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Note to Financial Statements:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,465.0
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,207.1
Equipment and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,771.3
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,443.4 Preface vii
Source: Adapted from McDonald’s Corporation’s 2016 annual report.
▪▪ Analysis for Decision Making highlights how companies use accounting information to make
The cost and
decisions andrelated accumulated
evaluate theirdepletion
business.of mineral
This rights are normally
provides shown with
students as partcontext
of the of why accounting
“Fixed assets” section of the balance sheet. The mineral rights may be shown net of depletion on
is important to companies.
the face of the balance sheet. In such cases, a supporting note discloses the accumulated depletion.
Analysis for Decision Making
Fixed Asset Turnover Ratio Objective 7

Describe and illustrate
The fixed asset turnover ratio measures the number of sales dollars earned per dollar of the fixed asset
fixed assets. The higher the ratio, the more efficiently a company is using its fixed assets in turnover ratio to
generating sales. The ratio is computed as follows: assess the efficiency
of a company’s use of
Sales its fixed assets.
Fixed Asset Turnover Ratio =
Average Book Value of Fixed Assets
To illustrate, the following data (in millions) were taken from a recent financial statement
of McDonald’s Corporation (MCD):
Sales $24,621.9
Fixed assets (net):
Beginning of year 21,257.6
End of year 23,117.6
McDonald’s fixed asset turnover ratio for the year is computed as follows (rounded to one
decimal place):
Sales
Fixed Asset Turnover Ratio =
Average Book Value of Fixed Assets
$24,621.9
=
($21,257.6 + $23,117.6) ÷ 2
$24,621.9
= = 1.1
$22,187.6
Is 1.1 efficient? To answer this question, McDonald’s fixed asset turnover ratio can be com-
pared to other quick-service restaurant companies, as shown in Exhibit 14. Yum! Brands (YUM)
operates KFC, Pizza Hut, and Taco Bell quick-service restaurants. The other restaurants are likely
familiar by name.
▪▪ Make a Decision in the end-of-chapter material gives students a chance to analyze real-world
business decisions.
98169_ch09_ptg01_442-493.indd 469 25/09/17 5:20 PM
Make a Decision
Fixed Asset Turnover Ratio
MAD 9-1 Analyze and compare Amazon.com to Netflix Obj. 7

Amazon.com, Inc. (AMZN) is the world’s leading Internet retailer of merchandise and
REAL WORLD
media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc.
(NFLX) is one of the world’s leading Internet television networks. Both companies compete
in the digital media and streaming space. However, Netflix is more narrowly focused in the
digital streaming business than is Amazon.
Sales and average book value of fixed assets information (in millions) are provided for
Amazon and Netflix for a recent year as follows:
Amazon.com Netflix
Sales $135,987 $8,830
Average book value of fixed assets 25,476 212
a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.
b. Which company is more efficient in generating sales from fixed assets?
c. Interpret your results.
MAD 9-2 Analyze and compare Alaska Air, Delta Air Lines, and Southwest Airlines Obj. 7
Alaska Air Group (ALK), Delta Air Lines (DAL), and Southwest Airlines (LUV) reported
the following financial information (in millions) in a recent year:
REAL WORLD
Alaska Air Group Delta Air Lines Southwest Airlines

Sales $5,931 $39,639 $20,425
Average book value of fixed assets 5,234 23,707 16,323
a. Determine the fixed asset turnover ratio for each airline. Round to one decimal place.
b. Based on the fixed asset turnover ratio, which airline appears to be the most ef-
ficient in the use of its fixed assets?
c. The most important fixed asset to an airline is the aircraft. Given this, what factors
might influence the efficient use of fixed assets for an airline?
MAD 9-3 Analyze Verizon Obj. 7

Verizon Communications Inc. (VZ) is a major telecommunications company in the
United States. Two recent balance sheets for Verizon disclosed the following information
REAL WORLD
regarding fixed assets:
viii Preface
▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment feature
that is designed to help busy students prepare for an exam. It includes a summary of each
learning objective’s key points, key terms, multiple-choice questions, exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
▪ Take It Further in the end-of-chapter activities allows instructors to assign other special activi-
ties related to ethics, communication, and teamwork.
▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students
prepare for the CMA exam so they can earn CMA certification.
CengageNOWv2
CengageNOWv2 is a powerful course management and online homework resource that provides
control and customization to optimize the student learning experience. Included are many proven
resources, such as algorithmic activities, a test bank, course management tools, reporting and
assessment options, and much more.
NEW! Excel Online

Cengage and Microsoft have partnered in CNOWv2 to provide students with a uniform, authentic
Excel experience. It provides instant feedback, built-in video tips, and easily accessible spreadsheet
work. These features allow you to spend more time teaching college accounting applications, and
less time troubleshooting Excel.
These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each
student receives his or her own version of the problem to perform the necessary data calculations
in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework
assignments in CNOWv2. It’s easily retrievable so students can review their answers without cumber-
some file management and numerous downloads/uploads.
Motivation: Set Expectations and Prepare Students

for the Course
CengageNOWv2 helps motivate students and get them ready to learn by reshaping their misconcep-
tions about the introductory accounting course and providing a powerful tool to engage students.
CengageNOWv2 Start-Up Center

Students are often surprised by the amount of time they need to spend outside of class working
through homework assignments in order to succeed. The CengageNOWv2 Start-Up Center will help
students identify what they need to do and where they need to focus in order to be successful
with a variety of new resources.
▪▪ What Is Accounting? Module ensures students understand course expectations and how to be
successful in the introductory accounting course. This module consists of two assignable vid-
eos: Introduction to Accounting and Success Strategies. The Student Advice Videos offer advice
from real students about what it takes to do well in the course.
▪▪ Math Review Module, designed to help students get up to speed with necessary math skills,
includes math review assignments and Show Me How math review videos to ensure that stu-
dents have an understanding of basic math skills.
▪▪ How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular soft-
ware system. Quickly familiarize your students with CengageNOWv2 and direct them to all of
its built-in student resources.
Preface ix
Motivation: Prepare Them for Class

With all the outside obligations accounting students have, finding time to read the textbook before
class can be a struggle. Point students to the key concepts they need to know before they attend
class.
▪▪ Video: Tell Me More. Short Tell Me More lecture activities explain the core concepts of the
chapter through an engaging auditory and visual presentation. Available either on a stand-
alone basis or as an assignment, they are ideal for all class formats—flipped model, online,
hybrid, or face-to-face.
Provide Help Right When Students Need It

The best way to learn accounting is through practice, but students often get stuck when attempt-
ing homework assignments on their own.
▪▪ Video: Show Me How. Created for the most frequently assigned end-of-chapter items,
Show Me How problem demonstration videos provide a step-by-step model of a similar prob-
lem. Embedded tips help students avoid common mistakes and pitfalls.
SHOW ME HOW
x Preface
Help Students Go Beyond Memorization to True

Understanding
Students often struggle to understand how concepts relate to one another. For most students, an
introductory accounting course is their first exposure to both business transactions and the account-
ing system. While these concepts are already difficult to master individually, their combination
and interdependency in the introductory accounting course often pose a challenge for students.
▪▪ Mastery Problems. Mastery Problems enable you to assign problems and activities designed to
test students’ comprehension and mastery of difficult concepts.
MindTap eReader
The MindTap eReader for Warren/Jones/Tayler’s Financial and Managerial Accounting is the
most robust digital reading experience available. Hallmark features include:
▪▪ Fully optimized for the iPad.
▪▪ Note taking, highlighting, and more.
▪▪ Embedded digital media.
▪▪ The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that
vocalizes, or “speech-enables,” online educational content. This feature is ideally suited for both
instructors and learners who would like to listen to content instead of (or in addition to) reading it.
Cengage Unlimited
Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs.
Students get total access to everything Cengage has to offer on demand—in one place. That’s
20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disciplines and
over 675 courses. Currently available in select markets. Details at www.cengage.com/unlimited.
New to This Edition

In all chapters, the following improvements have been made: ▪▪ New items have been added to the Take It Further sec-
▪▪ Chapter schemas have been revised throughout. tion of the chapter.
▪▪ Link to, Analysis for Decision Making, and Make a Deci- ▪▪ New Certified Management Accountant (CMA®) Examina-
sion page references added at the beginning of the tion Questions help students prepare for the CMA exam
chapter, as appropriate, allow students to easily locate so they can earn CMA certification.
the ties to the opening company throughout the chapter.
▪▪ New learning objective for Analysis for Decision Making. Chapter 1
▪▪ Stock ticker symbol has been inserted for all real-world ▪▪ Enhancing characteristics added to discussion of GAAP.
(publicly listed) companies. This helps students to use ▪▪ Discussion of fiscal year added to time period discussion of
financial websites to locate real company data. GAAP (moved from Chapter 6). This is consistent with use
▪▪ Years are now identified as 20Y1, 20Y2, …., 20Y9. of fiscal years throughout Chapters 1–4 and with the fact that
▪▪ New Pathways Challenge feature added, consistent with the many publicly traded companies use fiscal years not ending
work of the Pathways Commission. This feature empha- in December 31.
sizes the critical thinking aspect of accounting. A Suggested ▪▪ The statement of stockholders’ equity replaces the
Answer to the Pathways Challenge is provided at the end retained earnings statement. This is consistent with the
of the chapter. financial reporting of publicly held companies that report
▪▪ New Make a Decision section at the end of the Analysis for a statement of stockholders’ equity rather than a retained
Decision Making directs students and instructors to the real- earnings statement.
world company end-of-chapter materials related to Analysis ▪▪ Exhibit 8 revised to show the interrelationships of the
for Decision Making. Also, the continuing company analysis statement of stockholders’ equity with the income state-
is identified and referenced in this Make a Decision section. ment and balance sheet.
▪▪ New exercise based on Analysis for Decision Making has
been added to the Let’s Review section of the chapter.
Preface xi
Chapter 2 a statement of stockholders’ equity rather than a retained

earnings statement.
▪▪ Revised the discussion of correcting entries and inserted
new exhibit to better enhance student understanding.
Chapter 6
Chapter 3 ▪▪ New Check Up Corner on weighted average inventory
method has been added.
▪▪ Exhibit 1 (Accruals) has been revised to make it consistent
▪▪ New exhibit on weighted average flow of costs has been
with Exhibit 2 (Deferrals).
added.
▪▪ The chapter has been changed so that accruals are discussed
▪▪ Weighted average illustration has been added to Check
and illustrated first, followed by deferrals. Accruals are the
Up Corner 6-3.
simplest adjustment (no entry has been made). Thus, the
▪▪ Added an illustration of the lower of cost or net realiza-
chapter discussion now goes from simple to complex, which
ble for inventory applied by different classes of inventory
facilitates student understanding of this complex topic.
(Exhibit 10).
Chapter 4
Chapter 7
▪▪ New learning objectives for Appendices 1 and 2.
▪▪ The statement of stockholders’ equity replaces the retained ▪▪ Presentation of bank reconciliation has been reformatted.
earnings statement. This is consistent with the financial
reporting of publicly held companies that report a state- Chapter 9
ment of stockholders’ equity rather than a retained earnings ▪▪ New Check Up Corner on selling fixed assets was added.
statement. ▪▪ Lease discussion was modified to reflect the latest account-
▪▪ Exhibit 1 revised to show the interrelationships of the ing standard.
statement of stockholders’ equity with the income state-
ment and balance sheet. Chapter 10
▪▪ Simplified and updated the closing process so that two
▪▪ Simplified Exhibit 1 by removing cash/sales discounts.
rather than four closing entries are required. Doing so
eliminates the temporary (clearing) account Income Sum-
mary, which students have difficulty understanding. Chapter 11
▪▪ Exhibit 8 (Accounting Cycle) revised and made more ▪▪ Present value formulas have been added to Appendix 1,
readable. “Present Value Concepts and Pricing Bonds Payable.”
Chapter 5 Chapter 12
▪▪ Chapter has been retitled as “Accounting for Retail Busi- ▪▪ Added brief discussion of different classes of common
nesses.” Using Retail in the title rather than Merchandising stock (Classes A, B, and C).
is more current terminology that students can identify with.
▪▪ Schema revised to only focus on the financial statements and Chapter 15
the key accounts that will be discussed within the chapter. ▪▪ “Managerial Accounting in the Organization” section
▪▪ New learning objective and separate discussion for the significantly revised to discuss horizonal and vertical busi-
adjusting process of a retail business. ness units; McAfee, Inc., is used as an illustration.
▪▪ New learning objective and Appendix “Gross Method of ▪▪ New Why It Matters features the IMA and CMA.
Recording Sales Discounts.” This gives instructors flexi- ▪▪ New Why It Matters features vertical and horizontal func-
bility as to whether to cover the net or gross methods of tions for service companies.
accounting for sales discounts. ▪▪ Discussion of sustainability and accounting moved to new
▪▪ Chart of Accounts for NetSolutions as a Retail Business Chapter 28.
(Exhibit 2) has been moved earlier in the chapter so that
students can focus on the new accounts specific to retail
businesses.
Chapter 16
▪▪ Customer refunds, allowances, and returns discussion has ▪▪ Discussion of sustainability and accounting moved to new
been simplified to progress from simple to complex, as Chapter 28.
summarized in Exhibit 7. ▪▪ Added one new Analysis for Decision Making item.
▪▪ Closing process for a retail business has been revised to
use a two-entry closing process. Chapter 17
▪▪ The statement of stockholders’ equity replaces the
▪▪ Why It Matters feature (Sustainable Papermaking) moved
retained earnings statement. This is consistent with the
to Chapter 28.
financial reporting of publicly held companies that report
xii Preface
▪▪ Lean manufacturing discussion with related homework Chapter 24

items moved to Chapter 27.
▪▪ Balanced scorecard discussion moved to Chapter 28.
▪▪ Added one new Analysis for Decision Making item.
Chapter 18 Chapter 25
▪▪ Added Learning Objective 7: Describe and illustrate the use
▪▪ Total cost and variable cost concepts for product pricing
of activity-based costing information in decision making.
were moved to an end-of-chapter appendix.
▪▪ Added one new Make a Decision item.
Chapter 19—NEW Chapter
▪▪ Learning Objectives: Chapter 26
•• Describe support departments and support department ▪▪ Analysis for Decision Making on capital investment for
costs. sustainability has been moved to Chapter 28.
•• Describe the allocation of support department costs ▪▪ Added new Analysis for Decision Making entitled “Uncer-
using a single plantwide rate, multiple department tainty: Sensitivity and Expected Value Analyses.”
rates, and activity-based costing. ▪▪ Added six new Make a Decision items.
•• Allocate support department costs to production depart-
ments using the direct method, sequential method, and Chapter 27
reciprocal services method.
▪▪ Added Objective 4: Describe and illustrate the use of lean
•• Describe joint products and joint costs.
principles and activity analysis in a service or administra-
•• Allocate joint costs using the physical units, weighted
tive setting.
average, market value at split-off, and net realizable
value methods.
Chapter 28—NEW Chapter
•• Describe and illustrate the use of support department
and joint cost allocations to evaluate the performance ▪▪ Learning Objectives:
of production managers. •• Describe the concept of a performance measurement
system.
Chapter 20 •• Describe and illustrate the basic elements of a balanced
▪▪ Added one new Analysis for Decision Making item. scorecard.
•• Describe and illustrate the balance scorecard, including
Chapter 21 the use and impact of strategy maps, measure maps,
strategic learning, scorecard cascading, and cognitive
▪▪ Contribution margin analysis deleted from chapter.
biases.
▪▪ Revenue variance portion added as an appendix to
•• Describe corporate social responsibility (CSR), includ-
Chapter 23.
ing methods of measuring and encouraging social
responsibility using the balanced scorecard.
Chapter 22 •• Use capital investment analysis to evaluate CSR projects.
Appendix D Investments
Chapter 23 ▪▪ The investments appendix has been updated to be con-
▪▪ Added new appendix on revenue variances. sistent with Financial Instruments, Subtopic 825-10, FASB
▪▪ Nonfinancial performance measures (previously Learning Accounting Standards Update, Financial Accounting Stan-
Objective 6) moved to Chapter 28. dards Board, Norwalk, CT, January 2016.
▪▪ Added four new revenue variance exercises.
Acknowledgements
The many enhancements to this edition of Financial and Managerial Accounting are the direct result of reviews, surveys,
and focus groups with instructors at institutions across the country. We would like to take this opportunity to thank those
who have helped us better understand the challenge of the financial accounting course and provided valuable feedback on
our content and digital assets.
John Alpers, Tennessee Wesleyan Dave Fitzgerald, Jackson College Dr. April Poe, University of the
Anne Marie Anderson, Raritan Valley Kenneth Flug, St. Thomas Aquinas Incarnate Word
Community College College Francisco Rangel, Riverside City
Rick Andrews, Sinclair Community John Giles, North Carolina State College
College University Jeffery Reinking, University of Central
Maureen Baker, Long Beach City Marcye Hampton, University of Central Florida – Orlando
College Florida Jenny Resnick, Santa Monica College
Surasakdi Bhamornsiri, University of Christopher Harper, Grand Valley State Benjamin Reyes, Long Beach City
North Carolina at Charlotte University College
Alan Blankley, University of North Thomas Heikkinen, Jackson College Vernon Richardson, University of
Carolina at Charlotte Melanie Hicks, Liberty University Arkansas
Cindy Bolt, The Citadel Susanne Holloway, Salisbury Patrick Rogan, Cosumnes River
Julie Bonner, Central Washington University College
University Jose Hortensi, Miami Dade College Lauran B. Schmid, The University of
Charles Boster, Salisbury University Md Safayat Hossain, Florida Texas Rio Grande Valley
Salma Boumediene, Montana State International University Jennifer Schneider, University of North
University – Billings Su-Jane Hsieh, San Francisco State Georgia
Jerold K. Braun, Daytona State College University Mary Sheil, Kennesaw State University
Louise Burney, University of Mississippi Aileen Huang, Santa Monica College Meghna Singhvi, Loyola Marymount
Shauna Butler, St. Thomas Aquinas Julie Ying Huang, University of University
College Louisville Margie Snow, Norco College
James N. Cannon, Iowa State University Ann Kelley, Providence College Mona Stephens, Southern New
Kirk Canzano, Long Beach City College Daniel Kim, Midlands Technical College Hampshire University
Jack Cathey, University of North Angela Kirkendall, South Puget Sound Linda Stoller, Bentley University
Carolina at Charlotte Community College Michael Stoots, UCLA extension
Donna Chadwick, Sinclair Community Satoshi Kojima, East Los Angeles Nirmalee Summers, University of
College College Wisconsin – La Crosse
Ming Lu Chun, Santa Monica College Charles Leflar, University of Arkansas Dominique Svarc, Harper College
Anne Clem, Iowa State University Tara Maciel, San Diego Mesa College Patricia Tupaj, Quinsigamond
Dixon Cooper, Ouachita Baptist Annette Maddox, Georgia Highlands Community College
University College Bill Urquhart, Florida Atlantic
Bryan Corsnitz, Long Beach City LuAnn Bean Mangold, Florida Institute University
College of Technology Rodney Vogt, Kansas State University
Pat Creech, Northeastern Oklahoma A&M Eric Martin, University of Tennessee Rick Warne, University of Cincinnati
Stephan Davenport, University of Robert A. Martin, Kennesaw State Randi Watts, Baker College
Tennessee – Chattanooga University Cammy Wayne, Harper College
David Deboskey, San Diego State Michelle McFeaters, Grove City College Vivian Winston, Indiana University
Daniel De La Rosa, Fullerton College Dawn McKinley, Harper College Jan Workman, East Carolina University
Heather Demshock, Lycoming College Allison McLeod, University of North Glen Young, Texas A&M University –
Scott Dotson, Tennessee Wesleyan Texas College Station
University Rodney Michael Mellissa Youngman, National Technical
Hong Duong, Salisbury University Shawn Miller, Lone Star College Institute for the Deaf, RIT
Desiree Elias, Florida International Jill Mitchell, Northern Virginia Mustafa Younis, Tulane University
University Community College – Alexandria Fang Zhao, Florida International
James Emig, Villanova University DeeAnne Lynn Peterson-Meyer, University
Valerie Evans, Kansas State University University of Wisconsin – Eau Claire Terri Ziegler, Ohio State University
xiii
xiv Acknowledgements
Special thanks to our Financial Accounting Advisory Board Members:
Reb Beatty, Anne Arundel Community Steven Hegemann, University of Don Minyard, University of Alabama
College Nebraska – Lincoln Micki Nickla, Ivy Tech Community
Amy Bourne, Oregon State University Todd Jensen, Sierra College College – Gary
Rachel Brassine, East Carolina Sergey Komissarov, University of John Robertson, Arkansas State
University Wisconsin – La Crosse University
Gregory Brookins, Santa Monica Anthony Kurek, Eastern Michigan Philip Slater, Forsyth Technical
College University Community College
Marci Butterfield, University of Utah Joseph Larkin, Saint Joseph’s University Bob Urell, Irvine Valley College
Lawrence Chui, University of St. Gary Laycock, Ivy Tech Community Alycia Marie Winegardner, University of
Thomas College – Terre Haute Tennessee – Knoxville
Jerrilyn Eisenhauer, Tulsa Community Kristy McAuliffe, San Jacinto College
College – Southeast Melanie McCoskey, University of Akron
Shari Fowler, Indiana University – East Allison McLeod, University of North
Micah Frankel, California State Texas
University – East Bay
About the Authors
Carl S. Warren
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
©Terry R. Spray InHisImage Studios

Warren has taught classes at the University of Georgia, University of Iowa, Michigan State Univer-
sity, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his Ph.D. from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in pro-
fessional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numer-
ous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
Jefferson P. Jones
Dr. Jefferson P. Jones is an Associate Professor of Accounting in the School of Accountancy at
Auburn University where he teaches financial accounting and applied financial research courses.
He received his Bachelor’s in Accounting and Master of Accountancy degrees from Auburn Uni-
© Thomas Boutwell, T2PHOTOGRAPHY

versity and his Ph.D. from Florida State University. Dr. Jones has received numerous teaching
awards, including the Auburn University Beta Alpha Psi Outstanding Teaching Award (ten times);
the Auburn University Outstanding Master of Accountancy Professor Teaching Award (five times);
the Auburn University Outstanding Distance Master of Accountancy Teaching Award (three times);
and the Auburn University College of Business McCartney Teaching Award. In addition, he has
made numerous presentations around the country on research and pedagogical issues. Dr. Jones
has public accounting experience as an auditor with Deloitte and Touche, holds a CPA certificate
in the state of Alabama (inactive), and is a member of the American Accounting Association, the
American Institute of Certified Public Accountants (AICPA), and the Alabama Society of CPAs
(ASCPA). His research interests focus on financial accounting, specifically investigating the quality
of reported accounting information, and accounting education. He has published articles in numer-
ous journals, including Advances in Accounting, Review of Quantitative Finance and Accounting,
Issues in Accounting Education, International Journal of Forecasting, and The CPA Journal. When
not at work, Dr. Jones enjoys playing golf and watching college football.
William B. Tayler
Dr. William B. Tayler is the Robert J. Smith Professor of Accountancy in the Marriott School of
Business at Brigham Young University (BYU). Dr. Tayler is an internationally renowned, award-
winning accounting researcher and instructor. He has presented his research as an invited speaker
at universities and conferences across the globe. Dr. Tayler earned his Ph.D. and master’s degree
at Cornell University. He teaches in BYU’s Executive MBA Program and in BYU’s School of
Accountancy, one of the top ranked accounting programs in the world. Dr. Tayler has also taught
at Cornell University and Emory University and has received multiple teaching awards. Dr. Tayler
is a Certified Management Accountant and consultant specializing in cost accounting, perfor-
© EMORY UNIVERSITY
mance measurement, the assignment of decision rights, and incentive compensation. His work
has been published in top journals, including Accounting Horizons, Accounting, Organizations
and Society, The Accounting Review, Contemporary Accounting Research, IMA Educational Case
Journal, Journal of Accounting Research, Journal of Behavioral Finance, Journal of Finance,
Review of Financial Studies, and Strategic Finance. Dr. Tayler serves on the editorial boards of
The Accounting Review, Management Accounting Research, and Accounting, Organizations and
Society. He is also director of the Institute of Management Accountants Research Foundation.
xv
Brief Contents
1 Introduction to Accounting and Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2 Analyzing Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3 The Adjusting Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
4 The Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
5 Accounting for Retail Businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
6 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
7 Internal Control and Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
8 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396
9 Long-Term Assets: Fixed and Intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442
10 Liabilities: Current, Installment Notes, and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
11 Liabilities: Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
12 Corporations: Organization, Stock Transactions, and Dividends . . . . . . . . . . . . . . . . . . . . . . . . 580
13 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626
14 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686
15 Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
16 Job Order Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
17 Process Cost Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840
18 Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 896
19 Support Department and Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950
20 Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994
21 Variable Costing for M anagement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1048
22 Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1098
23 Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1156
24 Evaluating Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1206
25 Differential Analysis and Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1256
26 Capital Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1310
27 Lean Manufacturing and Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1358
28 The Balanced Scorecard and Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . 1400
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Appendix B Revenue Recognition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C International Financial Reporting Standards (IFRS). . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Appendix D Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Appendix E Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2017 Selected Excerpts. . . . E-1
Appendix F Special Journals and Subsidiary Ledgers (online). . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
xvi
Contents
1 Introduction to Accounting
and Business 2
Analysis for Decision Making 80
Horizontal Analysis 80
Make a Decision 104

Nature of Business and Accounting 4 Take It Further 106
Types of Businesses 4 Pathways Challenge 75, 107
Role of Accounting in Business 5
Role of Ethics in Accounting and Business 6
3
Opportunities for Accountants 7
Generally Accepted Accounting

Principles (GAAP) 9 The Adjusting Process 108
Characteristics of Financial Information 9
Assumptions 10 Nature of the Adjusting Process 111
Principles 12 Accrual and Cash Basis of Accounting 111
The Accounting Equation 12 Revenue and Expense Recognition 112
The Adjusting Process 112
Business Transactions and the Accounting Equation 13 Types of Accounts Requiring Adjustment 113
Summary 17
Classifications of Stockholders’ Equity 18 Adjusting Entries for Accruals 114
Accrued Revenues 114
Financial Statements 19 Accrued Expenses 115
Income Statement 21
Statement of Stockholders’ Equity 21 Adjusting Entries for Deferrals 118
Balance Sheet 22 Unearned Revenues 118
Statement of Cash Flows 23 Prepaid Expenses 119
Interrelationships Among Financial Statements 24 Adjusting Entries for Depreciation 122
Analysis for Decision Making 26 Summary of Adjusting Process 124
Ratio of Liabilities to Stockholders’ Equity 26
Adjusted Trial Balance 128
Make a Decision 52
Take It Further 53 Vertical Analysis 129
Pathways Challenge 11, 55 Make a Decision 153
2
Take It Further 155
Pathways Challenge 128, 157
Analyzing Transactions 56
Using Accounts to Record Transactions 59
Chart of Accounts 60
Double-Entry Accounting System 62

4 The Accounting Cycle 158
Balance Sheet Accounts 62 Flow of Accounting Information 161
Income Statement Accounts 62
Statement of Stockholders’ Equity Accounts (Dividends) 63 Financial Statements 163
Normal Balances 63 Income Statement 163
Journalizing 64 Statement of Stockholders’ Equity 163
Balance Sheet 165
Posting Journal Entries to Accounts 68
Closing Entries 168
Trial Balance 77 Journalizing and Posting Closing Entries 169
Errors Affecting the Trial Balance 78 Post-Closing Trial Balance 174
Errors Not Affecting the Trial Balance 79
Accounting Cycle 175
xvii
xviii Contents
Illustration of the Accounting Cycle 178 Financial Statements and Closing Entries for a Retail
Step 1. Analyzing and Recording Transactions Business 254
in the Journal 178 Multiple-Step Income Statement 254
Step 2. Posting Transactions to the Ledger 179 Single-Step Income Statement 256
Step 3. Preparing an Unadjusted Trial Balance 179 Statement of Stockholders’ Equity 256
Step 4. Assembling and Analyzing Adjustment Data 179 Balance Sheet 257
Step 5. Preparing an Optional End-of-Period Spreadsheet 181 The Closing Process 258
Step 6. Journalizing and Posting Adjusting Entries 182
Step 7. Preparing an Adjusted Trial Balance 182 Analysis for Decision Making 259
Step 8. Preparing the Financial Statements 182 Asset Turnover Ratio 259
Step 9. Journalizing and Posting Closing Entries 185 Appendix 1 Gross Method of
Step 10. Preparing a Post-Closing Trial Balance 185
Recording Sales Discounts 260
Analysis for Decision Making 188 Transactions 260
Working Capital and Current Ratio 188 Adjusting Entry 261
Subsequent Period 262
Appendix 1 End-of-Period Spreadsheet 190 Comparison with the Net Method 262
Step 1. Enter the Title 190
Step 2. Enter the Unadjusted Appendix 2 The Periodic Inventory System 263
Trial Balance 190 Chart of Accounts Under the Periodic Inventory System 263
Step 3. Enter the Adjustments 191 Recording Merchandise Transactions Under the
Step 4. Enter the Adjusted Trial Balance 192 Periodic Inventory System 264
Step 5. Extend the Accounts to the Income Statement and Balance Adjusting Process Under the Periodic Inventory System 265
Sheet Columns 193 Financial Statements Under the Periodic Inventory System 266
Step 6. Total the Income Statement and Balance Sheet Closing Entries Under the Periodic Inventory System 266
Columns, Compute the Net Income or Net Loss, and
Complete the Spreadsheet 194 Comprehensive Problem 2 291
Preparing the Financial Statements Make a Decision 293
from the Spreadsheet 195
Take It Further 294
Appendix 2 Reversing Entries 195
Comprehensive Problem 1 226
Make a Decision 227
Take It Further 229
Pathways Challenge 175, 231 6 Inventories 298
5
Control of Inventory 300
Accounting for Retail Safeguarding Inventory 300
Businesses 232 Reporting Inventory 301
Inventory Cost Flow Assumptions 301

Nature of Retail Businesses 234 Inventory Costing Methods Under
Operating Cycle 234 a Perpetual Inventory System 303
Financial Statements 235 First-In, First-Out Method 303
Last-In, First-Out Method 305
Merchandise Transactions 236
Weighted Average Cost Method 307
Chart of Accounts for Retail Business 236
Subsidiary Ledgers 237 Inventory Costing Methods Under
Purchases Transactions 237 a Periodic Inventory System 309
Sales Transactions 242 First-In, First-Out Method 309
Freight 246 Last-In, First-Out Method 309
Summary: Recording Inventory Transactions 249 Weighted Average Cost Method 311
Dual Nature of Merchandise Transactions 249
Sales Taxes and Trade Discounts 249 Comparing Inventory Costing Methods 313
The Adjusting Process 251 Reporting Inventory in the
Adjusting Entry for Inventory Shrinkage 251 Financial Statements 314
Adjusting Entries for Customer Refunds, Valuation at Lower of Cost or Market 314
Allowances, and Returns 252 Inventory on the Balance Sheet 316
Adjusted Trial Balance 253 Effect of Inventory Errors on the
Financial Statements 317
Contents xix
Analysis for Decision Making 320 Allowance Method for Uncollectible Accounts 400
Inventory Turnover and Number of Days’ Sales in Inventory 320 Write-Offs to the Allowance Account 401
Estimating Uncollectibles 403
Appendix Estimating Inventory Cost 322
Retail Method of Inventory Costing 322 Comparing Direct Write-Off and Allowance Methods 409
Gross Profit Method of Inventory Costing 323 Notes Receivable 410
Make a Decision 345 Characteristics of Notes Receivable 410
Accounting for Notes Receivable 412
Take It Further 346
Reporting Receivables on the Balance Sheet 414
7
Accounts Receivable Turnover and Number of Days’ Sales in
Receivables 415
Internal Control and Cash 350 Make a Decision 437

Take It Further 439
Sarbanes-Oxley Act 352 Pathways Challenge 413, 440
Internal Control 354
9
Objectives of Internal Control 354
Elements of Internal Control 354 Long-Term Assets: Fixed and
Control Environment 355
Risk Assessment 356
Intangible 442
Control Procedures 356
Monitoring 358 Nature of Fixed Assets 444
Information and Communication 358 Classifying Costs 444
Limitations of Internal Control 359 The Cost of Fixed Assets 446
Cash Controls over Receipts and Payments 360 Leasing Fixed Assets 447
Control of Cash Receipts 360 Accounting for Depreciation 448
Control of Cash Payments 362 Factors in Computing Depreciation Expense 448
Bank Accounts 363 Straight-Line Method 449
Bank Statement 363 Units-of-Activity Method 451
Using the Bank Statement as a Control over Cash 365 Double-Declining-Balance Method 453
Comparing Depreciation Methods 454
Bank Reconciliation 366 Partial-Year Depreciation 457
Revising Depreciation Estimates 457
Special-Purpose Cash Funds 370
Repair and Improvements 458
Financial Statement Reporting of Cash 371
Disposal of Fixed Assets 460
Analysis for Decision Making 372 Discarding Fixed Assets 460
Days’ Cash on Hand 372 Selling Fixed Assets 461
Make a Decision 392 Natural Resources 462

Take It Further 394 Intangible Assets 464
Patents 464
Pathways Challenge 372, 395 Copyrights and Trademarks 465
Goodwill 465
8
Financial Reporting for Long-Term Assets:
Fixed and Intangible 468
Receivables 396 Analysis for Decision Making 469
Fixed Asset Turnover Ratio 469
Classification of Receivables 398
Accounts Receivable 398
Appendix Exchanging Similar Fixed Assets 471
Gain on Exchange 471
Notes Receivable 398
Loss on Exchange 472
Other Receivables 399
Uncollectible Receivables 399 Make a Decision 490
Direct Write-Off Method for Uncollectible Take It Further 491

Accounts 400 Pathways Challenge 467, 493
xx Contents
10 Liabilities: Current,
Installment Notes, and
Contingencies 494
Appendix 1 Present Value Concepts and
Pricing Bonds Payable 556
Present Value Concepts 556
Pricing Bonds 559
Computing Present Values 560

Current Liabilities 496 Appendix 2 Effective Interest Rate Method
Accounts Payable and Accruals 496
Short-Term Notes Payable 497 of Amortization 561
Current Portion of Long-Term Debt 498 Amortization of Discount by the Interest Method 561
Amortization of Premium by the Interest Method 562
Payroll Liabilities 499
Liability for Employee Earnings 499 Make a Decision 577
Deductions from Employee Earnings 500 Take It Further 578
Computing Employee Net Pay 501
Employer’s Payroll Taxes 501 Pathways Challenge 553, 579
Recording Payroll 502
12
Paying Payroll 504
Internal Controls for Payroll 504 Corporations: Organization,
Employees’ Fringe Benefits 504 Stock Transactions, and
Vacation Pay 504 Dividends 580
Pensions 505
Postretirement Benefits Other than Pensions 506
Nature of a Corporation 582
Installment Notes 507 Characteristics of a Corporation 582
Issuance 507 Forming a Corporation 583
Periodic Payments 507
Paid-In Capital from Stock 585
Contingent Liabilities 510 Characteristics of Stock 585
Probable and Estimable 510 Types of Stock 586
Probable and Not Estimable 510 Issuing Stock 588
Reasonably Possible 511 Premium on Stock 589
Remote 511 No-Par Stock 590
Reporting Liabilities 513 Accounting for Dividends 591
Analysis for Decision Making 513 Cash Dividends 592
Quick Ratio 513 Stock Dividends 593
Comprehensive Problem 3 534 Stock Splits 594

Make a Decision 536 Treasury Stock Transactions 595
Take It Further 539 Reporting Stockholders’ Equity 597
Stockholders’ Equity on the Balance Sheet 597
Pathways Challenge 512, 541 Reporting Retained Earnings 598
11
Statement of Stockholders’ Equity 600
Reporting Stockholders’ Equity for Alphabet 601
Liabilities: Bonds Payable 542 Analysis for Decision Making 602

Earnings per Share 602
Nature of Bonds Payable 544 Comprehensive Problem 4 619

Bond Characteristics and Terminology 544 Make a Decision 621
Proceeds from Issuing Bonds 545
Take It Further 622
Accounting for Bonds Payable 547
Bonds Issued at Face Amount 547 Pathways Challenge 588, 625
Bonds Issued at a Discount 547
13
Amortizing a Bond Discount 548
Bonds Issued at a Premium 550
Amortizing a Bond Premium 551 Statement of Cash Flows 626
Bond Redemption 552
Reporting Bonds Payable 554 Reporting Cash Flows 628

Analysis for Decision Making 555 Cash Flows from Operating Activities 629
Times Interest Earned 555 Cash Flows from Investing Activities 631
Contents xxi
Cash Flows from Financing Activities 631 Analyzing Solvency 700

Noncash Investing and Financing Activities 632 Ratio of Fixed Assets to Long-Term Liabilities 700
Format of the Statement of Cash Flows 632 Ratio of Liabilities to Stockholders’ Equity 700
No Cash Flow per Share 633 Times Interest Earned 701
Cash Flows from Operating Activities— Analyzing Profitability 702
The Indirect Method 633 Asset Turnover 703
Net Income 635 Return on Total Assets 703
Adjustments to Net Income 635 Return on Stockholders’ Equity 704
Return on Common Stockholders’ Equity 705
Cash Flows from Investing Activities 638 Earnings per Share on Common Stock 706
Land 638
Price-Earnings Ratio 707
Building and Accumulated Depreciation—Building 639
Dividends per Share 708
Cash Flows from Financing Activities 640 Dividend Yield 708
Bonds Payable 640 Summary of Analytical Measures 710
Common Stock 640
Corporate Annual Reports 711
Dividends and Dividends Payable 641
Management Discussion and Analysis 711
Preparing the Statement of Cash Flows 642
Report on Internal Control 712
Analysis for Decision Making 644 Report on Fairness of the Financial Statements 712
Free Cash Flow 644
Appendix 1 Unusual Items on the Income
Appendix 1 Spreadsheet (Work Sheet) for Statement of Statement 713
Cash Flows—The Indirect Method 645 Unusual Items Affecting the Current Period’s
Analyzing Accounts 646 Income Statement 713
Retained Earnings 647 Unusual Items Affecting the Prior Period’s
Other Accounts 647 Income Statement 714
Preparing the Statement of Cash Flows 648 Appendix 2 Fair Value and Comprehensive
Appendix 2 Preparing the Statement of Cash Flows—The Income 714
Direct Method 648 Fair Value 715
Cash Received from Customers 649 Comprehensive Income 715
Cash Payments for Merchandise 649 Make a Decision 743
Cash Payments for Operating Expenses 650
Gain on Sale of Land 650 Take It Further 744
Interest Expense 651 Pathways Challenge 707, 746
Cash Payments for Income Taxes 651
Reporting Cash Flows from Operating
Activities—Direct Method 651
15
Make a Decision 680
Take It Further 683 Introduction to Managerial
Accounting 748
Managerial Accounting 750
Differences Between Managerial and Financial Accounting 751
14
Managerial Accounting in the Organization 752
Financial Statement The Management Process 754
Analysis 686 Uses of Managerial Accounting Information 755
Manufacturing Operations 757

Nature of Manufacturing 757
Analyzing and Interpreting Financial Statements 688 Direct and Indirect Costs 757
The Value of Financial Statement Information 688
Manufacturing Costs 758
Techniques for Analyzing Financial Statements 689
Financial Statements for a Manufacturing
Analytical Methods 689
Horizontal Analysis 689
Business 763
Balance Sheet 763
Vertical Analysis 691
Income Statement 764
Common-Sized Statements 693
Analyzing Liquidity 694 Analysis for Decision Making 767

Utilization Rates 767
Current Position Analysis 695
Accounts Receivable Analysis 696 Make a Decision 787
Inventory Analysis 697
xxii Contents
Take It Further 789 Appendix Weighted Average Method 864

Determining Costs Using the Weighted Average Method 864
Certified Management Accountant (CMA®) Examination The Cost of Production Report 866
Questions (Adapted) 791
Make a Decision 888
Take It Further 891
16
Certified Management Accountant (CMA®) Examination
Job Order Costing 792 Pathways Challenge 858, 895
Cost Accounting Systems Overview 794

Job Order Cost Systems 794
Process Cost Systems 794
Job Order Cost Systems for Manufacturing

18
Activity-Based Costing 896
Businesses 795 Product Costing Allocation Methods 898

Materials 796 Single Plantwide Factory Overhead Rate Method 899
Factory Labor 798
Factory Overhead 800 Multiple Production Department Factory Overhead
Work in Process 806 Rate Method 901
Finished Goods 807 Department Overhead Rates and Allocation 902
Sales and Cost of Goods Sold 807 Distortion of Product Costs 903
Period Costs 808
Summary of Cost Flows for Legend Guitars 808 Activity-Based Costing Method 906
Activity Rates 908
Job Order Cost Systems for Service Businesses 810 Allocating Costs 909
Types of Service Businesses 810 Distortion in Product Costs 911
Flow of Costs in a Service Job Order Cost System 810 Dangers of Product Cost Distortion 911
Analysis for Decision Making 812 Activity-Based Costing for Selling and Administrative
Analyzing Job Costs 812 Expenses 913
Make a Decision 832 Activity-Based Costing in Service Businesses 914
Take It Further 835 Analysis for Decision Making 919
Certified Management Accountant (CMA®) Examination Using ABC Product Cost Information to Reduce Costs 919
Questions (Adapted) 838 Make a Decision 945
Pathways Challenge 805, 839 Take It Further 947
17
Process Cost Systems 840
Process Manufacturers 842
Comparing Job Order and Process Cost Systems 843
Cost Flows for a Process Manufacturer 844
19 Support Department and
Joint Cost Allocation 950
Cost of Production Report 847 Support Departments 952
Step 1: Determine the Units to Be Assigned Costs 848
Step 2: Compute Equivalent Units of Production 848 Support Department Cost Allocation 953
Step 3: Determine the Cost per Equivalent Unit 852 Single Plantwide Rate 954
Step 4: Allocate Costs to Units Transferred Multiple Production Department Rates 954
Out and Partially Completed Units 853 Activity-Based Costing 955
Preparing the Cost of Production Report 855
Allocating Support Department Costs to Production
Journal Entries for a Process Cost System 858 Departments 956
Direct Method 957
Using the Cost of Production Report 862
The Sequential Method 959
Analysis for Decision Making 862 The Reciprocal Services Method 963
Analyzing Process Costs 862 Comparison of Support Department Cost Allocation Methods 967
Contents xxiii
Joint Costs 968

Joint Cost Allocation 968
The Physical Units Method 968
The Weighted Average Method 969
21 Variable Costing for
Management Analysis 1048
The Market Value at Split-Off Method 969 Operating Income: Absorption and Variable Costing 1050
The Net Realizable Value Method 970 Absorption Costing 1050
Comparison of Joint Cost Allocation Methods 971 Variable Costing 1051
By-Products 973 Effects of Inventory 1053
Analysis for Decision Making 973 Analyzing Operating Income Using

Using Support Department and Joint Cost Allocations for Absorption and Variable Costing 1056
Performance Evaluation 973
Using Absorption and Variable Costing 1061
Make a Decision 989 Controlling Costs 1061
Pricing Products 1061
Take It Further 991 Planning Production 1062
Certified Management Accountant (CMA®) Examination Analyzing Market Segments 1062
Questions (Adapted) 992 Analyzing Market Segments 1062
Pathways Challenge 967, 993 Sales Territory Profitability Analysis 1064
Product Profitability Analysis 1065
Salesperson Profitability Analysis 1065
20 Cost-Volume-Profit
Analysis 994
Variable Costing for Service Businesses 1067
Reporting Income 1067
Analyzing Segments 1068
Cost Behavior 996 Segment Analysis and EBITDA 1070
Variable Costs 997
Make a Decision 1092
Fixed Costs 998
Mixed Costs 1000 Take It Further 1094
Summary of Cost Behavior Concepts 1002 Certified Management Accountant (CMA®) Examination
Cost-Volume-Profit Relationships 1004 Questions (Adapted) 1095
Contribution Margin 1004
Contribution Margin Ratio 1004
22
Unit Contribution Margin 1005
Mathematical Approach to Cost-Volume-Profit

Analysis 1007 Budgeting 1098
Break-Even Point 1007
Target Profit 1011
Nature and Objectives of Budgeting 1100
Graphic Approach to Objectives of Budgeting 1100
Cost-Volume-Profit Analysis 1012 Human Behavior and Budgeting 1101
Cost-Volume-Profit (Break-Even) Chart 1012
Budgeting Systems 1102
Profit-Volume Chart 1014
Static Budget 1103
Use of Spreadsheets in Cost-Volume-Profit Analysis 1015
Flexible Budget 1104
Assumptions of Cost-Volume-Profit Analysis 1016
Master Budget 1106
Special Cost-Volume-Profit Relationships 1018
Sales Mix Considerations 1018 Operating Budgets 1107
Operating Leverage 1020 Sales Budget 1107
Margin of Safety 1021 Production Budget 1108
Direct Materials Purchases Budget 1109
Analysis for Decision Making 1023 Direct Labor Cost Budget 1110
Cost-Volume-Profit Analysis for Service Companies 1023 Factory Overhead Cost Budget 1112
Make a Decision 1043 Cost of Goods Sold Budget 1112
Selling and Administrative Expenses Budget 1114
Take It Further 1044 Budgeted Income Statement 1115
Certified Management Accountant (CMA®) Examination Financial Budgets 1116
Questions (Adapted) 1046 Cash Budget 1116
Capital Expenditures Budget 1121
Budgeted Balance Sheet 1121
xxiv Contents
Analysis for Decision Making 1122 Responsibility Accounting for Cost Centers 1210
Nonmanufacturing Staffing Budgets 1122
Responsibility Accounting for Profit Centers 1214
Make a Decision 1150 Support Department Allocations 1214
Profit Center Reporting 1216
Take It Further 1151
Responsibility Accounting for Investment
Centers 1218
Questions (Adapted) 1153 Return on Investment 1218
Pathways Challenge 1116, 1154 Residual Income 1222
Transfer Pricing 1225
23
Market Price Approach 1226
Evaluating Variances from Negotiated Price Approach 1226
Standard Costs 1156 Cost Price Approach 1229

Standards 1158 Franchise Operations 1229
Setting Standards 1158 Make a Decision 1250
Types of Standards 1159
Reviewing and Revising Standards 1159 Take It Further 1252
Criticisms of Standard Costs 1159 Certified Management Accountant (CMA®) Examination
Budgetary Performance Evaluation 1160 Questions (Adapted) 1254
Budget Performance Report 1160
Manufacturing Cost Variances 1161
Direct Materials and

Direct Labor Variances 1162
Direct Materials Variances 1162
Direct Labor Variances 1165
Factory Overhead Variances 1168

25 Differential Analysis and
Product Pricing 1256
The Factory Overhead Flexible Budget 1169 Differential Analysis 1258
Variable Factory Overhead Controllable Variance 1170 Lease or Sell 1260
Fixed Factory Overhead Volume Variance 1170 Discontinue a Segment or Product 1261
Reporting Factory Overhead Variances 1172 Make or Buy 1262
Factory Overhead Account 1173 Replace Equipment 1264
Process or Sell 1265
Recording and Reporting Variances Accept Business at a Special Price 1265
from Standards 1176
Setting Normal Product Selling Prices 1268
Analysis for Decision Making 1178 Cost-Plus Methods 1269
Service Staffing Variances 1178 Product Cost Method 1269
Appendix Revenue Variances 1179 Illustration 1270
Target Costing Method 1271
Comprehensive Problem 5 1199
Production Bottlenecks 1273
Make a Decision 1201 Managing Bottlenecks 1274
Pricing Bottleneck Products 1274
Certified Management Accountant (CMA®) Examination Analysis for Decision Making 1275
Yield Pricing in Service Businesses 1275
Appendix Total and Variable Cost Methods to Setting
Normal Price 1276
Total Cost Method 1276
24
Variable Cost Method 1279
Evaluating Decentralized
Operations 1206
Centralized and Decentralized Operations 1208 Certified Management Accountant (CMA®) Examination
Advantages of Decentralization 1208 Questions (Adapted) 1307
Disadvantages of Decentralization 1209
Responsibility Accounting 1210
Contents xxv
26 Capital Investment
Analysis 1310
Nature of Capital Investment Analysis 1312 Questions (Adapted) 1398
Methods Not Using Present Values 1313 Pathways Challenge 1365, 1399
Average Rate of Return Method 1313
Cash Payback Method 1314
Methods Using Present Values 1316
Present Value Concepts 1317
Net Present Value Method and Index 1319
Internal Rate of Return Method 1322
28 The Balanced Scorecard
and Corporate Social
Responsibility 1400
Factors That Complicate Capital
Investment Analysis 1325 Performance Measurement Systems 1402
Income Tax 1325
The Balanced Scorecard 1403
Unequal Proposal Lives 1325
Performance Perspectives 1403
Lease Versus Capital Investment 1327
Strategic Objectives 1405
Uncertainty 1327
Performance Metrics 1405
Changes in Price Levels 1328
Strategic Initiatives 1406
Qualitative Considerations 1329
Performance Targets 1407
Capital Rationing 1329
Using the Balanced Scorecard 1407
Analysis for Decision Making 1330 Strategy Maps 1407
Uncertainty: Sensitivity and Expected Value Analyses 1330 Measure Maps 1409
Strategic Learning 1411
Make a Decision 1351 Scorecard Cascading 1413
Take It Further 1353 Cognitive Biases 1413
Certified Management Accountant (CMA®) Examination Corporate Social Responsibility 1416

Questions (Adapted) 1355 CSR Reporting 1417
Corporate Social Responsibility and the Balanced Scorecard 1418
Pathways Challenge 1321, 1356 Encouraging Corporate Social Responsibility 1420
27
Lean Manufacturing and Capital Investment in CSR 1420
Activity Analysis 1358 Make a Decision 1438

Lean Principles 1360 Certified Management Accountant (CMA®) Examination
Reducing Inventory 1361
Reducing Lead Times 1361
Reducing Setup Time 1363 Pathways Challenge 1415, 1442
Emphasizing Product-Oriented Layout 1366
Emphasizing Employee Involvement 1366
Emphasizing Pull Manufacturing 1366 Appendix A: Interest Tables A-1
Emphasizing Zero Defects 1367 Appendix B: Revenue Recognition B-1
Emphasizing Supply Chain Management 1367
Appendix C: International Financial Reporting
Lean Accounting 1369 Standards (IFRS) C-1
Fewer Transactions 1369
Combined Accounts 1369 Appendix D: Investments D-1
Nonfinancial Performance Measures 1371
Direct Tracing of Overhead 1371
Appendix E: Nike Inc., Form 10-K for the Fiscal Year
Ended May 31, 2017 Selected Excerpts E-1
Activity Analysis 1372
Costs of Quality 1372 Appendix F: Special Journals and Subsidiary
Quality Activity Analysis 1373 Ledgers (online) F-1
Value-Added Activity Analysis 1375
Glossary G-1
Process Activity Analysis 1376
Index I-1
Lean Performance for Nonmanufacturing 1378
1 Introduction to
Chapter
Accounting and Business
Chapter 1
Transactions
Accounting System
Accounting Equation
Assets = Liabilities + Equity
Chapter 2
Analyzing Transactions
Chapter 3
The Adjusting Process
Chapter 4
The Accounting Cycle
2
Twitter, Inc.
W hen two teams pair up for a game of f ootball, there is often a lot
of noise. The band plays, the fans cheer, and fireworks light up
the scoreboard. Obviously, the fans are committed and care about the
Twitter, Inc. (TWTR) is one of the most visible com-
panies on the Internet. It provides a real-time information net-
work where members can post messages, called tweets, for free.
outcome of the game. Just like fans at a football game, the owners of Millions post tweets every day throughout the world.
a business want their business to “win” against their competitors in the Do you think Twitter is a successful company? Does it make
marketplace. While having your football team win can be a source of money? How would you know? Accounting helps to answer these
pride, winning in the marketplace goes beyond pride and has many questions.
tangible benefits. Companies that are winners are better able to serve This textbook introduces you to accounting, the language of
customers, provide good jobs for employees, and make money for business. Chapter 1 begins by discussing what a business is, how it
their owners. operates, and the role that accounting plays.
©CJG – TECHNOLOGY/ALAMY STOCK PHOTO

Link to Twitter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 4, 5, 6, 7, 10, 11, 13, 21, 23
Analysis for Decision Making. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 26
3
4 Chapter 1 Introduction to Accounting and Business
What's Covered
Introduction to Accounting and Business
Nature of Business Nature of Accounting Analyzing Business Financial Statements
▪▪ Types of Business (Obj. 1) ▪▪ Managerial and Financial Transactions ▪▪ Income Statement (Obj. 5)
▪▪ Role of Accounting (Obj. 1) Accounting (Obj. 1) ▪▪ Generally Accepted Accounting ▪▪ Statement of Stockholders’
▪▪ Ethics (Obj. 1) ▪▪ Career Opportunities (Obj. 1) Principles (Obj. 2) Equity (Obj. 5)
▪▪ Accounting Equation (Obj. 3) ▪▪ Balance Sheet (Obj. 5)
▪▪ Transactions (Obj. 4) ▪▪ Statement of Cash Flows
(Obj. 5)
Learning Objectives
Obj. 1 Describe the nature of business and the role of Obj. 4 Describe and illustrate how business transactions can be
accounting and ethics in business. recorded in terms of the resulting change in the elements
Obj. 2 Describe generally accepted accounting principles, of the accounting equation.
including the underlying assumptions and principles. Obj. 5 Describe the financial statements of a corporation and
Obj. 3 State the accounting equation and define each explain how they interrelate.
element of the equation.
Analysis for Decision Making

Obj. 6 Describe and illustrate the use of the ratio of liabilities to stockholders’ equity in evaluating a company’s financial condition.
Objective 1 Nature of Business and Accounting

Describe the nature of
business and the role of A business1 is an organization in which basic resources (inputs), such as materials and labor, are
accounting and ethics assembled and processed to provide goods or services (outputs) to customers. Businesses come in
in business. all sizes, from a local coffee house to Starbucks (SBUX), which sells over $15 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 operating 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, retail, and manufacturing businesses.
Some examples of each type of business follow:
▪▪ Service businesses provide services rather than products to customers.
Delta Air Lines (DAL) (transportation services)
The Walt Disney Company (DIS) (entertainment services)
▪▪ Retail businesses sell products they purchase from other businesses to customers.
Wal-Mart Stores, Inc. (WMT) (general merchandise)
Amazon.com (AMZN) (Internet books, music, videos, ...)
▪▪ Manufacturing businesses change basic inputs into products that are sold to customers.
Ford Motor Company (F) (cars, trucks, vans)
Merck & Co., Inc. (MRK) (pharmaceutical drugs)
Link to Twitter Twitter is a service company that provides a platform for individuals to send text messages called tweets.
1
A complete glossary of terms appears at the end of the text.
Chapter 1 Introduction to Accounting and Business 5
Role of Accounting in Business note:

The role of accounting in business is to provide information for managers to use in operating the Accounting is an information
business. In addition, accounting provides information to other users in assessing the economic system that provides reports
performance and condition of the business. to users about the economic
Thus, accounting can be defined as an information system that provides reports to users about activities and condition of a
business.
the economic activities and condition of a business. You could think of accounting as the “lan-
guage of business.” This is because accounting is the means by which businesses’ financial infor-
mation is communicated to users.
Twitter communicates to investors in an annual report that includes accounting information. Link to Twitter
The process by which accounting provides information to users is as follows:
1. Identify users.
2. Assess users’ information needs.
3. Design the accounting information system to meet users’ needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
As illustrated in Exhibit 1, users of accounting information can be divided into two groups:
internal users and external users.
Exhibit 1
1 Accounting as an
Identify
Users Information System
Internal External
Company Company
2
Assess
Users’
Information
Managers, Needs Investors, Creditors,
Employees Customers, Government
3 4
Design Record
Accounting Economic
System Data
5
Prepare
Accounting
Reports
Managerial Accounting Internal users of accounting information include managers and

mployees. These users are directly involved in managing and operating the business. The area
e
of accounting that provides internal users with information is called managerial accounting, or
management accounting.
The objective of managerial accounting is to provide relevant and timely information for m
anagers’
and employees’ decision-making needs. Often, such information is sensitive and is not distributed out-
side 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 operat-
ing 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 of 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.
Link to Twitter Twitter is a service company that provides a platform for individuals to send text messages called tweets.
Role of Ethics in Accounting and Business

The objective of accounting is to provide relevant, timely information for user decision making.
ETHICS 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.
Ethics are moral principles that guide the conduct of individuals. Unfortunately, business man-
agers and accountants sometimes behave in an unethical manner. Many of the managers of the
companies listed in Exhibit 2 engaged in accounting or business 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 inflated its financial results. CEO and senior executives indicted.
International, Inc. Five executives pled guilty. $225 million fine.
Enron Fraudulently inflated its financial results. Bankrupcty. Senior executives criminally con-
victed. More than $60 billion in stock market
losses.
HealthSouth Overstated performance by $4 billion in false entries. Senior executives criminally convicted.
Qwest Communications Improperly recognized $3 billion in false receipts. CEO and six other executives criminally convicted
International, Inc. of “massive financial fraud.” $250 million SEC fine.
Xerox Corporation Recognized $3 billion in sales prior to when $10 million fine to SEC. Six executives
it should have been recorded. forced to pay $22 million.
What went wrong for the managers and companies listed in Exhibit 2? The answer normally
involved one or both of the following two factors:
▪▪ Failure of Individual Character: Ethical managers and accountants are honest and fair. How-
ever, 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 cre-
ated 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 (PCAOB). In addition, SOX established standards for
independence, corporate responsibility, and disclosure.
How does one behave ethically when faced with financial or other types of pressure? Guide-
lines for behaving ethically follow:2
1. Identify an ethical decision by using your personal ethical standards of honesty and fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those who will be affected by your decision.
4. Make a decision that is ethical and fair to those affected by it.
Twitter ’s “Code of Business Conduct and Ethics” can be found at https://investor.twitterinc.com/

corporate-governance.cfm. Link to Twitter
Opportunities for Accountants

Numerous career opportunities are available for students majoring in accounting. Currently, 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 businesses 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 starting salaries. As shown in Exhibit 3, sev-
eral private accounting careers have certification options. Accountants who provide audit services,
called auditors, verify the accuracy of financial records, accounts, and systems.
Ethics: Don’t Do It!

ETHICS
Bernie Madoff investors, rather than basing returns on the investments’ actual
Bernard L. “Bernie” Madoff was sentenced to 150 years in performance. As long as the investment manager is able to
prison for defrauding thousands of investors in one of the attract new investors, he or she will have new funds to pay
b iggest frauds in American history. Madoff’s fraud started existing investors and continue the fraud. While most Ponzi
several d ecades earlier when he began a “Ponzi scheme” in his schemes collapse quickly when the investment manager runs
investment management firm, Bernard L. Madoff Investment out of new investors, Madoff’s reputation, popularity, and per-
Securities LLC. sonal contacts provided a steady stream of investors, which
In a Ponzi scheme, the investment manager uses funds allowed the fraud to survive for decades.
r eceived from new investors to pay a return to existing Source: Bernie Madoff
2
Many companies have ethical standards of conduct for managers and employees. In addition, the Institute of Management
Accountants and the American Institute of Certified Public Accountants have professional codes of c onduct, which can be obtained from their
Web sites at www.imanet.org and www.aicpa.org, respectively.
Exhibit 3 Accounting Career Paths and Salaries
Accounting Annual Starting

Career Track Description Career Options Salaries* Certification
Private Accounting Accountants employed Bookkeeper $40,000
by companies, govern- Payroll clerk $40,000 Certified Payroll Professional (CPP)
ment, and not-for-profit General accountant $51,000
entities. Budget analyst $53,000
Cost accountant $55,000 Certified Management Accountant (CMA)
Internal auditor $62,000 Certified Internal Auditor (CIA)
Information technology $71,000 Certified Information Systems Auditor (CISA)
auditor
Public Accounting Accountants employed Large firms (over $250 $68,000 Certified Public Accountant (CPA)
individually or within a million in revenue)
public accounting firm Mid-size firms $61,000 Certified Public Accountant (CPA)
in audit, tax, or manage- ($25–$250 million in
ment advisory services. revenue)
Small firms (less than $56,000 Certified Public Accountant (CPA)
$25 million in revenue)
*Average salaries rounded to the nearest thousand. Salaries may vary by size of company and region.
Source: Robert Half 2017 U.S. Salary Guide (Finance and Accounting), Robert Half International, Inc. (www.roberthalf.com/workplace-research/salary-guides).
Accountants and their staff who provide services on a fee basis are said to be employed in
ublic accounting. In public accounting, an accountant may practice as an individual or as a
p
member of a public accounting firm. Public accountants who have met a state’s education, expe-
rience, and examination requirements may become Certified Public Accountants (CPAs). CPAs
typically perform general accounting, audit, or tax services. As can be seen in Exhibit 3, CPAs have
slightly better starting salaries than private accountants. Career statistics indicate, however, that
these salary differences tend to disappear over time. The American Institute of Certified Public
Accountants (AICPA) provides information and resources for students interested in accounting at
www.startheregoplaces.com.
Because all functions within a business use accounting information, experience in private or
public accounting provides a solid foundation for a career. Many positions in industry and in gov-
ernment agencies are held by individuals with accounting backgrounds.
Why It Matters
CONCEPT CLIP
Pathways Commission
T
he Pathways Commission recently issued its study titled Chart-
ing a National Strategy for the Next Generation of Accountants.
The Commission was made up of diverse members and was
jointly sponsored by the American Institute of Certified Public Accoun-
tants (AICPA) and the American Accounting Association (AAA). The
Commission emphasized the importance of accounting for a prosper-
ous society and good decision making. The Commission also empha-
sized that accountants must be critical thinkers who are comfortable
addressing the shades of gray required by accounting judgments.
Source: Charting a National Strategy for the Next Generation of

Accountants, The Pathways Commission, July 2012.
Generally Accepted Accounting Objective 2

Describe generally
Principles (GAAP) accepted accounting
principles, including the
Financial information in the United States is based on generally accepted accounting principles underlying assumptions
(GAAP). GAAP is a collection of accounting standards, principles, and assumptions that define and principles.
how financial information will be reported.
▪▪ Accounting standards are the rules that determine the accounting for individual business
transactions.
▪▪ Accounting principles and assumptions provide the framework upon which accounting stan-
dards are constructed.
Within the United States, the Financial Accounting Standards Board (FASB) has the primary
responsibility for developing accounting standards. The FASB maintains an electronic database,
called the Accounting Standards Codification, that contains all the accounting standards that
make up GAAP. Changes in the FASB Codification are made using Accounting Standards Updates.
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 standards 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.
Outside the United States, most countries use accounting standards and principles adopted by
the International Accounting Standards Board (IASB). The IASB issues International Financial
Reporting Standards (IFRS). Major differences between FASB and IASB accounting principles are
identified throughout the chapters of this text and in Appendix C.
Characteristics of Financial Information

The primary goal of financial accounting is to provide information that is useful for decision mak-
ing. To be useful, financial reports must possess two important characteristics: relevance and faith-
ful representation.
▪▪ Relevant information has the potential to impact decision making.
▪▪ Faithful representation means that the information accurately reflects an entity’s economic
activity or condition.
The characteristics of relevant and faithful representation are enhanced by the following:
▪▪ Comparability allows users to identify similarities and differences among reported items.
▪▪ Verifiability allows users to agree on the meaning of reported items.
▪▪ Timeliness requires distribution of financial reports in time to influence a user’s decision.
▪▪ Understandability requires clear and concise financial reports that facilitate user interpretation
and analysis.
International Connection
IFRSInternational Financial contrast, IFRS allow more judgment in deciding how business
Reporting Standards (IFRS) transactions are recorded. Many believe that the strong reg-
IFRS are considered to be more “principles-based” than U.S. ulatory and litigation environment in the United States is the
GAAP, which is considered to be more “rules-based.” For cause for the more rules-based GAAP approach. Regardless,
example, U.S. GAAP consists of approximately 17,000 pages, IFRS and GAAP share many common principles.*
which include numerous industry-specific accounting rules. In *Differences between U.S. GAAP and IFRS are further discussed and illustrated in Appendix C.
Assumptions
Financial accounting and generally accepted accounting principles are based upon the following
assumptions:
▪▪ Monetary unit
▪▪ Time period
▪▪ Business entity
▪▪ Going concern
The monetary unit assumption requires that financial reports be expressed in a single
money unit, or currency. This provides a common measurement of the effects of economic events
and transactions on an entity. The monetary unit used is normally determined by the country in
which the company operates. For example, in the United States, the U.S. dollar is used as the
monetary unit.
The time period assumption allows a company to report its economic activities on a regular
basis for a specific period of time. In doing so, financial condition and changes in financial con-
dition are reported periodically on a consistent basis. In the United States, reports are normally
required on a yearly basis supplemented with quarterly reports.
Link to Twitter Twitter publishes quarterly as well as yearly financial reports that are available at https://investor.
twitterinc.com.
The annual accounting period adopted by a company is called its fiscal year. The fiscal year
most commonly used is the calendar year beginning January 1 and ending December 31. H owever,
other periods are not unusual, especially for companies organized as corporations. For example,
a corporation may adopt a fiscal year that ends when business activities have reached the lowest
point in its annual operating cycle, which allows more time to prepare financial reports. Such a
fiscal year is called the natural business year. For example, a company’s fiscal year could begin
August 1, 20Y7, and end on July 31, 20Y8, as follows:
20Y7 20Y8
Aug. 1 Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July 31
Fiscal Year
August 1, 20Y7 to July 31, 20Y8
The business entity assumption limits the economic data in financial reports to that directly
related to the activities of the business. In other words, the business is viewed as an entity separate
from its owners, creditors, or other businesses. For example, the accountant for a business with
one owner would record the activities of the business only and would not record the personal
activities, property, or debts of the owner.
A business entity may take the form of a proprietorship, partnership, corporation, or limited
liability company (LLC). Each of these forms and their major characteristics are listed in Exhibit 4.
The three types of businesses discussed earlier—service, retail, and manufacturing—may be
organized as proprietorships, partnerships, corporations, or limited liability companies.
Because of the large amount of resources required to operate a manufacturing business, most
manufacturers such as Ford Motor Company (F) are corporations. Most large retailers such
as Wal-Mart Stores (WMT) and The Home Depot (HD) are also corporations. Companies
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Analysis for Decision Making

Fixed Asset Turnover Ratio Objective 7

MAD 9-1 Analyze and compare Amazon.com to Netflix Obj. 7

Alaska Air Group Delta Air Lines Southwest Airlines

MAD 9-3 Analyze Verizon Obj. 7

NEW! Excel Online

Motivation: Set Expectations and Prepare Students

CengageNOWv2 Start-Up Center

Motivation: Prepare Them for Class

Provide Help Right When Students Need It

Help Students Go Beyond Memorization to True

New to This Edition

Chapter 2 a statement of stockholders’ equity rather than a retained

▪▪ Lean manufacturing discussion with related homework Chapter 24

Special thanks to our Financial Accounting Advisory Board Members:

©Terry R. Spray InHisImage Studios

© Thomas Boutwell, T2PHOTOGRAPHY

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

Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Make a Decision 104

Generally Accepted Accounting

Double-Entry Accounting System 62

Businesses 232 Reporting Inventory 301

Inventory Cost Flow Assumptions 301

Internal Control and Cash 350 Make a Decision 437

Make a Decision 392 Natural Resources 462

Uncollectible Receivables 399 Make a Decision 490

Direct Write-Off Method for Uncollectible Take It Further 491

Computing Present Values 560

Comprehensive Problem 3 534 Stock Splits 594

Liabilities: Bonds Payable 542 Analysis for Decision Making 602

Nature of Bonds Payable 544 Comprehensive Problem 4 619

Reporting Bonds Payable 554 Reporting Cash Flows 628

Cash Flows from Financing Activities 631 Analyzing Solvency 700

Manufacturing Operations 757

Analyzing Liquidity 694 Analysis for Decision Making 767

Take It Further 789 Appendix Weighted Average Method 864

Cost Accounting Systems Overview 794

Job Order Cost Systems for Manufacturing

Businesses 795 Product Costing Allocation Methods 898

Joint Costs 968

Analysis for Decision Making 973 Analyzing Operating Income Using

Mathematical Approach to Cost-Volume-Profit 

Transfer Pricing 1225

Analysis for Decision Making 1229

Direct Materials and

Factory Overhead Variances 1168

Certified Management Accountant (CMA®) Examination Corporate Social Responsibility 1416

Activity Analysis 1358 Make a Decision 1438

Accounting and Business

©CJG – TECHNOLOGY/ALAMY STOCK PHOTO

Analysis for Decision Making

Objective 1 Nature of Business and Accounting

Liabilities: Bonds Payable 542 Analysis for Decision Making 602

Mathematical Approach to Cost-Volume-Profit