ACCOUNTING PRINCIPLES TWELFTH EDITION ACCOUNT CLASSIFICATION AND PRESENTATION Account Title Classification Financial Statement Normal Balance A Accounts Payable Current Liability Balance Sheet Credit Accounts Receivable Current Asset Balance Sheet Debit Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit Advertising Expense Operating Expense Income Statement Debit Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit Amortization Expense Operating Expense Income Statement Debit B Bad Debt Expense Operating Expense Income Statement Debit Bonds Payable Long-Term Liability Balance Sheet Credit Buildings Plant Asset Balance Sheet Debit Cash Current Asset Balance Sheet Debit Common Stock Stockholders’ Equity Balance Sheet Credit Copyrights Intangible Asset Balance Sheet Debit Cost of Goods Sold Cost of Goods Sold Income Statement Debit C D Debt Investments Current Asset/Long-Term Investment Balance Sheet Debit Depreciation Expense Operating Expense Income Statement Debit Discount on Bonds Payable Dividends Long-Term Liability—Contra Temporary account closed to Retained Earnings Balance Sheet Retained Earnings Statement Debit Debit Dividends Payable Current Liability Balance Sheet Credit Balance Sheet Debit Income Statement Debit E Equipment Plant Asset F Freight-Out Operating Expense Gain on Disposal of Plant Assets Other Income Income Statement Credit Goodwill Intangible Asset Balance Sheet Debit Income Summary Temporary account closed to Retained Earnings Not Applicable (1) Income Tax Expense Income Tax Expense Income Statement Debit Income Taxes Payable Current Liability Balance Sheet Credit Insurance Expense Operating Expense Income Statement Debit Interest Expense Other Expense Income Statement Debit Interest Payable Current Liability Balance Sheet Credit Interest Receivable Current Asset Balance Sheet Debit Interest Revenue Other Income Income Statement Credit Inventory Current Asset Balance Sheet (2) Debit G I Financial Statement Normal Balance Plant Asset Balance Sheet Debit Loss on Disposal of Plant Assets Other Expense Income Statement Debit Maintenance and Repairs Expense Operating Expense Income Statement Debit Mortgage Payable Long-Term Liability Balance Sheet Credit Notes Payable Current Liability/ Long-Term Liability Balance Sheet Credit Owner’s Capital Owner’s Equity Credit Owner’s Drawings Temporary account closed to Owner’s Capital Owner’s Equity and Balance Sheet Owner’s Equity Intangible Asset Stockholders’ Equity Balance Sheet Balance Sheet Debit Credit Paid-in Capital in Excess of Par— Preferred Stock Stockholders’ Equity Balance Sheet Credit Preferred Stock Stockholders’ Equity Balance Sheet Credit Account Title Classification Land L M N O Debit P Patents Paid-in Capital in Excess of Par— Common Stock Premium on Bonds Payable Long-Term Liability Balance Sheet Credit Prepaid Insurance Current Asset Balance Sheet Debit Prepaid Rent Current Asset Balance Sheet Debit Rent Expense Retained Earnings Operating Expense Stockholders’ Equity Income Statement Balance Sheet and Retained Earnings Statement Debit Credit R S Salaries and Wages Expense Operating Expense Income Statement Debit Salaries and Wages Payable Current Liability Balance Sheet Credit Sales Discounts Revenue—Contra Income Statement Debit Sales Returns and Allowances Revenue—Contra Income Statement Debit Sales Revenue Revenue Income Statement Credit Selling Expenses Operating Expense Income Statement Debit Service Revenue Revenue Income Statement Credit Stock Investments Current Asset/Long-Term Investment Balance Sheet Debit Supplies Current Asset Balance Sheet Debit Supplies Expense Operating Expense Income Statement Debit Treasury Stock Stockholders’ Equity—Contra Balance Sheet Debit T U Unearned Service Revenue Current Liability Balance Sheet Credit Utilities Expense Operating Expense Income Statement Debit (1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss The Income Summary account does not appear on any financial statement (2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold The following is a sample chart of accounts It does not represent a comprehensive chart of all the accounts used in this textbook but rather those accounts that are commonly used This sample chart of accounts is for a company that generates both service revenue as well as sales revenue It uses the perpetual approach to inventory If a periodic system was used, the following temporary accounts would be needed to record inventory purchases: Purchases, Freight-In, Purchase Returns and Allowances, and Purchase Discounts CHART OF ACCOUNTS Assets Liabilities Owner’s and Stockholders’ Equity Revenues Expenses Cash Notes Payable Owner’s Capital Service Revenue Advertising Expense Accounts Receivable Accounts Payable Owner’s Drawings Sales Revenue Unearned Service Revenue Common Stock Sales Discounts Paid-in Capital in Excess of Par— Common Stock Sales Returns and Allowances Allowance for Doubtful Accounts Interest Receivable Salaries and Wages Payable Bad Debt Expense Cost of Goods Sold Interest Revenue Unearned Rent Revenue Inventory Interest Payable Supplies Dividends Payable Preferred Stock Paid-in Capital in Excess of Par— Preferred Stock Prepaid Insurance Prepaid Rent Amortization Expense Income Taxes Payable Gain on Disposal of Plant Assets Depreciation Expense Freight-Out Income Tax Expense Treasury Stock Insurance Expense Retained Earnings Land Bonds Payable Interest Expense Dividends Equipment Discount on Bonds Payable Income Summary Loss on Disposal of Plant Assets Accumulated Depreciation— Equipment Premium on Bonds Payable Maintenance and Repairs Expense Buildings Mortgage Payable Rent Expense Accumulated Depreciation— Buildings Salaries and Wages Expense Supplies Expense Copyrights Utilities Expense Goodwill Patents ACCOUNTING PRINCIPLES TWELFTH EDITION Jerry J Weygandt PhD, CPA University of Wisconsin—Madison Madison, Wisconsin Paul D Kimmel PhD, CPA University of Wisconsin—Milwaukee Milwaukee, Wisconsin Donald E Kieso PhD, CPA Northern Illinois University DeKalb, Illinois DEDICATED TO the Wiley sales representatives who sell our books and service our adopters in a professional and ethical manner, and to Enid, Merlynn, and Donna Vice President and Director Executive Editor Customer and Market Development Manager Development Editor Assistant Development Editor Editorial Supervisor Editorial Associate Senior Content Manager Senior Production Editor Senior Director, Marketing Senior Marketing Manager Product Design Manager Product Design Associate Media Specialist Design Director Cover Design Interior Design Senior Photo Editor Market Solutions Assistant Marketing Assistant Cover and title page George Hoffman Michael McDonald Christopher DeJohn Ed Brislin Rebecca Costantini Terry Ann Tatro Margaret Thompson Dorothy Sinclair Valerie A Vargas Amy Scholz Karolina Zarychta Honsa Allison Morris Matt Origoni Elena Santa Maria Harry Nolan Maureen Eide Maureen Eide/Kristine Carney Mary Ann Price Elizabeth Kearns Anna Wilhelm Marina Grau/Shutterstock This book was set in New Aster LT Std by Aptara®, Inc and printed and bound by Courier Kendallville The cover was printed by Courier Kendallville Founded in 1807, John Wiley & Sons, Inc has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support For more information, please visit our website: www.wiley.com/go/citizenship Copyright © 2015, 2012, 2010, 2008, 2005, 2002, 2000 John Wiley & Sons, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year These copies are licensed and may not be sold or transferred to a third party Upon completion of the review period, please return the evaluation copy to Wiley Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel Outside of the United States, please contact your local representative ISBN-13 978-1-118-87505-6 Binder-Ready Version ISBN 978-1-118-96990-8 Printed in the United States of America 10 Brief Contents 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Accounting in Action The Recording Process 48 Adjusting the Accounts 92 Completing the Accounting Cycle 148 Accounting for Merchandising Operations 206 Inventories 262 Accounting Information Systems 310 Fraud, Internal Control, and Cash 354 Accounting for Receivables 404 Plant Assets, Natural Resources, and Intangible Assets 442 Current Liabilities and Payroll Accounting 490 Accounting for Partnerships 532 Corporations: Organization and Capital Stock Transactions 570 Corporations: Dividends, Retained Earnings, and Income Reporting 608 Long-Term Liabilities 644 Investments 690 Statement of Cash Flows 726 Financial Statement Analysis 784 Managerial Accounting 834 Job Order Costing 876 Process Costing 916 Cost-Volume-Profit 960 Budgetary Planning 1004 Budgetary Control and Responsibility Accounting 1052 Standard Costs and Balanced Scorecard 1100 Incremental Analysis and Capital Budgeting 1146 APPENDICES A B C D E F G H Specimen Financial Statements: Apple Inc Specimen Financial Statements: PepsiCo, Inc Specimen Financial Statements: The Coca-Cola Company Specimen Financial Statements: Amazon.com, Inc Specimen Financial Statements: Wal-Mart Stores, Inc Specimen Financial Statements: Louis Vuitton Time Value of Money Standards of Ethical Conduct for Managerial Accountants Cases for Managerial Decision-Making* *Available at the book’s companion website, www.wiley.com/college/weygandt iii From the Authors Dear Student, Why This Course? Remember your biology course in high school? Did you have one of those “invisible man” models (or maybe something more high-tech than that) that gave you the opportunity to look “inside” the human body? This accounting course offers something similar To understand a business, you have to understand the financial insides of a business organization An accounting course will help you understand the essential financial components of businesses Whether you are looking at a large multinational company like Apple or Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening As an employee, a manager, an investor,a business owner, or a director of your own personal finances— any of which roles you will have at some point in “Whether you are looking at a large your life—you will make better decisions for having multinational company like Apple or taken this course Why This Book? Hundreds of thousands of students have used this textbook Your instructor has chosen it for you because of its trusted reputation The authors have worked hard to keep the book fresh, timely, and accurate Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening.” How to Succeed? We’ve asked many students and many instructors whether there is a secret for success in this course The nearly unanimous answer turns out to be not much of a secret: “Do the homework.” This is one course where doing is learning The more time you spend on the homework assignments—using the various tools that this textbook provides—the more likely you are to learn the essential concepts, techniques, and methods of accounting Besides the textbook itself, WileyPLUS and the book’s companion website also offers various support resources Good luck in this course We hope you enjoy the experience and that you put to good use throughout a lifetime of success the knowledge you obtain in this course We are sure you will not be disappointed Jerry J Weygandt Paul D Kimmel Donald E Kieso iv Subject Index Iacocca, Lee, 644 IASB, see International Accounting Standards Board Ideal standards, 1103 Identification of economic events, 4–5 IFRS, see International Financial Reporting Standards Ig Nobel Prize, 402 IMA, see Institute of Management Accountants IMA Statement of Ethical Professional Practice, 851 Imprest system, 370 Incentives, creating, 851 Income, 266 comprehensive, 705 net, see Net income other comprehensive, 259, 805–808 sustainable, 804–808 Income from operations, 224 Income ratios, 540–541, 545 Income statement, 21, 22 budget, 1018–1020 corporation, 623–626 CVP, 970–973, 982, 983 effect of cost flow methods on, 274–275 and errors in inventory accounting, 277–278 horizontal analysis of, 788–789 merchandising and manufacturing costs in, 844–845 for merchandising companies, 222–226 multiple-step, 223–225 sustainable income on, 804 transfer to worksheet, 236 variances on, 1116–1117 vertical analysis of, 790–792 Income taxes: on corporation income statements, 623 for corporations, 574 and depreciation, 454 payroll deductions for, 500, 501 Income taxes payable, 736–737, 754 Incremental analysis, 1148–1159 for accepting an order at a special price, 1151–1152 costs in, 1151–1159 for eliminating unprofitable segments, 1157–1159 for making vs buying, 1152–1155 management decision-making process in, 1148–1151 for repairing, retaining, or replacing equipment, 1156–1157 for selling vs processing further, 1155–1156 types of decisions involving, 1150 Indefinite life, 460 Independent contractors, 499 Independent internal verification, 362–363 of bank reconciliations, 408 and inventory fraud, 267 of net income, 447 of payroll expenses, 508 Indirect fixed costs, 1072 Indirect labor, 841 Indirect manufacturing costs, 841 Indirect materials, 840 Indirect method (statement of cash flows), 731–741 investing and financing activities, 738–739 net change in cash, 739–740 operating activities, 734–738 worksheet for, 751–755 Industry averages (norms), 786 Information, for internal control, 357 Information technology, 46 Initial public offering (IPO), 575 Insiders, cybercrime by, 330 Institute of Management Accountants (IMA), 851, 914 Insurance: adjusting entries for, 99–100 health, 511 Intangible assets, 460–463 accounting for, 460–462 on classified balance sheet, 171–172 and research and development costs, 462–463 statement presentation and analysis of, 463–465 Intercompany comparisons, 786 Interest, 106 accrued, 106 on bonds, 648, 659, 693 on buildings, 445 on notes receivable, 418–419 to partners, 541–542 on partners’ capital, 541 Interest coverage, 801 Interest rates: for bonds, 646, 649–650, 664 for mortgages, 656–657 Internal auditors, 363 Internal control, 356–381 with accounting software, 313, 314 for bank reconciliations, 408 components of, 357 and fraud, 314, 356–357 and inventory fraud, 267 limitations of, 365 for net income, 447 over cash, 366–373 for payroll, 508–509 principles of, 358–364 and Sarbanes-Oxley Act, 25, 46, 96 and theft of merchandise, 217 using banks for, 373–381 I-11 Internal rate of return (IRR) method, 1166–1168 Internal Revenue Service (IRS), 6, 26, 454, 508 Internal transactions, 14 Internal users, International Accounting Standards Board (IASB), 9, 46 definitional structure of, 90 on financial instrument accounting, 441, 687–688, 724 financial statement presentation project of, 203, 643, 782–783 financial statement structure project of, 260, 833 framework for accounting standards of, 353, 687–688 on liabilities, 531 pension project of, 531 revenue recognition project of, 147 International Auditing and Assurance Standards Board (IAASB), 403 International Financial Reporting Standards (IFRS), 9, 46, 47 for accounting information systems, 353 for adjusting accounts, 146–147 China’s adoption of, 171 for classified balance sheet, 202–203 for dividends, 642–643 for financial statement analysis, 832–833 financial statements required by, 21 and fraud, 402–403 for inventories, 308–309 for investments, 723–724 for liabilities, 530–531, 686–687 for merchandising operations, 259–260 for plant, property, and equipment, 487–488 for receivables, 441 recording process for, 90 for statement of cash flows, 782 and stockholders’ equity, 605–606 Internet, value chain and, 850 Interpretation of information, 4, Intracompany comparisons, 786 Inventoriable costs, 842 Inventory(-ies), 262–282 classifying, 264–265 cost flow methods, 282–284 See also Inventory costing determining quantities, 265–267 errors in accounting for, 277–278 estimating, 284–286 excessive levels of, 281 in financial statements, 277–280 IFRS and GAAP for, 308–309 and income, 266 for manufacturing companies, 846–847 I-12 Subject Index Inventory(-ies) (Continued) for merchandising companies, 846–847 periodic system for, 210, 235 perpetual system for, 209–211 for statement of cash flows, 752 Inventory costing, 268–276 consistency concept in, 275–276 cost flow assumptions, 269–276 financial statement and tax effects of methods, 274–275 lower-of-cost-or-market, 279–282 perpetual system, 282–284 specific identification method, 269 Inventory turnover, 280–282, 796 Investing activities: cash flows from, 728, 729 direct method for, 749–750 indirect method for, 738–739 noncash, 729–730 Investments, 690–706 associate, 724 on classified balance sheet, 171 debt investments, 692–695 IFRS and GAAP for, 723–724 long-term, 704 by owner, 13, 15 in partnerships, 550–551 reasons for making, 692–693 short-term, 703–704 speculative, 692 stock investments, 695–699 valuing and reporting, 700–706 Investment centers, 1070, 1073–1077 Investment portfolio, 695 Invoices: fake, 360 purchase, 212 sales, 216 IPO (initial public offering), 575 Irregularities, 68 IRR (internal rate of return) method, 1166–1168 IRS, see Internal Revenue Service J JIT (just-in-time) inventory, 264–265, 850 JIT (just-in-time) processing, 932–934 Job cost data, reporting, 895–897 Job cost sheet, 882, 883 Job order cost flow, 879–895 accumulating manufacturing costs, 879–882 assigning costs to cost of goods sold, 891 assigning costs to finished goods, 890–891 assigning manufacturing costs to work in process, 882–887 Job order costing, 878–879 advantages and disadvantages, 894–895 cost accounting systems, 878–879 job order cost flow, 879–895 reporting job cost data, 895–897 for service companies, 893–894 Job order cost systems, 878–879, 919 process cost systems vs., 919–920 standard cost accounting system with, 1120–1122 Journals, 55–57 See also General journal cash payments (disbursements), 326–328 cash receipts, 320–324 cross-footing, 323 footing, 323 posting to, see Posting purchases, 324–326 sales, 318–320 simple and compound entries in, 56 special, see Special journals Journalizing, 55–56 adjusting entries, 109–110, 158 cash payments transactions, 326–328 cash receipts transactions, 321–323 closing entries, 159–161, 233–234 credit purchases, 324–325 credit sales, 318–319 illustration of, 61–66 special journals for, 317–318 with standard cost accounting system, 1120–1122 Just-in-time (JIT) inventory, 264–265, 850 Just-in-time (JIT) processing, 932–934 K Knight, Philip “Phil,” 4, 570, 573 L Labor costs, 841, 881, 885–887, 919–922 Labor unions, as external users, Labor variances: direct, 1111–1113 price, 1112, 1113, 1115 quantity, 1112, 1113 total, 1111–1112 Land, 444–445, 448, 749, 754 Land improvements, 445 Last-in, first-out (LIFO), 272–273 financial statement and tax effects, 274–275 in GAAP and in IFRS, 309 in periodic inventory systems, 269–270 in perpetual inventory systems, 283 Last-in, still here (LISH), 271 LCM (lower-of-cost-or-market), 279–282 Lean manufacturing, 838, 850 Leases, 659–661 Leasing, 447 Ledgers, 57–60 See also General ledger; Subsidiary ledgers proving, 319, 321, 324 with standard cost accounting system, 1122 Lenders, information from, 422 Leveraging, 799 Liabilities (financial): in accounting equation, 12 accrued, 106 on classified balance sheet, 169, 172–173 contingent, 495–497, 530 current, 172–173, 492–499 in double-entry system, 51–52 IFRS and GAAP for, 530–531, 686–687 long-term, 173–174, 492 See also Long-term liabilities payroll, 504 pension, 512 Liability (legal), in partnerships, 535–536 Licenses, 461, 575 Life insurance benefits, 511 Life of a corporation, 573 LIFO, see Last-in, first-out LIFO conformity rule, 275 Limited liability, 10, 535–536, 572–573 Limited liability companies (LLCs), 535, 536 Limited liability partnerships (LLPs), 535, 536 Limited life, 460 Limited partners, 536 Limited partnerships (Ltd., LP), 535–536 Line positions, 839 Liquidating dividends, 610 Liquidation, of partnerships, 543–548 Liquidity: defined, 173, 497–498 excess, 173 listing current liabilities in order of, 497 of receivables, 423 short-term creditor interest in, 786 Liquidity ratios, 793–796, 802 LISH (last-in, still here), 271 LLCs (limited liability companies), 535, 536 LLPs (limited liability partnerships), 535, 536 Loans, bad, 422 Long-range planning, budgetary planning and, 1009 Subject Index Long-term creditor, 786 Long-term debt, 494–495 Long-term debt due within one year, 495 Long-term investments, 171, 704 Long-term liabilities, 492, 644–662 bond amortization, 662–667 bonds, 646–656 on classified balance sheet, 173 debt and equity financing, 658–659 on financial statements, 657–658 leases, 659–662 notes payable, long-term, 656–657 ratios, 658 Losses: from discontinued operations, 805 on disposal of plant assets, 456–458 realized, 544, 704–705 on sale of equipment, 734–735 unrealized, 701, 704–705 Lower-of-cost-or-market (LCM), 279–282 Lowry, Adam, 1146 LPs (limited partnerships), 535–536 Ltd (limited partnerships), 535–536 M Machine time used, 922 MACRS (Modified Accelerated Cost Recovery System), 454 Madoff, Bernard, 380 Mail receipts, cash, 368 Make-or-buy decisions, 1152–1155 Maker (promissory notes), 417 Management accounting, see Managerial accounting Management by exception, 1066 Management consulting, 25 Management decision-making: for accepting an order at a special price, 1151–1152 for eliminating unprofitable segments, 1157–1159 financial and nonfinancial information in, 1148 incremental analysis for, 1148–1151 for making vs buying, 1152–1155 for retaining vs replacing equipment, 1156–1157 for selling vs processing further, 1155–1156 Management of corporations, 573 Managers, functions of, 836–840 Managerial accounting, 26, 834–853 activities in, 836 business ethics in, 851 cost concepts in, 840–844 financial accounting vs., 836 managers’ functions in, 836–840 manufacturing costs, 840–841, 844–848 organizational structure, 838–839 product vs period costs, 842 trends in, 848–853 Manual accounting systems, 314 Manufacturing companies, 840–841 activity-based costing for, 936–940 classifying inventory in, 264–265 flexible budgets for, 1068 lean manufacturing by, 850 process cost systems for, 918 units-of-activity depreciation for, 451–452 Manufacturing costs, 840–841 See also Job order cost flow; Process cost system accumulating, 879–882 assigning, to work in process, 882–887 in balance sheet, 846–847 cost concepts, 842–844 and costing for service industries, 848–849 cost of goods manufactured, 844–848 in income statement, 844–848 in job order cost system, 919 journal entries for, 922 in process cost system, 919–923 Manufacturing overhead, 840–841, 881 under activity-based costing, 936–937 journal entries for, 921–923 process vs job order cost systems for, 919 under- or overapplied, 896 Manufacturing overhead budget, 1017–1018 Manufacturing overhead variance, 1113–1115 Margin of safety, 979, 980 Margin of safety ratio (CVP), 979, 980 Marketable securities, 703 Market interest rate, 647, 650 Market value: of bonds, 647–648 of stock, 578 Marshall, John, 572 Master budget, 1009–1010 Matching principle (expense recognition principle), 95 Materials, sell-vs.-processing further decisions for, 1155–1156 Materials costs, 840, 880, 883–885 journal entries for, 921–922 process vs job order cost systems for, 919–920 Materiality, 447, 1066 Materiality principle, 447 Materials variances, direct, 1108–1111 price, 1109, 1110 quantity, 1109–1111 total, 1109 I-13 Maturity date: for bonds, 646, 654 for notes receivable, 417–418 Mayor, David, 852 Measurement principles, 9, 120 Medicare deductions, 501 Members (LLCs), 535 Merchandise, theft of, 217 Merchandise inventory, 264 Merchandise purchases budget, 1025–1026, 1028 Merchandising, 264 Merchandising companies, 208–236 adjusting entries for, 220–222 budgetary planning for, 1025–1026 closing entries for, 220–221, 233–234 cost of goods in, 844–848 flow of costs in, 209–211 forms of financial statements for, 223–228 IFRS and GAAP for, 259–260 operating cycles in, 208–209 periodic inventory system for, 229–236 recording purchases of merchandise, 211–215 recording sales of merchandise, 216–219 worksheets for, 228–229, 234–236 Merchandising profit, 223 Mergers and acquisitions, 46 Mixed costs, in CVP, 965–966 Modified Accelerated Cost Recovery System (MACRS), 454 Monetary unit assumption, 9–10, 120 Monitoring, for internal control, 357 Mortgages, 656–657 Mortgage bonds, 646 Motion Picture Association of America, 1076 Moving-average method, 283–284 Multinational corporations, 46 Multiple-step income statement, 223–225 Murdoch, Rupert, 690 Murdock, Wilbert, 490 Mutual agency, in partnerships, 534 N Nation-states, cybercrime by, 330 Natural resources, 458–459, 463–465 Neal, Ray, 15 Net annual cash flow, 1162 Net cash from operating activities, net income vs., 730 Net change in cash: direct method, 751 indirect method, 739 I-14 Subject Index Net income, 21 converting from accrual to cash basis, 732, 734–738, 745–749 and fraud, 447 on multiple-step income statement, 224 net cash from operating activities vs., 730 for partnerships, 535, 539–542 target, 977–980 on worksheet, 156 Net losses, 21 closing entry for, 619 for partnerships, 535, 539–542 on worksheet, 156 Net pay, 502 Net present value (NPV) method, 1164–1166 Net (cash) realizable value, 410, 420 Net sales, 223 Net 30, 214 New York Stock Exchange (NYSE), 578 No capital deficiency (partnership liquidation), 544–546 Nominal accounts, 159 See also Temporary accounts Noncash activities, 729–730 Noncash current assets, changes to, 735 Noncash current liabilities, changes to, 735 Noncontrollable revenues/costs, 1066 Non-manufacturing companies, budgetary planning for, 1025–1027 Nonoperating activities, on multiple-step income statement, 224–225 No-par value stocks, 579, 582 Normal balances, in double-entry system, 51 Normal capacity, 1106 Normal range, see Relevant range Normal standards, 1103 Notes payable, 12 as current liabilities, 492–493 long-term, 656–657 Notes receivable, 406, 417–422 computing interest on, 418–419 disposing of, 420–422 maturity date for, 417–418 recognizing, 419 valuing, 420 Not-for-profit corporations/ organizations, 572, 1027, 1102 Not sufficient funds (NSF) checks, 376 NPV (net present value) method, 1164–1166 NSF (not sufficient funds) checks, 376 NYSE (New York Stock Exchange), 578 O Obsolescence, 449 Occupational fraud, 372 Off-balance-sheet financing, 661 Olympic Games, 1023 Operating activities, 226 cash flows from, 728, 729 direct method, 745–749 indirect method, 732, 734–738 Operating budgets, 1009, 1010 Operating cycles, 170, 208–209 Operating expenses, on multiple-step income statement, 224–225 Operating leases, 660 Operations costing, 931 Opportunity costs, 1149, 1153–1154 Ordinary repairs, 446 Organizational structure, 838–839 Organization charts, 838 Organization costs, 575 Organized crime, cybercrime and, 330 Other comprehensive income, 259, 805–808 Other expenses and losses, for merchandising companies, 224 Other receivables, 406 Other revenues and gains, for merchandising companies, 224 Outstanding checks, 377 Overhead: under activity-based costing, 936–937 journal entries for, 921–923 manufacturing, 840, 841, 881, 896 predetermined, 887–890 process vs job order cost systems for, 919 standard predetermined, 1105 Overhead variances, 1123–1124 controllable, 1114, 1123–1124 manufacturing, 1113–1115 total, 1113–1114 volume, 1114, 1124 Over-the-counter cash receipts, 366–368 Owner’s capital, 13, 52, 53 Owner’s equity See also Corporate capital in accounting equation, 13–14 on classified balance sheet, 169, 170, 174 decreases in, 13 in double-entry system, 52 increases in, 13 Owner’s equity statement, 21–23 Ownership of goods, 266–268 Ownership rights: in corporations, 572, 573 preemptive, 576 of stockholders, 576 P Pacioli, Luca, 5n.2 Paid absences, 510–511 Paid-in capital, 579, 587, 610 Paid-in capital in excess of par value, 581–582 Paper (phantom) profit, 275 Parent company, 698 Participative budgeting, 1008–1009 Partners, 536 admission of, 549–552 withdrawal of, 552–555 Partners’ capital statement, 541–542 Partnerships, 10, 46, 534–555 admission/withdrawal of partners, 549–555 advantages and disadvantages of, 537 characteristics of, 534–535 dividing net income/net loss, 539–542 financial statements for, 542–543 forming, 538–539 liquidation of, 543–548 owner’s equity account in, 174 partnership agreements, 537 types of, 535–536 Partnership agreements, 537 Partnership dissolution, 534 Partnership liquidation, 543–548 capital deficiency, 546–548 no capital deficiency, 544–546 realization for, 544 Par value, 578, 581–582 Patents, 460–461 Payee (promissory notes), 417 Payment date (cash dividends), 611, 612 Payout ratio, 800 Payroll accounting, 499–510 determining payroll, 499–502 employer payroll taxes, 506–507 filing/remitting payroll taxes, 508 and fraud, 508 fringe benefits, 510–513 internal control for, 508–510 recording payroll, 503–505 Payroll deductions, 500–502 Payroll processing centers, 506 Payroll register, 503 Payroll taxes, 506–510 Payroll tax expense, 506 PCAOB (Public Company Accounting Oversight Board), 356 Pensions, 511–512 P/E (price/earnings) ratio, 625n.3, 799–800 Percentage of receivables basis (uncollectibles), 413–414 Percentage of sales basis (uncollectibles), 412–413 Performance evaluation, 1066–1067, 1103 Subject Index Performance obligations, 95, 101 Period costs, 842 Periodic inventory systems, 210, 229–236, 265, 269–270 Periodicity assumption, 94 See also Time period assumption Permanent accounts, 159, 163–164 Perpetual inventory systems, 209–220 in cost accounting systems, 878 cost flow methods in, 221–222, 282–284 determining quantities in, 265 entries for periodic system vs., 232–233 merchandising entries with, 221–222 recording purchases under, 211–215 recording sales under, 216–220 Petty cash fund controls, 370–373 Phantom profit, 275 Physical controls, 217, 361–362 Physical inventory, 265–266 Physical units, 928 Physical unit flow, 928 Pickard, Thomas, Plan administrators, 511 Plant and equipment, 444 See also Plant assets Plant assets, 171, 444–467 buildings, 445 depreciation of, 448–455 determining cost of, 444–448 disposal of, 455–456 equipment, 445–446 exchange of, 465–467 expenditures during useful life of, 446–447 land, 444–445 land improvements, 445 statement presentation and analysis of, 463–465 Ponzi schemes, 380 Post-closing trial balance, 163–165 Posting, 59 of adjusting entries, 109–110, 158 cash payments journal, 327, 328 cash receipts journal, 323–324 of closing entries, 159, 161–162, 233–234 of correcting entries, 167 dual, 329 illustration of, 61–67 purchases journal, 325–326 sales journal, 319, 320 special journals for, 317–318 Post-retirement benefits, 511–513 Practical range, see Relevant range Predetermined overhead, 887–890 Preferred stock, 583, 612–614, 798–799 Premium: on bonds, 650, 652–654, 666–667 on stock, 581 Prenumbering documents, 361 Prepaid expenses (prepayments), 96 adjusting entries for, 98–101 alternative treatment of, 116–117 for statement of cash flows, 753–754 Present value, 647 of bonds, 647 of leases, 661 Price/earnings (P/E) ratio, 625n.3, 799–800 Price variances: labor, 1112, 1113, 1115 materials, 1109, 1110 Principal (bonds), 647 Principles in financial reporting, 120–121 Prior period adjustments, 620–621 Private accounting, 26 See also Managerial accounting Privately held corporations, 572 Process cost flow, 921 Process cost system, 878–879, 918–935 and activity-based costing, 934–935 assigning manufacturing costs, 921–923 equivalent units, 924–926 example of, 927–931 job order cost systems vs., 919–920 and just-in-time processing, 932–934 process cost flow, 921 for service companies, 919 uses of, 918 Products, sell-vs.-processing further decisions for, 1155–1156 Product costs, 842 Production budget, 1012–1013 Production cost report, 927–931 Product warranties, 496–497 Profits, retained, 642 Profitability, creditor interest in, 786 Profitability ratios, 796–800, 802 Profit and loss statement, 21 See also Income statement Profit centers, 1070–1073 Profit margin, 797 Promissory notes, 417 See also Notes receivable Property, plant, and equipment, 171, 444, 487–488 See also Plant assets Proprietorships, 10, 46, 174 Proving ledgers, 319, 321, 324 Provisions, 531 Public accounting, 25 Public Company Accounting Oversight Board (PCAOB), 356 Publicly held corporations, 572 Pull approach to manufacturing, 933 Purchases: of buildings, 445 of merchandise, recording, 211–215 recording, 231 transaction analysis for, 15–16 I-15 Purchase allowances, 214, 231 Purchase discounts, 214–215, 232 Purchase invoice, 212 Purchases journal, 324–326 Purchase of an interest (partnerships), 549–550 Purchase returns, 214, 231 Push approach to manufacturing, 932 Q Quantity variances: labor, 1112, 1113 materials, 1109–1111 Quarterly tax reports, 508 QuickBooks®, 310, 312, 313 Quick ratio, 794–795 See also Acid-test ratio R Ratio analysis, 786, 792–804 liquidity ratios, 793–796, 802 long-term liabilities, 658 profitability ratios, 796–800, 802 solvency ratios, 800–802 Raw materials, 264, 840 Raw materials costs, 880, 883–885 R&D (research and development) costs, 462–463 Real accounts, 159 See also Permanent accounts Real estate taxes payable, 12 Realized gain/loss, 704–705 Reasonable assurance concept, 365 Receivables, 404–423 accounts receivable, 406–416 on financial statements, 422–423 IFRS and GAAP for, 441 notes receivable, 417–422 types of, 406 Reconciling bank accounts, 376–381 electronic funds transfers, 380 entries from, 379–380 illustration of, 379–380 procedure for, 376–381 Reconciling items, for statement of cash flows, 752–755 Record date (cash dividends), 611, 612 Recording process, 48–70, 232–233 accounts in, 50–54 activities in, 4, debits and credits in, 50–54 for employer payroll taxes, 506–507 illustrated, 60–67 for payroll, 503–505 with periodic inventory system, 230–233 for purchases of merchandise, 211–215 for sales of merchandise, 216–219 for special and general journals, 329 steps in, 54–60 trial balance in, 68–70 I-16 Subject Index Recordkeeping, segregation of physical custody and, 360, 367 Recycling, 108, 926 Redeeming bonds, 654–656 Regression analysis, 968 Regular partnerships, 535 Regulations, government, 1102 for corporations, 574 as standards, 1102 See also Standard costs Regulatory agencies, Reimbursement requests, fraud involving, 361 Relevance: of figures, of financial information, 119 Relevant costs, 1149 Relevant range, 964–965, 1061 Repairs, ordinary, 446 Repurchase of shares, 587 Required rate of return, 1161, 1164 Research and development (R&D) costs, 462–463 Reserves, 605, 642 Residual claims, 576 Residual equity, 13 See also Owner’s equity Residual value, 488 Responsibility, establishment of, 358 Responsibility accounting, 1064–1073 controllable vs noncontrollable revenues/costs, 1066 responsibility centers, 1070–1073 responsibility reporting system, 1067–1070 Responsibility centers, 1070–1073 Responsibility reporting system, 1067–1070 Restricted cash, 382 Retailers, 208 Retail inventory method, 285–286 Retained earnings, 579–580, 619–621 payment of cash dividends from, 610 prior period adjustments, 620–621 restrictions on, 620 for statement of cash flows, 750, 755 Retained earnings statement, 621, 623, 789–790 Retained profits, 642 Retirement of plant assets, 456 Returns: purchase, 214 sales, 217–218 Return on assets, 798 Return on common stockholders’ equity, 622, 798 Return on investment (ROI), 1073–1075, 1119 Revenues, 13 accrued, 96, 104–105 controllable vs noncontrollable, 1066 in double-entry system, 53 recognizing, 95–96 for service companies, 894 on single-step income statement, 224 from stock investments, 697–698 unearned, see Unearned revenues Revenue expenditures, 446 Revenue recognition principle, 95, 121 Reversing entries, 166–168, 175–176 Risk assessment, 357 Risk levels of activities, 365 Rodgers, Aaron, 48, 49 ROI, see Return on investment Rolling Stones, 979 Rowlings, J.K., 460 Ryan, Eric, 1146 S Safe cash payments schedule, 545 See also Schedule of cash payments Sage 50, 312, 313 Salaries, 499, 500 See also Payroll accounting accrued, 106–108 to partners, 541–542 Salaries and wages payable, 12 Sales: of bonds, 693–694 credit card, 414–416 of equipment, loss on, 734–735 of merchandise, recording, 216–219 of notes receivable, 421 of plant assets, 456–458 of receivables, 415 recording, 232–233 of stocks, 696 Sales and administrative expense budget, 1018 Sales budget, 1011–1012 Sales commissions, fraud involving, 362 Sales discounts, 218–219, 232 Sales dollars, 974 Sales forecasts, 1007–1008, 1011–1012 Sales invoices, 216 Sales journal, 318–320 Sales returns and allowances, 217–218, 232 Sales revenue (sales), 208 Sales taxes payable, 12, 493 Sales units, 974 Salvage value, 449, 452 SAP ERP, 313 Sarbanes-Oxley Act: and accuracy of financial reports, 69 and corporation management, 573 and ethics, and fraud, 356–357, 402, 403 and human resources, 364 and internal auditor’s job, 26 and internal control, 25, 46, 96, 314 and software audit trails, 313 Schedule of cash payments, 545–546 Schultz, Howard, 1100 Scudamore, Brian, 1122 SEC, see Securities and Exchange Commission Secured bonds, 646 Securities: available-for-sale, 700–703, 806 held-to-maturity, 700 marketable, 703 trading, 700–701, 703, 806 Securities and Exchange Commission (SEC), 6, 9, 26, 380, 701, 723 Segments, in responsibility accounting, 1065 Segregation of duties, 359–360, 408 Service companies: budgetary planning for, 1026–1027 job order costing in, 893–894 and managerial accounting, 848–849 operating cycles for, 208 process cost systems for, 919 process vs job order cost systems for, 919 revenue for, 894 Service revenue, 894 Shares, sale of, 10 Shareholders’ equity, 579 See also Corporate capital Short-term creditor, 786 Short-term investments, 703–704 Short-term paper, 703n4 Simple entries, 56 Single-step income statement, 224 Sinking fund bonds, 646 “Slush” funds, 370 Social responsibility, see Corporate social responsibility Social Security, 511 Social Security taxes, 501 Software: for customization, 313 entry-level, 313 for fraud control, 314 for internal control, 313 network compatibility of, 313 Solvency, creditor interest in, 786 Solvency ratios, 800–802 SOX, see Sarbanes-Oxley Act Special journals, 317–329, 331 cash payments, 326–328 cash receipts, 320–324 effects on general journal, 329 purchases, 324–326 sales, 318–320 Subject Index Special order-price decisions, 1151–1152 Specific identification method (inventory), 269 Speculative investments, 692 Staff positions, 839 Standards See also Standard costs budgets vs., 1103 government, 1102 ideal vs normal, 1103 Standard costs, 1100–1115 analyzing and reporting variances, 1107–1108 balanced scorecard, 1117–1119 direct labor variances, 1110–1113 direct materials variances, 1108–1111 manufacturing overhead variances, 1113–1115 need for, 1102, 1103 reporting variances from, 1115–1120 setting, 1103–1107 and standards vs budgets, 1103 Standard cost accounting system, 1120–1122 Standard hours, 1114 Standard predetermined overhead, 1105 State income taxes, 501 Statement of cash flows, 21–24, 728–743 classification of cash flows, 728–729 company evaluation based on, 743–750 direct method for, 732, 743–750 format of, 730–731 IFRS and GAAP for, 782 indirect method for, 731–741 preparation of, 731–741 significant noncash activities, 729–730 T-account approach, 755–758 usefulness of, 728 worksheet for, 751–755 Statement of comprehensive income, 642, 804–807 Statement of earnings, 504–505 Statement of operations, 21 See also Income statement State unemployment taxes, 506 Static budgets, 1055–1057 Static budget reports, 1055–1057 Stocks, 576–579 authorized, 577 capital, 587 common, 576, 581–584 direct issues, 577 indirect issues, 577 issued for credit, 739 market value of, 578 no-par value, 579 par value of, 578 preferred, 583, 612–614 of tech companies, 740 treasury, 584–587 Stock certificates, 576–577 Stock dividends, 615–618 Stockholders, 786 limited liability of, 572–573 ownership rights of, 576 preferred, 612 Stockholders’ equity, 174, 579 See also Corporate capital on balance sheet, 588–589 contra account for, 585 effect of dividends on, 616–617 on financial statements, 622–623 and IFRS/GAAP, 605–606 preparing and analyzing, 619–623 Stock investments, 695–699 Stock option plans, 500, 588 Stockouts, 838 Stockpiling, 1014 Stock splits, 617–618 Straight-line amortization, 662–664 Straight-line depreciation, 450–451, 454 Su, Vivi, 404 Subchapter S corporations, 536 Subsidiary (affiliated) company, 698 Subsidiary ledgers, 315–317 job cost sheets as, 882, 884 posting from cash receipts journal to, 323–324 posting from purchases journal to, 325–326 Summa de Arithmetica, Geometria, Proportione et Proportionalite (Luca Pacioli), 5n.2 Summary entries, 881 Sunk costs, 1149 Supplies, adjusting entries for, 98–99 Sustainability reporting, 357, 459 Sustainable business practices, 852–853 Sustainable income, 804–808 defined, 804 discontinued operations, 805 other comprehensive income, 805–808 T Tabular summaries, 50 T accounts, 50–51, 755–758 Take-home pay, 502 See also Net pay “Tapping the cookie jar,” 414 Target net income, 977–980 Taxes: as accounting area, 25 on corporations, 574 and depreciation, 454 double taxation, 574 effect of cost flow methods on, 274, 275 on employers, 506–510 I-17 FICA, 500–501 income, see Income taxes for partnerships, 534 payroll, 500–502, 506–510 sales taxes payable, 493 and time period divisions, 94 Taxing authorities, Tech company stock, 740 Technology: cyber security, 330–331 investment in, 1163 value chain and, 850 Temporary accounts, 158, 164–165 Theft, 217, 365, 372 Theory of constraints, 850 Three-column form of account, 58 Tilton, Glenn, 1119 Times interest earned, 658, 801 Timeliness, 119 Time period assumption, 94–97, 120, 146 Time value of money, 647 Total quality management (TQM), 850 Total standard cost per unit, 1106 Total variance, 1107–1108 labor, 1111–1112 materials, 1109 overhead, 1113–1114 TQM (total quality management), 850 Trademarks, 461, 462 Trade names, 461 Trade receivables, 406 See also Accounts receivable; Notes receivable Trading on the equity, 799 Trading securities, 700–701, 703, 806 Transaction analysis, 14–20, 61–65 See also Business transactions Transparency, in financial reporting, 46 Transportation-in, 231 Transposition error, 69 Treasurers, 573, 839 Treasury stock, 584–587 Trend analysis, 787 See also Horizontal analysis Trial balances, 68–70 adjusted, 111–115 limitations of, 68–69 locating errors in, 90 outdated information in, 96 post-closing, 163–165 on worksheet, 151–155, 234–235 Triple bottom line, 852 Trustees (bonds), 646 U Uncollectible accounts, 408–416 allowance method, 409–414 direct write-off method, 409 Understandability, 119 Underwriting, 577–578 I-18 Subject Index Unearned revenues, 96 adjusting entries for, 101–103 alternative treatment of, 117–118 as current liabilities, 494 Unemployment taxes, 506 Unit contribution margin (CVP analysis), 971–972, 975, 978 United Nations, 964 Units-of-activity depreciation (units-of-production method), 451–452, 455 Unit production costs, 928–930 Unlimited liability, 535–537 Unprofitable segment elimination decisions, 1157–1159 Unrealized gains/losses, 701, 704–705 Unsecured bonds, 646 Useful financial information, 119 Useful life, 447, 449 Users of accounting data, 5–6 V Vacations, required, 363–364 Valuation: of accounts receivable, 408–414 cost allocation vs., 448 of investments, 700–706 of notes receivable, 420 Value chain, 849–850 Variable costs: in CVP, 962–963 in flexible budget, 1061 identifying, 969 in manufacturing overhead budget, 1017 Variable costing, 983–986 Variances from standards, 1107–1108 direct labor variances, 1111–1113 direct materials variances, 1108–1111 manufacturing overhead variance, 1113–1115 overhead, 1123–1124 reporting, 1115–1120 Venture capital firms, 535 Verifiability, 119 Verification, independent internal, see Independent internal verification Vertical analysis, 786, 790–792 Virtual closes, 162 Voucher register, 370 Voucher system controls, 370 W Wages, 499–500 See also Payroll accounting Wage and Tax Statement (Form W-2), 508–509 Warranties, product, 496–497 Wear and tear, 448 Weighted-average method, 924–926 Weighted-average unit cost, 273 West, Laura, 310 West, Paul, 310 Wholesalers, 208 Withdrawal of partners, 552–555 Working capital, 498, 794 Work in process, 264, 882–887 Work in process inventory, 845 Worksheets, 150–158 for merchandising companies, 228–229, 234–236 preparing adjusting entries from, 158 preparing financial statements from, 157–158 for statement of cash flows, 751–755 steps in preparing, 150–156 Y Years, fiscal, 94 Year-end, 23 Year-end balance, 896–897 Z Zero-interest bonds, 647 Zuckerberg, Mark, 575 RAPID REVIEW Chapter Content ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters and 6) Ownership Basic Equation Assets = Liabilities + Expanded Equation Assets = Debit / Credit Effects Dr + Cr – Liabilities Dr – + Owner’s Equity Owner’s Capital Dr – Cr + Cr + – Owner’s Drawing Dr + Revenues + Cr – Dr – Cr + – Ownership of goods on public carrier resides with: Expenses Freight Terms Dr + FOB shipping point Buyer Buyer FOB destination Seller Seller Cr – Perpetual vs Periodic Journal Entries ADJUSTING ENTRIES (Chapter 3) Event Perpetual Adjusting Entry Deferrals Prepaid expenses Unearned revenues Dr Expenses Dr Liabilities Cr Assets Cr Revenues Purchase of goods Accruals Accrued r evenues Accrued expenses Dr Assets Dr Expenses Cr Revenues Cr Liabilities Freight (shipping point) Inventory Cash Freight-In Cash Return of goods Cash (or A/P) Inventory Cash (or A/P) Purchase Ret and All Sale of goods Cash (or A/R) Sales Revenue Cost of Goods Sold Inventory Cash (or A/R) Sales Revenue No entry Sales returns and allowances Sales Ret and All Accounts Receivable Inventory Cost of Goods Sold Sales Ret and All Accounts Receivable No entry Sales discounts Cash Sales Discounts Accounts Receivable Cash Sales Discounts Accounts Receivable End of period No entry Closing or adjusting entry required Interest Computation Interest = Face value of note Annual interest rate Time in terms of one year CLOSING ENTRIES (Chapter 4) Purpose: (1) Update the Owner’s Capital account in the ledger by transferring net income (loss) and Owner’s Drawings to Owner’s Capital (2) Prepare the temporary accounts (revenue, expense, Owner’s Drawings) for the next period’s postings by reducing their balances to zero Process Debit each revenue account for its balance (assuming normal balances), and credit Income Summary for total revenues Debit Income Summary for total expenses, and credit each expense account for its balance (assuming normal balances) STOP AND CHECK: Does the balance in your Income Summary account equal the net income (loss) reported in the income statement? Periodic* Type Note: Each adjusting entry will affect one or more income statement accounts and one or more balance sheet accounts Who pays freight costs: Debit (credit) Income Summary, and credit (debit) Owner’s Capital for the amount of net income (loss) Debit Owner’s Capital for the balance in the Owner’s Drawings account, and credit Owner’s Drawings for the same amount STOP AND CHECK: Does the balance in your Owner’s Capital account equal the ending balance reported in the balance sheet and the owner’s equity statement? Are all of your temporary account balances zero? ACCOUNTING CYCLE (Chapter 4) *Covered in appendix Cost Flow Methods • Specific identification • First-in, first-out (FIFO) Journalize the transactions FRAUD, INTERNAL CONTROL, AND CASH (Chapter 8) The Fraud Triangle Principles of Internal Control Activities Opportunity Financial pressure Rationalization • • • • • • Establishment of responsibility Segregation of duties Documentation procedures Physical controls Independent internal verification Human resource controls Bank Books Balance per bank statement Add: Deposit in transit Balance per books Add: Unrecorded credit memoranda from bank statement Deduct: Unrecorded debit memoranda from bank statement Adjusted cash balance Journalize and post closing entries Post to ledger accounts Prepare financial statements: Income statement Owner’s equity statement Balance sheet Prepare a trial balance Deduct: Outstanding checks Prepare an adjusted trial balance • Weighted-average • Last-in, first-out (LIFO) Prepare a post-closing trial balance Purchases Cash (A/P) Bank Reconciliation Analyze business transactions Inventory Cash (A/P) Journalize and post adjusting entries: deferrals/accruals Optional steps: If a worksheet is prepared, Steps 4, 5, and are incorporated in the worksheet If reversing entries are prepared, they occur between Steps and Adjusted cash balance Note: Errors should be offset (added or deducted) on the side that made the error Adjusting journal entries should only be made on the books STOP AND CHECK: Does the adjusted cash balance in the Cash account equal the reconciled balance? RAPID REVIEW Chapter Content RECEIVABLES (Chapter 9) BONDS (Chapter 15) Methods to Account for Uncollectible Accounts Premium Record bad debt expense when the company determines a particular account to be uncollectible Direct write-off method At the end of each period, estimate the amount of credit sales uncollectible Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for this amount As specific accounts become uncollectible, debit Allowance for Doubtful Accounts and credit Accounts Receivable Allowance methods: Percentage-of-sales Percentage-of-receivables At the end of each period, estimate the amount of uncollectible receivables Debit Bad Debt Expense and credit Allowance for Doubtful Accounts in an amount that results in a balance in the allowance account equal to the estimate of uncollectibles As specific accounts become uncollectible, debit Allowance for Doubtful Accounts and credit Accounts Receivable Face Value Market interest rate Contractual interest rate Discount Market interest rate Contractual interest rate INVESTMENTS (Chapter 16) Comparison of Long-Term Bond Investment and Liability Journal Entries Event Investor Investee Purchase / issue of bonds Debt Investments Cash Cash Bonds Payable Interest receipt / payment Cash Interest Revenue Interest Expense Cash Comparison of Cost and Equity Methods of Accounting for Long-Term Stock Investments PLANT ASSETS (Chapter 10) Presentation Tangible Assets Market interest rate , Contractual interest rate Event Cost Equity Acquisition Stock Investments Cash Stock Investments Cash Investee reports earnings No entry Stock Investments Revenue from Stock Investments Investee pays dividends Cash Dividend Revenue Cash Stock Investments Intangible Assets Property, plant, and equipment Intangible assets (patents, copyrights, trademarks, franchises, goodwill) Natural resources Computation of Annual Depreciation Expense Trading and Available-for-Sale Securities Straight-line Cost Salvage value }}} Useful life (in years) Units-of-activity Depreciable cost }}} Units of activity during year Useful life (in units) Declining-balance Book value at beginning of year Declining balance rate* *Declining-balance rate Useful life (in years) Note: If depreciation is calculated for partial periods, the straight-line and decliningbalance methods must be adjusted for the relevant proportion of the year Multiply the annual depreciation expense by the number of months expired in the year divided by 12 months SHAREHOLDERS’ EQUITY (Chapter 13) Comparison of Equity Accounts Proprietorship Partnership Corporation Owner’s equity Owner’s capital Partner’s equity Name, Capital Name, Capital Stockholders’ equity Common stock Retained earnings No-Par Value vs Par Value Stock Journal Entries No-Par Value Par Value Cash Common Stock Cash Common Stock (par value) Paid-in Capital in Excess of Par—Common Stock DIVIDENDS (Chapter 14) Comparison of Dividend Effects Cash Common Stock Cash dividend ↓ No effect ↓ Stock dividend No effect ↑ ↓ Stock split No effect No effect No effect Trading Report at fair value with changes reported in net income Available-forsale Report at fair value with changes reported in the stockholders’ equity section STATEMENT OF CASH FLOWS (Chapter 17) Cash flows from operating activities (indirect method) Net income Add: Losses on disposals of assets Amortization and depreciation Decreases in current assets Increases in current liabilities Deduct: Gains on disposals of assets Increases in current assets Decreases in current liabilities Net cash provided (used) by operating activities Cash flows from operating activities (direct method) Cash receipts (Examples: from sales of goods and services to customers, from receipts of interest and dividends on loans and investments) Cash payments (Examples: to suppliers, for operating expenses, for interest, for taxes) Net cash provided (used) by operating activities $X X X X (X) (X) (X) $X $X (X) $X PRESENTATION OF NON-TYPICAL ITEMS (Chapter 18) Prior period adjustments (Chapter 14) Statement of retained earnings (adjustment of beginning retained earnings) Discontinued operations Income statement (presented separately after “Income from continuing operations”) Changes in accounting principle In most instances, use the new method in current period and restate previous year’s results using new method For changes in depreciation and amortization methods, use the new method in the current period but not restate previous periods Retained Earnings RAPID REVIEW Chapter Content MANAGERIAL ACCOUNTING (Chapter 19) COST-VOLUME-PROFIT (Chapter 22) Characteristics of Managerial Accounting Types of Costs Primary users Internal users Reports Internal reports issued as needed Purpose Special purpose for a particular user Content Pertains to subunits, may be detailed, use of relevant data Verification No independent audits Variable costs Vary in total directly and proportionately with changes in activity level Fixed costs Remain the same in total regardless of change in activity level Mixed costs Contain both a fixed and a variable element CVP Income Statement Format Types of Manufacturing Costs Total Direct materials Raw materials directly associated with finished product Direct labor Work of employees directly associated with turning raw materials into finished product Manufacturing overhead Costs indirectly associated with manufacture of finished product JOB ORDER AND PROCESS COSTING (Chapters 20 and 21) Sales Variable costs $xx xx xx xx $xx Contribution margin Fixed costs Net income Per Unit $xx xx $xx Unit contribution margin Unit selling price Unit variable costs Types of Accounting Systems Job order Costs are assigned to each unit or each batch of goods Process cost Costs are applied to similar products that are mass-produced in a continuous fashion Job Order and Process Cost Flow Job Order Cost Flow Process Cost Flow Direct Materials Direct Labor Manufacturing Overhead Direct Materials Direct Labor Manufacturing Overhead Work in Process Inventory Job No 101 Job No 102 Job No 103 Work in Process Finished Goods Inventory Finished Goods Inventory Cost of Goods Sold Cost of Goods Sold Break-even point in units Fixed costs Unit contribution margin Required sales in units Unit contribution (Fixed costs Target net income) for target net income margin RAPID REVIEW Chapter Content BUDGETS (Chapter 23) Materials price variance AQ AP AQ SP Materials quantity variance AQ SP SQ SP Labor price variance AH AR AH SR Labor quantity variance AH SR SH SR Components of the Master Budget Sales Budget Hayes Co Budget Production Budget Direct Materials Budget Direct Labor Budget Rightride * Overhead controllable variance Actual overhead Overhead budgeted Manufacturing Overhead Budget Operating Budgets * Overhead volume variance Fixed overhead rate Normal capacity hours Standard hours allowed *Appendix coverage Selling and Administrative Expense Budget INCREMENTAL ANALYSIS AND CAPITAL BUDGETING (Chapter 26) Incremental Analysis Budgeted Income Statement Capital Expenditure Budget Cash Budget Budgeted Balance Sheet Financial Budgets Identify the relevant costs associated with each alternative Relevant costs are those costs and revenues that differ across alternatives Choose the alternative that maximizes net income Opportunity costs are those benefits that are given up when one alternative is chosen instead of another one Opportunity costs are relevant costs Sunk costs have already been incurred and will not be changed or avoided by any future decision Sunk costs are not relevant costs Annual Rate of Return Annual rate of return Expected annual net income Average investment Cost of capital investment Net annual cash flow RESPONSIBILITY ACCOUNTING (Chapter 24) Cash Payback Types of Responsibility Centers Cash payback period Cost Profit Investment Expenses only Expenses and Revenues Expenses and Revenues and ROI Discounted Cash Flow Approaches Return on Investment Return on investment (ROI) Investment center controllable margin Average investment center operating assets STANDARD COSTS (Chapter 25) Standard Cost Variances Total materials variance Materials price variance Materials quantity variance Total labor variance Labor price variance Labor quantity variance Total overhead variance Overhead controllable variance Overhead volume variance Balanced Scorecard Linked process across perspectives: Financial Customer Internal Process Learning and Growth Net Present Value Compute net present value (a dollar amount) If net present value is zero or positive, accept the proposal If net present value is negative, reject the proposal Internal Rate of Return Compute internal rate of return (a percentage) If internal rate of return is equal to or greater than the minimum required rate of return, accept the proposal If internal rate of return is less than the minimum rate, reject the proposal RAPID REVIEW Financial Statements Order of Preparation Retained Earnings Statement Statement Type Date Income statement For the period ended Retained earnings statement For the period ended Balance sheet As of the end of the period Statement of cash flows For the period ended COMPANY NAME Retained Earnings Statement For the Period Ended Retained earnings, beginning of period Add: Net income (or deduct net loss) $X X X X $X Deduct: Dividends Retained earnings, end of period Income Statement (perpetual inventory system) STOP AND CHECK: Net income (loss) presented on the retained earnings statement must equal the net income (loss) presented on the income statement COMPANY NAME Income Statement For the Period Ended Sales Sales revenue Less: Sales returns and allowances Sales discounts Net sales Cost of goods sold Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other revenues and gains (Examples: interest, gains) Other expenses and losses (Examples: interest, losses) Income before income taxes Income tax expense Net income Balance Sheet COMPANY NAME Balance Sheet As of the End of the Period $X X X $X X X X X X X X X X $X Assets Current assets (Examples: cash, short-term debt investments, accounts receivable, inventory, prepaids) Long-term investments (Examples: investments in bonds, investments in stocks) Property, plant, and equipment Land Buildings and equipment $X Less: Accumulated depreciation X Intangible assets Total assets $X X $X X X X $X Liabilities and Stockholders’ Equity Income Statement (periodic inventory system) COMPANY NAME Income Statement For the Period Ended Sales Sales revenue Less: Sales returns and allowances Sales discounts Net sales Cost of goods sold Beginning inventory Purchases $X Less: Purchase returns and allowances X Net purchases X Add: Freight-in X Cost of goods purchased Cost of goods available for sale Less: Ending inventory Cost of goods sold Gross profit Operating expenses (Examples: store salaries, advertising, delivery, rent, depreciation, utilities, insurance) Income from operations Other revenues and gains (Examples: interest, gains) Other expenses and losses (Examples: interest, losses) Income before income taxes Income tax expense Net income $X X X $X X Liabilities Current liabilities (Examples: notes payable, accounts payable, accruals, unearned revenues, current portion of notes payable) Long-term liabilities (Examples: notes payable, bonds payable) Total liabilities Stockholders’ equity Common stock Retained earnings Total liabilities and stockholders’ equity $X X X X X $X STOP AND CHECK: Total assets on the balance sheet must equal total liabilities and stockholders’ equity; and, ending retained earnings on the balance sheet must equal ending retained earnings on the retained earnings statement X X X Statement of Cash Flows COMPANY NAME Statement of Cash Flows For the Period Ended X X X X X X X X X $X Cash flows from operating activities (Note: May be prepared using the direct or indirect method) Net cash provided (used) by operating activities Cash flows from investing activities (Examples: purchase / sale of long-term assets) Net cash provided (used) by investing activities Cash flows from financing activities (Examples: issue / repayment of long-term liabilities, issue of stock, payment of dividends) Net cash provided (used) by financing activities Net increase (decrease) in cash Cash, beginning of the period Cash, end of the period $X X X X X $X STOP AND CHECK: Cash, end of the period, on the statement of cash flows must equal cash presented on the balance sheet RAPID REVIEW Using the Information in the Financial Statements Ratio Formula Purpose or Use Liquidity Ratios Current ratio Acid-test (quick) ratio Accounts receivable turnover Inventory turnover Current assets }}} Current liabilities Measures short-term debt-paying ability Cash 1 Short-term investments 1 Accounts receivable (net) }}}}}}} Current liabilities Measures immediate short-term liquidity Net credit sales }}}} Average net accounts receivable Cost of goods sold }}} Average inventory Measures liquidity of receivables Measures liquidity of inventory Profitability Ratios Profit margin Net income }} Net sales Measures net income generated by each dollar of sales Asset turnover Net sales } } } } Average total assets Measures how efficiently assets are used to generate sales Return on assets Net income } } } } Average total assets Measures overall profitability of assets Return on common stockholders’ equity 10 Earnings per share (EPS) Price-earnings (P-E) ratio 11 Payout ratio Net income Preferred dividends }}}}}} Average common stockholders’ equity Net income Preferred dividends }}}}}} Weighted-average common shares outstanding Market price per share of stock }}}} Earnings per share Measures profitability of owners’ investment Measures net income earned on each share of common stock Measures ratio of the market price per share to earnings per share Cash dividends }} Net income Measures percentage of earnings distributed in the form of cash dividends Total liabilities } }} Total assets Measures percentage of total assets provided by creditors Solvency Ratios 12 Debt to assets ratio 13 Times interest earned 14 Free cash flow Net income + Interest expense + Income tax expense } }}}}}} Interest expense Net cash provided by operating activities Capital expenditures Cash dividends Measures ability to meet interest payments as they come due Measures the amount of cash generated during the current year that is available for the payment of additional dividends or for expansion WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... Receivable Supplies Equipment Payable Capital Drawings (1 ) 1$15,000 (2 ) 27,000 (3 ) (4 ) 11,200 (5 ) (6 ) 11,500 (7 ) 2600 2900 2200 (8 ) 2250 (9 ) 1600 (1 0) 21,300 Rev Exp $15,000 Initial invest 1$7,000... corporate accounting Employer Jr Level (0 –3 yrs .) Sr Level (4 –6 yrs .) Public accounting (large firm) Public accounting (small firm) Corporate accounting (large company) Corporate accounting (small... Expenses Capital Drawings 14 Accounting in Action DO IT! Owner’s Equity Effects Classify the following items as investment by owner (I), owner’s drawings (D), revenues (R), or expenses (E) Then indicate