Fundamental Accounting Principles

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17
edition
Fundamental
Accounting
Principles
Kermit D. Larson
University of Texas at Austin
John J. Wild
University of Wisconsin at Madison
Barbara Chiappetta
Nassau Community College
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York
San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur
Lisbon London Madrid Mexico City Milan Montreal New Delhi
Santiago Seoul Singapore Sydney Taipei Toronto
Lar12431_fm_i-xxxiii.qxd 11/5/03 21:51 Page ii
To my wife Nancy.
To my wife Gail and children, Kimberly, Jonathan, Stephanie, and Trevor.
To my husband Bob, my sons Michael and David, and my mother.
FUNDAMENTAL ACCOUNTING PRINCIPLES
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the
Americas, New York, NY, 10020. Copyright © 2005, 2002, 1999, 1996, 1993, 1990, 1987, 1984, 1981, 1978, 1975,
1972, 1969, 1966, 1963, 1959, 1955 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this
publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system,
without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network
or other electronic storage or transmission, or broadcast for distance learning.
Some ancillaries, including electronic and print components, may not be available to customers outside the United States.
This book is printed on acid-free paper.
domestic
1 2 3 4 5 6 7 8 9 0 DOW/DOW 0 9 8 7 6 5 4 3
international 1 2 3 4 5 6 7 8 9 0 DOW/DOW 0 9 8 7 6 5 4 3
ISBN
ISBN
ISBN
ISBN
ISBN
ISBN
0-07-251243-1
0-07-287003-6
0-07-287002-8
0-07-286993-3
0-07-287016-8
0-07-286999-2
(combined edition)
(volume 1, chapters 1–12)
(volume 2, chapters 12–25)
(volume 1 with working papers, chapters 1–12)
(volume 2 with working papers, chapters 12–25)
(Principles of Financial Accounting, chapters 1–17)
Editorial director: Brent Gordon
Publisher: Stewart Mattson
Sponsoring editor: Steve Schuetz
Developmental editor I: Kelly Odom
Marketing manager: Richard Kolasa
Senior producer, Media technology: Ed Przyzycki
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Typeface: 10.5/12 Times Roman
Compositor: The GTS Companies/York, PA Campus
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Library of Congress Cataloging-in-Publication Data
Larson, Kermit D.
Fundamental accounting principles / Kermit D. Larson, John J. Wild, Barbara
Chiappetta.—17th ed.
p. cm.
A variety of multi-media instructional aids are available to support the text.
Includes index.
ISBN 0-07-251243-1 (alk. paper)
1. Accounting. I. Wild, John J. II. Chiappetta, Barbara. III. Title.
HF5635.P975 2005
2003061454
657—dc22
INTERNATIONAL EDITION ISBN 0-07-111123-9
Copyright © 2005. Exclusive rights by The McGraw-Hill Companies, Inc. for manufacture and export.
This book cannot be re-exported from the country to which it is sold by McGraw-Hill.
The International Edition is not available in North America.
www.mhhe.com
Lar12431_fm_i-xxxiii.qxd 11/5/03 22:09 Page iii
iii
The first edition of Fundamental Accounting Principles was published fifty years
ago, into a world very different from the one we live in today.
Technological tools that have reshaped the accounting profession—handheld
computers, telecommunications, the Internet—could scarcely have been imagined
by the men and women filling in ledgers or punching figures into adding machines.
What they had were principles: tried-and-true rules and practices for collecting
and interpreting information comprehensively, accurately, and responsibly.
Fundamental Accounting Principles
Technology makes certain accounting functions easier, but students require a firm
grounding in principles to become good business people—in any era. Teaching
these principles in a way that is engaging to students while providing instructors
with the support they need has been the goal of Fundamental Accounting
Principles since the first copy rolled off the press.
Over the years instructors have turned to Fundamental Accounting Principles
confident that they have selected the most accurate, best organized, and best
written book on the market. Feedback on the book’s pedagogy, real world
examples, and assignment materials has always been outstanding. We’ve long
believed in doing whatever it takes to keep students engaged, from creating
interesting chapter opening vignettes to integrating leading-edge technology tools.
With fifty years of success and the expertise of our talented author team,
Fundamental Accounting Principles achieves new heights in
student motivation, creative pedagogy, technology integration,
and end-of-chapter material.
Thank you for choosing Fundamental Accounting Principles. Here’s to the next
fifty years!
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:50 Page iv
iv
Fundamental Accounting
Principles Rates #1
As with the past fifty years, we actively solicited your feedback when planning
the 17th edition of Fundamental Accounting Principles (FAP). Independent
research* confirmed what we already knew: Instructors find FAP more
satisfying to use than any other principles textbook.
“It (FAP) is the best
text I have ever used
(in 15 years of
teaching). It is the
best resource text
available for my
students to keep
and include in their
professional library
after the course.”
— L. Hass,
Glen Oaks
Community College
Rated as Very Satisfied or
Satisfied by Instructors
Top Five Textbooks
FAP, Larson/Wild/Chiappetta
Competitor #1
Competitor #2
Competitor #3
Competitor #4
100%
75%
64%
60%
47%
Mean
Rating*
4.46
3.83
3.83
3.76
3.79
*Instructors ranked books from very dissatisfied (1) to very satisfied (5).
The choice is clear: of the five best-selling principles
books, FAP scores consistently highest in user satisfaction.
Fundamental Accounting Principles also rates #1 with instructors
surveyed† in each of the following key areas:
#1
#1
#1
#1
#1
#1
#1
in
in
in
in
in
in
in
Accuracy
Clarity
Pedagogy
Organization
Real-World Examples
Problems and Exercises
Supplements
And remember, a book that satisfies your needs is that much more
likely to satisfy your students’ needs as well.
“With the help of the book, my instructor, and especially the FAP CD-ROM,
I am excelling in the class and like it so much I am considering becoming an
Accounting major myself! Thanks and keep up the good work!”
— Aimee Liddell, Student, Liberty University
†
Independent study conducted by Professional Research Group, February 2003.
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v
Kermit D. Larson is the Arthur Andersen & Co. Alumni Professor of Accounting Emeritus at the
University of Texas at Austin. He served as chairman of the University of Texas, Department of
Accounting and was visiting professor at Tulane University. His scholarly articles have been published
in a variety of journals, including The Accounting Review, Journal of Accountancy, and Abacus. He is the
author of several books, including Financial Accounting and Fundamentals of Financial and Managerial
Accounting, both published by McGraw-Hill/Irwin.
Professor Larson is a member of the American Accounting Association, the Texas Society of CPAs, and
the American Institute of CPAs. His positions with the AAA have included vice president, southwest
regional vice president, and chairperson of several committees, including the Committee of Concepts
and Standards. He was a member of the committee that planned the first AAA doctoral consortium
and served as its director.
Professor Larson served as president of the Richard D. Irwin Foundation. He also served on the
Accounting Accreditation Committee and on the Accounting Standards Committee of the AACSB. He
was a member of the Constitutional Drafting Committee of the Federation of Schools of Accountancy
and a member of the Commission on Professional Accounting Education. He has been an expert
witness on cases involving mergers, antitrust litigation, consolidation criteria, franchise taxes, and
expropriation of assets by foreign governments. Professor Larson served on the Board of Directors
and Executive Committee of Tekcon, Inc., and on the National Accountants Advisory Board of SafeGuard Business Systems. In his leisure time, he enjoys skiing and is an avid sailor and golfer.
John J. Wild is a professor of accounting and the Robert and Monica Beyer Distinguished Professor
at the University of Wisconsin at Madison. He previously held appointments at Michigan State University
and the University of Manchester in England. He received his BBA, MS, and PhD from the University of
Wisconsin.
Professor Wild teaches accounting courses at both the undergraduate and graduate levels. He has
received the Mabel W. Chipman Excellence-in-Teaching Award, the departmental Excellence-in-Teaching
Award, and the Teaching Excellence Award from the 2003 graduation class at the University of Wisconsin.
He also received the Beta Alpha Psi and Roland F. Salmonson Excellence-in Teaching Award from Michigan
State University. Professor Wild is a past KPMG Peat Marwick National Fellow and is a recipient of
fellowships from the American Accounting Association and the Ernst and Young Foundation.
Professor Wild is an active member of the American Accounting Association and its sections. He has
served on several committees of these organizations, including the Outstanding Accounting Educator
Award,Wildman Award, National Program Advisory, Publications, and Research Committees. Professor Wild
is author of Financial Accounting and Financial Statement Analysis, both published by McGraw-Hill/Irwin.
His research appears in The Accounting Review, Journal of Accounting Research, Journal of Accounting and
Economics, Contemporary Accounting Research, Journal of Accounting,Auditing and Finance, Journal of
Accounting and Public Policy, and other business periodicals. He is past associate editor of Contemporary
Accounting Research and has served on several editorial boards including The Accounting Review.
Professor Wild, his wife, and four children enjoy travel, music, sports, and community activities.
Barbara Chiappetta received her BBA in Accountancy and MS in Education from Hofstra
University and is a tenured full professor at Nassau Community College. For the past 17 years, she has
been an active executive board member of the Teachers of Accounting at Two-Year Colleges (TACTYC),
serving 10 years as vice president and as president from 1993 through 1999. As an active member of the
American Accounting Association, she has served on the Northeast Regional Steering Committee,
chaired the Curriculum Revision Committee of the Two-Year Section, and participated in numerous
national committees.
In 1998, Professor Chiappetta was inducted into the American Accounting Association Hall of
Fame for the Northeast Region. She received the Nassau Community College dean of instruction’s
Faculty Distinguished Achievement Award in 1995. Professor Chiappetta was honored with the State
University of New York Chancellor’s Award for Teaching Excellence in 1997. As a confirmed believer in
the benefits of active learning pedagogy, Professor Chiappetta has authored Student Learning Tools, an
active learning workbook for a first-year accounting course, published by McGraw-Hill/Irwin.
In her leisure time, Professor Chiappetta enjoys tennis and participates on a U.S.T.A. team. She also
enjoys the challenge of bridge. Her husband, Robert, is an entrepreneur in the leisure sport industry.
She has two sons—Michael, a lawyer, specializing in intellectual property law in New York, and David, a
composer, pursuing a career in music for film in Los Angeles.
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Achieve New Heights
Fundamental Accounting Principles, 17e
The principles course is crucial for accounting majors and
non-majors alike. It is a student’s first step into the world
of accounting, one which quickly immerses them
in unfamiliar and challenging new concepts.
Much of your students’ future success in both accounting and
business is determined in the time spent in the principles course.
Will your students struggle with this new material? Or will they
understand that accounting is a vital discipline relevant to any
career, and use that knowledge to achieve new heights of
success in business and throughout their lives?
Fundamental Accounting Principles has always been dedicated
to presenting accounting concepts as vital tools that anyone can
learn to successfully use.The 17th edition expands on this
traditional strength by especially focusing on three areas: student
engagement, technology, and end-of-chapter material.
FAP 17e portrays accounting as it truly is—a language of business
communication that is vital to student success.
“FAP has good coverage for [the Principles course] and excellent
exercises, problems, and end-of-chapter materials.”
— S. McClure,Tri-County Tech
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vii
New heights in student engagement
Instructors repeatedly raise a common concern: the biggest hurdle they face is getting students
interested and motivated in the materials. FAP provides solutions. It is more engaging and
student-friendly than any competing book, from the book’s eye-catching design to its
comprehensive and stimulating end-of-chapter material. Each new book includes the actual
shareholders’ report from Krispy Kreme Doughnuts, which gets real
financial data in students’ hands. Moreover, engaging chapter-opening
vignettes focus on small businesses and entrepreneurs to show how
accounting knowledge
is a springboard to success.
“I think FAP does a better job motivating and
sustaining student interest in accounting.”
New heights
in technology
— L. Kolar, Bucks County Community College
Match our technology assets against those of any other book, and we’re confident you’ll agree:
FAP’s technology is, hands-down, the best in the market.
• Carol Yachts General Ledger and
• Mcgraw-Hill’s Homework Manager
Peachtree Complete Accounting 2004 • Topic Tackler
• ALEKS for Financial Accounting and
• Online Learning Center
ALEKS for the Accounting Cycle
To learn more about these and other technology enhancements, see page xi.
New heights of end-of-chapter material
FAP’s end-of-chapter content is tightly coordinated with the main body of the chapter. Icons
for C.A.P. learning objectives make it easy for students to flip back in the chapter to a particular discussion, or to pick up the solution strategy for a specific assignment. In addition, FAP
takes technology integration to a new level with two powerful and popular study aids,
Homework Manager and Topic Tackler, both specifically written to coordinate with FAP. We
also revised and expanded the two problem sets for every chapter of FAP, with a third set
available on the text’s Online Learning Center.
By addressing students in language that speaks to them, by providing your class with marketleading technology support, and by ensuring the textbook package is strong in the areas you
rely on most, FAP helps you achieve new heights of success in the
classroom—and beyond.
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viii
Achieving New Heights
A decision icon calls out all relevant material within
chapters, whether it’s a boxed item or end-of-chapter item.
Decision Center
Whether we prepare, analyze,
or apply accounting information, one
skill remains essential: decision making. To help develop good decisionmaking habits and to illustrate the
relevance of accounting, FAP uses a
unique pedagogical framework called
the Decision Center. This framework
is comprised of a variety of approaches and subject areas, giving
students insight into every aspect of
business decision making. Answers
to Decision Maker and Ethics boxes
are at the end of each chapter.
66
Chapter 2 Analyzing and Recording Transactions
advan
capita
Entrepreneur You open a wholesale business selling entertainment
betwe
equipment to retail outlets.You find that most of your customers demand to
owner
y
p
p
p
buy on credit. How can you use the balance sheets of these customers to
(Reca
y
(LLC),
offers
the
limited
liability
of
a
cordecide which ones to extend credit to?
sheet
tleft a
Answer—p. 71
i- Another presentation is the report form: assets on
Decision
Insight
w uity.
Point: While revenues earned increase
Either presentation is acceptable.)
Decision Maker
equity and expenses incurred decrease
New Age Entrepreneurship will be the defining trend of business
ain this century, according to a survey of business leaders. Respondents see
ethe biggest opportunities for entrepreneurship in technology, medicine, food
n
services, hospitality, and information services.
a
he
person A corporation acts through its man-
An entrepreneurial icon calls out all relevant material within chapters,
whether it’s an opening vignette, box, or end-of-chapter assignment.
“The Decision sidebars are one of the particular strengths of the text. They help the student
stop and think about what he or she has read or can be used by the professor to stimulate
discussion when introducing a topic. They are excellent tools!”
— M. Conway, Kingsborough Community College
CAP Model
The Conceptual/Analytical/Procedural
(CAP) Model allows courses to be
specially designed to meet your
teaching needs or those of a diverse
faculty. This model identifies learning
objectives, textual materials, assignments, and test items by C, A, or P,
allowing different instructors to
teach from the same materials,
yet easily customize their courses
toward a conceptual, analytical, or
procedural approach (or a combination thereof) based on personal
preferences.
Learning Objectives
CAP
Conceptual
Analytical
Procedural
C1
source documents and
C2 Describe
their purpose. (p. 49)
an account and its use in
C3 Describe
recording transactions. (p. 49)
a ledger and a chart of
C4 Describe
accounts. (p. 52)
debits and credits and explain
C5 Define
their role in double-entry
A1
transactions in a journal and
P1 Record
post entries to a ledger. (p. 55)
and explain the use of a trial
P2 Prepare
balance. (p. 62)
financial statements from
P3 Prepare
business transactions. (p. 64)
Explain the steps in processing
transactions. (p. 48)
accounting. (p. 53)
Analyze the impact of transactions
on accounts and financial
statements. (p. 57)
the debt ratio and
A2 Compute
describe its use in analyzing company
performance. (p. 66)
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page ix
in Pedagogy
Chapter Preview
Flow Chart
New to the 17th edition, this feature
provides a handy textual/visual guide
at the start of every chapter.
Students can now begin their
reading with a clear understanding
of what they will learn and when,
allowing them to stay more focused
and organized along the way.
Quick Check
These short question/answer
features reinforce the material
immediately preceding them. They
allow the reader to pause and
reflect on the topics described, then
receive immediate feedback before
going on to new topics. Answers are
provided at the end of each chapter.
ix
Chapter Preview
Financial statements report on the financial performance and
condition of an organization. Knowledge of their preparation,
organization, and analysis is important. An important goal of
this chapter is to illustrate how transactions are recorded,
how they are reflected in financial statements, and how they
impact analysis of financial statements. Debits and credits are
introduced and identified as a tool in helping understand and
process transactions.
Analyzing and Recording Transactions
Analyzing and
Recording Process
• Source documents
• The account and its
analysis
• Types of accounts
Analyzing and
Processing Transactions
•
•
•
•
Trial Balance
• Trial balance
preparation
• Search for and
correction of
errors
• Trial balance use
General ledger
Double-entry accounting
Journalizing and posting
Illustration
Quick Check
8. What types of transactions increase equity? What types decrease equity?
9. Why are accounting systems called double entry?
10. For each transaction, double-entry accounting requires which of the following: (a) Debits
to asset accounts must create credits to liability or equity accounts, (b) a debit to a
liability account must create a credit to an asset account, or (c) total debits must equal
total credits.
11. An owner invests $15,000 cash along with equipment having a market value of $23,000 in a
proprietorship. Prepare the necessary journal entry.
12. Explain what a compound journal entry is.
13. Why are posting reference numbers entered in the journal when entries are posted to
ledger accounts?
Answers—p. 73
“I think FAP does a better job with learning objectives than my
book because of the CAP learning objectives organization.”
— S. McClure,Tri-County Tech
transactions of FastForward (numbered 12 through 16) that were omitted earlier.
FastForward
FastForward is a case that takes
students through the Accounting
Cycle, chapters 1-4. The FastForward
icon is placed in the margin at key
points when this case is discussed.
Marginal Student
Annotations
These annotations provide students
with additional hints, tips, and
examples to help them more fully
understand the concepts and retain
what they have learned. They also
include notes on global implications
of accounting and further examples.
Topic Tackler 2-1
1. Investment by Owner
Cash
(1)
101
30,000
Transaction: Chuck Taylor invests $30,000 cash in FastForward.
Analysis:
Assets
⫽ Liabilities ⫹ Equity
Cash
⫹30,000
C.Taylor, Capital
(1)
301
30,000
Double entry: (1)
⫽
Cash
C.Taylor, Capital
0
101
301
⫹
FAST
Forward
Capital
30,000
30,000
30,000
Statements affected:3 BLS and SCF
y
y
cord for each customer, but for now, we
es and decreases in receivables in a sinritten promise of another entity to pay a
o the holder of the note. A company holdas an asset that is recorded in a Note (or
) are assets that represent prepayments of
expenses are later incurred, the amounts
accounts. Common examples of prepaid
Point: A college parking fee is a
prepaid account from the student’s
standpoint. At the beginning of the
term, it represents an asset that entitles
a student to park on or near campus.
The benefits of the parking fee expire
as the term progresses. At term-end,
prepaid parking (asset) equals zero as
it has been entirely recorded as
parking expense.
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page x
Achieving New Heights in
x
Once a student has finished reading the chapter, how well he or she retains the material can depend greatly
on the questions, exercises, and problems that reinforce it. FAP has consistently led the way in comprehensive,
accurate end-of-chapter exercises. Independent survey research reports that instructors are more satisfied
with FAP’s end-of-chapter materials than any other textbook—and the 17th edition is no exception.
y
g
y
Analyze the future transactions to identify the accounts affected and apply debit and credit rules.
•
Demonstration Problem
Solution to Demonstration Problem
1. General journal entries:
(Note: This problem extends the demonstration problem of Chapter 1.
ning, Sylvia Workman started a haircutting business called Expressi
Chapter 2 Analyzing and Recording Transactions
curred during its first month:
a.
b.
c.
d.
e.
problem and a complete solution,
allowing students to review the entire
problem-solving process and achieve
success in the principles course.
f.
g.
h.
i.
j.
k.
On August 1, Workman invested $3,000 cash and $15,000 of equip
Aug. 1
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
the$600
Solution
On August 2,Planning
Expressions paid
cash for furniture for the sho
Store Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On August 3,• Expressions
paid
$500 cash
to use
rentthe
space
in and
a strip
m rules to prepare a journal entry
Analyze each
transaction
and
debit
credit
for each.
S. Workman, Capital . . . . . . . . . . . . . . . . . . . . . . . . . .
On August 4,•it Post
purchased
of equipment
onfrom
creditjournal
for the shop
( to their ledger accounts and cross-reference
each $1,200
debit and
each credit
entries
Owner’s investment.
amount opened
in the posting
reference
columns
On August 15, each
Expressions
for business.
Cash(PR)
received
fromof the journal and ledger.
2
Furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
week and a half
of business
August
15)and
is $825.
each(ended
account
balance
list the accounts with their balances on a trial balance.
• Calculate
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
On August 15,
it provided
$100debits
of haircutting
services
account
that total
in the trial
balanceonequal
total credits.
• Verify
Purchased furniture for cash.
On August 17,
a $100
checkstatement,
for services
previously
ren and expenses. List those items on the stateprepare the
income
identify
revenues
• Toit received
3
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
difference,
label the
result
On August 17, ment,
it paidcompute
$125 to the
an assistant
forand
working
during
theas net income or net loss.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
in the ledger
Cash received
frominformation
services provided
during to
theprepare
secondthe
halfstatement
of Au of owner’s equity.
• Use
Paid rent for August.
in the ledger
prepareonthe
On August 31,
paidinformation
a $400 installment
towardto
principal
thebalance
note p sheet.
• itUse
4
Store Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Calculate
the
debt
ratio
by
dividing
total
liabilities
by
total
assets.
On August 31,
Workman
made
a
$900
cash
withdrawal
for
person
•
Note Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
credit rules.
additional equipment on credit.
• Analyze the future transactions to identify the accounts affected and apply debit andPurchased
Required
15
t D
t ti
P
Chapter Summaries
Key Terms are bolded in the
provide students with a review
organized by learning objectives. Chapter
Summaries are a component of the CAP
model (see page viii), which recaps each
conceptual, analytical, and procedural
objective.
text and repeated at the end of the
chapter with page numbers indicating
their location. The 17th edition now
includes a Glossary of key terms at the
back of the book. Key Terms are also
available as online flash cards at the
book’s Website.
Quick Study are short exer-
18,000
640
101
500
165
240
1,200
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101
825
Haircutting Services Revenue . . . . . . . . . . . . . . . . . . .
Cash receipts from 10 days of operations.
403
bl
600
500
1,200
825
of the
to another.
n
Key Terms
Key Terms are available at the book’s Website for learning and tes
Debit (p. 53)
Debt ratio (p. 67)
Double-entry accounting (p. 53)
General journal (p. 55)
Journal (p. 55)
Journalizing (p. 55)
Ledger (p. 49)
Account (p. 49)
Account balance (p. 53)
Balance column account (p. 56)
Chart of accounts (p. 52)
Compound journal entry (p. 59)
Credit (p. 53)
Creditors (p. 50)
Homework Manager
repeats all Quick Study assignments on the book’s Website with new
numbers each time they are worked. It can be used in practice, homework, or exam mode.
cises that often focus on one learning
objective. The numerical ones are
included in Homework Manager. There
are usually 8-10 Quick Study
assignments per chapter.
QUICK STUDY
QS 2-1
Identifying source documents
Identify the items from the following list that are likely to serve as source documents:
a. Bank statement
d. Trial balance
g. Company revenue account
b. Sales ticket
e. Telephone bill
h. Balance sheet
c. Income statement
f. Invoice from supplier
i. Prepaid insurance
C2
Exercises are one of FAP’s
Homework Manager
repeats all Exercises on the book’s Website with new numbers
each time they are worked. It can be used in practice, homework, or exam mode.
ongoing strengths, and the 17th edition
again shows it competitive advantage.
There are about 10-15 per chapter
and most are included in Homework
Manager.
For each of the following (1) identify the type of account as an asset, liability, equity, revenue, or expense, (2) enter debit (Dr.) or credit (Cr.) to identify the kind of entry that would increase the account
balance, and (3) identify the normal balance of the account.
a. Unearned Revenue
e. Land
i. Cash
b. Accounts Payable
f. Owner Capital
j. Equipment
c. Postage Expense
g. Accounts Receivable
k. Fees Earned
d. Prepaid Insurance
h. Owner Withdrawals
l. Wages Expense
Problem Sets A & B
are proven problems that can be assigned as homework or for in-class projects. Problem Set C is available on the
book’s Website. All problems are coded
according to the CAP model (see page
viii), and many are included in
Homework Manager.
3,000
15,000
600
e.com/larso
hh
m
S l ti
101
165
301
161
101
EXERCISES
Exercise 2-1
Identifying type and normal
balances of accounts
C3 C5
ollections described for January.
the letter of its balance sheet clasr a Z in the blank.
PROBLEM SET A
Problem 4-1A
Determining balance sheet
classifications
C3
abilities
In the blank
space beside each numbered bala
sification. Ifliabilities
the item should not appear on th
D. Intangib
A. Current assets
E. Current
B. Long-term investments
2.
Interest
payable
C. Plant assets
Owner, Capital
______ 1.3.Accumulated
depreciation—
4.Trucks
Notes receivable (due in 120
days)
______ 2. Cash
5.
Accumulated depreciation—
______ 3. Buildings
______ 4. Owner, Withdrawals
______ 5. Office equipment
PROBLEM SET B
Problem 4-1B
Determining balance sheet
classifications
172
C3
Chapter 4
Completing the Accounting Cycle
n
PROBLEM SET C
SERIAL PROBLEM
e.com/larso
hh
m
Demonstration
Problems present both a
Problem Set C is avail
assess your learning.
(This serial problem began in Chapter 1 and c
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page xi
End-of-Chapter Materials
xi
Beyond the Numbers
exercises encourage
your students to use the figures and understand their
meaning, learning how accounting data applies to a variety
of business situations. These creative and fun exercises are
all new or updated, and are divided into 10 sections:
• Reporting in Action
• Comparative Analysis
• Ethics Challenge
• Communicating in Practice
• Taking It to the Net
• Teamwork in Action
• Hitting the Road—NEW
• Business Week Activity
• Entrepreneurial Decision
• Global Decision—NEW
BEYOND THE NUMBERS
Kreme’s financial statements in Appendix A to answer the following:
Krispy Kreme’s business segments.
vities of each of Krispy Kreme’s business segments.
REPORTING IN
ACTION
A1
nual report for fiscal years ending after February 2, 2003, from its
m) or the SEC’s EDGAR database (www.SEC.gov). Has Krispy Kreme
regarding segment information?
SERIAL PROBLEM
Success Systems
Serial Problems use a continuous running case study to illustrate
chapter concepts in a familiar context. Serial Problems can be followed continuously from the first chapter or picked up at any later point in the book;
enough information is provided to ensure students can get right to work.
P2 P3
(This serial problem began in Chapter 1 and c
ter segments were not completed, the serial pro
essary, that you use the Working Papers that ac
The December 31, 2004, adjusted trial balance
October through December of 2004) follows:
No.
Account Tit
101
Cash . . . . . . . . . . . . . . . . . . . . .
106
Accounts receivable . . . . . . . . . .
126
128
Computer supplies . . . . . . . . . . .
Prepaid insurance . . . . . . . . . . . .
“Some of the overall strengths of FAP include clearly stated learning objectives. Each chapter is written in a clear, concise language supported by a lot of exhibits and appropriate end-of-chapter materials to reinforce the learning process.”
— M. Bentil, Pierce College
The End of the Chapter Is Only the Beginning
c
FAP’s valuable and proven assignments aren’t just confined to the book. From problems that require technological solutions to
materials found exclusively online, FAP’s end-of-chapter material is fully integrated with its technology package.
m
• Quick Studies, Exercises, and Problems available on
Homework Manager (see page xii) are marked with an
icon.
• Problems supported by the all-new General Ledger
Application Software or Peachtree are marked with an icon.
n
e.com/larso
hh
m
• The Online Learning Center (OLC)
includes more Taking It To The Net exercises,
Personal Interactive Quizzes, more Excel template
assignments, and Problem Set C.
x
e cel
mhhe.com/larson
• Problems supported with Microsoft Excel templates are
marked with an icon.
• Material that receives additional coverage (slide
shows, videos, audio, etc.) in Topic Tackler is
marked with an icon.
Put Away Your
Red Pen
We’ve always prided
ourselves on the accuracy of FAP’s assignment materials, and the
market confirms this.
Independent research reports that instructors
pointed to the accuracy
of FAP’s assignment materials as a key factor in
their satisfaction with the
book, much more than
did instructors using
competing books. The
17th edition continues
that tradition of accuracy.
The authors extend special thanks to accuracy checkers Marc Giullian, Montana State University–Bozeman; Suzanne King, University
of Charleston; Barbara Schnathorst, The Write Solution, Inc.; and Jo Lynne Koehn, Central Missouri State University.
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page xii
xii
Achieving New Heights in
In teaching and learning from FAP, the book itself is only the beginning. Our comprehensive
technology package provides ample opportunity for both assessment and reinforcement, while
offering valuable practice in learning and using the digital tools that are integral to the modern
accounting and business workplace.
McGraw-Hill’s
Homework Manager
This Web-based study and review aid uses
a sophisticated algorithm to generate
“lookalike” versions of FAP’s assignment
materials. These new exercises and problems contain different values but are structured identically to those in FAP, allowing
students to practice and refine their skills.
The algorithm can generate infinite variations of any selected assignments, which
also discourages sharing of answers.
Instructors can use Homework Manager to build custom homework assignments, tests, or quizzes
that can be completed either online or with pencil and paper. Online assignments are graded automatically and the results stored in a secure online gradebook. Tests and quizzes prepared from
Homework Manager overcome any inconsistencies between “test bank drawn” problems and the
language and approach in the book—now there is complete consistency!
Homework Manager gives you:
• Textbook-specific quick studies, exercises, and problems
• Automatically-graded assignments and analysis for instructors
• Immediate grading and feedback for students
• Algorithmic-generated quick studies, exercises, and problems
• Instructor course management tools
• 100% consistency between test problems and the textbook
Quick Studies, Exercises, and Problems appearing in FAP that are reproduced in
Homework Manager are marked with an icon.
“On the whole, in my opinion, FAP’s activites are
better and there are more of them.”
— J. Miller, Mercer County Community College
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page xiii
Technology for
Assessment and Learning
xiii
ALEKS® for the
Accounting Cycle and
ALEKS® for Financial
Accounting
Available from McGraw-Hill over the
World Wide Web, ALEKS (Assessment
and LEarning in Knowledge Spaces) provides precise assessment and individualized instruction in the fundamental skills your students need
to succeed in accounting.
ALEKS motivates your students because ALEKS can tell what a student knows, doesn’t know, and is
most ready to learn next. ALEKS does this using the ALEKS Assessment and Knowledge Space Theory as an artificial intelligence engine to exactly identify a student’s knowledge of accounting. When
students focus on precisely what they are ready to learn, they build the confidence and learning
momentum that fuel success.
To learn more about adding ALEKS to your principles course, visit www.business.aleks.com.
GradeSummit
The online resource GradeSummit tells your students everything they need to know in order to
study effectively. GradeSummit provides a series of practice tests written to coincide with FAP’s
coverage. Once a student has taken a particular test, GradeSummit returns a detailed results page
showing exactly where the student did well and where he or she needs to improve. They can
compare their results with those of their other classmates, or even with those of every other
student using the text nationwide.
With that information, students can plan their studying to focus exclusively on their weak areas,
without wasting effort on material they’ve already mastered. And they can come back to take a
retest on those subjects later, comparing their new score with their previous efforts.
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page xiv
Achieving New Heights in
xiv
Carol Yacht’s General Ledger and Peachtree Complete 2004 CD-ROM
Carol Yacht’s General Ledger Software is McGrawHill/Irwin’s custom-built general ledger package for FAP.
Carol Yacht’s General Ledger can help your students master every aspect of the general ledger, from inputting sales
and cash receipts to calculating ratios for analysis or inventory valuations.
Carol Yacht’s General Ledger allows students to review an entire report, and
then double-click on any single transaction to review or edit it. All reports are
immediately updated to reflect the revised figures.When it comes to learning
how an individual transaction effects the
outcome of financial reports, no other
approach matches that of Carol Yacht’s
General Ledger.
Also on Carol Yacht’s General Ledger CD, students receive the educational version of Peachtree Complete
2004, along with templates containing data for many of
FAP’s exercises and problems. Familiarity with Peachtree
Complete is essential for many students entering the job
market, and Carol Yacht’s Peachtree
templates that accompany FAP 17e
makes sure they get plenty of practice.
Students can use Carol Yacht’s
General Ledger to solve numerous
problems from FAP; the data for
these problems are already included
on the Carol Yacht’s General Ledger
CD-ROM. You can even populate
Carol Yacht’s General Ledger with
your own custom data.
Online Learning Center (OLC) with PowerWeb
www.mhhe.com/larson
e.com/larso
hh
m
n
More students are using online learning aids. That’s why we offer an
Online Learning Center (OLC) that follows FAP chapter by chapter.
It doesn’t require any building or maintenance on your part; it’s ready
to go the moment your students type in the address.
As your students study and learn from FAP, they can visit the OLC
Website and work with a multitude of helpful tools:
• Tutorial
• Glossary
• NetTutor
• PowerWeb
• Chapter Objectives
• Chapter Overview
• Text Company Links
• Interactive Quizzes A & B
• Key Term Flashcards
• PowerPoint Presentation
• Additional appendices
• Cogg Hill Practice Set
• Updates
• Mobile Resources
• Audio Narrated PowerPoint
• Excel Template Assignments
• More Taking It To The Net
• Problem Set C
• Business Week Articles
A secured Instructor Resource Center stores your essential course
materials to save you prep time before class. Everything you need to
run a lively classroom and an efficient course is included:
• Sample Syllabi
• Additional chapter materials
• Transition Notes
• Instructors Manual
• Solutions to Excel Template Assignments
• Cogg Hill Solutions Manual
• Updates
• Solutions Manual
• PowerPoint Presentations
• Textbook Company Links
• More Taking It To The Net Solutions
• Business Week Articles
• Problem Set C Solutions
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page xv
Technology for Students
xv
PowerWeb provides high quality, peer-reviewed content including up-to-date
articles from leading periodicals and journals, current news, weekly updates with
assessment, interactive exercises,Web research guide, study tips, and much more.
PowerWeb is free with your FAP adoption.
Topic Tackler—FREE with new book
This software is a complete tutorial focusing on those
areas in the principles of accounting course that give
students the most trouble. Providing help on at least
2 key topics per chapter, this program delves into the
material using the following learning aids:
• Video clips
• PowerPoint slide-shows (many include
animations and/or audio)
• Drag-and-drop, fill-in-the-blank exercises
• Self-test quizzes
This highly engaging presentation will put your students in control of the most fundamental aspects
of principles of accounting.
Concepts appearing in FAP that receive additional treatment in Topic Tackler are
marked with an icon at the appropriate location in the margin of the page.
NetTutor
NetTutor allows tutors and students to communicate with
each other in a variety of ways:
• The Live Tutor Center via NetTutor’s WWWhiteboard
enables a tutor to hold an interactive on-line tutorial
with several students, whose questions are placed in a
queue and answered sequentially.
• The Q&A Center allows students to submit questions
at any time and retrieve answers within 24 hours.
• The Archive Center allows students to browse for
answers to previously asked questions. They can also search for questions pertinent to a
particular topic. If they encounter an answer they do not understand, they can ask a
follow-up question.
Students are issued 5 hours of free NetTutor time when they purchase a new copy of FAP.
Additional time can be purchased in 5-hour increments.
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:52 Page xvi
xvi
Achieving New Heights in
In today’s learning environment, a computer is as indispensible a tool as a blackboard or an
overhead projector. McGraw-Hill/Irwin continues to lead in innovative classroom technology,
and FAP’s teaching tools put it far ahead of any other book.
Course Management
PageOut
McGraw-Hill’s Course Management System
PageOut is the easiest way to create a Website for your accounting course.
There’s no need for HTML coding, graphic design, or a thick how-to book. Just fill in a series of boxes with
plain English and click on one of our professional designs. In no time, your course is online with a Website
that contains your syllabus!
Should you need assistance in preparing your Website, we can help you. Our team of specialists is ready to
take your course materials and build a custom Website to your specifications. Simply call a McGraw-Hill/Irwin
PageOut specialist to start the process. (For information on how to do this, see “Superior Service”
on page xvii.) Best of all, PageOut is free when you adopt FAP! To learn more, please visit www.pageout.net.
Third-Party Course Management Systems
For the ambitious instructor, we offer FAP content for complete online courses. To make this possible, we
have joined forces with the most popular delivery platforms currently available.These platforms are designed
for instructors who want complete control over course content and how it is presented to students. You
can customize the FAP Online Learning Center content and author your own course materials. It’s entirely
up to you.
Products like WebCT, Blackboard, and eCollege all expand the reach of your course. Online discussion and
message boards will now complement your office hours. Thanks to a sophisticated tracking system, you will
know which students need more attention – even if they don’t ask for help. That’s because online testing
scores are recorded and automatically placed in your grade book, and if a student is struggling with coursework, a special alert message lets you know.
Remember, FAP’s content is flexible enough to use with any platform currently available. If your department
or school is already using a platform, we can help. For information on McGraw-Hill/Irwin’s course management supplements, including Instructor Advantage and Knowledge Gateway, see “Superior Service” on the
next page.
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:53 Page xvii
Technology for Instructors
Superior Service
No matter which online course solution you choose, you
can count on the highest level of service. That’s what sets
McGraw-Hill apart. Once you choose FAP, our specialists offer
free training and answer any question you have through the life
of your adoption.
Instructor Advantage and Instructor
Advantage Plus
Instructor Advantage is a special level of service McGraw-Hill
offers in conjunction with WebCT and Blackboard. A team of
platform specialists is always available, either by toll-free phone
or e-mail, to ensure everything runs smoothly through the life
of your adoption. Instructor Advantage is available free to all
McGraw-Hill customers.
Instructor Advantage Plus is available to qualifying
McGraw-Hill adopters (see your representative for details).
IA Plus guarantees you a full day of on-site training by a
Blackboard or WebCT specialist, for yourself and up to nine
colleagues. Thereafter, you will enjoy the benefits of unlimited
telephone and e-mail support throughout the life of your
adoption. IA Plus users also have the opportunity to access the
McGraw-Hill Knowledge Gateway.
Knowledge Gateway
Developed with the help of our partner Eduprise, the
McGraw-Hill Knowledge Gateway is an all-purpose service
and resource center for instructors teaching FAP online.
The First Level of Knowledge Gateway is available to all professors browsing the McGraw-Hill Higher Education Website, and
consists of an introduction to OLC content, access to the first
level of the Resource Library, technical support, and information
on Instructional Design Services available through Eduprise.
The Second Level is password-protected and provides access to
the expanded Resource Library, technical and pedagogical support for WebCT, Blackboard, and TopClass, the online
Instructional Design helpdesk and an online discussion forum for
users. The Knowledge Gateway provides a considerable advantage for teaching online—and it’s only available through McGrawHill.
To see how these platforms can assist your online FAP course,
visit www.mhhe.com/solutions.
xvii
Lar12431_fm_i-xxxiii.qxd 11/5/03 23:32 Page xviii
xviii
Content Changes for
FAP’s revisions are in response to feedback from both instructors and students. Many of these revisions are summarized
below. Feedback suggests that FAP is the book instructors want to teach from and students want to learn from. Some overall
revisions include:
•
•
•
•
•
New chapter-opening flowchart
Revised assignments throughout
Updated ratio analyses
New and revised entrepreneurial elements
New assignments using chapter openers
• Serial problem running through nearly all chapters
• New Krispy Kreme annual report and comparisons to
Tastykake, Grupo Bimbo (Mexican), and the industry
• New Harley-Davidson financial statements
1 58
9
2 6
3 7 10
4
Chapter 1
The Chocolate Farm NEW opener
New, early introduction to
transaction analysis
Transaction analysis uses expanded
accounting equation to aid student
learning
Revised, early introduction to
financial statements
New, early introduction to key
accounting principles
Revised section on accounting and
related careers
Revised table on compensation
Moved return-risk analysis and
business activities to appendixes
for instructor flexibility
Chapter 2
York Entertainment NEW opener
Streamlined and revised introduction
to accounts
Revised discussion on analyzing and
processing transactions
Revised section on preparing
financial statements
Chapter 3
Mellies NEW opener
Streamlined discussion on adjusting
accounts
New visual linkages from adjusting
entries to the accounts
New presentation on preparing
financial statements from trial balance
Chapter 4
Premier Snowskate NEW opener
Streamlined discussion of accounting
work sheet
Revised Excel screen captures with
acetates for work sheet
Shortened section on closing process
Reduced presentation on operating
cycles
Chapter 5
Damani Dada NEW opener
New table summarizing merchandising entries
Revised description of credit terms
and discounts
Revised and simplified presentation
of income statement formats
Simplified descriptions of debit and
credit memoranda
Chapter 6
FunKo NEW opener
New discussion on internal controls
and inventory
New introduction to inventory cost
flow assumptions
Added simplified journal entries to
inventory computations
Revised discussion of “lower of cost
or market”
Moved gross profit and retail
inventory methods to appendix
for instructor flexibility
Chapter 7
Rap-Up NEW opener
Revised visuals for special journals
Streamlined coverage of posting
Revised discussion of technology in
accounting including ERP
Added new exercises on special
journals without postings
Chapter 8
Dylan’s Candy Bar NEW opener
Enhanced discussion on internal
controls
New material on Internet fraud
Simplified presentation of voucher
system of control
Streamlined discussion of bank
reconciliation
Moved control of purchase discounts
to appendix for instructor flexibility
Chapter 9
Manzi Metals NEW opener
New material on credit vs debit cards
Simplified discussion on disposing of
receivables
Streamlined discussion on estimating
bad debts
Deleted section on discounting notes
receivable
Moved short-term investments to
Chapter 15
Chapter 10
Queston Construction NEW opener
Simplified discussion of partial-year
depreciation and changes in
estimates
Shortened and simplified section on
“Additional Expenditures”
Simplified section on exchange of
similar assets
Revised discussion of intangible
assets per new standards
Shortened section on goodwill and
moved goodwill estimation to an
appendix
Lar12431_fm_i-xxxiii.qxd 11/5/03 21:51 Page xix
FAP 17th Edition
xix
20
1115 21
12 16 22
1317 23
18
24
14 19 25
Chapter 11
Chapter 15
Chapter 20
EEC NEW opener
Revised payroll liabilities for current
tax rates
Shortened section on contingent
liabilities
Removed noninterest-bearing notes
from this chapter
Revised appendix on payroll records
Moved “income tax liabilities” to
appendix for instructor flexibility
TradeStation Group NEW opener
All American Meats NEW opener
Simplified presentation of equivalent units of production
Streamlined discussion on costing
for multiple departments
New, simplified organization for
investments
New presentation of both shortterm and long-term investments
New illustrations on adjustments
for unrealized gains and losses on
securities
Moved investments in international operations to appendix for
instructor flexibility
Chapter 12
Koch Entertainment NEW opener
Chapter 16
Increased discussion of limited
liability companies
Revised section for partner
return on equity
Streamlined partnership
liquidation
Atomic Toys NEW opener
Simplified preparation of
statement of cash flows
New 3-stage process of analyzing
investing and financing cash
flows
Moved investments in international
operations to appendix for
instructor flexibility
Chapter 13
Get Real Girl, Inc. NEW opener
Shortened introductory materials
on corporations
Streamlined section on preferred
stock
Shortened section on stock
dividends
Streamlined reporting of
discontinued operations
Simplified section on “changes in
accounting principles”
Shortened sections on book value
per share and dividend yield
Chapter 14
Noodles & Company NEW opener
New visual linkages from bond
interest computations to
amortization entries
Moved effective interest
amortization to chapter appendix
for instructor flexibility
Streamlined presentation on
notes payable
Removed materials on
noninterest-bearing notes
Chapter 21
Life Is Good NEW opener
Simplified discussion of activitybased costing
Streamlined section on joint costs
Chapter 22
Vosges Haut Chocolat NEW
opener
Streamlined break-even point
analysis
Chapter 23
Chapter 17
The Motley Fool NEW opener
Krispy Kreme vs Tastykake NEW
comparative analysis
Streamlined section on
common-size analysis
Chapter 18
Rap Snacks NEW opener
Streamlined flow of costs
discussion with revised visuals
Expanded discussion of cost
controls with service businesses
Revised presentation of
manufacturing statement
Aquent NEW opener
Streamlined section on budget
administration
Moved production and manufacturing budgets to appendix for
instructor flexibility
Chapter 24
Technology Enabled Clothing
NEW opener
Expanded discussion of service
applications
Streamlined overhead cost
variance analysis
Chapter 25
Chapter 19
A. D. Morgan NEW opener
Streamlined discussion of overapplied and underapplied overhead
Expanded section on costing and
pricing for service businesses
AnthroTronix NEW opener
Further emphasis on applied
applications of managerial
accounting
Expanded applications to service
businesses
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:53 Page xx
xx
Instructor Supplements
Instructor’s
Resource CD-ROM
Instructor’s
Resource Manual
Contributing Authors
Volume 1: 0072869844
Volume 1: 0072869836
Volume 2: 0072870192
Volume 2: 0072869917
The FAP Team wishes to thank the
following contributors for their
excellent work.
This is your all-in-one resource.
It allows you to create custom presentations from your own materials
or from FAP’s text-specific materials
provided in the CD’s asset library:
Written by Barbara Chiappetta and
Janice Klimek.
•
•
•
•
Solutions Manual
Test Bank, Computerized Test Bank
Instructor’s Resource Manual
PowerPoint® Presentations
Prepared by Jon A. Booker,
Charles W. Caldwell, and
Susan C. Galbreath.
Presentations illustrate crucial
chapter concepts and procedures,
and allow for custom-revision of
lecture slides by instructors.
• Excel Templates and solutions
• Link to PageOut
• Video Clips
Solutions Manual
Volume 1: 0072869828 (Solutions
Transparencies 0072869801)
Volume 2: 0072869909 (Solutions
Transparencies 0072869887)
Written by John J.Wild and
Jo Lynne Koehn.
Test Bank
Volume 1: 0072869798
Volume 2: 0072869895
Written by Marilyn Sagrillo and
John J.Wild.
Brownstone Diploma
6.2 Computerized
Test Bank
Available for Windows only,
located on the Instructor’s
Resource CD-ROM.
This manual contains (for each chapter) a Lecture Outline, a chart linking
all assignment materials to Learning
Objectives, a list of relevant active
learning activities, and additional visuals with transparency masters.An
electronic version is available on the
Website and on the Instructor’s
Resource CD-ROM.
Financial and
Managerial
Accounting Video
Library
Financial Videos: 0072376163
Managerial Videos: 0072376171
These short, action-oriented videos,
developed by Dallas County
Community College for the
Accounting in Action distance-learning course, provide an impetus for
lively classroom discussion.Tied
closely to FAP’s pedagogical
framework, these videos avoid dry
talking-head footage in favor of
dynamic, documentary-style
explorations of how businesses
use accounting information.
Jo Lynne Koehn is a professor at
Central Missouri State University.
She received her PhD and Master’s of
Accountancy from the University of
Wisconsin—Madison. Her scholarly
articles are published in a variety of
journals including Issues in Accounting
Education, The CPA Journal, The Tax
Advisor, and Accounting Enquiries.
Professor Koehn is a member of the
American Accounting Association and
the American Institute of CPAs. She also
holds a Certified Financial Planning
license. In her leisure time, Professor
Koehn indulges her passion for golf and
participates in the Executive Women’s
Golf Association of Kansas City.
Professor Koehn also enjoys reading,
traveling, and visiting bookstores.
Marilyn Sagrillo is an associate professor at the University of Wisconsin—
Green Bay. She received her BA and MS
from Northern Illinois University and
her PhD from the University of
Wisconsin—Madison. Her scholarly articles are published in Accounting
Enquiries, Journal of Accounting Case
Research, and the Missouri Society of
CPAs Casebook. She is a member of
the American Accounting Association
and the Institute of Management
Accountants. In 1989 she received the
UWGB Founder’s Association Faculty
Award for Excellence in Teaching.
Professor Sagrillo is an active volunteer
for the Midwest Renewable Energy
Association. She also enjoys reading,
traveling, and hiking.
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:53 Page xxi
Student Supplements
To p i c Ta c k l e r
(free with new books)
Revised by Joan Cook and Laura
Ruff.
See page xv for complete description.
Wo r k i n g P a p e r s
Volume 1: 0072869852
Volume 2: 0072869925
Chapters 1-17: 007286995X
Written by John J.Wild.
C a r o l Ya c h t ’ s
General Ledger &
Peachtree Complete
2004 CD-ROM
Working Papers are available to help
direct students in solving all assignments. Each chapter also contains one
set of papers that can be used for
either the A or B series of problems.
ISBN 0072870079
GL Software developed by Jack E.
Terry, ComSource Associates, Inc.
Peachtree templates prepared by
Carol Yacht.
The CD-ROM includes fully functioning versions of McGraw-Hill’s own
General Ledger Application software
as well as Peachtree Complete 2004.
Problem templates are included that
allow you to assign FAP problems for
working in either Yacht’s General
Ledger or Peachtree Complete 2004.
E x c e l Wo r k i n g
Papers
Volume 1: 0072870109
Volume 2: 0072870117
Chapters 1-17: 0072870125
Written by John J.Wild.
Working Papers delivered in Excel
spreadsheets. Excel Working Papers
are available on CD-ROM and can be
bundled with the printed Working
Papers; see your representative for
information.
Study Guide
Volume 1: ISBN 007286981X
Volume 2: ISBN 0072869860
Chapters 1-17: ISBN 0072869968
Prepared by Barbara Chiappetta.
Covers each chapter and appendix
with reviews of the learning objectives, outlines of the chapters, summaries of chapter materials, and additional problems with solutions.
Special thanks to Joan Cook and
Laura Ruff, Milwaukee Area
Technical College, for their efforts
in revising the Topic Tackler CDROM, and to Janice Klimek,
Central Missouri State University,
for accuracy checking Topic
Tackler.
Telecourse Guide
Volume 1: 0072869941
Volume 2: 0072869879
Prepared by the Dallas County
Community College District.
Student Learning
To o l s
ISBN 0256255776
Prepared by Barbara Chiappetta.
This workbook helps students develop and use critical thinking and learning-to-learn skills in a collaborative
team environment. It contains class
activities, writing assignments, and
team presentation assignments.
xxi
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xxii
Achieving New Heights in
Publishing a textbook is a serious undertaking, and in
creating the 17th edition of FAP we had a 50-year
tradition of quality and innovation to live up to.
The process began more than two years before publication, when our editorial staff commissioned a survey of the principles market.This independent
research confirmed that FAP users were more satisfied by far with their chosen textbook than users of
any other book. However, that wasn’t enough for us.
Early in 2003, we and our research partners
surveyed 156 non-users for suggestions on how to
improve FAP; at the same time we asked 35 current
users what they liked about the book, and what they
would change if they could.This information proved
invaluable as we began the development process.
The next step was to meet face-to-face with principles instructors at 5 focus groups throughout the
country.A mix of users and non-users came to meet
with us in Orlando, Dallas, Chicago, Phoenix, and Los
Angeles, where they were able to speak to the
authors in person and talk at length about what they
needed in a principles book.When the authors sat
down to write, they did so having firsthand feedback
and suggestions from instructors.
The book you hold in your hands is the most marketdriven book available. It is the result of a lengthy dialogue between user, author, and instructor. FAP is
what principles instructors all over the country are
looking for: a book with solid content, engaging
explanations and examples, unmatched assignment
materials, and first-class technology.
We would like to acknowledge the assistance of the
following colleagues for their help in making FAP the
best book of its kind.
Cynthia Ash, Davenport University-South Bend
Ron Collyer, Santa Fe Community College
Richard Frederics, Lasell College
Sister Virginia Assumpta McNabb, Immaculata College
Elizabeth Conner, U. of Colorado - Denver
Benjamin Gardiner, Franklin Pierce College
Harold Averkamp, University of Wisconsin-Whitewater
Margaret Conway, Kingsborough Community College
Daniel Gibbons,Waubonsee Community College
Courtney Baillie, Nebraska Wesleyan University
James Cosby, John Tyler Community College
Thomas J. Gilday,Thomas More College
William Barnhart, El Centro College
Ralph Cotham, University of Arkansas-Little Rock
Mike Glasscock,Amarillo College
Mary Barnum, Grand Rapids Community College
Ken Couvillion, San Joaquin Delta College
Ellen Goldberg, Northern Virginia Community College
Sandy Barz, Rocky Mountain College
David G. Coy,Adrian College
Abdul Baten, NOVA Community College-Manassas
Louann Cummings, University of Findlay
Jack Goodwin,Tidewater Community College Portsmouth
Jim Bates, Mountain Empire Community College
Robert Bauman,Allan Hancock CommunityCollege
Stanley Dabrowski, Hudson County Community
College
James Q. Beisel, Longview Community College
Walter DeAguero, Saddleback College
Steve Grice,Troy State University
Irene Bembenista, Davenport University-Merrillville
Stanley Deal,Azusa Pacific College
Debbie Griest, Lake Tahoe Community College
Dr. Michael Bentil, Peirce College
David Dearman,Arkansas State University
Joyce Griffin, Kansas City Kansas Community College
Joseph Bentley, Bunker Hill Community College
Mary Kathryn Demarest, Carroll Community College
Dennis Gutting, Orange County Community College
JulieAnne Adamich, St. Petersburg College
Louis DePaul, Ivy Tech State College
Amy Haas, Kingsborough Community College
Rayla Black, Faulkner University
Michael Deschamps, Chaffey College
Gene Hale, Iowa Wesleyan College
Phoebe Blackburn, Bristol Community College
William Dillion, Carson-Newman College
Mary Halford, Prince George's Community College
Linda Bolduc, Mount Wachusett Community College
Vicky Dominguez, Community College of Southern
Nevada
Patricia Halliday, Santa Monica College
Kevin Dooley, Kapiolani Community College
William Harvey, Henry Ford Community College
Sanithia Boyd,Arkansas State University
David Doyon, Southern New Hampshire University
Larry Hass, Glen Oaks Community College
James Bryant, Community College of Baltimore CountyCatonsville
Phyllis N. Driver, Carson-Newman College
Robert D. Hayes,Tennessee State University
Sam Duah, Bowie State University
William Herd, Springfield Tech Community College
Ken Duffie, Brookdale Community College
Leonard Heritage,Tacoma Community College
Richard Dugger, Kilgore College
Jim Hoffman,Ancilla College
Helen Edwards, College of the Redwoods
Merrily Hoffman, San Jacinto College
Randalei Ellis, Black Hills State University
Jay Holmen, U. of Wisconsin - Eau Claire
Lori Epping, University of South Dakota
Patricia Holmes, Des Moines Area Community College
Larry Farmer, Middle Tenn. State University
Paul Holt,Texas A&M-Kingsville
Trudy Chiaravalli, Lansing Community College
Jim Ficek, Iowa Western Community College
John Horgan, Iowa Western
Tom Chilcote, Messiah College
Carolyn Fitzmorris, Hutchinson Community College
Kathy Horton, College of DuPage
Steven Christian, Jackson Community College
Steve Flynn,Thomas More College
Larry Huus, University of Minnesota
Dan Chrzan, Springfield College
James Forcier, Las Positas Community College
Verne Ingram, Red Rocks Community College
Anthony Cioffi, Lorain County Community College
Kelly Ford, Dowling College
Tim Ireland, Columbia College of Missouri
Deborah Boyce-Panella, Mohawk Valley Community
College
Ronald Burnette, Macomb Community College South
Leon Button, Scottsdale Community College
Carolyn Byrd, St. Petersburg College-Clearwater
Eric Carlsen, Kean University
Robert Carpenter, Eastfield College
Lloyd Carroll, Borough of Manhattan Community
College
Barbara Gregorio, Nassau Community College
Jennifer Gregorski,Assumption College
Sara Harris,Arapahoe Community College
Lar12431_fm_i-xxxiii.qxd 11/5/03 22:16 Page xxiii
xxiii
Development
Christine Iruno,Westfield State College
Lynn Isvik, Upper Iowa University
Mary Jackson-Heard, Norfolk State
University
Lori Jacobson, North Idaho College
Catherine Jeppson, Calif.St.U.Northridge
Peg Johnson, Omaha Metro
Community College
Sharon Johnson, Kansas City Kansas
Community College
Cynthia McCall, Des Moines Area
Community College
Susan McClure,Tri-County Technical
College
Clarice McCoy, Brookhaven College
Florence McGovern, Bergen C.C.
James McKinnie, NE State Technical
Community College
Shea Mears, Des Moines Area
Community College
Gary Ross, Harding College
David Schultz, Central Nebraska
Community College
Jerry Scott, Ivy Tech State CollegeSellersburg
William Shaver, J. Sargeant Reynolds
Community College
Jim Shelton, Freed-Hardeman
University
Leon Singleton, Santa Monica College
David Medved, Davenport University Dearborn
Brenda Skornogoski, Montana State
University-Northern
Kenneth Meisinger, U. of ColoradoColorado Springs
Daniel Small, J. Sargeant Reynolds
Community College
John Kim, SUNY-Hunter College
Trini Melcher, Calif. State University San Marcos
Warren Smock, Ivy Tech State College
Deanna King, Ivy Tech College-Terre
Haute
Mary Ann Merryman, St. Mary's College
Deb Kiss, Davenport University
John Miller, Metropolitan Community
College
Shirly Kleiner, Johnson County
Community College
Josephine Miller-Mathias, Mercer
County Community College
Mary Kline, Black Hawk College
Scott E. Miller, Gannon University
Dave Knight, Borough of Manhattan
Community College
Norma R. Montague, Central Carolina
Community College
Sherrie Koechling-Andraes, Lincoln
University
Henry Moore, Florida Community
College-Jacksonville
Elizabeth M. Kolar, Bucks County
Community College
Louella Moore,Arkansas State
University
Leon Korte, U. of South Dakota
Joe Moran, College of DuPage
Terry Kubican, Old Dominion
University
Andrea Murowski, Brookdale
Community College
Phillip Landers, Pennsylvania College
of Technology
Charles Murphy, Bunker Hill
Community College
Sandra Lang, McKendree College
Dr.Ali Naggar,West Chester University
Steve Teeter, Utah Valley State College
David Lanning, SUNY-Tompkins
Cortland Community College
V.R. Nemani,Trinity College
James Thomas, Cosumnes River
College
Thomas Kam, Hawaii Pacific University
John Karayan, Calif. State Polytech
University-Pomora
Tom Largay,Thomas College
Brian Lazarus, Baltimore City
Community College
Mike Leahy, North County C.C.
Martin Lecker, SUNY Rockland
Community College
Dave Nichols, University of Mississippi
Jason Nielsen, Harrisburg Area C.C.
Connie Nieser, Oklahoma City
Community College
Patricia Novak, Southeast Community
College
Franklin Olive, Jr., Manchester College
Richard Snapp, Olympic College
Tom Snavely,Yavapai College
Laura Solano, Pueblo Community
College
John Stancil, Florida Southern
University
Undine Stinnette, Roosevelt
University
Gary Stout, Cal State UniversityNorthridge
Gina Sturgill, Concord College
Kan Sugandh, DeVry Institute of
Technology-Pomona
William Sullivan,Assumption College
Ron Summers, Oklahoma City
Community College
Rahmat Tavallai,Walsh University
Leslie Thysell, Richard Bland College
Christine Todd,William Words
University
Tom Turner, Des Moines Area
Community College
Karen Ulbrich, Parkland College
Liz Ott, Casper College
Frank Urbancic, University of South
Alabama - Mobile
Louieco Lewis, Stillman College
George Otto,Truman College
Robert Urell, Irvine Valley College
Daniel Litt, UCLA
Bill Padley, Madison Area Tech College
James Lock, NOVA-Alexandria
Ronald Palma, Cape Cod Community
College
John VanSantvoord, Southern New
Hampshire University
Edward LeMay, Massasoit Community
College
Ronald Loesel, Davenport Univ.Saginaw
Judy Parker, North Idaho College
Jay Wahlund, Minot State University
Jeff Phillips, Clark Atlanta University
Pat Walczak, Lansing Community
College
Stephen Ludwig, NW Missouri State
Anthony Piltz, Rocky Mountain
College
Scott Wallace, Blue Mountain
Community College
Kathy Lukcso, Germanna Community
College
Von Plessner, Northwest State
Community College
Debra Warren, Chadron State College
Terri Lukshaitis, Davenport UniversityGaylord
Barbara Powers,Wytheville C.C.
Jeffrey Waybright, Spokane Community
College
Michael Prockton, Finger Lakes
Community College
Christian Widmer,Tidewater
Community College-VA Beach
Debbie Rankin, Lincoln University
Jack Wiehler, San Joaquin Delta
College
Angelo Luciano, Columbia CollegeChicago
John Lynch, Ivy Tech State College
Linda Mallory, Central Virginia
Community College
Jeff Mankin, Lipscomb University
Paulette Ratliff,Arkansas State
University
Frank Marino,Assumption College
Clara Richardson, McMurry University
Ken Mark, Kansas City Kansas
Community College
Thomas Rim, National University
Barbara Marotta, NOVA-Woodbridge
Donald Rogoff, Cal. State UniversityNorthridge
Dr. Otto Martinson, Old Dominion
University
Carol McCain, Reedley College
Frank Rodjius, Northwestern Univ.
Dan Roland, Hilbert College
Laura Rose, Dalton State College
Jo Winegar, Scott Community College
Rahnl Wood, NW Missouri State
University
Joe Woods, University of Arkansas-Little
Rock
Ray Wurzburger, New River
Community College
Lori Zulauf, Slippery Rock University
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:53 Page xxiv
Brief Contents
1
Accounting in Business 2
16
Reporting the Statement of Cash Flows 624
2
Analyzing and Recording Transactions 46
17
Analysis of Financial Statements 672
3
Adjusting Accounts and Preparing Financial
Statements 92
18
Managerial Accounting Concepts and
Principles 712
4
Completing the Accounting Cycle 134
19
Job Order Cost Accounting 752
5
Accounting for Merchandising Operations 176
20
Process Cost Accounting 788
6
Inventories and Cost of Sales 220
21
7
Accounting Information Systems 260
Cost Allocation and Performance
Measurement 830
8
Cash and Internal Controls 306
22
Cost-Volume-Profit Analysis 870
9
Accounting for Receivables 348
23
Master Budgets and Planning 902
Plant Assets, Natural Resources, and
Intangibles 380
24
Flexible Budgets and Standard Costs 940
25
Capital Budgeting and Managerial
Decisions 982
10
xxiv
11
Current Liabilities and Payroll Accounting 422
12
Accounting for Partnerships 466
13
Accounting for Corporations 494
14
Long-Term Liabilities 546
15
Investments and International Operations 590
Appendix A Financial Statement
Information A-1
Appendix B Present and Future Values in
Accounting B-1
Lar12431_fm_i-xxxiii.qxd 11/5/03 12:53 Page xxv
Contents
Trial Balance 63
Preparing a Trial Balance 64
Using a Trial Balance to Prepare Financial
Statements 65
Decision Analysis—Debt Ratio 67
Preface iii
1
Accounting in
Business 2
Importance of Accounting 4
Users of Accounting Information 5
Opportunities in Accounting 6
Fundamentals of Accounting 8
Ethics—A Key Concept 8
Generally Accepted Accounting Principles 9
Transaction Analysis and the Accounting Equation 12
Accounting Equation 12
Transaction Analysis 13
Summary of Transactions 16
Financial Statements 17
Income Statement 18
Statement of Owner’s Equity 18
Balance Sheet 18
Statement of Cash Flows 18
Decision Analysis—Return on Assets 20
Appendix 1A Return and Risk Analysis 23
Appendix 1B Business Activities and the Accounting
Equation 24
2
Analyzing
and Recording
Transactions 46
Analyzing and Recording Process 48
Source Documents 49
The Account and Its Analysis 49
Analyzing and Processing Transactions 52
Ledger and Chart of Accounts 52
Debits and Credits 53
Double-Entry Accounting 53
Journalizing and Posting Transactions 55
Analyzing Transactions—An Illustration 57
Accounting Equation Analysis 62
3
Adjusting Accounts and
Preparing Financial
Statements 92
Timing and Reporting 94
The Accounting Period 94
Accrual Basis versus Cash Basis 95
Recognizing Revenues and Expenses 96
Adjusting Accounts 97
Framework for Adjustments 97
Prepaid (Deferred) Expenses 97
Unearned (Deferred) Revenues 100
Accrued Expenses 101
Accrued Revenues 103
Links to Financial Statements 104
Adjusted Trial Balance 105
Preparing Financial Statements 106
Decision Analysis—Profit Margin 108
Appendix 3A Alternative Accounting for
Prepayments 112
4
Completing the
Accounting Cycle 134
Work Sheet as a Tool 136
Benefits of a Work Sheet 136
Use of a Work Sheet 136
Work Sheet Applications and Analysis 140
Closing Process 140
Temporary and Permanent Accounts 141
Recording Closing Entries 141
Post-Closing Trial Balance 143
Accounting Cycle 143
xxv
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xxvi
Contents
Specific Identification 225
First-In, First-Out 227
Last-In, First-Out 227
Weighted Average 228
Financial Statement Effects of Costing Methods 229
Consistency in Using Costing Methods 230
Valuing Inventory at LCM and the Effects of
Inventory Errors 231
Lower of Cost or Market 231
Financial Statement Effects of Inventory Errors 232
Decision Analysis—Inventory Turnover and Days’
Sales in Inventory 233
Appendix 6A Inventory Costing under a Periodic
System 239
Appendix 6B Inventory Estimation Methods 243
Classified Balance Sheet 146
Classification Structure 146
Classification Categories 146
Decision Analysis—Current Ratio 148
Appendix 4A Reversing Entries 152
5
Accounting for
Merchandising
Operations 176
Merchandising Activities 178
Reporting Income for a Merchandiser 178
Reporting Inventory for a Merchandiser 179
Operating Cycle for a Merchandiser 179
Inventory Systems 179
Accounting for Merchandise Purchases 180
Trade Discounts 180
Purchase Discounts 181
Purchase Returns and Allowances 182
Transportation Costs and Ownership Transfer 183
Accounting for Merchandise Sales 184
Sales of Merchandise 185
Sales Discounts 185
Sales Returns and Allowances 186
Completing the Accounting Cycle 187
Adjusting Entries for Merchandisers 188
Closing Entries for Merchandisers 188
Summary of Merchandising Entries 188
Financial Statement Formats 190
Multiple-Step Income Statement 190
Single-Step Income Statement 192
Classified Balance Sheet 192
Decision Analysis—Acid-Test and Gross Margin
Ratios 193
Appendix 5A Periodic (and Perpetual) Inventory
System 198
Appendix 5B Work Sheet—Perpetual System 202
6
Inventories and
Cost of Sales 220
Inventory Basics 222
Determining Inventory Items 222
Determining Inventory Costs 223
Inventory Controls and Taking a Physical Count 223
Inventory Costing under a Perpetual System 224
Inventory Cost Flow Assumptions 224
Inventory Costing Illustration 225
7
Accounting
Information
Systems 260
Fundamental System Principles 262
Control Principle 262
Relevance Principle 262
Compatibility Principle 263
Flexibility Principle 263
Cost-Benefit Principle 263
Components of Accounting Systems 263
Source Documents 263
Input Devices 264
Information Processors 264
Information Storage 264
Output Devices 265
Special Journals in Accounting 265
Basics of Special Journals 266
Subsidiary Ledgers 266
Sales Journal 267
Cash Receipts Journal 271
Purchases Journal 273
Cash Disbursements Journal 274
General Journal Transactions 276
Technology-Based Accounting Systems 276
Computer Technology in Accounting 276
Data Processing in Accounting 277
Computer Networks in Accounting 277
Enterprise Resource Planning Software 277
Decision Analysis—Segment Return on Assets 278
Appendix 7A Special Journals under a Periodic
System 282
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Contents
8
Buildings 384
Machinery and Equipment 384
Lump-Sum Purchase 384
Depreciation 385
Factors in Computing Depreciation 385
Depreciation Methods 386
Partial-Year Depreciation 390
Changes in Estimates for Depreciation 391
Reporting Depreciation 391
Additional Expenditures 392
Ordinary Repairs 393
Betterments and Extraordinary Repairs 393
Disposals of Plant Assets 393
Discarding Plant Assets 394
Selling Plant Assets 394
Exchanging Plant Assets 395
SECTION 2—NATURAL RESOURCES 397
Cost Determination and Depletion 397
Plant Assets Used in Extracting
Resources 398
SECTION 3—INTANGIBLE ASSETS 398
Cost Determination and Amortization 398
Types of Intangibles 399
Decision Analysis—Total Asset Turnover 401
Appendix 10A Goodwill Estimation 404
Cash and Internal
Controls 306
Internal Control 308
Purpose of Internal Control 308
Principles of Internal Control 309
Technology and Internal Control 310
Limitations of Internal Control 311
Control of Cash 312
Cash, Cash Equivalents, and Liquidity 312
Control of Cash Receipts 313
Control of Cash Disbursements 314
Banking Activities as Controls 319
Basic Bank Services 319
Bank Statement 320
Bank Reconciliation 322
Decision Analysis—Days’ Sales Uncollected 325
Appendix 8A Documents in a Voucher
System 328
Appendix 8B Control of Purchase Discounts 331
9
Accounting for
Receivables 348
Accounts Receivable 350
Recognizing Accounts Receivable 350
Valuing Accounts Receivable 353
Estimating Bad Debts Expense 356
Notes Receivable 359
Computing Maturity and Interest 360
Recognizing Notes Receivable 361
Valuing and Settling Notes 361
Disposing of Receivables 363
Selling Receivables 363
Pledging Receivables 363
Decision Analysis—Accounts Receivable
Turnover 364
10
Plant Assets,
Natural Resources,
and Intangibles 380
SECTION 1—PLANT ASSETS 382
Cost Determination 383
Land 383
Land Improvements 384
11
Current Liabilities
and Payroll
Accounting 422
Characteristics of Liabilities 424
Defining Liabilities 424
Classifying Liabilities 424
Uncertainty in Liabilities 425
Known (Determinable) Liabilities 426
Accounts Payable 426
Sales Taxes Payable 426
Unearned Revenues 427
Short-Term Notes Payable 427
Payroll Liabilities 429
Multi-Period Known Liabilities 432
Estimated Liabilities 433
Health and Pension Benefits 433
Vacation Benefits 434
Bonus Plans 434
Warranty Liabilities 434
Multi-Period Estimated Liabilities 435
xxvii
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xxviii
Contents
Callable Preferred Stock 505
Reasons for Issuing Preferred Stock 505
Dividends 506
Cash Dividends 506
Stock Dividends 507
Stock Splits 509
Treasury Stock 510
Purchasing Treasury Stock 510
Reissuing Treasury Stock 511
Retiring Stock 511
Reporting Income and Equity 512
Continuing Operations 512
Discontinued Segments 512
Extraordinary Items 512
Changes in Accounting Principles 513
Earnings per Share 514
Stock Options 516
Statement of Retained Earnings 516
Statement of Stockholders’ Equity 517
Decision Analysis—Book Value per Share, Dividend
Yield, and Price-Earnings Ratio 518
Contingent Liabilities 436
Accounting for Contingent Liabilities 436
Reasonably Possible Contingent Liabilities 436
Decision Analysis—Times Interest Earned Ratio 437
Appendix 11A Payroll Reports, Records, and
Procedures 440
Appendix 11B Income Taxes 446
12
Accounting for
Partnerships 466
Partnership Form of Organization 468
Characteristics of Partnerships 468
Organizations with Partnership
Characteristics 469
Choosing a Business Form 470
Basic Partnership Accounting 471
Organizing a Partnership 471
Dividing Income or Loss 471
Partnership Financial Statements 473
Admission and Withdrawal of Partners 474
Admission of a Partner 474
Withdrawal of a Partner 476
Death of Partner 477
Liquidation of a Partnership 477
No Capital Deficiency 478
Capital Deficiency 479
Decision Analysis—Partner Return on Equity 480
13
Accounting for
Corporations 494
Corporate Form of Organization 496
Characteristics of Corporations 496
Corporate Organization and Management 497
Stockholders of Corporations 498
Basics of Capital Stock 499
Common Stock 500
Issuing Par Value Stock 500
Issuing No-Par Value Stock 501
Issuing Stated Value Stock 501
Issuing Stock for Noncash Assets 502
Preferred Stock 503
Issuance of Preferred Stock 503
Dividend Preference of Preferred Stock 503
Convertible Preferred Stock 505
14
Long-Term
Liabilities 546
Basics of Bonds 548
Bond Financing 548
Types of Bonds 549
Bond Trading 550
Bond-Issuing Procedures 551
Bond Issuances 551
Issuing Bonds at Par 551
Bond Discount or Premium 552
Issuing Bonds at a Discount 552
Issuing Bonds at a Premium 555
Issuing Bonds between Interest Dates 557
Accruing Bond Interest Expense 558
Bond Pricing 558
Bond Retirement 560
Bond Retirement at Maturity 560
Bond Retirement before Maturity 560
Bond Retirement by Conversion 560
Long-Term Notes Payable 561
Installment Notes 561
Mortgage Notes and Bonds 564
Decision Analysis—Pledged Assets to Secured
Liabilities Ratio 565
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Contents
Cash Flows from Financing 641
Three-Stage Process of Analysis 641
Analysis of Noncurrent Liabilities 641
Analysis of Equity 642
Proving Cash Balances 643
Decision Analysis—Cash Flow Analysis 643
Appendix 16A Spreadsheet Preparation of the
Statement of Cash Flows 647
Appendix 16B Direct Method of Reporting Operating
Cash Flows 650
Appendix 14A Present Values of Bonds and Notes 568
Appendix 14B Effective Interest Amortization 571
Appendix 14C Leases and Pensions 573
15
Investments
and International
Operations 590
Basics of Investments 592
Motivation for Investments 592
Short-Term versus Long-Term Investments 592
Classes of and Reporting for Investments 593
Basics of Accounting for Investments 593
Accounting for Noninfluential Investments 595
Accounting for Influential Investments 597
Investment in Equity Securities with Significant
Influence 597
Investment in Equity Securities with Controlling
Influence 599
Accounting Summary for Investments in
Securities 599
Decision Analysis—Components of Return on Total
Assets 600
Appendix 15A Investments in International
Operations 605
16
17
Analysis of Financial
Statements 672
Basics of Analysis 674
Purpose of Analysis 674
Building Blocks of Analysis 675
Information for Analysis 675
Standards for Comparisons 676
Tools of Analysis 676
Horizontal Analysis 676
Comparative Statements 677
Trend Analysis 679
Vertical Analysis 681
Common-Size Statements 681
Common-Size Graphics 683
Ratio Analysis 685
Liquidity and Efficiency 685
Solvency 689
Profitability 690
Market Prospects 691
Summary of Ratios 692
Decision Analysis—Analysis Reporting 694
Reporting the
Statement of Cash
Flows 624
Basics of Cash Flow Reporting 626
Purpose of the Statement of Cash Flows 626
Importance of Cash Flows 626
Measurement of Cash Flows 627
Classification of Cash Flows 627
Noncash Investing and Financing 628
Format of the Statement of Cash Flows 629
Preparing the Statement of Cash Flows 630
Cash Flows from Operating 632
Indirect and Direct Methods of Reporting 632
Application of the Indirect Method of
Reporting 634
Summary of Adjustments for Indirect Method 638
Cash Flows from Investing 639
Three-Stage Process of Analysis 639
Analysis of Noncurrent Assets 639
Analysis of Other Assets 640
xxix
18
Managerial Accounting
Concepts and
Principles 712
Managerial Accounting Basics 714
Purpose of Managerial Accounting 714
Nature of Managerial Accounting 715
Managerial Decision Making 717
Focus on Managerial Accounting 717
Managerial Cost Concepts 719
Types of Cost Classifications 719
Identification of Cost Classification 721
Cost Concepts for Service Companies 721
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xxx
Contents
Process Costing Illustration 799
Accounting for First (Grinding) Department 799
Accounting for Second (Mixing) Department 805
Transfers to Finished Goods Inventory and Cost of
Goods Sold 807
Effects of Lean Business Model on Process
Operations 808
Decision Analysis—Hybrid Costing System 809
Reporting Manufacturing Activities 722
Manufacturer’s Balance Sheet 722
Manufacturer’s Income Statement 723
Flow of Manufacturing Activities 726
Manufacturing Statement 727
Decision Analysis—Unit Contribution Margin 729
19
Job Order Cost
Accounting 752
21
Job Order Cost Accounting 754
Cost Accounting System 754
Job Order Manufacturing 754
Events in Job Order Costing 755
Job Cost Sheet 756
Job Order Cost Flows and Reports 757
Materials Cost Flows and Documents 757
Labor Cost Flows and Documents 759
Overhead Cost Flows and Documents 761
Summary of Cost Flows 762
Adjustment of Overapplied and Underapplied
Overhead 765
Underapplied Overhead 765
Overapplied Overhead 766
Decision Analysis—Pricing for Services 766
20
Overhead Cost Allocation Methods 832
Two-Stage Cost Allocation 832
Activity-Based Cost Allocation 834
Comparison of Two-Stage and Activity-Based
Cost Allocation 836
Departmental Accounting 837
Motivation for Departmentalization 838
Departmental Evaluation 838
Departmental Reporting and Analysis 838
Departmental Expense Allocation 839
Direct and Indirect Expenses 839
Allocation of Indirect Expenses 840
Departmental Income Statements 841
Departmental Contribution to Overhead 844
Responsibility Accounting 845
Controllable versus Direct Costs 846
Responsibility Accounting System 846
Joint Costs and Their Allocation 848
Decision Analysis—Investment Center Return on
Total Assets 849
Process Cost
Accounting 788
Process Operations 790
Comparing Job Order and Process
Operations 791
Organization of Process Operations 791
GenX Company—An Illustration 791
Process Cost Accounting 793
Direct and Indirect Costs 794
Accounting for Materials Costs 794
Accounting for Labor Costs 795
Accounting for Factory Overhead 796
Equivalent Units of Production 798
Accounting for Goods in Process 798
Differences between Equivalent Units for
Materials and that for Labor and
Overhead 798
Cost Allocation and
Performance
Measurement 830
22
Cost-Volume-Profit
Analysis 870
Identifying Cost Behavior 872
Fixed Costs 872
Variable Costs 873
Mixed Costs 873
Step-Wise Costs 874
Curvilinear Costs 874
Measuring Cost Behavior 875
Scatter Diagrams 875
High-Low Method 876
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Contents
Least-Squares Regression 877
Comparison of Cost Estimation Methods 877
Using Break-Even Analysis 878
Computing Break-Even Point 878
Preparing a Cost-Volume-Profit Chart 879
Making Assumptions in Cost-Volume-Profit
Analysis 880
Applying Cost-Volume-Profit Analysis 881
Computing Income from Sales and Costs 881
Computing Sales for a Target Income 881
Computing the Margin of Safety 882
Using Sensitivity Analysis 883
Computing Multiproduct Break-Even Point 884
Decision Analysis—Degree of Operating
Leverage 885
23
24
Flexible Budget Reports 944
Purpose of Flexible Budgets 944
Preparation of Flexible Budgets 945
Flexible Budget Performance Report 946
SECTION 2—STANDARD COSTS 947
Materials and Labor Standards 948
Identifying Standard Costs 948
Setting Standard Costs 948
Cost Variances 949
Cost Variance Analysis 949
Cost Variance Computation 949
Materials and Labor Variances 950
Overhead Standards and Variances 953
Setting Overhead Standards 953
Using Overhead Cost Variance Analysis 954
Computing Overhead Cost Variances 955
Extensions of Standard Costs 958
Standard Costs for Control 958
Standard Costs for Services 958
Standard Cost Accounting System 958
Decision Analysis—Sales Variances 960
Master Budgets and
Planning 902
Budget Process 904
Strategic Budgeting 904
Benchmarking Budgets 904
Budgeting and Human Behavior 905
Budgeting as a Management Tool 905
Budgeting Communication 905
Budget Administration 906
Budget Committee 906
Budget Reporting 906
Budget Timing 906
Master Budget 908
Master Budget Components 908
Operating Budgets 910
Capital Expenditures Budget 913
Financial Budgets 914
Decision Analysis—Activity-Based
Budgeting 917
Appendix 23A Production and Manufacturing
Budgets 923
Flexible Budgets and
Standard Costs 940
SECTION 1—FLEXIBLE BUDGETS 942
Budgetary Process 942
Budgetary Control and Reporting 942
Fixed Budget Performance Report 943
Budget Reports for Evaluation 944
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25
Capital Budgeting
and Managerial
Decisions 982
SECTION 1—CAPITAL BUDGETING 984
Methods Not Using Time Value of Money 985
Payback Period 985
Accounting Rate of Return 987
Methods Using Time Value of Money 988
Net Present Value 989
Internal Rate of Return 991
Comparison of Capital Budgeting Methods 993
SECTION 2—MANAGERIAL DECISIONS 994
Decisions and Information 994
Decision Making 994
Relevant Costs 995
Managerial Decision Scenarios 995
Additional Business 995
Make or Buy 997
Scrap or Rework 998
Sell or Process 999
Sales Mix Selection 999
Segment Elimination 1000
Qualitative Decision Factors 1001
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Contents
Decision Analysis—Break-Even Time 1002
Glossary G
Credits CR-1
Appendix A Financial Statement Information A-1
Krispy Kreme A-2
Tastykake A-18
Harley-Davidson A-25
Appendix B Present and Future Values in
Accounting B-1
Index IND
Chart of Accounts CA
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Fundamental
Accounting
Principles