Issuu on Google+


Brief Contents 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

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 Managerial Accounting 764 Job Order Costing 808 Process Costing 852 Activity-Based Costing 900 Cost-Volume-Profit 950 Cost-Volume-Profit Analysis: Additional Issues 988 Incremental Analysis 1042 Pricing 1082 Budgetary Planning 1130 Budgetary Control and Responsibility Accounting 1180 Standard Costs and Balanced Scorecard 1238 Planning for Capital Investments 1290

APPENDICES A Specimen Financial Statements: PepsiCo, Inc. B Specimen Financial Statements: The Coca-Cola Company C Specimen Financial Statements: Zetar plc D Time Value of Money E Payroll Accounting F Subsidiary Ledgers and Special Journals G Other Significant Liabilities H Standards of Ethical Conduct for Managerial Accountants Cases for Managerial Decision-Making

CA-1 xxi


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

xxii

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 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

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

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

xxiii


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

xxiv

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

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

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

Just Add Water . . . and Paddle 764 Managerial Accounting Basics 766 Comparing Managerial and Financial Accounting 766 Management Functions 766 Organizational Structure 768 Business Ethics 769 Managerial Cost Concepts 771 Manufacturing Costs 771 Product versus Period Costs 773 Manufacturing Costs in Financial Statements 774 Income Statement 774 Cost of Goods Manufactured 775 Cost of Goods Manufactured Schedule 776 Balance Sheet 777 Cost Concepts—A Review 778 Product Costing for Service Industries 780 Managerial Accounting Today 781 Focus on the Value Chain 781 Balanced Scorecard 782 Corporate Social Responsibility 783

Chapter 14

Chapter 16

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

Chapter 15

Managerial Accounting

Job Order Costing

764

808

She Succeeds Where Others Have Failed 808 Cost Accounting Systems 810 Job Order Cost System 810 Process Cost System 810

xxv


Job Order Cost Flow 811 Accumulating Manufacturing Costs 812 Assigning Manufacturing Costs to Work in Process 814 Manufacturing Overhead Costs 819 Assigning Costs to Finished Goods 822 Assigning Costs to Cost of Goods Sold 823 Summary of Job Order Cost Flows 824 Job Order Costing for Service Companies 825 Advantages and Disadvantages of Job Order Costing 827 Reporting Job Cost Data 828 Under- or Overapplied Manufacturing Overhead 829

Chapter 17

Process Costing

852

Ben & Jerry’s Tracks Its Mix-Ups 852 The Nature of Process Cost Systems 854 Uses of Process Cost Systems 854 Process Costing for Service Companies 855 Similarities and Differences Between Job Order Cost and Process Cost Systems 855 Process Cost Flow 857 Assigning Manufacturing Costs—Journal Entries 857 Equivalent Units 860 Weighted-Average Method 860 Refinements on the Weighted-Average Method 861 Production Cost Report 863 Compute the Physical Unit Flow (Step 1) 864 Compute the Equivalent Units of Production (Step 2) 865 Compute Unit Production Costs (Step 3) 865 Prepare a Cost Reconciliation Schedule (Step 4) 866 Preparing the Production Cost Report 867 Costing Systems—Final Comments 868 APPENDIX 17A FIFO Method 871 Equivalent Units Under FIFO 871 Comprehensive Example 872 FIFO and Weighted-Average 876

Chapter 18

Example of ABC versus Traditional Costing 905 Identify and Classify Activities and Allocate Overhead to Cost Pools (Step 1) 906 Identify Cost Drivers (Step 2) 906 Compute Activity-Based Overhead Rates (Step 3) 906 Assign Overhead Costs to Products (Step 4) 907 Comparing Units Costs 908 Activity-Based Costing: A Closer Look 911 Benefits of ABC 911 Limitations of ABC 911 When to Use ABC 912 Value-Added versus Non–Value-Added Activities 913 Classification of Activity Levels 915 Activity-Based Costing in Service Industries 917 Traditional Costing Example 917 Activity-Based Costing Example 918 APPENDIX 18A: Just-in-Time Processing 922 Objective of JIT Processing 923 Elements of JIT Processing 923 Benefits of JIT Processing 923

Chapter 19

Cost-Volume-Profit

950

Don’t Worry—Just Get Big 950 Cost Behavior Analysis 952 Variable Costs 952 Fixed Costs 953 Relevant Range 954 Mixed Costs 955 Importance of Identifying Variable and Fixed Costs 959 Cost-Volume-Profit Analysis 960 Basic Components 960 CVP Income Statement 960 Break-Even Analysis 963 Target Net Income 967 Margin of Safety 969

Chapter 20

900

Cost-Volume-Profit Analysis: Additional Issues 988

Precor Is on Your Side 900 Traditional Costing and Activity-Based Costing 902 Traditional Costing Systems 902 The Need for a New Approach 902 Activity-Based Costing 903

Rapid Replay 988 Cost-Volume-Profit (CVP) Review 990 Basic Concepts 990 Basic Computations 991 CVP and Changes in the Business Environment 993

Activity-Based Costing

xxvi


Sales Mix 995 Break-Even Sales in Units 996 Break-Even Sales in Dollars 997 Determining Sales Mix with Limited Resources 1000 Cost Structure and Operating Leverage 1002 Effect on Contribution Margin Ratio 1003 Effect on Break-Even Point 1003 Effect on Margin of Safety Ratio 1004 Operating Leverage 1004 APPENDIX 20A: Absorption Costing versus Variable Costing 1007 Example Comparing Absorption Costing with Variable Costing 1007 An Extended Example 1009 Decision-Making Concerns 1013 Potential Advantages of Variable Costing 1015

Chapter 21

Incremental Analysis

1042

Make It or Buy It? 1042 Management’s Decision-Making Process 1044 Incremental Analysis Approach 1044 How Incremental Analysis Works 1045 Types of Incremental Analysis 1046 Accept an Order at a Special Price 1046 Make or Buy 1048 Sell or Process Further 1051 Repair, Retain, or Replace Equipment 1054 Eliminate an Unprofitable Segment or Product 1055 Other Considerations in Decision-Making 1058 Qualitative Factors 1058 Relationship of Incremental Analysis and Activity-Based Costing 1058

Chapter 22

Pricing

1082

They’ve Got Your Size—and Color 1082 Pricing Goods for External Sales 1084 Target Costing 1085 Cost-Plus Pricing 1086 Variable-Cost Pricing 1090 Pricing Services 1091 Transfer Pricing for Internal Sales 1095 Negotiated Transfer Prices 1096 Cost-Based Transfer Prices 1099 Market-Based Transfer Prices 1100 Effect of Outsourcing on Transfer Pricing 1101 Transfers Between Divisions in Different Countries 1101

APPENDIX 22A: Other Cost Approaches to Pricing 1104 Absorption-Cost Pricing 1104 Variable-Cost Pricing 1106

Chapter 23

Budgetary Planning

1130

Was This the Next Amazon.com? Not Quite 1130 Budgeting Basics 1132 Budgeting and Accounting 1132 The Benefits of Budgeting 1132 Essentials of Effective Budgeting 1132 Length of the Budget Period 1133 The Budgeting Process 1133 Budgeting and Human Behavior 1134 Budgeting and Long-Range Planning 1135 The Master Budget 1135 Preparing the Operating Budgets 1137 Sales Budget 1137 Production Budget 1138 Direct Materials Budget 1140 Direct Labor Budget 1143 Manufacturing Overhead Budget 1143 Selling and Administrative Expense Budget 1144 Budgeted Income Statement 1144 Preparing the Financial Budgets 1147 Cash Budget 1147 Budgeted Balance Sheet 1150 Budgeting in Nonmanufacturing Companies 1152 Merchandisers 1152 Service Companies 1153 Not-for-Profit Organizations 1153

Chapter 24

Budgetary Control and Responsibility Accounting 1180 Turning Trash Into Treasure 1180 Budgetary Control 1182 Static Budget Reports 1183 Examples 1183 Uses and Limitations 1184 Flexible Budgets 1184 Why Flexible Budgets? 1185 Developing the Flexible Budget 1186 Flexible Budget—A Case Study 1188 Flexible Budget Reports 1191 Responsibility Accounting 1193 Controllable versus Noncontrollable Revenues and Costs 1195 Principles of Performance Evaluation 1195 Responsibility Reporting System 1197

xxvii


Types of Responsibility Centers 1200 Responsibility Accounting for Cost Centers 1201 Responsibility Accounting for Profit Centers 1201 Responsibility Accounting for Investment Centers 1203 APPENDIX 24A: Residual Income—Another Performance Measurement 1209 Residual Income Compared to ROI 1210 Residual Income Weakness 1210

Chapter 25

Standard Costs and Balanced Scorecard 1238 80,000 Different Caffeinated Combinations 1238 The Need for Standards 1240 Distinguishing Between Standards and Budgets 1240 Why Standard Costs? 1240 Setting Standard Costs 1240 Ideal versus Normal Standards 1241 A Case Study 1242 Analyzing and Reporting Variances from Standards 1246 Direct Materials Variances 1247 Direct Labor Variances 1250 Manufacturing Overhead Variances 1252 Reporting Variances 1255 Statement Presentation of Variances 1256 Balanced Scorecard 1256 APPENDIX 25A: Standard Cost Accounting System 1261 Journal Entries 1262 Ledger Accounts 1263 APPENDIX 25B: A Closer Look at Overhead Variances 1264 Overhead Controllable Variance 1264 Overhead Volume Variance 1266

Chapter 26

Planning for Capital Investments 1290 Floating Hotels 1290 The Capital Budgeting Evaluation Process 1292 Cash Flow Information 1292 Illustrative Data 1293 Cash Payback 1294 Net Present Value Method 1295 Equal Annual Cash Flows 1296 Unequal Annual Cash Flows 1297

xxviii

Choosing a Discount Rate 1298 Simplifying Assumptions 1299 Comprehensive Example 1300 Additional Considerations 1300 Intangible Benefits 1301 Profitability Index for Mutually Exclusive Projects 1303 Risk Analysis 1304 Post-Audit of Investment Projects 1305 Other Capital Budgeting Techniques 1305 Internal Rate of Return Method 1306 Comparing Discounted Cash Flow Methods 1308 Annual Rate of Return Method 1308

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 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

(available online at www.wiley.com/college/weygandt) 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 (available online at www.wiley.com/college/weygandt) Expanding the Ledger—Subsidiary Ledgers F-1 Subsidiary Ledger Example F-2 Advantages of Subsidiary Ledgers F-3 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

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

Appendix H

Standards of Ethical Conduct for Management Accountants H-1 (available online at www.wiley.com/college/weygandt) IMA Statement of Ethical Professional Practice H-1 Principles H-1 Standards H-1 Resolution of Ethical Conflict H-2

Cases for Management DecisionMaking CA-1 (The full text of these cases is available online at www.wiley.com/college/weygandt.) Photo Credits PC-1 Company Index I-1 Subject Index I-3

Appendix G

Other Significant Liabilities

G-1

(available online at www.wiley.com/college/weygandt) Contingent Liabilities G-1 Recording a Contingent Liability G-1 Disclosure of Contingent Liabilities G-2

xxix


Weygandt Financial and Managerial Accounting,1e