Fundamental of financial accounting 5th by phillips libby

Fundamental of financial accounting 5th by phillips libby Fundamental of financial accounting 5th by phillips libby Fundamental of financial accounting 5th by phillips libby Fundamental of financial accounting 5th by phillips libby Fundamental of financial accounting 5th by phillips libby Fundamental of financial accounting 5th by phillips libby Fundamental of financial accounting 5th by phillips libby

Fundamentals of FINANCIAL ACCOUNTING Fifth Edition FRED PHILLIPS University of Saskatchewan ROBERT LIBBY Cornell University PATRICIA A LIBBY Ithaca College www.downloadslide.com FUNDAMENTALS OF FINANCIAL ACCOUNTING, FIFTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2016 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2013, 2011, and 2008 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 McGraw-Hill Education, 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 DOW/DOW ISBN 978-0-07-802591-4 MHID 0-07-802591-5 Senior Vice President, 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Printer: R.R Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Phillips, Fred Fundamentals of financial accounting/Fred Phillips, University of Saskatchewan, Robert Libby, Cornell University, Patricia A Libby, Ithaca College.—Fifth edition pages cm ISBN 978-0-07-802591-4 (alk paper) 1. Accounting. I Libby, Robert II Libby, Patricia A III Title HF5636.P545 2016 657—dc23 2014031474 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com Dedicated to The best teachers I’ve ever had: Cal Slobodian (my Grade 10 math teacher)—thank you for showing me the fun in learning new ideas; Mick Norgrove (my favorite accounting professor)—I am grateful that you taught me to approach accounting problems as a detective solving a mystery case; Mom and Dad—thank you for encouraging and helping me to always my best; and Barb, Harrison, and Daniel—thank you for reminding me that, although accounting is awesome, sometimes there are more important things in life FRED PHILLIPS Herman and Doris Hargenrater, Laura Libby, Oscar and Selma Libby PATRICIA AND ROBERT LIBBY www.downloadslide.com Meet the Authors Fred Phillips Fred Phillips is a professor and the George C Baxter Scholar at the University of Saskatchewan, where he teaches introductory financial accounting He also has taught introductory accounting at the University of Texas at Austin and the University of Manitoba Fred has an undergraduate accounting degree, a CPA, and a PhD from the University of Texas at Austin He previously worked as an audit manager at KPMG Fred’s main career interest is accounting education He has been recognized with more than 25 awards, as chosen by his students and peers In 2006, Fred was awarded the title Master Teacher at the University of Saskatchewan In 2011, he was admitted to the 3M National Teaching Fellowship, the highest honor for undergraduate teaching in Canada In the same year, he won a national competition for an instructional case that is integrated throughout assignment materials in Chapters 5–12 of this textbook In 2012, Fred received the L S Rosen Outstanding Educator Award, the American Accounting Association’s Innovation in Auditing and Assurance Education Award, and the American Accounting Association’s Award for Outstanding Research in Accounting Education His peer-reviewed publications include education-focused research and instructional cases in Issues in Accounting Education, as well as professional judgment studies in Journal of Accounting Research and Organizational Behavior and Human Decision Processes, among others Fred is a current member of the Teaching, Curriculum, & Learning and Two-Year College sections of the American Accounting Association In his spare time, he likes to play tennis, drink iced cappuccinos, and relax with his family Robert Libby Robert Libby is the David A Thomas Professor of Accounting at Cornell University, where he teaches the introductory financial accounting course He previously taught at the University of Illinois, Pennsylvania State University, the University of Texas at Austin, the University of Chicago, and the University of Michigan He received his BS from Pennsylvania State University and his MAS and PhD from the University of Illinois; he is also a CPA Bob is a widely published author and researcher specializing in behavioral accounting He was selected as the AAA Outstanding Educator in 2000, received the AAA Outstanding Service Award in 2006, and received the AAA Notable Contributions to the Literature Award in 1985 and 1996 He is the only person to have received all three of the Association’s highest awards iv for teaching, service, and research He has published numerous articles in The Accounting Review; Journal of Accounting Research; Accounting, Organizations, and Society; and other accounting journals He has held a variety of offices including vice president in the American Accounting Association and is a member of the American Institute of CPAs and the editorial boards of The Accounting Review and Accounting, Organizations, and Society Patricia A Libby Patricia Libby is associate professor of accounting at Ithaca College, where she teaches the undergraduate financial accounting course She previously taught graduate and undergraduate financial accounting at Eastern Michigan University and the University of Texas at Austin Before entering academe, she was an auditor with Price Waterhouse (now PricewaterhouseCoopers) and a financial administrator at the University of Chicago She is also faculty advisor to Beta Alpha Psi and Ithaca College Accounting Association She received her BS from Pennsylvania State University, her MBA from DePaul University, and her PhD from the University of Michigan; she is also a CPA Pat conducts research on using cases in the introductory course and other parts of the accounting curriculum She has published articles in The Accounting Review, Issues in Accounting Education, and The Michigan CPA v www.downloadslide.com Focused on Financial Accounting in the Context of Real Business One of the most widely used introductory accounting textbooks, Phillips/Libby/Libby Fundamentals of Financial Accounting focuses on three key attributes Engaging Writing Fundamentals of Financial Accounting introduces students to financial accounting using an appropriate mix of conversational wording, clear and concise presentations, and everyday examples It does this without ever sacrificing its rigor or the concepts that are important to grasping financial accounting Students can feel comfortable as they are introduced to the world of financial accounting Relevant Focus Companies Each chapter of Fundamentals of Financial Accounting makes financial accounting come alive by using a real company whose products and services are popular with students Students learn financial accounting concepts through the use of examples from such companies as American Eagle (clothing), Koss Corporation (headphones), and Under Armour (sportswear) Proven Pedagogy The authors’ approach to introducing the Practical, applicable to both accounting and non-accounting majors and a very thorough financial accounting textbook —Ronald Premuroso, University of Montana Students should find the use of companies from their generation, as examples, interesting accounting cycle and using visual aids throughout the textbook has been tested in peer-reviewed, published research studies One of these award-winning studies has shown that the accounting cycle approach used in this textbook yields learning gains that outpace approaches used in other textbooks by a significant margin The current edition of this textbook also integrates an award-winning continuing case in the assignment materials for Chapters 5–12 This continuing case enables your students to learn key accounting judgments that affect business decisions in the workplace Through ongoing research and development of innovative material, the authors are committed to helping your students succeed in accounting —Diane Marker, University of Toledo Phillips does an excellent job of writing at a level the average student will understand [The authors] know how to engage the students by using real companies, discussing relevant current events, using colorful, enticing-to-read graphs that are efficient at making a point, and most importantly, they know the frequent misconceptions and typical issues students have —Nancy Lynch, West Virginia University vii Dedicated to Student Motivation and Success A PROVEN TEACHING AND LEARNING METHODOLOGY Faculty agree the accounting cycle is the most critical concept to learn and master for students studying financial accounting The approach to this topic in Phillips/Libby/Libby is based on Compressed Coverage Step-by-Step Coverage the belief that students struggle with the account(Other textbooks) (Phillips/Libby/Libby) ing cycle when transaction analysis is covered in one chapter If students are exposed to the accounting equation, journal entries, and T-accounts for Overview of F/S and Users Overview of F/S and Users both balance sheet and income statement accounts in a single chapter, many are left behind and are B/S Transactions F/S, Ratios, and Conceptual unable to grasp material in the next chapter, which with Accounting Equation, Framework Journal Entries, and T-accounts typically covers adjustments and financial statement preparation B/S and I/S Transactions B/S and I/S Transactions The accompanying graphic shows how, unlike with Accounting Equation, with Accounting Equation, other textbooks, the Phillips/Libby/Libby approach Journal Entries, and T-accounts Journal Entries, and T-accounts spreads transaction analysis coverage over two chapters so that students have the time to masAdjustments, Closing Adjustments, Closing ter the material In Chapter of Fundamentals Entries, F/S Preparation Entries, F/S Preparation of Financial Accounting, students are exposed to the accounting equation and transaction analysis for transactions that affect only balance sheet accounts This provides students with the opportunity to learn the basic structure and tools used in accounting in a simpler setting In Chapter 3, students are exposed to more complex transactions that affect both balance sheet and income statement accounts As a result of this progressive approach to transaction analysis, students learn more, as documented in peerreviewed research.* We have also seen that our approach prepares students to learn adjustments, financial statement preparation, and more advanced topics Phillips/Libby/Libby introduces all of the financial statements in the first chapter, then utilizes debits and credits combined with increases and decreases for transactions affecting the balance sheet, and then reinforces the methodology when presenting the transactions affecting the income statement in Chapter This area is the toughest for students and requires the most practice Phillips understands this and expertly navigates through the two statements and demonstrates how the two interconnect and depend upon each other, setting the stage for an easier adjustment and closing process ahead —Margaret Costello Lambert, Oakland Community College *F Phillips and L Heiser, “A Field Experiment Examining the Effects of Accounting Equation Emphasis and Transaction Scope on Students Learning to Journalize,” Issues in Accounting Education 26, pp 681–699 (2011) vii www.downloadslide.com Real Companies Bring Accounting Concepts to Life Written in clear, understandable language  .  The multiple real-world examples, colorful and “clean” exhibits, as well as other illustrations enhance the student’s learning process by making the information relevant and understandable The “building block” approach allows the student to gain a solid understanding of the fundamentals of each chapter before moving on to the next —Muriel Anderson, SUNY–Buffalo The [Cedar Fair] focus company is fantastic; this keeps the classes on this chapter fast-paced You could not have picked a better company for demonstration of acquisitions and impairments of PPE Students love Chapter because of great examples, such as the installation and shipping of a roller coaster and the impairment of a ride due to “vortex shedding.” This chapter is simply exciting —Lisa McKinney, University of Alabama Not all students learn financial accounting with ease With so many distractions these days, it is difficult to keep both majors and nonmajors focused on the big picture The authors of Fundamentals of Financial Accounting understand the challenges instructors face and the need for a financial accounting text that is relevant, easy to read, and current Fundamentals of Financial Accounting responds by using carefully chosen focus companies that students not only recognize but are familiar with because they have visited or used their products From companies like the local pizza restaurant to the world’s most familiar businesses, each chapter features the business and accounting concepts underlying prominent companies such as Walmart, Cedar Fair, American Eagle, National Beverage, Under Armour, and General Mills Through crisp, clear, and engaging writing, the financial decisions these companies make and the financial statements they use come alive for students and they are able to see the big picture of how accounting relates to the real world—their world Long-Lived Tangible and Intangible Assets CH A PT E R NIN E © Robin Smith/Stone/Getty Images YOU R LEARN IN G O B J E C TIVE S LO 9-1 Define, classify, and explain the nature of long-lived assets LO 9-2 Apply the cost principle to the acquisition of long-lived assets LO 9-3 Apply various depreciation methods as economic benefits are used up over time LO 9-4 Explain the effect of asset impairment on the financial statements LO 9-5 Analyze the disposal of long-lived tangible assets LO 9-6 Analyze the acquisition, use, and disposal of long-lived intangible assets LO 9-7 Interpret the fixed asset turnover ratio LO 9-8 Describe factors to consider when comparing companies’ long-lived assets LO 9-S1 Analyze and report depletion of natural resources T H AT WA S T H E N In the past few chapters, you learned about the sale of goods and services to customers LO 9-S2 Calculate changes in depreciation arising from changes in estimates or capitalized cost FOCUS COMPANY: CEDAR FAIR M ost people agonize over how much money to spend on a house or which car to buy After all, they will own these expensive items for many years to come The same concerns exist when companies acquire long-lived assets One of the major challenges business managers face is determining the right amount to invest in long-lived assets The task is especially challenging for companies such as Disney, Six Flags, and Cedar Fair, which operate amusement parks Unlike merchandising companies, an amusement park cannot build up an inventory of unused roller-coaster seats to be sold sometime in the future If managers build more rides than needed to satisfy park-goers, some rides will run with empty seats Although the company will still incur all the costs of running the rides, it will generate only a fraction of the potential revenue On the other hand, amusement parks can also run into trouble if they have too few rides to satisfy patrons Fortunately for managers, accounting reports provide information to evaluate a company’s investment in long-lived assets In this chapter, you will study specific long-lived asset decisions at Cedar Fair, which is headquartered in Sandusky, Ohio, and owns and operates 11 amusement parks, four water parks, and five hotels throughout North America You will see the significant effect that long-lived assets can have on a company’s financial statements Although manufacturing companies, retailers, and even airlines must deal with the same issues as Cedar Fair, the impact on this amusement park company is particularly significant because it relies almost exclusively on long-lived assets As of December 31, 2013, in fact, Cedar Fair’s rides, hotels, and other long-lived assets accounted for more than 90 percent of its total assets 381 380 phi25915_ch09_380-429.indd 380 viii THIS IS NOW This chapter focuses on the assets that enable companies to produce and sell goods and services 22/08/14 3:40 PM phi25915_ch09_380-429.indd 381 22/08/14 3:40 PM From Concepts to Comprehension—  Reinforcement Is Key Whether you’re presenting, discussing, or problem solving, you want materials that will motivate students and hold their interest Motivating today’s students requires materials that connect them with the workplace and encourage them to think about course topics before, during, and after class Fundamentals of Financial Accounting offers students many tools to help reinforce the concepts discussed throughout the text Picture Receives PROMISSORY NOTE Gives SonicGateway promises to pay National Bank $20,000 on 8/3/2017 President & CEO SonicGateway Inc Coach’s Tips COACH’S TIP Name • SONICGATEWAY • SonicGateway has received $20,000 cash SonicGateway gave a note, payable to the bank for $20,000 Analyze Assets (c) Cash Liabilities 120,000 Note Payable Every student needs encouragement and Coach’s Tips are just one way Fundamentals of Financial Accounting fulfills that need Coach’s Tips appear throughout the text and in selected end-of-chapter problems to offer tips, advice, and suggestions Notes payable are like accounts payable except that they (a) charge interest, (b) can be outstanding for long periods (more than one year), and (c) are documented using formal documents called notes Stockholders’ Equity 120,000 phi25915_ch02_044-093.indd 51 05/09/14 1:51 PM How’s it going? Self-Study Practice Research shows that students learn best when they are actively engaged in the learning process This active learning feature engages the student, provides interactivity, and promotes efficient learning These quizzes ask students to pause at strategic points throughout each chapter to ensure they understand key points before moving ahead How’s it going? Self-Study Practice The following transactions are typical operating activities for Florida Flippers, a scuba diving and instruction company Indicate the amount of revenue, if any, that should be recognized in June for each activity using the accrual basis of accounting Amount of Revenue Earned in June Operating Activity In June, Florida Flippers provided $32,000 in diving instruction to customers for cash In June, new customers paid $8,200 cash for diving trips to be provided by Florida Flippers; $5,200 in trips were made in June and the rest will be provided in July In June, customers paid $3,900 cash for instruction they received in May After you have finished, check your answers with the solution in the margin Phillips does an outstanding job of incorporating real world data into the text, which increases a student’s engagement with the material and enhances their learning I think that the writing style is very conversational, which makes reading the chapter a manageable task for the students —Anne Clem, Iowa State University ix www.downloadslide.com IND6 SUBJECT INDEX Adjustments to financial statements—Cont making required adjustments, 150–162 need for, 148–162 statement of cash flows and notes, 166 statement of retained earnings, 164–165 Aging of accounts receivable method, 343–345 AICPA (American Institute of Certified Public Accountants), Code of Professional Conduct, 19 Allowance for doubtful accounts, 344, 349 Allowance method, for bad debts, 340–342, 344 American Institute of Certified Public Accountants (AICPA), Code of Professional Conduct, 19 Amortization defined, 157, 398 discount on bonds payable, 443–444, 446–447, 452–453, 455–457, 459–460 effective-interest, 453–460 of liabilities, 453–460 premium on bonds payable, 443, 446, 454–455, 458–459 simplified effective-interest, 457–460 for software use, 157 straight-line, 446–447, 451–453 Analysis of accounting transactions, 49–64 accounting transactions, nature of, 48 adjustments, 150–162 balance sheet concepts and values in, 49–54 debit/credit framework in, 57, 104–110 financial ratios and See Ratio analysis financing from lender, 51, 61–62 financing from stockholders, 50, 60–61 income statement concepts and values in, 105–110 incurring costs to be paid later, 109 investing in equipment, 52, 62, 547 investing in logos/trademarks, 50–51, 61 nature of, 49 ordering supplies, 53, 63 paying cash in advance, 108–109 paying cash to employees, 108, 220 paying supplier, 62, 109, 555 receiving cash for future services, 106 receiving payment on account, 107 receiving supplies, 54, 63 selling products for cash, 105 selling products on credit, 106 Annual interest rate, 346 Annual report, examples, A1–A12, B1–B14 Annuity defined, C6 future value of, C6–C8, C20 present value of, C8–C10, C12–C18, C20 Arrears, dividends in, 501–502 Asset(s) See also Intangible assets; Tangible assets in accounting equation, adjusting entries for, 148 on balance sheet, 12–13, 46, 65 See also Balance sheet basket purchase of, 385 current, 65, 542 defined, 8, 46 long-lived See Long-lived assets Asset impairment losses, 394–395 Asset misappropriation, in accounting fraud, 208 Asset turnover ratio, 399–400, 597, 600 Association of Certified Fraud Examiners, 214 Audit committee, 210 Authorized shares, 491–492 B Bad debt expense adjusting for estimated bad debts, 340–341 aging of accounts receivable method for estimating, 343–345 allowance method for estimating, 340–342, 344 collection of previously written off account, 345 direct write-off method, 341–342, 345–346, 353 estimating, 339–346, 349, 353 percentage of credit sales method for estimating, 343 pros and cons of extending credit, 338–339 revising estimates for, 345 Balance sheet, 12–13, 44–71 accounts on, 12–13, 46–49 adjusted trial balance and, 165–166 analysis of accounting transactions, 49–54 assessing ability to pay, 65–66 bond liability reporting on, 444 bond premium reporting, 451–452 business activities and, 46–49 chart of accounts, 49–50 classified, 64–65 comparative, 540 concepts and values on, 66–67 defined, 12 dividend effects, 13, 497 equation for, 8–10, 12–13, 16, 46, 49, 104, 540 inventory on, 297 preparing, 64–65 relationship with other financial statements, 15, 539, 540–541 summary, 16 Bank(s) as creditors, 7, 51, 61–62 as external users of financial information, financing from, 7, 51, 61–62 procedures concerning, 221–226 Bank reconciliation, 222–226 bank statement in, 221–222 defined, 221 need for, 222–226 procedures, 224–226 Bank statement, 221–222 checks cleared, 221 deposits made, 222 Basic accounting equation, 8–10, 12–13, 16, 46, 49, 104, 540 Basket purchase of assets, 385 Beginning inventory, 256 Benchmarks for inventory turnover, 306–307 for receivables turnover, 351–352 time-series analysis, 593 Blanchette, Michel, 607n Bond amortization, 445–447, 451–453, 453–460 effective-interest method, 453–460 simplified effective-interest method, 457–460 Bonding employees, 214 Bonds payable, 441–448, 453–460 bonds, defined, 441 certificate, sample, 441 discount amortization, 443–444, 446–447, 452–453, 455–457, 459–460 initial issuance, 442–445 interest owed and paid, 445–447 issued above or below face value, 443–444, 446–447, 451–452, 454–455, 458–460 www.downloadslide.com SUBJECT INDEX issued at face value, 443, 444, 445–446 premium amortization, 443, 446, 454–455, 458–459 pricing, 442 retirements, 447–448 times interest earned ratio, 450–451, 597, 603 types of, 448 Book (carrying) value, 155, 388–389, 444–445 Brand managers, 21 Brooks, David H., 305 Buildings See also Long-lived assets; Property, plant, and equipment acquisition of, 384 as tangible asset, 384 Business organization See Organizational forms C Callability, of long-term debt, 448 Capital accounts contributed capital, 104, 490 partnership, 507–509 sole proprietorship, 506 Capitalization defined, 384 of expenses, 384 of retained earnings, 509–510 of tangible asset costs, 384 Careers in accounting, 20–21, 68 Carrying (book) value, 155, 388–389, 444–445 Cash adjusting entries impact on, 161 on balance sheet, 13, 497 bank reconciliations, 221–222 controlling and reporting, 215–221 defined, 226 dividend declaration, 496–497 in financial statement reporting, 226–227 internal control over, 215–221 paying in advance, 108–109 paying to employees, 108 paying to supplier, 62, 109, 555 petty cash systems, 220, 227–228 pros and cons of extending credit, 338–339 in purchase of tangible assets, 386 receiving for future services, 106 receiving payment on account, 107 restricted, 227 selling products for, 105 timing of reporting expenses versus cash receipts, 103–104 timing of reporting revenue versus cash receipts, 100–102, 112–113, 551 Cash basis accounting, 99–100 Cash dividends See also Stock dividends in arrears, 501–502 balance sheet effects, 13, 497 closing temporary accounts, 166, 167 on common stock, 495–497 cuts in taxes, 495 declaration, 496 declared and paid, 496–497 dividends, defined, 10 nature of, 489 payment, 496–497 on preferred stock, 500, 501–502 IND7 record date, 496 on statement of retained earnings, 12 Cash equivalents defined, 226 in financial statement reporting, 226–227 Cash flow See also Statement of cash flows classifying cash flows, 537–540 converting operating expenses to cash outflow, 555–557 converting revenues to cash inflows, 554–555 from financing, 14, 537, 539, 548–549, 552 inventory reporting method and, 302 from investment, 14, 537, 538–539, 547–548, 551–552, 557–558 from operations, 14, 537, 538, 541–546, 551 overall patterns, 552–553 Cash payments, 218–220 by check for purchases on account, 218–220 to employees via electronic funds transfer, 220 petty cash, 220 to reimburse employees, 220 Cash receipts, 215–217 by mail, 216–217 in person, 215–216 via electronic funds transfer, 217 Certification of accountants, 19, 68 Certified Financial Manager (CFM), 68 Certified Forensic Accountant (Cr FA), 68 Certified Fraud Examiner (CFE), 68 Certified Internal Auditor (CIA), 68 Certified Management Accountant (CMA), 68 Certified Public Accountant (CPA), 68 CFA (Chartered Financial Analyst), 68 CFE (Certified Fraud Examiner), 68 CFM (Certified Financial Manager), 68 Channel stuffing, 350 Character, encouraging honesty, 211 Chartered Financial Analyst (CFA), 68 Charter, partnership, 507 Chart of accounts, 49–50 balance sheet, 49–50 defined, 49 Checks bank reconciliation and statements, 221–226 for purchases on account, 218–220 Chief executive officer (CEO) financial statement responsibility of, 19 internal controls, 19 Chief financial officer (CFO) financial statement responsibility of, 19 internal controls, 19 CIA (Certified Internal Auditor), 68 Classified balance sheet, 64–65 assessing ability to pay, 65–66 components, 64–65 defined, 64 Closing processes at end of accounting period, 55 temporary accounts, 166–169 CMA (Certified Management Accountant), 68 Code of Professional Conduct (AICPA), 19 Collusion, 214 Common size analysis See Vertical (common size) analysis Common stock, 490–497 authorization, 491–492 benefits of owning, 489 defined, 489 www.downloadslide.com IND8 SUBJECT INDEX Common stock—Cont dividends, 495–497 See also Cash dividends; Stock dividends issuance, preferred stock versus, 500 reissuance of, 494–495 repurchase, 493–494 on statement of cash flows, 548 in stockholders’ equity, See also Stockholders’ equity stock splits, 498–499 treasury stock, 490, 491, 493–495, 548 Communication, internal control, 212 Comparative balance sheet, 540 Compensation analysts, 21 Compounding, power of, C4, C8 Compound interest, C4, C8 Comprehensive income, 606–607 Consignment inventory, 296 Consistency, in inventory reporting, 303 Consolidated financial statements, examples, A5–A12, B4–B14 Construction in progress, 383 Contingent liabilities, 448–449 Contra-accounts accumulated depreciation, 155–157, 264, 388, 391, 392, 395–396 allowance for doubtful accounts, 344, 349 defined, 155 equity, 493–494 sales returns and allowances, 264 Treasury stock, 493–494 Contributed capital, 104, 490 Control See Internal control Control environment, 211 Convertible bonds, 448 Copyright, 397 Corporate bonds, 448 Corporate life cycle, 551, 552–553 Corporations See also Common stock; Stockholders’ equity extent of use, nature of, organization structure, 488 ownership characteristics, 488–489 Corruption See Accounting fraud Cost of goods sold (CGS) converting to cash paid to suppliers, 555 errors in ending inventory, 310–311 first-in, first-out (FIFO) method and, 299, 300–301, 308 inventory system, 255–258 last-in, first-out (LIFO) method and, 299–300, 301, 309 periodic inventory system, 257, 269–270 perpetual inventory system, 257–258, 308–310 reporting, 298 weighted average cost method, 299–301, 309 Cost of goods sold (CGS) equation, 256, 298 Cost principle, 13, 47, 67, 402–403 CPA (Certified Public Accountant), 68 Credit defined, 56, 104 extending, pros and cons of, 338–339 in purchase of tangible assets, 386 selling products on, 106 Credit balance, 60, 344 Credit card sales, 352 Credit crisis of 2008-2009 See Financial crisis of 2008-2009 Creditors accounting fraud and, 20 banks as, 7, 51, 61–62 as external users of financial information, 7, 17 nature of, types of, Credit ratings, 431 Credit terms, in benchmarks for receivables turnover, 351–352 Cr FA (Certified Forensic Accountant), 68 Crowdfunding, 440, 490 Cumulative dividend preference, 501–502 Currency, and unit of measure assumption, 10 Current assets defined, 65 operating activities and, 542 Current dividend preference, 501 Current liabilities, 433–441 accounts payable, 433 accrued liabilities, 433–436 current portion of long-term debt, 440–441 defined, 65, 432 notes payable, 436–438 operating activities and, 543 sales tax payable, 438–439 unearned revenue, 101, 106, 439 Current ratio, 65–66, 597, 602 Customer business developers, 21 D Daily transactions, 55 Days to collect, 350, 351, 597 Days to sell, 306, 597 Debentures, 448 Debit balance, 60, 344 Debit/credit framework, 56–64, 104–112 Debit, defined, 56, 104 Debt See also Long-term liabilities defined, 46 early retirement, 447–448 nonliability of corporate shareholders for, 488 Debt financing, equity financing versus, 46, 47, 489 Debt-to-assets ratio, 450, 597, 603 Declaration date of dividend, 496 Decline phase, 552–553 Declining-balance depreciation method, 389, 391–392, 393, 401 Deferral adjustments accounts affected by, 152–158 nature of, 149 role of, 149, 152 sample entries, 152–158 Deferred income tax, 393–394 Depletion, 402–403 Deposits in transit, 223, 224 Deposits made, 222 Depreciable cost, 389–394 Depreciation, 388–394 accumulated, 155–157, 264, 388, 391, 392, 395–396 asset impairment losses, 394–395 book (carrying) value, 155, 388–389, 444–445 calculating, 389–394 changes in estimates, 403–404 declining-balance method, 389, 391–392, 393, 401 deferral adjustments for, 155–157 defined, 155, 388 in determining operating cash flows, 542, 543, 556 differences, impact of, 401–402 disposal of tangible assets, 389, 395–396 partial-year calculations, 393 www.downloadslide.com SUBJECT INDEX straight-line method, 389, 390, 392, 393, 398, 401 tax, 393–394 units-of-production method, 389, 390–391, 392, 393 Direct method defined, 541 of reporting operating activities, 541, 553–557 of writing off bad debt expense, 341–342, 345–346, 353 Directors audit committee requirement, 210 declaration of dividends, 495–497 as external users of financial information, Direct write-off method for bad debts, 341–342, 345–346, 353 Discontinued operations, 606 Discount accounting for bonds issued at, 443–444, 446–447, 452–453, 455–457, 459–460 amortization of bonds issued at, 443–444, 446–447, 452–453, 455–457, 459–460 defined, 443 purchase, 260–261 sales, 264–265 Disposal gain/loss on, 395–396 of intangible assets, 399 of tangible assets, 389, 391, 392, 395–396 useful lives, 389 Dividends See Cash dividends; Stock dividends Documenting procedures, internal control and, 47, 213, 214, 221 Double-declining balance depreciation method, 391–393, 401 Doubtful accounts, allowance for, 344, 349 Drawing accounts partnership, 507 sole proprietorship, 506 Duality of effects, 49 E Early retirement of debt, 447–448 Earnings per share (EPS), 493, 503–504, 597, 601 EBITDA (earnings before interest, taxes, depreciation, and amortization), 402 Edison, Thomas, 489 Effective-interest amortization, 453–460 of bonds issued at discount, 455–457, 459–460 of bonds issued at premium, 454–455, 458–459 simplified, 457–460 Electronic funds transfer (EFT) bank reconciliation and, 223, 225 cash paid to employees via, 220 cash received via, 217 Employees accrued income taxes, 436 accrued payroll deductions, 434–435 bonding, 214 cash paid to, 108, 220 encouraging honesty in, 211 incentive to commit fraud, 208–209 inventory shrinkage and, 257–258 opportunity to commit fraud, 209 rationalizing fraud, 209 stock used to compensate, 493–495 wages expense, 108, 159 Ending inventory (EI), 256, 301, 310–311 Entrepreneurs, crowdfunding, 440, 490 Entry price/historical cost, 607 IND9 Equations See Accounting equations Equipment See also Long-lived assets; Property, plant, and equipment acquisition of, 384 on balance sheet, 13 depreciation for use of, 155–157 investing in, 52, 62, 547 on statement of cash flows, 547 as tangible asset, 384 Equity, defined, 46 Equity financing See also Common stock; Preferred stock debt financing versus, 46, 47, 489 nature of, 46 Errors bank reconciliation and, 223, 225 in ending inventory, 310–311 Estimates bad debt expense, 339–346, 349, 353 depreciation, 403–404 prospective change in, 403–404 revising, 345 Ethical issues See also Accounting fraud accrual manipulation, 537 Code of Professional Conduct (AICPA), 19 control over cash, 226 ethics, defined, 19 inventory and, 305 nature of accounting ethics, 19–20 resetting the clock for doubtful accounts, 349 time period assumption, 99 treasury stock purchases, 493 Exit price/fair value, 607 Expanded accounting equation, 104–110 Expense(s) in accrual basis accounting, 102–104, 112–113, 340, 551 adjusting entries for, 148 capitalizing, 384 in cash basis accounting, 99–100 changes in recognition, 551 converting to cash outflow, 555–557 defined, 9, 97 on income statement, 10–11, 97–98, 104–110, 113 incurring cost to be paid later, 109 review of, 112–113 as subcategory of retained earnings, 104, 105 time period assumption, 98, 99 Expense recognition (”matching”) principle, 102–104, 113, 148, 155, 160–161, 340, 402–403, 551 External audits of financial statements, 210 External exchanges, in accounting cycle, 48 External users of accounting information, 6–8 accounting system and, concepts for external reporting, 18–19 types of, 7, 17 Extraordinary events, 606 Extraordinary repairs and maintenance, 387 F Face value bonds issued above, 443, 444, 446, 451–452, 458–459 bonds issued at, 443, 444, 445–446 bonds issued below, 443–444, 446–447, 452–453, 455–457, 459–460 defined, 442 www.downloadslide.com IND10 SUBJECT INDEX Factoring receivables, 352 Fair value/exit price, 607 Faithful representation, 18–19 Federal Insurance Contributions Act (FICA), 434–435 Federal Unemployment Tax Act (FUTA), 435 FICA taxes, 434–435 FIFO (first-in, first-out) inventory costing method, 299, 300–301, 308 Financial accounting in accounting system, 6–8 government regulation of, 19, 210–211 Financial Accounting Standards Board (FASB), 18–19 See also Generally Accepted Accounting Principles (GAAP) Financial analysts, 21 Financial crisis of 2008-2009 Circuit City failure, 170, 432, 488 days to collect before and after, 351 Lehman Brothers’ operating cash flows, 552 liabilities in, 432 Financial fraud See Accounting fraud; Ethical issues Financial leverage, 504–505 Financial performance, 590–610 horizontal (trend) analysis, 592, 593–595, 598 ratio analysis See Ratio analysis vertical (common size) analysis, 592–593, 595–596, 599 Financial press, bond prices in, 442 Financial ratios See Ratio analysis Financial statement fraud, 208 Financial statements, 10–17 accounting concepts underlying, 604–606 accounting decisions underlying, 603–604 adjusted trial balance and, 164–166 adjustments to See Adjustments to financial statements balance sheet See Balance sheet defined, 6–7 ethical issues and See Ethical issues examples, A5–A12, B4–B14 faithful representation of information, 18–19 financial reporting environment, 19 format of, 541 income statement See Income statement independent external audits, 210 inventory costing method impact on, 297–298, 302 legal issues and See Legal issues notes to, 15 ratio analysis See Ratio analysis relationships among, 15, 539, 540–541 relevance to users, 18–19 reliability of, 18–19 See also Generally Accepted Accounting Principles (GAAP) statement of cash flows See Statement of cash flows statement of retained earnings See Statement of retained earnings summary, 16 useful financial information, 17–20 users, needs of, 6–7, 17 using, 17 Financing activities on balance sheet, 46 banks in, 7, 51, 61–62 crowdfunding, 440, 490 defined, 14 on statement of cash flows, 14, 537, 539, 548–549, 552 Finished goods inventory, 296 First-in, first-out (FIFO) inventory costing method, 299, 300–301, 308 Fixed assets See Property, plant, and equipment; Tangible assets Fixed asset turnover ratio, 399–400, 597, 600 FOB destination, 259, 262–263, 297 FOB shipping point, 259, 262–263, 297 Foreign exchange, unit of measure assumption and, 10 Franchise, 397 Fraud See Accounting fraud Fraud triangle, 208–211 Free cash flow, 550–551 Full disclosure principle, 605 Future value of an annuity, C6–C8, C20 defined, C1 of a single amount, C1–C4 tables for determining, C19–C20 G Generally Accepted Accounting Principles (GAAP) accrual basis accounting, 100 classification choices, 540 for contingent liabilities, 449 defined, 18 direct write-off method for bad debt, 353 external audits, 210 International Financial Reporting Standards (IFRS) versus, 18–19, 266, 303, 399, 449, 540, 607 preferred stock as stockholders’ equity, 500 Gift cards, redemption of, 157–158 Girard, Jean-Yves, 607n Going-concern assumption, 605 Going-concern problem, 605 Goods available for sale, 256 Goods in transit, 296–297 Goodwill, 397, 398 Government as external user of accounting information, regulation of financial reporting, 7, 19, 210–211 Gross earnings, 434 Gross profit analysis, 268–269 Gross profit, defined, 263, 267 Gross profit percentage, 268–269, 307, 597, 599–600 Growth investment, 495 Growth phase, 552–553 H Historical cost/entry price, 607 Hollinger, Richard, 258n Horizontal (trend) analysis, 593–595 computations, 593–595 defined, 593 examples of, 594 nature of, 592 trends revealed in, 598 Hotlines, anonymous, 211, 214 I Impairment asset impairment losses, 394–395 defined, 394 Imprest system, 220 Income investment, 495 www.downloadslide.com SUBJECT INDEX Income statement, 94–119 accounts on, 10–11, 97–98, 104–110, 112–113 accrual basis accounting See Accrual basis accounting adjusted trial balance and, 164–165 cash basis accounting, 99–100 closing temporary accounts, 166–167 concepts and values, 105–110 defined, 10 equations for, 10–11, 16, 104–110 expense accounts, 10–11, 97–98, 104–110, 113 interest expense reporting on, 445–447 inventory and, 297–298 limitations of, 114–115 multistep, 267–268 operating transactions See Operating activities relationship with other financial statements, 15, 539, 540–541 revenue accounts, 10–11, 97, 104–110, 112–113 See also Revenue(s) summary, 16 time period assumption, 98, 99 unadjusted trial balance, 110–112, 151, 152 unit of measure assumption in, 10 Income taxes See also Internal Revenue Service (IRS) accrued, 436 deferred, 393–394 direct write-off method for bad debts, 353 dividend policy affected by tax rules, 495 employee taxes withheld, 436 incurred but not yet recorded, 160–161 inventory reporting method and, 302 tax depreciation, 393–394 Independent verification external audits, 210 internal control and, 47, 213, 214, 221 Indirect method defined, 541 of reporting investing activities, 557–558 of reporting operating activities, 542–546, 557–558 Industry analysis See also Benchmarks; Horizontal (trend) analysis gross profit percentage, 269, 307 inventory turnover benchmarks, 306–307 receivable turnover, 351–352 Initial public offerings (IPOs), 5, 492 Intangible assets, 397–399 acquisition, 397, 398 defined, 382, 397 disposal, 399 on statement of cash flows, 548 types of, 382, 397 use, 398 Interest expenses accrued, 436–437 on bonds payable, 445–447 on notes payable, 436–437 effective-interest method amortization of bond discount, 455–457, 459–460 amortization of bond premium, 454–455, 458–459 incurred but not yet recorded, 159–160 long-term liabilities, 445–447 Interest formula, 346 Interest periods, time value of money and, C10 Interest rates calculating interest on notes receivable, 346 relationship to bond prices, 445 stated, 442 time value of money and, C10 IND11 Interest revenue accruing interest earned, 347–348 bank reconciliation and, 223, 225 calculating, 346 compound interest, C4, C8 interest formula, 346 recording, 347–349 reporting, on notes receivable, 347–349 timelines for, 347 Internal control, 19, 211–228 common control principles, 212–214 components of, 211–212 defined, 211 gross profit analysis, 268–269 independent verification and, 47, 213, 214, 221 lack of, 226 limitations of, 214 objectives of, 211, 212 over cash, 215–221 over inventory See Inventory control principles of, 212–214 Internal events, in accounting cycle, 48 Internal Revenue Service (IRS), 7, 393–394 See also Income taxes Internal users of accounting information accounting system and, types of, 6, International Accounting Standards Board (IASB), 18 International Financial Reporting Standards (IFRS) accounting for tangible and intangible assets, 399 accrual basis accounting, 100 classification choices, 540 component allocation in basket purchases, 385 contingent liabilities, 449 defined, 18 direct write-off method for bad debts, 353 Generally Accepted Accounting Principles (GAAP) versus, 18–19, 266, 303, 399, 449, 540, 607 inventory accounting methods, 303 LIFO reporting not allowed, 303 loan covenants, violated, 451 lower of cost or market inventory reporting, 303 preferred stock as stockholders’ equity, 500 Introductory phase, 552–553 Inventory, 294–314 balance sheet reporting, 297 comparison to benchmarks, 306–307 consignment, 296 control See Inventory control costing/valuation methods See Inventory costing methods days to sell, 306, 597 defined, 254, 296 financial statement effects of costing methods, 297–298, 302, 309–310 finished goods, 296 income statement reporting, 297–298 inventory system, 255–258 management decisions, 296 merchandise, 296 operating activities and, 545 purchase-related transactions, 256, 258–262, 269–270 raw materials, 296 sales-related transactions, 262–267, 296–297 shrinkage, 257–258, 269 type of business and, 296–297 work in process, 296 Inventory control, 255–267 periodic inventory system, 257, 259, 269–270, 298 perpetual inventory system, 257–267, 298, 308–310 www.downloadslide.com IND12 SUBJECT INDEX Inventory costing methods, 298–303, 308–311 cost flow assumptions, 298–303 first-in, first-out (FIFO), 299, 300–301, 308 last-in, first-out (LIFO), 299–300, 301, 309 lower of cost or market (LCM), 303–305, 307 specific identification, 299 weighted average costing method, 299–301, 309 Inventory turnover, 305–307, 597, 601–602 Investing activities on balance sheet, 46–48 defined, 14 indirect method of reporting, 557–558 on statement of cash flows, 14, 537, 538–539, 547–548, 551–552, 557–558 Investment analysts, 21 Investors as external users of financial information, 7, 17 nature of, stock exchanged between, 492 types of, Issued shares defined, 491 repurchase of, 493–494 stock exchanged between investors, 492 stock used to compensate employees, 493–495 Issue price bonds issued above face value, 443, 444, 446, 451–452, 458–459 bonds issued at face value, 443, 444, 445–446 bonds issued below face value, 443–444, 446–447, 452–453, 455–457, 459–460 defined, 442 J Journal(s) debit/credit framework for, 56–64 defined, 55 Journal entries accrual adjustments, 158–161 adjusting, 148, 150–162 allowance method for doubtful accounts, 344, 349 balance sheet accounts, 57–58, 59–60, 60–64 closing temporary accounts, 166–169 debit/credit framework in, 57–63 deferral adjustments, 152–158 defined, 57 formal journal page, 57 income statement accounts, 105–110 periodic inventory system, 269–270 perpetual inventory system, 259–267 posting to ledger, 58 repurchase of stock, 493 for tangible asset acquisition, 386 Jumpstart Our Business Startups (JOBS) Act, 490 K Kapner, S., 269n L Labor relations managers, 21 Land See also Long-lived assets; Property, plant, and equipment acquisition of, 384 land improvements versus, 383 as tangible asset, 384 Lantto, Anna-Maija, 607n Largay, James A., III, 537n Last-in, first-out (LIFO) inventory costing method, 299–300, 301, 309 Least and latest rule, 394 Ledger debit/credit framework for, 56–64 defined, 55 posting from journal to, 58 Ledger accounts summarizing in, 58–60 T-account simplified format for, 59–60 Legal issues internal controls, 19, 213, 214 organizational forms, 4–5, 488–489, 505–509 reporting requirements for corporations, 18–19, 210–211 Lenders financing from, 51, 61–62 peer-to-peer (P2P) lending, 440, 490 Leverage, financial, 504–505 Liabilities, 430–465 in accounting equation, 8–9 accounting for, 453–460 accrued See Accrued liabilities adjusting entries for, 148, 159–161 amortization of, 453–460 on balance sheet, 13, 46, 65 See also Balance sheet contingent, 448–449 current, 65, 432, 433–441 decisions related to, 432–433 defined, 8, 46 financial analysis tools, 449–451 long-term, 46, 441–448, 489, 548 long-term, current portion, 440–441 measuring, 433 noncurrent, 65 reporting bond liabilities, 444 role of, 432–433 Licensing rights, 397 LIFO Conformity Rule, 303 LIFO (last-in, first-out) inventory costing method, 299–300, 301, 309 Limited liability companies (LLCs), 509 extent of use, nature of, Limited liability partnerships (LLPs), 509 Limited life See Amortization; Depreciation Liquidity ratios current ratio, 65–66, 597, 602 days to collect, 350, 351, 597 days to sell, 306, 597 defined, 596 inventory turnover, 305–307, 597, 601–602 list of, 597 receivables turnover, 350–353, 597, 601 Loan covenants accounting fraud and, 209 defined, 209 incentive to commit fraud and, 209 violated, 451 Logos, investing in, 50–51, 61 Long-lived assets, 380–408 amortization of See Amortization defined, 382 depreciation of See Depreciation intangible, 382, 397–399, 548 management decisions concerning, 401–402 www.downloadslide.com SUBJECT INDEX natural resources, 402–403 tangible, 382, 383–396 turnover analysis, 399–400, 597, 600 Long-term liabilities, 441–448 bonds payable, 441–448, 453–460 crowdfunding, 440 current portion of long-term debt, 440–441 equity financing versus, 46, 489 nature of, 441 on statement of cash flows, 548 Lower of cost or market (LCM) inventory valuation, 303–305, 307 M MACRS (Modified Accelerated Cost Recovery System), 394n Maintenance costs accounting policy, 387 extraordinary repairs, 387 ordinary, 387 Management’s Discussion and Analysis (MD&A), 598 examples, A2, B2 Managerial accounting, Managers counteracting incentives to commit fraud, 210 decisions concerning long-lived assets, 401–402 encouraging honesty in employees, 211 incentive to commit fraud, 208–209 as internal users of financial information, opportunity to commit fraud, 209 rationalizing fraud, 209 reducing opportunities for fraud, 210–211 Manufacturing companies inventory of, 296–297 managerial accounting, 6, 255 operating cycles, 254–255 Market interest rate, 444 Matching principle, 102–104, 148, 155, 160–161, 340, 402–403 Maturity date bond retirement on, 447 bonds payable, 442 defined, 346 notes receivable, 346 Maturity phase, 552–553 Medicare, FICA taxes withheld, 434–435 Merchandising companies controlling and reporting sales, 255–267 defined, 254 financial reporting compared with service companies, 255 gross profit percentage, 268–269 inventory of, 296 inventory purchases, 256, 258–262, 266–267 inventory sales, 262–267, 296–297 inventory systems, 255–258 operating activities and cycles, 296 operating cycles, 254–255 sales tax payable, 438–439 Mistakes See Errors Modified Accelerated Cost Recovery System (MACRS), 394n Multistep income statement, 267–268 Municipal bonds, 448 N Natural resources, 402–403 Net assets, 397 Net book value (carrying value), 155, 388–389, 444–445 Net income See also Income statement defined, 98 in determining operating cash flows, 542, 543 limitations of income statement, 114–115 nature of, 9, 11 Net pay, 434 Net profit margin ratio, 113–114, 597, 599 New issues bonds, 442–445 common stocks, 5, 492 preferred stocks, 500 seasonal, 492 Noncurrent liabilities, 65 Nonrecurring items, 606 No-par value stock, 492 Notes payable on balance sheet, 13 creation, 436 as current liability, 436–438 defined, 51 on statement of cash flows, 548 Notes receivable, 346–349 defined, 339 establishing, 347 interest revenue and, 346–349 pros and cons of extending credit, 338–339 recording, 347–349 uncollectible, accounting for, 349 Notes to the financial statements, 15 adjusted trial balance and, 166 examples, A9–A12, B8–B14 NSF (not sufficient funds) checks, 223, 225 O 1/15, n/16, 351 Operating activities, 96–98 on balance sheet, 46–48 converting operating expenses to cash outflow, 555–557 current assets and, 543–545 current liabilities and, 543 defined, 14, 96 direct method of reporting, 541, 553–557 on income statement, 96–98 indirect method of reporting, 542–546, 557–558 interpreting cash flows from, 541–546 merchandising company, 296 on statement of cash flows, 14, 537, 538, 541–546, 551 Operating cycle activities, 96–98 control over cash, 215–221 control over inventory, 255–267 defined, 254–255 gross profit percentage, 268–269, 307 type of business, 254–255 Ordinary repairs and maintenance, 387 Organizational forms, 4–5 corporation, 5, 488–489 limited liability company (LLC), 5, 509 limited liability partnership (LLP), 509 partnership, 4, 5, 507–509 sole proprietorship, 4, 5, 505–507 Orpurt, Steven F., 554n Outsourcing specialists, 21 IND13 www.downloadslide.com IND14 SUBJECT INDEX Outstanding checks, 223, 224–225 Outstanding shares, 491 Overriding controls, 214 Owners’ equity See also Stockholders’ equity for partnership, 507–509 for sole proprietorship, 505–507 P Partnerships, 507–509 extent of use, nature of, 4, 507 owner’s equity for, 507–509 Par value, 492 Passive investments, D1 Patents, 397 Payment date of dividend, 496–497 Payroll, accrued, 434–435 Payroll deductions, 434–435 Payroll taxes, accrued, 434–435 Pcards, 220 Peer-to-peer (P2P) lending, 440, 490 Percentage of credit sales method, for estimating bad debts, 343 Periodic inventory system inventory control in, 257, 259, 269–270, 298 journal entries, 269–270 nature of, 257 Permanent accounts, 166 Perpetual inventory system inventory control in, 257–258, 298, 308–310 journal entries, 259–267 nature of, 257 Petty cash defined, 220 petty cash fund, 220, 227–228 procedures for, 220, 227–228 Petty cash fund, 220 Physical flow of goods, 299 Post-closing trial balance, 168–169 Preemptive rights, of common stockholders, 489 Preferred stock, 500–502 common stock versus, 500 defined, 500 dividends, 500, 501–502 See also Cash dividends; Stock dividends issuance, 500 Premium accounting for bonds issued at, 443, 444, 446, 451–452, 458–459 amortization of bonds issued at, 443, 446, 454–455, 458–459 defined, 443 Prepaid expenses deferral adjustments and, 149, 154–155 operating activities and, 545–546 paying cash in advance, 108–109 Presale arrangements, 440 Present value of an annuity, C8–C10, C12–C18, C20 of bond payments, 453–460 defined, 442, C1 of a single amount, C4–C6, C10–C12, C14–C18, C19 tables for determining, C19–C20 Price/earnings (P/E) ratio, 503, 504, 505, 597, 601 Principal defined, 346 recording for notes payable, 437–438 recording for notes receivable, 348–349 Private accountants, 5, 68 Private companies, Production managers, 21 Products future, receiving cash for, 106 selling for cash, 105 selling on credit, 106 Profit(s) in cash basis accounting, 99–100 generation of, 9–10 Profitability ratios, 599–601 asset turnover, 399–400, 597, 600 defined, 596 earnings per share (EPS), 493, 503–504, 597, 601 fixed asset turnover, 399–400, 597, 600 gross profit percentage, 268–269, 307, 597, 599–600 list of, 597 net profit margin, 113–114, 597, 599 price/earnings (P/E) ratio, 503, 504, 505, 597, 601 return on equity (ROE), 503, 504–505, 597, 600–601 Property, plant, and equipment, 382 See also Equipment; Long-lived assets; Tangible assets buildings, 384 land, 383, 384 reporting sales of, 557–558 Pro rata basis, 497 Public accountants, 5, 68 Public companies, 5, 19–20 Public Company Accounting Oversight Board (PCAOB), 19 Purchase(s) inventory, 256, 258–262, 269–270 of tangible asset for cash, 386 of tangible asset on credit, 386 Purchase discounts, inventory, 260–261 Purchase returns and allowances, 260 R Raciot, Franỗois-Eric, 607n Ratio analysis computations, 597 defined, 593, 596 interpreting, 599–603 liquidity ratios See Liquidity ratios nature of, 593 profitability ratios See Profitability ratios solvency ratios See Solvency ratios Raw materials inventory, 296 Receivables turnover analysis, 350–353, 597, 601 Reconciliation See Bank reconciliation Record date of dividend, 496 Recording accounting transactions adjusting entries, 148, 150–162 balance sheet concepts and values in, 66–67 debit/credit framework for, 57–58 income statement concepts and values in, 105–110 inventory, 259–267, 269–270 nature of, 49, 55, 57–58 Recovery, 345 Reissuance of common stock, 494–495 Remittance advice, 216–217 Rent benefits expiring during period, 154–155 prepaid, 108–109, 149 Repurchase of stock, 493–494 Research and development expenses, 397 Residual claims, of common stockholders, 489 Residual value, 389, 391, 392 Responsibility, internal control and, 213 www.downloadslide.com SUBJECT INDEX Restricted access, internal control and, 213–214, 221 Restricted cash, 227 Retailers See Merchandising companies Retained earnings, 490, 502 See also Statement of retained earnings on balance sheet, 13 capitalizing, 509–510 cash dividends and, 496–497 distributions to shareholders, 495–497 dividend declaration, 496–497 in expanded accounting equation, 104, 105 expense as subcategory of, 104, 105 restrictions on, 496 revenue as subcategory of, 104, 105 on statement of cash flows, 548, 549 stock dividends and, 497–498, 499, 509–510 in stockholders’ equity, stock splits and, 498–499 Retirement of bonds payable, 447–448 Return on equity (ROE), 503, 504–505, 597, 600–601 Revenue(s) in accrual basis accounting, 100–102, 112–113, 148, 158–159, 266, 551 adjusting entries for, 148, 149–150 in cash basis accounting, 99–100 converting to cash inflows, 554–555 credit card sales, 352 credit sales, pros and cons of, 338–339 defined, 9, 97 earned but not yet recorded, 158–159 on income statement, 10–11, 97, 104–110, 112–113 inventory system, 255–258 operating activities and, 553–557 review of, 112–113 as subcategory of retained earnings, 104, 105 time period assumption, 98, 99 unearned, 101, 106, 439 Revenue expenditures, ordinary repairs and maintenance as, 387 Revenue recognition principle, 100–102, 112–113, 148, 158–159, 266, 551 Risk assessment, internal control, 212 Risk Management Association, 599 Rule of accrual, 100 S Sahlström, Petri, 607n Sales discounts, inventory, 264–265 Sales, inventory, 262–267, 296–297 Sales returns and allowances, 263–264 Sales revenue See Revenue(s) Sales tax payable, 438–439 Salvage value, 389, 391, 392 Sarbanes-Oxley Act of 2002 (SOX), 19, 210–211 Seasonality cash flows from operating activities and, 551 new issues, 492 Secured bonds, 448 Segregation of duties defined, 213 internal control and, 213 Selling, General, and Administrative Expenses, 267 Selling price, 263 Separate entity assumption, Serial bonds, 448 Service charges, bank reconciliation and, 223, 225 Service companies defined, 254 financial reporting compared with merchandising companies, 255 operating cycles, 254–255 IND15 Services gift cards redeemed for, 157–158 paying cash in advance, 109 receiving cash for future, 106 Shrinkage, inventory, 257–258, 269 Simplified effective-interest amortization, 457–460 Single amount future value, C1–C4 present value, C4–C6, C10–C12, C14–C18, C19 Small business, crowdfunding, 440, 490 Social Security, FICA taxes withheld, 434–435 Sole proprietorships extent of use, nature of, 4, 505–507 owner’s equity for, 505–507 Solvency ratios debt-to-assets, 450, 597, 603 defined, 596 list of, 597 times interest earned ratio, 450–451, 597, 603 SOX See Sarbanes-Oxley Act of 2002 (SOX) Specific identification inventory costing method, 299 Stated interest rate, 442 Statement of cash flows, 14, 534–563 adjusted trial balance and, 166 categories of business activities, 14, 536 classifying cash flows, 537–540 defined, 14 direct method of reporting, 541, 553–557 equation for, 16 evaluating cash flows, 550–553 financing activities, 14, 537, 539, 548–549, 552 format, 550, 554 indirect method of reporting, 542–546, 557–558 investing activities, 14, 537, 538–539, 547–548, 551–552, 557–558 operating activities, 14, 537, 538, 541–546, 551 preparing, 541–550, 558–560 relationship with other financial statements, 15, 539, 540–541 summary, 16 supplemental disclosure, 549 Statement of retained earnings, 12 adjusted trial balance and, 164–165 defined, 12 equation for, 16 relationship with other financial statements, 15, 540–541 summary, 16 State Unemployment Tax Act (SUTA), 435 Stickney, Clyde P., 537n Stock dividends, 497–498, 499 large, 509–510 recording, 509–510 small, 510 Stockholders financing from, 50, 60–61 as investors, ownership characteristics, 488–489 Stockholders’ equity, 486–513 See also Owners’ equity; Statement of retained earnings in accounting equation, 9–10 adjusting entries, 161 on balance sheet, 13, 46 See also Balance sheet common stock See Common stock components of, 9–10 corporate ownership, concept of, 488–489 crowdfunding, 440 defined, 9, 46 distributions to shareholders, 495–497 dividends See Cash dividends; Stock dividends www.downloadslide.com IND16 SUBJECT INDEX Stockholders’ equity—Cont equity versus debt financing, 489 financial ratios, 503–505 preferred stock, 500–502 retained earnings See Retained earnings Stock splits, 498–499 Straight-line amortization method of bonds issued at discount, 446–447, 452–453 of bonds issued at premium, 446, 451–452 defined, 451 Straight-line depreciation method, 389, 390, 392, 393, 398, 401 Strips, 448 Subsidiary accounts, 341 Summarizing accounting transactions adjusting entries, 150–162 debit/credit framework for, 58–60 income statement concepts and values in, 105–110 nature of, 49, 55, 58–60 Suppliers as creditors, paying, 62, 109, 555 Supplies on balance sheet, 13 ordering, 53, 63 receiving, 54, 63 used during period, 152–153 T T-accounts accrual adjustments, 158–161 adjusted trial balance, 162–163 balance sheet transactions, 59–64 debit/credit framework for, 58–60 deferral adjustments, 152–158 defined, 58 income statement transactions, 105–110 to prepare statement of cash flows, 558–560 simplified format for ledger accounts, 59–60 unadjusted trial balance, 110–112 Tangible assets, 383–396 acquisition, 384–387 defined, 382 depreciation, 388–394 See also Depreciation disposal, 389, 391, 392, 395–396 maintenance costs, 387 types of, 382, 383, 384 use, 387–394 Tax depreciation, 393–394 Taxes See also Income taxes FICA, 434–435 sales tax payable, 438–439 unemployment, 435 Technology assets, 397 Temporary accounts closing, 55, 166–169 defined, 166 Term bonds, 448 Time lags bank reconciliation and, 223 receivables turnover analysis, 350–353 resetting the clock for doubtful accounts, 349 Timelines, interest period, 347 Time period assumption defined, 98 ethical issues in, 99 Times accounts receivable, 350–353 Time-series analysis, 593 Times interest earned ratio, 450–451, 597, 603 Time value of money annuity, C6–C10, C12–C18, C20 defined, C1 future value, C1–C4, C6–C10, C19–C20 interest periods in, C10 interest rates in, C10 present value, C1, C4–C6, C8–C20 single amount, C1–C4, C10–C12, C14–C18, C19–C20 Timing of reporting expenses versus cash receipts, 103–104 of reporting revenue versus cash receipts, 100–102, 112–113 Trademarks defined, 397 investing in, 50–51, 61 Transactions analysis of, in accounting cycle, 49–64 basic accounting equation and, 49 daily, 55 defined, 48 duality of effects, 49 types of events, 48–49 Transportation cost, inventory, 259–260, 262–263 Treasury bonds, 448 Treasury stock, 493–495 contra-accounts, 493–494 defined, 490, 491 reissuance of, 494–495 repurchase of stock, 493–494 on statement of cash flows, 548 Trend analysis See Horizontal (trend) analysis Trial balance adjusted, 162–166 defined, 64 post-closing, 168–169 preparing, 64–65 unadjusted, 110–112, 151, 152 Turnover analysis asset, 399–400, 597, 600 fixed asset, 399–400, 597, 600 inventory, 305–307, 597, 601–602 receivables, 350–353, 597, 601 U Unadjusted trial balance, 110–112, 151, 152 debit/credit framework and, 110–112 defined, 111 sample, 112, 152 Uncollectible accounts aging of accounts receivable method for estimating, 343–345 allowance method for estimating, 344, 349 direct write-off method, 341–342, 345–346, 353 percentage of credit sales method for estimating, 343 revising estimates for, 345 segregating collections and write-offs, 353 Uncollectible notes, 349 Unearned revenue, 101, 106, 439 Unearned revenue, deferral adjustments and, 149 Unemployment taxes, 435 Uniform Partnership Act, 507 U.S Department of Labor, 68 U.S Patent and Trademark Office, 397 U.S Securities and Exchange Commission (SEC), 7, 19, 440, 490 www.downloadslide.com SUBJECT INDEX Unit of measure assumption, 10 Units-of-production depreciation method, 389, 390–391, 392, 393 Unlimited life, amortization and, 398 Useful life, 389 V Vacation, mandatory, 214 Verification of transactions See Independent verification Vertical (common size) analysis, 595–596 computations, 595–596 defined, 595 examples of, 595–596 nature of, 592–593 relationships noted in, 599 Voting rights common stock, 489 preferred stock, 500 Voucher system for cash payments, 218–220 defined, 218 overview of, 218, 219 IND17 W Wages expense incurred but not yet recorded, 159 paying cash to employees, 108 Weighted average inventory costing method, 299–301, 309 Whistleblowers, 211, 214 Wholesalers See Merchandising companies Working capital management, 551 Work in process inventory, 296 Write-off defined, 341 direct write-off method for bad debts, 341–342, 345–346, 353 Z Zang, Yoonseok, 554n Zero-coupon bonds, 448 www.downloadslide.com www.downloadslide.com www.downloadslide.com ... textbooks, Phillips/ Libby/ Libby Fundamentals of Financial Accounting focuses on three key attributes Engaging Writing Fundamentals of Financial Accounting introduces students to financial accounting. ..Fundamentals of FINANCIAL ACCOUNTING Fifth Edition FRED PHILLIPS University of Saskatchewan ROBERT LIBBY Cornell University PATRICIA A LIBBY Ithaca College www.downloadslide.com FUNDAMENTALS... are introduced to the world of financial accounting Relevant Focus Companies Each chapter of Fundamentals of Financial Accounting makes financial accounting come alive by using a real company whose