Mark D. Beck, Beck Publishing Services
David M. Cottrell, Brigham Young University
Robert Derstine, Villanova University
James M. Emig, Villanova University
Linda Fischler, Nassau Community College
Barbara Gregorio, Nassau Community College Christine A. Jonick, Gainesville
State College
Ann E. Martel, Marquette University
Ken Martin, Martinique Development Services Jane Y. Stoneback, Central
Connecticut State University Janice A. Stoudemire, Midlands
Technical College
Gail B. Wright, Bryant University
with businesses, you will inevitably encounter accounting. Your ability to interpret and understand accounting will be a critical element in determining your ability to be successful and achieve your life-long goals.
Even now, accounting is all around you. You are probably already familiar with simple elements of accounting, such as your checkbook, credit card statement, and bank statement. Using accounting systems, individuals and businesses are able to measure how much money they have and how that money has changed over time. In fact, learning about business and accounting is fascinating. Thus, we believe the study of accounting should be fun.
With the objective of making your study of accounting exciting and fun, we have written this text with you in mind. We have designed the text by building a solid foun- dation of basic concepts before moving into more complex topics. Our foundation is what we term the “Integrated Financial Statement Framework.” This framework is used throughout the text and is designed to help you understand the world of accounting in a new and innovative way. The framework is our strategy for linking the elements of accounting together so that you can more easily understand how accounting works, how it is used in business, and how it can be used to help you both in this course and in your future business experiences.
We wish you the best of success with this course and your future endeavors.
Jon Duchac Jim Reeve Carl Warren
Jonathan E. Duchac
Jonathan Duchac is the Merrill Lynch and Co. Associate Professor of Accounting Policy and Director of the Program in Enterprise Risk Management at Wake Forest University.
He earned his Ph.D. in accounting from the University of Georgia, and currently teaches introductory and advanced courses in financial accounting. Dr. Duchac has received a number of awards during his career, including the Wake Forest Graduate Accounting Student Teaching Award, the T.B. Rose award for Instructional Innovation, and the University of Georgia Outstanding Teaching Assistant Award.
In addition to his teaching responsibilities, Dr. Duchac serves as Accounting Advisor to Merrill Lynch Equity Research, where he works with research analysts in reviewing and evaluating the financial reporting prac- tices of public companies. He has testified before the U.S. House of Representatives, the Financial Accounting Standards Board, and the Securities and Exchange Commission; and has worked with a number of major public companies on financial reporting and accounting policy issues.
In addition to his professional interests, Dr. Duchac is the Treasurer and Director of the Finance Committee for The Special Children’s School of Winston- Salem; a private, nonprofit developmental day school located in Winston- Salem, North Carolina, serving children with and without special needs.
Dr. Duchac is an avid long-distance runner, mountain biker, and snow skier. His recent events include the Grandfather Mountain Marathon, the Black Mountain Marathon, the Shut-In Ridge Trail run, and NO MAAM (Nocturnal Overnight Mountain Bike Assault on Mount Mitchell).
James M. Reeve
Dr. James M. Reeve is the William and Sara Clark Professor of Accounting and Business at the University of Tennessee. Professor Reeve has been on the accounting faculty since 1980, after graduating with a Ph.D. from Oklahoma State University.
His teaching effort has focused on undergraduate accounting principles and graduate education in the Master of Accountancy and Senior Executive MBA programs. Beyond this, Jim is also very active in the Supply Chain Certification program, which is a major executive education and research effort of the College. His research interests are varied and include work in managerial accounting, supply chain management, lean manufacturing, and information management. He has published over 40 articles in academic and professional journals, including the Journal of Cost Management, Journal of Management Accounting Research, Accounting Review, Management Accounting Quarterly,Supply Chain Management Review, and Accounting Horizons. In addi- tion to his research, Jim is also a co-author on six textbooks, including Thomson’s market-leading introductory textbook, Accounting. He has con- sulted or provided training around the world for a wide variety of organiza- tions, including, Boeing, Procter and Gamble, Norfolk Southern, Hershey Foods, Coca-Cola, and Sony. When not writing books, Jim plays golf and is involved in faith-based activities.
About the Authors
Carl S. Warren
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. For over twenty-five years, Professor Warren taught all levels of accounting classes. In recent years, Professor Warren focused his teaching efforts on principles of accounting and auditing courses. Professor Warren has taught classes at the University of Iowa, Michigan State University University of Chicago, and the University of Georgia. Professor Warren re- ceived his doctorate degree (Ph.D.) from Michigan State University and his undergraduate (B.B.A) and masters (M.A.) degrees from the University of Iowa. During his career, Professor Warren published numerous articles in professional journals, including The Accounting Review, Journal of Accounting Research, Journal of Accountancy, The CPA Journal, and Auditing: A Journal of Practice & Theory.Professor Warren’s outside interests include writing short stories and novels, oil painting, handball, golf, skiing, backpacking, and fly- fishing.
To my wife, Kristen, and my parents.
JD
To my wife, Susan, my sons, Josh and Chase, and my daughter, Reneé, with love.
JR
To Jack Whipple, my first accounting instructor;
To Philip Fess, my first co-author, mentor, and friend;
To Sharon, my wife, friend, and life-long partner;
To Stephanie and Jeffrey, our children, who make it all worthwhile.
CW
Financial Accounting
An Integrated Statements Approach
1 The Role of Accounting in Business
Learning Goals
Describe the types and forms of businesses, how busi- nesses make money, and business stakeholders.
Describe the three business activities of financing, invest- ing, and operating.
Define accounting and describe its role in business.
Describe and illustrate the basic financial statements and how they interrelate.
Describe eight accounting concepts underlying financial reporting.
Describe and illustrate how horizontal analysis can be used to analyze and evaluate a company’s
performance.
1 2 3 4
5 6
When two teams pair up for a game of football, there is often a lot of noise. The band plays, the fans cheer, and fireworks light up the score- board. Obviously, the fans are committed and care about the outcome of the game. Just like fans at a football game, the owners of a busi- ness want their business to “win” against their competitors in the marketplace. While having our football team win can be a source of pride, winning in the marketplace goes beyond pride and has many tangible benefits. Companies that are winners are better able to serve customers, provide good jobs for employees, and make more money for the owners.
An example of such a successful company is the Hershey Foods Corporation, founded by Milton Hershey in the early 1900s. Hershey Foods Corporation is America’s leading choco- late manufacturer, producing more than a billion pounds of chocolate products each year.
In addition to Hershey chocolate bars, the company sells candy under such brands as Reese’s, Twizzlers®, York®, Almond Joy®, and Kit Kat®.
The success of Hershey Foods brought wealth to the Hershey family. So what did Milton and his wife do with their wealth? First, they built a model town that included com- fortable homes and an inexpensive public transportation system for their employees.
Although Milton and his wife, Catherine, had no children of their own, they established a school for orphan boys. Following Catherine’s premature death in 1918, Milton endowed the school with his stock in the Hershey Chocolate Company. Today, the 10,000-acre school nur- tures over 1,300 financially needy boys and girls
in grades K-12. Through the Hershey Trust Company, the school controls 78% of the vot- ing shares of Hershey Foods Corporation. Thus, when Hershey Foods wins, so does the Hershey School.
As we begin our study of accounting in this chapter, we will first discuss the nature, types, and activities of businesses, such as Hershey’s.
In doing so, we describe business stakeholders, such as the owners, customers, and employees.
We conclude the chapter by discussing the role of accounting in business, including financial statements, basic accounting concepts, and how to use financial statements to evaluate a busi- ness’s performance.
© BERIT MYREKROK/DIGITAL VISION/GETTY IMAGES