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9780471328230

Financial Accounting: A Decision-Making Approach, 2nd Edition

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  • ISBN13:

    9780471328230

  • ISBN10:

    0471328235

  • Edition: 2nd
  • Format: Hardcover
  • Copyright: 2000-07-01
  • Publisher: Wiley

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Supplemental Materials

What is included with this book?

Summary

This fully revised edition teaches readers how to understand and use accounting information in their business decisions. Taking a user-oriented approach, the text spotlights the link between accounting information and decisions and helps readers gain an appreciation of the strengths and weaknesses of reported accounting information for making different types of business decisions.

Author Biography

THOMAS E. KING, CPA, is Professor of Accounting in the School of Business at Southern Illinois University at Edwardsville, where he served as Chairman of the Accounting Department for seven years. He received his B.S. degree in accounting from California State University, Northridge, and holds an M.B.A. and Ph.D. from the University of California, Los Angeles. Professor King has a number of years of business and consulting experience, and he has been teaching for more than 20 years. He previously was on the faculty of The University of Iowa and has taught courses for the Illinois and Iowa CPA Societies, the Iowa Department of Revenue, the Institute of Internal Auditors, and a major international CPA firm. Professor King has published numerous articles in journals such as The Accounting Review, the Journal of Accounting, Auditing, and Finance, Accounting Horizons, the Journal of Accountancy, and Financial Executive. He also coauthored Advanced financial Accounting, now in its fourth edition. Professor King recently completed his second term on the Board of Gov ernors of the St. Louis Chapter of the Institute of Internal Auditors and is active in the financial Executives Institute and the Institute of Management Accountants. In addition, he serves on the editorial boards of Advances in Accounting and Advances in Accounting Education. Professor King has taught financial and managerial accounting at all levels and has had a special interest in presenting accounting information so that it can be understood and used by non-accountants. VALDEAN C. LEMBKE is Professor of Accounting in the College of Business Administration at The University of Iowa. He received his B.S. degree from Iowa State University and his MBA and Ph.D. from the University of Michigan. He has internal audit and public accounting experience. He has been active in the American Accounting Association, including service as President of the Midwest Region and book review editor for Issues in Accounting Education. Professor Lembke has been a faculty member at The University of Iowa for more than 25 years, where he was named the first recipient of the Gilbert Maynard Excellence in Accounting Instruction award. He has served two terms as department head and is currently head of the professional program in accounting. Professor Lembke has authored or coauthored articles in The Accounting Review, the Journal of Accounting, Auditing, and finance, the Journal of Accountancy, and the Internal Auditor. He also coauthored an advanced financial accounting textbook with Richard Bake and Thomas King. His teaching has been in undergraduate and graduate financial accounting and governmental and not-for-profit accounting coursework, including responsibility for the introductory financial accounting course. JOHN H. SMITH, CPA, is Professor of Accountancy, Emeritus, at Northern Illinois University in Dekalb, Illinois. He has served as Accounting Department Chairman at Northern Illinois University and at The University of Iowa. He has held visiting professorship at the University of Hawaii and has been a staff member in the Office of the Chief Accountant of The Securities and Exchange Commission. He also has experience with a major international public accounting firm. Professor Smith holds a Ph.D. from the University of Illinois and M.A. and B.B.A. degrees from the University of Missouri. He has published in numerous journals and has held offices in academic and professional accounting organizations. He has published in numerous journals and has held offices in academic and professional accounting organizations. He also led the task force that organize the 150-hour education requirement in Illinois. He has taught introductory accounting and all levels of financial accounting, including financial accounting for non-accountants at the S.E.C. and in numerous other programs. He has won awards for teaching excellence at both the undergraduate and M.B.A. levels. Teaching accounting to business managers has led to a life-long interest in improving the instruction of accounting and is reflected in this textbook. Professor Smith believes that accounting should be a manager's best friend.

Table of Contents

Decision Making and Information
2(32)
The Decision-Making Process
4(4)
A Familiar Decision
4(2)
Steps to a Decision
6(2)
Decisions in a Market Economy
8(6)
Capital Markets
9(1)
Professional Management
9(1)
Organizations in the U.S. Economy
10(1)
Business and Nonbusiness Entities
11(1)
Forms of Business Organization
11(3)
The Role of Information in Decision Making
14(3)
The Nature of Accounting Information
17(2)
Decision Oriented
17(1)
Quantitative and Financial Nature
17(1)
Accounting Entity
18(1)
Information and The Accounting Process
19(4)
Identification
19(1)
Measurement
19(1)
Classification and Accumulation
19(1)
Summarization
19(1)
Communication
20(1)
Obtaining Accounting Information
20(3)
Summary
23(11)
Accounting in a Decision-Making Environment
34(36)
The Basic Financial Statements
36(9)
Income Statement
39(1)
Statement of Financial Position
39(2)
Statement of Cash Flows
41(1)
Statement of Changes in Owners' Equity
41(3)
Relationship Among the Financial Statements
44(1)
Users of Accounting Information
45(2)
Internal Users
46(1)
External Users
47(1)
Accounting Information Systems and Decision Making
47(1)
Internal and External Accounting Reports
48(1)
Internal Control
48(1)
Accountants: The Providers of Financial Information
48(4)
Accounting Regulation
50(1)
Regulation and Certification of Accountants
50(1)
The Role of Auditors
51(1)
Financial Auditing
51(1)
Audit Reports
51(1)
Assessing Internal Control
52(1)
Internal Auditing
52(1)
Setting Standards for Accounting Information
52(2)
The Standard Setting Organizations
53(1)
The Securities and Exchange Commission
53(1)
Financial Accounting Standards Board
53(1)
Practical Aspects of Standard Setting
53(1)
The Current Environment of Accounting
54(4)
Income Taxation
55(1)
International Accounting
55(1)
Litigation
55(1)
Ethical Considerations
56(1)
Accounting for Societal Issues
57(1)
Health Care Accounting
58(1)
Environmental Accounting
58(1)
Summary
58(12)
Understanding Cash Flows
70(50)
Part I:
Understanding Cash Flows
72(2)
Estimation of Cash Flows
74(6)
Forecasts of Cash Inflows
75(1)
Revenue Forecasts
75(1)
Cash Generated from Sales
75(2)
Nonrevenue Cash Inflows
77(1)
Forecasts of Cash Outflows
78(1)
Cash Outflows and Cost Structure
78(1)
Infrequently Recurring Cash Outflows
79(1)
Importance of Distinguishing Types of Cash Flows
79(1)
Evaluating Cash Management
80(5)
The Cash Cycle
81(2)
Efficient Employment of Cash
83(1)
Use of Credit
84(1)
Internal Control
84(1)
The Cash Flow Statement
85(2)
Cash Flows and Performance Evaluation
87(1)
Part II:
Decisions and the Timing of Cash Flows
88(14)
The Time-Value Rate
89(1)
Determining Future Values
90(2)
The Role of Compounding
92(1)
Determining Present Values
93(1)
Multiple Payments
94(3)
Using Present and Future Values
97(3)
Decisions and Time Value of Money
100(2)
Summary
102(1)
Appendix 3-1: Reconciliation of Bank Accounts
102(18)
Accrual Accounting and Financial Reporting
120(34)
Evaluating Financial Accounting Information
122(5)
Objectives of Financial Reporting
123(1)
Qualities of Accounting Information
123(1)
Relevance
123(2)
Reliability
125(1)
Understandability
125(1)
Comparability
125(1)
Consistency
126(1)
Constraints on Accounting Information
126(1)
The Financial Accounting Information Model
127(1)
Financial Records
128(1)
Financial Statements
128(1)
Basic Concepts of Financial Accounting
128(7)
The Accounting Entity
129(2)
Objectivity
131(1)
The Going Concern
132(1)
Periodicity
132(1)
Disclosure
133(1)
Conservatism
133(1)
Recognition and Measurement
133(1)
Recognition Criteria
134(1)
Measurement Methods
135(1)
Matching Costs and Benefits: The Heart of Accrual Accounting
135(3)
The Matching Concept
136(1)
Classifying Costs
137(1)
A Closer Look at Financial Statements
138(4)
Balance Sheet
140(2)
Income Statement
142(1)
Summary
142(12)
Understanding Income
154(44)
The Nature of Income
156(1)
The Income Statement
156(1)
Operating and Nonoperating Income
157(1)
The Importance of Income
157(3)
A Measure of Contribution to Society
158(1)
A Basis for Forecasting Cash Flows
158(1)
The Connection Between the Past and the Future
159(1)
Income Statement Users
159(1)
Components of Income
160(3)
Revenues
161(1)
Expenses
162(1)
Gains and Losses
162(1)
Nonoperating Income and Expenses
163(1)
Measurement of Income
163(1)
Income Recognition on the Cash Basis
164(2)
Cash-basis Revenue Recognition
165(1)
Cash-Basis Expense Recognition
166(1)
Income Recognition Using the Accrual Method
166(4)
The Matching Process
166(1)
Accrual-Basis Revenue Recognition
167(1)
Accrual-Basis Expense Recognition
168(1)
Recognition of Gains and Losses
169(1)
Summary of Accrual-Basis Recognition Rules
169(1)
Relationship Between Income and Cash Flows
170(3)
Usefulness of Alternative Income Figures
170(1)
Cash Flows or Accrual-Basis Income?
170(3)
Reporting Income Statement Elements
173(8)
Revenues
174(1)
Operating Expenses
175(1)
Cost of Goods Sold
175(1)
Marketing, Advertising, and Promotional Expenses
176(1)
General and Administrative Expenses
176(1)
Interest Expense
176(1)
Other Operating Income and Expenses
176(1)
Operating Income
176(1)
Gains, Losses, and Nonoperating Items
177(1)
Income Tax Expense
177(1)
Net Income
177(1)
Earnings Per Share
178(1)
Additional Elements of the Income Statement
178(1)
Discontinued Operations
179(1)
Extraordinary Items
180(1)
Changes in Accounting Principles
180(1)
Additional Disclosures
180(1)
Reporting Comprehensive Income
181(1)
Summary
182(16)
Understanding Financial Position
198(42)
Understanding Balance Sheets
200(4)
Fiscal Year
202(1)
Balance Sheet Form and Classification
203(1)
Assets
204(6)
Assets and Decision Making
204(1)
How Assets Are Classified
205(1)
Current Assets
206(1)
Investments
207(1)
Property, Plant, and Equipment
208(1)
Intangible Assets
209(1)
Liabilities
210(5)
Liabilities and Decision Making
211(1)
How Liabilities Are Classified
211(1)
Current Liabilities
212(1)
Long-Term Liabilities
213(1)
Strength of Creditor Claims
213(2)
Owners' Equity
215(2)
Contributed Capital
215(2)
Retained Earnings
217(1)
The Valuation of Balance Sheet Elements
217(3)
Historical Cost
217(1)
Allocated Historical Cost
218(1)
Fair Value
219(1)
Net Realizable Value
219(1)
Present Value
219(1)
Balance Sheet Analysis
220(3)
Indicators of Liquidity
221(1)
Working Capital
221(1)
Current Ratio
221(1)
Quick Ratio
222(1)
Other Indicators
222(1)
Summary
223(17)
The Accounting Process
240(46)
Accounting Systems
242(1)
The Accounting Equation: The Basis for Useful Information
243(1)
Using Ledger Accounts for Accumulation and Analysis
243(6)
How Ledger Accounts Work
245(1)
T-Accounts and the Accounting Equation
246(1)
Debits and Credits
247(1)
Double-Entry Bookkeeping: One Aspect of Reliability
248(1)
Using Ledger Accounts to Classify Information
249(3)
Two Types of Accounts: An Important Distinction
249(2)
The Accounting Equation Expanded
251(1)
Overview of the Accounting Cycle
252(3)
Adjustments: The Matching Concept at Work
255(4)
Accrued Income
255(1)
Accured Expenses
256(1)
Unearned Income
256(1)
Prepaid Expenses
257(1)
Depreciation of Assets
258(1)
A Final Word About Adjustments
258(1)
Comprehensive Illustration of the Accounting Cycle
259(11)
Classification and Original Entries
259(6)
End-of-Period Adjustments
265(1)
Accumulation and Summarization
266(1)
Preparation of Financial Statements
267(3)
Summary
270(16)
Cash, Receivables, and Investments
286(42)
Cash, Receivables, and Investments: Characteristics and Valuation
288(2)
Reporting Cash
290(2)
Restricted Cash
290(1)
Foreign Currency Deposits
291(1)
Reporting Accounts Receivable
292(11)
The Costs of Extending Credit
293(1)
Accounts Receivable Efficiency
293(1)
Speeding Cash Collections
293(2)
Recognition and Valuation of Accounts Receivable
295(1)
Accounting for Uncollectible Accounts
296(1)
Estimating Bad Debts and Uncollectible Accounts
297(1)
Making the Necessary Estimates
298(2)
Writing Off Uncollectible Accounts
300(1)
Summarizing Uncollectible Accounts
301(1)
Timing of Cash Collections from Accounts Receivable
302(1)
Financing through Receivables
303(1)
Notes and Other Receivables
303(3)
Interest-Bearing Notes
304(1)
Noninterest-Bearing Notes
304(2)
Other Receivables
306(1)
Investments
306(4)
Investments in Securities
308(1)
Held-to-Maturity Securities
308(1)
Trading Securities
308(1)
Available-for-Sale Securities
308(2)
Other Securities
310(1)
Investments Other Than Securities
310(1)
Impairment of Value
310(1)
Cash-Flow Implications
310(2)
Summary
312(16)
Prepaid Expenses and Inventories
328(38)
Nonfinancial Assets and Their Valuation
330(1)
Reporting Nonfinancial Assets: The Matching Concept Applied
331(3)
Determining Cost
331(2)
Matching Costs and Benefits
333(1)
Prepaid Expenses and Supplies
334(3)
Inventories
337(15)
Inventory Evaluation Measures
338(2)
Valuation of Inventories
340(1)
Determining Cost
340(1)
Lower of Cost or Market
341(1)
Market Values
342(1)
Assigning Costs to Inventory
342(1)
Specific Identification
343(1)
Cost Flow Assumptions
343(2)
The Effects of Cost Flow Assumptions
345(1)
Accounting For Inventory Transactions
346(1)
Perpetual Inventory Systems
347(1)
Periodic Inventory Systems
348(1)
Inventory Errors
349(1)
Manufacturing Inventories
350(2)
Summary
352(14)
Operating Assets and Intangibles
366(40)
Understanding Operating Assets
368(2)
Accounting and Reporting for Operating Assets
370(2)
Determining Cost
371(1)
Matching the Cost of Operating Assets
371(1)
Allocating The Cost of Operating Assets
372(10)
Straight-Line Depreciation
373(1)
Declining-Balance Depreciation
373(2)
Activity-Based Depreciation
375(1)
Evaluating Depreciation Methods
375(2)
Depreciation and Income Taxes
377(1)
Depreciation of Manufacturing Assets
378(1)
Depletion: Matching the Costs of Natural Resources
379(1)
Disposals and Impairments of Operating Assets
380(1)
Assets Held for Disposal
381(1)
Impairment of Assets
381(1)
Intangible Assets
382(4)
Intangible Assets That Confer Rights
382(1)
Research and Development Costs
383(1)
Goodwill
384(2)
Nonfinancial Asset Disclosures
386(1)
Financing Asset Acquisitions
387(2)
Borrowing to Purchase Assets
388(1)
Leasing Assets
388(1)
Capital Leases: A Transfer of Risks and Rewards
388(1)
Operating Leases: A More Flexible Commitment
389(1)
Summary
389(1)
Appendix 10-1: A Closer Look at Financing Asset Acquisitions
390(16)
Reporting Liabilities
406(44)
Understanding Liabilities
408(1)
Types and Classification of Liabilities
408(1)
Liabilities and Decisions
409(1)
Valuation of Liabilities
409(1)
Liabilities Arising from Day-to-Day Operations
410(5)
Analyzing Operating Liabilities
411(1)
Valuing Operating Liabilities
411(1)
Accounting for Operating Liabilities
412(1)
Estimated Liabilities
413(2)
Liabilities Related to Long-Term Financing
415(13)
The Use of Leverage
416(1)
Long-Term Debt and Interest Rates
417(1)
Evaluating the Riskiness of Long-Term Debt
418(2)
Valuing Long-Term Liabilities
420(1)
Discount and Premium: An Adjustment to Interest
421(3)
Frequency of Interest Payments
424(1)
Retirement of Debt
424(1)
Accounting for Long-Term Debt
424(2)
Current Maturities of Long-Term Debt
426(1)
Convertible Bonds
426(2)
Additional Disclosures
428(1)
Special Liabilities and Obligations
428(4)
Contingent Liabilities
428(1)
Other Liabilities
429(1)
Pensions and Other Postretirement Benefits
429(1)
Deferred Income Taxes
430(1)
Off-Balance-Sheet Obligations and Commitments
431(1)
Analyzing Liabilities
432(2)
Summary
434(1)
Appendix 11-1: Interest Expense and the Effective-Interest Method
434(16)
Reporting Ownership Interests
450(42)
Understanding Owners' Equity
452(1)
Stockholders' Equity: The Elements of Corporate Ownership
453(5)
Capital Stock
453(1)
Types of Capital Stock
453(1)
Analyzing Capital Stock
454(3)
Additional Paid-In Capital
457(1)
Retained Earnings
457(1)
Other Stockholders' Equity Elements
458(1)
Accounting for Capital Stock
458(3)
Issuance of Stock
458(1)
Retirement of Stock
459(1)
Treasury Stock Transactions
460(1)
Other Contributed Capital
461(1)
Accounting for Dividends
461(5)
Cash Dividends
461(3)
Stock Dividends and Splits
464(2)
Accounting for Stockholders' Equity Illustrated
466(5)
The Statement of Stockholders' Equity
471(1)
Analyzing Stockholders' Equity
472(3)
Margin of Safety
473(1)
Profitability
473(2)
Owners' Equity for Unincorporated Businesses
475(1)
Summary
476(16)
The Cash Flow Statement and Decisions
492(44)
Understanding the Statement of Cash Flows
494(3)
Organization of the Statement of Cash Flows
494(3)
Tying Together Activities and Financial Statements
497(1)
Operating Cash Flows
497(6)
Depreciation and Amortization
498(1)
Changes in Deferred Income Taxes
499(1)
Amortization of Debt Discount and Premium
500(1)
Gains and Losses
500(1)
Changes in Current Assets and Liabilities
500(2)
Assessing Cash Flows From Operations
502(1)
Investing Cash Flows
503(1)
Financing Cash Flows
504(3)
Changes in Debt and Capital Stock
505(1)
Payment of Cash Dividends
506(1)
Reporting Changes in Financial Position
507(6)
Identifying Cash Effects
507(2)
Supplemental Cash Flow Information
509(1)
Alternative Reporting Approaches
509(4)
Evaluating Cash Flow Information
513(3)
Cash Flow Measures Related to Return
514(1)
Cash Flow Measures Related to Safety
515(1)
Summary
516(20)
Special Income Reporting Considerations
536(34)
Recognizing Income: A Key to Decision Making
538(2)
Special Income Recognition Issues
540(4)
Long-Term Contracts
541(1)
Precious Metals and Commodities
542(2)
Special Sales Considerations
544(3)
Transfer of Title
545(1)
Financing Arrangements
545(1)
Sales With the Right of Return
546(1)
Inventory on Consignment
547(1)
Special Income Events
547(6)
Discontinued Operations
548(1)
Extraordinary Gains and Losses
549(1)
Unusual Gains and Losses
550(1)
Accounting Changes
551(1)
Changes in Accounting Principles
551(1)
Changes in Accounting Estimates
552(1)
Prior Period Adjustments
552(1)
Earnings Per Share
553(3)
Basic Earnings Per Share
554(1)
Diluted Earnings Per Share
555(1)
Summary
556(14)
Using Financial Statement Information
570(58)
The Securities and Exchange Commission
572(3)
The SEC and Decisions
573(1)
Authority and Impact of the SEC
573(1)
SEC Filing and Reporting Requirements
573(1)
Management's Discussion and Analysis
574(1)
Level of Financial Statement Disclosure
575(7)
Consolidated Financial Statements
576(1)
Consolidated Statements and Decision Making
577(2)
Requirements for Consolidated Financial Statements
579(1)
Principles of Consolidated Financial Statements
579(1)
Segment Disclosures
579(1)
Segments, Products, and Geographic Region
580(2)
Significant Customers
582(1)
Interim Financial Reporting
582(2)
Notes and Other Financial Statement Information
584(3)
Summary of Significant Accounting Policies
586(1)
Other Supplemental Information
587(1)
Financial Analysis
587(7)
Horizontal and Vertical Analysis
587(1)
Horizontal Analysis
587(2)
Vertical Analysis
589(2)
Ratio Analysis
591(1)
Liquidity
591(1)
Solvency
592(1)
Profitability
592(1)
Return to Investors
593(1)
Overall Evaluation
594(1)
Summary
594(1)
Appendix 15-1: Comparative Financial Statements and Ratios
595(6)
Appendix 15-2: Personal Financial Reporting
601(27)
Financial Reporting in A Global Economy
628(36)
Decision Making in a Global Economy
630(4)
The Impact of Global Factors
631(2)
Financial Reporting for Global Businesses
633(1)
Reporting Transactions Denominated in Foreign Currencies
634(6)
Foreign Exchange Markets
634(2)
Foreign Transactions
636(1)
Payment in a Foreign Currency
636(2)
Reducing Foreign Exchange Risk
638(2)
Financial Statement Translation
640(3)
International Accounting Standards
643(2)
Analysis of Global Businesses
645(2)
Summary
647(17)
Appendix A: Gateway Consolidated Financial Statements 664(22)
Appendix B: Present Value and Future Value Tables 686(8)
Glossary 694(9)
Subject Index 703(7)
Company Index 710

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