Principles of Accounting - Belverd E. Needles, Marian Powers, Susan V. Crosson

1331 Pages·2012·24.21 MB·English

Principles of
Accounting
ELEVENTH EDITION
Belverd E. Needles, Jr., Ph.D., C.P.A., C.M.A.
DePaul University
Marian Powers, Ph.D.
Northwestern University
Susan V. Crosson, M.S. Accounting, C.P.A
Santa Fe College
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.
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Belverd Needles, Marian Powers,
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Library of Congress Control Number: 2009941180
Student Edition ISBN 10: 1-4390-3774-4
Student Edition ISBN 13: 978-1-4390-3774-4
Instructors Edition ISBN 10: 0-538-75528-8
Instructors Edition ISBN 13: 978-0-538-75528-3
Loose-leaf Edition ISBN 10: 0-538-75519-9
Loose-leaf Edition ISBN 13: 978-0-538-75519-1
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BRIEF CONTENTS
1 Uses of Accounting Information and the Financial Statements 2
2 Analyzing Business Transactions 48
3 Measuring Business Income 98
4 Completing the Accounting Cycle 142
5 Financial Reporting and Analysis 180
SUPPLEMENT TO CHAPTER 5 How to Read an Annual Report 226
6 The Operating Cycle and Merchandising Operations 266
SUPPLEMENT TO CHAPTER 6 Special-Purpose Journals 302
7 Internal Control 318
8 Inventories 350
9 Cash and Receivables 390
10 Current Liabilities and Fair Value Accounting 430
11 Long-Term Assets 472
12 Contributed Capital 518
13 Long-Term Liabilities 562
14 The Corporate Income Statement and the Statement
of Stockholders’ Equity 614
15 The Statement of Cash Flows 656
16 Financial Performance Measurement 706
17 Partnerships 754
18 The Changing Business Environment:
A Manager’s Perspective 794
19 Cost Concepts and Cost Allocation 836
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iv
Brief Contents
20 Costing Systems: Job Order Costing 882
21 Costing Systems: Process Costing 920
22 Value-Based Systems: ABM and Lean 958
23 Cost Behavior Analysis 988
24 The Budgeting Process 1040
25 Performance Management and Evaluation 1092
26 Standard Costing and Variance Analysis 1136
27 Short-Run Decision Analysis 1184
28 Capital Investment Analysis 1224
APPENDIX A Accounting for investments 1262
APPENDIX B Present Value Tables 1276
CONTENTS
Preface xvii
About the Authors xxxvii
CHAPTER 1 Uses of Accounting Information and the Financial Statements 2
DECISION POINT (cid:2) A USER’S FOCUS KEEP-FIT CENTER 3 Financial Position and the Accounting
Equation 17
Accounting as an Information System 4
Business Goals, Activities, and Performance Assets 18
Measures 4 Liabilities 18
Financial and Management Accounting 7 Owner’s Equity 18
Processing Accounting Information 7 Financial Statements 19
Ethical Financial Reporting 8 Income Statement 19
Decision Makers: The Users of Accounting Statement of Owner’s Equity 20
Information 10 The Balance Sheet 20
Management 10 Statement of Cash Flows 21
Users with a Direct Financial Interest 11 Relationships Among the Financial Statements 21
Users with an Indirect Financial Interest 12 Generally Accepted Accounting Principles 24
Governmental and Not-for-Profit Organizations 12 GAAP and the Independent CPA’s Report 25
Accounting Measurement 13 Organizations That Issue Accounting Standards 26
Business Transactions 14 Other Organizations That Influence GAAP 26
Money Measure 14 Professional Conduct 27
Separate Entity 15 Corporate Governance 27
The Forms of Business Organization 15 (cid:2) KEEP-FIT CENTER: REVIEW PROBLEM 28
Characteristics of Corporations, Sole Proprietorships, STOP & REVIEW 31
and Partnerships 15
CHAPTER ASSIGNMENTS 33
CHAPTER 2 Analyzing Business Transactions 48
DECISION POINT (cid:2) A USER’S FOCUS PAWS AND HOOFS Business Transaction Analysis 58
CLINIC 49 Owner’s Investment to Form the Business 58
Measurement Issues 50 Economic Event That Is Not a Business
Recognition 50 Transaction 59
Valuation 51 Prepayment of Expenses in Cash 59
Classification 53 Purchase of an Asset on Credit 59
Ethics and Measurement Issues 53 Purchase of an Asset Partly in Cash and Partly
on Credit 60
Double-Entry System 54
Payment of a Liability 60
Accounts 54
Revenue in Cash 61
The T Account 54
Revenue on Credit 61
The T Account Illustrated 55
Revenue Collected in Advance 61
Rules of Double-Entry Accounting 55
Collection on Account 62
Normal Balance 56
Expense Paid in Cash 62
Owner’s Equity Accounts 56
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Contents
Expense to Be Paid Later 63 Recording and Posting Transactions 70
Withdrawals 63 Chart of Accounts 70
Summary of Transactions 65 General Journal 70
The Trial Balance 65 General Ledger 72
Preparation and Use of a Trial Balance 65 Some Notes on Presentation 73
Finding Trial Balance Errors 67 (cid:2) PAWS AND HOOFS CLINIC: REVIEW PROBLEM 75
Cash Flows and the Timing STOP & REVIEW 79
of Transactions 68 CHAPTER ASSIGNMENTS 81
CHAPTER 3 Measuring Business Income 98
DECISION POINT (cid:2) A USER’S FOCUS RELIABLE Type 2 Adjustment: Recognizing Unrecorded,
ANSWERING SERVICE 99 Incurred Expenses (Accrued Expenses) 111
Profitability Measurement: Issues and Type 3 Adjustment: Allocating Recorded, Unearned
Ethics 100 Revenues (Deferred Revenues) 113
Net Income 100 Type 4 Adjustment: Recognizing Unrecorded,
Earned Revenues (Accrued Revenues) 114
Income Measurement Assumptions 101
A Note About Journal Entries 115
Ethics and the Matching Rule 102
Using the Adjusted Trial Balance to Prepare
Accrual Accounting 104
Financial Statements 116
Recognizing Revenues 104
Cash Flows from Accrual-Based
Recognizing Expenses 105
Information 119
Adjusting the Accounts 105
(cid:2) RELIABLE ANSWERING SERVICE: REVIEW
Adjustments and Ethics 106
PROBLEM 121
The Adjustment Process 107 STOP & REVIEW 125
Type 1 Adjustment: Allocating Recorded Costs
CHAPTER ASSIGNMENTS 127
(Deferred Expenses) 107
CHAPTER 4 Completing the Accounting Cycle 142
DECISION POINT (cid:2) A USER’S FOCUS WESTWOOD The Accounts After Posting 148
MOVERS 143 The Post-Closing Trial Balance 150
From Transactions to Financial
Reversing Entries: An Optional First
Statements 144 Step 152
The Accounting Cycle 144
The Work Sheet: An Accountant’s Tool 154
Closing Entries 144
Preparing the Work Sheet 154
Preparing Closing Entries 147
Using the Work Sheet 157
Step 1: Closing the Credit Balances 147 (cid:2) WESTWOOD MOVERS: REVIEW PROBLEM 158
Step 2: Closing the Debit Balances 147
STOP & REVIEW 160
Step 3: Closing the Income Summary Account
CHAPTER ASSIGNMENTS 162
Balance 147
Step 4: Closing the Withdrawals Account
Balance 147
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Contents
CHAPTER 5 Financial Reporting and Analysis 180
DECISION POINT (cid:2) A USER’S FOCUS FUN-FOR-FEET Classified Balance Sheet 190
COMPANY 181 Assets 190
Foundations of Financial Reporting 182 Liabilities 192
Objective of Financial Reporting 182 Owner’s Equity 193
Qualitative Characteristics of Accounting Dell’s Balance Sheets 194
Information 182
Forms of the Income Statement 196
Accounting Conventions 184
Multistep Income Statement 196
Ethical Financial Reporting 184
Dell’s Income Statements 199
Accounting Conventions for Preparing
Single-Step Income Statement 200
Financial Statements 185
Using Classified Financial Statements 201
Consistency 185
Evaluation of Liquidity 201
Full Disclosure (Transparency) 186
Evaluation of Profitability 202
Materiality 187
(cid:2) FUN-FOR-FEET COMPANY: REVIEW PROBLEM 208
Conservatism 187
STOP & REVIEW 210
Cost-Benefit 188
CHAPTER ASSIGNMENTS 212
SUPPLEMENT TO CHAPTER 5 How to Read an Annual Report 226
The Components of an Annual Report 226 Financial Statements 228
Letter to the Stockholders 227 Notes to the Financial Statements 233
Financial Highlights 227 Reports of Management’s Responsibilities 234
Description of the Company 227 Reports of Certified Public Accountants 234
Management’s Discussion and Analysis 227
CHAPTER 6 The Operating Cycle and Merchandising Operations 266
DECISION POINT (cid:2) A USER’S FOCUS FONG Perpetual Inventory System 275
COMPANY 267 Purchases of Merchandise 275
Managing Merchandising Businesses 268 Sales of Merchandise 277
Operating Cycle 268
Periodic Inventory System 281
Choice of Inventory System 270
Purchases of Merchandise 282
Foreign Business Transactions 270
Sales of Merchandise 284
Terms of Sale 272 (cid:2) FONG COMPANY: REVIEW PROBLEM 286
Sales and Purchases Discounts 272
STOP & REVIEW 289
Transportation Costs 273
CHAPTER ASSIGNMENTS 290
Terms of Debit and Credit Card Sales 274
SUPPLEMENT TO CHAPTER 6 Special-Purpose Journals 302
Sales Journal 302 Cash Receipts Journal 308
Purchases Journal 306 Cash Payments Journal 311
viii
Contents
CHAPTER 7 Internal Control 318
DECISION POINT (cid:2) A USER’S FOCUS FISHER’S Internal Control over Merchandising
GRILL 319 Transactions 325
Management Issues Related to Internal Internal Control and Management Goals 325
Control 320 Control of Cash 326
The Need for Internal Controls 320 Control of Cash Receipts 326
Management’s Responsibility for Internal Control of Purchases and Cash Disbursements 327
Control 321
Petty Cash Funds 332
Independent Accountant’s Audit of Internal
Establishing the Petty Cash Fund 332
Control 322
Making Disbursements from the Petty Cash
Internal Control: Components, Activities,
Fund 333
and Limitations 322
Reimbursing the Petty Cash Fund 333
Components of Internal Control 322
(cid:2) FISHER’S GRILL: REVIEW PROBLEM 335
Control Activities 323
STOP & REVIEW 337
Limitations of Internal Control 324
CHAPTER ASSIGNMENTS 338
CHAPTER 8 Inventories 350
DECISION POINT (cid:2) A USER’S FOCUS SNUGS First-In, First-Out (FIFO) Method 362
COMPANY 351 Last-In, First-Out (LIFO) Method 363
Managing Inventories 352 Summary of Inventory Costing Methods 364
Inventory Decisions 352 Impact of Inventory Decisions 365
Evaluating the Level of Inventory 353
Effects on the Financial Statements 365
Effects of Inventory Misstatements on Income
Effects on Income Taxes 365
Measurement 355
Effects on Cash Flows 367
Inventory Cost and Valuation 358
Inventory Cost Under the Perpetual
Goods Flows and Cost Flows 358
Inventory System 367
Lower-of-Cost-or-Market (LCM) Rule 359
Valuing Inventory by Estimation 370
Disclosure of Inventory Methods 360
Retail Method 370
Inventory Cost Under the Periodic
Gross Profit Method 371
Inventory System 361
(cid:2) SNUGS COMPANY: REVIEW PROBLEM 373
Specific Identification Method 361
STOP & REVIEW 376
Average-Cost Method 362
CHAPTER ASSIGNMENTS 378
CHAPTER 9 Cash and Receivables 390
DECISION POINT (cid:2) A USER’S FOCUS PENTE COMPUTER Financing Receivables 396
COMPANY 391 Ethics and Estimates in Accounting for
Management Issues Related to Cash Receivables 398
and Receivables 392 Cash Equivalents and Cash Control 399
Cash Management 392 Cash Equivalents 399
Accounts Receivable and Credit Policies 393 Fair Value of Cash and Cash Equivalents 399
Evaluating the Level of Accounts Receivable 394 Cash Control Methods 400
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Contents
Bank Reconciliations 401 Duration of a Note 413
Uncollectible Accounts 403 Interest and Interest Rate 413
The Allowance Method 404 Maturity Value 414
Disclosure of Uncollectible Accounts 404 Accrued Interest 414
Estimating Uncollectible Accounts Expense 405 Dishonored Note 414
Writing Off Uncollectible Accounts 409 (cid:2) PENTE COMPUTER COMPANY: REVIEW PROBLEM 415
Notes Receivable 411 STOP & REVIEW 417
Maturity Date 412 CHAPTER ASSIGNMENTS 419
CHAPTER 10 Current Liabilities and Fair Value Accounting 430
DECISION POINT (cid:2) A USER’S FOCUS MEGGIE’S FITNESS Valuation Approaches to Fair Value
CENTER 431 Accounting 448
Management Issues Related to Current Interest and the Time Value of Money 448
Liabilities 432 Calculating Present Value 449
Managing Liquidity and Cash Flows 432
Applications Using Present Value 453
Evaluating Accounts Payable 432
Valuing an Asset 453
Reporting Liabilities 434
Deferred Payment 454
Common Types of Current Liabilities 436 Other Applications 455
Definitely Determinable Liabilities 436 (cid:2) MEGGIE’S FITNESS CENTER: REVIEW PROBLEM 456
Estimated Liabilities 443
STOP & REVIEW 458
Contingent Liabilities and CHAPTER ASSIGNMENTS 460
Commitments 447
CHAPTER 11 Long-Term Assets 472
DECISION POINT (cid:2) A USER’S FOCUS CAMPUS Disposal of Depreciable Assets 490
CLEANERS 473 Discarded Plant Assets 491
Management Issues Related to Long-Term
Plant Assets Sold for Cash 491
Assets 474
Exchanges of Plant Assets 493
Acquiring Long-Term Assets 476
Natural Resources 494
Financing Long-Term Assets 477
Depletion 494
Applying the Matching Rule 478
Depreciation of Related Plant Assets 495
Acquisition Cost of Property, Plant, and
Development and Exploration Costs in the Oil and
Equipment 479
Gas Industry 495
General Approach to Acquisition Costs 480
Intangible Assets 497
Specific Applications 480
Research and Development Costs 500
Depreciation 483
Computer Software Costs 500
Factors in Computing Depreciation 484
Goodwill 500
Methods of Computing Depreciation 484 (cid:2) CAMPUS CLEANERS: REVIEW PROBLEM 502
Special Issues in Depreciation 488
STOP & REVIEW 505
CHAPTER ASSIGNMENTS 507