Financial accounting by walter t harrison jr , charles t horngren c william (bill) thomas 9th edition

Financial accounting by walter t harrison jr , charles t horngren c william (bill) thomas 9th edition Financial accounting by walter t harrison jr , charles t horngren c william (bill) thomas 9th edition Financial accounting by walter t harrison jr , charles t horngren c william (bill) thomas 9th edition Financial accounting by walter t harrison jr , charles t horngren c william (bill) thomas 9th edition Financial accounting by walter t harrison jr , charles t horngren c william (bill) thomas 9th edition

Financial Accounting Ninth Edition This page intentionally left blank Financial Accounting Ninth Edition Walter T Harrison Jr Baylor University Charles T Horngren Stanford University C William (Bill) Thomas Baylor University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo VP/Editorial Director: Sally Yagan Editor in Chief: Donna Battista Acquisitions Editor: Lacey Vitetta Director of Editorial Services: Ashley Santora Senior Editorial Project Manager: Karen Kirincich Editorial Assistant: Jane Avery Editorial Assistant: Lauren Zanedis Director of Marketing: Maggie Moylan Leen Marketing Assistant: Ian Gold Marketing Assistant: Kimberly Lovato Senior Managing Editor: Nancy Fenton Senior Production Project Manager: Roberta Sherman Manufacturing Buyer: Carol Melville Art Director: Anthony Gemmellaro Text Designer: Anthony Gemmellaro Cover Designer: Anthony Gemmellaro Photo Researcher: Bill Smith Group Cover Art: © Fotolia Lead Media Project Manager: Sarah Peterson Media Production Project Manager: John Cassar Supplements Project Manager: Vonda Keator Composition: GEX Publishing Services Full-Service Project Management: GEX Publishing Services Printer/Binder: Courier Kendallville Cover Printer: Lehigh-Phoenix Color/Hagerstown Typeface: Adobe Jensen Pro 10/12 Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text All real company data presented in chapters 1–13 has been based on the most recent information reported by each company Copyright © 2013, 2010, 2008, 2006 by Pearson Education, Inc All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Harrison, Walter T Financial accounting / Walter T Harrison Jr., Charles T Horngren, C William (Bill) Thomas — 9th ed p cm Includes index ISBN 978-0-13-275112-4 (casebound) Accounting I Horngren, Charles T II Thomas, C William III Title HF5636.H37 2013 657 dc23 2011046912 10 www.pearsonhighered.com ISBN 10: 0-13-275112-7 ISBN 13: 978-0-13-275112-4 In memory of Charles T Horngren 1926–2011 Whose vast contributions to the teaching and learning of accounting impacted and will continue to impact generations of accounting students and professionals This page intentionally left blank For our wives, Nancy, Joan, and Mary Ann This page intentionally left blank BRIEF CONTENTS Visual Walk-Through 10 11 xviii The Financial Statements Transaction Analysis 59 Accrual Accounting & Income Internal Control & Cash 135 230 Short-Term Investments & Receivables Inventory & Cost of Goods Sold 283 337 Plant Assets, Natural Resources, & Intangibles 400 Long-Term Investments & the Time Value of Money Liabilities 463 517 Stockholders’ Equity 581 The Income Statement, the Statement of Comprehensive Income, & the Statement of Stockholders’ Equity 12 13 650 The Statement of Cash Flows 697 Financial Statement Analysis 771 Appendix A: Amazon.com 2010 Annual Report Appendix B: RadioShack 2010 Annual Report 847 873 Appendix C: Typical Charts of Accounts for Different Types of Businesses 891 Appendix D: Summary of Generally Accepted Accounting Principles (GAAP) 893 Appendix E: Summary of Differences Between U.S GAAP and IFRS Cross Referenced to Chapter Company Index Glindex 905 899 895 Glindex Cooking the books, 233 See also Fraud; Sarbanes-Oxley Act (SOX) capitalizing plant assets, 405–406 through depreciation, 417–418 EPIC Products example, 230–232 with inventory, 360–361 with investments and debt, 478 with liabilities, 526 with revenue, 653 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, 425 Corporate income statement, 651 See also Income statement Corporate income taxes, 656–658 Corporate taxation, 583–584 Corporation A business owned by stockholders A corporation is a legal entity, an “artificial person” in the eyes of the law, 5–6 features of, 583 organizing, 584 Cost of disclosure, Cost of goods sold Cost of the inventory the business has sold to customers, 339, 348, 653–654 Cost of inventory, 345 Cost per unit of inventory, 341–342 Cost of plant assets, 407 See also Plant assets Cost-of-goods-sold (COGS) model Formula that brings together all the inventory data for the entire accounting period: Beginning inventory + Purchases = Goods available Then, Goods available – Ending inventory = Cost of goods sold, 357 Credit The right side of an account, 73 Credit balance, 529 Credit card numbers, stolen, 240 Credit card sales, 304–305 Credit sales, 203, 292 Creditor The party to whom money is owed, 4, 11, 301 Cumulative preferred stock Preferred stock whose owners must receive all dividends in arrears before the corporation can pay dividends to the common stockholders, 603 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, 17–18, 163, 705–706 changes in account, 705–706 Current installment See Current portion of long-term debt 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, 19, 164, 518–524 ability to pay, 785–786 changes in account, 705–706 contingent, 523–524 of known amount, 518–523 Current maturity See Current portion of long-term debt Current portion of long-term debt The amount of the principal that is payable within one year, 19, 523, 547 909 Current ratio Current assets divided by current liabilities Measures a company’s ability to pay current liabilities with current assets, 166, 786 analyzing a company using, 171 and liquidity, 166 D Days payable outstanding (DPO) Accounts payable turnover expressed in days (365/turnover), 519 Days’ sales in receivables Ratio of average net accounts receivable to one sales remain in Accounts Receivable awaiting collection Also called the collection period and days sales outstanding, 306, 790 Debentures Unsecured bonds—bonds backed only by the good faith of the borrower, 529 Debit The left side of an account, 73 Debit and credit, rules of, 73–74 Debit balance, 529 Debit cards, 255 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, 344 Debt excessive, 799 long-term, 12, 19, 523, 548 Debt ratio Ratio of total liabilities to total assets States the proportion of a company’s assets that is financed with debt, 167, 791 analyzing a company using, 166–171 and liquidity, 167 Debtor The party who owes money, 301 Decision guidelines accounting for inventory, 361–362 use of cash flow and related information, 727 debt ratios, 576–577 evaluating debt-paying ability, 170–171 financing with debt or stock, 542 framework for making ethical judgments, 26 inventory methods, 391 investing in stock, 611 investment analysis, 668–669 investment decisions, 514–515 long-term investments, 479 measuring results of operations and financial position, 88 plant assets and related expenses, 431–432 quality of earnings, 694 raising capital, 645–646 using ratios, 800–802 Default, 529 Deferral An adjustment for which the business paid or received cash in advance Examples include prepaid rent, prepaid insurance, and supplies, 141 Deferred revenues See Unearned revenues Deferred tax liability, 658 910 Glindex Deficit Negative balance in retained earnings caused by net losses over a period of years Debit balance in the Retained Earnings account, 16, 600 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, 423 on statement of cash flows, 703, 719 Deposit tickets, 242 Deposits in transit A deposit recorded by the company but not yet by its bank, 244 Depreciable cost The cost of a plant asset minus its estimated residual value, 435 See also Depreciation Depreciation Allocation of the cost of a plant asset to expense over its useful life, 8, 18–19, 141–142 accelerated methods, 410–411 accumulated, 18–19, 145–146 change in accounting estimate, 416–417 changing useful life of assets, 416–417 comparing methods of, 411–412 double-declining-balance (DDB) method, 410–411 for partial years, 416 modified accelerated cost recovery system (MACRS), 415–416 of plant assets, 144–146, 406–412 on statement of cash flows, 703, 717 straight-line method (SL), 408–409 for tax purposes, 415–416 units-of-production method (UOP), 409–410 Detailed income statement, and inventory, 355 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, to employees, for interest and income taxes), 701, 716–725 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 UncollectibleAccount Expense and credits the customer’s Account Receivable, 300 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, reliable, and comparable information about its economic affairs, 353 Discontinued operations, 659–660 Discount (on a bond) Excess of a bond’s face (par) value over its issue price, 529 Dividend Distribution (usually cash) by a corporation to its stockholders, 12, 599–604, 609 See also Dividend yield cash as, 600–601 computing, 710–711 declaration of cash dividends, 666 as owners’ equity, 12–13 payment of, 17, 720 on preferred stock, 602–603 receiving dividends under the equity method, 473–474 as temporary accounts, 162 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, 797 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, 584 Double-declining-balance (DDB) method An accelerated depreciation method that computes annual depreciation by multiplying the asset’s decreasing book value by a constant percentage, which is two times the straight-line rate, 410–411 Doubtful-account expense Another name for uncollectibleaccount expense, 294 DuPont analysis A detailed approach to measuring rate of return on equity (ROE), calculated as follows: Net profit margin (net income before taxes/net sales) ϫ total asset turnover (net sales/average total assets) ϫ leverage ratio (average total assets/average stockholders’ equity) The first two components of the model comprise return on assets (ROA), 428–429, 607, 793 E Earnings, 654 See also Operating income; Retained earnings persistent, 651 Earnings per share (EPS) Amount of a company’s net income earned for each share of its outstanding common stock, 541, 661, 796 Earnings problems, 799 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, 651 expense recognition and, 651 gross margin/sales ratio, 651, 653–654 high operating earnings, 651, 654 low operating expenses, 651, 654 revenue recognition and, 651–652 E-commerce risks of, 240–241 security measures for, 241 Glindex 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, 798–799 Efficient capital market A capital market in which market prices fully reflect all information available to the public, 800 Electronic funds transfer (EFT) System that transfers cash by electronic communication rather than by paper documents, 243 payments by, 253 Employee compensation, 146–148, 521 treasury stock for, 598–599 Employee income tax payable, 521 Employer payroll tax, 521 Encryption Mathematical rearranging of data within an electronic file to prevent unauthorized access to information, 241 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, 8, 20, 30 Entity assumption, Equipment, cost of, 18, 61, 403 Equity method The method used to account for investments in which the investor has 20–50% of the investee’s voting stock and can significantly influence the decisions of the investee, 472–474 Equity multiplier Another name for leverage ratio, 543 Equity transactions, reporting, 609 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, 407 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, 407 Estimated warranty payable, 523 Ethical issues, 280, 334–335 See also Ethics accounting for inventory, 391 in accrual accounting, 140 Business Ethics Leadership Alliance (BELA), 26 capitalization of leases, 546 classification of investments, 842 contingent liabilities, 577–578 and the current ratio, 287–288 ethical decision making, 24–26, 118–119 Ethisphere Institute, 26 financial statements, 695, 768 franchise purchase, 647 and fraud, 234–235 global, 25 global recession, 648–649 and internal control, 280 lease agreements, 578 legal factors, 25–26 paying dividends, 515 reclassifying investments, 842 reclassifying long-term receivables, 768 911 reporting results of operations, 695 stock issuance other than cash, 592–593 stock value, 647 tax deductions, 461 treasury stock purchase, 647 uncollectible-account expense, 335 unfair trade practices, 577–578 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, 25 See also Ethical issues Excel, Microsoft, calculating present value with, 489–490 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, 238 Exchange, mediums of, Exchange rates, of foreign currencies, 481–482, 655 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, 139–140 Expenses Decrease in retained earnings that results from operations; the cost of doing business; opposite of revenues, 12, 75 accrued, 19, 62, 146–148, 521 administrative, 16 as component of retained earnings, 12–13 cost of products sold, 16 current liabilities, 526 distinguishing from capital expenditures, 405 general, 16 on income statement, 15–16 income tax expense, 16, 656–658 net interest expense, 16 prepaid, 142–144 salary, 146–148, 521, 717, 725 selling, 16 as temporary accounts, 162 Extraordinary gains and losses Also called extraordinary items, these gains and losses are both unusual for the company and infrequent, 660 Extraordinary items An extraordinary gain or loss, 660 F Face value, of bonds, 528, 530 Factoring receivables, 305 Fair value The amount that a business could sell an asset for, or the amount that a business could pay to settle a liability The amount that a seller would receive on the sale of an investment to a willing purchaser on a given date Securities and availablefor-sale securities are valued at fair market values on the 912 Glindex balance sheet date The asset’s estimated market value at a particular date Other assets may be recorded at fair market value on occasion, 9–10, 426, 468 fair value adjustment, 469–471 of investments, 490 of long-term debt, 548 FICA tax payable, 521 Fidelity bond An insurance policy taken out on employees who handle cash, 240 Financial accounting The branch of accounting that provides information to people outside the firm, Financial Accounting Standards Board (FASB), 6, 9–10, 29 and the direct method, 716 and revenue recognition, 653 Financial statements Business documents that report financial information about a business entity to decision makers, from adjusted trial balance, 154–155 analysis, red flags in, 799–800 elements of, 11–21 evaluating business operations through, 14–21 formats for, 164 production of, relationships between, 22 standards for, 9–10 and transactions, 68–70 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, 20, 701, 708–711 cash flows from, 708, 720, 725 noncash, 711–712, 720 Firewall An electronic barrier, usually provided by passwords, around computerized data files to protect local area networks of computers from unauthorized access, 241 First-in, first-out (FIFO) cost (method) 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, 347 effect on cost of goods sold, 348–349 effect on gross profit, 348–349 Fiscal year, 14–15, 138 FOB Acronym for “free on board”; used in quoting shipping terms See also shipping terms, 289–290, 342 Foreign subsidiaries, consolidation of, 481 Foreign-currency exchange rate The measure of one country’s currency against another country’s currency, 481–482, 655 Foreign-currency gains and losses accounting for, 654–655 reporting, 656 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, 482 Franchises and Licenses Privileges granted by a private business or a government to sell a product or service in accordance with specified conditions, 425 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, 233 See also Cooking the books; Ethical issues and ethics, 234–235 impact of, 233 and inventory, 360 types of, 233 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, 234 Fraudulent financial reporting Fraud perpetrated by management by preparing misleading financial statements, 233 Free cash flow The amount of cash available from operations after paying for planned investments in plant assets, 726 Fully depreciated assets, 418–419 Future benefits, 18 Future profits, predicting, 658–659 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, 484–486 Futures contracts, 656 G Generally accepted accounting principles (GAAP) Accounting guidelines, formulated by the Financial Accounting Standards Board, that govern how accounting is practiced, 6–7, 9–10, 31 and accrual accounting, 137, 780 accounting for research and development, 427–428 capitalization of leases, 546 and depreciation, 412 differences with IFRS, 422–423, Appendix E and extraordinary items, 660 and fair value adjustment, 469–471 vs International Financial Reporting Standards, 9–10 and inventory, 353–355 reported carrying values of plant assets, 422–423 reporting standards, 9–11 and revenue recognition, 138, 289 and stock dividends, 603 Global markets, See also International Financial Reporting Standards capitalization of leases, 546 extraordinary items, 660 impairments, 427–428 LIFO vs FIFO, 350, 354, 422 loss contingencies, 525 revenue recognition in, 138, 653 Going out of business, Going-concern assumption Holds that the entity will remain in operation for the foreseeable future, Goodwill Excess of the cost of an acquired company over the sum of the market values of its net assets (assets minus liabilities), 425–426, 477 Glindex Government regulations, 584 Gross margin Another name for gross profit, 341, 792 Gross margin method Another name for the gross profit method, 358 Gross margin percentage Another name for the gross profit percentage, 355 Gross profit Sales revenue minus cost of goods sold Also called gross margin, 339, 341, 348, 654 and inventory turnover, 355–357 Gross profit method A way to estimate inventory based on a rearrangement of the cost-of-goods-sold model: Beginning inventory + Net purchases = Goods available – Cost of goods sold = Ending inventory, 358–359 Gross profit percentage Gross profit divided by net sales revenue Also called the gross margin percentage, 355–356 H Hedging To protect oneself from losing money in one transaction by engaging in a counterbalancing transaction, 656 Held-to-maturity investments Bonds and notes that an investor intends to hold until maturity, 466–468 Hiring practices, smart, 238 Historical cost principle Principle that states that assets and services should be recorded at their actual cost, 8–9 Horizontal analysis Study of percentage changes in comparative financial statements, 774–775 I Impairment The condition that exists when the carrying amount of a long-lived asset exceeds the amount of the estimated 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, 426–428 Import/Export ratio, 482 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, 255 Income of a consolidated entity, 477 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, 14 corporate, 651 defined, formats, 164 and inventory, 355 as a measure of operating performance, 14–16 multi-step, 164 documents, 22–23 single-step, 164 Income-statement defect, 137 913 Income taxes, 19 corporate, 656–658 expense of, 657, 719 income tax payable, 657 Incorporators, 584 Indirect method Format of the operating activities section of the statement of cash flows; starts with net income and reconciles to cash flows from operating activities, 701–703 Individuals, as users of accounting information, Inflation, Information technology, 237 and internal control, 239–240 Inside information, 800 Intangible assets An asset with no physical form—a special right to current and expected future benefits, 19, 401–402 accounting for, 424–426 franchises and licenses, 425 and GAAP, 423–424 goodwill, 425–426 patents, 424–425 research and development, 426 trademarks and trade names, 425 Interest The borrower’s cost of renting money from a lender Interest is revenue for the lender and expense for the borrower, 301 See also Interest expense; Market interest rate on bonds, 528–529 partial-period, 535–536 stated rate, 529 Interest-coverage ratio Another name for the times-interest-earned ratio, 544 Interest expense, 527, 656 See also Interest on bonds, 532–535 measuring, 539 payments for, 719 Interest income, 656 Interest rate, of bonds, 528–529 Interest revenue, on checking account, 245 Internal control Organizational plan and related measures adopted by an entity to safeguard assets, encourage adherence to company policies, promote operational efficiency, and ensure accurate and reliable accounting records, 235 and banking, 242 over cash collections on account, 252–255, 291–292 control environment, 236 and e-commerce, 240–241 information system, 237, 239–240 limitations of, 241–242 monitoring of controls, 237 objectives of, 235 payment by check or EFT, 253 procedures, 237–239 over purchase and payment, 253–254 risk assessment, 237 safeguard controls, 240 International Accounting Standards Board (IASB), 6, and revenue recognition, 653 914 Glindex International Financial Reporting Standards (IFRS) Accounting guidelines, formulated by the International Accounting Standards Board (IASB) By 2015, U.S GAAP is expected to be harmonized with IFRS At that time, U.S companies are expected to adopt these principles for their financial statements, so that they can be compared with those of companies from other countries, 9, 31, Appendix E accounting for research and development, 427–428 capitalization of leases, 546 compared to GAAP, 9–11, 422–423, Appendix E definition of “market”, 354 disallowance of LIFO, 350 and extraordinary items, 660 and globalization, 11 purpose of, 9–10 reported carrying values of plant assets, 422–423 and revenue recognition, 138 Inventory The merchandise that a company sells to customers, 339 See also Periodic inventory system; Perpetual inventory system accounting for, 339, 342–344, 361–362 buildup of, 800 cost of, 341–342, 345 and the detailed income statement, 355 effects of errors, 359–360 ending, 348 estimating, 358–359 number of units on hand, 342 periodic system, 342, 393–394 trends in, 800 Inventory costing methods See also Average cost method; Firstin, first-out (FIFO) cost (method);Last-in, first-out (LIFO) cost (method); Specific-unit-cost method comparison of, 344–349 Inventory turnover Ratio of cost of goods sold to average inventory Indicates how rapidly inventory is sold, 356–357, 788 and gross profit, 355–357 Investing activities Activities that increase or decrease the long-term assets available to the business; a section of the statement of cash flows, 20, 701, 707 cash flows from, 719–720, 725 cash receivables, 305 long-term, 19 noncash, 711–712, 720 reporting, 483–484 short-term, 17 Investment capitalization rate An earnings rate used to estimate the value of an investment in stock, 658 Investment decisions based on stock, 796–798 other factors, 798–800 use of horizontal analysis for, 773–774 Investments, 465 See also Long-term investments; Short-term investments in affiliated companies, 472 in debt securities, 466–469 equity-method, 472–474 purchases and sales of, 708 reporting on balance sheet, 465 reporting on statement of cash flows, 483–484 selling, 471 Investors, 4, growth investors, 798 value investors, 798 Investor’s percentage of investee income, 472 Issued stock Number of shares a corporation has issued to its stockholders, 595 J Job rotation, 240 Journal The chronological accounting record of an entity’s transactions, 76 Journalizing process, 76, 138, 247 L Land cost of, 61, 402–40 improvements to, 403 Lapping A fraudulent scheme to steal cash through misappropriating certain customer payments and posting payments from other customers to the affected accounts to cover it up Lapping is caused by weak internal controls (i.e., not segregating the duties of cash handling and accounts receivable bookkeeping, allowing the bookkeeper improper access to cash, and not appropriately monitoring the activities of those who handle cash), 231–232 Last-in, first-out (LIFO) cost (method) 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, 10, 347–348 converting to FIFO, 398–399 disallowance under IFRS, 350–351 effect on cost of goods sold, 348–349 effect on gross profit, 348–349 LIFO liquidation, 350 and managing reported income, 350 tax advantage of, 349–350 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, 544 Leasehold improvements, 403 Ledger The book of accounts and their balances, 77 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, 587 Legal requirements, and internal control, 235 Lessee Tenant in a lease agreement, 544 Lessor Property owner in a lease agreement, 544 Glindex 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, 541, 794 measuring, 791–796 Leverage (equity multiplier) ratio Ratio of average total assets to average common stockholders’ equity Measures the proportion of average total assets actually owned by the stockholders The ratio of total assets ÷ total stockholders’ equity, showing the proportion of total stockholders’ equity to total assets 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, 543, 794–795 Liability An economic obligation (a debt) payable to an individual or an organization outside the business, 11 Liabilities accounting for, 518 accounts payable, 19, 61 accrued expenses, 19, 62, 146–148, 521 accrued liabilities, 62, 146–148, 521 classifying by liquidity, 162 contingent, 524–525 current, 19, 164, 518–524 current, liquidity of, 163 current accounts, 705–706 defined, 11–12, 61 income taxes payable, 19, 657 liabilities accounts, 61–62 long-term, 544–547 long-term, liquidity of, 163 long-term debt, 19 notes payable, 62 postretirement, 546–547 reporting, 164, 525, 547–548 summary of current, 526 understating, 526 unearned revenue, 149–150 Limited access, and internal control, 239 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, 583 Limited liability company (LLC) A business organization in which the business (not the owner) is liable for the company’s debts, Liquidation, 138, 585 Liquidation value The amount a corporation must pay a preferred stockholder in the event the company liquidates and goes out of business, 606 Liquidity Measure of how quickly an item can be converted to cash, 162 evaluating, 306 Loans, to other companies, 719 915 Lock-box system A system of handling cash receipts by mail whereby customers remit payment directly to the bank, rather than through the entity’s mail system, 231–232 Long-lived asset transactions, 430–431 Long-term asset An asset that is not a current asset, 164 and investing activities, 701 Long-term debt A liability that falls due beyond one year from the date of the financial statements, 12, 19, 523 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, 465–466, 468–469 accounting methods for, 479–481 Long-term liability A liability that is not a current liability, 164 See also Liabilities, long-term and Financing activities, 701 Long-term tangible fixed assets See Plant assets Loss contingencies, international accounting standard, 525 Losses, 286 Loss-prevention specialists, 240 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), 353 Lowest taxable income, 349 Lump-sum purchases of assets, 403–404 M Majority interest See Controlling interest Management, responsibility of, 666 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, 357–358 Managing reported income, 350 Market interest rate Interest rate that investors demand for loaning their money Also called effective interest rate, 529 Market price See Market value Market value (of a stock) Price for which a person could buy or sell a share of stock, 606 Marketable securities Another name for short-term investments, 284 Maturity The date on which a debt instrument must be paid, 291 Maturity date The date on which the debtor must pay the note, 301, 528 Maturity value The sum of principal and interest on the note, 301, 528 Merchandise inventory See Inventory Microsoft Excel, calculating present value with, 489–490 Minority interest, 477 Misappropriation of assets Fraud committed by employees by stealing assets from the company, 233 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 916 Glindex depreciation is computed by the double-declining-balance method, the 150%- declining-balance method, or, for most real estate, the straight-line method, 415 Monitoring of controls, 237 Mortgage bonds, 529 Motive for fraud, 234 Multi-step income statement An income statement that contains subtotals to highlight important relationships between revenues and expenses, 164 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, 402 accounting for, 423–424 and GAAP, 423–424 Net earnings Another name for net income, 12 See also Net income; Net profit Net income Excess of total revenues over total expenses Also called net earnings or net profit, 12 analysis of, 662 and dividends, 12 on an income statement, 13–16 need for profit, 700 from operations, 651 reporting, 665 and retained earnings, 17 Net loss Excess of total expenses over total revenues, 12 and retained earnings, 17 on an income statement, 13–16 Net profit Another name for net income, 12, 607 See also Net earnings; Net income Net profit margin Computed by the formula net income/net sales This ratio measures the portion of each net sales dollar generated in net profit, 429 Net profit margin on sales See Rate of return on sales Net sales, 15, 651 See also Revenue recognition Net working capital A measure of liquidity; Current assets – current liabilities, 166, 785–786 analyzing a company using, 171 Noncash investing and financing activities, 711–712, 720 Noncontrolling (minority) interest A subsidiary company’s equity that is held by stockholders other than the parent company (i.e., less than 50%), 477 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, 245 Notes payable, 527–528, 720 Notes receivable, accounting for, 301–304 Number of units of inventory, 342 O Obsolescence, 407 Online banking, 248 Operating activities Activities that create revenue or expense in the entity’s major line of business; a section of the statement of cash flows Operating activities affect the income statement, 20, 700–701, 703–706 cash flows from, 703–706, 717–718 cash receivables, 305 direct method, 701, 716–725 indirect method, 701–703 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, 238 See also Budget and internal control, 238 Operating cycle Time span during which cash is paid for goods and services that are sold to customers who pay the business in cash, 163 Operating expenses, 654 Operating income, 654 See also Earnings operating income (profit) percentage, 793 Operating lease A lease in which the lessee does not assume the risks or rewards of asset ownership, 544–546 Operational efficiency, and internal control, 235 Opportunity for fraud, 234 Outsider claims, 11 Outstanding checks A check issued by the company and recorded on its books but not yet paid by its bank, 245 Outstanding stock Stock in the hands of stockholders, 586, 595, 661 Overfunded benefit plan, 547 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 and financing activities, 701 paid-in capital, 11 of proprietorships and partnerships, 13 retained earnings, 11 P Paid-in capital The amount of stockholders’ equity that stockholders have contributed to the corporation Also called contributed capital, 12, 585 Par value Arbitrary amount assigned by a company to a share of its stock, 528, 587 issuing bonds at, 530 Parent company An investor company that owns more than 50% of the voting stock of a subsidiary company, 475 Partnership An association of two or more persons who co-own a business for profit, owners’ equity in, 13 Partial years, depreciation for, 416 Partial-period interest amounts, 535 Glindex Password A special set of characters that must be provided by the user of computerized program or data files to prevent unauthorized access to those files, 240 Patent A federal government grant giving the holder the exclusive right for 20 years to produce and sell an invention, 424–425 Payments, to suppliers, 717, 723 Payroll Employee compensation, a major expense of many businesses, 521 Payroll liabilities, 146–148, 521 Pension Employee compensation that will be received during retirement, 546–547 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, 295–296, 299–300 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, 342, 393 Permanent accounts Asset, liability, and stockholders’ equity accounts that are not closed at the end of the period, 162 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, 342–344 Petty cash Fund containing a small amount of cash that is used to pay minor amounts, 254–255 Phishing Creating bogus Web sites for the purpose of stealing unauthorized data, such as names, addresses, social security numbers, bank account, and credit card numbers, 241 Physical wear and tear, 407 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, 144, 401–402 accounting for, 414 analyzing transactions, 421–422 book value of, 146 buildings, machinery, and equipment, 18, 61, 403 cash flow impact, 430–431 cost of, 407 depreciation of, 144–146, 406–412 depreciation for tax purposes, 414–416 disposing of for no proceeds, 419 effects of disposal of, 418–422 exchanging, 420–421 land, 61, 402–403 land improvements and leasehold improvements, 403 lump-sum purchases of assets, 403–404 purchases and sales of, 707, 719–720 selling, 419–420 Posting Copying amounts from the journal to the ledger, 77 Postretirement liabilities, 546–547 917 Preferred dividends, effect on earnings per share, 661 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, 586, 593 dividends on, 602–603, 661 redeemable, 606 Premium (on a bond) Excess of a bond’s issue price over its face (par) value, 529 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, 18, 142–143 prepaid rent, 142–143 supplies, 143 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, 485 of an annuity, 487–488 of available-for-sale investments, 490–491 calculating with Microsoft Excel, 489–490 of investments in bonds, 491–492 of money, 485–486 Present-value tables, 486–487 President Chief operating officer in charge of managing the day-to-day operations of a corporation, 584 Pretax accounting income Income before tax on the income statement, 657 Price/earnings 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, 796–797 Principal The amount borrowed by a debtor and lent by a creditor, 301–302, 528 Prior-period adjustment A correction to beginning balance of retained earnings for an error of an earlier period, 662 Profit margin See Gross margin Profitability, and stockholder investment, 607–608 Proper approvals, and internal control, 239 Property and equipment See Plant assets Proprietorship A business with a single owner, Public Company Accounting Oversight Board, 236 Purchase allowance A decrease in the cost of purchases because the seller has granted the buyer a subtraction (an allowance) from the amount owed, 344 Purchase discount A decrease in the cost of purchases earned by making an early payment to the vendor, 344 Purchase return A decrease in the cost of purchases because the buyer returned the goods to the seller, 344 Q Quality of earnings See Earnings quality Quick ratio Another name for the acid-test ratio, 306, 788 Quitting concern, 918 Glindex R Rate of return on assets (ROA) Net income 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 ϫ asset turnover), 794 Rate of return on common stockholders’ equity (ROE) Net income minus preferred dividends, divided by average common stockholders’ equity A measure of profitability Also called return on equity Also can be computed with DuPont analysis, 608, 795 Rate of return on net sales Ratio of net income to net sales A measure of profitability Also called return on sales, 793 Rate of return on total assets (ROA) Net income 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, 428–430, 607, 794 Ratio analysis, limitations of, 798 Rationalization for fraud, 234 Ratios See also Current ratio; Times-interest-earned ratio for business decisions, 784–785 days’ sales in receivables, 306–307 quick (acid-test), 306, 788 Realized gains and losses, 286–287 Receivables Monetary claims against a business or an individual, acquired mainly by selling goods or services and by lending money, 291 accounting for, 284, 293 cash flow from, 304–305 factoring, 305 inability to collect, 799 managing, 293 selling, 305 trends in, 800 types of, 291 Records, adequate, and internal control, 239 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, 606 Redemption value The price a corporation agrees to eventually pay for its redeemable preferred stock, set when the stock is issued, 606 Regulatory bodies, 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, 242 Rent, prepaid, 142–143 Report format A balance-sheet format that lists assets at the top, followed by liabilities and stockholders’ equity below, 164 Research and development, costs of, 426 Retained earnings The amount of stockholders’ equity that the corporation has earned through profitable operation of the business and has not given back to stockholders, 585, 599–600 correcting, 662 and net income, 16–17 as part of owners’ equity, 12–13, 20 Retirement of stock, 597–598 Return on assets (ROA) Also known as rate of return on assets or rate of return on total assets Measures how profitably management has used the assets that stockholders and creditors have provided the company, 428–430, 607, 794 Return on equity (ROE) Another name for rate of return on common stockholders’ equity, 608 Revenue principle The basis for recording revenues; tells accountants when to record revenue and the amount of revenue to record, 138–139, 651 Revenue recognition, 651–653 See also net sales Revenues Increase in retained earnings from delivering goods or services to customers or clients, 12 See also Unearned revenue accrued, 148–149 on the income statement, 15 as part of owners’ equity, 12–15, 75 as temporary accounts, 162 Revenues collected in advance See Unearned revenues Risk assessment, 237 Rules of debit and credit, 74–75 S Safeguard controls, 240 Salary expense, 146–148, 521, 717, 725 Salary payable, 521 Sale price, vs cost of inventory, 341–342 Sales, trends in, 800 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, 290 Sales return and allowance Merchandise returned for credit or refunds for services provided, 290–291 Sales tax payable, 520 Sarbanes-Oxley Act (SOX), 235–236, 406 Secured bonds, 529 Security measures, 241–242 Separation of duties, 238 Serial bonds Bonds that mature in installments over a period of time, 529 Service charges, on bank reconciliation, 245 Shareholders Persons or other entities that own stock in a corporation Also called stockholders, 6, 583 Shares, of stock, 585 See also Stock Glindex Shipping terms Terms provided by the seller of merchandise that dictate the date on which title transfers o 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, 289–290 Short-term investments Investments that a company plans to hold for one year or less Also called marketable securities, 284, 465 accounting for, 284–287 liquidity of, 284 reporting as assets, 286 Short-term notes payable Notes payable that are due within one year, 519–520 Signature cards, 242 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, 164 Smart hiring practices, 238 Specific intangibles, 424–425 Specific-unit-cost method Inventory cost method based on the specific cost of particular units of inventory, 345–346 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, Stated interest rate Interest rate that determines the amount of cash interest the borrower pays and the investor receives each year, 529 Stated value An arbitrary amount assigned to no-par stock; similar to par value, 587 Statement of income, 15 Statement of cash flows Reports cash receipts and cash payments classified according to the entity’s major activities: operating, investing, and financing, 20, 699 analyzing, 781–783 direct method, 701, 716–725 and equity transactions, 609–611 financing activities, 20–21 indirect method, 701–706 investing activities, 20–21 operating activities, 20–21 preparation and use, 698 purpose of, 699 relationship with other financial statements, 22–23 reporting financing activities, 548 reporting investments on, 483–484 reporting receivables on, 305 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 919 comprehensive income, such as gains/losses on available-forsale securities and foreign currency translation adjustments A statement of comprehensive income is required to be a part of all financial statements issued after December 15, 2011, 663 Statement of financial position Another name for the balance sheet, 17 Statement of operations Another name for the income statement, 14 Statement of retained earnings Summary of the changes in the earnings of a corporation during a specific period, 16–17 relationship with other financial statements, 22–23 Statement of stockholders’ equity Reports the changes in all categories of stockholders’ equity during the period, 664 Stock Shares into which the owners’ equity of a corporation is divided, 6, 585 accounting for issuance of, 587–588 analyzing as investment, 796–798 authorized shares of, 585, 595 book value of, 606, 797–798 capital, 585 common See Common stock dividends on, 599–604, 609 explanation of, 585 issuance of, 609, 709, 720 issued, 595 kinds of, 586–587 market value of, 606 no-par, 586–587 outstanding, 586, 595 par, 586–587 preferred See Preferred stock prices of, 465 retirement of, 597–598 shares of, 585 splits, 599, 604–605 treasury See Treasury stock Stock and bond prices, 465 Stock certificates, 585 Stock dividend A proportional distribution by a corporation of its own stock to its stockholders, 603 See also Dividend Stock split An increase in the number of authorized, issued, and outstanding shares of stock coupled with a proportionate reduction in the stock’s par value, 604 Stock values, use in decision making, 606–609 Stock-based compensation, 666 Stockholder A person who owns stock in a corporation Also called a shareholder, 6, 583 rights of, 584–585 Stockholders’ (Owners’) equity The stockholders’ ownership interest in the assets of a corporation, 20, 62, 585 See also Capital; Owners’ equity accounts, 62, 75–76 accounts, analyzing, 601–602, 605 common stock, 19, 62 components of, 19–20 920 Glindex defined, 11–12, 582–583 dividends, 12–13, 17, 62, 599–604 expenses, 62 paid-in capital, 20, 585 reporting, 610–611, 664–665 retained earnings, 62, 585 revenues, 62 Stockholders’ equity accounts common stock, 62 dividends, 62 expenses, 62, 75–76 retained earnings, 62 revenues, 62, 75–76 Stockholders’ rights dividends, 584 liquidation, 585 preemption, 585 voting, 584 Straight-line (SL) method Depreciation method in which an equal amount of depreciation expense is assigned to each year of asset use, 408–409 See also Depreciation Strong currency A currency whose exchange rate is rising relative to other nations’ currencies, 482 Subsidiary An investee company in which a parent company owns more than 50% of the voting stock, 475 Suppliers, 717 payments to, 717, 723 Supplies, as prepaid expense, 143 T T-accounts analyzing business transactions with, 73, 86–87 analyzing plant asset transactions with, 421–422 Taxable income The basis for computing the amount of tax to pay the government, 657 Taxation corporate, 583–584 double, 584 employee income tax payable, FICA tax payable, 521 income taxes, 16, 656–658 sales tax payable, 520 tax advantage of LIFO, 349–350 taxable income, 657 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 account is also temporary, 162 Term The length of time from inception to maturity, 301 Term bonds Bonds that all mature at the same time for a particular issue, 529 Time value of money, 484–486, 529 Time-period concept Ensures that accounting information is reported at regular intervals, 138 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, 544, 553, 792 Tombstones, 587 Total asset turnover A measure of efficiency in usage of total assets The ratio calculates how many times per year total assets are covered by net sales Formula: Net sales ÷ Average total assets Also known as asset turnover, 429, 607, 794 Trademark, Trade name A distinctive identification of a product or service Also called a brand name, 425 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, 541, 794–795 Trading securities Stock investments that are to be sold in the near future with the intent of generating profits on the sale, 285 Transaction Any event that has a financial impact on the business and can be measured reliably, 60–61 Transactions and the accounting equation, 63–67 analyzing with t-accounts, 86–87 asset transactions, 430–431 equity transactions, 609 and financial statements, 68–70 impact on accounts, 73–75 journalizing and posting, 76–77 and ratios, 167–169 treasury stock transactions, 665 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, 238 Treasury stock A corporation’s own stock that it has issued and later reacquired, 20, 596–597 for employee compensation, 598 purchase of, 709–710 resale of, 598 treasury stock transactions, 665 Trend percentages A form of horizontal analysis that indicates the direction a business is taking, 777 Trial balance A list of all the ledger accounts with their balances, 83 adjusted, 153–154 constructing and using, 83–84 Trojan Horse A malicious program that hides within legitimate programs and acts like a computer virus, 241 Turnover, measuring, 788–790 See also Accounts receivable turnover; Accounts payable turnover Glindex 921 U V U S Securities and Exchange Commission (SEC), 4, Uncollectible accounts, writing off, 298 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 baddebt expense, 294 Underfunded benefit plan, 547 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, 529, 587 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, 148–151, 522–523 on the balance sheet, 526 Unit of output, of plant assets, 409 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, 409–410 Unqualified (clean) opinion An audit opinion stating that the financial statements are reliable, 668 Unrealized gains and losses, 285, 470 Unsecured bonds, 529 Useful life of a depreciable asset, 416–417 Vertical analysis Analysis of a financial statement that reveals the relationship of each statement item to a specified base, which is the 100% figure, 777–778 W Wages, 521, 717, 725 Warranty, 523 estimated warranty payable, 523–524 expense of, 523 Weak currency A currency whose exchange rate is falling relative to that of other nations, 482 Weighted average cost of capital (WACC) A weighted average of the returns demanded by the company’s stockholders and lenders The combined rate of return expected for a company by its creditors and investors In general, the higher the risk associated with the company, the greater the expected returns by creditors and investors, 658, 799, 808 Weighted-average-method Another name for the average-cost method, 346–347 effect on cost of goods sold, 348–349 effect on gross profit, 348–349 Working capital Current assets minus current liabilities; measures a business’s ability to meet its short-term obligations with its current assets Also called net working capital, 166, 785–786 Writing off uncollectible accounts, 298 MyAccountingLab Web-based tutorial and assessment software where students have more “I Get It” moments Flexible for instructors to easily integrate into their course For Instructors Powerful Homework and Test Manager Homework assignments, quizzes, and tests that directly correlate to the textbook Homework guided solutions to help students understand concepts Multiple assignment options including time limits, proctoring, and maximum number of attempts allowed Comprehensive Gradebook Tracking Automatic grading that tracks students’ results on tests, homework, and tutorials Flexible Gradebook with numerous student data views, weighted assignments, choice on which attempts to include when calculating scores, and the ability to omit results of individual assignments Department-Wide Solutions Simplified for departmental implementation with the use of Coordinator Courses—make changes once and they ripple down to all members View a guided tour of MyAccountingLab at http://www.myaccountinglab.com/support/tours For Students Interactive Tutorial Exercises Homework and practice exercises with additional algorithmic–generated problems for more practice Personalized interactive learning—guided solutions and 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Data Harrison, Walter T Financial accounting / Walter T Harrison Jr., Charles T Horngren, C William (Bill) Thomas — 9th ed p cm Includes index ISBN 978-0-13-275112-4 (casebound) Accounting I Horngren, .. .Financial Accounting Ninth Edition This page intentionally left blank Financial Accounting Ninth Edition Walter T Harrison Jr Baylor University Charles T Horngren Stanford University C William. .. of Financial & Managerial Accounting, second edition, 2009 and Accounting, eighth edition, 2009 (with Charles T Horngren and M Suzanne Oliver), published by Pearson Prentice Hall Professor Harrison