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16e
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
Contributing Authors
Christine A. Jonick
Professor of Accounting
University of North Georgia, Gainesville
Jennifer S. Schneider
Assistant Professor of Accounting
University of North Georgia, Gainesville
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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Jennifer S. Schneider WCN: 02-300
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Throughout this text, real-world companies are used in the narrative,
Text and Cover Designer: Christopher Doughman
illustrations, and end-of-chapter assignments. These companies are
Cover Image: iStock.com/ExperienceInteriors
identified in boldface type, and any data presented was adapted from or
based upon annual reports, Securities and Exchange Commission filings, or
other publicly available sources. Any other individuals or companies used
in illustrations or homework are fictional, and any resemblance to actual
persons, living or dead, businesses or companies is entirely coincidental.
Library of Congress Control Number: 2019954868

ISBN: 978-1-337-91310-2
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Printed in the United States of America

Print Number: 01 Print Year: 2019
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228
Chapter 6 Accounting for Merchandising Businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
Chapter 7 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346
Chapter 8 Internal Control and Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396
Chapter 9 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444
Chapter 10 Long-Term Assets: Fixed and Intangible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490
Chapter 11 Current Liabilities and Payroll. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540
Chapter 12 Accounting for Partnerships and Limited Liability Companies . . . . . . . . . . . . . . . . . . . . . . . . 588
Chapter 13 Corporations: Organization, Stock Transactions, and Dividends . . . . . . . . . . . . . . . . . . . . . . . 632
Chapter 14 Long-Term Liabilities: Bonds and Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679
Chapter 15 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723
Chapter 16 Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765
Chapter 17 Financial Statement Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821
Mornin’ Joe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MJ-1
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2
Appendix B Revenue Recognition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-2
Appendix C Selected Excerpts from Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2018. . . . C-1
Glossary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
iii
Preface
Roadmap for Success

Warren’s Financial Accounting 16e 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 account-
ing is important to a business.
The Warren 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
Schemas provide a roadmap of accounting that emphasizes the big picture. Each chapter begins with a 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 understanding of accounting.
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.
CHAPTER CHAPTER
4 Completing the
Accounting Cycle 6 Accounting for Merchandising
Businesses
Chapter 1 Transactions
STATEMENT OF
OWNER’S EQUITY
For the Year Ended December 31, 20Y6 STATEMENT OF CASH FLOWS
Accounting System For the Year Ended December 31, 20Y6
Accounting Equation Owner’s capital, Jan . 1, 20Y6 $XXX
Net income $ XXX Cash flows from (used for)
Assets = Liabilities + Owner's Equity
Withdrawals (XXX) operating activities $XXX
Increase in equity XXX Cash flows from (used for)
Owner’s capital, Dec . 31, 20Y6 $XXX investing activities XXX
Chapter 2 Account Cash flows from (used for)
Debits Credits financing activities XXX
Net increase (decrease) in cash $XXX
Rules of Debit and Credit INCOME STATEMENT
Cash balance, January 1, 20Y6 XXX
For the Year Ended December 31, 20Y6
BALANCE SHEET ACCOUNTS Cash balance, December 31, 20Y6 $XXX
Sales $XXX BALANCE SHEET
Cost of merchandise sold XXX December 31, 20Y6
ASSETS = LIABILITIES + OWNER’S EQUITY Gross profit $XXX
Asset Accounts Liability Accounts Owner’s Capital Account Current assets:
Debit for Credit for Debit for Credit for Debit for Credit for
Operating expenses:
Advertising expense $XXX Cash $XXX
increases (+) decreases (–) decreases (–) increases (+) decreases (–) increases (+)
Depreciation expense XXX Accounts receivable XXX
Balance Balance Balance
Amortization expense XXX Merchandise inventory XXX
Depletion expense XXX Total current assets $XXX
… XXX Property, plant, and equipment $XXX
Owner’s Drawing Income Statement Accounts
… XXX Intangible assets XXX
Account Revenue Accounts Total operating expenses XXX Total long-term assets XXX
Debit for Credit for Debit for Credit for Income from operations $XXX Total assets $XXX
increases (+) decreases (–) decreases (–) increases (+)
Other revenue and expenses XXX Liabilities:
Balance Balance
Net income $XXX Current liabilities $XXX
Expense Accounts Long-term liabilities XXX
Debit for Credit for Total liabilities $XXX
increases (+) decreases (–) Owner’s equity XXX
Balance Total liabilities and owner’s equity $XXX
Unadjusted Trial Balance

Total Debit Balances = Total Credit Balances
iv
362 Chapter 7 Inventories
Preface v
the net realizable value of the merchandise.4 Net realizable value is
follows:
Net Realizable Value = Estimated Selling Price – Direct Costs of Disposa
Revised and refreshed real company chapter openers engage readers from the start. Chapter openers
Direct costs
sales commissions.
of disposalintro-
include selling expenses such as special
duce and briefly describe a real company and how its challenges relate to the chapter content. Links to this
To illustrate, assumeopening
the following data about an item of damaged
company appear throughout the chapter to reinforce the importance of what readers are learning. Original cost
Estimated selling price
$1,000
800
Estimated selling expenses 150
In applying LCM, the market value of the merchandise is $650, comp

Market Value (Net Realizable Value) = $800 – $150 = $650
CHAPTER Thus, the merchandise would be valued at $650, which is the low
7
Link to Best Buy $1,000 and its market value of $650.
Best Buy values its The amount of any price decline is included in the cost of merchan
inventory at lower of
in turn, reduces gross profit and net income in the period in which the
cost or market based
occur. This matching of price declines to the period in which they o
upon cost and the
mary advantage of using the lower-of-cost-or-market method.
amount it expects to To illustrate, assume the following data for 400 identical units o
realize from the sale . inventory on December 31:
Cost per unit $10
Market value (net realizable value) per unit 9
Since the market value of Item Echo is $9.50 per unit, $9.50 is used u
of-cost-or-market method.
Exhibit 9 illustrates applying the lower-of-cost-or-market method
Link to Best Buy tory item (Echo, Foxtrot, Sierra, Tango). As applied on an item-by-
total lower-of-cost-or-market is $15,070, which is a market decline of $
The excess of cost
$15,070). This market decline of $450 is included in the cost of mercha
over the amount
Rather than applying the LCM method to each item of inventor
DUSAN PETKOVIC/SHUTTERSTOCK.COM
Best Buy Best Buy expects to

receive from the sale
applied to the total inventory. 5 For example, assume that items
A ssume that in September, you purchased a Sony

HDTV from Best Buy. At the same time, you pur-
chased a Denon surround sound system for $599.99. You
Merchandising businesses such as Best Buy make
similar assumptions when identical merchandise is pur-
chased at different costs. For example, Best Buy may have
of an item is called a
markdown .
Sierra, and Tango make up the total inventory in Exhibit 9. In this ca
applied to the total inventory is determined by comparing the total c
liked your surround sound so well that in November, you purchased thousands of Denon surround sound systems to the total market value of $15,472. Thus, the LCM is $15,472 if appl
purchased an identical Denon system on sale for $549.99 over the past year at different costs. At the end of a period, inventory.
for your bedroom TV. Over the holidays, you moved to a some of the Denon systems will still be in inventory, and
new apartment and in the process of unpacking discov- some will have been sold. But which costs relate to the
ered that one of the Denon surround sound systems was sold systems, and which costs relate to the systems still in
missing. Luckily, your renters or homeowners insurance inventory? Best Buy’s assumption about inventory costs
EXHIBIT 9 A B C D E F
policy will cover the theft, but the insurance company can involve large dollar amounts and, thus, can have a
1 Market Value
needs to know the cost of the system that was stolen. significant impact on the financial statements. For exam-
The Denon systems were identical. However, to ple, Best Buy reported $5,409 million of inventory and net
Determining 2 Inventory Cost per per Unit Total
respond to the insurance company, you will need to iden- income of $1,464 million for a recent year. Inventory at Lower 3 Item Quantity Unit (Net Realizable Value) Cost Market
tify which system was stolen. Was it the first system, which This chapter discusses such issues as how to deter- of Cost or Market 4 Echo 400 $10.25 $ 9.50 $ 4,100 $ 3,800
cost $599.99, or was it the second system, which cost mine the cost of merchandise in inventory and the cost
(LCM) 5 Foxtrot 120 22.50 24.10 2,700 2,892
$549.99? Whichever system you choose will determine of merchandise sold. However, it begins by discussing the
6 Sierra 600 8.00 7.75 4,800 4,650
the amount that you receive from the insurance company. importance of control over inventory.
7 Tango 280 14.00 14.75 3,920 4,130
8 Total $15,520 $15,472
9
Link to Best Buy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 349, 350, 362, 364
4 Accounting Standards Update, Inventory (Topic 330): Simplifying the Measurement of Inventory, No . 2015-11
(Norwalk, CT) .
5 The LCM can also be applied to different classes of inventory .
Revised end-of-chapter assignments (homework) provide important hands-on practice. Refined, meaningful
276 Chapter 5 Accounting Systems
review and applications at the end of each chapter include Discussion Questions, Practice Exercises (A and B
versions), Exercises, Problems (Series
3. Post theAappropriate
and B),individual
and Cases &theProjects
entries to that emphasize ethics, teamwork, and
general ledger.
4. Total each of the columns of the special journals and post the appropriate totals to the
communication skills. general ledger; insert the account balances.
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 Net-
books, 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
REAL
.jda.com and www.salesforce.com, respectively) and list the services provided by each
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
WORLD Go to NetSuite Inc.’s website at www.netsuite.com. Read about the product
and prepare a memo to management defining cloud-based accounting. Also outline the
advantages and disadvantages of using cloud-based accounting compared to running
software on a company’s internal computer network.
CP 5-4 Manual vs. computerized accounting systems

Copyright 2021 Cengage Learning. All Rights Reserved. May notThe following
be copied, conversation
scanned, or took
duplicated, in whole or inplace
part. Duebetween
to electronicDurable
rights, someConstruction
third party content Co.’s
may be bookkeeper,
suppressed from the eBook and/or eChapter(s).
Kyle affect
Editorial review has deemed that any suppressed content does not materially Byers, and the
the overall accounting
learning supervisor,
experience. Cengage LearningSarah
reservesNelson:
the right to remove additional content at any time if subsequent rights restrictions require it.
vi Preface
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.
Cengage Mobile App

The Cengage Mobile App lets students study wherever and whenever the mood strikes.
Now available with CengageNOWv2, it features a full interactive eBook—readable online
or off—with 24/7 course access and study tools to power on-the-go learning. Plus, the app
allows you to engage your students with instant in-class polling and take attendance with
a tap. Find details at www.cengage.com/mobile-app/.
Excel Online
Cengage and Microsoft have partnered in CengageNOWv2 to provide students with a uniform,
EXCEL authentic Excel experience. It provides instant feedback, built-in video tips, and easily acces-
ONLINE
sible spreadsheet work. These features allow you to spend more time teaching 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 cal-
culations in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of
homework assignments in CengageNOWv2. It’s easily retrievable so students can review their
answers without cumbersome 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
misconceptions 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 videos: 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 students have an understanding of basic math skills.
• How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular
software system. Quickly familiarize your students with CengageNOWv2 and direct them
to all of its built-in student resources.
Motivation: Prepare Them for Class

With all the outside obligations accounting students have, finding time to read the text-
book 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
Preface vii
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
attempting homework assignments on their own.
• Video: Show Me How. Created for the most frequently assigned end-of-chapter items,
SHOW Show Me How problem demonstration videos provide a step-by-step model of
ME HOW a similar problem. Embedded tips help students avoid common mistakes and
pitfalls.
MindTap eReader
The MindTap eReader for Warren’s Financial Accounting is the most robust digital read-
ing experience available. Hallmark features include:
• Fully optimized for the iPad.
• Note taking, highlighting, and more.
• The MindTap eReader also features ReadSpeaker®, an online text-to-speech application
that vocalizes, or “speech-enables,” online educational content. This feature is ideally
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(or in addition to) reading it.
Cengage Unlimited
Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs.
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viii Preface
New to This Edition

• Updated dates and real company information for • In Chapter 4, the “Reversing Entry” appendix has
currency. been moved to an online appendix.
• Refreshed end-of-chapter assignments with different • A new “Why Is the Accrual Basis of Accounting
numerical values and updated information. Required by GAAP?” discussion has been added as
• A new “Time Period Concept” discussion has been Appendix 2 to Chapter 4. The understanding of why
added to the “Generally Accepted Accounting Prin- accrual accounting is required by GAAP is important
ciples” section of Chapter 1. This discussion defines for students’ ability to analyze and evaluate financial
and illustrates the natural business year and fiscal statements. Why accrual accounting is required is
year accounting periods. illustrated by comparing NetSolutions’ financial state-
• The fiscal year discussion was moved from the prior ments under the accrual basis (Chapters 1–4) with
edition’s Chapter 4. In addition, the notation of 20Y1, related cash basis financial statements.
20Y2, … is introduced for indicating years through- • To simplify and give the instructor more flexibility
out the text. in Chapter 6, the discussion of the accounting for
• In Chapter 2, the discussion on “Errors Not Affecting customer merchandise refunds, including the related
the Trial Balance” has been revised to better aid stu- adjusting entries, has been moved to Appendix 2 at
dent understanding and to simplify the preparation the end of the chapter.
of correcting journal entries. • For those instructors who prefer to cover sales dis-
• In Chapter 4, the Accounting Cycle illustration in counts using the gross method, Appendix 1, “Gross
Exhibit 8 has been revised to facilitate student review. Method of Recording Sales Discounts,” has been
added to the end of Chapter 6.
• In Chapter 4, the “Fiscal Year” discussion has been
moved to Chapter 1.
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
Association, 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.
Christine A. Jonick
Dr. Christine A. Jonick is Professor of Accounting at University of North Georgia, Gaines-
ville. She received her Ed.D from the University of Georgia, her MBA from Adelphi Univer-
Courtesy of Christine Jonick

sity, and her BA from State University of New York at Binghamton. Dr. Jonick has focused
her teaching efforts on principles of accounting and intermediate financial accounting. She
is the recipient of several teaching awards, including one for excellence in online instruction.
She has published accounting-related articles in research journals and a case study in the
Institute of Management Accountants (IMA) Educational Case Journal. Dr. Jonick serves on
numerous professional committees, is an active board member for the American Account-
ing Association SE, and is a recent past president of the Georgia Association of Accounting
Educators. Dr. Jonick has worked with accounting textbook publishers for over a decade as
a technology consultant, subject matter expert, and content developer. Her outside interests
include travel, biking, technology development, and family activities.
Jennifer S. Schneider
Jennifer S. Schneider is an Assistant Professor at the University of North Georgia, Gainesville.
Professor Schneider has taught principles of accounting, survey of accounting, principles of
finance, accounting information systems, and auditing. She is a Florida CPA and began her
Courtesy of Jennifer Schneider

career at PwC. She has 15+ years’ experience with Fortune 500 companies, primarily in audit
and financial/SEC reporting. Prior to coming to the University of North Georgia, Professor
Schneider taught at the University of Amsterdam. Her research interests are in the Scholarship
of Teaching and Learning. Professor Schneider has published several articles including an
article in the Institute of Management Accountants (IMA) Educational Case Journal. She
has also served as faculty advisor for Beta Alpha Psi, which is an international honors
organization for financial information students and professionals. She enjoys spending time
with her two sons, Luke and Graeme, both students at the University of Georgia, Athens.
ix
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
Integrity, Objectivity, and Ethics in Business: Journalizing and Posting to Accounts 68
Bernie Madoff 9
Opportunities for Accountants 9 Business Connection: Microsoft’s Unearned Revenue 70
Business Connection: Pathways Commission 10 Business Connection: Computerized Accounting

Systems 72
Generally Accepted Accounting Principles 10
Trial Balance 78
Business Entity Concept 11
Errors Affecting the Trial Balance 79
International Connection: International Financial Errors Not Affecting the Trial Balance 80
Reporting Standards (IFRS) 11
Financial Analysis and Interpretation:
Time Period Concept 12
Horizontal Analysis 82
Cost Concept 13
Continuing Problem 106
The Accounting Equation 13
Business Connection: The Accounting Equation 14
Chapter 3 The Adjusting Process 110
Business Transactions and the Accounting
Equation 15 Nature of the Adjusting Process 113
Summary 18 Accrual and Cash Basis of Accounting 113
Financial Statements 19 Revenue and Expense Recognition 114
The Adjusting Process 114
Income Statement 20
Types of Accounts Requiring Adjustment 115
Statement of Owner’s Equity 21
Balance Sheet 21 Adjusting Entries for Accruals 116
Statement of Cash Flows 24 Accrued Revenues 117
Interrelationships Among Financial Statements 25 Accrued Expenses 118
Financial Analysis and Interpretation: Business Connection: Earning Revenues

Ratio of Liabilities to Owner’s Equity 26 from Season Tickets 120
Continuing Problem 52 Adjusting Entries for Deferrals 120

Unearned Revenues 121
Prepaid Expenses 122
Chapter 2 Analyzing Transactions 56 Business Connection: Sports Signing Bonus 122
Using Accounts to Record Transactions 59 Integrity, Objectivity, and Ethics in Business:
Chart of Accounts 61 Free Issue 123
Business Connection: The Hijacking Receivable 61 Adjusting Entries for Depreciation 124
x
Contents xi
Summary of Adjusting Process 126 Step 4. Enter the Adjusted Trial Balance 191
Step 5. Extend the Accounts to the Income
Business Connection: Microsoft’s Deferred Statement and Balance Sheet
Revenues 126 Columns 192
Adjusted Trial Balance 130 Step 6. Total the Income Statement and Balance
Sheet Columns, Compute the Net Income
Financial Analysis and Interpretation: or Net Loss, and Complete the
Vertical Analysis 131 Spreadsheet 192
Preparing the Financial Statements
Continuing Problem 156 from the Spreadsheet 193
Appendix 2: Why Is the Accrual Basis of
Accounting Required by GAAP? 195
Chapter 4
Completing the Cash Basis of Accounting 195
Accounting Cycle 160 Accrual Basis of Accounting 195
Illustration of Cash and Accrual Accounting 196
Flow of Accounting Information 163
Continuing Problem 223
Financial Statements 165
Comprehensive Problem 1 224
Income Statement 165
Integrity, Objectivity, and Ethics in Business:
CEO’s Health? 167 Chapter 5 Accounting Systems 228
Statement of Owner’s Equity 167
Balance Sheet 168 Basic Accounting Systems 230
International Connection: International Manual Accounting Systems 231

Differences 169 Subsidiary Ledgers 231
Special Journals 231
Closing Entries 169 Revenue Journal 233
Journalizing and Posting Closing Entries 170 Cash Receipts Journal 236
Post-Closing Trial Balance 174 Accounts Receivable Control Account and
Subsidiary Ledger 238
Accounting Cycle 174 Purchases Journal 238
Illustration of the Accounting Cycle 177 Cash Payments Journal 241
Step 1. Analyzing and Recording Transactions Accounts Payable Control Account and Subsidiary
Ledger 243
in the Journal 177
Step 2. Posting Transactions to the Ledger 179 Business Connection: Accounting Systems and Profit
Step 3. Preparing an Unadjusted Trial Bal- Measurement 244
ance 179
Step 4. Assembling and Analyzing Adjustment Computerized Accounting Systems 245
Data 180 Business Connection: TurboTax 247
Step 5. Preparing an Optional End-of-Period
Spreadsheet 180 E-Commerce 247
Step 6. Journalizing and Posting Adjusting Integrity, Objectivity, and Ethics in Business: Online
Entries 180
Fraud 248
Step 7. Preparing an Adjusted Trial Balance 182
Step 8. Preparing the Financial Statements 182 Financial Analysis and Interpretation:
Step 9. Journalizing and Posting Closing Segment Analysis 248
Entries 184
Step 10. Preparing a Post-Closing Trial Balance 184
Financial Analysis and Interpretation: Chapter 6
Accounting for
Working Capital and Current Ratio 187
Merchandising Businesses 278
Appendix 1: End-of-Period Spreadsheet 188
Step 1. Enter the Title 189 Nature of Merchandising Businesses 280
Step 2. Enter the Unadjusted Trial Balance 189 Operating Cycle 280
Step 3. Enter the Adjustments 190 Financial Statements 281
xii Contents
Business Connection: Comcast Versus Lowe’s 282 Chapter 7 Inventories 346

Merchandising Transactions 282
Control of Inventory 348
Chart of Accounts for a Merchandising
Safeguarding Inventory 348
Business 282
Reporting Inventory 349
Purchases Transactions 283
Sales Transactions 288 Inventory Cost Flow Assumptions 349
Integrity, Objectivity, and Ethics in Business: Business Connection: Pawn Stars and Specific
The Case of the Fraudulent Price Tags 291 Identification 351
Freight 292
Inventory Costing Methods Under a Perpetual
Summary: Recording Merchandise Inventory
Inventory System 352
Transactions 294
First-In, First-Out Method 352
Dual Nature of Merchandise Transactions 294
Last-In, First-Out Method 353
Sales Taxes and Trade Discounts 296
International Connection: International Financial
Business Connection: Sales Taxes 297
Reporting Standards (IFRS) 355
The Adjusting Process 297 Weighted Average Cost Method 355
Adjusting Entry for Inventory Shrinkage 297
Business Connection: Computerized Perpetual
Integrity, Objectivity, and Ethics in Business: The Cost Inventory Systems 357
of Employee Theft 298
Inventory Costing Methods Under
Adjusting Entries for Customer Refunds and
a Periodic Inventory System 357
Allowances 298
First-In, First-Out Method 357
Financial Statements for Last-In, First-Out Method 358
a Merchandising Business 299 Weighted Average Cost Method 359
Multiple-Step Income Statement 299 Comparing Inventory Costing Methods 360
Single-Step Income Statement 301
Statement of Owner’s Equity 301 Integrity, Objectivity, and Ethics in Business: Where’s
Balance Sheet 301 the Bonus? 361
The Closing Process 302
Reporting Merchandise Inventory
Financial Analysis and Interpretation: in the Financial Statements 361
Asset Turnover 303 Valuation at Lower of Cost or Market 361
Appendix 1: Gross Method of Recording Sales Business Connection: Good Samaritan 363
Discounts 305 Merchandise Inventory on the Balance Sheet 363
Transactions 305 Effect of Inventory Errors on the Financial
Statements 364
Adjusting Entry 306
Financial Analysis and Interpretation: Inventory
Subsequent Period 306 Turnover and Days’ Sales in Inventory 367
Comparison with the Net Method 307
Business Connection: Rapid Inventory
Appendix 2: Returns of Merchandise 308 at Costco 367
Appendix 3: The Periodic Inventory System 310 Appendix: Estimating Inventory Cost 370
Chart of Accounts Under the Periodic Inventory Retail Method of Inventory Costing 370
System 310 Gross Profit Method of Inventory Costing 371
Recording Merchandise Transactions Under the
Periodic Inventory System 311
Adjusting Process Under the Periodic Inventory
Chapter 8
Internal Control
System 311
Financial Statements Under the Periodic Inventory and Cash 396
System 312
Closing Entries Under the Periodic Inventory Sarbanes-Oxley Act 398
System 313
Internal Control 400
Comprehensive Problem 2 341 Objectives of Internal Control 400
Contents xiii
Business Connection: Employee Fraud 400 Business Connection: Failure to Collect 452
Elements of Internal Control 400 Estimating Uncollectibles 452
Control Environment 401
Business Connection: Allowance Percentages Across
Risk Assessment 402
Control Procedures 402
Companies 457
Integrity, Objectivity, and Ethics in Business: Tips on Comparing Direct Write-Off

Preventing Employee Fraud in Small Companies 403 and Allowance Methods 457
Monitoring 404 Notes Receivable 458
Information and Communication 404 Characteristics of Notes Receivable 458
Limitations of Internal Control 405 Accounting for Notes Receivable 460
Cash Controls over Receipts and Payments 405 Reporting Receivables on the Balance Sheet 462
Business Connection: What Is Cryptocurrency? 406 Business Connection: Delta Air Lines 462
Control of Cash Receipts 406
Control of Cash Payments 408 Financial Analysis and Interpretation:
Accounts Receivable Turnover and
Business Connection: Mobile Payments 409 Days’ Sales in Receivables 463
Bank Accounts 409
Bank Statement 409
Using the Bank Statement as a Control over Chapter 10Long-Term Assets:
Cash 412
Fixed and Intangible 490
Bank Reconciliation 412
Integrity, Objectivity, and Ethics in Business: Bank Nature of Fixed Assets 492
Error in Your Favor (or Maybe Not) 416 Classifying Costs 492
Special-Purpose Cash Funds 416 Business Connection: Fixed Assets 493

The Cost of Fixed Assets 494
Financial Statement Reporting of Cash 417 Leasing Fixed Assets 495
Business Connection: Managing Accounting for Depreciation 496
Apple’s Cash 418 Factors in Computing Depreciation Expense 496
Straight-Line Method 497
Financial Analysis and Interpretation: Units-of-Activity Method 499
Ratio of Cash to Monthly Cash Expenses 418 Double-Declining-Balance Method 501
Business Connection: Microsoft Corporation 420 Comparing Depreciation Methods 503
Partial-Year Depreciation 503
Business Connection: Depreciating Animals 504
Chapter 9 Receivables 444 Revising Depreciation Estimates 505
Repair and Improvements 506
Classification of Receivables 446 Integrity, Objectivity, and Ethics in Business: Capital
Accounts Receivable 446 Crime 507
Notes Receivable 446
Other Receivables 447 Disposal of Fixed Assets 508
Discarding Fixed Assets 508
Uncollectible Receivables 447 Selling Fixed Assets 509
Business Connection: Warning Signs 448 Business Connection: Downsizing 510
Direct Write-Off Method Natural Resources 511
for Uncollectible Accounts 448
Intangible Assets 512
Allowance Method for Uncollectible Patents 512
Accounts 449 Copyrights and Trademarks 513
Goodwill 513
Integrity, Objectivity, and Ethics in Business:
Collecting Past Due Accounts 450 International Connection: International Financial
Write-Offs to the Allowance Account 450 Reporting Standards (IFRS) 515
xiv Contents
Financial Reporting for Long-Term Assets: Fixed Chapter 12 Accounting for

and Intangible 515
Partnerships and Limited
Financial Analysis and Interpretation: Liability Companies 588
Fixed Asset Turnover Ratio 516
Fixed Asset Turnover Ratio 516 Proprietorships, Partnerships, and Limited
Business Connection: Hub-and-Spoke or Point-to- Liability Companies 590
Point? 517 Proprietorships 590
Partnerships 591
Appendix: Exchanging Similar Fixed Assets 518
Gain on Exchange 518 Business Connection: Breaking Up Is Hard To Do 591
Loss on Exchange 519 Limited Liability Companies 592
Comparing Proprietorships, Partnerships,
and Limited Liability Companies 592
Chapter 11Current Liabilities Business Connection: Organizational Forms in the

Accounting Industry 592
and Payroll 540
Forming a Partnership and Dividing Income 593
Current Liabilities 542 Forming a Partnership 593
Accounts Payable 542 Dividing Income 594
Current Portion of Long-Term Debt 542 Integrity, Objectivity, and Ethics in Business: Tyranny
Short-Term Notes Payable 543
of the Majority 596
Payroll and Payroll Taxes 545
Partner Admission and Withdrawal 597
Liability for Employee Earnings 545
Admitting a Partner 597
Deductions from Employee Earnings 545
Withdrawal of a Partner 603
Computing Employee Net Pay 548
Death of a Partner 603
Liability for Employer’s Payroll Taxes 549
Liquidating Partnerships 603
Business Connection: The Most You
Gain on Realization 604
Will Ever Pay 549
Loss on Realization 606
Accounting Systems for Payroll Loss on Realization—Capital Deficiency 607
and Payroll Taxes 549 Statement of Partnership Equity 610
Payroll Register 550
Employee’s Earnings Record 552 Financial Analysis and Interpretation:
Payroll Checks 554 Revenue per Employee 610
Computerized Payroll System 555
Internal Controls for Payroll Systems 555
Integrity, Objectivity, and Ethics in Business: Chapter 13Corporations:
Overbilling Clients 556
Organization, Stock Transactions,
Employees’ Fringe Benefits 556 and Dividends 632
Vacation Pay 556
Pensions 557 Nature of a Corporation 634
Postretirement Benefits Other Than Pensions 558 Characteristics of a Corporation 634
Current Liabilities on the Balance Sheet 558 Forming a Corporation 635
Contingent Liabilities 559 Business Connection 636
Probable and Estimable 559
Probable and Not Estimable 560 Stockholders’ Equity 637
Reasonably Possible 560
Paid-In Capital from Stock 638
Remote 560
Characteristics of Stock 638
Financial Analysis and Interpretation: Classes of Stock 639
Quick Ratio 561
Business Connection: You Have No Vote 639
Comprehensive Problem 3 582 Issuing Stock 640
Contents xv
Premium on Stock 641 Reporting Long-Term Liabilities 695

No-Par Stock 642
Integrity, Objectivity, and Ethics in Business: The Times Interest Earned Ratio 695
Professor Who Knew Too Much 643
Appendix 1: Present Value Concepts and
Accounting for Dividends 643
Pricing Bonds Payable 697
Cash Dividends 643
Present Value Concepts 697
Stock Dividends 645
Pricing Bonds 700
Stock Splits 646
Appendix 2: Interest Rate Method of
Business Connection: Buffett on Stock Splits 647 Amortization 701
Treasury Stock Transactions 648 Amortization of Discount by the Interest
Method 701
Business Connection: Treasury Stock or Amortization of Premium by the Interest
Dividends? 649 Method 702
Reporting Stockholders’ Equity 649
Stockholders’ Equity on the Balance Sheet 649
Reporting Retained Earnings 651 Chapter 15 Investments 723
Statement of Stockholders’ Equity 652
International Connection: International Financial Why Companies Invest 725
Reporting Standards for SMEs 653 Investing Cash in Current Operations 725
Reporting Stockholders’ Equity for Mornin’ Joe 653 Investing Cash in Temporary Investments 725
Investing Cash in Long-Term Investments 726
Earnings per Share 655 Equity Investments 726
Fair Value Method: Less Than 20%
Ownership 726
Chapter 14
Long-Term Liabilities: Equity Method: Between 20%–50% Ownership 729
Consolidation: More Than 50% Ownership 731
Bonds and Notes 679
Business Connection: More Cash Means More
Financing Corporations 681 Investments for Drug Companies 731
Nature of Bonds Payable 683 Held-to-Maturity Investments 731

Bond Characteristics and Terminology 684 Purchase of Bonds 732
Proceeds from Issuing Bonds 684 Receipt of Interest 732
Sale of Bonds 733
Business Connection: Investor Bond Price Risk 685
Reporting on Financial Statements 734
Accounting for Bonds Payable 685
Trading and Available-for-Sale Investments 734
Bonds Issued at Face Amount 685
Bonds Issued at a Discount 686 Trading Securities 735
Amortizing a Bond Discount 687 Available-for-Sale Securities 736
Business Connection: U.S. Government Debt 688 Integrity, Objectivity, and Ethics in Business: Socially
Bonds Issued at a Premium 689 Responsible Investing 736
Amortizing a Bond Premium 690 Summary 738
Business Connection: Bond Ratings 691 Business Connection: Warren Buffett: The Sage of
Bond Redemption 691 Omaha 740
Installment Notes 692 Financial Analysis and Interpretation:
Issuing an Installment Note 693 Dividend Yield 740
Annual Payments 693
Appendix: Comprehensive Income 741
Integrity, Objectivity, and Ethics in Business: The
Ratings Game 695 Comprehensive Problem 4 761
xvi Contents
Chapter 16 Statement of Cash Reporting Cash Flows from (used for) Operating
Activities—Direct Method 791
Flows 765
Reporting Cash Flows 767
Cash Flows from (used for) Operating Chapter 17Financial Statement
Activities 768 Analysis 821
Business Connection: Cash Crunch! 770
Cash Flows from (used for) Investing Analyzing and Interpreting Financial
Activities 770 Statements 823
Cash Flows from (used for) Financing Activities 770 The Value of Financial Statement Information 823
Noncash Investing and Financing Activities 770 Techniques for Analyzing Financial Statements 824
Format of the Statement of Cash Flows 771 Basic Analytical Methods 824
Cash Flow per Share 771 Horizontal Analysis 824
Cash Flows from (used for) Operating Vertical Analysis 827
Activities 772 Common-Sized Statements 828
Net Income 773 Analyzing Liquidity 829
Adjustments to Net Income 774 Current Position Analysis 830
Integrity, Objectivity, and Ethics in Business: Credit Accounts Receivable Analysis 832
Policy and Cash Flow 777 Inventory Analysis 833
Business Connection: Flying Off the Shelves 835
Cash Flows from (used for) Investing
Activities 778 Analyzing Solvency 835
Land 778 Ratio of Fixed Assets to Long-Term Liabilities 836
Building and Accumulated Ratio of Liabilities to Stockholders’ Equity 836
Depreciation—Building 779 Times Interest Earned 837
Cash Flows from (used for) Financing Business Connection: Liquidity Crunch 838
Activities 779
Analyzing Profitability 838
Bonds Payable 780
Asset Turnover 838
Common Stock 780
Return on Total Assets 839
Dividends and Dividends Payable 781
Return on Stockholders’ Equity 840
Prepare a Statement of Cash Flows—Indirect
Business Connection: Gearing for Profit 841
Method 782
Return on Common Stockholders’ Equity 841
International Connection: IFRS for Statement of Cash Earnings per Share on Common Stock 842
Flows 783 Price-Earnings Ratio 843
Dividends per Share 844
Financial Analysis and Interpretation: Dividend Yield 845
Free Cash Flow 783
Business Connection: Investing for Yield 845
Business Connection: Growing Pains 784 Summary of Analytical Measures 845
Appendix 1: Spreadsheet (Work Sheet) for Corporate Annual Reports 847
Statement of Cash Flows—The Indirect Method 785 Management Discussion and Analysis 847
Analyzing Accounts 785 Report on Internal Control 847
Retained Earnings 785 Integrity, Objectivity, and Ethics in Business:
Other Accounts 787
Characteristics of Financial Statement Fraud 847
Preparing the Statement of Cash Flows 787
Report on Fairness of the Financial Statements 848
Appendix 2: Preparing the Statement of Cash
Appendix: Unusual Items on the Income
Flows—The Direct Method 788
Statement 848
Cash Received from Customers 788
Unusual Items Affecting the Current Period’s
Cash Paid for Merchandise 789
Cash Paid for Operating Expenses 789
Unusual Items Affecting the Prior Period’s
Gain on Sale of Land 790
Interest Expense 790
Cash Paid for Income Taxes 790 Nike, Inc., Problem 877
Contents xvii
Mornin’ Joe MJ-1 Appendix C: Selected Excerpts from Nike Inc., Form
10-K for the Fiscal Year Ended May 31, 2018 C-1
Financial Statements for Mornin’ Joe MJ-1
Glossary G-1
Appendix A: Interest Tables A-2 Index I-1
Appendix B: Revenue Recognition B-2
CHAPTER
1 Introduction to Accounting
and Business
Chapter 1 Transactions
Accounting System
Accounting Equation
Assets 5 Liabilities 1 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 Statement 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
PHOTOMIX-COMPANY/PIXABAY
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, Inc. is one of the most visible companies
on the Internet. It provides a real-time information net-
work where members can post messages, called tweets,
the fans are committed and care about the outcome of for free. Millions post tweets every day throughout the
the game. Just like fans at a football game, the owners of world.
a business want their business to “win” against their com- Do you think Twitter is a successful company? Does it
petitors in the marketplace. While having your football make money? How would you know? Accounting helps
team win can be a source of pride, winning in the mar- to answer these questions.
ketplace goes beyond pride and has many tangible ben- This textbook introduces you to accounting, the lan-
efits. Companies that are winners are better able to serve guage of business. Chapter 1 begins by discussing what a
customers, provide good jobs for employees, and make business is, how it operates, and the role that accounting
money for their owners. plays.
Link to Twitter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 6, 12, 14, 20, 24
LEARNING OBJECTIVES
After studying this chapter, you should be able to: Example Exercises (EE) are shown in red.
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
OBJ. 2 Summarize the development of accounting
Financial Statements
principles and relate them to practice.
Generally Accepted Accounting Principles
Business Entity Concept
OBJ. 6 Describe and illustrate the use of the ratio of
liabilities to owner’s equity in evaluating a
Time Period Concept company’s financial condition.
Cost Concept EE 1-1
Ratio of Liabilities to Owner’s Equity
OBJ. 3 State the accounting equation and define each Computing and Interpreting Ratio
element of the equation. of Liabilities to Owner’s Equity EE 1-8
The Accounting Equation
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
At a Glance 1 Page 28
Recording Transactions EE 1-3
Nature of Business and Accounting OBJ. 1

Describe the
nature of business
and the role of accounting
A business1 is an organization in which basic resources (inputs), such as materials and ethics in business.
and labor, are assembled and processed to provide goods or services (outputs) to cus-
tomers. Businesses come in all sizes, from a local coffee house to Starbucks, which
sells over $24 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 busi-
nesses 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, 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 Twitter customers.
Wal-Mart Stores, Inc. (general merchandise)
Twitter is a service Amazon.com (general merchandise)
company that • Manufacturing businesses convert basic inputs into products that are sold to customers.
provides a platform Ford Motor Co. (cars, trucks, vans)
for individuals to Dell Inc. (personal computers)
send 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 of
provides reports to users
about the economic accounting as the “language of business.” This is because accounting is the means by
activities and condition of 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.
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.
Managerial Accounting Internal users of accounting information include man-

agers and employees. These users are directly involved in managing and operating
the business. The area 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 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,

Link to Twitter creditors, customers, and the government. These users are not directly involved in
One of the ways
managing and operating the business. The area of accounting that provides external
Twitter provides users with information is called financial accounting.
information to its The objective of financial accounting is to provide relevant and timely information
investors is by for the decision-making needs of users outside the business. For example, financial
publishing an annual reports on the operations and condition of the business are useful for banks and
report, which includes other creditors in deciding whether to lend money to the business. General-purpose
general-purpose financial statements are one type of financial accounting report that is distributed to
financial statements. 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 Users External Users

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
(PCAOB). In addition, SOX established standards for independence, corporate respon-
sibility, and disclosure.
How does one behave ethically when faced with financial or other types of pres-
sure? Guidelines for behaving ethically follow:2
1. Identify an ethical decision by using your personal ethical standards of honesty and
fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those who will be affected by your
decision.
4. Make a decision that is ethical and fair to those affected by it.
2 Many companies have ethical standards of conduct for managers and employees. In addition, the Institute of Management
Accountants and the American Institute of Certified Public Accountants have professional codes of conduct, which can be obtained
from their websites at www.imanet.org and www.aicpa.org, respectively.
Integrity, Objectivity, and Ethics in Business

BERNIE MADOFF
In June 2009, Bernard L. “Bernie” Madoff was sen- existing investors, rather than basing investment returns
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 American ment manager is able to attract new investors, he or
history. Madoff ’s fraud started several decades ear- she will have new funds to pay existing investors and
lier when he began a Ponzi scheme in his investment continue the fraud. While most Ponzi schemes collapse
management firm, Bernard L. Madoff Investment quickly when the investment manager runs out of new
Securities LLC. investors, Madoff’s reputation, popularity, and personal
In a Ponzi scheme, the investment manager uses contacts provided a steady stream of investors, which
funds received from new investors to pay a return to allowed the 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 businesses
have come to recognize the importance and value of accounting information.
As indicated earlier, accountants who work for a business are employed in pri-
vate 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. 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 $43,000

companies, government, Payroll clerk $39,000 Certified Payroll Professional (CPP)
and not-for-profit entities. General accountant $47,000
Budget analyst $51,000
Cost accountant $49,000 Certified Management Accountant (CMA)
Internal auditor $46,000 Certified Internal Auditor (CIA)
Information technology $51,000 Certified Information Systems Auditor (CISA)
auditor
Public Accounting Accountants employed $47,000 Certified Public Accountant (CPA)

individually or within a
public accounting firm in
audit, tax, or management
advisory services.
*Average salaries rounded to the nearest thousand. Salaries may vary by size of company and region.
Source: Robert Half 2019 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).
Because all functions within a business use accounting information, experience
in private or public accounting provides a solid foundation for a career. Many high-
level positions in industry and in government agencies are held by individuals with
accounting backgrounds.
Business Connection
PATHWAYS COMMISSION
The Pathways Commission issued its study titled Chart-
ing a National Strategy for the Next Generation of Accoun-
tants. The Commission was made up of diverse members
and was jointly sponsored by the American Institute of
Certified Public Accountants (AICPA) and the American
Accounting Association (AAA). The Commission empha-
sized the importance of accounting for a prosperous
society and good decision making. The Commission
also emphasized that accountants must be critical think-
ers 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
Financial Accounting Standards Board (FASB) has the primary responsibility for
developing accounting principles. 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. govern-
ment, has authority over the accounting and financial disclosures for companies
whose shares of ownership (stock) are traded and sold to the public. The SEC nor-
mally 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
Financial Reporting Standards (IFRS). Differences currently exist between FASB and
IASB accounting principles. Investors and other stakeholders should be aware of
these differences in analyzing financial reports of international companies. Through-
out 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 under-
standing 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 example, the
Under the business entity
accountant for a business with one owner would record the activities of the business concept, the activities of
only and would not record the personal activities, property, or debts of the owner. a business are recorded
A business entity may take the form of a proprietorship, partnership, corporation, separately from the
or limited liability company (LLC). Each of these forms and their major characteristics activities of its owners,
creditors, or other
are listed in Exhibit 4. businesses.
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.
International Connection
IFRS INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
IFRS are considered to be more “principles-based” than in d eciding how business transactions are recorded.
U.S. GAAP, which is considered to be more “rules-based.” Many believe that the strong regulatory and litigation
For e xample, U.S. GAAP consists of approximately environment in the United States is the cause for the more
17,000 pages, which include numerous industry-specific rules-based GAAP approach. Regardless, IFRS and GAAP
accounting rules. In contrast, IFRS allow more judgment share many common principles.
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)

• Apple
N
under state or federal • 20% of the business organizations in the United States.
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.
Time Period Concept

The time period concept requires a company to report its economic activities on
a regular basis for a specific period. In doing so, financial condition and operat-
ing results of the company are reported periodically on a consistent basis. Financial
accounting reports are often prepared monthly, quarterly, and yearly.
The annual accounting period adopted by a company is called its fiscal year. The
fiscal year most commonly used is the calendar year beginning January 1 and ending
December 31. However, other periods are not unusual, especially for companies orga-
nized as corporations.
Corporations often use a fiscal year that ends when business activities have
reached the lowest point in their annual operating cycle, which allows more time to
Link to Twitter prepare financial reports. Such a fiscal year is called the natural business year. For
Twitter uses an example, the natural business year for most retail businesses is January 31, which is
annual accounting after the busy holiday season and end-of-year sales. To illustrate, Wal-Mart Stores,
period ending Inc. recently reported its annual financial results for the year ending January 31.
December 31. Throughout this text, we use the notation 20Y1, 20Y2, 20Y3, etc., to indicate years.3
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
3 We use this notation to reduce the number of changes necessary when revising this and future editions of the text. This, in turn,
reduces the cost of each revision, which helps reduce the need to increase the retail price of the text.
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Length to end of tail 18 1/2 inches, to end of wings 11 3/8; extent of
wings 22 1/2; wing from flexure 8; tail 10 1/2; bill along the ridge
1 4 1/2/12; tarsus 1 10 1/2/12; first toe 8/12, its claw 10/12; middle toe
1 2/12, its claw 6/12.
Adult Female. Plate CCCLVII.

The Female is similar to the male, and little inferior in size.
Five American specimens compared with several European, present
no appearances indicative of a specific difference. Some individuals
of both countries are larger than others, and the tail differs much in
length, according to age or the growth of the feathers. The largest
specimen in my possession, presented to me by Dr Richardson,
and marked as shot by Mr Drummond, measures as follows:—
Length to end of tail 20 1/2 inches; bill along the ridge 1 7/12; tail
11 3/4; wing from flexure 8 9/12; tarsus 2; middle toe 1 1/12, its claw
7 1/2/12.
In this individual the feathers on the fore neck are white for
more than half their length from the base. In the other specimens this
white part is fainter or light grey, and of less extent.
PINE GROSBEAK.
Pyrrhula Enucleator, Temm.

PLATE CCCLVIII. Male and Female.
In Wilson’s time, this beautiful bird was rare in Pennsylvania; but

since then it has occasionally been seen in considerable numbers,
and in the winter of 1836 my young friend J. Trudeau, M. D.
procured several in the vicinity of Philadelphia. That season also
they were abundant in the States of New York and Massachusetts.
Some have been procured near the mouth of the Big Guyandotte on
the Ohio; and Mr Nuttall has observed it on the lower parts of the
Missouri. I have ascertained it to be a constant resident in the State
of Maine, and have met with it on several islands in the Bay of
Fundy, as well as in Newfoundland and Labrador. Dr Richardson
mentions it as having been observed by the Expedition in the 50th
parallel, and as a constant resident at Hudson’s Bay. It is indeed the
hardiest bird of its tribe yet discovered in North America, where even
the Rose-breasted Grosbeak, though found during summer in
Newfoundland and Labrador, removes in autumn to countries farther
south than the Texas, where as late as the middle of May I saw
many in their richest plumage.
The Pine Grosbeak is a charming songster. Well do I remember how
delighted I felt, while lying on the moss-clad rocks of Newfoundland,
near St George’s Bay, I listened to its continuous lay, so late as the
middle of August, particularly about sunset. I was reminded of the
pleasure I had formerly enjoyed on the banks of the clear Mohawk,
under nearly similar circumstances, when lending an attentive ear to
the mellow notes of another Grosbeak. But, Reader, at
Newfoundland I was still farther removed from my beloved family;
the scenery around was thrice wilder and more magnificent. The
stupendous dark granite rocks, fronting the north, as if bidding
defiance to the wintry tempests, brought a chillness to my heart, as I
thought of the hardships endured by those intrepid travellers who, for
the advancement of science, had braved the horrors of the polar
winter. The glowing tints of the western sky, and the brightening stars
twinkling over the waters of the great Gulf, rivetted me to the spot,
and the longer I gazed, the more I wished to remain; but darkness
was suddenly produced by the advance of a mass of damp fog, the
bird ceased its song, and all around seemed transformed into chaos.
Silently I groped my way to the beach, and soon reached the Ripley.
The young gentlemen of my party, accompanied by my son John
Woodhouse, and a Newfoundland Indian, had gone into the interior
in search of Rein Deer, but returned the following afternoon, having
found the flies and musquitoes intolerable. My son brought a number
of Pine Grosbeaks, of different sexes, young and adult, but all the
latter in moult, and patched with dark red, ash, black and white. It
was curious to see how covered with sores the legs of the old birds
of both sexes were. These sores or excrescences are, I believe,
produced by the resinous matter of the fir-trees on which they obtain
their food. Some specimens had the hinder part of the tarsi more
than double the usual size, the excrescences could not be removed
by the hand, and I was surprised that the birds had not found means
of ridding themselves of such an inconvenience. One of the figures
in my plate represents the form of these sores.
I was assured that during mild winters, the Pine Grosbeak is found in
the forests of Newfoundland in considerable numbers, and that some
remain during the most severe cold. A lady who had resided there
many years, and who was fond of birds, assured me that she had
kept several males in cages; that they soon became familiar, would
sing during the night, and fed on all sorts of fruits and berries during
the summer, and on seeds of various kinds in winter; that they were
fond of bathing, but liable to cramps; and that they died of sores
produced around their eyes and the base of the upper mandible. I
have observed the same to happen to the Cardinal and Rose-
breasted Grosbeaks.
The flight of this bird is undulating and smooth, performed in a direct
line when it is migrating, at a considerable height above the forests,
and in groups of from five to ten individuals. They alight frequently
during the day, on such trees as are opening their buds or blossoms.
At such times they are extremely gentle, and easily approached, are
extremely fond of bathing, and whether on the ground or on
branches, move by short leaps. I have been much surprised to see,
on my having fired, those that were untouched, fly directly towards
me, until within a few feet, and then slide off and alight on the lower
branches of the nearest tree, where, standing as erect as little
Hawks, they gazed upon me as if I were an object quite new, and of
whose nature they were ignorant. They are easily caught under
snow-shoes put up with a figure of four, around the wood-cutters
camps, in the State of Maine, and are said to afford good eating.
Their food consists of the buds and seeds of almost all sorts of trees.
Occasionally also they seize a passing insect. I once knew one of
these sweet songsters, which, in the evening, as soon as the lamp
was lighted in the room where its cage was hung, would instantly
tune its voice anew.
My kind friend Thomas M’Culloch of Pictou in Nova Scotia, has
sent me the following notice, which I trust will prove as interesting to
you as it has been to me. “Last winter the snow was exceedingly
deep, and the storms so frequent and violent that many birds must
have perished in consequence of the scarcity of food. The Pine
Grosbeaks being driven from the woods, collected about the barns in
great numbers, and even in the streets of Pictou they frequently
alighted in search of food. A pair of these birds which had been
recently taken were brought me by a friend, but they were in such a
poor emaciated condition, that I almost despaired of being able to
preserve them alive. Being anxious, however, to note for you the
changes of their plumage, I determined to make the attempt; but
notwithstanding all my care, they died a few days after they came
into my possession. Shortly after, I received a male in splendid
plumage, but so emaciated that he seemed little else than a mass of
feathers. By more cautious feeding, however, he soon regained his
flesh, and became so tame as to eat from my hand without the least
appearance of fear. To reconcile him gradually to confinement, he
was permitted to fly about my bedroom, and upon rising in the
morning, the first thing I did was to give him a small quantity of seed.
But three mornings in succession I happened to lie rather later than
usual, and each morning I was aroused by the bird fluttering upon
my shoulder, and calling for his usual allowance. The third morning, I
allowed him to flutter about me some time before shewing any
symptom of being awake, but he no sooner observed that his object
was effected than he retired to the window and waited patiently until I
arose. As the spring approached, he used to whistle occasionally in
the morning, and his notes, like those of his relative the Rose-
breasted Grosbeak, were exceedingly rich and full. About the time,
however, when the species began to remove to the north, his former
familiarity entirely disappeared. During the day he never rested a
moment, but continued to run from one side of the window to the
other, seeking a way of escape, and frequently during the night,
when the moonlight would fall upon the window, I was awakened by
him dashing against the glass. The desire of liberty seemed at last to
absorb every other feeling, and during four days I could not detect
the least diminution in the quantity of his food, while at the same time
he filled the house with a piteous wailing cry, which no person could
hear without feeling for the poor captive. Unable to resist his
appeals, I gave him his release; but when this was attained he
seemed very careless of availing himself of it. Having perched upon
the top of a tree in front of the house, he arranged his feathers, and
looked about him for a short time. He then alighted by the door, and I
was at last obliged to drive him away, lest some accident should
befall him.
“These birds are subject to a curious disease, which I have never
seen in any other. Irregularly shaped whitish masses are formed
upon the legs and feet. To the eye these lumps appear not unlike
pieces of lime; but when broken, the interior presents a congeries of
minute cells, as regularly and beautifully formed as those of a honey-
comb. Sometimes, though rarely, I have seen the whole of the legs
and feet covered with this substance, and when the crust was
broken, the bone was bare, and the sinews seemed almost
altogether to have lost the power of moving the feet. An
acquaintance of mine kept one of these birds during the summer
months. It became quite tame, but at last it lost the power of its legs
and died. By this person I was informed that his Grosbeak usually
sang during a thunder-storm, or when rain was falling on the house.”
While in the State of Maine, I observed that these birds, when
travelling, fly in silence, and at a considerable height above the
trees. They alight on the topmost branches, so that it is difficult to
obtain them, unless one has a remarkably good gun. But, on waiting
a few minutes, you see the flock, usually composed of seven or eight
individuals, descend from branch to branch, and betake themselves
to the ground, where they pick up gravel, hop towards the nearest
pool or streamlet, and bathe by dipping their heads and scattering
the water over them, until they are quite wet; after which they fly to
the branches of low bushes, shake themselves with so much vigour
as to produce a smart rustling sound, and arrange their plumage.
They then search for food among the boughs of the taller trees.
Loxia Enucleator, Linn. Syst. Nat. vol. i. p. 299.—Lath. Ind. Ornith. vol. i. p.
372.
Pine Grosbeak, Loxia Enucleator, Wils. Amer. Ornith. vol. i. p. 80, pl. 5, fig.
2.
Pyrrhula Enucleator, Ch. Bonaparte, Synopsis of Birds of United States,
p. 119.
Pyrrhula (Corythus) Enucleator, Richards. and Swains. Fauna Bor.-
Amer. vol. ii. p. 262.
Pine Grosbeak or Bullfinch, Nuttall, Manual, vol. i. p. 535.
Adult Male. Plate CCCLVIII. Fig. 1.

Bill short, robust, bulging at the base, conical, acute; upper mandible
with its dorsal outline convex, the sides convex, the edges sharp and
overlapping; lower mandible with the angle short and very broad, the
dorsal line ascending and slightly convex, the sides rounded, the
edges inflected; the acute decurved tip of the upper mandible
extending considerably beyond that of the lower; the gape-line
deflected at the base.
Head rather large, ovate, flattened above; neck short; body full. Legs
short, of moderate strength; tarsus short, compressed, with six
anterior scutella, and two plates behind, forming a thin edge; toes
short, the first proportionally stout, the third much longer than the two
lateral, which are about equal; their scutella large, their lower surface
with large pads covered with prominent papillæ. Claws rather long,
arched, much compressed, laterally grooved, and acute.
Plumage soft, full, rather blended, the feathers oblong. At the base of
the upper mandible are strong bristly feathers directed forwards. The
wings of moderate length; the primaries rounded, the second and
third longest, and with the fourth and fifth having their outer webs
slightly cut out. Tail rather long, emarginate, of twelve strong, broad,
obliquely rounded feathers.
Bill reddish-brown. Iris hazel. Feet blackish-brown, claws black. The
general colour of the plumage is bright carmine tinged with vermilion;
the feathers of the fore part of the back and the scapulars greyish-
brown in the centre; the bristly feathers at the base of the bill
blackish-brown; the middle of the breast, abdomen, and lower tail-
coverts, light grey, the latter with a central dusky streak. Wings
blackish-brown; the primaries and their coverts narrowly edged with
reddish-white, the secondaries more broadly with white; the
secondary coverts and first row of small coverts tipped with reddish-
white, the smaller coverts edged with red.
Length to end of tail 8 1/2 inches, to end of wings 6 1/4, to end of
claws 6 3/4; extent of wings 14; wing from flexure 4 3/4; tail 4; bill
along the ridge 7 1/2/12, along the edge of lower mandible 7/12; tarsus
9 1/2/ ; first toe 4 1/2/12, its claw 5/12; middle toe 8/12, its claw 5/12.
12
Female. Plate CCCLVIII. Fig. 2.

The female is scarcely inferior to the male in size. The bill is dusky,
the feet as in the male. The upper part of the head and hind neck are
yellowish-brown, each feather with a central dusky streak; the rump
brownish-yellow; the rest of the upper parts light brownish-grey.
Wings and tail as in the male, the white edgings and the tips tinged
with grey; the cheeks and throat greyish-white or yellowish; the fore
part and sides of the neck, the breast, sides, and abdomen ash-grey,
as are the lower tail-coverts.
Length to end of tail 8 1/4 inches, to end of wings 6 1/4, to end of

claws 6 3/4; extent of wings 13 1/2; wing from flexure 4 1/2; tail 3 10/12;
tarsus 9 1/2/12; middle toe and claw 1 1/12.
Young fully fledged. Plate CCCLVIII. Fig. 3.
The young, when in full plumage, resemble the female, but are more
tinged with brown.
Fig. 1.
Fig. 2.
An adult male from Boston examined. The roof of the mouth is

moderately concave, its anterior horny part with five prominent
ridges; the lower mandible deeply concave. Tongue 4 1/2 twelfths
long, firm, deflected at the middle, deeper than broad, papillate at the
base, with a median groove; for the distal half of its length, it is cased
with a firm horny substance, and is then of an oblong shape, when
viewed from above, deeply concave, with two flattened prominences
at the base, the point rounded and thin, the back or lower surface
convex. This remarkable structure of the tongue appears to be
intended for the purpose of enabling the bird, when it has insinuated
its bill between the scales of a strobilus, to lay hold of the seed by
pressing it against the roof of the mandible. In the Crossbills, the
tongue is nearly of the same form, but more slender, and these birds
feed in the same manner, in so far as regards the prehension of the
food. In the present species, the tongue is much strengthened by the
peculiar form of the basi-hyoid bone, to which there is appended as it
were above a thin longitudinal crest, giving it great firmness in the
perpendicular movements of the organ. The œsophagus a b c d, Fig.
1. is two inches 11 twelfths long, dilated on the middle of the neck so
as to form a kind of elongated dimidiate crop, 4 twelfths of an inch in
diameter, projecting to the right side, and with the trachea passing
along that side of the vertebræ. The proventriculus c, is 8 twelfths
long, somewhat bulbiform, with numerous oblong glandules, its
greatest diameter 4 1/2 twelfths. A very curious peculiarity of the
stomach e, is, that in place of having its axis continuous with that of
the œsophagus or proventriculus, it bends to the right nearly at a
right angle. It is a very powerful gizzard, 8 1/2 twelfths long, 8 twelfths
broad, with its lateral muscles 1/4 inch thick, the lower very distinct,
the epithelium longitudinally rugous, of a light reddish colour. The
duodenum, f, g, first curves backward to the length of 1 1/4 inch, then
folds in the usual manner, passing behind the right lobe of the liver;
the intestine then passes upwards and to the left, curves along the
left side, crosses to the right, forms about ten circumvolutions, and
above the stomach terminates in the rectum, which is 11 twelfths
long. The cœca are 1 1/4 twelfth in length and 1/4 twelfth in diameter.
The entire length of the intestine from the pylorus to the anus is
31 1/2 inches (in another male 31); its greatest breadth in the
duodenum 2 1/2 twelfths, gradually contracting to 1 1/4 twelfth. Fig. 2.
represents the convoluted appearance of the intestine. The
œsophagus a b c; the gizzard d, turned forwards; the duodenum, e f;
the rest of the intestine, g h the cœca, i; the rectum, i j, which is
much dilated at the end.
The trachea is 2 inches 2 twelfths long, of uniform diameter. 1 1/2

twelfth broad, with about 60 rings; its muscles like those of all the
other species of the Passerinæ or Fringillidæ.
In a female, the œsophagus is 2 inches 10 twelfths long; the
intestine 31 inches long.
In all these individuals and several others, the stomach contained a
great quantity of particles of white quartz, with remains of seeds; and
in the œsophagus of one was an oat seed entire.
Although this bird is in its habits very similar to the Crossbills, and
feeds on the same sort of food, it differs from them in the form and
extent of its crop, in having the gizzard much larger, and the
intestines more than double the length, in proportion to the size of
the bird.
ARKANSAW FLYCATCHER.
Muscicapa verticalis, Bonap.

PLATE CCCLIX. Male and Female.
This species extends its range from the mouth of the Columbia
River, across our continent, to the shores of the Gulf of Mexico; but
how far north it may proceed is as yet unknown. On the 10th of April
1837, whilst on Cayo Island, in the Bay of Mexico, I found a
specimen of this bird dead at the door of a deserted house, which
had recently been occupied by some salt-makers. From its freshness
I supposed that it had sought refuge in the house on the preceding
evening, which had been very cold for the season. Birds of several
other species we also found dead on the beaches. The individual
thus met with was emaciated, probably in consequence of a long
journey and scanty fare; but I was not the less pleased with it, as it
afforded me the means of taking measurements of a species not
previously described in full. In my possession are some remarkably
fine skins, from Dr Townsend’s collection, which differ considerably
from the figure given by Bonaparte, who first described the species.
So nearly allied is it to the Green-crested Flycatcher, M. crinita, that
after finding the dead bird, my son and I, seeing many individuals of
that species on the trees about the house mentioned, shot several of
them, supposing them, to be the same. We are indebted to the
lamented Thomas Say for the introduction of the Arkansaw
Flycatcher into our Fauna. Mr Nuttall has supplied me with an
account of its manners.
“We first met with this bold and querulous species, early in July, in
the scanty woods which border the north-west branch of the Platte,
within the range of the Rocky Mountains; and from thence we saw
them to the forests of the Columbia and the Wahlamet, as well as in
all parts of Upper California, to latitude 32°. They are remarkably
noisy and quarrelsome with each other, and in the time of incubation,
like the King Bird, suffer nothing of the bird kind to approach them
without exhibiting their predilection for battle and dispute. About the
middle of June, in the dark swamped forests of the Wahlamet, we
every day heard the discordant clicking warble of this bird, somewhat
like tsh’k, tsh’k, tshivait, sounding almost like the creaking of a rusty
door-hinge, somewhat in the manner of the King Bird, with a
blending of the notes of the Blackbird or Common Grakle. Although I
saw these birds residing in the woods of the Columbia, and near the
St Diego in Upper California, I have not been able to find the nest,
which is probably made in low thickets, where it would be
consequently easily overlooked. In the Rocky Mountains they do not
probably breed before midsummer, as they are still together in noisy
quarrelsome bands until the middle of June.”
Dr Townsend’s notice respecting it is as follows: “This is the Chlow-
ish-pil of the Chinooks. It is numerous along the banks of the Platte,
particularly in the vicinity of trees and bushes. It is found also, though
not so abundantly, across the whole range of the Rocky Mountains;
and among the banks of the Columbia to the ocean, it is a very
common species. Its voice is much more musical than is usual with
birds of its genus, and its motions are remarkably quick and graceful.
Its flight is often long sustained, and like the Common King Bird, with
which it associates, it is frequently seen to rest in the air, maintaining
its position for a considerable time. The males are wonderfully
belligerent, fighting almost constantly, and with great fury, and their
loud notes of anger and defiance remind one strongly of the
discordant grating and creaking of a rusty door hinge. The Indians of
the Columbia accuse him of a propensity to destroy the young, and
eat the eggs of other birds.”
Tyrannus verticalis, Say, Long’s Exped. vol. ii. p. 60.

Musicapa verticalis, Ch. Bonaparte, Synopsis of Birds of United States, p.
67.
Arkansaw Flycatcher, Musicapa verticalis, Ch. Bonaparte, Amer. Ornith.
vol. i. p. 18, pl. 2, fig. 2.
Arkansaw Flycatcher, Nuttall, Manual, vol. ii. p. 273.
Adult Male. Plate CCCLIX. Fig. 1.

Bill rather long, stout, tapering, broader than high, unless toward the
end. Upper mandible with its dorsal outline straight and declinate,
until at the tip, where it is deflected, the ridge narrow, the sides
convex, the edges sharp, with a slight notch close to the very narrow
tip. Lower mandible with the angle short and broad, the dorsal line
ascending and very slightly convex, the ridge broad and flat at the
base, the sides convex, the edges sharp, the tip acute. The gape-
line almost straight. Nostrils basal, elliptical, partly covered by the
bristly feathers.
Head rather large; neck short; body slender. Feet very short; tarsus
slender, compressed, with six anterior scutella, which are so large
below as almost to meet behind; toes free, slender, of moderate
length. Claws moderately arched, much compressed, acute.
Plumage soft and blended. Strong bristles along the basal margin of
the upper mandible, and over the nostrils. Wings rather long, broad;
the first five primaries much attenuated toward the end, the first more
so, the fifth least; this attenuation being chiefly produced by an
incision on the first web; the first four are nearly equal, the third
longest, the fourth half a twelfth shorter, the third one-twelfth shorter
than the hind, and exceeding the first by nearly two-twelfths; the
other primaries gradually broader and more rounded; outer
secondaries abrupt and slightly emarginate. Tail rather long, almost
even, of twelve broad, abruptly rounded and acuminate feathers.
Bill black. Iris brown. Feet and claws black. The general colour of the
upper parts is ash-grey, the back tinged with yellow; the wing-coverts
and quills chocolate-brown, with brownish-white edges, those of the
inner secondaries broader. Upper tail-coverts and tail black,
excepting the outer web of the lateral feather on each side, and the
basal margin of the next. There is a patch of bright vermilion on the
top of the head, tinged with orange-yellow behind. Throat greyish-
white, the sides and fore part of the neck pale ash-grey, shaded on
the fore part of the breast into pure yellow, which is the prevalent
colour of the lower parts; lower wing-coverts yellow, the middle ones
tinged with grey.
Length to end of tail 9 inches, to end of wings 7, to end of claws 7,
extent of wings 15 1/4; tail 3 7/8; wing from flexure 5 1/2; bill along the
1/2
ridge 9/12, along the edge of lower mandible 1 1/12; tarsus 8 /12; first
toe 3 1/2/12, its claw 4 1/2/12; third toe 7/12, its claw 4/12.
Adult Female. Plate CCCLIX. Fig. 2.

The Female is rather smaller, but is similar to the male in colouring.
The young also is similar to the adult, but wants the red patch on the
head.
In the female mentioned above as having been found in Texas, the
mouth is half an inch wide, its roof anteriorly slightly concave, with
three median prominent lines, the palate flat, with its membrane or
skin diaphanous, as in Goatsuckers. The tongue is 7 twelfths long,
deeply emarginate and papillate at the base; triangular, extremely
depressed, tapering to a thin slit and bristly point. The posterior
aperture of the nares is 4 twelfths long, linear, papillate on the edges,
ending abruptly at its fore part, without a prolonged fissure.
Œsophagus, a, a, b, 2 inches 9 twelfths long, funnel-shaped for half
an inch, then cylindrical and nearly 4 twelfths in diameter, until it
enters the thorax. Proventriculus, c, 3 1/2 twelfths in diameter, and
with a belt of oblong glandules. Stomach c, d, elliptical, 7 1/2 twelfths
long, 6 twelfths broad, its lateral muscles of moderate strength, the
lower not distinct; the epithelium with broad longitudinal rugæ, and of
a dark reddish-brown colour. Intestine, e, f, g, 7 inches long, its
diameter at the anterior part 3 1/2 twelfths, gradually diminishing to
1 1/2 twelfth. Cœca extremely small, 1 twelfth long, 1/2 twelfth broad,
and 1 1/4 inch distant from the anus; cloaca i, globular.
Trachea 1 inch 10 twelfths long, tapering from a diameter of 2

twelfths to 1 twelfth; the rings ossified and firm, about 70 in number;
the lateral and sterno-tracheal muscles slender; the inferior laryngeal
muscles are strong but very short, forming a prominent knob, and
attached to the first bronchial ring. Bronchi wide, of about 20 half-
rings.
The digestive organs of this bird, and of the Flycatchers in general,
do not differ materially from those of the Thrushes and Warblers. The
pharynx and œsophagus, however, are much wider.
SWALLOW-TAILED FLYCATCHER.
Muscicapa forficata, Gmel.

PLATE CCCLIX. Male.
Not having seen this handsome bird alive, I am unable to give you
any account of its habits from my own observation; but I have
pleasure in supplying the deficiency by extracting the following notice
from the “Manual of the Ornithology of the United States and of
Canada,” by my excellent friend Thomas Nuttall.
“This very beautiful and singular species of Flycatcher is confined
wholly to the open plains and scanty forests of the remote south-
western regions beyond the Mississippi, where they, in all probability,
extend their residence to the high plains of Mexico. I found these
birds rather common near the banks of Red River, about the
confluence of the Kiamesha. I again saw them more abundant, near
the Great Salt River of the Arkansa in the month of August, when the
young and old appeared, like our King Birds, assembling together
previously to their departure for the south. They alighted repeatedly
on the tall plants of the prairie, and were probably preying upon the
grasshoppers, which were now abundant. At this time also, they
were wholly silent, and flitted before our path with suspicion and
timidity. A week or two after, we saw them no more, having retired
probably to tropical winter-quarters.
“In the month of May, a pair, which I daily saw for three or four
weeks, had made a nest on the horizontal branch of an elm,
probably twelve or more feet from the ground. I did not examine it
very near, but it appeared externally composed of coarse dry grass.
The female, when first seen, was engaged in sitting, and her mate
wildly attacked every bird which approached their residence. The
harsh chirping note of the male, kept up at intervals, as remarked by
Mr Say, almost resembled the barking of the Prairie Marmot, ’tsh,
’tsh, ’tsh. His flowing kite-like tail, spread or contracted at will while
flying, is a singular trait in his plumage, and rendered him
conspicuously beautiful to the most careless observer.”
Muscicapa forficata Gmel. Linn. Syst. Nat. vol. i. p. 931.—Lath. Ind. Ornith.
vol. ii. p. 485.—Ch. Bonaparte, Synopsis of Birds of United States, p. 275.
Swallow-tailed Flycatcher, Muscicapa forficata, Bonap. Amer. Ornith.
vol. i. p. 15, pl. 2, fig. 1.
Swallow-tailed Flycatcher, Nuttall, Manual, vol. i. p. 275.
Adult Male. Plate CCCLIX. Fig. 3.

Bill of moderate length, rather stout, subtrigonal, depressed at the
base, straight; upper mandible with its dorsal outline nearly straight,
and declinate, to near the tip, which is deflected, slender,
compressed, and acute, the edges sharp and overlapping, with a
slight notch close to the tip; lower mandible with the angle rather
long and wide, the back broad at the base, the dorsal line ascending
and very slightly convex, the edges sharp, the tip acute. Nostrils
basal, roundish, partly covered by the bristly feathers.
Head rather large; neck short; body ovate. Feet short; tarsus with six
anterior very broad scutella. Toes free, slender; the first stout, the
lateral equal; claws rather long, arched, slender, much compressed,
very acute.
Plumage soft and blended. Bristles at the base of the upper
mandible strong. Wings rather long, the first four quills longest, with
their inner webs emarginate and attenuate at the end. Tail very long,
deeply forked, of twelve broad, rounded feathers.
Bill and feet black. Iris hazel. Upper part of the head, the cheeks,
and the hind part and sides of the neck, ash-grey; scapulars and
back darker and tinged with reddish-brown; the rump darker, the
upper tail-coverts black. Wings brownish black, all the feathers
margined with greyish-white, the anterior wing-coverts scarlet; tail-
feathers deep black, with their terminal margins white, the three
outer on each side pale rose-coloured to near the end. The throat,
fore part of neck and breast, pure white; the sides, abdomen, and
lower tail-coverts, and lower wing-coverts, pale rose-colour; the
axillary feathers bright scarlet.
Length to end of tail 11 1/2 inches, to end of wings 7 1/2; tail to the
fork 2 2/12, to the end 5 1/2; wing from flexure 5 1/8; bill along the
ridge 5/8, along the edge of lower mandible 7/8; tarsus 3/4; hind toe
3/ , 1/ 1/
8 its claw 4/12; middle toe 5 /12, its claw 3
2 /12.
2

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

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