Warren Reeve Duchac Accounting 25e PDF

Find more at www.downloadslide.com  Find more at www.downloadslide.com WARREN REEVE DUCHAC ACCOUNTING...

Find more at www.downloadslide.com  Find more at www.downloadslide.com WARREN REEVE DUCHAC ACCOUNTING 25e Carl S. Warren Professor Emeritus of Accounting University of Georgia, Athens James M. Reeve Professor Emeritus of Accounting University of Tennessee, Knoxville Jonathan E. Duchac Professor of Accounting Wake Forest University Copyright 2012 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.  Find more at www.downloadslide.com 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. Copyright 2012 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.  Find more at www.downloadslide.com Accounting 25e © 2014, 2012 South-Western, Cengage Learning Carl S. Warren ALL RIGHTS RESERVED. No part of this work covered by the copyright James M. Reeve hereon may be reproduced or used in any form or by any means— Jonathan E. Duchac graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution, information storage and retrieval systems, Senior Vice President, LRS/Acquisitions & Solutions or in any other manner, except as permitted under Section 107 or 108 Planning: Jack W. Calhoun of the 1976 United States Copyright Act, without the prior written Editorial Director, Business & Economics: Erin Joyner permission of the publisher. Editor-in-Chief: Rob Dewey Sr. Acquisitions Editor: Matt Filimonov For product information and technology assistance, Supervising Developmental Editor: Aaron Arnsparger contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 Sr. Developmental Editor: Laura Bofinger Ansara Editorial Assistant: Ann Loch For permission to use material from this text or product, submit all requests online at Marketing Manager: Natalie Livingston www.cengage.com/permissions Sr. Marketing Communications Manager: Sarah Greber Further permissions questions can be emailed to Sr. Content Project Manager: Cliff Kallemeyn [email protected] Sr. Media Editor: Scott Fidler Media Editor: Jessica Robbe Frontlist Buyer, Manufacturing: Doug Wilke ExamView ® is a registered trademark of eInstruction Corp. Windows is Sr. Art Director: Stacy Shirley a registered trademark of the Microsoft Corporation used herein under Sr. Rights Acquisitions Acct. Specialist: Dean Dauphinais license. Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc. used herein under license. © 2014 Cengage Learning. All Rights Reserved. Cengage Learning WebTutor™ is a trademark of Cengage Learning. Library of Congress Control Number: 2012943617 Student Edition ISBN-10: 1-133-60760-8 Student Edition ISBN-13: 978-1-133-60760-1 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning is a leading provider of customized learning solutions with office locations around the globe, including Singapore, the United Kingdom, Australia, Mexico, Brazil, and Japan. Locate your local office at: www.cengage.com/global 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.cengagebrain.com Printed in USA 1 2 3 4 5 6 17 16 15 14 13 12 Copyright 2012 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.  Find more at www.downloadslide.com The Author Team 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. Professor Warren focused his teaching efforts on principles of accounting and auditing. He received his Ph.D. from Michigan State University and his B.B.A. and M.A. from the University of Iowa. During his career, Dr. Warren pub- lished 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 Ac- counting Association, the American Institute of Certified Public Accountants, and the Institute of Internal Auditors. He has also consulted with numerous companies and public accounting firms. Professor Warren is an avid handball player and has played in the World Handball Championships in Portland, Oregon, and Dublin, Ireland. He enjoys backpacking and recently took an eleven-day, ten-night trip in the Thorofare area of Yellowstone National Park. He has rafted the Grand Canyon and backpacked rim-to-rim. Professor Warren also enjoys fly fishing, skiing, golfing, and motorcycling. James M. Reeve Charles J. Garvey III / Garvey Photography Dr. James M. Reeve is Professor Emeritus of Accounting and Information Management at the University of Tennessee. Professor Reeve taught on the accounting faculty for 25 years, after graduating with his Ph.D. from Oklahoma State University. His teaching efforts focused on undergraduate accounting principles and graduate education in the Master of Accountancy and Senior Executive MBA programs. Beyond this, Professor Reeve is also very active in the Supply Chain Certification program, which is a major executive education and research effort of the College. His research interests are varied and include work in managerial accounting, supply chain management, lean manufactur- ing, and information management. He has published over 40 articles in academic and professional journals, including the Journal of Cost Management, Journal of Manage- ment Accounting Research, Accounting Review, Management Accounting Quarterly, Sup- ply Chain Management Review, and Accounting Horizons. He has consulted or provided training around the world for a wide variety of organizations, including Boeing, Procter & Gamble, Norfolk Southern, Hershey Foods, Coca-Cola, and Sony. When not writing books, Professor Reeve plays golf and is involved in faith-based activities. Jonathan Duchac Dr. Jonathan Duchac is the Merrill Lynch and Co. Professor of Accounting and Director of International Programs at Wake Forest University. He holds a joint appointment at the Vi- enna University of Business and Economics in Vienna, Austria. Dr. Duchac currently teaches introductory and advanced courses in financial accounting and has received a number of awards during his career, including the Wake Forest University Outstanding Graduate Professor Award, the T.B. Rose Award for Instructional Innovation, and the University of © Ken Bennett Georgia Outstanding Teaching Assistant Award. In addition to his teaching responsibilities, Dr. Duchac has served as Accounting Advisor to Merrill Lynch Equity Research, where he worked with research analysts in reviewing and evaluating the financial reporting practices of public companies. He has testified before the U.S. House of Representatives, the Financial Accounting Standards Board, and the Securities and Exchange Commission and has worked with a number of major public companies on financial reporting and accounting policy is- sues. In addition to his professional interests, Dr. Duchac serves on the Board of Directors of The Special Children’s School of Winston-Salem, a private, nonprofit developmental day school serving children with special needs. Dr. Duchac is an avid long-distance runner, mountain biker, and snow skier. His recent events include the Grandfather Mountain Mara- thon, the Black Mountain Marathon, the Shut-In Ridge Trail run, and NO MAAM (Nocturnal Overnight Mountain Bike Assault on Mount Mitchell). iii Copyright 2012 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.  Find more at www.downloadslide.com A History of Success Leading the Way by Activating Learning Generations of business students have learned accounting from the Warren, Reeve, and Duchac text- book. This tradition of success goes back twenty-five editions. Accounting is successful because it continues to innovate and respond to changing student learning styles while introducing students to accounting through a variety of learning models and multimedia. This tradition of innovation continues today. Countless conversations with accounting instructors and the authors’ own experiences in the classroom have revealed how much the teaching and learning environment has changed. Today’s internet generation has grown up on the computer. The online and digital universe is both a natural learning environment for students and a learning medium they expect beyond the textbook. In response to changes in student learning, the authors have ensured their text is an integrated print/digital learning experience for students. In crafting the philosophy for this edition, the authors extended the time-tested integrated learning experience of their text to the technology in interactive ways. For this 25th anniversary edition, new online Activation Exercises were created by the authors. These foundational learning activities are the perfect introduction to the major concepts in each chapter. By using the online environment to demonstrate concepts through activities, the authors have gone beyond what is possible in a printed text. Students who complete these activities will come to class with a deeper understanding of key terminology, economic events, the account- ing system, and the impact on the financial statements. With a better foundational knowledge of accounting concepts, class sessions can be utilized to help students delve even further in their understanding. These activities are a result of much collaboration with many accounting instructors over the past two years. They reflect the suggestions and feedback we receive from instructors and students on an ongoing basis. We are very happy with the results and think you will be pleased with the new activities as well. The original author of Accounting, James McKinsey, could not have imagined the success and influence this text has enjoyed over the past 25 editions—or that his original vision would lead the market into the online world through subsequent authors’ expertise. As the current authors, we appreciate the responsibility of protecting and enhancing this vision, while continuing to re- fine it to meet the changing needs of students and instructors. Always in touch with a tradition of excellence, but never satisfied with yesterday’s success, this edition enthusiastically embraces a changing environment and continues to proudly lead the way in activating student learning and success. We sincerely thank our many colleagues who have helped to make it happen. “The teaching of accounting is no longer designed to train professional accountants only. With the growing complexity of business and the constantly increasing difficulty of the problems of management, it has become essential that everyone who aspires to a position of responsibility should have a knowledge of the fundamental principles of accounting.” —James O. McKinsey, Author, first edition, 1929 iv Copyright 2012 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.  Find more at www.downloadslide.com Preface New to the 25th Edition NEW Online Homework Solutions and Student Study Tools Given the prevalence and expansion of student learning through the use of online tools, the Warren, Reeve, and Duchac team has dedicated significant focus to creating new and valuable homework and teaching solutions for the 25th edition. Designed to work with the typical instructor’s workflow in mind, the following online home- work solutions offer a number of new and innovative choices for both instructors and students using Cengage Learning’s technology platforms: Animated Activities, Activation Exercises, Blueprint Problems, and Blueprint Connections. Animated Activities Many instructors struggle to expose students to concepts before class begins. Stu- dents who come to class more prepared are more likely to succeed, and Animated Activities are the perfect pre-lecture assignment! Animated Activities use illustrations to visually explain and guide students through selected core topics in introductory financial and managerial accounting. Each activity uses a realistic company example to illustrate how the concepts relate to the everyday activities of a business. These activities offer excellent resources for students prior to coming to lecture and will especially appeal to visual learners. Accounting concepts are brought to life through the use of engaging visuals! Topics covered include Introduction to the Financial Statements, Transaction Anal- ysis, Adjusting Entries, Receivables, Bank Reconciliations, Inventory, Depreciation, Bonds, Stockholders’ Equity, Cost of Goods Sold Model, Job Order Costing, Activity- Based Costing, Mixed Costs, Budgeting, and more. Coverage and terminology is consistent with the textbook presentation. Animated Activities are in CengageNOW as assignable homework items and as assets that populate the Study Tools/Personalized Study Plan. The assignable activities include multiple-choice questions that quiz students on the larger concepts addressed in the animation. v Copyright 2012 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.  Find more at www.downloadslide.com Preface New to the 25th Edition NEW Activation Exercises For most students, a Principles of Accounting course is their first exposure to both business transactions and the accounting system. While these concepts are already difficult to master individually, their combination and interdependency in the in- troductory accounting course causes students to struggle. Students often resort to memorization as a way to pass the course, but such surface learning does little to develop the critical thinking skills and deep understanding that are necessary for success in future business courses. To overcome these challenges, the authors created the Activation Exercises to providing a learning system that focuses on developing a better understanding of (1) key terms and definitions, (2) the economics of business transactions, (3) how these transactions are recorded in the accounting system, and where relevant, (4) how these transactions are ultimately reflected in the financial statements. The Activation Exercise structure builds the critical thinking skills that are neces- sary for students to succeed in both introductory accounting and future accounting courses. Reviewers have enthusiastically praised the authors’ new online activities and indicated that they would be both ideal pre-class activities and after-class assignments. The Activation Exercises are applied to the following financial chapters in this text and available within CengageNOW: Chapters 1–4, 6, 7, and 9–14. Blueprint Problems Blueprint Problems provide an opportunity to teach more than an opportunity to assess the student’s knowledge. Blueprint Problems cover the primary learning objec- tives and help students understand the fundamental accounting concepts and their associated building blocks, and not just memorize the formulas or journal entries vi Copyright 2012 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.  Find more at www.downloadslide.com required for a single concept. This means that a Blueprint Problem can include basic concepts from previous chapters, such as account types, the impact on the accounting equation, and other fundamental aspects of the financial statements. Where applicable, selected Blueprint Problems include dynamic visual elements that help students with difficult concepts. Blueprint Problems cover most major topics and concepts in financial and managerial accounting and include rich feedback to help students when checking their work. In addition, these problems provide detailed explanations to reinforce the correct solutions, providing students with an excellent learning resource. Coverage and terminology used is consistent with the textbook examples and homework problems. Blueprint Problems are available in CengageNOW and Aplia. Blueprint Connections Blueprint Connections are shorter extensions of the Blueprint Problems, created based on market demand for briefer but more focused homework assignments that build upon concepts covered and introduced within the Blueprint Problems. Blueprint Connections extend beyond the foundations covered in the Blueprint Problems. In this example, students are asked to respond to different scenarios related to the disposal of a fixed asset. vii Copyright 2012 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.  Find more at www.downloadslide.com New to the 25th Edition NEW Blueprint Connections offer a natural sequence immediately following the com- pletion of a corresponding Blueprint Problem, or completed independently. Blue- print Connections share a similar structure and level of feedback and explanation with Blueprint Problems. Coverage and terminology used is consistent with the textbook examples and homework problems. Blueprint Connections are available in CengageNOW. Textbook Changes in the 25th Edition Even with the shift of student learning online, we recognize that textbooks continue to play an invaluable role in the teaching and learning environments. Continuing our focus from previous editions, we collaborated with accounting instructors in an effort to improve the textbook presentation and make sure the printed textbook also meets students’ changing needs. Our research revealed to us the need to remain current in the areas of emerging topics/trends and to continue to look for ways to make the book more accessible to students. The results of this collaboration with hundreds of accounting instructors are reflected in the following significant improvements made to the 25th edition. As with every new edition, the authors have ensured that new real-world compa- nies have been added to the content, existing real world data has been updated, and names and values of end-of-chapter material have been changed. New highlighted chapter opener companies include Twitter (Chapter 1); Apple (Chapter 2); Google, along with updated bylaws and an activity using Google (Chapter 13); and Dick’s Sporting Goods (Chapter 14). “Accounting for Merchandising Businesses” (Chapter 6) was restructured from the prior edition. The discussion of financial statements, including the multiple-step income statement, has been moved to the end of the chapter. The chapter now be- gins with a brief description of the nature of merchandising operations, followed by the accounting for purchase and sales transactions. The perpetual inventory system is used throughout the chapter to illustrate merchandise transactions. The periodic inventory system is discussed in the end-of-chapter appendix. The homework has been designed so that the instructor can assign the perpetual, periodic, or both systems. “Inventories” (Chapter 7) has been revised to include coverage of the weighted average inventory cost flow method. The weighted average cost method is now de- scribed and illustrated for the perpetual and periodic inventory systems. In doing so, the chapter illustrations were revised and amounts changed to facilitate comparisons between the perpetual and periodic systems, as well as to avoid rounding issues. New homework exercises and problems were added so that instructors can cover the first-in, first-out (FIFO), last-in, first-out (LIFO), and weighted average cost methods using either perpetual or periodic inventory systems. The weighted average cost method for the perpetual inventory system was added because of the increased use of accounting software packages that use it with point-of-sale systems. In addition, many instructors suggested increasing coverage of the weighted average cost method. Working Paper problems (for series A & B) remaining from prior editions in Chapters 2, 4, and 19 have been moved to the product companion site, and the Chapter 19 problems have been altered within the text to stand alone without the Working Papers requirement. viii Copyright 2012 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.  Hallmark Features of Find more at www.downloadslide.com Accounting, Preface 25e Accounting, 25e, is unparalleled in pedagogical innovation. Our constant dialogue with accounting faculty continues to affect how we refine and improve the text to meet the needs of today’s students. Our goal is to provide a logical framework and pedagogical system that caters to how students of today study and learn. Clear Objectives and Key Learning Outcomes To guide students, the authors provide clear chapter objectives and important learning outcomes. All the chapter materials relate back to these key points and outcomes, which keeps students fo- cused on the most important topics and concepts in order to succeed in the course. Example Exercises Example Exercises reinforce concepts and procedures in a bold, new way. Like a teacher in the classroom, students follow the authors’ example to see how to complete accounting applications as they are presented in the text. This feature also provides a list of Practice Exercises that parallel the Example Exercises so students get the practice they need. In addition, the Practice Exercises include references to the chapter Example Exercises so that students can easily cross-reference when completing homework. 126 Chapter 3 The Adjusting Process Although RealNetworks still reported a loss in Year 2, it has improved its con- trol of expenses significantly from Year 1. However, the decrease in Revenues from $562,264 to $401,733 is a major concern. Apparently, RealNetworks reduced its expenses in response to its decreasing revenues. example exercise 3-10 Vertical Analysis EExample xample Exercise Exercise 2-2 2-2 2 Jo Jour urna urna nal Journalal En ntr t y fo Entry forr As A se et Pu Asset Purc rch rchase hase ha Purchasee Two income statements for Fortson Company are shown below. Prepare a journal entry Fortson for the purchase of a truck on June 3 for $42,500, paying $8,500 cash and the remainder Company on account. Income Statements For the years Ended December 31, 2014 and 2013 Follow My Example 20142-2 2013 Fees earned $425,000 $375,000 Operating expenses June 3 Truck.......263,500................. 210,000.................................. 42,500 Operating income $161,500 $165,000 Cash........................................................ 8,500 a. Prepare a vertical analysis of Fortson Company’s income statements. Accounts Payable........................................... 34,000 b. Does the vertical analysis indicate a favorable or an unfavorable trend? Follow My Example 3-10 Practice Exercises: PE 2-2A, PE 2-2B a. Fortson Company Income Statements For the years Ended December 31, 2014 and 2013 2014 2013 “At a Glance” Chapter $425,000 Fees earned Summary Amount Percent 100% Amount Students $375,000 Percent prepare 100% for homework and tests by referring to our end-of-chapter Operating expenses Operating income 263,500 $161,500 grid, 62 which$165,000 38% outlines learning 210,000 56 44% objectives, linking concept coverage to specific examples. b. An unfavorable Usingexpenses trend of increasing operating At and a Glance, students decreasing operating can review the chapter’s income is indicated. Practice Exercises: PE 3-10A, PE 3-10B at a Glance 3 Describe the nature of the adjusting process. Key Points The accrual basis of accounting requires that revenues are reported in the period in which they are earned and expenses are matched with the revenues they generate. The updating of accounts at the end of the accounting period is called the adjusting process. Each adjusting entry affects an income statement and balance sheet account. The four types of accounts requiring adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. Learning Outcomes example practice exercises exercises Explain why accrual accounting requires adjusting entries. List accounts that do and do NOT require adjusting EE3-1 PE3-1A, 3-1B entries at the end of the accounting period. Give an example of a prepaid expense, unearned EE3-2 PE3-2A, 3-2B revenue, accrued revenue, and accrued expense. ix CHE-WARREN25E-11-1101-003.indd 126 03/07/12 7:59 PM Copyright 2012 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.  Hallmark Features of Find more at www.downloadslide.com Accounting, 25e learning objectives and key learning outcomes. In addition, all the Example Exercises and Practice Exercises have been indexed so that each learning objective and key outcomes can be viewed. At the end of each chapter, the “At a Glance” summary grid ties everything together and helps students stay on track. Real-World Chapter Openers Building on the strengths Chapter of past editions, these openers continue to relate the accounting 25 and business concepts in the chapter to students’ lives. These openers employ examples of real companies and provide invaluable insight into Chapter real practice. Several 20 Process of the openers Cost Systems 915 created especially for this edition focus on interesting companies such as Twitter, Rhapsody, Razor, E.W. Scripps Company, a Process Manufacturing Companies diverse Job Ordermedia concern, and Facebook. Companies © AP Photo/PAul SAkumA Company Product Company Product Pepsi Differential Analysis, Product Pricing, softActivity-Based drinks Continuing Walt Disney Case movies Study Students follow a fictitious and Costing company, NetSolutions, throughout Chapters 1–6, which Alcoa aluminum Nike, Inc. athletic shoes Intel Facebook computer chip demonstrates a variety Nicklaus Design of transactions. The continuity of using golf courses M any of the decisions that you make depend on comparing networking site in the world, was cofounded by 26-year-old Mark Zucker- the same company facilitates student learning especially for the estimated costs of alternatives. The payoff from such compari- berg in 2004. Since then, it has grown to over 800 million users and made sons is described in the following report from a University of Michigan study. Zuckerberg a multibillionaire. Apple iPhone Richard Nisbett and two colleagues quizzed Michigan faculty members and univer- sity seniors on such questions as how often they walk out on a bad movie, refuse to Facebook has plans to grow to well over 1 billion users worldwide. Such growth involves decisions about where to expand. For example, Heritage Log Homes log homes Chapters 1–4, which cover the accounting cycle. Also, using expanding the site to new languages and countries involves software pro- finish a bad meal, start over on a weak term paper, or abandon a research project gramming, marketing, and computer hardware costs. The benefits include Hershey Foods chocolate bars DDB Advertising Agency advertising that no longer looks promising. They believe that people who cut their losses this adding new users to Facebook. way are following sound economic rules: calculating the net benefits of alternative Analysis of the benefits and costs might lead Facebook to expand in courses of action, writing off past costs that can’t be recovered, and weighing the the same company allows students to follow the transition some languages before others. For example, such an analysis might lead opportunity to use future time and effort more profitably elsewhere. Facebook to expand in Spanish before it expands in Tok Pisin (language of Among students, those who have learned to use cost-benefit analysis Papua New Guinea). frequently are apt to have far better grades than their Scholastic Aptitude In this chapter, differential analysis, which reports the effects of deci- Test scores would have predicted. Again, the more economics courses the sions on total revenues and costs, is discussed. Practical approaches to setting of the company from a service business in Chapters 1–4 to a students have, the more likely they are to apply cost-benefit analysis outside product prices are also described and illustrated. Finally, the classroom. Comparing Job Order and Process Cost Systems how production bottlenecks and activity-based costing Dr. Nisbett concedes that for many Americans, cost- influence pricing and other decisions are also discussed. benefit rules often appear to conflict with such traditional merchandising business in Chapters 5 and 6. principles as “never give up” and “waste not, want not.” Source: Alan L. Otten, “Economic Perspective Produces Managers must also evaluate the costs and ben- Steady Yields,” from People Patterns, The Wall Street Jour- efits of alternative actions. Facebook, the largest social nal, March 31,1992, p. B1. Process and job order cost systems are similar in that each system: CHE-WARREN25E-11-1101-025.indd 1149 21/05/12 12:43 PM Illustrative 1. Records and summarizes Problem and Solution A solved problem models one or more of the product costs. chapter’s assignment problems so that students can apply the modeled procedures to 2. Classifies product costs as direct materials, direct labor, and factory overhead. end-of-chapter materials. 3. Allocates factory overhead costs to products. 4. Uses perpetual inventory system for materials, work in process, and finished goods. Integrity, 5. Provides useful product Objectivity, cost information and Ethics for decision in Business In each chapter, these cases help making. students develop their ethical compass. Often coupled with related end-of-chapter Process and job costing systems activities, theseare different cases can bein discussed several ways. As or in class a basis for can consider the cases students as they read the chapter. Both the section and related end-of-chapter materials are illustrating these differences, the cost indicated withsystems a uniquefor Frozen icon for aDelight andpresentation. consistent Legend Guitars are used. Integrity, Objectivity, and Ethics in Business On Being green Process manufacturing often involves significant For example, Apple provides free recycling programs energy and material resources, which can be harmful for Macs®, iPhones®, and iPads®. Apple recovers over to the environment. Thus, many process manufacturing 90% by weight of the original product in reusable companies, such as chemical, electronic, and metal pro- components, glass, and plastic. You can even receive cessors, must address environmental issues. Companies, a free gift card for voluntarily recycling an older such as DuPont, intel, Apple, and Alcoa, are at the Apple product. forefront of providing environmental solutions for their products and processes. Source: Apple Web site. x Exhibit Copyright 1 Learning. 2012 Cengage illustrates theMayprocess All Rights Reserved. cost not be copied, scanned, system or duplicated, for in whole or in part.Frozen Due to electronicDelight, ancontent rights, some third party icemay cream 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. manufacturer. As a basis for comparison, Exhibit 1 also illustrates the job order  A disadvantage Find more at of www.downloadslide.com leasing a fixed asset is that it is normally more costly than purchasing the asset. This is because the lessor (owner of the asset) includes in the rental price not only the costs of owning the asset, but also a profit. The methods of evaluating capital investment proposals illustrated in this chapter can also be used to decide whether to lease or purchase a fixed asset. uncertainty All capital investment analyses rely on factors that are uncertain. For example, estimates of revenues, expenses, and cash flows are uncertain. This is especially true for long-term capital investments. Errors in one or more of the estimates Business Connection could and Comprehensive lead to incorrect Real-World Notes that decisions. Methods consider Students getthe a impact of uncertainty on capital operates close-up look at how accounting investment analysis in the are discussed marketplace throughin aadvanced variety ofaccounting and finance textbooks. Business Connection boxed features. Business Connection AvAtAr: ThE hIghEST gRoSSINg billion in worldwide box office revenues. Could he do it again? That was the question. MoVIE oF ALL TIME (BuT NoT ThE So, how did the film do? Only eight weeks after its MoST PRoFITABLE) release, Avatar had become the number one grossing film of all time, with over $2.5 billion in worldwide box Prior to the release of the blockbuster Avatar in Decem- office revenue. However, even though Avatar made the ber 2009, many were skeptical if the movie’s huge $500 most money, was it the most profitable when taking ac- million investment would pay off. After all, just to break count of the total investment? CNBC analyzed movies even the movie would have to perform as one of the top by their return on investment (total box office receipts 50 movies of all time. To provide a return that was double divided by the total movie cost) and found that Avatar the investment, the movie would have to crack the top 10. wasn’t even in the top 15 movies by this measure. Num- Many thought this was a tall order, even though James ber one on this list was My Big Fat Greek Wedding with Cameron, the force behind this movie, already had the a 6,150% return. To make this list, it helped to have a number one grossing movie of all time: Titanic, at $1.8 small denominator. Sources: Michael Cieply, “A Movie’s Budget Pops from the Screen,” New York Times, November 8, 2009; “Bulk of Avatar Profit Still to Come,” The Age, February 3, 2010. Daniel Bukszpan, "15 Most Profitable Movies of All Time," cnbc.com, September 10, 2010. Changes International Financial in Price Levels Reporting Standards (IFRS) IFRS is on the minds of many Price accounting levels educators normally change of economy as the today. While the future improves or deteriorates. General price is still unclear, our research indicates levels often increasea in growing need a rapidly to provide growing economy, more basic which is called inflation. During awareness of these standards withinthe such periods, therate text. We have of return continued on an investmentto should incorporate exceed the rising price level. some elements of IFRSIf throughout thecase, this is not the textthe as cash appropriate returned to onprovide this level the investment will be less than expected. of awareness, being careful not levels Price to encroach may also upon the core change GAAP principles for foreign investments.thatThis occurs as currency remain the hallmark focus of the exchange book. rates These change. elementsexchange Currency include icons thatthe rates are have rates at which currency in been placed throughoutanother the financial countrychapters can be which pointfor exchanged to U.S. specific IFRS-related dollars. content, outlined with more If thedetail in Appendix amount D. This of local dollars thattable can beoutlines exchangedthe for IFRSone U.S. dollar increases, impact on the ­accounting thenconcept. the local currency is said to be weakening to the dollar. When a company has an investment in another country where the local currency is weakening, the return on the investment, as expressed in U.S. dollars, is adversely impacted. This is because the expected amount of local currency returned on the investment would purchase fewer U.S. dollars.6 6 Further discussion on accounting for foreign currency transactions is available on the companion Web site at www.cengagebrain.com. xi CHE-WARREN25E-11-1101-026.indd 1216 21/05/12 12:51 PM Copyright 2012 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.  Adjustments to reconcile net income to net cash flow from operating activities: Hallmark Features of Find more at www.downloadslide.com Depreciation.................................. 7,000 Gain on sale of land............................ (12,000) Changes in current operating assets and Accounting, 25e liabilities: Increase in accounts receivable............... (9,000) Decrease in inventory........................ 8,000 Decrease in accounts payable................. (3,200) Increase in accrued expenses payable......... 2,200 Decrease in income taxes payable............. (500) Net cash flow from operating activities................ $100,500 International Connection International Connection features highlight IFRS topics from a real-world perspective and appear in Chapters 1, 4, 7, 10, 13, and 16. International Connection IFRS FOR STATEMENT OF CASH FLOWS can be reported as either an operating or an in- vesting activity. In contrast, U.S. GAAP reports The statement of cash flows is required under Interna- interest paid or received as an operating activity. tional Financial Reporting Standards (IFRS). The state- Dividends paid can be reported as either an op- ment of cash flows under IFRS is similar to that reported erating or a financing activity, while dividends under U.S. GAAP in that the statement has separate received can be reported as either an operating sections for operating, investing, and financing activi- or an investing activity. In contrast, U.S. GAAP re- ties. Like U.S. GAAP, IFRS also allow the use of either the ports dividends paid as a financing activity and indirect or direct method of reporting cash flows from dividends received as an operating activity. operating activities. IFRS differ from U.S. GAAP in some Cash flows to pay taxes are reported as a separate minor areas, including: line in the operating activities, in contrast to U.S. GAAP, which does not require a separate line dis- Interest paid can be reported as either an operat- closure. ing or a financing activity, while interest received * IFRS are further discussed and illustrated on pages 716–723 and in Appendix D. Mornin’ 60 Joe Chapter International 2 Analyzing Transactions Our authors have prepared statements for Mornin’ Joe under IFRS guidelines as a basis for comparison with U.S.-prepared statements. This allows students to see how CHE-WARREN25E-11-1101-016.indd 744 Transaction F Nov. 30 NetSolutions paid creditors on account, $950. 28/05/12 8:57 PM financial reporting differs under IFRS. This transaction decreases a liability account and decreases an asset account. It Analysis is recorded in the journal as a $950 decrease (debit) to Accounts Payable and The Accounting Equation a $950 decrease (credit) to Cash. We maintain the recently revamped format in Chapter 2 for analyzing Nov. 30 Accounts Payable 950 transac- tions. Journal This Entry format includes the Cash following elements: (1) transaction description, 950 Paid creditors on account. (2) analysis, (3) journal entry, and (4) accounting equation impact. This will help studentsAccounting understand that Assets a transaction= ultimately affects the+ accounting Liabilities equation— Owner’s Equity Assets = Liabilities Equation + Owner’s Cash Equity. Accounts Payable Impact Nov. 30 950 Nov. 30 950 Transaction G Nov. 30 Chris Clark determined that the cost of supplies on hand at November 30 was $550. NetSolutions purchased $1,350 of supplies on November 10. Thus, $800 ($1,350 – $550) of supplies must have been used during November. This transaction is Analysis recorded in the journal as an $800 increase (debit) to Supplies Expense and an $800 decrease (credit) to Supplies. Nov. 30 Supplies Expense 800 Journal Entry Supplies 800 Supplies used during November. Accounting Assets = Liabilities + Owner’s Equity (Expense) Equation Supplies Supplies Expense Impact Nov. 30 800 Nov. 30 800 Transaction H Nov. 30 Chris Clark withdrew $2,000 from NetSolutions for personal use. xii This transaction decreases assets and owner’s equity. This t