INTERMEDIATE ACCOUNTING FIFTEENTH EDITION Key learning aids to help you master the textbook material and prepare you for a successful career. CHAPTER PREVIEW As our opening story indicates, sustainability strategies are taking on increased importance for companies like Southwest Airlines and Clorox. Reporting challenges for effective sustainability investments are similar to those for intangible assets. In this chapter, we explain the basic conceptual and reporting issues related to intangible assets. The content and organization of the chapter are as follows. PREVIEW OF CHAPTER 12 Intangible Assets Intangible Asset Issues • Characteristics • Valuation • Amortization Types of Intangibles • Marketing-related • Customer-related • Artistic-related • Contract-related • Technology-related • Goodwill Impairment of Intangibles • Limited-life intangibles • Indefinite-life intangibles other than goodwill • Goodwill • Summary Research and Development Costs • Identifying R&D • Accounting for R&D • Similar costs Presentation of Intangibles and Related Items • Intangible assets • R&D costs c12IntangibleAssets.indd Page 649 1/8/13 9:32 AM f-535 /Users/f-535/Desktop/Praveen/9654969236 DEFINITELY INDEFINITE What do the numbers mean? The importance of intangible asset classication as either limited-life or indenite-life is illustrated in the experi- ence of Outdoor Channel Holdings. Here’s what hap- pened. Outdoor Channel recorded an intangible asset related to the value of an important distributor relation- ship, purchased from another company. At that time, it classied the relationship as indenite-life. Thus, in the rst two years of the asset’s life, Outdoor Channel re- corded no amortization expense on this asset. In the third year, investors were surprised to nd that Outdoor Chan- nel changed the classication of the distributor relationship to limited-life, with an expected life of 21.33 years (a fairly denite useful life) and, shortly thereafter, wrote off this intangible completely. Apparently, the company was overly optimistic about the expected future cash ows arising from the distributor rela- tionship. As a result of that optimism, income in the second year was overstated by $9.5 million, or 14 percent, and the impairment recorded in the third year amounted to 7 percent of assets. From indenite-life to limited-life to worthless in two short years—investors were surely hurt by Outdoor’s aggressive intangible asset classi cation. Source: Jack Ciesielski, The AAO Weblog, www.accountingobserver.com/blog/ (January 12, 2007). c12IntangibleAssets.indd Page 653 1/8/13 10:39 AM f-535 /Users/f-535/Desktop/Praveen/9654969236 RECOGNITION OF R&D AND INTERNALLY GENE R Evolving Issue The requirement that companies expense immediately all R&D costs (as well as start-up costs) incurred internally is a practical solution. It ensures consistency in practice and uni- formity among companies. But the practice of immediately writing off expenditures made in the expectation of benefit- ing future periods is conceptually incorrect. Proponents of immediate expensing contend that from an income statement standpoint, long-run application of this standard frequently makes little difference. They argue that because of the ongoing nature of most companies’ R&D activities, the amount of R&D cost charged to expense each accounting period is about the same, whether there is immedi- ate expensing or capitalization and subsequent amortization. Others criticize this practice. They believe that the balance showed a significant relat i subsequent benefits in t h earnings, and shareholder v Another study found tha t earnings usefulness for co m from capitalizing to exp decline appears to persist The current accounti n generated intangible as s trade-offs made among r and cost-benefit conside r completed some limited - for intangible assets, an d joint project on the acco u c12IntangibleAssets.indd Page 673 1/8/13 9:32 AM f-535 /Users/f-535/Desktop/Praveen/9654969236 International Perspective IFRS requires the capitalization of appropriate development expenditures. This conflicts with GAAP. c12IntangibleAssets.indd Page 666 02/01/13 7:52 PM f-391 /208/WB00806/XXXXXXXXXXXXX/ch12/text_s Underlying Concepts The controversy surrounding the accounting for R&D expenditures reflects a debate about whether such expenditures meet the def- inition of an asset. If so, then an “expense all R&D costs” policy results in overstated expenses and understated assets. c12IntangibleAssets.indd Page 651 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12 The Chapter Preview summarizes the major issues discussed in the chapter, and provides students with a visual outline of the key topics. UNDERLYING CONCEPTS The Underlying Concepts highlight and explain major conceptual topics in the chapter. WHAT DO THE NUMBERS MEAN? The “What do the numbers mean?” boxes further students’ understanding of key concepts with practical, real-world examples. INTERNATIONAL PERSPECTIVE International Perspectives provide students with specific examples of how global companies (and other countries) implement key accounting regulations. They also provide examples of how and where IFRS differs from GAAP. EVOLVING ISSUE The Evolving Issue feature introduces and discusses a current topic in the accounting industry in which the profession may be encountering controversy or nearing resolution. The feature shows how the key standard-setting organizations make decisions to adjust to the changing global business environment. DEMONSTRATION PROBLEM Sky Co., organized in 2014, provided you with the following information. 1. Purchased a license for $20,000 on July 1, 2014. The license gives Sky exclusive rights to sell its services in the tri-state region and will expire on July 1, 2022. 2. Purchased a patent on January 2, 2015, for $40,000. It is estimated to have a 5-year life. 3. Costs incurred to develop an exclusive Internet connection process as of June 1, 2015, were $45,000. The process has an indefinite life. 4. On April 1, 2015, Sky Co. purchased a small circuit board manufacturer for $350,000. Goodwill recorded in the transaction was $90,000. 5. On July 1, 2015, legal fees for successful defense of the patent purchased on January 2, 2015, were $11,400. 6. Research and development costs incurred as of September 1, 2015, were $75,000. Instructions (a) Prepare the journal entries to record all the entries related to the patent during 2015. (b) At December 31, 2015, an impairment test is performed on the license purchased in 2014. It is estimated that the net cash flows to be received from the license will be $13,000, and its fair value is $7,000. Compute the amount of impairment, if any, to be recorded on December 31, 2015. (c) What is the amount to be reported for intangible assets on the balance sheet at December 31, 2014? At December 31, 2015? DEMONSTRATION PROBLEM c12IntangibleAssets.indd Page 675 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12 FASB CODIFICATION FASB Codification References [1] FASB ASC 350-10-05. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting Standards No. 142 (Norwalk, Conn.: FASB, 2001).] [2] FASB ASC 350-30-35. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. 11.] [3] FASB ASC 805-10. [Predecessor literature: “Business Combinations,” Statement of Financial Accounting Standards No. 141R (Norwalk, Conn.: FASB, 2007).] [4] FASB ASC 350-30-35. [Predecessor literature: “Goodwill and Other Intangible Assets,” Statement of Financial Accounting Standards No. 142 (Norwalk, Conn.: FASB, 2001), par. B55.] [5] FASB ASC 805-10-20. [Predecessor literature: “Business Combinations,” Statement of Financial Accounting Standards No. 141R ( Norwalk , Conn.: FASB , 2007 ) . ] c12IntangibleAssets.indd Page 676 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12 See the book’s companion website, at www.wiley.com/college/kieso, for an additional set of problems. PROBLEMS SET B c12IntangibleAssets.indd Page 688 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12 FINANCIAL REPORTING Financial Reporting Problem The Procter & Gamble Company (P&G) The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www.wiley.com/college/kieso. Instructions Refer to P&G’s financial statements and the accompanying notes to answer the following questions. (a) Does P&G report any intangible assets, especially goodwill, in its 2011 financial statements and accompanying notes? (b) How much research and development (R&D) cost was expensed by P&G in 2010 and 2011? What percentage of sales revenue and net income did P&G spend on R&D in 2010 and 2011? USING YOUR JUDGMENT c12IntangibleAssets.indd Page 690 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12 There are some significant differences between IFRS and GAAP in the accounting for both intangible assets and impairments. IFRS related to intangible assets is presented in IAS 38 (“Intangible Assets”). IFRS related to impairments is found in IAS 36 (“Impairment of Assets”). IFRS INSIGHTS c12IntangibleAssets.indd Page 693 28/12/12 3:00 PM f-392 ~/Desktop/Nalini%2028.12/ch12 The Demonstration Problem provides a model for how to solve end-of-chapter material. FASB CODIFICATION The FASB Codification refers students to the relevant FASB literature for the key concepts presented in each chapter. USING YOUR JUDGMENT The Using Your Judgment section provides students with real-world homework problems covering topics such as financial reporting, financial statement analysis, and professional research. PROBLEMS SET B In addition to the B Set of Exercises, we now provide an additional set of problems for each chapter, based on the problems in the textbook. The B Set of Problems are available in WileyPLUS and on the book’s companion website, at www.wiley.com/college/kieso. IFRS INSIGHTS IFRS Insights offer students a detailed discussion as well as assessment material of international accounting standards at the end of each chapter. CPA Exam Readiness How Would You Score If You Took the CPA Exam Today? Before you can call yourself a CPA, you’ll have to pass one of the toughest licensure exams in any profession. To help you get a sense of what the exam is like and see where you stand, we’ve created a quick assessment consisting of actual exam questions from Wiley’s industry-leading CPAexcel Review Course software. Find out what it’s like to face off against real exam questions and see how you would fare if you took the real exam today. Visit CPAexcel.com/Kieso to start your quick assessment today. CPA Exam Support Site for Kieso Adopters Intermediate Accounting is a course that is a bridge to the profession. Throughout the course, you will be learning key concepts that you will be tested on if you choose to sit for the CPA exam. To help you understand how the con- cepts you are learning will be presented in the actual exam environment as well as learn more about the exam, please visit CPAexcel.com/Kieso. INTERMEDIATE ACCOUNTING FIFTEENTH EDITION Donald E. Kieso PhD, CPA Northern Illinois University DeKalb, Illinois Jerry J. Weygandt PhD, CPA University of Wisconsin—Madison Madison, Wisconsin Terry D. Warfield, PhD University of Wisconsin—Madison Madison, Wisconsin Dedicated to our wives, Donna, Enid, and Mary, for their love, support, and encouragement Vice President & Executive Publisher George Hoffman Associate Publisher Christopher DeJohn Senior Acquisitions Editor Michael McDonald Content Editor Brian Kamins Senior Development Editor Terry Ann Tatro Development Editor Margaret Thompson Editorial Operations Manager Yana Mermel Senior Content Manager Dorothy Sinclair Senior Production Editor Valerie Vargas Associate Director of Marketing Amy Scholz Marketing Manager Jesse Cruz Senior Product Designer Allie K. Morris Product Designer Greg Chaput Senior Designer Maureen Eide Designer Kristine Carney Production Management Services Ingrao Associates Creative Director Harry Nolan Senior Photo Editor Mary Ann Price Senior Editorial Assistant Jackie MacKenzie Cover Photo JB Broccard/Getty Images, Inc. Chapter Opener Photo JB Broccard/Getty Images, Inc. Cover Credit JB Broccard/Getty Images, Inc. This book was set in Palatino LT Std by Aptara ® , Inc. and printed and bound by Courier Kendallville. The cover was printed by Courier Kendallville. This book is printed on acid-free paper. q Copyright © 2013 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com . Requests to the Publisher for permission should 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 . To order books or for customer service, please call 1-800-CALL WILEY (225-5945). Material from the Uniform CPA Examinations and Unofficial Answers, copyright © 1965, 1966, 1967, 1968, 1969, 1970, 1971, 1972, 1973, 1974, 1975, 1976, 1977, 1978, 1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1990, 1991, 1992, and 1993 by the American Institute of Certified Public Accountants, Inc., is adapted with permission. This book contains quotations from Accounting Research Bulletins, Accounting Principles Board Opinions, Accounting Principles Board Statements, Accounting Interpretations, and Accounting Terminology Bulletins, copyright © 1953, 1956, 1966, 1968, 1969, 1970, 1971, 1972, 1973, 1974, 1975, 1976, 1977, 1978, 1979, 1980, 1981, 1982 by the American Institute of Certified Public Accountants, Inc., 1211 Avenue of the Americas, New York, NY 10036. This book contains citations from various FASB pronouncements. Copyright © by Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856 U.S.A. Reprinted with permission. Copies of complete documents are available from Financial Accounting Standards Board. Material from the Certificate in Management Accounting Examinations, copyright © 1975, 1976, 1977, 1978, 1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, and 1993 by the Institute of Certified Management Accountants, 10 Paragon Drive, Montvale, NJ 07645, is adapted with permission. Material from the Certified Internal Auditor Examinations, copyright © May 1984, November 1984, May 1986 by The Institute of Internal Auditors, 249 Maitland Ave., Altemonte Springs, FL 32701, is adapted with permission. The financial statements and accompanying notes reprinted from the 2011 Annual Report of Procter & Gamble Company are courtesy of P&G, copyright © 2011, all rights reserved. ISBN-13 978-1-118-14729-0 BRV ISBN-13 978-1-118-15964-4 Printed in the United States of America 10987654321 1 Financial Accounting and Accounting Standards 2 2 Conceptual Framework for Financial Reporting 42 3 The Accounting Information System 82 4 Income Statement and Related Information 158 5 Balance Sheet and Statement of Cash Flows 212 6 Accounting and the Time Value of Money 286 7 Cash and Receivables 344 8 Valuation of Inventories: A Cost-Basis Approach 414 9 Inventories: Additional Valuation Issues 472 10 Acquisition and Disposition of Property, Plant, and Equipment 536 11 Depreciation, Impairments, and Depletion 588 12 Intangible Assets 648 13 Current Liabilities and Contingencies 700 14 Long-Term Liabilities 762 15 Stockholders’ Equity 820 16 Dilutive Securities and Earnings per Share 882 17 Investments 950 18 Revenue Recognition 1040 19 Accounting for Income Taxes 1116 20 Accounting for Pensions and Postretirement Benefits 1182 21 Accounting for Leases 1268 22 Accounting Changes and Error Analysis 1342 23 Statement of Cash Flows 1410 24 Full Disclosure in Financial Reporting 1486 Brief Contents iii Jerry Weygandt Jerry J. Weygandt, PhD, CPA, is Arthur Andersen Alumni Emeritus Professor of Accounting at the University of Wisconsin—Madison. He holds a Ph.D. in accounting from the University of Illinois. Articles by Professor Weygandt have appeared in the Accounting Review, Journal of Accounting Research, Accounting Horizons, Journal of Accountancy, and other academic and professional journals. These articles have examined such financial reporting issues as accounting for price-level adjustments, pensions, convertible securities, stock option contracts, and interim reports. Professor Weygandt is author of other accounting and financial reporting books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Wisconsin Society of Certified Public Accountants. He has served on numerous committees of the American Accounting Association and as a member of the editorial board of the Accounting Review; he also has served as President and Secretary-Treasurer of the American Accounting Association. In addition, he has been actively involved with the American Institute of Certified Public Accountants and has been a member of the Accounting Standards Executive Committee (AcSEC) of that organization. He has served on the FASB task force that examined the reporting issues related to accounting for income taxes and served as a trustee of the Financial Accounting Foundation. Professor Weygandt has received the Chancellor’s Award for Excellence in Teaching and the Beta Gamma Sigma Dean’s Teaching Award. He is on the board of directors of M & I Bank of Southern Wisconsin. He is the recipient of the Wisconsin Institute of CPA’s Outstanding Educator’s Award and the Lifetime Achievement Award. In 2001, he received the American Accounting Association’s Outstanding Educator Award. Terry Warfield Terry D. Warfield, PhD, is the Pricewater- houseCoopers Professor in Accounting at the University of Wisconsin—Madison. He received a B.S. and M.B.A. from Indiana University and a Ph.D. in accounting from the University of Iowa. Professor Warfield’s area of expertise is financial reporting, and prior to his academic career, he worked for five years in the banking industry. He served as the Academic Accounting Fellow in the Office of the Chief Accountant at the U.S. Securities and Exchange Commission in Washington, D.C. from 1995–1996. Professor Warfield’s primary research interests concern financial accounting standards and disclosure policies. He has published scholarly articles in The Accounting Review, Journal of Accounting and Economics, Research in Accounting Regulation, and Accounting Horizons, and he has served on the editorial boards of The Accounting Review, Accounting Horizons, and Issues in Accounting Education. He has served as president of the Financial Accounting and Reporting Section, the Financial Accounting Standards Committee of the American Accounting Association (Chair 1995–1996), and on the AAA-FASB Research Conference Committee. He also served on the Financial Accounting Standards Advisory Council of the Financial Accounting Standards Board. Professor Warfield has received teaching awards at both the University of Iowa and the University of Wisconsin, and he was named to the Teaching Academy at the University of Wisconsin in 1995. Professor Warfield has developed and published several case studies based on his research for use in accounting classes. These cases have been selected for the AICPA Professor-Practitioner Case Development Program and have been published in Issues in Accounting Education. Don Kieso Donald E. Kieso, PhD, CPA, received his bachelor’s degree from Aurora University and his doctorate in accounting from the University of Illinois. He has served as chairman of the Department of Accountancy and is currently the KPMG Emeritus Professor of Accountancy at Northern Illinois University. He has public accounting experience with Price Waterhouse & Co. (San Francisco and Chicago) and Arthur Andersen & Co. (Chicago) and research experience with the Research Division of the American Institute of Certified Public Accountants (New York). He has done post-doctorate work as a Visiting Scholar at the University of California at Berkeley and is a recipient of NIU’s Teaching Excellence Award and four Golden Apple Teaching Awards. Professor Kieso is the author of other accounting and business books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Illinois CPA Society. He has served as a member of the Board of Directors of the Illinois CPA Society, then AACSB’s Accounting Accreditation Committees, the State of Illinois Comptroller’s Commission, as Secretary-Treasurer of the Federation of Schools of Accountancy, and as Secretary- Treasurer of the American Accounting Association. Professor Kieso is currently serving on the Board of Trustees and Executive Committee of Aurora University, as a member of the Board of Directors of Kishwaukee Community Hospital, and as Treasurer and Director of Valley West Community Hospital. From 1989 to 1993, he served as a charter member of the National Accounting Education Change Commission. He is the recipient of the Outstanding Accounting Educator Award from the Illinois CPA Society, the FSA’s Joseph A. Silvoso Award of Merit, the NIU Foundation’s Humanitarian Award for Service to Higher Education, a Distinguished Service Award from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University. Author Commitment v Accounting continues to be one of the most employable, sought-after majors, according to entry-level job site CollegeGrad.com. One reason for this interest is found in the statement by former Secretary of the Treasury and Economic Advisor to the President, Lawrence Summers. He noted that the single-most important innovation shaping our capital markets was the idea of generally accepted accounting principles (GAAP). We agree with Mr. Summers. Relevant and reliable financial information is a necessity for viable capital markets. Without it, our markets would be chaotic, and our standard of living would decrease. This textbook is the market leader in providing the tools needed to understand what GAAP is and how it is applied in practice. Mastery of this material will be invaluable to you in whatever field you select. Through many editions, this textbook has continued to reflect the constant changes taking place in the GAAP environment. This edition continues this tradition, which has become even more significant as the financial reporting environment is exploding with major change. Here are three areas of major importance that are now incorporated extensively into this edition of the textbook. Convergence of U.S. GAAP and IFRS As mentioned above, the most important innovation shaping our capital markets was the idea of U.S. GAAP. It might be said that it would be even better if we had one common set of accounting rules for the whole world, which will make it easier for international investors to compare the financial results of companies from different countries. That is happening quickly as U.S. GAAP and international accounting standards are converging. The convergence process has resulted in a number of common standards between U.S. GAAP and International Financial Reporting Standards (IFRS). And you have the chance to be on the ground floor as we develop for you the similarities and differences in the two systems that ultimately will be one. A Fair Value Movement The FASB believes that fair value information is more relevant to users than historical cost. As a result, there is more information that is being reported on this basis, and even more will occur in the future. The financial press is full of articles discussing how financial institutions must fair value their assets, which has led to massive losses during the recent credit crisis. In addition, additional insight into the reliability related to fair values is being addressed and disclosed to help investors make important capital allocation decisions. We devote a considerable amount of material that discusses and illustrates fair value concepts in this edition. A New Way of Looking at Generally Accepted Accounting Principles (GAAP) Learning GAAP used to be a daunting task, as it is comprised of many standards that vary in form, completeness, and structure. Fortunately, the profession has developed the Financial Accounting Standards Board Codification (often referred to as the Codification). This Codification provides in one place all the GAAP related to a given topic. This textbook is the first to incorporate this Codification—it will make learning GAAP easier and more interesting! Intermediate Accounting is the market-leading textbook in providing the tools needed to understand what GAAP is and how it is applied in practice. With this Fifteenth Edition, we strive to continue to provide the material needed to understand this subject area. The textbook is comprehensive and up-to-date. We also include proven pedagogical tools, designed to help you learn more effectively and to answer the changing needs of this course. Look inside the front cover for a detailed description of all of the learning tools of the textbook. We are excited about Intermediate Accounting, Fifteenth Edition. We believe it meets an important objective of providing useful information to educators and students interested in learning about both GAAP and IFRS. Suggestions and comments from users of this textbook will be appreciated. Please feel free to e-mail any one of us at AccountingAuthors@yahoo.com. Donald E. Kieso Jerry J. Weygandt Terry D. Warfield DeKalb, Illinois Madison, Wisconsin Madison, Wisconsin “If this textbook helps you appreciate the challenges, worth, and limitations of finan- cial reporting, if it encourages you to evaluate critically and understand financial accounting concepts and practice, and if it prepares you for advanced study, professional examinations, and the successful and ethical pursuit of your career in accounting or business in a global economy, then we will have attained our objectives.” From the Authors vi The Fifteenth Edition expands our emphasis on student learning and improves upon a teaching and learning pack- age that instructors and students have rated the highest in customer satisfaction. Based on extensive reviews, focus groups, and interactions with other intermediate accounting instructors and students, we have developed a number of new pedagogical features and content changes, designed both to help students learn more effectively and to answer the changing needs of the course. Evolving Issues As we continue to strive to reflect the constant changes in the accounting environment, we have added a new fea- ture to the Fifteenth Edition, Evolving Issues, which highlight and discuss areas in which the profession may be encountering controversy or nearing resolution. Our hope is that these high-interest boxes will increase student engagement, as well as serve as classroom discussion points. For another source of high-interest material, see the What Do the Numbers Mean? boxes, most of which are new to this edition. Demonstration Problems We understand that students often struggle to apply accounting concepts to realistic business situations. As a result, we include a new Demonstration Problem before the end-of-chapter problem material, to serve as a model to help students with their homework assignments. Updated IFRS Insights Content We have updated the end-of-chapter section, IFRS Insights, throughout the textbook. In addition, in the Relevant Facts section, we now present Similarities as well as Differences between GAAP and IFRS to increase student understanding. Major Content Revisions In response to the changing environment, we have significantly revised several chapters. CChhaapptteerr 22 CCoonncceeppttuuaall FFrraammeewwoorrkk ffoorr FFiinnaanncciiaall RReeppoorrttiinngg • New footnote material on the FASB’s additional guidance related to the use of fair value in financial statements. • Updated discussion plus added an illustration on the five steps of revenue recognition. • Revised Constraints section, as now only cost constraint is included in the conceptual framework. CChhaapptteerr 44 IInnccoommee SSttaatteemmeenntt aanndd RReellaatteedd IInnffoorrmmaattiioonn • Revised Format of the Income Statement section, adding discussion on the intermediate components of the income statement and presenting the multiple-step before the single-step format to reflect current practice. • Revised Reporting Irregular Items section, to broaden focus on irregular and unusual items. Updated discus- sion throughout as well as added new material on noncontrolling interest. • Updated Comprehensive Income discussion, to reflect the most recent accounting standards. • New illustration showing and explaining the revised income statement sections. CChhaapptteerr 1188 RReevveennuuee RReeccooggnniittiioonn • We anticipate a new FASB ruling on the revenue recognition principle. As a result, please see the book’s companion website, at www.wiley.com/college/kieso, for the latest information as well as the availability of an updated, replacement chapter. CChhaapptteerr 2233 SSttaatteemmeenntt ooff CCaasshh FFlloowwss • Reorganized chapter, to present the indirect method through preparation of the statement of cash flows first, followed by the discussion of the direct method as well as the advantages and disadvantages of both methods. • New Evolving Issue, “Direct versus Indirect Controversy,” on the arguments in favor of each method. See the next two pages for a complete list of content revisions by chapter. What’s New? [...]... replacement of the APB with the Financial Accounting Standards Board (FASB) in 1973 10 Chapter 1 Financial Accounting and Accounting Standards Changing Role of the AICPA When the FASB replaced the Accounting Principles Board, the AICPA established the Accounting Standards Executive Committee (AcSEC) as the committee authorized to speak for the AICPA in the area of financial accounting and reporting It does... problems that help students develop their intermediate accounting problem-solving skills Explanations assist in the approach, set-up, and completion of accounting problems Tips alert students to common pitfalls and misconceptions Available for purchase at the book’s companion site Rockford Corporation: An Accounting Practice Set This practice set helps students review the accounting cycle and the preparation... PACKAGED WITH A TEXTBOOK AND WileyPLUS, QUANTUM HELPS STUDENTS MASTER ACCOUNTING WITH LESS STUDY TIME! www.quantumsimulations.com Contents Chapter 1 Financial Accounting and Accounting Standards 2 We Can Do Better Financial Statements and Financial Reporting 4 Accounting and Capital Allocation 4 What Do the Numbers Mean? It’s the Accounting 5 Objective of Financial Reporting 5 What Do the Numbers Mean?... Lease Data 1300 Unresolved Lease Accounting Problems 1302 Evolving Issue Lease Accounting If It Quacks Like a Duck 1303 APPENDIX 21A Sale-Leasebacks 1306 Determining Asset Use 1307 Lessee 1307 Lessor 1308 Sale-Leaseback Example 1308 FASB Codification 1313 IFRS Insights 1331 Chapter 22 Accounting Changes and Error Analysis 1342 In the Dark Accounting Changes 1344 Changes in Accounting Principle 1344 What... as follows PREVIEW OF CHAPTER 1 Financial Accounting and Accounting Standards Financial Statements and Financial Reporting • Accounting and capital allocation • Objective • Need to develop standards Parties Involved in Standard-Setting • Securities and Exchange Commission • American Institute of CPAs • Financial Accounting Standards Board Generally Accepted Accounting Principles • FASB Codification... challenges • International accounting standards • Ethics 3 4 Chapter 1 Financial Accounting and Accounting Standards FINANCIAL STATEMENTS AND FINANCIAL REPORTING The essential characteristics of accounting are (1) the identification, measurement, and communication of financial information about (2) economic entities to (3) inIdentify the major financial statements terested parties Financial accounting is the... numbers mean? IT’S THE ACCOUNTING “It’s the accounting. ” That’s what many investors seem to be saying these days Even the slightest hint of any accounting irregularity at a company leads to a subsequent pounding of the company’s stock price For example, the Wall Street Journal has run the following headlines related to accounting and its effects on the economy • Stocks take a beating as accounting woes spread... the AICPA have contributed to this effort Committee on Accounting Procedure At the urging of the SEC, the AICPA appointed the Committee on Accounting Procedure in 1939 The Committee on Accounting Procedure (CAP) composed of practicing CPAs, issued 51 Accounting Research Bulletins during the years 1939 to 1959 These bulletins dealt with a variety of accounting problems But this problem-by-problem approach... problems But this problem-by-problem approach failed to provide the needed structured body of accounting principles In response, in 1959 the AICPA created the Accounting Principles Board Accounting Principles Board The major purposes of the Accounting Principles Board (APB) were to (1) advance the written expression of accounting principles, (2) determine appropriate practices, and (3) narrow the areas of... videos from Terry Warfield on select difficult topics in intermediate accounting • Exercise solution walkthrough videos where a student can see how an exercise similar to one in the textbook is solved • Accounting skills videos that demonstrate the basic concepts and skills needed for students to understand how to solve a multitude of intermediate accounting problems Student Study Guide, Vols 1 and 2 . contains quotations from Accounting Research Bulletins, Accounting Principles Board Opinions, Accounting Principles Board Statements, Accounting Interpretations, and Accounting Terminology Bulletins, copyright. financial accounting standards and disclosure policies. He has published scholarly articles in The Accounting Review, Journal of Accounting and Economics, Research in Accounting Regulation, and Accounting. boards of The Accounting Review, Accounting Horizons, and Issues in Accounting Education. He has served as president of the Financial Accounting and Reporting Section, the Financial Accounting Standards Committee