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Ebook Financial and Managerial Accounting 15Th Edition PDF Full Chapter PDF
Ebook Financial and Managerial Accounting 15Th Edition PDF Full Chapter PDF
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
Jefferson P. Jones
Associate Professor of Accounting
Auburn University
William B. Tayler
Brigham Young University
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Financial and Managerial Accounting, 15e © 2020, 2018 Cengage Learning, Inc. ALL RIGHTS RESERVED.
Carl S. Warren
Unless otherwise noted, all content is © Cengage.
Jefferson P. Jones
WCN: 02-300
William B. Tayler
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Preface
4 7
Chapter
Chapter
iii
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iv Preface
15
with managerial concepts and principles. Then it
Introduction to
Chapter
moves students through developing the informa-
Managerial Accounting
tion and ultimately into evaluating and analyzing
information in order to make decisions.
Principles
Chapter 15 Introduction to Managerial Accounting
Developing Information
COST SYSTEMS COST ALLOCATIONS
Decision Making
PLANNING AND EVALUATING TOOLS STRATEGIC TOOLS
748
Finally, controls for safeguarding inventory should include security measures to prevent damage
and customer or employee theft. Some examples of security measures include the following:
Best Buy ▪▪ Storing inventory in areas that are restricted to only authorized employees
▪▪ Locking high-priced inventory in cabinets
so well that in November you purchased an identical Denon sys- systems over the past year at different costs. At the end of a period, Best Buy uses scanners to screen customers as they leave the store for merchandise that has not been pur- Link to
tem on sale for $549.99 for your bedroom TV. Over the holidays, you
moved to a new apartment and in the process of unpacking discov-
some of the Denon systems will still be in inventory, and some will
have been sold. But which costs relate to the sold systems, and
chased. In addition, Best Buy stations greeters at the store’s entrance to keep customers from bringing in bags
that can be used to shoplift merchandise.
Best Buy
ered that one of the Denon surround sound systems was missing. which costs relate to the Denon systems still in inventory? Best
Luckily, your renters or homeowners insurance policy will cover the Buy’s assumption about inventory costs can involve large dollar
theft; but the insurance company needs to know the cost of the amounts and, thus, can have a significant impact on the financial Reporting Inventory
system that was stolen. statements. For example, Best Buy reported $5,051 million of inven- A physical inventory or count of inventory should be taken near year-end to make sure that
The Denon systems were identical. However, to respond to tory and net income of $897 million for a recent year. the quantity of inventory reported in the financial statements is accurate. After the quantity
may determine the amount that you receive from the insurance the inventory cost may be estimated as described in the appendix at the end of this chapter.
company.
1. Cost flow is in the order 2. Cost flow is in the reverse 3. Cost flow is an average of
in which the costs were order in which the costs the costs.
incurred. were incurred.
Link to Best Buy Pages 301, 303, 314, 315, 316 First-in, First-out Last-in, First-out Weighted Average Cost
(FIFO) (LIFO)
Why It Matters Page 308 Purchased Purchased Sold Purchased
Goods Goods Goods Goods
Analysis for Decision Making Pages 320–321
299
Sold
Goods
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
from a literary, artistic, or to exceed legal life
musical composition
Trademark Exclusive use of a name, None Impairment loss if fair
term, or symbol value less than carrying
value (impaired)
Goodwill Excess of purchase price of None Impairment loss if fair
a business over the fair value less than carrying Preface v
value of its net assets value (impaired)
(assets ] liabilities)
Pathways Challenge
This is Accounting!
Economic Activity
Verizon Communications Inc. (VZ) is the largest wireless service provider in the United States
with over 114 million retail subscribers. To deliver its products and services, Verizon must have access to
spectrum—the radio frequencies that carry sound, data, and video to wireless devices. However, spectrum
is a limited resource that the Federal Communications Commission (FCC) licenses to businesses for a period
of 10 years, subject to renewal. In a recent year, Verizon acquired almost $10 billion in wireless licenses.
In a recent financial statement, McDonald’s reported total property, plant, and equipment of over $34 billion, Link to
▪▪ Located
which
inconsists
eachofchapter,
land, buildings,
Why and equipment.
It M McDonald’s
atters shows students how accounting is important
to businesses with which they are familiar. A Concept Clip icon indicates which Why
It Matters features have an accompanying concept clip video in CNOWv2.
CONCEPT CLIP
Why It Matters
CONCEPT CLIP
Fixed Assets the proportion of fixed assets to total assets. Retail has the high-
est percent of fixed assets to total assets, while social media and
F
ixed assets often represent a significant portion of a company’s software are on the lower end of the scale. High-tech service com-
total assets. The table that follows shows the fixed assets as panies often use fewer fixed assets to deliver their services than
a percent of total assets for some select companies across a will companies that use stores, equipment, planes, cell towers,
variety of industries. As can be seen, the type of industry will impact or theme parks.
Fixed assets have important properties that require management ▪ Fixed assets need to be maintained during use. Managers need to
attention: develop maintenance programs to keep the investment in fixed as-
▪ Fixed assets require a long-term commitment. Mistakes in acquir- sets productive.
ing fixed assets can be very costly and difficult to reverse; thus, ▪ Fixed assets often require significant funds to purchase. Managers
managers must take special care in acquiring fixed assets. must acquire funding internally or by other sources to finance the
▪ Fixed assets wear out over time and need to be replaced. Managers purchase of fixed assets.
must monitor fixed assets and know when to replace fixed assets
due to wear and tear or obsolescence.
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
vi Preface
238 238 Chapter
Chapter
5 Accounting
5 Accounting
for Retail
forBusinesses
Retail Businesses
▪▪ To aid comprehension and to demonstrate the impact of transactions, journal entries
UnderUnder
includethethe
perpetual
the
netperpetual
inventory
effect inventory
of system,
the system,
cash purchases
transactioncashon
purchases
theof accounting
merchandise
of merchandise
are recorded
are recorded
equation. as follows:
as follows:
20Y8 20Y8
A 5 A L 51 L E 1 E Jan. 3Jan. Inventory
3 Inventory 2,510 2,510
12 12 Cash Cash 2,510 2,510
Purchased
Purchased
inventory
inventory
from Bowen
from Bowen
Co. Co.
Purchases
Purchases
of inventory
of inventory
on account
on account
are recorded
are recorded
as follows:
as follows:
The terms
The terms
of purchases
of purchases
on account
on account
are normally
are normally
indicated
indicated invoice
on theon the invoice
or billor
that
billthe
that
seller
the seller
▪sends
▪ The link
sends
the between
buyer.
the buyer. Anthe
An example journal
example
of an of entry
invoice
an and
invoice
sent the
tosent to accounting
NetSolutions
NetSolutions equation
by Alpha
by Alpha is also
Technologies included
Technologies
is shown in in
is shown in
the
Exhibit accompanying
Exhibit
3. 3. CengageNOWv2 course in the accounting cycle chapters, reminding
students of the link—but not requiring them to actively make the link.
Exhibit
Exhibit
3 3
AlphaAlpha
Technologies
Technologies InvoiceInvoice
Invoice
Invoice 1000 Matrix
1000 Matrix
Blvd. Blvd. 106-8 106-8
San Jose,
SanCA
Jose,
95116-1000
CA 95116-1000
Made inMade
U.S.A.in U.S.A.
dATE ShIppEd
dATE ShIppEd how ShIppEd
how ShIppEd
ANd RoUTE
ANd RoUTE TERMSTERMS INvoICE INvoICE
dATE dATE
Jan. 5, 20Y8
Jan. 5, 20Y8 US Express
US Express
Trucking
Trucking
Co. Co. 2/10, n/30
2/10, n/30 Jan. 5, 20Y8
Jan. 5, 20Y8
WhyWhy
It It
Matters
Matters Cash terms, terms,
then the
then
Accumulated Depreciation—Equipment
eratingerating
company
the company
95,000
240,000
cycle. For
cycle.
example,
is ableistoable
For example, Apple
use to
Apple
suppliers
(AAPL)
use suppliers
(AAPL)
to finance
to finance
is ableistoable
the op-the op-
collect
to collect
on on
Loss on Sale of Equipment 5,000
sales within
sales within
an average
an average
of approximately
of approximately
30 days.
30 However,
days. However,
Apple Apple
Apple’s
Apple’s
CreditCredit
Terms Terms Equipment
uses anuses
average
an average
340,000
of approximately
of approximately 100 days100todays
paytoitspaysuppliers.
its suppliers.
WW
orkingorking
capitalcapital
efficiency
efficiency
is influenced
is influenced
by theby relationship
the relationship Thus, Apple
Thus, AppleSelling
collects Price
collects
faster – Book Value
faster
than =
itthan
pays,it allowing
pays,Accumulated
allowing
Apple Apple
to use tothe
use the
$95,000 – $100,000 Depreciation at
between
between
the suppliers’
the suppliers’
and customers’
and customers’
credit credit
terms. terms. suppliers’
If the If the suppliers’
moneymoney
as an interest-free
as an interest-free
loan forloan
the for
70-day
the 70-day
(100 days(100–days –
b. Equipment sold for $105,000: the End of Year 3
suppliers’
suppliers’
credit terms
credit are
termslonger
are longer
than the
thancustomers’
the customers’
credit credit30 days)
30difference.
days) difference.
Source: Apple®
Source: Apple® Cash 105,000
Accumulated Depreciation—Equipment 240,000
Equipment 340,000
Gain on Sale of Equipment 5,000 Selling Price – Book Value =
$105,000 – $100,000
Check Up Corner
98169_ch05_rev03_232-297.indd
98169_ch05_rev03_232-297.indd
238 238 16/08/17 16/08/17
5:10 pm 5:10 pm
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Note to Financial Statements:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,465.0
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,207.1
Equipment and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,771.3
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,443.4 Preface vii
Source: Adapted from McDonald’s Corporation’s 2016 annual report.
▪▪ Analysis for Decision Making highlights how companies use accounting information to
The
make cost and related accumulated
decisions depletion
and evaluate of mineral
their rights are
business. normally
This shown asstudents
provides part of the with context of why
“Fixed assets” section of the balance sheet. The mineral rights may be shown net of depletion on
accounting
the face is sheet.
of the balance important to companies.
In such cases, a supporting note discloses the accumulated depletion.
To illustrate, the following data (in millions) were taken from a recent financial statement
of McDonald’s Corporation (MCD):
Sales $24,621.9
Fixed assets (net):
Beginning of year 21,257.6
End of year 23,117.6
McDonald’s fixed asset turnover ratio for the year is computed as follows (rounded to one
decimal place):
Sales
Fixed Asset Turnover Ratio =
Average Book Value of Fixed Assets
$24,621.9
=
($21,257.6 + $23,117.6) ÷ 2
$24,621.9
= = 1.1
$22,187.6
Is 1.1 efficient? To answer this question, McDonald’s fixed asset turnover ratio can be com-
pared to other quick-service restaurant companies, as shown in Exhibit 14. Yum! Brands (YUM)
operates KFC, Pizza Hut, and Taco Bell quick-service restaurants. The other restaurants are likely
familiar by name.
▪▪ Make a Decision in the end-of-chapter material gives students a chance to analyze real-world
business decisions.
98169_ch09_ptg01_442-493.indd 469 25/09/17 5:20 PM
Make a Decision
Fixed Asset Turnover Ratio
a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.
b. Which company is more efficient in generating sales from fixed assets?
c. Interpret your results.
MAD 9-2 Analyze and compare Alaska Air, Delta Air Lines, and Southwest Airlines Obj. 7
Alaska Air Group (ALK), Delta Air Lines (DAL), and Southwest Airlines (LUV) reported
the following financial information (in millions) in a recent year:
REAL WORLD
a. Determine the fixed asset turnover ratio for each airline. Round to one decimal place.
b. Based on the fixed asset turnover ratio, which airline appears to be the most ef-
ficient in the use of its fixed assets?
c. The most important fixed asset to an airline is the aircraft. Given this, what factors
might influence the efficient use of fixed assets for an airline?
▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment
feature that is designed to help busy students prepare for an exam. It includes a summary
of each learning objective’s key points, key terms, multiple-choice questions, exercises, and
a sample problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments
they are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowl-
edge immediately.
▪ Take It Further in the end-of-chapter activities allows instructors to assign other special
activities related to ethics, communication, and teamwork.
▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students
prepare for the CMA exam so they can earn CMA certification.
CengageNOWv2
CengageNOWv2 is a powerful course management and online homework resource that pro-
vides control and customization to optimize the student learning experience. Included are
many proven resources, such as algorithmic activities, a test bank, course management tools,
reporting and assessment options, and much more.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface ix
SHOW ME HOW
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x Preface
MindTap eReader
The MindTap eReader for Warren/Jones/Tayler’s Financial and Managerial Accounting is
the most robust digital reading experience available. Hallmark features include:
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▪▪ Note taking, highlighting, and more.
▪▪ Embedded digital media.
▪▪ The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that
vocalizes, or “speech-enables,” online educational content. This feature is ideally suited
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Preface xi
Chapter 3 Chapter 6
▪▪ New Check Up Corner on weighted average inventory
▪▪ Exhibit 1 (Accruals) has been revised to make it con-
method has been added.
sistent with Exhibit 2 (Deferrals).
▪▪ New exhibit on weighted average flow of costs has
▪▪ The chapter has been changed so that accruals are
been added.
discussed and illustrated first, followed by deferrals.
▪▪ Weighted average illustration has been added to
Accruals are the simplest adjustment (no entry has
Check Up Corner 6-3.
been made). Thus, the chapter discussion now goes
▪▪ Added an illustration of the lower of cost or net real-
from simple to complex, which facilitates student
izable for inventory applied by different classes of
understanding of this complex topic.
inventory (Exhibit 10).
Chapter 4
Chapter 7
▪▪ New learning objectives for Appendices 1 and 2.
▪▪ Presentation of bank reconciliation has been refor-
▪▪ The statement of stockholders’ equity replaces the
matted.
retained earnings statement. This is consistent with
the financial reporting of publicly held companies
Chapter 9
that report a statement of stockholders’ equity rather
than a retained earnings statement. ▪▪ New Check Up Corner on selling fixed assets was
▪▪ Exhibit 1 revised to show the interrelationships of added.
the statement of stockholders’ equity with the income ▪▪ Lease discussion was modified to reflect the latest
statement and balance sheet. accounting standard.
▪▪ Simplified and updated the closing process so that two
Chapter 10
rather than four closing entries are required. Doing so
eliminates the temporary (clearing) account Income ▪▪ Simplified Exhibit 1 by removing cash/sales discounts.
Summary, which students have difficulty understanding.
▪▪ Exhibit 8 (Accounting Cycle) revised and made more Chapter 11
readable. ▪▪ Present value formulas have been added to Appendix
1, “Present Value Concepts and Pricing Bonds Pay-
Chapter 5 able.”
▪▪ Chapter has been retitled as “Accounting for Retail
Businesses.” Using Retail in the title rather than Mer- Chapter 12
chandising is more current terminology that students ▪▪ Added brief discussion of different classes of common
can identify with. stock (Classes A, B, and C).
▪▪ Schema revised to only focus on the financial state-
ments and the key accounts that will be discussed Chapter 15
within the chapter. ▪▪ “Managerial Accounting in the Organization” section
▪▪ New learning objective and separate discussion for significantly revised to discuss horizonal and vertical
the adjusting process of a retail business. business units; McAfee, Inc., is used as an illustration.
▪▪ New learning objective and Appendix “Gross Method ▪▪ New Why It Matters features the IMA and CMA.
of Recording Sales Discounts.” This gives instructors ▪▪ New Why It Matters features vertical and horizontal
flexibility as to whether to cover the net or gross functions for service companies.
methods of accounting for sales discounts. ▪▪ Discussion of sustainability and accounting moved to
▪▪ Chart of Accounts for NetSolutions as a Retail Busi- new Chapter 28.
ness (Exhibit 2) has been moved earlier in the chapter
so that students can focus on the new accounts spe- Chapter 16
cific to retail businesses.
▪▪ Discussion of sustainability and accounting moved to
▪▪ Customer refunds, allowances, and returns discussion
new Chapter 28.
has been simplified to progress from simple to com-
▪▪ Added one new Analysis for Decision Making item.
plex, as summarized in Exhibit 7.
▪▪ Closing process for a retail business has been revised
to use a two-entry closing process. Chapter 17
▪▪ The statement of stockholders’ equity replaces the ▪▪ Why It Matters feature (Sustainable Papermaking)
retained earnings statement. This is consistent with moved to Chapter 28.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xii Preface
Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Acknowledgements
The many enhancements to this edition of Financial and Managerial Accounting are the direct result of reviews,
surveys, and focus groups with instructors at institutions across the country. We would like to take this opportunity
to thank those who have helped us better understand the challenge of the financial accounting course and provided
valuable feedback on our content and digital assets.
John Alpers, Tennessee Wesleyan Dave Fitzgerald, Jackson College Dr. April Poe, University of the
Anne Marie Anderson, Raritan Valley Kenneth Flug, St. Thomas Aquinas Incarnate Word
Community College College Francisco Rangel, Riverside City
Rick Andrews, Sinclair Community John Giles, North Carolina State College
College University Jeffery Reinking, University of
Maureen Baker, Long Beach City Marcye Hampton, University of Central Florida – Orlando
College Central Florida Jenny Resnick, Santa Monica College
Surasakdi Bhamornsiri, University of Christopher Harper, Grand Valley Benjamin Reyes, Long Beach City
North Carolina at Charlotte State University College
Alan Blankley, University of North Thomas Heikkinen, Jackson College Vernon Richardson, University of
Carolina at Charlotte Melanie Hicks, Liberty University Arkansas
Cindy Bolt, The Citadel Susanne Holloway, Salisbury University Patrick Rogan, Cosumnes River
Julie Bonner, Central Washington Jose Hortensi, Miami Dade College College
University Md Safayat Hossain, Florida Lauran B. Schmid, The University of
Charles Boster, Salisbury University International University Texas Rio Grande Valley
Salma Boumediene, Montana State Su-Jane Hsieh, San Francisco State Jennifer Schneider, University of
University – Billings University North Georgia
Jerold K. Braun, Daytona State College Aileen Huang, Santa Monica College Mary Sheil, Kennesaw State University
Louise Burney, University of Mississippi Julie Ying Huang, University of Meghna Singhvi, Loyola Marymount
Shauna Butler, St. Thomas Aquinas Louisville University
College Ann Kelley, Providence College Margie Snow, Norco College
James N. Cannon, Iowa State University Daniel Kim, Midlands Technical College Mona Stephens, Southern New
Kirk Canzano, Long Beach City College Angela Kirkendall, South Puget Hampshire University
Jack Cathey, University of North Sound Community College Linda Stoller, Bentley University
Carolina at Charlotte Satoshi Kojima, East Los Angeles Michael Stoots, UCLA extension
Donna Chadwick, Sinclair College Nirmalee Summers, University of
Community College Charles Leflar, University of Arkansas Wisconsin – La Crosse
Ming Lu Chun, Santa Monica College Tara Maciel, San Diego Mesa College Dominique Svarc, Harper College
Anne Clem, Iowa State University Annette Maddox, Georgia Highlands Patricia Tupaj, Quinsigamond
Dixon Cooper, Ouachita Baptist College Community College
University LuAnn Bean Mangold, Florida Bill Urquhart, Florida Atlantic
Bryan Corsnitz, Long Beach City Institute of Technology University
College Eric Martin, University of Tennessee Rodney Vogt, Kansas State University
Pat Creech, Northeastern Oklahoma Robert A. Martin, Kennesaw State Rick Warne, University of Cincinnati
A&M University Randi Watts, Baker College
Stephan Davenport, University of Michelle McFeaters, Grove City College Cammy Wayne, Harper College
Tennessee – Chattanooga Dawn McKinley, Harper College Vivian Winston, Indiana University
David Deboskey, San Diego State Allison McLeod, University of North Jan Workman, East Carolina University
Daniel De La Rosa, Fullerton College Texas Glen Young, Texas A&M University –
Heather Demshock, Lycoming College Rodney Michael College Station
Scott Dotson, Tennessee Wesleyan Shawn Miller, Lone Star College Mellissa Youngman, National Technical
University Jill Mitchell, Northern Virginia Institute for the Deaf, RIT
Hong Duong, Salisbury University Community College – Alexandria Mustafa Younis, Tulane University
Desiree Elias, Florida International DeeAnne Lynn Peterson-Meyer, Fang Zhao, Florida International
University University of Wisconsin – Eau University
James Emig, Villanova University Claire Terri Ziegler, Ohio State University
Valerie Evans, Kansas State University
xiii
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
xiv Acknowledgements
Reb Beatty, Anne Arundel Steven Hegemann, University of Don Minyard, University of Alabama
Community College Nebraska – Lincoln Micki Nickla, Ivy Tech Community
Amy Bourne, Oregon State University Todd Jensen, Sierra College College – Gary
Rachel Brassine, East Carolina Sergey Komissarov, University of John Robertson, Arkansas State
University Wisconsin – La Crosse University
Gregory Brookins, Santa Monica Anthony Kurek, Eastern Michigan Philip Slater, Forsyth Technical
College University Community College
Marci Butterfield, University of Utah Joseph Larkin, Saint Joseph’s University Bob Urell, Irvine Valley College
Lawrence Chui, University of St. Gary Laycock, Ivy Tech Community Alycia Marie Winegardner, University
Thomas College – Terre Haute of Tennessee – Knoxville
Jerrilyn Eisenhauer, Tulsa Kristy McAuliffe, San Jacinto College
Community College – Southeast Melanie McCoskey, University of Akron
Shari Fowler, Indiana University – East Allison McLeod, University of North
Micah Frankel, California State Texas
University – East Bay
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About the Authors
Carl S. Warren
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens.
Jefferson P. Jones
Dr. Jefferson P. Jones is an Associate Professor of Accounting in the School of Accountancy
at Auburn University where he teaches financial accounting and applied financial research
courses. He received his Bachelor’s in Accounting and Master of Accountancy degrees
William B. Tayler
Dr. William B. Tayler is the Robert J. Smith Professor of Accountancy in the Marriott
School of Business at Brigham Young University (BYU). Dr. Tayler is an internationally
renowned, award-winning accounting researcher and instructor. He has presented his
research as an invited speaker at universities and conferences across the globe. Dr. Tayler
earned his Ph.D. and master’s degree at Cornell University. He teaches in BYU’s Executive
MBA Program and in BYU’s School of Accountancy, one of the top ranked accounting
programs in the world. Dr. Tayler has also taught at Cornell University and Emory Uni-
versity and has received multiple teaching awards. Dr. Tayler is a Certified Management
© EMORY UNIVERSITY
xvi
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Contents
1 Introduction to Accounting
and Business 2
Analysis for Decision Making 80
Horizontal Analysis 80
3
Opportunities for Accountants 7
2
Take It Further 155
Pathways Challenge 128, 157
Analyzing Transactions 56
Using Accounts to Record Transactions 59
Chart of Accounts 60
xvii
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xviii Contents
Illustration of the Accounting Cycle 178 Financial Statements and Closing Entries for a Retail
Step 1. Analyzing and Recording Transactions Business 254
in the Journal 178 Multiple-Step Income Statement 254
Step 2. Posting Transactions to the Ledger 179 Single-Step Income Statement 256
Step 3. Preparing an Unadjusted Trial Balance 179 Statement of Stockholders’ Equity 256
Step 4. Assembling and Analyzing Adjustment Data 179 Balance Sheet 257
Step 5. Preparing an Optional End-of-Period Spreadsheet 181 The Closing Process 258
Step 6. Journalizing and Posting Adjusting Entries 182
Step 7. Preparing an Adjusted Trial Balance 182 Analysis for Decision Making 259
Step 8. Preparing the Financial Statements 182 Asset Turnover Ratio 259
Step 9. Journalizing and Posting Closing Entries 185 Appendix 1 Gross Method of
Step 10. Preparing a Post-Closing Trial Balance 185
Recording Sales Discounts 260
Analysis for Decision Making 188 Transactions 260
Working Capital and Current Ratio 188 Adjusting Entry 261
Subsequent Period 262
Appendix 1 End-of-Period Spreadsheet 190 Comparison with the Net Method 262
Step 1. Enter the Title 190
Step 2. Enter the Unadjusted Appendix 2 The Periodic Inventory System 263
Trial Balance 190 Chart of Accounts Under the Periodic Inventory System 263
Step 3. Enter the Adjustments 191 Recording Merchandise Transactions Under the
Step 4. Enter the Adjusted Trial Balance 192 Periodic Inventory System 264
Step 5. Extend the Accounts to the Income Statement and Adjusting Process Under the Periodic Inventory System 265
Balance Sheet Columns 193 Financial Statements Under the Periodic Inventory System 266
Step 6. Total the Income Statement and Balance Sheet Closing Entries Under the Periodic Inventory System 266
Columns, Compute the Net Income or Net Loss, and
Complete the Spreadsheet 194 Comprehensive Problem 2 291
Preparing the Financial Statements Make a Decision 293
from the Spreadsheet 195
Take It Further 294
Appendix 2 Reversing Entries 195
Pathways Challenge 242, 297
Comprehensive Problem 1 226
Make a Decision 227
Take It Further 229
Pathways Challenge 175, 231 6 Inventories 298
5
Control of Inventory 300
Accounting for Retail Safeguarding Inventory 300
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Contents xix
Analysis for Decision Making 320 Allowance Method for Uncollectible Accounts 400
Inventory Turnover and Number of Days’ Sales in Inventory 320 Write-Offs to the Allowance Account 401
Estimating Uncollectibles 403
Appendix Estimating Inventory Cost 322
Retail Method of Inventory Costing 322 Comparing Direct Write-Off and Allowance
Gross Profit Method of Inventory Costing 323 Methods 409
Make a Decision 345 Notes Receivable 410
Characteristics of Notes Receivable 410
Take It Further 346 Accounting for Notes Receivable 412
Pathways Challenge 317, 348 Reporting Receivables on the Balance Sheet 414
Analysis for Decision Making 415
7
Accounts Receivable Turnover and Number of Days’ Sales in
Receivables 415
Internal Control and Cash 350 Make a Decision 437
Take It Further 439
Sarbanes-Oxley Act 352
Pathways Challenge 413, 440
Internal Control 354
9
Objectives of Internal Control 354
Elements of Internal Control 354 Long-Term Assets: Fixed and
Control Environment 355
Risk Assessment 356 Intangible 442
Control Procedures 356
Monitoring 358 Nature of Fixed Assets 444
Information and Communication 358 Classifying Costs 444
Limitations of Internal Control 359 The Cost of Fixed Assets 446
Cash Controls over Receipts and Payments 360 Leasing Fixed Assets 447
Control of Cash Receipts 360 Accounting for Depreciation 448
Control of Cash Payments 362 Factors in Computing Depreciation Expense 448
Bank Accounts 363 Straight-Line Method 449
Bank Statement 363 Units-of-Activity Method 451
Using the Bank Statement as a Control over Cash 365 Double-Declining-Balance Method 453
Comparing Depreciation Methods 454
Bank Reconciliation 366 Partial-Year Depreciation 457
Special-Purpose Cash Funds 370 Revising Depreciation Estimates 457
Repair and Improvements 458
Financial Statement Reporting of Cash 371
Disposal of Fixed Assets 460
Analysis for Decision Making 372 Discarding Fixed Assets 460
Days’ Cash on Hand 372 Selling Fixed Assets 461
Make a Decision 392 Natural Resources 462
Take It Further 394 Intangible Assets 464
Patents 464
Pathways Challenge 372, 395
Copyrights and Trademarks 465
Goodwill 465
8
Financial Reporting for Long-Term Assets:
Fixed and Intangible 468
Receivables 396
Analysis for Decision Making 469
Fixed Asset Turnover Ratio 469
Classification of Receivables 398
Accounts Receivable 398 Appendix Exchanging Similar Fixed Assets 471
Notes Receivable 398 Gain on Exchange 471
Other Receivables 399 Loss on Exchange 472
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xx Contents
10 Liabilities: Current,
Installment Notes, and
Contingencies 494
Appendix 1 Present Value Concepts and
Pricing Bonds Payable 556
Present Value Concepts 556
Pricing Bonds 559
Computing Present Values 560
Current Liabilities 496 Appendix 2 Effective Interest Rate Method
Accounts Payable and Accruals 496 of Amortization 561
Short-Term Notes Payable 497 Amortization of Discount by the Interest Method 561
Current Portion of Long-Term Debt 498 Amortization of Premium by the Interest Method 562
Payroll Liabilities 499 Make a Decision 577
Liability for Employee Earnings 499
Deductions from Employee Earnings 500 Take It Further 578
Computing Employee Net Pay 501 Pathways Challenge 553, 579
Employer’s Payroll Taxes 501
Recording Payroll 502
12
Paying Payroll 504
Internal Controls for Payroll 504 Corporations: Organization,
Employees’ Fringe Benefits 504 Stock Transactions, and
Vacation Pay 504
Pensions 505 Dividends 580
Postretirement Benefits Other than Pensions 506
Installment Notes 507 Nature of a Corporation 582
Issuance 507 Characteristics of a Corporation 582
Periodic Payments 507 Forming a Corporation 583
Contingent Liabilities 510 Paid-In Capital from Stock 585
Probable and Estimable 510 Characteristics of Stock 585
Probable and Not Estimable 510 Types of Stock 586
Reasonably Possible 511 Issuing Stock 588
Remote 511 Premium on Stock 589
No-Par Stock 590
Reporting Liabilities 513
Analysis for Decision Making 513 Accounting for Dividends 591
Cash Dividends 592
Quick Ratio 513
Stock Dividends 593
Comprehensive Problem 3 534
Stock Splits 594
Make a Decision 536
Treasury Stock Transactions 595
Take It Further 539
Reporting Stockholders’ Equity 597
Pathways Challenge 512, 541 Stockholders’ Equity on the Balance Sheet 597
Reporting Retained Earnings 598
11
Statement of Stockholders’ Equity 600
Reporting Stockholders’ Equity for Alphabet 601
Analysis for Decision Making 602
Liabilities: Bonds Payable 542 Earnings per Share 602
Comprehensive Problem 4 619
Nature of Bonds Payable 544
Bond Characteristics and Terminology 544 Make a Decision 621
Proceeds from Issuing Bonds 545 Take It Further 622
Accounting for Bonds Payable 547 Pathways Challenge 588, 625
Bonds Issued at Face Amount 547
Bonds Issued at a Discount 547
13
Amortizing a Bond Discount 548
Bonds Issued at a Premium 550 Statement of Cash
Amortizing a Bond Premium 551 Flows 626
Bond Redemption 552
Reporting Bonds Payable 554 Reporting Cash Flows 628
Analysis for Decision Making 555 Cash Flows from Operating Activities 629
Times Interest Earned 555 Cash Flows from Investing Activities 631
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Contents xxi
15
Make a Decision 680
Introduction to Managerial
Take It Further 683
Accounting 748
Pathways Challenge 642, 684
Managerial Accounting 750
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xxii Contents
16
Examination Questions (Adapted) 893
Pathways Challenge 858, 895
Job Order Costing 792
Cost Accounting Systems Overview 794
Job Order Cost Systems 794
Process Cost Systems 794
18 Activity-Based
Costing 896
Job Order Cost Systems for Manufacturing
Product Costing Allocation Methods 898
Businesses 795
Materials 796 Single Plantwide Factory Overhead Rate
Factory Labor 798 Method 899
Factory Overhead 800
Work in Process 806 Multiple Production Department Factory Overhead
Finished Goods 807 Rate Method 901
Sales and Cost of Goods Sold 807 Department Overhead Rates and Allocation 902
Period Costs 808 Distortion of Product Costs 903
Summary of Cost Flows for Legend Guitars 808 Activity-Based Costing Method 906
Job Order Cost Systems for Service Businesses 810 Activity Rates 908
Types of Service Businesses 810 Allocating Costs 909
Flow of Costs in a Service Job Order Cost System 810 Distortion in Product Costs 911
Dangers of Product Cost Distortion 911
Analysis for Decision Making 812
Analyzing Job Costs 812 Activity-Based Costing for Selling and Administrative
Expenses 913
Make a Decision 832
Activity-Based Costing in Service Businesses 914
Take It Further 835
Analysis for Decision Making 919
Certified Management Accountant (CMA®) Using ABC Product Cost Information to Reduce Costs 919
Examination Questions (Adapted) 838 Make a Decision 945
Pathways Challenge 805, 839 Take It Further 947
Certified Management Accountant (CMA®)
17
Examination Questions (Adapted) 948
Pathways Challenge 917, 949
Process Cost Systems 840
Process Manufacturers 842
Comparing Job Order and Process Cost Systems 843
Cost Flows for a Process Manufacturer 844
19 Support Department and
Joint Cost Allocation 950
Cost of Production Report 847 Support Departments 952
Step 1: Determine the Units to Be Assigned Costs 848
Step 2: Compute Equivalent Units of Production 848 Support Department Cost Allocation 953
Step 3: Determine the Cost per Equivalent Unit 852 Single Plantwide Rate 954
Step 4: Allocate Costs to Units Transferred Multiple Production Department Rates 954
Out and Partially Completed Units 853 Activity-Based Costing 955
Preparing the Cost of Production Report 855
Allocating Support Department Costs to Production
Journal Entries for a Process Cost System 858 Departments 956
Direct Method 957
Using the Cost of Production Report 862
The Sequential Method 959
Analysis for Decision Making 862 The Reciprocal Services Method 963
Analyzing Process Costs 862 Comparison of Support Department Cost Allocation Methods 967
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Contents xxiii
The Market Value at Split-Off Method 969 Operating Income: Absorption and Variable
The Net Realizable Value Method 970 Costing 1050
Comparison of Joint Cost Allocation Methods 971 Absorption Costing 1050
By-Products 973 Variable Costing 1051
Effects of Inventory 1053
Analysis for Decision Making 973
Using Support Department and Joint Cost Allocations for Analyzing Operating Income Using
Performance Evaluation 973 Absorption and Variable Costing 1056
Make a Decision 989 Using Absorption and Variable Costing 1061
Controlling Costs 1061
Take It Further 991 Pricing Products 1061
Certified Management Accountant (CMA®) Planning Production 1062
Examination Questions (Adapted) 992 Analyzing Market Segments 1062
Analyzing Market Segments 1062
Pathways Challenge 967, 993 Sales Territory Profitability Analysis 1064
Product Profitability Analysis 1065
20
Salesperson Profitability Analysis 1065
Cost-Volume-Profit Variable Costing for Service Businesses 1067
Analysis 994 Reporting Income 1067
Analyzing Segments 1068
Analysis for Decision Making 1070
Cost Behavior 996 Segment Analysis and EBITDA 1070
Variable Costs 997
Fixed Costs 998
Make a Decision 1092
Mixed Costs 1000 Take It Further 1094
Summary of Cost Behavior Concepts 1002 Certified Management Accountant (CMA®)
Cost-Volume-Profit Relationships 1004 Examination Questions (Adapted) 1095
Contribution Margin 1004 Pathways Challenge 1060, 1096
Contribution Margin Ratio 1004
22
Unit Contribution Margin 1005
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xxiv Contents
Analysis for Decision Making 1122 Responsibility Accounting for Cost Centers 1210
Nonmanufacturing Staffing Budgets 1122
Responsibility Accounting for Profit Centers 1214
Make a Decision 1150 Support Department Allocations 1214
Take It Further 1151 Profit Center Reporting 1216
23
Transfer Pricing 1225
Evaluating Variances Market Price Approach 1226
Negotiated Price Approach 1226
from Standard Cost Price Approach 1229
Costs 1156 Analysis for Decision Making 1229
Franchise Operations 1229
Standards 1158 Make a Decision 1250
Setting Standards 1158
Types of Standards 1159 Take It Further 1252
Reviewing and Revising Standards 1159 Certified Management Accountant (CMA®)
Criticisms of Standard Costs 1159
Examination Questions (Adapted) 1254
Budgetary Performance Evaluation 1160
Budget Performance Report 1160
Pathways Challenge 1209, 1255
Manufacturing Cost Variances 1161
25
Direct Materials and
Direct Labor Variances 1162 Differential Analysis and
Direct Materials Variances 1162 Product Pricing 1256
Direct Labor Variances 1165
24
Variable Cost Method 1279
Evaluating Decentralized Make a Decision 1303
Operations 1206 Take It Further 1305
Certified Management Accountant (CMA®)
Centralized and Decentralized Operations 1208 Examination Questions (Adapted) 1307
Advantages of Decentralization 1208
Disadvantages of Decentralization 1209 Pathways Challenge 1263, 1308
Responsibility Accounting 1210
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Contents xxv
26 Capital Investment
Analysis 1310
Make a Decision 1395
Take It Further 1397
Certified Management Accountant (CMA®)
Nature of Capital Investment Analysis 1312 Examination Questions (Adapted) 1398
Methods Not Using Present Values 1313 Pathways Challenge 1365, 1399
Average Rate of Return Method 1313
Cash Payback Method 1314
Methods Using Present Values 1316
Present Value Concepts 1317
Net Present Value Method and Index 1319
Internal Rate of Return Method 1322
28 The Balanced Scorecard
and Corporate Social
Responsibility 1400
Factors That Complicate Capital
Investment Analysis 1325 Performance Measurement Systems 1402
Income Tax 1325
The Balanced Scorecard 1403
Unequal Proposal Lives 1325
Performance Perspectives 1403
Lease Versus Capital Investment 1327
Strategic Objectives 1405
Uncertainty 1327
Performance Metrics 1405
Changes in Price Levels 1328
Strategic Initiatives 1406
Qualitative Considerations 1329
Performance Targets 1407
Capital Rationing 1329
Using the Balanced Scorecard 1407
Analysis for Decision Making 1330 Strategy Maps 1407
Uncertainty: Sensitivity and Expected Value Analyses 1330 Measure Maps 1409
Strategic Learning 1411
Make a Decision 1351 Scorecard Cascading 1413
Take It Further 1353 Cognitive Biases 1413
27
Analysis for Decision Making 1420
Lean Manufacturing and Capital Investment in CSR 1420
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1 Introduction to
Chapter
Chapter 1
Transactions
ACCOUNTING SYSTEM
Accounting Equation
Assets = Liabilities + Equity
Chapter 2
ANALYZING TRANSACTIONS
Chapter 3
THE ADJUSTING PROCESS
Chapter 4
THE ACCOUNTING CYCLE
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Twitter, Inc.
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4 Chapter 1 Introduction to Accounting and Business
What's Covered
Introduction to Accounting and Business
Nature of Business Nature of Accounting Analyzing Business Financial Statements
▪▪ Types of Business (Obj. 1) ▪▪ Managerial and Financial Transactions ▪▪ Income Statement (Obj. 5)
▪▪ Role of Accounting (Obj. 1) Accounting (Obj. 1) ▪▪ Generally Accepted Accounting ▪▪ Statement of Stockholders’
▪▪ Ethics (Obj. 1) ▪▪ Career Opportunities (Obj. 1) Principles (Obj. 2) Equity (Obj. 5)
▪▪ Accounting Equation (Obj. 3) ▪▪ Balance Sheet (Obj. 5)
▪▪ Transactions (Obj. 4) ▪▪ Statement of Cash Flows
(Obj. 5)
Learning Objectives
Obj. 1 Describe the nature of business and the role of Obj. 4 Describe and illustrate how business transactions can
accounting and ethics in business. be recorded in terms of the resulting change in the
Obj. 2 Describe generally accepted accounting principles, elements of the accounting equation.
including the underlying assumptions and principles. Obj. 5 Describe the financial statements of a corporation and
Obj. 3 State the accounting equation and define each explain how they interrelate.
element of the equation.
Types of Businesses
Three types of businesses operating for profit include service, retail, and manufacturing busi-
nesses. Some examples of each type of business follow:
▪▪ Service businesses provide services rather than products to customers.
Delta Air Lines (DAL) (transportation services)
The Walt Disney Company (DIS) (entertainment services)
▪▪ Retail businesses sell products they purchase from other businesses to customers.
Wal-Mart Stores, Inc. (WMT) (general merchandise)
Amazon.com (AMZN) (Internet books, music, videos, ...)
▪▪ Manufacturing businesses change basic inputs into products that are sold to customers.
Ford Motor Company (F) (cars, trucks, vans)
Merck & Co., Inc. (MRK) (pharmaceutical drugs)
Link to Twitter Twitter is a service company that provides a platform for individuals to send text messages called tweets.
1
A complete glossary of terms appears at the end of the text.
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Chapter 1 Introduction to Accounting and Business 5
Twitter communicates to investors in an annual report that includes accounting information. Link to Twitter
The process by which accounting provides information to users is as follows:
1. Identify users.
2. Assess users’ information needs.
3. Design the accounting information system to meet users’ needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
As illustrated in Exhibit 1, users of accounting information can be divided into two groups:
internal users and external users.
Exhibit 1
1 Accounting as
Identify
Users an Information
System
Internal External
Company Company
2
Assess
Users’
Information
Managers, Needs Investors, Creditors,
Employees Customers, Government
3 4
Design Record
Accounting Economic
System Data
5
Prepare
Accounting
Reports
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6 Chapter 1 Introduction to Accounting and Business
The objective of managerial accounting is to provide relevant and timely information for
anagers’ and employees’ decision-making needs. Often, such information is sensitive and is not
m
distributed outside the business. Examples of sensitive information might include information
about customers, prices, and plans to expand the business. Managerial accountants employed by a
business are employed in private accounting.
Link to Twitter Twitter is a service company that provides a platform for individuals to send text messages called tweets.
Nature of Accounting
Company or Business Fraud Result
Computer Associates Fraudulently inflated its financial results. CEO and senior executives indicted.
International, Inc. Five executives pled guilty. $225 million fine.
Enron Fraudulently inflated its financial results. Bankrupcty. Senior executives criminally con-
victed. More than $60 billion in stock market
losses.
HealthSouth Overstated performance by $4 billion in false entries. Senior executives criminally convicted.
Qwest Communications Improperly recognized $3 billion in false receipts. CEO and six other executives criminally convicted
International, Inc. of “massive financial fraud.” $250 million SEC fine.
Xerox Corporation Recognized $3 billion in sales prior to when $10 million fine to SEC. Six executives
it should have been recorded. forced to pay $22 million.
What went wrong for the managers and companies listed in Exhibit 2? The answer nor-
mally involved one or both of the following two factors:
▪▪ Failure of Individual Character: Ethical managers and accountants are honest and
fair. However, managers and accountants often face pressures from supervisors to meet
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Chapter 1 Introduction to Accounting and Business 7
company and investor expectations. In many of the cases in Exhibit 2, managers and ac-
countants justified small ethical violations to avoid such pressures. However, these small
violations became big violations as the company’s financial problems became worse.
▪▪ Culture of Greed and Ethical Indifference: By their behavior and attitude, senior manag-
ers set the company culture. In most of the companies listed in Exhibit 2, the senior man-
agers created a culture of greed and indifference to the truth.
As a result of the accounting and business frauds shown in Exhibit 2, Congress passed
laws to monitor the behavior of accounting and business. For example, the Sarbanes-Oxley
Act (SOX) was enacted. SOX established a new oversight body for the accounting profession
called the P
ublic Company Accounting Oversight Board (PCAOB). In addition, SOX estab-
lished standards for independence, corporate responsibility, and disclosure.
How does one behave ethically when faced with financial or other types of pressure?
Guidelines for behaving ethically follow:2
1. Identify an ethical decision by using your personal ethical standards of honesty and
fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those who will be affected by your
decision.
4. Make a decision that is ethical and fair to those affected by it.
2
Many companies have ethical standards of conduct for managers and employees. In addition, the Institute of Management
Accountants and the American Institute of Certified Public Accountants have professional codes of c onduct, which can be obtained from
their Web sites at www.imanet.org and www.aicpa.org, respectively.
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8 Chapter 1 Introduction to Accounting and Business
Public Accounting Accountants employed Large firms (over $250 $68,000 Certified Public Accountant (CPA)
individually or within a million in revenue)
public accounting firm Mid-size firms $61,000 Certified Public Accountant (CPA)
in audit, tax, or manage- ($25–$250 million in
ment advisory services. revenue)
Small firms (less than $56,000 Certified Public Accountant (CPA)
$25 million in revenue)
*Average salaries rounded to the nearest thousand. Salaries may vary by size of company and region.
Source: Robert Half 2017 U.S. Salary Guide (Finance and Accounting), Robert Half International, Inc. (www.roberthalf.com/workplace-research/salary-guides).
Accountants and their staff who provide services on a fee basis are said to be employed in
ublic accounting. In public accounting, an accountant may practice as an individual or as a
p
member of a public accounting firm. Public accountants who have met a state’s education, ex-
perience, and examination requirements may become Certified Public Accountants (CPAs).
CPAs typically perform general accounting, audit, or tax services. As can be seen in Exhibit 3,
CPAs have slightly better starting salaries than private accountants. Career statistics indicate,
however, that these salary differences tend to disappear over time. The American Institute of
Certified Public Accountants (AICPA) provides information and resources for students inter-
ested in accounting at www.startheregoplaces.com.
Because all functions within a business use accounting information, experience in private
or public accounting provides a solid foundation for a career. Many positions in industry and
in government agencies are held by individuals with accounting backgrounds.
Why It Matters
CONCEPT CLIP
Pathways Commission
T
he Pathways Commission recently issued its study titled Chart-
ing a National Strategy for the Next Generation of Accountants.
The Commission was made up of diverse members and was
jointly sponsored by the American Institute of Certified Public Accoun-
tants (AICPA) and the American Accounting Association (AAA). The
Commission emphasized the importance of accounting for a prosper-
ous society and good decision making. The Commission also empha-
sized that accountants must be critical thinkers who are comfortable
addressing the shades of gray required by accounting judgments.
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Chapter 1 Introduction to Accounting and Business 9
International Connection
International Financial
IFRS in deciding how business transactions are recorded.
Reporting Standards (IFRS) Many believe that the strong regulatory and litigation en-
IFRS are considered to be more “principles-based” than vironment in the United States is the cause for the more
U.S. GAAP, which is considered to be more “rules-based.” rules-based GAAP approach. Regardless, IFRS and GAAP
For e xample, U.S. GAAP consists of approximately share many common principles.*
17,000 pages, which include numerous industry-specific *Differences between U.S. GAAP and IFRS are further discussed and illustrated in
accounting rules. In contrast, IFRS allow more judgment Appendix C.
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10 Chapter 1 Introduction to Accounting and Business
Assumptions
Financial accounting and generally accepted accounting principles are based upon the follow-
ing assumptions:
▪▪ Monetary unit
▪▪ Time period
▪▪ Business entity
▪▪ Going concern
The monetary unit assumption requires that financial reports be expressed in a single
money unit, or currency. This provides a common measurement of the effects of economic
events and transactions on an entity. The monetary unit used is normally determined by the
country in which the company operates. For example, in the United States, the U.S. dollar is
used as the monetary unit.
The time period assumption allows a company to report its economic activities on a regu-
lar basis for a specific period of time. In doing so, financial condition and changes in financial
condition are reported periodically on a consistent basis. In the United States, reports are nor-
mally required on a yearly basis supplemented with quarterly reports.
Link to Twitter Twitter publishes quarterly as well as yearly financial reports that are available at https://investor.
twitterinc.com.
The annual accounting period adopted by a company is called its fiscal year. The fiscal
year most commonly used is the calendar year beginning January 1 and ending December 31.
However, other periods are not unusual, especially for companies organized as corporations.
For example, a corporation may adopt a fiscal year that ends when business activities have
reached the lowest point in its annual operating cycle, which allows more time to prepare
financial reports. Such a fiscal year is called the natural business year. For example, a compa-
ny’s fiscal year could begin August 1, 20Y7, and end on July 31, 20Y8, as follows:
20Y7 20Y8
Aug. 1 Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July 31
Fiscal Year
August 1, 20Y7 to July 31, 20Y8
The business entity assumption limits the economic data in financial reports to that di-
rectly related to the activities of the business. In other words, the business is viewed as an
entity separate from its owners, creditors, or other businesses. For example, the accountant
for a business with one owner would record the activities of the business only and would not
record the personal activities, property, or debts of the owner.
A business entity may take the form of a proprietorship, partnership, corporation, or lim-
ited liability company (LLC). Each of these forms and their major characteristics are listed in
Exhibit 4.
The three types of businesses discussed earlier—service, retail, and manufacturing—may
be organized as proprietorships, partnerships, corporations, or limited liability companies.
Because of the large amount of resources required to operate a manufacturing business, most
manufacturers such as Ford Motor Company (F) are corporations. Most large retailers such
as Wal-Mart Stores (WMT) and The Home Depot (HD) are also corporations. Companies
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Chapter 1 Introduction to Accounting and Business 11
Proprietorship is owned • 70% of business entities in the United States. • A & B Painting
by one individual. • Easy and inexpensive to organize.
• Resources are limited to those of the owner.
• Used by small businesses.
Partnership is owned by • 10% of business organizations in the United States • Jones & Smith, Architects
two or more individuals. (combined with limited liability companies).
• Combines the skills and resources of more than one
person.
Limited liability • 10% of business organizations in the United States • Boston Basketball Partners,
company (LLC) combines (combined with partnerships). LLC
the attributes of a part- • Often used as an alternative to a partnership.
nership and a corporation. • Has tax and legal liability advantages for owners.
Although Twitter is organized as a corporation in Delaware, its principal offices are in San Francisco. Link to Twitter
organized as corporations often include Inc. as part of their name to indicate that they are incor-
porated. For example, Twitter’s legal name is Twitter, Inc.
The going concern assumption requires that financial reports be prepared assuming that the
entity will continue operating into the future. This assumption justifies reporting items such as
equipment, buildings, and land at their initial or historical cost rather than liquidation or forced
sale values.
Pathways Challenge
This is Accounting!
Economic Activity
Over 20 years ago, Starbucks (SBUX) and Pepsi (PEP) c reated a business, called
The North American C offee Partnership. The business combined Starbucks’ ex-
pertise in coffee with Pepsi’s ability to manufacture, market, and sell ready-to-drink cof-
fee products. Its first product, Frappuccino, took off and today the business dominates
the ready-to-drink market with over $1.5 billion in annual sales.
Critical Thinking/Judgment
Should the $1.5 million in annual sales be reported as part of Starbucks’ annual report?
Should the $1.5 million in annual sales be reported as part of Pepsi’s annual report?
Should the $1.5 million in annual sales be reported as part of a separate business’s annual report?
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12 Chapter 1 Introduction to Accounting and Business
Principles
In addition to the preceding characteristics and assumptions, the following four principles are
an integral part of financial accounting:
▪▪ Measurement
▪▪ Historical cost
▪▪ Revenue recognition
▪▪ Expense recognition
The measurement principle determines the amount that will be recorded and reported.
The measurement principle requires that amounts be objective and verifiable. An amount is
objective if it is based upon independent, unbiased evidence. An amount is verifiable if it can
be confirmed by a third party. Transactions between two independent parties, called arm’s-
length transactions, provide amounts that are objective and verifiable.
To illustrate, assume that Aaron Publishers purchased the following building from Schenk
Enterprises on February 20, 20Y1, for $150,000:
Aaron Publishers would record the building at the February 20, 20Y1, purchase price of
$150,000. This amount is both objective and verifiable, as it was the result of a transaction be-
tween two independent parties. Recording an item at its initial transaction price is called the
historical cost principle or cost principle. Under the historical cost principle, amounts do
not normally change until another transaction occurs.
To illustrate, the fact that the preceding building has an estimated selling price of $220,000
on December 31, 20Y3, indicates that the building’s value has increased. However, the $220,000
is not recorded in the accounting records because Aaron Publishers has not sold the building.
If, however, Aaron sells the building on January 9, 20Y4, for $240,000, a profit of $90,000
($240,000 − $150,000) would be recorded by Aaron Publishers.
Revenue is the amount earned (received) from providing services or selling goods to cus-
tomers. The revenue recognition principle determines when revenue is recorded in the ac-
counting records. Normally, revenue is recorded when the services have been performed or
goods are delivered to the customer.
Expenses are amounts used to generate revenue. The expense recognition principle,
sometimes called the matching principle, requires expenses to be recorded in the same period
as the related revenue. Doing so allows the reporting of a profit or loss for the period.
This equation is called the accounting equation. Liabilities usually are shown before equity in the
accounting equation because creditors have first rights to the assets.
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Chapter 1 Introduction to Accounting and Business 13
Throughout this text, we use the corporate form of business. However, most of the con-
cepts and principles described and illustrated also apply to proprietorships, partnerships, and
limited liability companies.
Given any two amounts, the accounting equation may be solved for the third unknown amount. To
illustrate, if the assets owned by a corporation amount to $100,000 and the liabilities amount to $30,000,
the stockholders’ equity is equal to $70,000, computed as follows:
Assets 2 Liabilities 5 Stockholders’ Equity
$100,000 2 $30,000 5 $70,000
Twitter’s accounting equation for a recent year is: Assets ($6,870 million) = Liabilities ($2,265 million) +
Stockholders’ Equity ($4,605 million). Link to Twitter
Why It Matters
The Accounting Equation
T
he accounting equation serves as the basic foundation local convenience store, to the largest business, such as The
for the accounting systems of all companies. The account- Coca-Cola Company (KO). Some examples taken from
ing equation is used by the smallest business, such as the recent financial reports of well-known companies follow:
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14 Chapter 1 Introduction to Accounting and Business
note: All business transactions can be stated in terms of changes in the elements of the accounting
equation. How business transactions affect the accounting equation can be illustrated by using
All business transactions
can be stated in terms of some typical transactions. As a basis for illustration, a business organized by Chris Clark is used.
changes in the elements Assume that on November 1, 20Y3, Chris Clark organizes a corporation that will be known as
of the accounting NetSolutions. The first phase of Chris’s business plan is to operate NetSolutions as a service busi-
equation. ness assisting individuals and small businesses in developing Web pages and installing computer
software. Chris expects this initial phase of the business to last one to two years. During this
period, Chris plans on gathering information on the software and hardware needs of customers.
During the second phase of the business plan, Chris plans to expand NetSolutions into a person-
alized retailer of software and hardware for individuals and small businesses.
Each transaction during NetSolutions’ first month of operations is described in the follow-
ing paragraphs. The effect of each transaction on the accounting equation is then shown.
Transaction a Nov. 1, 20Y3 Chris Clark deposited $25,000 in a bank account in the name of
NetSolutions in exchange for shares of common stock in the corporation.
The preceding accounting equation is only for the business, NetSolutions. Under the busi-
ness entity assumption, Chris’s personal assets, such as a home or personal bank account, and
personal liabilities are excluded from the equation.
Transaction b Nov. 5, 20Y3 NetSolutions paid $20,000 for the purchase of land as a future
building site.
The land is located in a business park with access to transportation facilities. Chris Clark plans
to rent office space and equipment during the first phase of the business plan. During the sec-
ond phase, Chris plans to build an office and a warehouse for NetSolutions on the land.
The purchase of the land changes the makeup of the assets, but it does not change the
total assets. The items in the equation prior to this transaction and the effect of the transaction
follow. The new amounts are called balances.
25,000 5 25,000
Transaction c Nov. 10, 20Y3 NetSolutions purchased supplies for $1,350 and agreed to pay the supplier
in the near future.
You have probably used a credit card to buy clothing or other merchandise. In this type of
transaction, you received clothing for a promise to pay your credit card bill in the future. That
is, you received an asset and incurred a liability to pay a future bill. NetSolutions entered into
a similar transaction by purchasing supplies for $1,350 and agreeing to pay the supplier in the
3
To simplify, we assume that NetSolutions issued no-par stock. Types of stock as well as par and stated values are discussed in Chapter 12.
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Chapter 1 Introduction to Accounting and Business 15
near future. This type of transaction is called a purchase on account and is often described as
follows: Purchased supplies on account, $1,350.
The liability created by a purchase on account is called an account payable. Items such
as supplies that will be used in the business in the future are called prepaid expenses, which
are assets. Thus, the effect of this transaction is to increase assets (Supplies) and liabilities
(Accounts Payable) by $1,350, as follows:
26,350 5 26,350
Nov. 18, 20Y3 NetSolutions received cash of $7,500 for providing services to customers. Transaction d
You may have earned money by painting houses or mowing lawns. If so, you received money
for rendering services to a customer. Likewise, a business earns money by selling goods or
services to its customers. This amount is called revenue.
During its first month of operations, NetSolutions received cash of $7,500 for providing
services to customers. The receipt of cash increases NetSolutions’ assets and also increases
stockholders’ equity in the business. The revenues of $7,500 are recorded in a Fees Earned
column to the right of Common Stock. The effect of this transaction is to increase Cash and
Fees Earned by $7,500, as follows:
33,850 5 33,850
Different terms are used for the various types of revenues. As illustrated for NetSolutions, reve-
nue from providing services is recorded as fees earned. Revenue from the sale of merchandise is
recorded as sales. Other examples of revenue include rent, which is recorded as rent revenue, and
interest, which is recorded as interest revenue.
Instead of receiving cash at the time services are provided or goods are sold, a business
may accept payment at a later date. Such revenues are described as fees earned on account or
sales on account. For example, if NetSolutions had provided services on account instead of for
cash, transaction (d) would have been described as follows: Fees earned on account, $7,500.
In such cases, the firm has an asset, called an account receivable, which is a claim against
the customer. The effect of the transaction increases Accounts Receivable and Fees Earned.
When customers pay their accounts, Cash increases and Accounts Receivable decreases.
A
ccounting principles require that a transaction have pany. Round-tripping has been used by companies to artificially
commercial substance. Commercial substance means inflate their sales. However, such agreements do not have commer-
that the transaction has an economic impact on the cial substance, since there is no economic change to either company
entity. An example of a transaction lacking commercial sub- after the round-trip. Thus, round-tripped sales are not transactions
stance is round-tripping. Round-tripping is a situation whereby from an accounting perspective.
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16 Chapter 1 Introduction to Accounting and Business
Transaction e Nov. 30, 20Y3 NetSolutions paid the following expenses during the month: wages, $2,125; rent,
$800; utilities, $450; and miscellaneous, $275.
During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used
in this process of earning revenue are called expenses. Expenses include supplies used and pay-
ments for employee wages, utilities, and other services.
NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utili-
ties, $450; and miscellaneous, $275. Miscellaneous expenses include small amounts paid for such
items as postage, coffee, and newspapers. The effect of expenses is the opposite of revenues
in that expenses reduce assets and stockholders’ equity. Like fees earned, the expenses are re-
corded in columns to the right of Common Stock. However, since expenses reduce stockholders’
equity, the expenses are entered as negative amounts. The effect of this transaction is as follows:
Assets 5 Liabilities 1 Stockholders’ Equity
Accounts Common Fees Wages Rent Utilities Misc.
Cash 1 Supplies 1 Land Payable 1 Stock 1 Earned 2 Exp. 2 Exp. 2 Exp. 2 Exp.
Bal. 12,500 1,350 20,000 5 1,350 25,000 7,500
e. 23,650 22,125 2800 2450 2275
Bal. 8,850 1,350 20,000 1,350 25,000 7,500 22,125 2800 2450 2275
30,200 5 30,200
Businesses usually record each revenue and expense transaction as it occurs. However, to sim-
plify, NetSolutions’ revenues and expenses are summarized for the month in transactions (d) and (e).
When you pay your monthly credit card bill, you decrease the cash and decrease the amount
you owe to the credit card company. Likewise, when NetSolutions paid $950 to creditors
during the month, it reduced assets and liabilities, as follows:
29,250 5 29,250
Paying an amount on account is different from paying an expense. The paying of an ex-
pense reduces stockholders’ equity, as illustrated in transaction (e). Paying an amount on ac-
count reduces the amount owed on a liability.
Transaction g Nov. 30, 20Y3 Chris Clark determined that the cost of supplies on hand at the end of the
month was $550.
The cost of the supplies on hand (not yet used) at the end of the month is $550. Thus, $800
($1,350 2 $550) of supplies must have been used during the month. This decrease in supplies
is recorded as an expense, as follows:
28,450 5 28,450
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Chapter 1 Introduction to Accounting and Business 17
26,450 5
26,450
Dividends should not be confused with expenses. Dividends do not represent assets or
services used in the process of earning revenues. Instead, dividends are considered a distri-
bution of earnings to stockholders.
Summary
The transactions of NetSolutions are summarized in Exhibit 5. Each transaction is identified by
letter, and the balance of each accounting equation element is shown after every transaction.
26,450 5 26,450
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18 Chapter 1 Introduction to Accounting and Business
$3,050
Exhibit 6
Stockholders’ Equity
Effects of
Transactions on
Types of
Stockholders’ Transactions Stockholders’ Distributions of
Revenues Expenses
Equity Investments Earnings to
(Common Stock) Stockholders’
(Dividends) Net Income (Net Loss)
(Retained Earnings)
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Chapter 1 Introduction to Accounting and Business 19
Indicate the effect that each of these transactions has on the following accounting equation elements: Cash,
Accounts Receivable, Accounts Payable, Common Stock, Dividends, Fees Earned, Wages Expense, Utilities Expense.
Solution:
Each transaction affects one or more accounting equation elements.
56,000 5 56,000
Check Up Corner
Exhibit 7
Order
Financial
Prepared Financial Statement Description of Statement
Statements
1. Income statement A summary of the revenue and expenses for a specific
period of time, such as a month or a year.
2. Statement of stockholders’ A summary of the changes in stockholders’ equity
equity that have occurred during a specific period of time,
such as a month or a year.
3. Balance sheet A list of the assets, liabilities, and stockholders’ equity
as of a specific date, usually at the close of the last day
of a month or a year.
4. Statement of cash flows A summary of the cash receipts and cash payments
for a specific period of time, such as a month or a year.
The four financial statements and their interrelationships are illustrated in Exhibit 8, The data
for the statements are taken from the summary of NetSolutions’ transactions in Exhibit 5.
All financial statements are identified by the name of the business, the title of the state-
ment, and the date or period of time. The data presented in the income statement, the
statement of stockholders’ equity, and the statement of cash flows are for a period of time. The
data presented in the balance sheet are for a specific date.
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us. The Chief and I were at Sandhurst together, don't you know, and
he'd do anything for me. But he's a busy man, a very busy man; and
I always respect a man's business, pull myself up short, don't you
know, wouldn't waste his time or bore him, on any account."
"They haven't much time to spare in this building, sir," assented
Faunce.
"Of course not. Magnificent building—splendid institution—fine body
of men the police—but there ought to be three times as many of 'em.
Eh, Faunce, that's your opinion, ain't it?"
"No doubt, sir, there ought to be more of them, if it would run to it."
"But it won't, no, of course it won't. Another penny on the income-tax
this year! We shall see it a shilling before we've done with it."
"We should see it half a crown, sir, if everything was done as it ought
to be done."
"True, true, Faunce. A social Utopia, and the taxpayer with hardly
bread to eat. Well, I want to take you straight to my mother-in-law,
who will tell you all about her worthless son—a bad egg, Faunce, a
bitter bad egg, and not worth a ha'porth of the anxiety that poor old
lady has been feeling about him. She lives at Buckingham Gate.
Shall we walk?"
"By all means, sir. May I ask what particular circumstances have
caused this uneasiness on Mrs. Rannock's part—and from what
period her anxiety dates?"
"Well, you see, Faunce, Rannock left England in March—late in
March—to go to Klondyke—a wild-cat scheme, like most of his
schemes—and from that day to this nobody who knows him—so far
as we can discover—has received any communication from him."
"Is that so strange, sir? I shouldn't think that when a man was
digging for gold among a few thousand other adventurers, at the risk
of being frozen to death, or murdered if he was lucky, he would be
likely to trouble himself much about family correspondence?"
"Well, no doubt it's a rough-and-tumble life, but still, I'm told they do
get the mails, and do keep somehow in touch with the civilized world;
and, blackguard as Rannock is, he has been in the habit of writing to
his mother three or four times a year, and oftener. I believe there is a
soft spot in his heart for her. But you'll see the old lady, and she'll tell
you her troubles," concluded Major Towgood, "so I needn't say any
more about it."
In spite of which remark he talked without intermission all the way to
Buckingham Gate.
CHAPTER XV.
"Happy he
With such a mother! faith in womankind
Beats with his blood, and trust in all things high
Comes easy to him, and tho' he trip and fall
He shall not blind his soul with clay."
The Honourable Mrs. Rannock, widow of Captain Rannock, second
son of Lord Kirkmichael, lived in a narrow-fronted Queen Anne
house facing Wellington Barracks. It was one of the smallest houses
to be found in a fashionable quarter, and the rent was the only thing
big about it; but Mrs. Rannock had lived at Court for the greater part
of her life, having begun as a maid-of-honour when she and her
Royal mistress were young, and she could hardly have existed out of
that rarefied atmosphere. Refinement and elegance were as
necessary to her as air and water are to the common herd; she
would have pined to death in a vulgar neighbourhood; her personal
wants were of the smallest, but her surroundings had to be the
surroundings of a lady.
Everything in the house was perfect of its kind. It was furnished with
family relics, Sheraton and Chippendale furniture that had been
made to order by those famous cabinet-makers for the Rannocks of
the eighteenth century, a buhl cabinet that had come straight from
the Faubourg St. Germain in the Red Terror, when Paris was running
with innocent blood, and the ci-devants were flying from ruin and
death.
The street door was painted sky-blue, the hall and staircase were
white, the rich colouring of the wall-papers made a vivid background
to the sober tones of the old furniture, and in the dainty drawing-
room, with its apple-blossom chintz and exquisite Chelsea china, the
daintiest thing was old Mrs. Rannock, with her pink-and-white
complexion, silvery hair, patrician features and bearing, tall and
slender figure, rich brocade gown, and Honiton cap with lappets that
fell almost to her waist.
She was an ideal old lady, grande dame in every detail. She had
been painted by Hayter and sketched by D'Orsay. The semi-
transparent hand, which lay on the arm of her chair, had been
modelled by sculptors of renown, had been carved in marble and in
ivory, when she was the beautiful Mary Rannock.
She was nearly eighty, and had been a widow for a quarter of a
century, drifting placidly down the river of time, with very few
pleasures and not many friends, having outlived most of them, and
with only one trouble, the wrong-doing of the son she adored.
She had hoped so much for him, had burnt with ambition for him,
had destined him for a high place in the world; and he had forfeited
every friendship, missed every chance, disappointed every hope.
And she loved him still, better than she loved her daughter and her
daughter's children; better, perhaps, because his life had been an
ignominious failure; better because of that boundless compassion
which she felt for his ill-fortune.
"My poor Dick has never had any luck," she would say excusingly.
She received Mr. Faunce with pathetic eagerness, like a drowning
man clutching at the first spar that floats within his reach.
"Pray, be seated," she said graciously. And then, turning to her son-
in-law, she said, "I should like to have my talk with Mr. Faunce quite
alone, Harry," at which Major Towgood bounded from his chair with a
snort of vexation.
"But surely, my dear mother, since I know all the circumstances of
the case, and as a man of the world, I can be of some use."
"Not while I am talking to Mr. Faunce, Harry. I want to keep my poor
old head calm and cool."
"Well, dear, you are the best judge, but really——"
"Dear Harry, it will be so kind of you to leave us alone."
"Well, mother, if that's so——" and the impetuous little Major puffed
and blew himself out of the room, and might have been heard fuming
on the landing, before he went downstairs to console himself with a
cigar in the dining-room.
"My son-in-law is an excellent creature, Mr. Faunce, but he talks too
much," said Mrs. Rannock. "No doubt he has told you something of
the circumstances in which I require your help."
"Yes, madam."
"And now ask me as many questions as you like. I will keep nothing
from you. I am too anxious about my son's fate to have any reserve."
"May I ask, madam, in the first place, what reason you have for
being anxious about Colonel Rannock?"
"His silence is a sufficient reason—his silence of nearly ten months.
My son is a very good correspondent. I don't think he has ever
before left me two months without a letter. He is a very good
correspondent," she repeated earnestly, as if she were saying, "He is
a very good son."
"But have you allowed for the rough life at Klondyke, madam, and
the disinclination that a man feels—in a scene of that kind—to sit
down and write a letter, dead beat, perhaps, after a day's toil?"
"Yes, I have allowed for that, but I cannot believe—if my son were
living"—her eyes filled with irrepressible tears in spite of her struggle
to be calm—"and in his right mind, with power to hold a pen—I
cannot believe that he would so neglect me."
"And you have written to him, I conclude, madam?"
"I have written week after week. I have sent letters to the Post Office
at San Francisco and at Dawson City, where my son told me to
address him—letter after letter."
"Have you communicated with Colonel Rannock's late body-
servant?"
"Chater? Yes, naturally. What do you know of Chater?"
"Very little, madam. I happened to hear of him from a gentleman who
had also been making inquiries about your son."
"For what reason?"
"In Lady Perivale's interest. The gentleman has since married Lady
Perivale."
"Mr. Haldane! Yes, I heard of the marriage. I was glad to hear of it.
Lady Perivale had suffered a great injustice from her likeness to that
wretched woman."
"Pardon me, madam. You know the saying—Cherchez la femme. If
you can tell me anything about that woman, and Colonel Rannock's
relations with her, it may help me in my search for him."
"Oh, it is a sad, sad story. My dear son began life so well, in his
grandfather's regiment. There had been Rannocks in the
Lanarkshire ever since Killicrankie. He was a fine soldier, and
distinguished himself in Afghanistan, and it was only after he made
that wretched woman's acquaintance that he began to go wrong—
seriously wrong. He may have been a little wild even before then, but
not more than many other young men. It was that woman and her
surroundings that ruined him."
"I take it that happened about ten years ago."
"Ten years? Yes. How did you know that?"
"I had occasion to look into Miss Delmaine's past life, madam. Pray
tell me all you can about her."
"It was an infatuation on my son's part. He saw her at the theatre,
where people made a great fuss about her on account of her beauty,
though she was no actress. She had a fine house in St. John's
Wood, at the expense of a young man of large means—whom she
ruined, and who died soon after. My son became a frequent visitor at
the house. There were Sunday dinners, and suppers after the
theatre, and my son was always there, madly in love with Miss
Delmaine. Whether she was more to him than an acquaintance in
those days I cannot say. Certainly he had no quarrel with Sir Hubert
Withernsea. But after that unhappy young man's death Kate
Delmaine's influence upon my son wrecked his career. He left the
Army when the Lanarkshire was ordered to Burmah, rather than
leave her, and not daring to take her with him. I don't know what kind
of life he lived after that, although I saw him from time to time; but I
know he was under a cloud, and there were only a few of his father's
old friends who were civil to him, and asked him to their houses."
"Did you know of Colonel Rannock's courtship of Lady Perivale,
madam?"
"Yes, indeed. It was my earnest hope that he would succeed in it."
"Did you know the lady, and know of her likeness to Miss Delmaine?"
"No. I go very little into society. I am an old woman, and only like to
see old friends. And you must understand that I never saw Miss
Delmaine."
"Do you think your son was in love with Lady Perivale?"
"Yes, I believe he was. Or it may be that he only liked her because of
her resemblance to that woman."
"And was he very angry when she refused him?"
"Yes, I know he was wounded—and even angry."
"Do you think that disappointment, and other troubles, might have
induced him to take his own life?"
"No, no, no; I couldn't believe that for one moment. My son has
faced death too often—has risked his life in a good cause, and would
never throw it away like a coward. I know how brave he is, what a
strong will he has—a will strong enough to overcome difficulties. It
was like him to think of Klondyke when he was ruined."
"Did you know that he was in Algiers with Miss Delmaine last
February?"
"Not till I read the report of Lady Perivale's libel suit. I thought he had
broken with her finally two years ago, and I believe at the time he
had. I need not tell you that I did not obtain my knowledge of that
unhappy connection from my son himself. You will understand a
mother's keen anxiety, and that I had other sources of information."
"Yes, madam, I can understand. I do not think I need give you any
further trouble to-day; but if you will oblige me with your son's
photograph—a recent likeness—it may be of use in this matter."
"Yes, I can give you his photograph, taken last year."
Mrs. Rannock opened a velvet case on the table next her chair, and
the wasted white hands trembled ever so faintly as she took out a
cabinet photograph and gave it to Faunce.
"Thank you, madam. I shall wait upon you again directly I have any
fresh information; but I must warn you that an inquiry of this kind is
apt to be very slow; and I fear you can give me no suggestion as to
where to look for Colonel Rannock in the event of his having
changed his mind and not gone to Klondyke."
"No, no; I cannot think that he would change his mind. He was with
me the day before he started, full of hope and excitement. He was
enthusiastic about the wild life in Alaska, and would not listen to my
fears and objections. Oh! Mr. Faunce, if anything evil has happened
to him, these grey hairs will go down in sorrow to the grave."
Again the uncontrollable tears welled into her eyes. She rose, and
Faunce took the movement as his dismissal.
"You may rely upon my most earnest endeavours, madam," he said,
and quietly withdrew, as she stretched a trembling hand to the bell.
"Poor soul! I'm afraid there must be sorrow for those grey hairs
before we come to the end of the story," mused Faunce, as he
walked back to his rooms.
He wrote to Chater, the valet, asking him to call in Essex Street next
morning on particular business concerning Colonel Rannock; and
the valet appeared, with exact punctuality, neatly clad, with well-
brushed hat and slim umbrella, and a little look about the clean-
shaved chin, broad chest, and close-cut hair, that told Faunce he
had once shouldered arms, and swung round to the "Right turn!" in
the white dust of a barrack-yard.
Chater was eminently a man of the world, very easy to get on with,
when he had heard Faunce's credentials, and knew what was
wanted of him, in Mrs. Rannock's interests. He had been Rannock's
soldier-servant in Afghanistan, and had lived with him between
eleven and twelve years.
"And I think you liked him," said Faunce.
"Yes, sir; I liked my master. He was a devil, but he was the kind of
devil I like."
"And I suppose you knew Miss Delmaine?"
"Couldn't help that, sir. She was a devil, and the kind of devil I don't
like. She was the ruin of my master—blue ruin, Mr. Faunce. He might
have kept inside the ropes but for her."
"Did you know anything of his courtship of Lady Perivale?"
"Of course I did, sir. I had to carry the 'cello backwards and forwards
between the Albany and Grosvenor Square."
"Do you think he cared much for Lady Perivale?"
"Well, I believe he did, in a way. He was cuts with Miss Delmaine just
then. She'd been going on a little too bad. There was a prize-fighter,
a man she'd known from her childhood, that was always after her,
and the Colonel wouldn't stand it. Mind you, I don't believe—to give
the devil his due—she ever cared for the fellow, but I think she liked
making my master jealous. She is that kind of aggravating creature
that knows her power over a man, and can't be happy until she's
made him miserable. And then there were rows, and a regular burst
up, and the Colonel swore he'd never see her again."
"And it was after the quarrel that he courted Lady Perivale?"
"Yes, it was after. He was knocked all of a heap the first time he met
her ladyship, on account of her likeness to Kate. 'She's the loveliest
woman I ever saw since Mrs. Randall was at her best,' he said, for
he was always free with me, having lived under canvas together, and
me nursing him through more than one bout of Indian fever—'and
she's an oof-bird,' he said, 'and I shall be on the pig's back if I marry
her.' And I know he meant to marry her, and tried hard—left off cards
and drink, and cut all the young fools that he used to have hanging
about him, and turned over a new leaf. I'd never known him keep
steady so long since we came from India. But when he found it was
all no go, and Lady Perivale wouldn't have him, he was furious. And
when she went off to Italy in the autumn, he took to the cards again,
and drank harder than ever, and went a mucker one way and
another, and by December he had made it up with Kate, and they
went off to Nice together the week before Christmas, with the
intention of crossing over to Ajaccio."
"Why didn't you go with your master?"
"I had business to do for him in town. He wanted to get rid of his
chambers and furniture, and I had to find a purchaser, and he
wanted it all carried through very quietly, for there was a money-
lender who thought he had a bill of sale on the goods."
"You succeeded in that?"
"Yes; I got him a fair price for his lease and furniture. I would give a
good deal to know where he is, and what became of that money."
"Was it much?"
"Six hundred and forty pounds. Three hundred for the lease, which
had only two years to run, and three hundred and forty for the
furniture, at a valuation."
"Did he take all the money with him when he started for America?"
"No; he paid me half a year's wages, on account of a year and a half
due, and he spent a little on himself, but he had five hundred and
fifty pounds in his pocket-book, in bank-notes, when he left
Waterloo."
"In bank-notes. Do you know the figures?"
"Yes; there were two hundred-pound notes, and four fifties, the rest
tens and fives. I wrote a list of the numbers at his dictation."
"Have you kept that list?"
"I believe I have a copy of it among my papers. I copied the figures,
knowing what a careless beggar the Colonel is, and that he was as
likely as not to lose his list."
"Why did he take the money in bank-notes?"
"He had been told that a cheque-book wouldn't be of much use to
him in San Francisco, and no use at all at Dawson City, where he
would have to buy most of his outfit—furs, and mining tools, and a lot
more."
"What put Klondyke into his head, do you think?"
"A pal of his, a Yankee, was going to try his luck there. My master
was always fond of adventure, and never minded roughing it; so the
scheme took his fancy."
"Chater," said Faunce, in a very earnest voice, "do you think Colonel
Rannock ever got as far as Klondyke?—as far as Dawson City?—as
far as 'Frisco?—as far as New York?"
"God knows, sir! I think the case looks—fishy."
"I have reason to know that he wasn't at 'Frisco in time to start for
Vancouver with the pal you talk of, Mr. Bamford—and that Bamford
and another friend sailed without him."
"I know that, sir. Mr. Haldane, the gentleman who came to me for
information, told me the result of his inquiry."
"And this made you rather uneasy, didn't it, Chater?"
"Well, I didn't like to hear it, Mr. Faunce. But my master is a rum sort.
He might change his mind at the last minute. He might go back to
her."
"He didn't do that, Chater. I can answer for him."
"What do you know about her?"
"A good deal. Was she at Waterloo to see your master off by the
boat-train?"
"Not she! They had one of their quarrels in Paris—and he left her
there to find her way home by herself."
"You say home? Had she any house in London?"
"No, she'd never owned a house since the Abbey Road. She was in
lodgings near Cheyne Walk before she went to Nice."
"Decent lodgings?"
"Oh yes, topping."
"And she didn't show up at the boat-train?"
"He didn't travel by the boat-train. He went the night before—by the
Bournemouth express."
"The four-fifty-five?"
"Yes."
"Was he going to stay in Southampton that night?"
"I suppose so. He didn't tell me what was up. He seemed a bit
excited and put out, and hadn't a word to throw at a dog."
"Did he promise to write to you from America?"
"Yes, he was to write to me directly he landed. He had instructions to
give me."
"Do you know of any Southampton friends of Colonel Rannock's?"
"Can't say I do. He has had yachting pals there sometimes in
summer, but there wouldn't be any of that sort in March."
"Mrs. Rannock is alarmed at being without letters from her son since
last March. Do you consider that an alarming circumstance?"
"Yes, Mr. Faunce, I do. My master was fond of his mother, in his way.
He didn't mind victimizing her to the extent of her last sovereign,
poor old lady, when he was hard pushed; but he was attached to her,
in his way. And I don't think he would have made her unhappy by not
writing to her, if it had been in his power to write. I give him that
much credit."
"Well, Chater, we shall have to set the cable at work, and find out
what we can at Dawson City. And now tell me your opinion of Mrs.
Randall, alias Delmaine. You describe her as a bit of a shrew; but do
you know if she was really attached to the Colonel?"
"I believe she worshipped him, in her way. I—well, a letter she wrote
him after their worst quarrel—the row that parted them for over two
years—forced itself on my attention—happening to take it up in a
casual way—and I must say it was a letter to melt a stone; but it
came just when the Colonel was going all he knew for Lady Perivale,
and he took no notice of it."
"And two years after he went back to her. That was weak, wasn't it?"
"I suppose it was, sir. But, after being much with a stuck-up person
like Lady Perivale, a spirited, free and easy creature like Kate
Delmaine would exercise a fascination."
"And you don't think she ever played him false? You don't think she
cared for the prize-fighter? What was his name, by-the-by; Bolisco,
wasn't it?"
"Yes, sir, Jim Bolisco. No, she never cared a straw for him—a great
ugly brute, with a cock-eye. She'd known him when she was a child
—for her people were very low—father kept a small public out
Battersea way; and it ain't easy for a woman to shake off that sort of
friend. Bolisco was took up by Sir Hubert Withernsea, and used to
dine at the Abbey Road sometimes, much to the Colonel's disgust.
No, I don't believe Kate ever had the slightest liking for that man; but
I sometimes used to fancy she was afraid of him."
CHAPTER XVI.
"Later or sooner by a minute then,
So much for the untimeliness of death,—
And as regards the manner that offends,
That rude and rough, I count the same for gain—
Be the act harsh and quick!"
His interview with Chater left John Faunce troubled in mind, and
deeply meditative. Had there been a crime, or was the
disappearance of Colonel Rannock a fact easily accounted for in the
natural course of events? The mother's conviction that some evil had
befallen him was after all founded on an inadequate reason. If he
had gone to Klondyke, as he intended, the whole fabric of his life
would have been changed, and the man who while in the civilized
world corresponded regularly with his mother, might well forget his
filial duty, in the daily toil and hourly dangers, hopes, and
disappointments of the struggle for gold. It was difficult to judge a
man so placed by previous experience or everyday rules. The most
dutiful son might well leave home letters unwritten; or a letter, trusted
to a casual hand, might easily go astray.
Then there was always the possibility that he had changed his plans;
that he had stayed in New York or in San Francisco; that he had
chosen some other portion of the wild West for his hunting ground;
that he had spent the summer fishing in Canada, or the autumn
shooting in the Alleghanies; and, again, that his letters to England
had been lost in transit.
Faunce would not have been disposed to suspect foul play on so
slight a ground as the absence of news from the wanderer, but there
had been that in Mrs. Randall's manner and countenance which had
excited his darkest suspicions, and which had been the cause of his
undiminished interest in her proceedings.
If there had been a crime she knew of it, had been in it, perhaps. He
had watched her and studied her, but he had never questioned her.
The time was not ripe for questioning. He did not want to alarm her
by the lightest hint of his suspicions. She was too important a factor
in the mystery.
He called on her on the evening after his interview with Chater, and
persuaded her to go to a theatre with him. It was the first time he had
assumed the attitude of established friendship, but although she
seemed surprised at the invitation, she accepted it.
"I shall be glad to get out of this hole for a few hours," she said, with
an impatient sigh, as she pinned on her hat before the glass over the
mantelpiece, the little fur toque in which she had charmed the jury.
Faunce took her to see a musical comedy, a roaring farce from start
to finish, in which the most popular low comedian in London gave a
free rein to his eccentricities; and he watched his companion's face
from time to time while the auditorium rocked with laughter at the
wild fun. Not a smile illumined that gloomy countenance. He could
see that she was hardly conscious of the scene, at which she stared
with fixed melancholy eyes. Once she looked round at the people
near her, with a dazed expression, as if she wondered why they
were laughing.
It is recorded of the first Napoleon that he once sat through a broad
farce with an unchanged countenance; but then his shoulders bore
the burden of empire, the lives and fortunes of myriads.
The experience of this evening went far to confirm Faunce's ideas.
He took Mrs. Randall to an oyster shop, and gave her some supper,
and then put her into a cab and sent her back to Selburne Street.
Just at the last, when he had paid the cabman and given her the
man's ticket, her face lighted up for a moment with a forced smile.
"Thank you no end for a jolly evening," she said.
"I'm afraid it hasn't been very jolly for you, Mrs. Randall. You didn't
seem amused."
"Oh, I don't think I'm up to that sort of trash now. I had too much of it
when I was on the boards. And the more comic the show is, the
more I get thinking of other things."
"You shouldn't think too much; it'll spoil your beauty."
"Oh, that's gone," she said, "or, if it ain't, I don't care. I'd as leave be
a nigger as a 'has been,' any day. Good night. Come and see me
soon; and perhaps, if you take me to a tragedy next time, I may
laugh," she added.
"There's something bitter bad behind that," mused Faunce, as he
tramped across the bridge to Waterloo Station for the last Putney
train, "but, for all that, I can't believe she's a murderess."
Faunce spent the next morning in his den in Essex Street poring
over a book to which he had frequent recourse, and of which he was
justly proud, since it was the wife of his bosom who had compiled
this register of passing events for his study and use, a labour of love
on her part, achieved with abnormal slowness, and kept closely up to
date. The book was carried home to Putney on the first of every
month, and Mrs. Faunce's careful hands added such paragraphs
bearing on the scheme of the work, as she had cut out of the
newspapers during the previous four weeks.
It had pleased this good helpmeet to think that she was assisting her
husband in his professional labours, and the gruesome nature of her
researches had never troubled her.
Mrs. Faunce's book was a large folio bound in red levant leather, and
containing newspaper cuttings, pasted in by the lady's careful hands,
and indexed and classified with neatness and intelligence.
The volume was labelled "Not accounted for," and was a record of
exceeding ghastliness.
It contained the reports of coroners' inquests upon all manner of
mysterious deaths, the unexplained cases which might have been
murder, the "found drowned," the nameless corpses discovered in
empty houses, in lodging-house garrets, on desolate heaths and
waste places; a dismal calendar of tragic destinies, the record of
hard fate or of undiscovered crime.
Steadily, carefully, John Faunce searched the spacious pages where
the scraps of newspaper type stood out against a broad margin of
white paper. He began his scrutiny at the date on which Colonel
Rannock was said to have left London, and pursued it without finding
any fact worth his attention till he came to a paragraph dated May
30, and extracted from the Hants Mercury, a popular bi-weekly
newspaper, published in Southampton.
"Strange Discovery at Redbridge.—An inquest was held
yesterday afternoon at the Royal George, Redbridge, on the body of
a man, which had been found the previous day by some workmen
engaged on the repair of the road by the river. Their attention was
attracted by the proceedings of some gulls that were hovering and
screaming over a discarded boat that lay keel upwards in the slime
and weeds of the foreshore, at a spot where the tide must have
washed over it day by day. The timbers were so rotten that they
crumbled under the men's hands as they tried to lift the boat; but
worthless as it was, they found it carefully secured with two strong
stakes which had been thrust between the timbers at stern and bow,
and driven deep into the beach below the soft ooze and shifting mud
that moved with every tide.
"The men pulled up the stakes and turned the keel over, and, almost
buried in the mud, they found the body of a man which had evidently
been lying there for a long time, and of which even the clothing was
so decomposed as to be unrecognizable. The most careful scrutiny
failed to afford any indication of identity, except the name of a well-
known West End tailor on the trousers-buttons, and the fact that the
unknown had been tall and strongly built. The doctor's evidence
showed that the back of the skull had been fractured by some blunt
instrument, and by a single blow of extraordinary violence. Death
must have been almost instantaneous. The inquiry was adjourned in
the hope of further evidence transpiring."
Other notices followed at short intervals, but no further evidence had
"transpired." A verdict of murder by some person or persons
unknown had ended the inquiry.
"Curious," mused Faunce, after reading the report a second time,
and with profound attention, and then he went on with his book till he
came to the last extract from a recent paper, another unknown victim
of an unknown murderer, pasted on to the page a week ago. And of
all those unsavoury records there was only that one of the body
hidden under the discarded boat that engaged his attention.
He knew Redbridge, a village street with its back to the water, a few
scattered houses along the shore, a homely inn, a bridge, and for the
rest a swampy waste where the reeds grew tall and rank, and the
wild duck skimmed. He knew the solitude that could be found along
that shore, not a quarter of a mile from pleasant cottage houses, and
lamplit village shops, and the gossip and movement of the inn. A
likely spot for a murderer to hide his victim; and this was clearly a
case of murder, the stealthy murderer's sudden blow, creeping
noiselessly behind the doomed man's back, with the strong arm lifted
ready to strike.
That single blow of great violence indicated the murderer's strength.
But where and how had the blow been dealt, and what connection
could there be between Colonel Rannock's supposed departure from
Southampton, and the body found on the shore at Redbridge, four
miles away?
The question was one which John Faunce told himself that he had to
answer. The answer, when arrived at, might have no bearing on the
case in hand, but it had to be found. Faunce's science was an
inductive science, and he was always asking himself apparently
futile questions and working hard at the answers.
Mr. Faunce spent the evening in his snug little sitting-room at Putney,
and his sole recreation during those domestic hours was furnished
by Mrs. Randall's discarded blotting-book, which he had not
examined since he obtained it from the little servant in Selburne
Street.
With a clear table and a strong duplex lamp in front of him, Faunce
took the leaves of blotting-paper one by one, and held them between
his eyes and the light, while Mrs. Faunce, reading a novel in her
armchair by the fire, looked up at him every now and then with an
indulgent smile.
"At your old blotting-paper work again, Faunce," she said. "I don't
fancy you'll get much information out of that ragged stuff. There's too
much ink, and too many blots and splotches."
"It's not a very good specimen, Nancy; but I suppose I shall come to
something before I've done. It's finnicking work; but it almost always
pays."
"You're so persevering; and then you love your work."
"If I didn't I should never have stuck to it, Nancy. It's rather trying
work for any man that hasn't a heart like the nether millstone; and I'm
afraid I haven't."
Faunce had been at work nearly two hours, and his wife's interest in
a transcendently lovely heroine and a repulsively plain hero was
beginning to flag, before he came upon a blurred and broken line
that rewarded his patience.
In that splotched and besmeared labyrinth of lines the detective's
trained eye had discovered—
1. A date, March 27.
2. Two words, "meet me——"
3. A line of fragmentary syllables, "Sou—ton—est—o'clock."
4. Three words, "always loved you."
5. "Your—nd——"
6. "ig——"
This much, the inky impression of a heavy hand and a broad-nibbed
pen, Faunce was able to decipher upon two sheets of blotting-paper.
That last item, the letters "ig," with a flourish under the g, was the
most significant part of his discovery.
The letter had been signed with the lady's pet name, "Pig," and
Faunce told himself that to only one man would she have so signed
herself—the lover who had called her by that name at the Mecca
Hotel, and whose playful invention was doubtless responsible for the
endearing sobriquet.
"She told me she did not know whether he sailed from Southampton
or Liverpool," mused Faunce, "yet here, under my hand, is the
evidence that she asked him to meet her at Southampton West."
He went to Southampton next day, and called at the office of the
American Line. If Colonel Rannock had carried out his intention there
must be some record of his passage to New York.
There was such a record, and a startling one, for it proved that he
had not gone to America by the ship in which he meant to sail.
After some difficulty, and being referred from one clerk to another,
Faunce found the young man who had booked Colonel Rannock's
passage in the Boston on Friday, March 29, the evening before she
sailed.
"He came after seven o'clock, when the office was shut," said the
clerk. "I was at work here, and as he made a great point of it I
booked his berth for him. He suffered for having left it till the eleventh
hour, for there were only two berths vacant—the two worst on the
ship. He grumbled a good deal, but took one of them, paid the
passage money, and left his cabin trunk to be sent on board next
morning. And from that day to this we have never heard of him. He
gave us no address, but we have his trunk, and we hold the cash to
his credit, and I suppose he'll claim it from us sooner or later."
"Was he alone?"
"He was alone when he came into the office, but there was some
one waiting for him in a cab outside, and I believe the some one was
a lady. He spoke to her as he came in at the door, and I heard her
answer him. 'Don't be all night about it, Dick,' she said."
"Thank you," said Faunce. "His friends are getting anxious about
him, but, for all that, I dare say he's safe enough, and he'll call upon
you for that passage money before long."
"If he's above ground I should think he would," answered the clerk,
"but I must say it looks rummy that he hasn't claimed the cash and
the trunk before now," and Faunce left the office more and more
concerned about that corpse under the disused boat.
The steamer Boston was to leave the docks late on Saturday
afternoon. Why did Colonel Rannock go to Southampton on Friday,
and how did he propose to spend the intervening hours? More
questions for Faunce to answer.
A woman was with him at Southampton—a woman who had not
travelled with him from Waterloo, since he was alone when Chater
saw the evening express leave the platform. Who was the woman,
and what was her business on the scene? That she had addressed
him by his Christian name showed that she was not the casual
acquaintance of an idle hour.
Faunce believed that he had found the answer to this question in
Mrs. Randall's blotting-book. If the letter that had left its fragmentary
impression on the blotting-paper had been sent to Colonel Rannock,
a letter urging him to meet her at Southampton West, it would
account for his going there the night before the steamer left. From
those scattered words, and that signature, "Your fond Pig," Faunce
concluded that Kate Delmaine had written to the man she loved,
pleading for a parting interview, and that Rannock had responded to
her appeal.
There were other questions for Faunce to answer, and it was in the
quiet pursuit of knowledge that he took himself to the hotel which he
deemed the best in Southampton, engaged a bedroom, and ordered
a dinner in the coffee-room at the old-fashioned hour of six.
Before dining he called upon the coroner, who was also a well-
known family solicitor, and heard all that gentleman could tell him
about the inquest at Redbridge, which was no more than had been
recorded in the local newspaper.
Faunce having revealed himself in his professional capacity, the
coroner expressed his own opinion freely.
"I made up my mind that it was a murder case, and a bad one," he
said; "I've got the tailor's buttons in my criminal museum. Dash,
Savile Row. That stamps the victim as a stranger. We Southampton
people don't get our clothes in Savile Row."