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'.fc 1 Chapter 1 Elements of Financial Statements 2 Chapter Opening 3 Elements of Financial Statements 4 Assets, Income, and Claims on Assets 4 The Accounting Equation 5 Recording Business Events under the Accounting Equation 6 Asset Source Transactions 7 Entity Concept 7 Asset Exchange Transactions 8 Another Asset Source Transaction 8 Asset Use Transactions 9 Historical Cost and Reliability Concepts 10 Measurement Rules 10 Recap: Types of Transactions 10 Summary of Transactions 11 Preparing Financial Statements 12 Income Statement and the Matching Concept 12 Statement of Changes in Stockholders' Equity 14 Balance Sheet 14 Statement of Cash Flows 14 Financial versus Managerial Accounting 15 The Horizontal Financial Statements Model 16 The Financial Analyst 17 Importance of Ethics 17 Sarbanes-Oxley Act of 2002 17 Common Features of Ethical Misconduct 18 Annual Report for The Topps Company, Inc. 20 A Look Back 20 A Look Forward 21 Self-Study Review Problem 21 Key Terms 22 Questions 23 Exercises 24 Problems 31 Analyze, Think, Communicate 35 Chapter 2 Understanding the Accounting Cycle 40 Chapter Opening 41 Accrual Accounting 42 Accounting for Accounts Receivable 42 Other Events 43 Accounting for Accrued Salary Expense (Adjusting Entry) 44 Summary of Events 45 The General Ledger 45 Vertical Statements Model 45 The Closing Process 48 Steps in an Accounting Cycle 49 The Matching Concept 49 The Conservatism Principle 49 Second Accounting Cycle 50 Prepaid Items (Cost versus Expense) 50 Accounting for Receipt of Unearned Revenue 51 Accounting for Supplies Purchase 51
Other 2009 Events 51 Adjusting Entries 53 Accounting for Supplies (Adjusting Entry) 53 Accounting for Prepaid Rent (Adjusting Entry) 54 Accounting for Unearned Revenue (Adjusting Entry) 54 Accounting for Accrued Salary Expense (Adjusting Entry) 55 Summary of Events 56 The General Ledger 57 Vertical Statements Model 57 The Financial Analyst 59 Price-earnings Ratio 59 Measuring Growth through Percentage Analysis 61 A Look Back 63 A Look Forward 64 Self-Study Review Problem 64 Key Terms 66 Questions 66 Exercises 67 Problems 75 Analyze, Think, Communicate 80 T'~-r\ Chapters Accounting for Merchandising Businesses 84 Chapter Opening 85 Product Costs versus Selling and Administrative Costs 86 Allocating inventory Cost between Asset and Expense Accounts 86 Perpetual inventory System 88 Effects of 2006 Events on Financial Statements 88 Financial Statements for 2006 89 Transportation Cost, Purchase Returns and Allowances, and Cash Discounts Related to Inventory Purchases 90 Effects of 2007 Events on Financial Statements 91 Financial Statements 96 Events Affecting Sales 97 Lost, Damaged, or Stolen Inventory 99 Adjustment for Lost, Damaged, or Stolen Inventory 99 Recognizing Gains and Losses 99 The Financial Analyst 101 Common Size Financial Statements 101 Comparisons between Companies 101 Gross Margin Percentage 101 Net Income Percentage 102 Comparisons within a Particular Company 102 Real-World Data 103 Financing Merchandise Inventory 104 A Look Back 105 A Look Forward 105 Appendix 106 Self-Study Review Problem 107 Key Terms 108 Questions 108 Exercises 109 Problems 116 Analyze, Think, Communicate 120
XfiHE Chapter 4 Accounting for Inventories 124 Chapter Opening 125 Inventory Cost Flow Methods 126 Specific Identification 126 First-ln, First-Out (FIFO) 126 Last-In, First-Out (UFO) 126 Weighted Average 126 Physical Flow 126 Effect of Cost Flow on Financial Statements 127 Effect on Income Statement 127 Effect on Balance Sheet 127 Multiple Layers with Multiple Quantities 128 Allocating Cost of Goods Available for Sale 128 Effect of Cost Flow on Financial Statements 130 Key Features of Internal Control Systems 133 Separation of Duties 133 Quality of Employees 133 Bonded Employees 133 Required Absences 133 Procedures Manual 134 Authority and Responsibility 134 Prenumbered Documents 134 Performance Evaluations 135 Limitations 135 Accounting for Cash 135 Controlling Cash 136 Cash Payments 136 Checking Account Documents 137 Reconciling the Bank Account 138 Illustrating a Bank Reconciliation 140 The Financial Analyst 143 Average Number of Days to Sell Inventory 143 Is It a Marketing or an Accounting Decision? 144 Real-World Data 144 Effects of Cost Flow on Ratio Analysis 145 A Look Back 145 A Look Forward 146 Self-Study Review Problem 1 146 Self-Study Review Problem 2 147 Key Terms 148 Questions 148 Exercises 149 Problems 155 Analyze, Think, Communicate 159 Physical Control 134 Chapter 5 Accounting for Receivables 162 Chapter Opening 163 Allowance Method of Accounting for Uncollectible Accounts 164 Accounting Events Affecting the 2006 Period 164 Financial Statements 166 Accounting Events Affecting the 2007 Period 166 Estimating Uncollectible Accounts Expense Using the Percent of Revenue (Sales) Method 168 Analysis of Financial Statements 169
Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method 170 Matching Revenues and Expenses versus Asset Measurement 171 Recognizing Uncollectible Accounts Expense Using the Direct Write-off Method 171 Characteristics of Notes Receivable (Promissory Notes) 173 Accounting for Notes Receivable 174 Financial Statements 175 Accounting for Credit Card Sales 177 The Financial Analyst 178 Costs of Credit Sales 178 Average Number of Days to Collect Accounts Receivable 178 Real-World Data 179 A Look Back 181 A Look Forward 182 Self-Study Review Problem 182 Key Terms 183 Questions 184 Exercises 185 Problems 191 Analyze, Think, Communicate 196 Chapter 6 Accounting for Long-Term Operational Assets 200 Chapter Opening 201 Tangible versus Intangible Assets 202 Tangible Long-Term Assets 202 Intangible Assets 202 Determining the Cost of Long-Term Assets 203 Basket Purchase Allocation 203 Methods of Recognizing Depreciation Expense 204 Dryden Enterprises Illustration 205 Straight-Line Depreciation 205 Financial Statements 207 Double-Declining-Balance Depreciation 208 Units-of-Production Depreciation 211 Comparing the Depreciation Methods 212 Income Tax Considerations 213 Revision of Estimates 214 Revision of Life 215 Revision of Salvage 215 Continuing Expenditures for Plant Assets 215 Costs That Are Expensed 215 Costs That Are Capitalized 216 Natural Resources 217 Intangible Assets 218 Trademarks 218 Patents 218 Copyrights 219 Franchises 219 Goodwill 220 Expense Recognition for Intangible Assets 221 Expensing Intangible Assets with Identifiable Useful Lives 221 Impairment Losses for Intangible Assets with Indefinite Useful Lives 221 Balance Sheet Presentation 222 The Financial Analyst 222 Effect of Judgment and Estimation 222 Effect of Industry Characteristics 223
./ t iy "; " I I A Look Back 224 A Look Forward 225 Self-Study Review Problem 225 Key Terms 226 Questions 226 Exercises 227 Problems 233 Analyze, Think, Communicate 239 Chapter 7 Accounting for Liabilities 244 Chapter Opening 245 Accounting for Current Liabilities 246 Accounting for Notes Payable 246 Accounting for Sales Tax 247 Contingent Liabilities 248 Warranty Obligations 249 Financial Statements 250 Accounting for Long-Term Debt 251 Installment Notes Payable 252 Line of Credit 255 Bond Liabilities 255 Advantages of Issuing Bonds 256 Bonds Issued at Face Value 256 Fixed-Rate, Fixed-Term, Annual Interest Bonds 256 Effect of Events on Financial Statements 257 Financial Statements 259 Security for Loan Agreements 260 The Financial Analyst 260 Current versus Noncurrent 260 Liquidity versus Solvency 261 Real-World Data 263 A Look Back 264 A Look Forward 264 Self-Study Review Problem 265 Key Terms 266 Questions 266 Exercises 267 Problems 272 Analyze, Think, Communicate 277. >j Chapter 8 Proprietorships, Partnerships, and Corporations 280 **«* Chapter Opening 281 ^ v,. i»s«. Forrns of Business Organizations 282 Advantages and Disadvantages of Different Forms of Business Organization 282 Regulation 282 Double Taxation 283 Limited Liability 284 Continuity 284 Transferability of Ownership 284 Management Structure 285 Ability to Raise Capital 285 Appearance of Capital Structure in Financial Statements 285 Presentation of Equity in Proprietorships 285
-* " i'~ f, 'S *- ' ^MM..^ Mia 1 mt Presentation of Equity in Partnerships 286 Presentation of Equity in Corporations 287 Characteristics of Capital Stock 287 Par Value 287 Stated Value 287 Other Valuation Terminology 288 Stock: Authorized, Issued, and Outstanding 288 Classes of Stock 288 Common Stock 289 Preferred Stock 289 Accounting for Stock Transactions on the Day of Issue 290 Issuing Par Value Stock 290 Stock Classification 290 Stock Issued at Stated Value 291 Stock Issued with No Par Value 291 Financial Statement Presentation 291 Stockholders' Equity Transactions after the Day of Issue 292 Treasury Stock 292 Cash Dividend 293 Stock Dividend 294 Stock Split 295 Appropriation of Retained Earnings 295 Financial Statement Presentation 295 The Financial Analyst 297 Receiving Dividends 297 Increasing the Price of Stock 297 Price-earnings Ratio 298 Exercising Control through Stock Ownership 298 A Look Back 299 A Look Forward 300 Self-Study Review Problem 300 Key Terms 301 Questions 301 Exercises 302 Problems 306 Analyze, Think, Communicate 310 Chapter 9 Financial Statement Analysis 314 Chapter Opening 315 Factors in Communicating Useful Information 316 The Users 316 The Types of Decisions 316 Information Analysis 316 Methods of Analysis 316 Horizontal Analysis 317 Vertical Analysis 319 Ratio Analysis 321 Measures of Debt-Paying Ability 321 Liquidity Ratios 321 Solvency Ratios 324 Measures of Profitability 327 Measures of Managerial Effectiveness 327 Stock Market Ratios 329 Presentation of Analytical Relationships 331 Limitations of Financial Statement Analysis 332 Different Industries 333 Changing Economic Environment 334 Accounting Principles 334 A Look Back 335 A Look Forward 335
- - ' "'."'' '' «/, V"-'- ' sf.r J r...-.- J». Self-Study Review Problem 335 Key Terms 337 Questions 337 Exercises 338 Problems 343 Analyze, Think, Communicate 349 Chapter 10 Management Accounting: A Value-Added Discipline 354 Chapter Opening 355 Differences between Managerial and Financial Accounting 356 Users and Types of Information 356 Level of Aggregation 356 Regulation 356 Information Characteristics 357 Time Horizon and Reporting Frequency 357 Product Costing 358 Product Costs in Manufacturing Companies 358 Tabor Manufacturing Company 358. Average Cost per Unit 359 Costs Can Be Assets or Expenses 359 Effect of Product Costs on Financial Statements 360 Manufacturing Product Cost Summary 364 Importance of Cost Classification 364 Practical Implications 366 Ethical Considerations 367 Upstream and Downstream Costs 368 Product Costs in Service Companies 368 Emerging Trends in Managerial Accounting 370 Total Quality Management 370 Activity-Based Management 370 Just-in-Time Inventory 371 Value Chain Analysis across Companies 373 A Look Back 373 A Look Forward 374 Self-Study Review Problem 374 Key Terms 376 Questions 377 Exercises 377 Problems 383 Analyze, Think, Communicate 386 Marion Manufacturing Company 365 Chapter 11 Cost Behavior, Operating Leverage, and Profitability Analysis 390 Chapter Opening 391 Fixed Cost Behavior 392 Operating Leverage 392 Calculating Percentage Change 393 Risk and Reward Assessment 394 Variable Cost Behavior 394
r-l' An Income Statement under the Contribution Margin Approach 396 Measuring Operating Leverage Using Contribution Margin 396 Cost Behavior Summarized 397 The Relevant Range 397. Context-Sensitive Definitions of Fixed and Variable 399 Mixed Costs 399 Determining the Contribution Margin per Unit 400 Calculating the Margin of Safety 402 A Look Back 403 A Look Forward 404 Self-Study Review Problem 1 404 Self-Study Review Problem 2 406 Key Terms 407 Questions 407 Exercises 408 Problems 414 Analyze, Think, Communicate 419 Determining the Break-Even Point 401 Using the Contribution Approach to Estimate the Sales Volume Necessary to Reach a Target Profit 401 Chapter 12 Cost Accumulation, Tracing, and Allocation 422 Chapter Opening 423 Use of Cost Drivers to Accumulate Costs 424 Estimated versus Actual Cost 424 Assignment of Cost to Objects in a Retail Business 424 Identifying Direct versus Indirect Costs 425 Cost Classifications-Independent Context Sensitive 425 Allocating Indirect Costs to Objects 426 Selecting a Cost Driver 428 Behavioral Implications 430 and Effects of Cost Behavior on Selecting the Most Appropriate Cost Driver 432 Using Volume Measures to Allocate Variable Overhead Costs 432 Allocating Fixed Overhead Costs 434 Allocating Costs to Solve Timing Problems 435 Establishing Cost Pools 436 Cost Allocation: The Human Factor 436 Using Cost Allocations in a Budgeting Decision 437 Using Cost Drivers to Make Allocations 437 Choosing the Best Cost Driver 438 Controlling Emotions 438 A Look Back 438 A Look Forward 439 Self-Study Review Problem 439 Key Terms 441 Questions 441 Exercises 442 Problems 446 Analyze, Think, Communicate 449
.'.- --.;-: Chapter 13 Relevant Information for Special Decisions 452 i^lljl Chapter Opening 453 The Decision Environment 454 Relevant Information 454 Sunk Cost 454 Relevant (Differential) Revenues 454 Relevant (Avoidable) Costs 455 Relevance Is an Independent Concept 456 Relevance of Opportunity Costs 457 Relevance Is Context-Sensitive 458 Relationship between Relevance and Accuracy 458 Quantitative versus Qualitative Characteristics of Decision Making 459 Relevant Information and Special Decisions 459 Special Order Decisions 459 Outsourcing Decisions 461 Segment Elimination Decisions 464 Summary of Relationships between Avoidable Costs and the Hierarchy of Business Activity 467 Equipment Replacement Decisions 467 A Look Back 469 A Look Forward 469 Self-Study Review Problem 470 Key Terms 472 Questions 472 Exercises 473 Problems 479 Analyze, Think, Communicate 484 Chapter 14 Planning for Profit and Cost Control 488 Chapter Opening 489 The Planning Process 490 Three Levels of Planning for Business Activity 490 Advantages of Budgeting 491 Planning 491 Coordination 491 Performance Measurement 491 Corrective Action 491 Budgeting and Human Behavior 492 The Master Budget 492 Hampton Hams Budgeting Illustration 493 Sales Budget 493 Inventory Purchases Budget 495 Selling and Administrative Expense Budget 497 Cash Budget 499 Pro Forma Income Statement 501 Pro Forma Balance Sheet 502 Pro Forma Statement of Cash Flows 502 A Look Back 503 A Look Forward 504 Self-Study Review Problem 504 Key Terms 506 Questions 506 Exercises 506 Problems 512 Analyze, Think, Communicate 515
Chapter 15 Performance Evaluation 520 KMWiiM- iw^m»-j«iri«ij«[bi Chapter Opening 522 Decentralization Concept 522 Responsibility Centers 522 Controllability Concept 523 Preparing Flexible Budgets 523 Determining Variances for Performance Evaluation 525 Sales Volume Variances 525 Flexible Budget Variances 527 Need for Standards 529 Managerial Performance Measurement 529 Return on Investment 530 Residual Income 532 Responsibility Accounting and the Balanced Scorecard 535 A Look Back 535 A Look Forward 536 Self-Study Review Problem 1 536 Self-Study Review Problem 2 538 Key Terms 539 Questions 539 Exercises 540 Problems 544 Analyze, Think, Communicate 548 Chapter 16 Planning for Capita! investments 552 Chapter Opening 554 Capital Investment Decisions 554 Time Value of Money 554 Techniques for Analyzing Capital Investment Proposals 559 Wet Present Value 559 Internal Rate of Return 560 Techniques for Measuring Investment Cash Flows 561 Cash Inflows 561 Cash Outflows 561 Techniques for Comparing Alternative Capital Investment Opportunities 562 Net Present Value 562 Internal Rate of Return 564 Relevance and the Time Value of Money 566 Tax Considerations 567 \ Techniques That Ignore the Time Value of Money 568 Payback Method 568 Real-World Reporting Practices 570 Postaudits 571 A Look Back 571 A Look Forward 572 Appendix 572 Self-Study Review Problem 573 Key Terms 574 Questions 574 Exercises 575 Problems 579 Analyze, Think, Communicate 582 Appendix A Accessing the EDGAR Database through the Internet 585 Appendix B Topps Annual Report 2003 586 Appendix C The Double-Entry Accounting System 620 Glossary 628 Photo Credits 639 Index 641