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I

WILEY

14th edition

John Wiley & Sons, Inc.

Donald E. Kieso PhD, CPANorthern Illinois University

DeKalb, Illinois

Jerry J. Weygandt PhD, CPAUniversity of Wisconsin—Madison

Madison, Wisconsin

Terry D. Warfield, PhDUniversity of Wisconsin—Madison

Madison, Wisconsin

ContentsChapter 1

Financial Accountingand Accounting Standards 2Thinking Outside the BoxFinancial Statements and Financial Reporting 4

Accounting and Capital Allocation 4What Do the Numbers Mean? It's the

Accounting 5Objective of Financial Reporting 5What Do the Numbers Mean? Don't

Forget Stewardship 6The Need to Develop Standards 7

Parties Involved in Standard-Setting 7Securities and Exchange Commission (SEC) 8American Institute of Certified Public

Accountants (AICPA) 9Financial Accounting Standards

Board (FASB) 10Changing Role of the AICPA 13

Generally Accepted Accounting Principles 13FASB Codification 14What Do the Numbers Mean? You Have to

Step Back 16Issues in Financial Reporting 16

GAAP in a Political Environment 16What Do the Numbers Mean? Fair

Consequences? 17The Expectations Gap 18Financial Reporting Challenges 19International Accounting Standards 20Ethics in the Environment of Financial

Accounting 20Conclusion 21

FASB Codification 23IFRS Insights 32

Chapter 2

Conceptual Frameworkfor Financial Accounting 4 2What Is It?Conceptual Framework 44

Need for a Conceptual Framework 44What Do the Numbers Mean?

What's Your Principle? 45Development of a Conceptual Framework 45Overview of the Conceptual Framework 46

First Level: Basic Objective 47Second Level: Fundamental Concepts 47

Qualitative Characteristics of AccountingInformation 47

What Do the Numbers Mean? Living in aMaterial World 50

What Do the Numbers Mean? ShowMe the Earnings! 53

Basic Elements 54Third Level: Recognition and Measurement

Concepts 55Basic Assumptions 56What Do the Numbers Mean? Whose

Company Is It? 56Basic Principles of Accounting 58Constraints 63What Do the Numbers Mean? You May

Need a Map 63Summary of the Structure 65


Chapter 3

The Accounting InformationSystem 86Needed: A Reliable Information SystemAccounting Information System 88

Basic Terminology 88Debits and Credits 89The Accounting Equation 90Financial Statements and Ownership

Structure 92The Accounting Cycle 93

Identifying and Recording Transactions andOther Events 93

Journalizing 95Posting 96Trial Balance 100Adjusting Entries 100What Do the Numbers Mean?

Am I Covered? 110Adjusted Trial Balance 111Preparing Financial Statements 111What Do the Numbers Mean?

24/7 Accounting 113Closing 113Post-Closing Trial Balance 116Reversing Entries 116The Accounting Cycle Summarized 116What Do the Numbers Mean? Statements,

Please 117Financial Statements for a Merchandising

Company 117Income Statement 117Statement of Retained Earnings 117

XXII

Balance Sheet 118Closing Entries 119

APPENDIX 3A Cash-Basis Accounting versusAccrual-Basis Accounting 121

Conversion from Cash Basis to Accrual Basis 123Service Revenue Computation 124Operating Expense Computation 124

Theoretical Weaknesses of the Cash Basis 126APPENDIX 3B Using Reversing Entries 126Illustration of Reversing Entries—Accruals 126Illustration of Reversing Entries—Deferrals 127Summary of Reversing Entries 128APPENDIX 3C Using a Worksheet: The Accounting

Cycle Revisited 129Worksheet Columns 129

Trial Balance Columns 129Adjustments Columns 129

Adjustments Entered on the Worksheet 130Adjusted Trial Balance 131Income Statement and Balance

Sheet Columns 131Preparing Financial Statements

from a Worksheet 131IFRS Insights 153

Chapter 4

Income Statement and RelatedInformation 158Watch Out for Pro FormaIncome Statement 160

Usefulness of the Income Statement 160Limitations of the Income Statement 160Quality of Earnings 161What Do the Numbers Mean? Four:

The Loneliest Number 162Format of the Income Statement 162

Elements of the Income Statement 162Single-Step Income Statements 163Multiple-Step Income Statements 164Condensed Income Statements 167

Reporting Irregular Items 168What Do the Numbers Mean? Are One-Time

Charges Bugging You? 169Discontinued Operations 169Extraordinary Items 170What Do the Numbers Mean? Extraordinary

Times 172Unusual Gains and Losses 172Changes in Accounting Principle 174Changes in Estimates 174Corrections of Errors 175Summary of Irregular Items 176

Special Reporting Issues 177Intraperiod Tax Allocation 177Earnings per Share 178

Retained Earnings Statement 180What Do the Numbers Mean? Different Income

Concepts 181Comprehensive Income 181


Chapter 5

Balance Sheet and Statementof Cash Flows 212Hey, It Doesn't Balance!SECTION 1 Balance Sheet 214Usefulness of the Balance Sheet 214

What Do the Numbers Mean? Grounded 214Limitations of the Balance Sheet 215Classification in the Balance Sheet 215

Current Assets 217Noncurrent Assets 220Liabilities 222What Do the Numbers Mean? "Show

Me the Assets!" 223Owners' Equity 225Balance Sheet Format 225What Do the Numbers Mean?

Warning Signals 227SECTION 2 Statement of Cash Flows 227Purpose of the Statement of Cash Flows 227

What Do the Numbers Mean? Watch ThatCash Flow 228

Content and Format of the Statementof Cash Flows 228

Overview of the Preparation ofthe Statement of Cash Flows 230

Sources of Information 230Preparing the Statement of Cash Flows 230 v

Significant Noncash Activities 232Usefulness of the Statement of Cash Flows 233

Financial Liquidity 233Financial Flexibility 234Free Cash Flow 234What Do the Numbers Mean?

"There Ought to Be a Law" 235SECTION 3 Additional Information 236"Supplemental Disclosures 236

Contingencies 236Accounting Policies 236Contractual Situations 237What Do the Numbers Mean? What About

Your Commitments? 237Fair Values 238

Techniques of Disclosure 239Parenthetical Explanations 239Notes 239Cross-Reference and Contra Items 241Supporting Schedules 241Terminology 242

xxiii

APPENDIX 5A Ratio Analysis—A Reference 244Using Ratios to Analyze Performance 244APPENDIX 5B Specimen Financial Statements: The

Procter & Gamble Company 246FASB Codification 278IFRS Insights 301

Chapter 6

Accounting and the TimeValue of Money 308The Magic of InterestBasic Time Value Concepts 310

Applications of Time ValueConcepts 310

The Nature of Interest 311Simple Interest 312Compound Interest 312What Do the Numbers Mean?

A Pretty Good Start 313Fundamental Variables 316

Single-Sum Problems 316Future Value of a Single Sum 317Present Value of a Single Sum 318Solving for Other Unknowns in Single-Sum

Problems 320Annuities 321

Future Value of an Ordinary Annuity 322Future Value of an Annuity Due 324Examples of Future Value of Annuity

Problems 325Present Value of an Ordinary Annuity 327What Do the Numbers Mean?

Up in Smoke 329Present Value of an Annuity Due 329Examples of Present Value of

Annuity Problems 330More Complex Situations 332

• Deferred Annuities 332Valuation of Long-Term Bonds 334Effective-Interest Method of Amortization of

Bond Discount or Premium 335Present Value Measurement 336

What Do the Numbers Mean? How Low CanThey Go? 337

Choosing an Appropriate Interest Rate 337Example of Expected Cash Flow 337

FASB Codification 340

Chapter 7

Cash and Receivables 3 6 4No-Tell NortelCash 366

What Is Cash? 366Reporting Cash 366

Summary of Cash-Related Items 368What Do the Numbers Mean?

Deep Pockets 369 _Accounts Receivable 369

Recognition of Accounts Receivable 370Valuation of Accounts Receivable 372What Do the Numbers Mean?

"Too Generous"? 378Notes Receivable 378

Recognition of Notes Receivable 378Valuation of Notes Receivable 382What Do the Numbers Mean?

Economic Consequences andWrite-Offs 383

Special Issues 383Fair Value Option 384Disposition of Accounts and Notes

Receivable 384What Do the Numbers Mean? Return

to Lender 389Presentation and Analysis 391

APPENDIX 7A Cash Controls 395Using Bank Accounts 395The Imprest Petty Cash System 396Physical Protection of Cash Balances 397Reconciliation of Bank Balances 397APPENDIX 7B Impairments of Receivables 400Impairment Measurement and Reporting 401

Impairment Loss Example 401What Do the Numbers Mean? Lost in

Translation 402Recording Impairment Losses 402


Chapter 8

Valuation of Inventories:A Cost-Basis Approach 4 3 4Inventories in the Crystal BallInventory Issues 436

Classification 436Inventory Cost Flow 437Inventory Control 439What Do the Numbers Mean?

Staying Lean 440Basic Issues in Inventory Valuation 440Physical Goods Included in Inventory 441

Goods in Transit 441Consigned Goods 441Special Sales Agreements 442What Do the Numbers Mean?

No Parking! 443Effect of Inventory Errors 443

Costs Included in Inventory 446Product Costs 446

XXIV

Period Costs 446Treatment of Purchase Discounts 447What Do the Numbers Mean? You May Need

Map 447Which Cost Flow Assumption to Adopt? 448

Specific Identification 448Average Cost 449First-ln, First-Out (FIFO) 450Last-In, First-Out (LIFO) 451

Special Issues Related to LIFO 452LIFO Reserve 452What Do the Numbers Mean?

Comparing Apples to Apples 453LIFO Liquidation 454Dollar-Value LIFO 455What Do the Numbers Mean? Quite a

Difference 460Comparison of LIFO Approaches 460Major Advantages of LIFO 461Major Disadvantages of LIFO 462

Basis for Selection of Inventory Method 463What Do the Numbers Mean? Repeal

LIFO! 465Inventory Valuation Methods—Summary

Analysis 465FASB Codification 468

Chapter 9

Inventories: AdditionalValuation Issues 4 9 2What Do Inventory Changes Tell Us?Lower-of-Cost-or-Market 494

Ceiling and Floor 495How Lower-of-Cost-or-Market Works 496Methods of Applying Lower-of-Cost-or-

Market 497Recording "Market" Instead of Cost 498Use of an Allowance 499Use of an Allowance—Multiple Periods 500What Do the Numbers Mean? "Put It in

Reverse" 500Evaluation of the Lower-of-Cost-or-Market

Rule 501Valuation Bases 501

Valuation at Net Realizable Value 501Valuation Using Relative Sales Value 502Purchase Commitments—A Special

Problem 503The Gross Profit Method of Estimating

Inventory 505Computation of Gross Profit Percentage 506Evaluation of Gross Profit Method 507What Do the Numbers Mean?

The Squeeze 508Retail Inventory Method 508

Retail-Method Concepts 509

Retail Inventory Method with Markupsand Markdowns—ConventionalMethod 510

Special Items Relating to Retail Method 513Evaluation of Retail Inventory Method 513

Presentation and Analysis 514Presentation of Inventories 514Analysis of Inventories 515

APPENDIX 9A LIFO Retail Methods 518Stable Prices—-LIFO Retail Method 518Fluctuating Prices—Dollar-Value

LIFO Retail Method 519Subsequent Adjustments Under

Dollar-Value LIFO Retail 520Changing from Conventional

Retail to LIFO 521FASB Codification 523IFRS Insights 545

Chapter 10

Acquisition and Dispositionof Property, Plant, andEquipment 5 5 4Where Have All the Assets Gone?Property, Plant, and Equipment 556Acquisition of Property, Plant,

and Equipment 556Cost of Land 557Cost of Buildings 557Cost of Equipment 558Self-Constructed Assets 558Interest Costs During Construction 559What Do the Numbers Mean? What's in

Your Interest? 564Observations 565

Valuation of Property, Plant,and Equipment 565

Cash Discounts 565Deferred-Payment Contracts 565Lump-Sum Purchases 566Issuance of Stock 567Exchanges of Nonmonetary Assets 568What Do the Numbers Mean? About

Those Swaps 573Accounting for Contributions 573Other Asset Valuation Methods 574

Costs Subsequent to Acquisition 574What Do the Numbers Mean?

Disconnected 575Additions 576Improvements and Replacements 576Rearrangement and Reinstallation 577Repairs 577Summary of Costs Subsequent to

Acquisition 578

XXV

Disposition of Property, Plant,and Equipment 578

Sale of Plant Assets 578Involuntary Conversion 579Miscellaneous Problems 579

FASB Codification 581

Chapter 11

Depreciation, Impairments,and Depletion 604Here Come the Write-Offs 604Depreciation—A Method of

Cost Allocation 606Factors Involved in the Depreciation

Process 606What Do the Numbers Mean?

Alphabet Dupe 608Methods of Depreciation 608Special Depreciation Methods 611What Do the Numbers Mean? Decelerating

Depreciation 613Special Depreciation Issues 614What Do the Numbers Mean? Depreciation

Choices 617Impairments 617

Recognizing Impairments 617Measuring Impairments 618Restoration of Impairment Loss 619Impairment of Assets to Be

Disposed of 619Depletion 620

Establishing a Depletion Base 621Write-Off of Resource Cost 622Estimating Recoverable

Reserves 623Liquidating Dividends 623Continuing Controversy 623What Do the Numbers Mean?

Rah-Rah Surprise 625Presentation and Analysis 625

Presentation of Property, Plant, Equipment,and Natural Resources 625

Analysis of Property, Plant, andEquipment 627

APPENDIX 11A Income TaxDepreciation 630

Modified Accelerated Cost RecoverySystem 630

Tax Lives (Recovery Periods) 630Tax Depreciation Methods 631Example of MACRS System 632

Optional Straight-Line Method 633Tax versus Book Depreciation 633FASB Codification 633IFRS Insights 653

Chapter 12

Intangible Assets 664Are We There Yet?Intangible Asset Issues 666

Characteristics 666Valuation 666Amortization of Intangibles 667What Do the Numbers Mean? Definitely

Indefinite 668Types of Intangible Assets 669

Marketing-Related Intangible Assets 669Customer-Related Intangible Assets 670Artistic-Related Intangible Assets 670Contract-Related Intangible Assets 671Technology-Related Intangible Assets 671What Do the Numbers Mean? Patent Battles 672What Do the Numbers Mean? The Value of a

Secret Formula 673Goodwill 674

Impairment of Intangible Assets 677Impairment of Limited-Life Intangibles 677Impairment of Indefinite-Life Intangibles Other

Than Goodwill 678Impairment of Goodwill 678Impairment Summary 679What Do the Numbers Mean?

Impairment Risk 680Research and Development Costs 680

Identifying R&D Activities 681Accounting for R&D Activities 682Costs Similar to R&D Costs 682What Do the Numbers Mean? Branded 685Conceptual Questions 685

Presentation of Intangibles andRelated Items 686

Presentation of Intangible Assets 686Presentation of Research and Development

Costs 686APPENDIX 12A Accounting for Computer

Software Costs 690Diversity in Practice 690The Profession's Position 691Accounting for Capitalized Software Costs 691Reporting Software Costs 692Setting Standards for Software Accounting 692FASB Codification 694IFRS Insights 712

Chapter 13

Current Liabilities andContingencies 7 2 0Now You See It, Now You Don'tSECTION 1 Current Liabilities 722What Is a Liability? 722

XXVI

What Is a Current Liability? 722Accounts Payable 723Notes Payable 723Current Maturities of Long-Term Debt 725Short-Term Obligations Expected

to Be Refinanced 725What Do the Numbers Mean? What About

That Short-Term Debt? 727Dividends Payable 727Customer Advances and Deposits 727Unearned Revenues 728What Do the Numbers Mean? Microsoft's

Liabilities—Good or Bad? 729Sales Taxes Payable 729Income Taxes Payable 730Employee-Related Liabilities 730Compensated Absences 732

SECTION 2 Contingencies 735Gain Contingencies 735Loss Contingencies 736

Likelihood of Loss 736Litigation, Claims, and Assessments 738Guarantee and Warranty Costs 739Premiums and Coupons 741What Do the Numbers Mean?

Frequent Flyers 742Environmental Liabilities 742What Do the Numbers Mean? More

Disclosure, Please 745Self-Insurance 745

SECTION 3 Presentation and Analysis 746Presentation of Current Liabilities 746Presentation of Contingencies 748Analysis of Current Liabilities 749

Current Ratio 749Acid-Test Ratio 750


Chapter 14

Long-Term Liabilities 782Bonds versus Notes?SECTION 1 Bonds Payable 784Issuing Bonds 784Types and Ratings of Bonds 784

What Do the Numbers Mean?All About Bonds 785

Valuation of Bonds Payable—Discountand Premium 786

What Do the Numbers Mean?How's My Rating? 788

Bonds Issued at Par on Interest Date 788Bonds Issued at Discount or Premium

on Interest Date 789Bonds Issued Between Interest

Dates 790

Effective-Interest Method 791Bonds Issued at a Discount 791Bonds Issued at a Premium 792Accruing Interest 793Classification of Discount and Premium 794

Costs of Issuing Bonds 794Extinguishment of Debt 795

What Do the Numbers Mean? Your DebtIs Killing My Equity 796

SECTION 2 Long-Term Notes Payable 797Notes Issued at Face Value 797Notes Not Issued at Face Value 798

Zero-Interest-Bearing Notes 798Interest-Bearing Notes 799

Special Notes Payable Situations 800Notes Issued for Property, Goods,

or Services 800Choice of Interest Rate 801

Mortgage Notes Payable 802Fair Value Option 803

Fair Value Measurement 803Fair Value Controversy 803

SECTION 3 Reporting and AnalyzingLong-Term Debt 804

Off-Balance-Sheet Financing 804Different Forms 804Rationale 805What Do the Numbers Mean? Obligated 806

Presentation and Analysis ofLong-Term Debt 806

Presentation of Long-Term Debt 806Analysis of Long-Term Debt 808

APPENDIX 14A Troubled-Debt Restructurings 810Settlement of Debt 811

Transfer of Assets 811Granting of Equity Interest 812

Modification of Terms 812Example 1—No Gain for Debtor 813Example 2—Gain for Debtor 815

Concluding Remarks 816FASB Codification 817IFRS Insights 835

Chapter 15

Stockholders' Equity 842It's a Global MarketThe Corporate Form of Organization 844

State Corporate Law 844Capital Stock or Share System 844Variety of Ownership Interests 845What Do the Numbers Mean?

A Class (B) Act 846Corporate Capital 846

Issuance of Stock 847What Do the Numbers Mean? The Case of the

Disappearing Receivable 851

XXVII

Reacquisition of Shares 851What Do the Numbers Mean?

Signals to Buy? 852What Do the Numbers Mean?

Not So Good Anymore 855Preferred Stock 856

Features of Preferred Stock 856Accounting for and Reporting Preferred

Stock 857Dividend Policy 858

Financial Condition and DividendDistributions 859

Types of Dividends 859Stock Split 864What Do the Numbers Mean? Splitsville 865What Do the Numbers Mean? Dividends Up,

Dividends Down 867Disclosure of Restrictions on Retained

Earnings 867Presentation and Analysis of Stockholders'

Equity 868Presentation 868Analysis 870

APPENDIX 15A Dividend Preferences and BookValue per Share 873

Dividend Preferences 873Book Value per Share 874FASB Codification 876IFRS Insights 895

What Do the Numbers Mean? A Little HonestyGoes a Long Way 921

SECTION 2 Computing Earnings per Share 921Earnings per Share—Simple Capital

Structure 922Preferred Stock Dividends 922Weighted-Average Number of Shares

Outstanding 923Comprehensive Example 925

Earnings per Share—Complex CapitalStructure 926

Diluted EPS—Convertible Securities 927Diluted EPS—Options and Warrants 929Contingent Issue Agreement 930Antidilution Revisited 931EPS Presentation and Disclosure 932What Do the Numbers Mean? Pro Forma

EPS Confusion 933Summary of EPS Computation 934

APPENDIX 16A Accounting for Stock-AppreciationRights 936

SARS—Share-Based Equity Awards 936SARS—Share-Based Liability Awards 936Stock-Appreciation Rights Example 937APPENDIX 16B Comprehensive Earnings

per Share Example 939Diluted Earnings per Share 940FASB Codification 944IFRS Insights 965

Chapter 16

Dilutive Securities and Earningsper Share 9 0 4Kicking the HabitSECTION 1 Dilutive Securities and

Compensation Plans 906Debt and Equity 906Accounting for Convertible Debt 906

At Time of Issuance 907At Time of Conversion 907Induced Conversions 907Retirement of Convertible Debt 908

Convertible Preferred Stock 908What Do the Numbers Mean?

How Low Can You Go? 909Stock Warrants 909

Stock Warrants Issued with Other Securities 910Rights to Subscribe to Additional Shares 913Stock Compensation Plans 913

Accounting for Stock Compensation 915Stock-Option Plans 915Restricted Stock 917Employee Stock-Purchase Plans 918Disclosure of Compensation Plans 919Debate over Stock-Option Accounting 919

Chapter 17

Investments 974What to Do?Investment Accounting Approaches 976SECTION 1 Investments in Debt

Securities 976Held-to-Maturity Securities 977Available-for-Sale Securities 979

Example: Single Security 980Example: Portfolio of Securities 981Sale of Available-for-Sale Securities 981Financial Statement PresentatiorT~982What Do the Numbers Mean? What Is

Fair Value? 983Trading Securities 983SECTION 2 Investments in Equity

Securities 984Holdings of Less Than 20% 985

Available-for-Sale Securities 986Trading Securities 988

Holdings Between 20% and 50% 988, Equity Method 988

What Do the Numbers Mean?Who's in Control Here? 990

Holdings of More Than 50% 991

XXVIII

SECTION 3 Other Reporting Issues 991Fair Value Option 991

Available-for-Sale Securities 992Equity Method of Accounting 992

Impairment of Value 992Reclassification Adjustments 993

Comprehensive Example 995Transfers Between Categories 997Fair Value Controversy 998

Measurement Based on Intent 998Gains Trading 998Liabilities Not Fairly Valued 998Fair Values—Final Comment 998

Summary of Reporting Treatment of Securities 998What Do the Numbers Mean?

More Disclosure, Please 999APPENDIX 17A Accounting for Derivative

Instruments 1001Defining Derivatives 1001Who Uses Derivatives, and Why? 1002

Producers and Consumers 1002Speculators and Arbitrageurs 1002

Basic Principles in Accounting forDerivatives 1003

Example of Derivative Financial Instrument—Speculation 1004

Differences between Traditional and DerivativeFinancial Instruments 1006

What Do the Numbers Mean?Risky Business 1007

Derivatives Used for Hedging 1008Fair Value Hedge 1008Cash Flow Hedge 1010 .

Other Reporting Issues 1012Embedded Derivatives 1012Qualifying Hedge Criteria 1013Summary of Derivatives Accounting 1014

Comprehensive Hedge Accounting Example 1015Fair Value Hedge 1015Financial Statement Presentation of an Interest

Rate Swap 1017Controversy and Concluding Remarks 1018APPENDIX 17B Variable-Interest Entities 1020What About GAAP? 1020Consolidation of Variable-Interest Entities 1021

Some Examples 1022What Is Happening in Practice? 1022

APPENDIX 17C Fair Value Measurementsand Disclosures 1023

Disclosure of Fair Value Information: FinancialInstruments—No Fair Value Option 1023

Disclosure of Fair Value Information: FinancialInstruments—Fair Value Option 1025

Disclosure of Fair Values: Impaired Assetsor Liabilities 1025


Chapter 18

Revenue Recognition 1164It's BackCurrent Environment 1066

Guidelines for Revenue Recognition 1067Departures from the Sale Basis 1068What Do the Numbers Mean?

Liability or Revenue? 1069Revenue Recognition at Point of Sale

(Delivery) 1069Sales with Discounts 1070Sales with Right of Return 1071Sales with Buybacks 1073Bill and Hold Sales 1074Principal-Agent Relationships 1074What Do the Numbers Mean? Grossed Out 1075Trade Loading and Channel Stuffing 1077What Do the Numbers Mean?

No Take-Backs 1077Multiple-Deliverable Arrangements 1078Summary of Revenue Recognition Methods 1080

Revenue Recognition Before Delivery 1081Percentage-of-Completion Method 1082Completed-Contract Method 1087Long-Term Contract Losses 1088Disclosures in Financial Statements 1091What Do the Numbers Mean?

Less Conservative 1091Completion-of-Production Basis 1092

Revenue Recognition after Delivery 1092Installment-Sales Method 1092Cost-Recovery Method 1101Deposit Method 1102Summary of Product Revenue Recognition

Bases 1103Concluding Remarks 1103APPENDIX 18A Revenue Recognition

for Franchises 1105Initial Franchise Fees 1106

Example of Entries for Initial Franchise Fee 1106Continuing Franchise Fees 1107Bargain Purchases 1107Options to Purchase 1108Franchisor's Cost 1108Disclosures of Franchisors 1108FASB Codification 1109IFRS Insights 1134

Chapter 19

Accounting for Income Taxes 1142How Much Is Enough?Fundamentals of Accounting for

Income Taxes 1144Future Taxable Amounts and Deferred

Taxes 1145

xxix

What Do the Numbers Mean?"Real Liabilities" 1148

Future Deductible Amounts and DeferredTaxes 1149

What Do the Numbers Mean? "Real Assets" 1151Income Statement Presentation 1152Specific Differences 1153Tax Rate Considerations 1156What Do the Numbers Mean?

Global Tax Rates 1157Accounting for Net Operating Losses 1158

Loss Carryback 1158Loss Carryforward 1158Loss Carryback Example 1159Loss Carryforward Example 1159What Do the Numbers Mean? NOLs: Good

News or Bad? 1163Financial Statement Presentation 1164

Balance Sheet 1164Income Statement 1165Uncertain Tax Positions 1168What Do the Numbers Mean?

Sheltered 1169Review of the Asset-Liability Method 1169APPENDIX 19A Comprehensive Example

of Interperiod Tax Allocation 1173First Year—2011 1173

Taxable Income and Income TaxesPayable—2011 1174

Computing Deferred Income Taxes—End of 2011 1174

Deferred Tax Expense (Benefit) and the JournalEntry to Record Income Taxes—2011 1175

Financial Statement Presentation—2011 1176Second Year—2012 1177

Taxable Income and Income TaxesPayable—2012 1178

Computing Deferred Income Taxes—Endof 2012 1178

Deferred Tax Expense (Benefit) and the JournalEntry to Record Income Taxes—2012 1179

Financial Statement Presentation—2012 1179FASB Codification 1180IFRS Insights 1199

Chapter 20

Accounting for Pensions andPostretirement Benefits 1 208Where Have All the Pensions Gone?Nature of Pension Plans 1210

Defined Contribution Plan 1211Defined Benefit Plan 1211What Do the Numbers Mean? Which Plan

Is Right for You? 1212The Role of Actuaries in Pension Accounting 1213

Accounting for Pensions 1213Alternative Measures of the Liability 1213Recognition of the Net Funded Status of the

Pension Plan 1215Components of Pension Expense 1215

Using a Pension Worksheet 12182012 Entries and Worksheet 1218Amortization of Prior Service Cost (PSC) 12202013 Entries and Worksheet 1221Gain or Loss 1223What Do the Numbers Mean?

Pension Costs Ups and Downs 12242014 Entries and Worksheet 1227What Do the Numbers Mean?

Roller Coaster 1229Reporting Pension Plans in Financial

Statements 1229Within the Financial Statements 1230Within the Notes to the Financial

Statements 1232Example of Pension Note Disclosure 12332015 Entries and Worksheet—A Comprehensive

Example 1235Special Issues 1236What Do the Numbers Mean? Bailing Out 1239Concluding Observations 1239

APPENDIX 20A Accounting for PostretirementBenefits 1241

Accounting Guidance 1241Differences Between Pension Benefits

and Healthcare Benefits 1242What Do the Numbers Mean? OPEBs—

How Big Are They? 1243Postretirement Benefits Accounting

Provisions 1243Obligations Under Postretirement Benefits 1244Postretirement Expense 1245

Illustrative Accounting Entries 12452012 Entries and Worksheet 1246Recognition of Gains and Losses 12472013 Entries and Worksheet 1247Amortization of Net Gain or Loss in 2014 1249

Disclosures in Notes to the FinancialStatements 1249

Actuarial Assumptions and ConceptualIssues 1249

What Do the Numbers Mean? GASB Who? 1251FASB Codification 1252IFRS Insights 1274

Chapter 21

Accounting for Leases 1288More Companies Ask, "Why Buy?"The Leasing Environment 1290

Who Are the Players? 1290Advantages of Leasing 1292

XXX

What Do the Numbers Mean?Off-Balance-Sheet Financing 1293

Conceptual Nature of a Lease 1293Accounting by the Lessee 1294

Capitalization Criteria 1294Asset and Liability Accounted

for Differently 1298Capital Lease Method (Lessee) 1298Operating Method (Lessee) 1301What Do the Numbers Mean? Restatements

on the Menu 1301Comparison of Capital Lease with Operating

Lease 1302What Do the Numbers Mean?

Are You Liable? 1303Accounting by the Lessor 1304

Economics of Leasing 1305Classification of Leases by the Lessor 1305Direct-Financing Method (Lessor) 1307Operating Method (Lessor) 1309

Special Accounting Problems 1310Residual Values 1310Sales-Type Leases (Lessor) 1316What Do the Numbers Mean? Xerox Takes

On the SEC 1319Bargain-Purchase Option (Lessee) 1319Initial Direct Costs (Lessor) 1320Current versus Noncurrent 1320Disclosing Lease Data 1321

Lease Accounting—UnresolvedProblems 1323

APPENDIX 21A Examples of LeaseArrangements 1327

Example 1: Harmon, Inc. 1328Example 2: Arden's Oven Co. 1329Example 3: Mendota Truck Co. 1329Example 4: Appleland Computer 1330APPENDIX 21B Sale-Leasebacks 1331Determining Asset Use 1331

Lessee 1332Lessor 1332

Sale-Leaseback Example 1332FASB Codification 1334IFRS Insights 1355

Chapter 22

Accounting Changes andError Analysis 1366In the DarkSECTION 1 Accounting Changes 1368Changes in Accounting Principle 1368

What Do the Numbers Mean?Quite a Change 1370

Retrospective Accounting ChangeApproach 1370

What Do the Numbers Mean? ChangeManagement 1372

Impracticability 1379Changes in Accounting Estimate 1381

Prospective Reporting 1381Disclosures 1382

Change in Reporting Entity 1383Correction of Errors 1383

Example of Error Correction 1385Summary of Accounting Changes and

Correction of Errors 1387What Do the Numbers Mean?

Can I Get My Money Back? 1388Motivations for Change of Accounting

Method 1389SECTION 2 Error Analysis 1390Balance Sheet Errors 1390Income Statement Errors 1391Balance Sheet and Income Statement

Errors 1391Counterbalancing Errors 1391Noncounterbalancing Errors 1393

Comprehensive Example: Numerous Errors 1394What Do the Numbers Mean?

Guard the Financial Statements! 1396Preparation of Financial Statements

with Error Corrections 1397APPENDIX 22A Changing from or to the

Equity Method 1401Change from the Equity Method 1401

Dividends in Excess of Earnings 1401Change to the Equity Method 1402FASB Codification 1404IFRS Insights 1428

Chapter 23

Statement of Cash Flows 1434Show Me the MoneySECTION 1 Preparation of the Statement

of Cash Flows 1436Usefulness of the Statement

of Cash Flows 1436Classification of Cash Flows 1437

What Do the Numbers Mean? How's MyCash Flow? 1438

Format of the Statement of Cash Flows 1439Steps in Preparation 1439First Example—2011 1440

Step 1: Determine the Change in Cash 1441Step 2: Determine Net Cash Flow from

Operating Activities 1441What Do the Numbers Mean? Pumping

UpCash 1443Step 3: Determine Net Cash Flows from

Investing and Financing Activities 1443Statement of Cash Flows—2011 1444

XXXI

Second Example—2012 1445Step 1: Determine the Change in Cash 1445Step 2: Determine Net Cash Flow from

Operating Activities—Indirect Method 1445Step 3: Determine Net Cash Flows from


Third Example—2013 1447Step 1: Determine the Change in Cash 1448Step 2: Determine Net Cash Flow from

Operating Activities—Indirect Method 1449Step 3: Determine Net Cash Flows from


Sources of Information for the Statementof Cash Flows 1451

Net Cash Flow from Operating Activities—Indirect versus Direct Method 1452

Indirect Method 1452Direct Method—An Example 1452Direct versus Indirect Controversy 1457What Do the Numbers Mean?

Not What It Seems 1458SECTION 2 Special Problems in Statement

Preparation 1459Adjustments to Net Income 1459

Depreciation and Amortization 1459Postretirement Benefit Costs 1459Change in Deferred Income Taxes 1459Equity Method of Accounting 1459Losses and Gains 1460Stock Options 1461Extraordinary Items 1461

Accounts Receivable (Net) 1462Indirect Method 1463Direct Method 1463

Other Working Capital Changes 1464Net Losses 1465Significant Noncash Transactions 1465

What Do the Numbers Mean?Cash Flow Tool 1467

SECTION 3 Use of a Worksheet 1467Preparation of the Worksheet 1469Analysis of Transactions 1471

Change in Retained Earnings 1471Accounts Receivable (Net) 1471Inventory 1472Prepaid Expense 1472Investment in Stock 1472Land 1472Equipment and Accumulated Depreciation 1473Building Depreciation and Amortization

of Trademarks 1473Other Noncash Charges or Credits 1473Common Stock and Related Accounts 1474Final Reconciling Entry 1474

Preparation of Final Statement 1476FASB Codification 1478IFRS Insights 1505

Chapter 24

Full Disclosure in FinancialReporting 1512High-Quality Financial Reporting—Always in FashionFull Disclosure Principle 1514

Increase in Reporting Requirements 1515Differential Disclosure 1515What Do the Numbers Mean?

"The Heart of the Matter" 1516Notes to the Financial Statements 1516

Accounting Policies 1516Common Notes 1517What Do the Numbers Mean?

Footnote Secrets 1519Disclosure Issues 1519

Disclosure of Special Transactionsor Events 1519

Post-Balance-Sheet Events (SubsequentEvents) 1521

Reporting for Diversified (Conglomerate)Companies 1522

Interim Reports 1528What Do the Numbers Mean?

"I Want It Faster" 1533Auditor's and Management's

Reports 1533Auditor's Report 1533Management's Reports 1536

Current Reporting Issues 1538Reporting on Financial Forecasts

and Projections 1538Internet Financial Reporting 1541What Do the Numbers Mean?

New Formats, New Disclosure 1542Fraudulent Financial Reporting 1542What Do the Numbers Mean?

Disclosure Overload 1544Criteria for Making Accounting and Reporting

Choices 1545APPENDIX 24A Basic Financial Statement

Analysis 1547Perspective on Financial Statement

Analysis 1547Ratio Analysis 1548

Limitations of Ratio Analysis 1549Comparative Analysis 1551Percentage (Common-Size) Analysis 1552FASB Codification 1554IFRS Insights 1573

Index 1-1

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