Financial Accounting The Impact on Decision Makers, The Alternative to Debits and Credits

by Porter, Gary A.; Norton, Curtis L.

• ISBN13: 9780324272666
• ISBN10: 0324272669
• Edition: 4th
• Format: Hardcover
• Copyright: 2004-01-06
• Publisher: South-Western College Pub

Summary

The fourth edition of Financial Accounting: The Impact on Decision Makers, An Alternative to Debits and Credits, 4e continues to focus on the user/decision maker perspective. Transactions, which as presented in a spreadsheet (accounting equation) format, are used to help students understand the impact on financial information. The authors use the financial statements from Winnebago Industries and Monaco Coach throughout the chapter and end of chapter material. Porter/Norton is unique in its use of these competing companies for comparative financial analysis and in end of chapter cases.

Table of Contents

PART I THE ACCOUNTING MODEL	1	(214)
INTRODUCTION Getting Started in Business	2	(10)
Winnebago Industries: The Need to Make Financial Decisions	3	(1)
What Is Business?	4	(1)
Forms of Organization	5	(2)
Business Entities	6	(1)
Nonbusiness Entities	7	(1)
Organizations and Social Responsibility	7	(1)
The Nature of Business Activity	7	(2)
Financing Activities	7	(1)
Investing Activities	8	(1)
Operating Activities	8	(1)
Starting the Study of Accounting	9	(1)
Key Term Quiz	10	(1)
Alternate Terms	11	(1)
Questions	11	(1)
Solutions to Key Terms Quiz	11	(1)
CHAPTER 1 Accounting as a Form of Communication	12	(44)
Focus on Financial Results: Winnebago Industries	13	(1)
What Is Accounting?	14	(1)
Users of Accounting Information and Their Needs	14	(1)
Internal Users	14	(1)
External Users	14	(1)
Business Strategy: To Build or Not to Build?	15	(1)
Financial Statements: How Accountants Communicate	16	(5)
The Accounting Equation and the Balance Sheet	17	(2)
The Income Statement	19	(1)
The Statement of Retained Earnings	20	(1)
Accounting for Your Decisions: You Are a Potential Stockholder	21	(1)
Relationships Among Winnebago Industries' Financial Statements	21	(1)
The Conceptual Framework: Foundation for Financial Statements	22	(2)
Accounting as a Social Science	23	(1)
Who Determines the Rules of the Game?	24	(1)
The Accounting Profession	24	(5)
Employment by Private Business	24	(1)
Employment by Nonbusiness Entities	25	(1)
Employment in Public Accounting	25	(3)
Accountants in Education	28	(1)
Accounting as a Career	28	(1)
Introduction to Ethics in Accounting	28	(1)
Accounting for Your Decisions: You Are a Student	29	(3)
Identification	30	(1)
Analysis	30	(1)
Resolution	31	(1)
Accountants and Ethical Judgments	31	(1)
The Changing Face of the Accounting Profession	32	(1)
A Final Note About Winnebago Industries	32	(24)
CHAPTER 2 Financial Statements and the Annual Report	56	(50)
Focus on Financial Results: Monaco Coach Corporation	57	(1)
What External Decision Makers Want to Know About Financial Statements	58	(1)
Why Does Accounting Information Need to Be Useful? Objectives of Financial Reporting	59	(2)
The Primary Objective: Provide Information for Decision Making	59	(1)
Secondary Objective: Reflect Prospective Cash Flows to the Enterprise	60	(1)
Secondary Objective: Reflect the Enterprises Resources and Claims to Its Resources	60	(1)
What Makes Accounting Information Useful? Qualitative Characteristics	61	(1)
Understandability	61	(1)
Relevance	61	(1)
Accounting for Your Decisions: You Are the Stockholder	62	(2)
Reliability	62	(1)
Comparability and Consistency	62	(2)
Materiality	64	(1)
Conservatism	64	(1)
Financial Reporting: An International Perspective	64	(1)
The Classified Balance Sheet	65	(5)
What Are the Parts of the Balance Sheet? Understanding the Operating Cycle	65	(2)
Current Assets	67	(1)
Noncurrent Assets	68	(1)
Accounting for Your Decisions	69	(1)
Current Liabilities	69	(1)
Long-Term Liabilities	70	(1)
Stockholders' Equity	70	(1)
Using a Classified Balance Sheet	70	(1)
Working Capital	70	(1)
Current Ratio	71	(1)
The Income Statement	71	(4)
What Appears on the Income Statement?	71	(1)
Ethics in Accounting	72	(1)
Format of the Income Statement	72	(2)
Using a Multiple-Step Income Statement	74	(1)
The Statement of Retained Earnings	75	(1)
The Statement of Cash Flows	75	(2)
The Cash Flow Statement for Dixon Sporting Goods	75	(2)
The Financial Statements for Monaco Coach Corporation	77	(5)
Monaco Coach's Balance Sheet	77	(2)
Monaco Coach's Income Statement	79	(1)
Other Elements of an Annual Report	79	(3)
Business Strategy: Focused on Growth	82	(1)
Ratios for Decision Making	83	(23)
CHAPTER 3 Processing Accounting Information	106	(50)
Focus on Financial Results: General Mills	107	(1)
What External Decision Makers Want To Know About How Accounting Information Is Processed	108	(1)
Economic Events: The Basis for Recording Transactions	109	(7)
External and Internal Events	109	(1)
The Role of Source Documents in Recording Transactions	110	(1)
Analyzing the Effects of Transactions on the Accounting Equation	110	(4)
Balance Sheet and Income Statement for the Health Club	114	(2)
Business Strategy: General Mills	116	(1)
The Account: The Basic Unit for Recording Transactions	117	(2)
Chart of Accounts	117	(1)
The General Ledger	117	(2)
Processing Accounting Information	119	(4)
APPENDIX: Accounting Tools: The Double-Entry System	123	(1)
The T Account	123	(1)
Debits and Credits	123	(1)
Accounting for Your Decisions: You Are a Student	124	(4)
Debits and Credits for Revenues, Expenses, and Dividends	124	(1)
Summary of the Rules for Increasing and Decreasing Accounts	125	(1)
Normal Account Balances	125	(1)
Debits Aren't Bad, and Credits Aren't Good	125	(1)
Debits and Credits Applied to Transactions	125	(1)
Transactions for Glengarry Health Club	126	(2)
The Journal: The Firm's Chronological Record of Transactions	128	(2)
The Trial Balance	130	(1)
Accounting for Your Decisions: You Are the Manager	131	(1)
Accounting for Your Decisions: You Are the Stockholder	132	(24)
CHAPTER 4 Income Measurement and Accrual Accounting	156	(57)
Focus on Financial Results: McDonald's	157	(1)
What External Decision Makers Want to Know About Accrual Accounting	158	(1)
Recognition and Measurement in Financial Statements	159	(2)
Recognition	159	(1)
Measurement	159	(2)
Summary of Recognition and Measurement in Financial Statements	161	(1)
The Accrual Basis of Accounting	161	(2)
Comparing the Cash and Accrual Bases of Accounting	161	(1)
What the Income Statement and the Statement of Cash Flows Reveal	162	(1)
Business Strategy: Adding Customers to Restaurants	163	(2)
Accrual Accounting and Time Periods	164	(1)
The Revenue Recognition Principle	164	(1)
Accounting for Your Decisions: You Are the Marketing Manager	165	(1)
Accounting for Your Decisions: You Are the Stockholder	165	(3)
Other Applications of the Revenue Recognition Principle	166	(2)
Ethics in Accounting: Bristol-Myers Squibb 167
Expense Recognition and the Matching Principle	168	(2)
Accrual Accounting and Adjustments	170	(1)
Types of Adjustments	170	(1)
Accounting for Your Decisions: You Are the Store Manager	171	(3)
Accounting for Your Decisions: You Are the Banker	174	(8)
Accruals and Deferrals	176	(1)
Summary of Adjustments	177	(1)
Comprehensive Example of Adjustments	178	(1)
Adjustments at the End of January	178	(2)
Income Statement and Balance Sheet for Duffy Transit	180	(1)
Ethical Considerations for a Company on the Accrual Basis	181	(1)
The Accounting Cycle	182	(34)
The Use of a Work Sheet	182	(1)
The Closing Process	182	(1)
Interim Financial Statements	183	(30)
Part I Integrative Problem	213	(2)
PART II ACCOUNTING FOR ASSETS	215	(200)
CHAPTER 5 Cash and Internal Control	216	(34)
Focus on Financial Results	217	(1)
What External Decision Makers Want to Know About Cash and Internal Control	218	(1)
What Constitutes Cash?	219	(1)
Cash Equivalents and the Statement of Cash Flows	219	(1)
Control Over Cash	220	(1)
Cash Management	220	(1)
Business Strategy: Putting Cash to Use	221	(4)
Reading a Bank Statement	221	(2)
The Bank Reconciliation	223	(2)
The Bank Reconciliation and the Need for Adjustments to the Records	225	(1)
Establishing a Petty Cash Fund	225	(1)
An Introduction to Internal Control	225	(4)
The Report of Management: Showing Responsibility for Control	226	(1)
The Control Environment	227	(1)
The Accounting System	228	(1)
Internal Control Procedures	228	(1)
Accounting for Your Decisions: You Are the Chief Financial Officer	229	(2)
Limitations on Internal Control	230	(1)
Computerized Business Documents and Internal Control	231	(19)
Control Over Cash Receipts	231	(1)
The Role of Computerized Business Documents in Controlling Cash Disbursements	232	(18)
CHAPTER 6 Investments and Receivables	250	(46)
Focus on Financial Results: PepsiCo	250	(2)
What External Decision Makers Want to Know About Short-Term Investments and Receivables	252	(1)
Accounting for Investments	253	(1)
Investments in Highly Liquid Financial Instruments	254	(1)
Investing Idle Cash	254	(1)
Accounting for an Investment in a Certificate of Deposit (CD),	254	(1)
Investments in Stocks and Bonds	255	(1)
Investments Without Significant Influence	256	(5)
Investments in Held-to-Maturity Securities	256	(1)
Investments in Trading Securities	257	(3)
Investments in Available-for-Sale Securities	260	(1)
Business Strategy: Adding Brands, Growing Sales, and Cutting Costs	261	(2)
Summary of Accounting and Reporting Requirements	262	(1)
The Controversy over Fair Value Accounting	262	(1)
Accounts Receivable	263	(2)
The Use of a Subsidiary Ledger	263	(1)
The Valuation of Accounts Receivable	264	(1)
Two Methods to Account for Bad Debts	264	(1)
Accounting for Your Decisions: You Are the Credit Manager	265	(2)
Write-Offs of Uncollectible Accounts with the Allowance Method	266	(1)
Two Approaches to the Allowance Method of Accounting for Bad Debts	266	(1)
Accounting for Your Decisions: You Are the Owner	267	(3)
Analyzing the Accounts Receivable Rate of Collection	270	(1)
Notes Receivable	270	(3)
Important Terms Connected with Promissory Notes	270	(1)
Interest-Bearing Notes	271	(1)
Non-Interest-Bearing Notes	272	(1)
Accelerating the Inflow of Cash from Sales	273	(2)
Credit Card Sales	273	(2)
Discounting Notes Receivable	275	(1)
How Liquid Assets Affect the Cash Flows Statement	275	(1)
Ratios for Decision Making: Reporting and Analyzing Financial Statement Information Related to a Company's Accounts Receivable	276	(20)
CHAPTER 7 Inventories and Cost of Goods Sold	296	(70)
Focus on Financial Results: Circuit City	297	(1)
What External Decision Makers Want to Know About
Inventory	298	(1)
The Nature of Inventory	299	(2)
The Income Statement for a Merchandiser	301	(1)
Net Sales of Merchandise	301	(1)
Sales Returns and Allowances	301	(1)
Credit Terms and Sales Discounts	302	(1)
The Cost of Goods Sold	302	(3)
The Cost of Goods Sold Model	303	(1)
Inventory Systems: Perpetual and Periodic	304	(1)
Accounting for Your Decisions: You Are the Entrepreneur	305	(2)
Beginning and Ending Inventories in a Periodic System	306	(1)
The Cost of Goods Purchased	306	(1)
Accounting for Your Decisions: You Are the President	307	(3)
Inventory Valuation and the Measurement of Income	310	(1)
Inventory Costs: What Should Be Included?	310	(1)
Inventory Costing Methods with a Periodic System	311	(1)
Business Strategy: Capitalizing on the Digital Age	311	(4)
Specific Identification Method	312	(1)
Weighted Average Cost Method	313	(1)
First-In, First-Out Method (FIFO)	314	(1)
Last-In, First-Out Method (LIFO)	314	(1)
Accounting for Your Decisions: You Are the Controller	315	(1)
Selecting an Inventory Costing Method	315	(4)
Costing Methods and Cash Flow	316	(1)
LIFO Liquidation	317	(1)
The LIFO Reserve: Estimating LIFO's Effect on Income and on Taxes Paid for Winnebago Industries	317	(1)
Costing Methods and Inventory Profits	318	(1)
Accounting for Your Decisions: You Are a Student	319	(6)
Changing Inventory Methods	319	(1)
Inventory Valuation in Other Countries	320	(1)
Inventory Errors	320	(3)
Valuing Inventory at Lower of Cost or Market	323	(1)
Why Replacement Cost Is Used as a Measure of Market	323	(1)
Conservism Is the Basis for the Lower-of-Cost-or-Market Rule	324	(1)
Application of the LCM Rule	325	(1)
Methods for Estimating Inventory Value	325	(3)
Gross Profit Method	326	(1)
Retail Inventory Method	327	(1)
Analyzing the Management of Inventory Turnover	328	(1)
How Inventories Affect the Cash Flows Statement	329	(1)
Ratios for Decision Making	330	(6)
APPENDIX: Accounting Tools: Inventory Costing Methods with the Use of a Perpetual Inventory System	336	(30)
CHAPTER 8 Operating Assets: Property, Plant, and Equipment, Natural Resources, and Intangibles	366	(46)
Focus on Financial Results: Walt Disney Company	367	(1)
What External Decision Makers Want to Know About Operating Assets	368	(1)
Operating Assets: Property, Plant, and Equipment	369	(1)
Balance Sheet Presentation	369	(1)
Acquisition of Property, Plant, and Equipment	369	(1)
Accounting for Your Decisions: You Are an Attorney	370	(9)
Challenges to Internal Decision Makers: Use, Depreciation, and Disposal of Property, Plant, and Equipment	372	(4)
Accounting for Your Decisions: You Are the Sole Owner	376	(3)
Accounting for Your Decisions: You Are the Owner	379	(2)
Environmental Aspects of Operating Assets	379	(1)
Disposal of Property, Plant, and Equipment	379	(2)
Operating Assets: Natural Resources	381	(1)
Balance Sheet Presentation	381	(1)
Depletion of Natural Resources	381	(1)
Operating Assets: Intangible Assets	382	(4)
Balance Sheet Presentation	383	(1)
Acquisition Cost of Intangible Assets	384	(2)
Business Strategy: Valuing Intangible Assets	386	(2)
Amortization of Intangibles	386	(2)
Ethics in Accounting: AOL Time Warner	388	(1)
How Long-Term Assets Affect the Statement of Cash Flows	388	(2)
Analyzing Long-Term Assets for Average Life and Asset Turnover	390	(1)
Accounting for Your Decisions: You Are the Student Intern	391	(2)
Ratios for Decision Making	393	(19)
Part II Integrative Problem	412	(3)
PAT III ACCOUNTING FOR LIABILITIES AND OWNERS' EQUITY	415	(176)
CHAPTER 9 Current Liabilities, Contingencies, and the Time Value of Money	416	(68)
Focus on Financial Results: J.C. Penney	417	(1)
What External Decision Makers Want to Know About Current Liabilities	418	(1)
Current Liabilities	419	(2)
Ethics in Accounting: Rent-Way	421	(4)
Accounts Payable	422	(1)
Notes Payable	422	(1)
Current Maturities of Long-Term Debt	423	(1)
Taxes Payable	424	(1)
Other Accrued Liabilities	424	(1)
Accounting for Your Decisions: You Are a Student	425	(1)
Reading the Statement of Cash Flows for Changes in Current Liabilities	425	(1)
Contingent Liabilities	426	(2)
Contingent Liabilities That Are Recorded	427	(1)
Business Strategy: Effectively Expanding into Different Market Segments	428	(3)
Contingent Liabilities That Are Disclosed	430	(1)
Contingent Liabilities versus Contingent Assets	430	(1)
Accounting for Your Decisions: You Are the CEO	431	(2)
Time Value of Money Concepts	433	(2)
Simple Interest	434	(1)
Compound Interest	434	(1)
Interest Compounding	434	(1)
Accounting for Your Decisions You Invest Some Unexpected Cash	435	(9)
Future Value of a Single Amount	435	(3)
Present Value of a Single Amount	438	(1)
Future Value of an Annuity	439	(2)
Present Value of an Annuity	441	(1)
Solving for Unknowns	442	(2)
Ratios for Decision Making	444	(10)
APPENDIX A: Accounting Tools: Payroll Accounting	454	(3)
APPENDIX B: Accounting Tools: Using Excel for Problems Involving Interest Calculations	457	(27)
CHAPTER 10 Long-Term Liabilities	484	(52)
Focus on Financial Results: Coca-Cola	485	(1)
What External Decision Makers Want to Know About Long-Term Liabilities	486	(1)
Balance Sheet Presentation	487	(1)
Ethics in Accounting. Enron Corporation	487	(2)
Bonds Payable	489	(3)
Characteristics of Bonds	489	(1)
Issuance of Bonds	490	(1)
Factors Affecting Bond Price	490	(2)
Accounting for Your Decisions: You Rate the Bonds	492	(8)
Premium or Discount on Bonds	493	(1)
Bond Amortization	494	(4)
Redemption of Bonds	498	(2)
Business Strategy: Product Strategy to Meet Competition	500	(1)
Liability for Leases	500	(1)
Leases	500	(1)
Accounting for Your Decisions: Should You Lease or Buy?	501	(4)
How Long-Term Liabilities Affect the Statement of Cash Flows	505	(2)
Analyzing Debt to Assess a Firm's Ability to Pay Its Liabilities	507	(1)
Ratios for Decision Making	508	(4)
Accounting Tools: Other Liabilities	512	(24)
CHAPTER 11 Stockholders' Equity	536	(53)
Focus on Financial Results: Southwest Airlines	537	(1)
What External Decision Makers Want To Know About Stockholders' Equity	538	(1)
An Overview of Stockholders' Equity	539	(1)
Equity as a Source of Financing	539	(1)
Accounting far Your Decisions: You Are the Investor	539	(6)
Stockholders' Equity on the Balance Sheet	541	(1)
How Income and Dividends Affect Retained Earnings	541	(1)
Identifying the Components of the Stockholders' Equity Section of the Balance Sheet	541	(4)
Business Strategy: Southwest's Culture and Compensation	545	(1)
What Is Preferred Stock?	545	(1)
Issuance of Stock	546	(1)
Stock Issued for Cash	546	(1)
Stock Issued for Noncash Consideration	547	(1)
What Is Treasury Stock?	547	(2)
Retirement of Stock	549	(1)
Dividends: Distribution of Income to Shareholders	549	(5)
Cash Dividends	549	(1)
Cash Dividends for Preferred and Common Stock	550	(1)
Stock Dividends	551	(2)
Stock Splits	553	(1)
Statement of Stockholders' Equity	554	(1)
What Is Comprehensive Income?	555	(1)
Ethics in Accounting: Boston Chicken	556	(1)
What Analyzing Owners' Equity Reveals About a Firm's Value	557	(2)
Book Value per Share	557	(1)
Calculating Book Value When Preferred Stock Is Present	557	(2)
Market Value per Share	559	(1)
How Changes in Stockholders' Equity Affect the Statement of Cash Flows	559	(2)
Ratios for Decision Making	561	(5)
APPENIDX: Accounting Tools: Unincorporated Businesses	566	(23)
Part III Integrative Problem	589	(2)
PART IV ADDITIONAL TOPICS IN FINANCIAL REPORTING	591	(130)
CHAPTER 12 The Statement of Cash Flows	592	(62)
Focus of Financial Results: IBM	593	(1)
What External Decision Makers Want to Know About the Statement of Cash Flows	594	(1)
Cash Flows and Accrual Accounting	595	(1)
Purpose of the Statement of Cash Flows	596	(1)
An Example	596	(1)
Reporting Requirements for a Statement of Cash Flows	597	(4)
The Definition of Cash: Cash and Cash Equivalents	598	(1)
Classification of Cash Flows	599	(2)
Business Strategy: Investing in the Future	601	(5)
Two Methods of Reporting Cash Flow from Operating Activities	602	(3)
Noncash Investing and Financing Activities	605	(1)
How the Statement of Cash Flows Is Put Together	606	(6)
The Accounting Equation and the Statement of Cash Flows	606	(2)
Preparing the Statement of Cash Flows: Direct Method	608	(4)
Accounting for Your Decisions: You Are an Entrepreneur	612	(4)
Accounting for Your Decisions: You Decide for Your Investment Club	616	(4)
An Approach to Preparing the Statement of Cash Flows: Indirect Method	617	(2)
Comparison of the Indirect and Direct Methods	619	(1)
The Use of Cash Flow Information	620	(2)
Creditors and Cash Flow Adequacy	620	(1)
Stockholders and Cash Flow per Share	621	(1)
Accounting for Your Decisions: You Are the Banker	622	(1)
Ratios for Decision Making	622	(4)
APPENDIX: Accounting Tools: A Work-Sheet Approach to the Statement of Cash Flows	626	(28)
CHAPTER 13 Financial Statement Analysis	654	(64)
Focus on Financial Results: Wm. Wrigley Jr. Company	655	(1)
Precautions in Statement Analysis	656	(1)
Watch for Alternative Accounting Principles	656	(1)
Take Care When Making Comparisons	656	(1)
Understand the Possible Effects of Inflation	657	(1)
Business Strategy: Focus on Core Values	657	(1)
Analysis of Comparative and Common-Size Statements	658	(8)
Horizontal Analysis	658	(3)
Vertical Analysis	661	(5)
Liquidity Analysis and the Management of Working Capital	666	(4)
Working Capital	666	(1)
Current Ratio	666	(1)
Acid-Test Ratio	667	(1)
Cash Flow from Operations to Current Liabilities	668	(1)
Accounts Receivable Analysis	669	(1)
Inventory Analysis	669	(1)
Accounting for Your Decisions: You Examine Your Business's Trends	670	(1)
Accounting for Your Decisions: You Are the Analyst	670	(1)
Cash Operating Cycle	671	(1)
Solvency Analysis	671	(3)
Debt-to-Equity Ratio	672	(1)
Times Interest Earned	672	(1)
Debt Service Coverage	673	(1)
Cash Flow from Operations to Capital Expenditures Ratio	673	(1)
Profitability Analysis	674	(5)
Rate of Return on Assets	674	(1)
Components of Return on Assets	675	(1)
Return on Common Stockholders' Equity	676	(1)
Return on Assets, Return on Equity, and Leverage	677	(1)
Earnings per Share	678	(1)
Price/Earnings Ratio	678	(1)
Accounting for Your Decisions: You Are the CEO	679	(3)
Dividend Ratios	679	(1)
Summary of Selected Financial Ratios	680	(2)
Accounting for Your Decisions: You Decide on a Stock Purchase	682	(6)
APPENDIX: Accounting Tools: Reporting and Analyzing Other Income Statement Items	688	(30)
Part IV Integrative Problem	718	(3)
APPENDIX A: WINNEBAGO INDUSTRIES 2002 ANNUAL REPORT	721	(44)
APPENDIX B: MONACO COACH CORPORATION 2002 ANNUAL REPORT	765
GLOSSARY	G-1
COMPANY INDEX	I-1
SUBJECT INDEX	I-3