financial and managerial accounting - gbv
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Financial and Managerial
Accounting S E C O N D E D I T I O N
Charles T. Horngren Stanford University
Walter T. Harrison Jr. Baylor University
M. Suzanne Oliver Northwest Florida State College
Pearson Education International
Contents CHAPTER J» Accounting and the Business Environment 1 Accounting Vocabulary: The Language of Business 2 Decision Makers: The Users of Accounting
Information 2 Individuals 2 Businesses 2 Investors 3 Creditors 3 Taxing Authorities 3 Financial Accounting and Management Accounting 3
The Accounting Profession and the Organizations that Govern it 3
Governing Organizations 4 Ethics in Accounting and Business 5 Standards of Professional Conduct 5
Types of Business Organizations 5 Four Types of Business Organizations 5
Distinguishing Characteristics and Organization of a Corporation 7
Separate Legal Entity 7 Continuous Life and Transferability of Ownership 7 No Mutual Agency 8 Limited Liability of Stockholders 8 Separation of Ownership and Management 8 Corporate Taxation 8 Government Regulation 8 Organization of a Corporation 9
Accounting Concepts and Principles 9 The Entity Concept 10 The Reliability (Objectivity) Principle 10 The Cost Principle 10 The Going-Concern Concept 10 The Stable Monetary Unit Concept 11
The Accounting Equation 11 Assets and Liabilities 11 Owners' Equity 12
Accounting for Business Transactions 13 Transactions Analysis for Smart Touch Learning 14
Preparing the Financial Statements—the User Perspective of Accounting 18
The Financial Statements 20 Headings 20
Using Financial Statements to Evaluate Business Performance 23
Relationships Among the Financial Statements 23 • Decision Guidelines 25 • Summary Problem 26
Review and Assignment Material 28 • Chapter 1 Demo Doc: Transaction Analysis Using Accounting
Equation/Financial Statement Preparation 54
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Recording Business Transactions 63 The Account, the Journal, and the Ledger 64
Assets 64 Liabilities 65 Stockholders' Equity 66 Chart of Accounts 66
Debits, Credits, and Double-Entry Accounting 68 The T-Account 68 Increases and Decreases in the Accounts 69
List the Steps of the Transaction Recording Process 70 Posting (Copying Information) from the Journal to the Ledger 71 Expanding the Rules of Debit and Credit: Revenues and Expenses 72 The Normal Balance of An Account 73 Source Documents—The Origin of the Steps 74
Journalizing Transactions and Posting to the Ledger 74 Practice Journalizing with Specific Examples 74 The Ledger Accounts After Posting 80
Preparing the Trial Balance from the T-Accounts 81 Correcting Trial Balance Errors 82 Details of Journals and Ledgers 83 The Four-Column Account: An Alternative to the T-Account 84
• Decision Guidelines 85 • Summary Problem 86
Review and Assignment Material 90 • Chapter 2 Demo Doc: Debit/Credit Transaction Analysis 123
CHAPTER О The Adjusting Process 133 Accrual Accounting Versus Cash-Basis
Accounting 134 Other Accounting Principles 135
The Accounting Period 135 The Revenue Principle 136 The Matching Principle 137 The Time-Period Concept 137
Why We Adjust the Accounts 138 Two Categories of Adjusting Entries 139
Prepaid Expenses 139 Depreciation 142 Accrued Expenses 144 Accrued Revenues 146 Unearned Revenues 146 Summary of the Adjusting Process 149
The Adjusted Trial Balance 152 The Financial Statements 153
Preparing the Statements 153 Relationships Among the Financial Statements 153
vi Contents
Ethical Issues in Accrual Accounting 155 • Decision Guidelines 156 • Summary Problem 157
Review and Assignment Material 162
CHAPTER APPENDIX ЗА: Alternative Treatment of Prepaid Expenses and Unearned Revenues 190
• Chapter 3 Demo Doc: Preparation of Adjusting Entries, Adjusted Trial Balance, and Financial Statements 194
CHAPTER Completing the Accounting Cycle 206 The Work Sheet 207
Net Income 210 Net Loss 210
• Summary Problem 1 211
Completing the Accounting Cycle 213 Preparing the Financial Statements from a Worksheet 213 Recording the Adjusting Entries from a Worksheet 213
Closing the Accounts 216 Closing Temporary Accounts 217
Postclosing Trial Balance 219
Classifying Assets and Liabilities 219 Assets 220 Liabilities 220 The Classified Balance Sheet 221 Balance Sheet Forms 221
Accounting Ratios 222 Current Ratio 223 Debt Ratio 223
• Decision Guidelines 224 • Summary Problem 2 225 Review and Assignment Material 229
CHAPTER APPENDIX 4A: Reversing Entries: An Optional Step 256
COMPREHENSIVE PROBLEM FOR CHAPTERS 1-4: Journalizing, Posting, Work Sheet, Adjusting, Closing the Financial Statements 260
*• Chapter 4 Demo Doc: Accounting Work Sheets and Closing Entries 262
CHAPTER w Merchandising Operations 270 What Are Merchandising Operations? 272
The Operating Cycle of a Merchandising Business 272 Inventory Systems: Perpetual and Periodic 273 Perpetual Inventory Systems 273
Accounting for Inventory in the Perpetual System 274 Purchase of Inventory 274
Sale of Inventory 279 • Summary Problem 1 284
Adjusting and Closing the Accounts of a Merchandiser 286
Adjusting Inventory Based on a Physical Count 286 Closing the Accounts of a Merchandiser 287
Preparing a Merchandiser's Financial Statements 288 Income Statement Formats: Multi-Step and Single-Step 290
Two Ratios for Decision Making 290 The Gross Profit Percentage 290 The Rate of Inventory Turnover 291
• Decision Guidelines 292 • Summary Problem 2 294
Review and Assignment Material 297
CHAPTER APPENDIX 5A: Work Sheet for a Merchandising Business 319
CHAPTER APPENDIX 5B: Accounting for Merchandise in a Periodic Inventory System 323
COMPREHENSIVE PROBLEM FOR CHAPTERS 1-5: Completing a Merchandiser's Accounting Cycle 329
CHAPTER CI Merchandise Inventory 331 Accounting Principles and Inventories 332
Inventory Costing Methods 333
Inventory Accounting in a Perpetual System 336 First-In, First-Out (FIFO) Method 336 Last-In, First-Out (LIFO) Method 338 Average Cost Method 340
Comparing FIFO, LIFO, and Average Cost 341 • Summary Problem 1 343
Lower-of-Cost-or-Market Rule 346
Effects of Inventory Errors 347 Estimating Ending Inventory 348 Ethical Issues 349
• Decision Guidelines 350 • Summary Problem 2 351
Review and Assignment Material 352
CHAPTER APPENDIX 6A: Accounting for Inventory in a Periodic System 371
CHAPTER 7 Internal Control and Cash 378 Internal Control 379
The Sarbanes-Oxley Act (SOX) 380
The Components of Internal Control 380 Internal Control Procedures 381
Contents vii
Internal Controls for E-Commerce 384 The Limitations of Internal Control—Costs and Benefits 385
The Bank Account as a Control Device 386
The Bank Reconciliation 388 Preparing the Bank Reconciliation 389 Online Banking 392
• Summary Problem 1. 394
Internal Control over Cash Receipts 396
Internal Control over Cash Payments 397 Controls over Payment by Check 397 Controlling Small Cash Payments 399
The Petty Cash Fund 399
Ethics and Accounting 402 Corporate and Professional Codes of Ethics 402 Ethical Issues in Accounting 403
• Decision Guidelines 404 • Summary Problem 2 405
Review and Assignment Material 406
CHAPTER : ^ : : . : - ; : ! y
Receivables 429 Receivables: An Introduction 430
Types of Receivables 430
Internal Control over Collection of Receivables 431
• Decision Guidelines 432
Accounting for Uncollectibles (Bad Debts) 433
The Allowance Method 433 Estimating Uncollectibles 434 Identifying and Writing Off Uncollectible Accounts 437 Recovery of Accounts Previously Written Off— Allowance Method 437
The Direct Write-Off Method 439 Recovery of Accounts Previously Written Off—Direct Write-Off Method 439
Reporting Receivables on the Balance Sheet 440
Credit-Card, Bankcard, and Debit-Card Sales 441 Credit-Card Sales 441 Bankcard Sales 442 Debit-Card Sales 442
• Summary Problem 1 443
Notes Receivable 445 Identifying Maturity Date 445 Computing Interest on a Note 446 Accruing Interest Revenue 447 Dishonored Notes Receivable 449 Computers and Receivables 450
Using Accounting Information for Decision Making 450
Acid-Test (or Quick) Ratio 451 Days' Sales in Receivables 451
• Decision Guidelines 453
• Summary Problem 2 454
Review and Assignment Material 455
CHAPTER APPENDIX 8A: Discounting a Note Receivable 477
CHAPTER 9 Plant Assets and Intangibles 480 Measuring the Cost of a Plant Asset 482
Land and Land Improvements 482 Buildings 484 Machinery and Equipment 484 Furniture and Fixtures 484 A Lump-Sum (Basket) Purchase of Assets 484 Capital Expenditures 486
Depreciation 487 Causes of Depreciation 487 Measuring Depreciation 487 Depreciation Methods 488 Comparing Depreciation Methods 491 Other Issues in Accounting for Plant Assets 493
• Summary Problem 1 495
Disposing of a Plant Asset 497 Situation A - Scrap the Track 499
Accounting for Natural Resources 502
Accounting for Intangible Assets 502 Specific Intangibles 503 Accounting for Research and Development Costs 505
Ethical Issues 505
• Decision Guidelines 506
• Summary Problem 2 507
Review and Assignment Material 508
CHAPTER i Current Liabilities, Payroll, and Long-Term Liabilities 524 Current Liabilities of Known Amount 525
Accounts Payable 525 Short-Term Notes Payable 526 Sales Tax Payable 526 Current Portion of Long-Term Notes Payable 527 Accrued Expenses (Accrued Liabilities) 527 Unearned Revenues 528
Current Liabilities that must be Estimated Estimated Warranty Payable 528 Contingent Liabilities 529
• Decision Guidelines 531 • Summary Problem 1 532
Accounting for Payroll 533 Gross Pay and Net (Take-Home) Pay 533 Payroll Withholding Deductions 534 Employer Payroll Taxes 536
528
viii Contents
Journalizing Payroll Transactions 537 Internal Control over Payroll 538
• Decision Guidelines 539
• Summary Problem 2 540
Bonds: An Introduction 542 Types of Bonds 542 Bond Prices 542 Present Value 544 Bond Interest Rates 544
Accounting for Bonds Payable - Straight Line Method 545
Issuing Bonds Payable at Maturity (Par) Value 545 Issuing Bonds Payable at a Discount 546
• Decision Guidelines 548
Issuing Bonds Payable at a Premium 549 Adjusting Entries for Bonds Payable 550 Issuing Bonds Payable Between Interest Dates 551
Reporting Liabilities on the Balance Sheet 552
Issuing Bonds Versus Stock 552
Ethical Issues in Reporting Liabilities 553 • Decision Guidelines 554
• Summary Problem 3 555
Review and Assignment Material 556
CHAPTER APPENDIX 10A: The Time Value of Money: Present Value of a Bond and Effective-Interest Amortization 576
CHAPTER APPENDIX 10B: Retiring and Converting Bonds Payable 589
COMPREHENSIVE PROBLEM FOR CHAPTERS 7-10: Comparing Two Businesses 593
CHAPTER 11
Corporations: Paid-in Capital and the Balance Sheet 595 Corporations: An Overview 596
Capital Stock 596
Stockholders' Equity Basics 597 Stockholders' Rights 598 Classes of Stock 598
Issuing Stock 599 Issuing Common Stock 600 Issuing Preferred Stock 603 Ethical Considerations 603 Review of Accounting for Paid-in Capital 604
• Decision Guidelines 605
• Summary Problem 1 608
Retained Earnings 608
Accounting for Cash Dividends 609 Dividend Dates 609 Declaring and Paying Dividends 610
Dividing Dividends Between Preferred and Common 611 Dividends on Cumulative and Noncumulative Preferred 611
Different Values of Stock 612 Market Value 612 Liquidation Value 613 Book Value 613
Evaluating Operations 614 Rate of Return on Total Assets 614 Rate of Return on Common Stockholders' Equity 615
Accounting for Income Taxes by Corporations 616 • Decision Guidelines 617
• Summary Problem 2 618
Review and Assignment Material 620
Corporations: Effects on Retained Earnings and the Income Statement 6 4 1 Stock Dividends 642
Stock Splits 645 Stock Dividends and Stock Splits Compared 647
Treasury Stock 647 Treasury Stock Basics 647 Purchase of Treasury Stock 648 Sale of Treasury Stock 648 Retirement of Stock 650
Restrictions on Retained Earnings 650 Variations in Reporting Stockholders' Equity 651
• Decision Guidelines 652
• Summary Problem 1 654
The Corporate Income Statement 656 Continuing Operations 656 Special Items 657 Earnings per Share 658 Statement of Retained Earnings 659 Combined Statement of Income and Retained Earnings 660 Prior-Period Adjustments 660 Reporting Comprehensive Income 661
• Decision Guidelines 662
• Summary Problem 2 863
Review and Assignment Material 665
CHAPTER
The Statement of Cash Flows 6 8 1 Introduction: The Statement of Cash Flows
Cash Equivalents 682
Operating, Investing, and Financing Activities 683 Two Formats for Operating Activities 684
682
Contents ix
Preparing the Statement of Cash Flows by the Indirect Method 684
Cash Flows from Operating Activities 686 Cash Flows from Investing Activities 689 Cash Flows from Financing Activities 691 Net Change in Cash and Cash Balances 693 Noncash Investing and Financing Activities 694
Measuring Cash Adequacy: Free Cash Flow 696 • Decision Guidelines 697 *- Summary Problem 698
Review and Assignment Material 701
CHAPTER APPENDIX 13A: PreparingThe Statement Of Cash Rows By The Direct Method 721
CHAPTER APPENDIX 13B: Preparing the Indirect Statement of Cash Flows Using a Spreadsheet 739
CHAPTER Financial Statement Analysis 745 Horizontal Analysis 746
Illustration: Smart Touch Learning, Inc. 747 Horizontal Analysis of the Income Statement 748 Horizontal Analysis of the Balance Sheet 748 Trend Percentages 748
Vertical Analysis 749
H o w D o We Compare One Company with Another? 751
Benchmarking 752 Benchmarking Against a Key Competitor 752 Benchmarking Against the Industry Average 752
^ Summary Problem 1 753
Using Ratios to Make Decisions 755 Measuring Ability to Pay Current Liabilities 755 Measuring Ability to Sell Inventory and Collect Receivables 757 Measuring Ability to Pay Long-Term Debt 759 Measuring Profitability 760 Analyzing Stock Investments 762
Red Flags in Financial Statement Analysis 764 • Decision Guidelines 765 • Summary Problem 2 767
Review and Assignment Material 769
COMPREHENSIVE PROBLEM FOR CHAPTERS 13 AND 14; Analyzing a Company for its Inventment Potential 790
CHAPTER 1 5 Introduction to Management Accounting 791 Management Accountability 792
Today's Business Environment 794
Service Companies 795
Merchandising Companies 796 • Summary Problem 1 799
Manufacturing Companies 801 Types of Costs 801
Ethical Standards 807 • Decision Guidelines 809 • Summary Problem 2 811
Review and Assignment Material 812
о Job Order and Process Costing 831 How Much Does it Cost to Make a Product? Two
Approaches 832 Job Order Costing 832 Process Costing 832
How Job Costs Flow Through the Accounts: An Overview 833
• Decision Guidelines 839 • Summary Problem 1 840
Job Order Costing: Allocating Manufacturing Overhead 842
Accounting for Completion and Sale of Finished Goods and Adjusting Manufacturing Overhead 845
Accounting for the Completion and Sale of Finished Goods 846
Job Order Costing in a Service Company 848 • Decision Guidelines 851 »• Summary Problem 2 852
Review and Assignment Material 855
CHAPTER APPENDIX 16A: Process Costing-Weighted-Average Method 877
CHAPTER Activity-Based Costing and Other Cost Management Tools 901 Refining Cost Systems 902
Sharpening the Focus: Assigning Costs Based on the Activities That Caused the Costs 902 Developing an Activity-Based Costing System 904 Traditional Versus Activity-Based Costing Systems: Smart Touch Learning 905
Activity-Based Management: Using ABC for Decision Making 907
Pricing and Product Mix Decisions 908 Cutting Costs 909
• Decision Guidelines 912 • Summary Problem 1 913
Just-In-Time (JIT) Systems 915 Just-in-Time Costing 916 JIT Costing Illustrated: Smart Touch Learning 917
x Contents
Continuous Improvement and the Management of Quality 919
The Four Types of Quality Costs 920 Deciding Whether to Adopt a New Quality Program 921
• Decision Guidelines 922 • Summary Problem 2 923
Review and Assignment Material 924
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Cost-Volume-Profit Analysis 947 Cost Behavior 948
Variable Costs 948 Fixed Costs 949 Mixed Costs 950 High-Low Method to Separate Fixed Cost from Variable Costs 951 Relevant Range 952
Basic CVP Analysis: What Must We Sell To Break Even? 953
Assumptions 953 How Much Must Greg Sell to Break Even? Three Approaches 954
Using CVP To Plan Profits 957 How Much Must Greg's Sell to Earn a Profit? 957 Graphing Cost-Volume-Profit Relations 958
• Summary Problem i 960
Using CVP For Sensitivity Analysis 962 Changing the Selling Price 962 Changing Variable Costs 962 Changing Fixed Costs 963 Margin of Safety 964 Information Technology and Sensitivity Analysis 964
Effect of Sales Mix on CVP Analysis 965 • Decision Guidelines 967 • Summary Problem 2 969
Review and Assignment Material 971
CHAPTER APPENDIX ISA: Variable Costing and Absorption Costing 986
994 CHAPTER J Short-Term Business Decisions
995 H o w Managers Make Decisions Relevant Information 995 Relevant Nonfinancial Information 997 Keys to Making Short-Term Special Decisions
Special Sales Order and Regular Pricing Decisions 998
When to Accept a Special Sales Order 998 How to Set Regular Prices 1001
• Decision Guidelines 1006
997
• Summary Problem 1 1007
When to Drop Products, Departments, or Territories 1009
Dropping Products Under Various Assumptions 1010 Product Mix: Which Product to Emphasize? 1012
Outsourcing and Sell as is or Process Further Decisions 1014
When to Outsource 1014 Sell As Is or Process Further? 1018
• Decision Guidelines 1020 • Summary Problem 2 1021
Review and Assignment Material 1023
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Capital investment Decisions and the Time Value of Money 1042 Capital Budgeting 1043
Four Popular Methods of Capital Budgeting Analysis 1043 Focus on Cash Flows 1043 Capital Budgeting Process 1044
Using Payback and Accounting Rate of Return to Make Capital Investment Decisions 1045
Payback Period 1045 Accounting Rate of Return (ARR) 1048
• Decision Guidelines 1051 • Summary Problem 1 1052
A Review of the Time Value of Money 1053 Factors Affecting the Time Value of Money 1053 Future Values and Present Values: Points Along the Time Line 1054 Future Value and Present Factors 1055 Calculating Future Values of Single Sums and Annuities Using FV Factors 1055 Calculating Present Values of Single Sums and Annuities Using PV Factors 1056
Using Discounted Cash Flow Models to Make Capital Budgeting Decisions 1058
Net Present Value (NPV) 1058 Internal Rate of Return (IRR) 1063
Comparing Capital Budgeting Methods 1066 • Decision Guidelines 1068 • Summary Problem 2 1069 Review and Assignment Material 1070
CHAPTER The Master Budget and Responsibility Accounting 1083 Why Managers Use Budgets 1084
Using Budgets to Plan and Control 1085 Benefits of Budgeting 1086
Contents x i
Understanding the Components of the Master Budget 1087
Components of the Master Budget 1088 Data for Greg's Groovy Tunes 1089
Preparing the Operating Budget 1091 The Sales Budget 1091 The Inventory, Purchases, and Cost of Goods Sold Budget 1091 The Operating Expenses Budget 1092 The Budgeted Income Statement 1093
• Summary Problem 1 1094
Preparing the Financial Budget 1096 Preparing the Cash Budget 1096 The Budgeted Balance Sheet 1099 The Budgeted Statement of Cash Flows 1100 Getting Employees to Accept the Budget 1100
Using Information Technology for Sensitivity Analysis and Rolling Up Unit Budgets 1101
Sensitivity Analysis 1101 Rolling Up Individual Unit Budgets into the Company wide Budget 1102
Responsibility Accounting 1103 Four Types of Responsibility Centers 1103 Responsibility Accounting Performance Reports 1104
• Decision Guidelines 1108 • Summary Problem 2 1109
Review and Assignment Material 1113
CHAPTER 22 Flexible Budgets and Standard Costs 1131 How Managers Use Flexible Budgets 1132
What IsaFlexibleBudget? 1133 Using The Flexible Budget: Why Do Actual Results
Differ From The Static Budget? 1134 • Decision Guidelines 1137 • Summary Problem 1 1138
Standard Costing 1139 Price Standards 1139 Application 1140 Quantity Standards 1140 Why Do Companies Use Standard Costs? 1141 Variance Analysis 1142
How Smart Touch Uses Standard Costing: Analyzing The Flexible Budget Variance 1143
Direct Material Variances 1143 Direct Labor Variances 1146
Manufacturing Overhead Variances 1147 Allocating Overhead in a Standard Cost System 1147 Overhead Flexible Budget Variance 1149 Overhead Production Volume Variance 1149 Summary of Overhead Variances 1150
Standard Cost Accounting Systems 1150 Journal Entries 1150 Standard Cost Income Statement for Management 1152
• Decision Guidelines 1154 • Summary Problem 2 1155
Review and Assignment Material 1158
CHAPTER 4 Performance Evaluation and the Balanced Scorecard 1176 Decentralized Operations 1177
Advantages of Decentralization 1178 Disadvantages of Decentralization 1178 Responsibility Centers 1179
Performance Measurement 1180 Goals of Performance Evaluation Systems 1180
The В alanced Scorecard 1181 The Four Perspectives of the Balanced Scorecard 1182
• Decision Guidelines 1187 • Summary Problem 1 1188
Measuring the Financial Performance of Cost, Revenue, and Profit Centers 1189
Measuring the Financial Performance of Investment Centers 1191
Return on Investment (ROI) 1193 Residual Income (RI) 1195 Limitations of Financial Performance Measures 1199
• Decision Guidelines 1201 • Summary Problem 2 1202
Review and Assignment Material 1204
CHAPTER APPENDIX 23A: Allocating Service Department Costs 1216
APPENDIX A: Amazon.com Annual Report A-l APPENDIX B: Present Value Tables B-l APPENDIX C: Check Figures C-l GLINDEX (COMBINED GLOSSARY/INDEX) G-l COMPANY INDEX 1-1
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