Financial Accounting: The Impact on Decision Makers PDF
Preview Financial Accounting: The Impact on Decision Makers
Financial Accounting The Impact on Decision Makers 9e Gary A. Porter DRAKE UNIVERSITY Curtis L. Norton ARIZONA STATE UNIVERSITY Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. 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FinancialAccounting:TheImpactonDecision ª2015,2013CengageLearning Makers,9thedition WCN: 02-200-203 GaryA.Porter,CurtisL.Norton ALLRIGHTSRESERVED.Nopartofthisworkcoveredbythecopyrightherein SeniorVicePresident,GlobalProduct maybereproduced,transmitted,stored,orusedinanyformorbyanymeans Management,HigherEd:JackW.Calhoun graphic,electronic,ormechanical,includingbutnotlimitedtophotocopying, VicePresidentandGeneralManager,Social recording,scanning,digitizing,taping,webdistribution,informationnetworks, Science&QualitativeBusiness:ErinJoyner orinformationstorageandretrievalsystems,exceptaspermittedunder ProductDirector:RobDewey Section107or108ofthe1976UnitedStatesCopyrightAct,withouttheprior writtenpermissionofthepublisher. 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May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Brief Contents Contents iv Preface xii CHAPTER 1 Accounting as a Form of Communication 2 CHAPTER 2 Financial Statements and the Annual Report 52 CHAPTER 3 Processing Accounting Information 102 CHAPTER 4 Income Measurement and Accrual Accounting 150 CHAPTER 5 Inventories and Cost of Goods Sold 224 CHAPTER 6 Cash and Internal Control 296 CHAPTER 7 Receivables and Investments 334 CHAPTER 8 Operating Assets: Property, Plant, and Equipment, and Intangibles 380 CHAPTER 9 Current Liabilities, Contingencies, and the Time Value of Money 430 CHAPTER 10 Long-Term Liabilities 486 CHAPTER 11 Stockholders’ Equity 536 CHAPTER 12 The Statement of Cash Flows 594 CHAPTER 13 Financial Statement Analysis 670 APPENDIX A International Financial Reporting Standards A-1 APPENDIX B Excerpts from Under Armour’s Form 10-K for the Fiscal Year Ended December 31, 2011 B-1 APPENDIX C Excerpts from Columbia Sportswear’s Form 10-K for the Fiscal Year Ended December 31, 2011 C-1 Glossary G-1 Index I-1 iii Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Contents CHAPTER 1 GoingConcern 21 Accounting as a Form of Communication 2 TimePeriodAssumption 21 SettingAccountingStandards 21 UnderArmour,Inc.:MakingBusinessDecisions 3 WhoDeterminestheRulesforFinancialStatements? 21 WhatIsBusiness? 4 TheAuditofFinancialStatements 22 FormsofOrganization 5 IntroductiontoEthicsinAccounting 22 BusinessEntities 5 WhyShouldAccountantsBeConcernedwithEthics? 23 SoleProprietorships 5 IstheInformationRelevantandaFaithful Partnerships 6 Representation? 23 Corporations 6 MoralandSocialContextofEthicalBehavior 23 NonbusinessEntities 7 HotTopics:SalesofStockCouldPayOffforUnder OrganizationsandSocialResponsibility 7 Armour’sFounder 25 TheNatureofBusinessActivity 7 AccountantsandEthicalJudgments 25 FinancingActivities 7 TheChangingFaceoftheAccountingProfession 25 InvestingActivities 8 LookingAhead 26 OperatingActivities 8 Eachchaptercontainssomeorallofthefollowingend-of- SummaryofBusinessActivities 8 chaptermaterial: WhatIsAccounting,andWhatInformation (cid:129)KeyPointsReview(cid:129)RatioReview(cid:129)AccountsHighlighted DoUsersofAccountingReportsNeed? 9 (cid:129)KeyTermsQuiz(cid:129)AlternateTerms(cid:129)WarmupExercises& Solutions(cid:129)ReviewProblem&Solution(cid:129)AppendixReview UsersofAccountingInformationandTheirNeeds 9 Problem&Solution(cid:129)Questions(cid:129)BriefExercises(cid:129)Exercises InternalUsers 9 (cid:129)Multi-ConceptExercises(cid:129)Problems(cid:129)Multi-Concept ExternalUsers 10 Problems(cid:129)AlternateProblems(cid:129)AlternateMulti-Concept UsingFinancialAccountingInformation 11 Problems(cid:129)DecisionCases:ReadingandInterpretingFinancial FinancialDecisionFramework 11 Statements;MakingFinancialDecisions;EthicalDecision FinancialStatements:HowAccountants Making(cid:129)SolutionstoKeyTermsQuiz Communicate 12 TheAccountingEquation 12 CHAPTER 2 TheBalanceSheet 13 Financial Statements and the Annual TheIncomeStatement 13 Report 52 TheStatementofRetainedEarnings 15 TheStatementofCashFlows 15 ColumbiaSportswear:MakingBusinessDecisions 53 RelationshipsAmongtheFinancialStatements 16 LookingatFinancialStatementsforaRealCompany: ObjectivesofFinancialReporting 54 UnderArmour 16 WhatMakesAccountingInformationUseful? UnderArmour’sBalanceSheet 16 QualitativeCharacteristics 56 UnderArmourIncomeStatement 17 Understandability 56 TheConceptualFramework:Foundationfor Relevance 56 FinancialStatements 19 FaithfulRepresentation 56 ConceptualFrameworkforAccounting 19 ComparabilityandConsistency 57 EconomicEntityConcept 19 Spotlight:PaulC.Stumb,Jr. 57 Spotlight:SusanKochRenner 20 Materiality 58 AssetValuation:CostorFairValue? 20 iv Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Contents v Conservatism 58 TheRoleofSourceDocumentsinRecording AnInternationalPerspectiveonQualitative Transactions 105 Characteristics 59 AnalyzingtheEffectsofTransactionsonthe TheClassifiedBalanceSheet 59 AccountingEquation 105 UnderstandingtheOperatingCycle 59 TheCostPrinciple 108 CurrentAssets 60 BalanceSheetandIncomeStatementforGlengarry NoncurrentAssets 61 HealthClub 108 Investments 61 WhatIsanAccount? 110 Property,Plant,andEquipment 62 ChartofAccounts 110 Intangibles 62 TheGeneralLedger 111 CurrentLiabilities 62 TheDouble-EntrySystem 112 Long-TermLiabilities 63 TheTAccount 112 Stockholders’Equity 63 DebitsandCredits 112 UsingaClassifiedBalanceSheet:Introduction DebitsAren’tBad,andCreditsAren’tGood 113 toRatios 64 DebitsandCreditsforRevenues,Expenses,and WorkingCapital 65 Dividends 113 CurrentRatio 65 Revenues 113 TheIncomeStatement 66 Expenses 113 Dividends 114 WhatAppearsontheIncomeStatement? 66 SummaryoftheRulesforIncreasingandDecreasing FormatoftheIncomeStatement 66 Accounts 114 Single-StepFormatfortheIncomeStatement 67 NormalAccountBalances 114 Multiple-StepFormatfortheIncomeStatement 67 DebitsandCreditsAppliedtoTransactions 114 UsinganIncomeStatement 68 TransactionsforGlengarryHealthClub 115 TheStatementofRetainedEarnings 69 TheJournal:TheFirm’sChronologicalRecord TheStatementofCashFlows 70 ofTransactions 117 Financial Statements for Columbia TheTrialBalance 119 Sportswear 71 HotTopics:HollandAmericaLine–OneoftheWorld’s ColumbiaSportswear’sBalanceSheet 72 MostEthicalCompanies 120 ColumbiaSportswear’sIncomeStatement 73 AFinalNote:ProcessingAccountingInformation 121 MakingBusinessDecisions:TheCurrentRatio 74 CHAPTER 4 OtherElementsofanAnnualReport 77 Income Measurement and Accrual ReportofIndependentAccountants(Auditors’Report) 77 Accounting 150 HotTopics:PayingDividendsinChallenging EconomicTimes 78 Nordstrom,Inc.:MakingBusinessDecisions 151 TheEthicalResponsibilityofManagementandthe RecognitionandMeasurementinFinancial Auditors 79 ManagementDiscussionandAnalysis 79 Statements 152 NotestoConsolidatedFinancialStatements 79 Recognition 153 LookingAhead 79 Spotlight:JamesH.Kennedy,CPA 153 Measurement 154 CHAPTER 3 Choice1:TheAttributetoBeMeasured 154 Processing Accounting Information 102 Choice2:TheUnitofMeasure 154 SummaryofRecognitionandMeasurementinFinancial CarnivalCorporation&PLC:MakingBusiness Statements 155 Decisions 103 TheAccrualBasisofAccounting 155 EconomicEvents:TheBasisforRecording ComparingtheCashandAccrualBasesofAccounting 155 Transactions 104 WhattheIncomeStatementandtheStatementof CashFlowsReveal 157 ExternalandInternalEvents 105 AccrualAccountingandTimePeriods 158 Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. vi Contents TheRevenueRecognitionPrinciple 158 ShippingTermsandTransportationCosts 236 ShippingTermsandTransferofTitletoInventory 237 Expense Recognition and the Matching Principle 159 TheGrossProfitRatio 237 AccrualAccountingandAdjustingEntries 161 MakingBusinessDecisions:TheGrossProfitRatio 238 TypesofAdjustingEntries 161 (1)CashPaidBeforeExpenseIsIncurred InventoryValuationandtheMeasurementof (DeferredExpense) 161 Income 240 (2)CashReceivedBeforeRevenueIsEarned (DeferredRevenue) 164 InventoryCosts:WhatShouldBeIncluded? 240 HotTopics:KeepingaWatchfulEyeonSales 165 InventoryCostingMethodswithaPeriodic System 241 (3)ExpenseIncurredBeforeCashIsPaid (AccruedLiability) 166 SpecificIdentificationMethod 242 (4)RevenueEarnedBeforeCashIsReceived WeightedAverageCostMethod 243 (AccruedAsset) 169 First-In,First-OutMethod(FIFO) 244 AccrualsandDeferrals 169 Last-In,First-OutMethod(LIFO) 245 SummaryofAdjustingEntries 170 SelectinganInventoryCostingMethod 245 ComprehensiveExampleofAdjustingEntries 170 CostingMethodsandCashFlow 245 EthicalConsiderationsforaCompanyontheAccrual LIFOLiquidation 247 Basis 174 TheLIFOConformityRule 247 TheAccountingCycle 175 TheLIFOReserve:EstimatingLIFO’sEffecton TheUseofaWorkSheet 176 IncomeandonTaxesPaidforWinnebagoIndustries 247 CostingMethodsandInventoryProfits 248 TheClosingProcess 177 ChangingInventoryMethods 249 InterimFinancialStatements 179 InventoryValuationinOtherCountries 249 APPENDIX—ACCOUNTINGTOOLS:WORKSHEETS 179 LookingAhead 249 InventoryErrors 249 CHAPTER 5 Inventories and Cost of Goods Sold 224 ValuingInventoryatLowerofCostorMarket 252 WhyReplacementCostIsUsedasaMeasureofMarket 253 GapInc.:MakingBusinessDecisions 225 ApplicationoftheLCMRule 254 Lower-of-Cost-or-MarketunderInternationalStandards 254 TheNatureofInventory 226 AnalyzingtheManagementofInventory 254 Spotlight:WendyRosasco 227 ThreeTypesofInventoryCostsandThreeFormsof MakingBusinessDecisions:AnalyzingtheManagement Inventory 227 ofInventory 255 ThreeTypesofManufacturingCosts 228 ThreeFormsofInventory 228 HowInventoriesAffecttheCashFlowsStatement 257 NetSalesofMerchandise 229 APPENDIX—ACCOUNTINGTOOLS:INVENTORY COSTINGMETHODSWITHTHEUSEOFA SalesReturnsandAllowances 229 CreditTermsandSalesDiscounts 230 PERPETUALINVENTORYSYSTEM 258 CostofGoodsSold 230 CHAPTER 6 HotTopics:LookingOutsidetheUnitedStatesfor Cash and Internal Control 296 Opportunities 231 TheCostofGoodsSoldModel 231 SearsHoldingsCorporation:MakingBusiness InventorySystems:PerpetualandPeriodic 232 Decisions 297 BeginningandEndingInventoriesinaPeriodicSystem 233 CostofGoodsPurchased 234 WhatConstitutesCash? 298 Purchases 234 CashEquivalentsandtheStatementofCashFlows 299 PurchaseReturnsandAllowances 234 PurchaseDiscounts 235 HotTopics:KeepingtheCashFlowing 299 Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Contents vii ControlOverCash 300 HotTopics:KeepingInvestorsInformed 347 CashManagement 300 NotesReceivable 347 ReadingaBankStatement 300 ImportantTermsConnectedwithPromissoryNotes 348 TheBankReconciliation 301 TheNeedforAdjustmentstotheRecords 303 AcceleratingtheInflowofCashfromSales 349 EstablishingaPettyCashFund 305 CreditCardSales 350 AnIntroductiontoInternalControl 307 DiscountingNotesReceivable 351 TheSarbanes-OxleyActof2002 307 AccountingforInvestments 352 TheControlEnvironment 310 InvestmentsinHighlyLiquidFinancialInstruments 352 TheAccountingSystem 310 InvestmentsinStocksandBonds 354 NoSignificantInfluence 354 InternalControlProcedures 310 SignificantInfluence 354 ProperAuthorizations 311 Control 354 SegregationofDuties 311 ValuingandReportingInvestmentsonthe IndependentVerification 311 FinancialStatements 357 SafeguardingofAssetsandRecords 311 IndependentReviewandAppraisal 311 HowLiquidAssetsAffecttheStatement DesignandUseofBusinessDocuments 312 ofCashFlows 358 LimitationsonInternalControl 312 LookingAhead 359 ComputerizedBusinessDocumentsandInternal Control 312 CHAPTER 8 ControlOverCashReceipts 313 Operating Assets: Property, Plant, and CashReceivedOvertheCounter 313 Equipment, and Intangibles 380 CashReceivedintheMail 313 CashDiscrepancies 314 Nike:MakingBusinessDecisions 381 TheRoleofComputerizedBusinessDocumentsin ControllingCashDisbursements 314 BalanceSheetPresentationofProperty,Plant,and PurchaseRequisition 314 Equipment 382 PurchaseOrder 314 AcquisitionofProperty,Plant,andEquipment 383 Invoice 316 GroupPurchase 383 ReceivingReport 317 CapitalizationofInterest 384 InvoiceApprovalForm 317 LandImprovements 384 CheckwithRemittanceAdvice 319 UseandDepreciationofProperty,Plant,and CHAPTER 7 Equipment 385 Receivables and Investments 334 Straight-LineMethod 385 Units-of-ProductionMethod 386 AppleInc.:MakingBusinessDecisions 335 AcceleratedDepreciationMethods 387 ComparisonofDepreciationMethods 388 AccountsReceivable 336 DepreciationandIncomeTaxes 388 TheUseofaSubsidiaryLedger 336 ChoiceofDepreciationMethod 388 ChangeinDepreciationEstimate 389 Spotlight:BradSolberg 337 CapitalversusRevenueExpenditures 390 TheValuationofAccountsReceivable 338 TwoMethodstoAccountforBadDebts 338 EnvironmentalAspectsofOperatingAssets 392 TwoApproachestotheAllowanceMethod DisposalofProperty,Plant,andEquipment 393 ofAccountingforBadDebts 340 PercentageofNetCreditSalesApproach 340 GainonSaleofAssets 393 PercentageofAccountsReceivableApproach 341 LossonSaleofAssets 394 AgingofAccountsReceivable 342 IFRSandProperty,Plant,andEquipment 395 OperatingAssets:IntangibleAssets 395 TheAccountsReceivableTurnoverRatio 344 BalanceSheetPresentation 395 MakingBusinessDecisions:Analyzing AcquisitionCostofIntangibleAssets 396 theAccountsReceivableRateofCollection 344 Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. viii Contents HotTopics:TheNikeBrand:Intangible?Yes. CompoundInterest 445 Valuable?Absolutely! 397 InterestCompounding 446 ResearchandDevelopmentCosts 397 PresentValueandFutureValue: AmortizationofIntangibles 397 SingleAmounts 446 IntangibleswithFiniteLife 397 FutureValueofaSingleAmount 446 IntangibleswithIndefiniteLife 398 PresentValueofaSingleAmount 448 Spotlight:JohnDavenport 399 PresentValueandFutureValueofanAnnuity 449 GoodwillandImpairments 399 FutureValueofanAnnuity 449 IFRSandIntangibleAssets 400 PresentValueofanAnnuity 450 HowLong-TermAssetsAffecttheStatement SolvingforUnknowns 451 ofCashFlows 400 APPENDIX—ACCOUNTINGTOOLS:USINGEXCEL¤ AnalyzingLong-TermAssetsforAverageLife FORPROBLEMSINVOLVINGINTEREST andAssetTurnover 401 CALCULATIONS 456 MakingBusinessDecisions 403 CHAPTER 10 CHAPTER 9 Long-Term Liabilities 486 Current Liabilities, Contingencies, and the Time Value of Money 430 Coca-Cola:MakingBusinessDecisions 487 BalanceSheetPresentationofLong-Term StarbucksCorporation:MakingBusiness Liabilities 488 Decisions 431 HotTopics:Coca-ColaversusPepsiCo 489 CurrentLiabilities 432 BondsPayable:Characteristics 490 AccountsPayable 433 NotesPayable 433 Spotlight:WilliamL.Matthes 490 Spotlight:KarenStephens 434 Collateral 491 CurrentMaturitiesofLong-TermDebt 436 DueDate 491 TaxesPayable 437 OtherFeatures 491 OtherAccruedLiabilities 438 IssuanceofBonds 492 IFRSandCurrentLiabilities 438 FactorsAffectingBondPrice 492 ReadingtheStatementofCashFlowsfor ChangesinCurrentLiabilities 439 PremiumorDiscountonBonds 494 ContingentLiabilities 440 BondAmortization 496 ContingentLiabilitiesThatAreRecorded 441 EffectiveInterestMethod:ImpactonExpense 496 ProductWarrantiesandGuarantees:Common RedemptionofBonds 500 ContingentLiabilitiesThatAreRecorded 441 RetiredEarlyataGainoraLoss 500 PremiumsorCoupons:OtherContingentLiabilities FinancialStatementPresentationofGainorLoss 502 ThatAreRecorded 442 SomeLawsuitsandLegalClaimsAreContingent LiabilityforLeases 502 LiabilitiesThatMustBeRecorded 442 Leases 502 ContingentLiabilitiesThatAreDisclosed 442 LeaseCriteria 502 ContingentLiabilitiesversusContingentAssets 443 OperatingLeases 503 HotTopics:Starbucks’LiabilityforProducts 443 CapitalLeases 504 IFRSandLeasing 506 IFRSandContingencies 444 LookingAhead 507 LookingAhead 444 AnalyzingDebttoAssessaFirm’sAbilityto TimeValueofMoneyConcepts:Compounding PayItsLiabilities 507 ofInterest 444 SimpleInterest 445 MakingBusinessDecisions 507 Copyright 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
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