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The Basics 1. Accounting Equation: Assets = Liabilities + Owner’s Equity 2. T Account: Account Title Left Side Right Side debit credit 3. Rules of Debit and Credit: STATEMENT OF OWNER’S EQUITY A summary of the changes in the owner’s equity of a business en- tity that have occurred during a specific period of time, such as a month or a year. BALANCE SHEET A list of the assets, liabilities, and owner’s equity of a business en- tity as of a specific date, usually at the close of the last day of a month or a year. STATEMENT OF CASH FLOWS A summary of the cash receipts and cash payments of a business entity for a specific period of time, such as a month or a year. 6. Accounting Cycle: 1. Analyze and record transactions in journal. 2. Post transactions to ledger. 3. Prepare trial balance, assemble adjustment data, and complete optional work sheet. 4. Prepare financial statements. 5. Journalize and post adjusting entries. 6. Journalize and post closing entries. 7. Prepare post-closing trial balance. 7. Types of Adjusting Entries: 1. Deferred expense (prepaid expense) 2. Deferred revenue (unearned revenue) 3. Accrued expense (accrued liability) 4. Accrued revenue (accrued asset) 5. Depreciation expense Each entry will always affect both a balance sheet and an income state- ment account. 8. Closing Entries: 1. Transfer revenue account balances to Income Summary. 2. Transfer expense account balances to Income Summary. 3. Transfer Income Summary balance to Capital. 4. Transfer drawing account balance to Capital. 9. Special Journals: Providing services on account → recorded in → Revenue (sales) journal Receipt of cash from any source → recorded in → Cash receipts journal Purchase of items on account → recorded in → Purchases journal Payments of cash for any purpose → recorded in → Cash payments journal 10. Shipping Terms: FOB Shipping Point FOB Destination Ownership (title) passes to buyer when merchandise is.................... delivered to delivered to freight carrier buyer Transportation costs are paid by .......................... buyer seller Balance Sheet Accounts ASSETS LIABILITIES Asset Accounts Liability Accounts Debit Credit Debit Credit for for for for increases decreases decreases increases OWNER’S EQUITY Owner’s Equity Accounts Debit Credit for for decreases increases Income Statement Accounts Debit for Credit for decreases in owner’s equity increases in owner’s equity Expense Accounts Revenue Accounts Debit Credit Debit Credit for for for for increases decreases decreases increases Normal Balance 4. To Analyze a Transaction: 1. Determine whether an asset, a liability, owner’s equity, revenue, or expense account is affected by the transaction. 2. For each account affected by the transaction, determine whether the account increases or decreases. 3. Determine whether each increase or decrease should be re- corded as a debit or a credit. 5. Financial Statements: INCOME STATEMENT A summary of the revenue and the expenses of a business entity for a specific period of time, such as a month or a year. 66124_endsheets_front.qxd 11/12/03 9:20 PM Page B

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  • 1. 66124_endsheets_front.qxd 11/12/03 9:20 PM Page B The Basics 1. Accounting Equation: STATEMENT OF OWNERS EQUITYAssets = Liabilities + Owners Equity A summary of the changes in the owners equity of a business en-tity that have occurred during a specific period of time, such as a 2. T Account:month or a year.Account TitleBALANCE SHEET A list of the assets, liabilities, and owners equity of a business en-Left Side Right Side tity as of a specific date, usually at the close of the last day of a debitcredit month or a year. STATEMENT OF CASH FLOWSA summary of the cash receipts and cash payments of a businessentity for a specific period of time, such as a month or a year. 3. Rules of Debit and Credit: Balance Sheet Accounts6. Accounting Cycle: 1. Analyze and record transactions in journal.ASSETSLIABILITIES2. Post transactions to ledger.Asset AccountsLiability Accounts 3. Prepare trial balance, assemble adjustment data, and completeoptional work sheet.Debit CreditDebit Credit 4. Prepare financial statements. forforfor for 5. Journalize and post adjusting entries.increasesdecreasesdecreases increases6. Journalize and post closing entries. 7. Prepare post-closing trial balance.OWNERS EQUITY 7. Types of Adjusting Entries:Owners Equity Accounts 1. Deferred expense (prepaid expense)Debit Credit2. Deferred revenue (unearned revenue)3. Accrued expense (accrued liability) for for4. Accrued revenue (accrued asset)decreases increases 5. Depreciation expense Each entry will always affect both a balance sheet and an income state-Income Statement Accountsment account. Debit for Credit for8. Closing Entries:decreases in owners equity increases in owners equity1. Transfer revenue account balances to Income Summary. Expense Accounts Revenue Accounts 2. Transfer expense account balances to Income Summary. 3. Transfer Income Summary balance to Capital.Debit CreditDebit Credit 4. Transfer drawing account balance to Capital. forforfor forincreasesdecreasesdecreases increases 9. Special Journals: Providing services on account recorded in Revenue (sales) journalNormal Balance Receipt of cash from any source recorded in Cash receipts journal 4. To Analyze a Transaction:Purchase of items on account recorded in Purchases journal1. Determine whether an asset, a liability, owners equity, revenue, Payments of cash for or expense account is affected by the transaction. any purpose recorded in Cash payments journal2. For each account affected by the transaction, determine whether the account increases or decreases.3. Determine whether each increase or decrease should be re- 10. Shipping Terms: corded as a debit or a credit. FOB Shipping PointFOB Destination Ownership (title) 5. Financial Statements:passes to buyer when merchandise is.................... delivered todelivered to INCOME STATEMENT freight carrier buyer A summary of the revenue and the expenses of a business entityTransportation costs for a specific period of time, such as a month or a year. are paid by .......................... buyer seller

2. 66124_endsheets_front.qxd 11/12/03 9:20 PM Page C 11. Format for Bank Reconciliation: 16. Contribution Margin Ratio = Sales Variable CostsSales Cash balance according to bank statement ......................$xxx Add:Additions by depositor not on bankstatement ..........................................................$xx17. Break-Even Sales (Units) = Fixed Costs Bank errors ............................................................. xx xxUnit Contribution Margin$xxx Deduct: Deductions by depositor not on bank 18. Sales (Units) = Fixed Costs + Target Profitstatement ..........................................................$xx Bank errors ............................................................. xx xx Unit Contribution Margin Adjusted balance.................................................................. $xxx 19. Margin of Safety = Sales Sales at Break-Even Point Cash balance according to depositors records ...............$xxx Sales Add:Additions by bank not recorded by depositor..$xx Depositor errors..................................................... xx xx$xxx 20. Operating Leverage = Contribution Margin Deduct: Deductions by bank not recordedIncome from Operationsby depositor .....................................................$xx Depositor errors..................................................... xx xx 21. Variances Adjusted balance.................................................................. $xxx Direct Materials = Actual Price per Unit Actual QuantityPrice Variance Standard Price Used 12. Inventory Costing Methods:1. First-in, First-out (fifo) Direct Materials = Actual Quantity Used Standard Price2. Last-in, First-out (lifo) Quantity Variance Standard Quantity per Unit3. Average Cost Direct Labor = Actual Rate per Hour Actual Hours Rate VarianceStandard Rate Worked 13. Interest Computations: Interest = Face Amount (or Principal) Rate TimeDirect Labor = Actual Hours Worked Standard Rate Time VarianceStandard Hoursper Hour 14. Methods of Determining Annual Depreciation: Variable FactoryActual Budgeted Factory Overhead Controllable = Factory Overhead for Variance OverheadAmount Produced STRAIGHT-LINE: Cost Estimated Residual Value Estimated Life Fixed FactoryBudgeted Factory Applied DECLINING-BALANCE: Rate* Book Value at Beginning of Overhead Volume = Overhead for Factory PeriodVarianceAmount Produced Overhead *Rate is commonly twice the straight-line rate (1 Estimated Life).22. Rate of Return on Income from Operations= Investment (ROI)Invested Assets Alternative ROI Computation: 15. Cash Provided by Operations on Statement of Cash Income from OperationsSales Flows (indirect method):ROI =Sales Invested AssetsNet income, per income statement ................................ $xxAdd:Depreciation of fixed assets ............................ $xx23. Capital Investment Analysis Methods:Amortization of bond payable discount and intangible assets ..................................xx1. Methods That Ignore Present Values:Decreases in current assets (receivables, A. Average Rate of Return Method inventories, prepaid expenses)................. xx B. Cash Payback MethodIncreases in current liabilities (accounts 2. Methods That Use Present Values: and notes payable, accrued liabilities) ....xx A. Net Present Value MethodLosses on disposal of assets and retirement B. Internal Rate of Return Method of debt ..........................................................xxxxDeduct: Amortization of bond payable premium......$xx24. Average Rate Estimated Average Annual Income =Increases in current assets (receivables,of Return Average Investment inventories, prepaid expenses)................. xxDecreases in current liabilities (accounts 25. Present Value Index = Total Present Value of Net Cash Flow and notes payable, accrued liabilities) ....xxAmount to Be InvestedGains on disposal of assets and retirement of debt ..........................................................xx xx 26. Present Value FactorAmount to Be Invested= Net cash flow from operating activities.................... $xx for an Annuity of $1 Equal Annual Net Cash Flows 3. 66124_frontmatter.qxd 11/13/03 2:41 PM Page i ACCOUNTING 21e CARL S. WARRENProfessor Emeritus of AccountingUniversity of Georgia, AthensJAMES M. REEVEProfessor of AccountingUniversity of Tennessee, KnoxvillePHILIP E. FESSProfessor Emeritus of Accounting University of Illinois, Champaign-Urbana 4. 66124_frontmatter.qxd 11/13/03 2:42 PM Page ii Accounting 21eCarl S. Warren, James M. Reeve, Philip E. FessVP/Editorial Director:Media Technology Editor: Sr. Design Project Manager:Jack W. Calhoun Jim Rice Michael H. StrattonVP/Editor-in-Chief: Media Developmental Editor:Internal and Cover Designer:George Werthman Sally Nieman Michael H. StrattonPublisher:Media Production Editors:Cover Illustration:Rob Dewey Robin Browning, Kelly Reid MatsuExecutive Editor: Manufacturing Coordinator: Preface Designer:Sharon Oblinger Doug Wilke Kathy HemingSr. Developmental Editor: Production House:Photography Manager:Ken MartinLitten Editing and Production, Inc.Deanna EttingerMarketing Manager:Compositor:Photo Researcher:Keith ChassGGS Information Services, Inc. Terri MillerSr. Production Editor:Printer:Deanna QuinnQuebecor WorldVersailles, KYCOPYRIGHT (c) 2005ALL RIGHTS RESERVED. For permission to use material from thisby South-Western, part of the Thomsontext or product, contact us byCorporation. South-Western, Thomson,No part of this work covered by the copy-Tel (800) 730-2214and the Thomson logo are trademarks right hereon may be reproduced or used Fax (800) 730-2215used herein under license.in any form or by any meansgraphic, http://www.thomsonrights.comelectronic, or mechanical, including photo-Printed in the United States of America copying, recording, taping, Web distribu-For more information1 2 3 4 5 06 05 04 03 tion or information storage and retrievalcontact South-Western,systemswithout the written permission of5191 Natorp Boulevard,ISBN: 0-324-18800-5 (Accounting, 21e) the publisher. Mason, Ohio 45040.ISBN: 0-324-22501-6 (International Edition,Or you can visit our Internet site at:21e) http://www.swlearning.comISBN: 0-324-20366-7 (Chapters 111, 21e)ISBN: 0-324-20367-5 (Chapters 1225,21e)Library of CongressControl Number:2003114842 5. 66124_frontmatter.qxd 11/19/03 4:24 PM Page iiithe author teamCarl S. WarrenDr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia,Athens. He has also taught at the University of Iowa, Michigan State University,and the University of Chicago. He received his doctorate degree (Ph.D.) fromMichigan State University and his undergraduate (B.B.A.) and masters (M.A.)degrees from the University of Iowa. Dr. Warrens primary teaching focus is onprinciples of accounting and auditing. He enjoys interacting and learning fromcolleagues on how to improve student learning and understanding of accounting.His outside interests include writing short stories, novels, oil painting, handball,golf, skiing, backpacking, and fly-fishing.James M. ReeveDr. James M. Reeve is the William and Sara Clark Professor of Accounting andBusiness at the University of Tennessee, Knoxville. He teaches and coordinatesthe Principles of Accounting course at the University of Tennessee. Dr. Reevereceived his Ph.D. from Oklahoma State University in 1980. In addition to histeaching experience, he brings to this text a wealth of experience consulting onmanagerial accounting issues with numerous companies, including Procter &Gamble, Hershey Foods, Coca-Cola, Sony, and Boeing. Dr. Reeves interests out-side the classroom and business world revolve around reading and issues of faith. Philip E. Fess40 Years Of Contributions The 21st edition marks the 40th year of Phil Fess contribution to this fami- ly of texts. Phil first co-authored the 9th edition of Accounting Principles with Rollie Niswonger, his mentor when he was a student at Miami University. Phil and Rollie worked closely together on six editions as they continued to improve accounting education through listening carefully to users of the texts and authoring thoughtfully. During his tenure as the Arthur Andersen & Co. Alumni Professor of Accountancy at the University of Illinois, Champaign-Urbana, Phils creativity, innovative ideas, and clear, concise writing style enabled Accounting to retain its position as the leading accounting principles textbook of all time. This new edition still reflects Phils attention to detail and his unique ability to make textbooks user- friendly. Phils continuing legacy is the millions of students who, through using the texts, have gained a strong understanding of and appreciation for accounting and its usefulness. 6. 66124_preface_iv-xxxi.qxd 11/19/03 5:23 PM Page iviv Preface Even as the undisputed leaders in accountingtextbook innovation, we faced a daunting challenge withthe 21st edition.Yet once again, we are proud to presentthe worlds best tool for teaching accounting, designedand engineered based on the solid foundation of ourpast success. Accounting, 21e presents, as always, the mostcomprehensive content in the market with strikinglyclear organization and breakthrough pedagogy. Togetherwith this solid textbook foundation, our leading-edgetechnology will guide your students toward success inthe business world yet to unfold. We invite you to experience this superior package oftext and technology and see how well they perform together. 7. 66124_preface_iv-xxxi.qxd 11/19/03 5:23 PM Page vPreface vHaving reache d more thanused textbook11.5 million stfor accountinudents, it woubeing numbe g principles to ld be easy fo r one doesnt coast on ther the most wid history of innocome from ju momentum ofely vation with th st coasting. Itits success. B e 21st edition comes from cout. ntinuing our lo To our manyngcolleagues wgratitude. Asho contributeusers of the 20d their valuabclassroom feedth edition, they le assistance,back, participshared their pwe extend ouaddition, doze ating in focu ersonal insighrns of distingu s groups, and ts by providing this edition. Wished reviewerfilling out que took all coms have kept usestionnaires. than its predements very seon track during In cessors becaus riously, and Athe revision of e of the wideccounting, 21variety of advi e is more robu Accounting, ce weve incost21e will remai rporated.we profile inn the text of chthe text haveoice for other grown and chreasthem. Weve integrated our w anged over tim ons as well. The companies on the markeork with somee, and so has t today. A lo of the most poour coverage guided Accoung list of distwerful and effeofnting throughinguished authctive technolo our part in th the better parors, editors, an gye evolution oft of the past d reviewers hathis great trad century. We ar sition.e proud to taBack in 1929,keauthor Jamesthis text has McKinsey coul enjoyed or th d not have im authors, we ap at his original agined the succ preciate the re vision would ess and influen refine it to meesponsibility ofremain intact ce t the changingprotecting this. As the curr many colleagneeds of studvision, whileentues who have ents and instrucontinuing tohelped to makctors. We sinc e it happen.erely thank ou r T he teaching of accounting is no longer designed to train professional accountants only. With the growing complexity of business and the constantly increasing difficulty of the problems of management, it has become essential that everyone who aspires to a position of responsibility should have a knowledge of the fundamental principles of accounting. James O. McKinsey, Author, first edition, 1929 8. 66124_preface_iv-xxxi.qxd 11/19/03 5:24 PM Page vivi Preface Based squarely on the success of yesterday, Accounting, 21e boldly leads the way into the accounting challenges of tomorrow with innovative learning systems that bring accounting principles and practices to life. Reflecting more realistically than ever the way business operates today, this edition integrates learning options designed to extend the classroom beyond its walls into the unlimited world of the Internet. You are the best judge of which supplements will best suit your class. For this reason, weve engineered the following content-rich and pedagogically sound course-management technologies so that you can tailor them to meet the needs of your curriculum or a particular class. These breakthrough technologies serve two important purposes: First, they help make sure your students receive the pedagogical benefits that come with completing homework assignments. Second, they give you more time to devote to other classroom activities.W ebTutor Advantage on W ebCT with Personal Trainer 3.0W ebTutor Advantage on Blackboar d with Personal Trainer 3.0WebTutor Advantage provides you with the most robust and pedagogicallyadvanced content for either the WebCT or Blackboard coursemanagement platform. Now you can enliven your course with inter- active reinforcement for students as well as powerful instructor tools.With this newest version, the students content comprehension is assessed after which they are referred to specific content features in WebTutor Advantage or the text to address areas in which they need additional help. Elements of WebTutor Advantage include: NEW Video Cases Students get a taste of accounting in action by viewing these lively two- to five-minute segments. Each video covers a key accounting concept as it is played out in a real-world company or situation. Accompanying pedagogy includes a summary of each video, a short description about what the student should look for when watching, and some suggested critical-thinking questions for them to answer at the end. Chapter Introductory Videos Students begin each chapter with a brief but engaging Flash introduction to the chapter objectives. 9. 66124_preface_iv-xxxi.qxd 11/19/03 5:24 PM Page vii Preface viie-LecturesBecause reinforcement is essential to conceptretention, each chapter includes two orthree Flash presentations that review thechapters major topics. The presentationsare in a visual lecture format with audio thatcovers one or two key chapter concepts.Illustrative ProblemsThese step-by-step Flash presentationsreview the Illustrative Problems and theirsolutions from each chapter.Accounting Cycle ReviewWith this tool, students get a firm grasp on the key concepts of theaccounting cycle by applying what theyve learned to realistic situationsand problems. Found only in Chapter 4.NEW Exercise DemosThese demos allow students to review explanations of twoto three representative exercises from each chapter in astep-by-step visual format with audio.QuizzesStudents make great strides with continuous reinforcement.Now they can select from a variety of intriguing options: RE-ACT Quiz Ten to fifteen multiple-choice and true-false questions cover key concepts in the chapter. Students are directed to specific resources for additional study related to their incorrect answers. Achievement Tests Similar to those found in the test bank, these testsprovide additional opportunities for students to study and quiz themselvesin multiple choice, true-false, and matching test formats. Multiple-Choice, True-False, and Matching Quizzes These quizzesare comprised of the questions provided in the study guide. UsingWebTutor Advantage, students can answer them, have them graded, andsubmit the results directly to their instructor.QuizBowlPopular with students, this engaging game allowsthem to review key accounting concepts.Crossword PuzzlesThis captivating and rewarding option encouragesstudents to go over key chapter terms.Spanish DictionaryThis timely resource defines common accounting terms in Spanish. 10. 66124_preface_iv-xxxi.qxd 11/19/03 5:24 PM Page viiiviii PrefacePersonal Trainer 3.0Specifically designed to ease the time-consumingtask of grading homework, Personal Trainer letsstudents complete their assigned homework fromthe text or practice on unassigned homeworkonline. The results are instantaneously entered intoa gradebook.With annotated spreadsheets and full-blown gradebook functionality, thegreatly enhanced Personal Trainer 3.0 provides an unprecedented real-time,guided, self-correcting, learning reinforcement system outside the classroom.Use this resource as an integrated solution for your distance learning ortraditional course. Enhanced Questions Personal Trainer 3.0 now includes all exercisesand problems. Students can get help entering their answers in the properformat and run a spell check on their answers. On selected questions,they can call up additional, similar questions for extra practice. Optionalalgorithmic questions will also be included. Enhanced Instructor Capabilities The flexible gradebook can displayand download any combination of student work, chapters, or activities.Capture grades on demand or set a particular time for grades to beautomatically captured. Tag questions as required or excluded, sostudents can only access the questions you want them to complete. Enhanced Hints Students can get up to three hints per activity.These hints can be PowerPoint slides, video clips, images, and more.And instructors can add a hint of their own! Enhanced Look-and-Feel Fast, reliable, dependable, and even easier to use, Personal Trainer 3.0 sports a fresh, new graphic design. Personal Trainer is included in WebTutor Advantage, or it can be purchased separately online. 11. 66124_preface_iv-xxxi.qxd 11/19/03 5:24 PM Page ix PrefaceixXtra!Available as an optional, free bundle with every new textbook, Xtra! givesstudents FREE access to the following online learning tools: e-Lectures Brief e-Lectures review more difficult conceptsfrom the chapter. Topical Quizzes Quizzes measure a students test readinesson the concepts in the chapter. Multiple Choice Quizzes Additional quizzes help studentsreview chapter concepts and prepare for exams. Feedback ontheir answers gives page references so they know where tolook up the questions theyve missed! Crosswords The Crossword Puzzles are a fun way studentscan review their understanding of key terms and concepts.P.A.S.S.Our best-selling computerized accounting software, by Dale Klooster andWarren Allen, Power Accounting System Software (formerly GeneralLedger Software) shows students the effects that accounting entries haveon financial statements. Solving end-of-chapter problems, the continuingproblem, comprehensive problems, and practice sets with P.A.S.S. helps makelearning relevant and interesting. Problem Checker Thisfeature enables students tosee if their entries arecorrect. Real Business FormsThis feature providesstudents with experiencecreating invoices anddoing payroll. Charts, Graphs, andRatios Allows studentsto analyze financial data,including expense distri-bution, top customers,sales, budgets, mostEach problem thatprofitable items, and can be completedrelevant ratios.with P.A.S.S. ismarked with thisP.A.S.S.icon in the text. 12. 66124_preface_iv-xxxi.qxd 11/19/03 5:24 PM Page xx PrefacePr oduct Suppor t W eb Site h t t p : / / w a r r e n . s w l e a r n i n g . c o m The Warren/Reeve/Fess Web site provides a variety of free instructor and student resources.There youll find text-specific content and other related resources organized by chapter and topic. The free Product Support Web site includes the highly stimu- lating Interactive Study Center, which provides students with a wide variety of materials for extra studying and review. Key Points All key points are pulled from the end of each chapter in the text so that students can review them online. e-Lectures Because reinforcement is essential to concept retention, each chapter includes a Flash presentation that reviews each chapters major topics. Review Problem The Illustrative Problems found in each chapter are presented in a step-by-step fashion, helping students understand how the solutions to each were reached. FAQs Students can review these Frequently Asked Questions in accounting and learn more about many of the key topics in each chapter. Internet Applications These activities from the text allow students to apply chapter concepts and improve their online research skills. Quizzes Interactive quizzes in both True-False and Multiple Choice formats provide students with immediate feedback after they submit their answers. Instructor Resources available to download from the secure instructors area include the Instructors Manual, Solutions Manual, PowerPoint Presentations, Spreadsheet Template Solutions, Instructors Guide to Online Resources, and Technology Demos. 13. 66124_preface_iv-xxxi.qxd 11/19/03 5:25 PM Page xiPreface xiDancin Music Continuing Pr oblemHeres a great opportunity for students to practice what theyve learned asthey study each step of the accounting cycle. Dancin Music, an imaginaryand entrepreneurial company, provides a contemporary example of keeninterest to students.As they follow Dancin Music, they examine its transac-tions and see the effect of those transactions on its financial statements.They can use the P.A.S.S. software with this problem as well.In Chapter 1, students analyze the effects of Dancin Musics firstmonths transactions on the accounting equation.C ontinuing ProblemShannon Burns enjoys listening to all types of music and owns countless CDs andtapes. Over the years, Shannon has gained a local reputation for knowledge ofmusic from classical to rap and the ability to put together sets of recordings thatappeal to all ages. During the last several months, Shannon served as a guest disc jockey on a localradio station. In addition, Shannon has entertained at several friends parties as thehost deejay. On April 1, 2006, Shannon established a proprietorship known as Dancin Music.Using an extensive collection of CDs and tapes, Shannon will serve as a disc jockey2. Net income: $530on a fee basis for weddings, college parties, and other events. During April, Shan-non entered into the following transactions:In Chapter 2, students review debits and credits by journalizing Dancin Musics second monthstransactions. C ontinuing ProblemThe transactions completed by Dancin Music during April 2006 were described atthe end of Chapter 1. The following transactions were completed during May, thesecond month of the businesss operations:May 1. Shannon Burns made an additional investment in Dancin Music by de- positing $3,000 in Dancin Musics checking account.1. Instead of continuing to share office space with a local real estate agency, Shannon decided to rent office space near a local music store. Paid rent for May, $1,600.1. Paid a premium of $3,360 for a comprehensive insurance policy covering 4. Total of Debit Column:liability, theft, and fire. The policy covers a two-year period. $31,7602. Received $1,200 on account.In Chapter 3, students review the adjusting process for Dancin Music.C ontinuing ProblemThe trial balance that you prepared for Dancin Music at the end of Chapter 2 shouldappear as follows:Dancin MusicTrial BalanceMay 31, 2006Cash . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,330Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,760Supplies . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 920Prepaid Insurance ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,3603. Total of Debit Column:Office Equipment . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000$33,190 Accounts Payable . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,750In Chapter 4, building on what theyve learned in Chapters 1, 2, and 3, students complete theaccounting cycle for Dancin Music, including preparing the financial statements. C ontinuing ProblemThe unadjusted trial balance of Dancin Music as of May 31, 2006, along with theadjustment data for the two months ended May 31, 2006, are shown in Chapter 3.Instructions1. Prepare a ten-column work sheet.2. Prepare an income statement, a statement of owners equity, and a balance sheet. (Note: Shannon Burns made investments in Dancin Music on April 1 and May 1, 2006.)3. Journalize and post the closing entries. The income summary account is #33 in the ledger of Dancin Music. Indicate closed accounts by inserting a line in both 2. Net income: $2,550Balance columns opposite the closing entry.4. Prepare a post-closing trial balance. 14. 66124_preface_iv-xxxi.qxd 11/19/03 11:19 PM Page xiixiiPreface Accounting, 21e speaks to anyone in an introductory Opens with a section that defines 1business and describes common types accounting course, because 80% of those studentsChapter of businesses and their strategies, value will not be accounting majors. For this reason,chains, and stakeholders. It also includes Accounting, 21e concentrates intentionally on the a section on business ethics. business of businesshow accounting contributes to effective management while emphasizing the most important accounting procedures.Begins with a discussion of the accounting cycle. Then it introducesChapter 1 4 Introduction to Accounting and Businessthe worksheet as an optional tool forChaptercollecting accounting data from a companys records. Some of the end-of-chapter materials identify theworksheet as an optional requirement.Chapter 2 Analyzing Transactions Chapter 3 The Matching Concept and the 5Includes an illustration of the revenue Adjusting ProcessChapterand collection cycle in a computerizedaccounting system using QuickBooks. Chapter 4 Completing the Accounting CycleIntroduces merchandising with an incomestatement that shows the effects of 6purchases on the cost of goods sold. Sales Chapter 5 Chapter transactions are illustrated next,Accounting Systems and Internal Controlsfollowed by purchases transactions and the special topics of transportation costs, sales taxes, and trade discounts. Chapter 6 Accounting for Merchandising BusinessesIntroduces the concept of inventory cost flows without reference to the Chapter 7 Cash 9 perpetual or periodic systems. TheChapter journal entries in a perpetual systemare presented alongside the inventorysubsidiary ledger to illustrate theChapter 8 ReceivablesFIFO and LIFO flow of costs. Chapter 9 Inventories Includes a discussion of classifying the 10costs of fixed assets and accounting fordonated assets. It continues with sectionsChapter on stages of acquiring fixed assets and Chapter 10 Fixed Assets and Intangible Assets the impairment of goodwill. 15. 66124_preface_iv-xxxi.qxd 11/19/03 5:25 PM Page xiiiPrefacexiiiChapter Chapter 11 Current LiabilitiesIncludes a section on reporting thecurrent portion of long-term debt and an expanded discussion of 401K plans.11 Chapter 12 Corporations: Organization, Capital StockTransactions, and DividendsChapter Discusses organization costs as Chapter 13 Accounting for Partnerships and Limitedexpenses. The chapter also includesLiability Corporations a comprehensive illustration of reporting stockholders equity.12 Chapter 14 Income Taxes, Unusual Income Items,and Investments in StocksChapter Describes and illustrates the accounting Chapter 15 Bonds Payable and Investmentstreatment of equity transactions forin Bonds partnerships and limited liabilitycorporations. It includes a discussion13of the lifecycle of a business. Chapter 16 Statement of Cash Flows Chapter 17 Financial Statement Analysis Includes the reporting of fixed asset impairments and restructuring charges.ChapterThe section on comprehensive income Chapter 18 Introduction to Managerial Accountingexamines a statement of comprehensiveand Job Order Cost Systems income and an illustration of reportingaccumulated other comprehensive income14in the stockholders equity Chapter 19 Process Cost Systems section of the balance sheet. Chapter 20 Cost Behavior andCost-Volume-Profit AnalysisChapter An appendix at the end of the chapterdescribes and illustrates the average cost Chapter 21 Budgeting method in a process costing system.19 Chapter 22 Performance Evaluation UsingVariances from Standard CostsChapterIncludes a new section on the computation of factory overhead variances as they Chapter 23 Performance Evaluation forrelate to the factory overhead account.22Decentralized Operations Chapter 24 Differential Analysis and Product Pricing Chapter 25 Capital Investment Analysis 16. 66124_preface_iv-xxxi.qxd 11/19/03 5:25 PM Page xivxiv Prefacet ica l Thin ksCriing and Ana lysiAs youd expect from the leader in pedagogical innovation, the colorful anddynamic Accounting, 21e text visually highlights conceptual segmentsdesigned to help students make the connection between accounting andbusiness. In addition, new box features found in each chapter make thecontent come to life. Financial Analysis and Interpretation To help students understand the information in financial statements and how that information is used, this feature describes an important element of financial analysis at the end of each financial chapter. Special Activities Students need to develop analytical abilities, not just memorize rules.These end-of-chapter activities focus on understanding and solving pertinent business and ethical issues. Some are presented as conversations in which students can observe and participate when they respond to the issue being discussed.WHAT DO YOU THINK? What Do You Think? These exercises and activities encourage students to speculate about the real-world effects of newly learned material. Whats Wrong With This? These innovative exercises challenge students to analyze and discover problems or errors in a financial statement,WHATS WRONG WITH THIS? report, or management decision. Technology-Assisted Learning System Combined with WebTutor Advantage elements such as illustrative problems, quizzes, and Accounting Cycle Review, students continue to hone and reinforceINTERNET their critical-thinking skills. e o f Te c h nUsologyInternet ActivitiesThese activities acquaint students with the ever-expanding accounting-related areas of the Web.Web ReferencesReal World Notes and end-of-chapter activities encourage students to engagein real business research.Technology-Assisted LearningTeaching and learning solutions are provided in an interactiveTMlearning environment. The learning system consists ofthree elements: WebTutor Advantage (on WebCT andBlackboard), Personal Trainer 3.0, and the product Web site. 17. 66124_preface_iv-xxxi.qxd 11/19/03 5:26 PM Page xv Preface xv I have 30,000 restau-a l Wo r l d A p Re rants in 121 coun- pl ication stries, with about 13,000 in the United NEW Who Am I? States. I serve more than 45 mil- lion people each day and employ Presenting a set of intriguing clues about a real company, from The Motley1.5 million. Moscows Pushkin Fool, this intriguing feature challenges students to identify theSquare sports one of my busiest company. They can check their decision against the answer provided laterstores. Fortune Magazine named me No. 1 for social responsibility. in the chapter. Im busy cutting fat from my offer- ings. I use more than three million pounds of potatoes per day. My New Tastes Menu is Made for You. My spokesmans shoes are size10Chapter 1 Introduction to Accounting and Business NEW Integrity 14 1/2 and he helps sick kids. More INTEGRITY IN BUSINESS in BusinessDOING THE RIGHT THING Real-life, business situations provide students with Time Magazine named three women as Persons of the Year 2002. Each of these not-so-ordinary women had countant, informed WorldComs Board of Directors of phony accounting that allowed WorldCom to cover up an opportunity to consider ethical issues that they the courage, determination, and integrity to do the right thing. Each risked their personal careers to expose short- over $3 billion in losses and forced WorldCom into bank- ruptcy. Coleen Rowley, an FBI staff attornery, wrote a may encounter in the business world. comings in their organizations. Sherron Watkins, an Enron memo to FBI Director Robert Mueller, exposing how the vice-president, wrote a letter to Enrons chairman, Kenneth Bureau brushed off her pleas to investigate Zacarias Lay, warning him of improper accounting that eventually Moussaoui, who was indicted as a co-conspirator in the led to Enrons collapse Cynthia Cooper an internal ac September 11 terrorist attacks SPOTLIGHT ON STRATEGY NEW Spotlight on Strategy boxes WHATS NEXT FOR AMAZON?Amazon.com built its online business strategy on of-tive of their prices and have refused to make Amazon.com These stimulating, real-business scenarios introduce fering books at significant discounts that traditional chainscouldnt match. Over the years, Amazon has expanded itsan authorized dealer. As Lauren Levitan, a noted financialanalyst, recently said, Its hard to be the low-cost retailer. students to the effects and importance of strategiconline offerings to include DVDs, toys, electronics, andeven kitchen appliances. But can its low-cost, discountYou have to execute flawlessly on a very consistent basis.Most people who try a low-price strategy fail. This risk ofstrategy continue to work across a variety of products? failing at the low-cost strategy was validated by Kmarts thinking and its impact on accounting. Some have their doubts. The electronics business has lowerfiling for bankruptcy protection in 2002 because of its in-margins and more competition than books. For example, ability to compete with Wal-Marts low prices.Dell Computers is already an established low-costprovider of personal computers and software. In addition, Source: Saul Hansell, A Profitable Amazon Looks to Do an Encore,l t i f thStTh N Y k Ti J 26 2002NEW Financial ReportingFINANCIAL REPORTING AND DISCLOSUREand Disclosure or Managerial UNEARNED REVENUE Disclosure and AnalysisM icrosoft Corporation develops, manufactures, li- passes and the support services are provided to customers.censes, and supports a wide range of computer software Thus, it is necessary to make an adjusting entry each year These boxes that feature actual com-products, including Windows XP, Windows NT, Word, to transfer unearned revenue to revenue.Excel, and the Xbox. When Microsoft sells its products,it incurs an obligation to support its software with tech- The excerpts below from Microsofts 2002 financial statements describe its accounting for unearned revenue.panies take students through thenical support and periodic updates. As a result, not all therevenue from selling software is earned on the date of Microsoft further indicated that, of the $7,743 million of unearned revenue at June 30, 2002, it expected to recog- rigors of the reporting and analysissale. Instead, some of the revenue is unearned. That is, nize $5,917 million during the next year and $1,826 mil-the portion of revenue related to support services, suchas updates and technical support, is earned only as time lion in future years.skills they will need in business. Real World Notes With these notes, students get a close-up look at how accounting operates in the marketplace. The following companies are among those highlighted in the margin of the text. AT&T J.C. Penney Co.Sears, Roebuck and Co. sells Campbell Soup Co. Hewlett Packardextended warranty contracts withterms between 12 and 36 months. Mercedes-Benz Delta Air LinesThe receipts from sales of these UPS General Electric contracts are reported as unearnedrevenue (deferred revenue) on Gillette Ford Motor Co. Sears balance sheet. Revenue is Coca-Cola Enterprises Inc.recorded as the contracts expire. 18. 66124_preface_iv-xxxi.qxd 11/19/03 5:27 PM Page xvixvi Preface Points of Interest These attention-getting margin notes offer insight into subjects of high interest to students, such as careers and current events,The tuition you pay at the begin-ning of each term is an example which helps keep accounting concepts of a deferred expense to you, as relevant.a student. Real World Exercises Selected exercises and most special activities are based on real-world data to provide students with practice in working with real company data. derstand aUnnd R evi ew Questions & Answers Students check whether they understandIf NetSolutions adjustment for what theyve just read, using these activi- unearned rent had incorrectly been ties in the margin of the text. made for $180 instead of $120, what would have been the effect on the financial statements? Revenues would have been over- stated by $60; net income would Relevant Chapter Openers The beginning of each chapter connects the students own experiences to the chapters topic. This tangible link is a great motivator. New Design A lively, colorful, and interesting design invites students to read the text. Colorful, clear, and relevant infographics help clarify difficult concepts in a visual presentation. 19. 66124_preface_iv-xxxi.qxd 11/19/03 5:27 PM Page xviiPreface xviiContinuing Case StudyA fictitious dot.com company, NetSolutions, is followed throughoutChapters 16 as the example company to demonstrate a variety of transactions.19Utilities Expense 4 5 0 00 1920Miscellaneous Expense 2 7 5 00 2021Cash 3 6 5 0 00 2122Paid expenses. 22 Summaries Regardless of the number of accounts, the sum of the debits is always equal Within each chapter, theseThe sum of the debits to the sum of the credits in a journal entry. This equality of debits and cred- synopses draw special attention its for each transaction is built into the accounting equation: Assets Liabil-must always equal theities Owners Equity. It is also because of this double equality that the to important points and help system is known as double-entry accounting.sum of the credits.On November 30, NetSolutions recorded the amount of supplies used in clarify difficult concepts. the operations during the month (transaction g). This transaction increases anBusiness TransactionsIn Chapters 1 and 2,students are introduced to the dynamics of business trans-actions through non-business events to which they can easily relate. Transaction f When you pay your monthly credit card bill, you decrease the cash in your checking account and also decrease the amount you owe to the credit card company. Likewise, when NetSolutions pays $950 to creditors during the month, it reduces both assets and liabilities, as shown below. Assets Liabilities Owners Equity Accounts Chris Clark, Self-Examination QuestionsFive multiple-choice questions, with answers at the end of the chapter,help students review and retain chapter concepts. 20. 66124_preface_iv-xxxi.qxd 11/19/03 5:28 PM Page xviiixviii Preface ) derstand a edUnnd R eview ( con tinu Illustrative Problem and Solution A solved problem models one or more of the chapters assignment problems, so that students can apply the modeled procedures to end-of-chapter materials. Illustrative Problem on WebTutor Advantage The illustrativeproblem from the text is also available in a lively electronic version aspart of WebTutor Advantage. In addition, several other features ofWebTutor Advantage provide review and reinforce understanding:e-lectures,exercise demos,Accounting Cycle Review, games, quizzes, and more!74 Chapter 2 Analyzing TransactionsIllustrative Problem J. F. Outz, M.D., has been practicing as a cardiologist for three years. During April, 2005, Outz completed the following transactions in her practice of cardiology. April 1. Paid office rent for April, $800. 3. Purchased equipment on account, $2,100. 5. Received cash on account from patients, $3,150. 8. Purchased X-ray film and other supplies on account, $245. 9. One of the items of equipment purchased on April 3 was defective. Itwas returned with the permission of the supplier, who agreed to reducethe account for the amount charged for the item, $325.12. Paid cash to creditors on account, $1,250.17. Paid cash for renewal of a six-month property insurance policy, $370.20. Discovered that the balances of the cash account and the accountspayable account as of April 1 were overstated by $200. A payment ofthat amount to a creditor in March had not been recorded. Journalize the$200 payment as of April 20.24. Paid cash for laboratory analysis, $545.s i gn me nAs r n i n g t M at e ri a ceLe a and ls t hat Re infor Thi nk in gStudents need to practice accounting in order to understand and use it.To give your students the greatest possible advantages in the real world,Accounting, 21e goes beyond presenting theory and procedure with thefollowing end-of-chapter features. Discussion Questions Exercises Problems Series A Problems Series B Special Activities Continuing Problem, Chapters 1 4 Comprehensive Problems 21. 66124_preface_iv-xxxi.qxd 11/19/03 5:29 PM Page xix Preface xixEach chapters Discussion Questions and Exercises can be assigned orused as examples in the classroom. An average of 25 exercises per chapterare includedmore than any other text on the market! In addition, thetwo full sets of problems can be used as classroom illustrations, assign-ments, alternate assignments, or for independent study. And theComprehensive Problems at the end of Chapters 4, 6, 11, and 15 integrateand summarize chapter concepts and test students comprehension. Communication Items These activi-ties help students develop communi-cation skills that will be essential onthe job, regardless of the fields theypursue. Team Building Group Learning Activities let students learn accounting andbusiness concepts while building teamwork skills. Complete homework online and receive immediate feedback!Using Personal Trainer 3.0, students can complete all of the end-of-chapterassignment material, utilize hints and tips, and receive scoring feedback.These scores are then recorded into a gradebook for the instructor.Doing homework has never been so easy and fun! Use P.A.S.S. to complete selected end-of-chapterproblems where several sequential activitiesneed to be recorded and an understandingof their effects on the financial statementsis required. P.A.S.S. 22. 66124_preface_iv-xxxi.qxd 11/19/03 5:29 PM Page xxxx Preface Accounting, 21e isnt the only best in the business. Its supplements are top-notch tooa result of taking instructor and student comments to heart over the years and creating products based on those needs.Supplements for Students * By offering a broad range of supplementsavailable both as print material and easy-to-use technologiesAccounting, 21e not only helps students succeed in the coursebut in the business world of tomorrow. Heres a look: Personal Trainer Specifically designed to ease the time-consuming task of grading homework, Personal Trainer 3.0 lets students complete online their assigned homework from the text or practice on unassigned homework. The results are instantaneously entered into a gradebook. With annotated spreadsheets and full-blown gradebook functionality, the greatly enhanced Personal Trainer 3.0 provides an unprecedented real-time, guided, self-correcting, learning reinforcement system outside the classroom. Use this resource as an integrated solution for your distance learning or traditional course. Personal Trainer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20371-3 Xtra! Available as an optional, free bundle with every new textbook, Xtra! gives students FREE access to the following online learning tools: e-Lectures briefly review more difficult concepts from the chapter. Topical Quizzes measure a students test readiness on the concepts in the chapter. Multiple Choice Quizzes help students review chapter concepts and prepare for exams. Feedback on their answers gives page refer- ences so they know where to look up the questions theyve missed! Crossword Puzzles are a fun way for students to review their understanding of key terms and concepts. Xtra! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20379-9 Product Support Web Site at http://warren.swlearning.com This site provides students with a wealth of introductory accounting resources, including limited quizzing, Internet application questions, e-lectures,spreadsheet applications software,review problems,and more.*Contact your local sales representative about package options. 23. 66124_preface_iv-xxxi.qxd 11/19/03 5:30 PM Page xxi Preface xxi Study GuidesThe Study Guides include quiz and test tips, multiple choice,fill-in-the-blank, and true-false questions with solutions. They aredesigned to assist students in comprehending the concepts andprinciples presented in the text.Study Guide Chapters 117. . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20373-XStudy Guide Chapters 1225 . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20374-8 P.A.S.S. (Power Accounting System Software)(formerly General Ledger Software)Prepared by Dale Klooster and Warren Allen, this best-selling educationalgeneral ledger package makes solving end-of-chapter problems, theContinuing Problem, Comprehensive Problems, and practice sets as easyas clicking a mouse. It allows students to see the difference betweenmanual and computerized accounting systems firsthand. It is enhancedwith a problem checker that enables students to determine if theirentries are correct and emulates commercial general ledger packages moreclosely than other educational packages. Problems that can be used withP.A.S.S. are highlighted by an icon. The benefits of using P.A.S.S. are that: Errors are more easily corrected than in commercial software. The Inspector Disk allows instructors to grade students work. A free Network Version is available to schools whose students purchase P.A.S.S.P.A.S.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20413-2P.A.S.S. Network Version . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20412-4 Spreadsheet Applications SoftwareThis set of electronic worksheets helps students solve selected exercisesand problems that are identified in the text with an icon. These spread-sheets give students the opportunity to solve dozens of problems usingMicrosoft Excel. The spreadsheets are available, free, for students todownload from the Student Resources section of the product support site.SPREADSHEET Working Papers for Exercises and ProblemsThe traditional Working Papers include problem-specific forms forpreparing solutions for Exercises, A and B Problems, the ContinuingProblem, and the Comprehensive Problems from the text. These forms,with preprinted headings, provide a structure for the problems, whichhelps students get started and saves them time. Additional blank formsare included.Working Papers for Exercises and Problems Chapters 117 . . 0-324-20375-6Working Papers for Exercises and Problems Chapters 1225 . 0-324-20376-4 24. 66124_preface_iv-xxxi.qxd 11/19/03 5:30 PM Page xxiixxii Preface Working Papers Plus for Selected Exercises and ProblemsThis alternative to traditional working papers integrates selectedexercise and problem information into the forms needed to completethe activities.These working papers are invaluable homework aids, andthey include learning objectives from the chapter and check figuresfor selected problems.Working Papers Plus for Selected Exercises and ProblemsChapters 117 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20377-2Working Papers Plus for Selected Exercises and ProblemsChapters 1225 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20378-0 Blank Working PapersThese Working Papers are available for completing exercises andproblems from the text or instructor-prepared problems. They have nopreprinted headings. A guide at the front of the Working Papers tellsstudents which form they will need for each problem.Blank Working Papers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20370-5 25. 66124_preface_iv-xxxi.qxd 11/19/03 5:30 PM Page xxiiiPrefacexxiii Practice Sets Toms Asphalt This set is a service business operated as a proprietorship. It includes a narrative of transactions and instructions for an optional solution with no debits and credits. This set can be solved manually or with the P.A.S.S. software in 5 7 hours. Toms Asphalt with P.A.S.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20520-1 Toms Asphalt Key with Inspector CD . . . . . . . . . . . . . . . . . . . 0-324-20522-8 Specialty SportsFormerly published as The Snow Shop, this set is a merchandising business operated as a proprietorship. It includes business documents, and it can be solved manually or with the P.A.S.S. software in 1215 hours. Specialty Sports with P.A.S.S. . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20525-2 Specialty Sports Key with Inspector CD . . . . . . . . . . . . . . . . . 0-324-20526-0 Groom and Board This completely revised set was formerly published as The Coddled Canine and includes payroll transactions for a merchandising business operated as a proprietorship. It includes business documents, and it can be solved manually or with the P.A.S.S. software in 1215 hours. Groom and Board with P.A.S.S.. . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20531-7 Groom and Board Key with Inspector CD . . . . . . . . . . . . . . . . 0-324-20532-5 Coddled Canine with Peachtree Accounting Software Completely revised with current Peachtree software. New Instructor CD provides solutions to the Practice Set as well as helpful hints for incorporating the set into the classroom and tips on tailoring the set to fit the specific needs of each classroom. This set can be solved with the Peachtree software in 1012 hours. Coddled Canine with Peachtree Software. . . . . . . . . . . . . . . . . 0-324-20588-0 Coddled Canine Instructor CD . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-23230-6 Ninas Decorating House This set is a service and merchandising business operated as a corporation. It includes narrative for six months of transactions, which are to be recorded in a general journal. The set can be solved manually or with the P.A.S.S. software in 1012 hours. Ninas Decorating House with P.A.S.S. . . . . . . . . . . . . . . . . . . . 0-324-20519-8 Ninas Decorating House Key with Inspector CD . . . . . . . . . . . 0-324-20549-X First Designs, Inc. This set is a departmentalized merchandising business operated as a corporation. It includes a narrative of transactions, which are to be recorded in special journals. The set can be solved manually or with the P.A.S.S. software in 1215 hours. First Designs with P.A.S.S.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20528-7 First Designs Key with Inspector CD . . . . . . . . . . . . . . . . . . . . 0-324-20530-9 Dynamic Designs, Inc. This set, formerly published as Sunblaze Inc., is a manufacturing business operated as a corporation that uses a job order cost system.The set can be solved manually or with the P.A.S.S. software in 1215 hours. Dynamic Designs, Inc. with P.A.S.S.. . . . . . . . . . . . . . . . . . . . . . 0-324-20523-6 Dynamic Designs, Inc. Key with Inspector CD . . . . . . . . . . . . . 0-324-20524-4 26. 66124_preface_iv-xxxi.qxd 11/19/03 5:31 PM Page xxivxxiv Preface From traditional printed materials to the latest integrated classroom technology, the proven Accounting, 21e is supported by the most extensive instructor resource package on the market. Just take a look.Supplements for Instr uctors WebTutor Advantage on WebCT and WebTutor Advantage on Blackboard are platform-driven systems for complete Web-based course management and delivery. More than just an interactive study guide, WebTutor Advantage provides lecture replacement and concept review, in addition to reinforce- ment, in the forms of quizzing, video cases, and much more. Powerful instructor tools are also provided to assist communication and collabo- ration between students and facul- ty. When students purchase thisTM product they also get automatic access to Personal Trainer. Webtutor Advantage on WebCT . . . . . . . . . . . . . . . . . . . . . . 0-324-20435-3 Webtutor Advantage on Blackboard . . . . . . . . . . . . . . . . . . . 0-324-20434-5 WebTutor Toolbox. WebTutor Toolbox on WebCT or Blackboard provides free limited content for your WebCT or Blackboard course. Webtutor Toolbox on WebCT . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-22361-7 Webtutor Toolbox on Blackboard . . . . . . . . . . . . . . . . . . . . . 0-324-22363-3 An Instructors Guide to Online Resources This imaginative resource helps you connect your classroom with Accounting, 21e and its dynamic spectrum of digital teaching and learning resources. This supplement is available not only in print form but also on the Instructors Resource CD-ROM and for download from the Product Support Web site. An Instructors Guide to Online Resouces . . . . . . . . . . . . . . . . 0-324-20459-1 Instructors Resource CD-ROM This convenient resource includes the PowerPoint Presentations, Instructors Manual, Solutions Manual, Test Bank, ExamView, An Instructors Guide to Online Resources, and Excel Application Solutions. Lively demonstrations of support technology, including WebTutor Advantage, Personal Trainer 3.0, and P.A.S.S. are also included. All the basic material an instructor would need is available in one place on this IRCD. Instructors Resource CD-ROM . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20416-7 27. 66124_preface_iv-xxxi.qxd 11/19/03 5:31 PM Page xxv Preface xxv Instructors ManualsThese resources are organized around thechapter learning objectives and offer a comprehensive guide toteaching from the text. The teaching suggestions emulate many of theteaching initiatives being stressed in higher education today, includingactive learning, collaborative learning, critical thinking, and writingacross the curriculum. Demonstration problems can be used in the classroom to illustrateaccounting practices. Working through an accounting problem givesthe instructor an opportunity to point out pitfalls that studentsshould avoid. Group learning activities provide another opportunity to activelyinvolve students in the learning process. These activities askstudents to apply accounting topics by completing an assigned taskin small groups of three to five students. Small group work is anexcellent way to introduce variety into the accounting classroomand creates a more productive learning environment if top studentsare mixed with average and poor students. Writing exercises provide an opportunity for students to developgood written communication skills essential to any business person.These exercises probe students knowledge of conceptual issuesrelated to accounting. Three to five Accounting Scenarios can be used as handouts. The Teaching Transparency Masters can be made into acetatetransparencies or can be duplicated and used as handouts.Instructors Manual Chapters 117. . . . . . . . . . . . . . . . . . . . . 0-324-20414-0Instructors Manual Chapters 1825 . . . . . . . . . . . . . . . . . . . . 0-324-20415-9 Solutions Manuals The Solutions Manuals provide the answers for allthe end-of-chapter materials in the text. Solutions Transparencies arealso available (see below.)Solutions Manual Chapters 117 . . . . . . . . . . . . . . . . . . . . . . 0-324-20420-5Solutions Manual Chapters 1825 . . . . . . . . . . . . . . . . . . . . . 0-324-20421-3 Solutions Transparencies These acetate transparencies are available forall exercise and problem solutions.Solutions Transparencies Chapters 117A Problems and Exercises. . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20427-2Solutions Transparencies Chapters 1825A Problems and Exercises . . . . . . . . . . . . . . . . . . . . . . . . . .0-324-20428-0Solutions Transparencies Chapters 117 B Problems . . . . . . 0-324-20429-9Solutions Transparencies Chapters 1825 B Problems . . . . . .0-324-20430-2 28. 66124_preface_iv-xxxi.qxd 11/19/03 5:32 PM Page xxvixxvi Preface Test Banks The Test Banks offer a variety of testing materials designed to test students comprehension of the materials presented in the text. The relevant chapter learning objective and the level of difficulty of each question are included. Approximately 2,800 true-false questions, multiple choice questions, fill-in-the-blank questions, and problems are available. The Test Banks are in two volumes and are available printed and bound as well as in a computerized version using the ExamView software found on the IRCD. Chapter and multi-chapter Achievement Tests assessing students understanding of terms, calculations, and transaction recording are included in the printed Test Bank volumes. Test Bank Chapters 117 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20422-1 Test Bank Chapters 1825 . . . . . . . . . . . . . . . . . . . . . . . . . . . 0-324-20423-X ExamView Pro Testing Software is easy-to-use software that allows you to customize exams, practice tests,and tutorials and deliver them over a network, on the Web, or in printed form. Test banks can also easily be uploaded to your WebCT or Blackboard course. The ExamView soft-ware is included on the IRCD. PowerPoint Presentations. Each presentation, which is included on the IRCD and on the product support site, enhances lectures and simplifies class preparation. Using this popular software package, you can also add your own custom slides. The dynamic Flash version for students is available online. Presentation Transparencies are acetates of the PowerPoint presentation slides found on the IRCD. Presentation Transparencies Chapters 117 . . . . . . . . . . . . . 0-324-20418-3 Presentation Transparencies Chapters 1825 . . . . . . . . . . . . 0-324-20419-1 29. 66124_preface_iv-xxxi.qxd 11/19/03 5:32 PM Page xxvii Preface xxvii Instructor Spreadsheet Templates show the instructor the completed solutions for the exercises and problems marked with an icon in the text. These are available on the IRCD and for download at the product support site. Tutorial Videos. Completely revised and remastered, the tutorial videos provide twenty-five hours of video instruction. Each chapter is presented in two half-hour, interactive, media-intensive segments that reinforce the concepts presented in the text. These videos are free to adopters and are now available in two formats, DVD and VHS. Tutorial Videos on DVD Chapters 117 . . . . . . . . . . . . . . . . . 0-324-20431-0 Tutorial Videos on DVD Chapters 1825. . . . . . . . . . . . . . . . . 0-324-20432-9 Tutorial Videos on VHS Chapters 117 . . . . . . . . . . . . . . . . . 0-324-20742-5 Tutorial Videos on VHS Chapters 1825 . . . . . . . . . . . . . . . . . 0-324-20743-3 Telecourse Videos. These videos are designed for distributed learning courses and are based on the Tutorial Videos but are of high broadcast quality. The videos are made on demand, and orders must be placed directly with South-Western. Each license is sold for either a one-year or three-year time period. Telecourse Videos Chapters 125,Three-Year License . . . . . . 0-324-20436-4 Telecourse Videos Chapters 125, One-Year License . . . . . . . . 0-324-20425-6 Product Support Web Site at http://warren.swlearning.com A variety of instructor resources are available through South-Westerns password-protected Web site. Downloadable instructor supplement files are available for the Instructors Manuals, Solutions Manuals, Test Banks, ExamView, PowerPoint, and Spreadsheet Template Solutions, each organized by chapter. An Instructors Guide to Online Resources can also be downloaded. Many of these resources are available on the Instructors Resource CD-ROM. 30. 66124_preface_iv-xxxi.qxd 11/19/03 5:32 PM Page xxviiixxviii PrefaceBecause the textbook plays an important supporting role in the teaching/learning environment,our collaboration with instructors is invaluable. We thank them for their contribution to makingAccounting, 21e and its supplements unsurpassed in quality.The following instructors created instructors createdL. L. Pricecontent for the supplements thatPierce Collegeaccompany the text: Toms Asphalt Practice SetTest BanksPeggy HusseyDoug CloudColorado Technical CollegeSpreadsheet Applications SoftwarePepperdine UniversityPowerPoint PresentationsGary BowerRobin TurnerCommunity College of Rhode IslandPersonal TrainerRowan-Cabarrus Community CollegePersonal TrainerDeb KissDonna ChadwickDavenport UniversityWebTutor AdvantageSinclair Community CollegeInstructors ManualsTerri LukshaitisJim ShimkoDavenport UniversityWebTutor AdvantageSinclair Community CollegePersonal TrainerMike GoughJohn GodfreyDe Anza CollegeTutorial VideosSpringfield Tech Community CollegeTest BanksJohn WanlassDiane GlowackiDe Anza CollegeWorking Papers Plus forTarrant County College Northeast CampusSelected Exercises and Problems Coddled Canine with PeachtreeTutorial Videos Software Practice SetWebTutor AdvantageBrenda HesterKevin McFarlane Volunteer State Community CollegeFront Range Community College Specialty Sports Practice SetWebTutor AdvantageChristine JonickThe instructors listed below, along instructors below,Gainesville College with Fernando Rodriguez, a graduateFernandoPersonal Trainerof Miami-Dade Community College,Cheryl Friesprovided invaluable verification ofprovidedGuilford Technical Community Collegetext and supplement content:Personal TrainerGary BowerLeah OGoleyCommunity College of Rhode IslandHolyoke Community College Groom & Board Practice SetWebTutor AdvantageDynamic Designs Practice SetSpecialty Sports Practice SetDon LucyCoddled Canine with Peachtree Practice SetIndian River Community CollegeNinas Decorating House Practice SetGroom and Board Practice SetDynamic Designs, Inc. Practice SetPatty HolmesDes Moines Area Community CollegeAna CruzSolutions ManualsMiami-Dade Community CollegeNinas Decorating House Practice SetAlice SineathForsyth Technical Community CollegeEdward KrohnSolutions ManualsMiami-Dade Community CollegeFirst Designs Practice SetJeff RitterSt. Norbert CollegeBlanca Ortega Test BanksMiami-Dade Community CollegeNinas Decorating House Practice SetJames EmigVillanova UniversityJanice Stoudemire Study GuidesMidlands Technical CollegeTest BanksAn Instructors Guide to Online Resources WebTutor Advantage Quizzes 31. 66124_preface_iv-xxxi.qxd 11/19/03 5:32 PM Page xxixPreface xxixThe following instructors instructors Bob Urellparticipated in the reviewing process:participatedreviewing process: Irvine Valley CollegeBrenda FowlerAmy HaasAlamance Community College Kingsborough Community CollegeTom BrantonTony CioffiAlvin Community CollegeLorain County Community CollegeSanithia BoydPaul MorganArkansas State UniversityMississippi Gulf Coast Community CollegeLenny Long Gil CrainBay State Junior College Montana State UniversityCathy Peck Judy ParkerBelhaven College North Idaho CollegeStuart Brown Jim WeglinCarol Garand North Seattle Community CollegeBristol Community CollegeKaren MozingoColin Battle Pitt Community CollegeBroward Community CollegeJohnnie AtkinsLuther RossRio Hondo CollegeCentral Piedmont Fred BlakeCommunity CollegeMaria DavisJohn Illig N. MaiLai EngLinda MallorySan Antonio CollegeCentral Virginia Community College Margaret BlackJoan RyanSan Jacinto College NorthClackamas Community CollegeCurt GustafsonLyle Hicks South Dakota State UniversityDanville Area Community CollegeBernie HillDeb Kiss Spokane Falls Community CollegeDavenport University Brian NashBill Parrish John TeterDelgado Community CollegeSt. Petersburg CollegeCynthia McCall Ken OBrienMike Prindle SUNY FarmingdaleBrad Smith Julie DaileyDes Moines Area Community CollegeTidewater Community College-Virginia BeachNino GonzalezPaul JensenEl Paso Community CollegeUniversity of Central ArkansasWilliam Hall Connie CooperFayetteville Technical Community College University of CincinnatiTeresa CookJoanie SompayracFerris State UniversityUniversity of Tennessee-ChattanoogaAlice SineathMark HenryForsyth Technical Community CollegeVictoria CollegeKaren BraydenBrenda HesterFront Range CommunityVolunteer State Community CollegeCollege Fort Collins Dan BiagiJoy BruceWalla Walla Community CollegeGaston College Lynette TealCheryl Fries Western Wisconsin Technical CollegeGuilford Technical Community College Jean MeyerLinda TarragoXavier UniversityHillsborough Community CollegeJack KlettDon LucyIndian River Community College 32. 66124_preface_iv-xxxi.qxd 11/19/03 5:33 PM Page xxxxxxPrefaceThe instructors listed below instructors The instructors listed below instructorsMike Wirthprovided weekly feedback onprovided provided useful feedback by provided College of Alamedatheir experience with the text:participating in a Web survey: participatingWeb survey: Barry StephensMary Schaffler Nick Lefakis College of the SouhwestCollege of the RedwoodsAsnuntuck Community CollegeKaren BraydenKaren BraydenRonny Marchman Colorado Community CollegeFront Range Community CollegeAugusta Technical InstituteStacey StewartJoy BruceAnn HendersonColorado Northwestern CommunityCollegeGaston College Austin Peay State UniversityJoanne GreenCheryl HonoreRick KwanCharles MillerRiverside Community CollegeBaker CollegeColumbia State Community CollegeJulie Billiris William ParksWanda MichaelsSt. Petersburg Junior CollegeBarber-Scotia CollegeCorinthian CollegesDawn Grimm John BardenEvelyn KoonceWilliam Rainey Harper CollegeBinghamton UniversityCraven Community College Bob SchweikleMike LaGrone Blackburn CollegeCumberlandThe following instructors instructorsparticipated in focus groups:participatedgroups:Michael Blue Dave Weaver Mike ShapeeroJulie DerrickAnita Singer Dallas County Community CollegeBrevard Community College CocoaBloomsburg UniversityDonna LarnerPete CiolfiRoger YoungDavenport UniversityMargaret Cox Bluffton College Mia TiptonRandy Glover Raymond Gaines De Anza CollegeBrevard Community College MelbourneBossier Parish Community College Patricia HolmesConnie Culbreth Cynthia McCall Connie CulbrethMike PrindleBrevard Community College Palm Bay Brevard Community CollegeJ Pat FullerDes Moines Area Community College David BlandJoan DiSalvioBill Rushing Vickie CampbellBrevard Community College Titusville Robert PorterDrew UniversityClarice McCoyCape Fear Community CollegeTerry MullinsCamilla Richardson Cynthia Thompson Dyersburg State Community CollegeBrookhaven College Carl Sandburg CollegeEdwin GoldbergMark FronkeNorma Montague Florida Memorial CollegeCerritos College Central Carolina Community College John StancilElden PriceDavid StoneFlorida Southern CollegeCoastal Bend College Central Carolina Technical College Alice SineathRobert Carpenter Michael Farina Forsyth Technical Community CollegeEastfield CollegeCerritos Community College Jamie PaytonLeah OGoley Janet Grange Gadsden State Community CollegeHolyoke Community CollegeChicago State University Mai-Ying WooLarry AllenNancy BurnsGolden West CollegePanola College Chipola Junior College Marlene MurphyCarol Wennagel Julie Miller Governors State UniversitySan Jacinto College SouthBrenda Thalacker Sushila KediaAnn GregoryChippewa Valley Technical CollegeGrambling State UniversitySouth Plains College Anthony WoodsLamar CreagerMeg Bellucci City College of San FranciscoHagerstown Community CollegeJohn Godfrey Cynthia EwingSusan CarbonWilliam HerdPat McClureClarendon CollegeHeritage CollegeMichael Tenerowicz Teri Zuccaro Jonathan BradshawSpringfield Technical CollegeClarke College Houghton CollegeGeorge KatzDeborah Carter Joanne AveryWallace Satchell Coahoma Community CollegeHusson CollegeSt. Philips College Jeanene JonesJohn EubanksMark Henry Coastal Bend College Independence Community CollegeVictoria CollegeDale FowlerIndiana Wesleyan University 33. 66124_preface_iv-xxxi.qxd 11/19/03 5:33 PM Page xxxi Preface xxxi Suzanne McKeeNortheastern Illinois College Patricia McClure Jackson Community CollegeDawn StevensSpringfield Tech Community College AJ Chase Northwest Mississippi Community College Kevin Leeds Sabrina SegalVon PlessnerSt. Peters College Keiser College Northwest State Community College Joe Shambley Joseph Kuvshinikov Jeff JamesSullivan County Community College Kent State UniversityNorthwest Shoals Community CollegePhilip Dunning Rose GarveyDick Van HollandCora Newcomb Sueann HelyTechnical College of the LowcountryNorthwestern College Kentucky Comm and Tech Mark FreemanLarry Allen Carolyn BottjerTuskegee UniversityPanola College Lehigh Carbon Community CollegeRea WaldonNancy Schrumpf Kirk Canzano Gregory ThomUnion Institute and University Long Beach City CollegeParkland CollegeLarry Huus Lou WolffVaun DayUniversity of Minnesota Los Angeles Harbor College Thomas JoyceCarol Collinsworth Bradford NashJeff Winter Dennis Ortiz Los Medanos CollegePasadena City College Mary Sauceda Mary Dugan Karen BarrUniversity of Texas, Brownsville Mansfield University Penn State University Mary Stevens Ben Powell Clarence Duncan University of Texas, El Paso The Masters College Teresa Walker Kathleen FitzpatrickPiedmont CollegeUniversity of Toledo Rod Boydstun Sandra LangPeggy Newsome Henry Carbone Kelly Witsberger Howard RobertsRichard Larson McKendree CollegePikeville College Bernice Murphy Martha VidmarMary Jo Mettler University of Maine Mesabi Range Technical and Pine Technical CollegePam Ondeck Community CollegeJohn DaughertyUniversity of Pittsburg Peg JohnsonPitt Community CollegeEd Shannon Idalene Williams Linda Beuning Ursinus College Metropolitan Community College Rasmussen Community College Brenda Hester Jesse Calvin NipperLarry Waugh Volunteer State Community College Middle Georgia College Rio Hondo Community College John Haugen Karen McGuireJoe Reddick Wartburg College Mid-Michigan Community College Karen WilliamsonClifford Bellers James JoyceRochester Community College Washtenaw Community College Miles Community CollegeSue CunninghamPeggy Helms Bob MahanRowan-Cabarrus Community CollegeWayne Community College Milligan College Teri BernsteinJeannette Eberle Mary HollowayPat HallidayJohn Logsdon Mississippi Delta Community CollegeIra LandisRobert NagodaSanta Monica CollegeWebber International University Amy Chataginer Paul MorganDonna ChadwickLynette Teal Terry Thompson William HooverWestern Wisconsin Technical College Mississippi Gulf Coast Community College Robert ReasSinclair Community CollegeRick Stevens Judy Olsen Wheaton College Molloy College David LaurelSouth Texas Community College Paul LoRusso Carl Essig Wilson Technical Community College Michael Lunday Daniel HoltSoutheastern Illinois College Sharon Vetsch Montgomery County Community CollegeWisconsin Indianhead Technical College Abby FapetuJ. Rendall GarrettSouthern Nazarene UniversityBarbara Powers Montreat CollegeWytheville Community College Ron Bowman Glenn BrooksSouthern Polytechnic State University Annette Fisher Mt. San Jacinto CollegeYavapai College Tim Miller Robert Consalvo Murray State UniversitySouthern Vermont College Ruth Goran Myung Yoon 34. 66124_frontmatter.qxd 11/13/03 2:43 PM Page xxxiibrief contents CH. 1Introduction to Accounting and Business 1 CH. 2Analyzing Transactions 47 CH. 3The Matching Concept and the Adjusting Process 101 CH. 4Completing the Accounting Cycle 139 CH. 5Accounting Systems and Internal Controls 182 CH. 6Accounting for Merchandising Businesses 230 CH. 7Cash 283 CH. 8Receivables 317 CH. 9Inventories 354 CH. 10 Fixed Assets and Intangible Assets 392 CH. 11 Current Liabilities 434 CH. 12 Corporations: Organization, Capital Stock Transactions, andDividends 481 CH. 13 Accounting for Partnerships and Limited Liability Corporations 517 CH. 14 Income Taxes, Unusual Income Items, and Investments inStocks 559 CH. 15 Bonds Payable and Investments in Bonds 601 CH. 16 Statement of Cash Flows 640 CH. 17 Financial Statement Analysis 691 CH. 18 Introduction to Managerial Accounting and Job Order CostSystems 737 CH. 19 Process Cost Systems 783 CH. 20 Cost Behavior and Cost-Volume-Profit Analysis 825 CH. 21 Budgeting 870 CH. 22 Performance Evaluation Using Variances from Standard Costs 916 CH. 23 Performance Evaluation for Decentralized Operations 952 CH. 24 Differential Analysis and Product Pricing 992 CH. 25 Capital Investment Analysis 1034 Appendices: A Interest Tables A-2 B Alternative Methods of Recording Deferrals B-1 C Periodic Inventory Systems for Merchandising Businesses C-1 D Foreign Currency Transactions D-1 E The Home Depot Annual Report E-1 Glossary G-1 Subject Index I-1 Company Index I-16 35. 66124_frontmatter.qxd 11/13/03 2:43 PM Page xxxiiicontents1.Introduction to Accounting and3. The Matching Concept and the AdjustingBusiness 1 Process 101Nature of a Business 2 The Matching Concept 102Types of Businesses 2 Nature of the Adjusting Process 103Types of Business Organizations 3Business Strategies 4Recording Adjusting Entries 104Value Chain of a Business 6Deferred Expenses (Prepaid Expenses) 105Business Stakeholders 6Deferred Revenue (Unearned Revenue) 107 Accrued Expenses (Accrued Liabilities) 108The Role of Accounting in Business 8 Accrued Revenues (Accrued Assets) 111Business Ethics 8Fixed Assets 112Profession of Accounting 10Summary of Adjustment Process 113Private Accounting 11 Financial Analysis and Interpretation 117Public Accounting 11Specialized Accounting Fields 114. Completing the Accounting Cycle 139Generally Accepted Accounting Principles 12 Accounting Cycle 140Business Entity Concept 13The Cost Concept 13Work Sheet 140 Unadjusted Trial Balance Columns 141Assets, Liabilities, and Owners Equity 13 Adjustments Columns 142Business Transactions and the Accounting Adjusted Trial Balance Columns 142Equation 14Income Statement and Balance SheetColumns 143Financial Statements 19Income Statement 19Financial Statements 143Statement of Owners Equity 19 Income Statement 144Balance Sheet 21 Statement of Owners Equity 144Statement of Cash Flows 21 Balance Sheet 144Financial Analysis and Interpretation 22 Adjusting and Closing Entries 144D Journalizing and Posting Closing Entries 1452.Analyzing Transactions 47Post-Closing Trial Balance 152Usefulness of an Account 48Fiscal Year 153Characteristics of an Account 49 Financial Analysis and Interpretation 154Analyzing and Summarizing Transactions inAppendix: Reversing Entries 155Accounts 50 Comprehensive Problem 1 177Transactions and Balance Sheet Accounts 50Income Statement Accounts 52Withdrawals by the Owner 54 Practice Set: Toms AsphaltNormal Balances of Accounts 55This set is a service business operated as a proprietorship.It includes a narrative of transactions and instructionsIllustration of Analyzing and Summarizingfor an optional solution with no debits and credits.Transactions 55This set can be solved manually or with the P.A.S.S.Trial Balance 68software.Discovery and Correction of Errors 69Discovery of Errors 695. Accounting Systems and InternalCorrection of Errors 70 Controls 182Financial Analysis and Interpretation 71 Basic Accounting Systems 183 36. 66124_frontmatter.qxd 11/13/03 2:43 PM Page xxxiv xxxiv Contents Internal Control 184Appendix 1: Accounting Systems for Objectives of Internal Control 184Merchandisers 252 Elements of Internal Control 185Manual Accounting System 252 Computerized Accounting Systems 254 Manual Accounting Systems 190 Subsidiary Ledgers 190Appendix 2: Work Sheet and Adjusting Special Journals 190and Closing Entries for a Merchandising Manual Accounting System: The Revenue and Business 256 Collection Cycle 192 Comprehensive Problem 2 278 Manual Accounting System: The Purchase and Payment Cycle 196Practice Set: Specialty Sports Adapting Manual Accounting Systems 200This set is a merchandising business operated as a Additional Subsidiary Ledgers 200proprietorship. It includes business documents, and it Modified Special Journals 201can be solved manually or with the P.A.S.S. software. Computerized Accounting Systems 202 E-Commerce 2047. Cash 283 6.Accounting for MerchandisingNature of Cash and the Importance of Businesses 230Controls Over Cash 284 Nature of Merchandising Businesses 231Control of Cash Receipts 285 Controlling Cash Received from Cash Sales 285 Financial Statements for a Merchandising Controlling Cash Received in the Mail 286 Business 232 Multiple-Step Income Statement 232Internal Control of Cash Payments 287 Single-Step Income Statement 236Basic Features of the Voucher System 287 Statement of Owners Equity 236 Electronic Funds Transfer 289 Balance Sheet 236 Bank Accounts: Their Nature and Use as a Sales Transactions 238Control Over Cash 289 Cash Sales 238Business Bank Accounts 289 Sales on Account 239Bank Statement 290 Sales Discounts 239 Bank Accounts as a Control Over Cash 292 Sales Returns and Allowances 241 Bank Reconciliation 293 Purchase Transactions 242 Petty Cash 295 Purchases Discounts 242 Purchases Returns and Allowances 243Presentation of Cash on the Balance Sheet 296 Transportation Costs, Sales Taxes, and Trade Discounts 245 Financial Analysis and Interpretation 298 Transportations Costs 245 Sales Taxes 2468. Receivables 317 Trade Discounts 247 Classification of Receivables 318 Illustration of Accounting for MerchandiseAccounts Receivable 318 Transactions 248Notes Receivable 318 Other Receivables 318 Chart of Accounts for a Merchandising Business 249Internal Control of Receivables 319 The Accounting Cycle for a MerchandisingUncollectible Receivables 320 Business 250 Allowance Method of Accounting for Merchandise Inventory Shrinkage 250 Uncollectibles 321 Work Sheet 251 Write-Offs to the Allowance Account 322 Closing Entries 251 Estimating Uncollectibles 323 Financial Analysis and Interpretation 251 37. 66124_frontmatter.qxd 11/13/03 2:43 PM Page xxxvContents xxxv Direct Write-Off Method of Accounting for Nature of Depreciation 395 Uncollectibles 325 Accounting for Depreciation 397 Characteristics of Notes Receivable 326 Straight-Line Method 398 Due Date 327Units-of-Production Method 399 Interest 328Declining-Balance Method 399 Maturity Value 328Comparing Depreciation Methods 400 Depreciation for Federal Income Tax 400 Accounting for Notes Receivable 328 Revising Depreciation Estimates 401 Receivables on the Balance Sheet 330Composite-Rate Method 402 Financial Analysis and Interpretation 330 Capital and Revenue Expenditures 402 Stages of Acquiring Fixed Assets 402 Appendix: Discounting Notes Receivable 332 Fixed Asset Components 4039. Inventories 354 Disposal of Fixed Assets 404 Discarding Fixed Assets 405 Internal Control of Inventories 355 Selling Fixed Assets 405 Effect of Inventory Errors on Financial Exchanging Similar Fixed Assets 406 Statements 357 Leasing Fixed Assets 408 Inventory Cost Flow Assumptions 358 Internal Control of Fixed Assets 409 Inventory Costing Methods Under a Perpetual Natural Resources 410 Inventory System 360 First-In, First-Out Method 360Intangible Assets 410 Last-In, First-Out Method 361 Patents 411 Average Cost Method 362 Copyrights and Trademarks 411 Computerized Perpetual Inventory Systems 362Goodwill 412 Inventory Costing Methods Under a PeriodicFinancial Reporting for Fixed Assets and Inventory System 363Intangible Assets 414 First-In, First-Out Method 363 Financial Analysis and Interpretation 414 Last-In, First-Out Method 364 Average Cost Method 364 Appendix: Sum-of-the-Years-Digits Depreciation 416 Comparing Inventory Costing Methods 365 Use of the First-In, First-Out Method 366 11. Current Liabilities 434 Use of the Last-In, First-Out Method 366 Use of the Average Cost Method 367The Nature of Current Liabilities 435 Valuation of Inventory at Other thanShort-Term Notes Payable and Current Portion Cost 367of Long-Term Debt 436 Valuation at Lower of Cost or Market 367Short-Term Notes Payable 436 Valuation at Net Realizable Value 368 Current Portion of Long-Term Debt 437 Presenting Merchandise Inventory on the Contingent Liabilities 438 Balance Sheet 368 Payroll and Payroll Taxes 439 Estimating Inventory Cost 369 Liability for Employee Earnings 440 Retail Method of Inventory Costing 370Deductions from Employee Earnings 441 Gross Profit Method of Estimating Inventories Computing Employee Net Pay 444371Liability for Employers Payroll Taxes 444 Financial Analysis and Interpretation 371 Accounting Systems for Payroll and Payroll Taxes 44610. Fixed Assets and Intangible Assets 392 Payroll Register 446 Employees Earnings Record 448 Nature of Fixed Assets 393 Payroll Checks 448 Classifying Costs 394 Payroll System Diagram 449 The Cost of Fixed Assets 394 Internal Controls for Payroll Systems 449 Donated Assets 395 38. 66124_frontmatter.qxd 11/13/03 2:43 PM Page xxxvi xxxvi Contents Employees Fringe Benefits 453 Equity Reporting for Alternate Entity Vacation Pay 453 Forms 521 Pensions 454 Equity Reporting for Proprietorships 522 Postretirement Benefits Other Than Pensions 455Equity Reporting for Corporations 522Equity Reporting for Partnerships and Limited Financial Analysis and Interpretation 455Liability Corporations 522 Comprehensive Problem 3 474Accounting for Partnerships and Limited LiabilityCorporations 523 Practice Set: Groom and BoardForming a Partnership 525 This set includes payroll transactions for a merchandisingDividing Income 525 business operated as a proprietorship. It includes busi-Dividing IncomeServices of Partners 525 ness documents, and it can be solved manually or withDividing IncomeServices of Partners and the P.A.S.S. software. Investments 526Dividing IncomeAllowances Exceed Net Income 527 Practice Set: The Coddled Canine with PeachtreePartnership Dissolution 528 Accounting SoftwareAdmitting a Partner 528 This set includes payroll transactions for a merchandisingWithdrawal of a Partner 531 business operated as a proprietorship. It can be solvedDeath of a Partner 531 with the Peachtree software.Liquidating Partnerships 531Gain on Realization 532 12. Corporations: Organization, Capital StockLoss on Realization 533 Transactions, and Dividends 481Loss on RealizationCapital Deficiency 534Errors in Liquidation 536 Nature of a Corporation 482 Characteristics of a Corporation 482 Business Life Cycle 536 Forming a Corporation 48314. Income Taxes, Unusual Income Items, and Stockholders Equity 484Investments in Stocks 559 Sources of Paid-In Capital 486Corporate Income Taxes 560 Stock 486Payment of Income Taxes 560 Issuing Stock 488Allocating Income Taxes 561 Premium on Stock 489 Reporting and Analyzing Taxes 563 No-Par Stock 490Unusual Items Affecting the Income Treasury Stock Transactions 491Statement 564Unusual Items Affecting Income from Continuing Stock Splits 492Operations 564 Accounting for Dividends 493 Unusual Items Not Affecting Income from Cash Dividends 493 Continuing Operations 566 Stock Dividends 494Reporting Unusual Below-the-Line Items 568 Reporting Stockholders Equity 495 Earnings per Common Share 568 Stockholders Equity in the Balance Sheet 496Comprehensive Income 570 Reporting Retained Earnings 497Accounting for Investments in Stocks 571 Financial Analysis and Interpretation 498Short-Term Investments in Stocks 571Long-Term Investments in Stocks 573 13. Accounting for Partnerships and LimitedSale of Investments in Stocks 575 Liability Corporations 517Business Combinations 575 Alternate Forms of Business Entities 518Mergers and Consolidations 575 Partnerships 519Parent and Subsidiary Corporations 576 Limited Liability Corporations 520Consolidated Financial Statements 576 Comparison of Alternate Entity Characteristics 521Financial Analysis and Interpretation 578 39. 66124_frontmatter.qxd 11/13/03 2:43 PM Page xxxvii Contents xxxviiComprehensive Problem 4 635Practice Set: Ninas Decorating HouseThis set is a service and merchandising business operated 16. Statement of Cash Flows 640as a corporation. It includes narrative for six months oftransactions, which are to be recorded in a general Reporting Cash Flows 641journal. The set can be solved manually or with the Cash Flows from Operating Activities 642P.A.S.S. software.Cash Flows from Investing Activities 643Cash Flows from Financing Activities 643Noncash Investing and Financing Activities 644No Cash Flow per Share 644Practice Set: First Designs, Inc.This set is a departmentalized merchandising business Statement of Cash FlowsThe Indirectoperated as a corporation. It includes a narrative of Method 645transactions, which are to be recorded in special journals. Retained Earnings 645The set can be solved manually or with the P.A.S.S. Common Stock 651software. Bonds Payable 651Building 652Land 65215. Bonds Payable and Investments inPreparing the Statement of Cash Flows 653Bonds 601 Statement of Cash FlowsThe DirectFinancing Corporations 602Method 654Cash Received from Customers 654Characteristics of Bonds Payable 603Cash Payments for Merchandise 655The Present-Value Concept and Bonds Cash Payments for Operating Expenses 656Payable 604 Gain on Sale of Land 657Present Value of the Face Amount of Bonds 605 Interest Expense 657Present Value of the Periodic Bond Interest Cash Payments for Income Taxes 657 Payments 606 Reporting Cash Flows from Operating Activities Direct Method 657Accounting for Bonds Payable 608Bonds Issued at Face Amount 608 Financial Analysis and Interpretation 658Bonds Issued at a Discount 610Appendix: Work Sheet for Statement of CashAmortizing a Bond Discount 610Flows 660Bonds Issued at a Premium 611 Work SheetIndirect Method 660Amortizing a Bond Premium 611 Work SheetDirect Method 663Zero-Coupon Bonds 611Bond Sinking Funds 61217. Financial Statement Analysis 691Bond Redemption 613 Basic Analytical Procedures 692Horizontal Analysis 692Investments in Bonds 614Vertical Analysis 694Accounting for Bond InvestmentsPurchase, Common-Size Statements 696 Interest, and Amortization 614 Other Analytical Measures 697Accounting for Bond InvestmentsSale 615Solvency Analysis 697Corporation Balance Sheet 616 Current Position Analysis 698Balance Sheet Presentation of Bonds Payable 616 Accounts Receivable Analysis 699Balance Sheet Presentation of BondInventory Analysis 700 Investments 618Ratio of Fixed Assets to Long-Term Liabilities 701Financial Analysis and Interpretation 618 Ratio of Liabilities to Stockholders Equity 702Number of Times Interest Charges Earned 702Appendix: Effective Interest Rate Method ofAmortization 619Profitability Analysis 704Amortization of Discount by the InterestRatio of Net Sales to Assets 704Method 619Rate Earned on Total Assets 704Amortization of Premium by the Interest Rate Earned on Stockholders Equity 705Method 620Rate Earned on Common StockholdersEquity 706 40. 66124_frontmatter.qxd 11/13/03 2:44 PM Page xxxviiixxxviii Contents Earnings per Share on Common Stock 706Step 2: Calculate Equivalent Units of Price-Earnings Ratio 707 Production 790 Dividends per Share and Dividend Yield 707Step 3: Determine the Cost per EquivalentUnit 791 Summary of Analytical Measures 708 Step 4: Allocate Costs to Transferred and Partially Corporate Annual Reports 708 Completed Units 793


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