transcript
- 1. W. STEVE ALBRECHT PhD, CPA, CIA, CFE Brigham Young
University EARL K. STICE PhD Brigham Young University JAMES D.
STICE PhD Brigham Young University MONTE R. SWAIN PhD, CPA, CMA
Brigham Young University TENTH EDITION W. STEVE ALBRECHT PhD, CPA,
CIA, CFE Brigham Young University EARL K. STICE PhD Brigham Young
University JAMES D. STICE PhD Brigham Young University MONTE R.
SWAIN PhD, CPA, CMA Brigham Young University ACCOUNTING Concepts
and Applications
- 2. Accounting: Concepts & Applications, 10e W. Steve
Albrecht, Earl K. Stice, James D. Stice, and Monte R. Swain
VP/Editorial Director: Jack W. Calhoun Publisher: Rob Dewey
Executive Editor: Sharon Oblinger Developmental Editor: Aaron
Arnsparger Marketing Manager: Kristen Hurd Content Project Manager:
Starratt E. Alexander Manager of Technology, Editorial: John Barans
Technology Project Editor: Scott Hamilton Manufacturing
Coordinator: Doug Wilke Production House/Composition: LEAP
Publishing Services and GGS Information Services Printer: R R
Donnelley Willard Manufacturing Division Art Director: Bethany
Casey Internal Designer: C Miller Design Cover Designer: Bethany
Casey Cover Illustrations: Larry Moore, Scott Hull Associates
Photography Manager: Deanna Ettinger Photo Researcher: Robin Samper
COPYRIGHT 2008, 2005 Thomson South-Western, a part of The Thomson
Corporation. Thomson, the Star logo, and South-Western are
trademarks used herein under license. Printed in the United States
of America 1 2 3 4 5 10 09 08 07 Student Edition ISBN 13:
978-0-324-37615-4 Student Edition ISBN 10: 0-324-37615-4
Instructors Edition ISBN 13: 978-0-324-64833-2 Instructors Edition
ISBN 10: 0-324-64833-2 ALL RIGHTS RESERVED. No part of this work
covered by the copyright hereon may be reproduced or used in any
form or by any meansgraphic, electronic, or mechanical, including
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- 3. TAKE A LOOK AT THE BEST GAME IN TOWN SEE page iv A STRATEGY
FOR SUCCESS Accounting, 10e continues to build upon a winning
strategy designed to help you meet the diverse needs of both
accounting majors and non-majors in your course. The texts solid
presentation of procedures blends with a balanced emphasis on
decision-making. Students learn how to effectively use and prepare
accounting information. With an emphasis on the activities of a
business, Accounting, 10e demonstrates accounting in action using a
wealth of actual examples from numerous leading companies
throughout the world. Student-focused learning features place
concepts within a business context. No matter what your students
career choices, this edition has the coverage to make them winners
in the game of life. THE WINNING SOLUTION STRONGER WITH EVERY ROUND
Building on the strengths that make this a market- leading text,
this edition takes the accounting experience to a new level. The
flexibility of expanded coverage, new applications in every
chapter, reorganized and streamlined content, and the innovative
online ThomsonNOW course management system are everything you need
to put your students ahead of the game! Now Its Your Turn. Take a
look for yourself! Staying on top of the game in todays competitive
world means consistently looking for ways to improve, building upon
existing strengths, and maximizing every opportunity. Accounting:
Concepts and Applications, 10e does just that to give you and your
students a competitive edge in accounting today. See for yourself
how proven accounting leaders Albrecht, Stice, Stice, and Swain
have improved this edition to help you and your students achieve
your personal best in todays classroom and the business world
beyond. ACCOUNTING: CONCEPTS AND APPLICATIONS, 10E WHERE FUTURE
BUSINESS CHAMPIONS BEGIN
- 4. YOU WIN WITH FLEXIBILITY TAILORED TO YOUR COURSE NEEDS
Always a hallmark of this text, expanded coverage within each
chapter, in addition to solid basic coverage of essential
accounting concepts, allows you to choose how much depth you wish
for exploring advanced topics. The result is maximum flexibility
for your class. YOUVE MET YOUR MATCH WITH ALL THE COVERAGE YOU NEED
ORGANIZATION PLAYS TO TODAYS BUSINESS STRENGTHS The texts unique
approach, emphasizing business activities, provides a solid
framework for understanding how an organization performs its
primary business activities. This realistic approach makes it
easier for students to understand accountings role.
- 5. STREAMLINED SOLUTIONS ADD UP TO SUCCESS FINANCIAL CHAPTERS
LEAVE NOTHING TO CHANCE Based on your feedback, the financial
statement analysis chapter appears as the last chapter (Ch. 14) in
the financial section. This now serves as a capstone chapter,
getting students into analysis. The unique chapter on financial
statement integrity (now Ch. 5) provides a strong ethical
foundation for students to better understand the impact of the
Sarbanes-Oxley Act and todays increased focus on earnings
management. MANAGERIAL CHAPTER REVISIONS ON THE ROLL Completely
reorganized, streamlined managerial chapters now center around a
new conceptual model that covers topics in a logical progression
thats ideal for the introductory level. Chapters now begin with
traditional product costing methods and discussion of cost flows
before moving to control topics, such as budgeting and variances.
Managerial chapters now conclude with decision-making subjects,
such as CVP and investments. Streamlined chapter on activity-based
costing (Ch. 17) provides an intriguing presentation thats careful
not to overwhelm students. The use of a continuing example Lily Ice
Cream Company is featured to allow students to see ongoing
applications of accounting concepts in decision-making. MODIFIED
TABLE OF CONTENTS Based on your feedback, the table of contents has
been modified to introduce topics similar to the order they are
presented on the balance sheet.
- 6. GAME ON! UNRAVEL THE PUZZLE LEARNING FEATURES STUDENTS
REALLY USE Brief Explanations that accompany Learning Objectives at
the beginning of every chapter direct students attention while
reading. They are an ideal resource to refresh student
understanding before lectures and tests. Revised Remember This
Summaries at the end of each topical section of the chapter
highlight the most important material within that section. Bulleted
lists assist with retention, while tables visually demonstrate
important relationships or connections. Improved Chapter-Opening
Exhibits place events in context, while showing both the timeline
of events for a particular business activity and the impact of
these events on the financial statements. These enhanced exhibits
provide a clear visual aid as students begin to conceptualize the
relationships between various activities of a business and the
proper accounting procedures that accompany them. FYI boxes draw
examples from real business events or situations to show students
the immediate relevance of the information they are learning. Stop
and Think features highlight thought- provoking issues or concepts
that reinforce the importance of developing critical-thinking
skills for success in todays competitive business world. Caution
boxes remind students of the important points to consider when
resolving more difficult situations or learning more complex
concepts.
- 7. FROM NOVICE TO PROFESSIONAL A variety of homework and
assignment opportunities at the end of each chapter provides a
wealth of hands-on, focused practice. Practice Exercises offer
quick-hit concept checks ideal for in-class practice. Exercises and
Problems delve deeper into concepts, testing students retention of
critical topics and procedures. Margin References to Learning
Objectives have been added to all exercise and problem materials
for quick reference and focused practice. Analytical Assignments,
following the problems in each chapter, provide dynamic new
discussion and critical-thinking activities. From discussion cases
and judgment calls, to assign- ments that require the analysis of
real company financial statements, this new section is a source for
assignments that take learning a step beyond the typical.
End-of-chapter practice exercises and problems are now available
online through the innovative ThomsonNOW for Accounting, 10e with
instant grading and homework management capabilities! VARIETY IS
THE NAME OF THE GAME! EXCEPTIONAL END-OF-CHAPTER RESOURCES
- 8. JUST WHAT YOU NEED TO KNOW AND DO NOW TECHNOLOGY NOW KEEPS
YOU AT THE TOP OF YOUR GAME The new ThomsonNOW for Accounting, 10e
provides a robust, flexible online course management system!
Instructors may assign end-of-chapter materials online while also
assessing students incoming knowledge through pre- and post-tests.
Students interact with a variety of multimedia as they create
personalized study plans that address specific gaps within their
individual understanding of accounting. ThomsonNOW is effective in
complementing the standard lecture-based course, also serving as a
strong foundation for full distance learning programs. ThomsonNOW
is compatible with WebCT and Blackboard platforms. I love the ease
of use for both students and me. I love that the program will grade
student work translating to less work for me the program taps the
power of electronic/media and enhances the learning experience For
more information, visit www.thomsonedu.com/thomsonnow by assigning
homework with ThomsonNOW, the students did better overall on the
final exam I have much less grading to do. For the student, there
is more practice which translates into better performance (This)
online manager allows me to track the work that (students) dothe
immediate feedbackleads to quicker mastery and the step-by-step
approach translates into better critical thinking.
- 9. JUST WHAT YOU NEED TO KNOW AND DO NOW ITS YOUR TURN TO SAVE
TIME AND ENSURE INTERACTIVE LEARNING Assign Online Homework All
end-of- chapter problems and exercises are available online with
hints and links to the eBook. This helps students to effectively
complete assignments. Check Course Credibility and Compliance
ThomsonNOW identifies assignment and test bank questions as they
relate to AACSB, AICPA, and IMA standards with customizable reports
that allow you to track progress as well as course content. Manage
Your Gradebook with Ease ThomsonNOW automatically grades homework
and tests and provides students with immediate results. Students
take responsibility for their own assignments as they can easily
view assignments completed, due dates, and current grades from one
convenient screen. You can even weight grades to best fit your
overall course plan. Integrated eBook Brings Content to Life
Students can read the latest edition sequentially or follow links
from specific assignments and end-of-chapter activities for
remedial review. Interactive Learning Games and Assignments
Reinforce Key Concepts Multimedia games provide a fun way to learn
accounting concepts. Both creative and challenging, these games
reinforce core content and provide immediate feedback to help
students improve knowledge and skills. Personalized Study Plans
Reinforce Student Comprehension Diagnostic pre- and post-assessment
quizzes identify gaps in knowledge and help students develop
Personalized Study Plans that provide practice with links to
tutorials, demonstration exercises, videos, eBook content,
accounting games and other multimedia tools.
- 10. QUALITY RESOURCES HELP SOLVE THE ACCOUNTING PUZZLE! FULL
SUITE OF INSTRUCTOR SUPPORT GIVES YOU THE WINNING HAND A complete
selection of reliable supplements, including PowerPoint slides and
a revised Test Bank edited personally by the authors, ensures
consistency throughout your course and full continuity with the
text! In addition to the innovative new technology offered with
ThomsonNOW , Accounting, 10e delivers a wealth of choices for your
teaching convenience. Here are just a few highlights from the
complete package: Experience Accounting Videos highlight managerial
accounting concepts in Accounting, 10e. These 14 video clips cover
many industry segments by spanning manufacturing, retail, and
service industries. Students watch managerial accounting concepts
come to life as they view brief videos that feature familiar
organizations such as Hard Rock Caf and BP. The videos are ideal
for launching a dynamic, interactive lecture in the classroom.
These videos are available in ThomsonNOW or as a standalone item.
Improved Test Bank now tags questions to AACSB standards as well as
AICPA (in the Financial portion) and IMA standards (in the
Managerial portion) so you can efficiently monitor student
progress. This is particularly valuable during the accreditation
process or when your school wants to standardize assessment. Test
bank questions are also identified as easy, moderate, and difficult
to help you create exams best suited for your individual students.
ExamView Electronic Testing Software allows you to easily generate
and customize tests from the reliable test bank questions for
traditional or online quizzes or exams. Instructors Manual includes
an overview of chapter Learning Objectives, detailed lecture
outlines, descriptions of key illustrations and boxed items with
page references, and a topical overview grid of end-of-chapter
assignments with assignments classified by level of difficulty and
estimated time of completion. Companion Web Site Find all of the
resources you and your students need on the texts companion Web
site. Online, password-protected access allows you to easily
download numerous valuable resources and teaching tools, including
Solutions Manual, Instructors Manual, PowerPoint slides, and
Spreadsheet Solutions. Students can easily access Student
Spreadsheet Templates.They can test their understanding with
interactive online quizzes and other interactive learning tools.
www.thomsonedu.com/accounting/albrecht
- 11. Content Providers: Cameron Pratt Brigham Young University
Jason Bond Brigham Young University John Morley Brigham Young
University Michael and Becky Blue Bloomsburg University David ODell
McPherson College Dave Cottrell Brigham Young University Verifiers:
James Emig Villanova University Beth Woods Howell, MI W. Steve
Albrecht James D. Stice Earl K. Stice Monte R. Swain The tenth
edition of Accounting: Concepts and Applications reflects many
comments from colleagues and students, all of which are deeply
appreciated. In particular we would like to thank the following:
Laurie Hays Western Michigan University Samuel Tiras University of
Buffalo Bob Hartman University of Iowa Cathy Lumbattis Southern
Illinois University- Carbondale Hubert Glover Howard University
Diane Tanner University of North Florida Kem Edwards Bryant College
James Bannister University of Hartford Linda Chase Baldwin Wallace
College K.D. Hatheway-Dial University of Idaho Doug Asbury
University of Findlay Louann Cummings University of Findlay Josie
Mathias Mercer County Community College Ibrahim Badawi St. Johns
University Christie Comunale Long Island University- C.W. Post
Keren Deal Auburn University Rafik Elias California State
University- Los Angeles Marian Boscia Kings College Mary MacAusland
Reading Area Community College Bonnie Slager Santiago Canyon
College Joey Styron Augusta State University Robert Holtfreter
Central Washington University Donald Raux Siena College William
Braberry Bluefield State College William Goodman Bluefield State
College Anne Rich Quinnipac University Paul Holt Texas A&M
University- Kingsville Ralph Lindeman Kent State University Susan
Minke Indiana University- Purdue University at Fort Wayne Lynne
Shoaf Belmont Abbey College ACKNOWLE DG M E NTS In addition, we
would like to thank the following content providers and verifiers
for their profes- sional services and consideration in providing a
more concise, higher-quality product.
- 12. W. Steve Albrecht W.SteveAlbrechtistheAssociateDean of the
Marriott School of Management and Andersen Professor at Brigham
Young University. Dr. Albrecht, a cer- tified public accountant,
certified in- ternal auditor, and certified fraud examiner, came to
BYU in 1977 after teaching at Stanford and at the University of
Illinois. Earlier, he worked as a staff accountant for Deloitte
& Touche. Prior to becom- ing associate dean of the Marriott
School, Dr. Albrecht served for nine years as the director of the
School of Accountancy and Information Systems at BYU. Dr. Albrecht
received a bache- lors degree in accounting from Brigham Young
University and his MBA and PhD degrees from the University of
Wisconsin at Madison. He is past President of the American
Accounting Association and the Association of Certified Fraud
Examiners. He was a former member of the Board of Regents of the
Institute of Internal Auditors and the Board of Directors of the
Utah Association of CPAs. He was also president of the Accounting
Program Leadership Group (chairs of accounting departments and
programs) and served on the task force of the American Institute of
CPAs that wrote a fraud auditing standard. He was a mem- ber of the
Committee of Sponsoring Organizations (COSO) from 19972000 and is
past president of Beta Alpha Psi, the national accounting honors
fraternity. He was a member of the AICPA Council and chaired their
Pre- Certification Executive Education Committee. Dr. Albrecht has
done extensive research on business fraud. His research has
resulted in the publica- tion of over one hundred articles in
academic and professional journals. He is the author or co-author
of over 20 books or monographs, several of which are on fraud. His
financial and principles of accounting textbooks are in their 10th
editions. In 2000, he completed a major study (Accounting
Education: Charting the Course through a Perilous Future) on the
future of accounting education in the United States. His fraud
textbook is currently in its second edition. He is a frequent
speaker on the topics of fraud examination, ac- counting education,
and personal financial planning. Dr. Albrecht has received numerous
awards and honors, including BYUs highest faculty honor, the Karl
G. Maeser Distinguished Faculty Lecturer Award for superior
scholarship and teaching. He has also received the BYU School of
Managements Outstanding Faculty Award and the BYU Outstanding
Researcher Award. He has been recognized by Beta Alpha Psi, the
Federation of Schools of Accountancy, the Auditing Section of the
American Association and the AICPA as Educator of the Year. He has
also received awards for outstanding teaching at Stanford
University, the University of Illinois, and the University of
Wisconsin. In 1997, 2001, 2002, and 2003 he was chosen as one of
the 100 most influential accounting professionals in the United
States by Accounting Today magazine. In 1998, he received the
Cressey Award from the Association of Certified Fraud Examiners,
the highest award given for a lifetime of achievement in fraud
detection and deterrence. (Past win- ners were Jane Bryant Quinn of
Newsweek magazine and Rudolph Giuliani, past United States Attorney
for the Southern District of New York and past mayor of New York
City.) In 2002, in honor of his contribution in fighting fraud, the
Association of Certified Fraud Examiners named one of the buildings
at their headquarters after Dr. Albrecht. And in 2001, in
recognition of his contributions to BYU and to academia, an
anonymous donor endowed the W. Steve Albrecht Professorship in
Accounting. Dr. Albrecht has consulted with numerous organizations,
including a variety of Fortune 500 compa- nies, major financial
institutions, the United Nations, FBI, and other organizations, and
he has been an ex- pert witness in some of the largest fraud cases
in America. He currently serves on the audit committees and boards
of directors of four public and three private companies. Dr.
Albrecht is married to the former LeAnn Christiansen, and they have
six children and 10 grandchildren. AB OUT TH E AUTHOR S
- 13. About the Authors xiii Earl K. Stice Earl K. Stice is the
PricewaterhouseCoopers Professor of Accounting in the School of
Accountancy and Information Systems at Brigham Young University
where he has been on the faculty since 1998. He holds bachelors and
masters degrees from Brigham Young University and a PhD from
Cornell University. Dr. Stice has taught at Rice University, the
University of Arizona, Cornell University, and the Hong Kong
University of Science and Technology (HKUST). He won the Phi Beta
Kappa teaching award at Rice University and was twice selected at
HKUST as one of the ten best lecturers on campus. Dr. Stice has
also taught in a variety of executive education and corporate
training programs in the United States, Hong Kong, China, and South
Africa, and he is currently on the executive MBA faculty of the
China Europe International Business School in Shanghai. He has
published papers in the Journal of Financial and Quantitative
Analysis, The Accounting Review, Review of Accounting Studies,
Issues in Accounting Education, and the Journal of Accounting
Education, and his research on stock splits has been cited in
Business Week, Money, and Forbes. Dr. Stice has presented his
research results at seminars in the United States, Finland, Taiwan,
Australia, and Hong Kong. He is co-author of Intermediate
Accounting, 16th edition and Financial Accounting: Reporting and
Analysis, 7th Edition. Dr. Stice and his wife, Ramona, are the
parents of seven children: Derrald, Han, Ryan Marie, Lorien, Lily,
Taraz, and Kamila. James D. Stice James D. Stice is the
Distinguished Teaching Professor in the Marriott School of
Management at Brigham Young University. He is currently the
Director of the Marriott Schools MBA Program. He holds bachelors
and masters degrees from BYU and a PhD from the University of
Washington, all in accounting. Professor Stice has been on the
faculty at BYU since 1988. During that time, he has been selected
by graduating accounting students as Teacher of the Year on
numerous occasions, he was selected by his peers in the Marriott
School at BYU to receive the Outstanding Teaching Award in 1995,
and in 1999 he was selected by the University to receive its
highest teaching award, the Maeser Excellence in Teaching Award.
Professor Stice has taught at INSEAD in France and at the China
Europe International Business School in Shanghai. Professor Stice
has published articles in The Journal of Accounting Research, The
Accounting Review, Decision Sciences, Issues in Accounting
Education, The CPA Journal, and other academic and professional
journals. In addition to this textbook, he has published two other
textbooks: Financial Accounting: Reporting and Analysis, and
Intermediate Accounting. In addition to his teaching and research,
Dr. Stice has been involved in executive education for such
companies as IBM, Bank of America, Ernst & Young, RSM McGladrey
and currently serves on the board of directors of Nutraceutical
Corporation. Dr. Stice and his wife, Kaye, have seven children:
Crystal, J.D., Ashley, Whitney, Kara, Skyler, and Cierra and two
grandchildren. Monte R. Swain Monte R. Swain is the Deloitte
Professor of Accounting in the School of Accountancy at Brigham
Young University. He received his PhD in managerial accounting and
information systems from Michigan State University and joined the
BYU faculty in 1991. His dissertation, which examined the impact of
information load on capital budgeting decision processes, was
awarded an Institute of Management Accountants Dissertation Grant.
At BYU, Dr. Swain has received the Teaching Excellence Award for
Management Skills in 1994, 1995, and 1997; the Marriott School of
Management Outstanding Teacher in 1999. In addition to his research
work involving human decision processes, Dr. Swain studies and
writes on activity-based cost- ing, the Balanced Scorecard, and the
Theory of Constraints in management information systems. He has
published papers in leading academic and practitioner journals such
as Behavioral Research in Accounting, Decision Sciences, Strategic
Finance, and The Internal Auditor. In addition, Dr. Swain is deeply
commit- ted to the scholarship of teaching and has published a
number of papers and cases on education in Issues in Accounting
Education, Journal of Accounting Education, The Journal of
Accounting Case Research, Journal of Education for Business, and
the Case Research Journal. Dr. Swain sits on the editorial board
for Issues in Accounting Education. Dr. Swain has spent significant
time working with or researching or- ganizations such as IBM,
Clorox, and Deere and Company. He is a Certified Public Accountant
and a Certified Management Accountant. Dr. Swain took an academic
leave from BYU from July 1999 to July 2000 to serve as the Chief
Financial Officer for Authorize.Net (payment-processing service for
e-commerce). As a result of that experience, he has published
papers and cases on the impact of eCommerce on financial and
managerial accounting. Dr. Swain is active in the American
Accounting Association where he serves in various capacities
helping to promote the objectives of that organization. He and his
wife, Shannon, have seven children.
- 14. SU PPLE M E NTS For the Instructor. ThomsonNOW for
Accounting: Concepts and Applications, 10e Description: Save time
and ensure all of your studentregardless of their majorhave the
understanding they need of accounting procedures and concepts with
the integrated, online innovation of ThomsonNOW. This integrated
online course management and learn- ing system combines the best of
current technology to save you time in planning your course and
manag- ing student assignments. You can teach with the latest
built-in technology support, reinforce comprehen- sion with
customized student learning paths, effi- ciently test and
automatically grade assignments with reports that correspond to
AACSB, AICPA and IMA standards. ThomsonNOW is effective for the
stan- dard lecture-based course or can serve as a strong foundation
for full distance-learning programs. For your convenience,
ThomsonNOW is even com- patible with WebCT and Blackboard . For
more information, visit www.thomsonedu. com/thomsonnow. Experience
Accounting Videos Description: The ideal tool for launching a
dynamic, interactive lec- ture in your course, these new Experience
Accounting Videos highlight managerial accounting concepts in ac-
tion from Accounting, 10e. Each brief video clip, which is
approximately five minutes, features recognizable companies, such
as Hard Rock Caf and BP, who are using managerial accounting to
strengthen their busi- ness performance. These videos are available
in ThomsonNOW or standalone via the web. Instructors Manual
Description: Simplify class preparation with these detailed lecture
outlines, overview of Learning Objectives, descrip- tions of key
illustrations and boxed items with page references, and topical
overview grid of end-of- chapter assignments with assignments
classified by level of difficulty and estimated time of completion.
Available online or on the Instructors Resource CD- ROM.
Instructors Resource CD-ROM ISBN: 0324645783 Description: Place all
of the key teaching resources you need for a winning course at your
fingertips with this all-in- one source. Find everything you need
to plan, teach, grade and assess student understanding and
progress. This CD includes the Solutions Manual, Instructors
Manual, Test Bank in Word and ExamView , PowerPoint slides,
spreadsheet solutions, and solu- tions to the Cumulative
Spreadsheet Analysis assign- ments from the textbook. PowerPoint
Presentation Slides Description: Bring your lectures to life and
clarify difficult con- cepts with these slides for this edition to
capture and keep your students attention. Ideal as guides for stu-
dent note-taking and study, print the slides or simply use with an
overhead projector. Available online or on the Instructors Resource
CD-Rom. Solutions Manual ISBN: 0324648308 and 0324648316
Description: Carefully verified to ensure accuracy, these solutions
and answers to all end-of-chapter materials from the textbook help
you easily plan, assign and efficiently grade assignments.
Solutions Transparencies ISBN: 0324645848 and 032464583X
Description: Clarify learning for students with these acetate mas-
ters that detail solutions for the exercises and prob- lems from
the text. These are specifically created for instructors who wish
to use overheads in class. Test Bank ISBN: 0324645775 and
0324645767 Description: This revised test bank helps you
efficiently assess your students understanding with problems and
questions that are now tagged to AACSB and AICPA standards. This is
particularly valuable during the ac- creditation process or when
your school wants to standardize assessment. Test bank questions
are also identified by easy, medium or challenging level of
difficulty for easy selection. Title: ExamView 5.0 Computerized
Test Bank Description: This easy-to-use test-creation program for
Microsoft Windows or Macintosh contains all questions from the
printed Test Bank with AACSB, AICPA and IMA standards and level of
difficulty indicated for each question. Its simple to customize
tests to your spe- cific class needs as you edit or create
questions and
- 15. Supplements xv store customized exams. This is an ideal
tool for online testing. Available on the IRCD. WebTutor Toolbox
for Blackboard and WebCT ISBN: 0534272401 (Blackboard) or
053427241x (WebCT) Description: Leverage the power of the Internet
and bring your course to life with this course management pro-
gram. You or your students can use this wealth of in- teractive
resources with those on the texts companion website to supplement
the classroom ex- perience and ensure positive outcomes. Use this
ef- fective resource as an integrated solution for your distance
learning or web-enhanced course. Visit
http://webtutor.swlearning.com. Working Papers t/a Financial
Accounting (chapters 114) ISBN: 0324648227 Description: Verified by
the text authors to ensure accuracy and quality consistent with the
text, the working papers for problems from the financial accounting
chapters in the textbook are provided together in one conve- nient
resource. Albrecht/Stice/Stice/Swains Accounting: Concepts and
Applications, 10e Companion Web Site URL:
www.thomsonedu.com/accounting/albrecht Description: Now you and
your students can reach the top of your game in accounting with
immediate access to a rich array of teaching and learning resources
at Accounting: Concepts and Applications, 10es inter- active
companion website. This resource features chapter-by-chapter online
tutorial quizzes, a final exam, chapter outlines and review, online
learning games, flashcards, expanded coverage of certain top- ics
not found in the textbook and more! Easily down- load the
instructor resources you need from the password-protected,
instructor-only section of the site. For Students. Companion Web
Site Description: Now you can stay on top of your game, master the
pro- cedures and concepts of accounting and earn the grade you want
in your accounting course with the rich ar- ray of learning
resources at the Accounting: Concepts and Applications, 10e
interactive companion web- site. Designed specifically for your
accounting needs, this website features chapter-by-chapter online
quizzes and solutions, learning games, flashcards, ex- panded
coverage of topics not covered in the text, and more! Working
Papers t/a Financial Accounting (chap- ters 114) ISBN: 0324648227
Description: The working papers for problems from the textbook are
provided together in one resource for your con- venience. Verified
by the text authors to ensure accuracy and consistent quality,
youll find the tools you need to enhance your learning experience.
TM
- 16. This page intentionally left blank
- 17. PART ONE: FINANCIAL REPORTING AND THE ACCOUNTING CYCLE 1 1
Accounting Information: Users and Uses . . . . . . . . . . . . . .
. . . . . . . . 3 2 Financial Statements: An Overview. . . . . . .
. . . . . . . . . . . . . . . . . . . 28 3 The Mechanics of
Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 75 4 Completing the Accounting Cycle . . . . . . . . . . . . . .
. . . . . . . . . . . 129 5 Ensuring the Integrity of Financial
Information . . . . . . . . . . . . . . . . 185 PART TWO: OPERATING
ACTIVITIES 223 6 Selling a Product or a Service . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 224 7 Inventory . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 282 8 Completing the Operating Cycle . . . . . . . . . . . . .
. . . . . . . . . . . . . 341 PART THREE: INVESTING AND FINANCING
ACTIVITIES 387 9 Investments in Property, Plant, and Equipment and
in Intangible Assets . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 388 10 Long-Term Debt Financing . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 11
Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 513 12 Investments in Debt and Equity
Securities. . . . . . . . . . . . . . . . . . . . 559 PART FOUR:
OTHER DIMENSIONS OF FINANCIAL REPORTING 611 13 The Statement of
Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
613 14 Introduction to Financial Statement Analysis . . . . . . . .
. . . . . . . . . . 667 PART FIVE: FOUNDATIONS OF MANAGEMENT
ACCOUNTING 725 15 Management Accounting and Cost Concepts. . . . .
. . . . . . . . . . . . . 727 16 Cost Flows and Business
Organizations. . . . . . . . . . . . . . . . . . . . . . 757 17
Activity-Based Costing . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 827 B R I E F CONTE NTS
- 18. xviii Contents PART SIX: CONTROL IN A MANAGEMENT ACCOUNTING
SYSTEM 869 18 Budgeting and Control . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 870 19 Controlling Cost, Profit,
and Investment Centers . . . . . . . . . . . . . . . 942 PART
SEVEN: MAKING DECISIONS USING MANAGEMENT ACCOUNTING 1007 20 Cost
Behavior and Decisions Using C-V-P Analysis . . . . . . . . . . . .
. 1009 21 Relevant Information and Decisions . . . . . . . . . . .
. . . . . . . . . . . . 1075 22 Capital Investment Decisions . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 1118 PART EIGHT:
CONTINUOUS IMPROVEMENT IN MANAGEMENT ACCOUNTING 1175 23 New
Measures of Performance . . . . . . . . . . . . . . . . . . . . . .
. . . . . 1177 APPENDICES A Wal-Mart 2006 Annual Report. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . A-1 B Glossary . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . B-1 C Check Figures. . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . C-1 INDEXES Subject .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . SI-1 Real World Company. . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . CI-1
- 19. P A R T O N E FI NANCIAL R E PORTI NG AN D TH E ACCOU NTI
NG CYCLE 1 1 ACCOUNTING INFORMATION: USERS AND USES . . . . . . . .
. . . . . 3 Whats the Purpose of Accounting? . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 5 The
Relationship of Accounting to Business . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 7 Who Uses Accounting Information . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 10 Investors . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 11 Management . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 11 Other Users of Financial Information. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 11 Within What
Kind of Environment Does Accounting Operate?. . . . . . . . . . . .
. . . . 13 The Significance and Development of Accounting Standards
. . . . . . . . . . . . . . 13 The Financial Accounting Standards
Board . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Other Organizations . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 14 International Business
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 15 Ethics in Accounting . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 17 So, Why Should I
Study Accounting? . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 20 End-of-Chapter Materials . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2 FINANCIAL STATEMENTS: AN OVERVIEW . . . . . . . . . . . . . . . .
. . 28 The Financial Statements. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 30 The Balance
Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 31 The Income Statement. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 38 The Statement of Cash Flows. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 43 How the
Financial Statements Tie Together . . . . . . . . . . . . . . . . .
. . . . . . . . . . 45 Notes to the Financial Statements . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Summary of Significant Accounting Policies. . . . . . . . . . . . .
. . . . . . . . . . . . . . 46 Additional Information about Summary
Totals . . . . . . . . . . . . . . . . . . . . . . . . 46
Disclosure of Information Not Recognized . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 46 Supplementary Information . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 47 The External Audit . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 47 Fundamental
Concepts and Assumptions . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 49 The Separate Entity Concept . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
The Assumption of Arms-Length Transactions . . . . . . . . . . . .
. . . . . . . . . . . . . 49 The Cost Principle . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 50 The Monetary Measurement Concept . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 50 The Going Concern
Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 50 End-of-Chapter Materials . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
CONTE NTS
- 20. xx Contents 3 THE MECHANICS OF ACCOUNTING. . . . . . . . .
. . . . . . . . . . . . . . 75 How Can We Collect All This
Information?. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 76 How Do Transactions Affect the Accounting Equation? . . . .
. . . . . . . . . . . . . . . . . 79 The Accounting Equation . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 79 Using Accounts to Categorize Transactions. . . . . . . .
. . . . . . . . . . . . . . . . . . . . 80 Expanding the Accounting
Equation to Include Revenues, Expenses, and Dividends . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 84 Why Should I
Understand the Mechanics of Accounting? . . . . . . . . . . . . . .
. . . 84 How Do We Record the Effects of Transactions?. . . . . . .
. . . . . . . . . . . . . . . . . . . 86 Acquiring Cash, Either
from Owners or by Borrowing . . . . . . . . . . . . . . . . . . .
87 Acquiring Other Assets . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 88 Selling Goods or
Providing Services . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 91 Collecting Cash and Paying Obligations . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 93 A Note on
Journal Entries. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 95 Posting Journal Entries and
Preparing a Trial Balance . . . . . . . . . . . . . . . . . . . . .
. 97 Determining Account Balances . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 98 Illustration of the
First Three Steps in the Accounting Cycle. . . . . . . . . . . . .
. . . . 99 Where Do Computers Fit In All This?. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 104 End-of-Chapter
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 106 4 COMPLETING THE ACCOUNTING CYCLE . .
. . . . . . . . . . . . . . . 129 Accrual Accounting . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 130 Periodic Reporting. . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 131 Accrual-
versus Cash-Basis Accounting . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 132 Adjusting Entries. . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 135 Unrecorded Receivables . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 136 Unrecorded
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 136 Prepaid Expenses . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 138 Unearned Revenues . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 140 Preparing
Financial Statements . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 143 Financial Statement Preparation . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 145 The Audit . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 146 Closing the Books. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 148 Real and Nominal Accounts . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 148 Closing Entries .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 149 Preparing a Post-Closing Trial
Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
149 A Summary of the Accounting Cycle . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 151 End-of-Chapter Materials .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 152 5 ENSURING THE INTEGRITY OF FINANCIAL INFORMATION
. . . 185 The Types of Problems that Can Occur . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 187 Types of Errors in
the Reporting Process. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 188
- 21. Contents xxi Disagreements in Judgment . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Fraudulent Financial Reporting . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 189 Safeguards Designed to
Minimize Problems. . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 190 The Control Environment . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 192 Control
Activities (Procedures) . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 192 Reasons for Earnings Management . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
195 Meet Internal Targets . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 196 Meet External
Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 196 Income Smoothing . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
196 Window Dressing for an IPO or a Loan . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 197 The Earnings Management
Continuum . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
197 Is Earnings Management Ethical? . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 199 Personal Ethics . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 200 The Sarbanes-Oxley Act. . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Public Company Accounting Oversight Board. . . . . . . . . . . . .
. . . . . . . . . . . . 201 Constraints on Auditors . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
201 Constraints on Management . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 202 The Role of Auditors in
the Accounting Process . . . . . . . . . . . . . . . . . . . . . .
. . . 202 Internal Auditors. . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 202 External
Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 203 What Do Auditors Do? . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 204 Are Outside (Independent) Auditors Independent? . . . .
. . . . . . . . . . . . . . . . . 206 The Securities and Exchange
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 207 The Effect of the 1934 Act on Independent Accountants . . . .
. . . . . . . . . . . . . 208 End-of-Chapter Materials . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 209 Comprehensive Problem 15 . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 220 P A R T T W O OPE RATI NG
ACTIVITI ES 223 6 SELLING A PRODUCT OR A SERVICE . . . . . . . . .
. . . . . . . . . . . . 224 Major Activities of a Business. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
228 Recognizing Revenue . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 230 When Should Revenue
Be Recognized? . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 231 Application of the Revenue Recognition Criteria. . . .
. . . . . . . . . . . . . . . . . . . 232 Cash Collection . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 234 Sales Discounts . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
234 Sales Returns and Allowances. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 235 Control of Cash. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 236 Accounting for Credit Customers Who Dont Pay
. . . . . . . . . . . . . . . . . . . . . . . . 237 Direct
Write-Off Method. . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 238 The Allowance Method . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 239 Real-World Illustration of Accounting for Bad Debts . . .
. . . . . . . . . . . . . . . . 243
- 22. xxii Contents Assessing How Well Companies Manage Their
Receivables . . . . . . . . . . . . . . . . . 244 Recording
Warranty and Service Costs Associated with a Sale . . . . . . . . .
. . . . . . 245 Reconciling the Bank Account. . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 247 Foreign
Currency Transactions . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 250 Foreign Currency Transaction
Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
250 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 253 7 INVENTORY . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 282 Inventory and Cost of Goods Sold . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 285 What is
Inventory? . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 286 What Costs Are Included in
Inventory Cost? . . . . . . . . . . . . . . . . . . . . . . . . . .
287 Who Owns the Inventory? . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 287 Ending Inventory and
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . .
. . . 288 Accounting for Inventory Purchases and Sales. . . . . . .
. . . . . . . . . . . . . . . . . . . . 289 Overview of Perpetual
and Periodic Systems. . . . . . . . . . . . . . . . . . . . . . . .
. . 289 Perpetual and Periodic Journal Entries . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 290 Counting Inventory and
Calculating Cost of Goods Sold . . . . . . . . . . . . . . . . . .
. 295 Taking a Physical Count of Inventory . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 295 The Income Effect of an
Error in Ending Inventory . . . . . . . . . . . . . . . . . . . .
296 Inventory Cost Flow Assumptions . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 297 Specific Identification
Inventory Cost Flow . . . . . . . . . . . . . . . . . . . . . . . .
. . . 298 FIFO Cost Flow Assumption . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 300 LIFO Cost Flow
Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 300 Average Cost Flow Assumption . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 A
Comparison of All Inventory Costing Methods. . . . . . . . . . . .
. . . . . . . . . . . 301 Assessing How Well Companies Manage Their
Inventories. . . . . . . . . . . . . . . . . . 303 Evaluating the
Level of Inventory . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 303 Impact of the Inventory Cost Flow
Assumption. . . . . . . . . . . . . . . . . . . . . . . . 304
Number of Days Purchases in Accounts Payable . . . . . . . . . . .
. . . . . . . . . . . 304 Inventory Errors . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 306 Complications of the Perpetual Method with LIFO and Average
Cost . . . . . . . . . . 309 Reporting Inventory at Amounts below
Cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . 311
Inventory Valued at Net Realizable Value . . . . . . . . . . . . .
. . . . . . . . . . . . . . 311 Inventory Valued at Lower of Cost
or Market. . . . . . . . . . . . . . . . . . . . . . . . . 311
Method of Estimating Inventories. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 313 The Gross Margin Method . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 314 End-of-Chapter Materials . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 315 EXPANDED
material EXPANDED material
- 23. Contents xxiii 8 COMPLETING THE OPERATING CYCLE . . . . . .
. . . . . . . . . . . . . 341 Employee Compensation. . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
344 Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 345 Compensated
Absences . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 346 Bonuses. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 347 Stock Options . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347
Postemployment Benefits. . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 348 Pensions . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 348 Postretirement Benefits Other Than
Pensions . . . . . . . . . . . . . . . . . . . . . . . . . 350
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 351 Sales Taxes .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 351 Property Taxes . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 351 Income Taxes . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352
Deferred Tax Example. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 353 Contingencies . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 355 Environmental Liabilities . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356
Capitalize versus Expense . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 358 Research and
Development . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 359 Advertising . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 359 Summarizing Operations on an Income Statement. . . . . . .
. . . . . . . . . . . . . . . . . 360 Other Revenues and Expenses.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 360 Extraordinary Items . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 360 Earnings per
Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 362 Differing Income Statement Formats.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363
End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 364 Comprehensive Problem
68 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 384 P A R T T H R E E I NVESTI NG AN D FI NANCI NG ACTIVITI ES
387 9 INVESTMENTS IN PROPERTY, PLANT, AND EQUIPMENT AND IN
INTANGIBLE ASSETS . . . . . . . . . . . . . . . . . 388 Nature of
Long-Term Operating Assets . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 391 Deciding Whether to Acquire a Long-Term
Operating Asset. . . . . . . . . . . . . . . . . 392 Accounting for
Acquisition of Property, Plant, and Equipment . . . . . . . . . . .
. . . . . 393 Assets Acquired by Purchase . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 394 Assets
Acquired by Leasing . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 394 Assets Acquired by
Self-Construction . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 397 Acquisition of Several Assets at Once . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 397
- 24. xxiv Contents Calculating and Recording Depreciation
Expense . . . . . . . . . . . . . . . . . . . . . . . . 399
Straight-Line Method of Depreciation . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 400 Units-of-Production Method of
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . .
402 A Comparison of Depreciation Methods . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 403 Partial-Year Depreciation
Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 403 Units-of-Production Method with Natural Resources . . . .
. . . . . . . . . . . . . . . . 404 Repairing and Improving
Property, Plant, and Equipment . . . . . . . . . . . . . . . . . .
405 Recording Impairments of Asset Value . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 407 Recording Decreases in
the Value of Property, Plant, and Equipment . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 407 Recording Increases in the Value of Property, Plant, and
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 408 Disposal of Property,
Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 409 Discarding Property, Plant, and Equipment . . . . . .
. . . . . . . . . . . . . . . . . . . . 409 Selling Property,
Plant, and Equipment. . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 410 Exchanging Property, Plant, and Equipment. . . . .
. . . . . . . . . . . . . . . . . . . . . 410 Accounting for
Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 411 Amortization of Intangible Assets . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414
Impairment of Intangible Assets . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 415 Measuring Property, Plant,
and Equipment Efficiency . . . . . . . . . . . . . . . . . . . . .
416 Evaluating the Level of Property, Plant, and Equipment. . . . .
. . . . . . . . . . . . 416 Industry Differences in Fixed Asset
Turnover . . . . . . . . . . . . . . . . . . . . . . . . . 416
Accelerated Depreciation Methods. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 417 Declining-Balance Method of
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . .
418 Sum-of-the-Years-Digits Method of Depreciation . . . . . . . .
. . . . . . . . . . . . . . . 419 A Comparison of Depreciation
Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
420 Changes in Depreciation Estimates and Methods. . . . . . . . .
. . . . . . . . . . . . . . . . 422 End-of-Chapter Materials . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 423 10 LONG-TERM DEBT FINANCING. . . . . . . . . . . . .
. . . . . . . . . . . . . 453 Measuring Long-Term Liabilities . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
455 Present Value and Future Value Concepts . . . . . . . . . . . .
. . . . . . . . . . . . . . . 455 Computing the Present Value of an
Annuity . . . . . . . . . . . . . . . . . . . . . . . . . 459
Accounting for Long-Term Liabilities . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 461 Interest-Bearing Notes . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 462 Mortgages Payable . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463
Accounting for Lease Obligations. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 465 Operating Leases . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 467 The Nature of Bonds. . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468
Types of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 468 Characteristics of
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 469 EXPANDED material
- 25. Contents xxv Determining a Bonds Issuance Price . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 469 Accounting
for Bonds Payable Issued at Face Value. . . . . . . . . . . . . . .
. . . . . 473 Bond Retirements before Maturity . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 475 Using
Debt-Related Financial Ratios . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 476 Debt Ratio and Debt-to-Equity
Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 476 Times Interest Earned Ratio . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 477 Bonds Issued at a
Discount or at a Premium . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 478 Accounting for Bonds Issued at a Discount . . . .
. . . . . . . . . . . . . . . . . . . . . . 478 Accounting for
Bonds Issued at a Premium . . . . . . . . . . . . . . . . . . . . .
. . . . . 480 Effective-Interest Amortization . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 481
End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 488 11 EQUITY FINANCING.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
513 Raising Equity Financing . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 516 Difference
between a Loan and an Investment. . . . . . . . . . . . . . . . . .
. . . . . . 516 Proprietorships and Partnerships . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 517 Corporations
and Corporate Stock . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 518 Characteristics of a Corporation . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518
Starting a Corporation . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 519 Common Stock . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 520 Preferred Stock . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
520 Accounting for Stock . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 521 Issuance of
Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 521 Accounting for Stock
Repurchases. . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 523 Balance Sheet Presentation . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 525 Retained
Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 526 Cash Dividends . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 526 Dividend Payout Ratio . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530 Other
Equity Items . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 531 Equity Items that Bypass
the Income Statement . . . . . . . . . . . . . . . . . . . . . . .
531 Statement of Stockholders Equity . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 533 End-of-Chapter Materials
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 534 12 INVESTMENTS IN DEBT AND EQUITY SECURITIES .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 559 Why Companies Invest in Other Companies . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 561 Classifying a
Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 564 Held-to-Maturity Securities. . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 565 Equity Method Securities . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 565 Trading and
Available-for-Sale Securities . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 566 Why the Different Classifications? . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566
EXPANDED material
- 26. xxvi Contents Accounting for Trading and Available-for-Sale
Securities. . . . . . . . . . . . . . . . . . . . 568 Accounting
for the Purchase of Securities . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 568 Accounting for the Return Earned on an
Investment . . . . . . . . . . . . . . . . . . . 569 Accounting for
the Sale of Securities . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 570 Accounting for Changes in the Value of
Securities . . . . . . . . . . . . . . . . . . . . . . . 571
Changes in the Value of Trading Securities. . . . . . . . . . . . .
. . . . . . . . . . . . . . 571 Changes in the Value of
Available-for-Sale Securities . . . . . . . . . . . . . . . . . . .
571 Subsequent Changes in Value . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 572 Accounting for
Held-to-Maturity Securities . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 574 Accounting for the Initial Purchase . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 574
Accounting for Bonds Purchased between Interest Dates . . . . . . .
. . . . . . . . . 575 Accounting for the Amortization of Bond
Discounts and Premiums . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 576 Accounting
for the Sale or Maturity of Bond Investments. . . . . . . . . . . .
. . . . 579 Accounting for Equity Investments Using the Equity
Method . . . . . . . . . . . . . . . . 580 Illustrating the Equity
Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 581 Consolidated Financial Statements . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 582
End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 585 Comprehensive Problem
912 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 609 P A R T F O U R OTH E R DI M E NSIONS OF FI NANCIAL R E PORTI
NG 611 13 THE STATEMENT OF CASH FLOWS. . . . . . . . . . . . . . .
. . . . . . . . 613 Whats the Purpose of a Statement of Cash Flows?
. . . . . . . . . . . . . . . . . . . . . . . 615 What Information
Is Reported in the Statement of Cash Flows? . . . . . . . . . . . .
. . 616 Major Classifications of Cash Flows . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 616 Noncash Investing and
Financing Activities . . . . . . . . . . . . . . . . . . . . . . .
. . . 619 Cash Flow Patterns . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 619 Preparing a
Statement of Cash FlowsA Simple Example . . . . . . . . . . . . . .
. . . . 620 Analyzing the Other Primary Financial Statements to
Prepare a Statement of Cash Flows . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 623 A Six-Step Process for
Preparing a Statement of Cash Flows . . . . . . . . . . . . . . 625
An Illustration of the Six-Step Process . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 626 Using Information from the
Statement of Cash Flows to Make Decisions . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 635 End-of-Chapter Materials . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 637 EXPANDED
material
- 27. Contents xxvii 14 INTRODUCTION TO FINANCIAL STATEMENT
ANALYSIS . . . . . . 667 The Need for Financial Statement Analysis
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669
Widely Used Financial Ratios . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 671 Debt Ratio. . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 671 Current Ratio . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 671 Return on Sales. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 672 Asset
Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 672 Return on Equity . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 673 Price-Earnings Ratio . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673
Common-Size Financial Statements. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 676 DuPont Framework. . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 679 Profitability Ratios . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680
Efficiency Ratios . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 680 Leverage Ratios. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 681 More Efficiency Ratios. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 682 Accounts Receivable Efficiency . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 683 Inventory Efficiency
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 683 Property, Plant, and Equipment Efficiency .
. . . . . . . . . . . . . . . . . . . . . . . . . . 684 More
Leverage Ratios . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 685 Debt-to-Equity Ratio . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 685 Times Interest Earned Ratio . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 686 Cash Flow
Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 686 Usefulness of Cash Flow
Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 687 Cash Flow to Net Income . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 687 Cash Flow
Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 688 Potential Pitfalls . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 689 Financial Statements Dont Contain All Information
. . . . . . . . . . . . . . . . . . . 689 Lack of Comparability . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 690 Search for the Smoking Gun. . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 690 Anchoring,
Adjustment, and Timeliness . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 690 End-of-Chapter Materials . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 691
P A R T F I V E FOU N DATIONS OF MANAG E M E NT ACCOU NTI NG 725 15
MANAGEMENT ACCOUNTING AND COST CONCEPTS . . . . . . . . 727
Management Accounting as a Competitive Tool . . . . . . . . . . . .
. . . . . . . . . . . . . 729 Management Accounting and Financial
Accounting . . . . . . . . . . . . . . . . . . . . . . . 730
Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 731 Controlling . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 733 Evaluating . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 733
- 28. xxviii Contents Managerial Accounting Terminology. . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 Terms
Used in Planning and Cost-Volume-Profit Analysis. . . . . . . . . .
. . . . . . 734 Terms Related to Controlling Product Cost Flows . .
. . . . . . . . . . . . . . . . . . . . 735 Terms Related to
Evaluation and Decision Making . . . . . . . . . . . . . . . . . .
. . 737 The Role of Ethics in Management Accounting . . . . . . . .
. . . . . . . . . . . . . . . . . . 741 End-of-Chapter Materials .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 743 16 COST FLOWS AND BUSINESS ORGANIZATIONS . . . .
. . . . . . . . . 757 The Flow of Products and Costs in
Manufacturing Firms . . . . . . . . . . . . . . . . . . . 759 The
Product Costing System . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 761 Accounting for Overhead . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 768 Estimated Manufacturing Overhead . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 769 Actual Manufacturing
Overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 769 Applied Manufacturing Overhead . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . 770 Disposition of
Over- and Underapplied Manufacturing Overhead. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 770 The Cost of Goods Manufactured Schedule. . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 773 The Flow of
Products and Costs in Service and Mechandising Firms . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 775 Comparing Service and Manufacturing Business
Activities. . . . . . . . . . . . . . . 776 Product Cost
Accumulation in Service Organizations . . . . . . . . . . . . . . .
. . . . 777 Product Cost Accumulation in Merchandising
Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 780 The Process Costing
System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 782 Steps in Process Costing . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782
End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 789 17 ACTIVITY-BASED
COSTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
827 Activity-Based Costing . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 828 Introduction to
Lily Ice Cream Company . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 829 The Basics of ABC . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830
Overhead Cost Activities . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 831 Analyze Individual
Overhead Costs . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 833 Cost Drivers. . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836
Assigning Overhead to Production Using ABC. . . . . . . . . . . . .
. . . . . . . . . . . . . . 838 Making Decisions Using ABC Data . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
840 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 845 End-of-Chapter
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 846 Comprehensive Problem 1517. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 868 EXPANDED
material
- 29. Contents xxix P A R T S I X CONTROL I N A MANAG E M E NT
ACCOU NTI NG SYSTE M 869 18 BUDGETING AND CONTROL. . . . . . . . .
. . . . . . . . . . . . . . . . . . . 870 Purposes of Personal
Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 873 The Budgeting Process in Organizations . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 875
Behavioral Considerations . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 876 Involvement in Preparing
the Budget: Top-Down versus Bottom-Up. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 876 The Master Budget . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 878 Budgeting
for Operations in a Manufacturing Firm. . . . . . . . . . . . . . .
. . . . . 878 Budgeting in Merchandising and Service Firms . . . .
. . . . . . . . . . . . . . . . . . . . . . 889 Budgeting for
Operations in a Merchandising Firm . . . . . . . . . . . . . . . .
. . . . 889 Budgeting for Operations in a Service Firm . . . . . .
. . . . . . . . . . . . . . . . . . . . 891 Static versus Flexible
Budgeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 897 Weaknesses in Static Budgeting. . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 897 Using the
Flexible Budget . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 899 Cash Budget. . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 901 Pro-Forma Financial Statements . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 904
End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 908 19 CONTROLLING COST,
PROFIT, AND INVESTMENT CENTERS . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 942 Control of
Divisions and Personnel in Different Types of Operating Units . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 945 Benefits and Problems of Decentralization
. . . . . . . . . . . . . . . . . . . . . . . . . . . 946
Responsibility Accounting . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 947 Standard Cost Systems. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 949 Determining Standard Costs. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950
Controlling Performance in Cost Centers . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 951 Direct Materials Variances . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 951 Direct Labor Variances . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 956 Controlling
Performance in Profit Centers . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 959 The Segment Margin Statement. . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 959
Interpreting Profit Center Performance Results. . . . . . . . . . .
. . . . . . . . . . . . . 961 Managing Revenues in Profit Centers .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962
EXPANDED material
- 30. xxx Contents Evaluating Performance in Investment Centers .
. . . . . . . . . . . . . . . . . . . . . . . . . 964 Return on
Investment (ROI) . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 964 Residual Income . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 966 Variable Manufacturing Overhead Variances in Cost Centers .
. . . . . . . . . . . . . . . 968 Measuring and Controlling
Variable Manufacturing Overhead Costs. . . . . . . 968 Fixed
Manufacturing Overhead Variances in Cost Centers . . . . . . . . .
. . . . . . . . . 972 Measuring and Controlling Fixed Manufacturing
Overhead Costs . . . . . . . . . 972 End-of-Chapter Materials . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . 976 P A R T S E V E N MAKI NG DECISIONS USI NG MANAG E M
E NT ACCOU NTI NG 1007 20 COST BEHAVIOR AND DECISIONS USING C-V-P
ANALYSIS . . . 1009 Understanding Why C-V-P Analysis Is Important .
. . . . . . . . . . . . . . . . . . . . . . . 1011 Basic Cost
Behavior Patterns . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 1012 Measuring Level of Activity . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1012 Variable Costs . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 1012 Fixed Costs .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1014 Mixed Costs . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 1016 Analysis of Mixed Costs. . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1017 The
Scattergraph, or Visual-Fit, Method. . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 1017 The High-Low Method . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1019 A Comparison of the Scattergraph and High-Low Methods . . . .
. . . . . . . . . . 1020 Methods of C-V-P Analysis . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1021 Contribution Margin. . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 1021 The C-V-P Equation .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 1024 Measuring the Effect of Potential Changes in
C-V-P Variables. . . . . . . . . . . . 1027 Using Graphs to See
C-V-P Relationships . . . . . . . . . . . . . . . . . . . . . . . .
. . . . 1030 The Profit Graph . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 1031 A
Comparison of C-V-P Graphs with C-V-P Equations . . . . . . . . . .
. . . . . . . . 1032 Sales Mix . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1035 Cost Structure and Operating Leverage. . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 1037 End-of-Chapter Materials .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 1041 Comprehensive Problem 1820. . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 1072 21 RELEVANT
INFORMATION AND DECISIONS. . . . . . . . . . . . . . . 1075
Differential Costs, Sunk Costs, and Decision Making . . . . . . . .
. . . . . . . . . . . . . 1077 Qualitative Considerations . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1080 EXPANDED material EXPANDED material
- 31. Contents xxxi Accepting or Rejecting Special Orders . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 1081 Special
OrdersThe Sellers Decision . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 1081 Making or Buying Products . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1084 Making or Buying Manufactured Parts. . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1084 Purchasing Services or Providing
Them Internally . . . . . . . . . . . . . . . . . . . . 1086
Exiting or Entering a Market . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . 1088 Exiting a Market . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 1088 Entering a Market. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1090
Determining at What Stage of Production to Sell Products . . . . .
. . . . . . . . . . . . 1092 Selecting the Best Use of a Scarce
Resource . . . . . . . . . . . . . . . . . . . . . . . . . . . 1094
Setting Selling Prices . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 1096 Normal Pricing of
Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 1096 End-of-Chapter Materials . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1098 22
CAPITAL INVESTMENT DECISIONS . . . . . . . . . . . . . . . . . . .
. . . 1118 Conceptual Basis of Capital Budgeting . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 1121 Importance of
Capital Investment Decisions in Planning . . . . . . . . . . . . .
. . 1121 Uses of Capital Budgeting: Screening and Ranking. . . . .
. . . . . . . . . . . . . . . 1121 The Time Value of Money . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 1122 Discounting Cash Flows . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 1123 Nondiscounted
Capital Budgeting Techniques. . . . . . . . . . . . . . . . . . . .
. . . . . . 1125 Payback Method . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1125
Unadjusted Rate of Return Method. . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 1127 Discounted Capital Budgeting
Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1128 Selecting a Discount Rate . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 1128 Net Present Value
Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . 1129 Internal Rate of Return Method . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . 1132
Comparative Example of Capital Budgeting Techniques . . . . . . . .
. . . . . . . . . . . 1135 Qualitative Factors in Strategic and
Capital Investment Decisions . . . . . . . . . . . . 1137 Dealing
with Uncertainty in Strategic and Capital Investment Decisions . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 1139 If Expected Cash Flows Are Uncertain. . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . 1139 If Useful Life
Is Uncertain . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 1140 If Disposal Value Is Uncertain . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1140
Capital Rationing . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 1141 Ranking by the
Internal Rate of Return Method. . . . . . . . . . . . . . . . . . .
. . . 1141 Ranking by the Net Present Value Method . . . . . . . .
. . . . . . . . . . . . . . . . . . 1141 Income Tax Considerations
in Capital Budgeting Decisions . . . . . . . . . . . . . . . . 1143
Appendix: The Time Value of Money . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1146 Present Value and Future Value
Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . 1146
The Present Value of an Annuity . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 1149 EXPANDED material
- 32. xxxii Contents Using Excel Spreadsheets for Time Value of
Money Calculations . . . . . . . . . 1150 PV Excel Function . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 1150 NPV Excel Function. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1150 IRR
Excel Function . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . 1151 End-of-Chapter Materials.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . 1156 Comprehensive Problem 2122. . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 1173 P A R T E I G H T
CONTI N UOUS I M PROVE M E NT I N MANAG E M E NT ACCOU NTI NG 1175
23 NEW MEASURES OF PERFORMANCE . . . . . . . . . . . . . . . . . .
. . . 1177 Adding Value to Investors Money . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 1179 Applying the EVA
Concept. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 1180 Managing Time and Quality . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1181 JIT
Inventory Systems . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . 1182 Measuring Time-Based
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 1183 JIT and Value-Added Activities . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 1183 Total Quality
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . 1184 TQM and Management Accounting. . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . 1185 Costs of
Quality (COQ) . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 1185 COQ Example . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 1188 Locating COQ in the Accounting Records . . . . . . . . .
. . . . . . . . . . . . . . . . . . 1189 Lets Take a Flight! . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . 1190 The Balanced Scorecard . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1191
Adding Value with Performance Measures . . . . . . . . . . . . . .
. . . . . . . . . . . . 1193 Customers . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . 1194 Internal Processes . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 1196 Learning
and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 1199 Linking It All Together . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . 1201 An Example Scorecard . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . 1203 There Is No Quick
Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . 1204 Accounting for Tomorrow. . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . 1206
End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . 1207 APPE N DICES A
WAL-MART 2006 ANNUAL REPORT . . . . . . . . . . . . . . . . . . . .
. . . . A-1 B GLOSSARY . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . B-1 C CHECK FIGURES . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. C-1 I N DEXES SUBJECT . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . SI-1 REAL WORLD
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . CI-1
- 33. FinancialReportingandtheAccountingCycle 1 P A R T 1 2 3
Accounting Information: Users and Uses Financial Statements: An
Overview 5Ensuring the Integrity of Financial Information The
Mechanics of Accounting 4 Completing the Accounting Cycle DUNCAN
SMITH/PHOTODISC GREEN/GETTY IMAGES INC.
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- 35. 1 2 3 4 Accounting Information: Users and Uses After
studying this chapter, you should be able to: C H A P T E R
Describe the purpose of accounting and explain its