WEI á than

SECOND EDITION

ACCOUNTING PRINCIPLES J erry JlJ^^ga n d t Ph.D. , C P A .

Arthur Andersen Alumni Professor of Accounting University of Wisconsin Madison, Wisconsin!!

Donald E. Kieso Ph.D., (

Peat Marwick Professor of Accounting Northern Illinois University DeKalb, Illinois

A

Walter G. Kell Ph D , Professor Emeritus of Accounting University of Michigan Ann Arbor, Michigan

í A N N O T A T E D INSTRUCTOR'S EDITION

7

WILEY

JOHN WILEY & SONS New York / Chichester / Brisbane Toronto / Singapore

CONTENTS

CHAPTER 1 / C M A R ^ BASIC CONCEPTS OF

iu

Study Objectives / 1 What Is Accounting? / 1 Users and Uses of Accounting Data / 3 Internal Users; External Users—Direct Interest; External Users—Indirect Interest Bookkeeping and Accounting Distinguished / 5 The Accounting Profession / 5 Public Accounting; Private Accou^pig; NotpllProfit Accounting Generally Accepted Accounting Principles 10 Assumptions /11 Economic Entity Assumption; Monetary Unit Assumption Assets, Liabilities and Owner's Equity / 13 Assets; Liabilities' Owner's Equity The Basic Accounting Equation /15 Transactions /16 Financial Statements / 22 Income Statement; Owner's Equity Statement; Balance Sheet Summary of Study Objectives / 25 Glossary / 26 Demonstration Problem / 28 Self-Study Test Questions I 29 Questions / 30 Exercises / 31 Problems / 35 Alternate Problems / 38 Financial Reporting Problem / 40 Decision Case / 41

CHAPTER 2 / THE RECORDING PROCESS

Study Objectives / 43 The Account / 43 Debits and Credits / 44 Debit and Credit Procedure; Expansion of Basic Equation Permanent and Temporary Accounts / 48 Steps in the Recording Process / 49 The Journal / 50 Journalizing 50 The Ledger 52 Standard Form of Account / 52 Posting / 53 Chart of Accounts 54 Illustration of Recording Process / 56 Summary Illustration of Journalizing and Posting / 61 The Trial Balance / 61 Limitations of a Trial Balance; Locating Errors; Use of Dollar Signs Summary of Study Objectives / 65 Glossary 65 Demonstration Problem / 66 Self-Study Test Questions / 68 Questions 6^ Exercises 70 Problems / 75 Alternate Problems / 78 Financial Reporting Problem 81 Decision Case / 82

CHAPTER 3 / ADJUSTING THE ACCOUNTS 85

Study Objectives / 85 Periodicity Assumption / 85 Fiscal and Calendar Years Sò Revenue and Expense Recognition / 86 Need for Adjusting Entries 88 Types of Adjusting Entries / 89 Adjusting Entries for Prepayments 89 Prepaid Expenses; Unearned Revenues Adjusting Entries for Accruals / 95 Accrued Revenues; Accrued Expenses; Summary of Basic Relationships Journalizing and Posting Adjusting Entries / 100 The Adjusted Trial Balance / 102 Financial Statements from the Adjusted Trial Balance / 103 Accrual vs. Cash Basis of Accounting Summary of Study Objectives / 106 A P P E N D I X 3 - A A L T E R N A T I V E T R E A T M E N T OF PREPAID EXPENSES AND U N E A R N E D R E V E N U E S / 107 Prepaid Expenses / 107 Unearned Revenues /108 Summary of Additional Adjustment Relationships / no Glossary 111 Demonstration Problem /111 Self-Study Test Questions / 112 Questions /113 Exercises /115 Problems / 119 Alternate Problems / 124 Financial Reporting Problem /127 Decision Case / 127

SỒN'OF THE ACCOUNTING CYCLE 131

Study Objectives / 131 Use of a Worksheet /132 Preparation oi a Workshee illustrated; Financial Statements from a Worksheet; Adjusting Entries from a'Worksheet boaing the Books of a Prowittoishlp / 137 Closing Entries; Closing Entries Illustrated, h-ling oi Closing intriis M O r i n g Trial Balance / 141 Reversing Entries-.An Optional Step /143 Summary of Ihe Accounting Cycle / 143 Closing Entries for 1 PàrtneMhip 1144 Closing En!*!* iw a Corporation /144 Comparative Summary of Owners' Equity 117 Correcting Entries / 147 Classified Financial Statements 149 Current AMfete; Long-Term Investments; Property, Plant, and Equipment; Current l ni ilitip tong-Te™ Liabilities Classified Balance Sheet Illustrated / 152 Analyzing the Balfcgtc* Sheet /153 Current Ratio; Working Capital Summary of Study Objcetft^/155 APPENDIX 4-A REVERSING ENTRIES / 156 Illustration of Reversing Entries /156 Glossary /158 Demonstration Problem / 159 Self-Study Test Questions /162 Questions /162 Exercises I 163 Problems 168 Alternate Problems / 168 Financial Reporting Problem / 175 Decision Case 176

CHAPTER 5 / ACCOUNTING FOR MERCHANDISING OPERATIONS

Study Objectives / 179 Income Measurement in ã Merchandising Company 179 Sales Revenue / 180 Sales Returns and Allowances; Sales Discounts; Statement Presentation Cost of Goods Sold / 185 Recording Purchases of Merchandise; Determining the Cost of Goods Purchased; Determining Cost ót Goods on Hand; c omputing the Cost of Goods Sold Gross Profit l

g

0 Operating Expenses 1̂ 1 Income Statement for a Merchandising Company 1*̂1 Accounting Cycle for a Merchandising Company / 192 Using a Work Sheet; Preparing Financial Statements; Journalized and Posting Adjusting Entries; [ournaliztng and Posting Closing Entries; Preparing the Post-Closing Trial Balance Summary of Merchandising Entries 196 Multiple-Step Income Statement w Nonoperating Activities; Subgrouping oi Operating Expenses Single-Step Income Statement 201 Analyzing the Income Statement / 202 Summary of Study Objectives 203 APPENDIX 5-A ADJUSTING ENTRY METHOD FOR MERCHANDISE IN VEN r o m 204 Using ã Worksheet 204 Preparing Financial Statements 206 Journalizing and Posting Adjusting Entries 20fr Journalizing and Posting Closing Entries 206 Glossary 207 Demonstration Problem / 208 Self-Study Test Questions 210 Questions 211 Exercises 213 Problems / 215 Alternate Problems 220 Financial Reporting Problem 224 Decision Case / 225

CHAPTER 6 / ACCOUNTING INFORMATION SYSTEMS MANUAL AND ELECTRONIC DATA TRÓC

Study Objectives 227 Principles of an Accounting Information System 22? PuiSici.

8 a n A c c o u n t i n

8 System 228 SECTION ONE—MANUAL DATA ESZuiSd |

E X P » ^ f t h e L^r-Subs id iarv Ledgers 230 Expansion oi SíSĩStS*? !

!0 l

!m a l s •

1 1 2 s

*fc* Journal 233 m n X n* Credu Sales; ^íĩtĩ^í ^ì , 5"* Receipt Journal 236 Journal M l * Transactions; Posting tho Cash Receipts lourna Purchases lour™ -un 127.1,

lurches Journal Cash Payments Journal 243 )ourn<ili/ine Cash Pavments

Transactions; Posting the Cash Payments ỉntin ^ _ Ì , * ,À*, Ì Ăn. ĩ Ì ẽ Li A " journal General Journal ' 246 Karnc

SECTION TWO-ELECTRON c DATA PROCESSiNG / 248 CompuVerTzed Order Entry '248 Comparative M ^ t ^ s - M ^ l ll Computerized Systems 2 ° * ™ a r

Costs; Processmg Speed; Processing Errors; Responsiveness; Generation 3 Repots S ^ ^

0

!8

* " ^ Objectives/251 Gtom^Tffi l DemonstrationProblem^ Sẹ f-study Test Questions / 253 Queston, / 254 Exercises / 255 Problem™ ẫ Alternate Problems / 265 Mini-Practice Set / 269 Decision Case / 270

C H A P T E R 7 I N T E R N A L CONTROL AND CASH 273

Study Objectives t 273 What Is Internal Control? / 273 Principles of Internal Control 274 Establishment of Responsibility; Segregation of Duties; Documentation Procedures; Physical, Mechanical, and Electronic Controls; Independent Internal Verification; Other Controls Limitations of Internal Control I 279 Need for Cash Control 280 Internal Control over Cash Receipts I 281 Over-the-Counter Receipts Mail Receipts Internal Control over Cash Disbursements f 283 Use of a Bank / 284 Making Bank Deposits; Writing Checks; Bank Statements Reconciling the Bank Account 288 Reconciliation Procedure; Illustrative Bank Reconciliation; Entries from Bank Reconciliation Petty Cash Fund ! 291 Establishing the Fund; Making Payments from the Fund; Replenishing the Fund Reporting Cash / 294 Electronic Funds Transfer (EFT) I 294 Summary of Study Objectives / 295 APPENDIX 7 A THE VOUCHER SYSTEM / 296 Preparing the Voucher / 296 Recording the Voucher t 298 Filing the Unpaid Voucher / 299 Paying the Voucher / 300 Recording Payment of the Voucher / 300 Vouchers at the Net Amount Due / 301 Glossary / 302 Demonstration Problem 303 Self-Study Test Questions / 304 Questions I 304 Exercises / 306 Problems / 309 Alternate Problems / 313 Financial Reporting Problem / 318 Decision Case '318

CHAPTER 8 / ACCOUNTING F O R R E C E I V A B L E S 321

Study Objectives / 321 Types of Receivables 321 SECTION ONE-ACCOUNTS RECEIVABLE / 322 Recognition of Accounts Receivable 322 Valuation of Accounts Receivable / 323 Uncollectible Accounts Receivable; Allowance Method; Bases Used Jor Allowance Method; Direct Write-Off Method Disposition of Accounts Receivable . 3 » Illustration One-Sale to Captive Finance Company; Illustration J ^ S a t e to

a Factor; Illustration Three-Credit Card Sales SECTION TWO-NOTES RECEIVABLE / 333 Detennining the Maturity Dale) 334 Computing Interest / 335 Accounting, for Notes Receivable /335 Recognition of Notes Receivable; Valuation of Notes Receivable; Disposition of Notes Receivable Installment Notes Receivable / 338

F

'n a

«c i a

' Statement Presentation of Receivables / 339 Summary of Study Objectives / Glossary / 341 Self-Study Test Questions / 342 Demonstration Problem Questions/ 344 Exercises / M5 Problems / 348 Alternate Problems Reporting Problem / 354 Decision Case / 355

351 Financial

CHAPTER 9 / INVENT 35:

Inventory Classifications Study Objectives / 357 Importance of Inventories/ 35; DeteimSig Inventory SSSSmt 3S9 Taking a Physical Inventory; Goods in!

ỉnventoriabie Costs í 361 Actual Physical flow c r- i_ . - — • * » J « « « n u n V i m I ro Method \ ^ u m » / t r Flow Methods 363 First-in. First-OI ỉ (FIFOV Last F - ^ 1 lìĩv x^^Or ^ . O S i F

Ta i , C i a l

? t a t e m e n t Effects of Costing Methods 367 M c c t k m of Cwtine Method / 368 Balance Sheet Effects; Income' Statement Effects Tax Fleets p£L.« 1 Inventory Systems / 369 y ^ m k i g Entries und̂ r a PerpSual 55?r»3r? Accounting ^ s UDamareTr^ Cast B « b of

f/- ? * L*niid£t or ^'Psocescence; I nee Declines; Methods of Applying Lovwr oi Cost or Market Estimating Inventories Ị 375 Cross Profit Method: Retaili Inventory ^ h o d

;

l n v e n t o r > E r r o i * ' 378 Income Statement Effect Fi iunoal Statement Presentation 380 Summary of Study Objectives f 380 APPENDIX Z \ INVENTORY SsĩĩĩSP1

PERPETUAL INVENTORY SYSTEMS 382 Fiist-In, First-Out _ Z r A v e r a s c C o s t ' 3 8 3 Last-In, Firsl-OuMLIFO) 383 Glossary 384

Demonstration Problem / 384 Self-Study Test Questions 386 Questions 386 Exercises 388 Problems 392 Alternate Problems / 3% Financial Reporting Problem 398 Decision Case

CHAPTER 10 / P L A N T ASSETS: ACQUISITION A N D DEPRECIATION

Study Objectives / 401 Importance of Plant Assets 401 Classes of Plant Assets 402 Determining the Cost of Plant Assets 402 Land; Land Improvements; Buildings; Equipment Determining Cost—Additional Considerations 405 Purchase with Interest-Bearing Note; Lump-Sum Purchase; Self-Construction Concept of Depreciation / 407 Depreciation Methods 408 Straight-Lino, Units ót Activity; Declining Balance; Sum-of-the-Years-Digits; Comparison of Methods Depreciation and Income Taxes / 415 Revision of Periodic Depreciation 415 Expenditures During Useful Life / 416 Additions; Improvements; Misdassification of Expenditures; Capital Expenditures and Subsequent Depreciation Summary of Study Objectives Glossary / 420 Demonstration Problem 421 Self-Study Test Questions 422 Questions / 422 Exercises / 424 Problems 427 Alternate Problems 430 Financial Reporting Problem / 432 Decision Case 433

C H A P T E R 11 / P L A N T ASSET DISPOSALS, N A r u RAI RESOURCES, A N D INTANGIBLE ASSETS 435

Study Objectives 435 SECTION O N E — P L A N T ASSET DISPOSALS 455 Disposal by Retirement / 436 Disposal by Sale 436 Gain on I Kspowl*; Los* on Disposal Disposal by Exchange I 438 Dissimilar Assets; Similar Assets Subsidiary Plant Ledgers/ 442 SECTION T W O — N A T U R A L RESOURCES 443 Acquisition Costs 444 Write off of Acquisition CoJtllDepletion) /444 SECTION T H R E E ^ I N T A N G I B L E ASSETS / 446 Accounting for Intangible Assets 446 Patents; CopyrightsTTrademarKs and Trade Names; Franchises and Licenses; Organization Coils; Goodwill 1 eases -Research and Development Costs 452 Financial Statement Presentation 453 SuAimaiy of Study pbjectives 454 Glossary í 455 Self-Study Test Question* 456 Demonstration Problem 436 Questions / 457 Exercise* / 459 Problems 4M Alternate Problems ỉ 464 Financial Reporting Problem 468 Decision Case 46H

CHAPTER 12 I CUR A N D PAYROLL ACC 471

Study Objectives 471 SECTION ONE—CURRENT LIABILITIES / 471 What Is a Current Liability? 471 Types of Current Liabilities / 472 Notes Payable; Sales Taxes Payable; Advances from Garnets (Unearned Revenues). Current Maturities of Lone Term Debt,^Contingent^Liabilities Statement Presentation of Current Liabilities / 479 SECTION TWO-PAYROLL ACCOUNTING / 479 Who Is an Employee? / 480 Importance of Internal Control / 480 Hiring Employees; Timekeeping; Paying the Payroll Gross Earnings / 483 Wages and Salaries; Bonuses Payroll Deductions / 484 Mandatory Deductions; FICA Taxes; Income Taxes; Voluntary Deductions Net Pay / 487 Payroll Department Records / 487 Recording the Payroll / 489 Paying Employees / 489 Employer Payroll Taxes m FICA Taxes; Federal Unemployment Taxes; State Unemployment Taxes Recording Employer's Payroll Taxes / 491 Filing and Remitting Payroll Taxes / 492 Additional Fringe Benefits / 493 Paid Absences; Postretirement Benefits Summary of Study Objectives / 497 Glossary / 498 Demonstration Problem 499 Self-Study Test Questions / 500 Questions / 501 Exercises / 502 Problems / 505 Alternate Problems / 508 Financial Reporting Problem / 512 Decision Case 512

CHAPTER 13 / A C C O U N T I N G PRINCIPLES 515

Study Objectives / 515 SECTION ONE—GENERALLY ACCEPTED ACCOUNTING PRINCIPLES / 516 Objectives of Financial Reporting / 517 Qualitative Characteristics of Accounting Information / 517 Relevance; Reliability; Comparability and Consistency Elements of Financial Statements / 520 Operating Guidelines 520 Assumptions; Principles; Constraints in Applying Guidelines Summary of Conceptual Framework / 530 SECTION TWO—ACCOUNTING PRINCIPLES AND ETHICS / 531 Ethical Considerations 531 Causes of Fraudulent Financial Reporting 532 SECTION THREE—ACCOUNTING PRINCIPLES AND INTERNATIONAL OPERATIONS 533 Importance of International Trade 534 Foreign Exchange Rate* 534 Translating Foreign Currency Transactions / 535 Foreign Purchases; Realized vs. Unrealized Foreign Exchange Gain or Loss; Foreign Sales; Financial Statement Presentation Translation of Foreign Currency Financial Statements / 540 Income Statement Translation; Balance Sheet Translation Uniform International Accounting Standards / 542 Summary of Study Objectives / 543 Glossary / 544 Self-Study Test Questions 545 Demonstration Problem 1 / 546 Demonstration Problem 2 546 Questions / 548 Exercises / 549 Problems / 554 Alternate Problems / 557 Financial Reporting Problem / 561 Decision Case / 561

CHAPTER 14 / A C C O U N T I N G FOR PARTNERSHIPS 565

Study Objectives / 565 Characteristics of a Partnership / 565 Association of Individuals; Mutual Agency; Limited Life; Unlimited Liability; Co-ownership of Property Advantages and Disadvantages of a Partnership / 568 The Partnership *F*^JJ* Formation of a Partnership / 569 Division of Net Income or Net Loss / 570 Closing Entries; Income Ratios; Salaries, Interest, and Remainder on * FSfid »*JE*J^]« Financial Statements / 574 Admission of a Partner ị 575 Purchase of a ^ t n ^ s Interest; Investment of Assets in Partnership Withdrawal of a Partner / 579 í aymertt

from Partner's Personal Assets; Payment from Partnership Assets; Death of a Partner Liquidation of a Partnership /Sắằ No Capital Deficiency; Capital Deficiency Summary of Study Objectives 588 Glossary / 588 Demonstration Problem / 589 Self-Study Test Questions 590 Questions 591 Exercises / 592 Problems / 595 Alternate Problems 598 Financial Reporting Problem / 601 Decision Case / 602

CHAPTER 15 / CORPORATIONS: ORGANIZATION

AND CAPITAL STOCK T R A N S A C T I O N S 605 Study Objectives 605 What Is a Corporation? / 605 Characteristics of a Corporation / 606 Separate Legal Existence; Limited Liability of Stockholders; Transferable Ownership Rights; Continuous Life; Organizational Structure (Delegation of Responsibility); Government Regulations; Additional Taxes Formation of a Corporation / 609 Corporate Capital / 610 Paid-in Capital; Retained Earnings Ownership Rights / 611 Characteristics of Stock Issuance / 612 Authorized Stock; Issuance of Stock; Market Value of Stock; Par and No-Par Value Stocks Accounting for Common Stock Issues / 616 Issuing Par Value Common Stock for Cash; Issuing No-Par Common Stock for Cash; Issuing Common Stock for Services or Noncash Assets Sale of Common Stock on a Subscription Basis / 618 Donated Capital / 618 Treasury Stock / 619 Treasury Stock Entries; Financial Statement Presentation Preferred Stock / 621 Dividend Preferences; Liquidation Preferences Preferred Stock—Other Rights / 624 Convertible Preferred Stock; Callable Preferred Stock Statement Presentation of Stockholders' Equity / 625 Book Value—Another Per Share Amount / 627 Supporting Stock Records and Procedures / 628 Summary of Study Objectives / 629 Glossary / 630 Demonstration Problem 631 Self-Study Test Questions 632 Questions / 633 Exercises / 634 Problems 638 Alternate Problems / 641 Financial Reporting Problem 644 Decision Case 645

CHAPTER 16 / CORPORATIONS: DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING 647

Study Objectives / 647 Dividends 647 Cash Dividends 648 Entries for Cash Dividends Stock Dividends / 650 Entries for Stock Dividends; Effects of Stock Dividends Stock Split / 653 Prior Period Adjustments 653 Retained Earnings Restrictions / 654 Retained Earnings Statement 655 Stockholders' Equity Section / 656 Corporation Income Statements 657 Expansion of the Income Statement / 658 Intraperiod Tax Allocation; Discontinued Operations; Extraordinary Items; Change in Accounting Principle Earnings Per Share 663 Earnings Per Share-

Additional Complications / 664 Preferred Stock Dividends; Complex Capital Structure Summary of Study Objectives / 666 Glossary 667 Demonstration Problem bbS Self-Study Test Questions / bb9 Questions 670 Exercises / 672 Problems 675 Alternate Problems / 678 Financial Reporting Case 681 Decision Case 681

CHAPTER 17 / LONG-TERM LIABILITIES 685

Study Objectives / 685 Why Issue Bonds? '• 686 Characteristics of Bond Issuance /1>87 Types of Bonds; Issuing Procedures; Trading of Bonds; Determining the Market Value oi Bonds Issuing Bonds at Face Value ' 691 Issuing Bonds at Face Value Plus Accrued Interest / 692 Issuing Bonds Below or Above Face Value / 693 Bonds Issued at a

Discount; Bonds IssụặỂfp&# Premium E í fective ínti rest Amortization / 696 Bonds Issued at a Discount; ỉtottđs Issued at a Premium Redemption of Bonds Before Maturity/700 Conve^ếÉtỊ$*l Bonds 700 Bond Silíklỉtg Funds / 701 Determining to Periodic Contribution; StokiB^Fund Entries Accounting for Long-Term Notes Payable / 702 Lease Liability / 70* Operating Lei^ỂS; Capital Leases Deferred Income Taxes "06 Statement PresentationJ^1&fi|&fenil Liabilities / 7Ơ7 Summary of Study Objectives 708 : | Ị Ệ ^ Ệ ^ ^ ^ ^ ^ | Ệ ^ ^ | j | Ệ ^ g Ọ N C Ì ^ / 709 Present Value of a Single Future Amount 709 Present Value of a Series of Future Payments 710 l ime Periods and Discounting / 712 ( om pitting the Present Value DÍ á Bond / 712 Glossary 713 Self-Study Test Questions / 714 Demonstration Problem 715 Questions / 716 Exercises / 717 Problems / 720 Alternate Problems 723 Financial Reporting Problem 727 Decision Case 728

C H A P T E R 18 / INVESTMENTS A N D

C O N S O L I D A T E D F I N A N C I A L STATEMENTS 731 Study Objectives 731 SECTION ONE—TEMPORARY INVESTMENTS 731 Types of Temporary Investments / 732 Readily Marketable; Intent tơ Convert Accounting for Temporary Investments / 733 Marketable Equity Securities; Marketable Debt Securities Valuation at Lower of Cost or Market 735 Recognition of Decline in Value; Subsequent Sale of Securities Financial Statement Presentation / 737 SECTION TWO—LONG-TERM INVESTMENTS / 737 Investments in Bonds 737 Investments in Stocks 738 Cost Method; Lower of Cost or Market Method; Equity Method; Receipt of Stock Dividends or Stock Splits; Statement Presentation of Long-Term Investments SECTION THREE—CONSOLIDATED FINANCIAL STATEMENTS 743 Parent and Subsidiary Company Relationships / 744 Purpose of Consolidated Financial Statements 744 Preparation of Consolidated Balance Sheet 745 Use of a Work Sheet; Acquisition Cost Above or Below Book Value of Net Assets; Acquisition of Less than 100 ' Ownership; Other Intercompany Eliminations Consolidated Income Statement 751 Business Combinations—Purchase versus Pooling of Interests 752 Balance Sheet Effects; Income Statement Effects Summary of Study Objectives 754 Glossary 756 Demonstration Problem 1 757 Demonstration Problem 2 758 Self-Study Test Questions / 758 Questions 759 Exercises 760 Problems 764 Alternate Problems / 768 Financial Reporting Problem 771 Decision Case 772

CHAPTER 19 / STATEMENT OF C A S H FLOWS 775

Study Objectives / 775 Purpose of the Statement of Cash Flows 775 Classification of Cash Flows / 776 Format of Statement of Cash Flows 778 Preparation of the Statement / 779 First Illustration—1990; Determining the Net Increase or Decrease in Cash Second Illustration—1991 / 784 Summary oi Conversion to Net Cash Provided by Operating Activities / 788 Additional Problems / 788 Redemption of Debt and Retirement or Reacquisition of Capital Stock; Gross Receipts and Payments; Significant Noncash Transactions; Additional Problems—A Recap Usefulness of the Statement of Cash Flows / 793 Summary of Study Objectives I 795 APPENDIX 19-A USING A WORK SHEET FOR P R E P A R I N G THE S T A T E M E N T OF C A S H FLOWS / 795 Preparation of the Work Sheet / 797 Determining the Reconciling Items Preparation of the Statement / 800 Glossary / 800 Demonstration Problem / 802 Self-Study Test Questions / 803 Questions / 804 Exercises / 805 Problems 808 Alternate Problems / 812 Financial Reporting Problem / 816 Decision Case t 816

Study Objectives / 819 Need tor Comparative Analysis / 819 Tools ơi Financial Statement Analysis 820 Horizontal Analysis; Vertical Analysis; Ratio Analysis; Liquidity Ratios; Profitability Ratios; Solvency Ratios Limitations of Financial Analysis 837 Estimates; Historical Cost; Alternative Accounting Methods; Atypical Date; Diversification of Firms Summary of Study Objectives / 839 Glossary 840 Demonstration Problem / 841 Self-Study Test Questions / 843 Questions 844 Exercises / 845 Problems 849 Alternate Problems / 855 Financial Reporting Problem 860 Decision Case 862

CHAPTER 21 MANAGj K ỉ AI \1 c Ị H A ỉ i V Ị 22

Study Objectives / 865 Managerial Accounting / 865 Managerial Accounting and Financial Accounting / 866 Primary Users; Type and Frequency of Reports; Purpose of Reports; Content oi Reports Management Functions 868 Managerial Cost Concepts; Manufacturing Costs; Direct Materials; Direct Labor; Manufacturing Overhead Product and Period Costs / 873 Manufacturing Costs in the Financial Statements 874 Income Statement Determining the Cost of Goods Manufactured 875 Cost of Goods Manufactured Schedule / 875 Balance Sheet; Other Cost Concepts; Variable and Fixed Costs; Cost Concepts—A Review / 879 Summary of Study Objectives /880 APPENDIX 21-A A C C O U N T I N G CYCLE FOR A M A N U F A C T U R I N G C O M P A N Y / 882 Work Sheet / 882 Closing Entries / 884 Glossary 885 Demonstration Problem 88e» Self-Study Test Questions / 890 Questions 890 Exercises 891 Problems 895 Alternate Problems / 899 Decision Case 902

CHAPTER 22 / JOB ORDER COST ACCOUNTING 905

Study Objectives / 905 Management Uses of Job Cost Data 905 Cost Accounting Systems / 906 Job Order Cost Flow 907 Accumulation oi Manufacturing Costs; Assignment of Manufacturing Costs to Work in Process; Recording the Cost ót Completed Jobs; Recording tho Cost oi Goods Sold Summary of Job Order Cost Flows / 918 Reporting Job Cost Data 920 Under- or Overapplied Manufacturing Overhead / 920 Summary of Study Objectives 922 Glossary 923 Demonstration Problem / 923 Self-Study Test Questions 925 Questions 925 Exercises Problems 930 Alternate Problems 934 Decision Case 938

CHAPTER 23 / PROCESS COST ACCOUNTING 941

Study Objectives / 441 Characteristics of Continuous Process Manufacturing M41 Features of Process Cost Accounting 942 Process Cost Flow 943 Accumulation of Manufacturing Costs, Assignment of Manufacturing Costs End of Period Procedures / 947 SECTION ONE—-MACHINING DEPARTMENT

c)48 Computing Physical Units / 948 Computing Equivalent Units of Production 948 Equivalent Units for Materials; Equivalent Units for Conversion Costs Computing Unit Costs of Production /950 Assigning Costs to Units Transferred and ỉn Process 981 Preparine

C o S t R e p

.O T i 1 9 5 2 SECTION TWO—ASSEMBLY DEPARTMENT^ 952

£ ™p i

! "^Physical Units / 952 Computing Equivalent Units oi Production 954 Equivalent Units for Materials; Equivalent Units for Conversion Costs Computing Unit

Costs of Production 936 Assigning Costa fo Unite Transferred and in Process Preparing the Production Cost Report / 957 Process Cost Flow Summary/959

in-Time Processing sú 9b/

Bv-Prođurt l i Problems 960 Joint Products Study Objectives gfr4 &PPẸÌ Computing Equivalent Units of Production / 965 Computing;UnU Costeof Production 966 Assigning Unit Costs to Units Transferred Out and In Process gtparing the Product on Cost Report / 968 Glossary /968 Demonstration Problem 969 Self-Study Test Questions / 971 Questions / 972 Problems 977 Alternate Problems / 980 Decision Case/ 983

"59 Special mmary of

%7

Exercises / 973

CHAPTER 24 COST-VOLUME-PROFIT RELATIONSHIPS 987

Study Objectives ỉ 987 SECTION O N E - C O S T BEHAVIOR ANALYSIS / 988 Activity Index 988 Variable Costs / 988 Fixed Costs / 989 Relevant Range / 990 Mixed Costs 991 Scatter Diagram Method^High-Low Method Importance of Identifying Variable and Fixed Costs 994 SECTION TWO—COST-VOLUME-PROFIT ANALYSIS 995 Basic Components / 995 Contribution Margin / 9% Break-Even Analysis 997 Mathematical Equation; Contribution Margin Technique- Graphic Presentation Margin of Safety / 1001 Target Net Income / 1002 Mathematical Equation; Contribution Margin Technique; Graphic Presentation; Target Net Income After Taxes Sales Mix / 1004 C V P and Changes in the Business Environment / 1004 CVP Income Statement / 1007 Summary of Study Objectives / 1008 APPENDIX 24-A VARIABLE COSTING /1009 Glossary / 1013 Demonstration Problem / 1013 Self-

Study Test Questions / 1014 Questions / 1015 Exercises / 1016 Problems / 1021 Alternate Problems / 1024 Decision Cases / 1026

CHAPTER 25 / BUDGETARY PLANNING 1031

Study Objectives / 1031 Budgeting and Management 1031 Budgeting and Accounting / 1032 Essentials of Effective Budgeting 1032 Sound Organizational Structure; Research and Analysis; Management Acceptance Budgeting and Human Behavior 1033 Advantages of Budgeting / 1035 Length of Budget Period / 1035 Budgeting Process / 1036 The Master Budget / 1036 Preparation of Master Budget / 1038 Sales Budget; Production Budget; Direct Materials Budget; Direct Labor Budget; Manufacturing Overhead Budget; Selling and Administrative Expense Budget; Cash Budget; Budgeted Income Statement; Budgeted Balance Sheet Budgeting and Long-Range Planning / 1047 Budgeting in Nonmanufacturing Companies 1048 Merchandising Companies; Service Enterprises; Not-for-Profit Organizations Summary of Study Objectives / 1050 Glossary / 1051 Demonstration Problem / 1052 5 « f - M u d y Test Questions / 1053 Questions/ 1053 Exercises / 1055 Problems / 1058 Alternate Problems / 1061 Decision Cases / 1064

CHAPTER 26 / BUDGETARY CONTROL AND RESPQNS1B1UTY ACCOUNTING

^ O b j e c t i v e s / 1069 Concept of Budgetary Control / 1069 Master Jug* S S

r

^ Sports /107Ĩ The Flexibie ^^'^L^ỄS^SX^ Roping the Flexible Budget Flexible Budgeiiliustra tad; f^^ i^s s d e m e n t by Exception / 1078 Concept of Responsibility Accounting

1069

IdntroJlable Versus Noncontrollable Revenues and Costs; Responsibility System; Types of Responsibility Centers Responsibility Performance Reports for Cost Centers 1084 Responsibility Accounting for Profit Centers /1085 Direct and Indirect Fixed Costs; Responsibility Performance Report " f f W ^ / T ^ f o r

Investment Centers / 1087 Return on Investment (ROI); Responsibility Performance Report ROI-Expanded Formula; Improving ROI; Judgmental Factors in ROI Principles of Performance Evaluation ì 1091 Summary of Study Objectives / 1092 Glossary/1093 Demonstration Problem / 1094 Self-Study Test Questions / 1095 Questions / 10% Exercises / 1097 Problems / noi Alternate Problems / 1105 Decision Cases / 1109

CHAPTER 27 / P E R F O R M A N C E E V A L U A T I O N

T H R O U G H STANDARD COSTS m M M

Study Objectives /1113 Need for Standards /1113 Distinction Between Standards and Budgets / 1114 Why Standard Costs? /1114 Setting Standard Costs—A Diff icul t Task / 1115 Setting Standards—A Case Study / 1116 Direct Materials; Direct Labor; Manufacturing Overhead; Total Standard Cost Per Unit Determining Variances from Standards /1119 Analyzing Variances /1120 Direct Materials Variances; Direct Labor Variances; Manufacturing Overhead Variances Reporting Variances / 1128 Causes of Variances / 1129 Materials Variances; Labor Variances; Manufacturing Overhead Variances Standard Cost Accounting System / 1130 Journal Entries; Ledger Accounts; Statement Presentation of Variances Summary of Study Objectives / 1134 APPENDIX 27-A THREE-VARIANCE ANALYSIS OF M A N U F A C T U R I N G O V E R H E A D / 1136 Glossary /1138 Demonstration Problem / 1139 Self-Study Test Questions / 1141 Questions /1141 Exercises / 1143 Problems / 1147 Alternate Problems /1150 Decision Cases /1153

C H A P T E R 28 I N C R E M E N T A L A N A L Y S I S

A N D C A P I T A L B U D G E T I N G 1157

Study Objectives / 1157 Management's Decision-Making Process i 1157 SECTION ONE—INCREMENTAL ANALYSIS 1158 Meaning of Incremental Analysis 1158 How Incremental Analysis Works > 1159 Types of Incremental Analysis ì 1159 Acceptance of an Order at a Special Price; Make a Buy; Sell or Process Further; Retain or Replace Equipment Elimination of an Unprofitable Segment / 1164 Allocation of Limited Resources / 1165 SECTION T W O — C A P I T A L . B U D G E T I N G / 1166 Approaches to Capital Budgeting / 1167 Annual Rate of Return; Cash Payback; Discounted Cash Flow; Comparison of Discounted Cash Flow Methods Summary of Study Objectives /1178 Glossary /1179 Demonstration Problem / 1180 Self-Study Test Questions / 1181 Questions / 1181 Exercises / 1182 Problems ỉ 1186 Alternate Problems / 1189 Decision Case / 1191

C H A P T E R 29 / I N C O M E TAXES A N D M A N A G E M E N T DECISION:

Federal Income Tax System / 1195 Taxable Entities / 11% Tax Relationships / 11% ? a l : ^ T Methods / 1197 Accrual Method; Cash Method Filing Status for Individuals /1197 SECTION O N E - I N D I V I D U A L S I 1198 Grow Income / 1198