Financial accounting with International Financial Reporting Standards

859 Pages·2019·14.896 MB·English

by  Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso

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Financial Accounting
with International Financial Reporting Standards
Fourth Edition
JERRY J. WEYGANDT PhD, CPA
University of Wisconsin—Madison
Madison, Wisconsin
PAUL D. KIMMEL PhD, CPA
University of Wisconsin—Milwaukee
Milwaukee, Wisconsin
DONALD E. KIESO PhD, CPA
Northern Illinois University
DeKalb, Illinois
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DEDICATED TO
Our wives,
Enid, Merlynn, and Donna, for their love,
support, and encouragement.
DIRECTOR Michael McDonald
ACQUISITIONS EDITOR Zoe Craig
LEAD PRODUCT DESIGNER Ed Brislin
PRODUCT DESIGNER Lindsey Myers
EDITORIAL SUPERVISOR Terry Ann Tatro
EDITORIAL ASSOCIATE Margaret Thompson
EDITORIAL ASSISTANT Alyce Pellegrino
SENIOR CONTENT MANAGER Dorothy Sinclair
SENIOR PRODUCTION EDITOR Elena Saccaro
SENIOR DESIGNER Wendy Lai
SENIOR PHOTO EDITOR Mary Ann Price
COVER IMAGE © Teodulo Vida/EyeEm/Getty Images
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Brief Contents
1 Accounting in Action 1-1
2 The Recording Process 2-1
3 Adjusting the Accounts 3-1
4 Completing the Accounting Cycle 4-1
5 Accounting for Merchandise Operations 5-1
6 Inventories 6-1
7 Fraud, Internal Control, and Cash 7-1
8 Accounting for Receivables 8-1
9 Plant Assets, Natural Resources, and Intangible Assets 9-1
10 Current Liabilities 10-1
11 Non-Current Liabilities 11-1
12 Corporations: Organization, Share Transactions, and Equity 12-1
13 Investments 13-1
14 Statement of Cash Flows 14-1
15 Financial Analysis: The Big Picture 15-1
APPENDICES
A Specimen Financial Statements: TSMC, Ltd. A-1
B Specimen Financial Statements: Nestlé SA B-1
C Specimen Financial Statements: Delfi Limited C-1
D Specimen Financial Statements: Apple Inc. D-1
E Time Value of Money E-1
F Accounting for Partnerships F-1
G Subsidiary Ledgers and Special Journals G-1
COMPANY INDEX / SUBJECT INDEX I-1
iii
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From the Authors
Dear Student, WHY THIS TEXT? Your instructor has chosen this text for
you because of the authors’ trusted reputation. The authors have
WHY THIS COURSE? Remember your biology course worked hard to write a text that is engaging, timely, and accurate.
in high school? Did you have one of those “invisible man”
models (or maybe something more high-tech than that) that HOW TO SUCCEED? We’ve asked many students and many
gave you the opportunity to look “inside” the human body? instructors whether there is a secret for success in this course.
This accounting course off ers something similar. To under- The nearly unanimous answer turns out to be not much of a
stand a business, you have to secret: “Do the homework.” This is one
understand the fi nancial in- “Whether you are looking at a large multina- course where doing is learning. The more
sides of a business organiza- tional company like Samsung or adidas or time you spend on the homework assign-
tion. A fi nancial accounting ments—using the various tools that this
a single-owner software consulting business
course will help you under- text provides—the more likely you are to
or coffee shop, knowing the fundamentals of
stand the essential fi nancial learn the essential concepts, techniques,
financial accounting will help you understand
components of businesses. and methods of accounting. Besides the
what is happening.”
Whether you are looking at a text itself, the book’s companion website
large multinational company also off ers various support resources.
like Samsung or adidas or a single-owner software consult-
Good luck in this course. We hope you enjoy the experience
ing business or coff ee shop, knowing the fundamentals of
and that you put to good use throughout a lifetime of success
fi nancial accounting will help you understand what is hap-
the knowledge you obtain in this course. We are sure you will
pening. As an employee, a manager, an investor, a business
not be disappointed.
owner, or a director of your own personal fi nances—any of
which roles you will have at some point in your life—you Jerry J. Weygandt
will make better decisions for having taken this course. Paul D. Kimmel
Donald E. Kieso
iv
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Author Commitment
Jerry Weygandt Paul Kimmel Don Kieso
JERRY J. WEYGANDT, PhD, PAUL D. KIMMEL, PhD, CPA, DONALD E. KIESO, PhD, CPA,
CPA, is Arthur Andersen Alumni Emeritus r eceived his bachelor’s degree from the Uni- received his bachelor’s degree from Aurora Uni-
Professor of Accounting at the University of versity of Minnesota and his doctorate in ac- versity and his doctorate in accounting from the
Wisconsin—Madison. He holds a Ph.D. in counting from the University of Wisconsin. University of Illinois. He has served as chairman
accounting from the University of Illinois. He teaches at the Univers ity of Wisconsin— of the Department of Accountancy and is currently
A rticles by Professor Weygandt have a ppeared Milwaukee and Madison, and has public ac- the KPMG Emeritus Professor of Accountancy
in The Accounting Review, Journal of Account- counting experience with Deloitte & Touche at Northern Illinois University. He has public
ing Research, Accounting Horizons, Journal of (Minneapolis). He was the recipient of the accounting experience with Price Waterhouse
Accountancy, and other academic and profes- UWM School of Business Advisory Council & Co. (San Francisco and Chicago) and Arthur
sional journals. These articles have examined Teaching Award, the Reggie Taite Excellence Andersen & Co. (Chicago) and research experi-
such fi nancial reporting issues as accounting for in Teaching Award and a three-time winner ence with the Research Division of the American
price-level adjustments, pensions, convertible of the Outstanding Teaching Assistant Award Institute of Certified Public Accountants (New
securities, stock option contracts, and i nterim at the University of Wisconsin. He is also a York). He has done post doctorate work as a
reports. Professor Weygandt is author of other recipient of the Elijah Watts Sells Award for Visiting Scholar at the University of California
accounting and fi nancial r eporting books and Honorary Distinction for his results on the at Berkeley and is a recipient of NIU’s Teach-
is a member of the American Accounting CPA exam. He is a member of the American ing Excellence Award and four Golden Apple
Association, the American Institute of Cer- Accounting Association and the Institute of Teaching Awards. Professor Kieso is the a uthor
tifi ed Public Accountants, and the Wiscon- Management Accountants and has published of other accounting and business books and is a
sin Society of Certifi ed Public A ccountants. articles in The Accounting Review, Accounting member of the American Accounting Associa-
He has served on numerous committees of H orizons, Advances in Management Accounting, tion, the A merican Institute of Certified Public
the American Accounting Association and Managerial Finance, Issues in Accounting Accountants, and the Illinois CPA Society.
as a member of the editorial board of The Education, Journal of Accounting Education, He has served as a member of the Board of
Accounting Review; he also has served as Pres- as well as other journals. His research interests Directors of the Illinois CPA Society, then
ident and Secretary-Treasurer of the A merican include accounting for fi nancial instruments AACSB’s Accounting Accreditation Commit-
Accounting Association. In addition, he has and innovation in accounting education. He tees, the State of Illinois Comptroller’s Commis-
been actively involved with the American has published papers and given numerous talks sion, as Secretary-Treasurer of the Federation
Institute of Certifi ed Public Accountants and on incorporating critical thinking into account- of Schools of Accountancy, and as Secretary-
has been a member of the Accounting Stand- ing education, and helped prepare a catalog of Treasurer of the American Accounting Associa-
ards Executive Committee (AcSEC) of that critical thinking resources for the Federated tion. Professor Kieso is currently serving on the
organization. He has served on the FASB task Schools of Accountancy. Board of Trustees and Executive Committee of
force that examined the reporting issues related Aurora University, as a member of the Board of
to accounting for income taxes and served as a Directors of Kishwaukee Community Hospital,
trustee of the Financial Accounting Foundation. and as Treasurer and Director of Valley West
Professor Weygandt has received the Chancellor’s Community Hospital. From 1989 to 1993 he
Award for Excellence in Teaching and the Beta served as a charter member of the national Ac-
Gamma Sigma Dean’s Teaching Award. He is on counting Education Change Commission. He
the board of directors of Bascom-Palmer Eye is the recipient of the Outstanding Accounting
Institute—Naples and also on the board of Artis— E ducator Award from the Illinois CPA Society,
Naples. He is the recipient of the Wisconsin In- the FSA’s Joseph A. Silvoso Award of Merit,
stitute of CPA’s Outstanding Educator’s Award the NIU Foundation’s Humanitarian Award for
and the Lifetime Achievement Award. In 2001 Service to Higher Education, a Distinguished
he received the American Accounting Associa- Service Award from the Illinois CPA Society,
tion’s Outstanding Educator Award. and in 2003 an honorary doctorate from Aurora
University. v
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Hallmark Features
Financial Accounting provides a simple and practical introduction to the fundamentals of
fi nancial accounting. It explains the concepts you need to know. This edition continues this
approach by off ering even more explanations, illustrations, and homework problems to help
students get a fi rm understanding of the accounting cycle.
DO IT! Exercises
DO IT! Exercises in the body of the text prompt students to stop and review key concepts. They
outline the Action Plan necessary to complete the exercise as well as show a detailed solution.
ACTION PLAN DO IT! 2 Closing Entries
• Close revenue and
expense accounts to Hancock Heating has the following balances in selected accounts of its adjusted trial balance.
Income Summary. Accounts Payable €27,000 Dividends €15,000
• Close Income Summary Service Revenue 98,000 Share Capital—Ordinary 42,000
to Retained Earnings. Rent Expense 22,000 Accounts Receivable 38,000
Salaries and Wages Expense 51,000 Supplies Expense 7,000
• Close Dividends to
Retained Earnings. Prepare the closing entries at December 31.
Solution
Dec. 31 Service Revenue 98,000
Income Summary 98,000
(To close revenue account to Income
Summary)
31 Income Summary 80,000
Salaries and Wages Expense 51,000
Rent Expense 22,000
Supplies Expense 7,000
(To close expense accounts to Income Summary)
Review and Practice
Each chapter concludes with a Review and Practice section which includes a review of learn-
ing objectives, key terms glossary, practice multiple-choice questions with annotated solu-
tions, practice brief exercises with solutions, practice exercises with solutions, and a practice
problem with a solution.
Practice Brief Exercises
Prepare the current assets section of a 3. (LO 4) The statement of fi nancial position debit column of the worksheet for Soon Cosmetics
statement of fi nancial position. i ncludes the following accounts (amounts in thousands): Accounts Receivable W25,000, Prepaid
Insurance W7,000, Cash W8,000, Supplies W11,000, and Inventory W14,000. Prepare the current
assets section of the statement of fi nancial position, listing the accounts in proper sequence.
Solution
3.
Soon Cosmetics
Statement of Financial Position (partial)
Current assets
Prepaid insurance W 7,000
Supplies 11,000
Inventory 14,000
Accounts receivable 25,000
Cash 8,000
Total current assets W65,000
vi
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Hallmark Fe atures vii
Infographic Learning
Over half of the text is visual, providing students alternative ways of learning about a ccounting.
In addition, a new interior design promotes accessibility.
ILLUSTRATION 2.1
Title of Account
Basic form of account
Left or debit side Right or credit side
Real-World Decision-Making
Real-world examples that illustrate interesting situations in companies and how accounting
information is used are integrated throughout the text, such as in the opening Feature Story as
well as the Insight boxes.
People, Planet, and Profit Insight Nestlé SA
Creating Value Nutrition: Products meeting or exceeding Nutritional Founda-
tion profi ling criteria (as percentage of total sales) and products
Appendix B contains the fi nancial state-
with increase in nutritious ingredients or essential nutrients.
ments of Nestlé SA (CHE). Those fi nan-
cial statements report on the company’s Water and Environmental Sustainability: Quality of water dis-
profi tability and fi nancial position. In charged (average mg COD/I) and packaging weight reduction (tonnes).
addition to these fi nancial statements, Rural Development: Farmers trained through capacity-build-
Nestlé, like many other companies today, ing programs and suppliers audited for food safety, quality, and
also reports its achievements with regard processing.
to other, non-fi nancial goals. In Nestlé’s
Simon Rawles/Alamy cVaasleu,e i.t” cNalelsst ltéh ehsaes g soeatl so “bCjercetaitviensg tSoh hareelpd tThoe lceoamrnp manoyr’es awbeobusti tNe.estlé’s eff orts to create shared value, go to
society in areas most directly related to its particular expertise:
nutrition, water and environmental sustainability, and rural What are some implications of Nestlé’s decision to measure
development. The company evaluates its progress in each area its results using objective measures and then publicly report
using objective measures. Examples of measures used are pro- these results? (Go to the book’s companion website for this
vided below. answer and additional questions.)
Additional Guidance
Throughout the text, marginal notes, such as Helpful Hints, Alternative Terminology, and
Ethics Notes, are provided as additional guidance.
Correcting Entries—An Avoidable Step
Unfortunately, errors may occur in the recording process. Companies should correct errors, as
soon as they discover them, by journalizing and posting correcting entries. If the account-
ing records are free of errors, no correcting entries are needed.
You should recognize several diff erences between correcting entries and adjusting entries.
First, adjusting entries are an integral part of the accounting cycle. Correcting entries, on the ETHICS NOTE
other hand, are unnecessary if the records are error-free. Second, companies journalize and post When companies fi nd errors
adjustments only at the end of an accounting period. In contrast, companies make correcting in previously released income
entries whenever they discover an error (see Ethics Note). Finally, adjusting entries always statements, they restate those
aff ect at least one statement of fi nancial position account and one income statement account. In numbers.
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Contents
1 Accounting in Action Summary Illustration of Journalizing and Posting 2-19
1-1
The Trial Balance 2-21
Limitations of a Trial Balance 2-22
Knowing the Numbers 1-1
Locating Errors 2-22
Accounting Activities and Users 1-3
Currency Signs and Underlining 2-22
Three Activities 1-3
A Look at U.S. GAAP 2-46
Who Uses Accounting Data 1-4
The Building Blocks of Accounting 1-6
Ethics in Financial Reporting 1-6 3 Adjusting the Accounts 3-1
Accounting Standards 1-7
Measurement Principles 1-8 What Was Your Profit?: Cadbury 3-1
Assumptions 1-8 Accrual-Basis Accounting and Adjusting Entries 3-2
The Accounting Equation 1-10 Fiscal and Calendar Years 3-3
Assets 1-11 Accrual- versus Cash-Basis Accounting 3-3
Liabilities 1-11 Recognizing Revenues and Expenses 3-3
Equity 1-11 The Need for Adjusting Entries 3-5
Analyzing Business Transactions 1-13 Types of Adjusting Entries 3-5
Accounting Transactions 1-13 Adjusting Entries for Deferrals 3-6
Transaction Analysis 1-14 Prepaid Expenses 3-6
Summary of Transactions 1-19 Unearned Revenues 3-10
Financial Statements 1-20 Adjusting Entries for Accruals 3-13
Income Statement 1-22 Accrued Revenues 3-13
Retained Earnings Statement 1-22 Accrued Expenses 3-14
Statement of Financial Position 1-22 Summary of Basic Relationships 3-17
Statement of Cash Flows 1-23 Adjusted Trial Balance and Financial Statements 3-20
Comprehensive Income Statement 1-23 Preparing the Adjusted Trial Balance 3-21
Appendix 1A: Career Opportunities in Accounting 1-25 Preparing Financial Statements 3-21
Public Accounting 1-25 Appendix 3A: Alternative Treatment of Deferrals 3-24
Private Accounting 1-26 Prepaid Expenses 3-25
Governmental Accounting 1-26 Unearned Revenues 3-26
Forensic Accounting 1-26 Summary of Additional Adjustment Relationships 3-27
A Look at U.S. GAAP 1-46 Appendix 3B: Financial Reporting Concepts 3-28
Qualities of Useful Information 3-28
2 The Recording Process
2-1 Assumptions in Financial Reporting 3-28
Principles in Financial Reporting 3-29
Accidents Happen: Bank of Taiwan 2-1 Cost Constraint 3-30
Accounts, Debits, and Credits 2-2 A Look at U.S. GAAP 3-56
The Account 2-2
Debits and Credits 2-3
4 Completing the Accounting
Equity Relationships 2-6
Summary of Debit/Credit Rules 2-6 Cycle 4-1
The Journal 2-7
The Recording Process 2-7 Speaking the Same Language: IASB 4-1
The Journal 2-8 The Worksheet 4-3
The Ledger and Posting 2-10 Steps in Preparing a Worksheet 4-3
The Ledger 2-10 Preparing Financial Statements from a Worksheet 4-10
Posting 2-12 Preparing Adjusting Entries from a Worksheet 4-11
Chart of Accounts 2-13 Closing the Books 4-11
The Recording Process Illustrated 2-13 Preparing Closing Entries 4-12
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Contents ix
Posting Closing Entries 4-14 6 Inventories
6-1
Preparing a Post-Closing Trial Balance 4-16
The Accounting Cycle and Correcting Entries 4-19
“Where Is That Spare Bulldozer Blade?”:
Summary of the Accounting Cycle 4-19
Komatsu 6-1
Reversing Entries—An Optional Step 4-19
Classifying and Determining Inventory 6-2
Correcting Entries—An Avoidable Step 4-19
Classifying Inventory 6-2
Classified Statement of Financial Position 4-23
Determining Inventory Quantities 6-4
Intangible Assets 4-24
Inventory Methods and Financial Eff ects 6-6
Property, Plant, and Equipment 4-25
Specific Identification 6-7
Long-Term Investments 4-25
Cost Flow Assumptions 6-7
Current Assets 4-25 Financial Statement and Tax Eff ects of Cost Flow
Equity 4-26
Methods 6-11
Non-Current Liabilities 4-27
Using Inventory Cost Flow Methods Consistently 6-12
Current Liabilities 4-27
Eff ects of Inventory Errors 6-13
Appendix 4A: Reversing Entries 4-29 Income Statement Eff ects 6-13
Reversing Entries Example 4-29 Statement of Financial Position Eff ects 6-14
A Look at U.S. GAAP 4-57
Inventory Statement Presentation and Analysis 6-15
Presentation 6-15
Lower-of-Cost-or-Net Realizable Value 6-15
5 Accounting for Merchandise Analysis 6-16
Operations Appendix 6A: Inventory Cost Flow Methods in Perpetual
5-1
Inventory Systems 6-18
First-In, First-Out (FIFO) 6-18
Who Doesn’t Shop?: Carrefour 5-1
Average-Cost 6-19
Merchandising Operations and Inventory Systems 5-3
Appendix 6B: Estimating Inventories 6-19
Operating Cycles 5-3
Gross Profit Method 6-20
Flow of Costs 5-4
Retail Inventory Method 6-21
Recording Purchases Under a Perpetual System 5-6
Appendix 6C: LIFO Inventory Method 6-22
Freight Costs 5-8
A Look at U.S. GAAP 6-44
Purchase Returns and Allowances 5-9
Purchase Discounts 5-9
Summary of Purchasing Transactions 5-10
Recording Sales Under a Perpetual System 5-11
7 Fraud, Internal Control,
Sales Returns and Allowances 5-12
Sales Discounts 5-13 and Cash 7-1
The Accounting Cycle for a Merchandising Company 5-14
Adjusting Entries 5-15 Minding the Money at Nick’s: Nick’s Steakhouse and
Closing Entries 5-15 Pizza 7-1
Summary of Merchandising Entries 5-16 Fraud and Internal Control 7-2
Financial Statements for a Merchandiser 5-17 Fraud 7-3
Income Statement 5-17 Internal Control 7-3
Classified Statement of Financial Position 5-21 Principles of Internal Control Activities 7-4
Appendix 5A: Worksheet for a Merchandising Limitations of Internal Control 7-10
Company 5-23 Cash Controls 7-10
Using a Worksheet 5-23 Cash Receipts Controls 7-11
Appendix 5B: Periodic Inventory System 5-24 Cash Disbursements Controls 7-13
Determining Cost of Goods Sold Under a Periodic Petty Cash Fund 7-15
System 5-25 Control Features of a Bank Account 7-18
Recording Merchandise Transactions 5-25 Making Bank Deposits 7-18
Recording Purchases of Merchandise 5-26 Writing Checks 7-19
Recording Sales of Merchandise 5-27 Electronic Funds Transfer (EFT) System 7-20
Journalizing and Posting Closing Entries 5-27 Bank Statements 7-20
Using a Worksheet 5-29 Reconciling the Bank Account 7-21
A Look at U.S. GAAP 5-54 Reporting Cash 7-26