Principles of accounting 10th edition by needles powers and crosson

Principles of accounting tenth edition by needles powers and crosson Principles of accounting tenth edition by needles powers and crosson Principles of accounting tenth edition by needles powers and crosson Principles of accounting tenth edition by needles powers and crosson Principles of accounting tenth edition by needles powers and crosson Principles of accounting tenth edition by needles powers and crosson Principles of accounting tenth edition by needles powers and crosson Principles of accounting tenth edition by needles powers and crosson

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Susan V Crosson, M.S Accounting, C.P.A.

Santa Fe Community College, Florida

Houghton Mifflin Company Boston New York

Openmirrors.com

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Executive Publisher: George Hoffman

Senior Sponsoring Editor: Ann West

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Cover photo © Don Smetzer/Stone/Getty Images

CVS Annual Report reprinted with permission of CVS

Portions of Southwest Airlines Annual Report courtesy of Southwest Airlines

COMPANY LOGO CREDITS: p 7, Reprinted with permission of CVS; p 53, Logo provided

by The Boeing Company, Copyright 2006, All Rights Reserved; p 104, ©2006 Yahoo! Inc Yahoo! and the Yahoo! logo are the trademarks of Yahoo! Inc.; p 152, Reprinted with permission of Best Buy; p 293, Reprinted with permission of Costco Wholesale;

(Continued on p 1312)

PHOTO CREDITS: p 3, Getty Images; p 9, AP Images; p 17, © Jim West/The Image Works;

p 26, © Frank Trapper/Corbis; p 51, Boeing Image Licensing; p 56, © Reuters/Corbis; p 72, Getty Images; p 103, © Yahoo! Inc Yahoo! and the Yahoo! logo are the trademarks of Yahoo! Inc.; p 111, AP Images; p 118, © Norbert von der Groeben/The Image Works;

(Continued on page 1312)

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1 Uses of Accounting Information and the Financial Statements 2

2 Analyzing Business Transactions 50

3 Measuring Business Income 102

4 Completing the Accounting Cycle 148

5 Financial Reporting and Analysis 184

SUPPLEMENT TO CHAPTER5 How to Read an Annual Report 235

6 The Operating Cycle and Merchandising Operations 290

7 Inventories 326

8 Cash and Receivables 368

9 Current Liabilities and the Time Value of Money 410

17 Financial Performance Measurement 776

18 The Changing Business Environment: A Manager’s Perspective 826

19 Cost Concepts and Cost Allocation 876

20 Costing Systems: Job Order and Process Costing 934

21 Activity-Based Systems: ABM and JIT 986

22 Cost Behavior Analysis 1034

23 The Budgeting Process 1080

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24 Performance Management and Evaluation 1136

25 Standard Costing and Variance Analysis 1182

26 Analysis for Decision Making 1232

APPENDIXA Future Value and Present Value Tables 1284

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Preface xv

User’s Guide xxi

Check Figures xxix

About the Authors xxxii

v

CHAPTER1 Uses of Accounting Information and the Financial Statements 2

Accounting as an Information System 4

Business Goals, Activities, and Performance Measures

5

Financial and Management Accounting 7

Processing Accounting Information 7

Ethical Financial Reporting 8

Decision Makers: The Users of Accounting

Information 10

Management 10

Users with a Direct Financial Interest 12

Users with an Indirect Financial Interest 12

Governmental and Not-for-Profit Organizations 13

Accounting Measurement 13

Business Transactions 14

Money Measure 14

Separate Entity 15

The Forms of Business Organization 15

Financial Position and the Accounting Equation 17

Statement of Owner’s Equity 20

The Balance Sheet 21

Statement of Cash Flows 21

Relationships Among the Financial Statements 22

Generally Accepted Accounting Principles 24

GAAP and the Independent CPA’s Report 25

Organizations That Influence GAAP 26

Professional Ethics 27

Corporate Governance 27

CHAPTER REVIEW 30 CHAPTER ASSIGNMENTS 35

CHAPTER2 Analyzing Business Transactions 50

The T Account Illustrated 58

Rules of Double-Entry Accounting 58

Normal Balance 59

Owner’s Equity Accounts 59

Business Transaction Analysis 61

Owners’ Investment to Form the Business 61

Economic Event That Is Not a Business Transaction 62

Prepayment of Expenses in Cash 62

Purchase of an Asset on Credit 62

Purchase of an Asset Partly in Cash and Partly on Credit

Expense Paid in Cash 66

Expense to Be Paid Later 66

Withdrawals 67

Summary of Transactions 67

The Trial Balance 69

Preparation and Use of a Trial Balance 69

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CHAPTER3 Measuring Business Income 102

Finding Trial Balance Errors 70

Cash Flows and the Timing of Transactions 71

Recording and Posting Transactions 73

Chart of Accounts 75

General Journal 75

General Ledger 76

Some Notes on Presentation 78

Type 2 Adjustment: Recognizing Unrecorded, IncurredExpenses (Accrued Expenses) 115

Type 3 Adjustment: Allocating Recorded, UnearnedRevenues (Deferred Revenues) 116

Type 4 Adjustment: Recognizing Unrecorded, EarnedRevenues (Accrued Revenues) 117

A Note About Journal Entries 119

Using the Adjusted Trial Balance to Prepare Financial Statements 121

Cash Flows from Accrual-Based Information 123

Profitability Measurement: Issues and Ethics 104

Net Income 104

Income Measurement Assumptions 104

Ethics and the Matching Rule 106

Accrual Accounting 108

Recognizing Revenues 108

Recognizing Expenses 108

Adjusting the Accounts 108

Adjustments and Ethics 109

The Adjustment Process 110

Type 1 Adjustment: Allocating Recorded Costs (Deferred

Expenses) 111

CHAPTER4 Completing the Accounting Cycle 148

SERVICES, INC. 149

From Transactions to Financial Statements 150

The Accounting Cycle 150

Closing Entries 150

Preparing Closing Entries 152

Step 1: Closing the Credit Balances 154

Step 2: Closing the Debit Balances 155

Step 3: Closing the Income Summary Account Balance

155

Step 4: Closing the Withdrawals Account Balance 155

The Accounts After Posting 156

The Post-Closing Trial Balance 156

Reversing Entries: An Optional First Step 158

The Work Sheet: An Accountant’s Tool 160

Preparing the Work Sheet 160

Using the Work Sheet 164

165 CHAPTER REVIEW 166 CHAPTER ASSIGNMENTS 168

CHAPTER5 Financial Reporting and Analysis 184

CORPORATION 185

Foundations of Financial Reporting 186

Objectives of Financial Reporting 186

Qualitative Characteristics of Accounting Information

Dell’s Balance Sheets 198

Forms of the Income Statement 201

Multistep Income Statement 201

Dell’s Income Statements 205

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Evaluation of Profitability 208

SUPPLEMENT TO CHAPTER 5 How to Read an Annual Report 235 The Components of an Annual Report 235

Letter to the Stockholders 235

Financial Highlights 236

Description of the Company 236

Management’s Discussion and Analysis 236

Financial Statements 236

Notes to the Financial Statements 242

Reports of Management’s Responsibilities 242

Reports of Certified Public Accountants 243

Annual Report of CVS Corporation 245

Financial Statements of Southwest Airlines Co.

281

CHAPTER6 The Operating Cycle and Merchandising Operations 290

CORPORATION 291

Managing Merchandising Businesses 292

Operating Cycle 292

Choice of Inventory System 293

Foreign Business Transactions 295

Terms of Sale 296

Sales and Purchases Discounts 296

Transportation Costs 297

Terms of Debit and Credit Card Sales 298

Perpetual Inventory System 299

Evaluating the Level of Inventory 329

Effects of Inventory Misstatements on Income

Measurement 331

Inventory Cost and Valuation 334

Goods Flows and Cost Flows 335

Lower-of-Cost-or-Market (LCM) Rule 336

Disclosure of Inventory Methods 336

Inventory Cost Under the Periodic Inventory

System 338

Specific Identification Method 338

Average-Cost Method 339

First-In, First-Out (FIFO) Method 339

Last-In, First-Out (LIFO) 340

Impact of Inventory Decisions 341

Effects on the Financial Statements 342

Effects on Income Taxes 343

Effects on Cash Flows 344

Inventory Cost Under the Perpetual Inventory System 345

Valuing Inventory by Estimation 347

Retail Method 347

Gross Profit Method 348

Management Issues Related to Cash and

Receivables 370

Cash Needs 370

Accounts Receivable and Credit Policies 371

Evaluating the Level of Accounts Receivable 373

Financing Receivables 374

Ethics and Estimates in Accounting for Receivables 376

Cash Equivalents and Cash Control 378

Cash Equivalents 378

Cash Control Methods 378

Bank Reconciliations 379

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CHAPTER9 Current Liabilities and the Time Value of Money 410

411

Management Issues Related to Current Liabilities

412

Managing Liquidity and Cash Flows 412

Evaluating Accounts Payable 412

Reporting Liabilities 414

Common Types of Current Liabilities 416

Definitely Determinable Liabilities 416

Estimated Liabilities 423

Contingent Liabilities and Commitments 427

The Time Value of Money 428

Investment of Idle Cash 436

Accumulation of a Fund for Loan Repayment 436

Other Applications 437

457

Management Issues Related to Internal Control

458

The Need for Internal Controls 458

Management’s Responsibility for Internal Control 459

Independent Accountant’s Audit of Internal Control 460

Internal Control: Components, Activities, and

Limitations 461

Components of Internal Control 461

Control Activities 461

Limitations of Internal Control 463

Internal Control over Merchandising Transactions

463

Control of Cash 464

Control of Cash Receipts 465

Control of Purchases and Cash Disbursements 466

Petty Cash Funds 471

Establishing the Petty Cash Fund 471

Making Disbursements from the Petty Cash Fund 471

Reimbursing the Petty Cash Fund 472

INC. 491

Management Issues Related to Long-Term Assets

492

Acquiring Long-Term Assets 494

Acquisition Cost of Property, Plant, and Equipment

497

General Approach to Acquisition Costs 498

Specific Applications 499

Uncollectible Accounts 382

The Allowance Method 382

Disclosure of Uncollectible Accounts 383

Estimating Uncollectible Accounts Expense 383

Writing Off Uncollectible Accounts 388

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CHAPTER12 Contributed Capital 540

Management Issues Related to Contributed

Capital 542

The Corporate Organization 542

Advantages and Disadvantages of Incorporation 543

Equity Financing 544

Dividend Policies 546

Using Return on Equity to Measure Performance 548

Stock Options as Compensation 549

Components of Stockholders’ Equity 550

Preferred Stock 554

Preference as to Dividends 554

Preference as to Assets 555

Convertible Preferred Stock 556

Callable Preferred Stock 557

Issuance of Common Stock 558

Par Value Stock 558

No-Par Stock 559

Issuance of Stock for Noncash Assets 560

Accounting for Treasury Stock 561

Purchase of Treasury Stock 561

Sale of Treasury Stock 562

Retirement of Treasury Stock 564

CORPORATION 585

Management Issues Related to Issuing Long-Term

Debt 586

Deciding to Issue Long-Term Debt 586

Evaluating Long-Term Debt 587

Types of Long-Term Debt 589

The Nature of Bonds 594

Bond Issue: Prices and Interest Rates 595

Characteristics of Bonds 596

Accounting for the Issuance of Bonds 598

Bonds Issued at Face Value 598

Bonds Issued at a Discount 599

Bonds Issued at a Premium 600

Bond Issue Costs 600

Using Present Value to Value a Bond 601

Case 1: Market Rate Above Face Rate 601

Case 2: Market Rate Below Face Rate 602

Amortization of Bond Discounts and Premiums

603

Amortizing a Bond Discount 603

Amortizing a Bond Premium 607

Retirement of Bonds 612

Calling Bonds 612

Converting Bonds 613

Other Bonds Payable Issues 613

Sale of Bonds Between Interest Dates 613

Year-End Accrual of Bond Interest Expense 615

Special Issues in Depreciation 507

Disposal of Depreciable Assets 509

Discarded Plant Assets 509

Plant Assets Sold for Cash 510

Exchanges of Plant Assets 511

Natural Resources 511

Depletion 512

Depreciation of Related Plant Assets 513

Development and Exploration Costs in the Oil and GasIndustry 513

Intangible Assets 514

Research and Development Costs 517

Computer Software Costs 518

Goodwill 518

CHAPTER14 The Corporate Income Statement and the Statement of Stockholders’ Equity 638

639

Performance Measurement: Quality of Earnings Issues 640

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The Effect of Accounting Estimates and Methods 641

Gains and Losses 643

Write-downs and Restructurings 643

Earnings per Share 651

Basic Earnings per Share 651

Diluted Earnings Per Share 653

Comprehensive Income and the Statement of Stockholders’ Equity 654

CHAPTER15 The Statement of Cash Flows 684

INTERNATIONAL, INC. 685

Overview of the Statement of Cash Flows 686

Purposes of the Statement of Cash Flows 686

Uses of the Statement of Cash Flows 686

Classification of Cash Flows 687

Noncash Investing and Financing Transactions 688

Format of the Statement of Cash Flows 688

Ethical Considerations and the Statement of Cash Flows

Gains and Losses 697

Changes in Current Assets 698

Changes in Current Liabilities 698

Schedule of Cash Flows from Operating Activities 699

Management Issues Related to Investments 734

Consolidated Financial Statements 746

Consolidated Balance Sheet 747

Consolidated Income Statement 752

Restatement of Foreign Subsidiary Financial Statements

753

Investments in Debt Securities 754

Held-to-Maturity Securities 755

Long-Term Investments in Bonds 755

CHAPTER REVIEW 758

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CHAPTER17 Financial Performance Measurement 776

Evaluating Long-term Solvency 797

Evaluating the Adequacy of Cash Flows 798

Evaluating Market Strength 800

CHAPTER18 The Changing Business Environment: A Manager’s Perspective 826

STORES, INC. 827

The Role of Management Accounting 828

Management Accounting and Financial Accounting: A

Comparison 828

Management Accounting and the Management Process

829

Value Chain Analysis 836

Primary Processes and Support Services 836

Advantages of Value Chain Analysis 838

Managers and Value Chain Analysis 838

Continuous Improvement 840

Management Tools for Continuous Improvement 841

Achieving Continuous Improvement 843

Performance Measures: A Key to Achieving Organizational Objectives 844

Using Performance Measures in the ManagementProcess 844

The Balanced Scorecard 845

Benchmarking 847

Analysis of Nonfinancial Data in a Retail Organization 847

Standards of Ethical Conduct 849

CHAPTER19 Cost Concepts and Cost Allocation 876

AIRLINES 877

Cost Information 878

Managers’ Use of Cost Information 878

Cost Information and Organizations 880

Cost Classifications and Their Uses 880

Cost Traceability 881

Cost Behavior 882

Value-Adding Versus Nonvalue-Adding Costs 883

Cost Classifications for Financial Reporting 883

Financial Statements and the Reporting of Costs

884

Cost Reporting and Accounting for Inventories

884

Statement of Cost of Goods Manufactured 886

Cost of Goods Sold and a Manufacturer’s IncomeStatement 888

Inventory Accounts in Manufacturing Organizations 889

Document Flows and Cost Flows Through the InventoryAccounts 889

The Manufacturing Cost Flow 891

Elements of Product Costs 894

Prime Costs and Conversion Costs 895

Computing Product Unit Cost 895

Computing Service Unit Cost 898

Cost Allocation 899

Allocating the Costs of Overhead 900

The Importance of Good Estimates 902

Allocating Overhead:The Traditional Approach 903

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Allocating Overhead: The ABC Approach 905

Planning Overhead Rates 906

Applying the Overhead Rates 908

CHAPTER20 Costing Systems: Job Order and Process Costing 934

Job Order Versus Process Costing 938

The Job Order Costing System 940

Cost Flow in a Job Order Costing System for a

Manufacturing Company 940

The Job Order Cost Card and Computation of Product

Unit Costs 947

Job Order Costing in a Service Organization 948

The Process Costing System 951

Patterns of Product Flows and Cost Flows 952

Cost Flows Through the Work in Process Inventory

Accounts 954

Computing Equivalent Production 955

Equivalent Production for Direct Materials 956

Equivalent Production for Conversion Costs 957

Summary of Equivalent Production 957

Preparing a Process Cost Report Using the FIFO Costing Method 958

Accounting for Units 958

Accounting for Costs 960

CHAPTER21 Activity-Based Systems: ABM and JIT 986

Value Chains and Supply Chains 991

ABM in a Service Organization 993

Value-Adding and Nonvalue-Adding Activities

and Process Value Analysis 994

Value-Adding and Nonvalue-Adding Activities in a

Service Organization 995

Process Value Analysis 996

Activity-Based Costing 997

The Cost Hierarchy and the Bill of Activities 998

Activity-Based Costing for Selling and Administrative

Minimum Inventory Levels 1003

Pull-Through Production 1004

Quick Setup and Flexible Work Cells 1004

A Multiskilled Work Force 1004

High Levels of Product Quality 1005

Effective Preventive Maintenance 1005

Continuous Improvement of the Work Environment

Comparison of ABM and JIT 1011

CHAPTER REVIEW 1013

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CHAPTER22 Cost Behavior Analysis 1034

1035

Cost Behavior and Management 1036

Planning 1036

Performing 1037

Evaluating and Communicating 1037

The Behavior of Costs 1038

The Breakeven Point for Multiple Products 1052

Using C-V-P Analysis to Plan Future Sales, Costs, and Profits 1054

Applying C-V-P to a Manufacturing Business 1054

Applying C-V-P Analysis to a Service Business 1058

JOHNSON 1081

The Budgeting Process 1082

Budgeting and Goals 1083

The Importance of Participation 1084

Budget Implementation 1085

Managers and the Budgeting Process 1085

The Master Budget 1087

Operating Budgets 1091

The Sales Budget 1091

The Production Budget 1092

The Direct Materials Purchases Budget 1093

The Direct Labor Budget 1095

The Overhead Budget 1096

The Selling and Administrative Expense Budget 1096

The Cost of Goods Manufactured Budget 1097

Financial Budgets 1099

The Budgeting Income Statement 1099

The Capital Expenditures Budget 1099

The Cash Budget 1100

The Budgeted Balance Sheet 1104

CHAPTER24 Performance Management and Evaluation 1136

What to Measure, How to Measure 1142

Other Measurement Issues 1142

Responsibility Accounting 1143

Types of Responsibility Centers 1143

Organizational Structure and Performance Management

Economic Value Added 1154

The Importance of Multiple Performance Measures

1156

Performance Incentives and Goals 1157

Linking Goals, Performance Objectives, Measures, andPerformance Targets 1157

Performance-Based Pay 1158

The Coordination of Goals 1158

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CHAPTER25 Standard Costing and Variance Analysis 1182

1183

Standard Costing 1184

Standard Costs and Managers 1184

The Relevance of Standard Costing in Today’s Business

Environment 1186

Computing Standard Costs 1186

Standard Direct Materials Cost 1187

Standard Direct Labor Cost 1187

Standard Overhead Cost 1188

Total Standard Unit Cost 1188

Variance Analysis 1190

The Role of Flexible Budgets in Variance Analysis 1190

Using Variance Analysis to Control Costs 1192

Computing and Analyzing Direct Materials

Variances 1194

Computing Direct Materials Variances 1194

Analyzing and Correcting Direct Materials Variances

1196

Computing and Analyzing Direct Labor Variances

1198

Computing Direct Labor Variances 1198

Analyzing and Correcting Direct Labor Variances 1199

Computing and Analyzing Overhead Variances

1201

Using a Flexible Budget to Analyze Overhead Variances

1201

Computing Overhead Variances 1202

Analyzing and Correcting Overhead Variances 1207

Using Cost Variances to Evaluate Managers’ Performance 1207

CHAPTER26 Analysis for Decision Making 1232

Incremental Analysis for Short-Run Decisions 1237

Irrelevant Costs and Revenues 1237

Opportunity Costs 1238

Application of Incremental Analysis to Short-Run

Decisions 1239

Incremental Analysis for Outsourcing Decisions 1239

Incremental Analysis for Special Order Decisions 1241

Incremental Analysis for Segment Profitability Decisions

1243

Incremental Analysis for Sales Mix Decisions 1245

Incremental Analysis for Sell or Process-Further

Decisions 1247

Capital Investment Decisions 1249

Capital Investment Analysis 1249

Measures Used in Capital Investment Analysis 1250

The Time Value of Money 1252

Interest 1252

Present Value 1253

Present Value of a Single Sum Due in the Future 1254

Present Value of an Ordinary Annuity 1255

Analyzing Capital Investment Proposals: The Net Present Value Method 1256

Advantages of the Net Present Value Method 1256

The Net Present Value Method Illustrated 1256

Other Methods of Capital Investment Analysis

1259

The Payback Period Method 1259

The Accounting Rate-of-Return Method 1260

Appendix A: Future Value and Present Value Tables 1284

Endnotes 1290

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This revision of Principles of Accounting is the most significant in the book’s long

history The substantial changes we have made meet the needs of today’s dents, who not only face a business world increasingly complicated by ethicalissues, globalization, and technology, but who also have more demands ontheir time To help them meet these challenges, we place a heavy emphasis ondeveloping their decision-making and critical-thinking skills and on providinginformation that is easy to understand and process

stu-We invite you to read the User’s Guide that follows this preface to get asense of how this book was written to help students master accounting Here,

we elaborate on exactly what we set out to achieve in this tenth edition

Streamlined Coverage and Redesign of the Text

While maintaining a solid foundation in double-entry accounting, we reducedcomplexity by eliminating approximately 30 percent of in-text journal entriesand all nonessential procedural coverage and by condensing learning objec-tives We also reduced excessive detail, shortened headings, simplified expla-nations, and increased readability In addition, we made the text more accessi-ble to students by using small, diverse companies to illustrate concepts andtechniques and well-known public companies to relate the concepts and tech-niques to the real world

To make the text more readable, visually appealing, and pedagogicallyuseful, we broke it into “user friendly” portions with bulleted and numberedlists and new art, photographs, end-of-section review material, and Focus onBusiness boxes

쑺 New line art clarifies concepts and appeals to students who are visuallearners

쑺 Photographs, with captions that underscore concepts in the text,increase visual interest

쑺 A new feature called “Stop, Review, and Apply” presents review tions; the answers to the questions are available on the student website(Online Study Center) Many of these new sections also include shortexercises and solutions

ques-쑺 To reduce distractions, the margins of the text include only Study Notes,which alert students to common misunderstandings of concepts andtechniques; key ratio and cash flow icons, which highlight discussions ofprofitability and liquidity; and accounting equations Icons and equa-tions appear in the financial chapters (Chapters 1-17)

Emphasis on Accounting Information and Successful Decision Making

Throughout the text, we increased our emphasis on how businesses useaccounting information to make decisions, thus providing a uniform frameworkfor developing decision-making skills

쑺 Each chapter opening includes a new Decision Point that shows how awell-known company—one that students will immediately recognize—

xv

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uses accounting information to make decisions The Decision Pointposes questions that challenge students to think about the relationshipbetween this information and the decisions management makes Thecompany discussed in the Decision Point is highlighted in the chapterand is revisited in “A Look Back At,” a feature that shows how the ques-tions introduced in the Decision Point can now be answered.

쑺 To relate accounting information to real-world decision making, we refer

to more than 200 actual companies and use some of those companies’recent financial statements as illustrations

쑺 We use the latest available data in tables, figures, and exhibits andincorporate the most recent FASB pronouncements in the text We illus-trate current practices in financial reporting by referring to data from

Accounting Trends and Techniques (AICPA) and integrate international topics

wherever appropriate

Financial Accounting Coverage: Using Financial Statements for Decision Making

In the financial chapters, our emphasis is on teaching students how to tell acompany’s “story” through its financial statements

쑺 To emphasize how important financial statements are in decision ing, the first page of each financial chapter includes a graphic model ofthe income statement, balance sheet, and statement of cash flows and abrief description of how these statements relate to the chapter’s topic

mak-쑺 We emphasize how ratios are used in evaluating a company’s ity and liquidity and highlight those discussions with key ratio and cashflow icons

profitabil-쑺 The assignment material in every financial chapter includes a case that pares CVS with Southwest Airlines or Walgreens and refers to both compa-nies’ financial statements Among other things, the comparison casesrequire students to compute ratios, make assumptions, report on theeffect of seasonal sales, and describe each company’s inventory man-agement system CVS’s complete annual report and Southwest Airlines’financial statements and Note 1 to the statements appear in the Supple-ment to Chapter 5

com-Management Accounting Coverage: Applying Accounting Concepts

to Real Businesses

Today, management’s use of information goes far beyond computing the cost ofproducts and services In the managerial chapters (Chapters 18-26), we explorethe full range of innovative managerial systems in a value-centered economy inwhich managers must make critical decisions about product quality, customerservice, and long-term relationships

쑺 Rather than focusing on the technical details of cost accounting, weemphasize the management process critical to operating a successfulbusiness A figure entitled “The Management Process: To-Dos for Man-agers,” which appears in the first section of each chapter, highlights man-agerial activities important at each stage of the management process

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operate in a just-in-time environment, utilize activity-based ment, apply the theory of constraints, and improve quality

manage-쑺 We discuss the latest in management models and technology andemphasize that performance measurement and evaluation are essential

to a manager’s success in today’s competitive environment

쑺 Service businesses, in which many students will ultimately work, receiveexpanded emphasis in the text discussion and the chapter assignments

Ethical Financial Reporting

We believe students need to know more about what constitutes ethical cial reporting and good corporate governance We revised the text to addressthis need

finan-쑺 The previews at the start of many chapters point out ethical and nance issues related to the chapter topic that are discussed in the chapter

gover-쑺 We cover the provisions of the Sarbanes-Oxley Act of 2002 and stress itsimportance in Chapter 1 and at appropriate points throughout the text

쑺 In the end-of-chapter material, we continue to provide short cases,based on real companies, that require students to address an ethicaldilemma directly related to the chapter content

Reorganized Assignment Material

This text has always provided a rich assortment of assignments that addressinstructors’ needs While keeping the range and depth of assignments fromprevious editions, we have simplified their organization for easier use

쑺 The end-of-chapter assignments are organized into two main sections:Building Your Basic Knowledge and Skills—which consists of Short Exer-cises, Exercises, Problems, and Alternate Problems—and EnhancingYour Knowledge, Skills, and Critical Thinking—which consists of cases

쑺 The first exercises in many chapters present questions useful in generatingclass discussion about the decision-making aspects of the chapter topics

쑺 Problems have been carefully scrutinized to reduce the number of actions involved and the time it takes to work them Many of the prob-lems have a requirement labeled “User Insight” or “Manager Insight.”These requirements challenge students to think about the numbers andhow they are used in business decision making

trans-쑺 Cases are grouped by skill: Conceptual Understanding; InterpretingFinancial or Management Reports; Decision Analysis Using Excel; EthicalDilemma; Internet; Group Activity; and Business Communication Eachfinancial chapter also has an Annual Report Case that focuses on CVS’sannual report and, as noted earlier, a Comparison Case

New Instructional Technologies for Today’s Business Environment

New technologies are today a driving force behind business growth and

accounting education For this tenth edition of Principles of Accounting, we

devel-oped an integrated text and technology program to help instructors takeadvantage of the opportunities created by new instructional technologies

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Whether an instructor takes a user or procedural approach to teaching, wants toincorporate new instructional strategies, wants to develop students’ core skillsand competencies, or desires to integrate technology into the classroom, thisedition provides a total solution (See the inside back cover of the book for acomplete listing of supplements.)

Course Management

We know that homework and practice are integral parts of accounting courses,and grading homework and tests can present a challenge to instructors The

Eduspace® online learning tool pairs the widely recognized resources of

Blackboard with quality, text-specific content from Houghton Mifflin graded homework comprising end-of-chapter short exercises, exercises, andproblems; algorithmic practice exercises; SMARTHINKING online tutoring;multimedia ebook with links to tutorials; demonstration videos; and other text-supporting content come ready to use Premium Blackboard course cartridgesand WebCT ePacks are also available

Auto-Included in Eduspace and new to this edition of Principles of Accounting isHM Assess, an online diagnostic assessment and study tool Working in HM Assess,

students take Chapter Assessments and receive Individual Study Paths, withlinks to tutorials, video, algorithmic practice questions, and online text con-tent Reporting and tracking are also available

HMTesting

HMTesting—now powered by Diploma®—contains the computerized version

of the Test Bank HMTesting provides instructors with the tools they need tocreate, customize, and deliver multiple types of tests Instructors can select,edit, and add questions—some with algorithms—or generate randomly selectedquestions to produce a test master for easy duplication All test questions arenow tagged with AACSB learning outcomes, learning objectives, and key con-cepts Online Testing and Gradebook functions allow instructors to administertests via their local area network or the Internet, set up classes, record gradesfrom tests or assignments, analyze grades, and compile class and individualstatistics HMTesting can be used on both PCs and Macintosh computers The Test Bank is also available in print The printed Test Bank provides thesame questions found in HMTesting—more than 4,000 true-false, multiplechoice, short essay, and critical-thinking questions, as well as exercises andproblems, all of which test students’ ability to recall, comprehend, apply, andanalyze information Two achievement tests are provided for each chapter

Instructor and Student Websites

The Online Teaching and Online Study Centers provide instructors and

stu-dents with text-specific resources that reinforce key concepts in the Principles of Accounting program For instructors, the Online Teaching Center includes pass-

word-protected course materials, such as completely revised PowerPointslides with video and original content; Classroom Response System content;

sample syllabi; the Accounting Instructor’s Report, which explores a wide range of

contemporary teaching issues; and Electronic Solutions, which are fully tioning Excel spreadsheets for all exercises, problems, and cases in the text For students, the Online Study Center offers open access to helpful supple-mentary materials, such as ACE practice tests, answers to Stop, Review, andApply questions, weblinks to companies discussed in the text, chapter outlinesand summaries, glossaries (chapter-based and complete), and much more In

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func-self-test quizzes, Flashcards, crossword puzzles, Study Guide content,

Demonstra-tion Videos, HMAccounting Tutor, and audio chapter reviews (MP3 chaptersummaries and quizzes) Both the student and instructor websites can beaccessed at college.hmco.com/info/needles See the User’s Guide and endpa-pers of the text for a complete listing of all the student supplements available

The Bottom Line

Although we have done more in this revision than in any previous one to makeaccounting concepts accessible to students, there is one thing we have notchanged: we still teach students how to use financial statements and theaccounting systems that provide the data needed to make business decisionsand that tell a company’s story For investors and creditors, financial informa-tion reveals a company’s financial health, prosperity, and future For manage-ment, both financial information and nonfinancial information are a means ofguiding a company’s progress and profitability Our goal is to improve stu-dents’ understanding of the “story” revealed in a company’s financial and non-financial data, and never has that goal been as critical as in current times, withbusiness events underscoring this fact: accounting really matters

To follow the “story,” students have to learn how to think Principles of Accounting teaches students to think about what they are reading, how they

might make financial decisions, and what roles they might play as future users

of accounting information Students also have to learn how to analyze andinterpret data—where did the numbers come from? What is the meaningbehind the numbers? What do the numbers say about a company’s financialhealth? Today, accounting students need to learn more than how to preparefinancial statements; they also must learn how to analyze meaningful informa-

tion in them and in the supporting data Principles of Accounting, Tenth Edition,

focuses on teaching students to do just that

Acknowledgments

A successful textbook is a collaborative effort We are grateful to the many fessors, other professional colleagues, and students who have taught and stud-ied from our book, and we thank all of them for their constructive comments Inthe space available, we cannot possibly mention everyone who has been help-ful, but we do want to recognize those who made special contributions to our

pro-efforts in preparing the tenth edition of Principles of Accounting.

We wish to express our deep appreciation to colleagues at DePaul sity, who have been extremely supportive and encouraging

Univer-The thoughtful and meticulous work of Edward H Julius (CaliforniaLutheran University) is reflected not only in the Study Guide, but in our TestBank and Eduspace course as well Eric Blazer (Millersville University) wrotethe managerial chapters of the study guide, and Judy R Colwell (NorthernOklahoma College) wrote the managerial chapters of the test bank We alsothank Jeri Condit for creating the PowerPoint slides, Linda Burkell for HMAc-counting Tutor and GLS, and Cathy Larson for her accuracy review of the textand solutions Sarah Evans deserves special recognition for her thoroughnessand clarity in editing portions of the text and laying out the tenth edition Also very important to the quality of this book is the supportive collabora-tion of our senior sponsoring editor, Ann West; senior development editor,Chere Bemelmans; editorial assistant, Diane Akerman; and project editor, Mar-garet Kearney—to whom we give special thanks

Others who have had a major impact on this book through their reviews,suggestions, and participation in surveys, interviews, and focus groups are

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listed below We cannot begin to say how grateful we are for the feedback from the many tors who have generously shared their responses and teaching experiences with us.

instruc-Daneen Adams, Santa Fe Community College

Gregory D Barnes, Clarion University

Mohamed E Bayou, The University of Michigan—Dearborn

Charles M Betts, Delaware Technical and Community College

Michael C Blue, Bloomsburg University

Gary R Bower, Community College of Rhode Island

Lee Cannell, El Paso Community College

Gerald Carnes, Edinboro College

John D Cunha, University of California—Berkeley

Julie Dailey, Central Virginia Community College

Mark W Dawson, Duquesne University

Patricia A Doherty, Boston University

Lizabeth England, American Language Academy

David Fetyko, Kent State University

Albert Fisher, Community College of Southern Nevada

Robert Flemming, Northern Michigan University

Sue Garr, Wayne State University

Roxanne Gooch, Cameron University

Christine Uber Grosse, The American Graduate School of

International Management

Dennis A Gutting, Orange County Community College

John Hancock, University of California—Davis Graduate School of

Management

Yvonne Hatami, Borough of Manhattan Community College

Robert Holtfreter, Centra, Washington University

Harry Hooper, Santa Fe Community College

Mark Henry, Victoria College Margaret Hoskins, Henderson State Univ

Marianne James, California State University, Los Angeles Sharon Johnson, Kansas City Kansas Community College Edward H Julius, California Lutheran University Howard A Kanter, DePaul University

Ann Kelley, Providence College Debbie Luna, El Paso Community College Kevin McClure, ESL Language Center

George McGowan Gail A Mestas Jenine Moscove

Beth Brooks Patel, University of California—Berkeley LaVonda Ramey, Schoolcraft College

Roberta Rettner, American Ways Gayle Richardson, Bakersfield College James B Rosa, Queensborough Community College Donald Shannon, DePaul Univeristy

S Murray Simons, Northeastern University Marion Taube, University of Pittsburgh Kathleen Villani, Queensborough Community College Vicki Vorell, Cuyahoga Community College

John Weber, DeVry Institute Brenda Werts, Park University Kay Westerfield, University of Oregon Andy Williams, Edmunds Community College

2006 COAE Facilitators

Salvador Aceves, University of San Francisco

Rita Grant, Grand Valley State University

Emmanuel Onifade, Morehouse College

Janet Papiernik, Indiana University—Purdue University

Andy Williams, Edmonds Community College

Peter Aghimien, Indiana University, South Bend

Charles Bunn, Wake Technical College

James Dougher, DeVry University

Frank Lordi, Widener University

Elizabeeth Murphy, DePaul University

Karen Novey, Robert Morris College

Wendy Tietz, Kent State University

Star Brown, Western Piedmont Community College

Rosie Bukics, Lafayette College

Stanley Chu, Borough of Manhattan Community College

Michael Cottrill, Northeastern University

Mark Mitschow, SUNY—Genesee

Elizabeth Murphy, DePaul University

Charlene Abendroth, California State University

Daneen Adams, Santa Fe Community College

Richard Fern, Eastern Kentucky University Terry Grant, Mississippi College

Yvonne Hatami, Borough of Manhattan Community College Rodger Holland, Columbus State University

Salvador Aceves, University of San Francisco Betty Habershon, Prince George's Community College Jim Mazza, Heald College

Roselyn Morris, Southwest Texas State University Ginger Parker, Creighton University

David Rogers, Mesa State College Jeanne Yamamura, University of Nevada—Reno

—B.N., M.P., and S.C.

Finally, we want to thank the facilitators for the last five years of COAE (Conference on AccountingEducation):

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Each Chapter Preview focuses on management issues; many also

present ethical issues As you read this section, consider the ing: Why are the concepts in this chapter important to managers? What are the ethical issues?

follow-The Learning Objectives (LOs) help guide you toward mastery

of the material These brief statements summarize what you should know after reading the chapter You will see many references to

LOs throughout each chapter.

Making a Statement (Chapters 1–17) reinforces the connection

between the financial statements and the chapter’s topics It cates which financial statements are important in each chapter.

indi-Use the Decision Point feature to see how real companies depend

on accounting information in decision making Look for references

to the Decision Point company throughout the chapter Many

of the companies profiled are among the most successful

We have designed Principles of Accounting with you—the student—in

mind Becoming familiar with this textbook will help you succeed in

this course: you will study more effectively and improve your grades

on tests and assignments The following User’s Guide will introduce

you to your Principles of Accounting textbook.

Preview the Chapter

Use these features to preview the chapter First, become familiar with

then read how a leading business uses accounting information.

which financial statements are important in the chapter

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56 |CHAPTER 2 Analyzing Business Transactions

S T O P • R E V I E W • A P P L Y

1-1 What three issues underlie most major accounting decisions?

1-2 A customer asks the owner of a store to save an item for him and says

he will pick it up and pay for it next week The owner agrees to hold it.

Should this transaction be recorded as a sale? Explain your answer.

1-3 Why do accountants rely on original cost for valuation purposes?

1-4 Why is classification of a transaction as an expense or an asset a critical

LO2 Explain the double-entry system and the usefulness of T accounts in

analyzing business transactions.

The double-entry system, the backbone of accounting, evolved during the Renaissance The first systematic description of double-entry book-

쏡 By a simple violation of the guidelines for classification, WorldCom(now

MCI) perpetrated the largest financial fraud in history, which resulted in the largest bankruptcy in history Over a period of several years, the company assets; this had the effect of understating the company’s expenses and over- stating its income by more than $10 billion.

Senior WorldCom executives violated

and GAAP when they deliberately

poor performance Consequences

were devastating for employees,

investors, and the public trust Left to

right: Melvin Dick of Arthur Andersen,

Bernard Ebbers and Scott Sullivan of

WorldCom, and Jack Grabman of

Salomon Smith Barney are sworn in

on July 8, 2002, at a congressional

hearing of charges against WorldCom.

Uncollectible Accounts | 383

20x8 Dec 31 Uncollectible Accounts Expense 6,000 Allowance for Uncollectible Accounts 6,000

To record the estimated uncollectible accounts expense for the year

A L OE

6,000 6,000

receivable amounted to $100,000 On December 31, 20x8, management

$6,000 of the $100,000 of accounts receivable were estimated to be lectible The following adjusting entry would be made on December 31 of that year:

uncol-Learning Objectives introduce the key points of each section and

are integrated throughout the text.

Boldface terms call out important concepts and their definitions.

These words also appear in a glossary at the end of the chapter.

Study Notes highlight important information and provide useful tips

on ways to avoid common mistakes.

Photographs with detailed captions reinforce concepts in the

text-book and show how accounting is used in the business world.

Stop, Review, and Apply features at the end of every section help

you review important concepts in the section These questions can also be used for discussion in class.

Accounting equations next to important journal entries

reinforce the impact of the transaction on the financial statements.

5 5

6 6

7 7

Reinforce What You Read

As you read each chapter, use the features described below to

rein-force the concepts Look for the LO before each main section, and

note boldface words: they are terms and definitions you should

main section to assess your understanding of the material

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Standard Costing | 1185

To-Do’s for Managers

• Plan – Determine standard costs and prepare budgets – Establish cost-based goals for products or services

• Perform – Apply cost standards as work is performed in cost centers – Collect actual cost data

• Evaluate – Use flexible budgets to evaluate managers’ performance – Calculate variances between standard and actual costs for direct materials, direct labor, variable overhead, and fixed overhead

– Determine their causes and take corrective action

• Communicate – Prepare cost center performance reports using standard costing

– Prepare comparative analyses of flexible budget to actual results for materials, labor and overhead

■FIGURE 1 The Management Process: To-Do’s for Managers

18 | CHAPTER 1 Uses of Accounting Information and the Financial Statements

A = L + OE

Liabilities Owner’s Equity Assets

■FIGURE 5

concepts and processes.

Exhibits throughout the text show financial information.

The cash flow icon highlights discussion of cash as a measure

of liquidity Measurement of cash flows serves as an indicator

of a company’s success; hence the emphasis on cash flows in this book.

Tables present factual information referred to in the text.

Each managerial chapter (Chapters 18–26) includes a graphic: To-Do’s for Managers These figures highlight managerial activities important to each stage of the management process.

Reinforce Concepts Visually

These features visually reinforce the concepts in your textbook Line

art helps explain concepts, exhibits show financial statements and

other information, and tables include material to support topics

cov-ered in the chapter Also look for icons throughout the text; they are

visual guides to key features.

from this amount are $1,200 of withdrawals that the owner made during the month, leaving an ending balance of $103,000 of capital in the business.

Financial Statements | 21 Statement of Owner’s Equity for Ramirez Agency

EXHIBIT 2씰

Ramirez Agency Statement of Owner’s Equity For the Month Ended December 31, 20xx

R Ramirez, Capital, December 1, 20xx $ 0 Investment by R Ramirez 100,000 Net income for the month

Subtotal $104,200 Less withdrawals

R Ramirez, Capital, December 31, 20xx $103,000

1,200 4,200

Statement of Cash Flows

Whereas the income statement focuses on a company’s profitability, the

focuses on its liquidity (see Exhibit 4) are the inflows and outflows of cash into and out of a business Net cash flows are shows the cash produced by business operations during an accounting period

Cash flows statement of cash flows

12

14

13

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Focus on Business Practice boxes highlight the relevance of

accounting to business today.

Ratios are used to measure a company’s performance.

The key ratio icon appears in the margin to highlight

discussions of important ratios.

The textbook refers to over 200 public, private, and not-for-profit

companies The Needles Online Study Center website (http://

college.hmco.com/info/needles) provides a direct link to the

web-sites of these companies The book also has a company name index.

Graphs and tables illustrate how actual business practices relate to

chapter topics Data for these illustrations come from Accounting

Trends & Techniques and from Dun & Bradstreet, key sources of

business information.

The complete annual report for CVS and the financial statements

of Southwest Airlines are in the Supplement to Chapter 5 CVS’s

financial statements with annotations also appear in the

Learn Why Accounting Is Relevant

These features demonstrate how and why accounting is relevant.

Focus on Business Practice boxes introduce you to real companies and real issues The Supplement to Chapter 5 helps you learn how to read—and understand—real financial statements and interpret what management says about them

20

Current Ratio The current ratio is closely related to working capital Many

bankers and other creditors believe it is a good indicator of a company’s ability

to pay its debts on time The is the ratio of current assets to

cur-rent liabilities For Ling Auto Supply Company, it is computed like this:

Current Ratio 2.9 Thus, Ling Auto Supply has $2.90 of current assets for each $1.00 of current lia-

bilities Is that good or bad? The answer requires a comparison of this year’s

current ratio with ratios for earlier years and with similar measures for

compa-nies in the same industry.

$248,712

$85,366 Current Assets

Current Liabilities

current ratio

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30 |CHAPTER 1 Uses of Accounting Information and the Financial Statements

Accounting is an information system that measures, processes, and tion necessary to make reasoned choices among alternative uses of scarce economic entity that engages in operating, investing, and financing activities to achieve the goals of profitability and liquidity.

communi-Management accounting focuses on the preparation of information rily for internal use by management Financial accounting is concerned with the business as well as to management Ethical financial reporting is important to sequences for many people.

prima-Accounting plays a significant role in society by providing information to those institutions, including present or potential investors (owners) and credi- interest in the business—for example, tax authorities, regulatory agencies, and economic planners.

man-To make an accounting measurement, the accountant must determine what is placed on what is measured, and how to classify what is measured The objects uses money measure to gauge the impact of these transactions on a separate business entity.

The three basic forms of business organization are the sole proprietorship, the nomic unit separate from its owners, although legally only the corporation is person A partnership is like a sole proprietorship in most ways, but it has two

by the state and legally separate from its owners (the stockholders).

Financial position refers to a company’s economic resources and the claims

financial position as Assets Liabilities Owner’s Equity Business tions affect financial position by decreasing or increasing assets, liabilities, and

transac-The four basic financial statements are the income statement, the statement of the primary means by which accountants communicate the financial condition and activities of a business to those who have an interest in the business.

C H A P T E R R E V I E W

REVIEW of Learning Objectives

LO1Define accounting and

describe its role in making

informed decisions, identify

busi-ness goals and activities, and

explain the importance of ethics

in accounting.

LO2Identify the users of

accounting information.

LO3Explain the importance of

business transactions, money

measure, and separate entity.

LO4Identify the three basic

forms of business organization.

LO5Define financial position,

and state the accounting equation.

LO6Identify the four basic

financial statements.

Chapter Review |31

Acceptable accounting practice consists of the conventions, rules, and time GAAP are essential to the preparation and interpretation of financial statements and the independent CPA’s report.

proce-Among the organizations that influence the formulation of GAAP are the Public Company Accounting Oversight Board, the Financial Accounting Stan- ties and Exchange Commission, and the Internal Revenue Service.

All accountants are required to follow a code of professional ethics, the foundation of which is responsibility to the public Accountants must act with their activities.

The board of directors is responsible for determining corporate policies and appointing corporate officers It is also responsible for corporate gover- mittee, which is appointed by the board and made up of independent directors, is an important factor in corporate governance.

LO7 Explain how generally accepted accounting principles (GAAP) relate to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP.

REVIEW of Concepts and Terminology

The following concepts and terms were introduced in this chapter:

Accounting: An information system that measures,

processes, and communicates financial information about an economic entity.(LO1)

Accounting equation: Assets Liabilities Owner’s Equity.(LO5)

American Institute of Certified Public Accountants (AICPA): The professional association of certified

public accountants.(LO7)

Assets: The economic resources of a company that are

expected to benefit future operations.(LO5)

Audit: An examination of a company’s financial

state-ments in order to render an independent sional opinion about whether they have been pre- with GAAP.(LO7)

profes-Audit committee: A subgroup of a corporation’s board

of directors that is charged with ensuring that the board will be objective in reviewing management’s performance; it engages the company’s independent auditors and reviews their work.(LO7)

Balance sheet: The financial statement that shows a

business’s assets, liabilities, and owner’s equity as

of a specific date Also called the statement of financial

position.(LO6)

Bookkeeping: The process of recording financial

transactions and keeping financial records.(LO1)

Business: An economic unit that aims to sell goods

and services to customers at prices that will

pro-Business transactions: Economic events that affect a

business’s financial position.(LO3)

Cash flows: The inflows and outflows of cash into and

out of a business.(LO6)

Certified public accountant (CPA): A public

account-ant who has met stringent state licensing requirements.(LO7)

Corporate governance: The oversight of a

corpora-tion’s management and ethics by the board of directors.(LO7)

Corporation: A business unit granted a state charter

recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its owners.(LO4)

Due care: Competence and diligence in carrying out

professional responsibilities.(LO7)

Ethics: A code of conduct that addresses whether

actions are right or wrong.(LO1)

Exchange rate: The value of one currency in terms of

another.(LO3)

Expenses: Decreases in owner’s equity that result

from operating a business.(LO5)

Financial accounting: The process of generating and

communicating accounting information in the form

of financial statements to those outside the organization.(LO1)

Financial Accounting Standards Board (FASB): The

most important body for developing rules on

accounting practice; it issues Statements of Financial

A Look Back At shows how the concepts learned in the chapter can

be used to evaluate a company’s performance.

The Chapter Review restates each learning objective

and its main ideas.

Want more study aids and review exercises? The Study Guide for

this book provides a thorough review of each learning objective, a

detailed outline, true/false and multiple-choice questions, and

exercises Answers are included Access the Study Guide with “Your

Guide to an A” passkey.

Each chapter includes a glossary of the key concepts and terms

defined in the chapter The LO next to each term indicates the

sec-tion in which it is discussed.

21

21 22

22

23 23

Summarize and Review

The end-of-chapter features provide summary, review, and

Objec-tives and a Review of Concepts and Terminology

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REVIEW Problem

LO6 Preparation and Interpretation of Financial Statements

The following financial statement accounts and amounts are from the records of operations.

Accounts payable $ 19,000 Accounts receivable 104,000 Cash 111,000 Commissions earned 375,000 Equipment 47,000 Investment by J Jackson 100,000 Marketing expense 18,000 Office and equipment rent expense 91,000 Salaries and commission expense 172,000 Salaries payable 78,000 Supplies 2,000 Supplies expense 6,000 Utilities expense 11,000 Withdrawals 10,000

Not sure if you understand the

tech-niques and calculations? Want to find

out if you’re ready for a test? The Review

Problem models main computations or

analyses presented in the chapter and

end-of-chapter assignments The answer,

often shown in Excel, is provided for

immediate feedback.

Short exercises provide additional practice Learning

Objectives appear in the margin next to all assignments

so you can refer to the text for help.

Single-topic exercises stress the application of the

Review and Practice

reflects computations or analyses covered in the chapter For

ExercisestoCases—let you develop skills learned in the chapter All

review the concepts presented in the text.

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Most problems include at least one User Insight or Manager Insight

question These questions challenge you to think about how

finan-cial information is used for business decision making.

Problems with this icon can be solved by using General Ledger

Software, which is available on your student CD Problems often

contain financial data and cover more than one Learning

Objective.

Cases at the end of each chapter have been organized to highlight

important skills, such as conceptual understanding, interpretation

of financial statements or management reports, Excel analysis,

deci-sion making, Internet research, and business communication.

28 28

29

Develop Important Skills

Use these end-of-chapter features to develop important skills Five

problems and three alternate problems per chapter allow extensive

Learn-ing Objective Cases provide opportunities for group assignments,

Internet research, analysis with Excel, and critical thinking.

Interpreting Management Reports

ABC and Selling and Administrative Expenses

C 4.Sandy Star, the owner of Star Bakery, wants to know the profitability of each of her bakery’s customer groups She is especially interested in the State groups Currently, the bakery is selling doughnuts and snack foods to ten state statement for the State Institutions customer group:

Star Bakery Income Statement for State Institutions Customer Group For the Year Ended December 31, 20x8

Sales ($5 per case 50,000 cases) $250,000 Cost of goods sold ($3.50 per case 50,000 cases)

Less: Selling and administrative activity costs Operating income (loss) contributed by State Institutions customer group

Activity Cost Actual Cost Driver

Make sales calls $60 per sales call 60 sales calls $ 3,600 Prepare sales orders $10 per sales order 900 sales orders 9,000 Handle inquiries $5 per minute 1,000 minutes 5,000 Ship products $1 per case sold 50,000 cases 50,000 Process invoices $20 per invoice 950 invoices 19,000 Process credits $20 per notice 40 notices 800 Process billings and $7 per billing 1,050 billings

collections Total selling and administrative activity costs 94,750

7,350

($19,750) 94,750 175,000

LO3, LO4

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The Online Study Center contains a variety of resources,

includ-ing ACE practice tests, chapter outlines and reviews, links to

com-panies mentioned in the text, glossaries, and additional

appen-dixes Content to help you improve your grade is available with

the “Your Guide to an A” passkey and includes Flashcards,

Cross-word Puzzles, MP3 audio summaries and quizzes, Demonstration

Videos, and the complete Study Guide.

Nearly all the problems in Chapters 1 to17 can be worked using

Houghton Mifflin’s General Ledger Software (GLS) These

prob-lems are clearly identified with an icon Our updated GLS includes

Export to Peachtree functionality.

The Principles of Accounting Electronic Working Papers CD

(0-618-73649-2) is an alternative to printed working papers These Excel-based files contain templates that allow you to work the exercises, problems, and cases in the text; a new interface makes it easy to navigate among assignments With the Electronic Working Papers CD, you master both accounting concepts and the basic skills required for spreadsheet applications.

Also available are print Working Papers (Vol 1: 0-618-73643-3;

Vol 2: 0-618-73644-1), which provide the appropriate accounting forms for solving the exercises, problems, and cases from the text.

The SMARTHINKING™ online tutoring center provides real-time access to experienced “e-structors” (online tutors) In addition

to live, one-on-one interaction, you can submit questions, assignments, and spreadsheets and receive personalized feedback—usually within 24 hours.

The Principles of Accounting Study Guide is designed to help

you improve your performance in the course This resource sists of five parts:“Reviewing the Chapter,” “Self-Test,” “Testing Students’ Knowledge,” “Applying Your Knowledge,” and

con-“Answers.”The Study Guide is available with the “Your Guide to an A” passkey.

To help you become familiar with computerized accounting

systems used in practice, the Peachtree Accounting CD

(0-618-62683-2) features the educational version of this leading software program The experience you gain from working with actual software makes you more desirable as a potential employee.

The Houghton Mifflin Accounting Bridge Tutorial CD

(0-618-31876-3) emphasizes accounting transactions, presents a review

of the debit/credit mechanism, and provides a foundation for the preparation of financial statements This CD features pre- and post-test activities on accounting concepts, designed to test your basic understanding of the accounting cycle Key concept tutorials provide reinforcement and practice Interactive Review and Reinforce questions with rejoinders provide feedback on right and wrong answers Tutorials also include demonstration problems with voice-over narrations and a built-in glossary with pop-up definitions.

Student Resources and Study Aids

Principles of Accounting offers a variety of print and multimedia tools to

complement the way you learn From study guides to downloadable

MP3 audio review files, the Needles Principles of Accounting program

keeps you engaged and on track for success The following student

resources may come packaged with your new copy of Principles of

Accounting, or can be purchased separately at your local college

bookstore or directly from Houghton Mifflin’s virtual bookstore at

http://college.hmco.com/students.

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Chapter 1

P 1 No check figure

P 2 Total assets, Set C: $380; Total liabilities and owner’s

equity, Set A: $4,600; Total liabilities and owner’s

equity, Set B: $31,000

P 3 Total assets: $151,500

P 4 Total assets: $20,900

P 5 No check figure

P 6 Total assets, Set A: $2,700; Total liabilities and

owner’s equity, Set B: $18,000; Total liabilities and

owner’s equity, Set C: $1,900

P 3 Adjusted trial balance: $121,792

P 2 Adjusted trial balance, May 31: $10,288; Adjusted

trial balance, June 30: $10,858

P 1 1 Cost of goods available for sale: $157,980

P 2 2 Cost of goods sold: March, $4,500; April, $10,540

P 3 1 Cost of goods sold: March, $4,579; April, $10,518

P 4 Estimated inventory shortage: At cost, $6,052; Atretail, $8,900

P 5 Estimated loss of inventory in fire: $653,027

P 6 Cost of goods available for sale: $10,560,000

P 7 1 Cost of goods sold: April, $9,660; May, $22,119

P 8 2 Cost of goods sold: April, $9,500; May, $21,880

Chapter 8

P 1 Adjusted book balance: $149,473.28

P 2 Uncollectible accounts expense, percentage of netsales method: $17,952; Uncollectible accountsexpense, accounts receivable aging method:

$15,700

P 3 Amount of uncollectible accounts expense: $9,109

P 4 Total accrued interest on June 30: $1,928.22

P 5 Adjusted book balance: $54,485.60

P 6 Uncollectible accounts expense, percentage of netsales method: $24,965; Uncollectible accountsexpense, accounts receivable aging method:

$27,100

P 7 Amount of uncollectible accounts expense: $73,413

Chapter 9

P 1 No check figure

P 2 June 30 Interest Expense: $552.33

P 3 1 b Estimated Product Warranty Liability: $10,800

P 4 Total current liabilities: $36,988.20

P 5 Fund Balance: $58,300; Initial Deposit: $110,250;Purchase Price: $399,300; Annual Payments:

$136,355.89

P 6 December 31 Interest expense: $426.08

P 7 1 b Estimated Product Warranty Liability: $20,160

P 8 Fund Balance: $3,310,000; Annual Payment:

$327,600; Cost of Buyout: $317,000; Fund Balance:

$798,600

Chapter 10

P 1 No check figure

P 2 No check figure

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P 1 2 Total stockholders’ equity: $1,342,000

P 2 1 20x9 Total dividends: Preferred, $280,000;

Com-mon, $820,000

P 3 No check figure

P 4 2 Total stockholders’ equity: $1,765,900

P 5 1 Ending balance, Treasury Stock, Common: 0

P 6 2 Total stockholders’ equity: $302,400

P 7 1 20x9 Total dividends: Preferred, $80,000;

P 3 1 Aug 31 Bond Interest Expense: $377,200; 2 Aug

31 Bond Interest Expense: $382,200

P 4 June 30 Bond Interest Expense: $289,332; Sept 1

Bond Interest Expense: $186,580

P 5 2 Loss on early retirement: $2,261,504

P 6 1 d Interest expense: $374,400; 2 d Interest

Expense: $385,600

P 7 1 Nov 30 Bond Interest Expense: $1,040,300;

2 Nov 30 Bond Interest Expense: $1,057,300

P 8 June 30 Bond Interest Expense: $93,195; Sept 30

Bond Interest Expense: $191,900

Chapter 14

P 1 2 Difference in net income: $97,600

P 2 1 Income before extraordinary items: $216,000

P 3 1 Income from continuing operations, December

P 7 1 Income before extraordinary items: $410,000

P 8 2 Retained earnings: $211,600; Total stockholders’equity: $524,500

P 4 1 Net cash flows from: operating activities,

$548,000; investing activities, $6,000; financing ities, ($260,000)

P 4 1.b Quick ratio, Lewis: 1.5 times; Ramsey: 1.2 times;2.d Return on equity, Lewis: 8.8%; Ramsey: 4.9%

P 4 2 Molding, Week 4, Second shift: 23.53%

P 5 Total traffic flow goal, 24,182

P 6 No check figure

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P 7 2 Decrease in number of rejects: 202

P 8 Average output, week eight: 92,899

Chapter 19

P 1 Cost of goods manufactured: $10,163,200

P 2 2a Gross Margin: $191,800; 2d Cost of Goods

Man-ufactured: $312,100

P 3 2 Total unit cost: $13.72

P 4 2 Overhead applied to Job 2214: $29,717

P 5 2 Total costs assigned to the Grater order,

activity-based costing method: $69,280.40

P 6 1 Predetermined overhead rate for 20x9: $5.014 per

machine hour

P 7 2 Total costs assigned to the Kent order,

activity-based costing method: $41,805.60

P 8 1c Rigger II: $11,665; BioScout: $14,940

Chapter 20

P 1 b $66,500; i $57,800

P 2 1 Overhead applied, January 15: $108,000

P 3 3 Costs of units sold: $182,857

P 4 1 Cost per equivalent unit: $6.05; Ending inventory:

$7,225

$5,372

P 6 2 Cost of units sold: $89,647

P 7 1 Contract revenue, Job Order No P-12: $28,990

P 4 3 Total direct cost, toy car work cell: $17,000

P 5 3 Cost of goods sold: $564,400

P 6 1 Product unit cost: $878.25

P 7 3 Product unit cost: $10.43

P 8 3 Cost of goods sold: $391,520

P 2 8 Income from operations: $3,086

P 3 1 Ending cash balance, February: $6,000

P 4 Ending cash balance, February: $17,660

P 5 1 Net income: $101,812

P 6 7 Manufactured cost per unit: $0.34

P 7 1 Ending cash balance, February: $19,555

P 8 1 Net income: $52,404

Chapter 24

P 1 1 Flexible Budget, Total Cost: $7,248,000

P 2 2 Operating Income: $194,782

P 3 1 Flexible Budget, Contribution margin: $88,200

P 4 3 Economic value added for 20x8: $21,850

P 5 1 Residual income: ($2,500)

P 6 2 Operating Income: $418,555

P 7 3a Actual Return on Investment: 6.30%

P 8 3 Economic value added: $126,000

Chapter 25

P 1 Total standard unit cost of front entrance: $8,510

P 2 2 Flexible budget formula: Total Budgeted Costs =($.35 x Units Produced) + $10,500

P 3 1 Direct materials price variance-Metal: $832 (F);

2 Direct labor rate variance-Molding: $510 (F)

P 4 1.b Direct materials quantity variance: $3,720 (U);1.h Fixed overhead volume variance: $320 (F)

P 5 a Actual variable overhead: $42,500

P 6 1 Total standard direct materials cost per unit:

$167.52

P 7 1 Direct materials price variance-Liquid Plastic:

$386 (F); 2 Direct labor rate Trimming/Packing: $56 (U)

variance-P 8 1.a Direct materials price variance-Chemicals:

$12,200 (F); 1.e Variable overhead spending variance: $100 (U)

P 4 1 Net present value: $99,672

P 5 1 HTZ Machine: 13.4 %; 2 XJS Machine: 5.5 years

P 6 1 Total cost to buy: $1,293,750

P 7 1 Contribution margin per hour for phone calls:

$130

P 8 1.a Net present value: ($26,895)

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Central to the success of any accounting text is the expertise of its author team.This team brings to the text a wealth of classroom teaching experience, rele-vant business insight, and pedagogical expertise, as well as first-hand knowl-edge of today’s students.

Belverd E Needles, Jr., Ph.D., C.P.A., C.M.A.

DePaul UniversityDuring his more than 30 years of teaching beginning accounting students,Belverd Needles has been an acknowledged innovator in accounting educa-tion He has won teaching and education awards from DePaul University, theAmerican Accounting Association, the Illinois CPA Society, the American Insti-tute of CPAs, and the national honorary society, Beta Alpha Psi The Conference

on Accounting Education, started by Dr Needles and sponsored by HoughtonMifflin, has been in existence for over 20 years and has helped more than 2,000accounting instructors improve their teaching Dr Needles is editor of the

Accounting Instructors’ Report, a newsletter that thousands of accounting teachers

rely on for new ideas in accounting education

Marian Powers, Ph.D.

Northwestern University

In the course of more than 25 years, Marian Powers has taught beginningaccounting at every level, from large lecture halls of 250 students to smallclasses of graduate students She is a dynamic teacher who incorporates a vari-ety of instructional strategies designed to broaden students’ skills and experi-ences in critical thinking, group interaction, and communication Dr Powers con-sistently receives the highest rating from students She brings practicalexperience to her students, including examples of how managers in all levels ofbusiness use and evaluate financial information In recent years, Dr Powers hasconcentrated on executive education She has taught thousands of executivesfrom leading companies around the world how to read and analyze the financialstatements of their own companies and those of their competitors

Susan V Crosson, M.S., C.P.A.

Santa Fe Community College, (Florida)With more than 25 years of teaching experience at the college and universitylevel, Susan Crosson is recognized for her pedagogical expertise in teachingmanagerial accounting She has a reputation for being able to engage universitystudents in very large course sections and for encouraging community collegestudents to master accounting She believes in integrating technology intoaccounting education and actively uses the Internet to teach online, on-campus,and blended courses Professor Crosson continues to promote the improve-ment of accounting education by serving the American Accounting Associationand the Florida Institute of CPAs on a variety of committees, task forces, andsections She is a past recipient of an IMA Faculty Development Grant to blendtechnology into the classroom, the Florida Association of Community CollegesProfessor of the Year Award for Instructional Excellence, and the University ofOklahoma’s Halliburton Education Award for Excellence

xxxii

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Accounting

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Uses of Accounting Information and the Financial Statements

Today, more people than ever before recognize the importance of

accounting information and the profound effect that unethical andmisleading financial reports can have on a business, its owners, itsemployees, its lenders, and the financial markets In this chapter, we dis-cuss the importance of ethical financial reporting, the uses and users ofaccounting information, and the financial statements that accountantsprepare We end the chapter with a discussion of generally acceptedaccounting principles

LO1 Define accounting and describe its role in making informed decisions, identify

business goals and activities, and explain the importance of ethics inaccounting

LO2 Identify the users of accounting information

LO3 Explain the importance of business transactions, money measure, andseparate entity

LO4 Identify the three basic forms of business organization

LO5 Define financial position, and state the accounting equation.

LO6 Identify the four basic financial statements

LO7 Explain how generally accepted accounting principles (GAAP) relate tofinancial statements and the independent CPA’s report, and identify theorganizations that influence GAAP

L E A R N I N G O B J E C T I V E S

Balance Sheet

Income Statement Statement of

Cash Flows

1

2

M a k i n g a S t at e m e nt

Financial statements measure how well

the business is run.

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● Is CVS meeting its goal of

profitability?

● As a manager at CVS, what

financial knowledge would

you need to measure

progress toward the

company’s goals?

● As a potential investor or

creditor, what financial

knowledge would you need

to evaluate CVS’s financial

performance?

CVS operates a nationwide chain of more than 5,000 drugstores Havingopened more than 1,300 new stores in the last five years, the company hasincreased sales and profits by more than 50 percent.This performance places

it among the fastest-growing retail companies

Why is CVS considered successful? Customers give the company highmarks because of the quality of the products that it sells and the large selec-tion and good service that its stores offer Investment firms and others with astake in CVS evaluate the company’s success in financial terms

Whether a company is large or small, the same financial measures areused to evaluate its management and to compare it with other companies Inthis chapter, as you learn more about accounting and the business environ-ment, you will become familiar with these financial measures

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Accounting as an Information System

LO1 Define accounting and describe its role in making informed decisions,

identify business goals and activities, and explain the importance ofethics in accounting

A is an information system that measures, processes, and

com-municates financial information about an economic entity.1An economicentity is a unit that exists independently, such as a business, a hospital,

or a governmental body Although the central focus of this book is on businessentities, we include other economic units at appropriate points in the text andend-of-chapter assignments

Accountants focus on the needs of decision makers who use financial mation, whether those decision makers are inside or outside a business orother economic entity Accountants provide a vital service by supplying theinformation decision makers need to make “reasoned choices among alterna-tive uses of scarce resources in the conduct of business and economic activi-ties.”2 As shown in Figure 1, accounting is a link between business activitiesand decision makers

infor-1 Accounting measures business activities by recording data about them forfuture use

2 The data are stored until needed and then processed to become usefulinformation

3 The information is communicated through reports to decision makers

Purchase Order

■ FIGURE 1 Accounting as an Information System

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In other words, data about business activities are the input to the accountingsystem, and useful information for decision makers is the output.

Business Goals, Activities, and Performance Measures

A is an economic unit that aims to sell goods and services to tomers at prices that will provide an adequate return to its owners The list thatfollows contains the names of some well-known businesses and the principalgoods or services that they sell

Despite their differences, these businesses have similar goals and engage insimilar activities, as shown in Figure 2

The two major goals of all businesses are profitability and liquidity

쏡 is the ability to earn enough income to attract and hold ment capital

invest-쏡 is the ability to have enough cash to pay debts when they are due.For example, Toyotamay meet the goal of profitability by selling many cars at

a price that earns a profit, but if its customers do not pay for their cars quicklyenough to enable Toyota to pay its suppliers and employees, the company

Liquidity Profitability

business

Multiple financial goals, namely

profitability and liquidity, signal

that more than one measure of

performance is of interest to users

of accounting information For

example, lenders are concerned

primarily with cash flow, and

owners are concerned with

earnings and withdrawals.

BUSINESS ACTIVITIES BUSINESS GOALS

■ FIGURE 2 Business Goals and Activities

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may fail to meet the goal of liquidity If a company is to survive and be cessful, it must meet both goals.

suc-All businesses pursue their goals by engaging in operating, investing, andfinancing activities

employ-ing managers and workers, buyemploy-ing and producemploy-ing goods and services, and paying taxes

pro-ductive ways that will help it achieve its objectives These activities includebuying land, buildings, equipment, and other resources that are needed tooperate the business and selling them when they are no longer needed

operations and to continue operating These activities include obtainingcapital from creditors, such as banks and suppliers, and from owners Theyalso include repaying creditors and paying a return to the owners

which indicate whether managers are achieving their business goals andwhether the business activities are well managed These performance meas-ures must align with the goals of the business For example, CVS, like all othercompanies, considers earned income to be a measure of profitability and cashflow to be a measure of liquidity

Ratios of accounting measures are also used as performance measures Forinstance, a performance measure for operating activities might be the ratio of

performance measures Financing activities

Investing activities Operating activities

In its annual report, CVS’s management describes the

com-pany’s progress in meeting the major business objectives:

Liquidity: “We anticipate that our cash flow from

opera-tions, supplemented by short-term commercial paper

and long-term debt borrowings, will continue to fund

the future growth of our business.”

Profitability: “Pharmacy sales growth continued to

ben-efit from new market expansions, increased

penetra-tion in existing markets, and favorable industry

trends .Net earnings increased $305.9 million or

33.3% to over $1.2 billion in 2005.”3

CVS’s main business activities are shown at the right

F O C U S O N B U S I N E S S P R A C T I C E

What Does CVS Have to Say About Itself?

Sells Products and Services Through More Than 5,000 Drugstores and Pharmacies

Invests Funds in

— Furniture, Fixtures and Equipment

— Improvements

to Buildings

— Computer Equipment

Nearly all businesses use the amounts reported in their

financial statements as a basis for rewarding management

Because managers act to achieve these accounting

mea-sures, selecting measures that are not easily manipulated isimportant Equally important is maintaining a balance ofmeasures that reflect the goals of profitability and liquidity.4

F O C U S O N B U S I N E S S P R A C T I C E

Cash Bonuses Depend on Accounting Numbers!

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activities might be the ratio of money owed by the company to the totalresources that it controls Because managers are usually evaluated on whethertargeted levels of specific performance measures are achieved, they musthave a knowledge of accounting to understand how they are evaluated andhow they can improve their performance In addition, because managers willact to achieve targeted performance measures, these measures must becrafted in a way that motivates them to act in the best interests of the owners

of the business

Financial and Management Accounting

Accounting’s role of assisting decision makers by measuring, processing, andcommunicating financial information is usually divided into the categories ofmanagement accounting and financial accounting Although the functions ofmanagement accounting and financial accounting overlap, the two can be dis-tinguished by the principal users of the information they provide

provides internal decision makers who are

charged with achieving the goals of profitability and liquidity with informationabout operating, investing, and financing activities Managers and employeeswho conduct the activities of the business need information that tells themhow they have done in the past and what they can expect in the future Forexample, The Gap, a retail clothing business, needs an operating report oneach outlet that tells how much was sold at that outlet and what costs wereincurred, and it needs a budget for each outlet that projects the sales and costsfor the next year

generates reports and communicates them to external

decision makers so they can evaluate how well the business has achieved its

traded on the New York Stock Exchange, sends its financial statements to its

owners (called stockholders), its banks and other creditors, and government

reg-ulators Financial statements report directly on the goals of profitability andliquidity and are used extensively both inside and outside a business to eval-uate the business’s success It is important for every person involved with abusiness to understand financial statements They are a central feature ofaccounting and a primary focus of this book

Processing Accounting Information

It is important to distinguish accounting from the ways in which accountinginformation is processed by bookkeeping, computers, and management infor-mation systems

Accounting includes the design of an information system that meets users’needs, and its major goals are the analysis, interpretation, and use of informa-tion , on the other hand, is mechanical and repetitive; it is theprocess of recording financial transactions and keeping financial records It is asmall—but important—part of accounting

Today, computers collect, organize, and communicate vast amounts ofinformation with great speed Computers can perform both routine bookkeep-ing chores and complex calculations Accountants were among the earliest andmost enthusiastic users of computers, and today they use computers in allaspects of their work

Bookkeeping

financial statements Financial accounting

Management accounting

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