Financial and Managerial Accounting

1390 Pages·2010·25.32 MB·English

by  Belverd E. Needles

Financial and
Managerial
Accounting
NINTH EDITION
Belverd E. Needles, Jr., Ph.D., C.P.A., C.M.A.
DePaul University
Marian Powers, Ph.D.
Northwestern University
Susan V. Crosson, M.S. Accounting, C.P.A
Santa Fe College
Financial and Managerial Accounting, © 2011, 2008 South-Western, Cengage Learning
Ninth Edition
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Library of Congress Control Number: 2009943378
Student Edition ISBN 10: 1-4390-3780-9
Student Edition ISBN 13: 978-1-4390-3780-5
Instructors Edition ISBN 10: 0-538-74282-8
Instructors Edition ISBN 13: 978-0-538-74282-5
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BRIEF CONTENTS
1 Uses of Accounting Information and the Financial Statements 2
SUPPLEMENT TO CHAPTER 1 How to Read an Annual Report 50
2 Analyzing Business Transactions 90
3 Measuring Business Income 142
SUPPLEMENT TO CHAPTER 3 Closing Entries and the Work Sheet 194
4 Financial Reporting and Analysis 208
SUPPLEMENT TO CHAPTER 4 The Annual Report Project 258
5 The Operating Cycle and Merchandising Operations 260
6 Inventories 310
7 Cash and Receivables 352
8 Current Liabilities and Fair Value Accounting 392
9 Long-Term Assets 434
10 Long-Term Liabilities 480
11 Contributed Capital 532
12 Investments 578
13 The Corporate Income Statement and the Statement
of Stockholders’ Equity 620
14 The Statement of Cash Flows 666
15 The Changing Business Environment: A Manager’s Perspective 718
16 Cost Concepts and Cost Allocation 760
17 Costing Systems: Job Order Costing 806
18 Costing Systems: Process Costing 844
19 Value-Based Systems: ABM and Lean 882
iii
iv Brief Contents
20 Cost Behavior Analysis 922
21 The Budgeting Process 964
22 Performance Management and Evaluation 1016
23 Standard Costing and Variance Analysis 1060
24 Short-Run Decision Analysis 1108
25 Capital Investment Analysis 1148
26 Pricing Decisions, Including Target Costing and Transfer
Pricing 1186
27 Quality Management and Measurement 1232
28 Financial Analysis of Performance 1270
APPENDIX A Accounting for Investments 1320
APPENDIX B Present Value Tables 1334
CONTENTS
Preface xix
About the Authors xxxiii
CHAPTER 1 Uses of Accounting Information and the Financial Statements 2
DECISION POINT (cid:2) A USER’S FOCUS CVS CAREMARK 3 Corporate Governance 18
Accounting as an Information System 4 Financial Position and the Accounting
Business Goals and Activities 4 Equation 19
Financial and Management Accounting 7 Assets 19
Processing Accounting Information 7 Liabilities 19
Ethical Financial Reporting 8 Stockholders’ Equity 20
Decision Makers: The Users of Accounting Financial Statements 21
Information 10 Income Statement 21
Management 10 Statement of Retained Earnings 22
Users with a Direct Financial Interest 11 The Balance Sheet 22
Users with an Indirect Financial Interest 12 Statement of Cash Flows 23
Governmental and Not-for-Profit Organizations 12 Relationships Among the Financial Statements 24
Accounting Measurement 13 Generally Accepted Accounting Principles 26
Business Transactions 13 GAAP and the Independent CPA’s Report 27
Money Measure 14 Organizations That Issue Accounting Standards 27
Separate Entity 14 Other Organizations That Influence GAAP 28
The Corporate Form of Business 15 Professional Conduct 29
Characteristics of Corporations, Sole Proprietorships, A LOOK BACK AT (cid:2) CVS CAREMARK 30
and Partnerships 15 STOP & REVIEW 33
Formation of a Corporation 17 CHAPTER ASSIGNMENTS 35
Organization of a Corporation 17
SUPPLEMENT TO CHAPTER 1 How to Read an Annual Report 50
The Components of an Annual Report 50 Financial Statements 52
Letter to the Stockholders 51 Notes to the Financial Statements 57
Financial Highlights 51 Reports of Management’s Responsibilities 58
Description of the Company 51 Reports of Certified Public Accountants 58
Management’s Discussion and Analysis 51
CHAPTER 2 Analyzing Business Transactions 90
DECISION POINT (cid:2) A USER’S FOCUS THE BOEING Classification 95
COMPANY 91 Ethics and Measurement Issues 95
Measurement Issues 92
Double-Entry System 96
Recognition 92
Accounts 97
Valuation 94
The T Account 97
v
vi Contents
The T Account Illustrated 97 Expense Paid in Cash 106
Rules of Double-Entry Accounting 98 Expense to Be Paid Later 106
Normal Balance 99 Dividends 106
Stockholders’ Equity Accounts 99 Summary of Transactions 107
Business Transaction Analysis 101 The Trial Balance 109
Owner’s Investment in the Business 101 Preparation and Use of a Trial Balance 109
Economic Event That Is Not a Business Finding Trial Balance Errors 110
Transaction 101
Cash Flows and the Timing of
Prepayment of Expenses in Cash 102 Transactions 111
Purchase of an Asset on Credit 102 Recording and Posting Transactions 114
Purchase of an Asset Partly in Cash and Partly Chart of Accounts 114
on Credit 103
General Journal 114
Payment of a Liability 103
General Ledger 116
Revenue in Cash 104
Some Notes on Presentation 118
Revenue on Credit 104
A LOOK BACK AT (cid:2) THE BOEING COMPANY 119
Revenue Received in Advance 104
STOP & REVIEW 123
Collection on Account 105
CHAPTER ASSIGNMENTS 125
CHAPTER 3 Measuring Business Income 142
DECISION POINT (cid:2) A USER’S FOCUS NETFLIX, INC. 143 Type 3 Adjustment: Allocating Recorded, Unearned
Revenues (Deferred Revenues) 157
Profitability Measurement Issues
and Ethics 144 Type 4 Adjustment: Recognizing Unrecorded,
Earned Revenues (Accrued Revenues) 158
Net Income 144
A Note About Journal Entries 160
Income Measurement Assumptions 144
Using the Adjusted Trial Balance to Prepare
Ethics and the Matching Rule 146
Financial Statements 160
Accrual Accounting 148
The Accounting Cycle 163
Recognizing Revenues 148
Closing Entries 163
Recognizing Expenses 148
The Post-Closing Trial Balance 165
Adjusting the Accounts 149
Cash Flows from Accrual-Based
Adjustments and Ethics 149
Information 167
The Adjustment Process 150
A LOOK BACK AT (cid:2) NETFLIX, INC. 169
Type 1 Adjustment: Allocating Recorded Costs
STOP & REVIEW 174
(Deferred Expenses) 151
CHAPTER ASSIGNMENTS 176
Type 2 Adjustment: Recognizing Unrecorded
Expenses (Accrued Expenses) 154
SUPPLEMENT TO CHAPTER 3 Closing Entries and the Work Sheet 194
Preparing Closing Entries 194 The Work Sheet: An Accountant’s Tool 198
Step 1: Closing the Credit Balances 194 Preparing the Work Sheet 199
Step 2: Closing the Debit Balances 194 Using the Work Sheet 202
Step 3: Closing the Income Summary Account Supplement Assignments 203
Balance 196
Step 4: Closing the Dividends Account Balance 196
The Accounts After Closing 196
Contents vii
CHAPTER 4 Financial Reporting and Analysis 208
DECISION POINT (cid:2) A USER’S FOCUS DELL COMPUTER Assets 217
CORPORATION 209 Liabilities 220
Foundations of Financial Reporting 210 Stockholders’ Equity 220
Objective of Financial Reporting 210
Owner’s Equity and Partners’ Equity 221
Qualitative Characteristics of Accounting
Dell’s Balance Sheets 221
Information 210
Forms of the Income Statement 223
Accounting Conventions 212
Multistep Income Statement 223
Ethical Financial Reporting 212
Dell’s Income Statements 227
Accounting Conventions for Preparing
Single-Step Income Statement 227
Financial Statements 213
Using Classified Financial Statements 229
Consistency 213
Evaluation of Liquidity 229
Full Disclosure (Transparency) 214
Evaluation of Profitability 230
Materiality 215
Conservatism 215 A LOOK BACK AT (cid:2) DELL COMPUTER
CORPORATION 237
Cost-Benefit 216
STOP & REVIEW 240
Classified Balance Sheet 217
CHAPTER ASSIGNMENTS 242
SUPPLEMENT TO CHAPTER 4 The Annual Report Project 258
Instructions 258
CHAPTER 5 The Operating Cycle and Merchandising Operations 260
DECISION POINT (cid:2) A USER’S FOCUS COSTCO WHOLESALE Purchases of Merchandise 275
CORPORATION 261 Sales of Merchandise 276
Managing Merchandising Businesses 262
Internal Control: Components, Activities,
Operating Cycle 262 and Limitations 279
Choice of Inventory System 263 Components of Internal Control 279
Foreign Business Transactions 264 Control Activities 279
The Need for Internal Controls 265 Limitations on Internal Control 280
Management’s Responsibility for Internal
Internal Control over Merchandising
Control 267
Transactions 281
Terms of Sale 268 Internal Control and Management Goals 282
Sales and Purchases Discounts 268
Control of Cash Receipts 283
Transportation Costs 269
Control of Purchases and Cash Disbursements 284
Terms of Debit and Credit Card Sales 269
A LOOK BACK AT (cid:2) COSTCO WHOLESALE
Perpetual Inventory System 270 CORPORATION 289
Purchases of Merchandise 270 STOP & REVIEW 292
Sales of Merchandise 272 CHAPTER ASSIGNMENTS 294
Periodic Inventory System 274
viii Contents
CHAPTER 6 Inventories 310
DECISION POINT (cid:2) A USER’S FOCUS TOYOTA MOTOR Last-In, First-Out (LIFO) Method 323
CORPORATION 311 Summary of Inventory Costing Methods 324
Managing Inventories 312
Impact of Inventory Decisions 325
Inventory Decisions 312
Effects on the Financial Statements 326
Evaluating the Level of Inventory 313
Effects on Income Taxes 326
Effects of Inventory Misstatements on Income
Effects on Cash Flows 327
Measurement 315
Inventory Cost Under the Perpetual
Inventory Cost and Valuation 318
Inventory System 328
Goods Flows and Cost Flows 319
Valuing Inventory by Estimation 330
Lower-of-Cost-or-Market (LCM) Rule 320
Retail Method 330
Disclosure of Inventory Methods 320
Gross Profit Method 331
Inventory Cost Under the Periodic
A LOOK BACK AT (cid:2) TOYOTA MOTOR
Inventory System 321
CORPORATION 333
Specific Identification Method 322
STOP & REVIEW 337
Average-Cost Method 322
CHAPTER ASSIGNMENTS 339
First-In, First-Out (FIFO) Method 322
CHAPTER 7 Cash and Receivables 352
DECISION POINT (cid:2) A USER’S FOCUS NIKE, INC. 353 Disclosure of Uncollectible Accounts 366
Management Issues Related to Cash and Estimating Uncollectible Accounts Expense 366
Receivables 354 Writing Off Uncollectible Accounts 370
Cash Management 354 Notes Receivable 372
Accounts Receivable and Credit Policies 355 Maturity Date 373
Evaluating the Level of Accounts Receivable 356 Duration of a Note 374
Financing Receivables 358 Interest and Interest Rate 374
Ethics and Estimates in Accounting for Maturity Value 375
Receivables 359
Accrued Interest 375
Cash Equivalents and Cash Control 361
Dishonored Note 375
Cash Equivalents 361
A LOOK BACK AT (cid:2) NIKE, INC. 376
Fair Value of Cash and Cash Equivalents 361
STOP & REVIEW 378
Cash Control Methods 361
CHAPTER ASSIGNMENTS 380
Uncollectible Accounts 365
The Allowance Method 365
CHAPTER 8 Current Liabilities and Fair Value Accounting 392
DECISION POINT (cid:2) A USER’S FOCUS MICROSOFT 393 Common Types of Current
Management Issues Related to Current Liabilities 398
Liabilities 394 Definitely Determinable Liabilities 398
Managing Liquidity and Cash Flows 394 Estimated Liabilities 404
Evaluating Accounts Payable 394 Contingent Liabilities and Commitments 408
Reporting Liabilities 396
Contents ix
Valuation Approaches to Fair Value Deferred Payment 414
Accounting 409 Other Applications 415
Interest and the Time Value of Money 409 A LOOK BACK AT (cid:2) MICROSOFT 416
Calculating Present Value 410 STOP & REVIEW 419
Applications Using Present Value 414 CHAPTER ASSIGNMENTS 421
Valuing an Asset 414
CHAPTER 9 Long-Term Assets 434
DECISION POINT (cid:2) A USER’S FOCUS APPLE Plant Assets Sold for Cash 453
COMPUTER, INC. 435 Exchanges of Plant Assets 454
Management Issues Related to
Natural Resources 455
Long-Term Assets 436
Depletion 455
Acquiring Long-Term Assets 438
Depreciation of Related Plant Assets 456
Financing Long-Term Assets 439
Development and Exploration Costs in the Oil and
Applying the Matching Rule 440
Gas Industry 456
Acquisition Cost of Property, Plant, Intangible Assets 458
and Equipment 441
Research and Development Costs 461
General Approach to Acquisition Costs 442
Computer Software Costs 461
Specific Applications 442
Goodwill 461
Depreciation 445
A LOOK BACK AT (cid:2) APPLE COMPUTER, INC. 463
Factors in Computing Depreciation 446
STOP & REVIEW 465
Methods of Computing Depreciation 446
CHAPTER ASSIGNMENTS 467
Special Issues in Depreciation 450
Disposal of Depreciable Assets 452
Discarded Plant Assets 453
CHAPTER 10 Long-Term Liabilities 480
DECISION POINT (cid:2) USER’S FOCUS MCDONALD’S Using Present Value to Value a Bond 497
CORPORATION 481
Case 1: Market Rate Above Face Rate 497
Management Issues Related to Issuing
Case 2: Market Rate Below Face Rate 497
Long-Term Debt 482
Amortization of Bond Discounts
Deciding to Issue Long-Term Debt 482
and Premiums 499
Evaluating Long-Term Debt 483
Amortizing a Bond Discount 499
Types of Long-Term Debt 484
Amortizing a Bond Premium 502
Cash Flow Information 490
Retirement of Bonds 507
The Nature of Bonds 490
Calling Bonds 507
Bond Issue: Prices and Interest Rates 491
Converting Bonds 508
Characteristics of Bonds 492
Other Bonds Payable Issues 509
Accounting for the Issuance of Bonds 493
Sale of Bonds Between Interest Dates 509
Bonds Issued at Face Value 494
Year-End Accrual of Bond Interest Expense 510
Bonds Issued at a Discount 494
A LOOK BACK AT (cid:2) MCDONALD’S CORPORATION 512
Bonds Issued at a Premium 495
STOP & REVIEW 515
Bond Issue Costs 496
CHAPTER ASSIGNMENTS 518