Principles of Financial Accounting ELEVENTH EDITION This page intentionally left blank Principles of Financial Accounting ELEVENTH EDITION Belverd E Needles, Jr., Ph.D., C.P.A., C.M.A DePaul University Marian Powers, Ph.D Northwestern University Principles of Financial Accounting, Eleventh Edition Belverd Needles and Marian Powers Vice President of Editorial, Business: Jack W Calhoun Editor in Chief: Rob Dewey Executive Editor: Sharon Oblinger Supervising Developmental Editor: Katie Yanos © 2011, 2008 South-Western, Cengage Learning ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher Sr Marketing Manager: Kristen Hurd Marketing Coordinator: Heather Mooney Sr Marketing Communications Manager: Libby Shipp Content Project Manager: Darrell Frye Media Editor: Bryan England Editorial Assistant: Julie Warwick For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Frontlist Buyer, Manufacturing: Doug Wilke Production Service: S4Carlisle Publishing Services Sr Art Director: Stacy Jenkins Shirley Cover and Internal Designer: Grannan Graphic Design ExamView® is a registered trademark of eInstruction Corp Windows is a registered trademark of the Microsoft Corporation used herein under license Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc used herein under license Cover Image: © Getty Images/Image Bank Permissions Account Manager: John Hill © 2011 Cengage Learning All Rights Reserved Cengage Learning WebTutor™ is a trademark of Cengage Learning Library of Congress Control Number: 2009941181 Student Edition ISBN 10: 0-538-75516-4 Student Edition ISBN 13: 978-0-538-75516-0 Instructors Edition ISBN 10: 0-538-75529-6 Instructors Edition ISBN 13: 978-0-538-75529-0 Loose-leaf Edition ISBN 10: 0-538-75524-5 Loose-leaf Edition ISBN 13: 978-0-538-75524-5 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.CengageBrain.com Printed in the United States of America 13 12 11 10 09 BRIEF CONTENTS SUPPLEMENT TO CHAPTER SUPPLEMENT TO CHAPTER Uses of Accounting Information and the Financial Statements Analyzing Business Transactions Measuring Business Income Completing the Accounting Cycle Financial Reporting and Analysis How to Read an Annual Report The Operating Cycle and Merchandising Operations Special-Purpose Journals Internal Control Inventories Cash and Receivables 48 98 142 180 226 266 302 318 350 390 10 Current Liabilities and Fair Value Accounting 11 Long-Term Assets 430 472 12 Contributed Capital 518 13 Long-Term Liabilities 562 14 The Corporate Income Statement and the Statement of Stockholders’ Equity 614 15 The Statement of Cash Flows 656 16 Financial Performance Measurement 17 Partnerships 706 754 APPENDIX A Accounting for investments APPENDIX B Present Value Tables 794 808 v This page intentionally left blank CONTENTS Preface xv Acknowledgements About the Authors CHAPTER xxv xxix Uses of Accounting Information and the Financial Statements DECISION POINT Ǡ A USER’S FOCUS KEEP-FIT CENTER Accounting as an Information System Business Goals, Activities, and Performance Measures Financial and Management Accounting Processing Accounting Information Ethical Financial Reporting Decision Makers: The Users of Accounting Information 10 Management 10 Users with a Direct Financial Interest 11 Users with an Indirect Financial Interest 12 Governmental and Not-for-Profit Organizations 12 Accounting Measurement 13 Business Transactions 14 Money Measure 14 Separate Entity 15 CHAPTER Financial Position and the Accounting Equation 17 Assets 18 Liabilities 18 Owner’s Equity 18 Financial Statements 19 Income Statement 19 Statement of Owner’s Equity 20 The Balance Sheet 20 Statement of Cash Flows 21 Relationships Among the Financial Statements 21 Generally Accepted Accounting Principles 24 GAAP and the Independent CPA’s Report 25 Organizations That Issue Accounting Standards 26 Other Organizations That Influence GAAP 26 Professional Conduct 27 Corporate Governance 27 The Forms of Business Organization 15 Ǡ KEEP-FIT CENTER: REVIEW PROBLEM 28 Characteristics of Corporations, Sole Proprietorships, and Partnerships 15 STOP & REVIEW 31 CHAPTER ASSIGNMENTS 33 Analyzing Business Transactions DECISION POINT Ǡ A USER’S FOCUS PAWS AND HOOFS CLINIC 49 Measurement Issues 50 Recognition 50 Valuation 51 Classification 53 Ethics and Measurement Issues 53 Double-Entry System 54 Accounts 54 The T Account 54 The T Account Illustrated 55 Rules of Double-Entry Accounting 55 Normal Balance 56 Owner’s Equity Accounts 56 48 Business Transaction Analysis 58 Owner’s Investment to Form the Business 58 Economic Event That Is Not a Business Transaction 59 Prepayment of Expenses in Cash 59 Purchase of an Asset on Credit 59 Purchase of an Asset Partly in Cash and Partly on Credit 60 Payment of a Liability 60 Revenue in Cash 61 Revenue on Credit 61 Revenue Collected in Advance 61 Collection on Account 62 Expense Paid in Cash 62 vii viii Contents Expense to Be Paid Later 63 Withdrawals 63 Summary of Transactions 65 The Trial Balance 65 Preparation and Use of a Trial Balance 65 Finding Trial Balance Errors 67 Cash Flows and the Timing of Transactions 68 CHAPTER Chart of Accounts 70 General Journal 70 General Ledger 72 Some Notes on Presentation 73 Ǡ PAWS AND HOOFS CLINIC: REVIEW PROBLEM 75 STOP & REVIEW 79 CHAPTER ASSIGNMENTS 81 Measuring Business Income DECISION POINT Ǡ A USER’S FOCUS RELIABLE ANSWERING SERVICE 99 Profitability Measurement: Issues and Ethics 100 Net Income 100 Income Measurement Assumptions 101 Ethics and the Matching Rule 102 Accrual Accounting 104 Recognizing Revenues Recognizing Expenses Adjusting the Accounts Adjustments and Ethics CHAPTER Recording and Posting Transactions 70 104 105 105 106 98 Type Adjustment: Recognizing Unrecorded, Incurred Expenses (Accrued Expenses) 111 Type Adjustment: Allocating Recorded, Unearned Revenues (Deferred Revenues) 113 Type Adjustment: Recognizing Unrecorded, Earned Revenues (Accrued Revenues) 114 A Note About Journal Entries 115 Using the Adjusted Trial Balance to Prepare Financial Statements 116 Cash Flows from Accrual-Based Information 119 Ǡ RELIABLE ANSWERING SERVICE: REVIEW PROBLEM 121 The Adjustment Process 107 STOP & REVIEW Type Adjustment: Allocating Recorded Costs (Deferred Expenses) 107 CHAPTER ASSIGNMENTS 125 127 Completing the Accounting Cycle DECISION POINT Ǡ A USER’S FOCUS WESTWOOD MOVERS 143 From Transactions to Financial Statements 144 The Accounting Cycle 144 Closing Entries 144 Preparing Closing Entries 147 Step 1: Closing the Credit Balances 147 Step 2: Closing the Debit Balances 147 Step 3: Closing the Income Summary Account Balance 147 Step 4: Closing the Withdrawals Account Balance 147 142 The Accounts After Posting 148 The Post-Closing Trial Balance 150 Reversing Entries: An Optional First Step 152 The Work Sheet: An Accountant’s Tool 154 Preparing the Work Sheet 154 Using the Work Sheet 157 Ǡ WESTWOOD MOVERS: REVIEW PROBLEM 158 STOP & REVIEW 160 CHAPTER ASSIGNMENTS 162 ix Contents CHAPTER Financial Reporting and Analysis DECISION POINT Ǡ A USER’S FOCUS FUN-FOR-FEET COMPANY 181 Foundations of Financial Reporting 182 Objective of Financial Reporting 182 Qualitative Characteristics of Accounting Information 182 Accounting Conventions 184 Ethical Financial Reporting 184 Accounting Conventions for Preparing Financial Statements 185 Consistency 185 Full Disclosure (Transparency) 186 Materiality 187 Conservatism 187 Cost-Benefit 188 SUPPLEMENT TO CHAPTER Classified Balance Sheet 190 Assets 190 Liabilities 192 Owner’s Equity 193 Dell’s Balance Sheets 194 Forms of the Income Statement 196 Multistep Income Statement 196 Dell’s Income Statements 199 Single-Step Income Statement 200 Using Classified Financial Statements 201 Evaluation of Liquidity 201 Evaluation of Profitability 202 Ǡ FUN-FOR-FEET COMPANY: REVIEW PROBLEM 208 STOP & REVIEW 210 CHAPTER ASSIGNMENTS 212 How to Read an Annual Report The Components of an Annual Report 226 Letter to the Stockholders 227 Financial Highlights 227 Description of the Company 227 Management’s Discussion and Analysis 227 CHAPTER 180 226 Financial Statements 228 Notes to the Financial Statements 233 Reports of Management’s Responsibilities 234 Reports of Certified Public Accountants 234 The Operating Cycle and Merchandising Operations DECISION POINT Ǡ A USER’S FOCUS FONG COMPANY 267 Managing Merchandising Businesses 268 266 Perpetual Inventory System 275 Purchases of Merchandise 275 Sales of Merchandise 277 Operating Cycle 268 Choice of Inventory System 270 Foreign Business Transactions 270 Periodic Inventory System 281 Terms of Sale 272 Ǡ FONG COMPANY: REVIEW PROBLEM 286 Sales and Purchases Discounts 272 Transportation Costs 273 Terms of Debit and Credit Card Sales 274 STOP & REVIEW SUPPLEMENT TO CHAPTER Purchases of Merchandise 282 Sales of Merchandise 284 289 CHAPTER ASSIGNMENTS Special-Purpose Journals Sales Journal 302 Purchases Journal 306 Cash Receipts Journal 308 Cash Payments Journal 311 290 302 Endnotes Professional Standards, vol 1, Sec AU 325.16 KPMG Peat Marwick, “1998 Fraud Survey,” 1998 Elizabeth Woyke, “Attention Shoplifters,” BusinessWeek, September 11, 2006 Amy Merrick, “Starbucks Accuses Employee, Husband of Embezzling $3.7 Million from Firm,” The Wall Street Journal, November 20, 2000 Chapter Toyota Motor Corporation, Annual Report, 2008 Gary McWilliams, “Whirlwind on the Web,” BusinessWeek, April 7, 1997 Karen Lundebaard, “Bumpy Ride,” The Wall Street Journal, May 21, 2001 “Cisco’s Numbers Confound Some,” International Herald Tribune, April 19, 2001 “Kmart Posts $67 Million Loss Due to Markdowns,” The Wall Street Journal, November 10, 2000 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2008) Toyota Motor Corporation., Annual Report, 2008 Ernst & Young, U.S GAAP vs IFRS: The Basics, 2007 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 10 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2008) Chapter Peter Coy and Michael Arndt, “Up a Creek with Lots of Cash,” BusinessWeek, November 12, 2001 “So Much for Detroit’s Cash Cushion,” BusinessWeek, November 5, 2001 Jesse Drucker, “Sprint Expects Loss of Subscribers,” The Wall Street Journal, September 24, 2002 Michael Selz, “Big Customers’ Late Bills Choke Small Suppliers,” The Wall Street Journal, June 22, 1994 Circuit City Stores, Inc., Annual Report, 2005 Deborah Solomon and Damian Paletta, “U.S Drafts Sweeping Plans to Fight Crisis as Turmoil Worsens in Credit Markets,” The Wall Street Journal, September 19, 2008 Heather Timmons, “Do Household’s Numbers Add Up?” BusinessWeek, December 10, 2001 Steve Daniels, “Bank One Reserves Feed Earnings,” Crain’s Chicago Business, December 15, 2003 Jonathon Weil, “Accounting Scheme Was Straightforward but Hard to Detect,” The Wall Street Journal, March 20, 2003 10 Nike, Inc., Annual Report, 2009 11 Ibid 12 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 13 Tom Lauricella, Shefali Anand, and Valerie Bauerlein, “A $34 Billion Cash Fund to Close Up,” The Wall Street Journal, December 11, 2007 14 Jathon Sapsford, “As Cash Fades, America Becomes a Plastic Nation,” The Wall Street Journal, July 23, 2004 15 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 16 “Bad Loans Rattle Telecom Vendors,” BusinessWeek, February 19, 2001 17 Scott Thurm, “Better Debt Bolsters Bottom Lines,” The Wall Street Journal, August 18, 2003 18 Information based on promotional brochures of Mitsubishi Corp 813 19 Elizabeth McDonald, “Unhatched Chickens,” Forbes, February 19, 2001 Chapter 10 Pamela L Moore, “How Xerox Ran Short of Black Ink,” BusinessWeek, October 30, 2000 Mark Heinzel, Deborah Solomon, and Joann S Lublin, “Nortel Board Fires CEO and Others,” The Wall Street Journal, April 29, 2004 Hershey Foods Corporation, Annual Report, 2006 Goodyear Tire & Rubber Company, Annual Report, 2006 Andersen Enterprise Group, cited in Crain’s Chicago Business, July 5, 1999 Promomagazine.com, July 6, 2005 Scott McCartney, “Your Free Flight to Mars Is Hobbling the Airline Industry,” The Wall Street Journal, February 4, 2004 Hershey Foods Corporation, Annual Report, 2007 Statement of Financial Accounting Standards No 5, “Accounting for Contingencies” (Norwalk, Conn.: Financial Accounting Standards Board, 1975) 10 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 11 Microsoft, Annual Report, 2007 12 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 13 Statement of Financial Accounting Concepts No 7, “Using Cash Flow Information and Present Value in Accounting Measurement” (Norwalk, Conn.: Financial Accounting Standards Board, 2000) 14 “Clarifications on Fair-Value Accounting,” U.S Securities and Exchange Commission, Release 2008-234, October 1, 2008 15 Advertisement, Chicago Tribune, November 8, 2002 16 General Motors Corporation, Annual Report, 2006 Chapter 11 Statement of Financial Accounting Standards No 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (Norwalk, Conn.: Financial Accounting Standards Board, 2001) Sharon Young, “Large Telecom Firms, After WorldCom Moves, Consider Writedowns,” The Wall Street Journal, March 18, 2003 Edward J Riedl, “An Examination of Long-lived Asset Impairments,” The Accounting Review, Vol 79, No 3, pp 823–852 Statement of Financial Accounting Standards No 34, “Capitalization of Interest Cost” (Norwalk, Conn.: Financial Accounting Standards Board, 1979), pars 9–11 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) Ibid Jonathan Weil, “Oil Reserves Can Sure Be Slick,” The Wall Street Journal, March 11, 2004 Statement of Financial Accounting Standards No 25, “Suspension of Certain Accounting Requirements for Oil and Gas Producing Companies” (Norwalk, Conn.: Financial Accounting Standards Board, 1979) “The Top 100 Brands,” BusinessWeek, August 5, 2002 10 The New York Times Company, Annual Report, 2006 11 Statement of Financial Accounting Standards No 142, “Goodwill and Other Intangible Assets” (Norwalk, Conn.: Financial Accounting Standards Board, 2001), pars 11–17 12 General Motors Corporation, Annual Report, 2005 13 Abbott Laboratories, Annual Report, 2005 814 Endnotes 14 Statement of Financial Accounting Standards No 2, “Accounting for Research and Development Costs” (Norwalk, Conn.: Financial Accounting Standards Board, 1974), par 12 15 Statement of Financial Accounting Standards No 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” (Norwalk, Conn.: Financial Accounting Standards Board, 1985) 16 General Mills, Inc., Annual Report, 2007; H.J Heinz Company, Annual Report, 2007; Tribune Company, Annual Report, 2007 17 Statement of Financial Accounting Standards No 142, “Goodwill and Other Intangible Assets” (Norwalk, Conn.: Financial Accounting Standards Board, 2001), pars 11–17 18 Southwest Airlines Co., Annual Report, 2002 19 Costco Wholesale Corporation, Annual Report, 2007 20 Hilton Hotels Corporation, Annual Report, 2006; Marriott International, Inc., Annual Report, 2006 Chapter 12 “Stock and Bond Market Shrivels,” Wall Street Journal Digital Network, January 2, 2009 Microsoft Corporation, Annual Report, 2009 Deborah Solomon, “AT&T Slashes Dividends 83%, Cuts Forecasts,” The Wall Street Journal, December 21, 2002 Abbott Laboratories, Annual Report, 2008 Google, Inc., Form S-1 (Registration Statement), 2007 Microsoft Corporation, Annual Report, 2009 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) Statement of Accounting Standards No 123, “Stock-Based Payments” (Norwalk, Conn.: Financial Accounting Standards Board, 1995; amended 2004) Google, Inc., Form S-1 (Registration Statement), 2009 10 Jonathan Weil, “FASB Unveils Expensing Plan on Option Pay,” The Wall Street Journal, April 1, 2004 11 Joseph Weber, “One Share, Many Votes,” BusinessWeek, March 29, 2004; Google, Inc., Form S-1 (Registration Statement), 2004 12 Michael Rapaport and Jonathan Weil, “More Truth-inLabeling for Accounting Carries Liabilities,” The Wall Street Journal, August 23, 2003 13 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 14 David Henry, “The Dirty Little Secret about Buybacks,” BusinessWeek, January 23, 2006; Peter A McKay and Justin Lahart, “Boom in Buybacks Helps Lift Stocks to Record Heights,” The Wall Street Journal, July 18, 2007 15 Mariss Marr, “Dreamworks Shares Rise 38% on First Day,” The Wall Street Journal, October 10, 2004; Yahoo Finance, December 26, 2007 16 IBM Corporation, Annual Report, 2006 17 Google, Inc., Form S-1 (Registration Statement), 2004 Chapter 13 Statement of Financial Accounting Standards No 13, “Accounting for Leases” (Norwalk, Conn.: Financial Accounting Standards Board, 1976), par 10 Statement of Financial Accounting Standards No 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (Norwalk, Conn.: Financial Accounting Standards Board, 2007) General Motors, Annual Report, 2007 Deborah Soloman, “After Pension Fund Debacle, San Diego Mired in Probes,” The Wall Street Journal, October 10, 2005 Mary Williams Walsh, “$53 Billion Shortfall for New Jersey Retiree Care,” The New York Times, July 25, 2007 Statement of Financial Accounting Standards No 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” (Norwalk, Conn.: Financial Accounting Standards Board, 1990) Southwest Airlines, Annual Report, 2008 McDonald’s, Inc., Annual Report, 2008 Bill Barnhart, “Bond Bellwether,” Chicago Tribune, December 4, 1996 10 Accounting Principles Board, Opinion No 21, “Interest on Receivables and Payables” (New York: AICPA, 1971), par 15 11 Continental Airlines, Annual Report, 2008 12 Tom Sullivan and Sonia Ryst, “Kodak $1 Billion Issue Draws Crowds,” The Wall Street Journal, October 8, 2003 13 Adapted from quotations in The Wall Street Journal Online, December 18, 2007 14 Amazon.com, Annual Report, 2007 Chapter 14 Cited in The Week in Review (Deloitte Haskins & Sells), February 28, 1985 “Up to the Minute, Down to the Wire,” Twentieth Century Mutual Funds Newsletter, 1996 “After Charge for Licensing, McDonald’s Posts a Record Loss,” The New York Times, July 25, 2007; Christina Cheddar Berk, “Campbell’s Profit Jumps 31 Percent,” The Wall Street Journal, November 22, 2005 Elizabeth MacDonald, “Pro Forma Puff Jobs,” Forbes, December 9, 2002 Barbara A Lougee and Carol A Marquardt, “Earnings Informativeness and Strategic Disclosure: An Empirical Examination of Pro Forma Earnings,” The Accounting Review, July 2004 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) Statement of Financial Reporting Standards No 145, “Rescission and Revision of Various Statements” (Norwalk, Conn.: Financial Accounting Standards Board, 2002) Statement of Financial Accounting Standards No 109, “Accounting for Income Taxes” (Norwalk, Conn.: Financial Accounting Standards Board, 1992) American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 10 Accounting Principles Board, Opinion No 30, “Reporting the Results of Operations” (New York: AICPA, 1973), par 20 11 Statement of Financial Accounting Standards No 128, “Earnings per Share and the Disclosure of Information About Capital Structure” (Norwalk, Conn.: Financial Accounting Standards Board, 1997) 12 Statement of Financial Accounting Standards No 130, “Reporting Comprehensive Income” (Norwalk, Conn.: Financial Accounting Standards Board, 1997) 13 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2007) 14 American Institute of Certified Public Accountants, Accounting Research Bulletin No 43 (New York: AICPA, 1953), chap 7, sec B, par 10 15 Ibid., par 13 16 Nike, Annual Report, 2007 Endnotes 17 Robert O’Brien, “Tech’s Chill Fails to Stem Stock Splits,” The Wall Street Journal, June 8, 2000 18 YahooFinance.com, 2007 19 “Technology Firms Post Strong Earnings but Stock Prices Decline Sharply,” The Wall Street Journal, January 21, 1988; Donald R Seace, “Industrials Plunge 57.2 Points— Technology Stocks’ Woes Cited,” The Wall Street Journal, January 21, 1988 Chapter 15 Ian McDonald, “Cash Dilemma: How to Spend It,” The Wall Street Journal, May 24, 2006; Ian McDonald, “Companies Are Rolling in Cash, Too Bad,” The Wall Street Journal, August 20, 2006 “Deadweight on the Markets,” BusinessWeek, February 19, 2001 “Free Cash Flow Standouts,” Upside Newsletter, October 3, 2001 Amazom.com, Form 10-K, 2008 Gary Slutsker, “Look at the Birdie and Say: ‘Cash Flow,’” Forbes, October 25, 1993 Jonathan Clements, “Yacktman Fund Is Bloodied but Unbowed,” The Wall Street Journal, November 8, 1993 Jeffery Laderman, “Earnings, Schmearnings—Look at the Cash,” BusinessWeek, July 24, 1989 Amazom.com, Form 10-K, 2008 American Institute of Certified Public Accountants, Accounting Trends & Techniques (New York: AICPA, 2006) 10 Martin Peers and Robin Sidel, “WorldCom Causes Analysts to Evaluate EBITDA’s Role,” The Wall Street Journal, July 15, 2002 11 Richard Passov, “How Much Cash Does Your Company Need?” Harvard Business Review, November 2003 12 “Cash Flow Shortfall in Quarter May Lead to Default on Loan,” The Wall Street Journal, September 4, 2001 815 13 Enron Corporation, Press Release, October 16, 2001 14 Dean Foust, “So Much Cash, So Few Dividends,” BusinessWeek, January 20, 2003 Chapter 16 David Henry, “The Numbers Game,” BusinessWeek, May 14, 2001 Jonathan Weil, “Pro Forma in Earnings Reports? As If,” The Wall Street Journal, April 24, 2003 Statement of Financial Accounting Standards No 131, “Segment Disclosures” (Norwalk, Conn.: Financial Accounting Standards Board, 1997) Starbucks Corporation, Annual Report, 2008 Ibid Ibid Target Corporation, Proxy Statement, May 18, 2005 Starbucks Corporation, Annual Report, 2008 Lee Hawkins, Jr., “S&P Cuts Rating on GM and Ford to Junk Status,” The Wall Street Journal, May 6, 2005 Chapter 17 “Nokia Unveils Plans for Chinese Centre,” Financial Times London, May 9, 2000 Appendix A Statement of Financial Accounting Standards No 157, “Fair Value Measurements” (Norwalk, Conn.: Financial Accounting Standards Board, 2007) Statement of Financial Accounting Standards No 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (Norwalk, Conn.: Financial Accounting Standards Board, 2007) Statement of Financial Accounting Standards No 115, “Accounting for Certain Investments in Debt and Equity Securities” (Norwalk, Conn.: Financial Accounting Standards Board, 1993) Ibid COMPANY NAME INDEX Abbott Laboratories, 500, 525 Adolph Coors Company, 529 Albertson’s, Inc., 224 Amazon.com, 97, 300, 435, 439, 613, 660, 661 (exh.), 663–664, 665, 666–667, 710 America Online (AOL), 140 American Airlines, 444 American Century Investments Corporation, 616 American Express, 618 AOL Time Warner, 285 Apple Computer, Inc., 102, 476–477, 478, 498, 525, 564 AT & T Corporation, 476, 525 Autoliv, Inc., 355, 357 Babies ‘R’ Us, 325 Bank of America, 400, 618 Bank One, 398 Barnes & Noble, 300 Bell South, 576 Best Buy Co., Boeing Company, 51, 190 Borders, 300 Cadillac, 470 Caesars World, 102 Campbell Soup, 619 Capital Corporation, 793 Chase, 400 Circuit City, 397 Cisco Systems, 405, 663, 705 Citibank, 400 CMS Energy, 533 Coca-Cola Company, 498, 576 Columbia HCA Healthcare, 576 CompuCredit, 428 Computer Associates, 53 Continental Airlines, 564–565, 612 Costco Wholesale Corporation, 45, 198, 269, 321, 327, 516 Credit Suisse First Boston, 523 Crocs, 653 CVS Caremark Corporation, 6, 7, 12, 46, 47, 97, 141, 177, 225, 226, 227, 228–233, 229 (exh.), 230 (exh.), 231 (exh.), 232–233 (exh.), 233–234, 235 (fig.), 236, 237, 238–255, 301, 349, 352, 388, 389, 429, 470, 816 471, 517, 561, 564, 568, 613, 655, 670, 705, 752, 753 DaimlerChrysler, 392, 437 Dell Computer, 104, 184–185, 187, 194–195, 199, 206, 353, 387, 705 Deloitte & Touche, 793 Delta, 485 Dillard’s, Inc., 396 Disney See The Walt Disney Company Dow Chemical Company, 613 DreamWorks Animation, 560 Dun & Bradstreet, 709, 712 Eastman Kodak, 612 eBay, 628, 628 (exh.) Eclipsys, 140 Electronic Data Systems Corporation (EDS), 69 Enron Corporation, 8, 9, 26, 53, 84, 185, 620, 703, 704, 758 Ernst & Young, 189, 793 Exxon Mobil Corporation, 15, 663 Fidelity Investments Company, 45 Fleetwood Enterprises, Inc., 703 Ford Motor Company, 392, 396, 751 Ford Motor Credit Company (FMCC), 396 Gap, The, General Electric (GE), 540 General Mills, 501 General Motors Corporation, 6, 392, 470, 500, 570, 751 Goodyear Tire & Rubber Company, 186, 437, 711, 751 Google, Inc., 523, 526, 527, 530, 534, 560 Great Atlantic and Pacific Tea Company (A&P), 224 HealthSouth, 398 Hershey Foods Corporation, 435 Hilton Hotels Corporation, 516–517 H.J Heinz, 102, 501 Home Depot, Inc., 540 Household International, 398 PepsiCo Inc., 712, 713 (exh.), 751 Piedmont, 485 PricewaterhouseCoopers, 793 IBM, 498, 560, 576, 653–654 Intel Corporation, 52, 498, 653, 705 Qwest Communications, 476 JCPenney, 387, 393 Johnson & Johnson, 540 Kelly Services, 102 Kmart, 359, 393 KnowledgeWare, 140 KPMG International, 793 Lands’ End, 280 L.L Bean, 280 Lucent Technologies, 140, 405, 437 Macy’s, 325, 396 Marriott International, 516–517 Marshall Field’s, 396 McDonald’s Corporation, 202, 274, 498, 572, 619 MCI See WorldCom (MCI) Mercedes-Benz, 498 Mergent, 712, 713 (exh.), 751 MGM-UA Communications, 102 Microsoft, 435, 447, 453, 526, 527, 540, 564, 663 Midas, 445 Mitsubishi Corp., 428 Morgan Stanley, 523 Motorola, Inc., 437, 625–626, 625 (exh.), 627 NBC Universal, 321 Neiman Marcus, 198 New York Times Company, The, 499 Netflix, 101, 113, 146, 154 Nike, Inc., 96, 354, 392, 393, 395–396, 432, 433–434, 633, 655 Nokia, 793 Nordstrom, 396 Nortel Networks Corporation, 405, 434 Office Depot, 280 Oracle, 705 Reebok International Ltd., RentWay, Inc., 356 Rite Aid Corporation, 356 Royal Dutch/Shell Group, 496 Sam’s Club, 198 Sears, 393, 396 Sears Roebuck Acceptance Corporation (SRAC), 396 Simon & Schuster, 285 Southwest Airlines Co., 5, 45, 47, 97, 177, 225, 226, 256–265, 349, 516, 517, 561, 564, 571, 613, 655, 705, 753 Sprint, 394 Standard & Poor’s, 566, 751 Starbucks Corporation, 5, 274, 348, 714, 715, 716 (exh.), 717 (exh.), 718–721, 720 (exh.), 722–729 Target Corporation, 9, 269, 726 Texas Instruments, 392 Tiffany & Co., 198 Time Warner, 533 Toyota Motor Company, 5, 352, 360, 413, 498 TWA (Trans World Airlines), 564–565 Twentieth Century Mutual Funds, 616 United Airlines, 564–565 UPS (United Parcel Service), 353 US Airways, 485 Vivendi, 673 Walgreens, 301, 352, 389, 429, 471, 618 Wal-Mart Corp., 5, 400, 540 Walt Disney Company, The, 140–141, 498, 576 Wendy’s International Inc., WorldCom (MCI), 8, 26, 53, 184, 185, 398, 476, 673 Xerox Corporation, 433, 533 SUBJECT INDEX ABC, see Activity-based costing ABM, see Activity-based management Accelerated method, 486, 488, 488(fig.) Account(s), 54 chart of, 70 collection on, 62 normal balances of major categories, 56(table) after posting, 148–149, 149(exh.), 150(exh.) receipts on, 279 see also Credit balances; Debit balances; specific types of accounts Accountability, recording transactions for, 323 Account balance, see Balance(s) Accounting, accrual, 104–106 by business form, 15n cash basis of, 102 development of, ethics in, 398 fair value, 448–453 as information system, 4–23, 4(fig.) for intangible assets, 497(table) inventory, 352–353 politics and, 528 Accounting conventions, 184, 188 for preparing financial statements, 185–189 Accounting cycle, 142, 144, 145(fig.) Accounting equation, 17, 17(fig.) Accounting firms, partners in, 765 Accounting information processing, 7–8 qualitative characteristics of, 182–184 users of, 10(fig.) see also Financial statements; Report(s); specific financial statements Accounting measurement, 13–15, 50–53 Accounting Principles Board, 625 Accounts payable, 17, 436 in cash payments journal, 311 evaluation of, 432–434 Accounts payable subsidiary ledger general ledger, cash payments journal, and, 312(exh.) single-column purchases journal, general ledger, and, 307(exh.) Accounts receivable, 17, 100, 393 aging of, 407–408, 409 credit policies and, 393–394 journal credit column, 310 schedule of, 305(exh.) Accounts receivable aging method, 407–408, 407(exh.), 409 Accounts receivable subsidiary ledger, general ledger cash receipts journal, and, 309(exh.) sales journal, posting procedure, and, 304(exh.) Accrual(s), 107 year-end accrual of bond interest expense, 593–595 Accrual accounting, 104–106 adjusting accounts and, 105 expense recognition and, 105 revenue recognition and, 104–105 Accrued expenses, 111–113 Accrued interest, 414 Accrued liabilities, 438 Accrued revenues, 114–115, 114(fig.) Accumulated Depreciation account, 110 Acquisition costs, 476–477, 477(table) general approach to, 480 for long-term assets, 479–482 specific applications of, 480–482 Additional Paid-in Capital account, 632 Additions, 479 Adjusted trial balance, 105, 106(exh.), 116–119 and balance sheet and statement of owner’s equity, 118(exh.) and income statement, 117(exh.) preparing closing entries from, 148(exh.) for preparing financial statements, 116–119, 143, 144 Adjusting entries, 107 Adjustments, 107(fig.) ethics and, 106–107 for prepaid (deferred) expenses, 108(fig.) process of, 107–116 Type 1, deferred expenses, 107–111 Type 2, accrued expenses, 111–113, 112(fig.) Type 3, deferred revenues, 113–114 Type 4, accrued revenues, 114–115 Advertising expense, in cash payments journal, 311 AICPA, see American Institute of Certified Public Accountants Airplane, useful life of, 485 Allocation of deferred expenses, 107–111 Allowance(s), sales returns and, 278–279, 284–285 Allowance for Uncollectible Accounts, 404, 406 Allowance method, 404 American Institute of Certified Public Accountants (AICPA), 25 on professional conduct, 26 Amortization, 474, 475 and annual impairment test, 497(table) of bond discount, 581–586, 584(table) of bond premium, 586–589, 588(table) of customer lists, 499 effective interest method of, 583–586, 587–589 straight-line method of, 484, 582–583, 586–587 Annual impairment test, 497(table), 499 Annual reports, 226, 236–255, 256–265, 711 components of, 226–265 Annuities, ordinary, 450–452 present value of, 450–451 APB, see Accounting Principles Board Articles of incorporation, 520 Asset(s), 17 credit purchase of, 59–60 current, 190–192 gain on sale of partnership, 773–775, 774(exh.) goodwill as, 500–501 intangible, 192, 497–501, 497(table) inventory, 350 investing in partnership, 768 issuance of stock for noncash, 537–538 long-term, 472, 473, 474–501 loss on sale of partnership, 775–778 plant, 491–493 preference as to, 532 purchase partly in cash and partly on credit, 60 return on, 204–205 short-term financial, 393 valuing, 453–454 withdrawal by removing partnership, 771–772 see also Depreciation; Long-term assets; Natural resources; Property, plant, and equipment 817 818 Subject Index Asset impairment, 475–476 Asset turnover, 203–204, 203(fig.), 724 ATMs, see Automated teller machines Audit(s), of internal control, 322 Audit committee, 27 Authorization, as control activity, 323 Authorized shares, 530, 530(fig.) Automobile manufacturers, promissory notes and, 413 Average capital balances, ratios based on, 762–763 Average-cost method, 362, 618 see also Periodic inventory system Bad debts, 398 Balance(s), 55 compensating, 392 normal, 56 see also Trial balance Balance sheet, 20–21, 20(exh.), 22(exh.), 23, 118(exh.) in annual report, 228 classified, 190(fig.), 191(exh.), 195(exh.) common-size, 719(fig.), 720(fig.) comparative, 669(exh.) of Dell Computer Corporation, 194–195 stockholders’ equity on, 529(exh.), 629(exh.) Bank(s) services of, 400 Bank loans, 437 Bank reconciliation, 401, 402(exh.) Bankruptcy protection, 565 Bank statement, 329 Bar codes, 271 Barron’s, 712 Base year, 715 Basic earnings per share, 626 Beginning capital balances, ratios based on, 762 Benefits post-retirement, 571 retirement, 569–570 from small businesses, 439 Betterments, 480 Board of directors, 520–521 Bond(s), 573–575 callable, 574 calling, 590–591 convertible, 574–575 converting, 591–592 coupon, 575 issued at discount, 576–577 issued at face value, 575–576 issued at premium, 577–578 100–year, 576 registered, 575 retirement of, 590–592 sale between interest dates, 592–593 secured, 574 serial, 574 term, 574 unsecured (debenture), 574 valuing using present value, 579–580, 580(fig.) year-end accrual of interest expense for, 593–595, 594 (f) zero coupon, 582 Bond certificates, 573 Bond discounts, amortizing, 581–586 Bond indenture, 573 Bonding, 324 Bond issues, 573 costs of, 578 Bond premiums, amortizing, 586–589, 588(table) Bonds payable, 566, 592–595, 678 Bonus, 768 to new partner, 769–770 to old partners, 768–769 Bookkeeping, Book of original entry, 70 Book value, 110, 474, 635–636 Book value per share, 635 Borrowing, debt and, 566 Bottom line, 619, 665 Brand names, 497 value of, 498 Buildings acquisition costs for, 481–482 see also Property, plant, and equipment Business, goals, activities, and performance measures of, 4–7, 5(fig.) see also Manufacturing companies; Merchandising businesses; Service organizations business communication, See Specific companies Business organization corporation as, 520–521 forms of, 15–16 Business periodicals, 712 Business transactions, 14, 50 analysis of, 58–78, 64(exh.), 70(fig.) posting, 70–74 recording, 70–74, 323 summary of, 65 timing of, cash flows and, 68–69, 68(fig.) Buybacks, of shares, 540 Buyers, large, 397 Callable bonds, 574 Callable preferred stock, 533–534 Calling bonds, 590 Call price, 574 Capital contributed (paid-in), 193, 194, 518–543 generation of, by corporations, 521 use of term, 193 see also Common stock; Corporations; Owner’s equity; Preferred stock; Stock entries; Stockholders’ equity Capital balance ratios, in distribution of partnership income and losses, 762–763 Capital expenditures, 479, 666 Capital leases, 568–569, 569(table) Capital structure complex, 626–627 simple, 626 Carrying value, 110, 474– 475, 475(fig.), 487(fig.), 584, 588(fig.) Cash, 390, 391, 392, 658 in cash payments journal, 311 company needs for, 679 control of, 326, 400 control of over-thecounter, 327 as current asset, 191 fair value of, 399–400 imprest systems and, 332, 340 petty cash funds and, 332–334 revenue in, 61 Cash basis of accounting, 102 Cash collections estimating, 405 Cash disbursements control of purchases and, 327–329, 330–331(fig.) internal control plan for, 330–331(fig.) Cash disbursements journal, 311 Cash equivalents, 399–403, 658 Cash flow adequacy ratios, 728(exh.) Cash flows, 657, 663–667 accounting method choice and, 367 from accrual-based information, 119–120 assessing prospects of, 182 consolidated statements of, 231(exh.) earnings and, 69 from financing activities, 22, 660 free, 477, 665–667 inflows and outflows, 659(fig.), 662 information about, 527, 572 from investing activities, 22, 659–660, 674–677 liquidity and, 432 from operating activities, 21, 21(exh.), 658–659 in operating cycle, 269(fig.) timing of transactions and, 68–69 see also Statement of cash flows Cash flows to assets, 664, 727 Subject Index Cash flows to sales, 664, 727 Cash flow yield, 664, 727 Cash-generating efficiency, 663–664 Cashless society, 274 Cash management, 392–398 seasonal cycles and cash requirements, 393(fig.) Cash payments journal, 311–313, 312(exh.) general ledger, accounts payable subsidiary ledger, and, 312(exh.) Cash receipts, control of, 326–327 Cash receipts journal, 308–311 general ledger, accounts receivable subsidiary ledger, and, 309(exh.) Centralization, of corporate authority and responsibility, 521–522 “Cents off ” coupons, 443 Certified public accountants (CPAs), 24, 24(table) audit of internal control by, 322 GAAP and report by, 24–25 reports of, in annual report, 234–235, 255 CFOs, see Chief financial officers Chart of accounts, 70, 71(exh.) Check(s), 329 outstanding, 401 Check authorization, 329 Chief financial officers (CFOs), responsibilities of, 11 Classification, 53 of deferred income taxes, 623 of liabilities, 435 Classified financial statements, 190 balance sheet, 190(fig.), 191(exh.), 195(exh.), 201–207 liquidity evaluation using, 201–202 profitability evaluation using, 202–207 Closely held corporations, 226 Closing entries, 144–146 overview of, 146(fig.) preparing, 147–151, 148(exh.) CM, see Contribution margin Commercial paper, 436, 437 Commitment, 447 Common-size statements, 718, 719–720, 719(fig.), 720(fig.), 721(exh.) Common stock, 529 issuance of, 534–538 schedule of cash flows and, 678–679 stock splits and, 634 Common Stock Distributable, 632 Communicating Comparability, 184 Comparative balance sheets, 669(exh.), 715, 716(exh.) Comparative financial statements, 228 Comparative income statements, 717(exh.) Compensating balance, 392 Compensation measuring performance for, 726 Compensation committees, 712 Complex capital structure, 626 Compound entry, 60 Compound interest, 449 Comprehensive income, 627–630 Computers for internal control, 327 software costs and, 500 Conglomerates, 710 Conservatism, 187–188 Consignment, 359 Consistency, 185–186 Consolidated balance sheets, 228, 230(exh.), 242, 257 Consolidated cash flows statements, 243, 260 Consolidated financial statements, 228, 230(exh.), 231(exh.), 232–233(exh.), 258 see also specific statements Consolidated operations statements, 241 Consolidated shareholders’ equity statements, 241–242, 259 Contingent liability, 397, 447 Continuity, 101 Continuous existence, of corporation, 521 Contra accounts, 110, 404 Contra-liability account, 577 Contributed capital, 193, 194, 518–543, 528 see also Common stock; Corporations; Preferred stock; Stock entries; Stockholders’ equity Control of cash, 326 of cash receipts, 326–327 physical, 324 of purchases and cash disbursements, 327– 329, 330–331(fig.) see also Internal control Control activities, 323–324 Control environment, 322 Controlling account, 303 Convertible bonds, 574–575 Convertible preferred stock, 532–533 Converting bonds, 591–592 Copyrights, 497 Corporate governance, 26–27 Corporations, 15n, 16, 519, 520–521 advantages and disadvantages of, 521–522 annual reports of, 711–712 boards of directors of, 520–521 equity financing of, 522–523 as form of business, 16, 520–521 government regulation of, 522 inventory costing methods used by, 366(fig.) management of, 522 mimicking characteristics of partnerships, 758 officers of, 521 organization of, 520(fig.) owner’s equity of, 193 ownership and control of, 522 privately (closely) held, 226 tax rate schedule for, 622(table) 819 see also Common stock; Dividends; Preferred stock; Stock entries; Stockholders’ equity Cost(s) acquisition, for long-term assets, 479–482 bond issue, 578 depreciable, 484 depreciation computation and, 484 research and development, 500 transportation, 273–274 Cost approach, 448 Cost-benefit convention, 188–189 Cost flows, 358–359 Cost of doing business, 101 Cost of goods available for sale, 281 Cost of goods sold, 197, 282(fig.) Cost principle, 52 Council of Economic Advisers, as user of accounting information, 12 Coupon(s), value of, 443 Coupon bonds, 575 Credit(s), 54–55 asset purchase on, 59–60 on bank statement, 401 lines of, 436 purchases on, 282 revenue on, 61 sales on, 278, 406 trade, 393 Credit and advisory services, 712 Credit balances, closing, 147, 149(exh.) Credit cards, 270, 274 Credit policies, accounts receivable and, 393–394 Crossfooting, 154, 310 Cumulative preferred stock, 531 Currencies, exchange rates and, 14 Current assets, 190–192 changes in, statement of cash flows and, 671–672 Current liabilities, 192–193, 430, 431, 435, 436–447 cash flows and, 432 changes in, statement of cash flows and, 672 liquidity and, 432 Current portion, of long-term debt, 440 820 Subject Index Current ratio, 201–202, 201(fig.), 723 Customer lists, 497, 499 C-V-P, see Cost-volume-profit (C-V-P) analysis Days’ inventory on hand, 330, 723 Days’ payable, 432, 434(fig.), 723 Days’ sales uncollected, 394–395, 395(fig.), 723 Debenture bonds, 574 Debit(s), 54–55 on bank statement, 401 deficit as, 630 in journal, 310 Debit balances, closing, 147, 149(exh.) Debit cards, 270, 274, 400 Debt bad debts, 398 borrowing ability and, 566 early extinguishment of, 574 long-term, 564–572 preferred stock as, 533 problems with, 433 see also Bond entries; Long-term liabilities; Uncollectible accounts Debt financing, see Long-term liabilities Debt to equity ratio, 205–206, 205(fig.), 565(fig.), 566, 726–727 Decision makers with direct financial interest, 11–12 management as, 10–11 Decision making, see Incremental analysis; Short-run decision analysis Declaration date, 524 Declining-balance method, 486–487 Deferrals, 107 Deferred expenses, allocating, 107–111 Deferred Income Taxes, 571–572, 622–623 Deferred payment, 454–455 Deferred revenues allocating, 113–114 see also Cost reporting; Direct labor entries; Direct materials entries; Unearned Revenues; Unit costs Deficit, 630 Defined benefit plans, 570 Defined contribution plans, 570 Definitely determinable liabilities, 436–443 Definite useful life, 499 Delivery expense, 274 Dell, Michael S., 184–185 Depletion, 474, 475, 494–495 Deposits in transit, 401 Depreciable assets, disposal of, 490–493 Depreciable cost, 484 Depreciation, 108, 110, 474, 483–484 accelerated cost recovery for tax purposes and, 488, 488(fig.) declining-balance method for computing, 486–487 double-declining-balance method for computing, 486–487, 487(table) factors affecting computation of, 484 for financial reporting, 488(fig.) group, 488 of long-term assets, 483–490 methods of computing, 484–487, 487(fig.) for partial years, 488 of plant and equipment, 110 production method for computing, 485–486, 488(fig.) of related plant assets, 495 revision of rates for, 489 statement of cash flows and, 670–671 straight-line method for computing, 484–485, 488(fig.) Depreciation methods, as accounting methods, 618 Description of the company, in annual report, 227 Differential analysis, see Incremental analysis Diluted earnings per share, 626–627 Direct charge-off method, 403 Direct financial interest, decision makers with, 11–12 Direct method, 668, 670 Disbursements cash, 330–331(fig.) petty cash, 333 Disclosure of inventory methods, 360 of noncash investing and financing transactions, 660 by publicly traded energy companies, 496 Discontinued operations, 620 Discount(s), 573–574 bonds issued at, 576–577 purchases, 273 sales, 272–273 trade, 272 Discounting, 397 Dishonored note, 414 Disposal, of depreciable assets, 490–494 Disposal value, 484 Dissolution, of partnership, 767–772 Distribution of partnership income and losses, 761–766 Diversified companies, 710 Dividend(s), 194, 520–521 liquidating, 524 policies for, 524–526 preference as to, 531–532 stock, 630–633 volatility of earnings and, 526 Dividend dates, 524, 525(fig.) Dividends in arrears, 531–532 Dividends payable, 438 Dividends yield, 524–525, 729 Documents, internal control and, 324, 328(fig.) Double-declining-balance method, 486–487, 487(table), 618 Double-entry system, 54–57, 64 accounts and, 58 rules of, 55–56 T accounts and, 54–55 Double taxation, 522 Due care, 26 Duration of a note, 413 Duties, separation of, 324 Early extinguishment of debt, 574 Earnings cash flows and, 69 misstatements of, 103 pro forma, 620 quality of, 616–625 retained, 193, 629–630, 679–680 volatility of, dividend policies and, 526 see also Income; Quality of earnings Earnings management, 103 Earnings per share, 625–627 basic, 626 diluted, 626–627 Ebbers, Bernard J., 185 EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), 673, 703 E-commerce, 300 Economic event, not a business transaction, 59 Economic Stimulus Act of 2008, 489–490 Economic value added (EVA), 726 Effective interest method, 583, 584 for amortization of bond discount, 583–586 for amortization of bond premium, 587–589 Effective interest rate, 573 Electronic funds transfer (EFT), 400 Energy companies, disclosure by publicly traded, 496 Equipment, acquisition costs for, 482 Equities (securities), 17 Equity owner’s, 18 ratio of debt to, 205–206 return on, 206–207, 206(fig.) see also Stockholders’ equity Equity financing, 518, 522–523 advantages of, 523 disadvantages of, 523 ERM, see Enterprise resource management Estimated liabilities, 443–448 Estimated useful life, 484, 485 Subject Index Estimation, inventory valuation by, 370–372 Ethics, in accounting for receivables, 398 and adjustments, 106–107 in financial reporting, 184–185 matching rule and, 102–104 measurement and, 53–54 professional ethical standards and, 26 profitability measurement issues and, 100–104 statement of cash flows and, 662 EVA, see Economic value added Evaluating accounts payable, 432–434 of long-term debt, 565–566 see also Inventory valuation; Performance evaluation Exchange gain or loss, 271 Exchange price, 51 Exchange rates, 14, 271 Excise taxes, 438–439 Ex-dividend stock, 524 Executive compensation, 712–713 Expenditures, 479 Expense(s), 18, 101 accrued, 111–113, 438 in cash payments journal, 311 deferred, allocating, 107–111 delivery, 274 paid in cash, 62–63 paid later, 63 prepaid, 108–110 prepayment in cash, 59–60 recognizing, 105 see also Depreciation Expense accounts, see Debit balances Expired costs, 101 Extraordinary items, 620 Extraordinary repairs, 480 Face interest rate, 573 market rate above, bond valuation and, 579 market rate below, bond valuation and, 580 Face value, bonds issued at, 575–576 Factor(s), 396–397 Factoring, 396 Factory burden, see Overhead costs Factory overhead, see Overhead costs Fair value, 51–52, 475–475 of cash and cash equivalents, 399–400 market and, 360 Fair value accounting, valuation approaches to, 448–453 Faithful representation, 184 FASB, see Financial Accounting Standards Board Federal income taxes, 440 Federal Reserve Board, as users of accounting information, 12 Federal Unemployment Tax Act (FUTA) tax, withholding for, 440, 442 feedback, lack of, FICA tax, see Social security (FICA) tax FIFO, see FIFO costing method; First-in, first-out (FIFO) method see also Periodic inventory system Financial accounting, Financial Accounting Standards Board (FASB), 25 accounting conventions and, 188, 189 on comprehensive income, 627–628 contingent liabilities and commitments disclosures and, 447 on diversified company reporting, 710–711 on objectives of financial reporting, 182–184 on research and development costs, 500 on revenue recognition, 105 on stock options, 528 on successful efforts and full-costing methods, 495–496 Financial analysis, 6, 180 GAAP and, 202 Financial assets, short-term, 393 Financial highlights, in annual report, 228 Financial leverage, 564, 565 Financial performance measurement, 706, 707, 708 management objectives and, 708 standards of comparison for, 709–711 Financial position, 17 Financial reporting, 180, 182–185, 183(fig.) ethical, 184–185 ethics in, 184–185 fraudulent, objectives of, 182–184 see also Financial statements; specific financial statements Financial risk, 564–565 Financial statements, 7, 19–23, 28–29 accounting conventions for, 185–189 adjusted trial balance for, 116–119 in annual report, 228– 233, 229(exh.), 230(exh.), 231(exh.), 232–233(exh.) interim, 234, 712 inventory valuation and, 365 notes to, 233–234 relationships among, 23–24 see also specific statements Financial Times, 712 Financing equity, 518, 522–523 of long-term assets, 477–478 off-balance-sheet, 565–566, 570 of receivables, 396–398 see also Bond entries; Common stock; Dividends; Longterm liabilities; Preferred stock; Stock entries Financing activities, 6, 660, 678–681 Financing period, 268–269 Financing transactions, noncash investing and, 660 821 First-in, first-out (FIFO) method, 362–363, 365– 366, 367, 369, 618 Fiscal year, 102 Fixed assets, 474 Fixed obligations, 727 Flow of costs, see Cost flow FOB destination, 273–274 FOB shipping point, 273, 274 follow-up, lack of, Footings, 55 Forbes, 712 Foreign business transactions, 270–272 Foreign exchange rates, 14(table) Form 8-K, 712 Form 10-K, 226, 712 Form 10-Q, 712 Fortune, 712 Franchises, 497 Fraud cash disbursements and, 327–328 common forms of, 323 in financial reporting, 184–185 Sarbanes-Oxley and, 321 Fraudulent financial reporting, Free cash flow, 477, 665–667, 728 Freight-in, 274 Frequent flyer miles, cost of, 444 Full-costing method, 496 Full disclosure, 186–187, 189 FUTA, see Federal Unemployment Tax Act (FUTA) tax Future value, 449 GAAP, see Generally accepted accounting principles Gains, 619 on sale of partnership assets, 773–775 statement of cash flows and, 671 GASB, see Governmental Accounting Standards Board General journal, 58, 70–71, 313 posting from, 74(exh.) transactions in, 314(exh.) General ledger, 58, 70 cash payments journal, accounts payable subsidiary ledger, and, 312(exh.) 822 Subject Index cash receipts journal, accounts receivable subsidiary ledger, and, 309(exh.) ledger account form and, 72–73 posting to, 73, 74(exh.) sales journal, accounts receivable subsidiary ledger, posting procedure, and, 304(exh.) single-column purchases journal, accounts payable subsidiary ledger, and, 307(exh.) Generally accepted accounting principles (GAAP), 24, 188, 620 direct method and, 670 financial analysis and, 202 independent CPA reports and, 24–25 internal control and, 320 liabilities recording and, 435 revenue recognition and, 105 Goals of business organizations, 4–7 management, 325–326 Going concerns, 101 Goods flow, 358–359 Goodwill, 497, 500–501 Government, as user of accounting information, 12–13 Governmental Accounting Standards Board (GASB), 26 Government regulation, of corporations, 522 Gross margin, 197–198 inventory valuation and, 365(table) Gross profit method (gross margin method), 371, 372(table) Gross sales, 197 Group depreciation, 488 Group purchases, acquisition costs for, 482 Handbook of Dividend Achievers (Mergent), 712, 713(exh.), 751 Health care benefits, 571 Horizontal analysis, 715, 716(exh.), 717(exh.) see also Trend analysis IASB, see International Accounting Standards Board IFRS, see International financial reporting standards IKEA, 10 IMA, see Institute of Management Accountants Imprest system, 332, 400 Incentives Income comprehensive, 627–630 distribution of partnership, 761–766 interest, on bank statement, 401 inventory misstatements and, 355–357 measurement of, 98, 101–102 net, 18, 23, 100, 199 Income (cash flow) approach, 448 Income from continuing operations, 616 Income from operations, 198 Income statement, 19, 19(exh.), 22(exh.), 23, 156–157, 614, 668(exh.) adjusted trial balance and, 117(exh.) in annual report, 228 common-size, 721(exh.) corporate, 614, 617(exh.) multistep, 196–199, 196(fig.), 197(exh.) under periodic inventory system, 281(exh.) under perpetual inventory system, 275(exh.) quality of earnings issues, 616 single-step, 200, 200(exh.) see also Comparative income statements Income Summary account, 146 closing balance of, 147, 150(exh.) Income tax(es), 198–199, 621–624 deferred, 571–572 federal, 440 inventory valuation and, 365–366 partnerships and, 757 payable, 444 state and local, 440 Income tax allocation, 622 Indefinite useful life, 499 Independence, 26 Independent directors, 521 Index number, 718 Indirect financial interest, users with, 12 Indirect manufacturing costs, see Overhead costs Indirect method, 668, 671(exh.), 673, 676 Indirect production costs, see Overhead costs Industry norms, as standard for financial performance assessment, 710–711 Industry Norms and Key Business Ratios (Dun & Bradstreet), 709, 712 Inflows, cash, 659(fig.), 662 Information, on public corporations, 711–712 information, poor-quality, Information and communication, 323 Information system(s), 4–23, 4(fig.) accounting as, 4–23, 4(fig.) Initial public offerings (IPOs), 519 Installment accounts receivable, 393 Institute of Management Accountants (IMA), 26 Intangible assets, 192, 474, 497–501, 498(fig.) Integrity, 26 Interest, 413, 448, 761 accrued, on promissory notes, 414 of bond discount, 584(table) compound, 452 on debt, 564 on notes, 437 salaries, stated ratios and, 763–766 and time value of money, 448–449 Interest coverage ratio, 566, 727 Interest expense bonds issued at premium, 588(fig.) bonds issued between interest dates, 594(fig.) Interest income, on bank statement, 401 Interest on partners’ capital, 761 Interest rate, 413–414 bond issue and, 573 face, 573 market (effective), 573 Interim financial statements, 234, 712 Interim periods, 102 Internal business plan, balanced scorecard and, 812 Internal control, 318, 320 audit of, 322 components of, 322–323 computers for, 327 in large company, 328(fig.) limitations of, 324–325 management goals and, 325–326 management responsibility for, 321 need for, 320–321 petty cash procedures for, 332–334 for purchases and cash disbursements, 330–331(fig.) Internal Revenue Code, 622 Internal Revenue Service (IRS), 26 see also Income tax(es) International Accounting Standards Board (IASB), 25, 52, 670 on revenue recognition, 105 International financial reporting standards (IFRS), 25, 52, 188 direct method and, 670 on revenue recognition, 105 International investment, partnerships and, 758 Internet Web sales and, 280 see also Periodic inventory system; Perpetual inventory system Subject Index Inventory accounting objectives, 352–353 as asset, 350 on hand, 354(fig.) impact of decisions about, 365–367 misstatements and income measurement, 355–357 Inventory cost, 358 methods used by large corporations, 366(fig.) under periodic inventory system, 361–364, 364(fig.) under perpetual inventory system, 367–369 and valuation, 358–360 Inventory systems, 270 bar codes and, 271 periodic, 281–285 perpetual, 275–280 Inventory turnover, 329–330, 354, 354(fig.), 723 Inventory valuation, 353–355 disclosure of inventory methods and, 360–361 by estimation, 370–372 gross margin and, 365(table) gross profit method for, 371, 372(table) inventory cost and, 358–360 retail method for, 370–371, 371(table) Investing activities, 5, 659– 660, 674–677 Investment(s), 192 international, partnerships and, 758 by owner, 58 statement of cash flows and, 675 see also Capital investment decisions; Long-term investments; Shortterm investments Investors quality of earnings and, 616 as users of accounting information, 12 Invoice, 329 IPOs, see Initial public offerings IRS, see Income tax(es); Internal Revenue Service Issued shares, 530 JIT, see Just-in-time (JIT) operating environment; Just-in-time (JIT) operating philosophy Joint ventures, 758 Journal(s), 70 general, 70–71 special-purpose, 302–314 Journal entry, 70, 75, 115–116 see also Closing entries Journal form, 58 Journalizing, 70 Just-in-time (JIT) operating environment, 355 Kamprad, Ingvar, 10 Labor unions, as users of accounting information, 12 Land, acquisition costs for, 481 Land improvements, acquisition costs for, 481 Last-in, first-out (LIFO) method, 363–364, 365–366, 367, 369, 618 see also Periodic inventory system Lay, Kenneth, 185 Lease(s) capital, 568–569 long-term, 567–570 operating, 568 Leasehold(s), 497 Leasehold improvements, 482 Ledger(s) general, 58, 70, 72–73 sales journal and, 303(exh.) subsidiary, 303–304 Ledger account form, 72–73 Legal capital, 523 Letter to the stockholders, 227 Liabilities (financial) payment of, 60–61 tax, 621–622 unlimited, 756–757 Liabilities (financial), 17, 192–193 accrued, 38 classification of, 435 contingent, 447 current, 192–193, 435 definitely determinable, 436–443 estimated, 443–448 long-term, 193, 435, 562, 563 payroll, 440 recognition of, 434–435 reporting of, 434–436 unfunded pension plans as, 571 valuation of, 435 see also Long-term liabilities Liability (responsibility), limited, of corporations, 16, 522 Licenses, 497 LIFO, see Last-in, first-out (LIFO) method; LIFO liquidation LIFO liquidation, 366 Limited liability, of corporations, 16, 521, 522 Limited liability corporation (LLC), 758 Limited life, 756 Limited partnerships, 757, 758 Lines of credit, 436, 437 Liquidating dividends, 524 Liquidation, of partnership, 772–778, 774(exh.), 775(exh.) Liquidity, 5, 726 cash flows and, 432 evaluating, 201–202 Liquidity ratios, 724(exh.) Local income taxes, 440 Long-term assets, 472, 473, 474, 474(fig.) acquiring, 476–477, 477(table) on balance sheet, 475 carrying value of, 475(fig.) depreciation of, 483–490 financing of, 477–478 intangible, 474 issues in accounting for, 478(fig.) matching rule and, 478–479 see also Depreciation; Natural resources; Property, plant, and equipment Long-term bonds, 566 Long-term debt, 564–572 823 current portion of, 440 evaluating, 565–566 types of, 566–572 see also Bond entries; Long-term liabilities Long-term leases, 567–570 Long-term liabilities, 193, 435, 562, 563 see also Bond entries Long-term solvency, 726–727, 727(exh.) Losses, 619 distribution of partnership, 761–766 net, 18, 100 on sale of partnership assets, 775–778, 775(exh.) statement of cash flows and, 671 Lower-of-cost-or-market (LCM) rule, 359–360 Mail, control of cash received by, 326–327 Maker, of promissory notes, 411 Management, 10–11 corporate, 522 discussion and analysis of, 227 financial performance measurement and, 708 functions of, 11 internal control and goals of, 325–326 responsibility for internal control, 321 supply-chain, 354–355 Management accounting, Management information system (MIS), Manufacturing companies, 196 Manufacturing overhead, see Overhead costs Market, 360 crash in 2001, 666 fair value and, 360 Market approach, 448 Market interest rate, 573 Market price, stock splits and, 634 Market strength, evaluating, 729(exh.) Matching rule, 102, 103(fig.) ethics and, 102–104 long-term assets and, 478–479, 480 824 Subject Index Materiality, 187, 187 Maturity date, 412 Maturity value, 414 Measurement, 50–53, 50(fig.) accounting, 13–15 ethics and, 53, 100–104 of profitability, 100–104 see also Financial performance measurement; Inventory cost; Inventory systems; Inventory valuation; Performance measure(s); Performance measurement Medical insurance, withholding for, 441 Medicare tax, withholding for, 440 Merchandise on hand not included in inventory, 359 purchases under periodic inventory system, 282–284 sales under perpetual inventory system, 277–279, 277(fig.) in transit, 358–359, 359(fig.) Merchandise inventory, 268, 321 Merchandising businesses, 266, 267–268 operating cycle of, 268–270 see also Inventory systems; specific inventory systems Merchandising company, 196 MIS, see Management information systems Misstatements of earnings, 103 Money, time value of, see Time value of money Money measure, 14 Monitoring, 323 Mortgages, 567, 567(table) Multicolumn purchases journal, 308(exh.) Multistep income statement, 196–199, 196(fig.), 197(exh.) Mutual agency, 756 corporate lack of, 521 NASDAQ, stock quotations on, 525(fig.) Natural resources, 474, 494–496 depletion of, 474 oil and gas industry costs and, 495–496 Negative financial leverage, 565 Net assets, 18 Net cash flows determining from operating activities, 670(fig.) Net cost of purchases, 281 Net income, 18, 23, 100, 199 Net loss, 18, 100 Net of taxes, 623–624 Net purchases, 281 Net sales, 196–197 percentage of net sales method and, 405–406 see also Sale(s) Networks, at IKEA, 10 Net worth use of term, 193 see also Owner’s equity Nominal accounts, 144 Noncash assets, issuance of stock for, 537–538 Noncash investing and financing transactions, 660 Noncompete covenants, 497 Noncumulative preferred stock, 531 Noninventoriable costs, see Period costs Nonoperating items, 620–622 Nonoperating revenues and expenses, 198 Nonsufficient-funds (NSF) checks, 401 No-par stock, 534–535, 536–537 Normal balance, 56 Normal operating cycle, 190 Notes, promissory, see Promissory notes Notes payable, 411, 437 long-term, 566–567 see also Promissory notes Notes receivable, 100, 411–414 see also Promissory notes Notes to financial statements, 233–234, 246–253, 261–265 Not-for-profit organizations as users of accounting information, 12–13 NSF checks, see Nonsufficientfunds checks Objectivity, 26 Obsolescence, 483 Off-balance-sheet financing, 565–566, 570 oil and gas industry, development and exploration costs in, 495–496 Online, see Internet; Web Operating activities, 5, 658–659, 668–673 Operating cycle, 266, 268–270, 723 cash flows in, 269(fig.) Operating expenses, 198 Operating income, 198 Operating leases, 568 Ordinary annuity, 450–452 present value of, 450–451, 452(table) Other accounts in cash payments journal, 311 journal credit column, 310 Other assets, 190 Other post-retirement benefits, 571 Other revenues and expenses, 198 Outflows, cash, 659(fig.), 662 Outstanding checks, 401 Outstanding shares, 530 Over-the-counter cash, control of, 327 Owner’s equity, 18, 100, 193–194 accounts, 56–57, 56(table), 57(fig.) statement of, 20, 20(exh.), 23 Ownership, of corporations separation of control and, 522 transfer of, 521 Pacioli, Luca, Paid-in capital, see Contributed capital Partial years, depreciation for, 488 Partner’s equity, 759 accounting for, 759–761 Partnership agreement, 756 negotiating, 764 Partnerships, 15–16, 755, 756–778 in accounting firms, 765 admission of new partner, 767–770 advantages and disadvantages of, 757 bonus to new partner, 769–770 bonus to old partners, 768–769 characteristics of, 756–757 co-ownership of property, 757 death of partner, 772 dissolution of, 767–772 distribution of income and losses, 761–766 income taxes and, 444 investing assets in, 768 joint ventures, 758 limited, 757, 758 liquidation of, 772–778, 774(exh.), 775(exh.) owner’s equity of, 193 participation in income, 757 purchasing interest from a partner, 767 selling interest in, 770–771 withdrawal of partner, 770–772 Par value, 522 Par value stock, 535–536 Past performance, as standard for financial performance assessment, 709–710 Patents, 497 Payables turnover, 432, 433(fig.), 723 Payee, of promissory notes, 411 Payment on account, 283 deferred, 454–455 of liability, 60–62 Payment date, 524 Payment schedule, on mortgage, 567(table) Payroll liabilities, 440, 441(fig.) PCAOB, see Public Company Accounting Oversight Board Pension contributions, withholding for, 441 Pension funds, 570 Pension plans, 570, 571 Subject Index Percentage of net sales method, 405–406 Performance, return on equity for measuring, 526–527 Performance measure(s), 4–7, for management compensation, 726 see also Financial performance measurement; Return on investment for executive compensation, 206 quality of earnings issues, 616–624 see also Financial performance measurement Periodic independent verification, 324 Periodic inventory system, 270, 281–285 inventory cost under, 361–364, 364(fig.) Periodicity, 101–102 Permanent accounts, 144 Perpetual inventory system, 270, 275–280 income statement under, 275(exh.) internal controls and, 320–321 inventory cost under, 367–369, 369(fig.) payments on account, 277 purchases of merchandise and, 276–277, 276(fig.) sales of merchandise and, 277–279, 277(fig.) Personnel practices, 324 Petty cash fund, 332–334 disbursements for, 333 establishing, 332 reimbursing, 333–334 Petty cash voucher, 333, 333(fig.) Physical controls, 324 for shoplifting, 325 Physical deterioration, 483 Physical inventory, 320 flow of, 358 Plant assets depreciation of related, 495 discarded, 491 exchanges of, 493 sold for cash, 491–493 statement of cash flows and, 675–677 Politics, accounting and, 528 Post-closing trial balance, 150, 150(exh.) Posting, 70, 73, 74(exh.) accounts after, 148–150, 149(exh.), 150(exh.) Posting procedure, sales journal, general ledger, accounts receivable subsidiary ledger, and, 304(exh.) Posting reference (Post Ref.) column, 75 Posting transactions, 70–74 Post-retirement benefits, 571 Preferred stock, 529 callable, 533–534 convertible, 532–533 as debt, 533 preference as to assets and, 531, 532 preference as to dividends and, 531–532 Premium(s), 574 bonds issued at, 577–578, 586–589, 588(fig.) Prepaid expenses, 108–110, 108(fig.), 192 in cash, 59–60 Present value, 450, 451(table) applications of, 453–455 bond valuation using, 579–580, 580(fig.) calculating, 449–452 of ordinary annuity, 450–451 of single sum due in future, 450 time periods and, 452 Price(s) call, 574 Principle of duality, 54 Privately held corporations, 226 Production method, 485–486, 488(fig.) Product warranty liability, 444–445 Professional ethics, 26 Profit, 100 gross, 197 Profitability, evaluating, 202–207, 723–725 measurement of, 100–104 Profitability ratios, 725(exh.) Profit margin, 202–203, 203(fig.), 736 Pro forma earnings, 620 Pro forma financial statements, 710 Promissory note, 411, 412(fig.), 437, 437(fig.) Promotional costs, 444 Property, plant, and equipment, 192 Provision for income taxes, 198–199 Public companies, 226 Public Company Accounting Oversight Board (PCAOB), 25, 234 Purchase(s) control of, 327–329, 330–331(fig.) internal control plan for, 330–331(fig.) of materials, 846–847 of merchandise, 282–283 net, 281 under periodic inventory system, 282–284, 283(fig.), 284(fig.) under perpetual merchandise system, 275–277 of treasury stock, 539–540 Purchase order, 328, 846 Purchase request, 846 Purchase requisition, 328 Purchases account, 282 Purchases discounts, 273 in cash payments journal, 311 Purchases journal, 306–308 multicolumn, 308(exh.) relationship of singlecolumn to general ledger and accounts payable subsidiary ledger, 307(exh.) Purchases returns and allowances, 283 Purchases returns and allowances account, 283 PVA, see Process value analysis (PVA) Qualitative characteristics, 182–184, 183 Quality of earnings, 616–625 accounting estimates and methods and, 617–619 Quick ratio, 723 R&D, see Research and development Ratio analysis, 721–722 825 cash flow adequacy evaluation using, 728(exh.) debt to equity ratio, 565(fig.) interest coverage ratio, 566, 727 liquidity evaluation using, 723, 724(exh.) market strength evaluation using, 729(exh.) profitability evaluation using, 725(exh.) Ratios, see specific ratios Real accounts, 144 Realization, 773 Receipts on account, 285 Receivables, 390, 391 ethics in accounting for, 398 financing, 396–398 notes receivable, 411–414 see also Accounts receivable Receivable turnover, 394–396, 395(fig.), 723 Receiving report, 329, 846 Recognition, 50–51 of expenses, 105 of liabilities, 434–435 Recognition point, 51 Record(s), internal control and, 324 Record date, 524 Recording transactions, 70–74, 70(fig.), 323 Registered bonds, 575 Registered independent auditors’ report, 234–235 Regulatory agencies, as users of accounting information, 12 Relevance, 183–184 Rent, adjustment for prepaid, 109 Rent expense, in cash payments journal, 311 Replacement cost, 360 Report(s) of certified public accountants, 234–235, 255 filed with SEC, 226, 712 Reporting of liabilities, 434–436 Research and development (R&D) costs, 500 Residual equity, 529 Residual value, 484 Restructurings, 619–620 826 Subject Index Retail method, 370–371, 371(table) Retail organizations Retained earnings, 194, 528, 629–630 schedule of cash flows and, 679–680 transfer from, 633 Retirement of bonds, 590–592 Return on assets, 204–205, 724–725 Return on equity, 206–207, 206(fig.), 520, 526, 725 for measuring performance, 526–527 Returns, sales, 278–279, 284–285 Revenue(s), 18, 100 accrued, recognizing, 104–105 in cash, 61 collected in advance, 61–62 on credit, 61 see also Unearned revenues Revenue accounts, see Credit balances Revenue expenditures, 479 Revenue recognition, 104 methods, 618 Reversing entries, 152–153 RI, see Residual income Risk long-term debt and, 564–566 predicting profitability or liquidity and, 709 Risk assessment, 323 ROI, see Return on investment Rule-of-thumb measures, as standard for financial performance assessment, 709 Salaries, 440, 761 interest, stated ratios, and, 763–766 Salary expense, in cash payments journal, 311 Sale(s) cost of, 197 journal credit column, 310 net, 196 online, 280 under periodic inventory system, 284–285, 284(fig.) under perpetual merchandise system, 277–279, 277(fig.) terms of, 272–274 see also Cost of goods sold Sales discount, 272–273 Sales journal, 302–306, 303(exh.), 306(exh.) general ledger, accounts receivable subsidiary ledger, posting procedure, and, 304(exh.) Sales returns and allowances, 197, 279, 285 Sales Returns and Allowances account, 279 Sales taxes, 306, 306(exh.), 438–439 Salvage value, 484 Sarbanes-Oxley Act (2002), 9, 27, 184, 321, 712 SC, see Service charges Schedule of cash flows from operating activities, indirect method, 671(exh.), 673, 676 S corporations, 758 Secured bonds, 574 Securities and Exchange Commission (SEC), 9, 12, 25, 26, 103–104, 184, 573 reports filed with, 226, 712 Securitization, 397 Segment(s), reporting on, 710–711, 711(exh.) Semifixed cost, see Step cost Separate entity, 15, 521 Separation of duties, 324, 328(fig.) Serial bonds, 574 Service charges (SC), on bank statement, 401 Shareholders, see Stockholders Shareholders’ equity, consolidated statements of, 232–233(exh.) Shares of stock, 520 authorized, 530 buybacks of, 540 issued, 530 outstanding, 530 Shoplifting, 325 Short-run decision(s), see Incremental analysis Short-term financial assets, 393 Short-term investments, 192 Simple capital structure, 626 Simple interest, 449 Single-column purchases journal, general ledger, accounts payable subsidiary ledger, and, 307(exh.) Single-step income statement, 200, 200(exh.) Skilling, Jeffrey, 185 Small businesses, benefits from, 439 Social Security (FICA) tax, withholding for, 440 Software, 497 Software costs, 500 Sole proprietorships, 15 income taxes and, 444 owner’s equity of, 193 Solvency, long-term, 726–727, 727(exh.) Source documents, 58 Special-purpose entities (SPEs), 758 Special-purpose journals, 302–313 cash payments journal, 311–313 cash receipts journal, 308–311 purchases journal, 306–308 sales journal, 302–306 Specific identification method, 361, 365 see also Periodic inventory system Start-up and organization costs, 523 Stated ratios in distribution of partnership income and losses, 761 salaries, interest, and, 763–766 Stated value, 535 State income taxes, 440 Statement of cash flows, 21–23, 21(exh.), 22(exh.), 656, 658, 665, 680(exh.) in annual report, 228–229 changes in current assets and, 671–672 changes in current liabilities and, 672 classification of cash flows and, 658–660 depreciation and, 670–671 ethical considerations and, 662 financing activities and, 660 format of, 660, 661(exh.) gains and losses and, 671 investing activities and, 659–660, 677 operating activities and, 658–659 plant assets and, 675–677 purposes of, 658 use outside United States, 662 uses of, 658 see also Financing activities Statement of changes in stockholders’ equity, 629 Statement of comprehensive income, 628(exh.) Statement of financial position, 20 Statement of owner’s equity, 20, 20(exh.), 23, 118(exh.) Statement of stockholders’ equity, 229, 627–630, 628(exh.), 629 Statements of Financial Accounting Standards, 25 State unemployment insurance taxes, withholding for, 440, 442 Step-fixed cost, see Step cost Step-variable cost, see Step cost Stock as debt, 533 for noncash assets, 537–538 shares of, 520, 530 treasury, 526 see also Common stock; Preferred stock Stock certificates, 522 Stock dividends, 630–633 Stock Dividends account, 632 Stockholders, 7, 226 classes of, 529 long-term debt and, 564 Stockholders’ equity, 528, 615 on balance sheet, 529(exh.), 629(exh.) components of, 528–530 statement of (changes in), 629 Subject Index Stock option plans, 527 Stock quotations, on NASDAQ, 525(fig.) Stock splits, 633–635 Straight-line method, 484, 582, 618 for amortization of bond discount, 582–583 for amortization of bond premium, 586–587 for depreciation computation, 484–485, 486, 488(fig.) Subsidiary ledger, 303–304 Successful efforts accounting, 495 Summary of Significant Accounting Policies, 233 Summary of transactions, 65 Suppliers, small, 397 Supplies, adjustment for, 109–110 Supply-chain management, 354–355 T accounts, 54–55, 568, 577 Tangible assets, 474, 475, 483 Tax(es) double, of corporations, 522 excise, 438–439 on interest on debt, 564 net of, 623–624 sales, 438–439 special rules for, 489–490 see also Depreciation; Income tax(es) Tax authorities, as users of accounting information, 12 Tax rate schedule, for corporations, 622(table) TCO, see Total cost of ownership Temporary accounts, 144 Term bonds, 574 Timeliness, 184 Time periods, for compounding interest, 452 Time value of money, 448, interest and, 448–449 timing, poor, TOC, see Theory of constraints Total interest cost, calculating, 581, 586 Total manufacturing costs, 849 Trade accounts payable, 436 Trade credit, 393 Trade discount, 272 Trade-in value, 484 Trademarks, 497 Trading on equity, 564 Trading securities, 659 Transactions, see Business transactions Transfer of ownership, in corporations, 521 Transparency, see Full disclosure Transportation costs, 273–274 Treasury stock, 526, 528, 681 accounting for, 539–543 retirement of, 542–543 sale of, 540–542 Trend analysis, 718, 718(exh.), 719(fig.) Trial balance, 65–67, 66(exh.), 70(fig.), 106(exh.) finding errors in, 67 post-closing, 150, 150(exh.) Uncollectible accounts, 398, 403–411 allowance method for, 404 direct charge-off method for, 403 disclosure of, 404–405 estimating, 405–409, 409(fig.) writing off, 409–410 Uncollectible receivable methods, 618 Understandability, 184 Underwriters, 523 Unearned revenues, 99, 113, 113(fig.), 435, 442–443 allocating, 113–114 Unemployment insurance taxes, withholding for, 440, 442 Unfunded pension plans, 571 Uniform Partnership Act, 756 Universal product code (UPC), 271 Unlimited liability, 756–757 Unsecured bonds, 574 Useful life estimated, 484, 485 of intangible assets, 499 Vacation pay liability, 446 Valuation, 51–52 of assets, 453–454 depreciation and, 484 inventory, 353–355 of liabilities, 435 see also Inventory valuation Valuation approaches, to fair value accounting, 448–453 Value residual, 484 827 of sale or purchase transaction, 52 see also Book value; Face value; Future value; Present value; Time value of money Verifiability, 184 Vertical analysis, 718–721 Volatility, of earnings, dividend policies and, 526 Vouchers, petty cash, 333, 333(fig.) Wages, 440 Wall Street Journal, The, 712 Warranty, product, 444–445 Web, sales on, 280 Withdrawals, 63 Withdrawals account, closing balance of, 147–148, 150(exh.) Withholdings, payroll, 440–442 With/without recourse, 396 Working capital, 201 Working papers, 154 Work sheet, 154–158 preparing, 154–157, 155(exh.) using, 157–158, 157(exh.) Write-downs, 619–620 Writing off uncollectible accounts, 409–410, 619 Year-end accrual, of bond interest expense, 593–594 Yield, cash flow, 664 Zero coupon bonds, 582 ... PREFACE Accounting in Motion! This revision of Principles of Financial Accounting is based on an understanding of the nature, culture, and motivations of today’s undergraduate students and on... misunderstandings of concepts and techniques; key ratio and cash flow icons, which highlight discussions of profitability and liquidity; and accounting equations IFRS, Fair Value, and Other Updates... for more details and ordering information CengageNOW™ CengageNOW for Needles/ Powers Principles of Financial Accounting, 11e is a powerful and fully integrated online teaching and learning system