Fundamental accounting principles 24e wild

24 Fundamental Accounting Principles th edition JOHN J WILD KEN W SHAW Fundamental Accounting 24 Principles th edition John J Wild University of Wisconsin at Madison Ken W Shaw University of Missouri at Columbia To my students and family, especially Kimberly, Jonathan, Stephanie, and Trevor To my wife Linda and children Erin, Emily, and Jacob FUNDAMENTAL ACCOUNTING PRINCIPLES, TWENTY-FOURTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright ©2019 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions ©2017, 2015, and 2013 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper LWI 21 20 19 18 ISBN 978-1-259-91696-0 (combined bound edition) MHID 1-259-91696-0 (combined bound edition) ISBN 978-1-260-15855-7 (combined loose-leaf edition) MHID 1-260-15855-1 (combined loose-leaf edition) ISBN 978-1-260-15860-1 (principles bound edition, chapters 1-17) MHID 1-260-15860-8 (principles bound edition, chapters 1-17) ISBN 978-1-260-15861-8 (principles loose-leaf edition, chapters 1-17) MHID 1-260-15861-6 (principles loose-leaf edition, chapters 1-17) Executive Portfolio Manager: Steve Schuetz Product Developers: Michael McCormick, Christina Sanders Marketing Manager: Michelle Williams Content Project Managers: Lori Koetters, Brian Nacik Buyer: Sandy Ludovissy Design: Debra Kubiak Content Licensing Specialist: Melissa Homer Cover Image: Bicyclist: ©Mezzotint/Shutterstock; Statistics icons: ©A-spring/Shutterstock; Background image: âVector work/Shutterstock Compositor: Aptarađ, Inc All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Names: Wild, John J., author | Shaw, Ken W., author Title: Fundamental accounting principles / John J Wild, University of   Wisconsin at Madison, Ken W Shaw, University of Missouri at Columbia Description: 24th edition | Dubuque, IA : McGraw-Hill Education, [2018] |   Revised edition of Fundamental accounting principles, [2017] Identifiers: LCCN 2018016853 | ISBN 9781259916960 (alk paper) | ISBN   1259916960 (alk paper) | ISBN 9781260158601 (alk paper) | ISBN   1260158608 (alk paper) Subjects: LCSH: Accounting Classification: LCC HF5636 W675 2018 | DDC 657—dc23 LC record available at https://lccn.loc.gov/2018016853 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites mheducation.com/highered About the Authors JOHN J WILD is a distinguished professor of accounting at the University of Wisconsin at Madison He previously held appointments at Michigan State University and the University of Manchester in England He received his BBA, MS, and PhD from the University of Wisconsin John teaches accounting courses at both the undergraduate and graduate levels He Courtesy of John J Wild has received numerous teaching honors, including the Mabel W Chipman Excellence-inTeaching Award and the departmental Excellence-in-Teaching Award, and he is a two-time recipient of the Teaching Excellence Award from business graduates at the University of Wisconsin He also received the Beta Alpha Psi and Roland F Salmonson Excellence-in-Teaching Award from Michigan State University John has received several research honors, is a past KPMG Peat Marwick National Fellow, and is a recipient of fellowships from the American Accounting Association and the Ernst and Young Foundation John is an active member of the American Accounting Association and its sections He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees John is author of Financial Accounting, Managerial Accounting, Financial and Managerial Accounting, and College Accounting, all published by McGraw-Hill Education John’s research articles on accounting and analysis appear in The Accounting Review; Journal of Accounting Research; Journal of Accounting and Economics; Contemporary Accounting Research; Journal of Accounting, Auditing and Finance; Journal of Accounting and Public Policy; Accounting Horizons; and other journals He is past associate editor of Contemporary Accounting Research and has served on several editorial boards including The Accounting Review and the Journal of Accounting and Public Policy In his leisure time, John enjoys hiking, sports, boating, travel, people, and spending time with family and friends KEN W SHAW Excellence in Teaching Award He is the advisor to his school’s chapter of the Association of Certified Fraud Examiners Ken is an active member of the American Accounting Association and its sections He has served on many committees of these organizations and presented his research papers at national and regional meetings Ken’s research appears in the Journal of Accounting Research; The Accounting Review; Contemporary Accounting Research; Journal of Financial and Quantitative Analysis; Journal of the American Taxation Association; Strategic Management Journal; Journal of Accounting, Auditing, and Finance; Journal of Financial Research; and other journals He has served on the editorial boards of Issues in Accounting Education; Journal of Business Research; and Research in Accounting Regulation Ken is co-author of Financial and Managerial Accounting, Managerial Accounting, and College Accounting, all published by McGraw-Hill Education In his leisure time, Ken enjoys tennis, cycling, music, and ­coaching his children’s sports teams is an associate professor of accounting and the KPMG/Joseph A Silvoso Distinguished Professor of Accounting at the University of Missouri He previously was on the faculty at the University of Maryland at College Park He has also taught in international programs at the University of Bergamo (Italy) and the University of Alicante (Spain) He received Courtesy of Ken W Shaw an accounting degree from Bradley University and an MBA and PhD from the University of Wisconsin He is a Certified Public Accountant with work experience in public accounting Ken teaches accounting at the undergraduate and graduate levels He has received numerous School of Accountancy, College of Business, and university-level teaching awards He was voted the “Most Influential Professor” by four School of Accountancy graduating classes and is a two-time recipient of the O’Brien Author Letter Using Learning Science and Data Analytics We use data to make decisions and maximize performance Like the mountain biker on the cover who uses data to track his progress, we used student performance data to identify content areas that can be made more direct, concise, and systematic Learning science reveals that students not read large chunks of text, so we streamlined this edition to present it in a more focused, succinct, blocked format to improve student learning and retention Our new edition delivers the same content in 115 fewer pages Visual aids and numerous videos offer additional learning aids New summary Cheat Sheets conclude each chapter to visually reinforce key concepts and procedures Our new edition has over 1,500 videos to engage students and improve outcomes: •  C  oncept Overview Videos—cover each chapter’s learning objectives with multimedia presentations that include Knowledge Checks to engage students and assess comprehension •  Need-to-Know Demos—walk-through demonstrations of key procedures and analysis to ensure success with assignments and tests •  Guided Examples (Hints)—step-by-step walk-through of assignments that mimic Quick Studies, Exercises, and General Ledger iii Recording Transactions Difference Makers in Teaching Learning Science + Equity −250 Chapter Preview Learning analytics show that students SYSTEM OF DEBITS AND RECORDING ACCOUNTS CREDITS TRANSACTIONS learn better when material is broken into “blocks” of content Each chapter opens Using financial T-account P1 Journalizing and statements posting C4 Debits and with a visual preview Learning objective credits C1 Source A1 Processing Chapter Accounting for Merchandising Operations numbers highlight the location of redocuments transactions— Normal balance Examples C2 Types of accounts lated content Each “block” of content Z-Mart’s Merchandise Inventory account at the end of the year has a balance of $21,250, but C3 General ledger concludes with a Need-to-Know (NTK) physical shows only $21,000learning of inventory exists The adjusting entry to record this $250 toa aid andcount reinforce student NTK 2-1 NTK 2-2 NTK 2-3 shrinkage is Visual aids and concise, bullet-point discussions further help students learn Dec 31 Cost of Goods Sold Merchandise Inventory Learning Objectives Adjust for $250 shrinkage P2 Trial balance preparation and use Error identification NTK 2-4 FINANCIAL STATEMENTS P3 Financial statement preparation A2 Debt ratio NTK 2-5 250 250 C4 CONCEPTUAL C1 TRIAL BALANCE Explain the steps in processing transactions and the role of source documents PROCEDURAL New Revenue Recognition Define debits and credits and explain double-entry accounting P1 Record transactions in a journal and post •  Wild uses the entries popular gross method to a ledger P2 Prepare and explain the use of a trial for merchandising transactions (net A1 Analyze the impact of transactions on recognition rules require sales to be reported at the amount expected received This means C2 Describe an accountto andbe its use in balance accounts and financial statements method is covered in an appendix) recording transactions that period-end adjusting entries are commonly made for P3 Prepare financial statements from A2 Compute the debt ratioThe and describe its gross method is widely used in C3 Describe a ledger and a chart of business transactions use in analyzing financial condition Expected sales discounts accounts practice and best for student success Expected returns and allowances (revenue side) •  Adjusting entries for new revenue recExpected returns and allowances (cost side) ognition rules are included in an apThese three adjustments produce three new accounts: Allowance for Sales Discounts, Sales pendix Assignments are clearly Refund Payable, and Inventory Returns Estimated Appendix 5B covers these accounts and the marked and separated Wild is GAAP adjusting entries compliant Sales Discounts, Returns, and Allowances—Adjusting Entries ANALYTICAL Revenue Preparing Financial Statements The financial statements of a merchandiser are similar to those for a service company described Up-to-Date in prior chapters The income statement mainly differs by the addition of cost of goods sold and wiL16960_ch02_044-083.indd 44 This book reflects changes in accounting revenue recognition, leases, and extraordinary items It is important gross profit Net sales is affected by discounts,for returns, and allowances, andinvestments, some additional that students GAAP accounting expenses such learn as delivery expense and loss from defective merchandise The balance sheet dif- fers by the addition of merchandise inventory as part of current assets (Appendix 5B explains inventory returns estimated as part of current assets and sales refund payable as part of current liabilities.) The statement of owner’s equity is unchanged Less Is More Wild has markedly fewer pages than competing books covering the same material forand Merchandisers •  Closing The text isEntries to the point uses visuals to aid student learning entries discussions are similar for service companies and aids merchandising •  Closing Bullet-point and active writing learning.companies The difference is that we close some new temporary accounts that come from merchandising activities Z-Mart has •  temporary The 24thaccounts editionunique has 115 fewer pages than 23rd edition—a to merchandisers: Sales (ofthe goods), Sales Discounts,10% Salesreduction! Returns and Allowances, and Cost of Goods Sold The third and fourth closing entries are identical for a merchandiser and a service company The differences are in red in the closing entries of Exhibit 5.11 11 for a Visual Learning First-in, first-out (FIFO) Costs flow in the order incurred Accounts to Income Last-in, first-out (LIFO) •  Learning analytics tell us intoStep 1: Close Credit Balances Temporary day’s students doSales not read large Dec 31 321,000 blocks of text Wild has adapted Income Summary $ 70 Closehaving credit balances to student needs by in-in temporary accounts May formative visual aids through65 Income Summary Step 2: Close Debit Balances in Temporary Accounts$to May out Many visuals and exhibits Dec 31 Income Summary 308,100 are new to this edition Sales Discounts $ 45 May G Sales Returns and Allowances o Cost of Goods Sold s Depreciation Expense G o Salaries Expense s Income Statement o o Insurance Expense l d Net sales $100 s d Rent Expense 45 l Supplies Expense Cost of goods sold e Advertising Expense Gross profit $ 55 f t Close debit balances in temporary accounts Balance Sheet Inventory $135 Step 3: Close Income Summary Step 4: Close Withdrawals iv Dec 31 Income Summary K Marty, Capital 12,900 Dec 31 12,900 G o o d s s o l d K Marty, Capital K Marty, Withdrawals 321,000 $70 May $70 May $65 May $65 May $45 May 4,300 $45 2,000 May 230,400 3,700 Income 43,800 Statement 600 Net sales $100 9,000 Cost of goods 3,000 sold 70 Gross profit $ 30 11,300 Balance Sheet Inventory $1 10 4,000 4,000 Weighted average Costs flow at an average of costs available Costs flow in the reverse order incurred Summary G o o d s l e f t Income Statement Net sales $100 Cost of goods sold 60 Gross profit $ 40 Balance Sheet Inventory $120 $180 = $60 each ×1 G o o d s s o l d ×2 G o o d s l e f t 5/3/18 2:14 PM Videos Adju ent sting ries Chapter Accounting for Receivables 333 •  A growing number of students now learn accounting online Wild offers over 1,500 Exhibitdesigned 9.6 portrays to theincrease allowance method It shows videos student en- the creation of the allowance for future write-offs—adding to a cookieoutcomes jar It also shows the decrease of the allowance through writegagement and improve offs—taking cookies from the jar •  H undreds of hint videos or Guided EXHIBIT 9.6 Examples provide a narrated, animated, Increases and step-by-step walk-through of select exerIncrease Allowance Decrease Allowance Decreases to the cises similar to those assigned These short Allowance for Doubtful Write -offs Accounts presentations, which can be turned on or Bad Debts Expense… # Allow for Doubtful Accts… # off by instructors, provide reinforcement Allow for Doubtful Accts… # Accts Receivable—J.Kent… # when students need it most (Exercise PowerPoints are available Allowance for instructors.) for Allowance for Adjusting entries add to allowance Bad debt write-offs subtract from doubtful accounts doubtful accounts allowance for doubtful accounts for doubtful accounts •  C oncept Overview Videos cover each chapter’s learning objectives with narRecovering a Badp Debt If an account rated, animated ­ resentations that that fre-was written off is later collected, two entries are made The first is to reverse the write-off and reinstate the customer’s account The quently assess comprehension Wild has second is to record the collection of the reinstated account If on March 11 Kent pays in full his concept overview presentations covering account previously written off, the entries are 228 Learning Objectives broken down intoMar over 700 videos Assets = Liabilities + Equity 11 Accounts Receivable—J Kent 520 Allowance for Doubtful Accounts Reinstate account previously written off Need-to-Know Demos Mar 11 Cash 520 520 +520 −520 Assets = Liabilities + Equity +520 demonstrations Need-to-Know demonstrations areKent located in each chapter These Accounts Receivable—J at key junctures 520 −520 Recordthe full payment of account pose questions about material just presented—content that students “need to know” to learn accounting Accompanying solutions walk students through key procedures and analysis necesKentto paid entire amount previously writtenand off, test but sometimes a customer pays only a porsary bethe successful with homework materials tion If we believe this customer will later pay in full, we return the entire amount owed to Need-to-Know demonstrations are supplemented with narrated, animated, step-by-step walkaccounts receivable (in the first entry only) If we expect no further collection, we return only through videos the amount paid led by an instructor and available via Connect A retailer uses the allowance method Record the following transactions Dec 31 Feb 14 Apr The retailer estimates $3,000 of its accounts receivable are uncollectible at its year-end The retailer determines that it cannot collect $400 of its accounts receivable from a customer named ZZZ Company ZZZ Company unexpectedly pays its account in full to the retailer, which then records its recovery of this bad debt NEED-TO-KNOW 9-3 Entries under Allowance Method P2 Solution Dec 31 Feb 14 Apr Apr Bad Debts Expense Allowance for Doubtful Accounts Record estimated bad debts Allowance for Doubtful Accounts Accounts Receivable—ZZZ Co Write off an account Accounts Receivable—ZZZ Co Allowance for Doubtful Accounts Reinstate an account previously written off Cash Accounts Receivable—ZZZ Co Record cash received on account 3,000 3,000 400 400 400 400 400 400 Do More: QS 9-4, QS 9-5, E 9-5 Comprehensive Need-to-Know  Comprehensive Need-to-Knows are problems that draw on material from the entire chapter They include a complete solution, allowing students to review the entire problem-solving process and achieve success wiL16960_ch09_326-357.indd 333 6/28/18 9:02 AM v or directly to the seller The cost principle requires that transportation costs of a buyer (often called transportation-in or freight-in) be part of the cost of merchandise inventory Z-Mart’s entry to record a $75 freight charge from UPS for merchandise purchased FOB shipping point is (d) Nov 24 Merchandise InventoryChapter Accounting for Receivables Cash 355 75 75 Paid freight costs on goods Required Prepare the adjusting entry to record bad debts expense on March 31, 2020, under each separate a sellerbalance is responsible for paying shipping costs,Accounts it recordsatthese costs in a Delivery assumption There is a zeroWhen unadjusted in the Allowance for Doubtful Expense account Delivery expense, also called transportation-out or freight-out, is reported as March 31 in the seller’s income statement a Bad debts are estimatedatoselling be 1%expense of total revenues 260 Chapter of Accounting Systems b Bad debts are estimatedItemized to be 2% accounts receivable (Round to theIndollar.) CostsInformation of Purchases summary, purchases are recorded as debits to Assume that Business Solutions’s Accounts Receivable balance at June 30, 2020, is $20,250 and that Merchandise Inventory (or Inventory) Purchases discounts, returns, and allowances are credited one account of $100 has been written off against the Allowance for Doubtful Accountsthe since March to (subtracted from) aMerchandise the benefits of producing specific report must outweigh costs of time and effort to produce 31, 2020 If Rey uses the method in part 1b, what adjusting journal entry is made to recognize bad Inventory is debited Itemized Costs ofrelevance, Merchandise Purchases that report.Transportation-in Decisions regarding other system principles (control, compatibility, and debts expense on June 30, (added) 2020? toareMerchandise Inventory flexibility) also affected by the cost-benefit principle cost of merchandise purchases $ 235,800 Should Rey consider adopting the direct write-off method of accounting forInvoice bad debts expense rather Z-Mart’s itemized costs of merchandise Less: Purchases discounts received ©Alexander Image/Shutterstock (4,200) than one of the allowance methods considered in part Explain.5.8 purchases for the year are 1? in Exhibit Difference Makers in Teaching Driving Decisions Chapter and Analyzing and Purchases returns allowances Recording (2) Dr Transactions (1,500) Check Bad Debts The accounting system described here Decision Insight and receive free shipping, we have terms FOB destination Assets = Liabilities + Equity +75 −75 Point: INcoming freight costs are charged to INventory When inventory EXits, freight costs are charged to EXpense EXHIBIT 5.8 Itemized Costs of Merchandise Purchases Point: Some companies have 61 separate accounts for purchases Add: Costs of transportation-in Expense, $48       2,300 discounts, returns and allowances, Whether we prepare, analyze, or apply accounting infordoes not provide separate records and transportation-in These Total after net cost ofhuge merchandise Go right $232,400 System’s stock increased the successpurchases of The Pokémon However, sheet listsFine its assets: cash, supplies, prepaidgreatly insurance, and equipment upper sidefew of accounts are then transferred to (accounts) forPrint total Nintendo’s purchases, total purmation, one skill remains essential: decision making To investors read Nintendo’s disclosures said$6,200 it ownedto less than one-third the company that developed the app Merchandise Inventory at periodthe balance sheet total shows that itthat owes creditors and of$3,000 in services to customers chases discounts, purchases returns end This is a hybrid system of ©Eric Audras/Getty Images When paid investors realized this, theequity stock dropped representing overcapital $6 billion in value of ■ $33,195 Note the help develop good decision-making habits and to show who in advance The section17%, shows ending The General Ledger tool in Connect automates several oftransportation-in the procedural steps inanaccounting socollect thatbalance the and allowances, and total Many companies this information in supple- perpetual and periodic That is, GENERAL 620financial professional can 620 Chapter 17 the Analysis ofbalance Financial Chapter 17 Statements Analysis ofofreports Financial Statements Merchandise Inventory is updated link between ending of the statement owner’s equity and the capital balance focus on the impacts of each transaction on various financial and performentary records to evaluate these costs Supplementary records, or supplemental records, refer LEDGER the relevance of accounting, we use a learning framework on a perpetual basis but only for (This presentation of the sheetaccounts is called the account form: assets GL on the left and liabili- purchases and cost of goods sold mance measures to information outside thebalance usual ledger PROBLEM SYSTEM COMPONENTS ties and equity on the right Another presentation is the report form: assets on top, followed by •  D  ecision Insight provides context for business decisions EXHIBIT EXHIBIT 17.9 liabilities equity Either 9-5A, presentation GL 9-1 17.9 General Ledger assignment GLand 9-1,then based on Problem focuses is onacceptable.) transactions APPLErelated INC to INC Decision Ethics The five components of accounting systems are source documents, input devices,APPLE information Point: Computerized systems •  D  ecision Ethics and Decision Maker are role-playing accounts and notes and receivable and highlights the impact each transaction Common-Size has on interestComparative revenue Income Common-Size Comparative Common-Size Comparative Common-Size Statements Comparative Income Statements provide more accuracy speed processors, information storage, and output devices These components apply manager whether a system Payables Manager As a new accounts payable manager, you are being trained by the outgoing She explains than manual scenarios that show the relevance of accounting Income Statements Income Common-Size Percents* C is Statements computerized orIssues manual 7.2 these components Presentation Dollarnet signs are not used in journals ledgers They doday appear that the system prepares checks forExhibit amounts ofshows favorable cash discounts, and theand checks are dated the last of the $ millions $ millions Current Yr company Prior Yr Yr Prior Prior Yr Yr C in financial reports such until as trial balances We that usually put dollar signs bediscount period.statements She tells youand that other checks are not mailed five days later, adding “the getsYr free Current use ofCurrent •  D  ecision Analysis provides key tools to assess company APPLE APPLE EXHIBIT 7.2 side only the five firstdays, andand last a column financial statements inpoint Appendix A cash for an extra ournumbers departmentin looks better.” DoApple’s you continue this policy? ■ Answer: One of view is that the performance late payment policyCompanies is unethical late the period Netthis sales A deliberate commonly plan toNet make sales payments amounts means the company reports lies when to it pretends $229,234 nearest to make payment dollar, $215,639 within or discount 100.0% round in the even$229,234 to a 100.0% $215,639 Accounting SystemAnalysis show Accounting Apple Another view is that the late payment policy is acceptable Some believe attempts to take discounts through late payments are accepted as “price negotiation.” higher Apple, to 141,048 the 61.5 Costlevel of sales like many Cost large of companies, sales rounds its financial Cloud 141,048 statement amounts 131,376 131,376 60.9 Storageusers’ decisions nearest This 62 Chapter Analyzing and Recording Transactions AA 9-1 Use Apple’s financial statements in Appendix following Grossmillion margin decision A to answer isGross based the margin on the impact of rounding for 88,186 COMPANY 84,263 88,186 38.5 84,263 39.1 620620 Chapter Chapter 17 17 Analysis Analysis of Financial of Financial Statements Statements What is the amount of Apple’s accounts receivable of September Prepare journal entries toas record following comResearch and development each Research of the 30, and Information 2017? development purchases transactions 11,581 of ANALYSIS a merchandising 10,045 Output 11,581 5.1 10,045 4.7 5-2 NEED-TO-KNOW Source Input Information Debt Ratio Assume a perpetual inventory system using the gross method for recordingA1 purchases Decision Analysis Compute Apple’s accountspany receivable turnover as of September Document Devices Selling, general and administrative Selling, 30, general 2017 .Processor and administrative Storage 15,261 14,194 Devices 15,261 6.7 14,194 6.6 Decision Maker Merchandise Purchases How longwith does it take, onOct average, for the company receivables for the fiscal year ended operating Purchased $1,000 to of collect goods and the inis important to assess a company’s risk of failing to pay its debts Companies finance their assets EXHIBIT EXHIBIT Total expenses Total Terms operating of the expenses sale are 4∕10, n∕30, 26,842 FOB shipping 24,239 point; 26,842 11.7 24,239 11.2 A2 17.917.9Iteither liabilities or equity A company that finances a relatively large portion of its assets with liabilities 30, isAPPLE APPLE INC INC September 2017? voiceYou is dated October business selling entertainment equipment to retailAPPLE P1 Entrepreneur open a wholesale outlets Most of your cusCompute the debt ratio and Source Documents Source acsaid to have higher financial leverage Higher financial leverage means greater risk because liabilities Operating income for equivalents, How freight can Operating charges you (b) use documents short-term from income balance UPS provide sheets the October the customers securities, information purchase 61,344 to decide processed which 60,024 ones byto an 61,344 26.8 60,024 27.8 describe its use inComparative analyzing Common-Size Common-Size Comparative 3want $30 for Common-Size Comparative Comparative Income Income Statements Statements One Apple’s assets include (a)Paid cash and cash marketable tomers to buy oncash credit the extend must be repaid and often require regular interest payments (equity financing doesCommon-Size not) measure most of the liquid financial condition counting system Examples include bank statements andofchecks, invoices from suppliers, cusrisk associated with liabilities is the debt ratio as defined in Exhibit 2.17 7inventory Returned $50 from received Income Income Statements Statements (c) accounts receivable, and (dOther )to? the these (in total) Answer:Compute We use the (Assets identify risky want to extend credit ■income, Percents* net of accounting the Common-Size $1,000 percentage Common-Size Other equation of income, goods Percents* that = Liabilities net the +liquid Equity) October to assets purchase customers 2,745 and to whom we would full 1,348 not credit 2,745 1.2 1,348 0.6 tomer bills, sales receipts, and employee earnings records Accurate source documents are credit A11 balance sheetthe provides amounts for each ofas these key components The lower a (less customer’s is relative to liabilities, 7) the less likely you would Paid amount due from the October purchase theequity return on October Point: Control limit the make up procedures of current liabilities asIncome of September 30, and oftaxes September EXHIBIT 2.17 $ millions $ millions Current Current Yr Prior Yr Yr2017, Current Current Yr Yrwas Prior Yr Total liabilities before provision for income Income before never Input provision Prior 24, made .claims 2016 .Yr wrong for to Instead, information taxes 64,089 damages 61,372 the reliability 64,089 28.0 61,372 28.5 possibility of entering wrong data crucial to accounting information systems of be to extend credit A low Prior equity means the business already has many creditor it .income ©REDPIXEL.PL/Shutterstock 31Yr Assume the October 11 payment payment Debt ratio = APPLE APPLE Debt Ratio Did Apple’s liquid assets as a percentage of current liabilities improve or worsen as of its fiscal 2017 of the amount due, less the Total assets of the information system Provision for on income taxes7, occurred Provision on for October income 31 .taxes 15,738 15,685 15,738 6.9 15,685 7.3 October its fiscal 2016 return year-end? Net sales Net sales year-end compared to $229,234 $229,234 $215,639 $215,639 100.0% 100.0% 100.0% 100.0% Costco’s total liabilities, total assets, and debt ratio for the past three years are shown in Exhibit 2.18 Net income Input devices Net income take information from source $ 48,351 documents and $ 45,687 transfer $it 48,351 21.1% $ 45,687 21.2% Input Devices to Point: Controls ensure that only Costco’s debt ratio ranges asales lowof of sales 0.63 Solution Costfrom of Cost to a high of 0.70 .Its ratio exceeds Walmart’s authorized in each individuals of the input data 141,048 141,048 131,376 131,376 61.5 61.5 60.9 60.9 last three years, suggesting a higher than average risk from financial leverage So, is financial leverage Prepare a trialprocessing balance for These Apple using theconvert following condensed datadocuments from its recent ended information devices data on source to a fiscal form year usable by NEED-TO-KNOW 2-4 good or bad for Costco? The answer: Ifmargin Costco Gross Gross margin is making more money with this debt into than the it is system .paying the 88,186 88,186 84,263 84,263 38.5 38.5 39.1 September ($ inrounded millions) Oct 130Journal Merchandise device exactly 39.1 to tenths to and totals thus and 1,000are *Percents are to tenths *Percents and thus are rounded not sum may subtotals not exactly sum totalscomand subtotals lenders, then it is successfully borrowing money to make more money A company’s use of debt can turn the system entries are aInventory type ofmay input Keyboards and scanners thetomost unprofitable quickly ifResearch its return from that money drops below the rate it is paying lenders Preparing Trial Balance Research and development and development AA 9-2 Comparative figures 11,581 11,581 10,045 10,045 5.1Payable 5.1 4.7 Accounts 4.7 1,000 mon inputand devices in follow business for Apple Google COMPARATIVE Owner, Capital14,194 14,194 Purchased 6.7 goods, 6.7 terms $128,249 Owner, Withdrawals $ 42,553 4∕10, n∕30.6.6 EXHIBIT 2.18 Selling, Selling, general general andAnalysis administrative and administrative Ago Years Ago 15,261 6.6 Company $ millions Current Year Year P2 dollar New to this edition, Accounting as15,261 representing one sales as representing dollar, the remaining one sales dollar, items show theANALYSIS remaining how each items revenue show howiseach distribreven Computation and Analysis Information Processors Information processors summarize information for use in Oct Merchandise Inventory 30 Accounts payable 49,049 Investments and other assets 303,373 Costco Total liabilities expenses expenses $25,268 Apple Google of Debt Ratio Total operating Total operating $20,831 $22,174 26,842 26,842 24,239 24,239expenses, 11.7 11.7 11.2 11.2 uted among costs, uted among and income costs, expenses, and income APPLE A1 P2 assignments have students analysis and reporting An information processor includes journals, ledgers, working papers, Total assets evaluate the $36,347 $33,163 $33,017 Cash 30 Other liabilities 192,223 Land and equipment 33,783 Debt ratio income income 0.70 Operating Operating 0.63 0.67 61,344 61,344 60,024 60,024 26.8 26.8 27.8 27.8 and posting procedures Each in 141,048 transforming raw data toYears useful information Current One(and Year Two Years One Year Two Exhibit 17.9 Exhibit 17.9 comparative shows common-size income income each dollar statements of Apple’s for each net Paid freight FOB shipping point Cost of sales other shows expenses) common-size assists on purchases Current Selling and other expense statements comparative for39,835 Walmart Debtstatements ratio from 59 58 58 most current financial Year 2,745 Prior Prior 1.2 1.2Year Prior Prior APPLE OtherOther income, income, net net $ millions 2,745 1,348 1,348 0.6 0.6 sales past numbers years’ common-size are are similar One withistwo the exception increase Cash .The on past next page] two years’ sales .common-size The 20,289two Accounts receivable similar with numbers two exceptions 17,874 [continued Information Storage Information storage keeps data accessible to information proApple, Google,Decision andMaker Samsung Students GOOGLE Income Income beforebefore provision provision for income for income taxes taxes Accounts receivable, net 64,089 28.5 28.5 $ 17,874 $ 15,754 $14,137 $11,556 Revenues .61,372 being in 61,372 research input $ 16,849 and 28.0 and 0.4 processed, 28.0 $development 18,336 229,234 of64,089 0.4 cents of cents in research costs, and which development a costs, positive development can be a positive if these costs develo cessors After data are stored for use in can futurebe analyses andwhich reports compute keyInvestor metrics and compare perfor for 229,234 215,639 233,7156.9 110,855 90,272 74,989 You consider buying stock in for Converse parttaxes of your analysis, Provision Provision income forAs income taxes you compute the company’s Net sales debt ratio 15,738 15,738 15,685 15,685 6.9 7.3 7.3 financial Auditors rely on this database when theyisaudit both statements and aof company’s conlead to future revenues lead Another to future the revenues increase Another in cost is of the sales increase 0.6 in cent cost and of increase sales of 0.6 in selling, cent an 2017, 2018, and 2019 as 0.35, 0.74, and 0.94, respectively Based on the debt ratio, is Converse a low-risk investment? ($ $in 45,687 millions) trols Modern systems increasingly on cloud Has the risk of buying Converse stock mance between companies and Net income Netchanged income over this industry .period? (The industry debt ratio averages 0.40.) ■ $ 48,351 $Solution 48,351 $ 45,687depend 21.1% 21.1% 21.2% 21.2%storage general and administrative general costs andofadministrative 0.1 cent We must costsmonitor of 0.1 cent the growth We must in monitor these expenses the growth in the Components Accounting Analytics Answer: The debt ratio suggests that Converse’s stock is of higher risk than normal and that this risk is rising The average industry ratio of 0.40 supports this conclusion The ©Amble Design/Shutterstock 2019 debt ratio for Converse is twice the industry norm Also, a debt ratio approaching 1.0 indicates little to no equity Required Output Devices Output make accounting information available to users APPLE These assignments are auto-gradable in Compute the accounts receivable turnover for (a) Apple and devices (b) Google for each of the two most *Percents *Percents are rounded are rounded to tenths to tenths and thus andmay thusnot may exactly not exactly sum tosum totals to totals subtotals and subtotals Trial Balance Common output devices are printers, monitors, and smartphones Output devices provide users recent years using theand data shown Connect and are included after Problem Common-Size Common-Si Graphics8/2/18 wiL16960_ch05_166-213.indd 173 Hint: Average collection September 30 of ititems bills, financial statements, andforinternal reports Income taxes Income taxes EXHIBIT 17.10 17.10 Compute how manyEXHIBIT days, aonvariety average, takesincluding to collect customer receivables for the two most recent years Debit Credit period equals 365 divided This problem extends Need-To-Know 1-6 from Chapter 1: Jasmine Worthy started a haircutting business as representing as representing one one sales sales dollar, dollar, the remaining the remaining items items show show how how each each revenue revenue dollar dollar is distribis distribSet B in the NEED-TO-KNOW (a) Apple and (b) Google 2-5 text 6.9% 6.9% Exhibit 17.10 is a graphic Exhibit of 17.10 Apple’s is a by the accounts receivable called Expressions The following events occurred during its first month Common-Size Graphic of Common-Size Graphic of Research and uteduted among among costs, costs, expenses, expenses, and and income income NEED-TO-KNOW 7-1 Exhibit Exhibit 17.917.9 shows shows common-size common-size comparative comparative income income statements statements for each for each dollar dollar of Apple’s of Apple’s net net sales sales The The pastpast two two years’ years’ common-size common-size numbers numbers are similar are similar withwith two two exceptions exceptions OneOne is theisincrease the increase e 15 of 0.4 of cents 0.4 cents in research in research and and development development costs, costs, which which can can be abe positive a positive development development if these if these costscosts f 16 that students learn best when using current data from real companies Wild uses Research shows g 17 leadlead to future to future revenues revenues Another Another is C1the is increase the increase in cost in cost of sales of sales of 0.6 of cent 0.6 cent and and increase increase in selling, in selling, h 18 data from real companies for assignments, examples, and analysis in the text See the most current i 31 general general and and administrative administrative costscosts of 0.1 of cent 0.1 cent We must We must monitor monitor the growth the growth in these in these expenses expenses Research and Cash receivable in the current year? $ 20,289 Worthy invested $3,000 cash and $15,000 of equipment in Expressions turnover Which company more quickly collects its accounts Income Statement Income Statement development Expressions paid $600 cash for furniture for the shop Match each of the numbered descriptions or descriptor that it best reflects Accounts receivable with the principle, development component, 17,874 Net income, Net income, Expressions paid $500 cash to rent space in a strip mall for August 5.1% 5.1% Indicate your answer by entering the letter A through J in the blank provided .non 33,783 Expressions purchased $1,200 of equipment on credit for the shop (recorded as accounts excluding non- Land and equipment excluding payable) A operating Control principleInvestments andoperating E.assets Cost-benefit storage general, System Principles and other principle Selling, general, 303,373I InformationSelling, Expressions opened for business on August Cash received from haircutting services in the Components Accounts payable F Source and documents administrative, $ 49,049 B.income Relevance principle J Output devices first week and a half of business (ended August 15) was $825 administrative, and income Expressions provided $100 of haircutting services on account Other liabilities G Input devices and other C expenses Compatibility principle income 192,223 and other income Expressions received a $100 check for services previously rendered on account expenses Expressions paid $125 to an assistant for hours worked for the grand opening Owner, Capital H Information processors 128,249 D Flexibility 6.7% 6.7% 19.8% principle 19.8% Cash received from services provided during the second half of August was $930 Cost of Owner, Withdrawals Cost of42,553 6/28/18 9:02 AM wiL16960_ch09_326-357.indd Expressions paid $400 cash toward the account payable entered into on August355 Worthy made a $900 cash withdrawal from the company for personal use Revenues .sales sales 229,234 current-year common-size current-year income com statement This pie chart statement showsThis the p contribution of each contribution cost component of e of net sales for net income of net sales for ne Exhibit 17.11 takesExhibit data from 17.11 Apple’s Segments Apple’s footnote.Segme The j 31 Chapter 17 for use of real data k 31 exhibit shows the level exhibit of netshows sales for the Required Cost of sales (and other expenses) 61.5% 141,048 61.5% each of Apple’s fiveeach operating of Apple’s segCommon-Size Common-Size Graphics Graphics Open the following ledger accounts in balance column format (account numbers are in parentheses): Selling and other expense 39,835 Income taxes taxes EXHIBIT EXHIBIT 17.10 17.10Cash (101); Accounts Receivable (102); Furniture (161);Income Store Equipment (165); Accounts Payable ments Its Americas ments segment ItsgenerAmeri Totals APPLE $598,755 $598,755 (201); J Worthy, Capital (301); J Worthy, Withdrawals (302); Haircutting Services Revenue (403); 6.9%6.9% Exhibit 17.10 17.10 is .a .is graphic a graphic of Apple’s of Apple’s Do More: E 2-8, E 2-10 Common-Size Common-Size Graphic Graphic ofWagesof Expense (623); and Rent Expense (640) Prepare general journal entries for the Research transactions Research and and atesExhibit $96.6 billion netates sales, $96.6 which billion is roughly net sales, 42% which of itsis total roughly sales 42% Within of itseach totalbar sales is that Wit current-year current-year common-size common-size income income Income Income Statement Statement development development 8/1/18 1:04 PM wiL16960_ch07_258-289.indd 260 Net income, Net income, segment’s operatingGOOGLE income segment’s margin operating (Operating incomeincome/Segment margin (Operating net income/Segment sales) The Americas net sales) seg5.1% 5.1% statement statement ThisThis pie pie chartchart shows shows the the excluding excluding non-nonment has a 32% operating ment has income a 32% margin operating Thisincome type of margin graphic This can raise type questions of graphicabout can raise the contribution of Samsung each of each costcost component component Selling, general, Selling, general,contribution operating operating profitability of each segment profitability and of lead each to discussion segment and of lead further to discussion expansionsofinto further moreexpansions profitable administrative, administrative, of net income income and and of sales net sales for net for income net income segments For example, segments the Japan Forsegment example, has theanJapan operating segment margin has of an 46% operating A natural margin question of 46% and other and other income income expenses expenses Exhibit Exhibit 17.11 17.11 takes takes datadata fromfrom for management potential is there is what to expand potential sales is there into the to expand Japan segment sales into and themaintain Japan se 6.7%6.7% for management is what 19.8% 19.8% CostCost of of Apple’s Apple’s Segments Segments footnote footnote The The wiL16960_ch02_044-083.indd 61 5/3/18 salessales exhibit shows shows the level the$100 level of net of sales net for for $100 $96.6sales $96.6 EXHIBIT 17.11 EXHIBITexhibit 17.11 61.5% 61.5% eacheach of Apple’s of Apple’s fivefive operating operating seg-segSegment percentages Segment percentages Sales and Operating Sales and Operating ments ments Its Americas Its Americas segment segment genergener- $80 based on: Operating based on: Operating $80 Income Margin Breakdown Income Margin Breakdown income/Net sales income/Net sales atesates $96.6 $96.6 billion billion net net sales, sales, which is roughly is roughly 42% of its of total its total sales sales Within Within eacheach bar bar is that is that bywhich Segment by 42% Segment segment’s segment’s operating operating income income margin margin (Operating (Operating income/Segment income/Segment net sales) net sales) The$60 The Americas Americas seg-seg$54.9 $60 $54.9 mentment has has a 32% a 32% operating operating income income margin margin ThisThis typetype of graphic of graphic can can raiseraise questions questions about about the the $44.8 $44.8 $40 profitability profitability of each of each segment segment and and leadlead to discussion to discussion of further of further expansions expansions intointo moremore profitable profitable $40 segments segments For For example, example, the Japan the Japan segment segment has has an operating an operating margin margin of 46% of 46% A natural A natural question question $17.7 $17.7 $20and and for management for management is what is what potential potential is there is there to expand to expand salessales intointo the Japan the Japan segment segment maintain maintain $20 $15.2 $15.2 COMPREHENSIVE Journalizing and Posting Transactions, Statement Preparation, and Debt Ratio a Aug b c d Keep It Real Net Sales (in bil.) EXHIBIT EXHIBIT 17.11 17.11 $96.6 $96.6 $0 Segment Segment percentages percentages based based on: Operating on: Operating income/Net income/Net salessales $80 $80 et Sales (in bil.) vi et Sales (in bil.) SalesSales and Operating and Operating Income Income Margin Margin Breakdown Breakdown by Segment by Segment $100$100 $60 $60 $40 $40 Net Sales (in bil.) 7/12/18 5:20 AM wiL16960_ch02_044-083.indd 62 $54.9 $54.9 $44.8 $44.8 32% 30% 38% 32% 46% 30% 35% 38% $0 Americas Europe China Americas JapanEurope Asia China Pacific 46% 35% Japan Asia Pacific Discounts Lost Cash 500 Cash 10 500 For sales transactions, the perpetual and periodic entries are identical except that under the periodic system the cost-side entries are not made at the time of each sale nor for any subsequent returns Instead, the cost of goods sold is computed at period-end based on a physical count of inventory This entry is shown in Exhibit 5A.1 SALES—Periodic APPENDIX 5D Cheat Sheets Work Sheet—Perpetual System This appendix along with assignments is available online New to this edition, Cheat Sheets are provided at the end of each chapter Cheat Sheets are roughly one page in length and Chapter 18 Managerial Accounting Concepts and Principles 667 include key procedures, concepts, journal entries, and formulas Value Chain The value chain refers to the series of activities that add value to a company’s Summary: products or services.Cheat Exhibit Sheet 18.18 illustrates a possible value chain for a retail cookie company Companies can use lean practices across the value chain to increase efficiency and profits MERCHANDISING PURCHASES MERCHANDISING ACTIVITIES Merchandise: Goods a company buys to resell Cost of goods sold: Costs of merchandise sold Gross profit (gross margin): Net sales minus896 cost of goods sold Computing net income (service company vs merchandiser): Service Company Acquire raw materials Baking Minus QS 23-14 Sales Equals EXHIBIT 18.18 Cash discount: A purchases discount on the price paid by the buyer; or, a Typical Value Chain sales discount on amount received for the seller (cookie retailer) termsBudgets example: “2/10, n/60” ChapterCredit 23 Flexible and Standard Costs means full payment is due within 60 days, but the buyer can deduct 2% of the invoice amount if payment is made within 10 days Service record purchases at gross (full) invoice amounts AirProGross Corp method: reports theInitially following for November Compute the total overhead variance and controllable Net Expensesoverhead Controllable variance for November and as favorable or unfavorable income overhead Purchasing Merchandise forclassify Resaleeach Entries: How Lean Principles Impact the Value Chain Adopting lean principles can be challenging variance Revenues because systems and procedures that a company accountPurchasing merchandise Merchandise Merchandiser Actual total factory overhead incurred Inventory 500$28,175 P4 follows must be realigned Managerial on credit ing hasNet an important role in Equals providing accurate information Developing Accounts Payable 500 Minus Minus cost and performance Equals Standard factory overhead: Cost of Gross Net Expenses goods soldto measuring profit the “value” provided toincome such asales system is important customers The priceVariable that cusoverhead $3 10 per unit produced tomers pay for acquiring goods and services is a key determinant of value In turn, the costs a ($12,000∕12,000 predicted units to be produced) $1 per unit Fixeddiscount overhead Paying within period Accounts Payable 500 Inventory: Costs merchandise owned, but not yet sold It is a current company incurs areofkey determinants of price Predicted units Inventory 12,000 units (Inventory reduced to byproduce Merchandise 10 asset on the balance sheet Actual units produced Cash 9,800 units taken) 490 Corporate Responsibility In addition to maximizing shareholderdiscount value, cor- Point: Companies like Microsoft, Merchandise Social Cost Flows: and Walt Disney, ranked porations must consider the demands of other stakeholders, including employees, suppliers, and Google, Paying outside discount 500 at theAccounts top of largePayable multinational Net Cost of society in general Corporate social responsibility (CSR) beyond fol- companies inCash terms of period purchases goods sold is a concept that goes CSR, 500 disclose CSR results on their lowing the law For example, to reduce its impact on the environment, Three Twins Ice Cream QS 23-15 Refer to the information in QSwebsites 23-14 Compute the overhead volume variance for November and classify 30 varianceUnited P4 By Blue, uses only cups and spoons madeMerchandise from organicVolume ingredients an Recording apparel and it as favorable orpurchases unfavorable Cash or Accounts Payable returns or allowances available for sale Merchandise Inventory 30 jewelry company, removes one pound of trash from waterways for every product sold Many companies extend the concept of CSR to include sustainability, which considers fuE n vir Transfer Rules: Transportation Costs and Ownership QS 23-16 Alvarez Company’s output for the current period o yields a $20,000 favorable overhead volume variance ture generations when making business decisions Beginning Ending Overhead cost variances inventory Goods in Transit and a $60,400 unfavorableOwnership overhead controllable variance Standard overhead applied to production for QS 23-18A Mosaic Company applies overhead using machine hours and reports the following information Compute ental nm inventory Triple Bottom Line Doing What’s Right Decision Insight Social Shipping Terms Transportation Costs Paid by Transfers at Triple bottomP4line focuses on three measures: financial the period is $225,000 What is the actualOwned total by overhead cost incurred for the period? Perpetual inventory system: Updates accounting records for each purshipping point Shipping point Buyer Buyer Merchandise Inventory # (“profits”), social (“people”), and environmental (“planet”) Adopting a tripleFOB bottom line Cash # Triple Bottom Line chase and each sale of inventory impacts how businesses report In response to a growing trend of such reporting, the Destination FOB destination Seller Seller Delivery Expense # Periodic inventory system: Updates accounting records for purchases and A was established to develop reportSustainability Accounting Standards Board (SASB) in its accounts # Refer to the information in QS 23-16 Alvarez records standardCashcosts Prepare the journal sales of inventory only at the end of a period QS 23-17 ing standards for businesses’ sustainability Preparing activities Some entries of the business sectorsoverhead for overhead entry to charge costs to the Work in Process Inventory account and to record any variances E which the SASB has developed reporting standards include health care, nonrenewable recon o mic P6 sources, and renewable resources and alternative energy Total variable overhead the total variable overhead cost variance and classify it as favorable or unfavorable cost variance Balanced Scorecard The balanced scorecard aids continuous improvement by augmenting financial measures with Actual machine hours used 4,700 hours8/2/18 7:20 AM information on the “drivers” (indicators) of future financialP5 performance along four dimensions: (1) financial—profitabilwiL16960_ch05_166-213.indd 194 ity and risk, (2) customer—value creation and product and service differentiation, (3) internal businessStandard processes— machine hours (for actual production) 5,000 hours business activities that create customer and owner satisfaction, and (4) learning and growth—organizational change,overhead rate per hour Actual variable $4 15 innovation, and growth ■ Standard variable overhead rate per hour $4 00 Companies increasingly issue sustainability reports, and accountants are being asked to prepare, analyze, and audit them Wild includes brief sections in the managerial chapters This material focuses on the importance of sustainability within the context of accounting, including standards from the Sustainability Accounting Standards Board (SASB) Sustainability assignments cover chapter material with a social responsibility twist QS 23-19 SUSTAINABILITY AND ACCOUNTING Overhead spending and Refer to the information from QS 23-18 Compute the variable overhead spending variance and the variable overhead efficiency variance and classify each as favorable or unfavorable variances P5 Standards Board In creating sustainability accounting standards, the efficiency Sustainability Accounting (SASB) has created reporting guidelines The SASB considers sustainability information as material if its disclosure would affect the views of equity investors on a company’s financial condition or operating performance QS 23-20 Farad, Inc., specializes in selling used trucks During the month, Farad sold 50 trucks at an average price Material information can vary across industries; for example, Computing sales price while and environmental of $9,000 each The budget for the month was to sell 45 trucks at an average price of $9,500 each Compute “planet” issues such as air quality, wastewater management, and biodiversity are sales price variance and sales volume variance for the month and classify each as favorvolume variances A1 theimpacts dealership’s important for investments in companies in the nonrenewable resources sectors, such issues able or unfavorable are likely not as important for investments in banks In contrast, “people” issues such as diversity and inclusion, fair labor practices, and employee health are considered material for ©MoringaConnect most sectors, particularly those that use considerable QS direct 23-21labor In a recent year, BMW sold 182,158 of its Series cars Assume the company expected to sell 191,158 of Sales variances A1 these cars during the year Also assume the budgeted sales price for each car was $30,000 and the actual sales price for each car was $30,200 Compute the sales price variance and the sales volume variance A QS 23-22 wiL16960_ch18_650-685.indd 667 Sustainability and standard costs P1 MM Co uses corrugated cardboard to ship its product to customers Management believes it has found a more efficient way to package its products and use less cardboard This new approach will reduce 9:37 AM shipping costs from $10.00 per shipment to $9.256/1/18 per shipment (1) If the company forecasts 1,200 shipments this year, what amount of total direct materials costs would appear on the shipping department’s flexible budget? (2) How much is this sustainability improvement predicted to save in direct materials costs for this coming year? vii wiL16960_ch23_864-911.indd 896 8/9/18 9:27 AM Students—study more efficiently, retain more and achieve better outcomes Instructors—focus on what you love—teaching SUCCESSFUL SEMESTERS INCLUDE CONNECT For Instructors You’re in the driver’s seat Want to build your own course? No problem Prefer to use our turnkey, prebuilt course? Easy Want to make changes throughout the semester? 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The Connect Calendar and Reports tools keep you on track with the work you need to get done and your assignment scores Life gets busy; Connect tools help you keep learning through it all 13 14 Chapter 12 Quiz Chapter 11 Quiz Chapter 13 Evidence of Evolution Chapter 11 DNA Technology Chapter Quiz Chapter DNA Structure and Gene and more Learning for everyone McGraw-Hill works directly with Accessibility Services Departments and faculty to meet the learning needs of all students Please contact your Accessibility Services office and ask them to email accessibility@mheducation.com, or visit www.mheducation.com/accessibility for more information www.freebookslides.com Appendix G  Summary Second, a company can borrow money by signing a note payable that is secured by pledging the accounts receivable A1  Compute accounts receivable turnover and use it to help assess financial condition Accounts receivable turnover is a measure of both the quality and liquidity of ­accounts receivable The accounts receivable turnover measure indicates how often, on average, receivables are received and collected during the period Accounts receivable turnover is computed as net sales divided by average accounts receivable P1  Apply the direct write-off method to accounts receivable The direct write-off method charges Bad Debts Expense when accounts are written off as uncollectible This method is acceptable only when the amount of bad debts expense is ­immaterial P2  Apply the allowance method to accounts receivable Under the allowance method, bad debts expense is recorded G-7 with an adjustment at the end of each accounting period that debits the Bad Debts Expense account and credits the Allowance for Doubtful Accounts The uncollectible accounts are later written off with a debit to the Allowance for Doubtful Accounts P3  Estimate uncollectibles based on sales and accounts receivable Uncollectibles are estimated by focusing on either (1) the income statement relation between bad debts expense and credit sales or (2) the balance sheet relation between accounts receivable and the allowance for doubtful accounts P4  Record the honoring and dishonoring of a note and adjustments for interest When a note is honored, the payee debits cash received and credits both Notes Receivable and Interest Revenue Dishonored notes are credited to Notes Receivable and debited to Accounts Receivable (to the account of the maker in an attempt to collect), and Interest Revenue is recorded for interest earned for the time the note is held CHAPTER 10 the cost of plant assets Plant assets are set C1  Compute apart from other tangible assets by two important fea- tures: use in operations and useful lives longer than one period Plant assets are recorded at cost when purchased Cost includes all normal and reasonable expenditures necessary to get the asset in place and ready for its intended use The cost of a lumpsum purchase is allocated among its individual assets depreciation for partial years and changes C2  Explain in estimates Partial-year depreciation is often required because assets are bought and sold throughout the year Depreciation is revised when changes in estimates such as salvage value and useful life occur If the useful life of a plant asset changes, for instance, the remaining cost to be depreciated is spread over the remaining (revised) useful life of the asset between revenue and capital expenditures, C3  Distinguish and account for them Revenue expenditures expire in the current period and are debited to expense accounts and matched with current revenues Ordinary repairs are an example of revenue expenditures Capital expenditures benefit future periods and are debited to asset accounts Examples of capital expenditures are extraordinary repairs and betterments total asset turnover and apply it to analyze a A1  Compute company’s use of assets Total asset turnover measures a company’s ability to use its assets to generate sales It is defined as net sales divided by average total assets While all companies desire a high total asset turnover, it must be interpreted in comparison with those for prior years and its competitors and record depreciation using the straightP1  Compute line, units-of-production, and declining-balance methods Depreciation is the process of allocating to expense the cost of a plant asset over the accounting periods that benefit from its use Depreciation does not measure the decline in a plant asset’s market value or its physical deterioration Three factors determine depreciation: cost, salvage value, and useful life Salvage value is an estimate of the asset’s value at the end of its benefit period Useful (service) life is the length of time an asset is productively used The straight-line method divides cost less salvage value by the asset’s useful life to determine depreciation expense per period The units-of-production method divides cost less salvage value by the estimated number of units the asset will produce over its life to determine depreciation per unit The declining-balance method multiplies the asset’s beginning-period book value by a factor that is often double the straight-line rate for asset disposal through discarding or P2  Account selling an asset When a plant asset is discarded or sold, its cost and accumulated depreciation are removed from the accounts Any cash proceeds from discarding or selling an asset are recorded and compared to the asset’s book value to determine gain or loss for natural resource assets and their P3  Account depletion The cost of a natural resource is recorded in a noncurrent asset account Depletion of a natural resource is recorded by allocating its cost to depletion expense using the units-of-production method Depletion is credited to an Accumulated Depletion account for intangible assets An intangible asset is P4  Account recorded at the cost incurred to purchase it The cost of an intangible asset with a definite useful life is allocated to expense using the straight-line method and is called amortization Intangible assets with an indefinite useful life are not amortized— they are annually tested for impairment Intangible assets include patents, copyrights, leaseholds, goodwill, and trademarks P5A  Account for asset exchanges For an asset exchange with commercial substance, a gain or loss is recorded based on the difference between the book value of the asset given up and the market value of the asset received www.freebookslides.com G-8 Appendix G  Summary CHAPTER 11 current and long-term liabilities and their C1  Describe characteristics Liabilities are probable future payments of assets or services that past transactions or events obligate an entity to make Current liabilities are due within one year or the operating cycle, whichever is longer All other liabilities are long term and describe known current liabilities C2  Identify Known (determinable) current liabilities are set by agreements or laws and are measurable with little uncertainty They include accounts payable, sales taxes payable, unearned revenues, notes payable, payroll liabilities, and the current portion of long-term debt C3  Explain how to account for contingent liabilities If an uncertain future payment depends on a probable future event and the amount can be reasonably estimated, the payment is recorded as a liability The uncertain future payment is reported as a contingent liability (in the notes) if (a) the future event is reasonably possible but not probable or (b) the event is probable but the payment amount cannot be reasonably estimated A1  Compute the times interest earned ratio and use it to analyze liabilities Times interest earned is computed by dividing a company’s net income before interest expense and income taxes by the amount of interest expense The times interest earned ratio reflects a company’s ability to pay interest obligations P1  Prepare entries to account for short-term notes payable Short-term notes payable are current liabilities; most bear interest When a short-term note’s face value equals the amount borrowed, it identifies a rate of interest to be paid at maturity P2  Compute and record employee payroll deductions and liabilities Employee payroll deductions include FICA taxes, income taxes, and voluntary deductions such as for pensions and charities They make up the difference between gross and net pay P3  Compute and record employer payroll expenses and liabilities An employer’s payroll expenses include employees’ gross earnings, any employee benefits, and the payroll taxes levied on the employer Payroll liabilities include employees’ net pay amounts, withholdings from employee wages, any employer-promised benefits, and the employer’s payroll taxes P4  Account for estimated liabilities, including warranties and bonuses Liabilities for health and pension benefits, warranties, and bonuses are recorded with estimated amounts These items are recognized as expenses when incurred and matched with revenues generated P5A  Identify and describe the details of payroll reports, records, and procedures Employers report FICA taxes and federal income tax withholdings using Form 941 FUTA taxes are reported on Form 940 Earnings and deductions are ­reported to each employee and the federal government on Form W-2 An employer’s payroll records often include a payroll ­register for each pay period, payroll checks and statements of earnings, and individual employee earnings reports CHAPTER 12 C1  Identify characteristics of partnerships and similar ­organizations Partnerships are voluntary associations, involve partnership agreements, have limited life, are not subject to corporate income tax, include mutual agency, and have unlimited liability Organizations that combine selected characteristics of partnerships and corporations include limited partnerships, limited liability partnerships, S corporations, and limited liability companies A1  Compute partner return on equity and use it to evaluate partnership performance Partner return on equity provides each partner an assessment of his or her return on ­equity invested in the partnership P1  Prepare entries for partnership formation A partner’s initial investment is recorded at the market value of the assets contributed to the partnership P2  Allocate and record income and loss among partners A partnership agreement should specify how to allocate partnership income or loss among partners Allocation can be based on a stated ratio, capital balances, or salary and interest allowances to compensate partners for differences in their ­service and capital contributions P3  Account for the admission of partners When a new partner buys a partnership interest directly from one or more existing partners, the amount of cash paid from one partner to another does not affect the partnership total recorded equity When a new partner purchases equity by investing additional assets in the partnership, the new partner’s investment can yield a bonus either to existing partners or to the new ­partner www.freebookslides.com Appendix G  Summary P4  Account for the withdrawal of partners The entry to record a withdrawal can involve payment from either (1) the existing partners’ personal assets or (2) partnership ­assets The latter can yield a bonus to either the withdrawing or remaining partners P5  G-9 partnership assets are allocated to the partners according to their income-and-loss-sharing ratio If a partner’s capital account has a deficiency that the partner cannot pay, the other partners share the deficit according to their relative income-and-loss-sharing ratio Prepare entries for partnership liquidation When a partnership is liquidated, losses and gains from selling CHAPTER 13 characteristics of corporations and their orgaC1  Identify nization Corporations are legal entities whose stockholders are not liable for its debts Stock is easily transferred, and the life of a corporation does not end with the incapacity of a stockholder A corporation acts through its agents, who are its officers and managers Corporations are regulated and subject to corporate income taxes Authorized stock is the stock that a corporation’s charter authorizes it to sell Issued stock is the portion of authorized shares sold Par value stock is a value per share assigned by the charter No-par value stock is stock not assigned a value per share by the charter Stated value stock is no-par stock to which the directors assign a value per share characteristics of, and distribute dividends C2  Explain between, common and preferred stock Preferred stock has a priority (or senior status) relative to common stock in (1) dividends and (2) assets in case of liquidation Preferred stock usually excludes voting rights Preferred stockholders usually hold the right to dividend distributions before common stockholders When preferred stock is cumulative and in arrears, the amount in arrears must be distributed to preferred stockholders before any dividends are distributed to common stockholders the items reported in retained earnings C3  Explain Stockholders’ equity is made up of (1) paid-in capital and (2) retained earnings Paid-in capital consists of funds raised by stock issuances Retained earnings consists of cumulative net income (losses) not distributed Many companies face statutory and contractual restrictions on retained earnings Corporations can voluntarily appropriate retained earnings Prior period adjustments are corrections of errors in prior financial statements earnings per share and describe its use A A1  Compute company with a simple capital structure computes basic EPS by dividing net income less any preferred dividends by the weighted-average number of outstanding common shares price-earnings ratio and describe its use in A2  Compute analysis A common stock’s price-earnings (PE) ratio is computed by dividing the stock’s market value (price) per share by its EPS A stock’s PE is based on expectations that can prove to be better or worse than eventual performance dividend yield and explain its use in analysis A3  Compute Dividend yield is the ratio of a stock’s annual cash dividends per share to its market value (price) per share Dividend yield can be compared with the yield of other companies to determine whether the stock is expected to be an income or growth stock book value and explain its use in analysis A4  Compute Book value per common share is equity applicable to com- mon shares divided by the number of outstanding common shares the issuance of corporate stock When stock is P1  Record issued, its par or stated value is credited to the stock ac- count and any excess is credited to a separate contributed capital account If a stock has neither par nor stated value, the entire proceeds are credited to the stock account transactions involving cash dividends, stock P2  Record dividends, and stock splits Cash dividends involve three events On the date of declaration, the directors bind the company to pay the dividend A dividend declaration reduces retained earnings and creates a current liability On the date of record, recipients of the dividend are identified On the date of payment, cash is paid to stockholders and the current liability is removed Neither a stock dividend nor a stock split alters company value However, the value of each share is less due to the distribution of additional shares The distribution of additional shares is according to individual stockholders’ ownership percentage Small stock dividends (≤25%) are recorded by capitalizing retained earnings equal to the market value of distributed shares Large stock dividends (>25%) are recorded by capitalizing retained earnings equal to the par or stated value of distributed shares Stock splits not require journal entries but require changes in the description of stock purchases and sales of treasury stock When P3  Record a corporation purchases its own previously issued stock, it debits the cost of these shares to Treasury Stock Treasury stock is subtracted from equity in the balance sheet If treasury stock is reissued, any proceeds in excess of cost are credited to Paid-In Capital, Treasury Stock If the proceeds are less than cost, they are debited to Paid-In Capital, Treasury Stock to the extent a credit balance exists Any remaining amount is debited to Retained Earnings www.freebookslides.com G-10 Appendix G  Summary CHAPTER 14 C1  Explain the types of notes and prepare entries to account for notes Notes repaid over a period of time are called installment notes and usually follow one of two payment patterns: (1) decreasing payments of interest plus equal amounts of principal or (2) equal total payments Mortgage notes also are common Interest is allocated to each period in a note’s life by multiplying its beginning-period carrying value by its market rate at issuance If a note is repaid with equal payments, the payment amount is computed by dividing the borrowed amount by the present value of an annuity factor (taken from a present value table) using the market rate and the number of payments C2A  Explain and compute bond pricing The basic concept of present value is that an amount of cash to be paid or received in the future is worth less than the same amount of cash to be paid or received today An annuity is a series of equal payments occurring at equal time intervals An annuity’s present value can be computed using the present value table for an annuity (or a calculator or Excel) C3C  Describe accounting for leases and pensions A lease is a rental agreement between the lessor and the lessee The lessee capitalizes a long-term lease asset and records a lease liability The lessee also records interest expense on the lease liability and amortization expense on the lease asset Amortization calculations depend on whether the lease is classified as a finance lease or an operating lease When the lease is short term with no purchase options, the lessee debits Rent Expense and credits Cash for its lease payments Pension agreements can result in either pension assets or pension liabilities A1  Compare bond financing with stock financing Bond financing is used to fund business activities Advantages of bond financing versus stock include (1) no effect on owner control, (2) tax savings, and (3) increased earnings potential due to financial leverage Disadvantages include (1) interest and principal payments and (2) amplification of poor performance A2  Assess debt features and their implications Certain bonds are secured by the issuer’s assets; other bonds, called debentures, are unsecured Serial bonds mature at different points in time; term bonds mature at one time Registered bonds have each bondholder’s name recorded by the issuer; bearer bonds are payable to the holder Convertible bonds are exchangeable for shares of the issuer’s stock Callable bonds can be retired by the issuer at a set price Debt features alter the risk of loss for creditors A3  Compute the debt-to-equity ratio and explain its use Both creditors and equity holders are concerned about the relation between the amount of liabilities and the amount of equity A company’s financing structure is at less risk when the debt-to-equity ratio is lower, as liabilities must be paid and usually with periodic interest P1  Prepare entries to record bond issuance and interest expense When bonds are issued at par, Cash is debited and Bonds Payable is credited for the bonds’ par value At bond interest payment dates (usually semiannual), Bond Interest Expense is debited and Cash credited—the latter for an amount equal to the bond par value multiplied by the bond contract rate for that period P2  Compute and record amortization of a bond discount using the straight-line method Bonds are issued at a discount when the contract rate is less than the market rate, making the issue (selling) price less than par When this occurs, the issuer records a credit to Bonds Payable (at par) and debits both Discount on Bonds Payable and Cash The amount of bond interest expense assigned to each period is computed using the straight-line method P3  Compute and record amortization of a bond premium using the straight-line method Bonds are issued at a premium when the contract rate is higher than the market rate, making the issue (selling) price greater than par When this occurs, the issuer records a debit to Cash and credits both Premium on Bonds Payable and Bonds Payable (at par) The amount of bond interest expense assigned to each period is computed using the straight-line method The Premium on Bonds Payable is allocated to reduce bond interest expense over the life of the bonds P4  Record the retirement of bonds Bonds are retired at maturity with a debit to Bonds Payable and a credit to Cash at par value The issuer can retire the bonds early by exercising a call option or purchasing them in the market Bondholders also can retire bonds early by exercising a conversion feature on convertible bonds The issuer recognizes a gain or loss for the difference between the amount paid and the bond carrying value P5B  Compute and record amortization of a bond discount using the effective interest method Bonds are issued at a discount when the contract rate is less than the market rate, making the issue (selling) price less than par The amount of bond interest expense assigned to each period, including amortization of the discount, is computed using the effective interest method P6B  Compute and record amortization of a bond premium using the effective interest method Bonds are issued at a premium when the contract rate is higher than the market rate, making the issue (selling) price greater than par The amount of bond interest expense assigned to each period, including amortization of the premium, is computed using the effective interest method www.freebookslides.com Appendix G  Summary G-11 CHAPTER 15 between debt and equity securities and C1  Distinguish between short-term and long-term investments Debt securities reflect a creditor relationship and include investments in notes, bonds, and certificates of deposit Equity securities reflect an owner relationship and include shares of stock issued by other companies Short-term investments in securities are current assets that meet two criteria: (1) They are expected to be converted into cash within one year and (2) they are readily convertible to cash, or marketable All other investments in securities are long term Long-term investments also include assets not used in operations and those held for special purposes, such as land for expansion Investments in securities are classified into one of six groups C2  Describe how to report equity securities with controlling influence If an investor owns more than 50% of another company’s voting stock and controls the investee, the investor’s ­financial reports are prepared on a consolidated basis These reports are prepared as if the company were organized as one entity A1  Compute and analyze the components of return on ­total assets Return on total assets has two components: profit margin and total asset turnover A decline in one component must be met with an increase in another if return on assets is to be maintained Component analysis is helpful in assessing company performance compared to that of competitors and its own past P1  Account for debt securities as trading Debt securities classified as trading are initially recorded at cost, and any interest from these investments is recorded in the income statement Debt securities classified as trading are reported at fair value in the balance sheet Unrealized gains and losses on trading securities are reported in income When investments are sold, the difference between the net proceeds from the sale and the cost of the securities is reported as a gain or loss in the ­income statement P2  Account for debt securities as held-to-maturity Debt securities classified as held-to-maturity are reported at cost when purchased Interest revenue is recorded as it accrues The cost of long-term held-to-maturity securities is adjusted for the amortization of any difference between cost and maturity value P3  Account for debt securities as available-for-sale Debt securities classified as available-for-sale are recorded at cost when purchased Available-for-sale securities are reported at their fair values on the balance sheet with unrealized gains or losses shown in the equity section Gains and losses realized on the sale of these investments are reported in the income statement P4  Account for equity securities with insignificant influence When an investor has an insignificant influence over an investee, which usually exists when an investor owns less than 20% of the investee’s voting stock, the stock investments are initially recorded at cost Any dividends from these investments are recorded in the income statement Stock investments are reported at fair value, with unrealized gains and losses reported in income When stock investments are sold, the difference between the net proceeds from the sale and the cost of the stock is recognized as a gain or loss P5  Account for equity securities with significant influence The equity method is used when an investor has a significant influence over an investee This usually exists when an investor owns 20% or more of the investee’s voting stock but not more than 50% The equity method means an investor records its share of investee earnings with a debit to the investment account and a credit to a revenue account Dividends received reduce the investment account balance but increase cash CHAPTER 16 between operating, investing, and financing C1  Distinguish activities, and describe how noncash investing and f­ inancing activities are disclosed The purpose of the statement of cash flows is to report major cash receipts and cash payments related to operating, investing, or financing activities Operating activities include transactions and events that determine net income Investing activities include transactions and events that mainly affect long-term assets Financing activities include transactions and events that mainly affect long-term liabilities and equity Noncash investing and financing activities must be disclosed in either a note or a separate schedule to the statement of cash flows Examples are the retirement of debt by issuing equity and the exchange of a note payable for plant assets A1  Analyze the statement of cash flows and apply the cash flow on total assets ratio To understand and predict cash flows, users stress identification of the sources and uses of cash flows by operating, investing, and financing activities Emphasis is on operating cash flows because they derive from continuing operations The cash flow on total assets ratio is defined as www.freebookslides.com G-12 Appendix G  Summary operating cash flows divided by average total assets Analysis of current and past values for this ratio can reflect a company’s ability to yield regular and positive cash flows It also is viewed as a measure of earnings quality P1  Prepare a statement of cash flows Preparation of a statement of cash flows involves five steps: (1) Compute the net increase or decrease in cash; (2) compute net cash provided or used by operating activities (using either the direct or indirect method); (3) compute net cash provided or used by investing activities; (4) compute net cash provided or used by financing activities; and (5) report the beginning and ending cash balances and prove that the ending cash balance is explained by net cash flows Noncash investing and financing activities also are disclosed P2  Compute cash flows from operating activities using the indirect method The indirect method for reporting net cash provided or used by operating activities starts with net income and then adjusts it for three items: (1) changes in noncash current assets and current liabilities related to operating activities, (2) revenues and expenses not providing or u­ sing cash, and (3) gains and losses from investing and financing activities P3  Determine cash flows from both investing and financing activities Cash flows from both investing and financing activities are determined by identifying the cash flow effects of transactions and events affecting each balance sheet account related to these activities All cash flows from these activities are identified when we can explain changes in these accounts from the beginning to the end of the period P4A  Illustrate use of a spreadsheet to prepare a statement of cash flows A spreadsheet is a useful tool in preparing a statement of cash flows Six key steps (see Appendix 16A) are applied when using the spreadsheet to prepare the statement P5B  Compute cash flows from operating activities using the direct method The direct method for reporting net cash provided or used by operating activities lists major operating cash inflows less cash outflows to yield net cash inflow or outflow from operations CHAPTER 17 C1  Explain the purpose and identify the building blocks of analysis The purpose of financial statement analysis is to help users make better business decisions Internal users want information to improve company efficiency and effectiveness External users want information to make better and more informed decisions in pursuing their goals The common goals of all users are to evaluate a company’s past and current performance, current financial position, and future performance and risk Financial statement analysis focuses on four “building blocks” of analysis: (1) liquidity and efficiency— ability to meet short-term obligations and efficiently generate revenues; (2) solvency—ability to generate future revenues and meet long-term obligations; (3) profitability—ability to provide financial rewards sufficient to attract and retain financing; and (4) market prospects—ability to generate positive market expectations C2  Describe standards for comparisons in analysis Standards for comparisons include (1) intracompany— prior performance and relations between financial items for the company under analysis; (2) competitor—one or more direct competitors of the company; (3) industry—industry statistics; and (4) guidelines (rules of thumb)—general standards developed from past experiences and personal judgments A1  Summarize and report results of analysis A financial statement analysis report is often organized around the building blocks of analysis A good report separates interpretations and conclusions of analysis from the information underlying them An analysis report often consists of six sections: (1) executive summary, (2) analysis overview, (3) evidential matter, (4) assumptions, (5) key factors, and (6) inferences A2A  Explain the form and assess the content of a complete income statement An income statement has three sections: (1) continuing operations, (2) discontinued segments— provided any exist, and (3) earnings per share P1  Explain and apply methods of horizontal analysis Horizontal analysis is a tool to evaluate changes in data across time Two important tools of horizontal analysis are comparative statements and trend analysis Comparative statements show amounts for two or more successive periods, often with changes disclosed in both absolute and percent terms Trend analysis is used to reveal important changes occurring from one period to the next P2  Describe and apply methods of vertical analysis Vertical analysis is a tool to evaluate each financial statement item or group of items in terms of a base amount Two tools of vertical analysis are common-size statements and graphical analyses Each item in common-size statements is expressed as a percent of a base amount For the balance sheet, the base amount is usually total assets, and for the income statement, it is usually sales P3  Define and apply ratio analysis Ratio analysis provides clues to and symptoms of underlying conditions Ratios, properly interpreted, identify areas requiring further investigation A ratio expresses a relation between two quantities such as a percent, rate, or proportion Ratios can be organized into the building blocks of analysis: (1) liquidity and efficiency, (2) solvency, (3) profitability, and (4) market prospects www.freebookslides.com Appendix G  Summary G-13 CHAPTER 18 C1  Explain the purpose and nature of, and the role of ethics in, managerial accounting The purpose of managerial accounting is to provide useful information to management and other internal decision makers It does this by collecting, managing, and reporting both monetary and nonmonetary information in a manner useful to internal users Major characteristics of managerial accounting include (1) focus on internal decision makers, (2) emphasis on planning and control, (3) flexibility, (4) timeliness, (5) reliance on forecasts and estimates, (6) focus on segments and projects, and (7) reporting both monetary and nonmonetary information Ethics are beliefs that distinguish right from wrong Ethics can be important in reducing fraud in business operations consists of the purchase and issuance of materials to production The production activity consists of converting materials into finished goods At this stage in the process, the materials, labor, and overhead costs have been incurred and the schedule of cost of goods manufactured is prepared The sales activity consists of selling some or all of finished goods available for sale At this stage, the cost of goods sold is determined C6  C2  Describe accounting concepts useful in classifying costs We can classify costs as (1) fixed vs variable, (2) direct vs indirect, and (3) product vs period A cost can be classified in more than one way, depending on the purpose for which the cost is being determined These classifications help us understand cost patterns, analyze performance, and plan operations Describe trends in managerial accounting Important trends in managerial accounting include an increased focus on satisfying customers, the impact of a global economy, and the growing presence of e-commerce and service-based businesses The lean business model, designed to eliminate waste and satisfy customers, can be useful in responding to recent trends Concepts such as total quality management, just-intime production, and the value chain often aid in application of the lean business model Trends in corporate social responsibility and sustainability activities further change how businesses report information C3  A1  Define product and period costs and explain how they impact financial statements Costs that are capitalized because they are expected to have future value are called product costs; costs that are expensed are called period costs This classification is important because it affects the amount of costs expensed in the income statement and the amount of costs assigned to inventory on the balance sheet Product costs are commonly made up of direct materials, direct labor, and overhead Period costs include selling and administrative expenses C4  Explain how balance sheets and income statements for manufacturing, merchandising, and service companies differ The main difference is that manufacturers usually carry three inventories on their balance sheets—raw materials, work in process, and finished goods—instead of one inventory that merchandisers carry Service company balance sheets not include inventories of items for sale The main difference between income statements of manufacturers and merchandisers is the items making up cost of goods sold A merchandiser uses merchandise inventory and the cost of goods purchased to compute cost of goods sold; a manufacturer uses finished goods inventory and the cost of goods manufactured to compute cost of goods sold A service company’s income statement does not include cost of goods sold C5  Explain manufacturing activities and the flow of manufacturing costs Manufacturing activities consist of ­ aterials, production, and sales activities The materials activity m Assess raw materials inventory management using raw materials inventory turnover and days’ sales in raw materials inventory A high raw materials inventory turnover suggests a business is more effective in managing its raw materials inventory We use days’ sales in raw materials inventory to assess the likelihood of production being delayed due to inadequate levels of raw materials We prefer a high raw materials inventory turnover ratio and a small number of days’ sales in raw materials inventory, provided that raw materials inventory levels are adequate to keep production steady P1  Compute cost of goods sold for a manufacturer and for a merchandiser A manufacturer adds beginning finished goods inventory to cost of goods manufactured and then subtracts ending finished goods inventory to get cost of goods sold A merchandiser adds beginning merchandise inventory to cost of goods purchased and then subtracts ending merchandise inventory to get cost of goods sold P2  Prepare a schedule of cost of goods manufactured and explain its purpose and links to financial statements This schedule reports the computation of cost of goods manufactured for the period It begins by showing the period’s costs for direct materials, direct labor, and overhead and then adjusts these numbers for the beginning and ending inventories of the work in process to yield cost of goods manufactured www.freebookslides.com G-14 Appendix G  Summary CHAPTER 19 C1  Describe important features of job order production Certain companies called job order manufacturers produce custom-made products in response to customers’ orders A job order manufacturer produces products that usually are different unique and, typically, produced in low volumes The production systems of job order companies are flexible and are not highly standardized C2  Explain job cost sheets and how they are used in job order costing In a job order costing system, the costs of producing each job are accumulated on a separate job cost sheet Costs of direct materials, direct labor, and overhead applied are accumulated separately on the job cost sheet and then added to determine the total cost of a job Job cost sheets for jobs in process, finished jobs, and jobs sold make up subsidiary records controlled by general ledger accounts A1  Apply job order costing in pricing services Job order costing can usefully be applied to a service setting The resulting job cost estimate can then be used to help determine a price for services P1  Describe and record the flow of materials costs in job order costing Costs of direct materials flow to the Work in Process Inventory account and to job cost sheets Costs of indirect materials flow to the Factory Overhead account and to the factory overhead subsidiary ledger Receiving reports evidence the purchase of raw materials, and requisition forms evidence the use of materials in production P2  Describe and record the flow of labor costs in job order costing Costs of direct labor flow to the Work in Process Inventory account and to job cost sheets Costs of indirect labor flow to the Factory Overhead account and to the factory overhead subsidiary ledger Time tickets document the use of labor P3  Describe and record the flow of overhead costs in job order costing Overhead costs are charged (allocated) to jobs using a predetermined overhead rate Actual overhead costs incurred are accumulated in the Factory Overhead account that controls the subsidiary factory overhead ledger P4  Determine adjustments for overapplied and under­ applied factory overhead At the end of each year, the Factory Overhead account usually has a residual debit (under­ applied overhead) or credit (overapplied overhead) balance Assuming the balance is not material, it is transferred to Cost of Goods Sold, and the Factory Overhead account is closed CHAPTER 20 C1  Explain process operations and the way they differ from job order operations Process operations produce large quantities of similar products or services by passing them through a series of processes, or steps, in production Like job order operations, they combine direct materials, direct labor, and overhead in the operations Unlike job order operations that assign the responsibility for each job to a manager, process operations assign the responsibility for each process to a manager C2  Define and compute equivalent units and explain their use in process costing Equivalent units of production measure the activity of a process as the number of units that would be completed in a period if all effort had been applied to units that were started and finished This measure of production activity is used to compute the cost per equivalent unit and to assign costs to finished goods and work in process inventory To compute equivalent units, determine the number of units that would have been finished if all materials (or conversion) had been used to produce units that were started and completed during the period The costs incurred by a process are divided by its equivalent units to yield cost per equivalent unit C3  Describe accounting for production activity and preparation of a process cost summary using weighted average A process cost summary reports on the activities of a production process or department for a period It describes the costs charged to the department, the equivalent units of production for the department, and the costs assigned to the output The report aims to (1) help managers control their departments, (2) help factory managers evaluate department managers’ performance, and (3) provide cost information for financial statements A process cost summary includes the physical flow of units, equivalent units of production, costs per equivalent unit, and a cost reconciliation It reports the units and costs to account for during the period and how they were accounted for during the period In terms of units, the summary includes the beginning work in process inventory and the units started during the month These units are accounted for in terms of the goods completed and transferred out, and the ending work in process inventory With respect to costs, the summary includes materials and conversion costs assigned to the process during the period It shows how these costs are assigned to goods completed and transferred out, and to ending work in process inventory www.freebookslides.com Appendix G  Summary G-15 accounting for production activity and C4A   Describe preparation of a process cost summary using FIFO P1  The FIFO method for process costing is applied and illustrated to (1) report the physical flow of units, (2) compute the equivalent units of production, (3) compute the cost per equivalent unit of production, and (4) assign and reconcile costs Record the flow of materials costs in process costing Materials purchased are debited to a Raw Materials Inventory account As direct materials are issued to processes, they are separately accumulated in a Work in Process Inventory account for that process As indirect materials are used, their costs are debited to Factory Overhead A1  P2  Compare process costing and job order costing Process and job order manufacturing operations are similar in that both combine materials and conversion to produce products or services They differ in the way they are organized and managed In job order operations, the job order costing system assigns product costs to specific jobs In process operations, the process costing system assigns product costs to specific processes The total costs associated with each process are then divided by the number of units passing through that process to get cost per equivalent unit The costs per equivalent unit for all processes are added to determine the total cost per unit of a product or service A2  Explain and illustrate a hybrid costing system A hybrid costing system contains features of both job order and process costing systems Generally, certain direct materials are accounted for by individual products as in job order costing, but direct labor and overhead costs are accounted for similar to process costing Record the flow of labor costs in process costing Direct labor costs are assigned to the Work in Process Inventory account pertaining to each process As indirect labor is used, its cost is debited to Factory Overhead P3  Record the flow of factory overhead costs in process costing Actual overhead costs are recorded as debits to the Factory Overhead account Estimated overhead costs are allocated, using a predetermined overhead rate, to the different processes This allocated amount is credited to the Factory Overhead account and debited to the Work in Process Inventory account for each separate process P4  Record the transfer of goods across departments, to Finished Goods Inventory, and to Cost of Goods Sold As units are passed through processes, their accumulated costs are transferred across separate Work in Process Inventory accounts for each process As units complete the final process and are eventually sold, their accumulated cost is transferred to Finished Goods Inventory and finally to Cost of Goods Sold CHAPTER 21 C1  Describe different types of cost behavior in relation to production and sales volume Cost behavior is described in terms of how its amount changes in relation to changes in volume of activity within a relevant range Total fixed costs remain constant to changes in volume Total variable costs change in ­direct proportion to volume changes Mixed costs display the ­effects of both fixed and variable components Step-wise costs remain constant over a small volume range, then change by a lump sum and remain constant over another volume range, and so on Curvilinear costs change in a nonlinear relation to volume changes C2  Describe several applications of cost-volume-profit analysis Cost-volume-profit analysis can be used to predict what can happen under alternative strategies concerning sales volume, selling prices, variable costs, or fixed costs Applications include “what-if” analysis, computing sales for a target income, and break-even analysis A1  Compute the contribution margin and describe what it reveals about a company’s cost structure Contribution margin per unit is a product’s selling price less its total variable costs Unit contribution margin is the amount received from each sale that contributes to fixed costs and income Contribution margin ratio is a product’s contribution margin per unit divided by its selling price per unit The contribution margin ratio reveals what portion of each sales dollar is available as contribution to fixed costs and income A2  Analyze changes in sales using the degree of operating leverage The extent, or relative size, of fixed costs in a company’s total cost structure is known as operating leverage One tool useful in assessing the effect of changes in sales on income is the degree of operating leverage, or DOL DOL is the ratio of the contribution margin divided by pretax income This ratio can be used to determine the expected percent change in income given a percent change in sales P1  Determine cost estimates using the scatter diagram, high-low, and regression methods of estimating costs Three different methods used to estimate costs are the scatter ­diagram, the high-low method, and least-squares regression All three methods use past data to estimate costs Cost estimates from a scatter diagram are based on a visual fit of the cost line Estimates from the high-low method are based only on costs corresponding to the lowest and highest sales The leastsquares regression method is a statistical technique and uses all data points P2  Compute the break-even point for a singleproduct company A company’s break-even point www.freebookslides.com G-16 Appendix G  Summary for a period is the sales volume at which total revenues equal total costs To compute a break-even point in terms of sales units, we divide total fixed costs by the contribution margin per unit To compute a break-even point in terms of sales dollars, divide total fixed costs by the contribution margin ratio P3  Interpret a CVP chart and graph costs and sales for a single-product company The costs and sales for a company can be graphically illustrated using a CVP chart In this chart, the horizontal axis represents the number of units sold and the vertical axis represents dollars of sales or costs Straight lines are used to depict both costs and sales on the CVP chart P4  Compute the break-even point for a multiproduct ­company CVP analysis can be applied to a multiproduct company by expressing sales volume in terms of composite units A composite unit consists of a specific number of units of each product in proportion to their expected sales mix Multiproduct CVP analysis treats this composite unit as a single product unit cost and income under both P5B   Compute absorption and variable costing Absorption cost per unit includes direct materials, direct labor, and all overhead, whereas variable cost per unit includes direct materials, direct labor, and only variable overhead Absorption costing income is equal to variable costing income plus the fixed overhead cost in ending inventory minus the fixed overhead cost in beginning inventory CHAPTER 22 C1  Describe the benefits of budgeting Planning is a management responsibility of critical importance to business success Budgeting is the process management uses to formalize its plans Budgeting promotes management analysis and focuses its attention on the future Budgeting also provides a basis for evaluating performance, serves as a source of motivation, is a means of coordinating activities, and communicates management’s plans and instructions to employees A1  Analyze expense planning using activity-based budgeting Activity-based budgeting requires management to identify activities performed by departments, plan necessary activity levels, identify resources required to perform these activities, and budget the resources P1  Prepare the operating budgets of a master budget— for a manufacturing company A master budget is a collection of component budgets From budgeted sales a manufacturer ­prepares a production budget A manufacturing budget shows the budgeted production costs for direct materials, direct labor, and overhead Selling and general and administrative expense budgets complete the operating budgets of the master budget The capital expenditures budget reflects expected and asset ­purchases and disposals The cash budget shows the impact of budgeted activities on cash P2  Prepare a cash budget—for a manufacturing company The cash budget shows expected cash inflows and outflows during a budgeting period This budget helps management maintain the company’s desired cash balance P3  Prepare budgeted financial statements The operating budgets, capital expenditures budget, and cash budget contain much of the information to prepare a budgeted income statement for the budget period and a budgeted balance sheet at the end of the budget period Budgeted financial statements show the expected financial consequences of the planned activities described in the budgets Prepare each component of a master budget—for a merP4A chandising company Merchandisers budget ­merchandise purchases instead of manufacturing costs Merchandisers also prepare capital expenditure, selling ­expense, general and administrative expense, and cash ­budgets www.freebookslides.com Appendix G  Summary G-17 CHAPTER 23 C1  Define standard costs and explain how standard cost information is useful for management by exception Standard costs are the normal costs that should be incurred to produce a product or perform a service They should be based on a careful examination of the processes used to produce a product or perform a service as well as the quantities and prices that should be incurred in carrying out those processes On a performance report, standard costs (which are flexible budget amounts) are compared to actual costs, and the differences are presented as variances Standard cost accounting provides management information about costs that differ from budgeted (expected) amounts Performance reports disclose the costs or areas of operations that have significant variances from budgeted amounts This allows managers to focus more attention on the exceptions and less attention on areas proceeding normally A1  Analyze changes in sales from expected amounts Actual sales can differ from budgeted sales, and managers can investigate this difference by computing both the sales price and sales volume variances The sales price variance refers to that portion of total variance resulting from a difference between actual and budgeted selling prices The sales volume variance refers to that portion of total variance resulting from a difference between actual and budgeted sales quantities P1  Prepare a flexible budget and interpret a flexible budget performance report A flexible budget expresses variable costs in per unit terms so that it can be used to develop budgeted amounts for any volume level within the relevant range Thus, managers compute budgeted amounts for evaluation after a period for the volume that actually occurred To prepare a flexible budget, we express each variable cost as a constant amount per unit of sales (or as a percent of sales dollars) In contrast, the budgeted amount of each fixed cost is expressed as a total amount expected to occur at any sales volume within the relevant range The flexible budget is then determined using these computations and amounts for fixed and variable costs at the expected sales volume P2  Compute the total cost variance The total cost variance is computed as the actual production cost minus the s­ tandard production cost The standard production cost is the total direct materials, direct labor, and overhead costs that should have been incurred for the actual units produced P3  Compute materials and labor variances Materials and labor variances are due to differences between the actual costs incurred and the budgeted costs The price (or rate) variance is computed by comparing the actual cost with the flexible budget amount that should have been incurred to acquire the actual quantity of resources The quantity (or efficiency) variance is computed by comparing the flexible budget amount that should have been incurred to acquire the actual quantity of resources with the flexible budget amount that should have been incurred to acquire the standard quantity of resources P4  Compute overhead controllable and volume variances Overhead variances are due to differences between the actual overhead costs incurred and the overhead applied to production The overhead controllable variance equals the actual overhead minus the budgeted overhead The volume variance equals the budgeted fixed overhead minus the applied fixed overhead overhead spending and efficiency variances P5A   Compute An overhead spending variance occurs when manage- ment pays an amount different from the standard price to acquire an item An overhead efficiency variance occurs when the standard amount of the allocation base to assign overhead differs from the actual amount of the allocation base used journal entries for standard costs and P6A   Prepare account for price and quantity variances When a company records standard costs in its accounts, the standard costs of direct materials, direct labor, and overhead are debited to the Work in Process Inventory account Based on an analysis of the material, labor, and overhead costs, each quantity variance, price variance, volume variance, and controllable variance is recorded in a separate account At period-end, if the variances are not material, they are debited (if unfavorable) or credited (if favorable) to the Cost of Goods Sold account www.freebookslides.com G-18 Appendix G  Summary CHAPTER 24 C1  Distinguish between direct and indirect expenses and identify bases for allocating indirect expenses to departments Direct expenses are traced to a specific department and are incurred for the sole benefit of that department Indirect expenses benefit more than one department Indirect expenses are allocated to departments when computing departmental net income Ideally, we allocate indirect expenses by using a causeeffect relation for the allocation base When a cause-effect relation is not identifiable, each indirect expense is allocated on a basis reflecting the relative benefit received by each department C2  Explain transfer pricing and methods to set transfer prices Transfer prices are used to record transfers of items between divisions of the same company Transfer prices can be based on costs or market prices, or they can be negotiated by division managers C  Describe allocation of joint costs across products C3   A joint cost refers to costs incurred to produce or pur- chase two or more products at the same time When income statements are prepared, joint costs are usually allocated to the resulting joint products using either a physical or value basis A1  Analyze investment centers using return on investment and residual income A financial measure often used to evaluate an investment center manager is the return on investment, also called return on assets This measure is computed as the center’s income divided by the center’s average total assets Residual income, computed as investment center income minus a target income, is an alternative financial measure of investment center performance A2  Analyze investment centers using profit margin and investment turnover Return on investment can also be computed as profit margin times investment (asset) turnover Profit margin (equal to income/sales) measures the income earned per dollar of sales, and investment turnover (equal to sales/assets) measures how efficiently a division uses its assets A3  Analyze investment centers using the balanced scorecard A balanced scorecard uses a combination of financial and nonfinancial measures to evaluate performance Customer, internal process, and innovation and learning are the three primary perspectives of nonfinancial measures used in balanced scorecards A4  Compute the number of days in the cash conversion cycle The cash conversion cycle is a measure of how long (in days) it takes a company to go from paying cash out for raw materials to receiving cash collections in from credit sales It is computed as the days’ sales in accounts receivable plus the days’ sales in inventory, minus the days’ sales in accounts payable P1  Prepare a responsibility accounting report using controllable costs Responsibility accounting systems provide information for evaluating the performance of department managers A responsibility accounting system’s performance reports for evaluating department managers should include only the expenses (and revenues) that each manager controls P2  Allocate indirect expenses to departments Indirect expenses include items like depreciation, rent, advertising, and other expenses that cannot be assigned directly to departments Indirect expenses are recorded in company accounts, an allocation base is identified for each expense, and costs are allocated to departments Departmental expense allocation spreadsheets are often used in allocating indirect expenses to departments P3  Prepare departmental income statements and contribution reports Each profit center (department) is assigned its expenses to yield its own income statement These costs include its direct expenses and its share of indirect expenses The departmental income statement lists its revenues and costs of goods sold to determine gross profit Its operating expenses (direct expenses and its indirect expenses allocated to the department) are deducted from gross profit to yield departmental net income The departmental contribution report is similar to the departmental income statement in terms of computing the gross profit for each department Then the direct operating expenses for each department are deducted from gross profit to determine the contribution generated by each department Indirect operating expenses are deducted in total from the company’s combined contribution www.freebookslides.com Appendix G  Summary G-19 CHAPTER 25 C1  Describe the importance of relevant costs for shortterm decisions A company must rely on relevant costs pertaining to alternative courses of action rather than historical costs Out-of-pocket expenses and opportunity costs are relevant because these are avoidable; sunk costs are irrelevant because they result from past decisions and are therefore unavoidable Managers must also consider the relevant benefits associated with alternative decisions best sales mix, management focuses on the contribution margin per unit of scarce resource Decision rule: If demand for products is limited, produce the most profitable product (per unit of scarce resource) up to the point of total demand (or the capacity constraint) Use remaining capacity to produce the next most profitable product P4  Determine service selling price using time and materials pricing It is common to price services using time and materials pricing With this method, companies set a price for labor and a price for materials, and each includes a charge for overhead costs and a desired profit margin Auto mechanics, construction companies, electricians, and accounting and law firms commonly use time and materials pricing Time and ­materials pricing applies four steps Evaluate segment elimination decisions When a segment, division, or store is performing poorly, management must consider eliminating it Determining a segment’s contribution to overhead is an important first step in this analysis Segments with revenues less than direct costs are candidates for elimination However, contribution to overhead is not sufficient for this decision We must further classify the segment’s expenses as avoidable or unavoidable Decision rule: A segment is a candidate for elimination if its revenues are less than its avoidable expenses P1  P5  A1  Evaluate make or buy decisions Only incremental ­overhead costs are relevant to this decision Incremental overhead costs of making the part might include, for example, additional power for operating machines, extra supplies, added cleanup costs, materials handling, and quality control Decision rule: If the incremental cost to make is less than the cost to buy, make the product P2  Evaluate sell or process further decisions Some companies must decide whether to sell partially completed products as is or to process them further for sale as other products The decision depends on the incremental costs and benefits of further processing Decision rule: Select the alternative with the higher incremental income P3  Determine sales mix with constrained resources Management concentrates sales efforts on more profitable products If production facilities or other factors are limited, producing more of one product usually requires producing less of others In this case, management must identify the most profitable combination, or sales mix, of products To identify the Evaluate keep or replace decisions Businesses periodically must decide whether to keep using equipment or replace it If the reduction in variable manufacturing costs with the new equipment is greater than its net purchase price, the equipment should be replaced In this setting, the net purchase price of the equipment is its total cost minus any trade-in allowance or cash receipt for the old equipment Decision rule: If the reduction in variable manufacturing cost is greater than the net cost to buy the new machine, the machine should be replaced P6  Determine product selling price using cost data Product selling price can be estimated using total costs, plus a markup Total costs include both product costs and selling and administrative expenses A markup is added to yield management’s desired profit P7  Evaluate special offer decisions Companies sometimes receive special offers at prices lower than their normal selling prices We evaluate these special offers by focusing on incremental revenues and incremental expenses Management needs to know whether accepting the offer will increase income CHAPTER 26 A1  Analyze a capital investment project using break-even time Break-even time (BET) is a method for evaluating capital investments by restating future cash flows in terms of their present values (discounting the cash flows) and then calculating the payback period using these present values of cash flows P1  Compute payback period and describe its use One way to compare potential investments is to compute and compare their payback periods The payback period is an estimate of the expected time before the cumulative net cash inflow from the investment equals its initial cost A payback period analysis fails to reflect risk of the cash flows, differences in the timing of cash flows within the payback period, and cash flows that occur after the payback period P2  Compute accounting rate of return and explain its use A project’s accounting rate of return is computed by dividing the expected annual after-tax net income by the average amount of investment in the project When the net cash flows are received evenly throughout each period and straight-line d­ epreciation is used, the average investment is computed as the average of the investment’s initial book value and its salvage value P3  Compute net present value and describe its use An investment’s net present value is determined by predicting the future cash flows it is expected to generate, discounting them at a rate that represents an acceptable return, and then subtracting the investment’s initial cost from the sum of the present values This technique can deal with any pattern of expected cash flows and applies a superior concept of return on investment P4  Compute internal rate of return and explain its use The internal rate of return (IRR) is the discount rate that results in a zero net present value When the cash flows are equal, we can compute the present value factor corresponding to the IRR by dividing the initial investment by the annual cash flows We then use the annuity tables to determine the discount rate corresponding to this present value factor www.freebookslides.com G-20 Appendix G  Summary APPENDIX B C1  Describe the earning of interest and the concepts of present and future values Interest is payment by a borrower to the owner of an asset for its use Present and future value computations are a way for us to estimate the interest component of holding assets or liabilities over a period of time P1  Apply present value concepts to a single amount by using interest tables The present value of a single amount received at a future date is the amount that can be invested now at the specified interest rate to yield that future value P2  Apply future value concepts to a single amount by using interest tables The future value of a single amount invested at a specified rate of interest is the amount that would accumulate by the future date P3  Apply present value concepts to an annuity by using interest tables The present value of an annuity is the amount that can be invested now at the specified interest rate to yield that series of equal periodic payments P4  Apply future value concepts to an annuity by using interest tables The future value of an annuity invested at a specific rate of interest is the amount that would accumulate by the date of the final payment APPENDIX C C1  Explain cost flows for activity-based costing With ABC, overhead costs are first traced to the activities that cause them, and then cost pools are formed combining costs caused by the same activity Overhead rates based on these activities are then used to assign overhead to products in proportion to the amount of activity required to produce them A1  Identify and assess advantages and disadvantages of activity-based costing ABC improves product costing accuracy and draws management attention to relevant factors to control The cost of constructing and maintaining an ABC system can sometimes outweigh its value P1  Assign overhead costs using the plantwide overhead rate method The plantwide overhead rate equals total budgeted overhead divided by budgeted plant volume, the latter often measured in direct labor hours or machine hours This rate multiplied by the number of direct labor hours (or machine hours) required for each product provides the overhead assigned to each product P2  Assign overhead costs using activity-based costing In activity-based costing, the costs of related activities are collected and then pooled in some logical manner into activity cost pools After all activity costs have been accumulated in an activity cost pool account, cost objects are assigned a portion of the total activity cost using a cost driver (allocation base) www.freebookslides.com Appendix G  Summary G-21 APPENDIX D C1  Describe lean principles Competition forces businesses to improve One approach is to adopt the lean business model, whose goal is to use fewer resources while still satisfying customers Key aspects of the lean business model are overall strategies aimed to eliminate waste in processes and meet customer needs At the next level are lean business practices such as continuous improvement, just-in-time inventory systems, supply chain management, and total quality management These practices aim to cut waste in spending and increase quality and productivity Businesses that produce better quality products and services with lower costs are more successful At the base of this model are key principles A1  Compute cycle time and cycle efficiency, and explain their importance to production management Lean businesses use many nonfinancial measures to evaluate the performance of their production processes It is important for lean businesses to reduce the time it takes to produce products and to improve efficiency Cycle time (CT) is the time it takes to produce a good or provide a service Process time is the only activity that adds value to the customer (value-added activity) Inspection, move, and wait times not add value to customers (non-value-added activities) Lean businesses try to reduce nonvalue-added time to improve cycle efficiency (CE) Cycle efficiency measures the amount of cycle time spent on value-added activities A CE of means a value stream’s time is spent entirely on value-added activities If the CE is low, too much time is being spent on non-value-added activities and the production process should be reviewed with an aim to eliminate waste A2  Compute days’ sales in work in process inventory Lean businesses aim to reduce inventory They typically not have a separate Raw Materials Inventory account and hold few finished goods This means the Work in Process Inventory account can be used to measure production efficiency Work in process inventory reflects delay in getting products to customers, which lean businesses consider wasteful Getting products to customers sooner by reducing work in process inventory can increase customer satisfaction To measure production efficiency, we can use days’ sales in work in process inventory Lower days’ sales in work in process inventory means the company is completing its production cycle more quickly Adopting a lean model should result in a smaller number of days’ sales in work in process inventory A3  Compute days’ payable outstanding Companies that buy on credit monitor how long they take to pay creditors This is particularly important for lean businesses because they usually have long-term contracts with important suppliers Taking too long to pay could harm important partnerships Paying too soon, however, means the company has less cash available for other needs Days’ payable outstanding is a ­measure of how long, on average, a company takes to pay its creditors P1  Record product costs using lean accounting Lean ­businesses usually have fewer transactions to record and use fewer accounts The key accounts in lean accounting follow (1) Work in Process Inventory Lean businesses put raw materials immediately into production, so a separate Raw Materials Inventory account is not used Raw materials purchases are ­recorded in Work in Process Inventory (2) Conversion Costs Direct labor, indirect labor, and overhead costs are recorded in this account In lean businesses, employees work within ­individual value streams and they both direct and indirect ­labor tasks ... www.freebookslides.com Fundamental Accounting Principles www.freebookslides.com Accounting in Business Chapter Preview ACCOUNTING USES C1 Purpose of accounting C2 Accounting information users Opportunities in accounting. .. Opportunities in Accounting? ?? Fundamentals of Accounting? ?? Ethics—A Key Concept  Generally Accepted Accounting Principles? ?? Conceptual Framework  Business Transactions and Accounting? ?? Accounting Equation ... 18 Managerial Accounting Concepts and Principles? ??650 Managerial Accounting Basics  651 Purpose of Managerial Accounting? ?? 651 Nature of Managerial Accounting? ?? 652 Fraud and Ethics in Managerial Accounting? ??