This isan elena version ofthe ein textbook. ue to eketmunic ight estes tons, sexe mi pay eoatene maybe suppres. ator review as deemed (any speed condcat docs not muteially lfee the overall ming experince, The publiabersescrves tho ght toremove contort fom this te at un tne i aubvayent sights exit sexsie i Foe ‘aleable inveemation on pice, provrs eitnns, changes Eo ceca elton ae aera foxmars, please vs we lard to saaneh ny ISBN, ato, ie, ce key od for inate in your aces of interest7°, SOUTH-WESTERN fas CENGAGE Learning Accounting?4e carts. Wareen Jamas MRaave Janatnenf Duchne Vice President of Editorial, Busines: 38 W Caoun {Stern Chit: ab Dewey eecutve Eaton Shao nOblinge Developmertal Editor: Irncy Newman {cited Aasetant: Cortney Dope marketing Coordinator: NIC Paris ‘Sr Marketing Communications Manage Libty Shipp ‘Content Project Manager: If Kallemeyn Se-MediaEltrs Sect Ror Media tor Jesia Noe ‘fat rector: cy 3 ‘Sr Right equlitens Meet anager: Photo Manager Tom Printed in Canasta 12345615 W912 Ww £2008, 201 SauthiWestom, CongogeLeariog thereon iy be rep ioloced or uted in any form or by any eneant— rai, electtoneor mechani. laches photocopng. recone taping eb dirtlon,ermationsarage and vthval ters ole any other mannes excepto pve under Section BY 0105 ofthe 896 Usited states Copyrgt Ae, wethout the prior ween perme ofthe pubteher Fer prouct inlormatnn ang tetralogy aitanes ‘oct un at Cengage Lenrning ‘customer Sales Support, -600358-9706 tortor pred, ‘brit a equess ele at veomucengage compermistors futher peminions quctionscanbeeraial to permssonreguesttcengegescom eamvew* i arepsierttradernrt of elnitrction Corp Windom 2 tegirerdtraternrofte iro Cerportnn ven evel eee ‘conse Moots andPawet Mocintosh ae eyed aden ple Comes ne, dhl vader ease £12008 Cengage coring A Fighes Reserved Cengage Leaning VebTator™Isa radomancot Cengige leur Student Elton s810:0-38-49005 Sent Eton SBN 1: 97.0538 75006 South-westerncengageLearing S191 Netorp Boulevard masen. On «5080 engage Leaming peau ar sepeserted a Carats ty Neon aeation 38 Foryeur courte adlertingtolitions viet wnncangapscort rele online ore womlchapterscom+ New Financial Analysts and Interprotation: Segment Analysts using eal-world company Irani, Ine; + Added now Example Exercise sind Practice Exercise to correspond with the new FAL Chapter 6: Accounting for Merchandising Businesses + The computation of cost of merchandise sold (under the pertodic inventory system) has heen moved from the beginning of the chapter to aa end-of-chaprer appendix. + 8 new scction has been added that summarizes the effects of merchandise transac- merchandise inventory account. This iy illustrated using a T account for 2 inventory: + Moved coverage of “Accounting Systems for Merchandisers” ta our onlin cengaye-conv/aecounting/wasten) + New Financial Analysis ane! Interpretation: Ratio of Net Sales to Assets using real ‘work! company Rollar Tree, te. + Added now Pxample Txerche and Practice Pacrcixe to correspond with the new TAL site (www Chapter 7: + New Fiaanctal Analysis and tnterprotation: Inventory Turnover and Number of Days, Sales in Inventory using real-world companies fest Hay ancl Zale. + Added now Example Exer inventories ind Practice Exercise to correspond with the new TAL Chapter 8: Sarbanes-Oxley, Internal Control, and Cash + updated chapter graphic for beet + New Financiit Analysis and Interpretation: Ratio of Cash to Monthly Cash Expenses Using eal-workl company Erergreen Solar, Jne + Added new Example Exercise sind Practice Exercise to correspond with the new FAL clarity and snapshot comprehension. Chapter 9: Receivables + New Financial Analysisand Interpretation: Accounts Receivable Turnover and Number of Days’ Sales In Receivables using real-world company FedEx. + Added new Example Facrcise and Practice Exercise to correspond with the new FAL Chapter 10: Fixed Assets and Intangible Assets + Updated many ehapter graphics for better clarity and snapshot comprehension, + New Financial Analysis and Interpretation: Fixed Asset Turnover Ratio usiag real: ‘work! company Starbucks Corporation + Added now Eximple Exercise sind Practice Exercise to correspond with de new FAL Chapter 11: Current Liabilities and Payroll +The example of Siarbieks Corporation on long-term debt hs boon replica by PF chang’. + Updatesd Wage Bracket Withholding table, based on data from the 2010 Publication £5, + Removed discussion of sucial seeusty expan withleolling (above $100,000).Chapter-by-Chapter Piette es + Updated thusiness Connection feature to cv fewveral Mofors:xnd its pension problems + New Financial Analysis and Interpretation: Quick Ratio using real-world compaay TechSolutions, Ine + Added new Example ENer je (0 correspond with the new FAL Chapter 12: Accounting for Partnerships and Limited Liability Companies + Razor replaces Agerbilaze LLE as the chapter op. + Updated Business Connection fexture to Kristen Hall, founding, member of the eo music group Sirgarland and her lawsuit + Now Finansial Analysis and laterprctation; Revenue per Employee showing MeDonel's aed Slarbischs to tnderatind eviluatiie within sin teluatey i Pructice Exercise to coreypond wi the new FAL n on “Errors in Liquidatlan® to reduce minor redundancy + Added new Example Exercise ated the sect Chapter 13: Corporations: Organization, Stock Transactions, and Dividends + New Financial analysis and Interpretation; Oa website they sty JPMorgan Chase & Go. Eatnings per Share Using Hasbro, Rank of America Corporation, Aad LP. Morgan Chase & Co, + Added now Example Exercise reise t correspond with the nes FAL Chapter 14: Long-Term Liabilities: Bonds and Notes + Updated Business Connection Feature on US. government debt + Updated business Connection Feature to cover General Motors bonds Integrity, Objectivity, ancl Ethiex feature © discuss “Liars Loans. iaeial Analysis and Interpretation: Number of Times Int Earned using Under crmour, Ine, + Ads warges Ave to correspond with the new FAL Chapter 15: Investments and Fair Value Accounting + Added an teri, Obie thas cad + Updated Husiness Connection feat: to" Bevan Yate ced pce Sew Financial Anatsis and tnerpretation Dividend Vet using News Corporation Aasded new Exarmple Exercine and Practice Execie 10 corespomi With ibe weW FAL Moved “Accotnti cld.to-Matucily Investments” appendis to WWWCongape. con 5 box titkal “Joan Lass tues” on morgage e's Entrance to Streaming, Music ments" t0 simply the wading process foe accounting/ waren Mornin’ Joe + Tocexpand students’ unclerstanding of financial statement pec States, the authors took our waique company example, Mornin Jo, and goes intenmational the United how i lowing IFRS guidalises, Ta aid in lsiening, callout fe enwcen US. GAAP and IFRS,Chapter 16; Statement of Cash Flows. + Updated Business Connection feature to “Cash Crunch!” featuting Chrysler Group LLC. + New Financial Analysis and Interpretation: Free Cash Flow using Research tn Sfotion, Inc,, maker of BlackBerry” smartphones. + Added new Example Exercise and Practice Exercise to correspond with the new FAL Chapter 17: Financial Statement Analysis + Real-world financial starernent analysis problem uses data from the Vike, Ine. 2010 10K, AA portion of Nike's 10-K is located in Appendix €. Objectivity, andl Ethicn feature discusses “Chief Financial Officer + Updated lntegrity, Objectivity, and Euhics feature to “Buy Low, Sell High.” Chapter 18; Managerial Accounting Concepts and Principles + ‘The chapter opener has been modified to feature Paul Stanley of RSS. He has a custom guitar built by Washburn Gritars + Updated Business Connection feature wo "Bulld-rOnler” about Dell Ine: Chapter 19: Job Order Costing + Updated Business Connection feature to discuss "BNWs Factory Labor Experiment Chapter 20: Process Cost Systems + Updated Business Connection featere entitled “Fridge Pack" to discuss Alcoa Ine Chapter 21: Cast Behavior and Cost-Volume-Profit Analy: + Updated Businers Connection feature entitled “Breaking Even in the Airline Industry” 1 discuss the afin industy + Added a new Business Connection feature to highlight frinchising using real-world companies such ay McDonall’s, Wendy's, Dunkin’ Donuts, and Falburger. Chapter 22: Budgeting + Updated usinewe Connection feature called the "U.S. Feder! Buel Def + Simplified! the writing of definitions and oer content explanations, Chapter 23: Performance Evaluation Using Variances from Standard Costs + Added 2 new Business Connection feature to highlight Brinker International, the operator of popular chains such as Chile andl Ox the BorderChapter-by-Chapter Enhancements Chapter 24: Performance Evaluation for Decentralized Operations + Chapter opener replaces 2 Sports with £.W. Scripps Company mredia. comp conglomerate of + Added @ new Business Connection feature entitled “Centralized vs, Decentralized Research and Development Chapter 25: Differential Analysis, Product Pricing and A -Based Costing wapter opener rephices ReatNetworks, tne + The discussion on aetivity-hasod costing (ABC) kas hon moved from the appendix and Updated, ABC i framed in the context of product pricing and profit analysis he total cost and tarlable cost concepts are moved to an appendix. This change simpli Fics this section to make room for the added ADE material Chapter 26: Capital Investment Analysis + Updated chapter opener with a cleaner writing style + Added 4 now Business Connection feature called “Avatar: The Most Expensive Movie Ever Made Gand the Most Successful)”Hallmark Features of Accounting, 24e ——————————————————————————— Accounting, 24e, $s ups ‘with aecounting Ficulty continues to afiect how we refine and improve the text (o meet the necds of today’s students. Our goal is (0 provide a logical framework and pecagogical system that caters to how stuclenty of today study and Kean alleled in pexkagogical innowation. Our constant dialogue Clear Objectives and Key Learning Outcomes To guide siudlents, the authors provide clear chapter objectives and important Ieaming outcomes. AIL the chapter muterials relate back to these Key points and outcomes, which keeps students fo- cused om the most important copies andl concepts in onde to succeed the course Example Exercises Example Exercises reinforce concepts and procedures in a bold, new ‘aly Like teacher in the ckissroom, students follow the auhory’ example w sev how 1 complete accounting applieitions ss they are presented in the text, This feature also. Provides a lis of Practice EXercises that parallel the Example Exercises so students get the prictice they need, In adlition, the Practice Exercises include eeferences 0 the chapler Example Exercises s0 that students can easily cross-reference when completing homework. io “Ata Glance” Chapter Summary At the end of each chapter, the summary grid des everything together ane helps stuclents stay on track, pl alptig sion tend | esa | eaeA, sam si ni eal: a esa | pesan, san,Hallmark Features of Accounting, 24e Real-World Chapter Openers building on the strengths ‘of past editions, these openers continue to relate the aceounting and business concepts in the chapter to students lives. These openers employ examples of real companies and provide invaluable insight into real practice. Several of the opences created expecially forthis edition focus on interesting companics such as Rhapsody, Razor, E.W. Scripps Company, a diverse media concern, and Facebook, Continuing Case Study Sudemis follow a fiedtious company, NetSolutions, throughout Chapiers 1-6, which demonsirates a variety of transtetions, The continuity of using the same company facilitates student learning, especially for Chapters 1-4, which cover the accounting eyele. Also, using the same company allows students 10 fallow the wansition of the company from a serviee business in Chapters 1-4 to a merchandising business in Chapters 5 and 6, Illustrative Problem and Solution 4 solved problem models one of more of the chapter's assignment problems so the modeled pracedures to end-of-chapter materials, students can apply Integrity, Objectivity, and Ethicsin Business In cach chapter, these cases help students develop their ethical compass, Often coupled with related end-of-chapier activities, these cases can be disctissed in class or students can consider the cases ws they read the chapter, Both the section anc! related enclotichapter materials are Indicated with a unique icon for a consistent presentation, Objectivit Ms nan CHIEF FINANCIAL OFFICER DONLISES recent study by compensation experts at Temple Univer- practices to improve eamnings. Wile the study doesnt cor- Sty found that chief financial officer salaries ate correlated clude that bonuset lad to accounting fraud, it does suggest with the compleaty of @ company’s operations but chief thatbonusesghve chief finarcialaicers@reasontofind ways Financial offcer bonuses ste covrelated with the company’s touse accounting to increase apparent earings ality to meet analysts’ eainings forecasts These resus FFE aa ta baba suggest that financial bonuses may provide chief frantal pesseten/ nen sonnets: [epre uncer. August See) fears with an ineertive 18 use questionable axeountingAplia Aplia isa premier onling homework proict va successfully engages students a traximizes the amount of effort thoy put forth, creating more efficent learners. pla's vantages a a dag ws Be GSO @: Saee ceeee . 1 RS Oe I excrearenraccancune ee aplia Sans Seis See ae ae Sor ene rere en Se ee eT parce euniecni Soe Aplia Upgrades: + Increased Instructor Control: lnstru ‘materials from the question banks. + Aplisext: Interactive AplisTest allaws students 10 use eBooks jaa new way. THIS unique Mllp-hook also dnckides a Chapter Recap that helps siudents craft ahelr own personal study guide. 5 now have more options in how daey assign For an Aplia demo, visi vwew-congaige com/community/warren, WebTutor™ WebTutor" om Blackboard" and WebCT* Improve student grades with on - review and tt preparation ais in an easyoase course cage, WebTUTOR Visit woww.cengaige.com/stehuutor for more informationFor the Instructor SS ———— When it comes to supporting instructors, South-Western is unsurpassed. Accounting, 24e, continues the tradition with powerful print and digital ancillaries aimed at facilitating greater course successes. Instructor's Manual ‘The Instructor's Manual includes: Bide Synopsis, List of Objectives, Key Terms, Ide Problems, Group Leaming Activities, Exercises and Problems for Reinfarcement, and laternct Activitios. Suggested Appeoaches incorporate may moder teachiag initiatives, including active learning, collsborstive learning, critical thinking, and ‘writing across the curriculum, for Class Discussion, Lecture Aids, Demonstration Solutions Manual Solutions Manual contains answers 10 all exereises, problems, and activities in the text. The soludons are authorswrites and verified multiple times for numerical accuracy and consistency. Test Bank ‘The ‘Test lank inclucles mone than 3,300 True) Multiple-Choice questions, and Problems, e: objective, and AASCB/AICPA/ACBSP tagaing se questions, marked with a difficulty level, chapler ExamView® Pro Testing Software This intuitive software allows you « easily BEART aisomize exams, practice vss, and worials and deliver thom over a exvork, ow tht Iaterne, oF in printed form, In aedibon, ExamView comes with scarching capabi that make sorting the wealth of questions from the printed test bank easy. The software anil files are found on the IRED, PowerPoint” Each presentation, which is inchided on the IRCD and on the produet suppor site, enhances lectures and simplifies class prepariton, Each chapter contains objectives followed by a thorough outline of the chapter thae casily provides an entice lecture sodel. Also, exhibits fro the chapter, such as the new Example Exerelses, have been cereale as colorful PowerPoint slides to crcate a powerul, customizable tol, Instructor Excel? Templates These templates provide the solutions for the problems that have Enhanced Excel templates for students, Through these files, Instauctors can see the solutions in the same format as the students, All problems with accompanying templates are marked in the books wish am icon ancl are listed in the information grid in the solutions manual, These templates are available for dawelosd on www.cengage.comy/accounting/warren or on the IRCD, Instructor's Resource CD The Instructors Ri eure CD includes the al, ‘Test Bank, Poweroint® Presentations, Instrucior’s Manual, Solutions. Mt BxamView", ( neal Ledger Inspector, and Excel” Temphite Solutions,For the Student 0 ——————————————————————— 1g with a varicty of learning needs. Account- ing, 24e, offers a broad range of supplements in both printed form and easy-to-use technology. We continue to refine our entire supplement around the comments instructors have provided about their \d teaching needs. Students come to accoun course Study Guide ‘This auihor-writen guicke provides students Quiz and Test Hints, Matching questions, Pil-in-the-Blank questions? iple-Chhoice questions, True/Palse questions, Exercises, and Problems for each cha Working Papers for Exercises and Problems Jnclude problem-specitic forms for preparing solutions for Exercises, A SB Problems, the Continuing Problem, and the Comprcheasive Problems from the textbook. These forms, with preprinted headings, provide a structure for the problems, which helps stuatomts get st .¢ fractional working papers tod and saves t Blank Working Papers. These Working Papers exercises and problems either from the text or prepared by the instructor. no preprinted headings. A quideat the front of the Working Papers tells students whieh for cach problem and are available onfine in a .pdi, printable allable for completing hey have Templates These templates are provided for selected loug or complicated enctof-chupter problems and provide assistance to the student. as they set up and work the problem, Certain cells are coded to display a red asterisk when an incorrect answer is emered, which heips students stay on track, Selected problems that can be solved tising these templates are designated by’ an icon. General Ledger Software ‘The CIC, sonware is now being offered in a new sling format, Suidents can solve selected enclaf-chaptor assigiients ta a format that ‘cmulates commercial genera ledger software, Students make entsies ime the general journal of spectal journals, track the posting of the entries to the general ledger, nd create financlal statements or reports, This gives students important exposure to ‘commercial accounting software, yet in a manner that IS more fongiving of stucient ly gracked online. errors, Assignments area Product Support Web Site www.cengage.com/accounting/warren ‘This site provides students with a wealth of intsoductory accounting resources, inching quizzing and supplement downloads and access to the Enhanced Excel" Templversations we've had with principles of accounting professors and students over the past several yea College Mia Breen Deivtsa Community College Anne ML, Gaede Broseane College James Cletak ‘Cuyahoga Comenurty College us, We want to take this opportunity to thank them for their perspective: feedback on textbook use, 24e represents our finest edition yet! wiveraity Lynn P Hedtge Comnratity College Gloria Graylens Aikdroy Banter Brown College Philip tm Northern Virgina ‘Community Gallege Sienandale Campiee Robert Gronstal Metropolitan Community College Suds Dakota State ‘Unversity Christopher Kwak, De dnca College nd 1g iaitructoes ane mcrabers off ce Bie Sky edincral board. whose helpful comments and feedback com Sin profes! icee oh Be presets toad cory Gaerncn of Was Gos Glecedand State Ua Jenny Resnic Sabla Monica Cotes Guyudregea Gomuenveey allege Retest Sinotin Gurus College Raivert ©, teeth Irvine Vatley College ‘The following stusentsautcrded our Blue Sky session, providing Insights ine the hie of aa aceounting studen Sucy Appleton Northern Kenney Cinversiy Danny Beacon Xavier University steve Busey Xavler Umiversity ston Butcher Xavier Unitwrsily Sunanne Bhazel, Nerier University Jenny Daugherty (Cee ten Northern Nemtnely Northern Kenney ‘University Cintcersin allory Malinoska fectens Poesier Xavier €niversity College Clare McGrath Xavier Unhcersity bobby Broking, Napier Cntortity Hiccia Mama Navler Urtversly Steve Laas Natler Univesity Jessica Nichols Norahorm Rratoky Univesity Oncer Ochieng Noritnrn Keniely Cntrersity Rick Riva Sinclair Commsnity College Max Roberts Sinclair Community College Anthony Sasi Xavier @niversy ‘The following individuals twok the tase ta participate in surveys, online sessions, content reviews, and test bank Bridget Anakwe Delaware State Unievrs Julia te Angst North Aransas Cobdoge i Arington Nortburest Mississippl ‘Comunity College Donna’T, Ascenai Bryant avud Siratron College Syracuse Eanpus Ed Bagley Darton Collage Judy Beebe James taker Brenda J Bineehatel Harford Commemity College College ric D. Hosewick The nteorety of West ‘lorida Usa Cooley Hanks Enteeraiy of Mdsigan tiryan C. Houchard Luton Bean Florida Iti of Teck noloay University Wester Orage University ‘Gren River Comanety Sou thorn New Ha ipabiee Th tle $M. Beinton Celestina Calcoya Mla Dade College John €aliste Cornell Usloersily Deborah Chabad Louisiana Techical Cotlege Marilyn 6. Ciotina Deseo Community CollegeFadl Clay Cape Cont Commaensiy College Lier M. Cote Jobusera County Cominanity Cole Cori Oliver Crews. Waycross Collage Jule Daigle Fe, Range Communsiy: Colne Julie Dailey Contre! Virginia ‘Commanity College John M. Daugherty Pitt Community College Becky Davis Eat Miss ‘Community College Ginger Dennis Weal Geurgla Texbnucal College Scot A, Ea Wisconsi Fuciambesc Texbnical College Pate Feller Nasbeile State Commas College Mike Foland Soiutburestern Miss College Belertde Mamarice Community College Jeune Gexare Franklin Pierce Unizorsity Christophee Gier, Fast Lax Angeles Colle, ontory Park, Co Metropolitan State Unteersity, $8 Pw, Minnesota Marina Geaw Houston Community Judith Grenkowiex Kirtlanal Community ‘Collcge Vicki Greshile Jamestown Colle Lillian 8, Grose ur Lacly of Hody Cross College Denise T Guest Germanna Gonmuaity Collcee 1 J-Gunming Kent State University at as! Liverpool asic take Southwest Tennesice ‘Conary Calege ‘Sara lacs Anapaoe Commands College Manhow P,Helinskt Northen! Labeoiew Colle Wands Mado Alabama Soutbers “Com maity Calege Tok A.Jensen Slerva College faut Xfhinson Mistapps elf Cou Contant Coege Mary Kline Black Hasek College Jan Krat Northwest Coe David W: Kron hy Xanutuky Larson Midddesee Comunity College Becnda 6, Laver Northeastern Junior Goltage Tel Lewis Mursballtoun Community College Marion Lojoks SEN Oramge County Comment Caltege Ming tu Santa Monica Colaye Dor tucy Inilian River Sie College Decbile buna E1Puso Communtty Collage Anna L Lusher Slippery Rock Unizersily Burk dyn Sandie Comnau nity College Liegette Malar Harold Washengéon allege Irene Meanes Untersity James B. Meir Cletcland State Commaity Calley Jom be Miter ‘Metroposiian Community College Peter Moloney Corrie Cotte Janet Morrow Eat Conia! Comonity College Pamela G. Needhaen Norihenst Mississipn ‘Commaruity Calexe Jeannie M.Neil Onange Gout! Calg, ‘Con Besa, Carolyn Netwon Cofferuite Community Callege Joseph Maline Nicassio Wesinmo roland Goat ‘Commrarity Cllege Rotrert 1. Osborne Oba Dominican Unteersiy Seo Paseon Nort lelabo Cottage Ronald Peart ay Caloge acted Rermia Essex County College Evick Pifor Lake Michigan College Maruunne 6. Pindar Lackawanna College erneth J. Phacinské State University of Neue ‘ork aa Prdomia Decbiie Porter Padeseater Commolty College Shicley J Powell, Arkunsais State Tniverity Bobo Erie M. Primuth Cuyadegea Commatiy allege Michact indie Gnend View University Rita Prichett Brovand Community College Joy Ramsey Sart Jacinto Colleen Patek Retin Nassats Commndty Calle Richaed Ricket South Montane ‘Commaity Cotewe Patricia 6, Roshto University of Zeuisiatta—Monroe Martin Sabo Community College of Beneer Tracy M.Schmette Waylee Community College Denis C, Shes Southern New HampsbiceChapter 1 Introduction to Accounting and Business 1 Nature of Business and Accounting 2 “Types of Businesses 2 “The Role of accou Role of tthies 4m Accounting and Business 4 “Opportunities for Accountants 3 Generally Accepted Accounting Principles 6 faternational Connection: International Financial Reporting Standards (IFRS) 7 ‘Business Entity Concept 7 The Cost Concept # ‘The Accounting Equation 9 Business Transactions and the Accounting Equation 9 Business Connection: The Accounting Equation 10 Financial Statements 15 Income Statement 15 Statement of Owsier's Equity 16 alance Sheet 16 Statement of Cash Flows 18 Interrelationships Among Fi sneial Statements 20 Financial Analysis and Interpretation: Ratio of Liabilities to Owner's Equity 21 Chapter 2 Analyzi g Transactions 51 Using Accotints to Record Trandacthiins 52 ‘Chart of Accounts 34 Business Connection: The Hijacking Receivable 5 Double-Entry Accounting System 55 Balance Sheet Accounts Income Statement Accorints $6 ‘Owner Withdrawals 56 Nomal Balances $6 Joumalizing 57 Posting Journal Entries to Accounts 61 Business Connection: Computerized Accounting Systems 65 Trial Balance 70 Errors Aflocting the Trial Balance 7 Errors Not Affecting the Trial Balance 72 Financial Analysis and Interpretation: Horizontal Analysis 73 Chapter 3. The Adjusting Process 103 Nature of the Adjusting Process 104 The Adjusting Process 104 Types of Accounts Requiring Adjustment 105 Adjusting Entries 110 Prepaid Expenses 110 Uneamest Revenues 113 Accrued Revenues 114 ‘Accmved Expenses 115 Depreciation Expense 116 Business Connection: Ford Motor Company Warranties 117 ‘Summary of Adjustment Process 119 Business Connection: Microsoft Corporation 121 Adjusted Trial Balance 123 Financial Analysis and lnterpretatior Vertical Analysis 125 Chapter Completing the Accounting Cycle_149 Flow of Accounting Information 150 Financial Statements 152 Income Statement 152 Stitement of Owner's Equity 154 Balance Sheet 153.International Connection: intecnazional Differences 156 Closing Entries 156 JJournatizings and Posting Closing: Entries 157 PostClosing Trl Datance 159 Accounting Cycle 162 Wlustration of the Accounting Cycle 163 step 1. Analyaing and Recording Transactions in the Journal 164 Step 2. Posiing Transactions ta the Ledger 164 Step 3. Preparing an Unadjusted Tal Balance 166 Seep 4 Assembling and Analyzing Adjustment Data 167 Step 5. Preparing aa Optional EndolPeriod Sprcadshoet 16° Step 6. Journalizing and Posting ‘Adjusting Entcles 167 Step 7. Preparing an Adjusted Trial Balance 168 Scop 8. Preparing the Financial Statements 168 step 9. Journalizing and Posting Closing Entsies 179 Step 10. Preparing a Post Closing Tell Malance 170 Fiscal Year 173 Business Connection: Cheosing a Fiscal Year 174 Financial Analysis and Interpretetion: Working Capital and Current Ratio 174 Appendix: End-of-Period Spreadsheet (Work Sheet) 176 Step E Enter the Title 176 Step 2. Enter the Unadiusted Trial Baance: 176 Seep 3. Ener the Aaeistments 1 Stop 4. Ener the Adjusted Trial Balance: 1764 Step 5. Extend the Accounts ta the Income Statement and Baliace Sheet ‘Cotumas 176A, Step 6, Total the Income Statement and Balance Sheet Columns, ¢ mypare the Net tneonre ‘or Net Loss, and Gomplete the Spread= sheet 176 Preparing the Fina Spreadsheet fal Statements from the 6c Comprehensive Problem 1 202 Chapter 5 Accounting Systems 205 6 Manual Accounting Systems 207 Subsidy Ledgers 2 ‘special Journals 207 Revenue Journal 289 ic Accounting Systems 206 Contents ev ashe ieceipts Jo Accaiats Receivable Control Account andl Subsidiary Leger 214 Porchases Journal 21 Cash Payments Journal 217 Accounts Payable Consol Account and Subsidiary Ledger 219 Computerized Accoun| Business Connection: Accounting Systems and Profit Measurement 220 19 Systems 220 Business Connection: TurboTax 222 E-Commerce 223, Financial Analysis and Interpretation: Segment Analysis 223 Chapter 6 Accounti Merchandisi g for ing Businesses 253 Nature of Merchandising Businesses 254 Financial Statements for a Merchandi Business 255 Muliplesstep Encame 5§ Single-Step Income Statement 258 Statement of Owner's Equity 258 2 ment 255 Babine Sheet Busnes: Connection: H&P Block versus The Home Depot 260 Merchandising Transactions 260 Chart of Accounts for a Merchandising Business 260 Sales Teansa Purchase Transactions 266 ions 260 Summary: Recording Merelnandive Inventory 271 Sales Taxes le Discounts 271 Business Gonnestion: Sales Taxes 272 Dual Nature of Merchandise Teanssctions 272 The Adjusting and Closing Process 274 Adjusting, Entry far (avenwory Shrinkage Closing Entries 275 Financial Analysis and Interpretation: Ratio of Net Sales to Assets 276 Appendix: The Periodic Inventory System 278. Cost of Merchandise Sold Using the Periodic Inventory System 278 Chart of Accounts Cader the Periodic Inventory System 278 Reconding Merchandise Transactions Under the »Adjusting Process Under the Reriadic tnventory ‘System 261 Financial Statements Under the Periodic Inventory 281 Closing Entskes Coder Syste 261 Comprehensive Problem 2 306 Practien Sats Glorious Garcon Lawn Servi “This sett a service business operated a8 0 props torship. Includes a narative of transactions andl Instructions foean optional solution with na debits fad cree. Ths set can be soled! manually or with the General Ledger software, 7_Invento Chast $311 Control of Inventory 312 Safeguarding Inventory 312 Reporting Lavestory 313 Inventory Cost Flow Assumptions 313 Inventory Costing Metheds Under a Perpetual Inventory System 316 First, Fir-Out Method 3 Listin, Pist-Out Method 3 International Conneetion: International Financial Reporting Standards (IFRS) 319 Average Cost Method 319 Computerized Perpetual Inventory Costing Methads Under a Periodic Inventory System 319 FieseIn Fies-Out Method 319 Lastin, Plist-Oul Methedl 320 Average Gost Method 321 Comparing Inventory Costing Methods 322 Reporting Merchandise Inventory in the Financial Statements 324 Valuation at Lawer of Cost or Market 32 entony Systems 329° Valuation at Net Realieable Value 525 Business Connection: Inventory Write-Downs 326 Merctuindise Inventory on the Balance Sheet 526 Effect of inventory Errors on ahe Fi Statement $26 Business Connection: Ropid Inventory at Costco 329 cial Financial Analysis and interpretation: inventory Turnover and Number of Days’ Sales in Inventory 330 Appendix; Estimating Inventory Cost 332 Retail Method of Inventory Casting 332 Gross Poolit Method of Lavemtory Gosting 933 Chapter 8 Sarbanes-Oxley, Internal Control, and Cash 355 Sarbanes-Oxley Act of 2002 356 Internal Control 358 Objectives of lntomal Conteol 358 Busines: Connection: Employee Fraud 358 Elements OF Internal Contiot 398 Contiat Environment $59 isk Aswessinent 360 Control Procedares 360 Monitering 362 Information and Communication 362 Limitations of Intexnal Contea! 363 Cash Controls Over Receipts and Payments 363, Control of Cash Receipes 464 Control of Cash Payments $648 Bank Accounts 366 bank Statement 566 Using the Bank Statens Over Gash 36 Bank Reconciliation 369 Special-Purpose Cash Funds 373 Financial Statement Reporting of Cash 374 Was 4 Conteol Financial Analysis and interpretation: Ratio of Cash fo Monthly Cash Expenses 375 Business Connection: Microsoft Corporation 377 Chapter9 Receivables 401 Other Receivables. 403, Uncolleetible Receivables 403 Direct Write-Off Method for Uncollectible Accounts 403 Allowance Method for Uncollectible Accounts 404 Writes fo the Allowance Accovat 408 Estimating Uncollectibles 407 Business Connection: Allowance Percentages ‘Across Companies 407 Comparing Direct Write-Gff and Allowance Methods 412 Notes Receivable 413 Characteristics of Notes Receivable 413 Accounting for Notes Receivable 424Reporting Receivables on the Balance Sheet 416 Financial Analysis and Interpretotion: Accounts Receivabfe Turnover and Number of Days’ Sales in Receivables 416 Business Connection: Desta Air Lines 418 Chapter 10 Fixed Assets and Intangible Assets 445 Nature of Fixed Assets 446 Slassifying Gosts 447 The Cost of Fixed Assets 448 Capital and Revenue Expenditures: 149 Leasing Fived Aesers 430 Accounting for Depreciation 451 Factors in Computing Depreciation SemightLine Method 453 Units-of Production Method 454 Double-Deckining-Halance Method 135 Coinpattag Depicclition Methods 156 Deprectition for Federal Income Tax 457 Business Connection: Depreciating Animals? 457 Revising Depreciation Estimates 458 Disposal of Fixed Assets 459 Discarding, Fixed Assets (59 Selling Fined Assets 160 Natural Resources 461 Intangible Assets 462 Parents 462, International Connection: Intemational Financial Reporting Standards (IFRS) 462 Copyeights ac Trademarks 168 inancial Reporting for Fixed Assets and Intangible Assets 465 Financial Analysis and Interpretaticn: Fixed Asset Turnover Ratio 466 Business Connection: Hub-and-spoke or Point-to-Point? 466 ilar Fixed Appendix: Exchanging Assets 468, Liss om Exchange 468 Contents xxwil bilities Chapter 117 Current Lit and Payroll 489 Current Liabilities 490 Accaunts Payable 499 Cusrent Portion of Longeierm Debt 491 Shorten Nowes Payable 491 Payroll and Payroll Taxes 493 shifty for Eraphoyee: Earnings 493 Deductions from Emplayee Earnings 494 Computing Employee Net Pay 496 Lanilty for Employer's Paysoll Taxes 497 Business Connection: The Most You Will Ever Bay 498 Accounting Systems for Payroll and Payroll Taxes 498 Payroll Register 498 Employee's Bamings Revo! $00 Payroll Checks 501 Payroll System Diagram 502 ols for Payroll Systems $03 Employees’ Fringe Benefits 504 Vacation Pay S04 Pensions 505 Posiretirament Henelts Otlce than Pensions 806 ‘Cuerent Liabilities on the Balance Sheet 306 Business Connection: General Motors Pension Problents 507 Contingent Liabilities 507 Pyobable nd Estimable 507 Probab ot Pi Reasonably Possible 50s Remote 508 Financial Analysis and Interpretation: ‘Quick Ratio 509 Comprehensive Problem 3 532 Practice Set: Pumplag iron This Sets & merchandising besiness operated at & proprstership, ft Includes business documents, ane itcan be sobved manualy crwth the General Ledner software Practice Set: Lucy's Doggie Care his set includes payroll ranssctions fr a mer chancising busines operated asa proprietorship. lncluces business lacements anditcan be salved manually er with the General Leager sofware,Chapter 12 Accounting for Partnerships and Limited Liability Companies 537 Proprietorships, Partnerships, and Limited Liability Companies 538 Propriciorships 538 Partnerships 539 Business Connection: Breaking Up Is Hard to Do 529 Limited Llabitity Companies 540 Comparing Proprictorships, Partnerships and Limited Liability Companies +19 Business Connection: Organizational Forms in the Accounting Industry 541 Forming and Dividing Income ofa Partnership 541 Forming Partnership 541 Dividing tncome $42 Partner Admission and Withdrawal $45 Admitting a Partner 515 Withdrawal of a Partner 550 Death of a Partner $5 Liquidating Partnerships 550 Gain on Realization 551 Iciency 355, Statement of Partnership Equity 557 Financial Analysis and Interpretation. Revenue per Employee 558 Chaprer 13 Corporations: Organization, Stock Transactions, and Dividends 581 Nature of a Corporation 582 Characteristics of a Coxporation S82 Forming a Corporation 384 Stockholders’ Equity 584 Paid-In Capital from Issuing Stock 585 Ghutacteristcs of Stock 585, Classes of Stock $85 Insting Stock $8 Preaniuen on Stock NowPar Stock $88 sae Business Connection: Cisco Systems, inc. 589 International Connection: IFRS for SIMEs 590 Accounting fer Dividends 590 cash Dividends 590 stock Dividends 592 Treasury Stock Transactions $93 Reporting Stockholders’ Equity 595 Stockholders’ Equity on the Balance Sheet 595 Reporting Retained Earnings $96 Statement of Stockholders’ Equity S58 Reporting Stockhal Stock Splits 599 Business Connection: Bulfet on Stock Splits 600 1° Equity for Mornia’ Joe 59% Financial Analysis and Interpretation: Earnings per Share 600 Practice Set: Art by Design This seis «sence and merchandsing business operated asa cameration Itineudes erative for she ‘months of traiactions, which are tobe recordectin ‘ganeral journal The set ean be zehed manualy ot with the GenetalLedger software Practice Set: Digital Revolution Services This set is 2 departmentatzed merchanslsing bust mess operated as 8 comparatic. ft includes 2 narative cof trensactons, whieh ave to be reccrded in special fourmas. The set can be solved manually or with the Ganerat Ledger sofware. < 14 Long-Term Liabilities: Bonds and Notes 625 Financing Corporations 626 Nature of Bonds Payable 628 ond Characteristics and Terminology 628 Issuing Bonds 629 . Government Debt 629 Accounting for Bonds Payable 630 Boncls (seucd at Face Amount 630 ons feucd at « Discount 630 Amostizingg a Bond! Discount 631 Bonds Issuiod at a Prealu Amostiziny. a Bond Premium 633 Proceeds fr Business Connectio Business Connection: General Motors Bonds 634 Bond Redemption 635 Installment Notes 636 tssuing an tastillment No ‘annual Payments 056 Reporting Long-Term Liabilities 638. Financial Analysis and interpretation: Number of Times Interest Charges Are Earned 639Chapter 21 Cost Behavior and Cost-Volume-Profit Analysis 957 Cost Behavior 958 Vartuble Casts 958; Fixed Costs 960 Mixed Costs 941 ‘Summary of Cast Behav Concepts Business Connection: Franchising 963 Cost-Volume-Profit Relationships 964 Contribution Margin 64 9 Margin Ratio 96% Cait Contdbution Sangin 965 contribu Mathematical Approach to Cost-Volume-Proftt Analysis 966 Business Connection: Breaking Even in the Airline Industry 979 Target Prosit 970, Graphie Approach to Cost-Volume-Profit Analysis 971 Cost-Volume-Peoft (Ii ProfleVolume Chart 973 Use of Computers in Cost Volume-Proft Analysis 975 6 of Cost-Valinie Prat sven} Chart 972 Asa salysis O76 Special Cost-Volume-Profit Relationships 976 Sales Mix Considerations 976 Operating Ley Mangin of sateey 979 Appendix: Variable Costing 980 Chapter 22 Budget Nature and Objectives of Budgeting 1008 Objectives of Huudgeting 1098 Human Dichavior and Budgeting Loo? Budgeting Systems 1010 g 1007 Business Connection: U.S. Federal Budget Deficit 1012 Flexibke Budget 1012 Computerized Budgeting Systems 1014, Business Connection: Build versus Harvest 1034 Master Budget 1015 Income Statement Budgets 1016 Sales Budget 16 Production Mudgst 1017 Contents ex Dircet Materials Purchases tudget 1018 Direct Lalor Cast thodget 101 Factory Overhead Cost faudget 1021 Cot of Goods Sold Budget 1021 1g and Administrative Expenses Duelyet 1028 Budgeted income Statement 102) alance Sheet Budgets 1023 cash Bardget 1024 Capital Expenditures Budget 1027 Budgeted Balance Shect 1028 Chapter 23. Performance Evaluation Using Variances from Standard Costs 1055 Standards 1056 Types of Standards 198 Reviewing and Revising Standards 1057 Criticisms of Standard Costs 1087 Business Connection: Making the Grade in the Real World—The 360-Degree Review 1058 Budgetary Performance Evaluation 1058 [Bulger Performance Report 1059 Manotactaring Cost Direct Materials and Direct Labor Variances 1061 inex Materials Variances 1061 Business Connection: Would You Like Dessert? 1067 Direct Labor Nurdances 1064 Factory Overhead Variances 1066 “Thee Factory Overhead! Flecible Budget 106 Variable Factory Overhead Controllable Variance 1068 Fixed Factory Overhead Volume Variance 1069 Reporting Factory Overhead Varkinces L071 Factory Overhead Account 1071 Recording and Reporting Variances from Standards 1073 Nonfinancial Performance Measures 1076 Comprehensive Problem 5 1096 Chapter 24 Performance Evaluation for Decentralized Operations 1101 Centralized and Decentralized Operations 1102 ‘Advantages of Decentralization 1103 Disadvantages of Docentealiation 1103Business Connection: Centralized vs. Decentralized Research and Development 1103 Responsibility Accounting 1103 Responsibility Accounting for Cost Centers 1104 Responsibility Accounting for Profit Centers 1106 Service Deparinent Charges 1106 Profit Center Reporting, 1108 Responsibility Accounting for Investment Centers 1109 Rate of Reusen on lavestment 1310 Business Connection: Boosting RO! 1113 13 The Salanced Ssonccant 1114 Nevidual Insorne Transfer Pricing 1115 Market Price Approach 1116 ‘Nexpotinied Price Approach, 1117 Cost Price Approach 1119 Chapter 25. Differential Analysis, Product Pricing, and Activity-Based Costing 1145 Differential Analysis 1946 Lsase 0 Sell 18 Discontinue a Segment oF Product 1149 Make oF Buy 1151 Replace Eq Process of Sell Lt Accept Bausiness at a Special Price 1156 Business Connection: Name Your Own Price 1157 Setting Normal Product Selling Prices 1158. Product Gost Concept UF Business Connestions iPad Praduct Cast 1760 Target Costing 1161 Production Bottlenecks, Pricing, and Profits 1161 Prosluction Motdenccks and Profits 1162 Proxluetion Botlences sud Pricing, 1162 Activity-Based Costing Method 1164 Lstimated Activity Costs 1164 Activity Rates L165 Overhead Allocation Dangers of Product Cost Distortion 1166 Appendix: Total and Variable Cost Concepts to Setting Normal Price 1168 otal Cost Concept 1164 Variable Cos Concept 1170 chaprer 26 Capital Investment Analysis 1197 Nature of Capital Investment Analysis 1198 Methods Not Using Present Values 1198. “Average Rate of Return Method 1199 cash Payback Method 1200 Methods Using Present Values 1201 Present Value Concepts 1202 Net Present Value Method 1204 Inaeroal Rate of Return Method! 1206 Business Connection: Panera Bread Store Rate of Return 1209 Factors That Complicate Capital Investment Analysis 1209 Ineome Tax 1209 Unequal Proposal Lives 1210 pital Investment 1211 Lease versus Vncertainty 1 Business Connection: Avatar: The Most Expensive Movie Ever Made (and the Most Successful) 1212 Shanges in Price Levels 12 Quilltathe Considerations 1213 Capital Rationing 1213 Appendix A: Interest Tables &-2 Appendix B: Reversing Entries B-1 Appendix C: Nike, Inc. 2010 Annual Report C-1 Appendix D: International Financial Reporting Standards D-1 Glossary G-1 Subject Index 1-1 Company Index 1-17O)) Introduction to Accounting Eee test Crt 1 gore of football, there fen alot of noe The bend plays, the fans cheer, and reworks fght up aatd. Obviously, the fans ae com: ‘mited and cave about the outcome ofthe geen, ust ie fans at football gam uintaganst ine all tear win can be winning in the ibe benefits ‘make money Google, one of the Nos wise co es on th vist the 3 search, As one has to an ultimate ans ‘Google’ search tocks ompany? Does ing helps 19 aunting eormation tells pany that ma fheney, but Ant fore you and me, Go rom adverse, Do you thinkLeaming Objectives Ae sje cept yousetd beet er coe mre ntl cesar tne recounang Team Monae of acounurgindiinss Telooftics i scstingand Bane partner Acouaes Summanze the evelopment of accountng princpies ard reate tem wo proce, “General Acepted Accourtung Principles ‘usenet Concept ‘he cout Concept en State the accounting equation and define eachelernent ofthe equation. Theacceunting Equation ea ‘Deserve and tat ate oe business transact canbe ecordedin terms ‘ofthe reuteng change inthe elementsofthe aecauniing equation. Busines Tiamactansand the Accounting Equation ceva Describe the francit statements ofa propietotihip and explain how they nietelate, Financia sttemenss Statamont ef Oumar Eq uns Aaleres Sheet ets Statement of Cas Flows ee Ineetlanianshipe eran Hnancia estents \Deiche r t ate the Le theo Ato hers ty inmvlusting company’s francaleandtion nunca dnapavandintepretatce: Fate of labllteste Owners faulty LB Nature of Business and Accounting scouring. an etics preven A business! is an omganization in which basic resources (inputs), such as materials and Labor, are assembled and processed to provide goods OF services (outputs) 10 customers, Businesses come in all sizes, from a local coflee house 10 starbucks, which sells over $10 billion of coftice and related products each year most businesses fs to earn a profit, Profit is the clfference berween the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services. This text focuses on businesses oper sting to carn a profit. However, many of the sme concepts and principles also apply {o not-for-profit organizations such a> hospitals, churches, ans government agensies, Types of Businesses Three types of businesses opersed for profit inchide service manufacturing businesses. ich aype of business and 50 ples are described below. Service bustnesses provide services rather than products te customers, Delta Ai Lines (irans portation services) The Walt Olsney Company (entertainment services) Merchandising businesses sell proxlucts they purchase from other businesses Wl Mart (general merchandise) Amazon.com (Internet books, music, videos) Manufacturing businesses change basic inputs into products 1 eustonners, Ford Motor Co. Keas, trucks, vans) Dail ine. (personal computers) ‘campeon tem ape athe and lth eaCchepter 1 Inticduction to Accounting sed Business 3 The Role of Accounting in Business. ‘The role of accounting in business is to provide information for managers to use in ‘operating the business, In addition, accounting provides information {0 other Users jn assessing the economic performance and condition of the business, ‘Thus, accounting can he defines as an information system that provieles reports to usees about the cconomie activities and condition of a busiaess. You muy thisk Not ‘Accoting isan ‘of accounting as the “language of business.” This is because accounting is the means formatn system by which businesses fnanelal information & communictted to users, epider ‘Ti froeuis by MCh aecOimaing pegridis torn users wae Goma: | LPN wad 1. Identify users, sopcition of 3 besaese Hy Auseat need afin acl 3. Design te accouhuog Information sywein to meet wets pei ((Recbed Golconda aber basics sub eltd re 8. Prepare accbuaitag reports for werk. ‘As Musee in Eehibi 1, sens of accounilag ivfommation can be delle! ti two groupe itera uncer anc extemal users EXHIBIT 1 Accounting as Internal users of accounting information include managers and employees. The: users ate diecelly involved in managing and operating the business. The ates of ac ‘counting that provides internal users with information Is called managerial account- ing or management aecounting. ‘The objective of managerial accounting is to proviele relevant and timely informa tion for managers’ and employees’ decision-making neces. Often times, such infor. ution is sensitive and is not distributed outside the business, Examples of sensitive Information might include information about customers, prices, and plans to expand the business, Managerial accountants employed by a business are employed in. pri= vate accounting. External users of accounting information include investors, creditors, customers, and the government. These users ire not directly involved in managing and operating the business, The area af accounting that provides external usces wit iy called financial accounting. ‘The objective of financial accounting is to provide selevant and timely information for the decision-making needs of users outside of the business, For example, financial reporis on the operations and condition of the business are useful for banks and Information6 Chapter 1 Intradvetion to Accounting and Business more businesses have come to recognize the importance and val information As indicated carlicr, accountants employed by a business are employed in pri vale accounting, Private accountants have a variety of possible career options within eof accounting 1 company, Some ef these carcer options are shown in Exhibit 4 along with their slanting salaries. Accountants who provide audit services, called auditors, verify dhe accuracy of financhil records, accounts, and systems, As shown in Exhibit 4, several jeers have certification options their staff who provide services employed in public accounting. In public accounting, an accountant may practice as an individual ors a member of a public accounting firm. Public accountants who have meta state's education, experience, and examination requirements may become Certified Public Accountants (CPAS). CPAs generally perform general accounting, a flee basis are said to be EXHIBIT 4 Accounting Career Paths and Salaries ‘Accounting Career Track Pree ecoursing Pb Aecounting eS ES eas commenpbyetty Bakken ans ‘Srp operent sesrereepomre Papa sans | canta Peden cent scant sa Baba ios Conant Bon | catidtnrnenon fenan en ute sas | Cuneaima sar itematon eae sssana | attain ene Sysco ‘ecomunaenpyed | Lc ern wae | cantare ‘salon fect 0 Seooasrvaes voaltome stam | cantare = Ssunmatae ie Seveopmentot scouring princes od cate then 0 practice audit, oF tax services. As can be soen ia Exhibit 4, CPAs have slightly better stating salaries than private accountants. Cascer statistics indicate, however, that these sakey differences tend w disappear over tim Because all functions within a business use accounting information, experience in private or public aecounting provides 3 solid foundation for # earcer. Many: post tions in industry and in government agencies are held by inclivicasls with accounting bbackgrouinels Generally Accepted Accounting Principles Ifa company’s management could record and report financial data as it suw fit, com: parisons among companies would he difficult, not impossible. Thus, Baancial accot {ants follow generally accepted accounting principtes (GAAP) in preparing repens, e llow investors and other ssers to compare one: company to another,Cchepter 1 Intioduction to Accounting sed Business 7 Accounting prine develop from research, accepted! accounting: practices, and pranouncements of regulators, Within the United States, the Financial Accounting Standards Beard (FASB) has the primary responsibility for developing, accounting principles. The FAST publishes Staicments of Financial Accounting Stan- dards 35 well 3s hrterpretations of these St Exchange Commission (SEC), an agency of the US. gover and fiaancial disclosures for companies whose shares of ownership. (stock) are traded and sole to the public, The SEG normally accepts the accounting principles set forth by the FASB, However, the SEC may issue StaiJ Accounting Bul- letins on accounting matters that may not have been acklressed by the FASE, Many couatries outside the United States use generally accepted accousting pin ‘ciples adopted by the International Accounting Standards Doard (LASD). The LASD Issues futernational Financial Reporting Siandards (IFRS). Significant differences uevently exist between FAS and IASB accounting principles, However, the FASB: andl 1ASB are: working together to reduce and eliminauve these differences into a single set of accounting principles. Such = set of Worldwide accounting principles would help facilitate investment and business in an increasingly global economy. In this chapter and text, accounting principles and concepts are emphasized. It is by this emphasis on the “why” as well as the “how" that you will gain an under standing of accounting adarcs. In addition, the Securities and. nent, has authority over > + oftxshes organizations in the Uned States tubutesefapartneihip anda comperation (comb ined with partenshis + Often aed arn attemative toa partnership + Has txandlegal iby advantages or auners “The three types of businesses discussed earlier—service, merchandising, and manu: facturing —may be organized as proprietorships, partnerships, corparations, of limited liability companies, Hecause of the ege amount of resources required to operate a ‘manufacturing business, most manufacturing businesses such as Ford IaotorCompary are corporations, Mast large setailers such as Wal itartand Home Depot aze also cosporations, The Cost Concept Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price, To illastrate, assume that Aaron Publishers purchased the following building om February 20, 2010, for $150,000, Plcebsted by ele on drway 1 2010 $6000 ‘Avon Publshers'inal offerte buy on Janusty 31,2010 vwoz00 Purchase pile on Febraaty 26,2010 1a00 Estimated selling pies on December 31,2012 220000 ‘Assessed value for property tates, December 31, 2012 190000 Under the cost concept, Aaron Publishers records the purchase of the building fon February 20, 2080, at the purchase price of $150,000. The other amounts listed above have no effect On the accounting records The fact that the building has an estimated selling price of $220,000 on Deven bor 41, 2012, inelicates that the building has inereased in value. However, 10 use the $220,000 in the accounting records would be to record an illusory or unsealized prot If Aaron Publishers sells the building on January 9, 2014, for $240,000, a profit of {$90,000 ($240,000 ~ $150,000) is then realized and recorded. The new owner would record $246)4000 as ies Cost of the building. The cost concept also involves the objectivity and unit of measure concepts. ‘The objectivity concept requires that the amounts recorced in the accounting recorcls be based on objective evidence. In exchanges between a buyer and a seller, both try to get the best price, Only the final agreed-upon amount is objective enough to be recorded in the accounting reconls. If amounts in the accounting reconls were constantly being revised upward or downward based on olfers, appraisals, and opt fons, accounting reports eauld become unstable and unreliable, The unit of measure concept reejuires that economic cata be recorded in elollars. Money is a common unit of measurement for reporting Fisanctal data and reports. ed ae ne (On Auatt 25, Gallatin Repat Service extended an offer of $125,000 for land that had been priced forsale st $150,000 ‘On september 3, Gata Real Service accepted the sellers countetafer of $ 137/000. On October 20, the land was assessed ata value of $98,000 for property tax purposes. On December 4, Gaiatin Repair Setvice was offered $160,000 fer the land by 2 rational retal chain. At what value should the land be recorded in Gelatin Repel Service's records? Follow My Example 1-1 31370000, Under the cost conceps, the lan shouldbe recorded at the cost ta Gallatin Repair Senice Practice Exercises: PE 1-1, PE1-18Cchepter 1 Intiodction to Accounting sed Business The Accounting Equation ‘The resources owned by a business are its assets, Examples of asset land, buildings, and equipment. The rights or claims to the assets are divided into Wo. rypest (1) the rights of credlitors and (2) the rights of owners. The rights of erodttors are the debts of the business and are called liabilities. The rights of the owners are cailled owner's equity. The following equation shows the relationship among asse liabilities, and owner's equity: Assets = Liabilities + Owner's Equity ‘This equation is called the accounting equation, Liabilikes usually are shown before owner's equity in the accounting equation because creditors have first rights to the assets, Given any two amounts, the accounting equation may be solved for the third un- known amount, To illustrate, i the assets osned by a business amount to $100,000 and the abilities amount 10 $30,000, the owner's equity i> equal to $70,000, a» shows below Astate-Uiabilties = Owners Equity 100000 $3000 = $70,000 Eudes State the xcountng cuaton and deine ich elenent othe enuation John Jootia the owner and operator of You're A Star, a motivational consuiting businest At the end of ts accounting period, Decermber31, 2011, Youre A Star has assets of $600,000 and lables of $350,000, Using the accounting feauation, determine the following amounts 2. Owners equity 9 of December 31,2011 1. Owners equity s of December 3, 2012, assuming that assets increased by $130,000 and lables decreased by 25000 during 2012 Pe ceed ‘Assets = Lnbitles + Owners Equity $800,000 = $350,000 + Owner's Equity ‘Owners Equity = $450 000 Bb. Fst determine the chenge in Ores Equity during 2012s follows ‘Arsetim Liabilities + Owners Equty $1307000 ~525/000 + Owner's Equity (Owners Equity = $155 000 Next add the change in Owners Equity on December 31,2011 to ative at Owner's Equity on December 31 shown below. Onvners Equity on December 1, 2012 = $408,000 = $450)000 = $185,000 Business Transactions and the Accounting Equation a monthly telephone bill of $168 alfects a business's financial condition because now has less cash on hand, Such an ecanomic event or condition that directly changes an entity's financial condition or its results of operations is a business transaction. For example, purchasing land for $50,00% is a business transaction. In contrast, a change In a business's credit rating does not directly affect cash or any other asset, Habilily, or owners equity amount “Practice Exercises: PE 1-24, escibe and Marate how business taniactons con be recorded in tem of therending ‘hangeln the elenents colthe scouting10 Chapter inraduetion to Accounting and Business ‘THE ACCOUNTING EQUATION largest busines, such at Ford Motor Company, compe ries use the accounting equation. Some exampis tahen ‘The accounting equation serves asthe basic foundation for | from recent financial reports of welbknown companies are the accounting systems of all companies, From tha smal- | shown below. fet busines, such as the local convenience store, to the = Usblties + Owmers favity = S007 + S204 sma + aan = 4s + pe = asp + mz Mebensld's mae = 1507 + 13388 Merortt Cxporston Tram Ram 539558 Staves tines Co, Maso = 9355 + 4353 Wal ar NeaAD = salah 6 6528s Note: All business transactions can be stated in terms of elanges in the elements of dhe rion ean be illustrated by using some typical transactions. As basis for illustration, a business organized by Chris Clack is used ‘Assume that on November b, 2011, Chris Chick hegins bus ‘accaunting equation. known as NetSolutions, The first phase of Chris’: business pls Solutions as a service business assisting individuals and small b Abuses accoutnting equation, How business transactions affect the accound ‘transactions ean, a a edicts ess that wil be is 10 operate Net inesses in develop- ing Web pages and installing computer software, Chris expects this initial phase of the business to hst ane #0 to years. During this period, Chris plans on gathering information on the software and hardware needs of customers. During the second phase of the business plan, Chris phins to expand NetSolutions into a personalized retailer of softwane anh Iardaire for individuals ancl small businesses, Fach transaction during NetSolutions’ first month of operations is described the following paragraphs, The effect of each transiction on the accounting equation is then shown ‘Transaction A Nop 1, 2011 Chris Clark epositee! $25,000 in a bamle aceonns ie th NetSolutéons, tame of ‘This transaction increases the asset cash (on the left side of the extation) by $25,000, To balance the equation, the owner's equity (on the right side of the equtation) in creases by the same amount. The equity of the owner is identified using the owner's name and “Capital,” such as “Chris Clark, Capi ‘The effect af this transaction on NetSolutfons' accot Assets | = |_ownerstquity Cosh | = Eine, Cont ng equation fs shown below. is Clark Is the sole owner, NetSolutions is a proprietorship. Alsa, the NetSolutions, Under the nce Ch accounting equation shown above is only for the businesCchepter 1 intwocluction to Accounting and Business 13. Assets Liabilities + waersequity Accounts Che Clark, Feet Wages Rent Utlitiy Wise cash + Supies © Land Lad Payables Capital 4 Eine — Gp. - Exp. Ba - Exh bal 700 7380 OD | 2 oo TOTS Paying an amount on account is diffewat from paying an expense. The paylag of an expense reduces owners equity, a9 illustrated in transaction (©), Paying an ‘on acgount reduces the amount owed on a Kability Nov, 30, 2011 Chris Clark determined that the cost of supplics on hand at the end Transact of the month wes $550. "The cost of the supplies on hand €not yet useed at the endl of the month 4s $550, hus, $800 (81,450 ~ $550) of supplies must have boen used during the month, This decrease in supplics ix recorded as an expense, as shown below Assets apices + Owner's Equity “Accounts Chris Clethy Feces Wages Rent Supplies _UUites Cash © Supplies » Land Payable © Capital « famed = fp. = fp = Gp. = Ep. al poe” tase s0ea9 fae” 3800 | se 235-88) =o 50 R00 BaF SoD ep. eH a Nop, 30, 201 Chris Clark withdrew $2,000 from NetSotusions for personal use, Transaction 1 At the end of the month, Chris Clark w etrew $2,000 in cash from the business for personal use, This tranciction is the opposite of an investment in the business by the owner, Withdrawals by the owner should not be confused with expenses, With- detwals do not eepsesent assets oF services uscd in the process of exning revenues, Instead, withdeawals ave ial to the owner, Owner widheeawals are identified hy the owner's ma ‘aig. For example, Chis Clark's withdrawal Is kdentiffed as Chris Clark, Drawing. Like expenses, withdrawals ane recorded in a column to the right of Chris Glirk, Capital, The effect af the $2,000 withdrawal is as follows: Assate ) (Lisbon + Owners Equity “Accounts Chris Clark Cha Clark Fees —-Wages—-Rent ‘Supple Ulies Mic Cash + Supp. + land yy Payable + Caph J = Drawing + Gxmed = Bp. = Bap. = bap. = bap. > be. a a a C) Summary The trinsactions of NeSolutions are summarized at the top of the next age, Es itied by letter, and the balance of each accounting ‘equation el 1 every transaction, You should not the following is shown 1. The effect of every transaction #6 an incre oF a decrease tr ame OF mone Of the ae counting eqauation elements 2. The two silos of the accounting eqwution are atuays equate 3. The owner's equity is imereusect hy boy wtdalrreats by the owner. In adlition, the owacr’s equity Is freretued by rever decreased Dy expenses =m TE14 Chapter inrecuetionte Accounting and Business ‘assets = Mabiies + owners Equity ‘counts ChraClrk CnC Fees Wages Rent Suppies Wiese cash Supp. + Land = Payable + Captal - Drawing + famed- fp. Op - Op - fp - ba 435000 435000 “20.000 “000 7500 30000 p00 7500 al a880 7350 30000 5000 7500-2335 -600 50275 © 900 Bal, 9,900 30,600, p08 7a00 “as eo as aS a 20 Bul 7900 70000 ae 5D 700 3s To Seo TE bh. _-2000 =2000 Bat 5900 350 “gop © aoe) “Spm po I ol aE ‘The four types of transactions affecting owner's equity are ilusuated i Exhibit 5, re EXHIBIT 5 Typesof ‘Transactions Affecting Owner's Equity ot meer et oe (Sele Salvo Dellvery Service is eamed and operated by Jel Salvo, The fllowing selected ansactions were completed by Silo Delvery Service during Febrasry: Received cash from ona 3s additonal investment, $35,000, Paid creditor on accout, $1,800: Baked customers fox delivery serves on account. $17,290, 4. Received cash from customers on account, $6,740 5. Paid eath to awnerfr personal ute, $1,000. Incatathe effect of each transaction onthe accounting equation laments (Assets, Labites, Owner's Equity, Drawing. Revenue; and Expense). Also Indicate the specific tem within the accounting equation element thats affected. To Iastate the answer ta (1) shown below (1) Asset (Cash) increases by $35,000; Owners Equity Uoe! Salo, Capital increases by $35,000, (2) Ast (Cask) deseaes by $00; Unb Accounts Pay ble) decreases by #1800 €3) asset (certs Recs) inereses by 411250: even (every Servee Fea reas by $1125. (4) Asset (Cash) increases by $6,740: Asset (Accounts Receivable) decreases by $6,740. 65 Ast (Cat) decreas by 1000; Braning lot! Sah Braning Inresesby $1900.chapter 1 Inticduction to Accounting sed Business 15; Financial Statements labeorpal ————_o_$_ 132 — Aneel After transactions have been recorded! and summarbel, repons are prepared for users samedi The accounting reports proving this information are calle finanetal statements, The cee primary tinancil statements of a proprictorship are the income statement, the sstement ce ff owner's equity, the balance she, and the statement of cash flows. The order that the toa ch statement is described as follows, Financial statements are prepared and dhe nature of « order _ Prepared _Tinancil statement Description of statement 1. income statement ‘A uanmary ofthe evenue snd-enpentes orate posocer ume, such af aenonth or aye. 2 Statomentot owners Asner ofthe changes the mers ety that eulty ove occured diary aspect pede ie, suchas 2 ‘manth orayese, 3. Balancasheet A stol the assets Asta andawners ety ast especies usualy at theclose ol thelast day ola mmonth ar ayeor 4 Staementofeash flows A surenary cf hecash recess and cash payment fora ‘acai serod of tne such os amon. area, ‘The four financial statements and their interrelationships ane illustrated in Exhibit 6, fon page 17, The dats for the statements are taken from the summary of trensietione of NeiSolations on page 14, All financial statements are identified by the name of the business, the ttle of the statement, and the dave o¢ period of tite, The sata presented in the income statement, the statement of owner's equity, and the stitement of cash flows are for a period of lime, The data presented in the balance sheet are for a specifie date, Income Statement The Income sslement repons the revenles andl expenses for a period of me, bases om dhe matching gancept. This oncept is applied by marebing the enpenses. Mhenrevenaes reed cred drag pero ih the fevenc at those expenses generated. The excese_ ern te rtored ofthe revenue over the expenses Ir called net tacome, net profh, oF earninga, 1 SEMIDOM the expenses exceed the fevemi, the excess a net Tose. Secs The bene gad apeaees r SEGRE ere SEAS eee separate increases and decreases. Net income for a period increases the owner's teesnetloss. faq capita forthe perod. A nt lose cecancs the ower’ equhy (empha For the peo ‘The even anpnic fd the al ince #080 fx NeBotiane ae poe inthe income statement in EXRDH 6, on page 17. The once in whic the expenses tne lied inthe income aatcinent vases anong burinemss, Mest busine tapenses a order of size, bepting wih he lager ena, Micellancous expense Sully ah sth lat Hom, sands OF thé aici ‘The reveruas and expenses of Chickadee Travel Service for the year ended Apri $0, 2012, are Isted below Fees exned $242,200 Miscellaneous expense 12.950 Oifce expense 63,000 Wages expense 131,700 Prapare an income statement fr the current year ended April 20, 2012. (cenunued)16 Chapter nrecuetionte Accounting and Business CChickadoo Travel Sorvico Income Statement For the Year Ended April 30, 2012 Fees wained a $263,200 Espenses: Woaes expense. $131700 fice expense 43,000 Miscellanecis expense 12930 Total expentes os 207650 Netincome. F350 Practice Exercives PE 1-4A, PET-4B the own equity reports the changes equity for a ic. Wy prepared afer the Income suutement because the net income or net loss for the period must be reported in this statement, Similarly, it is pre: pared before the balance sheet, since the amount of awner’s equity a& the end of the period must be reported om the balance: shoot, Because of this, the statement of owners equity is often wiewed as the connecting link between the income stat ‘ment and balance sheet. Three types of transaetions affected owner's equity of NetSolutions during Novernber, 1, the original investment of $25,000, 2. the revenue and expenses that resulted ia act iacome of $3,050 for the month, and 3. 4 withdrawal of $2,000 by the owner, “The preceding information is summarized in the statement of owner's equity ta Es Example Exercise 1-5 Using the inceme statement for Chickaces Travel Service shown in Example Eeerelee 1-4, prepare a statement of ‘owner's equity fer the year ended Api 30,2012. Adam Callin, the owner, invested an adasional $50,000 in the business and withdrew cash of $30,000 for personal use during the year. The capital ef the owner, Adam Celi was ‘$8000 on May 1,201, the beginning ofthe curtent yee. Ss ones Chickadee Travel Service Statement of Owner's Equity or the Year Ended April 30, 2032 ‘Adar Calin, capital, May 1, 2011... men ‘Adehtional investment by onmer during year — $ 50000 [Net Income fer the yew 33530 3105550 ess witha 30000 Incresse in owners equity. 75,550, 555.550 Practice Exercises: PE 1-5A, PE 1-38 Balance Sheet ‘The balance sheet in Exhibit 6 reports the amounts of NetSolutions assets, Libilies, and owner's equity as of November 50, 2011. The asset and liability amounts are taken from the last Hine of the summary of transactions on page Mi. Ches Clark, Capitalchapter 1 Intioduction to Accounting sed Business 17 ‘NetSolutions ens Reese Expenses Wages expance, - suas Fent expense 00 Iiscllneans expenve eaten m5 “ta Roots are near eae ery omnes Peery PReeieet etry 7 abies cath 5 Ss00— Aecount pagal Sipglies i 50 Owners equity land secon 20000 Chwisclak capital. . Tl asicts sssscsens $6450 ‘Tal Babes and owner sey ‘NetSolutions aera ee Pere cerias reese er Ty Cath ans trom eoeratng setts Cash ecelved fom estorers cot 5 7500 Deduct cath payments tor expantes and payments EURO cae - 4900 Netcath flow fom operating activins Cath ow from investing active: (ash payments for purchateofland .o.oscne son ‘cash favs rom financing ots: Cash veceied az oamersinvetment o-oo 25000 Deki cat ith oe by orn 2000 etcaeh tom rom facing athe : Chisclark, capital November 12011 . 50 Investment er orember 1, 2017 sors sosseone ne + $2390 NetincorteforHoverber.a.ecctcesteso z 355) <—$——$=$—$—$—<—} Fisas0 Les withdrawal 7 2000 ican, capi November 30,2011. ies 8 aaa EXHIBIT 6 Financial Statements for NetSolutions20 chapter 1 Invreduetionte Accounting and Business ee ‘Chickadee Travel Service ‘Statement of Cash Flows For the Year Ended April 30, 2012 ‘Ceuh flows from operating aclites Cu received fom externas. Deduct cath poyments for expentes Net cash lows ftom eperating activites... Cash flours from investing activities: Cash payments for purchase ofan... osc sose Cash flows from financing aetites: Cash received from owners investment, Deduct cath withdrawals by owner bo Not cath low from financing atten - 20,000 Net dlacrease in cash during yaar a 519.000) (Cath as of May 1, 2018 ese cecsecneneoe 72050 Cash as of April30, 2012, . 553.050 Prastice Exercises: PE 1-7A, PE1-78 Interrelationships Among Financial Statements Financial statements are prepared in the order of the income statement, statement of owner's equity, balance sheet, and statement of cash flows. This order is im portant because the financial statements are interrelated, These intervelationships for Netsolutions are shown in Exhibit 6 and are described below." Himencil Statements _nterteletonsbh HetSolutions Daample (eahlbit6) incomestatement _Hetincomeernetion parted onthe HetSolutonsner come of 3,050 fndStaterentof income tatementitabioreporiedon for November inaded to Chis Clark's Owner Eat thesttementalonneiseenity a ather investment af 65.000 nthe statement snaciton fetincoms)to oréeduction sf omer seqaty Inetiossftomthebegraing owners equry snd ay 23 tional vestments ype owner during the pve Baterentel Owners Ounerscepialattheend ofthe Chris Clark Capital ef $26,050 a5 of quayandBalonce period eparted onthe sintement of November 30, 2011,on theater sheet owners equty salsa reported onthe of mnersequlty alia appear onthe balncesheet szomner capital November 30,2011 balance sect a hie clk Capa ‘ince Shest end Theeathreportcdonthebalnce Cash of $5,900 reported on the Satementatcish —_sheetinchoreparted asthe end-ol- alan sheet ox of hoverbe20, 201, Flows per ash onthe statement of Isalsoreported onthe Movember Gh lows, statementof cashflows asthe end-of- peried cash. “The preceding interrelationships are important in analyzing financial statements and the impact of transactions on a business, In addition, these interrelationships seme as a check on whether the Eancial statements are prepared correctly. For example, if the ending cash on the statement of cash flaws docsa’t agree with the balance sheet eash, then aa error has accurved, Spandageathanehadat ppsnngths cia fou an peat sche chan ofthe suet so net zn tention nny see eyeern nutane fnew Tats totip oe soreness ofc ows cantn-iciret notes acted hag ¥6Cchepter 1 intrciactonto Accounting eee Business 21 Financial Analysis and Interpretation: Ratio of Liabilities to Owner’s Equity GZ) ‘The husie financial stateme tom, owners, and others im analy? illustrated in cis chapter ate useful to bankers, cei: SHB) once ans g and interpreting the nancial performance and thatite the dition of 4 company. Throughout this text, various tools and techniques that are used to analyze and interpret a company’s financial performance and condition fe described and illustrated, The first such cool that is discussed fs used in analyz= ing the ability of « company 10 pay its creditors. ‘The relationship between liabilities and owner's eq Labilities to ownee's equity, is computed as follows: edie to one Pompeys faa cenation, oli ratio of expressed a Ratio of ialities TotalLablities teOnmars Eauty ” oral owners Equity or Tot ‘Stockholders Equity) NelSolutions’ ratio of liabilities to owners equity at dhe end of November is 0.015, as computed below, FetloctLinbities _ _$400 toOwners Equity ~ 52650 ~ °°"? Corporations eel stockholders’ equity is substinuied for woial owners equity when computing this ratio, To illustrate, balance sheet data Gn millions) for Google inc. and Mcdonalds 1 to total owner's equity as to sackholders’ eqpity. Thus, total ceqporation ane shown below. ee. 34, Dees, 2008 cr “etal abilties $389 § 26H6 Teta stockholder” equity 2829 22690 MeDonskt's Corporation Tota labiltes| sisoro sla Total socholdes'eauiy 13383 15.280 The ratio of liabilities Lo stockholders’ equity a> of December 31, 2009 and 2008 for Google and MeDonald’s is computed below. Dee. 33, Dec. 31, 2009 Beogle ie Total abies same 5260 Total soxkholderf eaulty 29289 22690 Ratio of testes to stockholders equty 012 012 (53529852623 (62606/522650) McDonald's Comporation Total abies 515079 sana Total stockholder? eauly vasa 15280 Featio of fables to stockholders equty 43 092 (S150791813.283) ¢514,1127515 290) ‘The rights of creditors to a business's assexs come before the rights af the owners for stockholders. Thus, the lower the auto of Lshilities to owner's equity, the better ie company is to withstand poor bus ons and pay its obligations. to creditors, Google is unusual in thae it hay a very low amount of Hiabifickey; thus, ty ratio oF Kabiliies to stockholders! equity of 0.12 i small, In contrast, McDonald's has more22° Chapter 1 intreduetion to Accounting and Business| liabilities; its rato OF B 51, 2009 and 2008, respectively. Since McDonald's ratio of Habilities wo stockholders equity increased slightly from 2008 40, 2009, its creditors are slightly more at risk on December 31, 2009, as compared to December 31, 2008. Also, McDonald's creditors are more at risk than are Google’s creditors. ‘The creditars of both companies are, however, Well protected against the risk of nonpaymer ities to stockholders’ equity Is 1,13 anc 0.92 on December Dida Leone ‘The following data were taken from Hawthorne Company's balance sheet= Dee.31, Dee.31, 2012201 Teal iapiines 3120000 5105900 Total owners equity: 80000 75200 ‘8. Compute the tio oflabitios to owner's ety 1. Has the crectors ris increased or decressed from December 33,2011, t9 December 31,2012? anne = Dee. 31, 3012 201 ‘oral fables 3120000 $105,000, Total owners equity 80.000 75,000 Ratio of iabiftes to oar’ equlty 130 149 ($120200/880,000) _(§105,0008575,000) batncreased Pee RAH = Sete ces Key Points prof. Tinee (ypes of businesses include service, mercluindising, and manuficturing Pxsineses. Accounting i an information system that provides reports 10 users about the economic activites and A business provides goods of services Cou'puls) 10 cusiomers with the objective of eaming comliion af a busines Bhics ase moral principles that guid conduct of indiskuats. Gooxl ethical conduct depends on tndivddual character and fxm culture Ascountnts are engages in private axeounting or public accounting, aap Oana Practicg ee xarcies + isinguish among sense, merchandising, and minufacmiing businesses + esenbe the sole of accounting in business and explain why account ing i called the “Linguage of business + Define ethics and list the two factors affec ng: ethical conduct 4+ Deserts what private and public accounting meanschapter 1 Intioduction to Accounting sed Business 23. ne sepa, sll lea a con as fail ana toa ysis pce at be menus oe ecco eutimlis cop scare U0) lal Sonia? Ceres He Se een tier Ma pete ors beens cee ncaa cltcl oom Be — ta a om rere Pract taerchies + Explain whut is meant by generally accepted! accounting principles, + Desenbe hoor generally accepted! accounting principles are developect + Dosenbe and ive an example of what & meant by the business cemtiry concep. + Describe the Ghinicteritis of « proprictosship, parnership corporation, and limited lability company Desenbe and give an example of what meant by the cost concept FELL | PEWIA, 148 Desenbe and give an example of what 6 meant by the objectivity concept + Deseabe and give an ecimple of w ealane SO EEpE «meant by’ the wait of State the accounting equation and define each element of the equation. KeyPoints The resources ned by a business and the sighs or claims to abexe resources may be state in the fonn of an equation, follows: Aveta = Lables + Owner's Faulty Leaming Outcomes, = + State the accounting ecusthon, + Define assets abilities, and owners ecuiy + Given two elements of the accounting equation, solve for the thin weL2 | PEL2A, 128 celine, Lo eee Cee eran Kay Potath All busine transactions ean be nated i terme of the change in ane'er more af the thece els iments of the accounting equation canna Trarapla Practice ces taerelas txarcies + Define 9 business apse, * Using the accounting, equation aya framework, record t —24 chapter. Intreduetion to Accounting and Business Describe the financial statements of proprietorship and explain how they interrelate. Key Polnts The prirtary financial satemenes of a propHetorship’ a8 the imcome statement the stwenient of owner's equity, the hakince shoe, ancl the Satement of cash flows. The income statcment reports a period! s not income oF net ase Which fs als reported On the statement Of owners equ, The ending owner s ep {Ul reported on the stitement of owners equiy is aka reported on the balance sheet. The ending cash bale ance fy reported on the halance sheet and the sateinent of cash fons, ey Tranepte Practice Sassi eres rors List and deveitbe the financial stterents of 4 proprietorship Propane am income statement HEM | PEMA, 148 Prepare 4 statement of owner's eqully FELS | PEILSA, 158 Prepare a batince sheet rEL6 | PEL, 1-65 Prepare a statement of cash flows ven7 | ELTA, LB Explain how the finiacil siements of proprictorship ane interred Senne en ‘Company's nancial condition. Key Polnts 4 ratko useful in analyzing the soliy of a business to pays erextiors isthe abo Of ab ities to owner's (suckhollers’) equity. The lower the milo of habiltes to owner's ety, the beter able the: company fs to wihstand poor business conditions and pay is obligations 10 creditors nme = | as + Desenle dhe usetainess of the (sockhokders) equity i of Liabilities termes © Compute the ratio of Lihilities to owner's (stockhoklors’) equity EEL® | PEI-SA, 1-88 account form (18) cont concept (8) income statement (15) account payable C11) ecamings (15) interest revenue (12) account receivable (12) ethics Inteerntional Accounting axcounting (3) expenses (12) ‘Standards Board (LAST) (7) accounting equation (OP foes earned (12) abilities (9) assets (9) financial accountings (8) limited liability company balance slvect (15) Financial Accounting Stands Ae) 8) bodes) Board (FAS) (7) ‘management (or managerial) s ‘scouring GD Dies ery consent financial statement (15) a : iD, manufacturing business (2) busine tnanattion (9) encral-porpose financial ‘setements (9 smutching concepe (1 Certified Public Accountan > (35) (cra) «6) semerally accepted accounling ‘merchandising business (2) eats Principles (GAAP) (6) net income (or net profi) (15)chepter 1 Intioductionto Accounting ond Business 27 ere wr eed ero! Ante Gah sue Supplies land - abilities $6873 Accounts payable. $2385 2225 Owners tqulty 760 Cecl amesor capital us 2000 Taal ables andowner’s. Fram equity ses Baa oer cr sary panera ns Parente erneeter ty ‘Cath flows fom operating atts: ‘ash received tom customers Deduct cash payments for operating expenses. Netcath flows om operating activites ‘Gah flows from Investing actives ‘Cain fowesfom financing ate ash received fom owme a8 vesment... Deduct cash withdrawals by mers Neteash Fw fom fmancing acts. Netincreate in esh during yea. ‘Sasha of ly 1,201. ‘Cash asf ily 31,2011 sare siaze+ $3000 153,755 =510556$1,200051.500 Discussion Questions Name.some users of accounting infor What is the role Of accounting in business? Why are most large companies like Microsoft, Pepsico, Caterpillar, and Autozone orgat corporations? Murray Stoltz is the owner of Ontime Delivery Senvice, Recently, Musray paid inerest of § on a personal loan of $60,000 that he used to pin the business. Should Oatlme Delivery Service recon the interest payment? Explain. On October 3, A2Z Repair Service extended an of fer of $75,000 for land that had hoon priced forsale at $99,000. On November Repair Service 6 eae ay sas 270 tars Sear accepted the sellers countcrelfcr of $82,000. De scribe how AZZ Repair Service should record the and, Land with an aswessed value of $100,000 for Propesty tc purposes is acquired by a bust hess for $525,000. Ten years later, the plot of Lind has an assessed value of $700,000 aad the business receives an oifer of $2,000,000 for it Should the monetary amount assigned to the iad in the business records now be incheaseel? Assuming that the lund acquired ia (4) war sold for $1,000,000, how would the various el ‘ements of the accounting. equation be ecte!?28 Introduction to Accounting end Business chapter 1 Describe the difference between an account re- 10. cceivable and an account payable: A business had revenues of $430,000 and operating expenses of $615,000. Did the business (a) incur a net Foss oF €b) realize net incom: ‘A business had revenues of $825,000 and operating ‘expenses of $708,000. Did the business (a) incur a net loss or €b) realize net income? What particular item of financial or operating data appears on both the income statement and. the siaiement of owner's equity? What item appears fon both the Balince sheet and of owner's equity? Whit item appears on boil the Balance sheet and the statement of cash flows?Cchepter 1 Inticucion to Accounting sed Business 29 Practice Exercises earning Objectives exerci ‘Jan Poss is th AA Cost concept (0 June 10, Easy Repair Service extended an offer of $95,000 for Lind priced forsale at $118,500. On August 2, Easy Repair Semice accepted the seller's counteroffer 0f $105,000. On August 27, she laad was assessed at a value of $89,000 for property tax purposes. On Apall 1, Easy Repair Service was offered $125,000 for the land by «national retail chain. At what value should the lane be recorded in Rasy Repair Serview's records? PEBD costconcept (a Febnuaey 7, AXA Repair Service extended aa offer of $50,000 for land that had been priced for sale at $65,000, On Felmaisy 21, AAA Repair Service accepted the sellers counteroifer of $97,500. On April 30, the land way asvessedt at a value of $40,000 for 'y MAX purposes. On August 30, AAA Repair Service as offerett $90,000 fr the a hain. AU what valle should the lind be recorded in AMA Repair sewice’s recon? PE 1-20 Accounting equation Shannon Cook is the ewner and operator of Galaxy LLC, a motivational consulsing bss: news. AL the end of its accounting period, December 31, 2011, Galiay has assets of $800,000 and. Babilides of $450,000: Using the accounting equation, determine the fal: lowing ame a. Owners equity, as of December $1, 2011 b, Owners equity, as of December 41, 2012, assuming that assets increased by $175,000 and liabilities decreased by $60,000 during 2012 PET-26 Accounting equation ‘owner and operator of You're the One, a motivational consulting bust end! of Ks accounting period, December 31, 2011, You're the One his assets of $575,000 and liabillies of $125,000. Using the accounting equation, determine the following amounts a. Owner's equity, as of December $1, 2011 b, Owner's equity, as of December 94, 2012, assuming that assets and liabilities increasexl by $30,000 during, 2012 eased by $85,000 PEA Transactions Queens Delivery Service is owned and operated by List Dewar. The following selected transactions were completed by Queens Delivery Service during June: 1, Received cash from owner as additional investment, $18,000. 2, Paid creditors on account, $1,800, 3. Billed cus 4, Recelved cash from customers on account, 86,900. 5, Paid cash to owner for personal use, $4,000, Indlicate the effect of each transaction on the accounting, equation elements (Assets, Li abilides, Owners Equity, Deawing, Revenue, and Expense) Also, indicate the specific item within the accounting equation element that is affected. To Mlustrate, the answer to shown below ‘Asset (Cash) Increases hy $18,000; Owner's Equity {List Dewar, Capital) Increases by 8.000, mers for delivery services om account, $12,500.30 Sites ons.s. chapter 1 suample Ereries Intrecuetion to Accounting and Business PE 4.38 Transactions Motorcross Delivery Service is owned and operated by Jim Smith, The following selected teansactions were completed by Motorczoss Delivery Service duriag Febeuary= 1. Received cash from awner a6 additional investment, $40,000. Paid advertising expense, $1,200, 3. Purchased supplies on account, $430, 4, Billed customers for delivery servieus em account, $7,500, 5. Received cash from custonters on account, $4,900. Indicate the effect of each transaction on the accounting equation clements (Assets, Li abilities, Owners Equity, Drawing, Revenue, and Expense), Also, indicate the specific ftom within the accounting equation element that is affected. To illusteat, the answer to (1) fs shown below: (1) Asset (Cash) increases by $30,000; Owner's Equity Gin Seuith, Capital) increases by $30,000, PET-A. Income statement The revenues ancl expenses off Dynasty Travel Service for the year ended June 80, 2012, are listed below. Feeseuned 90000 Office expense 222000 Wooeseapenie 474000 Prepare an Income statement for the current year ended June 30, 2012, “The revenues andl expenses of Ewape Travel Se 2012, are listed below. ike for the year ended November 30, Feeseamed son2s00 Ofte expense ‘291628 Mijeilancres expense 15875 Wogesespense 62500 repare an incor statement forthe ctrment weak ended Novemnbr 30, 2012, PETLSA. Statement of owner's equity Using the income statement for Dynasty Travel Serview shown in Practice Exercise 1-1, prepuce 4 stutement of owner's equity for the current year ended Juae 30, 2012. Nancy Coleman, the owner, invested an additional $60,000 Jn the business during the year and withdeew cash of $36,000 for personal use. Naney Coleman, capital as of July 1, 2011 was $250,000. PE.5B Statement of owner's equity Using the income statement for Escape Travel Service shown in Practice Exercise IB, prepare a stuiement of owner's equity for the current year ended November 30, 2012 Brett Daniels, the owner, invested an additional $15,000 in the: business during the year and withdrew cash of $25,000 for personal use, Brett Daniels, capital as of December 1 2011, was $475,000, PETA. Balance sheet Using the following lata for Dynasty Trane! Service ax well a the statement of owner's ty shown In Practice Exereise 1-5A, propane at balince sheet as of June $0, 2012Cchepter 1 Intiuction to Accounting see Business 31 Kecrning Exempt Objectives Exercoes Aecounts receivable § 64009 ecounts payable 24000 cash 156009 Lind 300000 Supplies 12009 obs ceve 1) PES-GB Balance shost © following data for Escape Travel Service as well ax the statement of owner's equity shows ia Practice Exercise: 1-51, prepare a balance sheet as of November 30, 20 Accounts weeehable $ 94375 Aecounts payable 2803 cash sa759 Land 362500 Supple eam 08s cen7 52) PETA. Statement of cash flows A summary of cash flows for Dynasty Travel Service for the year ended June 30, 2012, fs shown below. Gash reels Cash cere fom customers ssn0p00 Cath received fom adctonal investment of «0000 cos payment: Cash pald tr operating expenses Noeee {cash pad orton ‘zo4oc0 (Cath pald 10 one for pensonatuse 3.000 “The cash balance as of July 1, 2011, was $150,000, Prepare a statement of cash flows for Dynasty Travel Service for the year ended June 30, 2013 PE-7B Statement of cash flows A summary of cash flows for Escape Travel Service for the year enue November 30, 2012, is shown beloxs ows eet Cash cep Cashteceived rom addeonalinvestmentofonner 45000 ‘cash pald or operating expenses onzseo Cah pad orton ese (Cas pald wo one for personatuse 25000 “The cash halance as of December 1, 2018, was $141,750. Prepare a statement of cash flows for Escape Travel Service for the year ended No- vember 30, 2012, 006 EEN PE NBA. Ratio of Habilitien to owner's equity am “The following data were taken from White Company’s balance sheet abies $3750. ——~3287.500 jowneesequlty 300,008,000 Tar Tot 8. Compute the sitio of liabilities to owner's equity 1, Has the creditor’ risk increased of decreased from December 31, 2011 to December Si. 2012734 chepter one 73. (1)nermase ‘$250,000 Intrecuetion to Accounting and Business EX 1-8 Asset ability, owner's equity iterns Indicate whether each of the following is identified with (1) am asset, (2) a Habiliq G) owner's equity a. cash b. wages expense accounts payable Foes camed ipplies and EX 1-8 Effect of tramactions on accounting aquation Describe how the following busieess Luasactions affect the Uwe ol counting, equation, a. Invested cash in business ments of the ue 1. Purchased supplies for cash, ‘Purchased supplies on account 4. Received cash for services performed. fe Paid for wil ed im the business, EX 1-10 _Effact of transactions on accounting equation ‘A vacant lt acquined for $100,000 is sol for $350,000 in cash, What is the effect of the sale on the tou! amount of the seller's (1) assets, (2) lsbilies, and @) owner's equity? , Assume thatthe seller owes $75,000 on a Joan forthe land. After receiving the $350,000 ‘exsh in (2), the seller pays the $75,000 owed, What is the effect of the payment an the toeal amount of the sellers (1) assets, (2) Habiliies, and (3) owner's equity? © [sit teue that 4 transaction allways affects at least two elements (Assets, Liabilities, oF Owaces Equity? of the accosenting equation? Explain EX -31 Effect of transactions on owner's equity Indicate whether each of the following types of transactions will either (a) Increase owner's equity oF (b) decrease owners equity 1, owner's investments 2. revenues ‘expenses 4. owner's withdrawals EM 1.412 Transaction: “The following sclected transactions were completed by Speedy Delivery Service during October: 1. Received cash from owner a6 additional investment, $40,000. 2.Purchased supplies for cash, $1,500, 3.Paid rent for Ocwber, $4,000, 4.Paid advertising expense, $2,500. 5. Reveived cash for providing delivery services, $18,750, 6.dilled customers for delivery services om account, $41,500, 7. Paid cxeditors on account, $6,000. 8. Received cash from customers on account, $26,200, 9. Determined that the cost of supplies on hand was $250; theretore, $1,250 of supplies had been used «luring the month, 10.Paid cash to owner for personal use, $2,000,ona 4,513,200 ¥ Leo: Net income, 60,000. chapter 1 Intioduction to Accounting sed Business 35; Indicate the effect of each transaction on the accounting equation by’ listing the num bers klentifying the transactions, (2) through (10), in a column, andl inserting atthe right of each number the approprlate letter from the following. Ist a. Inerease in an asset, decrease in another asset. D, nerease in Ad. Decrease in an asset, decrease in a Mabilt 6 Desrease in an asset, docrease in owner's equity, 413 Nature of wansactions Jeremy Zabel operates his own catering service. Summary financial data for presentesl in equation farm ay Follows. Each ling designated by a number indicates the offect of a transaction on the equation. Rach inctease and decrease im owner's equity except transaction 43), affects act incom ite abies Omners equity ‘Accounts deveny EabalyJaverny 2a Fear cash + suppor + band» ee Capital Sel Dring + gered — expen fat “7500020007500 Yap 80,000 1226600 29000 2 20000 +7000 2 -14000 14000 5. = 2000 =2000 & > 7000 7000 et Tigo 200 | Sim) “GomT m0 oat. 8. Describe each transaction >, What is the amount of net decrease in monthe 6 What is the amount of net increate in owner's equity during the manth? 4. What is the amoust of the net Income for the riaatle 6, How much of the net income for the month was retained in the business? Net income and owner's withdrawals ‘The income statement of 4 proprietorship for the month of December indicates a net incame of $120,000. During the same period, the owner withdrew $130,000 in cash from the business for personal use Would it be connect to say tht thee business incurred 4 net Joss of $10,000 dur Ing the month? Discuss, 15 Net Income and owner's equity for four businesses Four different proprietorships, Aries, Gemini, Leo, and Pisces, show the sime balance sheet dats at the beginning and end of # year. There data, exclusive of the amount of owner's equity, are summarized as follows: Tota Aatote_TotalLibiitor Beginning ofthe year $8000 $100,000, Endotthe year wsoooa 30000 On the basis of the above dats and the following addidonal information for the year, determine the net income (ar loss) of each company for the year. GFine the amount of increase oF decrease in owner's equity during the year.) Aries: The owner had made no alditional investments in the business and fed made no withdrawals from the business Gemini: The owner had made no additional Investments Ln the business but had! with- deawwn $40,000. eo: The owner had made an additional investment of $90,000 svithdeawals, Pixces: The owner had madean additional investment of $90,000 and had withdrawn $40,000. t had made no36 Chapter) intreduetion to Accounting and Business| ons: ons ¥ Penny Beall capital, ‘ane 30, 2012:$482000 June 30, 201 Net income: $449,000 ons. (a) $45,000 EX 1.16 Galance sheet items Trom the following list of selected tems taken from the records of Hoosier Appliance Semice as of a specific date, identify those that would appear oa the balance sheet LeAccounts Receivable 6. supplies 2.cash 7. Supplies Fexpense Bees Earned 8. Utlives Expense Aitand ‘9. Nvages Expense 5.Patsy Adkins, Capital 1O.Wages Payable EX 1-17 Income statement tems Based on the data presented ia Exercise 1-16, hleatify those fhems that would appear an the income statement. [X18 Statement of owner's equity Financial infomation related to Lost Trail Company, a proprietorship, for the month ended Is as follows: eet Income ar dene 5125.000 Penny Sealtswitndranah during ime 18009 Penny Beallscapia une 1.2012 35.000 a. Prepare 4 statement of owner's equity for the month ended June 30, 2012 ‘. Why is the statement of owner's equity prepared before the June $9, 2082, hakince sheet EX 1.49 Income statement Univeral Services was organized on October 1, 2012. A summary of the revenue and cexpease transactions for October follows: agesexpense 270,000 Rentexpense 60,000 Supple expense 93000 Micelnecusespense 12,000 Prepare an income statement for the month ended Oetober 31 EX 1-20 Missing amounts from balance shaet and Income statement date One item is omitted in each of the following summaries of balance sheet and income statement data for the following four different proprietorship: Aipiai Chien’ stipe iegiming ofthe ear ase, $300000 $800,690 s2e00a ’ burs tzogea 2e0a0 70000 $120,000 nd ofthe year bres toga 270.000 somoa 134000 During the year ‘aaional investment ithe business (160,99 1990849000 \Whhérawals for the business 25000 32000 @ ow feveoue 50000 (b) "15000182020 xperses wove = rznon)WaesonTz80N0 Determine the missing amounts, identifying thom by letter. (intr First determine the F decrease in owner's equity during the year.)om. wb, $40,000 ows. ‘chapter 1 Introduction to Accounting sed Business 37 EX 1-21 Balance sheets, netincome Financial information related to the proprieworship of Lady Interiors for July and August 2012 is a follows: July3.2012 August 38.2012 eons pe 90000 $1000 Aeourtstecenvable 200010 240000 Garth ncobs capital ’ 2 cok 9000 95000 Supplies 2000 15000 ie balance sheets for Luly Interiors 28 of July 1 and August 81, 2012 , Detennine the amount of net income for August, asumning that the ewner made ae additional investments of withdrawals during the mond © Detemnine the amount of net income for August assuring, that the ewner mack: A audigional Investments but whhdrew $45,000 auding the month, EX 1-22 Finandal statements acts of the following iterns is showwm in the inancial statements of Exxonhobil Corporation, 1, Accounts payable 9. Marketable securities 2.Cash equivalents 10.Notes and loans payable 8.Crude oil inventory HNows receivable 4. Equipment 12.Operating expenses S. exploration expenses 15. Prepaid taxes Glncome taxes payable 14.Sukes T.investments 15.5elling expenses BLongtenn debe a. Identity the financial st hem would appear. b. Can an item ape: 6 Is the accounting equation relevant sat (balance sheet or income statement) in which ech ‘on more than one Financial statement or ExxonMobil Comporation? EX 1-23 Statement of cash flows Indicate whether each of the following activities Would Be seported oa the statemeat of ‘ash flows 2s (a) an operating activity, (b) an investing acisity, or €e a Financing activity 1. Cash received from feos earned 2. Cash paid for expenses 3. Cash paid for land. 4, Cash recelved as an additional investment by owner, EX 1.24 Statement of cash flows A summary of cash fhomy for Absolute Consulting Group for the year ended July 31 2012, Is shown below Cash recep: Cash received from addtona investment of net 40,000 Cash payments: Cash pad for operating exnenses 127350 (Cash pa tor ina ‘30,000 Cash paid 0 owner for personatuse 5,009 “The cash balance as of August 4, 2011, Was $27,100, statement af cash flaws for Ahsolute Consulting, Group for the year ended38 cheptert Correct amount xO Intrecuetion to Accounting and Business EX 1.25 Financial statements Empire Realty, organized May 1, 2012, is owned and operated by Bertram Mitchell. How maay errors cin you Tied in the following statements for Empire Realty, prepared after its first month of operations? Expire Realty Income Statement Sales Commissions. -.o---- 7 e 233.550 Expenses ‘Olfice sates expense. stats -- s4sa00 Rent expenses ae i 49800 Automobile expense. tho nse Mscelgneousexense. re : ‘Supplies expente oe BOS es Total expenses oon a“ 7 ansa0 Net income. oa Bs Serax rtm tical owners Equity ‘May 312011 erty Michal, caphal May 8,20 oo ocen ese n zi 5 a0 Less vethdawalsdariag May. a : 000 Ty10 ‘Adaiional investment during May. 1.250 Tasso Net income for thay os ooo- ee 67050 fertam tichell copia May 31,2012... Tine, 109 lance sheet forthe anh Endad May 34,2012 514.850 Accaunteecewable : 5 64350 ‘owners equity Fettrarn MteheH, 2p se ocrevecose 116.209 Tota astetsereseoe $21,950 Total iabities and owners cquly.- 100.450 EX 1-26 Ratio of abilities to stockholders’ equity The Home Depot, ne, is the World’ largest home Smprovement retailer andl one of the largest rotate in the United States bascel on net sules volume. The Home Bepot oper ates aver 2,000 Home Depot” stores tut yell wide assortment of building, materials and home improvement and Lwn and garden products ‘The Home Depot reported the following balaaee sheet data Ga eillions): iosiaweteSSCSC~*~«SRSCS Tal stochhoters equity win vi &. Detemming the total liabilities as of Febuary, 2009, and February 3, 2008, Determine the eitio of Hablites to stockholders’ equity for 2009 and 2068. Rowad to two decimal places & What conclusions regarding the Frou (by? asgin of protection to the creditors can you draw EX 1.27 Ratlo of llabilites to stockholkery’ equity Lovve’n @ major competitor of The Home Depot ia the home improvement business, oper ates over 1,600 stores. For the years ending January 40, 2009, sind Febery 1, 2008, Lowe's reported the following balance: sheet data (in millions)‘chapter 1 Intioduction to Accounting sed Business 4Y Asie. « Unbiities « owners equity Gals Colin ‘Office recounts — tyes Myers Sales emt Sonics Autos Suppo; ine Came Suppies = Poyable + Eaptal - Drawing + Commisons ~ Erpente ~ Espente- Expense - Espen ~ Erpense ons wk. $200,000 2. Prepare an Income statement for January, a statement of owners «

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