Financial & Managerial Accounting

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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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preface

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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preface

IX

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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preface

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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preface

?

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


• Expanded discussion of retail inventory estimation method, new illustration included in chapter body


• 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


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.

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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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preface

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

XXI

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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


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


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


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


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


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


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


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


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


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


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


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


542


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


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


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


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


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


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


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


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


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


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


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


971


1039

Assignment Material

974

Assignment Material

1043


988


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


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