Accounting concepts and applications

1. W. STEVE ALBRECHT PhD, CPA, CIA, CFE Brigham Young University EARL K. STICE PhD Brigham Young University JAMES D. STICE PhD Brigham Young University MONTE R. SWAIN PhD, CPA, CMA Brigham Young University TENTH EDITION W. STEVE ALBRECHT PhD, CPA, CIA, CFE Brigham Young University EARL K. STICE PhD Brigham Young University JAMES D. STICE PhD Brigham Young University MONTE R. SWAIN PhD, CPA, CMA Brigham Young University ACCOUNTING Concepts and Applications

2. Accounting: Concepts & Applications, 10e W. Steve Albrecht, Earl K. Stice, James D. Stice, and Monte R. Swain VP/Editorial Director: Jack W. Calhoun Publisher: Rob Dewey Executive Editor: Sharon Oblinger Developmental Editor: Aaron Arnsparger Marketing Manager: Kristen Hurd Content Project Manager: Starratt E. Alexander Manager of Technology, Editorial: John Barans Technology Project Editor: Scott Hamilton Manufacturing Coordinator: Doug Wilke Production House/Composition: LEAP Publishing Services and GGS Information Services Printer: R R Donnelley Willard Manufacturing Division Art Director: Bethany Casey Internal Designer: C Miller Design Cover Designer: Bethany Casey Cover Illustrations: Larry Moore, Scott Hull Associates Photography Manager: Deanna Ettinger Photo Researcher: Robin Samper COPYRIGHT 2008, 2005 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Printed in the United States of America 1 2 3 4 5 10 09 08 07 Student Edition ISBN 13: 978-0-324-37615-4 Student Edition ISBN 10: 0-324-37615-4 Instructors Edition ISBN 13: 978-0-324-64833-2 Instructors Edition ISBN 10: 0-324-64833-2 ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any meansgraphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution or information storage and retrieval systems, or in any other manner without the written permission of the publisher. For permission to use material from this text or product, submit a request online at http://www.thomsonrights.com. Library of Congress Control Number: 2006940161 For more information about our products, contact us at: Thomson Learning Academic Resource Center 1-800-423-0563 Thomson Higher Education 5191 Natorp Boulevard Mason, OH 45040 USA

3. TAKE A LOOK AT THE BEST GAME IN TOWN SEE page iv A STRATEGY FOR SUCCESS Accounting, 10e continues to build upon a winning strategy designed to help you meet the diverse needs of both accounting majors and non-majors in your course. The texts solid presentation of procedures blends with a balanced emphasis on decision-making. Students learn how to effectively use and prepare accounting information. With an emphasis on the activities of a business, Accounting, 10e demonstrates accounting in action using a wealth of actual examples from numerous leading companies throughout the world. Student-focused learning features place concepts within a business context. No matter what your students career choices, this edition has the coverage to make them winners in the game of life. THE WINNING SOLUTION STRONGER WITH EVERY ROUND Building on the strengths that make this a market- leading text, this edition takes the accounting experience to a new level. The flexibility of expanded coverage, new applications in every chapter, reorganized and streamlined content, and the innovative online ThomsonNOW course management system are everything you need to put your students ahead of the game! Now Its Your Turn. Take a look for yourself! Staying on top of the game in todays competitive world means consistently looking for ways to improve, building upon existing strengths, and maximizing every opportunity. Accounting: Concepts and Applications, 10e does just that to give you and your students a competitive edge in accounting today. See for yourself how proven accounting leaders Albrecht, Stice, Stice, and Swain have improved this edition to help you and your students achieve your personal best in todays classroom and the business world beyond. ACCOUNTING: CONCEPTS AND APPLICATIONS, 10E WHERE FUTURE BUSINESS CHAMPIONS BEGIN

4. YOU WIN WITH FLEXIBILITY TAILORED TO YOUR COURSE NEEDS Always a hallmark of this text, expanded coverage within each chapter, in addition to solid basic coverage of essential accounting concepts, allows you to choose how much depth you wish for exploring advanced topics. The result is maximum flexibility for your class. YOUVE MET YOUR MATCH WITH ALL THE COVERAGE YOU NEED ORGANIZATION PLAYS TO TODAYS BUSINESS STRENGTHS The texts unique approach, emphasizing business activities, provides a solid framework for understanding how an organization performs its primary business activities. This realistic approach makes it easier for students to understand accountings role.

5. STREAMLINED SOLUTIONS ADD UP TO SUCCESS FINANCIAL CHAPTERS LEAVE NOTHING TO CHANCE Based on your feedback, the financial statement analysis chapter appears as the last chapter (Ch. 14) in the financial section. This now serves as a capstone chapter, getting students into analysis. The unique chapter on financial statement integrity (now Ch. 5) provides a strong ethical foundation for students to better understand the impact of the Sarbanes-Oxley Act and todays increased focus on earnings management. MANAGERIAL CHAPTER REVISIONS ON THE ROLL Completely reorganized, streamlined managerial chapters now center around a new conceptual model that covers topics in a logical progression thats ideal for the introductory level. Chapters now begin with traditional product costing methods and discussion of cost flows before moving to control topics, such as budgeting and variances. Managerial chapters now conclude with decision-making subjects, such as CVP and investments. Streamlined chapter on activity-based costing (Ch. 17) provides an intriguing presentation thats careful not to overwhelm students. The use of a continuing example Lily Ice Cream Company is featured to allow students to see ongoing applications of accounting concepts in decision-making. MODIFIED TABLE OF CONTENTS Based on your feedback, the table of contents has been modified to introduce topics similar to the order they are presented on the balance sheet.

6. GAME ON! UNRAVEL THE PUZZLE LEARNING FEATURES STUDENTS REALLY USE Brief Explanations that accompany Learning Objectives at the beginning of every chapter direct students attention while reading. They are an ideal resource to refresh student understanding before lectures and tests. Revised Remember This Summaries at the end of each topical section of the chapter highlight the most important material within that section. Bulleted lists assist with retention, while tables visually demonstrate important relationships or connections. Improved Chapter-Opening Exhibits place events in context, while showing both the timeline of events for a particular business activity and the impact of these events on the financial statements. These enhanced exhibits provide a clear visual aid as students begin to conceptualize the relationships between various activities of a business and the proper accounting procedures that accompany them. FYI boxes draw examples from real business events or situations to show students the immediate relevance of the information they are learning. Stop and Think features highlight thought- provoking issues or concepts that reinforce the importance of developing critical-thinking skills for success in todays competitive business world. Caution boxes remind students of the important points to consider when resolving more difficult situations or learning more complex concepts.

7. FROM NOVICE TO PROFESSIONAL A variety of homework and assignment opportunities at the end of each chapter provides a wealth of hands-on, focused practice. Practice Exercises offer quick-hit concept checks ideal for in-class practice. Exercises and Problems delve deeper into concepts, testing students retention of critical topics and procedures. Margin References to Learning Objectives have been added to all exercise and problem materials for quick reference and focused practice. Analytical Assignments, following the problems in each chapter, provide dynamic new discussion and critical-thinking activities. From discussion cases and judgment calls, to assignments that require the analysis of real company financial statements, this new section is a source for assignments that take learning a step beyond the typical. End-of-chapter practice exercises and problems are now available online through the innovative ThomsonNOW for Accounting, 10e with instant grading and homework management capabilities! VARIETY IS THE NAME OF THE GAME! EXCEPTIONAL END-OF-CHAPTER RESOURCES

8. JUST WHAT YOU NEED TO KNOW AND DO NOW TECHNOLOGY NOW KEEPS YOU AT THE TOP OF YOUR GAME The new ThomsonNOW for Accounting, 10e provides a robust, flexible online course management system! Instructors may assign end-of-chapter materials online while also assessing students incoming knowledge through pre- and post-tests. Students interact with a variety of multimedia as they create personalized study plans that address specific gaps within their individual understanding of accounting. ThomsonNOW is effective in complementing the standard lecture-based course, also serving as a strong foundation for full distance learning programs. ThomsonNOW is compatible with WebCT and Blackboard platforms. I love the ease of use for both students and me. I love that the program will grade student work translating to less work for me the program taps the power of electronic/media and enhances the learning experience For more information, visit www.thomsonedu.com/thomsonnow by assigning homework with ThomsonNOW, the students did better overall on the final exam I have much less grading to do. For the student, there is more practice which translates into better performance (This) online manager allows me to track the work that (students) dothe immediate feedbackleads to quicker mastery and the step-by-step approach translates into better critical thinking.

9. JUST WHAT YOU NEED TO KNOW AND DO NOW ITS YOUR TURN TO SAVE TIME AND ENSURE INTERACTIVE LEARNING Assign Online Homework All end-of- chapter problems and exercises are available online with hints and links to the eBook. This helps students to effectively complete assignments. Check Course Credibility and Compliance ThomsonNOW identifies assignment and test bank questions as they relate to AACSB, AICPA, and IMA standards with customizable reports that allow you to track progress as well as course content. Manage Your Gradebook with Ease ThomsonNOW automatically grades homework and tests and provides students with immediate results. Students take responsibility for their own assignments as they can easily view assignments completed, due dates, and current grades from one convenient screen. You can even weight grades to best fit your overall course plan. Integrated eBook Brings Content to Life Students can read the latest edition sequentially or follow links from specific assignments and end-of-chapter activities for remedial review. Interactive Learning Games and Assignments Reinforce Key Concepts Multimedia games provide a fun way to learn accounting concepts. Both creative and challenging, these games reinforce core content and provide immediate feedback to help students improve knowledge and skills. Personalized Study Plans Reinforce Student Comprehension Diagnostic pre- and post-assessment quizzes identify gaps in knowledge and help students develop Personalized Study Plans that provide practice with links to tutorials, demonstration exercises, videos, eBook content, accounting games and other multimedia tools.

10. QUALITY RESOURCES HELP SOLVE THE ACCOUNTING PUZZLE! FULL SUITE OF INSTRUCTOR SUPPORT GIVES YOU THE WINNING HAND A complete selection of reliable supplements, including PowerPoint slides and a revised Test Bank edited personally by the authors, ensures consistency throughout your course and full continuity with the text! In addition to the innovative new technology offered with ThomsonNOW , Accounting, 10e delivers a wealth of choices for your teaching convenience. Here are just a few highlights from the complete package: Experience Accounting Videos highlight managerial accounting concepts in Accounting, 10e. These 14 video clips cover many industry segments by spanning manufacturing, retail, and service industries. Students watch managerial accounting concepts come to life as they view brief videos that feature familiar organizations such as Hard Rock Caf and BP. The videos are ideal for launching a dynamic, interactive lecture in the classroom. These videos are available in ThomsonNOW or as a standalone item. Improved Test Bank now tags questions to AACSB standards as well as AICPA (in the Financial portion) and IMA standards (in the Managerial portion) so you can efficiently monitor student progress. This is particularly valuable during the accreditation process or when your school wants to standardize assessment. Test bank questions are also identified as easy, moderate, and difficult to help you create exams best suited for your individual students. ExamView Electronic Testing Software allows you to easily generate and customize tests from the reliable test bank questions for traditional or online quizzes or exams. Instructors Manual includes an overview of chapter Learning Objectives, detailed lecture outlines, descriptions of key illustrations and boxed items with page references, and a topical overview grid of end-of-chapter assignments with assignments classified by level of difficulty and estimated time of completion. Companion Web Site Find all of the resources you and your students need on the texts companion Web site. Online, password-protected access allows you to easily download numerous valuable resources and teaching tools, including Solutions Manual, Instructors Manual, PowerPoint slides, and Spreadsheet Solutions. Students can easily access Student Spreadsheet Templates.They can test their understanding with interactive online quizzes and other interactive learning tools. www.thomsonedu.com/accounting/albrecht

11. Content Providers: Cameron Pratt Brigham Young University Jason Bond Brigham Young University John Morley Brigham Young University Michael and Becky Blue Bloomsburg University David ODell McPherson College Dave Cottrell Brigham Young University Verifiers: James Emig Villanova University Beth Woods Howell, MI W. Steve Albrecht James D. Stice Earl K. Stice Monte R. Swain The tenth edition of Accounting: Concepts and Applications reflects many comments from colleagues and students, all of which are deeply appreciated. In particular we would like to thank the following: Laurie Hays Western Michigan University Samuel Tiras University of Buffalo Bob Hartman University of Iowa Cathy Lumbattis Southern Illinois University- Carbondale Hubert Glover Howard University Diane Tanner University of North Florida Kem Edwards Bryant College James Bannister University of Hartford Linda Chase Baldwin Wallace College K.D. Hatheway-Dial University of Idaho Doug Asbury University of Findlay Louann Cummings University of Findlay Josie Mathias Mercer County Community College Ibrahim Badawi St. Johns University Christie Comunale Long Island University- C.W. Post Keren Deal Auburn University Rafik Elias California State University- Los Angeles Marian Boscia Kings College Mary MacAusland Reading Area Community College Bonnie Slager Santiago Canyon College Joey Styron Augusta State University Robert Holtfreter Central Washington University Donald Raux Siena College William Braberry Bluefield State College William Goodman Bluefield State College Anne Rich Quinnipac University Paul Holt Texas A&M University- Kingsville Ralph Lindeman Kent State University Susan Minke Indiana University- Purdue University at Fort Wayne Lynne Shoaf Belmont Abbey College ACKNOWLE DG M E NTS In addition, we would like to thank the following content providers and verifiers for their professional services and consideration in providing a more concise, higher-quality product.

12. W. Steve Albrecht W.SteveAlbrechtistheAssociateDean of the Marriott School of Management and Andersen Professor at Brigham Young University. Dr. Albrecht, a certified public accountant, certified internal auditor, and certified fraud examiner, came to BYU in 1977 after teaching at Stanford and at the University of Illinois. Earlier, he worked as a staff accountant for Deloitte & Touche. Prior to becom- ing associate dean of the Marriott School, Dr. Albrecht served for nine years as the director of the School of Accountancy and Information Systems at BYU. Dr. Albrecht received a bachelors degree in accounting from Brigham Young University and his MBA and PhD degrees from the University of Wisconsin at Madison. He is past President of the American Accounting Association and the Association of Certified Fraud Examiners. He was a former member of the Board of Regents of the Institute of Internal Auditors and the Board of Directors of the Utah Association of CPAs. He was also president of the Accounting Program Leadership Group (chairs of accounting departments and programs) and served on the task force of the American Institute of CPAs that wrote a fraud auditing standard. He was a member of the Committee of Sponsoring Organizations (COSO) from 19972000 and is past president of Beta Alpha Psi, the national accounting honors fraternity. He was a member of the AICPA Council and chaired their Pre- Certification Executive Education Committee. Dr. Albrecht has done extensive research on business fraud. His research has resulted in the publica- tion of over one hundred articles in academic and professional journals. He is the author or co-author of over 20 books or monographs, several of which are on fraud. His financial and principles of accounting textbooks are in their 10th editions. In 2000, he completed a major study (Accounting Education: Charting the Course through a Perilous Future) on the future of accounting education in the United States. His fraud textbook is currently in its second edition. He is a frequent speaker on the topics of fraud examination, accounting education, and personal financial planning. Dr. Albrecht has received numerous awards and honors, including BYUs highest faculty honor, the Karl G. Maeser Distinguished Faculty Lecturer Award for superior scholarship and teaching. He has also received the BYU School of Managements Outstanding Faculty Award and the BYU Outstanding Researcher Award. He has been recognized by Beta Alpha Psi, the Federation of Schools of Accountancy, the Auditing Section of the American Association and the AICPA as Educator of the Year. He has also received awards for outstanding teaching at Stanford University, the University of Illinois, and the University of Wisconsin. In 1997, 2001, 2002, and 2003 he was chosen as one of the 100 most influential accounting professionals in the United States by Accounting Today magazine. In 1998, he received the Cressey Award from the Association of Certified Fraud Examiners, the highest award given for a lifetime of achievement in fraud detection and deterrence. (Past winners were Jane Bryant Quinn of Newsweek magazine and Rudolph Giuliani, past United States Attorney for the Southern District of New York and past mayor of New York City.) In 2002, in honor of his contribution in fighting fraud, the Association of Certified Fraud Examiners named one of the buildings at their headquarters after Dr. Albrecht. And in 2001, in recognition of his contributions to BYU and to academia, an anonymous donor endowed the W. Steve Albrecht Professorship in Accounting. Dr. Albrecht has consulted with numerous organizations, including a variety of Fortune 500 companies, major financial institutions, the United Nations, FBI, and other organizations, and he has been an ex- pert witness in some of the largest fraud cases in America. He currently serves on the audit committees and boards of directors of four public and three private companies. Dr. Albrecht is married to the former LeAnn Christiansen, and they have six children and 10 grandchildren. AB OUT TH E AUTHOR S

13. About the Authors xiii Earl K. Stice Earl K. Stice is the PricewaterhouseCoopers Professor of Accounting in the School of Accountancy and Information Systems at Brigham Young University where he has been on the faculty since 1998. He holds bachelors and masters degrees from Brigham Young University and a PhD from Cornell University. Dr. Stice has taught at Rice University, the University of Arizona, Cornell University, and the Hong Kong University of Science and Technology (HKUST). He won the Phi Beta Kappa teaching award at Rice University and was twice selected at HKUST as one of the ten best lecturers on campus. Dr. Stice has also taught in a variety of executive education and corporate training programs in the United States, Hong Kong, China, and South Africa, and he is currently on the executive MBA faculty of the China Europe International Business School in Shanghai. He has published papers in the Journal of Financial and Quantitative Analysis, The Accounting Review, Review of Accounting Studies, Issues in Accounting Education, and the Journal of Accounting Education, and his research on stock splits has been cited in Business Week, Money, and Forbes. Dr. Stice has presented his research results at seminars in the United States, Finland, Taiwan, Australia, and Hong Kong. He is co-author of Intermediate Accounting, 16th edition and Financial Accounting: Reporting and Analysis, 7th Edition. Dr. Stice and his wife, Ramona, are the parents of seven children: Derrald, Han, Ryan Marie, Lorien, Lily, Taraz, and Kamila. James D. Stice James D. Stice is the Distinguished Teaching Professor in the Marriott School of Management at Brigham Young University. He is currently the Director of the Marriott Schools MBA Program. He holds bachelors and masters degrees from BYU and a PhD from the University of Washington, all in accounting. Professor Stice has been on the faculty at BYU since 1988. During that time, he has been selected by graduating accounting students as Teacher of the Year on numerous occasions, he was selected by his peers in the Marriott School at BYU to receive the Outstanding Teaching Award in 1995, and in 1999 he was selected by the University to receive its highest teaching award, the Maeser Excellence in Teaching Award. Professor Stice has taught at INSEAD in France and at the China Europe International Business School in Shanghai. Professor Stice has published articles in The Journal of Accounting Research, The Accounting Review, Decision Sciences, Issues in Accounting Education, The CPA Journal, and other academic and professional journals. In addition to this textbook, he has published two other textbooks: Financial Accounting: Reporting and Analysis, and Intermediate Accounting. In addition to his teaching and research, Dr. Stice has been involved in executive education for such companies as IBM, Bank of America, Ernst & Young, RSM McGladrey and currently serves on the board of directors of Nutraceutical Corporation. Dr. Stice and his wife, Kaye, have seven children: Crystal, J.D., Ashley, Whitney, Kara, Skyler, and Cierra and two grandchildren. Monte R. Swain Monte R. Swain is the Deloitte Professor of Accounting in the School of Accountancy at Brigham Young University. He received his PhD in managerial accounting and information systems from Michigan State University and joined the BYU faculty in 1991. His dissertation, which examined the impact of information load on capital budgeting decision processes, was awarded an Institute of Management Accountants Dissertation Grant. At BYU, Dr. Swain has received the Teaching Excellence Award for Management Skills in 1994, 1995, and 1997; the Marriott School of Management Outstanding Teacher in 1999. In addition to his research work involving human decision processes, Dr. Swain studies and writes on activity-based costing, the Balanced Scorecard, and the Theory of Constraints in management information systems. He has published papers in leading academic and practitioner journals such as Behavioral Research in Accounting, Decision Sciences, Strategic Finance, and The Internal Auditor. In addition, Dr. Swain is deeply commit- ted to the scholarship of teaching and has published a number of papers and cases on education in Issues in Accounting Education, Journal of Accounting Education, The Journal of Accounting Case Research, Journal of Education for Business, and the Case Research Journal. Dr. Swain sits on the editorial board for Issues in Accounting Education. Dr. Swain has spent significant time working with or researching organizations such as IBM, Clorox, and Deere and Company. He is a Certified Public Accountant and a Certified Management Accountant. Dr. Swain took an academic leave from BYU from July 1999 to July 2000 to serve as the Chief Financial Officer for Authorize.Net (payment-processing service for e-commerce). As a result of that experience, he has published papers and cases on the impact of eCommerce on financial and managerial accounting. Dr. Swain is active in the American Accounting Association where he serves in various capacities helping to promote the objectives of that organization. He and his wife, Shannon, have seven children.

14. SU PPLE M E NTS For the Instructor. ThomsonNOW for Accounting: Concepts and Applications, 10e Description: Save time and ensure all of your studentregardless of their majorhave the understanding they need of accounting procedures and concepts with the integrated, online innovation of ThomsonNOW. This integrated online course management and learning system combines the best of current technology to save you time in planning your course and managing student assignments. You can teach with the latest built-in technology support, reinforce comprehension with customized student learning paths, efficiently test and automatically grade assignments with reports that correspond to AACSB, AICPA and IMA standards. ThomsonNOW is effective for the standard lecture-based course or can serve as a strong foundation for full distance-learning programs. For your convenience, ThomsonNOW is even compatible with WebCT and Blackboard . For more information, visit www.thomsonedu. com/thomsonnow. Experience Accounting Videos Description: The ideal tool for launching a dynamic, interactive lecture in your course, these new Experience Accounting Videos highlight managerial accounting concepts in action from Accounting, 10e. Each brief video clip, which is approximately five minutes, features recognizable companies, such as Hard Rock Caf and BP, who are using managerial accounting to strengthen their business performance. These videos are available in ThomsonNOW or standalone via the web. Instructors Manual Description: Simplify class preparation with these detailed lecture outlines, overview of Learning Objectives, descriptions of key illustrations and boxed items with page references, and topical overview grid of end-of- chapter assignments with assignments classified by level of difficulty and estimated time of completion. Available online or on the Instructors Resource CD- ROM. Instructors Resource CD-ROM ISBN: 0324645783 Description: Place all of the key teaching resources you need for a winning course at your fingertips with this all-in- one source. Find everything you need to plan, teach, grade and assess student understanding and progress. This CD includes the Solutions Manual, Instructors Manual, Test Bank in Word and ExamView , PowerPoint slides, spreadsheet solutions, and solutions to the Cumulative Spreadsheet Analysis assignments from the textbook. PowerPoint Presentation Slides Description: Bring your lectures to life and clarify difficult concepts with these slides for this edition to capture and keep your students attention. Ideal as guides for student note-taking and study, print the slides or simply use with an overhead projector. Available online or on the Instructors Resource CD-Rom. Solutions Manual ISBN: 0324648308 and 0324648316 Description: Carefully verified to ensure accuracy, these solutions and answers to all end-of-chapter materials from the textbook help you easily plan, assign and efficiently grade assignments. Solutions Transparencies ISBN: 0324645848 and 032464583X Description: Clarify learning for students with these acetate masters that detail solutions for the exercises and problems from the text. These are specifically created for instructors who wish to use overheads in class. Test Bank ISBN: 0324645775 and 0324645767 Description: This revised test bank helps you efficiently assess your students understanding with problems and questions that are now tagged to AACSB and AICPA standards. This is particularly valuable during the accreditation process or when your school wants to standardize assessment. Test bank questions are also identified by easy, medium or challenging level of difficulty for easy selection. Title: ExamView 5.0 Computerized Test Bank Description: This easy-to-use test-creation program for Microsoft Windows or Macintosh contains all questions from the printed Test Bank with AACSB, AICPA and IMA standards and level of difficulty indicated for each question. Its simple to customize tests to your specific class needs as you edit or create questions and

15. Supplements xv store customized exams. This is an ideal tool for online testing. Available on the IRCD. WebTutor Toolbox for Blackboard and WebCT ISBN: 0534272401 (Blackboard) or 053427241x (WebCT) Description: Leverage the power of the Internet and bring your course to life with this course management program. You or your students can use this wealth of interactive resources with those on the texts companion website to supplement the classroom experience and ensure positive outcomes. Use this effective resource as an integrated solution for your distance learning or web-enhanced course. Visit http://webtutor.swlearning.com. Working Papers t/a Financial Accounting (chapters 114) ISBN: 0324648227 Description: Verified by the text authors to ensure accuracy and quality consistent with the text, the working papers for problems from the financial accounting chapters in the textbook are provided together in one convenient resource. Albrecht/Stice/Stice/Swains Accounting: Concepts and Applications, 10e Companion Web Site URL: www.thomsonedu.com/accounting/albrecht Description: Now you and your students can reach the top of your game in accounting with immediate access to a rich array of teaching and learning resources at Accounting: Concepts and Applications, 10es interactive companion website. This resource features chapter-by-chapter online tutorial quizzes, a final exam, chapter outlines and review, online learning games, flashcards, expanded coverage of certain topics not found in the textbook and more! Easily download the instructor resources you need from the password-protected, instructor-only section of the site. For Students. Companion Web Site Description: Now you can stay on top of your game, master the procedures and concepts of accounting and earn the grade you want in your accounting course with the rich array of learning resources at the Accounting: Concepts and Applications, 10e interactive companion website. Designed specifically for your accounting needs, this website features chapter-by-chapter online quizzes and solutions, learning games, flashcards, expanded coverage of topics not covered in the text, and more! Working Papers t/a Financial Accounting (chapters 114) ISBN: 0324648227 Description: The working papers for problems from the textbook are provided together in one resource for your convenience. Verified by the text authors to ensure accuracy and consistent quality, youll find the tools you need to enhance your learning experience. TM

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17. PART ONE: FINANCIAL REPORTING AND THE ACCOUNTING CYCLE 1 1 Accounting Information: Users and Uses . . . . . . . . . . . . . . . . . . . . . . 3 2 Financial Statements: An Overview. . . . . . . . . . . . . . . . . . . . . . . . . . 28 3 The Mechanics of Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 4 Completing the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . 129 5 Ensuring the Integrity of Financial Information . . . . . . . . . . . . . . . . 185 PART TWO: OPERATING ACTIVITIES 223 6 Selling a Product or a Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 7 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 8 Completing the Operating Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . 341 PART THREE: INVESTING AND FINANCING ACTIVITIES 387 9 Investments in Property, Plant, and Equipment and in Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 10 Long-Term Debt Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453 11 Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513 12 Investments in Debt and Equity Securities. . . . . . . . . . . . . . . . . . . . 559 PART FOUR: OTHER DIMENSIONS OF FINANCIAL REPORTING 611 13 The Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613 14 Introduction to Financial Statement Analysis . . . . . . . . . . . . . . . . . . 667 PART FIVE: FOUNDATIONS OF MANAGEMENT ACCOUNTING 725 15 Management Accounting and Cost Concepts. . . . . . . . . . . . . . . . . . 727 16 Cost Flows and Business Organizations. . . . . . . . . . . . . . . . . . . . . . 757 17 Activity-Based Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827 B R I E F CONTE NTS

18. xviii Contents PART SIX: CONTROL IN A MANAGEMENT ACCOUNTING SYSTEM 869 18 Budgeting and Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 870 19 Controlling Cost, Profit, and Investment Centers . . . . . . . . . . . . . . . 942 PART SEVEN: MAKING DECISIONS USING MANAGEMENT ACCOUNTING 1007 20 Cost Behavior and Decisions Using C-V-P Analysis . . . . . . . . . . . . . 1009 21 Relevant Information and Decisions . . . . . . . . . . . . . . . . . . . . . . . 1075 22 Capital Investment Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1118 PART EIGHT: CONTINUOUS IMPROVEMENT IN MANAGEMENT ACCOUNTING 1175 23 New Measures of Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . 1177 APPENDICES A Wal-Mart 2006 Annual Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 B Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 C Check Figures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1 INDEXES Subject . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SI-1 Real World Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CI-1

19. P A R T O N E FI NANCIAL R E PORTI NG AN D TH E ACCOU NTI NG CYCLE 1 1 ACCOUNTING INFORMATION: USERS AND USES . . . . . . . . . . . . . 3 Whats the Purpose of Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Relationship of Accounting to Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Who Uses Accounting Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Other Users of Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Within What Kind of Environment Does Accounting Operate?. . . . . . . . . . . . . . . . 13 The Significance and Development of Accounting Standards . . . . . . . . . . . . . . 13 The Financial Accounting Standards Board . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Other Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 International Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Ethics in Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 So, Why Should I Study Accounting? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2 FINANCIAL STATEMENTS: AN OVERVIEW . . . . . . . . . . . . . . . . . . 28 The Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 The Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 The Income Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 The Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 How the Financial Statements Tie Together . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Summary of Significant Accounting Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Additional Information about Summary Totals . . . . . . . . . . . . . . . . . . . . . . . . 46 Disclosure of Information Not Recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Supplementary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 The External Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Fundamental Concepts and Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 The Separate Entity Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 The Assumption of Arms-Length Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 49 The Cost Principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 The Monetary Measurement Concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 The Going Concern Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 CONTE NTS

20. xx Contents 3 THE MECHANICS OF ACCOUNTING. . . . . . . . . . . . . . . . . . . . . . . 75 How Can We Collect All This Information?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 How Do Transactions Affect the Accounting Equation? . . . . . . . . . . . . . . . . . . . . . 79 The Accounting Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Using Accounts to Categorize Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Expanding the Accounting Equation to Include Revenues, Expenses, and Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Why Should I Understand the Mechanics of Accounting? . . . . . . . . . . . . . . . . . 84 How Do We Record the Effects of Transactions?. . . . . . . . . . . . . . . . . . . . . . . . . . 86 Acquiring Cash, Either from Owners or by Borrowing . . . . . . . . . . . . . . . . . . . 87 Acquiring Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Selling Goods or Providing Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Collecting Cash and Paying Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 A Note on Journal Entries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Posting Journal Entries and Preparing a Trial Balance . . . . . . . . . . . . . . . . . . . . . . 97 Determining Account Balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Illustration of the First Three Steps in the Accounting Cycle. . . . . . . . . . . . . . . . . 99 Where Do Computers Fit In All This?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 4 COMPLETING THE ACCOUNTING CYCLE . . . . . . . . . . . . . . . . . 129 Accrual Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 Periodic Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Accrual- versus Cash-Basis Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 Adjusting Entries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Unrecorded Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Unrecorded Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Unearned Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 Preparing Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Financial Statement Preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 The Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 The Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Closing the Books. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Real and Nominal Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Closing Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Preparing a Post-Closing Trial Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 A Summary of the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 5 ENSURING THE INTEGRITY OF FINANCIAL INFORMATION . . . 185 The Types of Problems that Can Occur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 Types of Errors in the Reporting Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

21. Contents xxi Disagreements in Judgment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Fraudulent Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 Safeguards Designed to Minimize Problems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 The Control Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 Control Activities (Procedures) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 Reasons for Earnings Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 Meet Internal Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Meet External Expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Income Smoothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Window Dressing for an IPO or a Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 The Earnings Management Continuum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Is Earnings Management Ethical? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 Personal Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 The Sarbanes-Oxley Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Public Company Accounting Oversight Board. . . . . . . . . . . . . . . . . . . . . . . . . 201 Constraints on Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 Constraints on Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 The Role of Auditors in the Accounting Process . . . . . . . . . . . . . . . . . . . . . . . . . 202 Internal Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 External Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 What Do Auditors Do? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 Are Outside (Independent) Auditors Independent? . . . . . . . . . . . . . . . . . . . . . 206 The Securities and Exchange Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 The Effect of the 1934 Act on Independent Accountants . . . . . . . . . . . . . . . . . 208 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 Comprehensive Problem 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 P A R T T W O OPE RATI NG ACTIVITI ES 223 6 SELLING A PRODUCT OR A SERVICE . . . . . . . . . . . . . . . . . . . . . 224 Major Activities of a Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 Recognizing Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 When Should Revenue Be Recognized? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 Application of the Revenue Recognition Criteria. . . . . . . . . . . . . . . . . . . . . . . 232 Cash Collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 Sales Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234 Sales Returns and Allowances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 Control of Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 Accounting for Credit Customers Who Dont Pay . . . . . . . . . . . . . . . . . . . . . . . . 237 Direct Write-Off Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 The Allowance Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 Real-World Illustration of Accounting for Bad Debts . . . . . . . . . . . . . . . . . . . 243

22. xxii Contents Assessing How Well Companies Manage Their Receivables . . . . . . . . . . . . . . . . . 244 Recording Warranty and Service Costs Associated with a Sale . . . . . . . . . . . . . . . 245 Reconciling the Bank Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 Foreign Currency Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Foreign Currency Transaction Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 7 INVENTORY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282 Inventory and Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 What is Inventory? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 What Costs Are Included in Inventory Cost? . . . . . . . . . . . . . . . . . . . . . . . . . . 287 Who Owns the Inventory? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 Ending Inventory and Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 Accounting for Inventory Purchases and Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . 289 Overview of Perpetual and Periodic Systems. . . . . . . . . . . . . . . . . . . . . . . . . . 289 Perpetual and Periodic Journal Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290 Counting Inventory and Calculating Cost of Goods Sold . . . . . . . . . . . . . . . . . . . 295 Taking a Physical Count of Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 The Income Effect of an Error in Ending Inventory . . . . . . . . . . . . . . . . . . . . 296 Inventory Cost Flow Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297 Specific Identification Inventory Cost Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 FIFO Cost Flow Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 LIFO Cost Flow Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Average Cost Flow Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 A Comparison of All Inventory Costing Methods. . . . . . . . . . . . . . . . . . . . . . . 301 Assessing How Well Companies Manage Their Inventories. . . . . . . . . . . . . . . . . . 303 Evaluating the Level of Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 Impact of the Inventory Cost Flow Assumption. . . . . . . . . . . . . . . . . . . . . . . . 304 Number of Days Purchases in Accounts Payable . . . . . . . . . . . . . . . . . . . . . . 304 Inventory Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 Complications of the Perpetual Method with LIFO and Average Cost . . . . . . . . . . 309 Reporting Inventory at Amounts below Cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 Inventory Valued at Net Realizable Value . . . . . . . . . . . . . . . . . . . . . . . . . . . 311 Inventory Valued at Lower of Cost or Market. . . . . . . . . . . . . . . . . . . . . . . . . 311 Method of Estimating Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313 The Gross Margin Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 EXPANDED material EXPANDED material

23. Contents xxiii 8 COMPLETING THE OPERATING CYCLE . . . . . . . . . . . . . . . . . . . 341 Employee Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 Compensated Absences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 Bonuses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Postemployment Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Postretirement Benefits Other Than Pensions . . . . . . . . . . . . . . . . . . . . . . . . . 350 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Sales Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 352 Deferred Tax Example. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 Environmental Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 Capitalize versus Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359 Summarizing Operations on an Income Statement. . . . . . . . . . . . . . . . . . . . . . . . 360 Other Revenues and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 Extraordinary Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362 Differing Income Statement Formats. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 Comprehensive Problem 68 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384 P A R T T H R E E I NVESTI NG AN D FI NANCI NG ACTIVITI ES 387 9 INVESTMENTS IN PROPERTY, PLANT, AND EQUIPMENT AND IN INTANGIBLE ASSETS . . . . . . . . . . . . . . . . . 388 Nature of Long-Term Operating Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 Deciding Whether to Acquire a Long-Term Operating Asset. . . . . . . . . . . . . . . . . 392 Accounting for Acquisition of Property, Plant, and Equipment . . . . . . . . . . . . . . . . 393 Assets Acquired by Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 Assets Acquired by Leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 Assets Acquired by Self-Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397 Acquisition of Several Assets at Once . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 397

24. xxiv Contents Calculating and Recording Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . 399 Straight-Line Method of Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 Units-of-Production Method of Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 402 A Comparison of Depreciation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 Partial-Year Depreciation Calculations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 403 Units-of-Production Method with Natural Resources . . . . . . . . . . . . . . . . . . . . 404 Repairing and Improving Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . 405 Recording Impairments of Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407 Recording Decreases in the Value of Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407 Recording Increases in the Value of Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408 Disposal of Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409 Discarding Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 409 Selling Property, Plant, and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410 Exchanging Property, Plant, and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . 410 Accounting for Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411 Amortization of Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 414 Impairment of Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 Measuring Property, Plant, and Equipment Efficiency . . . . . . . . . . . . . . . . . . . . . 416 Evaluating the Level of Property, Plant, and Equipment. . . . . . . . . . . . . . . . . 416 Industry Differences in Fixed Asset Turnover . . . . . . . . . . . . . . . . . . . . . . . . . 416 Accelerated Depreciation Methods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 Declining-Balance Method of Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 Sum-of-the-Years-Digits Method of Depreciation . . . . . . . . . . . . . . . . . . . . . . . 419 A Comparison of Depreciation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 Changes in Depreciation Estimates and Methods. . . . . . . . . . . . . . . . . . . . . . . . . 422 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 10 LONG-TERM DEBT FINANCING. . . . . . . . . . . . . . . . . . . . . . . . . . 453 Measuring Long-Term Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 Present Value and Future Value Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . 455 Computing the Present Value of an Annuity . . . . . . . . . . . . . . . . . . . . . . . . . 459 Accounting for Long-Term Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 Interest-Bearing Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 Mortgages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463 Accounting for Lease Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 465 Operating Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 The Nature of Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 Types of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 Characteristics of Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 EXPANDED material

25. Contents xxv Determining a Bonds Issuance Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 Accounting for Bonds Payable Issued at Face Value. . . . . . . . . . . . . . . . . . . . 473 Bond Retirements before Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475 Using Debt-Related Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476 Debt Ratio and Debt-to-Equity Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476 Times Interest Earned Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 Bonds Issued at a Discount or at a Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 478 Accounting for Bonds Issued at a Discount . . . . . . . . . . . . . . . . . . . . . . . . . . 478 Accounting for Bonds Issued at a Premium . . . . . . . . . . . . . . . . . . . . . . . . . . 480 Effective-Interest Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 488 11 EQUITY FINANCING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513 Raising Equity Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516 Difference between a Loan and an Investment. . . . . . . . . . . . . . . . . . . . . . . . 516 Proprietorships and Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 Corporations and Corporate Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 Characteristics of a Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 Starting a Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520 Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520 Accounting for Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521 Issuance of Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521 Accounting for Stock Repurchases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523 Balance Sheet Presentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526 Cash Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526 Dividend Payout Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530 Other Equity Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 531 Equity Items that Bypass the Income Statement . . . . . . . . . . . . . . . . . . . . . . . 531 Statement of Stockholders Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534 12 INVESTMENTS IN DEBT AND EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 559 Why Companies Invest in Other Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 Classifying a Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 564 Held-to-Maturity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 Equity Method Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 Trading and Available-for-Sale Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566 Why the Different Classifications? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566 EXPANDED material

26. xxvi Contents Accounting for Trading and Available-for-Sale Securities. . . . . . . . . . . . . . . . . . . . 568 Accounting for the Purchase of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568 Accounting for the Return Earned on an Investment . . . . . . . . . . . . . . . . . . . 569 Accounting for the Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 570 Accounting for Changes in the Value of Securities . . . . . . . . . . . . . . . . . . . . . . . 571 Changes in the Value of Trading Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 571 Changes in the Value of Available-for-Sale Securities . . . . . . . . . . . . . . . . . . . 571 Subsequent Changes in Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572 Accounting for Held-to-Maturity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574 Accounting for the Initial Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 574 Accounting for Bonds Purchased between Interest Dates . . . . . . . . . . . . . . . . 575 Accounting for the Amortization of Bond Discounts and Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576 Accounting for the Sale or Maturity of Bond Investments. . . . . . . . . . . . . . . . 579 Accounting for Equity Investments Using the Equity Method . . . . . . . . . . . . . . . . 580 Illustrating the Equity Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585 Comprehensive Problem 912 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609 P A R T F O U R OTH E R DI M E NSIONS OF FI NANCIAL R E PORTI NG 611 13 THE STATEMENT OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . . . . 613 Whats the Purpose of a Statement of Cash Flows? . . . . . . . . . . . . . . . . . . . . . . . 615 What Information Is Reported in the Statement of Cash Flows? . . . . . . . . . . . . . . 616 Major Classifications of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616 Noncash Investing and Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . 619 Cash Flow Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 Preparing a Statement of Cash FlowsA Simple Example . . . . . . . . . . . . . . . . . . 620 Analyzing the Other Primary Financial Statements to Prepare a Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 A Six-Step Process for Preparing a Statement of Cash Flows . . . . . . . . . . . . . . 625 An Illustration of the Six-Step Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626 Using Information from the Statement of Cash Flows to Make Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 637 EXPANDED material

27. Contents xxvii 14 INTRODUCTION TO FINANCIAL STATEMENT ANALYSIS . . . . . . 667 The Need for Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669 Widely Used Financial Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671 Debt Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671 Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 671 Return on Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672 Asset Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672 Return on Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673 Price-Earnings Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 673 Common-Size Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676 DuPont Framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679 Profitability Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680 Efficiency Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680 Leverage Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 681 More Efficiency Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 682 Accounts Receivable Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683 Inventory Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683 Property, Plant, and Equipment Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . 684 More Leverage Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685 Debt-to-Equity Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 685 Times Interest Earned Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686 Cash Flow Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686 Usefulness of Cash Flow Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687 Cash Flow to Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 687 Cash Flow Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688 Potential Pitfalls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689 Financial Statements Dont Contain All Information . . . . . . . . . . . . . . . . . . . 689 Lack of Comparability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690 Search for the Smoking Gun. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690 Anchoring, Adjustment, and Timeliness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 690 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 691 P A R T F I V E FOU N DATIONS OF MANAG E M E NT ACCOU NTI NG 725 15 MANAGEMENT ACCOUNTING AND COST CONCEPTS . . . . . . . . 727 Management Accounting as a Competitive Tool . . . . . . . . . . . . . . . . . . . . . . . . . 729 Management Accounting and Financial Accounting . . . . . . . . . . . . . . . . . . . . . . . 730 Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 731 Controlling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733 Evaluating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733

28. xxviii Contents Managerial Accounting Terminology. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 Terms Used in Planning and Cost-Volume-Profit Analysis. . . . . . . . . . . . . . . . 734 Terms Related to Controlling Product Cost Flows . . . . . . . . . . . . . . . . . . . . . . 735 Terms Related to Evaluation and Decision Making . . . . . . . . . . . . . . . . . . . . 737 The Role of Ethics in Management Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . 741 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743 16 COST FLOWS AND BUSINESS ORGANIZATIONS . . . . . . . . . . . . . 757 The Flow of Products and Costs in Manufacturing Firms . . . . . . . . . . . . . . . . . . . 759 The Product Costing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 761 Accounting for Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768 Estimated Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769 Actual Manufacturing Overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769 Applied Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770 Disposition of Over- and Underapplied Manufacturing Overhead. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770 The Cost of Goods Manufactured Schedule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773 The Flow of Products and Costs in Service and Mechandising Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775 Comparing Service and Manufacturing Business Activities. . . . . . . . . . . . . . . 776 Product Cost Accumulation in Service Organizations . . . . . . . . . . . . . . . . . . . 777 Product Cost Accumulation in Merchandising Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 780 The Process Costing System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782 Steps in Process Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789 17 ACTIVITY-BASED COSTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827 Activity-Based Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 828 Introduction to Lily Ice Cream Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829 The Basics of ABC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830 Overhead Cost Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 831 Analyze Individual Overhead Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833 Cost Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 Assigning Overhead to Production Using ABC. . . . . . . . . . . . . . . . . . . . . . . . . . . 838 Making Decisions Using ABC Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 845 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 846 Comprehensive Problem 1517. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 868 EXPANDED material

29. Contents xxix P A R T S I X CONTROL I N A MANAG E M E NT ACCOU NTI NG SYSTE M 869 18 BUDGETING AND CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 870 Purposes of Personal Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873 The Budgeting Process in Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 875 Behavioral Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876 Involvement in Preparing the Budget: Top-Down versus Bottom-Up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876 The Master Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878 Budgeting for Operations in a Manufacturing Firm. . . . . . . . . . . . . . . . . . . . 878 Budgeting in Merchandising and Service Firms . . . . . . . . . . . . . . . . . . . . . . . . . . 889 Budgeting for Operations in a Merchandising Firm . . . . . . . . . . . . . . . . . . . . 889 Budgeting for Operations in a Service Firm . . . . . . . . . . . . . . . . . . . . . . . . . . 891 Static versus Flexible Budgeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897 Weaknesses in Static Budgeting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 897 Using the Flexible Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899 Cash Budget. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901 Pro-Forma Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 904 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 19 CONTROLLING COST, PROFIT, AND INVESTMENT CENTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 942 Control of Divisions and Personnel in Different Types of Operating Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945 Benefits and Problems of Decentralization . . . . . . . . . . . . . . . . . . . . . . . . . . . 946 Responsibility Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 947 Standard Cost Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 949 Determining Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 Controlling Performance in Cost Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951 Direct Materials Variances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951 Direct Labor Variances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 956 Controlling Performance in Profit Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959 The Segment Margin Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959 Interpreting Profit Center Performance Results. . . . . . . . . . . . . . . . . . . . . . . . 961 Managing Revenues in Profit Centers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962 EXPANDED material

30. xxx Contents Evaluating Performance in Investment Centers . . . . . . . . . . . . . . . . . . . . . . . . . . 964 Return on Investment (ROI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 Residual Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 966 Variable Manufacturing Overhead Variances in Cost Centers . . . . . . . . . . . . . . . . 968 Measuring and Controlling Variable Manufacturing Overhead Costs. . . . . . . 968 Fixed Manufacturing Overhead Variances in Cost Centers . . . . . . . . . . . . . . . . . . 972 Measuring and Controlling Fixed Manufacturing Overhead Costs . . . . . . . . . 972 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 976 P A R T S E V E N MAKI NG DECISIONS USI NG MANAG E M E NT ACCOU NTI NG 1007 20 COST BEHAVIOR AND DECISIONS USING C-V-P ANALYSIS . . . 1009 Understanding Why C-V-P Analysis Is Important . . . . . . . . . . . . . . . . . . . . . . . . 1011 Basic Cost Behavior Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1012 Measuring Level of Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1012 Variable Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1012 Fixed Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1014 Mixed Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1016 Analysis of Mixed Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1017 The Scattergraph, or Visual-Fit, Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1017 The High-Low Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1019 A Comparison of the Scattergraph and High-Low Methods . . . . . . . . . . . . . . 1020 Methods of C-V-P Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1021 Contribution Margin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1021 The C-V-P Equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1024 Measuring the Effect of Potential Changes in C-V-P Variables. . . . . . . . . . . . 1027 Using Graphs to See C-V-P Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1030 The Profit Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1031 A Comparison of C-V-P Graphs with C-V-P Equations . . . . . . . . . . . . . . . . . . 1032 Sales Mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1035 Cost Structure and Operating Leverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1037 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1041 Comprehensive Problem 1820. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1072 21 RELEVANT INFORMATION AND DECISIONS. . . . . . . . . . . . . . . 1075 Differential Costs, Sunk Costs, and Decision Making . . . . . . . . . . . . . . . . . . . . . 1077 Qualitative Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1080 EXPANDED material EXPANDED material

31. Contents xxxi Accepting or Rejecting Special Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1081 Special OrdersThe Sellers Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1081 Making or Buying Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1084 Making or Buying Manufactured Parts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1084 Purchasing Services or Providing Them Internally . . . . . . . . . . . . . . . . . . . . 1086 Exiting or Entering a Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1088 Exiting a Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1088 Entering a Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1090 Determining at What Stage of Production to Sell Products . . . . . . . . . . . . . . . . . 1092 Selecting the Best Use of a Scarce Resource . . . . . . . . . . . . . . . . . . . . . . . . . . . 1094 Setting Selling Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1096 Normal Pricing of Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1096 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1098 22 CAPITAL INVESTMENT DECISIONS . . . . . . . . . . . . . . . . . . . . . . 1118 Conceptual Basis of Capital Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1121 Importance of Capital Investment Decisions in Planning . . . . . . . . . . . . . . . 1121 Uses of Capital Budgeting: Screening and Ranking. . . . . . . . . . . . . . . . . . . . 1121 The Time Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1122 Discounting Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1123 Nondiscounted Capital Budgeting Techniques. . . . . . . . . . . . . . . . . . . . . . . . . . 1125 Payback Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1125 Unadjusted Rate of Return Method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1127 Discounted Capital Budgeting Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1128 Selecting a Discount Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1128 Net Present Value Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1129 Internal Rate of Return Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1132 Comparative Example of Capital Budgeting Techniques . . . . . . . . . . . . . . . . . . . 1135 Qualitative Factors in Strategic and Capital Investment Decisions . . . . . . . . . . . . 1137 Dealing with Uncertainty in Strategic and Capital Investment Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1139 If Expected Cash Flows Are Uncertain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1139 If Useful Life Is Uncertain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1140 If Disposal Value Is Uncertain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1140 Capital Rationing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1141 Ranking by the Internal Rate of Return Method. . . . . . . . . . . . . . . . . . . . . . 1141 Ranking by the Net Present Value Method . . . . . . . . . . . . . . . . . . . . . . . . . . 1141 Income Tax Considerations in Capital Budgeting Decisions . . . . . . . . . . . . . . . . 1143 Appendix: The Time Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1146 Present Value and Future Value Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . 1146 The Present Value of an Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1149 EXPANDED material

32. xxxii Contents Using Excel Spreadsheets for Time Value of Money Calculations . . . . . . . . . 1150 PV Excel Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1150 NPV Excel Function. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1150 IRR Excel Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1151 End-of-Chapter Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1156 Comprehensive Problem 2122. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1173 P A R T E I G H T CONTI N UOUS I M PROVE M E NT I N MANAG E M E NT ACCOU NTI NG 1175 23 NEW MEASURES OF PERFORMANCE . . . . . . . . . . . . . . . . . . . . . 1177 Adding Value to Investors Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1179 Applying the EVA Concept. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1180 Managing Time and Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1181 JIT Inventory Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1182 Measuring Time-Based Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1183 JIT and Value-Added Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1183 Total Quality Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1184 TQM and Management Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1185 Costs of Quality (COQ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1185 COQ Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1188 Locating COQ in the Accounting Records . . . . . . . . . . . . . . . . . . . . . . . . . . . 1189 Lets Take a Flight! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1190 The Balanced Scorecard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1191 Adding Value with Performance Measures . . . . . . . . . . . . . . . . . . . . . . . . . . 1193 Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1194 Internal Processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1196 Learning and Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1199 Linking It All Together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1201 An Example Scorecard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1203 There Is No Quick Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1204 Accounting for Tomorrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1206 End-of-Chapter Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1207 APPE N DICES A WAL-MART 2006 ANNUAL REPORT . . . . . . . . . . . . . . . . . . . . . . . . A-1 B GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 C CHECK FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1 I N DEXES SUBJECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SI-1 REAL WORLD COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CI-1

33. FinancialReportingandtheAccountingCycle 1 P A R T 1 2 3 Accounting Information: Users and Uses Financial Statements: An Overview 5Ensuring the Integrity of Financial Information The Mechanics of Accounting 4 Completing the Accounting Cycle DUNCAN SMITH/PHOTODISC GREEN/GETTY IMAGES INC.

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35. 1 2 3 4 Accounting Information: Users and Uses After studying this chapter, you should be able to: C H A P T E R Describe the purpose of accounting and explain its

Accounting concepts and applications

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