Financial Accounting

by Warren/Reeve/Fess

• ISBN13: 9780324188035
• ISBN10: 032418803X
• Format: Hardcover
• Copyright: 2004-01-07
• Publisher: South-Western College Pub

Summary

FINANCIAL ACCOUNTING provides a solid foundation of accounting concepts with unique features to show how professionals can use accounting to understand business. FINANCIAL ACCOUNTING, 9th Edition, uses the preparation of financial statements as the framework for understanding what accounting is all about.

Table of Contents

1. Introduction to Accounting and Business	1	(46)
Nature of a Business	2	(6)
Types of Businesses	2	(1)
Types of Business Organizations	3	(1)
Business Strategies	4	(2)
Value Chain of a Business	6	(1)
Business Stakeholders	6	(2)
The Role of Accounting in Business	8	(1)
Business Ethics	8	(2)
Profession of Accounting	10	(2)
Private Accounting	11	(1)
Public Accounting	11	(1)
Specialized Accounting Fields	11	(1)
Generally Accepted Accounting Principles	12	(1)
Business Entity Concept	13	(1)
The Cost Concept	13	(1)
Assets, Liabilities, and Owner's Equity	13	(1)
Business Transactions and the Accounting Equation	14	(5)
Financial statements	19	(3)
Income Statement	19	(1)
Statement of Owner's Equity	19	(2)
Balance Sheet	21	(1)
Statement of Cash Flows	21	(1)
Financial Analysis and Interpretation	22	(25)
2. Analyzing Transactions	47	(54)
Usefulness of an Account	48	(1)
Characteristics of an Account	49	(1)
Analyzing and Summarizing Transactions in Accounts	50	(5)
Transactions and Balance Sheet Accounts	50	(2)
Income Statement Accounts	52	(2)
Withdrawals by the Owner	54	(1)
Normal Balances of Accounts	55	(1)
Illustration of Analyzing and Summarizing Transactions	55	(13)
Trial Balance	68	(1)
Discovery and Correction of Errors	69	(2)
Discovery of Errors	69	(1)
Correction of Errors	70	(1)
Financial Analysis and Interpretation	71	(30)
3. The Matching Concept and the Adjusting Process	101	(38)
The Matching Concept	102	(1)
Nature of the Adjusting Process	103	(1)
Recording Adjusting Entries	104	(9)
Deferred Expenses (Prepaid Expenses)	105	(2)
Deferred Revenue (Unearned Revenue)	107	(1)
Accrued Expenses (Accrued Liabilities)	108	(3)
Accrued Revenues (Accrued Assets)	111	(1)
Fixed Assets	112	(1)
Summary of Adjustment Process	113	(4)
Financial Analysis and Interpretation	117	(22)
4. Completing the Accounting Cycle	139	(43)
Accounting Cycle	140	(1)
Work Sheet	140	(3)
Unadjusted Trial Balance Columns	141	(1)
Adjustments Columns	142	(1)
Adjusted Trial Balance Columns	142	(1)
Income Statement and Balance Sheet Columns	143	(1)
Financial Statements	143	(1)
Income Statement	144	(1)
Statement of Owner's Equity	144	(1)
Balance Sheet	144	(1)
Adjusting and Closing Entries	144D	(9)
Journalizing and Posting Closing Entries	145	(7)
Post-Closing Trial Balance	152	(1)
Fiscal Year	153	(1)
Financial Analysis and Interpretation	154	(1)
Appendix: Reversing Entries	155	(22)
Comprehensive Problem 1	177	(5)
Practice set: Tom's Asphalt
This set is a service business operated as a proprietorship. It includes a narrative of transactions and instructions for an optional solution with no debits and credits. This set can be solved manually or with the P.A.S.S. software.
5. Accounting Systems and Internal Controls	182	(48)
Basic Accounting systems	183	(1)
Internal Control	184	(6)
Objectives of Internal Control	184	(1)
Elements of Internal Control	185	(5)
Manual Accounting systems	190	(10)
Subsidiary Ledgers	190	(1)
Special Journals	190	(2)
Manual Accounting System: The Revenue and Collection Cycle	192	(4)
Manual Accounting System: The Purchase and Payment Cycle	196	(4)
Adapting Manual Accounting Systems	200	(2)
Additional Subsidiary Ledgers	200	(1)
Modified Special Journals	201	(1)
Computerized Accounting systems	202	(2)
E-Commerce	204	(26)
6. Accounting for Merchandising Businesses	230	(53)
Nature of Merchandising Businesses	231	(1)
Financial Statements for a Merchandising Business	232	(6)
Multiple-Step Income Statement	232	(4)
Single-Step Income Statement	236	(1)
Statement of Owner's Equity	236	(1)
Balance Sheet	236	(2)
Sales Transactions	238	(4)
Cash Sales	238	(1)
Sales on Account	239	(1)
Sales Discounts	239	(2)
Sales Returns and Allowances	241	(1)
Purchase Transactions	242	(3)
Purchases Discounts	242	(1)
Purchases Returns and Allowances	243	(2)
Transportation Costs, Sales Taxes, and Trade Discounts	245	(3)
Transportations Costs	245	(1)
Sales Taxes	246	(1)
Trade Discounts	247	(1)
Illustration of Accounting for Merchandise Transactions	248	(1)
Chart of Accounts for a Merchandising Business	249	(1)
The Accounting Cycle for a Merchandising Business	250	(1)
Merchandise Inventory Shrinkage	250	(1)
Work Sheet	251	(1)
Closing Entries	251	(1)
Financial Analysis and Interpretation	251	(1)
Appendix 1. Accounting Systems for Merchandisers	252	(4)
Manual Accounting System	252	(2)
Computerized Accounting Systems	254	(2)
Appendix 2. Work Sheet and Adjusting and Goring Entries for a Merchandising Business	256	(22)
Comprehensive Problem 2	278	(5)
Practice Set: Specialty Sports
This set is a merchandising business operated as a proprietorship. It includes business documents, and it can be solved manually or with the P.A.S.S. software.
7. Cash	283	(34)
Nature of Cash and the Importance of Controls Over Cash	284	(1)
Control of Cash Receipts	285	(2)
Controlling Cash Received from Cash Sales	285	(1)
Controlling Cash Received in the Mail	286	(1)
Internal Control of Cash Payments	287	(2)
Basic Features of the Voucher System	287	(2)
Electronic Funds Transfer	289	(1)
Bank Accounts: Their Nature and Use as a Control Over Cash	289	(4)
Business Bank Accounts	289	(1)
Bank Statement	290	(2)
Bank Accounts as a Control Over Cash	292	(1)
Bank Reconciliation	293	(2)
Petty Cash	295	(1)
Presentation of Cash on the Balance Sheet	296	(2)
Financial Analysis and Interpretation	298	(19)
8. Receivables	317	(37)
Classification of Receivables	318	(1)
Accounts Receivable	318	(1)
Notes Receivable	318	(1)
Other Receivables	318	(1)
Internal Control of Receivables	319	(1)
Uncollectible Receivables	320	(1)
Allowance Method of Accounting for Uncollectibles	321	(4)
Write-Offs to the Allowance Account	322	(1)
Estimating Uncollectibles	323	(2)
Direct Write-Off Method of Accounting for Uncollectibles	325	(1)
Characteristics of Notes Receivable	326	(2)
Due Date	327	(1)
Interest	328	(1)
Maturity Value	328	(1)
Accounting for Notes Receivable	328	(2)
Receivables on the Balance sheet	330	(1)
Financial Analysis and Interpretation	330	(2)
Appendix: Discounting Notes Receivable	332	(22)
9. Inventories	354	(38)
Internal Control of Inventories	355	(2)
Effect of Inventory Errors on Financial statements	357	(1)
Inventory Cost Flow Assumptions	358	(2)
Inventory Costing Methods Under a Perpetual Inventory System	360	(3)
First-In, First-Out Method	360	(1)
Last-In, First-Out Method	361	(1)
Average Cost Method	362	(1)
Computerized Perpetual Inventory systems	362	(1)
Inventory Costing Methods Under a Periodic Inventory System	363	(2)
First-In, First-Out Method	363	(1)
Last-In, First-Out Method	364	(1)
Average Cost Method	364	(1)
Comparing Inventory Costing Methods	365	(2)
Use of the First-In, First-Out Method	366	(1)
Use of the Last-In, First-Out Method	366	(1)
Use of the Average Cost Method	367	(1)
Valuation of Inventory at Other than Cost	367	(1)
Valuation at Lower of Cost or Market	367	(1)
Valuation at Net Realizable Value	368	(1)
Presenting Merchandise Inventory on the Balance Sheet	368	(1)
Estimating Inventory Cost	369	(2)
Retail Method of Inventory Costing	370	(1)
Gross Profit Method of Estimating Inventories	371	(1)
Financial Analysis and Interpretation	371	(21)
10. Fixed Assets and Intangible Assets	392	(42)
Nature of Fixed Assets	393	(4)
Classifying Costs	394	(1)
The Cost of Fixed Assets	394	(1)
Donated Assets	395	(1)
Nature of Depreciation	395	(2)
Accounting for Depreciation	397	(5)
Straight-Line Method	398	(1)
Units-of-Production Method	399	(1)
Declining-Balance Method	399	(1)
Comparing Depreciation Methods	400	(1)
Depreciation for Federal Income Tax	400	(1)
Revising Depreciation Estimates	401	(1)
Composite-Rate Method	402	(1)
Capital and Revenue Expenditures	402	(2)
Stages of Acquiring Fixed Assets	402	(1)
Fixed Asset Components	403	(1)
Disposal of Fixed Assets	404	(4)
Discarding Fixed Assets	405	(1)
Selling Fixed Assets	405	(1)
Exchanging Similar Fixed Assets	406	(2)
Leasing Fixed Assets	408	(1)
Internal Control of Fixed Assets	409	(1)
Natural Resources	410	(1)
Intangible Assets	410	(4)
Patents	411	(1)
Copyrights and Trademarks	411	(1)
Goodwill	412	(2)
Financial Reporting for Fixed Assets and Intangible Assets	414	(1)
Financial Analysis and Interpretation	414	(2)
Appendix: Sum-of-the-Years-Digits Depreciation	416	(18)
11. Current Liabilities	434	(47)
The Nature of Current Liabilities	435	(1)
Short-Term Notes Payable and Current Portion of Long-Term Debt	436	(2)
Short-Term Notes Payable	436	(1)
Current Portion of Long-Term Debt	437	(1)
Contingent Liabilities	438	(1)
Payroll and Payroll Taxes	439	(7)
Liability for Employee Earnings	440	(1)
Deductions from Employee Earnings	441	(3)
Computing Employee Net Pay	444	(1)
Liability for Employer's Payroll Taxes	444	(2)
Accounting Systems for Payroll and Payroll Taxes	446	(7)
Payroll Register	446	(2)
Employee's Earnings Record	448	(1)
Payroll Checks	448	(1)
Payroll System Diagram	449	(1)
Internal Controls for Payroll Systems	449	(4)
Employees' Fringe Benefits	453	(2)
Vacation Pay	453	(1)
Pensions	454	(1)
Postretirement Benefits Other Than Pensions	455	(1)
Financial Analysis and Interpretation	455	(19)
Comprehensive Problem 3	474	(7)
Practice set: Groom and Board
This set includes payroll transactions for a merchandising business operated as a proprietorship. It includes business documents, and it can be solved manually or with the P.A.S.S. software.
Practice Set: The Coddled Canine with Peachtree® Accounting Software
This set includes payroll transactions for a merchandising business operated as a proprietorship. It can be solved with the Peachtree software.
12. Corporations: Organization, Capital Stock Transactions, and Dividends	481	(36)
Nature of a Corporation	482	(2)
Characteristics of a Corporation	482	(1)
Forming a Corporation	483	(1)
Stockholders' Equity	484	(2)
Sources of Paid-In Capital	486	(2)
Stock	486	(2)
Issuing Stock	488	(3)
Premium on Stock	489	(1)
No-Par Stock	490	(1)
Treasury Stock Transactions	491	(1)
Stock Splits	492	(1)
Accounting for Dividends	493	(2)
Cash Dividends	403	(91)
Stock Dividends	494	(1)
Reporting Stockholders' Equity	495	(3)
Stockholders' Equity in the Balance Sheet	496	(1)
Reporting Retained Earnings	497	(1)
Financial Analysis and Interpretation	498	(19)
13. Accounting for Partnerships and Limited Liability Corporations	517	(42)
Alternate Forms of Business Entities	518	(13)
Partnerships	519	(1)
Limited Liability Corporations	520	(1)
Comparison of Alternate Entity Characteristics	521	(10)
Equity Reporting for Alternate Entity Forms	531
Equity Reporting for Proprietorships	522	(1)
Equity Reporting for Corporations	522	(1)
Equity Reporting for Partnerships and Limited Liability Corporations	522	(1)
Accounting for Partnerships and Limited Liability Corporations	523	(2)
Forming a Partnership	525	(1)
Dividing Income	525	(3)
Dividing Income-Services of Partners	525	(1)
Dividing Income-Services of Partners and Investments	526	(1)
Dividing Income-Allowances Exceed Net Income	527	(1)
Partnership Dissolution	528	(3)
Admitting a Partner	528	(3)
Withdrawal of a Partner	531	(1)
Death of a Partner	531	(1)
Liquidating Partnerships	531	(5)
Gain on Realization	532	(1)
Loss on Realization	533	(1)
Loss on Realization-Capital Deficiency	534	(2)
Errors in Liquidation	536	(1)
Business Life Cycle	536	(23)
14. Income Taxes, Unusual Income Items, and Investments in Stocks	559	(42)
Corporate Income Taxes	560	(4)
Payment of Income Taxes	560	(1)
Allocating Income Taxes	561	(2)
Reporting and Analyzing Taxes	563	(1)
Unusual Items Affecting the Income Statement	564	(4)
Unusual Items Affecting Income from Continuing Operations	564	(2)
Unusual Items Not Affecting Income from Continuing Operations	566	(2)
Reporting Unusual Below-the-Line Items	568	(1)
Earnings per Common Share	568	(2)
Comprehensive Income	570	(1)
Accounting for Investments in stocks	571	(4)
Short-Term Investments in Stocks	571	(2)
Long-Term Investments in Stocks	573	(2)
Sale of Investments in Stocks	575	(1)
Business Combinations	575	(3)
Mergers and Consolidations	575	(1)
Parent and Subsidiary Corporations	576	(1)
Consolidated Financial Statements	576	(2)
Financial Analysis and Interpretation	578	(23)
Practice Set: Nina's Decorating House
This set is a service and merchandising business operated as a corporation. It includes narrative for six months of transactions, which are to be recorded in a general journal. The set can be solved manually or with the P.A.S.S. software.
Practice Set: First Designs, Inc.
This set is a departmentalized merchandising business operated as a corporation. It includes a narrative of transactions, which are to be recorded in special journals. The set can be solved manually or with the P.A.S.S. software.
15. Bonds Payable and Investments in Bonds	601	(39)
Financing Corporations	602	(1)
Characteristics of Bonds Payable	603	(1)
The Present-Value Concept and Bonds Payable	604	(4)
Present Value of the Face Amount of Bonds	605	(1)
Present Value of the Periodic Bond Interest Payments	606	(2)
Accounting for Bonds Payable	608	(4)
Bonds Issued at Face Amount	608	(2)
Bonds Issued at a Discount	610	(1)
Amortizing a Bond Discount	610	(1)
Bonds Issued at a Premium	611	(1)
Amortizing a Bond Premium	611	(1)
Zero-Coupon Bonds	611	(1)
Bond Sinking Funds	612	(1)
Bond Redemption	613	(1)
Investments in Bonds	614	(2)
Accounting for Bond Investments-Purchase, Interest, and Amortization	614	(1)
Accounting for Bond Investments-Sale	615	(1)
Corporation Balance Sheet	616	(2)
Balance Sheet Presentation of Bonds Payable	616	(2)
Balance Sheet Presentation of Bond Investments	618	(1)
Financial Analysis and interpretation	618	(1)
Appendix: Effective Interest Rate Method of Amortization	619	(16)
Amortization of Discount by the Interest Method	619	(1)
Amortization of Premium by the Interest Method	620	(15)
Comprehensive Problem 4	635	(5)
16. Statement of Cash Flows	640	(51)
Reporting Cash Flows	641	(4)
Cash Flows from Operating Activities	642	(1)
Cash Flows from Investing Activities	643	(1)
Cash Flows from Financing Activities	643	(1)
Noncash Investing and Financing Activities	644	(1)
No Cash Flow per Share	644	(1)
Statement of Cash Flows-The Indirect Method	645	(9)
Retained Earnings	645	(6)
Common Stock	651	(1)
Bonds Payable	651	(1)
Building	652	(1)
Land	652	(1)
Preparing the Statement of Cash Flows	653	(1)
Statement of Cash Flows-The Direct Method	654	(4)
Cash Received from Customers	654	(1)
Cash Payments for Merchandise	655	(1)
Cash Payments for Operating Expenses	656	(1)
Gain on Sale of Land	657	(1)
Interest Expense	657	(1)
Cash Payments for Income Taxes	657	(1)
Reporting Cash Flows from Operating Activities Direct Method	657	(1)
Financial Analysis and Interpretation	658	(2)
Appendix: Work Sheet for Statement of Cash Flows	660	(31)
Work Sheet-Indirect Method	660	(3)
Work Sheet-Direct Method	663	(28)
17. Financial Statement Analysis	691
Basic Analytical Procedures	692	(5)
Horizontal Analysis	692	(2)
Vertical Analysis	694	(2)
Common-Size Statements	696	(1)
Other Analytical Measures	697	(1)
Solvency Analysis	697	(7)
Current Position Analysis	698	(1)
Accounts Receivable Analysis	699	(1)
Inventory Analysis	700	(1)
Ratio of Fixed Assets to Long-Term Liabilities	701	(1)
Ratio of Liabilities to stockholders' Equity	702	(1)
Number of Times Interest Charges Earned	702	(2)
Profitability Analysis	704	(4)
Ratio of Net Sales to Assets	704	(1)
Rate Earned on Total Assets	704	(1)
Rate Earned on Stockholders' Equity	705	(1)
Rate Earned on Common Stockholders' Equity	706	(1)
Earnings per Share on Common Stock	706	(1)
Price-Earnings Ratio	707	(1)
Dividends per share and Dividend Yield	707	(1)
Summary of Analytical Measures	708	(1)
Corporate Annual Reports	708
Management Discussion and Analysis	710	(1)
Independent Auditors' Report	710
Appendix A: Interest Tables A-	2
Appendix B: Alternative Methods of Recording Deferrals B-	1	(1)
Appendix C: Periodic Inventory systems for Merchandising Businesses C-	1	(1)
Appendix D: Foreign Currency Transactions D-	1	(1)
Appendix E: The Home Depot Annual Report E-	1	(1)
Glossary G-	1	(1)
Subject Index 1-	1	(10)
Company Index 1-	11