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Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
ACCOUNTING 27e
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
James M. Reeve
Professor Emeritus of Accounting
University of Tennessee, Knoxville
Jonathan E. Duchac
Professor of Accounting
Wake Forest University
Accounting, 27e © 2018, 2016 Cengage Learning®
Carl S. Warren ALL RIGHTS RESERVED. No part of this work covered by the copyright
James M. Reeve herein may be reproduced or distributed in any form or by any means,
Jonathan E. Duchac except as permitted by U.S. copyright law, without the prior written
permission of the copyright owner.
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The Warren/Reeve/Duchac Family
The Warren/Reeve/Duchac Family of solutions provides a host of options to fit your exact teaching style—all with an
integrated technology solution.
Sole Proprietorship Approach Corporate Approach
• 26 Chapters
• 26 Chapters
• 65% Financial Accounting/
• 50% Financial Accounting/
35% Managerial Accounting 50% Managerial Accounting
• Chapters 1–14 • Chapters 13–26

from Financial & from Financial &
Managerial Managerial
• Financial Chapters 1–17 from Accounting, 14e Accounting, 14e
Accounting, 27e
Brief Contents
Chapter 1 Introduction to Accounting and Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Chapter 2 Analyzing Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Chapter 3 The Adjusting Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Chapter 4 Completing the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
Chapter 5 Accounting Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
Chapter 6 Accounting for Merchandising Businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
Chapter 7 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
Chapter 8 Internal Control and Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394
Chapter 9 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
Chapter 10 Long-Term Assets: Fixed and Intangible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486
Chapter 11 Current Liabilities and Payroll. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 536
Chapter 12 Accounting for Partnerships and Limited Liability Companies . . . . . . . . . . . . . . . . . . . . . . . . 584
Chapter 13 Corporations: Organization, Stock Transactions, and Dividends. . . . . . . . . . . . . . . . . . . . . . . 628
Chapter 14 Long-Term Liabilities: Bonds and Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675
Chapter 15 Investments and Fair Value Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 719
Chapter 16 Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765
Chapter 17 FInancial Statement Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 823
Chapter 18 Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883
Chapter 19 Job Order Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924
Chapter 20 Process Cost Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968
Chapter 21 Cost-Volume-Profit Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1020
Chapter 22 Budgeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1074
Chapter 23 Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1124
Chapter 24 Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1172
Chapter 25 DIfferential Analysis, Product Pricing, and Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . 1218
Chapter 26 Capital Investment Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1272
Mornin' Joe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MJ-1
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Appendix B International Financial Reporting Standards (IFRS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C Revenue Recognition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Appendix D Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
iv
The Warren Vision
Warren/Reeve/Duchac’s Accounting 27e gives students a solid foundation in accounting

oduction to ess
CHAPTER
4
CHAPTER
Intrworld.
1
to prepare them for future business courses and the real n nd Busi
1. H
elps students connect concepts to the Accounting a Chapter 3
bigger picture with features such as the Transactions Adjusting Entri

es
Chapter 1
new Chapter-Opening Schema. Unadjusted
Accounts Adjusting
XXX Journal Entries
XXX Adjusted
Accrued Revenues Accounts
Accrued Expenses Unadj. Balances
System
Accounting Equation
Unadjusted Unearned Reve Adjustments XXX XXX
nues XXX
Trial Balance Prepaid Expenses Adj. Balances XXX
XXX
Accounting ity Total Debit
Depreciation XXX
ilities + Owner's Equ Balances = Total Credit

Assets = Liab Balances
Adjusted Tria
l Balance
Total Debit
2. A
ccounting Cycle Coverage provides an Chapter 2
Account
Debits
Credits
Balances = Total Credit
Balances
it
unmatched foundation so students are bit and Cred Chapter 4
Rules of De ACCOUNTS
Adjusted Acco
unts
ANCE SHEET
prepared to succeed in later chapters. BAL
ITY
XXX XXX
+ OWNER’S EQU ount Adjusted Balan

ces
ital Acc
= LIABILITIES Owner’s Cap for
ounts Credit
ASSETS Liability Acc Debit for
Asset Accoun
ts Credit for decreases (–)
increases (+) Financial Statem
Credit for
Debit for
decreases (–)
increases (+) Balance Income Stateme
nt
Statement of
ents
Debit for
decreases (–) Balance Own er’s Equity
increases (+)
Balance Adjusted
Closing Entries Balance Shee
t
ts
ement Accoun Accounts Closing
Income Stat
wing ounts Journal Entries Income Stateme
Owner’s Dra Revenue Acc XXX XXX and Drawing nt
Account Credit for Accounts
Debit for
Credit for increases (+) 0
Debit for decreases (–) Adjusted 0
decreases (–) Balance Balances
increases (+)
ounts Zero Balances
Balance Expense Acc Total Debit
Credit for Balances = Total Credit
Debit for Balances Balance Shee
decreases (–) t
increases (+) Accounts
Balance XXX
XXX
Post-Closing
Trial Balance
e
Trial Balanc
Unadjusted
Total Debit
Balances Balances = Total Credit
Total Credit Balances
Balances =
Total Debit
BK-CHE-WAR PM
REN_27E-160 08/11/16 4:56
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3. H
elps learners appreciate why accounting is important to business and a prosperous
ARREN_27
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PM
BK-CHE-W
society with new tools such as the Why It Matters Concept Clips.
490 Chapter 10 Long-Term Assets: Fixed and Intangible
Investments are long-lived assets that are not used in the normal operations and
are held for future resale. Such assets are reported on the balance sheet in a section
entitled Investments. For example, undeveloped land acquired for future resale would
be classified and reported as an investment, not land.
The Cost of Fixed Assets

In addition to purchase price, the costs of acquiring fixed assets include all amounts
spent getting the asset in place and ready for use. For example, freight costs and the
costs of installing equipment are part of the asset’s total cost.
Exhibit 2 summarizes some of the common costs of acquiring fixed assets. These
costs are recorded by debiting the related fixed asset account, such as Land,1 Building,
Land Improvements, or Machinery and Equipment.
4. A presentation style built for the way this EXHIBIT 2 Costs of Acquiring Fixed Assets
generation reads and assimilates information.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 v
Only costs necessary for preparing the fixed asset for use are included as a cost of
Features
Roadmap for Success

Warren/Reeve/Duchac’s Accounting 27e makes it easy for you to give students a solid foundation in accounting
without overwhelming students. Warren covers the fundamentals AND motivates students to learn by showing how
accounting is important to a business.
Built for Today’s Students

The Warren/Reeve/Duchac presentation style provides content in a way that this generation reads and assimilates
information.
• Short, concise paragraphs and bullets
• Stepwise progression
• Meaningful illustrations and graphs
Hallmarks of the Revision

New schemas provide a roadmap of accounting that emphasizes the big picture. Each chapter begins
with a new graphic Schema, or Roadmap of Accounting, that shows readers how the chapter material fits
within the larger context of the overall book. With this approach, students view chapter concepts as part
of a larger whole rather than as mere independent pieces of knowledge, for a truly functional understand-
ing of accounting.
Financial and managerial sections use separate schemas. A four-part schema (Chs. 1–4) demonstrates how chapter
content integrates within the accounting cycle. The financial accounting chapters’ schema (Chs. 5–17) highlights
chapter content within a set of integrated financial statements. A separate managerial accounting schema (Chs. 18–26)
shows how chapter content integrates within the managerial accounting functions.
CHAPTER
18
CHAPTER
Introduction to
6 Accounting for
Merchandising Businesses Managerial Accounting
Chapters 1–4
Accounting Cycle
Chapter 5
Accounting Systems Concepts and Principles
Chapter 18 Introduction to Managerial Accounting
Statement of Statement of
Income Statement Balance Sheet
Owner's Equity Cash Flows
Chapter 6 Accounting for Chapter 16 Cash Flows
Merchandising
Businesses
Assets = Liabilities + Owner's Equity
Developing Information
Chapter 8 Cash Chapter 11 Current Liabilities Chapter 12 Partnerships
Chapter 9 Receivables Chapter 14 Bonds and Notes Chapter 13 Corporations
Chapter 7 Inventories COST SYSTEMS COST BEHAVIOR
Chapter 10 Fixed and Intangible
Assets Chapter 19 Job Order Costing Chapter 21 Cost-Volume-Profit Analysis
Chapter 15 Investments
Chapter 20 Process Cost Systems
Chapter 17
Financial Statement Analysis
Statement of Owner's Equity Statement of Cash Flows

Owner's capital, Jan. 1 $XXX Cash flows from (used in) operating activities $XXX Decision Making
Net income $ XXX Cash flows from (used in) investing activities XXX
Withdrawals (XXX) Cash flows from (used in) financing activities XXX
EVALUATING PERFORMANCE COMPARING ALTERNATIVES
Increase in capital XXX Increase (decrease) in cash flows $XXX
Retained earnings, Jan. 1, 20Y5 $XXX Cash as of January 1, 20Y5 XXX
Income Statement Balance
Cash as Sheet
of December 31, 20Y5 $XXX Chapter 22 Budgeting Chapter 24 Decentralized Operations
Chapter 23 Variances from Standard Costs Chapter 25 Differential Analysis,
Sales $XXX Current assets:
Cost of merchandise sold XXX Cash $XXX Product Pricing, and
Gross profit $XXX Accounts receivable XXX Activity-Based Costing
Operating expenses: Merchandise inventory XXX
Advertising expense $XXX Total current assets $XXX
Chapter 26 Capital Investment Analysis
Depreciation expense XXX Property, plant, and equipment $XXX
Amortization expense XXX Intangible assets XXX
Depletion expense XXX Total long-term assets XXX
… XXX Total assets $XXX
… XXX Liabilities:
Total operating expenses XXX Current liabilities $XXX
Income from operations $XXX Long-term liabilities XXX
Other revenue and expenses XXX Total liabilities $XXX
Net income $XXX Owner’s equity XXX
Total liabilities and owner’s equity $XXX
vi
BK-CHE-WARREN_27E-160241-Chp06.indd 280 30/11/16 2:25 PM
Features vii
360 Chapter 7 Inventories
Revised and refreshed real company chapter openers engage readers from
the net realizable value ofthe start. New
the merchandise. andvalue
Net realizable fresh chapter
is determined as 4
follows: IFRS
openers introduce and briefly describe a real company andSee how its
Appendix B for challenges relate to the chapter content.
Net Realizable Value = Estimated Selling Price – Direct Costs of Disposal
Links
more information.
to this opening company appear throughout the chapter to reinforce Direct the costs
importance
of disposal include ofselling
what expensesreaders
such as specialareadvertising
learning.or
sales commissions.
To illustrate, assume the following data about an item of damaged merchandise:
Original cost $1,000
Estimated selling price 800
Estimated selling expenses 150
In applying LCM, the market value of the merchandise is $650, computed as follows:
7
CHAPTER Market Value (Net Realizable Value) = $800 – $150 = $650
Thus, the merchandise would be valued at $650, which is the lower of its cost of
Link to Best Buy $1,000 and its market value of $650.
Best Buy values its The lower-of-cost-or-market method can be applied in one of three ways. The
inventory at lower of cost, market price, and any declines could be determined for:
cost or market based • Each item in the inventory
upon cost and the • Each major class or category of inventory
amount it expects to • Inventory as a whole
realize from the sale.
The amount of any price decline is included in the cost of merchandise sold.
This, in turn, reduces gross profit and net income in the period in which the price
declines occur. This matching of price declines to the period in which they occur is
the primary advantage of using the lower-of-cost-or-market method.
To illustrate, assume the following data for 400 identical units of Item Echo in
inventory on December 31:
Cost per unit $10.25
Market value (net realizable value) per unit 9.50
Since the market value of Item Echo is $9.50 per unit, $9.50 is used under the lower-
RICHARD B. LEVINE/NEWSCOM
of-cost-or-market method.
Best Buy Exhibit 9 illustrates applying the lower-of-cost-or-market method to each inventory
A ssume that in September, you purchased a Sony
HDTV from Best Buy. At the same time, you pur-
Merchandising businesses such as Best Buy make
similar assumptions when identical merchandise is pur-
Link to Best Buy item (Echo, Foxtrot, Sierra, Tango). As applied on an item-by-item basis, the total lower-
of-cost-or-market is $15,070, which is a market decline of $450 ($15,520 – $15,070).
chased a Denon surround sound system for $599.99. You chased at different costs. For example, Best Buy may have The excess of cost
liked your surround sound so well that in November, you purchased thousands of Denon surround sound systems This market decline of $450 is included in the cost of merchandise sold.
purchased an identical Denon system on sale for $549.99 over the past year at different costs. At the end of a period,
over the amount
for your bedroom TV. Over the holidays, you moved to a some of the Denon systems will still be in inventory, and Best Buy expects to In Exhibit 9, Items Echo, Foxtrot, Sierra, and Tango could be viewed as a class of in-
new apartment and in the process of unpacking discov- some will have been sold. But which costs relate to the receive from the sale ventory items. If the lower-of-cost-or-market method is applied to the class, the inventory
ered that one of the Denon surround sound systems was sold systems, and which costs relate to the systems still
missing. Luckily, your renters or homeowners insurance in inventory? Best Buy’s assumption about inventory costs of an item is called a would be valued at $15,472, which is a market decline of $48 ($15,520 − $15,472). Likewise,
policy will cover the theft, but the insurance company can involve large dollar amounts and, thus, can have a sig- markdown. if Items Echo, Foxtrot, Sierra, and Tango make up the total inventory, the lower-of-cost-
needs to know the cost of the system that was stolen. nificant impact on the financial statements. For example, or-market method as applied to the total inventory would be the same amount, $15,472.
The Denon systems were identical. However, to re- Best Buy reported $5,731 million of inventory and net loss
spond to the insurance company, you will need to identify of $1,231 million for a recent year.
which system was stolen. Was it the first system, which This chapter discusses such issues as how to deter-
cost $599.99, or was it the second system, which cost mine the cost of merchandise in inventory and the cost
$549.99? Whichever system you choose will determine of merchandise sold. However, it begins by discussing the EXHIBIT 9 A B C D E F G
the amount that you receive from the insurance company. importance of control over inventory. 1 Market Value
Determining 2 Inventory Cost per per Unit Total
Inventory at Lower 3 Item Quantity Unit (Net Realizable Value) Cost Market LCM
of Cost or Market 4 Echo 400 $10.25 $ 9.50 $ 4,100 $ 3,800 $ 3,800
(LCM) 5 Foxtrot 120 22.50 24.10 2,700 2,892 2,700
6 Sierra 600 8.00 7.75 4,800 4,650 4,650
7 Tango 280 14.00 14.75 3,920 4,130 3,920
8 Total $15,520 $15,472 $15,070
9
278 Chapter 5 Accounting Systems
Revised end-of-chapter assignments (homework) provide important hands-on practice. Refined, meaningful review 4 Accounting Standards Update, Inventory (Topic 330): Simplifying the Measurement of Inventory, No. 2015-11, July 2015, FASB
(Norwalk, CT).
3. Post the appropriate individual entries to the general ledger.
and applications at the end of each chapter include Discussion Questions, Practice Exercises (A and B versions),
4. Total each of the columns of the special journals and post the appropriate totals to
Exercises, Problems (Series A and B), the
and Cases
general & Projects
ledger; that emphasize
insert the account balances. ethics, teamwork, and communication skills.
5. Prepare a trial balance.
Cases & Projects
CP 5-1 Ethics in Action

Netbooks Inc. provides accounting applications for business customers on the Internet for
a monthly subscription. Netbooks customers run their accounting system on the Internet;
Ethics
thus, the business data and accounting software reside on the servers of Netbooks Inc. The
senior management of Netbooks believes that once a customer begins to use Netbooks,
it is very difficult to cancel the service. That is, customers are “locked in” because it is
difficult to move the business data from Netbooks to another accounting application even
though the customers own their own data. Therefore, Netbooks has decided to entice
customers with an initial low monthly price that is half the normal monthly rate for the
first year of services. After a year, the price will be increased to the regular monthly rate.
Netbooks management believes that customers will have to accept the full price because
customers will be “locked in” after one year of use.
a. Discuss whether the half-price offer is an ethical business practice.
b. Discuss whether customer “lock-in” is an ethical business practice.
CP 5-2 Team Activity

The two leading software application providers for supply chain management (SCM)
Team
Activity and customer relationship management (CRM) software are JDA and Salesforce.com,
respectively. In groups of two or three, go to the website of each company (www
.jda.com and www.salesforce.com, respectively) and list the services provided by each
Real
World company’s software.
CP 5-3 Communication
Internet-based accounting software is a recent trend in business computing. Major software
Communication firms such as Oracle, SAP, and NetSuite are running their core products on the Internet
using cloud computing. NetSuite is one of the most popular small-business Internet-based
accounting systems.
Real Go to NetSuite Inc.’s website at www.netsuite.com. Read about the product and
World
prepare a memo to management defining cloud-based accounting. Also outline the advan-
tages and disadvantages of using cloud-based accounting compared to running software
on a company’s internal computer network.
Copyright 2018 Cengage Learning. CP

All 5-4 Manual
Rights vs. computerized
Reserved. accounting
May not be copied, systems
scanned, or duplicated, in whole or in part. WCN 02-200-203
The following conversation took place between Durable Construction Co.’s bookkeeper,
Kyle Byers, and the accounting supervisor, Sarah Nelson:
Close the Gap
Between Homework and Exam Performance
with CengageNOWv2.
We’ve talked with hundreds of accounting

instructors across the country, and we are learning
that online homework systems have created a new
challenge in the accounting course.
CengageNOWv2 better prepares students
We are hearing that students perform well on the for the exam by providing an online
homework but poorly on the exam, which leads homework experience that is similar to
instructors to believe that students are not truly what students will experience on the
learning the content, but rather are memorizing exam and in the real world.
their way through the system. Read on to see how CengageNOWv2 helps close this gap.
Closing the gap, one step at a time.
Multi-Panel View
One of the biggest complaints students have about online homework is the scrolling, which prevents students from
seeing the big picture and understanding the accounting system. This new Multi-Panel View in CengageNOWv2
enables students to see all the elements of a problem on one screen.
•• Students make
connections and
see the tasks
as connected
components in the
accounting process.
•• Dramatically reduced
scrolling eliminates
student frustration.
Blank Sheet
of Paper
Experience
Many students perform
well on homework but
struggle when it comes
to exams. Now, with
the new Blank Sheet of Paper Experience, students must problem-solve on their own, just as they would if taking a
test on a blank sheet of paper. This discourages overreliance on the system.
•• Students must refer to the Chart of Accounts and decide for themselves which account is impacted.
•• The number of accounts in each transaction is not given away.
•• Whether the account should be debited or credited is not given away.
•• Transactions may be entered in any order
(as long as the entries are correct).
Adaptive Feedback
Adaptive Feedback responds to students
based upon their unique answers and alerts
them to the type of error they have made
without giving away the answer.
From Motivation to Mastery
MOTIVATION:
Engage students and better prepare
them for class.
NEW Video: Animated Concept Clips
Animated Concept Clips are brief captivating
video clips that expose students to why a
concept is important and how the concept is
used in the real world.
Video: Tell Me More

Tell Me More lecture activities explain the core
concepts of the chapter through an engaging
auditory and visual presentation that is ideal for
all class formats—flipped mode, online, hybrid,
face-to-face.
Adaptive Study Plan

The Adaptive Study Plan is an assignable/gradable study center that adapts
to each student’s unique needs and provides a remediation pathway to keep
students progressing.
APPLICATION:
Help students apply accounting concepts.
Video: Show Me How
Linked to end-of-chapter problems in CengageNOWv2, Show Me How
problem demonstration videos provide a step-by-step model of a
similar problem.
MASTERY:
Teach students to go beyond memorization to true understanding.
Interactive Dynamic Exhibits allow students to change the variables
in a scenario and see how a change ripples through the accounting
system. This helps students see connections and relationships
like never before!
Mastery Problems allow students to connect concepts across

multiple objectives and demonstrate mastery.
And that’s not all…
You might also want to learn about the MindTap eReader, our LMS integration options, and more.
MindTap eReader ADA Accessibility

The MindTap eReader is the most robust digital Cengage Learning is committed to making its
reading experience available. educational materials accessible to users of all abilities.
•• Fully optimized for the iPad. We are steadily working to increase accessibility and
create a full spectrum of usable tools, features, and
•• Note-taking, highlighting, and more.
choices that are accessible for users of all abilities.
•• Offline access to smartphones. All new Cengage Learning products and services are
•• Embedded digital media such as the designed with accessibility in mind.
Dynamic Exhibits. •• With the latest release of CengageNOWv2:
The MindTap eReader also features ReadSpeaker®, • Images and graphics have been converted to HTML
an online text-to-speech application that vocalizes, tables so that they can be read by screen readers.
or “speechenables,” online educational content.
• The assignment experience now offers proper
heading structure to support easy navigation with
LMS Integration assistive technology.
CengageNOWv2 can be seamlessly integrated •• CengageNOWv2 solutions offer high contrast and
with most Learning Management Systems. well-structured HTML, which helps support screen
Adopters will enjoy: reader interactivity.
•• A Seamless User Experience—Access your •• All videos are created with closed captioning and
Cengage resources seamlessly using only transcripts available for download.
your LMS login credentials. •• The MindTap eReader is HTML-based and compatible
•• Simplified Registration Process—Get students with most screen reading assistive software. The
up and running faster! eReader supports browser settings for high-contrast
•• Content Customization and Deep Linking— narrative text, variable font sizes, and multiple
Use our Content Selector to create a unique learning foreground and background color options.
path for students that blends your content with For more information on accessibility, please visit
Cengage Learning activities, eText, and more within www.cengage.com/accessibility.
your LMS course.
•• Automatic Grade Synchronization*—Need to iPad Tablet Compatibility
have your course grades recorded in your LMS
CengageNOWv2 is fully compatible with the iPad and
gradebook? No problem. Simply select the activities
other tablet devices, with the exception of General
you want synched and grades will automatically be
Ledger (CLGL) and Excel Tutorials, which are flash
recorded in your LMS gradebook.
based.
* Grade synchronization is currently available with Blackboard,
Brightspace (powered by D2L), Angel 8, and Canvas.
www.cengage.com/cnowv2
New to This Edition
In this edition, the following improvements have been ° Prepaid Expenses
made to all chapters: ° Depreciation
• Added schema at the beginning of each chapter to • Inserted account numbers of NetSolutions in trial
show students how the chapter material fits within balances for Exhibits 3 and 9. Account numbers are
the overall textbook. added to trial balances in selected end-of-chapter
° In financial chapters, the schema links material to items and solutions where appropriate.
the accounting cycle or the financial statements. Chapter 4
° In managerial chapters, the schema moves through • Revised Exhibit 1 for report form of balance sheet.
developing information and ultimately into evaluat-
• Revised discussion of closing entries from four clos-
ing and analyzing information to make decisions.
ing entries to just two closing entries.
• Updated dates and real company information for
currency. ° The temporary account Income Summary is no
longer used in the closing process.
• Added “Link to” for the opening company to inter-
weave real-world references through each chapter. ° Updated closing process to the one used in mod-
ern, computerized accounting systems.
• Refreshed end-of-chapter assignments with different
numerical values and updated information. ° Simpler for students to understand.
• Revised Cases & Projects to include Ethics in Action, ° First closing entry closes revenues and expenses
yielding net income or net loss, which is trans-
Team Activity, and Communication in every chapter.
ferred to owner’s capital, and ties into the income
Chapter 1 statement.
• Added new Exhibit 1 to show a more accurate nature ° Second closing entry closes owner’s drawing ac-
of the flow of information to users. count to owner’s capital account.
• Added equality of accounting equation after each • Revised Exhibits 3 and 4 to reflect new two-entry
transaction A through H. closing method.
• Report form of balance sheet shown in Exhibit 9. • Added new Exhibit 8 that ties the Chapters 1–4
Report form is used throughout remaining chapter schema into the accounting cycle and summarizes
and end of chapter. the accounting cycle.
• Changed account form presentations to report form • Inserted account numbers into trial balances for
presentations. Exhibits 7 (NetSolutions), 11, 14, and 17 (Kelly
• Updated ratio of liabilities to owner’s equity. Consulting). Account numbers are added to trial bal-
Chapter 2 ances in selected end-of-chapter items and solutions
where appropriate.
• Revised Exhibit 3 rules for debits and credits to ease
student understanding. • Added new Appendix 2, Reversing Entries, at the end
of the chapter. Reversing entries are consistent with
• Inserted account numbers in trial balance of Exhibit
most modern, computerized accounting systems.
7. Account numbers are added to trial balances in
selected end-of-chapter solutions where appropriate. Chapter 5
• Added account numbers to the unadjusted trial • Added a new dedicated schema for Chapter 5, which
balance. shows the revenue collection cycle and purchase pay-
• Updated Microsoft Business Connection box. ment cycle as part of an accounting system.
Chapter 3 Chapter 6
• Revised Nature of the Adjusting Process and updated • Integrated the new revenue recognition standard
for new revenue recognition standard. (Revenue from Contracts with Customers) through-
out the chapter and the NetSolutions illustration.
• New Exhibits 1 and 2.
• Added new Exhibit 2, which shows the chart of
• Reordered discussion of adjustments from simplest
accounts for NetSolutions. The chart of accounts
to more complex as follows:
includes accounts for Estimated Returns Inventory
° Accrued Revenues and Customer Refunds Payable.
° Accrued Expenses
° Unearned Revenues
xii
New to This Edition xiii
• Added journal entry for purchases discounts “not • The end-of-chapter materials have been revised to
taken.” include the effects of the chapter reorganization.
• Reorganized sales transactions discussion: Chapter 7
° Journal entry for sales discount “not taken” has • Added new Business Connection boxes:
been added.
° Pawn Stars and Specific Identification
° Adjusting entries for customer refunds, allow- ° Computerized Perpetual Inventory Systems
ances, and returns have been moved to the end of
° Good Samaritan
the chapter with the adjusting entry for inventory
shrinkage. This simplifies the initial discussion of Chapter 8
customer refunds, allowances, and returns. • Revised chapter title to delete reference to Sarbanes-
Oxley.
° Discussion of customer refunds, allowances, and
returns has been changed so that the discussion • Exhibit 2 changed from Nike to eBay (consistent with
flows from simple to complex as follows: chapter opener).
¤ Customer cash refunds (no return) • Updated example in Ethics box.
¤ Customer allowance against their accounts re- • Added new Business Connection boxes:
ceivable (no return; credit memorandum) ° Mobile Payments
¤ Customer return with refund or allowance ° Managing Apple’s Cash
• Revised Exhibit 9 (Recording Merchandise Inventory Chapter 9
Transactions) to exclude the effects of adjusting en- • New opening company, Keurig Green Mountain, Inc.
tries for customer refunds, allowances, and returns.
• Added new Business Connection boxes:
• Revised Exhibit 10 (Illustration of Merchandise
Inventory Transactions for Seller and Buyer) to in- ° Warning Signs
clude a customer cash refund and a return with an ° Failure to Collect
allowance (credit) memorandum to the customer’s Chapter 10
accounts receivable. • Changed title to Long-Term Assets: Fixed and
• Revised discussion of the adjusting process for a Intangible.
merchandise business to include the adjustments for • New Business Connection box on Fixed Assets.
customer refunds, allowances, and returns. The dis- • Reorganized chapter as follows:
cussion is ordered from simple to complex with the
° Capital and Revenue Expenditures now appears
first adjustment (the simplest) for inventory shrink-
after discussion of depreciation and before the
age followed by the more complex adjustments for
discussion of disposal of fixed assets. Capital and
customer refunds, allowances, and returns.
Revenue Expenditures section is now titled Repair
• Updated NetSolutions financial statements (Exhibits and Improvements.
11, 12, 13, and 14) include the effects of the new
° Partial-Year Depreciation is now covered as a sep-
revenue recognition standard. For example, the bal-
arate section after all three depreciation methods
ance sheet (Exhibit 14) includes Estimated Returns
have been discussed.
Inventory and Customer Refunds Payable. Note that
• New Exhibit 3 (Depreciation Expense).
this is consistent with the chart of accounts presented
in Exhibit 2. • New Exhibit 4 (Straight-Line Method).
• The closing process has been changed to use only • Added journal entry for recording straight-line depreciation.
two closing entries. This is consistent with the closing • Book value emphasized in discussion of all three
entries in Chapter 4. The first closing entry closes the depreciation methods.
revenue and expense accounts to the owner’s capital • New Exhibit 5 (Straight-Line Method: Depreciation
account. Owner’s capital account is credited for net Expense and Book Value).
income and debited for a net loss. The second clos- • Added journal entry for recording units-of-activity
ing entry closes the owner’s drawing account to the method.
owner’s capital account. • New Exhibit 6 (Units-of-Activity Method).
• The chapter appendix (The Periodic Inventory System) • Added journal entry for recording double-declining-
using NetSolutions has been revised to include the ef- balance method.
fects of the new revenue recognition standard.
• New Exhibit 7 (Double-Declining-Balance Method).
xiv New to This Edition
• New Partial-Year Depreciation section. Chapter 17

• Added new Repair and Improvements section. • Revised learning objectives on liquidity analysis and
• Added new Business Connection box on Downsizing. solvency analysis.
Chapter 11 • Added learning objective on Analyzing and
Interpreting Financial Statements.
• Refreshed Financial Analysis and Interpretation dis-
cussion of quick ratio. • Name changes to several ratios:
• Added Business Connection box on State Pension ° From “number of times interest charges are earned”
Obligations. to “times interest earned”
• Updated federal wage bracket withholding informa- ° From “ratio of assets to sales” to “asset turnover”
tion. ° From “rate earned on total assets” to “return on
Chapter 12 total assets”
• Closing entries are changed to reflect a single-stage ° From “rate earned on stockholders’ equity” to “re-
approach to closing—closing revenues and expenses turn on stockholders’ equity”
to partnership capital directly, without using an ° From “rate earned on common stockholders’
income summary account. equity” to “return on common stockholders’ eq-
• New entries are provided to illustrate closing the uity”
partner drawing accounts. • Refreshed Exhibit 13, Summary of Analytical Measures.
• The term “net assets” is more clearly defined. • Added Business Connection boxes:
• Revised Exhibit 7, Statement of Partnership ° Flying off the Shelves
Liquidation: Loss on Realization—Capital Deficiency, ° Liquidity Crunch at Radio Shack
to provide a clearer presentation of the transactions ° Gearing for Profit
steps. • Updated Comprehensive Problem for Nike’s recent
Chapter 13 financial statements.
• Google name changed to Alphabet (Google), Inc. Chapter 18
• Moved Stock Splits earlier in the chapter. It is now • Revised chapter title.
Objective 5, which follows dividends (Obj. 4). • Added new learning objective on Sustainability and
• Treasury stock is now Objective 6. Accounting.
• New Business Connections boxes: • Added Business Connection box on Line and Staff
° Excerpts from Alphabet (Google)’s Bylaws for Service Companies.
° You Have No Vote Chapter 19
° Treasury Stock or Dividends? • Added Business Connection boxes:
Chapter 14 ° 3D Printing
• Added Business Connection box on Investor Bond ° Advanced Robotics
Price Risk. Chapter 20
• Refreshed Financial Analysis and Interpretation dis- • References to “just-in-time processing” are changed
cussion of times interest earned, focusing on intra- to “lean manufacturing” to reflect use of more con-
industry comparisons. temporary terms.
Chapter 15 • Added new Business Connection box on Sustainable
• Refreshed Interest Timeline exhibits to clearly illus- Papermaking.
trate the timing of interest accruals. Chapter 21
Chapter 16 • Added Business Connection boxes:
• Added Business Connection boxes: ° Booking Fees
° Cash Crunch! ° Airline Industry Break-Even
° Growing Pains at Twitter Chapter 22
• Updated and expanded Financial Analysis and • Added new Business Connection box on Mad Men;
Interpretation discussion of free cash flow. it shows the U.S. companies with the largest adver-
tising budgets.
New to This Edition xv
Chapter 23 • Improved the explanation of the differential analysis

• Revised chapter title. table illustration at the beginning of the chapter.
Chapter 24 • The differential make vs. buy analysis table has an
added revenue line that is set at “zero.” Thus, income
• Revised chapter title.
and loss can now be arithmetically determined.
• Refreshed Exhibit 3, Responsibility Accounting
• Added new Business Connection box on The ABC’s
Reports for Cost Centers.
of Schwab; it shows how Charles Schwab Corporation
• Added Business Connection box on Coca-Cola uses activity-based costing.
Company: Go West Young Man.
Chapter 26
Chapter 25
• Added new section on capital investment analysis
• Eliminated the step structure at the beginning of for sustainability.
the chapter to provide a less complex analysis
• Added new exercises for capital investment analysis
framework.
for sustainability.
Instructor Resources
Solutions Manual assignment preparation grid that includes information

Author-written and carefully verified multiple times about learning objective coverage, difficulty level and
to ensure accuracy and consistency with the text, the Bloom’s taxonomy categorization, time estimates, and
Solutions Manual contains answers to the Discussion accrediting standard alignment for business programs,
Questions, Practice Exercises, Exercises, Problems (Series AICPA, ACBSP, and IMA.
A and Series B), Continuing Problems, Comprehensive
PowerPoint Slides Bring your lectures to life with slides
Problems, and Cases & Projects that appear in the text.
designed to clarify difficult concepts for your students.
These solutions help you easily plan, assign, and efficiently
The lecture PowerPoints include key terms and definitions,
grade assignments.
equations, examples, and exhibits from the textbook.
Test Bank Descriptions for all graphics in the PowerPoints are
included to enhance PowerPoint usability for students
Test Bank content is delivered via Cengage Learning
with disabilities.
Testing, powered by Cognero®, a flexible, online system
that allows you to: Excel Template Solutions Excel Templates
• Author, edit, and manage test bank content are provided for selected long or complicated
• Create multiple test versions in an instant end-of-chapter exercises and problems to EXCEL
• Deliver tests from your LMS, from your classroom, or assist students as they set up and work the problems.
through CengageNOWv2 Certain cells are coded to display a red asterisk when an
• Export tests in Word format incorrect answer is entered, which helps students stay on
track. Selected problems that can be solved using these
Companion Website templates are designated by an icon in the textbook
and are listed in the assignment preparation grid in the
This robust companion website provides immediate
Instructor’s Manual. The Excel Template Solutions provide
access to a rich array of teaching and learning resources—
answers to these templates.
including the Instructor’s Manual, PowerPoint slides, and
Excel Template Solutions. Easily download the instructor
Practice Set Solutions Establish a fundamental
resources you need from the password-protected,
understanding of the accounting cycle for your students
instructor-only section of the site.
with Practice Sets, which require students to complete
one month of transactions for a fictional company.
Instructor’s Manual Discover new ways to engage your
Brief descriptions of each Practice Set are provided in
students by using the Instructor’s Manual ideas for class
the Table of Contents. The Practice Set Solutions provide
discussion, group learning activities, writing exercises, and
answers to these practice sets.
Internet activities. Moreover, simplify class preparation
by reviewing a brief summary of each chapter, a detailed
chapter synopsis, teaching tips regarding a suggested
approach to the material, questions students frequently
ask in the classroom, lecture aids, and demonstration
problems in the Instructor’s Manual. Quickly identify
the assignments that best align your course with the
xvi
Student Resources
Study Guide
Now available free in CengageNOWv2, the Study Guide allows students to easily assess what they
know with a “Do You Know” checklist covering the key points in each chapter. To further test their
comprehension, students can work through Practice Exercises, which include a “strategy” hint and
solution so they can continue to practice applying key accounting concepts.
Working Papers
Students will find the tools they need to help work through end-of-chapter assignments with the
Working Papers. The preformatted templates provide a starting point by giving students a basic
structure for problems and journal entries. Working Papers are available in a printed format as a
bundle option.
Practice Sets
For more in-depth application of accounting practices, instructors may choose from among six
different Practice Sets for long-term assignments. Each Practice Set requires students to complete
General
one month of transactions for a fictional company. Practice Sets can be solved manually or with Ledger
the Cengage Learning General Ledger software.
Website
Designed specifically for your students’ accounting needs, this website features student
PowerPoint slides and Excel Templates, along with the Study Guides.
▪▪ PowerPoint Slides: Students can easily take notes or review difficult concepts with the student
version of this edition’s PowerPoint slides.
▪▪ Excel Templates: These Excel Templates help students stay on track. If students enter an
incorrect answer in certain cells, a red asterisk will appear to let them know something is wrong.
Problems that can be solved using these templates are designated by an icon. EXCEL
xvii
Acknowledgments
The many enhancements to this edition of Accounting are the direct result of one-on-one interviews, surveys,
reviews, and focus groups with instructors at institutions across the country. We would like to take this opportu-
nity to thank those who helped us better understand the challenges of the principles of accounting course and
provided valuable feedback on our content and digital assets.
Debbie Adkins, Remington College Esther S. Bunn, Stephen F. Austin Robin D’Agati, Palm Beach State
Online State University College
Sharon Agee, Rollins College Jacqueline Burke, Hofstra University Dori Danko, Grand Valley State
Sol. Ahiarah, SUNY Buffalo State Lisa Busto, William Rainey Harper University
John G. Ahmad, Northern Virginia College Emmanuel Danso, Palm Beach State
Community College Thane Butt, Champlain College College
Janice Akeo, Butler Community Marci Butterfield, University of Bruce L. Darling, University of
College Utah Oregon
Dave Alldredge, Salt Lake Community Magan Calhoun, Austin Peay State Dorothy Davis, University of
College University Louisiana Monroe
Robert Almon, South Texas College Julia M. Camp, Providence College Rebecca Grava Davis, East Mississippi
Lynn Almond, Virginia Tech Kirk Canzano, Long Beach City Community College
Elizabeth Ammann, Lindenwood College Julie Dawson, Carthage College
University Roy Carson, Anne Arundel Christopher Demaline, Central
Sheila Ammons, Austin Community Community College Arizona College
College Cassandra H. Catlett, Carson Newman Carol Dickerson, Chaffey College
Anne Marie Anderson, Raritan Valley University Patricia Doherty, Boston University
Community College David Centers, Grand Valley State School of Management
Rick Andrews, Sinclair Community University Michael P. Dole, Marquette University
College Machiavelli W. Chao, University of Karen C. Elsom, Fayetteville Technical
Leah Arrington, Northwest Mississippi California, Irvine Community College
Community College Bea Chiang, The College of Nancy Emerson, North Dakota State
Christopher Ashley, Everest College New Jersey University
John Babich, Kankakee Community Linda Christiansen, Indiana University James M. Emig, Villanova University
College Southeast Bruce England, Massasoit Community
Felicia R. Baldwin, Richard J. Daley Lawrence Chui, University of College
College St. Thomas Lucile Faurel, University of California,
Sara Barritt, Northeast Community Colleen Chung, Miami Dade College Irvine
College Tony Cioffi, Lorain County Robert Foster, Los Angeles Pierce
Geoffrey D. Bartlett, Drake University Community College College
Jan Barton, Emory University Sandra Cohen, Columbia College Kimberly Franklin, St. Louis
Robert E. (Reb) Beatty, Anne Arundel Chicago Community College
Community College Debora Constable, Georgia Perimeter Michael J. Gallagher, DeSales
Eric Blazer, Millersville University College University
Cindy Bleasdal, Hilbert College Susan Cordes, Johnson County Ann Gervais, Springfield Technical
Cynthia Bolt, The Citadel Community College Community College
Anna Boulware, St. Charles Leonard Cronin, University Center Alex Gialanella, Manhattanville
Community College Rochester College
Gary Bower, Community College of Louann Hofheins Cummings, The Michael Goeken, Northwest Vista
Rhode Island University of Findlay College
Thomas Branton, Alvin Community Sue Cunningham, Rowan Cabarrus Nino Gonzalez, El Paso Community
College Community College College
Gregory Brookins, Santa Monica Don Curfman, McHenry County Saturnino (Nino) Gonzalez, El Paso
College College Community College
xviii
Acknowledgments xix
Lori A. Grady, Bucks County Richard Lau, California State Julie Miller Millmann, Chippewa
Community College University, Los Angeles Valley Technical College
Carol Graham, The University of Suzanne Laudadio, Durham Technical Rita Mintz, Calhoun Community
San Francisco Community College College
Marina Grau, Houston Community Greg Lauer, North Iowa Area Jill Mitchell, Northern Virginia
College Community College Community College
Gloria Grayless, Sam Houston State David E. Laurel, South Texas College Timothy J. Moran, Aurora University
University Michael Lawrence, Mt. Hood Michelle Moshier, University at
Tim Green, North Georgia Technical Community College Albany
College Charles J. F. Leflar, University of Linda Muren, Cuyahoga Community
Ann Gregory, South Plains College Arkansas College
Timothy Griffin, Hillsborough Jennifer LeSure, Ivy Tech Community Andrea Murowski, Brookdale
Community College College Community College
Sheila Guillot, Lamar State College- Bruce Leung, City College of Johnna Murray, University of
Port Arthur San Francisco Missouri-St. Louis
Michael Gurevitz, Montgomery Charles Lewis, Houston Community Adam Myers, Texas A&M University
College College John Nader, Davenport University
Keith Hallmark, Calhoun Community Erik Lindquist, Lansing Community Joseph M. Nicassio, Westmoreland
College College County Community College
Rebecca Hancock, El Paso Harold Little, Western Kentucky Lisa Novak, Mott Community College
Community College University Jamie O’Brien, South Dakota State
Martin Hart, Manchester Community James Lock, Northern Virginia University
College Community College Ron O’Brien, Fayetteville Technical
Len Heritage, Tacoma Community Katy Long, Hill College Community College
College Dawn Lopez, Johnson & Wales Robert A. Pacheco, Masssasoit
Katherine Sue Hewitt, Klamath University Community College
Community College Ming Lu, Santa Monica College Edwin Pagan, Passaic County
Merrily Hoffman, San Jacinto College Angelo Luciano, Columbia College Community College
Jose Hortensi, Miami Dade College Chicago Judy Patrick, Minnesota State
Jana Hosmer, Blue Ridge Community Debbie Luna, El Paso Community Community and Technical
College College College
Aileen Huang, Santa Monica College Jennifer Mack, Lindenwood University Sy Pearlman, California State
Marianne James, California State Suneel Maheshwari, Marshall University, Long Beach
University, Los Angeles University Aaron Pennington, York College of
Cynthia Johnson, University of Ajay Maindiratta, New York University Pennsylvania
Arkansas at Little Rock Richard Mandau, Piedmont Technical Rachel Pernia, Essex County College
Lori Johnson, Minnesota State College Dawn Peters, Southwestern Illinois
University Moorhead Michele Martinez, Hillsborough College
Odessa Jordan, Calhoun Community Community College April Poe, University of the Incarnate
College Michelle A. McFeaters, Grove City Word
Stani Kantcheva, Cincinnati State College Michael P. Prockton, Finger Lakes
Technical and Community College Noel McKeon, Florida State College Community College
Chris Kinney, Mount Wachusett at Jacksonville Kristen Quinn, Northern Essex
Community College Chris McNamara, Finger Lakes Community College
Taylor Klett, Sam Houston State Community College La Vonda Ramey, Schoolcraft College
University Kevin McNelis, New Mexico State Marcela Raphael, Chippewa Valley
Stacy Kline, Drexel University University Technical College
Pamela Knight, Columbus Technical Glenn (Mel) McQueary, Houston Jenny Resnick, Santa Monica College
College Community College Rick Rinetti, Los Angeles City College
W. Jeff Knight, Flagler College Brenda McVey, Green River Cecile Roberti, Community College of
Lynn Krausse, Bakersfield College Community College Rhode Island
Barbara Kren, Marquette Pam Meyer, University of Louisiana at Shani N. Robinson, Sam Houston
University Lafayette State University
Jeffrey T. Kunz, Carroll University Jeanette Milius, Iowa Western Patrick Rogan, Cosumnes River
Steven J. LaFave, Augsburg Community College College
College Cynthia J. Miller, University of Lawrence A. Roman, Cuyahoga
Tara Laken, Joliet Junior College Kentucky Community College
Meg Costello Lambert, Oakland Linda Miller, Northeast Community Debbie Rose, Northeast Wisconsin
Community College College Technical College
xx Acknowledgments
Leah Russell, Holyoke Community Lee Smart, Southwest Tennessee Denise Teixeira, Chemeketa
College Community College Community College
John H. Sabbagh, Northern Essex Gerald Smith, University of Northern Teresa Thompson, Chaffey
Community College Iowa Community College
Lynn K. Saubert, Radford University Judy Smith, Parkland College Judith A. Toland, Bucks County
Marie Saunders, Dakota County Ryan Smith, Columbia College Community College
Technical College Jennifer Spring Sneed, Arkansas State Lana Tuss, Chemeketa Community
Michael G. Schaefer, Blinn College University-Newport College
Jennifer Schneider, University of Nancy L. Snow, University of Toledo Robert Urell, Irvine Valley College
North Georgia Sharif Soussi, Charter Oak State Jeff Varblow, College of Lake County
Darlene Schnuck, Waukesha County College John Verani, White Mountains
Technical College Marilyn Stansbury, Calvin College Community College
John Seilo, Irvine Valley College Larry G. Stephens, Austin Community Patricia Walczak, Lansing Community
Mon Sellers, Lone Star College-North College College
Harris Dawn W. Stevens, Northwest Terri Walsh, Seminole State College
Perry Sellers, Lone Star College Mississippi Community College James Webb, University of the Pacific
System Joel Strong, St. Cloud State University Wanda Wong, Chabot College
Jim Shelton, Harding University Timothy Swenson, Sullivan University Patricia Worsham, Norco College
Ercan Sinmaz, Houston Community Linda H. Tarrago, Hillsborough Judith Zander, Grossmont College
College Community College Mary Zenner, College of Lake County
About the Authors
Carl S. Warren
Terry R. Spray InHisImage Studios

Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens.
Dr. Warren has taught classes at the University of Georgia, University of Iowa, Michigan
State University, and University of Chicago. He focused his teaching efforts on principles of
accounting and auditing. Dr. Warren received his PhD from Michigan State University and his
BBA and MA from the University of Iowa. During his career, Dr. Warren published numerous
articles in professional journals, including The Accounting Review, Journal of Accounting
Research, Journal of Accountancy, The CPA Journal, and Auditing: A Journal of Practice &
Theory. Dr. Warren has served on numerous committees of the American Accounting Asso-
ciation, the American Institute of Certified Public Accountants, and the Institute of Internal
Auditors. He also has consulted with numerous companies and public accounting firms. His
outside interests include handball, golf, skiing, backpacking, and fly-fishing.
James M. Reeve
Charles J. Garvey III / Garvey Photography

Dr. James M. Reeve is Professor Emeritus of Accounting and Information Management at
the University of Tennessee. Dr. Reeve taught full time as part of the accounting faculty
for 25 years after graduating with his PhD from Oklahoma State University. He presently
teaches part time at UT. His teaching efforts focused on Senior Executive MBA programs.
His research interests are varied and include work in managerial accounting, supply chain
management, lean manufacturing, and information management. He has published over
40 articles in academic and professional journals, including Journal of Cost Management,
Journal of Management Accounting Research, Accounting Review, Management Accounting
Quarterly, Supply Chain Management Review, and Accounting Horizons. He has consulted or
provided training around the world for a variety of organizations, including Boeing, Procter
& Gamble, Norfolk Southern, Hershey Foods, Coca-Cola, and Sony. When not writing books,
Dr. Reeve plays golf and is involved in faith-based activities.
Jonathan Duchac
Dr. Jonathan Duchac is the Wayne Calloway Professor of Accounting and Acting Associate
Dean of Accounting Programs at Wake Forest University. He earned his PhD in accounting
from the University of Georgia and currently teaches introductory and advanced courses in
financial accounting. Dr. Duchac has received a number of awards during his career, including
the Wake Forest University Outstanding Graduate Professor Award, the T.B. Rose Award for
Instructional Innovation, and the University of Georgia Outstanding Teaching Assistant Award. © Ken Bennett
In addition to his teaching responsibilities, Dr. Duchac has served as Accounting Advisor to
Merrill Lynch Equity Research, where he worked with research analysts in reviewing and
evaluating the financial reporting practices of public companies. He has testified before the
U.S. House of Representatives, the Financial Accounting Standards Board, and the Securities
and Exchange Commission and has worked with a number of major public companies on
financial reporting and accounting policy issues. In addition to his professional interests,
Dr. Duchac is an avid mountain biker and snow skier.
xxi
Contents
Chapter 1
Introduction to Double-Entry Accounting System 62
Balance Sheet Accounts 62
Accounting and Business 2 Income Statement Accounts 63
Owner Withdrawals 63
Nature of Business and Accounting 5 Normal Balances 63
Types of Businesses 5 Journalizing 64
Role of Accounting in Business 6
Integrity, Objectivity, and Ethics in Business:
Role of Ethics in Accounting and Business 6
Will Journalizing Prevent Fraud? 67
Bernie Madoff 9 Journalizing and Posting to Accounts 68
Opportunities for Accountants 9 Business Connection: Microsoft’s Unearned
Business Connection: Pathways Commission 10 Revenue 70
Generally Accepted Accounting Principles 10 Business Connection: Computerized Accounting

Business Entity Concept 11 Systems 72
International Connection: International Financial Trial Balance 77

Reporting Standards (IFRS) 11 Errors Affecting the Trial Balance 78
Cost Concept 12 Errors Not Affecting the Trial Balance 79
The Accounting Equation 13 Financial Analysis and Interpretation:

Horizontal Analysis 80
Business Connection: The Accounting Equation 13
Business Transactions and the
Accounting Equation 14 Chapter 3 The Adjusting Process 110
Summary 18
Financial Statements 19 Nature of the Adjusting Process 113
Accrual and Cash Basis of Accounting 113
Income Statement 20
Revenue and Expense Recognition 114
Statement of Owner’s Equity 21
The Adjusting Process 114
Balance Sheet 21
Types of Accounts Requiring Adjustment 115
Statement of Cash Flows 24
Interrelationships Among Financial Statements 25 Adjusting Entries for Accruals 116
Financial Analysis and Interpretation: Accrued Revenues 117
Accrued Expenses 118
Ratio of Liabilities to Owner’s Equity 26
Business Connection: Earning Revenues from
Season Tickets 120
Chapter 2 Analyzing Transactions 56 Adjusting Entries for Deferrals 120
Unearned Revenues 121
Using Accounts to Record Transactions 59 Prepaid Expenses 122
Chart of Accounts 61
Business Connection: Sports Signing Bonus 122
Business Connection: The Hijacking Receivable 61
xxii
Contents xxiii
Integrity, Objectivity, and Ethics in Business: Step 3. Enter the Adjustments 191
Free Issue 123 Step 4. Enter the Adjusted Trial Balance 192
Step 5. Extend the Accounts to the Income
Adjusting Entries for Depreciation 124 Statement and Balance Sheet Columns 193
Summary of Adjusting Process 126 Step 6. Total the Income Statement and Balance
Sheet Columns, Compute the Net Income
Business Connection: Microsoft’s Deferred or Net Loss, and Complete the Spread-
Revenues 126 sheet 193
Preparing the Financial Statements from the
Adjusted Trial Balance 130 Spreadsheet 194
Financial Analysis and Interpretation: Reversing Entries 196
Vertical Analysis 131
Chapter 5 Accounting Systems 230

Chapter 4
Completing the
Accounting Cycle 160 Basic Accounting Systems 232
Manual Accounting Systems 233
Flow of Accounting Information 163 Subsidiary Ledgers 233
Financial Statements 165 Special Journals 233
Income Statement 165 Revenue Journal 235
Cash Receipts Journal 238
Integrity, Objectivity, and Ethics in Business: CEO's Accounts Receivable Control Account and
Health? 167 Subsidiary Ledger 240
Statement of Owner’s Equity 167 Purchases Journal 240
Balance Sheet 168 Cash Payments Journal 243
Accounts Payable Control Account and Subsidiary
International Connection: International Differences 169 Ledger 245
Closing Entries 169 Business Connection: Accounting Systems and Profit
Journalizing and Posting Closing Entries 170 Measurement 246
Post-Closing Trial Balance 174
Computerized Accounting Systems 247
Accounting Cycle 174
Business Connection: TurboTax 249
Illustration of the Accounting Cycle 177
Step 1. Analyzing and Recording Transactions E-Commerce 249
in the Journal 177
Step 2. Posting Transactions to the Ledger 179
Step 3. Preparing an Unadjusted Trial Balance 179 Online Fraud 250
Step 4. Assembling and Analyzing Adjustment Financial Analysis and Interpretation:
Data 180 Segment Analysis 250
Step 5. Preparing an Optional End-of-Period
Spreadsheet 180
Step 6. Journalizing and Posting Adjusting
Entries 180 Chapter 6
Accounting for
Step 7. Preparing an Adjusted Trial Balance 182
Step 8. Preparing the Financial Statements 182
Merchandising Businesses 280
Step 9. Journalizing and Posting Closing Entries 184
Nature of Merchandising Businesses 282
Step 10. Preparing a Post-Closing Trial Balance 184
Operating Cycle 282
Fiscal Year 187 Financial Statements 283
Business Connection: Choosing a Fiscal Year 188 Business Connection: Comcast Versus Lowe’s 284
Financial Analysis and Interpretation: Merchandising Transactions 284
Working Capital and Current Ratio 188 Chart of Accounts for a Merchandising
Business 284
End-of-Period Spreadsheet 189 Purchases Transactions 285
Step 1. Enter the Title 190 Sales Transactions 290
Step 2. Enter the Unadjusted Trial Balance 190
xxiv Contents
Integrity, Objectivity, and Ethics in Business: Inventory Costing Methods Under

The Case of the Fraudulent Price Tags 294 a Perpetual Inventory System 350
Freight 295 First-In, First-Out Method 350
Summary: Recording Merchandise Inventory Last-In, First-Out Method 351
Transactions 297
Dual Nature of Merchandise Transactions 297
International Connection: International Financial
Sales Taxes and Trade Discounts 299 Reporting Standards (IFRS) 353
Weighted Average Cost Method 353
Business Connection: Sales Taxes 300
Business Connection: Computerized Perpetual
The Adjusting Process 300 Inventory Systems 355
Adjusting Entry for Inventory Shrinkage 300
Inventory Costing Methods Under
Integrity, Objectivity, and Ethics in Business: a Periodic Inventory System 355
The Cost of Employee Theft 301 First-In, First-Out Method 355
Adjusting Entries for Customer Refunds, Last-In, First-Out Method 356
Allowances, and Returns 301 Weighted Average Cost Method 357
Financial Statements for Comparing Inventory Costing Methods 358
a Merchandising Business 303
Multiple-Step Income Statement 303 Integrity, Objectivity, and Ethics in Business:
Single-Step Income Statement 305 Where's the Bonus? 359
Statement of Owner’s Equity 305 Reporting Merchandise Inventory
Balance Sheet 305
in the Financial Statements 359
The Closing Process 306
Valuation at Lower of Cost or Market 359
Financial Analysis and Interpretation:
Business Connection: Good Samaritan 361
Asset Turnover 307
Merchandise Inventory on the Balance Sheet 361
The Periodic Inventory System 309 Effect of Inventory Errors on the Financial
Chart of Accounts Under the Periodic Inventory Statements 362
System 309 Financial Analysis and Interpretation: Inventory
Recording Merchandise Transactions Under the
Turnover and Days’ Sales in Inventory 365
Periodic Inventory System 310
Adjusting Process Under the Periodic Inventory Business Connection: Rapid Inventory at Costco 365
System 310
Financial Statements Under the Periodic Inventory Estimating Inventory Cost 368
System 311 Retail Method of Inventory Costing 368
Closing Entries Under the Periodic Inventory Gross Profit Method of Inventory Costing 369
System 312
Practice Set: Lawn Ranger Landscaping Chapter 8

Internal Control
This set covers the complete accounting cycle for a
service business operated as a sole proprietorship. and Cash 394
Students follow a narrative of transactions to make
general journal entries. Includes instructions for an Sarbanes-Oxley Act 396
optional solution with no debits and credits. This
Internal Control 398
set can be completed manually or with the General
Objectives of Internal Control 398
Ledger software.
Business Connection: Employee Fraud 398
Elements of Internal Control 398
Chapter 7 Inventories 344 Control Environment 399
Risk Assessment 400
Control Procedures 400
Control of Inventory 346
Safeguarding Inventory 346 Integrity, Objectivity, and Ethics in Business:
Reporting Inventory 347 Tips on Preventing Employee Fraud in
Inventory Cost Flow Assumptions 347 Small Companies 401
Monitoring 402
Business Connection: Pawn Stars and Specific Information and Communication 402
Identification 349 Limitations of Internal Control 403
Contents xxv
Cash Controls over Receipts and Payments 403 Financial Analysis and Interpretation:
Control of Cash Receipts 404 Accounts Receivable Turnover and
Control of Cash Payments 406 Days’ Sales in Receivables 459
Business Connection: Mobile Payments 406
Bank Accounts 407
Chapter 10Long-Term Assets:
Bank Statement 407
Using the Bank Statement as a Control Fixed and Intangible 486
over Cash 409
Bank Reconciliation 410 Nature of Fixed Assets 488
Classifying Costs 488
Business Connection: Fixed Assets 489
Bank Error in Your Favor (or Maybe Not) 413
The Cost of Fixed Assets 490
Special-Purpose Cash Funds 413 Leasing Fixed Assets 491
Financial Statement Reporting of Cash 415 Accounting for Depreciation 492
Factors in Computing Depreciation Expense 492
Business Connection: Managing Apple's Cash 415 Straight-Line Method 493
Financial Analysis and Interpretation: Units-of-Activity Method 495
Ratio of Cash to Monthly Cash Expenses 415 Double-Declining-Balance Method 497
Comparing Depreciation Methods 499
Business Connection: Microsoft Corporation 417 Partial-Year Depreciation 499
Business Connection: Depreciating Animals 500
Revising Depreciation Estimates 501
Repair and Improvements 502
Chapter 9 Receivables 440 Integrity, Objectivity, and Ethics in Business:
Capital Crime 503
Classification of Receivables 442
Accounts Receivable 442 Disposal of Fixed Assets 504
Notes Receivable 442 Discarding Fixed Assets 504
Other Receivables 443 Selling Fixed Assets 505
Uncollectible Receivables 443 Business Connection: Downsizing 506
Business Connection: Warning Signs 444 Natural Resources 507
Direct Write-Off Method Intangible Assets 508
for Uncollectible Accounts 444 Patents 508
Copyrights and Trademarks 509
Allowance Method for Uncollectible Accounts 445
Goodwill 509
Integrity, Objectivity, and Ethics in Business: International Connection: International
Collecting Past Due Accounts 446 Financial Reporting Standards (IFRS) 511
Write-Offs to the Allowance Account 446
Financial Reporting for Long-Term Assets: Fixed
Business Connection: Failure to Collect 448
and Intangible 511
Estimating Uncollectibles 448
Business Connection: Allowance Percentages Across
Fixed Asset Turnover Ratio 512
Companies 453
Fixed Asset Turnover Ratio 512
Comparing Direct Write-Off
Business Connection: Hub-and-Spoke or
and Allowance Methods 453
Point-to-Point? 513
Notes Receivable 454
Exchanging Similar Fixed Assets 514
Characteristics of Notes Receivable 454
Gain on Exchange 514
Accounting for Notes Receivable 456
Loss on Exchange 515
Reporting Receivables on the Balance Sheet 458
Business Connection: Delta Air Lines 458
xxvi Contents
Chapter 11Current Liabilities Chapter 12Accounting for

and Payroll 536 Partnerships and Limited Liability
Current Liabilities 538 Companies 584
Accounts Payable 538
Current Portion of Long-Term Debt 538 Proprietorships, Partnerships, and Limited
Short-Term Notes Payable 539 Liability Companies 586
Proprietorships 586
Payroll and Payroll Taxes 541 Partnerships 587
Liability for Employee Earnings 541
Deductions from Employee Earnings 541 Business Connection: Breaking Up Is Hard To Do 587
Computing Employee Net Pay 544 Limited Liability Companies 588
Liability for Employer’s Payroll Taxes 545 Comparing Proprietorships, Partnerships,
and Limited Liability Companies 588
Business Connection: The Most You Will Ever Pay 545
Business Connection: Organizational Forms in the
Accounting Systems for Payroll Accounting Industry 588
and Payroll Taxes 545
Payroll Register 546 Forming a Partnership and Dividing Income 589
Employee’s Earnings Record 549 Forming a Partnership 589
Payroll Checks 550 Dividing Income 590
Computerized Payroll System 551
Integrity, Objectivity, and Ethics in Business: Tyranny
Internal Controls for Payroll Systems 551
of the Majority 592
Overbilling Clients 552 Partner Admission and Withdrawal 593
Admitting a Partner 593
Employees’ Fringe Benefits 552 Withdrawal of a Partner 598
Vacation Pay 552 Death of a Partner 598
Pensions 553
Liquidating Partnerships 599
Postretirement Benefits Other Than
Gain on Realization 600
Pensions 554
Loss on Realization 601
Current Liabilities on the Balance Sheet 554
Loss on Realization—Capital Deficiency 603
Business Connection: State Pension
Statement of Partnership Equity 606
Obligations 555
Contingent Liabilities 555
Revenue per Employee 606
Probable and Estimable 555
Probable and Not Estimable 556
Chapter 13
Reasonably Possible 556
Remote 557 Corporations:
Financial Analysis and Interpretation: Organization, Stock Transactions,
Quick Ratio 557 and Dividends 628
Practice Set: Fit & Fashionable Nature of a Corporation 630
This set is a merchandising business operated as Characteristics of a Corporation 630
a sole proprietorship. It includes a general journal, Forming a Corporation 631
special journals, and source documents and can be
completed manually or with the General Ledger
Business Connection: Alphabet (Google)'s Bylaws 632
software. Stockholders’ Equity 633
Practice Set: Chic Events by Jada Paid-In Capital from Stock 634
This set is a merchandising business operated Characteristics of Stock 634
as a proprietorship. It includes payroll transac- Classes of Stock 635
tions and purchases and sales with discounts, Business Connection: You Have No Vote 635
along with source documents. It can be com-
Issuing Stock 636
pleted manually or with the General Ledger
Premium on Stock 637
software.
No-Par Stock 638
Contents xxvii
Integrity, Objectivity, and Ethics in Business: Integrity, Objectivity, and Ethics in Business:
The Professor Who Knew Too Much 639 The Ratings Game 691
Accounting for Dividends 639 Reporting Long-Term Liabilities 691
Cash Dividends 639
Stock Dividends 641
Times Interest Earned Ratio 691
Stock Splits 642
Present Value Concepts and
Business Connection: Buffett on Stock Splits 643 Pricing Bonds Payable 693
Treasury Stock Transactions 644 Present Value Concepts 693
Pricing Bonds 696
Business Connection: Treasury Stock or
Interest Rate Method of Amortization 697
Dividends? 645
Amortization of Discount by the Interest
Reporting Stockholders’ Equity 645 Method 697
Stockholders’ Equity on the Balance Sheet 645 Amortization of Premium by the Interest Method 698
Reporting Retained Earnings 647
Statement of Stockholders’ Equity 648
International Connection: IFRS for SMEs 649 Chapter 15Investments and Fair
Reporting Stockholders’ Equity for Mornin’ Joe 649 Value Accounting 719
Earnings per Share 651 Why Companies Invest 721
Investing Cash in Current Operations 721
Practice Set: My Place, House of Décor Investing Cash in Temporary Investments 722
This set is a service and merchandising business Investing Cash in Long-Term Investments 722
operated as a corporation. It includes narrative for Accounting for Debt Investments 722
six months of transactions to be recorded in a gen- Purchase of Bonds 723
eral journal. The set can be completed manually or Interest Revenue 723
with the General Ledger software. Sale of Bonds 724
Accounting for Equity Investments 725
Chapter 14
Cost Method: Less Than 20% Ownership 725
Long-Term Liabilities: Equity Method: Between 20%–50%
Bonds and Notes 675 Ownership 727
Consolidation: More Than 50% Ownership 729
Financing Corporations 677 Business Connection: More Cash Means More
Nature of Bonds Payable 679 Investments for Drug Companies 730
Bond Characteristics and Terminology 680 Valuing and Reporting Investments 730
Proceeds from Issuing Bonds 680
Trading Securities 730
Business Connection: Investor Bond Price Integrity, Objectivity, and Ethics in Business:
Risk 681 Socially Responsible Investing 732
Accounting for Bonds Payable 681 Available-for-Sale Securities 732
Bonds Issued at Face Amount 681 Held-to-Maturity Securities 734
Bonds Issued at a Discount 682 Summary 734
Amortizing a Bond Discount 683 Business Connection: Warren Buffett:
Business Connection: U.S. Government Debt 684 The Sage of Omaha 736
Bonds Issued at a Premium 685
Fair Value Accounting 737
Amortizing a Bond Premium 686
Effect of Fair Value Accounting on the
Business Connection: Bond Ratings 687 Financial Statements 737
Bond Redemption 687
Installment Notes 688 Dividend Yield 737
Issuing an Installment Note 689
Comprehensive Income 739
Annual Payments 689
xxviii Contents
Chapter 16Statement of The Value of Financial Statement

Information 825
Cash Flows 765 Techniques for Analyzing Financial Statements 826
Reporting Cash Flows 767 Basic Analytical Methods 826

Cash Flows from Operating Activities 768 Horizontal Analysis 826
Vertical Analysis 829
Business Connection: Cash Crunch! 770 Common-Sized Statements 830
Cash Flows from (Used for) Investing Activities 770
Cash Flows from (Used for) Financing Activities 770 Analyzing Liquidity 831
Noncash Investing and Financing Activities 770 Current Position Analysis 832
Format of the Statement of Cash Flows 771 Accounts Receivable Analysis 834
No Cash Flow per Share 771 Inventory Analysis 835
Preparing the Statement of Cash Flows— Business Connection: Flying off the Shelves 837
The Indirect Method 772 Analyzing Solvency 837
Net Income 773 Ratio of Fixed Assets to Long-Term Liabilities 838
Adjustments to Net Income 774 Ratio of Liabilities to Stockholders’ Equity 838
Integrity, Objectivity, and Ethics in Business: Times Interest Earned 839
Credit Policy and Cash Flow 777 Business Connection: Liquidity Crunch 840
Dividends and Dividends Payable 778
Common Stock 779 Analyzing Profitability 840
Bonds Payable 779 Asset Turnover 840
Building and Accumulated Return on Total Assets 841
Depreciation—Building 780 Return on Stockholders’ Equity 842
Land 780 Business Connection: Gearing for Profit 843
Preparing the Statement of Cash Flows 781 Return on Common Stockholders’ Equity 843
Business Connection: Growing Pains 782 Earnings per Share on Common Stock 844
Price-Earnings Ratio 845
Preparing the Statement of Cash Flows— Dividends per Share 846
The Direct Method 782 Dividend Yield 847
Cash Received from Customers 783
Cash Payments for Merchandise 783
Business Connection: Investing for Yield 847
Cash Payments for Operating Expenses 784 Summary of Analytical Measures 847
Gain on Sale of Land 785 Corporate Annual Reports 849
Interest Expense 785 Management Discussion and Analysis 849
Cash Payments for Income Taxes 785 Report on Internal Control 849
Reporting Cash Flows from Operating
Activities—Direct Method 786 Integrity, Objectivity, and Ethics in Business:
Characteristics of Financial Statement Fraud 849
International Connection: IFRS for Statement of Report on Fairness of the Financial Statements 850
Cash Flows 786
Unusual Items on the Income Statement 850
Financial Analysis and Interpretation: Unusual Items Affecting the Current Period’s
Free Cash Flow 787 Income Statement 850
Spreadsheet (Work Sheet) for Statement of Cash Unusual Items Affecting the Prior Period’s
Income Statement 852
Flows—The Indirect Method 789
Analyzing Accounts 789
Retained Earnings 789
Chapter 18Introduction to
Other Accounts 791
Preparing the Statement of Cash Flows 791 Managerial Accounting 883
Managerial Accounting 885
Chapter 17Financial Statement Differences Between Managerial and Financial
Accounting 885
Analysis 823 The Management Accountant in the
Organization 886
Analyzing and Interpreting Financial The Management Process 888
Statements 825
Contents xxix
Business Connection: Line and Staff for Service Practice Set: Hydro Paddle Boards
Companies 888 This practice set is a manufacturing business oper-
Uses of Managerial Accounting Information 889 ated as a corporation. This set uses a job order cost
system and includes subsidiary ledgers and job
Manufacturing Operations: cost records. This set can be solved manually or
Costs and Terminology 890 with the General Ledger software.
Direct and Indirect Costs 891
Manufacturing Costs 892
Business Connection: Overhead Costs 893 Chapter 20 Process Cost Systems 968
Sustainability and Accounting 896
Process Cost Systems 970
Sustainability 897
Eco-Efficiency Measures in Managerial Integrity, Objectivity, and Ethics in Business:
Accounting 897 On Being Green 970
Integrity, Objectivity, and Ethics in Business: Comparing Job Order and Process
Environmental Managerial Accounting 898 Cost Systems 971
Cost Flows for a Process Manufacturer 973
Financial Statements for a
Business Connection: Sustainable Papermaking 975
Manufacturing Business 898
Balance Sheet for a Manufacturing Business 898 Cost of Production Report 976
Income Statement for a Manufacturing Step 1: Determine the Units to Be
Business 898 Assigned Costs 976
Service Focus: Managerial Accounting in the Service Step 2: Compute Equivalent Units of
Production 978
Industry 903
Step 3: Determine the Cost per Equivalent
Unit 981
Chapter 19
Step 4: Allocate Costs to Units Transferred
Job Order Costing 924 Out and Partially Completed Units 982
Preparing the Cost of Production Report 984
Cost Accounting Systems Overview 926
Job Order Cost Systems 926 Journal Entries for a Process Cost System 985
Process Cost Systems 926 Service Focus: Costing the Power Stack 988
Job Order Cost Systems for
Using the Cost of Production
Manufacturing Businesses 927
Report for Decision Making 989
Materials 927
Cost per Equivalent Unit Between Periods 989
Integrity, Objectivity, and Ethics in Business: Cost Category Analysis 989
Phony Invoice Scams 929 Yield 990
Factory Labor 930 Lean Manufacturing 991
Business Connection: 3D Printing 931 Traditional Production Process 991
Factory Overhead 931 Lean Production Process 992
Business Connection: Advanced Robotics 932 Average Cost Method 993

Work in Process 936 Determining Costs Using the Average
Finished Goods 937 Cost Method 993
Sales and Cost of Goods Sold 938 The Cost of Production Report 995
Period Costs 938
Summary of Cost Flows for Legend Guitars 938
Job Order Costing for Decision Making 940 Chapter 21Cost-Volume-Profit
Job Order Cost Systems for Service Analysis 1020
Businesses 941
Types of Service Businesses 941 Cost Behavior 1022
Flow of Costs in a Service Job Order Variable Costs 1022
Cost System 942 Fixed Costs 1024
Mixed Costs 1024
Service Focus: Job Order Costing in a Law Firm 943 Summary of Cost Behavior Concepts 1027
xxx Contents
Business Connection: Booking Fees 1028 Business Connection: Mad Men 1091
Budgeted Income Statement 1091
Cost-Volume-Profit Relationships 1028
Contribution Margin 1029 Financial Budgets 1092
Contribution Margin Ratio 1029 Cash Budget 1092
Unit Contribution Margin 1030 Capital Expenditures Budget 1095
Budgeted Balance Sheet 1096
Mathematical Approach to
Cost-Volume-Profit Analysis 1031
Break-Even Point 1031
Target Profit 1035 Chapter 23Evaluating Variances
Business Connection: Airline Industry Break-Even 1036 from Standard Costs 1124
Integrity, Objectivity, and Ethics in Business: Orphan Standards 1126
Drugs 1037 Setting Standards 1126
Graphic Approach to Types of Standards 1127
Cost-Volume-Profit Analysis 1037 Reviewing and Revising Standards 1127
Cost-Volume-Profit (Break-Even) Chart 1037 Integrity, Objectivity, and Ethics in Business:
Profit-Volume Chart 1039 Company Reputation: The Best of the Best 1127
Use of Computers in Cost-Volume-Profit Criticisms of Standard Costs 1127
Analysis 1042
Assumptions of Cost-Volume-Profit Analysis 1042 Business Connection: Standard Costing in Action:
Expanding Brewing Operations 1128
Service Focus: Profit, Loss, and Break-Even in Major
League Baseball 1042 Budgetary Performance Evaluation 1128
Budget Performance Report 1129
Special Cost-Volume-Profit Relationships 1042 Manufacturing Cost Variances 1129
Sales Mix Considerations 1043
Operating Leverage 1044 Direct Materials and Direct Labor Variances 1131
Margin of Safety 1046 Direct Materials Variances 1131
Variable Costing 1047 Service Focus: Standard Costing in the Restaurant

Industry 1133
Direct Labor Variances 1134
Chapter 22 Budgeting 1074 Factory Overhead Variances 1136
The Factory Overhead Flexible Budget 1136
Nature and Objectives of Budgeting 1076 Variable Factory Overhead Controllable Variance 1138
Objectives of Budgeting 1076 Fixed Factory Overhead Volume Variance 1139
Human Behavior and Budgeting 1077 Reporting Factory Overhead Variances 1141
Factory Overhead Account 1142
Budget Games 1078 Recording and Reporting Variances
from Standards 1143
Budgeting Systems 1078
Static Budget 1079 Nonfinancial Performance Measures 1146
Service Focus: Film Budgeting 1080
Flexible Budget 1080
Computerized Budgeting Systems 1081 Chapter 24Decentralized
Master Budget 1082 Operations 1172
Operating Budgets 1082 Centralized and Decentralized Operations 1174
Sales Budget 1082 Advantages of Decentralization 1174
Production Budget 1084 Disadvantages of Decentralization 1175
Direct Materials Purchases Budget 1084
Direct Labor Cost Budget 1086 Business Connection: Dover Corporation: Many
Factory Overhead Cost Budget 1088 Pieces, One Picture 1175
Cost of Goods Sold Budget 1088 Responsibility Accounting 1175
Selling and Administrative Expenses Budget 1090
Responsibility Accounting for Cost Centers 1176
Contents xxxi
Responsibility Accounting for Profit Centers 1178

Chapter 26 Capital Investment
Service Department Charges 1178
Profit Center Reporting 1180 Analysis 1272
Responsibility Accounting Nature of Capital Investment
for Investment Centers 1181 Analysis 1274
Return on Investment 1182
Business Connection: Business Use of Investment
Business Connection: Coca-Cola Company: Go West
Analysis Methods 1275
Young Man 1184
Residual Income 1185 Methods Not Using Present Values 1275
The Balanced Scorecard 1187 Average Rate of Return Method 1275
Cash Payback Method 1276
Service Focus:Turning Around Charles Schwab 1188
Methods Using Present Values 1278
Transfer Pricing 1188
Present Value Concepts 1278
Market Price Approach 1189 Net Present Value Method and
Negotiated Price Approach 1190 Index 1281
Cost Price Approach 1192 Internal Rate of Return Method 1283
Integrity, Objectivity, and Ethics in Business: Business Connection: Panera Bread Rate of
The Ethics of Transfer Prices 1193 Return 1285
Additional Factors in Capital Investment
Analysis 1286
Chapter 25 Differential Analysis, Income Tax 1286
Product Pricing, and Unequal Proposal Lives 1286
Activity-Based Costing 1218 Lease Versus Purchase 1288
Uncertainty 1288
Differential Analysis 1220 Service Focus: If You Build It, They Will
Lease or Sell 1222 Come 1288
Discontinue a Segment or Product 1223 Changes in Price Levels 1289
Make or Buy 1225 Qualitative Considerations 1289
Replace Equipment 1226 Capital Investment for Sustainability 1289
Process or Sell 1228
Accept Business at a Special Price 1229 Integrity, Objectivity, and Ethics in Business:
Assumption Fudging 1290
Business Connection: 60% Off! 1230
Capital Rationing 1290
Setting Normal Product Selling Prices 1231
Service Focus: Revenue Management 1232
Product Cost Concept 1232 Mornin’ Joe MJ-1
Integrity, Objectivity, and Ethics in Business: Financial Statements for Mornin’ Joe MJ-2
Price Fixing 1234 Financial Statements for Mornin’ Joe
Target Costing 1234 International MJ-5
Production Bottlenecks 1235
Appendix A: Interest Tables A-1
Activity-Based Costing 1237
Estimated Activity Costs 1237 Appendix B: International Financial Reporting
Activity Rates 1238 Standards (IFRS) B-1
Overhead Allocation 1238 Appendix C: Revenue Recognition C-1
Business Connection: The ABC's of Schwab 1239 Appendix D: Nike Inc., Form 10-K for the Fiscal
Dangers of Product Cost Distortion 1240 Year Ended May 31, 2016 D-1
Total and Variable Cost Concepts to
Glossary G-1
Setting Normal Price 1241
Total Cost Concept 1241 Index I-1
Variable Cost Concept 1244
CHAPTER
1 Introduction to
Accounting and Business
Chapter 1 Transactions
Accounting System
Accounting Equation
Assets = Liabilities + Owner's Equity
Chapter 2
Account
Debits Credits
Rules of Debit and Credit

BALANCE SHEET ACCOUNTS
ASSETS = LIABILITIES + OWNER’S EQUITY

Asset Accounts Liability Accounts Owner’s Capital Account
Debit for Credit for Debit for Credit for Debit for Credit for
increases (+) decreases (–) decreases (–) increases (+) decreases (–) increases (+)
Balance Balance Balance
Owner’s Drawing Income Statement Accounts

Account Revenue Accounts
Debit for Credit for Debit for Credit for
increases (+) decreases (–) decreases (–) increases (+)
Balance Balance
Expense Accounts
Debit for Credit for
increases (+) decreases (–)
Balance
Unadjusted Trial Balance

Total Debit Balances = Total Credit Balances
CHAPTER
1
Chapter 3
Adjusting Entries
Unadjusted Adjusting Adjusted

Accounts Journal Entries Accounts
XXX XXX Accrued Revenues Unadj. Balances XXX XXX
Accrued Expenses Adjustments XXX XXX
Unearned Revenues Adj. Balances XXX XXX
Unadjusted Prepaid Expenses
Trial Balance Depreciation
Adjusted Trial Balance
Total Debit = Total Credit
Balances Balances
Total Debit Total Credit
Balances
= Balances
Chapter 4 Adjusted Accounts

XXX XXX
Adjusted Balances
Financial Statements
Income Statement Statment of Owner's Equity Balance Sheet
Closing Entries
Adjusted Closing Income Statement
Accounts Journal Entries and Drawing Accounts
XXX XXX 0 0
Adjusted Zero Balances

Balances
Balance Sheet
Total Debit = Total Credit Accounts
Balances Balances
XXX XXX
Post-Closing
Trial Balance
Total Debit = Total Credit
Balances Balances
CHAPTER
1
DIGITALLIFE/ALAMY
Twitter
W hen two teams pair up for a game of football, there
is often a lot of noise. The band plays, the fans
cheer, and fireworks light up the scoreboard. Obviously,
Twitter is one of the most visible companies on the
Internet. It provides a real-time information network
where members can post messages, called tweets, for
the fans are committed and care about the outcome of free. Millions post tweets every day throughout the world.
the game. Just like fans at a football game, the owners Do you think Twitter is a successful company? Does it
of a business want their business to “win” against their make money? How would you know? A ccounting helps
competitors in the marketplace. While having your foot- to answer these questions.
ball team win can be a source of pride, winning in the This textbook introduces you to accounting, the
marketplace goes beyond pride and has many tangible language of business. Chapter 1 begins by discussing
benefits. Companies that are winners are better able to what a business is, how it operates, and the role that
serve customers, provide good jobs for employees, and accounting plays.
make money for their owners.
Chapter 6 Accounting for Merchandising Businesses 5
Learning Objectives
After studying this chapter, you should be able to: Example Exercises (EE) are shown in green.
Obj. 1 Describe the nature of business and the role of Obj. 5 Describe the financial statements of a
accounting and ethics in business. proprietorship and explain how they
interrelate.
Nature of Business and Accounting
Types of Businesses Financial Statements
Role of Accounting in Business Income Statement EE 1-4
Role of Ethics in Accounting and Business Statement of Owner’s Equity EE 1-5
Opportunities for Accountants Balance Sheet EE 1-6
Statement of Cash Flows EE 1-7
Interrelationships Among Financial
Obj. 2 Summarize the development of accounting
Statements
principles and relate them to practice.
Generally Accepted Accounting Principles
Obj. 6 Describe and illustrate the use of the ratio of
Business Entity Concept liabilities to owner’s equity in evaluating a
Cost Concept EE 1-1 company’s financial condition.
Obj. 3 State the accounting equation and define each Ratio of Liabilities to Owner’s Equity
element of the equation. Computing and Interpreting Ratio
The Accounting Equation of Liabilities to Owners’ Equity EE 1-8
Solving the Accounting Equation EE 1-2
Obj. 4 Describe and illustrate how business

transactions can be recorded in terms of
the resulting change in the elements of the
accounting equation.
Business Transactions and the
Accounting Equation
Recording Transactions EE 1-3
At a Glance 1 Page 28
Nature of Business and Accounting Obj. 1 Describe the

nature of
business and the role of
A business1 is an organization in which basic resources (inputs), such as materials accounting and ethics in
and labor, are assembled and processed to provide goods or services (outputs) to business.
customers. Businesses come in all sizes, from a local coffee house to Starbucks, which
sells over $19 billion of coffee and related products each year.
The objective of most businesses is to earn a profit. Profit is the difference between
the amounts received from customers for goods or services and the amounts paid for
the inputs used to provide the goods or services. This text focuses on businesses oper-
ating to earn a profit. However, many of the same concepts and principles also apply
to not-for-profit organizations such as hospitals, churches, and government agencies.
Types of Businesses
Three types of businesses operating for profit include service, merchandising, and
manufacturing businesses. Some examples of each type of business follow:
• Service businesses provide services rather than products to customers.
Delta Air Lines (transportation services)
The Walt Disney Company (entertainment services)
1 A complete glossary of terms appears at the end of the text.
6 Chapter 1 Introduction to Accounting and Business
• Merchandising businesses sell products they purchase from other businesses to

Link to customers.
Wal-Mart (general merchandise)
Twitter Amazon.com (Internet books, music, videos)
Twitter is a service • Manufacturing businesses convert basic inputs into products that are sold to
company that customers.
provides a platform Ford Motor Co. (cars, trucks, vans)
for individuals to send Dell Inc. (personal computers)
text messages called
tweets.
Role of Accounting in Business
The role of accounting in business is to provide information for managers to use in
operating the business. In addition, accounting provides information to other users
in assessing the economic performance and condition of the business.
Accounting is an Thus, accounting can be defined as an information system that provides reports
information system that to users about the economic activities and condition of a business. You could think
provides reports to users of accounting as the “language of business.” This is because accounting is the means
about the economic
activities and condition of by which businesses’ financial information is communicated to users.
a business. 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.
Link to 4. Record economic data about business activities and events.
Twitter 5. Prepare accounting reports for users.
One of the ways
Twitter provides As illustrated in Exhibit 1, users of accounting information can be divided into
information to two groups: internal users and external users.
its investors is by
publishing an annual
Managerial Accounting Internal users of accounting information include manag-
ers and employees. These users are directly involved in managing and operating the
report, which includes
business. The area of accounting that provides internal users with information is called
general-purpose
managerial accounting or management accounting.
financial statements.
The objective of managerial accounting is to provide relevant and timely information
for managers’ and employees’ decision-making needs. Oftentimes, such information is
sensitive and is not 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.
Financial Accounting External users of accounting information include investors,

creditors, customers, and the government. These users are not directly involved in
managing and operating the business. The area of accounting that provides external
users with information is called financial accounting.
The objective of financial accounting is to provide relevant and timely information
for the decision-making needs of users outside the business. For example, financial
reports on the operations and condition of the business are useful for banks and
other creditors in deciding whether to lend money to the business. General-purpose
financial statements are one type of financial accounting report that is distributed to
external users. The term general-purpose refers to the wide range of decision-making
needs that these reports are designed to serve. Later in this chapter, general-purpose
financial statements are described and illustrated.
Role of Ethics in Accounting and Business

The objective of accounting is to provide relevant, timely information for user decision
Ethics making. Accountants must behave in an ethical manner so that the information they
provide users will be trustworthy and, thus, useful for decision making. Managers
and employees must also behave in an ethical manner in managing and operating a
business. Otherwise, no one will be willing to invest in or loan money to the business.
Chapter 1 Introduction to Accounting and Business 7
Accounting as an Information System EXHIBIT 1
1
Identify
Users
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
Ethics are moral principles that guide the conduct of individuals. Unfortunately,
business managers and accountants sometimes behave in an unethical manner. Many
of the managers of the companies listed in Exhibit 2 engaged in accounting or busi-
ness fraud. These ethical violations led to fines, firings, and lawsuits. In some cases,
managers were criminally prosecuted, convicted, and sent to prison.
EXHIBIT 2 Accounting and Business Frauds
Nature of Accounting
Company or Business Fraud Result
Computer Associates Fraudulently reported its financial results. CEO and senior executives indicted.
International, Inc. Five executives pled guilty. $225 million
fine.
Enron Fraudulently reported its financial results. Bankrupcty. Senior executives criminally
convicted. More than $60 billion in stock
market losses.
HealthSouth Overstated performance by $4 billion in false Senior executives criminally convicted.

entries.
Qwest Communications Improperly reported $3 billion in false receipts. CEO and six other executives criminally
International, Inc. convicted of “massive financial fraud.”
$250 million SEC fine.
Xerox Corporation Recognized $3 billion in revenue 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
normally involved one or both of the following factors:
• Failure of Individual Character. Ethical managers and accountants are honest and
fair. However, managers and accountants often face pressures from supervisors to
meet company and investor expectations. In many of the cases in Exhibit 2, managers
and accountants 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
managers set the company culture. In most of the companies listed in Exhibit 2, the
senior managers 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 Public Company Accounting Oversight Board
Link to (PCAOB). In addition, SOX established standards for independence, corporate
responsibility, and disclosure.
Twitter How does one behave ethically when faced with financial or other types of
Twitter’s “Code of
pressure? Guidelines for behaving ethically follow:2
Business Conduct &
Ethics” can be 1. Identify an ethical decision by using your personal ethical standards of honesty and
found at https:// fairness.
investor.twitterinc 2. Identify the consequences of the decision and its effect on others.
.com/corporate- 3. Consider your obligations and responsibilities to those who will be affected by your
governance.cfm 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 websites at www.imanet.org and www.aicpa.org, respectively.
BERNIE MADOFF
In June 2009, Bernard L. “Bernie” Madoff was sen- xisting investors, rather than basing investment returns
e
tenced to 150 years in prison for defrauding thousands on the fund’s actual performance. As long as the invest-
of investors in one of the biggest frauds in Ameri- ment manager is able to attract new investors, he or she
can history. Madoff’s fraud started several decades will have new funds to pay existing investors and continue
earlier when he b egan a Ponzi scheme in his invest- the fraud. While most Ponzi schemes collapse quickly
ment management firm, B ernard L. Madoff Investment when the investment manager runs out of new investors,
Securities LLC. Madoff’s reputation, popularity, and personal contacts
In a Ponzi scheme, the investment manager uses provided a steady stream of investors, which allowed the
funds received from new investors to pay a return to fraud to survive for decades.
Opportunities for Accountants

Numerous career opportunities are available for students majoring in accounting. Cur-
rently, the demand for accountants exceeds the number of new graduates entering
the job market. This is partly due to the increased regulation of business caused by
the accounting and business frauds shown in Exhibit 2. Also, more and more busi-
nesses have come to recognize the importance and value of accounting information.
As indicated earlier, accountants employed by a business are employed in private
accounting. Private accountants have a variety of possible career options within a
company. Some of these career options are shown in Exhibit 3 along with their start-
ing salaries. Accountants who provide audit services, called auditors, attest to the
accuracy of financial records, accounts, and systems. As shown in Exhibit 3, several
private accounting careers have certification options.
Accounting Career Paths and Salaries EXHIBIT 3
Accounting Annual Starting

Career Track Description Career Options Salaries* Certification
Private Accounting Accountants employed by Bookkeeper $45,000

companies, government, Payroll clerk $41,000 Certified Payroll Professional (CPP)
and not-for-profit entities. General accountant $49,000
Budget analyst $52,000
Cost accountant $53,000 Certified Management Accountant (CMA)
Internal auditor $60,000 Certified Internal Auditor (CIA)
Information technology $68,000 Certified Information Systems Auditor (CISA)
auditor
Public Accounting Accountants employed Large firms (over $250 $65,000 Certified Public Accountant (CPA)
individually or within a million in revenue)
public accounting firm in Mid-size firms $58,000 Certified Public Accountant (CPA)
audit, tax, or management ($25-$250 million in
advisory services. revenue)
Small firms (less than $54,000 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 2016 U.S. Salary Guide (Finance and Accounting), Robert Half International, Inc. (www.roberthalf.com/workplace-research/salary-guides)
Accountants who provide services on a fee basis are said to be employed in public
accounting. In public accounting, an accountant may practice as an individual or as
a member of a public accounting firm. Public accountants who have met a state’s
education, experience, 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.
Because all functions within a business use accounting information, experience
in private or public accounting provides a solid foundation for a career. Many posi-
tions in industry and in government agencies are held by individuals with accounting
backgrounds.
PATHWAYS COMMISSION
The Pathways Commission issued its study titled
Charting 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 P ublic Accountants
(AICPA) and the American Accounting Association
(AAA). The C ommission emphasized the importance
of accounting for a prosperous society and good
decision making. The Commission also emphasized
that accountants must be critical thinkers who are
comfortable addressing the shades of gray required
by accounting judgments.
Source: Charting a National Strategy for the Next Generation of

Accountants, The Pathways Commission, July 2012.
Obj. 2 Summarize the

development of
Generally Accepted Accounting Principles
accounting principles and
relate them to practice. If companies did not follow the same rules when reporting financial information,
comparisons among companies would be difficult, if not impossible. Thus, financial
accountants follow generally accepted accounting principles (GAAP) in preparing
reports. These reports allow investors and other users to compare one company to
another.
Accounting principles and concepts develop from research, accepted account-
ing practices, and pronouncements of regulators. Within the United States, the
inancial Accounting Standards Board (FASB) has the primary responsibility for devel-
F
oping accounting principles. The FASB publishes Statements of Financial Accounting
Standards as well as Interpretations of these Standards. In addition, the Securities and
Exchange Commission (SEC), an agency of the U.S. government, has authority over
the accounting and financial disclosures for companies whose shares of ownership
(stock) are traded and sold to the public. The SEC normally accepts the accounting
principles set forth by the FASB. However, the SEC may issue Staff Accounting Bulletins
on accounting matters that may not have been addressed by the FASB.
Many countries outside the United States use accounting principles adopted by
the International Accounting Standards Board (IASB). The IASB issues International IFRS
Financial Reporting Standards (IFRS). Differences currently exist between FASB and See Appendix B for more
IASB accounting principles. Investors and other stakeholders should be alert to these information.
differences in analyzing financial reports of international companies. Throughout this
text, International Connection boxes, such as the one at the bottom of this page,
highlight many of these differences. In addition, Appendix B at the end of this text
summarizes differences between U.S. GAAP and IFRS.
In this chapter and text, accounting principles and concepts are emphasized. It
is through this emphasis on the “why” as well as the “how” that you will gain an
understanding of accounting.
Business Entity Concept

The business entity concept limits the economic data in an accounting system to
data related directly 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 Under the business entity
example, the accountant for a business with one owner would record the a ctivities concept, the activities of
of the business only and would not record the personal activities, property, or a business are recorded
debts of the owner. separately from the
A business entity may take the form of a proprietorship, partnership, corporation, activities of its owners,
creditors, or other
or limited liability company (LLC). Each of these forms and their major characteristics businesses.
are listed in Exhibit 4.
The three types of businesses discussed earlier—service, merchandising, 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
are corporations. Most large retailers such as Wal-Mart and The Home Depot are also
corporations.
IFRS INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)

IFRS are considered to be more “principles-based” than U.S. how business transactions are recorded. Many believe
GAAP, which is considered to be more “rules-based.” For that the strong regulatory and litigation environment in
example, U.S. GAAP consists of approximately 17,000 pages, the United States is the cause for the more rules-based
which include numerous industry-specific accounting GAAP approach. Regardless, IFRS and GAAP share many
rules. In contrast, IFRS allow more judgment in d eciding common principles.*
*Differences between U.S. GAAP and IFRS are further discussed and illustrated in Appendix B.
EXHIBIT 4 Forms of Business Entities
Form of Business Entity Characteristics Examples
Proprietorship is owned by • 70% of business entities in the United States. • A & B Painting
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.
Corporation is organized • Generates 90% of business revenues. • Alphabet (Google)

N
under state or federal • 20% of the business organizations in the United States. • Apple
PORATIO
XYZ COR
k
te of Stoc
Certifica
statutes as a separate legal • Ownership is divided into shares called stock. • Ford Motor Company
taxable entity. • Can obtain large amounts of resources by issuing stock. • Twitter
• Used by large businesses.
Limited liability company • 10% of business organizations in the United States • Mosel & Farmer, CPAs, LLC
(LLC) combines the (combined with partnerships).
attributes of a partnership • Often used as an alternative to a partnership.
and a corporation. • Has tax and legal liability advantages for owners.
Cost Concept
Under the cost concept, amounts are initially recorded in the accounting records at
their cost or purchase price. To illustrate, assume that Aaron Publishers purchased
a building on February 20, 2017, for $150,000. The following additional information
applies to the building:
Price listed by seller on January 1, 2017 $160,000
Aaron Publishers’ initial offer to buy on January 31, 2017 140,000
Purchase price on February 20, 2017 150,000
Estimated selling price on December 31, 2019 220,000
Assessed value for property taxes, December 31, 2019 190,000
Under the cost concept, Aaron Publishers records the purchase of the building
on February 20, 2017, at the purchase price of $150,000. The other amounts listed
have no effect on the accounting records.
The fact that the building has an estimated selling price of $220,000 on Decem-
ber 31, 2019, indicates that the building has increased in value. However, to use the
$220,000 in the accounting records would be to record a profit before selling the
building. If Aaron Publishers sells the building on January 9, 2021, for $240,000, a
profit of $90,000 ($240,000 − $150,000) is then realized and recorded. The new owner
would record $240,000 as its cost of the building.
The cost concept also involves the objectivity and unit of measure concepts. The
objectivity concept requires that the amounts recorded in the accounting records be
based on objective evidence. In exchanges between a buyer and a seller, both try
to get the best price. Only the final agreed-upon amount is objective enough to be
recorded in the accounting records. If amounts in the accounting records were con-
stantly being revised upward or downward based on offers, appraisals, and opinions,
accounting reports could become unstable and unreliable.
The unit of measure concept requires that economic data be recorded in dollars.
Money is a common unit of measurement for reporting financial data and reports.
Example Exercise 1-1 Cost Concept Obj. 2

On August 25, Gallatin Repair Service extended an offer of $400,000 for land that had been priced for sale at $500,000. On
September 3, Gallatin Repair Service accepted the seller’s counteroffer of $460,000. On October 20, the land was assessed
at a value of $300,000 for property tax purposes. On December 4, a national retail chain offered Gallatin Repair Service
$525,000 for the land. At what value should the land be recorded in Gallatin Repair Service’s records?
Follow My Example 1-1

$460,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service.
Practice Exercises: PE 1-1A, PE 1-1B
The Accounting Equation Obj. 3 State the

accounting
equation and define each
The resources owned by a business are its assets. Examples of assets include cash, element of the equation.
land, buildings, and equipment. The rights or claims to the assets are divided into two
types: (1) the rights of creditors and (2) the rights of owners. The rights of creditors
are the debts of the business and are called liabilities. The rights of the owners of
a proprietorship, partnership, or limited liability company are called owner's equity.
Since stockholders own a corporation, the rights of owners of a corporation are
called stockholders’ equity.
The following equation shows the relationship among assets, liabilities, and
owner’s equity: Link to
Assets 5 Liabilities 1 Owner’s Equity Twitter
Twitter’s accounting
This equation is called the accounting equation. Liabilities usually are shown before
equation for a recent
owner’s equity in the accounting equation because creditors have first rights to the assets.
year: Assets ($3,366
Given any two amounts, the accounting equation may be solved for the third unknown
million) = Liabilities
amount. To illustrate, if the assets owned by a business amount to $100,000 and the
($416 million) +
liabilities amount to $30,000, the owner’s equity is equal to $70,000, computed as follows:
Stockholders’ Equity
Assets 2 Liabilities 5 Owner’s Equity ($2,950 million)
$100,000 – $30,000 = $70,000
THE ACCOUNTING EQUATION business, such as the local convenience store, to the largest
business, such as The Coca-Cola Company, companies use
The accounting equation serves as the basic foundation for the accounting equation. Some examples taken from
the accounting systems of all companies. From the smallest recent financial reports of well-known c orporations follow:
Company Assets* 5 Liabilities 1 Stockholders’ Equity

Alphabet (Google) $110,920 = $23,611 + $87,309
The Coca-Cola Company $92,023 = $61,462 + $30,561
DuPont $49,876 = $36,498 + $13,378
eBay $45,132 = $25,226 + $19,906
McDonald’s $34,281 = $21,428 + $12,853
Microsoft Corporation $172,384 = $82,600 + $89,784
Southwest Airlines $20,200 = $13,425 + $6,775
Wal-Mart $203,706 = $117,769 + $85,937
*Amounts are shown in millions of dollars.
Example Exercise 1-2 Accounting Equation Obj. 3

John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting
period, December 31, 2018, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation,
determine the following amounts:
a. Owner’s equity as of December 31, 2018.
b. Owner’s equity as of December 31, 2019, assuming that assets increased by $130,000 and liabilities decreased by
$25,000 during 2019.
Follow My Example 1-2

a. Assets = Liabilities + Owner’s Equity
$800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000
b. First, determine the change in owner’s equity during 2019 as follows:
Assets = Liabilities + Owner’s Equity
$130,000 = –$25,000 + Owner’s Equity
Owner’s Equity = $155,000
Next, add the change in owner’s equity during 2019 to the owner’s equity on December 31, 2018, to arrive at owner’s
equity on December 31, 2019, as follows:
Owner’s Equity on December 31, 2019 = $450,000 (Owner’s Equity on 12/31/18) + $155,000 (change in Owner’s
Equity) = $605,000
Practice Exercises: PE 1-2A, PE 1-2B
Obj. 4 Describe and

illustrate how Business Transactions and the
business transactions can
be recorded in terms of the
Accounting Equation
resulting change in the
elements of the accounting Paying a monthly bill, such as a telephone bill of $168, affects a business’s financial
equation. condition because it now has less cash on hand. Such an economic event or condi-
tion that directly changes an entity’s financial condition or its results of operations
is a business transaction. For example, purchasing land for $50,000 is a business
transaction. In contrast, a change in a business’s credit rating does not directly affect
cash or any other asset, liability, or owner’s equity amount.
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 some typical transactions. As a basis for illustration, a business
All business transactions
can be stated in terms of organized by Chris Clark is used.
changes in the elements of Assume that on November 1, 2018, Chris Clark begins a business that will be
the accounting equation. known as NetSolutions. The first phase of Chris’s business plan is to operate
NetSolutions as a service business 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 personalized retailer of software and hardware for individuals and small
businesses.
Each transaction during NetSolutions’ first month of operations is described in
the following paragraphs. The effect of each transaction on the accounting equation
is then shown.
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Rouva näytti ovella sisarelleen menevää kirjettä.
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Rouva kääntyi takaisin. Kuinka August oli hänelle tyly! Oliko

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Kortin täytettyään vei hän sen taas miehelleen.
— Onko tämä nyt hyvä?
Mies katsoi sitä, pyyhki siitä pois rouvan kuittauksen, antoi toisen
kortin ja käski kirjoittaa uuden, selittäen tuon virheen.
Mutta rouva kysyi:
— Tahdotko sinä vaan minua kiusata?
— Kiusata! Kuka tässä kiusaa?
— Kun pakotat minut kirjoittamaan sitä, mitä en kuitenkaan osaa.
— Sinä opit sillä tavalla.
— Kaikessa tapauksissa sinä olet minulle hyvin epäkohtelias.
— Kyllä, täällä konttorissa. Täällä tehdänn työtä.
Rouva puri huuliaan ja kirjoitti uuden kortin.

— Punnitse nyt se että tiedät paljonko siitä menee.
Rouva punnitsi.
— Tämä painaa 750.
— Niin, 750 grammaa, ja paketti maksaa 1 kiloon asti 60 penniä.
— Mutta kun tämä painaa 750 grammaa?
— Yhdessä kilossa on 1,000 grammaa ja 1,000:een asti saa

lähettää 60 pennillä.
Rouva katsoi epätoivoissaan mieheensä.
— Minä en ymmärrä sinua ollenkaan.
— Herrajumala! Siitä menee 60 penniä! Lähetä piika viemään, sillä

pojan pitää odottaa etelän postia.
Rouva vei pakettinsa ja kirjeensä sisään. Jonkun ajan kuluttua tuli

hän paketti kädessä katsomaan konttoorin kelloa.
— Vieläköhän tämä paketti ehtii postiin? kysyi hän hyvin

välinpitämättömästi.
— Mutta miksi et ole sitä jo lähettänyt?
— Minä aukasin paketin ja panin kirjeen sisään, ettei menisi

turhaan rahaa.
Mies teki vihaisen liikkeen ja painui työhönsä.
Vähän päästä hän näki, kun piika meni kadulla paketti sylissä.
Toinen piika tuli kohta sen jälkeen kutsumaan herraa rouvan luo.
—
Rouva sairastui äkkiä, ilmoitti piika.
Herra puhisi harmista mennessään sisään.
Rouva makasi kammarissaan sohvalla ja itki. Parhaiksi kävelevä

pikku poika seisoi sohvan ääressä ja vedet silmissä loihti: Elä ikke,
elä ikke!
— Mitä sinä itket?
— Suutuitko sinä minuun?
— Mistä minä olisin suuttunut?
— Kun minä purin sen paketin.
— Enkä ole suuttunut, mutta sinä sen varmaan teit äkäpäissäsi.
— Ni — iin…
— Ymmärrätkö sinä että teit siinä tyhmästi?
— Ym — ymm — mär — rän…
— Elä tee vasta niin! Lakkaa nyt itkemästä, kun Kaarlekin pyytää;
minun täytyy lähteä.
Hän taputti lähtiessään pari kertaa vaimonsa päätä.
— Niin lapsi vielä! sanoi hän itsekseen myötätuntoisella säälillä.

Kohta kun hän oli istuutunut pulpettinsa ääreen tuli rouva
konttooriin, pikku Kaarle sylissään. Hän oli nyt hyvällä tuulella
jälleen, itku oli selvittänyt hänet.
— Rakas August! sanoi hän ja katsoi mieheensä mitä

herttaisimmasti.
— No?
— Luuletko sinä että se paketti ehtii postiin. Hilman pitäisi saada

se välttämättä huomenna.
— Ehtiihän se. Vaan menkää nyt täältä pois, meillä on niin kiirettä.
— Me menemme, me menemme. Hyvätti, hyvätti! sanoo Kaarle.
He menivät. Mutta hetken päästä tulivat he konttoorin ovelle.
— August, tulisitko vähän tänne, hyvin pikkuisen vaan.
— Voi, kun minä en jouda!
— Minä yhden sanan vaan sinulta kysyisin, se on hyvin, hyvin

tärkeätä.
Aviomies läksi, päästäkseen hänestä vihdoinkin erilleen.
— Mitä?
— Eikö minun pitäisi lähettää Liina Lauran jälkeen postiin

varottamaan Lauraa, ettei suinkaan sanoisi että paketissa on
kapalovyöt, jos postissa kysyvät?
— Lähetä, lähetä!
Mies kääntyi samassa konttooriinsa. Hän luuli saavansa nyt olla
rauhassa.
Lähetettyään toisenkin piijan postiin, juohtui rouvalle vielä yksi asia

mieleen, vaan kun hän ei enää tahtonut mennä häiritsemään
konttooriin, asettui hän pikku Kaarlen kanssa konttoorin viereiseen,
miehensä kammariin kärsivällisesti odottamaan, jos August sattuisi
pistäymään siellä. Hän oli kuitenkin kiltti vaimo, joka ei mennyt
häiritsemään miestään työssä, ja hänestä tuntui tämä kärsivällinen
miehensä tietämättä odottaminen niin mieluiselta, että hän olisi
istunut ja odottanut tässä vaikka kuinka kauvan. Hän toivoi, että
August vasta pitkän ajan päästä pistäytyisi kammariinsa ja saisi
tietää, että hän on niin ja niin kauvan odottanut täällä, kun ei tahtonut
tulla konttooriin häiritsemään työtä. Hänen sydämensä värähteli
ajatellessaan, kuinka liikutetuksi August varmaankin on tuleva.
Noin kymmenen minuutin päästä meni August kammaristaan

hakemaan nimileimasintaan, kun tarvitsi painaa sinettinsä erääseen
kohta postissa lähetettävään paperiin.
— August, rakas August!
— No?
— Tulepas nyt vähän tähän istumaan.
— Minulla on tulinen kiire!
— No mutta August —! Minä olen sinua odottanut tässä Kaarlen

kanssa kauvan aikaa.
— Mutta kun minä en jouda, kuuletko sinä!

August oli jo menemässä ovessa, kun hän kääntyi takaisin
huomatessaan, että vaimonsa oli itkuun pyrähtämäisillään.
— Sano nyt se asiasi.
Vaan rouva hikotteli itkuhereissään eikä voinut vähään aikaan

mitään puhua. Mies tyynnytteli häntä, toisessa kädessään yhä pitäen
nimileimasinta.
— Sinä taas suutuit minuun, valitti rouva, kyettyään puhumaan.
— Enkä ole suuttunut. Sano nyt asiasi.
— Suutuit sinä, kyllä minä sen näin, ja mene nyt, kun sinä et
kuitenkaan todella tahdo kuunnella minua.
— Mutta minä en lähde ennen kuin sanot sen asiasi. Minä istun
nyt tässä ja kuuntelen.
— Etkös ole suuttunut?
Hän katsoi suurilla silmillään suoraan miehensä silmiin.
— En, vastasi mies, vaan silmänsä vähän rävähtivät.
Rouva tarttui miehensä kaulaan.
— Minä vaan tahdoin kertoa sinulle, mitä minä kirjoitin sinun

puolestasi Hilman kirjeeseen.
Juuri sen vuoksi, että tuo tärkeä asia oli niin vähäpätöinen, ei
aviomies hypännyt sohvasta eikä rynnännyt ulos huoneesta, jonka
hän muutoin olisi tehnyt. Hän jätti lähetettävän tärkeän kirjeensä ja
monet muut kiireet asiat oman onnensa nojaan, heittäysi vaan
mukavampaan asentoon sohvassa ja päätti hartaasti kuunnella
vaimoaan, niin kuin tahdotaan pientä lasta erityisesti tarkastaa, kun
huomataan hänessä oikein lapsellista, mitä ei ole ennen huomattu.
— Kerropas nyt, mitä sinä kirjoitit!
Rouva kertoi, mitä hän oli kirjoittanut omasta puolestaan ja miten

hän sitte oli kirjoittanut, että Augustilla oli hirveä kiire, jonka tähden ei
joutanut itse kirjoittamaan tervehdystään, vaan hän kirjoitti Augustin
puolesta, ollen varma siitä, että August yhtyi joka sanaan, mitä hän
kirjoitti.
— Yhdytkö sinä joka sanaan?
— Tietysti, tietysti!
— Sitäpä minä juuri tahdoin tietää ja minä olin siitä levoton.
Mies jäi yhä edelleen istumaan ja uteliaasti katselemaan

vaimoaan, otsassaan lyhyt, hieno viiva, joka osoitti, että hän samalla
jotakin ajatteli. Mutta rouva sanoi:
— Kuule, sinun pitää mennä nyt konttooriin, kun sinulla on kiire, en

minä tahdo sinua viivyttää.
— Tosiaankin, olin unhottaa.
Hän painoi vaimonsa hiuksiin suudelman, niin kuin hänen tapansa

oli, otti sinettinsä ja meni.
Hänen kirjeensä oli auttamattomasti myöhästynyt, hänellä ei ollut

enää mitään kiirettä, ja hän käveli konttoorissa edestakaisin.
Mutta hän ei ollut vähääkään vihastunut, kaikki harminsa oli
hävinnyt, ja hän vaan odotteli konttooritunnin päättymistä,
mennäkseen sisään vaimonsa ja poikansa luo.
Vähän päästä hypähti rouva konttoorin ovelle, huudahtaen:
— Paketti ehti postiin! Vaan ihan parhaiksi, ihan parhaiksi!
— Sepä hyvä oli! sanoi mies ja meni hänen jälestään sisään.

Siellä hän otti vainionsa ja pikku poikansa, — nuo molemmat
lapsensa, niin kuin hän ajatteli, — syliinsä ja rupatteli hauskasti
heidän kanssaan päivällistä odottaessa.
Kevätpäivä Penttisen talossa.
Nuorin, viime kesänä syntynyt tyttölapsi olisi voinut luulla, ettei sitä
muuta maailmata ollutkaan kuin ne kaksi huonetta, joissa asuttiin.
Häntä ei ollut näet vielä kertaakaan käytetty ulkoilmassa, vaikka oli
jo kevät käsissä. Hän oli syntynyt niin terveenä ja vahvana, että äiti
oli ylpeillyt lapsestaan, mutta nyt hän oli kalpea ja surkastuneen
näköinen. Perähuone oli ollut hänen asuntonsa alusta alkaen: jos
tahtoi ryömiä etuhuoneeseen, käännytti äiti kynnykseltä takaisin ja
sanoi että siellä oli kylmä. Toisinaan äiti kuitenkin vei hänet sylissään
etuhuoneeseen, vaan omin päinsä ryömimään ei sinne päässyt. Siitä
hän useasti puhkesi katkerasti itkemään, vaan se ei auttanut, sillä
silloin pani äiti hänet maata tai pakoitti syömään.
Näin eli pienokainen koko pitkän talven perähuoneessa, joka oli

pohjoiseen päin ja pimeä ja jossa ilma vaihtui ainoastaan siitä, kun
ovea aina avattiin etuhuoneeseen. Useasti sai hän olla huoneessa
pitkät ajat aivan yksin. Hänellä oli kuitenkin pieniä veljiä, jotka
leikkivät hänen kanssaan ja hoitivat häntä. Vaan he eivät olleet aina
hänen luonaan, mihin lienevät aina hävinneen, ja sitte taas
ilmestyivät, tuoden mukanaan kylmää ilmaa, joka pienestä tuntui
hirveältä.
Kun tuli kevätpuoli ja ulkona oli vähän sulaa, hävisivät veljet

päiväkausiksi kokonaan, ja silloin vietti lapsi pisimmät hetkensä. Nyt
ei häntä kuitenkaan enää niin paljon vangittu, perähuoneessa, hän
sai useasti ryömiä etuhuoneeseenkin, ja häntä suuresti huvitti hiihtää
etuhuoneen lattialla auringon paisteessa, joka tuntui hyvin
lämpimältä. Hän taputteli kämmenellään lattiata, mihin aurinko
paistoi, ja hänellä oli myöskin suuri hauskuus muutamasta
kärpäsestä, joka oli surissut ikkunassa ja lenteli nyt hänen
ympärillään, laskeutuen sekin aina mielellään lattialle
päiväpaisteeseen, josta hän sen kuitenkin joka kerta karkoitti pois
tavoittaissaan sitä kiini. Mutta näin yksinään ollessaan keväällä, kun
ei kumpasessakaan huoneessa tuntunut ketään olevan, tuli
pienokaiselle toisinaan niin vaikea olla, että hän rupesi itkemään
ikävästä. Kun ei yhtä hyvin ketään tullut hänen luokseen, lakkasi hän
itkemästä, istui lattialla ja kuulosti. Huoneessa ei tuntunut ketään
olevan, vaan ulkoa kuului ääniä, veikkojen iloisia ääniä ja muita
tuttuja ääniä, tuolta tuntemattomasta maailmasta, johon hän ei ollut
saanut vielä päätään pistää, vaan jonne hän jo halusi. Siitä tuli
hänen mielensä jälleen ikäväksi, ja haikea itku kaikui taas tyhjässä
huoneessa.
Kerran, kun ei mistään apua tullut, ryömi hän raolleen jääneen

ulko-oven kynnykselle. Siinä hän pysähtyi, sillä eteensä avautui
aivan uusi maailma. Päivä paistoi porstuaan häikäisevän kirkkaasti,
näkyi piha, jossa oli vielä lunta, vaan toisin paikoin oli paljas hiekka,
jolla veikot juoksentelivat. Tuo kaikki näytti hyvin ihmeelliseltä, vaan
samalla tuntui lapsesta iloiselta katsella sinne, eikä kylmän viileä
ilmakaan, joka häntä yltäänsä huuhtoi, tuntunut nyt niin hirveältä kuin
aina talvella poikien mukanaan tuoma. Hän istui siinä ja katseli,
kasvoillaan surullinen hymy ikään kuin sairaalla.
Mutta äiti tuli sieltä, siunasi hämmästyksissään, sieppasi hänet

syliinsä ja vei sisään.
*****
Ahdas ja sulettu oli Onnikinkin olo pienessä navetassaan, joka

pihan perällä rysötti puoleksi maahan vajonneena. Se oli saanut
koko talven olla parressaan, liikkumatta mihinkään, selkä miltei
laessa kiini. Kovana talvisydännä se tyytyikin kohtaloonsa, vaan kun
kirkkaat keväiset auringon säteet alkoivat paistaa heloittaa navettaan
Onnikin edessä olevasta pienestä reijästä, jossa oli kellastunut lasi,
tuli sille ikävä ja kaipaus. Vaan vasta sitte sille kainompi ikävä tuli,
kun navetan räystäs alkoi tippua. Katolla oli vahva hanki: päivän
mustuttamaa päreistä räystään reunaa rupesivat auringon säteet
lämmittämään, ja niin alkoi ikään kuin suuresta alkuainemäärästä
syntyä ja muodostua loistavia maailmoja. Lumihangen laidasta itketti
räystään nenään koko räystään pituisen liikkuvan, kiiltelevän
vesijuovan, ja siitä muodostui lukemattomia vesihelmiä, jotka
tippuivat alas. Pitkässä elävässä vesijuovassa kiilteli sateenkaaren
värejä epäselvinä ja hajanaisina, vaan putoavissa pienissä
vesihelmissä oli ikään kuin luomistyö päättynyt, sillä ne loistivat kuin
tähdet kirkkaasti ja ihanasti. Mutta niiden aika oli lyhyt; välähdys
vaan, ja tuo loistava maailma oli kadonnut. Niin ne syntyivät,
välähtivät ja katosivat hetkessä. Mutta niitä oli lukemattomia: yhden
hävittyä syntyi säännöllisesti toinen räystään elävästä vesijuovasta,
joka oli kuin ijäti heruva vesivirta, minkä täytyi säännöllisinä hetkinä
synnyttää uusi kappale.
Tämä vesihelmimaailmojen loistava näytelmä tapahtui kahden

ulkohuoneen välisessä ahtaassa, likaisessa solassa.
Kun vesihelmen tipahtaessa nuo heleät, ihanat värit sattuivat

pienestä ikkunareijästä kellastuneen lasin läpi Onnikin silmiin, tuli
eläimelle kaiho ikävä. Se sai viestin keväästä ja uudesta syntyvästä
luonnosta: sen silmiä häikäisi, sille tuli vaikea olla ja se ammahteli
ikävissään.
*****
Pihassa oli jo suuri siekale hietikkoa sulana, jolla kaikki pihan

lapset olivat leikkimässä, paitse kaikkein nuorin, joka istui
etuhuoneessa yksinään päiväpaisteessa ja kuunteli kärpästen
surinata ympärillään. Hietikolla oli lasten mieluista olla, he kävelivät
nelinkontan ja piehtaroivat kuin maahan kaivautuakseen; se oli aivan
eläimellinen ilo päiväpaisteesta ja sulasta maasta, joita he niin
suuresti rakastivat. He keksivät senkin tempun että hautasivat
toisiaan hiekkaan, vaan vielä suurempaa riemua herätti keksintö
täyttää housut hiekalla pullolleen, sitoa lahkeen suut kiinni ja sitte
koettaa kävellä. Äiti sivu kulkiessaan kielsi heitä hulluista ilveistään,
vaan sitäkö he kuulivat.
Asuinhuoneen ja porstuan katolta oli isä syytänyt lumen pois.

Mustaan pahvikattoon paistoi nyt päivä hyvin kuumasti, niin että
katto oli kuuma kuin uunin arina. Parhaassa helteessä porstuan
katolla makasi kissa sorkat suorana. Kun lapset sen huomasivat,
alkoivat he sitä hätistellä meluamalla ja kivittämällä, vaan kun kissa
tunsi, ettei heistä ole sen suurempaa vaaraa, ei se liikahtanutkaan.
Sen oli siinä niin äärettömän hyvä olla, kaikissa jäsenissä oli
suloinen raukeus, joka teki ruumiin ja hengen puolikuolleeksi, ettei
olisi tahtonut jaksaa silmiään avata, ja niin se vaan makasi siinä
hievahtamatta, välittämättä lasten peloitteluista. Miisulle kuitenkin
onneksi tuli pihaan posetiivin soittaja, juuri kun pojat olivat
hankkeissa viskata kivensä katolle kaikki yhtaikaa, jonka olisi pitänyt
varmaan häiritä kissan unta. Kun posetiivi viritti säveleensä, unhottui
lapsilta kaikki muu ja he menivät soittokoneen ääreen kädet selän
takana kuuntelemaan ja katsomaan.
Kuultuaan soiton huoneeseen, hyppäsi äiti ulos rappusille

kuuntelemaan. Pienokainen jäi aivan yksin huoneeseen, ja kun hän
kuuli kaikkien jättävän huoneet ja kuuli tuon raikuvan soiton, tuli
hänen mielensä niin oudoksi. Häntä peloitti tuo soitto ja hän ei
käsittänyt kaikesta tästä muuta kuin että hänet oli jätetty enemmän
yksin kuin koskaan ennen. Hän istui lattialla kuin kaikkien
unhoittamana, kun oli tullut kiire lähtö ihmettä katsomaan.
Pienokainen rupesi itkemään täyttä kurkkua, posetiivin helisevien
sävelten kaikuessa korvissaan.
Äidin päähän pisti silloin että voihan hän ottaa pienen ulos, kun oli
tämmöinen kaunis kevätpäivä, ja hän meni sisään, kääräsi
peitevaatteen lapsen ympärille ja toi sen sylissään ulos.
Näin oli pienokainen päässyt ulos ensi kerran elämässään. Hän

istui äitinsä sylissä entistä kalpeamman näköisenä, pelokas ilme
kasvoissaan, vaan samalla hän tunsi jotakin iloakin nähdessään
kauniin paistavan päivän, kuullessaan iloisesti raikuvaa soittoa ja
nähdessään kaikki tutut tässä ympärillään.
— Niin, lapsi kuuntelee soittoa, sanoi hänelle äiti. Se soipi niin
koreasti.
Vähitellen mukautui lapsi posetiiviinkin, niin että kun äiti pani

hänen käteensä lantin ja vei sen niin soittajalle, ei hän enää
pelännyt.
Posetiivi herätti iloa ja elämää kaikissa muissa, vaan Miisu ei

liikahtanutkaan mukavasta asennostaan. Toisella silmäpuolellaan se
näki koko kometiian eikä välittänyt siitä sen enempää kuin että sen
korvat vähän liikkuivat soiton vaikutuksesta.
— Laske tuokin lehmä ulos, kun ammuu tuolla, sanoi isä

tullessaan työmaalta kotiin ja nähdessään kaikkien olevan pihalla;
posetiivin soittaja meni jo portilla.
Lehmä todellakin ammahteli. Sekin oli tuntenut itsensä yksin

jätetyksi, silloin kun kaikki muut olivat rientäneet ulos päivää
paistattamaan. Emäntä oli jättänyt lämpimän ilman tähden navetan
oven auki, josta eläin sai sieramiinsa kevään tuoksua, samalla kuin
välähtävät vesihelmet häikäisivät sen silmiä.
— Kylläpä minä sen laskenkin pitkän talven perästä vähän

jalkuuttelemaan, sanoi emäntä.
— Laske, laske: paha vaan että musiikki ennätti mennä pois:

lehmä olisi saanut tanssia pelin mukaan.
Päästyään ulos, juoksenteli Onnikki ympäri pihaa, hyppi ja teki

äkillisiä pyörähdyksiä, juoksi ja laukkasi häntä suorana, niin että
sieramet soivat. Välistä se vähän pysähtyi hengittämään, vaan sitte
taas läksi yhtäkkiä laukkaamaan. Eräässä kohti se tapasi lumen alta
paljastunutta nurmea, jota se pysähtyi haistelemaan ja veti syvälle
sieramiinsa, tunteakseen oliko siinä vihannuutta. Mutta se oli vaan
kuollutta kuloa, ja lehmä kääntyi siitä pois. Maailma näytti kuitenkin
jo niin hauskalta ja vapaa hetki teki mielen niin iloiseksi, että eläin sai
aivan raivoisan puuskan hyppiä ja ilvehtiä; sen jalat penkoivat
pihamaahan syviä jälkiä.
Seisoessaan sen jälkeen parressaan tuhki Onnikki vielä

hengästyneenä sieramiinsa ja silmät pyörtivät ja päätä tuntui
huimaavan. Se pureksi hajamielisesti eteen pantuja heiniä, koko sen
olennossa oli vielä jotakin riehuvata ja ilosta kuohahtanutta. Eläin oli
ahminut vapautta ja raitista, lämminnyttä ilmaa liijan suurin
siemauksin, ja se oli sen juovuttanut. Räystäältä putoilevat
välähtävät vesihelmet heleine väreineen tahtoivat nyt kokonaan
häikäistä sen tavallista suuremmiksi auvenneet silmät.
Saman tapaisessa tilassa oli pieni lapsikin istuessaan pimeän,

ikävän näköisen peräkammarin lattialla. Hän ei ollut oikein selvillä
siitä, mitä oli tapahtunut, vaan tunsi epäselvää aavistusta, että hän
oli käynyt jossakin, joka oli hänelle aivan uutta ja outoa, nähnyt
jotakin hyvin valoisata ja iloista, joka tulee häntä voimakkaasti
puoleensa vetämään.
— Niinpä on kuin mielenmuutoksissaan, sanoi äiti, ottaessaan

lapsen lattialta syliinsä imetettäväksi. Lapsella oli omituinen
hajamielinen katse.
Tämä oli Penttisen talossa ensimäinen kevätpäivä, sillä posetiivin

soittaja oli käynyt pihassa, pienokainen oli ensi kerran saanut olla
ulkona ja Onnikki oli kevät-iloissaan penkonut pihamaahan syviä
jälkiä.
Eerikki.
Kauppaneuvoksen myllyn hoitajan vaimo tuli poikansa Eerikin

kanssa kauppaneuvoksen puheille konttooriin kl. 2:n jälkeen, juuri
kun konttoristit olivat menneet päivällistunnille. Vainio oli pukeutunut
parhaisiin vaatteihinsa ja näytti vasta peseytyneeltä,
puhdaskasvoiselta. Pojan pää oli kasteltu, ja kammattu.
— Mitäs kuuluu? kysyi kauppaneuvos vaimolta tuttavallisesti ja

antoi hänelle kättä.
— Minä taas tulin tämän pojan kanssa, herra kauppaneuvos. Ei

tästä saa kalua koulussa eikä missään. Tänä päivänä taas laittoivat
opettajat koulusta pois eivätkä kuulu ennen huolivan takaisin ennen
kuin isä tulisi ja koululla kurittaisi. Vaan se mieheni, joka muutenkaan
ei suvaitse koko poikaa, ei sano lähtevänsä opettajain häväistäväksi.
Niin minä tulin taas herra kauppaneuvokselta kysymään, mitä tälle
pojalle pitäisi tehdä.
Vaimo oli hyvin huolissaan, vaan kauppaneuvos, joka muisti oman

samanlaisen pahankurisuutensa lapsuutensa ajoilta ja koulusta
eroittamisensa, katseli jonkunlaisella mielihyvällä ja rakkaudella
tuota rohkeakasvuista 13-vuotiasta poikaa, jossa hän niin hyvästi
tunsi omat kauniit piirteensä, ja joka niin samalla lailla kuin hänkin
osasi pitää päätään vähän eteen päin nuukallaan. Hän löi poikaa
olkapäähän ja sanoi:
— Kyllä tästä pojasta mies tulee muutenkin kuin kouluissa! Elä

Maria ollenkaan huolehdi pojastasi, minä takaan, että kyllä siitä mies
tulee. Ei pakoiteta poikaa kouluun, kun se ei sen luonnolle sovi. Minä
otan pojan huostaani.
— Mihin kauppaneuvos aikoo Eerikin panna?
— Minä otan Eerikin asiapojakseni, ja siitä se voi päästä viimein

vaikka kauppaneuvokseksi — heh, heh!
— Kauppaneuvos laskee leikkiä. Vaan hyväpä olisi, jos

kauppaneuvos ottaisi pojan. Siitä on semmoinen risti siellä kotona,
kun se mieheni sitä vielä niin hylkii.
— Mutta kyllä pojan siltä pitäisi pitää asuntoa siellä kotona. Koeta
Maria sovitella sen miehesi kanssa. Tulkoon Eerikki sitte aamulla
tänne.
— Kiitoksia, herra kauppaneuvos! Sepä nyt oli hyvä asia. —

Menehän Eerikki jo ulos, minulla on kauppaneuvokselle vähän asiaa.
— Niin, kauppaneuvos antaisi anteeksi, vaan minun täytyy nyt
pyytää, että eikö kauppaneuvos taas vähän auttaisi minua.
Tarvitsisin vähän rahaa tuon pojan tähden. Se oli kivellä viskannut
kaksi ikkunaa rikki siitä naapurista, niin ne pitäisi maksaa. En ole
uskaltanut Taavetille mainitakaan koko asiasta, kun se on niin karsas
sille pojalle. Minun on oikein pitänyt vartioida, ettei se kerran löisi sitä
kuoliaaksi. Sen tähden sille ei uskalla kaikkia pojan pahoja tekoja
kertoakaan. Taavetti sanoo, että pojasta on tullut samallainen
mustilainen kuin kauppaneuvos on!
Kauppaneuvos nauroi vaimon kanssa ja taputti vaimoa poskelle,

johon oli juuri kohonnut heikko puna.
— Tässä on 10 markkaa, ehkä sinä sillä tulet toimeen.
— Tuhannet kiitokset, herra kauppaneuvos! Tällä minä olen

hyvinkin autettu.
Vaimo meni.
Aamulla kun Eerikki tuli konttoorille, kauppaneuvos puoleksi

teeskennellyn ankarasti nuhteli ja varoitteli häntä ja antoi ohjeita.
Eerikki sai olla etuhuoneessa, jossa hänellä oli pöytä ja istuin. Kun
häntä tarvittiin, kilisi sähkökello vierellään seinässä.
Eerikillä oli kauppaneuvoksen vanhoista vaatteista laitetut

vaatteet, tukkansa oli äitinsä karkeasti leikannut, kastellut ja
kammannut.
Kauppaneuvos toi hänen eteensä pöydälle kasan vanhoja

satukirjoja, kauppaneuvokselle itselleen aivan tuntemattomia.
— Ehkä näissä on sinulle hupaista lukemista, ettei aikasi tule

ikäväksi, sanoi kauppaneuvos.
Eerikki oli tottunut pitämään ikävinä kaikkia kirjoja, vaan

mielestään oli kauppaneuvos määrännyt hänet lukemaan noita
kirjoja, ja velvollisuudenomaisella tunteella selaili hän paksuja
satukirjoja, katseli kuvia ja viimein alkoi lukeakin. Kirjat olivatkin
hänestä hyvin hupaisia, ja kaikella lapsen vilkkaalla
mielikuvituksellaan rupesi hän seuraamaan satujen ihmeellisiä
juttuja.
Väkisin hän riistäytyi lukemisestaan, kun sähkökello soi ja hänet

lähetettiin asialle.
Ensi päivinä hän kävi asioilla sukkelasti ja säntillisesti, kaikessa

kiireessä vaan poikkesi syrjäkaduille vetämään pari savua
paperossin tai sikaarin pätkistä, joita oli konttoorilla roskalaatikosta
poiminut taskuunsa ison varaston. Vaan vähitellen alkoi hän

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Sole Proprietorship Approach Corporate Approach

• Chapters 1–14 • Chapters 13–26

Chapter 1 Introduction to Accounting and Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Warren/Reeve/Duchac’s Accounting 27e gives students a solid foundation in accounting

bigger picture with features such as the Transactions Adjusting Entri

ilities + Owner's Equ Balances = Total Credit

+ OWNER’S EQU ount Adjusted Balan

490 Chapter 10 Long-Term Assets: Fixed and Intangible

The Cost of Fixed Assets

Roadmap for Success

Built for Today’s Students

Hallmarks of the Revision

Statement of Owner's Equity Statement of Cash Flows

Cases & Projects

CP 5-1 Ethics in Action

CP 5-2 Team Activity

Copyright 2018 Cengage Learning. CP

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Adaptive Study Plan

Mastery Problems allow students to connect concepts across

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• New Partial-Year Depreciation section. Chapter 17

Chapter 23 • Improved the explanation of the differential analysis

Solutions Manual assignment preparation grid that includes information

Terry R. Spray InHisImage Studios

Charles J. Garvey III / Garvey Photography

Generally Accepted Accounting Principles 10 Business Connection: Computerized Accounting

International Connection: International Financial Trial Balance 77

The Accounting Equation 13 Financial Analysis and Interpretation:

Chapter 5 Accounting Systems 230

Integrity, Objectivity, and Ethics in Business: Inventory Costing Methods Under

Practice Set: Lawn Ranger Landscaping Chapter 8

Chapter 11Current Liabilities Chapter 12Accounting for

Chapter 16Statement of The Value of Financial Statement

Reporting Cash Flows 767 Basic Analytical Methods 826

Business Connection: Advanced Robotics 932 Average Cost Method 993

Variable Costing 1047 Service Focus: Standard Costing in the Restaurant

Responsibility Accounting for Profit Centers 1178

Rules of Debit and Credit

ASSETS = LIABILITIES + OWNER’S EQUITY

Owner’s Drawing Income Statement Accounts

Unadjusted Trial Balance

Unadjusted Adjusting Adjusted

Chapter 4 Adjusted Accounts

Adjusted Zero Balances

Obj. 4 Describe and illustrate how business

Nature of Business and Accounting Obj. 1 Describe the

• Merchandising businesses sell products they purchase from other businesses to

• Merchandising businesses sell products they purchase from other businesses to

As a result of the accounting and business frauds shown in Exhibit 2, Congress