Intermediate Accounting

1440 Pages·2009·73.43 MB·English

by  John D. Bazley

Intermediate
Accounting
11th edition
Loren A.
Nikolai
Ernst & Young Professor, School of Accountancy
University of Missouri—Columbia
John D.
Bazley
John J. Gilbert Professor, School of Accountancy
University of Denver
Jefferson P.
Jones
PricewaterhouseCoopers Associate Professor
School of Accountancy, Auburn University
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
Intermediate Accounting, Eleventh Edition © 2010, 2007 South-Western, Cengage Learning
Loren Nikolai, John Bazley, Jefferson Jones
ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon
may be reproduced or used in any form or by any means—graphic, electronic,
Vice President of Editorial, Business:
or mechanical, including photocopying, recording, taping, Web distribution,
Jack W. Calhoun
information storage and retrieval systems, or in any other manner—except as
Publisher: Rob Dewey
may be permitted by the license terms herein.
Sr. Acquisitions Editor: Matt Filimonov
Developmental Editor: Leslie Kauffman For product information and technology assistance, contact us at
Editorial Assistant: Lauren Athmer Cengage Learning Customer & Sales Support, 1-800-354-9706
Marketing Manager: Steven E. Joos For permission to use material from this text or product,
submit all requests online at www.cengage.com/permissions
Marketing Coordinator: Heather McAuliffe
Further permissions questions can be emailed to
Marketing Communications Manager: [email protected]
Libby Shipp
Sr. Content Project Manager: Martha Conway Material from the Uniform CPA Examination Questions and Unofficial
Answers, Copyright 1948, 1954, 1960 through 1991, 1993 through 1995 by the
Media Editor: Bryan England
American Institute of Certified Public Accountants, Inc., is reprinted (or adapted)
Frontlist Buyer, Manufacturing: Doug Wilke
with permission.
Production Service: LEAP Publishing
Copyright 1967, 1971, 1972, 1973, and 1981 by the American Institute of Certified
Services, Inc.
Public Accountants, Inc. Reprinted (or adapted) with permission.
Compositor: International Typesetting and
Portions of various FASB documents, copyright by the Financial Accounting
Composition
Standards Board, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, are
Sr. Art Director: Stacy Jenkins Shirley
reprinted with permission.
Internal Designer: Lou Ann Thesing/
Materials from the Certified Management Accountant Examinations,
Beckmeyer Design
Copyright © 1981, 1982, 1983, 1986, 1987 by the Institute of Certified
Cover Designer: Beckmeyer Design
Management Accountants are reprinted (or adapted) with permission.
Cover Image: © Getty Images/Photodisc
Library of Congress Control Number: 2008941384
Text Permissions Manager: Margaret
Chamberlain-Gaston Student Edition ISBN 13: 978-0-324-65913-9
Student Edition ISBN 10: 0-324-65913-X
Photography Manager: Amanda Groszko
Instructor’s Edition ISBN 13: 978-0-324-65914-6
Photo Researcher: PrePress Company
Instructor’s Edition ISBN 10: 0-324-65914-8
South-Western Cengage Learning
5191 Natorp Boulevard
Mason, OH 45040
USA
Cengage Learning products are represented in Canada by
Nelson Education, Ltd.
For your course and learning solutions, visit www.cengage.com
Purchase any of our products at your local college store or at our
preferred online store www.ichapters.com
Printed in the United States of America
1 2 3 4 5 6 7 12 11 10 09 08
About the Authors
LOREN A.NIKOLAI
Loren Nikolai is the Ernst & Young Professor in the School of Accountancy at the
University of Missouri—Columbia (MU). He received his B.A. and M.B.A. from St. Cloud
State University and his Ph.D. from the University of Minnesota. Professor Nikolai has
taught at the University of Wisconsin at Platteville and at the University of North Carolina
at Chapel Hill. Professor Nikolai has received numerous teaching awards. He is the recip-
ient of the MU Student-Athlete Advisory Council 2004 Most Inspiring Professor Award,
the University of Missouri System 1999 Presidential Award for Outstanding Teaching, the
MU Alumni Association 1996 Faculty Award, the MU College of Business 1994 Accounting
Professor of the Year Award, the Missouri Society of CPAs 1993 Outstanding Accounting
Educator of the Year Award, the MU 1992 Kemper Fellowship for Teaching Excellence, the
St. Cloud State University 1990 Distinguished Alumni Award, and the Federation of
Schools of Accountancy 1989 Faculty Award of Merit. He holds a CPA certificate in the
state of Missouri and previously worked for the 3M Company. Professor Nikolai is the lead
author of Intermediate Accounting and has also been an author on four other accounting
textbooks.
Professor Nikolai has published numerous articles in The Accounting Review, Journal
of Accounting Research, The Accounting Educator’s Journal, Journal of Accounting Education,
The CPA Journal, Management Accounting, Policy Analysis, Academy of Management Journal,
Journal of Business Research, and other professional journals. He was also lead author of
a monograph published by the National Association of Accountants. Professor Nikolai
has served as an ad hoc reviewer for The Accounting Review and Issues in Accounting
Education. He has made numerous presentations around the country on curricular and
pedagogical issues in accounting education and was advisor for Beta Alpha Psi for twenty
years.
Professor Nikolai is a member of the American Accounting Association (AAA), the
American Institute of Certified Public Accountants (AICPA), and the Missouri Society of
CPAs (MSCPA). He has chaired and served on numerous committees of the AICPA, the
MSCPA, the Federation of Schools of Accountancy (FSA), and the AAA. He is past presi-
dent of the FSA and currently is serving on the Board of Directors of the MSCPA. Professor
Nikolai is married and has two adult children, three grandsons, and four step-grandchildren.
His family has two cats, and he is an avid golfer and weight lifter.
JOHN D.BAZLEY
John Bazley is the John J. Gilbert Professor in the School of Accountancy of the Daniels
College of Business at the University of Denver, where he has received numerous teach-
ing awards, including the University’s Distinguished Teaching Award. Professor Bazley
earned a B.A. from the University of Bristol in England and an M.S. and Ph.D. from the
University of Minnesota. He has taught at the University of North Carolina at Chapel Hill
and holds a CPA certificate in the state of Colorado. He has taught national professional
development classes for a major CPA firm and was consultant for another CPA firm.
Professor Bazley is the coauthor of Intermediate Accounting and has also been an author
on three other accounting texts.
Professor Bazley has published articles in professional journals, including The
Accounting Review, Management Accounting, Accounting Horizons, Practical Accountant,
Academy of Management Journal, The Journal of Managerial Issues, and The International
Journal of Accounting, and was a member of the Editorial Boards of Issues in Accounting
Educationand the Journal of Managerial Issues. He has served on numerous committees of
The Federation of Schools of Accountancy (including chair of the Student Lyceum
Committee), the American Accounting Association, and the Colorado Society of CPAs
(including the Continuing Professional Education Board). He is also a coauthor of a
monograph on environmental accounting published by the National Association of
Accountants. Professor Bazley is a member of the American Institute of Certified Public
Accountants, the Colorado Society of CPAs (CSCPA), and the American Accounting
iii
iv About the Authors
Association. He is a member of the Board of Trustees of the Educational Foundation of
the CSCPA. He has recently appeared as an expert witness for the Securities and Exchange
Commission and as a consultant for a defendant in a securities fraud case. Professor
Bazley is married and has two children, who especially enjoy their three cats, one dog,
and eleven reptiles. He enjoys skiing, playing golf, car racing, and listening to jazz.
JEFFERSON P.JONES
Jeff Jones is the PricewaterhouseCoopers Associate Professor of Accounting in the School
of Accountancy at Auburn University. He received his B.S. and Master of Accountancy
from Auburn University and his Ph.D. from Florida State University. Professor Jones has
received numerous teaching awards. He is the recipient of the 2004 Auburn University
College of Business McCartney Teaching Award, the 2008, 2007, 2006, 2005, 2003, and
2001 Beta Alpha Psi Outstanding Teaching Award, and the 2000 Auburn University
School of Accountancy Teaching Award. He has also been recognized in Who’s Who
Among America’s Teachers (2002 and 2004). Professor Jones holds a CPA certificate in the
state of Alabama and previously worked for Deloitte & Touche. Professor Jones is a co-
author of Cornerstones of Financial AccountingandIntermediate Accounting.
Professor Jones has published articles in professional journals, including Advances in
Accounting, Review of Quantitative Finance and Accounting, Issues in Accounting Education,
International Journal of Forecasting, The CPA Journal, Managerial Finance, Journal of
Accounting and Finance Research, and The Journal of Corporate Accounting and Finance.
Professor Jones has made numerous presentations around the country on research and
pedagogical issues. He is a member of the American Accounting Association, the
American Institute of Certified Public Accountants, and the Alabama Society of CPAs
(ASCPA). Professor Jones is married, has two children, and enjoys playing golf.
Preface
Y S ’G W A
OUR TUDENTS UIDE TO THE ORLD OF CCOUNTING
Known for its balanced coverage of both concepts and procedures, Intermediate Accounting
gives students an unparalleled look at financial accounting information and its increasingly
varied uses in the world today. In addition to the thorough coverage of GAAP—tempered
with a healthy respect and careful consideration of IFRS and the changing conceptual
framework—expected of a book of its caliber, the timely eleventh edition illustrates the
practices professional accountants execute daily, as well as the concepts behind those
practices. Through this approach, this textbook equips students with the tools needed to
critically assess evolving accounting practices needed to meet the demands of a dynamic,
professional world.
With three decades of experience, we continue to connect with the contemporary stu-
dent with a revision that they will find more engaging and useful. Increased and better
examples help students as they “google” their textbooks, improving readability, while at
the same time avoiding sacrifices as they are introduced to the language of the profession.
As before, compelling real-world financial statements and research cases help students see
the implication of the material at hand and learn to apply it in a real business context.
Notably, Appendix A contains the 2007 financial statements and supplemental data of
the Coca-Cola Company for use throughout the book, but the eleventh edition brings
even more to the table.
Intermediate Accounting effectively imparts essential knowledge and skills through a
student-friendly, easy to reference, and pedagogically sound presentation. Coupling that
with the comprehensive coverage, professional language, and real-world applications that
have been the hallmarks of the text for many years, the eleventh edition provides the per-
fect link between the academic and professional world. We believe this book simultane-
ously provides students with the vibrant pedagogy they need to understand the material
and the technical complexity they need to succeed as professionals.
Intermediate Accounting, Eleventh Edition, consists of five parts containing 23 chap-
ters, as follows:
Part 1 Financial Reporting: Concepts, Financial Statements, and Related Disclosures
(Chapters 1–6, and the Time Value of Money Module)
Part 2 Financial Reporting: Asset Valuation and Income Measurement
(Chapters 7–12)
Part 3 Financial Reporting: Valuation of Liabilities and Investments
(Chapters 13–15)
Part 4 Financial Reporting: Stockholders’ Equity
(Chapters 16–17)
Part 5 Financial Reporting: Special Topics
(Chapters 18–23)
C S R B
HANGING TUDENT EADING EHAVIOR
Many instructors have commented on how students are no longer reading books in the
traditional sense. Indeed, current research indicates that students are more often than not
“googling” their textbooks. Accordingly, we have taken steps to increase the usability and
relevance of our text—without sacrificing rigor and depth.
CONCEPTUAL–ANALYTICAL–REAL REPORT FRAMEWORK (C–A–R)
Over the years, a major strength of Intermediate Accountinghas been its comprehensive cover-
age of GAAP—now tempered with essential coverage of international reporting standards—
but its unique and continuing hallmark is the authors’ conceptual and analytical discus-
sions related to those procedures. Through the C-A-R framework, the textbook draws out
v
vi Preface
these important explanations and presents the underlying thought processes of financial
“C-A-R enhances the
analysis. Coupled with the interactive revised Real Reports, the C-A-R progression bolsters
visualization of the
students’ accounting savvy as they come to understand the logic and the practice of
important content and
accounting. In addition, the clear design format allows students to identify information
its interrelatedness.
quickly as they study.
Students find the C-A-R
very helpful.”
Abe Qastin Conceptual
Lakeland College Supported by the conceptual framework introduced in Chapter 2, we relate the discussion
of specific topics to the objectives of financial reporting, qualitative characteristics of
“We need to develop accounting information, conceptual reporting guidelines, and to the concepts of liquidity,
problem solvers, not just financial flexibility, risk, operating capability, and return on investment. With the concep-
technical accounting tual discussions, students begin to understand the environment that gave rise to a specific
students. The C-A-R procedure. Once that logic is placed, they can begin the practice of accounting with a firm
framework helps them understanding of the environment in which they operate.
better connect the con-
ceptual to the reporting
in an easy-to-understand
way.”
Alee Phillips
University of Kansas
Analysis
To help bridge the gap between the conceptual and procedural, we indicate essential ana-
lytical coverage that illustrates the significance and application of certain key company
characteristics and related ratio calculations to financial analysis. This material illumi-
nates the critical-thinking process, so that students can further understand how the logic
of the conceptual framework translates to everyday accounting procedure and business
practice. By effectively grounding this translation in specific business activities, this cover-
age further prepares students to intelligently apply this material on their own.
Reporting
In addition to a thorough understanding of business transactions and the environment
of financial analysis, students need to be aware of issues that arise during financial report-
ing. Using concrete examples, we describe how items are reported in financial statements,
which instills in students a knowledge and understanding they need to efficiently and
effectively report their findings according to GAAP. A key aspect of the report coverage are
the Real Reports. The unique Real Report feature gives students the opportunity to test
their reporting mettle with real company data.
Preface vii
Real Reports
“I appreciate the inclu-
When it’s time to put it all together, this feature encourages students to test their under-
sion of actual annual
standing by providing excerpts from real company reports and challenging students to
report excerpts, because
answer several questions about the information they see. As part of the Reporting material, once they graduate my
students learn by doing, and stretch their understanding of each topic to its limit. We have students will be respon-
updated all of these Real Report features from the tenth to the eleventh edition. With the sible for preparing these
answers provided in the end-of-chapter material, these self-contained features allow stu- reports for actual com-
dents a chance to test themselves as they read. panies. They need to be
exposed to how account-
ing looks in the real
world before they grad-
uate, and the text helps
prepare them for their
future jobs.”
Helen Brubeck
San Jose State
University
“I like the “real life”
annual report examples
because they help to
introduce the reading of
annual reports to the
students in a piecemeal
basis, so that as they
learn the basic account-
ing rules they are also
becoming more familiar
with how accounts are
disclosed on real finan-
cial statements.”
Derek Oler
Indiana University
ENHANCED DESIGN FOR EXAMPLES
In Intermediate Accounting, examples are clearly identified for easy reference. For in-text
“In my experience as a
examples, the example text heading are in redand when the example ends, there is a red
student and a teacher,
diamond. ♦ Major, numbered examples are in red but are in a box. This useful design
it is these worked-out
ensures that students will know where they are in the material at all times.
examples that students
rely upon most when
going through a text.
The expanded examples
are one of the reasons I
like this text so much!”
Helen Brubeck
San Jose State
University
CLARIFYING COMPUTATIONAL STEPS
Because complex computations can be hard for students to master, we reduce many com-
putational procedures to a series of steps outlined in list format. For instance, Example 8-4
viii Preface
includes a series of steps for dollar-value LIFO calculations. Similar lists of steps for the
gross profit inventory method, retail inventory method, and dollar-value LIFO retail
method appear in Chapter 9. We include other computational steps where appropriate
throughout the rest of the book.
STRAIGHTFORWARD DESIGN DISTINGUISHES IMPORTANT MATERIAL
• Key terms, definitions, and official statements are in boldface type.
• Particularly important information is in italics.
• All real company names are in red.
• Exhibits of illustrations of journal entries, supporting schedules, and financial
statements clarify concepts or procedures.
• All journal entries are in blue.
• Excerpts from real financial statements have a special background:
R C M
EINFORCE OURSE ATERIAL
Improved summary features help students identify key concepts and link them to a more
“It is very clear the complete understanding of the accounting process.
authors have employed
a variety of pedagogi-
cal tools to facilitate
ENHANCED! QUICK CHECK SUMMARY
the learning process.
Great job!” With all of the material presented to a student in an Intermediate Accounting text, these
Florence Atiase bulleted summaries help students identify key points, which allows them to test their
University of Texas at knowledge and review for tests.
Austin
Preface ix
CLEAR OBJECTIVES
4 Classify the
Objectives at the beginning of each chapter prepare students for what they will be studying.
assets of a
We list each objective in the margin beside the topical coverage to reinforce students’ learning.
balance sheet.
COMPREHENSIVE CHAPTER SUMMARIES
Each chapter ends with a summary of the key points for each major topic. Tied directly to
the Objectives from the beginning of the chapter, these summaries provide students with
a quick review of the important topical issues.
HELPFUL SUMMARY EXHIBITS
Summary exhibits throughout the text help students pull together and understand what
they have learned so far. For instance, Exhibit 5-3 summarizes corporate earnings and
cash flow topics, Exhibit 21-2 summarizes the criteria and classifications for leases, and
Exhibit 23-1 summarizes the impacts on financial statements of the methods used for
accounting changes and errors.