Accounting

703 Pages·2011·14.465 MB·English

by  Horngren, Charles T.

00_horn_00_FM.qxd 12/2/09 1:32 PM Page i
CHARLES T. HORNGREN
STANFORD UNIVERSITY
WALTER T. HARRISON, JR.
BAYLOR UNIVERSITY
M. SUZANNE OLIVER
NORTHWEST FLORIDA STATE COLLEGE
PETER R. NORWOOD
LANGARA COLLEGE
JO-ANN L. JOHNSTON
BRITISH COLUMBIA INSTITUTE OF TECHNOLOGY
Pearson Canada
Toronto
00_horn_00_FM.qxd 12/2/09 1:32 PM Page ii
Library and Archives Canada Cataloguing in Publication
Accounting / Charles T. Horngren … [et al.]. — Canadian 8th ed.
Canadian ed. published under title: Accounting / Charles T. Horngren,
Walter T. Harrison, W. Morley Lemon; with Carol E. Dilworth.
Includes index.
ISBN 978-0-13-815601-5 (v. 1)—ISBN 978-0-13-815602-2 (v. 2).
1. Accounting—Textbooks. 2. Managerial accounting—Textbooks.
I. Horngren, Charles T., 1926- II. Horngren, Charles T., 1926-. Accounting.
HF5636.A32 2011 657'.044 C2009-906520-7
Copyright © 2011, 2007, 2005, 2002, 1999, 1996, 1993, 1991 Pearson Canada Inc., Toronto, Ontario.
Pearson Prentice Hall. All rights reserved. This publication is protected by copyright and permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in
any form or by any means, electronic, mechanical, photocopying, recording, or likewise. For information regard-
ing permission, write to the Permissions Department.
Original edition published by Pearson Education, Inc., Upper Saddle River, New Jersey, USA. Copyright © 2009
Pearson Education, Inc. This edition is authorized for sale only in Canada.
ISBN: 978-0-13-815601-5
Vice-President, Editorial Director: Gary Bennett
Editor-in-Chief: Nicole Lukach
Executive Marketing Manager: Cas Shields
Developmental Editor: Anita Smale
Production Editor: Lila Campbell
Copy Editor: Marg Bukta
Proofreader: Tom Gamblin
Production Coordinator: Andrea Falkenberg
Compositor: MPS Limited, AMacmillan Company
Photo and Permissions Researcher: Sandy Cooke
Art Director: Julia Hall
Cover and Interior Designer: Anthony Leung
Cover Image: Veer.com
1 2 3 4 5 14 13 12 11 10
Printed and bound in United States of America.
Photo Credits
1Jupiter Unlimited; 51APPhoto/Lisa Poole; 107CPPhoto/Larry MacDougal;
164CPPhoto/Darryl Dyck; 224Shutterstock; 300CPPhoto/Larry MacDougal;
342 Photo by Ryan Nunn; 402© Jim Craigmyle/Corbis; 450Courtesy of Canadian Tire;
499CPPhoto/Larry MacDougal; 549CPPhoto/Jacques Boissinot
00_horn_00_FM.qxd 12/2/09 1:32 PM Page iii
B R I E F
Contents
The Accounting Profession: Part 3 Accounting for Partnerships and
Career Opportunities xxii Corporate Transactions
12 Partnerships
Part 1 The Basic Structure of Accounting
13 Corporations:Share Capital and the Balance Sheet
1 Accounting and the Business Environment 1 14 Corporations:Retained Earnings and the
2 Recording Business Transactions 51 Income Statement
3 Measuring Business Income:The Adjusting Process 107 15 Long-Term Liabilities
4 Completing the Accounting Cycle 164 16 Investments and International Operations
5 Merchandising Operations and the Accounting Cycle 224
6 Accounting for Merchandise Inventory 300 Part 4 Analysis of Accounting Information
7 Accounting Information Systems 342 17 The Cash Flow Statement
18 Financial Statement Analysis
Part 2 Accounting for Assets and Liabilities
8 Internal Control and Cash 402
9 Receivables 450
10 Property,Plant,and Equipment;Goodwill;and Intangible
Assets 499
11 Current Liabilities and Payroll 549
iii
00_horn_00_FM.qxd 12/2/09 1:33 PM Page iv
Contents
2 Recording Business
Transactions 51
The Account,the Ledger,and the Journal 52
Chart of Accounts 55
Double-Entry Accounting 57
The Accounting Profession:
Increases and Decreases in the Accounts 58
Career Opportunities xxii
Expanding the Rules of Debit and Credit:Revenues and
Expenses 60
Normal Balance of an Account 61
Part 1 The Basic Structure of
Source Documents—The Origin of Transactions 62
Accounting 1 The Flow of Accounting Data 65
The Trial Balance 73
Recording Business Transactions Under International
1 Accounting and the Business
Financial Reporting Standards (IFRS) 78
Environment 1
Summary Problem for Your Review 79
Summary 84
Accounting:The Language of Business 2
Assignment Material 85
Decision Makers:The Users of Accounting Information 2
Extending Your Knowledge 105
The History and Development of Accounting 4
Ethical Considerations in Accounting and Business 5
3 Measuring Business Income:
Forms of Business Organizations 7
The Adjusting Process 107
Accounting Concepts 9
The Accounting Equation 13
Accrual-Basis Accounting versus Cash-Basis Accounting 109
Accounting for Business Transactions 14
Recognition Criteria for Revenues and Expenses 111
Evaluating Business Transactions 19
Adjusting the Accounts 113
The Financial Statements 20
The Adjusted Trial Balance 125
Relationships among the Financial Statements 21
Preparing the Financial Statements from the
International Financial Reporting Standards:
Adjusted Trial Balance 127
Recognizing the Globalization of Accounting 24
Relationships among the Three Financial Statements 128
Summary Problem for Your Review 26
Ethical Issues in Accrual Accounting 129
Summary 28
Adjusting Process Implications of International Financial
Assignment Material* 30
Reporting Standards (IFRS) 130
Extending Your Knowledge** 49
Summary Problem for Your Review 132
Summary 136
Chapter 3 Appendix 136
Assignment Material 140
Extending Your Knowledge 162
*In each chapter, Assignment Material includes Questions, Starters, Exercises (including Serial and Challenge Exercises), Beyond
the Numbers, an Ethical Issue, and Problems (Group Aand B, and Challenge Problems).
**Extending Your Knowledge includes Decision Problems and Financial Statement Cases.
iv
00_horn_00_FM.qxd 12/2/09 1:33 PM Page v
Estimating Ending Inventory 315
4 Completing the Accounting Accounting-Cycle and Financial-Reporting
Cycle 164 Implications of IFRS 317
Summary Problem for Your Review 318
The Accounting Cycle 165 Summary 319
Completing the Accounting Cycle 169 Assignment Material 321
Closing the Accounts 172 Extending Your Knowledge 341
Correcting Journal Entries 176
Classifying Assets and Liabilities 178
7 Accounting Information
Accounting Ratios 182
Systems 342
Accounting-Cycle and Financial-Reporting
Implications of IFRS 184
Effective Accounting Information Systems 343
Summary Problem for Your Review 186
How Computerized and Manual Accounting
Summary 191
Systems Work 345
Chapter 4 Appendix 191
Special Journals 350
Assignment Material 196
Special Journals in a Manual System 351
Extending Your Knowledge 221
The Role of the General Journal 362
Special Journals and Sales Taxes 366
Accounting-Cycle and Financial-Reporting
5 Merchandising Operations and the
Implications of IFRS 368
Accounting Cycle 224
Summary Problem for Your Review 370
Summary 374
What Are Merchandising Operations? 225
Assignment Material 376
The Operating Cycle for a Merchandising Business 227
Extending Your Knowledge 396
Inventory Systems:Perpetual and Periodic 228
Comprehensive Problem for Part 1 398
Accounting for Inventory in the Perpetual Inventory
System 230
Selling Inventory and Recording Cost of Goods Part 2 Accounting for Assets
Sold 235
and Liabilities 402
Goods and Services Tax 238
Adjusting and Closing the Accounts of a
Merchandising Business 239
8 Internal Control and
Preparing a Merchandiser’s Financial Statements 242
Cash 402
Two Ratios for Decision Making 247
Accounting-Cycle and Financial-Reporting
Cash 403
Implications of IFRS 249
Internal Control 403
Summary Problem for Your Review 251
Internal Control Procedures 406
Chapter 5 Appendix A 255
The Bank Account as a Control Device 410
Chapter 5 Appendix B 268
Internal Control over Cash Receipts 419
Summary 270
Internal Control over Cash Payments 421
Assignment Material 272
Reporting Cash on the Balance Sheet 425
Extending Your Knowledge 298
Ethics and Accounting 425
The Effects of IFRS on Cash 427
Summary Problem for Your Review 427
6 Accounting for Merchandise Summary 429
Inventory 300 Assignment Material 431
Extending Your Knowledge 449
Inventory Costing Methods 302
Inventory Costing in a Perpetual System 304
Inventory Costing in a Periodic System 308
Accounting Principles and Inventories 309
Other Inventory Issues 311
v
00_horn_00_FM.qxd 12/2/09 1:33 PM Page vi
9 Receivables 450 11 Current Liabilities and
Payroll 549
Receivables:An Introduction 451 Current Liabilities of Known Amount 550
Accounting for Uncollectible Accounts (Bad Debts) 454 Current Liabilities That Must Be Estimated 558
Credit-Card and Debit-Card Sales 461 Contingent Liabilities 560
Credit Balances in Accounts Receivable 463 Ethical Issues in Accounting for Current and Contingent
Notes Receivable:An Overview 464 Liabilities 561
Accounting for Notes Receivable 465 Accounting for Payroll 562
Using Accounting Information for Decision Gross Pay and Net Pay 563
Making 469 Payroll Entries 568
Understanding the Impact of IFRS on The Payroll System 570
Accounts Receivable 471 Recording Cash Payments for Payroll 572
Summary Problem for Your Review 473 Internal Control over Payroll 575
Chapter 9 Appendix 474 Reporting Payroll Expense and Liabilities 577
Summary 475 The Impact on Current Liabilities of International Financial
Assignment Material 477 Reporting Standards (IFRS) 578
Extending Your Knowledge 497 Summary Problem for Your Review 580
Summary 582
Assignment Material 584
10 Property,Plant,and Equipment;
Extending Your Knowledge 601
Goodwill;and Intangible Assets 499
Comprehensive Problem for Part 2 602
Appendix A CanadianWestern Bank 2008 Annual
Measuring the Cost of Property,Plant,and Equipment 500
Report 604
Measuring Amortization 506
Appendix B Sun-Rype Products Ltd.2008 Annual
Other Issues in Accounting for Property,Plant,
Report 636
and Equipment 512
Appendix C Standard Setting in Canada 657
Change in the Useful Life of an Amortizable Asset 513
Appendix D Typical Charts of Accounts for Different Types of
Using Fully Amortized Assets 514
Businesses 659
Disposing of Property,Plant,and Equipment 515
Selling Property,Plant,and Equipment 516 Glossary 661
Internal Control of Property,Plant,and Equipment 518 Index 665
Accounting for Natural Resources (Wasting Assets) 519
Accounting for Goodwill and Intangible Assets 521
Ethical Issues:Property,Plant,and Equipment,and Intangible
Assets 523
Understand the Impact on Property,Plant,and Equipment of
IFRS 524
Understand the Impact on Intangible Assets of IFRS 525
Summary Problem for Your Review 526
Chapter 10 Appendix 528
Summary 529
Assignment Material 531
Extending Your Knowledge 547
vi
00_horn_00_FM.qxd 12/2/09 1:33 PM Page vii
About the Authors
CHARLES T. HORNGREN
is the Edmund W. Littlefield Professor of Account-
ing, Emeritus, at Stanford University. Agraduate of Marquette University, he re-
ceived his MBA from Harvard University and his PhD from the University of
Chicago. He is also the recipient of honorary doctorates from Marquette Univer-
sity and DePaul University.
ACertified Public Accountant, Horngren served on the Accounting Principles
Board for six years, the Financial Accounting Standards Board Advisory Council
for five years, and the Council of the American Institute of Certified Public
Accountants for three years. For six years, he served as a trustee of the Financial
Accounting Foundation, which oversees the Financial Accounting Standards
Board and the Government Accounting Standards Board.
Horngren is a member of the Accounting Hall of Fame.
A member of the American Accounting Association, Horngren has been its
President and its Director of Research. He received its first annual Outstanding
Accounting Educator Award.
The California Certified Public Accountants Foundation gave Horngren its
Faculty Excellence Award and its Distinguished Professor Award. He is the first
person to have received both awards.
The American Institute of Certified Public Accountants presented its first Out-
standing Educator Award to Horngren.
Horngren was named Accountant of the Year, in Education, by the national pro-
fessional accounting fraternity, Beta Alpha Psi.
Professor Horngren is also a member of the Institute of Management Accoun-
tants, from whom he has received its Distinguished Service Award. He was a
member of the Institute’s Board of Regents, which administers the Certified Man-
agement Accountant examinations.
Horngren is the author of other accounting books published by Pearson
Prentice Hall: Cost Accounting: A Managerial Emphasis, Thirteenth Edition, 2008
(with Srikant Datar and George Foster); Introduction to Financial Accounting, Ninth
Edition, 2006 (with Gary L. Sundem and John A. Elliott); Introduction to Manage-
ment Accounting, Fourteenth Edition, 2008 (with Gary L. Sundem and William
Stratton); Financial Accounting, Seventh Edition, 2008 (with Walter T. Harrison, Jr.).
Horngren is the Consulting Editor for Pearson Prentice Hall’s Charles T. Horngren
Series in Accounting.
WALTER T. HARRISON, JR.
is Professor Emeritus of Accounting at the
Hankamer School of Business, Baylor University. He received his BBA degree
from Baylor University, his MS from Oklahoma State University, and his PhD
from Michigan State University.
Professor Harrison, recipient of numerous teaching awards from student
groups as well as from university administrators, has also taught at Cleveland
State Community College, Michigan State University, the University of Texas, and
Stanford University.
Amember of the American Accounting Association and the American Institute
of Certified Public Accountants, Professor Harrison has served as Chairman of the
Financial Accounting Standards Committee of the American Accounting Associa-
tion, on the Teaching/Curriculum Development Award Committee, on the Pro-
gram Advisory Committee for Accounting Education and Teaching, and on the
Notable Contributions to Accounting Literature Committee.
Professor Harrison has lectured in several foreign countries and published arti-
cles in numerous journals, including Journal of Accounting Research, Journal of Ac-
countancy, Journal of Accounting and Public Policy, Economic Consequences of Financial
vii
00_horn_00_FM.qxd 12/2/09 1:33 PM Page viii
Accounting Standards, Accounting Horizons, Issues in Accounting Education, and Jour-
nal of Law and Commerce.
He is co-author of Financial Accounting, Seventh Edition, 2008 (with Charles T.
Horngren),publishedbyPearsonPrenticeHall.ProfessorHarrisonhasreceivedschol-
arships,fellowships,andresearchgrantsorawardsfromPriceWaterhouseCoopers,
Deloitte&Touche,theErnst&YoungFoundation,andtheKPMGFoundation.
M. SUZANNE OLIVER
is an associate professor of accounting at Northwest
Florida State College in Niceville, Florida. She received her B.A. in Accounting
Information Systems and her Masters in Accountancy from the University of
West Florida.
Professor Oliver began her career in accounting in the tax department of a re-
gional accounting firm, specializing in benefit plan administration. She has served
as a software analyst for a national software development firm (CPASoftware) and
as the Oracle fixed assets analyst for Spirit Energy, formerly part of Union Oil of
California (Unocal). A Certified Public Accountant, Oliver is a member of the
Florida Institute of Certified Public Accountants.
Professor Oliver has taught financial accounting, managerial accounting, inter-
mediate accounting, tax accounting, accounting software applications, payroll
accounting, auditing, accounting systems, advanced accounting, managerial fi-
nance, business math, and supervision. She has also taught pension continuing
education classes for CPAs, and has developed and instructed online courses
using MyAccountingLab, WebCT, and other proprietary software.
Professor Oliver lives in Niceville where she is a member of the First United
Methodist Church with her husband Greg and son C.J.
PETER R. NORWOOD
is an instructor in accounting and the chair of the
Langara School of Management at Langara College in Vancouver. Agraduate of
the University of Alberta, he received his MBA from the University of Western
Ontario. He is a Chartered Accountant, a Fellow of the Institute of Chartered
Accountants of British Columbia, a Certified Management Accountant, and a
Fellow of the Society of Management Accountants of Canada.
Before entering the academic community, Mr. Norwood worked in public prac-
tice and industry for over fifteen years. He is First Vice-President of the Institute of
Chartered Accountants of British Columbia (President in 2010–2011) and a member
of the board of the Chartered Accountants School of Business (CASB). He is chair of
the Chartered Accountants Education Foundation for the British Columbia Institute
of Chartered Accountants, for whom he has served on a variety of committees.
Mr.Norwood is a past member of the Board of Evaluators of the Canadian Institute
of Chartered Accountants. Mr. Norwood is also a sessional instructor in the Sauder
School of Business, University of British Columbia. He is a past chair of the Langara
College Foundation.
JO-ANN L. JOHNSTON
is an instructor in accounting and financial planning in
the Financial Management Department at the British Columbia Institute of Tech-
nology (BCIT). She obtained her Bachelor in Administrative Studies from British
Columbia Open University, her Diploma of Technology in Financial Management
from BCIT, and her MBA from Simon Fraser University. She is also a Certified
General Accountant and recently completed the Canadian Securities Course.
Prior to entering the field of education, Mrs. Johnston worked in public practice
and industry for over 10 years. She is a past member of the Board of Governors of
the Certified General Accountants Association of British Columbia and has served
on various committees for the Association. She was also a member of the Board of
Directors for the BCIT Faculty and Staff Association, and served as Treasurer dur-
ing that tenure. She currently serves as chair of the CGAStudent Advisory Group
and is a member of CGA-BC Education Foundation and the Strategic Planning
Committee for the Certified General Accountants Association of British Columbia.
In addition to teaching duties and committee work for the British Columbia Insti-
tute of Technology, Mrs. Johnston is the financial officer for a family-owned business.
viii
00_horn_00_FM.qxd 12/2/09 1:33 PM Page ix
A Letter to Students
Students will “Get It”Anytime,Anywhere with
Accounting’s Student Learning System
Welcome to your introductory accounting course! Accounting is the language of
business. Whether you intend to be an accountant or not, you owe it to yourself to
develop your skills with this language so that you can give yourself a winning
edge in your career.
As instructors, we know that you want to ace your accounting course, and we
also know that the volume of material covered in introductory accounting can be
overwhelming. To help you develop your skills and understanding of accounting
principles—to help you “get it”—we created the Accounting Student Learning
System. All the features of the student textbook, study resources, and online
homework systemare designed to work together to provide you with more “I get
it!” moments inside the classroom and especially outside the classroom, when you
don’t have access to your instructor.
We first had to create a really solid textbook, one that covered the material in a
way that makes new and possibly intimidating topics easier to understand. To
make sure we were on the right track, we held focus groups with first-year ac-
counting students like you. Many of the changes made to the textbook and many
of the new study resources were a direct result of suggestions from these students.
We have also created a number of tools and resources to support you, and your
portal to these resources is MyAccountingLab. In intro accounting, sometimes the
only way to “get it” is to do it—to practise similar questions many times until the
concepts are clear, and MyAccountingLab allows you to do this. Sometimes seeing
the basics of accounting presented in a slightly different, interactive way will help
you “get it,” and the Accounting Cycle Tutorials and the Demo Docs in MyAc-
countingLab help you do this. The tools and the features of MyAccountingLab ap-
pear in the fold-out at the front of this book. The tools and the features of this
textbook are described in detail in the tour, Helping You “Get” Accounting, which
is presented over the next few pages. And reminders appear in Chapter 1 to de-
scribe how each feature in the text can help you to master accounting.
Best of luck with your course, and much success!
Peter Norwood
Jo-Ann Johnston
ix