Financial Accounting: Tools for Business Decision-Making

883 Pages·2016·39.48 MB·English

by  Paul D. Kimmel

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FINANCIAL
ACCOUNTING
Tools for Business Decision-Making
SEVENTH CANADIAN EDITION
Paul D. Kimmel
Ph.D., CPA
University of Wisconsin—Milwaukee, Wisconsin
Jerry J. Weygandt
Ph.D., CPA
University of Wisconsin—Madison, Wisconsin
Donald E. Kieso
Ph.D., CPA
Northern Illinois University—DeKalb, Illinois
Barbara Trenholm
FCPA, FCA, ICD.D
University of New Brunswick—Fredericton, New Brunswick
Wayne Irvine
CPA, CA, CFA
University of Calgary—Calgary, Alberta
Christopher D. Burnley
FCPA, FCA
Vancouver Island University—Nanaimo, British Columbia
Dedicated to our students—past, present, and future.
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Library and Archives Canada Cataloguing in Publication
Kimmel, Paul D., author
Financial accounting : tools for business decision-making / Paul D. Kimmel, Ph.D., CPA, University of Wisconsin—Milwaukee,
Wisconsin; Jerry J. Weygandt, Ph.D., CPA, University of Wisconsin—Madison, Wisconsin; Donald E. Kieso, Ph.D., CPA, Northern Illinois
University—DeKalb, Illinois; Barbara Trenholm, FCPA, FCA, ICD.D, University of New Brunswick—Fredericton, New Brunswick; Wayne
Irvine, CPA, CA, CFA; University of Calgary—Calgary, Alberta; Christopher D. Burnley, CPA, CA, Vancouver Island University—British
Columbia.—Seventh Canadian edition.
Includes index.
Issued in print and electronic formats.
ISBN 978-1-119-21158-7.—ISBN 978-1-119-21157-0 (looseleaf).—ISBN 978-1-119-32062-3 (EPUB)
1. Accounting—Textbooks. I. Weygandt, Jerry J., author II. Kieso, Donald E., author III. Trenholm, Barbara, author IV. Irvine, Wayne,
author V. Burnley, Christopher D., 1966- VI. Title.
HF5636.K55 2016 657’.044 C2016-906102-7
C2016-906103-5
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ABOUT THE AUTHORS
Barbara Trenholm, FCPA, FCA, ICD.D, Atlantic School of Business), and past president of the New
is a professor emerita at the University of Brunswick Institute of Chartered Accountants (now known
New Brunswick, for which she continues as CPA New Brunswick). She has extensive service as chair
to teach on a part-time basis. Her teaching and a member of a wide range of committees at the provincial,
and educational leadership has been widely national, and international levels of the accounting profes-
recognized with numerous local, national, sion. In addition to her involvement with her profession, she
and international teaching awards. She also served a three- has also served in leadership roles at the university and in the
year term as a Teaching Scholar at the University of New community.
Brunswick. She has presented at many conferences and published
Barbara is a member of the boards of several public, widely in the fi eld of accounting education and standard set-
Crown, and private corporations, including Plazacorp Retail ting in journals, including Accounting Horizons, Journal of the
REIT, NB Power, and the International Development Research Academy of Business Education, CAmagazine, CGA Magazine,
Centre. She is a past board member of Atomic Energy and CMA Magazine. She is also part of the Canadian author
of Canada Limited, the Canadian Institute of Chartered team of Weygandt, Kieso, Kimmel, Trenholm, Warren, and
Accountants (now known as CPA Canada), and the Atlantic Novak, Accounting Principles, published by John Wiley & Sons
School of Chartered Accountancy (now known as CPA Canada, Ltd.
Wayne Irvine, CPA, CA, CFA, teaches Wayne has, in addition to other publishing projects,
accounting at the Haskayne School of authored a number of case exams for CPA legacy programs
Business, University of Calgary. Prior to his and published a case in Accounting Perspectives.
full-time academic career, Wayne worked Wayne is a four-time recipient of the University of
for 12 years at Price Waterhouse in the audit Calgary’s Students’ Union Teaching Excellence Award and is
group and as manager of the Calgary offi ce’s the only member of his faculty to have been awarded a Hall
continuing education program. of Fame Teaching award from that organization. He has also
Wayne has over 25 years of teaching experience with received over a dozen other teaching and service awards from
several professional accounting programs, most recently as other student organizations and from the CPA profession.
a session leader for CPA Western School of Business in its
Professional Education Program.
Chris Burnley, FCPA, FCA, is a professor partner institutions in Europe, Asia, and the South Pacifi c.
in the Accounting Department at Vancouver Chris has been awarded numerous internal and external
Island University. Prior to his full-time aca- grants in support of his academic work and has presented at
demic career, Chris worked for 12 years in national conferences.
public practice and also audited government Chris has been awarded a number of prizes by the
departments and United Nations agencies Canadian Academic Accounting Association as a result of
with the Offi ce of the Auditor General of his academic work, including awards for case authoring and
Canada. Chris also teaches in the CPA Professional Education developing innovative ideas in accounting education.
Program for the CPA Western School of Business. Chris is active in the accounting profession, and chairs
Chris has also taught in the Master of Professional the board of the Chartered Professional Accountants of British
Accounting Program at the Edwards School of Business, Columbia’s Education Foundation. He is a past recipient of
where he was recognized by the University of Saskatchewan the Ritchie W. McCloy Award for CA Volunteerism. Chris
with the Chartered Professional Accountants of Alberta teach- is also the author of the textbook Understanding Financial
ing excellence award. He is active internationally, teaching Accounting, published by John Wiley & Sons Canada, Ltd.
and delivering guest lectures at Vancouver Island University’s
vi About the Authors
Paul D. Kimmel, Ph.D., CPA, received his bachelor’s degree is a member of the American Accounting Association and
from the University of Minnesota and his doctorate in account- the Institute of Management Accountants and has published
ing from the University of Wisconsin. He is an Associate articles in Accounting Review, Accounting Horizons, Advances
Professor at the University of Wisconsin—Milwaukee, and in Management Accounting, Managerial Finance, Issues in
has public accounting experience with Deloitte & Touche Accounting Education, and Journal of Accounting Education, as
(Minneapolis). He was the recipient of the UWM School of well as other journals. His research interests include account-
Business Advisory Council Teaching Award, the Reggie Taite ing for fi nancial instruments and innovation in accounting
Excellence in Teaching Award, and a three-time winner of the education. He has published papers and given numerous talks
Outstanding Teaching Assistant Award at the University of on incorporating critical thinking into accounting education,
Wisconsin. He is also a recipient of the Elijah Watts Sells Award and helped prepare a catalogue of critical thinking resources
for Honorary Distinction for his results on the CPA exam. He for the Federated Schools of Accountancy.
Jerry J. Weygandt, Ph.D., CPA, is the Arthur Andersen In addition, he has been actively involved with the American
Alumni Emeritus Professor of Accounting at the University of Institute of Certifi ed Public Accountants and has been a
Wisconsin—Madison. He holds a Ph.D. in accounting from member of the Accounting Standards Executive Committee
the University of Illinois. Articles by Professor Weygandt of that organization. He served on the FASB task force that
have appeared in Accounting Review, Journal of Accounting examined the reporting issues related to accounting for
Research, Accounting Horizons, Journal of Accountancy, and income taxes and as a trustee of the Financial Accounting
other academic and professional journals. Professor Weygandt Foundation. Professor Weygandt has received the Chancellor’s
is author of other accounting and fi nancial reporting books Award for Excellence in Teaching and the Beta Gamma Sigma
and is a member of the American Accounting Association, Dean’s Teaching Award. He is on the board of directors of
the American Institute of Certifi ed Public Accountants, M&I Bank of Southern Wisconsin. He is the recipient of the
and the Wisconsin Society of Certifi ed Public Accountants. Wisconsin Institute of CPAs’ Outstanding Educator’s Award
He has served on numerous committees of the American and the Lifetime Achievement Award. In 2001, he received the
Accounting Association and as a member of the editorial board American Accounting Association’s Outstanding Accounting
of Accounting Review; he has also served as President and Educator Award.
Secretary-Treasurer of the American Accounting Association.
Donald E. Kieso, Ph.D., CPA, received his bachelor’s Committees, and the State of Illinois Comptroller’s
degree from Aurora University and his doctorate in account- Commission; as Secretary-Treasurer of the Federation of
ing from the University of Illinois. He has served as chairman Schools of Accountancy; and as Secretary-Treasurer of the
of the Department of Accountancy and is currently the American Accounting Association. Professor Kieso is currently
KPMG Emeritus Professor of Accounting at Northern Illinois serving on the Board of Trustees and Executive Committee of
University. He has public accounting experience with Price Aurora University, and is a member of various other boards.
Waterhouse & Co. and Arthur Andersen & Co. and research From 1989 to 1993, he served as a charter member of the
experience with the Research Division of the American national Accounting Education Change Commission. He is
Institute of Certifi ed Public Accountants. He is a recipi- the recipient of the Outstanding Accounting Educator Award
ent of NIU’s Teaching Excellence Award and four Golden from the Illinois CPA Society, the FSA’s Joseph A. Silvoso
Apple Teaching Awards. Professor Kieso is a member of the Award of Merit, the NIU Foundation’s Humanitarian Award
American Accounting Association, the American Institute of for Service to Higher Education, the Distinguished Service
Certifi ed Public Accountants, and the Illinois CPA Society. Award from the Illinois CPA Society, and in 2003 an honorary
He has served as a member of the Board of Directors of the doctorate from Aurora University.
Illinois CPA Society, the AACSB’s Accounting Accreditation
WHAT’S NEW?
Helping Students Learn Accounting Review and Practice
Concepts
A new review and practice section added to each chapter
includes, in one place, an overview of the learning objectives,
We have carefully scrutinized all chapter material to fi nd new
key terms, diff erences (if any) between IFRS and ASPE, and
ways to engage students and help them learn accounting con-
decision tools in addition to practice opportunities using the
cepts. A new learning objective structure helps students learn
Decision Toolkit and a comprehensive Do It! Th e review and
concepts in more manageable “chunks,” with 20% more Do
practice section also includes objective-format questions that
It! exercises added to help students test their understanding
allow students to self-assess their understanding of the topics
before moving on to the next topic. Of these, more than 60% are
in each chapter. Th ese questions are comprehensive in their
new or updated. As well, we added and/or revised a signifi cant
coverage, with detailed feedback provided at the end of the
number of explanations, examples, illustrations, and summa-
chapter to assist students in analyzing their results. Additional
ries throughout the text to better facilitate student learning.
practice objective-format questions are available in the test
bank for instructor use.
Real-World Context
End-of-Chapter Material
One of the goals of the fi nancial accounting course is to orient
students to the application of accounting principles and tech-
Th e end-of-chapter material underwent a comprehensive
niques in practice. Accordingly, we have expanded our practice
updating to ensure that it continues to be relevant and fresh.
of using current examples from real companies throughout
Well over half of the questions, brief exercises, exercises, prob-
the textbook by adding more high-interest companies that we
lems, and cases in the end-of-chapter material are either new
hope will increase student engagement. Th is edition includes
or signifi cantly updated. Th e cases in the Expand Your Critical
more than 300 references to real-world companies of interest
Th inking section of each chapter have been reorganized into
to students. Nearly a quarter of the chapter-opening feature
new categories, including fi nancial reporting, fi nancial anal-
stories were replaced with new stories, while the remainder
ysis, ethics, student view, professional judgement, and serial
were updated. New feature companies for this edition are Th e
cases. Th e serial case, which has been an important continuing
North West Company and Sobeys, two well-known compa-
feature in each chapter in past editions, has been completely
nies in the grocery industry. References to these companies
revised in this edition to follow the evolution of a computer
have been included throughout the textbook in a variety of
consulting company from a small private company to a large
ways—in simplifi ed fi nancial statements in the chapter mate-
publicly traded company.
rial, ratio analyses, Using the Decision Toolkit, end-of-chapter
cases, and fi nancial statements in Appendices A and B at the
Key Features of Each Chapter
end of the textbook. In addition, our author team is active in
delivering the CPA Professional Education Program and incor- Chapter 1: Th e Purpose and Use of Financial Statements
porated this real-world perspective as each chapter, including • Feature story is about Th e North West Company and how
the end-of-chapter material, was written. International accounting aids decision-making
Financial Reporting Standards (IFRS) and Accounting • Identifi es the users and uses of fi nancial accounting
Standards for Private Enterprises (ASPE) were also revised to information and forms of business organization—
refl ect current and pending changes to standards. proprietorship, partnership, private corporation, and
public corporation
Focus on the Accounting Cycle • Describes the business activities—fi nancing, investing,
and operating activities—that aff ect companies
For many students, success in an introductory account- • Explains the content, purpose, and interrelationships of
ing course hinges on developing a sound understanding of each of the fi nancial statements—income statement, state-
the accounting cycle and seeing how the material they are ment of changes in equity, statement of fi nancial position,
working with in a particular chapter fi ts in the accounting and statement of cash fl ows
cycle. To help students improve their understanding, we have • Uses fi nancial statements of a hypothetical company (to
added new, recurring illustrations that show students the big keep it simple), followed by those for a real company, Th e
picture of the accounting cycle and doubled the number of North West Company (to make it relevant)
comprehensive cases that incorporate the accounting cycle. • Key changes: Clarifi ed concept of internal users of fi nancial
All of these changes provide students with more opportunities information. Added discussion on why ASPE exists and why
to learn and retain accounting fundamentals integrated across a private company may choose to use IFRS. Switched order
multiple chapters. of discussion of debt and equity fi nancing and added context
viii What’s New?
to discussion of dividends. Revised discussion of investing Chapter 4: Accrual Accounting Concepts
activities related to investments in shares and debt securi- • Feature story is about Western University’s application of
ties and added information about asset disposals. Content accrual accounting
added related to management discussion and analysis. • Explains revenue and expense recognition
• Emphasizes the diff erence between cash and accrual
Chapter 2: A Further Look at Financial Statements
accounting
• Feature story is about CT Real Estate Investment Trust, its
• Completes the accounting cycle, from adjusting entries to
users, and use of accounting standards
the closing process
• Presents the classifi ed statement of fi nancial position and
• Key changes: Updated the revenue recognition section
the items typically found in each section
to incorporate new criteria consistent with anticipated
• Explains how ratio analysis is used to analyze a company’s
changes to the revenue recognition standard and con-
liquidity, solvency, and profi tability
ceptual framework. Clarifi ed and reordered discussion
• Applies ratio analysis to CT REIT, Choice Properties
of accrued revenues and expenses. Added original
REIT, and their industry (working capital, current debt to
transaction entries throughout adjusting entry section.
total assets, basic earnings per share, and price-earnings
Reorganized summary tables and added eff ects on net
ratios)
income and shareholders’ equity. Expanded discussion
• Describes the conceptual framework of accounting
and illustration of closing entries, using same format
• Key changes: Updated terminology relating to current
employed in Chapters 3 and 4.
value and income. Added explanation of future economic
benefi ts. Added illustration of operating cycle. Expanded Chapter 5: Merchandising Operations
illustration of statement of fi nancial position classifi ca- • Feature story is about Loblaw Companies Limited’s ini-
tions. Expanded discussion of using price-earnings ratio tiatives to improve its process of getting products from its
to assess the price of a company’s shares relative to the suppliers to its shelves
company’s earnings. Added material on acceptance of • Identifi es the key diff erences between service and mer-
IFRS-based fi nancial statements by U.S. securities reg- chandising companies
ulators. Included management stewardship of assets in • Introduces inventory systems using perpetual inventory
objectives of fi nancial reporting. Added discussion of users system (the periodic inventory system is presented in an
identifi ed in conceptual framework and explanation of the appendix)
diff erence between fundamental and enhancing qualitative • Explains how to record purchases and sales of merchandise
characteristics. Revised conceptual framework illustration. • Presents single-step and multiple-step income statements
• Applies ratio analysis to Loblaw, Metro, and their industry
Chapter 3: Th e Accounting Information System
(gross profi t margin and profi t margin)
• Feature story is about BeaverTails’ experiences with an
• Key changes: Restructured multiple illustrations through-
accounting information system
out the chapter, including income measurements, fl ow of
• Covers transaction analysis, explaining how accounts,
costs, freight terms, cost of goods purchased, cost of goods
debits, and credits are used to record transactions
available for sale, cost of goods sold, and net sales. Added
• Explains the fi rst four steps in the accounting cycle, includ-
table outlining the advantages of each type of inventory
ing analyzing, journalizing, and posting transactions and
system. Included discussion on professional judgement
preparing the trial balance
required when classifying expenses by function.
• Key changes: Updated receivable transactions in the Sierra
Corporation accounting cycle example. Expanded the dis- Chapter 6: Reporting and Analyzing Inventory
cussion of when to record and not to record transactions in • Feature story is about lululemon athletica inc.’s inventory
reference to the elements of fi nancial statements. Clarifi ed management
a number of concepts incorporated in this chapter, includ- • Explains how inventory quantities and ownership are
ing the use of negatives in the accounting equation, the use determined
of the chart of accounts, and the distinction between for- • Covers cost formulas and their fi nancial statement eff ects
mal general ledger accounts and T accounts. Reformatted using perpetual inventory system (the periodic inventory
the accounting equation analysis to the same format used system is presented in an appendix)
in Chapter 4 so that students can more easily compare in- • Discusses eff ects of inventory errors on fi nancial statements
formation in diff erent parts of the accounting cycle from • Outlines how to value and record inventory at the lower of
one chapter to the next. Added a section on how opening cost and net realizable value
balances aff ect accounting equation analyses. Repositioned • Applies ratio analysis to lululemon, Limited Brands, and
the discussion of normal balances earlier in the chapter. their industry (inventory turnover and days in inventory)
Added a review of fi nancial statement relationships to • Key changes: Deleted section on detailed inventory count
help students better understand the directional impact of procedures. Revised discussion of errors to focus on two
shareholders’ equity and how the statements fi t together. types of errors: errors made when determining the cost
Expanded the discussion about the preparation of a trial of inventory and errors made recording goods in tran-
balance, including how to fi nd errors. sit. Expanded discussion of goods in transit and clarifi ed