Fundamental Accocoununtitingng PrPrininciciplpleses Ac John J. Wild University of Wisconsin at Madison
Ken W. Shaw University of Missouri at Columbia
Barbara Chiappetta Nassau Community College
20
th
edition
To my students and family, especially Kimberly, Jonathan, Stephanie, and Trevor. To my wife Linda and children, Erin, Emily, and Jacob. To my mother, husband Bob, and sons Michael and David.
FUNDAMENTAL ACCOUNTING PRINCIPLES Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2011, 2009, 2007, 2005, 2002, 1999, 1996, 1993, 1990, 1987, 1984, 1981, 1978, 1975, 1972, 1969, 1966, 1963, 1959, 1955 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 0
ISBN-13: ISBN-10: ISBN-13: ISBN-10: ISBN-13: ISBN-10: ISBN-13: ISBN-10: ISBN-13: ISBN-10: ISBN-13: ISBN-10:
978-0-07-811087-0 (combined (combined edition) 0-07-811087-4 (combined (combined edition) 978-0-07-733825-1 (volume (volume 1, chapters 1-12) 0-07-733825-1 (volume (volume 1, chapters 1-12) 978-0-07-733824-4 (volume (volume 2, chapters 12-25) 0-07-733824-3 (volume (volume 2, chapters 12-25) 978-0-07-733826-8 (with working papers papers volume 1, chapters 1-12) 0-07-733826-X (with working papers volume volume 1, chapters 1-12) 978-0-07-733827-5 (with working papers papers volume 2, chapters 12-25) 0-07-733827-8 (with working papers volume volume 2, chapters 12-25) 978-0-07-733823-7 (principles, (principles, chapters 1-17) 0-07-733823-5 (principles, chapters 1-17)
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Library of Congress Cataloging-in-Publication Data Wild, John J. Fundamental accounting principles / John J. Wild, Ken W. Shaw, Barbara Chiappetta.—20th Chiappetta.—20t h ed. p. cm. Includes index. ISBN-13: 978-0-07-811087-0 978-0-07-811087-0 (combined edition : alk. paper) ISBN-10: 0-07-811087-4 0-07-811087-4 (combined edition : alk. paper) ISBN-13: 978-0-07-733825-1 978-0-07-733825-1 (volume (volume 1 ch. 1-12 : alk. paper) ISBN-10: 0-07-733825-1 (volume 1 ch. 1-12 : alk. paper) [etc.] 1. Accounting. I. Shaw, Ken Ken W. W. II. Chiappetta, Barbara. III. Title.
HF5636.W675 2011 657—dc22 2010026205 www.mhhe.com
Dear Colleagues/Friends, Accounting Principles , we thank each As we roll out the new edition of Fundamental Accounting
of you who provided suggestions to improve our textbook. As teachers, we know how important it is to select the right book for our course. This new edition reflects the advice and wisdom of many dedicated reviewers, symposium and workshop participants, students, and instructors. Our book consistently rates number one in customer loyalty because of you. Together, we have created the most readable, concise, current, accurate, and innovative accounting book available today. Throughout the writing process, we steered this book in the manner you directed. Reviewers, instructors, and students say this book’s enhanced presentation, graphics, and technology cater to different learning styles and helps students better understand accounting. Connect Accounting Plus offers new features to improve student learning and to assist instructor teaching and grading. Our iPod content lets students study on the go, while our Algorithmic Algorithmi c Test Bank provides provi des an infinite infi nite variety var iety of exam problems. You and your students will find all these tools easy to apply. We owe the success of this book to our colleagues who graciously took time to help us focus on the changing needs of today’s today’s instructors instructor s and students. We feel fortun fortunate ate to have witnessed our profession’s extraordinary extraordinar y devotion to teaching. teachi ng. Your feedback and suggestions are reflected in everything we write. Please accept our heartfelt thanks for your dedication in helping today’s students learn, understand, and appreciate accounting. With kindest regards,
John J. Wild
Ken W. Shaw
Barbara Chiappetta
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About the Authors JOHN J. WILD
is a distinguished professor of accounting at the University of Wisconsin at Madison. He previously held appointments at Michigan State University and the University of Manchester in England. He received his BBA, MS, and PhD from the University of Wisconsin. Professor Wild teaches accounting courses at both the undergraduate and graduate levels. He has received numerous teaching honors, including the Mabel W. Chipman Excellence-in-Teaching Award, the departmental Excellence-in-Teaching Award, and the Teaching Excellence Award from the 2003 and 2005 business graduates at the University of Wisconsin. He also received the Beta Alpha Psi and Roland F. Salmonson Excellence-in-Teaching Award from Michigan State University. Professor Wild has received several research honors and is a past KPMG Peat Marwick National Fellow and is a recipient of
KEN W. SHAW
is an associate professor of accounting and the Deloitte Professor at the University of Missouri. He previously was on the faculty at the University of Maryland at College Park. He received an accounting degree from Bradley University and an MBA and PhD from the University of Wisconsin. He is a Certified Public Accountant with work experience in public accounting. Professor Shaw teaches financial accounting at the undergraduate and graduate levels. He received the Williams-Keepers LLC Teaching Excellence award in 2007, was voted the “Most Influential Professor” by the 2005, 2006, and 2010 School of Accountancy graduating classes, and is a two-time recipient of the O’Brien Excellence in Teaching Award. He is the advisor to his School’s chapter of the Association of Certified Fraud Examiners.
BARBARA CHIAPPETTA
received her BBA in Accountancy and MS in Education from Hofstra University and is a tenured full professor at Nassau Community College. For the past two decades, she has been an active executive board member of the Teachers of Accounting at Two-Year Colleges (TACTYC), serving 10 years as vice president and as president from 1993 through 1999. As an active member of the American Accounting Association, she has served on the Northeast Regional Steering Committee, chaired the Curriculum Revision Committee of the Two-Year Section, and participated in numerous national committees. Professor Chiappetta has been inducted into the American
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fellowships from the American Accounting Association and the Ernst and Young Foundation. Professor Wild is an active member of the American Accounting Association and its sections. He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees. Professor Wild is author of Financial Accounting, Managerial Accounting, and College Accounting, each published by McGraw-Hill/Irwin. His research articles on accounting and analysis appear in The Accounting Review, Journal of Accounting Research, Journal of Accounting and Economics, Contemporary Accounting Research, Journal of Accounting, Auditing and Finance, Journal of Accounting and Public Policy, and other journals. He is past associate editor of Contemporary Accounting Research and has served on several editorial boards including The Accounting Review. In his leisure time, Professor Wild enjoys hiking, sports, travel, people, and spending time with family and friends.
Professor Shaw is an active member of the American Accounting Association and its sections. He has served on many committees of these organizations and presented his research papers at national and regional meetings. Professor Shaw’s research appears in The Accounting Review; Journal of Accounting Research; Contemporary Accounting Research; Journal of Financial and Quantitative Analysis; Journal of the American Taxation Association; Journal of Accounting, Auditing, and Finance; Journal of Financial Research; Research in Accounting Regulation; and other journals. He has served on the editorial boards of Issues in Accounting Education, the Journal of Business Research, and Research in Accounting Regulation. Professor Shaw is co-author of Financial and Managerial Accounting and College Accounting, both published by McGraw-Hill. In his leisure time, Professor Shaw enjoys tennis, cycling, music, and coaching his children’s sports teams.
Accounting Association Hall of Fame for the Northeast Region. She had also received the Nassau Community College dean of instruction’s Faculty Distinguished Achievement Award. Professor Chiappetta was honored with the State University of New York Chancellor’s Award for Teaching Excellence in 1997. As a confirmed believer in the benefits of the active learning pedagogy, Professor Chiappetta has authored Student Learning Tools, an active learning workbook for a first-year accounting course, published by McGrawHill/Irwin. In her leisure time, Professor Chiappetta enjoys tennis and participates on a U.S.T.A. team. She also enjoys the challenge of bridge. Her husband, Robert, is an entrepreneur in the leisure sport industry. She has two sons—Michael, a lawyer, specializing in intellectual property law in New York, and David, a composer, pursuing a career in music for film in Los Angeles.
Helping Students Achieve Peak Performance Fundamental Accounting Principles 20e Great performances result from pushing the limits through quality practices and reinforcing feedback to strengthen abilities and motivation. Assist your students in achieving their peak performance by giving them what they need to succeed in today's accounting principles course. Whether the goal is to become an accountant or a businessperson, or simply to be an informed consumer of accounting information, Fundamental Accounting Principles (FAP) has helped generations of students succeed by giving them support in the form of leading-edge accounting content that engages students, paired with state-of-the-art technology that elevates their understanding of key ac counting principles. With FAP on your side, you’ll be provided with engaging content in a motivating style to help students see the relevance of accounting. Students are motivated when reading materials that are clear and pertinent. FAP excels at engaging students. Its chapter-opening vignettes showcase dynamic, successful entrepreneurial individuals and companies guaranteed to interest and excite students . This edition’s featured companies— Research In Motion (maker of BlackBerry), Apple, Nokia, and Palm—captivate students with their products and annual reports, which
are a pathway for learning financial statements. Further, this book’s coverage of the accounting cycle fundamentals is widely praised for its clarity and effectiveness. FAP also delivers innovative technology to help student performance. Connect Accounting provides students with instant grading and feedback for assignments that are completed online. Connect Accounting Plus integrates an online version of the textbook with Connect Accounting . Our algorithmic test bank offers infinite variations of numerical test bank questions. The Self-Quiz and Study, Interactive Presentations, and LearnSmart all provide additional support to help reinforce concepts and keep students motivated. We’re confident you’ll agree that FAP will help your students achieve peak performance.
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accounting
Your Students' Connection to
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Student Resource Library: The Connect Accounting Student Study Center gives access to additional resources such as recorded lectures, online practice materials, an eBook, and more.
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Reach Peak Performance! Guided Examples: The Guided Examples in Connect Accounting provide a narrated, animated, step-by-step walk-through of select exercises similar to those assigned. These short presentations provide reinforcement when students need it most.
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Connect Accounting Connect Accounting offers a number of powerful tools and features to ma ke managing assignments easier, so faculty can spend more time teaching. With Connect Accounting , students can engage with their coursework anytime and anywhere, making the learning process more accessible and efficient. (Please see previous page for a description of the student tools available within Connect Accounting .)
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Tools for Instructors McGraw-Hill Connect Plus Accounting McGraw-Hill reinvents the textbook learning experience for the modern student with Connect Plus Accounting . A seamless integration of an eBook and Connect Accounting, Connect Plus Accounting provides all of the Connect Accounting features plus:
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How Can Text-Related Web Resources Enrich My Course? Online Learning Center (OLC)
We offer an Online Learning Center (OLC) that follows Fundamental Accounting Principles chapter by chapter. It doesn’t require any building or maintenance on your part. It’s ready to go the moment you and your students type in the URL: www.mhhe.com/wildFAP20e As students study and learn from Fundamental Accounting Principles , they can visit the Student Edition of the OLC Website to work with a multitude of helpful tools: • • • •
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Online Course Management No matter what online course management system you use (WebCT, BlackBoard, or eCollege), we have a course content ePack available for FAP 20e. Our new ePacks are specifically designed to make it easy for students to navigate and access content online. They are easier than ever to install on the latest version of the course management system available today.
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How Students Can Study On the Go Using Their iPods iPod Content Harness the power of one of the most popular technology tools students use today—the Apple iPod. Our innovative approach allows students to download audio and video presentations right into their iPod and take learning materials with them wherever they go. Students just need to visit the Online Learning Center at www.mhhe.com/wildFAP20e to download our iPod content. For each chapter of the book they will be able to download audio narrated lecture presentations for use on various versions of iPods. iPod Touch users can even access self-quizzes. It makes review and study time as easy as putting on headphones.
How Can McGraw-Hill Help Teach My Course Online? Improve Student Learning Outcomes and Save Instructor Time with ALEKS® ALEKS is an assessment and learning program that provides individualized instruction in accounting. Available online in partnership with McGraw-Hill/Irwin, ALEKS interacts with students much like a skilled human tutor, with the ability to assess precisely a student’s knowledge and provide instruction on the exact topics the s tudent is most ready to learn. By providing topics to meet individual students’ needs, allowing students to move between explanation and practice, correcting and analyzing errors, and defining terms, ALEKS helps students to master course content quickly and easily. ALEKS also includes an Instructor Module with powerful, assignmentdriven features and extensive content flexibility. The complimentary Instructor Module provides a course calendar, a customizable gradebook with automatically graded homework, textbook integration, and dynamic reports to monitor student and class progress. ALEKS simplifies course management and allows instructors to spend less time with administrative tasks and more time directing student learning. To learn more about ALEKS, visit www.aleks.com/highered/business. ALEKS is a registered trademark of ALEKS Corporation. xi
Innovative Textbook Features Using Accounting for Decisions
Decision Insight Decision Insight
Whether we prepare, analyze, or apply accounting information, one skill remains essential: decision-making. To help develop good decision-making habits and to illustrate the relevance of accounting, our book uses a unique pedagogical framework we call the Decision Center. This framework is comprised of a variety of approaches and subject areas, giving students insight into every aspect of business decision-making; see three examples to the right and one below. Answers to Decision Maker and Ethics boxes are at the end of each chapter.
Revenue Spread The New Orleans Saints have Unearned Revenues of about $60 million in advance ticket sales. When the team plays its home games, it settles this liability to its ti cket holders and then transfers the amount earned to Ticket Revenues . ■
Decision Ethics
Answer — p. 206
Credit Manager As a new credit manager, you are being trained by the outgoing manager. She explains that the system prepares checks for amounts net of favorable cash discounts, and the checks are dated the last day of the discount period. She also tells you that checks are not mailed until five days later, adding that “the company gets free use of cash for an extra five days, and our department looks better. When a supplier complains, we blame the comput er system and the mailroom.” Do you continue this payment poli cy? ■
Decision Analysis
Inventory Turnover and Days’ Sales in Inventory
InventoryTurnover Earlier chapters described two important ratios useful in evaluating a company’s short-term liquidity: current ratio and acid-test ratio. A merchandiser’s ability to pay its short-term obligations also depends on how quickly it sells its merchandise inventory. Inventory turnover, also called merchandise inventory turnover, is one ratio used to assess this and is defined in Exhibit 6.13.
Inventory turnover
Decision Maker
Assess inventory management using both inventory turnover and days’ sales in inventory.
Inventory Turnover
Average inventory
CAP Model
Learning Objectives
CAP CONCEPTUAL
C1
ANALYTICAL
Explain the importance of periodic reporting and the time period assumption. (p. 94)
PROCEDURAL
Explain how accounting adjustments
A1 link to financial statements. (p. 105)
P1
Prepare and explain adjusting
Compute profit margin and describe
P2
Explain and prepare an adjusted trial
P3
Prepare financial statements from an
P4
Appendix 3A—Explain the alternatives
C2
Explain accrual accounting and how it
A2 its use in analyzing company
improves financial statements. (p. 95)
performance. (p. 109)
C3
Identify the types of adjustments and their purpose. (p. 96)
entries. (p. 97)
balance. (p. 106)
adjusted trial balance. (p. 106)
in accounting for prepaids. (p. 113)
LP3
This section discusses differences between U.S. GAAP and IFRS in the items and costs making up merchandise inventory, in the methods to assign costs to inventory, and in the methods to estimate inventory values. Items and Costs Making Up Inventory Both U.S. GAAP and IFRS include broad and similar guidance for the items and costs making up merchandise inventory. Specifically, under both accounting systems, merchandise inventory includes all items that a company owns and holds for sale. Further, merchandise inventory includes costs of expenditures necessary, directly or indirectly, to bring those items to a salable condition and location. Assigning Costs to Inventory Both U.S. GAAP and IFRS allow companies to use specific identification in assigning costs to inventory. Further, both systems allow companies to apply a cost flow assumption . The usual cost flow assumptions are: FIFO, Weighted Average, and LIFO. However, IFRS does not (currently) allow use of LIFO. As the convergence project progresses, this prohibition may or may not persist.
RIM
The value of inventory can change while it awaits sale to customers.
Both U.S. GAAP and IFRS require companies to write down ( reduce the cost recorded for) inventory when its value falls below the cost recorded. This is referred to as the lower of cost or market method explained in this chapter. U.S. GAAP prohibits any later increase in the recorded value of that inventory even if that decline in value is reversed through value increases in later periods. However, IFRS allows reversals of those write downs up to the original acquisition cost. For example, if Research In Motion wrote down its 2010 inventory from $622 million to $600 million, it could not reverse this in future periods even if its value increased to more than $622 million. However, if RIM applied IFRS, it could reverse that previous loss. (Another difference is that value refers to replacement cost under Decreases in Inventory Value
The Conceptual/Analytical/Procedural (CAP) Model allows courses to be specially designed to meet your teaching needs or those of a diverse faculty. This model identifies learning objectives, textual materials, assignments, and test items by C, A, or P, allowing different instructors to teach from the same materials, yet easily customize their courses toward a conceptual, analytical, or procedural approach (or a combination thereof) based on personal preferences.
New Global View
GLOBAL VIEW
Estimating Inventory Costs That value can decrease or increase.
Answer — p. 253
Financial Planner One of your clients asks if the inventory account of a company using FIFO needs any “adjustments” for analysis purposes in light of recent inflation. What is your advice? Does your advice depend on changes in the costs of these inventories? ■
EXHIBIT 6.13
Cost of goods sold 5
A3
This section explains international accounting practices relating to the material covered in that chapter. This section is purposefully located at the end of each chapter so that each instructor can decide what emphasis, if at all, is to be assigned to it. The aim of this Global View section is to describe accounting practices and to identify the similarities and differences in international accounting practices versus that in the U.S. As we move toward global convergence in accounting practices, and as we witness the likely conversion of U.S. GAAP to IFRS, the importance of student familiarity with international accounting grows. This innovative section helps us begin down that path of learning and teaching global accounting practices.
"...the chapter openers are absolutely excellent and include entrepreneurs that the students can easily relate to. This helps the students understand the need/importance of accounting in a small business." xii
—Michelle Grant, Bossier Parish Community College
Bring Accounting To Life Completing the Accounting Cycle
Work Sheet •
•
Benefits of a work sheet Use of a work sheet
Closing Process •
• •
Temporary and permanent accounts Closing entries Post-closing trial balance
Classified Balance Sheet
Accounting Cycle •
•
Definition of accounting cycle Review of accounting cycle
Quick Check
•
•
Classification structure Classification categories
Answers — p. 156
7. Classify the following assets as (1) current assets, (2) plant assets, or (3) intangible assets: (a ) land used in operations, (b ) office supplies, (c ) receivables from customers due in 10 months, (d ) insurance protection for the next 9 months, (e ) trucks used to provide services to customers, ( f ) trademarks.
8. Cite at least two examples of assets classified as investments on the balance sheet. 9. Explain the operating cycle for a service company.
Chapter Preview With Flowchart This feature provides a handy textual/ visual guide at the start of every chapter. Students can now begin their reading with a clear understanding of what they will learn and when, allowing them to stay more focused and organized along the way.
Quick Check These short question/answer features reinforce the material immediately preceding them. They allow the reader to pause and reflect on the topics described, then receive immediate feedback before going on to new topics. Answers are provided at the end of each chapter.
"The author(s) are doing an excellent job of using learning and study aids. The examples are real-world and easy to understand. I cannot think of anything else that I would add." —Shirly Kleiner, Johnson County Community College
g transactions is to post journal entries to ledger is up-to-date, entries are posted as n time permits. All entries must be posted to ensure that account balances are up-tobits in journal entries are transferred into
Point:
Computerized systems often provide a code beside a balance such as dr . or cr . to identify its balance. Posting is automatic and immediate with accounting software.
Marginal Student Annotations These annotations provide students with additional hints, tips, and examples to help them more fully understand the concepts and retain what they have learned. The annotations also include notes on global implications of accounting and further examples. xiii
Outstanding Assignment Material Once a student has finished reading the chapter, how well he or she retains the material can depend greatly on the questions, exercises, and problems that reinforce it. This book leads the way in comprehensive, accurate assignments .
DEMONSTRATION PROBLEM The partial work sheet of Midtown Repair Company mpany at at December December 31, 31, 2011, 2011, follows. follows. PLANNING THE SOLUTION ●
Extend the adjusted trial balance account balances to the appropriate financial statement columns.
Balance Sheet and ● Prepare entries to close the revenue accounts to Income Summary, to close the expense accounts to InAdjusted d justed Trial Income Statement come Summary, to close Income Summary to the capitalof account, and to close the withdrawals account Balance Owner’s Equity to the capital account.Statement
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demonstration Problems present both a problem
Notes receivable (current) . . . . . . . . . . . . . . .
and a complete solution, allowing students to review the entire problem-solving process and achieve success.
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid insurance . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debit it Credit re i t Debit D e i t Credit re i t Debit D e i t Credit re i t ● Post the first and second closing entries to the Income Summary account. Examine the balance of income summary and verify that it agrees with the net income shown on the work sheet. 95,600 ● Post the third and fourth closing entries to the capital account. 50,000 50,000 ● Use the work sheet’s two right-most columns and your answer in part 4 to prepare the classified balance sheet. 16,000
4,000
SOLUTION TO DEMONSTRATION PROBLEM
170,000 1. Completing the work sheet.
Adjusted Trial Balance Debit
Chapter Summaries provide students with a review organized by learning objectives. Chapter Summaries are a component of the CAP model (see page xii), which recaps each conceptual, analytical, and procedural objective.
Credit
Income Statement Debit
Credit
Balance Sheet and Statement of Owner’s Equity Debit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95,600
95,600
Notes receivable (current) . . . . . . . . . . . . . .
50,000
50,000
Prepaid insurance . . . . . . . . . . . . . . . . . . . . .
16,000
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . .
4,000
4,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
170,000
170,000
Accumulated depreciation— Equipment . . .
16,000
57,000
Average cost (p. 234)
First-in, first-out (FIFO) (p. 233)
Conservatism constraint (p. 238)
Gross profit method (p. 252)
Consignee (p. 228)
Interim statements (p. 251)
Consignor (p. 228)
Inventory turnover (p. 241)
Consistency concept (p. 237)
chapter with page numbers indicating their location. The book also includes a complete Glossary of Key Terms.
Last-in, first-out (LIFO) (p. 233)
Days’ sales in inventory (p. 241)
Lower of cost or market (LCM) (p. 237)
Multiple Choice Quiz
Multiple Choice Quiz Questions quickly test chap-
Answers on p. 269
Additional Quiz Questions are available at the book’s Website. Use the following information from Marvel Company for the month of July to answer questions 1 through 4. July 1 July 3
Beginning inventory . . . . . . . .
75 units @ $25 each
Purchase . . . . . . . . . . . . . . . . .
348 units @ $27 each
July 8
Sale . . . . . . . . . . . . . . . . . . . . .
July 15
Purchase Purchase . . . . . . . . . . . . . . . . .
300 units 257 257units units@ $28each 28 each
3. Assume that Mar
ventory system. I beginning invent 45 units from the its ending invento a. $2,940 b. $2,685
eginning inventory and purchases for the month of January. On January What is the cost of the 155 units that remain in ending inventory at signed based on a perpetual inventory system and use of FIFO? (Round t inventory balances to the dollar.) Units
Unit Cost
entory on January 1 . . . . . . . . .
320
$6.00
January 9 . . . . . . . . . . . . . . . . .
85
6.40
January 25 . . . . . . . . . . . . . . . .
110
6.60
ter knowledge before a student moves on to complete Quick Studies, Exercises, and Problems.
QUICK STUDY QS 6-1 Inventory costing with FIFO perpetual
P1
Quick Study assignments are short exercises that often focus on one learning objective. Most are included in Connect Accounting . There are usually 8-10 Quick Study assignments per chapter.
Exercises are one of this book’s many strengths and a competitive advantage. There are about 10-15 per chapter and most are included in Connect Accounting .
PROBLEM SET A
500 of goods to China Co., and China Co. has arranged to sell the go ods or and the consignee. Which company should include any unsold goods
EXERCISES Exercise 6-1
ipped $850 of merchandise FOB destination to China Co. Which comof merchandise in transit as part of its year-end inventory?
Inventory ownership C1
, purchased the contents of an estate for $37,500. Terms of the purchase cost of transporting the goods to Duke Associates’ warehouse was $1,200.
Exercise 6-2 Inventory costs
Problem 3-1A
ompany purtory of sup-
Preparing adjusting and subsequent journal entries
C1 A1 P1
nce sheet formation year, the . The sup-
PROBLEM SET B Problem 3-1B Preparing adjusting and subsequent journal entries
C1 A1 P1
Problem Sets A & B are proven problems that can be assigned as homework or for in-class projects. All problems are coded according to the CAP model (see page xii), and Set A is included in Connect Accounting .
PUT AWAY YOUR RED PEN!
xiv
57,000
Key Terms are bolded in the text and repeated at the end of the
Key Terms
ce sheet acinformation
Credit
We pride ourselves on the accuracy of this book ’s assignment materials. Independent research reports that instructors and reviewers point to the accuracy of this book’s assignment materials as one of its key competitive advantages .
Helps Students Master Key Concepts Beyond the Numbers exercises ask students to use accounting figures and understand their meaning. Students also learn how accounting applies to a variety of business situations. These creative and fun exercises are all new or updated, and are divided into sections: • • • •
Reporting in Action Comparative Analysis Ethics Challenge Communicating in Practice
SERIAL PROBLEM Business Solutions
P1 P2 P3
• • • • •
Beyond the Numbers REPORTING IN ACTION
BTN 5-1
A1
Required
RIM
Taking It To The Net Teamwork in Action Hitting the Road Entrepreneurial Decision Global Decision
This serial problem began in Chapter 1 and continues through most of the book. If previous chapter segments were not completed, the serial problem can still begin at this point. It is helpful, but not necessary, to use the Working Papers that accompany the book. After the success of the company’s first two months, Santana Rey continues to operate Business Solutions. (Transactions for the first two months are described in the serial problem of Chapter 2.) The November 30, 2011, unadjusted trial balance of Business Solutions (reflecting its transactions for October and November of 2011) follows. SP 3
No.
Account Title
101
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debit
$38,264
106
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,618
Credit
Refer to Reearch In Motion’s financial statements in Appendix A t
1. Assume that the amounts reported for inventories and cost of sales reflect i ready for resale. Compute the net cost of goods purchased for the fiscal year 2. Compute the current ratio and acid-test ratio as of February 27, 2010, and Fe and comment on the ratio results. How does Research In Motion compare t 2.4 for the current ratio and 1.5 for the acid-test ratio? Fast Forward
3. Access Research In Motion’s financial statements (form 10-K) for fiscal years 2010, from its Website (RIM.com) or the SEC’s EDGAR database (www.s interpret the current ratio and acid-test ratio for these current fiscal years.
Serial Problem uses a continuous running case study to illustrate chapter concepts in a familiar context. The Se rial Problem can be followed continuously from the first chapter or picked up at any late r point in the book; enough information is provided to ensure students can get right to work.
"Well planned, and very organized. A very thorough coverage of all topics. Easy to read and comprehend." — Linda Bolduc, Mount Wachusett Community College
The End of the Chapter Is Only the Beginning Our valuable and proven assignments aren’t just confined to the book. From problems that require technological solutions to materials found ex clusively online, this book’s end-of-chapter material is fully integrated with its technology package.
accountin
• Quick Studies, Exercises, and Problems available in Connect are marked with an icon. • Problems supported by the General Ledger Application Software, Peachtree, or Quickbooks are marked with an icon. • Online Learning Center (OLC) includes Interactive Quizzes, Excel template assignments, and more.
e cel x mhhe.com/wildFAP20e
• Problems supported with Microsoft Excel template assignments are marked with an icon. • Material that receives additional coverage (slide shows, videos, audio, etc.) available in iPod ready format are marked with an icon. • Assignments that focus on global accounting practices and companies are often identified with an icon.
The authors extend a special thanks to accuracy checkers Barbara Schnathorst, The Write Solution, Inc.; Helen Roybark, Radford University; Beth Woods, CPA, Accuracy Counts; and David Krug, Johnson County Community College.
xv
Enhancements in This Edition This edition’s revisions are driven by instructors and students. General revisions to the entire book follow (including chapter-by-chapter revisions): • Revised and updated assignments throughout • Updated ratio (tool) analyses for each chapter • New material on International Financial Reporting Standards (IFRS) in most chapters, including global examples
• New Research In Motion (maker of BlackBerry) annual report with comparisons to Apple, Palm, and Nokia (IFRS) with new assignments •
Updated graphics added to each chapter’s analysis section
• New and revised entrepreneurial examples and elements
•
New technology content integrated and referenced in the book
• Revised serial problem through nearly all chapters
•
New Global View section in each chapter referencing international accounting including examples using global companies
•
New assignments covering international accounting
• New art program, visual info-graphics and text layout
Chapter 1 Facebook NEW opener with new entrepreneurial assignment Streamlined and consolidated learning objectives New section on International Standards and convergence Revised section on accounting principles, assumptions, and constraints New visual layouts for conceptual framework and the building blocks of GAAP New discussion of conceptual framework linked to IFRSs New graphic discussing fraud control in accounting Updated compensation data in exhibit
Chapter 2 CitySlips NEW opene r with new entrepreneurial assignment Reorganized and streamlined learning objectives Revised introduction of double-entry accounting New 4-step process for analyzing, recording, and posting transactions Revised layout for transaction analysis New discussion on accounting quality
Chapter 3 Cheezburger Network NEW opener with new entrepreneurial assignment Updated 3-step process for adjusting accounts Enhanced and streamlined presentation of accounting adjustments Revised info-graphics for adjusting entries Enhanced exhibit on steps in preparing financial statements Expanded discussion of global accounting
Chapter 4 Gamer Grub NEW opene r with new entrepreneurial assignment Slightly revised steps 1 and 2 of work sheet xvi
Enhanced graphics for closing process Enhanced details for general ledger after the closing process Updated color-coded work sheet
Chapter 5 Heritage Link Brands NEW opener with new entrepreneurial assignment Streamlined learning objectives New 2-step presentation for recording merchandise sales and its costs Revised presentation on purchase returns New discussion on fraud and invoices Revised discussion of gross margin
Chapter 6 Fitness Anywhere NEW opener with new entrepreneurial assignment Streamlined presentation for lower of cost or market (LCM) Color-coded graphic for introducing cost flow assumptions Enhanced graphics for learning inventory errors Expanded discussion on inventory controls Expanded explanation of inventory accounting under IFRS
Chapter 7 New Belgium Brewing Company NEW opener with new entrepreneurial assignment Streamlined learning objectives Enhanced graphics for special journals Detailed four benefits from subsidiary ledgers Updated ERP presentation Revised discussion of segment returns
Chapter 8 Dylan’s Candy Bar REVISED opener with new entrepreneurial assignment Enhanced SOX discussion of controls, including the role of COSO Streamlined learning objectives New material on drivers of human fraud
New graphic introducing a bank reconciliation with links to bank and book balances Updated graphic on frequent cyber frauds New graphic on drivers of financial misconduct
Chapter 9 LaserMonks NEW opener with new entrepreneurial assignment Streamlined learning objectives Reorganized recording of credit sales Further clarification of interest formula Enhanced graphics for bad debts estimation
Chapter 10 Games2U NEW opener with new entrepreneurial assignment Reorganized learning objectives Added entry to record impairment Enhanced discussion of asset sales Expanded explanation of asset valuation under IFRS Updated all real world examples and graphics
Chapter 11 SnorgTees NEW opener with new entrepreneurial assignment Updated tax illustrations and assignments using most recent government rates New data on frauds involving employee payroll New entry to reclassify long- to short-term debt Updated all real world examples and graphics
Chapter 12 Kids Konserve NEW opener with new entrepreneurial assignment New 3-step process for partnership liquidation New statement of liquidation introduced Enhanced discussion of partnership liquidation
For Better Learning Chapter 13 Clean Air Lawn Care NEW opener with new entrepreneurial assignment Streamlined learning objectives Inserted numerous key margin computations for entries involving equity Updated statement of stockholders’ equity Updated all real world examples and graphics Explained accounting for equity under IFRS
Chapter 14 CakeLove NEW opener with new entrepreneurial assignment Enhanced graphics for bonds and notes Revised discussion of debt-to-equity Enhanced explanation of how U.S. GAAP and IFRS determine fair value New arrow lines linking effective interest amortization tables to journal entries
Chapter 15 Blackboard NEW opener with new entrepreneurial assignment Streamlined learning objectives Phrase “fair value” used in lieu of “market value” Enhanced exhibit summarizing accounting for securities Revised explanation of investments in securities with significant influence New, enhanced section on comprehensive income
Chapter 16 Animoto NEW opener with new entrepreneurial assignment Streamlined learning objectives Enhanced graphics on cash inflows and outflows involving operating, investing, and financing Highlighted 5-step process to prepare the statement of cash flows New discussion of different classifications for certain cash flows under IFRS Increased number and range of assignments
Chapter 17 Motley Fool REVISED opener with new entrepreneurial assignment Streamlined learning objectives New companies—Research In Motion, Apple, Palm and Nokia—data throughout the chapter, exhibits, and illustrations
Enhanced horizontal and vertical analysis using new company and industry data Enhanced discussion of common-size graphics Enhanced ratio analysis using new company and industry data
Chapter 18 Hot Box Cookies NEW opener with new entrepreneurial assignment Revised learning objectives Enhanced discussion of trends in managerial accounting, including e-commerce and role of services New exhibit and discussion of the value chain Discussion of fraud and ethics in managerial accounting moved to earlier in chapter New discussion of global trends in managerial accounting
Chapter 19 Liberty Tax Service NEW opener with new entrepreneurial assignment Enhanced explanation of events in job order costing, including new 3-step process Added new arrow lines to exhibits as learning aids Enhanced discussion of adjusting factory overhead New factory overhead T-account exhibit New exhibit on entries to adjust factory overhead account Added several new assignments
Chapter 20 IdeaPaint NEW opener with new entrepreneurial assignment Streamlined learning objectives Updated list of companies applying process operations Enhanced several exhibits for better learning New section on trends in process operations, including discussion of just-in-time, automation, role of services, and customer focus Increased number and range of assignments
Chapter 21 Skullcandy NEW opener with new entrepreneurial assignment Streamlined learning objectives Enhanced activity-based costing exhibits Revised discussion and exhibits for comparisons between activity-based costing and two-stage cost allocation Added summary of cost allocation methods with exhibit
Deleted section on departmental reporting and analysis Added Serial Problem to end of chapter assignments
Chapter 22 Johnny Cupcakes NEW opener with new entrepreneurial assignment Streamlined learning objectives Revised cost exhibits for added clarity and learning New discussion on global use of contribution margin
Chapter 23 Smathers and Branson NEW opener with new entrepreneurial assignment Reorganized learning objectives New discussion on potential outcomes of participatory budgeting Enhanced discussion and exhibits for cash budgets New exhibit on general formula for preparing the cash budget Added Decision Insight box on Apple’s cash cushion Enhanced discussion of computing cash disbursements for purchases, including new exhibit Increased number and range of assignments
Chapter 24 SewWhat? NEW opener with new entrepreneurial assignment Streamlined learning objectives Simplified presentation of overhead variances to focus on controllable and volume variances Moved detailed overhead variances and standard cost system journal entries to (new) Appendix 24A Increased number and range of assignments
Chapter 25 Dogswell NEW opener with new entrepreneurial assignment Streamlined learning objectives Updated graphic on industry cost of capital estimates Added section and assignments on decision to keep or replace equipment Increased number and range of assignments
xvii
Instructor Supplements learning activities, and additional visuals with transparency masters.
Instructor’s Resource CD-ROM Chapters 1-25 ISBN13: 978007338107 ISBN10: 0077338103
• •
This is your all-in-one resource. It allows you to create custom presentations from your own materials or from the following text-specific materials provided in the CD’s asset library:
•
•
Instructor’s Resource Manual Written by Barbara Chiappetta, Nassau Community College, and Patricia Walczak, Lansing Community College . This manual contains (for each chapter) a Lecture Outline, a chart linking all assignment materials to Learning Objectives, a list of relevant active
Solutions Manual Test Bank, Computerized Test Bank PowerPoint® Presentations Prepared by Jon Booker, Charles Caldwell, Cindy Rooney, and Susan Galbreth. Presentations allow for revision of lecture slides, and includes a viewer, allowing screens to be shown with or without the software.
•
Link to PageOut
Test Bank Vol. 1, Chapters 1-12 ISBN13: 9780077338183 ISBN10: 0077338189
Vol. 2, Chapters 13-25 ISBN13: 9780077338190 ISBN10: 0077338197 Revised by Barbara Gershowitz, Nashville State Technical Community College.
Solutions Manual Vol. 1, Chapters 1-12 ISBN13: 9780077338152 ISBN10: 0077338154 Vol. 2, Chapters 13-25 ISBN13: 9780077338145 ISBN10: 0077338146
Written by John J. Wild, Ken W. Shaw, and Anita Kroll, University of Wisconsin–Madison.
Student Supplements Excel Working Papers CD
Study Guide
ISBN13: 9780077338084 ISBN10: 0077338081
Vol. 1, Chapters 1-12 ISBN13: 9780077338169 ISBN10: 0077338162
Written by John J. Wild. Working Papers (for Chapters 1-25) delivered in Excel spreadsheets. These Excel Working Papers are available on CD-ROM and can be bundled with the printed Working Papers; see your representative for information.
Working Papers Vol. 1, Chapters 1-12 ISBN13: 9780077338220 ISBN10: 0077338227 Vol. 2, Chapters 12-25 ISBN13: 9780077338206 ISBN10: 0077338200 Principles of Financial Accounting Chapters 1-17 ISBN13: 9780077338213 ISBN10: 0077338219
Written by John J. Wild.
xviii
student user guides are included that allow you to assign text problems for working in Yacht's General Ledger or Peachtree.
Vol. 2, Chapters 12-25 ISBN13: 9780077338176 ISBN10: 0077338170
QuickBooks Pro 2011 Student Guide and Templates
Written by Barbara Chiapetta, Nassau Community College, and Patricia Walczak, Lansing Community College.
ISBN13: 9780077455309 ISBN10: 0077455304
Covers each chapter and appendix with reviews of the learning objectives, outlines of the chapters, summaries of chapter materials, and additional problems with solutions.
Carol Yacht’s General Ledger CD-ROM ISBN13: 9780077338039 ISBN10: 0077338030 The CD-ROM includes fully functioning versions of McGraw-Hill's own General Ledger Application software. Problem templates prepared by Carol Yacht and
Prepared by Carol Yacht. To better prepare students for accounting in the real world, select end-ofchapter material in the text is tied to QuickBooks software. The accompanying student guide provides a step-by-step walkthrough for students on how to complete the problem in the software.
Assurance of Learning Ready Many educational institutions today are focused on the notion of assurance of learning, an important element of some accreditation standards. Fundamental Accounting Principles is designed specifically to support your assurance of learning initiatives with a simple, yet powerful solution. Each test bank question for Fundamental Accounting Principles maps to a specific chapter learning objective listed in the text. You can use our test bank software, EZ Test and EZ Test Online, or Connect Accounting to easily query for learning objectives that directly relate to the learning objectives for your course. You can then use the reporting features of EZ Test to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy.
"Best on the market! Great examples, complete coverage of principle's topics, and great resources!" — David Alldredge, Salt Lake Community College
AACSB Statement The McGraw-Hill Companies is a proud corporate member of AACSB International. Understanding the importance and value of AACSB accreditation, Fundamental Accounting Principles recognizes the curricula guidelines detailed in the AACSB standards for business accreditation by connecting selected questions in the test bank to the six general knowledge and skill guidelines in the AACSB standards. The statements contained in Fundamental Accounting Principles are provided only as a guide for the users of this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and the faculty. While Fundamental Accounting Principles and the teaching package make no claim of any specific AACSB qualification or evaluation, we have within Fundamental Account- ing Principles labeled select questions according to the six general knowledge and skills areas.
The authors extend a special thanks to our contributing and technology supplement authors: Contributing Author: Anita Kroll, University of Wisconsin–Madison LearnSmart Authors: Anna Boulware, St. Charles Community College; Brenda Mattison, Tri County Technical College; and Dominique Svarc, William Rainey Harper College Online Quizzes: Gina Jones, Aims County Community College Connect Self-Quiz and Study: Jeannine Metzler, Northampton Community College Interactive Presentations: Kathleen O'Donnell, Onongada Community College, and Jeannie Folk, College of DuPage xix
Acknowledgments John J. Wild, Ken W. Shaw, Barbara Chiappetta, and McGraw-Hill/Irwin would like to recognize the following instructors for their valuable feedback and involvement in the development of Fundamental Accounting Principles 20e. We are thankful for their suggestions, counsel, and encouragement. Nelson Alino, Quinnipiac University David Alldredge, Salt Lake Community College
Alan Czyzewski, Indiana State UniversityTerre Haute
Betty Habiger, New Mexico State University
Judy Daulton, Piedmont Technical College
Betty Harper, Middle Tennessee State University
Francis Haggerty, Lee College
Sheila Ammons, Austin Community College
Walter DeAguero, Saddleback College
Victoria Badura, Chadron State College
Mike Deschamps, Mira Costa College
Jeannie Harrington, Middle Tennessee State University
Susan Baker, University of Michigan-Dearborn
Rosemond Desir, Colorado State University
John L. Haverty, St. Joseph’s University
Charles Scott Barhight, Northampton Community College
Vincent Dicalogero, Suffolk County Community College
Laurie Hays, Western Michigan University
Robert Beebe, Morrisville State University
Roger Dorsey, University of Arkansas-Little Rock
Geoffrey Heriot, Greenville Technical College
Teri Bernstein, Santa Monica College Swati Bhandarkar, University of Georgia Jaswinder Bhangal, Chabot College Linda Bolduc, Mount Wachusett Community College Anna Boulware, St. Charles Community College Philip Brown, Harding University Jay Buchanon, Burlington County CollegePemberton Mary Burnell, Fairmont State University Nathaniel Calloway, University of Maryland Sal Cardiel, Chaffey College Lloyd Carroll, Borough of Manhattan Community College
Jap Efendi, University of Texas-Arlington Terry Elliott Morehead State University James M. Emig, Villanova University Steven Englert, Ivy Tech Community College Caroline Falconetti, Nassau Community College Stephanie Farewell, University of Arkansas-Little Rock Laura Farrell, Wagner College Charles Fazzi, Saint Vincent College
Shelley Henke, Fox Valley Technical College Lyle Hicks, Danville Area Community College Cecil Hill, Jackson State University Patricia Holmes, Des Moines Area Community College Margaret Houston, Wright State University Constance Hylton, George Mason University Gary Allen Hypes, Mount Aloysius College Catherine Jeppson, Caifornia State University–Northridge Gina M. Jones, Aims Community College
Ronald A. Feinberg, Suffolk Community College
Rita Jones, Columbus State University
Kathleen Fitzpatrick, University of ToledoScott Park
Thomas Kam, Hawaii Pacific University
Christine Jonick, Gainesville State College
Jeannie Folk, College of DuPage
Jack Karbens, Hawaii Pacific University
Hong Chen, Northeastern Illinois University
Mary Foster, Illinois Central College
Connie Kelt, San Juan College
Stanley Chu, Borough of Manhattan Community College
Mitchell Franklin, Syracuse University
Karen Kettelson, Western Technical College
Paul Franklin, Kaplan University Online
Randy Kidd, Longview Community College
Kim Gatzke, Delgado Community College
Irene Kim, George Washington University
Rich Geglien, Ivy Tech Community College
James Kinard, Ohio State University-Columbus
Barbara Gershowitz, Nashville State Technical Community College
Rita Kingery-Cook, University of Delaware
Richard Gordon, Columbia Southern
Shirly A. Kleiner, Johnson County Community College
Kwang-Hyun Chung, Pace University Shiefei Chung, Rowan University Robert Churchman, Harding University Marilyn Ciolino, Delgado Community College Lisa Cole, Johnson County Community College Howard A. Collins, SUNY at Stony Brook William Cooper, North Carolina A &T University
Michelle Grant, Bossier Parish Community College
Frank Klaus, Cleveland State University
Robert F. Koch, Saint Peter’s College
Richard P. Green II, Texas A& M University
Phillip Korb, University of Baltimore
Tony Greig, Purdue University
David Krug, Johnson County Community College
Suzie Cordes, Johnson County Community College
Joyce Griffin, Kansas City Kansas Community College
James Cosby, John Tyler Community College
Lillian Grose, Delgado Community College
Richard Culp, Ball State University
Denise Guest, Germanna Community College
Charles Lacey, Henry Ford Community College
Amy Haas, Kingsborough Community College
Tara Laken, Joliet Junior College
xx
Jill Kolody, Anne Arundel Community College
Beth Lasky, Delgado Community College
Joel Peralto, Hawaii Community College
Phillip Lee, Nashville State Technical Community College
Yvonne Phang, Borough of Manhattan Community College
Jerry Lehman, Madison Area Technical College
Gary Pieroni, Diablo Valley College
Douglas P. Stives, Monmouth University
Frederic Lerner, New York University
Susan Pope, University of Akron
Jacqueline Stoute, Baruch University
Roger Lewis, West Virginia UniversityParkersburg
Jean Price, Marshall University
Beverly Strachan, Troy University
Debbie Rankin, Lincoln University
John Suckow, Lansing Community College
Susan Reeves, University of South Carolina
Dominique Svarc, William Rainey Harper College
Eric Lindquist, Lansing Community College Jeannie Liu, Chaffey College
Jenny Resnick, Santa Monica College
Rebecca Lohmann, Southeast Missouri State University
Ruthie Reynolds, Howard University
Debra Luna, El Paso Community College Sylvester A. Maorino, SUNY Westchester Community College
Carla Rich, Pensacola Junior College Paul Rivers, Bunker Hill Community College Jill Roberts, Campbellsville University
Charles Spector, State University of New York College Jane Stam, Onondaga Community College
Anthony Teng, Saddleback College Sue Terizan, Wright State University Leslie Thysell, John Tyler Community College Michael Ulinski, Pace University-Pleasantville
Karen Robinson, Morgan State University
Bob Urell, Irvine Valley College
Richard Roding, Red Rocks Community College
Alonda Vaughn, Strayer University-Tampa East
Brenda Mattison, Tri-County Technical College
Joel Rosenfeld, New York University
Adam Vitalis, University of Wisconsin
Pamela Rouse, Butler University
Patricia Walczak, Lansing Community College
Jeanine Metzler, Northampton Community College
Helen Roybark, Radford University
Li Wang, University of Akron
Kathleen Michele, Prairieville University
Alphonse Ruggiero, Suffolk County Community College
Doris Warmflash, SUNY Westchester Community College
Tim Miller, El Camino College
Martin Sabo, Community College of Denver
David Welch, Franklin University
Roger L. Moore, Arkansas State UniversityBeebe
Judith Sage, Texas A&M International University
Jean Wells, Howard University
Robbie Morse, Ivy Tech Community College
Nathaniel Samba, Ivy Tech Community College
Thomas S. Marsh, Northern Virginia Community College-Annadale Stacie Mayes, Rose State College
Linda Muren, Cuyahoga Community College—West Campus
Linda Schain, Hoefstra University
Andrea Murowski, Brookdale Community College
Christine Schalow, University of WisconsinStevens Point
Ramesh Narasimhan, Montclair State University
Bunney Schmidt, Keiser University
Mary Beth Nelson, North Shore Community College Deborah Niemer, Oakland Community College Kathleen O’Donnell, Onongada Community College Ahmed Omar, Burlington County College Deborah Pauly, Loras College
Geeta Shankhar, University of Dayton Regina Shea, Community College of Baltimore County—Essex Jay Siegel, Union County College Lois Slutsky, Broward College-South Gerald Smith, University of Northern Iowa Kathleen Sobieralski, University of Maryland
Ari Vega, Fashion Institute of Technology
Robert A. Widman, Brooklyn College CUNY Christopher Widmer, Tidewater Communi ty College Jane Wiese, Valencia Community College Kenneth L. Wild, University of London Scott Williams, County College of Morris Wanda Wong, Chabot College Darryl Woolley, University of Idaho Gloria Worthy, Southwest Tennessee Community College-Macon Lorenzo Ybarra, West Los Angeles College Laura Young, University of Central Arkansas Judy Zander, Grossmont College
In addition to the helpful and generous colleagues listed above, we thank the entire McGraw-Hill/Irwin Fundamental Accounting Principles 20e team, including Stewart Mattson, Tim Vertovec, Steve Schuetz, Christina Sanders, Aaron Downey of Matrix Productions, Lori Koetters, Matthew Baldwin, Carol Bielski, Patricia Plumb, and Brian Nacik. We also thank the great marketing and sales support staff, including Michelle Heaster, Kathleen Klehr, and Simi Dutt. Many talented educators and professionals worked hard to create the supplements for this book, and for their efforts we’re grateful. Finally, many more people we either did not meet or whose efforts we did not personally witness nevertheless helped to make this book everything that it is, and we thank them all.
John J. Wild
Ken W. Shaw
Barbara Chiappetta
xxi
Brief Contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14
xxii
Accounting in Business 2
15
Analyzing and Recording Transactions 48
Investments and International Operations 594
16
Reporting the Statement o Cash Flows 630
17 18
Analysis o Financial Statements 684
19 20 21
Job Order Cost Accounting 774
Cost-Volume-Proft Analysis 906
Plant Assets, Natural Resources, and Intangibles 392
22 23 24
Current Liabilities and Payroll Accounting 434
25
Capital Budgeting and Managerial Decisions 1034
Adjusting Accounts and Preparing Financial Statements 92 Completing the Accounting Cycle 136 Accounting or Merchandising Operations 178 Inventories and Cost o Sales 226 Accounting Inormation Systems 270 Cash and Internal Controls 314 Accounting or Receivables 358
Accounting or Partnerships 478 Accounting or Corporations 506 Long-Term Liabilities 550
Managerial Accounting Concepts and Principles 730
Process Cost Accounting 812 Cost Allocation and Perormance Measurement 856
Master Budgets and Planning 944 Flexible Budgets and Standard Costs 988
Appendix A
Financial Statement Inormation A-1
Appendix B
Time Value o Money B
Contents 1 Accounting in Business
2
Importance of Accounting 4 Users o Accounting Inormation 5 Opportunities in Accounting 6
Fundamentals of Accounting 8 Ethics—A Key Concept 8 Generally Accepted Accounting Principles 8 International Standards 9 Conceptual Framework and Convergence 9 Sarbanes–Oxley (SOX) 12
Transaction Analysis and the Accounting Equation 14 Accounting Equation 14 Transaction Analysis 15 Summary o Transactions 18
Financial Statements 19 Income Statement 19 Statement o Owner’s Equity 19 Balance Sheet 21 Statement o Cash Flows 21
Global View 21 Decision Analysis—Return on Assets 22 Appendix 1A Return and Risk Analysis 26 Appendix 1B Business Activities and the Accounting Equation 26
2 Analyzing and Recording Transactions 48
Trial Balance 65 Preparing a Trial Balance 65 Using a Trial Balance to Prepare Financial Statements 66
Global View 68 Decision Analysis—Debt Ratio 69
3 Adjusting Accounts and Preparing Financial Statements 92 Timing and Reporting 94 The Accounting Period 94 Accrual Basis versus Cash Basis 95 Recognizing Revenues and Expenses 96
Adjusting Accounts 96 Framework or Adjustments 96 Prepaid (Deerred) Expenses 97 Unearned (Deerred) Revenues 100 Accrued Expenses 101 Accrued Revenues 103 Links to Financial Statements 105 Adjusted Trial Balance 106
Preparing Financial Statements 106 Global View 108 Decision Analysis—Profit Margin 109 Appendix 3A Alternative Accounting for Prepayments 113
Analyzing and Recording Process 50 Source Documents 50 The Account and Its Analysis 51
Analyzing and Processing Transactions 54 Ledger and Chart o Accounts 54 Debits and Credits 55 Double-Entry Accounting 55 Journalizing and Posting Transactions 56 Analyzing Transactions—An Illustration 59 Accounting Equation Analysis 63
4 Completing the Accounting Cycle 136 Work Sheet as a Tool 138 Benefts o a Work Sheet (Spreadsheet) 138 Use o a Work Sheet 138 Work Sheet Applications and Analysis 142
xxiii
xxiv
Contents
Closing Process 142 Temporary and Permanent Accounts 142 Recording Closing Entries 143 Post-Closing Trial Balance 144
Accounting Cycle 146 Classified Balance Sheet 147 Classifcation Structure 147 Classifcation Categories 148
Global View 150 Decision Analysis—Current Ratio 150 Appendix 4A Reversing Entries 154
5 Accounting for Merchandising Operations 178 Merchandising Activities 180 Reporting Income or a Merchandiser 180 Reporting Inventory or a Merchandiser 181 Operating Cycle or a Merchandiser 181 Inventory Systems 181
Accounting for Merchandise Purchases 182 Purchase Discounts 183 Purchase Returns and Allowances 184 Transportation Costs and Ownership Transer 185
Accounting for Merchandise Sales 187 Sales o Merchandise 187 Sales Discounts 188 Sales Returns and Allowances 188
Completing the Accounting Cycle 190 Adjusting Entries or Merchandisers 190 Preparing Financial Statements 191 Closing Entries or Merchandisers 191 Summary o Merchandising Entries 191
Financial Statement Formats 192 Multiple-Step Income Statement 193 Single-Step Income Statement 194 Classifed Balance Sheet 194
Global View 195 Decision Analysis—Acid-Test and Gross Margin Ratios 196 Appendix 5A Periodic Inventory System 201 Appendix 5B Work Sheet—Perpetual System 205
6 Inventories and Cost of Sales 226 Inventory Basics 228 Determining Inventory Items 228 Determining Inventory Costs 229 Internal Controls and Taking a Physical Count 229
Inventory Costing under a Perpetual System 229 Inventory Cost Flow Assumptions 230 Inventory Costing Illustration 231 Specifc Identifcation 231 First-In, First-Out 233 Last-In, First-Out 233 Weighted Average 234 Financial Statement Eects o Costing Methods 236 Consistency in Using Costing Methods 237
Valuing Inventory at LCM and the Effects of Inventory Errors 237 Lower o Cost or Market 237 Financial Statement Eects o Inventory Errors 238
Global View 240 Decision Analysis—Inventory Turnover and Days’ Sales in Inventory 241 Appendix 6A Inventory Costing under a Periodic System 246 Appendix 6B Inventory Estimation Methods 251
7 Accounting Information Systems 270 Fundamental System Principles 272 Control Principle 272 Relevance Principle 272 Compatibility Principle 273 Flexibility Principle 273 Cost-Beneft Principle 273
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xxv
Components of Accounting Systems 273 Source Documents 274 Input Devices 274 Information Processors 274 Information Storage 274 Output Devices 275
Special Journals in Accounting 275 Basics of Special Journals 276 Subsidiary Ledgers 276 Sales Journal 278 Cash Receipts Journal 281 Purchases Journal 283 Cash Disbursements Journal 284 General Journal Transactions 285
Technology-Based Accounting Systems 286 Computer Technology in Accounting 286 Data Processing in Accounting 286 Computer Networks in Accounting 286 Enterprise Resource Planning Software 287
Global View 287 Decision Analysis—Segment Return on Assets 288 Appendix 7A Special Journals under a Periodic System 292
9 Accounting for Receivables 358 Accounts Receivable 360 Recognizing Accounts Receivable 360 Valuing Accounts Receivable—Direct Write-Off Method 363 Valuing Accounts Receivable—Allowance Method 364 Estimating Bad Debts—Percent of Sales Method 366 Estimating Bad Debts—Percent of Receivables Method 367 Estimating Bad Debts—Aging of Receivables Method 368
Notes Receivable 370 Computing Maturity and Interest 370 Recognizing Notes Receivable 371 Valuing and Settling Notes 372
Disposal of Receivables 373 Selling Receivables 373 Pledging Receivables 373
Global View 374 Decision Analysis—Accounts Receivable Turnover 375
8 Cash and Internal Controls 314 Internal Control 316 Purpose of Internal Control 316 Principles of Internal Control 317 Technology and Internal Control 319 Limitations of Internal Control 320
Control of Cash 321 Cash, Cash Equivalents, and Liquidity 321 Cash Management 321 Control of Cash Receipts 322 Control of Cash Disbursements 324
Banking Activities as Controls 328 Basic Bank Services 328 Bank Statement 330 Bank Reconciliation 331
Global View 334 Decision Analysis—Days’ Sales Uncollected 335 Appendix 8A Documentation and Verification 338 Appendix 8B Control of Purchase Discounts 341
10 Plant Assets, Natural Resources, and Intangibles 392 SECTION 1—PLANT ASSETS 394 Cost Determination 395 Land 395 Land Improvements 396 Buildings 396 Machinery and Equipment 396 Lump-Sum Purchase 396
Depreciation 397 Factors in Computing Depreciation 397 Depreciation Methods 398 Partial-Year Depreciation 402 Change in Estimates for Depreciation 403 Reporting Depreciation 403
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Contents
Additional Expenditures 404 Ordinary Repairs 404 Betterments and Extraordinary Repairs 405
Disposals of Plant Assets 405 Discarding Plant Assets 406 Selling Plant Assets 406
SECTION 2—NATURAL RESOURCES 408 Cost Determination and Depletion 408 Plant Assets Used in Extracting 409
SECTION 3—INTANGIBLE ASSETS 409 Cost Determination and Amortization 409 Types o Intangibles 410
Global View 412 Decision Analysis—Total Asset Turnover 413 Appendix 10A Exchanging Plant Assets 416
11 Current Liabilities and Payroll Accounting 434 Characteristics of Liabilities 436 Defning Liabilities 436 Classiying Liabilities 436 Uncertainty in Liabilities 437
Known Liabilities 438 Accounts Payable 438 Sales Taxes Payable 438 Unearned Revenues 439 Short-Term Notes Payable 439 Payroll Liabilities 441 Multi-Period Known Liabilities 444
Estimated Liabilities 445 Health and Pension Benefts 445 Vacation Benefts 446 Bonus Plans 446 Warranty Liabilities 446 Multi-Period Estimated Liabilities 447
Contingent Liabilities 448 Accounting or Contingent Liabilities 448 Reasonably Possible Contingent Liabilities 448 Uncertainties that Are Not Contingencies 449
Global View 449 Decision Analysis—Times Interest Earned Ratio 450 Appendix 11A Payroll Reports, Records, and Procedures 453 Appendix 11B Corporate Income Taxes 459
12 Accounting for Partnerships 478 Partnership Form of Organization 480 Characteristics o Partnerships 480 Organizations with Partnership Characteristics 481 Choosing a Business Form 482
Basic Partnership Accounting 483 Organizing a Partnership 483 Dividing Income or Loss 483 Partnership Financial Statements 485
Admission and Withdrawal of Partners 486 Admission o a Partner 486 Withdrawal o a Partner 488 Death o a Partner 489
Liquidation of a Partnership 489 No Capital Defciency 490 Capital Defciency 491
Global View 492 Decision Analysis—Partner Return on Equity 492
13 Accounting for Corporations 506 Corporate Form of Organization 508 Characteristics o Corporations 508 Corporate Organization and Management 509 Stockholders o Corporations 510 Basics o Capital Stock 511
Common Stock 512 Issuing Par Value Stock 512 Issuing No-Par Value Stock 513 Issuing Stated Value Stock 514 Issuing Stock or Noncash Assets 514
Dividends 515 Cash Dividends 515 Stock Dividends 516 Stock Splits 518
Preferred Stock 518 Issuance o Preerred Stock 519 Dividend Preerence o Preerred Stock 519 Convertible Preerred Stock 520 Callable Preerred Stock 521 Reasons or Issuing Preerred Stock 521
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Treasury Stock 522 Purchasing Treasury Stock 522 Reissuing Treasury Stock 523 Retiring Stock 524
Reporting of Equity 524 Statement o Retained Earnings 524 Statement o Stockholders’ Equity 525 Reporting Stock Options 525
Global View 526 Decision Analysis—Earnings per Share, PriceEarnings Ratio, Dividend Yield, and Book Value per Share 527
15 Investments and International Operations 594 Basics of Investments 596 Motivation or Investments 596 Classifcation and Reporting 597 Debt Securities: Accounting Basics 597 Equity Securities: Accounting Basics 598
Reporting of Noninfluential Investments 599 Trading Securities 599 Held-to-Maturity Securities 600 Available-or-Sale Securities 600
Reporting of Influential Investments 602
14 Long-Term Liabilities
550
Basics of Bonds 552 Bond Financing 552 Bond Trading 553 Bond-Issuing Procedures 554
Bond Issuances 554 Issuing Bonds at Par 554 Bond Discount or Premium 555 Issuing Bonds at a Discount 555 Issuing Bonds at a Premium 558 Bond Pricing 560
Bond Retirement 561 Bond Retirement at Maturity 561 Bond Retirement beore Maturity 561 Bond Retirement by Conversion 562
Long-Term Notes Payable 562 Installment Notes 562 Mortgage Notes and Bonds 564
Global View 565 Decision Analysis—Debt Features and the Debt-toEquity Ratio 566 Appendix 14A Present Values of Bonds and Notes 570 Appendix 14B Effective Interest Amortization 572 Appendix 14C Issuing Bonds between Interest Dates 574 Appendix 14D Leases and Pensions 576
Investment in Securities with Signifcant Inuence 602 Investment in Securities with Controlling Inuence 603 Accounting Summary or Investments in Securities 603
Global View 605 Decision Analysis—Components of Return on Total Assets 605 Appendix 15A Investments in International Operations 610
16 Reporting the Statement of Cash Flows 630 Basics of Cash Flow Reporting 632 Purpose o the Statement o Cash Flows 632 Importance o Cash Flows 632 Measurement o Cash Flows 633 Classifcation o Cash Flows 633 Noncash Investing and Financing 635 Format o the Statement o Cash Flows 635 Preparing the Statement o Cash Flows 636
Cash Flows from Operating 638 Indirect and Direct Methods o Reporting 638 Application o the Indirect Method o Reporting 639 Summary o Adjustments or Indirect Method 644
Cash Flows from Investing 645 Three-Stage Process o Analysis 645 Analysis o Noncurrent Assets 645 Analysis o Other Assets 646
Cash Flows from Financing 647 Three-Stage Process o Analysis 647 Analysis o Noncurrent Liabilities 647 Analysis o Equity 648 Proving Cash Balances 649
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Contents
Global View 649 Decision Analysis—Cash Flow Analysis 650 Appendix 16A Spreadsheet Preparation of the Statement of Cash Flows 654 Appendix 16B Direct Method of Reporting Operating Cash Flows 657
17 Analysis of Financial Statements 684 Basics of Analysis 686 Purpose o Analysis 686 Building Blocks o Analysis 687 Inormation or Analysis 687 Standards or Comparisons 688 Tools o Analysis 688
Horizontal Analysis 688 Comparative Statements 688 Trend Analysis 691
Vertical Analysis 693 Common-Size Statements 693 Common-Size Graphics 695
Ratio Analysis 696 Liquidity and Efciency 697 Solvency 701 Proftability 702 Market Prospects 703 Summary o Ratios 704
Global View 706 Decision Analysis—Analysis Reporting 706 Appendix 17A Sustainable Income 710
18 Managerial Accounting Concepts and Principles 730 Managerial Accounting Basics 732 Purpose o Managerial Accounting 732 Nature o Managerial Accounting 733 Managerial Decision Making 735 Fraud and Ethics in Managerial Accounting 735
Managerial Cost Concepts 736 Types o Cost Classifcations 736 Identifcation o Cost Classifcations 739 Cost Concepts or Service Companies 739
Reporting Manufacturing Activities 740 Manuacturer’s Balance Sheet 740 Manuacturer’s Income Statement 741 Flow o Manuacturing Activities 744
Manuacturing Statement 745 Trends in Managerial Accounting 747
Global View 749 Decision Analysis—Cycle Time and Cycle Efficiency 749
19 Job Order Cost Accounting 774 Job Order Cost Accounting 776 Cost Accounting System 776 Job Order Production 776 Events in Job Order Costing 777 Job Cost Sheet 778
Job Order Cost Flows and Reports 780 Materials Cost Flows and Documents 780 Labor Cost Flows and Documents 782 Overhead Cost Flows and Documents 783 Summary o Cost Flows 785
Adjusting Factory Overhead 787 Factory Overhead T-Account 787 Underapplied or Overapplied Overhead 788
Global View 788 Decision Analysis—Pricing for Services 789
20 Process Cost Accounting 812 Process Operations 814 Comparing Job Order and Process Operations 815 Organization o Process Operations 815 GenX Company—An Illustration 815
Process Cost Accounting 817 Comparing Job Order and Process Cost Accounting Systems 817 Direct and Indirect Costs 817 Accounting or Materials Costs 818 Accounting or Labor Costs 819 Accounting or Factory Overhead 819
Equivalent Units of Production 821 Accounting or Goods in Process 821 Dierences in Equivalent Units or Materials, Labor, and Overhead 821
Process Costing Illustration 822 Step Step Step Step
1: Determine the Physical Flow o Units 823 2: Compute Equivalent Units o Production 823 3: Compute the Cost per Equivalent Unit 824 4: Assign and Reconcile Costs 824
Contents
Transers to Finished Goods Inventory and Cost o Goods Sold 827 Trends in Process Operations 829
Global View 829 Decision Analysis—Hybrid Costing System 829 Appendix 20A FIFO Method of Process Costing 833
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22 Cost-Volume-Proft Analysis 906 Identifying Cost Behavior 908
21 Cost Allocation and Perormance Measurement 856 SECTION 1—ALLOCATING COSTS FOR PRODUCT COSTING 858 Overhead Cost Allocation Methods 858 Two-Stage Cost Allocation 858 Activity-Based Cost Allocation 860 Comparison o Two-Stage and Activity-Based Cost Allocation 863
SECTION 2—ALLOCATING COSTS FOR PERFORMANCE EVALUATION 864 Departmental Accounting 864 Motivation or Departmentalization 864 Departmental Evaluation 864
Departmental Expense Allocation 865 Direct and Indirect Expenses 865 Allocation o Indirect Expenses 866 Departmental Income Statements 867 Departmental Contribution to Overhead 871
Evaluating Investment Center Performance 873 Financial Perormance Evaluation Measures 873 Nonfnancial Perormance Evaluation Measures 874
Fixed Costs 908 Variable Costs 909 Mixed Costs 909 Step-Wise Costs 910 Curvilinear Costs 910
Measuring Cost Behavior 911 Scatter Diagrams 911 High-Low Method 912 Least-Squares Regression 913 Comparison o Cost Estimation Methods 913
Using Break-Even Analysis 914 Contribution Margin and Its Measures 914 Computing the Break-Even Point 915 Preparing a Cost-Volume-Proft Chart 916 Making Assumptions in Cost-Volume-Proft Analysis 917
Applying Cost-Volume-Profit Analysis 918 Computing Income rom Sales and Costs 919 Computing Sales or a Target Income 919 Computing the Margin o Saety 920 Using Sensitivity Analysis 921 Computing a Multiproduct Break-Even Point 921
Global View 924 Decision Analysis—Degree of Operating Leverage 924 Appendix 22A Using Excel to Estimate Least-Squares Regression 926
Responsibility Accounting 875 Controllable versus Direct Costs 875 Responsibility Accounting System 876 Summary o Cost Allocation 877
Global View 878 Decision Analysis—Investment Center Profit Margin and Investment Turnover 878 Appendix 21A Transfer Pricing 882 Appendix 21B Joint Costs and Their Allocation 883
23 Master Budgets and Planning 944 Budget Process 946 Strategic Budgeting 946 Benchmarking Budgets 946 Budgeting and Human Behavior 947 Budgeting as a Management Tool 947 Budgeting Communication 947
Budget Administration 948 Budget Committee 948 Budget Reporting 948 Budget Timing 949
