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Ratio Formula Purpose or Use
Liquidity Ratios
1. Current ratio Measures short-term debt-paying ability.
2. Acid-test (quick) ratio Measures immediate short-term liquidity.
3. Accounts receivableturnover
Measures liquidity of accounts receivable.
4. Inventory turnover Measures liquidity of inventory.
Profitability Ratios
5. Profit margin
NNetetinscaolemse
Measures net income generated by eachdollar of sales.
6. Asset turnover Measures how efficiently assets are usedto generate sales.
7. Return on assets Measures overall profitability of assets.
8. Return on commonstockholders equity
Measures profitability of stockholdersinvestment.
9. Earnings per share (EPS)Measures net income earned on eachshare of common stock.
10. Price-earnings (P-E) ratio Measures the ratio of the market price pershare to earnings per share.
11. Payout ratio Measures percentage of earnings distributedin the form of cash dividends.
Solvency Ratios
12. Debt to total assets ratio Measures percentage of total assets providedby creditors.
13. Times interest earnedMeasures ability to meet interest paymentsas they come due.
14. Free cash flow Cash provided by operating activities Measures the amount of cash generatedCapital expenditures Cash dividends during the current year that is available for
the payment of additional dividends or forexpansion.
Income before income taxes and interest expense
Interest expense
Total debt
Total assets
Cash dividends
Net income
Market price per share of stock
Earnings per share
Net income Preferred dividends
Weighted-average common shares outstanding
Net income Preferred dividends
Average common stockholders equity
Net income
Average assets
Net sales
Average assets
Cost of goods sold
Average inventory
Net credit sales
Average net accounts receivable
Cash Short-term investments Receivables (net)
Current liabilities
Current assets
Current liabilities
RAPID REVIEW
Using the Information in the Financial Statements
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ACCOUNT CLASSIFICATION AND PRESENTATION
NormalAccount Title Classification Financial Statement Balance
A
Accounts Payable Current Liability Balance Sheet Credit
Accounts Receivable Current Asset Balance Sheet DebitAccumulated DepreciationBuildings Plant AssetContra Balance Sheet Credit
Accumulated DepreciationEquipment Plant AssetContra Balance Sheet Credit
Administrative Expenses Operating Expense Income Statement Debit
Advertising Expense Operating Expense Income Statement Debit
Allowance for Doubtful Accounts Current AssetContra Balance Sheet Credit
Amortization Expense Operating Expense Income Statement Debit
B
Bad Debt Expense Operating Expense Income Statement Debit
Bonds Payable Long-Term Liability Balance Sheet Credit
Buildings Plant Asset Balance Sheet Debit
CCash Current Asset Balance Sheet Debit
Common Stock Stockholders' Equity Balance Sheet Credit
Copyrights Intangible Asset Balance Sheet Debit
Cost of Goods Sold Cost of Goods Sold Income Statement Debit
D
Debt Investments Current Asset/Long-Term Balance Sheet DebitInvestment
Depreciation Expense Operating Expense Income Statement Debit
Discount on Bonds Payable Long-Term LiabilityContra Balance Sheet Debit
Dividend Revenue Other Income Income Statement Credit
Dividends Temporary account closed Retained Earnings Debitto Retained Earnings Statement
Dividends Payable Current Liability Balance Sheet Credit
E
Equipment Plant Asset Balance Sheet Debit
F
Freight-Out Operating Expense Income Statement Debit
G
Gain on Disposal of Plant Assets Other Income Income Statement Credit
Goodwill Intangible Asset Balance Sheet Debit
I
Income Summary Temporary account closed Not Applicable (1)to Retained Earnings
Income Tax Expense Income Tax Expense Income Statement Debit
Income Taxes Payable Current Liability Balance Sheet Credit
Insurance Expense Operating Expense Income Statement Debit
Interest Expense Other Expense Income Statement Debit
Interest Payable Current Liability Balance Sheet Credit
Interest Receivable Current Asset Balance Sheet Debit
Interest Revenue Other Income Income Statement Credit
Inventory Current Asset Balance Sheet (2) Debit
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NormalAccount Title Classification Financial Statement Balance
L
Land Plant Asset Balance Sheet Debit
Loss on Disposal of Plant Assets Other Expense Income Statement Debit
MMaintenance and Repairs Expense Operating Expense Income Statement Debit
Mortgage Payable Long-Term Liability Balance Sheet Credit
N
Notes Payable Current Liability/ Balance Sheet CreditLong-Term Liability
P
Patents Intangible Asset Balance Sheet Debit
Paid-in Capital in Excess of Par Stockholders Equity Balance Sheet CreditCommon Stock
Paid-in Capital in Excess of Par Stockholders Equity Balance Sheet CreditPreferred Stock
Preferred Stock Stockholders Equity Balance Sheet Credit
Premium on Bonds Payable Long-Term LiabilityAdjunct Balance Sheet Credit
Prepaid Insurance Current Asset Balance Sheet Debit
R
Rent Expense Operating Expense Income Statement Debit
Retained Earnings Stockholders Equity Balance Sheet and Retained CreditEarnings Statement
S
Salaries and Wages Expense Operating Expense Income Statement Debit
Salaries and Wages Payable Current Liability Balance Sheet Credit
Sales Discounts RevenueContra Income Statement Debit
Sales Returns and Allowances RevenueContra Income Statement Debit
Sales Revenue Revenue Income Statement Credit
Selling Expenses Operating Expense Income Statement Debit
Service Revenue Revenue Income Statement Credit
Short-Term Investments Current Asset Balance Sheet Debit
Stock Investments Current Asset/Long-Term Balance Sheet DebitInvestment
Supplies Current Asset Balance Sheet Debit
Supplies Expense Operating Expense Income Statement Debit
T
Treasury Stock Stockholders Equity Balance Sheet Debit
U
Unearned Service Revenue Current Liability Balance Sheet Credit
Utilities Expense Operating Expense Income Statement Debit
(1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss. TheIncome Summary account does not appear on any financial statement.
(2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold.
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The following is a sample chart of accounts. It does not represent a comprehensive chart of all the accounts used inthis textbook but rather those accounts that are commonly used. This sample chart of accounts is for a company thatgenerates both service revenue as well as sales revenue. It uses the perpetual approach to inventory. If a periodicsystem was used, the following temporary accounts would be needed to record inventory purchases: Purchases;Freight-In; Purchase Returns and Allowances; and Purchase Discounts.
AdministrativeExpenses
AmortizationExpense
Bad Debt Expense
Cost of Goods Sold
DepreciationExpense
Freight-Out
Income TaxExpense
Insurance Expense
Interest Expense
Loss on Disposal ofPlant Assets
Maintenance andRepairs Expense
Rent Expense
Salaries and WagesExpense
Selling Expenses
Supplies Expense
Utilities Expense
Service Revenue
Sales Revenue
Sales Discounts
Sales Returns andAllowances
Interest Revenue
Gain on Disposalof Plant Assets
Common Stock
Paid-in Capital inExcess of ParCommon Stock
Preferred Stock
Paid-in Capital inExcess of Par
Preferred Stock
Treasury Stock
Retained Earnings
Dividends
Income Summary
Notes Payable
Accounts Payable
Unearned ServiceRevenue
Salaries andWages Payable
Interest Payable
Dividends Payable
Income TaxesPayable
Bonds Payable
Discount on BondsPayable
Premium on BondsPayable
Mortgage Payable
CHART OF ACCOUNTSStockholders
Assets Liabilities Equity Revenues Expenses
Cash
AccountsReceivable
Allowance forDoubtfulAccounts
Interest
Receivable
Inventory
Supplies
Prepaid Insurance
Land
Equipment
AccumulatedDepreciation
Equipment
Buildings
AccumulatedDepreciationBuildings
Copyrights
Goodwill
Patents
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Jerry J. Weygandt PhD, CPAUniversity of WisconsinMadison
Madison, Wisconsin
Paul D. Kimmel PhD, CPAUniversity of WisconsinMilwaukee
Milwaukee, Wisconsin
Donald E. Kieso PhD, CPANorthern Illinois University
DeKalb, Illinois
John Wiley & Sons, Inc.
FINANCIALACCOUNTING EIGHTHEDITION
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ISBN-13 978-0-470-92938-4
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From the
Authors
Dear Student,
Why This Course?Remember your biology course in high school? Did you haveone of those invisible man models (or maybe something more high-tech than that)that gave you the opportunity to look inside the human body? This accountingcourse offers something similar: To understand a business, you have to understandthe financial insides of a business organization. An accounting course will help youunderstand the essential financial components of businesses. Whether you arelooking at a large multinational company like MicrosoftorStarbucks or a single-owner
software consulting business or coffee shop, knowing the fundamentals of accountingwill help you understand what is happening. As an employee, a manager, an investor,a business owner, or a director of your own personalfinancesany of which roles you will have at some pointin your lifeyou will make better decisions for havingtaken this course.
Why This Book?Hundreds of thousands of studentshave used this textbook. Your instructor has chosen it for
you because of its trusted reputation. The authors haveworked hard to keep the book fresh, timely, and accurate.
This textbook contains features to help you learn best, whatever your learning style.To understand what your learning style is, spend about 10 minutes to take the learningstyle quiz at the books companion website. Then, look at page xiii for how you canapply an understanding of your learning style to this course. When you know more about
your own learning style, browse through pages xivxvi. These pages describe the mainfeatures you will find in this textbook and explain their purpose.
How To Succeed?Weve asked many students and many instructors whether thereis a secret for success in this course. The nearly unanimous answer turns out to be notmuch of a secret: Do the homework. This is one course where doing is learning.The more time you spend on the homework assignmentsusing the various toolsthat this textbook providesthe more likely you are to learn the essential concepts,
techniques, and methods of accounting. Besides the textbook itself, the bookscompanion website also offers various support resources.
Good luck in this course. We hope you enjoy the experience and that you put to gooduse throughout a lifetime of success the knowledge you obtain in this course. We are
sure you will not be disappointed.
Jerry J. WeygandtPaul D. KimmelDonald E. Kieso
Whether you are looking at a largemultinational company like MicrosoftStarbucks or a single-owner softwareconsulting business or coffee shop,knowing the fundamentals of accounwill help you understand what ishappening.
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Your Team for Success in Accountin
Wiley Accounting is your partner in accountingeducation. We want to be the first publisher youthink of when it comes to quality content, reliabletechnology, innovative resources, professionaltraining, and unparalleled support for youraccounting classroom.
Your Wiley Accounting Team for Success iscomprised of three distinctive advantages thatyou wont find with any other publisher:
Author Commitment
Wiley Faculty Network WileyPLUS
Author Commitment:
A Proven Author Teamof Inspired Teachers
The Team for Success authors bringyears of industry and academicexperience to the developmentof each textbook that relatesaccounting concepts to real-world
experiences. This cohesive team brings continuity ofwriting style, pedagogy, and problem material to
each course from Principles to Intermediate so youand your students can seamlessly progress fromintroductory through advanced coursesin accounting.
The authors understand the mindset and timelimitations of todays students. They demonstratean intangible ability to effectively deliver complexinformation so it is clear and understandable whilestaying one step ahead of emerging global trendsin business.
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Wiley Faculty Network:A Team of Educators Dedicatedto Your Professional Development
The Wiley Faculty Network (WFN)is a global group of seasonedaccounting professionals whoshare best practices in teachingwith their peers. Our Virtual Guest
Lecture Series provides the opportunity you need forprofessional development in an online environment
that is relevant, convenient, and collaborative. Thequality of these seminars and workshops meets thestrictest standards, so we are proud to be able tooffer valuable CPE credits to attendees.
With 24 faculty mentors in accounting, its easyto find help with your most challenging curriculumquestionsjust ask our experts!
WileyPLUS:An Experienced Teamof Support Professionals
The WileyPLUSAccountManagers understand thetime constraints of busy
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Account Managers act as your personal contactand expert resource for training, course set-up, andshortcuts throughout the WileyPLUSexperience.
Your success as an educator directly correlates tostudent success, and thats our goal. The WileyAccounting Team for Success truly strives forYOUR success! Partner with us today!
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Author CommitmentCollaboration. Innovation. Experience.
After decades of success as authors of textbooks like this one,Jerry Weygandt, Paul Kimmel, and Don Kieso understand thatteaching accounting goes beyond simply presenting data. Theauthors are truly effective because they know that teaching isabout telling compelling stories in ways that make each
concept come to life.
Teacher / Author / ProfessionalThrough their textbooks, supplements, online learning tools,and classrooms, these authors have developed a comprehensivepedagogy that engages students in learning and faculty
with teaching.
These authors collaborate throughout the entire process. Theend result is a true collaboration where each author brings hisindividual experience and talent to the development of everyparagraph, page, and chapter, thus creating a truly well-rounded,
thorough view on any given accounting topic.
Many Ways in One DirectionOur Team for Success has developed a teaching system thataddresses every learning style. Each year brings new insights,feedback, ideas, and improvements on how to deliver the materialto every student with a passion for the subject in a format thatgives them the best chance to succeed.
The key to the teams approach is in understanding that, just asthere are many different ways to learn, there are also many
different ways to teach.
In Their Own WordsVisit the Wiley Team for Success website to hear from the authorsfirst-hand as they discuss their teaching styles, collaboration, andthe future of accounting.
www.wileyteamforsuccess.com
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JerryWeygandt
Jerry J. Weygandt, PhD, CPA, is ArthurAndersen Alumni Emeritus Professor ofAccounting at the University of WisconsinMadison. He holds a Ph.D. in accountingfrom the University of Illinois. Articles byProfessor Weygandt have appeared in the
Accounting Review,Journal of AccountingResearch,Accounting Horizons,Journal of
Accountancy, and other academic andprofessional journals. These articles haveexamined such financial reporting issuesas accounting for price-level adjustments,pensions, convertible securities, stock optioncontracts, and interim reports. ProfessorWeygandt is author of other accounting andfinancial reporting books and is a memberof the American Accounting Association,
the American Institute of Certified PublicAccountants, and the Wisconsin Society ofCertified Public Accountants. He has servedon numerous committees of the AmericanAccounting Association and as a memberof the editorial board of the AccountingReview; he also has served as Presidentand Secretary-Treasurer of the AmericanAccounting Association. In addition, he hasbeen actively involved with the AmericanInstitute of Certified Public Accountantsand has been a member of the AccountingStandards Executive Committee (AcSEC) ofthat organization. He has served on the FASBtask force that examined the reporting issuesrelated to accounting for income taxes
and served as a trustee of the FinancialAccounting Foundation. Professor Weygandthas received the Chancellors Award forExcellence in Teaching and the Beta GammaSigma Deans Teaching Award. He is on theboard of directors of M & I Bank of SouthernWisconsin. He is the recipient of theWisconsin Institute of CPAs OutstandingEducators Award and the LifetimeAchievement Award. In 2001 he receivedthe American Accounting AssociationsOutstanding Educator Award.
Paul KimmelPaul D. Kimmel, PhD, CPA, received hisbachelors degree from the University ofMinnesota and his doctorate in accountingfrom the University of Wisconsin. He is anAssociate Professor at the University ofWisconsinMilwaukee, and haspublic accounting experience with Deloitte& Touche (Minneapolis). He was the recipientof the UWM School of Business AdvisoryCouncil Teaching Award, the ReggieTaite Excellence in Teaching Award and athree-time winner of the OutstandingTeaching Assistant Award at the Universityof Wisconsin. He is also a recipient of theElijah Watts Sells Award for HonoraryDistinction for his results on the CPA exam.He is a member of the American AccountingAssociation and the Institute of ManagementAccountants and has published articles in
Accounting Review,Accounting Horizons,Advances in Management Accounting,Managerial Finance, Issues in AccountingEducation,Journal of Accounting Education,as well as other journals. His researchinterests include accounting for financial
instruments and innovation in accountingeducation. He has published papers andgiven numerous talks on incorporatingcritical thinking into accounting education,and helped prepare a catalog of criticalthinking resources for the Federated Schoolsof Accountancy.
Don KiesoDonald E. Kieso, PhD, CPA, received hisbachelors degree from Aurora Universityand his doctorate in accounting from theUniversity of Illinois. He has served aschairman of the Department of Accountancyand is currently the KPMG Emeritus Professoof Accountancy at Northern Illinois UniversityHe has public accounting experience withPrice Waterhouse & Co. (San Francisco andChicago) and Arthur Andersen & Co.(Chicago) and research experience with theResearch Division of the American Institute oCertified Public Accountants (New York). Hehas done post doctorate work as a VisitingScholar at the University of California atBerkeley and is a recipient of NIUs Teaching
Excellence Award and four Golden AppleTeaching Awards. Professor Kieso is theauthor of other accounting and businessbooks and is a member of the AmericanAccounting Association, the AmericanInstitute of Certified Public Accountants, andthe Illinois CPA Society. He has served as amember of the Board of Directors of theIllinois CPA Society, then AACSBs AccountinAccreditation Committees, the State ofIllinois Comptrollers Commission, asSecretary-Treasurer of the Federationof Schools of Accountancy, and asSecretary-Treasurer of the AmericanAccounting Association. Professor Kieso iscurrently serving on the Board of Trusteesand Executive Committee of AuroraUniversity, as a member of the Board ofDirectors of Kishwaukee CommunityHospital, and as Treasurer and Director ofValley West Community Hospital. From 1989to 1993 he served as a charter member ofthe national Accounting Education ChangeCommission. He is the recipient of theOutstanding Accounting Educator Awardfrom the Illinois CPA Society, the FSAs JosepA. Silvoso Award of Merit, the NIUFoundations Humanitarian Award for Serviceto Higher Education, a Distinguished ServiceAward from the Illinois CPA Society, andin 2003 an honorary doctorate fromAurora University.
Author
Commitment
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TheemergingimportanceofInternationalFinancialReportingStandardspresentschallengesinhowyouteachandhowyourstudentslearnAccounting.
The Wiley Accounting Team for Success is ready when youare to help prepare you and your students for the integration of IFRS into your courses.
No matter where you are in this transition, Wiley Accounting is here to provide the tools youneed to fully incorporate IFRS into your accounting courses. We offer the most extensiveProducts, Content, Services, Support, and Training available todayleading the wayto prepare you and your students for success!
Innovative ProductsNew IFRS Editions of Kieso, Intermediate Accountingand Weygandt, Financial Accounting are the most current and only textbooks available based
fully on International Financial Reporting Standards. Wiley Accounting also offers numerous IFRS
resources that can serve to supplement your course.
Exclusive Content Our accounting publications feature more quality andcurrent coverage of IFRS topics than any other textbook available today! The Wiley Accounting
Team for Success authors integrate IFRS content within each chapter through features like
A Look at IFRS, which demonstrates how international standards apply to each U.S. GAAP
topic, as well as provides an opportunity for practical application. International Insights
also provide an international perspective of the accounting topic discussed in the text.
Support & ServicesWiley Accounting features a dedicated IFRS website(at www.wileyifrs.com) and an Accounting Weekly Updates website (at www.
wileyaccountingupdates.com) to make sure you have the most current resources available.
Timely Training Wiley Accounting and the Wiley Faculty Network provides free IFRSvirtual training workshops, IFRS Guest Lectures, and IFRS Boot Camps featuring authors Paul
Kimmel and Terry Warfield. You can also earn CPE credit for attending these sessions.
To learn more about how the Wiley Accounting Team for Success can help your students succeed,visit www.wileyteamforsuccess.com or contact your Wiley sales representative today.
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IFRS Review and Assessment Content
Integrated Content The Eighth Editionprovides many new IFRS review and assessment toolsthat both instructors and students can easily incorpo-
rate into an introduction to financial accounting
course. In the margin of the textbook narrative,
International Notes highlight key differences between
U.S. and international accounting standards as well as
important IFRS updates.
A Look at IFRS: Review andPractice Each chapter also closes with an IFRSmodule that includes:
Key Points that provide visual and textual high-
lights of IFRS topics that relate to concepts in a
particular chapter. Students are presented with
IFRS transactions, illustrations, and representations
of IFRS financial statements.
Looking to the Future discussions of upcomingIFRS challenges and issues.
IFRS Practice that includes both multiple-choice
self-test questions and exercises.
International Financial Reporting Problems that address Zetar plcs (a U.K.
manufacturer of confectionary and natural snacks) financial statements, which
are found in Appendix C.
Comprehensive Teaching Materials IFRS review and assessmentcontent is also incorporated into instructor resources such as the test bank, computerized test
bank, PowerPoint lecture slides, and instructors manual.
Countries that require
or permit IFRS or havefixed dates for adoption
Countries seeking conver-
gence with the IASB or
pursuing adoption of IFRS
Source: http://www.pwc.com/us/en/issues/ifrs-reporting/country-adoption/index.jhtml.
Property, Plant, and Equipment
Property, plant, and equipment are assets with relatively long useful lives thaa company is currently using in operating the business. This categor(sometimes calledfixed assets) includes land, buildings, machinery andequipment, delivery equipment, and furniture. In Illustration 4-18 , Franklin Corporation reported property, plant, and equipment of $29,000.
Depreciation is the practice of allocating the cost of assets to number of years. Companies do this by systematically assigning aportion of an assets cost as an expense each year (rather than expensingthe full purchase price in the year of purchase). The assets that thecompany depreciates are reported on the balance sheet at cost lesaccumulated depreciation. The accumulated depreciation accounshows the total amount of depreciation that the company has expensedthus far in the assets life. In Illustration 4-18, Franklin Corporationreported accumulated depreciation of $5,000.
Illustration 4-21 presents the property, plant, and equipment oCooper Tire & Rubber Company.
Recently, China adopted
International Financial Reporting
Standards (IFRS). This was done
in an effort to reduce fraud and
increase investor confidence in
financial reports. Under these
standards, many items, such as
property, plant, and equipment,
may be reported at current fair
values, rather than historical cost.
International
Note
c04CompletingtheAccountingCycle.indd Page 182 03/10/11 7:50 PM user-F391 /User
IFRS4-5 The following information is available for Rego Bowling Alley at December 31, 2014.
Buildings $128,000 Share Capital $90,000
Accounts Receivable 7,540 Retained Earnings 22,000Prepaid Insurance 4,680 Accumulated DepreciationBuildings 42,600Cash 18,040 Accounts Payable 12,300Equipment 62,400 Notes Payable 95,000Land 67,000 Accumulated DepreciationEquipment 18,720Insurance Expense 780 Interest Payable 2,600Depreciation Expense 7,360 Service Revenues 15,180Interest Expense 2,600
Prepare a classified statement of financial position; assume that $13,900 of the notes payable willbe paid in 2015.
c04CompletingtheAccountingCycle.indd Page 217 03/10/11 7:52 PM user-F391 /Users/user-F391/Desktop
Walter CompanyStatement of Comprehensive Income
For the Year Ended December 31, 2014
Net income $600,000Other comprehensive income
Unrealized gain on trading securities 75,000
$675,000
c04CompletingtheAccountingCycle.indd Page 167 03/10/11 8:40 PM user-F391
Cash 1,000,000
Bonds Payable 850,000Share PremiumConversion Equity 150,000
c07FraudInternalControlAndCash.indd Page 341 03/10/11 8:42 PM user-F391 /Users/user-F39
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WileyPLUS.Beyond Books.
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The Place WhereFaculty Connect ...The Wiley Faculty Network is a global communityof faculty connected by a passion for teachingand a drive to learn and share. Connect withthe Wiley Faculty Network to collaborate withyour colleagues, find a mentor, attend virtualand live events, and view a wealth of resourcesall designed to help you grow as an educator.
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authors, and faculty where and when you need it.
Teaching ResourcesPropel your teaching and student learning to thenext level with quality peer-reviewed case studies,
testimonials, classroom tools, and checklists.
Connect with ColleaguesAchieve goals and tackle challenges more easily by
enlisting the help of your peers. Connecting with
colleagues through the WFN can help you improve
your teaching experience.
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What TYPEof learner are you?Understanding each of these basic learning styles enables the authors to engage students minds and
motivate them to do their best work, ultimately improving the experience for both students and faculty.
VISUA
L
AU
RAL
READIN
G/
WRITIN
G
KINESTHETIC
Pay close attention to charts,
drawings, and handoutsyour instructors use. Underline. Use different colors. Use symbols, flow charts,
graphs, differentarrangements on the page,white spaces.
Convert your lecture notes into
page pictures.To do this: Use the Intake strategies. Reconstruct images in
different ways. Redraw pages from memory. Replace words with symbols
and initials. Look at your pages.
The Navigator/Feature
Story/PreviewInfographics/IllustrationsAccounting equation analysesHighlighted wordsComprehensive DO IT!
Problem/Action PlanQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemReal-World Focus
Recall your page pict
Draw diagrams whereappropriate. Practice turning your v
back into words.
Attend lectures and tutorials. Discuss topics with students
and instructors. Explain new ideas to
other people. Use a tape recorder. Leave spaces in your lecture
notes for later recall. Describe overheads, pictures,
and visuals to somebodywho was not in class.
You may take poor notesbecause you prefer to listen.Therefore: Expand your notes by talking
with others and withinformation fromyour textbook.
Tape-record summarizednotes and listen.
Read summarized notesout loud.
Explain your notes toanother aural person.
PreviewInsight BoxesDO IT! Action PlanSummary of Learning ObjectivesGlossaryComprehensive DO IT!
Problem/Action PlanSelf-Test QuestionsQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemReal-World FocusDecision-Making Across the
OrganizationCommunication ActivityEthics Case
Talk with the instructo Spend time in quiet p
recalling the ideas. Practice writing answe
to old exam questions Say your answers out l
Use lists and headings. Use dictionaries, glossaries,
and definitions.
Read handouts, textbooks,and supplementarylibrary readings.
Use lecture notes.
Write out words againand again.
Reread notes silently.
Rewrite ideas and principlesinto other words.
Turn charts, diagrams,and other illustrationsinto statements.
The Navigator/FeatureStory/Study
Objectives/Preview
DO IT! Action PlanSummary of Learning
ObjectivesGlossary/Self-Test QuestionsQuestions/Exercises/ProblemsWriting ProblemsFinancial Reporting ProblemComparative Analysis ProblemReal-World FocusDecision-Making Across
the OrganizationCommunication ActivityAll About You
Write exam answers. Practice with multiple-
questions.
Write paragraphs, begand endings.
Write your lists inoutline form.
Arrange your words inhierarchies and points
Use all your senses.
Go to labs, take field trips. Listen to real-life examples. Pay attention to applications. Use hands-on approaches. Use trial-and-error methods.
You may take poor notes
because topics do not seemconcrete or relevant.Therefore: Put examples in
your summaries. Use case studies and
applications to help withprinciples and abstractconcepts.
Talk about your notes withanother kinesthetic person.
Use pictures andphotographs thatillustrate an idea.
The Navigator/Feature
Story/PreviewInfographics/IllustrationsDO IT! Action PlanSummary of Learning ObjectivesComprehensive DO IT!
Problem/Action PlanSelf-Test QuestionsQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemReal-World FocusDecision-Making Across
the OrganizationCommunication ActivityAll About You
Write practice answers
Role-play the exam sit
Intake:To take in the information To make a study package
Text features that mayhelp you the most
Output:To do well on exams
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International Financial Reporting Standards
As we continue to strive to reflect the constant changes inthe accounting environment, we have added new materialon International Financial Reporting Standards (IFRS). Wehave added a comprehensive new section at the end ofeach chapter, A Look at IFRS, which includes an overviewsection, addresses differences between GAAP and IFRS
(Key Points), describes convergence efforts (Looking tothe Future), and provides students with the opportunity totest their understanding through self-test questions andexercises (IFRS Practice). An international financial reportingproblem is also included, based on Zetar plcs (a U.K.candy company) financial statements, provided in a newAppendix C of the textbook.
International Insights (and InternationalNotes in the margin) also provide aglobal perspective of the accountingtopics discussed in the textbook.
People, Planet, and Profit
Todays companies are evaluating not justtheir profitability but also their corporatesocial responsibility. In this edition, we haveprofiled some of these companies, such asPepsiCo, to highlight their sustainable busi-
ness practices.
Whats New?
What is meant by monetize environmental sustainability for shareholders? (See
page 267.)?
PEOPLE, PLANET, AND PROFIT INSIGHT
Selling Green
Here is a question an executive of PepsiCo was asked: Should PepsiCo market green? The execu-
tive indicated that the company should, as he believes it's the No. 1 thing consumers all over the
world care about. Here are some thoughts on this issue:
If you are going to market green, what are some things we've learned? I'll share with you
one thing we've learned at PepsiCo.
Sun Chips are part of the food business I run. It's a "healthy snack." We decided that Sun Chips,
if it's a healthy snack, should be made in facilities that have a net-zero footprint. In other words, I
want off the electric grid everywhere we make Sun Chips. We did that. Sun Chips should be made
in a facility that puts back more water than it uses. It does that. And we partnered with our suppli-
ers and came out with the world's first compostable chip package.
Now, there was an issue with this package: It was louder than the New York subway, louder than
jet engines taking off. What would a company that's committed to green do: walk away or stay com-
mitted? If your people are passionate, they're going to fix it for you as long as you stay committed. Six
months later, the compostable bag has half the noise of our current package.
So the view today is: we should market green, we should be proud to do it . . . it has to be
a 360 process, both internal and external. And if you do that, you can monetize environmental
sustainability for the shareholders.
Source: Four Problemsand Solutions, Wall Street Journal(March 7, 2011), p. R2.
c05AccountingforMerchandisingOperations.indd Page 231 16/08/11 3:22 PM user-F391 /Users/user-F391/Desktop
Features of the Eighth Edition
The Eighth Edition expands our emphasis on student learning and improves upon ateaching and learning package that instructors and students have rated the highest incustomer satisfaction.
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The Accounting Cycle
For many students, success in an introduc-tory accounting course hinges on develop-ing a sound conceptual understanding ofthe accounting cycle. In the past, we havereceived positive feedback regarding theframework that we have employed to intro-duce the recording process in Chapter 2. Inthis edition, we have expanded our use ofthis framework to cover the entire account-ing cycle in Chapters 14.
Accounting Principles
For many students, learning about the conceptual framework can be somewhattedious. Yet, at the same time, we believe that students need a good understanding ofthe accounting assumptions, principles, and constraints that accountants use as a basis
for recording and reporting financial information. As a result, we decided to integrateour discussion of accounting principles throughout the textbook as they relate to thetopic at hand. However, we also realize that students might find it helpful to have a sum-mary of all the concepts, which we provide in a new Chapter 3 Appendix, Concepts inAction.
Chart of Accounts
It is important to always try to eliminate unnecessary barriers to student understanding.Sometimes, the accounting course can seem unnecessarily complicated to studentsbecause so many account titles are used. In order to reduce possible confusion and tokeep students focused on those concepts that really matter, we undertook to stream-
line the number of accounts used in the textbook, supplements, and WileyPLUS. Seeinside the front cover of the textbook for a sample chart of accounts, which representthe majority of the account titles used.
Anatomy of a Fraud
Many users of our textbook have responded favor-ably to our Anatomy of a Fraudfeature, previouslyonly included in Chapter 7 (Fraud, Internal Control,and Cash). They have requested that we expand itthroughout the textbook to demonstrate the
importance of internal controls to all assets and lia-bilities. Accordingly, in this edition, we haveexpanded the Anatomy of a Fraud feature to allappropriate chapters.
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xvi
This edition was subject to an overall, comprehensive revision to ensure that it is techni-cally accurate, relevant, and up-to-date. We have continued and enhanced many of thefeatures of the Seventh Edition ofFinancial Accounting, including the following:
Real-World EmphasisOne of the goals of the financial accounting course is to orient students to the applica-tion of accounting principles and techniques in practice. Accordingly, we have contin-
ued our practice of using numerousexamples from real companiesthroughout the textbook. The namesof these real companies are high-lighted in red.
Also, throughout the chapters,Insight and Accounting Across theOrganization boxes show how peo-ple, often in non-accounting func-
tions, in actual companies makedecisions using accounting infor-mation. These high-interest boxesfocus on various themesethics,international, investor, and corpo-rate social responsibility concerns.
Guideline Answers to the critical thinking questions are provided near the end of eachchapter.
Exercises
Brief exercises ask students to apply their newly acquired knowledge. Theexercises include an Action Plan, which reviews the necessary steps to complete
the exercise, as well as a Solution so students can have immediate feedback. AComprehensive problem at the end of each chapter allows students a finalcheck of their understanding before they do their homework. Review problemsare part of the end-of-chapter homework material.
Accounting Equation Analyses
We include accounting equation analyses in the mar-gin next to key journal entries. They will help studentsunderstand the impact of an accounting transaction
on the components of the accounting equation, on thestockholders equity accounts, and on the companyscash flows.
DO IT!
DO IT!
DO IT!
DO IT!
DO IT!
Hallmark Features of the Eighth Edition
Why has Mark Zuckerberg, the CEO and founder of Facebook, delayed taking his
companys shares public through an initial public offering (IPO)? (See page 596.)?
Wall Street No Friend of Facebook
In the 1990s, it was the dream of every young technology entrepreneur to start a company and
do an initial public offering (IPO), that is, list company shares on a stock exchange. It seemed
like there was a never-ending supply of 20-something-year-old technology entrepreneurs that
made millions doing IPOs of companies that never made a profit and eventually failed. In sharp
contrast to this is Mark Zuckerberg, the 27-year-old founder and CEO of Facebook. If Facebook
did an IPO, he would make billions of dollars. But, he is in no hurry to go public. Because his
company doesnt need to invest in factories, distribution systems, or even marketing, it doesnt
need to raise a lot of cash. Also, by not going public, Zuckerberg has more control over the
direction of the company. Right now, he and the other founders dont have to answer to out-
side shareholders, who might be more concerned about short-term investment horizons rather
than long-term goals. In addition, publicly traded companies face many more financial report-
ing disclosure requirements.
Source: Jessica E. Vascellaro, Facebook CEO in No Rush to Friend Wall Street,Wall Street Journal Online
(March 4, 2010).
ACCOUNTING ACROSS THE ORGANIZATION
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Financial Statements
Students will be more willing to commit time andenergy to a topic when they believe it is relevant totheir future careers. There is no better way todemonstrate relevance than to ground discussionsin the real world. To that end, we include financialstatements from actual companies regularlythroughout the textbook.
Marginal Notes
Helpful Hints in the margin further clarify concepts being discussed. Ethics Notes pointout ethical points related to the nearby text discussion. Alternative Terminology lets stu-dents know about interchangeable words and phrases. International Notes provide aglobal perspective of the accounting topics being discussed.
Comprehensive Homework Material
Each chapter concludes with revised Self-Test Questions, Questions, Brief Exercises,Review, Exercises, and Problems. An icon identifies Exercises and Problems that
can be solved using Excel templates at the books companion website. The ContinuingCookie Chronicle uses the business activities of a fictional company to help studentsapply accounting topics to a realistic entrepreneurial situation.
Broadening Your Perspective Section
We have revised and updated the Broadening Your Perspective section at the end of
each chapter. Elements in this section include the following: Financial Reporting Problem: PepsiCo, Inc. Communication Activity Comparative Analysis Problem: PepsiCo, Ethics Case
Inc. vs. The Coca-Cola Company All About You Real-World Focus FASB Codification Activity Decision-Making Across the Organization
These assignments are designed to help develop students decision-making and critical-thinking skills.
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xvii
Kellogg CompanyBalance Sheet (partial)
($ in millions)
Stockholders equityCommon stock, $0.25 par value, 1,000,000,000 shares authorized
501$serahs391,966,814:deussI883eulavrapfossecxenilatipaC712,4sgninraedeniateR
)753,1(serahs250,816,82tsocta,kcotsyrusaerT)728()ssol(emocnievisneherpmocrehtodetalumuccA
625,2$ytiuqesredlohkcotslatoT
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Chapter 1 Accounting in Action New format of transaction analyses, so students
see Basic Analysis and Equation Analysistogether, for a better understanding of thedual effect on the accounting equation.
New Accounting Across the Organization box,about how Rhino Foods uses accounting torecruit new employees.
Updated Ethics Insight, to include recent reliefefforts in Haiti.
New International Insight, about why SouthKorean companies must comply with interna-tional accounting standards.
New People, Planet, and Profit Insight, about
whether corporations should take into accountenvironmental and social performance as partof their financial results.
New International Note, about the formatdifferences that exist between GAAP and IFRSfinancial statements.
Chapter 2 The Recording Process Rewrote Debits and Credit section, to provide
additional instruction/explanation to students. New Investor Insights, about Chicago Cubs
major revenue and expense accounts and whySOX is important.
Chapter 3 Adjusting the Accounts Updated revenue recognition discussion to
reflect the proposed new accounting standard,whereby revenue should be recognized in theaccounting period in which services are per-formed (formerly when revenue was earned).
New Ethics Insight, about real-world companiesabuse of the revenue recognition principle.
New International Insight, about the Chinesegovernments inconsistent use of cash accounting.
New People, Planet and Profit Insight, abouthow companies disposal of waste materialsmight lead to accounting issues.
Updated discussion of The Basics of AdjustingEntries section, including new transactionanalysis format (Basic Analysis, Equation
Analysis, Debit-Credit Analysis, Journal Entry,and Posting) for adjusting entries examples,providing continuity from Chapters 1 and 2.
New Appendix 3B, Concepts in Action, aboutthe accounting assumptions, principles, andconstraints that accountants use as a basis forrecording and reporting financial information.
Chapter 4 Completing the Accounting Cycle New People, Planet, and Profit Insight, about the
dimensions that influence a companys reputationand consumer behavior.
New Accounting Across the Organization box,about managing working capital efficiently.
Chapter 5 Accounting for MerchandisingOperations
Updated Feature Story, to include more recentWal-Mart sales information.
Added additional explanation to Sales Returnsand Allowances section, to increase studentunderstanding.
New Anatomy of a Fraud, about cashier-relatedfraud.
Revised Accounting Across the Organization box,to reflect recent information on Costco.
Added new illustration in Sales Discounts section,
so students could better visualize how net salesare composed of sales revenue, sales returns andallowances, and sales discounts.
New People, Planet, and Profit Insight, about howcompanies can market their green efforts.
New Ethics Insight, about disclosing other gainsand losses in a separate line item.
Rewrote Appendix 5A, Determining Cost ofGoods Sold Under a Periodic System, to improvestudent understanding.
Chapter 6 Inventories
New Accounting Across the Organization boxes,about JIT risks and rewards and Wal-Marts experi-ence with using RFID to improve inventory control.
New Ethics Insight, about manipulating inventoryrecords.
Content Changes by Chapter
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New Anatomy of a Fraud, about alteringinventory figures.
Expanded discussion in Cost Flow Assumptionssection, to ensure student understanding ofaccounting requirements for cost flowassumption chosen.
Chapter 7 Fraud, Internal Control, and Cash New People, Planet, and Profit Insight, about
the need for internal controls for sustainabilityaccounting.
New Ethics Insight boxes, Big Theft at SmallCompanies and How Employees Steal.
New Helpful Hint about how petty cash receiptssatisfy internal control procedures.
New Investor Insight, about Madoffs Ponzischeme.
Chapter 8 Accounting for Receivables
Rewrote Types of Receivables section, to includemore general discussion of receivables. New Anatomy of a Fraud, about an accounts
receivable clerk who committed fraud at a largenot-for-profit foundation.
Added new material on recent home foreclo-sures in section on Valuing Accounts Receivable.
New International Insight, about the IASBs pushfor fair value and the FASBs response to it.
Expanded discussion of Disposing of NotesReceivable section, to include a timeline illustra-tion to increase student understanding.
New Accounting Across the Organization box,
about Countrywides Fast and Easy loanprogram.
Chapter 9 Plant Assets, Natural Resources, andIntangible Assets
New DO IT! on revised depreciation. New Anatomy of a Fraud, about WorldCom. New People, Planet, and Profit Insight, about
BHP Billitons sustainability report and howit measures the success or failure of its environ-mental policies.
New International Insight, about Japans Internetcompany Softbank Corp.
Chapter 10 Liabilities New Accounting Across the Organization boxes,
about the amount of payroll deductions and
taxes, and the trend of companies to borrowmore from bond investors than banks.
New Anatomy of a Fraud, about using fakeemployees to collect paychecks.
In Accounting for Bond Issues section, addedmore general discussion to ensure studentunderstanding.
Chapter 11 Corporations: Organization, StockTransactions, Dividends, and RetainedEarnings
Added more real-company detail to Charac-teristics of a Corporation section, to increasestudent engagement/interest.
New Accounting Across the Organization boxes,about Facebooks status as a privately heldcompany.
New People, Planet, and Profit Insight, about howmost investors believe environmental and socialfactors impact shareholder value.
New Anatomy of a Fraud, about SafeNetsemployees abusing company stock optionplan.
New Investor Insight, about Warren Buffettscompany Berkshire Hathaway.
Chapter 12 Investments Updated Categories of Securities section, to
reflect proposed new FASB classifications fordebt and stock investments.
Chapter 13 Statement of Cash Flows
New Anatomy of a Fraud, about Parmalatsmultiple frauds.
New Appendix 13C, Statement of Cash FlowsT-Account Approach.
Chapter 14 Financial Statement Analysis New Anatomy of a Fraud, about using Benfords
Law (statistics) to detect fraud. New Investor Insight, about the limitations of the
current ratio in financial statement analysis.
End-of-Textbook
New Appendix C, financial statements ofZetar plc(U.K. candy company).
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For InstructorsIn addition to the support instructors receive from WileyPLUSand the Wiley Faculty Network, we offer the following useful
supplements.
Books Companion Website. On this website,www.wiley.com/college/weygandt, instructors will findthe Solutions Manual, Test Bank, Instructors Manual,Computerized Test Bank, and other resources.
Instructors Resource CD. The Instructors ResourceCD (IRCD) contains all the instructor supplements. TheIRCD gives instructors the flexibility to access and prepareinstructional materials based on their individual needs.
Solutions Manual. The Solutions Manual containsdetailed solutions to all questions, brief exercises, exercises,and problems in the textbook, as well as suggested
answers to the questions and cases. The estimated timeto complete exercises, problems, and cases is provided.
Solution Transparencies. The solution transparenciesfeature detailed solutions to brief exercises, exercises,problems, and Broadening Your Perspective activities.Transparencies can be easily ordered from the bookscompanion website.
Instructors Manual. Included in each chapter arelecture outlines with teaching tips, chapter reviews, illustrations,and review quizzes.
Teaching Transparencies. The teaching transparenciesare 4-color acetate images of the illustrations found in the
Instructors Manual. Transparencies can be easily ordered fromthe books companion website.
Test Bank and Computerized Test Bank. The testbank and computerized test bank allow instructors to tailorexaminations according to study objectives and learning out-comes, including AACSB, AICPA, and IMA professional stan-dards. Achievement tests, comprehensive examinations, and afinal exam are included.
PowerPoint. The PowerPoint presentations containa combination of key concepts, images, and problems fromthe textbook.
Blackboard. Blackboard offers an integrated set ofcourse management tools that enable instructors toeasily design, develop, and manage Web-based andWeb-enhanced courses.
For StudentsBooks Companion Website. On this website,students will find:
Exercises: Set B and Challenge Exercises
Problems: Set C
Self-Tests and Additional Self-Tests
Student Study Guide. Each chapter of the StudyGuide contains a chapter review, chapter outline, and aglossary of key terms. Demonstration problems, multiplechoice, true/false, matching, and other exercises arealso included.
Working Papers. The working papers are printedtemplates that can help students correctly format theirtextbook accounting solutions. Working paper template
are available for all end-of-chapter brief exercises, exerciseproblems, and cases.
Excel Working Papers. The Excel Working Papersare Excel templates that students can use to correctlyformat their textbook accounting solutions.
Excel Primer: Using Excel in Accounting. Theonline Excel primer and accompanying Excel templatesallow students to complete select end-of-chapter exerciseand problems identified by a spreadsheet icon in themargin of the textbook.
Problem-Solving Survival Guide. This tutorialis designed to improve students success rates in solving
homework assignments and exam questions. Eachchapter includes an overview of key topics; a purposestatement and link to study objectives for each homewoassignment; numerous review tips to alert students tocommon pitfalls and misconceptions; and reminders toconcepts and principles. Multiple-choice exercises andcases similar to common homework assignments or examquestions enhance students problem-solving proficiencSolutions not only explain answers but also discuss anapproach to similar types of accounting problems.
Mobile Applications. Quizzing and reviewing conteis available for download on iTunes.
Teaching and Learning Supplementary Material
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Acknowledgments
Financial Accounting has benefited greatly from the input of focus group participants, manuscriptreviewers, those who have sent comments by letter or e-mail, ancillary authors, and proofers. Wegreatly appreciate the constructive suggestions and innovative ideas of reviewers and the creativityand accuracy of the ancillary authors and checkers.
Eighth Edition
Dawn AddingtonCentral New Mexico CommunityCollege
Audrey AgnelloNiagara County Community College
Matt AndersonMichigan State University
Joe AnthonyMichigan State University
Art BajaOhlone College
Felicia BaldwinCity College of ChicagoRichardJ. Daley
John BlahnikLorain County Community College
Brian BrattenUniversity of KentuckyLexington
Jerry BraunDaytona State College
Erin BurrellUniversity of Central Florida
Lisa Capozzoli
College of DuPageBruce CasselSUNY Dutchess Community College
Milton Chavez-AriasOhlone College
Kung ChenUniversity of NebraskaLincoln
Suzanne CounteSt. Louis Community CollegeMeramec
Robin DAgatiPalm Beach State College
Karl Dahlberg
Rutgers UniversityNewarkDori DankoGrand Valley State University
Alan DavisCommunity College of Philadelphia
Andrew DeJosephCollege of Mount Saint Vincent
Naman DesaiUniversity of Central Florida
Martin EpsteinCentral New Mexico Community College
Ann EsarcoMcHenry County College
Caroline FalconettiNassau Community College
Roger GeeSan Diego Mesa College
Severin GrabskiMichigan State University
Hassan HefziCalifornia State PolytechnicUniversityPomona
Janice HolmesLouisiana State UniversityBaton Rouge
John HoskinsUniversity of AlabamaHuntsville
Leslie HubbardSolano Community College
Daniel HuntIvy Tech Community College
John IlligState College of Florida
Nancy KellyMiddlesex Community College
Ridgway Knight
Santa Monica CollegeLinda MarquisNorthern Kentucky University
Maureen McBethCollege of DuPage
Jeanette MiliusIowa Western Community College
Mary Beth NelsonNorth Shore Community College
Oluwakemi OnwuchekwaUniversity of Central Florida
Hong PakCalifornia State Polytechnic UniversityPomona
Richard PettitMountain View College
Raymond ReisigPace UniversityPleasantville
Chuck SmithIowa Western Community College
Ashley SolizDelta State University
Jalal SorooshLoyola University Maryland
Grace Stuart-TugglePalm Beach State College
Richard Van NessSchenectady County CommunityCollege
Cynthia VanoosterumIvy Tech Community College
Robert WalshUniversity of Dallas
Barbara WarschawskiSchenectady County Community
CollegeBob WillisRogers State University
Jeffrey WongBellevue College
Marj YuschakRutgers UniversityNew Brunswick
Prior Edition
John AhmadNorthern Virginia CommunityCollegeAnnandale
Colin BattleBroward College
Beverly BeattyAnne Arundel Community College
Jaswinder BhangalChabot College
Leroy BuggerEdison State College
Anne CardozoBroward College
Kimberly CharlandKansas State University
Lisa ColeJohnson County State College
Kathy Crusto-WayTarrant County College
Robin DAgatiPalm Beach State College
Karl E. DahlbergRutgers University
Tony DellarteLuzerne County Community College
Pam DonahueNorthern Essex Community College
xxi
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Kathy DunneRider University
Dora EstesVolunteer State Community College
Mary FalkeyPrince Georges Community College
Lori Grady
Bucks County Community CollegeJoyce GriffinKansas City Kansas Community College
Lester HallDanville Community College
Becky HancockEl Paso Community College
Audrey HunterBroward College
Donna Johnston-BlairSanta Clara University
Naomi KarolinskiMonroe Community College
Kenneth KoerberBucks County Community College
Sandra LangMcKendree University
Cathy Xanthaky LarsonMiddlesex Community College
David LaurelSouth Texas College
Michael LawrencePortland Community College
Pamela LegnerCollege of DuPage
Suneel MaheshwariMarshall University
Lori MajorLuzerne County CommunityCollege
Jim MartinUniversity of Montevallo
Evelyn McDowellRider University
Glenn PatePalm Beach State College
Yvonne PhangBorough of Manhattan CommunityCollege
Mike ProcktonFinger Lakes CommunityCollege
Jessica RakowLouisiana State University
Richard SarkisianCamden County College
Mark SavitskieWayne State University
Beth SecrestWalsh University
William SerafinCommunity College of AlleghenyCounty
Walter SilvaMassachusetts Bay CommunityCollege
Lois Slutsky
Broward CollegeFrank StangotaRutgers University
Dennis StovallGrand Valley State University
Shafi UllahBroward College
WileyPLUS Developersand Reviewers
Carole Brandt-FinkLaura McNally
Melanie Yon
Ancillary Authors,Contributors, Proofers,and Accuracy Checkers
LuAnn BeanFlorida Institute of Technology
Jack BorkeUniversity of WisconsinPlatteville
Sandra CohenColumbia College Chicago
Larry FalcettoEmporia State University
Mark Gleason
Metropolitan State UniversityCoby HarmonUniversity of CaliforniaSanta Barbara
Douglas KiesoAurora University
Kirk LynchSandhills Community College
Kevin McNelisNew Mexico State University
Jill MisuracaCentral Connecticut StateUniversity
Barbara Muller
Arizona State UniversityYvonne PhangBorough of Manhattan CommunityCollege
John PlouffeCalifornia State UniversityLos Angeles
Rex SchildhouseSan Diego Community CollegeMiramar
Lynn StallworthAppalachian State University
Diane TannerUniversity of North Florida
Dick WassonSan Diego State University
Andrea WeickgenanntXavier University
Bernie WeinrichLindenwood University
We appreciate the exemplary support and commitment givento us by associate publisher Chris DeJohn, marketing managerKarolina Zarychta Honsa, operations manager Yana Mermel,
senior content editor Ed Brislin, development editors TerryAnn Tatro and Margaret Thompson, lead product designerAllie Morris, product designer Greg Chaput, vice president ofhigher education production and manufacturing Ann Berlin,designers Maureen Eide and Kristine Carney, illustration editorAnna Melhorn, photo editor Mary Ann Price, project editorSuzanne Ingrao of Ingrao Associates, indexer Steve Ingle,Denise Showers at Aptara, Cyndy Taylor, and project managerAngel Chavez at Integra. All of these professionals providedinnumerable services that helped the textbook take shape.
Finally, our thanks to Amy Scholz, Susan Elbe, GeorgeHoffman, Tim Stookesberry, Joe Heider, and Steve Smithfor their support and leadership in Wileys College Division.
We will appreciate suggestions and comments fromusersinstructors and students alike. You can send yourthoughts and ideas about the textbook to us via email at:[email protected].
Jerry J. Weygandt Paul D. Kimmel Donald E. KiesoMadison, Wisconsin Milwaukee, Wisconsin DeKalb, Illinois
xxii
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Brief Contents1 Accounting in Action 22 The Recording Process 52
3 Adjusting the Accounts 1004 Completing the Accounting Cycle 1625 Accounting for Merchandising Operations 2186 Inventories 2707 Fraud, Internal Control, and Cash 3248 Accounting for Receivables 3789 Plant Assets, Natural Resources,
and Intangible Assets 42210 Liabilities 47411 Corporations: Organization, Stock Transactions,
Dividends, and Retained Earnings 53612 Investments 60013 Statement of Cash Flows 64414 Financial Statement Analysis 710
APPENDICES
A Specimen Financial Statements:PepsiCo, Inc. A-1
B Specimen Financial Statements:The Coca-Cola Company B-1
CSpecimen Financial Statements:Zetar plc C-1
D Time Value of Money D-1E Payroll Accounting E-1F Subsidiary Ledgers and Special Journals F-1G Other Significant Liabilities G-1
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ContentsChapter 1
Accounting in Action 2Knowing the Numbers 2
What Is Accounting? 4Three Activities 4Who Uses Accounting Data 5
The Building Blocks of Accounting 7Ethics in Financial Reporting 7Generally Accepted Accounting Principles 8Measurement Principles 9Assumptions 10
The Basic Accounting Equation 12Assets 13Liabilities 13Stockholders Equity 13
Using the Accounting Equation 15Transaction Analysis 15Summary of Transactions 20
Financial Statements 22Income Statement 22Retained Earnings Statement 22Balance Sheet 24Statement of Cash Flows 24
APPENDIX 1A: Accounting Career Opportunities 29Public Accounting 30Private Accounting 30Opportunities in Government 30Forensic Accounting 30
Show Me the Money 31A Look at IFRS 49
Chapter 2
The Recording Process 52Accidents Happen 52The Account 54
Debits and Credits 54Stockholders Equity Relationships 58Summary of Debit/Credit Rules 58
Steps in the Recording Process 59The Journal 60
The Ledger 62Posting 64
The Recording Process Illustrated 66Summary Illustration of Journalizing and Posting 72
The Trial Balance 73Limitations of a Trial Balance 74Locating Errors 74Use of Dollar Signs 75
A Look at IFRS 97
Chapter 3
Adjusting the Accounts 100What Was Your Profit? 100
Timing Issues 102Fiscal and Calendar Years 102Accrual- versus Cash-Basis Accounting 102Recognizing Revenues and Expenses 103
The Basics of Adjusting Entries 104Types of Adjusting Entries 105Adjusting Entries for Deferrals 106Adjusting Entries for Accruals 113Summary of Basic Relationships 119
The Adjusted Trial Balance andFinancial Statements 121
Preparing the Adjusted Trial Balance 121Preparing Financial Statements 122
APPENDIX 3A: Alternative Treatment of PrepaidExpenses and Unearned Revenues 126
Prepaid Expenses 127Unearned Revenues 128Summary of Additional Adjustment
Relationships 129APPENDIX 3B: Concepts in Action 130
Qualities of Useful Information 130Assumptions in Financial Reporting 130Principles in Financial Reporting 131Constraints in Financial Reporting 132
A Look at IFRS 159
Chapter 4
Completing the Accounting Cycle 162Everyone Likes to Win 162Using a Worksheet 164
Steps in Preparing a Worksheet 165Preparing Financial Statements from a
Worksheet 167Preparing Adjusting Entries from a Worksheet 1
Closing the Books 170Preparing Closing Entries 170Posting Closing Entries 172
Preparing a Post-Closing Trial Balance 174Summary of the Accounting Cycle 176
Reversing EntriesAn Optional Step 177Correcting EntriesAn Avoidable Step 177
The Classified Balance Sheet 179Current Assets 181Long-Term Investments 181Property, Plant, and Equipment 182Intangible Assets 182
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Current Liabilities 184Long-Term Liabilities 185Stockholders (Owners) Equity 185
APPENDIX 4A: Reversing Entries 190Reversing Entries Example 190
A Look at IFRS 214
Chapter 5
Accounting for MerchandisingOperations 218Who Doesnt Shop at Wal-Mart? 218Merchandising Operations 220
Operating Cycles 220Flow of Costs 220
Recording Purchases of Merchandise 223Freight Costs 223Purchase Returns and Allowances 225Purchase Discounts 226Summary of Purchasing Transactions 227
Recording Sales of Merchandise 227
Sales Returns and Allowances 229Sales Discounts 230
Completing the Accounting Cycle 232Adjusting Entries 232Closing Entries 232Summary of Merchandising Entries 233
Forms of Financial Statements 234Multiple-Step Income Statement 234Income Statement Presentation of Sales 234Single-Step Income Statement 237Classified Balance Sheet 238
APPENDIX 5A: Periodic Inventory System 242Determining Cost of Goods Sold Under
a Periodic System 242Recording Merchandise Transactions 243Recording Purchases of Merchandise 243Recording Sales of Merchandise 244
APPENDIX 5B: Worksheet for a MerchandisingCompany 245
Using a Worksheet 245A Look at IFRS 268
Chapter 6
Inventories 270
Where Is That Spare Bulldozer Blade? 270Classifying Inventory 272Determining Inventory Quantities 273
Taking a Physical Inventory 273Determining Ownership of Goods 274
Inventory Costing 276Specific Identification 277Cost Flow Assumptions 277Financial Statement and Tax Effects of
Cost Flow Methods 282
Using Inventory Cost FlowMethods Consistently 284
Lower-of-Cost-or-Market 285Inventory Errors 286
Income Statement Effects 286Balance Sheet Effects 287
Statement Presentation and Analysis 288Presentation 288Analysis 289
APPENDIX 6A: Inventory Cost Flow Methodsin Perpetual Inventory Systems 292
First-In, First-Out (FIFO) 293Last-In, First-Out (LIFO) 293Average-Cost 294
APPENDIX 6B: Estimating Inventories 296Gross Profit Method 297Retail Inventory Method 298
A Look at IFRS 321
Chapter 7
Fraud, Internal Control, and Cash324Minding the Money in Moose Jaw 324
Fraud and Internal Control 326Fraud 326The Sarbanes-Oxley Act 326Internal Control 327Principles of Internal Control Activities 328Limitations of Internal Control 335
Cash Controls 336Cash Receipts Controls 336Cash Disbursements Controls 339
Control Features: Use of a Bank 344Making Bank Deposits 344
Writing Checks 344Bank Statements 345Reconciling the Bank Account 347Electronic Funds Transfer (EFT) System 350
Reporting Cash 352Cash Equivalents 352Restricted Cash 352
A Look at IFRS 375
Chapter 8
Accounting for Receivables 378A Dose of Careful Management KeepsReceivables Healthy 378Types of Receivables 380Accounts Receivable 380
Recognizing Accounts Receivable 381Valuing Accounts Receivable 382Disposing of Accounts Receivable 388
Notes Receivable 391Determining the Maturity Date 392Computing Interest 393
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Recognizing Notes Receivable 394Valuing Notes Receivable 394Disposing of Notes Receivable 394
Statement Presentation and Analysis 397Presentation 397Analysis 397
A Look at IFRS 419
Chapter 9
Plant Assets, Natural Resources,and Intangible Assets 422How Much for a Ride to the Beach? 422Plant Assets 424
Determining the Cost of Plant Assets 424Depreciation 427Expenditures During Useful Life 435Plant Asset Disposals 436
Natural Resources 439Intangible Assets 441
Accounting for Intangible Assets 441
Research and Development Costs 443Statement Presentation and Analysis 444
Presentation 444Analysis 445
APPENDIX 9A: Exchange of Plant Assets 449Loss Treatment 449Gain Treatment 450
A Look at IFRS 470
Chapter 10
Liabilities 474Financing His Dreams 474Current Liabilities 476
Notes Payable 476Sales Taxes Payable 477Payroll and Payroll Taxes Payable 477Unearned Revenues 480Current Maturities of Long-Term Debt 480Statement Presentation and Analysis 481
Long-Term Liabilities 483Bond Basics 483Accounting for Bond Issues 488Accounting for Bond Retirements 492Accounting for Long-Term Notes Payable 494
Statement Presentation and Analysis 496APPENDIX 10A: Present Value Concepts Relatedto Bond Pricing 501
Present Value of Face Value 501Present Value of Interest Payments
(Annuities) 503Time Periods and Discounting 504Computing the Market Price of a Bond 504
APPENDIX 10B: Effective-Interest Methodof Bond Amortization 506
Amortizing Bond Discount 506Amortizing Bond Premium 508
APPENDIX 10C: Straight-Line Amortization 510Amortizing Bond Discount 510Amortizing Bond Premium 511
A Look at IFRS 533
Chapter 11
Corporations: Organization, StockTransactions, Dividends,and Retained Earnings 536Whats Cooking? 536The Corporate Form of Organization 538
Characteristics of a Corporation 538Forming a Corporation 541Ownership Rights of Stockholders 542Stock Issue Considerations 542
Corporate Capital 545Accounting for Stock Transactions 548Accounting for Common Stock Issues 548Accounting for Treasury Stock 551Accounting for Preferred Stock 554
Dividends 556Cash Dividends 556Stock Dividends 560Stock Splits 562
Retained Earnings 564Retained Earnings Restrictions 565Prior Period Adjustments 566Retained Earnings Statement 567
Statement Presentation and Analysis 568Presentation 568Analysis 569
APPENDIX 11A: Stockholders EquityStatement 573APPENDIX 11B: Book ValueAnother Per ShareAmount 574
Book Value per Share 574Book Value versus Market Value 575
A Look at IFRS 597
Chapter 12
Investments 600Is There Anything Else We Can Buy? 600Why Corporations Invest 602Accounting for Debt Investments 603
Recording Acquisition of Bonds 603Recording Bond Interest 604Recording Sale of Bonds 604
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Accounting for Stock Investments 605Holdings of Less than 20% 606Holdings Between 20% and 50% 606Holdings of More than 50% 608
Valuing and Reporting Investments 610Categories of Securities 610Balance Sheet Presentation 614Presentation of Realized and Unrealized
Gain or Loss 614Classified Balance Sheet 615
APPENDIX 12A: Preparing Consolidated FinancialStatements 619
Consolidated Balance Sheet 619Consolidated Income Statement 623
A Look at IFRS 641
Chapter 13
Statement of Cash Flows 644Got Cash? 644Statement of Cash Flows: Usefulness
and Format 646Usefulness of the Statement of Cash Flows 646Classification of Cash Flows 646Significant Noncash Activities 648Format of the Statement of Cash Flows 648Preparing the Statement of Cash Flows 650Indirect and Direct Methods 650
Preparing the Statement of Cash FlowsIndirect Method 651
Step 1: Operating Activities 652Summary of Conversion to Net Cash Provided
by Operating ActivitiesIndirect Method 656Step 2: Investing and Financing Activities 658
Step 3: Net Change in Cash 659Using Cash Flows to Evaluate a Company 662
Free Cash Flow 662APPENDIX 13A: Using a Worksheet to Preparethe Statement of Cash FlowsIndirect Method 666
Preparing the Worksheet 667APPENDIX 13B: Statement of Cash FlowsDirect Method 672
Step 1: Operating Activities 673Step 2: Investing and Financing Activities 677Step 3: Net Change in Cash 679
APPENDIX 13C: Statement of CashFlowsT-Account Approach 681
A Look at IFRS 706
Chapter 14
Financial Statement Analysis 710It Pays to Be Patient 710Basics of Financial Statement Analysis 712
Need for Comparative Analysis 712Tools of Analysis 712
Horizontal Analysis 713Balance Sheet 714Income Statement 714Retained Earnings Statement 715
Vertical Analysis 716Balance Sheet 716Income Statement 716
Ratio Analysis 718Liquidity Ratios 719Profitability Ratios 723Solvency Ratios 727Summary of Ratios 728
Earning Power and Irregular Items 730Discontinued Operations 731Extraordinary Items 731Changes in Accounting Principle 733Comprehensive Income 734
Quality of Earnings 735Alternative Accounting Methods 735Pro Forma Income 735Improper Recognition 736
A Look at IFRS 760
Appendix A
Specimen Financial Statements:PepsiCo, Inc. A-1
Appendix B
Specimen Financial Statements: TheCoca-Cola Company B-1
Appendix C
Specimen Financial Statements:Zetar plc C-1
Appendix D
Time Value of Money D-1Nature of Interest D-1
SimpIe Interest D-1Compound Interest D-2
Future Value Concepts D-2Future Value of a Single Amount D-2Future Value of an Annuity D-4
Present Value Concepts D-7Present Value Variables D-7Present Value of a Single Amount D-7Present Value of an Annuity D-9Time Periods and Discounting D-11Computing the Present Value of a
Long-Term Note or Bond D-11
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Computing the Present Values in a CapitalBudgeting Decision D-14
Using Financial Calculators D-16Present Value of a Single Sum D-16Present Value of an Annuity D-17Useful Applications of the Financial
Calculator D-18
Appendix E
Payroll Accounting E-1Accounting for Payroll E-1
Determining the Payroll E-1Recording the Payroll E-5
Employer Payroll Taxes E-8FICA Taxes E-9Federal Unemployment Taxes E-9State Unemployment Taxes E-9Recording Employer Payroll Taxes E-9Filing and Remitting Payroll Taxes E-10
Internal Control for Payroll E-12
Appendix F
Subsidiary Ledgers andSpecial Journals F-1Expanding the LedgerSubsidiaryLedgers F-1
Subsidiary Ledger Example F-2Advantages of Subsidiary Ledgers F-3
Expanding the JournalSpecialJournals F-4
Sales Journal F-4Cash Receipts Journal F-7Purchases Journal F-11Cash Payments Journal F-13Effects of Special Journals on the
General Journal F-16
Appendix G
Other Significant Liabilities G-1Contingent Liabilities G-1
Recording a Contingent Liability G-1Disclosure of Contingent Liabilities G-2
Lease Liabilities G-3Operating Leases G-3Capital Leases G-4
Additional Liabilities for EmployeeFringe Benefits G-5
Paid Absences G-6Postretirement Benefits G-7
Photo Credits PC-1Company Index I-1Subject Index I-3
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EIGHTH
EDITION
FINANCIALACCOUNTING