Financial accounting 11th edition by walter t harrison

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One of the biggest challenges for accounting instructors

is that students often feel disengaged from the course material, which can seem abstract and unrelated to their personal experiences But by incorporating real-life exam- ples, instructors can spark student interest and

engagement, especially when teaching accounting at the introductory level

Accounting in the Headlines, an award-winning blog by

renowned author Wendy Tietz, does just that with stories about real companies and events that can be used in the accounting classroom to illustrate introductory financial and managerial accounting concepts

Concise, tailorable, and updated on a weekly basis, these articles easily fit into the typical introductory accounting curriculum, whether the course is delivered in-person or

online Accounting in the Headlines articles, along with

multiple-choice and polling questions, can be assigned through My Accounting Lab and Learning Catalytics™ Instructors are also provided with discussion questions, PowerPoint slides, and handout files, to support

learning initiatives

http://accountingintheheadlines.com

Welcome to the Eleventh Edition of Financial Accounting We are grateful for your

support as an adopter of our text as we celebrate over 30 years of success in the

market The Eleventh Edition of Financial Accounting has been improved in many

respects, as explained below

Several editions ago, we shifted the focus of Financial Accounting more

toward meeting the needs of users of accounting information for a more balanced presentation Despite this shift, we still cover the “basic nuts-and-bolts of financial accounting”—the accounting cycle and financial statement preparation In this edition, we added more discussion of key financial ratios, detailing what those ratios measure and how they are used

Try It in Excel ® As educators, we often have conversations with those who recruit our students Based on these conversations, we found that students often complete their study of financial accounting without sufficient knowledge of how to use Excel

to perform accounting tasks To respond to this concern, we have adapted most

of the illustrations of key accounting tasks in the book to Excel format and have added new sections in key chapters entitled “Try It in Excel,” which describe line-by-line how to retrieve and prepare accounting information (such as adjusted trial balance worksheets, ratio computations, depreciation schedules, bond discount and premium amortization schedules, and financial statement analysis) in Excel format

Student success We feel we have the most advanced student learning materials in the market with MyAccountingLab These include automatically graded homework, DemoDocs, and learning aid videos We believe that the use

of MyAccountingLab homework will greatly enhance student understanding of accounting with its instantaneous feedback MyAccountingLab makes the study of financial accounting a more interactive and fun experience for students In addition,

we have adopted a scaffolding approach in the book and its resources Chapter content and the end-of-chapter material builds from the basic short exercise featuring one basic single concept to more advanced problems featuring multiple learning objectives The student can practice at the basic level and then build upon that success to advance on to more challenging problems

Professor expectations As professors, we know that you want a book that contains the most relevant and technically correct content available We also know that you want excellent end-of-chapter material that is as up-to-date and error-free as possible We reviewed and created the end-of-chapter questions, exercises, problems, and cases taking into account the types of assignments we ourselves use in class and assign as homework Based on comments from adopters, we have thoroughly reviewed every end-of-chapter exercise and problem, with the goal of eliminating redundancy and adding relevance The textbook and solutions manual have been put through a rigorous accuracy check to ensure that they are as complete and error-free as possible

We welcome your comments and suggestions Please don’t hesitate to send feedback about this book to HorngrensAccounting@pearson.com

Bill Thomas Wendy Tietz

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Library of Congress Cataloging-in-Publication Data

Names: Harrison, Walter T., author | Horngren, Charles T., author |

Thomas, C William, author

Title: Financial accounting / Walter T Harrison Jr., Baylor University,

Charles T Horngren, Stanford University, C William (Bill) Thomas, Baylor

University, Wendy M Tietz, Kent State University

Description: Eleventh Edition | Boston : Pearson, 2016 | Revised edition of

Financial accounting, 2015 | Includes index

Walter T Harrison Jr is professor emeritus of accounting at the Hankamer School

of Business, Baylor University He received his BBA from Baylor University, his MS

from Oklahoma State University, and his PhD from Michigan State University

Professor Harrison, recipient of numerous teaching awards from student groups as well as from university administrators, has also taught at Cleveland State Community

College, Michigan State University, the University of Texas, and Stanford University

A member of the American Accounting Association and the American Institute of Certified Public Accountants, Professor Harrison has served as chairman of the

Financial Accounting Standards Committee of the American Accounting Association,

on the Teaching/Curriculum Development Award Committee, on the Program

Advisory Committee for Accounting Education and Teaching, and on the Notable

Contributions to Accounting Literature Committee

Professor Harrison has lectured in several foreign countries and published articles

in numerous journals, including Journal of Accounting Research, Journal of

Accountancy, Journal of Accounting and Public Policy, Economic Consequences of

Financial Accounting Standards, Accounting Horizons, Issues in Accounting

Education, and Journal of Law and Commerce.

Professor Harrison has received scholarships, fellowships, and research grants or awards from PricewaterhouseCoopers, Deloitte & Touche, the Ernst & Young

Foundation, and the KPMG Foundation

Charles T Horngren (1926–2011) was the Edmund W Littlefield Professor of

Accounting, emeritus, at Stanford University A graduate of Marquette University, he

received his MBA from Harvard University and his PhD from the University of

Chicago He was also the recipient of honorary doctorates from Marquette University

and DePaul University

A certified public accountant, Horngren served on the Accounting Principles Board for six years, the Financial Accounting Standards Board Advisory Council for

five years, and the Council of the American Institute of Certified Public Accountants

for three years For six years he served as a trustee of the Financial Accounting

Foun-dation, which oversees the Financial Accounting Standards Board and the Government

Accounting Standards Board

Horngren is a member of the Accounting Hall of Fame As a member of the American Accounting Association, Horngren was its president and its director of research He

received its first annual Outstanding Accounting Educator Award The California

Certi-fied Public Accountants Foundation gave Horngren its Faculty Excellence Award and its

Distinguished Professor Award He was the first person to have received both awards

The American Institute of Certified Public Accountants presented its first Outstanding

Educator Award to Horngren Horngren was named Accountant of the Year, in Education,

by the national professional accounting fraternity, Beta Alpha Psi Professor Horngren

was also a member of the Institute of Management Accountants, from whom he received

its Distinguished Service Award He was a member of the institute’s Board of Regents,

which administers the certified management accountant examinations

Horngren is an author of these other accounting books published by Pearson: Cost Accounting: A Managerial Emphasis, Fifteenth Edition, 2015 (with Srikant M Datar

and Madhav V Rajan); Introduction to Financial Accounting, Eleventh Edition, 2014

Management Accounting, Sixteenth Edition, 2014 (with Gary L Sundem, Jeff berg, and Dave Burgstahler); Horngren’s Financial & Managerial Accounting, Fifth

Schatz-Edition, 2016 (with Tracie L Miller-Nobles, Brenda L Mattison, and Ella Mae

Matsu-mura); and Horngren’s Accounting, Eleventh Edition, 2016 (with Tracie L

Miller-No-bles, Brenda L Mattison, and Ella Mae Matsumura) Horngren was the consulting editor for Pearson’s Charles T Horngren Series in Accounting

C William (Bill) Thomas is the J.E Bush Professor of Accounting and a Master Teacher at Baylor University A Baylor University alumnus, he received both his BBA and MBA there and went on to earn his PhD from The University of Texas at Austin

With primary interests in the areas of financial accounting and auditing, Bill Thomas has served as the J.E Bush Professor of Accounting since 1995 He has been a member

of the faculty of the Accounting and Business Law Department of the Hankamer School

of Business since 1971 and served as chair of the department for 12 years He has been recognized as an Outstanding Faculty Member of Baylor University as well as a Distinguished Professor for the Hankamer School of Business Dr Thomas has received many awards for outstanding teaching, including the Outstanding Professor in the Executive MBA Programs as well as the designation of Master Teacher

Thomas is the author of textbooks in auditing and financial accounting, as well as many articles in auditing, financial accounting and reporting, taxation, ethics, and accounting education His scholarly work focuses on the subject of fraud prevention and detection, as well as ethical issues among accountants in public practice He presently

serves as the accounting and auditing editor of Today’s CPA, the journal of the Texas

Society of Certified Public Accountants, with a circulation of approximately 28,000

Thomas is a certified public accountant in Texas Prior to becoming a professor, Thomas was a practicing accountant with the firms of KPMG, LLP, and BDO Seidman, LLP He is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Texas Society of Certified Public Accountants

For my wife, Mary Ann

C William (Bill) Thomas

Wendy M Tietz is a professor in the Department of Accounting in the College of Business Administration at Kent State University, where she has taught since 2000 She teaches introductory financial and managerial accounting in a variety of formats, including large sections, small sections, and web-based sections She has received numerous college and university teaching awards while at Kent State University Most recently she was named the Beta Gamma Sigma Professor of the Year for the College of Business Administration

Dr Tietz is a certified public accountant, a certified management accountant, and a chartered global management accountant She is a member of the American Accounting Association (AAA), the Institute of Management Accountants (IMA), and the American Institute of Certified Public Accountants (AICPA) She has published articles in such

journals as Issues in Accounting Education, Accounting Education: An International Journal, and Journal of Accounting & Public Policy She received the 2014 Bea Sanders/

AICPA Innovation in Teaching Award for her accounting educator blog entitled “Accounting in the Headlines.” She regularly presents at AAA regional and national

meetings Dr Tietz is also the coauthor of a managerial accounting textbook, Managerial Accounting, with Dr Karen Braun.

Dr Tietz received her PhD from Kent State University She received both her MBA and BSA from the University of Akron She worked in industry for several years, both

as a controller for a financial institution and as the operations manager and controller for

a recycled plastics manufacturer

To my husband, Russ, who steadfastly supports me in every endeavor

Preface xvVisual Walk-Through xviii

7 Plant Assets, Natural resources, & Intangibles 371

11 evaluating Performance: earnings Quality, the Income statement, & the statement of

Comprehensive Income 631

AppEndix A: Apple Inc Annual Report 2014 831

AppEndix B: Under Armour, Inc Annual Report 2014 851

AppEndix C: Typical Charts of Accounts for Different Types of Businesses 867

AppEndix d: Summary of Generally Accepted Accounting Principles (GAAP) 869

AppEndix E: Summary of Differences Between U.S GAAP and IFRS Cross Referenced to

Chapter 871

vii

Preface xv

Visual Walk-Through xviii

Chapter 1

The Financial Statements 1

Explain Why Accounting Is the Language of

Business 4

Who Uses Accounting Information? 4

Two Kinds of Accounting: Financial Accounting and

Management Accounting 5

Organizing a Business 5

Explain and Apply Underlying Accounting Concepts,

Assumptions, and Principles 7

The Entity Assumption 8

The Continuity (Going-Concern) Assumption 8

The Historical Cost Principle 9

The Stable-Monetary-Unit Assumption 9

Apply the Accounting Equation to Business

The Statement of Retained Earnings Shows What a

Company Did with Its Net Income 18

The Balance Sheet Measures Financial Position 19

The Statement of Cash Flows Measures Cash Receipts

and Payments 22

Construct Financial Statements and Analyze the

Relationships Among Them 24

Evaluate Business Decisions Ethically 26

American Institute of Certified Public Accountants

Code of Professional Conduct 28

End-of-Chapter Summary Problem 30

Chapter 2

Transaction Analysis 60

records Millions of Transactions a Year! 60

Explain What a Transaction Is 61 Define “Account,” and List and Differentiate Between Different Types of Accounts 62

Assets 62Liabilities 63Stockholders’ (Owners’) Equity 63

Show the Impact of Business Transactions on the Accounting Equation 64

Example: Alladin Travel, Inc 64Transactions and Financial Statements 70

Mid-Chapter Summary Problem 73 Analyze the Impact of Business Transactions on Accounts 75

The T-Account 75Increases and Decreases in the Accounts: The Rules of Debit and Credit 75

Additional Stockholders’ Equity Accounts: Revenues and Expenses 77

Record (Journalize and Post) Transactions in the Books 78

Copying Information (Posting) from the Journal to the Ledger 79

The Flow of Accounting Data 80Accounts after Posting to the Ledger 84

Construct and Use a Trial Balance 85

Analyzing Accounts 86Correcting Accounting Errors 87Chart of Accounts 87

The Normal Balance of an Account 88Account Formats 88

Analyzing Transactions Using Only T-Accounts 89

End-of-Chapter Summary Problem 91

Chapter 3

Accrual Accounting & Income 121

Disney World Headquarters 121

Explain How Accrual Accounting Differs from

Adjust the Accounts 127

Which Accounts Need to Be Updated (Adjusted)? 127

Categories of Adjusting Entries 128Prepaid Expenses 128

Depreciation of Plant Assets 131Accrued Expenses 134

Accrued Revenues 135Unearned Revenues 136Summary of the Adjusting Process 138The Adjusted Trial Balance 140

Construct the Financial Statements 141

Mid-Chapter Summary Problem 143 Close the Books 148

Classifying Assets and Liabilities Based on Their Liquidity 150

Reporting Assets and Liabilities: The Walt Disney Company 150

Formats for the Financial Statements 150

Analyze and Evaluate a Company’s Debt-Paying

Ability 152

Net Working Capital 153Current Ratio 153Debt Ratio 154How Do Transactions Affect the Ratios? 154

End-of-Chapter Summary Problem 158

Chapter 4

Internal Control & Cash 199

at Green Valley Coffee Company:

$10 Million Is a Lot of Beans! 199

Describe Fraud and Its Impact 202

Fraud and Ethics 204

Explain the Objectives and Components

of Internal Control 204

The Sarbanes-Oxley Act (SOX) 205The Components of Internal Control 206Internal Control Procedures 207

Information Technology 209Safeguard Controls 210Internal Controls for E-Commerce 210Security Measures 211

The Limitations of Internal Control—Costs and Benefits 211

Design and Use a Bank Reconciliation 212

Signature Card 212Deposit Ticket 212Check 212Bank Statement 213Bank Reconciliation 213Preparing the Bank Reconciliation 214Online Banking 217

Mid-Chapter Summary Problem 219

Evaluate Internal Controls Over Cash Receipts and Cash Payments 221

Cash Receipts over the Counter 221Cash Receipts by Mail 221

Controls over Payment by Check 222

Construct and Use a Cash Budget 224 Report Cash on the Balance Sheet 226

Compensating Balance Agreements 226

End-of-Chapter Summary Problem 227

Chapter 5

Short-Term Investments &

Receivables 249

short-Term Investments and Accounts

receivable Are 14 Times as Large as

Inventories! 249

Account for Short-Term Investments 251

Reasons to Invest in Other Companies 251

Trading Securities 252

Reporting on the Balance Sheet and the Income

Statement 256

Ethics and the Current Ratio 256

Mid-Chapter Summary Problem 257

Apply GAAP for Proper Revenue

Recognition 258

Shipping Terms 261

Collection Within (vs Outside) the Discount

Period 261

Sales Refunds, Returns, and Allowances 261

Account for and Control Accounts

Direct Write-Off Method 272

Computing Cash Collections from

Customers 272

Account for Notes Receivable 273

Accounting for Notes Receivable 274

Show How to Speed Up Cash Flow from

Receivables 276

Credit Card or Bankcard Sales 276

Selling (Factoring) Receivables 277

Reporting on the Statement of Cash

Flows 277

Evaluate Liquidity Using Two New Ratios 278

Quick (Acid-Test) Ratio 278Accounts Receivable Turnover and Days’ Sales Outstanding 278

End-of-Chapter Summary Problem 280

Chapter 6

Inventory & Cost of Goods Sold 308

About More than Clothing! 308

Show How to Account for Inventory 311

Sale Price vs Cost of Inventory 312Accounting for Inventory in the Perpetual System 314

Apply and Compare Various Inventory Cost Methods 316

What Goes into Inventory Cost? 316Apply the Various Inventory Costing Methods 317

Compare the Effects of FIFO, LIFO, and Average Cost on Cost of Goods Sold, Gross Profit, and Ending Inventory 319Keeping Track of Perpetual Inventories under LIFO and Weighted-Average Cost Methods 320

The Tax Advantage of LIFO 321

Mid-Chapter Summary Problem 322 Explain and Apply Underlying GAAP for Inventory 324

Disclosure Principle 324Lower-of-Cost-or-Market Rule 324

Compute and Evaluate Gross Profit (Margin) Percentage, Inventory Turnover, and Days’

Inventory Outstanding (DIO) 326

Gross Profit Percentage 326Inventory Turnover 327

Use the COGS Model to Make Management Decisions 328

Computing Budgeted Purchases 329Estimating Inventory by the Gross Profit Method 329

Analyze Effects of Inventory Errors 330

End-of-Chapter Summary Problem 333

Chapter 7

Plant Assets, Natural Resources, &

Intangibles 371

Measure and Account for the Cost of Plant

Assets 374

Land 374Buildings, Machinery, and Equipment 374Land Improvements and Leasehold

Improvements 375Lump-Sum (or Basket) Purchases of Assets 375

Distinguish a Capital Expenditure from an

Immediate Expense 376 Measure and Record Depreciation on Plant

Assets 378

How to Measure Depreciation 379Depreciation Methods 379Comparing Depreciation Methods 384

Mid-Chapter Summary Problem 386

Other Issues in Accounting for Plant Assets 387

Depreciation for Tax Purposes 387Depreciation for Partial Years 389Changing the Useful Life of a Depreciable Asset 389

Fully Depreciated Assets 391

Analyze the Effect of a Plant Asset

Apply GAAP for Natural Resources and

Explain the Effect of an Asset Impairment on the Financial Statements 399

Analyze Rate of Return on Assets 401

DuPont Analysis: A More Detailed View of ROA 402

Analyze the Cash Flow Impact of Long-Lived Asset Transactions 403

End-of-Chapter Summary Problem 406

Analyze and Report Investments in Maturity Debt Securities 441

Held-to-Analyze and Report Investments in Sale Securities 443

Available-for-Accounting Methods for Long-Term Stock Investments 443

The Fair Value Adjustment 445Selling an Available-for-Sale Investment 446

Analyze and Report Investments in Affiliated Companies Using the Equity Method 447

Buying a Large Stake in Another Company 447Accounting for Equity-Method Investments 448

Analyze and Report Controlling Interests in Other Corporations Using Consolidated Financial Statements 450

Why Buy Controlling Interest in Another Company? 450

Consolidation Accounting 450The Consolidated Balance Sheet and the Related Work Sheet 451

Goodwill and Noncontrolling Interest 452Income of a Consolidated Entity 452

Mid-Chapter Summary Problem 454

Consolidation of Foreign Subsidiaries 456

Foreign Currencies and Exchange Rates 456

The Foreign-Currency Translation Adjustment 457

Report Investing Activities on the Statement of

Cash Flows 458

Explain the Impact of the Time Value of Money

on Certain Types of Investments 459

Present Value 460

Present-Value Tables 461

Present Value of an Ordinary Annuity 462

Using Microsoft Excel to Calculate Present

Value 463

Using the PV Model to Compute Fair Value of

Available-for-Sale Investments 465

Present Value of an Investment in Bonds 465

End-of-Chapter Summary Problems 467

Current Liabilities of Known Amount 494

Current Liabilities That Must Be Estimated 500

Contingent Liabilities 501

Are All Liabilities Reported on the Balance

Sheet? 502

Summary of Current Liabilities 503

Mid-Chapter Summary Problem 503

Account for Bonds Payable and Interest Expense

with Straight-Line Amortization 504

Bonds: An Introduction 504

Issuing Bonds Payable at Par (Face Value) 507

Issuing Bonds Payable at a Discount 509

Issuing Bonds Payable at a Premium 510

Account for Bonds Payable and Interest Expense

with Effective Interest Amortization 512

Issuing Bonds Payable at a Discount 512

Interest Expense on Bonds Issued at a

Discount 513

Partial-Period Interest Amounts 516Issuing Bonds Payable at a Premium 516Should We Retire Bonds Payable Before Their Maturity? 519

Convertible Bonds and Notes 520

Analyze and Differentiate Financing with Debt Versus Equity 521

The Leverage Ratio 522The Times-Interest-Earned Ratio 523

Understand Other Long-Term Liabilities 524

Leases 524Types of Leases 524

Do Lessees Prefer Operating Leases or Capital Leases? 525

Pensions and Postretirement Liabilities 526

Report Liabilities on the Financial Statements 527

Reporting on the Balance Sheet 528Reporting Financing Activities on the Statement of Cash Flows 528

End-of-Chapter Summary Problems 529

Chapter 10

Stockholders’ Equity 564

Building Toward success 564

Explain the Features of a Corporation 566

Organizing a Corporation 567Stockholders’ Rights 568Stockholders’ Equity 569Classes of Stock 569

Account for the Issuance of Stock 571

Common Stock 571

A Stock Issuance for Other Than Cash Can Create an Ethical Challenge 574Preferred Stock 575

Mid-Chapter Summary Problem 576

Authorized, Issued, and Outstanding Stock 577

Show How Treasury Stock Affects a

Company 578

How Is Treasury Stock Recorded? 578Retirement of Treasury Stock 579Resale of Treasury Stock 579Issuing Stock for Employee Compensation 580Summary of Treasury-Stock Transactions 581

Account for Retained Earnings, Dividends,

and Splits 581

Should the Company Declare and Pay Cash Dividends? 582

Cash Dividends 582Analyzing the Stockholder’s Equity Accounts 583Dividends on Preferred Stock 584

Stock Dividends 585Stock Splits 586Summary of the Effects on Assets, Liabilities, and Stockholders’ Equity 587

Use Stock Values in Decision Making 587

Market, Redemption, Liquidation, and Book Value 587

ROE: Relating Profitability to Stockholder Investment 589

Report Stockholders’ Equity Transactions in the

Evaluating Performance: Earnings

Quality, the Income Statement, &

the Statement of Comprehensive

Operating and Other Expenses 636Operating Income (Earnings) 636

Account for Foreign-Currency Gains and Losses 637

Dollars Versus Foreign Currency 637Reporting Foreign-Currency Gains and Losses on the Income Statement 638

Reporting Foreign-Currency Exchange Gains and Losses on Cash and Cash Equivalents in the Statement of Cash Flows 639

Should We Hedge Our Transaction Risk? 639

Foreign-Currency-Account for Other Items on the Income Statement 639

Interest Expense and Interest Income 639Corporate Income Taxes 639

Which Income Number Predicts Future Profits? 641

Discontinued Operations 642Accounting Changes 643

Compute Earnings per Share 644 Analyze the Statement of Comprehensive Income, Footnotes, and Supplemental Disclosures 645

Reporting Comprehensive Income 645For Additional Details, Don’t Forget the Footnotes 646

Nonfinancial Reports 648

Differentiate Management’s and Auditors’

Responsibilities in Financial Reporting 648

Management’s Responsibility 648Auditor Report 648

End-of-Chapter Summary Problems 651

Chapter 12

The Statement of Cash Flows 678

(and Cash) Machine 678

Identify the Purposes of the Statement of Cash Flows 680

How’s Your Cash Flow? Telltale Signs of Financial Difficulty 681

Distinguish Among Operating, Investing, and

Financing Activities 682

Two Formats for Operating Activities 683

Prepare a Statement of Cash Flows by the

Indirect Method 683

Cash Flows from Operating Activities 685

Cash Flows from Investing Activities 689

Cash Flows from Financing Activities 690

Noncash Investing and Financing Activities 693

Mid-Chapter Summary Problem 694

Prepare a Statement of Cash Flows by the Direct

Method 697

Cash Flows from Operating Activities 699

Depreciation, Depletion, and Amortization

Expense 700

Cash Flows from Investing Activities 700

Cash Flows from Financing Activities 700

Noncash Investing and Financing Activities 700

Computing Operating Cash Flows by the Direct

Method 702

Computing Investing and Financing Cash

Flows 705

Measuring Cash Adequacy: Free Cash Flow 706

End-of-Chapter Summary Problems 708

Chapter 13

Financial Statement Analysis 750

“red-Hot” Competitor! 750

It Starts with the Big Picture 752

Perform Horizontal Analysis 754

Illustration: Under Armour, Inc 754

Trend Percentages 758

Perform Vertical Analysis 759

Illustration: Under Armour, Inc 759

Prepare Common-Size Financial Statements 762

Benchmarking 762

Benchmarking Against a Key Competitor 763

Analyze the Statement of Cash Flows 763 Mid-Chapter Summary Problem 766 Use Ratios to Make Business Decisions 767

Remember to Start at the Beginning: Company and Industry Information 768

Now Let’s Do the Numbers 770

Measuring Ability to Pay Current Liabilities 770

Measuring Turnover and the Cash Conversion Cycle 773

Measuring Leverage: Overall Ability to Pay Debts 776

Measuring Profitability 777Analyzing Stock as an Investment 781The Limitations of Ratio Analysis 783

Use Other Measures to Make Investment Decisions 784

Economic Value Added (EVA®) 784Red Flags in Financial Statement Analysis 785Efficient Markets 785

End-of-Chapter Summary Problems 788

Financial Accounting gives readers a solid foundation in the fundamentals of accounting and the basics of

finan-cial statements, and then builds upon that foundation to offer more advanced and challenging concepts and

problems This scaffolded approach helps students to better understand the meaning and relevance of financial

information, see its significance within a real-world context, as well as develop the skills needed to analyze

financial information in both their courses and career

Financial Accounting has a long-standing reputation in the marketplace for being readable and easy to

understand It drives home fundamental concepts using relevant examples from real-world companies in a

reader-friendly way without adding unnecessary complexity While maintaining hallmark features of accuracy,

readability, and ease of understanding, the Eleventh Edition includes updated explanations, coverage, and ratio

analysis with decision-making guidelines These time-tested methodologies with the latest technology ensures

that students learn basic concepts in accounting in a way that is relevant, stimulating, and fun, while exercises

and examples from real-world companies help students gain a better grasp of the course material

Changes for the eleventh edition

1 The first three chapters of the book cover the accounting cycle and how financial statements are constructed

In previous editions of the book, we used separate companies in each of Chapters 1, 2, and 3 to illustrate

various phases of the accounting cycle In the Eleventh Edition, we switched to using a single, very

familiar company (The Walt Disney Company) to illustrate all phases of the accounting cycle In Chapter

1, we give an overview of the company’s financial statements and explain what each contains In Chapter

2, we cover transactions—how they impact the accounting equation and how they are journalized, posted, and summarized In Chapter 3, we discuss the latter stages of the accounting cycle for the same company and what goes on at the end of the cycle to convert the books into financial statements—adjusting entries, closing entries, and financial statement preparation Thus, the Eleventh Edition should have more continuity in the early chapters; tell a more integrated, unified story; and cover the accounting cycle in a chronological sequence The hypothetical company (Alladin Travel, Inc.) that we have created in Chapter 1 and carried through Chapter 3 is a company that conceivably fits into Disney’s business model

2 A scaffolding approach has been implemented in the book and its resources Chapter content and the of-chapter material builds from the basic short exercise featuring one basic concept to more advanced problems featuring multiple learning objectives This allows the student to practice at the basic level and then build upon that success to advance to more challenging problems

end-3 The ethical component of accounting has been enhanced in the Eleventh Edition by adding a section on the AICPA’s Code of Professional Conduct, located at the end of Chapter 1 The principles section of the code is included, explaining CPAs’ responsibilities to act in the public interest, to have integrity and objectivity, and to exercise due professional care In each chapter, there are short exercises that demonstrate the application of these principles

4 Short exercises, exercises, and problems are more clearly labeled by learning objective (LO) Short exercises have been shortened and simplified in this edition to cover only one LO each They can be used better to briefly cover single concepts as illustrations or class exercises Exercises might cover two or three LOs, and problems cover multiple LOs

5 In Chapters 3, 5, and 11, we have updated and provided complete coverage of the revised FASB ing standard on revenue recognition, impacting the accounting for sales returns and sales discounts We provide the most accurate up-to-the-minute information available for this critical area End-of-chapter short exercises, exercises, and problems have also been revised to reflect application of the new revenue recognition standard at an appropriate and understandable level for beginning students in accounting

account-6 Chapter 4 contains a new hypothetical case study to introduce the concepts of fraud and how it can be prevented by internal control This fictionalized case study is based on an actual company in Texas whose highly trusted and loyal controller and his wife systematically stole $16 million over the space of 10 years

by issuing company checks to pay off their personal credit card bills The scheme was enabled by weak internal controls Executives of the company allowed the controller to have access to the check-signing

xv

machine and electronic signature of the company president Chapter 4 also contains updated illustrations of electronic bank statements.

7 In Chapter 5, using Apple Inc as the book’s Appendix A focus company, we emphasize proper revenue recognition, accounting for accounts and notes receivable, and measuring and evaluating collectability through the allowance for doubtful accounts The coverage of the days’ sales outstanding (DSO) ratio has been updated, improved, and made more consistent with the coverage of days’ inventory outstanding (DIO) in Chapter 6 and days’

payable outstanding (DPO) in Chapter 9 We first introduce the computation of accounts receivable turnover (net sales/average accounts receivable) and explain its meaning We then convert the turnover to DSO by dividing the turnover by 365 In previous editions, the primary computation was average daily sales (net sales/365), followed by division of average AR by average daily sales

8 In Chapter 6, the coverage of inventory and cost of goods sold has been updated, using Under Armour, Inc., the textbook’s Appendix B focus company The products sold by Under Armour should be highly familiar to college students, and the study of inventory is made more interesting by applying it to this fascinating and fast-growing company

9 In Chapter 9, based on feedback we received from adopters who only have time to cover straight-line amortization for bond premium or discount, we added a new self-contained section at the beginning of the coverage for bonds payable: Accounting for Bonds Payable Using Straight-Line Amortization We moved the coverage of amortization by the effective-interest method back one section Thus, users who only want to cover issuance of bonds and recognition of interest expense based on straight-line amortization of bond premium or discount may use only that section Separate problems using the straight-line method or amortization at the end of the chapter allow these users to easily skip the more complex effective-interest method altogether

10 In every chapter, after relevant concepts are covered, a text box labeled “Try it” is introduced

This employs the following learning philosophy: 1 read it; 2 try it; 3 practice it

11 In many cases, we add “Try It in Excel” to illustrate use of Excel and a business problem-solving tool We feel that students should be exposed early and frequently in their business education to Excel applications At the beginning of every chapter, we give students instructions as to how to access the most current financial statements of the chapter’s focus company in Excel format from the Securities and Exchange Commission

(SEC) website (http://www.sec.gov) Throughout the book, most exhibits and journal

entries are formatted as Excel worksheets In addition, at certain points throughout the text,

we include examples that show students step-by-step how to build Excel templates to facilitate the solutions of specific accounting problems The following provides examples

of these applications by chapter:

Chapter 1: Preparing basic financial statements (income statement, retained earnings statement, balance sheet)

Chapter 2: Processing business transactions, preparation of trial balanceChapter 3: Adjusting journal entries, preparation of adjusted trial balance, final financial statements

Chapter 4: Preparation of bank reconciliation, cash budgetChapter 5: Accounts receivable aging analysis

Chapter 6: Computation of cost of goods sold and gross profitChapter 7: Calculation of depreciation expense and accumulated depreciation by three methods: straight-line, units-of-production, and double-declining balance

Chapter 8: Calculation of present valueChapter 9: Calculation of bond discount and premium amortization tables using effective-interest method

Chapter 13: Horizontal and vertical analysis of financial statements

12 Ethics is a vital part of accounting Several sections of the text are dedicated to discussing potential ethical problems that can arise in dealing with that particular subject matter and how they should be properly handled.

13 In all chapters, we emphasize how accounting information covered in that chapter is lyzed and used to help managers make various kinds of business decisions User-relevant information and key ratios that are covered in various chapters include the following:

ana-Chapter 3: Debt-paying ability: net working capital, current ratio, debt ratioChapter 4: Internal control: importance of internal control to preserve the integrity of financial information; the significance of cash and cash flow

Chapter 5: Liquidity: quick (acid-test) ratio, accounts receivable turnover, days’ sales

in receivablesChapter 6: Profitability: gross profit percentage, inventory turnover, days’ inventory outstanding

Chapter 7: Profitability: introduction rate of return on total assets (ROA) using Du Pont Analysis (profit margin × asset turnover)

Chapter 8: Time value: time value of money and how it impacts investing and lending decisions

Chapter 9: Liquidity: accounts payable turnover, days’ payable outstanding, cash collection cycle (days’ sales in receivables + days inventory outstanding – days’

payable outstanding) Leverage: continuation of Du Pont Analysis by introducing leverage ratio (average total assets/average stockholders’ equity)

Chapter 10: Profitability: rate of return on common stockholders’ equity using expanded Du Pont Analysis Model (ROA [introduced in Chapter 7] × leverage ratio [introduced in Chapter 9])

Chapter 11: Evaluating performance: earnings quality, earnings per share, book value per share, dividend yield, capitalization of earnings from operations to estimate future profitability and stock price

Chapter 12: Cash flow: use of cash flow information by creditors and investors; free cash flow

Chapter 13: Statement analysis: comprehensive financial statement analysis, rating all of the ratios covered in the previous chapters, applying them to the book’s two appendix focus companies, Under Armour, Inc and Apple Inc

Accrual Accounting & Income 131

Depreciation of Plant Assets

Plant assets are long-lived tangible assets, such as land, buildings, furniture, and equipment All

plant assets except land decline in usefulness, and this decline is an expense Accountants spread

the cost of each plant asset, except land, over its useful life Depreciation is the process of

allocat-ing cost to expense for a long-term plant asset.

To illustrate depreciation, consider Alladin Travel Suppose that on June 3 Alladin Travel purchased equipment on account for $24,000:

At the beginning of the month, supplies were $5,000 During the month, $7,000 of

1 3 5

A B C D E F

9,000 9,000 Supplies Expense ($5,000 + $7,000 - $3,000)

Supplies Ending balance of supplies = $3,000 (the supplies still on hand)

A1

1 3

1 3

A B C D E F

24,000 24,000

Purchased equipment on account.

Equipment Accounts Payable Jun 3

Equipment

24,000 Jun 3

Alladin Travel records an asset when it purchases machinery and equipment Then, as the asset

is used, a portion of the asset’s cost is transferred to Depreciation Expense The machinery

Excel Integrated Throughout Text!

Excel-based financial statements are used

so that students will familiarize themselves with the accounting information format actually used in the business world

310 Chapter 6

Merchandise inventory is the heart of a merchandising business, and cost of goods sold is the most important expense for a company that sells goods rather than services Gross profit (or gross margin)

is the difference between net sales and cost of goods sold Gross profit percentage is gross profit

expressed as a percentage of net sales It shows how profitable a company’s products are when they

are sold Inventory turnover and days’ inventory outstanding show how fast products are sold All of

these are important measures of success for a merchandising company.

This chapter covers the accounting for inventory and cost of goods sold It

also shows you how to analyze the impact of changes in this asset and expense

on the financial statements.

A1

1 2 3 5 6 8 9 10 12 14

1 3 4 6 7 9 10 12 13

Net revenues Cost of goods sold Gross profit Selling, general and administrative expenses Income from operations

Interest expense, net Other expense, net Income before income taxes Provision for income taxes Net income

12 Months Ended

In Thousands of $ Dec 31, 2014 Dec 31, 2013

$ 1,834,921 955,624 879,297 670,602 208,695 (5,183) (73) 203,439 74,661

$ 128,778

Dec 31, 2012

$ 2,332,051 1,195,381 1,136,670 871,572 (2,933) 260,993 98,663

$ 162,330

$ 3,084,370 1,572,164 1,512,206 353,955 (5,335) 342,210 134,168 $ 208,042

Under Armour, Inc.

Consolidated Statements of Income

1 Show how to account for inventory

2 Apply and compare various inventory cost methods

3 Explain and apply underlying GAAP for inventory

4 Compute and evaluate gross profit (margin) percentage,

inventory turnover, and days’ inventory outstanding (DIO)

5 Use the cost-of-goods-sold (COGS) model to make

management decisions

6 Analyze effects of inventory errors

Learning Objectives

Try It in

in Excel format at http://www.sec.gov Using the “FILINGS” link on

the toolbar at the top of the page, select “Company Filings Search.” This will take you to the “EDGAR Company Filings” page Type “Under Armour” in the company name box, and select “Search.” This will produce the “EDGAR Search Results” page showing the company name Click on the “CIK” link beside the company name This will pull up a list of the reports that the company has filed with the SEC Under the “Filing Type” box, type “10-K.” Form

Try It in Excel

Describes line-by-line how to retrieve and prepare accounting information (such as adjusted trial balance worksheets, ratio computations, depreciation schedules, bond  discount and premium amortization schedules, and financial statement analysis)

1 3 5 7 9 10 12 14

A B C D E F

Dec 31, 2013

% change 2013–2014

2012–2013

Net revenues Cost of goods sold Gross profit Selling, general and administrative expenses Income from operations Interest expense, net Other expense, net Income before income taxes Provision for income taxes Net income

$ 1,834,921 955,624 670,602 (5,183) (73) 203,439 74,661 $ 128,778

27.1%

29.3%

27.0%

(43.4%) 1,505.5%

28.3%

26.1%

$ 2,332,051 1,195,381 871,572 (2,933) 260,993 98,663 $ 162,330

12 Months Ended

Under Armour, Inc.

Comparative Horizontal Analysis of Consolidated Statements of Income

(In thousands of $)

Exhibit 13-2| Comparative Consolidated Statements of Operations—Horizontal Analysis

Try It in

Excel ® Formatting comparative financial statements for horizontal analysis

when the financial statements are in Excel format is quite easy Try constructing Exhibit 13-2 in Excel.

re-1 Start with the Consolidated Statements of Operations in the opening figure of the chapter.

2 Change the labels to correspond with Exhibit 13-2 Your spreadsheet might be slightly different from Exhibit 13-2, so the cells in which you start to enter formulas might have

5 Repeat the process in (4) using blank cell E4 and using the formula: =(D4−F4)/F4 Copy this formula through line 13.

6 Pat yourself on the back You’ve just performed horizontal analysis using Excel!

M13_HARR7620_11_SE_C13_750-830.indd 755 11/20/15 3:25 PM

526 Chapter 9

(operating leases versus reclassifying them as capital leases) will make your decision clear

(us-ing Southwest’s actual figures in millions):

Debt ratio Total liabilities

as Stated

You can see that capital leases increase the debt ratio—by almost seven percentage points for Southwest By contrast, notice that operating leases don’t affect the debt ratio that’s currently see why Southwest’s long-term commitment for operating leases, as disclosed in Note 8, far outweighs that of its capital lease agreements.

Ethical Challenge Because of the relatively mechanical nature of the accounting criteria for

capitalization of leases, it is possible under existing U.S GAAP to purposely structure a pany’s lease agreements so that they barely miss meeting the third criterion (75% test) or the fourth criterion (90% test) for capitalization Many U.S companies have taken advantage of same economic benefits associated with ownership of long-term assets, but avoiding the detri- mental impact that recording those assets and obligations can have on their debt ratios.

com-In contrast to U.S GAAP, with its mechanical, or “bright line,” tests for capitalization of that focuses on the overall substance of the transaction, rather than on the mechanical form, judgment of the company’s accountants, the lease transfers “substantially all of the risks and rewards of ownership to the lessee,” IFRS says the lease should be capitalized Other- wise, the lease should be expensed as an operating lease.

As of the date of this text, the FASB and IASB have issued a final exposure draft for

a new standard on long-term leases that will, for the great majority of such agreements, require capital lease treatment This will essentially end the practice of operating leases and sometime after 2016 When that happens, Southwest Airlines and many other companies their long-term assets, as well as their long-term liabilities, with results as we just showed

on their debt and other ratios.

GloBAl View

Pensions and Postretirement Liabilities

Most companies have retirement plans for their employees A pension is employee compensation

medical insurance for retired former employees Because employees earn these benefits by their the company.

Pensions are one of the most complex areas of accounting As employees earn their pensions and the company pays into the pension plan, the plan’s assets grow The obligation for future pen-

Global View

Offers students an international perspective

on accounting issues and integrates the International Financial Reporting Standards (IFRS) with corresponding concepts throughout the text

Preface xix

ing typically contains five paragraphs:

■ The first paragraph identifies the audited financial statements as well as the company being audited It also states the responsibility of the company’s management as well as the auditor’s responsibilities.

■ The second paragraph describes how the audit was performed in accordance with generally accepted auditing standards of the Public Company Accounting Oversight Board (an inde- pendent regulatory body with SEC oversight) These are the standards used by auditors as the benchmark for evaluating audit quality.

■ The third paragraph describes in detail what a system of internal controls is, noting that it should be designed to provide reasonable assurance that transactions are recorded to permit preparation of financial statements that are fairly presented in conformity with GAAP.

■ The fourth paragraph describes inherent limitations in the system of internal controls and notes that, at best, the system of internal controls can only provide reasonable assurance that financial statements are fairly presented.

■ The fifth paragraph expresses the auditor’s combined opinion on both the fairness of cial statements, in all material respects, in conformity with GAAP and the effectiveness of the company’s internal controls over financial reporting The auditing firm is expressing an

finan-unqualified (clean) opinion on both the fairness of the financial statements and the

effec-tiveness of the company’s internal controls The unqualified opinion is the highest ment of assurance that an independent certified public accountant can express.

state-The independent audit adds credibility to the financial statements of a company as well as to its system of internal controls It is no accident that financial reporting and auditing are more advanced in the United States than anywhere else in the world and that U.S capital markets are the envy of the world.

dEcision guidElinEs

USING THE INCOME STATEMENT AND RELATED NOTES IN INVESTMENT ANALySIS

Suppose you’ve completed your studies, taken a job, and have been fortunate to save $10,000 Now you are ready to start investing These guidelines provide a framework for using accounting information for investment analysis.

Which measure of profitability should

be used for ment analysis?

invest-Are you interested

in accounting income?

Income, including all revenues, expenses, gains, and losses?

Net income (bottom line)

Income that can be expected to repeat from year to year?

Income from continuing operations

Are you interested

in cash flows? Net cash flow from operating activities (Chapter 12)

Note: A conservative strategy may use both income and cash flows and compare the two sets of results.

Decision guidelines

Illustrates how financial statements are used and how accounting information aids companies in decision making

600 Chapter 10

Assess Your Progress

Some of the following exercises and problems are available as Excel questions in

My Accounting Lab

Ethics Check

EC10-1 Identify ethical principle violated

For each of the situations listed, identify which of three principles (integrity, objectivity and independence, or due care) from the AICPA Code of Professional Conduct that is violated

Assume all persons listed in the situations are members of the AICPA (Note: Refer to the AICPA Code of Professional Conduct contained on pages 29 –30, Chapter 1 for descriptions of the principles.)

a Henry is the CFO for Front Street Coffee Corporation and is going to take the company

public within the next six months In an effort to make the stock look more appealing and therefore sell at a higher price, Henry overrides the system controls and records fictitious sales entries.

b Heather is a senior auditor for Lenardi & Calwell and has worked on its client, New

Iron, Inc., for the past few years A few months ago, New Iron, Inc., offered Heather a position in its internal audit department Heather accepted the position and works very closely with the external auditors In fact, she often prepares the work papers for the external auditor since she knows the systems better than the new auditors.

c Lauren’s company, Tombolo Technologies, recently decided to repurchase stock from its

shareholders Lauren is in charge of booking the entries for this new treasury stock

However, she does not know how to record treasury stock transactions, so she just deducts the amount repurchased from Common Stock.

d Evan is a senior manager at Firth & Wells, a regional public accounting firm Firth &

Wells recently obtained a new client, Gatmut, Inc Evan’s sister is the CEO of Gamut, a fact that he did not disclose to the board.

Short Exercises

S10-1 (Learning Objective 1: Explain advantages and disadvantages of a corporation)

What are two main advantages that a corporation has over a proprietorship and a partnership?

What are two main disadvantages of a corporation? Describe the authority structure of a corporation Who holds ultimate power?

S10-2 (Learning Objective 1: Describe characteristics of preferred and common stock)

Answer the following questions about the characteristics of a corporation’s stock:

1 Who are the real owners of a corporation?

2 What privileges do preferred stockholders have over common stockholders?

3 Which class of stockholders reaps greater benefits from a highly profitable corporation?

Explain your answer.

S10-3 (Learning Objective 2: Describe the effect of a stock issuance on paid-in capital)

Mitchell Corporation received $11,500,000 for the issuance of its stock on May 14 The par value of the Mitchell Corporation stock was only $11,500 Was the excess amount of

$11,488,500 a profit to Mitchell Corporation? If not, what was it?

Suppose the par value of the Mitchell Corporation stock had been $2 per share, $4 per share,

or $7 per share Would a change in the par value of the company’s stock affect Mitchell Corporation’s total paid-in capital? Give the reason for your answer.

S10-4 (Learning Objective 2: Issue stock—par-value stock and no-par stock) At fiscal

year-end 2016, Martin Legal Services and Kramer Doughnuts reported these adapted amounts

on their balance sheets (all amounts in millions except for par value per share):

NEW!

Ethical issue

This end-of-chapter feature presents students with ethical situations and has them work through the decision framework for making ethical judgments Finally, they are asked

to come to a decision and support it

490 Chapter 8

investments may hold the key to helping the company meet its net income goal for the year She

is considering what to do with the following investments:

1 Barham owns 50% of the common stock of Ohio Office Systems, which provides the

business forms that Barham uses Ohio Office Systems has lost money for the past two years but still has a retained earnings balance of $550,000 Talbert thinks she can get Ohio’s treasurer to declare a $160,000 cash dividend, half of which would go to Barham.

2 Barham owns a bond investment purchased eight years ago for $250,000 The purchase price

represents a discount from the bonds’ maturity value of $400,000 These bonds mature two years from now, and Barham purchased them as a long-term investment intending to hold them until they matured Their current market value is $380,000 Ms Talbert has checked

with a Charles Schwab investment representative, and she is considering selling the bonds

Schwab would charge a 1% commission on the sale transaction.

3 Barham owns 5,000 shares of Microsoft stock valued at $53 per share as a long-term

investment One year ago, Microsoft stock was worth only $28 per share Barham purchased the Microsoft stock for $37 per share Talbert wonders whether Barham should sell the Microsoft stock.

Requirement

1 Evaluate all three actions as a way for Barham Company to generate the needed amount of

income Recommend the best way for Barham to achieve its net income goal.

Ethical Issue

Media One owns 18% of the voting stock of Web Talk, Inc The remainder of the Web Talk stock

is held by numerous investors with small holdings Austin Cohen, president of Media One and a member of Web Talk’s board of directors, heavily influences Web Talk’s policies.

Under the fair value method of accounting for investments, Media One’s net income increases

as it receives dividend revenue from Web Talk Media One pays President Cohen a bonus computed as a percentage of Media One’s net income Therefore, Cohen can control his personal bonus to a certain extent by influencing Web Talk’s dividends.

A recession occurs in 2016, and Media One’s income is low Cohen uses his power to have Web Talk pay a large cash dividend The action requires Web Talk to borrow in order to pay the dividend.

Requirements

1 What are the ethical issues in the Media One case?

2 Who are the stakeholders? What are the possible consequences to each?

3 What are the alternatives for Austin Cohen to consider? Analyze each alternative from the

following standpoints: (a) economic, (b) legal, (c) ethical.

4 If you were Cohen, what would you do?

5 Discuss how using the equity method of accounting for the investment would decrease

Cohen’s potential for manipulating his bonus.

Focus on Financials | Apple Inc.

(Learning Objectives 2, 3, 4: Analyze investments, consolidated subsidiaries, and tional operations) The consolidated financial statements of Apple Inc are given in Appendix A

interna-and online in the filings section of http://www.sec.gov.

Requirements

1 Refer to Note 1—Summary of Significant Accounting Policies, under Cash Equivalents

and Marketable Securities How does the company classify its investments?

2 Refer to Note 1 under Cash Equivalents and Marketable Securities Does Apple Inc adjust for

periodic changes in fair value of these investments? If so, where do these adjustments appear?

1 Record the transactions in Quick Meals’ journal Assume that no sales returns are expected

Round all amounts to the nearest dollar Explanations are not required.

2 Show what Quick Meals will report on its comparative classified balance sheet at

Decem-ber 31, 2017, and DecemDecem-ber 31, 2016.

P5-66B (Learning Objectives 6, 7: Show how to speed up cash flow from receivables;

evaluate liquidity using ratios) The comparative financial statements of Gold Pools, Inc., for

2017, 2016, and 2015 included the following select data:

Total current assets

Income statement

Net sales (all on account)

(In millions) 2017

$ 70 150

270 70

$ 910

$6,570

2016

$ 60 175

260 20

$ 860

$5,110

2015

$ 50 110

240 45

b Quick (acid-test) ratio

c Days’ sales outstanding

2 Which ratios improved from 2016 to 2017 and which ratios deteriorated? Is this trend

fa-vorable or unfafa-vorable?

3 Recommend two ways for Gold Pools to improve cash flow from receivables.

Challenge Exercises and Problem

E5-67 (Learning Objective 6: Show how to speed up cash from receivables) Ripley Shirt

Company sells on credit and manages its own receivables Average experience for the past three years has been the following:

Sales

Uncollectible-account expense

Cash

$350,000 175,000

— 89,000

Credit

$350,000 175,000 20,000

Total

$700,000 350,000 20,000 178,000 Jack Rivers, the owner, is considering whether to accept bankcards (VISA, MasterCard) Rivers expects total sales to increase by 12% but cash sales to remain unchanged If Rivers switches to bankcards, the business can save $10,000 on other expenses, but VISA and MasterCard charge

Pearson eText

The Pearson eText, available through MyAccountingLab, gives students access to their textbook anytime, anywhere In addition to note taking, highlighting, and bookmarking, the Pearson eText offers interactive and sharing features Rich media options let students watch lecture and example videos as they read or do their homework Instructors can share their comments or highlights, and students can add their own, creating a tight community of learners in your class

The Pearson eText companion app (http://www.pearsonhighered.com/etextmobile/)

allows existing subscribers to access their titles on an iPad or Android tablet for either online or offline viewing

■ Now available on smartphones and tablets

■ Seamlessly integrated videos and other rich media

■ Accessible (screen-reader ready)

■ Configurable reading settings, including resizable type and night-reading mode

■ Instructor and student note taking, highlighting, bookmarking, and search

NEW!

NEW!

Accounting Cycle Tutorial (ACT)

MyAccountingLab’s new interactive tutorial helps students master the accounting cycle for early and continued success

in the Introduction to Accounting course The tutorial, accessed by computer, Smartphone, or tablet, provides students with brief explanations of each concept of the accounting cycle through engaging videos and animations

Students are immediately assessed on their understanding, and their performance is recorded in the MyAccountingLab grade book Whether the Accounting Cycle Tutorial is used

as a remediation self-study tool or course assignment, students have yet another resource within MyAccountingLab

to help them be successful with the accounting cycle

NEW!

Learning Catalytics

Learning Catalytics, available through MyAccountingLab,

is a “bring your own device” assessment and classroom

activity system that expands the possibilities for student

engagement Using Learning Catalytics, you can deliver a

wide range of automatically graded or open-ended

questions that test content knowledge and build critical

thinking skills Eighteen different answer types provide

great flexibility, including graphical, numerical, textual

input, and more

xx

Try It Videos

These videos, offered only in MyAccountingLab, guide students step-by-step through key exhibits in the text

student and instruCtor resourCes

For Students

MyAccountingLab online Homework and Assessment Manager includes:

■ Pearson eText

■ Student PowerPoint® Presentations

■ Accounting Cycle Tutorial

■ Videos

■ Demo Docs

■ Flash Cards

■ Dynamic Study Modules

■ QuickBooks Data Files

■ Excel in Practice Data Files

■ Working Papers

■ Directed Reading

■ Questions You Should be Able to Answer

Student resource website: http://www.pearsonhighered.com/harrison

This website contains the following:

■ The QuickBooks Data Files and the Excel in Practice Data Files, related to select end-of-chapter problems

■ Working Papers, for completing end-of-chapter questions in preformatted templates

■ Directed Reading, help direct students to what is content in the chapter is important

■ Student PowerPoint® Presentations

For Instructors

Instructor Resource Center: http://www.pearsonhighered.com/harrison

For the instructor’s convenience, the instructor resources can be downloaded from the

textbook’s catalog page and MyAccountingLab Available resources include the following:

discussions and promote interaction and engagement with your financial accounting students This supplement will aid instructors in facing the challenges

of utilizing discussion prompts effectively in the accounting classroom

Discussion Prompts for each chapter includes: sample discussion prompts for introductory financial accounting, engaging discussion prompts to promote critical thinking, effective facilitation strategies, possible sources of potential online discussion sources, and examples of grading rubrics for online discussions

BEFORE coming to class and help direct them to what is important Students should hand in these directed reading worksheets at the beginning of class before starting the corresponding chapter

■ Instructor’s Resource Manual: Includes chapter outlines, suggested in-class

activities, topics with which students struggle, as well as the following:

– The Questions You Should Be Able To Answer feature presented in a table format

This is an interactive feature students can find in the MyAccountingLab eText

– Assignment grid that outlines all end-of-chapter exercises, problems, and cases;

the topic being covered in that particular exercise, problem, or cases; estimated completion time; level of difficulty; and availability in General Ledger, QuickBooks, or Excel templates

– Ten-minute quizzes that quickly assess students’ understanding of the chapter material.

– NEW! Flipping Your Classroom Guide: Tips for each chapter on how to take

your course from a traditional/in-class course to a hybrid, blended, or fully online format Includes links to the discussion board prompts

■ Instructor’s Solutions Manual: Contains solutions to all end-of-chapter questions,

including short exercises, exercises, problems and cases

■ Test Bank: Includes more than 2,000 questions Both objective-based questions

and computational problems are available Algorithmic test bank is available in MyAccountingLab

■ PowerPoint Presentations: These presentations help facilitate classroom

■ Data and Solution Files: The QuickBooks Data Files and the Excel in Practice

Data Files, related to select end-of-chapter problems Corresponding solution files are also provided

aCknowledgments

We sincerely thank the many friends and colleagues who have helped in the process of writing and revising this book Betsy Willis deserves special mention for her dedication, feedback, and hard work throughout this project We thank Carolyn Streuly for her amazing accuracy checking We are also deeply grateful to Lacey Vitetta and Heather Pagano for their endless patience and support Thank you to Donna Battista, Natalie Wagner, Mary Kate Murray, Sarah Peterson, Kathy Smith, and Martha LaChance for their continued help and support Thanks also to Sheila Ammons for preparing the Test

Bank, to Betsy Willis for preparing the Instructor’s Resource Manual, and to Michelle

Franz for preparing the PowerPoint presentation Thank you also to the many professors and students who have used the book and provided feedback for improving it

We would like to thank the following reviewers for the Eleventh Edition for their valuable input: Patricia Derrick, Drexel University; Shuai Ma, American University;

Susan Machuga, University of Hartford; Dorothy Thompson, Ave Maria University;

Gary Olsen, Carroll University; Reed Easton, Seton Hall University; Randall Serrett, University of Houston– Downtown; Ada Duffey, University of Wisconsin-Waukesha;

Alesha Graves, Mount St Joseph University; Brian Routh, University of Southern Indiana; Regan Garey, Lock Haven University; Michelle Watts, Boise State University;

David Parker, Saint Xavier University; Brian Porter, Hope College; Rosemary Nurre, College of San Mateo

In revising previous editions of Financial Accounting, we had the help of instructors

from across the country who have participated in online surveys, chapter reviews, and focus groups Their comments and suggestions for both the text and the supplements have been a great help in planning and carrying out revisions, and we thank them for their contributions

Past Reviewer Participants

Shawn Abbott, College of the Siskiyous

Linda Abernathy, Kirkwood Community College

Sol Ahiarah, SUNY College at Buffalo (Buffalo State)

M J Albin, University of Southern Mississippi

Gary Ames, Brigham Young University, Idaho

Elizabeth Ammann, Lindenwood University

Brenda Anderson, Brandeis University

Kim Anderson, Indiana University of Pennsylvania

Florence Atiase, University of Texas at Austin

Walter Austin, Mercer University, Macon

Brad Badertscher, University of Iowa

Sandra Bailey, Oregon Institute of Technology

Patrick Bauer, DeVry University, Kansas City

Barbara A Beltrand, Metropolitan State University

Jerry Bennett, University of South Carolina–Spartanburg

Peg Beresewski, Robert Morris College

Lucille Berry, Webster University

John Bildersee, New York University, Stern School

Brenda Bindschatel, Green River Community College

Candace Blankenship, Belmont University

Charlie Bokemeier, Michigan State University

Patrick Bouker, North Seattle Community College

Amy Bourne, Oregon State University

Scott Boylan, Washington and Lee University

Robert Braun, Southeastern Louisiana University

Linda Bressler, University of Houston–Downtown

Michael Broihahn, Barry University

Rada Brooks, University of California, Berkeley

Carol Brown, Oregon State University

Elizabeth Brown, Keene State College

Helen Brubeck, San Jose State University

Scott Bryant, Baylor University

Marcus Butler, University of Rochester

Marci Butterfield, University of Utah

Mark Camma, Atlantic Cape Community College

Kay Carnes, Gonzaga University

Brian Carpenter, University of Scranton

Sandra Cereola, James Madison University

Kam Chan, Pace University

Hong Chen, Northeastern Illinois University

C Catherine Chiang, Elon University

Freddy Choo, San Francisco State University

Charles Christy, Delaware Tech and Community College,

Stanton CampusLawrence Chui, Opus College of Business, University

of St ThomasShifei Chung, Rowan University

Bryan Church, Georgia Tech at Atlanta

Carolyn Clark, Saint Joseph’s University

Dr Paul Clikeman, University of Richmond

Charles Coate, St Bonaventure University

Dianne Conry, University of California State College

Extension–CupertinoEllen D Cook, University of Louisiana at Lafayette

John Coulter, Western New England CollegeSue Counte, Saint Louis Community College–MeramecJulia Creighton, American University

Sue Cullers, Buena Vista UniversityDonald Curfman, McHenry County CollegeAlan Czyzewski, Indiana State UniversityLaurie Dahlin, Worcester State CollegeBonita Daly, University of Southern MaineKreag Danvers, Clarion UniversityBetty David, Francis Marion UniversityPatricia Derrick, George Washington UniversityPeter DiCarlo, Boston College

Charles Dick, Miami UniversityBarbara Doughty, New Hampshire Community Technical College

Allan Drebin, Northwestern UniversityCarolyn Dreher, Southern Methodist UniversityEmily Drogt, Grand Valley State UniversityCarol Dutton, South Florida Community CollegeJames Emig, Villanova University

Ellen Engel, University of ChicagoMary Ewanechko, Monroe Community CollegeAlan Falcon, Loyola Marymount UniversityJanet Farler, Pima Community College

Dr Andrew Felo, Penn State Great ValleyKen Ferris, Thunderbird College

Dr Mary Fischer, The University of Texas at Tyler

Dr Caroline Ford, Baylor UniversityClayton Forester, University of MinnesotaLou Fowler, Missouri Western State CollegeTimothy Gagnon, Northeastern UniversityTerrie Gehman, Elizabethtown CollegeLucille Genduso, Nova Southeastern UniversityFrank Gersich, Monmouth College

Bradley Gillespie, Saddleback CollegeLisa Gillespie, Loyola University, ChicagoMarvin Gordon, University of Illinois at ChicagoBrian Green, University of Michigan at DearbornAnthony Greig, Purdue University

Ronald Guidry, University of Louisiana at MonroeKonrad Gunderson, Missouri Western State College

Dr Geoffrey J Gurka, Colorado Mesa UniversityWilliam Hahn, Southeastern College

Jack Hall, Western Kentucky UniversityGloria Halpern, Montgomery CollegePenny Hanes, Mercyhurst College

Dr Heidi Hansel, Kirkwood Community CollegeKenneth Hart, Brigham Young University, Idaho

Al Hartgraves, Emory UniversityMichael Haselkorn, Bentley UniversityThomas Hayes, University of North TexasLarry Hegstad, Pacific Lutheran UniversityCandy Heino, Anoka-Ramsey Community CollegeMary Hollars, Vincennes University

Anit Hope, Tarrant County College

Thomas Huse, Boston College

Fred R Jex, Macomb Community College

Grace Johnson, Marietta College

Celina Jozsi, University of South Florida

John Karayan, Woodbury University

Beth Kern, Indiana University, South Bend

Irene Kim, The George Washington University

Hans E Klein, Babson College

Robert Kollar, Duquesne University

Willem Koole, North Carolina State University

Emil Koren, Hillsborough Community College

Dennis Kovach, Community College of Allegheny County–

North Campus

Maria U Ku, Ohlone College & Diablo Valley College

Ellen Landgraf, Loyola University Chicago

Howard Lawrence, Christian Brothers University

Barry Leffkov, Regis College

Elliott Levy, Bentley University

Chao-Shin Liu, Notre Dame

Barbara Lougee, University of California, Irvine

Heidemarie Lundblad, California State University,

Northridge

Joseph Lupino, Saint Mary’s College of California

Anna Lusher, West Liberty State College

Harriet Maccracken, Arizona State University

Constance Malone Hylton, George Mason University

Carol Mannino, Milwaukee School of Engineering

Herb Martin, Hope College

Aziz Martinez, Harvard University, Harvard Business

School

Anthony Masino, Queens University/NC Central

Lizbeth Matz, University of Pittsburgh, Bradford

Bruce Maule, College of San Mateo

Michelle McEacharn, University of Louisiana

at Monroe

Molly McFadden-May, Tulsa Community College

Nick McGaughey, San Jose State University

Allison McLeod, University of North Texas

Cathleen Miller, University of Michigan–Flint

Cynthia J Miller, Gatton College of Business & Economics,

University of Kentucky

Mark Miller, University of San Francisco

Mary Miller, University of New Haven

Scott Miller, Gannon University

Frank Mioni, Madonna University

Dr Birendra (Barry) K Mishra, University of California,

Riverside

Theodore D Morrison III, Wingate University

Lisa Nash, Vincennes University

Rosemary Nurre, College of San Mateo

Bruce L Oliver, Rochester Institute of Technology

Stephen Owen, Hamilton College

Charles Pedersen, Quinsigamond Community College

Richard J Pettit, Mountain View CollegeGeorge Plesko, Massachusetts Institute of TechnologyDavid Plumlee, University of Utah

Gregory Prescott, University of South AlabamaRama Ramamurthy, College of William and MaryCraig Reeder, Florida A&M University

Barb Reeves, Cleary UniversityBettye Rogers-Desselle, Prairie View A&M UniversityDarren Roulstone, University of Chicago

Norlin Rueschhoff, Notre DameAnwar Salimi, California State Polytechnic University, Pomona

Philippe Sammour, Eastern Michigan UniversityAngela Sandberg, Jacksonville State UniversityGeorge Sanders, Western Washington UniversityBetty Saunders, University of North FloridaAlbert A Schepanski, University of IowaWilliam Schmul, Notre Dame

Arnie Schnieder, Georgia Tech at AtlantaGim Seow, University of ConnecticutItzhak Sharav, CUNY–Lehman Graduate School of Business

Allan Sheets, International Business CollegeLily Sieux, California State University, East BayAlvin Gerald Smith, University of Northern IowaJames Smith, Community College of PhiladelphiaVirginia Smith, Saint Mary’s College of CaliforniaBeverly Soriano, Framingham State CollegeVic Stanton, Stanford University

Carolyn R Stokes, Frances Marion University

J B Stroud, Nicholls State UniversityGloria J Stuart, Georgia Southern University

Al Taccone, Cuyamaca CollegeDiane Tanner, University of North FloridaMartin Taylor, University of Texas at ArlingtonHoward Toole, San Diego State UniversityVincent Turner, California State Polytechnic University, Pomona

Sue Van Boven, Paradise Valley Community CollegeMarcia Veit, University of Central Florida

Bruce Wampler, Louisiana State University, ShreveportSuzanne Ward, University of Louisiana at LafayetteCraig Weaver, University of California, RiversideFrederick Weis, Claremont McKenna CollegeFrederick Weiss, Virginia Wesleyan CollegeBetsy Willis, Baylor University

Ronald Woan, Indiana University of PennsylvaniaAllen Wright, Hillsborough Community College

Dr Jia Wu, University of Massachusetts, DartmouthYanfeng Xue, George Washington UniversityBarbara Yahvah, University of Montana–HelenaMyung Yoon, Northeastern Illinois UniversityLin Zeng, Northeastern Illinois UniversityTony Zordan, University of St Francis

The Financial Statements

1

Where is the happiest place on earth? Walt Disney World or Disneyland, of course! The Disney theme parks in Orlando, Florida, and Anaheim, California, are famous for providing the ultimate family entertainment experience However, these two theme parks are actually only a small part

of the worldwide entertainment empire that is The Walt Disney Company

From rather humble beginnings in the American Midwest, Walt Disney first began to display his extraordinary talents as an animation artist in the 1920s Walt and his brother Roy pooled their resources and set up a cartoon studio in Hollywood, California, in 1923 Their early work focused on animated short cartoon films featuring animal characters The best known of these

is Mickey Mouse, invented in the early 1930s Mickey became an instant success in the

first cartoon “short” with sound called Steamboat Willie, earning

Disney his first Academy Award in 1932 The studio soon launched spin-offs for supporting characters: Mickey’s friends Donald Duck and Goofy, and Mickey’s beloved hound Pluto

Thankfully, Walt Disney’s dreams didn’t end with the short animated cartoon In 1937, the studio released its first-ever

full-length feature animated film, Snow White and the Seven Dwarfs Considered quite a risky venture at the time, the film

became the most successful motion picture of 1938, earning over $8 million on its initial release, the equivalent of over $134 million today This led to numerous other animated features such

as Pinocchio, Fantasia, Bambi, Cinderella, Peter Pan, and Dumbo

Fueled by imagination, the empire continued to grow The opening of Disneyland in 1955 signaled a new era in development for the Disney name, which has become synonymous with family entertainment worldwide Sixty years later, among The Walt Disney Company’s assets are sole ownership or interests in 5 vacation resorts, 11 theme parks, 2 water parks, 39 hotels, 8 motion picture studios, 6 record labels, and 11 cable television networks (including ESPN and ABC) The company also sells billions of dollars of branded merchandise through its retail, online, and wholesale distribution channels (Disney Stores and DisneyStore.com) As shown in The

Martin Beddall/Alamy

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Services revenue Products revenue Total revenues Cost of services (exclusive of depreciation and amortization) Cost of products (exclusive of depreciation and amortization) Selling, general, administrative, and other

Depreciation and amortization Total costs and expenses Income from operations Other income (expense), net Income before income taxes Income taxes

Net income Less: Net income attributable to noncontrolling interests Net income attributable to The Walt Disney Company (Disney)

12 Months Ended Sep 27, 2014 Sep 28, 2013

$ 40,246 8,567 $ 37,280

The terms revenue and net income may be unfamiliar to you now, but after you read this chapter,

you’ll be able to use these and other business terms Welcome to the world of accounting! ●

Most chapters of this book begin with an actual financial statement In

Chapters 1–3, our reference is the Consolidated Financial Statements of The Walt Disney Company, for the two years ended September 27, 2014, and September 28, 2013 The core of financial accounting revolves around these basic financial statements:

■ Income statement (sometimes known as the statement of operations)

■ Statement of retained earnings (usually included in the statement of stockholders’ equity)

■ Balance sheet (sometimes known as the statement of financial position)

■ Statement of cash flows

Financial statements are the business documents that companies use to report the results of their activities to various user groups, which can include managers, investors, creditors, and regulatory agencies In turn, these parties use the reported information to make a variety of decisions, such as whether to invest in or loan money to the company To learn accounting, you must learn to focus on decisions

In this chapter, we explain generally accepted accounting principles, their underlying assumptions and concepts, and the bodies responsible for issuing accounting standards We discuss the judgment process that is necessary for making good accounting decisions We also discuss the contents of the four basic financial statements that report the results of those decisions In later

chapters, we will explain in more detail how to construct the financial

state-ments, as well as how user groups typically use the information contained in

them to make business decisions

1 Explain why accounting is the language of business

2 Explain and apply underlying accounting concepts,

assumptions, and principles

3 Apply the accounting equation to business

organizations

4 Evaluate business operations through the financial

statements

5 Construct financial statements and analyze the

relationships among them

6 Evaluate business decisions ethically

Learning Objectives

The Walt Disney Company’s managers make lots of decisions What new ideas will bring about a new feature film? How can those ideas be incorporated into new features in the com-

pany’s theme parks? Should the company acquire another television network or sell a radio

net-work? Which character dolls are the hottest sellers—Mickey, Pluto, Donald, or Elsa from Frozen?

Which theme parks are most and least profitable? Accounting information helps companies make

these decisions

Take a look at The Walt Disney Company’s Consolidated Statements of Income on page 2

Focus on Net income attributable to The Walt Disney Company (line 17) Net income (profit) is the

excess of revenues (net sales) over expenses You can see that The Walt Disney Company earned

$7,501 million of net income in the year ended September 27, 2014 That’s good news because it

means that The Walt Disney Company had $7.5 billion more revenues than expenses for the year

The Walt Disney Company’s Consolidated Statements of Income present more interesting news Total revenue (line 5) increased by about 8.4% during the period compared with the previ-

ous year (from $45,041 million to $48,813 million) Furthermore, net income attributable to The

Walt Disney Company increased by 22.2% (from $6,136 million to $7,501 million)

Suppose you have $10,000 to invest What information would you need before deciding to invest that money in stock of The Walt Disney Company? Let’s see how accounting works

You can access the most current annual report of The Walt Disney pany in Excel® format at http://www.sec.gov Using the “filings” link

Com-on the toolbar at the top of the home page, select “Company filings search.” This will take you to the “EDgAR Company filings” page Type “Walt Disney” in the company name box, and select “search.” This will produce the “EDgAR search Results” page showing the com-pany name Click on the “CiK” link beside the company name This will pull up a list of the reports the company has filed with the securities and Exchange Commission (sEC) Under the

“filing Type” box, type “10-K,” and click the “search” box form 10-K is the sEC form for the company’s annual report find the year that you wish to view Click on the “interactive Data” box, which takes you to the “View filing Data” page find and click on the “View Excel Document” link at the top of this page, and download the Excel file containing the selected 10-K report Alternatively, you can click the listed section of the 10-K you would like to open

Explain Why accounting is thE languagE

of BusinEss

Accounting is an information system It measures business activities, processes data into reports,

and communicates results to decision makers Accounting is “the language of business.” The ter you understand the language, the better you can manage your finances, as well as those of your business

bet-Accounting produces financial statements, which report information about a business The financial statements measure performance and communicate where a business stands in financial terms In this chapter, as well as Chapters 2 and 3, we focus on The Walt Disney Company After completing this chapter, you’ll begin to understand the nature of financial statements and the relationships between them By the end of Chapter 3, you’ll understand the process by which a

company’s financial statements are prepared, called the accounting cycle.

Don’t confuse bookkeeping and accounting Bookkeeping is a mechanical part of accounting, just as arithmetic is a part of mathematics Exhibit 1-1 below illustrates the flow of accounting information and helps illustrate accounting’s role in business The accounting process begins and ends with people making decisions

Who Uses Accounting Information?

Decision makers use many types of information; a banker needs information to decide who gets

a loan or The Walt Disney Company uses accounting information, along with designs and plans from its “imagineers” (designers and engineers) to decide the size and location of a new theme park attraction Let’s see how decision makers use accounting information

■ Individuals People like you manage their personal bank accounts, decide whether to rent

an apartment or buy a house, and budget the monthly income and expenditures of their businesses Accounting provides the necessary information to allow individuals to make these decisions

■ Investors and creditors Investors and creditors provide the money to finance The Walt

Disney Company Investors want to know how much income they can expect to earn on an investment Creditors want to know when and how The Walt Disney Company is going to pay them back These decisions also require accounting information

■ Regulatory bodies All kinds of regulatory bodies use accounting information For

exam-ple, the Internal Revenue Service (IRS) and various state and local governments require businesses, individuals, and other types of organizations to pay income, property, excise,

1 Explain why

accounting is the

language of business

Exhibit 1-1|The Flow of Accounting Information

3 Companies report their results.

1 People make decisions 2 Business transactions occur.

and other taxes The SEC requires companies with publicly-traded stock to provide it with many kinds of periodic financial reports All of these reports contain accounting information.

■ Nonprofit organizations Nonprofit organizations—churches, hospitals, and charities such

as Habitat for Humanity and the Red Cross—base many of their operating decisions on accounting data In addition, these organizations have to file periodic reports of their activi-ties with the IRS and state governments, even though they may owe no taxes

Two Kinds of Accounting: Financial Accounting and

Management Accounting

Both external and internal users of accounting information exist We can therefore classify

ac-counting into two branches

Financial accounting provides information for decision makers outside the entity, such as

investors, creditors, government agencies, and the public This information must be relevant for

the needs of decision makers and must faithfully give an accurate picture of the entity’s economic

activities This textbook focuses on financial accounting

Management accounting provides information for managers of The Walt Disney Company

Examples of management accounting information include budgets, forecasts, and projections

that are used in making the strategic decisions of the entity Internal information must still be

ac-curate and relevant for the decision needs of managers Management accounting is covered in a

separate course that usually follows this one

Exhibit 1-2|The Various Forms of Business Organization

Partnership

Partners—two or more owners General partners are personally liable;

limited partners are not

business's debts

Corporation

Stockholders—generally many owners Stockholders are

not personally

liable

LLC

Members Members are

not personally

liable

Proprietorship A proprietorship has a single owner, called the proprietor Walt Disney started

his work as a sole-proprietor animator working out of his home Proprietorships tend to be small

retail stores or solo providers of professional services—physicians, attorneys, artists, or

accoun-tants Legally, the business is the proprietor, and the proprietor is personally liable for all the

busi-ness’s debts But for accounting purposes, a proprietorship is a distinct entity, separate from its

proprietor Thus, the business records should not include the proprietor’s personal finances

Partnership A partnership has two or more parties as co-owners, and each owner is a

partner Individuals, corporations, partnerships, or other types of entities can be partners come and losses of the partnership “flow through” to the partners, and they recognize them based on their agreed-upon percentage interest in the business The partnership is not a tax-paying entity Instead, each partner takes a proportionate share of the entity’s taxable income and pays tax according to that partner’s individual or corporate rate Many retail establish-ments, professional service firms (law, accounting, etc.), real estate, and oil and gas explora-tion companies operate as partnerships Many partnerships are small or medium-sized, but some are gigantic, with thousands of partners Partnerships are governed by agreement, usu-ally spelled out in writing in the form of a contract between the partners General partnerships have mutual agency and unlimited liability, meaning that each partner may conduct business

In-in the name of the entity and can make agreements that legally bIn-ind all partners without limit for the partnership’s debts Partnerships are therefore quite risky because an irresponsible partner can create large debts for the other general partners without their knowledge or per-mission This feature of general partnerships has spawned the creation of limited-liability partnerships (LLPs)

A limited-liability partnership is one in which a wayward partner cannot create a large

liability for the other partners In LLPs, each partner is liable for partnership debts only up to the extent of his or her investment in the partnership Each LLP, however, must have one gen-eral partner with unlimited liability for all partnership debts

Limited-Liability Company A limited-liability company (LLC) is one in which the

busi-ness (and not the owner) is liable for the company’s debts An LLC may have one owner or many

owners, called members Unlike a proprietorship or a general partnership, the members of an LLC do not have unlimited liability for the LLC’s debts An LLC pays no business income tax

Instead, the LLC’s income “flows through” to the members, and they pay income tax at their own tax rates, just as they would if they were partners Today, many multiple-owner businesses are organized as LLCs, because members of an LLC effectively enjoy limited liability while still be-ing taxed like members of a partnership

Corporation A corporation is a business owned by the stockholders, or shareholders, who

own stock representing shares of ownership in the corporation One of the major advantages of

doing business in the corporate form is the ability to raise large sums of capital from the ance of stock to the public All types of entities (individuals, partnerships, corporations, or other types) may be shareholders in a corporation Even though proprietorships and partnerships are more numerous, corporations transact much more business and are larger in terms of assets, income, and number of employees Most well-known companies, such as The Walt Disney Company, Amazon.com, Inc., Google, Inc., General Motors Company, Toyota Motor Corpora-

issu-tion, and Apple Inc., are corporations Their full names include Corporation or Incorporated (abbreviated as Corp and Inc.) to indicate that they are corporations—for example, Starbucks Corporation A few bear the name Company, such as Ford Motor Company or The Walt Disney

Company

A corporation is formed under state law Unlike proprietorships and partnerships, a tion is legally distinct from its owners The corporation is like an artificial person and possesses many of the same rights that a person has The stockholders have no personal obligation for the corporation’s debts So, stockholders of a corporation have limited liability, as do limited partners and members of an LLC However, unlike partnerships or LLCs, a corporation pays a business income tax as well as many other types of taxes Furthermore, the shareholders of a corporation are effectively taxed twice on distributions received from the corporation (called dividends)

corpora-Thus, one of the major disadvantages of the corporate form of business is double taxation of

distributed profits.

Ultimate control of a corporation rests with the stockholders, who generally get one vote for

each share of stock they own Stockholders elect the board of directors, which sets policy and

appoints officers The board elects a chairperson, who holds the most power in the corporation and often carries the title chief executive officer (CEO); it also appoints the president as chief operating officer (COO) Corporations have vice presidents in charge of sales, accounting, fi-nance (the chief financial officer or CFO), and other key areas

Explain and apply undErlying accounting

concEpts, assumptions, and principlEs

Accountants follow professional frameworks for measurement and disclosure of financial

infor-mation The most common of these frameworks is called generally accepted accounting

prin-ciples (GAAP) In the United States, the Financial Accounting Standards Board (FASB)

formulates GAAP The International Accounting Standards Board (IASB) sets global—or

international—financial reporting standards (IFRS), as discussed later in this section

Exhibit 1-3 gives an overview of the joint conceptual framework of accounting developed by the FASB and the IASB Financial reporting standards (whether U.S or international), at the bot-

tom, follow this conceptual framework The overall objective of accounting is to provide

finan-cial information about the reporting entity that is useful to existing and potential investors,

lenders, and other creditors in making decisions about providing resources to the entity

To be useful, information must have the fundamental qualitative characteristics, which include

■ relevance, and

■ faithful representation

To be relevant, information must be capable of making a difference to the decision maker, in

helping them to predict or confirm value In addition, the information must be material, which

means it must be important enough to the informed user so that, if it were omitted or incorrect, it

would make a difference in the user’s decision Only information that is material needs to be

separately disclosed (listed or discussed) in the financial statements If not material, it does not

need separate disclosure but may be combined with other information To make a faithful

representation, the information must be complete, neutral (free from bias), and free from error

(accurate) Accounting information must focus on the economic substance of a transaction, event,

or circumstance, which may or may not always be the same as its legal form Faithful

representa-tion makes the informarepresenta-tion reliable to users.

2 Explain and apply underlying

accounting concepts, assumptions, and principles

Exhibit 1-3|Conceptual Foundation of Accounting

Financial Reporting Standards

Accounting’s Objective

Fundamental Qualitative Characteristics

Enhancing Qualitative Characteristics

Constraints

Timeliness

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.

Relevance (Includes materiality)

Verifiability

Faithful representation

Understandability Comparability

Cost

Based on Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), Joint Conceptual

Framework for Reporting (2010).

Accounting information must also have a number of enhancing or supplementary qualitative

characteristics These include

■ comparability,

■ verifiability,

■ timeliness, and

■ understandability

Comparability means that the accounting information for a company must be prepared in

such a way as to be capable of being compared with information from other companies in the

same period; it should also be consistent with similar information for that company in previous periods Verifiability means that the information must be capable of being checked for accuracy, completeness, and reliability The process of verifying information is often done by internal as well as external auditors Verifiability enhances the reliability of information and thus makes the information more representative of economic reality Timeliness means that the information must

be made available to users early enough to help them make decisions, thus making the

informa-tion more relevant to their needs Understandability means the informainforma-tion must be sufficiently

transparent so that it makes sense to reasonably informed users of the information (investors, creditors, regulatory agencies, and managers)

Accounting information is costly to produce A primary constraint in the decision to disclose

accounting information is that the cost of disclosure should not exceed the expected benefits to

users The management of an entity is primarily responsible for preparing accounting tion Managers must exercise judgment in determining whether the information is necessary for

informa-a complete understinforma-anding of economic finforma-acts informa-and is not excessively costly to provide

This course will expose you to GAAP as well as to relevant IFRS We summarize GAAP in Appendix D and IFRS in Appendix E In the following section, we briefly summarize some of the basic assumptions and principles that underlie the application of these standards

The Entity Assumption

The most basic accounting assumption (underlying idea) is the entity, which is any organization

(or person) that stands apart as a separate economic unit Sharp boundaries are drawn around each entity so as not to confuse its affairs with those of others

Consider Robert A Iger, chairman and CEO of The Walt Disney Company Iger likely owns eral homes, automobiles, and other personal assets In addition, he may owe money on some personal loans All these assets and liabilities belong to Iger and have nothing to do with The Walt Disney Com-pany Likewise, The Walt Disney Company’s cash, computers, and inventories belong to the company and not to Iger Why? Because the entity assumption draws a sharp boundary around each entity; in this case, The Walt Disney Company is one entity, and Robert A Iger is a second, separate entity

sev-Let’s consider the various types of businesses that make up The Walt Disney Company The

company operates five types of businesses, called segments: media networks, parks and resorts,

studio entertainment, consumer products, and interactive media (games, online services) Top managers evaluate the results of the parks and resorts businesses separately from those of media networks If theme park revenues were falling, The Walt Disney Company should identify the reason But if revenue figures from all the businesses were combined in a single total, managers couldn’t tell how differently each business segment was performing To correct the problem, managers need accounting information for each business segment (entity) in the company They also need separate information for each geographic region (such as country) Thus, each type of business and each region keeps its own records in order to be evaluated separately

The Continuity (Going-Concern) Assumption

In measuring and reporting accounting information, we assume that the entity will continue to operate long enough to sell its inventories, convert any receivables to cash, use other existing assets (such as land, buildings, equipment, and supplies) for their intended purposes, and settle its obligations in the

normal course of business This is called the continuity (or going-concern) assumption.

Consider the alternative to the going-concern assumption: the quitting concern, or going out

of business assumption An entity that is not continuing would have to sell all of its assets in the

process In that case, the most relevant measure of the value of the assets would be their

liquidat-ing values (or the amount the company can receive for the assets when sold in order to go out of

business) But going out of business is the exception rather than the rule Therefore, the

continu-ity assumption says that a business should stay in business long enough to convert its inventories

and receivables to cash and pay off its obligations in the ordinary course of business, and to

continue this process of operating into the future

The Historical Cost Principle

The historical cost principle states that assets should be recorded at their actual cost, measured

on the date of purchase as the amount of cash paid plus the fair market value of all noncash

considerations (other assets, privileges, or rights) also given in exchange For example, suppose

The Walt Disney Company purchases a building for a new Disney Store The building’s current

owner is asking $6,000,000 for the building The management of The Walt Disney Company

believes the building is worth $5,850,000 and offers the present owner that amount Two real estate

professionals appraise the building at $6,100,000 The buyer and seller compromise and agree on

a price of $5,900,000 for the building The historical cost principle requires The Walt Disney

Com-pany to initially record the building at its actual cost of $5,900,000—not at $5,850,000, $6,000,000,

or $6,100,000, even though those amounts were what some people believed the building was

worth At the point of purchase, $5,900,000 is both the relevant amount for the building’s worth

and the amount that faithfully represents a reliable figure for the price the company paid for it.

The historical cost principle and the continuity assumption (discussed previously) also

maintain that The Walt Disney Company’s accounting records should continue to use historical

cost to value the asset for as long as the business holds it Why? Because cost is a verifiable

mea-sure that is relatively free from bias Suppose that The Walt Disney Company owns the building

for six years Real estate prices increase during this period As a result, at the end of the period,

the building can be sold for $6,500,000 Should The Walt Disney Company increase the carrying

value of the building on the company’s books to $6,500,000? No According to the historical cost

principle, the building remains on The Walt Disney Company’s books at its historical cost of

$5,900,000, less accumulated depreciation According to the continuity assumption, The Walt

Disney Company intends to stay in business and use the building, not to sell it, so its historical

cost is the most relevant and the most faithful representation of its carrying value It is also the

most easily verifiable (auditable) amount Should the company decide to sell the building later at

a price above or below its carrying value, it will record the cash received, remove the carrying

value of the building from the books, and record a gain or a loss for the difference at that time

Although the historical cost principle is used widely in the United States to value certain sets, accounting is moving in the direction of reporting more assets and liabilities at their fair

as-values Fair value is the amount that the business could sell the asset for, or the amount that the

business could pay to settle the liability The FASB has issued guidance for companies to report

many assets and liabilities at fair values.1 Moreover, in recent years, the FASB has agreed to

“harmonize” GAAP with IFRS IFRS generally allow for broader measurement of different types

of assets with fair values than GAAP, which may cause more assets to be revalued periodically to

fair market values We will discuss the trend toward globalization of accounting standards on the

next page, and we will illustrate it in later chapters throughout the book

The Stable-Monetary-Unit Assumption

In the United States, we record transactions in dollars because that is our medium of exchange

British accountants record transactions in pounds sterling, Japanese in yen, and some continental

Europeans in euros

1 In 2013, the American Institute of Certified Public Accountants (AICPA) adopted a separate “financial

re-porting framework for small and medium-sized entities” (FRF-SME) that avoids some of the complexities

of full-blown GAAP Many SMEs are owner managed and prepare financial statements mostly for the use

of their bankers, who do not require all of the complex disclosures of GAAP FRF-SME is less complicated

than GAAP, and, while it requires accrual accounting, it emphasizes use of historical cost more than fair

values for assets Most of the principles we employ in this text are applicable to both FRF-SMEs and GAAP

Accrual accounting is discussed in Chapter 3.

Unlike a liter or a mile, the value of a dollar changes over time A rise in the general price

level is called inflation During inflation, a dollar will purchase less food, less toothpaste, and

less of other goods and services When prices are stable—there is little inflation—a dollar’s chasing power is also stable

pur-Under the stable-monetary-unit assumption, accountants assume that the dollar’s

purchas-ing power is stable over time We ignore inflation, and this allows us to add and subtract dollar amounts as though the dollar over successive years has a consistent amount of purchasing power

This is important because businesses that report their financial information publicly usually port comparative financial information (that is, the current year along with one or more prior years) If we could not assume a stable monetary unit, assets and liabilities denominated in prior years’ dollars would have to be adjusted to current year price levels Inflation has been at very low levels in developed countries for several decades and is expected to remain so for the foresee-able future Thus, inflation adjustments to accounting information to make it comparable over time are not considered necessary

re-International Financial Reporting Standards We live in a global economy! Investors

in the United States can easily trade stocks on the Hong Kong, London, and Brussels stock exchanges over the Internet Each year, American companies such as Starbucks Corpora-tion, The Gap, Inc., McDonalds Corp., Microsoft Corp., and The Walt Disney Company conduct billions of dollars of business around the globe Conversely, foreign companies such as Nokia, Samsung, Toyota, and Nestlé conduct billions of dollars of business in the United States American companies have merged with foreign companies to create interna-tional conglomerates such as Pearson (the publisher of this textbook) and Anheuser-Busch InBev (producers of alcoholic beverages) No matter where your career starts, it is very likely that it will eventually take you into global markets

Until recently, one of the major challenges of conducting global business has been the fact that different countries have adopted different accounting standards for business trans-actions Historically, the major developed countries in the world (United States, United Kingdom, Japan, Germany, etc.) have all had their own versions of GAAP As investors seek to compare financial results across entities from different countries, they have had to restate and convert accounting data from one country to the next in order to make them comparable This takes time and can be expensive

The solution to this problem lies with the IASB, which has developed the International Financial Reporting Standards (IFRS) These standards are now being used by most coun-tries around the world For years, accountants in the United States did not pay much attention

to IFRS because our GAAP was considered to be the strongest single set of accounting dards in the world In addition, the application of GAAP for public companies in the United States is overseen carefully by the SEC, a body that at present has no global counterpart

stan-Nevertheless, in order to promote consistency in global financial reporting, the SEC

is studying whether and how to require all U.S public companies to adopt some version

of IFRS within the next decade The advantage to adopting a uniform set of high-quality global accounting standards is that financial statements from a U.S company (say, Her-shey Corporation in Pennsylvania) will be comparable to those of a foreign company (say, Nestlé in Switzerland) Using these standards, it will be easier for investors and business-people to evaluate information of various companies in the same industries from across the globe, and companies will have to prepare only one set of financial statements instead of multiple versions Thus, in the long run, a uniform set of high-quality global accounting standards should significantly reduce costs of doing business globally

Does this mean that the accounting information you are studying in this textbook will eventually become outdated? Fortunately, no For one thing, the vast majority of the introduc-tory material you learn from this textbook, including the underlying conceptual framework

outlined in this section, is already part of IFRS as well The most commonly used accounting

practices are essentially the same under both U.S GAAP and IFRS Additionally, the FASB is

working hand-in-hand with the IASB toward the convergence of standards, that is, gradually

GlobAl View

apply thE accounting Equation

to BusinEss organizations

The Walt Disney Company’s financial statements tell us how the business is performing and

where it stands But how do we arrive at the financial statements? Let’s examine the elements of

financial statements, which are the building blocks from which statements are made.

Assets and Liabilities

The financial statements are based on the accounting equation This equation presents the

re-sources of a company and the claims to those rere-sources

■ Assets are economic resources that are expected to produce a benefit in the future The

Walt Disney Company’s cash, receivables, inventory, attractions, buildings, and equipment are examples of assets

Claims on assets come from two sources:

■ Liabilities are “outsider claims.” They are debts that are payable to outsiders, called

credi-tors For example, a creditor who has loaned money to The Walt Disney Company has a

claim—a legal right—to a part of The Walt Disney Company’s assets until the company repays the debt

■ Owners’ equity (also called capital, equity, or stockholders’ equity for a corporation)

represents the “insider claims” of a business Equity means ownership, so The Walt Disney Company’s equity is the stockholders’ interest in the assets of the corporation

adjusting both sets of standards to more closely align them over time so that, if transition

to IFRS in the United States ever occurs, it will occur smoothly At the time of the tion of this text, there are still some areas of disagreement between U.S GAAP and IFRS

publica-For example, certain widely accepted U.S practices, such as the use of the last-in, first-out (LIFO) inventory costing method (discussed in Chapter 6), are disallowed under IFRS Other differences exist as well, which must be resolved before IFRS can be fully adopted in the United States

In general, the main difference between U.S GAAP and IFRS is that U.S GAAP has become rather “rules based” over its long history, while IFRS (not in existence as long) allows more professional judgment on the part of companies One other major difference between IFRS and U.S GAAP lies in the valuation of long-term assets (plant assets and intangibles) and liabilities In U.S GAAP, the historical cost principle tells us to value assets at historical cost

In contrast, IFRS prefers a more fair-value approach, which reports assets and liabilities on the balance sheet at their up-to-date values rather than at historical cost This may seem like a big difference, but U.S GAAP already allows for a partial fair-value approach with rules such as lower-of-cost-or-market, accounting for the impairment of long-term assets, and adjusting cer-tain investments to fair values We cover these concepts in more depth in later chapters

Throughout the remainder of this textbook, in chapters that cover concepts where major differences between U.S GAAP and IFRS exist, we will discuss those differences Because this is an introductory textbook in financial accounting, our discussion will be brief in order to focus on the differences that are relevant for this course Appendix E includes a table, cross-referenced by chapter, that summarizes all of these differences, as well as their impacts on financial statements once IFRS is fully adopted

You can expect to hear more about the global harmonization of accounting standards in the future When you do, the most important things to remember will be that these changes will be beneficial for financial statement users in the long run and that most of what you learned in this accounting course will still apply Remember that there are far more areas

of common ground than of disagreement Whatever may come, your knowledge of national accounting principles will benefit you in the future The globalization of the world economy provides a wonderful opportunity for you to succeed in the business world

inter-3 Apply the accounting

equation to business organizations

What are some of The Walt Disney Company’s assets? The first asset is cash and cash

equiv-alents, the liquid assets that are the medium of exchange Another important asset is merchandise

inventory (often called inventories)—the consumer products—that The Walt Disney Company’s

stores sell The Walt Disney Company also has assets in the form of parks, resorts, and

equip-ment, or fixed assets These are the long-lived assets the company uses to do business—theme

park attractions (rides), buildings, computers, and other equipment

The Walt Disney Company’s liabilities include a number of payables, such as accounts

payable and accrued liabilities The word payable always signifies a liability An account payable

is a liability for goods or services purchased on credit and supported by the credit standing of the

purchaser Accounts payable typically have to be paid within 30 to 60 days Long-term debt

(borrowings) is a liability that’s payable beyond one year from the date of the financial statements

The current portion of long-term debt (borrowings) is the amount due within the next year, and

it has to be disclosed separately in current liabilities

Owners’ Equity

The owners’ equity of any business is its assets minus its liabilities We can write the accounting equation to show that owners’ equity is what’s left over when we subtract liabilities from assets

Assets - Liabilities = Owners’ Equity

A corporation’s equity—called stockholders’ equity—has two main subparts:

■ Paid-in capital

■ Retained earningsThe accounting equation can be written as

Assets = Liabilities + Stockholders’ Equity Assets = Liabilities + Paid-in Capital + Retained Earnings

Exhibit 1-4|The Accounting Equation

The accounting equation shows the relationship among assets, liabilities, and owners’ equity

Assets appear on the left side and liabilities and owners’ equity on the right As Exhibit 1-4 shows, the two sides must be equal:

■ Paid-in capital is the amount the stockholders have invested in the corporation The basic component of paid-in capital is common stock, which the corporation issues to the stock-

holders as evidence of their ownership All corporations have common stock

■ Retained earnings is the amount earned by income-producing activities and kept for use

in the business Three major types of transactions affect retained earnings: revenues, penses, and dividends

ex-■ Revenues are inflows of resources that increase retained earnings by delivering goods or

services to customers For example, sales of admissions to theme parks brings in revenue and increases The Walt Disney Company’s retained earnings

■ Expenses are resource outflows that decrease retained earnings due to operations For

ex-ample, the wages that The Walt Disney Company pays employees are an expense and crease retained earnings Expenses represent the costs of doing business; they are the opposite of revenues Expenses include cost of services or products sold, building rent, salaries, and utility payments Expenses also include the depreciation of attractions and buildings held as fixed assets, and other equipment

de-■ Dividends decrease retained earnings, because they are distributions to stockholders of

assets (usually cash) generated by operating activities A successful business may pay

dividends to shareholders as a return on their investments Remember: dividends are not

expenses Dividends never affect net income Instead of being subtracted from revenues to compute net income, dividends are recorded as direct reductions of retained earnings.

Businesses strive for profits, the excess of revenues over expenses.

■ When total revenues exceed total expenses, the result is called net income, net earnings,

or net profit.

■ When total expenses exceed total revenues, the result is a net loss.

■ Net income or net loss is the “bottom line” on an income statement The Walt Disney Company’s bottom line reports net income attributable to The Walt Disney Company for the year ended September 27, 2014, of $7,501 million (line 17 on the Consolidated Statements of Income on page 15)

Exhibit 1-5 shows the relationships among the following:

■ Retained earnings

■ Revenues 2 Expenses 5 Net income (or net loss)

■ Dividends

Revenues for the period

Dividends for the period

Net Income (or Net Loss) for the period

Beginning Balance of Retained Earnings

Ending Balance of Retained Earnings

Expenses for the period

plus or minus

The owners’ equity of proprietorships and partnerships is different from that of corporations

Proprietorships and partnerships don’t identify paid-in capital and retained earnings separately

Instead, they use a single heading: Capital Examples include “Randall Waller, Capital” (for a proprietorship) and “Powers, Capital” and “Salazar, Capital” (for a partnership)

state-Question Financial Statement Answer

1 How well did the company perform during the year?

2 Why did the company’s retained earnings change during the year?

3 What is the company’s financial position at fiscal year end?

4 How much cash did the company generate

Income statement (also called the Statement of operations) Statement of retained earnings

Balance sheet (also called the Statement

of financial position) Statement of cash flows and spend during

the year?

Revenues

- Expenses Net income (or Net loss) Beginning retained earnings + Net income (or - Net loss)

- Dividends declared Ending retained earnings Assets = Liabilities + Owners’

Equity

Net Operating cash flows

; Net Investing cash flows

; Net Financing cash flows Increase (decrease) in cash

Exhibit 1-6|Information Reported in the Financial Statements

(1) If the assets of a business are $480,000 and the liabilities are $160,000, how

much is the owners’ equity?

(2) If the owners’ equity in a business is $160,000 and the liabilities are $100,000,

how much are the assets?

(3) A company reported monthly revenues of $365,000 and monthly expenses of

$225,000 What is the result of operations for the month?

(4) If the beginning balance of retained earnings is $180,000, revenue is $85,000,

expenses total $35,000, and the company declares and pays a $20,000 dividend, what is the ending balance of retained earnings?

Answers:

(1) $320,000 ($480,000 2 $160,000) (2) $260,000 ($160,000 1 $100,000) (3) Net income of $140,000 ($365,000 2 $225,000); revenues minus expenses (4) $210,000 [$180,000 beginning balance 1 net income $50,000 ($85,000 2 $35,000)

2 dividends $20,000]

Try It

To learn how to use financial statements, let’s work through The Walt Disney Company’s nancial statements for the year ended September 27, 2014 The following diagram shows how the

fi-data flow from one financial statement to the next The order is important

Balance Sheet

Statement of Retained Earnings

Income Statement Statement ofCash Flows

We begin with the income statement in Exhibit 1-7

The Income Statement Measures Operating Performance

The income statement, or statement of operations, reports revenues and expenses for the

pe-riod The bottom line is net income or net loss for the pepe-riod At the top of Exhibit 1-7 is the

company’s name: The Walt Disney Company On the second line is the term “Consolidated

State-ments of Income.”

The Walt Disney Company is actually made up of several corporations that are owned by a common group of shareholders Commonly controlled corporations like this are required to com-

bine, or consolidate, all of their revenues, expenses, assets, liabilities, and stockholders’ equity

and to report them all as one

The dates of The Walt Disney Company’s Consolidated Statements of Income are 12 months ended September 27, 2014, and 12 months ended September 28, 2013 The Walt Disney Com-

pany, like many retailers, uses a fiscal year consisting of the 52 weeks ending closest to

Septem-ber 30 as the accounting year This is because the summer vacation season is the busiest time of

the year for the company, while September is typically a slower month, allowing the company

time to get its books in order Companies often adopt a fiscal year that ends at the low point of

their operations Whole Foods Market, Inc., uses a fiscal year consisting of the 52 weeks ending

closest to September 30 FedEx Corp.’s fiscal year-end falls on May 31 Alternatively, about 60%

of the largest companies, such as Amazon.com, Inc., use a fiscal year corresponding to the

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Services revenue Products revenue Total revenues Cost of services (exclusive of depreciation and amortization) Cost of products (exclusive of depreciation and amortization) Selling, general, administrative, and other

Depreciation and amortization Total costs and expenses Income from operations Other income (expense), net Income before income taxes Income taxes

Net income Less: Net income attributable to noncontrolling interests Net income attributable to The Walt Disney Company (Disney)

12 Months Ended Fiscal 2014 Sep 27, 2014 Sep 28, 2013

$ 40,246 8,567 $ 37,280