Financial accounting 11th edition by walter t harrison

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Accounting in the Headlines One of the biggest challenges for accounting instructors is that students often feel disengaged from the course material, which can seem abstract and unrelated to their personal experiences But by incorporating real-life examples, instructors can spark student interest and engagement, especially when teaching accounting at the introductory level Accounting in the Headlines, an award-winning blog by renowned author Wendy Tietz, does just that with stories about real companies and events that can be used in the accounting classroom to illustrate introductory financial and managerial accounting concepts Concise, tailorable, and updated on a weekly basis, these articles easily fit into the typical introductory accounting curriculum, whether the course is delivered in-person or online Accounting in the Headlines articles, along with multiple-choice and polling questions, can be assigned through MyAccountingLab and Learning Catalytics™ Instructors are also provided with discussion questions, PowerPoint slides, and handout files, to support learning initiatives http://accountingintheheadlines.com A01_HARR7620_11_SE_FM.indd 11/23/15 5:57 PM Dear Valued Colleagues, Welcome to the Eleventh Edition of Financial Accounting We are grateful for your support as an adopter of our text as we celebrate over 30 years of success in the market The Eleventh Edition of Financial Accounting has been improved in many respects, as explained below Several editions ago, we shifted the focus of Financial Accounting more toward meeting the needs of users of accounting information for a more balanced presentation Despite this shift, we still cover the “basic nuts-and-bolts of financial accounting”—the accounting cycle and financial statement preparation In this edition, we added more discussion of key financial ratios, detailing what those ratios measure and how they are used Try It in Excel ® As educators, we often have conversations with those who recruit our students Based on these conversations, we found that students often complete their study of financial accounting without sufficient knowledge of how to use Excel to perform accounting tasks To respond to this concern, we have adapted most of the illustrations of key accounting tasks in the book to Excel format and have added new sections in key chapters entitled “Try It in Excel,” which describe lineby-line how to retrieve and prepare accounting information (such as adjusted trial balance worksheets, ratio computations, depreciation schedules, bond discount and premium amortization schedules, and financial statement analysis) in Excel format Student success We feel we have the most advanced student learning materials in the market with MyAccountingLab These include automatically graded homework, DemoDocs, and learning aid videos We believe that the use of MyAccountingLab homework will greatly enhance student understanding of accounting with its instantaneous feedback MyAccountingLab makes the study of financial accounting a more interactive and fun experience for students In addition, we have adopted a scaffolding approach in the book and its resources Chapter content and the end-of-chapter material builds from the basic short exercise featuring one basic single concept to more advanced problems featuring multiple learning objectives The student can practice at the basic level and then build upon that success to advance on to more challenging problems Professor expectations As professors, we know that you want a book that contains the most relevant and technically correct content available We also know that you want excellent end-of-chapter material that is as up-to-date and errorfree as possible We reviewed and created the end-of-chapter questions, exercises, problems, and cases taking into account the types of assignments we ourselves use in class and assign as homework Based on comments from adopters, we have thoroughly reviewed every end-of-chapter exercise and problem, with the goal of eliminating redundancy and adding relevance The textbook and solutions manual have been put through a rigorous accuracy check to ensure that they are as complete and error-free as possible We welcome your comments and suggestions Please don’t hesitate to send feedback about this book to HorngrensAccounting@pearson.com A01_HARR7620_11_SE_FM.indd Bill Thomas Wendy Tietz 11/24/15 9:56 AM Financial Accounting Eleventh Edition Walter T Harrison Jr Baylor University Charles T Horngren Stanford University C William (Bill) Thomas Baylor University Wendy M Tietz Kent State University Boston  Columbus  Indianapolis  New York  San Francisco Amsterdam  Cape Town  Dubai  London  Madrid  Milan  Munich  Paris  Montréal  Toronto Delhi  Mexico City  São Paulo  Sydney  Hong Kong  Seoul  Singapore  Taipei  Tokyo A01_HARR7620_11_SE_FM.indd 11/23/15 5:57 PM Vice President, Business Publishing: Donna Battista Editor-in-Chief: Adrienne D’Ambrosio Senior Acquisitions Editor: 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prior to any prohibited reproduction, storage in a r­etrieval ­system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or o­ therwise For information ­regarding ­permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/ Acknowledgments of third-party content appear on the appropriate page within the text, or are as follows: Decision Guidelines and Ethical Issue icons: Micromaniac/Shutterstock Global View and Cooking the Books icons: Pearson Education PEARSON, ALWAYS LEARNING, and MYACCOUNTINGLAB® are exclusive trademarks owned by ­Pearson Education, Inc., or its affiliates in the U.S and/or other countries Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors Library of Congress Cataloging-in-Publication Data Names: Harrison, Walter T., author | Horngren, Charles T., author | Thomas, C William, author Title: Financial accounting / Walter T Harrison Jr., Baylor University, Charles T Horngren, Stanford University, C William (Bill) Thomas, Baylor University, Wendy M Tietz, Kent State University Description: Eleventh Edition | Boston : Pearson, 2016 | Revised edition of Financial accounting, 2015 | Includes index Identifiers: LCCN 2015043663 | ISBN 9780134127620 Subjects: LCSH: Accounting Classification: LCC HF5636 H37 2016 | DDC 657— dc23 LC record available at http://lccn.loc.gov/2015043663 10 ISBN 10: 0-13-412762-5 ISBN 13: 978-0-13-412762-0 A01_HARR7620_11_SE_FM.indd 11/23/15 5:57 PM About the Authors Walter T Harrison Jr is professor emeritus of accounting at the Hankamer School of Business, Baylor University He received his BBA from Baylor University, his MS from Oklahoma State University, and his PhD from Michigan State University Professor Harrison, recipient of numerous teaching awards from student groups as well as from university administrators, has also taught at Cleveland State Community College, Michigan State University, the University of Texas, and Stanford University A member of the American Accounting Association and the American Institute of Certified Public Accountants, Professor Harrison has served as chairman of the ­Financial Accounting Standards Committee of the American Accounting Association, on the Teaching/Curriculum Development Award Committee, on the Program ­Advisory Committee for Accounting Education and Teaching, and on the Notable Contributions to Accounting Literature Committee Professor Harrison has lectured in several foreign countries and published articles in numerous journals, including Journal of Accounting Research, Journal of ­Accountancy, Journal of Accounting and Public Policy, Economic Consequences of Financial Accounting Standards, Accounting Horizons, Issues in Accounting ­Education, and Journal of Law and Commerce Professor Harrison has received scholarships, fellowships, and research grants or awards from PricewaterhouseCoopers, Deloitte & Touche, the Ernst & Young ­Foundation, and the KPMG Foundation Charles T Horngren (1926–2011) was the Edmund W Littlefield Professor of ­Accounting, emeritus, at Stanford University A graduate of Marquette University, he received his MBA from Harvard University and his PhD from the University of ­Chicago He was also the ­recipient of honorary doctorates from Marquette University and DePaul University A certified public accountant, Horngren served on the Accounting Principles Board for six years, the Financial Accounting Standards Board Advisory Council for five years, and the Council of the American Institute of Certified Public Accountants for three years For six years he served as a trustee of the Financial Accounting Foundation, which oversees the F ­ inancial Accounting Standards Board and the G ­ overnment Accounting Standards Board Horngren is a member of the Accounting Hall of Fame As a member of the ­American Accounting Association, Horngren was its ­president and its director of research He ­received its first annual Outstanding Accounting ­Educator Award The California Certified Public Accountants Foundation gave Horngren its ­Faculty Excellence Award and its Distinguished Professor Award He was the first person to have received both awards The American Institute of Certified Public Accountants presented its first O ­ utstanding Educator Award to Horngren Horngren was named Accountant of the Year, in ­Education, by the national ­professional accounting fraternity, Beta Alpha Psi Professor Horngren was also a member of the Institute of Management Accountants, from whom he r­ eceived its Distinguished Service Award He was a member of the institute’s Board of Regents, which administers the certified management ­accountant examinations Horngren is an author of these other accounting books published by Pearson: Cost Accounting: A Managerial Emphasis, Fifteenth Edition, 2015 (with Srikant M Datar and Madhav V Rajan); Introduction to Financial Accounting, Eleventh Edition, 2014 (with Gary L Sundem, John A Elliott, and Donna Philbrick); Introduction to A01_HARR7620_11_SE_FM.indd v 11/23/15 5:57 PM vi   About the Authors Management Accounting, Sixteenth Edition, 2014 (with Gary L Sundem, Jeff Schatzberg, and Dave Burgstahler); Horngren’s Financial & Managerial Accounting, Fifth Edition, 2016 (with Tracie L Miller-Nobles, Brenda L Mattison, and Ella Mae Matsumura); and Horngren’s Accounting, Eleventh Edition, 2016 (with Tracie L Miller-Nobles, Brenda L Mattison, and Ella Mae Matsumura) Horngren was the consulting editor for ­Pearson’s Charles T Horngren Series in Accounting C William (Bill) Thomas is the J.E Bush Professor of Accounting and a Master Teacher at Baylor University A Baylor University alumnus, he received both his BBA and MBA there and went on to earn his PhD from The University of Texas at Austin With primary interests in the areas of financial accounting and auditing, Bill Thomas has served as the J.E Bush Professor of Accounting since 1995 He has been a member of the faculty of the Accounting and Business Law Department of the Hankamer School of Business since 1971 and served as chair of the department for 12 years He has been recognized as an Outstanding Faculty Member of Baylor University as well as a ­Distinguished Professor for the Hankamer School of Business Dr Thomas has received many awards for outstanding teaching, including the Outstanding Professor in the ­Executive MBA Programs as well as the designation of Master Teacher Thomas is the author of textbooks in auditing and financial accounting, as well as many articles in auditing, financial accounting and reporting, taxation, ethics, and ­accounting education His scholarly work focuses on the subject of fraud prevention and detection, as well as ethical issues among accountants in public practice He presently serves as the accounting and auditing editor of Today’s CPA, the journal of the Texas Society of Certified Public Accountants, with a circulation of approximately 28,000 Thomas is a certified public accountant in Texas Prior to becoming a professor, Thomas was a practicing accountant with the firms of KPMG, LLP, and BDO Seidman, LLP He is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Texas Society of Certified Public Accountants For my wife, Mary Ann C William (Bill) Thomas Wendy M Tietz is a professor in the Department of Accounting in the College of B ­ usiness Administration at Kent State University, where she has taught since 2000 She teaches ­introductory financial and managerial accounting in a variety of formats, ­including large sections, small sections, and web-based sections She has received n­ umerous college and university teaching awards while at Kent State University Most recently she was named the Beta Gamma Sigma Professor of the Year for the College of Business Administration Dr Tietz is a certified public accountant, a certified management accountant, and a chartered global management accountant She is a member of the American Accounting Association (AAA), the Institute of Management Accountants (IMA), and the American Institute of Certified Public Accountants (AICPA) She has published articles in such journals as Issues in Accounting Education, Accounting Education: An International ­ anders/ Journal, and Journal of Accounting & Public Policy She received the 2014 Bea S AICPA Innovation in Teaching Award for her accounting educator blog entitled ­“Accounting in the Headlines.” She regularly presents at AAA regional and national meetings Dr Tietz is also the coauthor of a managerial accounting textbook, ­Managerial Accounting, with Dr Karen Braun Dr Tietz received her PhD from Kent State University She received both her MBA and BSA from the University of Akron She worked in industry for several years, both as a controller for a financial institution and as the operations manager and controller for a recycled plastics manufacturer To my husband, Russ, who steadfastly supports me in every endeavor Wendy M Tietz A01_HARR7620_11_SE_FM.indd 11/23/15 5:57 PM Brief Contents Preface xv Visual Walk-Through  xviii 10 11 12 13 The Financial Statements  Transaction Analysis  60 Accrual Accounting & Income  121 Internal Control & Cash  199 Short-Term Investments & Receivables  249 Inventory & Cost of Goods Sold  308 Plant Assets, Natural Resources, & Intangibles  371 Long-Term Investments & the Time Value of Money  438 Liabilities 492 Stockholders’ Equity  564 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income  631 The Statement of Cash Flows  678 Financial Statement Analysis  750 Appendix A: Apple Inc Annual Report 2014  831 Appendix B: Under Armour, Inc Annual Report 2014  851 Appendix C: Typical Charts of Accounts for Different Types of Businesses  867 Appendix D: Summary of Generally Accepted Accounting Principles (GAAP)  869 Appendix E: Summary of Differences Between U.S GAAP and IFRS Cross Referenced to Chapter 871 vii A01_HARR7620_11_SE_FM.indd 11/23/15 5:57 PM Contents Preface  xv Chapter Visual Walk-Through  xviii Transaction Analysis  60 Chapter Spotlight The Walt Disney Company The Financial Statements  Spotlig ht The Walt Disney Company  Explain Why Accounting Is the Language of Business 4 Records Millions of Transactions a Year!  60 Explain What a Transaction Is  61 Define “Account,” and List and Differentiate Between Different Types of Accounts  62 Assets 62 Who Uses Accounting Information?  Liabilities 63 Two Kinds of Accounting: Financial Accounting and Management Accounting  Stockholders’ (Owners’) Equity  63 Organizing a Business  Explain and Apply Underlying Accounting Concepts, Assumptions, and Principles  The Entity Assumption  The Continuity (Going-Concern) Assumption  The Historical Cost Principle  The Stable-Monetary-Unit Assumption  Apply the Accounting Equation to Business Organizations 11 Assets and Liabilities  11 Owners’ Equity  12 Evaluate Business Operations Through the Financial Statements 14 Show the Impact of Business Transactions on the Accounting Equation  64 Example: Alladin Travel, Inc.  64 Transactions and Financial Statements  70 Mid-Chapter Summary Problem  73 Analyze the Impact of Business Transactions on Accounts 75 The T-Account  75 Increases and Decreases in the Accounts: The Rules of Debit and Credit  75 Additional Stockholders’ Equity Accounts: Revenues and Expenses 77 Record (Journalize and Post) Transactions in the Books 78 The Income Statement Measures Operating Performance 15 Copying Information (Posting) from the Journal to the Ledger 79 The Statement of Retained Earnings Shows What a Company Did with Its Net Income  18 The Flow of Accounting Data  80 The Balance Sheet Measures Financial Position  19 The Statement of Cash Flows Measures Cash Receipts and Payments  22 Construct Financial Statements and Analyze the Relationships Among Them  24 Evaluate Business Decisions Ethically  26 Accounts after Posting to the Ledger  84 Construct and Use a Trial Balance  85 Analyzing Accounts  86 Correcting Accounting Errors  87 Chart of Accounts  87 The Normal Balance of an Account  88 American Institute of Certified Public Accountants Code of Professional Conduct  28 Account Formats  88 End-of-Chapter Summary Problem  30 End-of-Chapter Summary Problem  91 Analyzing Transactions Using Only T-Accounts  89 viii A01_HARR7620_11_SE_FM.indd 11/23/15 5:57 PM Contents     ix Chapter Chapter Accrual Accounting & Income  121 Internal Control & Cash  199 September Is Busy at Walt Disney World Headquarters  121 Cooking the Books at Green Valley Coffee Company: $10 Million Is a Lot of Beans!  199 Spotlight Explain How Accrual Accounting Differs from Cash-Basis Accounting  122 Accrual Accounting and Cash Flows  123 The Time-Period Concept  124 Apply the Revenue and Expense Recognition Principles 124 Spotlight Describe Fraud and Its Impact  202 Fraud and Ethics  204 Explain the Objectives and Components of Internal Control  204 The Sarbanes-Oxley Act (SOX)  205 The Revenue Principle  124 The Components of Internal Control  206 The Expense Recognition Principle  125 Internal Control Procedures  207 Ethical Issues in Accrual Accounting  127 Information Technology  209 Adjust the Accounts  127 Which Accounts Need to Be Updated (Adjusted)? 127 Categories of Adjusting Entries  128 Prepaid Expenses  128 Depreciation of Plant Assets  131 Safeguard Controls  210 Internal Controls for E-Commerce  210 Security Measures  211 The Limitations of Internal Control—Costs and Benefits  211 Accrued Expenses  134 Design and Use a Bank Reconciliation 212 Accrued Revenues  135 Signature Card  212 Unearned Revenues  136 Deposit Ticket  212 Summary of the Adjusting Process  138 Check 212 The Adjusted Trial Balance  140 Bank Statement  213 Construct the Financial Statements  141 Mid-Chapter Summary Problem  143 Close the Books  148 Classifying Assets and Liabilities Based on Their Liquidity 150 Reporting Assets and Liabilities: The Walt Disney Company 150 Formats for the Financial Statements  150 Analyze and Evaluate a Company’s Debt-Paying Ability 152 Bank Reconciliation  213 Preparing the Bank Reconciliation  214 Online Banking  217 Mid-Chapter Summary Problem 219 Evaluate Internal Controls Over Cash Receipts and Cash Payments  221 Cash Receipts over the Counter  221 Cash Receipts by Mail  221 Controls over Payment by Check  222 Net Working Capital  153 Construct and Use a Cash Budget  224 Current Ratio  153 Report Cash on the Balance Sheet  226 Debt Ratio  154 Compensating Balance Agreements  226 How Do Transactions Affect the Ratios?  154 End-of-Chapter Summary Problem 227 End-of-Chapter Summary Problem  158 ix A01_HARR7620_11_SE_FM.indd 11/23/15 5:57 PM 878   Glindex Assumptions continuity (going-concern), 8–9 entity, historical cost, stable monetary unit, 9–10 At par common stock, 571 Audit A periodic examination of a company’s financial statements and the accounting systems, controls, and records that produce them Audits may be either external or internal External audits are usually performed by certified public accountants (CPAs), 208 Auditors external, 208 fraudulent activity of, 453 internal, 208 responsibility of, 648–650 for verifying information, Authorized stock Maximum number of shares a corporation can issue under its charter, 569, 577 Available-for-sale securities Securities that are not classified as held-to-maturity or trading securities, 251, 443–447 accounting and reporting for, 255–256 balance sheet reporting, 440 characteristics of, 251 fair value of, 465 selling, 446–447 Average-cost method Inventory costing method based on the average cost of inventory during the period Average cost is determined by dividing the cost of goods available by the number of units available Also called the weighted-average method, 318 effect on cost of goods sold, 319–320 effect on gross profit, 319–320 perpetual inventories under, keeping track of, 320–321 B Bad debts, allowance for, 266–273 Bad-debt expense Another name for uncollectible-account expense, 266 Balance agreements, compensating, 226 Balance sheet List of an entity’s assets, liabilities, and owners’ equity as of a specific date Also called the statement of financial position, 19 assets on, 19–21 classified, 150 consolidated, 451–452 elements of, 19–22 format of, 150–151 liabilities on, 21–22, 502 and owners’ equity, 22, 593–594 relationship with other financial statements, 24, 25 reporting cash on, 226 short-term investments, 256 Balance sheet formats, 150–151 account format, 151 report format, 150 Balance-sheet approach, 269–270 Balance-sheet defect, 123 Bank collections Collection of money by the bank on behalf of a depositor, 215 Bank debt, cooking the books with, 453 Bank reconciliation A document explaining the reasons for the difference between a depositor’s records and the bank’s records about the depositor’s cash, 213–214 Z07_HARR7620_11_SE_AIDX.indd 878 bank side of, 214–215 book side of, 215 controlling cash with, 219 example of, 215–216 journalizing transactions from, 217 preparing, 214–217 Bank statement Document showing the beginning and ending balances of a particular bank account listing the month’s transactions that affected the account, 213 Bankcard sales, 276–277 Banking bank errors, 215 bank reconciliation, 213–217 bank statement, 213 check, 212 See also Check deposit ticket, 212 and internal control, 212–219 online banking, 217–218 signature card, 212 Bar codes, 209 Basket purchases of assets, 375 Benchmarking The comparison of a company to a standard set by other companies, with a view toward improvement, 762, 763 Benefit plans, 526–527 Board of directors Group elected by the stockholders to set policy for a corporation and to appoint its officers, 6, 567, 568 Bogus websites, 210 Bond prices, 440 Bondholders, 504 Bonds payable Groups of debt securities issued to multiple lenders called bondholders, 504 See also Amortization; Callable bond accounting for, 504–520 interest expense on, 509–521 issuing at a discount, 519–520 issuing at a premium, 516–519 issuing at par, 507–508 proceeds from, 700 retiring, 519–520 Bonus payments, to employees, 497– 498 Book errors, 215 Book value (of a plant asset) The asset’s cost minus accumulated depreciation, 133 Book value per share Amount of common stockholders’ equity on the company’s books for each share of its stock, 588 Book value per share of common stock Common stockholders’ equity divided by the number of shares of common stock outstanding The recorded amount for each share of common stock outstanding, 782–783 Bookkeeping, Bosworth, T., 219 “Bottom line,” 13 Budget A quantitative expression of a plan that helps managers coordinate the entity’s activities, 208 See also Cash budget; Operating budget Budgeted purchases, 329 Buildings, cost of, 21, 62, 374–375 Burglar alarms, 210 Business activities, types of, 682 Business decisions economic, 27 ethical, 26–29 legal, 27 Business Ethics Leadership Alliance (BELA), 27 Business transaction See Transaction Businesses corporations, limited-liability companies, organizing, 5–6 partnerships, proprietorships, Bylaws Constitution for governing a corporation, 567 C Calendar year, 15 Callable bond Bonds that are paid off early at a specified price at the option of the issuer, 519–520 Canceled checks, 213 Capital Another name for the owners’ equity of a business, 11–12 See also Owners’ equity; Stockholders’ equity paid-in, 12–13, 22, 569 working, 153, 770 Capital charge The amount that stockholders and lenders charge a company for the use of their money Calculated as (Notes payable + Loans payable + Long-term debt + Stockholders’ equity) × Cost of capital, 784 Capital expenditure Expenditure that increases an asset’s capacity or extends its useful life Capital expenditures are debited to an asset, 376 distinguishing from immediate expense, 376–377 Capital lease Lease agreement in which the lessee assumes, in substance, the risks and rewards of asset ownership In the United States, a lease is assumed to be a capital lease if it meets any one of four criteria: (1) The lease transfers title of the leased asset to the lessee (2) The lease contains a bargain purchase option (3) The lease term is 75% or more of the estimated useful life of the leased asset (4) The present value of the lease payments is 90% or more of the market value of the leased asset, 525–526 Capital stock, 569 Cash Money and any medium of exchange that a bank accepts at face value as asset, 12 as an asset, 62 on balance sheet, 19, 20 computing collections of, 272–273, 703 controlling with bank reconciliation, 219 controls for, 212–213 from customers, 221–222, 272–273, 699 defined, 62 as liquid asset, 150 Cash adequacy See Free cash flow Cash budget A budget that projects the entity’s future cash receipts and cash disbursements, 208 constructing and using, 224–225 and internal control, 208 Cash collections computing, 272–273, 703 from customers, 221–222, 272–273, 699 Cash conversion cycle The number of days it takes to convert inventory to receivables, and receivables into cash, after paying off payables The formula is Days’ inventory outstanding + Days’ sales outstanding − Days’ payables outstanding, 775–776 measuring turnover and, 496, 773 Cash equivalent Highly liquid short-term investments such as time deposits, certificates of deposit, or high-grade government securities that can be converted into cash immediately These investments are 11/20/15 1:54 PM Glindex    879 considered so similar to cash that they are combined with cash for financial disclosure purposes on the balance sheet, 226, 681 Cash flows Cash receipts and cash payments (disbursements), 680 See also Statement of cash flows accrual accounting and, 123 asset transactions, 403–404 computed by direct method, 702–706 decreased, 785 depreciation for tax purposes, 387–388 in financial statement, 22–24 free cash flow, 706 from operations, analysis of, 646–647 reporting financing activities and, 528 speeding up, 276–277 Cash receipts of interest and dividends, 699 by mail, 221–222 over the counter, 221 Cash-basis accounting Accounting that records only transactions in which cash is received or paid, 122 accrual accounting vs., 122 Chairperson Elected by a corporation’s board of directors, usually the most powerful person in the corporation, 568 Channel stuffing A type of financial statement fraud that is accomplished by shipping more to customers (usually around the end of the year) than they ordered, with the expectation that they may return some or all of it The objective is to record more revenue than the company has actually earned with legitimate sales and shipments, 635 Chart of accounts List of a company’s accounts and their account numbers, 87–88 Check Document instructing a bank to pay the designated person or business the specified amount of money on bank statement, 212–213 cost of printing, 215 and internal control, 212 outstanding, 215 payments by, 222–224 Chief executive officer (CEO), 6, 568 Chief financial officer (CFO), 6, 568 Chief operating officer (COO), 6, 568 Classified balance sheet A balance sheet that shows current assets separate from long-term assets and current liabilities separate from long-term liabilities, 150 Clean opinion An unqualified opinion, 650 Closing entries Entries that transfer the revenue, expense, and dividends balances from these respective accounts to the Retained Earnings account, 148–152 Closing the books The process of preparing the accounts to begin recording the next period’s transactions Closing the accounts consists of journalizing and posting the closing entries to set the balances of the revenue, expense, and dividends accounts to zero Also called closing the accounts, 148–152 Code of professional conduct, AICPA, 28–30 Collateral, 264 Collectibility, evaluating, 266–273 Collection period Another name for days’ sales outstanding (DSO), 278–279, 774–775 Collusion, 211 Commission, 497 Committee of Sponsoring Organizations (COSO) of the Treadway Commission, 648 Z07_HARR7620_11_SE_AIDX.indd 879 Common stock The most basic form of capital stock The common stockholders own a corporation, 13, 570 above par, 571–572 at par, 571 on balance sheet, 22 issued for assets other than cash, 573–574 issued for services, 574 no-par, 573 no-par with stated value, 573 outstanding, 569, 577–578, 644 as paid-in capital, 13 Common-size statement A financial statement that reports only percentages (no dollar amounts), 762–763 Company policy, and internal control, 204–205 Comparisons, and internal control, 208 Compensating balance agreements, 226 Compliance monitoring, 208 Compound interest, 460 Comprehensive income A company’s change in total stockholders’ equity from all sources other than from the owners of the business (including distributions to owners), 645 Computer virus A malicious program that enters a company’s computer system by e-mail or other means and destroys program and data files, 210 Consignment An inventory arrangement where the seller sells inventory that belongs to another party The seller does not include consigned merchandise on hand in its balance sheet, because the seller does not own this inventory, 313 Consolidated balance sheets, 451–452 Consolidated entity, income of, 452 Consolidated financial statements Financial statements of the parent company plus those of more-than-50%-owned subsidiaries as if the combination were a single legal entity, 450 Consolidation The method of accounting used for multiple entities that are under common ownership (more than 50% of the voting interests are owned by the same parties), 17, 450–451 Consolidation of foreign subsidiaries, 456 Contingent liabilities, 501 Continuity assumption, 8–9 See also Goingconcern assumption Continuous life, 566 Contra account An account that always has a companion account and whose normal balance is opposite that of the companion account, 132 Contract An agreement between two parties that creates enforceable rights or obligations, 258 Contributed capital The amount of stockholders’ equity that stockholders have contributed to the corporation Also called paid-in capital, 569 Control, internal See Internal control Control environment, 204, 206–207 Controller The chief accounting officer of a business, 208 Controlling (majority) interest Ownership of more than 50% of an investee company’s voting stock, 450 Convertible bonds (or notes) Bonds or notes that may be converted into the issuing company’s common stock at the investor’s option, 520–521 Convertible notes See Convertible bonds Cooking the books See also Fraud; SarbanesOxley Act (SOX) capitalizing plant assets, 377–378 with inventory, 331–332 with investments and debt, 453 with liabilities, 502 methods of, 203 through depreciation, 389–390 with revenue, 635 Copyright Exclusive right to reproduce and sell a book, musical composition, film, other work of art, or computer program Issued by the federal government, copyrights extend 70 years beyond the author’s life, 398 Corporate income statement, 633 See also Income statement Corporate income taxes, 639–641 Corporate social responsibility (CSR) A nonfinancial measure of a company’s performance, including its investment in corporate governance, environmental conservation, and other socially responsible programs that benefit society as a whole, 648 Corporate taxation, 567 Corporation A business owned by stockholders A corporation is a legal entity, an “artificial person” in the eyes of the law, characteristics of, features of, 566–571 organizing, 567–568 Cost of disclosure, Cost of goods sold Cost of the inventory the business has sold to customers, 312, 319–320, 636 Cost of inventory, 316–317 Cost of plant assets, 379 See also Plant assets Cost per unit of inventory, 314 Cost-of-goods-sold (COGS) model Formula that brings together all the inventory data for the entire accounting period: Beginning inventory + Purchases = Cost of goods available (i.e., cost of goods available for sale) Then, Cost of goods available – Ending inventory = Cost of goods sold, 328–330 Credit The right side of an account, 75 debit and, rules of, 75–76 Credit balance, 506 Credit card numbers, stolen, 210 Credit card sales, 276–277 Credit department, 209 Credit memo A document issued to a credit customer for merchandise returned, authorizing a credit to the customer’s account receivable for the amount of the sale, 261 Creditor The party to whom money is owed, 4, 11, 273 Cumulative preferred stock Preferred stock whose owners must receive all dividends in arrears plus current year dividends before the corporation can pay dividends to the common stockholders, 584–585 Current asset An asset that is expected to be converted to cash, sold, or consumed during the next 12 months, or within the business’s normal operating cycle if longer than a year, 19, 150 on balance sheet, 19–20 changes in account, 687–688 liquidity of, 150 reporting of, 150 Current installment of long-term debt See Current portion of long-term debt 11/20/15 1:54 PM 880   Glindex Current liability A debt due to be paid within one year or within the entity’s operating cycle if the cycle is longer than a year, 21, 150, 494–500 ability to pay, 770–783 on balance sheet, 19, 21 changes in account, 687–688 contingent, 501 of known amount, 494–499 liquidity of, 150 that must be estimated, 500 Current maturity of long-term debt, 499 Current portion of long-term debt The amount of the principal that is payable within one year, 12, 19, 499, 527 Current ratio Current assets divided by current liabilities Measure a company’s ability to pay current liabilities with current assets, 153, 770–772 analyzing a company using, 153 ethics and, 256–257 D Days payable outstanding (DPO) Accounts payable turnover expressed in days (365/turnover), 495 Days’ sales in receivables Another name for days’ sales outstanding (DSO), 278–279, 774–775 Days’ sales outstanding (DSO) 365 ÷ Accounts receivable turnover Indicates how many days’ sales remain in Accounts Receivable awaiting collection Also called days’ sales in receivables or the collection period, 278–279, 774–775 Debentures Unsecured bonds—bonds backed only by the good faith of the borrower, 505 Debit The left side of an account, 75 and credit, rules of, 75–76 Debit balance, 506 Debit cards, 224 Debit memorandum A document issued to the seller (vendor) when an item of inventory that is unwanted or damaged is returned This document authorizes a reduction (debit) to accounts payable for the amount of the goods returned, 316 Debt(s) bad, allowance for, 267–271 excessive, 785 long-term, 12, 21, 499, 527 payment of, 700 proceeds from, 700 Debt ratio Ratio of total liabilities to total assets States the proportion of a company’s assets that is financed with debt, 154 analyzing a company using, 154 decision guidelines, 559–560 measuring leverage, 776 Debtor The party who owes money, 273, 440 Debt-paying ability, 152–158 Decision guidelines/cases accounting difference effect on ratios, 825–826 accounting for inventory, 332 accrual accounting and income, 193–195 action to cut losses and establish profitability, 826 company evaluation, 26 debt ratios, 559–560 ethical judgments, 28 evaluating debt-paying ability, 157–158 Z07_HARR7620_11_SE_AIDX.indd 880 financial statements, 26, 55–56 financing with debt or stock, 522 inventory and cost of goods sold, 364 inventory methods, 332 investing in stock, 594 investment analysis, 650–651 investment decisions, 489–490 long-term investments, 454 measuring results of operations and financial position, 90 plant assets and related expenses, 405, 435 quality of earnings, 675–676 raising capital, 627–628 receivables, managing and accounting for, 265 transaction analysis, 115–117 transaction effects on a company, 825 uncollectible receivables, 305 use of cash flow and related information, 707, 746–748 using ratios in financial statement analysis, 786–787 Default, 505 Deferral An adjustment for which the business paid or received cash in advance Examples include prepaid rent, prepaid insurance, and supplies, 128 Deferred revenues, 498 See also Unearned revenue Deferred tax liability, 641 Deficit Negative (debit) balance in retained earnings caused by net losses over a period of years, 18, 581 Depletion That portion of a natural resource’s cost that is used up in a particular period Depletion expense is computed in the same way as units-of-production depreciation A depleted asset usually flows into inventory and eventually to cost of goods sold as the resource is sold, 396 on statement of cash flows, 685, 687, 700 Deposit tickets, 212 Deposits in transit A deposit recorded by the company but not yet by its bank, 214 Depreciable cost The cost of a plant asset minus its estimated residual value, 379 See also Depreciation Depreciation Allocation of the cost of a plant asset to expense over its useful life, 17, 131 accelerated method, 382–384 accumulated, 21, 132 adjusting entries, 128 as an expense, 13, 15, 17 change in accounting estimate, 389–390 changing useful life of assets, 389–390 comparing methods of, 384–385 cooking the books through, 389–390 double-declining-balance (DDB) method, 382–384 fully depreciated assets, 391, 392 modified accelerated cost recovery system (MACRS), 388–389 for partial years, 389 of plant assets, 131–133, 378–385 on statement of cash flows, 685, 687, 700 straight-line method (SL), 380 for tax purposes, 387–389 units-of-production method (UOP), 381–382 Depreciation expense, plant assets, 373 Diluted earnings per share, 644 Direct method Format of the operating activities section of the statement of cash flows; lists the major categories of operating cash receipts (collections from customers and receipts of interest and dividends) and cash disbursements (payments to suppliers and employees, and for interest and income taxes), 683, 697–705 Direct write-off method A method of accounting for bad debts in which the company waits until a customer’s account receivable proves uncollectible and then debits Uncollectible-Account Expense and credits the customer’s Accounts Receivable, 272 Disclosure principle A business’s financial statements must report enough information for outsiders to make knowledgeable decisions about the business The company should report relevant, representationally faithful information about its economic affairs, 324 contingent liabilities, 501 cost of disclosure, Discontinued operations, 642–643 Discount (on a bond) Excess of a bond’s face (par) value over its issue price, 506 interest expense of bonds issued at, 513–515 issuing payable bonds at, 509–510, 512–513 Distributed profits, double taxation of, Dividend Distributions (usually cash) by a corporation to its stockholders, 13, 582 See also Dividend yield cash as, 582–583 computing, 692–693 declaration of cash dividends, 644 as part of owners’ equity, 13 payment of, 19, 23, 700 on preferred stock, 584–585 receiving dividends under the equity method, 448–449 reporting on statement of cash flows, 592 stockholders’ rights, 568 as temporary accounts, 148 Dividend yield Ratio of dividends per share of stock to the stock’s market price per share Tells the percentage of a stock’s market value that the company returns to stockholders as dividends, 782–783 See also Dividend Double taxation Corporations pay income taxes on corporate income Then, the stockholders pay personal income tax on the cash dividends that they receive from corporations, 7, 567 Double-declining-balance (DDB) An accelerated depreciation method that computes annual depreciation by multiplying the asset’s decreasing book value at the beginning of the year by a constant percentage, which is two times the straight-line rate, 382–384 Doubtful-account expense Another name for uncollectible-account expense, 266 Due care principle, 29–30 DuPont Analysis A detailed approach to measuring rate of return on equity (ROE), calculated as follows: Net profit margin (net income minus preferred dividends/net sales) × Total asset turnover (net sales/average total assets) × Leverage ratio (average total assets/ average common stockholders’ equity) The first two components of the model comprise return on assets (ROA), 402–403, 523, 589, 778 E Earnings, persistent, 633 See also Operating income; Retained earnings Earnings per share (EPS) Amount of a company’s net income earned for each share of its outstanding common stock, 521, 644, 781 11/20/15 1:54 PM Glindex    881 Earnings problems, 785 Earnings quality The characteristics of an earnings number that make it most useful for decision making; the degree to which earnings are an accurate reflection of underlying economic events for both revenues and expenses, and the extent to which earnings from a company’s core operations are improving over time Assuming that revenues and expenses are measured accurately, high-quality earnings are reflected in steadily improving sales and steadily declining costs over time, so that income from continuing operations follows a high and improving pattern over time, 633 components of, 633 cost of goods sold, 636 gross profit (gross margin), 636 high operating earnings, 636–637 operating and other expenses, 636 revenue recognition and, 634–635 E-commerce internal controls for, 210 risks of, 210 security measures for, 211 Economic value added (EVA®) Used to evaluate a company’s operating performance EVA® combines the concepts of accounting income and corporate finance to measure whether the company’s operations have increased stockholder wealth EVA® = Net income + Interest expense – Capital charge, 784 Efficient capital market A capital market in which market prices fully reflect all information available to the public, 785 Electronic funds transfer (EFT) System that transfers cash by electronic communication rather than by paper documents, 213 in bank reconciliation, 215 payments by, 222–223 uses for, 213 Electronic sensor on merchandise, 209 Employee compensation See also Salary expense as accrued expense, 134–136, 497 as a company’s major expense, 497 treasury stock for, 580–581 wages, 497, 700, 705 Employee income tax payable, 498 Employer payroll tax, 498 Encryption Mathematical rearranging of data within an electronic file to prevent unauthorized access to information, 209, 210, 211 Entity An organization or a section of an organization that, for accounting purposes, stands apart from other organizations and individuals as a separate economic unit, Entity assumption, Equipment, cost of, 21, 62, 374–375 Equity See Owners’ equity; Stockholders’ equity Equity method Method of accounting required for investments where 20 to 50% of voting interest is owned, 17, 20, 447–449 Equity multiplier Another name for leverage ratio, 523 Equity transactions, reporting, 591–594 Estimated residual value Expected cash value of an asset at the end of its useful life Also called residual value, scrap value, or salvage value, 379 Z07_HARR7620_11_SE_AIDX.indd 881 Estimated useful life Length of service that a business expects to get from an asset May be expressed in years, units of output, miles, or other measures, 379 Estimated warranty payable, 500 Ethical analysis, 27 Ethical issues academic dishonesty, 56–57 accounting for inventory, 331–332 in accrual accounting, 127 accrual accounting and income, 195–196 Business Ethics Leadership Alliance (BELA), 27 capitalization of leases, 526 classification/reclassification of investments, 827 contingent liabilities, 561 current ratio, 256–257 economic factors, 27 ethical decision making, 26–28 Ethisphere Institute, 27 financial statements, 676 franchise purchase, 628 fraud, 204 global, 27 internal control, 247 inventory and cost of goods sold, 364–365 lease agreements, 561 legal factors, 27 paying dividends, 490 reclassifying long-term receivables, 748 stock issuance other than case, 574–575 tax deductions, 436 transaction analysis, 117–118 treasury stock purchase, 628 uncollectible-account expense, 305–306 Ethics Standards of right and wrong that transcend economic and legal boundaries Ethical standards deal with the way we treat others and restrain our own actions because of the desires, expectations, or rights of others, or because of our obligations to them, 27 See also Ethical issues Excel, calculating present value with, 463–465 Excel exercises Apple annual report, 250 bond amortization tables, 513, 517–518 cash budget, 225 comparative financial statements for horizontal analysis, 755–756 comparative financial statements for vertical analysis, 759–760 depreciation schedules, 381, 382, 383 FedEx, Inc., annual report, 373 financial statements, 32, 72, 141 The Gap, Inc., annual report, 634 Google, Inc., annual report, 680 The Home Depot, Inc., annual report, 566 Intel Corp annual report, 440 Southwest Airlines annual report, 494 transaction analysis, 64–72 trial balance, 86, 140–141 Under Armour, Inc, annual report, 310–311, 752 The Walt Disney Company, annual report, Exception reporting Identifying data that is not within “normal limits” so that managers can follow up and take corrective action Exception reporting is used in operating and cash budgets to keep company profits and cash flow in line with management’s plans, 207, 208 Exchange, mediums of, cash/cash equivalents, 12 Exchange rates, of foreign currencies, 456–457, 637–638 Expense recognition principle The basis for recording expenses Directs accountants to identify all expenses incurred during the period, to measure the expenses, and to match them against the revenues earned during that same period, 125–126 Expenses Decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues, 13, 64 accrued, 134–136 administrative, 17 cost of products sold, 15 current liabilities, 503 distinguishing from capital expenditures, 376–377 general, 17 on income statement, 16–17 income tax expense, 17, 639–641 operating, 17, 636, 704–705 as part of owners’ equity, 13, 77–78 prepaid, 128–131 recognition of, 125–126 salary, 134–136, 498, 700, 705 selling, 17 as temporary accounts, 148 F Face value, of bonds, 504, 507–508 Factoring receivables, 277 Fair value The amount that a business could sell an asset for, or the amount that a business could pay to settle a liability, asset impairment and, 400 available-for-sale securities, 443 fair value adjustment, 445–446 IFRS vs GAAP on, 11 of investments, 465 of long-term debt, 528 FICA tax payable, 498 Fidelity bond An insurance policy taken out on employees who handle cash, 210 Films, production costs, 20 Financial accounting The branch of accounting that provides information to people outside the firm, Financial Accounting Standards Board (FASB) The regulatory body in the United States that formulates generally accepted accounting principles (GAAP), 7, contingent liabilities, 501 convergence of accounting standards, 10–11 and the direct method, 697 and revenue recognition, 124, 635 Financial statements Business documents that report financial information about a business entity to decision makers, from adjusted trial balance, 141–142 analysis of, red flags in, 785 analyzing relationships between, 25 asset impairment and, 399–401 constructing, 24 elements of, 11–14 evaluating business operations through, 14–24 footnotes to, 646–647 formats for, 150–152 fraudulent financial reporting, 203 production of, standards for, 10–11 and transactions, 70–72 11/20/15 1:54 PM 882   Glindex Financing activities Activities that obtain from investors and creditors the cash needed to launch and sustain the business; a section of the statement of cash flows, 22, 23, 682 cash flows from, 690–692, 700, 705 noncash, 693, 700–701 Fireproof vaults for important documents, 210 Firewall An electronic barrier, usually provided by passwords, around computerized data files to protect local area networks of computers from unauthorized access, 211 First-in, first-out (FIFO) Inventory costing method by which the first costs into inventory are the first costs out to cost of goods sold Ending inventory is based on the costs of the most recent purchases, 318–319 converting LIFO company’s net income to FIFO basis, 369–370 effect on cost of goods sold, 319–320 effect on gross profit, 319–320 Fiscal year, 15, 121 FOB Acronym for “free on board”; used in quoting shipping terms, 261, 313, 315 See also Shipping terms Footnotes, 646–647 Foreign subsidiaries, consolidation of, 456 Foreign-currency exchange rate The measure of one country’s currency against another country’s currency, 456–457, 637 Foreign-currency gains and losses accounting for, 637–639 reporting, 638–639 Foreign-currency translation adjustment The balancing figure that brings the dollar amount of the total liabilities and stockholders’ equity of the foreign subsidiary into agreement with the dollar amount of its total assets, 457–458 Franchises and licenses Privileges granted by a private business or a government to sell a product or service in accordance with specified conditions, 398 Fraud An intentional misrepresentation of facts, made for the purpose of persuading another party to act in a way that causes injury or damage to that party, 202 cooking the books, 203 See also Cooking the books and ethics, 204 impact of, 202–204 and inventory, 331–332 scope of, 202 types of, 203–204 Fraud triangle The three elements that are present in almost all cases of fraud These elements are motive, opportunity, and rationalization on the part of the perpetrator, 203–204 Fraudulent financial reporting Fraud perpetrated by management by preparing misleading financial statements, 203 Free cash flow The amount of cash available from operations after paying for planned investments in plant assets, 706 Fully depreciated assets, 391, 392 Future benefits, assets as, 20, 21, 62 Future profits, predicting, 641–642 Future value Measures the future sum of money that a given current investment is “worth” at a specified time in the future assuming a certain interest rate, 459 Futures contracts, 639 Z07_HARR7620_11_SE_AIDX.indd 882 G Generally accepted accounting principles (GAAP) Accounting guidelines, formulated by the Financial Accounting Standards Board, that govern how accounting is practiced, accounting for research and development, 401 and accrual accounting, 122–123 capitalization of leases, 526 and depreciation, 384 differences with IFRS, 9, 10–11, 395–396 and fair value adjustment, 445 globalization and, 11 and inventory, 324–326 reported carrying values of plant assets, 395–396 reporting standards, 9, 10–11 and revenue recognition, 124, 258–260 and stock dividends, 585–586 Global markets, 10 See also International Financial Reporting Standards (IFRS) asset impairment and, 401 capitalization of leases, 526 carrying values of property, plant and equipment, 395–396 consolidation of foreign subsidiaries, 456 LIFO vs FIFO, 322 loss contingencies, 502 market, IFRS definition of, 325 revenue recognition in, 124, 635 Global Reporting Initiative (GRI), 648 Going out of business, Going-concern assumption Holds that the entity will remain in operation for the foreseeable future, 8–9 Goodwill Excess of the cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities), 21, 398–399, 452 Government regulations, 567 Gross margin Another name for gross profit, 312, 777 Gross margin method Another name for the gross profit method, 329 Gross margin percentage Another name for the gross profit percentage, 326 Gross profit Revenue from a particular activity minus the direct costs associated with earning that revenue, 16, 636 calculating, 16 effects of inventory cost method, 319–320 and inventory turnover, 327–328 sale price vs cost of inventory, 312–313 Gross profit method A way to estimate inventory based on a rearrangement of the cost-of-goods-sold model: Beginning inventory + Net purchases = Cost of goods available – Cost of goods sold = Ending inventory Also called the gross margin method, 329–330 Gross profit percentage Gross profit divided by net sale revenue Also called the gross margin percentage, 326–327 H Hedging To protect oneself from losing money in one transaction by engaging in a counterbalancing transaction, 639 Held-to-maturity investments Bonds and notes that an investor intends to hold until maturity, 440, 441–443 Held-to-maturity securities Securities in which the investor has the intent and ability to hold until a maturity date stated on the face of the security, 252 balance sheet reporting, 440 characteristics of, 251 Hiring practices, smart, 208–209 Historical cost principle Principle that states that assets should be recorded at their actual cost, Horizontal analysis Study of percentage changes in line items on comparative financial statements, 754–759 Human resources (HR) department, 209 I Immediate expense, distinguishing capital expenditure from, 376–377 Impairment The condition that exists when the carrying amount of a long-lived asset exceeds the amount of the future cash flows from the asset Whenever long-term assets have been impaired, they have to be written down to fair market values using a two-step process Under U.S GAAP, once impaired, the carrying value of a long-lived asset may never again be increased Under IFRS, if the fair value of impaired assets recovers in the future, the values may be increased, 399–401 Import/Export ratio, 457 Imprest system A way to account for petty cash by maintaining a constant balance in the petty cash account, supported by the fund (cash plus payment tickets) totaling the same amount, 224 Income of a consolidated entity, 452 Income statement A financial statement listing an entity’s revenues, expenses, and net income or net loss for a specific period Also called the statement of operations, 15 corporate, 633 documents, 24 formats, 151–152 as a measure of operating performance, 15–18 multi-step, 151–152 short-term investments, 256 single-step, 151 Income statement defect, 123 Income taxes computing payments of, 705 corporate, 639–641 expense of, 17, 639, 700 income tax payable, 639 payable, 21 Income-statement approach, 268 Incorporators, 567 Independence principle, 29 Indirect method Format of the operating activities section of the statement to cash flows; starts with net income and reconciles to cash flow from operating activities, 683–693 Individuals, as users of accounting information, Inflation, 10 Information technology, for internal control, 207, 209–210 Initial public offering (IPO) The first time a corporation issues stock to the public, which causes the number of issued and outstanding shares of stock to increase, 571 Inside information, 785 “Insider claims,” 11 11/20/15 1:54 PM Glindex    883 Intangible assets An asset with no physical form —a special right to current and expected future benefits, 21 accounting for, 397–398 on balance sheet, 19, 21 copyrights, 398 franchises and licenses, 398 and GAAP, 397 goodwill, 398–399 as long-lived assets, 373 patents, 397–398 research and development, 399 trademarks and trade names, 398 Integrity principle, 29 Interest The borrower’s cost of renting money from a lender Interest is revenue for the lender and expense for the borrower, 273, 459 See also Interest expense; Market interest rate on bonds, 505 compound, 460 computing payments of, 705 market rate, 506 partial-period, 516 stated rate, 506 Interest expense See also Interest accounting for, 504 on bonds, 509–521 cash flows from operating activities, 700 income statement reporting, 639–641 measuring, 518–519 net income expense, 17 payments for, 700 Interest income, 639 Interest rate of bonds, 506–507 effective, 506 Interest revenue, on checking account, 215 Interest-coverage ratio Another name for the times-interest-earned ratio, 524, 776–777 Internal control Organizational plan and related measures adopted by an entity to safeguard assets, encourage adherence to company policies, promote operational efficiency, ensure accurate and reliable accounting records, and ensure compliance with legal requirements and banking, 212–219 control environment, 206–207 for e-commerce, 210 importance of, 205 information system, 207 information technology, 209–210 limitations of, 211 monitoring of controls, 207 objectives of, 204 over cash collections on account, 221–222, 264 over purchase and payment, 222–224 payment of check or EFT, 222–224 procedures, 207–209 risk assessment, 207 safeguard controls, 210 International Accounting Standards Board (IASB), 7, 10, 635, 697 International Financial Reporting Standards (IFRS) Accounting guidelines, formulated by the International Accounting Standards Board (IASB), 7, 10–11 accounting for research and development, 401 capitalization of leases, 526 differences with GAAP, 9, 10–11, 395–396 disallowance of LIFO, 322 globalization and, 11 Z07_HARR7620_11_SE_AIDX.indd 883 market, defined, 325 reported carrying values of plant assets, 395–396 and revenue recognition, 124 Inventory The merchandise that a company sells to customers See also Periodic inventory system; Perpetual inventory system accounting for, 311–316, 332 on balance sheet, 19, 20 buildup of, 785 computerized monitoring of, 209 cost of, 312–314, 316–317 cost of goods sold vs., 312–313 defined, 62 effects of errors, 330–332 ending, 319–320 estimating, 329–330 number of units on hand, 313 trends in, 785 Inventory costing methods See also Averagecost method; First-in, first-out; Last-in, first-out; Specific-unit-cost method comparison of, 316–322 Inventory turnover Ratio of cost of goods sold to average inventory Indicates how rapidly inventory is sold, 327–328 and gross profit, 327–328 measuring, 773–774 Investee, 440 Investing activities Activities that increase or decrease the long-term assets available to the business; a section of the statement of cash flows, 22, 23, 682, 689–690 cash flows from, 700, 705 cash receivables, 277 equity method, 17, 20 long-term, 23 noncash, 693, 700–701 reporting, 458–459 Investment capitalization rate An assumed rate of return used to estimate the value of an investment in stock This rate should approximate the weighted-average cost of capital, 641 Investment decisions based on stock, 781–783 other factors in, 784–785 use of horizontal analysis for, 754–759 Investments See also Long-term investments; Short-term investments in affiliated companies, 447– 449 in debt securities, 441– 443 equity method, 447– 449 purchases and sales of, 690 reporting on balance sheet, 440–441 reporting on statement of cash flows, 458–459 selling, 446–447 short-term, 440 Investor(s), 440 global stock trading, 10 percentage of investee income, 448 use of accounting information, value vs growth investors, 783 Issued stock Number of shares a corporation has issued to its stockholders, 577 J Job rotation, 210 Journal The chronological accounting record of an entity’s transactions, 78 Journalizing process, 78 bank reconciliation, 217 L Labor costs, 20 Land cost of, 62, 374 improvements to, 374, 375 as not depreciable, 373 Last-in, first-out (LIFO) Inventory costing method by which the last costs into inventory are the first costs out to cost of goods sold This method leaves the oldest costs—those of beginning inventory and the earliest purchases of the period—in ending inventory, 11, 319 converting to FIFO, 369–370 disallowance under IFRS, 322 effect on cost of goods sold, 319–320 effect on gross profit, 319–320 LIFO liquidation, 321 and managing reported income, 321 perpetual inventories under, keeping track of, 320–321 tax advantage of, 321 Lease Rental agreement in which the tenant (lessee) agrees to make rent payments to the property owner (lessor) in exchange for the use of the asset, 524–525 Leasehold improvements, 375 Ledger The book of accounts and their balances, 79 Legal capital Minimum amount of stockholders’ equity that a corporation must maintain for the protection of creditors For corporations with par-value stock, legal capital is the par value of the stock issued, 570 Legal requirements, and internal control, 204 Lessee Tenant in a lease agreement, 524 Lessor Property owner in a lease agreement, 524 Leverage Using borrowed funds to increase the return on equity Successful use of leverage means earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business Also called trading on the equity, 521, 776, 780 financing with debt vs.equity, 521 Leverage ratio The ratio of average total assets ÷ average total stockholders’ equity, showing the proportion of average total assets to average total common stockholders’ equity This ratio, like the debt ratio introduced in Chapter 3, tells the mixture of a company’s debt and equity financing and is useful in calculating rate of return on stockholders’ equity (ROE) through the DuPont Model, 522–523, 779–780 Liability An economic obligation (a debt) payable to an individual or an organization outside the business, 11, 12 accounting for, 494–503 accounts payable, 21, 63 accrued expenses, 21, 63, 134–136, 497 accrued liabilities, 63, 134–136, 497 classifying by liquidity, 150 contingent, 501 current, 21, 494–500 current, liquidity of, 150 current, summarized, 503 current accounts, 687–688 income taxes payable, 21, 639 liability accounts, 63 long-term, 21, 150, 524–527, 682 long-term debt See Long-term debt long-term liquidity of, 150 11/20/15 1:54 PM 884   Glindex Liability (continued) notes payable, 63 postretirement, 526–527 reporting, 150, 502 reporting on balance sheet, 527–528 understating, 502 unearned revenue, 136–137 Licenses See Franchises and licenses Limited access, and internal control, 208–209 Limited liability No personal obligation of a stockholder for corporation debts A stockholder can lose no more on an investment in a corporation’s stock than the cost of the investment, 566–567 Limited-liability company (LLC) A business organization in which the business (not the owner) is liable for the company’s debts, Limited-liability partnership, Liquidation, 124, 568 LIFO, 321 Liquidation value The amount a corporation must pay a preferred stockholder in the event the company liquidates and goes out of business, 588 Liquidity Measure of how quickly an item can be converted to cash, 150 classifying assets and liabilities based on, 150 current ratio measuring, 153 debt ratio measuring, 154 evaluating, 278–279 Loan(s) to other companies, 700 security for, 264 Lock-box system A system of handling cash receipts by mail whereby customers remit payment directly to the bank’s post office box, rather than through the entity’s mail system, 208, 215, 222 Long-lived asset transactions, 403–404 Long-term assets Assets that are expected to benefit the entity for long periods of time, beyond the end of the next fiscal year These usually include investments, property and equipment (plant assets), and intangible assets, 20 on balance sheet, 19, 20 investing activities and, 20, 682 liquidity of, 150 Long-term debt A liability that falls due beyond one year from the date of the financial statements, 12, 121, 499, 527 Long-term investments Any investment that does not meet the criteria of a short-term investment; any investment that the investor expects to hold longer than a year or that is not readily marketable accounting methods for, 443–444, 454 balance sheet reporting, 441 from investor perspective, 441 Long-term liability A liability that is not a current liability, 21, 150, 524–527, 682 See also Financing activities Long-term tangible fixed assets See Plant assets Loss contingencies, international accounting standard, 502 Losses, 253–254 Loss-prevention specialists, 210 Lower-of-cost-or-market (LCM) rule Requires that an asset be reported in the financial statements at whichever is lower—its historical cost or its market value (current replacement cost for inventory), 324–325 Lowest taxable income, 321 Lump-sum purchases of assets, 375 Z07_HARR7620_11_SE_AIDX.indd 884 M Majority interest See Controlling (majority) interest Management, responsibility of, 648 Management accounting The branch of accounting that generates information for the internal decision makers of a business, such as top executives, Management decisions, using COGS model, 328–330 Managing reported income, 321 Mandatory vacations, 210 Market capitalization The market price of one share of common stock × the total number of common shares outstanding at a particular date, 587 Market interest rate Interest rate that investors demand for loaning their money Also called effective interest rate, 506 Market price See Market value Market value (of a stock) Price for which a person could buy or sell a share of stock, 587 Marketable securities Another name for shortterm investments, 226 Maturity The date on which a debt instrument must be paid, 264 Maturity date The date on which the debtor must pay the note, 273, 504 Maturity value The sum of principal and interest on the note, 273, 504 Merchandise inventory See Inventory Microsoft Excel, calculating present value with, 463–465 Minority interest, 452 Misappropriation of assets Fraud committed by employees by stealing assets from the company, 203 Modified Accelerated Cost Recovery System (MACRS) A special depreciation method used only for income tax purposes Assets are grouped into classes, and for a given class depreciation is computed by the double-declining-balance method, the 150% declining-balance method, or, for most real estate, the straight-line method, 388–389 Monitoring of controls, 207 Mortgage bonds, 505 Motive for fraud, 203–204 Movies, production costs, 20 Multistep income statement An income statement that contains subtotals to highlight important relationships between revenues and expenses, 151–152 N Natural resources Assets such as oil and gas reserves, coal mines, or stands of timber—accounted for as long-term assets when purchased or developed, their cost is transferred to expense through a process called depletion, 396 accounting for, 396–397 and GAAP, 396–397 as long-term asset, 373 Net earnings Another name for net income, 13 See also Net income; Net profit Net income Excess of total revenues over total expenses Also called net earnings or net profit, 13 and dividends, 13 on income statement, 15–18 need for profit, 681–682 from operations, 633, 646 reporting, 645–647 and retained earnings, 18 Net loss Excess of total expenses over total revenues, 13 on income statement, 15–18 and retained earnings, 18 Net profit Another name for net income, 13, 589 See also Net earnings; Net income Net profit margin on sales See Rate of return on net sales Net profit margin ratio Computed by the formula Net income/Net sales This ratio measures the portion of each net sales dollar generated in net profit, 402, 589 Net sales, 634 See also Revenue recognition Net working capital A measure of liquidity; current assets – current liabilities, 153 analyzing a company using, 153 measuring ability to pay current liabilities, 770 Noncash investing and financing activities, 693, 700–701 Noncontrolling interests Interests in consolidated entities that are more than 50% but less than 100% owned, 17, 22, 452 net income attributable to, 17 Noncumulative preferred stock, 584–585 Nonprofit organizations, Nonsufficient funds (NSF) check A “hot” check, one for which the payer’s bank account has insufficient money to pay the check NSF checks are cash receipts that turn out to be worthless, 215 No-par common stock, 573 no-par with stated value, 573 Notes payable, 63, 496–497, 504, 700 Notes receivable, 264 accounting for, 273–276 proceeds from collections of, 700 Number of units of inventory, 313 O Objectivity principle, 29 Obsolescence, 378 Online banking, 217–218 Operating activities Activities that create revenues, expenses, gains, and losses; a section of the statement of cash flows Operating activities affect the income statement, 22, 23, 682 cash flows from, 685–688, 699–700 direct method, 683, 697–705 indirect method, 683–693 Operating budget A budget of future net income The operating budget projects a company’s future revenue and expenses It is usually prepared by line item of the company’s income statement, 208 See also Budget Operating cycle Time span during which cash is paid for goods and services that are sold to customers who pay the business in cash, 150 Operating expenses, 636, 704–705 Operating income, 636–637, 777 Operating lease A lease in which the lessee does not assume the risks or rewards of asset ownership, 524–525 Operational efficiency, and internal control, 204 Opportunity for fraud, 204 Other comprehensive income Certain types of revenue, expenses, gains, and losses that are allowed to bypass the income statement 11/20/15 1:54 PM Glindex    885 These items are reported either in a separate statement or in a combined statement of net income and comprehensive income At the end of a period, items of comprehensive income for that period are reported as accumulated other comprehensive income, a separate category of stockholders’ equity, 256, 446 Other receivables, 264 “Outsider claims,” 11 Outstanding check A check issued by the company and recorded on its books but not yet paid by its bank, 215 Outstanding stock Stock in the hands of stockholders, 569, 577–578, 644 Overfunded benefit plan, 527 Owners’ equity The claim of the owners of a business to the assets of the business Also called capital, stockholders’ equity or net assets, 11, 22 and financing activities, 682 paid-in capital, 12–13, 22 of proprietorships and partnerships, 14 retained earnings, 12–13, 22 Ownership, transferability of, 566 P Paid-in capital The amount of stockholders’ equity that stockholders have contributed to the corporation Also called contributed capital, 12–13, 22, 569 Par value Arbitrary amount assigned by a company to a share of its stock, 504, 570 of common stock See under Common stock issuing bonds at, 507–508 Parent company An investor company that owns more than 50% of the voting stock of a subsidiary company, 450 Partial years, depreciation for, 389 Partial-period interest amounts, 516 Partnership An association of two or more persons who co-own a business for profit, owners’ equity in, 14 Password A special set of characters that must be provided by the user of a computerized program or data files to prevent unauthorized access to those files, 209, 210 Patent A federal government grant giving the holder the exclusive right for 20 years to produce and sell an invention, 397–398 Payments, to suppliers, 699, 704 Payroll Employee compensation, a major expense of many businesses, 497–498 Payroll liabilities, 134–136, 497–498 Pension Employee compensation that will be received during retirement, 526–527 Percent-of-sales method Computes uncollectible-account expense as a percentage of net sales Also called the income-statement approach because it focuses on the amount of expense to be reported on the income statement, 268–269, 271 Periodic inventory system An inventory system in which the business does not keep a continuous record of the inventory on hand Instead, at the end of the period, the business makes a physical count of the inventory on hand and applies the appropriate unit costs to determine the cost of the ending inventory, 314, 332, 366–367 Permanent accounts Asset, liability, and stockholders’ equity accounts that are not closed at the end of the period, 148 Z07_HARR7620_11_SE_AIDX.indd 885 Perpetual inventory system An inventory system in which the business keeps a continuous record for each inventory item to show the inventory on hand at all times, 314–316, 320–321, 332 Petty cash Fund containing a small amount of cash that is used to pay minor amounts, 224 Phish Creating bogus websites for the purpose of stealing unauthorized data, such as names, addresses, Social Security numbers, bank account, and credit card numbers, 210 Phishing expeditions, 210 Physical wear and tear, 378 Plant assets Long-lived assets, such as land, buildings, and equipment, used in the operation of the business Also called fixed assets or property and equipment, 131, 373 accounting for, 387 analyzing transactions, 394–395 book value of, 133 buildings, machinery, and equipment, 21, 62, 374–375 cash flow impact, 403–404 depreciable cost of, 379 depreciation for tax purposes, 387–389 depreciation of, 131–133, 378–385 disposing of for no proceeds, 392 effects of disposal of, 391–395 exchanging, 393–394 land, 62, 373, 374 land improvements and leasehold improvements, 375 lump-sum purchases of assets, 375 purchases and sales of, 689, 700 selling, 392–393 Posting Copying amounts from the journal to the ledger, 79 Postretirement liabilities, 526–527 Preemption, 568 Preferred dividends, effect on earnings per share, 644, 782 Preferred stock Stock that gives its owners certain advantages, such as the priority to receive dividends before the common stockholders and the priority to receive assets before the common stockholders if the corporation liquidates, 570, 575–576 dividends on, 584–585, 644 redeemable, 588 Premium (on a bond) Excess of bond’s issue price over its face (par) value, 506 issuing bonds payable at, 510–511, 516–519 Prepaid expense A category of miscellaneous assets that typically expire or get used up in the near future Examples include prepaid rent, prepaid insurance, and supplies, 128 adjusting entries, 128–131 on balance sheet, 19, 20 prepaid rent, 129 supplies, 130 Present value The value on a given date of a future payment or series of future payments, discounted to reflect the time value of money, 460 of an annuity, 462–463 of available-for-sale investments, 465 calculating with Microsoft Excel, 463–465 of investments in bonds, 465–466 of money, 460–461 Present-value tables, 461–462 President Chief operating officer in charge of managing the day-to-day operations of a corporation, 568 Pre-tax accounting income Income before tax on the income statement, 640 Price-earnings (P/E) ratio Ratio of the market price of a share of common stock to the company’s earnings per share Measures the value that the stock market places on $1 of a company’s earnings, 587, 781–782 Principal The amount borrowed by a debtor and lent by a creditor, 273, 274, 504 Prior-period adjustment A correction to the beginning balance of retained earnings for an error of an earlier period, 643 Production costs, 20 Profit margin See Gross margin Profitability, and stockholder investment, 589–591 Projected benefit obligation, 526 Promissory notes, 264, 274 Proper approvals, and internal control, 209 Property and equipment See Plant assets Proprietorship A business with a single owner, owners’ equity in, 14 Public Company Accounting Oversight Board, 205 Public interest principle, 29 Purchase allowance A decrease in the cost of purchases because the seller has granted the buyer a subtraction (an allowance) from the amount owed, 315 Purchase discount A decrease in the cost of purchases earned by making an early payment to the vendor, 316 Purchase return A decrease in the cost of purchases because the buyer returned the goods to the seller, 315 Purchases, budgeted, 329 Purchasing department, 209 Q Quality of earnings See Earnings quality Quick ratio Another name for the acid-test ratio, 278, 772–773 Quitting concern, R Rate of return, foreign currencies and exchange rates, 457 Rate of return on assets (ROA) Net income – preferred dividends divided by average total assets This ratio measures a company’s success in using its assets to earn income for the persons who finance the business Also called return on total assets Can also be computed using the first two elements of DuPont Analysis (Rate of return on net sales × Asset turnover), 779 Rate of return on common stockholders’ equity Net income minus preferred dividends, divided by average common stockholders’ equity A measure of profitability Also called return on equity, 589, 780 Rate of return on net sales Ratio of net income – preferred dividends to net sales A measure of profitability Also called return on sales, 778 Rate of return on total assets Net income minus preferred dividends divided by average total assets This ratio measures a company’s success in using its assets to earn income for the persons who finance the business Also called return on assets, 401–403, 589, 779 11/20/15 1:54 PM 886   Glindex Ratio analysis, limitations of, 783 Rationalization for fraud, 204 Ratios See also Current ratio analysis, limitations of, 783 for business decisions, 767–783 current, 153 days’ sales in receivables, 278–279, 774–775 debt ratio, 154, 559–560, 776 decision guidelines, 157–158, 559–560, 786–787 dividend yield, 782–783 gross margin/sales, 633 Import/Export, 457 inventory turnover, 327–328, 773–774 leverage ratio, 522–523, 779–780 net profit margin, 402, 589 price-earnings ratio, 587, 781–782 quick (acid-test), 278, 772–773 rate of return on net sales, 778 rate of return on total assets, 401–403, 589, 779 times-interest-earned ratio, 523–524, 776–777 total asset turnover, 402, 589, 779 Realized gain or loss, 254, 446 Receivables Monetary claims against a business or an individual, acquired mainly by selling goods or services and by lending money, 263 accounting for, 264–265 on balance sheet, 19, 20 cash flow from, 276–277 factoring, 277 inability to collect, 785 managing, 264–265 other receivables, 264 selling, 277 trends in, 785 types of, 256–257 Records, adequate, and internal control, 208 Redeemable preferred stock A corporation reserves the right to buy an issue of stock back from its shareholders, with the intent to retire the stock, 588 Redemption value The price a corporation agrees to eventually pay for its redeemable preferred stock, set when the stock is issued, 588 Regulatory bodies, 4–5 Relative-sales-value method, 375 Remittance advice An optional attachment to a check (sometimes a perforated tear-off document and sometimes capable of being electronically scanned) that indicates the payer, date, and purpose of the cash payment The remittance advice is often used as the source document for posting cash receipts or payments, 212 Rent, prepaid, 129 Report format A balance-sheet format that lists assets at the top, followed by liabilities and stockholders’ equity below, 150–151 Research and development, costs of, 399 Responsibility principle, 29 Retained earnings The amount of stockholders’ equity that the corporation has earned through profitable operations and has not given back to stockholders, 13, 569, 581 and net income, 18 as part of stockholders’ equity, 13, 22 Retirement of stock, 579 Return on assets (ROA) Also known as rate of return on total assets Measures how profitably management has used the assets that Z07_HARR7620_11_SE_AIDX.indd 886 stockholders and creditors have provided the company, 401–403, 589, 779 Return on equity (ROE) Another name for rate of return on common stockholders’ equity, 589–591 Revenue principle The basis for recording revenues; tells accountants when to record revenue and the amount of revenue to record, 124–125, 634 Revenue recognition The process of recording revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods and services, 258 See also Net sales GAAP and, 124, 258–260 in global markets, 124, 635 Revenues Increase in retained earnings from delivering goods or services to customers or clients, 13 accrued, 135 collected in advance, 498 on income statement, 16 as part of owners’ equity, 13, 77–78 recognition of, 258 See also Revenue recognition as temporary accounts, 148 unearned See Unearned revenue Revenues collected in advance, 498 See also Unearned revenue Risk assessment, 207 Royalties, unearned, 21 Rules of debit and credit, 75–76 S Safeguard controls, 210 Salary expense accrued, 134–136 cash flows from operating activities, 700 computing, 705 gross pay as, 498 Salary payable, 498 Sale price vs cost of inventory, 312–314 Sales, trends in, 785 Sales discount Percentage reduction of sales price by the seller as an incentive for early payment before the due date A typical way to express sales discount is “2/10, n/30.” This means the seller will grant a 2% discount if the invoice is paid within 10 days, and the entire amount is due within 30 days, 260 Sales return and allowance Merchandise returned for credit or refunds for services provided, 261–262 Sales tax payable, 497 Salgado, Carlos, Jr., 210 Sarbanes-Oxley Act (SOX), 205, 378, 648 SCALP acronym, 209 Secured bonds, 505 Securities and Exchange Commission (SEC), 3, 10 Securities Exchange Act of 1934, 648 Security cameras, 210 Security for a loan, 264 Security measures, 211 Segment A division or subset of a business’s operations, especially in large corporations For a division to be considered a segment, it must directly earn revenue for the company Segments may be created by product line, by type of business, by geographic areas, or other logical divisions for the corporation Internally, each segment’s revenues and expenses are accounted for separately, 8, 646, 647 selling or discontinuing, 642–643 Segregation/Separation of duties, 204, 208–209 information technology and, 209–210 Serial bonds Bonds that mature in installments over a period of time, 505 Service charges, on bank reconciliation, 215 Shareholders Persons or other entities that own stock in a corporation Also called stockholders, 6, 566 Shares, of stock, 569 See also Stock Shipping terms Terms provided by the seller of merchandise that dictate the date on which title transfers to the buyer A typical way to express shipping terms is through FOB terms For example, “FOB destination” means title to the goods passes to the buyer when the goods are delivered and the buyer assumes control over them “FOB shipping point” means title passes on the date the goods are shipped from the seller’s warehouse, 261 Short-term investments Investments that a company plans to hold for one year or less and the investment is liquid (readily convertible to cash) Also called marketable securities accounting for, 251–257 balance sheet reporting, 440 from investor perspective, 440 liquidity of, 249–250 reporting as assets, 256 Short-term notes payable Notes payable that are due within one year, 496–497 Signature card, 212 Single-step income statement An income statement that lists all the revenues together under a heading such as Revenues or Revenues and Gains Expenses appear in a separate category called Expenses or perhaps Expenses and Losses, 151 “Slide” (accounting error), 87 Smart hiring practices, 208–209 Specific intangibles, 397–398 Specific-unit-cost method Inventory cost method based on the specific cost of particular units of inventory, 317–318, 332 Stable-monetary-unit assumption The reason for ignoring the effect of inflation in the accounting records, based on the assumption that the dollar’s purchasing power is relatively stable, 9–10 Stage productions, costs of, 20 Stated interest rate Interest rate that determines the amount of cash interest the borrower pays and the investor receives each year, 506 Stated value An arbitrary amount assigned to no-par stock; similar to par value, 571 Statement of cash flows Reports cash receipts and cash payments classified according to the entity’s major activities: operating, investing, and financing, 23–24, 680 analyzing, 763–765 direct method, 683, 697–705 and equity transactions, 591–592 financing activities, 22–23 indirect method, 683–693 investing activities, 22–23 operating activities, 22–23 purpose of, 680–681 relationship with other financial statements, 25 reporting financing activities, 528 11/20/15 1:54 PM Glindex    887 reporting investments on, 458–459 reporting receivables on, 277 Statement of comprehensive income A statement showing all of the changes in stockholders’ equity during a period other than transactions with owners The statement of comprehensive income includes net income as well as other comprehensive income, such as unrealized gains/losses on available-for-sale securities and foreign-currency translation gains/losses, 645 Statement of financial position Another name for the balance sheet, 19 Statement of income, 15–18 Statement of operations Another name for the income statement, 15 Statement of retained earnings Summary of the changes in the retained earnings of a corporation during a specific period, 18–19, 24, 25 Statement of stockholders’ equity Reports the changes in all categories of stockholders’ equity during the period, 645 Stock Shares into which the owners’ equity of a corporation is divided, 6, 569 accounting for issuance of, 571–576 analyzing as investment, 781–783 authorized shares of, 569, 577 book value of, 588, 782–783 capital, 569 classes of, 569–571 common See Common stock dividends on, 581–587, 592 issuance of, 591, 691–692, 701 issued, 577 market value of, 587 no-par, 570–571 outstanding, 569, 577–578 par value, 570–571 preferred See Preferred stock prices of, 440 retirement of, 579 shares of, 569 splits, 586 stockholders’ equity, 569 treasury See Treasury stock Stock and bond prices, 440 Stock certificates, 569 Stock dividend A proportional distribution by a corporation of its own stock to its stockholders, 585–586 See also Dividend Stock split An increase in the number of issued and outstanding shares of stock coupled with a proportionate reduction in the stock’s par value, 586 Stock values, 570–571 use in decision making, 587–591 Stock-based compensation, 646 Stockholder A person who owns stock in a corporation Also called a shareholder, 6, 566 rights of, 568 Stockholders’ equity The stockholders’ ownership interest in the assets of a corporation, 11–12, 63–64, 569 See also Capital; Owners’ equity accounts, 63–64, 77–78 accounts, analyzing of, 583–584, 587 on balance sheet, 19, 22 common stock, 19, 22, 63 components, 22 defined, 12 dividends, 13, 19, 63, 581–587 expenses, 64 paid-in capital, 12–13, 22, 569 Z07_HARR7620_11_SE_AIDX.indd 887 reporting, 592–593, 645 retained earnings, 12–13, 22, 63, 569 revenues, 63 Stockholders’ equity accounts common stock, 63 dividends, 63 expenses, 64, 77–78 retained earnings, 63 revenues, 63, 77–78 Stockholders’ rights dividends, 568 liquidation, 568 preemption, 568 voting, 568 Straight-line amortization method, 509–511 Straight-line (SL) method Depreciation method in which an equal amount of depreciation expense is assigned to each year of asset use, 380 See also Depreciation Strong currency A currency whose exchange rate is rising relative to other nations’ currencies, 457 Subsidiary An investee company in which a parent company owns more than 50% of the voting stock, 450 Suppliers, payments to, 699, 704 Supplies, as prepaid expense, 130 T T-accounts analyzing business transactions with, 75, 89 analyzing plant asset transactions with, 394–395 equity method and, 449 Taxable income The basis for computing the amount of tax to pay the government, 640 Taxation corporate, 567 depreciation for tax purposes, 387–389 double taxation, 7, 567 employee income tax payable, 498 FICA tax payable, 498 income taxes, 17, 639–641, 700 sales tax payable, 497 tax advantage of LIFO, 321 taxable income, 640 Television, production costs, 20 Temporary accounts The revenue and expense accounts that relate to a limited period and are closed at the end of the period are temporary accounts For a corporation, the Dividends accounts is also temporary, 148 Term The length of time from inception to maturity, 273 Term bonds Bonds that all mature at the same time for a particular issue, 505 Time value of money, 459–467, 506 Time-period concept Ensures that accounting information is reported at regular intervals, 124 Times-interest-earned ratio Ratio of income from operations to interest expense Measures the number of times that operating income can cover interest expense Also called the interest-coverage ratio, 523–524, 776–777 Total asset turnover A measure of efficiency in usage of total assets The ratio calculates how many times per year average total assets are covered by net sales: Formula: Net sales/ Average total assets Also known as asset turnover, 402, 589, 779 Trademark, trade name A distinctive identification of a product or service Also called a brand name, 398 Trading on the equity Earning more income on borrowed money than the related interest expense, thereby increasing the earnings for the owners of the business Also called leverage, the power of which is illustrated through the leverage ratio, 521, 780 Trading securities Debt or equity investments that are to be sold in the near future with the intent of generating profits on the sale, 251, 252–256, 440 Transaction Any event that has a financial impact on the business and can be measured reliably, 61–62 and the accounting equation, 62 analyzing with T-accounts, 89 asset transactions, 403–404 equity transactions, 591–594 and financial statements, 70–72 impact on accounting equation, 64–72 impact on accounts, 75–78 journalizing and posting, 78–85 ratios and, 154–156 treasury stock transactions, 644 Translation of currency, 457 “Transposition” (accounting error), 87 Treasurer In a large company, the individual in charge of the department that has final responsibility for cash handling and cash management Duties of the treasurer’s department include cash budgeting, cash collections, writing checks, investing excess funds, and making proposals for raising additional cash when needed, 207 Treasury stock A corporation’s own stock that it has issued and later reacquired, 578–581 on balance sheet, 22 for employee compensation, 580–581 purchase of, 691–692 recording of, 578–579 reporting on statement of cash flows, 591 resale of, 579–580 transactions of, 581, 644 Trend percentages A form of horizontal analysis that indicates the direction a business is taking, 758–759 Trial balance A list of all the ledger accounts with their balances, 85 adjusted, 140 constructing and using, 85–86 purpose of, 86 Trojan Horse A malicious program that hides within legitimate programs and acts like a computer virus, 210 Turnover, measuring, 773–774 See also Accounts payable turnover; Accounts receivable turnover U Uncollectible accounts allowance for, 266–273 writing off, 270–271 Uncollectible-account expense Cost to the seller of extending credit Arises from the failure to collect from credit customers Also called doubtful-account expense or bad-debt expense, 266 Underfunded benefit plan, 527 11/20/15 1:54 PM 888   Glindex Underwriter Organization that purchases the bonds from an issuing company and resells them to its clients or sells the bonds for a commission, agreeing to buy all unsold bonds, 505, 571 Unearned revenue A liability created when a business collects cash from customers in advance of earning the revenue The obligation is to provide a product or a service in the future, 136–137, 498–499 on the balance sheet, 503 Unearned royalties, 21 Unit of output, of plant assets, 381 U.S Securities and Exchange Commission (SEC), 3, 10 Units-of-production (UOP) method Depreciation method by which a fixed amount of depreciation is assigned to each unit of output produced by the plant asset, 381–382 Unqualified (clean) opinion An audit opinion stating that the financial statements are presented fairly in accordance with generally accepted accounting principles, 650 Z07_HARR7620_11_SE_AIDX.indd 888 Unrealized gain/loss Gains and losses that occur on investments through fluctuations in market values, rather than through sales, 253–254, 446 Unsecured bonds, 505 Useful life of a depreciable asset, changing, 389–390 V Vacations, mandatory, 210 Vertical analysis Analysis of a financial statement that reveals the relationship of each statement item to a specified base, which is the 100% figure, 759–762 Vote, 568 W Wages, 497, 700, 705 Warranty estimated warranty payable, 500 expense of, 500 Wasting assets, 396 Weak currency A currency whose exchange rate is falling relative to that of other nations, 457 Websites, bogus, 210 Weighted average cost of capital (WACC) The combined average rate of returns demanded by a company’s creditors and investors In general, the higher the risk associated with the company, the greater the expected returns by creditors and investors, 641, 784 Weighted-average-method Another name for the average-cost method, 318 effect on cost of goods sold, 319–320 effect on gross profit, 319–320 perpetual inventories under, 320–321 Wireless network (Wi-Fi), 210 Working capital Current assets minus current liabilities; measures a business’s ability to meet its short-term obligations with its current assets Also called return on sales, 153, 770 Writing off uncollectible accounts, 270–271 11/20/15 1:54 PM Prepare, Apply, and Confirm • Pearson eText­­—Give students access to their textbook anytime, anywhere In addition to note taking, highlighting, and bookmarking, the Pearson eText offers interactive and sharing features Rich media options let students watch lecture and example videos as they read or their homework Instructors can share their comments or highlights, and students can add their own, creating a tight community of learners in your class • Keep students engaged in learning on their own time, while helping them achieve greater conceptual understanding of course material through authorcreated solutions videos, opportunities to Try It!, and live exhibits • Accounting Cycle Tutorial—Accessed by computer, smartphone, or tablet, the ACT provides students with brief explanations of each concept in the Accounting Cycle through engaging, interactive activities • Dynamic Study Modules—Work by continuously assessing student performance and activity, then using data and analytics to provide personalized content in real time to reinforce concepts that target each student’s particular strengths and weaknesses with MyAccountingLab đ H  allmark FeaturesPersonalized Learning Aids, like Help Me Solve This, Demo Docs, and instant feedback are available for further practice and mastery when students need 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options let students watch lecture and example videos as they read or their homework Instructors can share their comments or highlights, and students can add their own, creating a tight community of learners in your class • Keep students engaged in learning on their own time, while helping them achieve greater conceptual understanding of course material through authorcreated solutions videos, opportunities to Try It!, and live exhibits • Accounting Cycle Tutorial—Accessed by computer, smartphone, or tablet, the ACT provides students with brief explanations of each concept in the Accounting Cycle through engaging, interactive activities • Dynamic Study Modules—Work by continuously assessing student performance and activity, then using data and analytics to provide personalized content in real time to reinforce concepts that target each student’s particular strengths and weaknesses with MyAccountingLab đ H  allmark Features—Personalized Learning Aids, like Help Me Solve This, Demo Docs, 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Accounting: Financial Accounting and Management Accounting Both external and internal users of accounting information exist We can therefore classify accounting into two branches Financial accounting. .. Cataloging-in-Publication Data Names: Harrison, Walter T., author | Horngren, Charles T., author | Thomas, C William, author Title: Financial accounting / Walter T Harrison Jr., Baylor University,... Journal of Accounting Research, Journal of ­Accountancy, Journal of Accounting and Public Policy, Economic Consequences of Financial Accounting Standards, Accounting Horizons, Issues in Accounting