accounting

15th Edition Financial &ManagerialAccountingTHE BASIS FOR BUSINESS DECISIONS

Jan R. WilliamsUniversity of Tennessee

Susan F. HakaMichigan State University

Mark S. BettnerBucknell University

Joseph V. CarcelioUniversity of Tennessee

McGraw-HillIrwin

Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. LouisBangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico CityMilan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

ContentsAccounting: Informationfor Decision Making

Accounting Information: A Means to an End 4Accounting from a User's Perspective 4Types of Accounting Information 5

Accounting Systems 6Determining Information Needs 7The Cost of Producing Accounting Information 7Basic Functions of an Accounting System 7Who Designs and Installs Accounting Systems? 8Components of Internal Control 8

Financial Accounting Information 9External Users of Accounting Information 9Objectives of External Financial Reporting 10Characteristics of Externally Reported Information 12

Management Accounting Information 13Users of Internal Accounting Information 13Objectives of Management Accounting Information 14Characteristics of ManagementAccounting Information 15

Integrity of Accounting Information 16Institutional Features 17

Professional Organizations 19Competence, Judgment, and Ethical Behavior 21

Careers in Accounting 23Public Accounting 23Management Accounting 24Governmental Accounting 24Accounting Education 24What about Bookkeeping? 25Accounting as a Stepping-Stone 25But What about Me? I'm Not an Accounting Major 25

Ethics^ Fraud & Corporate Governance . 26Concluding Remarks 26End-of-Chapter Review 27Assignment Material 30

Basic FinancialStatements

Introduction to Financial Statements 40A Starting Point: Statement of Financial Position 41

Assets 42Liabilities 44

Owners' EquityThe Accounting EquationThe Effects of Business Transactions: An IllustrationEffects of These Business Transactionson the Accounting Equation

Income StatementStatement of Cash FlowsRelationships among Financial StatementsFinancial Analysis and Decision MakingForms of Business Organization

Sole ProprietorshipsPartnershipsCorporationsReporting Ownership Equity in theStatement of Financial Position

The Use of Financial Statements byExternal Parties

The Need for Adequate DisclosureManagement's Interest in Financial Statements

Ethics, Fraud & Corporate GovernanceConcluding RemarksEnd-of-Chapter ReviewAssignment Material

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The Accounting Cycle:Capturing EconomicEvents

The Accounting CycleThe Role of Accounting Records

The LedgerThe Use of AccountsDebit and Credit Entries

Double-Entry AccountingThe Equality ofDebits and Credits

The JournalPosting Journal Entries to the Ledger Accounts(and How to "Read" a Journal Entry)

Recording Balance Sheet Transactions:An IllustrationLedger Accounts after PostingWhat Is Net Income?

Retained EarningsThe Income Statement: A PreviewRevenue

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ExpensesThe Accrual Basis of AccountingDebit and Credit Rules for Revenue and Expenses

DividendsRecording Income Statement Transactions:An Illustration

The Journal

February's Ledger BalancesThe Trial Balance

Uses and Limitations of the Trial Balance

Ethics, Fraud & Corporate GovernanceConcluding Remarks

The Accounting Cycle in Perspective

End-of-Chapter ReviewAssignment Material

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The Accounting Cycle:Accruals and Deferrals

Adjusting EntriesThe Need for Adjusting EntriesTypes of Adjusting EntriesAdjusting Entries and Timing DifferencesCharacteristics of Adjusting EntriesYear-End at Overnight Auto ServiceConverting Assets to ExpensesThe Concept of DepreciationConverting Liabilities to RevenueAccruing Unpaid ExpensesAccruing Uncollected RevenueAccruing Income Taxes Expense:The Final Adjusting Entry

Adjusting Entries and Accounting PrinciplesThe Concept of MaterialityEffects of the Adjusting Entries


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The Accounting Cycle:Reporting FinancialResults

Preparing Financial StatementsThe Income StatementThe Statement of Retained EarningsThe Balance Sheet

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Relationships among the Financial StatementsDrafting the Notes That Accompany Financial StatementsWhat Types of Information Must Be Disclosed?

Closing the Temporary AccountsClosing Entries for Revenue AccountsClosing Entries for Expense AccountsClosing the Income Summary AccountClosing the Dividends Account

Summary of the Closing ProcessAfter-Closing Trial Balance

A Last Look at Overnight: Was 2009 a Good Year?

Financial Analysis and Decision Making "Preparing Financial Statements Covering DifferentPeriods of Time

Ethics, Fraud & Corporate GovernanceConcluding RemarksSupplemental Topic: The Worksheet

Isn't This Really a Spreadsheet?How Is a Worksheet Used?The Mechanics: How It's DoneWhat If: A Special Application of Worksheet Software

End-of-Chapter ReviewAssignment Material

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Susquehanna Equipmental Rentals 244

6 MerchandisingActivities

Merchandising Companies 248The Operating Cycle of a Merchandising Company 248Income Statement of a Merchandising Company 249Accounting System Requirements for MerchandisingCompanies 250Two Approaches Used in Accounting for MerchandiseInventories 251

Perpetual Inventory Systems 251Taking a Physical Inventory 253Closing Entries in a Perpetual Inventory System 254

Periodic Inventory Systems 254Operation of a Periodic Inventory System 254Closing Process in a Periodic Inventory System 255Comparison of Perpetual and Periodic Inventory Systems 257Selecting an Inventory System 258

Transactions Relating to Purchases 259Credit Terms and Cash Discounts 259Returns of Unsatisfactory Merchandise 261Transportation Costs on Purchases 261

XXIV

Transactions Relating to Sales 262Sales Returns and Allowances 262Sales Discounts 263Delivery Expenses 263Accounting for Sales Taxes 264

Modifying an Accounting System 264Special Journals Provide Speed and Efficiency 264

Financial Analysis and Decision Making 265Net Sales 265Gross Profit Margins 265

Ethics, Fraud & Corporate Governance 267Concluding Remarks 267End-of-Chapter Review 268Assignment Material 272

7 Financial Assets

How Much Cash Should a Business Have? 292The Valuation of Financial Assets 292

Cash 293Reporting Cash in the Balance Sheet 293The Statement of Cash Flows '; 294Cash Management / 294Internal Control over Cash 294Bank Statements 295Reconciling the Bank Statement 295Petty Cash Funds 299

Short-Term Investments 299Accounting for Marketable Securities 300

Purchase of Marketable Securities 300Recognition of Investment Revenue 301Sale of Investments 301Adjusting Marketable Securities to Market Value 302

Accounts Receivable 303Uncollectible Accounts 303The Allowance for Doubtful Accounts 305Writing Off an Uncollectible Account Receivable 305Monthly Estimates of Credit Losses 306Concentrations of Credit Risk 308Recovery of an Account Receivable Previously Written Off 308Direct Write-Off Method 309Internal Controls for Receivables 310Management of Accounts Receivable 310Factoring Accounts Receivable 310Credit Card Sales . 310

Notes Receivable and Interest Revenue 311Nature of Interest 312Accounting for Notes Receivable 312

Financial Analysis and Decision Making 314Ethics, Fraud & Corporate Governance 316Concluding Remarks 316End-of-Chapter Review 317Assignment Material 321

Inventories and theCost of Goods Sold

Inventory Defined

The Flow of Inventory CostsWhich Unit Did We Sell?Data for an IllustrationSpecific IdentificationCost Flow AssumptionsAverage-Cost MethodFirst-ln, First-Out MethodLast-In, First-Out MethodEvaluation of the MethodsDo Inventory Methods Really AffectPerformance?The Principle of ConsistencyJust-in-Time (JIT) Inventory Systems

Taking a Physical InventoryRecording Shrinkage LossesLCM and Other Write-Downs of InventoryThe Year-End Cutoff of TransactionsPeriodic Inventory SystemsInternational Financial Reporting StandardsImportance of an Accurate Valuationof InventoryTechniques for Estimating the Cost ofGoods Sold and the Ending InventoryThe Gross Profit MethodThe Retail Method"Textbook" Inventory Systems Can BeModif ied.. . and They Often Are

Financial Analysis and Decision MakingInventory Turnover

Receivables TurnoverAccounting Methods Can AffectFinancial Ratios


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Guitar Universe, Inc. 388XXV

Plant and IntangibleAssets

Concluding RemarksEnd-of-Chapter ReviewAssignment Material

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Plant Assets as a "Stream of Future Services"Major Categories of Plant AssetsAccountable Events in the Lives of Plant Assets

Acquisitions of Plant AssetsDetermining Cost: An ExampleSome Special ConsiderationsCapital Expenditures and Revenue Expenditures

DepreciationAllocating the Cost of Plant andEquipment over the Years of UseCauses of DepreciationMethods of Computing DepreciationThe Straight-Line MethodThe Declining-Balance MethodWhich Depreciation Methods Do MostBusinesses Use?Financial Statement DisclosuresThe Impairment of Plant Assets

Other Depreciation MethodsThe Units-of-Output MethodMACRSSum-of-the-Years' DigitsDecelerated Depreciation MethodsDepreciation Methods in Use: A Survey

Disposal of Plant and EquipmentGains and Losses on the Disposalof Plant and EquipmentTrading in Used Assets for New OnesInternational Financial Reporting Standards

Intangible AssetsCharacteristicsOperating Expenses versus Intangible AssetsAmortization

GoodwillPatentsTrademarks and Trade NamesFranchisesCopyrightsOther Intangibles and Deferred ChargesResearch and Development (R&D) Costs

Financial Analysis and Decision MakingNatural Resources

Accounting for Natural ResourcesDepreciation, Amortization, and DepletionA Common Goal

Plant Transactions and theStatement of Cash FlowsEthics, Fraud & Corporate Governance

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10 Liabilities

The Nature of Liabilities

Current LiabilitiesAccounts PayableMotes PayableThe Current Portion of Long-Term DebtAccrued LiabilitiesPayroll LiabilitiesUnearned Revenue

Long-Term LiabilitiesMaturing Obligations Intended to Be RefinancedInstallment Notes PayableBonds PayableWhat Are Bonds?Tax Advantage of Bond FinancingAccounting for Bonds PayableBonds Issued at a Discount or a PremiumAccounting for a Bond Discount: An IllustrationAccounting fora Bond Premium: An IllustrationBond Discount and Premium in PerspectiveThe Concept of Present ValueBond Prices after IssuanceEarly Retirement of Bonds Payable

Estimated Liabilities, Loss Contingencies,and Commitments

Estimated LiabilitiesLoss ContingenciesCommitments

Evaluating the Safety of Creditors' ClaimsMethods of Determining CreditworthinessHow Much Debt Should a Business Have?

Financial Analysis and Decision MakingEthics, Fraud & Corporate GovernanceSpecial Types of Liabilities

Lease Payment ObligationsOperating LeasesCapital LeasesLiabilities for Pensions and OtherPostretirement BenefitsDeferred Income Taxes


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XXVI

Stockholders' Equity:Paid-in Capital

Corporations 490Why Businesses Incorporate 490Publicly Owned Corporations 491

Formation of a Corporation 492Stockholder Records in a Corporation 494

Paid-in Capital of a Corporation 494Authorization and Issuance of Capital Stock 494Common Stock and Preferred Stock 496Characteristics of Preferred Stock 497Book Value per Share of Common Stock 499

Market Value 500Market Price of Preferred Stock 501Market Price of Common Stock 501Book Value and Market Price 502Stock Splits 502

Treasury Stock 502Recording Purchases of Treasury Stock 503Reissuance of Treasury Stock 503Stock Buyback Programs 504

Financial Analysis and Decision Making 505Ethics, Fraud & Corporate Governance 506Concluding Remarks / 506End-of-Chapter Review 507Assignment Material 510

McMinn Retail, Inc. 525

12 Income and Changesin Retained Earnings

Reporting the Results of Operations 528Developing Predictive Information 528Reporting Irregular Items: An Illustration 528Continuing Operations 528Discontinued Operations 529Extraordinary Items 529Earnings per Share (EPS) 531

Financial Analysis and Decision Making 533Basic and Diluted Earnings per Share 534

Other Transactions Affecting Retained Earnings 534Cash Dividends 534Dividend Dates 535Liquidating Dividends _ 536Stock Dividends 536

Statement of Retained Earnings 538Prior Period Adjustments 539Comprehensive Income 539Statement of Stockholders' Equity 540Stockholders' Equity Section of the Balance Sheet 540


13 Statement of Cash Flows

Statement of Cash Flows 570Purposes of the Statement 570Example of a Statement of Cash Flows 570Classification of Cash Flows 570

Preparing a Statement of Cash Flows 573Operating Activities 574Investing Activities 574Financing Activities 575Cash and Cash Equivalents 575Cash Flows from Operating Activities 576Cash Payments for Merchandise and for Expenses 577Cash Flows from Investing Activities 579Cash Flows from Financing Activities 581Relationship between the Statement ofCash Flows and the Balance Sheet 582 ,Reporting Operating Cash Flows by the Indirect Method 583Reconciling Net Income with Net Cash Flows 584The Indirect Method: A Summary 585Indirect Method May Be Required ina Supplementary Schedule 585

The Statement of Cash Flows: A Second Look 585

Financial Analysis and Decision Making 587Managing Cash Flows 589

Budgeting: The Primary Cash Management Tool 589What Priority Should Managers Give toIncreasing Net Cash Flows? 589Some Strategies for Permanent Improvements

in Cash Flow 590

Ethics, Fraud & Corporate Governance 591A Worksheet for Preparing a Statementof Cash Flows 592

Data for an Illustration 592The Worksheet 593Entry 595

Concluding Remarks 596End-of-Chapter Review .' 598Assignment Material 603

XXVII

14 Financial StatementAnalysis

Financial Statements Are Designedfor Analysis 630

Tools of Analysis 631Dollar and Percentage Changes 631Trend Percentages 632Component Percentages 633Ratios 633Standards of Comparison 633Quality of Earnings 634Quality of Assets and the RelativeAmount of Debt 635

Measures of Liquidity and Credit Risk 635A Classified Balance Sheet 635Working Capital 637Current Ratio 637Quick Ratio 638Debt Ratio 638Evaluating Financial Ratios 638Liquidity, Credit Risk, and the Law 640

Measures of Profitability 640Classifications in the Income Statement 641Multiple-Step Income Statements 642Earnings per Share . 644Price-Earnings Ratio 644Single-Step Income Statements 645Evaluating the Adequacy of Net Income 645Return on Investment (ROI) 645Return on Assets (ROA) 646Return on Equity (ROE) 646

Comprehensive Illustration: Seacliff Company 647Analysis by Common Stockholders 650Return on Investment (ROI) 652Leverage . 653Analysis by Long-Term Creditors 654Analysis by Short-Term Creditors 654Cash Flow Analysis 658Usefulness of Notes to FinancialStatements 659International Financial Reporting Standards 659Summary of Analytical Measurements 660


Home Depot, Inc. 688

15 Global Businessand Accounting

GlobalizationEnvironmental Forces Shaping Globalization

Political and Legal SystemsEconomic SystemsCultureTechnology and Infrastructure

Harmonization of Financial Reporting StandardsInternational Financial ReportingStandards: Adoption or Convergence

Foreign Currencies and Exchange RatesExchange RatesAccounting for Transactions with Foreign CompaniesCurrency FluctuationsWho Wins and Who Loses?Consolidated Financial Statements That IncludeForeign Subsidiaries

Global SourcingForeign Corrupt Practices Act


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ManagementAccounting: A BusinessPartner

Management Accounting: Basic Framework 730Management Accounting's Role in AssigningDecision-Making Authority 730Management Accounting's Role in Decision Making 730Management Accounting's Role in PerformanceEvaluation and Rewards 731Accounting Systems: A Business Partner 731

Accounting for Manufacturing Operations 733Classifications of Manufacturing Costs 734Product Costs versus Period Costs 734

Ethics, Fraud & Corporate Governance 735Product Costs and the Matching Principle 736Inventories of a Manufacturing Business 736The Flow of Costs Parallels the Flow of Physical Goods 736Accounting for Manufacturing Costs: An Illustration 737Direct Materials 737Direct Labor 738Manufacturing Overhead 739Direct and Indirect Manufacturing Costs 740Work in Process Inventory, Finished GoodsInventory, and the Cost of Goods Sold 740

XXVIII

The Need for Per-Unit Cost Data 741Determining the Cost of Finished Goods Manufactured 741Financial Statements of a Manufacturing Company 742International Financial Reporting Standards

and Inventories 743

Concluding Remarks 744End-of-Chapter Review 745Assignment Material 748

17 Job Order CostSystems and OverheadAllocations

Cost Accounting SystemsJob Order Cost Systems and the Creationof Goods and ServicesOverhead Application Rates

What "Drives" Overhead Costs?

Job Order CostingThe Job Cost SheetFlow of Costs in Job Costing: An IllustrationAccounting for Direct MaterialsAccounting for Direct Labor CostsAccounting for Overhead CostsAccounting for Completed Jobs'Job Order Costing in Service Industries

Activity-Based Costing (ABC)Stage 1: Separate Activity Cost PoolsStage 2: Allocate Activity Cost Pools to the ProductsDetermining Unit Costs Using ABC

The Trend toward More InformativeCost Accounting SystemsEthics, Fraud & Corporate GovernanceConcluding RemarksEnd-of-Chapter ReviewAssignment Material

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18 Process Costing

Production of Goods and Services and CostingSystemsProcess Costing

Tracking the Physical Flow and Related Production CostsProcess Costing and Equivalent UnitsCost per Equivalent UnitTracking Costs Using a Process CostingProduction ReportEvaluating Departmental Efficiency


Costing and theValue Chain

The Value Chain 852International Financial ReportingStandards and the Value Chain 852Value- and Non-Value-Added Activities 852

Activity-Based Management 854Activity-Based Management across the Value Chain 854

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ABC: A Subset of Activity-Based Management

The Target Costing ProcessComponents of the Target Costing ProcessTarget Costing: An IllustrationCharacteristics of the Target Costing Process

Just-in-Time Inventory ProceduresJIT, Supplier Relationships, and Product QualityMeasures of Efficiency in a JIT System

Total Quality Management and the Value ChainComponents of the Cost of QualityMeasuring the Cost of QualityProductivity and Quality


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What Change in Operating Income Do We Anticipate? 900Business Applications of CVP 900Additional Considerations in CVP 903CVP Analysis When a Company Sells Many Products 903Determining Semivariable Cost Elements:The High-Low Method 904Assumptions Underlying Cost-Volume-Profit Analysis 905Summary of Basic Cost-Volume-Profit Relationships 905


21 Incremental Analysis

The Challenge of Changing MarketsThe Concept of Relevant Cost Information

Relevant Information in Business DecisionsInternational Financial Reporting Standardsand Relevant CostsA Simple Illustration Of Relevant CostsOpportunity CostsSunk Costs versus Out-of-Pocket Costs

Ethics, Fraud & Corporate Governance 'Incremental Analysis in CommonBusiness Decisions

Special Order DecisionsProduction Constraint DecisionsMake or Buy DecisionsSell, Scrap, or Rebuild DecisionsJoint Product Decisions


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The Gilster Company 960

22 ResponsibilityAccounting andTransfer Pricing

Responsibility Centers 964The Need for Information about ResponsibilityCenter Performance 964Cost Centers, Profit Centers,and Investment Centers 965

Responsibility Accounting SystemsResponsibility Accounting: An IllustrationAssigning Revenue and Coststo Responsibility CentersVariable CostsContribution MarginFixed CostsTraceable Fixed CostsCommon Fixed CostsResponsibility MarginWhen Is a Responsibility Center "Unprofitable"?Evaluating Responsibility Center ManagersArguments against Allocating Common FixedCosts to Business CentersTransfer PricesNonfinancial Objectives and Information

Ethics, Fraud & Corporate GovernanceResponsibility Center Reporting inFinancial Statements

International Financial Reporting Standardsand Responsibility Center Reporting


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I; 23 Operational Budgeting

Profit Rich, Yet Cash PoorOperating Cash Flows: The Lifeblood of Survival

Budgeting: The Basis for Planning and ControlBenefits Derived from BudgetingEstablishing Budgeted Amounts

Ethics, Fraud & Corporate GovernanceThe Budget PeriodThe Master Budget: A Package of Related BudgetsSteps in Preparing a Master BudgetPreparing the Master Budget: An IllustrationOperating Budget EstimatesBudgeted Income StatementCash Budget EstimatesThe Cash BudgetBudgeted Balance SheetsInternational Financial Reporting:Standards and BudgetingUsing Budgets EffectivelyFlexible Budgeting


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24 Standard Cost Systems

Standard Cost SystemsEstablishing and Revising Standard CostsDirect Materials StandardsDirect Labor StandardsManufacturing Overhead StandardsStandard Costs and Variance Analysis:An IllustrationMaterials Price and Quantity VariancesLabor Rate and Efficiency VariancesManufacturing Overhead VariancesValuation of Finished GoodsEvaluating Cost Variances from DifferentPerspectivesA Final Note: JIT Systems and VarianceAnalysis

Concluding RemarksEthics, Fraud & Corporate GovernanceEnd-of-Chapter ReviewAssignment Material

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Management CompensationComponents of Management Compensation

Ethics, Fraud & Corporate GovernanceInternational Financial Reporting Standardsand Management CompensationDesign Choices for ManagementCompensationGoals and Rewards in Life


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25 Rewarding BusinessPerformance

Motivation and Aligning Goals and ObjectivesCommunicating Goals and ObjectivesAccounting Information and Feedback aboutGoal AchievementRewarding Goal Achievement

The DuPont SystemReturn on Investment

The Components of Return on InvestmentReturn on SalesCapital Turnover

Criticisms of ROIThe Short Horizon ProblemFailing to Undertake Profitable InvestmentsMeasurement Problems

Residual Income and EconomicValue Added

Residual Income' Economic Value Added

The Balanced ScorecardThe Financial PerspectiveThe Customer PerspectiveThe Business Process PerspectiveThe Learning and Growth PerspectiveDifficulties with the Balanced Scorecard

26 Capital Budgeting

Capital Investment DecisionsFinancial and Nonfinancial ConsiderationsEvaluating Capital Investment Proposals:An Illustration

Payback PeriodReturn on Average InvestmentDiscounting Future Cash FlowsReplacing Assets

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B

Behavioral Considerations in Capital Budgeting

Concluding RemarksEthics, Fraud & Corporate GovernanceA Concluding Comment from the AuthorsEnd-of-Chapter ReviewAssignment Material

ra A Home Depot 2007 FinancialM Statements

The Time Value of Money: FutureAmounts and Present Values

The ConceptRelationships between Present Valuesand Future AmountsCompound InterestApplications of the Time Value of Money Concept

Future AmountsThe Tables ApproachThe Future Amount of an AnnuityInterest Periods of Less than One Year

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Present ValuesUsing Present Value TablesWhat Is the Appropriate Discount Rate?The Present Value of an AnnuityDiscount Periods of Less than One Year

Valuation of Financial InstrumentsInterest-Bearing Receivables and Payables"Non-Interest-Bearing" NotesMarket Prices of BondsCapital LeasesObligations for Postretirement Benefits

Assignment Material

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C Forms of Business Organization

Importance of Business Form C-1

Sole Proprietorships C-1The Concept of the Separate Business Entity C-1Characteristics of a Sole Proprietorship C-1Unlimited Personal Liability C-2Accounting Practices of Sole Proprietorships C-2Evaluating the Financial Statementsof a Proprietorship C-2

Partnerships C-3General Partnerships C-4Partnerships That Limit Personal Liability C-4Accounting Practices of Partnerships C-5

Evaluating the Financial Statementsof a Partnership C-6

Corporations C-6What Is a Corporation? C-7Stockholders' Liability for Debts of a Corporation C-8What Types of Businesses Choose theCorporate Form of Organization? C-8Accounting for Corporate Income Taxes C-8Salaries Paid to Owners C-10Owners' Equity in a Corporate Balance Sheet C-10The Issuance of Capital Stock C-10Retained Earnings C-10Accounting for Dividends C-11Closing Entries and the Statementof Retained Earnings C-11Evaluating the Financial Statements of a Corporation C-12The Conceptand the Problemof "Double Taxation" C-13S Corporations C-13

Selecting an Appropriate Form of BusinessOrganization C-14

Incorporating an Established Business C-14

Supplemental Topic: Partnership AccountingA Closer Look C-16

Opening the Accounts of a New Partnership C-16Allocating Partnership Net Income amongthe Partners C-18

Assignment Material C-22

Index I

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accounting

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