Eleventh Edition I ntro d u c t i o n t o Financial Accounting Charles T Horngren Stanford University Gary L Sundem University of Washington John A Elliott University of Connecticut Donna R Philbrick Portland State University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo To Chuck Horngren whose contributions over many years have made this textbook what it is Editor in Chief: Donna Battista Acquisitions Editor: Lacey Vitetta Director of Editorial Services: Ashley Santora Senior Editorial Project Manager: Karen Kirincich Marketing Manager: Alison Haskins Marketing Assistant: Kimberly Lovato Senior Production Project Manager: Roberta Sherman Manufacturing Buyer: Carol Melville Art Director: Anthony Gemmellaro Interior Design: Lisa Delgado/Emily Friel, Integra Cover Design: Anthony Gemmellaro Cover Photos: Ryan McVay/Stone/Getty Images; Mary Rice/Shutterstock Art Studio: GEX Publishing Services Compositor: GEX Publishing Services Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text (or on page PC1) Copyright © 2014 by Pearson Education, Inc All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Horngren, Charles T Introduction to financial accounting / Charles T Horngren, Gary L Sundem, John A Elliott, Donna R Philbrick Eleventh edition pages cm Includes index ISBN 978-0-13-325103-6 (casebound) 1. Accounting I Title HF5635.H813 2014 657 dc23 2012047453 10 9 8 7 6 5 4 3 2 1 ISBN-13: 978-0-13-325103-6 ISBN-10: 0-13-325103-9 About the Authors Charles T Horngren passed away in the midst of this current revision of Introduction to Financial Accounting He was the Edmund W Littlefield professor of accounting emeritus at Stanford University A graduate of Marquette University, he received his MBA from Harvard University and his PhD from the University of Chicago He also received honorary doctorates from Marquette University and DePaul University A certified public accountant, Horngren served on the Accounting Principles Board, the Financial Accounting Standards Board Advisory Council, and the Council of the American Institute of Certified Public Accountants In addition, he served as a trustee of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board and the Government Accounting Standards Board He is a member of the Accounting Hall of Fame Horngren served the American Accounting Association as its president and its director of research He received the association’s first annual Outstanding Accounting Educator Award and also received its Lifetime Contribution to Management Accounting Award The California Certified Public Accountants Foundation gave Horngren its Faculty Excellence Award and its Distinguished Professor Award He is the first person to have received both awards The American Institute of Certified Public Accountants presented him with its first Outstanding Educator Award He was also named Accountant of the Year, Education, by the national professional accounting fraternity, Beta Alpha Psi Professor Horngren was also a member of the Institute of Management Accountants, where he received its Distinguished Service Award He was a member of the Institute’s Board of Regents, which administers the Certified Management Accountant examinations Horngren is the author of other accounting books published by Pearson Education: Cost Accounting: A Managerial Emphasis, Introduction to Management Accounting, Accounting, and Financial Accounting He was also the Consulting Editor for the Charles T Horngren Series in Accounting Gary L Sundem is professor of accounting emeritus at the Foster School of Business at the University of Washington, Seattle He received his BA from Carleton College and his MBA and PhD from Stanford University Professor Sundem has served as President of the American Accounting Association, Executive Director of the Accounting Education Change Commission, and Editor of The Accounting Review He is currently president of the International Association for Accounting Education and Research Sundem is a past president of the Seattle chapter of the IMA (formerly the Institute of Management Accountants) He has served on IMA’s national board of directors and chaired its Academic Relations and Professional Development committees He has chaired the AACSB’s Accounting Accreditation Committee and currently serves on the Board of Trustees of Rainier Mutual Funds and the Board of Trustees of Carleton College, where he chairs the Audit Committee He received the Carleton College Outstanding Alumni award in 2002 Professor Sundem has numerous publications in accounting and finance journals including Issues in Accounting Education, The Accounting Review, Journal of Accounting Research, and Journal of Finance He was selected as the Outstanding Accounting Educator by the American Accounting Association in 1998 and by the Washington Society of CPAs in 1987 iii John A Elliott is the dean of the School of Business at the University of Connecticut and the Auran J Fox Chair in Business Prior to joining the University of Connecticut, he served for 10 years as dean of the Zicklin School of Business at Baruch College, part of the City University of New York (CUNY) He was the Irwin and Arlene Ettinger professor of accountancy He received his BS and MBA from the University of Maryland and his PhD from Cornell University Prior to accepting the deanship at the Zicklin School, he spent 20 years on the faculty at Cornell University’s Johnson Graduate School of Management, most recently as associate dean for academic affairs Dean Elliott is a certified public accountant with professional experience as an auditor and consultant for Arthur Andersen & Co and in the controller’s office of the Westinghouse Defense and Space Center During his career he has taught at seven different institutions His responsibilities have included financial accounting, intermediate accounting, financial statement analysis, taxation, and extensive executive teaching In 2004 his paper on earnings management (with Nelson and Tarpley) received the award from the American Accounting Association for Notable Contributions to Accounting Literature His research is concentrated on the role of accounting information in financial analysis and contracts He serves on two corporate boards, NFP and Liquidnet, and chairs their audit committees He has previously served on and chaired the boards for the Hangar Theatre, Cayuga Medical Center, and the Graduate Management Admissions Council Donna R Philbrick is Professor of Accounting at Portland State University She received her BS from the University of Oregon and her MBA and PhD from Cornell University Professor Philbrick is a certified public accountant (inactive) and worked as an auditor for Touche Ross (now Deloitte & Touche) and Price Waterhouse (now PricewaterhouseCoopers) prior to returning for her graduate degrees Before joining the faculty at Portland State University, she taught at the University of Oregon and Duke University She currently teaches at both the graduate and undergraduate levels, focusing on financial accounting, intermediate accounting, and financial statement analysis Professor Philbrick has taught for many years in the Oregon Executive MBA program and has experience teaching in numerous corporate programs Professor Philbrick’s research has been published in accounting journals including The Accounting Review, Journal of Accounting Research, and Journal of Accounting and Economics Most recently her research has focused on corporate governance issues She has served on the Advisory Board and as an associate editor of Accounting Horizons iv Brief Contents Preface xiv Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter 10 Chapter 11 Chapter 12 Accounting: The Language of Business Measuring Income to Assess Performance 44 The Portfolio P1 Recording Transactions 90 Accrual Accounting and Financial Statements 140 Statement of Cash Flows 188 Accounting for Sales 238 Inventories and Cost of Goods Sold 284 Long-Lived Assets 338 Liabilities and Interest 386 Stockholders’ Equity 448 Intercorporate Investments and Consolidations 492 Financial Statement Analysis 532 Glossary G1 Index I1 Photo Credits PC1 v Contents Preface xiv Acknowledgements xvi Chapter Accounting: The Language of Business Starbucks Coffee The Nature of Accounting The Balance Sheet Balance Sheet Transactions 10 Types of Ownership 17 Accounting Differences Between Proprietorships, Partnerships, and Corporations 19 Stockholders and the Board of Directors 22 Regulation of Financial Reporting 23 Credibility and the Role of Auditing 25 The Accounting Profession 25 Career Opportunities for Accountants 28 Highlights to Remember 31 Assignment Material 32 Chapter • Accounting Vocabulary 32 • Measuring Income to Assess Performance 44 General Mills 44 Introduction to Income Measurement 46 Measuring Income 52 The Income Statement 56 Accounting for Dividends and Retained Earnings 61 Four Popular Financial Ratios 65 The Portfolio P1 Conceptual Framework 69 Other Basic Concepts And Conventions 72 Highlights to Remember 74 Assignment Material 75 Chapter • Accounting Vocabulary 75 • Recording Transactions 90 Delta Air Lines 90 The Double-Entry Accounting System 92 Debits and Credits 95 The Recording Process 96 Analyzing, Journalizing, and Posting the Biwheels Transactions 99 Biwheels’ Transactions in the Journal and Ledger 106 Preparing the Trial Balance 109 Effects of Errors 116 Incomplete Records 118 Data Processing and Accounting Systems 119 Highlights to Remember 121 Assignment Material 122 vi • Accounting Vocabulary 121 • Chapter Accrual Accounting and Financial Statements 140 Columbia Sportswear 140 Adjustments to the Accounts 142 I Expiration or Consumption of Unexpired Costs 143 II Earning of Revenues Received in Advance 144 III Accrual of Unrecorded Expenses 146 IV Accrual of Unrecorded Revenues 149 The Adjusting Process in Perspective 151 Classified Balance Sheet 156 Income Statement 161 Profitability Evaluation Ratios 165 Highlights to Remember 169 Assignment Material 170 Chapter • Accounting Vocabulary 170 • Statement of Cash Flows 188 Costco 188 Overview of Statement of Cash Flows 189 Preparing a Statement of Cash Flows 192 Cash Flow from Operating Activities 199 The Statement of Cash Flows and the Balance Sheet Equation 207 Examples of Statements of Cash Flows 209 The Importance of Cash Flow 211 Highlights to Remember 218 Assignment Material 219 Chapter • Accounting Vocabulary 219 • Accounting for Sales 238 Oracle Corporation 238 Recognition of Sales Revenue 239 Measurement of Sales Revenue 242 Credit Sales and Accounts Receivable 248 Measurement of Uncollectible Accounts 249 Assessing the Level of Accounts Receivable 256 Accounting for and Managing Cash 258 Overview of Internal Control 259 Highlights to Remember 263 • Appendix 6: Bank Reconciliations Accounting Vocabulary 266 • Assignment Material 267 Chapter 264 • Inventories and Cost of Goods Sold 284 The Home Depot 284 Gross Profit and Cost of Goods Sold 285 Perpetual and Periodic Inventory Systems 286 Cost of Merchandise Acquired 289 Comparing Accounting Procedures for Periodic and Perpetual Inventory Systems 291 Principal Inventory Valuation Methods 293 Lower-of-Cost-or-Market Method 299 Effects of Inventory Errors 301 vii Cutoff Errors and Inventory Valuation 303 The Importance of Gross Profits 304 Gross Profit Percentages And Accuracy of Records 308 Internal Control of Inventories 308 Highlights to Remember 310 • Appendix 7A: Characteristics and Consequences of LIFO 311 • Appendix 7B: Inventory in a Manufacturing Environment 315 • Accounting Vocabulary 317 • Assignment Material 317 Chapter Long-Lived Assets 338 Intel Corporation 338 Overview of Long-Lived Assets 340 Contrasting Long-Lived Asset Expenditures with Expenses 342 Acquisition Cost of Tangible Assets 343 Accounting Alternatives Subsequent to Acquisition 345 Depreciation of Buildings and Equipment 345 Changes in Estimated Useful Life or Residual Value 349 Contrasting Income Tax and Shareholder Reporting 350 Depreciation and Cash Flow 350 Expenditures after Acquisition 353 Gains and Losses on Sales of Tangible Assets 354 Revaluation of Tangible Assets 358 Intangible Assets 360 Goodwill 364 Depletion of Natural Resources 366 Highlights to Remember 366 Assignment Material 368 Chapter • Accounting Vocabulary 368 • Liabilities and Interest 386 Jack in the Box 386 Liabilities in Perspective 387 Accounting for Current Liabilities 389 Long-Term Liabilities 394 Bond Accounting 399 Accounting for Leases 408 Other Long-Term Liabilities, Including Pensions and Deferred Taxes 413 Debt Ratios and Interest-Coverage Ratios 420 Highlights to Remember 421 • Appendix 9: Compound Interest, Future Value, and Present Value 422 • Accounting Vocabulary 429 • Assignment Material 430 Chapter 10 Stockholders’ Equity 448 United Parcel Service (UPS) 448 Background on Stockholders’ Equity 451 Accounting For Common Stock in Publicly Held Corporations 452 Preferred Stock 456 Stock Options and Restricted Stock 460 Stock Splits and Stock Dividends 462 Repurchase of Shares 467 viii Other Issuances of Common Stock 472 Retained Earnings Restrictions 473 Other Components of Stockholders’ Equity 474 Financial Ratios Related to Stockholders’ Equity 474 Highlights to Remember 476 Assignment Material 477 Chapter 11 • Accounting Vocabulary 477 • Intercorporate Investments and Consolidations 492 Coca-Cola Company 492 An Overview of Corporate Investments 493 Short-Term Investments 494 Long-Term Investments in Bonds 499 The Market and Equity Methods for Intercorporate Equity Investments 501 Consolidated Financial Statements 504 Purchase Price not Equal to Book Value 515 Summary of Accounting for Equity Securities 516 Highlights to Remember 517 Assignment Material 519 Chapter 12 • Accounting Vocabulary 518 • Financial Statement Analysis 532 Nike 532 Sources of Information About Companies 534 Objectives of Financial Statement Analysis 535 Evaluating Trends and Components of the Business 537 Financial Ratios 548 Operating Performance and Financing Decisions 555 Prominence of Earnings Per Share 561 Disclosure of Irregular Items 563 International Issues 567 Valuation Issues 567 Relating Cash Flow and Net Income 570 Highlights to Remember 574 Assignment Material 575 • Accounting Vocabulary 575 • Glossary G1 Index I1 Photo Credits PC1 ix I8 SUBJECT INDEX Investing activities, 191 noncash, 197 Investments corporate, 493–494 intercorporate equity, 501–504, 516–517 long-term, 499–501 short-term, 494–498 Invoice, 389 Irregular items changes in accounting principle, 566–567 disclosure of, 563 discontinued operations, 564, 566 extraordinary items, 564 unusual or nonrecurring items, 563–564 IRS See Internal Revenue Service Issued shares, 453 J Jakob, Mark, 536 Jobs, Steve, 536 Journal entry, 97 Journalizing, 97 K Kiplinger Personal Finance, 398 Knowledge-based businesses, 362 See also Intellectual property L Land, 341, 343 Last-in, first-out (LIFO), 295–296 compared to FIFO, 311–314 and holding gains, 311 and inflation, 311 LIFO layers, 312 LIFO liquidation, 312–313 LIFO reserve, 313 Lauer, Matt, 29 Lay, Kenneth, 29 LCM See Lower-of-cost-or-market method League of American Communications Professionals (LACP), Lease, 408 Leasehold, 364 Leasehold improvement, 364 Leases accounting for, 408–412 capital, 408–411 operating, 408–411 Ledger account, 92–95 Lessee, 408 Lessor, 408 Leveraging See Trading on the equity Liabilities, 9, 368–388, P2, P4 Liabilities accrued, 390 contingent, 419 current, 156–157, 389–393 long-term, 388, 413–418 restructuring, 419 LIBOR (London Interbank Offering Rate), 399 Licenses See Franchises LIFO See Last-in, first-out LIFO increment See LIFO layer LIFO layer (LIFO increment), 312 LIFO liquidation, 312–313 LIFO reserve, 313 Limited liability, 17–18 Line of credit, 389 Liquidating value, 457 Liquidation, 394 Liquidity, 159 London Stock Exchange, 5, 18–19 Long-lived assets, 339–340 accounting alternatives subsequent to acquisition, 345 acquisition cost of tangible assets, 343–345 changes in estimated life or residual value, 349 contrasting income tax and shareholder reporting, 250 contrasting long-lived asset expenditures with expenses, 342–343 depletion of natural resources, 366 depreciation of buildings and equipment, 345–349 depreciation and cash flow, 250–251 expenditures after acquisition, 353 gains and losses on sales of tangible assets, 354–357 goodwill, 364–366 intangible assets, 360–364 revaluation of tangible assets, 358–360 overview, 340–342 Long-term debt, current portion of, 391 Long-term liabilities, 388, 394–399 contingent liabilities, 419–420 corporate bonds, 394–404 deferred taxes, 415–416 leases, 408–411 pensions, 413–415 other postretirement benefits, 415 restructuring, 419 Long-term solvency, 535 Long-term-debt-to-total-capital ratio, 420 Lower-of-cost-or-market method (LCM), 299–301 Lump-sum purchase See Basket purchase M Maintenance, 353 Management accounting, SUBJECT INDEX Management discussion and analysis (MD&A), 541 Marcus, Bernie, 284 Margin Call, 191 Market method, 495, 501, 517 and statement of cash flows, 498 Market rate, 396 Market value, 67 Marketable securities, 494 Market-to-book ratio, 475, P2 Matching, 53 Materiality, 73 Mays, Willie, 445–446 Measurement of sales revenue, 242 accounting for net sales revenue, 247 charge card transactions, recording, 246 merchandise returns and allowances, 242–243 trade and cash discounts, 243–246 Mergers, corporate See Corporate mergers Michaels, Ed, 341 Microsoft Small Business Manager, 119 Modified Accelerated Cost Recovery System (MACRS), 350 Monetary assets, 344 See also Assets Moore, Gordon E., 338 Mortgage bond, 394 Moving-average cost method, 296 Multi-step income statement, 163–165 N NAICS, 554 NASDAQ, 18, 21, 450, 536 National Retail Federation, 308–309 Natural resources, 366 Negotiable, 394 Net assets, 10 Net book value See Book value Net current assets See Working capital Net earnings See Net income Net income (net earnings), 44, 56–57, P1 and cash flow, 570–571 Net liability, 499 Net loss, 57 Net realizable value, 299 Net sales, 242, 247 Net working capital See Working capital NetSuite, 119 New York Times, 536 Nikkei, Nominal interest rate (contractual rate, coupon rate, stated rate), 394 Noncash exchanges, 472 Noncash investing and financing activities, 197, 225 I9 Noncontrolling interests, 474, 511–513, P1 Nonmonetary assets, 344 Nonoperating revenues and expenses, 164–165 Nonprofit organizations, 30–31 Nonrecurring items (unusual items), 563–564, 566–567 North American Industry Classification System (NAICS), 551 Notes payable, 9, 389–390 Noyce, Robert, 338 O Objective of financial reporting, 70 OCI See Other comprehensive income Open account, 13 Operating activities, 190, 199–201 Operating cycle (cash cycle), 47 Operating expenses, 164 Operating income (operating profit, income from operations), 164 Operating lease, 408–411 Operating management, 555 Operating performance, 555–557 Operating profit See Operating income Ordinary annuity, 427–429 Other comprehensive income (OCI), 63 Other postretirement benefits, 413–415 Outstanding shares, 453 Owners’ equity, 9–10 Ownership changes in level of, 502–503 types of, 17–19 P Pacioli, Luca, 93 Paid-in capital, 19 Paid-in capital in excess of par value (additional paid-in capital), 20 Par value (stated value), 20–21 Parent company, 504 Participating, 458 Partnership, 17 Patents, 362 Payment date, 455 Payroll taxes, 390 PCAOB See Public Company Accounting Oversight Board P-E ratio See Price-earnings ratio Pemberton, John, 492 Pensions, 413 Percentage of accounts receivable method, 253 Percentage of completion method, 241 Percentage of sales method, 253 Period costs, 53 I10 SUBJECT INDEX Periodic inventory system, 288, 291–293, 309 Periodicity convention, 73 Permanent differences, 416 Perpetual inventory system, 286–288, 291–293, 309 Pharmaceuticals, 306 Physical count, 286 Plant assets See Tangible assets Posting, 98–99 Predictive value, 71 Preemptive rights, 452 Preferred stock, 456–458 compared to bonds, 459 Premium on bonds See Bond premium Prepaid expenses, 104 Present value (PV), 422, 424–429 Pretax and pre-interest return on total assets, 555 Pretax income See Income before income tax Price-earnings (P-E) ratio (earnings multiple), 66–67, 567, 569–570, P3 Price-earnings growth (PEG) ratio, 570 Principal, 422 Private placements, 394 Privately owned (closely held, unlisted), 18, 450 Pro forma statements, 535 Product costs, 53 Profit margin ratio See Return on sales ratio Profitability, 166 Profits See Income Promissory note, 389 Protective covenant (covenant), 395–396 Provisions, 383 Public accounting firms, 26–27 Public companies, 450 Public Company Accounting Oversight Board (PCAOB), 27, 453 Publicly traded stock, Purchase allowance See Sales allowance Purchase order, 389 Purchase returns See Sales returns, 242 Q Quick ratio (acid test ratio), 161 QuickBooks, 119 R Rate of return, 166 Rate of return on common stockholders’ equity (rate of return on equity, ROE, ROCE), 474–475, 555 Rate of return on equity See Rate of return on common stockholders’ equity Ratios, 65, P1 benchmark comparison, 551 comparison of, 548–551, 553 cross-sectional comparison, 551 current ratio, 159–161 debt-to-equity, 420, 560 debt-to-total-assets, 420 dividend-payout, 68 dividend-yield, 68 earnings multiple, 66 earnings per share (EPS), 65–66 evaluating, 548–551, 553–554 financial leverage, 557 gross profit percentage, 166 information in the press, 68–69 interest-coverage, 421, 548 long-term-debt-to-total-capital, 420 market-to-book, 475 applied to Nike, 549–550 price-earnings (P-E), 66–67, 570 price-earnings growth, 570 profit margin, 166 profitability evaluation, 165–168, 553 quick, 161 rate of return on common stockholders’ equity, 474–475 related to stockholders’ equity, 474–476 return on assets, 167–168 return on common stockholders’ equity (ROE), 167–168, P1 return on sales (net profit margin), 166–167 time-series comparison, 551 Raw material inventory, 315 Real interest rate, 398 Receivables See Accounts receivable Receiving report, 389 Recognition of expired assets, 55–56 Recognition of sales revenue, 239–242 Reconcile a bank statement, 259 Reconciliation statement, 207 Recording process, 96–99 Records, incomplete, 118–119 Recoverability test, 359 Recoverable amount, 360 Red Herring, 535 Redemption price See Call price Registered public accounting firm, 27 Relevance, 71 Reliability, 73 Repairs, 353 Report format, 157–159 Research and development, 306, 341 expenditures for, 361 Reserve, 473 Residual value (terminal value, disposal value, salvage value, scrap value), 345, 349 SUBJECT INDEX Restricted retained earnings (appropriated retained earnings), 473 Restricted stock, 460–461 Restructuring, 419 Retailer, 304 Retained earnings (retained income), 48, 102 accounting for, 62–64 restrictions on, 473 Retained income See retained earnings Return on assets See Pretax and pre-interest return on total assets Return on assets ratio (ROA), 167, 555–557, P4–P5 Return on common stockholders’ equity ratio (ROE or ROCE), 167, 555, 567, P1, P4–P5 Return on sales ratio (profit margin ratio), 166, P3 Returnable deposits, 391–392 Revenue (sales, sales revenue), 48 accounting for, 239–242 accrual of unrecorded, 149–151 adjustment for, 204–205 franchises and revenue recognition, 145 nonoperating, 164–165 received in advance, 144–146 unearned, 144–146, 392 unearned, and ethics, 150–151 Revenue received in advance See Unearned revenue Revenue recognition, 52 and ethics, 150–151 Revenue transactions, 101–103 Reverse stock split, 462 Risk, measuring, 560 Risk Management Association, 554 ROA See Return on assets ratio ROCE See Rate of return on common stockholders’ equity; Return on common stockholders’ equity ratio Rodriguez, Alex, 142–143, 445–446 ROE See Rate of return on common stockholders’ equity; Return on common stockholders’ equity ratio Ruth, Babe, 445 S Sage 50 Accounting, 119 Sales See Revenue Sales allowance (purchase allowance), 242 Sales returns (purchase returns), 242 Sales revenue accounting for, 239–242 measurement of, 242–247 recognition of, 239–242 Sales tax, 270, 391 Salvage value See Residual value Sarbanes-Oxley (SOX) Act, 27, 453 Schillit, Howard, 278 I11 Scrap value See Residual value Securities, 494 changes in market price of, 495–497 conversion of, 472–473 equity, 516–517 Securities and Exchange Commission (SEC), 7, 24, 120, 450, 453, 534, 565 Segment reporting, 545–548 Service life See Useful life Shanahan, Brian, 162 Shareholder reporting, and depreciation, 350 Shareholders See Stockholders Shareholders’ equity See Stockholders’ equity Shares, weighted-average, 561 Short-term debt securities, 494 Short-term equity securities, 494 Short-term investment, 494 Short-term liquidity, 535 Simple entry, 100 Simple interest, 423 Single-step income statement, 163–165 Sinking fund, 395 Sinking fund bonds, 395 Social Security taxes, 390 Sole proprietorship, 17 Sombart, Werner, 93 Source documents, 96 South Florida Sun-Sentinel, 537 Specific identification method, 294 Specific write-off method (direct write-off method), 249 Spin-offs, 505–506 Stable monetary unit, 73 Standard Industry Classification (SIC) system, 551 Stated rate See Nominal interest rate Stated value See Par value Statement of cash flows (cash flow statement), 189, P6 See also Cash flow and asset sales, 356–357 and the balance sheet equation, 207–209 and bonds, 404–405 differences in, 412 and the equity method, 503 examples, 209–210 and the market method, 498 overview, 189–192 preparing, 192–197 purposes of, 190 Statement of earnings See Income statement Statement of financial position See Balance sheet Statement of operations See Income statement Statement of stockholders’ equity, 63–64 Stevens, Mark, 281 I12 SUBJECT INDEX Stock See also Common stock; Stock dividend accounting for, 452–456 fractional shares, 465 preferred, 456–459 price of, 68–69, 240 publicly traded, repurchase of shares, 467, 469, 471–472 restricted, 460–461 retirement of shares, 468–469 treasury, 470–471 Stock certificate, 18 and par value, 20 Stock dividend, 463–466, 472 accounting for, 463–464 large-percentage, 463–464 small-percentage, 464 Stock options, 460–461 Stock prices, comparison of, 567–569 Stock split, 462–463, 465–466, 472 reverse, 462 Stockholders, 21 and the board of directors, 22–23 Stockholders’ equity (shareholders’ equity), 19, 451–452 background on, 451–452 financial ratios related to, 474 other components of, 474 Straight-line depreciation, 346, 348 Strike price See Exercise price Subordinated debentures, 394 Subsidiary, 504 Sullivan, Scott, 29 Summa de Arithmetica, Geometria, Proportioni, et Proportionalita (Luca), 93 T T-account, 92–94 Tangible assets (fixed assets, plant assets), 340–341, 563 acquisition cost of, 343–345 depreciation of, 345–349 impairment of, 359–360 revaluation of, 358–360 sales of, 354–357 Tax rate, 416 Taxes See also Income tax deferred, 415–416 income tax, 350–351 sales tax, 270, 391 Social Security tax, 390 Temporary differences, 416–418 Tender offer, 469 Terminal value See Residual value Timeliness, 71 Time-series comparisons, 551 Times-interest-earned ratio See Interest-coverage ratio Tokyo Stock Exchange, 5, 18 Total asset turnover, 556 Total equity, P1 Trade discounts, 243 Trade receivables See Accounts receivable Trademarks, 363 Trading on the equity (financial leverage, leveraging, gearing), 557 Trading securities, 494 Transaction, 10 See also Balance sheet transactions analyzing, journalizing, and posting, 97–106 compound entry, 100 expense, 101–103 explicit, 142 implicit, 142 prepaid expense and depreciation, 104–105 recording, 96–99 revenue and expense, 101–104 simple entry, 100 Transportation charges, 290 Treasury stock, 454, 467, 470–471 Trend analysis, 537–542 Trial balance, 96 closing the books, 110–112 deriving financial statements from, 110–112 preparing, 109–112 TTM (trailing twelve months), 567, 569 Turnover, 165 See also Sales; Sales revenue U U.S Department of State, U.S GAAP, 120, 158, 165, 200, 241, 409 See also Financial Accounting Standards U.S Securities Acts, 450 U.S Treasury obligations, 494 Uncollectible accounts (bad debts), 248–253 See also Bad debt expense; Bad debt recoveries allowance method, 250–253 and credit sales, 248 measurement of, 249 specific write-off method, 249–250 Understandability, 71 Underwriters, 399, 450 Unearned revenue (revenue received in advance, deferred revenue), 144, 392 Unexpired costs, expiration (consumption) of, 143 Units-of-production depreciation (activity method), 347, 366 Unlisted See Privately owned Unrealized gain (loss), 495–497 Unrecorded expenses, accrual of accounting for accrual of wages, 147–148 COMPANY INDEX accounting for payment of wages, 146–147 accrual of income taxes, 148–149 accrual of interest, 148 Unrecorded revenues, accrual of, 149–151 Unusual items See Nonrecurring items Useful life (service life), 345, 349 V Valuation issues, 567–569 Value future, 423–425, 427–429 liquidating, 457–458 present, 424, 426–427 Venture capitalists, 450 Verifiability, 71 Vested options, 460 W Wages, 142 accrual of, 147–148 as liabilities, 390 payment of, 146 Wall Street Journal, 295, 535 Warranty, 392–393 Washburn, Cadwallander, 44 Watkins, Sherron, 29 Watson, Mathew, 120 Weighted-average cost method, 296 Whistle-blowers, 29 Wholesaler, 304 Work in process inventory, 315 Working capital (net working capital, net current assets), 157 managing, 162 Working capital ratio See Current ratio Write-down, 300 X XBRL, 119–120 Y Yield to maturity, 398 Z Zero coupon bond, 406–407 COMPANY INDEX A Accenture, 268 Adelphia, 93 adidas, 554, 567 I13 Adobe Systems, 489 AIG, 5, 58, 93 Air France-KLM S.A., 39–40 Air Transport Association, 565 Airlines for America, 565 Alaska Air Group, 282 Alaska Airlines, 172, 177–178, 180, 370, 376, 447 Alcoa, Inc., 40, 442–443 Allianz, 25 Allied Crude Vegetable Oil and Refining, 289 Allstate Corporation, 282 Altria Group, Amazon.com, Inc 4, 170, 182, 220, 450, 598 AMC Theaters, 384 AMERCO, 381 American Airlines, 105, 144, 191, 212, 382, 447, 529 American Express, 4, 6, 119, 246, 268, 552 American Steel Warehouse Association, 332 American Stock Exchange, 68 American Tobacco, Amgen, 63, 375, 444 AMOCO, 505 AMR Corp., 212 Amtek Auto, 19 AOL, 551 Apple Computer, Inc., 4, 6, 50, 67, 178, 320, 341, 472, 536 Aquila Corporation, 212 Arab Insurance Group, 19 ArcelorMittal, 436 ARCO, 505 Argent Corporation, 280 Arthur Andersen, 29, 490 Asahi Kasei Corporation, 377 AT&T, 4–5, 67, 486, 559 B Bainbridge Island Land Trust, 30 Bank of America, 4–5, 173, 264, 340, 528, 551 Bayer AG, 272, 362 Bayfront Medical Center, 248 Bear Stearns, 93 Berkshire Hathaway, 8, 72, 451, 462, 551, 552 Beximco Pharmaceuticals, 19 BHP Billiton, 67 Blockbuster, 191 Bloomberg, 536–537 BMC Software, 362 Boeing Company, 4, 178, 382, 442 Borders, 399 BP, 505 BP Amoco, 505 Briggs & Stratton Corporation, 597 Bristol-Myers Squibb, 490 I14 COMPANY INDEX British Petroleum, 505 Brunswick Corporation, 333 BT Group plc, 535 Buell Motorcycle, 182 Burlington Northern Railway, 551 Burlington Northern Santa Fe, 256 C Cadbury Schweppes plc, 506 Canadian Pacific Railways, 19 Cannondale, 15 Capital IQ Compustat, 537 Carrefour, 42, 380–381, 454 Castle, 332 Caterpillar, Ceradyne, Inc., 372 Chase Bank, 6, 10 Chevron Corporation, 4–5, 41, 80, 87, 340, 593, 595 Chez José Mexican Restaurant, 141 China Construction Bank, 67 China Petroleum and Chemical Corp., 19 Chiquita Brands International, 258 Chrysler Corporation, 330–331 Cineplex Odeon, 384 Circuit City, 191 Cisco Systems, 4–5, 43, 472 Citibank, 272, 432 Citicorp, Citigroup, 41 Clorox Company, 229 CNN, 536 Coca-Cola Amatil, 502 Coca-Cola Central Japan Company, 503 Coca-Cola Company, 4, 340–341, 356, 363, 371, 389–390, 399, 480–481, 492–494, 496–7, 505, 508, 511, 515, 552, 591–592 Coca-Cola FEMSA, 502 Coca-Cola Hellenic, 502 Columbia Pictures, 505 Columbia Sportswear, 133–134, 140–141, 146–149, 157–158, 161, 164–169, 175, 177, 180, 186–187 Columbia/HCA Healthcare, 282 Comcast, 18 Comptronix, 278 ConAgra Foods, Inc., 223 Consolidated Edison, 551 Continental AG, 125 Continental Airlines, 411 Costco Wholesale Corporation, 35, 166, 188–189, 210, 305, 322 Countrywide Financial, 365 Crown Crafts, Inc., 274 CSR Limited, 229 CVS Caremark, 592 Cytec Industries, 162 D Daiwa House Industry Co., Ltd., Deckers Outdoor Corporation, 337, 340 Dell Computer Company, 329 Deloitte & Touche LLP, 25, 120 Deloitte Touche Tohmatsu, 26 Delta Air Lines, 90–92, 105, 138–139, 168, 172, 383, 441, 447 Deufol AG, Deutsche Post World Net, 86 Devon Energy, 489 Dewalt, 287 Dick Clark Productions, 282 Dick’s Sporting Goods, 177 Diebold, Incorporated, 87, 181 Diner’s Club, 268 Domino’s Pizza, 373 Dow Chemical, 503–504 Dow Corning, Inc., 420 Dr Pepper Snapple Group, 506 Duke Energy, 340, 548, 551, 564 Duke Power, 282 Dun & Bradstreet (D&B), 535, 551, 553 DuPont, 356, 557 Dynegy, Inc., 212 E Eastman Kodak, eBay, 18, 62, 472 Eli Lilly, 277, 305–306, 361 Emblaze Systems, 19 Emory University, 370 Empire District Electric Company, 271, 434, 489 Emulex, 536 Energy Brands, 492 Enron, 29, 58, 93, 189, 399, 490 Ernst & Young LLP, 26, 120 Estée Lauder, 451 Exxon Corp., 505 ExxonMobil, 4, 67, 73, 80, 87, 295, 475, 487, 593, 595 F Facebook, 341, 450, 505 FedEx Corporation, 78, 86, 260, 441–442 Fila Korea, 554 FleetBoston Financial, 365, 528 Ford Credit, 238 Ford Motor Company, 6, 304, 308, 313–314, 377–378, 393, 415, 451, 505–506, 527, 530–531 COMPANY INDEX G Gap Inc., 178 Garanti Emeklilik, GEICO, 551 General Electric (GE), 4–5, 18, 67, 73, 287, 444, 455, 487, 535 General Electric Capital (GE), 399 General Mills, Inc., 42, 44–48, 53, 55, 57, 62, 65–66, 68–69, 86, 376, 571–574 General Motors, 5, 20, 189, 191 General Re, 551 Girl Scouts, 30 GlaxoSmithKline plc, 80, 223 Glidden, 287 Global Crossing, 93 GM Financial, 238 Goldman Sachs Group, 399, 551 Google, Inc., 4, 21, 161, 170, 191, 220, 277, 340–341, 444, 450–451, 505, 537 Google Finance, 532, 535, 551 Google News, 537 Great Plains Coca-Cola Bottling Company, 515 Great Plains Energy, 212 Great Plains Software, 120 Groupe Eurotunnel SA, 19 Groupon, 450 Grupo Clarín SA, 19 H H&M, 119 H.J Heinz Company, 82–83 Harley-Davidson Financial Services, 182 Harley-Davidson Motor, 182–183 Hershey Company, 588–591 Hewlett-Packard (HP), 4, 309, 565–566 Hollywood Video, 191 Home Depot, 4, 69, 284–287, 289–290, 296–297, 304–308, 422, 577, 580 Honda Motor Company, 19, 41, 47, 480 Honest Tea, Inc., 515 Honeywell, Hoover’s Online, 551, 554 Hrvatski Telekom, 19 I IBM Corporation, 4, 41, 119, 141, 161, 341, 370, 479 ICBC, 67 Instagram, 505 Integra Group, 19 Intel Corporation, 4, 18, 166, 182, 240, 338–339, 343, 345, 348, 359–360, 385, 505 Interbrand, 341 International Paper, J J.M Smucker Company, 227–228 Jack in the Box, 15–16, 386–390, 395, 399, 408, 414–418 Jaguar, 505 JCPenney, 287, 289, 334, 593, 596–597 Johnson & Johnson, 4, 67, 168–169, 224 Johnson Matthey, 135 Jones Soda, 341 JPMorgan Chase & Co., 4, 581 K Kansai Electric, 223 Kawasaki Heavy Industries, 479 Kellogg Company, 234, 571–574 Kimberly Clark (KC), 172 Kmart, 334 Kobe Steel, Ltd., 106 KOÇ Holding, Kohl’s, 593, 596–597 Kohlberg, Kravis, Roberts & Co., 396 Komercˇni Banka, 19 KPMG LLP, 26, 120, 343, 365 Kraft Foods, 5, 506 Krispy Kreme Company, 432 Kroger Company, 444 K-Swiss, 554, 566–570 L Laclede Gas, Land Rover, 505 LaSalle Bank Corporation, 365 La-Z-Boy Incorporated, 581–582 Lehman Brothers, 58, 191, 399, 560 Levitz, 191 Linens ’n Things, 191 Linkedin Corporation, 450 Loewe, 536 Lowe’s Companies, Inc., 136, 287, 577 Lubrizol, 551 Lufthansa, 383 M Macy’s, Inc., 15, 40, 47, 242, 447 Martha Stewart Living, 287, 451 Marvel Comics, 161 Marvel Entertainment Group, 282 MasterCard, 6, 246, 268, 274 MBNA, 365 I15 I16 COMPANY INDEX McCormick & Company, 304 McDonald’s Corporation, 4, 52, 62, 86, 92, 132–133, 145, 234–235, 341, 363, 474–475 McGraw-Hill, 398 McKinsey & Company, 341 Medco, 505 Medivir AB, 212 Medtronic, 415, 419 Merck & Co., Incorporated, 4, 85, 183, 304–305, 308, 505, 577–579 Mergent, Inc., 398, 537 Merrill Lynch, 93, 365 MF Global, 191 Microsoft Corporation, 4, 18, 22, 47, 62, 67, 80–81, 120, 166, 189, 191, 340–341, 383, 421, 472, 505, 537 Midway Games, 212 Miller Paint Company, 173 Millward Brown, 341 Minnesota Mining and Manufacturing Company (3M), 4, 486, 583–585 Minute-Maid Corporation, 492 Mitchell Energy and Development Corporation, 489 Mobil Corp., 505 See also ExxonMobil Monster Worldwide, Inc., 392 Moody’s, 398, 535 N NASDAQ, 5, 21, 68 National Bank of Greece, 19 National Basketball Association, 145 National Savings Bank (Sri Lanka), Nestlé, 4, 25, 419 Nestlé Group, 175–176 Nestlé S.A., 83 New Balance, 554 New York Stock Exchange (NYSE), 18, 21, 68 New York Times Company, 392 New York Yankees, 445 Nike, Inc., 38–39, 124, 180, 237, 363, 532–533, 535, 537–550, 553–554, 561–564, 567–570 NM Electronics See Intel Corporation Nokia Corporation, 4, 25, 158–159 Nordstrom, Inc., 233, 242, 248 Norsk Hydro, 136–137 Northwest Harvest Food Bank, 31 Northwest Natural, 150, 181 P Pacific Gas & Electric, 161 Pennzoil Company, 522 PepsiCo, 134, 191, 363 Pepsi-Cola Bottling Company of New York, 432 Petrobras-Petroleo, 67 PetroChina, 67 Pfizer, 4–5 Phar Mor, 318 Phillips, 287 Pixar, 505 Platinum Australia Ltd., 19 Plum Creek Timber Company, Inc., 87 Powerflute Oyj, 19 Prentice Hall, 269 Pressure Biosciences, Inc., 212 PricewaterhouseCoopers LLP, 26, 120 Prime Motor Inns, 212–213 Procter & Gamble Company, 4, 67, 136, 184–185, 260, 405, 433 PT Adaro Energy Tbk, Puget Sound Energy, 282 PwC See PricewaterhouseCoopers LLP Q Qdoba Mexican Grill, 386 Quaker Oats Company, 363 R R.J Reynolds Tobacco Company, 396 RC Cola, 341 Reader’s Digest Association, Inc., 282, 432 Red Cross, 30 Regency Health Services, 282 Reuters, 537, 551, 567, 583 Rheem, 287 Risk Management Association, 551 Rite Aid, 398 Robert Morris Associates, 551 Rockwell Automation, 382–383 Rocky Mountain Chocolate Factory, 145 Rolls-Royce Holdings plc, 222 Royal Dutch Shell, 63, 67, 87, 399–400, 483–484, 522, 526 RTL Group, Ryerson, 332 O S Odwalla, 492 Oracle Corporation, 119, 238–239, 241, 247, 255, 258, 263, 277–278, 283 Oregon TelCo Credit Union, 262 S.C Automobile Craiova S.A., 506 Safeway, 42, 52, 168, 304–305, 308 SAP, 119 Satyam Computer Services, 58 COMPANY INDEX SBC, Schwinn, 11–12 Sears, 289 Sears Holdings Corporation, 324 Sears/Kmart, 334 Shanghai Petrochemical, 25 Sharper Image, 191 Shenzhen Zuonmens Industrial, 260 Shimano, 11–15 Siemens AG, 19, 436–438 Sony Corporation, 19, 47, 64, 135, 375, 505 Southwest Airlines Company, 282, 565 Spectra Energy, 551 Springfield ReManufacturing Corporation, 96 Standard & Poor (S&P), 5, 398, 535 Starbucks Corporation, 2–4, 15–17, 21–23, 25–26, 43, 62, 88, 138, 146, 186, 212, 237, 247, 283, 337, 363, 384, 447, 491, 530, 598, P1–P6 Stern Stewart & Company, 559 Subway, 145 Suez Cement Company, 19 Sumitomo Metal Industries, Ltd., 230 Sysco, 304, 308 System Development Laboratories, 238 United Airlines, 444–445, 447, 536 United Continental Holdings, 445 United Parcel Service (UPS), 86, 448–451, 454, 456, 469, 474 United States Trust Company, 365 United Technologies Corporation, 4, 40 UnitedHealth Group, University of Washington, 277 UPS Capital, 448 URS Corporation, 528 US Airways, 447 USLIFE, Incorporated, 282 V Value Line, 535 Vanguard Group, Verizon Communications, Inc., 4–5, 92, 221, 398 VF Corporation, 257, 553–544, 564, 567–570 VISA, 6, 246, 268, 274 Vodafone Group plc, 224 Volkswagen Group, 4, 6, 454 Volvo Group, 278, 505 Vossloh AG, Vulcan Materials Company, 272 T W Target Corporation, 565, 593, 596–597 Tata, 505 Tennessee Coal & Iron, Texas Instruments, 329–330 Thomson Reuters I/B/E/S, 50, 162 3M See Minnesota Mining and Manufacturing Company Timberland, 543, 564 Time Warner, 89, 340, 551 Time Warner Cable, 392 Tisza Chemical Group, 19 Tompkins Financial Corporation, 275, 481 Toshiba, 47 Toyota Motor Corporation, 4, 47, 135, 284 Toys “R” Us, 322 Travelers Companies, 4–5 Tyco, 93 Walgreen Company, 38, 119, 378 Wall Street Journal, 52, 68 Wal-Mart, 4, 47, 52, 67, 211, 260, 287, 305, 379–380, 435, 465, 593, 596–597 Walt Disney Company, 4, 47, 282, 505 Wells Fargo & Company, 39, 148–149, 552, 565 Weyerhaeuser Company, 71 Whirlpool Corporation, 432 Whole Foods, 168, 304–305, 308, 432 WorldCom, 29, 58, 93, 343 Worldsec, 19 X Xcel Energy, 79 Xerox, 527–528 Y U U.S Leather, U.S Rubber, U-Haul International, 381 Umbro, 563 Under Armour, 66, 543, 554, 567–570 Unilever Group, 158–160 Yahoo!, 18, 450, 475, 537 Yahoo! Finance, 551 YouTube, Z Zacks Investment Research, 50 Zhejiang Geely Holding Group, 505 I17 This page intentionally left blank Photo Credits Chapter 1, page 3, Weng Lei/AP Images Chapter 2, page 45, Paul Sakuma/AP Images Portfolio, page P1, Dim Dimich/Shutterstock Chapter 3, page 91, ZUMA Press, Inc./Alamy Chapter 4, page 141, Pascal Pavani/Getty Images Chapter 5, page 189, Ted S Warren/AP Images Chapter 6, page 239, Kristoffer Tripplaar/Alamy Chapter 7, page 285, Katharine Andriotis Photography, LLC/Editorial/Alamy Chapter 8, page 339, Cello/Alamy Chapter 9, page 387, Imago Stock & People/Newscom Chapter 10, page 449, Kristoffer Tripplaar/Alamy Chapter 11, page 493, Jeremy Sutton-Hibbert/Alamy Chapter 12, page 533, Iain Masterton/Alamy PC1 This page intentionally left blank MyAccountingLab For Instructors EASE OF USE AND FLEXIBLE CONTENT DELIVERY ■ Homework assignments, quizzes, and tests that directly correlate to the textbook ■ Learning Aids available on demand to help students understand key concepts ■ Assess your students your way with multiple assignment options and maximum flexibility with a wide range of questions tied to end-of-chapter content including: ● Book/static and algorithmic versions ● Open response questions available for journal entry and financial statement problems to better prepare students for the paper exam by requiring that students type account names rather than select from a drop-down menu or use type ahead ● Excel—select end-of-chapter automatically graded questions in a simulated Excel environment provide students with practice opportunities on a tool they’ll use in the real world Remediation and learning aids will be available within each question to help guide students through both Accounting and Excel concepts COURSE MANAGEMENT TOOLS AND GRADEBOOK ■ ■ ■ Automatic grading that tracks students’ results on tests, homework, and tutorials Flexible Gradebook with numerous student data views, weighted assignments, choice on which attempts to include when calculating scores, and the ability to omit results of individual assignments AACSB, Student Learning Outcomes, and State-Specific Standards mapping allow instructors to track accreditation information and print reports on assessment in a few clicks DEPARTMENT-WIDE SOLUTIONS ■ ■ Simplified for departmental implementation through Coordinator Courses that allow one point of control for multiple sections Instructor and student single sign on through NEW Blackboard integration For Students MEANINGFUL HELP AND FEEDBACK ■ Personalized interactive learning aids for point-of-use help and immediate feedback These learning aids include: ● “Help Me Solve This” walks students through solving an algorithmic version of the questions they are working, with additional detailed tutorial reminders These informational cues assist the students and help them understand concepts and mechanics ● “Accounting Simplified” videos give students a 3- to 5-minute lesson on concepts Our new videos are engaging whiteboard animations that help illustrate concepts for students ● eText links students directly to the concept covered in the problem they are working on ● Homework and practice exercises with additional algorithmically generated problems for further practice and mastery PERSONALIZED STUDY PATH ■ Assists students in monitoring their own progress by offering them a customized study plan based on Homework, Quiz, and Test results ■ Includes regenerated exercises with unlimited practice and the opportunity to prove mastery through Quizzes on recommended learning objectives ... inventory TRANSACTION 4, PURCHASE INVENTORY FOR CASH Inventory refers to goods held by the com- Goods held by a company for the purpose of sale to customers pany for the purpose of sale to customers... Background on Stockholders’ Equity 451 Accounting For Common Stock in Publicly Held Corporations 452 Preferred Stock 456 Stock Options and Restricted Stock 460 Stock Splits and Stock Dividends... Kong Seoul Singapore Taipei Tokyo To Chuck Horngren whose contributions over many years have made this textbook what it is Editor in Chief: Donna Battista Acquisitions Editor: Lacey Vitetta Director of Editorial