Part 2 ebook “accounting” has contents: investments and fair value accounting, financial statement analysis, managerial accounting concepts and principles, job order costing, process cost systems, process cost systems, performance evaluation using variances from standard costs,… and other contents.
Chapter 15 Fred Prouser/Reuters/Landov www.downloadslide.net Investments and Fair Value Accounting News Corporation Y ou invest cash to earn more cash For example, you could deposit cash in a bank account to earn interest You could also invest cash in preferred or common stocks and in corporate or U.S government notes and bonds Preferred and common stock can be purchased through a stock exchange, such as the New York Stock Exchange (NYSE) Preferred stock is purchased primarily with the expectation of earning dividends Common stock is purchased with the expectation of earning dividends or realizing gains from a price increase in the stock Corporate and U.S government bonds can also be purchased through a bond exchange Bonds are purchased with the primary expectation of earning interest revenue Companies make investments for many of the same reasons that you would as an individual For example, News Corporation, a diversified media company, which produces such popular television shows as The Simpsons and American Idol, has invested approximately $652 million of available cash in stocks and bonds These investments are held by News Corporation for interest, dividends, and expected price increases Unlike most individuals, however, companies also purchase significant amounts of the outstanding common stock of other companies for strategic reasons For example, News Corporation invested in 32% of Hulu, an online video joint venture with other major media companies Investments in debt and equity securities give rise to a number of accounting issues These issues are described and illustrated in this chapter Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Learning Objectives Example Exercises After studying this chapter, you should be able to: Describe why companies invest in debt and equity securities Why Companies Invest Investing Cash in Current Operations Investing Cash in Temporary Investments Investing Cash in Long-Term Investments Describe and illustrate the accounting for debt investments Accounting for Debt Investments Purchase of Bonds Interest Revenue Sale of Bonds EE 15-1 Describe and illustrate the accounting for equity investments Accounting for Equity Investments Less Than 20% Ownership Between 20%–50% Ownership More Than 50% Ownership EE 15-2 EE 15-3 Describe and illustrate valuing and reporting investments in the financial statements Valuing and Reporting Investments Trading Securities Available-for-Sale Securities Held-to-Maturity Securities Summary EE 15-4 EE 15-5 Describe fair value accounting and its implications for the future Fair Value Accounting Trend to Fair Value Accounting Effect of Fair Value Accounting on the Financial Statements Describe and illustrate the computation of dividend yield Financial Analysis and Interpretation: Dividend Yield EE 15-6 At a Glance Describe why companies invest in debt and equity securities 15 Page 688 Why Companies Invest Most companies generate cash from their operations This cash can be used for the following purposes: Investing in current operations Investing in temporary investments to earn additional revenue Investing in long-term investments in stock of other companies for strategic reasons Investing Cash in Current Operations Cash is often used to support the current operating activities of a company For example, cash may be used to replace worn-out equipment or to purchase new, more efficient and productive equipment In addition, cash may be reinvested in the company to expand its current operations For example, a retailer based in the northwest United States might decide to expand by opening stores in the Midwest To support its current level of operations, a company also uses cash to pay: expenses suppliers of merchandise and other assets interest to creditors dividends to stockholders The accounting for the use of cash in current operations has been described and illustrated in earlier chapters For example, Chapter 10, “Fixed Assets and Intangible Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Chapter 15 Investments and Fair Value Accounting 669 Assets,” illustrated the use of cash for purchasing property, plant, and equipment In this chapter, we describe and illustrate the use of cash for investing in temporary investments and the stock of other companies Investing Cash in Temporary Investments A company may temporarily have excess cash that is not needed for use in its current operations This is often the case when a company has a seasonal operating cycle For example, a significant portion of the annual merchandise sales of a retailer occurs during the fall holiday season As a result, retailers often experience a large increase in cash during this period, which is not needed until the spring buying season Instead of letting excess cash remain idle in a checking account, most companies invest their excess cash in temporary investments In doing so, companies invest in securities such as: Debt securities, which are notes and bonds that pay interest and have a fixed maturity date Equity securities, which are preferred and common stock that represent ownership in a company and not have a fixed maturity date Investments in debt and equity securities, termed Investments or Temporary Investments, are reported in the Current Assets section of the balance sheet The primary objective of investing in temporary investments is to: earn interest revenue receive dividends realize gains from increases in the market price of the securities Investments in certificates of deposit and other securities that not normally change in value are disclosed on the balance sheet as cash and cash equivalents Such investments are held primarily for their interest revenue Investing Cash in Long-Term Investments A company may invest cash in the debt or equity of another company as a long-term investment Long-term investments may be held for the same investment objectives as temporary investments However, long-term investments often involve the purchase of a significant portion of the stock of another company Such investments usually have a strategic purpose, such as: Reduction of costs: When one company buys another company, the combined company may be able to reduce administrative expenses For example, a combined company does not need two chief executive officers (CEOs) or chief financial officers (CFOs) Replacement of management: If the purchased company has been mismanaged, the acquiring company may replace the company’s management and, thus, improve operations and profits Expansion: The acquiring company may purchase a company because it has a complementary product line, territory, or customer base The new combined company may be able to serve customers better than the two companies could separately Integration: A company may integrate operations by acquiring a supplier or customer Acquiring a supplier may provide a more stable or uninterrupted supply of resources Acquiring a customer may also provide a market for the company’s products or services Accounting for Debt Investments Debt securities include notes and bonds, issued by corporations and governmental organizations Most companies invest excess cash in bonds as investments to earn interest revenue The Walt Disney Company purchased Marvel Entertainment in order to expand into action/ adventure characters, movies, and products Describe and illustrate the accounting for debt investments Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 670 Chapter 15 Investments and Fair Value Accounting The accounting for bond investments1 includes recording the following: Purchase of bonds Interest revenue Sale of bonds Purchase of Bonds The purchase of bonds is recorded by debiting an investments account for the purchase price of the bonds, including any brokerage commissions If the bonds are purchased between interest dates, the purchase price includes accrued interest since the last interest payment This is because the seller has earned the accrued interest, but the buyer will receive the accrued interest when it is paid To illustrate, assume that Homer Company purchases $18,000 of U.S Treasury bonds at their face amount on March 17, 2014, plus accrued interest for 45 days The bonds have an interest rate of 6%, payable on July 31 and January 31 The entry to record the purchase of the Treasury bonds is as follows: 2014 Mar 17 Investments—U.S Treasury Bonds Interest Receivable Cash Purchased $18,000, 6% Treasury bonds 18,000 135 18,135 Since Homer Company purchased the bonds on March 17, it is also purchasing the accrued interest for 45 days (January 31 to March 17), as shown in Exhibit The accrued interest of $135 is computed as follows:2 Accrued Interest = $18,000 × 6% × (45/360) = $135 The accrued interest is recorded by debiting Interest Receivable for $135 Investments is debited for the purchase price of the bonds of $18,000 Interest Revenue On July 31, Homer Company receives a semiannual interest payment of $540 ($18,000 ì 6% ẵ) The $540 interest includes the $135 accrued interest that Homer Company purchased with the bonds on March 17 Thus, Homer Company has earned $405 ($540 $135) of interest revenue since purchasing the bonds, as shown in Exhibit The receipt of the interest on July 31 is recorded as follows: 2014 July 31 Cash Interest Receivable Interest Revenue Received semiannual interest 540 135 405 Homer Company’s accounting period ends on December 31 Thus, an adjusting entry must be made to accrue interest for five months (August to December 31) of $450 ($18,000 6% 5/12), as shown in Exhibit The adjusting entry to record the accrued interest is as follows: 2014 Dec 31 Interest Receivable Interest Revenue Accrued interest 450 450 Debt investments may also include installment notes and short-term notes The basic accounting for notes is similar to bonds and, thus, is not illustrated To simplify, a 360-day year is used to compute interest Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Chapter 15 Investments and Fair Value Accounting Interest Timeline Interest Receipt Date Purchase Bonds Interest Receipt Date End of Year Accrual Interest Receipt Date Jan 31, 2014 Mar 17 July 31 Dec 31 Jan 31, 2015 $135 Interest Receivable $405 Interest Revenue (earned) $450 Interest Revenue (earned) $540 Interest Received in Cash $90 Interest Revenue $450 (earned) $540 Interest Interest Accrued Received in Cash © Cengage Learning 2014 Exhibit 671 For the year ended December 31, 2014, Homer Company would report Interest revenue of $855 ($405 + $450) as part of Other income on its income statement The receipt of the semiannual interest of $540 on January 31, 2015, is recorded as follows: 2015 Jan 31 Cash Interest Revenue Interest Receivable Received interest on Treasury bonds 540 90 450 Sale of Bonds The sale of a bond investment normally results in a gain or loss If the proceeds from the sale exceed the book value (cost) of the bonds, then a gain is recorded If the proceeds are less than the book value (cost) of the bonds, a loss is recorded To illustrate, on January 31, 2015, Homer Company sells the Treasury bonds at 98, which is a price equal to 98% of their face amount The sale results in a loss of $360, as shown below Proceeds from sale Less book value (cost) of the bonds Loss on sale of bonds $17,640* 18,000 $ (360) *$18,000 × 98% The entry to record the sale is as follows: 2015 Jan 31 Cash Loss on Sale of Investment Investments—U.S Treasury Bonds Sold U.S Treasury bonds 17,640 360 18,000 There is no accrued interest upon the sale, since the interest payment date is also January 31 If the sale were between interest dates, interest accrued since the last interest payment date would be added to the sale proceeds and credited to Interest Revenue The loss on the sale of bond investments is reported as part of Other income (loss) on Homer Company’s income statement Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 672 Chapter 15 Investments and Fair Value Accounting Example Exercise 15-1 Bond Investment Transactions Journalize the entries to record the following selected bond investment transactions for Fly Company: Purchased for cash $40,000 of Tyler Company 10% bonds at 100 plus accrued interest of $320 Received the first semiannual interest Sold $30,000 of the bonds at 102 plus accrued interest of $110 Follow My Example 15-1 Investments—Tyler Company Bonds Interest Receivable Cash Cash Interest Receivable Interest Revenue *$40,000 ì 10% ì ẵ Cash Interest Revenue Gain on Sale of Investments Investments—Tyler Company Bonds *Sale proceeds ($30,000 × 102%) Accrued interest Total proceeds from sale 40,000 320 40,320 2,000* 320 1,680 30,710* 110 600 30,000 $30,600 110 $30,710 Practice Exercises: PE 15-1A, PE 15-1B Exhibit Stock Investments Accounting for Equity Investments A company may invest in the preferred or common stock of another company The company investing in another company’s stock is the investor The company whose stock is purchased is the investee The percent of the investee’s outstanding stock purchased by the investor determines the degree of control that the investor has over the investee This, in turn, determines the accounting method used to record the stock investment, as shown in Exhibit Percent of Outstanding Stock Owned by Investor Degree of Control of Investor over Investee Accounting Method Less than 20% Between 20% and 50% Greater than 50% No control Significant influence Control Cost method Equity method Consolidation © Cengage Learning 2014 Describe and illustrate the accounting for equity investments Less Than 20% Ownership If the investor purchases less than 20% of the outstanding stock of the investee, the investor is considered to have no control over the investee In this case, it is assumed that the investor purchased the stock primarily to earn dividends or to realize gains on price increases of the stock Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Chapter 15 Investments and Fair Value Accounting 673 Investments of less than 20% of the investee’s outstanding stock are accounted for using the cost method Under the cost method, entries are recorded for the following transactions: Purchase of stock Receipt of dividends Sale of stock Purchase of Stock The purchase of stock is recorded at its cost Any brokerage commissions are included as part of the cost To illustrate, assume that on May 1, Bart Company purchases 2,000 shares of Lisa Company common stock at $49.90 per share plus a brokerage fee of $200 The entry to record the purchase of the stock is as follows: May 1 Investments—Lisa Company Stock Cash Purchased 2,000 shares of Lisa Company common stock [($49.90 × 2,000 shares) + $200] 100,000 100,000 Receipt of Dividends On July 31, Bart Company receives a dividend of $0.40 per share from Lisa Company The entry to record the receipt of the dividend is as follows: July 31 Cash Dividend Revenue Received dividend on Lisa Company common stock (2,000 shares × $0.40) 800 800 Dividend revenue is reported as part of Other income on Bart Company’s income statement Sale of Stock The sale of a stock investment normally results in a gain or loss A gain is recorded if the proceeds from the sale exceed the book value (cost) of the stock A loss is recorded if the proceeds from the sale are less than the book value (cost) To illustrate, on September 1, Bart Company sells 1,500 shares of Lisa Company stock for $54.50 per share, less a $160 commission The sale results in a gain of $6,590, as shown below Proceeds from sale Book value (cost) of the stock Gain on sale $81,590* 75,000** $ 6,590 *($54.50 × 1,500 shares) – $160 **($100,000/2,000 shares) × 1,500 shares The entry to record the sale is as follows: Sept 1 Cash Gain on Sale of Investments Investments—Lisa Company Stock Sold 1,500 shares of Lisa Company common stock 81,590 6,590 75,000 The gain on the sale of investments is reported as part of Other income on Bart Company’s income statement Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 674 Chapter 15 Investments and Fair Value Accounting Example Exercise 15-2 Stock Investment Transactions On September 1, 1,500 shares of Monroe Company are acquired at a price of $24 per share plus a $40 brokerage fee On October 14, a $0.60-per-share dividend was received on the Monroe Company stock On November 11, 750 shares (half) of Monroe Company stock were sold for $20 per share, less a $45 brokerage fee Prepare the journal entries for the original purchase, dividend, and sale Follow My Example 15-2 Sept Oct 14 Nov 11 Investments—Monroe Company Stock Cash *(1,500 shares × $24 per share) + $40 Cash Dividend Revenue *$0.60 per share × 1,500 shares Cash Loss on Sale of Investments Investments—Monroe Company Stock *(750 shares × $20) – $45 **$36,040 ì ẵ 36,040* 36,040 900* 900 14,955* 3,065 18,020** Practice Exercises: PE 15-2A, PE 15-2B Between 20%–50% Ownership If the investor purchases between 20% and 50% of the outstanding stock of the investee, the investor is considered to have a significant influence over the investee In this case, it is assumed that the investor purchased the stock primarily for strategic reasons, such as developing a supplier relationship Investments of between 20% and 50% of the investee’s outstanding stock are accounted for using the equity method Under the equity method, the stock is recorded initially at its cost, including any brokerage commissions This is the same as under the cost method Under the equity method, the investment account is adjusted for the investor’s share of the net income and dividends of the investee These adjustments are as follows: Net Income: The investor records its share of the net income of the investee as an increase in the investment account Its share of any net loss is recorded as a decrease in the investment account Dividends: The investor’s share of cash dividends received from the investee decreases the investment account Purchase of Stock To illustrate, assume that Simpson Inc purchased its 40% interest in Flanders Corporation’s common stock on January 2, 2014, for $350,000 The entry to record the purchase is as follows: 2014 Jan 2 Investment in Flanders Corporation Stock Cash Purchased 40% of Flanders Corporation stock 350,000 350,000 Recording Investee Net Income For the year ended December 31, 2014, Flanders Corporation reported net income of $105,000 Under the equity method, Simpson Inc (the investor) records its share of Flanders net income, as shown on the next page Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Chapter 15 Investments and Fair Value Accounting 2014 Dec 31 Investment in Flanders Corporation Stock Income of Flanders Corporation Recorded 40% share of Flanders Corporation net income, $105,000 × 40% 675 42,000 42,000 Income of Flanders Corporation is reported on Simpson Inc.’s income statement Depending on its significance, it may be reported separately or as part of Other income If Flanders Corporation had a loss during the period, then the journal entry would be a debit to Loss of Flanders Corporation and a credit to the investment account Recording Investee Dividends During the year, Flanders declared and paid cash dividends of $45,000 Under the equity method, Simpson Inc (the investor) records its share of Flanders dividends as follows: 2014 Dec 31 Cash Investment in Flanders Corporation Stock Recorded 40% share of Flanders Corporation dividends, $45,000 × 40% 18,000 18,000 The effect of recording 40% of Flanders Corporation’s net income and dividends is to increase the investment account by $24,000 ($42,000 $18,000) Thus, Investment in Flanders Corporation Stock increases from $350,000 to $374,000, as shown below Investment and Dividends $42,000 40% of Flanders Corp.’s cash dividends $18,000 Investment in Flanders Corp stock $374,000 (40% interest) $350,000 (40% interest) JAN DEC 31 $24,000 net increase © Cengage Learning 2014 Investment in Flanders Corp stock 40% of Flanders Corp.’s net income Under the equity method, the investment account reflects the investor’s proportional changes in the net book value of the investee For example, Flanders Corporation’s net book value increased by $60,000 (net income of $105,000 less dividends of $45,000) during the year As a result, Simpson’s share of Flanders’ net book value increased by $24,000 ($60,000 × 40%) Investments accounted for under the equity method are classified on the balance sheet as noncurrent assets Sale of Stock Under the equity method, a gain or loss is normally recorded from the sale of an investment A gain is recorded if the proceeds exceed the book value of the investment A loss is recorded if the proceeds are less than the book value of the investment To illlustrate, if Simpson Inc sold Flanders Corporation’s stock on January 1, 2015, for $400,000, a gain of $26,000 would be reported, as shown below Proceeds from sale Book value of stock investment Gain on sale $400,000 374,000 $ 26,000 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 676 Chapter 15 Investments and Fair Value Accounting The entry to record the sale is as follows: 2015 Jan 1 Cash Investment in Flanders Corporation Stock Gain on Sale of Flanders Corporation Stock Sold Flanders Corporation stock 400,000 374,000 26,000 Example Exercise 15-3 Equity Method On January 2, Olson Company acquired 35% of the outstanding stock of Bryant Company for $140,000 For the year ended December 31, Bryant Company earned income of $44,000 and paid dividends of $20,000 Prepare the entries for Olson Company for the purchase of the stock, the share of Bryant income, and the dividends received from Bryant Company Follow My Example 15-3 Jan Dec 31 Dec 31 Investment in Bryant Company Stock Cash Investment in Bryant Company Stock Income of Bryant Company *Recorded 35% of Bryant income, 35% × $44,000 Cash Investment in Bryant Company Stock *Recorded 35% of Bryant’s $20,000 dividend, 35% × $20,000 140,000 140,000 15,400* 15,400 7,000* 7,000 Practice Exercises: PE 15-3A, PE 15-3B More Than 50% Ownership If the investor purchases more than 50% of the outstanding stock of the investee, the investor is considered to have control over the investee In this case, it is assumed that the investor purchased the stock of the investee primarily for strategic reasons The purchase of more than 50% ownership of the investee’s stock is termed a business combination Companies may combine in order to produce more efficiently, diversify product lines, expand geographically, or acquire know-how A corporation owning all or a majority of the voting stock of another corporation is called a parent company The corporation that is controlled is called the subsidiary company Parent and subsidiary corporations often continue to maintain separate accounting records and prepare their own financial statements In such cases, at the end of the year, the financial statements of the parent and subsidiary are combined and reported as a single company These combined financial statements are called consolidated financial statements Such statements are normally identified by adding and Subsidiary(ies) to the name of the parent corporation or by adding Consolidated to the statement title To the external stakeholders of the parent company, consolidated financial statements are more meaningful than separate statements for each corporation This is because the parent company, in substance, controls the subsidiaries The accounting for business combinations, including preparing consolidated financial statements, is described and illustrated in advanced accounting courses and textbooks Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Subject Index Personnel, competent, 364 Personnel policies, 363 Petty cash custodian, 377 Petty cash fund, def., 377 Physical depreciation, 453 Physical flows for a process manufacturers, illus., 917 Physical inventory, def., 256, 313 Planning, 1014 def., 837 directing, and controlling, illus., 1015 Plant assets, 448 def., 117, 155 Point-to-point or hub-and-spoke, 468 Ponzi scheme, Post-closing trial balance, 159 illus., 162, 171 preparing, 170 Posting(s) adjusting entries, 167 cash payments journal and, illus., 218 cash receipts journal, illus., 212 closing entries, 157, 170 def., 61 journal entries to accounts, 61 purchases journal and, illus., 215 revenue journal and, illus., 211 transactions to ledger, 164 Postretirement benefits other than pensions, 508 Predetermined factory overhead rate, def., 878 Preferred dividends, number of times earned, 792 Preferred stock cumulative, 586 def., 586 participating, 586fn Premium amortization of by interest method, 646 bonds issued at, 632 def., 587, 629 Premium on bonds payable, amortization of, illus., 646 Premium on stock, 588 Prepaid expenses, 110 def., 11, 105 illus., 106 Prepaid insurance, 111 Present value def., 641 methods not using, 1202 methods using, 1205 of an amount, 641, 1206 of an annuity, def., 642, 1207 of an annuity of $1 at compound interest, illus., 643 of an annuity table, partial, illus., 1208 of the periodic receipts, 642 Present value concepts, 640, 641 def., 1206 Present value index, def., 1209 Present value of $1 at compound interest, illus., 642 Present value of $1 table, 642 partial, illus., 1206 Price fixing, 1162 Price levels, changes in, 1216 Price-earnings (P/E) ratio, 800 def., 798 Prime costs, def., 842 Prime costs and conversion costs, 842 illus., 842 Principal, 636 Principle of exceptions, 1062 Prior period adjustments, def., 598 Private accounting, def., Private corporations, 582 Probable and estimable, contingent liabilities, 509, 510 Proceeds, 494 Proceeds from issuing bonds, 629 Process, def., 1082 Process and job order cost systems, comparing, 915 Process cost and job order cost systems, illus., 916 Process cost system, 914 def., 872, 914 journal entries for, 930 Process further or sell, differential analysis, illus., 1159 Process manufacturer cost flows for, 917, illus., 919 def., 914 physical flows for, illus., 917 Process or sell, 1158 Processing methods, 207 Product, discontinue a, 1153 Product cost concept, def., 1162 Product cost distortion, dangers of, 1169 Product cost, iPhone, 1164 Product costs, 1162 and period costs, examples of, illus., 843 def., 842 period costs, and financial statements, illus., 843 Product life-cycle management (PLM), 223 Product selling prices, setting normal, 1162 Production, compute equivalent units of, 938 Production bottlenecks, def., 1165 Production budget def., 1023 illus., 1023 Production line just-in-time, illus., 935 traditional, illus., 935 Production report cost of, 938, illus., 929, 939 for decision making, using cost of, 932 preparing cost of, 928 Profit def., I-13 gross, 254, 271 net, 15 target, 976 Profit center def., 1112 responsibility accounting for, 1112 Profit center reporting, 1114 Profit margin, def., 1116 Profit measurement and accounting systems, 220 Profitability, def., 785 Profitability analysis, 793 Profitability measures, 800 Profits illusory, 324 inventory, 324 Profit-volume chart def., 979 illus., 980 original and revised, illus., 981 Profit-volume ratio, 970 Promissory note, illus., 416 Proofs and security measures, 365 Property, plant, and equipment, 155, 448 Proprietorship(s), 538 characteristics of, illus., 540 def., partnerships, and limited liability companies, comparing, 540 Public accounting, def., Public Company Accounting Oversight Board (PCAOB), Public corporations, 582 Publicly held companies, 360 Purchase order, def., 312 Purchase transactions, 256 Purchases, 279 Purchases discounts, 279 def., 257 Purchases journal and postings, illus., 215 def., 214 Purchases returns and allowances, 279 def., 259 Q Qualitative considerations, 1217 Quick assets, def., 512, 787 Quick ratio, 511, 800 def., 512, 787 R Rate earned on common stockholders’ equity, 800 def., 795 Rate earned on operating assets, 794 Rate earned on stockholders’ equity, 800 def., 795 Rate earned on total assets, 800 def., 794 Rate of return on assets, 1116 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net I-14 Subject Index Rate of return on investment (ROI), def., 1116 Rate of return, Panera Bread store, 1213 Ratio acid-test, 787 contribution margin, 970 current, 786, 800 fixed asset turnover, 468 fixed charge coverage, 792 price-earnings, 798, 800 profit-volume, 970 quick, 511, 512, 787, 800 working capital, 786 Ratio of cash to monthly cash expenses, def., 379 Ratio of fixed assets to long-term liabilities, 800 def., 791 Ratio of liabilities to owner’s equity, def., 21 Ratio of liabilities to stockholders’ equity, 800 def., 791 Ratio of net sales to assets, 800 def., 276, 793 Real accounts, def., 156 Realization capital deficiency—loss on, 554 def., 550 gain on, 551 loss on, 552 Reasonably possible, contingent liabilities, 510 Receipts and payments, cash controls over, 367 Receivable(s) accounts, 404 aging the, 411 characteristics of notes, 415 classification of, 404 def., 404 notes, 404, 415 number of days’ sales in, 419, 789, 800 other, 405 reporting on the balance sheet, 418 trade, 404 uncollectible, 405 Receivables method, analysis of, 411 Receiving report, def., 313, 875 Receiving reports, 874 Records and bank statement, illus., 373 Registrar, 587 Related operations, separating responsibilities for, 365 Relevant range, def., 964 Remittance advice, 369 Remote, contingent liabilities, 510 Rent revenue, def., 12 Repairs extraordinary, 451 ordinary, 451 Replace equipment, 1157 Replace or continue with old equipment, differential analysis, illus., 1157 Report form, 18fn def., 273 of balance sheet, illus., 273 Report of Independent Registered Public Accounting Firm, 801 Research and development, centralized vs decentralized, 1109 Research and development costs, 465 Residual income, def., 1119 Residual value, def., 453 Responsibility accounting def., 1109 for cost centers, 1110 for investment centers, 1115 for profit centers, 1112 reports for cost centers, illus., 1111 Responsibility centers, 1109 def., 1015 Restrictions, def., 598 Retail inventory method, def., 333 Retail method determining inventory by, illus., 333 of inventory costing, 333 Retained earnings, 731, 748 def., 584 reporting, 597 Retained earnings statement comparative, horizontal analysis, illus., 782 def., 597 illus., 597 Return on investment, boosting, 1119 Revenue(s) accrued, 107, 114, illus., 108 def., 11, 54 differential, 1151 interest, 12 per employee, def., 557 per passenger mile, 799 rent, 12 unearned, 63, 106, 113, illus., 107 Revenue and cash receipts in QuickBooks, illus., 221 Revenue expenditures, def., 451 Revenue from sales, 271 Revenue journal and postings, illus., 211 def., 209 illus., 210 Revenue recognition concept, def., 104 Reversing entries, 116fn, 162fn Risk assessment, 364 Rules of debit and credit def., 55 illus., 57 S Safety, margin of, 985 Salary, 495 Sale of bonds, 671 Sale of land, gain on, 742 Sale of stock, 673, 675 Sales cash, 260 def., 12 net, 271 revenue from, 271 schedule of collections from, 1030, illus., 1031 Sales and cost of goods sold, 884 Sales budget def., 1022 illus., 1023 Sales discounts, 262 Sales method, percent of, 409 Sales mix considerations, 982 def., 982 Sales on account, 262 Sales returns and allowances, 263 Sales taxes, 270 Sales transactions, 260 Salvage value, 454 Sarbanes-Oxley Act of 2002 (SOX), 5, 583, 801 def., 360 Sarbanes-Oxley report of Nike, illus., 361 Scattergraph method, 967fn Schedule of collections from sales, 1030 illus., 1031 Schedule of payments for manufacturing costs, 1031 illus., 1032 Scrap value, 454 Securities available-for-sale, 679 debt, 669 equity, 669 held-to-maturity, 681 trading, 677, 679 Securities and Exchange Commission (SEC), 361, 1213 def., Security measures and proofs, 365 Segment, discontinue a, 1153 Segment analysis, 223 Sell or lease, 1152 differential analysis, illus., 1152 Sell or process, 1158 Sell or process further, differential analysis, illus., 1159 Seller beware, 407 Selling and administrative expenses budget, 1029 illus., 1029 Selling expenses, 842 def., 272 Semifixed costs, 967 Semivariable costs, 967 Sensitivity analysis, 981 Serial bonds, 628 Service activities, 935 Service business(es) def., flow of costs through, illus., 888 job order cost systems for professional, 887 Service department charge rates, 1113 Service department charges def., 1112 illus., 1113 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Subject Index Services of partners, dividing income, 542 Setup, def., 1167 Shareholders, 582 Shareholders’ equity, 584 Shareholders’ investment, 584 Short-term notes payable, 493 Single-step income statement def., 272 illus., 272 Sinking fund, 635fn Slide, def., 71 Social security, 498 Social Security Board, 500 Solvency, def., 174, 785 Solvency analysis, 785 Solvency and liquidity measures, 800 Sources and uses of cash, illus., 727 Special journals, 207 def., 207 Special-purpose cash funds, 377 Special-purpose funds, def., 378 Specific identification inventory cost flow method, def., 314 Spreadsheet complete, 176C end-of-period, 176, illus., 167 enter the adjusted trial balance, 176A enter the adjustments, 176 enter the title, 176 enter the unadjusted trial balance, 176 extend the account to the income statement columns, 176A extend the accounts to the balance sheet columns, 176A preparing end-of-period, 167 preparing financial statements from, 176C Spreadsheet completed with net income, illus., 176B Spreadsheet (work sheet) for statement of cash flows end-of-period, indirect method, illus., 747 indirect method, 746 Spreadsheet with amounts extended to income statement and balance sheet columns, illus., 176B Spreadsheet with unadjusted trial balance adjustments and adjusted trial balance, illus., 176B and adjustments, illus., 176B illus., 176B Staff, 836 Staff Accounting Bulletins, Staff department, def., 836 Standard cost(s) criticisms of, 1063 def., 1062 illus., 1065 Standard cost systems, def., 1062 Standard factory overhead rate, factory overhead cost budget indicating, illus., 1073 Standards currently attainable, 1063 def., 1062 for nonmanufacturing activities, direct labor, 1072 ideal, 1063 in income statement, variance from, illus., 1081 normal, 1063 recording and reporting variances from, 1079 restaurant, 1069 reviewing and revising, 1063 setting of, 1062 theoretical, 1063 types of, 1063 State unemployment compensation tax, See SUTA tax Stated value, 585 Statement of cash flows, 18 def., 15, 726 direct method, 740, illus., 743–744 end-of-period spreadsheet for, indirect method, illus., 747 indirect method, 730, illus., 739 preparing, 739, 749 spreadsheet for, indirect method, 746 Statement of cost of goods manufactured def., 846 income statement with, (manufacturing company), illus., 848 Statement of members’ equity, def., 557 Statement of owner’s equity, 16, 154, 273 def., 15 for merchandising business, illus., 273 Statement of partnership equity def., 557 illus., 557 Statement of partnership liquidation def., 552 gain on realization, illus., 551 loss on realization, illus., 553, capital deficiency, illus., 555 Statement of stockholders’ equity def., 598 illus., 598 Statements of Financial Accounting Standards, 6–7 Static and flexible budgets, illus., 1019 Static budget def., 1017 illus., 1017 Stock characteristics of, 585 classes of, 585 common, 585, 737 cumulative preferred, 586 def., 582 issuing, 587 no-par, 585, 588 outstanding, 585 paid-in capital from issuing, 585 I-15 participating preferred, 586fn preferred, 586 premium on, 588 purchase of, 673, 674 sale of, 673, 675 treasury, 594 Stock dividend, def., 592 Stock investments, illus., 672 Stock ledger, 883 Stock split, def., 600 Stockholders, def., 582 Stockholders ledger, 587fn Stockholders’ equity def., 584 for Mornin’ Joe, reporting of, 599 in balance sheet, 595 rate earned on, 795, 800 rate earned on common, 795, 800 ratio of liabilities to, 791, 800 reporting, 595 section of balance sheet, illus., 595 statement of, 598, illus., 598 Straight-line method, 632 def., 455 Strategic planning, def., 837 Strategies, def., 837 Sub-prime woes, 679 Subsidiary company, def., 676 Subsidiary inventory ledger, def., 313 Subsidiary ledger(s) accounts payable, 207 accounts payable control account and, 219 accounts receivable, 207 accounts receivable control account and, 214 and general ledger, illus., 208 def., 207 Sum-of-the-years digits method, 454fn Sunk costs, def., 1153 Supplies, 110 Supply chain management (SCM), 223 SUTA tax, 499 T T account, def., 52 Take-home pay, 498 Tangible assets, 448 Target cost concept, illus., 1165 Target costing, def., 1165 Target profit, 976 Tax(es) accounting systems for payroll, 500 cash payments for income, 743 FICA, 498, 499 FUTA, 499 income, 496 liability for employer’s payroll, 499 payroll, 495 recording and paying payroll, 500 sales, 270 Tax payments, responsibility for, illus., 499 Taxation, double, 583 Temporary accounts, def., 156 Temporary investments, 669 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net I-16 Subject Index investing cash in, 669 Term, 415 Term bonds, 628 Terminology, manufacturing operations, 838 Terms, freight, illus., 266 Theft, cost of employee, 278 Theoretical standards, 1063 Theory of constraints (TOC), def., 1165 360-degree review, 1064 Time tickets, def., 876 Time value of money concept, 641 def., 1202 Time-adjusted rate of return method, 1210 Title, enter on the spreadsheet, 176 Total assets, rate earned on, 794, 800 Total cost concept def., 1171 to setting normal price, 1171 Total manufacturing cost variance, def., 1066 Trade discounts, def., 270 Trade receivables, 404 Trade-in allowance, def., 470 Trade-in value, 454 Trademark, 466 def., 465 Trading securities, 679 def., 677 Traditional production line, illus., 935 Transactions analyzing and recording in the journal, 164 dual nature of merchandise, 267 illus., 53 merchandising, 256 posting to ledger, 164 purchase, 256 recording merchandise under the periodic inventory system, 279 sales, 260 treasury stock, 594 types of affecting owner’s equity, illus., 14 using accounts to record, 52 using periodic and perpetual inventory systems, illus., 280 Transfer agent, 587 Transfer price def., 1121 illus., 1122 shifting income through, 1126 Transfer pricing, 1121 Transposition, def., 71 Treasury stock, def., 594 Treasury stock transactions, 594 Trial balance adjusted, 123, illus., 124, 169 adjustments and adjusted trial balance, spreadsheet with unadjusted, illus., 176B def., 70 errors effecting, 71 errors not affecting, 72 illus., 71 post-closing, 159, illus., 162, 171 preparing a post-closing, 170 preparing an adjusted, 168 preparing an unadjusted, 166 spreadsheet with unadjusted, illus., 176B unadjusted, 71, illus., 166 Trial balance and adjustments, spreadsheet with unadjusted, illus., 176B Turnover accounts receivable, 419, 788, 800 inventory, 330, 790, 800 Tyranny of the majority in partnerships, 543 U U.S federal budget deficit, 1018 U.S government debt, 629 Unadjusted trial balance adjustments and adjusted trial balance, spreadsheet with, illus., 176B and adjustments, spreadsheet with, illus., 176B def., 70 enter on the spreadsheet, 176 illus., 110, 166 preparing, 166 spreadsheet with, illus., 176B Uncertainty, 1216 Uncollectible accounts allowance method for, 406 direct write-off method for, 405 Uncollectible accounts expense, 405 Uncollectible receivables, 405 Uncollectibles, estimating, 409 Underabsorbed factory overhead, 880 Underapplied factory overhead, def., 880 Unearned revenues, 54, 113 def., 63, 106 illus., 107 Unequal proposal lives, 1214 Unfavorable cost variance, def., 1065 Unfavorable fixed factory overhead variance, 1075 Uniform Partnership Act, 539fn Unit contribution margin, def., 971 Unit of measure concept, def., Unit selling price, effect of changes in, 975 Unit variable costs, effect of changes in, 974 Units allocate costs to transferred and partially completed, 938 allocate costs to units transferred out and partially completed, 926 started and completed, 927 whole, 921 Units manufactured exceed units sold, illus., 988 Units to be assigned costs, determine, 920, 937 Units to be costed—mixing department, illus., 921 Units-of-output method, def., 456 Unqualified opinion, 802 Unrealized gain or loss, def., 677 Unusual items affecting the current period’s income statement, 802 affecting the prior period’s income statement, 804 in the income statement, illus., 803 on income statement, 802 Uses and sources of cash, illus., 727 V Vacation pay, 506 Vacations, mandatory, 364 Valuation at lower of cost or market, 325 at net realizable value, 326 method, 118 Value book, 457, 675 fair, 677 fair market, 592fn fundamental, 802 future, 641 maturity, 416 net book, 118 net realizable, 326, 407 present, 641 residual, scrap, salvage, or trade-in, 453–454 stated, 585 Variable cost concept def., 1173 to setting normal price, 1171 Variable cost graphs, illus., 965 Variable cost of goods sold, 987 Variable costing, 986 def., 969 Variable costing income statement, illus., 987 Variable costs, def., 965 Variable factory overhead controllable variance, 1074 Variance(s) controllable, 1074 cost, 1065 direct labor, 1070 direct labor and direct materials, 1067 direct labor rate, 1070 direct labor time, 1071 direct materials, 1067 direct materials price, 1068 direct materials quantity, 1068 factory overhead, 1072 favorable cost, 1065 favorable fixed factory overhead, 1075 fixed factory overhead volume, 1075 graph of fixed overhead volume, illus., 1076 manufacturing cost, 1066, illus., 1066 reporting direct labor, 1071 reporting direct materials, 1069 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Subject Index reporting factory overhead, 1077 total manufacturing cost, 1066 unfavorable cost, 1065 unfavorable fixed factory overhead, 1075 variable factory overhead controllable, 1074 volume, 1075 Variance from standards in income statement, illus., 1081 recording and reporting, 1079 Variance relationships direct labor, 1071, illus., 1071 direct materials, 1068, illus., 1069 Vendor’s invoice, 312, 313 Vertical analysis comparative balance sheet, illus., 783 comparative income statement, illus., 784 def., 124, 783 Volume variance, def., 1075 Voucher, def., 370 Voucher system, def., 370 W W-4 (Employee’s Withholding Allowance Certificate), 496 illus., 496 Wage bracket withholding table, illus., 497 Wages, 495 accrued, illus., 115 Warning signs of internal control problems, illus., 366 Warranties, Ford Motor Company, 117 Weight average cost method, 319, 322 Weighted average inventory cost flow method, def., 314 “What if” analysis, 981 Whole units, def., 921 I-17 Withdrawals, owner, 56 Work in process, 882 applying factory overhead to, 879 Work in process controlling account and job cost sheets, illus., 882 Work in process inventory, def., 844 Working capital, 511, 800 def., 174, 786 Working capital ratio, 786 Write-offs to the allowance account, 407 Y Yield, def., 934 Z Zero-based budgeting, def., 1017 Zero-coupon bonds, 644fn Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Company Index A A&E Television Networks, LLC, 540 Adams, Stevens & Bradley, Ltd., 405 Alcoa Inc., 31, 446, 449, 493, 915, 918, 946 Allos Therapeutics, Inc., 393 Altria Group, Inc., 536 Amazon.com, 3, 48, 174, 223, 240, 316, 357, 1198 American, 976 American Airlines, 104, 468 American Express Company, 261, 683, 1138 American Greetings Corporation, 346 Amgen Inc., 1237 Anheuser-Busch InBev Companies, Inc., 998 Ann Taylor, Inc., 856 Apple Inc., 51, 74, 154, 174, 223, 240, 346, 409, 445, 482, 525, 677, 686, 729, 745, 831, 915, 1020, 1164 AT&T, 174, 493 AutoZone, Inc., 27, 446 B Bank of America, 174 Barnes & Noble, Inc., 446, 725 Bavarian Motorworks (BMW), 877 Berkshire Hathaway Inc., 600, 683, 712 Best Buy, 113, 256, 290, 311, 313, 331, 357, 444, 483, 686 Bill and Melinda Gates Foundation, 683 Blue Ribbon Sports, 779 BMW Group, 156, 1061 Boeing, 31, 409, 428, 849 Brinker International, 1069 Bristol-Myers Squibb Company (BMS), 223 Burlington Northern Santa Fe Railroad, 683 C C.H Robinson Worldwide Inc., 819 Callaway Golf Company, 116, 836 Campbell Soup Company, The, 136 Canyons Resort, The, 1228 Capstone Turbine Corporation, 393 Cardinal Health, Inc., 174 Carnival Corporation, 1201, 1226 Caterpillar Inc., 27, 31, 319, 404, 446, 584, 856, 936 Charles Schwab Corporation, 1182 Chevron Corp., 493 Children’s Hospital of the King’s Daughters Health System, 1058 Chrysler Group LLC, 579, 734 Cisco Systems, Inc., 174, 223 Citigroup Inc., 31 CNBC, 1216 Coca-Cola Company, The, 10, 446, 493, 521, 639–640, 683, 686, 745, 821, 918, 1043, 1064 Coca-Cola Enterprises, 1043 Colgate-Palmolive Company, 855 Comcast Corporation, 469, 490 Computer Associates International, Inc., Consolidated Edison Inc., 886 Continental Airlines, Inc., 84, 758, 976 Costco Wholesale Corporation, 136, 174, 331, 357, 445 CVS Caremark Corporation (CVS), 31, 174 CyberSource, 261f D Darden Restaurants, Inc., 1069 DDB Advertising Agency, 915 Deere & Co, 821, 831 Dell Inc., 3, 10, 138, 174, 240, 256, 356, 525, 817, 831, 844, 1198 Deloitte & Touche, 540, 571, 579 Delta Air Lines, 2, 147, 409, 420, 428, 446, 452, 468, 584, 976, 1016, 1198 Dick’s Sporting Goods, 625 Disturbed, 871 Dollar General Corporation, 277 Dollar Tree Stores, Inc., 32, 253, 276 Domino Foods, Inc., 946 Domino’s Pizza L.L.C., 1058 Donnkenny, Inc., 389 Dow Chemical Company, The, 31, 584, 629 Dreyer’s Ice Cream, Inc., 913 Duke Energy, 686 Dunkin’ Donuts, 969 DuPont, 240, 915 E E.I du Pont de Nemours and Company, 1116fn E.W Scripps Company, 1107 eBay Inc., 10, 31, 174, 359, 702 Edmunds.com, 779 Electronic Arts Inc., 149, 175 Enron Corporation, 4, 49 Ernst & Young, 540, 579 ESPN, 999 eToys Direct, Inc., 316 Evergreen Solar, Inc., 379 Exxon Mobil Corporation, 36, 449, 723 F Facebook, 1149 Fatburger Inc., 447, 969 FedEx Corporation, 31, 186, 405, 419 Fiat, 734 Ford Motor Company, 3, 8, 10, 31, 117, 147, 449, 510, 723, 1016 Fox Sports, 999 Fujitsu, 1020 Furniture.com, Inc., 316 G Gap Inc., 31, 493 General Dynamics, 849 General Electric Capital, 664 General Electric Company, 174, 405, 584, 664 General Motors Corporation (GM), 509, 518, 524, 634 GlaxoSmithKline, 1126 Goldman Sachs Group, Inc., 601 Google Inc., 10, 21–22, 469, 511, 581, 584, 589, 601, 686, 821, 1064 Grooveshark, 677 H H&R Block, 31, 255 H.J Heinz Company, 436, 445, 818, 1020, 1092 Harris Corporation, 1133 Harris Interactive, 1064 Hasbro, 818 HCA Inc., 409 HealthSouth, Heritage Log Homes, 915 Hershey Foods Company, The, 818, 915, 945 Hewlett-Packard Development Company, L.P (HP), 138, 356, 686, 817 Hilton Hospitality, Inc., 31 Hilton Hotels Corporation, 972, 1121 I-18 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Company Index Home Depot, The, 8, 38, 181, 255, 271, 295, 446, 584, 786 Howard Schultz & Associates (HS&A), 370 Hyatt Hotels Corporation, 832 Hynix Semiconductor, 1164 I IBM, 446, 493, 1112 Intel Corporation, 405, 451, 915, 1064 Internal Revenue Service (IRS), 538, 1070, 1126 International Paper Company, 960 Intuit Inc., 205, 222, 223, 240, 997 iSuppli, 1164 J Jacobus Pharmaceuticals Company, Inc., 977 JCPenney, 181, 271, 357, 405, 1107 JDA, 252 JetBlue Airways Corp., 778 JHT Holdings, Inc., 389 Johnson & Johnson, 429, 778, 1064 Jones Soda Co., 725, 762 K Kellogg Company, 584, 947 KISS, 833, 871 Kohl’s Corporation, 654, 764 KPMG LLP, 540, 567, 579 Kraft Foods, 1064 Kroger, 256, 295, 347, 446, 449, 723 L L.L Bean, Inc., 240 Levi Strauss & Co., 872, 1044 LG Display, 1164 Limited Brands Inc., The, 181, 436, 1062 Lockheed Martin, 849 Lowe’s Companies Inc., 38, 117 LVMH, 722 M Macy’s, 405, 1107 Manpower Inc., 469 Marriott International, Inc., 832, 1198 Marshalls, 264 Marvel Entertainment, 669 MasterCard, 261, 406 Mattel, Inc., 393, 818 McDonald’s Corporation, 10, 21–22, 241, 558, 702, 969, 998, 1178 Merck & Co., Inc., 1237 Metro-Goldwyn-Mayer Studios Inc (MGM), 1237 MGM Resorts International, 429 Microsoft Corporation, 10, 27, 121, 136, 150, 174, 205, 381, 591, 600, 622, 679, 686, 702, 712, 1020 Miller Brewing, 918 Miramax Film Corp., 888 N Nestlé, 913 Netflix, 963 NetSuite, 252 New York Stock Exchange (NYSE), 667, 683 News Corporation, 241, 667, 685 Nicklaus Design, 915 Nike, Inc., 138, 174, 361, 654, 713, 765, 779, 802, 829, 915, C-1 Nokia Corporation, 465 Norfolk Southern Corporation, 456, 469 North Face, The, 1013 Novartis AG, 977 O Oakley, Inc., 403 Occidental Petroleum Corporation, 490 Office Depot Inc., 256, 449 Office Max, 256, 615 Oracle, 205, 252 Overhill Flowers, Inc., 735 P P&G, 1020 Pacific Gas and Electric Company, 615, 886 Pandora, 677 Panera Bread, 491, 512, 725, 1213 PayPal, 702 Peet’s Coffee & Tea Inc., 32 PepsiCo, Inc., 27, 405, 816, 915 Polo Ralph Lauren Corporation, 435 Priceline.com Inc., 223, 1161, 1198 PricewaterhouseCoopers, 540, 579 Procter & Gamble, 31, 55, 446, 524, 683 Pulaski Furniture Corporation, 936 Q Qualcomm, 1164 Qwest Communications International, Inc., R R.J Reynolds Tobacco Company, 584 RadioShack Corporation, 114, 483 Ralph Lauren Corp., 819 Razor USA, LLC, 537 RealNetworks, 103, 125 Research in Motion, Inc., 745 Rhapsody, 103 Risk Management Association, 786 Rite Aid Corp., 493 Ruby Tuesday, Inc., 469 S Safeway Inc., 347 Sage Software, Inc., 205 I-19 Salesforce.com, 252 SAP, 205, 252 Sears, 181, 409, 1107 Sears Holding Corporation, 256 Societe Generale, 389 Sony Corporation, 1064 Southern Airways, 54 Southwest Airlines Co., 10, 206, 468, 469, 656 Speedway Motorsports, Inc., 814 Sprint Nextel, 999 Staples, Inc., 615, 665 Starbucks Corporation, 2, 32, 189, 241, 468, 512, 558, 584, 686, 725 Starwood Hotels & Resorts Worldwide, 1137 Steelcase Inc., 1041 Sugarland, 539 Sun Microsystems, Inc., 584 SunTrust Banks Inc., 31, 677 T Take-Two Interactive Software, Inc., 175 Target Corporation, 32, 90, 174, 181 TearLab Corp., 402 Tennessee Valley Authority, 886 The Wall Street Journal, 685 Tiffany & Co., 181, 295, 357 Towers Perrin, 1064 Toyota Motor Corporation, 265, 1187 Twitter, U U-Haul, 1162 Under Armour, Inc., 189 Unilever Group, 721 Union Pacific, 819 United, 976 United Airlines, Inc., 428, 468 United Continental Holdings, 639–640 United Parcel Service, Inc (UPS), 449, 1062, 1138 United States Postal Service, 1093 Uno Restaurant Holdings Corp., 1069 US Air, 976 V Verizon Communications, Inc., 449, 483, 639–640, 686, 745 VISA, 261, 406 W W.W Grainger, Inc., 240 Walgreen Co., 174, 449 Walmart Stores, Inc., 3, 8, 10, 31, 90, 174, 256, 357, 446, 449, 490 Walt Disney Company, The, 2, 174, 540, 669, 915, 1136, 1202 Warner Bros., 872 Washburn Guitars, 833, 871 Washington Post Company, The, 584 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net I-20 Company Index Wells Fargo & Company, 368, 601, 683 Wendy’s, 969 Weyerhaeuser, 1129 Whirlpool Corporation, 446, 584 Winn-Dixie Stores, Inc., 256, 347 WorldCom, 451, 620 Worthington Industries, Inc., 327, 1237 X Xerox Corporation, Y Yahoo!, 31, 622, 799 Yahoo! Finance, 685 YRC Worldwide, 819 Z Zacks Investment Research, 786 Zale Corporation, 332 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net The Basics 1. Accounting Equation: Statement of Cash Flows A summary of the cash receipts and cash payments of a business entity for a specific period of time, such as a month or a year Assets = Liabilities + Owner’s Equity 2. T Account: 6. Accounting Cycle: Account Title Left Side Right Side debit credit 3. Rules of Debit and Credit: ASSETS Asset Accounts Debit for increases (+) Credit for decreases (–) = LIABILITIES Liability Accounts Debit for decreases (–) Balance Credit for increases (+) Balance Transactions are analyzed and recorded in the journal Transactions are posted to the ledger An unadjusted trial balance is prepared Adjustment data are assembled and analyzed An optional end-of-period spreadsheet is prepared 6. Adjusting entries are journalized and posted to the ledger 7. An adjusted trial balance is prepared 8. Financial statements are prepared 9. Closing entries are journalized + OWNER’S EQUITY Owner’s Capital Account and posted to the ledger Debit for Credit for 10. A post-closing trial balance is decreases (–) increases (+) prepared Balance 7. Types of Adjusting Entries: – Owner’s Drawing Account Debit for increases (+) Credit for decreases (–) Balance Income Statement Accounts + Revenue Accounts Debit for decreases(–) Credit for increases (+) Balance – Expense Accounts The side of the account for recording increases and the normal balance is shaded Debit for increases (+) Credit for decreases (–) Balance Net income or net loss 4. Analyzing and Journalizing Transactions Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s equity, a revenue, an expense, or a drawing account is affected For each account affected by the transaction, determine whether the account increases or decreases Determine whether each increase or decrease should be r ecorded as a debit or a credit, following the rules of debit and credit Record the transaction using a journal entry Periodically post journal entries to the accounts in the ledger Prepare an unadjusted trial balance at the end of the period 5. Financial Statements: Income Statement A summary of the revenue and expenses of a business entity for a specific period of time, such as a month or a year Statement of Owner’s Equity A summary of the changes in the owner’s equity of a business entity that have occurred during a specific period of time, such as a month or a year Balance Sheet A list of the assets, liabilities, and owner’s equity of a business entity as of a specific date, usually at the close of the last day of a month or a year 1. Prepaid expense (deferred expense) 2. Unearned revenue (deferred revenue) 3. Accrued revenue (accrued asset) 4. Accrued expense (accrued liability) 5. Depreciation expense Each entry will always affect both a balance sheet account and an income statement account 8. Closing Entries: 1. Revenue account balances are transferred to an account called Income Summary Expense account balances are transferred to an account called Income Summary The balance of Income Summary (net income or net loss) is transferred to the owner’s capital account The balance of the owner’s drawing account is transferred to the owner’s capital account 9. Special Journals: Providing services on account → recorded in → Revenue (sales) journal Receipt of cash from any source → recorded in → Cash receipts journal Purchase of items on account → recorded in → Purchases journal Payments of cash for any purpose → recorded in → Cash payments journal 10. Shipping Terms: FOB Shipping Point Ownership (title) passes to buyer when merchandise is delivered to freight carrier Freight costs are paid by buyer FOB Destination delivered to buyer seller Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 11 Format for Bank Reconciliation: Cash balance according to bank statement $xxx Add: Additions by company not on bank statement $xx Bank errors xx xx $xxx Deduct: Deductions by company not on bank statement $xx Bank errors xx xx Adjusted balance $xxx Cash balance according to company’s records $xxx Add: Additions by bank not recorded by company $xx Company errors xx xx $xxx Deduct: Deductions by bank not recorded by company $xx Company errors xx xx Adjusted balance $xxx 19 Margin of Safety = Sales – Sales at Break-Even Point Sales 20 Operating Leverage = Contribution Margin Income from Operations 21 Variances Direct Materials Actual Price – = × Actual Quantity Price Variance Standard Price Direct Labor = Actual Rate per Hour – × Actual Hours Rate Variance Standard Rate per Hour Direct Labor = Actual Direct Labor Hours – Standard Direct Labor Hours Time Variance 13 Interest Computations: Interest = Face Amount (or Principal) Rate Time 14 Methods of Determining Annual Depreciation: Cost – Estimated Residual Value Estimated Life Double-Declining-Balance: Rate* Book Value at Beginning of Period *Rate is commonly twice the straight-line rate (1Estimated Life) 15 Adjustments to Net Income (Loss) Using the Indirect Method Increase (Decrease) Net income (loss) $ XXX Adjustments to reconcile net income to net cash flow from operating activities: Depreciation of fixed assets XXX Amortization of intangible assets XXX Losses on disposal of assets XXX Gains on disposal of assets (XXX) Changes in current operating assets and liabilities: Increases in noncash current operating assets (XXX) Decreases in noncash current operating assets XXX Increases in current operating liabilities XXX Decreases in current operating liabilities (XXX) Net cash flow from operating activities $ XXX or $(XXX) 16 Contribution Margin Ratio = Fixed Costs + Target Profit Unit Contribution Margin First-in, First-out (FIFO) Last-in, First-out (LIFO) Average Cost STRAIGHT-LINE: 18 Sales (Units) = Fixed Costs Unit Contribution Margin Direct Materials = Actual Quantity – × Standard Price Quantity Variance Standard Quantity 12 Inventory Costing Methods: 17 Break-Even Sales (Units) = Sales – Variable Costs Sales × Standard Rate per Hour Variable Factory Actual Variable Budgeted Variable Overhead Controllable = Factory – Factory Overhead Variance Overhead Fixed Factory Standard Hours Standard Overhead = for 100% of – Hours for Volume Normal Actual Units Variance Capacity Produced × Fixed Factory Overhead Rate 22 Rate of Return on Income from Operations = Invested Assets Investment (ROI) Alternative ROI Computation: Income from Operations Sales × ROI = Sales Invested Assets 23 Capital Investment Analysis Methods: Methods That Ignore Present Values: A Average Rate of Return Method B Cash Payback Method Methods That Use Present Values: A Net Present Value Method B Internal Rate of Return Method 24 Average Rate = Estimated Average Annual Income of Return Average Investment 25 Present Value Index = Total Present Value of Net Cash Flow Amount to Be Invested 26 Present Value Factor for an Annuity of $1 = Amount to Be Invested Equal Annual Net Cash Flows Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Abbreviations and Acronyms Commonly Used in Business and Accounting AAA American Accounting Association ABC Activity-based costing AICPA American Institute of Certified Public Accountants CIA Certified Internal Auditor CIM Computer-integrated manufacturing Certified Management Accountant CMA CPA Certified Public Accountant Cr Credit Dr Debit EFT Electronic funds transfer EPS Earnings per share FAF Financial Accounting Foundation FASB Financial Accounting Standards Board FEI Financial Executives International FICA tax Federal Insurance Contributions Act tax FIFO First-in, first-out FOB Free on board GAAP Generally accepted accounting principles GASB Governmental Accounting Standards Board GNP Gross National Product IMA Institute of Management Accountants IRC Internal Revenue Code IRS Internal Revenue Service JIT Just-in-time LIFO Last-in, first-out Lower of C or M Lower of cost or market MACRS Modified Accelerated Cost Recovery System n/30 Net 30 n/eom Net, end-of-month P/E Ratio Price-earnings ratio POS Point of sale ROI Return on investment SEC Securities and Exchange Commission TQC Total quality control Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Classification of Accounts Account Title Account Classification Normal Financial Balance Statement Accounts Payable Current liability Credit Balance sheet Accounts Receivable Current asset Debit Balance sheet Accumulated Depletion Contra fixed asset Credit Balance sheet Contra fixed asset Credit Balance sheet Accumulated Depreciation Advertising Expense Operating expense Debit Income statement Allowance for Doubtful Accounts Contra current asset Credit Balance sheet Amortization Expense Operating expense Debit Income statement Bonds Payable ZLong-term liability Credit Balance sheet Fixed asset Debit Balance sheet Building Capital Owner’s equity Credit Statement of owner’s equity/ Balance sheet Capital Stock Stockholders’ equity Credit Balance sheet Cash Current asset Debit Balance sheet Stockholders’ equity Debit Retained earnings statement Cash Dividends Cash Dividends Payable Current liability Credit Balance sheet Common Stock Stockholders’ equity Credit Balance sheet Cost of Merchandise (Goods) Cost of merchandise Debit Income statement Sold (goods sold) Deferred Income Tax Payable Current liability/Long- Credit Balance sheet term liability Delivery Expense Operating expense Debit Income statement Depletion Expense Operating expense Debit Income statement Long-term liability Debit Balance sheet Discount on Bonds Payable Dividend Revenue Other income Credit Income statement Stockholders’ equity Debit Retained earnings statement Dividends Drawing Owner’s equity Debit Statement of owner’s equity Employees Federal Income Tax Current liability Credit Balance sheet Payable Equipment Fixed asset Debit Balance sheet Other income Credit Income statement Exchange Gain Exchange Loss Other expense Debit Income statement Factory Overhead (Overapplied) Deferred credit Credit Balance sheet (interim) Deferred debit Debit Balance sheet (interim) Factory Overhead (Underapplied) Federal Income Tax Payable Current liability Credit Balance sheet Federal Unemployment Tax Current liability Credit Balance sheet Payable Finished Goods Current asset Debit Balance sheet Cost of merchandise Debit Income statement Freight In sold Operating expense Debit Income statement Freight Out Gain on Disposal of Fixed Assets Other income Credit Income statement Gain on Redemption of Bonds Other income Credit Income statement Gain on Sale of Investments Other income Credit Income statement Goodwill Intangible asset Debit Balance sheet Income Tax Expense Income tax Debit Income statement Current liability Credit Balance sheet Income Tax Payable Insurance Expense Operating expense Debit Income statement Interest Expense Other expense Debit Income statement Interest Receivable Current asset Debit Balance sheet Interest Revenue Other income Credit Income statement Investment in Bonds Investment Debit Balance sheet Investment in Stocks Investment Debit Balance sheet Investment in Subsidiary Investment Debit Balance sheet Land Fixed asset Debit Balance sheet Loss on Disposal of Fixed Assets Other expense Debit Income statement Loss on Redemption of Bonds Other expense Debit Income statement Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Account Title Account Classification Normal Financial Balance Statement Loss on Sale of Investments Other expense Debit Income statement Marketable Securities Current asset Debit Balance sheet Materials Current asset Debit Balance sheet Current liability Credit Balance sheet Medicare Tax Payable Merchandise Inventory Current asset/Cost of Debit Balance sheet/Income merchandise sold statement Notes Payable Current liability/Long- Credit Balance sheet term liability Current asset/Investment Debit Balance sheet Notes Receivable Organizational Expenses Operating expense Debit Income statement Patents Intangible asset Debit Balance sheet Paid-In Capital from Sale of Stockholders’ equity Credit Balance sheet Treasury Stock Stockholders’ equity Credit Balance sheet Paid-In Capital in Excess of Par (Stated Value) Payroll Tax Expense Operating expense Debit Income statement Pension Expense Operating expense Debit Income statement Current asset Debit Balance sheet Petty Cash Preferred Stock Stockholders’ equity Credit Balance sheet Long-term liability Credit Balance sheet Premium on Bonds Payable Prepaid Insurance Current asset Debit Balance sheet Prepaid Rent Current asset Debit Balance sheet Cost of merchandise Debit Income statement Purchases sold Cost of merchandise Credit Income statement Purchases Discounts sold Purchases Returns and Cost of merchandise Credit Income statement Allowances sold Rent Expense Operating expense Debit Income statement Other income Credit Income statement Rent Revenue Retained Earnings Stockholders’ equity Credit Balance sheet/Retained earnings statement Operating expense Debit Income statement Salaries Expense Salaries Payable Current liability Credit Balance sheet Revenue from sales Credit Income statement Sales Sales Discounts Revenue from sales Debit Income statement Sales Returns and Allowances Revenue from sales Debit Income statement Current liability Credit Balance sheet Sales Tax Payable Sinking Fund Cash Investment Debit Balance sheet Sinking Fund Investments Investment Debit Balance sheet Social Security Tax Payable Current liability Credit Balance sheet State Unemployment Tax Payable Current liability Credit Balance sheet Stock Dividends Stockholders’ equity Debit Retained earnings statement Stock Dividends Distributable Stockholders’ equity Credit Balance sheet Supplies Current asset Debit Balance sheet Supplies Expense Operating expense Debit Income statement Treasury Stock Stockholders’ equity Debit Balance sheet Uncollectible Accounts Expense Operating expense Debit Income statement Unearned Rent Current liability Credit Balance sheet Utilities Expense Operating expense Debit Income statement Vacation Pay Expense Operating expense Debit Income statement Vacation Pay Payable Current liability/Long- Credit Balance sheet term liability Work in Process Current asset Debit Balance sheet Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... stockholders’ equity $ 23 5,000 $ 420 ,000 45,000 $ 305,000 12, 300 465,000 29 2,700 120 ,000 24 ,000 $1,136,700 565,000 $1,850,000 $2, 650,000 420 ,000 $ 350,000 1 02, 000 2, 230,000 24 8,000 4, 328 ,000 140,000... 31, 20 14 $23 3,000 136,530 a b $ c $ d e 115,000 $ f $ 69,400 70,000 22 5,000 g h $ i $22 0,000 138,000 103,770 2, 500 $101 ,27 0 — $ 77,000 130,000 $666 ,27 0 $ 60,000 70,000 22 5,000... December 31, 20 14 Basic earnings per share [($ 421 ,600 $30,000)/44,000 shares issued and outstanding] $5,450,000 $ 26 ,500 21 ,400 47,900 $5,4 02, 100 2, 160,000 $3 ,24 2,100 $ 825 ,000 678,900 124 ,300 26 ,500