Principles of Financial Accounting, 11th Edition

858 Pages·2011·21.77 MB·English

by  Belverd E. Needles

Principles of
Financial
Accounting
ELEVENTH EDITION
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Principles of
Financial
Accounting
ELEVENTH EDITION
Belverd E. Needles, Jr., Ph.D., C.P.A., C.M.A.
DePaul University
Marian Powers, Ph.D.
Northwestern University
Principles of Financial Accounting, © 2011, 2008 South-Western, Cengage Learning
Eleventh Edition
Belverd Needles and Marian Powers ALL RIGHTS RESERVED. No part of this work covered by the
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Library of Congress Control Number: 2009941181
Student Edition ISBN 10: 0-538-75516-4
Student Edition ISBN 13: 978-0-538-75516-0
Instructors Edition ISBN 10: 0-538-75529-6
Instructors Edition ISBN 13: 978-0-538-75529-0
Loose-leaf Edition ISBN 10: 0-538-75524-5
Loose-leaf Edition ISBN 13: 978-0-538-75524-5
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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
APPENDIX A Accounting for investments 794
APPENDIX B Present Value Tables 808
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CONTENTS
Preface xv
Acknowledgements xxv
About the Authors xxix
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
Assets 18
Business Goals, Activities, and Performance
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
vii
viii 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
Contents ix
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