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ACCOUNT CLASSIFICATION AND PRESENTATION Normal Account Title Classification Financial Statement Balance A Accounts Payable Current Liability Balance Sheet Credit Accounts Receivable Current Asset Balance Sheet Debit Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit Advertising Expense Operating Expense Income Statement Debit Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit Amortization Expense Operating Expense Income Statement Debit B Bad Debt Expense Operating Expense Income Statement Debit Bonds Payable Long-Term Liability Balance Sheet Credit Buildings Plant Asset Balance Sheet Debit C Cash Current Asset Balance Sheet Debit Common Stock Stockholders’ Equity Balance Sheet Credit Copyrights Intangible Asset Balance Sheet Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit D Debt Investments Current Asset/Long-Term Balance Sheet Debit Investment Depreciation Expense Operating Expense Income Statement Debit Discount on Bonds Payable Long-Term Liability—Contra Balance Sheet Debit Dividends Temporary account closed Retained Earnings Debit to Retained Earnings Statement Dividends Payable Current Liability Balance Sheet Credit E Equipment Plant Asset Balance Sheet Debit F Freight-Out Operating Expense Income Statement Debit G Gain on Disposal of Plant Assets Other Income Income Statement Credit Goodwill Intangible Asset Balance Sheet Debit I Income Summary Temporary account closed Not Applicable (1) to Retained Earnings Income Tax Expense Income Tax Expense Income Statement Debit Income Taxes Payable Current Liability Balance Sheet Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Expense Income Statement Debit Interest Payable Current Liability Balance Sheet Credit Interest Receivable Current Asset Balance Sheet Debit Interest Revenue Other Income Income Statement Credit Inventory Current Asset Balance Sheet (2) Debit
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Normal Account Title Classification Financial Statement Balance L Land Plant Asset Balance Sheet Debit Loss on Disposal of Plant Assets Other Expense Income Statement Debit M Maintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Long-Term Liability Balance Sheet Credit N Notes Payable Current Liability/ Balance Sheet Credit Long-Term Liability O Owner’s Capital Owner’s Equity Owner’s Equity and Credit Balance Sheet Owner’s Drawings Temporary account closed Owner’s Equity Debit to Owner’s Capital P Patents Intangible Asset Balance Sheet Debit Paid-in Capital in Excess of Par— Stockholders’ Equity Balance Sheet Credit Common Stock Paid-in Capital in Excess of Par— Stockholders’ Equity Balance Sheet Credit Preferred Stock Preferred Stock Stockholders’ Equity Balance Sheet Credit Premium on Bonds Payable Long-Term Liability Balance Sheet Credit Prepaid Insurance Current Asset Balance Sheet Debit Prepaid Rent Current Asset Balance Sheet Debit R Rent Expense Operating Expense Income Statement Debit Retained Earnings Stockholders’ Equity Balance Sheet and Retained Credit Earnings Statement S Salaries and Wages Expense Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Balance Sheet Credit Sales Discounts Revenue—Contra Income Statement Debit Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Stock Investments Current Asset/Long-Term Balance Sheet Debit Investment Supplies Current Asset Balance Sheet Debit Supplies Expense Operating Expense Income Statement Debit T Treasury Stock Stockholders’ Equity—Contra Balance Sheet Debit U Unearned Service Revenue Current Liability Balance Sheet Credit Utilities Expense Operating Expense Income Statement Debit (1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss. The Income Summary account does not appear on any financial statement. (2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold.
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The following is a sample chart of accounts. It does not represent a comprehensive chart of all the accounts used in this textbook but rather those accounts that are commonly used. This sample chart of accounts is for a company that generates both service revenue as well as sales revenue. It uses the perpetual approach to inventory. If a periodic system was used, the following temporary accounts would be needed to record inventory purchases: Purchases, Freight-In, Purchase Returns and Allowances, and Purchase Discounts. CHART OF ACCOUNTS Owner’s and Stockholders’ Assets Liabilities Equity Revenues Expenses Cash Notes Payable Owner’s Capital Service Revenue Advertising Expense Accounts Accounts Payable Owner’s Drawings Sales Revenue Receivable Amortization Unearned Service Common Stock Sales Discounts Expense Allowance for Revenue Doubtful Paid-in Capital in Sales Returns and Bad Debt Expense Accounts Salaries and Excess of Par— Allowances Wages Payable Common Stock Cost of Goods Sold Interest Interest Revenue Receivable Unearned Rent Preferred Stock Depreciation Revenue Gain on Disposal Expense Inventory Paid-in Capital in of Plant Assets Interest Payable Excess of Par— Freight-Out Supplies Preferred Dividends Payable Stock Income Tax Prepaid Insurance Expense Income Taxes Treasury Stock Prepaid Rent Payable Insurance Expense Retained Earnings Land Bonds Payable Interest Expense Dividends Equipment Discount on Bonds Loss on Disposal of Payable Income Summary Plant Assets Accumulated Depreciation— Premium on Bonds Maintenance and Equipment Payable Repairs Expense Buildings Mortgage Payable Rent Expense Accumulated Salaries and Wages Depreciation— Expense Buildings Supplies Expense Copyrights Utilities Expense Goodwill Patents
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ACCOUNTING PRINCIPLES T W E L F T H E D I T I O N Jerry J. Weygandt PhD, CPA University of Wisconsin—Madison Madison, Wisconsin Paul D. Kimmel PhD, CPA University of Wisconsin—Milwaukee Milwaukee, Wisconsin Donald E. Kieso PhD, CPA Northern Illinois University DeKalb, Illinois
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D E D I C A T E D T O the Wiley sales representatives who sell our books and service our adopters in a professional and ethical manner, and to Enid, Merlynn, and Donna Vice President and Director George Hoffman Executive Editor Michael McDonald Customer and Market Development Manager Christopher DeJohn Development Editor Ed Brislin Assistant Development Editor Rebecca Costantini Editorial Supervisor Terry Ann Tatro Editorial Associate Margaret Thompson Senior Content Manager Dorothy Sinclair Senior Production Editor Valerie A. Vargas Senior Director, Marketing Amy Scholz Senior Marketing Manager Karolina Zarychta Honsa Product Design Manager Allison Morris Product Design Associate Matt Origoni Media Specialist Elena Santa Maria Design Director Harry Nolan Cover Design Maureen Eide Interior Design Maureen Eide/Kristine Carney Senior Photo Editor Mary Ann Price Market Solutions Assistant Elizabeth Kearns Marketing Assistant Anna Wilhelm Cover and title page Marina Grau/Shutterstock This book was set in New Aster LT Std by Aptara®, Inc. and printed and bound by Courier Kendallville. The cover was printed by Courier Kendallville. Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations. Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business. Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support. For more information, please visit our website: www.wiley.com/go/citizenship. Copyright © 2015, 2012, 2010, 2008, 2005, 2002, 2000 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions. Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year. These copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. Outside of the United States, please contact your local representative. ISBN-13 978-1-118-87505-6 Binder-Ready Version ISBN 978-1-118-96990-8 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1
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Brief Contents 1 Accounting in Action 2 2 The Recording Process 48 3 Adjusting the Accounts 92 4 Completing the Accounting Cycle 148 5 Accounting for Merchandising Operations 206 6 Inventories 262 7 Accounting Information Systems 310 8 Fraud, Internal Control, and Cash 354 9 Accounting for Receivables 404 10 Plant Assets, Natural Resources, and Intangible Assets 442 11 Current Liabilities and Payroll Accounting 490 12 Accounting for Partnerships 532 13 Corporations: Organization and Capital Stock Transactions 570 14 Corporations: Dividends, Retained Earnings, and Income Reporting 608 15 Long-Term Liabilities 644 16 Investments 690 17 Statement of Cash Flows 726 18 Financial Statement Analysis 784 19 Managerial Accounting 834 20 Job Order Costing 876 21 Process Costing 916 22 Cost-Volume-Profit 960 23 Budgetary Planning 1004 24 Budgetary Control and Responsibility Accounting 1052 25 Standard Costs and Balanced Scorecard 1100 26 Incremental Analysis and Capital Budgeting 1146 APPENDICES A Specimen Financial Statements: Apple Inc. B Specimen Financial Statements: PepsiCo, Inc. C Specimen Financial Statements: The Coca-Cola Company D Specimen Financial Statements: Amazon.com, Inc. E Specimen Financial Statements: Wal-Mart Stores, Inc. F Specimen Financial Statements: Louis Vuitton G Time Value of Money H Standards of Ethical Conduct for Managerial Accountants Cases for Managerial Decision-Making* *Available at the book’s companion website, www.wiley.com/college/weygandt. iii
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From the Authors Dear Student, Why This Course? Remember your biology course in high school? Did you have one of those “invisible man” models (or maybe something more high-tech than that) that gave you the opportunity to look “inside” the human body? This accounting course offers something similar. To understand a business, you have to understand the finan- cial insides of a business organization. An accounting course will help you understand the essential financial components of businesses. Whether you are looking at a large multinational company like Apple or Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening. As an employee, a manager, an investor,a business owner, or a director of your own personal finances— any of which roles you will have at some point in your life—you will make better decisions for having “Whether you are looking at a large taken this course. multinational company like Apple or Starbucks or a single-owner software Why This Book? Hundreds of thousands of stu- consulting business or coffee shop, dents have used this textbook. Your instructor has knowing the fundamentals of chosen it for you because of its trusted reputation. accounting will help you understand The authors have worked hard to keep the book what is happening.” fresh, timely, and accurate. How to Succeed? We’ve asked many students and many instructors whether there is a secret for success in this course. The nearly unanimous answer turns out to be not much of a secret: “Do the homework.” This is one course where doing is learning. The more time you spend on the homework assignments—using the various tools that this textbook provides—the more likely you are to learn the essential concepts, techniques, and methods of accounting. Besides the textbook itself, WileyPLUS and the book’s companion website also offers various support resources. Good luck in this course. We hope you enjoy the experience and that you put to good use throughout a lifetime of success the knowledge you obtain in this course. We are sure you will not be disappointed. Jerry J. Weygandt Paul D. Kimmel Donald E. Kieso iv
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Author Commitment Jerry Weygandt Paul Kimmel Don Kieso Jerry J. Weygandt, PhD, CPA, is Arthur Paul D. Kimmel, PhD, CPA, received his Donald E. Kieso, PhD, CPA, received his Andersen Alumni Emeritus Professor of bachelor’s degree from the University of bachelor’s degree from Aurora University Accounting at the University of Wisconsin— Minnesota and his doctorate in account- and his doctorate in accounting from the Madison. He holds a Ph.D. in accounting ing from the University of Wisconsin. He University of Illinois. He has served as chairman from the University of Illinois. Articles by is an Associate Professor at the University of the Department of Accountancy and is Professor Weygandt have appeared in the of Wisconsin—Milwaukee, and has public currently the KPMG Emeritus Professor of Accounting Review, Journal of Accounting accounting experience with Deloitte & Touche Accountancy at Northern Illinois University. Research, Accounting Horizons, Journal of (Minneapolis). He was the recipient of the He has public accounting experience with Accountancy, and other academic and profes- UWM School of Business Advisory Council Price Waterhouse & Co. (San Francisco sional journals. These articles have examined Teaching Award, the Reggie Taite Excellence and Chicago) and Arthur Andersen & Co. such financial reporting issues as accounting in Teaching Award and a three-time winner (Chicago) and research experience with the for price-level adjustments, pensions, convert- of the Outstanding Teaching Assistant Award Research Division of the American Institute of ible securities, stock option contracts, and at the University of Wisconsin. He is also a Certified Public Accountants (New York). He interim reports. Professor Weygandt is author recipient of the Elijah Watts Sells Award for has done post doctorate work as a Visiting of other accounting and financial report- Honorary Distinction for his results on the Scholar at the University of California at ing books and is a member of the American CPA exam. He is a member of the American Berkeley and is a recipient of NIU’s Teaching Accounting Association, the American Accounting Association and the Institute of Excellence Award and four Golden Apple Institute of Certified Public Accountants, Management Accountants and has published Teaching Awards. Professor Kieso is the and the Wisconsin Society of Certified Public articles in Accounting Review, Accounting author of other accounting and business Accountants. He has served on numerous Horizons, Advances in Management books and is a member of the American committees of the American Accounting Accounting, Managerial Finance, Issues in Accounting Association, the American Association and as a member of the editorial Accounting Education, Journal of Accounting Institute of Certified Public Accountants, and board of the Accounting Review; he also has Education, as well as other journals. His the Illinois CPA Society. He has served as a served as President and Secretary-Treasurer research interests include accounting for finan- member of the Board of Directors of the of the American Accounting Association. In cial instruments and innovation in accounting Illinois CPA Society, then AACSB’s Accounting addition, he has been actively involved with education. He has published papers and given Accreditation Committees, the State of Illinois the American Institute of Certified Public numerous talks on incorporating critical Comptroller’s Commission, as Secretary- Accountants and has been a member of the thinking into accounting education, and Treasurer of the Federation of Schools of Accounting Standards Executive Committee helped prepare a catalog of critical thinking Accountancy, and as Secretary-Treasurer of the (AcSEC) of that organization. He has served resources for the Federated Schools of American Accounting Association. Professor on the FASB task force that examined the report- Accountancy. Kieso is currently serving on the Board of ing issues related to accounting for income Trustees and Executive Committee of Aurora taxes and served as a trustee of the Financial University, as a member of the Board of Accounting Foundation. Professor Weygandt Directors of Kishwaukee Community Hospital, has received the Chancellor’s Award for and as Treasurer and Director of Valley West Excellence in Teaching and the Beta Gamma Community Hospital. From 1989 to 1993 he Sigma Dean’s Teaching Award. He is on the served as a charter member of the national board of directors of M & I Bank of Southern Accounting Education Change Commission. Wisconsin. He is the recipient of the Wisconsin He is the recipient of the Outstanding Institute of CPA’s Outstanding Educator’s Accounting Educator Award from the Illinois Award and the Lifetime Achievement Award. CPA Society, the FSA’s Joseph A. Silvoso Award In 2001 he received the American Accounting of Merit, the NIU Foundation’s Humanitarian Association’s Outstanding Educator Award. Award for Service to Higher Education, a Distinguished Service Award from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University.
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Practice Made Simple The Team for Success is focused on helping students get the most out of their accounting course by making practice simple. Both in the printed text and the online environment of WileyPLUS, new opportunities for self-guided practice allow students to check their knowledge of accounting concepts, skills, and problem-solving techniques as they receive individual feedback at the question, learning objective, and course level. Personalized Practice Based on cognitive science, WileyPLUS with ORION is a personalized, adaptive learning experience that gives students the practice they need to build proficiency on topics while using their study time most effectively. The adaptive engine is powered by hundreds of unique questions per chapter, giving students endless opportunities for practice throughout the course.
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Streamlined Learning Objectives Newly streamlined learning objectives help students make the best use of their time outside of class. Each learning objective is addressed by reading content, answering a variety of practice and assessment questions, and watching educational videos, so that no matter where students begin their work, the relevant resources and practice are readily accessible. Reading Content Learning Objective Assessment Educational Videos Review and Practice A new section in the text and in WileyPLUS offers students more opportunities for self-guided practice. In the text, the new Review and Practice section includes: • Learning Objectives Review • Glossary Review • Practice Multiple-Choice Questions and Solutions • Practice Exercises and Solutions • Practice Problem and Solution In WileyPLUS, the new practice assignments include several Do ITs, Brief Exercises, Exercises, and Problems, giving students the opportunity to check their work or see the answer and solution after their final attempt.
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What’s New? WileyPLUS with ORION Over 5,500 new questions are available for practice and review. WileyPLUS with Orion is an adaptive study and practice tool that helps students build proficiency in course topics. Updated Content and Design We scrutinized all chapter material to find new ways to engage students and help them learn accounting concepts. Homework problems were updated in all chapters. A new learning objective structure helps students practice their understanding of concepts with DO IT! exercises before they move on to different topics in other learning objectives. Coupled with a new interior design and revised infographics, the new outcomes-oriented approach motivates students and helps them make the best use of their time. WileyPLUS Videos Over 300 videos are available in WileyPLUS. More than 150 of the videos are new to the 12th Edition. The videos walk students through relevant homework problems and solutions, review important concepts, provide overviews of Excel skills, and explore topics in a real-world context. Student Practice and Solutions New practice opportunities with solutions are integrated throughout the textbook and WileyPLUS course. Each textbook chapter now provides students with a Review and Practice section that includes learning objective summaries, multiple-choice questions with feedback for each answer choice, and both practice exercises and problems with solutions. Also, each learning objective module in the textbook is now followed by a DO IT! exercise with an accompanying solution. In WileyPLUS, two brief exercises, two DO IT! exercises, two exercises, and a new problem are available for practice with each chapter. These practice questions are algorithmic, providing students with multiple opportunities for advanced practice. Real World Context We expanded our practice of using numerous examples of real companies throughout the textbook. For example, new feature stories highlight operations of Clif Bar, Groupon, and REI. Also, in WileyPLUS, real-world Insight boxes now have questions that can be assigned as homework. Excel New Excel skill videos help students understand Excel features they can apply in their accounting studies. A new continuing Excel tutorial is also available at the end of each managerial accounting chapter. More information about the 12th Edition is available on the book’s website at www.wiley.com/college/weygandt. viii
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Table of Contents Accounting in Action 2 LO 3: Explain how a ledger and posting help 1 in the recording process. 57 The Ledger 57 Knowing the Numbers: Clif Bar 2 Posting 59 LO 1: Identify the activities and users associated The Recording Process Illustrated 60 with accounting. 4 Summary Illustration of Journalizing and Three Activities 4 Posting 66 Who Uses Accounting Data 5 LO 4: Prepare a trial balance. 68 LO 2: Explain the building blocks of accounting: Limitations of a Trial Balance 68 ethics, principles, and assumptions. 7 Locating Errors 69 Ethics in Financial Reporting 7 Dollar Signs and Underlining 69 Generally Accepted Accounting Principles 8 A Look at IFRS 90 Measurement Principles 9 Assumptions 9 LO 3: State the accounting equation, and define its components. 12 92 Assets 12 3 Adjusting the Accounts Liabilities 12 Owner’s Equity 13 Keeping Track of Groupons: Groupon 92 LO 4: Analyze the effects of business transactions LO 1: Explain the accrual basis of accounting on the accounting equation. 14 and the reasons for adjusting entries. 94 Transaction Analysis 15 Fiscal and Calendar Years 94 Summary of Transactions 19 Accrual-versus Cash-Basis Accounting 94 LO 5: Describe the four financial statements and Recognizing Revenues and Expenses 95 how they are prepared. 21 The Need for Adjusting Entries 96 Income Statement 21 Types of Adjusting Entries 96 Owner’s Equity Statement 21 LO 2: Prepare adjusting entries for deferrals. 97 Balance Sheet 23 Prepaid Expenses 98 Statement of Cash Flows 23 Unearned Revenues 101 LO *6: APPENDIX 1A: Explain the career LO 3: Prepare adjusting entries for accruals. 104 opportunities in accounting. 25 Accrued Revenues 104 Public Accounting 25 Accrued Expenses 106 Private Accounting 26 Summary of Basic Relationships 109 Governmental Accounting 26 LO 4: Describe the nature and purpose of an Forensic Accounting 26 adjusted trial balance. 111 “Show Me the Money” 26 Preparing the Adjusted Trial Balance 111 A Look at IFRS 46 Preparing Financial Statements 112 LO *5: APPENDIX 3A: Prepare adjusting 48 entries for the alternative treatment of 2 The Recording Process deferrals. 115 Prepaid Expenses 116 Accidents Happen: MF Global Holdings 48 Unearned Revenues 117 LO 1: Describe how accounts, debits, and credits Summary of Additional Adjustment are used to record business transactions. 50 Relationships 118 The Account 50 LO *6: APPENDIX 3B: Discuss financial reporting Debits and Credits 50 concepts. 119 Summary of Debit/Credit Rules 53 Qualities of Useful Information 119 LO 2: Indicate how a journal is used in the Assumptions in Financial Reporting 119 recording process. 54 Principles in Financial Reporting 120 Steps in the Recording Process 54 Cost Constraint 121 The Journal 55 A Look at IFRS 146 ix
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Completing the LO 4: Apply the steps in the accounting cycle to a 4 Accounting Cycle 148 merchandising company. 220 Adjusting Entries 220 Closing Entries 220 Everyone Likes to Win: Rhino Foods 148 Summary of Merchandising Entries 221 LO 1: Prepare a worksheet. 150 LO 5: Compare a multiple-step with a single-step Steps in Preparing a Worksheet 150 income statement. 222 Preparing Financial Statements from a Multiple-Step Income Statement 222 Worksheet 157 Single-Step Income Statement 226 Preparing Adjusting Entries from a Classified Balance Sheet 226 Worksheet 158 LO *6: APPENDIX 5A: Prepare a worksheet for a LO 2: Prepare closing entries and a post-closing merchandising company. 228 trial balance. 158 Using a Worksheet 228 Preparing Closing Entries 159 LO *7: APPENDIX 5B: Record purchases and sales Posting Closing Entries 161 under a periodic inventory system. 229 Preparing a Post-Closing Trial Balance 163 Determining Cost of Goods Sold Under a Periodic LO 3: Explain the steps in the accounting cycle and System 230 how to prepare correcting entries. 166 Recording Merchandise Transactions 230 Summary of the Accounting Cycle 166 Recording Purchases of Merchandise 231 Reversing Entries—An Optional Step 166 Recording Sales of Merchandise 232 Correcting Entries—An Avoidable Step 167 Journalizing and Posting Closing Entries 233 LO 4: Identify the sections of a classified balance Using a Worksheet 234 sheet. 169 A Look at IFRS 259 Current Assets 170 Long-Term Investments 171 Property, Plant, and Equipment 171 262 Intangible Assets 171 6 Inventories Current Liabilities 172 Long-Term Liabilities 173 “Where Is That Spare Bulldozer Blade?”: Caterpillar 262 Owner’s Equity 174 LO 1: Discuss how to classify and determine LO *5: APPENDIX 4A: Prepare reversing inventory. 264 entries. 175 Classifying Inventory 264 Reversing Entries Example 175 Determining Inventory Quantities 265 A Look at IFRS 202 LO 2: Apply inventory cost flow methods and discuss their financial effects. 268 Specific Identification 269 Cost Flow Assumptions 269 Accounting for Financial Statement and Tax Effects of Cost Flow 5 Merchandising Operations 206 Methods 274 Using Inventory Cost Flow Methods Consistently 275 Buy Now, Vote Later: REI 206 LO 3: Indicate the effects of inventory errors on LO 1: Describe merchandising operations and the financial statements. 277 inventory systems. 208 Income Statement Effects 277 Operating Cycles 208 Balance Sheet Effects 278 Flow of Costs 209 LO 4: Explain the statement presentation and LO 2: Record purchases under a perpetual analysis of inventory. 279 inventory system. 211 Presentation 279 Freight Costs 213 Lower-of-Cost-or-Net Realizable Value 279 Purchase Returns and Allowances 214 Analysis 280 Purchase Discounts 214 LO *5: APPENDIX 6A: Apply the inventory Summary of Purchasing Transactions 215 cost flow methods to perpetual inventory LO 3: Record sales under a perpetual inventory records. 282 system. 216 First-In, First-Out (FIFO) 282 Sales Returns and Allowances 217 Last-In, First-Out (LIFO) 283 Sales Discounts 218 Average-Cost 283 x
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LO *6: APPENDIX 6B: Describe the two methods of Accounting for Receivables 404 estimating inventories. 284 9 Gross Profit Method 284 Retail Inventory Method 285 A Dose of Careful Management Keeps Receivables A Look at IFRS 308 Healthy: Whitehall-Robins 404 LO 1: Explain how companies recognize accounts Accounting Information receivable. 406 7 Systems 310 Types of Receivables 406 Recognizing Accounts Receivable 406 LO 2: Describe how companies value QuickBooks® Helps This Retailer Sell Guitars 310 accounts receivable and record their LO 1: Explain the basic concepts of an accounting disposition. 408 information system. 312 Valuing Accounts Receivable 408 Computerized Accounting Systems 312 Disposing of Accounts Receivable 414 Manual Accounting Systems 314 LO 3: Explain how companies recognize notes LO 2: Describe the nature and purpose of a receivable. 417 subsidiary ledger. 315 Determining the Maturity Date 417 Subsidiary Ledger Example 315 Computing Interest 418 Advantages of Subsidiary Ledgers 316 Recognizing Notes Receivable 419 LO 3: Record transactions in special journals. 317 LO 4: Describe how companies value notes Sales Journal 318 receivable, record their disposition, and present Cash Receipts Journal 320 and analyze receivables. 420 Purchases Journal 324 Valuing Notes Receivable 420 Cash Payments Journal 326 Disposing of Notes Receivable 420 Effects of Special Journals on the General Statement Presentation and Analysis 422 Journal 329 A Look at IFRS 440 Cyber Security: A Final Comment 330 A Look at IFRS 353 Fraud, Internal Control, Plant Assets, Natural 8 and Cash 354 10 Resources, and Intangible 442 Assets Minding the Money in Madison: Barriques 354 LO 1: Discuss fraud and the principles of internal How Much for a Ride to the Beach?: control. 356 Rent-A-Wreck 442 Fraud 356 LO 1: Explain the accounting for plant asset The Sarbanes-Oxley Act 356 expenditures. 444 Internal Control 357 Determining the Cost of Plant Assets 444 Principles of Internal Control Activities 358 Expenditures During Useful Life 446 Limitations of Internal Control 365 LO 2: Apply depreciation methods to plant LO 2: Apply internal control principles to assets. 448 cash. 366 Factors in Computing Depreciation 449 Cash Receipts Controls 366 Depreciation Methods 449 Cash Disbursements Controls 369 Depreciation and Income Taxes 454 Petty Cash Fund 370 Revising Periodic Depreciation 454 LO 3: Identify the control features of a bank LO 3: Explain how to account for the disposal of account. 373 plant assets. 455 Making Bank Deposits 373 Retirement of Plant Assets 456 Writing Checks 374 Sale of Plant Assets 456 Bank Statements 375 LO 4: Describe how to account for natural Reconciling the Bank Account 376 resources and intangible assets. 458 Electronic Funds Transfer (EFT) System 380 Natural Resources 458 LO 4: Explain the reporting of cash. 381 Depletion 458 Cash Equivalents 381 Intangible Assets 460 Restricted Cash 382 Accounting for Intangible Assets 460 A Look at IFRS 402 Research and Development Costs 462 xi
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LO 5: Discuss how plant assets, natural resources, LO 2: Explain how to account for net income or and intangible assets are reported and net loss of a partnership. 539 analyzed. 463 Dividing Net Income or Net Loss 539 Presentation 463 Partnership Financial Statements 542 Analysis 464 LO 3: Explain how to account for the liquidation of LO *6: APPENDIX 10A: Explain how to account a partnership. 543 for the exchange of plant assets. 465 No Capital Deficiency 544 Loss Treatment 465 Capital Deficiency 546 Gain Treatment 466 LO *4: APPENDIX 12A: Prepare journal entries when A Look at IFRS 487 a partner is either admitted or withdraws. 549 Admission of a Partner 549 Current Liabilities and Withdrawal of a Partner 552 11 Payroll Accounting 490 Financing His Dreams: Wilbert Murdock 490 Corporations: Organization 570 13 and Capital Stock Transactions LO 1: Explain how to account for current liabilities. 492 What Is a Current Liability? 492 What’s Cooking?: Nike 570 Notes Payable 492 LO 1: Discuss the major characteristics of Sales Taxes Payable 493 a corporation. 572 Unearned Revenues 494 Characteristics of a Corporation 572 Current Maturities of Long-Term Debt 494 Forming a Corporation 574 LO 2: Discuss how current liabilities are reported Stockholder Rights 576 and analyzed. 495 Stock Issue Considerations 576 Reporting Uncertainty 495 Corporate Capital 579 Reporting of Current Liabilities 497 LO 2: Explain how to account for the issuance Analysis of Current Liabilities 497 of common and preferred stock. 581 LO 3: Explain how to account for payroll. 499 Issuing Par Value Common Stock for Cash 581 Determining the Payroll 499 Issuing No-Par Common Stock for Cash 582 Recording the Payroll 503 Issuing Common Stock for Services or Noncash Employer Payroll Taxes 506 Assets 582 Filing and Remitting Payroll Taxes 508 Accounting for Preferred Stock 583 Internal Control for Payroll 508 LO 3: Explain how to account for treasury LO *4: APPENDIX 11A: Discuss additional stock. 584 fringe benefits associated with employee Purchase of Treasury Stock 584 compensation. 510 Disposal of Treasury Stock 585 Paid Absences 510 LO 4: Prepare a stockholders’ equity section. 587 Postretirement Benefits 511 A Look at IFRS 605 A Look at IFRS 530 Accounting for Corporations: Dividends, 12 Partnerships 532 14 Retained Earnings, and 608 Income Reporting From Trials to the Top Ten: Razor & Tie 532 LO 1: Discuss and account for the formation of a Owning a Piece of the Action: Van Meter Inc. 608 partnership. 534 LO 1: Explain how to account for cash Characteristics of Partnerships 534 dividends. 610 Organizations with Partnership Cash Dividends 610 Characteristics 535 Dividend Preferences 612 Advantages and Disadvantages of LO 2: Explain how to account for stock dividends Partnerships 537 and splits. 615 The Partnership Agreement 537 Stock Dividends 615 Accounting for a Partnership Formation 538 Stock Splits 617 xii
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LO 3: Prepare and analyze a comprehensive LO 2: Explain how to account for stock stockholders’ equity section. 619 investments. 695 Retained Earnings 619 Holdings of Less than 20% 696 Statement Presentation and Analysis 622 Holdings Between 20% and 50% 696 LO 4: Describe the form and content of corporation Holdings of More than 50% 698 income statements. 623 LO 3: Discuss how debt and stock investments are Income Statement Presentation 623 reported in financial statements. 700 Income Statement Analysis 624 Categories of Securities 700 A Look at IFRS 642 Balance Sheet Presentation 703 Presentation of Realized and Unrealized Gain or Loss 704 15 Long-Term Liabilities 644 Classified Balance Sheet 705 A Look at IFRS 723 And Then There Were Two 644 726 LO 1: Describe the major characteristics of bonds. 646 17 Statement of Cash Flows Types of Bonds 646 Issuing Procedures 646 Got Cash?: Microsoft 726 Determining the Market Price of a Bond 647 LO 1: Discuss the usefulness and format of the LO 2: Explain how to account for bond statement of cash flows. 728 transactions. 649 Usefulness of the Statement of Cash Flows 728 Issuing Bonds at Face Value 649 Classification of Cash Flows 728 Discount or Premium on Bonds 650 Significant Noncash Activities 729 Issuing Bonds at a Discount 651 Format of the Statement of Cash Flows 730 Issuing Bonds at a Premium 652 LO 2: Prepare a statement of cash flows using the Redeeming and Converting Bonds 654 indirect method. 731 LO 3: Explain how to account for long-term Indirect and Direct Methods 732 notes payable. 656 Indirect Method—Computer Services Long-Term Notes Payable 656 Company 732 LO 4: Discuss how long-term liabilities are Step 1: Operating Activities 734 reported and analyzed. 657 Summary of Conversion to Net Cash Provided Presentation 657 by Operating Activities—Indirect Method 737 Use of Ratios 658 Step 2: Investing and Financing Activities 738 Debt and Equity Financing 658 Step 3: Net Change in Cash 739 Lease Liabilities and Off-Balance-Sheet LO 3: Analyze the statement of cash flows. 742 Financing 659 Free Cash Flow 742 LO *5: APPENDIX 15A: Apply the straight-line LO *4: APPENDIX 17A: Prepare a statement of method of amortizing bond discount cash flows using the direct method. 743 and bond premium. 662 Step 1: Operating Activities 745 Amortizing Bond Discount 662 Step 2: Investing and Financing Activities 749 Amortizing Bond Premium 663 Step 3: Net Change in Cash 751 LO *6: APPENDIX 15B: Apply the effective-interest LO *5: APPENDIX 17B: Use a worksheet to method of amortizing bond discount and bond prepare the statement of cash flows using the premium. 664 indirect method. 751 Amortizing Bond Discount 665 Preparing the Worksheet 752 Amortizing Bond Premium 666 LO *6: APPENDIX 17C: Use the T-account approach A Look at IFRS 686 to prepare a statement of cash flows. 755 A Look at IFRS 782 16 Investments 690 Financial Statement 784 18 Analysis “Is There Anything Else We Can Buy?”: Time Warner 690 It Pays to Be Patient: Warren Buffett 784 LO 1: Explain how to account for debt LO 1: Apply horizontal and vertical analysis to investments. 692 financial statements. 786 Why Corporations Invest 692 Need for Comparative Analysis 786 Accounting for Debt Investments 693 Tools of Analysis 786 xiii
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Horizontal Analysis 787 LO 2: Use a job cost sheet to assign costs to work Vertical Analysis 790 in process. 882 LO 2: Analyze a company’s performance Raw Materials Costs 883 using ratio analysis. 792 Factory Labor Costs 885 Liquidity Ratios 793 LO 3: Demonstrate how to determine Profitability Ratios 796 and use the predetermined overhead Solvency Ratios 800 rate. 887 Summary of Ratios 802 LO 4: Prepare entries for manufacturing and LO 3: Apply the concept of sustainable income. 804 service jobs completed and sold. 890 Discontinued Operations 805 Assigning Costs to Finished Goods 890 Other Comprehensive Income 805 Assigning Costs to Cost of Goods Sold 891 A Look at IFRS 832 Summary of Job Order Cost Flows 891 Job Order Costing for Service Companies 893 Advantages and Disadvantages of Job Order 19 Managerial Accounting 834 Costing 894 LO 5: Distinguish between under- and overapplied manufacturing overhead. 895 Just Add Water . . . and Paddle: Current Designs 834 Under- or Overapplied Manufacturing LO 1: Identify the features of managerial Overhead 896 accounting and the functions of management. 836 Comparing Managerial and Financial Process Costing 916 Accounting 836 21 Management Functions 836 Organizational Structure 838 The Little Guy Who Could: Jones Soda Co. 916 LO 2: Describe the classes of manufacturing costs LO 1: Discuss the uses of a process cost and the differences between product and period system and how it compares to a job order costs. 840 system. 918 Manufacturing Costs 840 Uses of Process Cost Systems 918 Product versus Period Costs 842 Process Costing for Service Companies 919 Illustration of Cost Concepts 842 Similarities and Differences Between Job Order LO 3: Demonstrate how to compute cost of goods Cost and Process Cost Systems 919 manufactured and prepare financial statements LO 2: Explain the flow of costs in a process for a manufacturer. 844 cost system and the journal entries to assign Income Statement 844 manufacturing costs. 921 Cost of Goods Manufactured 845 Process Cost Flow 921 Cost of Goods Manufactured Schedule 846 Assigning Manufacturing Costs—Journal Balance Sheet 846 Entries 921 LO 4: Discuss trends in managerial accounting. 848 LO 3: Compute equivalent units. 924 Service Industries 848 Weighted-Average Method 924 Focus on the Value Chain 849 Refinements on the Weighted-Average Balanced Scorecard 850 Method 925 Business Ethics 851 LO 4: Complete the four steps to prepare a Corporate Social Responsibility 852 production cost report. 927 Compute the Physical Unit Flow (Step 1) 928 Compute the Equivalent Units of Production Job Order Costing 876 (Step 2) 928 20 Compute Unit Production Costs (Step 3) 929 Prepare a Cost Reconciliation Schedule Profiting from the Silver Screen: Disney 876 (Step 4) 930 LO 1: Describe cost systems and the flow of costs Preparing the Production Cost Report 930 in a job order system. 878 Costing Systems—Final Comments 931 Process Cost System 878 LO 5: Explain just-in-time (JIT) processing and Job Order Cost System 878 activity-based costing (ABC). 932 Job Order Cost Flow 879 Just-in-Time Processing 932 Accumulating Manufacturing Costs 880 Activity-Based Costing 934 xiv
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