Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso

Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso Financial accounting tools for business decision making (7th edition) by kimmel, weygandt, kieso

Financial accounting Tools for Business Decision Making 7e ACCOUNT CLASSIFICATION AND PRESENTATION Financial Statement Normal Balance Current Liability Balance Sheet Credit Accounts Receivable Current Asset Balance Sheet Debit Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit Administrative Expenses Operating Expense Income Statement Debit Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit Amortization Expense Operating Expense Income Statement Debit Bad Debt Expense Operating Expense Income Statement Debit Bonds Payable Long-Term Liability Balance Sheet Credit Buildings Plant Assets Balance Sheet Debit Account Title Classification Accounts Payable A B C Cash Current Asset Balance Sheet Debit Common Stock Stockholder's Equity Balance Sheet Credit Copyrights Intangible Asset Balance Sheet Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit Debt Investments Current Asset/ Long-Term Investment Balance Sheet Debit Depreciation Expense Operating Expense Income Statement Debit Discount on Bonds Payable Long-Term Liability—Contra Balance Sheet Debit Dividend Revenue Other Income Income Statement Credit Dividends Temporary account closed to Retained Earnings Retained Earnings Statement Debit Dividends Payable Current Liability Balance Sheet Credit Equipment Plant Asset Balance Sheet Debit Income Statement Debit D E F Freight-Out Operating Expense G Gain on Disposal of Plant Assets Other Income Income Statement Credit Goodwill Intangible Asset Balance Sheet Debit Income Summary Temporary account closed to Retained Earnings Not Applicable (1) Income Tax Expense Income Tax Expense Income Statement Debit Income Taxes Payable Current Liability Balance Sheet Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Expense Income Statement Debit Interest Payable Current Liability Balance Sheet Credit Interest Receivable Current Asset Balance Sheet Debit Interest Revenue Other Income Income Statement Credit Inventory Current Asset Balance Sheet (2) Debit I Financial Statement Normal Balance Plant Asset Balance Sheet Debit Loss on Disposal of Plant Assets Other Expense Income Statement Debit Maintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Long-Term Liability Balance Sheet Credit Notes Payable Current Liability/ Long-Term Liability Balance Sheet Credit Patents Intangible Asset Balance Sheet Debit Paid-in Capital in Excess of Par Value—Common Stock Stockholders’ Equity Balance Sheet Credit Paid-in Capital in Excess of Par Value—Preferred Stock Stockholders’ Equity Balance Sheet Credit Preferred Stock Stockholders’ Equity Balance Sheet Credit Premium on Bonds Payable Long-Term Liability—Contra Balance Sheet Credit Prepaid Insurance Current Asset Balance Sheet Debit Prepaid Rent Current Asset Balance Sheet Debit Account Title Classification Land L M N P R Rent Expense Operating Expense Income Statement Debit Retained Earnings Stockholders’ Equity Balance Sheet and Retained Earnings Statement Credit Salaries and Wages Expense Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Balance Sheet Credit Sales Discounts Revenue—Contra Income Statement Debit Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Stock Investments Current Asset/Long-Term Investment Balance Sheet Debit Supplies Current Asset Balance Sheet Debit Supplies Expense Operating Expense Income Statement Debit Balance Sheet Debit S T Treasury Stock Stockholders’ Equity Unearned Service Revenue Current Liability Balance Sheet Credit Utilities Expense Operating Expense Income Statement Debit U (1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss The Income Summary account does not appear on any financial statement (2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold The following is a sample chart of accounts It does not represent a comprehensive chart of all the accounts used in this textbook but rather those accounts that are commonly used This sample chart of accounts is for a company that generates both service revenue as well as sales revenue It uses the perpetual approach to inventory If a periodic system was used, the following temporary accounts would be needed to record inventory purchases: Purchases; Freight-in; Purchase Returns and Allowances; and Purchase Discounts CHART OF ACCOUNTS Assets Liabilities Stockholders’ Equity Revenues Expenses Cash Notes Payable Common Stock Service Revenue Administrative Expenses Accounts Receivable Accounts Payable Paid-in Capital in Excess of Par Value—Common Stock Sales Revenue Allowance for Doubtful Accounts Interest Receivable Unearned Service Revenue Salaries and Wages Payable Interest Payable Inventory Dividends Payable Supplies Income Taxes Payable Preferred Stock Sales Discounts Sales Returns and Allowances Amortization Expense Bad Debt Expense Cost of Goods Sold Paid-in Capital in Excess of Par Value—Preferred Stock Interest Revenue Gain on Disposal of Plant Assets Depreciation Expense Freight-Out Prepaid Insurance Treasury Stock Retained Earnings Income Tax Expense Dividends Insurance Expense Income Summary Interest Expense Bonds Payable Prepaid Rent Land Equipment Accumulated Depreciation— Equipment Discount on Bonds Payable Premium on Bonds Payable Loss on Disposal of Plant Assets Mortgage Payable Maintenance and Repairs Expense Buildings Rent Expense Accumulated Depreciation— Buildings Salaries and Wages Expense Selling Expenses Copyrights Supplies Expense Goodwill Utilities Expense Patents Paul D Kimmel PhD, CPA University of Wisconsin—Milwaukee Milwaukee, Wisconsin Jerry J Weygandt PhD, CPA University of Wisconsin—Madison Madison, Wisconsin Donald E Kieso PhD, CPA Northern Illinois University DeKalb, Illinois Dedicated to the Wiley sales representatives who sell our books and service our adopters in a professional and ethical manner, and to Enid, Merlynn, and Donna Vice President & Executive Publisher Associate Publisher Editorial Operations Manager Content Editor Associate Editor Senior Development Editor Development Editor Senior Content Manager Senior Production Editor Associate Director of Marketing Marketing Manager Lead Product Designer Product Designer Media Specialist Design Director Cover Design Interior Design Production Management Services Senior Photo Editor Editorial Assistant Marketing Assistant Cover Photo Title Page and Brief Contents Image Sierra Corporation Icon Continuing Cookie Chronicle Icon George Hoffman Christopher DeJohn Yana Mermel Ed Brislin Sarah Vernon Terry Ann Tatro Margaret Thompson Dorothy Sinclair Erin Bascom Amy Scholz Karolina Zarychta Honsa Allison Morris Greg Chaput Daniela DiMaggio Harry Nolan Maureen Eide Kristine Carney Furino Production Mary Ann Price Jaclyn MacKenzie Justine Kay © Joseph C Dovala/Age Fotostock © Joseph C Dovala/Age Fotostock © Ben Blankenburg/iStockphoto © Fekete Tibor/iStockphoto This book was set in New Aster by Aptara®, Inc and printed and bound by Courier-Kendallville The cover was printed by Courier-Kendallville Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support For more information, please visit our website: www.wiley.com/go/citizenship Copyright © 2013, John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel Outside of the United States, please contact your local representative ISBN-13 978-1-118-16228-6 Binder-Ready Version ISBN 978-1-118-34426-2 Printed in the United States of America 10 Brief Contents 10 11 12 13 Introduction to Financial Statements A Further Look at Financial Statements 46 The Accounting Information System 100 Accrual Accounting Concepts 162 Merchandising Operations and the Multiple-Step Income Statement 228 Reporting and Analyzing Inventory 282 Fraud, Internal Control, and Cash 334 Reporting and Analyzing Receivables 396 Reporting and Analyzing Long-Lived Assets 446 Reporting and Analyzing Liabilities 504 Reporting and Analyzing Stockholders’ Equity 568 Statement of Cash Flows 624 Financial Analysis: The Big Picture 688 APPENDICES A Specimen Financial Statements: Tootsie Roll Industries, Inc A-1 B Specimen Financial Statements: The Hershey Company B-1 C Specimen Financial Statements: Zetar plc C-1 D Time Value of Money D-1 E Reporting and Analyzing Investments E-1 Company Index I-1 Subject Index I-4 From the Authors Dear Student, Why This Course? Remember your biology course in high school? Did you have one of those “invisible man” models (or maybe something more high-tech than that) that gave you the opportunity to look “inside” the human body? This accounting course offers something similar To understand a business, you have to understand the financial insides of a business organization An accounting course will help you understand the essential financial components of businesses Whether you are looking at a large multinational company like Apple or Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening As an employee, a manager, an investor, a business owner, or a director of your own personal finances—any of which roles you will have at some point “Whether you are looking at a large in your life—you will make better decisions for having multinational company like Apple or taken this course Why This Book? Hundreds of thousands of students have used this textbook Your instructor has chosen it for you because of its trusted reputation The authors have worked hard to keep the book fresh, timely, and accurate Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening.” This textbook contains features to help you learn best, whatever your learning style We invite you to browse through pages xxi–xxv These pages describe the main features you will find in this textbook and explain their purpose How To Succeed? We’ve asked many students and many instructors whether there is a secret for success in this course The nearly unanimous answer turns out to be not much of a secret: “Do the homework.” This is one course where doing is learning The more time you spend on the homework assignments—using the various tools that this textbook provides—the more likely you are to learn the essential concepts, techniques, and methods of accounting Besides the textbook itself, the book’s companion website also offers various support resources Good luck in this course We hope you enjoy the experience and that you put to good use throughout a lifetime of success the knowledge you obtain in this course We are sure you will not be disappointed Paul D Kimmel Jerry J Weygandt Donald E Kieso I-11 Subject Index Human resource controls background checks and, 344 bonding employees and, 344 employee hirings and, 511 fraud and, 239 limitations of, 345 rotating employee duties and, 344 I Idle cash, 361 Impairments, plant assets and, 461 Improper adjusting entries, 186 Improper recognition, quality of earnings and, 707 Improperly capitalized expenditures, 449 Improvements, plant assets and, 460 Income from operations, 242, 244 Income measurement process, merchandising company and, 230 Income statements adjusted trial balance and, 184 complete income statement, 696 components of, 691 cost flow methods and, 294–295 determining cost of good sold under periodic system, 246–247 gross profit and, 242, 243 horizontal analysis of, 699–700 income from operations and, 242 inventory efforts and, 308–309 multiple-step income statements, 242–243 net income and, 12, 242 nonoperating activities and, 244–245 operating expenses and, 243 presentation, 241–247 revenues and expenses and, 241 sales revenues and, 243 single-step income statement, 241–242 specific time period and, 12 stock issues and, 12 user communication and, 11 uses of, 54–55 vertical analysis and, 701–702 Income summary, 188 Income taxes cash payments for, 654 depreciation and, 458 operating activities and, 10 payable to government, 11 statement of cash flows and, 638 Independent internal verification, fraud and, 288, 343–344, 400, 511, 576, 639, 703 Indirect method (statement of cash flows), 632–641 changes in current liabilities, 638 decrease in accounts receivable, 637 decrease in income taxes payable, 638 depreciation expense and, 635–636 increase in accounts payable, 638 increase in bonds payable, 640–641 increase in buildings, 640 increase in common stock, 641 increase in equipment, 640 increase in inventory, 637 increase in land, 640 increase in prepaid expenses, 637–638 increase in retained earnings, 641 investing and financing activities and, 640–641 loss on disposal of plant assets, 636 net change in cash and, 641 net income to net cash conversions, 635 noncash current assets and, 636–637 operating activities and, 635–640 Industries gross profit rate by, 248 industry-average comparisons, 54, 697 profit margins by, 249 Inflation, cost flow methods and, 295 Insurance, adjustment for, 170–171 Insurance policies, 107, 124 Intangible assets, 467–471 accounting for, 468–469 amortization of, 468–469 copyrights, 470 determining useful life and, 469 franchises, 470–471 goodwill, 471 limited life and, 468 patents, 469 research and development costs, 469–470 trademarks and tradenames, 470 types of, 51, 469–471 Intent to convert, investments and, E11 Intercompany comparative analysis, 54, 697, 702 Interest accrued interest, 177–178 bonds and, 513, 514, 516 buildings and, 450–451 cash payments for, 654 compound interest, D2 compound interest table, D3–D4 coverage, 717 expense, 10 interest-bearing notes, 410–411 interest rates, D1 nature of, D1–D2 notes receivable and, 408–409 passing up discount and, 237 payable, 11 payable as a current liability, 516 recording bond interest, E3 revenue, 10 simple interest, D1 Internal auditors, 344 Internal controls See also Cash controls; Fraud bank reconciliations and, 352–357 bank statements and, 352–353 business size and, 346 cash managing and monitoring, 360–364 Subject Index I-12 Internal controls (continued) cash reporting, 358–359 collusion and, 346 control activities and, 338 control environment and, 337 documentation procedures and, 341–342 human element and, 346 human resource controls, 344–345 independent internal verification and, 343–344 information and communication and, 338 limitations of, 345–346 monitoring and, 338 petty cash funds, 367–369 physical controls, 342–343 principles of control activities, 338–344 reasonable assurance and, 345 responsibility establishment and, 339 risk assessment and, 338 segregation of duties and, 339–341 segregation of record-keeping from physical custody, 341 segregation of related activities and, 340 sustainability reporting and, 338 Internal users, financial information and, Internal verification, independent, 343–344 International Accounting Standards Board (IASB), 63, 409 International Financial Reporting Standards (IFRS), 11, 43–44, 63, 95–97 Intracompany comparisons, 54, 697 Introductory phase, corporate life cycle and, 630 Inventory analysis of, 299–302 classifying, 284–285 consigned goods and, 287 conversion from LIFO to FIFO, 302 costing of, 288–298 determining ownership of goods and, 286–287 determining quantities and, 286–287 errors in, 308–309 falsifying of, 286 finished goods inventory, 284 goods in transit and, 286–287 just-in-time inventory methods, 285 manufacturing companies and, 284–285 merchandise inventory, 284 perpetual inventory systems, 305–307 raw materials and, 284 statement of cash flows and, 637 taking physical inventory, 286 work in process, 284 Inventory analysis, 299–302 computing days in inventory, 399 inventory turnover and, 299–300 LIFO reserve and, 301–302 recession and, 300 Inventory costing, 288–298 See also Cost flow methods average-cost method and, 293 balance sheet effects and, 296 change in methods and, 694 cost flow assumptions and, 289–293 first-in, first-out method and, 290–297 income statement effects and, 294–295 last-in, first-out method and, 291–297 lower-of-cost-or-market and, 298 methods, 706 specific identification and, 288–289 tax effects and, 296 using methods consistently, 297 weighted-average unit cost and, 293 Inventory errors balance sheet effects and, 309 income statement effects and, 308–309 Inventory levels, cash management and, 361 Inventory turnover, 299–300, 704, 715 Investment portfolios, E4 Investments available-for-sale securities, E8 balance sheet presentation and, E10–E11 cash flows and, 15–16, 627 corporations and, E1–E2 excess cash and, 10 held-to-maturity securities, E8 intent to convert and, E11 nonoperating items related to, E12 presentation of realized and unrealized gain or loss, E12 readily marketable, E11 security categories, E8 statement of cash flows (direct method) and, 655–666 statement of cash flows (indirect method) and, 640–641 statement of cash flows presentation, E12–E13 trading securities, E8–E9 valuing and reporting of, E7–E13 Irregular items, sustainable income and, 691 Irregularity, 129 Issuing procedures, bonds and, 513 J Journals, 117–118 Just-in-time inventory methods, 285, 299 K Korean discount, 63 L Labor unions, Land costs related to, 449–450 depreciation and, 453 improvements and, 450 statement of cash flows (direct method) and, 655 statement of cash flows (indirect method) and, 640 Large stock dividends, 587 Last-in, first-out (LIFO) method, 291–297, 306–307, 706 I-13 Subject Index Leasing, 452, 526 Ledger, 119–120 Legal capital, 577 Legal liability, organizational forms and, Letter to stockholders, A2–A5 Leveraging, 720 Liabilities See also Bonds analysis of, 523 balance sheet presentation and, 14, 521–522 bank line of credit and, 523 bonds and, 512–521 cash management and, 361 contingencies and, 526 credit balances and, 112 current liabilities, 506–511 debt covenants, 527 debt masking and, 525 leasing and, 452, 526 liquidity ratios and, 523 off-balance-sheet financing and, 525–526 solvency ratios and, 524 times interest earned and, 524 Licenses, corporations and, 574 LIFO conformity rule, 296 LIFO ending inventory, 292 LIFO reserve, 301–302 Limited liability companies (LLCs), 5, 574 Limited liability of stockholders, corporations and, 571 Limited liability partnerships (LLPs), 574 Limited life, intangible assets and, 468 Limited partnerships, 574 Line of credit, liabilities and, 523 Liquid investments, 361 Liquidation preference, preferred stocks and, 582–583 Liquidity, 58–59 excessive liquidity, 59 receivables and, 415–416 statement of cash flows and, 645 working capital and, 58 Liquidity ratios, 714–716 accounts receivable turnover, 416 average collection period, 416, 715 current cash debt coverage, 645, 714–715 current ratio, 58–59, 714 days in inventory, 300, 716 inventory turnover, 300, 715–716 liabilities and, 523 role of, 54 summary of, 704 working capital, 58 London Stock Exchange, 576 Long-lived assets financial statement presentation of, 472–473 intangible assets, 467–471 plant assets, 448–467 Long-term debt, current maturities of, 509 Long-term investments balance sheet presentation and, E11 characteristics of, 50 Long-term liabilities bonds, 512–521 characteristics of, 53 current liabilities and, 506 Long-term notes, present value of, D11–D13 Long-term notes payable, 536–537 Long-term notes receivable, 409 Loss on disposal of plant assets, 653–654 Loss on sale of plant assets, 462–463 Low-volume businesses, profit margin and, 720 Lower-of-cost-or-market (LCM), 298 M Madoff, Bernard, 358 Madoff’s ponzi scheme, 358 Mail receipts, 349 Major expenditures, cash management and, 361 Management, corporation, 572 Management certifications of financial statements, A30–A31 Management discussion and analysis, 19, A6–A13 Management’s report on internal control, A30–A31 Market interest rates, bonds and, 514, 516–517 Market price, stock, 577 Market price determination, bonds and, 513–515 Market-to-market accounting, E8 Marketable securities, E10 Marketing expenses, 10 Marketing managers, Marketing return on investment, 465 Matching principle, 165 Maturity date bonds and, 513 notes receivable and, 408 redeeming bonds at, 520 redeeming bonds before, 532 Maturity phase, corporate life cycle and, 631–632 Maturity value, interest-bearing notes and, 410 Measurement principles, financial reporting and, 66 Memoranda, bank, 355 Merchandise inventory See Inventory Merchandise purchases, 233–237 freight costs and, 234–235 periodic inventory system and, 254 purchase discounts and, 236–237 purchase invoices and, 233–234 purchase returns and allowances, 235–236 transaction summary, 237 Merchandise sales, 238–241 business documents and, 238 cash register documents and, 238 periodic inventory system and, 254 sales accounts and, 238 sales discounts, 240–241 sales returns and allowances, 239–240 Merchandise transactions, periodic inventory system and, 253–254 Subject Index I-14 Merchandising operations, 230–233 flow of costs and, 231–233 income measurement process for, 230 operating cycles and, 231, 360 periodic inventory system and, 232 perpetual inventory system and, 232–233 Merchandising profit, 243 Modified accelerated cost recovery system (MARCS), 458 Monetary unit assumption, 65 Money market funds, 359 Mortgage loans, D16 Mortgage notes payable, 536 Moving-average method, 307 Multiple-step income statements, 242–243, 245 N Nasdaq stock market, 576 National credit card sales, 418–419 Negative cash, 631 Net 30, 236 Net cash, 191–192 Net cash flows, statement of cash flows and, 654 Net cash provided by operating activities, 61, 627 Net change in cash statement of cash flows (direct method) and, 656 statement of cash flows (indirect method) and, 641 Net income income statements and, 12, 242 net cash and, 191–192 to net cash conversions, 635 per share, 722 statement of cash flows and, 627 Net sales horizontal analysis of, 698 income statement and, 243 New employee hiring, 125 New York Stock Exchange, 576 No-par stock, 578 Nominal accounts, 188 Non-recurring charges, 693 Noncash activities, statement of cash flows and, 628 Noncash current assets, statement of cash flows and, 636–637 Nonoperating items income statement presentation and, 244–245 related to investments and, E12 Normal balances, 112–113 Not-for-profit organizations, Note issued in exchange for cash, 105 Notes payable accounting for, 507 financing activities and, issuance of, 122 long-term, 536–537 Notes receivable, 407–411 accrual of interest receivable, 410–411 cash (net) realizable value and, 409 collection of, 356 computing interest and, 408–409 determining maturity date and, 408 dishonor of, 411 disposing of, 410–411 face value and, 409 honor of, 410 promissory notes and, 407–408 recognizing notes receivable, 409 valuing notes receivable, 409 Notes to financial statements, 20 NSF (not sufficient funds) checks, 352, 357 O Obligations, statement of cash flows and, 627 Obsolescence depreciation and, 453–454 equipment and, 180 leasing and, 452 Off-balance sheet financing, liabilities and, 525–526 Office equipment, purchase of for cash, 105 One-time items, 185–186 Operating activities, 10–11 cash flows and, 15–16, 627 classifying as, 130 statement of cash flows (direct method) and, 651–654 statement of cash flows (indirect method) and, 635–640 Operating cycles definition of, 50 for merchandising company, 231 for service company, 231 temporary investments and, E1 Operating expenses cash payments for, 653 improper capitalization of, 707 income statement presentation and, 243 Operating leases, 526 Operations, income from, 242 Ordinary repairs, 460 Organization chart, corporations and, 572 Other expenses and losses, 244 Other revenues and gains, 244 Outstanding checks, 355 Over-the-counter receipts, 347–349 Ownership of goods, determining, 286–287 Ownership rights, corporations and, 571 P Paid-in capital stock dividends and, 586 stock splits and, 589 stockholders’ equity and, 577–578 Paper profit, 295 Par or stated value per share, 587 Par value stock, 577 Parent company, E7 Partnerships, 4–5 Patents, 469 Payment date, cash dividends and, 585 Payment period establishment, receivables and, 413 Payout ratio, 705, 723 Payroll, 510–511 Payroll taxes payable, 510–511 Pension portfolios, 694 I-15 Subject Index Percentage, gross profit rate as, 247 Percentage of base amount, 700 Percentage of net sales, 701 Percentage-of-receivables basis, 404 Periodic inventory system, 253–256 cost of goods sold under, 232, 246–247 freight costs and, 254 purchase discounts and, 254 purchase returns and allowances, 254 recording merchandise transactions and, 253–254 recording purchases of merchandise, 254 recording sales of merchandise, 254–255 sales discounts and, 255 sales returns and allowances and, 255 Periodicity assumption, 65 Permanent accounts, 188 Permanent decline in fair value, plant assets and, 461 Perpetual inventory systems advantages of, 232–233 average-cost and, 307 cost flow methods in, 305–307 determining cost of goods sold under, 232 first-in, first-out and, 306 last-in, first-out and, 306–307 periodic system compared, 246 Petty cash funds, 367–369 establishment of, 367 internal controls and, 351 making payments from, 367–368 replenishment of, 368–369 Phantom profit, 295 Physical controls, 239, 342–343 Physical custody, 341 Physical inventory, 286 Plant assets, 448–467 See also Depreciation accounting for, 453–463 additions and improvements and, 460 analyzing, 464–467 asset turnover, 465–466 buildings, 450–451 buying or leasing, 452 capital expenditures and, 460 cash equivalent price and, 449 depreciation and, 51, 453–460 determining cost of, 449–451 disposals, 461–462 earnings management and, 461 equipment, 451 expenditures during useful life, 460 expense capitalization and, 449 gain on sale and, 462 historical cost principle and, 449 impairments and, 461 land, 449–450 land improvements, 450 loss on disposal of, 636, 653–654 loss on sale and, 462–463 ordinary repairs and, 460 profit margin and, 466–467 retirement of, 463 return on assets, 464–465 sale of, 462–463 Plus and minus, financial calculators and, D15 Ponzi schemes, 358 Post-closing trial balance, 189–190 Post-dated checks, 358 Posting, 120 Predictive value, 64 Preferred stock, 581–583 cumulative dividends and, 582–583 dividend preferences and, 582–583 liquidation preference and, 583 Premiums bonds and, 516–517 effective-interest amortization method and, 535–536 issuing bonds at, 519–520 straight-line amortization method and, 531–532 Prenumbered documents, 341 Prepaid expenses accounting for, 172 adjusting entries for, 169–172 statement of cash flows and, 637–638 Prepaid insurance, 170–171 Present value of annuity, D9–D11, D15 Present value of long-term note or bond, D11–D13 Present value of single amount, D7–D9 Present value of single sum, D14 Present value variables, D7 Price-earnings (P-E) ratio, 705, 707–708, 722–723 Principal bonds and, 514 interest rate and, D1 Pro forma income, 706–707 Production supervisors, Profit margins, 249–250 changes in, 250 gross profit compared, 249 plant assets and, 466 profitability ratios and, 705, 720 variation across industries and, 249 Profitability evaluation, 247–250 gross profit rate, 247–249 profit margin, 249–250 Profitability ratios, 705, 719–723 asset turnover, 465, 721 definition of, 54 earnings per share, 55, 722 gross profit rate, 248, 721–722 payout ratio, 594, 723 price-earnings ratio, 707, 722 profit margin, 250, 720 return on assets, 464, 719–720 return on common stockholders’ equity, 595, 719 Promissory notes, 407–408 Property taxes payable, 11 Proration, depreciation and, 456 Public Company Accounting Oversight Board (PCAOB), 63, 337 Purchase discounts, 236–237 credit terms and, 236 discount period and, 236 inventory and, 236 paying interest and, 237 periodic inventory system and, 254 Purchase invoices, 233–234 Purchase returns and allowances, 235–236 Subject Index I-16 Purchasing activities, internal controls and, 340 Purchasing on account, 108 Q Quality of earnings, 185–187, 706–708 alternative accounting methods and, 706 cooking the books and, 186 earnings management and, 185 improper adjusting entries and, 186 improper recognition and, 707 indicators, 251 inflating revenue numbers and, 186 inventory costing and, 297 one-time items and, 185–186 price-earnings ratio and, 707–708 pro forma income and, 706–707 Sarbanes-Oxley Act and, 186 Quarterly dividend rates, 584 R Rating agencies, 705 Ratio analysis, 703–705 classifications, 54 comprehensive illustration of, 712–723 liquidity ratios and, 704, 714–716 profitability ratios and, 705, 719–723 solvency ratios and, 704, 716–718 Ratios, LIFO reserve and, 302 Raw materials, 284 Readily marketable investments, E11 Real accounts, 188 Realized gain or loss, investments and, E12 Reasonable assurance, internal controls and, 345 Receivables accounts receivable, 399–407 accounts receivable turnover, 415–416 average collection period and, 415–416 cash management and, 361 cash receipt acceleration and, 417–420 collection monitoring and, 413–414 concentration of credit risk and, 414 extending credit and, 412–413 financial statement presentation of, 411–412 liquidity evaluation and, 415–416 management of, 412–420 national credit card sales and, 418–419 notes receivable, 407–411 payment period establishment and, 413 sale of, 417–418 sale of receivables to a factor, 418 types of, 398–399 Recession, inventory management and, 300 Reconciliation, bank accounts and, 352–357 Record date, cash dividends and, 585 Record keeping, segregation from physical custody, 341 Recording estimated uncollectibles, 402–403 Recording process, 116–128 chart of accounts and, 120 hiring of new employees, 125 illustrated, 121–126 investment of cash by stockholders, 121 issue of note payable, 122 journal and, 117–118 ledger and, 119–120 payment of cash for employee salaries, 126 payment of dividends, 126 payment of rent with cash, 124 posting and, 120 purchase of equipment, 122 purchase of insurance policy with cash, 124 purchase of supplies on account, 125 receipt of cash in advance from customer, 123 services performed for cash, 123 source document and, 117 summary illustration and, 127–128 Recovery of uncollectible account, 404 Redemptions, bonds and, 520–521 Regulatory agencies, Related activities, segregation of, 340 Relevance, information, 64 Rent, 107, 124 Research and development costs (R&D), 469–470 Responsibility establishment, internal controls and, 339 Restricted cash, 359 Restructuring charges, 693 Retailers, 230 Retained earnings, 590–591 adjusted trial balance and, 184 cash dividends and, 584 common stock and, 577–578 debit and credit procedures and, 113–114 net losses and, 590 preparing closing entries and, 188 restrictions and, 590–591 statement of cash flows (direct method) and, 655 statement of cash flows (indirect method) and, 641 stock dividends and, 586 stock splits and, 589 stockholders’ equity and, 53 Retirement of plant assets, 463 Return on assets, 464–465, 705, 719–720 Return on common stockholders’ equity, 594–596, 705, 719 Returns and allowances periodic inventory system and, 254–255 purchases and, 235–236 returns and, 255 Returns policy, 240 Revenues accrued revenues, 175–177 income statements and, 241 inflating numbers and, 186 operating activities and, 10 revenue recognition principle, 164–165 stockholders’ equity and, 114 unearned revenues, 173–174 I-17 Subject Index Revised depreciation, 459–460 Risk-free investments, 361 Rounding, financial calculators and, D15 S S corporation, 573–574 Salaries accrued salaries, 178–180 payment of cash for, 108–109, 126 Sales discounts and, 240–241 income statement presentation and, 243 internal controls and, 340 merchandising operations and, 230 periodic inventory system and, 255 plant assets and, 462–463 returns and allowances and, 239–240 revenue from, 10 sale of receivables to a factor, 418 Sales taxes payable, 11, 507–508 Salvage value, depreciation and, 454 Sarbanes-Oxley Act, 8, 109, 186, 337, 345, 572 Secured bonds, 512 Securities available-for-sale securities, 695, E9–E10 categories of, E8 comprehensive income and, 695–696 trading of, E8–E9 trading securities, 695 Securities and Exchange Commission (SEC), 7, 63, 525, 572 Segregation of duties, 339–341, 400 Segregation of record-keeping from physical custody, 341 Segregation of related activities, 340 Selling expenses, 10 Separate legal existence, corporations and, 571 Service company, operating cycles for, 231 Service revenue, accounts after adjustment, 174 Services performed for cash, 106–107 Shoplifting losses, 345 Short-term investments, balance sheet presentation and, E10–E11 Signature requirements, documents and, 341 Simple interest, D1 Single-step income statement, 241–242 Small stock dividends, 587 Social responsibility, corporations and, 573 Social Security taxes, 511 Socially responsive business, 16 Sole proprietorships, 4–5 Solvency, 59–60, 524 Solvency assessment, statement of cash flows and, 646 Solvency ratios, 716–718 cash debt coverage, 646, 704, 718 debt to assets ratio, 60, 704, 717 definition of, 54 free cash flow, 61, 704, 718 summary of, 704 times interest earned, 525, 704, 717–718 Source document, recording process and, 117 Specific identification method of inventory costing, 288–289 Standard-setting environment, 63 Statement interrelationships, 16–18 Statement of cash flows, 15–16 See also Direct method; Indirect method additional information and, 632 cash investing and financing transactions and, 627 classification of cash flows and, 627 company evaluation and, 642–646 comparative balance sheets and, 632 corporate life cycle and, 630–632 current income statement and, 632 direct method and, 632–633, 649–656 format of, 629 free cash flow and, 642–643 future cash flows and, 626–627 indirect method and, 632–641 investments and, E12–E13 liquidity assessment and, 645 major steps in, 633 net cash provided by operating activities and, 627 net income and, 627 paying dividends and meeting obligations and, 627 preparation of, 632 significant noncash activities and, 628 solvency assessment and, 646 T-account approach, 656–658 usefulness of, 626–627 user communication and, 11 Stock certificates, 574–575 Stock dividends, 586–588 effects of, 587–588 entries for, 599 fair value per share, 587 large stock dividend, 587 par or stated value per share, 587 purpose and benefits of, 587 small stock dividend, 587 stock splits differentiated, 589 stockholders’ equity and, 587–588 Stock holdings of more than 50%, E7 Stock investments accounting for, E4–E7 holdings between 20% and 50%, E5–E7 holdings of less than 20% and, E4–E5 holdings of more than 50% and, E7 Stock investments between 20% and 50%, E5–E7 recording acquisition of stock, E6 recording revenue and dividends, E6–E7 Subject Index I-18 Stock investments of less than 20%, E4–E5 recording acquisition of stock, E4 recording dividends, E5 recording sale of stock, E5 Stock issue considerations, 575–579 authorized stock, 576 market price and, 577 par and no-par value stocks, 577 stock issuance, 576 Stock quotes, reading, 579 Stock splits, 588–589 Stock value considerations, 577–578 Stockholders creditor claims vs., 9–10 investment of cash by, 104–105, 121 liability and, 571 raising funds and, rights of, 574–575 Stockholders’ equity accounting for treasury stock, 579–581 additional paid-in capital and, 591 balance sheet presentation and, 14, 591–592 capital stock and, 591 common stock and, 113 corporate form of organization and, 570–575 debit and credit procedures for, 113–114 debt vs equity decision and, 595–596 dividend record and, 593–594 dividends and, 114, 584–589 earnings performance and, 594–595 expenses and, 107 financial statement presentation of, 591–592 measuring corporate performance and, 593–596 parts of, 53 preferred stock and, 581–583 relationships and, 115 retained earnings and, 113–114, 590–591 return on common stockholders’ equity (ROE), 594–596 revenue and, 106 revenues and expenses and, 114 stock issue considerations and, 575–579 stock splits and, 588–589 unrealized loss and, 696 use of, 56–57 Straight-line amortization, 530–532 amortizing bond discount, 530–531 amortizing bond premium, 531–532 Straight-line depreciation, 454–456 Subchapter S corporations, Subsidiary (affiliated) company, E7 Suppliers, cash payments to, 652–653 Supplies adjusting entries for, 169–170 operating activities and, 10 purchase on account, 108, 125 Sustainability reports, 467 Sustainable income, 690–696 change in accounting principle and, 694 comprehensive income and, 695–696 discontinued operations and, 691–692 extraordinary items and, 692–693 irregular items and, 691 T T-account approach, statement of cash flows and, 656–658 Tax advantages, leasing and, 452 Taxes See also Income taxes corporations and, 573 cost flow methods and, 296 irregular items and, 691 organizational forms and, taxing authorities, Temporary accounts, 188 Temporary investments, operating cycle and, E1 Time periods discounting and, D11 interest rates and, D1 Time value of money, 513 computing present value of long-term note or bond, D11–D13 future value of a single amount, D2–D4 future value of an annuity, D4–D6 nature of interest, D1–D2 present value of annuity, D9–D11 present value of single amount, D7–D9 present value variables, D7 time diagram, D3 time periods and discounting, D11 using financial calculators and, D14–D16 Timeliness, 64–65 Times interest earned, 524, 704, 717 Timing issues, 164–167 accrual vs cash basis of accounting and, 166–167 expense recognition principle and, 165 revenue recognition principle and, 164–165 Tokyo Stock Exchange, 576 Total cost of trading securities, E8 Total fair value of securities, E8 Trademarks, 470 Tradenames, 470 Trading on the equity, 720 Trading securities, 695, E8 Transferable ownership rights, corporations and, 571 Treasurer, 572 Treasury bills, 359 Treasury stock accounting for, 579–581 purchase of, 580–581 Trial balance, 129–132 example, 131–132 limitations of, 129 post-closing, 189–190 types of adjusting entries and, 168 I-19 Subject Index True cash balance, 356 Turnover, asset, 465–466 U Uncollectible accounts allowance method for, 402 direct write-off method for, 401–402 expense, 401 recording estimated uncollectibles, 402–403 recording the write-off of, 403 recovery of, 404 Understandability, 64–65 Unearned revenues, 173–174, 508–509 Units-of-activity method, depreciation and, 456–457, 477–478 Units-of-production method See Units-of-activity method Unqualified opinions, 20 Unrealized gains or losses investments and, E12 securities and, E8 stockholders’ equity and, 696 Unsecured bonds, 512 Useful life depreciation and, 454 intangible assets and, 469 V Vacations, requiring taking of, 344 Verifiability, 64–65 Verification, independent internal, 343–344 Vertical analysis, 700–702 Voucher register, 351 Voucher system controls, 350–351 W Wages payable, 11 Weighted-average unit cost, 293 Wholesalers, 230 Work in process, 284 Working capital, 58, 704 Worksheets, 195–196 Write-downs, 298, 461 Write-off method, uncollectible accounts and, 401–402 Z Zero-coupon bonds, 517 RAPID REVIEW Chapter Content ACCOUNTING CONCEPTS (Chapters 2–4) Fundamental Qualities Enhancing Qualities Assumptions Principles Constraint Relevance Faithful representation Comparability Consistency Verifiability Timeliness Understandability Monetary unit Economic entity Periodicity Going concern Accrual basis Historical cost Fair value Full disclosure Revenue recognition Expense recognition Materiality INVENTORY (Chapters and 6) BASIC ACCOUNTING EQUATION (Chapter 3) Ownership Basic Equation Assets = Liabilities + Stockholders’ Equity Freight Terms Expanded Basic Equation Debit / Credit Rules Assets Dr Cr – + = Liabilities Dr Cr + – + Common + Stock Retained Earnings + Revenues – Dr Cr – + Dr Cr – + Dr – Cr + ADJUSTING ENTRIES (Chapter 4) Expenses Dr + – Dividends Cr – Dr + Cr – Buyer FOB Destination Seller Type Adjusting Entry Deferrals Prepaid expenses Unearned revenues Dr Expenses Dr Liabilities Cr Assets Cr Revenues Purchase of goods Inventory Cash (A/P) Purchases Cash (A/P) Accruals Accrued revenues Accrued expenses Dr Assets Dr Expenses Cr Revenues Cr Liabilities Freight (shipping point) Inventory Cash Freight-In Cash Return of goods Cash (or A/P) Inventory Cash (or A/P) Purchase Returns and Allowances Sale of goods Cash (or A/R) Sales Cost of Goods Sold Inventory Cash (or A/R) Sales No entry End of period No entry Closing or adjusting entry required Event Interest Computation Interest ϭ Face value of note ϫ Annual interest rate ϫ Time in terms of one year CLOSING ENTRIES (Chapter 4) Purpose FOB Shipping point Perpetual vs Periodic Journal Entries Note: Each adjusting entry will affect one or more income statement accounts and one or more balance sheet accounts Ownership of goods on public carrier resides with: Update the Retained Earnings account in the ledger by transferring net income (loss) and dividends to retained earnings Prepare the temporary accounts (revenue, expense, dividends) for the next period’s postings by reducing their balances to zero Analyze business transactions Prepare a post-closing trial balance Journalize the transactions Journalize and post closing entries Post to ledger accounts Principles of Internal Control Prepare financial statements: Income statement Retained earnings statement Balance sheet Prepare a trial balance Journalize and post adjusting entries: Deferrals/Accruals The Fraud Triangle Opportunity Financial pressure Rationalization Bank Reconciliation Bank Books Balance per bank statement Add: Deposits in transit Balance per books Add: Unrecorded credit memoranda from bank statement Deduct: Unrecorded debit memoranda from bank statement Adjusted cash balance Deduct: Outstanding checks Adjusted cash balance Periodic FRAUD, INTERNAL CONTROL, AND CASH (Chapter 7) Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls ACCOUNTING CYCLE (Chapter 4) Prepare an adjusted trial balance Perpetual Note: Errors should be offset (added or deducted) on the side that made the error Adjusting journal entries should only be made for items affecting books STOP AND CHECK: Does the adjusted cash balance in the Cash account equal the reconciled balance? RAPID REVIEW Chapter Content RECEIVABLES (Chapter 8) STATEMENT OF CASH FLOWS (Chapter 12) Two Methods to Account for Uncollectible Accounts Cash flows from operating activities (indirect method) Net income Add: Amortization and depreciation Losses on disposals of assets Decreases in current assets Increases in current liabilities Deduct: Increases in current assets Decreases in current liabilities Gains on disposals of assets Cash provided (used) by operating activities Direct write-off method Record bad debt expense when the company determines a particular account to be uncollectible Allowance method At the end of each period, estimate the amount of uncollectible receivables Debit Bad Debt Expense and credit Allowance for Doubtful Accounts in an amount that results in a balance in the allowance account equal to the estimate of uncollectibles As specific accounts become uncollectible, debit Allowance for Doubtful Accounts and credit Accounts Receivable Steps to Manage Accounts Receivable Determine to whom to extend credit Establish a payment period Monitor collections Evaluate the receivables balance Accelerate cash receipts from receivables when necessary Cash flows from operating activities (direct method) Cash receipts (Examples: from sales of goods and services to customers, from receipts of interest and dividends) $X Cash payments (Examples: to suppliers, for operating expenses, for interest, for taxes) (X) Cash provided (used) by operating activities $X Discontinued operations Income statement (presented separately after “Income from continuing operations”) Cost Ϫ Salvage value ᎏᎏᎏ Useful life (in years) Extraordinary items Income statement (presented separately after “Discontinued operations”) Book value at beginning of year ϫ Declining balance rate* *Declining-balance rate ϭ Ϭ Useful life (in years) Changes in accounting principle In most instances, use the new method in current period and restate previous years’ results using new method For changes in depreciation and amortization methods, use the new method in the current period, but not restate previous periods Computation of Annual Depreciation Expense *Declining-balance Depreciable cost ᎏᎏᎏ ϫ Units of activity during year Useful life (in units) *Units-of-activity $X FINANCIAL STATEMENT ANALYSIS (Chapter 13) PLANT ASSETS (Chapter 9) Straight-line $X X X X (X) (X) (X) Note: If depreciation is calculated for partial periods, the straight-line and decliningbalance methods must be adjusted for the relevant proportion of the year Multiply the annual depreciation expense by the number of months expired in the year divided by 12 months BONDS (Chapter 10) Premium Market interest rate Ͻ Contractual interest rate Face Value Market interest rate ϭ Contractual interest rate Discount Market interest rate Ͼ Contractual interest rate Computation of Annual Bond Interest Expense Interest expense ϭ Interest paid (payable) ϩ Amortization of discount (OR Ϫ Amortization of premium) Income Statement and Comprehensive Income Sales Cost of goods sold Gross profit Operating expenses Income from operations Other revenues (expenses) and gains (losses) Income before income taxes Income tax expense Income before irregular items Irregular items (net of tax) Net income Other comprehensive income items (net of tax) Comprehensive income $ XX XX XX XX XX XX XX XX XX XX XX XX $ XX INVESTMENTS (Appendix E) *Straight-line amortization Bond discount (premium) ᎏᎏᎏᎏ Number of interest periods *Effective-interest amortization (preferred method) Bond interest expense Bond interest paid Carrying value of bonds at beginning of period ϫ Effective-interest rate Face amount of bonds ϫ Contractual interest rate Comparison of Long-Term Bond Investment and Liability Journal Entries Event Investor Investee Purchase / issue of bonds Debt Investments Cash Cash Bonds Payable Interest receipt / payment Cash Interest Revenue Interest Expense Cash STOCKHOLDERS’ EQUITY (Chapter 11) No-Par Value vs Par Value Stock Journal Entries Comparison of Cost and Equity Methods of Accounting for Long-Term Stock Investments No-Par Value Par Value Cash Common Stock Cash Common Stock (par value) Paid-in Capital in Excess of Par Value Comparison of Dividend Effects Cash Common Stock Retained Earnings Cash dividend ↓ No effect ↓ Stock dividend No effect ↑ ↓ Stock split No effect No effect No effect *Items with asterisk are covered in appendix Event Cost Equity Acquisition Stock Investments Cash Stock Investments Cash Investee reports earnings No entry Stock Investments Investment Revenue Investee pays dividends Cash Dividend Revenue Cash Stock Investments RAPID REVIEW Financial Statements Order of Preparation Retained Earnings Statement Date Income statement For the period ended Retained earnings statement For the period ended Balance sheet As of the end of the period Statement of cash flows For the period ended Name of Company Retained Earnings Statement For the Period Ended Retained earnings, beginning of period Add: Net income (or deduct net loss) $X X X X $X Deduct: Dividends Retained earnings, end of period Income Statement (perpetual inventory system) STOP AND CHECK: Net income (loss) presented on the retained earnings statement must equal the net income (loss) presented on the income statement Name of Company Income Statement For the Period Ended Sales revenues Sales Less: Sales returns and allowances Sales discounts Net sales Cost of goods sold Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other revenues and gains (Examples: interest, gains) Other expenses and losses (Examples: interest, losses) Income before income taxes Income tax expense Net income Balance Sheet Name of Company Balance Sheet As of the End of the Period $X X X $X X X X X X X X X X $X Income Statement (periodic inventory system) Name of Company Income Statement For the Period Ended Sales revenues Sales Less: Sales returns and allowances Sales discounts Net sales Cost of goods sold Beginning inventory Purchases $X Less: Purchase returns and allowances X Net purchases X Add: Freight in X Cost of goods purchased Cost of goods available for sale Less: Ending inventory Cost of goods sold Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other revenues and gains (Examples: interest, gains) Other expenses and losses (Examples: interest, losses) Income before income taxes Income tax expense Net income $X X X $X X Assets Current assets (Examples: cash, short-term investments, accounts receivable, inventory, prepaids) Long-term investments (Examples: investments in bonds, investments in stocks) Property, plant, and equipment Land Buildings and equipment $X Less: Accumulated depreciation X Intangible assets Total assets X $X X X X $X Liabilities and Stockholders’ Equity Liabilities Current liabilities (Examples: notes payable, accounts payable, accruals, unearned revenues, current portion of notes payable) Long-term liabilities (Examples: notes payable, bonds payable) Total liabilities Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $X X X X X $X STOP AND CHECK: Total assets on the balance sheet must equal total liabilities plus stockholders’ equity; and, ending retained earnings on the balance sheet must equal ending retained earnings on the retained earnings statement Statement of Cash Flows X X X Name of Company Statement of Cash Flows For the Period Ended X X X X X X $X X X X $X Cash flows from operating activities Note: May be prepared using the direct or indirect method Cash provided (used) by operating activities Cash flows from investing activities (Examples: purchase / sale of long-term assets) Cash provided (used) by investing activities Cash flows from financing activities (Examples: issue / repayment of long-term liabilities, issue of stock, payment of dividends) Cash provided (used) by financing activities Net increase (decrease) in cash Cash, beginning of the period Cash, end of the period $X X X X X $X STOP AND CHECK: Cash, end of the period, on the statement of cash flows must equal cash presented on the balance sheet RAPID REVIEW Tools for Analysis Liquidity Working capital Current assets – Current liabilities p 58 Current assets Current liabilities p 59 Cash provided by operations Average current liabilities p 645 Inventory turnover Cost of goods sold Average inventory p 300 Days in inventory 365 days Inventory turnover p 300 Net credit sales Average net accounts receivable p 416 365 days Accounts receivable turnover p 416 Debt to assets ratio Total liabilities Total assets p 60 Cash debt coverage Net cash provided by operating activities Average total liabilities p 646 Times interest earned Net income + Interest expense + Tax expense Interest expense p 525 Free cash flow Net cash provided by Cash Capital – ᎏᎏ – ᎏᎏ operating activities expenditures dividends p 61 Current ratio Current cash debt coverage Accounts receivable turnover Average collection period Solvency Profitability Earnings per share Net income – Preferred dividends Average common shares outstanding p 55 Price-earnings ratio Stock price per share Earnings per share p 707 Gross profit rate Gross profit Net sales p 248 Profit margin Net income Net sales p 250 Return on assets Net income Average total assets p 464 Asset turnover Net sales Average total assets p 465 Cash dividends declared on common stock Net income p 594 Net income – Preferred dividends Average common stockholders’ equity p 595 Payout ratio Return on common stockholders’ equity Do Real Accounting, Get Real Results WileyPLUS is a research-based, online environment for effective teaching and learning www.wiley.com/college/kimmel Cover Design: Maureen Eide Cover Photograph: © Joseph C Dovala/Age Fotostock ... The Accounting Information System 100 Knowing the Numbers Forms of Business Organization Users and Uses of Financial Information Internal Users External Users Ethics in Financial Reporting Business. .. exercises xxiv TOOLS FOR DECISION- MAKING ! As an employee, manager, or even a director of your own personal finances, you will make better decisions by learning how to analyze and solve business problems... using tools provided throughout each chapter The Decision Toolkit and the Decision Toolkit Summary direct you to the tools and information you need when evaluating business issues Using the Decision