Financial accounting and introduction to concepts methods and uses 14e weil

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giáo trình Financial accounting and introduction to concepts methods and uses 14e weil giáo trình Financial accounting and introduction to concepts methods and uses 14e giáo trình Financial accounting and introduction to concepts methods and uses 14e giáo trình Financial accounting and introduction to concepts methods and uses 14e giáo trình Financial accounting and introduction to concepts methods and uses 14e giáo trình Financial accounting and introduction to concepts methods and uses 14e Differences Between U.S GA AP and IFRS (Exhibit 17.1, p 670) © Cengage Learning 2014 Chapter Reporting Topic U.S GAAP IFRS Revenue recognition Must have delivered a product or service in return for net assets capable of sufficiently reliable measurement Over 200 documents provide industry-specific and transactionspecific guidance One general standard and a few documents with industry-specific guidance For long-term contracts, use percentage-of-completion method if amounts are estimable Otherwise, use cost-recovery method Completed contract method not permitted Inventories and cost of goods sold: lower of cost or market Measurement of market value uses a combination of replacement cost and net realizable values Measurement of market value uses net realizable value Inventories: cost flow Specific identification, FIFO, weightedaverage, and LIFO cost-flow assumptions permitted Specific identification, FIFO, and weighted-average cost-flow assumptions permitted LIFO not permitted 10 Property, plant, and equipment: revaluations above acquisition cost Not permitted Permitted under certain conditions 10 Research and development cost Recognize as an expense in the period incurred, except for certain software development costs Recognize research costs as an expense in the period incurred Capitalize certain development costs and amortize them over the expected period of benefit 10 Property, plant, and equipment: impairment loss If carrying value exceeds undiscounted cash flows value, recognize an impairment loss equal to the excess of carrying value over fair value Recognize an impairment loss for the excess of carrying value over recoverable amount Recoverable amount is larger of the fair value less cost to sell and the value in use Can subsequently reverse the impairment loss but not above acquisition cost 10 Intangible assets with finite lives: impairment loss If undiscounted cash flows exceed carrying value, recognize an impairment loss equal to the excess of carrying value over fair value Recognize an impairment loss for the excess of carrying value over recoverable amount Recoverable amount is the larger of the fair value less cost to sell and the value in use Can subsequently reverse the impairment loss but not above acquisition cost 10 Intangible assets, other than goodwill, with indefinite lives: impairment loss Recognize an impairment loss for the excess of carrying value over fair value Recognize an impairment loss for the excess of carrying value over recoverable amount Recoverable amount is the larger of the fair value less cost to sell and the value in use Test these assets annually for impairment losses and recoveries of impairment losses 10 Goodwill: impairment loss Step 1: Compare the carrying value to the fair value of a reporting unit If the carrying value exceeds the fair value, proceed to Step Step 2: Allocate the fair value of the reporting unit to assets and liabilities based on their fair values and any excess to goodwill Recognize an impairment loss on the goodwill if the carrying value exceeds the allocated fair value Step 3: Test goodwill annually for impairment loss or whenever a goodwill impairment loss is probable Firms may also apply a qualitative impairment test Step 1: Compare the carrying value to the recoverable amount for a cash-generating unit Step 2: Recognize an impairment loss for any excess of carrying value over recoverable amount of the cashgenerating unit First write down goodwill and then allocate any remaining loss to other assets based on their relative recoverable amounts Step 3: Test goodwill annually for impairment losses 12 Contingent obligations (U.S GAAP) and provisions (IFRS) Recognize as liabilities if payment is probable (probability usually exceeds 80%) Measure at the most likely amount or at the low end of range if no one estimate is better than any other Recognize as liabilities if payment is more likely than not (probability exceeds 50%) Measure at the best estimate of the amount to settle the obligation 11 Leases A lease is a capital lease if it satisfies one of four conditions; otherwise, it is an operating lease Judgment required based on several indicators to identify the entity that enjoys the benefits and bears the risks of leasing 15 Convertible bonds Unless the conversion option can be settled in cash, allocate issue price entirely to bonds and none to conversion option Allocate issue price between the bonds and the conversion option Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Summary of Financial Statement Ratios (Exhibit 7.11, p 244) Ratio Numerator Denominator Profitability Ratios Return on Equity (ROE) Net Income Average Shareholders’ Equity During the Period Return on Assets (ROA) Net Income Average Total Assets During the Period Return on Assets, adjusted for financing Net Income + Interest Expense (net of tax effects) Average Total Assets During the Period Profit Margin Net Income Sales Various Expense Ratios Various Expenses Sales Asset Ratio Turnover Sales Average Total Assets During the Period Accounts Receivable Turnover Ratio Sales Average Accounts Receivable During the Period Inventory Turnover Ratio Cost of Goods Sold Average Inventory During the Period Fixed-Asset Turnover Ratio Sales Average Fixed Assets During the Period Financial Leverage Ratio Average Total Assets During the Period Average Shareholders’ Equity During the Period Short-Term Liquidity Risk Ratios Current Ratio Current Assets Current Liabilities Quick or Acid Test Ratio Highly Liquid Assets (cash, marketable securities, and accounts receivable)a Current Liabilities Cash Flow from Operations to Current Liabilities Ratio Cash Flow from Operations Average Current Liabilities During the Period Accounts Payable Turnover Ratio Purchasesb Average Accounts Payable During the Period Days Accounts Receivable Outstanding 365 days Accounts Receivable Turnover Ratio Days Inventories Held 365 days Inventory Turnover Ratio Days Accounts Payable Outstanding 365 days Accounts Payable Turnover Ratio Liabilities Assets Long-Term Debt Ratio Long-Term Debt Assets Debt–Equity Ratio Long-Term Debt Shareholders’ Equity Cash Flow from Operations to Total Liabilities Ratio Cash Flow from Operations Average Total Liabilities During the Period Long-Term Liquidity Ratios © Cengage Learning 2014 Liabilities to Assets Ratio Interest Coverage Ratio aThe Income Before Interest and Income Taxes Interest Expense calculation could exclude receivables for some firms and include inventories for others = Cost of Goods Sold + Ending Inventories – Beginning Inventories bPurchases Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it FINANCIAL ACCOUNTING 14e AN INTRODUCTION TO CONCEPTS, METHODS, AND USES Roman L Weil University of Chicago University of California, San Diego Katherine Schipper Duke University Jennifer Francis Duke University Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Financial Accounting: An Introduction to Concepts, Methods, and Uses, 14e Roman L Weil, Katherine Schipper, Jennifer Francis Senior Vice President, LRS/Acquisitions & Solutions Planning: Jack W Calhoun Editorial Director, Business & Economics: Erin Joyner Editor-in-Chief: Rob Dewey Senior Acquisitions Editor: Matthew Filimonov Senior Developmental Editor: Craig Avery Editorial Assistant: Ann Loch © 2014, 2010 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 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 Marketing Manager: Heather Mooney Senior Content Project Manager: Tim Bailey Media Editor: Jessica Robbe Manufacturing Planner: Doug Wilke Senior Marketing Communications Manager: Libby Shipp Production Service: Lachina Publishing Services, Inc Senior Art Director: Stacy Jenkins Shirley Cover and Internal Designer: Joe Devine, Red Hangar Design Cover Images: ©Shutterstock Rights Acquisition Director: Audrey Pettengill ExamView® is a registered trademark of eInstruction Corp Windows is a registered trademark of the Microsoft Corporation used herein under license The financial statements are included for illustrative and education purposes only Nothing herein should be construed as financial advice Library of Congress Control Number: 2012942884 ISBN-13: 978-1-111-82345-0 ISBN-10: 1-111-82345-6 South-Western 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 16 15 14 13 12 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it For Our Students Whatever be the detail with which you cram your students, the chance of their meeting in afterlife exactly that detail is infinitesimal; and if they meet it, they will probably have forgotten what you taught them about it The really useful training yields a comprehension of a few general principles with a thorough grounding in the way they apply to a variety of concrete details In subsequent practice the students will have forgotten your particular details; but they will remember by an unconscious common sense how to apply principles to immediate circumstances Alfred North Whitehead The Aims of Education and Other Essays WARNING: Study of this book is known to cause thinking, occasionally deep thinking Typical side effects include mild temporary anxiety followed by profound long-term understanding and satisfaction Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Preface O ver the years, we have come to refer to our book’s title by the acronym FACMU— Financial Accounting: An Introduction to Concepts, Methods, and Uses We take concepts, methods, and uses to be the central elements in learning and teaching about financial accounting The 14th Edition of FACMU has the same objectives as the previous editions: ■ ■ To help students develop a sufficient understanding of the basic concepts underlying financial reports so that they can apply the concepts to new and different situations To train students in accounting terminology and methods so that they can interpret, analyze, and evaluate financial statements and notes currently published in corporate annual reports Most introductory financial accounting textbooks state these, or similar, objectives Textbooks differ in their relative emphases on concepts, methods, and uses Concepts This book emphasizes the rationale for, and implications of, accounting concepts To learn accounting, students must develop the ability to conceptualize the transactions that accounting summarizes and the process of summarization Without such concepts, students will have difficulty focusing on the relevant issues in new and different situations Accordingly, each chapter identifies important accounting concepts and includes numerical examples illustrating their application The end-of-chapter material includes numerous short exercises and longer problems to check students’ ability to apply the concepts to different situations Methods We place enough emphasis on accounting procedures to enable students to interpret, analyze, and evaluate published financial statements The text does not emphasize procedures to such an extent that students bog down in detail All writers of accounting textbooks must decide just how much accounting procedure to include We believe students learn most effectively by working exercises and problems Too much emphasis on accounting procedures, however, lulls students into the security of thinking they understand accounting concepts when they not We have for many years used the mixture of concepts and procedures in this book and have found it effective in the classroom Understanding the accounting implications of an event requires that students construct the journal entry for that event Throughout this book we use journal entries in describing the nature of accounting events Moreover, most chapters contain exercises and problems that require the analysis of transactions with debits and credits Do not conclude by a glance at this text, however, that it is primarily procedural We want students to learn concepts; the procedures enhance the learning of concepts Uses This book attempts to bridge the gap between the preparation of financial reports and their use in various decision situations The chapters consider the effects of alternative accounting principles on the measurement of earnings and financial position and the appropriate interpretations of them Numerous problems based on financial statement data of actual companies appear at the end of most chapters OVERVIEW OF THE 14TH EDITION WHAT’S NEW IN FACMU 14E Most important, but easily visible, we have simplified the book The text pulls back a bit from discussion of advanced accounting topics and simplifies the treatments remaining Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it vi Preface The major visible changes occur at the beginning and end of the book: ■ ■ NEW: We have split the former Chapter 2, which treated record-keeping procedures, into two chapters, now Chapters and Chapter treats balance sheet basics, and Chapter treats income statement basics NEW: Chapter 17 now treats issues of organizing and presenting elements of income in a single place We discuss the following in sequence, with emphasis on why these matter: recurring versus nonrecurring income, operating versus peripheral income, earnings versus other comprehensive income, and errors and accounting changes Other important features of the 14th Edition are as follows These features affect multiple chapters of the text ■ ■ ■ Integration of International Financial Reporting Standards (IFRS) We continue to integrate IFRS into the text We start from the premise that U.S GAAP and IFRS use the same concepts but sometimes require or permit different methods At the FACMU level, for MBA students and upperclass undergraduates, the methods are often identical or similar; where they are not, we describe and illustrate the differences You can easily see the scope of the U.S GAAP/IFRS details in this book by examining the chart inside the front cover That chart shows the chapters and topics where the discussion includes both IFRS and U.S GAAP Fair values and components of other comprehensive income As U.S GAAP and IFRS incorporate more required or permitted fair value measurements, we have broadened our coverage The fair value option in U.S GAAP affects accounting for some debt securities and some investments We discuss these in Chapters 11, 13, 14, 15, and 17, both concepts and methods Insofar as changes in fair values affect other comprehensive income, we’ve expanded that discussion as well Actual financial statements We have continued the use of actual financial statement excerpts in the chapters and in end-of-chapter assignment materials We often change the names and dates in the financial statements You will see that Chapter 1, for example, shows the financial statements for Great Deal and Thames, which are based on the financial statements of Best Buy and Thales, respectively The following features affect individual chapters ■ ■ Treatment of record-keeping cycle in early chapters Given the success the Duke University authors have had with the record-keeping material they give to their MBA students before the financial accounting class begins, we have reorganized the balance sheet and income statement record-keeping material into a pair of chapters that precede most of the conceptual discussions Chapter introduces assets, liabilities, shareholders’ equity, journal entries, and T-accounts Chapter introduces the recording of operating transactions, elementary adjusting entries, closing entries, and preparation of financial statements Chapters and accomplish this without overwhelming the student with advanced accounting and economic concepts The problem material for Chapter includes the “working backward” problems that have distinguished this text from many of its competitors The basic record-keeping cycle gives students transactions and then asks them to produce recording entries and adjusting entries, prepare the income statement, supply the closing entries, and finally provide the ending balance sheet and statement of cash flows In the working backward problems, we give students some of the later items and ask them to derive earlier items We say one doesn’t understand accounting until one can work through the record-keeping cycle backward as well as forward The typical accounting problem gives facts and asks the students to derive the financial statements The working backward problems start with some subset of the financial statements and ask the students to derive the underlying transactions Focus on balance sheet and income statement measurements, formats, and conventions Chapter (balance sheet) introduces the asset and liability recognition criteria and measurement bases, including fair value measurement Chapter (income statement) continues by describing basic revenue and expense recognition criteria and measurement and timing issues Chapter contains a more detailed discussion of revenue recognition All three chapters highlight classification and display differences that exist across firms, as well as between firms that follow U.S GAAP and IFRS Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 834 Index Amortization (continued) held-to-maturity securities, 510 measurement methods, 383–7 of patents, 620 of stock options, 594 periodic depreciation, 387–9 schedule, 420–1, 428, 430 treatment of changes in, 388–9 Amortized cost method, intercorporate investments in common stock, 567 Amortized costs, 418, 510–2 Annual report to shareholders, See also Financial statements AOCI See Accumulated other comprehensive income (AOCI) APB (Accounting Principles Board) Opinions No (status of Accounting Research Bulletins), 591n No 10 (Omnibus Opinion—1966), 296n, 299n No 14 (convertible debt), 596n No 18 (equity method), 548n No 29 (accounting for nonmonetary transactions), 589n No 30 (reporting the results of operations), 678n APIC See Additional paid-in capital (APIC) Apple, Inc., revenue recognition, 279, 280, 295 ARBs See Accounting Research Bulletins (ARBs) Arcelor Mittal, marketable securities acquisitions, 506 ASC See Accounting Standards Codification (ASC) Asset recognition, 114–6, 659–60 Assets abandonment of, 392 balance sheet accounts, 44–5 current assets See Current assets defined, 9, 44, 114, 659–60 depreciation of See Depreciation equality of assets and liabilities plus shareholders’ equity equation, 14–5 fair value See Fair value financial assets See Financial assets impairments See Impairment loss intangible assets See Intangible assets liabilities to assets ratio, 236 long-lived assets See Long-lived assets measurement, 116–20 net assets, 46 noncurrent assets See Noncurrent assets operating assets, 328, 375 prepaid assets, 328 pro forma financial statement projections, 248–9 realized assets, 119 recognition of, 114–6, 659–60 retirement obligation, 384 return on assets (ROA), 223–4 revaluations of, 393 sales of, 185–8, 391–2 turnover ratio, 226–31 ASU See Accounting Standards Updates (ASU) Audit opinion, 23 Auditors, 23 Authoritative guidance, 113 Auto dealers, 192 Available-for-sale securities (or financial assets), 509, 513–5, 533, 667 See also Marketable securities B Bad Debt Expense account, 283 Bad debt expense-sales revenue ratio, 291 Balance sheet, 43–70, 111–40 aggregation, 15 analysis of, 16 assets See Assets classifications, 15, 112 defined, 8–9 defined benefit plans, 473–4 derivatives, 519–20 dual effect of transactions, 48–50, 52–3 equation, 14–5, 48–50, 112–3 equity method investments, 553–4 examples, 8, 12, 47–8, 86, 145, 170, 225, 616 IFRS format, 113 income statement and, 17, 72–3 intercorporate investments in common stock, 567 journal entries, 53–7 liabilities See Liabilities long-term debt, 444 marketable securities and derivatives, 506–8 measurement, 16 preparation, 85 shareholders’ equity measurement and disclosure, 46, 124–5, 583–4 statement of cash flows and, 18 T-accounts, 50–7 terminology, 43–6 U.S GAAP format, 112–3 Bargain purchase, 556 Basic earnings per share, 685 Benefit element (stock options), 594 Boards of directors, 4, 20 Boise Cascade, 416 Bombardier, revenue recognition, 279, 280–1 Bond indenture, 417 Bonds accounting for after issuance, 427–31 as investment, callable bonds, 417 cash flow patterns, 421–2 convertible bonds, 417, 596–7, 668 debenture bonds, 417 defined, 5, 417 initial issue price, 422–6 interest rates, 418 par value See Par value payable, 46, 417, 418 retirement of debt, 432–3 serial bonds, 417 statement of cash flows, 627 summary of reporting standards, 665 terminology, 422 variety of provisions, 417–8 zero coupon bonds, 417 Bonuses See Stock options Book basis, 479 Book income, 479–80 Book value, 45 See also Carrying value Buildings as investment, asset account, 43 depreciation, 617–9 See also Depreciation on balance sheet, 45 salvage value, 384 Business activities, overview of, 4–6 Business combinations, 555–6 Bylaws, 585 C Call options, 593 Callable bonds, 417 Callable preferred shares, 587 Capital additional paid-in capital See Additional paid-in capital (APIC) contributed capital, 124 defined, 585 working capital See Working capital Capital contributed in excess of par value, 124 See also Additional paid-in capital (APIC) Capital contributions, 583, 584–7 Capital expenditures, 18 Capital lease method, 435–41 defined, 435 lessee’s financial statement effects, 437 lessor’s financial statement effects, 440–1 old rules, 435–7, 439–40 vs operating lease method, 437–9 Capital stock, 585 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Index Capital stock contracts, 585 Carrying value changes to reflect fair value, 682 defined, 45 disclosures of, 433 of loan, 419–20 Cash accounts receivable transfers for, 292 as investment, balance sheet accounts, 43 collection uncertainty, 296–9 defined, 328 flow of See Cash flow measurement, 118 on statement of cash flows, 168 pro forma financial statement projections, 249 receipt of, 280 stock issue for, 586 Cash basis of accounting, 25–6, 27 Cash change equation, 174–5 Cash (earnings or operating) cycle, 12, 234, 344–5 Cash dividends, 588–9 Cash equivalents, 168, 328 Cash flow bonds, 421–2 classification ambiguities, 171–2 defined, 168 from financing activities, 171, 190–1 from investing activities, 169, 190–1 from operations See Cash flow from operations hedges See Cash flow hedges net income and, 167–8, 173–4, 632 present value of future cash flows, 418 statement of See Statement of cash flows types of, 169–71 Cash flow from financing activities, 171, 190–1 Cash flow from investing activities, 169, 190–1 Cash flow from operations defined, 169 financial ratios, 234, 237 net income and, 632 on statement of cash flows, 17–8 relationship with other cash flows, 190–1 Cash flow from operations to current liabilities ratio, 234 Cash flow from operations to total liabilities ratio, 237 Cash flow hedges defined, 520 disclosures about, 531 fair value option, 533 gains and losses, 521 interest rate swap designated as, 526–30 summary of accounting for, 530 Cash flow statement See Statement of cash flows Cash-generating unit, 399, 400 Central vs peripheral activities, 677–81 Changes accounting principles, 683 estimates, 683–4 periodic depreciation and amortization, 388–9 service life, 388–9 Charges (debits), 51–2, 54 Charters, 585 Chrysler Corporation, bond issuance, 421–2, 423 Citigroup, intercorporate investments in common stock, 547, 548 Closing process, 84–5 Coca-Cola Company, intercorporate investments in common stock, 547, 548–9 Commercial substance, 392n Committee on Accounting Procedures, Accounting Research Bulletins See Accounting Research Bulletins (ARBs) Common stock (common shares) as investment, debt securities converted to, 630 defined, 585 dividends, 589, 590 intercorporate investments See Intercorporate investments in common stock issuance, 585–6 par value, 124 pro forma financial statement projections, 250–1 repurchases, 590–3, 661 shareholders’ equity account, 46 splits, 589–90 Common-size balance sheets, 239, 240–1 Common-size financial statements, 239–43 Common-size income statements, 227–8, 239 Comparability, 22, 658–9 Completed contract method, 302–3 Comprehensive income, 151–2, 662 See also Accumulated other comprehensive income (AOCI); Other comprehensive income (OCI) Concepts Statements See Statements of Financial Accounting Concepts Conceptual framework, 21–2 Conditional obligations, 661 Conservatism, 120 835 Consistency, 658–9 Consolidated Edison (ConEd), held-tomaturity investments, 510–1 Consolidated financial statements consolidated net income, 561–2 defined, 554 disclosure of consolidation policy, 564 intercompany eliminations, 559–61 investments subsequent to date of acquisition, 558 limitations, 565 noncontrolling interest, 562 preparation at date of acquisition, 557–8 preparation subsequent to date of acquisition, 559 purpose, 555 recording acquisition, 556–7 Consolidation policy, 564 Consolidation work sheet, 556–7 Construction in Progress (or Process) account, 300 Constructive capitalization, 442 Constructive retirement method, treasury stock repurchases and reissuances, 591–2 Contingent obligations or provisions, 466–7, 660 Contra accounts, 51n, 81 Contracts capital stock contracts, 585 forward commodity contracts, 519 forward foreign exchange contracts, 518, 519 interest rate swaps See Interest rate swap contracts multiple deliverable contracts, 280, 661 mutually unexecuted (executory) contracts, 122, 466, 660 Contractual limits on dividends, 588 Contractual rights, as investment, Contributed capital, 124 Control, 554 See also Majority, active investments Control (controlling) accounts, 283 Convergence, FASB and IASB standards, 23 Convertible bonds, 417, 596–7, 668 Convertible preferred stock, 587, 596–7 Corporate bylaws, 585 Corporate charters, 585 Corporations advantages of business form, 584–5 business activities, 4–6 distributions See Distributions investments See Intercorporate investments in common stock Correcting entries, 82 Corrections of errors, 683 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 836 Index Cost constraints, defined, 659 Cost flow See Flow of costs Cost method, treasury stock repurchases and reissuances, 591–2 Cost of goods sold calculation using different inventory valuation bases, 336–7 defined, 17, 72, 143, 331 percentage, 342–3 pro forma financial statement projections, 247 Cost of sales, 17 Cost of services, 72, 143 Cost recovery method, 298–9 Costco Wholesale Corporation, revenue recognition, 278, 295 Costs acquisition costs See Acquisition costs administrative costs, 149–50 amortized costs, 418, 510–2 current replacement cost, 116 direct response marketing costs, 126n flow See Flow of costs interest costs, 380, 471–2 joint costs, 383 manufacturing costs, 330 opportunity cost, 117 prior service costs, 473 product costs, 149, 330, 619 replacement costs, 336 service costs, 471 Counterparties, 519 Coupon interest rate, 421 Coupon payments, excess over interest expense, 622–3 Coupon rate, 422 Credit, 51–2, 54 Credit card payments, 278n Credit change, defined, 614n Creditors, Cross-section analysis, 242–3 Cumulative dividend rights, 587 Current amount, 16 Current assets balance sheet account, 44 cash See Cash cash equivalents, 328 defined, 15, 47, 112 inventories See Inventories marketable securities See Marketable securities prepayments, 328 pro forma financial statement projections, 249 Current liabilities accounts payable See Accounts payable defined, 15, 47, 112 income taxes payable, 347 interest payable, 345–6 pro forma financial statement projections, 250 product warranties, 347–8 restructuring, 349–50 short-term notes payable, 345 wages and salaries payable, 346 Current market interest rate, 418, 420, 422 Current ratio, 233, 327, 354 Current replacement cost, 116 Customers, advances from, 46, 294–5, 625 D Days accounts receivable outstanding, 229, 291 Debenture bonds, 417 Debits, 51–2, 54 Debt covenants, 465 markets, 417–8 ratios, 236–7, 415–6 retirement, 432–3, 627 securities, conversion to common stock, 630 See also Bonds securities held to maturity, 509, 533, 667 See also Marketable securities service payments, 421n Debt-equity ratio, 236, 415–6 Declining-balance method, 385 Deferred compensation, 469 gross margin, 296n income taxes, 46, 621–2 performance obligations, 294–5 Revenues, 294–5 tax asset valuation allowance, 484 tax assets, 480, 485 tax liabilities, 480, 485 Defined benefit plans, 470, 471–4 Defined contribution plans, 470 Definite service life, asset impairment procedures for assets with, 396–7 Dell Inc., cash flow, 345 Depreciation asset measurement and, 119 defined, 382–3 expense, 383, 395 measurement methods, 383–7 of buildings and equipment, 617–9 on balance sheet, 45 periodic depreciation, 387–9 treatment of changes in, 388–9 Derivatives asset measurement and income recognition issues, 506–8 defined, 518 disclosures about, 531–2 examples, 517–9 fair value option, 532–3 hedge designation, 520–30 on balance sheet, 519–20 statement of cash flows impact, 633–4 summary of accounting for, 530–1 summary of reporting standards, 667 terminology, 519 Diffuse ownership, 548n Diluted earnings per share, 685 Direct labor, 330 Direct materials, 329 Direct method for creating cash flow statement, 85, 173–4, 179–83, 631–2 Direct response marketing costs, 126n Direct write-off method, 284n Disaggregated data, 43–4 Disclosures carrying value, 433 cash flow hedges, 531 consolidated financial statements, 564 derivatives, 531–2 fair value, 433 fair value hedges, 531 financial statement notes, 22 income, 674–84 marketable securities, 515–7 segment disclosure, 686–9 transactions in statement of cash flows, 191–2 Discontinued operations, 679–81 Discount to face value, 424 Disposal of long-lived assets, 391–2, 623 Distributions, 587–98 defined, 583 dividends See Dividends option arrangements, 593–7 stock repurchases, 590–3 stock splits, 589–90 Dividends corporate financial policy and, 588 defined, in kind, 589 legal limits, 588 recording procedures, 75 shareholders’ rights, 587 statement of cash flows, 627 types, 588–9 Double-declining balance method, 385–6 Doubtful accounts, allowance for, 285 Dual effect of transactions, 48–50, 52–3, 76–8 DuPont Decomposition Analysis, 226–31 E Earnings See also Net income defined, 16, 141 price-earnings ratio, 685 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Index retained earnings See Retained earnings shareholders’ equity changes resulting from, 583 statement See Income statement Earnings (cash or operating) cycle, 12, 234, 344–5 Earnings per share (EPS), 684–9 Economic entity, defined, 554 Effective interest method, 420–1, 427–31, 665 Effective tax rate, 479 Emerging Issues Task Force, Issue No 08-1 (revenue arrangements with multiple deliverables), 280n Employee stock options (ESOs), 593–5, 620, 668 Entity, reporting, 663 Entry value, 116 EPS (earnings per share), 684–9 Equipment acquisition of, 626 as investment, balance sheet account, 43 depreciation, 617–9 See also Depreciation disposal of, 623 on balance sheet, 45 sales of, 185–8 Equity, defined, 415n See also Shareholders’ equity Equity method, 549–54, 562, 567 Equity method investments, 549 Equity securities See Marketable securities Errors, adjustments for, 682–4 ESOs (employee stock options), 593–5, 620, 668 Estimates, changes in, 683–4 Excess purchase price, on acquisition of equity method investment, 552 Executory contracts, 122, 466, 660 Exercise date, 594 Exercise price, 593, 594 Exit value, 117 Expected holding period, 548 Expenditures additional expenditures to maintain or improve long-lived assets, 389–90 treatment as assets vs expenses, 376–9 Expense recognition conditions, 662 criteria, 149 defined, 278 period expenses, 149–50 product costs, 149 timing of, 149, 167–8 Expenses advertising, 72 classification on income statement, 17 defined, 17, 141, 662 depreciation, 383, 395 expenditures treated as, 376–9 income tax See Income tax expense interest See Interest expense measurement, 150–1 operating, 143, 246–8 period expenses, 149–50, 330 recognition of, 149–50, 167–8, 278, 662 recording procedures, 75 reporting on income statement, 143–4 research and development See Research and development (R&D) expenses selling, general, and administrative (SG&A), 17, 72, 248 Extraordinary gains and losses, 681 F Face value, 421, 422, 424–5 Fair value defined, 117, 418, 422 derivatives, 507–8, 520 disclosures of, 433 hedges See Fair value hedges intercorporate investments in common stock, 567 long-lived assets, 378, 392–4 marketable securities, 507–8 measurement option See Fair value option remeasurement of investments in statement of cash flows, 629 remeasurement of marketable equity to in statement of cash flows, 628–9 stock options, 594 unrealized vs realized gains and losses from changes in, 681–2 Fair value hedges defined, 520 disclosures about, 531 fair value, 532 gains and losses, 521 interest rate swap designated as, 521–6 of recognized asset or liability, 521–6 summary of accounting for, 526 Fair value option defined, 418 derivatives, 532–3 implications of measuring financial assets and liabilities at, 433–4 marketable securities, 532–3 statement of cash flows impact, 633–4 Faithful representation, 658 837 FASB See Financial Accounting Standards Board (FASB) FIFO (first-in, first-out) conversion of LIFO to, 352–4 defined, 340 vs other cost-flow assumptions, 341, 355 Finance lease method See Capital lease method Financial accounting, defined, Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) See Accounting Standards Codification (ASC) Accounting Standards Updates (ASU) See Accounting Standards Updates (ASU) conceptual framework for standardsetting decision, 21–2, 657–63 Interpretation No 35 (applying equity method for investments in common stock), 549n Interpretation No 46R (consolidation of variable interest entities), 565n joint revenue recognition project with IASB, 305–6 leases, 434–5, 439, 441 role of, 21 Statements of Financial Accounting Concepts See Statements of Financial Accounting Concepts Statements of Financial Accounting Standards (SFAS) See Statements of Financial Accounting Standards (SFAS) Financial accounting systems See Generally accepted accounting principles (U.S GAAP); International Financial Reporting Standards (IFRS) Financial assets at fair value through profit or loss, 509, 512–3, 532, 667 See also Marketable securities classification of, 533–4 defined, 328, 375 measurement, 118 Financial instruments, 418 Financial leverage, 223–4, 231 Financial liabilities, 123, 328 Financial ratios accounts receivable, 291 defined, 222 firm performance analysis using, 239–43 inventory, 342–3 limitations of, 238–9 long-term borrowing, 415–6 long-term liquidity risk, 236–8 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 838 Index Financial ratios (continued) profitability, 222–31 short-term liquidity risk, 232–6 summary of, 244 Financial reporting conceptual framework for standardsetting decision, 21–2, 657–63 conventions, defined, depreciation and amortization method, 386–7 financial statements See Financial statements objectives, 657–8 process, 20–3 qualitative characteristics of information, 658–9 summary of standards and concepts, 663–74 Financial statement analysis, 219–74 income tax expense, 485–6 introduction, 219–20 limitations of, 238–9 objectives, 220–2 profitability analysis, 222–32 retirement benefits, 475–7 risk analysis, 232–8 Financial statements accounts receivable, 289–91 analysis of See Financial statement analysis balance sheet See Balance sheet business activities relating to, 4–6 financial reporting conventions, income statement See Income statement leases, 442–3 long-lived assets, 394–5 notes to See Notes to financial statements overview of, 6–7 preparation, 7, 83–7 pro forma financial statements, 245–54 statement of cash flows See Statement of cash flows statement of shareholders’ equity See Statement of shareholders’ equity user responsibilities, 23 Financing, defined, Financing activities cash flows from, 171, 190–1 on statement of cash flows, 18, 171, 628–30 Financing structure, 112 Finished goods inventory, 45, 331 Finite life, 382 First-in, first-out (FIFO) See FIFO (first-in, first-out) Fiscal year, Fixed assets, 376, 664 See also Long-lived assets Fixed interest rates, 418 Fixed-asset turnover ratio, 230–1, 376 Floor plan financing, 192 Flow of costs assumptions for inventory, 338–41, 351–5 defined, 330 diagram, 331 manufacturing firms, 332 Ford Motor Company, bond issuance, 421, 422–3 Foreign private issuers, 21, 22–3 Forward commodity contracts, 519 See also Derivatives Forward foreign exchange contracts, 518, 519 See also Derivatives Free cash flow, 172–3 Functional factors, 384 Funded status on balance sheet, 473–4 Furniture and fixtures, 45 G Gains defined, 146 extraordinary gains, 681 hedges, 521 holding gains, 336, 383 on equipment sales, 188 recognition of, 662 unrealized gains, 507–8, 681–2 General ledger, posting to, 54n General Motors, bond issuance, 422, 423–4 Generally accepted accounting principles (U.S GAAP) Accounting Standards Codification (ASC) See Accounting Standards Codification (ASC) acquisition cost measurement, 379 adjustments for errors and accounting changes, 682–4 asset impairment procedures, 396–401 balance sheet format, 112–3 balance sheet measurement, 16 business combinations, 556 cash flows classification, 171 comprehensive income, 151–2 convertible securities, 596–7 defined, 3n, 21 derivatives, 520–1, 531 discontinued operations, 680 expenditures to maintain or improve long-lived assets, 389–90 expenses, 143 Extraordinary Gains and Losses, 681 fair value of long-lived assets, 393–4 fair value option See Fair value option financial statement presentation, holding gain, 383n income measurement, 677 income statement format, 142 income tax expenses, 480–1, 484 intercorporate investments in common stock, 548–9, 554 interest costs during construction, 380 inventory, 335–8 lease accounting, 438 long-lived assets, 375, 378, 379 marketable securities, 509–17 multiple deliverable contracts, 280 off-balance-sheet financing, 467–8 other comprehensive income, 682 patent costs, 45 periodic depreciation and amortization, 387 reporting periods, research and development costs, 377 restructuring liabilities, 349 retirement benefits, 469–71, 473, 474, 475 revenue recognition, 146, 300, 302, 304–5 sales returns, 293 segment disclosure, 686 stock rights, 595 summary of, 663–74 trade-in transactions, 392 treasury stock, 591 unrealized gains and losses form changes in fair value, 682 variable interest entities, 565–6 vs IFRS, 670 warranty liabilities, 348 Goals, 4–5 Going concerns, 119 Goldman Sachs, marketable securities acquisitions, 505, 508 Goodwill acquisition method, 556 defined, 378, 556 impairment loss, 393, 398–401 on balance sheet, 45 summary of reporting standards, 665 Governing boards, 4, 20 Grant date, 593 Gross margin (gross profit), 143, 296 Gross margin percentage, 296 Guarantees, 467 H Health insurance, 469, 475 Hedge accounting, 520–30 classification of derivatives, 520 defined, 520 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Index interest rate swaps designated as cash value hedge, 526–30 interest rate swaps designated as fair value hedge, 521–6 treatment of gains and losses, 521 Hedging, 518 See also Derivatives Held-to-maturity investments, 509–12, 533, 667 See also Marketable securities Historical amount, 16 costs See Acquisition costs market interest rate, 418, 420, 422, 433 Holding gains, 336, 383 Hybrid securities, 661 I IAS See International Accounting Standard (IAS) IASB See International Accounting Standards Board (IASB) IBM, expenditures treated as assets vs expenses, 377 IFRS See International Financial Reporting Standards (IFRS) Impaired inventory, 336 Impairment loss asset measurement and, 119 defined, 393–4 goodwill, 393, 398–401 held-to-maturity securities, 511 income statement presentation, 395 measurement and recognition of, 393–4, 396–401 on land, 396–7, 620–1 Implicit interest rate, 418 Improvements, 390 In-the-money stock options, 594 Income before income taxes, 143 from continuing operations, 143–4, 678–9 from discontinued operations, 143–4, 679–81 gains and losses from discontinued operations, 679–81 measurement of, 677–8 recognition of See Revenue recognition reporting of, 674–84 Income statement, 71–110, 141–66 adjusting entries, 79–83 balance sheet and, 17, 73–4 classification of earnings, 678–81 closing process, 84–5 components of, 16–7 comprehensive income, 151–2 defined, 16 defined benefit plans, 474 display, 142–5 dual effect of transactions, 76–8 examples, 13, 72–3, 141–2, 144, 226, 615 expenses See Expenses intercorporate investments in common stock, 567 journal entries, 76–8 long-lived assets, 395 marketable securities and derivatives, 506–8 preparation, 83–5 purpose, 74, 141 recording of revenues, expenses, and dividends, 74–83 revenues See Revenues statement of cash flows and, 18, 167–8 terminology, 71–2, 141–2 types of, 72 Income tax deductions, 620 deferred, 46, 621–2 Income tax expense calculation, 143, 479–80 defined, 72, 480 financial reporting requirements, 484 financial statement analysis, 485–6 pro forma financial statement projections, 251 temporary differences, 480–1 Income taxes payable calculation, 480 defined, 347 on balance sheet, 46 summary of reporting standards, 666 Indefinite life, 382, 397–8 Independent auditors, 23 Indirect method for creating cash flow statement, 86, 173–4, 183–4, 631–2 Initial yield to maturity, 422 In-process research and development (IPR&D), 378 Installment method, 296–8, 299 Intangible assets See also Long-lived assets asset impairment procedures, 397–8 defined, 375 patents, 5, 45, 620 pro forma financial statement projections, 249 summary of reporting standards, 664 Intel, debt ratios, 416 Intercompany transactions, 559–61 Intercorporate investments in common stock, 547–81 accounting summary, 566–7 examples, 547 expected holding period, 548 majority, active investments, 549, 554–65 839 minority, active investments, 548–54 purpose of, 548–9 statement of cash flows impact, 634 summary of reporting standards, 668 variable interest entities, 565–6 Interest, defined, 421n Interest costs, defined benefit plans, 471–2 Interest costs during construction, 380 Interest coverage ratio, 237–8 Interest expense defined, 72 effective interest method, 427–31 excess of coupon payments over, 622–3 long-term debt, 444 pro forma financial statement projections, 251 Interest income, 72 Interest payable, 46, 345–6 Interest rate swap contracts See also Derivatives cash flow hedge designation, 526–30 example of, 506 fair value hedge designation, 521–6 purpose of, 518 Interest rates bonds, 418 coupon interest rate, 421 current market interest rate, 418, 420, 422 fixed interest rates, 418 historical market interest rate, 418, 420, 422, 433 market interest rate, 418 variable interest rates, 418 Interest receivable, 45 Interim reports, 6n, 24 Internal audits, 23n Internal rate of return, 418 International Accounting Standard (IAS) No (financial statements), 141n, 585n, 678n, 682n No (inventories), 330n, 336n No (business combinations), 377n, 378n, 556n, 562n, 586n No (noncurrent assets), 680n No (statement of cash flows), 168n No (accounting policies), 683n No (financial instruments), 533–4, 549n No 10 (consolidated financial statements), 468n, 549n, 554n, 566n No 12 (income taxes), 480n No 13 (fair value measurement), 433–4, 532n No 16 (property, plant, and equipment), 384n, 387n, 388n, 392n, 393n No 17 (leases), 435n No 18 (revenue), 304n Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 840 Index International Accounting Standard (IAS) (continued) No 19 (employee benefits), 469n, 473n No 23 (borrowing costs), 380n No 28 (investments in associates), 548n, 549n No 32 (financial instruments), 591n, 596n, 597n No 33 (earnings per share), 684n, 685n No 36 (impairments), 393n No 37 (provisions, contingent assets, and contingent liabilities), 349n No 38 (intangible assets), 377n, 387n, 393n No 39 (recognition and measurement), 418n, 433n, 442n, 468n, 508n, 515n, 518n, 532n, 549n International Accounting Standards Board (IASB) conceptual framework for standardsetting decision, 22–3, 657–63 Framework for the Preparation and Presentation of Financial Statements, 114n International Financial Reporting Standards (IFRS) See International Financial Reporting Standards (IFRS) joint revenue recognition project with FASB, 305–6 leases, 434–5, 439, 441 role of, 22 International Financial Reporting Standards (IFRS) acquisition cost measurement, 379 adjustments for errors and accounting changes, 682–4 asset impairment procedures, 396–401 balance sheet format, 113 balance sheet measurement, 16 business combinations, 556 cash flows classification, 171 comprehensive income, 151–2 convertible securities, 597 cost-flow assumptions, 340 defined, 22 derivatives, 520–1, 531 discontinued operations, 680 expenditures to maintain or improve long-lived assets, 389–90 expenses, 143 fair value of long-lived assets, 393–4 fair value option See Fair value option financial statement presentation, holding gain, 383n income measurement, 677 income statement format, 142 income tax expenses, 480–1, 484 intercorporate investments in common stock, 548–9, 554–5 interest costs during construction, 380 inventory, 335–8 lease accounting, 438–9 long-lived assets, 375, 378, 379 marketable securities, 509–17 off-balance-sheet financing, 467–8 other comprehensive income, 682 patent costs, 45 periodic depreciation and amortization, 387 reporting periods, research and development costs, 377 restructuring liabilities, 349 retirement benefits, 469–71, 473, 474, 475 revenue recognition, 146, 300, 303, 304–5 sales returns, 293 segment disclosure, 686 stock rights, 595 summary of, 663–74 trade-in transactions, 392 treasury stock, 591 unrealized gains and losses from changes in fair value, 682 variable interest entities, 565–6 vs U.S GAAP, 670 warranty liabilities, 348 International Financial Reporting Standards (IFRS), specific standards No (share-based payment), 593n No (financial instruments: disclosures), 433n, 515n No (operating segments), 686n No 13 (fair value measurement), 117n Intrinsic value, 593 Inventories analysis of, 342–3 as investment, cost-flow assumptions, 338–41, 351–5 costs included in, 329–35 defined, 329 equation, 329 on balance sheet, 45, 330 pro forma financial statement projections, 249 remeasurement, 338 statement of cash flow, 625–6 summary of reporting standards, 664 valuation subsequent to acquisition, 335–8 Inventory turnover ratio cost of goods sold differences and, 341 defined, 229–30, 342–3 under LIFO, 354 Investing activities cash flows from, 18, 169, 190–1 defined, 5–6 Investment in Subsidiary account, 562 Investments in affiliates, 549 Investments in associates, 549 Investments in securities defined, 508, 548 issued by other entities See Intercorporate investments in common stock measurement, 118 on balance sheet, 45, 508 IPR&D (in-process research and development), 378 J Joint costs, 383 Joint ventures, 466 Journal entries adjusting entries, 79–83 correcting entries, 82 from balance sheet accounts, 53–7 from income statement accounts, 76–8 retirement benefit obligation changes, 477–9 L Land as investment, impairment loss, 396–7, 620–1 on balance sheet, 45 Last-in, first-out (LIFO) See LIFO (last-in, first-out) Leases financial statement disclosure, 442–3 operating vs capital lease methods, 434–42 summary of reporting standards, 665–6 Lessees, 437–9 Lessors, 439–41 Leverage, financial, 223–4, 231 Liabilities, 465–504 balance sheet accounts, 45–6 bonds See Bonds current liabilities See Current liabilities defined, 9–10, 44, 121, 660–1 equality of assets and liabilities plus shareholders’ equity equation, 14–5 financial liabilities, 123, 328 income tax expense See Income tax expense leases, 434–43, 665–6 measurement, 123–4 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Index noncurrent liabilities See Noncurrent liabilities nonfinancial liabilities, 123, 660 notes See Notes off-balance-sheet financing, 465–9 operating liabilities, 328 pro forma financial statement projections, 250–1 recognition of, 121–3, 660–1 restructuring liabilities, 349–50 retirement benefits, 469–79 warranties, 347–8, 626 Liabilities to assets ratio, 236 Licenses, as investment, LIFO (last-in, first-out) conformity rule, 340n conversion to FIFO, 352–4 current ratio under, 354 defined, 340–1 financial statement effects, 351–5 inventory layer, 351–2 inventory turnover ratio under, 354 liquidation, 351–2 reserve, 352 vs other cost-flow assumptions, 341, 355 Limited liability, 584 companies (LLCs), 584n partnerships (LLPs), 584n Liquidity defined, 232, 327 long-term risk, 236–8 operations impact, 190 short-term risk, 232–6 Long-lived assets, 375–414 characteristics, 375–6 definitions, 375 disposal of, 391–2 expenditures, 376–9 fair value changes, 392–4 financial statement presentation, 394–5 impact on new information about, 388–92 impairments See Impairment loss measurement at acquisition cost, 379–81 treatment of acquisition cost over life of, 382–8 Long-term contracts, revenue recognition, 280–1, 299–303 Long-term creditors, Long-term debt balance sheet presentation, 444 bonds See Bonds debt ratios, 236, 415–6 disclosures of, 433 interest expense computation, 444 leases See Leases markets for, 417–8 notes See Notes pro forma financial statement projections, 250 retirement, 627 Long-term debt ratio, 236, 415 Long-term liabilities, pro forma financial statement projections, 250 Long-term liquidity risk, 236–8 Loss contingencies or provisions, 467 Losses defined, 146 extraordinary losses, 681 hedges, 521 impairment See Impairment loss marketable equity securities sale, 621 net loss, 17, 141 on equipment sales, 186–8 recognition of, 662 unrealized losses, 507–8, 681–2 Louisiana-Pacific Corporation, executory contracts, 466, 467 Lower-of-cost-or-market basis, 336 M Maintenance, 390 Majority, active investments consolidated financial statements See Consolidated financial statements defined, 549 purchase transaction, 555–6 reasons for legally separate corporations, 555 U.S GAAP vs IFRS approach, 554 Management’s Discussion and Analysis (MD&A), Managers and management, 4n, 20 Manufacturing costs, 330 Manufacturing firms, 329–35 Manufacturing overhead, 330 Market interest rate, 418 Market participant perspective, 117 Market price, 594 Market value, of inventory, 336–8 See also Fair value Marketable securities acquisitions, 505–6, 508 asset measurement and income recognition issues, 506–8 bonds See Bonds classification of, 509, 533–4 common stock See Common stock (common shares) defined, 505, 548 disclosures about, 515–7 fair value option, 532–3 loss on sale of, 621 measurement of, 509–12 on balance sheet, 44 841 preferred stock See Preferred stock (preferred shares) reclassification of, 515 remeasurement to fair value on statement of cash flows, 515–7 summary of reporting standards, 667 Marketing, Matching convention, 26, 149 Materiality, 24, 659 Maturity, retirement before, 432–3 Maturity value, of bonds, 421, 422 MD&A (Management’s Discussion and Analysis), Merchandise inventory, 45 See also Inventories Merchandising firms, 329 Merck acquisition cost measurement, 380 acquisition cost treatment over life of long-lived asset, 383 expenditures treated as assets vs expenses, 377 Microsoft Corporation, intercorporate investments in common stock, 547, 548 Minority, active investments, 548–54 Minority, passive investments, 548 Minority (noncontrolling) interest, 251, 562 Mitchells & Butlers Plc., revenue recognition, 279–80 Monetary amount, Mortgage payable, 46 Multiple deliverable contracts, 280, 661 Mutually unexecuted (executory) contracts, 122, 466, 660 N Natural business year, 24 Negative cash flow, 345 Nestlé, 337, 505 Net assets, 46 Net book value, 45 Net defined benefit liability (asset), 473 Net income calculation, 74 cash flow from operations and, 167–8, 173–4, 632 components, 662 consolidated financial statements, 561–2 defined, 16–7, 141 statement of cash flows work sheet, 615 unrealized gains and losses in, 507 vs comprehensive income, 151–2 Net loss, 17, 141 Net realizable value, 116–7 Net settlement, 519 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 842 Index Nike, available-for-sale securities, 513–5 Nominal value, 124 Non-cash transactions, 173, 175, 628–30 Noncontrolling interest, 251, 562 Noncurrent assets defined, 15, 47, 112 investments in securities See Investments in securities net income adjustments, 632 Noncurrent liabilities defined, 15, 47, 112 net income adjustments, 632 Nonfinancial assets, 118 Nonfinancial liabilities, 123, 660 Nonmonetary transactions, 173, 175 Non-operating expenses, pro forma financial statement projections, 248 Non-operating income, 679 Nonrecurring vs recurring activities, 677–81 Non-U.S issuers, 21, 22–3 Non-U.S SEC registrants, 21, 22–3 No-par shares, 586n Notes defined, 417 initial valuation, 419 measurement subsequent to date of initial loan, 419–20 summary of reporting standards, 665 Notes payable accounting measurement, 418 defined, 345, 417 on balance sheet, 45–6 Notes receivable, 45 Notes to financial statements consolidation policy, 564 defined, 19 disclosure in, 22 leases, 442–3 retirement benefits, 475–7 Notional amounts, 519 O Obligating event, 121, 660 OCI See Other comprehensive income (OCI) Off-balance-sheet financing, 465–9 One-line consolidation, 562 Operating activities assets, 328, 375 cash flows from, 17–8, 169, 190–1 See also Cash flow from operations cash or earnings cycle, 112, 234, 344–5 defined, expenses, 143, 246–8 income, 84, 143, 679 lease method, 435, 437–42 leases, 435, 466 liabilities, 328 profit, 84, 143, 679 segments, 686–9 Opportunity cost, 117 Option arrangements, 593–7 Other comprehensive income (OCI) defined, 151–2 equity method investments, 551–2 unrealized gains and losses in, 507, 682 Out-of-the-money stock options, 594 Owners’ equity See Retained earnings; Shareholders’ equity P Paid-in capital, 124 Par value bonds issued at, 422n, 425, 427 bonds issued at less than, 425–6, 427 bonds issued at more than, 426, 429–30 defined, 124, 586 Parent (P), 549, 554 Partnerships, 5n Patents, 5, 45, 620 PBO (projected benefit obligations), 471 PCAOB (Public Company Accounting Oversight Board), 23 Pensions See Retirement benefits Percentage-of-completion method, 300–2, 303 Percentage-of-sales procedure, 285–7 Performance, accounting methods for, 24–7 Period expenses, 149–50, 330 Periodic depreciation and amortization, 387–8 Periodic inventory method, 329n, 339n Peripheral vs central activities, 677–81 Permanent accounts, 44, 71 Permanent differences, 480 Perpetual inventory method, 329n, 339n Physical factors, 384 P&L (profit and loss statement) See Income statement Pol Roget Vineyards, revenue recognition, 278 Posting, 54n, 78 PPE (property, plant, and equipment), 249, 664 Preferred stock (preferred shares) defined, 587 on balance sheet, 46 pro forma financial statement projections, 250 shareholders’ rights, 587 statement of cash flows, 627 Premium to face value, 424 Prepaid assets, 328, 624 insurance, 45 rent, 45 Prepayments, 328, 624 Present value of defined benefit obligation, 471 of future cash flows, 418 of future net cash flows, 117–8 Price appreciation or depreciation, 221 Price-earnings ratio, 685 Primary beneficiary, 566 Principal, 421, 422 Prior service costs, 473 Pro forma financial statements, 245–54 defined, 245 example, 253–4 preparation steps, 246–52 Probable, defined, 122, 661 Product costs, 149, 330, 619 life cycle, 633 warranties See Warranties Production, Profit and loss statement (P&L) See Income statement Profit and profitability See also Net income before income taxes, 143 defined, 16, 141, 222 DuPont Decomposition Analysis, 226–31 financial statement’s role in assessment, 221–2 return on assets (ROA), 223–4 return on equity (ROE), 222–4 Profit margin ratio, 226–8 Progress payments, 299 Projected benefit obligations (PBO), 471 Property, plant, and equipment (PPE), 249, 664 Gross account, 387 Net account, 387–8 Property dividends, 589 Proprietorships, 5n Provision for Bad Debts account, 283 Provision for Uncollectible Accounts account, 283 Public Company Accounting Oversight Board (PCAOB), 23 Publicly traded firms, Purchase method, 556 Purchasing, Put options (bond), 418 Q Qualitative characteristics, 658–9 Quick ratio, 233–4 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Index R Ratio analysis See Financial ratios Raw materials, 45, 329 R&D See Research and development (R&D) expenses Realization, 24 Realized assets, 119 Reclassification of marketable securities, 515 Recognition, 22 Recognized assets, 119 Record keeping account terminology, 43–4 balance sheet, 43–70 income statement, 71–110 introduction, 43 process, 88 Recoverable amount, 396 Recurring vs nonrecurring activities, 677–81 Relevance, 21, 119, 658 Reliability, 119–20 Rent received in advance, 46 Repairs, 390 Replacement costs, 336 Reporting See also Financial reporting entity, 663 periods, 7, 16, 24 unit, 399 Representational faithfulness, 21–2 Repurchases of stock See Stock repurchases Research and development (R&D) expenses defined, 6, 72 in-process research and development (IPR&D), 378 treatment as assets vs expenses, 377 Residual value See Salvage value Restructuring defined, 349 liabilities, 349–50 provision, 349 Retailing, 84 Retained earnings defined, 13, 124–5 on balance sheet, 46 pro forma financial statement projections, 251 Retirement benefits, 469–79 defined benefit plans, 470, 471–5 financial statement analysis, 475–7 health insurance, 475 journal entry to record change in obligations, 477–9 pension expense recognition, 469 pension plan structure, 469–71 summary of reporting standards, 666 Retirement of debt, 432–3, 627 Retrospective restatement, 682–3 Return defined, 221 of goods, 280, 293–4 on assets (ROA), 223–4, 226–7, 342–3 on equity (ROE), 222–4, 226–7 Revenue measurement, 277 Revenue recognition, 277–326 after sale, 294–9 applications of principles, 278–81 at time of sale, 281–94 before delivery, 299–303 criteria for, 146, 661 defined, 146, 277 examples, 146–9 FASB-IASB joint project, 305–6 measurement, 661 summary of reporting standards, 663 timing of, 167 U.S GAAP vs IFRS criteria, 304–5 vs receipt of cash, 280 Revenues classification on income statement, 17 defined, 17, 72, 141, 142–3, 661 measurement, 149 pro forma financial statement projections, 246 recognition of See Revenue recognition recording procedures, 74–5 reporting on income statement, 142–3 Risk, 221–2, 232–8 ROA (return on assets), 223–4, 226–7, 342–3 Roche Holding, marketable securities acquisitions, 505, 508 ROE (return on equity), 22–4, 226–7 S SA Electric, 416 Sales of assets, 185–8, 391–2 Sales or sales revenue See Revenues Sales returns, 280, 293–4 Salvage value, 383–4, 388–9 Sarbanes-Oxley Act (2002), 23 Schedules, 19 See also Notes to financial statements Seagram Company, contingent obligations, 467 SEC See Securities and Exchange Commission (SEC) Secured borrowings, 417 Securities available-for-sale securities, 509, 513–5, 533, 667 bonds See Bonds hybrid securities, 661 843 investments in See Investments in securities marketable securities See Marketable securities trading securities, 509, 512–3, 532, 667 Securities and Exchange Commission (SEC) 10-K form, 24 10-Q form, 24 accounting standards establishment, 21 defined, 21 Staff Accounting Bulletin No 104, 304 Securities available for sale, 509, 513–5, 533, 667 See also Marketable securities Securitization, 292, 468 Segment disclosure, 686–9 Segments, defined, 143 Self-constructed assets, 380–1 Selling, general, and administrative (SG&A) expenses, 17, 72, 248 Senior rights, 417 Serial bonds, 417 Service costs, 471 Service life changes in, 388–9 defined, 382 estimation, 384 Services received, stock issue for, 586 SFAS See Statements of Financial Accounting Standards (SFAS) SG&A See Selling, general, and administrative expenses (SG&A) Share premium, 124 See also Additional paid-in capital (APIC) Shareholders, defined, Shareholders’ equity, 583–609 balance sheet disclosure, 46, 124–5, 583–4 capital contributions, 583, 584–7 defined, 12–3, 44, 124, 661 distributions, 583, 587–98 equality of assets and liabilities plus shareholders’ equity equation, 14–5 measurement, 124–5, 583–4 noncurrent shareholders’ equity, 15 return on equity (ROE), 222–4 Shares See Stock Short-term borrowing, 627 creditors, investments, pro forma financial statement projections, 249 liquidity risk, 232–6 notes payable, 345 Siemens AG, marketable securities acquisitions, 505–6 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net 844 Index Significant influence, 548 Solvency risk, 236–8 Southwest Airlines, marketable securities acquisitions, 505, 508 SPE See Special purpose entities Special purpose entities (SPE), 468, 565n Specific identification, 339 Staff Accounting Bulletin No 104 (SAB 104), 304 Standard setting, 21–3 See also Generally accepted accounting principles (U.S GAAP); International Financial Reporting Standards (IFRS) Stated value, 124 Statement of cash flows, 167–218, 613–56 accounts payable, 624–5 accounts receivable, 625 advances from customers, 625 asset sales, 185–8 balance sheet and, 18 bond issuance, 627 concepts underlying, 613–4 deferred income taxes, 621–2 defined, 17, 167 depreciation of buildings and equipment, 617–9 derivative transactions, 633–4 direct vs indirect method, 85–6, 173–4, 179–84, 631–2 dividends, 627 employee stock options exercised, 628 equipment acquisition, 626 equipment disposal gain, 623 equity in undistributed earnings of affiliate, 623–4 examples, 10, 14, 87, 168–74, 615–30 excess of coupon payments over interest expense, 622–3 fair value option transactions, 633–4 financing activities, 18, 628–30 impairment loss on land, 620–1 income statement and, 18, 167–8 intercorporate investments in common stock, 634 interpretation of, 172–3, 191–3, 632–3 inventories, 625–6 investing activities, 18 loss on marketable equity securities sale, 621 need for, 167–8 net income, 615 net income-cash flow from operations reconciliation, 173–4 non-cash investments, 628–30 operating activities, 17–8 overview of, 168–74 patent amortization, 620 preferred stock issuance, 627 preparation, 85–7, 174–90 prepayments, 624 presentation formats, 173 pro forma financial statement projections, 252 retirement of long-term debt at maturity, 627 short-term borrowing, 627 stock option compensation expense, 620 T-account work sheet, 614, 618–9 treasury stock, 627 using information from, 190–1 warranty liability, 626 Statement of earnings, examples of, 9, 170 See also Income statement Statement of financial position See Balance sheet Statement of operating activity See Income statement Statement of operations See Income statement Statement of profit and loss See Income statement Statement of shareholders’ equity defined, 18 examples of, 11, 15 Statements of Financial Accounting Concepts conceptual framework, 21–2 No (qualitative characteristics), 120n No (recognition and measurement), 114n, 121n, 141n, 304n No (financial statements), 114n, 121n, 124n, 296n No (general financial reporting and qualitative characteristics), 114n, 119n, 120n, 657n Statements of Financial Accounting Standards (SFAS) defined, 21 No (research and development costs), 377n No (contingencies), 588n No 13 (leases), 435n No 34 (interest capitalization), 380n No 45 (franchises), 305n No 48 (revenue recognition), 280n, 293n No 49 (product financing arrangements), 468n No 66 (real estate), 305n No 68 (research and development), 468n No 86 (costs of computer software), 377n No 94 (majority-owned subsidiaries), 549n, 554n No 95 (statement of cash flows), 168n No 107 (disclosures about fair value of financial statements), 433n No 109 (income taxes), 480n No 115 (securities), 508n, 515n, 532n No 123R (share-based payment), 593n No 128 (earnings per share), 684n, 685n No 129 (capital structure), 585n No 130 (reporting comprehensive income), 551n, 678n, 682n No 131 (segments), 686n No 133 (derivative instruments and hedging), 433n, 518n No 138 (derivative instruments and hedging), 518n No 141R (business combinations), 378n, 556n, 586n No 142 (goodwill and other intangible assets), 393n, 399n No 143 (asset retirement obligations), 384n No 144 (impairment of long-lived asset), 393n, 680n No 153 (exchanges of nonmonetary assets), 392n No 154 (accounting changes and error corrections), 388n, 683n No 156 (servicing of financial assets), 468n No 157 (fair value measurements), 433–4 No 158 (defined benefit pension plans), 469n, 473n No 159 (fair value option), 418n, 433, 442n, 532n, 549n No 160 (noncontrolling interests), 562n No 166 (transfers of financial assets), 468n No 167 (amendments to FASB Interpretation No 46(R)), 565n Statutory limits on dividends, 588 Stock capital stock, 585 common stock See Common stock (common shares) dividends, 589, 590 issuance, 585–6 options, 593–5, 620, 628 preferred stock See Preferred stock (preferred shares) price appreciation or depreciation, 221 purchase rights, 593 repurchases, 590–3, 661 rights, 593, 595 splits, 589–90 treasury stock, 590–3, 627, 669 warrants, 593, 595–6, 668 Stockholders, defined, Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Index Stockholders’ equity See Shareholders’ equity Straight-line (time and use) method, 384–6 Strategies, 4–5 Strike price (exercise price), 593 Subordinated rights, 417 Subsidiary (S), 549, 554 Substantial performance, revenue recognition after sale when, 294–5 Substantial uncertainty about cash collection, 298–9 Sum-of-the-years’-digits method, 385 Suppliers, advances to, 45 Supporting schedules, 19 See also Notes to financial statements Swaps, interest rate See Interest rate swap contracts T T-accounts, 50–7 debit and credit, 51 defined, 50 dual effect of transactions in, 52–3 examples of, 51–2, 176, 180, 187 increases and decreases to, 50–1 journal entries and, 53–7 statement of cash flows preparation, 614, 618–9 work sheet preparation, 175–9, 614, 618–9 Takeovers, 591 Tangible assets, 375 See also Longlived assets Tax basis, 479 Tax reporting, depreciation and amortization method, 386 Tax treatment, of employer contributions to postretirement benefits, 475n Taxes payable, 347 Temporary accounts, 44, 71 Temporary differences, 480–1 10-K form, 24 10-Q form, 24 Tenants, advances from, 46 Time value element, 594 Timeliness, 22 Time-series analysis, 242 Trade payables See Accounts payable Trade receivables See Accounts receivable Trade-in transactions, 392 Trading securities, 509, 512–3, 532, 667 See also Marketable securities Transactions, classification and disclosure of, 191–2 Transfers of receivables, 467–8 Treasury stock (treasury shares), 590–3, 627, 669 Treatment of changes in periodic depreciation and amortization, 388–9 Turnover ratios accounts payable, 235–6, 344 accounts receivable, 229, 291 asset turnover, 226–31 fixed assets, 230–1, 376 inventory See Inventory turnover ratio working capital, 234–6 U Uncertainty, 661 Uncollectible accounts, 281–9 allowance method, 282–5, 664 avoiding, 281–2 defined, 281 estimation of, 285–9 summary of accounting for, 289 Unconditional obligations, 661 Underlyings, 519 Understandability, 22, 659 Unearned Revenues, 294–5 United Airlines, operating lease agreements, 466 Unrealized gains and losses, 507–8, 681–2 Unsecured borrowings, 417 U.S GAAP See Generally accepted accounting principles (U.S GAAP) U.S SEC registrants, 21 Use method, 385 Useful life See Service life Users of financial statements, 23 845 V Variable interest entities (VIE), 468, 565–6 Variable interest rates, 418 Verifiability, 22, 659 Vesting period, 593 VIE See Variable interest entities W Wages and salaries payable, 346 Walt Disney Company, intercorporate investments in common stock, 547, 548, 549 Warranties allowance method, 294 defined, 122, 347–8 Warrants, stock, 593, 595–6, 668 Warranty liability, 347–8, 626 provision, 347 Weighted-average cost-flow assumption, 339–41 Weighted-average number of outstanding common shares, 684–5 Weyerhaeuser Company, executory contracts, 466, 467 Work sheets, T-account, 175–9, 614, 618–9 Working capital, 327–74 current asset accounts, 328–43 current liability accounts, 344–50 defined, 327–8 net income adjustments, 632 ratio, 327 terminology, 327–8 turnover ratios, 234–6 Work-in-process (work-in-progress) inventory, 45, 331 WPP Group, 416 Writing off accounts, 284 Y Yield to maturity, 418 Z Zero coupon bonds, 417 Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Simplified Statement of Cash Flows (Exhibit 6.12, p 192) OPERATIONS Cash Receipts from Customers (1) Less: Cash Payments to Suppliers, Employees, and Others −(2) Cash Flow from Operations [= (1) – (2)] Reconciliation of Net Income to Cash Flow from Operations Net Income −S1 Additions to Net Income to Compute Cash Flow from Operations +(4) Subtractions from Net Income to Compute Cash Flow from Operations −(5) Cash Flow from Operations [= (3) + (4) – (5)] S1 (3) INVESTING Proceeds from Dispositions of “Investing” Assets +(6) Cash Used to Acquire “Investing” Assets −(7) Cash Flow from Investing [= (6) – (7)] S2 FINANCING © Cengage Learning 2014 Cash Provided by Increases in Debt or Capital Stock +(8) Cash Used to Reduce Debt or Capital Stock −(9) Cash Used for Dividends −(10) Cash Flow from Financing [= (8) – (9) – (10)] S3 Net Change in Cash [= S1 + S2 + S3] Cash, Beginning of the Period (11) S4 Cash, End of the Period [= (11) + S4] S5 Effects of Various Methods of Accounting for Short- and Long-Term Investments in Corporate Securities © Cengage Learning 2014 (Exhibit 14.8, p 567) Method of Accounting Balance Sheet Income Statement Fair value method for marketable securities available for sale (generally used when equity ownership percentage is less than 20%) and for cash flow hedges.a Investment account or derivative appears at fair value Unrealized gains and losses appear in Other Comprehensive Income Dividends declared by investee included in revenue of investor Gains and losses included in income when realized in arm’slength transactions with outsiders Fair value method for trading securities (generally used when ownership percentage is less than 20%) and for fair value hedges Investment account or derivative appears at fair value Unrealized gains and losses appear in income statement, and the effects increase or decrease the Retained Earnings account Dividends declared by investee included in revenue of investor Gains and losses (from then-current carrying values) included in income when fair values change Amortized cost method (used only for debt where holder has both intent and ability to hold to maturity).a Acquisition cost plus accrued interest not yet received in cash Carrying value at start of period multiplied by historical market interest rate on the date of acquisition of debt security Equity method (generally used when ownership percentage is at least 20% but not more than 50%).a Investment account appears at acquisition cost plus share of investee’s net income less share of investee’s dividends since acquisition minus amortization of excess of purchase price over fair value of identifiable assets with limited lives Equity in investee’s net income is part of the investor’s income in the period that investee earns income Reduce (increase) by the amount, if any, of intercompany gains (losses) Consolidation (generally used when ownership percentage exceeds 50% [U.S GAAP] or when the investor controls the investee [IFRS]) Eliminate investment account, and replace it with individual assets and liabilities of subsidiary Show noncontrolling interest in shareholders’ equity Eliminate inter-company assets and liabilities Combine individual revenues and expenses of subsidiary with those of parent, and eliminate intercompany items Subtract noncontrolling interest in subsidiary’s net income aFirms can elect the fair value option to account for these securities The effects on the balance sheet and income statement are the same as those described for trading securities and fair value hedges Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it www.downloadslide.net Common Accounting Terms (Glossary, pp 735–832) account adjunct account advances from customers advances to suppliers asset capital closing entry contra account conservatism control(ling) account depreciation, amortization equity executory contract expenditure expense goodwill income statement liability make (making) money net assets partially executory contract periodic inventory product cost receipt revenue A device for keeping track of the amount on one line (or part of one line) of a balance sheet An account for accumulating additions to another account Liability title used on receipt of cash for future goods or service Asset title used on paying cash for future goods or service Future benefit that (1) the firm controls and (2) arises from something other than an executory contract Avoid using this word because it has so many different meanings, such as cash, assets, funding sources, and owners’ equity Journal entry made after preparing income statement to move balances in revenue and expense accounts to Retained Earnings An account for accumulating subtractions from another account Defer income to later periods, showing low cumulative income; show low asset totals An account showing the sum of balances in other, similar accounts An allocation of costs to periods of benefit (and, in manufacturing, subsequently to products) Not a decline in market value A source of assets A claim to assets A mere exchange of promises Outflow of cash Gone (net) asset Effect on Balance Sheet: The decrease in owners’ equity accompanying the decrease in (net) assets caused by the sale of goods, the rendering of services, or the passage of time The excess of purchase price (fair value of consideration given) over the fair market value of identifiable net assets in a purchased acquisition Not the Purpose: To report income Purpose: To tell why income was what it was to allow comparisons across time or across companies (divisions), or both An obligation (1) for a reasonably definite amount, (2) due at a reasonably definite time, (3) arising from something other than an executory contract One of at least seven possible meanings Don’t say this unless you can be precise about your meaning Assets minus liabilities Executory contract in which one or both parties have done something other than merely promise Compute cost of goods sold once per period, at the end as: beginning inventory (from books) plus purchases minus ending inventory (go out into the warehouse; then count and cost it) Contrast with perpetual inventory, where firm tracks cost of goods sold with each withdrawal from inventory A manufacturing cost; debited to work in process, not to expense Inflow of cash Service rendered Effect on balance sheet: The increase in owners’ equity accompanying the increase in (net) assets caused by the selling of goods or the rendering of service Measured by the expected net present value of the cash receipts make money making money Do not use these phrases as they can mean any of the following: Earn income: “Microsoft made a lot of money last year.” Earn other comprehensive income: “I still hold the Microsoft shares I bought in 1990, and I’ve made a lot of money on them.” This is an unrealized holding gain, an increase in wealth, but not an increase in cash Save opportunity costs or opportunity losses: “If I’d only sold those shares in 1999, I’d have made more money I didn’t sell the shares, so I lost money.” This use refers to the lost benefits from not doing something Accounting does not recognize opportunity costs Earn revenues: “He made a lot of money touting cooking devices on TV.” He earned income and received payments, but this use subtracts no costs Earn gross margin Sell for cash Generate cash flow from operations Many companies can have positive income but negative cash flow from operations Some analysts will say such a company made no money in such a year Counterfeit Debit-Credit Rules (Glossary, p 762) Typical Asset Account Opening Balance Increase Decrease + − Dr Cr Ending Balance Typical Liability Account Opening Balance Decrease Increase − + Decrease Increase Dr Cr − + Ending Balance Dr Cr Owners’ Equity Typical Owners’ Equity Account Expenses Revenues Opening Balance Dr Cr Dr Cr Decrease Increase + − − + − + * Dr Cr Ending Balance * *Normal balance before closing Copyright 2014 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Financial Accounting: An Introduction to Concepts, Methods, and Uses We take concepts, methods, and uses to be the central elements in learning and teaching about financial accounting The 14th Edition... understand the concepts, methods, and uses of financial accounting to enable you to use financial accounting information effectively As a financial statement user, you will encounter financial. .. reserves the right to remove additional content at any time if subsequent rights restrictions require it FINANCIAL ACCOUNTING 14e AN INTRODUCTION TO CONCEPTS, METHODS, AND USES Roman L Weil University
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