Accounting - GBV · Cash-Based Measurements 100 ... Components of an Accounting Information System 206 Accounts Receivable Subsidiary Ledger 206 ... Basic Theory of Accounting …

Accountingwww.mhhe.com/LLPWle

Patricia A. LibbyIthaca College

Robert LibbyCornell University

Fred PhillipsUniversity of Saskatchewan

Stacey WhitecottonArizona State University

McGraw-HillIrwin

Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. LouisBangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico CityMilan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

C h a p t e r

The Role of Accounting in Starting a Business 2

PIZZA AROMA 3

Business Types and Organizational Forms 4Business Types 4

Organizational Forms 4

Accounting and Business Decisions 6

Accounting Defined 6AccountingProfessionals 6 ,Users of FinancialInformation 6

Basic FinancialReports 8

The AccountingEquation 9

Pizza Aroma Illustration 10

Financial Statements 13

Professional Standards and Ethical Conduct 22Generally Accepted Accounting Principles 23

Ethical Conduct 24

Epilogue for Pizza Aroma 25

Demonstration Case 26Supplement JA: Overview of Career Choices for AccountingProfessionals 27Chapter Summary 28Key Terms 30Questions 30Multiple Choice 31Mini Exercises 31Exercises 33Problems—Set A 38Problems—Set B 42Cases and Projects 45

Establishing a Business and the Balance Sheet 48

PIZZA AROMA 49

Determine the Effects of Business Activities 50

Nature of Business Transactions 50

Balance Sheet Accounts 51

Transaction Analysis 52

Analysis of Pizza Aroma's Transactions 53

Prepare Accounting Records 57

The Accounting Cycle 57

Analyzing Business Transactions 57

Recording Transaction Effects 58

Posting Transaction Effects 60

Pizza Aroma's Accounting Records 62

Preparing a Trial Balance 64

Prepare a Balance Sheet 67

Classified Balance Sheet 67

Limitations of the Balance Sheet 68

Summary of the Accounting Cycle 70

Demonstration Case 71

Chapter Summary 74

Key Terms 75

Questions 75

Multiple Choice 76

Mini Exercises 76

Exercises 80

Problems—Set A 85

Problems—Set B 88

Cases and Projects 92

C h a p t e r '<

Operating a Business and the IncomeStatement 96

PIZZA AROMA 97

Recognizing Operating Activities 98

Income Statement Accounts 98

Operating Cycle 99

Measure Operating Activities 100

Cash-Based Measurements 100

Accrual Basis Accounting 101

Expanded Transaction Analysis Model 103

Analysis of Pizza Aroma's Transactions 106

Prepare an Income Statement 112

Unadjusted Trial Balance 112

Classified Income Statements 112

Limitations of the Income Statement 114

XXVI Contents


Chapter Summary 118

Key Terms 119

Questions 119

Multiple Choice 120

Mini Exercises 121

Exercises 125

Problems—Set A 133

Problems—Set B 136


C h a p t e r

Completing the Accounting Cycle 144

PIZZA AROMA 145

Adjusting Revenues and Expenses 146

Reasons for Adjustments 146

Types of Adjustments 147

Analysis of Adjustments 147

Preparing Financial Statements 160

Adjusted Trial Balance 160

Relationships among Financial Statements 161

Classified Income Statement 162

Statement of Owner's Equity 162

Classified Balance Sheet 163

Completing the Accounting Cycle 164Closing the Books 164

Preparing a Post-Closing Trial Balance 167

Analyzing Financial Information 169

Computing and Interpreting Key Ratios 169

Analyzing Net Profit Margin (NPM) 169

Making Comparisons to Benchmarks 170


Supplement 4: Using an Accounting Workshop 175

Chapter Summary 177

Key Terms 179

Questions 179

Multiple Choice 179

Mini Exercises 180

Exercises 183


Problems—Set B J95


C h a p t e r

Accounting Systems 202

THE UPS STORE 203

Manual versus Computerized AccountingInformation Systems 204

Components of an Accounting Information System 206

Accounts Receivable Subsidiary Ledger 206

Accounts Payable Subsidiary Ledger 208

Special Journals and Posting of Transactions 209

Revenue Journal 209

Cash ReceiptsJournal 212

PurchasesJournal 216

Cash PaymentsJournal 217

Use of the GeneralJournal 218

Summary of the Recording Process 219

Basic Theory of Accounting InformationSystems 221

Underlying Assumptions 221

Developmental Phases 221

Computerized Accounting Information Systems 222

Advantages and Disadvantages 222

Peachtree Complete 2008—An Illustration 223


Chapter Summary 228

Key Terms 228

Questions 229

Multiple Choice 229

Mini Exercises 230

Exercises 233




Contents xxvii

C h a p t e r .

Merchandising Operations 260

WAL-MART 261

Operating Cycles and Inventory Systems 262

Operating Cycles 262

Inventory Systems 262

Recording Merchandise Purchases 265

Purchases on Account 265

Transportation Cost (Freight-In) 265

Purchase Returns and Allowances 266

Purchase Discounts 266

Summary of Purchase-Related Transactions 268

Recording Merchandise Sales 270

Cash Sales 270

Sales Returns and Allowances 271

Credit Card Sales 271

Sales on Account and Sales Discounts 272

Transportation Cost (Freight-Out) 273

Summary of Sales-Related Transactions 273

Comparison of Sales and Purchases Accounting 274

Preparing and Analyzing the IncomeStatement 276

Multistep Income Statement forMerchandisers 276

Gross Profit Percentage 277

Comparison to Benchmarks 278

Demonstration Case A 279

Demonstration Case B 280

Supplement 6A: Periodic Inventory Records 281

Supplement 6B: Closing Entries for a Merchandiser 283

Chapter Summary 283

Key Terms 283

Questions 285

Multiple Choice 285

Mini Exercises 286

Exercises 288




C h a p t e r

Inventories 302

AMERICAN EAGLE OUTFITTERS 303

Reporting Inventory and Cost of Goods Sold 304

Balance Sheet and Income Statement Reporting 304

Cost of Goods Sold Equation 305

Choosing Among Inventory Closing Methods 306

Cost Flow Methods under a PerpetualInventory System 308

First-In, Last Out (FIFO) 308

Last-In, First-Out (LIFO) 309

Weighted Average Cost 310

FinancialStatementEffects ofInventory CostingMethods 310

Reporting Inventoryat the Lower of Costor Market 312

Identifying theEffects of InventoryErrors 314

Income StatementEffects 314

Balance Sheet Effects 315

Evaluating Inventory Management 316

Inventory Turnover Analysis 316


Demonstration Case 318Supplement 7A: Cost Flow Methods under a PeriodicInventory System 320

Supplement 7B: Estimating Inventory Gross Profit Method 323

Chapter Summary 324

Key Terms 325

Questions 325

Multiple Choice 325

Mini Exercises 326

Exercises 328




Contents

C h a p t e r

Internal Control and Cash 342

THE HOME DEPOT 343

Internal Control 344

Definition and Purpose 344

Sarbanes-Oxley Act of 2002 344

Common Control Principles 346

Control Limitations 348

Internal Control of Cash 348

Cash Receipts 349

Cash Payments 351

Bank Procedures and Reconciliation

Financial Reporting of Cash 360

Cash and Cash Equivalents



Chapter Summary 362

Key Terms 363

Questions 363

Multiple Choice 364

Mini Exercises 365

Exercises 368




355

360

tf'^1C h a p t e r

Receivables 380

SKECHERS 381

Types of Receivables 382

Accounts Receivable 383

Accounting for BadDebts: The AllowanceMethod 383

Recording Estimated BadDebt Expense 383

Method for EstimatingBad Debts 385

Other Issues 388

Notes Receivable and Interest Revenue 390

Calculating Interest 390

Recording Notes Receivable and InterestRevenue 390

Evaluating Receivables Management 393

Receivables Turnover Analysis 393




Supplement 9A: Direct Write-Off Method 398

Chapter Summary 398

Key Terms 399

Questions 400

Multiple Choice 400

Mini Exercises 401

Exercises 403




C h a p t e r

Long-Lived Tangible and IntangibleAssets 416

CEDAR FAIR 417

Definition and Classification 418

Tangible Assets 418

Intangible Assets 418

Tangible Assets: Acquisition, Use,Impairment, and Disposal 419

Acquisition of Tangible Assets 419

Use of Tangible Assets 423

Impairment of Tangible Assets 430

Disposal and Exchange of Tangible Assets 431

Intangible Assets: Types, Acquisition,Use, and Disposal 433

Types of Intangible Assets 433

Acquisition, Use, and Disposal of IntangibleAssets 434

Evaluation of Long-Lived Asset Use 436

Turnover Analysis 436

Impact of Differences in Depreciation 437


Supplement 10A: Natural Resources 442

Supplement 10B: Changes in Depreciation 443

Contents xxix

Supplement IOC: Exchanging Assets

Chapter Summary 444

Key Terms 445

Questions 446

Multiple Choice 446

Mini Exercises 447

Exercises 450




443

C h a p t e r•'/•I

CheeriosToasted Whole Grain Oat Cereal *

Current Liabilities and Payroll 466

GENERAL MILLS, INC. 467

Reporting Liabilities 468

Measuring Liabilities 468

Classifying Liabilities 468

Calculating and Interpreting the Current Ratio 469

Accounting for CurrentLiabilities 470

Accounts Payable 470Notes Payable 470Current Portion ofLong-Term Debt 472Other CurrentLiabilities 473

Payroll Accounting 473Calculating thePayroll 478Recording thePayroll 480ApplyingInternal ControlPrinciples 484



Demonstration Case C 487

Supplement 11 A: Employee Benefits 488

Chapter Summary 489

Key Terms 490

Questions 490

Multiple Choice 491

Mini Exercises 492

Exercises 494



Cases and Projects 501 '

C h a p t e r

Partnerships 504

BLOOM'N FLOWERS 505

Partnerships Compared to Similar Organizations 506

Characteristics of Partnerships 506

Similar Forms of Business 507

Accounting for Partnerships 509

Formation: Recording Cash and NoncashContributions 509

Division of Income (or Loss): Four Methods 511

Preparation of Financial Statements 516

Changes of Ownerships in a Partnership 517

Admission of a Partner 517

Withdrawal of a Partner 521

Death of Partner 525

Liquidation of a Partnership 526

No Capital Deficiency 527

Capital Deficiency 529

Ratio Analysis 533Partner Return on Equity 533




DemonstrationCase D 539

ChapterSummary 539

Key Terms 541

Questions 541

Multiple Choice 541

Mini Exercises 542

Exercises 545




C h a p t e r

Accounting for Corporations 558

SONIC CORP. 559

Characteristics of the Corporate Form 560

Ownership 560

Laws and Taxes 560

xxx Contents

Formation 561

Financing 562

Accounting for Stock Transactions 562

Common and Preferred Stock 563

Treasury Stock 565

FinancialStatementReporting 567

Accounting forDividends andSplits 568

Cash Dividends onCommon Stock 568

Cash Dividends on Preferred Stock 570

Stock Dividends 572

Stock Splits 573

Statement of Retained Earnings 574

Financial Ratio Analysis 575

Earnings per Share (EPS) 576

Price/Earnings (P/E) Ratio 577



Chapter Summary 580

Ke;y Terms 580

Questions 581

Multiple Choice 581

Mini Exercises 582

Exercises 584




C h a p t e r

Long-Term Liabilities 598

GENERAL MILLS, INC. 599

Long-Term Liabilities 600

Making Financing Decisions 600

Measuring Liabilities 600

Accounting for Long-Term Liabilities 601

Discounted Notes 601

Bonds Payable 604

Lease Liabilities 610

Analyzing Long-Term Liabilities 611

Debt-to-Assets Ratio 611

Times Interest Earned Ratio 612




Supplement 14A: Discounting Future Payments 616Supplement 14B: Effective-Interest Methodof Amortization 619

Supplement 14C: Straight-Line Method of Amortization 622

Chapter Summary 623

Ke;y Terms 624

Questions 625

Multiple Choice 625

Mini Exercises 626

Exercises 628


Problems—Set B 634Cases and Projects 637

C h a p t e r

Accounting for Investments 640

THE WASHINGTON POST COMPANY 641

An Overview 642

Reasons Companies Invest 642

Identifying Investment Types and AccountingMethods 643

Accounting for Passive Investments 644Debt Investments Held to Maturity: AmortizedCost Method 644Investments in Stock of Significant Influence 645Investments in Stock forControl 645Securities Available for Sale:Market Value Method 646Comparison ofAvailable-for-Sale andTrading Securities 650

Accounting for InfluentialInvestments 654

Investments for SignificantInfluence: EquityMethod 654

Investments with ControllingInterests: ConsolidatedStatements 658

\

Contents xxxi

Evaluating Total Invested Capital 660

Return on Assets (ROA) 660





Chapter Summary 664

Key Terms 665

Questions 665

Multiple Choice 666

Mini Exercises 667

Exercises 668




C h a p t e r

Reporting and Interpreting the Statementof Cash Flows 680

NAUTILUS INC. 681

Classifications of the Statement of Cash Flows 682

The Relationship between Business Activitiesand Cash Flows 682

Cash Flows from Operating Activities 683

Cash Flows from Investing Activities 684

Cash Flows from Financing Activities 684

Net Increase (Decrease) in Cash 684

Relationships to the Balance Sheet and IncomeStatement 685

Reporting Cash Flowsfrom OperatingActivities—IndirectMethod 687

Depreciation andGains and Losses onSale of Long-TermAssets 689

Changes in Current Assetsand Current Liabilities 689

Reporting Cash Flows fromInvesting Activities 693

Plant and Equipment 693

Land and Investments 694

Reporting Cash Flows from Financing Activities 694

Long-Term Debt 694

Contributed Capital 694

Retained Earnings 694

Preparing and Evaluating the Statementof Cash Flows 696

Format for the Statement of Cash Flows 696

Noncash Investing and Financing Activities 696

Supplemental Cash Flow Information 698

Free Cash Flow 698

Quality of Income Ratio 698

Demonstration Case A: Indirect Method 699

Supplement 16A: Reporting Cash Flows fromOperating Activities—Direct Method 700

Demonstration Case B: Direct Method (Supplement A) 704

Supplement 16B: Spreadsheet Approach:

Indirect Method 705

Chapter Summary 707

Key Terms 707

Questions 708

Multiple Choice 708

Mini Exercises 709

Exercises 712




C h a p t e r 7/

Financial Statement Analysis 728

LOWE'S 729

Release of Financial Information 730

Preliminary Press Release 730

Quarterly and Annual Reports 730

Securities and Exchange Commission (SEC)Filings 731

Investor Information Web Sites 731

Horizontal (Trend) Analysis 732Preparing Comparative Balance Sheets andComparative Income Statements 732Revealing Changes through Trend Analyses 732

Vertical (Common Size) Analysis 734

Preparing a Common Size Balance Sheetand Income Statement 735

Interpreting Common Size Statements 735

XXXII Contents

Financial Ratios 736

Profitability Ratios 736

Liquidity Ratios 740Solvency Ratios 742Accounting Decisions and Ratio Analysis 744


Supplement 17A: Nonrecurring and Other Special Items 746Chapter Summary 747

Key Terms 747

Questions 747

Multiple Choice 747

Mini Exercises 748

Exercises 749




C h a p t e r

Managerial Accounting 764

TOMBSTONE PIZZA 765

Role of Managerial Accounting in Organizations 766Decision-Making Orientation 766

Comparison of Financial and ManagerialAccounting 766

Functions of Management 767

Cost Classifications and Definitions 769Definition of Cost 769

Out-of-Pocketversus OpportunityCosts 770

Direct versusIndirect Costs 770Variable versusFixed Costs 771Relevant versusIrrelevant Costs 772Manufacturing versusNonmanufacturing Costs 772

Product versus Period Costs 773

Costs in Manufacturing versus NonmanufacturingFirms 773

Balance Sheets of Merchandising versus ManufacturingFirms 775

Cost of Goods Manufactured Report 775

Income Statements of Merchandising versusManufacturing Firms 776


Chapter Summary 781

Key Terms 782

Questions , 782

Multiple Choice 783

Mini Exercises 784

Exercises 789




VC h a p t e r

Job Order Costing 798

TOLL BROTHERS INC. 799

Job Order versus Process Costing 800

Process Costing 800

Job Order Costing 801

Assignment of Manufacturing Costs to Jobs 801

Manufacturing Cost Categories 801

Materials Requisition Form 802

Direct Labor Time Tickets 803

Job Cost Sheet 803

Predetermined Overhead Rates 804

Journal Entries for Job Order Costing 806

Recording the Purchase and Issue of Materials 807

Recording Labor Costs 808

Recording Actual Manufacturing Overhead 809

Recording Applied Manufacturing Overhead 809Transferring Costs to Finished Goods Inventoryand Cost of Goods Sold 811

Recording Nonmanufacturing Costs 812

Overapplied or Underapplied ManufacturingOverhead 812

Calculating Overapplied and UnderappliedOverhead 812

Disposing of Overapplied or UnderappliedOverhead 813

Calculating Cost of Goods Manufactured and Costof Goods Sold 815


Chapter Summary 818

Key Terms 819

Questions 819

Contents xxxiii

Multiple Choice 820

Mini Exercises 821

Exercises 823




C h a p t e r

Process Costing and Activity Based Costing 840

CK MONDAVI FAMILY VINYARDS 841

Basic Concepts in Process Costing 842Job Order versus Process Costing 842Flow of Costs in Process Costing 843Journal Entries for Process Costing 844

Process Costing Production Report 849Step 1: Reconcile the Number of Physical Units 850Step 2: Translate Physical Units into EquivalentUnits 851Step 3: Calculate Cost per Equivalent Unit 853Step 4: Reconcile the Total Costof Work in Process 854

Step 5: Prepare a Production Report - 855

Additional Factors in Process Costing 855

Activity Based Costing (ABC) 856Step 1: Identify and Classify Activities 858Step 2: Form Activity Cost Pools and Assign IndirectCost to Each Pool 858Step 3: Select an Activity Cost Driver and Calculatean Activity Rate for Each Cost Pool 859Step 4: Assign Costs to Products or Services Based onTheir Activity Demands 860

Demonstration Case A (Process Costing) 862

Demonstration Case B (Activity Based Costing) 863

Supplement 20A: Weighted Average Method 865

Chapter Summary 869

Key Terms 870

Questions 870

Multiple Choice 871

Mini Exercises 872

Exercises 873




C h a p t e r

Cost Behavior and Cost-Volume-ProfitAnalysis 882

STARBUCKS COFFEE 883

Cost Behavior Patterns 884

Relevant Range 884

Variable Costs 884 ^

Fixed Costs 884 SkStep Costs 885 | K lMixed Costs 886 • H

Estimating Cost ^ BBehavior 887 i b S

Preparing a &flHScattergraph 887 H H

Linear Approaches H H lto Analyzing Mixed ^ ^ ^ |Costs 889 1 _

>

Contribution Margin 892

Contribution Margin Income Statement

Contribution Margin Formula 893

Unit Contribution Margin 893

Contribution Margin Ratio 893

Cost-Volume-Profit Analysis 894

Assumption of Cost-Volume-Profit 894

Break-Even Analysis 895

Margin of Safety 896

Target Profit Analysis 897

Cost-Volume-Profit Relationshipsin Graphic Form 898

Multiproduct Cost-Volume-Profit Analysis


Supplement 21A 901

Chapter Summary 904

Key Terms 905

Questions 906

Multiple Choice 906

Mini Exercises 907

Exercises 909


Problems—Set B 9J3


892

899

xxxiv Contents

C h a p t e r 22Incremental Analysis and Capital Budgeting 918

MATTEL TOYS 919

Managerial Decision Making Process 920

Step 1: Identify the Decision to Be Made 920

Step 2: Determine the Decision Alternatives 920

Step 3: Evaluate the Costs and Benefitsof the Alternatives 921

Step 4: Make the Decision 921

Step 5: Review the Results of the Decision-Making

Process 922

Relevant versus Irrelevant Costs and Benefits 922

Relevant Costs 922

Irrelevant Costs 922

Incremental Analysis of Short-Term Decisions 923

Special-Order Decisions 923

Make-or-Buy Decisions 925

Keep-or-Drop Decisions 928

Sell-or-Process Further Decisions 930

Capital Budgeting for Long-Term InvestmentDecisions 931

Nondiscounting Methods 932

Discounted Cash Flow Methods 934



Chapter Summary 939

Key Terms 940

Questions 940

Multiple Choice 941

Mini Exercises 942

Exercises 944


Problems—Set B 950Cases and Projects 953

C h a p t e r 23Budgetary Planning 956

COLD STONE CREAMERY 957

Role of Budgets in the Planning and ControlCycles 958

Planning Process 959

Benefits of Budgeting 959

Behavioral Effects of Budgets 960

Components of the Master Budget 962

Preparation of the Operating Budget 964

Sales Budget 964

Production Budget 964

Raw Materials PurchasesBudget 965

Direct Labor Budget 966

Manufacturing OverheadBudget 967

Budgeted Cost of GoodsSold 967

Selling and AdministrativeExpense Budget 968

Budgeted IncomeStatement 968

Preparation of the FinancialBudgets 970

Cash Budget 970

Budgeted Balance Sheet 971

Budgeting in a MerchandisingCompany 972



Chapter Summary 976

Key Terms 977

Questions 978

Multiple Choice 978

Mini Exercises 979

Exercises 980




C h a p t e r

Budgetary Control 986

COLD STONE CREAMERY 987

Standard Cost Systems 988

Ideal versus Attainable Standards 988

Types of Standard 988

Standard Cost Card 989

Favorable versus Unfavorable Variances 989

Use of Flexible Budgets to Calculate CostVariances 990

Master Budgets versus Flexible Budgets 990

Flexible Budget as a Benchmark 992

Volume Variance versus Spending Variance 992

Direct Material and Direct Labor Variances 993Variance Framework 993

Direct Materials Variances 994

Direct Labor Variances 996

Manufacturing Overhead Cost Variances 998Variable Manufacturing Overhead Variances 998

Fixed Manufacturing Overhead Variances 1001

Summary of Variances 1003


Supplement 24A: Recording Standard Costsand Variances in a Standard Cost System 1008

Chapter Summary 1012

Key Terms 1013

Questions 1013

Multiple Choice 1013

Mini Exercises 1014

Exercises 1015




C h a p t e r

Decentralized Performance Evaluation 1026

BLOCKBUSTER 1027

Decentralization of Responsibility

Responsibility Centers 1030

Cost Centers 1030

1028

Revenue Centers 1031

Profit Centers 1031

Investment Centers 1032

Evaluation of Investment Center Performance 1034

Return on Investment (ROI) 1034

Residual Income 1036

Return on Investment versus Residual Income 1038

Limitations of Financial Performance Measures 1038

Balanced Scorecard 1039

Transfer Pricing 1040

Market-Price Method 1041

Cost-Based Method 1042

Negotiation 1042


Chapter Summary 1044

Key Terms 1045

Questions 1046

Multiple Choice 1046

Mini Exercises 1047

Exercises 1048


Problems—Set B J052


Appendix A A-l

Appendix B B-l

Appendix C C-J

Appendix D D-l

Glossary G-l

Credits PC-1

Business Index 1-1

Subject Index 1-4

Documents

Accounting - GBV · Cash-Based Measurements 100 ... Components of an Accounting Information System 206 Accounts Receivable Subsidiary Ledger 206 ... Basic Theory of Accounting …