Accounting Principles: A Business Perspective, Financial Accounting (Chapters 9 – 18) A Textbook Equity Open College Textbook originally by Hermanson, Edwards, and Maher Fearless copy, print, remix (tm) www.textbookequity.com www.opencollegetextbooks.org License: CC-BY-NC-SA ISBN-13: 978-1461160861 ISBN-10: 1461160863 1 About This Publication Simply put, you may copy, print, redistribute, and re-purpose this textbook or parts of this textbook provided that you give attribution (credit) to Textbook Equity, and provided that any derivative work has the same Creative Commons license (CC-BY-NC-SA). That’s it. Textbook Equity, in turn, provides attribution, with thanks, to the Global Text Project, who provided the source textbook. Consistent with it’s strategic mission to provide free and low-cost textbooks, this is Textbook Equity’s derivative work based on “Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1, Financial Accounting”, utilizing the permissions granted by it’s Creative Commons license. Global Text Project nor the original authors endorse or are responsible in any way for this printing or it’s contents. Textbook Provenance (1998 - 2011) 1998 Edition Accounting: A Business Perspective (Irwin/Mcgraw-Hill Series in Principles of Accounting) [Hardcover] Roger H. Hermanson (Author), James Don Edwards (Author), Michael W. Maher (Author) Eighth Edition Hardcover: 944 pages Publisher: Richard D Irwin; 7 Sub edition (April 1998) Language: English ISBN-10: 0075615851 ISBN-13: 978-0075615859 Product Dimensions: 11.1 x 8.7 x 1.8 inches Current Hardbound Price $140.00 (Amazon.com) 2010 Editions (http://globaltext.terry.uga.edu/books/) Global Text Project Conversion to Creative Commons License CC-BY “Accounting Principles: A Business Perspective First Global Text Edition, Volume 1 Financial Accounting”, Revision Editor: Donald J. McCubbrey, PhD. PDF Version, 817 pages, Free Download “Accounting Principles: A Business Perspective First Global Text Edition, Volume 2 Managerial Accounting”, Revision Editor: Donald J. McCubbrey, PhD. PDF Version Volume 2, 262 pages, Free Download 2011 Editions (http://opencollegetextbooks.org) Textbook Equity publishes this soft cover version using a the CC-BY-NC-SA license. 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Versions available at the Open College Textbook repository: 2 • PDF Version, Section 1 of Volume 1 (Chapters 1 – 8), 436 pages, Free Download • Textbook Equity Paperback, Volume 1 Financial Accounting (Chapters 1 – 8), 436 pages, List Price $24.95 • PDF Version, Volume 1 Financial Accounting (Chapters 9 – 18), Free Download • Textbook Equity Paperback, Volume 1 Financial Accounting (Chapters 9 – 18), List Price $24.95 • PDF Version Volume 2, (Chapters 19 – 26), Free Download • Textbook Equity Paperback, Volume 2 Managerial Accounting (Chapters 19 – 24), List Price $24.95 For original author information and acknowledgments see opencollegetextbooks.org 3 Table of Contents 9 Receivables and payables 11 9.1 Learning objectives 11 9.2 A career in litigation support 11 9.3 Accounts receivable 13 9.4 Current liabilities 26 9.5 Notes receivable and notes payable 35 9.6 Short-term financing through notes payable 42 9.7 Analyzing and using the financial results—Accounts receivable turnover 45 9.8 Key terms 50 9.9 Self test 52 9.10 Questions 54 9.11 Exercises 56 9.12 Problems 58 9.13 Alternate problems 61 9.14 Beyond the numbers—Critical thinking 63 9.15 Using the Internet—A view of the real world 65 9.16 Answers to self test 66 10 Property, plant, and equipment 68 10.1 Learning objectives 68 10.2 A company accountant's role in managing plant assets 68 10.3 Nature of plant assets 69 10.4 Initial recording of plant assets 71 10.5 Depreciation of plant assets 77 10.6 Subsequent expenditures (capital and revenue) on assets 90 10.7 Subsidiary records used to control plant assets 94 10.8 Analyzing and using the financial results—Rate of return on operating assets 97 10.9 Key terms 101 10.10 Self-test 102 10.11 Exercises 106 4 10.12 Problems 109 10.13 Alternate problems 112 10.14 Beyond the numbers—Critical thinking 115 10.15 Using the Internet—A view of the real world 118 10.16 Answers to self-test 118 11 Plant asset disposals, natural resources, and intangible assets 120 11.1 Learning objectives 120 11.2 A company accountant's role in measuring intangibles 120 11.3 Disposal of plant assets 122 11.4 Sale of plant assets 122 11.5 Natural resources 133 11.6 Intangible assets 138 11.7 Analyzing and using the financial results—Total assets turnover 147 11.8 Key terms 155 11.9 Self-test 156 11.10 Problems 162 11.11 Alternate problems 166 11.12 Beyond the numbers-Critical thinking 170 11.13 Using the Internet—A view of the real world 173 11.14 Answers to self-test 173 12 Stockholders' equity: Classes of capital stock 175 12.1 Learning objectives 175 12.2 The accountant as a corporate treasurer 175 12.3 The corporation 176 12.4 Analyzing and using the financial results—Return on average common stockholders' equity 202 12.5 Key Terms 209 12.6 Self-test 212 12.7 Exercises 215 12.8 Problems 216 12.9 Alternate problems 220 12.10 Beyond the numbers—Critical thinking 225 5 12.11 Using the Internet—A view of the real world 227 12.12 Answers to self-test 228 13 Corporations: Paid-in capital, retained earnings, dividends, and treasury stock 230 13.1 Learning objectives 230 13.2 The accountant as a financial analyst 230 13.3 Paid-in (or contributed) capital 231 13.4 Paid-in capital—Stock dividends 232 13.5 Paid-in capital—Treasury stock transactions 233 13.6 Paid-in capital—Donations 233 13.7 Retained earnings 233 13.8 Paid-in capital and retained earnings on the balance sheet 234 13.9 Retained earnings appropriations 244 13.10 Statement of retained earnings 246 13.11 Statement of stockholders' equity 247 13.12 Treasury stock 248 13.13 Net income inclusions and exclusions 253 13.14 Analyzing and using the financial results—Earnings per share and price-earnings ratio 259 13.15 Key terms 265 13.16 Self-test 267 13.17 Exercises 271 13.18 Problems 273 13.19 Alternate problems 278 13.20 Beyond the numbers—Critical thinking 282 13.21 Using the Internet—A view of the real world 286 13.22 Answers to self-test 286 14 Stock investments 288 14.1 Learning objectives 288 14.2 The role of accountants in business acquisitions 288 14.3 Cost and equity methods 290 14.4 Accounting for short-term stock investments and for long-term stock investments of less than 20 percent 291 6 14.5 Cost method for short-term investments and for long-term investments of less than 20 percent 291 14.6 The equity method for long-term investments of between 20 percent and 50 percent 297 14.7 Reporting for stock investments of more than 50 percent 298 14.8 Consolidated balance sheet at time of acquisition 302 14.9 Accounting for income, losses, and dividends of a subsidiary 308 14.10 Consolidated financial statements at a date after acquisition 309 14.11 Uses and limitations of consolidated statements 313 14.12 Analyzing and using the financial results—Dividend yield on common stock and payout ratios 314 14.13 Key terms 321 14.14 Self-test 322 14.15 Exercises 325 14.16 Problems 327 14.17 Alternate problems 331 14.18 Beyond the numbers—Critical thinking 334 14.19 Using the Internet—A view of the real world 336 14.20 Answers to self-test 336 15 Long-term financing: Bonds 337 15.1 Learning objectives 337 15.2 The accountant's role in financial institutions 338 15.3 Bonds payable 339 15.4 Comparison with stock 340 15.5 Selling (issuing) bonds 340 15.6 Bond prices and interest rates 348 15.7 Redeeming bonds payable 359 15.8 Analyzing and using the financial results—Times interest earned ratio 365 15.9 Appendix: Future value and present value 370 15.10 Demonstration problem 377 15.11 Solution to demonstration problem 377 15.12 Key terms 378 15.13 Self-test 380 7 15.14 Exercises 383 15.15 Problems 385 15.16 Alternate problems 387 15.17 Beyond the numbers—Critical thinking 389 15.18 Using the Internet—A view of the real world 392 15.19 Answers to self-test 393 16 Analysis using the statement of cash flows 394 16.1 Learning objectives 394 16.2 A career in external auditing 394 16.3 Purposes of the statement of cash flows 396 16.4 Uses of the statement of cash flows 397 16.5 Information in the statement of cash flows 398 16.6 Cash flows from operating activities 400 16.7 Steps in preparing statement of cash flows 404 16.8 Analysis of the statement of cash flows 412 16.9 Liquidity and capital resources 412 16.10 Analyzing and using the financial results—Cash flow per share of common stock, cash flow margin, and cash flow liquidity ratios 421 16.11 Appendix: Use of a working paper to prepare a statement of cash flows 424 16.12 Key terms 431 16.13 Self-test 432 16.14 Questions 434 16.15 Exercises 435 16.16 Problems 437 16.17 Alternate problems 446 16.18 Management's discussion and analysis - Capital 449 16.19 Management's discussion and analysis - Financial* 453 16.20 Beyond the numbers—Critical thinking 457 16.21 Using the Internet—A view of the real world 461 16.22 Answers to self-test 462 17 Analysis and interpretation of financial statements 463 17.1 Learning objectives 463 8 17.2 Accountants as investment analysts 463 17.3 Objectives of financial statement analysis 464 17.4 Sources of information 467 17.5 Horizontal analysis and vertical analysis: An illustration 469 17.6 Trend percentages 473 17.7 Ratio analysis 475 17.8 Understanding the learning objectives 505 17.9 Demonstration problem 508 17.10 Solution to demonstration problem 510 17.11 Key terms 511 17.12 Self-test 513 17.13 Exercises 517 17.14 Problems 519 17.15 Alternate problems 527 17.16 Beyond the numbers – Critical thinking 534 17.17 Using the Internet—A view of the real world 537 17.18 Answers to self-test 538 18 Managerial accounting concepts/job costing 540 18.1 Learning objectives 540 18.2 A manager's perspective 540 18.3 Compare managerial accounting with financial accounting 542 18.4 Merchandiser and manufacturer accounting: Differences in cost concepts 543 18.5 Financial reporting by manufacturing companies 548 18.6 The general cost accumulation model 552 18.7 Job costing 555 18.8 Predetermined overhead rates 563 18.9 Appendix: Variable versus absorption costing 567 18.10 Demonstration problem 570 18.11 Solution to demonstration problem 571 18.12 Key terms 573 18.13 Self-test 574 18.14 Questions 577 9 18.15 Exercises 579 18.16 Problems 581 18.17 Alternate problems 586 18.18 Beyond the numbers—Critical thinking 588 18.19 Using the Internet—A view of the real world 592 18.20 Answers to self-test 594 10 [...]... show as accounts payable or notes payable Accounts payable normally result from the purchase of goods or services and do not carry an interest charge Short-term notes payable carry an interest charge and may arise from the same transactions as accounts payable, but they can also result from borrowing money from a bank or other institution Chapter 4 identified accounts payable and short-term notes payable... year that a determination is made; however, in management's opinion, the final resolution of all legal matters will not have a material adverse effect on the Company's financial position 34 Contingent liabilities may also arise from discounted notes receivable, income tax disputes, penalties that may be assessed because of some past action, and failure of another party to pay a debt that a company has... only a convenient way to make purchases but also the only way many people can own highpriced items such as automobiles This chapter discusses receivables and payables For a company, a receivable is any sum of money due to be paid to that company from any party for any reason Similarly, a payable describes any sum of money to be paid by that company to any party for any reason Primarily, receivables arise... Receivable – American Express ( -A) To record remittance from American Express 1,330 1,330 To illustrate the accounting entries for the use of bank credit cards (such as VISA or MasterCard), assume that a retailer has made sales of USD 1,000 for which VISA cards were accepted and the service charge is USD 30 (which is 3 percent of sales) VISA sales are treated as cash sales because the receipt of cash... of Business Service company selling for cash only Service company selling on credit Merchandising company selling for cash Merchandising company selling on credit Manufacturing company selling for cash Operating Cycle Instantaneous Cash -> Accounts Receivable -> Cash Cash -> Inventory -> Cash Cash -> Inventory -> Accounts receivable -> Cash Cash -> Materials inventory -> Work in process inventory -> ... Payable and the credit is to Cash To illustrate, assume that a company sells merchandise in a state that has a 6 percent sales tax If it sells goods with a sales price of USD 1,000 on credit, the company makes this entry: Accounts Receivable ( +A) Sales (+SE) Sales Tax Payable (+L) To record sales and sales tax payable 1,060 1,000 60 Now assume that sales for the entire period are USD 100,000 and that USD... they can calculate withholdings, print payroll checks, and complete reporting forms for taxing agencies In addition to calculating the employer's payroll taxes, this software maintains all accounting payroll records Managers of companies that have estimated liabilities know these liabilities exist but can only estimate the amount The primary accounting problem is to estimate a reasonable liability as... toward purchases of new automobiles (e.g General 25 Motors cards), credit toward free trips on airlines, and cash rebates on all purchases Discover Card, for example, remits a percentage of all charges back to credit card holders Also, some credit card companies have reduced interest rates on unpaid balances and have eliminated the annual fee Just as every company must have current assets such as cash... Also, a business may give a note to a supplier in exchange for merchandise to sell or to a bank or an individual for a loan Thus, a company may have notes receivable or notes payable arising from transactions with customers, suppliers, banks, or individuals Companies usually do not establish a subsidiary ledger for notes Instead, they maintain a file of the actual notes receivable and copies of notes payable... to calculate interest, assume a company borrowed USD 20,000 from a bank The note has a principal (face value) of USD 20,000, an annual interest rate of 10 percent, and a life of 90 days The interest calculation is: Interest= USD 20,000×0.10× 90 360 Interest = USD 500 Note that in this calculation we expressed the time period as a fraction of a 360-day year because the interest rate is an annual rate . accountant as a financial analyst 230 13.3 Paid-in (or contributed) capital 231 13.4 Paid-in capital—Stock dividends 232 13.5 Paid-in capital—Treasury stock transactions 233 13.6 Paid-in capital—Donations. Accounting (Chapters 1 – 8), 436 pages, List Price $24 .95 • PDF Version, Volume 1 Financial Accounting (Chapters 9 – 18), Free Download • Textbook Equity Paperback, Volume 1 Financial Accounting (Chapters. Accounting Principles: A Business Perspective, Financial Accounting (Chapters 9 – 18) A Textbook Equity Open College Textbook originally by Hermanson, Edwards, and Maher Fearless copy,