Financial and managerial accounting by weygandt kimmel and kieso

Brief Contents1 Accounting in Action 2 2 The Recording Process 52 3 Adjusting the Accounts 100 4 Completing the Accounting Cycle 162 5 Accounting for Merchandising Operations 218 6 Inven

FINANCIAL

MANAGERIAL

This page is intentionally left blank

ACCOUNT CLASSIFICATION AND PRESENTATION

Normal

A

B

C

D

Investment

I

to Retained Earnings

Normal

L

M

N

P

Common Stock

Preferred Stock

R

S

Investment

T

U

(1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss The

Income Summary account does not appear on any fi nancial statement

(2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold

The following is a sample chart of accounts It does not represent a comprehensive chart of all the accounts used in this textbook but rather those accounts that are commonly used This sample chart of accounts is for a company that generates both service revenue as well as sales revenue It uses the perpetual approach to inventory If a periodic system was used, the following temporary accounts would be needed to record inventory purchases: Purchases;

Freight-In; Purchase Returns and Allowances; and Purchase Discounts

AdministrativeExpensesAmortizationExpenseBad Debt ExpenseCost of Goods SoldDepreciationExpenseFreight-OutIncome TaxExpenseInsurance Expense Interest ExpenseLoss on Disposal ofPlant AssetsMaintenance andRepairs ExpenseRent ExpenseSalaries and WagesExpense

Selling ExpensesSupplies ExpenseUtilities Expense

Service RevenueSales RevenueSales DiscountsSales Returns and AllowancesInterest RevenueGain on Disposal

of Plant Assets

Common StockPaid-in Capital inExcess of Par—

Common Stock Preferred StockPaid-in Capital inExcess of Par—

Preferred StockTreasury StockRetained EarningsDividends

Income Summary

Notes PayableAccounts PayableUnearned ServiceRevenueSalaries andWages PayableInterest PayableDividends PayableIncome TaxesPayableBonds PayableDiscount on BondsPayable

Premium on BondsPayable

Mortgage Payable

CHART OF ACCOUNTS Stockholders’

CashAccountsReceivableAllowance forDoubtfulAccountsInterestReceivableInventorySuppliesPrepaid InsuranceLand

EquipmentAccumulatedDepreciation—

EquipmentBuildingsAccumulated Depreciation—

BuildingsCopyrightsGoodwillPatents

Jerry J Weygandt PhD, CPA

Donald E Kieso PhD, CPA

Northern Illinois University DeKalb, Illinois

John Wiley & Sons, Inc.

FINANCIAL MANAGERIAL ACCOUNTING

AND

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ISBN-13 978-1-118-00423-4

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

From the Authors

Dear Student,

Why This Course? Remember your biology course in high school? Did you have one of those “invisible man” models (or maybe something more high-tech than that) that gave you the opportunity to look “inside” the human body? This accounting course offers something similar: To understand a business, you have to understand the financial insides of a business organization An introductory accounting course will help you understand the essential financial components of businesses Whether you are looking at a large multinational company like Microsoft or Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening As an employee, a manager, an investor,

a business owner, or a director of your own personal finances—any of which roles you will have at some point

in your life—you will make better decisions for having taken this course.

Why This Book? This textbook contains features to help you learn best, whatever your learning style To understand what your learning style is, spend about 10 minutes to take the learning style quiz at the book’s companion website Then, look at page xiii for how you can apply an understanding of your learning style to this course When you know more about your own learning style, browse through pages xiv–xvii These pages describe the main features you will find in this textbook and explain their purpose.

How To Succeed? We’ve asked many students and many instructors whether there

is a secret for success in this course The nearly unanimous answer turns out to be not much of a secret: “Do the homework.” This is one course where doing is learning

The more time you spend on the homework assignments—using the various tools that this textbook provides—the more likely you are to learn the essential concepts, techniques, and methods of accounting Besides the textbook itself, the book’s companion website also offers various support resources.

Good luck in this course We hope you enjoy the experience and that you put to good use throughout a lifetime of success the knowledge you obtain in this course We are sure you will not be disappointed.

Jerry J Weygandt Paul D Kimmel Donald E Kieso

“Whether you are looking at a large multinational company like Microsoft or Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is

happening.”

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Author Commitment Collaboration Innovation Experience.

After decades of success as authors of textbooks like this one, Jerry Weygandt, Paul Kimmel, and Don Kieso understand that teaching accounting goes beyond simply presenting data The authors are truly effective because they know that teaching is about telling compelling stories in ways that make each concept come to life.

T

Te ea acch he err // A Au utth ho orr // P Prro offe essssiio on na all

Through their textbooks, supplements, online learning tools, and classrooms, these authors have developed a comprehensive pedagogy that engages students in learning and faculty

with teaching.

These authors collaborate throughout the entire process The end result is a true collaboration where each author brings his individual experience and talent to the development of every paragraph, page, and chapter, thus creating a truly well-rounded, thorough view on any given accounting topic.

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Ma an nyy W Wa ayyss iin n O On ne e D Diirre eccttiio on n

Our Team for Success has developed a teaching system that

addresses every learning style Each year brings new insights, feedback, ideas, and improvements on how to deliver the material

to every student with a passion for the subject in a format that gives them the best chance to succeed

The key to the team’s approach is in understanding that, just as there are many different ways to learn, there are also many different ways to teach.

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Visit the Wiley Team for Success website to hear from the authors

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Jerry Weygandt

Jerry J Weygandt, PhD, CPA, is Arthur

Andersen Alumni Emeritus Professor of

Accounting at the University of Wisconsin—

Madison He holds a Ph.D in accounting

from the University of Illinois Articles by

Professor Weygandt have appeared in the

Accounting Review, Journal of Accounting

Research, Accounting Horizons, Journal of

Accountancy, and other academic and

professional journals These articles have

examined such financial reporting issues

as accounting for price-level adjustments,

pensions, convertible securities, stock option

contracts, and interim reports Professor

Weygandt is author of other accounting and

financial reporting books and is a member

of the American Accounting Association,

the American Institute of Certified Public

Accountants, and the Wisconsin Society of

Certified Public Accountants He has served

on numerous committees of the American

Accounting Association and as a member

of the editorial board of the Accounting

Review; he also has served as President

and Secretary-Treasurer of the American

Accounting Association In addition, he has

been actively involved with the American

Institute of Certified Public Accountants

and has been a member of the Accounting

Standards Executive Committee (AcSEC) of

that organization He has served on the FASB

task force that examined the reporting issues

related to accounting for income taxes

and served as a trustee of the Financial

Accounting Foundation Professor Weygandt

has received the Chancellor’s Award for

Excellence in Teaching and the Beta Gamma

Sigma Dean’s Teaching Award He is on the

board of directors of M & I Bank of Southern

Wisconsin He is the recipient of the

Wisconsin Institute of CPA’s Outstanding

Educator’s Award and the Lifetime

Achievement Award In 2001 he received

the American Accounting Association’s

Outstanding Educator Award

Paul D Kimmel, PhD, CPA, received his bachelor’s degree from the University ofMinnesota and his doctorate in accountingfrom the University of Wisconsin He is anAssociate Professor at the University ofWisconsin—Milwaukee, and haspublic accounting experience with Deloitte

& Touche (Minneapolis) He was the recipient

of the UWM School of Business AdvisoryCouncil Teaching Award, the Reggie Taite Excellence in Teaching Award and athree-time winner of the OutstandingTeaching Assistant Award at the University

of Wisconsin He is also a recipient of theElijah Watts Sells Award for HonoraryDistinction for his results on the CPA exam

He is a member of the American AccountingAssociation and the Institute of ManagementAccountants and has published articles in

Accounting Review, Accounting Horizons, Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, Journal of Accounting Education,

as well as other journals His research interests include accounting for financialinstruments and innovation in accountingeducation He has published papers andgiven numerous talks on incorporating critical thinking into accounting education,and helped prepare a catalog of criticalthinking resources for the Federated Schools

of Accountancy

Donald E Kieso, PhD, CPA, received hisbachelor’s degree from Aurora University and his doctorate in accounting from theUniversity of Illinois He has served as chairman of the Department of Accountancyand is currently the KPMG Emeritus Professor

of Accountancy at Northern Illinois University

He has public accounting experience withPrice Waterhouse & Co (San Francisco andChicago) and Arthur Andersen & Co.(Chicago) and research experience with theResearch Division of the American Institute ofCertified Public Accountants (New York) Hehas done post doctorate work as a VisitingScholar at the University of California atBerkeley and is a recipient of NIU’s TeachingExcellence Award and four Golden AppleTeaching Awards Professor Kieso is theauthor of other accounting and businessbooks and is a member of the AmericanAccounting Association, the AmericanInstitute of Certified Public Accountants, andthe Illinois CPA Society He has served as amember of the Board of Directors of theIllinois CPA Society, then AACSB’s AccountingAccreditation Committees, the State ofIllinois Comptroller’s Commission, asSecretary-Treasurer of the Federation

of Schools of Accountancy, and as Secretary-Treasurer of the AmericanAccounting Association Professor Kieso iscurrently serving on the Board of Trusteesand Executive Committee of AuroraUniversity, as a member of the Board ofDirectors of Kishwaukee CommunityHospital, and as Treasurer and Director ofValley West Community Hospital From 1989

to 1993 he served as a charter member ofthe national Accounting Education ChangeCommission He is the recipient of theOutstanding Accounting Educator Awardfrom the Illinois CPA Society, the FSA’s Joseph

A Silvoso Award of Merit, the NIUFoundation’s Humanitarian Award for Service

to Higher Education, a Distinguished ServiceAward from the Illinois CPA Society, and

in 2003 an honorary doctorate from Aurora University

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and how your students lear

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also provide an international perspective of the accounting topic discussed in the text.

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What TYPE of learner are you?

Understanding each of these basic learning styles enables the authors to engage students’ minds and motivate them to do their best work, ultimately improving the experience for both students and faculty.

• Underline

• Use different colors

• Use symbols, flow charts, graphs, different arrangements on the page,white spaces

Convert your lecture notes into

“page pictures.”

To do this:

• Use the “Intake” strategies

• Reconstruct images in different ways

• Redraw pages from memory

• Replace words with symbols and initials

• Look at your pages

The Navigator/Feature Story/PreviewInfographics/IllustrationsAccounting equation analysesHighlighted words

Comprehensive DO IT!

Problem/Action PlanQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemReal-World Focus

• Recall your “page pictures.”

• Draw diagrams where appropriate

• Practice turning your visuals back into words

• Attend lectures and tutorials

• Discuss topics with students and instructors

• Explain new ideas to other people

• Use a tape recorder

• Leave spaces in your lecturenotes for later recall

• Describe overheads, pictures,and visuals to somebody who was not in class

You may take poor notesbecause you prefer to listen

Therefore:

• Expand your notes by talking with others and with information from your textbook

• Tape-record summarized notes and listen

• Read summarized notes out loud

• Explain your notes to another “aural” person

PreviewInsight Boxes

DO IT! Action PlanSummary of Learning ObjectivesGlossary

Comprehensive DO IT!

Problem/Action PlanSelf-Test QuestionsQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemReal-World Focus

Decision-Making Across the Organization

Communication Activity Ethics Case

• Talk with the instructor

• Spend time in quiet places recalling the ideas

• Practice writing answers

to old exam questions

• Say your answers out loud

• Use lists and headings

• Use dictionaries, glossaries, and definitions

• Read handouts, textbooks, and supplementary library readings

• Use lecture notes

• Write out words again and again

• Reread notes silently

• Rewrite ideas and principlesinto other words

• Turn charts, diagrams, and other illustrations into statements

The Navigator/Feature Story/StudyObjectives/Preview

DO IT! Action PlanSummary of LearningObjectivesGlossary/Self-Test QuestionsQuestions/Exercises/ProblemsWriting Problems

Financial Reporting ProblemComparative Analysis ProblemReal-World Focus

Decision-Making Across the OrganizationCommunication ActivityAll About You

• Write exam answers

• Practice with multiple-choicequestions

• Write paragraphs, beginningsand endings

• Write your lists in outline form

• Arrange your words into hierarchies and points

• Use all your senses

• Go to labs, take field trips

• Listen to real-life examples

• Pay attention to applications

• Use hands-on approaches

• Use trial-and-error methods

You may take poor notesbecause topics do not seemconcrete or relevant

Therefore:

• Put examples in your summaries

• Use case studies and applications to help with principles and abstract concepts

• Talk about your notes with another “kinesthetic” person

• Use pictures and photographs that illustrate an idea

The Navigator/Feature Story/PreviewInfographics/Illustrations

DO IT! Action PlanSummary of Learning ObjectivesComprehensive DO IT!

Problem/Action PlanSelf-Test QuestionsQuestions/Exercises/ProblemsFinancial Reporting ProblemComparative Analysis ProblemReal-World Focus

Decision-Making Across the OrganizationCommunication ActivityAll About You

• Write practice answers

• Role-play the exam situation

Intake:

To take in the information To make a study package

Text features that mayhelp you the most

Output:

To do well on exams

xiii

The Accounting Cycle

For many students, success in an introductory accounting course hinges on developing a sound conceptual understanding of the accounting cycle As a result, we have developed a frame- work to help students visualize how to analyze, journalize, and post transaction data.

Accounting Principles

For many students, learning about the tual framework can be somewhat tedious Yet, at the same time, we believe that stu- dents need a good understanding of the accounting assumptions, principles, and con- straints that accountants use as a basis for recording and reporting financial information.

concep-As a result, we decided to integrate our discussion of accounting principles throughout the textbook as they relate to the topic at hand However, we also realize that students might find it helpful to have a summary of all the concepts, which we provide in the C

Ch ha ap ptte err 3 3 A Ap pp pe endiixx, Concepts in Action.

Chart of Accounts

It is important to always try to eliminate unnecessary barriers to student understanding Sometimes, the accounting course can seem unnecessarily complicated to students because so many account titles are used In order to reduce possible confusion and to keep students focused on those concepts that really matter, we streamlined the num- ber of accounts used in the textbook, supplements, and WileyPLUS See inside the front cover of the textbook for a sample chart of accounts, which represent the majority of the account titles used.

Accounting Equation Analyses

We include a acccco ounttiin ng g e equa attiio on n a anallyysse ess in the margin next to key journal entries They will help stu- dents understand the impact of an accounting transaction on the components of the accounting equation, on the stockholders’ equity accounts, and

on the company’s cash flows.

Textbook Features

In this First Edition, we include numerous pedagogical tools that expand our emphasis

on student learning Our goal is to provide a teaching and learning package that tors and students will rate as the highest in customer satisfaction.

instruc-xiv

Real-World Emphasis

One of the goals of the introductory

accounting course is to orient students to the

application of accounting principles and

techniques in practice Accordingly, we use

numerous examples from real companies

throughout the textbook The names of these

real companies are highlighted in red.

Also, throughout the chapters, IIn nssiig gh htt and A Acccco ounttiin ng g A Accrro ossss tth he e O Orrg ga an niizza attiio on n

boxes show how people, often in

non-accounting functions, in actual companies

make decisions using accounting information These high-interest boxes focus on various

themes—ethics, international, investor, and corporate social responsibility concerns.

Guideline Answers to the critical thinking questions are provided at the end of each

chapter.

Anatomy of a Fraud

Our Anatomy of a Fraud stories highlight some real-world

frauds We describe the situation, note the extent of the

fraud, and then discuss the missing internal control activity

that would likely have prevented or uncovered the fraud.

Here is a question an executive of PepsiCo was asked: Should PepsiCo market green? The

execu-tive indicated that the company should, as he believes it's the No 1 thing consumers all over the

world care about Here are some thoughts on this issue:

If you are going to market green, what are some things we've learned? I'll share with you

one thing we've learned at PepsiCo.

Sun Chips are part of the food business I run It's a "healthy snack." We decided that Sun Chips,

if it's a healthy snack, should be made in facilities that have a net-zero footprint In other words, I

in a facility that puts back more water than it uses It does that And we partnered with our

suppli-ers and came out with the world's first compostable chip package.

Now, there was an issue with this package: It was louder than the New York subway, louder than

jet engines taking off What would a company that's committed to green do: walk away or stay

com-months later, the compostable bag has half the noise of our current package.

So the view today is: we should market green, we should be proud to do it it has to be

a 360 process, both internal and external And if you do that, you can monetize environmental

sustainability for the shareholders.

Source: “Four Problems—and Solutions,” Wall Street Journal (March 7, 2011), p R2.

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Why has Mark Zuckerberg, the CEO and founder of Facebook, delayed taking his company’s shares public through an initial public offering (IPO)? (See page 596.)

?

Wall Street No Friend of Facebook

In the 1990s, it was the dream of every young technology entrepreneur to start a company and

like there was a never-ending supply of 20-something-year-old technology entrepreneurs that made millions doing IPOs of companies that never made a profit and eventually failed In sharp contrast to this is Mark Zuckerberg, the 27-year-old founder and CEO of Facebook If Facebook did an IPO, he would make billions of dollars But, he is in no hurry to go public Because his

need to raise a lot of cash Also, by not going public, Zuckerberg has more control over the direction of the company Right now, he and the other founders don’t have to answer to out- side shareholders, who might be more concerned about short-term investment horizons rather than long-term goals In addition, publicly traded companies face many more fi nancial report- ing disclosure requirements.

Source: Jessica E Vascellaro, “Facebook CEO in No Rush to ‘Friend’ Wall Street,” Wall Street Journal Online

(March 4, 2010).

ACCOUNTING ACROSS THE ORGANIZATION

People, Planet, and Profit

Today’s companies are evaluating not just their profitability but also their corporate social respon- sibility To that end, we have profiled some of these companies, such

as PepsiCo , to highlight their sustainable busi- ness practices.

FMTOC.qxd 10/28/11 1:04 PM Page xv

International Financial Reporting Standards

To reflect the constant changes in the accounting environment,

we have included a comprehensive section at the end of each chapter on International Financial Reporting Standards (IFRS).

A Look at IFRS includes an overview section, addresses ences between GAAP and IFRS (Key Points), describes conver- gence efforts (Looking to the Future), and provides students with the opportunity to test their understanding through self- test questions and exercises (IFRS Practice) An international financial reporting problem is also included, based on Zetar plc ’s (a U.K candy

differ-company) financial statements, provided

in Appendix C of the textbook

International Insights (and International Notes in the margin) also provide a global perspective of the accounting topics discussed in the textbook.

Exercises

Brief DO IT! exercises ask students to apply their newly acquired knowledge The

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DO IT!

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exercises include an Action Plan, which reviews the necessary steps to complete the exercise, as well as a Solution so students can have immediate feedback A C

Co omprre ehen nssiivve e DO IT! problem at the end of each chapter allows students a final

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DO IT!

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check of their understanding before they do their homework R Re evviie ew w problems are part of the end-of-chapter homework material.

Marginal Notes

H

He ellp pffu ull H Hiin nttss in the margin further clarify concepts being discussed E Etth hiiccss N No otte ess point out ethical points related to the nearby text discussion A Alltte errn na attiivve e T Te errm miin no ollo og gyy lets stu- dents know about interchangeable words and phrases IIn ntte errn na attiio on na all N No otte ess provide a global perspective of the accounting topics being discussed.

Kellogg Company

Balance Sheet (partial) ($ in millions)

Stockholders’ equity Common stock, $0.25 par value, 1,000,000,000 shares authorized

5 1

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FMTOC.qxd 10/28/11 1:04 PM Page xvi

Managerial Decision-Making

Beginning in Chapter 15, we introduce Current Designs , a kayak-making company based

in Winona, Minnesota We then follow-up with a decision-making problem in every

sub-sequent chapter based on this real-world company Each problem presents realistic

managerial accounting situations that students must analyze to determine the best

course of action In addition, many of these end-of-chapter activities also have an

accompanying video.

Managerial Accounting Video Series

Through the use of real-world, cutting-edge companies, these videos

engage students with a dynamic overview of managerial accounting topics

and motivate them through the detailed tools, examples, and discussions

presented in their textbook, WileyPLUS course, and classroom lectures.

Comprehensive Homework Material

Each chapter concludes with Self-Test Questions, Questions, Brief Exercises,

Review, Exercises, and Problems Many chapters also include a Comprehensive

Problem An icon identifies Exercises and Problems that can be solved using E Exxcce ell tte em

m p

plla atte ess at the book’s companion website The C Co on nttiin nu uiin ng g C Co oo okkiie e C Ch hrro on niicclle e and the

W

Wa atte errw wa ayyss C Co on nttiin nu uiin ng g P Prro ob blle em m use the business activities of two fictional companies to

help students apply financial and managerial accounting topics to realistic

entrepre-neurial situations.

Broadening Your Perspective Section

The B Brro oadeniin ng g Y Yourr P Pe errssp pe eccttiivve e section at the end of each chapter presents short cases

that require analytical, decision-making, and critical thinking skills Elements in this

sec-tion include the following:

• Financial Reporting Problem: • Communication Activity

• Comparative Analysis Problem: PepsiCo, • All About You Inc vs The Coca-Cola Company • Considering People, Planet,

• Decision-Making Across the Organization • Considering Your Costs and

• Decision-Making at Current Designs Benefits

These assignments are designed to help develop students’ decision-making and

critical-thinking skills.

DO IT!

xviiFMTOC.qxd 10/28/11 1:04 PM Page xvii

For Instructors

In addition to the support instructors receive from WileyPLUS

and the Wiley Faculty Network, we offer the following useful

supplements

Book’s Companion Website. On this website,

www.wiley.com/college/weygandt, instructors will find

the Solutions Manual, Test Bank, Instructor’s Manual,

Computerized Test Bank, and other resources

Solutions Manual. The Solutions Manual contains

detailed solutions to all questions, brief exercises, exercises,

and problems in the textbook, as well as suggested

answers to the questions and cases The estimated time

to complete exercises, problems, and cases is provided

Instructor’s Manual. Included in each chapter are

lecture outlines with teaching tips, chapter reviews, illustrations,

and review quizzes

Test Bank and Computerized Test Bank. The test

bank and computerized test bank allow instructors to tailor

examinations according to study objectives and learning

out-comes, including AACSB, AICPA, and IMA professional

stan-dards Achievement tests, comprehensive examinations, and a

final exam are included

PowerPoint™. The PowerPoint™ presentations contain

a combination of key concepts, images, and problems from

the textbook

Blackboard. Blackboard offers an integrated set of

course management tools that enable instructors to easily

design, develop, and manage based and

Web-enhanced courses

For Students Book’s Companion Website. On this website, students will find:

• Exercises: Set B and Challenge Exercises

of key terms Demonstration problems, multiple-choice,true/false, matching, and other exercises are also included.Working Papers and Excel Working Papers.The working papers are printed templates that can help students correctly format their textbook accountingsolutions

Excel Primer: Using Excel in Accounting. Theonline Excel primer and accompanying Excel templatesallow students to complete select end-of-chapter exercisesand problems identified by a spreadsheet icon in the margin of the textbook

Managerial Accounting Video Series. Through theexamples of real-world, cutting-edge companies, thesevideos engage students with a dynamic overview of man-agerial accounting topics and motivate them through thedetailed tools, examples, and discussions presented intheir textbook, WileyPLUS course, and classroom lectures.Mobile Applications. Quizzing and reviewing content

is available for download on iTunes

Teaching and Learning Supplementary Material

xviii

Financial & Managerial Accounting has benefited greatly from the input of focus group participants, uscript reviewers, ancillary authors, and proofers We greatly appreciate the constructive suggestions and innovative ideas of reviewers and the creativity and accuracy of the ancillary authors and checkers.

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xix

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We appreciate the exemplary support and commitment given

to us by associate publisher Chris DeJohn, senior acquisitions

editor Michael McDonald, marketing manager Karolina

Zarychta Honsa, operations manager Yana Mermel, senior

content editor Ed Brislin, development editors Terry Ann Tatro

and Margaret Thompson, lead product designer Allie Morris,

product designer Greg Chaput, vice president of higher

edu-cation production and manufacturing Ann Berlin, designers

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We also thank Benjamin Huegel and Teresa Speck of St

Mary’s University for their extensive efforts in the preparation

of the homework materials related to Current Designs Wealso appreciate the considerable support provided to us bythe following people at Current Designs: Mike Cichanowski,Jim Brown, Diane Buswell, and Jake Greseth We also benefitedfrom the assistance and suggestions provided to us by JoanVan Hise in the preparation of materials related to sustainability

Finally, our thanks to Amy Scholz, Susan Elbe, GeorgeHoffman, Tim Stookesberry, Joe Heider, and Steve Smith for theirsupport and leadership in Wiley’s College Division We willappreciate suggestions and comments from users—instructorsand students alike You can send your thoughts and ideas aboutthe textbook to us via email at: wileyauthorfeedback@gmail.com.Jerry J Weygandt Paul D Kimmel Donald E KiesoMadison, Wisconsin Milwaukee, Wisconsin DeKalb, Illinois

xx

Brief Contents

1 Accounting in Action 2

2 The Recording Process 52

3 Adjusting the Accounts 100

4 Completing the Accounting Cycle 162

5 Accounting for Merchandising Operations 218

6 Inventories 270

7 Fraud, Internal Control, and Cash 324

8 Accounting for Receivables 378

9 Plant Assets, Natural Resources, and Intangible Assets 422

10 Liabilities 474

11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings 536

12 Investments 600

13 Statement of Cash Flows 644

14 Financial Statement Analysis 710

25 Standard Costs and Balanced Scorecard 1238

26 Planning for Capital Investments 1290

APPENDICES

A Specimen Financial Statements: PepsiCo, Inc.

B Specimen Financial Statements: The Coca-Cola Company

C Specimen Financial Statements: Zetar plc

D Time Value of Money

E Payroll Accounting*

F Subsidiary Ledgers and Special Journals*

G Other Significant Liabilities*

H Standards of Ethical Conduct for Managerial Accountants*

Cases for Managerial Decision-Making* CA-1

*Available online at www.wiley.com/college/weygandt

xxi

Assumptions 10 The Basic Accounting Equation 12 Assets 13

Liabilities 13 Stockholders’ Equity 13 Using the Accounting Equation 15 Transaction Analysis 15

Summary of Transactions 20 Financial Statements 22 Income Statement 22 Retained Earnings Statement 22 Balance Sheet 24

Statement of Cash Flows 24

APPENDIX 1A: Accounting Career Opportunities 29

Public Accounting 30 Private Accounting 30 Opportunities in Government 30 Forensic Accounting 30

“Show Me the Money” 31

A Look at IFRS 49 Chapter 2

Accidents Happen 52 The Account 54 Debits and Credits 54 Stockholders’ Equity Relationships 58 Summary of Debit/Credit Rules 58 Steps in the Recording Process 59 The Journal 60

The Ledger 62 Posting 64 The Recording Process Illustrated 66 Summary Illustration of Journalizing and Posting 72 The Trial Balance 73

Limitations of a Trial Balance 74 Locating Errors 74

Use of Dollar Signs 75

A Look at IFRS 97

Chapter 3

What Was Your Profit? 100 Timing Issues 102 Fiscal and Calendar Years 102 Accrual- versus Cash-Basis Accounting 102 Recognizing Revenues and Expenses 103 The Basics of Adjusting Entries 104

Types of Adjusting Entries 105 Adjusting Entries for Deferrals 106 Adjusting Entries for Accruals 113 Summary of Basic Relationships 119 The Adjusted Trial Balance and Financial Statements 121 Preparing the Adjusted Trial Balance 121 Preparing Financial Statements 122

APPENDIX 3A: Alternative Treatment of Prepaid Expenses and Unearned Revenues 126

Prepaid Expenses 127 Unearned Revenues 128 Summary of Additional Adjustment Relationships 129

APPENDIX 3B: Concepts in Action 130

Qualities of Useful Information 130 Assumptions in Financial Reporting 130 Principles in Financial Reporting 131 Constraints in Financial Reporting 132

A Look at IFRS 159 Chapter 4

Everyone Likes to Win 162 Using a Worksheet 164 Steps in Preparing a Worksheet 165 Preparing Financial Statements from a Worksheet 167

Preparing Adjusting Entries from a Worksheet 169 Closing the Books 170

Preparing Closing Entries 170 Posting Closing Entries 172 Preparing a Post-Closing Trial Balance 174 Summary of the Accounting Cycle 176 Reversing Entries—An Optional Step 177 Correcting Entries—An Avoidable Step 177 The Classified Balance Sheet 179

Current Assets 181 Long-Term Investments 181 Property, Plant, and Equipment 182 Intangible Assets 182

xxii

Current Liabilities 184 Long-Term Liabilities 185 Stockholders’ (Owners’) Equity 185

APPENDIX 4A: Reversing Entries 190

Reversing Entries Example 190

Freight Costs 223 Purchase Returns and Allowances 225 Purchase Discounts 226

Summary of Purchasing Transactions 227 Recording Sales of Merchandise 227

Sales Returns and Allowances 229 Sales Discounts 230

Completing the Accounting Cycle 232

Adjusting Entries 232 Closing Entries 232 Summary of Merchandising Entries 233 Forms of Financial Statements 234

Multiple-Step Income Statement 234 Income Statement Presentation of Sales 234 Single-Step Income Statement 237

Classified Balance Sheet 238

APPENDIX 5A: Periodic Inventory System 242

Determining Cost of Goods Sold Under

a Periodic System 242 Recording Merchandise Transactions 243 Recording Purchases of Merchandise 243 Recording Sales of Merchandise 244

APPENDIX 5B: Worksheet for a Merchandising

Determining Inventory Quantities 273

Taking a Physical Inventory 273 Determining Ownership of Goods 274 Inventory Costing 276

Specific Identification 277 Cost Flow Assumptions 277 Financial Statement and Tax Effects of Cost Flow Methods 282

Using Inventory Cost Flow Methods Consistently 284 Lower-of-Cost-or-Market 285 Inventory Errors 286

Income Statement Effects 286 Balance Sheet Effects 287 Statement Presentation and Analysis 288 Presentation 288

Analysis 289

APPENDIX 6A: Inventory Cost Flow Methods

in Perpetual Inventory Systems 292

First-In, First-Out (FIFO) 293 Last-In, First-Out (LIFO) 293 Average-Cost 294

APPENDIX 6B: Estimating Inventories 296

Gross Profit Method 297 Retail Inventory Method 298

A Look at IFRS 321 Chapter 7

Minding the Money in Moose Jaw 324 Fraud and Internal Control 326 Fraud 326

The Sarbanes-Oxley Act 326 Internal Control 327

Principles of Internal Control Activities 328 Limitations of Internal Control 335

Cash Controls 336 Cash Receipts Controls 336 Cash Disbursements Controls 339 Control Features: Use of a Bank 344 Making Bank Deposits 344

Writing Checks 344 Bank Statements 345 Reconciling the Bank Account 347 Electronic Funds Transfer (EFT) System 350 Reporting Cash 352

Cash Equivalents 352 Restricted Cash 352

A Look at IFRS 375 Chapter 8

A Dose of Careful Management Keeps Receivables Healthy 378

Types of Receivables 380 Accounts Receivable 380 Recognizing Accounts Receivable 381 Valuing Accounts Receivable 382 Disposing of Accounts Receivable 388 Notes Receivable 391

Determining the Maturity Date 392 Computing Interest 393

xxiii

Recognizing Notes Receivable 394 Valuing Notes Receivable 394 Disposing of Notes Receivable 394 Statement Presentation and Analysis 397 Presentation 397

Analysis 397

A Look at IFRS 419 Chapter 9

Plant Assets, Natural Resources,

How Much for a Ride to the Beach? 422 Plant Assets 424

Determining the Cost of Plant Assets 424

Depreciation 427 Expenditures During Useful Life 435 Plant Asset Disposals 436

Natural Resources 439 Intangible Assets 441 Accounting for Intangible Assets 441 Research and Development Costs 443 Statement Presentation and Analysis 444 Presentation 444

Analysis 445

APPENDIX 9A: Exchange of Plant Assets 449

Loss Treatment 449 Gain Treatment 450

A Look at IFRS 470 Chapter 10

Liabilities 474

Financing His Dreams 474 Current Liabilities 476 Notes Payable 476 Sales Taxes Payable 477 Payroll and Payroll Taxes Payable 477 Unearned Revenues 480

Current Maturities of Long-Term Debt 480 Statement Presentation and Analysis 481 Long-Term Liabilities 483

Bond Basics 483 Accounting for Bond Issues 488 Accounting for Bond Retirements 492 Accounting for Long-Term Notes Payable 494 Statement Presentation and Analysis 496

APPENDIX 10A: Present Value Concepts Related

to Bond Pricing 501

Present Value of Face Value 501 Present Value of Interest Payments (Annuities) 503

Time Periods and Discounting 504 Computing the Market Price of a Bond 504

APPENDIX 10B: Effective-Interest Method

of Bond Amortization 506

Amortizing Bond Discount 506 Amortizing Bond Premium 508

APPENDIX 10C: Straight-Line Amortization 510

Amortizing Bond Discount 510 Amortizing Bond Premium 511

A Look at IFRS 533 Chapter 11

Corporations: Organization, Stock Transactions, Dividends,

What’s Cooking? 536 The Corporate Form of Organization 538 Characteristics of a Corporation 538 Forming a Corporation 541

Ownership Rights of Stockholders 542 Stock Issue Considerations 542 Corporate Capital 545

Accounting for Stock Transactions 548 Accounting for Common Stock Issues 548

Accounting for Treasury Stock 551 Accounting for Preferred Stock 554 Dividends 556

Cash Dividends 556 Stock Dividends 560 Stock Splits 562 Retained Earnings 564 Retained Earnings Restrictions 565 Prior Period Adjustments 566 Retained Earnings Statement 567 Statement Presentation and Analysis 568 Presentation 568

xxiv

Accounting for Stock Investments 605

Holdings of Less than 20% 606 Holdings Between 20% and 50% 606 Holdings of More than 50% 608 Valuing and Reporting Investments 610

Categories of Securities 610 Balance Sheet Presentation 614 Presentation of Realized and Unrealized Gain or Loss 614

Classified Balance Sheet 615

APPENDIX 12A: Preparing Consolidated Financial

Preparing the Statement of Cash Flows—

Using Cash Flows to Evaluate a Company 662

Free Cash Flow 662

APPENDIX 13A: Using a Worksheet to Prepare

the Statement of Cash Flows—Indirect Method 666

Preparing the Worksheet 667

APPENDIX 13B: Statement of Cash Flows—

Direct Method 672

Step 1: Operating Activities 673 Step 2: Investing and Financing Activities 677 Step 3: Net Change in Cash 679

APPENDIX 13C: Statement of Cash

Basics of Financial Statement Analysis 712

Need for Comparative Analysis 712 Tools of Analysis 712

Horizontal Analysis 713 Balance Sheet 714 Income Statement 714 Retained Earnings Statement 715 Vertical Analysis 716

Balance Sheet 716 Income Statement 716 Ratio Analysis 718 Liquidity Ratios 719 Profitability Ratios 723 Solvency Ratios 727 Summary of Ratios 728 Earning Power and Irregular Items 730 Discontinued Operations 731

Extraordinary Items 731 Changes in Accounting Principle 733 Comprehensive Income 734

Quality of Earnings 735 Alternative Accounting Methods 735 Pro Forma Income 735

Improper Recognition 736

A Look at IFRS 760 Chapter 15

Just Add Water and Paddle 764 Managerial Accounting Basics 766 Comparing Managerial and Financial Accounting 766

Management Functions 766 Organizational Structure 768 Business Ethics 769

Managerial Cost Concepts 771 Manufacturing Costs 771 Product versus Period Costs 773 Manufacturing Costs in Financial Statements 774

Income Statement 774 Cost of Goods Manufactured 775 Cost of Goods Manufactured Schedule 776 Balance Sheet 777

Cost Concepts—A Review 778 Product Costing for Service Industries 780 Managerial Accounting Today 781

Focus on the Value Chain 781 Balanced Scorecard 782 Corporate Social Responsibility 783

Chapter 16

She Succeeds Where Others Have Failed 808 Cost Accounting Systems 810

Job Order Cost System 810 Process Cost System 810

xxv

Job Order Cost Flow 811 Accumulating Manufacturing Costs 812 Assigning Manufacturing Costs to Work

in Process 814 Manufacturing Overhead Costs 819 Assigning Costs to Finished Goods 822 Assigning Costs to Cost of Goods Sold 823 Summary of Job Order Cost Flows 824 Job Order Costing for Service Companies 825 Advantages and Disadvantages of Job Order Costing 827

Reporting Job Cost Data 828 Under- or Overapplied Manufacturing Overhead 829

Chapter 17

Ben & Jerry’s Tracks Its Mix-Ups 852 The Nature of Process Cost Systems 854 Uses of Process Cost Systems 854 Process Costing for Service Companies 855 Similarities and Differences Between Job Order Cost and Process Cost Systems 855

Process Cost Flow 857 Assigning Manufacturing Costs—Journal Entries 857

Equivalent Units 860 Weighted-Average Method 860 Refinements on the Weighted-Average Method 861

Production Cost Report 863 Compute the Physical Unit Flow (Step 1) 864 Compute the Equivalent Units of Production (Step 2) 865

Compute Unit Production Costs (Step 3) 865 Prepare a Cost Reconciliation Schedule (Step 4) 866

Preparing the Production Cost Report 867 Costing Systems—Final Comments 868

Equivalent Units Under FIFO 871 Comprehensive Example 872 FIFO and Weighted-Average 876

Chapter 18

Precor Is on Your Side 900 Traditional Costing and Activity-Based Costing 902

Traditional Costing Systems 902 The Need for a New Approach 902 Activity-Based Costing 903

Example of ABC versus Traditional Costing 905 Identify and Classify Activities and Allocate Overhead to Cost Pools (Step 1) 906 Identify Cost Drivers (Step 2) 906 Compute Activity-Based Overhead Rates (Step 3) 906

Assign Overhead Costs to Products (Step 4) 907

Comparing Units Costs 908 Activity-Based Costing: A Closer Look 911 Benefits of ABC 911

Limitations of ABC 911 When to Use ABC 912 Value-Added versus Non–Value-Added Activities 913

Classification of Activity Levels 915 Activity-Based Costing in Service Industries 917

Traditional Costing Example 917 Activity-Based Costing Example 918

APPENDIX 18A: Just-in-Time Processing 922

Objective of JIT Processing 923 Elements of JIT Processing 923 Benefits of JIT Processing 923

Chapter 19

Don’t Worry—Just Get Big 950 Cost Behavior Analysis 952 Variable Costs 952 Fixed Costs 953 Relevant Range 954 Mixed Costs 955 Importance of Identifying Variable and Fixed Costs 959

Cost-Volume-Profit Analysis 960 Basic Components 960 CVP Income Statement 960 Break-Even Analysis 963 Target Net Income 967 Margin of Safety 969

Chapter 20

Cost-Volume-Profit Analysis:

Rapid Replay 988 Cost-Volume-Profit (CVP) Review 990 Basic Concepts 990

Basic Computations 991 CVP and Changes in the Business Environment 993

xxvi

Sales Mix 995

Break-Even Sales in Units 996 Break-Even Sales in Dollars 997 Determining Sales Mix with Limited Resources 1000

Cost Structure and Operating Leverage 1002

Effect on Contribution Margin Ratio 1003 Effect on Break-Even Point 1003

Effect on Margin of Safety Ratio 1004 Operating Leverage 1004

APPENDIX 20A: Absorption Costing versus

Variable Costing 1007

Example Comparing Absorption Costing with Variable Costing 1007

An Extended Example 1009 Decision-Making Concerns 1013 Potential Advantages of Variable Costing 1015

Chapter 21

Make It or Buy It? 1042

Management’s Decision-Making Process 1044

Incremental Analysis Approach 1044 How Incremental Analysis Works 1045 Types of Incremental Analysis 1046

Accept an Order at a Special Price 1046 Make or Buy 1048

Sell or Process Further 1051 Repair, Retain, or Replace Equipment 1054 Eliminate an Unprofitable Segment or Product 1055

Other Considerations in Decision-Making 1058

Qualitative Factors 1058 Relationship of Incremental Analysis and Activity-Based Costing 1058

Chapter 22

They’ve Got Your Size—and Color 1082

Pricing Goods for External Sales 1084

Target Costing 1085 Cost-Plus Pricing 1086 Variable-Cost Pricing 1090 Pricing Services 1091

Transfer Pricing for Internal Sales 1095

Negotiated Transfer Prices 1096 Cost-Based Transfer Prices 1099 Market-Based Transfer Prices 1100 Effect of Outsourcing on Transfer Pricing 1101

Transfers Between Divisions in Different

Countries 1101

APPENDIX 22A: Other Cost Approaches

to Pricing 1104

Absorption-Cost Pricing 1104 Variable-Cost Pricing 1106

Preparing the Operating Budgets 1137 Sales Budget 1137

Production Budget 1138 Direct Materials Budget 1140 Direct Labor Budget 1143 Manufacturing Overhead Budget 1143 Selling and Administrative Expense Budget 1144

Budgeted Income Statement 1144 Preparing the Financial Budgets 1147 Cash Budget 1147

Budgeted Balance Sheet 1150 Budgeting in Nonmanufacturing Companies 1152

Merchandisers 1152 Service Companies 1153 Not-for-Profit Organizations 1153

Uses and Limitations 1184 Flexible Budgets 1184 Why Flexible Budgets? 1185 Developing the Flexible Budget 1186 Flexible Budget—A Case Study 1188 Flexible Budget Reports 1191 Responsibility Accounting 1193 Controllable versus Noncontrollable Revenues and Costs 1195

Principles of Performance Evaluation 1195 Responsibility Reporting System 1197

Types of Responsibility Centers 1200 Responsibility Accounting for Cost Centers 1201

Responsibility Accounting for Profit Centers 1201

Responsibility Accounting for Investment Centers 1203

APPENDIX 24A: Residual Income—Another Performance Measurement 1209

Residual Income Compared to ROI 1210 Residual Income Weakness 1210

A Case Study 1242 Analyzing and Reporting Variances from Standards 1246

Direct Materials Variances 1247 Direct Labor Variances 1250 Manufacturing Overhead Variances 1252 Reporting Variances 1255

Statement Presentation of Variances 1256 Balanced Scorecard 1256

APPENDIX 25A: Standard Cost Accounting System 1261

Journal Entries 1262 Ledger Accounts 1263

APPENDIX 25B: A Closer Look at Overhead Variances 1264

Overhead Controllable Variance 1264 Overhead Volume Variance 1266

Chapter 26

Planning for Capital

Floating Hotels 1290 The Capital Budgeting Evaluation Process 1292

Cash Flow Information 1292 Illustrative Data 1293 Cash Payback 1294 Net Present Value Method 1295 Equal Annual Cash Flows 1296 Unequal Annual Cash Flows 1297

Choosing a Discount Rate 1298 Simplifying Assumptions 1299 Comprehensive Example 1300 Additional Considerations 1300 Intangible Benefits 1301 Profitability Index for Mutually Exclusive Projects 1303

Risk Analysis 1304 Post-Audit of Investment Projects 1305 Other Capital Budgeting Techniques 1305 Internal Rate of Return Method 1306 Comparing Discounted Cash Flow Methods 1308

Annual Rate of Return Method 1308

Appendix A

Specimen Financial Statements:

PepsiCo, Inc A-1 Appendix B

Specimen Financial Statements:

The Coca-Cola Company B-1 Appendix C

Specimen Financial Statements:

Zetar plc C-1 Appendix D

Nature of Interest D-1 SimpIe Interest D-1 Compound Interest D-2 Future Value Concepts D-2 Future Value of a Single Amount D-2 Future Value of an Annuity D-4 Present Value Concepts D-7 Present Value Variables D-7 Present Value of a Single Amount D-7 Present Value of an Annuity D-9 Time Periods and Discounting D-11 Computing the Present Value of a Long-Term Note or Bond D-11 Computing the Present Values in a Capital Budgeting Decision D-14

Using Financial Calculators D-16 Present Value of a Single Sum D-16 Present Value of an Annuity D-17 Useful Applications of the Financial Calculator D-18

xxviii

Appendix E

(available online at www.wiley.com/college/weygandt)

Accounting for Payroll E-1

Determining the Payroll E-1 Recording the Payroll E-5 Employer Payroll Taxes E-8

FICA Taxes E-9 Federal Unemployment Taxes E-9 State Unemployment Taxes E-9 Recording Employer Payroll Taxes E-9 Filing and Remitting Payroll Taxes E-10 Internal Control for Payroll E-12

Appendix F

Subsidiary Ledgers and

(available online at www.wiley.com/college/weygandt)

Expanding the Ledger—Subsidiary

Ledgers F-1

Subsidiary Ledger Example F-2 Advantages of Subsidiary Ledgers F-3 Expanding the Journal—Special

Journals F-4

Sales Journal F-4 Cash Receipts Journal F-7 Purchases Journal F-11 Cash Payments Journal F-13 Effects of Special Journals on the General Journal F-16

Appendix G

(available online at www.wiley.com/college/weygandt)

Contingent Liabilities G-1

Recording a Contingent Liability G-1 Disclosure of Contingent Liabilities G-2

Lease Liabilities G-3 Operating Leases G-3 Capital Leases G-4 Additional Liabilities for Employee Fringe Benefits G-5

Paid Absences G-6 Postretirement Benefits G-7

Appendix H

Standards of Ethical Conduct for

(available online at www.wiley.com/college/weygandt)

IMA Statement of Ethical Professional Practice H-1

Principles H-1 Standards H-1 Resolution of Ethical Conflict H-2

Cases for Management

(The full text of these cases is available online at www.wiley.com/college/weygandt.)

Photo Credits PC-1 Company Index I-1 Subject Index I-3

Learning Objectives

After studying this chapter, you should be able to:

1 Explain what accounting is

2 Identify the users and uses of accounting

3 Understand why ethics is a fundamental business concept

4 Explain generally accepted accounting principles

5 Explain the monetary unit assumption and the economic entity assumption

6 State the accounting equation, and defi ne its components

7 Analyze the effects of business transactions on the accounting equation

8 Understand the four financial statements and how they are prepared

Knowing the Numbers

Many students who take this course do not plan to be accountants If you are

in that group, you might be thinking,

“If I’m not going to be an accountant, why do I need to know accounting?”

In response, consider the quote from Harold Geneen, the former chairman of

IT&T: “To be good at your business, you have to know the numbers—cold.”

Success in any business comes back to the numbers You will rely on them to make decisions, and managers will use them to evaluate your performance

That is true whether your job involves marketing, production, management,

or information systems

In business, accounting and fi nancial statements are the means for commu-nicating the numbers If you don’t know how to read fi nancial statements, you can’t really know your business

Many companies spend signifi cant resources teaching their employees basic accounting so that they can read

fi nancial statements and understand how their actions affect the company’s

fi nancial results One such company is

Springfi eld ReManufacturing tion (SRC) When Jack Stack and 11 other managers purchased SRC for

Corpora-10 cents a share, it was a failing division of International Harvester Jack’s 119 employees, however, were counting on him for their livelihood

He decided that for the company to

2

Scan Learning Objectives

Read Feature Story

Read text and answer DO IT! p 11

p 14 p 21 p 25 Work Comprehensive DO IT! p 26

Review Summary of Learning Objectives

Answer Self-Test Questions

Go to WileyPLUS for practice and tutorials

Read A Look at IFRS p 49

The Navigator

✔

Accounting in Action

✔ The Navigator

The Navigator is a learning system designed

to prompt you to use the learning aids in the

chapter and set priorities as you study.

Learning Objectives give you a framework for learning the

specifi c concepts covered in the chapter.

survive, every employee needed to think like a businessperson

and to act like an owner To accomplish this, all employees at

SRC took basic accounting courses

and participated in weekly reviews of

the company’s fi nancial statements SRC

survived, and eventually thrived To

this day, every employee (now

number-ing more than 1,000) undergoes this

same training

Many other companies have adopted

this approach, which is called

“open-book management.” Even in

compa-nies that do not practice open-book

management, employers generally

assume that managers in all areas of

the company are “fi nancially literate.”

Taking this course will go a long way to making you fi nancially literate In this book, you will learn how to read and prepare

fi nancial statements, and how to use basic tools to evaluate fi nancial results

Appendices A and B provide real

fi nancial statements of two known U.S companies, PepsiCo, Inc

well-and TheCoca-Cola Company Appendix C includes the fi nancial statements of Zetar plc, a U.K candy company Throughout this textbook,

we attempt to increase your familiarity with fi nancial reporting by providing numerous references, questions, and exercises that encourage you to explore these fi nancial statements

✔ The Navigator

3

The opening story about Springfi eld ReManufacturing Corporation highlights the importance of having good fi nancial information and knowing how to use it to make effective business decisions Whatever your pursuits or occupation, the need for fi nancial information is inescapable You cannot earn a living, spend money, buy on credit, make an investment, or pay taxes without receiving, using, or dispensing

fi nancial information Good decision-making depends on good information.

The purpose of this chapter is to show you that accounting is the system used to provide useful fi nancial information The content and organization of Chapter 1 are as follows.

Preview of Chapter 1

The Feature Story helps you picture how the chapter topic

relates to the real world of accounting and business You will

fi nd references to the story throughout the chapter.

The Preview describes and outlines the

major topics and subtopics you will see

in the chapter.

• Three activities

• Who usesaccounting data

• Ethics in fi nancial reporting

• Generally accepted accounting

principles

• Measurement principles

Using the Accounting Equation

✔ The Navigator

What Is Accounting?

• Income statement

• Retained earnings statement

• Balance sheet

• Statement of cash

fl ows

Financial StatementsACCOUNTING IN ACTION

4 1 Accounting in Action

What consistently ranks as one of the top career opportunities in business? What frequently rates among the most popular majors on campus? What was the undergraduate degree chosen by Nike founder Phil Knight, Home Depot co-founder Arthur Blank, former acting director of the Federal Bureau of Investigation (FBI)

Thomas Pickard, and numerous members of Congress? Accounting.1 Why did these people choose accounting? They wanted to understand what was happening

fi nancially to their organizations Accounting is the fi nancial information system that provides these insights In short, to understand your organization, you have

to know the numbers.

communicates the economic events of an organization to interested users Let’s

take a closer look at these three activities.

Three Activities

As a starting point to the accounting process, a company identifi es the economic

events relevant to its business Examples of economic events are the sale of

snack chips by PepsiCo , the providing of telephone services by AT&T , and the payment of wages by Ford Motor Company

Once a company like PepsiCo identifi es economic events, it records those

events in order to provide a history of its fi nancial activities Recording consists

of keeping a systematic, chronological diary of events, measured in dollars

and cents In recording, PepsiCo also classifi es and summarizes economic events.

Finally, PepsiCo communicates the collected information to interested users

by means of accounting reports The most common of these reports are called

fi nancial statements To make the reported fi nancial information meaningful,

PepsiCo reports the recorded data in a standardized way It accumulates mation resulting from similar transactions For example, PepsiCo accumulates all sales transactions over a certain period of time and reports the data as one amount in the company’s fi nancial statements Such data are said to be reported

infor-in the aggregate By presentinfor-ing the recorded data infor-in the aggregate, the

account-ing process simplifi es a multitude of transactions and makes a series of activities understandable and meaningful.

A vital element in communicating economic events is the accountant’s ability

to analyze and interpret the reported information Analysis involves use of

ratios, percentages, graphs, and charts to highlight signifi cant fi nancial trends

and relationships Interpretation involves explaining the uses, meaning, and

limitations of reported data Appendix A of this textbook shows the fi nancial

statements of PepsiCo, Inc Appendix B illustrates the fi nancial statements of

The Coca-Cola Company We refer to these statements at various places

through-out the textbook (In addition, in the A Look at IFRS section at the end of each

chapter, the U.K company Zetar plc is analyzed.) At this point, these fi nancial statements probably strike you as complex and confusing By the end of this course, you’ll be surprised at your ability to understand, analyze, and interpret them.

Illustration 1-1 summarizes the activities of the accounting process.

Essential terms are

printed in blue when they

fi rst appear, and are defi ned

in the end-of-chapter

glossary.

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