Financial & Managerial Accounting: The Basis for Business Decisions

1265 Pages·2016·52.84 MB·English

by  Williams J.R. [et al.]

16th Edition Financial &
Managerial
Accounting
THE BASIS FOR BUSINESS DECISIONS
Jan R. Williams
University of Tennessee
Susan F. Haka
Michigan State University
Mark S. Bettner
Bucknell University
Joseph V. Carcello
University of Tennessee
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FINANCIAL AND MANAGERIAL ACCOUNTING: THE BASIS FOR BUSINESS DECISIONS
Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020.
Copyright © 2012, 2010, 2008, 2005, 2002, 1999, 1996, 1993, 1990, 1987, 1984, 1981, 1977 by The McGraw-Hill Companies, Inc. All rights reserved.
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broadcast for distance learning.
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This book is printed on acid-free paper.
1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1
ISBN 978-0-07-811104-4
MHID 0-07-811104-8
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Library of Congress Cataloging-in-Publication Data
Financial & managerial accounting : the basis for business decisions / Jan R. Williams . . . [et al.].
—16th ed.
p. cm.
Includes index.
ISBN-13: 978-0-07-811104-4 (alk. paper)
ISBN-10: 0-07-811104-8 (alk. paper)
1. Accounting. I. Williams, Jan R. II. Title: Financial and managerial accounting.
HF5636.F5314 2012
657—dc22 2010036617
www.mhhe.com
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To Ben and Meg Wishart and Asher, Lainey, and Lucy Hunt,
who have taught me the joys of being a grandfather.
—Jan R. Williams
For Cliff, Abi, and my mother, Fran.
—Susan F. Haka
To my parents, Fred and Marjorie.
—Mark S. Bettner
To Terri, Stephen, Karen, and Sarah, whose sacrifices
enabled me to participate in writing this book. Thank you—I
love you!
—Joseph V. Carcello
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Jan R. Williams is Dean of the College of Business Administration and the
SSttookkeely Foundation Leadership Chair at the University of Tennessee, where he
hhaas been a faculty member since 1977. He received a BS degree from George
PPeabody College, an MBA from Baylor University, and a PhD from the Uni-
versity of Arkansas. He previously served on the faculties at the University
of Georgia and Texas Tech University. A CPA in Tennessee and Arkansas,
Dr. Williams is also the coauthor of three books and has published over
770 articles on issues of corporate financial reporting and accounting edu-
ccaattion. He served as president of the American Accounting Association in
1999–2000 and has been actively involved in Beta Alpha Psi, the Tennessee Soci-
ety of CPAs, the American Institute of CPAs, and AACSB International—the Asso-
ciation to Advance Collegiate Schools of Business—the accrediting organization for
b usiness schools and accounting programs worldwide. He currently serves as chair-
elect of the Board of Directors of AACSB International.
Susan F. Haka is the Associate Dean for Academic Affairs and Research and the
Ernst & Young Professor of Accounting in the Department of Accounting and Infor-
mmaattion Systems at Michigan State University. Dr. Haka received her PhD from
tthhe University of Kansas and a master’s degree in accounting from the Univer-
sity of Illinois. She served as president of the American Accounting Associa-
tion in 2008–2009 and has previously served as president of the Management
Accounting Section. Dr. Haka is active in editorial processes and has been
eeditor of Behavioral Research in Accounting and an associate editor of Journal
ooff Management Accounting Research, Accounting Horizons, The International
JJoouurrnnal of Accounting, and C ontemporary Accounting Research. Dr. Haka has
been honored by Michigan State University with several teaching and research awards,
including both universitywide Teacher-Scholar and Distinguished Faculty awards.
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MMeeeett tthhee AAuutthhoorrss
Mark S. Bettner is the Christian R. Lindback Chair of Accounting & Financial
Management at Bucknell University. Dr. Bettner received his PhD in business admmiinn-
istration from Texas Tech University and his MS in accounting from Virginia Techh
University. He has received numerous teaching and research awards. In addition
to his work on F inancial Accounting and F inancial & Managerial Accounting ,
he has written many ancillary materials, published in scholarly journals, and
presented at academic and practitioner conferences. Professor Bettner is also
on the editorial advisory boards of several academic journals, including the
International Journal of Accounting and Business Society and the A ccountingg
Forum, and has served as a reviewer for several journals, including A dvances in
Public Interest Accounting and H ospital and Health Services Administration.
Joseph V. Carcello is the Ernst & Young and Business Alumni Professor in the
Department of Accounting and Information Management at the University of Tennessee.
He also is the cofounder and director of research for UT’s Corporate Governance
Center. Dr. Carcello received his PhD from Georgia State University, his MAcc from the
University of Georgia, and his BS from the State University of New York Colleggee
at Plattsburgh. Dr. Carcello is currently the author or coauthor of four books,
more than 60 journal articles, and three monographs. Dr. Carcello serves on the
Public Company Accounting Oversight Board’s (PCAOB) Investor Advisory
Group, and he previously served two terms on the PCAOB’s Standing Advisory
Group. He also has testified before the U.S. Treasury Department’s Advisory
Committee on the Auditing Profession and has served as a member of a COSOO
task force that developed guidance on applying COSO’s internal control framewoorrkk
for smaller public companies. Dr. Carcello is active in the American Accounting
Association—he serves as an associate editor of A ccounting Horizons and serves
on the editorial boards of The Accounting Review, Auditing: A Journal of Practice &
Theory, and Contemporary Issues in Auditing. Dr. Carcello has consulted with three of
the Big Four accounting firms, regional and local accounting firms, and the Securities
and Exchange Commission.
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REACHING
GREAT HEIGHTS
BEGINS WITH A
SOLID BASE
As our eyes are drawn upward to the skyline of great cities, it’s
important to remember that these impressive constructions are able
to reach such heights only because their foundations are strong. In
much the same way, being successful in the business world begins
with fundamental courses like financial and managerial account-
ing. It is only when students have a firm grasp of concepts like the
accounting cycle and managerial decision making that they have a
base on which to stand, a strong foundation on which to grow.
In this edition, as before, the Williams team has revised the text
with a keen eye toward the principle of helping students establish
the foundation they will need for future success in business. How-
ever, through new coverage of International Financial Reporting
Standards and a revised globalization chapter, the Williams book
also introduces students to larger themes and evolving concerns. This
dual emphasis allows students to keep their eyes trained upward even
as they become solidly grounded in accounting fundamentals.
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The Williams book continues to rest on a bedrock of four
key components: “This is a well balanced textbook
that encompasses many issues,
yet provides them in a precise,
readable, and orderly fashion to
Balanced Coverage. The 16th edition of Williams provides the students. The extent of the real-
most balanced coverage of financial and managerial topics on the world examples makes this edi-
market. By giving equal weight to financial and managerial topics, tion clearly a superior choice.”
the authors emphasize the need for a strong foundation in both aspects Hossein Noorian,
of accounting. Wentworth Institute
Clear Accounting Cycle Presentation. In the first five
chapters of F inancial & Managerial Accounting, the authors present the
“Excellent book! Explains difficult Accounting Cycle in a clear, graphically interesting four-step process.
subjects in easy-to-understand
Central to this presentation is the dedication of three successive
terms.”
chapters to three key components of the cycle: recording entries
Naser Kamleh, Wallace (Chapter 3), adjusting entries (Chapter 4), and closing entries (Chapter 5).
Community College The Williams team places easy-to-read margin notes explaining each
equation used in particular journal entries.
Student Motivation. The Williams team has put together a market-
leading student package that will not only motivate your students, but
“This textbook is current and
help you see greater retention rates in your accounting courses. Vital
very interactive. It brings in excel-
pieces of technology supplement the core curriculum covered in the
lent “real-world” applications for
book: the Online Learning Center provides supplemental tools for both
the students to use in applying
students and instructors; and McGraw-Hill Connect Accounting uses end-
the concepts. It has excellent
of-chapter material pulled directly from the textbook to create static and
student and instructor
algorithmic questions that can be used for homework and practice tests.
resources. Some of the resources
The full Financial & Managerial Accounting package encourages students to
would be especially valuable for
apply what they’re learning and improve their grades.
instructors teaching online.”
Karen Mozingo, Pitt
Community College
Problem-Solving Skills. Financial & Managerial Accounting
challenges your students to think about real-world situations and put
“The text is excellent. I wish the
themselves in the role of the decision maker through Case In Point,
texts had been this well written
Your Turn, and Ethics, Fraud & Corporate Governance boxes. Students
when I was a student!”
reference the Home Depot Financial Statements—included in the text
Mark Anderson, Bob Jones University as an appendix—to further hone problem-solving skills by evaluating
real world financial data. The authors show a keen attention to detail
when creating high-quality end-of-chapter material, such as the Critical
Thinking Cases and Problems, ensuring that all homework is tied directly
back to chapter learning objectives.
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How Does Williams Help Students

Step-by-Step Process for the Accounting Cycle
Financial & Managerial Accounting was the FIRST text to illustrate Balance Sheet
and Income Statement transactions using the four-step process described below.
This hallmark coverage has been further revised and refined in the 16th edition.
The Williams team breaks down the Accounting Cycle into three full chapters to
help students absorb and understand this material: recording entries (Chapter 3),
adjusting entries (Chapter 4), and closing entries (Chapter 5). Transactions are
demonstrated visually to help students conquer recording transactions by show-
ing the four steps in the process:
1 A A Analysis—shows which accounts Recording Balance Sheet Transactions: An Illustration 91
aare recorded with an increase/ its balance sheet. The revenue and expense transactions that took place on January 31 will be
addressed later in the chapter.
Each transaction from January 20 through January 27 is analyzed first in terms of increases
decrease. in assets, liabilities, and owners’ equity. Second, we follow the debit and credit rules for enter-
ing these increases and decreases in specific accounts. Asset ledger accounts are shown on the
left side of the analysis; liability and owners’ equity ledger accounts are shown on the right
2 D Debit/Credit Rules—helps side. For convenience in the following transactions, both the debit and credit figures for the
transaction under discussion are shown in red. Figures relating to earlier transactions appear
in b lack.
ssttudents to remember whether
Jan. 20 Michael McBryan and family invested $80,000 cash in exchange for capital
stock.
the account should be debited/
credited.
ANALYSIS The asset Cash is increased by $80,000, and owners’ equity (Capital Owners invest cash in the
Stock) is increased by the same amount. business
3 J JJoournal Entry—shows the result Ass ets (cid:2) Liabi lities (cid:3) OEwqnueitrys’
(cid:3)$80,000 (cid:3)$80,000
DEBIT–CREDIT Increases in assets are recorded by debits; debit Cash $80,000.
oof the two previous steps. RULES Increases in owners’ equity are recorded by credits; credit Capital Stock
$80,000.
4 L Ledger T-Accounts—shows
JOURNAL Jan. 20 Cash . . . . . . . . . . . . . . . . . . . . . 80,000
ENTRY Capital Stock . . . . . . . . . . . . . . . . . . . 80,000
ssttudents what was recorded
and where. ENTRIES IN Cash Capital Stock
LEDGER
ACCOUNTS 1/20 80,000 1/20 80,000
The Williams team puts the Jan. 21 Representing Overnight, McBryan negotiated with both the City of Santa Teresa
and Metropolitan Transit Authority (MTA) to purchase an abandoned bus garage.
(The city owned the land, but the MTA owned the building.) On January 21,
Accounting Equation Overnight Auto Service purchased the land from the city for $52,000 cash.
(A (cid:2) L (cid:3) OE) in the margin
ANALYSIS The asset Land is increased $52,000, and the asset Cash is decreased Purchase of an asset for cash
by transaction illustrations to $52,000. Owners’
Assets (cid:2) Liabilities (cid:3) Equity
(cid:3)$52,000
show students the big picture! (cid:4)$52,000
DEBIT–CREDIT Increases in assets are recorded by debits; debit Land $52,000.
RULES Decreases in assets are recorded by credits; credit Cash $52,000.
JOURNAL Jan. 21 Land. . . . . . . . . . . . . . . . . . . . . . 52,000
ENTRY Cash. . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
ENTRIES IN Land Cash
LEDGER
ACCOUNTS 1/21 52,000 1/20 80,000 1/21 52,000
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Build a Strong Foundation?

Robust End-of-Chapter Material
BBrriieeff EExxeerrcciisseess Brief Exercises supplement the exercises
accounting
LO1 BBRIEF Listed below in random order are the eight steps comprising a complete accounting cycle: with shorter, single-concept exercises that test
EEEXERCISE 3.1 Prepare a trial balance.
LO2 TC TChyec leA ccounting J Porueprnaareli zfien aanndci palo sstta ttheem celnotssi.n g entries. the basic concepts of each chapter. These brief
Post transaction data to the ledger.
LO5 Prepare an adjusted trial balance. exercises give instructors more flexibility in their
Make end-of-period adjustments.
LO9 J Porueprnaareli zaen tarfatnesra-ccltoiosninsg. trial balance. homework assignments.
a. List these steps in the sequence in which they would normally be performed. (A detailed
LO10 understanding of these eight steps is not required until Chapters 4 and 5.)
b. Dcoemscpraibney ’ws amyasn iang ewmheicnht athned ienmfoprlmoyaetieosn. produced through the accounting cycle is used by a An Alternate Problem Set provides
LO3 BEBEXREIERFC ISE 3.2 P P rroobbll RIeenecmmclourdde SStah ebee rfioettlfl oeBBwxpin l agn saetiloenct oedf tthraen tsraacntsiaocntsio inn agse npearrat lo jfo euarcnha lj ofourrmna fl oern Struyn. Orthopedic Clinic, Inc. students with even more practice on important
ttthhhhLrrrrooooOuuuu1ggggghhhhhPEOPEOOvRradOltteuhhrrrBaoouutLiggnhhEgM RTRT are a2Scn1ops.rea1dccBinitaigol nsin Scowmirpl aInnyc ohrap Oso csrcta.ht e edd1 u dleesdi T ghphnreso dacunlicdnt iimoc nai snosufu f5ea0dc,t 0u40r,0e0s0 s0fial kashd sidkoiintritaosb.n lBael uw sdhogamerteeends ’ocs ofc scltoast phfioitnra glt h.s iFtso opcrrk ot hdtoeu ccDto oamcreitno agrs Syfooelaglroe, wst hase:t $50 per concepts.
LO3 (5U0n,0i0t 0C ousntists) Total
LO5 VVaarriiaabbllee smeallninugfa ecxtupreinngse cso s. t.s . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. $1450 $ 2,0765000,,000000 Six C omprehensive Problems, ranging from
Fixed manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 600,000 two to five pages in length, present students
Fixed opCeraOtingM expePnseRs . . E. . . H. . . .E . . .N . . . S. . .I . V. . . .E . . . P. . . R O B10 LE M 500,000
wil11048_ch03_084-137.indd 117 $ $ 8/11/10 2:34 PM
with real-world scenarios and challenge them to
Utease Corporation apply what they’ve learned in the chapters lead-
ing up to them.
Utease Corporation has many production plants across the midwestern United States. A newly
opened plant, the Bellingham plant, produces and sells one product. The plant is treated, for
responsibility accounting purposes, as a profit center. The unit standard costs for a production
unit, with overhead applied based on direct labor hours, are as follows: Defined Key Terms and Self-Test Questions
S Seellff--TTeesstt QQuueessttiioonnss review and reinforce chapter material.
The answers to these questions appear on page 137. 4. Which of the following is provided by a trial balance in
1. Aaccccoourndtisn:g to the rules of debit and credit for balance sheet w a.h iPcrho tooft atlh date bniots teraqnusaal cttoitoanl cwreads ictso?mpletely omitted from Demonstration Problems and their solutions
a. Increases in asset, liability, and owners’ equity accounts the ledger during the posting process.
are recorded by debits. b. Proof that the correct debit or credit balance has been allow students to test their knowledge of key
b. Decreases in asset and liability accounts are recorded by computed for each account.
credits. c. Proof that the ledger is in balance.
c. Increases AinS SaIsGseNt MaEndN To wMnAeTrsE’R eIAqLui ty Dacciosunctsu arse si on d . QPruoofe thsatt triaonsnactsions have been correctly analyzed and points in the chapters.
1. Baker Construction is a small corporation owned and managed 8. What is the meaning of the term r evenue? Does the receipt
by Tom Baker. The corporation has 21 employees, few cred- of cash by a business indicate that revenue has been earned?
itors, and no investor other than Tom Baker. Thus, like many Explain. Critical Thinking Cases and P roblems put stu-
small businesses, it has no obligation to issue fi nancial state- 9. What is the meaning of the term e xpenses? Does the pay-
wil11048_ch21_916-951.indd 943 mis ethnetsr et oa ncyre rdeiatosorsn ofor ri nthviess tcoorrsp. oUrantdioenr tthoe msea icnirtaciunm asctcaonucnest-, minecnutr roefd c?a Eshx pblya ian .b usiness indicate 9th/2a2/t1 0a n 1 e2:x34p ePMnse has been dents’ analytical skills to the test by having them
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StP. Llaonut is SprPinlagnvtille TWO sets of Problems and a full set of Exer-
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000,000 $2,000,000
Variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,000 880,000 cises in EACH chapter give Financial & Managerial
Traceable fixed costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750,000 550,000
During Cther qiutaritecr, acolm mTohn fiixnedk coisnts grel aCtinga tos beotsh p lants amounted to $500,000. Accounting the edge in homework materials.
LO7 CCASE 3.1 The realization principle determines when a business should recognize revenue. Listed next are
RRRevenue Recognition three common business situations involving revenue. After each situation, we give two alternatives
LO10 athse t oa pthpero apcrciaotuen atilntegr npaetriivoed b (yo ra ppeprliyoidnsg) tihne wrehailcihz atthioe nb upsriinnecsips lme, iagnhdt reexcpolganiniz yeo tuhri sr ereavsoenniuneg. .S elect Ethics Cases in each chapter challenge students
wil11048_ch03_084-137.indd 116 a. (APierrliinoed ttiicckkeett rseovlde;n upeer: iModo ostf afliirglihnte) s sell tickets well before the scheduled date of the flig8h/1t1./ 10 2:34 PM to explore the ethical impact of decisions made
b. Sales on account: In June 2011, a San Diego–based furniture store had a big sale, featuring
LO6 CCASE 3.2 Kim Morris“ Npuor cphaaysmede nPtsr inutn tSilh o2p0,1 2In.”c .(,P ae rpioridn tfiunrgn ibtuusrien seossld, ;f rpoemri oCdhsr tihs aSt tpanaylemy.e nMtso rarries rmecaediev ead from in business.
MMeasuring Income cash down cpuasytmomenetr sa)n d agreed to make annual payments equal to 40 percent of the company’s
LO7 FFairly ntyheeeat rpi’nusc rn oc cehm. ta eisn eoMic nfoo a tfmegh aaaee cz s himfmna eoara gflsb laut ebzhbliuoesnws cenirn. ie Spex(ttPstais oent.nrh)li esroS yerdte’ea s vns yeeuleenxbayupsr ecesw:rc. iaMt(pasStt oiiduoosicntnsh ams sp.“o apelgodaair;zn npit-neeoedru i,pot shud”obs wl aitsrheehva etear r sm,c swoaemghllae msznuio nbMnes scom rrairepriaestin ormsen pasoi offl roeftdrie n fdtau oant u ccfriiuenrs sgdtto emliveerrsy)
LO10 The agreement between Morris and Stanley did not state precisely how “net income” was to be The 2009 Home Depot Financial Statements
measured. Neither Morris nor Stanley was familiar with accounting concepts. Their agreement stated
only that the net income of the corporation should be measured in a “fair and reasonable manner.”
In measuring net income, Morris applied the following policies: are included in Appendix A. Students are
1. Revenue was recognized when cash was received from customers. Most customers paid in
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P P rroobbbllleemm SSeett AA concepts.
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LO3 PPROBLEM 16.1A Aqua-Marine manufactures fiberglass fishing boats. The manufacturing costs incurred during its
AAAn Introduction to first year of operations are shown as follows:
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Excel Connect Accounting Ethhicall GGroup WWriittiing IIntternett Internatiionall
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