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2. FMTOC_SE.qxd 12/3/10 12:09 PM Page i accessible, affordable, active learning 3. FMTOC_SE.qxd 12/3/10 12:09 PM Page ii 4. FMTOC_SE.qxd 12/3/10 12:09 PM Page iii ACCOUNTING 10 PRINCIPLESJerry J. Weygandt PhD, CPAUniversity of WisconsinMadison Madison, WisconsinPaul D. Kimmel PhD, CPA University of WisconsinMilwaukeeMilwaukee, WisconsinJohn Wiley & Sons, Inc. Donald E. Kieso PhD, CPA Northern Illinois UniversityDeKalb, Illinois 5. FMTOC_SE.qxd 12/11/10 3:49 AMPage ivDedicated to the Wiley sales representatives who sell our books and serviceour adopters in a professional and ethical manner and toEnid, Merlynn, and DonnaVice President & Executive Publisher George HoffmanAssociate PublisherChristopher DeJohnProject Editor Ed BrislinDevelopment Editor Terry Ann TatroProject Editor Yana MermelProduction Manager Dorothy SinclairSenior Production Editor Valerie A. VargasProduction EditorErin BascomAssociate Director of MarketingAmy ScholzSenior Marketing Manager Ramona ShermanExecutive Media Editor Allison MorrisMedia Editor Greg ChaputCreative DirectorHarry NolanSenior DesignerMadelyn LesureProduction Management Services Ingrao AssociatesSenior Photo EditorMary Ann PriceEditorial AssistantJacqueline KeppingMarketing AssistantCourtney LuzziAssistant Marketing ManagerDiane MarsCover Design Maureen EideCover PhotoBill Stevenson/Photolibrary This book was set in Times Ten by Aptara , Inc. and printed and bound by RR Donnelley. The cover was printed by RR Donnelley. Copyright 2007, 2009, 2012 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior writ- ten permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions. Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years, helping people around the world meet their needs and fulfill their aspirations. Our company is built on a foundation of principles that include responsibility to the communities we serve and where we live and work. In 2008, we launched a Corporate Citizenship Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business. Among the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct within our business and among our vendors, and community and charitable support. For more information, please visit our website: www.wiley.com/go/citizenship. Evaluation copies are provided to qualified academics and professionals for review purposes only, for use in their courses during the next academic year. These copies are licensed and may not be sold or transferred to a third party. Upon completion of the review period, please return the evaluation copy to Wiley. Return instructions and a free of charge return shipping label are available at www.wiley.com/go/returnlabel. Outside of the United States, please contact your local representative.ISBN-13 978-0-470-53479-3 (main textbook)ISBN-13 978-1-118-00929-1 (BRV edition)Printed in the United States of America10 9 8 7 6 5 4 3 2 1 6. FMTOC_SE.qxd 12/11/10 3:49 AM Page v From theAuthorsDear Student,Why This Course? Remember your biology course in high school? Did you haveone of those invisible man models (or maybe something more high-tech than that)that gave you the opportunity to look inside the human body? This accountingcourse offers something similar: To understand a business, you have to understand thefinancial insides of a business organization. An accounting course will help you under-stand the essential financial components of businesses. Whether you are looking at alarge multinational company like Microsoft or Starbucks or a single-owner softwareconsulting business or coffee shop, knowing the fundamentals of accounting will helpyou understand what is happening. As an employee, a manager, an investor, a businessowner, or a director of your own personal financesany of which roles you will have atsome point in your lifeyou will be much the wiser for having taken this course.Why This Book? Hundreds of thousands of students have used this textbook. Yourinstructor has chosen it for you because of its trusted reputation. The authors haveworked hard to keep the book fresh, timely, and accurate.This textbook contains features to help you learn best, whatever your learning style. Tounderstand what your learning style is, spend about ten minutes to take the learningstyle quiz at the books companion website. Then, look at page vii for how you canapply an understanding of your learning style to this course. When you know moreabout your own learning style, browse through the Student Owners Manual on pagesviiixi. It shows you the main features you will find in this textbook and explains theirpurpose.How To Succeed? Weve asked many students and many instructors whether thereis a secret for success in this course. The nearly unanimous answer turns out to be notmuch of a secret: Do the homework. This is one course where doing is learning, andthe more time you spend on the homework assignmentsusing the various toolsthat this textbook providesthe more likely you are to learn the essential concepts,techniques, and methods of accounting. Besides the textbook itself, the bookscompanion website offers various support resources.Good luck in this course. We hope you enjoy the experience and that you put to gooduse throughout a lifetime of success the knowledge you obtain in this course. We aresure you will not be disappointed. Jerry J. WeygandtPaul D. Kimmel Donald E. Kiesov 7. FMTOC_SE.qxd 12/3/10 12:10 PMPage viAbout the Authors Jerry WeygandtDon Kieso Jerry J. Weygandt, PhD, CPA, is Arthur Andersen Alumni Emeritus Professor of Donald E. Kieso, PhD, CPA, received his Accounting at the University of Wisconsinbachelors degree from Aurora University Madison. He holds a Ph.D. in accounting and his doctorate in accounting from the University of Illinois. He has served as from the University of Illinois. Articles by Professor Weygandt have appeared in the Accounting Review. Journal of AccountingPaul Kimmelchairman of the Department of Accountancy and is currently the KPMG Emeritus Professor Research, Accounting Horizons, Journal of of Accountancy at Northern Illinois University. Accountancy, and other academic and He has public accounting experience withPaul D. Kimmel, PhD, CPA, received his Price Waterhouse & Co. (San Francisco and professional journals. These articles have bachelors degree from the University of examined such financial reporting issuesChicago) and Arthur Andersen & Co.Minnesota and his doctorate in accounting(Chicago) and research experience with the as accounting for price-level adjustments, from the University of Wisconsin. He is an pensions, convertible securities, stock optionResearch Division of the American Institute ofAssociate Professor at the University of Certified Public Accountants (New York). He contracts, and interim reports. ProfessorWisconsinMilwaukee, and has Weygandt is author of other accounting andhas done post doctorate work as a Visitingpublic accounting experience with Deloitte Scholar at the University of California at financial reporting books and is a member& Touche (Minneapolis). He was the recipient of the American Accounting Association, Berkeley and is a recipient of NIUs Teachingof the UWM School of Business Advisory Excellence Award and four Golden Apple the American Institute of Certified Public Council Teaching Award, the Reggie Accountants, and the Wisconsin Society of Teaching Awards. Professor Kieso is theTaite Excellence in Teaching Award and a author of other accounting and business Certified Public Accountants. He has servedthree-time winner of the Outstanding on numerous committees of the Americanbooks and is a member of the AmericanTeaching Assistant Award at the University Accounting Association, the American Accounting Association and as a member of Wisconsin. He is also a recipient of the of the editorial board of the AccountingInstitute of Certified Public Accountants, andElijah Watts Sells Award for Honorarythe Illinois CPA Society. He has served as a Review; he also has served as PresidentDistinction for his results on the CPA exam. and Secretary-Treasurer of the American member of the Board of Directors of theHe is a member of the American AccountingIllinois CPA Society, then AACSBs Accounting Accounting Association. In addition, he hasAssociation and the Institute of Management been actively involved with the AmericanAccreditation Committees, the State ofAccountants and has published articles inIllinois Comptrollers Commission, as Institute of Certified Public AccountantsAccounting Review, Accounting Horizons, and has been a member of the Accounting Secretary-Treasurer of the FederationAdvances in Management Accounting, of Schools of Accountancy, and as Standards Executive Committee (AcSEC) of Managerial Finance, Issues in Accounting that organization. He has served on the FASBSecretary-Treasurer of the AmericanEducation, Journal of Accounting Education,Accounting Association. Professor Kieso is task force that examined the reporting issuesas well as other journals. His research related to accounting for income taxescurrently serving on the Board of Trusteesinterests include accounting for financial and Executive Committee of Aurora and served as a trustee of the Financial instruments and innovation in accounting Accounting Foundation. Professor Weygandt University, as a member of the Board ofeducation. He has published papers and Directors of Kishwaukee Community has received the Chancellors Award forgiven numerous talks on incorporating Excellence in Teaching and the Beta Gamma Hospital, and as Treasurer and Director ofcritical thinking into accounting education, Valley West Community Hospital. From 1989 Sigma Deans Teaching Award. He is on theand helped prepare a catalog of critical board of directors of M & I Bank of Southernto 1993 he served as a charter member ofthinking resources for the Federated Schools the national Accounting Education Change Wisconsin. He is the recipient of theof Accountancy. Wisconsin Institute of CPAs OutstandingCommission. He is the recipient of the Educators Award and the Lifetime Outstanding Accounting Educator Award Achievement Award. In 2001 he receivedfrom the Illinois CPA Society, the FSAs Joseph the American Accounting Associations A. Silvoso Award of Merit, the NIU Outstanding Educator Award. Foundations Humanitarian Award for Service to Higher Education, a Distinguished Service Award from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University. 8. FMTOC_SE.qxd12/11/104:49 PM Page vii What TYPE of learner are you? Intake:Text features that may Output: To take in the information To make a study package help you the mostTo do well on exams Pay close attention to charts, Convert your lecture notes into The Navigator/Feature Recall your page pictures. VISUALdrawings, and handoutspage pictures.Story/Preview Draw diagrams whereyour instructors use. Infographics/Illustrationsappropriate. Underline. To do this: Accounting Equation Analyses Practice turning your visuals Use different colors. Use the Intake strategies.Highlighted wordsback into words. Use symbols, flow charts, Reconstruct images in Demonstration Problem/ graphs, different different ways. Action Planarrangements on the page, Redraw pages from memory. Questions/Exercises/Problemswhite spaces. Replace words with symbolsFinancial Reporting Problem and initials.Comparative Analysis Problem Look at your pages. On the WebTutorials, video, iPod apps Attend lectures and tutorials. You may take poor notes PreviewCommunication Activity AURAL Discuss topics with students because you prefer to listen. Insight BoxesEthics Caseand instructors.Therefore:Review It/Do it!/Action Plan Talk with the instructor. Explain new ideas to Expand your notes by talkingSummary of Study Objectives Spend time in quiet places other people.with others and withGlossary recalling the ideas. Use a tape recorder. information fromDemonstration Problem/Action Practice writing answers Leave spaces in your lecture your textbook. Planto old exam questions. notes for later recall. Tape-record summarizedSelf-Test Questions Say your answers out loud. Describe overheads, pictures,notes and listen. Questions/Exercises/Problems and visuals to somebody Read summarized notes Financial Reporting Problem who was not in class.out loud. Comparative Analysis Problem Explain your notes to On the Webanother aural person. Decision Making Across the OrganizationTutorials, video Use lists and headings. Write out words again The Navigator/Feature Write exam answers. Use dictionaries, glossaries,and again.Story/Study Practice with multiple-choice and definitions. Reread notes silently.Objectives/Preview questions.READING/ WRITING Read handouts, textbooks, Rewrite ideas and principlesReview It/Do it!/Action Plan Write paragraphs, beginnings and supplementaryinto other words. Summary of Study Objectivesand endings. library readings. Turn charts, diagrams,Glossary/Self-Test Questions Write your lists in Use lecture notes. and other illustrations Questions/Exercises/Problems outline form.into statements.Writing Problems Arrange your words intoFinancial Reporting Problemhierarchies and points.Comparative Analysis ProblemAll About You ActivityOn the WebDecision Making Across the OrganizationCommunication ActivityFlashcards Use all your senses. You may take poor notes The Navigator/Feature Write practice answers. KINESTHETIC Go to labs, take field trips.because topics do not seemStory/Preview Role-play the exam situation. Listen to real-life examples.concrete or relevant. Infographics/Illustrations Pay attention to applications. Therefore:Review It/Do it!/Action Plan Use hands-on approaches. Put examples in Summary of Study Objectives Use trial-and-error methods. your summaries. Demonstration Problem/ Use case studies and Action Planapplications to help with Self-Test Questionsprinciples and abstract Questions/Exercises/Problemsconcepts. Financial Reporting Problem Talk about your notes withComparative Analysis Problemanother kinesthetic person. On the Web Use pictures andDecision Making Acrossphotographs that the Organizationillustrate an idea. Communication ActivityAll About You Activity 9. FMTOC_SE.qxd12/3/10 12:10 PMPage viii c03AdjustingTheAccounts.indd Page 98 11/29/101:14:45 PM f-392 /Users/f-392/De c03AdjustingTheAccounts.indd Page 111 11/29/101:14:56 PM f-392 /Users/f-392/Desktop/Nalini 23.9/ch05Student Owners Manualc02TheRecordingProcess.indd Page 53 11/26/10 2:12:13 PM user-s146/Users/user-s146/Desktop/Merry_X-Mas/NewUsing Your Textbook EffectivelyThe Navigator guides you through each chapter by [The Navigator] pulling learning tools together into one learning system. Scan Study ObjectivesThroughout the chapter, The Navigator prompts you to Read Feature Story Read Preview use listed learning aids and to set priorities as you study. Read text and answer Do it! p. 102 p. 110 p. 116 p. 121 Work Comprehensive Do it! p. 122 Review Summary of Study Objectives Answer Self-Test Questions Complete Assignments Go to WileyPLUS for practice and tutorials Read A Look at IFRS p. 148 c13CorporationsOrganizationAndCa600 Page 600 11/24/10 1:49:09 PM user-s146/Users/user-s146/Desktop/Merry_X-Mas/New Illustration 3-13 Adjusting entries for accruedHelpful Hints in the margins further clarifyAccrued Revenues revenuesconcepts being discussed. They are likeAssetRevenue Debit Adjusting Credit Adjusting Helpful Hint having an instructor with you as you read. Entry (+) Entry (+) For accruals, there may have been no prior entry,c03AdjustingTheAccounts.indd the accounts 11/29/10 and Page 113 requiring1:14:56 PM f-392 /Users/f-392/Desktop/Nalini 23.9/ch05 adjustment may both have zero balances prior to adjustment. Ethics Notes and International NotesEthics NoteInternational Notepoint out ethical and international pointsA report released by Fannie Maes related to the nearby text discussion. board of directors stated thatRules for accounting for specificevents sometimes differ acrossimproper adjusting entries at the countries. For example, Europeanmortgage-finance companycompanies rely less on historicalresulted in delayed recognition ofcost and more on fair value thanexpenses caused by interest-rateU.S. companies. Despite thechanges. The motivation for suchdifferences, the double-entryaccounting apparently was the accounting system is the basis ofdesire to hit earnings estimates. accounting systems worldwide.INVESTOR INSIGHTSO SG Insight examples give you more glimpses How to Read Stock Quotesinto how actual companies make decisions Organized exchanges trade the stock of publicly held companies at dollar prices per share established by the interaction between buyers and sellers. For each listed security, the finan- using accounting information. These high-cial press reports the high and low prices of the stock during the year, the total volume of stocktraded on a given day, the high and low prices for the day, and the closing market price, with the netchange for the day. Nike is listed on the New York Stock Exchange. Here is a recent listing for Nike: interest boxes focus on various themes 52 Weeksethics, international, and investor concerns. Stock High LowVolume HighLowClose Net Change Nike78.55 48.76 5,375,651 72.44 69.78 70.61 21.69These numbers indicate the following: The high and low market prices for the last 52 weeks havebeen $78.55 and $48.76. The trading volume for the day was 5,375,651 shares. The high, low, andclosing prices for that date were $72.44, $69.78, and $70.61, respectively. The net change for the A critical thinking question asks you today was a decrease of $1.69 per share. apply your accounting learning to the?For stocks traded on organized exchanges, how are the dollar prices per share established? story in the example. Guideline Answersc13CorporationsOrganizationAndCa598 Page 598 11/24/10 1:49:07 PM user-s146 What factors might influence the price of shares in the marketplace? (See page 629.) /Users/user-s146/Desktop/Merry_X-Mas/New appear at the end of the chapter.Accounting Across the OrganizationACCOU G AC OSS THE ORGANIZATION CCOUNTING CROSS G Oexamples show the use of accounting by Wall Street No Friend of FacebookIn the 1990s, it was the dream of every young technology entrepreneur to start a people in non-accounting functionssuchcompany and do an initial public offering (IPO), that is, list company shares on astock exchange. It seemed like there was a never-ending supply of 20-something as finance, marketing, or management.year-old technology entrepreneurs that made millions doing IPOs of companies that never madea profit and eventually failed. In sharp contrast to this is Mark Zuckerberg, the 25-year-old Guideline Answers appear at the end of founder and CEO of Facebook. If Facebook did an IPO, he would make billions of dollars. But, heis in no hurry to go public. Because his company doesnt need to invest in factories, distributionthe chapter.systems, or even marketing, it doesnt need to raise a lot of cash. Also, by not going public,Zuckerberg has more control over the direction of the company. Right now, he and the otherfounders dont have to answer to outside shareholders, who might be more concerned about short-term investment horizons rather than long-term goals. In addition, publicly traded companiesface many more financial reporting disclosure requirements.Source: Jessica E. Vascellaro, Facebook CEO in No Rush to Friend Wall Street, Wall Street Journal Online(March 4, 2010).?Why has Mark Zuckerberg, the CEO and founder of Facebook, delayed taking his companys shares public through an initial public offering (IPO)? (See page 629.)viii 10. FMTOC_SE.qxd 12/11/103:51 AM Page ix c03AdjustingTheAccounts.indd Page 11011/29/108:43:49 PM user-s146 /Users/user-s146/Desktop/Merry_X-Mas/New Student Owners Manual Anatomy of a Fraud boxes illustrate howANATOMY OF A FRAUD a lack of specific internal controlsBernie Ebbers was the founder and CEO of the phone company WorldCom. The company engaged in a series of increasingly large, debt-financed acquisitions ofresulted in real-world frauds. c03AdjustingTheAccounts.indd Page 122 other companies. These acquisitions made the company grow quickly, which made 11/29/10 stock price f-392 the 1:15:00 PM increase dramatically. However, because the acquired companies all 23.9/ch05 /Users/f-392/Desktop/Nalini had different accounting systems, WorldComs financial records were a mess. When WorldComs performance started to flatten out, Bernie coerced WorldComs accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the stock price. One of these frauds involved treating $7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current-period profits. Total take: $7 billion THE MISSING CONTROLS Documentation procedures. The companys accounting system was a disorganized collection of non-integrated systems, which resulted from a series of corporate acquisitions. Top management took advantage of this disorganization to conceal its fraudulent activities. Independent internal verification. A fraud of this size should have been detected by a routine comparison of the actual physical assets with the list of physical assets shown in the accounting records. Do it!Brief Do it! exercises ask you to put toc13CorporationsOrganizationAndCa604 Page 604 11/25/10 9:55:45 AM user-s146/Users/user-s146/Desktop/Merry_X-Mas/New Adjusting Entries The ledger of Hammond Company, on March 31, 2012, includes these selected work your newly acquired knowledge. for Deferrals accounts before adjusting entries are prepared. Debit CreditThey outline an Action Plan necessary Prepaid Insurance Supplies$ 3,6002,800 to complete the exercise, and Equipment Accumulated DepreciationEquipment 25,000 $5,000they show a Solution. Unearned Service Revenue 9,200 An analysis of the accounts shows the following. 1. Insurance expires at the rate of $100 per month. 2. Supplies on hand total $800. c03AdjustingTheAccounts.indd Page 13111/29/101:15:03 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05 Comprehensive Do it! problem COMPREHENSIVE with Action Plan gives you anDo it! Terry Thomas opens the Green Thumb Lawn Care Company on April 1.At April 30, opportunity to see a detailed solution to a the trial balance shows the following balances for selected accounts. representative problem before you do Prepaid InsuranceEquipment $ 3,60028,000Notes Payable 20,000your homework. Coincides with the Do it!Unearned Service RevenueService Revenue 4,200 1,800 problems within the chapter. Do it! Review problems appear in theDo it! Reviewhomework material and provide another Do it! 3-1 Numerous timing concepts are discussed on pages 100102. A list of concepts isIdentify timing concepts. way for you to determine whether provided below in the left column, with a description of the concept in the right column. There aremore descriptions provided than concepts. Match the description of the concept to the concept. (SO 1, 2)you have mastered the content in the1. ____ Cash-basis accounting.2. ____ Fiscal year. (a) Monthly and quarterly time periods. (b) Accountants divide the economic life of a business3. ____ Revenue recognition principle. into artificial time periods. chapters.4. ____ Expense recognition principle. (c) Efforts (expenses) should be matched with ac- complishments (revenues).p p p q y What happens when no-par stock does not have a stated value? In that case, the corporation credits the entire proceeds to Common Stock. Thus, if Hydro-SlideAccounting equation analyses appear next to key does not assign a stated value to its no-par stock, it records the issuance of the 5,000 shares at $8 per share for cash as follows.journal entries. They will help you understand the A 5 L 1SE 140,000Cash 40,000 impact of an accounting transaction on the 140,000 CS Common Stock40,000 Cash Flows 140,000(To record issue of 5,000 shares of no-par stock) components of the accounting equation, on thestockholders equity accounts, and on the companyscash flows.c14CorporationsDividendsRetained644 Page 64411/24/10 2:49:28 PM users-133 /Users/users-133/Desktop/Ramakant_04.05.09/WB00113_R1:JWCL170/New Financial statements appear regularly.Illustration 14-11 Tektronix Inc. Disclosure of restriction Those from actual companies are identified Notes to the Financial StatementsCertain of the Companys debt agreements require compliance with debt covenants.by a company logo or a photo. Management believes that the Company is in compliance with such requirements.The Company had unrestricted retained earnings of $223.8 million after meetingthose requirements. ix 11. FMTOC_SE.qxd12/11/107:23 PM Page x c03AdjustingTheAccounts.indd Page 14411/29/10 1:15:07 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05Exercises: Set B are available online at Exercises: Set Bwww.wiley.com/college/weygandt.Visit the books companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B.In the textbook, two similar sets of ProblemsA and Bare keyedJournalize transactions and P3-5A On September 1, 2012, the account balances of Moore Equipment Repair were asto the same study objectives.follow through accounting cycle to preparation of financial follows. statements. No.Debits No. Credits (SO 5, 6, 7)101 Cash$ 4,880 154Accumulated DepreciationEquipment $ 1,500 112 Accounts Receivable 3,520 201Accounts Payable 3,400 Selected problems, identified by this 126 153 c20JobOrderCosting.indd Page 952 11/30/10 10:44:18 AM f-392 Supplies Equipment 2,00015,000 209 212Unearned Service RevenueSalaries and Wages Payable 1,400 500 /Users/f-392/Desktop/Nalini 23.9/ch05 icon, can be solved using the General $25,400 301Owners Capital 18,600$25,400c07AccountingInformationSystems.353 Page 353Ledger Software (GLS) package. 12/3/10 3:40:34 PM user-s146/Users/user-s146/Desktop/Merry_X-Mas/New Prepare correct income statement.E3-10 The income statement of Brandon Co. for the month of July shows net income of $1,400based on Service Revenue $5,500, Salaries and Wages Expense $2,300, Supplies Expense $1,200,An icon identifies Exercises and (SO 2, 5, 6, 7)and Utilities Expense $600. In reviewing the statement, you discover the following.1. Insurance expired during July of $400 was omitted.Problems that can be solved using2. Supplies expense includes $250 of supplies that are still on hand at July 31.Excel templates at the student website.Those exercises and problems that focus on Determine cost of jobs and ending balance in work in E20-12 Alma Ortiz and Associates, a CPA firm, uses job order costing to capture the costs of its audit jobs. There were no audit jobs in process at the beginning of November. Listed below accounting situations faced by service companiesprocess and overhead accounts. (SO 3, 4, 6) are data concerning the three audit jobs conducted during November. PerezRivera Sota are identified by the icon shown here.Direct materials Auditor labor costs $600 $5,400$400$6,600$200$3,375 Auditor hours 72 8845Problems: Set Cc19ManagerialAccounting.indd Page 917 11/29/1012:14:40 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05 An additional parallel set of C Problems Visit the books companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C. appears at the books companion website.c03AdjustingTheAccounts.indd Page 145 11/29/10 1:15:07 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05Comprehensive Problem: Chapters 3 to 7Comprehensive Problems combine materialCP7 Packard Company has the following opening account balances in its general and subsidiaryledgers on January 1 and uses the periodic inventory system. All accounts have normal debit andfrom the current chapter with previouscredit balances. c03AdjustingTheAccounts.indd Page 145 11/29/10 1:15:07 PM f-392General Ledgerc03AdjustingTheAccounts.indd Page 145 /Users/f-392/Desktop/Nalini 23.9/ch05chapters so that you understand how it all11/29/10 1:15:07 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05c03AdjustingTheAccounts.indd Page 145 11/29/10 1:15:07 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05AccountNumber Account Title January 1Opening Balancefits together.101 Cash $33,750 The Continuing Cookie Chronicle exercise Continuing Cookie Chroniclefollows the continuing saga of accounting (Note: This is a continuation of the Cookie Chronicle from Chapters 1 and 2. Use the infor-mation from the previous chapters and follow the instructions below using the general ledgerfor a small business begun by anaccounts you have already prepared.) entrepreneurial student.Waterways Continuing Problem The Waterways Continuing Problem uses the business(Note: The Waterways Problem begins in Chapter 19 and continues in the remaining chapters.You can also find this problem at the books Student Companion site.) activities of a fictional company, to help you apply h bl managerial accounting topics to a realistic entrepreneurial situation.The Broadening Your PerspectiveBROADENINGYOURPERSPECTIVE BROADENINGPERSPECTIVE section helps to pull togetherconcepts from the chapter and apply them to real-world business situations. The Financial Reporting Problem Financial Reporting and Analysisfocuses on reading and understanding Financial Reporting Problem: PepsiCo, Inc. the financial statements of PepsiCo,BYP3-1 The financial statements of PepsiCo, Inc. are presented in Appendix A at the end of this textbook. Instructions which are available in Appendix A.(a) Using the consolidated financial statements and related information, identify items that may result inComparative Analysis Problem: PepsiCo, Inc. A Comparative Analysis Problem comparesvs. The Coca-Cola Company and contrasts the financial reporting ofBYP3-2 PepsiCos financial statements are presented in Appendix A. Financial statements forThe Coca-Cola Company are presented in Appendix B.PepsiCo and The Coca-Cola Company. x 12. c20JobOrderCosting.indd Page 959 11/30/10 10:44:19 AM f-392 /Users/f-392/Desktop/Nalini 23.9/ch05FMTOC_SE.qxd 12/3/10 12:10 PMPage xi c03AdjustingTheAccounts.indd Page 146 11/29/101:15:08 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05Student Owners Manual On the WebOn the Web exercises guide you to BYP3-3 No financial decision f-392c03AdjustingTheAccounts.indd Page 147 11/29/10 1:15:08 PMmaker should ever rely solely on the financial information reported in the websites where you can find and analyze /Users/f-392/Desktop/Nalini 23.9/ch05 annual report to make decisions. It is important to keep abreast of financial news. This activity demon- strates how to search for financial news on the Web. Address: http://biz.yahoo.com/i, or go to www.wiley.com/college/weygandtinformation related to the chapter topic.c03AdjustingTheAccounts.indd Page 147 11/29/10 1:15:08 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05c03AdjustingTheAccounts.indd Page 147 11/29/10 1:15:08 PM f-392/Users/f-392/Desktop/Nalini 23.9/ch05Decision Making Across theDecision Making Across the OrganizationOrganization cases help you BYP20-1 Burgio Parts Company uses a job order cost system. For a number of months, there has beenan ongoing rift between the sales department and the production department concerning a special-orderbuild decision-making skills by analyzing product, TC-1. TC-1 is a seasonal product that is manufactured in batches of 1,000 units. TC-1 is sold atcost plus a markup of 40% of cost. accounting information in a lessstructured situation. These casesrequire you to work in teams.Communication ActivityCommunication Activity problemsBYP3-5 In reviewing the accounts of Keri Ann Co. at the end of the year, you discover that adjustingentries have not been made.help you to apply and practice businesscommunication skills.Ethics Cases ask you to reflect Ethics Case on typical ethical dilemmas, analyze theBYP3-6 Bluestem Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of Bluestems chemical pesticides. In the coming year, stakeholders and the issues involved, and Bluestem will have environmentally safe and competitive chemicals to replace these discontinued prod- ucts. Sales in the next year are expected to greatly exceed any prior years. The decline in sales and profits appears to be a one-year aberration. But even so, the company president fears a large dip in the currentdecide on an appropriate years profits. He believes that such a dip could cause a significant drop in the market price of Bluestems stock and make the company a takeover target. course of action. c03AdjustingTheAccounts.indd Page 14811/29/101:15:08 PM f-392 c19ManagerialAccounting.indd Page 919 11/29/10 12:14:42 id f-392 i C hi B llT id hi ibilih c03AdjustingTheAccounts.indd Page 148 11/29/10 /Users/f-392/Desktop/Nalini 23.9/ch05 PM ll1:15:08 PM f-392 lldihii /Users/f-392/Desktop/Nalini 23.9/ch05d/Users/f-392/Desktop/Nalini 23.9/ch05All About You ActivityAll About You activities are designed to BYP3-7 Companies must report or disclose in their financial statements information about all liabilities, including potential liabilities related to environmental clean-up. There are many situations in which youget you thinking and talking about how c19ManagerialAccounting.indd to provide personal financial information about your assets, liabilities, revenue, and expenses. will be asked Page 919 11/29/10 12:14:42 PM f-392 /Users/f-392/Desktop/Nalini 23.9/ch05 Sometimes you will face difficult decisions regarding what to disclose and how to disclose it. accounting impacts your personal life.FASB Codification Activity offers you the FASB Codification Activityopportunity to use this online system,BYP3-8 If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfmto log in and prepare responses to the following. which contains all the authoritative literatureInstructionsAccess the glossary (Master Glossary) to answer the following.related to a particular topic.(a) What is the definition of revenue?(b) What is the definition of compensation? Managerial AnalysisManagerial Analysis assignments build BYP19-2 B.J. King is a fairly large manufacturing company located in the southern United States. The company manufactures tennis rackets, tennis balls, tennis clothing, and tennis shoes, all bearing the com- analytical and decision-making skills in panys distinctive logo, a large green question mark on a white-flocked tennis ball. The companys sales have been increasing over the past 10 years. The tennis racket division has recently implemented several advanced manufacturing techniques.situations required by managers. Robot arms hold the tennis rackets in place while glue dries, and machine vision systems check for defects. The engineering and design team uses computerized drafting and testing of new products. The following managers work in the tennis racket division.( ) Real World Focus problems require you to Real-World Focusapply techniques and concepts learned inBYP19-3 Anchor Glass Container Corporation, the third largest manufacturer of glass containers in theUnited States, supplies beverage and food producers and consumer products manufacturers nationwide.Parent company Consumers Packaging Inc. (Toronto Stock Exchange: CGC) is a leading internationalthe chapter to specific situations faced by designer and manufacturer of glass containers. The following management discussion appeared in a recent annual report of Anchor Glass. actual companies.A Look at IFRS provides an overviewIFRS A Look at IFRS of the International Financial Reporting It is often difficult for companies to determine in what time period they should report particular revenues and expenses. Both the IASB and FASB are working on a joint project to develop aStandards (IFRS) that relate to common conceptual framework, as well as a revenue recognition project, that will enable com- panies to better use the same principles to record transactions consistently over time.the chapter topics, highlights thedifferences between GAAP and IFRS,discusses IFRS/GAAP convergenceefforts, and tests your understandingthrough IFRS Self-Test Questions andIFRS Concepts and Application. xi 13. FMTOC_SE.qxd 12/3/10 12:10 PMPage xiiAcknowledgmentsAccounting Principles has benefited greatly from the input of focus group participants, manuscript reviewers,those who have sent comments by letter or e-mail, ancillary authors, and proofers. We greatly appreciatethe constructive suggestions and innovative ideas of reviewers and the creativity and accuracy of theancillary authors and checkers.Prior EditionsSandra Lang, McKendree College; Cathy Xanthaky Larsen,Middlesex Community College; David Laurel, South TexasCommunity College; Robert Laycock, Montgomery College;Thanks to the following reviewers and focus group Natasha Librizzi, Madison Area Technical College; William P. Lovell,participants of prior editions of Accounting Principles:Cayuga Community College; Melanie Mackey, Ocean CountyCollege; Jerry Martens, Community College of Aurora; MaureenJohn Ahmad, Northern Virginia Community CollegeAnnandale;McBeth, College of DuPage; Francis McCloskey, CommunitySylvia Allen, Los Angeles Valley College; Matt Anderson, Michigan College of Philadelphia; Chris McNamara, Finger Lakes CommunityState University; Alan Applebaum, Broward Community College;College; Lori Major, Luzerne County Community College; EdwinJuanita Ardovany, Los Angeles Valley College; Yvonne Baker, Mah, University of Maryland, University College; Thomas Marsh,Cincinnati State Tech Community College; Peter Battelle, University Northern Virginia Community CollegeAnnandale; Jim Martin,of Vermont; Colin Battle, Broward Community College; JimUniversity of Montevallo; Suneel Maheshwari, Marshall University;Benedum; Beverly Beatty, Anne Arundel Community College;Shea Mears, Des Moines Area Community College; Pam Meyer,Milwaukee Area Technical College; Jaswinder Bhangal, Chabot University of LouisianaLafayette; Cathy Montesarchio, BrowardCollege; Bernard Bieg, Bucks County College; Michael Blackett,Community College.National American University; Barry Bomboy, J. Sargeant ReynoldsCommunity College; Kent D. Bowen, Butler County Community Robin Nelson, Community College of Southern Nevada; Joseph M.College; David Boyd, Arkansas State University; Greg Brookins,Nicassio, Westmoreland County Community College; MichaelSanta Monica College; Kurt H. Buerger, Angelo State University; ONeill, Seattle Central Community College; Mike Palma, GwinnettLeroy Bugger, Edison Community College; Leon Button, Scottsdale Tech; George Palz, Erie Community College; Michael Papke,Community College.Kellogg Community College; Ruth Parks, Kellogg CommunityCollege; Al Partington, Los Angeles Pierce College; Jennifer Patty,Ann Cardozo, Broward Community College; Steve Carlson,Des Moines Area Community College; Yvonne Phang, Borough ofUniversity of North Dakota; Fatma Cebenoyan, Hunter College;Manhattan Community College; Jan Pitera, Broome CommunityKimberly Charland, Kansas State University; Trudy Chiaravelli,College; Mike Prockton, Finger Lakes Community College; Laura M.Lansing Community College; Shifei Chung, Rowan University; SiuProsser, Black Hills State University; Bill Rencher, SeminoleChung, Los Angeles Valley College; Lisa Cole, Johnson CountyCommunity College; Jenny Resnick, Santa Monica College; ReneeCommunity College; Kenneth Couvillion, San Joaquin DeltaRigoni, Monroe Community College; Kathie Rogers, SUNY Suffolk;College; Alan B. Czyzewski, Indiana State University; ThomasAl Ruggiero, SUNY Suffolk; Jill Russell, Camden County College.Davies, University of South Dakota; Peggy DeJong, KirkwoodCommunity College; John Delaney, Augustana College; TonyRoger Sands, Milwaukee Area Technical College; Marcia Sandvold,Dellarte, Luzerne Community College; Kevin Dooley, Kapiolani Des Moines Area Community College; Richard Sarkisian, CamdenCommunity College; Pam Donahue, Northern Essex CommunityCommunity College; Kent Schneider, East Tennessee StateCollege; Edmond Douville, Indiana University Northwest; PamelaUniversity; Karen Searle, Paul J. Shinal, Cayuga CommunityDruger, Augustana College; Russell Dunn, Broward CommunityCollege; Beth Secrest, Walsh University; Kevin Sinclair, LehighCollege; John Eagan, Erie Community College; Richard Ellison, University; Alice Sineath, Forsyth Tech Community College; LeonMiddlesex Community College; Dora Estes, Volunteer StateSingleton, Santa Monica College; Michael S. Skaff, College of theCommunity College; Mary Falkey, Prince Georges CommunitySequoias; Jeff Slater, North Shore Community College; Lois Slutsky,College.Broward Community College; Dan Small, J. Sargeant ReynoldsCommunity College; Lee Smart, Southwest Tennessee CommunityRaymond Gardner, Ocean County College; Lori Grady, BucksCollege; James Smith, Ivy Tech State College; Carol Springer,County Community College; Richard Ghio, San Joaquin Delta Georgia State University; Jeff Spoelman, Grand Rapids CommunityCollege; Joyce Griffin, Kansas City Community College; Amy Haas,College; Norman Sunderman, Angelo State University.Kingsborough Community College, CUNY; Lester Hall, DanvilleCommunity College; Becky Hancock, El Paso Community College;Donald Terpstra, Jefferson Community College; Lynda Thompson,Jeannie Harrington, Middle Tennessee State University; Bonnie Massasoit Community College; Shafi Ullah, Broward CommunityHarrison, College of Southern Maryland; William Harvey, Henry College; Sue Van Boven, Paradise Valley Community College;Ford Community College; Michelle Heard, MetropolitanChristian Widmer, Tidewater Community College; Wanda Wong,Community College; Ruth Henderson, Union Community College; Chabot College; Pat Walczak, Lansing Community College; KentonEd Hess, Butler County Community College; Kathy Hill, Leeward Walker, University of Wyoming; Patricia Wall, Middle TennesseeCommunity College; Patty Holmes, Des Moines Area CommunityState University; Carol N. Welsh, Rowan University; IdaleneCollege; Zach Holmes, Oakland Community College; Paul Holt, Williams, Metropolitan Community College; Gloria Worthy,Texas A&MKingsville; Audrey Hunter, Broward CommunitySouthwest Tennessee Community College.College; Verne Ingram, Red Rocks Community College; JoanneJohnson, Caldwell Community College; Naomi Karolinski, Monroe Thanks also to perpetual reviewers Robert Benjamin, TaylorCommunity College; Anil Khatri, Bowie State University; Shirley University; Charles Malone, Tammy Wend, and Carol Wysocki, allKleiner, Johnson County Community College; Jo Koehn, Centralof Columbia Basin College; and William Gregg of MontgomeryMissouri State University; Ken Koerber, Bucks County CommunityCollege. We appreciate their continuing interest in the textbookCollege; Adriana Kulakowski, Mynderse Academy.and their regular contributions of ideas to improve it. 14. FMTOC_SE.qxd 12/11/105:45 AM Page xiiiTenth Edition Ancillary Authors,Thanks to the following reviewers, focus group participants,and others who provided suggestions for the Tenth Edition:Contributors, and ProofersSylvia Allen Los Angeles Valley College We sincerely thank the following individuals for their hard workJuanita Ardavany Los Angeles Valley College in preparing the content that accompanies this textbook:Shele BannonQueensborough Community CollegeAmy Bentley Tallahassee Community College LuAnn Bean Florida Institute of TechnologyTimothy Bergsma Davenport UniversityJohn C. Borke University of WisconsinPlattevilleTeri BernsteinSanta Monica CollegeRichard Campbell Rio Grande CollegePatrick BorjaCitrus College Siu ChungLos Angeles Valley CollegeStanley Carroll New York City College of Technology Mel Coe DeVry Institute of Technology, AtlantaSiu ChungLos Angeles Valley College Chris ColeCole Creative GroupCarol CollinsworthUniversity of TexasBrownsville Joan CookMilwaukee Area Technical CollegeKelly Cranford Hinds Community CollegeRaymondLarry FalcettoEmporia State UniversityLiz Diers Black Hills State UniversityMark Gleason Metropolitan State UniversitySamuel A. DuahBowie State UniversityLori Grady Bucks County Community CollegeCarle Essig Montgomery County Community College Coby Harmon University of California, Santa BarbaraAnnette FisherGlendale Community CollegeDouglas W. KiesoAurora UniversityKelly FordQueensborough Community College Yvonne Phang Borough of Manhattan Community CollegeLori Grady Bucks County Community College Rex A. SchildhouseSan Diego Community CollegeMiramarMary Halford Prince Georges Community College Eileen ShifflettJames Madison UniversityThomas KamHawaii Pacific University Diane TannerUniversity of North FloridaNaomi KarolinskiMonroe Community CollegeSheila VielUniversity of WisconsinMilwaukeeLynn Krausse Bakersfield CollegeDick Wasson Southwestern CollegeDavid KrugJohnson County Community CollegeBernard Weinrich Lindenwood UniversityCathy X. LarsonMiddlesex Community CollegeMelanie YonDavid LaurelSouth Texas CollegeChristina Manzo Queensborough Community College We also greatly appreciate the expert assistance providedBeverly MasonFront Range Community Collegeby the following individuals in checking the accuracyRobert Maxwell College of the Canyons of the content that accompanies this textbook:Jill MitchellNorthern Virginia Community College AnnandaleLuAnn Bean Florida Institute of TechnologyRonald OBrien Fayetteville Technical Community College Jack Borke University of WisconsinPlattevilleMichael Motes University of Maryland University College Sandee Cohen Columbia CollegeGregory L. Prescott University of South Alabama Terry Elliott Morehead State UniversityJan PiteraBroome Community CollegeJames Emig Villanova UniversityDebra A. Sills PorterTidewater Community CollegeLarry FalcettoEmporia State UniversityWilliam ProsserCuyuga County Community CollegeAnthony Falgiani Western Illinois UniversityAda Rodriguez Lehman College, The City University ofLori Grady Bucks County Community CollegeNew YorkKirk LynchSandhills Community CollegeEric RothenburgKingsborough Community College, The City Kevin McNelisNew Mexico State UniversityUniversity of New YorkJill MisuracaCentral Connecticut State UniversityAl Ruggiero Suffolk County Community CollegeBarbara Muller Arizona State UniversityMarcia SandvoldDes Moines Area Community CollegeJohn Plouffe California State UniversityLos AngelesMary Jane Sauceda University of TexasBrownsville Ed SchellUniversity of HawaiiPaul J. Shinal Cayauga Community CollegeRex Schildhouse San Diego Community CollegeMiramarBradley SmithDes Moines Area Community CollegeAlice Sineath Forsyth Tech Community CollegeScott Stroher Glendale Community CollegeTeresa Speck St. Marys UniversityGeoffrey TickellIndiana University of PennsylvaniaLynn StallworthAppalachian State UniversityPat Walczak Lansing Community College Sheila Viel University of WisconsinMilwaukeeWanda Wong Chabot College Dick WassonSouthwestern CollegeJack WiehlerSan Joaquin Delta College Andrea WeickgenanntXavier UniversityBernie Weinrich Lindenwood UniversityOur thanks to the publishing pros who contribute to our efforts to and ideas that Ramona Sherman, senior marketing manager, brings topublish high-quality products that benefit both teachers and students: the project.Terry Ann Tatro, development editor; Ed Brislin, project editor; YanaMermel, project editor; Allie K. Morris, executive media editor; GregFinally, our thanks to Amy Scholz, Susan Elbe, George Hoffman, TimChaput, media editor; Jacqueline Kepping, editorial assistant; Valerie Stookesberry, Joe Heider, Bonnie Lieberman, and Will Pesce for theirA. Vargas, senior production editor; Maddy Lesure, textbook designer;support and leadership in Wileys College Division.Dorothy Sinclair, managing editor; Erin Bascom, production editor, We thank PepsiCo, Inc. for permitting us the use of its 2009 annualPam Kennedy, director of production and manufacturing; Ann Berlin, reports for our specimen financial statements and accompanyingvice president of higher education production and manufacturing; notes. You can send your thoughts and ideas about the textbook toMary Ann Price, photo editor; Sandra Rigby, illustration editor; us via email at: AccountingAuthors@yahoo.com.Suzanne Ingrao of Ingrao Associates, project manager; Jo-AnneNaples, permissions editor; Denise Showers of Aptara Inc., project Jerry J. Weygandtmanager at Aptara Inc.; Danielle Urban, project manager at Elm StreetMadison, WisconsinPublishing Services; and Cyndy Taylor. They provided innumerable Paul D. Kimmelservices that helped this project take shape.Milwaukee, WisconsinWe also appreciate the exemplary support and professional commit-Donald E. Kiesoment given us by Chris DeJohn, associate publisher, and the enthusiasm DeKalb, Illinois 15. This page intentionally left blank 16. FMTOC_SE.qxd 12/3/10 12:10 PM Page xvBrief Contents1Accounting in Action 22The Recording Process 503Adjusting the Accounts 984Completing the Accounting Cycle 1525Accounting for Merchandising Operations 2086Inventories 2607Accounting Information Systems 3148Fraud, Internal Control, and Cash 3609Accounting for Receivables 41410 Plant Assets, Natural Resources, and Intangible Assets 45611 Current Liabilities and Payroll Accounting 50812 Accounting for Partnerships 55213 Corporations: Organization and Capital Stock Transactions 59214 Corporations: Dividends, Retained Earnings, and Income Reporting 63215 Long-Term Liabilities 66816 Investments 72217 Statement of Cash Flows 76018 Financial Statement Analysis 82419 Managerial Accounting 87620 Job Order Costing 92221 Process Costing 96422 Cost-Volume-Profit 101023 Budgetary Planning 105224 Budgetary Control and Responsibility Accounting 109625 Standard Costs and Balanced Scorecard 114626 Incremental Analysis and Capital Budgeting 1192APPENDICESA Specimen Financial Statements: PepsiCo, Inc. A1B Specimen Financial Statements: The Coca-ColaCompany, Inc. B1C Specimen Financial Statements: Zetar plc C1D Time Value of Money D1E Using Financial Calculators E1F Standards of Ethical Conduct for ManagementAccountants F1 xv 17. FMTOC_SE.qxd 12/3/10 12:10 PM Page xviContents chapter 1chapter 3 Accounting in Action2Adjusting the Accounts 98 Feature Story: Knowing the Numbers 2 Feature Story: What Was Your Profit? 98 What Is Accounting? 4Timing Issues 100 Three Activities 4 Fiscal and Calendar Years 100 Who Uses Accounting Data 6 Accrual- vs. Cash-Basis Accounting 101 The Building Blocks of Accounting 7Recognizing Revenues and Expenses 101 Ethics in Financial Reporting 7The Basics of Adjusting Entries 103 Generally Accepted Accounting Principles 9 Types of Adjusting Entries 103 Measurement Principles 9 Adjusting Entries for Deferrals 104 Assumptions 10 Adjusting Entries for Accruals 111 The Basic Accounting Equation 12 Summary of Basic Relationships 117 Assets 12The Adjusted Trial Balance and Financial Liabilities 13 Statements 119 Owners Equity 13Preparing the Adjusted Trial Balance 119 Using the Accounting Equation 14 Preparing Financial Statements 120 Transaction Analysis 15APPENDIX 3A Alternative Treatment of Prepaid Summary of Transactions 20 Expenses and Unearned Revenues 124 Financial Statements 21Prepaid Expenses 125 Income Statement 23Unearned Revenues 126 Owners Equity Statement 23Summary of Additional Adjustment Balance Sheet 24Relationships 127 Statement of Cash Flows 24 A Look at IFRS 148 APPENDIX 1A Accounting Career Opportunities 29 Public Accounting 29 chapter 4 Private Accounting 29 Opportunities in Government 30 Completing the Accounting Cycle152 Forensic Accounting 30 Feature Story: Everyone Likes to Win 152 Show Me the Money 30 Using a Worksheet 154 A Look at IFRS 46Steps in Preparing a Worksheet 154Preparing Financial Statements froma Worksheet 158 chapter 2Preparing Adjusting Entries from a The Recording Process 50 Worksheet 158Closing the Books 160 Feature Story: Accidents Happen 50 The Account 52 Preparing Closing Entries 161 Debits and Credits 52Posting Closing Entries 163 Summary of Debit/Credit Rules 56 Preparing a Post-Closing Trial Balance 165 Steps in the Recording Process 57Summary of the Accounting Cycle 167 The Journal 58 Reversing EntriesAn Optional Step 168 The Ledger 60Correcting EntriesAn Avoidable Step 168 The Recording Process Illustrated 63 The Classified Balance Sheet 170 Summary Illustration of Journalizing and Current Assets 172Posting 70Long-Term Investments 172 The Trial Balance 70 Property, Plant, and Equipment 173 Limitations of a Trial Balance 72Intangible Assets 173 Locating Errors 72 Current Liabilities 174 Use of Dollar Signs 73 Long-Term Liabilities 175 A Look at IFRS 94Owners Equity 176 xvi 18. FMTOC_SE.qxd 12/3/10 12:10 PM Page xvii APPENDIX 4A Reversing Entries 181 Inventory Errors 276 Reversing Entries Example 181 Income Statement Effects 276 A Look at IFRS 204Balance Sheet Effects 277 Statement Presentation and Analysis 278 chapter 5 Presentation 265 Analysis 279 Accounting for MerchandisingAPPENDIX 6A Inventory Cost Flow Methods in Operations 208Perpetual Inventory Systems 283 Feature Story: Who Doesnt Shop at Wal-Mart? 208First-In, First-Out (FIFO) 283 Merchandising Operations 210Last-In, First-Out (LIFO) 284 Operating Cycles 211Average-Cost 284 Flow of Costs 211 APPENDIX 6B Estimating Inventories 286 Recording Purchases of Merchandise 213Gross Profit Method 287 Freight Costs 215 Retail Inventory Method 288 Purchase Returns and Allowances 216 A Look at IFRS 310 Purchase Discounts 216 Summary of Purchasing Transactions 217chapter 7 Recording Sales of Merchandise 218 Sales Returns and Allowances 219Accounting Information Systems314 Sales Discounts 220 Feature Story: QuickBooks Helps Completing the Accounting Cycle 222 This Retailer Sell Guitars 314 Adjusting Entries 222 Basic Concepts of Accounting Information Closing Entries 222 Systems 316 Summary of Merchandising Entries 223Computerized Accounting Systems 316 Forms of Financial Statements 224 Manual Accounting Systems 319 Multiple-Step Income Statement 224Subsidiary Ledgers 319 Single-Step Income Statement 227Subsidiary Ledger Example 320 Classified Balance Sheet 227Advantages of Subsidiary Ledgers 321 APPENDIX 5A Periodic Inventory System 232 Special Journals 322 Determining Cost of Goods Sold Under a Periodic Sales Journal 323System 232 Cash Receipts Journal 325 Recording Merchandise Transactions 233Purchases Journal 329 Recording Purchases of Merchandise 233Cash Payments Journal 331 Recording Sales of Merchandise 234Effects of Special Journals on the General APPENDIX 5B Worksheet for a Merchandising Journal 334 Company 236 A Look at IFRS 357 Using a Worksheet 236 A Look at IFRS 257chapter 8 chapter 6 Fraud, Internal Control, and Cash 360 Inventories 260 Feature Story: Minding the Money in Feature Story: Where Is That Spare Moose Jaw 360 Bulldozer Blade? 260 Fraud and Internal Control 362 Classifying Inventory 262 Fraud 362 Determining Inventory Quantities 263The Sarbanes-Oxley Act 363 Taking a Physical Inventory 263 Internal Control 363 Determining Ownership of Goods 264Principles of Internal Control Activities 364 Inventory Costing 266 Limitations of Internal Control 371 Specific Identification 267 Cash Controls 372 Cost Flow Assumptions 267 Cash Receipts Controls 372 Financial Statement and Tax Effects of Cost Cash Disbursements Controls 375Flow Methods 272 Control Features: Use of a Bank 380 Using Inventory Cost Flow Methods Making Bank Deposits 380Consistently 274 Writing Checks 380 Lower-of-Cost-or-Market 275 Bank Statements 381 xvii 19. FMTOC_SE.qxd 12/3/10 12:10 PM Page xviii Reconciling the Bank Account 383Research and Development Costs 478 Electronic Funds Transfer (EFT) System 387Statement Presentation and Analysis 479 Reporting Cash 388Presentation 479 Cash Equivalents 388Analysis 480 Restricted Cash 389 APPENDIX 10A Exchange of Plant Assets 484 A Look at IFRS 410Loss Treatment 484 Gain Treatment 485 chapter 9 A Look at IFRS 504 Accounting for Receivables 414chapter 11 Feature Story: A Dose of Careful Management Keeps Receivables Healthy 414 Current Liabilities and Payroll Types of Receivables 416 Accounts Receivable 417 Accounting 508 Feature Story: Financing His Dreams 508 Recognizing Accounts Receivable 417 Accounting for Current Liabilities 510 Valuing Accounts Receivable 418 Notes Payable 510 Disposing of Accounts Receivable 425 Sales Taxes Payable 511 Notes Receivable 427 Unearned Revenues 512 Determining the Maturity Date 428 Current Maturities of Long-Term Debt 513 Computing Interest 429 Statement Presentation and Analysis 514 Recognizing Notes Receivable 430 Contingent Liabilities 515 Valuing Notes Receivable 430 Recording a Contingent Liability 516 Disposing of Notes Receivable 431 Disclosure of Contingent Liabilities 517 Statement Presentation and Analysis 433 Payroll Accounting 518 Presentation 433 Determining the Payroll 519 Analysis 433 Recording the Payroll 522 A Look at IFRS 453 Employer Payroll Taxes 525 Filing and Remitting Payroll Taxes 528 chapter 10Internal Control for Payroll 528 Plant Assets, Natural Resources,APPENDIX 11A Additional Fringe Benefits 532 and Intangible Assets 456 Paid Absences 532 Post-Retirement Benefits 533 Feature Story: How Much for a A Look at IFRS 549 Ride to the Beach? 456 SECTION 1 Plant Assets 458 Determining the Cost of Plant Assets 459chapter 12 Land 459 Land Improvements 459 Accounting for Partnerships 552 Buildings 460 Feature Story: From Trials to Top Ten 552 Equipment 460 Partnership Form of Organization 554 Depreciation 462Characteristics of Partnerships 554 Factors in Computing Depreciation 463 Organizations with Partnership Depreciation Methods 464 Characteristics 555 Depreciation and Income Taxes 468 Advantages and Disadvantages of Revising Periodic Depreciation 468 Partnerships 556 Expenditures During Useful Life 470 The Partnership Agreement 558 Plant Assets Disposals 471Basic Partnership Accounting 559 Retirement of Plant Assets 471Forming a Partnership 559 Sale of Plant Assets 472Dividing Net Income or Net Loss 560 SECTION 2 Natural Resources 474 Partnership Financial Statements 563 SECTION 3 Intangible Assets 475 Liquidation of a Partnership 564 Accounting for Intangible Assets 475No Capital Deficiency 565 Patents 476 Capital Deficiency 568 Copyrights 476APPENDIX 12A Admission and Withdrawal of Trademarks and Trade Names 476Partners 572 Franchises and Licenses 477 Admission of a Partner 572 Goodwill 477Withdrawal of a Partner 576 xviii 20. FMTOC_SE.qxd 12/3/10 12:10 PM Page xix chapter 13 Discount or Premium on Bonds 675Issuing Bonds at a Discount 676 Corporations: Organization and Issuing Bonds at a Premium 677 Capital Stock Transactions 592 Accounting for Bond Retirements 678 Feature Story: Whats Cooking? 592 Redeeming Bonds at Maturity 679 The Corporate Form of Organization 594 Redeeming Bonds before Maturity 679 Characteristics of a Corporation 595 Converting Bonds into Common Stock 679 Forming a Corporation 597Accounting for Other Long-Term Liabilities 680 Ownership Rights of Stockholders 598 Long-Term Notes Payable 680 Stock Issue Considerations 598 Lease Liabilities 683 Corporate Capital 601Statement Presentation and Analysis 684 Accounting for Issues of Common Stock 603Presentation 684 Issuing Par Value Common Stock for Cash 603Analysis 685 Issuing No-Par Common Stock for Cash 604 APPENDIX 15A Present Value Concepts Issuing Common Stock for Services or Noncash Related to Bond Pricing 690 Assets 605 Present Value of Face Value 690 Accounting for Treasury Stock 606Present Value of Interest Payments Purchase of Treasury Stock 607 (Annuities) 692 Disposal of Treasury Stock 608 Time Periods and Discounting 693 Preferred Stock 610Computing the Present Value of a Bond 693 Dividend Preferences 610 APPENDIX 15B Effective-Interest Method of Liquidation Preference 611 Bond Amortization 695 Statement Presentation 611 Amortizing Bond Discount 695 A Look at IFRS 629 Amortizing Bond Premium 697 chapter 14 APPENDIX 15C Straight-Line Amortization 699Amortizing Bond Discount 699 Corporations: Dividends, Amortizing Bond Premium 700A Look at IFRS 718 Retained Earnings, and Income Reporting 632chapter 16 Feature Story: Owning a Piece of the Action 632 Dividends 634Investments 722 Cash Dividends 634 Feature Story: Is There Anything Stock Dividends 638Else We Can Buy? 722 Stock Splits 640 Why Corporations Invest 724 Retained Earnings 642Accounting for Debt Investments 725 Retained Earnings Restrictions 643 Recording Acquisition of Bonds 726 Prior Period Adjustments 644 Recording Bond Interest 726 Retained Earnings Statement 645Recording Sale of Bonds 726 Statement Presentation and Analysis 646Accounting for Stock Investments 727 Stockholders Equity Presentation 646Holdings of Less than 20% 728 Stockholders Equity Analysis 647Holdings Between 20% and 50% 729 Income Statement Presentation 647Holdings of More than 50% 730 Income Statement Analysis 648Valuing and Reporting Investments 732 A Look at IFRS 665 Categories of Securities 733Balance Sheet Presentation 736 chapter 15 Presentation of Realized and Unrealized Gain or Loss 737 Long-Term Liabilities 668Classified Balance Sheet 738 Feature Story: Thanks Goodness A Look at IFRS 757 for Bankruptcy 668 Bond Basics 670chapter 17 Types of Bonds 671 Issuing Procedures 672 Statement of Cash Flows 760 Determining the Market Value of Bonds 672Feature Story: Got Cash? 760 Accounting for Bond Issues 674 The Statement of Cash Flows: Usefulness Issuing Bonds at Face Value 674and Format 762xix 21. FMTOC_SE.qxd 12/3/10 12:10 PM Page xx Usefulness of the Statement of chapter 19 Cash Flows 762 Classification of Cash Flows 763 Managerial Accounting 876 Significant Noncash Activities 764 Feature Story: Think Fast 876 Format of the Statement of Cash Flows 765Managerial Accounting Basics 878 Preparing the Statement of Cash Flows 766Comparing Managerial and Financial Indirect and Direct Methods 767Accounting 879 Preparing the Statement of Cash FlowsIndirect Management Functions 880 Method 768 Organizational Structure 881 Step 1: Operating Activities 769 Business Ethics 882 Summary of Conversion to Net Cash Provided Managerial Cost Concepts 884 by Operating ActivitiesIndirect Method 773Manufacturing Costs 884 Step 2: Investing and Financing Activities 774 Product versus Period Costs 886 Step 3: Net Change in Cash 775 Manufacturing Costs in Financial Using Cash Flows to Evaluate a Company 778 Statements 887 Free Cash Flow 778 Income Statement 887 APPENDIX 17A Using a Work Sheet to Prepare Cost of Goods Manufactured 888 the Statement of Cash FlowsIndirect Balance Sheet 890Cost ConceptsA Review 891 Method 783Managerial Accounting Today 894 Preparing the Worksheet 784The Value Chain 894 APPENDIX 17B Statement of Cash FlowsDirectTechnological Change 895 Method 789 Just-in-Time Inventory Methods 895 Step 1: Operating Activities 790 Quality 896 Step 2: Investing and Financing Activities 794 Activity-Based Costing 896 Step 3: Net Change in Cash 795 Theory of Constraints 896 A Look at IFRS 820 Balanced Scorecard 897 chapter 18 chapter 20 Financial Statement Analysis824Job Order Costing 922 Feature Story: It Pays to Be Patient 824 Feature Story: . . . And Wed Like It in Red 922 Basics of Financial Statement Analysis 826 Cost Accounting Systems 924 Need for Comparative Analysis 826Job Order Cost System 924 Tools of Analysis 827Process Cost System 925 Horizontal Analysis 827Job Order Cost Flow 926 Balance Sheet 828Accumulating Manufacturing Costs 927 Income Statement 829 Assigning Manufacturing Costs to Work in Retained Earnings Statement 830 Process 929 Vertical Analysis 831Assigning Costs to Finished Goods 936 Balance Sheet 831Assigning Costs to Cost of Goods Sold 937 Income Statement 831 Job Order Costing for Service Companies 937 Ratio Analysis 833 Summary of Job Order Cost Flows 938 Liquidity Ratios 835 Advantages and Disadvantages of Job Order Profitability Ratios 838Costing 940 Solvency Ratios 842Reporting Job Cost Data 941 Summary of Ratios 843Under- or Overapplied Manufacturing Earning Power and Irregular Items 846Overhead 941 Discontinued Operations 846 Extraordinary Items 847chapter 21 Changes in Accounting Principle 848 Comprehensive Income 849 Process Costing 964 Quality of Earnings 850Feature Story: Ben & Jerrys Tracks Alternative Accounting Methods 850 Its Mix-Ups 964 Pro Forma Income 850 The Nature of Process Cost Systems 966 Improper Recognition 851Uses of Process Cost Systems 966 A Look at IFRS 874Process Costing for Service Companies 967 xx 22. FMTOC_SE.qxd 12/3/10 12:10 PM Page xxi Similarities and Differences between Job Order chapter 23Cost and Process Cost Systems 967 Process Cost Flow 969Budgetary Planning1052 Assignment of Manufacturing CostsJournalFeature Story: The Next amazon.com?Entries 970 Not Quite 1052 Equivalent Units 972 Budgeting Basics 1054 Weighted-Average Method 973Budgeting and Accounting 1054 Refinements on the Weighted-AverageThe Benefits of Budgeting 1055Method 974Essentials of Effective Budgeting 1055 Production Cost Report 975 Length of the Budget Period 1055 Comprehensive Example of Process The Budgeting Process 1055 Costing 976Budgeting and Human Behavior 1056 Compute the Physical Unit Flow (Step 1) 977Budgeting and Long-Range Planning 1058 Compute Equivalent Units of Production The Master Budget 1058(Step 2) 978Preparing the Operating Budgets 1059 Compute Unit Production Costs (Step 3) 978 Sales Budget 1059 Prepare a Cost Reconciliation Schedule Production Budget 1060(Step 4) 979Direct Materials Budget 1061 Preparing the Production Cost Report 980 Direct Labor Budget 1063 Costing SystemsFinal Comments 981 Manufacturing Overhead Budget 1064 Contemporary Developments 982Selling and Administrative Expense Just-in-Time Processing 982 Budget 1065 Activity-Based Costing 984 Budgeted Income Statement 1065 APPENDIX 21A Example of Traditional CostingPreparing the Financial Budgets 1067 versus Activity-Based Costing 989Cash Budget 1067 Production and Cost Data 989 Budgeted Balance Sheet 1070 Unit Costs Under Traditional Costing 989 Budgeting in Non-Manufacturing Unit Costs Under ABC 989 Companies 1072 Comparing Unit Costs 990 Merchandisers 1072 Benefits and Limitations of Activity-Based Service Enterprises 1073Costing 991 Not-for-Profit Organizations 1073chapter 24 chapter 22 Cost-Volume-Profit1010 Budgetary Control and Feature Story: Understanding Medical Costs Responsibility Accounting 1096 Might Lead to Better Health Care 1010Feature Story: Turning Trash into Treasure 1096 Cost Behavior Analysis 1012The Concept of Budgetary Control 1098 Variable Costs 1012Static Budget Reports 1099 Fixed Costs 1013 Examples 1099 Relevant Range 1014Uses and Limitations 1100 Mixed Costs 1015 Flexible Budgets 1101 Importance of Identifying Variable and Fixed Why Flexible Budgets? 1101Costs 1019Developing the Flexible Budget 1103 Cost-Volume-Profit Analysis 1020 Flexible BudgetA Case Study 1104 Basic Components 1020Flexible Budget Reports 1106 CVP Income Statement 1020Management by Exception 1108 Break-even Analysis 1023 The Concept of Responsibility Accounting 1109 Target Net Income 1026 Controllable versus Non-controllable Revenues Margin of Safety 1027and Costs 1111 CVP and Changes in the BusinessResponsibility Reporting System 1111Environment 1028Types of Responsibility Centers 1112 CVP Income Statement Revisited 1030Responsibility Accounting for Cost Centers 1114 APPENDIX 22A Variable Costing 1034 Responsibility Accounting for Profit Centers 1115 Effects of Variable Costing on Income 1035 Responsibility Accounting for Investment Rationale for Variable Costing 1036Centers 1117Principles of Performance Evaluation 1120 xxi 23. FMTOC_SE.qxd 12/6/10 1:44 PM Page xxii chapter 25appendix A Standard Costs and Balanced Specimen Financial Statements: Scorecard 1146PepsiCo, Inc. A1 Feature Story: Highlighting Performance Efficiency 1146 appendix B The Need for Standards 1148Distinguishing between Standards and Specimen Financial Statements: TheBudgets 1148 Coca-Cola Company B1Why Standard Costs? 1149 Setting Standard CostsA Difficult Task 1150appendix CIdeal versus Normal Standards 1150A Case Study 1150Specimen Financial Statements: Analyzing and Reporting Variances fromZetar plc C1Standards 1154Direct Materials Variances 1155appendix DDirect Labor Variances 1157Causes of Labor Variances 1158 Time Value of Money D1Manufacturing Overhead Variances 1159Nature of Interest D1Reporting Variances 1160 Simple Interest D1Statement Presentation of Variances 1161 Compound Interest D2 Balanced Scorecard 1162 Present Value Variables D3 APPENDIX 25A Standard Cost Accounting Present Value of a Single Amount D3 System 1168 Present Value of an Annuity D5Journal Entries 1168 Time Periods and Discounting D7Ledger Accounts 1170 Computing the Present Value of a APPENDIX 25B A Closer Look at OverheadLong-Term Note or Bond D7 Variances 1171 appendix EOverhead Controllable Variance 1171Overhead Volume Variance 1172Using Financial Calculators E1 Present Value of a Single Sum E1 chapter 26Plus and Minus E2 Compounding Periods E2 Incremental Analysis and CapitalRounding E2 Budgeting 1192Present Value of an Annuity E2 Feature Story: Soup Is Good Food 1192 Useful Applications of the Financial Calculator E3 SECTION 1 Incremental Analysis 1194 Auto Loan E3 Managements Decision-Making Process 1194 Mortgage Loan Amount E3 The Incremental Analysis Approach 1195 How Incremental Analysis Works 1195 appendix F Types of Incremental Analysis 1196 Accept an Order at a Special Price 1196 Standards of Ethical Conduct for Make or Buy 1198Management Accountants F1 Sell or Process Further 1200IMA Statement of Ethical Professional Retain or Replace Equipment 1201Practice F1 Eliminate an Unprofitable Segment 1202 Principles F1 Allocate Limited Resources 1204Standards F1 SECTION 2 Capital Budgeting 1205 Resolution of Ethical Conflict F2 Evaluation Process 1206 Annual Rate of Return 1207photo credits PC-1 Cash Payback 1208 company index I-1 Discounted Cash Flow 1210 subject index I-3 Net Present Value Method 1210 Internal Rate of Return Method 1212 Comparing Discounted Cash Flow Methods 1214 xxii 24. This page intentionally left blank 25. c01AccountingInAction.indd Page 2 11/26/10 2:10:41 PM user-s146 /Users/user-s146/Desktop/Merry_X-Mas/New CHAPTER1 Accounting in Action Study Objectives After studying this chapter, you should be able to: [1] Explain what accounting is. [2] Identify the users and uses of accounting. [3] Understand why ethics is a fundamental business concept. [4] Explain generally accepted accounting principles. [5] Explain the monetary unit assumption and the economic entity assumption. [6] State the accounting equation, and define its Feature Story components.KNOWING THE NUMBERS [7] Analyze the effects of business transactions onMany students who take this course do not the accounting equation.plan to be accountants. If you are in that [8] Understand the four financial statements and how they are prepared. group, you might be thinking, If Im not Study Objectives give you a framework for going to be an accountant, why do I need learning the specific concepts covered in the[The Navigator] chapter. to know accounting? In response, considerthe quote from Harold Geneen, the formerchairman of IT&T: To be good at your [The Navigator]business, you have to know the numberscold. Success in any business comes back to Scan Study Objectivesthe numbers. You will rely on them to make Read Feature Story decisions, and managers will use them to Read Preview evaluate your performance. That is true Read text and answer Do it! p. 11 whether your job involves marketing, produc- p. 14 p. 21 p. 25 tion, management, or information systems. Work Comprehensive Do it! p. 26 Review Summary of Study Objectives In business, accounting and financial Answer Self-Test Questions statements are the means for communi- Complete Assignments cating the numbers. If you dont know howto read financial statements, you cant Go to WileyPLUS for practice and tutorials really know your business.Read A Look at IFRS p. 46 Many companies spend significant resources The Navigator is a learning system designed to prompt you to teaching their employees basic accounting so use the learning aids in the chapter and set priorities as you study. 2 26. c01AccountingInAction.indd Page 3 11/26/10 2:10:43 PM user-s146 /Users/user-s146/Desktop/Merry_X-Mas/New that they can read financial statements and understand how their actions affect the companys financial results. One such company is Springfield ReManufacturing Corporation (SRC). When Jack Stack and 11 other managers purchased SRC for 10 cents a share, it was a failing division of International Harvester. Jacks 119 employees, however, were counting on him for their livelihood. He decided that for the company to survive, every employee needed to think like a businessperson and to act like an owner. To accomplish this, all employees at SRC took basicaccounting courses and participated in weekly reviews of the companys financial statements.SRC survived, and eventually thrived. To this day, every employee (now numbering more than1,000) undergoes this same training.Many other companies have adopted this approach, which is called open-book management.Even in companies that do not practice open-book management, employers generally assumethat managers in all areas of the company are financially literate.Taking this course will go a long way to making you financially literate. In this book, you willlearn how to read and prepare financial statements, and how to use basic tools to evaluatefinancial results. Appendices A and B provide real financial statements of two well-knowncompanies, PepsiCo, Inc. and The Coca-Cola Company. Throughout this textbook, we attempt toincrease your familiarity with financial reporting by providing numerous references, questions,and exercises that encourage you to explore these financial statements. [The Navigator]The Feature Story helps you picture how the chapter topic relates to the real world ofaccounting and business. You will find references to the story throughout the chapter.InsideCHAPTER1Inside Chapter x lists boxesin the chapter that should be ofspecial interest to you. Accounting Across the Organization: The Scoop on Accounting (p. 6) Ethics Insight: The Numbers Behind Not-for-Profit Organizations (p. 8) International Insight: The Korean Discount (p. 10) Accounting Across the Organization: Spinning the Career Wheel (p. 12)3 27. c01AccountingInAction.indd Page 4 11/26/10 2:10:48 PM user-s146 /Users/user-s146/Desktop/Merry_X-Mas/New PreviewofCHAPTER1 The opening story about Springfield ReManufacturing Corporation highlights the importance of having good financial information to make effective business decisions. Whatever ones pursuits or occupation, the need for financial information is inescapable. You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing financial information. Good decision making depends on good information. The purpose of this chapter is to show you that accounting is the system used to provide useful financial information. The content and organization of Chapter 1 are as follows. Accounting in Action The Building Blocks The Basic AccountingUsing theWhat Is Accounting? Financial Statements of AccountingEquationAccounting Equation Three activities Ethics in financial Assets Transaction analysis Income statement Who uses accounting reporting Liabilities Summary of Owners equity data Generally accepted Owners equitytransactionsstatement accounting principles Balance sheet Measurement Statement of cash principlesflows Assumptions The Preview describes and [The Navigator] outlines the major topics and subtopics you will see in the chapter. What Is Accounting? Why is accounting so popular? What consistently ranks as one of the top careerStudy Objective [1] opportunities in business? What frequently rates among the most popular majorsExplain what on campus? What was the undergraduate degree chosen by Nike founder Philaccounting is. Knight, Home Depot co-founder Arthur Blank, former acting director of the Federal Bureau of Investigation (FBI) Thomas Pickard, and numerous members of Congress? Accounting.1 Why did these people choose accounting? They wanted to understand what was happening financially to their organizations. Accounting is the financial information system that provides these insights. In short, to under- stand your organization, you have to know the numbers.Accounting consists of three basic activitiesit identifies, records, and com- municates the economic events of an organization to interested users. Lets take a closer look at these three activities. Three Activities As a starting point to the accounting process, a company identifies the economic events relevant to its business. Examples of economic events are the sale of snack chips by PepsiCo, providing of telephone services by AT&T, and payment of wages by Ford Motor Company. Once a company like PepsiCo identifies economic events, it records those events in order to provide a history of its financial activities. Recording consists of 1The appendix to this chapter describes job opportunities for accounting majors and explains why accounting is such a popular major. 4 28. c01AccountingInAction.indd Page 5 11/26/10 2:10:49 PM user-s146/Users/user-s146/Desktop/Merry_X-Mas/New What Is Accounting?5keeping a systematic, chronological diary of events, measured in dollars and cents.In recording, PepsiCo also classifies and summarizes economic events. Finally, PepsiCo communicates the collected information to interested users bymeans of accounting reports. The most common of these reports are called finan-cial statements. To make the reported financial information meaningful, PepsiCoreports the recorded data in a standardized way. It accumulates information result-ing from similar transactions. For example, PepsiCo accumulates all sales transac-tions over a certain period of time and reports the data as one amount in thecompanys financial statements. Such data are said to be reported in the aggregate.By presenting the recorded data in the aggregate, the accounting process simplifiesa multitude of transactions and makes a series of activities understandable andmeaningful. A vital element in communicating economic events is the accountants ability toanalyze and interpret the reported information. Analysis involves use of ratios, per-centages, graphs, and charts to highlight significant financial trends and relationships.Interpretation involves explaining the uses, meaning, and limitations of reporteddata. Appendix A of this textbook shows the financial statements of PepsiCo, Inc.;Appendix B illustrates the financial statements of The Coca-Cola Company. We re-fer to these statements at various places throughout the text. At this point, theyprobably strike you as complex and confusing. By the end of this course, youll besurprised at your ability to understand, analyze, and interpret them. Illustration 1-1 summarizes the activities of the accounting process.Illustration 1-1The activities of theaccounting process Communication Identification RecordingPrepare accounting reportsSelect economic events (transactions) Record, classify, and summarizeKIA epoIA rt NOKallRepo rt ua RAnn uAAnalyze and interpret for usersYou should understand that the accounting process includes the bookkeepingEssential terms are printedfunction. Bookkeeping usually involves only the recording of economic events. It is in blue when they first appear,therefore just one part of the accounting process. In total, accounting involves theand are defined in the end-of-entire process of identifying, recording, and communicating economic events.2 chapter glossary.2 The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian Renaissancemathematician. Pacioli was a close friend and tutor to Leonardo da Vinci and a contemporary ofChristopher Columbus. In his 1494 text Summa de Arithmetica, Geometria, Proportione et Proportionalite,Pacioli described a system to ensure that financial information was recorded efficiently and accurately. 29. c01AccountingInAction.indd Page 6 11/26/10 2:10:51 PM user-s146 /Users/user-s146/Desktop/Merry_X-Mas/New 61 Accounting in Action Who Uses Accounting Data The information that a user of financial information needs depends upon the kinds Study Objective [2] of decisions the user makes. There are two broad groups of users of financial infor- Identify the users andmation: internal users and external users. uses of accounting. INTERNAL USERS Internal users of accounting information are managers who plan, organize, and run the business. These include marketing managers, production supervisors, finance Illustration 1-2directors, and company officers. In running a business, internal users must answer Questions that internal many important questions, as shown in Illustration 1-2. users ask Questions Asked by Internal Users ST ONST RIKrRIKE fai es E Un cticP raplaylistitunesBriens L. H.C.B.In Sgt. Peppers ComesMy ShipCowboy? WhenDo Wia GonnaWhatis A LifeWantAll I MENU Snack ch ack chck chi k chipshi Beverage Beverageseve ageverageverage ge Stockholder Finance Marketing Human Resources Management Is cash sufficient to pay What price for an Apple iPodCan we afford to giveWhich PepsiCo product line is dividends towill maximize the companys General Motors employees the most profitable? Should any Microsoft stockholders? net income?pay raises this year? product lines be eliminated? To answer these and other questions, internal users need detailed information on a timely basis. Managerial accounting provides internal reports to help users make decisions about their companies. Examples are financial comparisons of op- erating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year. ACCOUNTING ACROSS THE ORGANIZATION The Scoop on Accounting Accounting can serve as a useful recruiting tool even for the human resources department. Rhino Foods, located in Burlington, Vermont, is a manufacturer of specialty ice cream. Its corporate website includes the following: Wouldnt it be great to work where you were part of a team? Where your input and hard work made a difference? Where you werent kept in the dark about what management was thinking? . . . Wellits not a dream! Its the way we do business . . . Rhino Foods believes in family, honesty and open communication we really care about and appreciate our employeesand it shows. Operating re- sults are posted and monthly group meetings inform all employees about whats happening in the Company. Employees also share in the Companys profits, in addition to having an excellent comprehensive benefits package. Source: www.rhinofoods.com/workforus/workforus.html. Accounting Across the Organization boxes demonstrate applications of accounting information in various business functions. ?What are the benefits to the company and to the employees of making the financialstatements available to all employees? (See page 46.) EXTERNAL USERS External users are individuals and organizations outside a company who want financial information about the company. The two most common types of external users are 30. c01AccountingInAction.indd Page 711/29/10 5:19:12 PM user-s146 /Users/user-s146/Desktop/Merry_X-Mas/New The Building Blocks of Accounting 7investors and creditors. Investors (owners) use accounting information to make deci-sions to buy, hold, or sell ownership shares of a company. Creditors (such as suppliersand bankers) use accounting information to evaluate the risks of granting credit orlending money. Illustration 1-3 shows some questions that investors and creditorsmay ask. Questions Asked by External UsersYeah! What do we do if they catch us?BILLCOLLECTOR InvestorsInvestors CreditorsIs General Electric earningHow does Disney compare in size Will United Airlines be able satisfactory income?and profitability with Time Warner?to pay its debts as they come due? Illustration 1-3 Questions that externalFinancial accounting answers these questions. It provides economic and financial users askinformation for investors, creditors, and other external users. The information needsof external users vary considerably. Taxing authorities, such as the Internal RevenueService, want to know whether the company complies with tax laws. Regulatoryagencies, such as the Securities and Exchange Commission or the Federal TradeCommission, want to know whether the company is operating within prescribedrules. Customers are interested in whether a company like General Motors will con-tinue to honor product warranties and support its product lines. Labor unions such asthe Major League Baseball Players Association want to know whether the ownershave the ability to pay increased wages and benefits.The Building Blocks of AccountingA doctor follows certain standards in treating a patients illness. An architectfollows certain standards in designing a building. An accountant follows certainstandards in reporting financial information. For these standards to work, a funda-mental business concept must be at workethical behavior.Ethics in Financial ReportingPeople wont gamble in a casino if they think it is rigged. Similarly, people wontplay the stock market if they think stock prices are rigged. In recent years the finan-Study Objective [3]cial press has been full of articles about financial scandals at Enron, WorldCom,Understand why ethics isHealthSouth, AIG, and others. As the scandals came to light, mistrust of financial a fundamental businessreporting in general grew. One article in the Wall Street Journal noted that concept.repeated disclosures about questionable accounting practices have bruised inves-tors faith in the reliability of earnings reports, which in turn has sent stock pricestumbling.3 Imagine trying to carry on a business or invest money if you couldnot depend on the financial statements to be honestly prepared. Information wouldhave no credibility. There is no doubt that a sound, well-functioning economydepends on accurate and dependable financial reporting. United States regulators and lawmakers were very concerned that the econ-omy would suffer if investors lost confidence in corporate accounting because of3 U.S. Share Prices Slump, Wall Street Journal (February 21, 2002). 31. c01AccountingInAction.indd Page 8 11/26/10 2:11:00 PM user-s146 /Users/user-s146/Desktop/Merry_X-Mas/New 81 Accounting in Actionunethical financial reporting. In response, Congress passed the Sarbanes-Oxley Act of2002 (SOX, or Sarbox). Its intent is to reduce unethical corporate behavior anddecrease the likelihood of future corporate scandals. As a result of SOX,Ethics Note top management must now certify the accuracy of financial information. Inaddition, penalties for fraudulent financial activity are much more severe. Circus-founder P.T. Barnum isAlso, SOX increased the independence of the outside auditors who review alleged to have said, Trust the accuracy of corporate financial statements and increased the oversight everyone, but cut the deck. Whatrole of boards of directors. Sarbanes-Oxley does is to provide measures that (like cutting the The standards of conduct by which ones actions are judged as right or deck of playing cards) help ensure wrong, honest or dishonest, fair or not fair, are ethics. Effective financial that fraud will not occur. reporting depends on sound ethical behavior. To sensitize you to ethicalsituations in business and to give you practice at solving ethical dilemmas,we address ethics in a number of ways in this book: Ethics Notes help sensitize you to some of the ethical issues in1. A number of the Feature Stories and other parts of the text discuss the central accounting.importance of ethical behavior to financial reporting. 2. Ethics Insight boxes and marginal Ethics Notes highlight ethics situations andissues in actual business settings. 3. Many of the All About You topics (available on the books companion website)focus on ethical issues you may face in your college and early-career years. 4. At the end of the chapter, an Ethics Case simulates a business situation andasks you to put yourself in the position of a decision maker in that case. Illustration 1-4 When analyzing these various ethics cases, as well as experiences in your own Steps in analyzing ethicslife, it is useful to apply the three steps outlined in Illustration 1-4. cases and situations1. Recognize an ethical 2. Identify and analyze3. Identify the alternatives,situation and the ethical the principal el