Accounting Principles fullbook - Accounting Principles A Business Perspective Volume 1 Financial Accounting Accounting Principles A Business

Accounting Principles fullbook - Accounting Principles...

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Unformatted text preview: Accounting Principles: A Business Perspective Volume 1 Financial Accounting Accounting Principles: A Business Perspective First Global Text Edition, Volume 1 Financial Accounting Roger H. Hermanson,PhD, CPA Regents Professor Emeritus of Accounting Ernst & Young-J. W. Holloway Memorial Professor Emeritus Georgia State University James Don Edwards PhD, D.H.C, CPA J.M. Tull Professor Emeritus of Accounting Terry College of Business University of Georgia Michael W. Maher PhD, CPA Graduate School of Management University of California at Davis Special contributors to managerial chapters: Kathleen M. Donelan-Knox Department of Accountancy University of Notre Dame Funding for the First Global Text Edition was provided by the Endeavor Corporation, Houston, Texas, USA The Global Text Project is funded by the Jacobs Foundation, Zurich, Switzerland This book is licensed under a Creative Commons Attribution 3.0 License Acknowledgments for the Global Text First Edition: Revision Editor: Donald J. McCubbrey, PhD Clinical Professor, Daniels College of Business University of Denver Life member, American Institute of Certified Public Accountants Revision Assistants Emily Anderson Kyle Block Assistant Editor Jackie Sharman Associate Editor Marisa Drexel Conversion Specialist Varun Sharma Table of Contents Accounting principles:A business perspective..........................................................................8 The accounting environment...................................................................................................18 Accounting defined...................................................................................................................19 Financial accounting versus managerial accounting..............................................................23 Development of financial accounting standards.....................................................................25 Ethical behavior of accountants..............................................................................................26 1. Accounting and its use in business decisions.................................................30 Forms of business organizations..............................................................................................31 Types of activities performed by business organizations.......................................................32 Financial statements of business organizations......................................................................33 The financial accounting process............................................................................................37 Analyzing and using the financial results—the equity ratio...................................................46 2. Recording business transactions....................................................................65 The The The The The account and rules of debit and credit...............................................................................66 accounting cycle................................................................................................................72 journal................................................................................................................................73 ledger.................................................................................................................................76 accounting process in operation.......................................................................................76 3. Adjustments for financial reporting..............................................................116 Cash versus accrual basis accounting...................................................................................117 Classes and types of adjusting entries..................................................................................120 Adjustments for deferred items.............................................................................................122 Adjustments for accrued items..............................................................................................129 4. Completing the accounting cycle.................................................................150 The accounting cycle summarized.........................................................................................151 The work sheet.......................................................................................................................151 Preparing financial statements from the work sheet............................................................157 Journalizing adjusting entries................................................................................................158 The closing process................................................................................................................159 Accounting systems: From manual to computerized............................................................164 A classified balance sheet......................................................................................................169 Analyzing and using the financial results — the current ratio.............................................175 5. Accounting theory.........................................................................................198 Traditional accounting theory................................................................................................199 Other basic concepts..............................................................................................................201 The measurement process in accounting..............................................................................202 The major principles..............................................................................................................203 Modifying conventions (or constraints).................................................................................209 The financial accounting standards board's conceptual framework project.......................212 Objectives of financial reporting...........................................................................................212 Qualitative characteristics.....................................................................................................214 Recognition and measurement in financial statements........................................................218 6. Merchandising transactions.........................................................................236 Introduction to inventories and the classified income statement........................................236 Two income statements compared— Service company and merchandising company........237 Sales revenues........................................................................................................................238 Cost of goods sold..................................................................................................................244 Classified income statement..................................................................................................252 Analyzing and using the financial results—Gross margin percentage.................................256 7. Measuring and reporting inventories...........................................................279 Inventories and cost of goods sold........................................................................................280 Determining inventory cost...................................................................................................282 Departures from cost basis of inventory measurement........................................................303 Analyzing and using financial results—inventory turnover ratio.........................................308 8. Control of cash..............................................................................................332 Internal control......................................................................................................................333 Controlling cash.....................................................................................................................340 The bank checking account...................................................................................................343 Bank reconciliation................................................................................................................347 Petty cash funds.....................................................................................................................352 Analyzing and using the financial results—The quick ratio..................................................355 9. Receivables and payables.............................................................................371 Accounts receivable...............................................................................................................372 Current liabilities...................................................................................................................381 Notes receivable and notes payable......................................................................................387 Short-term financing through notes payable........................................................................391 Analyzing and using the financial results—Accounts receivable turnover and number of days' sales in accounts receivable....................................................................................................................................394 10. Property, plant, and equipment..................................................................410 Nature of plant assets............................................................................................................411 Initial recording of plant assets.............................................................................................412 Depreciation of plant assets..................................................................................................416 Subsequent expenditures (capital and revenue) on assets..................................................428 Subsidiary records used to control plant assets...................................................................431 Analyzing and using the financial results—Rate of return on operating assets..................433 11. Plant asset disposals, natural resources, and intangible assets................449 Disposal of plant assets..........................................................................................................450 Intangible assets....................................................................................................................461 Analyzing and using the financial results—Total assets turnover........................................468 12. Stockholders' equity: Classes of capital stock............................................486 The corporation......................................................................................................................487 Documents, books, and records relating to capital stock.....................................................491 Par value and no-par capital stock........................................................................................492 Other values commonly associated with capital stock.........................................................493 Capital stock authorized and outstanding.............................................................................493 Classes of capital stock..........................................................................................................494 Types of preferred stock........................................................................................................495 Balance sheet presentation of stock......................................................................................497 Stock issuances for cash........................................................................................................498 Capital stock issued for property or services........................................................................500 Balance sheet presentation of paid-in capital in excess of par (or stated) value—Common or preferred 500 Analyzing and using the financial results—Return on average common stockholders' equity503 13. Corporations: Paid-in capital, retained earnings, dividends, and treasury stock 521 Paid-in (or contributed) capital..............................................................................................522 Retained earnings..................................................................................................................523 Paid-in capital and retained earnings on the balance sheet.................................................523 Retained earnings appropriations.........................................................................................530 Statement of retained earnings.............................................................................................532 Statement of stockholders' equity.........................................................................................532 Treasury stock........................................................................................................................533 Net income inclusions and exclusions...................................................................................536 Analyzing and using the financial results—Earnings per share and price-earnings ratio. .540 14. Stock investments.......................................................................................559 Cost and equity methods........................................................................................................560 Consolidated balance sheet at time of acquisition................................................................568 Accounting for income, losses, and dividends of a subsidiary.............................................572 Consolidated financial statements at a date after acquisition.............................................572 Uses and limitations of consolidated statements..................................................................576 Analyzing and using the financial results—Dividend yield on common stock and payout ratios 577 15. Long-term financing: Bonds........................................................................593 Bonds payable........................................................................................................................594 Bond prices and interest rates...............................................................................................600 Analyzing and using the financial results—Times interest earned ratio..............................611 16. Analysis using the statement of cash flows................................................630 Purposes of the statement of cash flows...............................................................................631 Uses of the statement of cash flows......................................................................................631 Information in the statement of cash flows...........................................................................632 Cash flows from operating activities.....................................................................................634 Steps in preparing statement of cash flows..........................................................................636 Analysis of the statement of cash flows.................................................................................641 Analyzing and using the financial results—Cash flow per share of common stock, cash flow margin, and cash flow liquidity ratios.....................................................................................................................647 Appendix: Use of a working paper to prepare a statement of cash flows............................649 17. Analysis and interpretation of financial statements...................................675 Objectives of financial statement analysis............................................................................676 Sources of information...........................................................................................................678 Horizontal analysis and vertical analysis: An illustration.....................................................679 Trend percentages.................................................................................................................682 Ratio analysis.........................................................................................................................683 18. Managerial accounting concepts/job costing.............................................728 Compare managerial accounting with financial accounting................................................729 Merchandiser and manufacturer accounting: Differences in cost concepts.......................730 Financial reporting by manufacturing companies................................................................733 The general cost accumulation model...................................................................................736 Job costing..............................................................................................................................738 Predetermined overhead rates..............................................................................................743 19. Process: Cost systems.................................................................................765 Nature of a process cost system............................................................................................765 Process costing illustration....................................................................................................766 Process costing in service organizations...............................................................................775 Spoilage..................................................................................................................................775 20. Using accounting for quality and cost management..................................795 Importance of good accounting information.........................................................................795 Quality and customer satisfaction measures........................................................................802 Just-in-time method................................................................................................................805 Activity-based costing and management...............................................................................808 Methods used for activity-based costing...............................................................................811 Impact of new production environment on cost drivers.......................................................815 Activity-based costing in marketing......................................................................................816 Strategic use of activity-based management........................................................................816 Behavioral and implementation issues..................................................................................817 Opportunities to improve activity-based costing in practice................................................817 21. Cost-volume-profit analysis.........................................................................831 Cost behavior patterns...........................................................................................................832 Methods for analyzing costs..................................................................................................835 Cost-volume-profit (CVP) analysis..........................................................
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