Accounting 28th Edition PDF

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208  28e...

Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208  28e Carl S. Warren Professor Emeritus of Accounting University of Georgia, Athens Contributing Authors Christine A. Jonick Professor of Accounting University of North Georgia, Gainesville Jennifer S. Schneider Assistant Professor of Accounting University of North Georgia, Gainesville Australia Brazil Mexico Singapore United Kingdom United States Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  This is an electronic version of the print textbook. Due to electronic rights restrictions, some third party content may be suppressed. Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it. For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest. Important Notice: Media content referenced within the product description or the product text may not be available in the eBook version. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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. Accounting, 28th edition © 2021, 2018 Cengage Learning, Inc. Carl S. Warren, Christine A. Jonick, and Unless otherwise noted, all content is © Cengage. Jennifer S. Schneider ALL RIGHTS RESERVED. No part of this work covered by the copyright herein Senior Vice President, Higher Education & Skills may be reproduced or distributed in any form or by any means, except as Product: Erin Joyner permitted by U.S. copyright law, without the prior written permission of the Product Director: Jason Fremder copyright owner. 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These companies are Cover Image: iStock.com/ExperienceInteriors identified in boldface type, and any data presented was adapted from or based upon annual reports, Securities and Exchange Commission filings, or other publicly available sources. Any other individuals or companies used in illustrations or homework are fictional, and any resemblance to actual persons, living or dead, businesses or companies is entirely coincidental. Library of Congress Control Number: 2019954858 ISBN: 978-1-337-90268-7 Cengage 200 Pier 4 Boulevard Boston, MA 02210 Cengage is a leading provider of customized learning solutions with employees residing in nearly 40 different countries and sales in more than 125 countries around the world. Find your local representative at: www.cengage.com. Cengage products are represented in Canada by Nelson Education, Ltd. To learn more about Cengage platforms and services, register or access your online learning solution, or purchase materials for your course, visit www.cengage.com. Printed in the United States of America Print Number: 01    Print Year: 2019 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  Brief Contents Chapter 1 Introduction to Accounting and Business............................................ 2 Chapter 2 Analyzing Transactions.............................................................. 56 Chapter 3 The Adjusting Process............................................................... 110 Chapter 4 Completing the Accounting Cycle................................................... 160 Chapter 5 Accounting Systems................................................................. 228 Chapter 6 Accounting for Merchandising Businesses............................................ 278 Chapter 7 Inventories.......................................................................... 346 Chapter 8 Internal Control and Cash............................................................ 396 Chapter 9 Receivables.......................................................................... 444 Chapter 10 Long-Term Assets: Fixed and Intangible.............................................. 490 Chapter 11 Current Liabilities and Payroll........................................................ 540 Chapter 12 Accounting for Partnerships and Limited Liability Companies........................ 588 Chapter 13 Corporations: Organization, Stock Transactions, and Dividends....................... 632 Chapter 14 Long-Term Liabilities: Bonds and Notes.............................................. 679 Chapter 15 Investments......................................................................... 723 Chapter 16 Statement of Cash Flows............................................................. 765 Chapter 17 Financial Statement Analysis......................................................... 821 Chapter 18 Introduction to Managerial Accounting.............................................. 881 Chapter 19 Job Order Costing................................................................... 922 Chapter 20 Process Cost Systems................................................................ 966 Chapter 21 Cost-Volume-Profit Analysis.......................................................... 1018 Chapter 22 Budgeting........................................................................... 1072 Chapter 23 Evaluating Variances from Standard Costs............................................ 1122 Chapter 24 Decentralized Operations............................................................ 1170 Chapter 25 Differential Analysis, Product Pricing, and Activity-Based Costing..................... 1216 Chapter 26 Capital Investment Analysis.......................................................... 1270 Mornin’ Joe.......................................................................... MJ-1 Appendix A Interest Tables....................................................................... A-2 Appendix B Revenue Recognition................................................................ B-2 Appendix C Selected Excerpts from Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2018.... C-1 Glossary............................................................................. G-1 Index................................................................................ I-1 iii Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  Preface Roadmap for Success Warren’s Accounting 28e makes it easy for you to give students a solid foundation in accounting without over- whelming students. Warren covers the fundamentals AND motivates students to learn by showing how accounting is important to a business. The Warren presentation style provides content in a way that this generation reads and assimilates information. Short, concise paragraphs and bullets Stepwise progression Meaningful illustrations and graphs Hallmarks Schemas provide a roadmap of accounting that emphasizes the big picture. Each chapter begins with a graphic Schema, or Roadmap of Accounting, that shows readers how the chapter material fits within the larger context of the overall book. With this approach, students view chapter concepts as part of a larger whole rather than as mere independent pieces of knowledge, for a truly functional understanding of accounting. Financial and managerial sections use separate schemas. A four-part schema (Chs. 1–4) demonstrates how chapter content integrates within the accounting cycle. The financial accounting chapters’ schema (Chs. 5–17) highlights chapter content within a set of integrated financial statements. A separate managerial accounting schema (Chs. 18–26) shows how chapter content integrates within the managerial accounting functions. CHAPTER CHAPTER 6 Accounting for Merchandising Businesses Introduction to Managerial Accounting 18 Concepts and Principles Chapter 18 Introduction to Managerial Accounting STATEMENT OF OWNER’S EQUITY For the Year Ended December 31, 20Y6 STATEMENT OF CASH FLOWS Owner’s capital, Jan. 1, 20Y6 $XXX For the Year Ended December 31, 20Y6 Developing Information Net income $ XXX Cash flows from (used for) COST SYSTEMS COST BEHAVIOR Withdrawals (XXX) operating activities $XXX Increase in equity XXX Cash flows from (used for) Chapter 19 Job Order Costing Chapter 21 Cost-Volume-Profit Analysis Owner’s capital, Dec. 31, 20Y6 $XXX investing activities XXX Chapter 20 Process Cost Systems Cash flows from (used for) financing activities XXX Net increase (decrease) in cash $XXX INCOME STATEMENT Cash balance, January 1, 20Y6 XXX For the Year Ended December 31, 20Y6 Cash balance, December 31, 20Y6 $XXX Sales $XXX BALANCE SHEET Decision Making Cost of merchandise sold XXX December 31, 20Y6 EVALUATING PERFORMANCE COMPARING ALTERNATIVES Gross profit $XXX Operating expenses: Current assets: Chapter 22 Budgeting Chapter 24 Decentralized Operations Advertising expense $XXX Cash $XXX Chapter 23 Variances from Standard Costs Chapter 25 Differential Analysis, Depreciation expense XXX Accounts receivable XXX Product Pricing, and Amortization expense XXX Merchandise inventory XXX Activity-Based Costing Total current assets $XXX Chapter 26 Capital Investment Analysis Depletion expense XXX … XXX Property, plant, and equipment $XXX … XXX Intangible assets XXX Total operating expenses XXX Total long-term assets XXX Income from operations $XXX Total assets $XXX Other revenue and expenses XXX Liabilities: Net income $XXX Current liabilities $XXX Long-term liabilities XXX Total liabilities $XXX Owner’s equity XXX Total liabilities and owner’s equity $XXX iv Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  362 Chapter 7 Inventories Preface the net realizable value of the merchandise.4 v follows: Revised and refreshed real company chapter openers engage readers from the start. Chapter openers intro- duce and briefly describe a real company and how its challenges relate to the chapter content. Links to this opening sales commissions. company appear throughout the chapter to reinforce the importance of what readers are learning. Original cost $1,000 Estimated selling price 800 Estimated selling expenses 150 Market Value (Net Realizable Value) = $800 – $150 = $650 CHAPTER 7 Link to Best Buy $1,000 and its market value of $650. Best Buy values its inventory at lower of cost or market based upon cost and the mary advantage of using the lower-of-cost-or-market method. amount it expects to realize from the sale. inventory on December 31: Cost per unit Market value (net realizable value) per unit of-cost-or-market method. Link to Best Buy The excess of cost over the amount DUSAN PETKOVIC/SHUTTERSTOCK.COM Best Buy Best Buy expects to receive from the sale applied to the total inventory. 5 A ssume that in September, you purchased a Sony HDTV from Best Buy. At the same time, you pur- chased a Denon surround sound system for $599.99. You Merchandising businesses such as Best Buy make similar assumptions when identical merchandise is pur- chased at different costs. For example, Best Buy may have of an item is called a markdown. liked your surround sound so well that in November, you purchased thousands of Denon surround sound systems purchased an identical Denon system on sale for $549.99 over the past year at different costs. At the end of a period, inventory. for your bedroom TV. Over the holidays, you moved to a some of the Denon systems will still be in inventory, and new apartment and in the process of unpacking discov- some will have been sold. But which costs relate to the ered that one of the Denon surround sound systems was sold systems, and which costs relate to the systems still in missing. Luckily, your renters or homeowners insurance inventory? Best Buy’s assumption about inventory costs EXHIBIT 9 A B C D E policy will cover the theft, but the insurance company can involve large dollar amounts and, thus, can have a 1 Market Value needs to know the cost of the system that was stolen. significant impact on the financial statements. For exam- The Denon systems were identical. However, to ple, Best Buy reported $5,409 million of inventory and net Determining 2 Inventory Cost per per Unit Total respond to the insurance company, you will need to iden- income of $1,464 million for a recent year. Inventory at Lower 3 Item Quantity Unit (Net Realizable Value) tify which system was stolen. Was it the first system, which This chapter discusses such issues as how to deter- of Cost or Market 4 Echo 400 $10.25 $ 9.50 $ 4,100 cost $599.99, or was it the second system, which cost mine the cost of merchandise in inventory and the cost (LCM) 5 Foxtrot 120 22.50 24.10 2,700 $549.99? Whichever system you choose will determine of merchandise sold. However, it begins by discussing the 6 Sierra 600 8.00 7.75 4,800 the amount that you receive from the insurance company. importance of control over inventory. 7 Tango 280 14.00 14.75 3,920 8 Total $15,520 9 Link to Best Buy..................................................... Pages 349, 350, 362, 364 4 Accounting Standards Update, Inventory (Topic 330): Simplifying the Measurement of Inventory (Norwalk, CT). 5 The LCM can also be applied to different classes of inventory. Revised end-of-chapter assignments (homework) provide important hands-on practice. Refined, meaningful review and applications at the end of each chapter include Discussion Questions, Practice Exercises (A and B versions), Exercises, Problems (Series A and B), and Cases & Projects that emphasize ethics, teamwork, and communication skills. CengageNOWv2 CengageNOWv2 is a powerful course management and online homework resource that provides control and customization to optimize the student learning experience. Included are many proven resources, such as algorithmic activities, a test bank, course management tools, reporting and assessment options, and much more. Cengage Mobile App The Cengage Mobile App lets students study wherever and whenever the mood strikes. Now available with CengageNOWv2, it features a full interactive eBook—readable online or off—with 24/7 course access and study tools to power on-the-go learning. Plus, the app allows you to engage your students with instant in-class polling and take attendance with a tap. Find details at www.cengage.com/mobile-app/. Excel Online Cengage and Microsoft have partnered in CengageNOWv2 to provide students with a uniform, EXCEL authentic Excel experience. It provides instant feedback, built-in video tips, and easily acces- ONLINE sible spreadsheet work. These features allow you to spend more time teaching accounting applications and less time troubleshooting Excel. These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each student receives his or her own version of the problem to perform the necessary data cal- culations in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework assignments in CengageNOWv2. It’s easily retrievable so students can review their answers without cumbersome file management and numerous downloads/uploads. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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. vi Preface MindTap eReader The MindTap eReader for Warren’s Accounting is the most robust digital reading experi- ence available. Hallmark features include: Fully optimized for the iPad. Note taking, highlighting, and more. Embedded digital media. The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that vocalizes, or “speech-enables,” online educational content. This feature is ideally suited for both instructors and learners who would like to listen to content instead of (or in addition to) reading it. Cengage Unlimited Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs. Students get total access to everything Cengage has to offer on demand—in one place. That’s over 20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disci- plines and over 675 courses. Currently available in select markets. Find details at www.cengage. com/unlimited. New to This Edition Updated dates and real company information for In Chapter 4, the “Reversing Entry” appendix has currency. been moved to an online appendix. Refreshed end-of-chapter assignments with different A new “Why Is the Accrual Basis of Accounting numerical values and updated information. Required by GAAP?” discussion has been added as A new “Time Period Concept” discussion has been Appendix 2 to Chapter 4. The understanding of why added to the “Generally Accepted Accounting Prin- accrual accounting is required by GAAP is important ciples” section of Chapter 1. This discussion defines for students’ ability to analyze and evaluate financial and illustrates the natural business year and fiscal statements. Why accrual accounting is required is year accounting periods. illustrated by comparing NetSolutions’ financial state- The fiscal year discussion was moved from the prior ments under the accrual basis (Chapters 1–4) with edition’s Chapter 4. In addition, the notation of 20Y1, related cash basis financial statements. 20Y2, … is introduced for indicating years through- To simplify and give the instructor more flexibility out the text. in Chapter 6, the discussion of the accounting for In Chapter 2, the discussion on “Errors Not Affecting customer merchandise refunds, including the related the Trial Balance” has been revised to better aid stu- adjusting entries, has been moved to Appendix 2 at dent understanding and to simplify the preparation the end of the chapter. of correcting journal entries. For those instructors who prefer to cover sales dis- In Chapter 4, the Accounting Cycle illustration in counts using the gross method, Appendix 1, “Gross Exhibit 8 has been revised to facilitate student review. Method of Recording Sales Discounts,” has been added to the end of Chapter 6. In Chapter 4, the “Fiscal Year” discussion has been moved to Chapter 1. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  About the Authors Carl S. Warren Terry R. Spray/InHisImage Studios Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr. Warren has taught classes at the University of Georgia, University of Iowa, Michigan State University, and University of Chicago. He focused his teaching efforts on principles of accounting and auditing. Dr. Warren received his PhD from Michigan State University and his BBA and MA from the University of Iowa. During his career, Dr. Warren published numerous articles in professional journals, including The Accounting Review, Journal of Accounting Research, Journal of Accountancy, The CPA Journal, and Auditing: A Journal of Practice & Theory. Dr. Warren has served on numerous committees of the American Accounting Association, the American Institute of Certified Public Accountants, and the Institute of Internal Auditors. He also has consulted with numerous companies and public accounting firms. His outside interests include handball, golf, skiing, backpacking, and fly-fishing. Christine A. Jonick Dr. Christine A. Jonick is Professor of Accounting at University of North Georgia, Gaines- ville. She received her Ed.D from the University of Georgia, her MBA from Adelphi Univer- Courtesy of Christine Jonick sity, and her BA from State University of New York at Binghamton. Dr. Jonick has focused her teaching efforts on principles of accounting and intermediate financial accounting. She is the recipient of several teaching awards, including one for excellence in online instruction. She has published accounting-related articles in research journals and a case study in the Institute of Management Accountants (IMA) Educational Case Journal. Dr. Jonick serves on numerous professional committees, is an active board member for the American Account- ing Association SE, and is a recent past president of the Georgia Association of Accounting Educators. Dr. Jonick has worked with accounting textbook publishers for over a decade as a technology consultant, subject matter expert, and content developer. Her outside interests include travel, biking, technology development, and family activities. Jennifer S. Schneider Jennifer S. Schneider is an Assistant Professor at the University of North Georgia, Gainesville. Professor Schneider has taught principles of accounting, survey of accounting, principles of finance, accounting information systems, and auditing. She is a Florida CPA and began her Courtesy of Jennifer Schneider career at PwC. She has 15+ years’ experience with Fortune 500 companies, primarily in audit and financial/SEC reporting. Prior to coming to the University of North Georgia, Professor Schneider taught at the University of Amsterdam. Her research interests are in the Scholarship of Teaching and Learning. Professor Schneider has published several articles including an article in the Institute of Management Accountants (IMA) Educational Case Journal. She has also served as faculty advisor for Beta Alpha Psi, which is an international honors organization for financial information students and professionals. She enjoys spending time with her two sons, Luke and Graeme, both students at the University of Georgia, Athens. vii Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  Contents Chapter 1 Introduction to Double-Entry Accounting System 62 Balance Sheet Accounts 62 Accounting and Business 2 Income Statement Accounts 63 Owner Withdrawals 63 Nature of Business and Accounting 5 Normal Balances 63 Types of Businesses 5 Journalizing 64 Role of Accounting in Business 6 Integrity, Objectivity, and Ethics in Business: Role of Ethics in Accounting and Business 6 Will Journalizing Prevent Fraud? 67 Integrity, Objectivity, and Ethics in Business: Journalizing and Posting to Accounts 68 Bernie Madoff 9 Opportunities for Accountants 9 Business Connection: Microsoft’s Unearned Revenue 70 Business Connection: Pathways Commission 10 Business Connection: Computerized Accounting Systems 72 Generally Accepted Accounting Principles 10 Business Entity Concept 11 Trial Balance 78 International Connection: International Financial Errors Affecting the Trial Balance 79 Reporting Standards (IFRS) 11 Errors Not Affecting the Trial Balance 80 Time Period Concept 12 Financial Analysis and Interpretation: Cost Concept 13 Horizontal Analysis 82 The Accounting Equation 13 Continuing Problem 106 Business Connection: The Accounting Equation 14 Business Transactions and the Accounting Chapter 3 The Adjusting Process 110 Equation 15 Nature of the Adjusting Process 113 Summary 18 Accrual and Cash Basis of Accounting 113 Financial Statements 19 Revenue and Expense Recognition 114 Income Statement 20 The Adjusting Process 114 Statement of Owner’s Equity 21 Types of Accounts Requiring Adjustment 115 Balance Sheet 21 Adjusting Entries for Accruals 116 Statement of Cash Flows 24 Accrued Revenues 117 Interrelationships Among Financial Accrued Expenses 118 Statements 25 Financial Analysis and Interpretation: Business Connection: Earning Revenues Ratio of Liabilities to Owner’s Equity 26 from Season Tickets 120 Continuing Problem 52 Adjusting Entries for Deferrals 120 Unearned Revenues 121 Prepaid Expenses 122 Chapter 2 Analyzing Transactions 56 Business Connection: Sports Signing Bonus 122 Using Accounts to Record Transactions 59 Integrity, Objectivity, and Ethics in Business: Chart of Accounts 61 Free Issue 123 Business Connection: The Hijacking Receivable 61 Adjusting Entries for Depreciation 124 viii Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  Contents ix Summary of Adjusting Process 126 Step 4. Enter the Adjusted Trial Balance 191 Step 5. Extend the Accounts to the Income Business Connection: Microsoft’s Deferred Statement and Balance Sheet Revenues 126 Columns 192 Adjusted Trial Balance 130 Step 6. Total the Income Statement and Balance Sheet Columns, Compute the Net Income Financial Analysis and Interpretation: or Net Loss, and Complete the Vertical Analysis 131 Spreadsheet 192 Preparing the Financial Statements Continuing Problem 156 from the Spreadsheet 193 Appendix 2: Why Is the Accrual Basis of Accounting Required by GAAP? 195 Chapter 4 Completing the Cash Basis of Accounting 195 Accounting Cycle 160 Accrual Basis of Accounting 195 Illustration of Cash and Accrual Accounting 196 Flow of Accounting Information 163 Continuing Problem 223 Financial Statements 165 Comprehensive Problem 1 224 Income Statement 165 Integrity, Objectivity, and Ethics in Business: CEO’s Health? 167 Chapter 5 Accounting Systems 228 Statement of Owner’s Equity 167 Balance Sheet 168 Basic Accounting Systems 230 International Connection: International Manual Accounting Systems 231 Differences 169 Subsidiary Ledgers 231 Special Journals 231 Closing Entries 169 Revenue Journal 233 Journalizing and Posting Closing Entries 170 Cash Receipts Journal 236 Post-Closing Trial Balance 174 Accounts Receivable Control Account and Subsidiary Ledger 238 Accounting Cycle 174 Purchases Journal 238 Illustration of the Accounting Cycle 177 Cash Payments Journal 241 Accounts Payable Control Account and Subsidiary Step 1. Analyzing and Recording Transactions Ledger 243 in the Journal 177 Step 2. Posting Transactions to the Ledger 179 Business Connection: Accounting Systems and Profit Step 3. Preparing an Unadjusted Trial Bal- Measurement 244 ance 179 Computerized Accounting Systems 245 Step 4. Assembling and Analyzing Adjustment Data 180 Business Connection: TurboTax 247 Step 5. Preparing an Optional End-of-Period Spreadsheet 180 E-Commerce 247 Step 6. Journalizing and Posting Adjusting Integrity, Objectivity, and Ethics in Business: Online Entries 180 Fraud 248 Step 7. Preparing an Adjusted Trial Balance 182 Step 8. Preparing the Financial Statements 182 Financial Analysis and Interpretation: Step 9. Journalizing and Posting Closing Segment Analysis 248 Entries 184 Step 10. Preparing a Post-Closing Trial Balance 184 Financial Analysis and Interpretation: Chapter 6 Accounting for Working Capital and Current Ratio 187 Merchandising Businesses 278 Appendix 1: End-of-Period Spreadsheet 188 Step 1. Enter the Title 189 Nature of Merchandising Businesses 280 Step 2. Enter the Unadjusted Trial Balance 189 Operating Cycle 280 Step 3. Enter the Adjustments 190 Financial Statements 281 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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. x Contents Business Connection: Comcast Versus Chapter 7 Inventories 346 Lowe’s 282 Merchandising Transactions 282 Control of Inventory 348 Chart of Accounts for a Merchandising Safeguarding Inventory 348 Business 282 Reporting Inventory 349 Purchases Transactions 283 Inventory Cost Flow Assumptions 349 Sales Transactions 288 Business Connection: Pawn Stars and Specific Integrity, Objectivity, and Ethics in Business: Identification 351 The Case of the Fraudulent Price Tags 291 Freight 292 Inventory Costing Methods Under a Perpetual Summary: Recording Merchandise Inventory Inventory System 352 Transactions 294 First-In, First-Out Method 352 Dual Nature of Merchandise Transactions 294 Last-In, First-Out Method 353 Sales Taxes and Trade Discounts 296 International Connection: International Financial Business Connection: Sales Taxes 297 Reporting Standards (IFRS) 355 The Adjusting Process 297 Weighted Average Cost Method 355 Adjusting Entry for Inventory Shrinkage 297 Business Connection: Computerized Perpetual Integrity, Objectivity, and Ethics in Business: The Cost Inventory Systems 357 of Employee Theft 298 Inventory Costing Methods Under Adjusting Entries for Customer Refunds and a Periodic Inventory System 357 Allowances 298 First-In, First-Out Method 357 Financial Statements for Last-In, First-Out Method 358 a Merchandising Business 299 Weighted Average Cost Method 359 Multiple-Step Income Statement 299 Comparing Inventory Costing Methods 360 Single-Step Income Statement 301 Statement of Owner’s Equity 301 Integrity, Objectivity, and Ethics in Business: Where’s Balance Sheet 301 the Bonus? 361 The Closing Process 302 Reporting Merchandise Inventory Financial Analysis and Interpretation: in the Financial Statements 361 Asset Turnover 303 Valuation at Lower of Cost or Market 361 Appendix 1: Gross Method of Recording Sales Business Connection: Good Samaritan 363 Discounts 305 Merchandise Inventory on the Balance Sheet 363 Transactions 305 Effect of Inventory Errors on the Financial Statements 364 Adjusting Entry 306 Financial Analysis and Interpretation: Inventory Subsequent Period 306 Turnover and Days’ Sales in Inventory 367 Comparison with the Net Method 307 Business Connection: Rapid Inventory Appendix 2: Returns of Merchandise 308 at Costco 367 Appendix 3: The Periodic Inventory Appendix: Estimating Inventory Cost 370 System 310 Retail Method of Inventory Costing 370 Chart of Accounts Under the Periodic Inventory Gross Profit Method of Inventory Costing 371 System 310 Recording Merchandise Transactions Under the Periodic Inventory System 311 Adjusting Process Under the Periodic Inventory Chapter 8 Internal Control System 311 Financial Statements Under the Periodic Inventory and Cash 396 System 312 Closing Entries Under the Periodic Inventory Sarbanes-Oxley Act 398 System 313 Internal Control 400 Comprehensive Problem 2 341 Objectives of Internal Control 400 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  Contents xi Business Connection: Employee Fraud 400 Business Connection: Failure to Collect 452 Elements of Internal Control 400 Estimating Uncollectibles 452 Control Environment 401 Business Connection: Allowance Percentages Across Risk Assessment 402 Control Procedures 402 Companies 457 Integrity, Objectivity, and Ethics in Business: Tips on Comparing Direct Write-Off Preventing Employee Fraud in Small Companies 403 and Allowance Methods 457 Monitoring 404 Notes Receivable 458 Information and Communication 404 Characteristics of Notes Receivable 458 Limitations of Internal Control 405 Accounting for Notes Receivable 460 Cash Controls over Receipts and Payments 405 Reporting Receivables on the Balance Sheet 462 Business Connection: What Is Cryptocurrency? 406 Business Connection: Delta Air Lines 462 Control of Cash Receipts 406 Control of Cash Payments 408 Financial Analysis and Interpretation: Accounts Receivable Turnover and Business Connection: Mobile Payments 409 Days’ Sales in Receivables 463 Bank Accounts 409 Bank Statement 409 Using the Bank Statement as a Control over Chapter 10Long-Term Assets: Cash 412 Bank Reconciliation 412 Fixed and Intangible 490 Integrity, Objectivity, and Ethics in Business: Bank Nature of Fixed Assets 492 Error in Your Favor (or Maybe Not) 416 Classifying Costs 492 Special-Purpose Cash Funds 416 Business Connection: Fixed Assets 493 The Cost of Fixed Assets 494 Financial Statement Reporting of Cash 417 Leasing Fixed Assets 495 Business Connection: Managing Accounting for Depreciation 496 Apple’s Cash 418 Factors in Computing Depreciation Expense 496 Straight-Line Method 497 Financial Analysis and Interpretation: Units-of-Activity Method 499 Ratio of Cash to Monthly Cash Expenses 418 Double-Declining-Balance Method 501 Business Connection: Microsoft Corporation 420 Comparing Depreciation Methods 503 Partial-Year Depreciation 503 Business Connection: Depreciating Animals 504 Chapter 9 Receivables 444 Revising Depreciation Estimates 505 Repair and Improvements 506 Classification of Receivables 446 Integrity, Objectivity, and Ethics in Business: Capital Accounts Receivable 446 Crime 507 Notes Receivable 446 Other Receivables 447 Disposal of Fixed Assets 508 Discarding Fixed Assets 508 Uncollectible Receivables 447 Selling Fixed Assets 509 Business Connection: Warning Signs 448 Business Connection: Downsizing 510 Direct Write-Off Method Natural Resources 511 for Uncollectible Accounts 448 Intangible Assets 512 Allowance Method for Uncollectible Patents 512 Accounts 449 Copyrights and Trademarks 513 Goodwill 513 Integrity, Objectivity, and Ethics in Business: Collecting Past Due Accounts 450 International Connection: International Financial Write-Offs to the Allowance Account 450 Reporting Standards (IFRS) 515 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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. xii Contents Financial Reporting for Long-Term Assets: Fixed Chapter 12 Accounting for and Intangible 515 Partnerships and Limited Financial Analysis and Interpretation: Liability Companies 588 Fixed Asset Turnover Ratio 516 Fixed Asset Turnover Ratio 516 Proprietorships, Partnerships, and Limited Business Connection: Hub-and-Spoke or Point-to- Liability Companies 590 Point? 517 Proprietorships 590 Partnerships 591 Appendix: Exchanging Similar Fixed Assets 518 Gain on Exchange 518 Business Connection: Breaking Up Is Hard To Do 591 Loss on Exchange 519 Limited Liability Companies 592 Comparing Proprietorships, Partnerships, and Limited Liability Companies 592 Chapter 11Current Liabilities Business Connection: Organizational Forms in the Accounting Industry 592 and Payroll 540 Forming a Partnership and Dividing Income 593 Current Liabilities 542 Forming a Partnership 593 Accounts Payable 542 Dividing Income 594 Current Portion of Long-Term Debt 542 Integrity, Objectivity, and Ethics in Business: Tyranny Short-Term Notes Payable 543 of the Majority 596 Payroll and Payroll Taxes 545 Partner Admission and Withdrawal 597 Liability for Employee Earnings 545 Admitting a Partner 597 Deductions from Employee Earnings 545 Withdrawal of a Partner 603 Computing Employee Net Pay 548 Death of a Partner 603 Liability for Employer’s Payroll Taxes 549 Liquidating Partnerships 603 Business Connection: The Most You Gain on Realization 604 Will Ever Pay 549 Loss on Realization 606 Accounting Systems for Payroll Loss on Realization—Capital Deficiency 607 and Payroll Taxes 549 Statement of Partnership Equity 610 Payroll Register 550 Employee’s Earnings Record 552 Financial Analysis and Interpretation: Payroll Checks 554 Revenue per Employee 610 Computerized Payroll System 555 Internal Controls for Payroll Systems 555 Integrity, Objectivity, and Ethics in Business: Chapter 13Corporations: Overbilling Clients 556 Organization, Stock Transactions, Employees’ Fringe Benefits 556 and Dividends 632 Vacation Pay 556 Pensions 557 Nature of a Corporation 634 Postretirement Benefits Other Than Pensions 558 Characteristics of a Corporation 634 Current Liabilities on the Balance Sheet 558 Forming a Corporation 635 Contingent Liabilities 559 Business Connection 636 Probable and Estimable 559 Probable and Not Estimable 560 Stockholders’ Equity 637 Reasonably Possible 560 Paid-In Capital from Stock 638 Remote 560 Characteristics of Stock 638 Financial Analysis and Interpretation: Classes of Stock 639 Quick Ratio 561 Business Connection: You Have No Vote 639 Comprehensive Problem 3 582 Issuing Stock 640 Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyright 2021 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.  Contents xiii Premium on Stock 641 Reporting Long-Term Liabilities 695 No-Par Stock 642 Financial Analysis and Interpretation: Integrity, Objectivity, and Ethics in Business: The Times Interest Earned Ratio 695 Professor Who Knew Too Much 643 Appendix 1: Present Value Concepts and Accounting for Dividends 643 Pricing Bonds Payable 697 Cash Dividends 643 Present Value Concepts 697 Stock Dividends 645 Pricing Bonds 700 Stock Splits 646 Appendix 2: Interest Rate Method of Business Connection: Buffett on Stock Splits 647 Amortization 701 Treasury Stock Transactions 648 Amortization of Discount by the Interest Method 701 Business Connection: Treasury Stock or Amortization of Premium by the Interest Dividends? 649 Method 702 Reporting Stockholders’ Equity 649 Stockholders’ Equity on the Balance Sheet 649 Reporting Retained Earnings 651 Chapter 15 Investments 723 Statement of Stockholders’ Equity 652 International Connection: International Financial