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1 Financial Accounting and Accounting Standards 2
We Can Do Better 2
Financial Reporting Environment 4
Parties Involved in Standard-Setting 7
Generally Accepted Accounting Principles 13
Major Challenges in Financial Reporting 15
IFRS Insights 29
2 Conceptual Framework for Financial Reporting 36
What is It? 36
Conceptual Framework 38
First Level: Basic Objective 40
Second Level: Fundamental Concepts 41
Third Level: Recognition and Measurement Concepts 49
FASB Codification 73
IFRS Insights 74
3 The Accounting Information System 78
Needed: A Reliable Information System 78
Accounting Information System 80
Record and Summarize Basic Transactions 87
Adjusting Entries 92
Preparing Financial Statements 104
Financial Statements for a Merchandising Company 110
Appendix 3A: Cash-Basis Accounting versus Accrual-Basis Accounting 113
Conversion from Cash Basis to Accrual Basis 115
Theoretical Weaknesses of the Cash Basis 118
Appendix 3B: Using Reversing Entries 119
Illustration of Reversing Entries—Accruals 119
Illustration of Reversing Entries—Deferrals 120
Summary of Reversing Entries 121
Appendix 3C: Using a Worksheet: The Accounting Cycle Revisited 121
Worksheet Columns 121
Adjustments Entered on the Worksheet 123
Preparing Financial Statements from a Worksheet 124
IFRS Insights 147
4 Income Statement and Related Information 152
Financial Statements are Changing 152
Income Statement 154
Format of the Income Statement 156
Reporting Various Income Items 162
Other Reporting Issues 170
FASB Codification 194
IFRS Insights 195
5 Balance Sheet and Statement of Cash Flows 200
Hey, It Doesn’t Balance! 200
Balance Sheet 202
Statement of Cash Flows 216
Additional Information 224
Appendix 5A: Ratio Analysis—A Reference 231
Using Ratios to Analyze Performance 231
FASB Codification 257
IFRS Insights 258
6 Accounting and the Time Value of Money 266
How Do I Measure That? 266
Basic Time Value Concepts 268
Single-Sum Problems 274
Annuities (Future Value) 279
Annuities (Present Value) 286
Other Time Value of Money Issues 291
FASB Codification 312
7 Cash and Receivables 324
Luck of the Irish 324
Cash 32
Receivables 329
Notes Receivable 338
Special Issues 343
Appendix 7A: Cash Controls 352
Using Bank Accounts 353
The Imprest Petty Cash System 353
Physical Protection of Cash Balances 355
Reconciliation of Bank Balances 355
Appendix 7B: Collectability Assessment Based on Expected Cash Flows 358
Measurement of Collectibility 358
FASB Codification 382
IFRS Insights 383
8 Valuation of Inventories: A Cost-Basis Approach 386
To Switch or Not to Switch 386
Inventory Issues 388
Goods and Costs Included in Inventory 393
Which Cost Flow Assumption to Adopt? 398
Special Issues Related to LIFO 402
Effect of Inventory Errors 416
FASB Codification 441
9 Inventories: Additional Valuation Issues 442
Not What It Seems to Be 442
Lower-of-Cost-or-Net Realizable Value 444
Lower-of-Cost-or-Market 448
Other Valuation Approaches 452
The Gross Profit Method of Estimating Inventory 455
Retail Inventory Method 458
Presentation and Analysis 464
Appendix 9A: LIFO Retail Methods 466
Stable Prices—LIFO Retail Method 466
Fluctuating Prices—Dollar-Value LIFO Retail Method 467
Subsequent Adjustments Under Dollar-Value LIFO Retail 469
Changing from Conventional Retail to LIFO 470
FASB Codification 493
IFRS Insights 494
10 Acquisition and Disposition of Property, Plant, and Equipment 502
Watch Your Spending 502
Property, Plant, and Equipment 504
Valuation of Property, Plant, and Equipment 513
Costs Subsequent to Acquisition 522
Disposition of Property, Plant, and Equipment 526
FASB Codification 550
11 Depreciation, Impairments, and Depletion 552
Here Come the Write-Offs 552
Depreciation—A Method of Cost Allocation 554
Special Depreciation Methods and Other Issues 559
Impairments 565
Depletion 568
Presentation and Analysis 573
Appendix 11A: Income Tax Depreciation 576
Modified Accelerated Cost Recovery System 577
Optional Straight-Line Method 579
Tax versus Book Depreciation 579
FASB Codification 600
IFRS Insights 601
12 Intangible Assets 610
Is This Sustainable? 610
Intangible Asset Issues 612
Types of Intangible Assets 614
Impairment and Presentation of Intangible Assets 622
Research and Development Costs 628
FASB Codification 650
IFRS Insights 652
13 Current Liabilities and Contingencies 658
Now You See It, Now You Don’t 658
Current Liabilities 660
Contingencies 673
Presentation and Analysis 684
FASB Codification 708
IFRS Insights 710
14 Long-Term Liabilities 718
Going Long 718
Bonds Payable 720
Long-Term Notes Payable 731
Reporting and Analyzing Liabilities 739
Appendix 14A: Troubled-Debt Restructuring 743
Settlement of Debt 744
Modification of Terms 745
Concluding Remarks 749
FASB Codification 767
IFRS Insights 768
15 Stockholders’ Equity 774
It’s a Global Market 774
Corporate Capital 776
Reacquisition of Shares 786
Dividend Policy 791
Presentation and Analysis of Stockholders' Equity 800
Appendix 15A: Dividend Preferences and Book Value per Share 804
Dividend Preferences 804
Book Value per Share 805
FASB Codification 826
IFRS Insights 827
16 Dilutive Securities and Earnings per Share 834
Kicking the Habit 834
Dilutive Securities 836
Stock Warrants 839
Stock Compensation Plans 843
Basic Earnings per Share 851
Diluted Earnings per Share 855
Appendix 16A: Accounting for Stock-Appreciation Rights 863
SARS—Share-Based Equity Awards 864
SARS—Share-Based Liability Awards 864
Stock-Appreciation Rights Example 865
Appendix 16B: Comprehensive Earnings per Share Example 866
Diluted Earnings per Share 867
FASB Codification 889
IFRS Insights 890
17 Investments 898
What to Do? 898
Investments in Debt Securities 900
Investments in Equity Securities 908
Other Financial Reporting Issues 915
Appendix 17A: Accounting for Derivative Instruments 923
Defining Derivatives 924
Who Uses Derivatives, and Why? 924
Basic Principles in Accounting for Derivatives 926
Derivatives Used for Hedging 929
Other Reporting Issues 934
Comprehensive Hedge Accounting Example 937
Controversy and Concluding Remarks 940
Appendix 17B: Fair Value Disclosures 941
Disclosure of Fair Value Information: Financial Instruments 941
Disclosure of Fair Values: Impaired Assets or Liabilities 944
Conclusion 944
FASB Codification 965
IFRS Insights 966
18 Revenue Recognition 978
It’s Back 978
Fundamentals of Revenue Recognition 980
The Five-Step Process Revisited 986
Accounting for Revenue Recognition Issues 996
Presentation and Disclosure 1007
Appendix 18A: Long-Term Construction Contracts 1013
Revenue Recognition Over Time 1013
Appendix 18B: Revenue Recognition for Franchises 1023
Franchise Accounting 1024
Recognition of Franchise Rights Revenue Over Time 1026
FASB Codification 1050
19 Accounting for Income Taxes 1052
Hey–Let’s Pay More Income Taxes! 1052
Fundamentals of Accounting for Income Taxes 1054
Additional Considerations 1064
Accounting for Net Operating Losses 1069
Financial Statement Presentation 1076
Appendix 19A: Comprehensive Example of Interperiod Tax Allocation 1083
First Year—2016 1083
Second Year—2017 1087
FASB Codification 1109
IFRS Insights 1110
20 Accounting for Pensions and Postretirement Benefits 1116
Where Have All the Pensions Gone? 1116
Fundamentals of Pension Plan Accounting 1118
Using a Pension Worksheet 1126
Prior Service Cost (PSC) 1128
Gains and Losses 1131
Reporting Pension Plans in Financial Statements 1138
Appendix 20A: Accounting for Postretirement Benefits 1148
Accounting Guidance 1148
Differences Between Pension Benefits and Healthcare Benefits 1149
Postretirement Benefits Accounting Provisions 1150
Illustrative Accounting Entries 1152
Disclosures in Notes to the Financial Statements 1155
Actuarial Assumptions and Conceptual Issues 1157
FASB Codification 1179
IFRS Insights 1180
21 Accounting for Leases 1194
More Companies Ask, “Why Buy?” 1194
The Leasing Environment 1196
Accounting by the Lessee 1200
Accounting by the Lessor 1210
Special Lease Accounting Problems 1215
Appendix 21A: Sale-Leasebacks 1231
Determining Asset Use 1231
Sale-Leaseback Example 1232
FASB Codification 1254
IFRS Insights 1256
22 Accounting Changes and Error Analysis 1266
In the Dark 1266
Accounting Changes 1268
Other Accounting Changes 1281
Accounting Errors 1284
Error Analysis 1290
Appendix 22A: Changing from or to the Equity Method 1299
Change from the Equity Method 1299
Change to the Equity Method 1300
FASB Codification 1325
IFRS Insights 1326
23 Statement of Cash Flows 1330
Show Me the Money! 1330
Statement of Cash Flows 1332
Preparing the Statement of Cash Flows 1335
Special Problems in Statement Preparation 1353
Use of a Worksheet 1361
FASB Codification 1395
IFRS Insights 1396
24 Full Disclosure in Financial Reporting 1402
High-Quality Financial Reporting—Always in Fashion 1402
Full Disclosure Principle 1404
Disclosure Issues 1409
Auditor’s and Management’s Reports 1423
Current Reporting Issues 1428
Appendix 24A: Basic Financial Statement Analysis 1435
Perspective on Financial Statement Analysis 1436
Ratio Analysis 1437
Comparative Analysis 1439
Percentage (Common-Size) Analysis 1440
FASB Codification 1460
IFRS Insights 1461
Appendix A Private Company Accounting A-1
The Private company Council (PCC) A -1
Private Company Alternatives for Intangible Assets and Goodwill A -2
Appendix B Specimen Financial Statements: The Procter & Gamble Company B-1
Appendix C Specimen Financial Statements: The Coca-Cola Company C-1
Appendix D Specimen Financial Statements: PepsiCo, Inc. D-1
Appendix E Specimen Financial Statements: Marks and Spencer plc E-1
Index I-1
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