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Principles of Financial Accounting, 11th Edition PDF

858 Pages·2011·21.77 MB·English
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Principles of Financial Accounting ELEVENTH EDITION This page intentionally left blank 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 copyright herein may be reproduced, transmitted, stored, or used Vice President of Editorial, Business: in any form or by any means graphic, electronic, or mechanical, Jack W. Calhoun including but not limited to photocopying, recording, scanning, Editor in Chief: Rob Dewey digitizing, taping, web distribution, information networks, or Executive Editor: Sharon Oblinger information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, Supervising Developmental Editor: without the prior written permission of the publisher. Katie Yanos Sr. Marketing Manager: Kristen Hurd Marketing Coordinator: Heather Mooney For product information and technology assistance, contact Sr. Marketing Communications Manager: us at Cengage Learning Customer & Sales Support, Libby Shipp 1-800-354-9706 Content Project Manager: Darrell Frye For permission to use material from this text or product, submit Media Editor: Bryan England all requests online at www.cengage.com/permissions Further permissions questions can be emailed to Editorial Assistant: Julie Warwick [email protected] Frontlist Buyer, Manufacturing: Doug Wilke Production Service: S4Carlisle Publishing Services ExamView® is a registered trademark of eInstruction Corp. Windows is a registered trademark of the Microsoft Corporation Sr. Art Director: Stacy Jenkins Shirley used herein under license. Macintosh and Power Macintosh are Cover and Internal Designer: registered trademarks of Apple Computer, Inc. used herein under Grannan Graphic Design license. Cover Image: © Getty Images/Image Bank Permissions Account Manager: John Hill © 2011 Cengage Learning. All Rights Reserved. Cengage Learning WebTutor™ is a trademark of Cengage Learning. 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 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.CengageBrain.com Printed in the United States of America 1 2 3 4 5 6 7 13 12 11 10 09 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 v This page intentionally left blank 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

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Needles/Powers/Crosson delivers interactive pedagogy by illustrating accounting principles and real-world examples to encourage critical thinking. This revision is based on an understanding of the nature, culture, and motivations of today's students and on extensive feedback from instructors. These
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