Financial and Managerial Accounting Needles Powers Crosson
NINTH EDITION
Belverd E. Needles, Jr., Ph.D., C.P.A., C.M.A.
DePaul University
Marian Powers, Ph.D.
Northwestern University
Susan V. Crosson, M.S. Accounting, C.P.A
Santa Fe College
Financial and Managerial Accounting, Ninth Edition Belverd Needles, Marian Powers, Susan Crosson
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BRIEF CONTENTS
1 Uses of Accounting Information and the Financial Statements 2
SUPPLEMENT TO CHAPTER 1 How to Read an Annual Report 50
2 Analyzing Business Transactions 90
3 Measuring Business Income 142
SUPPLEMENT TO CHAPTER 3 Closing Entries and the Work Sheet 194
4 Financial Reporting and Analysis 208
SUPPLEMENT TO CHAPTER 4 The Annual Report Project 258
5 The Operating Cycle and Merchandising Operations 260
6 Inventories 310
7 Cash and Receivables 352
8 Current Liabilities and Fair Value Accounting 392
9 Long-Term Assets 434
10 Long-Term Liabilities 480
11 Contributed Capital 532
12 Investments 578
13 The Corporate Income Statement and the Statement
of Stockholders’ Equity 620
14 The Statement of Cash Flows 666
15 The Changing Business Environment: A Manager’s Perspective 718
16 Cost Concepts and Cost Allocation 760 16 Cost Concepts and Cost Allocation 760
20 Cost Behavior Analysis 922
21 The Budgeting Process 964
22 Performance Management and Evaluation 1016
23 Standard Costing and Variance Analysis 1060
24 Short-Run Decision Analysis 1108
25 Capital Investment Analysis 1148
26 Pricing Decisions, Including Target Costing and Transfer
Pricing 1186
27 Quality Management and Measurement 1232
28 Financial Analysis of Performance 1270
APPENDIX A Accounting for Investments 1320
APPENDIX B Present Value Tables 1334
CONTENTS
Preface xix About the Authors xxxiii
CHAPTER 1 Uses of Accounting Information and the Financial Statements
DECISION POINT 씰 A USER’S FOCUS CVS CAREMARK 3 Corporate Governance 18 Accounting as an Information System 4 Financial Position and the Accounting
Business Goals and Activities 4
Equation 19
Financial and Management Accounting 7
Assets 19
Processing Accounting Information 7
Liabilities 19
Ethical Financial Reporting 8
Stockholders’ Equity 20
Decision Makers: The Users of Accounting Financial Statements 21 Information 10 Income Statement 21
Management 10 Statement of Retained Earnings 22 Users with a Direct Financial Interest 11
The Balance Sheet 22
Users with an Indirect Financial Interest 12 Statement of Cash Flows 23 Governmental and Not-for-Profit Organizations 12 Relationships Among the Financial Statements 24 Accounting Measurement 13 Generally Accepted Accounting Principles 26 Business Transactions 13
GAAP and the Independent CPA’s Report 27 Money Measure 14
Organizations That Issue Accounting Standards 27 Separate Entity 14
Other Organizations That Influence GAAP 28 The Corporate Form of Business 15 Professional Conduct 29
Characteristics of Corporations, Sole Proprietorships, A LOOK BACK AT 씰 CVS CAREMARK 30 and Partnerships 15
STOP & REVIEW 33
Formation of a Corporation 17 CHAPTER ASSIGNMENTS 35 Organization of a Corporation 17
SUPPLEMENT TO CHAPTER 1 How to Read an Annual Report
The Components of an Annual Report 50
Financial Statements 52
Letter to the Stockholders 51 Notes to the Financial Statements 57 Financial Highlights 51
Reports of Management’s Responsibilities 58 Description of the Company 51
Reports of Certified Public Accountants 58 Management’s Discussion and Analysis 51
CHAPTER 2 Analyzing Business Transactions CHAPTER 2 Analyzing Business Transactions
The T Account Illustrated 97
Expense Paid in Cash 106
Rules of Double-Entry Accounting 98 Expense to Be Paid Later 106 Normal Balance 99
Dividends 106
Stockholders’ Equity Accounts 99 Summary of Transactions 107 Business Transaction Analysis 101
The Trial Balance 109
Owner’s Investment in the Business 101 Preparation and Use of a Trial Balance 109 Economic Event That Is Not a Business
Finding Trial Balance Errors 110 Transaction 101
Cash Flows and the Timing of Prepayment of Expenses in Cash 102
Transactions 111
Purchase of an Asset on Credit 102 Recording and Posting Transactions 114 Purchase of an Asset Partly in Cash and Partly
Chart of Accounts 114
on Credit 103
General Journal 114
Payment of a Liability 103
General Ledger 116
Revenue in Cash 104 Some Notes on Presentation 118
Revenue on Credit 104 A LOOK BACK AT 씰 THE BOEING COMPANY 119
Revenue Received in Advance 104
STOP & REVIEW 123
Collection on Account 105 CHAPTER ASSIGNMENTS 125
CHAPTER 3 Measuring Business Income
Type 3 Adjustment: Allocating Recorded, Unearned Profitability Measurement Issues
DECISION POINT 씰 A USER’S FOCUS NETFLIX, INC. 143
Revenues (Deferred Revenues) 157 and Ethics 144
Type 4 Adjustment: Recognizing Unrecorded, Net Income 144
Earned Revenues (Accrued Revenues) 158 Income Measurement Assumptions 144
A Note About Journal Entries 160 Ethics and the Matching Rule 146
Using the Adjusted Trial Balance to Prepare Financial Statements 160
Accrual Accounting 148 The Accounting Cycle 163
Recognizing Revenues 148 Recognizing Expenses 148
Closing Entries 163
Adjusting the Accounts 149 The Post-Closing Trial Balance 165 Adjustments and Ethics 149
Cash Flows from Accrual-Based
Information 167
The Adjustment Process 150 A LOOK BACK AT 씰 NETFLIX, INC. 169
Type 1 Adjustment: Allocating Recorded Costs (Deferred Expenses) 151 STOP & REVIEW 174
Type 2 Adjustment: Recognizing Unrecorded CHAPTER ASSIGNMENTS 176
Expenses (Accrued Expenses) 154
SUPPLEMENT TO CHAPTER 3 Closing Entries and the Work Sheet
Preparing Closing Entries 194 The Work Sheet: An Accountant’s Tool 198 Step 1: Closing the Credit Balances 194
Preparing the Work Sheet 199
Contents
vii
CHAPTER 4 Financial Reporting and Analysis
DECISION POINT 씰 A USER’S FOCUS DELL COMPUTER
Foundations of Financial Reporting 210
Stockholders’ Equity 220
Objective of Financial Reporting 210 Owner’s Equity and Partners’ Equity 221 Qualitative Characteristics of Accounting
Dell’s Balance Sheets 221
Information 210 Forms of the Income Statement 223
Accounting Conventions 212 Multistep Income Statement 223
Ethical Financial Reporting 212 Dell’s Income Statements 227 Accounting Conventions for Preparing
Financial Statements 213 Single-Step Income Statement 227 Consistency 213
Using Classified Financial Statements 229 Full Disclosure (Transparency) 214
Evaluation of Liquidity 229 Materiality 215
Evaluation of Profitability 230
Conservatism 215 A LOOK BACK AT 씰 DELL COMPUTER
CORPORATION 237
Cost-Benefit 216
STOP & REVIEW 240
Classified Balance Sheet 217 CHAPTER ASSIGNMENTS 242
SUPPLEMENT TO CHAPTER 4 The Annual Report Project
Instructions 258
CHAPTER 5 The Operating Cycle and Merchandising Operations
Purchases of Merchandise 275 CORPORATION 261
DECISION POINT 씰 A USER’S FOCUS COSTCO WHOLESALE
Sales of Merchandise 276
Managing Merchandising Businesses 262 Internal Control: Components, Activities, Operating Cycle 262
and Limitations 279
Choice of Inventory System 263 Components of Internal Control 279 Foreign Business Transactions 264
Control Activities 279
The Need for Internal Controls 265 Limitations on Internal Control 280 Management’s Responsibility for Internal
Internal Control over Merchandising Control 267
Transactions 281
Terms of Sale 268 Internal Control and Management Goals 282 Sales and Purchases Discounts 268
Control of Cash Receipts 283 Transportation Costs 269
Control of Purchases and Cash Disbursements 284 Terms of Debit and Credit Card Sales 269
A LOOK BACK AT 씰 COSTCO WHOLESALE
Perpetual Inventory System 270
CORPORATION 289 CORPORATION 289
CHAPTER 6 Inventories
Last-In, First-Out (LIFO) Method 323 CORPORATION 311
DECISION POINT 씰 A USER’S FOCUS TOYOTA MOTOR
Summary of Inventory Costing Methods 324 Managing Inventories 312
Impact of Inventory Decisions 325 Inventory Decisions 312
Effects on the Financial Statements 326 Evaluating the Level of Inventory 313
Effects on Income Taxes 326 Effects of Inventory Misstatements on Income
Effects on Cash Flows 327
Measurement 315 Inventory Cost Under the Perpetual Inventory Cost and Valuation 318
Inventory System 328 Goods Flows and Cost Flows 319
Valuing Inventory by Estimation 330 Lower-of-Cost-or-Market (LCM) Rule 320
Retail Method 330
Disclosure of Inventory Methods 320
Gross Profit Method 331
Inventory Cost Under the Periodic
A LOOK BACK AT 씰 Inventory System TOYOTA MOTOR
Specific Identification Method 322
STOP & REVIEW 337
Average-Cost Method 322 CHAPTER ASSIGNMENTS 339 First-In, First-Out (FIFO) Method 322
CHAPTER 7 Cash and Receivables
Disclosure of Uncollectible Accounts 366 Management Issues Related to Cash and
DECISION POINT 씰 A USER’S FOCUS NIKE, INC. 353
Estimating Uncollectible Accounts Expense 366 Receivables 354
Writing Off Uncollectible Accounts 370 Cash Management 354
Notes Receivable 372
Accounts Receivable and Credit Policies 355
Maturity Date 373
Evaluating the Level of Accounts Receivable 356
Duration of a Note 374
Financing Receivables 358 Interest and Interest Rate 374 Ethics and Estimates in Accounting for
Maturity Value 375
Receivables 359
Accrued Interest 375
Cash Equivalents and Cash Control 361
Dishonored Note 375
Cash Equivalents 361 A LOOK BACK AT 씰 NIKE, INC. 376 Fair Value of Cash and Cash Equivalents 361
STOP & REVIEW 378
Cash Control Methods 361 CHAPTER ASSIGNMENTS 380 Uncollectible Accounts 365
The Allowance Method 365
CHAPTER 8 Current Liabilities and Fair Value Accounting
DECISION POINT 씰 A USER’S FOCUS MICROSOFT 393
Common Types of Current
Contents
ix
Valuation Approaches to Fair Value
Deferred Payment 414
Accounting 409
Other Applications 415
Interest and the Time Value of Money 409
416 Calculating Present Value 410
A LOOK BACK AT 씰 MICROSOFT
STOP & REVIEW 419
Applications Using Present Value 414 CHAPTER ASSIGNMENTS 421 Valuing an Asset 414
CHAPTER 9 Long-Term Assets
Plant Assets Sold for Cash 453 COMPUTER, INC. 435
DECISION POINT 씰 A USER’S FOCUS APPLE
Exchanges of Plant Assets 454 Management Issues Related to
Natural Resources 455
Long-Term Assets 436
Depletion 455
Acquiring Long-Term Assets 438 Depreciation of Related Plant Assets 456 Financing Long-Term Assets 439 Development and Exploration Costs in the Oil and Applying the Matching Rule 440
Gas Industry 456
Acquisition Cost of Property, Plant,
Intangible Assets 458
and Equipment 441 Research and Development Costs 461
General Approach to Acquisition Costs 442 Computer Software Costs 461
Specific Applications 442
Goodwill 461
Depreciation 445 A LOOK BACK AT 씰 APPLE COMPUTER, INC. 463 Factors in Computing Depreciation 446
STOP & REVIEW 465
Methods of Computing Depreciation 446 CHAPTER ASSIGNMENTS 467 Special Issues in Depreciation 450
Disposal of Depreciable Assets 452 Discarded Plant Assets 453
CHAPTER 10 Long-Term Liabilities
Using Present Value to Value a Bond 497 CORPORATION 481 Case 1: Market Rate Above Face Rate 497
DECISION POINT 씰 USER’S FOCUS M C DONALD’S
Management Issues Related to Issuing Case 2: Market Rate Below Face Rate 497 Long-Term Debt 482 Amortization of Bond Discounts Deciding to Issue Long-Term Debt 482
and Premiums 499
Evaluating Long-Term Debt 483 Amortizing a Bond Discount 499 Types of Long-Term Debt 484
Amortizing a Bond Premium 502 Cash Flow Information 490
Retirement of Bonds 507 The Nature of Bonds 490
Calling Bonds 507
Bond Issue: Prices and Interest Rates 491
Converting Bonds 508
Characteristics of Bonds 492 Other Bonds Payable Issues 509
Accounting for the Issuance of Bonds 493 Accounting for the Issuance of Bonds 493
CHAPTER 11 Contributed Capital
Convertible Preferred Stock 547 Management Issues Related to Contributed
DECISION POINT 씰 A USER’S FOCUS GOOGLE, INC. 533
Callable Preferred Stock 548 Capital 534
Issuance of Common Stock 549 The Corporate Form of Business 534
Par Value Stock 550
Equity Financing 536
No-Par Stock 551
Dividend Policies 538 Issuance of Stock for Noncash Assets 551 Using Return on Equity to Measure
Accounting for Treasury Stock 553 Performance 540 Purchase of Treasury Stock 553 Stock Options as Compensation 541 Sale of Treasury Stock 554 Cash Flow Information 542 Retirement of Treasury Stock 556 Components of Stockholders’ Equity 543
A LOOK BACK AT 씰 GOOGLE, INC. 557 Preferred Stock 546
STOP & REVIEW 561
Preference as to Dividends 546 CHAPTER ASSIGNMENTS 563 Preference as to Assets 547
CHAPTER 12 Investments
Consolidated Financial Statements 593 Management Issues Related to
DECISION POINT 씰 A USER’S FOCUS EBAY, INC. 579
Consolidated Balance Sheet 593 Investments 580
Consolidated Income Statement 598 Recognition 580
Restatement of Foreign Subsidiary Financial Valuation 580
Statements 599
Classification 580 Investments in Debt Securities 600 Disclosure 582
Held-to-Maturity Securities 600 Ethics of Investing 583
Long-Term Investments in Bonds 601 Short-Term Investments in Equity
A LOOK BACK AT 씰 EBAY, INC. 602 Securities 584
STOP & REVIEW 605
Trading Securities 584 CHAPTER ASSIGNMENTS 607 Available-for-Sale Securities 587 Long-Term Investments in Equity
Securities 588 Noninfluential and Noncontrolling Investment 588 Influential but Noncontrolling Investment 590
CHAPTER 13 The Corporate Income Statement and the Statement of Stockholders’ Equity
Write-downs and Restructurings 625 INC. 621
DECISION POINT 씰 A USER’S FOCUS MOTOROLA,
Contents
xi
Earnings per Share 632 Stock Dividends and Stock Splits 638 Basic Earnings per Share 633
Stock Dividends 638
Diluted Earnings per Share 634
Stock Splits 641
Comprehensive Income and the Statement
Book Value 643
of Stockholders’ Equity 635 A LOOK BACK AT 씰 MOTOROLA, INC. 645 Comprehensive Income 635
STOP & REVIEW 648
The Statement of Stockholders’ Equity 636 CHAPTER ASSIGNMENTS 650 Retained Earnings 637
CHAPTER 14 The Statement of Cash Flows
Operating Activities 678 INC. 667
DECISION POINT 씰 A USER’S FOCUS AMAZON.COM,
Depreciation 680
Overview of the Statement of Cash
Gains and Losses 681
Flows 668 Changes in Current Assets 681
Purposes of the Statement of Cash Flows 668 Changes in Current Liabilities 682
Uses of the Statement of Cash Flows 668 Schedule of Cash Flows from Operating
Classification of Cash Flows 668
Activities 683
Required Disclosure of Noncash Investing and
Investing Activities 684
Financing Transactions 670
Investments 685
Format of the Statement of Cash Flows 670
Plant Assets 685
Ethical Considerations and the Statement of Cash Flows 672
Financing Activities 688 Analyzing Cash Flows 673
Bonds Payable 688
Can a Company Have Too Much Cash? 673
Common Stock 688
Cash-Generating Efficiency 673
Retained Earnings 689
Asking the Right Questions About the Statement
Treasury Stock 690
of Cash Flows 675 A LOOK BACK AT 씰 AMAZON.COM, INC. 692 Free Cash Flow 676
STOP & REVIEW 697 CHAPTER ASSIGNMENTS 699
CHAPTER 15 The Changing Business Environment: A Manager’s Perspective 718
Achieving Continuous Improvement 733 STORES, INC. 719 Performance Measures: A Key to Achieving
DECISION POINT 씰 A MANAGER’S FOCUS WAL-MART
The Role of Management Accounting 720 Organizational Objectives 735 Management Accounting and Financial Accounting:
Using Performance Measures in the Management
A Comparison 720
Process 735
Management Accounting and the Management The Balanced Scorecard 736 Process 721
Benchmarking 738
Value Chain Analysis 727 Standards of Ethical Conduct 738 Primary Processes and Support Services 728
A LOOK BACK AT 씰 WAL-MART STORES, INC. 741 Advantages of Value Chain Analysis 729 A LOOK BACK AT 씰 WAL-MART STORES, INC. 741 Advantages of Value Chain Analysis 729
CHAPTER 16 Cost Concepts and Cost Allocation
Inventory Accounts in Manufacturing COMPANY 761
DECISION POINT 씰 A MANAGER’S FOCUS THE HERSHEY
Organizations 770
Cost Information 762 Document Flows and Cost Flows Through the Managers’ Use of Cost Information 762
Inventory Accounts 770
Cost Information and Organizations 762 The Manufacturing Cost Flow 772 Cost Classifications and Their Uses 762
Elements of Product Costs 774 Cost Traceability 763
Prime Costs and Conversion Costs 775 Cost Behavior 764
Computing Product Unit Cost 775 Value-Adding Versus Nonvalue-Adding
Product Cost Measurement Methods 776 Costs 764
Computing Service Unit Cost 778 Cost Classifications for Financial Reporting 764
Cost Allocation 779
Financial Statements and the Reporting Allocating the Costs of Overhead 779 of Costs 766
Allocating Overhead: The Traditional Approach 781 Income Statement and Accounting for
Allocating Overhead: The ABC Approach 783 Inventories 766 A LOOK BACK AT 씰 THE HERSHEY COMPANY 785 Statement of Cost of Goods Manufactured 767
STOP & REVIEW 787
Cost of Goods Sold and a Manufacturer’s Income Statement 769
CHAPTER ASSIGNMENTS 790
CHAPTER 17 Costing Systems: Job Order Costing
DECISION POINT 씰 A MANAGER’S FOCUS COLD STONE
Overhead 814
CREAMERY, INC. 807
Completed Units 815
Product Unit Cost Information and the
Sold Units 815
Management Process 808 Reconciliation of Overhead Costs 816 Planning 808
A Job Order Cost Card and the Computation Performing 808
of Unit Cost 817
Evaluating 808 A Manufacturer’s Job Order Cost Card and the Communicating 808
Computation of Unit Cost 817 Product Costing Systems 809
Job Order Costing in a Service Organization 818 Job Order Costing in a Manufacturing
A LOOK BACK AT 씰 COLD STONE CREAMERY, INC. 821 Company 811
STOP & REVIEW 823
Materials 812 CHAPTER ASSIGNMENTS 825 Labor 814
CHAPTER 18 Costing Systems: Process Costing
Computing Equivalent Production 849 FOODS 845 Equivalent Production for Direct
DECISION POINT 씰 A MANAGER’S FOCUS DEAN
Contents
xiii
Preparing a Process Cost Report Using the
Accounting for Costs 861
FIFO Costing Method 852
Assigning Costs 861
Accounting for Units 852
864 Accounting for Costs 855
A LOOK BACK AT 씰 DEAN FOODS
STOP & REVIEW 867
Assigning Costs 855 CHAPTER ASSIGNMENTS 869 Process Costing for Two or More Production
Departments 857 Preparing a Process Cost Report Using the
Average Costing Method 859 Accounting for Units 859
CHAPTER 19 Value-Based Systems: ABM and Lean
The New Operating Environment and Lean INC. 883
DECISION POINT 씰 A MANAGER’S FOCUS LA-Z-BOY,
Operations 892
Value-Based Systems and
Just-in-Time (JIT) 892
Management 884 Continuous Improvement of the Work Value Chains and Supply Chains 885
Environment 894
Process Value Analysis 886 Accounting for Product Costs in a JIT Operating Value-Adding and Non-Value-Adding Activities 887
Environment 894
Value-Based Systems 887
Backflush Costing 896
Activity-Based Management 887 Comparison of ABM and Lean 900 Managing Lean Operations 888
901 Activity-Based Costing 888
A LOOK BACK AT 씰 LA-Z-BOY, INC.
STOP & REVIEW 904
The Cost Hierarchy and the Bill of Activities 889 CHAPTER ASSIGNMENTS 906
CHAPTER 20 Cost Behavior Analysis
DECISION POINT 씰 A MANAGER’S FOCUS FLICKR
Breakeven Analysis 936
Cost Behavior and Management 924 Using an Equation to Determine the Breakeven The Behavior of Costs 924
Point 937
Mixed Costs and the Contribution Margin The Breakeven Point for Multiple Products 938 Income Statement 930
Using C-V-P Analysis to Plan Future Sales, The Engineering Method 930
Costs, and Profits 941 The Scatter Diagram Method 930
Applying C-V-P to Target Profits 941 The High-Low Method 931
944 Statistical Methods 933
A LOOK BACK AT 씰 FLICKR
STOP & REVIEW 947
Contribution Margin Income Statements 933 CHAPTER ASSIGNMENTS 949 Cost-Volume-Profit Analysis 934 Contribution Margin Income Statements 933 CHAPTER ASSIGNMENTS 949 Cost-Volume-Profit Analysis 934
CHAPTER 21 The Budgeting Process
The Direct Labor Budget 977 CORPORATION 965
DECISION POINT 씰 A MANAGER’S FOCUS FRAMERICA
The Overhead Budget 977 The Budgeting Process 966
The Selling and Administrative Expense Advantages of Budgeting 966
Budget 978
Budgeting and Goals 967 The Cost of Goods Manufactured Budget 979 Budgeting Basics 967
Financial Budgets 981
The Master Budget 969 The Budgeted Income Statement 981 Preparation of a Master Budget 969
The Capital Expenditures Budget 982 Budget Procedures 972
The Cash Budget 982
Operating Budgets 973 The Budgeted Balance Sheet 985 The Sales Budget 973
A LOOK BACK AT 씰 FRAMERICA CORPORATION 987 The Production Budget 974
STOP & REVIEW 990
The Direct Materials Purchases Budget 975 CHAPTER ASSIGNMENTS 992
CHAPTER 22 Performance Management and Evaluation
DECISION POINT 씰 A MANAGER’S FOCUS VAIL
Performance Evaluation of Investment
Performance Measurement 1018 Return on Investment 1029 What to Measure, How to Measure 1018
Residual Income 1031
Other Measurement Issues 1018 Economic Value Added 1032 Organizational Goals and the Balanced
The Importance of Multiple Performance Scorecard 1019
Measures 1034
The Balanced Scorecard and Management 1019 Performance Incentives and Goals 1035 Responsibility Accounting 1021
Linking Goals, Performance Objectives, Measures, Types of Responsibility Centers 1022
and Performance Targets 1035 Organizational Structure and Performance
Performance-Based Pay 1036 Management 1024
The Coordination of Goals 1036 Performance Evaluation of Cost Centers and
A LOOK BACK AT 씰 VAIL RESORTS 1039 Profit Centers 1026
STOP & REVIEW 1042
Evaluating Cost Center Performance Using Flexible CHAPTER ASSIGNMENTS 1044 Budgeting 1026
Evaluating Profit Center Performance Using Variable Costing 1027
CHAPTER 23 Standard Costing and Variance Analysis
Standard Overhead Cost 1064 CORPORATION 1061
DECISION POINT 씰 A MANAGER’S FOCUS iROBOT
Contents
xv
Computing and Analyzing Direct Materials Using a Flexible Budget to Analyze Overhead Variances 1071
Variances 1077
Computing Direct Materials Variances 1071 Computing Overhead Variances 1078 Analyzing and Correcting Direct Materials
Analyzing and Correcting Overhead Variances 1083 Variances 1073
Using Cost Variances to Evaluate Managers’ Computing and Analyzing Direct Labor
Performance 1085
Variances 1074 A LOOK BACK AT 씰 iROBOT CORPORATION 1087 Computing Direct Labor Variances 1074
STOP & REVIEW 1092
Analyzing and Correcting Direct Labor CHAPTER ASSIGNMENTS 1094 Variances 1076
Computing and Analyzing Overhead Variances 1077
CHAPTER 24 Short-Run Decision Analysis
Incremental Analysis for Segment AMERICA 1109
DECISION POINT 씰 A MANAGER’S FOCUS BANK OF
Profitability Decisions 1118 Short-Run Decision Analysis and the
Incremental Analysis for Sales Mix Management Process 1110
Decisions 1120
Incremental Analysis for Short-Run Decisions 1110 Incremental Analysis for Sell or Process- Incremental Analysis for Outsourcing
Further Decisions 1123 Decisions 1113
A LOOK BACK AT 씰 BANK OF AMERICA 1126 Incremental Analysis for Special Order
STOP & REVIEW 1129
Decisions 1115 CHAPTER ASSIGNMENTS 1131
CHAPTER 25 Capital Investment Analysis
The Time Value of Money 1158 AND CHEMICALS INC. 1149
DECISION POINT 씰 A MANAGER’S FOCUS AIR PRODUCTS
Interest 1158
The Capital Investment Process 1150
Present Value 1159
Capital Investment Analysis 1150 Present Value of a Single Sum Due in the Capital Investment Analysis in the Management
Future 1160
Process 1151 Present Value of an Ordinary Annuity 1160 The Minimum Rate of Return on Investment 1153
The Net Present Value Method 1162 Cost of Capital 1153
Advantages of the Net Present Value Method 1162 Other Measures for Determining Minimum Rate of
The Net Present Value Method Illustrated 1162 Return 1154 Other Methods of Capital Investment Ranking Capital Investment Proposals 1154
Analysis 1165
Measures Used in Capital Investment The Payback Period Method 1165 Analysis 15
The Accounting Rate-of-Return Method 16 Expected Benefits from a Capital Investment 15 A LOOK BACK AT 씰 Equal Versus Unequal Cash Flows 1156 AIR PRODUCTS
AND CHEMICALS INC. 1168 AND CHEMICALS INC. 1168
CHAPTER 26 Pricing Decisions, Including Target Costing and Transfer Pricing
Pricing Based on Target Costing 1201 The Pricing Decision and the Manager 18
DECISION POINT 씰 A MANAGER’S FOCUS LAB 126
Differences Between Cost-Based Pricing and Target Pricing Policies 18
Costing 1201
Pricing Policy Objectives 18 Target Costing Analysis in an Activity-Based Management Environment 1203
Pricing and the Management Process 1189 Pricing for Internal Providers of Goods
External and Internal Pricing Factors 1189
and Services 1205
Economic Pricing Concepts 1191
Transfer Pricing 1205
Total Revenue and Total Cost Curves 1191 Developing a Transfer Price 1206 Marginal Revenue and Marginal Cost Curves 1193
Other Transfer Price Issues 1207 Auction-Based Pricing 1193
Using Transfer Prices to Measure Cost-Based Pricing Methods 1194
Performance 1207
Gross Margin Pricing 1195 A LOOK BACK AT 씰 LAB 126 1209 Return on Assets Pricing 1196
STOP & REVIEW 1212
Summary of Cost-Based Pricing Methods 1197 CHAPTER ASSIGNMENTS 1214 Pricing Services 1198 Factors Affecting Cost-Based Pricing Methods 19
CHAPTER 27 Quality Management and Measurement
DECISION POINT 씰 A MANAGER’S FOCUS AMAZON
Measuring Quality: An Illustration 1242
Evaluating the Costs of Quality 1242 The Role of Management Information
.COM
Evaluating Nonfinancial Measures of Quality 1245 Systems in Quality Management 1234
The Evolving Concept of Quality 1246 Enterprise Resource Planning Systems 1234 Recognition of Quality 1248 Managers’ Use of MIS 1234
1250 Financial and Nonfinancial Measures
A LOOK BACK AT 씰 AMAZON.COM
of Quality STOP & REVIEW 1252
Financial Measures of Quality 1236 CHAPTER ASSIGNMENTS 1254 Nonfinancial Measures of Quality 1237
Measuring Service Quality 1241
CHAPTER 28 Financial Analysis of Performance
DECISION POINT 씰 A MANAGER’S FOCUS STARBUCKS
Sources of Information 1275
Executive Compensation 1277 Foundations of Financial Performance
CORPORATION
Tools and Techniques of Financial Measurement 1272
Analysis 1279
Contents
xvii
Comprehensive Illustration of Ratio Evaluating the Adequacy of Cash Flows 1291 Analysis 1287
Evaluating Market Strength 1293 Evaluating Liquidity 1287
1294 Evaluating Profitability 1289
A LOOK BACK AT 씰 STARBUCKS CORPORATION
STOP & REVIEW 1299
Evaluating Long-Term Solvency 1290 CHAPTER ASSIGNMENTS 1301
APPENDIX A Accounting for Investments
Management Issues Related to Investments 1320 Trading Securities 1322 Available-for-Sale Securities 1325 Long-Term Investments in Equity Securities 1325 Investments in Debt Securities 1329 Long-Term Investments in Bonds 1330 STOP & REVIEW 1331
APPENDIX B Present Value Tables
Endnotes 1338 Company Index 1344 Subject Index 1346
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PREFACE
Accounting
This revision of Financial and Managerial Accounting is based on an understand-
in Motion! ing of the nature, culture, and motivations of today’s undergraduate students and
on extensive feedback from many instructors who use our book. These substantial changes meet the needs of these students, who not only face a business world increasingly complicated by ethical issues, globalization, and technology but who also have more demands on their time. To assist them to meet these challenges, the authors carefully show them how the effects of business transactions, which are the result of business decisions, are recorded in a way that will be reflected on the financial statements. Instructors will find that building on the text’s histori- cally strong pedagogy, the authors have strengthened transaction analysis and its link to the accounting cycle.
Updated Content, Strengthened Transaction Analysis
Organization
Maintaining a solid foundation in double-entry accounting, we increased the
and Pedagogy
number of in-text journal entries and have used T accounts linked to these journal-entry illustrations throughout the financial accounting chapters. In Chapter 2, “Analyzing Business Transactions,” for example, we clarified the rela- tionship of transaction analysis to the accounting cycle. In Chapter 5, “The Oper- ating Cycle and Merchandising Accounting,” we include transaction illustrations for all transactions mentioned in the chapter. At the same time, we reduced exces- sive detail, shortened headings, simplified explanations, and increased readability in an effort to reduce the length of each chapter.
Application of Double Entry:
Assets ⫽ Liabilities ⫹ Owner’s Equity
C ASH
W AGES E XPENSE
Entry in Journal Form :
Dr. Cr.
July 26 Wages Expense
Cash
Preface
Strong Pedagogical System
Financial and Managerial Accounting originated the pedagogical system of Integrated Learning Objectives. The system supports both learning and teach- ing by providing flexibility in support of the instructor’s teaching of first-year accounting. The chapter review and all assignments identify the applicable learn- ing objective(s) for easy reference.
Each learning objective refers to a specific content area, usually either con- ceptual content or procedural techniques, in short and easily understandable seg- ments. Each segment is followed by a “Stop and Apply” section that illustrates and solves a short exercise related to the learning objective.
STOP & APPLY
Match the letter of each item below with the numbers of the related items:
a. An inventory cost
3. Application of the LCM rule
b. An assumption used in the valuation of
____ 4. Goods flow
inventory
____ 5. Transportation charge for mer-
c. Full disclosure convention
chandise shipped FOB shipping
d. Conservatism convention
point
e. Consistency convention
____ 6. Cost flow
f. Not an inventory cost or assumed flow
____ 7. Choosing a method and sticking
1. Cost of consigned goods
with it
____ 2. A note to the financial statements
____ 8. Transportation charge for mer-
explaining inventory policies
chandise shipped FOB destination
SOLUTION
1. f; 2. c; 3. d; 4. b; 5. a; 6. f; 7. e; 8. f
To make the text more visually appealing and readable, it is divided into student-friendly sections with brief bulleted lists, new art, photographs, and end- of-section review material.
Cash Flows
To avoid financial distress, a company must be able to pay its bills on time. Because
and the Timing
the timing of cash flows is critical to maintaining adequate liquidity to pay bills,
of Transactions managers and other users of financial information must understand the difference
between transactions that generate immediate cash and those that do not. Con-
sider the transactions of Miller Design Studio shown in Figure 2-3. Most of them
LO
5 Show how the timing
involve either an inflow or outflow of cash.
of transactions affects cash
As you can see in Figure 2-3, Miller’s Cash account has more transactions
flows and liquidity.
than any of its other accounts. Look at the transactions of July 10, 15, and 22: July 10: Miller received a cash payment of $2,800.
July 15: The firm billed a customer $9,600 for a service it had already per- formed.
Preface
xxi
Further, to reduce distractions, the margins of the text include only Study
Notes, which alert students to common misunderstandings of concepts and tech- After Step 1 has been completed,
Study Note
niques; key ratio and cash flow icons, which highlight discussions of profitability the Income Summary account
and liquidity; and accounting equations. Icons and equations appear in the finan- reflects the account balance of
cial chapters (Chapters 1–14).
the Design Revenue account before it was closed.
Enhanced Real-
IFRS, Fair Value, and Other Updates
World Examples
International Financial Reporting Standards and fair value have been integrated
Demonstrate
throughout the book where accounting standards have changed and also in the Business Focus features where applicable. All current events, statistics, and tables
Accounting
have been updated with the latest data.
in Motion
FOCUS ON BUSINESS PRACTICE
IFRS: The Arrival of International Financial Reporting Standards in the United States
Over the next few years, international financial and Exchange Commission (SEC) recently voted to reporting standards (IFRS) will become much more allow foreign registrants in the United States. This important in the United States and globally. The is a major development because in the past, the International Accounting Standards Board (IASB) SEC required foreign registrants to explain how the has been working with the Financial Accounting standards used in their statements differed from Standards Board (FASB) and similar boards in other U.S. standards. This change affects approximately 10 nations to achieve identical or nearly identical stan- percent of all public U.S. companies. In addition, the dards worldwide. IFRS are now required in many SEC may in the near future allow U.S. companies to parts of the world, including Europe. The Securities- use IFRS. 11
Use of Diverse Companies
Each chapter begins with a Decision Point, a real-world scenario about a company that challenges students to see the connection between accounting information and management decisions.
DECISION POINT A USER’S FOCUS
An order for airplanes is
THE BOEING COMPANY
obviously an important economic event for both the buyer and the seller. Is there a
In April 2006, the Chinese government announced that it had ordered
difference between an economic event and a business transaction
80 Boeing commercial jet liners, thus fulfilling a commitment it
that should be recorded in the
had made to purchase 150 airplanes from Boeing. Valued at about
accounting records?
$4.6 billion, the order for the 80 airplanes was one of many events
Should Boeing record the order
that brought about Boeing’s resurgence in the stock market. After
in its accounting records?
Boeing received this order, as well as orders from other customers, its stock began trading at an all-time high.
How important are liquidity and cash flows to Boeing?
Typically, it takes Boeing almost two years to manufacture an Typically, it takes Boeing almost two years to manufacture an
Preface These company examples come full circle at the end of the chapter by linking
directly to the A Look Back At diverse company examples illustrate accounting concepts and encourage students to apply what they have learned.
A LOOK BACK AT
씰 THE BOEING COMPANY
The Decision Point at the beginning of the chapter described the order for 80 airplanes that the Chinese government placed with Boeing . It posed the following questions:
• An order for airplanes is obviously an important economic event to both the buyer and the seller. Is there a difference between an economic event and a business transaction that should be recorded in the accounting records?
• Should Boeing record the order in its accounting records? • How important are liquidity and cash flows to Boeing?
Despite its importance, the order did not constitute a business transaction, and nei- ther the buyer nor the seller should have recognized it in its accounting records. At the time the Chinese government placed the order, Boeing had not yet built the airplanes. Until it delivers them and title to them shifts to the Chinese government, Boeing cannot record any revenue.
Use of Well-Known Public Companies
This textbook also offers examples from highly recognizable public companies, such as CVS Caremark, Southwest Airlines, Dell Computer, and Netflix, to relate basic accounting concepts and techniques to the real world. Chapter 4, “Finan- cial Reporting and Analysis,” helps students interpret financial information. The latest available data is used in exhibits to incorporate the most recent FASB pronouncements. The authors illustrate current practices in financial reporting by referring to data from Accounting Trends and Techniques (AICPA) and integrate international topics wherever appropriate.
Consolidated means that data from all
CVS Caremark Corporation Consolidated Statements of Operations
CVS’s fiscal year ends on the Saturday
companies owned by CVS are combined.
closest to December 31.
Fiscal Year Ended
Dec. 31, 2008
Dec. 29, 2007 Dec. 30, 2006
(In millions, except per share amounts)
(52 weeks)
(52 weeks) (53 weeks)
Net revenues
Cost of revenues
Gross profit
Total operating expenses
11,314.4 9,300.6 Operating profit 1 6,046.2 4,793.3 2,441.6
Interest expense, net 2 509.5 434.6 215.8
Earnings before income tax provision
Loss from discontinued operations,
net of income tax benefit of $82.4 Income tax provision
1,721.7 856.9 Net earnings 3 3,212.1 2,637.0 1,368.9
Preference dividends, net of income tax benefit 4 14.1 14.2 13.9
Net earnings available to common shareholders
BASIC EARNINGS PER COMMON SHARE : 5
Net earnings
Preface
xxiii
Revised and Expanded Assignments
Assignments have been carefully scrutinized for direct relevancy to the learning objectives in the chapters. Names and numbers for all Short Exercises, Exercises, and Problems have been changed except those used on videos. We have reversed the alternate and main problems from the previous edition. Most importantly, alternative problems have been expanded so that there are ample problems for any course.
All of the cases have been updated as appropriate and the number of cases in each chapter has been reduced in response to user preferences. The variety of cases in each chapter depends on their relevance to the chapter topics, but throughout the text there are cases involving conceptual understanding, ethical dilemmas, interpreting financial reports, group activities, business communication, and the Internet. Annual report cases based on CVS Caremark and Southwest Airlines can be found at the end of the chapter.
Specific Chapter Changes
The following chapter-specific changes have been made in this edition of Financial and Managerial Accounting:
Chapter 1 Uses of Accounting Information and the Financial Statements
• Discussion of performance measures revised using CVS and General Motors as examples of how these measures relate to profitability and liquidity • Discussion of the statement of cash flows revised to relate the statement to business activities and goals • Updated and enhanced coverage of the roles of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB)
• New Focus on Business Practice box on SEC’s decision to let foreign com- panies registered in the United States use international financial reporting standards (IFRS)
• New study note on the role of the Public Company Accounting Oversight Board (PCAOB)
Chapter 2 Analyzing Business Transactions
• Section on valuation in Learning Objective (LO) 1 revised to address fair value and IFRS • New Focus on Business Practice box on fair value accounting in an interna- tional marketplace • New example of recognition violation focusing on Computer Associates • LO3 revised to emphasize and clarify the role of T accounts, journal form,
and their relationship to the general ledger • Cash flow discussion in LO5 edited for clearer delineation of the sequence of transactions
Chapter 3 Measuring Business Income
• New company (Netflix) used as example in the Decision Point • New company (Netflix) used as example in the Decision Point
Preface
Chapter 4 Financial Reporting and Analysis
• First section in LO1 revised to reflect the FASB’s emphasis on the needs of
capital providers and other users of financial reports • Coverage of qualitative characteristics simplified and shortened • Topics in LO2 reorganized to reflect changes in LO1 • New Focus on Business Practice box on convergence of U.S. GAAP and IFRS
and their effect on accounting conventions • New Focus on Business Practice box on the IASB’s proposed changes in the
format of financial statements • New Focus on Business Practice box on how the convergence of U.S. GAAP
and IFRS has made financial analysis more difficult • New Focus on Business Practice box on the use of ratios in measuring perfor-
mance and determining executives’ compensation
Chapter 5 The Operating Cycle and Merchandising Operations
• Discussion of the operating cycle in LO1 revised for greater clarity • New Focus on Business Practice box on the effectiveness of the Sarbanes-
Oxley Act in preventing fraud • Journal entries used to illustrate accounting for merchandising transactions under both the perpetual and periodic inventory systems (LO3 and LO4) • Clearer differentiation in LO4 between the cost of goods available for sale
and the cost of goods sold • New Focus on Business Practice box on methods of preventing shoplifting • Material in LO6 reformatted to clarify discussion of documents used in an
internal control plan for purchases and cash disbursements
Chapter 6 Inventories
• New company (Toyota) used as example in the Decision Point • Discussion in LO1 of disclosure of inventory methods shortened for greater
clarity • New Focus on Business Practice box on the lower-of-cost-or-market rule • New Focus on Business Practice box on the use of LIFO inside and outside
the United States • New Focus on Business Practice box on how IFRS and U.S. standards define
fair value
Chapter 7 Cash and Receivables
• New coverage of subprime loans, including a new Focus on Business Practice
box in LO1 • Concept of fair value introduced at various points throughout the chapter • Revised Focus on Business Practice box on estimating cash collections
Chapter 8 Current Liabilities and Fair Value Accounting
• New company (Microsoft) used as example in the Decision Point • Chapter revised to include coverage of fair value accounting • Discussions and assignments related to future value deleted to emphasize
present value and fair value, which are more directly related to this course
Preface
xxv
• Coverage of tax laws in LO3 revised to address the Economic Stimulus Act of 2008 • Coverage of intangible assets in LO6 revised to reflect current standards • Revised Focus on Business Practice box on the amortization of customer
lists
Chapter 10 Long-Term Liabilities
• Discussion in LO1 of accounting for defined benefit plans updated • Section on cash flow information added to LO1 • New Focus on Business Practice box on postretirement liabilities • Bonds interest rates changed so that they are more realistic than in previous
edition
Chapter 11 Contributed Capital
• Revised Focus on Business Practice box on how political pressure affected the FASB’s ruling on stock options • Section on cash flow information added to LO1 • Updated Focus on Business Practice box on share buybacks
Chapter 12 Investments
• Discussion of measuring investments at fair value added to valuation section in LO1 • New Focus on Business Practice box on the role of fair value accounting in the subprime mortgage collapse
Chapter 13 The Corporate Income Statement and the Statement of Stockholders’ Equity
• New Focus on Business Practice box on looking beyond the bottom line • Revised Focus on Business Practice box on pro forma earnings • Discontinued operations and extraordinary items, which were covered in
LO3 in previous edition, now discussed in section on nonoperating items in LO1
Chapter 14 The Statement of Cash Flows
• New company (Amazon.com) used as example in the Decision Point • Clarification of required disclosure of noncash investing and financing activi-
ties in LO1 • Sections on the risks of having too much cash and on interpreting the state- ment of cash flows added to LO2 • New Focus on Business Practice box on the IASB’s support of the direct method
Chapter 15 The Changing Business Environment: A Manager’s Perspective
• Updated definition of management accounting in LO1 • Lean production introduced as a key term in LO3 • Sections on total quality management and activity based management in LO3
revised revised
Preface • Introduction to methods of product cost measurement added and section on
computing service unit cost shortened in new LO4 • LO7 and LO8 in previous edition (the traditional and ABC approaches to allocating overhead) streamlined and incorporated in new LO5
Chapter 17 Costing Systems: Job Order Costing
• Chapter 17 in previous edition separated into two chapters, with new Chapter 17 focusing on job order costing and new Chapter 18 focusing on process costing
• Operations costing system introduced as a key concept • Discussions of manufacturer’s job order cost card, computation of unit cost,
and job order costing in a service organization included in new LO4
Chapter 18 Costing Systems: Process Costing
• New chapter (part of Chapter 17 in previous edition)
Chapter 19 Value-Based Systems: ABM and Lean
• Chapter revised to emphasize value-based systems • LO1, LO2, and LO3 in last edition revised and incorporated in new LO1 • New listing of the disadvantages of activity-based costing in LO2 • New focus on lean operations in LO3 and section on accounting for product
costs added
Chapter 20 Cost Behavior Analysis
• New company (Flickr) used as example in the Decision Point • Sections on variable, fixed, and mixed costs, which were in LO2 in last edi-
tion, now included in LO1 • Concept of a step cost introduced in discussion of fixed costs in LO1 • Methods used to separate the components of mixed costs and the contribu-
tion margin income statement now the focus of LO2 • Material in LO4 reformatted to clarify concepts
Chapter 21 The Budgeting Process
• New company (Framerica Corporation) used as example in the Decision
Point • LO1 reorganized, revised, and shortened • Section on advantages of budgeting and three new key terms—static budget,
continuous budget, and zero-based budgeting added to LO1
Chapter 22 Performance Management and Evaluation
• LO1 and LO2 in last edition combined and revised