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Brief Contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Accounting in Action 2 The Recording Process 52 Adjusting the Accounts 100 Completing the Accounting Cycle 162 Accounting for Merchandising Operations 218 Inventories 270 Fraud, Internal Control, and Cash 324 Accounting for Receivables 378 Plant Assets, Natural Resources, and Intangible Assets 422 Liabilities 474 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings 536 Investments 600 Statement of Cash Flows 644 Financial Statement Analysis 710

APPENDICES A Specimen Financial Statements: PepsiCo, Inc. A-1 B Specimen Financial Statements: The Coca-Cola Company B-1 C Specimen Financial Statements: Zetar plc C-1 D Time Value of Money D-1 E Payroll Accounting E-1 F Subsidiary Ledgers and Special Journals G Other Significant Liabilities G-1

F-1

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Contents Chapter 1

Accounting in Action

Chapter 3

2

Adjusting the Accounts

100

Knowing the Numbers 2 What Is Accounting? 4 Three Activities 4 Who Uses Accounting Data 5 The Building Blocks of Accounting 7 Ethics in Financial Reporting 7 Generally Accepted Accounting Principles 8 Measurement Principles 9 Assumptions 10 The Basic Accounting Equation 12 Assets 13 Liabilities 13 Stockholders’ Equity 13 Using the Accounting Equation 15 Transaction Analysis 15 Summary of Transactions 20 Financial Statements 22 Income Statement 22 Retained Earnings Statement 22 Balance Sheet 24 Statement of Cash Flows 24 APPENDIX 1A: Accounting Career Opportunities 29 Public Accounting 30 Private Accounting 30 Opportunities in Government 30 Forensic Accounting 30 “Show Me the Money” 31 A Look at IFRS 49

What Was Your Profit? 100 Timing Issues 102 Fiscal and Calendar Years 102 Accrual- versus Cash-Basis Accounting 102 Recognizing Revenues and Expenses 103 The Basics of Adjusting Entries 104 Types of Adjusting Entries 105 Adjusting Entries for Deferrals 106 Adjusting Entries for Accruals 113 Summary of Basic Relationships 119 The Adjusted Trial Balance and Financial Statements 121 Preparing the Adjusted Trial Balance 121 Preparing Financial Statements 122 APPENDIX 3A: Alternative Treatment of Prepaid Expenses and Unearned Revenues 126 Prepaid Expenses 127 Unearned Revenues 128 Summary of Additional Adjustment Relationships 129 APPENDIX 3B: Concepts in Action 130 Qualities of Useful Information 130 Assumptions in Financial Reporting 130 Principles in Financial Reporting 131 Constraints in Financial Reporting 132 A Look at IFRS 159

Chapter 2

Completing the Accounting Cycle

The Recording Process

52

Accidents Happen 52 The Account 54 Debits and Credits 54 Stockholders’ Equity Relationships 58 Summary of Debit/Credit Rules 58 Steps in the Recording Process 59 The Journal 60 The Ledger 62 Posting 64 The Recording Process Illustrated 66 Summary Illustration of Journalizing and Posting 72 The Trial Balance 73 Limitations of a Trial Balance 74 Locating Errors 74 Use of Dollar Signs 75 A Look at IFRS 97

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Chapter 4

162

Everyone Likes to Win 162 Using a Worksheet 164 Steps in Preparing a Worksheet 165 Preparing Financial Statements from a Worksheet 167 Preparing Adjusting Entries from a Worksheet 169 Closing the Books 170 Preparing Closing Entries 170 Posting Closing Entries 172 Preparing a Post-Closing Trial Balance 174 Summary of the Accounting Cycle 176 Reversing Entries—An Optional Step 177 Correcting Entries—An Avoidable Step 177 The Classified Balance Sheet 179 Current Assets 181 Long-Term Investments 181 Property, Plant, and Equipment 182 Intangible Assets 182


Current Liabilities 184 Long-Term Liabilities 185 Stockholders’ (Owners’) Equity 185 APPENDIX 4A: Reversing Entries 190 Reversing Entries Example 190 A Look at IFRS 214

Chapter 5

Accounting for Merchandising Operations 218 Who Doesn’t Shop at Wal-Mart? 218 Merchandising Operations 220 Operating Cycles 220 Flow of Costs 220 Recording Purchases of Merchandise 223 Freight Costs 223 Purchase Returns and Allowances 225 Purchase Discounts 226 Summary of Purchasing Transactions 227 Recording Sales of Merchandise 227 Sales Returns and Allowances 229 Sales Discounts 230 Completing the Accounting Cycle 232 Adjusting Entries 232 Closing Entries 232 Summary of Merchandising Entries 233 Forms of Financial Statements 234 Multiple-Step Income Statement 234 Income Statement Presentation of Sales 234 Single-Step Income Statement 237 Classified Balance Sheet 238 APPENDIX 5A: Periodic Inventory System 242 Determining Cost of Goods Sold Under a Periodic System 242 Recording Merchandise Transactions 243 Recording Purchases of Merchandise 243 Recording Sales of Merchandise 244 APPENDIX 5B: Worksheet for a Merchandising Company 245 Using a Worksheet 245 A Look at IFRS 268

Chapter 7

Fraud, Internal Control, and Cash

324

Minding the Money in Moose Jaw 324 Fraud and Internal Control 326 Fraud 326 The Sarbanes-Oxley Act 326 Internal Control 327 Principles of Internal Control Activities 328 Limitations of Internal Control 335 Cash Controls 336 Cash Receipts Controls 336 Cash Disbursements Controls 339 Control Features: Use of a Bank 344 Making Bank Deposits 344 Writing Checks 344 Bank Statements 345 Reconciling the Bank Account 347 Electronic Funds Transfer (EFT) System 350 Reporting Cash 352 Cash Equivalents 352 Restricted Cash 352 A Look at IFRS 375

Chapter 8

Chapter 6

Inventories

Using Inventory Cost Flow Methods Consistently 284 Lower-of-Cost-or-Market 285 Inventory Errors 286 Income Statement Effects 286 Balance Sheet Effects 287 Statement Presentation and Analysis 288 Presentation 288 Analysis 289 APPENDIX 6A: Inventory Cost Flow Methods in Perpetual Inventory Systems 292 First-In, First-Out (FIFO) 293 Last-In, First-Out (LIFO) 293 Average-Cost 294 APPENDIX 6B: Estimating Inventories 296 Gross Profit Method 297 Retail Inventory Method 298 A Look at IFRS 321

270

“Where Is That Spare Bulldozer Blade?” 270 Classifying Inventory 272 Determining Inventory Quantities 273 Taking a Physical Inventory 273 Determining Ownership of Goods 274 Inventory Costing 276 Specific Identification 277 Cost Flow Assumptions 277 Financial Statement and Tax Effects of Cost Flow Methods 282

Accounting for Receivables

378

A Dose of Careful Management Keeps Receivables Healthy 378 Types of Receivables 380 Accounts Receivable 380 Recognizing Accounts Receivable 381 Valuing Accounts Receivable 382 Disposing of Accounts Receivable 388 Notes Receivable 391 Determining the Maturity Date 392 Computing Interest 393

xxv


Recognizing Notes Receivable 394 Valuing Notes Receivable 394 Disposing of Notes Receivable 394 Statement Presentation and Analysis 397 Presentation 397 Analysis 397 A Look at IFRS 419

APPENDIX 10B: Effective-Interest Method of Bond Amortization 506 Amortizing Bond Discount 506 Amortizing Bond Premium 508 APPENDIX 10C: Straight-Line Amortization 510 Amortizing Bond Discount 510 Amortizing Bond Premium 511 A Look at IFRS 533

Chapter 9

Plant Assets, Natural Resources, and Intangible Assets 422 How Much for a Ride to the Beach? 422 Plant Assets 424 Determining the Cost of Plant Assets 424 Depreciation 427 Expenditures During Useful Life 435 Plant Asset Disposals 436 Natural Resources 439 Intangible Assets 441 Accounting for Intangible Assets 441 Research and Development Costs 443 Statement Presentation and Analysis 444 Presentation 444 Analysis 445 APPENDIX 9A: Exchange of Plant Assets 449 Loss Treatment 449 Gain Treatment 450 A Look at IFRS 470

Chapter 10

Liabilities

474

Financing His Dreams 474 Current Liabilities 476 Notes Payable 476 Sales Taxes Payable 477 Payroll and Payroll Taxes Payable 477 Unearned Revenues 480 Current Maturities of Long-Term Debt 480 Statement Presentation and Analysis 481 Long-Term Liabilities 483 Bond Basics 483 Accounting for Bond Issues 488 Accounting for Bond Retirements 492 Accounting for Long-Term Notes Payable 494 Statement Presentation and Analysis 496 APPENDIX 10A: Present Value Concepts Related to Bond Pricing 501 Present Value of Face Value 501 Present Value of Interest Payments (Annuities) 503 Time Periods and Discounting 504 Computing the Market Price of a Bond 504

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Chapter 11

Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings 536 What’s Cooking? 536 The Corporate Form of Organization 538 Characteristics of a Corporation 538 Forming a Corporation 541 Ownership Rights of Stockholders 542 Stock Issue Considerations 542 Corporate Capital 545 Accounting for Stock Transactions 548 Accounting for Common Stock Issues 548 Accounting for Treasury Stock 551 Accounting for Preferred Stock 554 Dividends 556 Cash Dividends 556 Stock Dividends 560 Stock Splits 562 Retained Earnings 564 Retained Earnings Restrictions 565 Prior Period Adjustments 566 Retained Earnings Statement 567 Statement Presentation and Analysis 568 Presentation 568 Analysis 569 APPENDIX 11A: Stockholders’ Equity Statement 573 APPENDIX 11B: Book Value—Another Per Share Amount 574 Book Value per Share 574 Book Value versus Market Value 575 A Look at IFRS 597

Chapter 12

Investments

600

“Is There Anything Else We Can Buy?” 600 Why Corporations Invest 602 Accounting for Debt Investments 603 Recording Acquisition of Bonds 603 Recording Bond Interest 604 Recording Sale of Bonds 604


Accounting for Stock Investments 605 Holdings of Less than 20% 606 Holdings Between 20% and 50% 606 Holdings of More than 50% 608 Valuing and Reporting Investments 610 Categories of Securities 610 Balance Sheet Presentation 614 Presentation of Realized and Unrealized Gain or Loss 614 Classified Balance Sheet 615 APPENDIX 12A: Preparing Consolidated Financial Statements 619 Consolidated Balance Sheet 619 Consolidated Income Statement 623 A Look at IFRS 641

Chapter 13

Statement of Cash Flows

644

Got Cash? 644 Statement of Cash Flows: Usefulness and Format 646 Usefulness of the Statement of Cash Flows 646 Classification of Cash Flows 646 Significant Noncash Activities 648 Format of the Statement of Cash Flows 648 Preparing the Statement of Cash Flows 650 Indirect and Direct Methods 650 Preparing the Statement of Cash Flows— Indirect Method 651 Step 1: Operating Activities 652 Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method 656 Step 2: Investing and Financing Activities 658 Step 3: Net Change in Cash 659 Using Cash Flows to Evaluate a Company 662 Free Cash Flow 662 APPENDIX 13A: Using a Worksheet to Prepare the Statement of Cash Flows—Indirect Method 666 Preparing the Worksheet 667 APPENDIX 13B: Statement of Cash Flows— Direct Method 672 Step 1: Operating Activities 673 Step 2: Investing and Financing Activities 677 Step 3: Net Change in Cash 679 APPENDIX 13C: Statement of Cash Flows—T-Account Approach 681 A Look at IFRS 706

Chapter 14

Financial Statement Analysis

710

It Pays to Be Patient 710 Basics of Financial Statement Analysis 712 Need for Comparative Analysis 712 Tools of Analysis 712

Horizontal Analysis 713 Balance Sheet 714 Income Statement 714 Retained Earnings Statement 715 Vertical Analysis 716 Balance Sheet 716 Income Statement 716 Ratio Analysis 718 Liquidity Ratios 719 Profitability Ratios 723 Solvency Ratios 727 Summary of Ratios 728 Earning Power and Irregular Items 730 Discontinued Operations 731 Extraordinary Items 731 Changes in Accounting Principle 733 Comprehensive Income 734 Quality of Earnings 735 Alternative Accounting Methods 735 Pro Forma Income 735 Improper Recognition 736 A Look at IFRS 760

Appendix A

Specimen Financial Statements: PepsiCo, Inc. A-1 Appendix B

Specimen Financial Statements: The Coca-Cola Company B-1 Appendix C

Specimen Financial Statements: Zetar plc C-1 Appendix D

Time Value of Money

D-1

Nature of Interest D-1 SimpIe Interest D-1 Compound Interest D-2 Future Value Concepts D-2 Future Value of a Single Amount D-2 Future Value of an Annuity D-4 Present Value Concepts D-7 Present Value Variables D-7 Present Value of a Single Amount D-7 Present Value of an Annuity D-9 Time Periods and Discounting D-11 Computing the Present Value of a Long-Term Note or Bond D-11

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Computing the Present Values in a Capital Budgeting Decision D-14 Using Financial Calculators D-16 Present Value of a Single Sum D-16 Present Value of an Annuity D-17 Useful Applications of the Financial Calculator D-18

Appendix E

Payroll Accounting

E-1

Accounting for Payroll E-1 Determining the Payroll E-1 Recording the Payroll E-5 Employer Payroll Taxes E-8 FICA Taxes E-9 Federal Unemployment Taxes E-9 State Unemployment Taxes E-9 Recording Employer Payroll Taxes E-9 Filing and Remitting Payroll Taxes E-10 Internal Control for Payroll E-12

Appendix F

Subsidiary Ledgers and Special Journals F-1 Expanding the Ledger—Subsidiary Ledgers F-1 Subsidiary Ledger Example F-2 Advantages of Subsidiary Ledgers F-3

xxviii

Expanding the Journal—Special Journals F-4 Sales Journal F-4 Cash Receipts Journal F-7 Purchases Journal F-11 Cash Payments Journal F-13 Effects of Special Journals on the General Journal F-16

Appendix G

Other Significant Liabilities

G-1

Contingent Liabilities G-1 Recording a Contingent Liability G-1 Disclosure of Contingent Liabilities G-2 Lease Liabilities G-3 Operating Leases G-3 Capital Leases G-4 Additional Liabilities for Employee Fringe Benefits G-5 Paid Absences G-6 Postretirement Benefits G-7 Photo Credits PC-1 Company Index I-1 Subject Index I-3


Weygandt Financial Accounting, 8e