Survey of Accounting1st edition

1 Introduction to Financial Statements 2

Knowing the Numbers 3

LO 1: Identify the forms of business organization and the uses of accounting information 4

Forms of Business Organization 4

Users and Uses of Financial Information 5

Ethics in Financial Reporting 7

LO 2: Explain the three principal types of business activity 8

Financing Activities 9

Investing Activities 9

Operating Activities 9

LO 3: Describe the four financial statements and how they are prepared 11

Income Statement 11

Retained Earnings Statement 12

Balance Sheet 13

Statement of Cash Flows 14

Interrelationships of Statements 15

Other Elements of an Annual Report 18

2 A Further Look at Financial Statements 42

Just Fooling Around? 43

LO 1: Identity the sections of a classified balance sheet 44

Current Assets 44

Long-Term Investments 46

Property, Plant, and Equipment 46

Intangible Assets 46

Current Liabilities 48

Long-Term Liabilities 48

Stockholders’ Equity 48

LO 2: Use ratios to evaluate a company’s profitability, liquidity, and solvency 49

Ratio Analysis 49

Using the Income Statement 50

Using a Classified Balance Sheet 51

Using the Statement of Cash Flows 55

3 The Accounting Information System 78

Accidents Happen 79

LO 1: Discuss financial reporting concepts 80

The Standard-Setting Environment 80

Qualities of Useful Information 81

Assumptions in Financial Reporting 82

Principles in Financial Reporting 83

Cost Constraint 83

LO 2: Analyze the effect of business transactions on the basic accounting equation 84

Accounting Transactions 84

Analyzing Transactions 85

Summary of Transactions 91

Preparing Financial Statements 92

4 Accrual Accounting Concepts 110

Keeping Track of Groupons 111

LO 1: Explain the accrual basis of accounting and the reasons for adjustments 112

The Revenue Recognition Principle 112

The Expense Recognition Principle 112

Accrual versus Cash Basis of Accounting 113

The Need for Adjustments 114

Types of Adjustments 115

LO 2: Prepare adjustments for deferrals 116

Prepaid Expenses 116

Unearned Revenues 120

LO 3: Prepare adjustments for accruals 122

Accrued Revenues 122

Accrued Expenses 124

Summary of Basic Relationships 127

LO 4: Prepare financial statements from adjusted amounts 128

5 Fraud, Internal Control, and Cash 154

Minding the Money in Madison 155

LO 1: Define fraud and the principles of internal control 156

Fraud 156

The Sarbanes-Oxley Act 156

Internal Control 157

Principles of Internal Control Activities 158

Limitations of Internal Control 164

LO 2: Apply internal control principles to cash 165

Cash Receipts Controls 166

Cash Disbursements Controls 168

LO 3: Identify the control features of a bank account 171

Electronic Funds Transfer (EFT) System 171

Bank Statements 171

Reconciling the Bank Account 172

LO 4: Explain the reporting of cash and the basic principles of cash management 178

Reporting Cash 178

Managing and Monitoring Cash 179

Cash Budgeting 182

6 Recording and Analyzing Merchandising Transactions, Receivables, and Inventory 206

Buy Now, Vote Later 207

LO 1: Describe inventory systems and record purchases and sales 208

Flow of Costs 208

Recording Purchases under a Perpetual Inventory System 209

Recording Sales under a Perpetual Inventory System 210

LO 2: Discuss how to classify and determine cost of inventory under a periodic approach 212

Classifying Inventory 212

Determining the Cost of Inventory 212

Cost Flow Assumptions 213

Financial Statement and Tax Effects of Cost Flow Methods 217

LO 3: Explain how companies recognize and value receivables 220

Types of Receivables 220

Recognizing Accounts Receivable 221

Valuing Accounts Receivable 221

LO 4: Prepare a multiple-step income statement and a comprehensive income statement 225

Multiple-Step Income Statement 225

Comprehensive Income Statement 228

LO 5: Compute and analyze gross profit rate and profit margin 230

Gross Profit Rate 230

Profit Margin 231

7 Reporting and Analyzing Long-Lived Assets 258

A Tale of Two Airlines 259

LO 1: Explain the accounting for plant asset expenditures 260

Determining the Cost of Plant Assets 260

Expenditures during Useful Life 263

LO 2: Apply depreciation methods to plant assets 264

Factors in Computing Depreciation 265

Depreciation Methods 265

Revising Periodic Depreciation 270

Impairments 271

LO 3: Explain how to account for the disposal of plant assets 272

Sale of Plant Assets 272

Retirement of Plant Assets 273

LO 4: Identity the basic issues related to reporting intangible assets 274

Accounting for Intangible Assets 275

Types of Intangible Assets 275

LO 5: Discuss how long-lived assets are reported and analyzed 278

Presentation 278

Analysis 279

8 Reporting and Analyzing Liabilities and Stockholders’ Equity 302

And Then There Were Two 303

LO 1: Explain how to account for current liabilities 304

What is a Current Liability? 304

Notes Payable 304

Sales Taxes Payable 305

Unearned Revenues 305

Current Maturities of Long-Term Debt 306

Payroll and Payroll Taxes Payable 307

LO 2: Explain how to account for bonds 309

Issuing Bonds at Face Value 310

Discount or Premium on Bonds 310

Issuing Bonds at a Discount 311

Issuing Bonds at a Premium 313

Redeeming Bonds at Maturity 314

LO 3: Explain how to account for the issuance of common and preferred stock, and the purchase of treasury stock 315

Stockholder Rights 315

Corporate Capital 316

Accounting for Common Stock 317

Accounting for Preferred Stock 318

Accounting for Treasury Stock 319

LO 4: Explain how to account for cash dividends 321

Cash Dividends 322

Dividend Preferences 323

LO 5: Discuss how stockholders’ equity is reported and analyzed 325

Balance Sheet Presentation of Stockholders’ Equity 325

Analysis of Stockholders’ Equity 326

Debt versus Equity Decision 328

9 Financial Analysis: The Big Picture 352

It Pays to Be Patient 353

LO 1: Apply the concepts of sustainable income and quality of earnings 354

Sustainable Income 354

Quality of Earnings 358

LO 2: Apply horizontal analysis and vertical analysis 360

Horizontal Analysis 361

Vertical Analysis 363

LO 3: Analyze a company’s performance using ratio analysis 366

Price-Earnings Ratio 366

Liquidity Ratios 366

Solvency Ratios 367

Profitability Ratios 367

LO *4: Appendix 9A: Evaluate a company comprehensively using ratio analysis 372

Liquidity Ratios 374

Solvency Ratios 376

Profitability Ratios 378

10 Managerial Accounting 406

Just Add Water . . . and Paddle 407

LO 1: Identify the features of managerial accounting and the functions of management 408

Comparing Managerial and Financial Accounting 408

Management Functions 408

Organizational Structure 410

LO 2: Describe the classes of manufacturing costs and the differences between product and period costs 412

Manufacturing Costs 412

Product versus Period Costs 414

Illustration of Cost Concepts 414

LO 3: Demonstrate how to compute cost of goods manufactured and prepare financial statements for a manufacturer 416

Income Statement 416

Cost of Goods Manufactured 417

Cost of Goods Manufactured Schedule 418

Balance Sheet 418

LO 4: Discuss trends in managerial accounting 420

Service Industries 420

Focus on the Value Chain 421

Balanced Scorecard 422

Business Ethics 423

Corporate Social Responsibility 424

11 Cost-Volume-Profit 450

Don’t Worry—Just Get Big 451

LO 1: Explain variable, fixed, and mixed costs and the relevant range 452

Variable Costs 452

Fixed Costs 453

Relevant Range 454

Mixed Costs 455

LO 2: Apply the high-low method to determine the components of mixed costs 456

High-Low Method 457

Importance of Identifying Variable and Fixed Costs 459

LO 3: Prepare a CVP income statement to determine contribution margin 460

Basic Components 460

CVP Income Statement 460

LO 4: Compute the break-even point using three approaches 464

Mathematical Equation 464

Contribution Margin Technique 465

Graphic Presentation 466

LO 5: Determine the sales required to earn target net income and determine margin of safety 467

Target Net Income 467

Margin of Safety 469

12 Incremental Analysis 490

Keeping it Clean 491

LO 1: Describe management’s decision-making process and incremental analysis 492

Incremental Analysis Approach 492

How Incremental Analysis Works 493

Qualitative Factors 494

Types of Incremental Analysis 495

LO 2: Analyze the relevant costs in accepting an order at a special price 495

LO 3: Analyze the relevant costs in a make-or-buy decision 497

Opportunity Cost 498

LO 4: Analyze the relevant costs in determining whether to sell or process materials further 499

Single-Product Case 500

Multiple-Product Case 500

LO 5: Analyze the relevant costs to be considered in repairing, retaining, or replacing equipment 503

LO 6: Analyze the relevant costs in deciding whether to eliminate an unprofitable segment or product 504

13 Budgetary Planning 530

What’s in Your Cupcake? 531

LO 1: State the essentials of effective budgeting and the components of the master budget 532

Budgeting and Accounting 532

The Benefits of Budgeting 532

Essentials of Effective Budgeting 532

The Master Budget 535

LO 2: Prepare budgets for sales, production, and direct materials 537

Sales Budget 537

Production Budget 538

Direct Materials Budget 539

LO 3: Prepare budgets for direct labor, manufacturing overhead, and selling and administrative expenses, and a budgeted income statement 542

Direct Labor Budget 542

Manufacturing Overhead Budget 543

Selling and Administrative Expense Budget 544

Budgeted Income Statement 544

LO 4: Prepare a cash budget and a budgeted balance sheet 546

Cash Budget 546

Budgeted Balance Sheet 549

LO 5: Apply budgeting principles to nonmanufacturing companies 551

Merchandisers 551

Service Companies 552

Not-for-Profit Organizations 553

14 Budgetary Control and Responsibility Accounting 580

Pumpkin Madeleines and a Movie 581

LO 1: Describe budgetary control and static budget reports 582

Budgetary Control 582

Static Budget Reports 583

LO 2: Prepare flexible budget reports 585

Why Flexible Budgets? 585

Developing the Flexible Budget 588

Flexible Budget—A Case Study 588

Flexible Budget Reports 590

LO 3: Apply responsibility accounting to cost and profit centers 592

Controllable Versus Noncontrollable Revenues and Costs 594

Principles of Performance Evaluation 594

Responsibility Reporting System 596

Types of Responsibility Centers 598

LO 4: Evaluate performance in investment centers 601

Return on Investment (ROI) 601

Responsibility Report 602

Judgmental Factors in ROI 603

Improving ROI 603

LO *5: Appendix 14A: Explain the difference between ROI and residual income 607

Residual Income Compared to ROI 607

Residual Income Weakness 608

15 Standard Costs and Balanced Scorecard 634

80,000 Different Caffeinated Combinations 635

LO 1: Describe standard costs 636

Distinguishing Between Standards and Budgets 637

Setting Standard Costs 637

LO 2: Determine direct materials variances 641

Analyzing and Reporting Variances 641

Direct Materials Variances 642

LO 3: Determine direct labor and total manufacturing overhead variances 645

Direct Labor Variances 645

Manufacturing Overhead Variances 647

LO 4: Prepare variance reports and balanced scorecards 649

Reporting Variances 649

Income Statement Presentation of Variances 650

Balanced Scorecard 651

LO *5: Appendix 15A: Compute overhead controllable and volume variances 655

Overhead Controllable Variance 655

Overhead Volume Variance 656

16 Planning for Capital Investments 678

Floating Hotels 679

LO 1: Describe capital budgeting inputs and apply the cash payback technique 680

Cash Flow Information 680

Illustrative Data 681

Cash Payback 681

LO 2: Use the net present value method 683

Equal Annual Cash Flows 684

Unequal Annual Cash Flows 685

Choosing a Discount Rate 686

Simplifying Assumptions 687

Comprehensive Example 687

LO 3: Identify capital budgeting challenges and refinements 688

Intangible Benefits 688

Profitability Index for Mutually Exclusive Projects 690

Risk Analysis 692

Post-Audit of Investment Projects 692

LO 4: Use the internal rate of return method 694

Comparing Discounted Cash Flow Methods 695

LO 5: Use the annual rate of return method 696

A Specimen Financial Statements: Apple Inc. A-1

B Specimen Financial Statements: Columbia Sportswear Company B-1

C Specimen Financial Statements: VF Corporation C-1

D Double-Entry Accounting System D-1

LO 1: Explain how accounts, debits, and credits are used to record business transactions D-2

Debits and Credits D-2

Debit and Credit Procedures D-3

Summary of Debit/Credit Rules D-5

LO 2: Indicate how a journal and ledger are used in the recording process D-5

The Recording Process D-5

The Journal D-5

The Ledger D-6

Chart of Accounts D-6

Posting D-6

The Recording Process Illustrated D-6

LO 3: Prepare a trial balance D-9

LO 4: Prepare adjusting entries and an adjusted trial balance D-10

The Need for Adjusting Entries D-10

The Adjusting Process Illustrated D-10

Preparing Financial Statements D-11

E Time Value of Money E-1

LO 1: Compute interest and future values E-1

Nature of Interest E-1

Future Value of a Single Amount E-3

Future Value of an Annuity E-4

LO 2: Compute present values E-7

Present Value Variables E-7

Present Value of a Single Amount E-7

Present Value of an Annuity E-9

Time Periods and Discounting E-11

Present Value of a Long-Term Note or Bond E-11

LO 3: Use a financial calculator to solve time value of money problems E-13

Present Value of a Single Sum E-14

Present Value of an Annuity E-15

Useful Applications of the Financial Calculator E-15

Company Index I-1

Subject Index I-5