fundamental accounting principles, wild, 20th ed

FundamentalAccounting Principles 20th

edition

John J. WildUniversity of Wisconsin at Madison

Ken W. ShawUniversity of Missouri at Columbia

Barbara ChiappettaNassau Community College

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FUNDAMENTAL ACCOUNTING PRINCIPLESPublished by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2011, 2009, 2007, 2005, 2002, 1999, 1996, 1993, 1990, 1987, 1984, 1981, 1978, 1975, 1972, 1969, 1966, 1963, 1959, 1955 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN-13: 978-0-07-811087-0 (combined edition)ISBN-10: 0-07-811087-4 (combined edition)ISBN-13: 978-0-07-733825-1 (volume 1, chapters 1-12)ISBN-10: 0-07-733825-1 (volume 1, chapters 1-12)ISBN-13: 978-0-07-733824-4 (volume 2, chapters 12-25)ISBN-10: 0-07-733824-3 (volume 2, chapters 12-25)ISBN-13: 978-0-07-733826-8 (with working papers volume 1, chapters 1-12)ISBN-10: 0-07-733826-X (with working papers volume 1, chapters 1-12)ISBN-13: 978-0-07-733827-5 (with working papers volume 2, chapters 12-25)ISBN-10: 0-07-733827-8 (with working papers volume 2, chapters 12-25)ISBN-13: 978-0-07-733823-7 (principles, chapters 1-17)ISBN-10: 0-07-733823-5 (principles, chapters 1-17)

Vice president and editor-in-chief: Brent GordonEditorial director: Stewart MattsonPublisher: Tim VertovecExecutive editor: Steve SchuetzDirector of development: Ann TorbertSenior development editor: Christina A. SandersVice president and director of marketing: Robin J. ZwettlerMarketing director: Brad ParkinsMarketing manager: Michelle HeasterVice president of editing, design, and production: Sesha BolisettyManaging editor: Lori Koetters

To my students and family, especially Kimberly, Jonathan, Stephanie, and Trevor.To my wife Linda and children, Erin, Emily, and Jacob.To my mother, husband Bob, and sons Michael and David.

Senior buyer: Carol A. BielskiLead designer: Matthew BaldwinSenior photo research coordinator: Jeremy CheshareckPhoto researcher: Sarah EvertsonLead media project manager: Brian NacikMedia project manager: Ron NelmsInterior and cover design: Laurie EntringerCover image: © Getty ImagesTypeface: 10.5/12 Times RomanCompositor: Aptara®, Inc.Printer: R. R. Donnelley

Library of Congress Cataloging-in-Publication DataWild, John J. Fundamental accounting principles / John J. Wild, Ken W. Shaw, Barbara Chiappetta.—20th ed. p. cm. Includes index. ISBN-13: 978-0-07-811087-0 (combined edition : alk. paper) ISBN-10: 0-07-811087-4 (combined edition : alk. paper) ISBN-13: 978-0-07-733825-1 (volume 1 ch. 1-12 : alk. paper) ISBN-10: 0-07-733825-1 (volume 1 ch. 1-12 : alk. paper) [etc.] 1. Accounting. I. Shaw, Ken W. II. Chiappetta, Barbara. III. Title. HF5636.W675 2011 657—dc22 2010026205

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Dear Colleagues/Friends,

As we roll out the new edition of Fundamental Accounting Principles, we thank each

of you who provided suggestions to improve our textbook. As teachers, we know

how important it is to select the right book for our course. This new edition reflects

the advice and wisdom of many dedicated reviewers, symposium and workshop

participants, students, and instructors. Our book consistently rates number one

in customer loyalty because of you. Together, we have created the most readable,

concise, current, accurate, and innovative accounting book available today.

Throughout the writing process, we steered this book in the manner you directed.

Reviewers, instructors, and students say this book’s enhanced presentation, graphics,

and technology cater to different learning styles and helps students better understand

accounting. Connect Accounting Plus offers new features to improve student learning and

to assist instructor teaching and grading. Our iPod content lets students study on the

go, while our Algorithmic Test Bank provides an infinite variety of exam problems. You

and your students will find all these tools easy to apply.

We owe the success of this book to our colleagues who graciously took time to help

us focus on the changing needs of today’s instructors and students. We feel fortunate

to have witnessed our profession’s extraordinary devotion to teaching. Your feed-

back and suggestions are reflected in everything we write. Please accept our heartfelt

thanks for your dedication in helping today’s students learn, understand, and appreciate

accounting.

With kindest regards,

John J. Wild Ken W. Shaw Barbara Chiappetta

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JOHN J. WILD is a distinguished professor

of accounting at the University of Wisconsin

at Madison. He previously held appointments

at Michigan State University and the University

of Manchester in England. He received his

BBA, MS, and PhD from the University of

Wisconsin.

Professor Wild teaches accounting cours-

es at both the undergraduate and graduate

levels. He has received numerous teaching honors, including the

Mabel W. Chipman Excellence-in-Teaching Award, the departmental

Excellence-in-Teaching Award, and the Teaching Excellence Award

from the 2003 and 2005 business graduates at the University

of Wisconsin. He also received the Beta Alpha Psi and Roland

F. Salmonson Excellence-in-Teaching Award from Michigan State

University. Professor Wild has received several research honors and

is a past KPMG Peat Marwick National Fellow and is a recipient of

fellowships from the American Accounting Association and the Ernst

and Young Foundation.

Professor Wild is an active member of the American Accounting

Association and its sections. He has served on several committees of

these organizations, including the Outstanding Accounting Educator

Award, Wildman Award, National Program Advisory, Publications,

and Research Committees. Professor Wild is author of Financial

Accounting, Managerial Accounting, and College Accounting, each

published by McGraw-Hill/Irwin. His research articles on accounting

and analysis appear in The Accounting Review, Journal of Accounting

Research, Journal of Accounting and Economics, Contemporary

Accounting Research, Journal of Accounting, Auditing and Finance,

Journal of Accounting and Public Policy, and other journals. He is

past associate editor of Contemporary Accounting Research and has

served on several editorial boards including The Accounting Review.

In his leisure time, Professor Wild enjoys hiking, sports, travel,

people, and spending time with family and friends.

KEN W. SHAW is an associate professor

of accounting and the Deloitte Professor at

the University of Missouri. He previously was

on the faculty at the University of Maryland

at College Park. He received an accounting

degree from Bradley University and an MBA

and PhD from the University of Wisconsin.

He is a Certified Public Accountant with work

experience in public accounting.

Professor Shaw teaches financial accounting at the undergradu-

ate and graduate levels. He received the Williams-Keepers LLC

Teaching Excellence award in 2007, was voted the “Most Influential

Professor” by the 2005, 2006, and 2010 School of Accountancy grad-

uating classes, and is a two-time recipient of the O’Brien Excellence

in Teaching Award. He is the advisor to his School’s chapter of the

Association of Certified Fraud Examiners.

Professor Shaw is an active member of the American Accounting

Association and its sections. He has served on many committees of

these organizations and presented his research papers at national

and regional meetings. Professor Shaw’s research appears in The

Accounting Review; Journal of Accounting Research; Contemporary

Accounting Research; Journal of Financial and Quantitative Analysis;

Journal of the American Taxation Association; Journal of Accounting,

Auditing, and Finance; Journal of Financial Research; Research in

Accounting Regulation; and other journals. He has served on the edito-

rial boards of Issues in Accounting Education, the Journal of Business

Research, and Research in Accounting Regulation. Professor Shaw

is co-author of Financial and Managerial Accounting and College

Accounting, both published by McGraw-Hill.

In his leisure time, Professor Shaw enjoys tennis, cycling, music,

and coaching his children’s sports teams.

BARBARA CHIAPPETTA received her

BBA in Accountancy and MS in Education

from Hofstra University and is a tenured full

professor at Nassau Community College. For

the past two decades, she has been an active

executive board member of the Teachers of

Accounting at Two-Year Colleges (TACTYC),

serving 10 years as vice president and as

president from 1993 through 1999. As an

active member of the American Accounting

Association, she has served on the Northeast Regional Steering

Committee, chaired the Curriculum Revision Committee of the

Two-Year Section, and participated in numerous national commit-

tees. Professor Chiappetta has been inducted into the American

Accounting Association Hall of Fame for the Northeast Region.

She had also received the Nassau Community College dean of

instruction’s Faculty Distinguished Achievement Award. Professor

Chiappetta was honored with the State University of New York

Chancellor’s Award for Teaching Excellence in 1997. As a confirmed

believer in the benefits of the active learning pedagogy, Professor

Chiappetta has authored Student Learning Tools, an active learning

workbook for a first-year accounting course, published by McGraw-

Hill/Irwin.

In her leisure time, Professor Chiappetta enjoys tennis and

participates on a U.S.T.A. team. She also enjoys the challenge of

bridge. Her husband, Robert, is an entrepreneur in the leisure sport

industry. She has two sons—Michael, a lawyer, specializing in intel-

lectual property law in New York, and David, a composer, pursuing

a career in music for film in Los Angeles.

About the Authors

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Helping Students Achieve Peak PerformanceFundamental Accounting Principles 20e

Great performances result from pushing the limits through quality practices and reinforcing

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We’re confident you’ll agree that FAP will help your students achieve

peak performance.

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Your Students' Connection to McGraw-Hill Connect Accounting is an online assignment and assessment solution that connects your

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Student Resource Library: The Connect Accounting Student Study Center gives access to additional resources such as recorded lectures, online practice materials, an eBook, and more.

Online Assignments: Connect Accounting helps students learn more efficiently by providing feedback and practice material when they need it, where they need it. Connect grades homework automatically and gives immediate feedback on any questions students may have missed.

accounting

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Reach Peak Performance!

Guided Examples: The Guided Examples in Connect Accounting provide a narrated, ani-mated, step-by-step walk-through of select exercises similar to those assigned. These short presentations provide reinforcement when stu-dents need it most.

LearnSmart: LearnSmart adaptive self-study technology within Connect Accounting helps students make the best use of their study time. LearnSmart provides a seamless combination of practice, assessment, and remediation for every concept in the textbook. LearnSmart’s intelligent software adapts to students by supplying ques-tions on a new concept when they are ready to learn it. With LearnSmart, students will spend less time on topics they understand and practice more on those they have yet to master.

Self-Quiz and Study: The Self-Quiz and Study (SQS) connects students to the learning resources students need to succeed in the course. For each chapter, students can take a practice quiz and imme-diately see how well they performed. A study plan then recommends specific readings from the text, supplemental study material, and practice exercises that will improve students' understanding and mas-tery of each learning objective.

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Connect Accounting offers a number of powerful tools and features to make managing assignments easier, so faculty can spend more time teaching. With Connect Accounting, students can engage with their course-work anytime and anywhere, making the learning process more accessible and efficient. (Please see previ-ous page for a description of the student tools available within Connect Accounting.)

Simple Assignment Management and Smart GradingWith Connect Accounting, creating assignments is easier than ever, so you can spend more time teaching and less time managing. Connect Accounting enables you to:

• Create and deliver assignments easily with select end-of-chapter questions and test bank items.• Go paperless with the eBook and online submission and grading of student assignments.• Have assignments scored automatically, giving students immediate feedback on their work and side-

by-side comparisons with correct answers. • Reinforce classroom concepts with practice tests and instant quizzes.

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• Access an instant view of student or class performance relative to learning objectives.

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Instructor LibraryThe Connect Accounting Instructor Library is your repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Accounting Instructor Library includes: access to the eBook version of the text, PowerPoint files, Solutions Manual, Instructor Resource Manual, and Test Bank.

Connect Accounting

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© Svetlana Gryankina; iStockphoto

© David Pedre; iStockphoto

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McGraw-Hill Connect Plus AccountingMcGraw-Hill reinvents the textbook learning experience for the modern student with Connect Plus Accounting. A seamless integration of an eBook and Connect Accounting, Connect Plus Accounting provides all of the Connect Accounting features plus:

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For more information about Connect, go to www.mcgrawhillconnect.com, or contact your local McGraw-Hill sales representative.

Tegrity Campus: Lectures 24/7Tegrity Campus is a service that makes class time available 24/7 by automatically capturing every lecture. With a simple

one-click start-and-stop process, you capture all computer screens and corresponding audio in a format that is easily searchable, frame by frame. Students can replay any part of any class with easy-to-use browser-based viewing on a PC or Mac, an iPod, or other mobile device.

Educators know that the more students can see, hear, and experience class resources, the better they learn. In fact, studies prove it. Tegrity Campus’s unique search feature helps students efficiently find what they need, when they need it, across an entire semester of class recordings. Help turn your students’ study time into learning moments immediately supported by your lecture. With Tegrity Campus, you also increase intent listening and class participation by easing students’ concerns about note-taking. Lecture Capture will make it more likely you will see students’ faces, not the tops of their heads.

To learn more about Tegrity watch a two-minute Flash demo at http://tegritycampus.mhhe.com.

McGraw-Hill Customer Care Contact Information

At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can e-mail our Product Specialists 24 hours a day to get product training online. Or you can search our knowledge bank of Frequently Asked Questions on our support Website. For Customer Support, call 800-331-5094 or visit www.mhhe.com/support. One of our Technical Support Analysts will be able to assist you in a timely fashion.

Tools for Instructors

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We offer an Online Learning Center (OLC) that follows Fundamental Accounting Principles chapter by chapter. It doesn’t require any building or maintenance on your part. It’s ready to go the moment you and your students type in the URL:www.mhhe.com/wildFAP20e As students study and learn from Fundamental Accounting Principles, they can visit the Student Edition of the OLC Website to work with a multitude of helpful tools:

* indicates Premium Content

A secured Instructor Edition stores essential course materials to save you prep time before class. Everything you need to run a lively classroom and an efficient course is included. All resources available to students, plus . . .

• Instructor’s Resource Manual• Solutions Manual• Solutions to Excel Template Assignments• Test Bank• Solutions to CYGL, Peachtree, and QuickBooks templates

The OLC Website also serves as a doorway to other technology solutions, like course management systems.

• Generic Template Working Papers• Chapter Learning Objectives• Interactive Chapter Quizzes• PowerPoint® Presentations

• Narrated PowerPoint® Presentations*• Video Library• Excel Template Assignments• iPod Content*

How Can Text-Related Web Resources Enrich My Course?Online Learning Center (OLC)

"There are numerous materials and resources available for the instructor. I love how everything is on one

Website and there is no need for a CD or different supplements/materials that need to be carried around."—Jeanine Metzler, Northampton Community College, on the OLC

Online Course ManagementNo matter what online course management system you use (WebCT, BlackBoard, or eCollege), we have a course content ePack available for FAP 20e. Our new ePacks are specifically designed to make it easy for students to navigate and access content online. They are easier than ever to install on the latest version of the course man-agement system available today.

Don’t forget that you can count on the highest level of service from McGraw-Hill. Our online course management specialists are ready to assist you with your online course needs. They provide training and will answer any questions you have throughout the life of your adoption. So try our new ePack for FAP 20e and make online course content delivery easy and fun.

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Improve Student Learning Outcomes andSave Instructor Time with ALEKS®

ALEKS is an assessment and learning program that provides indi-vidualized instruction in accounting. Available online in partnership with McGraw-Hill/Irwin, ALEKS interacts with students much like a skilled human tutor, with the ability to assess precisely a student’s knowledge and provide instruction on the exact topics the student is most ready to learn. By providing topics to meet individual students’ needs, allowing students to move between explanation and prac-tice, correcting and analyzing errors, and defining terms, ALEKS helps students to master course content quickly and easily.

ALEKS also includes an Instructor Module with powerful, assignment-driven features and extensive content flexibility. The compli-mentary Instructor Module provides a course calendar, a customi-zable gradebook with automatically graded homework, textbook integration, and dynamic reports to monitor student and class prog-ress. ALEKS simplifies course management and allows instructors to spend less time with administrative tasks and more time directing student learning.

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ALEKS is a registered trademark of ALEKS Corporation.

How Can McGraw-Hill Help Teach My Course Online?

CourseSmartCourseSmart is a new way to find and buy eTextbooks. CourseSmart has the largest selection of eTextbooks available anywhere, offering thousands of the most commonly adopted textbooks from a wide variety of higher education publishers. CourseSmart eTextbooks are available in one standard online reader with full text search, notes, and highlighting, and email tools for sharing between classmates. Visit www.CourseSmart.com for more information on ordering.

How Students Can Study On the Go Using Their iPodsiPod ContentHarness the power of one of the most popular technology tools students use today—the Apple iPod. Our innovative approach allows students to down-load audio and video presentations right into their iPod and take learning materials with them wherever they go. Students just need to visit the Online Learning Center at www.mhhe.com/wildFAP20e to download our iPod con-tent. For each chapter of the book they will be able to download audio nar-rated lecture presentations for use on various versions of iPods. iPod Touch users can even access self-quizzes.

It makes review and study time as easy as putting on headphones.

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Using Accounting for DecisionsWhether we prepare, analyze, or apply accounting information, one skill remains essential: decision-making. To help develop good decision-making habits and to illustrate the relevance of accounting, our book uses a unique pedagogical framework we call the Decision Center. This framework is comprised of a variety of approaches and subject areas, giving students insight into every aspect of business decision-making; see three examples to the right and one below. Answers to Decision Maker and Ethics boxes are at the end of each chapter.

CAP ModelThe Conceptual/Analytical/Procedural (CAP) Model allows courses to be specially designed to meet your teaching needs or those of a diverse faculty. This model identifies learning objectives, textual materials, assignments, and test items by C, A, or P, allowing different instructors to teach from the same materials, yet easily customize their courses toward a conceptual, analytical, or procedural approach (or a combina-tion thereof) based on personal preferences.

Decision Insight

Revenue Spread The New Orleans Saints have Unearned Revenues of about $60 million in advance ticket sales. When the team plays its home games, it settles this liability to its ticket holders and then transfers the amount earned to Ticket Revenues. ■

Decision Insight

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Credit Manager As a new credit manager, you are being trained by the outgoing manager. She explains that the system prepares checks for amounts net of favorable cash discounts, and the checks are dated the last day of the discount period. She also tells you that checks are not mailed until five days later, adding that “the company gets free use of cash for an extra five days, and our department looks better. When a supplier complains, we blame the computer system and the mailroom.” Do you continue this payment policy? ■

Decision Ethics Answer — p. 206

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Decision Maker

Financial Planner One of your clients asks if the inventory account of a company using FIFO needs any “adjustments” for analysis purposes in light of recent inflation. What is your advice? Does your advice depend on changes in the costs of these inventories? ■

Answer — p. 253

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Inventory Turnover and Days’ Sales in Inventory Decision Analysis

A3 Assess inventory management using both inventory turnover and days’ sales in inventory.

Inventory TurnoverEarlier chapters described two important ratios useful in evaluating a company’s short-term liquidity: cur-rent ratio and acid-test ratio. A merchandiser’s ability to pay its short-term obligations also depends on how quickly it sells its merchandise inventory. Inventory turnover, also called merchandise inventory turnover, is one ratio used to assess this and is defined in Exhibit 6.13.

Inventory turnover 5Cost of goods sold

Average inventory

EXHIBIT 6.13Inventory Turnover

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Innovative Textbook Features

"...the chapter openers are absolutely excellent and include entrepreneurs that the students can easily relate to. This helps

the students understand the need/importance of accounting in a small business."—Michelle Grant, Bossier Parish Community College

New Global ViewThis section explains international accounting practices relating to the material covered in that chapter. This section is purpose-fully located at the end of each chapter so that each instructor can decide what emphasis, if at all, is to be assigned to it. The aim of this Global View section is to describe accounting practices and to identify the similarities and differences in international account-ing practices versus that in the U.S. As we move toward global convergence in accounting practices, and as we witness the likely conversion of U.S. GAAP to IFRS, the importance of student fa-miliarity with international accounting grows. This innovative section helps us begin down that path of learning and teaching global accounting practices.

CAP

Learning Objectives

CONCEPTUAL

C1 Explain the importance of periodic reporting and the time period assumption. (p. 94)

C2 Explain accrual accounting and how it improves financial statements. (p. 95)

C3 Identify the types of adjustments and their purpose. (p. 96)

ANALYTICAL

A1 Explain how accounting adjustments link to financial statements. (p. 105)

A2 Compute profit margin and describe its use in analyzing company performance. (p. 109)

PROCEDURAL

P1 Prepare and explain adjusting entries. (p. 97)

P2 Explain and prepare an adjusted trial balance. (p. 106)

P3 Prepare financial statements from an adjusted trial balance. (p. 106)

P4 Appendix 3A —Explain the alternatives in accounting for prepaids. (p. 113)

LP3


↓ ↓ ↓ ↑ ↑ ↑

This section discusses differences between U.S. GAAP and IFRS in the items and costs making up merchan-dise inventory, in the methods to assign costs to inventory, and in the methods to estimate inventory values.

Items and Costs Making Up Inventory Both U.S. GAAP and IFRS include broad and similar guidance for the items and costs making up merchandise inventory. Specifically, under both accounting systems, merchandise inventory includes all items that a company owns and holds for sale. Further, mer-chandise inventory includes costs of expenditures necessary, directly or indirectly, to bring those items to a salable condition and location.

Assigning Costs to Inventory Both U.S. GAAP and IFRS allow companies to use specific identi-fication in assigning costs to inventory. Further, both systems allow companies to apply a cost flow assumption. The usual cost flow assumptions are: FIFO, Weighted Average, and LIFO. However, IFRS does not (cur-rently) allow use of LIFO. As the convergence project progresses, this prohibition may or may not persist.

Estimating Inventory Costs The value of inventory can change while it awaits sale to customers. That value can decrease or increase.

Decreases in Inventory Value Both U.S. GAAP and IFRS require companies to write down (reduce the cost recorded for) inventory when its value falls below the cost recorded. This is referred to as the lower of cost or market method explained in this chapter. U.S. GAAP prohibits any later increase in the recorded value of that inventory even if that decline in value is reversed through value increases in later periods. However, IFRS allows reversals of those write downs up to the original acquisition cost. For example, if Research In Motion wrote down its 2010 inventory from $622 million to $600 million, it could not re-verse this in future periods even if its value increased to more than $622 million. However, if RIM applied IFRS, it could reverse that previous loss. (Another difference is that value refers to replacement cost under

GLOBAL VIEW

RIM

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Marginal Student AnnotationsThese annotations provide students with additional hints, tips, and examples to help them more fully understand the con-cepts and retain what they have learned. The annotations also include notes on global implications of accounting and fur-ther examples.

Chapter Preview With FlowchartThis feature provides a handy textual/visual guide at the start of every chapter. Students can now begin their reading with a clear understanding of what they will learn and when, allowing them to stay more focused and organized along the way.

Quick CheckThese short question/answer features reinforce the material immediately preceding them. They allow the reader to pause and refl ect on the topics described, then receive immediate feedback before going on to new topics. Answers are pro-vided at the end of each chapter.

Completing the Accounting Cycle

Closing Process

• Temporary and permanent accounts

• Closing entries• Post-closing trial

balance

Work Sheet

• Benefits of a work sheet

• Use of a work sheet

Accounting Cycle

• Definition of accounting cycle

• Review of accounting cycle

Classified Balance Sheet

• Classification structure

• Classification categories

wiL10874_ch04_136-177.indd 8 7/31/10 5:20:22 PM user-f500 /Users/user-f500/Desktop

7. Classify the following assets as (1) current assets, (2) plant assets, or (3) intangible assets:(a) land used in operations, (b) office supplies, (c) receivables from customers due in 10 months, (d ) insurance protection for the next 9 months, (e) trucks used to provide services to customers, (f ) trademarks.

8. Cite at least two examples of assets classified as investments on the balance sheet.

9. Explain the operating cycle for a service company.

Quick Check Answers — p. 156

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ng transactions is to post journal entries to e ledger is up-to-date, entries are posted as en time permits. All entries must be posted d to ensure that account balances are up-to-bits in journal entries are transferred into

Point: Computerized systems often provide a code beside a balance such as dr. or cr. to identify its balance. Posting is automatic and immediate with accounting software.

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"The author(s) are doing an excellent job of using learning and study aids. The examples

are real-world and easy to understand. I cannot think of anything else that I would add."—Shirly Kleiner, Johnson County Community College

Bring Accounting To Life

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Demonstration Problems present both a problem and a complete solution, allowing students to review the entire problem-solving process and achieve success.

Chapter Summaries provide students with a review organized by learning objectives. Chapter Summaries are a component of the CAP model (see page xii), which recaps each conceptual, analytical, and procedural objective.

Key Terms are bolded in the text and repeated at the end of the chapter with page numbers indicating their location. The book also includes a complete Glossary of Key Terms.

Quick Study assignments are short exercises that often focus on one learning objective. Most are included in Connect Accounting. There are usually 8-10 Quick Study assignments per chapter.

Problem Sets A & B are proven problems that can be assigned as homework or for in-class projects. All prob-lems are coded according to the CAP model (see page xii), and Set A is included in Connect Accounting.

Exercises are one of this book’s many strengths and a competitive advantage. There are about 10-15 per chapter and most are included in Connect Accounting.

Multiple Choice Quiz Questions quickly test chap-ter knowledge before a student moves on to complete Quick Studies, Exercises, and Problems.

Once a student has finished reading the chapter, how well he

or she retains the material can depend greatly on the questions,

exercises, and problems that reinforce it. This book leads the

way in comprehensive, accurate assignments.

Average cost (p. 234)

Conservatism constraint (p. 238)

Consignee (p. 228)

Consignor (p. 228)

Consistency concept (p. 237)

Days’ sales in inventory (p. 241)

First-in, first-out (FIFO) (p. 233)

Gross profit method (p. 252)

Interim statements (p. 251)

Inventory turnover (p. 241)

Last-in, first-out (LIFO) (p. 233)

Lower of cost or market (LCM) (p. 237)

N

R

S

W

Key Terms


p (p )

nv

, ( ) (p )

Additional Quiz Questions are available at the book’s Website.

Multiple Choice Quiz Answers on p. 269

3. Assume that Marvventory system. Ibeginning invento45 units from the its ending invento

a. $2,940 b. $2,685

Use the following information from Marvel Company for the month of July to answer questions 1 through 4.

July 1 Beginning inventory . . . . . . . . 75 units @ $25 each

July 3 Purchase . . . . . . . . . . . . . . . . . 348 units @ $27 each

July 8 Sale . . . . . . . . . . . . . . . . . . . . . 300 units

July 15 Purchase . . . . . . . . . . . . . . . . . 257 units @ $28 each


b. $2,685y

y 15 Purchase 257 units @ $28 each

beginning inventory and purchases for the month of January. On January What is the cost of the 155 units that remain in ending inventory at signed based on a perpetual inventory system and use of FIFO? (Round ut inventory balances to the dollar.)

QUICK STUDY

QS 6-1Inventory costing with FIFO perpetual

P1 Units Unit Cost

ventory on January 1 . . . . . . . . . 320 $6.00

January 9 . . . . . . . . . . . . . . . . . 85 6.40

January 25 . . . . . . . . . . . . . . . . 110 6.60


Exercise 6-2Inventory costs

, purchased the contents of an estate for $37,500. Terms of the purchase cost of transporting the goods to Duke Associates’ warehouse was $1,200.

$

500 of goods to China Co., and China Co. has arranged to sell the goods nor and the consignee. Which company should include any unsold goods

hipped $850 of merchandise FOB destination to China Co. Which com- of merchandise in transit as part of its year-end inventory?

EXERCISES

Exercise 6-1Inventory ownership C1


nce sheet ac-g information

ompany pur-ntory of sup-

PROBLEM SET A

Problem 3-1APreparing adjusting and subsequent journal entries

C1 A1 P1


PROBLEM SET B

Problem 3-1BPreparing adjusting and subsequent journal entries

C1 A1 P1

ance sheet nformation

l year, the . The sup-


PUT AWAY YOUR RED PEN!We pride ourselves on the accuracy of this book’s assignment materials. Independent research reports that instructors and reviewers point to the accuracy of this book’s assignment materials as one of its key competitive advantages.

The partial work sheet of Midtown Repair Company at December 31, 2011, follows.

DEMONSTRATION PROBLEM

Balance Sheet and Adjusted Trial Income Statement of Balance Statement Owner’s Equity

Debit Credit Debit Credit Debit Credit

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,600

Notes receivable (current) . . . . . . . . . . . . . . . 50,000

Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . 16,000

Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000


ompany at December 31, 2011, follows.

Balance Sheet andAAAAAAdddjusted Trial Income Statement of

Balance Statement Owner’s Equity

DDDDDeeeebbbit Credit Debit Credit Debit Credit

95,600

50,000

16,000

4,000

170,000

PLANNING THE SOLUTION● Extend the adjusted trial balance account balances to the appropriate financial statement columns.● Prepare entries to close the revenue accounts to Income Summary, to close the expense accounts to In-

come Summary, to close Income Summary to the capital account, and to close the withdrawals account to the capital account.


● Post the first and second closing entries to the Income Summary account. Examine the balance of income summary and verify that it agrees with the net income shown on the work sheet.

● Post the third and fourth closing entries to the capital account.● Use the work sheet’s two right-most columns and your answer in part 4 to prepare the classified

balance sheet.

SOLUTION TO DEMONSTRATION PROBLEM 1. Completing the work sheet.

Balance Sheet and Adjusted Trial Income Statement of Balance Statement Owner’s Equity

Debit Credit Debit Credit Debit Credit

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,600 95,600

Notes receivable (current) . . . . . . . . . . . . . . 50,000 50,000

Prepaid insurance . . . . . . . . . . . . . . . . . . . . . 16,000 16,000

Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 4,000

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 170,000

Accumulated depreciation — Equipment . . . 57,000 57,000


Outstanding Assignment Material

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Beyond the Numbers exercises ask students to use accounting fi gures and understand their meaning. Stu-dents also learn how accounting applies to a variety of business situations. These creative and fun exercises are all new or updated, and are divided into sections:

Serial Problem uses a continuous running case study to illustrate chapter concepts in a familiar context. The Se-rial Problem can be followed continuously from the fi rst chapter or picked up at any later point in the book; enough information is provided to ensure students can get right to work.

The End of the Chapter Is Only the Beginning Our valuable and proven assignments aren’t just confi ned to the book. From problems that require technological solutions to materials found exclusively online, this book’s end-of-chapter material is fully integrated with its technology package.

• Reporting in Action• Comparative Analysis• Ethics Challenge• Communicating in Practice

• Taking It To The Net• Teamwork in Action• Hitting the Road• Entrepreneurial Decision• Global Decision

The authors extend a special thanks to accuracy checkers Barbara Schnathorst, The Write Solution, Inc.; Helen Roybark, Radford University; Beth Woods, CPA, Accuracy Counts; and David Krug, Johnson County Community College.

e celxmhhe.com/wildFAP20e

• Quick Studies, Exercises, and Problems available in Connect are marked with an icon.

• Problems supported by the General Ledger Application Software, Peachtree, or Quickbooks are marked with an icon.

• Online Learning Center (OLC) includes Interactive Quizzes, Excel template assignments, and more.

• Problems supported with Microsoft Excel template assignments are marked with an icon.

• Material that receives additional coverage (slide shows, videos, audio, etc.) available in iPod ready format are marked with an icon.

• Assignments that focus on global accounting practices and companies are often identified with an icon.

accounting

Beyond the Numbers

BTN 5-1 Refer to Research In Motion’s financial statements in Appendix A t

Required

1. Assume that the amounts reported for inventories and cost of sales reflect itready for resale. Compute the net cost of goods purchased for the fiscal year e

2. Compute the current ratio and acid-test ratio as of February 27, 2010, and Feband comment on the ratio results. How does Research In Motion compare t2.4 for the current ratio and 1.5 for the acid-test ratio?

Fast Forward

3. Access Research In Motion’s financial statements (form 10-K) for fiscal years 2010, from its Website (RIM.com) or the SEC’s EDGAR database (www.sinterpret the current ratio and acid-test ratio for these current fiscal years.

REPORTING IN ACTIONA1

RIM


No. Account Title Debit Credit

101 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $38,264

106 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,618

This serial problem began in Chapter 1 and continues through most of the book. If previous chapter seg-ments were not completed, the serial problem can still begin at this point. It is helpful, but not necessary, to use the Working Papers that accompany the book.

SP 3 After the success of the company’s first two months, Santana Rey continues to operate Business Solutions. (Transactions for the first two months are described in the serial problem of Chapter 2.) The November 30, 2011, unadjusted trial balance of Business Solutions (reflecting its transactions for October and November of 2011) follows.

SERIAL PROBLEMBusiness Solutions

P1 P2 P3


Helps Students Master Key Concepts

"Well planned, and very organized. A very thorough coverage of all topics. Easy to read and comprehend."— Linda Bolduc, Mount Wachusett Community College

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Enhancements in This Edition

Chapter 1Facebook NEW opener with new entrepreneurial assignment Streamlined and consolidated learning objectivesNew section on International Standards and convergenceRevised section on accounting principles, assumptions, and constraintsNew visual layouts for conceptual framework and the building blocks of GAAPNew discussion of conceptual framework linked to IFRSsNew graphic discussing fraud control in accountingUpdated compensation data in exhibit

Chapter 2CitySlips NEW opener with new entrepreneurial assignment Reorganized and streamlined learning objectivesRevised introduction of double-entry accountingNew 4-step process for analyzing, recording, and posting transactions Revised layout for transaction analysisNew discussion on accounting quality

Chapter 3Cheezburger Network NEW opener with new entrepreneurial assignment Updated 3-step process for adjusting accountsEnhanced and streamlined presentation of accounting adjustmentsRevised info-graphics for adjusting entriesEnhanced exhibit on steps in preparing financial statementsExpanded discussion of global accounting

Chapter 4Gamer Grub NEW opener with new entrepreneurial assignment Slightly revised steps 1 and 2 of work sheet

Enhanced graphics for closing processEnhanced details for general ledger after the closing processUpdated color-coded work sheet

Chapter 5Heritage Link Brands NEW opener with new entrepreneurial assignment Streamlined learning objectivesNew 2-step presentation for recording merchandise sales and its costsRevised presentation on purchase returnsNew discussion on fraud and invoicesRevised discussion of gross margin

Chapter 6Fitness Anywhere NEW opener with new entrepreneurial assignment Streamlined presentation for lower of cost or market (LCM)Color-coded graphic for introducing cost flow assumptionsEnhanced graphics for learning inventory errorsExpanded discussion on inventory controlsExpanded explanation of inventory accounting under IFRS

Chapter 7New Belgium Brewing Company NEW opener with new entrepreneurial assignment Streamlined learning objectivesEnhanced graphics for special journalsDetailed four benefits from subsidiary ledgersUpdated ERP presentationRevised discussion of segment returns

Chapter 8Dylan’s Candy Bar REVISED opener with new entrepreneurial assignment Enhanced SOX discussion of controls, including the role of COSOStreamlined learning objectivesNew material on drivers of human fraud

New graphic introducing a bank reconciliation with links to bank and book balancesUpdated graphic on frequent cyber fraudsNew graphic on drivers of financial misconduct

Chapter 9LaserMonks NEW opener with new entrepreneurial assignment Streamlined learning objectivesReorganized recording of credit salesFurther clarification of interest formulaEnhanced graphics for bad debts estimation

Chapter 10Games2U NEW opener with new entrepreneurial assignment Reorganized learning objectivesAdded entry to record impairmentEnhanced discussion of asset salesExpanded explanation of asset valuation under IFRSUpdated all real world examples and graphics

Chapter 11SnorgTees NEW opener with new entrepreneurial assignment Updated tax illustrations and assignments using most recent government ratesNew data on frauds involving employee payrollNew entry to reclassify long- to short-term debtUpdated all real world examples and graphics

Chapter 12Kids Konserve NEW opener with new entrepreneurial assignment New 3-step process for partnership liquidation New statement of liquidation introducedEnhanced discussion of partnership liquidation

This edition’s revisions are driven by instructors and students. General revisions to the entire book follow (including chapter-by-chapter revisions):

• Revised and updated assignments throughout

• Updated ratio (tool) analyses for each chapter

• New material on International Financial Reporting Standards (IFRS) in most chapters, including global examples

• New and revised entrepreneurial examples and elements

• Revised serial problem through nearly all chapters

• New art program, visual info-graphics and text layout

• New Research In Motion (maker of BlackBerry) annual report with comparisons to Apple, Palm, and Nokia (IFRS) with new assignments

• Updated graphics added to each chapter’s analysis section

• New technology content integrated and referenced in the book

• New Global View section in each chapter referencing interna-tional accounting including examples using global companies

• New assignments covering international accounting

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For Better Learning

Chapter 13Clean Air Lawn Care NEW opener with new entrepreneurial assignment Streamlined learning objectivesInserted numerous key margin computations for entries involving equityUpdated statement of stockholders’ equityUpdated all real world examples and graphicsExplained accounting for equity under IFRS

Chapter 14CakeLove NEW opener with new entrepreneurial assignment Enhanced graphics for bonds and notesRevised discussion of debt-to-equityEnhanced explanation of how U.S. GAAP and IFRS determine fair valueNew arrow lines linking effective interest amortization tables to journal entries

Chapter 15Blackboard NEW opener with new entrepreneurial assignment Streamlined learning objectivesPhrase “fair value” used in lieu of “market value”Enhanced exhibit summarizing accounting for securitiesRevised explanation of investments in securities with significant influenceNew, enhanced section on comprehensive income

Chapter 16Animoto NEW opener with new entrepreneurial assignment Streamlined learning objectivesEnhanced graphics on cash inflows and outflows involving operating, investing, and financingHighlighted 5-step process to prepare the statement of cash flowsNew discussion of different classifications for certain cash flows under IFRSIncreased number and range of assignments

Chapter 17Motley Fool REVISED opener with new entrepreneurial assignment Streamlined learning objectivesNew companies—Research In Motion, Apple, Palm and Nokia—data throughout the chapter, exhibits, and illustrations

Enhanced horizontal and vertical analysis using new company and industry dataEnhanced discussion of common-size graphicsEnhanced ratio analysis using new company and industry data

Chapter 18Hot Box Cookies NEW opener with new entrepreneurial assignmentRevised learning objectivesEnhanced discussion of trends in managerial accounting, including e-commerce and role of servicesNew exhibit and discussion of the value chainDiscussion of fraud and ethics in managerial accounting moved to earlier in chapterNew discussion of global trends in managerial accounting

Chapter 19Liberty Tax Service NEW opener with new entrepreneurial assignmentEnhanced explanation of events in job order costing, including new 3-step processAdded new arrow lines to exhibits as learning aidsEnhanced discussion of adjusting factory overheadNew factory overhead T-account exhibitNew exhibit on entries to adjust factory overhead accountAdded several new assignments

Chapter 20IdeaPaint NEW opener with new entrepreneurial assignmentStreamlined learning objectivesUpdated list of companies applying process operationsEnhanced several exhibits for better learningNew section on trends in process operations, including discussion of just-in-time, automation, role of services, and customer focusIncreased number and range of assignments

Chapter 21Skullcandy NEW opener with new entrepreneurial assignmentStreamlined learning objectivesEnhanced activity-based costing exhibitsRevised discussion and exhibits for comparisons between activity-based costing and two-stage cost allocationAdded summary of cost allocation methods with exhibit

Deleted section on departmental reporting and analysisAdded Serial Problem to end of chapter assignments

Chapter 22Johnny Cupcakes NEW opener with new entrepreneurial assignmentStreamlined learning objectivesRevised cost exhibits for added clarity and learningNew discussion on global use of contribution margin

Chapter 23Smathers and Branson NEW opener with new entrepreneurial assignmentReorganized learning objectivesNew discussion on potential outcomes of participatory budgetingEnhanced discussion and exhibits for cash budgetsNew exhibit on general formula for preparing the cash budgetAdded Decision Insight box on Apple’s cash cushionEnhanced discussion of computing cash disbursements for purchases, including new exhibitIncreased number and range of assignments

Chapter 24SewWhat? NEW opener with new entrepreneurial assignmentStreamlined learning objectivesSimplified presentation of overhead variances to focus on controllable and volume variancesMoved detailed overhead variances and standard cost system journal entries to (new) Appendix 24AIncreased number and range of assignments

Chapter 25Dogswell NEW opener with new entrepreneurial assignmentStreamlined learning objectivesUpdated graphic on industry cost of capital estimatesAdded section and assignments on decision to keep or replace equipmentIncreased number and range of assignments

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Instructor’s Resource CD-ROM Chapters 1-25 ISBN13: 978007338107ISBN10: 0077338103

This is your all-in-one resource. It allows you to create custom presentations from your own materials or from the follow-ing text-specific materials provided in the CD’s asset library:

• Instructor’s Resource ManualWritten by Barbara Chiappetta, Nassau Community College, and Patricia Walczak, Lansing Community College.

This manual contains (for each chap-ter) a Lecture Outline, a chart linking all assignment materials to Learning Objectives, a list of relevant active

learning activities, and additional visuals with transparency masters.

• Solutions Manual• Test Bank, Computerized

Test Bank• PowerPoint® Presentations

Prepared by Jon Booker, Charles Caldwell, Cindy Rooney, and Susan Galbreth.

Presentations allow for revision of lecture slides, and includes a viewer, allowing screens to be shown with or without the software.

• Link to PageOut

Test Bank Vol. 1, Chapters 1-12 ISBN13: 9780077338183ISBN10: 0077338189

Vol. 2, Chapters 13-25 ISBN13: 9780077338190ISBN10: 0077338197

Revised by Barbara Gershowitz, Nashville State Technical Community College.

Solutions ManualVol. 1, Chapters 1-12 ISBN13: 9780077338152ISBN10: 0077338154

Vol. 2, Chapters 13-25 ISBN13: 9780077338145ISBN10: 0077338146

Written by John J. Wild, Ken W. Shaw, and Anita Kroll, University of Wisconsin–Madison.

Excel Working Papers CDISBN13: 9780077338084ISBN10: 0077338081

Written by John J. Wild.

Working Papers (for Chapters 1-25)delivered in Excel spreadsheets. These Excel Working Papers are available on CD-ROM and can be bundled with the printed Working Papers; see your repre-sentative for information.

Working PapersVol. 1, Chapters 1-12ISBN13: 9780077338220ISBN10: 0077338227

Vol. 2, Chapters 12-25ISBN13: 9780077338206ISBN10: 0077338200

Principles of Financial Accounting Chapters 1-17ISBN13: 9780077338213ISBN10: 0077338219

Written by John J. Wild.

Study GuideVol. 1, Chapters 1-12ISBN13: 9780077338169ISBN10: 0077338162

Vol. 2, Chapters 12-25ISBN13: 9780077338176ISBN10: 0077338170

Written by Barbara Chiapetta, Nassau Community College, and Patricia Walczak, Lansing Community College.

Covers each chapter and appendix with reviews of the learning objectives, outlines of the chapters, summaries of chapter materials, and additional prob-lems with solutions.

Carol Yacht’s General Ledger CD-ROMISBN13: 9780077338039ISBN10: 0077338030

The CD-ROM includes fully functioning versions of McGraw-Hill's own General Ledger Application software. Problem templates prepared by Carol Yacht and

student user guides are included that allow you to assign text problems for working in Yacht's General Ledger or Peachtree.

QuickBooks Pro 2011 Student Guide and TemplatesISBN13: 9780077455309ISBN10: 0077455304

Prepared by Carol Yacht.

To better prepare students for account-ing in the real world, select end-of-chapter material in the text is tied to QuickBooks software. The accompanying student guide provides a step-by-step walkthrough for students on how to complete the problem in the software.

Instructor Supplements

Student Supplements

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The authors extend a special thanks to our contributing and technology supplement authors:Contributing Author: Anita Kroll, University of Wisconsin–Madison

LearnSmart Authors: Anna Boulware, St. Charles Community College; Brenda Mattison, Tri County Technical College; and Dominique Svarc, William Rainey Harper College

Online Quizzes: Gina Jones, Aims County Community College

Connect Self-Quiz and Study: Jeannine Metzler, Northampton Community College

Interactive Presentations: Kathleen O'Donnell, Onongada Community College, and Jeannie Folk, College of DuPage

Assurance of Learning Ready

Many educational institutions today are focused on the notion of assur-ance of learning, an important element of some accreditation standards. Fundamental Accounting Principles is designed specifi cally to support your

assurance of learning initiatives with a simple, yet powerful solution. Each test bank question for Fundamental Accounting Principles maps to a specifi c chapter learning objective listed in the text. You can use our test bank software, EZ Test and EZ Test Online, or Connect Accounting to easily query for learning objectives that directly relate to the learning objectives for your course. You can then use the reporting features of EZ Test to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.

AACSB Statement

The McGraw-Hill Companies is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, Fundamental Accounting Principles recognizes the curricula guidelines detailed in the AACSB stan-

dards for business accreditation by connecting selected questions in the test bank to the six general knowledge and skill guidelines in the AACSB standards. The statements contained in Fundamental Accounting Principles are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While Fundamental Accounting Principles and the teaching package make no claim of any specifi c AACSB qualifi cation or evaluation, we have within Fundamental Account-ing Principles labeled select questions according to the six general knowledge and skills areas.

"Best on the market! Great examples, complete coverage of principle's topics, and great

resources!" — David Alldredge, Salt Lake Community College

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Nelson Alino, Quinnipiac University

David Alldredge, Salt Lake Community College

Sheila Ammons, Austin Community College

Victoria Badura, Chadron State College

Susan Baker, University of Michigan-Dearborn

Charles Scott Barhight, Northampton Community College

Robert Beebe, Morrisville State University

Teri Bernstein, Santa Monica College

Swati Bhandarkar, University of Georgia

Jaswinder Bhangal, Chabot College

Linda Bolduc, Mount Wachusett Community College

Anna Boulware, St. Charles Community College

Philip Brown, Harding University

Jay Buchanon, Burlington County College-Pemberton

Mary Burnell, Fairmont State University

Nathaniel Calloway, University of Maryland

Sal Cardiel, Chaffey College

Lloyd Carroll, Borough of Manhattan Community College

Hong Chen, Northeastern Illinois University

Stanley Chu, Borough of Manhattan Community College

Kwang-Hyun Chung, Pace University

Shiefei Chung, Rowan University

Robert Churchman, Harding University

Marilyn Ciolino, Delgado Community College

Lisa Cole, Johnson County Community College

Howard A. Collins, SUNY at Stony Brook

William Cooper, North Carolina A &T University

Suzie Cordes, Johnson County Community College

James Cosby, John Tyler Community College

Richard Culp, Ball State University

Alan Czyzewski, Indiana State University-Terre Haute

Judy Daulton, Piedmont Technical College

Walter DeAguero, Saddleback College

Mike Deschamps, Mira Costa College

Rosemond Desir, Colorado State University

Vincent Dicalogero, Suffolk County Community College

Roger Dorsey, University of Arkansas-Little Rock

Jap Efendi, University of Texas-Arlington

Terry Elliott Morehead State University

James M. Emig, Villanova University

Steven Englert, Ivy Tech Community College

Caroline Falconetti, Nassau Community College

Stephanie Farewell, University of Arkansas-Little Rock

Laura Farrell, Wagner College

Charles Fazzi, Saint Vincent College

Ronald A. Feinberg, Suffolk Community College

Kathleen Fitzpatrick, University of Toledo-Scott Park

Jeannie Folk, College of DuPage

Mary Foster, Illinois Central College

Mitchell Franklin, Syracuse University

Paul Franklin, Kaplan University Online

Kim Gatzke, Delgado Community College

Rich Geglien, Ivy Tech Community College

Barbara Gershowitz, Nashville State Technical Community College

Richard Gordon, Columbia Southern

Michelle Grant, Bossier Parish Community College

Richard P. Green II, Texas A& M University

Tony Greig, Purdue University

Joyce Griffin, Kansas City Kansas Community College

Lillian Grose, Delgado Community College

Denise Guest, Germanna Community College

Amy Haas, Kingsborough Community College

Betty Habiger, New Mexico State University

Francis Haggerty, Lee College

Betty Harper, Middle Tennessee State University

Jeannie Harrington, Middle Tennessee State University

John L. Haverty, St. Joseph’s University

Laurie Hays, Western Michigan University

Shelley Henke, Fox Valley Technical College

Geoffrey Heriot, Greenville Technical College

Lyle Hicks, Danville Area Community College

Cecil Hill, Jackson State University

Patricia Holmes, Des Moines Area Community College

Margaret Houston, Wright State University

Constance Hylton, George Mason University

Gary Allen Hypes, Mount Aloysius College

Catherine Jeppson, Caifornia State University–Northridge

Gina M. Jones, Aims Community College

Rita Jones, Columbus State University

Christine Jonick, Gainesville State College

Thomas Kam, Hawaii Pacific University

Jack Karbens, Hawaii Pacific University

Connie Kelt, San Juan College

Karen Kettelson, Western Technical College

Randy Kidd, Longview Community College

Irene Kim, George Washington University

James Kinard, Ohio State University-Columbus

Rita Kingery-Cook, University of Delaware

Frank Klaus, Cleveland State University

Shirly A. Kleiner, Johnson County Community College

Robert F. Koch, Saint Peter’s College

Phillip Korb, University of Baltimore

David Krug, Johnson County Community College

Jill Kolody, Anne Arundel Community College

Charles Lacey, Henry Ford Community College

Tara Laken, Joliet Junior College

AcknowledgmentsJohn J. Wild, Ken W. Shaw, Barbara Chiappetta, and McGraw-Hill/Irwin would like to recognize the following instructors for their

valuable feedback and involvement in the development of Fundamental Accounting Principles 20e. We are thankful for their sugges-

tions, counsel, and encouragement.

xx

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In addition to the helpful and generous colleagues listed above, we thank the entire McGraw-Hill/Irwin Fundamental Accounting Principles 20e team, including Stewart Mattson, Tim Vertovec, Steve Schuetz, Christina Sanders, Aaron Downey of Matrix Productions, Lori Koetters, Matthew Baldwin, Carol Bielski, Patricia Plumb, and Brian Nacik. We also thank the great marketing and sales support staff, including Michelle Heaster, Kathleen Klehr, and Simi Dutt. Many talented educators and professionals worked hard to create the supplements for this book, and for their efforts we’re grateful. Finally, many more people we either did not meet or whose efforts we did not personally witness nevertheless helped to make this book everything that it is, and we thank them all.

John J. Wild Ken W. Shaw Barbara Chiappetta

Beth Lasky, Delgado Community College

Phillip Lee, Nashville State Technical Community College

Jerry Lehman, Madison Area Technical College

Frederic Lerner, New York University

Roger Lewis, West Virginia University-Parkersburg

Eric Lindquist, Lansing Community College

Jeannie Liu, Chaffey College

Rebecca Lohmann, Southeast Missouri State University

Debra Luna, El Paso Community College

Sylvester A. Maorino, SUNY Westchester Community College

Thomas S. Marsh, Northern Virginia Community College-Annadale

Stacie Mayes, Rose State College

Brenda Mattison, Tri-County Technical College

Jeanine Metzler, Northampton Community College

Kathleen Michele, Prairieville University

Tim Miller, El Camino College

Roger L. Moore, Arkansas State University-Beebe

Robbie Morse, Ivy Tech Community College

Linda Muren, Cuyahoga Community College—West Campus

Andrea Murowski, Brookdale Community College

Ramesh Narasimhan, Montclair StateUniversity

Mary Beth Nelson, North Shore Community College

Deborah Niemer, Oakland Community College

Kathleen O’Donnell, Onongada Community College

Ahmed Omar, Burlington County College

Deborah Pauly, Loras College

Joel Peralto, Hawaii Community College

Yvonne Phang, Borough of Manhattan Community College

Gary Pieroni, Diablo Valley College

Susan Pope, University of Akron

Jean Price, Marshall University

Debbie Rankin, Lincoln University

Susan Reeves, University of South Carolina

Jenny Resnick, Santa Monica College

Ruthie Reynolds, Howard University

Carla Rich, Pensacola Junior College

Paul Rivers, Bunker Hill Community College

Jill Roberts, Campbellsville University

Karen Robinson, Morgan State University

Richard Roding, Red Rocks Community College

Joel Rosenfeld, New York University

Pamela Rouse, Butler University

Helen Roybark, Radford University

Alphonse Ruggiero, Suffolk County Community College

Martin Sabo, Community College of Denver

Judith Sage, Texas A&M International University

Nathaniel Samba, Ivy Tech Community College

Linda Schain, Hoefstra University

Christine Schalow, University of Wisconsin-Stevens Point

Bunney Schmidt, Keiser University

Geeta Shankhar, University of Dayton

Regina Shea, Community College of Baltimore County—Essex

Jay Siegel, Union County College

Lois Slutsky, Broward College-South

Gerald Smith, University of Northern Iowa

Kathleen Sobieralski, University of Maryland

Charles Spector, State University of New York College

Jane Stam, Onondaga Community College

Douglas P. Stives, Monmouth University

Jacqueline Stoute, Baruch University

Beverly Strachan, Troy University

John Suckow, Lansing Community College

Dominique Svarc, William Rainey Harper College

Anthony Teng, Saddleback College

Sue Terizan, Wright State University

Leslie Thysell, John Tyler Community College

Michael Ulinski, Pace University-Pleasantville

Bob Urell, Irvine Valley College

Alonda Vaughn, Strayer University-Tampa East

Ari Vega, Fashion Institute of Technology

Adam Vitalis, University of Wisconsin

Patricia Walczak, Lansing Community College

Li Wang, University of Akron

Doris Warmflash, SUNY Westchester Community College

David Welch, Franklin University

Jean Wells, Howard University

Robert A. Widman, Brooklyn College CUNY

Christopher Widmer, Tidewater Community College

Jane Wiese, Valencia Community College

Kenneth L. Wild, University of London

Scott Williams, County College of Morris

Wanda Wong, Chabot College

Darryl Woolley, University of Idaho

Gloria Worthy, Southwest Tennessee Community College-Macon

Lorenzo Ybarra, West Los Angeles College

Laura Young, University of Central Arkansas

Judy Zander, Grossmont College

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Brief Contents

xxii

1 Accounting in Business 2

2 Analyzing and Recording Transactions 48

3 Adjusting Accounts and Preparing Financial Statements 92

4 Completing the Accounting Cycle 136

5 Accounting for Merchandising Operations 178

6 Inventories and Cost of Sales 226

7 Accounting Information Systems 270

8 Cash and Internal Controls 314

9 Accounting for Receivables 358

10 Plant Assets, Natural Resources, and Intangibles 392

11 Current Liabilities and Payroll Accounting 434

12 Accounting for Partnerships 478

13 Accounting for Corporations 506

14 Long-Term Liabilities 550

15 Investments and International Operations 594

16 Reporting the Statement of Cash Flows 630

17 Analysis of Financial Statements 684

18 Managerial Accounting Concepts and Principles 730

19 Job Order Cost Accounting 774

20 Process Cost Accounting 812

21 Cost Allocation and Performance Measurement 856

22 Cost-Volume-Profi t Analysis 906

23 Master Budgets and Planning 944

24 Flexible Budgets and StandardCosts 988

25 Capital Budgeting and Managerial Decisions 1034

Appendix A Financial Statement Information A-1

Appendix B Time Value of Money B

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1 Accounting in Business 2

Importance of Accounting 4Users of Accounting Information 5Opportunities in Accounting 6

Fundamentals of Accounting 8Ethics—A Key Concept 8Generally Accepted Accounting Principles 8International Standards 9Conceptual Framework and Convergence 9Sarbanes–Oxley (SOX) 12

Transaction Analysis and the Accounting Equation 14

Accounting Equation 14Transaction Analysis 15Summary of Transactions 18

Financial Statements 19Income Statement 19Statement of Owner’s Equity 19Balance Sheet 21Statement of Cash Flows 21

Global View 21Decision Analysis—Return on Assets 22Appendix 1A Return and Risk Analysis 26Appendix 1B Business Activities and the Accounting

Equation 26

2 Analyzing and Recording Transactions 48

Analyzing and Recording Process 50Source Documents 50The Account and Its Analysis 51

Analyzing and Processing Transactions 54Ledger and Chart of Accounts 54Debits and Credits 55Double-Entry Accounting 55Journalizing and Posting Transactions 56Analyzing Transactions—An Illustration 59Accounting Equation Analysis 63

Trial Balance 65Preparing a Trial Balance 65Using a Trial Balance to Prepare Financial Statements 66

Global View 68Decision Analysis—Debt Ratio 69

3 Adjusting Accounts and Preparing Financial Statements 92

Timing and Reporting 94The Accounting Period 94Accrual Basis versus Cash Basis 95Recognizing Revenues and Expenses 96

Adjusting Accounts 96Framework for Adjustments 96Prepaid (Deferred) Expenses 97Unearned (Deferred) Revenues 100Accrued Expenses 101Accrued Revenues 103Links to Financial Statements 105Adjusted Trial Balance 106

Preparing Financial Statements 106

Global View 108Decision Analysis—Profi t Margin 109Appendix 3A Alternative Accounting for

Prepayments 113

4 Completing theAccounting Cycle 136

Work Sheet as a Tool 138Benefi ts of a Work Sheet (Spreadsheet) 138Use of a Work Sheet 138Work Sheet Applications and Analysis 142

Contents

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xxiv Contents

Closing Process 142Temporary and Permanent Accounts 142Recording Closing Entries 143Post-Closing Trial Balance 144

Accounting Cycle 146

Classifi ed Balance Sheet 147Classifi cation Structure 147Classifi cation Categories 148

Global View 150Decision Analysis—Current Ratio 150Appendix 4A Reversing Entries 154

5 Accounting for Merchandising Operations 178

Merchandising Activities 180Reporting Income for a Merchandiser 180Reporting Inventory for a Merchandiser 181Operating Cycle for a Merchandiser 181Inventory Systems 181

Accounting for Merchandise Purchases 182Purchase Discounts 183Purchase Returns and Allowances 184Transportation Costs and Ownership Transfer 185

Accounting for Merchandise Sales 187Sales of Merchandise 187Sales Discounts 188Sales Returns and Allowances 188

Completing the Accounting Cycle 190Adjusting Entries for Merchandisers 190Preparing Financial Statements 191Closing Entries for Merchandisers 191Summary of Merchandising Entries 191

Financial Statement Formats 192Multiple-Step Income Statement 193Single-Step Income Statement 194Classifi ed Balance Sheet 194

Global View 195Decision Analysis—Acid-Test and Gross Margin

Ratios 196Appendix 5A Periodic Inventory System 201Appendix 5B Work Sheet—Perpetual System 205

6 Inventories and Cost of Sales 226

Inventory Basics 228Determining Inventory Items 228Determining Inventory Costs 229Internal Controls and Taking a Physical Count 229

Inventory Costing under a Perpetual System 229Inventory Cost Flow Assumptions 230Inventory Costing Illustration 231Specifi c Identifi cation 231First-In, First-Out 233Last-In, First-Out 233Weighted Average 234Financial Statement Effects of Costing Methods 236Consistency in Using Costing Methods 237

Valuing Inventory at LCM and the Effects of Inventory Errors 237

Lower of Cost or Market 237Financial Statement Effects of Inventory Errors 238

Global View 240Decision Analysis—Inventory Turnover and Days’

Sales in Inventory 241Appendix 6A Inventory Costing under a Periodic

System 246Appendix 6B Inventory Estimation

Methods 251

7 Accounting Information Systems 270

Fundamental System Principles 272Control Principle 272Relevance Principle 272Compatibility Principle 273Flexibility Principle 273Cost-Benefi t Principle 273

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Contents xxv

Components of Accounting Systems 273Source Documents 274Input Devices 274Information Processors 274Information Storage 274Output Devices 275

Special Journals in Accounting 275Basics of Special Journals 276Subsidiary Ledgers 276Sales Journal 278Cash Receipts Journal 281Purchases Journal 283Cash Disbursements Journal 284General Journal Transactions 285

Technology-Based Accounting Systems 286Computer Technology in Accounting 286Data Processing in Accounting 286Computer Networks in Accounting 286Enterprise Resource Planning Software 287

Global View 287Decision Analysis—Segment Return on Assets 288Appendix 7A Special Journals under a Periodic

System 292

8 Cash and Internal Controls 314

Internal Control 316Purpose of Internal Control 316Principles of Internal Control 317Technology and Internal Control 319Limitations of Internal Control 320

Control of Cash 321Cash, Cash Equivalents, and Liquidity 321Cash Management 321Control of Cash Receipts 322Control of Cash Disbursements 324

Banking Activities as Controls 328Basic Bank Services 328Bank Statement 330Bank Reconciliation 331

Global View 334Decision Analysis—Days’ Sales Uncollected 335Appendix 8A Documentation and Verifi cation 338Appendix 8B Control of Purchase Discounts 341

9 Accounting for Receivables 358

Accounts Receivable 360Recognizing Accounts Receivable 360Valuing Accounts Receivable—Direct Write-Off Method 363Valuing Accounts Receivable—Allowance Method 364Estimating Bad Debts—Percent of Sales Method 366Estimating Bad Debts—Percent of Receivables Method 367Estimating Bad Debts—Aging of Receivables Method 368

Notes Receivable 370Computing Maturity and Interest 370Recognizing Notes Receivable 371Valuing and Settling Notes 372

Disposal of Receivables 373Selling Receivables 373Pledging Receivables 373

Global View 374Decision Analysis—Accounts Receivable Turnover 375

10 Plant Assets, Natural Resources, and Intangibles 392

SECTION 1—PLANT ASSETS 394Cost Determination 395

Land 395Land Improvements 396Buildings 396Machinery and Equipment 396Lump-Sum Purchase 396

Depreciation 397Factors in Computing Depreciation 397Depreciation Methods 398Partial-Year Depreciation 402Change in Estimates for Depreciation 403Reporting Depreciation 403

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xxvi Contents

Additional Expenditures 404Ordinary Repairs 404Betterments and Extraordinary Repairs 405

Disposals of Plant Assets 405Discarding Plant Assets 406Selling Plant Assets 406

SECTION 2—NATURAL RESOURCES 408Cost Determination and Depletion 408Plant Assets Used in Extracting 409

SECTION 3—INTANGIBLE ASSETS 409Cost Determination and Amortization 409Types of Intangibles 410

Global View 412Decision Analysis—Total Asset Turnover 413Appendix 10A Exchanging Plant Assets 416

11 Current Liabilities and Payroll Accounting 434

Characteristics of Liabilities 436Defi ning Liabilities 436Classifying Liabilities 436Uncertainty in Liabilities 437

Known Liabilities 438Accounts Payable 438Sales Taxes Payable 438Unearned Revenues 439Short-Term Notes Payable 439Payroll Liabilities 441Multi-Period Known Liabilities 444

Estimated Liabilities 445Health and Pension Benefi ts 445Vacation Benefi ts 446Bonus Plans 446Warranty Liabilities 446Multi-Period Estimated Liabilities 447

Contingent Liabilities 448Accounting for Contingent Liabilities 448Reasonably Possible Contingent Liabilities 448Uncertainties that Are Not Contingencies 449

Global View 449Decision Analysis—Times Interest Earned Ratio 450Appendix 11A Payroll Reports, Records,

and Procedures 453Appendix 11B Corporate Income Taxes 459

12 Accounting for Partnerships 478

Partnership Form of Organization 480Characteristics of Partnerships 480Organizations with Partnership Characteristics 481Choosing a Business Form 482

Basic Partnership Accounting 483Organizing a Partnership 483Dividing Income or Loss 483Partnership Financial Statements 485

Admission and Withdrawal of Partners 486Admission of a Partner 486Withdrawal of a Partner 488Death of a Partner 489

Liquidation of a Partnership 489No Capital Defi ciency 490Capital Defi ciency 491

Global View 492Decision Analysis—Partner Return on Equity 492

13 Accounting for Corporations 506

Corporate Form of Organization 508Characteristics of Corporations 508Corporate Organization and Management 509Stockholders of Corporations 510Basics of Capital Stock 511

Common Stock 512Issuing Par Value Stock 512Issuing No-Par Value Stock 513Issuing Stated Value Stock 514Issuing Stock for Noncash Assets 514

Dividends 515Cash Dividends 515Stock Dividends 516Stock Splits 518

Preferred Stock 518Issuance of Preferred Stock 519Dividend Preference of Preferred Stock 519Convertible Preferred Stock 520Callable Preferred Stock 521Reasons for Issuing Preferred Stock 521

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Contents xxvii

Treasury Stock 522Purchasing Treasury Stock 522Reissuing Treasury Stock 523Retiring Stock 524

Reporting of Equity 524Statement of Retained Earnings 524Statement of Stockholders’ Equity 525Reporting Stock Options 525

Global View 526Decision Analysis—Earnings per Share, Price-

Earnings Ratio, Dividend Yield, and Book Value per Share 527

14 Long-Term Liabilities 550

Basics of Bonds 552Bond Financing 552Bond Trading 553Bond-Issuing Procedures 554

Bond Issuances 554Issuing Bonds at Par 554Bond Discount or Premium 555Issuing Bonds at a Discount 555Issuing Bonds at a Premium 558Bond Pricing 560

Bond Retirement 561Bond Retirement at Maturity 561Bond Retirement before Maturity 561Bond Retirement by Conversion 562

Long-Term Notes Payable 562Installment Notes 562Mortgage Notes and Bonds 564

Global View 565Decision Analysis—Debt Features and the Debt-to-

Equity Ratio 566Appendix 14A Present Values of Bonds and Notes 570Appendix 14B Effective Interest Amortization 572Appendix 14C Issuing Bonds between Interest

Dates 574Appendix 14D Leases and Pensions 576

15 Investments and International Operations 594

Basics of Investments 596Motivation for Investments 596Classifi cation and Reporting 597Debt Securities: Accounting Basics 597Equity Securities: Accounting Basics 598

Reporting of Noninfluential Investments 599Trading Securities 599Held-to-Maturity Securities 600Available-for-Sale Securities 600

Reporting of Influential Investments 602Investment in Securities with Signifi cant Infl uence 602Investment in Securities with Controlling Infl uence 603Accounting Summary for Investments in Securities 603

Global View 605Decision Analysis—Components of Return on Total

Assets 605Appendix 15A Investments in International

Operations 610

16 Reporting the Statement of Cash Flows 630

Basics of Cash Flow Reporting 632Purpose of the Statement of Cash Flows 632Importance of Cash Flows 632Measurement of Cash Flows 633Classifi cation of Cash Flows 633Noncash Investing and Financing 635Format of the Statement of Cash Flows 635Preparing the Statement of Cash Flows 636

Cash Flows from Operating 638Indirect and Direct Methods of Reporting 638Application of the Indirect Method of Reporting 639Summary of Adjustments for Indirect Method 644

Cash Flows from Investing 645Three-Stage Process of Analysis 645Analysis of Noncurrent Assets 645Analysis of Other Assets 646

Cash Flows from Financing 647Three-Stage Process of Analysis 647Analysis of Noncurrent Liabilities 647Analysis of Equity 648Proving Cash Balances 649

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xxviii Contents

Global View 649Decision Analysis—Cash Flow Analysis 650Appendix 16A Spreadsheet Preparation of the Statement

of Cash Flows 654Appendix 16B Direct Method of Reporting Operating

Cash Flows 657

17 Analysis of Financial Statements 684

Basics of Analysis 686Purpose of Analysis 686Building Blocks of Analysis 687Information for Analysis 687Standards for Comparisons 688Tools of Analysis 688

Horizontal Analysis 688Comparative Statements 688Trend Analysis 691

Vertical Analysis 693Common-Size Statements 693Common-Size Graphics 695

Ratio Analysis 696Liquidity and Effi ciency 697Solvency 701Profi tability 702Market Prospects 703Summary of Ratios 704

Global View 706Decision Analysis—Analysis Reporting 706Appendix 17A Sustainable Income 710

18 Managerial Accounting Concepts and Principles 730

Managerial Accounting Basics 732Purpose of Managerial Accounting 732Nature of Managerial Accounting 733Managerial Decision Making 735Fraud and Ethics in Managerial Accounting 735

Managerial Cost Concepts 736Types of Cost Classifi cations 736Identifi cation of Cost Classifi cations 739Cost Concepts for Service Companies 739

Reporting Manufacturing Activities 740Manufacturer’s Balance Sheet 740Manufacturer’s Income Statement 741Flow of Manufacturing Activities 744

Manufacturing Statement 745Trends in Managerial Accounting 747

Global View 749Decision Analysis—Cycle Time and Cycle

Effi ciency 749

19 Job Order Cost Accounting 774

Job Order Cost Accounting 776Cost Accounting System 776Job Order Production 776Events in Job Order Costing 777Job Cost Sheet 778

Job Order Cost Flows and Reports 780Materials Cost Flows and Documents 780Labor Cost Flows and Documents 782Overhead Cost Flows and Documents 783Summary of Cost Flows 785

Adjusting Factory Overhead 787Factory Overhead T-Account 787Underapplied or Overapplied Overhead 788

Global View 788Decision Analysis—Pricing for Services 789

20 Process Cost Accounting 812

Process Operations 814Comparing Job Order and Process Operations 815Organization of Process Operations 815GenX Company—An Illustration 815

Process Cost Accounting 817Comparing Job Order and Process Cost Accounting Systems 817Direct and Indirect Costs 817Accounting for Materials Costs 818Accounting for Labor Costs 819Accounting for Factory Overhead 819

Equivalent Units of Production 821Accounting for Goods in Process 821Differences in Equivalent Units for Materials, Labor, and Overhead 821

Process Costing Illustration 822Step 1: Determine the Physical Flow of Units 823Step 2: Compute Equivalent Units of Production 823Step 3: Compute the Cost per Equivalent Unit 824Step 4: Assign and Reconcile Costs 824

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Contents xxix

Transfers to Finished Goods Inventory and Cost of Goods Sold 827Trends in Process Operations 829

Global View 829Decision Analysis—Hybrid Costing System 829Appendix 20A FIFO Method of Process Costing 833

21 Cost Allocation and Performance Measurement 856

SECTION 1—ALLOCATING COSTS FOR PRODUCT COSTING 858Overhead Cost Allocation Methods 858

Two-Stage Cost Allocation 858Activity-Based Cost Allocation 860Comparison of Two-Stage and Activity-Based Cost Allocation 863

SECTION 2—ALLOCATING COSTS FOR PERFORMANCE EVALUATION 864Departmental Accounting 864

Motivation for Departmentalization 864Departmental Evaluation 864

Departmental Expense Allocation 865Direct and Indirect Expenses 865Allocation of Indirect Expenses 866Departmental Income Statements 867Departmental Contribution to Overhead 871

Evaluating Investment Center Performance 873Financial Performance Evaluation Measures 873Nonfi nancial Performance Evaluation Measures 874

Responsibility Accounting 875Controllable versus Direct Costs 875Responsibility Accounting System 876Summary of Cost Allocation 877

Global View 878Decision Analysis—Investment Center Profit Margin

and Investment Turnover 878Appendix 21A Transfer Pricing 882Appendix 21B Joint Costs and Their Allocation 883

22 Cost-Volume-Profi t Analysis 906

Identifying Cost Behavior 908Fixed Costs 908Variable Costs 909Mixed Costs 909Step-Wise Costs 910Curvilinear Costs 910

Measuring Cost Behavior 911Scatter Diagrams 911High-Low Method 912Least-Squares Regression 913Comparison of Cost Estimation Methods 913

Using Break-Even Analysis 914Contribution Margin and Its Measures 914Computing the Break-Even Point 915Preparing a Cost-Volume-Profi t Chart 916Making Assumptions in Cost-Volume-Profi t Analysis 917

Applying Cost-Volume-Profit Analysis 918Computing Income from Sales and Costs 919Computing Sales for a Target Income 919Computing the Margin of Safety 920Using Sensitivity Analysis 921Computing a Multiproduct Break-Even Point 921

Global View 924Decision Analysis—Degree of Operating Leverage 924Appendix 22A Using Excel to Estimate Least-Squares

Regression 926

23 Master Budgets and Planning 944

Budget Process 946Strategic Budgeting 946Benchmarking Budgets 946Budgeting and Human Behavior 947Budgeting as a Management Tool 947Budgeting Communication 947

Budget Administration 948Budget Committee 948Budget Reporting 948Budget Timing 949

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xxx Contents

Master Budget 950Master Budget Components 950Operating Budgets 952Capital Expenditures Budget 956Financial Budgets 956

Global View 960Decision Analysis—Activity-Based Budgeting 960Appendix 23A Production and Manufacturing

Budgets 966

24 Flexible Budgets and Standard Costs 988

SECTION 1—FLEXIBLE BUDGETS 990Budgetary Process 990

Budgetary Control and Reporting 990Fixed Budget Performance Report 991Budget Reports for Evaluation 992

Flexible Budget Reports 992Purpose of Flexible Budgets 992Preparation of Flexible Budgets 992Flexible Budget Performance Report 994

SECTION 2—STANDARD COSTS 995Materials and Labor Standards 996

Identifying Standard Costs 996Setting Standard Costs 996

Cost Variances 997Cost Variance Analysis 997Cost Variance Computation 997Computing Materials and Labor Variances 998

Overhead Standards and Variances 1001Setting Overhead Standards 1001Total Overhead Cost Variance 1002

Global View 1004Decision Analysis—Sales Variances 1005Appendix 24A: Expanded Overhead Variances and

Standard Cost Accounting System 1010

25 Capital Budgeting and Managerial Decisions 1034

SECTION 1—CAPITAL BUDGETING 1036Methods Not Using Time Value of Money 1037

Payback Period 1037Accounting Rate of Return 1039

Methods Using Time Value of Money 1040Net Present Value 1041Internal Rate of Return 1043Comparison of Capital Budgeting Methods 1045

SECTION 2—MANAGERIAL DECISIONS 1046Decisions and Information 1047

Decision Making 1047Relevant Costs 1047

Managerial Decision Scenarios 1048Additional Business 1048Make or Buy 1049Scrap or Rework 1050Sell or Process 1051Sales Mix Selection 1052Segment Elimination 1053Keep or Replace Equipment 1054Qualitative Decision Factors 1055

Global View 1055Decision Analysis—Break-Even Time 1055Appendix 25A Using Excel to Compute Net Present

Value and Internal Rate of Return 1060

Appendix A Financial Statement Information A-1 Research in Motion A-2 Apple A-19 Palm A-24 Nokia A-29Appendix B Time Value of Money BGlossary G

Credits CR

Index IND

Chart of Accounts CA

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fundamental accounting principles, wild, 20th ed

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