ISBN-13: 978-0-13-325103-6

ISBN-10: 0-13-325103-9

Summary: A unique blend of theory, practice, and robust financial statement analysis.

Introduction to Financial Accounting describes the most widely accepted accounting theory and practice with an emphasis on using and analyzing the information in financial statements. This text also compares U.S. GAAP to IFRS where relevant.

Contents

Preface xiv

Acknowledgements xvi

Chapter 1 Accounting: The Language of Business 2

Starbucks Coffee 2

The Nature of Accounting 5

The Balance Sheet 9

Balance Sheet Transactions 10

Types of Ownership 17

Accounting Differences Between Proprietorships, Partnerships,

and Corporations 19

Stockholders and the Board of Directors 22

Regulation of Financial Reporting 23

Credibility and the Role of Auditing 25

The Accounting Profession 25

Career Opportunities for Accountants 28

Highlights to Remember 31 • Accounting Vocabulary 32 •

Assignment Material 32

Chapter 2 Measuring Income to Assess Performance 44

General Mills 44

Introduction to Income Measurement 46

Measuring Income 52

The Income Statement 5 6

Accounting for Dividends and Retained Earnings 61

Four Popular Financial Ratios 65

The Portfolio P1

Conceptual Framework 69

Other Basic Concepts And Conventions 72

Highlights to Remember 74 • Accounting Vocabulary 75 •

Assignment Material 75

Chapter 3 Recording Transactions 90

Delta Air Lines 90

The Double-Entry Accounting System 92

Debits and Credits 95

The Recording Process 96

Analyzing, Journalizing, and Posting the Biwheels Transactions 99

Biwheels’ Transactions in the Journal and Ledger 106

Preparing the Trial Balance 109

Effects of Errors 116

Incomplete Records 118

Data Processing and Accounting Systems 119

Chapter 4 Accrual Accounting and Financial Statements 140

Columbia Sportswear 140

Adjustments to the Accounts 142

I. Expiration or Consumption of Unexpired Costs 143

II. Earning of Revenues Received in Advance 144

III. Accrual of Unrecorded Expenses 146

IV. Accrual of Unrecorded Revenues 149

The Adjusting Process in Perspective 151

Classifi ed Balance Sheet 156

Income Statement 161

Profi tability Evaluation Ratios 165

Highlights to Remember 169 • Accounting Vocabulary 170 •

Assignment Material 170

Chapter 5 Statement of Cash Flows 188

Costco 188

Overview of Statement of Cash Flows 189

Preparing a Statement of Cash Flows 192

Cash Flow from Operating Activities 199

The Statement of Cash Flows and the Balance Sheet Equation 207

Examples of Statements of Cash Flows 209

The Importance of Cash Flow 211

Highlights to Remember 218 • Accounting Vocabulary 219 •

Assignment Material 219

Chapter 6 Accounting for Sales 238

Oracle Corporation 238

Recognition of Sales Revenue 239

Measurement of Sales Revenue 242

Credit Sales and Accounts Receivable 248

Measurement of Uncollectible Accounts 249

Assessing the Level of Accounts Receivable 256

Accounting for and Managing Cash 258

Overview of Internal Control 259

Highlights to Remember 263 • Appendix 6: Bank Reconciliations 264 •

Accounting Vocabulary 266 • Assignment Material 267

Chapter 7 Inventories and Cost of Goods Sold 284

The Home Depot 284

Gross Profi t and Cost of Goods Sold 285

Perpetual and Periodic Inventory Systems 286

Cost of Merchandise Acquired 289

Comparing Accounting Procedures for Periodic and Perpetual

Inventory Systems 291

Principal Inventory Valuation Methods 293

Lower-of-Cost-or-Market Method 299

Effects of Inventory Errors 301

Cutoff Errors and Inventory Valuation 303

The Importance of Gross Profi ts 304

Gross Profi t Percentages And Accuracy of Records 308

Internal Control of Inventories 308

Highlights to Remember 310 • Appendix 7A: Characteristics and Consequences

of LIFO 311 • Appendix 7B: Inventory in a Manufacturing Environment 315 •

Accounting Vocabulary 317 • Assignment Material 317

Chapter 8 Long-Lived Assets 338

Intel Corporation 338

Overview of Long-Lived Assets 340

Contrasting Long-Lived Asset Expenditures with Expenses 342

Acquisition Cost of Tangible Assets 343

Accounting Alternatives Subsequent to Acquisition 345

Depreciation of Buildings and Equipment 345

Changes in Estimated Useful Life or Residual Value 349

Contrasting Income Tax and Shareholder Reporting 350

Depreciation and Cash Flow 350

Expenditures after Acquisition 353

Gains and Losses on Sales of Tangible Assets 354

Revaluation of Tangible Assets 358

Intangible Assets 360

Goodwill 364

Depletion of Natural Resources 366

Highlights to Remember 366 • Accounting Vocabulary 368 •

Assignment Material 368

Chapter 9 Liabilities and Interest 386

Jack in the Box 386

Liabilities in Perspective 387

Accounting for Current Liabilities 389

Long-Term Liabilities 394

Bond Accounting 399

Accounting for Leases 408

Other Long-Term Liabilities, Including Pensions and Deferred Taxes 413

Debt Ratios and Interest-Coverage Ratios 420

Highlights to Remember 421 • Appendix 9: Compound Interest, Future Value, and

Present Value 422 • Accounting Vocabulary 429 • Assignment Material 430

Chapter 10 Stockholders’ Equity 448

United Parcel Service (UPS) 448

Background on Stockholders’ Equity 451

Accounting For Common Stock in Publicly Held Corporations 452

Preferred Stock 456

Stock Options and Restricted Stock 460

Stock Splits and Stock Dividends 462

Repurchase of Shares 467

Other Issuances of Common Stock 472

Retained Earnings Restrictions 473

Other Components of Stockholders’ Equity 474

Financial Ratios Related to Stockholders’ Equity 474

Highlights to Remember 476 • Accounting Vocabulary 477 •

Assignment Material 477

Chapter 11 Intercorporate Investments and Consolidations 492

Coca-Cola Company 492

An Overview of Corporate Investments 493

Short-Term Investments 494

Long-Term Investments in Bonds 499

The Market and Equity Methods for Intercorporate Equity

Investments 501

Consolidated Financial Statements 504

Purchase Price not Equal to Book Value 515

Summary of Accounting for Equity Securities 516

Highlights to Remember 517 • Accounting Vocabulary 518 •

Assignment Material 519

Chapter 12 Financial Statement Analysis 532

Nike 532

Sources of Information About Companies 534

Objectives of Financial Statement Analysis 535

Evaluating Trends and Components of the Business 537

Financial Ratios 548

Operating Performance and Financing Decisions 555

Prominence of Earnings Per Share 561

Disclosure of Irregular Items 563

International Issues 567

Valuation Issues 567

Relating Cash Flow and Net Income 570