Jerry J Weygandt PhD, CPA University of Wisconsin—Madison Madison, Wisconsin Paul D Kimmel PhD, CPA University of Wisconsin—Milwaukee Milwaukee, Wisconsin Donald E Kieso PhD, CPA Northern Illinois University DeKalb, Illinois ACCOUNT CLASSIFICATION AND PRESENTATION Account Title Classification Financial Statement Normal Balance A Accounts Payable Accounts Receivable Current Liability Current Asset Statement of Financial Position Statement of Financial Position Credit Debit Accumulated Depreciation— Buildings Plant Asset—Contra Statement of Financial Position Credit Accumulated Depreciation— Equipment Plant Asset—Contra Statement of Financial Position Credit Administrative Expenses Operating Expense Income Statement Debit Advertising Expense Operating Expense Income Statement Debit Allowance for Doubtful Accounts Current Asset—Contra Statement of Financial Position Credit Amortization Expense Operating Expense Income Statement Debit Bad Debt Expense Operating Expense Income Statement Debit B Bonds Payable Non-Current Liability Statement of Financial Position Credit Buildings Plant Asset Statement of Financial Position Debit Cash Current Asset Statement of Financial Position Debit C Copyrights Intangible Asset Statement of Financial Position Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit Debt Investments Current Asset/Long-Term Investment Statement of Financial Position Debit Depreciation Expense Operating Expense Income Statement Debit Dividend Revenue Other Income and Expense Income Statement Credit Dividends Temporary account closed to Retained Earnings Retained Earnings Statement Debit Dividends Payable Current Liability Statement of Financial Position Credit Statement of Financial Position Debit Income Statement Debit D E Equipment Plant Asset F Freight-Out Operating Expense G Gain on Disposal of Plant Assets Other Income and Expense Income Statement Credit Goodwill Intangible Asset Statement of Financial Position Debit Income Summary Temporary account closed to Retained Earnings Not Applicable (1) Income Tax Expense Income Tax Expense Income Statement Debit Income Taxes Payable Current Liability Statement of Financial Position Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Income and Expense Income Statement Debit Interest Payable Current Liability Statement of Financial Position Credit Interest Receivable Current Asset Statement of Financial Position Debit I Interest Revenue Other Income and Expense Income Statement Credit Inventory Current Asset Statement of Financial Position (2) Debit Account Title Classification Financial Statement Normal Balance Statement of Financial Position Debit Income Statement Debit L Land Plant Asset Loss on Disposal of Plant Assets Other Income and Expense M Maintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Non-Current Liability Statement of Financial Position Credit Statement of Financial Position Credit N Notes Payable Current Liability/ Non-Current Liability P Patents Intangible Asset Statement of Financial Position Debit Prepaid Insurance Current Asset Statement of Financial Position Debit Rent Expense Operating Expense Income Statement Debit Research and Development Expense Operating Expense Income Statement Debit Retained Earnings Equity Statement of Financial Position and Retained Earnings Statement Credit Salaries and Wages Expense Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Statement of Financial Position Credit Sales Discounts Revenue—Contra Income Statement Debit R S Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Share Capital—Ordinary Equity Statement of Financial Position Credit Share Capital—Preference Equity Statement of Financial Position Credit Share Investments Current Asset/Long-Term Investment Statement of Financial Position Debit Share Premium—Ordinary Equity Statement of Financial Position Credit Share Premium—Preference Equity Statement of Financial Position Credit Supplies Current Asset Statement of Financial Position Debit Supplies Expense Operating Expense Income Statement Debit Statement of Financial Position Debit T Treasury Shares Equity—Contra U Unearned Service Revenue Current Liability Statement of Financial Position Credit Utilities Expense Operating Expense Income Statement Debit (1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss The Income Summary account does not appear on any financial statement (2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold The following is a sample chart of accounts It does not represent a comprehensive chart of all the accounts used in this textbook but rather those accounts that are commonly used This sample chart of accounts is for a company that generates both service revenue as well as sales revenue It uses the perpetual approach to inventory If a periodic system was used, the following temporary accounts would be needed to record inventory purchases: Purchases, Freight-In, Purchase Returns and Allowances, and Purchase Discounts CHART OF ACCOUNTS Assets Liabilities Equity Revenues Expenses Cash Notes Payable Share Capital— Preference Service Revenue Administrative Expenses Accounts Receivable Accounts Payable Allowance for Doubtful Accounts Interest Receivable Unearned Service Revenue Salaries and Wages Payable Interest Payable Sales Revenue Share Capital— Ordinary Sales Discounts Share Premium— Preference Sales Returns and Allowances Share Premium— Ordinary Interest Revenue Amortization Expense Bad Debt Expense Cost of Goods Sold Inventory Dividends Payable Retained Earnings Supplies Income Taxes Payable Treasury Shares Gain on Disposal of Plant Assets Depreciation Expense Freight-Out Prepaid Insurance Dividends Income Tax Expense Income Summary Insurance Expense Bonds Payable Land Mortgage Payable Equipment Interest Expense Accumulated Depreciation— Equipment Loss on Disposal of Plant Assets Buildings Accumulated Depreciation— Buildings Maintenance and Repairs Expense Rent Expense Salaries and Wages Expense Copyrights Selling Expenses Goodwill Supplies Expense Patents Utilities Expense DEDICATED TO the Wiley sales representatives who sell our books and service our adopters in a professional and ethical manner, and to Enid, Merlynn, and Donna Vice President and Director Executive Editor Senior Development Editor Associate Development Editor Editorial Supervisor Editorial Associate Senior Content Manager Senior Production Editor Senior Marketing Manager Product Design Manager Product Design Associate Media Specialist Design Director Cover Design Interior Design Senior Photo Editor Market Solutions Assistant Cover and title page George Hoffman Michael McDonald Ed Brislin Courtney Luzzi Terry Ann Tatro Margaret Thompson Dorothy Sinclair Valerie A Vargas Karolina Zarychta Honsa Allison Morris Matt Origoni Elena Santa Maria Harry Nolan Maureen Eide Maureen Eide/Kristine Carney Mary Ann Price Elizabeth Kearns John Bencina/iStockphoto This book was set in New Aster LT Std by Aptara®, Inc and printed and bound by Printplus Ltd Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications 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http://www.wiley.com/go/permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel Outside of the United States, please contact your local representative Library of Congress Cataloging-in-Publication Data Weygandt, Jerry J Financial accounting : IFRS / Jerry J Weygandt, Paul D Kimmel, Donald E Kieso — 3rd edition pages cm Includes index ISBN 978-1-118-97808-5 (cloth) Accounting Accounting—Standards International business enterprises—Accounting—Standards I Kimmel, Paul D II Kieso, Donald E III Title HF5635.W52423 2015 657.02’18—dc23 2015022964 ISBN-13 978-1-118-97808-5 The inside back cover will contain printing identification and country of origin if omitted from this page In addition, if the ISBN on the back cover differs from the ISBN on this page, the one on the back cover is correct Printed in Asia 10 Brief Contents 10 11 12 13 14 Accounting in Action The Recording Process 52 Adjusting the Accounts 100 Completing the Accounting Cycle 160 Accounting for Merchandising Operations 218 Inventories 276 Fraud, Internal Control, and Cash 328 Accounting for Receivables 382 Plant Assets, Natural Resources, and Intangible Assets 426 Liabilities 480 Corporations: Organization, Share Transactions, Dividends, and Retained Earnings 536 Investments 598 Statement of Cash Flows 644 Financial Statement Analysis 710 APPENDICES A B C D E F *G *H *I Specimen Financial Statements: TSMC, Ltd A-1 Specimen Financial Statements: Nestlé SA B-1 Specimen Financial Statements: Petra Foods Limited Specimen Financial Statements: Apple Inc D-1 Time Value of Money E-1 Accounting for Partnerships F-1 Subsidiary Ledgers and Special Journals G-1 Other Significant Liabilities H-1 Payroll Accounting I-1 C-1 *Available at the book's companion website, www.wiley.com/college/ weygandt iii From the Authors Dear Student, Why This Course? Remember your biology course in high school? Did you have one of those “invisible man” models (or maybe something more high-tech than that) that gave you the opportunity to look “inside” the human body? This accounting course offers something similar To understand a business, you have to understand the financial insides of a business organization An accounting course will help you understand the essential financial components of businesses Whether you are looking at a large multinational company like TSMC or Apple or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening As an employee, a manager, an investor, a business owner, or a director of your own personal finances—any of which roles you will have at some point in your “Whether you are looking at a large life—you will make better decisions for having multinational company like TSMC taken this course Why This Book? Thousands of students have used this textbook Your instructor has chosen it for you because of its trusted reputation The authors have worked hard to keep the book fresh, timely, and accurate or Apple or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening.” How to Succeed? We've asked many students and many instructors whether there is a secret for success in this course The nearly unanimous answer turns out to be not much of a secret: “Do the homework.” This is one course where doing is learning The more time you spend on the homework assignments—using the various tools that this textbook provides—the more likely you are to learn the essential concepts, techniques, and methods of accounting Besides the textbook itself, WileyPLUS and the book's companion website also offers various support resources Good luck in this course We hope you enjoy the experience and that you put to good use throughout a lifetime of success the knowledge you obtain in this course We are sure you will not be disappointed Jerry J Weygandt Paul D Kimmel Donald E Kieso iv Author Commitment Kimmel Jerry Weygandt Paul JERRY J WEYGANDT, PhD, CPA, is Arthur Andersen Alumni Emeritus Professor of Accounting at the University of Wisconsin— Madison He holds a Ph.D in accounting from the University of Illinois Articles by Professor Weygandt have appeared in the Accounting Review, Journal of Accounting Research, Accounting Horizons, Journal of Accountancy, and other academic and professional journals These articles have examined such financial reporting issues as accounting for price-level adjustments, pensions, convertible securities, stock option contracts, and interim reports Professor Weygandt is author of other accounting and financial reporting books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Wisconsin Society of Certified Public Accountants He has served on numerous committees of the American Accounting Association and as a member of the editorial board of the Accounting Review; he also has served as President and SecretaryTreasurer of the American Accounting Association In addition, he has been actively involved with the American Institute of Certified Public Accountants and has been a member of the Accounting Standards Executive Committee (AcSEC) of that organization He has served on the FASB task force that examined the reporting issues related to accounting for income taxes and served as a trustee of the Financial Accounting Foundation Professor Weygandt has received the Chancellor's Award for Excellence in Teaching and the Beta Gamma Sigma Dean's Teaching Award He is on the board of directors of M & I Bank of Southern Wisconsin He is the recipient of the Wisconsin Institute of CPA's Outstanding Educator's Award and the Lifetime Achievement Award In 2001 he received the American Accounting Association's Outstanding Educator Award PAUL D KIMMEL, PhD, CPA, received his bachelor's degree from the University of Minnesota and his doctorate in accounting from the University of Wisconsin He is an Associate Professor at the University of Wisconsin—Milwaukee, and has public accounting experience with Deloitte & Touche (Minneapolis) He was the recipient of the UWM School of Business Advisory Council Teaching Award, the Reggie Taite Excellence in Teaching Award and a three-time winner of the Outstanding Teaching Assistant Award at the University of Wisconsin He is also a recipient of the Elijah Watts Sells Award for Honorary Distinction for his results on the CPA exam He is a member of the American Accounting Association and the Institute of Management Accountants and has published articles in Accounting Review, Accounting Horizons, Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, Journal of Accounting Education, as well as other journals His research interests include accounting for financial instruments and innovation in accounting education He has published papers and given numerous talks on incorporating critical thinking into accounting education, and helped prepare a catalog of critical thinking resources for the Federated Schools of Accountancy Don Kieso DONALD E KIESO, PhD, CPA, received his bachelor's degree from Aurora University and his doctorate in accounting from the University of Illinois He has served as chairman of the Department of Accountancy and is currently the KPMG Emeritus Professor of Accountancy at Northern Illinois University He has public accounting experience with Price Waterhouse & Co (San Francisco and Chicago) and Arthur Andersen & Co (Chicago) and research experience with the Research Division of the American Institute of Certified Public Accountants (New York) He has done post doctorate work as a Visiting Scholar at the University of California at Berkeley and is a recipient of NIU's Teaching Excellence Award and four Golden Apple Teaching Awards Professor Kieso is the author of other accounting and business books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Illinois CPA Society He has served as a member of the Board of Directors of the Illinois CPA Society, then AACSB's Accounting Accreditation Committees, the State of Illinois Comptroller's Commission, as SecretaryTreasurer of the Federation of Schools of Accountancy, and as Secretary-Treasurer of the American Accounting Association Professor Kieso is currently serving on the Board of Trustees and Executive Committee of Aurora University, as a member of the Board of Directors of Kishwaukee Community Hospital, and as Treasurer and Director of Valley West Community Hospital From 1989 to 1993 he served as a charter member of the national Accounting Education Change Commission He is the recipient of the Outstanding Accounting Educator Award from the Illinois CPA Society, the FSA’s Joseph A Silvoso Award of Merit, the NIU Foundation’s Humanitarian Award for Service to Higher Education, a Distinguished Service Award from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University Practice Made Simple The Team for Success is focused on helping students get the most out of their accounting course by making practice simple Both in the printed text and the online environment of WileyPLUS, new opportunities for self-guided practice allow students to check their knowledge of accounting concepts, skills, and problem-solving techniques as they receive individual feedback at the question, learning objective, and course level Personalized Practice Based on cognitive science, WileyPLUS with ORION is a personalized, adaptive learning experience that gives students the practice they need to build proficiency on topics while using their study time most effectively The adaptive engine is powered by hundreds of unique questions per chapter, giving students endless opportunities for practice throughout the course www.downloadslide.net Subject Index Financial assets, 642 Financial calculators, E16–E18 “Financial Instruments” (IFRS 9), 423–424, 608 Financial markets, standards for, 50 Financial position statements, see Statements of financial position Financial pressure, 330 Financial reporting, 128–130 ethics in, 7–8 IFRS impact on U.S., 49–50 for partnerships, F1 principles in, 129–130 Financial scandals, Financial statements See also specific statements in accounting cycle, 165–167 accounting data in, 22–27 and adjusted trial balance, 121, 165 and adjusting accounts, 122–123 adjusting entries for, 105 communication with, consolidated, see Consolidated financial statements currency signs in, 74 fraud on, 346 and GAAP/IFRS, 158 and inventories, 287–288, 290–294 for merchandising operations, 234–239 for partnerships, F9 revaluation of plant assets on, 440 and reversing entries, 184 structure of, 274 and timing, 102 Financial statement analysis, 710–737 See also Ratio analysis of earning power, 730–734 horizontal analysis, 712–716 need for, 712 of quality of earnings, 734–736 standards for, 759–760 terminology, 736–737 vertical analysis, 712, 713, 716–718 Financing activities: classification of, 646–648 defined, 679 recording of, 650, 658–659, 669–670 on statements of cash flows, 659 understanding, 646 Financing charges (credit cards), 385 Finished goods inventory, 278, 301 First-in, first-out inventory method, see FIFO inventory method Fiscal year, 102, 131 FISH assumption, 299 Fixed assets, 180 See also Plant assets; Property, plant, and equipment Fixed-rate mortgages, 498 Flowcharts, 341 Flow of costs, 221–223 FOB destination: defined, 249, 301 and inventory, 280 in merchandising operations, 225 FOB shipping point: defined, 249, 301 and inventory, 280 in merchandising operations, 225 Footing across (term), 672, G10 Forensic accounting, 28, 29 For-profit corporations, 538 Franchises, 426, 447–448, 454 Fraud See also Internal control altered checks in, 334 with debt-financed acquisitions, 441 by “dedicated” employees, 337 defined, 330, 357 in exercise of share options, 549 with expense-reimbursement requests, 334, 336 factors contributing to, 330 with fake vendor invoices, 333 with fictitious claims, 332 inventory, 281, 291 overstating assets/understating liabilities in, 659 payroll, I11 in Ponzi schemes, 354 receivables, 385–386 standards to prevent, 158, 379–380 terminology, 357 theft of merchandise as, 229 with unearned commissions, 335 using numeric relationships, 719 Fraud triangle, 330, 357, 379 Free cash flow, 662–663, 679 Free on board destination, see FOB destination Free on board shipping point, see FOB shipping point Freight costs, 225, 227, 243 Freight-in, 243 Fringe benefits, H5–H7, I8 Full-disclosure principle, 130, 131, H3 FUTA (Federal Unemployment Tax Act), I8 Future cash flows, 646 Future value: of an annuity, E4–E6, E19 of a single amount, E3–E4, E19 G GAAP, see Generally accepted accounting principles Gains: on bonds, 497 on disposal of business components, 731 on disposal of plant assets, 443, 653, 654 on exchange of plant assets, 452–453 in income statements, 236 on realization, F10 revaluation of plant assets with, 439–440 on sale of plant assets, 443 unrealized, 609, 615–616, 642, 733 Geneen, Harold, General journals See also Journals and journalizing closing entries in, 168 defined, 60, 76 effects of special journals on, G15–G16 special vs., G3–G4 General ledgers See also Ledgers defined, 62, 76 posting to, G5 and subsidiary ledgers, G1–G3, G9 Generally accepted accounting principles (GAAP): accounting cycle, 214–216 adjusting accounts, 157–158 cash controls, 379–380 defined, 8, 29 effective-interest method, 505 equity, 594–595 financial statement analysis, 759–760 fraud, 379–380 and IFRS, 49–50 internal controls, 379–380 inventory, 325–326 investments, 641–642 liabilities, 532–533 I-8 merchandising operations, 273–274 property, plant, and equipment, 476–477 receivables, 423–424 recording process, 97–98 statement of cash flows, 707–708 General partners, F15 Gift cards, 112 Global accounting issues: fair value, 398 goodwill, 448 Korean discount, LIFO inventory method, 289 Global financial crisis, 400 Going concern assumption, 129, 131, 432, 454 Goods in transit, 280–281 Goodwill, 446, 448, 454 Government: accounting careers in, 28 bonds issued by, 488 regulation of corporations by, 539–540 regulation of partnerships by, F4 Green bonds, 491 Gross earnings, I1–I2, I11 Gross profit, 235, 249 Gross profit method, 296–297, 301 Gross profit rate, 235, 249 H Hackers, computer, G17 Harry Potter series (J.K Rowling), 446 Health care, H6 Held-for-collection securities, 609, 622, 642 Hiring of employees, 68, I11 Historical cost principle: defined, 29, 129, 131 in IFRS, 8–9 and ordinary shares for services or non-cash assets, 548 for plant, property, and equipment, 477 Hong Kong, Honor of notes receivable, 398 Horizontal analysis: defined, 712, 737 of financial statements, 712–716 vertical and ratio analysis vs., 713 Human element, in internal control, 338 Human resources: for cash controls, 340, 343 internal controls in, 229, 337–338 internal users in, I IAASB (International Auditing and Assurance Standards Board), 380 IASB, see International Accounting Standards Board Identification, 4, IFRS, see International Financial Reporting Standards Impairment, 423, 476, 477 Imprest system, 343 Improper recognition of revenue, 735 Improvements, 429, 441, 453 Income See also Revenue(s) comprehensive, see Comprehensive income and discontinued operations, 731 GAAP vs IFRS on, 158 for merchandising company, 220 net, see Net income profitability ratios for measuring, 723–726 pro forma, 735, 737 statements of, see Income statements Income and loss ratio, F6–F8 www.downloadslide.net I-9 Subject Index Income ratio, F6–F8, F15 Income statements, 22–23 from adjusted trial balances, 122 adjusting entries on, 105, 113, 114, 118–119 classification on, 759 comprehensive, see Comprehensive income statements consolidated, 621, A3, B1, C1 defined, 29 in direct method, 665–666 discontinued operations on, 731 and estimating uncollectibles, 390 function of, 22 and GAAP, 274 horizontal analysis of, 714–715 and inventory, 287–288, 290–291 of merchandising companies, 234–238, 241, 246–248 operating activities on, 647 of partnerships, F8 receivables on, 401 standards for, 595 and statements of cash flow, 650 vertical analysis of, 716–718 and worksheets, 165, 166, 241, 246–248, 663 Income Summary accounts, 168–170, 187 Income taxes: cash payments for, 668–669 and depreciation, 438 and discontinued operations, 731 and payroll accounting, I3–I4, I10 on statements of cash flows, 655–656, 668–669, 674–675 Income tax expense, 728 Income taxes payable, 655–656, 674–675 Independent internal verification: in bank reconciliation, 350 in cash controls, 340, 343 and fraud, 281, 386, 441, 549, 659, 719 in internal control, 335–337 India: accounting standards of, online merchandising in, 238 retailer expansion in, 218 Indirect issuance of shares, 543 Indirect method (statements of cash flows), 651–661 changes in non-current assets and liabilities in, 658–659 converting net income to net cash in, 652–657 defined, 679 direct method vs., 651 net change in cash and statement of financial position in, 659–660 standards for, 707 worksheets in, 671–676 Industry averages, 712, 718 Information (internal control), 331 Information technology, 50 Insurance, 67, 107–108, H6 Intangible assets, 446–449 and accounting cycle, 178–179 analysis of, 450–451 defined, 178, 187, 446, 454 R&D costs, 449 standards on, 476–477 statement presentation of, 450 terminology, 453–454 types of, 446–448 Intended use, 428 Intent to convert (investments), 614–615 Intercompany comparisons (analysis), 712, 718 Intercompany eliminations, 618, 619, 622 Intercompany transactions, 618, 622 Interest: accrued, 115–116 on bonds, 487, 601–602 cash flows from, 647n.1 cash payments for, 668 compound, E2–E4, E19 computing, 115 on credit cards, 385 defined, E1, E19 and market price of bonds, 490 on notes payable, 482 on notes receivable, 397, 398 in partnerships, F7–F8 and passing up discounts, 227 on plant assets, 429, 477 simple, E1–E2, E19 on statement of cash flows, 707 Interest coverage, see Times interest earned Interest expense: bond, 493, 502 on income statement, 236–237 in times interest earned, 728 understatement of, 115 Interest payable, 492 Interest rates: annual, 397 on bonds, 488, 492–493 contractual, 488, 492–493, 511 market, 490, 492–493, 511 on mortgages, 498 stated, 488 and time value of money, E1 Interest receivable, 398–399 Interest revenue, 236 Interim periods, 102, 131 Internal auditors, 336–337, 357 Internal control, 330–339 See also Cash control(s); Fraud and adjusting accounts, 158 components of, 330–331 defined, 357 documentation procedures for, 334 establishment of responsibility in, 331–332 and human resource controls, 337–338 independent internal verification in, 335–337 limitations of, 338 and payroll accounting, I10–I11 physical controls in, 335 segregation of duties in, 332–334, 336 standards for, 379–380 terminology, 357 Internal Revenue Service (IRS), I3, I10 Internal transactions, 14 Internal users, 5–6 International Accounting Standards (IAS): “Accounting Policies, Changes in Accounting Estimates, and Errors” (IAS 8), 594 “Cash Flow Statements” (IAS 7), 707 “Employee Benefits” (IAS 19), 532 “Presentation of Financial Statements” (IAS 1), 273, 379, 532 “Provisions, Contingent Liabilities, and Contingent Assets” (IAS 37), 532 International Accounting Standards Board (IASB), See also International Financial Reporting Standards accounting for financial instruments, 398, 423–424 adjusting accounts, 157–158 amortized cost, 642 cash equivalents, 355 defined, 29 financial statements, 97, 98, 274, 595, 708, 760 intangible assets, 477 liabilities, 533 objectives of, 160 preference for direct method, 651 prohibition of LIFO method, 298 receivables, 388n.1, 423 single set of standards, 49, 50, 128 unusual income items, 759 International Auditing and Assurance Standards Board (IAASB), 380 International Financial Reporting Standards (IFRS) See also specific standards accounting cycle, 214–216 accrual-basis accounting, 102, 652 adjusting accounts, 157–158 in Africa, 177 cash controls, 379–380 classification of cash flows, 647, 647n.1 convergence of national standards and, 160 defined, 8, 29 depreciation methods, 433, 436n.1, 437 effective-interest method, 505 equity, 594–595 fair value, 237 financial statement analysis, 759–760 fraud, 379–380 intangible assets, 446 internal controls, 379–380 inventory, 287n.2, 325–326 investments, 641–642 leases, H4 liabilities, 532–533, H1 merchandising operations, 273–274 natural resources, 444 operating expenses, 236 pro forma income, 735 property, plant, and equipment, 476–477 and quality of earnings, 734 receivables, 423–424 recording process, 97–98 reserves, 566 revaluation of plant assets, 439 revenue and expense recognition, 103 share dividends, 559 statement of cash flows, 707–708 and U.S financial reporting, 49–50 Interpretation, of reported information, Intracompany comparisons (analysis), 712, 718 Inventory(-ies), 276–301 See also Costing, inventory of agricultural products, 326 average-cost method for, 283, 284, 286–288, 294–296 in cash receipts journal, G9 classification of, 278–279 in classified statements of financial position, 238–239 consistency concept for, 288–289 determining quantities in, 279–281 errors in accounting for, 290–292 estimation of, 296–298 falsifying, 280 FIFO method for, 283–285, 287, 288, 294, 295, 301 and financial statements, 287–288, 290–294 and GAAP, 274 increases in, 655, 674 LIFO method for, 287n.2, 289, 298–301, 325 in merchandising operations, 221–223, 232 periodic systems for, see Periodic inventory systems perpetual systems for, see Perpetual inventory systems www.downloadslide.net Subject Index physical, 221, 279–280 purchase of, 223–227 sales of, 228–231 specific identification for costing of, 283, 301, 325 standards, 287n.2, 325–326 and taxes, 288 terminology, 301 value of, 289–290 Inventory account, 243, 247–248 Inventory management, 276 Inventory turnover: defined, 293, 301, 722, 737 in financial statement analysis, 293, 294, 722–723, 728 Investing activities: classification of, 646–648 defined, 679 recording of, 650, 658–659, 669–670 statement of cash flows for understanding, 646 on statements of cash flows, 659 Investments, 598–622 advantages of, 600–601 debt, 601–603, 608–609, 622, 641 investing activities and changes in, 647 long-term, see Long-term investments and preparing consolidated financial statements, 618–621 share, 602–614, 617, 641 short-term, see Short-term investments standards for, 641–642 statement presentation of, 614–621 temporary, 600 terminology, 622 in transaction analysis, 16 value of, 608–614 Investment account, 606 Investment portfolios, 603, 622 Investors: accounting errors as issue for, 74 bond vs share investments for, 602 and corporate governance/economic growth, 177 current ratio as issue for, 720 and debt covenants, 501 as external users, influence of, 604 inventory control as issue for, 223 non-recurring events as issue for, 732 in Ponzi schemes, 354 reading of share quotes by, 544 revenue and expense accounts as issue for, 57 share splits for, 561 and standards for equity, 594 Invoices: prenumbered, 334 purchase, 224, 249 sales, 228, 249 iPod, 446 Irregularities, 73 IRS (Internal Revenue Service), I3, I10 J Japan, accounting standards of, JIT (just-in-time) inventory method, 278–279, 301 Joint ventures, 598 Journals and journalizing: in accounting cycle, 168 for adjusting entries, 119, 163 bank reconciliation, 352–353 bonds, 490, 491 cash payments journals, G13–G16 cash receipts journals, G7–G11 closing entries in, 170 definitions of, 76 general journals, 60, 76, G15–G16 illustration of transactions in, 71 in merchandising operations, 244–245 and posting from worksheets, 167 purchases journals, G11–G13 reconciling items, 672 in recording process, 60–61 sales journals, G4–G7 share splits, 561 Just-in-time (JIT) inventory method, 278–279, 301 K Korean discount, L Labor unions, Land: and depreciation, 432 increase in, 658, 669, 674 as plant asset, 428–429 Land improvements, 429 Large share dividends, 559 Last-in, first-out inventory method, see LIFO inventory method LCNRV (lower-of-cost-or-net-realizable value), 289–290, 301 Leases, 431, H3–H5, H9 Ledgers: accounts payable, G12 adjusted trial balances in, 163 adjusting entries in, 119, 120 closing entries in, 168 defined, 76 illustration of transactions in, 72 and intercompany eliminations, 619 for partnership liquidation, F13, F14 permanent accounts in, 173 posting to, 63–65 for recording process, 62–64 subsidiary, G1–G3, G9, G10, G12, G18 temporary accounts in, 174 write-offs in, 389 Left side (accounts), See Debit(s) Legal entities, subsidiary companies as, 606, 607 Legal existence of corporations, 538 Legal lives of intangible assets, 446–447 Legal restrictions on retained earnings, 563 Leveraging, 725, 737 Liability(-ies), 480–511 See also specific liabilities with accrued expenses, 115, 117 in basic accounting equation, 12–13 defined, 12, 29 effective-interest method of bond amortization, 502–505 for employee fringe benefits, H5–H7 in partnerships, F2–F4 in recording process, 55–56, 58 standards for, 532–533 on statements of financial position, 24, 182–183 on statements of financial positions, 178 straight-line amortization of, 505–508 terminology, 510–511, H8 with unearned revenues, 110, 111 Licenses, 447–448, 454, 541 I-10 Life: of corporations, 539 of intangible assets, 446 of leased property, H4 of partnerships, F2, F4 useful, see Useful life Life insurance, H6 LIFO (last-in, first-out) inventory method: cost allocation in, 298–300 defined, 301 fairness of, 289 standards on, 287n.2, 325 Li Ka-shing, 710 Limited liability, 10, 538, F3 Limited liability companies, F3, F15 Limited liability partnerships, F3, F15 Limited life: of intangible assets, 446 of partnerships, F2, F4 Limited partners, F3, F15 Limited partnerships, F3, F15 Liquidating dividend, 571 Liquidation, partnership, F10–F16 Liquidation preference, 554–555 Liquidity, 183, 187, 485, 486 Liquidity ratios, 719–723, 728, 737 See also specific ratios LISH assumption, 285 Loans: after global financial crisis, 400 auto, E18 doubtful, 382 mortgage, E18 standards, 398 Long-term bonds, E11–E13 Long-term capital, 487 Long-term creditors, 712 Long-term debt, 484–485 Long-term debt due within one year, 485 Long-term investments: and accounting cycle, 180 defined, 180, 187, 622 on statements of financial position, 615 Long-term liabilities, see Non-current liability(-ies) Long-term notes, E11–E13 Long-term notes payable, 497–499 Loss(es): accumulated other comprehensive, 615 accumulated profit or loss, 595 casualty, 236 in direct write-off method, 387 on disposal of business components, 731 on disposal of plant assets, 443, 653–654, 668 on exchange of plant assets, 451–452 impairment, 477 income and loss ratio, F6–F8 on income statement, 236 net, see Net losses on realization, F10 revaluation of plant assets with, 440 on sale of plant assets, 443–444 unrealized, 609, 615–616, 642, 733 Lower-of-cost-or-market value, 326 Lower-of-cost-or-net-realizable value (LCNRV), 289–290, 301 M Machinery, cost of, 430 Madoff, Bernard, 354, 379 Mail receipts, 341 Maintenance, 441 www.downloadslide.net I-11 Subject Index Makers: check, 347 promissory note, 395, 403 Management: accounting careers in, 11 consolidated statements for, 606 corporation, 539 internal users in, of publicly traded companies, 100 Management consulting, 27, 30 Managerial accounting, 5–6, 28, 30 Manufacturing companies, 278 Marketable securities, 614–615 Marketing, 5, 11 Market interest rate, 490, 492–493, 511 Market price: of bonds, 490–491 book value vs., 570 in price-earnings ratio, 726 of shares, 543–544 Matching principle, see Expense recognition principle Materiality (term), 128, 132, 388, 441 Materiality concept, 441, 454 Maturities: bond redemption at, 496 bond redemption before, 497 current, of long-term debt, 484–485 Maturity dates, 396, 488, 511 Maturity value, of notes receivable, 398 Measurement principles, 129–130 Medicare, I2, I3 Merchandise inventory, 278 Merchandising operations, 218–249 accounting cycle completion in, 231–234 financial statements for, 234–239 flow of costs in, 221–223 inventory classification in, 278 operating cycles in, 220–221 periodic inventory system for, 241–248 recording purchases in, 223–227 recording sales in, 228–231 standards for, 273–274 terminology, 249 types of, 220 worksheets for, 240–241 Merchandising profit, 235 Minus signs (financial calculators), E17 Monetary unit assumption, 9–10, 30, 129, 132 Monitoring (internal control), 331 Monthly rent, 67 Monthly time periods, 102 Mortgage bonds, 488, 511 Mortgage loans, E18 Mortgage notes payable, 497–498, 511 Moving-average method, 295–296 See also Average-cost inventory method Multinational corporations, 50 Murdock, Wilbert, 480 Mutual agency, F2, F4 N Natural resources, 444–445 analysis, 450–451 defined, 454 standards for reporting, 476–477 statement presentation, 450 terminology, 453–454 Negotiable instruments, 348 Net 30 (credit term), 226 Net cash: converting net income to, 650, 652–657, 665–669 difference between net income and, 646, 648 in direct method, 665–669 and free cash flow, 662 in indirect method, 652–657 Net change in cash, 650, 659–660, 671 Net income: conversion to net cash, 650, 652–657, 665–669 defined, 30 difference between net cash and, 646, 648 in direct method, 665–669 and dividends, 170 on income statements, 22 in indirect method, 652–657 and inventory errors, 291 overstatement of, 107, 110, 115 in partnerships, F6–F8 in profitability ratios, 723–726 retained earnings as, 56 in times interest earned, 728 understatement of, 111, 114 on worksheets, 165 Net income available to ordinary shareholders, 567 Net income per share, 726 Net losses: defined, 30 and dividends, 170 on income statements, 22 in partnerships, F6–F8 and retained earnings, 563 on worksheets, 165 Net pay, I4–I5, I12 Net realizable value: of accounts receivable, 388, 389 defined, 388, 403 in LCNRV, 289–290, 301 of notes receivable, 397 standards on, 325–326 Net sales: defined, 234, 249 and gross profit, 235 in profitability ratios, 723, 724 Neutral information, 128 No capital deficiency (partnership liquidation), F10–F12, F15 Nominal accounts, 168, 187 See also Temporary accounts Nominal shares, 544 See also Par value shares Non-cash activities, 674 depreciation as, 675 significant, 648 standards on, 707 and statement of cash flows, 648, 658–659, 669–670 Non-cash current assets, 654–655 Non-current assets: investing activities with, 647, 650, 658–659 standards for, 215 Non-current liability(-ies), 486–501 See also Bonds analysis of, 500–501 on classified statements of financial position, 182 current vs., 482 defined, 187, 486, 511 financing activities with, 647, 650, 658–659 in indirect method, 658–659 and leases, H5 long-term notes payable, 497–499 postretirement benefits, H7 standards for, 532, 533 statement presentation of, 499–500 Non-monetary assets, 477 Non-operating activities, 615 Non-recurring events, 732 Non-trading securities: defined, 609, 622 share investments as, 609, 611–613 standards for, 642 No-par value shares, 544, 548, 571 Normal balance, 55–56, 59, 76 Notes: adjustable-rate, 498 long-term, E11–E13 promissory, 395–396, 403 Notes payable See also Bonds borrowing with bonds vs., 499 defined, 511 as liability, 13, 482–483 long-term, 497–499 mortgage, 497–498, 511 Notes receivable, 395–400 in bank reconciliation, 352 defined, 384, 403 dishonored, 399, 403 disposition of, 398–400 interest on, 397 maturity date of, 396 recognition of, 397 valuation of, 397–398 Notes to financial statements, 563–564, 648 Not-for-profit organizations, 28, 538 NSF (not sufficient funds) checks, 353, 357 Nutrition, as shared value, 181 O Obligations, ability to meet, 646 Obsolescence, 432 Off-balance-sheet financing, H5 Olofsson, Lars, 218 Online merchandising, 238 Operating activities: classification of, 646–648 defined, 679 in direct method, 665–669 and free cash flow, 662 in indirect method, 652–657 net cash from, 646, 648, 650, 652–657, 662, 665–669 standards for, 707 Operating cycles: defined, 181, 187 in merchandising operations, 220–221 and temporary investments, 600 Operating expenses: cash payments for, 667–668 defined, 249 in franchise agreements, 448 freight costs as, 225 improper capitalization of, 735 on income statements, 235–236 Operating leases, H3–H4, H9 Opportunity (fraud), 330 Ordinary repairs, 441, 454, 477 Ordinary shares See also No-par value shares; Par value shares authorization of, 543 and cash dividends, 557–558 equity, 569 financing with bonds vs., 487 issuance of, 547–550 net income available to shareholders of, 567 and ownership rights, 541 preference vs., 554 share capital from, 545 on statements of financial position, 566 Ordinary share dividends distributable, 566 www.downloadslide.net Subject Index Organizations, applications of accounting in: borrowing with bonds vs notes, 499 careers using accounting skills, 11 credit cards, 394 double-entry accounting systems, 62 internal control by human resources, 338 inventory control, 293 just-in-time inventories, 279 leases, 431 loans, 400 online merchandising, 238 share repurchases, 551 subsidiary companies, 607 virtual closes, 171 year-end dates, 24 Organizational charts, 338 Organization costs, 541, 571 Other Accounts column (cash receipts journal), G9, G10 Other assets, 178 Other comprehensive income, 274 Other Expenses and Losses, 642 Other income and expense, 236 Other receivables, 384 Other Revenues and Gains, 642 Outstanding checks, 350, 352, 357 Outstanding shares, 551, 571 Over-the-counter receipts, 339–341 Owens, Jesse, 536 Ownership: corporation classification by, 538 in corporations, 541, 542 of goods, 280–282, 325 with leases, H4 in partnerships, F3 separation of management and, 539 share certificates for proof of, 541 Ownership rights, 539, 541, 542 P Pacioli, Luca, 5n.2 Paid absences, H5–H6 Parent companies, 606, 622 Partners: admission/withdrawal of, F9–F10 creditors and employees vs., F7 general, F15 limited, F3, F15 Partners’ capital statement, F9, F15 Partnerships, F1–F16 admission/withdrawal of partners from, F9–F10 advantages and disadvantages of, F3–F4 business organizations with characteristics of, F3 characteristics of, F1–F3 corporations vs., 540 defined, 10, 30, F1, F15 financial statements for, F9 forming, F4–F5 international differences in, 50 limited, F3, F15 limited liability, F3, F15 net income/loss in, F6–F8 terminology, F15–F16 Partnership agreements, F4, F15 Partnership dissolution, F2, F16 Partnership liquidation, F10–F16 Par value, see Face value Par value shares, 544, 547–548, 571 Patents, 446–447, 454 Payees: check, 348 promissory note, 395, 403 Payments: cash, 665–668, F12, F16 to partnerships, F13–F15 of payroll, I7 periodic, E5–E6 with petty cash fund, 344–345 in recording process, 67 Payment date (cash dividends), 556, 557, 571 Payout ratio, 726–728, 737 Payroll accounting, I1–I12 determining payroll in, I1–I5 and internal control, I10–I11 recording payroll in, I5–I7 taxes in, 508–509, I2–I5, I8–I10 terminology, I1, I11–I12 Payroll deductions, 508–509, I2–I4, I12 Payroll register, I6, I12 PCAOB (Public Company Accounting Oversight Board), 380 Pension plans, H6–H8 Pension recipients, H6 People, planet, and profit, see Corporate social responsibility (CSR) P-E ratio, see Price-earnings ratio Percentages, expressing relationships with, 718 Percentage-of-receivables basis, 390–392, 403 Percentage-of-sales basis, 390–391, 403 Performance obligations, 103 Periodic depreciation, 438–439 Periodic inventory systems: availability of goods in, 300 cost of goods sold in, 222, 241–242, 248, 284 defined, 222, 249 determining quantities in, 279 journalizing and posting closing entries in, 244–246 LIFO in, 300 in merchandising operations, 241–248, 274 perpetual vs., 244, 245, 283–284 recording transactions in, 242–244 on worksheets, 246–248 Periodicity assumption, 102, 129 Periodic payments, E5–E6 Permanent accounts: defined, 168, 187 in ledgers, 173 in post-closing trial balance, 172 proving equality of, 172 temporary vs., 168 Perpetual inventory systems: cost of goods sold in, 242 defined, 221, 249 determining quantities in, 279 inventory cost flow methods in, 294–296 in merchandising operations, 221–223, 233, 274 periodic vs., 244, 245, 283–284 purchases in, 223–227 sales in, 228–231, 242 and sales journals, G4–G5 Petros, Nick, 328 Petty cash funds, 342–346, 357 Physical controls, 229, 335, 340, 343 Physical custody, 333 Physical inventory, 221, 279–280 Plan administrator, pension, H6 Plant assets, 428–444 in accounting cycle, 180 analysis of, 450–451 buildings, 429, 658, 669, 674, 675 characteristics of, 428 defined, 454 depreciation of, see Depreciation determining cost of, 428–431 disposal of, 441–444, 476 I-12 equipment, 429–431 exchange of, 451–453 expenditures on, 441 land, 428–429, 658, 669, 674 land improvements, 429 loss on disposal of, 443, 653–654, 668 retirement of, 442 revaluation of, 439–440 sale of, 442–444 standards for, 476–477 statement presentation of, 450 terminology, 453–454 P&L (profit and loss) ratio, F6–F8 Plus signs (financial calculators), E17 Point-of-sale (POS) systems, 328, 484 Ponzi schemes, 354, 379 Post-closing trial balance, 172–174, 187 Posting: in accounting cycle, 168 of adjusting entries, 119, 120 of bad debts, 392 in cash payments journal, G14, G15 in cash receipts journals, G8, G10 of closing entries, 170–172, 245–246 of correcting entries, 176 defined, 76 in general journals, G16 in perpetual inventory systems, G4 in purchases journal, G12–G13 of reconciling items, 672 in recording process, 63–65 of reversing entries, 186 in sales journals, G5–G6 in subsidiary ledgers, G3 from worksheets, 167 Postretirement benefits, H6–H8 Predictive value, of information, 128 Preemptive right, of shareholders, 542 Preference dividends, 567, 724–725 Preference shares: and cash dividends, 557–558 of corporations, 553–555, 557–558 defined, 553, 571 equity, 569, 570 investment in, 604 Premium(s): bond, see Bond premiums and present value, E13 share, 548, 558, 561, 566 Prenumbered documents, 334 Prepaid expenses: adjusting entries for, 106–109, 119, 125–126 alternative treatment for, 124–127 and cash payments for operating expenses, 668 as deferrals, 105 defined, 105, 106, 132 depreciation, 108–110 increases in, 655, 674 insurance, 107–108 supplies, 106–107 Presentation by function, 236 Presentation by nature, 236 “Presentation of Financial Statements” (IAS 1), 273, 379, 532 Present value, E7–E15 of an annuity, E9–E11, E17, E19 in capital budgeting decisions, E14–E15 defined, 490, E7, E19 and discounting, E11 of leased property, H4 of long-term notes and bonds, E11–E13 of a single amount, E7–E9 of a single sum, E16–E17 www.downloadslide.net I-13 Subject Index Price-earnings (P-E) ratio, 726, 728, 737 Principal: defined, E19 in interest calculation, E1 for long-term notes payable, 498 and market price of bonds, 490 repayment of, 487–488 Principles-based standards, 50 Principles in financial reporting, 129–130 Prior period adjustments, 564, 571, 594 Prior-period information, 215 Private accounting, 28, 30 See also Managerial accounting Privately held corporations, 538, 571 Product warranties, H1–H2 Profit(s) See also Revenue accumulated profit or loss, 595 gross, 235, 249 merchandising, 235 retained, 595 Profitability, inventory management and, 276 Profitability ratios, 719, 723–728, 737 See also specific ratios Profit and loss (P&L) ratio, F6–F8 Profit margin, 723, 728, 737 Pro forma income, 735, 737 Promissory notes, 395–396, 403 See also Notes payable Property, plant, and equipment See also Plant assets in accounting cycle, 180, 215 analysis of, 450–451 defined, 180, 187, 428 and free cash flow, 662, 663 standards on, 476–477 statement presentation, 450 Proportions, expressing relationships with, 718 Proprietorships: corporations vs., 540, 546 defined, 10, 30 international differences in, 50 Prorating, of deprecation, 434 Proving equality: of ledgers, G7, G10–G11, G13, G15 of permanent accounts, 172 Provisions (liabilities), 533, H1–H2, H9 “Provisions, Contingent Liabilities, and Contingent Assets” (IAS 37), 532 Prudence, 289, 301 Public accounting, 27, 30 Public Company Accounting Oversight Board (PCAOB), 380 Publicly held corporations, 538, 571 Purchases: of buildings, 429 and cash payments to suppliers, 667 credit, G11–G12 freight costs, 225, 227 purchase discounts, 226–227 purchase returns and allowances in, 226, 227 recording process for, 223–227, 243 of treasury shares, 550–551 Purchases account, 242, 243 Purchase allowances, 226, 227, 243, 249 Purchase discounts, 226–227, 243, 249 Purchase invoices, 224, 249 Purchases journals, G11–G13, G18 Purchase returns, 226, 227, 243, 249 Purchasing activities, 332–333 Q Quality of earnings, 734–737, 760 Quarterly time periods, 102 Quick ratio, see Acid-test ratio R Radio frequency identification (RFID), 293 Rates, expressing relationships with, 718 Rate of return on sales, 723 See also Profit margin Ratios, 718, 737 See also specific ratios Ratio analysis, 718–730 corporate profitability, 567 defined, 712, 737 horizontal and vertical analysis vs., 713 of intangible assets, 450–451 of liabilities, 485–486, 499–500 liquidity ratios, 719–723 of natural resources, 450–451 of plant assets, 450–451 profitability ratios, 723–727 of receivables, 401–402 solvency ratios, 727–728 Rationalization (fraud), 330 Raw materials, 278, 301 R&D costs, see Research and development costs Readily marketable investments, 614 Real accounts, 168, 187 See also Permanent accounts Real estate, 11 Real estate taxes payable, 13 Realization, in partnership liquidation, F10 Reasonable assurance (of control), 338 Receipts: cash, 339–342, 665, 666 mail, 341 petty cash, 344 Receipt of cash on account, 19–20, 66, 70 Receipt transactions, 339–342 Receivables, 382–403 See also Accounts receivable analysis of, 401–402 defined, 384 notes receivable, 395–400 standards, 398, 423–424 statement presentation of, 401 terminology, 403 types of, 384 Receivables turnover, 721–722 Recognition See also specific recognition principles of accounts receivable, 384–386 defined, 103 of depreciation, 432 of notes receivable, 397 of revenue, 158, 605, 735 Reconciliation (banks), 347, 350–354, 357 Reconciling items, 672–675 Record date (cash dividends), 556, 557, 571 Recording process, 4, 5, 52–76 and the account, 54–59 business documents for, 59 debits and credits in, 54–58, 60 for debt investments, 601–603 and equity relationships, 58 under GAAP, 97–98 illustration of, 65–72 journals for, 60–61 ledgers for, 62–64 for merchandise operations, 223–231, 242–244 for payroll, I5–I7 for payroll taxes, I–9 posting in, 63–65 for provisions, H1–H2 for purchases, 223–227, 243 for sales, 228–231, 244 for share investments, 604–68 terminology, 75–76 and trial balance, 72–75 for uncollectible accounts, 388–389 Record-keeping, 333 Recovery of uncollectible accounts, 389–390 Recycling, computer/television, 118 Reference column: in journals, 60 in ledgers, 64 Regulation(s): for corporations, 539–540 on financial disclosures, 100 on partnerships, F4 Regulatory agencies, Related activities, 332–333 Relevance: defined, 30 in IFRS, of information, 128, 132 Remittance advice (checks), 348 Rent revenue, 236 Repairs, ordinary, 441 Replenishing, 345 Reporting See also Financial reporting of cash, 354–356 of dividends, 555 of investments, 608–614 of payroll taxes, I9–I10 by South Korean companies, sustainability, 331, 445 Research and development (R&D) costs, 449, 454, 476 Reserves (equity), 566, 595 Residual claims, of shareholders, 542 Residual equity, 13 Residual value: defined, 433, 454 in depreciation, 433, 435, 436 standards on, 477 Responsibility: in cash controls, 340, 343 in internal control, 331–332 Restricted cash, 355, 357 Retailers, 218, 220, 393–394 Retail inventory method, 297–298, 301 Retained earnings, 562–565 and cash dividends, 555 of corporations, 562–565 defined, 13, 76, 545, 562, 571 increase in, 658, 670, 675 as part of equity, 13–14 and prior period adjustments, 564 in recording process, 56 and share splits, 561 standards for, 595 Retained Earnings account, 169 Retained earnings restrictions, 563–564, 566, 571 Retained earnings statements, 22–24 from adjusted trial balances, 122 defined, 30, 571 function of, 22, 24, 564–565 horizontal analysis of, 715 items reported in, 562–563 prior period adjustments in, 564 and worksheets, 166 Retained profits, 595 Retirement (assets), 442 Retirement (employee), H6–H7 Returns: purchase, 226, 227, 243, 249 sales, 229–230, 244, 249 Return on assets, 724, 728, 737 Return on ordinary shareholders’ equity, 567, 571, 724–725, 728, 737 www.downloadslide.net Subject Index Revaluation, 158, 439–440, 476 Revaluation surplus, 595 Revenue(s): accrued, see Accrued revenues and adjusting entries, 110, 113 deferred, 111 defined, 30 dividend, 236 and equity, 17 from gift cards, 112 interest, 236 matching of expenses with, 391 other, 642 overstatement of, 111 in recording process, 57 rent, 236 and retained earnings, 13 sales, see Sales revenue from share investments, 605–606 shifting of, 100 and uncollectible amounts, 388 understatement of, 114 unearned, see Unearned revenue Revenue account, 606 Revenue expenditures, 441, 454 Revenue recognition, 158, 605, 735 Revenue recognition principle, 103, 104, 130, 132 Reversing entries, 175, 177, 184–187 Revised depreciation, 438–439 RFID (radio frequency identification), 293 Right side (accounts), see Credit(s) Risk assessment, 330 Rounding, E17 Rowling, J.K., 446 Rules-based standards, 50 Rural development, as shared value, 181 S Salaries See also Payroll accounting accrued, 116–117 defined, I2, I12 in partnerships, F7–F8 payment of, 69 Salaries payable, 13, 510 Sales See also Sales revenue of bonds, 602 credit, 722 net, see Net sales of notes receivable, 399 of plant assets, 442–444 rate of return on, 723 of receivables, 393 recording of, 228–231, 244 of shares, 604–605 in subsidiary ledgers, G2 of treasury shares, 552–553 Sales activities, 333 Sales allowances, 229–230, 244, 249 Sales discounts: in cash receipts journal, G9 defined, 230, 249 in periodic inventory systems, 244 in perpetual inventory systems, 230–231 Sales invoices, 228, 249 Sales journals, G4–G7, G18 Sales returns: defined, 229, 249 in periodic inventory systems, 244 in perpetual inventory systems, 229–230 Sales revenue See also Sales in cash receipts journal, G9 defined, 220, 249 on income statements, 234 in perpetual inventory systems, 228–231 Sales taxes payable, 13, 483–484 Salvage value, 433, 477 See also Residual value Sarbanes-Oxley Act (SOX), 50, 158, 379–380 Scandals, 7, 380 Schauble, Wolfgang, 74 Schedule of cash payments, F12, F16 “S” corporations, F3, F16 SEC, see U.S Securities and Exchange Commission Secured bonds, 488, 511 Securities: categories of, 608–614 held-for-collection, 609, 622, 642 marketable, 614–615 non-trading, 609, 611–613, 622, 642 trading, see Trading securities Segregation of duties: in cash controls, 340, 343 and fraud, 386 in internal control, 332–334, 336 Sellers, freight costs for, 225 Services: ordinary shares for, 548–549 transaction analysis for, 17–19 Service companies, operating cycles for, 220 Service life, see Useful life Service Revenue accounts, 111, 126 Shares: acquisition of, 604, 605 authorized, 543, 571 issuance of, 543 market price of, 543–544 nominal, 544 See also Par value shares no-par value, 544, 548, 571 ordinary, see Ordinary shares outstanding, 551, 571 par value, 544, 547–548, 571 preference, see Preference shares repurchases of, 551 sales of, 604–605 treasury, 550–553, 571, 595 “Share-based Payments” (IFRS 2), 532 Share capital: defined, 545, 571 on financial statements, 566 and GAAP, 98 increase in, 658, 670, 675 owner’s capital vs., 546 and share dividends, 558 and share splits, 561 Share capital–ordinary, 13, 30, 56, 215 Share Capital–Ordinary account, 658, 670, 675 Share certificates, 541, 542 Share compensation plans, 549 Share dividends, 558–560, 571 Shareholders: consolidated statements for, 606 financial statement analysis by, 712 financing and control of, 487 limited liability of, 10, 538 net income available to ordinary, 567 ownership rights of, 541, 542 of preference vs ordinary shares, 554 share dividend for, 559 in transaction analysis, 16 Shareholders’ equity, 98, 567, D4 Share investments, 602–614 of 20% to 50%, 605–606 bond investments vs., 602 defined, 603, 617 of less than 20%, 604–605 of more than 50%, 606–607 recording process for, 604–68 standards, 641 I-14 Share options, 549 Share premiums, 548, 558, 561, 566 Share quotes, reading, 544 Share splits, 560–562, 571 Short-term creditors, 712 Short-term investments: defined, 622 liquidity of, 721 on statements of financial position, 614–615 trading securities as, 609 Short-term paper, 614n.4 Simple interest, E1–E2, E19 Simple journal entries, 61, 76 Sinking fund bonds, 488, 511 Small companies, internal control in, 338 Small share dividends, 559 Social responsibility, see Corporate social responsibility (CSR) Social Security Administration, I10 Social Security taxes, 508, I2, I3 Social Welfare taxes, 508 Solvency ratios, 719, 727–729, 737 South Korean companies, financial reports of, SOX, see Sarbanes-Oxley Act Special journals, G4–G18 cash payments journals, G13–G16 cash receipts journals, G7–G11 and cyber security, G17–G18 defined, G18 purchases journals, G11–G13 sales journals, G4–G7 terminology, G18 Specific identification method (inventory), 283, 301, 325 Spreadsheet applications, 620 Standards, See also specific standards adjusting accounts, 157–158 cash controls, 379–380 for corporations, 594–595 equity, 594–595 financial statement analysis, 759–760 fraud, 379–380 intangible assets, 476–477 internal control, 379–380 inventory, 287n.2, 325–326 investment, 641–642 liabilities, 532–533 loans, 398 merchandising operations, 273–274 natural resources, 476–477 plant assets, 476–477 principles-based, 50 receivables, 398, 423–424 recording process, 97–98 statement of cash flows, 707–708 transaction analysis, 50 U.S financial reporting, 49–50 Stated interest rate, 488 Stated value, 544, 560, 571 Statements of cash flows, 23, 644–679 and cash flow classification, 646–650 consolidated, A6, B5, C5, D5 defined, 30, 646, 679 direct method for preparing, 650, 651, 664–671 format of, 648–650 and free cash flow, 662–663 function of, 22, 25 indirect method for preparing, 650–661, 671–676 investing and financing activities on, 646–648, 650, 659, 669–670 net change in cash on, 650, 659–660, 671 and non-cash activities, 648 www.downloadslide.net I-15 Subject Index Statements of cash flows (cont’d) operating activities on, 646–648, 650, 652–657, 665–669 standards for, 707–708 T-account approach, 677–678 terminology, 679 usefulness of, 646 worksheets for, 671–676 Statements of changes in equity: consolidated, A4–A5, B6, C4 for corporations, 566, 568 defined, 566, 571 Statements of comprehensive income, see Comprehensive income statements Statements of earnings, I7, I12 Statements of financial position, 22–24, 98 See also Classified statements of financial position from adjusted trial balance, 123 adjusting entries on, 105, 118–119 adjusting entry for accruals and, 113, 114 adjusting entry for deferrals and, 107–109, 111 balance sheets vs., 215–216 change in cash account on, 650, 659–660, 671 comprehensive income on, 733 consolidated, 618–621 for corporations, 566–567 current liabilities on, 485, 486, 498 defined, 30 depreciation on, 109–110 equity on, 545–546 function of, 22, 24 horizontal analysis of, 714 intangible assets on, 450 inventory on, 278, 288, 291–294 investments on, 610, 612–617 for merchandising operations, 241, 248 natural resources on, 444 non-current liabilities on, 493, 495, 498–500 for partnerships, F9 plant, property, and equipment on, 450 receivables on, 388–390, 401 share dividends on, 560 and statements of cash flow, 650, 659–660, 671 treasury shares on, 550, 551 unrealized gain or loss on, 615 vertical analysis of, 716, 717 and worksheets, 165, 166, 241, 248, 663 Statements of operations, consolidated, D1 Statements of shareholders’ equity, consolidated, D4 State unemployment taxes, I8, I12 State unemployment tax acts (SUTA), I8 Stock: on balance sheets, 215 common, 98, 215 Stockholders’ equity, 98 Straight-line method: for amortization, 505–508 for depreciation, 433–434, 437, 454 Strategic goals, investments and, 600, 601 Subsidiary companies, 606, 607, 622 Subsidiary ledgers, G1–G3 defined, G1, G18 frequency of posting to, G12 general vs., G9 posting from cash receipts journal to, G10 terminology, G18 Suppliers, cash payments to, 666–667 Supplies: as prepaid expense, 106–107 in transaction analysis, 17, 68 Surplus, revaluation, 595 Sustainability reports, 331, 445 SUTA (state unemployment tax acts), I8 T Tabular summary: account form vs., 54–55 of transactions, 20–21 T-account: debits and credits in, 54–55 defined, 54, 76 payments to suppliers in, 667 statement of cash flows from, 677–678 three-column form of account vs., 62 Taxes and taxation: defined, 30 and financing with bonds, 487 income taxes, see Income taxes incurred by corporations, 540 and inventories, 288 payroll taxes, 508–509, I2–I5, I8–I10 in public accounting, 27 sales taxes payable, 13, 483–484 Social Security taxes, 508, I2, I3 Social Welfare taxes, 508 on statements of cash flows, 647n.1, 707 unemployment taxes, I8, I11, I12 value-added tax, 483n.1 Taxing authorities, Technology, 52, 171 Televisions, recycling, 118 Temporary accounts, 167, 168, 174, 187 Temporary investments, 600 Three-column form of account, 62, 76 Time, in interest calculation, E1 Times interest earned, 500, 511, 727–729, 737 Timekeeping, I11 Time lags, 350 Timeliness of information, 128, 132 Time periods: for current vs noncurrent assets, 181 for discounting, E11 in economic life, 102 on financial statements, 22 for interest computations, 115 Time period assumption, 102, 129, 132, 158 Time value of money, E1–E19 defined, 490, 511 and financial calculators, E16–E18 future value concepts, E3–E6 and interest, E1–E2 and market price of bonds, 490 present value concepts, E7–E15 terminology, E19 Timing, 102–104 Total assets: and dividends, 556 plant assets in relation to, 428 in profitability ratios, 724 in solvency ratios, 727 on statements of financial positions, 716 Total cost of borrowing, 494, 495 Total equity: and sale of treasury shares, 552 and share dividends, 560 and share splits, 561 on statements of financial position, 716 Total liabilities: in solvency ratios, 727 on statements of financial position, 716 Trademarks (trade names), 447, 454 Trade receivables, 384, 403 Trading: of bonds, 488–489 on the equity, 725, 737 of shares, 543 Trading securities: debt investments in, 609 defined, 609, 622 share investments in, 609–611 standards, 642 Transactions (business transactions): and accounting equation, 14–21 defined, 30 documents providing evidence of, 59 external and internal, 14 and statement of cash flows, 650 tabular summary of, 20–21 Transaction analysis, 15–20, 50, 65–70 Transferable ownership rights, 539 Transportation-in, 243 Transposition errors, 73 Treasurers, 539 Treasury shares: of corporations, 550–553 defined, 550, 571 standards, 595 Trend analysis, see Horizontal analysis Trial balances: adjusted, 121–124, 131, 163–165 defined, 76 under GAAP, 98 incomplete data in, 105 for merchandising operations, 241, 246 post-closing, 172–174, 187 and recording process, 72–75 on worksheets, 163–165, 241, 246 Truck, cost of, 430 True (adjusted) cash balance, 352, 353 Trustees, bond, 488 Turnover ratio(s): accounts receivable, 401, 403, 721–722, 728, 736 asset, 450–451, 453, 723–724, 728, 736, 737 inventory, 293, 294, 722–723, 728, 737 receivables, 721–722 U Uncollectible accounts, 386–392 allowance method for, 387–392 direct write-off method for, 387 Uncollectible Accounts Expense, 386 Understandability of information, 128, 132 Underwriting, 543 Unearned revenue: adjusting entries for, 110–112, 119, 127 alternative treatment of, 126–127 from current liabilities, 484 as deferral, 105 defined, 105, 110, 132 Unearned Service Revenue accounts, 126 Unemployment taxes, I8, I11, I12 Unexpired cost, see Book value Unions, U.S Congress, 289, 380, I–2 U.S generally accepted accounting principles, see Generally accepted accounting principles U.S Securities and Exchange Commission (SEC), 98, 211, 354, 610 Units-of-activity method: for depletion, 444 for depreciation, 435, 437, 454 www.downloadslide.net Subject Index Universities, bonds issued by, 488 Unlimited liability, with partnerships, F2–F4 Unrealized gains and losses: standards on, 642 on statement of financial position, 733 statement presentation of, 615–616 with trading securities, 609 Unsecured bonds, 488, 511 Useful information, 128 Useful life: amortization over, 447 defined, 108, 132, 454 in depreciation computation, 432–433 depreciation over, 108, 431 expenditures during, 441 standards, 476 creating, 181 of goodwill, 448 of inventories, 289–290 of investments, 608–614 Value-added tax (VAT), 483n.1 Value-in-use, 477 Verifiability of information, 128, 132 Vertical analysis: defined, 712, 737 of financial statements, 716–718 horizontal and ratio analysis vs., 713 Virtual close, 171 Voluntary restrictions, 563 Vouchers, 357 Voucher register, 342 Voucher systems, 342–343, 357 V Vacations, employee, 337 Vacation pay, H5–H6 Valuation: of accounts receivable, 386–392 and depreciation, 108, 109 of investments, 608–614 of notes receivable, 397–398 Value See also specific types of value carrying, 109, 493 W Wages, 116–117, I2, I12 See also Payroll accounting Wage and Tax Statement (Form W-2), I9, I10, I12 Wages payable, 13, 510 Walton, Sam, 62 Warranties, H1–H2 Water and environmental sustainability, 181 Wear and tear, 432 I-16 Website ad space, 100 Weight-averaged unit cost, 286, 301 W-2 form, see Wage and Tax Statement W-4 form (Employee’s Withholding Allowance Certificate), I11 Wholesalers, 220 Withholdings, tax, 508–509, I4–I5 Working capital, 486, 511, 720 Working capital ratio, 720 Work in process, 278, 301 Worksheets: in accounting cycle, 162–167 and adjusting entries, 163, 167 defined, 162, 187 financial statements from, 165–167 for merchandising operations, 240–241, 246–248 preparing, 163–165 for statements of cash flows, 671–676 for statements of financial position, 619–621 Write-offs (uncollectible accounts), 389 Y Year-ends (accounting), 24 Z Zero-interest bonds, 490 www.downloadslide.net www.downloadslide.net RAPID REVIEW Chapter Content BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters and 6) Ownership Basic Equation Assets Expanded Equation Assets = Liabilities + = Liabilities Dr Cr + – Debit /Credit Effects Dr – Cr + + Equity Share Capital Dr – + Cr + Retained Earnings Dr – Cr + + Revenues Dr – Cr + – Expenses Dr + – Dividends Cr – Dr + Cr – ADJUSTING ENTRIES (Chapter 3) Ownership of goods on public carrier resides with: Who pays freight costs: FOB shipping point Buyer Buyer FOB destination Seller Seller Freight Terms Perpetual vs Periodic Journal Entries Type Adjusting Entry Deferrals Prepaid expenses Unearned revenues Dr Expenses Dr Liabilities Cr Assets Cr Revenues Purchase of goods Accruals Accrued revenues Accrued expenses Dr Assets Dr Expenses Cr Revenues Cr Liabilities Freight (shipping point) Inventory Cash Freight-In Cash Return of goods Cash (or A/P) Inventory Cash (or A/P) Purchase Returns and Allowances Sale of goods Cash (or A/R) Sales Revenue Cost of Goods Sold Inventory Cash (or A/R) Sales Revenue No entry End of period No entry Closing or adjusting entry required Event Note: Each adjusting entry will affect one or more income statement accounts and one or more statement of financial position accounts Interest Computation Perpetual Interest = Face value of note × Annual interest rate × Time in terms of one year CLOSING ENTRIES (Chapter 4) Purpose: (1) Update the Retained Earnings account in the ledger by transferring net income (loss) and dividends to retained earnings (2) Prepare the temporary accounts (revenue, expense, dividends) for the next period’s postings by reducing their balances to zero Process Periodic Purchases Cash (A/P) Cost Flow Methods • Specific identification • First-in, first-out (FIFO) • Weighted-average FRAUD, INTERNAL CONTROL, AND CASH (Chapter 7) Debit each revenue account for its balance (assuming normal balances) and credit Income Summary for total revenues Debit Income Summary for total expenses and credit each expense account for its balance (assuming normal balances) STOP AND CHECK: Does the balance in your Income Summary account equal the net income (loss) reported in the income statement? Inventory Cash (A/P) Debit (credit) Income Summary and credit (debit) Retained Earnings for the amount of net income (loss) Debit Retained Earnings for the balance in the Dividends account and credit Dividends for the same amount STOP AND CHECK: Does the balance in your Retained Earnings account equal the ending balance reported in the statement of financial position and the retained earnings statement? Are all of your temporary account balances zero? ACCOUNTING CYCLE (Chapter 4) The Fraud Triangle Opportunity Financial pressure Bank Books Balance per bank statement Add: Deposits in transit Balance per books Add: Unrecorded credit memoranda from bank statement Deduct: Unrecorded debit memoranda from bank statement Adjusted cash balance Deduct: Outstanding checks Adjusted cash balance Prepare a post-closing trial balance Journalize the transactions Journalize and post closing entries Post to ledger accounts Prepare financial statements: Income statement Retained earnings statement Statement of financial position Prepare a trial balance Prepare an adjusted trial balance Errors should be offset (added or deducted) on the side that made the error Adjusting journal entries should only be made on the books STOP AND CHECK: Does the adjusted cash balance in the Cash account equal the reconciled balance? Analyze business transactions Rationalization Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls Bank Reconciliation Note: Principles of Internal Control Activities • • • • • • Journalize and post adjusting entries: Prepayments/Accruals Optional steps: If a worksheet is prepared, Steps 4, 5, and are incorporated in the worksheet If reversing entries are prepared, they occur between Steps and RECEIVABLES (Chapter 8) Methods to Account for Uncollectible Accounts Direct write-off method Record bad debt expense when the company determines a particular account to be uncollectible Allowance methods: Percentage-of-sales At the end of each period, estimate the amount of credit sales uncollectible Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for this amount As specific accounts become uncollectible, debit Allowance for Doubtful Accounts and credit Accounts Receivable Percentage-of-receivables At the end of each period, estimate the amount of uncollectible receivables Debit Bad Debt Expense and credit Allowance for Doubtful Accounts in an amount that results in a balance in the allowance account equal to the estimate of uncollectibles As specific accounts become uncollectible, debit Allowance for Doubtful Accounts and credit Accounts Receivable www.downloadslide.net RAPID REVIEW Chapter Content PLANT ASSETS (Chapter 9) INVESTMENTS (Chapter 12) Presentation Comparison of Long-Term Bond Investment and Liability Journal Entries Tangible Assets Intangible Assets Event Investor Investee Property, plant, and equipment Intangible assets (patents, copyrights, trademarks, franchises, goodwill) Purchase / issue of bonds Debt Investments Cash Cash Bonds Payable Interest receipt / payment Cash Interest Revenue Interest Expense Cash Natural resources Computation of Annual Depreciation Expense Comparison of Cost and Equity Methods of Accounting for Long-Term Share Investments Straight-line Cost − Residual value ——— Useful life (in years) Units-of-activity Depreciable cost ——— × Units of activity during year Useful life (in units) Book value at beginning of year × Declining-balance rate* *Declining-balance rate = ÷ Useful life (in years) Declining-balance Note: If depreciation is calculated for partial periods, the straight-line and decliningbalance methods must be adjusted for the relevant proportion of the year Multiply the annual depreciation expense by the number of months expired in the year divided by 12 months Event Cost Equity Acquisition Share Investments Cash Share Investments Cash Investee reports earnings No entry Share Investments Investment Revenue Investee pays dividends Cash Dividend Revenue Cash Share Investments Trading and Non-Trading Securities BONDS (Chapter 10) Premium Market interest rate < Contractual interest rate Face value Market interest rate = Contractual interest rate Discount Market interest rate > Contractual interest rate Interest expense = Interest paid (payable) + Amortization of discount (OR − Amortization of premium) Effective-interest amortization (preferred method) Report at fair value with changes reported in net income Non-trading Report at fair value with changes reported in the equity section STATEMENT OF CASH FLOWS (Chapter 13) Computation of Annual Bond Interest Expense Straight-line amortization Trading Bond discount (premium) Number of interest periods Bond interest expense Bond interest paid Carrying value of bonds at beginning of period × Effective-interest rate Face amount of bonds × Contractual interest rate EQUITY (Chapter 11) No-Par Value vs Par Value Share Journal Entries No-Par Value Par Value Cash Share Capital—Ordinary Cash Share Capital—Ordinary (par value) Share Premium—Ordinary Cash flows from operating activities (indirect method) Net income Add: Losses on disposals of assets Amortization and depreciation Decreases in non-cash current assets Increases in current liabilities Deduct: Gains on disposals of assets Increases in non-cash current assets Decreases in current liabilities Net cash provided (used) by operating activities $X Cash flows from operating activities (direct method) Cash receipts (Examples: from sales of goods and services to customers, from receipts of interest and dividends on loans and investments) $X Cash payments (Examples: to suppliers, for operating expenses, for interest, for taxes) (X) Net cash provided (used) by operating activities $X PRESENTATION OF NON-TYPICAL ITEMS (Chapter 14) Prior period adjustments (Chapter 11) Retained earnings statement (adjustment of beginning retained earnings) Discontinued operations Income statement (presented separately after “Income from continuing operations”) Changes in accounting principle In most instances, use the new method in current period and restate previous years’ results using new method For changes in depreciation and amortization methods, use the new method in the current period but not restate previous periods Comparison of Dividend Effects Share Capital— Ordinary Cash $X X X X (X) (X) (X) Retained Earnings Cash dividend ↓ Share dividend No effect ↑ ↓ Share split No effect No effect No effect No effect ↓ Debits and Credits to Retained Earnings Retained Earnings Debits (Decreases) Credits (Increases) Net loss Prior period adjustments for overstatement of net income Cash dividends and share dividends Some disposals of treasury shares Net income Prior period adjustments for understatement of net income www.downloadslide.net RAPID REVIEW Financial Statements Order of Preparation Retained Earnings Statement Statement Type NAME OF COMPANY Retained Earnings Statement For the Period Ended Date Income statement For the period ended Retained earnings statement For the period ended Statement of financial position As of the end of the period Statement of cash flows For the period ended Deduct: Dividends Retained earnings, end of period Income Statement (perpetual inventory system) STOP AND CHECK: Net income (loss) presented on the retained earnings statement must equal the net income (loss) presented on the income statement NAME OF COMPANY Income Statement For the Period Ended Sales Sales revenue Less: Sales returns and allowances Sales discounts Net sales Cost of goods sold Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other income and expense Interest expense Income before income taxes Income tax expense Net income Statement of Financial Position NAME OF COMPANY Statement of Financial Position As of the End of the Period €X X X €X X X X X X X X X €X Assets Intangible assets Property, plant, and equipment Land Buildings and equipment €X Less: Accumulated depreciation X Long-term investments (Examples: investments in bonds, investments in shares) Current assets (Examples: prepaid expenses, merchandise inventory, accounts receivable, short-term investments, cash) Total assets €X €X X X X X €X Equity and Liabilities Income Statement (periodic inventory system) NAME OF COMPANY Income Statement For the Period Ended Sales Sales revenue Less: Sales returns and allowances Sales discounts Net sales Cost of goods sold Beginning inventory Purchases €X Less: Purchase returns and allowances X Net purchases X Add: Freight-in X Cost of goods purchased Cost of goods available for sale Less: Ending inventory Cost of goods sold Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other income and expense Interest expense Income before income taxes Income tax expense Net income €X X X X €X Retained earnings, beginning of period Add: Net income (or deduct net loss) €X X X €X Equity Share capital—ordinary Retained earnings Liabilities Non-current liabilities (Examples: notes payable, bonds payable) Current liabilities (Examples: notes payable, accounts payable, accruals, unearned revenues, current portion of notes payable) Total equity and liabilities €X X €X X X X €X X STOP AND CHECK: Total assets on the statement of financial position must equal total equity and liabilities; ending retained earnings on the statement of financial position must equal ending retained earnings on the retained earnings statement X X X Statement of Cash Flows NAME OF COMPANY Statement of Cash Flows For the Period Ended X X X X X X X €X Cash flows from operating activities (Note: May be prepared using the direct or indirect method) Net cash provided (used) by operating activities Cash flows from investing activities (Examples: purchase / sale of non-current assets) Net cash provided (used) by investing activities Cash flows from financing activities (Examples: issue / repayment of non-current liabilities, issue of shares, payment of dividends) Net cash provided (used) by financing activities Net increase (decrease) in cash Cash, beginning of the period NAME OF COMPANY Comprehensive Income Statement For the Period Ended Cash, end of the period Net income Other comprehensive income € XX XX Comprehensive income € XX €X X X X X €X STOP AND CHECK: Cash, end of the period, on the statement of cash flows must equal cash presented on the statement of financial position www.downloadslide.net RAPID REVIEW Using the Information in the Financial Statements Ratio Formula Purpose or Use Current assets ——— Current liabilities Measures short-term debt-paying ability Liquidity Ratios Current ratio Acid-test (quick) ratio Accounts receivable turnover Inventory turnover Cash + Short-term investments + Accounts receivable (net) — — — — — Current liabilities Net credit sales ———— Average net accounts receivable Cost of goods sold ——— Average inventory Measures immediate short-term liquidity Measures liquidity of accounts receivable Measures liquidity of inventory Profitability Ratios Profit margin Net income —— Net sales Measures net income generated by each currency unit of sales Asset turnover Net sales ——— Average total assets Measures how efficiently assets are used to generate sales Return on assets Net income ——— Average total assets Measures overall profitability of assets Return on ordinary shareholders’ equity Earnings per share (EPS) Net income − Preference dividends —————— Weighted-average ordinary shares outstanding Measures net income earned on each ordinary share 10 Price-earnings (P-E) ratio Market price per share ——— Earnings per share Measures the ratio of the market price per share to earnings per share 11 Payout ratio Net income − Preference dividends —————— Average ordinary shareholders’ equity Measures profitability of shareholders’ investment Cash dividends —— Net income Measures percentage of earnings distributed in the form of cash dividends Total liabilities — — — Total assets Measures percentage of total assets provided by creditors Solvency Ratios 12 Debt to assets ratio 13 Times interest earned 14 Free cash flow Net income + Interest expense + Income tax expense ——————— Interest expense Net cash provided by operating activities − Capital expenditures − Cash dividends Measures ability to meet interest payments as they come due Measures the amount of cash generated during the current year that is available for the payment of additional dividends or for expansion www.downloadslide.net WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... follows ACCOUNTING IN ACTION What Is Accounting? The Building Blocks of Accounting The Basic Using the Accounting Equation Accounting Equation Financial Statements • Three activities • Who uses accounting. .. Weygandt, Jerry J Financial accounting : IFRS / Jerry J Weygandt, Paul D Kimmel, Donald E Kieso — 3rd edition pages cm Includes index ISBN 978-1-118-97808-5 (cloth) Accounting Accounting—Standards... (IASB) and the Financial Accounting Standards Board (FASB) More than 130 countries follow standards referred to as International Financial Reporting Standards (IFRS) IFRSs are determined by the IASB