Financial Accounting Tools for Business Decision Making

Financial Accounting: Tools for Business Decision Making by Paul Kimmel, Jerry Weygandt, and Jill Mitchell provides a practical introduction to financial accounting with a focus on how to use accounting information to make business decisions. Through significant course updates, the 10th Edition presents an active, hands-on approach to spark efficient and effective learning and develops the necessary skills to inspire and prepare students to be the accounting and business professionals of tomorrow.

To ensure maximum understanding, students work through integrated assessment at different levels of difficulty right at the point of learning. The course's varied assessment also presents homework and assessment within real-world contexts to help students understand the why and the how of accounting information and business application.

Throughout the course, students also work through various hands-on activities including Cookie Creations Cases, Expand Your Critical Thinking Questions, Excel Templates, and Analytics in Action problems, all within the accounting context. These applications all map to chapter material, making it easier for instructors to determine where and how to incorporate key skill development in their syllabus.

With Financial Accounting, students will understand the foundations of financial accounting and develop the necessary tools for business decision-making, no matter what path they take.

1 Introduction to Financial Statements 1-1

Knowing the Numbers: Columbia Sportswear Company 1-1

1.1 Business Organization and Accounting Information Uses 1-2

Forms of Business Organization 1-3

Users and Uses of Financial Information 1-4

Data Analytics 1-6

Ethics in Financial Reporting 1-7

1.2 The Three Types of Business Activity 1-8

Financing Activities 1-9

Investing Activities 1-9

Operating Activities 1-10

1.3 The Four Financial Statements 1-11

Income Statement 1-12

Retained Earnings Statement 1-13

Balance Sheet 1-14

Statement of Cash Flows 1-16

Interrelationships of Statements 1-17

Elements of an Annual Report 1-20

Appendix 1A: Career Opportunities in Accounting 1-23

“Show Me the Money” 1-24

2 A Further Look at Financial Statements 2-1

Just Fooling Around?: The Motley Fool 2-2

2.1 The Classified Balance Sheet 2-3

Current Assets 2-3

Long-Term Investments 2-5

Property, Plant, and Equipment 2-5

Intangible Assets 2-5

Current Liabilities 2-7

Long-Term Liabilities 2-7

Stockholders’ Equity 2-7

2.2 Analyzing the Financial Statements Using Ratios 2-8

Ratio Analysis 2-8

Using the Income Statement 2-9

Using a Classified Balance Sheet 2-10

2.3 Financial Reporting Concepts 2-14

The Standard-Setting Environment 2-14

Qualities of Useful Information 2-16

Assumptions in Financial Reporting 2-17

Principles in Financial Reporting 2-18

Cost Constraint 2-18

3 The Accounting Information System 3-1

Accidents Happen: MF Global Holdings Ltd 3-1

3.1 Using the Accounting Equation to Analyze Transactions 3-3

Accounting Transactions 3-3

Analyzing Transactions 3-4

Summary of Transactions 3-10

3.2 Accounts, Debits, and Credits 3-11

Debits and Credits 3-11

Debit and Credit Procedures 3-12

Stockholders’ Equity Relationships 3-15

Summary of Debit/Credit Rules 3-16

3.3 Using a Journal 3-17

The Recording Process 3-17

The Journal 3-18

3.4 The Ledger and Posting 3-20

The Ledger 3-20

Chart of Accounts 3-21

Posting 3-21

The Recording Process Illustrated 3-22

Summary Illustration of Journalizing and Posting 3-28

3.5 The Trial Balance 3-30

Limitations of a Trial Balance 3-31

4 Accrual Accounting Concepts 4-1

Keeping Track of Groupons: Groupon 4-1

4.1 Accrual-Basis Accounting and Adjusting Entries 4-2

The Revenue Recognition Principle 4-3

The Expense Recognition Principle 4-4

Accrual versus Cash Basis of Accounting 4-5

The Need for Adjusting Entries 4-5

Types of Adjusting Entries 4-6

4.2 Adjusting Entries for Deferrals 4-7

Prepaid Expenses 4-7

Unearned Revenues 4-12

4.3 Adjusting Entries for Accruals 4-15

Accrued Revenues 4-15

Accrued Expenses 4-17

Summary of Basic Relationships 4-20

4.4 The Adjusted Trial Balance and Closing Entries 4-23

Preparing the Adjusted Trial Balance 4-23

Preparing Financial Statements 4-24

Quality of Earnings 4-24

Closing the Books 4-27

Summary of the Accounting Cycle 4-30

Appendix 4A: Using a Worksheet 4-34

5 Merchandising Operations and the Multiple-Step Income Statement 5-1

Buy Now, Vote Later: REI 5-1

5.1 Merchandising Operations and Inventory Systems 5-2

Operating Cycles 5-3

Flow of Costs 5-4

5.2 Recording Purchases Under a Perpetual System 5-6

Freight Costs 5-8

Purchase Returns and Allowances 5-9

Purchase Discounts 5-10

Summary of Purchasing Transactions 5-11

5.3 Recording Sales Under a Perpetual System 5-11

Sales Returns and Allowances 5-13

Sales Discounts 5-14

Data Analytics and Credit Sales 5-15

5.4 Preparing the Multiple-Step Income Statement 5-16

Single-Step Income Statement 5-16

Multiple-Step Income Statement 5-17

5.5 Cost of Goods Sold Under a Periodic System 5-21

5.6 Gross Profit Rate and Profit Margin 5-23

Gross Profit Rate 5-23

Profit Margin 5-24

Appendix 5A: Periodic Inventory System 5-27

Recording Merchandise Transactions 5-27

Recording Purchases of Merchandise 5-28

Freight Costs 5-28

Recording Sales of Merchandise 5-28

Comparison of Entries—Perpetual vs. Periodic 5-29

Appendix 5B: Adjusting Entries for Credit Sales with Returns and Allowances 5-30

Data Analytics in Action 5-52

6 Reporting and Analyzing Inventory 6-1

“Where Is That Spare Bulldozer Blade?”: Caterpillar 6-1

6.1 Classifying and Determining Inventory 6-2

Classifying Inventory 6-2

Determining Inventory Quantities 6-4

6.2 Inventory Methods and Financial Effects 6-7

Specific Identification 6-7

Cost Flow Assumptions 6-8

Financial Statement and Tax Effects of Cost Flow Methods 6-13

Using Inventory Cost Flow Methods Consistently 6-15

6.3 Inventory Presentation and Analysis 6-17

Presentation 6-17

Lower-of-Cost-or-Net Realizable Value 6-17

Financial Analysis and Data Analytics 6-18

Adjustments for LIFO Reserve 6-21

Appendix 6A: Inventory Cost Flow Methods in Perpetual Inventory Systems 6-24

First-In, First-Out (FIFO) 6-24

Last-In, First-Out (LIFO) 6-25

Average-Cost 6-26

Appendix 6B: Effects of Inventory Errors 6-27

Income Statement Effects 6-27

Balance Sheet Effects 6-28

Data Analytics in Action 6-49

7 Fraud, Internal Control, and Cash 7-1

Minding the Money in Madison: Barriques 7-1

7.1 Fraud and Internal Control 7-3

Fraud 7-3

The Sarbanes-Oxley Act 7-3

Internal Control 7-4

Principles of Internal Control Activities 7-5

Data Analytics and Internal Controls 7-10

Limitations of Internal Control 7-11

7.2 Cash Controls 7-12

Cash Receipts Controls 7-12

Cash Disbursements Controls 7-14

Petty Cash Fund 7-16

7.3 Control Features of a Bank Account 7-17

Electronic Banking 7-18

Bank Statements 7-18

Reconciling the Bank Account 7-20

7.4 Reporting Cash 7-25

Cash Equivalents 7-26

Restricted Cash 7-26

Managing and Monitoring Cash 7-27

Cash Budgeting 7-29

Appendix 7A: Operation of a Petty Cash Fund 7-32

Establishing the Petty Cash Fund 7-33

Making Payments from the Petty Cash Fund 7-33

Replenishing the Petty Cash Fund 7-34

Data Analytics in Action 7-56

8 Reporting and Analyzing Receivables 8-1

What’s Cooking?: Nike 8-1

8.1 Recognition of Accounts Receivable 8-3

Types of Receivables 8-3

Recognizing Accounts Receivable 8-3

8.2 Valuation and Disposition of Accounts Receivable 8-5

Valuing Accounts Receivable 8-5

Disposing of Accounts Receivable 8-13

8.3 Notes Receivable 8-15

Determining the Maturity Date 8-16

Computing Interest 8-16

Recognizing Notes Receivable 8-17

Valuing Notes Receivable 8-17

Disposing of Notes Receivable 8-17

8.4 Receivables Presentation and Management 8-20

Financial Statement Presentation of Receivables 8-20

Managing Receivables 8-21

Evaluating Liquidity of Receivables 8-23

Accelerating Cash Receipts 8-24

Data Analytics and Receivables Management 8-25

Data Analytics in Action 8-46

9 Reporting and Analyzing Long-Lived Assets 9-1

A Tale of Two Airlines: American Airlines 9-1

9.1 Plant Asset Expenditures 9-3

Determining the Cost of Plant Assets 9-3

Expenditures During Useful Life 9-6

To Buy or Lease? 9-7

9.2 Depreciation Methods 9-8

Factors in Computing Depreciation 9-9

Depreciation Methods 9-9

Revising Periodic Depreciation 9-14

Impairments 9-15

9.3 Plant Asset Disposals 9-16

Sale of Plant Assets 9-16

Retirement of Plant Assets 9-18

9.4 Intangible Assets 9-19

Accounting for Intangible Assets 9-19

Types of Intangible Assets 9-20

Research and Development Costs 9-22

9.5 Statement Presentation and Analysis 9-23

Presentation 9-23

Analysis 9-25

Appendix 9A: Other Depreciation Methods 9-30

Declining-Balance Method 9-30

Units-of-Activity Method 9-31

Data Analytics in Action 9-55

10 Reporting and Analyzing Liabilities 10-1

And Then There Were Two: Maxwell Car Company 10-1

10.1 Accounting for Current Liabilities 10-3

What Is a Current Liability? 10-3

Notes Payable 10-3

Sales Taxes Payable 10-4

Unearned Revenues 10-5

Current Maturities of Long-Term Debt 10-6

Payroll and Payroll Taxes Payable 10-6

10.2 Characteristics of Bonds 10-9

Types of Bonds 10-9

Issuing Procedures 10-10

Bond Trading 10-10

Determining the Market Price of a Bond 10-11

10.3 Accounting for Bond Transactions 10-14

Issuing Bonds at Face Value 10-14

Discount or Premium on Bonds 10-14

Issuing Bonds at a Discount 10-15

Issuing Bonds at a Premium 10-17

Redeeming Bonds at Maturity 10-19

Redeeming Bonds Before Maturity 10-19

10.4 Presentation and Analysis 10-20

Presentation 10-20

Analysis 10-22

Appendix 10A: Straight-Line Amortization 10-26

Amortizing Bond Discount 10-26

Amortizing Bond Premium 10-28

Appendix 10B: Effective-Interest Amortization 10-29

Amortizing Bond Discount 10-29

Amortizing Bond Premium 10-31

Appendix 10C: Accounting for Long-Term Notes Payable 10-32

11 Reporting and Analyzing Stockholders’ Equity 11-1

Oh Well, I Guess I’ll Get Rich: Facebook 11-1

11.1 Corporate Form of Organization 11-3

Characteristics of a Corporation 11-3

Forming a Corporation 11-6

Stockholder Rights 11-7

Stock Issue Considerations 11-8

Corporate Capital 11-10

11.2 Accounting for Common, Preferred, and Treasury Stock 11-12

Accounting for Common Stock 11-12

Accounting for Preferred Stock 11-13

Accounting for Treasury Stock 11-14

11.3 Accounting for Dividends and Stock Splits 11-16

Cash Dividends 11-16

Dividend Preferences 11-19

Stock Dividends 11-21

Stock Splits 11-22

11.4 Presentation and Analysis 11-24

Retained Earnings 11-24

Retained Earnings Restrictions 11-25

Balance Sheet Presentation of Stockholders’ Equity 11-26

Analysis of Stockholders’ Equity 11-28

Debt versus Equity Decision 11-29

Appendix 11A: Entries for Stock Dividends 11-32

Data Analytics in Action 11-55

12 Statement of Cash Flows 12-1

Got Cash?: Microsoft 12-2

12.1 Usefulness and Format of the Statement of Cash Flows 12-3

Usefulness of the Statement of Cash Flows 12-3

Classification of Cash Flows 12-3

Significant Noncash Activities 12-4

Format of the Statement of Cash Flows 12-5

12.2 Preparing the Statement of Cash Flows—Indirect Method 12-6

Indirect and Direct Methods 12-7

Indirect Method—Computer Services Company 12-7

Step 1: Operating Activities 12-9

Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method 12-12

Step 2: Investing and Financing Activities 12-13

Step 3: Net Change in Cash 12-15

12.3 Analyzing the Statement of Cash Flows 12-17

The Corporate Life Cycle 12-17

Free Cash Flow 12-19

Appendix 12A: Statement of Cash Flows—Direct Method 12-22

Step 1: Operating Activities 12-24

Step 2: Investing and Financing Activities 12-28

Step 3: Net Change in Cash 12-30

Appendix 12B: Worksheet for the Indirect Method 12-30

Preparing the Worksheet 12-31

Appendix 12C: Statement of Cash Flows—T-Account Approach 12-35

Data Analytics in Action 12-61

13 Financial Analysis: The Big Picture 13-1

It Pays to Be Patient: Warren Buffett 13-2

13.1 Sustainable Income and Quality of Earnings 13-3

Sustainable Income 13-3

Quality of Earnings 13-7

13.2 Horizontal Analysis and Vertical Analysis 13-9

Horizontal Analysis 13-10

Vertical Analysis 13-12

13.3 Ratio Analysis 13-15

Liquidity Ratios 13-16

Solvency Ratios 13-17

Profitability Ratios 13-17

Financial Analysis and Data Analytics 13-18

Comprehensive Example of Ratio Analysis 13-18

Appendix A Specimen Financial Statements: Apple Inc. A-1

Appendix B Specimen Financial Statements: Columbia Sportswear Company B-1

Appendix C Specimen Financial Statements: Under Armour, Inc. C-1

Appendix D Specimen Financial Statements: Amazon.com, Inc. D-1

Appendix E Specimen Financial Statements: Walmart Inc. E-1

Appendix F Time Value of Money F-1

F.1 Interest and Future Values F-2

Nature of Interest F-2

Future Value of a Single Amount F-3

Future Value of an Annuity F-5

F.2 Present Values F-8

Present Value Variables F-8

Present Value of a Single Amount F-9

Present Value of an Annuity F-11

Time Periods and Discounting F-13

Present Value of a Long-Term Note or Bond F-13

F.3 Capital Budgeting Situations F-16

F.4 Using Technological Tools F-18

Present Value of a Single Sum F-19

Present Value of an Annuity F-20

Future Value of a Single Sum F-21

Future Value of an Annuity F-22

Internal Rate of Return F-22

Useful Applications F-23

Appendix G Reporting and Analyzing Investments G-1

G.1 Accounting for Debt Investments G-2

Why Corporations Invest G-2

Accounting for Debt Investments G-2

G.2 Accounting for Stock Investments G-4

Holdings of Less Than 20% G-5

Holdings Between 20% and 50% G-6

Holdings of More Than 50% G-7

G.3 Reporting Investments in Financial Statements G-9

Debt Securities G-9

Equity Securities G-12

Balance Sheet Presentation G-13

Presentation of Realized and Unrealized Gain or Loss G-14

Company Index I-1

Subject Index I-5

Rapid Review: Chapter Content

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