Intermediate Accounting, Seventeenth Edition

1489 Pages·2009·34.28 MB·English

by  James D. Stice

17e
I N T E R M E D I A T E
A C C O U N T I N G
Earl K. Stice, PhD
Brigham Young University
James D. Stice, PhD
Brigham Young University
K. Fred Skousen, PhD, CPA
Brigham Young University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
Intermediate Accounting, 17E © 2010, 2007 South-Western, Cengage Learning
Earl K. Stice, James D. Stice, K. Fred Skousen
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Printed in the United States of America
1 2 3 4 5 13 12 11 10 09
P R E F A C E
Clear, Connected, Complete: The Big Picture
of Accounting
From the smallest mom-and-pop retailer to the largest multinational corporation, busi-
nesses of all sizes are recognizing that accounting professionals are no longer simply
“number crunchers” but rather essential partners in achieving the fundamental goals
of their organization.
Intermediate Accounting, 17e provides a powerful connection to accounting
careers with:
• A Clear organization based around the essential interrelationship between account-
ing procedures and the activities of business. The order of the text chapters flows with a
traditional balance sheet presentation without sacrificing links to business activities. The
result is a more balanced treatment of coverage for instructors and students alike.
• Connected and relevant coverage that examines the issues that are driving account-
ing in today’s business environment, such as fair value, valuation, and International
Financial Reporting Standards.
• Complete and engaging pedagogy that enhances the learning experience and pre-
pares students for an evolving accounting profession. Each learning objective in the text
is supplemented with a Why and How framework. This feature provides students with a
snapshot of why things are accounted for the way they are before being asked how the
information is used in making decisions.
• Superior technology, which allows instructors to pick and choose precisely the educa-
tional resources they want to accompany this text. CengageNOWTM Express offers a com-
plete technology solution with interactive homework assignments that help students tackle
the course’s most difficult concepts.
CLEAR and Forward-Thinking Organization
No other text works this hard to demonstrate accounting’s integral importance to an
organization’s decision-making capabilities. The innovative structure is unsurpassed
in preparing students to serve as trusted advisors on the front lines of business.
In an effort to streamline the sequence of chapters in the text, the table of contents
accounts for a more traditional balance sheet order of topics while still maintaining
the structure of covering topics as they relate to business activities. The investing
chapters fall before the financing chapters, which results in a more familiar order of
presentation for instructors and students.
Part 1—Foundations of Financial Accounting provides students with the funda-
mentals of financial accounting and concludes with a module that covers the Time
Value of Money as well as a new module on Fair Value.
Part 2—Routine Activities of a Business gets down to business, integrating
accounting into management by exploring operating and investing activities.
Part 3—Additional Activities of a Business examines financing activities, leases,
income taxes, and employee compensation.
Part 4—Other Dimensions of Financial Reporting rounds out the comprehen-
sive coverage with earnings per share; derivatives, contingencies, business segments,
and interim reports; accounting changes; and financial statement analysis, as well as
the addition of a new chapter, Accounting in a Global Market.
iii
iv Preface
CONNECTED to Current and Relevant Coverage
One look at the business pages of any newspaper shows how illusory long-term suc-
cess can be. Yesterday’s runaway successes can quickly find themselves derailed by
the new realities of today’s business world. This is the first text to provide a real-world
perspective that links accounting functions to the activities of business.
Completely updated to reflect the latest changes in accounting standards, prac-
tices, and techniques. The real company information has been revised to account for
recent changes in financial statements and other company reports.
EXHIBIT 7-7 McDonald’s Notes to Consolidated Financial Statements
Segment and geographic information
(In millions) 2007 2006 2005
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,905.5 $ 7,464.1 $ 6,955.1
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,926.2 7,637.7 7,071.8
APMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,598.9 3,053.5 2,815.8
Other Countries & Corporate. . . . . . . . . . . . . . . . . . . . . . . . . 2,356.0 2,739.9 2,274.6
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,786.6 $20,895.2 $19,117.3
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,841.9 $ 2,657.0 $ 2,421.6
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,125.4 1,610.2 1,449.3
APMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616.3 364.4 345.1
Other Countries & Corporate . . . . . . . . . . . . . . . . . . . . . . . . (1,704.6) (198.6) (232.0)
Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,879.0 $ 4,433.0 $ 3,984.0
U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,031.8 $ 9,477.4 $ 8,968.3
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,380.4 10,413.9 9,424.6
APMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,145.3 3,727.6 3,596.5
Other Countries & Corporate . . . . . . . . . . . . . . . . . . . . . . . . 3,834.2 3,529.4 5,891.0
Businesses held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,631.5 1,517.6
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194.7 590.8
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,391.7 $28,974.5 $29,988.8
International Financial Reporting Standards topics, indicated by this symbol
throughout the text, help students understand how accounting practices differ from
country to country and reflect the increasingly global nature of business.
The international environment of business is dramatically changing the land-
Stice_CH07_pp0319-0381.indd 341 scape of accounting. The Financial Accounting Standards Board (FASB) and the1 /27/09 12:33:18PM
International Accounting Standards Board (IASB) are working together to develop
one set of accounting standards to be used by companies in countries around the
world. No longer is the United States making the rules for the rest of the world to fol-
low. Instead, the FASB and the IASB are working hand-in-hand as financial account-
ing standards converge at a pace that was not dreamed of even five years ago.
These events have affected this textbook. Every chapter discusses relevant
accounting standards and developments from both a U.S. and a global perspective.
Each chapter begins with a discussion of the accounting standards and procedures
used by companies complying with U.S. GAAP. Then those areas where U.S. GAAP
and international accounting standards are significantly different are discussed so that
the reader can understand how accounting standards around the world are similar
and how they are different. A new chapter on Accounting in a Global Market further
emphasizes the role of international financial reporting standards.
The objective of this approach is to develop in students the ability to see beyond
the borders of the United States and understand that the global business environment
is leading to global accounting standards. Users of this text will understand that they
are not just learning U.S. GAAP. Instead, they are being prepared to be players in a
Preface v
global accounting environment with the ability to understand and apply international
accounting standards as well as U.S. accounting standards.
Fair Value Accounting is another major topic affecting the accounting environment.
The credit crisis of 2008 is blamed by some on the inappropriate use of fair value
accounting. A new module details the “why,” “when,” “where,” and “how” for using
fair values in financial statements. Because this concept of fair value accounting is so
important and affects so many of the principles and topics discussed later in the text,
it has been placed near the front of the text following the discussion of the financial
statements.
Opening Scenario Questions are critical-thinking questions that follow the real
company chapter openers, with solutions provided at the end of each chapter so
that students can check their answers as they think about how they would answer
accounting-related issues businesses face.
QUESTIONS
1. What would be the consequences to a customer if their bank could not
tell them if their paycheck (which is direct deposited) had in fact been
deposited? What would be the consequences to the bank?
2. Suppose the Internal Revenue Service and employers had no system estab-
lished to track the amount of income tax withheld from employee sala-
ries. How would taxpayers demonstrate to the U.S. government that they
had paid taxes? How would the government verify tax payments?
Answers to these questions can be found on page 70.
A Chapter on Earnings Management in Part 1 establishes a framework for the
remainder of the course. Students come to understand the importance and ramifica-
tions of earnings management through current, real-world examples, extracts from SEC
enforcement actions, business press analysis, and the extensive use of academic
research findings.
COMPLETE Pedagogy to Connect to the
Big Picture of Accounting
Just one glance tells you this accounting text is different. Refreshingly rich in color,
appealing graphics, and icons, this text energizes students’ imaginations with a visu-
ally stimulating look they prefer.
Why and How Framework Following each learning objective, the authors pro-
vide additional reinforcement of the critical concepts by highlighting both the proce-
dural aspects (the “how”) as well as the context (or “why”) for which they are applied.
As they move through the chapter, students gain a greater understanding of both ele-
ments and can rationalize why businesses account for things the way they do.
Overview of the Accounting Process
1 Identify and WHY It is important to understand how accounting information flows through an
explain the basic organization and how that information is captured by the accounting infor-
steps in the account- mation system.
ing process (account- HOW The accounting process, often referred to as the accounting cycle, generally
ing cycle). includes the following steps: analyze business documents, journalize trans-
actions, post to ledger accounts, prepare a trial balance, prepare adjusting
entries, prepare financial statements, close the nominal accounts, and pre-
pare a post-closing trial balance.
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vi Preface
Statement of Cash Flows “Revisited” Chapter 21 provides coverage of the
statement of cash flows in the second semester of the course. The book continues to
provide a full chapter early in the text (Chapter 5) addressing the statement of cash
flows and integrates this financial statement throughout the text, which results in the
most comprehensive treatment of this important subject available.
Stop & Think Multiple-choice questions
stop&think
have been written by the authors to accom-
pany the Stop & Think boxed features.
These critical-thinking boxes, found in every
Consider these four organizations: FASB, AICPA, chapter, allow students to test their knowl-
SEC, and IASB. Which one do you think will be edge and then consult the answer found at
making U.S. GAAP twenty years from now? the end of the chapter.
a) FASB
b) AICPA
c) SEC
d) IASB
fyi FYI These margin boxes often provide
additional context to an important topic by
emphasizing additional points of interest.
In 2001, the IASB restructured itself as an
independent body with closer links to national
standard-setting bodies. At that time, the IASB
adopted its current name and dropped its
original name of the International Accounting
Standards Committee (IASC).
caution Caution Crucial cautions provide students
with important points to consider when
thinking about more complex concepts and
topics.
Don’t think that the conceptual framework is
a useless exercise in accounting theory. Since
its completion, the framework has signifi-
cantly affected the nature of many accounting
standards.
Chapter Updates and Enhancements
Chapter 1
• Update on the standard-setting process
• Introduction of the revised GAAP hierarchy
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• Introduction to the convergence of U.S. GAAP and IASB standards
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Preface vii
Chapter 3
• Updated opening case on Coca-Cola
• New coverage on minority interest as related to the consolidated balance sheet
NEW! Fair Value Module
• Defines “fair value” and describes the valuation concepts used in determining fair value
• Explains the need for fair values in financial reporting and identifies where fair values are
used in the financial statements
• Demonstrates a variety of valuation models and the preparation of fair value disclosures
required under SFAS No. 157
Chapter 7
• New discussion on the transfer and derecognition of receivables as addressed in IAS 39
Chapter 8
• Expanded discussion of internal controls
• Expanded discussion of EITF 00-21, “Revenue Arrangements with Multiple Deliverables”
• New discussion on the asset-and-liability approach to revenue recognition that is currently
being developed as a joint effort of the FASB and the IASB
Chapter 9
• New discussion on accounting for declines in inventory values as addressed in IAS 2
Chapter 10
• New discussion on the capitalization of interest as addressed in IAS 23
• New discussion on the recognition of increases and decreases in the value of property
from growth or discovery as addressed in IAS 41
• New discussion on acquired in-process R&D as addressed in SFAS No. 141R
• Updated coverage on accounting for a bargain purchase
• Updated coverage on international accounting for intangibles as addressed in IAS 38 and IFRS 3
Chapter 12
• New discussion on the use of the fair value option for the reporting of financial assets and
liabilities
• New discussion on the consolidation of special purposes entities as addressed in SIC 12
Chapter 13
• New discussion on the current developments in the accounting for preferred stock
• New discussion on the current developments in the accounting for stock options
• New discussion on noncontrolling interest as defined under SFAS No. 160
Chapter 14
• New discussion on the use of the fair value option for the reporting of financial assets and
liabilities as addressed in SFAS No. 159
viii Preface
• New discussion on the classification of investment securities according to IFRS
• New discussion on equity method accounting according to IFRS
• New discussion on derecognition
Chapter 15
• New guidance on distinguishing between operating and finance leases as described in IAS 17
• New discussion on the deferral of sale profits on a sale-leaseback that results in a finance
(capital) lease according to IAS 17
Chapter 16
• Comparison of the use of future tax rates under U.S. GAAP and IAS 12
• New discussion on deferred tax classification under IFRS
• New discussion on valuation allowance under IAS 12
• Expanded discussion of accounting for uncertain tax provisions
Chapter 17
• Updated coverage of prior service cost, including discussion of IAS 19, “Employee Benefits”
• Updated discussion of amortization of prior service cost
• New discussion on plan contributions
• Added examples of financial statement reporting for various components of employee
compensation
Chapter 18
• New discussion on participating securities and the two-class method
Chapter 19
• Added discussion of how IFRS affects derivatives, contingencies, business segments, and
interim reports
• Introduction to the FASB’s Exposure Draft on improved loss contingency disclosure
Chapter 21
• New comprehensive example of the statement of cash flows using Tesco, one of the larg-
est supermarket chains in the United Kingdom
NEW! Chapter 22
• New chapter on accounting in a global market
• Explains the importance and potential impact of a common set of accounting standards
• Outlines the history of the IASB and identifies the key differences between U.S. GAAP and IFRS
• Demonstrates the conversion of foreign currency financial statements into U.S. dollars
using the translation method
Chapter 23
• New introduction to equity valuation
Preface ix
CONNECT and Reinforce Student Understanding
Unmatched End-of-Chapter Material
Widely regarded as providing the most varied and expansive set of problem assign-
ments available, Intermediate Accounting, 17e continues to raise the bar to new
heights. Only Intermediate Accounting features such a diverse set of traditional exer-
cises, problems, and cases:
• 15–25 Questions per chapter to help assimilate chapter content
• More than 400 Practice Exercises written by the authors
• Discussion Cases for homework or class discussion
• Exercises to reinforce key concepts or applications
• Problems that integrate several concepts or techniques
• Sample CPA Exam Questions written to provide students with similar
problems commonly found on the CPA exam
• Selected Problems marked with a demonstration icon point students to the
DEMO PROBLEM
free Web site to view a visual demonstration of the problem with audio
SPREADSHEET • Selected Exercises or Problems have accompanying spreadsheet templates, marked with an icon
Case Materials have been designed to help accelerate the development of essential
skills in critical thinking, communication, research, and teamwork. Retention and
application of key concepts build as future accountants and business professionals take
advantage of a wide range of tools found in this innovative section. These cases satisfy
the skills-based curriculum endorsed by the AICPA’s Core Competency Framework
and the recommendations of the Accounting Education Change Commission (AECC).
Deciphering Actual Financial Statements Cases enable students to analyze
financial data from recent annual reports from companies such as The Walt Disney
Company, Coca-Cola, and the Boston Celtics.
Case 8-63 Deciphering Financial Statements (The Walt Disney Company)
Locate the 2007 financial statements for The Walt Disney Company on the Internet.
1. L ocate Disney’s note on revenue recognition. What is Disney’s revenue recog-
nition policy for the various business segments?
2. R elating to video and video game sales, what other points in the revenue cycle
(other than when video units are made widely available for sale by retailers)
could Disney have used to recognize revenue?
3. R elating to motion pictures, what other points in the revenue cycle (other than
when motion pictures are exhibited) could Disney have used to recognize revenue?
Researching Accounting Standards Cases ask students to visit the FASB’s Web
site to access designated pronouncements as they are applied to each chapter’s
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Case 2-51 Researching Accounting Standards
To help you become familiar with the accounting standards, this case is designed to take
you to the FASB’s Web site and have you access various publications. Access the FASB’s
Web site at http://www.fasb.org. Click on “Pronouncements & EITF Abstracts.”
For this case, we will use Statement of Financial Accounting Concepts No. 6. Open
Concepts Statement No. 6.
1. R ead paragraph 137. Based on the information in this paragraph, what is a
transaction?
2. R ead paragraph 139. What is the difference between transactions with “cash
consequences” and transactions involving “cash”?
3. R ead paragraph 141. Based on the information in this paragraph, what is the
primary difference between an accrual and a deferral?
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