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www.downloadslide.net Financial accounting eleVentH eDItIon Belverd E needles, jr.,  Ph.d., C.P.a., C.m.a Depaul University marian Powers,  Ph.d northwestern University Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Financial Accounting, 11th Edition Belverd E Needles, Jr Marian Powers Vice President of Editorial, Business: Jack W Calhoun Editor-in-Chief: Rob Dewey Senior Acquisitions Editor: Sharon Oblinger Developmental Editor: Krista Kellman © 2012, 2010 South-Western, Cengage Learning ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher Editorial Assistant: Courtney Doyle Senior Marketing Manager: Kristen Hurd Marketing Coordinator: Nicole Parsons Content Project Manager: Corey Geissler Media Editor: Bryan England Senior Frontlist Buyer, Manufacturing: Doug Wilke Production Service: Cadmus Communications For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Senior Art Director: Stacy Jenkins Shirley Internal Designer: Craig Ramsdell Cover Designer: Craig Ramsdell Cover Image: © Mike Grandmaison/All Canada Photos/ Corbis Rights Acquisitions Specialist: John Hill Library of Congress Control Number: 2010940446 Package ISBN-13: 978-0-538-47601-0 Package ISBN-10: 0-538-47601-X Student Edition ISBN 13: 978-1-111-82094-7 Student Edition ISBN 10: 1-111-82094-5 South-Western 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.CengageBrain.com Printed in the United States of America 14 13 12 11 10 Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it BrIeF Contents SuPPlEmEnT TO ChaPTER SuPPlEmEnT TO ChaPTER SuPPlEmEnT TO ChaPTER Uses of Accounting Information and the Financial Statements How to Read an Annual Report Analyzing Business Transactions Measuring Business Income Closing Entries and the Work Sheet Financial Reporting and Analysis The Annual Report Project The Operating Cycle and Merchandising Operations Inventories Cash and Receivables Current Liabilities and Fair Value Accounting Long-Term Assets 46 89 137 184 197 242 245 291 327 363 401 10 Long-Term Liabilities 11 Stockholders’ Equity 12 The Statement of Cash Flows 13 Financial Performance Measurement 14 Investments 443 487 537 585 635 aPPEndIx A Accounting for Unincorporated Businesses aPPEndIx B Present Value Tables 674 684 iii Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Contents Preface xii about the authors xxv ChaPTER Uses of Accounting Information and the Financial statements DeCisiON POiNT A User’s fOCUs CVs CAreMArK Accounting as an Information System Business Goals and Activities Financial and Management Accounting Ethical Financial Reporting Decision Makers: The Users of Accounting Information Management Users with a Direct Financial Interest Users with an Indirect Financial Interest 10 Governmental and Not-for-Profit Organizations 10 Accounting Measurement 11 Business Transactions 11 Money Measure 12 Separate Entity 12 The Corporate Form of Business 13 Forms of Business 13 Formation and Organization of a Corporation 14 The Financial Statements and Their Elements 15 Income Statement 15 Statement of Retained Earnings 16 Balance Sheet 16 Statement of Cash Flows 18 Relationships Among the Financial Statements 19 Focus on Financial Statement Elements: Financial Ratios 19 Generally Accepted Accounting Principles 22 GAAP and the Independent CPA’s Report 23 Organizations That Issue Accounting Standards 24 Other Organizations That Influence GAAP 24 Professional Conduct 25 A LOOK BACK AT CVs CAreMArK 27 STOP & REVIEW 29 ChaPTER aSSIgnmEnTS 30 46 SuPPlEmEnT TO ChaPTER hOW TO REad an annual REPORT The Components of an Annual Report 46 Letter to the Stockholders 46 Financial Highlights 47 Description of the Company 47 Management’s Discussion and Analysis 47 ChaPTER Financial Statements 47 Notes to the Financial Statements 50 Reports of Management’s Responsibilities 53 Reports of Certified Public Accountants 53 Analyzing Business transactions DeCisiON POiNT A User’s fOCUs THe BOeiNG COMPANY 88 Measurement Issues 90 Recognition 90 Valuation 91 Classification 92 Ethics and Measurement Issues 92 89 Double-Entry System 93 Accounts 93 The T Account 94 The T Account Illustrated 94 Rules of Double-Entry Accounting 94 Normal Balance 95 Stockholders’ Equity Accounts 96 v Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it vi Contents The Accounting Cycle  96 Business Transaction Analysis  98 Owner’s Investment in the Business  98 Economic Event That Is Not a Business Transaction  99 Prepayment of Expenses in Cash  99 Purchase of an Asset on Credit  100 Purchase of an Asset Partly in Cash and Partly on Credit  100 Payment of a Liability  101 Revenue in Cash  101 Revenue on Credit  102 Revenue Received in Advance  102 Collection on Account  102 Expense Paid in Cash  103 Expense to Be Paid Later  103 CHAPTeR Dividends  104 Summary of Transactions  104 The Trial Balance  106 Preparation and Use of a Trial Balance  106 Finding Trial Balance Errors  107 Recording and Posting Transactions  108 Chart of Accounts  108 General Journal  108 General Ledger  110 Some Notes on Presentation  111 Cash Flows and the Timing of Transactions  112 A LOOK BACK AT  THE BOEING COMPANY  114 STOP & REVIEW  118 Chapter Assignments  119 Measuring Business Income Decision Point  A User’s Focus Netflix, Inc.  136 Profitability Measurement Issues and Ethics  138 Net Income  138 Income Measurement Assumptions  138 Ethics and the Matching Rule  140 Accrual Accounting  141 Recognizing Revenues  142 Recognizing Expenses  142 Adjusting the Accounts  143 Adjustments and Ethics  143 The Adjustment Process  144 Type Adjustment: Allocating Recorded Costs (Deferred Expenses)  145 Type Adjustment: Recognizing Unrecorded Expenses (Accrued Expenses)  148 137 Type Adjustment: Allocating Recorded, Unearned Revenues (Deferred Revenues)  150 Type Adjustment: Recognizing Unrecorded, Earned Revenues (Accrued Revenues)  151 A Note About Journal Entries  152 Using the Adjusted Trial Balance to Prepare Financial Statements  152 Closing Entries  154 Cash Flows from Accrual-Based Information  156 A LOOK BACK AT  Netflix, Inc.  158 STOP & REVIEW  163 Chapter Assignments  164 Supplement to CHAPTeR 3  Closing Entries and the Work Sheet 184 Preparing Closing Entries  184 The Accounts After Closing  187 Step 1: Closing the Credit Balances  184 Step 2: Closing the Debit Balances  184 Step 3: Closing the Income Summary Account Balance  187 Step 4: Closing the Dividends Account Balance  187 The Work Sheet: An Accountant’s Tool  188 Preparing the Work Sheet  188 Using the Work Sheet  191 Supplement Assignments  192 Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it vii Contents CHAPTeR Financial Reporting and Analysis Decision Point  A User’s Focus Dell Computer Corporation  196 Foundations of Financial Reporting  198 Objective of Financial Reporting  198 Qualitative Characteristics of Accounting Information  199 Accounting Conventions  200 Ethical Financial Reporting  200 Accounting Conventions for Preparing Financial Statements  201 Consistency  202 Full Disclosure (Transparency)  202 Materiality  202 Conservatism  203 Cost-Benefit  203 Classified Balance Sheet  204 197 Stockholders’ Equity  207 Owner’s Equity and Partners’ Equity  207 Dell’s Balance Sheets  208 Forms of the Income Statement  210 Multistep Income Statement  210 Dell’s Income Statements  213 Single-Step Income Statement  214 Using Financial Ratios for Performance Evaluation  215 Critical Financial Ratios and Financial Statement Elements  215 Beyond the Basics: Additional Financial Ratios  219 A LOOK BACK AT  Dell Computer Corporation  223 STOP & REVIEW  226 Chapter Assignments  228 Assets  206 Liabilities  207 242 Supplement to CHAPTeR 4  The Annual Report Project Instructions  242 CHAPTeR The Operating Cycle and Merchandising Operations Decision Point  A User’s Focus Best Buy Co., Inc.  244 Managing Merchandising Businesses  246 Evaluation of Liquidity  246 Operating Cycle  247 Choice of Inventory System  248 Foreign Business Transactions  249 The Need for Internal Controls  250 Management’s Responsibility for Internal Control  251 Terms of Sale  252 Sales and Purchases Discounts  252 Transportation Costs  253 Terms of Debit and Credit Card Sales  253 245 Periodic Inventory System  258 Purchases of Merchandise  259 Sales of Merchandise  261 Internal Control: Components, Activities, and Limitations  263 Components of Internal Control  263 Control Activities  263 Limitations on Internal Control  264 Internal Control over Merchandising Transactions  265 Internal Control and Management Goals  265 Control of Cash Receipts  266 Control of Purchases and Cash Disbursements  267 A LOOK BACK AT  Best Buy Co., Inc.  270 Perpetual Inventory System  254 STOP & REVIEW  272 Purchases of Merchandise  254 Sales of Merchandise  256 Chapter Assignments  274 Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it viii Contents CHAPTeR Inventories Decision Point  A User’s Focus Cisco Systems, Inc.  290 Managing Inventories  292 Inventory Decisions  292 Financial Ratios: Inventory Turnover and Days’ Inventory on Hand  293 Inventory Management  294 Effects of Inventory Misstatements on Income Measurement  295 Inventory Misstatements and Fraud  295 Inventory Cost and Valuation  297 Goods Flows and Cost Flows  297 Lower-of-Cost-or-Market (LCM) Rule  298 Disclosure of Inventory Methods  299 Inventory Cost Under the Periodic Inventory System  299 Specific Identification Method  300 CHAPTeR Average-Cost Method  300 First-In, First-Out (FIFO) Method  301 Last-In, First-Out (LIFO) Method  301 Summary of Inventory Costing Methods  302 Impact of Inventory Decisions  302 Effects on the Financial Statements  303 Effects on Income Taxes  304 Effects on Cash Flows  305 Inventory Cost Under the Perpetual Inventory System  305 Valuing Inventory by Estimation  308 Retail Method  308 Gross Profit Method  308 A LOOK BACK AT  Cisco Systems, Inc.  310 STOP & REVIEW  313 Chapter Assignments  314 Cash and Receivables Decision Point  A User’s Focus Hewlett-Packard Company   326 Management Issues Related to Cash and Receivables  328 Cash Management  328 Accounts Receivable and Credit Policies   329 Evaluating the Level of Accounts Receivable  330 Financing Receivables  331 Ethics and Estimates in Accounting for Receivables  333 Cash Equivalents and Cash Control  334 Cash Equivalents  334 Cash Control Methods  334 Uncollectible Accounts  337 The Allowance Method  338 CHAPTeR 291 327 Disclosure of Uncollectible Accounts  338 Estimating Uncollectible Accounts Expense  339 Writing Off Uncollectible Accounts  342 Notes Receivable  343 Maturity Date  344 Duration of a Note  344 Interest and Interest Rate   345 Maturity Value  345 Accrued Interest  346 Dishonored Note  346 A LOOK BACK AT  Hewlett-Packard Company (HP)  347 STOP & REVIEW  348 Chapter Assignments 350 Current Liabilities and Fair Value Accounting Decision Point  A User’s Focus Microsoft  362 Management Issues Related to Current Liabilities  364 Managing Liquidity and Cash Flows   364 Evaluating Accounts Payable  365 Reporting Liabilities  366 Common Types of Current Liabilities  368 363 Definitely Determinable Liabilities  368 Estimated Liabilities  373 Contingent Liabilities and Commitments  376 Valuation Approaches to Fair Value Accounting  377 Interest, the Time Value of Money, and Future Value  378 Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 703 Subject Index Price/earnings (P/E) ratio, 495, 610, 610–611 Principal, 452 Principle of duality, 93 Private Company Financial Reporting Committee, 24 Private corporations, 46 Product warranty liability, 374 Production method, 413 comparison of straight-line method, declining-balance method, and, 414, 415 (exh.) Professional conduct, 25 Professional management, 489 Profit, 138 Profit margin, 22, 26, 215, 215–216, 601, 601–602 Profitability, 5, evaluating, 601–611 measurement issues and ethics, 138–141 ratio relationships, 603 Profit-sharing plans, 450 Promissory note, 343, 343 (exh.), 368 (exh.) Promotional costs, 373–374 Property taxes payable, 373 Property, plant, and equipment, 206, 206–207 acquisition cost of, 407–410 Proprietorships, 208 number and receipts of U.S., 13 (exh.) Provision for income taxes, 213 Public companies, 46 Public Company Accounting Oversight Board (PCAOB), 24, 54, 489 Publicly held corporations, 489 Publicly traded energy companies and accounting standards, 421 Purchase(s) control of, 267–270, 268–269 (exh.) group, 410 in foreign currency, 249 net, 259 of assets, 100–101 of equity investment, 647 of held-to-maturity securities, 656 of long-term investment, 644 of merchandise, 254–255, 259–261 of trading securities, 640 of treasury stock, 505–506 on credit, 255, 260 Purchase method, 649, 650 Purchase order, 269 Purchase requisition, 269 Purchase transactions recording under periodic inventory system, 259 (exh.) recording under perpetual inventory system, 254 (exh.) Purchases account, 260 Purchases discount, 252, 252–253 Purchases returns and allowances, 255, 260 Purchases Returns and Allowances account, 260 Qualitative characteristics, 199, 200 Quality of earnings, 590, 590–594 Quick ratio, 610 Ratios capital balance, 677 cash flow, 542–544 financial, 6, 19–22, 26, 115, 158, 215–223, 223–224, 246, 293–294, 310, 330, 331, 347–348, 365–366, 385, 445–446, 493–495, 543, 544, 601–602, 602–603, 604, 605, 606–607, 607–608, 608–609, 609–610, 610–611 financial analysis, 600–601 stated, 676–677, 677–678 Real accounts, 154 Receipt of cash dividend, 648 Receipt of interest, 657 Receipts on account, 257, 262 Receivables intercompany, 654 management issues related to, 328–333 Receivable(s) turnover, 330, 347–348, 608 Receiving report, 269 Recognition, 90, 90–91, 366, 636 of income, 647–648 Recognition point, 91 Record date, 492, 493, 509 Recycling, 641 Registered bonds, 454 Registered independent auditors’ report, 53 See also Auditor’s report Regulatory agencies, 10 Relevance, 199, 199–200 Reporting currency, 655 Reports filed with SEC, 589 of certified public accountants, 53–54 of management’s responsibilities, 53 published by corporation, 589 Research and development costs, 424 Residual equity, 497 Residual value, 411 Restatement, 655 of foreign subsidiary financial statements, 654–655 Restructurings, 593 Retail method, 308, 308 (exh.) Retail pharmacy segment, 50 Retained earnings, 16, 207, 497, 558 account, 187 (exh.) Retirement of bonds, 468 treasury stock, 507–508 Return on assets, 220, 220–221, 602, 602–603 Return on equity, 222, 222–223, 494, 494–495, 606, 606–607 Revenue(s), 15, 138 accrued, 151–152 and expenses, other, 212–213 cost of, 211 deferred, 150–151 earned, 151–152 in cash, 101 net, 210, 216 nonoperating, 212 on credit, 102 received in advance, 102 unearned, 150–151, 150 (exh.), 372–373 Revenue accounts, 184 Revenue expenditure, 407 Revenue recognition, 142 Risk assessment, 263 Rule of thumb measures, 588 Rules for double-entry accounting, 94–95 Ryan, Thomas M., 58–61 Salaries, 370, 677–678 Sale(s), 210 and excise taxes payable, 369–370 in foreign currency, 249 of long-term investment, 645 of merchandise, 256–257, 261–262 of trading securities, 641 of treasury shares, 506–507 of treasury stock, 506 on credit, 256, 261 terms of, 252–253 Sales discounts, 252 Sales returns, accounting for, 261 Sales returns and allowances, 210, 257, 262 Sales Returns and Allowances account, 257 Sales transactions recording under periodic inventory system, 261 (exh.) recording under perpetual inventory system, 256 (exh.) Sarbanes-Oxley Act, 8, 14, 53, 200, 251, 586 Scope section of auditor’s report, 54 SEC See Securities and Exchange Commission Secured bonds, 453 Securities and Exchange Commission (SEC), 8, 10, 23, 24, 46, 53, 141, 142, 452, 489, 638 reports filed with, 589 Securitization, 332 Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 704 Subject Index Segment information, 589 (exh.) Selling expenses, 212 Separate entity, 12 Separate legal entity, 489 Separation of duties, 264 Separation of ownership and control, 490 Serial bonds, 453, 453–454 Service charges (SC), 335 Share buybacks, 506 Share of stock, 14, 489 Shareholders, 46 Shareholders’ equity, 17 See also Statement of shareholders’ equity Short-term financial assets, 329 Short-term investments, 636 in equity securities, 639–642 Significant influence, 637 Simple interest, 378 example of future value using, 378 Single-step income statement, 214, 214–215, 214 (exh.) Skilling, Jeffrey, 201 Social security (FICA) tax, 371 Software, 422 Sole proprietorship, 13, 208, 674 Sombart, Werner, 93 Sound personnel practices, 264 Source documents, 98 Special-purpose entities (SPEs), 639 Specific identification method, 300 Standards of comparison, financial statement analysis, 587–589 Start-up and organization costs, 490 State and local income taxes, 371 State unemployment insurance tax, 371 Stated ratios, 676–677, 677–678 Stated value, 501 Statement of cash flows, 18, 18–19, 19 (exh.), 20 (exh.), 51 (exh.), 538 asking right questions about, 545–546 consolidated, 64, 81, 539 (exh.) ethical considerations and, 541–542 how universal is, 541 in annual report, 50 indirect method, 559 (exh.) overview of, 538–542 preparing, 559, 546 (exh.) purposes and uses of, 538 Statement of changes in stockholders’ equity, 512 Statement of financial position, 16 Statement of operations, 15 consolidated, 62 Statement of retained earnings, 16, 17 (exh.), 20 (exh.), 153 (exh.) Statement of stockholders’ equity, 52–53 (exh.), 512, 512–513, 513 (exh.) consolidated, 80 Statements of Financial Accounting Standards, 24 Statements of shareholders’ equity consolidated, 65–66 in annual report, 50 Statement of income, consolidated, 79 Stewardship, 199 Stewart, Martha, 638 Stock becomes debt under IFRS, 500 issuance of, for cash and other assets, 501–504 issuance of, for noncash assets, 503–504 issuing above par value, 502 issuing no-par with a stated value, 503 issuing no-par with no stated value, 502–503 share of, 489 See also Common stock; Preferred stock Stock dividends, 508, 508–510 effect of on stockholders’ equity, 510 transactions, 509 Stock option plans, 495 Stock options as compensation, 495–496 Stock quotations on NASDAQ, 494 (exh.) Stock splits, 510, 510–511 Stockholder control, 444 decreased, 491 Stockholders, 7, 14 first-class or second-class, 498 letter to, 46–47 Stockholders’ equity, 17, 17–18, 207 accounts, 96, 96 (exh.) components of, 497–500 effect of stock dividend on, 510 section of balance sheet, 497 (exh.), 513 (exh.) statement of, 512–513 Straight-line method, 412, 460, 460–461 amortizing bond premium, 464–465 comparison of production method, declining-balance method, and, 414, 415 (exh.) Subprime loans, 332 Subprime mortgage, fair value accounting and, 637 Subsidiary, 648 Successful efforts accounting, 421 Supplemental financial ratios for assessing operating asset management and liquidity, 609–610 Supplementary information notes, 53 Supply-chain management, 294 T-account, 94 Tangible assets, 206, 402 Tax advantage, 444 authorities, 10 double taxation, 489–490 FUTA, 371 liability, increased, 491 Medicare, 371 purposes, special rules for, 416 social security, 371 SUTA, 371 See also Income taxes Taxes payable, sales and excise, 369–370 Temporary accounts, 154 Term bonds, 453 Terms of sale, 252–253 debit and credit card sales, 253 Time periods, 381 Time value of money, 378, 378–379 Timeliness, 200 Total asset management, evaluating, 601–611 Trade accounts payable, 368 Trade credit, 329 Trade discount, 252 Trademark, 422 Trading on equity, 444 Trading securities, 539, 637, 639–642 purchase of, 640 sale of, 641 Transactions, 113 (exh.) cash flows and timing of, 112–113 dividend, 492–493 merchandising, 265–270 noncash investing and financing, 541 posting of, 108–112 purchase, 254 (exh.), 259 (exh.) recording, 108–112, 264 sales, 256 (exh.), 261 (exh.) stock dividends, 509 summary of, 104, 105 (exh.) See also Business transactions Transfer of ownership, ease of, 489 Transnational corporations, 654 Transparency, 202 Transportation costs, 253 Treasury shares, 506–507 Treasury stock, 495, 497, 558 accounting for, 505–508 purchase of, 505–506 retirement of, 507–508 sale of, 506 Trend analysis, 597, 597 (exh.) Trial balance, 106, 106–107, 106 (exh.), 143 (exh.), 153 (exh.), 185 (exh.) adjusted, 152–154 errors, 107 post-closing, 155, 188 (exh.) U.S GAAP See Generally accepted accounting principles (GAAP) Uncollectible accounts, 333, 337–342 disclosure of, 338 estimating expense, 339–342, 342 (exh.) writing off, 342 Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 705 Subject Index Understandability, 200 Underwriter, 490 Unearned revenues, 150, 150–151, 150 (exh.), 372, 372–373 Uniform Partnership Act, 675 Units of production method, 413 Unlimited liability, partnerships, 675 Unrecorded revenues, adjustment for, 151 (exh.) Unsecured bonds, 453 Useful life definite, 423 estimated, 412 indefinite, 423 of airplanes, 411 Vacation pay liability, 375 Valuation, 91, 91–92, 367, 636 and adjustment, year-end, 640, 641 approaches to fair value accounting, 377–381 issue, 90 of an asset, 382–383 of inventory by estimation, 308–309 Value, 514 in use, 404 Variable interest entities (VIEs), 639 Verifiability, 200 Vertical analysis, 598, 598–600 Voluntary association, partnerships as, 675 Wages, 370 Wall Street Journal, 590, 637 definition of free cash flow, 545 Web sales, 257 Weighted average method, 300 With recourse, 331 Withdrawal of partner, 681 Without recourse, 332 Work sheet, 188–191, 189 (exh.), 191 (exh.), 651 (exh.), 652 (exh.), 653 (exh.), 655 (exh.) closing entries and, 184–191 preparing, 188–191 using, 191 Working capital, 246 Working papers, 188 Write-downs, 593 Write-off, 593 uncollectible accounts, 342 Year-end accrual of interest, 656–657 Year-end adjustment, 644–645, 645–646 Year-end valuation and adjustment, 640, 641 Zero coupon bonds, 460 Zuckerberg, Mark, 503 Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows for Inglot Consultancy, Inc Inglot Consultancy, Inc Inglot Consultancy, Inc Statement of Cash Flows Income Statement For the Month Ended December 31, 2011 For the Month Ended December 31, 2011 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash flows from operating activities (Increase) in accounts receivable ($ 4,000) (Increase) in supplies (2,000) Increase in accounts payable 6,400 Net cash flows from operating activities Cash flows from investing activities Purchase of land ($ 40,000) Purchase of building (100,000) Net cash flows from investing activities Cash flows from financing activities Issued common stock $200,000 Paid dividends (2,400) Net cash flows from financing activities Net increase (decrease) in cash Cash at beginning of month Cash at end of month STUDY NOTE: Notice the sequence in which these financial statements must be prepared The statement of retained earnings is a link between the income statement and the balance sheet, and the statement of cash flows is prepared last Revenues $ 3,200 Consulting fees Expenses Equipment rental expense Wages expense Utilities expense Total expenses Income before income taxes Income taxes expense Net income $10,000 $2,800 1,600 1,200 5,600 $ 4,400 1,200 $ 3,200 400 $ 3,600 Inglot Consultancy, Inc Statement of Retained Earnings For the Month Ended December 31, 2011 (140,000) Retained earnings, December 1, 2011 Net income for the month Subtotal Less dividends Retained earnings, December 31, 2011 $ 3,200 $3,200 2,400 $ 800 197,600 $ $ 61,200 61,200 Inglot Consultancy, Inc Balance Sheet December 31, 2011 Assets Liabilities Cash $ 61,200 Accounts payable $ 6,400 Accounts receivable 4,000 Supplies 2,000 Stockholders’ Equity Land 40,000 Common stock $200,000 Building 100,000 Retained earnings 800 Total stockholders’ equity $200,800 Total liabilities and $207,200 stockholders’ equity $207,200 Total assets FOCUS ON FINANCIAL STATEMENT ELEMENTS Financial ratios show important relationships among the elements of the financial statements They can be used to assess a company’s performance and compare it relative to its past performance as well as to those of other companies in the same industry The following ratios have been shown to be most predictive of company performance: Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net The profit margin shows the percentage of each sales dollar that results in net income F O C U S Revenue R O N F I N A N C I A L S T A T E M E N T S Net Income NI Cash Flows from Operating Activities COFA Total Assets TA Total Liablities TL Profit Margin NI R Asset Turnover R avg TA Cash Flow Yield COFA NI Debt to Equity TL TE Profit Margin ϭ Total Equity TE Net Income Revenue The asset turnover ratio measures how efficiently assets are used to produce sales F O C U S Revenue R O N F I N A N C I A L S T A T E M E N T S Net Income NI Cash Flows from Operating Activities COFA Total Assets TA Total Liablities TL Profit Margin NI R Asset Turnover R avg TA Cash Flow Yield COFA NI Debt to Equity TL TE Asset Turnover ϭ Total Equity TE Revenue Average Total Assets The cash flow yield ratio measures how much cash a company’s operations generate in relation to its net income F O C U S Revenue R O N F I N A N C I A L S T A T E M E N T S Net Income NI Cash Flows from Operating Activities COFA Total Assets TA Total Liablities TL Profit Margin NI R Asset Turnover R avg TA Cash Flow Yield COFA NI Debt to Equity TL TE Cash Flow Yield ϭ Total Equity TE Cash Flows from Operating Activities Net Income The debt to equity ratio reflects a company’s strategy for financing its operations F O C U S Revenue R O N F I N A N C I A L S T A T E M E N T S Net Income NI Cash Flows from Operating Activities COFA Total Assets TA Total Liablities TL Profit Margin NI R Asset Turnover R avg TA Cash Flow Yield COFA NI Debt to Equity TL TE Debt to Equity ϭ Total Equity TE Total Liabilities Total Equity Simply understanding how to find these six elements on the financial statements and how to compute these four ratios will allow you to analyze financial statements and determine how well or poorly a company is performing, which, in turn, is the basis for making good business decisions Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... of Accounting Information and the Financial statements DeCisiON POiNT A User’s fOCUs CVs CAreMArK Accounting as an Information System Business Goals and Activities Financial and Management Accounting. .. 198 Qualitative Characteristics of Accounting Information  199 Accounting Conventions  200 Ethical Financial Reporting  200 Accounting Conventions for Preparing Financial Statements  201 Consistency ... the financial statements and each chapter’s topics Application Application of Double Entry: introducing and integrating financial statements In Financial Accounting, Stockholders’ NEW CHE -NEEDLES- 10-0401-002.indd