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Chapter 2 Analyzing Transactions 63
Statement of Stockholders' Equity Accounts (Dividends)
The debit and credit rules for recording dividends are based on theT effect hof diviedend s oBn stockahold-sics
ers’ equity (retained earnings). Since dividends decrease stockholders’ equity (retained earnings),
the dividends account is increased by debits. Likewise, the dividends account is decreased by
credits. Thus, the rules of debit and credit for the dividends account are as follows:
Dividends Account
Accounting EquatioDenb:it for Credit for ▪ Balance sheet: A list of the assets, liabilities, and stockholders’
increases (+) decreases (–)
equity as of a specific date, usually at the close of the last day
Assets = Liabilities + Stockholders’ Equity
Normal Balances of a month or a year.
The sum of the increases in an account is usually equal to or greater than the sum of the decre▪a sesS tatement of cash flows: A summary of the cash receipts and
in the accTo uAnct.c Tohuusn, tth:e normal balance of an account is either a debit or credit depending onc ash payments for a specific period of time, such as a month
whether increases in the account are rAeccocroduedn ta Ts idtleebits or credits. For example, because asset
or a year.
accounts are increased with debits, asset accounts normally have debit balances. Likewise, liability
accounts normally have crediLt ebfat lsaindcees. Right side
The rules of debit and creddiet baintd the normal balanccerse odfi tthe various types of accountsA acrce ounting Cycle:
summarized in Exhibit 3. Debits and credits are sometimes abbreviated as Dr. for debit and Cr.
for credit. 1. Transactions are analyzed and recorded in the journal.
2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
Rules of Debit and Credit, Normal Balances:
Rules of Debit and Credit, Normal Balances of Accounts
4. Adjustment data are assembled and
analyzed.
Balance Sheet Accounts
5. An optional end-of-period spreadsheet
is prepared.
ASSETS = LIABILITIES + STOCKHOLDERS' EQUITY 6. Adjusting entries are journalized and
Asset Accounts Liability Accounts Common Stock + Retained Earnings posted to the ledger.
Debit for Credit for Debit for Credit for Debit for Credit for Debit for Credit for 7. An adjusted trial balance is prepared.
increases decreases decreases increases decreases increases decreases increases 8. Financial statements are prepared.
(+) (–) (–) (+) (–) (+) (–) (+)
9. Closing entries are journalized and
Balance Balance Balance Balance posted to the ledger.
10. A post-closing trial balance is prepared.
Income Statement
Accounts Types of Adjusting Entries:
Dividends Revenue Accounts
Debit for Credit for Debit for Credit for ▪ Accrued revenue (accrued asset)
increases decreases decreases increases
(+) (–) (–) (+) ▪ Accrued expense (accrued liability)
Balance Balance ▪ Unearned revenue (deferred revenue)
Expense Accounts ▪ Prepaid expense (deferred expense)
Debit for Credit for ▪ Depreciation expense
increases decreases
The side of the account for recording increases (+) (–) Each entry will always affect both a balance
and the normal balance is shaded. Balance sheet account and an income statement
account.
Analyzing and Journalizing Transactions Closing Entries:
When an account normally having a debit balance has a credit balance, or vice versa, an error
may have occ1u. rr Cedar oerf ualnly u rneuasdua tlh seit udaetsiocnri pmtaiyo ne xoisf tt. hFeo rt reaxnasmapcltei,o an ctroe ddiet tbearlmanicnee in the offi1c.e Revenue and expense account balances are transferred to the
equipment account could result only from an error. This is because a business cannot have more
whether an asset, liability, common stock, retained earnings, retained earnings account.
decreases than increases of office equipment. On the other hand, a debit balance in an accounts
payable accountr ecovuelndu ree,s euxltp feronmse a, no ro dveivrpidayemnednst .account is affected. 2. The balance of the dividends account is transferred to the
2. For each account affected by the transaction, determine retained earnings account.
whether the account increases or decreases.
3. Determine whether each increase or decrease should be recorded Shipping Terms:
as a debit or a credit, following the rules of debit and credit.
FOB Shipping Point FOB Destination
4. Record the transaction using a journal entry. Ownership (title) 18/09/17 10:49 AM
5. Periodically post journal entries to the accounts in the ledger. passes to buyer when
6. Prepare an unadjusted trial balance at the end of the period. merchandise is .................. delivered to delivered to
freight carrier buyer
Financial Statements: Freight costs
are paid by .......................... buyer seller
▪ Income statement: A summary of the revenue and expenses for
a specific period of time, such as a month or a year.
▪ Statement of stockholders’ equity: A summary of the changes in
stockholders’ equity that have occurred during a specific period
of time, such as a month or a year.
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Format for Bank Reconciliation: Summary of Analytical Measures
Cash balance according to bank statement $ XXX liquidity Measures
Add: Deposits in transit XXX
Deduct: Outstanding checks not paid by bank (XXX) Working Capital 5 Current Assets – Current Liabilities
Adjusted balance $ XXX Current Assets
Current Ratio 5
Cash balance according to company’s records $ XXX Current Liabilities
Add: Credit memos that have not been recorded Quick Assets
(notes collected by bank) XXX Quick Ratio 5
Current Liabilities
Deduct: Debit memos that have not been recorded
(NSF checks, service charges) (XXX) Accounts Receivable Sales
5
Adjusted balance $ XXX Turnover Average Accounts Receivable
Inventory Costing Methods: Numbers of Days’ 5 Average Accounts Receivable
Sales in Receivables Average Daily Sales
▪ First-in, First-out (FIFO)
Cost of Goods Sold
▪ Last-in, First-out (LIFO) Inventory Turnover 5
Average Inventory
▪ Average Cost
Number of Days’ Sales Average Inventory
5
Interest Computations: in Inventory Average Daily Cost of Goods Sold
Interest = Face Amount (or Principal) 3 Rate 3 Time Solvency Measures
Methods of Determining Depreciation: Ratio of Fixed Assets to Fixed Assets (net)
5
Cost – Estimated Residual Value Long-Term Liabilities Long-Term Liabilities
Straight-line:
Estimated Life
Ratio of Liabilities to Total Liabilities
5
Units-of-Activity: Cost – Estimated Residual Value 3 Units of Activity Stockholders’ Equity Total Stockholders’ Equity
Total Estimated Units of Activity
Income Before
Double-Declining-Balance: Ra te* × Book Value at Beginning of Period Income Tax + Interest Expense
Times Interest Earned 5
*Rate is commonly twice the straight-line rate (1 ÷ Estimated Life).
Interest Expense
Adjustments to Net Income (Loss) Profitability Measures
Using the Indirect Method:
Sales
Asset Turnover 5
Net income (loss) ......................................... $ XXX Average Total Assets
Adjustments to reconcile net income to net cash flow (excluding long-term investments)
from operating activities:
Depreciation of fixed assets.......................... XXX Net Income + Interest Expense
Amortization of intangible assets..................... XXX Return on Total Assets 5
Losses on disposal of assets.......................... XXX Average Total Assets
Gains on disposal of assets........................... (XXX)
Return on Net Income
Changes in current operating assets and liabilities: 5
Increases in noncash current operating assets .... (XXX) Stockholders’ Equity Average Total Stockholders’ Equity
Decreases in noncash current operating assets.... XXX
Increases in current operating liabilities .......... XXX Return on Common Net Income – Preferred Dividends
5
Decreases in current operating liabilities ......... (XXX) Stockholders’ Equity Average Common Stockholders’ Equity
Net cash flow from operating activities ..................... $XXX
Net Income – Preferred Dividends
Earnings per Share (EPS) 5
Shares of Common Stock Outstanding
Subtract Add
Increases in accounts receivable Decreases in accounts receivable Market Price per Share of Common Stock
Increases in inventory Decreases in inventory Price-Earnings (P/E) Ratio5
Increases in prepaid expenses Decreases in prepaid expenses Earnings per Share on Common Stock
Decreases in accounts payable Increases in accounts payable
Dividends on Common Stock
Decreases in accrued expenses payable Increases in accrued expenses payable Dividends per Share 5
Decreases in income taxes payable Increases in income taxes payable Shares of Common Stock Outstanding
Dividends per Share of Common Stock
Dividend Yield 5
Market Price per Share of Common Stock
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Corporate Financial
Accounting
15e
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
Jefferson P. Jones
Associate Professor of Accounting
Auburn University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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Corporate Financial Accounting, 15e © 2019, 2017 Cengage Learning, Inc.
Carl S. Warren
Unless otherwise noted, all content is © Cengage
Jefferson P. Jones
ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
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Printed in the United States of America
Print Number: 01 Print Year: 2017
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Preface
Roadmap for Success
Warren/Jones Corporate Financial Accounting, 15e, provides a sound pedagogy for giving s tudents
a solid foundation in business and accounting. Warren/Jones covers the fundamentals AND
motivates students to learn by showing how accounting is important to businesses.
Warren/Jones is successful because it reaches students with a combination of new and tried-and-
tested pedagogy.
This revision includes a range of new and existing features that help Warren/Jones provide students
with the context to see how accounting is valuable to business. These include:
▪ New! Make a Decision section
▪ New! Pathways Challenge
Warren/Jones also includes a thorough grounding in the fundamentals that any business student
will need to be successful. These key features include:
▪ Stepwise approach to accounting cycle
▪ Presentation style designed around the way students learn
▪ Updated schema
▪ At the start of each chapter, a schema, or roadmap, shows students what they are going
to learn and how it is connected to the larger picture. In the early chapters, the schema
illustrates how the steps in the accounting cycle are interrelated. In later chapters, the schema
shows how each chapter’s topics are connected to the financial statements.
4 7
Chapter The Accounting Cycle Chapter Internal Control and Cash
Chapter 1 Transactions
Statement of Statement of caSh flowS
StockholderS’ equity For the Year Ended December 31, 20Y5
For the Year Ended December 31, 20Y5
Cash flows from (used for)
Accounting SyStem CoSmtomcko n ERaertnaiinnegds Total Caosph eflroawtins gfr aocmti v(uitsieesd for) $XXX
Accounting Equation Balances, Jan. 1, 20Y5 $XXX $ XXX $ XXX investing activities XXX
Assets = Liabilities + Equity Issued common stock XXX XXX Cash flows from (used for)
Net income XXX XXX financing activities XXX
Dividends (XXX) (XXX) Net increase (decrease) in cash $XXX
Chapter 2 Account Balances, Dec. 31, 20Y5 $XXX $ XXX $ XXX CCaasshh bbaallaannccee,, JDaencueamryb 1e,r 2301Y, 52 0Y5 $ XXXXXX
Debits Credits
RuleS of Debit AnD cReDit Balance Sheet
Balance Sheet Accounts income Statement December 31, 20Y5
For the Year Ended December 31, 20Y5
Assets
DiBnaecAlbrae(isn+tacs )fsAeoeerstS AScECdcerTeocdSrue(i– tna )fstoesrs =DdLeeicbaLri(bet–I aif)AosliertB sy I LACiBIcnTarccelIraodeE(niu+atcS s)nfeeo tsrs +Dde e cbCri(et–o af)moserS sm ToOnCiBnCar ceSlraKdet(ni+aoHtc s)feceoOksr LD+ERDdRSeeecb'rt i(eta–E af)iosQnere sU dI TECiBnYaarcelrradne(ni+aitcn s)feeogsrs SCGO aoWAUrpolsedetastisrv lgsoai e t eptfirei srgtn soieogs fexio inetxpd gxpesp ene senxsonesples dee n ss: e $XXXXXXXXX $$ ( XXXXXXXXX) T PC oru ICAo nt rc aapvTrcelsoee oanhntrusattt sy lnoa e,ct rsptsuyss le rr a retnescnt:e,t ia vanasdbs eleetq s u ipment $ XXXXXXXXX $$XXXXXXXXX
Depreciation expense XXX Liabilities
IncomAcec Sotuanttesment T o…ta l operating expenses XXX (XXX) CLounrrge-ntet rlmiab liialibtieilist ies $ XXXXXX
Dinecbre(i+ta Dfs)oeirsv ideCdneredcdrs(ei–t a ) fsoers DdReeecbvri(et–e af)noseru se ACincrccerdoe(i+aut s)fneostr s OONepthte eirnar ctrioenvmge enin u ceo maned expense $$ XXXXXXXXX TCRoeottmaalim nlieaodSbnt i elosiattciorekncshik no glds ers’ Equity $ XXXXXX $XXX
Balance Balance TToottaall lsiatobcilkithieosl danerds ’s etoqcukihtyo lders’ equity $ XXXXXX
Expense Accounts
Debit for Credit for
increases decreases
(+) (–)
Balance
Unadjusted Trial Balance
158 Total Debit Balances = Total Credit Balances 350
98169_ch04_ptg01_158-231.indd 158 25/09/17 5:27 PM 98169_ch07_ptg01_350-395.indd 350 25/09/17 5:28 PM
iii
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
iv Preface
▪ Link to the “opening company” of each chapter calls out examples of how the concepts
introduced in the chapter are connected to the opening company. This shows how account-
ing is used in the real world by real companies.
Chapter 6 Inventories 301
Finally, controls for safeguarding inventory should include security measures to prevent d amage
and customer or employee theft. Some examples of security measures include the following:
Best Buy ▪▪Storing inventory in areas that are restricted to only authorized employees
▪▪Locking high-priced inventory in cabinets
Assume that in September you purchased a Sony HDTV from Businesses such as Best Buy make similar assumptions when ▪▪Using two-way mirrors, cameras, security tags, and guards
Best Buy (BBY). At the same time, you purchased a Denon identical merchandise is purchased at different costs. For example,
ssuo rwroeulnl dth saotu innd N soyvsetemmb feorr y$o5u9 9p.u99rc. hYoasue ldik eadn yidoeunr tsiucarrlo Duenndo sno usynsd- Bsyesstte Bmusy o mveayr thhaev pe apsut rycehaars aetd d tihffoeuresannt dcos sotfs .D Aetn tohne seunrdro oufn ad p seoruiondd, Best Buy uses scanners to screen customers as they leave the store for merchandise that has not been pur- Link to
tmemov oedn tsoa lae nfoerw $ 5a4p9a.r9tm9 feonr ty aonudr bine tdhreo opmro TceVs. sO ovfe ur nthpea chkoilnidga dyiss,c yoovu- shoamvee boef ethne s Doledn. oBnu ts ywstheimchs wcoilslt sst irlel blaete in t oin vtheen tsooryld, asnydst seomms,e awnidll cthhaats ecadn. I nb ea dudseitdio tno, sBheospt Blifuty m setarctihoannsd girseee.ters at the store’s entrance to keep customers from bringing in bags Best Buy
ered that one of the Denon surround sound systems was missing. which costs relate to the Denon systems still in inventory? Best
Luckily, your renters or homeowners insurance policy will cover the Buy’s assumption about inventory costs can involve large dollar
theft; but the insurance company needs to know the cost of the amounts and, thus, can have a significant impact on the financial Reporting Inventory
system that was stolen. statements. For example, Best Buy reported $5,051 million of inven-
The Denon systems were identical. However, to respond to tory and net income of $897 million for a recent year. A physical inventory or count of inventory should be taken near year-end to make sure that
the insurance company, you will need to identify which system was This chapter discusses such issues as how to determine the the quantity of inventory reported in the financial statements is accurate. After the quantity
sotnodle sny.s Wteams ,i tw thheic fihr csot ssty s$t5e4m9,. 9w9h? iWchh cicohset v$e5r9 a9s.9su9m, opr twioans yito tuh em saekce- ceovestr ,o tfh mis ecrhcahpatnedri sbee igni nins vbeyn tdoisryc uasnsdin tgh eth ceo simt opfo grtoaondcse soofl dc.o Hnotrwo-l of inventory on hand is determined, the cost of the inventory is assigned for reporting in the
mcoamy pdaentye.rmine the amount that you receive from the insurance over inventory. © Photo credit here fcthionesa tn ifnclvoiaewln tsaotsarstyue mmcopesntti tosmn. saM.y I ofbs aet pceohstmyismpicaaatneli deco sa uasn stds ieigss ncn rocibto epsdtos s isntoi b tlhiene vo earn pitnpoverenynd tuioxsr iyna tgr etohcnoe reed nos dfa rtoehf r netohet i sian vcvaheialnaptbotelrery,.
Best Buy conducts ongoing physical counts of inventory throughout the year as a basis for monitoring and Link to
predicting loss adjustments for theft. Best Buy
Inventory Cost Flow Assumptions Objective 2
Describe three
Exhibit 13 summarizes the characteristics of inta©richard Levine/aLamy Stock Photongible assets.Adcaonunsdr tia nrcfCgleco lohawauat e pnpadttesei rsniriung o9mv d ies.p nsLItutnoiooen rngs yau- T racecinhsromde ssc tAr aiwensslsgehaes tetm,es nd:w e F ithidihxneeeovndned tansainc tndoaa rlrIi enytuet ancsmnhoigt ossiibts wiol nesnfg o m limdne, e rEictth4xh ioh6asdni7 bn.d ieTtis ch1eer .seaserae rc yao cmtqomu dioreentde c raomts itdn fieflof eiwtrse ancsots Esuutxn muhitpsi bictnioiogtsn t1ass Coiatsssnhsthtvae seeFtyueenl motimtm.owperpt ynAiao tccs natoss nstu hdtam en flb dpoian wtlhcaiooo nnwmcse e
Exhibit 13
Link to Best Buy IA n s t sa e n t g i b l e D e scPraipgteiso n301, 303, 314, 315, A31m6ortization Period Periodic Expense Comparison of
Why It Matters P a t e n t E x c lu s i v e r i g h t t o b e n e fi tP age E3s0t8imated useful life not Amor1ti. zCainto ioswtnh f ielcoxhwp teihsne si nec othsets o wrdeerer Intangible2 .A Cosrosdseet rtf slionw w ihsi cinh tthhee rceovsetrss e 3. Cthoes ct oflsotws. is an average of
Analysis for Decision Making f r o m a n i n n o v a t i o nPages 320–t3o2 1exceed legal life incurred. were incurred.
Copyright Exclusive right to benefit Estimated useful life not Amortization expense
from a literary, artistic, or to exceed legal life
musical composition First-in, First-out Last-in, First-out Weighted Average Cost
Trademark Exclusive use of a name, None Impairment loss i(fF fIaFirO ) (LIFO)
term, or symbol value lesPs uthrcahna csaerdrying Purchased Sold Purchased
299 value (impGaioreodd)s Goods Goods Goods
Goodwill Excess of purchase price of None Impairment loss if fair
a business over the fair value less than carrying
value of its net assets value (impaired)
(assets ] liabilities)
98169_ch06_rev05_298-349.indd 299 ▪ New! Pathways Chall18e/08/1n7 2g:25 pme encourageFsIF Ostudents’ interestL IFOin accounting anWdAVECEI OGRSHAeTTGEEmD phaGSosooliddzses
the critical thinking aspect of accounting. A suggested answer to the Pathways Challenge
is provided at the end of the chapSotledr.
Goods
Pathways Challenge
This is Accounting!
98169_ch06_rev05_298-349.indd 301 18/08/17 2:29 pm
Economic Activity
Verizon Communications Inc. (VZ) is the largest wireless service provider in the United States
with over 114 million retail subscribers. To deliver its products and services, Verizon must have access to
spectrum—the radio frequencies that carry sound, data, and video to wireless devices. However, spectrum
is a limited resource that the Federal Communications Commission (FCC) licenses to businesses for a period
of 10 years, subject to renewal. In a recent year, Verizon acquired almost $10 billion in wireless licenses.
Critical Thinking/Judgment
How should Verizon account for its acquisition of wireless licenses?
What is the useful life of a wireless license?
Should Verizon expense (amortize) the cost of its wireless licenses?
Suggested answer at end of chapter. Chapter 9 Long-Term Assets: Fixed and Intangible 493
Pathways Challenge
This is Accounting!
Information/Consequences
Because a wireless license does not exist physically, Verizon’s (VZ) wireless licenses are intangible assets.
All of the costs of acquiring a wireless license should be recorded as an asset. In a recent year, Verizon report-
ed almost $87 billion of wireless licenses, representing 35% of its total assets.
Even though the FCC license is granted for a 10-year period, Verizon considers this license to have an indef-
inite useful life. This is because the license is subject to renewal at a low cost and, historically, the FCC has
renewed Verizon’s licenses.
Verizon does not expense (amortize) the cost of its wireless licenses. Instead, the licenses are reviewed for
any impaired value.
Suggested Answer
98169_ch09_ptg01_442-493.indd 467 25/09/17 5:38 PM
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Copyright 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
the business. However, standby equipment for use during peak periods or when other equip-
ment breaks down is still classified as a fixed asset, even though it is not used very often. In
contrast, fixed assets that have been abandoned or are no longer used in operations are not
classified as fixed assets. Preface v
▪ Located in each chapter, Why It M atters shows students how accounting is important
to buIsni an reecsesnet fsin awnciiatlh st awtemheincth, M tchDeoyn aalrde’s rfeapmortieldia tort.a lA pr oCpeortny,c pelapntt, anCdl eipqu ipicmoennt oif novdeir c$a34t ebisll iown, hiLchin kW thoy It
which consists of land, buildings, and equipment.
Matters features have an accompanying concept clip video in CNOWv2. McDonald’s
CONCEPT CLIP
Why It Matters
CONCEPT CLIP
Fixed Assets the proportion of fixed assets to total assets. Retail has the high-
est percent of fixed assets to total assets, while social media and
Fixed assets often represent a significant portion of a company’s software are on the lower end of the scale. High-tech service com-
total assets. The table that follows shows the fixed assets as panies often use fewer fixed assets to deliver their services than
a percent of total assets for some select companies across a will companies that use stores, equipment, planes, cell towers,
variety of industries. As can be seen, the type of industry will impact or theme parks.
Percent of Fixed Assets
Company Industry to Total Assets
McDonald’s Corporation (MCD) Food Retail 69%
Target Corporation (TGT) Merchandise Retail 63%
Delta Air Lines, Inc. (DAL) Transportation 48%
Verizon Communications Inc. (VZ) Communications 35%
The Walt Disney Company (DIS) Entertainment 30%
Facebook, Inc. (FB) Social Media 13%
Microsoft Corporation (MSFT) Software 9%
Fixed assets have important properties that require management ▪ Fixed assets need to be maintained during use. Managers need to
attention: develop maintenance programs to keep the investment in fixed as-
▪ Fixed assets require a long-term commitment. Mistakes in acquir- sets productive.
ing fixed assets can be very costly and difficult to reverse; thus, ▪ Fixed assets often require significant funds to purchase. Managers
managers must take special care in acquiring fixed assets. must acquire funding internally or by other sources to finance the
▪ Fixed assets wear out over time and need to be replaced. Managers purchase of fixed assets.
must monitor fixed assets and know when to replace fixed assets
due to wear and tear or obsolescence.
▪ To aid comprehension and to demonstrate the impact of transactions, journal entries include
Chapter 5 Accounting for Retail Businesses 238 Chapter 5
98169_ch09_ptg0t1h_4e42 -4n93e.intdd e 4f45fect of the transaction on the accounting equation. 25/09/17 5:34 PM
Under the perpetual inventory system, cash purchases of merchandise are recorded as follows:
20Y8 20Y8
5 L 1 E Jan. 3 Inventory 2,510 A 5 L 1 E Jan. 3
12
Cash 2,510
Purchased inventory from Bowen Co.
Purchases of inventory on account are recorded as follows:
A 5 L 1 E Jan. 4 Inventory 9,250 A 5 L 1 E Jan. 4
1 1 Accounts Payable—Thomas Corporation 9,250 1 1
Purchased inventory on account.
The terms of purchases on account are normally indicated on the invoice or bill that the seller
sends the buyer. An example of an invoice sent to NetSolutions by Alpha Technologies is shown in
Exhibit 3. Exhibit 3.
Exhibit 3
Alpha Technologies Invoice
Invoice
1000 Matrix Blvd. 106-8
San Jose, CA 95116-1000
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