13/e. Financial &. Managerial. Accounting. Boston Burr Ridge, IL Dubuque, IA
Madison, WI New York San Francisco St. .... counting Research, Accounting
Horizons, Management Accounting Research, and .... EMPHASIZED IN
CHAPTER 17.
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Financial & Managerial Accounting The Basis for Business Decisions 13/e Jan R. Williams
University of Tennessee—Knoxville
Susan F. Haka
Michigan State University
Mark S. Bettner Bucknell University
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto
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FINANCIAL & MANAGERIAL ACCOUNTING: THE BASIS FOR BUSINESS DECISIONS Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2005, 2002, 1999, 1996, 1993, 1990, 1987, 1984, 1981, 1972, 1967, 1962 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. domestic 1 2 3 4 5 6 7 8 9 0 VNH/VNH 0 9 8 7 6 5 4 3 international 1 2 3 4 5 6 7 8 9 0 VNH/VNH 0 9 8 7 6 5 4 3 ISBN 0-07-285659-9 Editorial director: Brent Gordon Publisher: Stewart Mattson Executive editor: Tim Vertovec Developmental editor: Heather Sabo Marketing manager: Katherine Mattison Senior producer, Media technology: Ed Przyzycki Senior project manager: Lori Koetters Production supervisor: Gina Hangos Coordinator freelance design: Artemio Ortiz Jr. Photo research coordinator: Kathy Shive Photo researcher: Mary Reeg Senior supplement producer: Carol Loreth Senior digital content specialist: Brian Nacik Cover design: Krista Lehmkuhl Interior Design: Maureen McCutcheon Typeface: 10.5/12 Times Roman Compositor: The GTS Companies/York, PA Campus Printer: Von Hoffmann Corporation Library of Congress Cataloging-in-Publication Data Williams, Jan R. Financial and managerial accounting : the basis for business decisions / Jan R. Williams, Susan F. Haka, Mark S. Bettner.-- 13th ed. p. cm. Rev. ed. of: Financial and managerial accounting / Jan R. Williams ... [et al.]. 12th ed. 2002. ISBN 0-07-285659-9 (alk. paper) 1. Accounting. I. Haka, Susan F. (Susan Frances) II. Bettner, Mark S. III. Financial and managerial accounting. IV. Title. HF5635.M4887 2005 2003060360 657--dc22 INTERNATIONAL EDITION ISBN 0-07-111222-7 Copyright © 2005. Exclusive rights by The McGraw-Hill Companies, Inc. for manufacture and export. This book cannot be re-exported from the country to which it is sold by McGraw-Hill. The International Edition is not available in North America. www.mhhe.com
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To Benjamin Taylor Wishart, Asher Williams Hunt, and Margaret Elaine Wishart, who have taught me the joys of being a grandfather. — Jan R. Williams
For Cliff, Abi, and my mother, Fran. — Susan F. Haka
To my parents, Fred and Marjorie. — Mark S. Bettner
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preface
About the Authors Jan R. Williams Jan R. Williams is Ernst & Young Professor of Accounting and Dean of the College of Business Administration, University of Tennessee. He received a BS degree from George Peabody College, an MBA from Baylor University and a Ph.D. from the University of Arkansas. Dr. Williams’s primary teaching and research interest is corporate finance reporting. He is currently the author or coauthor of four books and more than 70 articles and other publications about financial reporting and accounting education. Dr. Williams has been extensively involved in professional accounting activities with the American Accounting Association (AAA), the American Institute of CPAs (AICPA), the Tennessee Society of CPAs, and other organizations. In 1999–2000, he served as president of the AAA and recently served on two task forces of the AICPA to redesign the CPA examination.
Susan F. Haka
The Ernst & Young Professor of Accounting in the Department of Accounting and Information Systems at Michigan State University, Sue Haka received her Ph.D. from the University of Kansas and a master’s degree in accounting from the University of Illinois. She is an active member of the American Accounting Association, was recently elected to be vice president of finance, has served as Director of the Doctoral Consortium, and has served as president of the Management Accounting Section. Dr. Haka is active in editorial processes and has been editor of Behavioral Research in Accounting and an associate editor for Journal of Management Accounting Research, Accounting Horizons, Management Accounting Research, and Contemporary Accounting Research. Dr. Haka has been honored with several teaching and research awards including a University-wide Teacher-Scholar award.
Mark S. Bettner Associate Professor at Bucknell University, Mark Bettner has received numerous teaching and research awards. In addition to his work on the Williams titles, he has written many ancillary materials, published in scholarly journals, and presented at numerous academic and practitioner conferences. Bettner is also on the editorial advisory boards of several academic journals, including the International Journal of Accounting and Business Society.
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preface BUILDING A SOLID FOUNDATION
Redwood trees represent strength, stability, and a solid foundation. The same can be said for Williams/Haka/Bettner, Financial and Managerial Accounting, 13e. It helps students learn the basics of financial and managerial accounting by providing a solid presentation of the root of the principles course, the accounting cycle. Financial and Managerial Accounting helps students build a foundation upon which they’ll continue to learn and grow in their study of business. Students who use this text know where the numbers come from and how to find the information they need to make important decisions. The Williams team’s solid foundation is comprised of the following four qualities:
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preface Accounting Cycle Presentation
In the first five chapters of Financial and Managerial Accounting, the authors’ presentation of the Accounting Cycle provides a solid foundation for learning accounting concepts. Central to this presentation is the authors’ treatment of the 4-step process involved in all business transactions. Making their hallmark coverage of transactions even clearer, the Williams team places the accounting equation in the margin as the perfect accompaniment to their solid presentation of the accounting cycle.
Student Motivation The Williams team has put together a market-leading student package that will not only motivate your students, but help you see greater retention rates in your accounting courses. Vital pieces of technology, such as My Mentor—a visual learning tool; the Online Learning Center, packed with tools for both students and instructors; and McGraw-Hill Homework Manager—online practice/testing tied directly to text end-ofchapter material, complement the text, encouraging students to apply what they’re learning and improve their grades. Problem-Solving Skills Financial and Managerial Accounting challenges your students to think about real-world situations and put themselves in the role of the decision maker through Case-In-Point, Your Turn, and Management Strategy and Financial Reporting boxes. Students are driven to the Tootsie Roll Annual Report included in the text and other sources to further hone problem-solving skills by evaluating real-world financial data. The authors’ attention to detail in creating high quality end-of-chapter material, such as the Critical Thinking Cases and Problems, ensures that all homework is tied directly back to chapter topics. Balanced Coverage
The 13th edition of Williams provides the most balanced coverage of financial and managerial topics on the market. The author team has refined the presentation of traditional financial accounting topics—such as updating to reflect important changes made as a result of the Sarbanes/Oxley Act, enhancing their focus on ethics in accounting, and improving the explanation of stockholders’ equity. The authors have extended the coverage of managerial topics by adding a separate chapter on Process Costing and presenting Job Order Costing and Activity-Based Costing in Chapter 17, as well as enhanced coverage of just-in-time systems, activitybased management, and the balanced scorecard.
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Why is the Williams presentation of the accounting cycle so effective? Williams breaks down the Accounting Cycle into 3 full chapters to help students absorb and understand this material: recording entries (chapter 3), adjusting entries (chapter 4), and closing entries (chapter 5). Williams helps students conquer recording transactions by showing students the 4 steps in the process visually: Step 1: Analysis—shows which accounts recorded with an increase/descrease Step 2: Debit/Credit Rules—helps students to remember the account should be debited/credited Step 3: Journal Entry—shows the result of the two previous steps Step 4: Ledger T-accounts—shows students what was recorded and where Williams was the FIRST to illustrate this 4-step process to work students through any Balance Sheet or Income Statement transaction. And, this hallmark coverage has been even further enhanced for Williams 13e! Williams puts the Accounting Equation (A = L + OE) in the margin by transaction illustrations to show students the big picture!
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How does the Williams author team treat end-of-chapter material? Five Comprehensive Problems, ranging from two to five pages in length, challenge students to use what they’ve learned in the chapters leading up to them in a real-world scenario. KEY TERMS INTRODUCED OR EMPHASIZED IN CHAPTER 17 activity-based costing (p. 743) Cost accounting method that tracks indirect costs to the activities that consume resources. activity cost pools (p. 751) Overhead categories that represent the costs associated with an activity that consumes overhead resources. cost accounting systems (p. 740) The methods and techniques used by enterprises to track resources consumed in creating and delivering products and services to customers.
Defined Key Terms and Self-Test Questions review and reinforce chapter material.
job cost sheet (p. 744) A record used in job order costing to summarize the manufacturing costs (materials, labor, and overhead) applicable to each job or batch of production. Job cost sheets may be viewed as a subsidiary ledger supporting the balance of the Work in Process Inventory control account. job order costing (p. 741) A cost accounting method under which the focal point of costing is a quantity of product known as a job or lot. Costs of direct materials, direct labor, and manufacturing overhead applicable to each job are compiled to arrive at average unit cost.
Demonstration Problems and their solutions allow students to test their knowledge of key points in the chapters.
overhead application rate (p. 741) A device used to apply a ⫽ 44% normal amount of overhead costs to work in process The rate is
SELF-TEST QUESTIONS The answers to these questions appear on page 261. 1. Mark and Amanda Carter own an appliance store and a restaurant. The appliance store sells merchandise on a 12-month installment plan; the restaurant sells only for cash. Which of the following statements are true? (More than one answer may be correct.) a. The appliance store has a longer operating cycle than the restaurant. b. The appliance store probably uses a perpetual inventory system, whereas the restaurant probably uses a periodic system. c. Both businesses require subsidiary ledgers for accounts receivable and inventory. d. Both businesses probably have subsidiary ledgers for accounts payable. 2. Which of the following statements about merchandising activities is true? (More than one answer may be correct.) a. As inventory is purchased, the Inventory Expense account is debited and Cash (or Acis credited. Oceanview Enterprises is a print shop thatcounts uses jobPayable) order costing. Overhead is applied to individual jobs at a predetermined rate based on direct costs. The job cost as sheet for jobwhen no. 21 appears below. b. labor Inventory is recorded an asset it is first purchased.
Critical Thinking Cases and Problems put students’ analytical skills to the test by having them think critically about key concepts from the chapter and apply them to business decisions.
DEMONSTRATION PROBLEM
c. As inventory is sold, its cost is transferred from the balance sheet to the income statement. d. JOB As inventory is sold, its cost is transferred from the income statement to the balance sheet. COST SHEET 3. Marietta Corporation uses a perpetual inventory system. All of its sales are made on account. The company sells merchandise costing $3,000 at a sales price of $4,300. In recording this DATE STARTED: Feb. 1 JOB NUMBER: 21 transaction, Marietta will make all of the following entries except: Feb. 6 PRODUCT: Income Tax Handbook a. Credit Sales, $4,300. DATE COMPLETED: UNITS COMPLETED: 2,500 b. Credit Inventory, $4,300. c. Debit Cost of Goods Sold, $3,000. d Debit Accounts Receivable $4 300 $
Business Week Assignments are pulled from recent headlines and require students to relate accounting concepts to current events. The 2002 Tootsie Roll Industries, Inc., Annual Report is included in its entirety in Appendix A. Students are referred to it both in the text material and in exercises and problems to help them realize actual business applications of chapter concepts. Ethics Assignments challenge students to explore the impact of decisions made in business. Icons identify text and EOC material involving Carol Yacht’s General Ledger and Peachtree Complete 2004, Excel spreadsheets templates, ethical issues, group activities, international issues, My Mentor topics, and McGraw-Hill Homework Manager problem material.
My Mentor
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What makes Williams features
RELEVANT examples:
• High-tech companies frame the chapter discussion through the use of the CHAPTER OPENER and SECOND LOOK features which open and close each chapter. • Special CASH EFFECTS boxes break down the impact of transactions on cash flow of an organization, so students truly understand the concept of liquidity.
Williams
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?
pedagogy work for students? 1030
Chapter 25 Rewarding Business Performance
they would have some invested capital in administration and research and development. Organizations constantly struggle with how to make capital allocations in their attempt to evaluate business performance.
CASE IN
POINT
Measurement problems also occur when managers do not follow the accounting rules. For example, after WorldCom Inc. (now MCI) filed for bankruptcy in 2002 it became clear that the company manipulated its financial results through a variety of tricks. Interviews with current and former employees uncovered that it was routine to double-count revenue from a single cus- AP Wide World Photo tomer, which inflated return on sales and ROI. In addition, millions of dollars in uncollectable accounts were kept on the books to artificially inflate revenue and reduce liabilities. The SEC investigations uncovered $3.8 billion in accounting misstatements. The proposed $500 million penalty is the heaviest ever levied on a company accused of accounting fraud and the proposed penalty is designed to compensate misled investors.
Williams uses REAL-WORLD examples to keep your students’ attention:
• Real-world companies and the actual business events they encounter are illustrated in the CASE IN POINT boxes to link accounting concepts in the chapter to their use in the real world. These are sometimes of an international flavor to show students practices outside the U.S.
Williams puts the student in the
role of the DECISION MAKER:
• Often including an ethical issue, YOUR TURN boxes challenge students to be the problem solver—they must apply what they’ve learned to real situations faced by investors, creditors, and managers. You as a Production Manager You are the production manager of the Assembly Department described in this chapter. One of your responsibilities is to determine if costs are remaining relatively stable from month to month. Assume the $25,000 that is associated with the 1,000 units in beginning work in process for March is composed of $5,050 of direct labor, $15,450 of direct materials, and $4,500 for Overhead. Determine the cost per equivalent unit for the work done in February on the beginning work in process units. Were direct materials and conversion costs higher or lower in February or March? Speculate about why these costs might differ from one month to the next. (Our comments appear on page 800.)
Tracking Costs in Process Costing Using a Production Report
YOUR TURN
• Students are shown the link between management decisions and financial reporting through the MANAGEMENT STRATEGY boxes.
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What’s New about the 13th Edition
1 Chapter
1:
• Expanded chapter opener emphasizes importance of financial information for both internal & external parties
trate effects of adjusting entries on elements of income statement & balance sheet • Extensive EOC material reinforces understanding of effects of adjusting entries on elements of income statement & balance sheet
• New EOC materials emphasize preparation & interpretation of income statement issued by merchandising companies
chapter body • Estimated liabilities, loss contingencies, & commitments covered in chapter body
7 11 5 12 2 6 813 14 3 9 15 4 • Relationship among financial, managerial, & tax information clarified • Relationship of investment & return on investment clarified in text, exhibit
• Some information regarding financial statements moved to Ch. 2 • Information about recent legislation affecting accounting profession (Sarbanes-Oxley) added
• Information about new/computerized CPA examination added • Information about careers moved from supplemental topic to chapter body
Chapter
2:
• High-tech companies featured in almost all illustrations, including chapter opener, to allow mention of differences between information-age companies and traditional manufacturing & other companies; Companies include Intel, Microsoft, Cisco Systems • Some material moved from Ch. 1 to Ch. 2 to strengthen introduction to financial statements, make relationship of three primary financial statements more understandable
Chapter
3:
• EOC material revised to reinforce understanding of effects of economic events on income statement & balance sheet
• New, short comprehensive EOC items require students to integrate concepts & learning objectives from entire chapter • New & revised real world EOC materials
Chapter
4:
• Revised exhibit illustrates how accruals & deferrals of revenue & expense affect multiple accounting periods • New exhibit & discussion illus-
• New short comprehensive EOC items require students to integrate concepts & learning objectives from entire chapter
• New & revised real world EOC materials
Chapter
7:
• Coverage of cash management & internal controls condensed; Procedural discussion of voucher systems eliminated
• Coverage of leases, pensions, & deferred taxes streamlined and moved to supplemental topic • Significant revision of EOC materials
Chapter
11:
• General updating of chapter material
• New & revised real-world EOC materials
• Presentation of bank reconciliation revised for added clarity
5:
• Presentation of accounting for doubtful accounts revised to include new diagrams, illustrations, & tables for added clarity
• Coverage of capital stock, including preferred stock, streamlined to eliminate less important information and strengthen coverage of primary topics
• Coverage of notes receivable & interest revenue moved from supplemental topic, integrated into chapter body; Added more EOC materials related to these topics
• Increased coverage of importance of stock option plans as a part of executive compensation & rationale for purchasing treasury stock
Chapter
• Expanded discussion & presentation of Financial Analysis section • New short comprehensive EOC items require students to integrate concepts & learning objectives from Chapter 4 (adjustments for accruals & deferrals) with concepts & learning objectives from Chapter 5 (financial statement preparation, financial analysis, & closing process) • New & revised real-world EOC materials
Chapter
6:
• New exhibits & discussions of: 1) income statements issued by merchandising companies, 2) to illustrate flow of inventory costs from income statement to balance sheet, and 3) to illustrate differences between income statements issued by service companies & merchandising companies • Revision of subsidiary ledger presentation focuses less on specific details & mechanical issues, more on developing conceptual understanding of what subsidiary ledgers are • Revision of end-of-year closing process in both perpetual & periodic inventory environments • New exhibit & discussion illustrate closing process using T account format • Revised placement of discussion on special journals
• Revised & updated EOC material includes new comprehensive problem that integrates multiple learning objectives
Chapter
8:
Chapter
12:
• General updating of chapter material • Explanation of similarity of large stock dividends & stock splits added
Chapter
13:
• Expanded discussion of inventory write-downs & lower-of-costor market (LCM) rule; New LCM illustration & exhibit included in chapter body
• General updating of chapter material
• Expanded discussion of retail inventory estimation method, new illustration included in chapter body
• General updating of chapter material
• Extensive revision of EOC material—most new items feature real world companies
Chapter
9:
• New chapter opener features Kraft Foods
Chapter Chapter
14: 15:
• Coverage of general business topics condensed; Discussion of international accounting standards board & difference in international reporting requirements added
• New chapter opener features United Parcel Service
• Added graphics illustrating different economic systems
• Expansion of boxed material to emphasize calculation of "book value"
• Revised presentation of foreign exchange conversions and accounting for transactions with foreign companies includes new diagrams, illustrations, & tables for added clarity
• General updating of chapter material
10
Chapter
10:
• Expanded coverage of payroll issues & activities
• Significant expansion of bonds payable; Accounting for bond discounts & premiums covered in
• New chapter opener & additional EOC materials related to opener added
• Revised & updated EOC material
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of Financial and Managerial Accounting? includes exercises for practice of foreign exchange conversions, new comprehensive problem about foreign exchange impacts on projected budgets
cussion of equivalent units—why useful, how to do computations • Introduces Periodic Production Cost Report that managers use to track & manage processes over time introduced
• New exhibit links relevant financial & non-financial information to various categories of incremental decisions
ing standard costs • New exhibit shows graphical presentation of direct materials & direct labor variances
22 1619 25
Chapter
16:
• Introduction to and details about overhead allocation moved to Ch. 17 • Revised chapter opener
• Several new exhibits explain and illustrate 1) management accounting framework, 2) Flow of physical goods in production, & 3) Flow of costs associated with production
• New exhibits & end-of-chapter materials
Chapter
19:
• Chapter opening company accompanying story is new
• New exhibit clarifies the value chain & value-added versus nonvalue-added activities in the value chain
• Multiple additional new exercises
Chapter
22:
• New end-of-chapter material
Chapter
25:
• New chapter opener features Northwest Airlines & frequent flier mile programs
• New chapter opener features AT&T Wireless changing performance goals to make sure employees receive bonuses
• New exhibit illustrates responsibility hierarchy to show how cost, profit, & revenue centers are related
• Several additional ethics-based Case In Points about WorldCom, Enron, Tyco • Discussion about components of management compensation added
17 23 20 26 1821 24 • New end-of-chapter material related to chapter opener company (Boeing)
Chapter
17:
• New Title: Job Order Cost Systems and Overhead Allocations
• New chapter opener features GM Goodwrench to emphasize a business using job order costing • Development & discussion of overhead application rates moved here from Ch. 16
• Process costing text & EOC material moved to new Ch. 18 on process costing
• ABC discussion clarified by rearranging ABC method into two stages—definition of activity cost pools & allocation of cost pools to products; Also includes new exhibits
Chapter
18:
• New Title: Process Costing
• New chapter opener features Kellogg Company to emphasize a business using process costing
• Separate costing chapters created to introduce costing systems separately; Gives more time to distinguish between approaches & understand when they’re appropriate to help manage different types of processes • Clearer introduction to & dis-
• Activity-based management discussion completely revised to simplify, clarify; New related exhibits • New exhibit clarifies how ABC relates to activity-based management • New Case in Points provide current real-world examples
• New end-of-chapter materials related to Tootsie Roll, Dell Computer, and lean manufacturing
Chapter
20:
• New chapter opener features Puma
• New end-of-chapter material, Second Look, Concluding Comments, Business Week case, etc.
• New illustration about impact of volume fluctuation on fixed & variable costs
Chapter
21:
• New chapter opener features Blue Cross and Blue Shield & rising cost of health care • New exhibit emphasizes importance of decision-making focus when identifying relevant costs, sunk costs, opportunity costs, etc. • New Case In Point about individual, incremental healthcarerelated decisions
• New ethical Your Turn about downsizing employees and linking to Federal Family & Medical Leave Act
• Revision, clarification of transfer pricing discussion
Chapter
23:
• New chapter opener features Yahoo! and their new success based on traditional business tools like budgeting
• Entire budgeting process new—uses four quarters; Uses arrows to identify how budget information flows between operating budgets & financial budgets
• New ethics Your Turn about budget motivations for earnings management
• New Case In Point about CFO’s role post Enron • New exhibit linking all parts of master budget, operating, & financial budgets • New end-of-chapter material
Chapter
24:
• New chapter opener features U.S. Navy & their need to comply with Cost Accounting Standards Board when acquiring new weaponry • New exhibit shows standard cost system components
• New management strategy box about role of Six Sigma in revis-
• Discussion about accounting & nonaccounting-based components of AT&T Wireless’ compensation program in Second Look feature • Tootsie Roll Internet assignment added—students asked to access proxy statement & view components of management compensation • Other new end-of-chapter material
Chapter
26:
• New chapter opener features Navistar, a bus and truck company that recently made major capital investments • Two new exhibits help students understand time-value of money concepts • New Case in Point about ROI analyses & technology investments • Other new end-of-chapter material
Appendix
B:
• Bond coverage expanded to better augment Chapter 10 materials
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What Can McGraw-Hill Technology Offer You?
How Will McGraw-Hill Text Resources Enhance Your Course?
Today,
ONLINE LEARNING CENTER (OLC)
hundreds of thousands of college instructors use the Internet in their respective courses. Some are just getting started while others are ready to embrace the very latest advances in educational content delivery and course management.
Also available with Financial and Managerial Accounting are NetTutor and My Mentor, created to help students learn important concepts. In addition, Financial and Managerial Accounting boasts McGraw-Hill Homework Manager, an optional online supplement that uses an intelligent algorithm to generate an infinite number of problems for students based on problem structures from the text, enabling students to practice particular types of problems repeatedly until they master key concepts. With McGraw-Hill’s Instructor’s Resource CD-ROM, instructors have electronic access to all crucial supplements (for details, see Supplements page). McGraw-Hill is a leader in bringing helpful technology into the classroom. With Financial and Managerial Accounting, your class gets all the benefits of the digital age.
My Mentor
www.mhhe.com/ williams_basis13e
That’s why we at McGraw-Hill/Irwin offer you a complete range of digital solutions. Your students can access Williams/Haka/Bettner, Financial and Managerial Accounting: The Basis for Business Decisions 13e’s robust Online Learning Center with PowerWeb on their own or we can help you create your own course website using McGraw-Hill’s PageOut.
More and more students are studying online. That’s why we offer an Online Learning Center (OLC) that follows Financial and Managerial Accounting chapter by chapter. It doesn’t require any building or maintenance on your part, and it’s ready to go the moment you and your students type in the URL: www.mhhe.com/williams_basis13e
As your students study, they can refer to the OLC website for such benefits as: Chapter Summaries Online Quizzing Key Term Reviews Internet Exercises PowerPoint Presentations Alternate Problems Check Figures Tootsie Roll Exercises
Excel Templates Help from Net Tutor and Homework Manager NY Times and PowerWeb News Feeds Links to Professional Resources Text Updates
A secured Instructor Resource Center stores your essential course materials to save you prep time before class. Key supplements, such as the Instructor’s Resource Manual and Solutions Manual, are all just a couple of clicks away.
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preface How Can Your Students Use Their Study Time More Effectively? M C G R AW- H I L L H O M E WO R K M A N A G E R McGraw-Hill Homework Manager is an exciting new Webbased supplement available with Financial and Managerial Accounting: The Basis for Business Decisions by Williams/Haka/Bettner. McGraw-Hill Homework Manager will help your students learn the basics of accounting by allowing them to work through selected problem structures pulled from the text and powered by algorithms. Providing a wealth of these textbook-quality questions enables students to work on fresh problems with the same problem structure until they master the topics covered. Each student also receives immediate scoring and feedback from the program to guide their studies. The problem structures available in McGrawHill Homework Manager can easily be identified in the text by the icon found in the margin. McGraw-Hill Homework Manager may be used in practice, homework, or exam mode, as well as a variety of other standard assignment modes. In the practice mode, students receive feedback and work as many iterations of each problem as they like without entering a record in the class grade book. In the homework mode, students receive a customized level of feedback and their grades and individual responses are recorded in the class grade book. In the exam mode, instructors can create an online exam. McGraw-Hill Homework Manager will then record all the individual responses, grade the exams, and record the grades in the online grade book. So, you not only know how your class performed on the exam but also know which topics or learning objectives your students struggled with. Access this supplement at www.mhhe.com/williams_basis13e
How Can Busy Students Get Text-Specific Help at Their Convenience? N E T T U TO R NetTutor is a breakthrough program that allows one-on-one assistance completely online. Qualified accounting tutors equipped with Financial and Managerial Acounting: The Basis for Business Decisions work online with your students on specific problems or concepts from the text. The Live Tutor Center via NetTutor’s WWWhiteboard enables a tutor to hold an interactive, online tutorial session with a student or several students. The Q&A Center allows students to submit questions at any time and retrieve answers within 24 hours. Finally, the Archive Center allows students to browse for answers to previously asked questions. They can also search for questions pertinent to a particular topic and ask a follow-up question if they encounter an answer they do not understand. Students are issued five hours of NetTutor time FREE when they purchase a new copy of Financial and Managerial Accounting. Additional time may be purchased in five-hour increments. Tutors are available during the week to help students clear those afternoon and evening study hurdles. NetTutor can be accessed through www.mhhe.com/williams_basis13e.
XV
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preface Does McGraw-Hill Have a Tool to Help Your Students Brush Up on Their Financial Accounting Skills?
Is There a Way to Easily Create an Online Course?
ALEKS is an assessment and learning system
For the instructor needing to edu-
that provides individual instruction in Financial Accounting. Available from McGraw-Hill/Irwin over the World Wide Web, ALEKS helps your students learn and strengthen the fundamental concepts and problem-solving skills needed to succeed in your accounting courses. uses assessments to determine which skills your students have mastered in accounting – and which ones they’re ready to learn next. By focusing precisely on what your students are ready to learn, ALEKS for Financial Accounting motivates them to develop and sharpen their critical skills on topics such as Financial Statements, Accounting Cycle, Liabilities, Bonds, and Shareholder Equity. ALEKS teaches your students to work with real financial accounting data, spreadsheets, and journal entries, avoiding abstract formulas and focusing on the key concepts. If a student needs additional practice or reinforcement, ALEKS is available 24/7 to provide new problems with algorithmically generated data sets. ALEKS is available with the Williams, Financial and Managerial Accounting text in two different versions: the ALEKS for the Accounting Cycle product, which covers only the Accounting Cycle portion of the principles course and the complete ALEKS for Financial Accounting product which covers the entire financial accounting portion of your principles of accounting course. Visit the ALEKS website at http://www.business.aleks.com for more information.
Williams Basis 13/e + ALEKS for The Accounting Cycle – 0073665525 Williams Basis 13/e + ALEKS for Financial Accounting – 0073666068 ALEKS ® The Accounting Cycle ISBN 0072975326 ALEKS ® for Financial Accounting ISBN 0072841966
cate students online, we offer Financial and Managerial Accounting content for complete online courses. To make this possible, we have joined forces with the most popular delivery platforms currently available. These platforms are designed for instructors who want complete control over course content and how it is presented to students. You can customize the Financial and Managerial Accounting Online Learning Center content and author your own course materials. It’s entirely up to you. Products like WebCT, Blackboard, eCollege, and TopClass (a product of WBT) all expand the reach of your course. Online discussion and message boards will now complement your office hours. Thanks to a sophisticated tracking system, you will know which students need more attention—even if they don’t ask for help. That’s because online testing scores are recorded and automatically placed in your grade book, and if a student is struggling with course work, a special alert message lets you know. Remember, Financial and Managerial Accounting’s content is flexible enough to use with any platform currently available. If your department or school is already using a platform, we can help. For information on McGraw-Hill/Irwin’s course management materials including Knowledge Gateway, Instructor Advantage, and PageOut, please see the next page. .
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preface What Help Will McGraw-Hill Provide in Setting Up an Online Course? Developed with the help of our partner Eduprise, the McGrawHill Knowledge Gateway is an all-purpose service and resource center for instructors teaching online. While training programs from WebCT and Blackboard will help teach you their software, only McGraw-Hill has services to help you actually manage and teach your online course as well as run and maintain the software. To see how these platforms can assist your online course, visit www.mhhe.com/solutions.
ONLINE COURSE MANAGEMENT No matter which online course solution you choose, you can count on the highest level of service from McGraw-Hill. Our specialists offer free training and answer any questions you have throughout the life of your adoption through Instructor Advantage and Instructor Advantage Plus.
PAGEOUT McGraw-Hill’s Course Management System is the easiest way to create a website for your accounting course. There is no need for HTML coding, graphic design, or a thick how-to book. Just fill in a series of boxes with simple English and click on one of our professional designs. In no time, your course is online with a website that contains your syllabus! Should you need assistance in preparing your website, we can help. Our team of product specialists is ready to take your course materials and build a custom website to your specifications. You simply need to call a McGraw-Hill/Irwin PageOut specialist to start the process. To learn more, please visit www.pageout.net and see “PageOut Service” below. Best of all, PageOut is FREE when you adopt Financial and Managerial Accounting!
Instructor Advantage is a special level of service McGraw-Hill offers in conjunction with WebCT and Blackboard. A team of platform specialists is always available, either by toll-free phone or e-mail, to ensure everything runs smoothly. Instructor Advantage is available FREE to all McGraw-Hill customers. Instructor Advantage Plus guarantees you a full day of on-site training by a Blackboard or WebCT specialist for yourself and up to nine colleagues. Thereafter, you will enjoy the benefits of unlimited telephone and e-mail support throughout the life of your adoption. Instructor Advantage Plus is available to qualifying McGraw-Hill adopters (see your representative for details). Users of this service also have the opportunity to access the McGraw-Hill Knowledge Gateway (see above).
PAGEOUT SERVICE Our team of product specialists is happy to help you design your own course website. Just call 1-800-634-3963, press 0, and ask to speak with a PageOut specialist. You will be asked to send in your course materials and then participate in a brief telephone consultation. Once we have your information, we build your website for you, from scratch.
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XVIII
SUPPLEMENTS I N S T RU C T O R SUPPLEMENTS
for Financial and Managerial Accounting Solutions Manual to accompany
I n s t r u c t o r ’s R e s o u r c e C D - RO M
www.mhhe.com/williams_basis/13e All essential instructor supplements are available here, password protected.
Vol.1, ISBN: 007292277X Full Version, ISBN: 0072969857 Contains the Computerized Testbank, Testbank Word files, PowerPoint ® Slides, Instructor’s Resource Manual, Solutions Manual, MY MENTOR Using Excel Professor Templates, and Excel Templates. I n s t r u c t o r ’s R e source Manual
Solutions Manual Vol.1, ISBN: 0072922729 Vol.2, ISBN: 0072922273 This comprehensive manual provides solutions to all Discussion Questions, Exercises, Problems, Cases, and Comprehensive Problems.
to accompany
Solutions Tr a n s p a r e n c i e s I n s t r u c t o r ’s R e s o u r c e Manual
Vol.1, ISBN: 0072922710 Vol.2, ISBN: 0072922788 Acetates of the Solutions Manual pages are available for instructors’ convenience.
Vol.1, ISBN: 007292263X Vol.2, ISBN: 0072922648 For each chapter and appendix, you will find: • A brief topical outline that indicates topics to discuss in class. • An assignment guide that provides at a glance the topical content of each exercise, problem, and case. • Comments and observations concerning the chapter content, methods of presentation, and usefulness of specific assignment material. • Many real-world examples not found in the text, including additional Business Week and Internet assignments, sample assignment schedules, and suggestions for using each element of the supplemental package.
Online Learning C e n t e r ( web s i t e )
Te s t b a n k ( P r i n t ) Vol.1, ISBN: 0072922672 Vol.2, ISBN: 0072922664 With an abundance of objective questions and short exercises, this supplement is a valuable resource for instructors who prepare their own quizzes and examinations.
B row n s t o n e C o m p u t e r i z e d Te s t Bank ISBN: 007292232X This computerized version of the printed testbank is available in Windows® format.
Powe r Po i n t ® S l i d e s This important tool uses PowerPoint® software to illustrate chapter concepts. The PowerPoint® Slides are available on the Instructor CD-ROM and on the website www.mhhe.com/williams_basis13e
Financial Accounting Video Library ISBN: 0072376163 This diverse array of videos prepared by Dallas County Community College District Telecourse can be used to stimulate classroom discussion, illustrate key concepts, or review critical material.
Instructor Excel Te m p l a t e s These are solutions to the Student Excel Templates available for selected end-ofchapter material (noted with an icon in the text).Available password protected on the Online Learning Center: www.mhhe.com/williams_basis13e and on the Instructor's Resource CDROM.
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preface STUDENT SUPPLEMENTS
E x c e l Te m p l a t e s Study Guide to accompany
Study Guide
My Mentor This interactive accounting software is packaged for FREE with new copies of Financial and Managerial Accounting:The Basis for Business Decisions, 13e. It makes accounting visual and helps students learn key concepts for each chapter of this textbook!
McGraw-Hill H o m ewo r k M a n a ge r This optional online supplement uses an intelligent algorithm to generate an infinite number of problems, based on problem structures from the text.This enables students to practice particular types of problems repeatedly until they master key concepts.
Online Learning C e n t e r ( web s i t e ) www.mhhe.com/williams_basis13e The OLC is full of resources for students, including Chapter Summaries, Online Quizzing, Key Term Reviews, Internet Exercises, PowerPoint Presentations,Alternate Problems, Check Figures,Tootsie Roll Exercises, Excel Templates, Help from Net Tutor and McGraw-Hill Homework Manager, NY Times and PowerWeb News Feeds, Links to Professional Resources, and Text Updates.
to accompany
Excel Templates are tied directly to selected end-of-chapter material.They help students develop important spreadsheet skills by using the templates to solve assignments.Available on the Online Learning Center: www.mhhe.com/williams_basis13e
Study Guide Vol.1, ISBN: 0072922656 Vol.2, ISBN: 0072922680 For each chapter, students can measure their progress through a wealth of selftest material (with solutions) and a summary of each chapter’s key points.
Wo r k i n g P a p e r s
Practice Sets Manual Practice Set Prepared by William R. Pasewark,Texas Tech University Understanding Corporate Annual Reports Instructor ISBN: 0072868228 Student ISBN: 007286821X
to accompany
Computerized Practice Sets Prepared by Leland Mansuetti and Keith Weidkamp, Sierra College
Wo r k i n g P a p e r s Vol.1, ISBN: 0072922702 Vol.2, ISBN: 0072922699 This softcover booklet is filled with columnar paper for each problem and comprehensive problem in Financial and Managerial Accounting. Checkpoints are included to assure students that they are on the right track.
C a r o l Ya c h t ’s General Ledger and Pe a c h t re e C o m p l e t e 2004 ISBN: 0072922761 This new software includes both an easy to use, modern general ledger software tool and a real-world accounting software package all on one CD-Rom! It will help students learn how to record transactions and create financial statements. Icons in the text denote selected end-of-chapter problems where both Yacht’s general ledger software and the Peachtree Complete 2004 software are available to help students work through the problem.
Granite Bay Jet Ski Inc., Level 1 Instructor ISBN: 0072426896 Student ISBN: 0072426942 Granite Bay Jet Ski Inc., Level 2 Instructor ISBN: 0072426209 Student ISBN: 0072426950 Wheels Exquisite, Inc., Level 1 Instructor ISBN: 0072922605 Student ISBN: 0072428457 Thunder Mountain Snowmobile Instructor ISBN: 0072922605 Student ISBN: 0072931884 Gold Run Snowmobile, Inc. Instructor ISBN: 0072341092 Student ISBN: 0072341076
ALEKS™ for Financial Accounting ISBN: 0072841966
ALEKS™ for the Accounting Cycle ISBN: ISBN: 0072975326 Or check out the ALEKS Website www.business.aleks.com
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Acknowledgements Many of our colleagues reviewed Financial and Managerial Accounting: The Basis for Business Decisions and we wish to thank each of you. Your comments and suggestions are invaluable to us as they help us identify areas needing improvement, help to highlight our strengths, and offer direction for potential change. Our sincerest thanks to . . . Thirteenth edition reviewers: Kim Belden, Daytona Beach Community College Nat R. Briscoe, Northwestern State University James J. Chimenti, Jamestown Community College Marcia Croteau, University of Maryland, Baltimore County
Reviewed Previous editions: Elenito Ayuyao, Los Angeles City College Sharla Bailey, Southwest Baptist University Walter Baggett, Manhattan College Jill Bale, Doane College Scott Barhight, Northampton County Area Community College
Steve Czarsty, Mary Washington College Larry Davis, Southwest Virginia County College Victoria Doby, Villa Julie College Carlton Donchess, Bridgewater State College Steve Driver, Horry-Georgetown Tech Pamela Druger, Augustana College
Mary B. Davis, University of Maryland, Baltimore County
William Barze, St. Petersburg Junior College
Ana M. Cruz, Miami-Dade Community College
John Bayles, Oakton Community College
Anthony Daly-Leonard, Delaware County Community College
Janet Becker, University of Pittsburg
Calvin Fink, Daytona Beach Community College
Jerard Berardino, Community College of Allegheny
Mary L. Hollars, Vincennes University
Teri Bernstein, Santa Monica College
Rosemary Lanahan, Schenectady County Community College
Cynthia Bolt-Lee, The Citadel
Mary Lou Gamma, East Tennessee State University
Nancy Boyd, Middle Tennessee State University
Brother Gerald Fitzgerald, LaSalle University
Sallie Branscom, Virginia Western Community College
Ralph Fritsch, Midwestern State University
Russell Bresslauer, Chabot College
Mike Fujita, Leeward Community College
Susan Logorda, Lehigh Carbon Community College Benjamin L. Sadler, Miami-Dade Community College Joseph W. Sejnoha, Mount Mary College Andy Williams, Edmonds Community College
R. E. Bryson, University of Alabama Priscilla Burnaby, Bentley College Bryan Burks, Harding University Loring Carlson, Western New England College David Chu, College of the Holy Cross Stanley Chu, Borough Manhattan Community College William Cravey, Jersey City State College Brian Curtis, Raritan Valley Community College
Anita Ellzey, Hartford Community College Emmanuel Emenyonu, Sacred Heart University David Erlach, CUNY – Queens College Paul Everson, Northern State University
Don Van Gieson, Kapiolani Community College Peter Gilbert, Thomas College Penny Hanes, Mercyhurst College Lyle Hicks, Danville Area Community College Richard Hanna, Ferris State University Stephen Hano, Rockland Community College Sara Harris, Arapahoe Community College Jeannelou Hodgens, Florence-Darlington Technical College
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preface Patricia H. Holmes, Des Moines Area Community College
Philip Little, Western Carolina University
Michael Holt, Eastern Nazarene College
J.Thomas Love, Walters State Community College
Evelyn Honaker, Walters State Community College
Josie Miller, Mercer Community College
Dave Jensen, Bucknell University
Merrill Moore, Delaware Tech & Community College
Dewey Martin, Husson College
Deborah Most, Dutchess Community College
David Junnola, Eastern Michigan University
Haim Mozes, Fordham University
Barbara Sturdevant, SUNY
Frank Olive, Nicholas College
Gene Sullivan, Liberty University and Central Virginia Community College
Leo Jubb, Essex Community College Khondkar Karim, Monmouth University James Kennedy, Texas A&M University Jane Kingston, Piedmont Virginia Community College
Bruce Oliver, Rochester Institute of Technology
Monica Seiler, Queensborough Community College Stan Stanley, Skagit Valley College Jim Stanton, Mira Costa College Carolyn Strickler, Ohlone College Robert Stilson, CUNY
Mary Ann Swindlehurst, Carroll Community College
Michael Prockton, Finger Lakes Community College
Larry Tartaglino, Cabrillo College
Annette M. Leps, Goucher College
Martin Taylor, University of Texas at Arlington
Gary Reynolds, Ozard Technical College Renee Rigoni, Monroe Community College
Raymond Krasniewski, Ohio State University
Earl Roberts, Delaware Tech & Community College
David Lardie, Tunxis Community College
Julie Rosenblatt, Delaware Tech & Community College
Bill Lasher, Jamestown Community College
Bob Rothenberg, SUNY – Oneonta
Eric Lewis, Union College
Mike Schoderbek, Rutgers University – New Brunswick
Ginger Parker, Creighton University
Ed Knudson, Linn Benton Community College
Suk Jun Lee, Chapman University
Linda Schain, Hofstra University
Victoria Rymer, University of Maryland
Anne Tippett, Tarrant County College South Bruce Toews, Walla Walla College Cynthia Tomes, Des Moines Area Community College Harold Wilson, Middle Tennessee State University Steve Wilts, Bucknell University Teri Yohn, Georgetown University
Francis A. Sakiey, Mercer County Community College
We are grateful . . . We would like to acknowledge the following individuals for their help authoring some of the text’s supplements: PowerPoint Presentations: Jon Booker, Charles W. Caldwell both of Tennessee Technological University, and Susan C. Galbreath of David Lipscomb University; Excel Templates and General Ledger Accounting Software: Jack Terry, Comsource Associates; Instructor’s Resource Manual: Alice Sineath, Forsyth Technical Community College; Testbank: Carol Klinger, Queens College-CUNY; and My Mentor: Craig Miller, Normandale Community College. Our special thanks go to Barbara Schnathorst, The Write Solution, Inc., and Beth Woods, Accuracy Counts! for accuracy checking the text manuscript and solutions manual. We appreciate the expert attention given to this project by the staff at McGraw-Hill/Irwin, especially Stewart Mattson, Publisher; Tim Vertovec, Executive Editor; Heather Sabo, Developmental Editor; Katherine Mattison, Marketing Manager; Judy Besser, Senior Administrative Assistant; Lori Koetters, Project Manager; Carol Loreth, Supplements Producer; Kathy Shive, Photo Research Coordinator; Artemio Ortiz, Designer; Gina Hangos, Production Supervisor; and Edward Przyzycki, Lead Media Producer.
S i n c e r e l y, J a n R . W i l l i a m s, S u s a n F. H a k a , a n d M a r k S . B e t t n e r
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Contents in Brief 1
Accounting: Information for Decision Making
2
Basic Financial Statements
40
3
The Accounting Cycle: Capturing Economic Events
86
4
The Accounting Cycle: Accruals and Deferrals
134
5
The Accounting Cycle: Reporting Financial Results
176
Comprehensive Problem 1: West Branch Rent All
221
6
Merchandising Activities
224
7
Financial Assets
262
8
Inventories and the Cost of Goods Sold
318
Comprehensive Problem 2: Guitar Universe, Inc.
363
Plant and Intangible Assets
366
10
Liabilities
410
11
Stockholders’ Equity: Paid-In Capital
464
12
Income and Changes in Retained Earnings
502
13
Statement of Cash Flows
542
14
Financial Statement Analysis
600
Comprehensive Problem 3: Tootsie Roll Industries, Inc.
665
15
Global Business and Accounting
668
16
Management Accounting: A Business Partner
704
17
Job Order Cost Systems and Overhead Allocations
738
18
Process Costing
774
19
Costing and the Value Chain
802
20
Cost-Volume-Profit Analysis
836
21
Incremental Analysis
872
Comprehensive Problem 4: The Gilster Company
901
9
2
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Contents in Brief
22
Responsibility Accounting and Transfer Pricing
904
23
Operational Budgeting
946
24
Standard Cost Systems
988
25
Rewarding Business Performance
1022
Comprehensive Problem 5: Utease Corporation
1050
Capital Budgeting
1052
Appendix A: Annual Report of Tootsie Roll Industries, Inc., 2002
1079
Appendix B: The Time Value of Money: Future Amounts and Present Values
1102
Appendix C: Forms of Business Organization
1120
Index
1151
26
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Contents 1
Accounting: Information for Decision Making
2
Accounting Information: A Means to an End
4
Accounting from a User’s Perspective Types of Accounting Information
Accounting Systems
5
6
Determining Information Needs
7
The Cost of Producing Accounting Information
8
Basic Functions of an Accounting System
8
Who Designs and Installs Accounting Systems?
8
Financial Accounting Information External Users of Accounting Information Objectives of External Financial Reporting Characteristics of Externally Reported Information
56
Relationships among Financial Statements
57
Financial Analysis
60
Forms of Business Organization
61
Sole Proprietorships
61
Partnerships
61
Corporations
61
Reporting Ownership Equity in the Statement of Financial Position
62
The Use of Financial Statements by External Parties 63 The Need for Adequate Disclosure
8
Management’s Interest in Financial Statements
8 9 12
63 64
Concluding Remarks
65
End-of-Chapter Review
66
Assignment Material
70
Management Accounting Information
13
Users of Internal Accounting Information
14
Objectives of Management Accounting Information
15
Characteristics of Management Accounting Information
16
The Accounting Cycle: Capturing Economic Events
86
17
The Accounting Cycle
88
Integrity of Accounting Information
2
4
Statement of Cash Flows
Institutional Features
18
Professional Organizations
20
Competence, Judgment, and Ethical Behavior
21
3
The Role of Accounting Records
88
The Ledger
88
The Use of Accounts
89
Debit and Credit Entries
89
Careers in Accounting
24
Public Accounting
24
Management Accounting
25
Governmental Accounting
25
Accounting Education
26
What about Bookkeeping?
26
Accounting as a Stepping-Stone
27
Recording Balance Sheet Transactions: An Illustration 93
Concluding Remarks
27
Ledger Accounts after Posting
96
End-of-Chapter Review
28
What Is Net Income?
98
Assignment Material
32
Retained Earnings
98
The Income Statement: A Preview
99
Basic Financial Statements
40
Introduction to Financial Statements
42
A Starting Point: Statement of Financial Position
43
Assets
44
Liabilities
46
Owners’ Equity
47
The Accounting Equation
47
The Effects of Business Transactions: An Illustration
48
Effects of These Business Transactions on the Accounting Equation
53
Income Statement
55
Double-Entry Accounting—The Equality of Debits and Credits
The Journal Posting Journal Entries to the Ledger Accounts (and How to “Read” a Journal Entry)
90
91 92
Revenue
100
Expenses
101
The Accrual Basis of Accounting
102
Debit and Credit Rules for Revenue and Expenses
103
Dividends
103
Recording Income Statement Transactions: An Illustration
104
The Journal
110
February’s Ledger Balances
111
The Trial Balance
113
Uses and Limitations of the Trial Balance
113
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Contents
Concluding Remarks The Accounting Cycle in Perspective
End-of-Chapter Review Assignment Material
4
195
114
Isn’t This Really a Spreadsheet?
115
How Is a Worksheet Used?
195
120
The Mechanics: How It’s Done
196
What If: A Special Application of Worksheet Software
198
The Accounting Cycle: Accruals and Deferrals
134
Adjusting Entries
136
The Need for Adjusting Entries
136
Types of Adjusting Entries
136
Characteristics of Adjusting Entries
138
Year-End at Overnight Auto Service
139
End-of-Chapter Review
199
Assignment Material
206
Comprehensive Problem 1 West Branch Rent All 6
195
221
Merchandising Activities
224
Merchandising Companies
226
Converting Assets to Expenses
140
The Concept of Depreciation
142
The Operating Cycle of a Merchandising Company
226
Converting Liabilities to Revenue
145
Income Statement of a Merchandising Company
227
Accruing Unpaid Expenses
147
Accruing Uncollected Revenue
149
Accounting System Requirements for Merchandising Companies
228
150
Two Approaches Used in Accounting for Merchandise Transactions
Accruing Income Taxes Expense: The Final Adjusting Entry
Adjusting Entries and Accounting Principles The Concept of Materiality Effects of the Adjusting Entries
Concluding Remarks End-of-Chapter Review Assignment Material
5
Supplemental Topic: The Worksheet
114
229
151
Perpetual Inventory Systems
152
Taking a Physical Inventory
232
153
Closing Entries in a Perpetual Inventory System
232
Periodic Inventory Systems
156 157 162
230
233
Operation of a Periodic Inventory System
233
Closing Process in a Periodic Inventory System
234
Comparison of Perpetual and Periodic Inventory Systems
235
Selecting an Inventory System
237
The Accounting Cycle: Reporting Financial Results
Transactions Relating to Purchases
238
176
Credit Terms and Cash Discounts
238
Preparing Financial Statements
178
Returns of Unsatisfactory Merchandise
240
The Income Statement
179
The Statement of Retained Earnings
181
The Balance Sheet
182
Sales Returns and Allowances
241
182
Sales Discounts
242
Relationships among the Financial Statements Drafting the Notes That Accompany Financial Statements What Types of Information Must Be Disclosed?
182 183
Closing the Temporary Equity Accounts
184
Closing Entries for Revenue Accounts
185
Closing Entries for Expense Accounts
185
Closing the Income Summary Account
187
Closing the Dividends Account
187
Summary of the Closing Process
188
After-Closing Trial Balance
189
A Last Look at Overnight: Was 2005 a Good Year?
Financial Analysis Preparing Financial Statements Covering Different Periods of Time
Concluding Remarks
Transportation Costs on Purchases
Transactions Relating to Sales
Delivery Expenses
243
Accounting for Sales Taxes
243
Modifying an Accounting System Special Journals Provide Speed and Efficiency
Financial Analysis Net Sales
190
241
241
243 244
244 244
Gross Profit Margins
245
Concluding Remarks
246
End-of-Chapter Review
247
Assignment Material
251
Financial Assets
262
192
7 193
How Much Cash Should a Business Have?
264
194
The Valuation of Financial Assets
264
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Contents
265
Last-In, First-Out Method
324
Reporting Cash in the Balance Sheet
265
Evaluation of the Methods
325
The Statement of Cash Flows
266
Do Inventory Methods Really Affect Performance?
327
Cash Management
266
The Principle of Consistency
328
Internal Control over Cash
267
Just-in-Time (JIT) Inventory Systems
328
Cash
Bank Statements
268
Taking a Physical Inventory
329
Reconciling the Bank Statement
269
Recording Shrinkage Losses
329
Petty Cash Funds
272
LCM and Other Write-Downs of Inventory
330
The Cash Budget as a Control Device
273
The Year-End Cutoff of Transactions
331
273
Periodic Inventory Systems
332
274
Importance of an Accurate Valuation of Inventory
335
275
Techniques for Estimating the Cost of Goods Sold and the Ending Inventory
337
The Gross Profit Method
337
The Retail Method
338
“Textbook” Inventory Systems Can Be Modified . . . and They Often Are
338
Short-Term Investments Mark-to-Market: A Principle of Asset Valuation
Accounts Receivable Uncollectible Accounts
276
The Allowance for Doubtful Accounts
277
Writing Off an Uncollectible Account Receivable
278
Monthly Estimates of Credit Losses
278
Concentrations of Credit Risk
281
Recovery of an Account Receivable Previously Written Off
282
Direct Write-off Method
282
Inventory Turnover Rate Accounting Methods Can Affect Financial Ratios
339 339 341
Internal Controls for Receivables
283
Concluding Remarks
Management of Accounts Receivable
283
Supplemental Topic: LIFO Reserves
342
Factoring Accounts Receivable
283
The Significance of a LIFO Reserve
342
Credit Card Sales
Notes Receivable and Interest Revenue
341
284
End-of-Chapter Review
345
285
Assignment Material
349
Nature of Interest
286
Accounting for Notes Receivable
286
The Decision of Whether to Accrue Interest
288
Comprehensive Problem 2 Guitar Universe, Inc.
363
Financial Analysis
289
Concluding Remarks
290
Supplemental Topic: Accounting for Marketable Securities
292
Purchases of Marketable Securities
292
Plant Assets as a “Stream of Future Services”
Recognition of Investment Revenue
292
Major Categories of Plant Assets
368
Sales of Investments
293
Accountable Events in the Lives of Plant Assets
368
Adjusting Marketable Securities to Market Value
293
Reporting Investment Transactions in the Financial Statements
8
Financial Analysis
295
End-of-Chapter Review
296
Assignment Material
301
9
Plant and Intangible Assets
Acquisitions of Plant Assets Determining Cost: An Example
366 368
368 369
Some Special Considerations
369
Capital Expenditures and Revenue Expenditures
370
Depreciation
371
Allocating the Cost of Plant and Equipment over the Years of Use
371
318
Causes of Depreciation
372
320
Methods of Computing Depreciation
373
The Flow of Inventory Costs
320
The Straight-Line Method
373
Which Unit Did We Sell?
321
The Declining-Balance Method
376
Data for an Illustration
321
Specific Identification
322
Which Depreciation Methods Do Most Businesses Use?
378
Cost Flow Assumptions
322
Financial Statement Disclosures
379
Average-Cost Method
322
The Impairment of Plant Assets
380
First-In, First-Out Method
323
Disposal of Plant and Equipment
381
Inventories and the Cost of Goods Sold Inventory Defined
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Contents
Gains and Losses on Disposals of Plant and Equipment
Bond Discount and Premium in Perspective
432
381
The Concept of Present Value
432
Trading in Used Assets for New Ones
382
Bond Prices after Issuance
433
383
Early Retirement of Bonds Payable
434
Intangible Assets Characteristics
383
Operating Expenses versus Intangible Assets
383
Amortization
384
Estimated Liabilities
435
Goodwill
384
Loss Contingencies
435
Patents
386
Commitments
436
Trademarks and Trade Names
387
Evaluating the Safety of Creditors’ Claims
437
Franchises
387
How Much Debt Should a Business Have?
438
Copyrights
387
Other Intangibles and Deferred Charges
387
Research and Development (R&D) Costs
388
Financial Analysis
388
Natural Resources
389
Accounting for Natural Resources
389
Depreciation, Amortization, and Depletion— A Common Goal
390
Plant Transactions and the Statement of Cash Flows
390
Concluding Remarks
390
Supplemental Topic: Other Depreciation Methods
391
The Units-of-Output Method
391
MACRS
392
Sum-of-the-Years’ Digits
392
Decelerated Depreciation Methods
393
Depreciation Methods in Use: A Survey
393
End-of-Chapter Review
394
Assignment Material
398
Estimated Liabilities, Loss Contingencies, and Commitments
11
Financial Analysis
438
Concluding Remarks
439
Supplemental Topic: Special Types of Liabilities
440
Lease Payment Obligations
440
Operating Leases
440
Capital Leases
440
Liabilities for Pensions and Other Postretirement Benefits
441
Deferred Income Taxes
443
End-of-Chapter Review
445
Assignment Material
450
Stockholders’ Equity: Paid-In Capital
464
Corporations
466
Why Businesses Incorporate Publicly Owned Corporations
Formation of a Corporation Stockholder Records in a Corporation
10
Liabilities The Nature of Liabilities
410 412
435
Paid-In Capital of a Corporation
467 468
468 471
472
Authorization and Issuance of Capital Stock
472
Current Liabilities
413
Common Stocks and Preferred Stocks
474
Accounts Payable
413
Characteristics of Preferred Stock
474
Notes Payable
413
Book Value per Share of Common Stock
478
The Current Portion of Long-Term Debt
415
Accrued Liabilities
415
Payroll Liabilities
415
Unearned Revenue
417
Long-Term Liabilities
418
Maturing Obligations Intended to Be Refinanced
418
Installment Notes Payable
419
Bonds Payable
421
What Are Bonds?
421
Tax Advantage of Bond Financing
423
Market Value Market Price of Preferred Stock
479 480
Market Price of Common Stock
481
Book Value and Market Price
481
Stock Splits
482
Treasury Stock
482
Recording Purchases of Treasury Stock
483
Reissuance of Treasury Stock
483
Stock Buyback Programs
484
Financial Analysis
485
Accounting for Bonds Payable
423
Bonds Issued at a Discount or a Premium
426
Concluding Remarks
486
Accounting for a Bond Discount: An Illustration
426
End-of-Chapter Review
487
Accounting for a Bond Premium: An Illustration
429
Assignment Material
491
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563
The Statement of Cash Flows: A Second Look
563
502
Reporting the Results of Operations
504
Developing Predictive Information
504
Reporting Irregular Items: An Illustration
505
Continuing Operations
506
Budgeting: The Primary Cash Management Tool
568
Discontinued Operations
506
What Priority Should Managers Give to Increasing Net Cash Flows?
568
Extraordinary Items
506
Changes in Accounting Principles
508
Earnings per Share (EPS)
509
Financial Analysis Basic and Diluted Earnings per Share
Other Transactions Affecting Retained Earnings Cash Dividends
13
Indirect Method May Be Required in a Supplementary Schedule
Income and Changes in Retained Earnings
Financial Analysis Annotated Statement of Cash Flows: Arden Group, Inc.
Managing Cash Flows
Some Strategies for Permanent Improvements in Cash Flow
565 566
568
569
511
Concluding Remarks
571
512
Supplemental Topic: A Worksheet for Preparing a Statement of Cash Flows
572
513 513
Dividend Dates
513
Liquidating Dividends
514
Data for an Illustration
572
The Worksheet
573
Entry
573
Stock Dividends
515
End-of-Chapter Review
Statement of Retained Earnings
517
Assignment Material
583
Prior Period Adjustments
518
Financial Statement Analysis
600
Comprehensive Income
519
Statement of Stockholders’ Equity
520
Stockholders’ Equity Section of the Balance Sheet
521
Concluding Remarks
521
End-of-Chapter Review Assignment Material
14
Financial Statements Are Designed for Analysis
Tools of Analysis
577
602
603
Dollar and Percentage Changes
603
523
Trend Percentages
604
527
Component Percentages
605
Statement of Cash Flows
542
Statement of Cash Flows
544
Ratios
606
Standards of Comparison
606
Quality of Earnings
607
Quality of Assets and the Relative Amount of Debt
608
Purposes of the Statement
544
Example of a Statement of Cash Flows
544
A Classified Balance Sheet
608
Classification of Cash Flows
545
Working Capital
610
The Approach to Preparing a Statement of Cash Flows
547
Current Ratio
611
Quick Ratio
611
Preparing a Statement of Cash Flows: An Illustration
Measures of Liquidity and Credit Risk
608
548
Debt Ratio
611
549
Evaluating Financial Ratios
612
Investing Activities
549
Liquidity, Credit Risk, and the Law
614
Financing Activities
551
Cash and Cash Equivalents
551
Cash Flows from Operating Activities
551
Cash Payments for Merchandise and for Expenses Cash Flows from Investing Activities
Operating Activities
Measures of Profitability
615
Classifications in the Income Statement
615
552
Some Specific Examples of Corporate Earnings and Losses
616
555
Multiple-Step Income Statements
617
Cash Flows from Financing Activities
557
Earnings per Share
619
Relationship between the Statement of Cash Flows and the Balance Sheet
Price-Earnings Ratio
620
559
Reporting Operating Cash Flows by the Indirect Method
559
Single-Step Income Statements
620
Evaluating the Adequacy of Net Income
621
Return on Investment (ROI)
621
Differences between Net Income and Net Cash Flows from Operating Activities
560
Return on Assets (ROA)
622
Reconciling Net Income with Net Cash Flows
561
Return on Equity (ROE)
622
The Indirect Method: A Summary
563
Comprehensive Illustration: Seacliff Company
623
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Analysis by Common Stockholders
626
Product Costs and the Matching Principle
Return on Investment (ROI)
628
Inventories of a Manufacturing Business
712
Leverage
629
The Flow of Costs Parallels the Flow of Physical Goods
712
Analysis by Long-Term Creditors
630
Accounting for Manufacturing Costs: An Illustration
713
Analysis by Short-Term Creditors
632
Direct Materials
713
Cash Flow Analysis
635
Direct Labor
714
Usefulness of Notes to Financial Statements
636
Manufacturing Overhead
715
Summary of Analytical Measurements
637
Direct and Indirect Manufacturing Costs
717
Concluding Remarks
639
End-of-Chapter Review
641
Work in Process Inventory, Finished Goods Inventory, and the Cost of Goods Sold
717
Assignment Material
645
The Need for Per-Unit Cost Data
718
Determining the Cost of Finished Goods Manufactured
718
Financial Statements of a Manufacturing Company
Comprehensive Problem 3 Tootsie Roll Industries, Inc. 15
Global Business and Accounting
668
Globalization
670
Environmental Forces Shaping Globalization Political and Legal Systems
676
Foreign Currencies and Exchange Rates
678
Exchange Rates
678
Accounting for Transactions with Foreign Companies
680
Foreign Corrupt Practices Act
End-of-Chapter Review Assignment Material
724
672
676
Concluding Remarks
Assignment Material
738
Harmonization of Financial Reporting Standards
Global Sourcing
721
740
673
Consolidated Financial Statements That Include Foreign Subsidiaries
End-of-Chapter Review
Cost Accounting Systems
674
Currency Fluctuations—Who Wins and Who Loses?
720
672
Culture
17
719
Concluding Remarks
Job Order Cost Systems and Overhead Allocations
Economic Systems Technology and Infrastructure
16
665
711
Job Order Cost Systems and the Creation of Goods and Services
740
Overhead Application Rates
741
What “Drives” Overhead Costs?
Job Order Costing
684 686
The Job Cost Sheet
744
Flow of Costs in Job Costing: An Illustration
745
Accounting for Direct Materials
745
Accounting for Direct Labor Costs
746
Accounting for Overhead Costs
746
Accounting for Completed Jobs
747
Job Order Costing in Service Industries
686
Activity-Based Costing (ABC)
688
743
744
750
750
689
ABC Versus a Single Application Rate: A Comparison
690
Stage 1: Separate Activity Cost Pools
752
Stage 2: Allocate Activity Cost Pools to the Products
754
Determining Unit Costs Using ABC
757
693
751
The Trend toward More Informative Cost Accounting Systems
758
704
Concluding Remarks
759
706
End-of-Chapter Review
760
Assignment Material
763
Management Accounting: A Business Partner Management Accounting: Basic Framework Management Accounting’s Role in Assigning Decision-Making Authority
706
Management Accounting’s Role in Decision Making
706
Management Accounting’s Role in Performance Evaluation and Rewards
707
Accounting Systems: A Business Partner
Accounting for Manufacturing Operations
18
Process Costing
774
707
Production of Goods and Services and Costing Systems
776
709
Process Costing
777
Classifications of Manufacturing Costs
710
Product Costs versus Period Costs
710
Tracking the Physical Flow and Related Production Costs
777
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Process Costing and Equivalent Units
779
CVP Analysis When a Company Sells Many Products
852
Cost per Equivalent Unit
781
Tracking Costs in Process Costing Using a Production Report
Determining Semivariable Cost Elements: The High-Low Method
853
783
Evaluating Departmental Efficiency
787
Assumptions Underlying Cost-Volume-Profit Analysis
854
Concluding Remarks
787
End-of-Chapter Review
789
Assignment Material
793
Costing and the Value Chain
802
The Value Chain
804
Value- and Non-Value-Added Activities
Activity-Based Management
21
854
Concluding Remarks
855
End-of-Chapter Review
856
Assignment Material
859
Incremental Analysis
872
804
The Challenge of Changing Markets
874
805
The Concept of Relevant Cost Information
874
Activity-Based Management across the Value Chain
806
Relevant Information in Business Decisions
875
ABC: A Subset of Activity-Based Management
808
Opportunity Costs
876
809
Sunk Costs versus Out-of-Pocket Costs
877
The Target Costing Process
Incremental Analysis in Common Business Decisions
Components of the Target Costing Process
810
Target Costing: An Illustration
811
Characteristics of the Target Costing Process
814
Special Order Decisions
878
814
Production Constraint Decisions
879
815
Make or Buy Decisions
881
Measures of Efficiency in a JIT System
816
Sell, Scrap, or Rebuild Decisions
882
A Concluding Comment
816
Just-in-Time Inventory Procedures JIT, Supplier Relationships, and Product Quality
Joint Product Decisions
878
883
817
Concluding Remarks
Components of the Cost of Quality
817
End-of-Chapter Review
886
Measuring the Cost of Quality
818
Assignment Material
889
Productivity and Quality
820
Total Quality Management and the Value Chain
20
Summary of Basic Cost-Volume-Profit Relationships
Concluding Remarks
820
End-of-Chapter Review
821
Assignment Material
824
Cost-Volume-Profit Analysis
836
Cost-Volume Relationships Cost-Volume Relationships: A Graphic Analysis
Comprehensive Problem 4 The Gilster Company 22
884
901
838
Responsibility Accounting and Transfer Pricing
904
839
Responsibility Centers
906
The Behavior of Per-Unit Costs
841
Economies of Scale
842
The Need for Information about Responsibility Center Performance
906
843
Cost Centers, Profit Centers, and Investment Centers
907
Additional Cost Behavior Patterns
Cost Behavior and Operating Income
844
Responsibility Accounting Systems
910
Responsibility Accounting: An Illustration
910
Assigning Revenue and Costs to Responsibility Centers
911
Cost-Volume-Profit Analysis: An Illustration
844
Preparing and Using a Cost-Volume-Profit Graph
845
Variable Costs
912
Contribution Margin: A Key Relationship
846
Contribution Margin
912
How Many Units Must We Sell?
847
Fixed Costs
913
How Many Dollars in Sales Must We Generate?
848
Traceable Fixed Costs
913
What Is Our Margin of Safety?
848
Common Fixed Costs
913
What Change in Operating Income Do We Anticipate?
849
Responsibility Margin
915
Business Applications of CVP
849
When Is a Responsibility Center “Unprofitable”?
916
Additional Considerations in CVP
852
Evaluating Responsibility Center Managers
917
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Arguments against Allocating Common Fixed Costs to Business Centers
918
Transfer Prices
918
Nonfinancial Objectives and Information
921
Responsibility Center Reporting in Financial Statements
922
Supplemental Topic: Variable Costing
922
25
1000 1004
Concluding Remarks
1004
End-of-Chapter Review
1005
Assignment Material
1008
Rewarding Business Performance
1022
Motivation and Aligning Goals and Objectives
1024
Full Costing: The Traditional View of Product Costs
923
Variable Costing: A Different View of Product Costs
923
Communicating Goals and Objectives
An Illustration of Variable Costing
923
Fluctuation in the Level of Production
926
Accounting Information and Feedback about Goal Achievement
1024
Rewarding Goal Achievement
1024
The DuPont System
929
1024
1025
Return on Investment
1025
The Components of Return on Investment
1027
Return on Sales
1027
End-of-Chapter Review
930
Assignment Material
933
Operational Budgeting
946
Profit Rich, Yet Cash Poor
948
The Short Horizon Problem
1029
949
Failing to Undertake Profitable Investments
1029
949
Measurement Problems
1029
Operating Cash Flows: The Lifeblood of Survival
Budgeting: The Basis for Planning and Control
24
A Final Note: JIT Systems and Variance Analysis
921
Concluding Remarks
Why Is Variable Costing Unacceptable for Use in Financial Statements and Income Tax Returns?
23
Evaluating Cost Variances from Different Perspectives
Capital Turnover
1028
Criticisms of ROI
1028
Residual Income and Economic Value Added
1030
Benefits Derived from Budgeting
950
Establishing Budgeted Amounts
951
Residual Income
1030
The Budget Period
952
Economic Value Added
1031
The Master Budget: A Package of Related Budgets
952
The Balanced Scorecard
1031
Steps in Preparing a Master Budget
953
The Financial Perspective
1033
Preparing the Master Budget: An Illustration
955
The Customer Perspective
1033
Operating Budget Estimates
955
The Business Process Perspective
1033
Budgeted Income Statement
960
The Learning and Growth Perspective
1033
Cash Budget Estimates
960
Difficulties with the Balanced Scorecard
1034
The Cash Budget
965
Budgeted Balance Sheets
965
Components of Management Compensation
1035
Using Budgets Effectively
965
Design Choices for Management Compensation
1036
Flexible Budgeting
968
Goals and Rewards in Life
1038
Concluding Remarks
970
Concluding Remarks
1038
End-of-Chapter Review
971
End-of-Chapter Review
1039
Assignment Material
974
Assignment Material
1043
Standard Cost Systems
988
Standard Cost Systems
990
Establishing and Revising Standard Costs
Management Compensation
Comprehensive Problem 5 Utease Corporation
1035
1050
990
Direct Material Standards
992
Direct Labor Standards
992
Manufacturing Overhead Standards
992
Standard Costs and Variance Analysis: An Illustration
993
Financial and Nonfinancial Considerations
1054
Materials Price and Quantity Variances
994
Labor Rate and Efficiency Variances
996
Evaluating Capital Investment Proposals: An Illustration
1054
Manufacturing Overhead Variances
997
Payback Period
1056
Return on Average Investment
1056
Valuation of Finished Goods
1000
26
Capital Budgeting
1052
Capital Investment Decisions
1054
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Discounting Future Cash Flows
A
B
1057
Partnerships That Limit Personal Liability
Replacing Assets
1060
Accounting Practices of Partnerships
1125
Behavioral Considerations in Capital Budgeting
1063
Evaluating the Financial Statements of a Partnership
1126
Concluding Remarks
1064
A Concluding Comment from the Authors
1064
What Is a Corporation?
1127
End-of-Chapter Review
1065
Stockholders’ Liability for Debts of a Corporation
1128
Assignment Material
1068
What Types of Businesses Choose the Corporate Form of Organization?
1128
Accounting for Corporate Income Taxes
1129
Salaries Paid to Owners
1131
Owners’ Equity in a Corporate Balance Sheet
1131
The Issuance of Capital Stock
1131
Appendix A Annual Report of Tootsie Roll Industries, Inc., 2002 1079 Appendix B The Time Value of Money: Future Amounts and Present Values 1102 The Concept
1127
Retained Earnings
1131
Accounting for Dividends
1132
Closing Entries and the Statement of Retained Earnings
1133
Evaluating the Financial Statements of a Corporation
1133
Relationships between Present Values and Future Amounts
1103
Compound Interest
1104
The Concept—and the Problem—of “Double Taxation”
1134
1104
S Corporations
1135
Applications of the Time Value of Money Concept
Future Amounts The Tables Approach
1104 1105
The Future Amount of an Annuity
1106
Interest Periods of Less than One Year
1107
Present Values Using Present Value Tables
1108 1109
What Is the Appropriate Discount Rate?
1109
The Present Value of an Annuity
1110
Discount Periods of Less than One Year
1111
Valuation of Financial Instruments
1111
Interest-Bearing Receivables and Payables
1112
“Non-Interest-Bearing” Notes
1112
Market Prices of Bonds
1113
Capital Leases
1115
Obligations for Postretirement Benefits
1116
Disclosure of Up-to-Date Present Value Information
1116
Deferred Income Taxes
C
1103
Corporations
1125
1117
Assignment Material
1117
Appendix C Forms of Business Organization
1120
Importance of Business Form
1121
Sole Proprietorships
1121
The Concept of the Separate Business Entity
1121
Characteristics of a Sole Proprietorship
1121
Unlimited Personal Liability (Subtitle: The Owner Could Lose EVERYTHING! )
1122
Accounting Practices of Sole Proprietorships
1122
Evaluating the Financial Statements of a Proprietorship 1122
Partnerships General Partnerships
1123 1124
Selecting an Appropriate Form of Business Organization Incorporating an Established Business
1135 1136
Supplemental Topic: Partnership Accounting—A Closer Look
1137
Opening the Accounts of a New Partnership
1137
Allocating Partnership Net Income among the Partners 1140
Assignment Material
1144
Index
1151
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Financial & Managerial Accounting The Basis for Business Decisions