Business Accounting - 2012 Book Archive

1108 Pages·2012·19.51 MB·English

Business Accounting
v. 2.0
This is the bookBusiness Accounting(v. 2.0).
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Table of Contents
About the Authors................................................................................................................. 1
Acknowledgments................................................................................................................. 4
Preface..................................................................................................................................... 6
Chapter 1: What Is Financial Accounting, and Why Is It Important?...................... 10
Making Good Financial Decisions about an Organization.......................................................................11
Incorporation and the Trading of Capital Shares.....................................................................................21
Using Financial Accounting for Wise Decision Making...........................................................................31
End-of-Chapter Exercises............................................................................................................................40
Chapter 2: What Should Decision Makers Know in Order to Make Good Decisions
about an Organization? ..................................................................................................... 50
Creating a Portrait of an Organization That Can Be Used by Decision Makers.....................................51
Dealing with Uncertainty............................................................................................................................58
The Need for Accounting Standards..........................................................................................................62
Four Essential Terms Encountered in Financial Accounting..................................................................72
End-of-Chapter Exercises............................................................................................................................86
Chapter 3: How Is Financial Information Delivered to Decision Makers Such as
Investors and Creditors?................................................................................................... 96
Construction of Financial Statements Beginning with the Income Statement.....................................97
Reported Profitability and the Impact of Conservatism........................................................................107
Increasing the Net Assets of a Company..................................................................................................117
Reporting a Balance Sheet and a Statement of Cash Flows...................................................................126
End-of-Chapter Exercises..........................................................................................................................136
Chapter 4: How Does an Organization Accumulate and Organize the Information
Necessary to Create Financial Statements?................................................................. 155
The Essential Role of Transaction Analysis.............................................................................................156
Understanding the Effects Caused by Common Transactions..............................................................164
Double-Entry Bookkeeping.......................................................................................................................174
Recording Transactions Using Journal Entries.......................................................................................181
Connecting the Journal to the Ledger......................................................................................................191
End-of-Chapter Exercises..........................................................................................................................206
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Chapter 5: Why Is Financial Information Adjusted Prior to the Production of
Financial Statements?...................................................................................................... 220
The Need for Adjusting Entries................................................................................................................221
Preparing Various Adjusting Entries.......................................................................................................229
Preparation of Financial Statements.......................................................................................................240
End-of-Chapter Exercises..........................................................................................................................248
Chapter 6: Why Should Decision Makers Trust Financial Statements? ................ 269
The Need for the Securities and Exchange Commission........................................................................270
The Role of the Independent Auditor in Financial Reporting...............................................................277
Performing an Audit..................................................................................................................................284
The Need for Internal Control..................................................................................................................291
The Purpose and Content of an Independent Auditor’s Report............................................................296
End-of-Chapter Exercises..........................................................................................................................302
Chapter 7: In Financial Reporting, What Information Is Conveyed about
Receivables?....................................................................................................................... 312
Accounts Receivable and Net Realizable Value......................................................................................313
Accounting for Uncollectible Accounts...................................................................................................320
The Problem with Estimations.................................................................................................................327
The Actual Estimation of Uncollectible Accounts..................................................................................335
Reporting Foreign Currency Balances.....................................................................................................345
A Company’s Vital Signs—Accounts Receivable.....................................................................................352
End-of-Chapter Exercises..........................................................................................................................360
Chapter 8: How Does a Company Gather Information about Its Inventory?........ 382
Determining and Reporting the Cost of Inventory................................................................................383
Perpetual and Periodic Inventory Systems.............................................................................................391
The Calculation of Cost of Goods Sold......................................................................................................400
Reporting Inventory at Lower of Cost or Market...................................................................................409
Determining Inventory on Hand..............................................................................................................416
End-of-Chapter Exercises..........................................................................................................................424
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Chapter 9: Why Does a Company Need a Cost Flow Assumption in Reporting
Inventory? .......................................................................................................................... 445
The Necessity of Adopting a Cost Flow Assumption..............................................................................446
The Selection of a Cost Flow Assumption for Reporting Purposes.......................................................457
Problems with Applying LIFO...................................................................................................................464
Merging Periodic and Perpetual Inventory Systems with a Cost Flow Assumption...........................472
Applying LIFO and Averaging to Determine Reported Inventory Balances........................................479
Analyzing Reported Inventory Figures....................................................................................................490
End-of-Chapter Exercises..........................................................................................................................500
Chapter 10: In a Set of Financial Statements, What Information Is Conveyed
about Property and Equipment?.................................................................................... 526
The Reporting of Property and Equipment.............................................................................................527
Determining Historical Cost and Depreciation Expense........................................................................534
Recording Depreciation Expense for a Partial Year...............................................................................542
Alternative Depreciation Patterns and the Recording of a Wasting Asset..........................................549
Recording Asset Exchanges and Expenditures That Affect Older Assets.............................................561
Reporting Land Improvements and Impairments in the Value of Property and Equipment............571
End-of-Chapter Exercises..........................................................................................................................581
Chapter 11: In a Set of Financial Statements, What Information Is Conveyed
about Intangible Assets?.................................................................................................. 605
Identifying and Accounting for Intangible Assets..................................................................................606
Balance Sheet Reporting of Intangible Assets........................................................................................614
Recognizing Intangible Assets Owned by a Subsidiary..........................................................................622
Accounting for Research and Development............................................................................................631
Acquiring an Asset with Future Cash Payments.....................................................................................638
End-of-Chapter Exercises..........................................................................................................................653
Chapter 12: In a Set of Financial Statements, What Information Is Conveyed
about Equity Investments?.............................................................................................. 677
Accounting for Investments in Trading Securities................................................................................678
Accounting for Investments in Securities That Are Classified as Available-for-Sale.........................688
Accounting for Investments by Means of the Equity Method...............................................................697
Reporting Consolidated Financial Statements........................................................................................709
End-of-Chapter Exercises..........................................................................................................................720
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Chapter 13: In a Set of Financial Statements, What Information Is Conveyed
about Current and Contingent Liabilities?.................................................................. 745
The Basic Reporting of Liabilities.............................................................................................................746
Reporting Current Liabilities Such as Gift Cards....................................................................................753
Accounting for Contingencies..................................................................................................................760
Accounting for Product Warranties.........................................................................................................771
End-of-Chapter Exercises..........................................................................................................................782
Chapter 14: In a Set of Financial Statements, What Information Is Conveyed
about Noncurrent Liabilities Such as Bonds?............................................................. 804
Debt Financing...........................................................................................................................................805
Issuance of Notes and Bonds.....................................................................................................................810
Accounting for Zero-Coupon Bonds.........................................................................................................820
Pricing and Reporting Term Bonds..........................................................................................................832
Issuing and Accounting for Serial Bonds.................................................................................................841
Bonds with Other Than Annual Interest Payments................................................................................852
End-of-Chapter Exercises..........................................................................................................................859
Chapter 15: In a Set of Financial Statements, What Information Is Conveyed
about Other Noncurrent Liabilities?............................................................................. 879
Accounting for Leases................................................................................................................................880
Operating Leases versus Capital Leases...................................................................................................890
Recognition of Deferred Income Taxes....................................................................................................899
Reporting Postretirement Benefits..........................................................................................................907
End-of-Chapter Exercises..........................................................................................................................918
Chapter 16: In a Set of Financial Statements, What Information Is Conveyed
about Shareholders’ Equity? .......................................................................................... 941
Selecting a Legal Form for a Business......................................................................................................942
The Issuance of Common Stock................................................................................................................948
Issuing and Accounting for Preferred Stock and Treasury Stock.........................................................957
The Issuance of Cash and Stock Dividends..............................................................................................967
The Computation of Earnings per Share.................................................................................................978
End-of-Chapter Exercises..........................................................................................................................986
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Chapter 17: In a Set of Financial Statements, What Information Is Conveyed by
the Statement of Cash Flows?....................................................................................... 1012
The Structure of a Statement of Cash Flows.........................................................................................1013
Cash Flows from Operating Activities: The Direct Method.................................................................1024
Cash Flows from Operating Activities: The Indirect Method..............................................................1036
Cash Flows from Investing and Financing Activities...........................................................................1046
Appendix: Comprehensive Illustration—Statement of Cash Flows....................................................1063
End-of-Chapter Exercises........................................................................................................................1074
Appendix: Present Value Tables.................................................................................. 1099
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About the Authors
Joe Ben Hoyle, University of Richmond
Joe Hoyle is an associate professor of accounting at the
Robins School of Business at the University of
Richmond. In 2006, he was named byBusinessWeekas
one of twenty-six favorite undergraduate business
professors in the United States. In 2007, he was selected
as the Virginia Professor of the Year by the Carnegie
Foundation for the Advancement of Teaching and the
Council for the Advancement and Support of Education.
In 2009, he was judged to be one of the one hundred
most influential members of the accounting profession
byAccounting Today.
Joe has two market-leading textbooks published with McGraw-Hill—Advanced
Accounting(11th edition, 2012) andEssentials of Advanced Accounting(5th edition,
2012), both coauthored with Tom Schaefer of the University of Notre Dame and Tim
Doupnik of the University of South Carolina.
At the Robins School of Business, Joe teaches Fundamentals of Financial Accounting,
Intermediate Financial Accounting I, Intermediate Financial Accounting II, and
Advanced Financial Accounting. He earned his BA degree in accounting from Duke
University and his MA degree in business and economics, with a minor in education,
from Appalachian State University. He has written numerous articles and continues
to make many presentations around the country on teaching excellence. He
maintains a blog on teaching athttp://www.joehoyle-teaching.blogspot.com/.
Joe also has three decades of experience operating his own CPA (Certified Public
Accountant) Exam review programs. In 2008, he created CPA Review for Free
(http://www.CPAreviewforFREE.com), which provides thousands of free questions
to help accountants around the world prepare for the CPA Exam.
Joe and his wife, Sarah, have four children and four grandchildren.
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About the Authors
C. J. Skender, University of North Carolina at Chapel
Hill
C. J. Skender has received two dozen teaching awards at
the University of North Carolina’s Kenan-Flagler
Business School (fourteen awards), at Duke University’s
Fuqua School of Business (five awards), and at North
Carolina State University (five awards). He has been
included among the outstanding Fuqua faculty in four
editions of theBusinessweek Guide to the Best Business
Schools. His classes were highlighted inBusinessweek
(http://www.businessweek.com) andSports Illustrated
(http://sportsillustrated.cnn.com) in 2006. C. J. was
featured in “The Last Word” in the April 2008Journal of
Accountancy. He was voted best professor inThe Daily Tar
Heel: Carolina’s Finestannual awards issue in 2011.
C. J. has served as a training consultant on three continents for organizations, such
asGlaxoSmithKline,IBM,Siemens,Starwood, andWells Fargo. He was inducted
into theWells FargoHall of Fame in 2003 for lifetime achievement. C. J. has
developed and delivered various executive education seminars as well as CPA, CMA
(Certified Management Accountant), and CIA (Certified Internal Auditor) review
courses. For six years, he lectured simultaneously in the state, Carolina, and Duke
CPA preparatory classes. For seven years, C. J. taught financial accounting and
managerial accounting on cable television in the Research Triangle area. His
scholarly work has been published inTAXESand theJournal of Accounting Education.
C. J. Skender was born in Harrisburg, Pennsylvania, in 1954. He captained three
sports at Susquehanna Township High School. C. J. holds academic degrees from
Lehigh University and Duke University. He attended Lehigh on a basketball
scholarship and graduated magna cum laude. C. J. worked as an auditor for Deloitte
Haskins & Sells in Philadelphia. He has attained eleven professional designations in
accounting, financial planning, insurance, and management. C. J. has taught more
than five hundred sections of college courses and more than twenty-five thousand
students in his academic career. He was tapped into the Golden Chain Honor Society
at North Carolina State University in 1985 and was named Alumni Distinguished
Professor there in 1992. C. J. was presented the Outstanding Educator Award by the
North Carolina Association of Certified Public Accountants in 1995. At the
University of North Carolina, he has received three Weatherspoons (2000, 2004, and
2007) as well as the James M. Johnston Teaching Excellence Award in 2005.
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About the Authors
C. J. and his wife, Mary Anne, are the parents of two sons and one daughter: Charles
(1979), Timothy (1983), and Corey (1987). They have one granddaughter: Riley
(2010). C. J. and his wife reside in Raleigh, North Carolina.
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