TITLE : FINANCIAL ACCOUNTING.

 
Contents
 
Note: The topic of income tax is integrated throughout the book. It is
covered at those points where it is relevant to the discussion.
 
Preface
 
1 Accounting as an Information System 2
Accounting and Decision Making
Accounting Defined
Decision Makers: The Users of Accounting Management 7 / Users with a
Direct Financial Interest 8 / Users with an Indirect Financial
Interest 8
 
Accounting Communication Through Financial Statements
The Accounting View of Business Activities 10 / The Balance Sheet 11 /
The Income Statement 12/ The Statement of Retained Earnings 12/ The
Statement of Changes in Financial Position 13 / Relationship of the
Four Statements 14
 
Accounting Measurement
What Is to be Measured? 15 / The Concept of Separate Entity 15 /
Business Transactions as the Object of Measurement 15 / Money Measure
16
 
The Corporation as a Separate Entity
Formation of a Corporation 18 / Organization of a Corporation 18
 
The Effects of Transactions on Financial Position
Financial Position and the Accounting Equation l9 / Assets 19 /
Liabilities 20 / Owners' Equity 20 / Some Illustrations 21
 
Accounting Theory and Practice
Generally Accepted Accounting Principles 27 / Organizations Concerned
with Accounting Practice 27
 
The Accounting Profession
Management Accounting 29 / Public Accounting 30 / Government and Other
Nonprofit Accounting 31 / accounting Education 32
Chapter Review
Chapter Assignments
 
2 Measuring and Recording Business Transactions   47
 
Measurement Problems
The Recognition Problem 48 / The Valuation Problem 48 / The
Classification Problem 49
 
Accounts
The Account 50 / The Account Illustrated 50 / Management's Use of
Accounts 51 / The Ledger 51 / Types of Commonly Used Accounts 52 /
Titles of Accounts 55
 
The Double-Entry System: The Basic Method of Accounting
Analysis of Transactions 56 / Transaction Analysis Illustrated 58 /
Summary of Transactions 64
 
Recording Transactions
The Journal 64 / The General JouTnal 66 / The Ledger Account Form 67 /
Relationship Between the Journal and the Ledger 68
The Trial Balance
Some Notes on Bookkeeping Techniques
Chapter Review
Chapter Assignments
 
3 Business Income and Adjusting Entries 91
 
The Measurement of Business Income
Net Income 92 / The Accounting Period Problem 93 / The Continuity
Problem 94 / The Matching Problem 94 / Accrual Accounting 95
 
The Adjustment Process
Apportioning Recorded Costs Between Two or More Accounting Periods 97
/ Apportioning Recorded Revenues Between Two or More Accounting
Periods 101 / Unrecorded or Accrued Revenues 102 / Unrecorded or
Accrued
Expenses 103 / The Adjusted Trial Balance 105
The Importance of Adjustments in Accounting
Correcting Errors
A Note About Journal Entries
Chapter Review
Chapter Assignments
 
4 Completing the Accounting Cycle 133
Overview of the Accounting System
The Work Sheet: A Tool of Accountants
Steps in Preparing the Work Sheet
Uses of the Work Sheet
 
Preparing the Financial Statements 142 / Recording the Adjusting
Entries 144 / Recording the Closing Entries 146
 
Required Closing Entries
Closing the Revenue Accounts to the Income Summary 147 / Closing the
Expense Accounts to the Income Summary I49 / Closing the Income
Summary to the Retained Earnings Account 149 / Closing the Dividends
Account to the Retained Earnings Account 150 / The Accounts After
Closing 150
The Post-Closing Trial Balance
Chapter Review
Chapter Assignments
 
5 Merchandising Accounting and Internal Control  177
Income Statement for a Merchandising Concern Revenues from Sales
Gross Sales 179 / Sales Returns and Allowances 179 / Sales Discounts
180
 
Cost of Goods Sold
Merchandise Inventory 182 / Net Cost of Purchases 183 / Cost of Goods
Sold Summarized 186 / Inventory Losses 186
 
Work Sheet of a Merchandising Concern
Trial Balance, Adjustments, and Adjusted Trial Balance Columns 187 /
Income Statement Columns 187 / Completing the Work Sheet 189 /
Adjusting Entries 189 / Closing Entries 189
 
Internal Control: Basic Principles and Policies
Separation of Duties 192 / Sound Accounting System 192 / Sound
Personnel Policies 192 / Reliable Personnel 192 / Regular Internal
Review 192 / Limitations of Internal Control 193 / Protection of
Assets 193
 
Internal Control over Merchandising Transactions  193
Control of Sales and Cash Receipts 194 / Control of Purchases and Cash
Disbursements 196 / Control of Purchases Discounts 201
Chapter Review
Chapter Assignments
 
6 Accounting Systems and Special-Purpose Journals  222
Accounting Systems Installation
Principles of Systems Design
Cost/Benefit Principle 223 / Control Principle 224 / Compatibility
Principle 224 / Flexibility Principle 224
 
Data Processing: Three Perspectives
Manual Data Processing: Journals and Procedures
Controlling Accounts and Subsidiary Ledgers 227 / Sales Journal 228 /
Purchases Journal 230 / Cash Receipts Journal 233 / Cash Payments
Journal 236 / General Journal 238 / Flexibility of Special Purpose
Journals 239
Computer Data Processing
Chapter Review
Chapter Assignments
 
7 General-Purpose External Financial Statements  260
Objectives of Financial Information
Qualitative Characteristics of Accounting Information
Understand ability 262 / The Usefulness of Accounting Information 263
 
Conventions to Aid Interpretation of Financial Information
Comparability and Consistency 264 / Materiality 265 / Conservatism 265
/ Full Disclosure 266 / Cost/Benefit 266
 
Classified Balance Sheet
Assets 267 / Liabilities 270 / Stockholders' Equity 270
 
Classified Income Statement
Operating Expenses 274 / Income from Operations 274 / Financing
Revenues and Expenses 274 / Income Taxes 274 / Earnings per Share 275
 
Other Financial Statements
Chart of Accounts
Using Classified Financial Statements
Evaluation of Liquidity 277 / Evaluation of Profitability 278
 
The Annual Report of a Major Corporation
Consolidated Statements of Income (Figure 7-6) 280 / Consolidated
Statements of Retained Earnings (Figure 7-7) 281 / Consolidated
Balance Sheets (Figure 7-8) 281 / Consolidated Statement of Changes in
Financial Position (Figure 7-9) 284 / Notes to Consolidated Financial
Statements 285 / Ten-Year Financial Summary 287 / Report of Management
Responsibilities 287 / Management's Discussion and Analysis of
Earnings 287 / Report of Certified Public Accountants (Figure 7-10)
287
Chapter Review
Chapter Assignments
 
8 Short-Term Liquid Assets 306
Accounting for Cash
Banking Transactions 307 / Preparing a Bank Reconciliation 307 / Petty
Cash Procedures 312
 
Accounting for Short-Term Investments Accounting for Accounts
Receivable
Credit Policies and Uncollectible Accounts 316 / Matching Losses on
Uncollectible Accounts with Sales 317 / Allowance for Uncollectible
Accounts 318 / Estimating Uncollectible Accounts Expense 319 / Writing
Off an Uncollectible Account 323 / Direct Charge-off Method 324 /
Credit Balances in Accounts Receivable 325 / Sales to and Purchases
from the Same Firm 325 / Installment Accounts Receivable 325 / Credit
Card Sales 326 / Other Accounts Receivable 327
 
Accounting for Notes Receivable
Computations Associated with Promissory Notes 327 / Illustrative
Accounting Entries 331
Chapter Review
Chapter Assignments
 
9 Inventories 352
Nonmonetary Assets and the Matching Rule Inventories and Income
Determination
Objective of Inventory Measurement 353 / Review of Gross Profit and
Cost of Goods Sold Computations 354 / Effects of Errors on Inventory
Measurement 354
 
Inventory Measurement
Merchandise in Transit 358 / Sold Merchandise on Hand 358
 
Pricing the Inventory at Cost
Cost Defined 359 / Methods of Pricing Inventory at Cost 359 /
Evaluating the Alternative Methods of Pricing Inventory 363
 
Valuing the Inventory at the Lower of Cost or Market (LCM)
Methods of Applying LCM 365 / Determination of Market When Using the
LCM 366
 
Note on Inventory Valuation and Federal Income Taxes Valuing the
Inventory by Estimation
Retail Method of Inventory Estimation 368 / Gross Profit
Method of Inventory Estimation 370
 
Periodic and Perpetual Inventory Systems
Handling Inventory Systems in the Accounts 371 / Need for Physical
Inventories Under the Perpetual System 372
Chapter Review
Chapter Assignments
 
10 Property, Plant, and Equipment 386
Long-Term Nonmonetary Assets
Life of Long-Term Nonmonetary Assets 387 / Types of Long-Term
Nonmonetary Assets 387 / Problems of Accounting for Long-Term
Nonmonetary Assets 388
 
Acquisition Cost of Property, Plant, and Equipment
Land 389 / Building 390 / Equipment 390 / Land Improvements 390 /
Group Purchases 390
 
Accounting for Depreciation
Causes of Limited Useful Life 392 / Recording Depreciation in the
Accounts 392 / Factors That Affect the Computation of Depreciation 393
 
Methods of Computing Depreciation
Straight-Line Method 395 / Production Method 395 /
Sum-of-the-Years'-Digits Method 396 / Declining-Balance Method 397 /
Comparing the Four Methods 399
 
Special Problems of Depreciating Plant Assets
Depreciation for Partial Years 399 / Revision of Depreciation Rates
400 / Accounting for Assets of Low Unit Cost 401 / Group Depreciation
402
 
Income Taxes and Plant Assets Disposal of Depreciable Assets
Assumptions for the Comprehensive Illustration 404 / Depreciation for
Fractional Period Prior to Disposal 404 / Recording Discarded Plant
Assets 405 / Recording Plant Assets Sold for Cash 405 / Recording
Exchanges of Similar Plant Assets 406
 
Control of Plant Assets Accounting for Natural Resources
Depletion 409 / Depreciation of Closely Related Plant Assets 412 /
Development and Exploration Costs in the Oil and Gas Industry 412
Chapter Review
Chapter Assignments
 
11 Revenue and Expense Issues and Inflation  Accounting  431
 
Applying the Matching Rule to Revenue Recognition
Point of Sale Basis 431 / Cash Basis 432
 
Applying the Matching Rule to Allocation of Expired Costs
Capital Expenditures and Revenue Expenditures 432 /
Intangible Assets 434 / Arbitrary Allocation Procedures 438
 
The Nature of Inflation
Price Indexes 440 / General Price Indexes 441
 
Reporting the Effects of Price Changes
Constant Dollar Accounting 442 / Current Value Accounting 447 / The
FASB Position 449
Chapter Review
Chapter Assignments
 
12 Current Liabilities, Income Taxes, and the Time Value of Money  466
 
Nature and Measurement of Liabilities
Recognition of Liabilities 466 / Valuation of Liabilities 467 /
Classification of Liabilities 467
 
Common Categories of Current Liabilities
Definitely Determinable Liabilities 467 / Estimated Liabilities 472
 
Contingent Liabilities Corporate Income Taxes and Income Tax
Allocation
Corporate Income Taxes 476 / Financial Reporting and Income Tax
Allocation 479
 
The Time Value of Money
Simple Interest and Compound Interest 481 / Future Value of a Single
Invested Sum at Compound Interest 482 / Future Value of an Ordinary
Annuity 483 / Present Value 484 / Present Value of a Single Sum Due in
the Future 485 / Present Value of an Ordinary Annuity 486 / Time
Periods 487
 
Applications of Present Value to Accounting
Imputing Interest on Noninterest-bearing Notes 487 / Valuing an Asset
489 / Other Accounting Applications 489
Note on Reversing Entries
Chapter Review
Chapter Assignments
 
13 Long-Term Liabilities and Bond Investments 505
 
Nature of Bonds
Secured or Unsecured Bonds 506 / Term or Serial Bonds 506 / Registered
or Coupon Bonds 506
 
Accounting for Bonds Payable
Balance Sheet Disclosure of Bonds 507 / Bonds Issued at Face Value 507
/ Sales of Bonds Between Interest Dates 508 / The Effect of the Market
Rate of Interest on Bond Prices 509 / Using Present Value to Value a
Bond 510 / Bonds Issued at a Discount 511 / Calculation of Total
Interest Cost 511 / Amortizing the Bond Discount 512 / Bonds Issued at
a Premium S1S / Amortizing Bond Premium 516 / Bond Issue
Costs 516 / Year-End Accrual for Bond Interest Expense 517
Retirement of Bonds
Conversion of Bonds into Stock
Bond Sinking Fund
Other Long-Term Liabilities
Mortgages Payable 522 / Long-Term Leases 523 /
Pensions 525
 
Accounting for Bond Investments
Purchase of Bonds Between Interest Dates 526 / Amortization of Premium
or Discount 527 / Sale of Bonds 529
Chapter Review
Chapter Assignments
 
14 Contributed Capital 545
 
The Corporation
Advantages of a Corporation 546 / Disadvantages of a Corporation 547
 
Organization Costs The Components of Stockholders' Equity
Capital Stock 549 / Authorization of Stock SS1 / Issued and
Outstanding Stock 551 / Common Stock 551 / Preferred Stock 552
 
Accounting for Stock Issuance
Issuance of Par Value Stock 557 / Issuance of No-Par Stock 558 /
Issuance of Stock for Noncash Assets 559 / Stock Subscriptions 560
 
Stock Values
Book Value 562 / Market Value 564
Chapter Review
Chapter Assignments
 
15 Retained Earnings and Corporate Income 580
Statements
Retained Earnings Transactions
Profits and Losses of a Corporation 581 / Dividends 582 /
Treasury Stock Transactions 587 / Prior Period
Adjustments 590 / Statement of Retained Earnings 591
Appropriation of Retained Earnings
Other Stockholders' Equity Transactions
Retirement of Stock 594 / Donation of Stock 595 /
Donations by Nonstockholders 597
Corporate Income Statements
Net of Taxes 597 / Discontinued Operations 599 /
Extraordinary Items 600 / Accounting Changes 601 /
Earnings per Share 602
Chapter Review
Chapter Assignments
 
 
16 Statement of Changes in Financial Position 624
and Cash Flow Statement
Cash and Working Capital Funds Distinguished
Changes in Working Capital
Effects of Transactions on Working Capital
Sources of Working Capital 628 / Uses of Working
Capital 631 / Exchange Transactions 632
Preparing the Statement of Changes in
Financial Position
Determining the Changes in Working Capital for the
Year 634 / Preparing the Work Sheet 636 / Analyzing the
Changes in Noncurrent Accounts 638 / Completing the
Statement and,Supporting Schedule 642
Preparing the Cash Flow Statement
Cash Flow from Operations 643 / Completing the Cash Flow
Statement 647
Chapter Review
Chapter Assignments
 
17 Intercompany Investments and International 670
Accounting
Classification of Long-Term Investments
Noninfluential and Noncontrolling Investment 672 /
Influential but Noncontrolling Investment 675 / Controlling
Investment 676
Consolidated Financial Statements
Methods of Accounting for Consolidations 677 /
Consolidated Balance Sheet 677 / Consolidated Income
Statement 682 / Other Consolidated Financial Statements 684
Financial Statements Using the Pooling of
Interests Method
International Accounting
Accounting for Transactions in Foreign Countries 689 /
Restatement of Foreign Subsidiary Financial
Statements 692 / The Search for Uniformity of International
Accounting Standards 696
Chapter Review
Chapter Assignments
 
18 Financial Statement Analysis 717
Objectives of Financial Statement Analysis
Assessment of Past Performance and Current Position 718 /
Assessment of Future Potential and Related Risk 718
Standards for Financial Statement Analysis
Rule-of-Thumb Measures 719 / Past Performance of the
Company 719 / Industry Norms 720
Sources of Information
Published Reports 721 / SEC Reports 722 / Business
Periodicals and Credit and Investment Advisory Services 722
Tools and Techniques of Financial Analysis
Horizontal Analysis 723 / Trend Analysis 726 / Vertical
Analysis 727 / Ratio Analysis 729
Survey of Commonly Used Ratios
Evaluation of Liquidity 729 / Evaluation of
Profitability 731 / Evaluation of Long-Run Solvency 734 /
Market Test Ratios 735
Chapter Review
Chapter Assignments
 
Appendix A Accounting for Unincorporated 762
Businesses
Accounting for Sole Proprietorships
Accounting for Partnerships
Partnership Characteristics 763 / Advantages and Disadvantages of
Partnerships in Comparison to Other Business Forms 764 / Accounting
for Partners' Equity 765 / Distribution of Partnership Profits and
Losses 766 / Dissolution of a Partnership 769 / Liquidation of a
Partnership 772
Questions
Exercises
Problems
 
Appendix B The Voucher System 776
Vouchers
Voucher Checks
Voucher Register
Check Register
Operation of a Voucher System
Preparing the Voucher 780 / Recording the Voucher 780 / Paying the
Voucher 780 / Posting the Voucher and Check Registers 781 /
Summarizing Unpaid Vouchers 781
Questions
Exercises
Problem
 
Appendix C Introduction to Payroll 784
Accounting
Liabilities for Employee Compensation
Liabilities for Employee Payroll Withholdings
FICA Tax 785 / Federal Income Tax 786 / State Income Tax 786 / Other
Withholdings 786 Computation of an Employee's Take-Home Pay:
An Illustration Employee Earnings Record 789 / Payroll Register 789 /
Recording the Payroll 789 Liabilities for Employer Payroll Taxes
FICA Tax 790 / Federal Unemployment Insurance Tax 790 / State
Unemployment Insurance Tax 790 / Recording Payroll Taxes 790
Payment of Payroll and Payroll Taxes
Internal Control for Payroll
Questions
Exercises
Problems
 
Appendix D Compound Interest and Present 795
Value Tables
Table D-1. Future Value of $1 After a Given
Number of Time Periods
Table D-2. Future Value of $1 Paid in Each
Period for a Given Number of Time Periods
lible D-S. Present Vilue of $1 to Be Received
atthe End of a Given N urnber of Tinne
Periods
lible D-4. Present Vilue of $1 Received Each
Period for a Given N u m ber of Tinne Periods
Glossary 802
Index 817