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' . f c 1
Chapter 1 Elements of Financial Statements 2
Chapter Opening 3
Elements of Financial Statements 4
Assets, Income, and Claims onAssets 4
The Accounting Equation 5
Recording Business Events under theAccounting Equation 6
Asset Source Transactions 7
Entity Concept 7
Asset Exchange Transactions 8
Another Asset Source Transaction 8
Asset Use Transactions 9
Historical Cost and ReliabilityConcepts 10
Measurement Rules 10
Recap: Types of Transactions 10
Summary of Transactions 11
Preparing Financial Statements 12
Income Statement and the Matching
Concept 12
Statement of Changes in Stockholders'Equity 14
Balance Sheet 14
Statement of Cash Flows 14
Financial versus ManagerialAccounting 15
The Horizontal Financial StatementsModel 16
The Financial Analyst 17
Importance of Ethics 17
Sarbanes-Oxley Act of 2002 17
Common Features of EthicalMisconduct 18
Annual Report for The ToppsCompany, Inc. 20
A Look Back 20
A Look Forward 21
Self-Study Review Problem 21
Key Terms 22
Questions 23
Exercises 24
Problems 31
Analyze, Think, Communicate 35
Chapter 2 Understanding the Accounting Cycle 40
Chapter Opening 41
Accrual Accounting 42
Accounting for AccountsReceivable 42
Other Events 43
Accounting for Accrued Salary Expense(Adjusting Entry) 44
Summary of Events 45
The General Ledger 45
Vertical Statements Model 45
The Closing Process 48
Steps in an Accounting Cycle 49
The Matching Concept 49
The Conservatism Principle 49
Second Accounting Cycle 50
Prepaid Items (Cost versusExpense) 50
Accounting for Receipt of UnearnedRevenue 51
Accounting for Supplies Purchase 51
Other 2009 Events 51
Adjusting Entries 53
Accounting for Supplies (Adjusting
Entry) 53
Accounting for Prepaid Rent (AdjustingEntry) 54
Accounting for Unearned Revenue
(Adjusting Entry) 54
Accounting for Accrued Salary Expense
(Adjusting Entry) 55
Summary of Events 56
The General Ledger 57
Vertical Statements Model 57
The Financial Analyst 59
Price-earnings Ratio 59
Measuring Growth through Percentage
Analysis 61
A Look Back 63
A Look Forward 64
Self-Study Review Problem 64
Key Terms 66
Questions 66
Exercises 67
Problems 75
Analyze, Think, Communicate 80
• T'~-r \ C h a p t e r s Accounting for Merchandising Businesses 84
Chapter Opening 85
Product Costs versus Selling and
Administrative Costs 86
Allocating inventory Cost between Asset
and Expense Accounts 86
Perpetual inventory System 88
Effects of 2006 Events on FinancialStatements 88
Financial Statements for 2006 89
Transportation Cost, Purchase Returns andAllowances, and Cash Discounts Relatedto Inventory Purchases 90
Effects of 2007 Events on FinancialStatements 91
Financial Statements 96
Events Affecting Sales 97
Lost, Damaged, or Stolen Inventory 99
Adjustment for Lost, Damaged, or Stolen
Inventory 99
Recognizing Gains and Losses 99
The Financial Analyst 101
Common Size Financial Statements 101
Comparisons between Companies 101
Gross Margin Percentage 101
Net Income Percentage 102
Comparisons within a Particular
Company 102
Real-World Data 103
Financing Merchandise Inventory 104
A Look Back 105
A Look Forward 105
Appendix 106
Self-Study Review Problem 107
Key Terms 108
Questions 108
Exercises 109
Problems 116
Analyze, Think, Communicate 120
XfiHE
Chapter 4 Accounting for Inventories 124
Chapter Opening 125
Inventory Cost Flow Methods 126
Specific Identification 126
First-ln, First-Out (FIFO) 126
Last-In, First-Out (UFO) 126
Weighted Average 126
Physical Flow 126
Effect of Cost Flow on FinancialStatements 127
Effect on Income Statement 127
Effect on Balance Sheet 127
Multiple Layers with Multiple
Quantities 128
Allocating Cost of Goods Available forSale 128
Effect of Cost Flow on FinancialStatements 130
Key Features of Internal Control
Systems 133
Separation of Duties 133
Quality of Employees 133
Bonded Employees 133
Required Absences 133
Procedures Manual 134
Authority and Responsibility 134
Prenumbered Documents 134
Physical Control 134
Performance Evaluations 135
Limitations 135
Accounting for Cash 135
Controlling Cash 136
Cash Payments 136
Checking Account Documents 137
Reconciling the Bank Account 138
Illustrating a Bank Reconciliation 140
The Financial Analyst 143
Average Number of Days to SellInventory 143
Is It a Marketing or an AccountingDecision? 144
Real-World Data 144
Effects of Cost Flow on RatioAnalysis 145
A Look Back 145
A Look Forward 146
Self-Study Review Problem 1 146
Self-Study Review Problem 2 147
Key Terms 148
Questions 148
Exercises 149
Problems 155
Analyze, Think, Communicate 159
Chapter 5 Accounting for Receivables 162
Chapter Opening 163
Allowance Method of Accounting for
Uncollectible Accounts 164
Accounting Events Affecting the 2006
Period 164
Financial Statements 166
Accounting Events Affecting the 2007Period 166
Estimating Uncollectible Accounts Expense
Using the Percent of Revenue (Sales)
Method 168
Analysis of Financial Statements 169
Estimating Uncollectible Accounts ExpenseUsing the Percent of ReceivablesMethod 170
Matching Revenues and Expenses versus
Asset Measurement 171
Recognizing Uncollectible Accounts
Expense Using the Direct Write-off
Method 171
Characteristics of Notes Receivable
(Promissory Notes) 173
Accounting for Notes Receivable 174
Financial Statements 175
Accounting for Credit Card Sales 177
The Financial Analyst 178
Costs of Credit Sales 178
Average Number of Days to CollectAccounts Receivable 178
Real-World Data 179
A Look Back 181
A Look Forward 182
Self-Study Review Problem 182
Key Terms 183
Questions 184
Exercises 185
Problems 191
Analyze, Think, Communicate 196
Chapter 6 Accounting for Long-Term Operational Assets 200
Chapter Opening 201
Tangible versus Intangible Assets 202
Tangible Long-Term Assets 202
Intangible Assets 202
Determining the Cost of Long-Term
Assets 203
Basket Purchase Allocation 203
Methods of Recognizing Depreciation
Expense 204
Dryden Enterprises Illustration 205
Straight-Line Depreciation 205
Financial Statements 207
Double-Declining-Balance
Depreciation 208
Units-of-Production Depreciation 211
Comparing the Depreciation
Methods 212
Income Tax Considerations 213
Revision of Estimates 214
Revision of Life 215
Revision of Salvage 215
Continuing Expenditures for Plant
Assets 215
Costs That Are Expensed 215
Costs That Are Capitalized 216
Natural Resources 217
Intangible Assets 218
Trademarks 218
Patents 218
Copyrights 219
Franchises 219
Goodwill 220
Expense Recognition for Intangible
Assets 221
Expensing Intangible Assets with
Identifiable Useful Lives 221
Impairment Losses for Intangible Assets
with Indefinite Useful Lives 221
Balance Sheet Presentation 222
The Financial Analyst 222
Effect of Judgment and Estimation 222
Effect of Industry Characteristics 223
" I I
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A Look Back 224
A Look Forward 225
Self-Study Review Problem 225
Key Terms 226
Questions 226Exercises 227
Problems 233
Analyze, Think, Communicate 239
Chapter 7 Accounting for Liabilities 244
Chapter Opening 245
Accounting for Current Liabilities 246
Accounting for Notes Payable 246
Accounting for Sales Tax 247
Contingent Liabilities 248
Warranty Obligations 249
Financial Statements 250
Accounting for Long-Term Debt 251
Installment Notes Payable 252
Line of Credit 255
Bond Liabilities 255
Advantages of Issuing Bonds 256
Bonds Issued at Face Value 256
Fixed-Rate, Fixed-Term, Annual InterestBonds 256
Effect of Events on FinancialStatements 257
Financial Statements 259
Security for Loan Agreements 260
The Financial Analyst 260
Current versus Noncurrent 260
Liquidity versus Solvency 261
Real-World Data 263
A Look Back 264
A Look Forward 264
Self-Study Review Problem 265
Key Terms 266
Questions 266
Exercises 267
Problems 272
Analyze, Think, Communicate 277
. >j Chapter 8 Proprietorships, Partnerships, and Corporations
* * « * Chapter Opening 281
^ „ v,. i»s« • • •.•«»•«» F o r r n s o f Business Organizations 282
280
Advantages and Disadvantages of DifferentForms of Business Organization 282
Regulation 282
Double Taxation 283
Limited Liability 284
Continuity 284
Transferability of Ownership 284
Management Structure 285
Ability to Raise Capital 285
Appearance of Capital Structure inFinancial Statements 285
Presentation of Equity in
Proprietorships 285
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Presentation of Equity inPartnerships 286
Presentation of Equity in
Corporations 287
Characteristics of Capital Stock 287
Par Value 287
Stated Value 287
Other Valuation Terminology 288
Stock: Authorized, Issued, and
Outstanding 288
Classes of Stock 288
Common Stock 289
Preferred Stock 289
Accounting for Stock Transactions on the
Day of Issue 290
Issuing Par Value Stock 290
Stock Classification 290
Stock Issued at Stated Value 291
Stock Issued with No Par Value 291
Financial Statement Presentation 291
Stockholders' Equity Transactions after the
Day of Issue 292
Treasury Stock 292
Cash Dividend 293
Stock Dividend 294
Stock Split 295
Appropriation of Retained
Earnings 295
Financial Statement Presentation 295
The Financial Analyst 297
Receiving Dividends 297
Increasing the Price of Stock 297
Price-earnings Ratio 298
Exercising Control through Stock
Ownership 298
A Look Back 299
A Look Forward 300
Self-Study Review Problem 300
Key Terms 301
Questions 301
Exercises 302
Problems 306
Analyze, Think, Communicate 310
Chapter 9 Financial Statement Analysis 314
Measures of Profitability 327
Measures of Managerial
Chapter Opening 315
Factors in Communicating Useful
Information 316
The Users 316
The Types of Decisions 316
Information Analysis 316
Methods of Analysis 316
Horizontal Analysis 317
Vertical Analysis 319
Ratio Analysis 321
Measures of Debt-Paying Ability 321
Liquidity Ratios 321
Solvency Ratios 324
Effectiveness 327
Stock Market Ratios 329
Presentation of AnalyticalRelationships 331
Limitations of Financial StatementAnalysis 332
Different Industries 333
Changing Economic Environment 334
Accounting Principles 334
A Look Back 335
A Look Forward 335
• - • - '
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Self-Study Review Problem 335
Key Terms 337
Questions 337
Exercises 338
Problems 343
Analyze, Think, Communicate 349
Chapter 1 0 Management Accounting: A Value-AddedDiscipline 354
Chapter Opening 355
Differences between Managerial and
Financial Accounting 356
Users and Types of Information 356
Level of Aggregation 356
Regulation 356
Information Characteristics 357
Time Horizon and ReportingFrequency 357
Product Costing 358
Product Costs in ManufacturingCompanies 358
Tabor Manufacturing Company 358
. Average Cost per Unit 359
Costs Can Be Assets or Expenses 359
Effect of Product Costs on FinancialStatements 360
Manufacturing Product CostSummary 364
Importance of Cost Classification 364
Marion Manufacturing Company 365
Practical Implications 366
Ethical Considerations 367
Upstream and Downstream Costs 368
Product Costs in Service Companies 368
Emerging Trends in Managerial
Accounting 370
Total Quality Management 370
Activity-Based Management 370
Just-in-Time Inventory 371
Value Chain Analysis acrossCompanies 373
A Look Back 373
A Look Forward 374
Self-Study Review Problem 374
Key Terms 376
Questions 377
Exercises 377
Problems 383
Analyze, Think, Communicate 386
Chapter 1 1 Cost Behavior, Operating Leverage, and ProfitabilityAnalysis 390
Chapter Opening 391
Fixed Cost Behavior 392
Operating Leverage 392
Calculating Percentage Change 393
Risk and Reward Assessment 394
Variable Cost Behavior 394
r - l '
An Income Statement under theContribution Margin Approach 396
Measuring Operating Leverage UsingContribution Margin 396
Cost Behavior Summarized 397
The Relevant Range 397
. Context-Sensitive Definitions of Fixed
and Variable 399
Mixed Costs 399
Determining the Contribution Margin per
Unit 400
Determining the Break-Even Point 401
Using the Contribution Approach to
Estimate the Sales Volume Necessary to
Reach a Target Profit 401
Calculating the Margin of Safety 402
A Look Back 403
A Look Forward 404
Self-Study Review Problem 1 404
Self-Study Review Problem 2 406
Key Terms 407
Questions 407
Exercises 408
Problems 414
Analyze, Think, Communicate 419
Chapter 1 2 Cost Accumulation, Tracing, and Allocation 422
Chapter Opening 423
Use of Cost Drivers to Accumulate
Costs 424
Estimated versus Actual Cost 424
Assignment of Cost to Objects in a Retail
Business 424
Identifying Direct versus Indirect
Costs 425
Cost Classifications-Independent and
Context Sensitive 425
Allocating Indirect Costs to
Objects 426
Selecting a Cost Driver 428
Behavioral Implications 430
Effects of Cost Behavior on Selecting the
Most Appropriate Cost Driver 432
Using Volume Measures to AllocateVariable Overhead Costs 432
Allocating Fixed Overhead Costs 434
Allocating Costs to Solve Timing
Problems 435
Establishing Cost Pools 436
Cost Allocation: The Human Factor 436
Using Cost Allocations in a BudgetingDecision 437
Using Cost Drivers to Make
Allocations 437
Choosing the Best Cost Driver 438
Controlling Emotions 438
A Look Back 438
A Look Forward 439
Self-Study Review Problem 439
Key Terms 441
Questions 441
Exercises 442
Problems 446
Analyze, Think, Communicate 449
.'.- --.;-: Chapter 1 3 Relevant Information for Special Decisions 452
i^lLJl
Chapter Opening 453
The Decision Environment 454
Relevant Information 454
Sunk Cost 454
Relevant (Differential) Revenues 454
Relevant (Avoidable) Costs 455
Relevance Is an IndependentConcept 456
Relevance of Opportunity Costs 457
Relevance Is Context-Sensitive 458
Relationship between Relevance and
Accuracy 458
Quantitative versus QualitativeCharacteristics of DecisionMaking 459
Relevant Information and Special
Decisions 459
Special Order Decisions 459
Outsourcing Decisions 461
Segment Elimination Decisions 464
Summary of Relationshipsbetween Avoidable Costs andthe Hierarchy of BusinessActivity 467
Equipment ReplacementDecisions 467
A Look Back 469
A Look Forward 469
Self-Study Review Problem 470
Key Terms 472
Questions 472
Exercises 473
Problems 479
Analyze, Think, Communicate 484
Chapter 1 4 Planning for Profit and Cost Control 488
Chapter Opening 489
The Planning Process 490
Three Levels of Planning for Business
Activity 490
Advantages of Budgeting 491
Planning 491
Coordination 491
Performance Measurement 491
Corrective Action 491
Budgeting and Human Behavior 492
The Master Budget 492
Hampton Hams Budgeting
Illustration 493
Sales Budget 493
Inventory Purchases Budget 495
Selling and Administrative ExpenseBudget 497
Cash Budget 499
Pro Forma Income Statement 501
Pro Forma Balance Sheet 502
Pro Forma Statement of CashFlows 502
A Look Back 503
A Look Forward 504
Self-Study Review Problem 504
Key Terms 506
Questions 506
Exercises 506
Problems 512
Analyze, Think, Communicate 515
Chapter 1 5 Performance Evaluation 520
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Chapter Opening 522
Decentralization Concept 522
Responsibility Centers 522
Controllability Concept 523
Preparing Flexible Budgets 523
Determining Variances for PerformanceEvaluation 525
Sales Volume Variances 525
Flexible Budget Variances 527
Need for Standards 529
Managerial PerformanceMeasurement 529
Return on Investment 530
Residual Income 532
Responsibility Accounting and the
Balanced Scorecard 535
A Look Back 535
A Look Forward 536
Self-Study Review Problem 1 536
Self-Study Review Problem 2 538
Key Terms 539
Questions 539
Exercises 540
Problems 544
Analyze, Think, Communicate 548
Chapter 1 6 Planning for Capita! investments 552
Chapter Opening 554
Capital Investment Decisions 554
Time Value of Money 554
Techniques for Analyzing Capital
Investment Proposals 559
Wet Present Value 559
Internal Rate of Return 560
Techniques for Measuring Investment
Cash Flows 561
Cash Inflows 561
Cash Outflows 561
Techniques for Comparing Alternative
Capital Investment Opportunities 562
Net Present Value 562
Internal Rate of Return 564
Relevance and the Time Value of
Money 566
Appendix A Accessing the EDGAR
Database through the Internet 585
Appendix B Topps AnnualReport 2003 586
Appendix C The Double-Entry AccountingSystem 620
Tax Considerations 567 \
Techniques That Ignore the Time Value of
Money 568
Payback Method 568
Real-World Reporting Practices 570
Postaudits 571
A Look Back 571
A Look Forward 572
Appendix 572
Self-Study Review Problem 573
Key Terms 574
Questions 574
Exercises 575
Problems 579
Analyze, Think, Communicate 582
Glossary 628
Photo Credits 639
Index 641
