TITLE : FINANCIAL ACCOUNTING. 3RD ED.

Preface

The environment of accounting is changing fast and these environmental changes, such as continued inflation and the critical financial problems of many cities effect the goals and the content of an introductory text in accounting. In order to function intergently as a citizen as well as in a business of any size or type, every individual needs more than ever before a clear understanding of basic accounting concepts. In this third edition, we have tried to reflect the impact of inflation on accounting measurements and to suggest the direction of needed changes accounting concepts and methods. The importance of adequate disclosure in the system of financial reporting is stressed, and attention is drawn to the need for improved accounting controls in all sectors of society. We have emphasized the responsibility of the modern corporation to do an adequate job of financial reporting to investors and others outside the corporate enfity. However, management's internal use of accounting data is by no means neglected.

This third edition of financial accounting is designed as a one-semester introducton to accounting. It is suitable for courses of three to four semester-hours' credit or in the case of schools on the quarter system, for courses of four to six quarter-hours' credit In these courses, instructors often recognize three general groups of students: those who stand at the threshold of preparation for a career in accounting, Mudents of business adminitration who need a good understanding of accounting as an important element of the total business information system, and students from a variety of other disciplines who will find the ability to use and interpret accounting information a valuable accomplishment.. During the process of revision on we have tried to keep in mind the needs and interests of all three groups.

A new edition provides authors with an opportunity to add new material to condense the coverage of topics that have declined in relative importance, to reorganize portions of the book to improve instructional effciency,, and to refine and polish the treatment of basic subject matter.. We have tried to do all these things in this third edition.. New features of this edition

Among the many new features of this edition are:

1 A glossary at the end of each chapter with concise explanations of key terms introduced or emphasized in that chaptem

2 An increase of over 306 in the number of questions,, exercises,, and problems throughout the book.

3 A discussion of the impact of inflation on the measurement of profits,, on inventories, and on plant and equipment.

4 The concept of present value, presented in clear understandable terms, integrated into discussions of the valuation of assets and liabilities.

s People-oriented problems which depict the hard decisions that must be made by men and women acting as managerS investors,, and in other roles.

6 Increased attention to perpetual inventory systems.

7 Increased emphasis on internal control-how a business can strengthen its system of internal control.

Evaluation of corporate profits.. Are they adequate? Are they rea- sonable?? What are the appropriate yardsticks??

New emphasis on replacement cost and the implled move from historical cost to current-value accounting.

t0 Careful integration into the text and problems of the pronounce- ments of the Financial Accounting Standards Board.

Attention to the increased activity of the SEC in establishing ac- counting standards.

12 An examination booklet with test material arranged chapter by chapter for the entire text

13 Improved format for supplementary materials. Partially filled--in working papers and practice sets appear in a new improved format, with wider rulings and printed in color. Features carried forward from prior editions

Special qualities that are carried forward from prior editions include: 1 The only introductory accounting book that is part of an integrated series of introductory, intermediate, and advanced accounting text- books with confinuity of authorship. This established series concept provides assurance that students finishing the introductory course will be prepared to move readily into intermediate accounting without gaps or unnecessary overlaps..

2 Respect for the needs of the student. Topics are covered in a depth which will qualift the student for subsequent course work in ac- mumi.

3 Provocative problems that raise a variety of interesting questions and carry the student far beyond routine drill.

4 Problem material developed and tested firsthand by the authors in their own classes for introductory accounting students.

A good blend of (a) the theoretical and conceptual aspects of ac- counting and (b) the realities of applying these concepts to everyday practical business situations.

New and extensively revised chapters

Chapter 5, ""Merchandising Transactions and Internal ControFH con- tains much new materiaL It explains the purpose and nature of internal control and illustrates the methods of achieving good internal control Also discussed is the Foreign Corrupt Pracfices Act of 1977, which makes an adequate system of internal control legally mandatory. Chapter 8, deaSng with such topics as earnings per share, extraordS nary Rems, and diconEnued operatons, is extensively revised to emphasize the interpretation of this information by users of Enancial statements. The concepts of primary and fuUy diluted earnings per share are Hlustrated and discussed in clear understandable terms. Chapter 9 is updMed to rdled the na posRion of the RSB with respect to the valuation of marketable equity securRies. Alternative valuaton models, including the use of market prices and the equity method, also are Mustrated and discussed. Chapter 10, "Receivables and PayablesS' includes a dScussion of the concept of present value in terms that students Wm End readny understandable. Chapter 11, on the subject of inventories, contains much new material on the impact of infaton upon tte measurement of cost of goods sold and the valuafon of inventories. The topig of inventory profRs is related to recent official pronouncements pointng to the need for consideKng replacement costs when measuHng the proft reaHzed on sabs tansadions. Chap- ter 12, covering plant assets, presents the problems arising from an envkonment of inEation. Attenfon k focused on the rules issued by the SEC requidng large corporatons to diclose the replacement cost of Nant and equipment and to show what deprecitin wout amount to computed on a replacement cost bask. Chapter 13, on the subiect of long-term Aabifes, includes new up-to-date coverage of leases. Am- ortzaton of bond premium and discount is iHustrated using both the straightJine and effective interest methods, and problem material is suppHed covering both methods. Chapter 14, "Accounfing Principles/' puS together the theoretcal concepts covered in preceding chapters and gSes further attention to the problems created by rising prices. The dramatic change in the posRion of many of the large internatonal CPA Frms which are now advocahng current-value accounUng as the wave of the future is related to the increasingly active role of the SEC. Chapter 16, "Analysis and Interpretation of Financial Statements," invRes students to use the accounting expeNise they have acquired to evaluate the adequacy or inadequacy of corporate profts in relaton to sales volume, to total assets of the fkm, to invested capitat and to other yardstcks. The last chapter, "Income Taxes and Business DecikonsS' k extensSely revied to include the many recent changes in tax law aXecting both individuals and corporatons. Increased emphasis b gSen to tax planning and the impact of taxes upon business decSions.

Supplementary materials

A fuH assortment of supplementary materials accompanies this text >A set of four Achbwement osts and a Comprehensw BamAaNon. Each test covers three or four chapters; the ComprehensSe Exami- naton covers the enf re text and may be used as a Snal examinaton.

2 an vamAafion booMet With an abundance of test questons and exerckes arranged chapter by chapter for the entre text thb exam- lnaton booklet win be a most useful source for instructors who prefer to assemble thek own examinatons. The quesfons in thk book are pCnted M an 8 x 11 format on one Mde of a page. They can be torn out and copied to prepare indivBual examinafons.

S A seDSstudy guSde. WrRten by the authors of the textbook, the ssdy t Gulde enables students to measure their progress by immediate feedback. This self-study guide includes an outline of the most important poink in each chaptet an abundance of objecfive ques- tons, and several short exercies for each chapten In the back of the seW-study guide are answers to questons and solufions to exercbes to help students evaluate their understanding of the suWect. The seW-study guide win also be useful in classroom dicussions and for review by students before examinatons.

4 nbXWhg payen. A soft-cover book of parNaFy #Steduin woWng paye for the problem material is published separately from the text. On these work sheets, the problem headings and some preHminary data have been entered to save students much of the mechanical pen- cU-pushing inherent in problem assignments. All the working papers are in a new improved format featuHng wider money columns and the use of color

s PracUceseL The prachce set avaHable wRh the preceding edRion has been completeW revied and appears in convenient bound form wAh improved format R b designed for use aQer covering the frst gx chapters of the book.

s CheckAktoftey figunes ArpnobAuns Thb Ibt appean on the fn>M and back inside covers of this book. The purpose of the checklist is to aid students in verWying their problem solutions and in discovering their own errors.

7 >nsparencSes ofpnoblem soduNons. This is a visual aid prepared by the publisher for the instructor who wishes to display in a classroom the complete solutions to problems.

In the development of problem material for this book, special aUention has been given to the inclusion of problems of varying length and diticulty. By referring to the Eme estimates, dificulty ratngs, and problem descripfions in the 0BuNons Manuat instructors n m pmSms M _m e -,m>, d em>_ a the course they are offering.

8 AddiNona banspanencies br cSssnoom SHuskaNons. Sixteen special bansparencies have been produced for use in the classroom to illustrate such concepts as closing entries, the preparation of a work sheet, and the use of special journals, subsidiary ledgers, and con- trolling accounts. These transparencies contain original material and do not duplicate illustrations contained in the text.

9 A booklet of learning objecVves. This brief statement of learning ob- jectives for each chapter is designed to focus the student's attention on key principles and procedures. A clear understanding of these points will be especially helpful in directing attention to the most fundamental concepts in each chapter.

Contributions by others

We want to express our sincere thanks to the many users of preceding editions who offered helpful suggestions for this edition. Especially helpful was the advice received from Professors Larry P. Bailey, Temple University; Francis A. Bird, University of Richmond; Harold L. Cannon, State University of New York; Victoria L. Carvey, Indiana University; Harold Cook, Central Michigan University; Larry Godwin, Oregon State University; William C. Lins, Rutgers University; Frank C. Lordi, Widener College; Lawrence H. Malchman, Northeastern University; G. Kenneth Nelson, Pennsylvania State University; Richard A. Samuelson, San Diego State University; R. W. Schneider, Winona State University; and Edwin E. Thele, University of Wisconsin.

Special thanks go to Professors Robert K. Eskew, Purdue University and Ira E. Steele, George Mason University for assisting us in the proof stages of this edition by reviewing the end-of-chapter problem material and text examples for accuracy.

The assistance of Richard Fell, Barbara Freeman, Robert Graziano, and Paul Kidman was most helpful in preparation of the manuscript. We acknowledge with appreciation permission from the American Institute of Certified Public Accountants to quote from many of its pronouncements. All quotations are copyrighted by the American Institute of Certified Public Accountants.

We also are grateful to the Financial Accounting Standards Board which granted us permission to quote from FASB Statements, Discus- sion Memoranda, Interpretations, and Exposure Drafts. All quotations are copyrighted (by the Financial Accounting Standards Board, High Ridge Park, Stamford, Connecticut 06905, U.S.A., and are reprinted with permission. Copies of the complete documents are available from the FASB.

WALTER B. MEIGS ROBERT F. MEIGS