www.freebookslides.com Final PDF to printer www.freebookslides.com Fundamentals of FINANCIAL ACCOUNTING Sixth Edition FRED PHILLIPS University of Saskatchewan ROBERT LIBBY Cornell University PATRICIA A LIBBY Ithaca College Runners: ©Shutterstock/lzf; Hammer: ©Ingram Publishing; Mountain: ©Shutterstock/Vixit; Mobile apps: ©Shutterstock/ImageFlow; Roller coaster: ©ManunNgueampha/iStock/ Getty Images phi64235_fm_i-1.indd i 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com FUNDAMENTALS OF FINANCIAL ACCOUNTING, SIXTH 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 © 2016, 2013, and 2011 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 978-1-259-86423-0 MHID 1-259-86423-5 Executive Portfolio Manager: Rebecca Olson Marketing Manager: Zachary Rudin Content Project Managers: Lori Koetters, Angela Norris Buyer: Sandy Ludovissy Design: Matt Diamond Content Licensing Specialist: Melissa Homer Cover Images: Skyline: ©Chris Hepburn/Getty Images; Runners: ©Shutterstock/lzf; Hammer: ©Ingram Publishing; Mountain: ©Shutterstock/Vixit; Mobile apps: ©Shutterstock/ImageFlow; Roller coaster: ©ManunNgueampha/ iStock/Getty Images Compositor: SPi Global 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: Phillips, Fred, author | Libby, Robert, author | Libby, Patricia A., author Title: Fundamentals of financial accounting / Fred Phillips, University of Saskatchewan, Robert Libby, Cornell University, Patricia A Libby, Ithaca College Description: Sixth edition | New York, NY : McGraw-Hill Education, [2019] Identifiers: LCCN 2017048566 | ISBN 9781259864230 (alk paper) Subjects: LCSH: Accounting Classification: LCC HF5636 P545 2019 | DDC 657—dc23 LC record available at https://lccn.loc.gov/2017048566 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 phi64235_fm_i-1.indd ii 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com Dedicated to Barb, Harrison, and Daniel, my Mom, and (memory of) my Dad FRED PHILLIPS Herman and Doris Hargenrater, Laura Libby, Oscar and Selma Libby PATRICIA AND ROBERT LIBBY phi64235_fm_i-1.indd iii 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com Meet the Authors Fred Phillips Fred Phillips is a professor at the University of Saskatchewan, where he teaches introductory financial accounting He also has taught introductory accounting at the University of Texas at Austin and the University of Manitoba Fred has an undergraduate accounting degree, a CPA, CA (Canada), and a PhD from the University of Texas at Austin He previously worked as an audit manager at KPMG Fred’s main career interest is accounting education He has been recognized with more than Courtesy of Fred Phillips 26 awards, as chosen by his students and peers In 2006, Fred was awarded the title Master Teacher at the University of Saskatchewan In 2011, he was admitted to the 3M National Teaching Fellowship, the highest honor for undergraduate teaching in Canada In 2012, Fred received the L S Rosen Outstanding Educator Award, the American Accounting Association’s Innovation in Auditing and Assurance Education Award, and the American Accounting Association’s Award for Outstanding Research in Accounting Education Most recently, he received the Edwards MPAcc Teaching Effectiveness Award and, for the third time in his career, the University of Saskatchewan Student Union’s Teaching Excellence Award His peer-reviewed publications include education-focused research and instructional cases in Issues in Accounting Education, as well as professional judgment studies in Journal of Accounting Research and Organizational Behavior and Human Decision Processes, among others Fred is a current member of the Teaching, Curriculum, & Learning and Two-Year College sections of the American Accounting Association In his spare time, he likes to play tennis, drink iced cappuccinos, and relax with his family Robert Libby Robert Libby is the David A Thomas Professor of Accounting and Accounting Area Coordinator at Cornell University, where he teaches the introductory financial accounting course He previously taught at the University of Illinois, Pennsylvania State University, the University of Texas at Austin, the University of Chicago, and the University of Michigan He received his BS from Pennsylvania State University and his MAS and PhD from the University of Illinois; he also successfully completed the CPA exam (Illinois) Courtesy of Robert Libby Bob was selected as the AAA Outstanding Educator in 2000 and received the AAA Outstanding Service Award in 2006 and the AAA Notable Contributions to the Literature Award in 1985 and 1996 He has received the Core Faculty Teaching Award multiple times at Cornell Bob is a widely published author and researcher specializing in behavioral accounting He has iv phi64235_fm_i-1.indd iv 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com published numerous articles in The Accounting Review; Journal of Accounting Research; Accounting, Organizations, and Society; and other accounting journals He has held a variety of offices, including vice president, in the American Accounting Association, and he is a member of the American Institute of CPAs and the editorial boards of The Accounting Review and Accounting, Organizations, and Society Patricia A Libby Patricia Libby is associate professor of accounting at Ithaca College, where she teaches the undergraduate financial accounting course She previously taught graduate and undergraduate financial accounting at Eastern Michigan University and the University of Texas Before entering academe, she was an auditor with Price Waterhouse (now PricewaterhouseCoopers) and a financial administrator at the University of Chicago She is also faculty advisor to Beta Alpha Psi and Ithaca College Accounting Association She received her BS from Pennsylvania State University, her MBA from DePaul University, and her PhD from the University of Michigan; she also successfully completed the CPA exam (Illinois) Courtesy of Patricia A Libby Pat conducts research on using cases in the introductory course and other parts of the accounting curriculum She has published articles in The Accounting Review, Issues in Accounting Education, and The Michigan CPA v phi64235_fm_i-1.indd v 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com Engaging Students with Real-World Context and Business One of the most widely used introductory accounting textbooks, Phillips/Libby/Libby Fundamentals of Financial Accounting focuses on four key attributes Engaging Writing. Fundamentals of Financial Accounting introduces students to financial accounting using a balanced mix of conversational wording, clear and concise presentations, and everyday examples Students can feel comfortable as they are introduced to the world of financial accounting This measured approach allows students to grasp concepts fundamental to financial accounting, without sacrificing rigor or coverage Runners: ©Shutterstock/lzf; Hammer: ©Ingram Publishing; Mountain: ©Shutterstock/Vixit; Mobile apps: ©Shutterstock/ImageFlow; Roller coaster: ©ManunNgueampha/iStock/Getty Images Entrepreneurial Focus. Each chapter makes financial accounting engaging by using a real company whose products and services are popular with students Students learn financial accounting concepts through the use of examples from such companies as American Eagle (clothing), Koss Corporation (headphones), and Under Armour (sportswear) The accounting cycle chapters tap into students’ innate curiosity about start-up culture by focusing on an actual startup, Noodlecake Studios, providing details and financial accounting lessons through a real-life entrepreneurial story Data-Driven Pedagogy. The authors’ approach to introducing the accountPractical, applicable to both accounting and non-accounting majors and a very thorough financial accounting textbook —Ronald Premuroso, University of Montana Students should find the use of companies from their generation, as examples, interesting —Diane Marker, University of Toledo ing cycle and using visual aids has been tested in peer-reviewed, published research studies One of these award-winning studies has shown this accounting cycle approach yields learning gains that outpace other approaches by a significant margin By breaking the accounting cycle down into more cohesive, bite-sized segments, students develop a stronger foundational understanding This paced introduction to the core concepts of accounting enables improved student success, allowing them to better retain and apply key concepts Video Asset Variety. Fundamentals of Financial Accounting offers a diverse range of video assets within the Connect platform that can fit nearly any instructor need From reinforcing key lessons to painting the big picture, videos can be a critical and complementary learning tool for engaging students Phillips does an excellent job of writing at a level the average student will understand [The authors] . . . know how to engage the students by using real companies; discussing relevant current events; using colorful, enticing-to-read graphs that are efficient at making a point; and most importantly, they know the frequent misconceptions and typical issues students have —Nancy Lynch, West Virginia University vi phi64235_fm_i-1.indd vi 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com Driving Success with Clear, Effective, and Innovative Ideas A Proven Teaching and Learning Methodology Faculty agree that for students studying financial accounting, the accounting cycle is the most critical topic to learn and master The approach to this topic in Phillips/Libby/Libby is based on the belief that students struggle with the accounting cycle when transaction analysis is covered in one chapter If students are exposed to the accounting equation, journal entries, and T-accounts for both balance sheet and income statement accounts in a single chapter, many are left behind and are unable to grasp material in the next chapter, which typically covers adjustments and financial statement preparation The graphic shows how, unlike other texts, the Phillips/Libby/Libby approach spreads transaction analysis coverage over two chapters so that students have the time to master the material In Chapter 2, students are exposed to the accounting equation and transaction analysis for transactions that affect only balance sheet accounts This provides students with the opportunity to learn the basic structure and tools used in accounting in a simpler setting In Chapter 3, students are exposed to more complex transactions that affect both balance sheet and income statement accounts As a result of this progressive approach to transaction analysis, students learn more, as documented in peer-reviewed research.* This innovative approach also prepares students to better understand adjustments, financial statement preparation, and more advanced topics In addition, the accounting cycle approach used here tells a natural business story—one that would be familiar to any modern entrepreneur From planning and establishing the business to opening and evaluating the business, the first few chapters clearly break out each key stage in starting a company The accounting cycle coverage steadily unfolds as students move along this company’s journey, allowing them to keep pace and absorb how accounting events unfold in the real world of business Phillips/Libby/Libby Accounting Cycle Approach e Traditional Accounting Cycle Approach rv cu ing rn lea p ee St Overview of Financial Statements and Users Introduction (Ch 1) Financial Statements Ratios Recording Transactions Affecting Both Balance Sheet and Income Statement Accounts Prepare Unadjusted Trial Balance Adjusting Entries and the Adjusted Trial Balance Financial Statement Preparation Closing Process Recording Transactions Affecting Only Balance Sheet Accounts Recording Transactions Affecting Both Balance Sheet and Income Statement Accounts Prepare Unadjusted Trial Balance Prepare Unadjusted Trial Balance Prepare and Evaluate the Balance Sheet Prepare and Evaluate Income Statement Establish the Business (Ch 2) Operate the Business (Ch 3) Overview of Financial Statements and Users Conceptual Framework Deeper Dive Debits & Credits (Ch 2) (Ch 3) ing d learn , pace Steady Final Steps (Ch 4) Plan the Business (Ch 1) Adjusting Entries and the Adjusted Trial Balance Financial Statement Preparation Closing Process Evaluate the Business (Ch 4) Phillips/Libby/Libby introduces all of the financial statements in the first chapter, then utilizes debits and credits combined with increases and decreases for transactions affecting the balance sheet, and then reinforces the methodology when presenting the transactions affecting the income statement in Chapter This area is the toughest for students and requires the most practice Phillips understands this and expertly navigates through the two statements and demonstrates how the two interconnect and depend upon each other, setting the stage for an easier adjustment and closing process ahead. —Margaret Costello Lambert, Oakland Community College *F Phillips and L Heiser, “A Field Experiment Examining the Effects of Accounting Equation Emphasis and Transaction Scope on Students Learning to Journalize,” Issues in Accounting Education 26 (2011), pp 681–699 phi64235_fm_i-1.indd vii 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com Modern Businesses Bring Accounting Concepts to Life Not all students learn financial accounting with ease With so many distractions these days, it is difficult to keep both majors and nonmajors focused on the big picture The authors of Fundamentals of Financial Accounting understand the challenges instructors face and the need for a financial accounting text that is relevant, easy to read, and current Fundamentals of Financial Accounting responds by using carefully chosen focus companies that students recognize and engage with in their everyday lives From tech start-ups to some of the world’s most familiar trademark brands, each chapter opens with an engaging scenario or story using a familiar company The same focus company, such as Walmart, Cedar Fair, American Eagle, National Beverage, Under Armour, or General Mills, is used throughout the entire chapter so that students can see how the concepts and calculations apply to a real-world company they are already familiar with ©ManunNgueampha/iStock/Getty Images Written in clear, understandable language . The multiple real-world examples, colorful and “clean” exhibits, as well as other illustrations enhance the student’s learning process by making the information relevant and understandable The “building block” approach allows the student to gain a solid understanding of the fundamentals of each chapter before moving on to the next Today’s students have grown up hearing about start-up culture, and many are entrepreneurially minded having seen the rise of Apple, Facebook, and the “gig economy.” The authors showcase accounting’s relevance by using Noodlecake Studios, a digital start-up, as the company profiled in Chapters 1–4 With this example, students see how a new small business uses accounting, from planning to evaluation of financial performance Through crisp, clear, and engaging writing, the financial decisions these companies make and the financial statements they use come alive for students, who are able to see the big picture of how accounting relates to the real world—their world —Muriel Anderson, SUNY–Buffalo The [Cedar Fair] focus company is fantastic; this keeps the classes on this chapter fast-paced You could not have picked a better company for demonstration of acquisitions and impairments of PPE Students love Chapter because of great examples, such as the installation and shipping of a roller coaster and the impairment of a ride due to “vortex shedding.” This chapter is simply exciting —Lisa McKinney, University of Alabama viii phi64235_fm_i-1.indd viii 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com Pedagogy Built on Research Data and Analysis Fundamentals of Financial Accounting uses peer-reviewed research and careful analysis of data to inform decisions on pedagogy and presentation of concepts For example, the authors’ research on various approaches to teaching the accounting cycle informed the step-by-step model used in the text—a model proven to lead to better results in short-term assessment as well as in long-term understanding and application of the material In a peer-reviewed study published in Issues in Accounting Education, author Fred Phillips and his research partner Lindsay Heiser studied the effects of teaching the accounting cycle by initially restricting the scope of transactions to only those affecting balance sheet accounts, while waiting to introduce transactions involving both balance sheet and income statement accounts until later The pair hypothesized that further scaffolding concepts would help ensure students didn’t get overwhelmed To test this theory, students were assigned to random groups, with each group learning the accounting cycle via a different approach All students were evaluated with the same homework assignments and in-class tests 100 95 Field Experiment Results Phillips/Libby/Libby approach Others 90 85 80 75 HW-Practiced Novel Transactions Transactions HW-Practiced Transactions Immediate Test Delayed Test The results showed that students who learned the accounting cycle via the scaffolded approach were better able to prepare journal entries on similar types of transactions both immediately and one week later Importantly, these same students later performed just as well on complex transactions affecting balance sheet and income statement accounts despite having had less practice with them The scaffolded accounting cycle approach that proved so effective in this study is the same that is used in Fundamentals of Financial Accounting, helping students to “work smarter,” and better preparing them for success in financial accounting and beyond “Clear, concise, and the most reader friendly text I’ve come across Most importantly, it is based on sound learning theory, which greatly enhances the learning experience.” —Professor Audrey Agnello, Niagara County Community College ix phi64235_fm_i-1.indd ix 11/17/17 07:19 AM Final PDF to printer www.freebookslides.com IND8 SUBJECT INDEX Cash flow See also Statement of cash flows business activities and, 556–557 classifying, 557–559 converting cost of goods sold to cash paid to suppliers, 575 converting operating expenses to cash outflow, 575–577 converting revenues to cash inflows, 574–575 from financing, 14, 557, 559, 568–569, 572 from investment, 14, 557, 558–559, 567, 571–572, 578 from operations, 14, 557, 558, 561–562, 571 overall patterns, 572–573 Cash payments, 224–226 by check for purchases on account, 224–226 to employees via direct deposits, 226 to reimburse employees (petty cash), 226 Cash receipts, 221–223 electronic funds transfer, 223 by mail, 222–223 in person, 221–222 Cash shortage (overage), 234 Certified Financial Manager (CFM), 70 Certified Forensic Accountant (Cr FA), 70 Certified Fraud Examiner (CFE), 70 Certified Internal Auditor (CIA), 70 Certified Management Accountant (CMA), 70 Certified Public Accountant (CPA), 70 CFA (Chartered Financial Analyst), 70 CFE (Certified Fraud Examiner), 70 CFM (Certified Financial Manager), 70 Channel stuffing, 364 Charter (articles of incorporation), 509 Chartered Financial Analyst (CFA), 70 Chart of accounts, 51–52 Checks bank reconciliation and statements, 227–232 for purchases on account, 224–226 Chief Executive Officer (CEO), 22 CIA (Certified Internal Auditor), 70 Classified balance sheet assessing ability to pay, 67–68 components, 67 defined, 66 preparing, 66–67, 73 Closing processes at end of accounting period, 57 temporary accounts, 170–173 CMA (Certified Management Accountant), 70 Code of Professional Conduct (AICPA), 19 Collections collection analysis by customer region, 365 speeding up, 366–367 Collusion, 220 Common size analysis See Vertical (common size) analysis phi64235_sidx_IND5-IND22.indd IND8 Common stock, 9, 510–517, 568 authorization, 512 defined, 509 dividends, 515–518 earnings per share (EPS), 523–524, 621 issuance, 512 repurchase, 513–514 on statement of cash flows, 568 stock splits, 518–519 transactions, 510–517 treasury stock, 510, 511, 514–515 Communication, internal control and, 218 Comparative balance sheet, 560 Compensation analyst, 21 Compliance, 217 Component allocation, 399 Compounding, power of, C4, C8 Compound interest, C4, C8 Consignment inventory, 308–309 Consolidated financial statements, examples, A5–A12, B4–B14 Construction in progress, 397 Contingent liabilities, 462–463, 483 Continuity assumption, 625 Contra-accounts, 160, 269n accumulated depreciation, 159–160, 355, 397, 402–405, 408–410 allowance for doubtful accounts, 355–359, 363 defined, 159 Contract rate, 484 Contributed capital, 108, 510 Control See Internal controls Control activities, risk reduction and, 218 Control environment, 217 See also Internal controls Convertible bonds, 462 Copyrights, 411 Corporate bonds, 462 Corporate life cycle, 571, 572–573 Corporate ownership, 508–509 Corporations nature of, 5, 25 ownership characteristics, 508–509 Correct cash balance, 237 Corruption, 214 See also Fraud Cost of goods sold (CGS), 325, 452 accepted costing methods, 311 converting to cash paid to suppliers, 575 equation, 262, 310 errors in ending inventory, 322–323 first-in, first-out (FIFO) method and, 311 inventory system, 261–262 last-in, first-out (LIFO) method and, 311–312 periodic inventory system, 263, 277 perpetual inventory system, 263, 278 reporting, 309 weighted average cost method, 312 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com Cost principle, 13, 49, 69, 417 Coupon rate, 484 CPA (Certified Public Accountant), 70 Cr FA (Certified Forensic Accountant), 70 Credit cash basis accounting and, 101 defined, 58 extending, pros and cons of, 352–353 Credit balance, 59, 62 Credit cards, 353, 367 Creditors, 26 claim on assets, 48 as external users of financial information, financial statements and, 17 fraud against, 20 types of, Credit terms, 267, 365 Crowdfunding, 453, 510 Cumulative dividend preference, 521–522 Currency, and unit of measure assumption, 10 Current assets defined, 67 operating activities and, 562 Current dividend preference, 521 Current liabilities, 67, 446, 447–450, 483 accounts payable, 447 accrued liabilities, 477–448 current portion of long-term debt, 454–455 deferred revenue, 453 defined, 446 notes payable, 450–452 payroll deductions, 448 sales tax payable, 452–453 Current market price, 627 Current ratio, 67–68, 73, 622 Customer business developer, 21 D Daily transactions, 57 Data visualization, 319, 365 Days’ sales outstanding See Days to collect Days to collect, 364–366 Days to sell, 317 Debentures, 462 Debit, defined, 58 Debit balance, 59, 62, 358 Debit/credit framework, 58–66, 108 Debt, 48 See also Long-term liabilities defined, 48 early retirement, 461–462 Debt financing, 48, 509 Debt-to-assets ratio, 464, 483, 623 Declaration date of dividend, 516 Decline phase, of corporate life cycle, 572, 573 phi64235_sidx_IND5-IND22.indd IND9 SUBJECT INDEX IND9 Declining-balance depreciation method, 403, 405–406 Deferral adjustments nature of, 153 role of, 156 sample entries, 157–162 Deferred income tax, 408 Deferred revenue, 104, 109 Depletion, 417 Deposits in transit, 229, 230 Deposits made, 228 Depreciable cost, 403 Depreciation accumulated, 156, 159, 160, 169, 172, 355, 402 asset impairment losses, 408–409 book (carrying) value, 159 calculating, 403 changes in, 417–418 declining-balance method, 403, 405–406 defined, 159, 402 in determining operating cash flows, 562, 563 differences, impact of, 415–417 disposal of tangible assets, 409–410 double-declining-balance depreciation method, 405 for equipment use, 159 expense, 402 impact of differences in, 415–418 methods, 403–408 partial-year calculations, 407 straight-line method, 403, 404 tax, 407–408 units-of-production method, 403, 404–405 Direct deposits, 226 Direct method of reporting operating cash flows, 561 Directors, Direct write-off method for bad debts, 359, 367–368, 371 Discounts amortization of bonds issued at, 466–467 interest on bonds issued at, 460–461 purchase of inventory, 266–267 sales, 270, 282 Disposal of intangible assets, 413 of tangible assets, 409–410 Distribution of net income, 529 Dividends, 9–10 cash, on common stock, 515–517 closing dividend accounts, 170–171 shareholder loyalty program, 515 Dividends in arrears, 521 Documentation of procedures, internal control and, 220 Double-declining-balance depreciation method, 405 Drawing account, 526 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com IND10 SUBJECT INDEX E Earnings before interest, taxes, depreciation, and amortization (EBITDA), 416–417 Earnings per share (EPS), 513, 523–524, 533, 621 EBITDA, 416–417 Edison, Thomas, 509 Effective-interest method of amortization, 465, 467–471 of bonds issued at discount, 468–469, 471 of bonds issued at premium, 469–470 defined, 467 simplified, 471–474 Effective interest rate, 484 Electronic funds transfer (EFT), 229 direct deposits paid to employees, 226 payments from customers via, 223 Electronic Gathering and Retrieval Service (EDGAR), 23 Ellingsen, Tore, 447n Embezzlement, 214 Employees bonding, 220 stock options for, 513 theft by, 264 Employer payroll taxes, 449–450 Entry price, 627 Equations See Accounting equations Equipment, 54, 159, 396–400, 567 Equity financing, 48, 509 Errors made by banks, 229 made by clients, 229 Estimates bad debt expense, 357–360 revising, 359 Ethical issues See also Fraud accounting scandals, 20 accrual manipulation, 557 Code of Professional Conduct (AICPA), 19 ethics, defined, 19 nature of accounting ethics, 19–20 resetting the clock for doubtful accounts, 363 time period assumption, 101 Exit price, 627 Expanded accounting equation, 107–114 Expense recognition (“matching”) principle, 106–107, 123, 156–157, 159, 354, 417 Expenses, 99–100, 123 in accrual basis accounting, 102, 106 adjusting entries for, 152, 153 capitalizing, 148 in cash basis accounting, 101–102 changes in recognition, 571 in debit/credit framework, 108 decrease in net income and, 111 defined, 9, 99 on income statements, 99–100, 107, 116–117 phi64235_sidx_IND5-IND22.indd IND10 incurring cost to be paid later, 112 review of, 116–117 Selling, General, and Administrative Expenses, 274, 275 as subcategory of retained earnings, 108 time period assumption, 101 wages, 111 Expensing versus capitalization, 401 External audits, 216 External exchanges, 50 External users of financial information, 6, Extraordinary repairs, 401 F Face value of bonds, 456, 457 interest on bonds issued at, 459–460 Factor/factoring, 366–367 Fair value, 627 Faithful representation, 18–19 FASB See Financial Accounting Standards Board (FASB) Federal Insurance Contributions Act, 448 Federal Unemployment Tax Act (FUTA), 449 FICA taxes, 448 FIFO (first-in, first-out) inventory costing method, 311, 3320 Financial accounting in accounting system, 6–8 government regulation of, 7, 19, 216–217 Financial Accounting Standards Board (FASB), 18 See also Generally Accepted Accounting Principles (GAAP) Financial analyst, 21 Financial crisis Circuit City failure, 174, 508 Lehman Brothers’ operating cash flow, 572 Financial leverage, 525 Financial performance, 611–628 accounting decisions and, 623–624 horizontal (trend) analysis, 613–615, 618 ratio analysis (See Ratio analysis) vertical (common size) analysis, 613–616, 619 Financial press, bond price reporting, 456 Financial statements, 10–17 See also Adjustments to financial statements; Generally Accepted Accounting Principles (GAAP) accounting concepts underlying, 624–626 accounting decisions underlying, 623–624 adjusted trial balance and, 168–170 adjustments to (See Adjustments to financial statements) balance sheet (See Balance sheet) defined, 6–7 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com ethical issues and (See Ethical issues) examples, A5–A12, B4–B14 faithful representation of information, 18–19 format of, 561 fraud and, 214, 216 (See also Fraud) income statement (See Income statement) inventory costing method impact on, 321–322 legal issues and (See Legal issues) notes to, 15 ratio analysis (See Ratio analysis) relationships among, 15, 559, 560–561 relevance and faithful representation in, 18 reliability of, 18–19 statement of cash flows (See Statement of cash flows) statement of retained earnings (See Statement of retained earnings) summary, 16 supplementary schedule, 569 timing of, 23 useful information, 17–20 users of, 7–8 using, 17 Financing activities on balance sheet, 48 crowdfunding, 453, 510 defined, 14 noncash, 569 start-up companies and, 48 on statement of cash flows, 14, 559, 568–569, 572 Finished goods inventory, 308, 325 First-in, first-out (FIFO) inventory costing method, 311, 320 Fixed assets See Property, plant, and equipment; Tangible assets Fixed asset turnover ratio, 414, 620 FOB destination, 265, 267, 309 FOB shipping point, 265, 267–268, 309 Foreign currency exchange, unit of measure assumption and, 10 Form 8-K, 23 Form 10-K, 23 Form 10-Q, 23 Franchises, 411 Fraud, 236 See also Ethical issues categories of employee fraud, 214 conditions for, 214–216 controls from bank procedures, 227 defined, 214 fraud triangle, 214–215 incentive to commit, 214–215 lack of internal controls and, 232 opportunity for, 215 prevention through internal controls, 217–223, 226 rationalizing, 215 Fraud triangle, 214–215 Free cash flow, 571 Full disclosure principle, 625 phi64235_sidx_IND5-IND22.indd IND11 IND11 SUBJECT INDEX Fund transfers, 228 Future value of an annuity, C6–C8, C20 defined, C1 of a single amount, C1–C4 tables for determining, C19–C20 G Generally Accepted Accounting Principles (GAAP), 26 accounting for tangible and intangible assets, 413 accrual basis accounting, 102 contingent liabilities, 463 defined, 18 direct write-off for bad debt not allowed, 367 estimating bad debt, 357 external audits, 216 IFRS versus, 18–19, 413, 463, 465, 560, 627–628 inventory costing methods, 311 tangible and intangible assets, 413 violated loan covenants, 465 Giannetti, Mariassunta, 447n Gift cards, redemption of, 161 Girard, Jean-Yves, 627n Going-concern assumption, 625 Goods available for sale, 262 Goods in transit, 309 Goodwill, 411, 412 Government as external users of financial information, regulation of financial reporting, 7, 19, 216–217 Gross earnings, 448 Gross margin, 274 Gross method of recording purchases/sales, 276 Gross profit, 274–275 Gross profit analysis, 275 Gross profit percentage, 275–276, 283, 318, 319, 619–620 Growth phase, of corporate life cycle, 572, 573 H Historical cost, 627 Hollinger, Richard, 264 Holowaty, Ryan, Honesty, 216, 217 Horizontal (trend) analysis computations, 613–615 defined, 612 examples of, 614 trends revealed in, 618 Hotlines, anonymous, 220, 255 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com IND12 SUBJECT INDEX I IASB See International Accounting Standards Board (IASB) Impairment, 563n asset impairment losses, 408–409 defined, 408 Imprest system, 226 Income investment, 515 Income statement, 10–11, 26, 96–125 accounts on, 10–11, 99–100 accrual basis accounting (See Accrual basis accounting) adjusted trial balance and, 168–169 and balance sheet compared, 100 cash basis accounting, 101–102 closing temporary accounts, 170–171 comparative format, 275 defined, 10 equations for, 10, 16, 107–114 expense accounts, 99–100, 116–117 limitations of, 118 multistep, 274–275, 283 net income, 100 net profit margin, 117–118 operating activities, 98–99, 123 relationship with other financial statements, 15, 559, 560–561 revenue accounts, 10–11, 99, 116 (See also Revenues) single-step, 11 summary, 16 time period assumption, 100–101 unadjusted trial balance, 114–116, 155 unit of measure assumption in, 10 Income summary account, 170n Income taxes See also Internal Revenue Service (IRS); Taxes accrued, 450 deferred, 408 depreciation, 407–408 employee taxes withheld, 448 incurred but not yet recorded, 164 inventory reporting method and, 314–315 tax depreciation, 407–408 Incurred expenses, Independent verification external audits, 216, 220 internal control and, 216, 219, 220 Indirect method defined, 561 of reporting disposals of property, plant, and equipment, 577–578 of reporting operating activities, 561, 562–567 Industry analysis See also Benchmarks; Horizontal (trend) analysis gross profit percentage, 275–276, 283, 318, 319, 619–620 inventory turnover benchmarks, 318 receivable turnover, 365–366 phi64235_sidx_IND5-IND22.indd IND12 Initial public offering (IPO), 21, 512 Installment notes payable, 474–479 amortization schedule, 475 journal entries, 476–479 Intangible assets, 396, 411–413 acquisition, 412 amortization, 412 defined, 396 disposal, 413 types of, 396, 411 use, 412–413 Interest deposited, 228, 229 Interest expenses on bonds issued at discount, 460–461, 473–474 on bonds issued at face value, 459–460 on bonds issued at premium, 460, 472–473 reporting of, 459 Interest formula, 360 Interest periods, time value of money and, C10 Interest rates calculating interest on notes receivable, 360 market interest rate (bonds), 458 stated interest rate, 456 time value of money and, C10 Interest revenue accruing interest earned, 361–362 bank reconciliation and, 231, 235 calculating, 360 compound interest, C4, C8 interest formula, 360 recording, 361–363 reporting, on notes receivable, 360 timelines for, 361 Internal controls, 217–223, 236 cash payments and, 224–226 cash receipts and, 221–223 components of, 217–218 limitations of, 220 objectives, 217 principles of, 218–220 responsibilities for, under Sarbanes-Oxley Act, 19 Internal events, 50 Internal Revenue Service (IRS), Internal users of financial information, 6, International Accounting Standards Board (IASB), 18 International Financial Reporting Standards (IFRS), 26 accounting for tangible and intangible assets, 413 accrual basis accounting, 102 classification choices, 560 component allocation, 399 contingent liabilities, 463 defined, 18 direct write-off for bad debts not allowed, 367 estimating bad debt, 357 GAAP versus, 18–19, 413, 463, 465, 560, 627–628 LIFO reporting not allowed, 315 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com loan covenants violated, 465 preferred stock as stockholders’ equity, 520 tangible and intangible assets, 413 violated loan covenants, 465 Introductory phase, of corporate life cycle, 572, 573 Inventory balance sheet reporting, 309 beginning inventory, 262 comparison to benchmarks, 318 consignment, 308–309 control (See Inventory control) costing/valuation methods (See Inventory costing methods) credit terms, 267 days to sell, 319 defined, 260 financial statement effects of costing methods, 314 finished goods, 308 income statement reporting, 309–310 inventory systems, 261–264 management decisions, 308 merchandise, 308 operating activities and, 565 purchase-related transactions, 264–267 raw materials, 308 sales-related transactions, 267–271 transportation cost, 265–266 turnover (See Inventory turnover) work in process, 308 Inventory control periodic inventory system, 263, 277, 310, 313n perpetual inventory system, 263, 310, 313n, 320–322 shrinkage, 263, 264 Inventory costing methods, 310–315, 325–326 cost flow assumptions, 311, 312–315 financial statements and, 321–322 first-in, first-out (FIFO), 311, 312–313, 320 last-in, first-out (LIFO), 311, 313, 321 lower of cost or market (LCM), 315–316, 319 specific identification, 311–312 weighted average costing method, 312, 313, 321 Inventory turnover, 317–323, 326, 617, 621–622, 624 comparison to benchmarks, 318 inventory LCM/NRV analysis, 319, 322 Investing activities on balance sheet, 48–49 defined, 14 indirect method of reporting, 577–578 noncash, 569 on statement of cash flows, 557, 558–559, 567–568, 571–572 Investment analyst, 21 Investors, 7, 26 as external users of financial information, financial statements and, 17 stock exchanges between, 512 IPO (initial public offering), 21, 512 phi64235_sidx_IND5-IND22.indd IND13 SUBJECT INDEX IND13 Issued shares defined, 511 repurchase of, 513 stock exchanged between investors, 512 stock used to compensate employees, 513 Issue price, bonds bonds issued at a discount, 458, 460–461 bonds issued at face value, 457–459 bonds issued at a premium, 457, 460 defined, 456 J Journal entries, 73 accrual adjustments, 162–163 adjusting, 152, 154–166 allowance method for doubtful accounts, 354–355, 363 balance sheet accounts, 57–62 closing temporary accounts, 170–173 debit/credit framework in, 58 deferral adjustments, 156, 157–162 formal journal page, 59 income statement accounts, 107–114 periodic inventory system, 277–278 perpetual inventory system, 276–277 recording, 59–60 repurchase of stock, 513–514 for stock dividends, 530 summarizing in ledger, 60–61 for tangible asset acquisition, 397–398 Journals debit/credit framework for, 58 defined, 57 K Kapner, S., 276 L Labor relations manager, 21 Land acquisition of, 398 improvements, 397 as tangible asset, 396, 397 Lantto, Anna-Maija, 627n Largay, James A., 557 Last-in, first-out (LIFO) inventory method, 321 Least and latest rule, 408 Ledger debit/credit framework for, 58–66 defined, 57 posting from journal to, 60, 61 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com IND14 SUBJECT INDEX Ledger accounts, 57 summarizing in, 60–62 T-account simplified format for, 60 Legal issues See also Fraud internal controls, 19 organizational forms, 4–5, 525–529 reporting requirements for corporations, 216–217 Liabilities in accounting equation, 8–9 accrued (See Accrued liabilities) adjusting entries for, 152 amortization of, 465–467 on balance sheet, 12–13, 48, 66 (See also Balance sheet) chart of, 74 contingent, 462–463 current, 67, 446, 447–450, 452–453, 563 current portion, long-term, 454–455 debt-to-assets ratio, 464 deferred revenue, 104 defined, 8–9, 48 long-term, 455–462 measuring, 447 noncurrent, 67 notes payable, 450–452 role of, 446–447, 483 Licensing rights defined, 411 as intangible assets, 396 LIFO Conformity Rule, 315 LIFO (last-in, first-out) inventory costing method, 311–313, 315, 320 Limited liability companies (LLCs), 5, 529 Limited liability partnerships (LLPs), 529 Limited life, 412 Liquidity ratios, 616, 617 current ratio, 67–68, 73, 622 days to collect, 364, 365, 617 days to sell, 317, 617 inventory turnover, 317–323, 326, 617, 621–622 list of, 621–622 receivables turnover, 364–368, 371, 621 Loan covenants, 215, 465 Logos, investing in, 48–49, 51, 53, 59, 63 Long-lived assets, 395–413 amortization of (See Amortization) defined, 396 depreciation of (See Depreciation) intangible, 396, 411–413 natural resources, 396, 417 tangible, 396, 397–410 turnover analysis, 414–416 Long-term liabilities, 455–462 bonds, 455–459 crowdfunding, 453 current portion of long-term debt, 454–455 phi64235_sidx_IND5-IND22.indd IND14 on statement of cash flows, 568 Lower of cost or market/net realizable value (LCM/NRV), 315–316, 319, 322, 326 M MACRS (Modified Accelerated Cost Recovery System), 408n Madoff, Bernie, 94 Maintenance costs, 401 Management’s Discussion and Analysis (MD&A), 618, 620 examples, A2, B2 Managerial accounting reports, Managers decisions concerning long-lived assets, 395 fraud prevention by, 218 as internal users of financial information, inventory managers, 308 Mandatory vacation policy, 220 Manufacturing companies, operating cycles of, 260 Margin, 274 Market interest rate, 458 Matching principle, 106–107, 123, 156–157, 159, 354, 417 Maturity date bonds payable, 456 defined, 360 notes receivable, 360 retiring bonds prior to, 461 Maturity phase, of corporate life cycle, 572, 573 Medicare, 449 Merchandise inventory, 308, 325 Merchandising companies, 260, 282 defined, 260 financial reporting compared with service companies, 261 inventory purchases, 264–265 inventory system, 261–264 operating cycles, 260–261 purchase discounts, 266–267 purchase returns and allowances, 266 recording inventory sales, 267–274 transportation costs, 265–266 Modified Accelerated Cost Recovery System (MACRS), 408n Multistep income statement, 274–275, 283 Municipal bonds, 462 N Natural resource assets, 396, 417 Net assets, 412 Net book (carrying) value, 159 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com Net income, 9, 11 See also Income statement defined, 100 in determining operating cash flows, 562, 563 income statement limitations, 118 Net loss, 12n Net method of recording purchases/sales, 276 Net pay, 448 Net profit margin, 117–118, 619 Net worth, 68 New issues bonds, 461 common stock, 512 preferred stock, 520 seasonal, 512 New York Stock Exchange Bond Directory, 456 Noncash investing and financing activities, 569 Noncurrent assets and liabilities, 67 Non-sufficient funds (NSF) checks, 229 No-par value stock, 512 Norris, Laurie, Notes payable, 8–9, 53, 67, 481, 568 See also Installment notes payable on balance sheet, 13, 16 as current liability, 450–452 establishing, 450 Notes receivable, 360–363 defined, 353 establishing, 361 interest revenue and, 360, 371 pros and cons of extending credit, 352–353 recording, 361–363 uncollectible, 363, 370 Notes to the financial statements examples, A9–A12, B8–B14 NSF (non-sufficient funds) checks, 229 n/60, 266 NYSE Bond Directory, 456 O Operating activities, 98–99 on balance sheet, 57 converting operating expenses to cash outflow, 575–577 defined, 14, 98 direct method of reporting, 561, 562, 573–577 on income statement, 98–99, 107–108 indirect method of reporting, 561, 562–566 interpreting cash flows from, 561–566 on statement of cash flows, 14, 557–558 Operating cycle See also Accounting cycle activities, 98–99 control over cash, 221–226 control over inventory, 261–269 defined, 260–261 gross profit percentage, 275, 276, 283, 318, 319 phi64235_sidx_IND5-IND22.indd IND15 SUBJECT INDEX IND15 Operations, internal control and, 217 Ordinary repairs and maintenance, 401 Organizational forms, 4–5 corporation, 5, 529 limited liability company (LLC), 5, 529 limited liability partnership (LLP), 529 partnership, 4–5, 527–529 sole proprietorship, 4, 525–527 Orpurt, Steven F., 574n Outsourcing specialists, 21 Outstanding checks, 229, 230 Outstanding shares, 511 Overage (cash shortage), 234 Overriding internal controls, 220 Owners’ equity See also Stockholders’ equity for partnership, 527–529 for sole proprietorship, 525 P Pacioli, Luca, 18 Paid-in capital, 511, 515, 518 Partial-year depreciation calculations, 407 Partnership, 4–5, 25 advantages of, 527 owners’ equity for, 527–529 Par value, 512 Patents, 411 Payment date of dividend, 516 Payroll accrued, 448–450 deductions, 448–449 employer payroll taxes, 449–450 taxes, accrued, 448–450 Pcards (purchasing cards), 226 Peer-to-peer (P2P) lending, 454 Percentage of credit sales method, 357 Periodic inventory system, 282, 320 inventory control in, 263, 277, 310, 313n nature of, 263 Permanent account, 170 Perpetual inventory system, 263–264, 282, 320–322 inventory control in, 263, 310, 313n journal entries, 265, 267–268, 270 nature of, 263 Petty cash in petty cash fund, 226, 233 systems, 233–234 Ponzi, Charles, 94 “Ponzi scheme,” 94 Post-closing trial balance, 172–173 Preemptive rights, of common stockholders, 509 Preferred stock, 520–522 common stock versus, 520 cumulative dividend preference, 521–522 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com IND16 SUBJECT INDEX Preferred stock—Cont current dividend preference, 521 defined, 520 dividends, 520, 521–522 issuance, 520 voting rights, 520 Premium amortization of bonds issued at, 460, 465–467, 469 balance sheet reporting of, 458–459 carrying value of, 458–459 defined, 455 discounts, 466–467, 469–471 interest expense, 459–461 issued at a discount, 457, 458, 460–461 issued at face value, 457, 459–460 issued at premium, 457, 460, 465–466, 468–469 pricing, 457 retirements, 461–462 types of, 462 Prepaid expenses deferral adjustments and, 153, 158–159 operating activities and, 565–566 paying cash in advance, 112 Presale arrangements, 454 Present value, 467 of an annuity, C8–C10, C12–C18, C20 bond pricing and, 467 defined, 456, C1 of a single amount, C4–C6, C10–C11, C14–C19 tables for determining, C19–C20 Press releases, 22 Price/earnings (P/E) ratio, 523, 525, 621 Principal defined, 360 recording for notes receivable, 362–363 Private accountant, 5, 70 Private companies, Production managers, 21 Profit, See also Net income in accrual basis accounting, 102 in cash basis accounting, 101 gross profit, 274–275 Profitability ratios, 616, 617 earnings per share (EPS), 523–524, 533, 621 fixed asset turnover, 414, 620 gross profit percentage, 275–276, 283, 318, 319, 329, 619–620 interpreting, 619–621 net profit margin, 117–118, 619 price/earnings (P/E) ratio, 523, 525, 533, 621 return on equity (ROE), 523, 524–525, 533, 620–621 Property, plant, and equipment, 396 buildings, 396–399 equipment, 396–400 land, 396–399 reporting sales of, 577–578 phi64235_sidx_IND5-IND22.indd IND16 Pro rata basis, 517 Public accountant, 5, 70 Public companies, 5, 21–25 demonstration case, 23–25 financial reporting, 21–23 financial statement reports, 22 press releases, 22 SEC filings, 22–23 Public Company Accounting Oversight Board (PCAOB), 19 Purchase discounts, inventory, 266–267 Purchase returns and allowances, 266 Purchases, inventory, 266 Purchasing cards (Pcards), 226 Purchasing system, 224–226 Q Quarterly reports, 22 R Raciot, Francois-Eric, 627n Ratio analysis See also Liquidity ratios; Profitability ratios; Solvency ratios classifying, 616 interpreting, 619–623 Raw materials inventory, 308, 325 Receivables turnover analysis, 364–368, 371, 621 Receivable write-off, 355 Reconciling, 227 Record date of dividend, 516 Recording accounting transactions adjusting entries, 152, 154–155, 165 balance sheet concepts and values in, 68–69 debit/credit framework for, 58–59 income statement, 108–114 inventory, 267–274 Recovery, of bad debt, 359 Remittance advice, 222 Rent benefits expired during period, 158–159 prepaid, 112, 116, 153 Reporting, internal control and, 217 Repurchase of stock, 513 Research and development expenses, 412 Residual claims, of common stockholders, 509 Residual value, 403, 405 Responsibility, internal control and, 218 Restricted cash, 233, 236 Retained earnings, 9, 522, 569 See also Statement of retained earnings on balance sheet, 13 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com capitalizing, 529 cash dividends and, 518 distributions to shareholders, 517–518 dividend declaration, 518 in expanded accounting equation, 108 expense as subcategory of, 108 restrictions on, 516 revenue as subcategory of, 108 on statement of cash flows, 569 stock dividends and, 519 in stockholders’ equity, 9, 510 stock splits and, 519 Retirement, of bonds early retirement, 461–462 at maturity, 461 Return on equity (ROE), 523, 524–525, 620–621 Revenue expenditures, 401 Revenue recognition policy, 105 Revenue recognition principle, 102–105, 123, 163 defined, 102 five-step model for, 102–104, 272 Revenues, 9, 123 in accrual basis accounting, 102–103 adjusting entries for, 152, 153–154 in cash basis accounting, 101–102 changes in recognition, 571 converting to cash inflows, 574–575 credit card sales, 353, 367 credit sales, pros and cons of, 352–353, 370 deferred, 104, 153 defined, 99 earned but not yet recorded, 163 five-step model for reporting, 102–104 on income statements, 10–11, 99, 116 inventory and, 261–263, 267 operating activities and, 558, 574 reporting, 102–103 review of, 116–117 as subcategory of retained earnings, 108 time period assumption, 100, 101 Risk assessment, fraud prevention and, 218 Rule of accrual, 102 S Sahlström, Petri, 627n Sales, discount, 270 Sales, inventory, 267–274 actual returns, 269 of bundled items, 271–272, 281–283 expected returns, 269 initial sales transactions, 268 recording, 267–274 reporting, 270–271 phi64235_sidx_IND5-IND22.indd IND17 IND17 SUBJECT INDEX Sales discounts, inventory, 276–277, 282 Sales returns and allowances, 269 Sales revenue See Revenues Sales tax payable, 452–453 Salvage value, 403 Sarbanes-Oxley Act (SOX), 19, 216–217 Saving, and compound interest, C8 Scandals, 20 Schidlowsky, Jordan, S corporations, 529 Seasonality cash flows from operating activities and, 571 new issues, 512 Seasoned new issues, 512 Secured bonds, 462 Securities and Exchange Commission (SEC), 7, 19 crowdfunding and, 510 Electronic Gathering and Retrieval service (EDGAR), 23 public company required filings, 22–23 Segregation of duties, 219, 367 Selling, General, and Administrative Expenses, 274, 275 Selling price, 261, 268, 269 Separate entity assumption, 8, 512 Serial bonds, 462 Service charges, bank reconciliation and, 229–231 Service companies, 282 defined, 260 financial reporting compared with merchandising companies, 261 operating cycles, 260–261 Services gift cards redeemed for, 161 receiving cash for future, 104 Shareholder loyalty program, 515 Shareholders, 533 Shareholders’ equity See Stockholders’ equity Shoplifting, 264 Shrinkage, 263, 264 Simplified effective-interest amortization, 471–474 accounting for the bond issue, 471 interest expense, 472 Single amount future value, C1–C4 present value, C4–C6, C10–C12, C14–C19 Single-step income statement, 11 Small business, crowdfunding, 510 Social Security, 449 Sole proprietorship, 4, 25, 525–527 Solvency ratios, 616, 617 debt-to-assets, 464, 483, 623 times interest earned, 464–465, 483, 623 SOX See Sarbanes-Oxley Act (SOX) Specific identification inventory costing method, 311 Spreadsheets, 57 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com IND18 SUBJECT INDEX Statement of cash flows, 555–580 adjusted trial balance and, 170 categories of business activities, 556 classifying cash flows, 557–559 defined, 14, 26 direct method of reporting, 561, 573–577 equation for, 16 evaluating cash flows, 571–573 financing activities, 14, 559, 568–569 format, 561, 569, 570 indirect method of reporting, 561, 562–566, 577–580 investing activities, 14, 558–559, 567–568 operating activities, 14, 557–558 preparing, 561–570 relationship with other financial statements, 15, 560–561 summary, 16 supplemental disclosure, 569 Statement of financial position See Balance sheet Statement of retained earnings, 26, 522 adjusted trial balance and, 168–169 defined, 12 equation for, 16 relationship with other financial statements, 15, 522 summary, 16 State Unemployment Tax Act (SUTA), 449 Stickney, Clyde P., 557 Stock dividends, 517–518 choosing between stock splits and, 519 defined, 517 large, 529–530, 533 recording, 529–530 small, 530 Stockholders, Stockholders’ equity, 507–533 on balance sheet, 12–13, 48, 66 (See also Balance sheet) in basic accounting equation, 9–10 chart of, 74 common stock (See Common stock) comparison of distributions to, 519 corporate ownership, concept of, 508–509 crowdfunding, 510 defined, 48 equity versus debt financing, 509 financial ratios, 523–525 preferred stock, 520–522 retained earnings (See Retained earnings) statement of, 522–523 Stock options, 513 Stocks See Issued shares Stock splits, 518–519 Straight-line depreciation method, 403, 404 Straight-line method of amortization, 465–467 bond discounts, 466 phi64235_sidx_IND5-IND22.indd IND18 bond premiums, 465–466 defined, 465 Strips, 462 Subsidiary account, 355 Suppliers as creditors, paying, 54 Supplies on balance sheet, 13 ordering, 55, 65 receiving, 56, 65 T T-accounts accrual adjustments, 153–154 adjusted trial balance, 165–167 balance sheet transactions, 60–62, 66 debit/credit framework for, 60–62 deferral adjustments, 153 defined, 60 income statement transactions, 112, 114 to prepare statement of cash flows, 578–580 simplified format for ledger accounts, 60 unadjusted trial balance, 114–116 Tangible assets, 396, 397–410 acquisition, 397–401 defined, 396 depreciation, 402–408 (See also Depreciation) disposal, 409–411 maintenance costs, 401 types of, 396, 397 use, 401–408 Tax depreciation, 407–408 Taxes See also Income taxes accrued income taxes, 450 deferred income tax, 408 direct write-off method for bad debts, 359–360 dividends and, 509 employer payroll, 449–450 FICA, 448 sales tax payable, 452–453 unemployment, 449 Technology assets, 411 Temporary accounts bad debt expense, 355 closing, 170–173 defined, 170 Term bonds, 462 Theft by employees, 264 by shoppers, 276 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com Time lags bank reconciliation and, 229 receivables turnover analysis, 364–368 resetting the clock for doubtful accounts, 363 Timelines, interest period, 361 Time period assumption, 100–101 Time-series analysis See Horizontal (trend) analysis Times interest earned ratio, 464–465, 483, 623 Time value of money annuity, C6–C10, C12–C18, C20 defined, C1 future value, C1–C4, C6–C10, C19–C20 interest periods in, C10 interest rates in, C10 present value, C1, C4–C6, C8–C20 single amount, C1–C4, C10–C12, C14–C20 Timing of reporting expenses versus cash receipts, 106–107 of reporting revenue versus cash receipts, 104 Trademarks defined, 411 as intangible assets, 396 Transactions analysis of, in accounting cycle, 51–56 basic accounting equation and, 51 daily, 57 defined, 50 duality of effects, 51 spreadsheets to record/summarize, 57 types of events, 50–51 Transportation cost, inventory, 265–266, 282 Treasury bonds, 462 Treasury stock, 510, 511 contra-accounts, 515 defined, 510, 511 reissuance of, 514–515 repurchase of, 513 on statement of cash flows, 568 Trend analysis See Horizontal (trend) analysis Trial balance adjusted, 166–170 defined, 66 post-closing, 172–173 preparing, 66–67, 73 unadjusted, 114–116, 155 True cash balance, 237 Turnover analysis asset, 414–415 fixed asset, 414–415, 620 inventory, 317–318, 621–622 receivables, 364–366, 621 2/30, 266 phi64235_sidx_IND5-IND22.indd IND19 IND19 SUBJECT INDEX U Unadjusted trial balance, 155 debit/credit framework and, 114–116 defined, 115 Uncollectible accounts aging of accounts receivable method for estimating, 357–359 allowance method for estimating, 354, 359 direct write-off method, 359, 367–368, 371 percentage of credit sales method for estimating, 357 revising estimates for, 359 segregating collections and write-offs, 367 Uncollectible notes, 363 Unemployment taxes, 449 Uniform Partnership Act, 527 Unit of measure assumption, 10 Units-of-production depreciation method, 403, 404–407, 417 Unlimited life, 412 Unqualified opinions, 624 U.S Department of Labor, 70 U.S Patent and Trademark Office, 411 U.S Securities and Exchange Commission See Securities and Exchange Commission (SEC) Useful life, 403 V Vacations, mandatory, 220 Verification of transactions See Independent verification Vertical (common size) analysis, 613 computations, 615–616 defined, 615 examples of, 615–616 relationships noted in, 619 Voting rights common stock and, 509 preferred stock and, 520 Voucher system, 224–226 W Wages expense expense recognition principle and, 106 on income statement, 99 increased when credit is extended, 352 incurred but not yet recorded, 163 Weighted average inventory costing method, 312, 321 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com IND20 SUBJECT INDEX Whistleblowers, 216, 217 Wholesalers See Merchandising companies Working capital management, 571 Work in process inventory, 308, 325 Write-off direct write-off method for bad debts, 359–360, 367–368 receivable write-off, 355–356 phi64235_sidx_IND5-IND22.indd IND20 Y Yield rate, 484 Z Zang, Yoonseok, 574n Zero-coupon bonds, 462 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com phi64235_sidx_IND5-IND22.indd IND21 10/16/17 09:06 PM Final PDF to printer www.freebookslides.com phi64235_sidx_IND5-IND22.indd IND22 10/16/17 09:06 PM ... One of the most widely used introductory accounting textbooks, Phillips /Libby/ Libby Fundamentals of Financial Accounting focuses on four key attributes Engaging Writing. Fundamentals of Financial. .. authors of Fundamentals of Financial Accounting understand the challenges instructors face and the need for a financial accounting text that is relevant, easy to read, and current Fundamentals of Financial. .. American Institute of CPAs and the editorial boards of The Accounting Review and Accounting, Organizations, and Society Patricia A Libby Patricia Libby is associate professor of accounting at Ithaca