Fundamental Financial Accounting Concepts

by Edmonds, Thomas P.; McNair, Frances M.; Milam, Edward E.; Olds, Philip R.

• ISBN13: 9780070217782
• ISBN10: 0070217785
• Edition: 2nd
• Format: Hardcover
• Copyright: 1998-06-01
• Publisher: McGraw Hill College Div

Table of Contents

Preface	vi
Elements of Financial Statements
Introduction	2	(1)
Role of Accounting in Society	3	(4)
Market-Based Allocations	3	(1)
Competition for Resources	4	(1)
Accounting Is Information	5	(1)
Nonbusiness Resource Allocations	6	(1)
Role of Accounting in Business	7	(1)
Finacial Statements	8	(4)
Elements of Financial Statements	11	(1)
Accounting Events and Transactions	12	(1)
The New Company Illustration---Events for 19X1	12	(4)
Summary of Transactions	15	(1)
Elements Presented in Financial Statements	16	(4)
Income Statement	16	(1)
Statement of Changes in Equity	16	(1)
Balance Sheet	17	(1)
Statement of Cash Flows	18	(2)
Completing the Cycle	20	(1)
The New Company Illustration---Events for 19X2	20	(2)
Financial Statements for 19X2	22	(2)
Using the Financial Statements Model	24	(3)
A Vertical Statements Model	24	(2)
A Horizontal Statements Model	26	(1)
Real-World Financial Reports	27	(4)
Real-World Complications	27	(1)
Annual Report for Reynolds Metals	28	(1)
Special Terms for Corporations	28	(1)
Unusual Items on the Income Statement	28	(3)
Glossary	31	(2)
Questions	33	(1)
Exercises	34	(6)
Problems	40	(10)
Case Studies	50	(3)
Accounting for Accruals
Introduction	53	(1)
Accrual Accounting Illustrated	53	(7)
Effect of Events on the Accounting Equation	53	(3)
Summary of Transactions	56	(1)
Understanding the 19X1 Financial Statements	56	(1)
Understanding the Effects of Accrual Accounting	56	(4)
Second Accounting Cycle	60	(4)
Effect of Events on the Accounting Equation	61	(1)
Understanding the 19X2 Financial Statements	62	(1)
Understanding the Effects of Accrual Accounting	63	(1)
Third Accounting Cycle	64	(5)
Effect of Events on the Accounting Equation	65	(2)
Understanding the 19X3 Financial Statements	67	(2)
Role of the Independent Auditor	69	(5)
The Financial Audit	69	(3)
Materiality and Financial Audits	72	(1)
Types of Audit Opinions	72	(1)
Confidentiality	73	(1)
Importance of Ethics	74	(2)
Common Features of Ethical Misconduct	74	(2)
A Review of Core Concepts	76	(2)
Glossary	78	(1)
Questions	79	(1)
Exercises	80	(6)
Problems	86	(9)
Case Studies	95	(4)
Accounting for Deferrals
Introduction	99	(1)
Accounting for Deferrals Illustrated	100	(8)
Summary of Transactions for 19X4	104	(1)
Understanding the 19X4 Financial Statements	104	(4)
Second Accounting Cycle	108	(4)
Effect of 19X5 Transactions on the Accounting Equation and the Financial Statements	108	(4)
Third Accounting Cycle	112	(5)
Effect of 19X6 Transactions on the Accounting Equation and the Financial Statements	113	(4)
Analyzing Financial Statements to Assess Managerial Performance	117	(5)
Assessing the Effective Use of Assets	117	(1)
Assessing the Risk of Debt	118	(3)
Real-World Data	121	(1)
Scope of Coverage	122	(1)
A Review of Core Concepts	122	(1)
Glossary	123	(1)
Questions	124	(1)
Exercises	125	(5)
Problems	130	(13)
Case Studies	143	(3)
The Recording Process
Introduction	146	(1)
Debit/Credit Terminology	146	(2)
Collins Consultants Case	148	(14)
Asset Source Transactions	148	(4)
Asset Exchange Transactions	152	(2)
Asset Use Transactions	154	(2)
Claims Exchange Transactions	156	(1)
Adjustments for Accruals	157	(2)
Adjustments for Deferrals	159	(3)
Overview of Debit/Credit Relationships	162	(1)
Summary of T-Accounts	162	(1)
The Ledger	162	(1)
The General Journal	163	(3)
Financial Statements	166	(1)
Closing Entries	166	(2)
Trial Balance	168	(3)
Components of an Annual Report	171	(4)
Footnotes to Financial Statements	172	(1)
Management's Discussion and Analysis	173	(1)
Role of the Independent Auditor Revisited	174	(1)
The Securities and Exchange Commission	174	(1)
Glossary	175	(1)
Questions	176	(1)
Exercises	177	(8)
Problems	185	(19)
Case Studies	204	(4)
Accounting for Merchandising Businesses
Introduction	208	(1)
Product Costs Versus Selling and Administrative Costs	208	(1)
Allocating Inventory Cost Between Asset and Expense Accounts	209	(2)
Recording Inventory Cost	211	(2)
Perpetual Inventory Method	213	(3)
Effect of Events on Financial Statements	213	(2)
Journal Entries and Ledger T-Accounts	215	(1)
Other Events Affecting Purchases and Sales of Inventory	216	(8)
Effect of Events on Financial Statements	216	(5)
Journal Entries and Ledger Accounts	221	(1)
Financial Statements	221	(3)
Periodic Inventory Method	224	(3)
Schedule of Cost of Goods Sold	227	(1)
Lost, Damaged, or Stolen Merchandise	227	(2)
Adjustment for Lost, Damaged, or Stolen Inventory	228	(1)
Financial Analysis for Merchandising Companies	229	(5)
Common Size Financial Statements	229	(1)
Gross Margin Percentage	230	(1)
Real-World Data	230	(1)
Return on Sales	231	(1)
Using Common Size Financial Statements	232	(1)
Financing Merchandise Inventory	232	(2)
Glossary	234	(1)
Questions	235	(1)
Exercises	236	(8)
Problems	244	(10)
Case Studies	254	(3)
Internal Control and Accounting for Cash
Introduction	257	(1)
Key Features of Internal Control Systems	257	(6)
Separation of Duties	258	(1)
Quality of Employees	258	(1)
Bonded Employees	258	(1)
Periods of Absence	259	(1)
Procedures Manual	259	(1)
Authority and Responsibility	260	(1)
Prenumbered Documents	260	(1)
Physical Control	260	(1)
Performance Evaluations	261	(1)
Internal Control in Computer Systems	261	(2)
Accounting For Cash	263	(12)
Controlling Cash	264	(1)
Checking Account Documents	265	(4)
Illustration of the Reconciliation Schedule	269	(4)
Petty Cash Funds	273	(2)
Assessing the Level of Liquidity	275	(6)
Current Versus Noncurrent	275	(2)
Liquidity Versus Solvency	277	(1)
Current Ratio	278	(2)
Real-World Data	280	(1)
Glossary	281	(1)
Questions	282	(1)
Exercises	283	(6)
Problems	289	(12)
Case Studies	301	(3)
Accounting for Accruals---Advanced Topics: Receivables and Payables
Introduction	304	(1)
Accounting Events Affecting the 19X1 Period	305	(5)
Ledger T-Accounts	308	(1)
Financial Statements	309	(1)
Estimating Bad Debts Expense	310	(1)
Accounting Events Afecting the 19X2 Period	310	(6)
Ledger T-Accounts	314	(1)
Analysis of Financial Statements	315	(1)
Recognizing Bad Debts Under the Direct Write-Off Method	316	(1)
Accounting for Credit Card Sales	317	(1)
Warranty Obligations	318	(3)
Ledger T-Accounts and Financial Statements	320	(1)
Accounting for Discount Notes	321	(3)
Ledger T-Accounts and Financial Statements	323	(1)
Accounting Events Affecting the 19X2 Period	324	(3)
Ledger T-Accounts and Financial Statements	327	(1)
Real-World Credit Costs	327	(5)
Managing Accounts Receivable	327	(1)
Costs of Making Credit Sales	327	(2)
Average Days to Collect Accounts Receivable	329	(2)
Real-World Data	331	(1)
Glossary	332	(1)
Questions	333	(1)
Exercises	334	(6)
Problems	340	(12)
Case Studies	352	(3)
Asset Valuation: Accounting for Investments and Inventories
Introduction	355	(1)
Types of Investment Securities	356	(2)
Reporting Events That Affect Investment Securities	358	(3)
Financial Statements Under the Three Classification Alternatives	361	(4)
Alternative Reporting Practices for Equity Securities	363	(2)
The Valuation of Inventory Assets	365	(1)
Inventory Cost Flow Methods	365	(2)
Specific Identification	365	(1)
First-In, First-Out (FIFO)	366	(1)
Last-In, First-Out (LIFO)	366	(1)
Weighted Average	366	(1)
Physical Flow	366	(1)
Effect of Cost Flow on Financial Statements	367	(1)
Effect on Income Statement	367	(1)
Effect on Balance Sheet	367	(1)
Inventory Cost Flow Under a Perpetual System	368	(6)
Multiple Layers with Multiple Quantities	368	(3)
Effect of Cost Flow on Financial Statements	371	(3)
Inventory Cost Flow When Sales and Purchases Occur Intermittently	374	(1)
FIFO Cost Flow	374	(1)
Weighted-Average and LIFO Cost Flows	374	(1)
Inventory Cost Flow in a Periodic System	375	(2)
Lower-of-Cost-or-Market Rule	377	(1)
Estimating the Ending Inventory Balance	378	(1)
Effect of Inventory Errors on Financial Statements	379	(3)
Errors Under a Periodic System	380	(1)
Errors Under a Perpetual System	381	(1)
Understanding How the Length of the Operating Cycle Affects Profitability	382	(4)
Average Days to Sell Inventory	382	(1)
Real-World Data	383	(2)
Effects of Cost Flow on Ratio Analysis	385	(1)
Glossary	386	(1)
Questions	387	(1)
Exercises	388	(8)
Problems	396	(11)
Case Studies	407	(3)
Long-Term Operational Assets
Introduction	410	(1)
Classifications of Long-Term Operational Assets	410	(2)
Tangible Long-Term Assets	411	(1)
Intangible Assets	411	(1)
Determining the Cost of Long-Term Assets	412	(2)
Basket Purchase Allocation	413	(1)
Life Cycle of Operational Assets	414	(1)
Accounting for Operational Assets Throughout the Life Cycle	414	(1)
Methods of Depreciation	415	(10)
Straight-Line Depreciation	416	(3)
Double-Declining-Balance Depreciation	419	(3)
Units-of-Production Depreciation	422	(1)
Comparing the Methods	423	(2)
Income Tax Considerations	425	(2)
Revision of Estimates	427	(1)
Revision of Life	427	(1)
Revision of Salvage	428	(1)
Continuing Expenditures for Plant Assets	428	(2)
Costs That Are Expensed	428	(1)
Costs That Are Capitalized	428	(2)
Natural Resources	430	(1)
Intangible Assets	431	(4)
Specifically Identifiable Intangibles	431	(3)
Goodwill	434	(1)
Balance Sheet Presentation	435	(1)
Understanding How Expense Recognition Affects Financial Performance Measures	436	(4)
Effect of Judgment and Estimation	437	(2)
Effect of Industry Characteristics	439	(1)
Glossary	440	(1)
Questions	441	(2)
Exercises	443	(6)
Problems	449	(12)
Case Studies	461	(4)
Accounting for Long-Term Debt
Introduction	465	(1)
Long-Term Notes Payable	466	(3)
Security for Bank Loan Agreements	468	(1)
Line of Credit	469	(1)
Bond Liabilities	470	(4)
Characteristics of Bonds	472	(1)
Security of Bonds	472	(1)
Manner of Interest Payment	472	(1)
Timing of Maturity	473	(1)
Special Features	473	(1)
Bond Rating	474	(1)
Bonds Issued at Face Value	474	(4)
Fixed-Rate, Fixed-Term, Annual Interest Bonds	474	(1)
Effect of Events on Financial Statements	475	(1)
Financial Statements	476	(1)
Recording Procedures	477	(1)
Bonds Issued at a Discount	478	(7)
Effective Interest Rate	478	(1)
Bond Prices	479	(1)
Mason Company Revisited	479	(3)
Effect on Financial Statements	482	(2)
Effect of Semiannual Interest Payments	484	(1)
Bonds Issued at a Premium	485	(1)
Bond Redemptions	486	(1)
Tax Advantage Associated with Debt Financing	487	(3)
EBIT and Ratio Analysis	488	(1)
Times-Interest-Earned Ratio	489	(1)
Appendix	490	(11)
Time Value of Money	490	(4)
Business Applications	494	(7)
Glossary	501	(2)
Questions	503	(1)
Exercises	504	(6)
Problems	510	(10)
Case Studies	520	(4)
Accounting for Equity Transactions
Introduction	524	(1)
Formation of Business Organizations	525	(1)
Ownership Agreements	525	(1)
Regulation	526	(1)
Advantages and Disadvantages of Different Forms of Business Organization	526	(4)
Double Taxation	527	(1)
Regulation	528	(1)
Limited Liability	528	(1)
Continuity	528	(1)
Transferability	529	(1)
Management Structure	529	(1)
Ability to Raise Capital	529	(1)
Appearance of Capital Structure in Financial Statements	530	(2)
Presentation of Equity in Proprietorships	530	(1)
Presentation of Equity in Partnerships	531	(1)
Presentation of Equity in Corporations	531	(1)
Characteristics of Capital Stock	532	(4)
Par Value	532	(1)
Stated Value	533	(1)
Other Valuation Terminology	533	(1)
Stock: Authorized, Issued, and Outstanding	533	(1)
Classes of Stock	533	(1)
Preferred Stock	534	(2)
Accounting for Stock Transactions on the Day of Issue	536	(3)
Stock Issued at Par Value	536	(1)
Stock Classification	536	(1)
Stock Issued at Stated Value	537	(1)
Stock Issued at No-Par Value	538	(1)
Financial Statement Presentation	538	(1)
Stockholder Equity Transactions After the Day of Issue	539	(5)
Treasury Stock	539	(1)
Cash Dividend	540	(2)
Stock Dividend	542	(1)
Stock Split	543	(1)
Appropriation of Retained Earnings	544	(1)
Financial Statement Presentation	544	(1)
Assessment of Potential Investment Returns	545	(3)
Receiving Dividends	546	(1)
Increasing the Price of Stock	546	(1)
Understanding the Price Earnings Ratio	547	(1)
Exercising Control	548	(1)
Appendix	548	(5)
Accounting for Not-for-Profit (NFP) Organizations	548	(4)
Government Accounting	552	(1)
Glossary	553	(2)
Questions	555	(2)
Exercises	557	(4)
Problems	561	(10)
Case Studies	571	(3)
Statement of Cash Flows
Introduction	574	(1)
Statement of Cash Flow	574	(2)
Operating Activities	575	(1)
Investing Activities	575	(1)
Financing Activities	575	(1)
Noncash Investing and Financing Transactions	576	(1)
Reporting Format for Statement of Cash Flows	576	(1)
Converting from Accrual to Cash Basis Accounting	576	(6)
Operating Activities	577	(4)
Investing Activities	581	(1)
Financing Activities	582	(1)
Comprehensive Example Using the T-Account Approach	582	(9)
Preparation of Statement of Cash Flows	583	(1)
Cash Flows from Operating Activities	584	(5)
Cash Flows from Investing Activities	589	(1)
Cash Flows from Financing Activities	590	(1)
Presenting Information in the Statement of Cash Flows	591	(1)
Statement of Cash Flows Presented Under the Indirect Method	591	(2)
Consequences of Growth on Cash Flow	593	(4)
Real-World Data	594	(3)
Glossary	597	(1)
Questions	598	(1)
Exercises	599	(3)
Problems	602	(12)
Case Studies	614	(2)
Appendix A Accessing the EDGAR Database Through the Internet	616	(2)
Appendix B Reynolds Financial Statements	618	(42)
Index	660