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 Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Chapter 1 The Financial Statements 1 Spotlight: RadioShack Corporation 1 Explain Why Accounting is the Language of Business 3 Who Uses Accounting Information? 4 Two Kinds of Accounting: Financial Accounting and Management Accounting 4 Organizing a Business 5 Explain and Apply Underlying Accounting Concepts, Assumptions, and Principles 6 The Entity Assumption 8 The Continuity (Going-Concern) Assumption 8 The Historical Cost Principle 8 The Stable-Monetary-Unit Assumption 9 Apply the Accounting Equation to Business Organizations 11 Assets and Liabilities 11 ; Owners' Equity 12 Evaluate Business Operations Through the Financial Statements 14 The Income Statement Measures Operating Performance 14 The Statement of Retained Earnings Shows What a Company Did with Its Net Income 16 The Balance Sheet Measures Financial Position 17 The Statement of Cash Flows Measures Cash Receipts and Payments 20 Construct the Financial Statements and Analyze the Relationships Among Them 22 Evaluate Business Decisions Ethically 24 End-of-Chapter Summary Problem 27 Demo Doc 55 Chapter 2 Transaction Analysis 59 Spotlight: Apple, Inc. 59 Explain What a Transaction Is 60 Define "Account," and List and Differentiate Between Different Types of Accounts 61 Assets 61 Liabilities 61 Stockholders' (Owners') Equity 62 Show the Impact of Business Transactions on the Accounting Equation 63 Example: Genie Car Wash, Inc. 63 Transactions and Financial Statements 68 Mid-Chapter Summary Problem 71 Analyze the Impact of Business Transactions on Accounts 73 The T-Account 73 Increases and Decreases in the Accounts: The Rules of Debit and Credit 73 Additional Stockholders' Equity Accounts: Revenues and Expenses 75 Record (Journalize and Post) Transactions in the Books 76 Copying Information (Posting) from the Journal to the Ledger 77 The Flow of Accounting Data 78 Accounts After Posting to the Ledger 82 Construct and Use a Trial Balance 83 Analyzing Accounts 84 Correcting Accounting Errors 84 Chart of Accounts 85 The Normal Balance of an Account 86 Account Formats 86 Analyzing Transactions Using Only T-Accounts 86 End-of-Chapter Summary Problem 89 Demo Doc 122 Chapter 3 Accrual Accounting & Income 135 Spotlight: Starbucks Corporation 135
xii Contents Explain How Accrual Accounting Differs From Cash-Basis Accounting 136 Accrual Accounting and Cash Flows 137 The Time-Period Concept 138 Apply the Revenue and Expense Recognition Principles 138 The Revenue Principle 138 The Expense Recognition Principle 139 Ethical Issues in Accrual Accounting 140 Adjust The Accounts 140 Which Accounts Need to Be Updated (Adjusted)? 140 Categories of Adjusting Entries 141 Prepaid Expenses 142 Depreciation of Plant Assets 144 Accrued Expenses 146 Accrued Revenues 148 Unearned Revenues 149 Summary of the Adjusting Process 151 The Adjusted Trial Balance 153 Construct the Financial Statements 154 Mid-Chapter Summary Problem 156 Close the Books 162 Classifying Assets and Liabilities Based on Their Liquidity 162 Reporting Assets and Liabilities: Starbucks Corporation 164 Formats for the Financial Statements 164 Analyze and Evaluate a Company's Debt-Paying Ability 166 Net Working Capital 166 Current Ratio 166 Debt Ratio 167 How Do Transactions Affect the Ratios? 167 End-of-Chapter Summary Problem 171 Demo Doc 215 Chapter k Internal Control & Cash 230 Spotlight: Cooking the Books: EPIC Products Takes a Hit 230 Describe Fraud and Its Impact 233 Fraud and Ethics 234 Explain the Objectives and Components of Internal Control 235 The Sarbanes-Oxley Act (SOX) 235 The Components of Internal Control 236 Internal Control Procedures 238 Information Technology 239 Safeguard Controls 240 Internal Controls for E-Commerce 240 Security Measures 241 The Limitations of Internal Control Costs and Benefits 241 Design and Use a Bank Reconciliation 242 Signature Card 242 Deposit Ticket 242 Check 242 Bank Statement 243 Bank Reconciliation 243 Preparing the Bank Reconciliation 244 Online Banking 248 Mid-Chapter Summary Problem 250 Evaluate Internal Controls over Cash Receipts and Cash Payments 252 Cash Receipts over the Counter 252 Cash Receipts by Mail 252 Controls over Payment by Check 253 Construct and Use a Cash Budget 255 Reporting Cash on the Balance Sheet 256 Compensating Balance Agreements 256 End-of-Chapter Summary Problem 257 Chapter 5 Short-Term Investments & Receivables 283 Spotlight: Receivables and Short-Term Investments are Double PepsiCo's Inventories! 283 Account for Short-Term Investments 284 Trading Securities 285 Reporting on the Balance Sheet and the Income Statement 286
Contents XIII Ethics and the Current Ratio 287 Mid-Chapter Summary Problem 288 Apply GAAP for Proper Revenue Recognition 289 Shipping Terms, Sales Discounts, and Sales Returns 289 Account for and Control Accounts Receivable 291 Types of Receivables 291 Internal Controls over Cash Collections on Account 291 How Do We Manage the Risk of Not Collecting? 292 Evaluate Collectibility Using the Allowance for Uncollectible Accounts 293 Allowance Method 294 Direct Write-Off Method 300 Computing Cash Collections from Customers 300 Account for Notes Receivable 301 Accounting for Notes Receivable 302 Show How to Speed Up Cash Flow from Receivables 304 Credit Card or Bankcard Sales 304 Selling (Factoring) Receivables 305 Reporting on the Statement of Cash Flows 305 Evaluate Liquidity Using Two New Ratios 306 Quick (Acid-test) Ratio 306 Days' Sales in Receivables 306 End-of-Chapter Summary Problem 308 Chapter 6 Inventory & Cost of Goods Sold 337 Spotlight: Williams-Sonoma, Inc. 337 Show How to Account for Inventory 339 Sale Price vs. Cost of Inventory 341 Accounting for Inventory in the Perpetual System 342 Apply and Compare Various Inventory Cost Methods 344 What Goes into Inventory Cost? 345 Apply the Various Inventory Costing Methods 345 Compare the Effects of FIFO, LIFO, and Average Cost on Cost of Goods Sold, Gross Profit, and Ending Inventory 348 Keeping Track of Perpetual Inventories under LIFO and Weighted-Average Cost Methods 349 The Tax Advantage of LIFO 349 Mid-Chapter Summary Problem 351 Explain and Apply Underlying GAAP for Inventory 353 Disclosure Principle 353 Lower-of-Cost-or-Market Rule 353 Inventory and the Detailed Income Statement 355 Compute and Evaluate Gross Profit (Margin) and Inventory Turnover 355 Gross Profit Percentage 355 Inventory Turnover 356 Use the COGS Model to Make Management Decisions 357 Computing Budgeted Purchases 358 Estimating Inventory by the Gross Profit Method 358 Analyze Effects of Inventory Errors 359 End-of-Chapter Summary Problem 362 Chapter 7 Plant Assets. Natural Resources, & Intangibles 400 Spotlight: FedEx Corporation 400 Measure and Account for the Cost of Plant Assets 402 Land 402 Buildings, Machinery, and Equipment 403 Land Improvements and Leasehold Improvements 403 Lump-Sum (or Basket) Purchases of Assets 403 Distinguish a Capital Expenditure from an Immediate Expense 405 Measure and Record Depreciation on Plant Assets 406 How to Measure Depreciation 407 Depreciation Methods 408 Comparing Depreciation Methods 411 Mid-Chapter Summary Problem 413 Other Issues in Accounting for Plant Assets 414 Depreciation for Tax Purposes 414 Depreciation for Partial Years 416 Changing the Useful Life of a Depreciable Asset 416 Fully Depreciated Assets 418
XIV Contents Analyze the Effect of a Plant Asset Disposal 418 Disposing of a Fully Depreciated Asset for No Proceeds 419 Selling a Plant Asset 419> Exchanging a Plant Asset 420 T-Accounts for Analyzing Plant Asset Transactions 421 Apply GAAP for Natural Resources and Intangible Assets 423 Accounting for Natural Resources 423 Accounting for Intangible Assets 424 Accounting for Specific Intangibles 424 Accounting for Research and Development Costs 426 Explain the Effect of an Asset Impairment on the Financial Statements. 426 Analyze Rate of Return on Assets 428 DuPont Analysis: A More Detailed View of ROA 428 Analyze the Cash Flow Impact of Long-Lived Asset Transactions 430 End-of-Chapter Summary Problems 433 Chapter 8 Long-Term Investments & the Time Value of Money 463 Spotlight: Intel Holds Several Different Types of Investments 463 Stock and Bond Prices 465 Reporting Investments on the Balance Sheet 465 Analyze and Report Investments in Held-to-Maturity Debt Securities 466 Analyze and Report Investments in Available-for-Sale Securities 468 Accounting Methods for Long-Term Stock Investments 468 The Fair Value Adjustment 469 Selling an Available-for-Sale Investment 471 Analyze and Report Investments in Affiliated Companies Using The Equity Method 472 Buying a Large Stake in Another Company 472 Accounting for Equity-Method Investments 472 Analyze and Report Controlling Interests in Other Corporations Using Consolidated Financial Statements 475 Why Buy Another Company? 475 Consolidation Accounting 475 The Consolidated Balance Sheet and the Related Work Sheet 476 Goodwill and Noncontrolling Interest 477 Income of a Consolidated Entity 477 Mid-Chapter Summary Problems 479 Consolidation of Foreign Subsidiaries 481 Foreign Currencies and Exchange Rates 481 The Foreign-Currency Translation Adjustment 482 Report Investing Activities on the Statement of Cash Flows 483 Explain the Impact of the Time Value of Money on Certain Types of Investments 484 Present Value 485 Present-Value Tables 486 Present Value of an Annuity 487 Using Microsoft Excel to Calculate Present Value 489 Using the PV Model to Compute Fair Value of Availablefor-Sale Investments 490 Present Value of an Investment in Bonds 491 End-of-Chapter Summary Problems 492 Chapter 9 Liabilities 517 Spotlight: Southwest Airlines: A Success Story 517 Account for Current and Contingent Liabilities 518 Current Liabilities of Known Amount 518 Current Liabilities That Must Be Estimated 523 Contingent Liabilities 524 Are All Liabilities Reported on the Balance Sheet? 525 Summary of Current Liabilities 526 Mid-Chapter Summary Problem 527 Account for Bonds Payable, Notes Payable, and Interest Expense 527 Bonds: An Introduction 528
Contents XV Issuing Bonds Payable at Par (Face Value) 530 Issuing Bonds Payable at a Discount 532 What Is the Interest Expense on These Bonds Payable? 532, Interest Expense on Bonds Issued at a Discount 533 Partial-Period Interest Amounts 535 Issuing Bonds Payable at a Premium 536 The Straight-Line Amortization Method: A Quick and Dirty Way to Measure Interest Expense 539 Should We Retire Bonds Payable Before Their Maturity? 540 Convertible Bonds and Notes 540 Analyze and Differentiate Financing with Debt Versus Equity 541 The Leverage Ratio 543 -i The Times-Interest-Earned Ratio 544 Understand Other Long-Term Liabilities 544 Leases 544 Types of Leases 544 Do Lessees Prefer Operating Leases or Capital Leases? 545 Pensions and Postretirement Liabilities 546 Report Liabilities 547 Reporting on the Balance Sheet 547 Disclosing the Fair Value of Long-Term Debt 548 Reporting Financing Activities on the Statement of Cash Flows 548 End-of-Chapter Summary Problem 549 Chapter 10 Stockholders' Equity 581 Spotlight: RadioShack Corporation 581 Explain The Features of a Corporation 583 Organizing a Corporation 584 Stockholders' Rights 584 Stockholders' Equity 585 Classes of Stock 586 Account for the Issuance of Stock 587 Common Stock - 589 A Stock Issuance for Other Than Cash Can Create an Ethical Challenge 592 Preferred Stock 593 Mid-Chapter Summary Problem 594 Authorized, Issued, and Outstanding Stock 595 Show How Treasury Stock Affects a Company 596 How is Treasury Stock Recorded? 596 Retirement of Stock 597 Resale of Treasury Stock 598 Treasury Stock for Employee Compensation 598 Summary of Treasury-Stock Transactions 599 Account for Retained Earnings, Dividends, and Splits 599 Should the Company Declare and Pay Cash Dividends? 600 Cash Dividends 600 Analyzing the Stockholder's Equity Accounts 601 Dividends on Preferred Stock 602 Stock Dividends 603 Stock Splits 604 Summary of the Effects on Assets, Liabilities, and Stockholders' Equity 605 Use Stock Values in Decision Making 606 Market, Redemption, Liquidation, and Book Value 606 ROE: Relating Profitability to Stockholder Investment 607 Report Equity Transactions in the Financial Statements 609 Statement of Cash Flows 609 Reporting Stockholders' Equity on the Balance Sheet 610 End-of-Chapter Summary Problem 612 Chapter 11 The Income Statement, the Statement of Comprehensive Income. & the Statement of Stockholders' Equity 650 Spotlight: The Gap, Inc: A Global Icon Adapts to Changing Markets 650 Evaluate Quality of Earnings 651 Revenue Recognition 651
XVI Contents Cost of Goods Sold and Gross Profit (Gross Margin) 653 Operating and Other Expenses 654 Operating Income (Earnings) 654 Account for Foreign-Currency Gains and Losses 654 Dollars Versus Foreign Currency 654 Reporting Foreign-Currency Gains and Losses on the Income Statement 656 Should We Hedge Our Foreign-Currency-Transaction Risk? 656 Account for Other Items on the Income Statement 656 Interest Expense and Interest Income 656 Corporate Income Taxes 656 Which Income Number Predicts Future Profits? 658 Discontinued Operations 659 Accounting Changes 660 Compute Earnings Per Share 661 What Should You Analyze to Gain an Overall Picture of a Company? 662 Correcting Retained Earnings 662 Analyze the Statement of Comprehensive Income and the Statement of Stockholders' Equity 663 Reporting Comprehensive Income 663 Reporting Stockholders' Equity 664 Differentiate Management's and Auditors' Responsibilites in Financial Reporting 666 Management's Responsibility 666 Auditor Report 666 End-of-Chapter Summary Problem 669 Chapter 12 The Statement of Cash Flows 697 Spotlight: Google: The Ultimate Answer Machine 697 Identify the Purposes of the Statement of Cash Flows 699 How's Your Cash Flow? Telltale Signs of Financial Difficulty 700 Distinguish Among Operating, Investing, and Financing Activities 700 Two Formats for Operating Activities 701 Prepare a Statement of Cash Flows by the Indirect Method 702 Cash Flows from Operating Activities 703 Cash Flows from Investing Activities 707 Cash Flows from Financing Activities 708 Noncash Investing and Financing Activities 711 Mid-Chapter Summary Problem 713 Prepare a Statement of Cash Flows by the Direct Method 716 Cash Flows from Operating Activities 717 Depreciation, Depletion, and Amortization Expense 719 Cash Flows from Investing Activities 719 Cash Flows from Financing Activities 720 Non-Cash Investing and Financing Activities 720 Computing Operating Cash Flows by the Direct Method 721 Computing Investing and Financing Cash Flows 725 Measuring Cash Adequacy: Free Cash Flow 726 End-of-Chapter Summary Problem 728 Chapter 13 Financial Statement Analysis 771 Spotlight: How Well is Amazon.com Doing? 771 Perform Horizontal Analysis 773 Illustration: Amazon.com, Inc. 774 Trend Percentages 777 Perform Vertical Analysis 777 Illustration: Amazon.com, Inc. 777 Prepare Common-Size Financial Statements 779 Benchmarking 780 Benchmarking Against a Key Competitor 780 Analyze the Statement of Cash Flows 781 Mid-Chapter Summary Problem 783 Use Ratios to Make Business Decisions 784 Measuring Ability to Pay Current Liabilities 785 Measuring Turnover and the Cash Conversion Cycle 788 Measuring Leverage: Overall Ability to Pay Debts 791 Measuring Profitability 792
Contents XVII Analyzing Stock as an Investment 796 The Limitations of Ratio Analysis 798 Use Other Measures to Make Investment Decisions 798 Economic Value Added (EVA ) 798 Red Flags in Financial Statement Analysis 799 Efficient Markets 800 End-of-Chapter Summary Problem 803 Appendix A: Amazon.com 2010 Annual Report 847 Appendix B: RadioShack 2010 Annual Report 873 Appendix C- Typical Charts of Accounts for Different Types of Businesses 891 Appendix D: Summary of Generally Accepted Accounting Principles (GAAP) 893 Appendix E: Summary of Differences Between U.S. GAAP and IFRS Cross Referenced to Chapter 895 Company Index 899 Glindex 905