessee and Lessor, 768 Depreciation, 770 Accrued Interest, 771 Concept Review Exercise: Direct Financing Lease, 772 Sales-Type Leases, 773 Part B: Residual Value and Bargain Purchase Options, 775 Residual Value, 775 Who Gets the Residual Value? 775 When the Residual Value Is Guaranteed by the Lessee, 776 When the Residual Value Is Not Guaranteed, 778 Bargain Purchase Options, 780 When a BPO Is Exercisable before the End of the Lease Term, 782 Part C: Other Lease Accounting Issues, 783 Executory Costs, 783 Discount Rate, 783 When the Lessee's Incremental Borrowing Rate Is Less Than the Lessor's Implicit Rate, 784 When the Lessor's Implicit Rate Is Unknown, 785 Lessor's Initial Direct Costs, 785 Contingent Rentals, 786 A Brief Summary, 786 Lease Disclosures, 788 Decision Makers' Perspective Financial Statement Impact, 788 Balance Sheet and Income Statement, 789 Statement of Cash Flow Impact, 791 Concept Review Exercise: Various Lease Accounting Issues, 791 Part D: Special Leasing Arrangements, 793 Sale-Leaseback Arrangements, 793 Capital Leases, 794 Operating Leases, 795 Losses on Sale-Leasebacks, 796 Real Estate Leases, 796 Leases of Land Only, 796 Leases of Land and Building, 796 Leases of Only Part of a Building, 797 Leveraged Leases, 797 Questions for Review of Key Topics, 798 Brief Exercises, 799 Exercises, 800 CPA/CMA Review Questions, 806 Problems, 808 Broaden Your Perspective, 815 CPA Simulation 15-1, Accounting for Income Taxes, 820 Part A: Deferred Tax Assets and Deferred Tax Liabilities, 822 Conceptual Underpinning, 822 Temporary Differences, 823 Deferred Tax Liabilities, 823 The FASB's Balance Sheet Approach, 825 Types of Temporary Differences, 826 Deferred Tax Assets, 830 Valuation Allowance, 833 Nontemporary Differences, 834 Concept Review Exercise: Temporary and Permanent Differences, 837 Part B: Other Tax Accounting Issues, 837 Tax Rate Considerations, 837 When Enacted Tax Rates Differ, 838 Changes in Tax Laws or Rates, 839 Multiple Temporary Differences, 840 Net Operating Losses, 841 Operating Loss Carryforward, 842 Operating Loss Carryback, 843 Financial Statement Presentation, 844 Balance Sheet Classification, 844 Disclosure Notes, 847 Coping with Uncertainty in Income Taxes, 848 Intraperiod Tax Allocation, 850 Conceptual Concerns, 851 Decision Makers' Perspective, 852 Concept Review Exercise: Multiple Differences and Operating Loss, 853 Questions for Review of Key Topics, 856 Brief Exercises, 857 Exercises, 859 CPA/CMA Review Questions, 866 Problems, 868 Broaden Your Perspective, 874 CPA Simulation 16-1, Pensions and Other Postretirement Benefits, 880 Part A: The Nature of Pension Plans, 882 Defined Contribution Pension Plans, 884 xxxvi

9 Defined Benefit Pension Plans, 885 Pension Expense An Overview, 886 Part B: The Pension Obligation and Plan Assets, 887 The Pension Obligation, 887 Vested Benefit Obligation, 887 Accumulated Benefit Obligation, 888 Projected Benefit Obligation, 888 Illustration Expanded to Consider the Entire Employee Pool, 893 Pension Plan Assets, 893 Reporting the Funded Status of the Pension Plan, 894 Part C: Determining Pension Expense, 895 The Relationship between Pension Expense and Changes in the PBO and Plan Assets, 895 Components of Pension Expense, 896 Income Smoothing, 898 Part D: Reporting Issues, 900 Recording Gains and Losses, 900 Recording the Pension Expense, 901 Recording the Funding of Plan Assets, 902 Comprehensive Income, 903 Income Tax Considerations, 904 Putting the Pieces Together, 905 Decision Makers' Perspective, 906 Settlement or Curtailment of Pension Plans, 906 Concept Review Exercise: Pension Plans, 907 Part E: Postretirement Benefits Other Than Pensions, 908 What Is a Postretirement Benefit Plan? 908 Postretirement Health Benefits and Pension Benefits Compared, 909 Determining the Net Cost of Benefits, 909 Postretirement Benefit Obligation, 910 Measuring the Obligation, 910 Attribution, 911 Accounting for Postretirement Benefit Plans Other Than Pensions, 912 A Comprehensive Illustration, 913 Decision Makers' Perspective, 914 Concept Review Exercise: Other Postretirement Benefits, 915 Appendix 17: Service Method of Allocating Prior Service Cost, 917 Questions for Review of Key Topics, 918 Brief Exercises, 919 Exercises, 920 CPA/CMA Review Questions, 928 Problems, 930 Broaden Your Perspective, 937 CPA Simulation 17-1, Shareholders' Equity, 944 Part A: The Nature of Shareholders' Equity, 946 Financial Reporting Overview, 946 Retained Earnings, 948 Accumulated Other Comprehensive Income, 948 Treasury Stock, 949 The Corporate Organization, 950 Limited Liability, 950 Ease of Raising Capital, 951 Disadvantages, 952 Types of Corporations, 952 Hybrid Organizations, 952 The Model Business Corporation Act, 953 Part B: Paid-in Capital, 953 Fundamental Share Rights, 953 Distinguishing Classes of Shares, 954 Typical Rights of Preferred Shares, 954 Is It Equity or Is It Debt? 955 The Concept of Par Value, 956 Accounting for the Issuance of Shares, 956 Shares Issued for Cash, 956 Shares Issued for Noncash Consideration, 957 More Than One Security Issued for a Single Price, 957 Share Issue Costs, 958 Concept Review Exercise: Expansion of Corporate Capital, 959 Share Buybacks, 960 Decision Makers' Perspective, 960 Shares Formally Retired or Viewed as Treasury Stock, 961 Accounting for Retired Shares, 961 Accounting for Treasury Stock, 963 Resale of Shares, 964 Concept Review Exercise: Treasury Stock, 964 Part C: Retained Earnings, 966 Characteristics of Retained Earnings, 966 Dividends, 966 Liquidating Dividend, 966 Retained Earnings Restrictions, 967 Cash Dividends, 967 Property Dividends, 968 Stock Dividends and Splits, 968 Stock Dividends, 968 Stock Splits, 970 Stock Splits Effected in the Form of Stock Dividends (Large Stock Dividends), 970 Decision Makers' Perspective, 972 Concept Review Exercise: Changes in Retained Earnings, 973 Appendix 18: Quasi Reorganizations, 977 Questions for Review of Key Topics, 978 Brief Exercises, 979 Exercises, 980 CPA/CMA Review Questions, 986 Problems, 987 Broaden Your Perspective, 993 CPA Simulation 18-1, 999 XXXVII

10 Additional Financial Reporting Issues SECTION iy s^apter Share-Based Compensation and Earnings Per Share, 1000 Part A: Share-Based Compensation, 1002 Stock Award Plans, 1002 Stock Option Plans, 1003 Expense The Great Debate, 1004 Recognizing the Fair Value of Options, 1005 When Options Are Exercised, 1007 When Unexercised Options Expire, 1007 Plans with Performance or Market Conditions, 1009 Employee Share Purchase Plans, 1010 Decision Makers'Perspective, 1011 Concept Review Exercise: Share-Based Compensation Plans, 1011 Part B: Earnings Per Share, 1012 Basic Earnings Per Share, 1013 Issuance of New Shares, 1013 Stock Dividends and Stock Splits, 1014 Reacquired Shares, 1015 Earnings Available to Common Shareholders, 1016 Diluted Earnings Per Share, 1017 Potential Common Shares, 1017 Options, Rights, Warrants, 1017 Convertible Securities, 1020 Antidilutive Securities, 1023 Options, Warrants, Rights, 1023 Convertible Securities, 1024 Order of Entry for Multiple Convertible Securities, 1025 Concept Review Exercise: Basic and Diluted EPS, 1025 Additional EPS Issues, 1026 Contingently Issuable Shares, 1026 Summary of the Effect of Potential Common Shares on Earnings Per Share, 1027 Actual Conversions, 1028 Financial Statement Presentation of Earnings Per Share Data, 1029 Decision Makers'Perspective, 1030 Concept Review Exercise: Additional EPS Issues, 1031 Appendix 19A: Option-Pricing Theory, 1034 Appendix 19B: Stock Appreciation Rights, 1036 Questions for Review of Key Topics, 1039 Brief Exercises, 1039 Exercises, 1041 CPA/CMA Review Questions, 1046 Problems, 1047 Broaden Your Perspective, 1052 CPA Simulation Accounting Changes and Error Corrections, 1060 Part A: Accounting Changes, 1062 Change in Accounting Principle, 1063 Decision Makers' Perspective Motivation for Accounting Choices, 1063 The Retrospective Approach: Most Changes in Accounting Principle, 1064 The Prospective Approach, 1068 Change in Accounting Estimate, 1070 Changing Depreciation, Amortization, and Depletion Methods, 1071 Change in Reporting Entity, 1072 Error Correction, 1073 Concept Review Exercise: Accounting Changes, 1074 Part B: Correction of Accounting Errors, 1075 Prior Period Adjustments, 1076 Error Correction Illustrated, 1077 Error Discovered in the Same Reporting Period That It Occurred, 1077 Error Affecting Previous Financial Statements, but Not Net Income, 1077 Error Affecting a Prior Year's Net Income, 1078 Concept Review Exercise: Correction of Errors, 1082 Questions for Review of Key Topics, 1084 Brief Exercises, 1084 Exercises, 1085 CPA/CMA Review Questions, 1091 Problems, 1093 Broaden Your Perspective, 1100 xxxviii

11 21 The Statement of Cash Flows Revisited, 1106 Part A: The Content and Value of the Statement of Cash Flows, 1108 Decision Makers' Perspective Usefulness of Cash Flow Information, 1108 Cash Inflows and Outflows, 1108 Role of the Statement of Cash Flows, 1109 Cash and Cash Equivalents, 1111 Primary Elements of the Statement of Cash Flows, 1111 Preparation of the Statement of Cash Flows, 1116 Part B: Preparing an SCF: The Direct Method of Reporting Cash Flows from Operating Activities, 1119 Using a Spreadsheet, 1119 Income Statement Accounts, 1121 Balance Sheet Accounts, 1129 Concept Review Exercise: Comprehensive Review, 1136 ""*&*>**' Part C: Preparing an SCF: The Indirect Method of Reporting Cash Flows from Operating Activities, 1139 Getting There through the Back Door, 1139 Components of Net Income that Do Not Increase or Decrease Cash, 1140 Components of Net Income that Do Increase or Decrease Cash, 1141 Comparison with the Direct Method, 1141 Reconciliation of Net Income to Cash Flows from Operating Activities, 1143 Decision Makers' Perspective Cash Flow Ratios, 1145 Appendix 21 A: Spreadsheet for the Indirect Method, 1147 Appendix 21B: The T-Account Method of Preparing the Statement of Cash Flows, 1151 Questions for Review of Key Topics, 1153 Brief Exercises, 1154 Exercises, 1155 CPA/CMA Review Questions, 1164 Problems, 1166 Broaden Your Perspective, 1178 CPA Simulation 21-1, 1184 Appendix A: Derivatives, 1185 Glossary, G-0 Photo Credits, C-1 Index, I-O Present and Future Value Tables, P-0 xxxix