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accessible, affordable,active learning

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Jerry J. Weygandt PhD, CPAUniversity of WisconsinMadison

Madison, Wisconsin

Paul D. Kimmel PhD, CPAUniversity of WisconsinMilwaukee

Milwaukee, Wisconsin

Donald E. Kieso PhD, CPANorthern Illinois University

DeKalb, Illinois

10ACCOUNTINGP R I N C I P L E S

John Wiley & Sons, Inc.

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Dedicated tothe Wiley sales representativeswho sell our books and service our adopters in a professional and ethical manner and toEnid, Merlynn, and Donna

Vice President & Executive Publisher George HoffmanAssociate Publisher Christopher DeJohnProject Editor Ed BrislinDevelopment Editor Terry Ann TatroProject Editor Yana MermelProduction Manager Dorothy SinclairSenior Production Editor Valerie A. VargasProduction Editor Erin BascomAssociate Director of Marketing Amy ScholzSenior Marketing Manager Ramona ShermanExecutive Media Editor Allison MorrisMedia Editor Greg ChaputCreative Director Harry NolanSenior Designer Madelyn LesureProduction Management Services Ingrao AssociatesSenior Photo Editor Mary Ann PriceEditorial Assistant Jacqueline KeppingMarketing Assistant Courtney LuzziAssistant Marketing Manager Diane MarsCover Design Maureen EideCover Photo Bill Stevenson/Photolibrary

This book was set in Times Ten by Aptara, Inc. and printed and bound by RR Donnelley. The cover was printed by RR Donnelley.

Copyright 2007, 2009, 2012 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, storedin a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning orotherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior writ-ten permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright ClearanceCenter, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permissionshould be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774,(201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions.

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v

From the Authors

Dear Student,

Why This Course? Remember your biology course in high school? Did you haveone of those invisible man models (or maybe something more high-tech than that)that gave you the opportunity to look inside the human body? This accountingcourse offers something similar: To understand a business, you have to understand thefinancial insides of a business organization. An accounting course will help you under-stand the essential financial components of businesses. Whether you are looking at alarge multinational company like Microsoft or Starbucks or a single-owner softwareconsulting business or coffee shop, knowing the fundamentals of accounting will helpyou understand what is happening. As an employee, a manager, an investor, a businessowner, or a director of your own personal financesany of which roles you will have atsome point in your lifeyou will be much the wiser for having taken this course.

Why This Book? Hundreds of thousands of students have used this textbook. Yourinstructor has chosen it for you because of its trusted reputation. The authors have worked hard to keep the book fresh, timely, and accurate.

This textbook contains features to help you learn best, whatever your learning style. Tounderstand what your learning style is, spend about ten minutes to take the learningstyle quiz at the books companion website. Then, look at page vii for how you canapply an understanding of your learning style to this course. When you know moreabout your own learning style, browse through the Student Owners Manual on pagesviiixi. It shows you the main features you will find in this textbook and explains theirpurpose.

How To Succeed? Weve asked many students and many instructors whether thereis a secret for success in this course. The nearly unanimous answer turns out to be notmuch of a secret: Do the homework. This is one course where doing is learning, andthe more time you spend on the homework assignmentsusing the various toolsthat this textbook providesthe more likely you are to learn the essential concepts,techniques, and methods of accounting. Besides the textbook itself, the bookscompanion website offers various support resources.

Good luck in this course. We hope you enjoy the experience and that you put to gooduse throughout a lifetime of success the knowledge you obtain in this course. We aresure you will not be disappointed.

Jerry J. WeygandtPaul D. KimmelDonald E. Kieso

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Jerry WeygandtJerry J. Weygandt, PhD, CPA, is ArthurAndersen Alumni Emeritus Professor ofAccounting at the University of WisconsinMadison. He holds a Ph.D. in accountingfrom the University of Illinois. Articles byProfessor Weygandt have appeared in theAccounting Review. Journal of AccountingResearch, Accounting Horizons, Journal ofAccountancy, and other academic and professional journals. These articles haveexamined such financial reporting issues as accounting for price-level adjustments, pensions, convertible securities, stock optioncontracts, and interim reports. ProfessorWeygandt is author of other accounting andfinancial reporting books and is a member of the American Accounting Association, the American Institute of Certified PublicAccountants, and the Wisconsin Society ofCertified Public Accountants. He has servedon numerous committees of the AmericanAccounting Association and as a member of the editorial board of the AccountingReview; he also has served as President and Secretary-Treasurer of the AmericanAccounting Association. In addition, he hasbeen actively involved with the AmericanInstitute of Certified Public Accountants and has been a member of the AccountingStandards Executive Committee (AcSEC) ofthat organization. He has served on the FASBtask force that examined the reporting issuesrelated to accounting for income taxes and served as a trustee of the FinancialAccounting Foundation. Professor Weygandthas received the Chancellors Award forExcellence in Teaching and the Beta GammaSigma Deans Teaching Award. He is on theboard of directors of M & I Bank of SouthernWisconsin. He is the recipient of theWisconsin Institute of CPAs OutstandingEducators Award and the LifetimeAchievement Award. In 2001 he received the American Accounting AssociationsOutstanding Educator Award.

Paul KimmelPaul D. Kimmel, PhD, CPA, received his bachelors degree from the University ofMinnesota and his doctorate in accountingfrom the University of Wisconsin. He is anAssociate Professor at the University ofWisconsinMilwaukee, and haspublic accounting experience with Deloitte & Touche (Minneapolis). He was the recipientof the UWM School of Business AdvisoryCouncil Teaching Award, the Reggie Taite Excellence in Teaching Award and athree-time winner of the OutstandingTeaching Assistant Award at the University of Wisconsin. He is also a recipient of theElijah Watts Sells Award for HonoraryDistinction for his results on the CPA exam.He is a member of the American AccountingAssociation and the Institute of ManagementAccountants and has published articles inAccounting Review, Accounting Horizons,Advances in Management Accounting,Managerial Finance, Issues in AccountingEducation, Journal of Accounting Education,as well as other journals. His research interests include accounting for financialinstruments and innovation in accountingeducation. He has published papers andgiven numerous talks on incorporating critical thinking into accounting education,and helped prepare a catalog of criticalthinking resources for the Federated Schoolsof Accountancy.

Don KiesoDonald E. Kieso, PhD, CPA, received hisbachelors degree from Aurora University and his doctorate in accounting from theUniversity of Illinois. He has served as chairman of the Department of Accountancyand is currently the KPMG Emeritus Professorof Accountancy at Northern Illinois University.He has public accounting experience withPrice Waterhouse & Co. (San Francisco andChicago) and Arthur Andersen & Co.(Chicago) and research experience with theResearch Division of the American Institute ofCertified Public Accountants (New York). Hehas done post doctorate work as a VisitingScholar at the University of California atBerkeley and is a recipient of NIUs TeachingExcellence Award and four Golden AppleTeaching Awards. Professor Kieso is theauthor of other accounting and businessbooks and is a member of the AmericanAccounting Association, the AmericanInstitute of Certified Public Accountants, andthe Illinois CPA Society. He has served as amember of the Board of Directors of theIllinois CPA Society, then AACSBs AccountingAccreditation Committees, the State ofIllinois Comptrollers Commission, asSecretary-Treasurer of the Federation of Schools of Accountancy, and as Secretary-Treasurer of the AmericanAccounting Association. Professor Kieso iscurrently serving on the Board of Trusteesand Executive Committee of AuroraUniversity, as a member of the Board ofDirectors of Kishwaukee CommunityHospital, and as Treasurer and Director ofValley West Community Hospital. From 1989 to 1993 he served as a charter member ofthe national Accounting Education ChangeCommission. He is the recipient of theOutstanding Accounting Educator Awardfrom the Illinois CPA Society, the FSAs JosephA. Silvoso Award of Merit, the NIUFoundations Humanitarian Award for Serviceto Higher Education, a Distinguished ServiceAward from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University.

About the

Authors

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What TYPEof learner are you?V

ISU

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C

Pay close attention to charts, drawings, and handouts your instructors use.

Underline. Use different colors. Use symbols, flow charts, graphs, different

arrangements on the page,white spaces.

Convert your lecture notes intopage pictures.

To do this: Use the Intake strategies. Reconstruct images in

different ways. Redraw pages from memory. Replace words with symbols

and initials. Look at your pages.

The Navigator/Feature Story/PreviewInfographics/IllustrationsAccounting Equation AnalysesHighlighted wordsDemonstration Problem/

Action PlanQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemOn the WebTutorials, video, iPod apps

Recall your page pictures. Draw diagrams where

appropriate. Practice turning your visuals back into words.

Attend lectures and tutorials. Discuss topics with students

and instructors. Explain new ideas to

other people. Use a tape recorder. Leave spaces in your lecture

notes for later recall. Describe overheads, pictures,

and visuals to somebody who was not in class.

You may take poor notesbecause you prefer to listen.Therefore: Expand your notes by talking

with others and with information from your textbook.

Tape-record summarized notes and listen.

Read summarized notes out loud.

Explain your notes to another aural person.

PreviewInsight BoxesReview It/Do it!/Action PlanSummary of Study ObjectivesGlossaryDemonstration Problem/Action

PlanSelf-Test QuestionsQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemOn the WebDecision Making Across the

OrganizationTutorials, video

Communication Activity Ethics Case Talk with the instructor. Spend time in quiet places

recalling the ideas. Practice writing answers

to old exam questions. Say your answers out loud.

Use lists and headings. Use dictionaries, glossaries,

and definitions. Read handouts, textbooks,

and supplementary library readings.

Use lecture notes.

Write out words again and again.

Reread notes silently. Rewrite ideas and principles

into other words. Turn charts, diagrams,

and other illustrations into statements.

The Navigator/Feature Story/StudyObjectives/PreviewReview It/Do it!/Action PlanSummary of Study ObjectivesGlossary/Self-Test QuestionsQuestions/Exercises/ProblemsWriting ProblemsFinancial Reporting ProblemComparative Analysis ProblemAll About You ActivityOn the WebDecision Making Across

the OrganizationCommunication ActivityFlashcards

Write exam answers. Practice with multiple-choice

questions. Write paragraphs, beginnings

and endings. Write your lists in

outline form. Arrange your words into

hierarchies and points.

Use all your senses. Go to labs, take field trips. Listen to real-life examples. Pay attention to applications. Use hands-on approaches. Use trial-and-error methods.

You may take poor notesbecause topics do not seemconcrete or relevant.Therefore: Put examples in

your summaries. Use case studies and

applications to help with principles and abstract concepts.

Talk about your notes with another kinesthetic person.

Use pictures and photographs that illustrate an idea.

The Navigator/FeatureStory/PreviewInfographics/IllustrationsReview It/Do it!/Action PlanSummary of Study ObjectivesDemonstration Problem/

Action PlanSelf-Test QuestionsQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemOn the WebDecision Making Across

the OrganizationCommunication ActivityAll About You Activity

Write practice answers. Role-play the exam situation.

Intake:To take in the information To make a study package

Text features that mayhelp you the most

Output:To do well on exams

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Accrued Revenues

Asset Revenue

DebitAdjustingEntry (+)

CreditAdjustingEntry (+)

Illustration 3-13Adjusting entries for accrued revenues

Helpful Hint

For accruals, there may have been no prior entry, and the accounts requiring adjustment may both have zero balances prior to adjustment.

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Student Owners ManualUsing Your Textbook Effectively

Helpful Hints in the margins further clarify concepts being discussed. They are like having an instructor with you as you read.

Insight examples give you more glimpsesinto how actual companies make decisionsusing accounting information. These high-interest boxes focus on various themesethics, international, and investor concerns.

A critical thinking question asks you toapply your accounting learning to thestory in the example. Guideline Answersappear at the end of the chapter.

Ethics Notes and International Notes point out ethical and international points

related to the nearby text discussion.

Accounting Across the Organizationexamples show the use of accounting by

people in non-accounting functionssuch as finance, marketing, or management.

Guideline Answers appear at the end of the chapter.

Scan Study Objectives

Read Feature Story

Read Preview

Read text and answer Do it! p. 102 p. 110 p. 116 p. 121

Work Comprehensive Do it! p. 122

Review Summary of Study Objectives

Answer Self-Test Questions

Complete Assignments

Go to WileyPLUS for practice and tutorials

Read A Look at IFRS p. 148

[The Navigator]


Ethics Note

A report released by Fannie Maesboard of directors stated that improper adjusting entries at the mortgage-fi nance company resulted in delayed recognition of expenses caused by interest-rate changes. The motivation for such accounting apparently was the desire to hit earnings estimates.


International Note

Rules for accounting for specifi c events sometimes differ across countries. For example, European companies rely less on historical cost and more on fair value than U.S. companies. Despite the differences, the double-entry accounting system is the basis of accounting systems worldwide.

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I S ONVESTOR II S GNSIGHTHow to Read Stock Quotes

Organized exchanges trade the stock of publicly held companies at dollar prices per shareestablished by the interaction between buyers and sellers. For each listed security, the fi nan-

cial press reports the high and low prices of the stock during the year, the total volume of stocktraded on a given day, the high and low prices for the day, and the closing market price, with the netchange for the day. Nike is listed on the New York Stock Exchange. Here is a recent listing for Nike:

52 Weeks

Stock High Low Volume High Low Close Net Change

Nike 78.55 48.76 5,375,651 72.44 69.78 70.61 21.69

These numbers indicate the following: The high and low market prices for the last 52 weeks havebeen $78.55 and $48.76. The trading volume for the day was 5,375,651 shares. The high, low, andclosing prices for that date were $72.44, $69.78, and $70.61, respectively. The net change for theday was a decrease of $1.69 per share.

For stocks traded on organized exchanges, how are the dollar prices per share established?What factors might influence the price of shares in the marketplace? (See page 629.)?

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AACCOU GCCOUNTINGAAC OSSCROSS THEOOO G ORGANIZATIONWall Street No Friend of Facebook

In the 1990s, it was the dream of every young technology entrepreneur to start acompany and do an initial public offering (IPO), that is, list company shares on astock exchange. It seemed like there was a never-ending supply of 20-something

year-old technology entrepreneurs that made millions doing IPOs of companies that never madea profit and eventually failed. In sharp contrast to this is Mark Zuckerberg, the 25-year-old founder and CEO of Facebook. If Facebook did an IPO, he would make billions of dollars. But, heis in no hurry to go public. Because his company doesnt need to invest in factories, distributionsystems, or even marketing, it doesnt need to raise a lot of cash. Also, by not going public,Zuckerberg has more control over the direction of the company. Right now, he and the otherfounders dont have to answer to outside shareholders, who might be more concerned about short-term investment horizons rather than long-term goals. In addition, publicly traded companiesface many more financial reporting disclosure requirements.

Source: Jessica E. Vascellaro, Facebook CEO in No Rush to Friend Wall Street, Wall Street Journal Online(March 4, 2010).

Why has Mark Zuckerberg, the CEO and founder of Facebook, delayed taking his companys shares public through an initial public offering (IPO)? (See page 629.)?

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viii

The Navigator guides you through each chapter bypulling learning tools together into one learning system.Throughout the chapter, The Navigator prompts you to

use listed learning aids and to set priorities as you study.

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ix

Brief Do it! exercises ask you to put towork your newly acquired knowledge.They outline an Action Plan necessaryto complete the exercise, and they show a Solution.

Accounting equation analyses appear next to keyjournal entries. They will help you understand theimpact of an accounting transaction on the components of the accounting equation, on thestockholders equity accounts, and on the companyscash flows.

Comprehensive Do it! problem with Action Plan gives you an

opportunity to see a detailed solution to arepresentative problem before you do

your homework. Coincides with the Do it! problems within the chapter.

Do it! Review problems appear in thehomework material and provide another

way for you to determine whether you have mastered the content in the

chapters.

The ledger of Hammond Company, on March 31, 2012, includes these selected accounts before adjusting entries are prepared.

Debit CreditPrepaid Insurance $ 3,600Supplies 2,800Equipment 25,000Accumulated DepreciationEquipment $5,000Unearned Service Revenue 9,200

An analysis of the accounts shows the following.

1. Insurance expires at the rate of $100 per month.2. Supplies on hand total $800.

Do it!Adjusting Entries for Deferrals

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Bernie Ebbers was the founder and CEO of the phone company WorldCom. The company engaged in a series of increasingly large, debt-financed acquisitions of other companies. These acquisitions made the company grow quickly, which made the stock price increase dramatically. However, because the acquired companies all had different accounting systems, WorldComs financial records were a mess. When WorldComs performance started to flatten out, Bernie coerced WorldComs accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the stock price. One of these frauds involved treating $7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current-period profi ts.

Total take: $7 billion

THE MISSING CONTROLS

Documentation procedures. The companys accounting system was a disorganized collection of non-integrated systems, which resulted from a series of corporate acquisitions. Top management took advantage of this disorganization to conceal its fraudulent activities.

Independent internal verifi cation. A fraud of this size should have been detected by a routine comparison of the actual physical assets with the list of physical assets shown in the accounting records.

ANATOMY OF A FRAUD

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Terry Thomas opens the Green Thumb Lawn Care Company on April 1.At April 30,the trial balance shows the following balances for selected accounts.

Prepaid Insurance $ 3,600 Equipment 28,000 Notes Payable 20,000

Unearned Service Revenue 4,200 Service Revenue 1,800

Do it!C OM P R E H E N S I V E


Do it! ReviewDo it! 3-1 Numerous timing concepts are discussed on pages 100102. A list of concepts isprovided below in the left column, with a description of the concept in the right column.There are more descriptions provided than concepts. Match the description of the concept to the concept.1. ____ Cash-basis accounting.2. ____ Fiscal year.3. ____ Revenue recognition principle.4. ____ Expense recognition principle.

(a) Monthly and quarterly time periods.(b) Accountants divide the economic life of a business

into artificial time periods.(c) Efforts (expenses) should be matched with ac-

complishments (revenues).

Identify timing concepts.

(SO 1, 2)


p p p q yWhat happens when no-par stock does not have a stated value? In that case,

the corporation credits the entire proceeds to Common Stock.Thus, if Hydro-Slide does not assign a stated value to its no-par stock, it records the issuance of the 5,000 shares at $8 per share for cash as follows.

Cash 40,000 Common Stock 40,000

(To record issue of 5,000 shares of no-par stock)

140,000140,000 CS

Cash Flows140,000

SEA L5 1

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Student O

wners M

anual

Anatomy of a Fraud boxes illustrate how a lack of specific internal controls

resulted in real-world frauds.

Financial statements appear regularly. Those from actual companies are identified

by a company logo or a photo.

Illustration 14-11Disclosure of restriction Tektronix Inc.

Notes to the Financial Statements

Certain of the Companys debt agreements require compliance with debt covenants.Management believes that the Company is in compliance with such requirements.The Company had unrestricted retained earnings of $223.8 million after meetingthose requirements.

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An additional parallel set of C Problemsappears at the books companion website.

Problems: Set CVisit the books companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.


(Note: This is a continuation of the Cookie Chronicle from Chapters 1 and 2. Use the infor-mation from the previous chapters and follow the instructions below using the general ledger accounts you have already prepared.)

Continuing Cookie Chronicle


Those exercises and problems that focus onaccounting situations faced by service companies

are identified by the icon shown here.

Comprehensive Problems combine materialfrom the current chapter with previous chapters so that you understand how it allfits together.

The Continuing Cookie Chronicle exercisefollows the continuing saga of accounting

for a small business begun by an entrepreneurial student.

The Waterways Continuing Problem uses the businessactivities of a fictional company, to help you apply managerial accounting topics to a realistic entrepreneurialsituation.

h bl

Waterways Continuing Problem(Note: The Waterways Problem begins in Chapter 19 and continues in the remaining chapters.You can also find this problem at the books Student Companion site.)

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Exercises: Set BVisit the books companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B.


P3-5A On September 1, 2012, the account balances of Moore Equipment Repair were as follows.

Journalize transactions and follow through accounting cycle to preparation of fi nancial statements.

(SO 5, 6, 7)

No. Debits No. Credits

101 Cash $ 4,880 154 Accumulated DepreciationEquipment $ 1,500112 Accounts Receivable 3,520 201 Accounts Payable 3,400126 Supplies 2,000 209 Unearned Service Revenue 1,400153 Equipment 15,000 212 Salaries and Wages Payable 500

301 Owners Capital 18,600

$25,400 $25,400


Exercises: Set B are available online atwww.wiley.com/college/weygandt.

In the textbook, two similar sets ofProblemsA and Bare keyed

to the same study objectives.

Selected problems, identified by thisicon, can be solved using the General

Ledger Software (GLS) package.

An icon identifies Exercises andProblems that can be solved using Excel templates at the student website.

E3-10 The income statement of Brandon Co. for the month of July shows net income of $1,400 based on Service Revenue $5,500, Salaries and Wages Expense $2,300, Supplies Expense $1,200,and Utilities Expense $600. In reviewing the statement, you discover the following.1. Insurance expired during July of $400 was omitted.2. Supplies expense includes $250 of supplies that are still on hand at July 31.

Prepare correct income statement.

(SO 2, 5, 6, 7)


The Broadening Your Perspective section helps to pull together

concepts from the chapter and applythem to real-world business situations.

The Financial Reporting Problem focuses on reading and understanding

the financial statements of PepsiCo,which are available in Appendix A.

BROADENINGBROADENINGBROADENINGYOURPERSPECTIVEPERSPECTIVEPERSPECTIVE


Financial Reporting and AnalysisFinancial Reporting Problem: PepsiCo, Inc.BYP3-1 The financial statements of PepsiCo, Inc. are presented in Appendix A at the end of this textbook.

Instructions(a) Using the consolidated financial statements and related information, identify items that may result in


Comparative Analysis Problem: PepsiCo, Inc. vs. The Coca-Cola CompanyBYP3-2 PepsiCos financial statements are presented in Appendix A. Financial statements for The Coca-Cola Company are presented in Appendix B.


A Comparative Analysis Problem comparesand contrasts the financial reporting ofPepsiCo and The Coca-Cola Company.

E20-12 Alma Ortiz and Associates, a CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below are data concerning the three audit jobs conducted during November.

Perez Rivera Sota

Direct materials $600 $400 $200Auditor labor costs $5,400 $6,600 $3,375Auditor hours 72 88 45

Determine cost of jobs and ending balance in work in process and overhead accounts.

(SO 3, 4, 6)

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Comprehensive Problem: Chapters 3 to 7CP7 Packard Company has the following opening account balances in its general and subsidiaryledgers on January 1 and uses the periodic inventory system. All accounts have normal debit and credit balances.

General Ledger

Account January 1 Number Account Title Opening Balance

101 Cash $33,750

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Ethics Cases ask you to reflect on typical ethical dilemmas, analyze the

stakeholders and the issues involved, anddecide on an appropriate

course of action.

Decision Making Across theOrganization cases help you

build decision-making skills by analyzingaccounting information in a less

structured situation. These cases require you to work in teams.

A Look at IFRS provides an overview of the International Financial ReportingStandards (IFRS) that relate to the chapter topics, highlights the differences between GAAP and IFRS, discusses IFRS/GAAP convergence efforts, and tests your understandingthrough IFRS Self-Test Questions and IFRS Concepts and Application.

Decision Making Across the OrganizationBYP20-1 Burgio Parts Company uses a job order cost system. For a number of months, there has been an ongoing rift between the sales department and the production department concerning a special-order product, TC-1. TC-1 is a seasonal product that is manufactured in batches of 1,000 units. TC-1 is sold at cost plus a markup of 40% of cost.

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Ethics CaseBYP3-6 Bluestem Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of Bluestems chemical pesticides. In the coming year,Bluestem will have environmentally safe and competitive chemicals to replace these discontinued prod-ucts. Sales in the next year are expected to greatly exceed any prior years. The decline in sales and profi ts appears to be a one-year aberration. But even so, the company president fears a large dip in the current years profits. He believes that such a dip could cause a significant drop in the market price of Bluestems stock and make the company a takeover target.

T id hi ibili h id ll i C hi B ll ll di hi i d


FASB Codification Activity offers you theopportunity to use this online system,

which contains all the authoritative literaturerelated to a particular topic.

FASB Codifi cation ActivityBYP3-8 If your school has a subscription to the FASB Codifi cation, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following.

InstructionsAccess the glossary (Master Glossary) to answer the following.(a) What is the definition of revenue?(b) What is the definition of compensation?


Real World Focus problems require you toapply techniques and concepts learned inthe chapter to specific situations faced by

actual companies.

Real-World FocusBYP19-3 Anchor Glass Container Corporation, the third largest manufacturer of glass containers in the United States, supplies beverage and food producers and consumer products manufacturers nationwide. Parent company Consumers Packaging Inc. (Toronto Stock Exchange: CGC) is a leading international designer and manufacturer of glass containers.

The following management discussion appeared in a recent annual report of Anchor Glass.


Communication Activity problemshelp you to apply and practice businesscommunication skills.

Communication ActivityBYP3-5 In reviewing the accounts of Keri Ann Co. at the end of the year, you discover that adjusting entries have not been made.


All About You activities are designed toget you thinking and talking about howaccounting impacts your personal life.

All About You ActivityBYP3-7 Companies must report or disclose in their financial statements information about all liabilities,including potential liabilities related to environmental clean-up. There are many situations in which you will be asked to provide personal financial information about your assets, liabilities, revenue, and expenses.Sometimes you will face difficult decisions regarding what to disclose and how to disclose it.


Managerial Analysis assignments buildanalytical and decision-making skills insituations required by managers.

Managerial AnalysisBYP19-2 B.J. King is a fairly large manufacturing company located in the southern United States. The company manufactures tennis rackets, tennis balls, tennis clothing, and tennis shoes, all bearing the com-panys distinctive logo, a large green question mark on a white-flocked tennis ball. The companys sales have been increasing over the past 10 years.

The tennis racket division has recently implemented several advanced manufacturing techniques. Robot arms hold the tennis rackets in place while glue dries, and machine vision systems check for defects. The engineering and design team uses computerized drafting and testing of new products. The following managers work in the tennis racket division.

( )


It is often difficult for companies to determine in what time period they should report particular revenues and expenses. Both the IASB and FASB are working on a joint project to develop a common conceptual framework, as well as a revenue recognition project, that will enable com-panies to better use the same principles to record transactions consistently over time.

IFRS A Look at IFRS


Student O

wners M

anual

xi

On the Web exercises guide you to websites where you can find and analyze information related to the chapter topic.

On the WebBYP3-3 No financial decision maker should ever rely solely on the financial information reported in the annual report to make decisions. It is important to keep abreast of financial news. This activity demon-strates how to search for financial news on the Web.

Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/weygandt


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Acknowledgments

Prior EditionsThanks to the following reviewers and focus group participants of prior editions of Accounting Principles:

John Ahmad, Northern Virginia Community CollegeAnnandale;Sylvia Allen, Los Angeles Valley College; Matt Anderson, MichiganState University; Alan Applebaum, Broward Community College;Juanita Ardovany, Los Angeles Valley College; Yvonne Baker,Cincinnati State Tech Community College; Peter Battelle, Universityof Vermont; Colin Battle, Broward Community College; JimBenedum; Beverly Beatty, Anne Arundel Community College;Milwaukee Area Technical College; Jaswinder Bhangal, ChabotCollege; Bernard Bieg, Bucks County College; Michael Blackett,National American University; Barry Bomboy, J. Sargeant ReynoldsCommunity College; Kent D. Bowen, Butler County CommunityCollege; David Boyd, Arkansas State University; Greg Brookins,Santa Monica College; Kurt H. Buerger, Angelo State University;Leroy Bugger, Edison Community College; Leon Button, ScottsdaleCommunity College.

Ann Cardozo, Broward Community College; Steve Carlson,University of North Dakota; Fatma Cebenoyan, Hunter College;Kimberly Charland, Kansas State University; Trudy Chiaravelli,Lansing Community College; Shifei Chung, Rowan University; SiuChung, Los Angeles Valley College; Lisa Cole, Johnson CountyCommunity College; Kenneth Couvillion, San Joaquin DeltaCollege; Alan B. Czyzewski, Indiana State University; ThomasDavies, University of South Dakota; Peggy DeJong, KirkwoodCommunity College; John Delaney, Augustana College; TonyDellarte, Luzerne Community College; Kevin Dooley, KapiolaniCommunity College; Pam Donahue, Northern Essex CommunityCollege; Edmond Douville, Indiana University Northwest; PamelaDruger, Augustana College; Russell Dunn, Broward CommunityCollege; John Eagan, Erie Community College; Richard Ellison,Middlesex Community College; Dora Estes, Volunteer StateCommunity College; Mary Falkey, Prince Georges CommunityCollege.

Raymond Gardner, Ocean County College; Lori Grady, BucksCounty Community College; Richard Ghio, San Joaquin DeltaCollege; Joyce Griffin, Kansas City Community College; Amy Haas,Kingsborough Community College, CUNY; Lester Hall, DanvilleCommunity College; Becky Hancock, El Paso Community College;Jeannie Harrington, Middle Tennessee State University; BonnieHarrison, College of Southern Maryland; William Harvey, HenryFord Community College; Michelle Heard, MetropolitanCommunity College; Ruth Henderson, Union Community College;Ed Hess, Butler County Community College; Kathy Hill, LeewardCommunity College; Patty Holmes, Des Moines Area CommunityCollege; Zach Holmes, Oakland Community College; Paul Holt,Texas A&MKingsville; Audrey Hunter, Broward CommunityCollege; Verne Ingram, Red Rocks Community College; JoanneJohnson, Caldwell Community College; Naomi Karolinski, MonroeCommunity College; Anil Khatri, Bowie State University; ShirleyKleiner, Johnson County Community College; Jo Koehn, CentralMissouri State University; Ken Koerber, Bucks County CommunityCollege; Adriana Kulakowski, Mynderse Academy.

Sandra Lang, McKendree College; Cathy Xanthaky Larsen,Middlesex Community College; David Laurel, South TexasCommunity College; Robert Laycock, Montgomery College;Natasha Librizzi, Madison Area Technical College; William P. Lovell,Cayuga Community College; Melanie Mackey, Ocean CountyCollege; Jerry Martens, Community College of Aurora; MaureenMcBeth, College of DuPage; Francis McCloskey, CommunityCollege of Philadelphia; Chris McNamara, Finger Lakes CommunityCollege; Lori Major, Luzerne County Community College; EdwinMah, University of Maryland, University College; Thomas Marsh,Northern Virginia Community CollegeAnnandale; Jim Martin,University of Montevallo; Suneel Maheshwari, Marshall University;Shea Mears, Des Moines Area Community College; Pam Meyer,University of LouisianaLafayette; Cathy Montesarchio, BrowardCommunity College.

Robin Nelson, Community College of Southern Nevada; Joseph M.Nicassio, Westmoreland County Community College; MichaelONeill, Seattle Central Community College; Mike Palma, GwinnettTech; George Palz, Erie Community College; Michael Papke,Kellogg Community College; Ruth Parks, Kellogg CommunityCollege; Al Partington, Los Angeles Pierce College; Jennifer Patty,Des Moines Area Community College; Yvonne Phang, Borough ofManhattan Community College; Jan Pitera, Broome CommunityCollege; Mike Prockton, Finger Lakes Community College; Laura M.Prosser, Black Hills State University; Bill Rencher, SeminoleCommunity College; Jenny Resnick, Santa Monica College; ReneeRigoni, Monroe Community College; Kathie Rogers, SUNY Suffolk;Al Ruggiero, SUNY Suffolk; Jill Russell, Camden County College.

Roger Sands, Milwaukee Area Technical College; Marcia Sandvold,Des Moines Area Community College; Richard Sarkisian, CamdenCommunity College; Kent Schneider, East Tennessee StateUniversity; Karen Searle, Paul J. Shinal, Cayuga CommunityCollege; Beth Secrest, Walsh University; Kevin Sinclair, LehighUniversity; Alice Sineath, Forsyth Tech Community College; LeonSingleton, Santa Monica College; Michael S. Skaff, College of theSequoias; Jeff Slater, North Shore Community College; Lois Slutsky,Broward Community College; Dan Small, J. Sargeant ReynoldsCommunity College; Lee Smart, Southwest Tennessee CommunityCollege; James Smith, Ivy Tech State College; Carol Springer,Georgia State University; Jeff Spoelman, Grand Rapids CommunityCollege; Norman Sunderman, Angelo State University.

Donald Terpstra, Jefferson Community College; Lynda Thompson,Massasoit Community College; Shafi Ullah, Broward CommunityCollege; Sue Van Boven, Paradise Valley Community College;Christian Widmer, Tidewater Community College; Wanda Wong,Chabot College; Pat Walczak, Lansing Community College; KentonWalker, University of Wyoming; Patricia Wall, Middle TennesseeState University; Carol N. Welsh, Rowan University; IdaleneWilliams, Metropolitan Community College; Gloria Worthy,Southwest Tennessee Community College.

Thanks also to perpetual reviewers Robert Benjamin, TaylorUniversity; Charles Malone, Tammy Wend, and Carol Wysocki, all of Columbia Basin College; and William Gregg of MontgomeryCollege. We appreciate their continuing interest in the textbookand their regular contributions of ideas to improve it.

Accounting Principles has benefited greatly from the input of focus group participants, manuscript reviewers,those who have sent comments by letter or e-mail, ancillary authors, and proofers. We greatly appreciate the constructive suggestions and innovative ideas of reviewers and the creativity and accuracy of the ancillary authors and checkers.

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Tenth EditionThanks to the following reviewers, focus group participants,and others who provided suggestions for the Tenth Edition:

Sylvia Allen Los Angeles Valley CollegeJuanita Ardavany Los Angeles Valley CollegeShele Bannon Queensborough Community CollegeAmy Bentley Tallahassee Community CollegeTimothy Bergsma Davenport UniversityTeri Bernstein Santa Monica CollegePatrick Borja Citrus CollegeStanley Carroll New York City College of TechnologySiu Chung Los Angeles Valley CollegeCarol Collinsworth University of TexasBrownsvilleKelly Cranford Hinds Community CollegeRaymondLiz Diers Black Hills State UniversitySamuel A. Duah Bowie State UniversityCarle Essig Montgomery County Community College Annette Fisher Glendale Community CollegeKelly Ford Queensborough Community CollegeLori Grady Bucks County Community CollegeMary Halford Prince Georges Community CollegeThomas Kam Hawaii Pacific UniversityNaomi Karolinski Monroe Community CollegeLynn Krausse Bakersfield CollegeDavid Krug Johnson County Community CollegeCathy X. Larson Middlesex Community CollegeDavid Laurel South Texas CollegeChristina Manzo Queensborough Community CollegeBeverly Mason Front Range Community CollegeRobert Maxwell College of the CanyonsJill Mitchell Northern Virginia Community College

AnnandaleRonald OBrien Fayetteville Technical Community CollegeMichael Motes University of Maryland University CollegeGregory L. Prescott University of South AlabamaJan Pitera Broome Community CollegeDebra A. Sills Porter Tidewater Community CollegeWilliam Prosser Cuyuga County Community CollegeAda Rodriguez Lehman College, The City University of

New YorkEric Rothenburg Kingsborough Community College, The City

University of New YorkAl Ruggiero Suffolk County Community CollegeMarcia Sandvold Des Moines Area Community CollegeMary Jane Sauceda University of TexasBrownsvillePaul J. Shinal Cayauga Community CollegeBradley Smith Des Moines Area Community CollegeScott Stroher Glendale Community CollegeGeoffrey Tickell Indiana University of PennsylvaniaPat Walczak Lansing Community CollegeWanda Wong Chabot CollegeJack Wiehler San Joaquin Delta College

Ancillary Authors, Contributors, and ProofersWe sincerely thank the following individuals for their hard work in preparing the content that accompanies this textbook:

LuAnn Bean Florida Institute of TechnologyJohn C. Borke University of WisconsinPlattevilleRichard Campbell Rio Grande CollegeSiu Chung Los Angeles Valley CollegeMel Coe DeVry Institute of Technology, AtlantaChris Cole Cole Creative GroupJoan Cook Milwaukee Area Technical CollegeLarry Falcetto Emporia State UniversityMark Gleason Metropolitan State UniversityLori Grady Bucks County Community CollegeCoby Harmon University of California, Santa BarbaraDouglas W. Kieso Aurora UniversityYvonne Phang Borough of Manhattan Community CollegeRex A. Schildhouse San Diego Community CollegeMiramarEileen Shifflett James Madison UniversityDiane Tanner University of North FloridaSheila Viel University of WisconsinMilwaukeeDick Wasson Southwestern CollegeBernard Weinrich Lindenwood UniversityMelanie Yon

We also greatly appreciate the expert assistance providedby the following individuals in checking the accuracyof the content that accompanies this textbook:

LuAnn Bean Florida Institute of TechnologyJack Borke University of WisconsinPlattevilleSandee Cohen Columbia CollegeTerry Elliott Morehead State UniversityJames Emig Villanova UniversityLarry Falcetto Emporia State UniversityAnthony Falgiani Western Illinois UniversityLori Grady Bucks County Community CollegeKirk Lynch Sandhills Community CollegeKevin McNelis New Mexico State UniversityJill Misuraca Central Connecticut State UniversityBarbara Muller Arizona State UniversityJohn Plouffe California State UniversityLos AngelesEd Schell University of HawaiiRex Schildhouse San Diego Community CollegeMiramarAlice Sineath Forsyth Tech Community CollegeTeresa Speck St. Marys UniversityLynn Stallworth Appalachian State UniversitySheila Viel University of WisconsinMilwaukeeDick Wasson Southwestern CollegeAndrea Weickgenannt Xavier UniversityBernie Weinrich Lindenwood University

Our thanks to the publishing pros who contribute to our efforts topublish high-quality products that benefit both teachers and students:Terry Ann Tatro, development editor; Ed Brislin, project editor; YanaMermel, project editor; Allie K. Morris, executive media editor; GregChaput, media editor; Jacqueline Kepping, editorial assistant; ValerieA. Vargas, senior production editor; Maddy Lesure, textbook designer;Dorothy Sinclair, managing editor; Erin Bascom, production editor,Pam Kennedy, director of production and manufacturing; Ann Berlin,vice president of higher education production and manufacturing;Mary Ann Price, photo editor; Sandra Rigby, illustration editor;Suzanne Ingrao of Ingrao Associates, project manager; Jo-AnneNaples, permissions editor; Denise Showers of Aptara Inc., projectmanager at Aptara Inc.; Danielle Urban, project manager at Elm StreetPublishing Services; and Cyndy Taylor. They provided innumerableservices that helped this project take shape.

We also appreciate the exemplary support and professional commit-ment given us by Chris DeJohn, associate publisher, and the enthusiasm

and ideas that Ramona Sherman, senior marketing manager, brings tothe project.

Finally, our thanks to Amy Scholz, Susan Elbe, George Hoffman, TimStookesberry, Joe Heider, Bonnie Lieberman, and Will Pesce for theirsupport and leadership in Wileys College Division.

We thank PepsiCo, Inc. for permitting us the use of its 2009 annualreports for our specimen financial statements and accompanyingnotes. You can send your thoughts and ideas about the textbook tous via email at: [email protected].

Jerry J. WeygandtMadison, Wisconsin

Paul D. KimmelMilwaukee, Wisconsin

Donald E. KiesoDeKalb, Illinois

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Brief Contents1 Accounting in Action 22 The Recording Process 503 Adjusting the Accounts 984 Completing the Accounting Cycle 1525 Accounting for Merchandising Operations 2086 Inventories 2607 Accounting Information Systems 3148 Fraud, Internal Control, and Cash 3609 Accounting for Receivables 41410 Plant Assets, Natural Resources, and Intangible

Assets 45611 Current Liabilities and Payroll Accounting 50812 Accounting for Partnerships 55213 Corporations: Organization and Capital Stock

Transactions 59214 Corporations: Dividends, Retained Earnings, and

Income Reporting 63215 Long-Term Liabilities 66816 Investments 72217 Statement of Cash Flows 76018 Financial Statement Analysis 82419 Managerial Accounting 87620 Job Order Costing 92221 Process Costing 96422 Cost-Volume-Profit 101023 Budgetary Planning 105224 Budgetary Control and Responsibility

Accounting 109625 Standard Costs and Balanced Scorecard 114626 Incremental Analysis and Capital Budgeting 1192

APPENDICES

A Specimen Financial Statements: PepsiCo, Inc. A1B Specimen Financial Statements: The Coca-Cola

Company, Inc. B1C Specimen Financial Statements: Zetar plc C1D Time Value of Money D1E Using Financial Calculators E1F Standards of Ethical Conduct for Management

Accountants F1xv

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Contentschapter 1

Accounting in Action 2Feature Story: Knowing the Numbers 2What Is Accounting? 4

Three Activities 4Who Uses Accounting Data 6

The Building Blocks of Accounting 7Ethics in Financial Reporting 7Generally Accepted Accounting Principles 9Measurement Principles 9Assumptions 10

The Basic Accounting Equation 12Assets 12Liabilities 13Owners Equity 13

Using the Accounting Equation 14Transaction Analysis 15Summary of Transactions 20

Financial Statements 21Income Statement 23Owners Equity Statement 23Balance Sheet 24Statement of Cash Flows 24

APPENDIX 1A Accounting Career Opportunities 29Public Accounting 29Private Accounting 29Opportunities in Government 30Forensic Accounting 30Show Me the Money 30

A Look at IFRS 46

chapter 2

The Recording Process 50Feature Story: Accidents Happen 50The Account 52

Debits and Credits 52Summary of Debit/Credit Rules 56

Steps in the Recording Process 57The Journal 58The Ledger 60

The Recording Process Illustrated 63Summary Illustration of Journalizing and

Posting 70The Trial Balance 70

Limitations of a Trial Balance 72Locating Errors 72Use of Dollar Signs 73

A Look at IFRS 94

chapter 3

Adjusting the Accounts 98Feature Story: What Was Your Profit? 98Timing Issues 100

Fiscal and Calendar Years 100Accrual- vs. Cash-Basis Accounting 101Recognizing Revenues and Expenses 101

The Basics of Adjusting Entries 103Types of Adjusting Entries 103Adjusting Entries for Deferrals 104Adjusting Entries for Accruals 111Summary of Basic Relationships 117

The Adjusted Trial Balance and Financial Statements 119

Preparing the Adjusted Trial Balance 119Preparing Financial Statements 120

APPENDIX 3A Alternative Treatment of PrepaidExpenses and Unearned Revenues 124

Prepaid Expenses 125Unearned Revenues 126Summary of Additional Adjustment

Relationships 127A Look at IFRS 148

chapter 4

Completing the Accounting Cycle 152Feature Story: Everyone Likes to Win 152Using a Worksheet 154

Steps in Preparing a Worksheet 154Preparing Financial Statements from

a Worksheet 158Preparing Adjusting Entries from a

Worksheet 158Closing the Books 160

Preparing Closing Entries 161Posting Closing Entries 163Preparing a Post-Closing Trial Balance 165

Summary of the Accounting Cycle 167Reversing EntriesAn Optional Step 168Correcting EntriesAn Avoidable Step 168

The Classified Balance Sheet 170Current Assets 172Long-Term Investments 172Property, Plant, and Equipment 173Intangible Assets 173Current Liabilities 174Long-Term Liabilities 175Owners Equity 176

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APPENDIX 4A Reversing Entries 181Reversing Entries Example 181

A Look at IFRS 204

chapter 5

Accounting for MerchandisingOperations 208Feature Story: Who Doesnt Shop at Wal-Mart? 208Merchandising Operations 210

Operating Cycles 211Flow of Costs 211

Recording Purchases of Merchandise 213Freight Costs 215Purchase Returns and Allowances 216Purchase Discounts 216Summary of Purchasing Transactions 217

Recording Sales of Merchandise 218Sales Returns and Allowances 219Sales Discounts 220

Completing the Accounting Cycle 222Adjusting Entries 222Closing Entries 222Summary of Merchandising Entries 223

Forms of Financial Statements 224Multiple-Step Income Statement 224Single-Step Income Statement 227Classified Balance Sheet 227

APPENDIX 5A Periodic Inventory System 232Determining Cost of Goods Sold Under a Periodic

System 232Recording Merchandise Transactions 233Recording Purchases of Merchandise 233Recording Sales of Merchandise 234

APPENDIX 5B Worksheet for a Merchandising Company 236

Using a Worksheet 236A Look at IFRS 257

chapter 6

Inventories 260Feature Story: Where Is That Spare Bulldozer Blade? 260Classifying Inventory 262Determining Inventory Quantities 263

Taking a Physical Inventory 263Determining Ownership of Goods 264

Inventory Costing 266Specific Identification 267Cost Flow Assumptions 267Financial Statement and Tax Effects of Cost

Flow Methods 272Using Inventory Cost Flow Methods

Consistently 274Lower-of-Cost-or-Market 275

Inventory Errors 276Income Statement Effects 276Balance Sheet Effects 277

Statement Presentation and Analysis 278Presentation 265Analysis 279

APPENDIX 6A Inventory Cost Flow Methods inPerpetual Inventory Systems 283

First-In, First-Out (FIFO) 283Last-In, First-Out (LIFO) 284Average-Cost 284

APPENDIX 6B Estimating Inventories 286Gross Profit Method 287Retail Inventory Method 288

A Look at IFRS 310

chapter 7

Accounting Information Systems 314Feature Story: QuickBooks Helps This Retailer Sell Guitars 314Basic Concepts of Accounting Information

Systems 316Computerized Accounting Systems 316Manual Accounting Systems 319

Subsidiary Ledgers 319Subsidiary Ledger Example 320Advantages of Subsidiary Ledgers 321

Special Journals 322Sales Journal 323Cash Receipts Journal 325Purchases Journal 329Cash Payments Journal 331Effects of Special Journals on the General

Journal 334A Look at IFRS 357

chapter 8

Fraud, Internal Control, and Cash 360Feature Story: Minding the Money in Moose Jaw 360Fraud and Internal Control 362

Fraud 362The Sarbanes-Oxley Act 363Internal Control 363Principles of Internal Control Activities 364Limitations of Internal Control 371

Cash Controls 372Cash Receipts Controls 372Cash Disbursements Controls 375

Control Features: Use of a Bank 380Making Bank Deposits 380Writing Checks 380Bank Statements 381

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Reconciling the Bank Account 383Electronic Funds Transfer (EFT) System 387

Reporting Cash 388Cash Equivalents 388Restricted Cash 389

A Look at IFRS 410

chapter 9

Accounting for Receivables 414Feature Story: A Dose of Careful Management KeepsReceivables Healthy 414Types of Receivables 416Accounts Receivable 417

Recognizing Accounts Receivable 417Valuing Accounts Receivable 418Disposing of Accounts Receivable 425

Notes Receivable 427Determining the Maturity Date 428Computing Interest 429Recognizing Notes Receivable 430Valuing Notes Receivable 430Disposing of Notes Receivable 431


A Look at IFRS 453

chapter 10

Plant Assets, Natural Resources, and Intangible Assets 456Feature Story: How Much for a Ride to the Beach? 456SECTION 1 Plant Assets 458Determining the Cost of Plant Assets 459

Land 459Land Improvements 459Buildings 460Equipment 460

Depreciation 462Factors in Computing Depreciation 463Depreciation Methods 464Depreciation and Income Taxes 468Revising Periodic Depreciation 468

Expenditures During Useful Life 470Plant Assets Disposals 471

Retirement of Plant Assets 471Sale of Plant Assets 472

SECTION 2 Natural Resources 474SECTION 3 Intangible Assets 475Accounting for Intangible Assets 475

Patents 476Copyrights 476Trademarks and Trade Names 476Franchises and Licenses 477Goodwill 477

Research and Development Costs 478Statement Presentation and Analysis 479

Presentation 479Analysis 480

APPENDIX 10A Exchange of Plant Assets 484Loss Treatment 484Gain Treatment 485

A Look at IFRS 504

chapter 11

Current Liabilities and PayrollAccounting 508Feature Story: Financing His Dreams 508Accounting for Current Liabilities 510

Notes Payable 510Sales Taxes Payable 511Unearned Revenues 512Current Maturities of Long-Term Debt 513Statement Presentation and Analysis 514

Contingent Liabilities 515Recording a Contingent Liability 516Disclosure of Contingent Liabilities 517

Payroll Accounting 518Determining the Payroll 519Recording the Payroll 522Employer Payroll Taxes 525Filing and Remitting Payroll Taxes 528Internal Control for Payroll 528

APPENDIX 11A Additional Fringe Benefits 532Paid Absences 532Post-Retirement Benefits 533

A Look at IFRS 549

chapter 12

Accounting for Partnerships 552Feature Story: From Trials to Top Ten 552Partnership Form of Organization 554

Characteristics of Partnerships 554Organizations with Partnership

Characteristics 555Advantages and Disadvantages of

Partnerships 556The Partnership Agreement 558

Basic Partnership Accounting 559Forming a Partnership 559Dividing Net Income or Net Loss 560Partnership Financial Statements 563

Liquidation of a Partnership 564No Capital Deficiency 565Capital Deficiency 568

APPENDIX 12A Admission and Withdrawal ofPartners 572

Admission of a Partner 572Withdrawal of a Partner 576

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chapter 13

Corporations: Organization andCapital Stock Transactions 592Feature Story: Whats Cooking? 592The Corporate Form of Organization 594

Characteristics of a Corporation 595Forming a Corporation 597Ownership Rights of Stockholders 598Stock Issue Considerations 598Corporate Capital 601

Accounting for Issues of Common Stock 603Issuing Par Value Common Stock for Cash 603Issuing No-Par Common Stock for Cash 604Issuing Common Stock for Services or Noncash

Assets 605Accounting for Treasury Stock 606

Purchase of Treasury Stock 607Disposal of Treasury Stock 608

Preferred Stock 610Dividend Preferences 610Liquidation Preference 611

Statement Presentation 611A Look at IFRS 629

chapter 14

Corporations: Dividends, Retained Earnings, and IncomeReporting 632Feature Story: Owning a Piece of the Action 632Dividends 634

Cash Dividends 634Stock Dividends 638Stock Splits 640

Retained Earnings 642Retained Earnings Restrictions 643Prior Period Adjustments 644Retained Earnings Statement 645

Statement Presentation and Analysis 646Stockholders Equity Presentation 646Stockholders Equity Analysis 647Income Statement Presentation 647Income Statement Analysis 648

A Look at IFRS 665

chapter 15

Long-Term Liabilities 668Feature Story: Thanks Goodness for Bankruptcy 668Bond Basics 670

Types of Bonds 671Issuing Procedures 672Determining the Market Value of Bonds 672

Accounting for Bond Issues 674Issuing Bonds at Face Value 674

Discount or Premium on Bonds 675Issuing Bonds at a Discount 676Issuing Bonds at a Premium 677

Accounting for Bond Retirements 678Redeeming Bonds at Maturity 679Redeeming Bonds before Maturity 679Converting Bonds into Common Stock 679

Accounting for Other Long-Term Liabilities 680Long-Term Notes Payable 680Lease Liabilities 683


APPENDIX 15A Present Value Concepts Related to Bond Pricing 690

Present Value of Face Value 690Present Value of Interest Payments

(Annuities) 692Time Periods and Discounting 693Computing the Present Value of a Bond 693

APPENDIX 15B Effective-Interest Method of Bond Amortization 695

Amortizing Bond Discount 695Amortizing Bond Premium 697

APPENDIX 15C Straight-Line Amortization 699Amortizing Bond Discount 699Amortizing Bond Premium 700

A Look at IFRS 718

chapter 16

Investments 722Feature Story: Is There Anything Else We Can Buy? 722Why Corporations Invest 724Accounting for Debt Investments 725

Recording Acquisition of Bonds 726Recording Bond Interest 726Recording Sale of Bonds 726

Accounting for Stock Investments 727Holdings of Less than 20% 728Holdings Between 20% and 50% 729Holdings of More than 50% 730

Valuing and Reporting Investments 732Categories of Securities 733Balance Sheet Presentation 736Presentation of Realized and Unrealized

Gain or Loss 737Classified Balance Sheet 738

A Look at IFRS 757

chapter 17

Statement of Cash Flows 760Feature Story: Got Cash? 760The Statement of Cash Flows: Usefulness

and Format 762

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Usefulness of the Statement of Cash Flows 762

Classification of Cash Flows 763Significant Noncash Activities 764Format of the Statement of Cash Flows 765Preparing the Statement of Cash Flows 766Indirect and Direct Methods 767

Preparing the Statement of Cash FlowsIndirectMethod 768

Step 1: Operating Activities 769Summary of Conversion to Net Cash Provided

by Operating ActivitiesIndirect Method 773Step 2: Investing and Financing Activities 774Step 3: Net Change in Cash 775

Using Cash Flows to Evaluate a Company 778Free Cash Flow 778

APPENDIX 17A Using a Work Sheet to Preparethe Statement of Cash FlowsIndirect Method 783

Preparing the Worksheet 784APPENDIX 17B Statement of Cash FlowsDirectMethod 789

Step 1: Operating Activities 790Step 2: Investing and Financing Activities 794Step 3: Net Change in Cash 795

A Look at IFRS 820

chapter 18

Financial Statement Analysis 824Feature Story: It Pays to Be Patient 824Basics of Financial Statement Analysis 826

Need for Comparative Analysis 826Tools of Analysis 827

Horizontal Analysis 827Balance Sheet 828Income Statement 829Retained Earnings Statement 830

Vertical Analysis 831Balance Sheet 831Income Statement 831

Ratio Analysis 833Liquidity Ratios 835Profitability Ratios 838Solvency Ratios 842Summary of Ratios 843

Earning Power and Irregular Items 846Discontinued Operations 846Extraordinary Items 847Changes in Accounting Principle 848Comprehensive Income 849

Quality of Earnings 850Alternative Accounting Methods 850Pro Forma Income 850Improper Recognition 851

A Look at IFRS 874

chapter 19

Managerial Accounting 876Feature Story: Think Fast 876Managerial Accounting Basics 878

Comparing Managerial and Financial Accounting 879

Management Functions 880Organizational Structure 881Business Ethics 882

Managerial Cost Concepts 884Manufacturing Costs 884Product versus Period Costs 886

Manufacturing Costs in Financial Statements 887

Income Statement 887Cost of Goods Manufactured 888Balance Sheet 890Cost ConceptsA Review 891

Managerial Accounting Today 894The Value Chain 894Technological Change 895Just-in-Time Inventory Methods 895Quality 896Activity-Based Costing 896Theory of Constraints 896Balanced Scorecard 897

chapter 20

Job Order Costing 922Feature Story: . . . And Wed Like It in Red 922Cost Accounting Systems 924

Job Order Cost System 924Process Cost System 925

Job Order Cost Flow 926Accumulating Manufacturing Costs 927Assigning Manufacturing Costs to Work in

Process 929Assigning Costs to Finished Goods 936Assigning Costs to Cost of Goods Sold 937Job Order Costing for Service Companies 937Summary of Job Order Cost Flows 938Advantages and Disadvantages of Job Order

Costing 940Reporting Job Cost Data 941Under- or Overapplied Manufacturing

Overhead 941

chapter 21

Process Costing 964Feature Story: Ben & Jerrys Tracks Its Mix-Ups 964The Nature of Process Cost Systems 966

Uses of Process Cost Systems 966Process Costing for Service Companies 967

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Similarities and Differences between Job OrderCost and Process Cost Systems 967

Process Cost Flow 969Assignment of Manufacturing CostsJournal

Entries 970Equivalent Units 972

Weighted-Average Method 973Refinements on the Weighted-Average

Method 974Production Cost Report 975

Comprehensive Example of Process Costing 976

Compute the Physical Unit Flow (Step 1) 977Compute Equivalent Units of Production

(Step 2) 978Compute Unit Production Costs (Step 3) 978Prepare a Cost Reconciliation Schedule

(Step 4) 979Preparing the Production Cost Report 980Costing SystemsFinal Comments 981

Contemporary Developments 982Just-in-Time Processing 982Activity-Based Costing 984

APPENDIX 21A Example of Traditional Costingversus Activity-Based Costing 989

Production and Cost Data 989Unit Costs Under Traditional Costing 989Unit Costs Under ABC 989Comparing Unit Costs 990Benefits and Limitations of Activity-Based

Costing 991

chapter 22

Cost-Volume-Profit 1010Feature Story: Understanding Medical Costs Might Lead to Better Health Care 1010Cost Behavior Analysis 1012

Variable Costs 1012Fixed Costs 1013Relevant Range 1014Mixed Costs 1015Importance of Identifying Variable and Fixed

Costs 1019Cost-Volume-Profit Analysis 1020

Basic Components 1020CVP Income Statement 1020Break-even Analysis 1023Target Net Income 1026Margin of Safety 1027CVP and Changes in the Business

Environment 1028CVP Income Statement Revisited 1030

APPENDIX 22A Variable Costing 1034Effects of Variable Costing on Income 1035Rationale for Variable Costing 1036

chapter 23

Budgetary Planning 1052Feature Story: The Next amazon.com? Not Quite 1052Budgeting Basics 1054

Budgeting and Accounting 1054The Benefits of Budgeting 1055Essentials of Effective Budgeting 1055Length of the Budget Period 1055The Budgeting Process 1055Budgeting and Human Behavior 1056Budgeting and Long-Range Planning 1058The Master Budget 1058

Preparing the Operating Budgets 1059Sales Budget 1059Production Budget 1060Direct Materials Budget 1061Direct Labor Budget 1063Manufacturing Overhead Budget 1064Selling and Administrative Expense

Budget 1065Budgeted Income Statement 1065

Preparing the Financial Budgets 1067Cash Budget 1067Budgeted Balance Sheet 1070

Budgeting in Non-Manufacturing Companies 1072

Merchandisers 1072Service Enterprises 1073Not-for-Profit Organizations 1073

chapter 24

Budgetary Control andResponsibility Accounting 1096Feature Story: Turning Trash into Treasure 1096The Concept of Budgetary Control 1098Static Budget Reports 1099

Examples 1099Uses and Limitations 1100

Flexible Budgets 1101Why Flexible Budgets? 1101Developing the Flexible Budget 1103Flexible BudgetA Case Study 1104Flexible Budget Reports 1106Management by Exception 1108

The Concept of Responsibility Accounting 1109Controllable versus Non-controllable Revenues

and Costs 1111Responsibility Reporting System 1111

Types of Responsibility Centers 1112Responsibility Accounting for Cost Centers 1114Responsibility Accounting for Profit Centers 1115Responsibility Accounting for Investment

Centers 1117Principles of Performance Evaluation 1120

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chapter 25

Standard Costs and Balanced Scorecard 1146Feature Story: Highlighting Performance Efficiency 1146The Need for Standards 1148

Distinguishing between Standards and Budgets 1148

Why Standard Costs? 1149Setting Standard CostsA Difficult Task 1150

Ideal versus Normal Standards 1150A Case Study 1150

Analyzing and Reporting Variances from Standards 1154

Direct Materials Variances 1155Direct Labor Variances 1157Causes of Labor Variances 1158Manufacturing Overhead Variances 1159Reporting Variances 1160Statement Presentation of Variances 1161

Balanced Scorecard 1162APPENDIX 25A Standard Cost Accounting System 1168

Journal Entries 1168Ledger Accounts 1170

APPENDIX 25B A Closer Look at Overhead Variances 1171

Overhead Controllable Variance 1171Overhead Volume Variance 1172

chapter 26

Incremental Analysis and CapitalBudgeting 1192Feature Story: Soup Is Good Food 1192SECTION 1 Incremental Analysis 1194Managements Decision-Making Process 1194

The Incremental Analysis Approach 1195How Incremental Analysis Works 1195

Types of Incremental Analysis 1196Accept an Order at a Special Price 1196Make or Buy 1198Sell or Process Further 1200Retain or Replace Equipment 1201Eliminate an Unprofitable Segment 1202Allocate Limited Resources 1204

SECTION 2 Capital Budgeting 1205Evaluation Process 1206Annual Rate of Return 1207Cash Payback 1208Discounted Cash Flow 1210

Net Present Value Method 1210Internal Rate of Return Method 1212Comparing Discounted Cash Flow

Methods 1214

appendix A

Specimen Financial Statements: PepsiCo, Inc. A1

appendix B

Specimen Financial Statements: TheCoca-Cola Company B1

appendix C

Specimen Financial Statements: Zetar plc C1

appendix D

Time Value of Money D1Nature of Interest D1

Simple Interest D1Compound Interest D2

Present Value Variables D3Present Value of a Single Amount D3Present Value of an Annuity D5Time Periods and Discounting D7Computing the Present Value of a

Long-Term Note or Bond D7

appendix E

Using Financial Calculators E1Present Value of a Single Sum E1

Plus and Minus E2Compounding Periods E2Rounding E2

Present Value of an Annuity E2Useful Applications of the Financial Calculator E3

Auto Loan E3Mortgage Loan Amount E3

appendix F

Standards of Ethical Conduct forManagement Accountants F1IMA Statement of Ethical Professional

Practice F1Principles F1Standards F1Resolution of Ethical Conflict F2

photo credits PC-1company index I-1subject index I-3

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Accounting in

ActionStudy ObjectivesAfter studying this chapter, you should be able to:

[1] Explain what accounting is.

[2] Identify the users and uses of accounting.

[3] Understand why ethics is a fundamental business concept.

[4] Explain generally accepted accounting principles.

[5] Explain the monetary unit assumption and the economic entity assumption.

[6] State the accounting equation, and defi ne its components.

[7] Analyze the effects of business transactions on the accounting equation.

[8] Understand the four fi nancial statements and how they are prepared.

Feature StoryKNOWING THE NUMBERS

Many students who take this course do not plan to be accountants. If you are in that group, you might be thinking, If Im not going to be an accountant, why do I need to know accounting? In response, consider the quote from Harold Geneen, the former chairman of IT&T: To be good at your business, you have to know the numberscold. Success in any business comes back to the numbers. You will rely on them to make decisions, and managers will use them to evaluate your performance. That is true whether your job involves marketing, produc-tion, management, or information systems.

In business, accounting and fi nancial statements are the means for communi-cating the numbers. If you dont know how to read fi nancial statements, you cant really know your business.

Many companies spend signifi cant resources teaching their employees basic accounting so

CHAPTER1

Scan Study Objectives

Read Feature Story

Read Preview

Read text and answer Do it! p. 11 p. 14 p. 21 p. 25

Work Comprehensive Do it! p. 26

Review Summary of Study Objectives

Answer Self-Test Questions

Complete Assignments

Go to WileyPLUS for practice and tutorials

Read A Look at IFRS p. 46

[The Navigator]

[The Navigator]

2

Study Objectives give you a framework for learning the specifi c concepts covered in the chapter.

The Navigator is a learning system designed to prompt you to use the learning aids in the chapter and set priorities as you study.

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InsideCHAPTER1 Accounting Across the Organization: The Scoop on Accounting (p. 6)

Ethics Insight: The Numbers Behind Not-for-Profi t Organizations (p. 8)

International Insight: The Korean Discount (p. 10)

Accounting Across the Organization: Spinning the Career Wheel (p. 12)

that they can read fi nancial statements and understand how their actions affect the companys fi nancial results. One such company is Springfi eld ReManufacturing Corporation (SRC). When Jack Stack and 11 other managers purchased SRC for 10 cents a share, it was a failing division of International Harvester. Jacks 119 employees, however, were counting on him for their livelihood. He decided that for the company to survive, every employee needed to think like a businessperson and to act like an owner. To accomplish this, all employees at SRC took basic

accounting courses and participated in weekly reviews of the companys fi nancial statements. SRC survived, and eventually thrived. To this day, every employee (now numbering more than 1,000) undergoes this same training.

Many other companies have adopted this approach, which is called open-book management. Even in companies that do not practice open-book management, employers generally assume that managers in all areas of the company are fi nancially literate.

Taking this course will go a long way to making you fi nancially literate. In this book, you will learn how to read and prepare fi nancial statements, and how to use basic tools to evaluate fi nancial results. Appendices A and B provide real fi nancial statements of two well-known companies, PepsiCo, Inc. and The Coca-Cola Company. Throughout this textbook, we attempt to increase your familiarity with fi nancial reporting by providing numerous references, questions, and exercises that encourage you to explore these fi nancial statements.

[The Navigator]

3

The Feature Story helps you picture how the chapter topic relates to the real world of accounting and business. You will fi nd references to the story throughout the chapter.

Inside Chapter x lists boxes in the chapter that should be of special interest to you.


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4

Why is accounting so popular? What consistently ranks as one of the top career opportunities in business? What frequently rates among the most popular majors on campus? What was the undergraduate degree chosen by Nike founder Phil Knight, Home Depot co-founder Arthur Blank, former acting director of the Federal Bureau of Investigation (FBI) Thomas Pickard, and numerous members of Congress? Accounting.1 Why did these people choose accounting? They wanted to understand what was happening fi nancially to their organizations. Accounting is the fi nancial information system that provides these insights. In short, to under-stand your organization, you have to know the numbers.

Accounting consists of three basic activitiesit identifi es, records, and com-municates the economic events of an organization to interested users. Lets take a closer look at these three activities.

Three ActivitiesAs a starting point to the accounting process, a company identifi es the economic events relevant to its business. Examples of economic events are the sale of snack chips by PepsiCo, providing of telephone services by AT&T, and payment of wages by Ford Motor Company.

Once a company like PepsiCo identifi es economic events, it records those events in order to provide a history of its fi nancial activities. Recording consists of

What Is Accounting?

Study Objective [1]Explain what accounting is.

1The appendix to this chapter describes job opportunities for accounting majors and explains why accounting is such a popular major.

[The Navigator]

The opening story about Springfi eld ReManufacturing Corporation highlights the importance of having good fi nancial information to make effective business decisions. Whatever ones pursuits or occupation, the need for fi nancial information is inescapable. You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing fi nancial information. Good decision making depends on good information.

The purpose of this chapter is to show you that accounting is the system used to provide useful fi nancial information. The content and organization of Chapter 1 are as follows.

PreviewofCHAPTER1

Ethics in fi nancial reporting

Generally accepted accounting principles

Measurement principles

Assumptions

Assets Liabilities Owners equity

Transaction analysis Summary of

transactions

Income statement Owners equity

statement Balance sheet Statement of cash

fl ows

Accounting in Action

What Is Accounting?

Three activities Who uses accounting

data

The Building Blocks of Accounting

The Basic Accounting Equation

Using the Accounting Equation Financial Statements

The Preview describes and outlines the major topics and subtopics you will see in the chapter.


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What Is Accounting? 5

keeping a systematic, chronological diary of events, measured in dollars and cents. In recording, PepsiCo also classifi es and summarizes economic events.

Finally, PepsiCo communicates the collected information to interested users by means of accounting reports. The most common of these reports are called fi nan-cial statements. To make the reported fi nancial information meaningful, PepsiCo reports the recorded data in a standardized way. It accumulates information result-ing from similar transactions. For example, PepsiCo accumulates all sales transac-tions over a certain period of time and reports the data as one amount in the companys fi nancial statements. Such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifi es a multitude of transactions and makes a series of activities understandable and meaningful.

A vital element in communicating economic events is the accountants ability to analyze and interpret the reported information. Analysis involves use of ratios, per-centages, graphs, and charts to highlight signifi cant fi nancial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of reported data. Appendix A of this textbook shows the fi nancial statements of PepsiCo, Inc.; Appendix B illustrates the fi nancial statements of The Coca-Cola Company. We re-fer to these statements at various places throughout the text. At this point, they probably strike you as complex and confusing. By the end of this course, youll be surprised at your ability to understand, analyze, and interpret them.

Illustration 1-1 summarizes the activities of the accounting process.

2The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian Renaissance mathematician. Pacioli was a close friend and tutor to Leonardo da Vinci and a contemporary of Christopher Columbus. In his 1494 text Summa de Arithmetica, Geometria, Proportione et Proportionalite, Pacioli described a system to ensure that fi nancial information was recorded effi ciently and accurately.

You should understand that the accounting process includes the bookkeeping function. Bookkeeping usually involves only the recording of economic events. It is therefore just one part of the accounting process. In total, accounting involves the entire process of identifying, recording, and communicating economic events.2

Identification Recording

Communication

Select economic events (transactions) Record, classify, and summarize

Prepare accounting reports

Analyze and interpret for usersAnn

ualNOKIARepor

t

AnnualN

OKIAReport

Illustration 1-1The activities of the accounting process

Essential terms are printed in blue when they fi rst appear, and are defi ned in the end-of-chapter glossary.


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6 1 Accounting in Action

Who Uses Accounting DataThe information that a user of fi nancial information needs depends upon the kinds of decisions the user makes. There are two broad groups of users of fi nancial infor-mation: internal users and external users.

INTERNAL USERSInternal users of accounting information are managers who plan, organize, and run the business. These include marketing managers, production supervisors, fi nance directors, and company offi cers. In running a business, internal users must answer many important questions, as shown in Illustration 1-2.

Study Objective [2]Identify the users and uses of accounting.

Illustration 1-2Questions that internal users ask

Questions Asked by Internal Users

Is cash sufficient to paydividends to

Microsoft stockholders?

Stockholder

FinanceCan we afford to give

General Motors employees

Documents

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