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CONTENTS
1 Accounting in Action 2 Fiscal and Calendar Years 96
Feature Story: KNOWING THE NUMBERS 2 Accrual- vs. Cash-Basis Accounting 97
What Is Accounting? 4
Three Activities 4
Who Uses Accounting Data 6
The Building Blocks of Accounting 7
Ethics in Financial Reporting 7
Generally Accepted Accounting Principles
Assumptions 9
The Basic Accounting Equation 11
Assets 12
Liabilities 12
Owner’s Equity 12
Using the Basic Accounting Equation 14
Transaction Analysis 14
Summary of Transactions 19
Financial Statements 20
Income Statement 22
Owner’s Equity Statement 22
Balance Sheet 22
Statement of Cash Flows 23
All About You: ETHICS: MANAGING PERSONAL FINANCIAL
REPORTING 25
APPENDIX: Accounting Career Opportunities
Public Accounting 29
Private Accounting 29
Opportunities in Government 30
Forensic Accounting 30
“Show Me the Money” 30
2 The Recording Process
Feature Story: ACCIDENTS HAPPEN 48
The Account 50
Debits and Credits 51
Summary of Debit/Credit Rules 54
Steps in the Recording Process 55
The Journal 55
The Ledger 58
The Recording Process Illustrated 61
Summary Illustration of Journalizing and Posting
The Trial Balance 68
Limitations of a Trial Balance 69
Locating Errors 70
Use of Dollar Signs 70
All About You: YOUR PERSONAL ANNUAL REPORT
3 Adjusting the Accounts
Feature Story: WHAT WAS YOUR PROFIT? 94
Timing Issues 96
Recognizing Revenues and Expenses 97
The Basics of Adjusting Entries 99
Types of Adjusting Entries 99
Adjusting Entries for Deferrals 100
Adjusting Entries for Accruals 107
8 Summary of Journalizing and Posting 112
The Adjusted Trial Balance and Financial
Statements 114
Preparing the Adjusted Trial Balance 114
Preparing Financial Statements 115
APPENDIX: Alternative Treatment of Prepaid Expenses
and Unearned Revenues 119
Prepaid Expenses 120
Unearned Revenues 121
Summary of Additional Adjustment Relationships 122
4 Completing the Accounting
Cycle 144
Feature Story: EVERYONE LIKES TO WIN 144
Using a Worksheet 146
29 Steps in Preparing a Worksheet 146
Preparing Financial Statements from a Worksheet 150
Preparing Adjusting Entries from a Worksheet 150
Closing the Books 152
Preparing Closing Entries 153
Posting Closing Entries 155
Preparing a Post-Closing Trial Balance 157
48 Summary of the Accounting Cycle 159
Reversing Entries—An Optional Step 160
Correcting Entries—An Avoidable Step 160
The Classified Balance Sheet 162
Current Assets 164
Long-Term Investments 164
Property, Plant, and Equipment 165
Intangible Assets 165
Current Liabilities 166
Long-Term Liabilities 167
67
Owner’s Equity 167
All About You: YOUR PERSONAL BALANCE SHEET 169
APPENDIX: Reversing Entries 173
Reversing Entries Example 173
72
5 Accounting for Merchandising
94 Operations 198
Feature Story: WHO DOESN’T SHOP AT WAL-MART? 198
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Merchandising Operations 200
Operating Cycles 201
Flow of Costs 201
Recording Purchases of Merchandise 203
Freight Costs 205
Purchase Returns and Allowances 206
Purchase Discounts 206
Summary of Purchasing Transactions 207
Recording Sales of Merchandise 208
Sales Returns and Allowances 209
Sales Discounts 210
Completing the Accounting Cycle 211
Adjusting Entries 211
Closing Entries 212
Summary of Merchandising Entries 212
Forms of Financial Statements 214
Multiple-Step Income Statement 214
Single-Step Income Statement 217
Classified Balance Sheet 217
APPENDIX 5A: Periodic Inventory System 221
Determining Cost of Goods Sold Under a Periodic
System 221
Recording Merchandise Transactions 222
Recording Purchases of Merchandise 222
Recording Sales of Merchandise 223
APPENDIX 5B: Worksheet for a Merchandising
Company 225
Using a Worksheet 225
6 Inventories 248
Feature Story: WHERE IS THAT SPARE BULLDOZER BLADE?
Classifying Inventory 250
Determining Inventory Quantities 251
Taking a Physical Inventory 251
Determining Ownership of Goods 252
Inventory Costing 254
Specific Identification 254
Cost Flow Assumptions 255
Financial Statement and Tax Effects of Cost
Flow Methods 260
Using Inventory Cost Flow Methods Consistently
Lower-of-Cost-or-Market 262
Inventory Errors 263
Income Statement Effects 263
Balance Sheet Effects 265
Statement Presentation and Analysis 265
Presentation 265
Analysis 266
All About You: EMPLOYEE THEFT—AN INSIDE JOB
APPENDIX 6A: Inventory Cost Flow Methods in
Perpetual Inventory Systems 271
First-In, First-Out (FIFO) 271
Last-In, First-Out (LIFO) 272
Average-Cost 272
APPENDIX 6B: Estimating Inventories 274
Gross Profit Method 275
Retail Inventory Method 276
7 Accounting Information Systems 300
Feature Story: QUICKBOOKS® HELPS THIS RETAILER SELL
GUITARS 300
Basic Concepts of Accounting Information Systems 302
Computerized Accounting Systems 302
Manual Accounting Systems 305
Subsidiary Ledgers 305
Subsidiary Ledger Example 306
Advantages of Subsidiary Ledgers 307
Special Journals 308
Sales Journal 309
Cash Receipts Journal 311
Purchases Journal 315
Cash Payments Journal 317
Effects of Special Journals on the General Journal 320
8 Fraud, Internal Control,
and Cash 344
Feature Story: MINDING THE MONEY IN MOOSE JAW 344
Fraud and Internal Control 346
Fraud 346
The Sarbanes-Oxley Act 348
Internal Control 348
Principles of Internal Control Activities 349
248 Limitations of Internal Control 356
Cash Controls 357
Cash Receipts Controls 357
Cash Disbursements Controls 360
Control Features: Use of a Bank 364
Making Bank Deposits 365
Writing Checks 365
Bank Statements 365
Reconciling the Bank Account 367
Electronic Funds Transfer (EFT) System 371
262 Reporting Cash 372
All About You: PROTECTING YOURSELF FROM
IDENTITY THEFT 373
9 Accounting for Receivables 396
Feature Story: A DOSE OF CAREFUL MANAGEMENT KEEPS
268 RECEIVABLES HEALTHY 396
Types of Receivables 398
Accounts Receivable 398
Recognizing Accounts Receivable 399
Valuing Accounts Receivable 400
Disposing of Accounts Receivable 406
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Notes Receivable 409
Determining the Maturity Date 410
Computing Interest 411
Recognizing Notes Receivable 411
Valuing Notes Receivable 411
Disposing of Notes Receivable 412
Statement Presentation and Analysis 414
Presentation 414
Analysis 414
All About You: SHOULD YOU BE CARRYING PLASTIC?
10 Plant Assets, Natural Resources,
and Intangible Assets 436
Feature Story: HOW MUCH FOR A RIDE TO THE BEACH?
SECTION 1 Plant Assets 438
Determining the Cost of Plant Assets 439
Land 439
Land Improvements 439
Buildings 440
Equipment 440
Depreciation 442
Factors in Computing Depreciation 443
Depreciation Methods 444
Depreciation and Income Taxes 448
Revising Periodic Depreciation 448
Expenditures During Useful Life 449
Plant Assets Disposals 450
Retirement of Plant Assets 450
Sale of Plant Assets 451
SECTION 2 Natural Resources 453
SECTION 3 Intangible Assets 454
Accounting for Intangible Assets 454
Patents 455
Copyrights 455
Trademarks and Trade Names 455
Franchises and Licenses 456
Goodwill 456
Research and Development Costs 457
Statement Presentation and Analysis 458
Presentation 458
Analysis 459
All About You: BUYING A WRECK OF YOUR OWN 460
APPENDIX: Exchange of Plant Assets 464
Loss Treatment 464
Gain Treatment 464
11 Current Liabilities and Payroll
Accounting 484
Feature Story: FINANCING HIS DREAMS 484
Accounting for Current Liabilities 486
Notes Payable 486
Sales Taxes Payable 487
Contents xvii
Unearned Revenues 488
Current Maturities of Long-Term Debt 489
Statement Presentation and Analysis 490
Contingent Liabilities 491
Recording a Contingent Liability 492
Disclosure of Contingent Liabilities 493
Payroll Accounting 494
Determining the Payroll 495
Recording the Payroll 498
416 Employer Payroll Taxes 501
Filing and Remitting Payroll Taxes 503
Internal Control for Payroll 504
All About You: YOUR BOSS WANTS TO KNOW IF YOU JOGGED
TODAY 506
APPENDIX: Additional Fringe Benefits 509
436
Paid Absences 509
Post-Retirement Benefits 510
Post-Retirement Healthcare and Life Insurance
Benefits 510
12 Accounting for Partnerships 526
Feature Story: FROM TRIALS TO TOP TEN 526
Partnership Form of Organization 528
Characteristics of Partnerships 528
Organizations with Partnership Characteristics 529
Advantages and Disadvantages of Partnerships 530
The Partnership Agreement 532
Basic Partnership Accounting 533
Forming a Partnership 533
Dividing Net Income or Net Loss 534
Partnership Financial Statements 537
Liquidation of a Partnership 538
No Capital Deficiency 539
Capital Deficiency 542
APPENDIX: Admission and Withdrawal of Partners 546
Admission of a Partner 546
Withdrawal of a Partner 550
13 Corporations: Organization and
Capital Stock Transactions 568
568
Feature Story: “HAVE YOU DRIVEN A FORD LATELY?”
The Corporate Form of Organization 570
Characteristics of a Corporation 571
Forming a Corporation 573
Ownership Rights of Stockholders 574
Stock Issue Considerations 575
Corporate Capital 577
Accounting for Issues of Common Stock 579
Issuing Par Value Common Stock for Cash 579
Issuing No-Par Common Stock for Cash 580
Issuing Common Stock for Services or Noncash
Assets 580
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Accounting for Treasury Stock 582
Purchase of Treasury Stock 582
Disposal of Treasury Stock 584
Preferred Stock 586
Dividend Preferences 586
Liquidation Preference 587
Statement Presentation 587
14 Corporations: Dividends, Retained
Earnings, and Income Reporting 606
Feature Story: OWNING A PIECE OF THE ACTION
Dividends 608
Cash Dividends 608
Stock Dividends 612
Stock Splits 614
Retained Earnings 616
Retained Earnings Restrictions 617
Prior Period Adjustments 618
Retained Earnings Statement 619
Statement Presentation and Analysis 620
Stockholders’ Equity Presentation 620
Stockholders’ Equity Analysis 621
Income Statement Presentation 621
Income Statement Analysis 622
All About You: CORPORATIONS HAVE GOVERNANCE
STRUCTURES—DO YOU? 624
15 Long-Term Liabilities 642
Feature Story: THANKS GOODNESS FOR BANKRUPTCY
Bond Basics 644
Types of Bonds 645
Issuing Procedures 646
Bond Trading 646
Determining the Market Value of Bonds 648
Accounting for Bond Issues 649
Issuing Bonds at Face Value 649
Discount or Premium on Bonds 649
Issuing Bonds at a Discount 650
Issuing Bonds at a Premium 651
Accounting for Bond Retirements 653
Redeeming Bonds at Maturity 653
Redeeming Bonds before Maturity 653
Converting Bonds into Common Stock 653
Accounting for Other Long-Term Liabilities 654
Long-Term Notes Payable 654
Lease Liabilities 656
Statement Presentation and Analysis 658
Presentation 658
Analysis 659
APPENDIX 15A: Present Value Concepts Related to
Bond Pricing 663
Present Value of Face Value 664
Present Value of Interest Payments (Annuities) 665
Time Periods and Discounting 667
Computing the Present Value of a Bond 667
APPENDIX 15B: Effective-Interest Method of Bond
Amortization 669
Amortizing Bond Discount 669
Amortizing Bond Premium 671
APPENDIX 15C: Straight-Line Amortization 673
Amortizing Bond Discount 673
Amortizing Bond Premium 674
16 Investments 694
606
Feature Story: “IS THERE ANYTHING ELSE WE CAN BUY?” 694
Why Corporations Invest 696
Accounting for Debt Investments 698
Recording Acquisition of Bonds 698
Recording Bond Interest 698
Recording Sale of Bonds 698
Accounting for Stock Investments 699
Holdings of Less than 20% 700
Holdings Between 20% and 50% 701
Holdings of More than 50% 702
Valuing and Reporting Investments 704
Categories of Securities 705
Balance Sheet Presentation 708
Presentation of Realized and Unrealized
Gain or Loss 709
Classified Balance Sheet 710
642
17 Statement of Cash Flows 730
Feature Story: GOT CASH? 730
The Statement of Cash Flows: Usefulness
and Format 731
Usefulness of the Statement of Cash Flows 731
Classification of Cash Flows 733
Significant Noncash Activities 734
Format of the Statement of Cash Flows 735
Preparing the Statement of Cash Flows 736
Indirect and Direct Methods 737
Preparing the Statement of Cash Flows—Indirect
Method 738
Step 1: Operating Activities 739
Step 2: Investing and Financing Activities 744
Step 3: Net Change in Cash 745
Using Cash Flows to Evaluate a Company 748
Free Cash Flow 748
APPENDIX 17A: Using a Work Sheet to Prepare the
Statement of Cash Flows—Indirect Method 752
Preparing the Worksheet 753
APPENDIX 17B: Statement of Cash Flows—Direct
Method 758
Step 1: Operating Activities 759
Step 2: Investing and Financing Activities 763
Step 3: Net Change in Cash 764
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18 Financial Statement Analysis
Feature Story: IT PAYS TO BE PATIENT 790
Basics of Financial Statement Analysis 792
Need for Comparative Analysis 792
Tools of Analysis 793
Horizontal Analysis 793
Balance Sheet 794
Income Statement 795
Retained Earnings Statement 796
Vertical Analysis 797
Balance Sheet 797
Income Statement 797
Ratio Analysis 799
Liquidity Ratios 800
Profitability Ratios 803
Solvency Ratios 807
Summary of Ratios 809
Earning Power and Irregular Items 811
Discontinued Operations 811
Extraordinary Items 812
Changes in Accounting Principle 814
Comprehensive Income 814
Quality of Earnings 815
Alternative Accounting Methods 816
Pro Forma Income 816
Improper Recognition 816
19 Managerial Accounting 842
Feature Story: WHAT A DIFFERENCE A DAY MAKES 842
Managerial Accounting Basics 844
Comparing Managerial and Financial Accounting 845
Management Functions 846
Business Ethics 847
Managerial Cost Concepts 849
Manufacturing Costs 849
Product versus Period Costs 851
Manufacturing Costs in Financial Statements 852
Income Statement 852
Balance Sheet 855
Cost Concepts—A Review 856
Managerial Accounting Today 858
Service-Industry Trends 585
Managerial Accounting Practices 858
20 Job Order Costing 886
Feature Story: “. . . AND WE’D LIKE IT IN RED” 886
Cost Accounting Systems 888
Job Order Cost System 888
Process Cost System 889
Job Order Cost Flow 890
Accumulating Manufacturing Costs 891
Assigning Manufacturing Costs to Work in Process
Contents xix
Assigning Costs to Finished Goods 900
790 Assigning Costs to Cost of Goods Sold 901
Summary of Job Order Cost Flows 901
Reporting Job Cost Data 903
Under- or Overapplied Manufacturing
Overhead 904
All About You: MINDING YOUR OWN BUSINESS 906
21 Process Costing 928
928
Feature Story: BEN & JERRY’S TRACKS ITS MIX-UPS
The Nature of Process Cost Systems 930
Uses of Process Cost Systems 930
Similarities and Differences between Job Order Cost
and Process Cost Systems 931
Process Cost Flow 933
Assignment of Manufacturing Costs—Journal
Entries 933
Equivalent Units 936
Weighted-Average Method 937
Refinements on the Weighted-Average Method 937
Production Cost Report 939
Comprehensive Example of Process Costing 940
Compute the Physical Unit Flow (Step 1) 941
Compute Equivalent Units of Production (Step 2) 941
Compute Unit Production Costs (Step 3) 942
Prepare a Cost Reconciliation Schedule (Step 4) 943
Preparing the Production Cost Report 943
Costing Systems—Final Comments 945
Contemporary Developments 946
Just-in-Time Processing 946
Activity-Based Costing 948
APPENDIX: Example of Traditional Costing versus
Activity-Based Costing 953
Production and Cost Data 953
Unit Costs Under Traditional Costing 953
Unit Costs Under ABC 953
Comparing Unit Costs 954
Benefits and Limitations of Activity-Based
Costing 955
22 Cost-Volume-Profit 974
Feature Story: GROWING BY LEAPS AND LEOTARDS 974
Cost Behavior Analysis 976
Variable Costs 977
Fixed Costs 977
Relevant Range 978
Mixed Costs 980
Importance of Identifying Variable and Fixed
Costs 982
Cost-Volume-Profit Analysis 983
Basic Components 983
CVP Income Statement 984
893 Break-even Analysis 986
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Target Net Income 989
Margin of Safety 991
CVP and Changes in the Business
Environment 992
CVP Income Statement Revisited 993
All About You: A HYBRID DILEMMA 995
APPENDIX: Variable Costing 998
Effects of Variable Costing on Income 999
Rationale for Variable Costing 1001
23 Budgetary Planning 1016
Feature Story: THE NEXT AMAZON.COM? NOT QUITE
Budgeting Basics 1018
Budgeting and Accounting 1018
The Benefits of Budgeting 1019
Essentials of Effective Budgeting 1019
Length of the Budget Period 1019
The Budgeting Process 1020
Budgeting and Human Behavior 1020
Budgeting and Long-Range Planning 1021
The Master Budget 1022
Preparing the Operating Budgets 1023
Sales Budget 1023
Production Budget 1024
Direct Materials Budget 1025
Direct Labor Budget 1027
Manufacturing Overhead Budget 1028
Selling and Administrative Expense Budget 1029
Budgeted Income Statement 1029
Preparing the Financial Budgets 1031
Cash Budget 1031
Budgeted Balance Sheet 1034
Budgeting in Non-Manufacturing Companies 1036
Merchandisers 1036
Service Enterprises 1037
Not-for-Profit Organizations 1037
All About You: AVOIDING PERSONAL FINANCIAL
DISASTER 1038
24 Budgetary Control and Responsibility
Accounting 1060
Feature Story: TRYING TO AVOID AN ELECTRIC
SHOCK 1060
The Concept of Budgetary Control 1062
Static Budget Reports 1063
Examples 1064
Uses and Limitations 1065
Flexible Budgets 1065
Why Flexible Budgets? 1065
Developing the Flexible Budget 1067
Flexible Budget—A Case Study 1068
Flexible Budget Reports 1070
Management by Exception 1071
The Concept of Responsibility Accounting 1072
Controllable versus Non-controllable Revenues
and Costs 1074
Responsibility Reporting System 1074
Types of Responsibility Centers 1077
Responsibility Accounting for Cost Centers 1078
Responsibility Accounting for Profit Centers 1078
Responsibility Accounting for Investment Centers 1080
Principles of Performance Evaluation 1083
25 Standard Costs and Balanced
1016 Scorecard 1108
1108
Feature Story: HIGHLIGHTING PERFORMANCE EFFICIENCY
The Need for Standards 1110
Distinguishing between Standards and Budgets 1111
Why Standard Costs? 1111
Setting Standard Costs—A Difficult Task 1112
Ideal versus Normal Standards 1112
A Case Study 1112
Analyzing and Reporting Variances from Standards 1116
Direct Materials Variances 1116
Direct Labor Variances 1119
Manufacturing Overhead Variances 1121
Reporting Variances 1122
Statement Presentation of Variances 1123
Balanced Scorecard 1124
APPENDIX 25A: Standard Cost Accounting System 1130
Journal Entries 1130
Ledger Accounts 1132
APPENDIX 25B: A Closer Look at Overhead
Variances 1133
Overhead Controllable Variance 1133
Overhead Volume Variance 1134
26 Incremental Analysis and Capital
Budgeting 1154
Feature Story: SOUP IS GOOD FOOD 1154
SECTION 1 Incremental Analysis 1156
Management’s Decision-Making Process 1156
The Incremental Analysis Approach 1157
How Incremental Analysis Works 1157
Types of Incremental Analysis 1158
Accept an Order at a Special Price 1158
Make or Buy 1159
Sell or Process Further 1162
Retain or Replace Equipment 1163
Eliminate an Unprofitable Segment 1164
Allocate Limited Resources 1165
SECTION 2 Capital Budgeting 1166
Evaluation Process 1167
Annual Rate of Return 1167
Cash Payback 1168
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Discounted Cash Flow 1170 APPENDIX D Using Financial Calculators D1

Net Present Value Method 1171
Internal Rate of Return Method 1173
Comparing Discounted Cash Flow Methods
All About You: WHAT IS A DEGREE WORTH? 1176
APPENDIX A Specimen Financial Statements:
PepsiCo, Inc. A1
Present Value of a Single Sum D1
Plus and Minus D2
1174 Compounding Periods D2
Rounding D2
Present Value of an Annuity D2
Useful Applications of the Financial Calculator D3
Auto Loan D3
Mortgage Loan Amount D3

APPENDIX B Specimen Financial Statements: The Coca- APPENDIX E Standards of Ethical Conduct for
Cola Company B1 Management Accountants E1
IMA Statement of Ethical Professional Practice E1
APPENDIX C Time Value of Money C1
Principles E1
Nature of Interest C1
Standards E1
Simple Interest C1
Resolution of Ethical Conflict E2
Compound Interest C2
Present Value Variables C3
Photo Credits PC1
Present Value of a Single Amount C3
Company Index I1
Present Value of an Annuity C5
Subject Index I3
Time Periods and Discounting C7
Computing the Present Value of a Long-Term Note or
Bond C7