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Corporate Financial
Accounting 16e
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
Jefferson P. Jones
Associate Professor of Accounting
Auburn University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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Corporate Financial Accounting, 16th edition © 2022, 2019 Cengage Learning, Inc.
Carl S. Warren WCN: 02-300
Jefferson P. Jones
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Throughout this text, real-world companies are used in the narrative, illustrations, and end-of-chapter assignments. These companies
are identified in boldface color 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 and homework are
fictional, and any resemblance to actual persons, living or dead, businesses or companies is entirely coincidental.
Printed in the United States of America

Print Number: 01 Print Year: 2020
Preface
Roadmap for Success

Warren/Jones Corporate Financial Accounting, 16e, provides a sound pedagogy for giving s tudents
a solid foundation in business and accounting. Warren/Jones covers the fundamentals in an inclu-
sive manner that motivates students to learn by showing how accounting is important to their
careers and business.
Inclusivity
A major objective of Warren/Jones Corporate Financial Accounting, 16e, is to create an inclusive
learning experience for all students that recognizes the wide diversity in student demographics,
abilities, and experiences. This edition has been revised with a learner-centric approach that
understands and acknowledges that a student’s learning experience may be influenced by a vari-
ety of mental, sensory, and physical factors. As a result, this edition and its ancillaries have been
designed to create an accessible learning experience for all students.
This edition also recognizes that students have unique backgrounds and perspectives. As a result,
chapter content, illustrations, and homework are designed to be respectful and inclusive of differ-
ences in student race, ethnicity, sexual orientation, gender, religion, age, and culture. The authors
welcome suggestions and comments on how to be even more inclusive in future editions.
New Features
This revision includes a range of new features that help Warren/Jones provide students with the
context to see how accounting is valuable to their careers and business. These new features include:
▪▪ Using Data Analytics
▪▪ Take It Further data analytic cases
▪▪ Journal entries with T accounts
▪▪ Illustration of why accrual accounting is required by GAAP
iii
Customer Refunds Payable is a liability account
for estimated refunds and allowances.
The account receivable was paid in cash

iv Preface within the 30-day credit period.
c. Jan. 6 Cash 9,000
The remaining account receivable
Data Analytics
Accounts Receivable—Wall Company 9,000
($12,000 – $3,000) is paid in cash.
Using Data Analytics examples have been added to each chapter, which describe an application
Check Up Corner
of data analytics to each chapter’s content.
Using Data Analytics

Sales
Retail businesses, such as Target Corporation (TGT), use data analytics to answer questions such
as the following:
l What are our best-selling products?
l What products are generating returns?
l What percent of our customers are using self-checkouts? USING DATA
l What time of the day do we have the most sales? ANALYTICS
l What percent of our customers use credit cards?
l What percent of our customers use debit cards?
Target has used data (predictive) analytics to improve the retail experience of its customers as well
as to increase its sales. For example, Target uses data analytics to decide which products should
earn shelf space in its brick-and-mortar stores and which are best serviced with its online sales app.
See TIF 5-8 for a homework assignment using data analytics.
Source: Dina Gerdeman, “On Target: Rethinking the Retail Website,” Forbes, December 4, 2018, www.forbes.com/sites/
hbsworkingknowledge/2018/12/04/on-target-rethinking-the-retail-website/#2690a20916fb.
Take It Further Data Analytic Cases

Chapter 5 Accounting for Retail Businesses 307
Take It Further data analytic cases have been added to several chapters. These TIF cases use
a dataset related to the chapter content that requires a student to analyze and develop reports
Mark: Krista, I don’t know what to do about buying my new stereo.
using Excel and Tableau. The chapters with TIF data analytic cases are as follows:
Krista: What’s the problem?
Mark: Well,5:
Chapter I can buy it locally
Accounting foratRetail
Tru-Sound Systems for $1,175.00. However, Wholesale Stereo
Businesses
has the same system listed for $1,200.00.
TIF 5-8 “Sales analysis” (Excel application)
Krista: What’s the big deal? Buy it from Tru-Sound Systems.
Chapter 6: quite
Mark: It’s not Inventories
that simple. Wholesale Stereo charges $49.99 for shipping and handling.
If I have Wholesale Stereo senditems”
TIF 6-5 “Out-of-stock it next-day
(Excelair, it’ll cost $89.99 for shipping and handling.
application)
Krista: So?
Chapter 7: Internal Control and Cash
Mark: But, that’s not all. Tru-Sound Systems will give an additional 2% discount if I pay cash.
TIF 7-6
Otherwise, they“Inventory
will let me losses
use myandVisa,potential
or I can controls” (Tableau
pay it off in application)
three monthly installments. In
addition, if I buy it from Tru-Sound Systems, I have to pay 9% sales tax. I won’t have to pay
Chapter 8: Receivables
sales tax if I buy it from Wholesale Stereo, since they are out of state.
TIF
Krista: 8-6 “Collectability
Anything else??? of receivables by customer type” (Excel application)
Mark: Well 9:
Chapter . . . Wholesale
Long-TermStereo saysFixed
Assets: I haveand
to charge it on my Visa. They don’t accept checks.
Intangible
Krista: I am not surprised. Many online stores don’t accept checks.
TIF 9-5 “Equipment maintenance, downtime, and costs” (Excel and Tableau applications)
Mark: I give up. What would you do?
Chapter 10: Liabilities: Current, Installment Notes, and Contingencies”
1. Assuming that Wholesale Stereo doesn’t charge sales tax on the sale to Mark, which
TIF 10-6is offering
company “Supplier the(vendor)
best buy?analyses” (Excel application)
2. What might be
The following is the data analytic some considerations other than
case for Chapter 5. price that influence Mark’s decision
on where to buy the stereo system?
TIF 5-8 Data Analytics: Sales analysis

Michelle Horowitz is the manager of AAAA Office Supplies, a locally owned office supply store
for schools and businesses. Michelle is concerned about the large variety of products the store
USING DATA carries, which ties up storage space and working capital. Michelle has asked you to analyze the
ANALYTICS
store’s inventory and sales to determine if there are products that may be worth discontinuing.
Michelle has asked you for the following:
1. A list of the quantity of each product sold for a recent month.
2. Recommendations for any products that should be discontinued.
Go to CengageNOWv2 to complete this assignment.
Pathways Challenge
Preface v
Journal Entries with T Accounts

T accounts with debit and credit postings are included with journal entries throughout
Corporate Financial Accounting, 16e. The accounting equation and T accounts are shown in a
smaller font so that the presentation is still focused on the journal entry. That is, the presentation
is designed to subtly reinforce student learning without detracting from a journal entry focus.
Examples of this new presentation follow:
Purchase of $9,250 of inventory on account.
Inventory 9,250
Accounts Payable—Thomas Corporation 9,250
Purchased inventory on account.
Assets 5 Liabilities 1 Stockholders’ Equity

Inventory Accounts Payable
9,250 9,250
Discarding of fully depreciated equipment.
Accumulated Depreciation—Equipment 4,800

Loss on Disposal of Equipment 1,200
Equipment 6,000
To write off equipment discarded.

Accumulated Loss on Disposal of
Equipment Depreciation Equipment
6,000 4,800 1,200
Issuance of preferred stock and common stock at par value for cash.
Cash 1,500,000
Preferred Stock 500,000
Common Stock 1,000,000
Issued preferred stock and common
stock at par for cash.
Cash Preferred Stock Common Stock
1,500,000 500,000 1,000,000
The preceding presentation has the following pedagogical advantages:

▪▪ Students can see the impact of the journal entry on the elements of the accounting equation.
▪▪ Students can see the impact of the journal entry on the financial statements.
The impact on the balance sheet is shown by the accounting equation.
The impact on the income statement is shown by revenue and expense T accounts under
Stockholders’ Equity.
The impact on the statement of stockholders’ equity is shown by common stock, retained
earnings, and dividend T accounts under Stockholders’ Equity.
The impact on the statement of cash flows is shown by the cash T account under Assets.
▪▪ The presentation reinforces the rules of debit and credit.
▪▪ The accounting equation is illustrated as the foundation (framework) for all financial account-
ing systems.
▪▪ The presentation is consistent with today’s accounting systems where posting to accounts is
often done at the same time journal entries are recorded.
vi Preface
Why Accrual Accounting is Required

Why the accrual basis of accounting is required by GAAP has been added to Chapter 4. This
192 section uses the NetSolutions illustrations from Chapters 1–4 as a basis for the following exhibit.
Chapter 4 The Accounting Cycle
Exhibit 20
Accrual versus Cash Accrual Basis of Accounting
Basis of Accounting Increase (Decrease) Interpretation
for NetSolutions December November Amount Percent
Revenues $9,460 $7,500 $1,960 26.1%
NetSolutions is profitable and rapidly
Expenses (5,405) (4,450) 955 21.5%
expanding.
Net income (loss) $4,055 $3,050 1,005 33.0%
Cash Basis of Accounting

Increase (Decrease) Interpretation
December November Amount Percent NetSolutions is in trouble with declining
Revenues $6,980 $7,500 $ (520) (6.9)% revenues and increasing expenses, which
generated a net loss. This suggests that
Expenses (7,915) (4,600) 3,315 72.1%
NetSolutions may not be able to continue
Net income (loss) $ (935) $2,900 (3,835) (132.2)% as a viable company without significant
operational changes.
Under the accrual basis of accounting, revenues increased by 26.1% in December, while
This exhibit illustrates that accrual
expenses increased accounting
by only 21.5%. As aisresult,
required by GAAP
net income because
increased it These
by 33.0%. betterresults
matches
sug-
revenues and expenses and, thus, is a better indicator of a company’s
gest that NetSolutions is a profitable, rapidly expanding company. profitability.
Under the cash basis of accounting, revenues decreased by (6.9)%, while expenses increased
by 72.1%. As a result, NetSolutions reported a net loss of $(935) or a decrease of (132.2)% from
Existing Features
November’s net income of $2,900. These results suggest that NetSolutions is in trouble and may
not be able to continue as a viable company.
As shown in Exhibit 20, accrual accounting better reports the underlying operating perfor-
Some existing features
mance offrom previous
NetSolutions. editions
It does include:
this by better matching revenues and expenses. This is why accrual
accountingto
▪▪ Stepwise approach is accounting
required by generally
cycle accepted accounting principles (GAAP).
▪▪ Presentation style designed around the way students learn
▪▪ A Schema, or roadmap, at the start of each chapter.
▪▪ Links to theAnalysis
Opening Company for Decision Making
▪▪ Pathway Challenges
Objective
Describe ▪and
Working Capital and Current Ratio
▪▪ 7Check Up Corners
illustrate for Decision Making
▪ Analysis
the use of working The ability to convert assets into cash is called liquidity, while the ability of a business to
▪▪the
capital and Make a Decision
current pay its debts is called solvency. Two financial measures for evaluating a business’s short-term
ratio in evaluating a liquidity and solvency are working capital and the current ratio.
company’s financial
Working capital is the excess of the current assets of a business over its current liabilities:
condition.
Schema Working Capital = Current Assets – Current Liabilities
Each chapter begins with a schema that shows students what they are going to learn and how
Current assets are more liquid than long-term assets, because they can be more readily
it is connected turned
to theintolarger
cash picture. In the early
to meet short-term chapters,
obligations. Thus,the schemainillustrates
an increase a company’show theassets
current steps
in the accounting cycle or
increases areimproves
interrelated. In later
its liquidity chapters,
because the are
these assets schema shows
available how
for uses each
other thanchapter’s
paying
current to
topics are connected liabilities.
the financial statements. The following are examples of the schema for
Chapters 4, 5, and A9.positive working capital implies that the business is able to pay its current liabilities and
is solvent. Thus, an increase in working capital increases or improves a company’s short-term
solvency.
To illustrate, NetSolutions’ working capital at the end of 20Y3 is $6,355, computed as fol-
lows from Exhibit 1:
Working Capital = Current Assets – Current Liabilities
= $7,745 – $1,390
= $6,355
This amount of working capital implies that NetSolutions is able to pay its current liabilities.
Preface vii
Chapter
4 The Accounting Cycle
Chapter 1 Chapter 3
Transactions
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
ACCOUNTING SYSTEM Unadjusted Prepaid Expenses
Accounting Equation Trial Balance Depreciation
Adjusted Trial Balance
Assets = Liabilities + Equity
Total Debit Total Credit
Balances
= Balances
Chapter 2 Account
Debits Credits
Chapter 4 Adjusted Accounts
RULES OF DEBIT AND CREDIT XXX XXX
Balance Sheet Accounts
Adjusted Balances
AS S ETS = L IABIL ITIES + STOCKHOL DER S ' E Q U IT Y

Asset Accounts Liability Accounts Common Stock + Retained Earnings
FINANCIAL STATEMENTS
Debit for Credit for Debit for Credit for Debit for Credit for Debit for Credit for Income Statement Statement of Stockholders’ Equity Balance Sheet
increases decreases decreases increases decreases increases decreases increases
(+) (–) (–) (+) (–) (+) (–) (+)
Balance Balance Balance Balance CLOSING ENTRIES
Adjusted Closing Income Statement
Accounts Journal Entries and Dividend Accounts
Income Statement
XXX XXX 0 0
Accounts
Dividends Revenue Accounts
Adjusted Zero Balances
Debit for Credit for Debit for Credit for Balances
increases decreases decreases increases
(+) (–) (–) (+) Balance Sheet
Balance Accounts
Balance
XXX XXX
Expense Accounts
Debit for Credit for
increases decreases Post-Closing
(+) (–) Trial Balance
Balance
Unadjusted Trial Balance

160 Tota l De bit Ba la nc e s = Tota l Cre dit Ba la nces 161
5 Accounting for
9 Long-Term Assets:
Chapter
Chapter
Retail Businesses Fixed and Intangible
STATEMENT OF STATEMENT OF CASH FLOWS

STOCKHOLDERS’ EQUITY For the Year Ended December 31, 20Y5
STATEMENT OF STATEMENT OF CASH FLOWS For the Year Ended December 31, 20Y5
Cash flows from (used for)
STOCKHOLDERS’ EQUITY For the Year Ended December 31, 20Y5
Common Retained operating activities $XXX
For the Year Ended December 31, 20Y5
Cash flows from (used for) Stock Earnings Total Cash flows from (used for)
operating activities $XXX Balances, Jan. 1, 20Y5 $XXX $ XXX $ XXX investing activities XXX
Common Retained
Cash flows from (used for) Issued common stock XXX XXX Cash flows from (used for)
Stock Earnings Total
investing activities XXX Net income XXX XXX financing activities XXX
Balances, Jan. 1, 20Y5 $XXX $ XXX $ XXX
Cash flows from (used for) Dividends (XXX) (XXX) Net increase (decrease) in cash $XXX
Issued common stock XXX XXX
financing activities XXX Balances, Dec. 31, 20Y5 $XXX $ XXX $ XXX Cash balance, January 1, 20Y5 XXX
Net income XXX XXX
Net increase (decrease) in cash $XXX Cash balance, December 31, 20Y5 $XXX
Dividends (XXX) (XXX)
Balances, Dec. 31, 20Y5 $XXX $ XXX $ XXX Cash balance, January 1, 20Y5 XXX
Cash balance, December 31, 20Y5 $XXX
INCOME STATEMENT BALANCE SHEET
For the Year Ended December 31, 20Y5 December 31, 20Y5
INCOME STATEMENT
For the Year Ended December 31, 20Y5 BALANCE SHEET Sales $ XXX Assets
December 31, 20Y5 Cost of goods sold (XXX) Current assets:
Sales $ XXX Gross profit $ XXX Cash $XXX
Assets Operating expenses: Accounts receivable XXX
Cost of goods sold (XXX)
Current assets: Wages expense $XXX Inventory XXX
Gross profit $ XXX
Cash $XXX Advertising expense XXX Total current assets $XXX
Operating expenses:
Accounts receivable XXX Utilities expense XXX Long-term assets:
Wages expense $XXX
Inventory XXX Depreciation expense XXX Property, plant, and equipment $ XXX
Advertising expense XXX
Total current assets $XXX Amortization expense XXX Accumulated depreciation (XXX)
Utilities expense XXX
Property, plant, and equipment XXX Depletion expense XXX Book value $XXX
Depreciation expense XXX
Total assets $XXX … XXX Natural resources $ XXX
… XXX Liabilities
Total operating expenses (XXX) Total operating expenses (XXX) Accumulated depletion (XXX)
Current liabilities $XXX
Operating income $ XXX Operating income $ XXX Net natural resources XXX
Long-term liabilities XXX
Other revenue and expense XXX Other revenue and expense XXX Intangible assets XXX
Total liabilities $XXX
Net income $ XXX Net income $ XXX Total long-term assets XXX
Stockholders’ Equity
Total assets $XXX
Common stock $XXX
Liabilities
Retained earnings XXX
Current liabilities $XXX
Total stockholders’ equity XXX
Long-term liabilities XXX
Total liabilities and stockholders’ equity $XXX
Total liabilities $XXX
Stockholders’ Equity
Common stock $XXX
Retained earnings XXX
Total stockholders’ equity XXX
Total liabilities and stockholders’ equity $XXX
236
454
Link to Opening Company

Links to the “opening company” of each chapter calls out examples of how the concepts intro-
duced in the chapter are connected to the opening company. This shows how accounting is used
in the real world by companies. When a real-world public company is first mentioned, its stock
(ticker) symbol is shown in parentheses. Doing so facilitates students’ ability to access additional
information about the company, including its stock price and website.
Assets expenses 5
LiabilitiesCost of goods
(XXX)
Operating 1 sold Stockholders’
(XXX)Equity
Cash Sales
$ XXX
Operating income Gross profit $ XXX
1,800 1,800
Operating expenses (XXX)
Using the perpetual inventory system, the cost Operating income
of goods sold and the$ XXX
decrease in inventory
The also
are revenue activitiesInofthis
recorded. a service
way, business involveaccount
the inventory providing services to
indicates thecustomers.
amount On the incomeon
of inventory state-
hand
mentsold).
(not for a service business, the revenues from services are reported as fees earned. The operating expenses
viii Preface incurred in providing
To illustrate, assumethe services
that theare subtracted
cost of goodsfrom soldthe onfees earned
March 3 isto$1,200.
arrive atTheoperating
entry to income.
record the
costInofcontrast, the revenue
goods sold and theactivities
decrease ofin
a retail business involve
the inventory the buying and selling of merchandise.
is as follows:
A retail business first purchases merchandise to sell to its customers. When this merchandise is sold, the
revenue is reported as sales, and its cost is recognized as an expense. This expense is called the cost of
goods soldMar.or cost
3 ofCost
merchandise sold. The cost of goods sold is subtracted from
of Goods Sold 1,200sales to arrive at gross
254 profit.Chapter
This amount Inventory
is called
5 Accounting gross
for Retailprofit because it is the profit before deducting operating
Businesses 1,200 expenses.
The operating expenses areTosubtracted
record the from
cost ofgross
goods sold. to arrive at operating income.
Dollar Tree, Inc. profit
Merchandise on hand (not sold) at the end of an accounting period is called inventory or
Assets
SalesLiabilities Stockholders’ Equity
W
Exhibit 7 Journal Entries 5
for Customer Returns, Refunds,1 and Allowances
hen you are low on cash but need to pick up party supplies, must design its accounting system to not only record the receipt merchandise inventory. Inventory
Inventory
is reported as a current asset on the balance sheet.
Cost of Goods Sold
housewares, or other consumer items, where do you go? Many of goods for resale, but also to keep track of what merchandise is
1,200 1,200
shoppers are turning to Dollar Tree, Inc. (DLTR), a leading available for sale as well as where the merchandise is located. In
operator of discount variety stores with more than 15,000 stores in addition, Dollar Tree must record the sales and cost of the goods
SalesSales
may . .be
End-of-Period
On a recent income statement, Dollar Tree reported
be made to customers
Adjusting
the following Entries
(in billions):
using debit cards, sometimes XXX called bank cards. When
Link to
. . . . . . . . . . . . . . . . . . . . .Sales
North America. Its stores operate under the brand names Dollar Tree
and Family Dollar. All merchandise is $1 at Dollar Tree stores, while
sold for each of its stores. Finally, Dollar Tree must record such
data as delivery costs, merchandise discounts, and merchandise a customerCost uses
of goods a debit sold .card, . . . . . . the
$ 22 .8
money Refunds
. . Customer
(15 .9) required Payable by the purchase is deductedXXX instantly from the Dollar Tree
Family Dollar offers merchandise for $10 or less. The stores typically returns. customer’s bank
Gross profitaccount. . . . . . . . . .For
. . . . .this $reason,
. .Estimated debitInventory
6 .9 Returns card sales are recorded XXXas cash sales.
carry more than 7,000 items, consisting of basic, everyday items as This chapter focuses on the accounting principles and SalesOperating
may also expenses be made . . . . to
. . . customers
(7 .9)
Cost of Goods using Sold credit cards such as Mastercard XXX or Visa. Credit
well as seasonal, closeout, and promotional items. concepts for a retail business. ln doing so, the basic differences card salesOperating
are normally income (loss) processed . . . $ by(1 .0)a clearinghouse that contacts the bank that issued the card.
The accounting for a retailer, like Dollar Tree, is more between retail and service company activities are highlighted. Cash Refund Paid to the retailer’s bank account. Credit Memorandum Issued
TheOnissuing bank
its balance sheet, then electronically
it reported inventorytransfers
of $3 .5 billion . cash directly 4
Since
complex than for a service company. This is because a service The financial statements of a retail business and accounting for
company sells only services and has no inventory. Dollar Tree merchandise transactions are also described and illustrated. the retailer normally
Customer returns receives cashCustomer within Refunds
a few days Payable of making the sale, credit
. . . . . XXX card sales
Customer arePayable
Refunds also . . . . . XXX
recordedmerchandise
as cash sales. Cash . . . . . . . . . . . . . . . . . . . . . . . . XXX Accounts Receivable . . . . . . . . . . XXX
Business Insight Inventory . Estimated

Dollar Tree normally receives cash
. . . . . . . . . . . . . . . . . . . . . XXX
Returns
from credit card Inventory sales within . . . threeXXX
Inventory . . . . . . . . . . . . . . . . . . . . . . XXX
Estimated
business days, and Returns
thus records InventoryLink . . . to XXX
credit card Versus
Comcast sales as cash
Customer does not
sales.
Lowe’s
return Customer Refunds Payable . . . . . XXX Customer Refunds Payable . . . . . XXX Dollar Tree
C
merchandise Cash . is
. . a . .service
. . . . . . .business
. . . . . . . . . . . . XXX Lowe’s Companies,
Accounts Receivable . Inc. . . . . . . . . . XXX
omcast Corporation (CMCSA)
If a that offersallows
retailer cable communications,
customers to use broadcast debit or televisioncredit cards to pay for purchases, Condensed Income the retailer Statement
may be(NBC television),
charged filmed entertainment
processing fees by the (Universal
clearinghouse Pictures), or issuing bank. Such fees are (in periodically
millions)
and themeasparks
recorded (UniversalTo
an expense. Parks) to its customers .
illustrate, assume that Lowe’s a companySales pays . . .credit
. . . . . . . card
. . . . . .processing
. . . . . . . . . . . . . fees
. . . . . .of . . . . . . . . . . . $ 71,309
Companies, Inc. (LOW) is a large
fees home
wouldimprovement retailer . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48,401)
$4,150
Link to
on October 31. These
Although
The differences in the operations all sales
of a service andare
be recorded
retailfinal, business Dollar
as follows:
are Tree Grosswill
profit “exchange”
. . . . . . . . . . .any
. . . . .unopened
. . . . . . . . . . . .item
. . . . . .with
. . . . . the original
. $ 22,908
Dollar Tree receipt .
illustrated in their recent income statements, as follows: Selling, general, and administrative expenses . . . . . . . . . . . . (17,413)
Oct. 31 Comcast
Credit Card Expense
Corporation Depreciation expense
4,150 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,477)
CashIncome Statement
Condensed Operating income . . . . . . 4,150
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,018
(inTo record service charges on credit
millions) Source: Lowe's Companies, Inc ., Form 10-K for a Recent Fiscal Year Ended February 1.
Revenue . . . . . . . . . . . . . . . . . . . . .card
. . . . sales
. . . . . for
. . . the
. . . .month.
. . . . . . . $108,942
Assets Ethics in Action
Programming and production expenses . . . . . . . . . . . . . . . (34,440)
5 Liabilities 1 As a retail company,
Stockholders’Lowe’s
Equity subtracts cost of goods sold from sales to
©KIT LEONG/SHUTTERSTOCK.COM
Selling and administrative Cashexpenses . . . . . . . . . . . . . . . . . . . (40,424) disclose gross profit .
Credit As a service company, Comcast does not show
Card Expense
ETHICS
The Case
Depreciation and amortization of the 4,150 Fraudulent
expenses . . . . . . . . Price Tags
. . . . . . (12,953) merchandise
cost of goods sold, nor abought
4,150 or obtained
gross profit elsewhere .
line . Rather, The couple then
service expenses
Chapter 9 Long-Term Assets: Fixed and Intangible
Operating
One of 467
incomethe challenges . . . . . . . . . . . .for
. . . .a . .retailer
. . . . . . . . is . . . . . . $ its
. . .policing 21,125
sales return returned
are subtracted the cheaper
from revenue goods
straight and received
to operating income . the substantially
Instead of using Mastercard or Visa, a customer may use a credit card that is not issued by a bank.
Source:policy .
ComcastThere areForm
Corporation, many
10-K ways in Fiscal
for a Recent which Yearcustomers
Ended Decembercan
31 . unethi- higher refund amount . Company security officials discovered
Exhibit 13 summarizes the characteristics of intangible assets. For example, a customer might use an American Express card. If the seller uses a clearinghouse, the
cally or illegally abuse such policies . In one case, a couple was the fraud and had the couple arrested after they had allegedly
clearinghouse will collect the receivable and transfer the cash to the retailer’s bank account, similar
accused of attaching a company’s store price tags to cheaper bilked the company for more than $1 million .
to the way it would have if the customer had used Mastercard or Visa. Large businesses, however,
Source: Jack L . Hayes International, Inc ., 28th Annual Retail Theft Survey, 2016 .
Exhibit 13
Intangible CyberSource is one of the major credit card clearinghouses. For a more detailed description of how credit card sales are processed, see the
4
Comparisonfollowing
of CyberSource web page: www.cybersource.com, click on Products, and under Payment Processing, click on Payment Cards, and then on
Asset Description Amortization Period Periodic Expense
Link to Dollar Tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Pages 239, 241, 247, 248, 251, 254, 265, 268 Intangible Assets
How it Works.
Patent Exclusive right to benefit Estimated useful life not Amortization expense
Analysis for Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 269–270
from an innovation to exceed legal life Check Up Corner 5-2 Sales Transactions
Make a Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 304
Copyright Exclusive right to benefit Estimated useful life not Amortization expense
On December 30, Burrows Inc . sold $12,000 of merchandise to Wall Company on account, with terms n/30 . The
from a literary, artistic, or to exceed legal life merchandise cost Burrows $8,000 . On January 3, Wall determines that a portion of the merchandise received does
musical composition not operate properly, and Burrows issues a credit memo for the returned items . The invoice amount of the returned
merchandise is $3,000, which cost Burrows $2,000 . Journalize the entries by Burrows to record (a) the December 30 sale,
Trademark Exclusive use of a name, None Impairment loss if fair 237 (b) the January 3 return, and (c) the receipt of the amount due from Wall on January 6 .
term, or symbol value less than carrying
value (impaired)
Goodwill Excess of purchase price of None Impairment loss if fair
a business over the fair value less than carrying
value of its net assets
(assets ] liabilities) Pathways Challenges value (impaired)
Pathways Challenge encourages students’ interest in accounting and emphasizes the critical
thinking aspect of accounting. A suggested answer to the Pathways Challenge is provided at
the end of the chapter.
Pathways Challenge
This is Accounting!
Economic Activity
Verizon Communications Inc. (VZ) is the largest wireless service provider in the United States
with over 114 million retail subscribers. To deliver its products and services, Verizon must have access to
spectrum—the radio frequencies that carry sound, data, and video to wireless devices. However, spectrum
is a limited resource that the Federal Communications Commission (FCC) licenses to businesses for a period
of 10 years, subject to renewal. In a recent year, Verizon acquired almost $10 billion in wireless licenses.
Critical Thinking/Judgment
How should Verizon account for its acquisition of wireless licenses?
What is the useful life of a wireless license?
Should Verizon expense (amortize) the cost of its wireless licenses?
Suggested answer at end of chapter.
Chapter 9 Long-Term Assets: Fixed and Intangible 493
Pathways Challenge
This is Accounting!
Information/Consequences
Because a wireless license does not exist physically, Verizon’s (VZ) wireless licenses are intangible assets.
All of the costs of acquiring a wireless license should be recorded as an asset. In a recent year, Verizon report-
ed almost $87 billion of wireless licenses, representing 35% of its total assets.
Even though the FCC license is granted for a 10-year period, Verizon considers this license to have an indef-
inite useful life. This is because the license is subject to renewal at a low cost and, historically, the FCC has
renewed Verizon’s licenses.
Verizon does not expense (amortize) the cost of its wireless licenses. Instead, the licenses are reviewed for
any impaired value.
25/09/17 5:38 PM
Suggested Answer
Preface ix
Check Up Corners
Throughout each chapter, Check Up Corners provide students with step-by-step guidance on
how
462 to Chapter
solve problems. Problem-solving
9 Long-Term Assets: Fixed and Intangibletips help students avoid common errors.
Check Up Corner 9-2 Selling Fixed Assets

On the first day of the year, Firefall Company purchased equipment at a cost of $340,000. The equipment
was expected to have a useful life of four years, a residual value of $20,000, and is depreciated at a straight-
line rate of 25%. Firefall sold the equipment at the beginning of the fourth year when the balance in the
accumulated depreciation account was $240,000. Journalize the entry to record the sale if the equipment
was sold for:
a. $95,000
b. $105,000
Solution:
a. Equipment sold for $95,000:
Cash 95,000
Accumulated Depreciation—Equipment 240,000
Loss on Sale of Equipment 5,000 Long-Term Assets: Fixed and Intangible
Equipment 340,000
McDonald’s Corporation
Balance Sheet
Selling Price – Book Value = Link to
Accumulated
December 31
$95,000 – $100,000
McDonald’s
Depreciation at
the End of Year 3
b. Equipment sold for $105,000: (in millions)
Assets
Cash 105,000
Accumulated
Property Depreciation—Equipment
and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
$ 39,050.9
Equipment
Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,890.9)340,000
Gain
Net on Saleand
property of equipment.
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
$24,160.0 Selling Price – Book Value =
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,677.4 $105,000 – $100,000
Note to Financial Statements:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,026.4
Check Up Corner
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,609.6
Equipment and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,414.9
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,050.9
Analysis for Decision Making
Source: McDonald’s Corporation, Form 10-K for a Recent Year Ended December 31 (adapted).
Analysis for Decision Making highlights how businesses use accounting information to make
The4cost and relatedNatural
the health Resources
Objective accumulated depletion
decisions
Describe
and evaluate ofofamineral rights are normally shown as part of the
business. This provides students with context of why
theassets” section of the balance sheet. The mineral rights may be shown net of depletion on
“Fixed
accounting
accounting is
forof
the face important
natural
the to
balance sheet. In a business.
such cases, a supporting note discloses
Some businesses own natural resources such the accumulated
as timber,depletion.
minerals, or oil. The characteristics of
resources, including natural resources are as follows:
the journal entry for
depletion. Analysis for Decision
▪▪ Naturally Making
Occurring: An asset that is created through natural growth or naturally through
the passage of time. For example, timber is a natural resource that naturally grows over time.
▪▪ Removed for Sale: The asset is consumed by removing it from its land source. For
Fixed Asset Turnover example, timberRatio is removed for use when it is harvested, and minerals Objective 7
are removed when
Describe and illustrate
The fixed asset turnover they are measures
ratio mined. the number of sales dollars earned per dollar of the fixed asset
▪▪ Removed
fixed assets. The higher and
the ratio, the Sold
more over More
efficiently Than isOne
a company Year:
using Theassets
its fixed natural
in resource
turnoverisratio
removed
to and sold
generating sales. The ratio is computed
over a period asof follows:
more than one year. assess the efficiency
of a company’s use of
Sales
FixedNatural resources
Asset Turnover Ratio = are classified as a type of fixed asset. The cost ofits
a fixed
natural resource includes
assets.
the cost of obtaining Average Book Value of
and preparing itFixed
for Assets
use. For example, legal fees incurred in purchasing a
To illustrate, the natural
followingresource are included
data (in millions) were as part
taken of its
from cost. financial statement
a recent
of McDonald’s Corporation As natural resources
(MCD) : are harvested or mined and then sold, a portion of their cost is debited to an
e account called depletion$21,076.5
expensSales expense.
Fixed assets (net):
Beginning of year 22,842.7
End of year 24.160.0
McDonald’s fixed asset turnover ratio for the year is computed as follows (rounded to one
decimal place):
Sales
Fixed Asset Turnover Ratio =
Average Book Value of Fixed Assets
$21,076.5
=
($22,842.7 + $24,160.0) ÷ 2
$21,076.5
= = 0.9
98169_ch09_rev02_442-493.indd 462 $23,501.4 16/08/17 5:12 pm
Is 0.9 efficient? To answer this question, McDonald’s fixed asset turnover ratio can be com-
pared to other quick-service restaurant companies, as shown in Exhibit 13. Yum! Brands (YUM)
operates KFC, Pizza Hut, and Taco Bell quick-service restaurants. The other restaurants are likely
familiar by name.
x Preface
Make a Decision
Make a Decision in the end-of-chapter material gives students a chance to analyze and compare
real 502
companies.
Chapter 9 Long-Term Assets: Fixed and Intangible
Make a Decision
Fixed Asset Turnover Ratio
MAD 9-1 Analyze and compare Amazon.com and Netflix Obj. 7

REAL Amazon.com, Inc. (AMZN) is the world’s leading Internet retailer of merchandise and
WORLD
media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc.
(NFLX) is one of the world’s leading Internet television networks. Both companies compete
in the digital media and streaming space. However, Netflix is more narrowly focused in the
digital streaming business than is Amazon.
Sales and average book value of fixed assets information (in millions) are provided for
Amazon and Netflix for a recent year as follows:
Amazon.com Netflix
Sales $177,866 $20,156
Average book value of fixed assets 67,251 492
a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.
b. Which company is more efficient in generating sales from fixed assets?
c. Interpret your results.
MAD 9-2 Analyze and compare Alaska Air, Delta Air Lines, and Southwest Airlines Obj. 7
REAL Alaska Air Group (ALK), Delta Air Lines (DAL), and Southwest Airlines (LUV) reported
WORLD
the following financial information (in millions) in a recent year:
Alaska Air Group Delta Air Lines Southwest Airlines

Sales $8,781 $47,007 $22,428
Average book value of fixed assets 6,842 29,823 18,275
a. Determine the fixed asset turnover ratio for each airline. Round to one decimal place.
b. Based on the fixed asset turnover ratio, which airline appears to be the most ef-
ficient in the use of its fixed assets?
c. The most important fixed asset to an airline is the aircraft. Given this, what factors
might influence the efficient use of fixed assets for an airline?
MAD 9-3 Analyze Verizon Obj. 7

REAL Verizon Communications Inc. (VZ) is a major telecommunications company in the
WORLD
United States. Two recent balance sheets for Verizon disclosed the following information
Student Learning Aids regarding fixed assets:
End of Year
Beginning of
Year
(in millions) (in millions)
This edition includes a variety of Property,
student learning
plant, and equipment aids in $ 265,734
addition $to the Check Up Corners,
252,835
Accumulated depreciation (173,819) (163,549)
including the following: Property, plant, and equipment (net) $ 91,915 $ 89,286
▪▪ At the end of each chapter,

Verizon’s Let’s
revenueReview
for the yeariswas
a $131,868
new chapter summary
million. Assume and
the fixed assetself-assessment
turnover ratio for feature
the telecommunications industry averages approximately 1.1.
that is designed to help busy students prepare for an exam. It includes a summary of each
a. Determine Verizon’s fixed asset turnover ratio. Round to one decimal place.
learning objective’s key
b. points, key this
Interpret terms, multiple-choice
ratio with questions,
respect to the industry average. exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
Instructor and Student Resources

Additional instructor and student resources for this product are available online. Instructor assets
include an Educator’s Guide, PowerPoint® slides, and a test bank powered by Cognero®. Student
assets include data sets and online appendices. Sign up or sign in at www.cengage.com to search
for and access this product and its online resources.
Preface xi
New Appendixes
Two new end-of-text appendixes have been added to this Each topic is designed as a self-contained learning module
edition. with its own assignment materials. The modules have been
written so that instructors have the flexibility of covering one
Appendix B: Selected Topics. This appendix allows instruc-
or more of the modules at a variety of different places in
tors the flexibility to cover a variety of topics that might be
their course depending upon their students’ needs.
relevant to their students. The topics include the following:
Topic 1: Investments Appendix C: Nike Annual Report (10-K). This appendix
Topic 2: Foreign Currency Transactions includes excerpts from a recent Nike annual report (10-K).
Topic 3: Corporate Taxes New to this appendix are student assignments for each
Topic 4: Reporting Unusual Items and Comprehensive chapter. An instructor could use all of the chapter assignments
Income as an “annual report” project. The annual report assignments
Topic 5: Revenue Recognition are referenced at the end of each chapter following the Take
Topic 6: International Accounting Standards It Further section.
Chapter Changes and Improvements

The following chapter changes and improvements have been Chapter 5
made in this edition:
▪▪ The discussion of the Nature of Retail Businesses has
been changed to reference business-to-business (B2B)
Chapter 1 and business-to-customer (B2C) transactions.
▪▪ Why It Matters boxes from prior edition have been rela- ▪▪ The accounting for purchase discounts has been changed
beled as Business Insight boxes. to use the gross method of accounting for purchase dis-
▪▪ New section on Business Activities has been added, counts.
including a related exhibit. ▪▪ The accounting for sales to customers using debit cards
▪▪ Exhibit 3 has been updated with new and more current has been added to this edition.
examples of accounting and business frauds. ▪▪ The accounting for sales coupons and rebates has been
▪▪ New Business Insight box on “Business Strategies” has added to the chapter. This discussion replaces the prior
been added. edition’s discussion of the accounting for sales discounts,
▪▪ Exhibit 11 is new and illustrates the interrelationships which has been moved to an end-of-chapter appendix.
of the financial statements with the balance sheet as the ▪▪ The end-of-chapter Appendix 1 illustrates the account-
connecting link. ing for sales discounts for gross and net methods. This
discussion has been simplified so that adjusting entries
Chapter 3 are not required.
▪▪ The opening company has been changed from Pandora ▪▪ The discussion of sales returns, refunds, and allowances
Media, Inc., which is now a subsidiary of Sirius XM, to has been revised so that the end-of-period adjusting
Netflix, Inc. entry is illustrated before examples illustrating customer
▪▪ The chapter Links have been changed to relate to Netflix. returns, refunds, and allowances.
▪▪ A new exhibit (Exhibit 7) has been added that summarizes
Chapter 4 the journal entries for customer sales returns, refunds,
▪▪ The discussion of NetSolutons’ financial statements has and allowances.
been changed to include a brief discussion of the state-
ment of cash flows, which is shown in a new appendix Chapter 6
to the chapter. This provides instructors the flexibility to ▪▪ New Business Insight box on radio frequency identifica-
cover all four of NetSolutions’ financial statements if they tion (RFID) has been added.
choose to do so. ▪▪ Revised section on the effect of inventory errors on finan-
▪▪ A new section and learning objective have been added cial statements.
to the end of the chapter on why the accrual basis of
accounting is required by GAAP.
▪▪ The appendix on reversing entries has been moved to an
online appendix.
xii Preface
Chapter 7 Chapter 12
▪▪ Updated Ethics in Action box on employee fraud. ▪▪ New exhibit on the effects of dividends and stock splits
▪▪ Updated Business Insight box to include remote deposits. has been added.
Chapter 8 Chapter 14
▪▪ Updated discussion of the allowance method for uncol- ▪▪ The opening company has been changed from Nike to
lectible accounts to reflect the new standard on current The Walt Disney Company.
expected credit losses. ▪▪ Appendix on the reporting of unusual items was moved
to Appendix B: Special Topics.
Chapter 10 ▪▪ Appendix on the concepts of fair value and comprehen-
▪▪ Updated W-4 Form to reflect recent changes. sive income was moved to Appendix B: Special Topics.
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About the Authors
Carl S. Warren
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
©TERRY R. SPRAY INHISIMAGE STUDIOS

Warren has taught classes at the University of Georgia, University of Iowa, Michigan State Univer-
sity, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his PhD from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in pro-
fessional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numer-
ous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
Jefferson P. Jones
©THOMAS BOUTWELL, T2PHOTOGRAPHY

Dr. Jefferson P. Jones is an Associate Professor of Accounting in the School of Accountancy at
Auburn University where he teaches financial accounting and applied financial research. He
received his Bachelor’s in Accounting and Master of Accountancy degrees from Auburn Univer-
sity and his PhD from Florida State University. Dr. Jones has received numerous teaching awards,
including the Auburn University Beta Alpha Psi Outstanding Teaching Award (eight times); the
Auburn University Outstanding Master of Accountancy Professor Teaching Award (five times); the
Auburn University Outstanding Distance Master of Accountancy Teaching Award (three times);
and the Auburn University College of Business McCartney Teaching Award. In addition, he has
made numerous presentations around the country on research and pedagogical issues. Dr. Jones
has public accounting experience as an auditor with Deloitte and Touche, holds a CPA certificate
in the state of Alabama (inactive), and is a member of the American Accounting Association, the
American Institute of Certified Public Accountants (AICPA), and the Alabama Society of CPAs
(ASCPA). His research interests focus on financial accounting, specifically investigating the quality
of reported accounting information, and accounting education. He has published articles in numer-
ous journals, including Advances in Accounting, Review of Quantitative Finance and Accounting,
Issues in Accounting Education, International Journal of Forecasting, and The CPA Journal. When
not at work, Dr. Jones enjoys playing golf and watching college football.
xiii
Brief Contents
1 Introduction to Accounting and Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2 Analyzing Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3 The Adjusting Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
4 The Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
5 Accounting for Retail Businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
6 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
7 Internal Control and Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
8 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
9 Long-Term Assets: Fixed and Intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454
10 Liabilities: Current, Installment Notes, and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
11 Liabilities: Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556
12 Corporations: Organization, Stock Transactions, and Dividends . . . . . . . . . . . . . . . . . . . . . . . . 596
13 Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644
14 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2

Appendix B Selected Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2020 Selected Excerpts. . . . C-1
Appendix D Reversing Entries (online). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Appendix E Special Journals and Subsidiary Ledgers (online) . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
xiv
Contents
1 Introduction to Accounting
and Business 2
Analysis for Decision Making 82
Horizontal Analysis 82
Continuing Problem 105

Nature of Business and Accounting 4 Make a Decision 106
Types of Businesses 4 Take It Further 108
Business Activities 5
Role of Accounting in Business 5 Pathways Challenge 77, 109
Role of Ethics in Accounting and Business 7
3
Opportunities for Accountants 8
Generally Accepted Accounting

Principles (GAAP) 10 The Adjusting Process 110
Characteristics of Financial Information 11
Assumptions 12
Principles 14 Nature of the Adjusting Process 113
Accrual and Cash Bases of Accounting 113
The Accounting Equation 14 Revenue and Expense Recognition 114
Business Transactions and the Accounting Equation 15 The Adjusting Process 114
Summary 19 Types of Accounts Requiring Adjustment 115
Classifications of Stockholders’ Equity 20 Adjusting Entries for Accruals 116
Financial Statements 21 Accrued Revenues 116
Income Statement 23 Accrued Expenses 117
Statement of Stockholders’ Equity 23 Adjusting Entries for Deferrals 120
Balance Sheet 24 Unearned Revenues 120
Statement of Cash Flows 25 Prepaid Expenses 121
Interrelationships Among Financial Statements 26
Adjusting Entries for Depreciation 124
Ratio of Liabilities to Stockholders’ Equity 29 Summary of Adjusting Process 126
Continuing Problem 54 Adjusted Trial Balance 130
Make a Decision 55 Analysis for Decision Making 132
Vertical Analysis 132
Take It Further 56
Pathways Challenge 13, 57
Make a Decision 155
2
Take It Further 157
Analyzing Pathways Challenge 131, 159
Transactions 58
Using Accounts to Record Transactions 61
Chart of Accounts 62
Double-Entry Accounting System 64

4 The Accounting Cycle 160
Balance Sheet Accounts 64 Flow of Accounting Information 163
Income Statement Accounts 64
Statement of Stockholders’ Equity Accounts (Dividends) 65 Financial Statements 165
Normal Balances 65 Income Statement 165
Journalizing 66 Statement of Stockholders’ Equity 165
Balance Sheet 167
Posting Journal Entries to Accounts 70 Statement of Cash Flows 168
Trial Balance 80 Closing Entries 170
Errors Affecting the Trial Balance 80 Journalizing and Posting Closing Entries 171
Errors Not Affecting the Trial Balance 81 Post-Closing Trial Balance 176
xv
xvi Contents
Accounting Cycle 177 The Adjusting Process 261

Inventory Shrinkage 261
Illustration of the Accounting Cycle 180 Customer Returns, Refunds, and Allowances 262
Step 1. Analyzing and Recording Transactions
Adjusted Trial Balance 263
in the Journal 180
Step 2. Posting Transactions to the Ledger 181 Financial Statements and Closing Entries for
Step 3. Preparing an Unadjusted Trial Balance 181 a Retail Business 264
Step 4. Assembling and Analyzing Adjustment Data 181 Multiple-Step Income Statement 264
Step 5. Preparing an Optional End-of-Period Spreadsheet 183 Single-Step Income Statement 266
Step 6. Journalizing and Posting Adjusting Entries 184 Statement of Stockholders’ Equity 266
Step 7. Preparing an Adjusted Trial Balance 184 Balance Sheet 267
Step 8. Preparing the Financial Statements 184 The Closing Process 268
Step 9. Journalizing and Posting Closing Entries 187
Step 10. Preparing a Post-Closing Trial Balance 187 Analysis for Decision Making 269
Asset Turnover Ratio 269
Why Is the Accrual Basis of Accounting Required by
GAAP? 190 Appendix 1 Sales Discounts 270
Gross Method 270
Analysis for Decision Making 192 Net Method 272
Working Capital and Current Ratio 192 Comparison of Gross and Net Methods 273
Appendix 1 End-of-Period Spreadsheet 194 Appendix 2 The Periodic Inventory System 273
Step 1. Enter the Title 194 Chart of Accounts Under the Periodic Inventory System 273
Step 2. Enter the Unadjusted Trial Balance 194 Recording Merchandise Transactions Under the Periodic
Step 3. Enter the Adjustments 195 Inventory System 274
Step 4. Enter the Adjusted Trial Balance 196 Adjusting Process Under the Periodic Inventory System 275
Step 5. Extend the Accounts to the Income Financial Statements Under the Periodic Inventory System 276
Statement and Balance Sheet Columns 197 Closing Entries Under the Periodic Inventory System 276
Step 6. Total the Income Statement and Balance Sheet
Columns, Compute the Net Income or Net Loss, and Comprehensive Problem 2 302
Complete the Spreadsheet 198 Make a Decision 303
Preparing the Financial Statements
from the Spreadsheet 199 Take It Further 305
Appendix 2 Statement of Cash Flows Pathways Challenge 246, 307
for NetSolutions 199
6
Comprehensive Problem 1 229
Inventories 308
Make a Decision 231
Take It Further 233 Control of Inventory 310
Pathways Challenge 177, 235 Safeguarding Inventory 310
Reporting Inventory 311
5
Inventory Cost Flow Assumptions 311
Accounting for Retail Inventory Costing Methods Under
Businesses 236 a Perpetual Inventory System 313
First-In, First-Out Method 313
Last-In, First-Out Method 315
Nature of Retail Businesses 238 Weighted Average Cost Method 317
Operating Cycle 238
Financial Statements 239 Inventory Costing Methods Under
Merchandise Transactions 240 a Periodic Inventory System 319
First-In, First-Out Method 319
Chart of Accounts for Retail Business 240
Last-In, First-Out Method 319
Subsidiary Ledgers 241
Weighted Average Cost Method 320
Purchases Transactions 241
Sales Transactions 246 Comparing Inventory Costing Methods 323
Freight 256
Summary: Recording Inventory Transactions 258 Reporting Inventory in the Financial
Dual Nature of Merchandise Transactions 259 Statements 324
Sales Taxes and Trade Discounts 259 Valuation at Lower of Cost or Market 324
Contents xvii
Inventory on the Balance Sheet 326 Direct Write-Off Method for Uncollectible
Effects of Inventory Errors on the Financial Statements 327 Accounts 412
Analysis for Decision Making 330 Allowance Method for Uncollectible Accounts 413
Inventory Turnover and Days’ Sales in Inventory 330 Write-Offs to the Allowance Account 413
Appendix Estimating Inventory Cost 332 Estimating Uncollectibles 415
Retail Method of Inventory Costing 332 Comparing Direct Write-Off and Allowance Methods 422
Gross Profit Method of Inventory Costing 333
Notes Receivable 423
Make a Decision 355 Characteristics of Notes Receivable 423
Take It Further 356 Accounting for Notes Receivable 424
Pathways Challenge 327, 358 Reporting Receivables on the Balance Sheet 427
7
Accounts Receivable Turnover and Days’ Sales in Receivables 428
Make a Decision 450

Internal Control and Cash 360 Take It Further 452
Sarbanes-Oxley Act 362
9
Internal Control 364
Objectives of Internal Control 364
Long-Term Assets:
Elements of Internal Control 364 Fixed and Intangible 454
Control Environment 365
Risk Assessment 366
Control Procedures 366
Nature of Fixed Assets 456
Classifying Costs 456
Monitoring 368
The Cost of Fixed Assets 458
Information and Communication 368
Leasing Fixed Assets 459
Limitations of Internal Control 369
Cash Controls over Receipts and Payments 370 Accounting for Depreciation 460
Factors in Computing Depreciation Expense 460
Control of Cash Receipts 370
Straight-Line Method 461
Control of Cash Payments 373
Units-of-Activity Method 463
Bank Accounts 374 Double-Declining-Balance Method 465
Bank Statement 374 Comparing Depreciation Methods 466
Using the Bank Statement as a Control over Cash 376 Partial-Year Depreciation 469
Revising Depreciation Estimates 470
Bank Reconciliation 377
Repair and Improvements 471
Special-Purpose Cash Funds 381
Disposal of Fixed Assets 473
Financial Statement Reporting of Cash 382 Discarding Fixed Assets 473
Selling Fixed Assets 474
Days’ Cash on Hand 383 Natural Resources 475
Make a Decision 403 Intangible Assets 477
Patents 477
Take It Further 404 Copyrights and Trademarks 478
Pathways Challenge 383, 406 Goodwill 478
Financial Reporting for Long-Term Assets:
8
Fixed and Intangible 480
Receivables 408 Fixed Asset Turnover Ratio 481
Appendix Exchanging Similar Fixed Assets 483

Classification of Receivables 410 Gain on Exchange 483
Accounts Receivable 410 Loss on Exchange 484
Notes Receivable 410
Make a Decision 502
Other Receivables 411
Take It Further 503
Uncollectible Receivables 411
xviii Contents
10 Liabilities: Current, Reporting Bonds Payable 569

Installment Notes, and Analysis for Decision Making 570
Times Interest Earned 570
Contingencies 506
Appendix 1 Present Value Concepts and
Pricing Bonds Payable 572
Current Liabilities 508 Present Value Concepts 572
Accounts Payable and Accruals 508 Pricing Bonds 575
Short-Term Notes Payable 509 Computing Present Values 576
Current Portion of Long-Term Debt 511
Appendix 2 Effective Interest Rate Method
Payroll Liabilities 511
of Amortization 576
Liability for Employee Earnings 512
Amortization of Discount by the Interest Method 577
Deductions from Employee Earnings 512
Amortization of Premium by the Interest Method 578
Computing Employee Net Pay 513
Employer’s Payroll Taxes 514 Make a Decision 593
Recording Payroll 515
Paying Payroll 517
Take It Further 594
Internal Controls for Payroll 517 Pathways Challenge 568, 595
Employees’ Fringe Benefits 517
12 Corporations: Organization,
Vacation Pay 517
Pensions 518
Postretirement Benefits Other than Pensions 520 Stock Transactions, and
Installment Notes 520 Dividends 596
Issuance 520
Periodic Payments 520
Nature of a Corporation 598
Contingent Liabilities 523 Characteristics of a Corporation 598
Probable and Estimable 523 Forming a Corporation 599
Probable and Not Estimable 523
Reasonably Possible 524 Paid-In Capital from Stock 601
Remote 524 Characteristics of Stock 601
Types of Stock 602
Reporting Liabilities 526 Issuing Stock 604
Analysis for Decision Making 527 Premium on Stock 605
Short-Term Liquidity Analysis 527 No-Par Stock 606
Comprehensive Problem 3 547 Accounting for Dividends 607

Cash Dividends 608
Make a Decision 549 Stock Dividends 609
Take It Further 552 Stock Splits 611
Pathways Challenge 525, 554 Treasury Stock Transactions 612
11
Reporting Stockholders’ Equity 614
Liabilities: Bonds Stockholders’ Equity on the Balance Sheet 614
Payable 556 Reporting Retained Earnings 615
Statement of Stockholders’ Equity 617
Reporting Stockholders’ Equity for Alphabet 618
Nature of Bonds Payable 558 Analysis for Decision Making 619
Bond Characteristics and Terminology 558
Earnings per Share 619
Proceeds from Issuing Bonds 559
Comprehensive Problem 4 637
Accounting for Bonds Payable 561
Bonds Issued at Face Amount 561 Make a Decision 639
Bonds Issued at a Discount 562
Take It Further 640
Amortizing a Bond Discount 562
Bonds Issued at a Premium 564 Pathways Challenge 604, 643
Amortizing a Bond Premium 565
Bond Redemption 567
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the Emperor? Did the pagans attribute divine assistance to
Constantine throughout this critical campaign? The answer is
unmistakable. They did so most unequivocally. Nazarius tells us[52]
that all Gaul was talking with awe and wonder of the marvels which
had taken place, how the soldiers of Constantine had seen in the sky
celestial armies marching in battle array and had been dazzled by
their flashing shields and glittering armour. Not only had the dull eyes
of earthly men for once availed to look upon heavenly brightness;
Constantine’s soldiery had also heard the shouts of these armies in
the sky, “We seek Constantine; we are marching to the aid of
Constantine.”[53] Clearly the pagan as well as the Christian world
insisted upon attributing divine assistance to Constantine and had its
own version of how that succour came. Nazarius’s explanation was
simple. According to him, it was Constantius Chlorus, the deified
Emperor, who was leading up the hosts of heaven, and such
miraculous intervention was due to the supreme virtue of the father,
which had descended to the son.
The question at once arises whether this is merely a pagan
version of the Christian legend. Unable to deny the miracle, did the
pagans, in order to rob the Christians of this wonderful testimony to
the truth of their religion, invent the story of Constantius and the
heavenly hosts? Such a theory is absolutely untenable. It leaves out
of sight the all-important fact that public opinion in the fourth century
—as indeed for many centuries both before and after—was not only
willing to believe in supernatural intervention at moments of great
crisis, but actually insisted that there should be such intervention.
The greater the crisis, the more entirely reasonable it was that some
deity or deities should make their influence especially felt and turn
the scale to one side or the other. Every Roman believed that Castor
and Pollux had fought for Rome in the supreme struggle against
Hannibal. Julius believed that the favour of Venus Genetrix, the
special patroness of the Julian House, had helped him to win the
battle of Pharsalus. Augustus was just as certain that Apollo had
fought on his side at Philippi and at Actium. It was easy—and
modest—for the winner to believe in his protecting deity’s strength of
arm.
One curious phrase employed by Nazarius is worth noting. It is
that in which he claims that the special interference of Heaven on
behalf of Constantine was not merely an extraordinary and gratifying
tribute to the Emperor’s virtues, but that it was no more than his due.
In short, the crisis was so tremendous that Heaven would have stood
convicted of a strange failure to see events in their just proportion if it
had not done “some great thing,” and wrought some corresponding
wonder. Such was the idea at the back of Nazarius’s mind; we
suspect that it was not wanting in the mind of Eusebius or of
Constantine. We may put the matter paradoxically and say that a
miracle in those days was not much considered unless it was a very
great one. People who were accustomed to see—or to think that
they saw—statues sweating blood, and to hear words proceeding
from lips of bronze or marble, and were accustomed to treat such
untoward events merely as portents denoting that something
unusual was about to happen, must have been difficult people to
surprise. Naturally, therefore, legends grew more and more
marvellous with repetition after the event. The oftener a man told
such a story the less appeal it would make to his own wonder, unless
he fortified it with some new incident. But to impress one’s auditors it
is above all things necessary to be impressed oneself. Hence the
well-garnished narrative of Nazarius. The idea of armies marching
along the sky was common enough. Any one can imagine he sees
the glint of weapons as the sun strikes the clouds. But this does not
satisfy the professional rhetorician. He bids us see the proud look in
the faces of the heavenly hosts, and distinguish the cries with which
they move to battle. But if Nazarius is suspect, why not Eusebius
and Constantine? Unless, indeed, there is to be one standard for
pagan and another for Christian miracles!
But was there some unusual manifestation in the sky which was
the common basis of the stories of Eusebius and Nazarius? It is not
unreasonable to suppose so. Scientists say that the natural
phenomenon known as the parhelion not infrequently assumes the
shape of a cross, and Dean Stanley, while discussing this possible
explanation in his Lectures on the Eastern Church, instanced the
extraordinary impression made upon the minds of the vulgar by the
aurora borealis of November, 1848. He recalled how, throughout
France, the people thought they saw in the sky the letters L. N.—the
initials of Louis Napoleon—and took them as a clear indication from
Heaven of how they ought to vote at the impending Presidential
election, and as an omen of the result. That was the interpretation in
France. In Rome—where the people knew and cared nothing for
Louis Napoleon—no one saw the Napoleonic initials. The lurid gleam
in the sky was there thought to be the blood of the murdered Rossi,
which had risen to heaven and was calling for vengeance. In Oporto,
on the other hand, the conscience-stricken populace thought the fire
was coming down from heaven to punish them for their profligacy. If
such varying interpretations of a natural if rare phenomenon were
possible in the middle of the nineteenth century, what interpretation
was not possible in the fourth? The world was profoundly
superstitious. When people believe in manifest signs they usually
see them. Some Polonius, gifted either with better vision or livelier
imagination than his fellows, declares that he can distinguish clear
and definite shapes amid the vague outline of the clouds; the report
spreads; the legend grows. And when legends are found to serve a
useful purpose the authorities lend them countenance, guarantee
their accuracy, and even take to themselves the credit of their
authorship. At the outbreak of the Russo-Japanese war a strange
story came from St. Petersburg that the Russian moujiks were
passing on from village to village the legend that St. George had
been seen in the skies leading his hosts to the Far East against the
infidel Japanese. Had Russian victories followed, what better “proof”
of celestial aid could have been desired? But as disaster ensued, it
is to be supposed that St. George remembered midway that he also
had interests in the Anglo-Japanese alliance, and remained strictly
neutral.
But though we may be justly sceptical of the circumstances
attending the conversion of Constantine, there is no room to doubt
the conversion itself. We do not believe that he fought the battle of
the Milvian Bridge as the avowed champion of Christianity, but the
probabilities are that he had made up his mind to become a Christian
when he fought it. The miraculous vision in the heavens, the dream
in the quiet of the night, the appearance of Christ by the bedside of
the Emperor—as to these things we may keep an open mind, but the
fashioning of the Labarum—the sacred standard which was
preserved for so many centuries as the most precious of imperial
heirlooms and was seen and described as late as the ninth century
—this was the outward and visible proof of the change which had
come over the Emperor. He had abandoned Apollo for Christ. The
sun-god had been the favourite deity of his youth and early
manhood, as it had been of Augustus Cæsar, the founder of the
Empire, and the originator of the close association between the
worship of Apollo and the worship of the reigning Cæsar.
Constantine would not fail to note that many of the most gracious
attributes of Apollo belonged also to Christ.
He soon manifested the sincerity of his conversion. After a short
stay in Rome, he went north to Milan, where he gave the hand of his
sister, Constantia, to his ally, Licinius. Diocletian was invited, but
declined to make the journey. The two Emperors, no doubt, desired
to secure the prestige of his moral support in their mutual hostility to
the Emperor of the East, and the benefit of his counsel in their
deliberations upon the state of the Empire. But even if Diocletian had
been tempted to leave his cabbages to join in the marriage festivities
and the political conference at Milan, we imagine that he would still
have declined if he had been given any hint of the intentions of
Constantine and Licinius with respect to the great question of
religious toleration or persecution. He might have been candid
enough to admit the failure of his policy, but he would still have
shrunk from proclaiming it with his own lips. For, before the festivities
at Milan were interrupted by the news that Maximin had thrown down
the gage of battle, Constantine and Licinius issued in their joint
names the famous Edict of Milan, which proclaimed for the first time
in its absolute entirety the noble principle of complete religious
toleration. Despite their length, it will be well to give in full the more
important clauses. They are found in the text which has been happily
preserved by Lactantius[54] in the original Latin, while we also have
the edict in Greek in the Ecclesiastical History of Eusebius (x. 5). It
runs as follows:
“Inasmuch as we, Constantine Augustus and Licinius Augustus,

have met together at Milan on a joyful occasion, and have discussed
all that appertains to the public advantage and safety, we have come
to the conclusion that, among the steps likely to profit the majority of
mankind and demanding immediate attention, nothing is more
necessary than to regulate the worship of the Divinity.
“We have decided, therefore, to grant both to the Christians and to
all others perfect freedom to practise the religion which each has
thought best for himself, that so whatever Divinity resides in heaven
may be placated, and rendered propitious to us and to all who have
been placed under our authority. Consequently, we have thought this
to be the policy demanded alike by healthy and sound reason—that
no one, on any pretext whatever, should be denied freedom to
choose his religion, whether he prefers the Christian religion or any
other that seems most suited to him, in order that the Supreme
Divinity, whose observance we obey with free minds, may in all
things vouchsafe to us its usual favours and benevolences.
“Wherefore, it is expedient for your Excellency to know that we
have resolved to abolish every one of the stipulations contained in all
previous edicts sent to you with respect to the Christians, on the
ground that they now seem to us to be unjust and alien from the
spirit of our clemency.
“Henceforth, in perfect and absolute freedom, each and every
person who chooses to belong to and practise the Christian religion
shall be at liberty to do so without let or hindrance in any shape or
form.
“We have thought it best to explain this to your Excellency in the
fullest possible manner that you may know that we have accorded to
these same Christians a free and absolutely unrestricted right to
practise their own religion.
“And inasmuch as you see that we have granted this indulgence to
the Christians, your Excellency will understand that a similarly free
and unrestricted right, conformable to the peace of our times, is
granted to all others equally to practise the religion of their choice.
We have resolved upon this course that no one and no religion may
seem to be robbed of the honour that is their due.”
Then follow the most explicit instructions for the restoration to the
Christians of the properties of which they had been robbed during
the persecutions, though the robbery had been committed in
accordance with imperial command. Whether a property had been
simply confiscated, or sold, or given away, it was to be handed back
without the slightest cost and without any delays or ambiguities
(Postposita omni frustratione atque ambiguitate). Purchasers who
had bought such properties in good faith were to be indemnified from
the public treasury by grace of the Emperor.
But the abiding interest of this celebrated edict lies in the general
principles there clearly enunciated. Every man, without distinction of
rank or nationality, is to have absolute freedom to choose and
practise the religion which he deems most suited to his needs
(Libera atque absoluta colendæ religionis suæ facultas). The phrase
is repeated with almost wearisome iteration, but the principle was
novel and strange, and one can see the anxiety of the framers of this
edict that there shall be no possible loophole for misunderstanding.
Everybody is to have free choice; all previous anti-Christian
enactments are annulled; not only is no compulsion to be employed
against the Christian, he is not even to be troubled or annoyed (Citra
ullam inquietudinem ac molestiam). The novelty lay not so much in
the toleration of the existence of Christianity,—both Constantine and
Licinius had two years before signed the edict whereby Galerius put
an end to the persecution,—but in its formal official recognition by
the State.
What motives, then, are assigned by the Emperors for this notable
change of policy? Certainly not humanity. Nothing is said of the
terrors of the late persecutions and the horrible sufferings of the
Christians—there is merely a bald reference to previous edicts which
the Emperors consider “unjust and alien from the spirit of our
clemency” (Sinistra et a nostra clementia aliena esse). There is no
appeal to political necessity, such as the exhaustion of the world and
its palpable need of rest. The motives assigned are purely religious.
The Emperors proclaim religious toleration in order that they and
their subjects may continue to receive the blessings of Heaven. One
of them at least had just emerged victoriously from the manifold
hazards of an invasion of Italy. Surely we can trace a reference to
the battle of the Milvian Bridge and the overthrow of Maxentius in the
mention of “the Divine favour towards us, which we have
experienced in affairs of the highest moment” (Divinus juxta nos
favor quem in tantis sumus rebus experti). What Constantine and
Licinius hope to secure is a continuance of the favour and
benevolence of the Supreme Divinity, the patronage of the ruling
powers of the sky. The phraseology is important. The name of God is
not mentioned—only the vague “Summa Divinitas,“ ”Divinus favor,”
and the still more curious and non-committal phrase, “Quicquid est
Divinitatis in sede cœlesti.” In Eusebius the same phrase appears in
a form still more nebulous (ὅτι ποτέ ἐστι θειότης καὶ οὐρανίου
πράγματος). A pagan philosopher, more than half sceptical as to the
existence of a personal God, might well employ such language, but it
reads strangely in an official edict.
But then this edict was to bear the joint names of Constantine and
Licinius. Constantine might be a Christian, but Licinius was still a
pagan, and Licinius was not his vassal, but his equal. He would
certainly not have been prepared to set his name to an edict which
pledged him to personal adherence to the Christian faith.
Constantine, in the flush of triumph, would insist that the persecution
of the Christians should cease, and that the Christian religion should
be officially recognised. Licinius would raise no objection. But they
would speedily find, when it came to drafting a joint edict, that the
only religious ground common to them both was very limited in
extent, and that the only way to preserve a semblance of unity was
to employ the vaguest phraseology which each might interpret in his
own fashion. If we can imagine the Pope and the Caliph drafting a
joint appeal to mankind which necessitated the mention of the Higher
Power, they would find themselves driven to use words as cloudy
and indistinct as the “Whatever Divinity there is and heavenly
substance” of Eusebius. No, it was not that Constantine’s mind was
in the transitional stage; it was rather that he had to find a common
platform for himself and Licinius.
But to have converted Licinius at all to an official recognition of the
Christians and complete toleration was a great achievement, for the
principle, as we have said, was entirely new. M. Gaston Boissier, in
discussing this point, recalls how even the broad-minded Plato had
found no place in his ideal republic for those who disbelieved in the
gods of their fatherland and of the city of their birth. Even if they kept
their opinions to themselves and did not seek to disturb the faith of
others, Plato insisted upon their being placed in a House of
Correction—it is true he calls it a Sophronisterion, or House of
Wisdom—for five years, where they were to listen to a sermon every
day; while, if they were zealous propagandists of their pernicious
doctrines, he proposed to keep them all their lives in horrible
dungeons and deny their bodies after death the right of sepulture.
How, one wonders, would Socrates have fared in such a state? No
better, we fancy, than he fared in his own city of Athens. But,
throughout antiquity, every lawgiver took the same view, that a good
citizen must accept without question the gods of his native place who
had been the gods of his fathers; and it was a simple step from that
position to the stern refusal to allow a man, in the vigorous words of
the Old Testament, to go a-whoring after other gods. “For I, thy God,
am a jealous God.” The God of the Jews was not more jealous than
the gods of the Assyrians, the Egyptians, the Greeks, or the Romans
would like to have been, had they had the same power of concise
expression.
What was the theory of the State religion in Rome? Cicero tells us
in a well-known passage in his treatise On the Laws, where he
quotes the ancient formula, “Let no man have separate gods of his
own: nor let people privately worship new gods or alien gods, unless
they have been publicly admitted.”[55] Nothing could be more explicit.
But theory and practice in Rome had a habit of becoming divorced
from one another. It is a notorious fact that, as Rome’s conquering
eagles flew farther afield, the legions and the merchants who
followed in their track brought all manner of strange gods back to the
city, where every wandering Chaldæan thaumaturgist, magician, or
soothsayer found welcome and profit, and every stray goddess—
especially if her rites had mysteries attached to them—received a
comfortable home. In a word, Rome found new religions just as
fascinating—for a season or two—as do the capitals of the modern
world, and these new religions were certainly not “publicly admitted”
by the Pontifex Maximus and the representatives of the State
religion. Occasionally, usually after some outbreak of pestilence or
because an Emperor was nervous at the presence of so many
swarthy charlatans devoting themselves to the Black Arts, an order
of expulsion would be issued and there would be a fluttering of the
dove-cotes. But they came creeping back one by one, as the storm
blew over. While, therefore, in theory the gods of Rome were
jealous, in practice they were not so. The easy scepticism or
eclecticism of the cultured Roman was conducive to tolerance.
Cicero’s famous sentence in the Pro Flacco, “Each state has its own
religion, Lælius: we have ours,” shews how little of the religious
fanatic there was in the average Roman, who stole the gods of the
people he conquered and made them his own, so that they might
acquiesce in the Roman domination. The Roman was tolerant
enough in private life towards other people’s religious convictions: all
he asked was reciprocity, and that was precisely what the Christian
would not and could not give him. If the Christian would have
sacrificed at the altars of the State gods, the Roman would never
have objected to his worship of Christ for his own private
satisfaction. There lies the secret of the persecutions, and of the
fierce anti-Christian hatreds.
Constantine and Licinius, by their edict of recognition and
toleration, “publicly admitted” into the Roman worship the God of the
Christians.
CHAPTER VII
THE DOWNFALL OF LICINIUS
It will be convenient in this chapter to present a connected

narrative of the course of political events from the Edict of Milan in
313 down to the overthrow of Licinius by Constantine in 324. We
have seen that Maximin Daza never moved a single soldier to help
his ally, Maxentius, during Constantine’s invasion of Italy, though he
soon gave practical proof that his hostility had not abated by
invading the territory of Licinius. The attack was clearly not expected.
Licinius was still at Milan, and his troops had probably been drawn
off into winter quarters, when the news came that Maximin had
collected a powerful army in Syria, had marched through to Bithynia
regardless of the sufferings of his legions and the havoc caused in
the ranks by the severity of the season, and had succeeded in
crossing the Bosphorus. Apparently, Maximin was besieging
Byzantium before Licinius was ready to move from Italy to confront
him.
Byzantium capitulated after a siege of eleven days and Heraclea
did not offer a prolonged resistance. By this time, however, Licinius
was getting within touch of the invader and preparations were made
on both sides for a pitched battle. The numbers of Licinius’s army
were scarcely half those of his rival, but Maximin was completely
routed on a plain called Serenus, near the city of Adrianople, and
fled for his life, leaving his broken battalions to shift for themselves.
Lactantius, in describing the engagement,[56] represents it as having
been a duel to the death between Christianity and paganism. He
says that Maximin had vowed to eradicate the very name of the
Christians if Jupiter favoured his arms; while Licinius had been
warned by an angel of God in a dream that, if he wished to make
infallibly sure of victory, he and his army had only to recite a prayer
to Almighty God which the angel would dictate to him. Licinius at
once sent for a secretary and the prayer was taken down. It ran as
follows:
“God most High, we call upon Thee; Holy God, we call upon Thee.
We commend to Thee all justice; we commend to Thee our safety;
we commend to Thee our sovereignty. Through Thee we live;
through Thee we gain victory and happiness. Most High and Holy
God, hear our prayers. We stretch out our arms to Thee. Hear us,
Most High and Holy God.”
Such was the talismanic prayer of which the Emperor’s secretary

made hurried copies, distributing them to the general officers and the
tribunes of the legions, with instructions that the troops were at once
to get the words off by heart. When the armies moved against one
another in battle array, the legions of Licinius at a given signal laid
down their shields, removed their helmets, and, lifting their hands to
heaven, recited in unison these rhythmic sentences with their
strangely effective repetitions. Lactantius tells us that the murmur of
the prayer was borne upon the ears of the doomed army of the
enemy. Then, after a brief colloquy between the rivals, in which
Maximin refused to offer or agree to any concession, because he
believed that the soldiers of Licinius would come over to him in a
body, the armies charged and the standard of Maximin went down.
It is a striking story, and we may easily understand that Licinius,
fresh from his meeting with Constantine and with vivid recollection of
how valiantly this Summus Deus had fought for his ally against
Maxentius, would be ready to believe beforehand in the efficacy of
any supernatural warning conveyed by any supernatural “minister of
grace.” We may note, too, the splendid vagueness of the Deity
invoked in the prayer. Lactantius, of course, claims that this Most
High and Holy God is none other than the God of the Christians, but
there was nothing to prevent the votary of Jupiter, of Apollo, of
Mithra, of Baal, or of Balenus, from thinking that he was imploring
the aid of his own familiar deity.
Maximin fled from the scene of carnage as though he had been
pursued by all the Cabiri. Throwing aside his purple and assuming
the garb of a slave—it is Lactantius, however, who is speaking—he
crossed the Bosphorus, and, within twenty-four hours of quitting the
field, reached once more the palace of Nicomedia—a distance of a
hundred and sixty miles. Taking his wife and children with him, he
hurried through the defiles of the Taurus, summoned to his side
whatever troops he had left behind in Syria and Egypt, and awaited
the oncoming of Licinius, who followed at leisure in his tracks. The
end was not long delayed. Maximin’s soldiers regarded his cause as
lost, and despairing of clemency, he took his own life at Tarsus. His
provinces passed without a struggle into the hands of Licinius, who
butchered every surviving member of Maximin’s family.
Nor had the victor pity even for two ladies of imperial rank, whose
misfortunes and sufferings excited the deepest compassion in that
stony-hearted age. These were Prisca, the wife of Diocletian, and
her daughter Valeria, the widow of the Emperor Galerius. On his
death-bed Galerius had entrusted his wife to the care and the
gratitude of Maximin, whom he had raised from obscurity to a throne.
Maximin repaid his confidence by pressing Valeria to marry him and
offering to divorce his own wife. Valeria returned an indignant and
high-spirited refusal. She would never think of marriage, she said,[57]
while still wearing mourning for a husband whose ashes were not yet
cold. It was monstrous that Maximin should seek to divorce a faithful
wife, and, even if she assented to his proposal, she had clear
warning of what was likely to be her own fate. Finally, it was not
becoming that the daughter of Diocletian and the widow of Galerius
should stoop to a second marriage. Maximin took a bitter revenge.
He reduced Valeria to penury, marked down all her friends for ruin,
and finally drove her into exile with her mother, Prisca, who nobly
shared the sufferings of the daughter whom she could not shield.
Lactantius tells us that the two imperial ladies wandered miserably
through the Syrian wastes, while Maximin took delight in spurning
the overtures of the aged Diocletian, who sent repeated messages
begging that his daughter might be allowed to go and live with him at
Salona. Maximin refused even when Diocletian sent one of his
relatives to remind him of past benefits, and the two unfortunate
ladies knew no alleviation of their troubles. When the tyrant fell, they
probably thought that the implacable hatred with which Maximin had
pursued them would be their best recommendation to the favour of
Licinius. Again, however, they were disappointed, for Licinius, in his
jealous anxiety to spare no one connected with the families of his
predecessors in the purple, ordered the execution of Candidianus, a
natural son of Galerius, who had been brought up by Valeria as her
own child. In despair, therefore, the two ladies, who had boldly gone
to Nicomedia, fled from the scene and “wandered for fifteen months,
disguised as plebeians, through various provinces,”[58] until they had
the misfortune to be recognised at Thessalonica. They were at once
beheaded and their bodies thrown into the sea, amid the pitying
sympathy of a vast throng which dared not lift a hand to save them.
Constantine and Licinius now shared between them the whole of
the Roman Empire. They were allies, but their alliance did not long
stand the strain of their respective ambitions. Each had won an easy
victory over his antagonist, and each was confident that his legions
would suffice to win him undivided empire. We know very little of the
pretexts assigned for the quarrel which culminated in the war of 316.
Zosimus throws the blame upon Constantine, whom he accuses of
not keeping faith and of trying to filch from Licinius some of his
provinces. But as the sympathies of Zosimus were strongly pagan
and as he invariably imputed the worst possible motive to
Constantine, it is fairest and most reasonable to suppose that the
two Emperors simply quarrelled over the division of the Empire.
Constantine had given the hand of his half-sister Anastasia to one of
his generals, named Bassianus, whom he had raised to the dignity of
a Cæsar. But for some reason left unexplained—possibly because
Constantine granted only the title, without the legions and the
provinces, of a Cæsar—Bassianus became discontented with his
position and entered into an intrigue with Licinius. Constantine
discovered the plot, put Bassianus to death, and demanded from
Licinius the surrender of Senecio, a brother of the victim and a
relative of Licinius. The demand was refused; some statues of
Constantine were demolished by Licinius’s orders at Æmona
(Laybach) and war ensued.
The armies met in the autumn of 316 near Cibalis, in Pannonia,
between the rivers Drave and Save. Neither Emperor led into the
field anything approaching the full strength he was able to muster;
Licinius is said to have had only 35,000 men and Constantine no
more than 20,000. From Zosimus’s highly rhetorical account of the
battle[59] we gather that Constantine chose a position between a
steep hill and an impassable morass, and repulsed the charge of the
legions of Licinius. Then as he advanced into the plain in pursuit of
the enemy, he was checked by some fresh troops which Licinius
brought up, and a long and stubborn contest lasted until nightfall,
when Constantine decided the fortunes of the day by an irresistible
charge. Licinius is said to have lost 20,000 men in this encounter,
more than fifty per cent. of his entire force, and he beat a hurried
retreat, leaving his camp to be plundered by the victor, whose own
losses must also have been severe.
A few weeks later the battle was renewed on the plain of Mardia in
Thrace. Licinius had evidently been strongly reinforced from Asia,
for, though he was again defeated after a hotly contested battle, he
was able to effect an orderly retreat and draw off his beaten troops
without disorder—a rare thing in the annals of Roman warfare,
where defeat usually involved destruction. Constantine is said to
have owed his victory to his superior generalship and to the skill with
which he timed a surprise attack of five thousand of his men upon
the rear of the enemy. Yet we may be certain that he would not have
consented to treat with Licinius for peace had he not had
considerable cause for anxiety about the final issue of the campaign.
However, his two victories, while not sufficiently decisive to enable
him to dictate any terms he chose, at least gave him the authoritative
word in the negotiations which ensued, and sealed the doom of the
unfortunate Valens, whom Licinius had just appointed Cæsar. When
Licinius’s envoy spoke of his two imperial masters, Licinius and
Valens, Constantine retorted that he recognised but one, and bluntly
stated that he had not endured tedious marches and won a
succession of victories, only to share the prize with a contemptible
slave. Licinius sacrificed his lieutenant without compunction and
consented to hand over to Constantine Illyria and its legions, with the
important provinces of Pannonia, Dalmatia, Moesia, and Dacia. The
only foothold left him on the Continent of Europe, out of all that had
previously been included in the eastern half of the Empire, was the
province of Thrace.
At the same time, the two Emperors agreed to elevate their sons
to the rank of Cæsar. Constantine bestowed the dignity upon
Crispus, the son of his first marriage with Minervina. Crispus was
now in the promise of early manhood, and had proved his valour,
and won his spurs in the recent campaign. Licinius gave the title to
his son Licinianus, an infant no more than twenty months old. These
appointments are important, for they shew how completely the
system of Diocletian had broken down. The Emperors appointed
Cæsars out of deference to the letter of that constitution, but they
outrageously violated its spirit by appointing their own sons, and
when the choice fell on an infant, insult was added to injury. It was
plain warning to all the world that Constantine and Licinius meant to
keep power in their own hands. When, a few years later, three sons
were born to Constantine and Fausta in quick succession, the eldest,
who was given the name of his father, was created Cæsar shortly
after his birth. No doubt the Empress—herself an Emperor’s
daughter—demanded that her son should enjoy equal rank with the
son of the low-born Minervina, and the probabilities are that
Constantine already looked forward to providing the young Princes
with patrimonies carved out of the territory of Licinius. However,
there was no actual rupture between the two Emperors until 323,
though relations had long been strained.
We know comparatively little of what took place in the intervening
years. They were not, however, years of unbroken peace. There was
fighting both on the Danube and the Rhine. The Goths and the
Sarmatæ, who had been taught such a severe lesson by Claudius
and Aurelian that they had left the Danubian frontier undisturbed for
half a century, again surged forward and swept over Moesia and
Pannonia. We hear of several hard-fought battles along the course
of the river, and then, when Constantine, at the head of his legions,
had driven out the invader, he himself crossed the Danube and
compelled the barbarians to assent to a peace whereby they
pledged themselves to supply the Roman armies, when required,
with forty thousand auxiliaries. The details of this campaign are
exceedingly obscure and untrustworthy. The Panegyrists of the
Emperor claimed that he had repeated the triumphs of Trajan.
Constantine himself is represented by the mocking Julian as
boasting that he was a greater general than Trajan, because it is a
finer thing to win back what you have lost than to conquer something
which was not yours before. The probabilities are that there took
place one of those alarming barbarian movements from which the
Roman Empire was never long secure, that Constantine beat it back
successfully, and gained victories which were decisive enough at the
moment, but in which there was no real finality, because no finality
was possible. Probably it was the seriousness of these Gothic and
Sarmatian campaigns which was chiefly responsible for the years of
peace between Constantine and Licinius. Until the barbarian danger
had been repelled, Constantine was perforce obliged to remain on
tolerable terms with the Emperor of the East.
While the father was thus engaged on the Danube, the son was
similarly employed on the Rhine. The young Cæsar, Crispus, already
entrusted with the administration of Gaul and Britain and the
command of the Rhine legions, won a victory over the Alemanni in a
winter campaign and distinguished himself by the skill and rapidity
with which he executed a long forced march despite the icy rigours
of a severe season. It is Nazarius, the Panegyrist, who refers[60] in
glowing sentences to this admirable performance—carried through,
he says, with “incredibly youthful verve” (incredibili juvenilitate
confecit),—and praises Crispus to the skies as “the most noble
Cæsar of his august father.” When that speech was delivered on the
day of the Quinquennalia of the Cæsars in 321, Constantine’s ears
did not yet grudge to listen to the eulogies of his gallant son.
But there is one omission from the speech which is exceedingly
significant. It contains no mention of Licinius, and no one reading the
oration would gather that there were two Emperors or that the
Empire was divided. Evidently, Constantine and Licinius were no
longer on good terms, and none knew better than the Panegyrists of
the Court the art of suppressing the slightest word or reference that
might bring a frown to the brow of their imperial auditor. But even two
years before, in 319, the names of Licinius and the boy, Cæsar
Licinianus, had ceased to figure on the consular Fasti—a straw
which pointed very clearly in which direction the wind was blowing.
Zosimus attributes the war to the ambition of Constantine;
Eutropius roundly accuses[61] him of having set his heart upon
acquiring the sovereignty of the whole world. On the other hand,
Eusebius[62] depicts Constantine as a magnanimous monarch, the
very pattern of humanity, long suffering of injury, and forgiving to the
point of seventy times seven the ungrateful intrigues of the black-
hearted Licinius. According to the Bishop of Cæsarea, Constantine
had been the benefactor of Licinius, who, conscious of his inferiority,
plotted in secret until he was driven into open enmity. But it is very
evident that the reason of Eusebius’s enmity to Licinius was the anti-
Christian policy into which the Emperor had drifted, as soon as he
became estranged from Constantine. A more detailed description of
Licinius’s religious policy and of the new persecution which broke out
in his provinces will be found in another chapter; here we need only
point out Eusebius’s anxiety to represent the cause of the quarrel
between the Emperors as being in the main a religious one. He tells
us[63] that Licinius regarded as traitors to himself those who were
friendly to his rival, and savagely attacked the bishops, who, as he
judged, were his most bitter opponents. The phrase, not without
reason, has given rise to the suspicion that the Christian bishops of
the East were regarded as head centres of political disaffection, and
Licinius evidently suspected them of preaching treason and acting as
the agents of Constantine. We have not sufficient data to enable us
to draw any sure inference, but the bishops could not help
contrasting the liberality of Constantine to the Church, of which he
was the open champion, with the reactionary policy of Licinius, which
had at length culminated in active persecution.
THE WESTERN SIDE OF A PEDESTAL, SHOWING THE HOMAGE
OF THE VANQUISHED GOTHS.
FROM GROSVENOR’S “CONSTANTINOPLE.”
But the dominant cause of this war is to be found in political

ambitions rather than in religious passions, and if we must declare
who of the two was the aggressor, it is difficult to escape throwing
the blame upon Constantine. Licinius was advancing in years. Even
if he had not outlived his ambitions, he can at least have had little
taste for a campaign in which he put all to the venture. Constantine,
on the other hand, was in the prime of life, and the master of a well
tried, disciplined, and victorious army. The odds were on his side. He
had all the legions which could be spared from the Rhine and the
Danube, and all the auxiliaries from the Illyrian and Pannonian
provinces—the best recruiting grounds in the Empire—to oppose to
the legions of Syria and Egypt. Constantine doubtless seemed to the
bishops to be entering the field as the champion of the Church, but
the real prize which drew him on was universal dominion.
This time both Emperors exerted themselves to make tremendous
preparations for the struggle. Zosimus describes how Constantine
began a new naval harbour at Thessalonica to accommodate the
two hundred war galleys and two thousand transports which he had
ordered to be built in his dock-yards. He mobilised, if Zosimus is to
be trusted, 120,000 infantry and 10,000 marines and cavalry.
Licinius, on the other hand, is said to have collected 150,000 foot
and 15,000 horse. Whether these numbers are trustworthy or not, it
is evident that the two Emperors did their best to throw every
available man into the plain of Adrianople, where the two hosts were
separated by the river Hebrus. Some days were spent in skirmishing
and manœuvring; then on July 3, 323, a decisive action was brought
on, which ended in the rout of the army of Licinius. Constantine,
whose tactical dispositions seem to have been more skilful than
those of Licinius, secretly detached a force of 5000 archers to
occupy a position in the rear of the enemy, and these used their
bows with overwhelming effect at a critical moment of the action,
when Constantine himself, at the head of another detachment,
succeeded in forcing a passage of the river. Constantine received a
slight wound in the thigh, but he had the satisfaction of seeing the
enemy driven from their fortified camp and betake themselves in
hurried flight to the sheltering walls of Byzantium, leaving 34,000
dead and wounded on the field of battle.
Byzantium was a stronghold which had fallen before Maximin after
a siege of eleven days, but we may suppose that Licinius had looked
well to its fortifications with a view to such an emergency as that in
which he now found himself. He placed, however, his chief reliance
in his fleet, which was nearly twice as numerous as that of
Constantine. Licinius had assembled 350 ships of war, levied, in
accordance with the practice of Rome, from the maritime countries of
Asia and Egypt. No fewer than 130 came from Egypt and Libya, 110
from Phœnicia and Cyprus, and a similar quota from the ports of
Cilicia, Ionia, and Bithynia. The galleys were probably in good
fighting trim, but the service was not a willing one, and the fleet was
as badly handled as it was badly stationed. Amandus, the admiral of
Licinius, had kept his ships cooped up in the narrow Hellespont, thus
acting weakly on the defensive instead of boldly seeking out the
enemy. Constantine entrusted the chief command of his various
squadrons to his son Crispus, whose only experience of naval

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Roadmap for Success

The account receivable was paid in cash

Using Data Analytics

Take It Further Data Analytic Cases

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Journal Entries with T Accounts

Assets 5 Liabilities 1 Stockholders’ Equity

Discarding of fully depreciated equipment.

Accumulated Depreciation—Equipment 4,800

Assets 5 Liabilities 1 Stockholders’ Equity

The preceding presentation has the following pedagogical advantages:

Why Accrual Accounting is Required

Cash Basis of Accounting

Unadjusted Adjusting Adjusted

AS S ETS = L IABIL ITIES + STOCKHOL DER S ' E Q U IT Y

Unadjusted Trial Balance

Retail Businesses Fixed and Intangible

STATEMENT OF STATEMENT OF CASH FLOWS

Link to Opening Company

Business Insight Inventory . Estimated

Chapter 9 Long-Term Assets: Fixed and Intangible 493

Check Up Corner 9-2 Selling Fixed Assets

Note to Financial Statements:

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

Alaska Air Group Delta Air Lines Southwest Airlines

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

Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2

Continuing Problem 105

Generally Accepted Accounting

Double-Entry Accounting System 64

Accounting Cycle 177 The Adjusting Process 261

Make a Decision 450

Financial Reporting for Long-Term Assets:

Appendix Exchanging Similar Fixed Assets 483

10 Liabilities: Current, Reporting Bonds Payable 569

Comprehensive Problem 3 547 Accounting for Dividends 607

“Inasmuch as we, Constantine Augustus and Licinius Augustus,

It will be convenient in this chapter to present a connected

Such was the talismanic prayer of which the Emperor’s secretary

10 Liabilities: Current, Reporting Bonds Payable 569