Introduction to Financial Accounting: A User Perspective

by Jones, Kumen H.; Werner, Michael L.; Terrell, Katherene; Terrell, Robert

• ISBN13: 9780130120960
• ISBN10: 0130120960
• Edition: 2nd
• Format: Hardcover
• Copyright: 1999-07-01
• Publisher: Pearson College Div

Summary

An excellent introduction to financial accounting, this book informs the reader about its significant role in making sound business decisions. With its concentration on the "uses" of financial accounting rather than on the preparation of accounting information, the authors present the information in a manner that makes the topic readily available for use in a broad number of ways. This complete and easy to understand financial accounting book covers the following topics briefly, yet comprehensively: economic decision-making and business in the United States; balance sheets; income statements and statements of owners' equity; economic management; the accounting system; long-lived depreciable assets; inventory accounting; cash flow statements; and a close look at financial statement analysis. For readers needing a book that will allow them a basic understanding of financial accounting.

Table of Contents

Preface	ix
Introduction to Financial Accounting: A User Perspective	1	(2)
Introduction to Business in the United States	3	(40)
What Is Business?	5	(3)
Factors of Production	5	(1)
Profit Motive	6	(1)
Profits Versus Social Responsibility	7	(1)
Social Responsibility in Business Today	7	(1)
Forms of Business Organization	8	(5)
Sole Proprietorships	8	(1)
Partnerships	9	(2)
Separate Entity Assumption	11	(1)
Corporations	11	(1)
Other Business Forms	12	(1)
Types of Businesses	13	(2)
Manufacturing Companies	13	(1)
Merchandising Companies	14	(1)
Service Companies	14	(1)
Hybrid Companies	14	(1)
Global Nature of Business in the 1990s and Beyond	15	(1)
Economic Complications	15	(1)
Political Complications	15	(1)
Business and Accounting	16	(4)
Authority over Accounting Reporting Standards	16	(1)
The Securities and Exchange Commission (SEC)	17	(1)
Financial Accounting Standards Board (FASB)	18	(1)
The Standards-Setting Process Today	18	(2)
Outside Assurance on Financial Statements	20	(2)
What Exactly Is an Audit?	20	(1)
Who Performs Audits?	21	(1)
The Audit Opinion	21	(1)
Summary	22	(1)
Appendix	23	(7)
Corporate Reporting and the Annual Report	23	(2)
Form 10-K	25	(1)
Gathering Additional Information about a Company	26	(4)
Summary to Appendix	30	(1)
Key Terms	30	(1)
Review the Facts	30	(1)
Apply What You Have Learned	31	(7)
Financial Reporting Cases	38	(2)
Annual Report Project	40	(3)
Economic Decision Making	43	(34)
What Is Decision Making	44	(3)
Rewards and Sacrifices: The Trade-off	44	(2)
Coping with Uncertainty and Risk	46	(1)
Routine and Nonroutine Decisions	46	(1)
How We Make Decisions	47	(4)
Information-Processing Styles	47	(1)
Reasoned Decision Making	48	(2)
Creative Decision Making	50	(1)
Personal Values and Decision Making	51	(1)
Ethics and Personal Values	51	(1)
Individual versus Group Decision Making	52	(1)
Economic Decision Making	53	(4)
Internal Decision Makers	54	(1)
External Decision Makers	54	(1)
What All Economic Decision Makers Want to Know	55	(1)
Cash Is the ``Ball'' of Business	56	(1)
Accounting Information	57	(1)
Data versus Information	57	(1)
Useful Accounting Information	58	(1)
Qualitative Characteristics of Accounting Information	58	(3)
Relevance	59	(1)
Reliability	59	(1)
Comparability and Consistency	60	(1)
Decision Makers and Understandability	61	(1)
Summary	61	(1)
Key Terms	62	(1)
Review the Facts	62	(1)
Apply What You Have Learned	63	(11)
Financial Reporting Cases	74	(1)
Annual Report Project	74	(3)
Tools of the Trade, Part I The Balance Sheet: Initial Financing---Investments by Owners	77	(32)
The First Tool: Introduction to the Balance Sheet	78	(3)
The Accounting Elements	78	(2)
Organization of the Balance Sheet	80	(1)
Starting a Business---Investments by Owners	81	(2)
Balance Sheet for a Proprietorship	82	(1)
Balance Sheet for a Partnership	82	(1)
Balance Sheet for a Corporation	83	(1)
Corporate Organizational Structure	83	(3)
The Stockholders	84	(1)
Board of Directors	84	(1)
Corporate Officers	84	(2)
Corporate Capital Structure	86	(5)
Common Stock	86	(2)
No-Par Stock	88	(1)
Preferred Stock	89	(2)
The Stock Market	91	(2)
Primary and Secondary Markets	91	(1)
How Stock Prices Are Quoted	92	(1)
Government Influence on the Stock Market	93	(1)
Summary	93	(2)
Key Terms	95	(1)
Review the Facts	96	(1)
Apply What You Have Learned	96	(11)
Financial Reporting Cases	107	(1)
Annual Report Project	108	(1)
The Balance Sheet (Continued): Additional Financing---Borrowing from Others	109	(32)
Borrowing from Financial Institutions	111	(6)
How Banks Earn Profits	112	(1)
Notes Payable	113	(1)
The Cost of Borrowing	114	(2)
Effective Interest Rate	116	(1)
Borrowing by Issuing Bonds	117	(7)
Issuing Bonds Sold at Par	119	(2)
Initial Offerings---The Primary Bond Market	121	(1)
Interest Rates and the Secondary Bond Market	122	(2)
Equity and Debt Investments Compared	124	(3)
Equity Investments	125	(1)
Debt Investments	126	(1)
Which Is Better, Equity Investment or Debt Investment?	126	(1)
Summary	127	(1)
Key Terms	128	(1)
Review the Facts	129	(1)
Apply What You Have Learned	129	(10)
Financial Reporting Cases	139	(1)
Annual Report Project	140	(1)
Tools of the Trade, Part II Income Statement and Statement of Owners' Equity	141	(42)
Introduction to the Income Statement	142	(7)
Construction of the Income Statement	144	(1)
Single-Step Format of the Income Statement	145	(1)
Multistep Format of the Income Statement	146	(3)
Net Income as an Increase in Owners' Equity	149	(1)
Introduction to the Statement of Owners' Equity	149	(4)
Proprietorships---Statement of Capital	149	(1)
Partnerships---Statement of Capital	150	(1)
Corporations---Statement of Stockholders' Equity	151	(2)
Distributions to Owners	153	(6)
Drawings---Proprietorships and Partnerships	153	(1)
Distributions to Owners---Corporate Form	154	(5)
Articulation	159	(5)
Financial Statements of a Proprietorship	159	(1)
Financial Statements of a Partnership	159	(3)
Financial Statements of a Corporation	162	(2)
Summary	164	(1)
Key Terms	165	(1)
Review the Facts	165	(1)
Apply What You Have Learned	166	(12)
Financial Reporting Cases	178	(3)
Annual Report Project	181	(2)
Keeping Score: Bases of Economic Measurement	183	(40)
Reality versus the Measurement of Reality	184	(4)
The Problems of Periodic Measurement	185	(2)
Revenue and Expense Recognition	187	(1)
Bases of Economic Measurement	187	(1)
Cash Basis of Economic Measurement	188	(3)
Cash Basis Revenue Recognition	188	(1)
Cash Basis Expense Recognition	188	(1)
Cash Basis Financial Statements	189	(2)
Strengths and Weaknesses of Cash Basis Accounting	191	(1)
Accrual Basis of Economic Measurement	191	(11)
Accrual Basis Revenue Recognition	192	(1)
Accrual Basis Expense Recognition	193	(1)
The Matching Principle	194	(1)
Accounting Depreciation	195	(1)
Accruals and Deferrals	196	(2)
Accrual Basis Financial Statements	198	(3)
Strengths and Weaknesses of Accrual Basis Accounting	201	(1)
Comparing the Two Bases of Economic Measurement	202	(2)
Summary	204	(1)
Key Terms	205	(1)
Review the Facts	205	(1)
Apply What You Have Learned	206	(15)
Financial Reporting Cases	221	(1)
Annual Report Project	221	(2)
Accumulating Accounting Data	223	(52)
The Accounting Cycle	224	(10)
Analyzing Transactions	225	(1)
Journalizing Transactions	226	(1)
Posting Transactions to the General Ledger	227	(1)
Preparing the Trial Balance (or Worksheet)	228	(1)
Adjusting the Accounts and Reconciling the Bank Statement	228	(1)
Preparing Financial Statements	229	(1)
Preparing and Posting Closing Entries	230	(1)
Preparing the Post-Closing Trial Balance	231	(1)
Debits and Credits	231	(1)
The Account	232	(1)
The Journal Entry	233	(1)
Accounting Cycle Application	234	(18)
Analyzing and Journalizing Transactions	235	(2)
Posting to the General Ledger	237	(1)
Preparing the Trial Balance	237	(5)
Adjusting the Accounts and Reconciling the Bank Statement	242	(4)
Preparing Financial Statements	246	(1)
Closing the Accounts	247	(4)
Preparing the Post-Closing Trial Balance	251	(1)
Summary	252	(1)
Key Terms	253	(1)
Review the Facts	253	(1)
Apply What You Have Learned	254	(16)
Accounting Cycle Cases	270	(5)
Challenging Issues under Accrual Accounting: Long-Lived Depreciable Assets---A Closer Look	275	(40)
Depreciation	276	(8)
The Effect of Estimates	276	(1)
The Effect of Different Depreciation Methods	277	(1)
Straight-Line Depreciation	278	(3)
Double-Declining-Balance Depreciation	281	(2)
Understanding the Impact of Depreciation Method Choice	283	(1)
Disposal of Depreciable Assets	284	(5)
Gains and Losses---Important Accounting Elements	285	(1)
Calculating Gains and Losses	286	(3)
Understanding the True Meaning of Gains and Losses	289	(6)
Summary	295	(1)
Appendix---Recording Long-Lived Assets and Depreciation	296	(3)
Summary to Appendix	299	(1)
Key Terms	299	(1)
Review the Facts	300	(1)
Apply What You Have Learned	300	(12)
Financial Reporting Cases	312	(1)
Annual Report Project	312	(3)
Challenging Issues under Accrual Accounting: Merchandise Inventory and Cost of Goods Sold	315	(58)
Tracking Inventory Costs	316	(2)
Merchandising Companies	316	(2)
Manufacturing Companies	318	(1)
Inventory Systems	318	(6)
Periodic Inventory System	318	(1)
Perpetual Inventory System	319	(1)
The Necessity of a Physical Inventory Count	320	(2)
The Physical Movement of Inventory (Reality)	322	(2)
The Flow of Inventory Cost (Measurement of Reality)	324	(1)
Cost Flow Assumptions	324	(2)
Specific Identification Cost Flow Assumption	325	(1)
Cost Flow Assumptions Under a Periodic System	326	(4)
First-In, First-Out Method (FIFO)	327	(1)
Last-In, First-Out Method (LIFO)	328	(1)
Average Cost Method	329	(1)
Comparison of Methods	330	(1)
Cost Flow Assumptions under a Perpetual Inventory System	330	(10)
First-In, First-Out Method	331	(1)
Last-In, First-Out Method	332	(1)
Moving Average Cost Method	333	(2)
Comparison of Methods	335	(1)
The Effects of Inventory Cost Flow Assumption Choice	335	(5)
Summary	340	(1)
Appendix---Inventory Purchasing Issues	341	(2)
Cash Discounts	341	(1)
Freight Terms	342	(1)
Appendix---Recording Inventory	343	(8)
Periodic Inventory Systems	343	(2)
Periodic Inventory Closing Entries	345	(2)
Perpetual Inventory Systems	347	(2)
Perpetual Inventory Closing Entires	349	(1)
Summary of the Appendices	350	(1)
Key Terms	351	(1)
Review the Facts	351	(1)
Apply What You Have Learned	351	(19)
Financial Reporting Cases	370	(1)
Annual Report Project	371	(2)
The Balance Sheet and Income Statement: A Closer Look	373	(36)
History and Development of the Balance Sheet and Income Statement	374	(1)
Organization of the Balance Sheet	375	(4)
The Classified Balance Sheet	376	(3)
Organization of the Income Statement	379	(10)
Recurring and Nonrecurring Items	380	(2)
Income Tax Disclosure	382	(2)
Discontinued Operations	384	(1)
Extraordinary Items	385	(1)
Changes in Accounting Principles	386	(3)
Earnings Per Share	389	(3)
Calculating Earnings per Share	390	(1)
Income Statement Presentation	390	(2)
Comparative Financial Statements	392	(1)
Summary	392	(2)
Appendix	394	(1)
Recording Income Tax Expense	394	(1)
Summary of Appendix	395	(1)
Key Terms	395	(1)
Review the Facts	396	(1)
Apply What You Have Learned	396	(10)
Financial Reporting Cases	406	(1)
Annual Report Project	407	(2)
Tools of the Trade, Part III The Statement of Cash Flows: Bringing the Focus Back to Cash	409	(38)
Basic Organization of the Statement of Cash Flows	410	(5)
Operating Activities	412	(1)
Investing Activities	413	(1)
Financing Activities	413	(1)
Direct Method versus Indirect Method	414	(1)
Construction of the Statement of Cash Flows	415	(13)
Determining Cash Flow from Operating Activities---Direct Method	419	(3)
Determining Cash Flow from Operating Activities---Indirect Method	422	(4)
Determining Cash Flow from Investing Activities	426	(1)
Determining Cash Flow from Financing Activities	427	(1)
Supplemental Schedule	427	(1)
How to Use the Statement of Cash Flows	428	(1)
Summary	429	(1)
Key Terms	430	(1)
Review the Facts	430	(1)
Apply What You Have Learned	430	(15)
Financial Reporting Cases	445	(1)
Annual Report Project	446	(1)
Financial Statement Analysis	447	(49)
Who Performs Financial Statement Analysis and Why?	448	(2)
Objectives of Creditors	449	(1)
Objectives of Equity Investors	449	(1)
Objectives of Management	450	(1)
Gathering Background Information---An Important First Step	450	(4)
General Economic Conditions and Expectations	451	(1)
Political Events and Political Climate	451	(1)
Industry Outlook	452	(2)
Ratio Analysis: Calculating the Ratios	454	(12)
Measuring Profitability	455	(4)
Measuring Liquidity	459	(4)
Measuring Solvency	463	(3)
Ratio Analysis: Using the Ratios	466	(13)
Standard Industrial Classification System	467	(3)
Industry Comparisons	470	(1)
Company Analysis---Step 1: Comparing Ratios to the Industry Averages	471	(4)
Company Analysis---Step 2: Looking for Company Trends	475	(2)
Company Analysis---Step 3: Considering the Industry Environment	477	(1)
Company Analysis---Step 4: Drawing Conclusions	478	(1)
Limitations of Ratio Analysis	479	(1)
Summary	479	(1)
Key Terms	480	(1)
Review the Facts	480	(1)
Apply What You Have Learned	481	(13)
Financial Reporting Cases	494	(2)
Annual Report Project	496