Financial Accounting

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1 GLOBAL EDITION Financial Accounting INTERNATIONAL FINANCIAL REPORTING STANDARDS NINTH EDITION Walter T. Harrison Jr. Charles T. Horngren C. William Thomas Themin Suwardy

3 Financial Accounting: Global Edition Table of Contents Cover Contents I get it! Hallmark Features New to the Ninth Edition Students Will Get It Anytime, Anywhere with the Student Learning System! Student Resources Instructor Resources Acknowledgments Accounting Careers: Much More Than Counting Things 1 Conceptual Framework and Financial Statements SPOTLIGHT: Samsung Electronics BUSINESS DECISIONS ACCOUNTING IS THE LANGUAGE OF BUSINESS Two Perspectives of Accounting: Financial Accounting and Management Accounting Organizing a Business Accounting Standards THE CONCEPTUAL FRAMEWORK Why is Financial Reporting Important? Who are the Users of Accounting Information? What Makes Accounting Information Useful? What Constraints do We Face in Providing Useful Information? What are Our Assumptions in Financial Reporting? What Exactly are We Accounting for? THE ACCOUNTING EQUATIONS FINANCIAL STATEMENTS The Income Statement Shows a Companys Financial Performance The Statement of Changes in Equity Shows a Companys Transactions with its Owners The Balance Sheet Shows a Companys Financial Position THE STATEMENT OF CASH FLOWS SHOWS A COMPANYS CASH RECEIPTS AND PAYMENTS RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS ETHICS IN BUSINESS AND ACCOUNTING DECISIONS Demo Doc 2 Recording Business Transactions

4 SPOTLIGHT: De Beers TRANSACTIONS KEEPING TRACK OF FINANCIAL STATEMENT ITEMS Assets Liabilities Equity ACCOUNTING FOR BUSINESS TRANSACTIONS Transactions and Financial Statements DOUBLE-ENTRY ACCOUNTING The T-Account Increases and Decreases in the Accounts: The Rules of Debit and Credit Additional Shareholders Equity Accounts: Income and Expenses RECORDING TRANSACTIONS Copying Information (Posting) from the Journal to the Ledger The Flow of Accounting Data Accounts After Posting to the Ledger THE TRIAL BALANCE Analyzing Accounts Correcting Accounting Errors Chart of Accounts The Normal Balance of an Account Account Formats Analyzing Transactions Using Only T-Accounts Demo Doc 3 Accrual Accounting SPOTLIGHT: Richemont ACCRUAL ACCOUNTING VERSUS CASH BASIS ACCOUNTING Accrual Accounting and Cash Flows The Time-Period Concept The Revenue Recognition Principle The Matching Concept ETHICS IN BUSINESS AND ACCOUNTING DECISIONS UPDATING THE ACCOUNTS: THE ADJUSTING PROCESS Which Accounts Need to Be Updated (Adjusted)? Categories of Adjusting Entries Prepaid Expenses Depreciation of Property, Plant and Equipment

5 Accrued Expenses Accrued Revenues Unearned Revenues Summary of the Adjusting Process The Adjusted Trial Balance PREPARING THE FINANCIAL STATEMENTS Which Accounts Need to be Closed? Demo Doc 4 Presentation of Financial Statements SPOTLIGHT: BASF ANNUAL REPORTS AS A COMMUNICATION TOOL Substance Over Style Obtaining Annual Reports Typical Structure of an Annual Report Corporate Information Analysis and Commentaries Other Statements and Disclosures Financial Statements GENERAL PRESENTATION REQUIREMENTS Complete Set of Financial Statements Fair Presentation and Compliance with IFRS Going Concern Accrual Basis of Accounting Materiality and Aggregation Offsetting Frequency of Reporting Comparative Information Consistency of Presentation STATEMENT OF FINANCIAL POSITION STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF CHANGES IN EQUITY NOTES TO THE ACCOUNTS 5 Internal Control, Cash, and Receivables SPOTLIGHT: Nestlé FRAUD AND ITS IMPACT Ethics in Business and Accounting Decisions INTERNAL CONTROL

6 The Sarbanes-Oxley Act (SOX) INTERNAL CONTROL PROCEDURES Smart Hiring Practices and Separation of Duties Comparisons and Compliance Monitoring Adequate Records Limited Access Proper Approvals Information Technology Internal Controls for e-commerce The Limitations of Internal ControlCosts and Benefits INTERNAL CONTROL OVER CASH RECEIPTS Cash Receipts Over the Counter Cash Receipts by Mail INTERNAL CONTROL OVER CASH PAYMENTS Controls Over Payments by Cheque USING A BANK ACCOUNT AS A CONTROL PROCEDURE Preparing the Bank Reconciliation Online Banking USING A BUDGET TO MANAGE CASH Reporting Cash on the Balance Sheet ACCOUNTS AND NOTES RECEIVABLE Types of Receivables Internal Controls Over Cash Collections on Account How Do We Manage the Risk of Not Collecting? ACCOUNTING FOR UNCOLLECTIBLE RECEIVABLES Allowance Method Direct Write-Off Method Computing Cash Collections from Customers NOTES RECEIVABLE Accounting for Notes Receivable HOW TO SPEED UP CASH FLOW Credit Card or Bankcard Sales Selling (Factoring) Receivables USING TWO KEY RATIOS TO MAKE DECISIONS Current Ratio Receivable Turnover and Collection Period 6 Inventory and Merchandizing Operations SPOTLIGHT: Inditex

7 INVENTORY AND RETAILING OPERATIONS Sale Price vs. Cost of Inventory INVENTORY-RELATED TRANSACTIONS UNDER THE PERPETUAL SYSTEM Inventory Systems Recording Transactions in the Perpetual System INVENTORY COSTING METHODS Effects of FIFO, LIFO and Average Cost on Cost of Goods Sold, Gross Profit, and Ending Inventory Comparison of the Inventory Methods OTHER INVENTORY ISSUES Comparability as an Enhancing Qualitative Characteristic Why is LIFO not allowed under IFRS? Net Realizable Value Analyzing Financial Statements Using the Cost-of-Goods-Sold Model Estimating Inventory by the Gross Profit Method Detailed Income Statement Effects of Inventory Errors COOKING THE BOOKS with Inventory: Crazy Eddie APPENDIX 6A Accounting for Inventory in the Periodic System 7 PPE and Intangibles SPOTLIGHT: Dairy Farm TYPES OF NON-CURRENT ASSETS Property, Plant and Equipment (PPE) Intangible Assets Other Non-Current Assets INITIAL RECOGNITION AND MEASUREMENT OF PPE Recognition of PPE and Intangible Assets Measurement of PPE on Initial Recognition Land and Land Improvements Buildings, Machinery, and Equipment Lump-Sum (or Basket) Purchases of Assets Subsequent Costs COOKING THE BOOKS by Improper Capitalization: WorldCom ALLOCATING DEPRECIATION ON PPE How to Allocate Depreciation Depreciation Methods Comparing Depreciation Methods Choosing a Depreciation Method

8 OTHER ISSUES IN ACCOUNTING FOR PPE Depreciation for Tax Purposes Depreciation for Partial Years Changes in Estimates of Useful Lives or Residual Values COOKING THE BOOKS Through Depreciation: Waste Management Impairment of PPE Measurement Subsequent to Initial Recognition Using Fully Depreciated Assets ACCOUNTING FOR DISPOSAL OF PPE T-Accounts for Analyzing PPE Transactions ACCOUNTING FOR NATURAL RESOURCES ACCOUNTING FOR INTANGIBLE ASSETS Accounting for Specific Intangibles Accounting for the Impairment of an Intangible Asset Accounting for Research and Development Costs REPORTING PPE TRANSACTIONS ON THE STATEMENT OF CASH FLOWS Analyzing Financial Statements 8 Investments and International Operations SPOTLIGHT: Vivendi INVESTMENTS: AN OVERVIEW Reporting Investments on the Balance Sheet FINANCIAL ASSET INVESTMENTS Trading Securities Loans and Receivables Held-to-maturity Available-for-Sale Investments Summary of Financial Assets Recognition and Measurements EQUITY-METHOD INVESTMENTS CONSOLIDATED SUBSIDIARIES Consolidation Accounting The Consolidated Balance Sheet and the Related Worksheet Goodwill and Non-Controlling Interest Income of a Consolidated Entity COOKING THE BOOKS with Investments and Debt: Enron Corporation S ACCOUNTING FOR INTERNATIONAL OPERATIONS Foreign Currencies and Exchange Rates Accounting for Foreign Currency Transactions

9 Reporting Gains and Losses on the Income Statement Should We Hedge Our Foreign-Currency-Transaction Risk? Consolidation of Foreign Subsidiaries Analyzing Financial Statements IMPACT OF INVESTING ACTIVITIES ON THE STATEMENT OF CASH FLOWS 9 Liabilities SPOTLIGHT: GlaxoSmithKline (GSK) LIABILITIES Contingent Liabilities Are All Liabilities Reported in the Balance Sheet? COOKING THE BOOKS with Liabilities: Crazy Eddie, Inc. SUMMARY OF CURRENT LIABILITIES LONG-TERM LIABILITIES: BONDS Bonds: An Introduction Issuing Bonds Payable at Par (Face Value) Issuing Bonds Payable at a Discount What Is the Interest Expense on These Bonds Payable? Interest Expense on Bonds Issued at a Discount Partial-Period Interest Amounts Issuing Bonds Payable at a Premium The Straight-line Amortization Method: A Quick Way to Measure Interest Expense Should We Retire Bonds Payable Before Their Maturity? Convertible Bonds and Notes LEASES Types of Leases Do Lessees Prefer Operating Leases or Capital Leases? Financing Operations with Bonds or Shares? Debt Ratio The Times-Interest-Earned Ratio REPORTING LIABILITIES Reporting on the Balance Sheet Reporting the Fair Market Value of Long-Term Debt Reporting Financing Activities on the Statement of Cash Flows 10 Shareholders Equity SPOTLIGHT: LOccitane WHATS THE BEST WAY TO ORGANIZE A BUSINESS? ORGANIZING A CORPORATION

10 Shareholders Rights Shareholders Equity Classes of Shares ISSUING SHARES Ordinary Shares Share Issuance for Other than Cash can Create an Ethical Challenge Preference Shares AUTHORIZED, ISSUED, AND OUTSTANDING SHARES TREASURY SHARES How is Treasury Share Recorded? Resale of Treasury Shares Issuing Treasury Shares as Compensation Retiring Treasury Shares RETAINED EARNINGS, DIVIDENDS, AND SPLITS Should the Company Declare and Pay Cash Dividends? Cash Dividends Dividends on Preference Shares Dividends on Cumulative and Non-cumulative Preference Shares Share Dividends Stock Splits Summary of the Effects on Assets, Liabilities, and Shareholders Equity MEASURING VALUE OF SHARES Market, Redemption, Liquidation, and Book Value Relating Profitability to a Companys Shares REPORTING SHAREHOLDERS EQUITY TRANSACTIONS Statement of Cash Flows 11 The Statement of Cash Flows SPOTLIGHT: Royal Philips Electronics OVERVIEW OF STATEMENT OF CASH FLOWS Hows Your Cash Flow? Telltale Signs of Financial Difficulty Operating, Investing, and Financing Activities Two Formats for Operating Activities PREPARING CASH FLOWS FROM OPERATING ACTIVITIES: INDIRECT METHOD Understanding Reconciliation of Net Income to Cash Flows from Operations EVALUATING CASH FLOWS FROM INVESTING ACTIVITIES PREPARING CASH FLOWS FROM FINANCING ACTIVITIES Completing the Statement of Cash Flows (Indirect CFO) Non-cash Investing and Financing Activities

11 PREPARING CASH FLOWS FROM OPERATING ACTIVITIES: DIRECT METHOD Computing Operating Cash Flows by the Direct Method ANALYZING THE STATEMENT OF CASH FLOWS Free Cash Flow Cash Realization Ratio Examining Cash Flow Patterns 12 Financial Statement Analysis SPOTLIGHT: Vodafone Group plc HOW DOES AN INVESTOR EVALUATE A COMPANY? HORIZONTAL ANALYSIS Illustration: Vodafone Trend Percentages VERTICAL ANALYSIS Illustration: Vodafone BENCHMARKING How Do We Compare One Company to Another? USING RATIOS TO MAKE BUSINESS DECISIONS Financial Ratios Cash Conversion Cycle Measuring Ability to Pay Current Liabilities Measuring Ability to Pay Debts Measuring Profitability Analyzing Share Investments Putting it All Together Using the Statement of Cash Flows OTHER ISSUES IN FINANCIAL STATEMENT ANALYSIS Limitations of Ratio Analysis Economic Value Added (EVA ) Red Flags in Financial Statement Analysis Appendix A VODAFONE GROUP PLC: ANNUAL REPORT EXCERPTS Appendix B TIME VALUE OF MONEY: FUTURE VALUE AND PRESENT VALUE Appendix C TYPICAL CHARTS OF ACCOUNTS FOR DIFFERENT TYPES OF BUSINES Appendix D INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSS) Glindex Company Index

Walter T. Harrison Jr. Baylor University. Charles T. Horngren Stanford University. C. William (Bill) Thomas Baylor University

G O Ninth Edition Walter T. Harrison Jr. Baylor University Charles T. Horngren Stanford University C. William (Bill) Thomas Baylor University PEARSON Boston Columbus Indianapolis New York San Francisco