Survey of accounting 3e by thomas p edmonds

A comparative table of contents is shown below: WHAT WE DID Table of Contents for the Second Edition Table of Contents for the Third Edition Chapter 1 An Introduction to Accounting C

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To download more slides, ebooks, solution manual, and test bank, visit http://downloadslide.blogspot.com

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Third Edition

Survey of Accounting

Thomas P Edmonds University of Alabama—Birmingham

Frances M McNair Mississippi State University

Philip R Olds Virginia Commonwealth University

Bor-Yi Tsay University of Alabama—Birmingham

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SURVEY OF ACCOUNTING Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020 Copyright © 2012, 2010, 2007 by The McGraw-Hill Companies, Inc All rights reserved No part of this publication may be reproduced or distributed

in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper

1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 ISBN 978-0-07-811085-6

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Library of Congress Cataloging-in-Publication Data

Survey of accounting / Thomas P Edmonds [et al.] — 3rd ed.

www.mhhe.com

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This book is dedicated to our students, whose questions have so frequently caused us to

reevaluate our method of presentation that they have, in fact, become major

contributors to the development of this text

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iv Survey of Accounting

This textbook emerged as a market leader within a short time frame because it provides

a more effective teaching methodology Here is what sets us apart from our competitors

WITH FINANCIAL STATEMENTS

A horizontal financial statements model replaces the accounting equation as the

predominant teaching platform in this text The model arranges the balance sheet,

income statement and statement of cash flows horizontally across a single line of text

as shown below The linkage between business events and financial statements is veloped by having students record the effects of transaction data directly into the model

de-The acquisition of cash from the issue of stock is shown as an example in the following model (N/A indicates not affected; FA abbreviates financing activities):

Assets 5 Liabilities 1 Stockholders’ Equity Revenue 2 Expense 5 Net Inc Cash Flow

The statements model enables students to more clearly see how accounting relates to real-world decision making Under the traditional approach, students learn to journalize a series of events and to present summarized information in financial statements They never see how individual transactions affect financial statements When students record transactions into a statements model, they see a direct link between business events and financial statements Most business people think, “if I take this particular action, how will it affect my financials,” not “if I do these fifteen things how will they be journal-ized.” Accordingly, the statements model approach provides a learning experience that

is more intuitive and relevant than the one provided by traditional teaching methodology

Individual event analysis also broadens the user focus to include internal as well as

external users Typically, a user oriented approach focuses on external users such as

investors and creditors Certainly, investors and creditors need to understand how events affect financial statements Anticipating future business events and their impact on fi-nancial performance is a major factor in evaluating investment opportunities and credit worthiness Since business executives (internal users) are dependent on investors and creditors to provide funding for their operations, they too are interested in how events affect financial statements Indeed, executives make few decisions without considering how those decisions affect “bottom line” financial performance measures Accordingly, focusing on how individual transactions affect financial statements encourages students

to develop an internal as well as external user focus

We provide comprehensive coverage of the statement of cash flows Cash flow coverage

starts in Chapter 1 and continues in every chapter throughout the text With respect

to scope of coverage, this text places the statement of cash flows on parity with the come statement and balance sheet While the statement of cash flows is critically impor-tant in the real world, coverage of the statement is often slighted and usually relegated to

“The alternative

approach to debits and

credits used in the text

to present transactions

the Horizontal Financial

Statement Model is

one that my students

can understand and

can work with in the

classroom and for

testing.”

ROBERT PATTERSON,

PENN STATE-ERIE

“I heartily applaud

the authors’ goal of

education, one that

appeals to both users

and preparers and

that enables students

“Well written and

easy to read text that

makes the study of

accounting attractive

The layout of the text,

the colors used, the

additional information

and real-life examples

all increase the appeal

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Tom Edmonds/Phil Olds/Frances McNair/Bor-Yi Tsay v

the last chapter in the text The primary reason for this treatment is that teaching students

to convert accrual accounting data into cash flow is complicated We remove this

com-plexity by introducing the statement through a highly simplified teaching approach We

be-gin by teaching students to classify individual cash transactions as financing, investing, or

operating activity Students then compile the classified transactions into a formal

state-ment of cash flows Preparing the statestate-ment under this direct, transaction by transaction,

approach reduces the learning task to a simple classification scheme

We have made a concerted effort to reduced complexity in the early chapters to promote

the development of a strong conceptual foundation Specifically, we delay coverage of

depreciation, interest computations, and gains and losses For example, the

intro-duction to depreciation is presented in Chapter 6 thereby allowing students to develop an

understanding of accounting for deferrals without the unnecessary complication of contra

accounts Likewise, we delay the introduction of gains and losses so that students can

develop an understanding of cash flow from operating activities in a simplified learning

environment These subjects are not omitted, but rather their introduction is delayed

We not only provide comprehensive coverage of Generally Accepted Accounting Principles

(GAAP) but also expose students to International Financial Reporting Standards (IFRS)

Clearly, GAAP is the predominant practice in the United States However, ever increasing

globalization requires awareness of international standards as well The book

con-tains textboxes titled “Focus on International Issues” These boxes include content

re-garding IFRS and other interesting international topics Exercises allow the instructor to

reinforce the international content through homework assignments The textbox approach

allows flexibility in the level of emphasis instructors choose to place on this subject

We place greater emphasis on service companies For example, our budgeting chapter

uses a merchandising business while most traditional texts use a manufacturing

com-pany Using a service company is not only more relevant but also simplifies the

learning environment thereby making it easier for students to focus on budgeting

concepts rather than procedural details This is only one example of our efforts to place

greater emphasis on service companies

We provide extensive coverage of ethics The accounting scandals of Enron, MCI WorldCom,

HealthSouth and others led to the enactment the Sarbanes-Oxley Act (SOX) SOX places

significant pressure on accountants to identify and eliminate fraudulent reporting This text

not only provides coverage of appropriate content but also provides a framework for

em-phasizing ethics throughout the text This framework is used to solve an ethics case that

is included in the Analyze, Think, and Communicate (ATC) section of end-of-chapter

materi-als for every chapter in the text Specifically, look at ATC Problem 5 in each chapter These

cases relate the ethics framework to the specific subjects covered in the each chapter

“Excellent Survey of Accounting book;

easy to understand and lots of resources.”

SANDRA OWEN, INDIANA UNIVERSITY BLOOMINGTON

“Clear and concise

The best book I have seen for use by non-accounting majors!”

THOMAS CASEY, DeVRY UNIVERSITY

“I couldn’t recommend this text too highly to any of my colleagues

It literally puts the

‘sizzle’ back into the teaching process!”

MICHAEL R DODGE, COASTAL CAROLINA COMMUNITY COLLEGE

“This book allowed

me to make accounting more interesting and foster interest where there was none previously

More importantly,

it helps students understand the impact

of trans actions on financial statements and managerial decision making.”

GLADYS GOMEZ, UNIVERSITY OF MARY WASHINGTON

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vi Survey of Accounting

Thomas P Edmonds

Thomas P Edmonds, Ph.D., is the Friends and Alumni Professor of Accounting at the University of Alabama

at Birmingham (UAB) Dr Edmonds has taught in the introductory area throughout his career He has coordinated the accounting principles courses at the University of Houston and UAB He currently teaches introductory accounting in mass sections and in UAB’s distance learning program He is actively involved

in the accounting education change movement He has conducted more than 50 workshops related to teaching introductory accounting during the last decade Dr Edmonds has received numerous presti-gious teaching awards including the Alabama Society of CPAs Outstanding Educator Award and the UAB President’s Excellence in Teaching Award Dr Edmonds’s current research is education based He has

written articles that have appeared in many publications including the Accounting Review, Issues in Accounting Education, Journal of Accounting Education, and Advances in Accounting Education Dr Edmonds

has been a successful entrepreneur He has worked as a management accountant for a transportation company and as a commercial lending officer for the Federal Home Loan Bank Dr Edmonds began his academic training at Young Harris Community College His Ph.D degree was awarded by Georgia State University Dr Edmonds’s work experience and academic training have enabled him to bring a unique perspective to the classroom

Philip R Olds

Professor Olds is Associate Professor of Accounting at Virginia Commonwealth University (VCU) He serves

as the coordinator of the introduction to accounting courses at VCU Professor Olds received his A.S gree from Brunswick Junior College in Brunswick, Georgia (now Costal Georgia Community College) He received a B.B.A in accounting from Georgia Southern College (now Georgia Southern University) and his M.P.A and Ph.D degrees are from Georgia State University After graduating from Georgia Southern, he worked as an auditor with the U.S Department of Labor in Atlanta, Georgia A former CPA in Virginia, Professor Olds has published articles in various professional journals and presented papers at national and regional conferences He also served as the faculty adviser to the VCU chapter of Beta Alpha Psi for five years In 1989, he was recognized with an Outstanding Faculty Vice-President Award by the national Beta Alpha Psi organization Professor Olds has received both the Distinguished Teaching Award and the Distinguished Service Award from the VCU School of Business

Frances M McNair

Frances M McNair holds the KPMG Peat Marwick Professorship in Accounting at Mississippi State sity (MSU) She has been involved in teaching principles of accounting for the past 12 years and currently serves as the coordinator for the principles of accounting courses at MSU She joined the MSU faculty in

Univer-1987 after receiving her Ph.D from the University of Mississippi The author of various articles that have

appeared in the Journal of Accountancy, Management Accounting, Business and Professional Ethics Journal, The Practical Accountant, Taxes, and other publications, she also coauthored the book The Tax Practitioner with Dr Denzil Causey Dr McNair is currently serving on committees of the American Taxation

Association, the American Accounting Association, and the Institute of Management Accountants as well

as numerous School of Accountancy and MSU committees

ABOUT THE AUTHORS

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Tom Edmonds/Phil Olds/Frances McNair/Bor-Yi Tsay vii

Bor-Yi Tsay

Bor-Yi Tsay, Ph.D., CPA is Professor of Accounting at the University of Alabama at Birmingham (UAB)

where he has taught since 1986 He has taught principles of accounting courses at the University of

Houston and UAB Currently, he teaches an undergraduate cost accounting course and an MBA strategic

cost management course Dr Tsay received the 1996 Loudell Ellis Robinson Excellence in Teaching

Award He has also received numerous awards for his writing and publications including the John L

Rhoads Manuscripts Award, John Pugsley Manuscripts Award, Van Pelt Manuscripts Award, and three

certificates of merits from the Institute of Management Accountants His articles have appeared in Journal

of Accounting Education, Management Accounting, Journal of Managerial Issues, CPA Journal, CMA

Mag-azine, Journal of Systems Management, and Journal of Medical Systems He currently serves as a

mem-ber of the board of the Birmingham Chapter, Institute of Management Accountants He is also a memmem-ber

of the American Institute of Certified Public Accountants and Alabama Society of Certified Public

Accoun-tants Dr Tsay received a B.S in agricultural economics from National Taiwan University, an M.B.A with

a concentration in accounting from Eastern Washington University, and a Ph.D in accounting from the

University of Houston

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viii Survey of Accounting

HOW DOES THE BOOK

Real-World Examples

The text provides a variety

of thought- provoking,

real-world examples of financial

and managerial

account-ing as an essential part of

the management process

There are descriptions of

accounting practices from

Zales These companies

are highlighted in blue in

the text

The Curious Accountant

Suppose the U.S government purchases $10 million of fuel from ExxonMobil Assume the government offers

to pay for the fuel on the day it receives it from Exxon (a cash purchase) or 30 days later (a purchase on account).

Assume that Exxon is absolutely sure the ment will pay its account when due Do you think Exxon should care whether the government pays for the goods upon delivery or 30 days later? Why? (Answers on page 159.)

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Exxon would definitely prefer to make the sale to the government in cash rather than on account Even though it may be certain to collect its accounts receivable, the sooner Exxon gets its cash, the sooner the cash can be reinvested.

The interest cost related to a small account receivable of $50 that takes 30 days to collect may seem immaterial; at 4 percent, the lost interest amounts to less than $.20 However, when one considers that Exxon had approximately $27.6 billion of accounts receivable, the cost of financing receivables for a real-world company becomes apparent At 4 percent, the cost of waiting 30 days to collect $27.6 billion of cash is $90.7 million ($27.6 billion 3 04 3 [30 4 365]) For one full year, the cost to Exxon would be more than $1.1 billion ($27.6 billion 3 0.04) In 2009, it took Exxon approximately 32 days to collect its accounts receivable, and the weighted-average interest rate on its debt was approximately 4 percent.

t

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The Curious Accountant

Each chapter opens with a

short vignette that sets the

stage and helps pique student

interest These pose a

question about a real-world

accounting issue related to

the topic of the chapter The

answer to the question

ap-pears in a separate sidebar

a few pages further into the

chapter

“The Curious Accountant and Real-World Examples, all make the text better and would make it a pleasure to teach from.”

VIVIAN WINSTON, INDIANA UNIVERSITY

Focus on International Issues

These boxed inserts expose

stu-dents to international issues in

DEVELOPMENT

For many years some thought the companies that followed U.S

GAAP were at a disadvantage when it came to research and opment (R&D) costs, because these companies had to immediately expense such cost, while the accounting rules of some other coun- tries allowed R&D cost to be capitalized Remember, recording costs

devel-as an devel-asset—capitalizing it—means that net income is not ately reduced The global movement toward using IFRS is reducing, but not eliminating, the different accounting treatments for R&D.

immedi-Like U.S GAAP, IFRS require research costs to be expensed, but they allow development costs to be capitalized This IFRS rule

itself can present challenges, because sometimes it is not clear where research ends and development begins Basically, once research has produced a product, patent, and so forth, that the company believes will result in a revenue generating outcome, any additional costs to get it ready for market are development costs.

FOCUS ON INTERNATIONAL ISSUES

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Reality Bytes

This feature provides examples

or expansions of the topics presented by highlighting com-panies and showing how they use the accounting concepts discussed in the chapter to make business decisions

“Closed for Inventory Count” is a sign you frequently see on retail stores sometime during the month of January Even if companies use a perpetual inventory system, the amount of inventory on hand may be unknown because of lost, damaged, or stolen goods The only way to determine the amount of inventory on hand is to count it Why count it in January? Christmas shoppers and many after-Christmas sales shoppers are satiated by mid-January, leaving the stores low on both merchandise and customers Accordingly, stores have less merchandise

to count and “lost sales” are minimized during January Companies that do not depend on seasonal sales (e.g., a plumbing supplies wholesale business) may choose to count inventory

at some other time during the year Counting inventory is not a revenue-generating activity; it

is a necessary evil that should be conducted when it least disrupts operations.

MOTIVATE STUDENTS?

A Look Back/A Look Forward

Students need a roadmap to make sense of where the chapter topics fit into the whole picture A Look Back reviews the chapter material and a Look Forward introduces new material to come in the next chapter

A Look Back <<

We first introduced accounting for receivables in Chapter 2 This chapter presented

ad-ditional complexities related to accounts receivable, such as the allowance method of

accounting for uncollectible accounts The allowance method improves matching of

ex-penses with revenues It also provides a more accurate measure of the value of accounts receivable on the balance sheet.

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A Look Forward >>

Chapters 1 and 2 focused on businesses that generate revenue by providing services to their customers Examples of these types of businesses include consulting, real estate sales, medical services, and legal services The next chapter introduces accounting practices for businesses that generate revenue by selling goods Examples of these companies include Wal-Mart , Circuit City , Office Depot, and Lowes.

“ The Reality Bytes and Check Yourself sections in the chapters enhance the presentation.”

ROBERT PATTERSON, PENN STATE-ERIE

“I like the Check yourself examples.”

BRUCE DARLING, UNIVERSITY OF OREGON

Check Yourself

These short question/answer features occur at the end of each main topic and ask students to stop and think about the material just covered

The answer follows to provide immediate feedback before students go on to a new topic

state-Answer Net income is $45,000 ($345,000 revenue 2 $300,000 expenses) The cash flow from operating activities is $20,000, the amount of revenue collected in cash from customers (accounts receivable) minus the cash paid for expenses ($320,000 2 $300,000)

Dividend payments are classified as financing activities and do not affect the nation of either net income or cash flow from operating activities.

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x Survey of Accounting

Regardless of the instructional approach, there is no shortcut to learning accounting

Students must practice to master basic accounting concepts The text includes a

prodi-gious supply of practice materials and exercises and problems

HOW ARE CHAPTER

A step-by-step audio-narrated series of slides is provided on the text website at www.mhhe.com/edmondssurvey3e

SELF-STUDY REVIEW PROBLEM

Gifford Company experienced the following accounting events during 2012.

1 Started operations on January 1 when it acquired $20,000 cash by issuing common stock.

2 Earned $18,000 of revenue on account.

3 On March 1 collected $36,000 cash as an advance for services to be performed in the future.

4 Paid cash operating expenses of $17,000.

5 Paid a $2,700 cash dividend to stockholders.

6 On December 31, 2012, adjusted the books to recognize the revenue earned by providing

services related to the advance described in Event 3 The contract required Gifford to provide services for a one-year period starting March 1.

7 Collected $15,000 cash from accounts receivable.

These sections offer

problems and solutions

The figures provide a

quick reference for

students to check on

their progress in solving

the problem

• Excel

Many exercises and

problems can be solved

using the Excel™

spreadsheet templates

contained on the text’s

Online Learning Center

A logo appears in the

margins next to these

exercises and problems

for easy identification

a On February 1, 2012, Heider, Inc., was formed when it received $80,000 cash from the issue

of common stock On May 1, 2012, the company paid $60,000 cash in advance to rent office space for the coming year The office space was used as a place to consult with clients The consulting activity generated $120,000 of cash revenue during 2012 Based on this information alone, record the events and related adjusting entry in the general ledger accounts under the accounting equation Determine the amount of net income and cash flows from operating activities for 2012.

b On January 1, 2012, the accounting firm of Bonds & Associates was formed On August 1,

2012, the company received a retainer fee (was paid in advance) of $30,000 for services to be performed monthly during the next 12 months Assuming that this was the only transaction completed in 2012, prepare an income statement, statement of changes in stockholders’

equity, balance sheet, and statement of cash flows for 2012.

c Edge Company had $2,200 of supplies on hand on January 1, 2012 Edge purchased $7,200

of supplies on account during 2012 A physical count of supplies revealed that $900 of plies was on hand as of December 31, 2012 Determine the amount of supplies expense that should be recognized in the December 31, 2012 adjusting entry Use a financial statements model to show how the adjusting entry would affect the balance sheet, income statement, and statement of cash flows.

sup-Problem 2-29 Effect of adjusting entries on the accounting equation

Required

Each of the following independent events requires a year-end adjusting entry Show how each event and its related adjusting entry affect the accounting equation Assume a December 31 closing date The first event is recorded as an example.

LO 2

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Tom Edmonds/Frances McNair/Phil Olds xi

Each chapter includes an innovative

section entitled Analyze, Think,

Commu-nicate (ATC) This section contains:

• Business application cases related to

the annual report for Target Company

ANALYZE, THINK, COMMUNICATE

ATC 6-1 Business Applications Case Understanding real-world annual reports

Required

Use the Target Corporation’s annual report in Appendix B to answer the following questions.

a What method of depreciation does Target use?

b What types of intangible assets does Target have?

c What are the estimated lives that Target uses for the various types of long-term assets?

d As of January 30, 2010, what is the original cost of Target’s: Land; Buildings and

improve-ments; and Fixtures and equipment (see the footnotes)?

e What was Target’s depreciation expense and amortization expense for 2009 (see the

footnotes)?

ATC 6-2 Group Assignment Different depreciation methods

Sweet’s Bakery makes cakes, pies, and other pastries that it sells to local grocery stores The pany experienced the following transactions during 2012.

com-1 Started business by acquiring $60,000 cash from the issue of common stock.

2 Purchased bakery equipment for $46,000 with a four year life and a $6,000 salvage value.

3 Had cash sales in 2012 amounting to $42,000.

4 Paid $8,200 of cash for supplies which were all used during the year to make baked goods.

5 Paid other operating expenses of $12,000 for 2012.

Required

a Organize the class into two sections and divide each section into groups of three to five

students Assign each section a depreciation method: straight-line or balance.

double-declining-Group Task

Prepare an income statement and a balance sheet using the preceding information and the depreciation method assigned to your group.

Class Discussion

b Have a representative of each section put its income statement on the board Are there

differ-ences in net income? How will these differdiffer-ences in the amount of depreciation expense change over the life of the equipment?

ATC 6-3 Research Assignment Comparing Microsoft’s and Intel’s operational assets

Companies in different industries often use different proportions of current versus long-term sets to accomplish their business objective The technology revolution resulting from the silicon microchip has often been led by two well-known companies: Microsoft and Intel Although often thought of together, these companies are really very different Using either the most current requirements below To obtain the Forms 10-K, use either the EDGAR system following the instructions in Appendix A or the company’s website Microsoft’s annual report is available on its website; Intel’s annual report is its Form 10-K.

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CONCEPTS REINFORCED?

• Real Company Examples

• Excel Spreadsheet Applications

• Writing Assignments

• Ethics Cases

• Internet Assignments

• Group Exercises

“I like the real life examples; I like the Analyze, Think and Communicate.”

DEBBIE GAHR, WAUKESHA COUNTY TECHNICAL COLLEGE

Target Corporation

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xii Survey of Accounting

We have reorganized the content to more closely follow a traditional balance sheet sequencing approach Specifically, the first three chapters introduce the accounting cycle for service and merchandising businesses Thereafter, topics are presented in the order they normally appear in a balance sheet with accounting for assets being discussed first, followed by accounting for liabilities, and finally accounting for equity We moved topics associated with corporate governance from Chapter 2 into Chapter 4 Chapter 4 now includes coverage of Accounting for Cash, Internal Controls, and Ethics Accounting for Inventory Cost Flow was moved from Chapter 4 into Chapter 5 Chapter 5 now includes Accounting for Receivables and Inventory Cost Flow A comparative table of contents is shown below:

WHAT WE DID

Table of Contents for the Second Edition Table of Contents for the Third Edition

Chapter 1 An Introduction to Accounting Chapter 1 An Introduction to Accounting

Chapter 2 Understanding the Accounting Cycle Chapter 2 Understanding the Accounting Cycle

Chapter 3 Accounting for Merchandising Businesses Chapter 3 Accounting for Merchandising Businesses

Chapter 4 Accounting for Inventories and Cash Chapter 4 Internal Controls, Accounting for Cash, and Ethics

Chapter 5 Accounting for Receivables Chapter 5 Accounting for Receivables and Inventory Cost Flow

Chapter 6 Accounting for Long-Term Operational Assets Chapter 6 Accounting for Long-Term Operational Assets

Chapter 7 Accounting for Liabilities Chapter 7 Accounting for Liabilities

Chapter 8 Proprietorships, Partnerships, and Corporations Chapter 8 Proprietorships, Partnerships, and Corporations

Chapter 9 Financial Statement Analysis Chapter 9 Financial Statement Analysis

Chapter 10 An Introduction to Managerial Accounting Chapter 10 An Introduction to Managerial Accounting

Chapter 11 Cost Behavior, Operating Leverage, and Chapter 11 Cost Behavior, Operating Leverage, and

Profitability Analysis Profitability Analysis Chapter 12 Cost Accumulation, Tracing and Allocation Chapter 12 Cost Accumulation, Tracing and Allocation

Chapter 13 Relevant Information for Special Decisions Chapter 13 Relevant Information for Special Decisions

Chapter 14 Planning for Profit and Cost Control Chapter 14 Planning for Profit and Cost Control

Chapter 15 Performance Evaluation Chapter 15 Performance Evaluation

Chapter 16 Planning for Capital Investments Chapter 16 Planning for Capital Investments

To reduce duplication we consolidated coverage of financial ratios into Chapter 9 Financial Statement Analysis While we continue to cover statement interpretation issues in each chapter, financial ratios are presented in Chapter 9 Removing cover-age of financial ratios from each chapter provided additional space that has allowed

us to add coverage of topics For example, we added basic coverage of auditing tices in Chapter 4 In addition, we added coverage of bond discounts and premiums

prac-in Chapter 7 The straight-lprac-ine method of amortizprac-ing discounts and premiums is ered in the main body of the text and the effective interest rate method is covered in the chapter appendix Also, we added coverage of manufacturing costs flow through raw materials, work-in-process, and finished goods inventory in Chapter 10 Finally,

cov-we revised the ATC end of chapter materials to contain a consistent set of cases and exercises Specifically, the ATC section now includes a business application case, a group assignment, a research assignment, a writing assignment, and an ethics case

in each chapter

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SPECIFIC CHAPTER CHANGES

Chapter 1 An Introduction to Accounting

• Added a discussion of the role of accounting in society

• More clearly described the relationship between assets and expenses

• Updated Curious Accountant with new scenario including high-profile companies and

products

• Updated Focus on International Issues textbox

• Revised Reality Bytes with new content about a new high-profile company and products

• Updated Check Yourself text box content to reflect current dates and relevant scenarios

• Updated exercises, problems, and cases

Chapter 2 Understanding the Accounting Cycle

• Reorganized Exhibit 2.1 and 2.7 to include transaction data

• Updated Curious Accountant with current data from real-world companies

• Removed content related to corporate governance and ethics This content now appears

in Chapter 4 with related issues such as internal control

Chapter 3 Accounting for Merchandising Businesses

• Revised Reality Bytes with new content about a new scenario, company and products

Chapter 4 Accounting for Internal Controls, Accounting for

Cash, and Ethics

• Accounting for inventory cost flow has been moved from this chapter and placed in

what is now Chapter 5 of the revised third edition text Cooperate governance and

ethics content have been moved into Chapter 4 These changes are in keeping with a

balance sheet sequence of content presentation Specifically, we cover internal control,

ethics, and accounting for cash in Chapter 4 Coverage of accounts receivable and a

discussion of inventory cost flow now appear in Chapter 5 Thereafter, we continue to

discuss topics in the order they would appear in a customary top down reading of a

balance sheet

• Added coverage of The Committee of Sponsoring Organizations of the Treadway

Com-mission (COSO) framework for internal controls

• Added coverage of the external audit function and the types of audit opinions

• Replaced Curious Accountant content with new scenario including high-profile

compa-nies and characters

• Added a new Reality Bytes textbox

TO MAKE IT BETTER!

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xiv Survey of Accounting

Chapter 5 Accounting for Receivables and Inventory

• Added a new Focus on International Issues textbox

Chapter 6 Accounting for Long-Term Operational Assets

• Replaced Focus on International Issues with new scenario related to international

finan-cial reporting standards (IFRS)

Chapter 7 Accounting for Liabilities

• Added coverage of straight-ling amortization of discounts and premiums

• Added a chapter appendix covering the effective interest rate method of amortization

of discounts and premiums

compa-nies and products

• Replaced Focus on International Issues with new scenario related to international

Chapter 8 Proprietorships, Partnerships, and Corporations

• Replaced Focus on International Issues with new scenario related to international

Chapter 9 Financial Statement Analysis

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Tom Edmonds/Phil Olds/Frances McNair/Bor-Yi Tsay xv

Chapter 10 An Introduction to Managerial Accounting

• Added coverage of manufacturing cost flow including raw materials inventory,

work-in-process inventory and finished goods inventory Coverage includes preparation of the

schedule of cost of goods manufactured and sold

• Updated Curious Accountant with new scenario including high-profile companies and

products

• Updated Focus on International Issues textbox

• Revised Reality Bytes with new content about a new high-profile company and products

• Updated Check Yourself text box content to reflect current dates and relevant scenarios

• Updated exercises, problems, and cases Added exercises and problems associated

with the schedule of cost of goods manufactured and sold

Chapter 11 Cost Behavior, Operating Leverage,

and Profitability Analysis

• Replaced Curious Accountant content with new scenario including high-profile

• Replaced Focus on International Issues content with new subject matter

• Replaced Reality Bytes with new content about a new high-profile companies and products

Chapter 12 Cost Accumulation, Tracing, and Allocation

• Replaced Focus on International Issues content with new subject matter

• Updated Reality Bytes

• Updated Check Yourself text box content to reflect current dates and relevant scenarios

Chapter 13 Relevant Information for Special Decisions

• Updated Curious Accountant

• Updated Focus on International Issues

Chapter 14 Planning for Profit and Cost Control

Chapter 15 Performance Evaluation

• Replaced Curious Accountant content with new scenario including high-profile

Chapter 16 Planning for Capital Investments

• Updated Focus on International Issues

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xvi Survey of Accounting

HOW CAN TECHNOLOGY

• Access and review each response; manually change grades or leave comments for students to review

Instructor Library

The Connect Accounting Instructor Library is your

repository for additional resources to improve dent engagement in and out of class You can se-lect and use any asset that enhances your lecture

stu-The Connect Accounting Instructor Library for

The Connect Accounting Student Library is the place

for students to access additional resources The Student Library provides:

• Quick access to lectures, practice materials, eBook, and more

• Instant practice material and study questions, easily accessible on the go

Student Progress Tracking

Connect Accounting keeps instructors informed

about how each student, section, and class is forming, allowing for more productive use of lecture and office hours The progress-tracking function enables you to:

• View scored work immediately and track ual or group performance with assignment and grade reports

• Access an instant view of student or class mance relative to learning objectives

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Connect Accounting offers a number of powerful

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Connect Accounting offers you the features described

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ACCOUNTING

accounting

Trang 19

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For more information about Connect Accounting ,

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xviii Survey of Accounting

Online Learning Center (OLC)

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Tom Edmonds/Frances McNair/Phil Olds xix

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xx Survey of Accounting

Instructor’s Resource CD

ISBN-13: 9780077317690 (ISBN-10: 0077317696)

This CD includes electronic versions of the

Instruc-tor’s Manual, Solutions Manual, Test Bank, and

computerized Test Bank, as well as PowerPoint

slides, all exhibits in the text, and spreadsheet

tem-plates with solutions This CD-ROM makes it easy

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Instructor’s Manual

This comprehensive manual includes step-by-step,

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implement alternative teaching methods It also

pro-vides guidance for instructors who use the

tradi-tional lecture method The guide includes lesson

plans and demonstration problems with student

work papers, as well as solutions It was prepared

by Tom Edmonds

Solutions Manual

Prepared by the authors, the manual contains

com-plete solutions to all the text’s end-of-chapter

exer-cises, problems, and cases

Test Bank

This test bank in Word format contains

multiple-choice questions, essay questions, and short

prob-lems Each test item is coded for level of difficulty

and learning objective In addition to an expansive

array of traditional test questions, the test bank

in-cludes new types of questions that focus exclusively

on how business events affect financial statements

PowerPoint Presentation

These slides can serve as interactive class discussions

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AACSB STATEMENT

The McGraw-Hill Companies is a proud corporate member of AACSB International Understanding the importance and value of AACSB accreditation,

Edmonds Survey of Accounting 3e recognizes the

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The statements contained in Survey of Accounting 3e

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Survey of Accounting 3e and the teaching package

make no claim of any specific AACSB qualification or

evaluation, we have within Survey of Accounting 3e

labeled selected questions according to the six eral knowledge and skills areas

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Tom Edmonds/Frances McNair/Phil Olds xxi

McGraw-Hill’s Connect ™ Plus Accounting

This integrates all of the text’s multimedia resources

Students can obtain state-of-the-art study aids,

including McGraw-Hill’s ConnectTM Accounting and

online access to an eBook

SUPPLEMENTS FOR STUDENTS

accounting

Online Learning Center (OLC)

www.mhhe.com/edmondssurvey3e See page xviii for details

Excel Templates

These templates allow students to develop sheet skills to solve selected assignments identi-fied by an icon in the end-of-chapter material

McGraw-Hill’s Connect™ Accounting

McGraw-Hill’s Connect Accounting is a web-based

assignment and assessment platform that gives

students the means to better connect with their

coursework, with their instructors, and with the

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schedule All applicable Exercises and Problems are

available with McGraw-Hill’s Connect

accounting

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xxii Survey of Accounting

We would like to express our appreciation to the people who have provided assistance

in the development of this textbook

We recognize the following instructors for their invaluable feedback and involvement in

the development of Survey of Accounting, Third Edition We are thankful for their feedback

and suggestions

Special thanks to the talented people who prepared the supplements These take a great deal of time and effort to

write and we appreciate their efforts Rebecca Toledo of AIverno College prepared the Test bank and Quizzes Sally

Gilfillan of Longwood University prepared the PowerPoints and accuracy checked the Test Bank LuAnn Bean of

Florida Institute of Technology prepared the Instructor’s Manual and accuracy checked the PowerPoints and

Quiz-zes; and Jack Terry prepared the Excel Templates We also thank our accuracy checker Beth Woods for her work A

special thanks to Linda Bell of William Jewell College for her contribution to the Financial Statement Analysis

mate-rial that appears in the Instructor Manual and text Web site

In addition to the helpful and generous colleagues listed above, we thank the entire McGraw-Hill/Irwin Survey of

Accounting 3e team, including Stewart Mattson, Tim Vertovec, Steve Schuetz, Katie Jones, Pat Frederickson,

Michelle Heaster, Michael McCormick, Matt Diamond, Jeremy Cheshareck, Joyce Chappetto, and Brian Nacik We

deeply appreciate the long hours that you committed to the formation of a high-quality text

Thomas P Edmonds • Philip R Olds • Frances M McNair • Bor-Yi Tsay

ACKNOWLEDGMENTS

Reviewers

Mollie Adams, Virginia Polytechnic Institute

David Bukovinsky, Wright State University

Susan Cain, Southern Oregon University

Thomas Casey, DeVry University—Tinley Park

Suzanne Cercone, Keystone College

Bruce Darling, University of Oregon

Harry Davis, Baruch College

Harry Davis, Bernard M Baruch College

Julie Dilling, Fox Valley Technical College

Edwin Doty, East Carolina University

Barbara Fox, Northern Illinois University

Debbie Gahr, Waukesha County Technical College

Dana Garner, Virginia Polytechnic Institute

Gladys Gomez, University of Mary Washington Harry Hughes, University of Tennessee, Knoxville Kim Hurt, Central Community College

Melanie Middlemist, Colorado State University Gay Mills, Amarillo College

Sandra Owen, Indiana University Bloomington Robert Patterson, Penn State-Erie, the Behrend College Vanda Pauwels, Texas Tech University

Daniel Ricigliano, Buffalo State College Shiv Sharma, Robert Morris University Jim Shelton, Harding University George Smith, Newman University Vivian Winston, Indiana University Bloomington

Trang 25

Brief Contents

Chapter 10 An Introduction to Managerial Accounting 358

analysis 396

Chapter 13 Relevant Information for Special Decisions 462

Chapter 14 Planning for Profit and Cost Control 498

Through the Internet 595 Appendix B Annual Report for Portion of the Form 10-K for Target Corporation 596

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Contents

Chapter Opening 2 Role of Accounting in Society 4

Using Free Markets to Set Resource Priorities 4

Accounting Provides Information 4 Types of Accounting Information 6 Nonbusiness Resource

Usage 6 Careers in Accounting 7 Measurement Rules 8 Reporting Entities 9

Elements of Financial Statements 10

Using Accounts to Gather Information 11

Transaction 15 Asset Use Transactions 15 Summary of Transactions 17

Recap: Types of Transactions 17

Preparing Financial Statements 18

Income Statement and the Matching Concept 18

Statement of Changes in Stockholders’

Equity 20 Balance Sheet 20 Statement of Cash Flows 21 The Closing Process 22

The Horizontal Financial Statements Model 23

Real-World Financial Reports 24

Annual Report for Target Corporation 25 Special Terms in Real-World Reports 25

A Look Back 26

A Look Forward 26 Self-Study Review Problem 26 Key Terms 28

Questions 28 Multiple-choice Questions 29 Exercises 29

Problems 37 Analyze, Think, Communicate 41

Chapter Opening 44 Accrual Accounting 46

Accounting for Accounts Receivable 46 Other Events 47

Accounting for Accrued Salary Expense (Adjusting Entry) 47

Summary of Events and General Ledger 49

Vertical Statements Model 49

The Closing Process 52 Steps in an Accounting Cycle 52 The Matching Concept 53 The Conservatism Principle 53

Second Accounting Cycle 53

Prepaid Items (Cost versus Expense) 54

Accounting for Receipt of Unearned Revenue 55

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Accounting for Supplies Purchase 55 Other 2013 Events 55

Adjusting Entries 58 Accounting for Supplies (Adjusting Entry) 58

Accounting for Prepaid Rent (Adjusting Entry) 58

Accounting for Unearned Revenue (Adjusting Entry) 59

Accounting for Accrued Salary Expense (Adjusting Entry) 62

Summary of Events and General Ledger 62

Vertical Statements Model 62

Transaction Classification 66

A Look Back 66

Chapter Opening 86

Product Costs Versus Selling and

Administrative Costs 88

Allocating Inventory Cost between Asset

and Expense Accounts 89

Perpetual Inventory System 89

Effects of 2012 Events on Financial Statements 90

Financial Statements for 2012 91 Transportation Cost, Purchase Returns and Allowances, and Cash Discounts Related to Inventory Purchases 92 Effects of 2013 Events on Financial Statements 92

Accounting for Purchase Returns and Allowances 93

Purchase Discounts 94 The Cost of Financing Inventory 94 Accounting for Transportation Costs 95

Recognizing Gains and Losses 98

Multistep Income Statement 98 Lost, Damaged, or Stolen Inventory 100

Adjustment for Lost, Damaged,

or Stolen Inventory 101

Events Affecting Sales 101

Accounting for Sales Returns and Allowances 102

Accounting for Sales Discounts 102

Common Size Financial Statements 103

A Look Back 105

A Look Forward 106 Appendix 106 Self-Study Review Problem 107 Key Terms 109

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Chapter 4 Internal Controls, Accounting for Cash, and Ethics 124

Chapter Opening 124 Key Features of Internal Control Systems 126

Separation of Duties 126 Quality of Employees 127 Bonded Employees 127 Required Absences 127 Procedures Manual 127 Authority and Responsibility 127 Prenumbered Documents 128 Physical Control 128

Performance Evaluations 128 Limitations 128

Accounting for Cash 129

Controlling Cash 129 Checking Account Documents 130 Reconciling the Bank Account 131 Determining True Cash Balance 131 Illustrating a Bank Reconciliation 134

Importance of Ethics 137

Common Features of Criminal and Ethical Misconduct 137

Role of the Independent Auditor 139

The Financial Statement Audit 140 Materiality and Financial Audits 140 Types of Audit Opinions 141 Confidentiality 141

A Look Back 142

Chapter Opening 156 Allowance Method of Accounting for Uncollectible Accounts 158

Accounting Events Affecting the 2012 Period 158

Accounting Events Affecting the 2013 Period 161

Estimating Uncollectible Accounts Expense Using the Percent of Revenue (Sales) Method 163

Analysis of Financial Statements 163

Estimating Uncollectible Accounts Expense Using the Percent of Receivables

Accounting for Credit

Card Sales 170 Inventory Cost Flow Methods 171

Specific Identification 172 First-In, First-Out (FIFO) 172 Last-In, First-Out (LIFO) 172 Weighted Average 172 Physical Flow 172

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Tangible versus Intangible Assets 202

Tangible Long-Term Assets 202 Intangible Assets 202

Determining the Cost of Long-Term

Assets 203

Basket Purchase Allocation 203

Methods of Recognizing Depreciation

Expense 204

Dryden Enterprises Illustration 205 Straight-Line Depreciation 205 Financial Statements 207 Double-Declining-Balance Depreciation 208 Units-of-Production Depreciation 211 Comparing the Depreciation

Methods 212

Revision of Estimates 213

Revision of Life 213 Revision of Salvage 213

Continuing Expenditures for Plant

Expense Recognition for Intangible Assets 219

Expensing Intangible Assets with Identifiable Useful Lives 219 Impairment Losses for Intangible Assets with Indefinite Useful Lives 219

Balance Sheet Presentation 220 Effect of Judgment and Estimation 220 Effect of Industry Characteristics 221

A Look Back 222

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Chapter 8 Proprietorships, Partnerships, and Corporations 286

Chapter Opening 240 Accounting for Current Liabilities 242

Accounting for Notes Payable 242 Accounting for Sales Tax 243 Contingent Liabilities 244 Warranty Obligations 245 Financial Statements 246

Accounting for Long-Term Debt 247

Installment Notes Payable 248 Line of Credit 251

Bond Liabilities 251 Bonds Issued at Face Value 252

Amortization Using the Straight-Line Method 256

Bonds Issued at a Discount 256 Bonds Issued at a Premium 260

Security for Loan Agreements 261 Current versus Noncurrent 261

A Look Back 263

Chapter Opening 286 Forms of Business Organizations 288 Advantages and Disadvantages of Different Forms of Business Organization 288

Regulation 288 Double Taxation 289 Limited Liability 289 Continuity 290 Transferability of Ownership 290 Management Structure 290 Ability to Raise Capital 291

Appearance of Capital Structure in Financial Statements 291

Presentation of Equity in Proprietorships 291 Presentation of Equity in Partnerships 292 Presentation of Equity in

Corporations 293

Characteristics of Capital Stock 293

Par Value 293 Stated Value 293 Other Valuation Terminology 293 Stock: Authorized, Issued, and Outstanding 293

Stockholders’ Equity Transactions after the Day of Issue 298

Treasury Stock 298 Cash Dividend 299

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Stock Dividend 300 Stock Split 301 Appropriation of Retained Earnings 301

Financial Statement Presentation 302

Investing in Common Stock 303

Receiving Dividends 303 Increasing the Price of Stock 303 Exercising Control through Stock Ownership 304

A Look Back 304

Factors in Communicating Useful

Information 320

The Users 320 The Types of Decisions 320 Information Analysis 320

Methods of Analysis 320

Horizontal Analysis 321 Vertical Analysis 324 Ratio Analysis 324

Measures of Debt-Paying Ability 325

Liquidity Ratios 325 Solvency Ratios 329

Measures of Profitability 331

Measures of Managerial Effectiveness 331 Stock Market Ratios 333

Presentation of Analytical Relationships 336 Limitations of Financial Statement Analysis 337

Different Industries 338 Changing Economic Environment 338 Accounting Principles 339

A Look Back 339

Time Horizon and Reporting Frequency 362

Product Costing in Manufacturing Companies 362

Tabor Manufacturing Company 362 Average Cost per Unit 362

Costs Can Be Assets or Expenses 363

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Chapter 11 Cost Behavior, Operating Leverage,

and Profitability Analysis 396

Effect of Product Costs on Financial Statements 364

Materials Costs (Event 2) 365 Labor Costs (Event 4) 365 Overhead Costs (Event 8) 366 Total Product Cost 366 General, Selling, and Administrative Costs 367

Overhead Costs: A Closer Look 367 Manufacturing Product Cost

Chapter Opening 396 Fixed Cost Behavior 398 Operating Leverage 398

Calculating Percentage Change 399 Risk and Reward Assessment 400

Variable Cost Behavior 401

Risk and Reward Assessment 401

An Income Statement under the Contribution Margin Approach 402 Measuring Operating Leverage Using Contribution Margin 403

Cost Behavior Summarized 404

Mixed Costs (Semivariable Costs) 405 The Relevant Range 405

Context-Sensitive Definitions of Fixed and Variable 405

Determining the Break-Even Point 406

Equation Method 407 Contribution Margin per Unit Method 408

Determining the Sales Volume Necessary to Reach a Desired Profit 409

Calculating the Margin of Safety 410

A Look Back 411

A Look Forward 412 Self-Study Review Problem 1 412 Self-Study Review Problem 2 414 Key Terms 415

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Determine the Cost of Cost Objects 432

Estimated versus Actual Cost 432

Assignment of Costs to Objects in a

Retail Business 432

Identifying Direct and Indirect Costs 433

Cost Classifications—Independent and Context Sensitive 434

Allocating Indirect Costs to Objects 434

Selecting a Cost Driver 436

Behavioral Implications 439

Effects of Cost Behavior on Selecting the

Most Appropriate Cost Driver 440

Using Volume Measures to Allocate Variable Overhead Costs 440 Allocating Fixed Overhead Costs 443

Allocating Costs to Solve Timing

Problems 444

Aggregating and Disaggregating Individual Costs into Cost Pools 445

Cost Allocation: The Human Factor 445

Using Cost Allocations in a Budgeting Decision 445

Using Cost Drivers to Make Allocations 446

Choosing the Best Cost Driver 447 Controlling Emotions 447

A Look Back 448

Relevant Information 464

Sunk Cost 464 Opportunity Costs 464 Relevance Is an Independent Concept 465

Relevance Is Context-Sensitive 466 Relationship Between Relevance and Accuracy 466

Quantitative versus Qualitative Characteristics of Decision Making 466 Differential Revenue and Avoidable Cost 467

Relationship of Cost Avoidance to a Cost

Equipment Replacement Decisions 477

A Look Back 478

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Chapter 15 Performance Evaluation 530

Chapter Opening 498 The Planning Process 500 Three Levels of Planning for Business Activity 500

Advantages of Budgeting 501

Planning 501 Coordination 501 Performance Measurement 501 Corrective Action 501

Budgeting and Human Behavior 501 The Master Budget 502

Hampton Hams Budgeting Illustration 503

Sales Budget 503 Inventory Purchases Budget 505 Selling and Administrative Expense Budget 507

Cash Budget 508 Pro Forma Income Statement 511 Pro Forma Balance Sheet 512 Pro Forma Statement

of Cash Flows 512

A Look Back 513

Chapter Opening 530 Decentralization Concept 532

Responsibility Centers 532 Controllability Concept 532

Preparing Flexible Budgets 533 Determining Variances for Performance Evaluation 535

Sales and Variable Cost Volume Variances 535

Interpreting the Sales and Variable Cost Volume Variances 535

Fixed Cost Considerations 536

Flexible Budget Variances 537

Calculating the Sales Price Variance 538 The Human Element Associated with Flexible Budget Variances 539 Need for Standards 540

Managerial Performance Measurement 540

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Capital Investment Decisions 564

Time Value of Money 564 Determining the Minimum Rate of Return 564

Converting Future Cash Inflows to Their

Equivalent Present Values 565

Present Value Table for Single-Amount Cash Inflows 566

Present Value Table for Annuities 566 Software Programs That Calculate Present Values 567

Ordinary Annuity Assumption 568 Reinvestment Assumption 568

Techniques for Analyzing Capital

Techniques for Comparing Alternative Capital Investment Opportunities 572

Net Present Value 572 Internal Rate of Return 574 Relevance and the Time Value of Money 576

Tax Considerations 576

Techniques That Ignore the Time Value

of Money 578

Payback Method 578 Unadjusted Rate of Return 579 Real-World Reporting Practices 581

Postaudits 581

A Look Back 582 Appendix 582 Self-Study Review Problem 583 Key Terms 584

Appendix A Accessing the EDGAR Database Through the Internet 595

Appendix B Annual Report for Portion of the Form 10-K for Target Corporation 596

Appendix C The Double-Entry Accounting System 661

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C H A P T E R 1

An Introduction to

Accounting

LEARNING OBJECTIVES

After you have mastered the material in this chapter, you will be able to:

1 Explain the role of accounting in society

2 Construct an accounting equation using elements of financial statements terminology

3 Record business events in general ledger accounts organized under an accounting equation

4 Classify business events as asset source, use, or exchange transactions

5 Use general ledger account information to prepare four financial statements

6 Record business events using a horizontal financial statements model

CHAPTER OPENING

Why should you study accounting? You should study accounting because it can help you succeed in business

Businesses use accounting to keep score Imagine trying to play football without knowing how many points a touchdown is worth Like sports, business is competitive If you do not know how to keep score, you are not likely to succeed

Accounting is an information system that reports on the economic activities and financial condition of a

business or other organization Do not underestimate the importance of accounting information If you had information that enabled you to predict business success, you could become a very wealthy Wall Street in-

vestor Communicating economic information is so important that accounting is frequently called the language

of business.

2

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Who owns Starbucks? Who owns the American Cancer

Society (ACS)? Many people and organizations other

than owners are interested in the operations of

Starbucks and the ACS These parties are called

stakeholders Among others, they include lenders,

employees, suppliers, customers, benefactors,

re-search institutions, local governments, cancer patients,

lawyers, bankers, financial analysts, and government

agencies such as the Internal Revenue Service and the

Securities and Exchange Commission Organizations

communicate information to stakeholders through

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Explain the role of accounting

in society.

LO 1

ROLE OF ACCOUNTING IN SOCIETY

How should society allocate its resources? Should we spend more to harvest food

or cure disease? Should we build computers or cars? Should we invest money in IBM or General Motors? Accounting provides information that helps answer such questions

Using Free Markets to Set Resource Priorities

Suppose you want to start a business You may have heard “you have to have money to make money.” In fact, you will need more than just money to start and operate a busi-ness You will likely need such resources as equipment, land, materials, and employees

If you do not have these resources, how can you get them? In the United States, you compete for resources in open markets

A market is a group of people or entities organized to exchange items of value The

market for business resources involves three distinct participants: consumers,

conver-sion agents, and resource owners Consumers use resources Resources are frequently

not in a form consumers want For example, nature provides trees but consumers want

furniture Conversion agents (businesses) transform resources such as trees into able products such as furniture Resource owners control the distribution of resources to

desir-conversion agents Thus resource owners provide resources (inputs) to desir-conversion agents who provide goods and services (outputs) to consumers

For example, a home builder (conversion agent) transforms labor and materials (inputs) into houses (output) that consumers use The transformation adds value to the inputs, creating outputs worth more than the sum of the inputs A house that required

$220,000 of materials and labor to build could have a market value of $250,000

Common terms for the added value created

in the transformation process include profit, income, or earnings Accountants measure the

added value as the difference between the cost of

a product or service and the selling price of that product or service The profit on the house de-scribed above is $30,000, the difference between its $220,000 cost and $250,000 market value

Conversion agents who successfully and efficiently (at low cost) satisfy consumer preferences are rewarded with high earnings These earnings are shared with resource owners, so conversion agents who exhibit high earnings potential are more likely to compete successfully for resources

Return to the original question How can you get the resources you need to start a business? You must go to open markets and convince resource owners that you can pro-duce profits Exhibit 1.1 illustrates the market trilogy involved in resource allocation

The specific resources businesses commonly use to satisfy consumer demand are financial resources, physical resources, and labor resources

Financial Resources

Businesses (conversion agents) need financial resources (money) to get started and to

operate Investors and creditors provide financial resources.

■ Investors provide financial resources in exchange for ownership interests in

businesses Owners expect businesses to return to them a share of the business income earned

■ Creditors lend financial resources to businesses Instead of a share of business

income, creditors expect businesses to repay borrowed resources at a future date

The resources controlled by a business are called assets If a business ceases to

operate, its remaining assets are sold and the sale proceeds are returned to the investors

and creditors through a process called business liquidation Creditors have a priority

claim on assets in business liquidations After creditor claims are satisfied, any ing assets are distributed to investors (owners)

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remain-An Introduction to Accounting 5

To illustrate, suppose a business acquired $100 cash from investors and $200 cash from creditors Assume the business lost $75 and returned the remaining $225 ($300 2 $75) to

the resource providers The creditors would receive $200; the owners would receive only

$25 If the business lost $120, the creditors would receive only $180 ($300 2 $120); the

investors would receive nothing

As this illustration suggests, both creditors and investors can lose resources when businesses fail Creditors, however, are in a more secure position because of their

priority claim on resources In exchange for their more secure position, creditors

normally do not share business profits Instead, they receive a fixed amount of money

In their most primitive form, physical resources are natural resources Physical resources

often move through numerous stages of transformation For example, standing timber

may be successively transformed into harvested logs, raw lumber, and finished furniture

Owners of physical resources seek to sell those resources to businesses with high

earn-ings potential because profitable businesses are able to pay higher prices and make

repeat purchases

Labor Resources

Labor resources include both intellectual and physical labor Like other resource

provid-ers, workers prefer businesses that have high income potential because these businesses

are able to pay higher wages and offer continued employment

Accounting Provides Information

How do providers of financial, physical, and labor resources identify conversion agents

(businesses) with high profit potential? Investors, creditors, and workers rely heavily on

EXHIBIT 1.1

Market Trilogy in Resource Allocation

Provide financial, physical, and labor resources

to conversion agents

Resources

Compensation

Goods and services

Profits

Add value by transforming basic resources into goods and services that consumers demand

Use resources

Consumers

Consumers Conversion

agents

Conversion agents

Resource owners

Compensate resource owners

Reward conversion agents with profits

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accounting information to evaluate which businesses are worthy of receiving resources

In addition, other people and organizations have an interest in accounting information

about businesses The many users of accounting information are commonly called

stakeholders Stakeholders include resource providers, financial analysts, brokers,

attorneys, government regulators, and news reporters

The link between conversion agents (businesses) and those stakeholders who provide resources is direct: businesses pay resource providers Resource providers use accounting information to identify companies with high earnings potential because those companies are more likely to return higher profits, make interest payments, repay debt, pay higher prices, and provide stable employment

The link between conversion agents and other stakeholders is indirect Financial analysts, brokers, and attorneys may use accounting information when advising their clients Government agencies may use accounting information to assess companies’

compliance with income tax laws and other regulations Reporters may use accounting information in news reports

Types of Accounting Information

Stakeholders such as investors, creditors, lawyers, and financial analysts exist outside of and separate from the businesses in which they are interested The accounting informa-

tion these external users need is provided by financial accounting In contrast, the

accounting information needed by internal users, stakeholders such as managers and

employees who work within a business, is provided by managerial accounting.

The information needs of external and internal users frequently overlap For ample, external and internal users are both interested in the amount of income a busi-ness earns Managerial accounting information, however, is usually more detailed than financial accounting reports Investors are concerned about the overall profitability of

individual Wendy’s restaurants In fact, a regional manager is also interested in financial measures, such as the number of employees needed to operate a restaurant, the times at which customer demand is high versus low, and measures of cleanliness and customer satisfaction

non-Nonbusiness Resource Usage

The U.S economy is not purely market based Factors other than profitability often

influence resource allocation priorities For example, governments allocate resources to national defense, to redistribute wealth, or to protect the environment Foundations, religious groups, the Peace Corps, and other benevolent organizations prioritize resource usage based on humanitarian concerns

Like profit-oriented businesses, civic or humanitarian organizations add value through resource transformation For example, a soup kitchen adds value to uncooked meats and vegetables by converting them into prepared meals The individuals who consume the meals, however, are unable to pay for the kitchen’s operating costs, much less for the added value The soup kitchen’s motivation is to meet humanitarian needs,

not to earn profits Organizations that are not motivated by profit are called

not-for-profit entities (also called nonnot-for-profit or nonbusiness organizations).

Stakeholders interested in nonprofit organizations also need accounting tion Accounting systems measure the cost of the goods and services not-for-profit organizations provide, the efficiency and effectiveness of the organizations’ operations, and the ability of the organizations to continue to provide goods and services This information serves a host of stakeholders, including taxpayers, contributors, lenders, suppliers, employees, managers, financial analysts, attorneys, and beneficiaries

informa-The focus of accounting, therefore, is to provide information useful to making decisions for a variety of business and nonbusiness user groups The different types of accounting information and the stakeholders that commonly use the information are summarized in Exhibit 1.2

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