Financial Accounting: The Impact on Decision Makers

864 Pages·2014·16.11 MB·English

by  Gary A. Porter

Financial Accounting
The Impact on Decision Makers
9e
Gary A. Porter
DRAKE UNIVERSITY
Curtis L. Norton
ARIZONA STATE UNIVERSITY
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Brief Contents
Contents iv
Preface xii
CHAPTER 1 Accounting as a Form of Communication 2
CHAPTER 2 Financial Statements and the Annual Report 52
CHAPTER 3 Processing Accounting Information 102
CHAPTER 4 Income Measurement and Accrual Accounting 150
CHAPTER 5 Inventories and Cost of Goods Sold 224
CHAPTER 6 Cash and Internal Control 296
CHAPTER 7 Receivables and Investments 334
CHAPTER 8 Operating Assets: Property, Plant, and Equipment, and Intangibles 380
CHAPTER 9 Current Liabilities, Contingencies, and the Time Value of Money 430
CHAPTER 10 Long-Term Liabilities 486
CHAPTER 11 Stockholders’ Equity 536
CHAPTER 12 The Statement of Cash Flows 594
CHAPTER 13 Financial Statement Analysis 670
APPENDIX A International Financial Reporting Standards A-1
APPENDIX B Excerpts from Under Armour’s Form 10-K for the Fiscal Year Ended
December 31, 2011 B-1
APPENDIX C Excerpts from Columbia Sportswear’s Form 10-K for the Fiscal Year
Ended December 31, 2011 C-1
Glossary G-1
Index I-1
iii
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Contents
CHAPTER 1 GoingConcern 21
Accounting as a Form of Communication 2 TimePeriodAssumption 21
SettingAccountingStandards 21
UnderArmour,Inc.:MakingBusinessDecisions 3
WhoDeterminestheRulesforFinancialStatements? 21
WhatIsBusiness? 4 TheAuditofFinancialStatements 22
FormsofOrganization 5 IntroductiontoEthicsinAccounting 22
BusinessEntities 5 WhyShouldAccountantsBeConcernedwithEthics? 23
SoleProprietorships 5 IstheInformationRelevantandaFaithful
Partnerships 6 Representation? 23
Corporations 6 MoralandSocialContextofEthicalBehavior 23
NonbusinessEntities 7
HotTopics:SalesofStockCouldPayOffforUnder
OrganizationsandSocialResponsibility 7
Armour’sFounder 25
TheNatureofBusinessActivity 7 AccountantsandEthicalJudgments 25
FinancingActivities 7 TheChangingFaceoftheAccountingProfession 25
InvestingActivities 8
LookingAhead 26
OperatingActivities 8
Eachchaptercontainssomeorallofthefollowingend-of-
SummaryofBusinessActivities 8
chaptermaterial:
WhatIsAccounting,andWhatInformation (cid:129)KeyPointsReview(cid:129)RatioReview(cid:129)AccountsHighlighted
DoUsersofAccountingReportsNeed? 9 (cid:129)KeyTermsQuiz(cid:129)AlternateTerms(cid:129)WarmupExercises&
Solutions(cid:129)ReviewProblem&Solution(cid:129)AppendixReview
UsersofAccountingInformationandTheirNeeds 9
Problem&Solution(cid:129)Questions(cid:129)BriefExercises(cid:129)Exercises
InternalUsers 9
(cid:129)Multi-ConceptExercises(cid:129)Problems(cid:129)Multi-Concept
ExternalUsers 10
Problems(cid:129)AlternateProblems(cid:129)AlternateMulti-Concept
UsingFinancialAccountingInformation 11
Problems(cid:129)DecisionCases:ReadingandInterpretingFinancial
FinancialDecisionFramework 11 Statements;MakingFinancialDecisions;EthicalDecision
FinancialStatements:HowAccountants Making(cid:129)SolutionstoKeyTermsQuiz
Communicate 12
TheAccountingEquation 12 CHAPTER 2
TheBalanceSheet 13 Financial Statements and the Annual
TheIncomeStatement 13 Report 52
TheStatementofRetainedEarnings 15
TheStatementofCashFlows 15
ColumbiaSportswear:MakingBusinessDecisions 53
RelationshipsAmongtheFinancialStatements 16
LookingatFinancialStatementsforaRealCompany:
ObjectivesofFinancialReporting 54
UnderArmour 16
WhatMakesAccountingInformationUseful?
UnderArmour’sBalanceSheet 16
QualitativeCharacteristics 56
UnderArmourIncomeStatement 17
Understandability 56
TheConceptualFramework:Foundationfor
Relevance 56
FinancialStatements 19 FaithfulRepresentation 56
ConceptualFrameworkforAccounting 19 ComparabilityandConsistency 57
EconomicEntityConcept 19
Spotlight:PaulC.Stumb,Jr. 57
Spotlight:SusanKochRenner 20
Materiality 58
AssetValuation:CostorFairValue? 20
iv
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Contents v
Conservatism 58 TheRoleofSourceDocumentsinRecording
AnInternationalPerspectiveonQualitative Transactions 105
Characteristics 59
AnalyzingtheEffectsofTransactionsonthe
TheClassifiedBalanceSheet 59 AccountingEquation 105
UnderstandingtheOperatingCycle 59 TheCostPrinciple 108
CurrentAssets 60 BalanceSheetandIncomeStatementforGlengarry
NoncurrentAssets 61 HealthClub 108
Investments 61
WhatIsanAccount? 110
Property,Plant,andEquipment 62
ChartofAccounts 110
Intangibles 62
TheGeneralLedger 111
CurrentLiabilities 62
TheDouble-EntrySystem 112
Long-TermLiabilities 63
TheTAccount 112
Stockholders’Equity 63
DebitsandCredits 112
UsingaClassifiedBalanceSheet:Introduction
DebitsAren’tBad,andCreditsAren’tGood 113
toRatios 64
DebitsandCreditsforRevenues,Expenses,and
WorkingCapital 65
Dividends 113
CurrentRatio 65
Revenues 113
TheIncomeStatement 66 Expenses 113
Dividends 114
WhatAppearsontheIncomeStatement? 66
SummaryoftheRulesforIncreasingandDecreasing
FormatoftheIncomeStatement 66
Accounts 114
Single-StepFormatfortheIncomeStatement 67
NormalAccountBalances 114
Multiple-StepFormatfortheIncomeStatement 67
DebitsandCreditsAppliedtoTransactions 114
UsinganIncomeStatement 68 TransactionsforGlengarryHealthClub 115
TheStatementofRetainedEarnings 69 TheJournal:TheFirm’sChronologicalRecord
TheStatementofCashFlows 70 ofTransactions 117
Financial Statements for Columbia TheTrialBalance 119
Sportswear 71
HotTopics:HollandAmericaLine–OneoftheWorld’s
ColumbiaSportswear’sBalanceSheet 72 MostEthicalCompanies 120
ColumbiaSportswear’sIncomeStatement 73
AFinalNote:ProcessingAccountingInformation 121
MakingBusinessDecisions:TheCurrentRatio 74
CHAPTER 4
OtherElementsofanAnnualReport 77
Income Measurement and Accrual
ReportofIndependentAccountants(Auditors’Report) 77
Accounting 150
HotTopics:PayingDividendsinChallenging
EconomicTimes 78
Nordstrom,Inc.:MakingBusinessDecisions 151
TheEthicalResponsibilityofManagementandthe
RecognitionandMeasurementinFinancial
Auditors 79
ManagementDiscussionandAnalysis 79 Statements 152
NotestoConsolidatedFinancialStatements 79 Recognition 153
LookingAhead 79 Spotlight:JamesH.Kennedy,CPA 153
Measurement 154
CHAPTER 3
Choice1:TheAttributetoBeMeasured 154
Processing Accounting Information 102
Choice2:TheUnitofMeasure 154
SummaryofRecognitionandMeasurementinFinancial
CarnivalCorporation&PLC:MakingBusiness Statements 155
Decisions 103
TheAccrualBasisofAccounting 155
EconomicEvents:TheBasisforRecording ComparingtheCashandAccrualBasesofAccounting 155
Transactions 104 WhattheIncomeStatementandtheStatementof
CashFlowsReveal 157
ExternalandInternalEvents 105
AccrualAccountingandTimePeriods 158
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vi Contents
TheRevenueRecognitionPrinciple 158 ShippingTermsandTransportationCosts 236
ShippingTermsandTransferofTitletoInventory 237
Expense Recognition and the Matching
Principle 159 TheGrossProfitRatio 237
AccrualAccountingandAdjustingEntries 161
MakingBusinessDecisions:TheGrossProfitRatio 238
TypesofAdjustingEntries 161
(1)CashPaidBeforeExpenseIsIncurred
InventoryValuationandtheMeasurementof
(DeferredExpense) 161
Income 240
(2)CashReceivedBeforeRevenueIsEarned
(DeferredRevenue) 164 InventoryCosts:WhatShouldBeIncluded? 240
HotTopics:KeepingaWatchfulEyeonSales 165 InventoryCostingMethodswithaPeriodic
System 241
(3)ExpenseIncurredBeforeCashIsPaid
(AccruedLiability) 166 SpecificIdentificationMethod 242
(4)RevenueEarnedBeforeCashIsReceived WeightedAverageCostMethod 243
(AccruedAsset) 169 First-In,First-OutMethod(FIFO) 244
AccrualsandDeferrals 169 Last-In,First-OutMethod(LIFO) 245
SummaryofAdjustingEntries 170
SelectinganInventoryCostingMethod 245
ComprehensiveExampleofAdjustingEntries 170
CostingMethodsandCashFlow 245
EthicalConsiderationsforaCompanyontheAccrual
LIFOLiquidation 247
Basis 174
TheLIFOConformityRule 247
TheAccountingCycle 175 TheLIFOReserve:EstimatingLIFO’sEffecton
TheUseofaWorkSheet 176 IncomeandonTaxesPaidforWinnebagoIndustries 247
CostingMethodsandInventoryProfits 248
TheClosingProcess 177
ChangingInventoryMethods 249
InterimFinancialStatements 179 InventoryValuationinOtherCountries 249
APPENDIX—ACCOUNTINGTOOLS:WORKSHEETS 179 LookingAhead 249
InventoryErrors 249
CHAPTER 5
Inventories and Cost of Goods Sold 224 ValuingInventoryatLowerofCostorMarket 252
WhyReplacementCostIsUsedasaMeasureofMarket 253
GapInc.:MakingBusinessDecisions 225 ApplicationoftheLCMRule 254
Lower-of-Cost-or-MarketunderInternationalStandards 254
TheNatureofInventory 226
AnalyzingtheManagementofInventory 254
Spotlight:WendyRosasco 227
ThreeTypesofInventoryCostsandThreeFormsof MakingBusinessDecisions:AnalyzingtheManagement
Inventory 227 ofInventory 255
ThreeTypesofManufacturingCosts 228
ThreeFormsofInventory 228 HowInventoriesAffecttheCashFlowsStatement 257
NetSalesofMerchandise 229 APPENDIX—ACCOUNTINGTOOLS:INVENTORY
COSTINGMETHODSWITHTHEUSEOFA
SalesReturnsandAllowances 229
CreditTermsandSalesDiscounts 230 PERPETUALINVENTORYSYSTEM 258
CostofGoodsSold 230
CHAPTER 6
HotTopics:LookingOutsidetheUnitedStatesfor Cash and Internal Control 296
Opportunities 231
TheCostofGoodsSoldModel 231
SearsHoldingsCorporation:MakingBusiness
InventorySystems:PerpetualandPeriodic 232
Decisions 297
BeginningandEndingInventoriesinaPeriodicSystem 233
CostofGoodsPurchased 234 WhatConstitutesCash? 298
Purchases 234
CashEquivalentsandtheStatementofCashFlows 299
PurchaseReturnsandAllowances 234
PurchaseDiscounts 235 HotTopics:KeepingtheCashFlowing 299
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Contents vii
ControlOverCash 300 HotTopics:KeepingInvestorsInformed 347
CashManagement 300 NotesReceivable 347
ReadingaBankStatement 300
ImportantTermsConnectedwithPromissoryNotes 348
TheBankReconciliation 301
TheNeedforAdjustmentstotheRecords 303 AcceleratingtheInflowofCashfromSales 349
EstablishingaPettyCashFund 305
CreditCardSales 350
AnIntroductiontoInternalControl 307 DiscountingNotesReceivable 351
TheSarbanes-OxleyActof2002 307 AccountingforInvestments 352
TheControlEnvironment 310
InvestmentsinHighlyLiquidFinancialInstruments 352
TheAccountingSystem 310
InvestmentsinStocksandBonds 354
NoSignificantInfluence 354
InternalControlProcedures 310
SignificantInfluence 354
ProperAuthorizations 311
Control 354
SegregationofDuties 311
ValuingandReportingInvestmentsonthe
IndependentVerification 311
FinancialStatements 357
SafeguardingofAssetsandRecords 311
IndependentReviewandAppraisal 311 HowLiquidAssetsAffecttheStatement
DesignandUseofBusinessDocuments 312 ofCashFlows 358
LimitationsonInternalControl 312
LookingAhead 359
ComputerizedBusinessDocumentsandInternal
Control 312 CHAPTER 8
ControlOverCashReceipts 313 Operating Assets: Property, Plant, and
CashReceivedOvertheCounter 313 Equipment, and Intangibles 380
CashReceivedintheMail 313
CashDiscrepancies 314 Nike:MakingBusinessDecisions 381
TheRoleofComputerizedBusinessDocumentsin
ControllingCashDisbursements 314 BalanceSheetPresentationofProperty,Plant,and
PurchaseRequisition 314 Equipment 382
PurchaseOrder 314
AcquisitionofProperty,Plant,andEquipment 383
Invoice 316
GroupPurchase 383
ReceivingReport 317
CapitalizationofInterest 384
InvoiceApprovalForm 317
LandImprovements 384
CheckwithRemittanceAdvice 319
UseandDepreciationofProperty,Plant,and
CHAPTER 7
Equipment 385
Receivables and Investments 334
Straight-LineMethod 385
Units-of-ProductionMethod 386
AppleInc.:MakingBusinessDecisions 335 AcceleratedDepreciationMethods 387
ComparisonofDepreciationMethods 388
AccountsReceivable 336
DepreciationandIncomeTaxes 388
TheUseofaSubsidiaryLedger 336 ChoiceofDepreciationMethod 388
ChangeinDepreciationEstimate 389
Spotlight:BradSolberg 337
CapitalversusRevenueExpenditures 390
TheValuationofAccountsReceivable 338
TwoMethodstoAccountforBadDebts 338 EnvironmentalAspectsofOperatingAssets 392
TwoApproachestotheAllowanceMethod
DisposalofProperty,Plant,andEquipment 393
ofAccountingforBadDebts 340
PercentageofNetCreditSalesApproach 340 GainonSaleofAssets 393
PercentageofAccountsReceivableApproach 341 LossonSaleofAssets 394
AgingofAccountsReceivable 342 IFRSandProperty,Plant,andEquipment 395
OperatingAssets:IntangibleAssets 395
TheAccountsReceivableTurnoverRatio 344
BalanceSheetPresentation 395
MakingBusinessDecisions:Analyzing
AcquisitionCostofIntangibleAssets 396
theAccountsReceivableRateofCollection 344
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viii Contents
HotTopics:TheNikeBrand:Intangible?Yes. CompoundInterest 445
Valuable?Absolutely! 397 InterestCompounding 446
ResearchandDevelopmentCosts 397 PresentValueandFutureValue:
AmortizationofIntangibles 397 SingleAmounts 446
IntangibleswithFiniteLife 397
FutureValueofaSingleAmount 446
IntangibleswithIndefiniteLife 398
PresentValueofaSingleAmount 448
Spotlight:JohnDavenport 399
PresentValueandFutureValueofanAnnuity 449
GoodwillandImpairments 399
FutureValueofanAnnuity 449
IFRSandIntangibleAssets 400
PresentValueofanAnnuity 450
HowLong-TermAssetsAffecttheStatement SolvingforUnknowns 451
ofCashFlows 400
APPENDIX—ACCOUNTINGTOOLS:USINGEXCEL¤
AnalyzingLong-TermAssetsforAverageLife
FORPROBLEMSINVOLVINGINTEREST
andAssetTurnover 401
CALCULATIONS 456
MakingBusinessDecisions 403
CHAPTER 10
CHAPTER 9 Long-Term Liabilities 486
Current Liabilities, Contingencies, and the
Time Value of Money 430 Coca-Cola:MakingBusinessDecisions 487
BalanceSheetPresentationofLong-Term
StarbucksCorporation:MakingBusiness
Liabilities 488
Decisions 431
HotTopics:Coca-ColaversusPepsiCo 489
CurrentLiabilities 432
BondsPayable:Characteristics 490
AccountsPayable 433
NotesPayable 433
Spotlight:WilliamL.Matthes 490
Spotlight:KarenStephens 434
Collateral 491
CurrentMaturitiesofLong-TermDebt 436
DueDate 491
TaxesPayable 437
OtherFeatures 491
OtherAccruedLiabilities 438
IssuanceofBonds 492
IFRSandCurrentLiabilities 438
FactorsAffectingBondPrice 492
ReadingtheStatementofCashFlowsfor
ChangesinCurrentLiabilities 439 PremiumorDiscountonBonds 494
ContingentLiabilities 440 BondAmortization 496
ContingentLiabilitiesThatAreRecorded 441 EffectiveInterestMethod:ImpactonExpense 496
ProductWarrantiesandGuarantees:Common
RedemptionofBonds 500
ContingentLiabilitiesThatAreRecorded 441
RetiredEarlyataGainoraLoss 500
PremiumsorCoupons:OtherContingentLiabilities
FinancialStatementPresentationofGainorLoss 502
ThatAreRecorded 442
SomeLawsuitsandLegalClaimsAreContingent LiabilityforLeases 502
LiabilitiesThatMustBeRecorded 442
Leases 502
ContingentLiabilitiesThatAreDisclosed 442
LeaseCriteria 502
ContingentLiabilitiesversusContingentAssets 443
OperatingLeases 503
HotTopics:Starbucks’LiabilityforProducts 443 CapitalLeases 504
IFRSandLeasing 506
IFRSandContingencies 444
LookingAhead 507
LookingAhead 444
AnalyzingDebttoAssessaFirm’sAbilityto
TimeValueofMoneyConcepts:Compounding
PayItsLiabilities 507
ofInterest 444
SimpleInterest 445 MakingBusinessDecisions 507
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