Fundamental Financial Accounting Concepts

, by Edmonds, Thomas P.; McNair, Frances M.; Milam, Edward E.; Olds, Philip R.

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ISBN: 9780070217782 | 0070217785
Cover: Hardcover
Copyright: 6/1/1998

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Supplemental Materials

Preface

Elements of Financial Statements

Introduction

(1)

Role of Accounting in Society

(4)

Market-Based Allocations

(1)

Competition for Resources

(1)

Accounting Is Information

(1)

Nonbusiness Resource Allocations

(1)

Role of Accounting in Business

(1)

Finacial Statements

(4)

Elements of Financial Statements

(1)

Accounting Events and Transactions

(1)

The New Company Illustration---Events for 19X1

(4)

Summary of Transactions

(1)

Elements Presented in Financial Statements

(4)

Income Statement

(1)

Statement of Changes in Equity

(1)

Balance Sheet

(1)

Statement of Cash Flows

(2)

Completing the Cycle

(1)

The New Company Illustration---Events for 19X2

(2)

Financial Statements for 19X2

(2)

Using the Financial Statements Model

(3)

A Vertical Statements Model

(2)

A Horizontal Statements Model

(1)

Real-World Financial Reports

(4)

Real-World Complications

(1)

Annual Report for Reynolds Metals

(1)

Special Terms for Corporations

(1)

Unusual Items on the Income Statement

(3)

Glossary

(2)

Questions

(1)

Exercises

(6)

Problems

(10)

Case Studies

(3)

Accounting for Accruals

Introduction

(1)

Accrual Accounting Illustrated

(7)

Effect of Events on the Accounting Equation

(3)

Summary of Transactions

(1)

Understanding the 19X1 Financial Statements

(1)

Understanding the Effects of Accrual Accounting

(4)

Second Accounting Cycle

(4)

Effect of Events on the Accounting Equation

(1)

Understanding the 19X2 Financial Statements

(1)

Understanding the Effects of Accrual Accounting

(1)

Third Accounting Cycle

(5)

Effect of Events on the Accounting Equation

(2)

Understanding the 19X3 Financial Statements

(2)

Role of the Independent Auditor

(5)

The Financial Audit

(3)

Materiality and Financial Audits

(1)

Types of Audit Opinions

(1)

Confidentiality

(1)

Importance of Ethics

(2)

Common Features of Ethical Misconduct

(2)

A Review of Core Concepts

(2)

Glossary

(1)

Questions

(1)

Exercises

(6)

Problems

(9)

Case Studies

(4)

Accounting for Deferrals

Introduction

(1)

Accounting for Deferrals Illustrated

100

(8)

Summary of Transactions for 19X4

104

(1)

Understanding the 19X4 Financial Statements

104

(4)

Second Accounting Cycle

108

(4)

Effect of 19X5 Transactions on the Accounting Equation and the Financial Statements

108

(4)

Third Accounting Cycle

112

(5)

Effect of 19X6 Transactions on the Accounting Equation and the Financial Statements

113

(4)

Analyzing Financial Statements to Assess Managerial Performance

117

(5)

Assessing the Effective Use of Assets

117

(1)

Assessing the Risk of Debt

118

(3)

Real-World Data

121

(1)

Scope of Coverage

122

(1)

A Review of Core Concepts

122

(1)

Glossary

123

(1)

Questions

124

(1)

Exercises

125

(5)

Problems

130

(13)

Case Studies

143

(3)

The Recording Process

Introduction

146

(1)

Debit/Credit Terminology

146

(2)

Collins Consultants Case

148

(14)

Asset Source Transactions

148

(4)

Asset Exchange Transactions

152

(2)

Asset Use Transactions

154

(2)

Claims Exchange Transactions

156

(1)

Adjustments for Accruals

157

(2)

Adjustments for Deferrals

159

(3)

Overview of Debit/Credit Relationships

162

(1)

Summary of T-Accounts

162

(1)

The Ledger

162

(1)

The General Journal

163

(3)

Financial Statements

166

(1)

Closing Entries

166

(2)

Trial Balance

168

(3)

Components of an Annual Report

171

(4)

Footnotes to Financial Statements

172

(1)

Management's Discussion and Analysis

173

(1)

Role of the Independent Auditor Revisited

174

(1)

The Securities and Exchange Commission

174

(1)

Glossary

175

(1)

Questions

176

(1)

Exercises

177

(8)

Problems

185

(19)

Case Studies

204

(4)

Accounting for Merchandising Businesses

Introduction

208

(1)

Product Costs Versus Selling and Administrative Costs

208

(1)

Allocating Inventory Cost Between Asset and Expense Accounts

209

(2)

Recording Inventory Cost

211

(2)

Perpetual Inventory Method

213

(3)

Effect of Events on Financial Statements

213

(2)

Journal Entries and Ledger T-Accounts

215

(1)

Other Events Affecting Purchases and Sales of Inventory

216

(8)

Effect of Events on Financial Statements

216

(5)

Journal Entries and Ledger Accounts

221

(1)

Financial Statements

221

(3)

Periodic Inventory Method

224

(3)

Schedule of Cost of Goods Sold

227

(1)

Lost, Damaged, or Stolen Merchandise

227

(2)

Adjustment for Lost, Damaged, or Stolen Inventory

228

(1)

Financial Analysis for Merchandising Companies

229

(5)

Common Size Financial Statements

229

(1)

Gross Margin Percentage

230

(1)

Real-World Data

230

(1)

Return on Sales

231

(1)

Using Common Size Financial Statements

232

(1)

Financing Merchandise Inventory

232

(2)

Glossary

234

(1)

Questions

235

(1)

Exercises

236

(8)

Problems

244

(10)

Case Studies

254

(3)

Internal Control and Accounting for Cash

Introduction

257

(1)

Key Features of Internal Control Systems

257

(6)

Separation of Duties

258

(1)

Quality of Employees

258

(1)

Bonded Employees

258

(1)

Periods of Absence

259

(1)

Procedures Manual

259

(1)

Authority and Responsibility

260

(1)

Prenumbered Documents

260

(1)

Physical Control

260

(1)

Performance Evaluations

261

(1)

Internal Control in Computer Systems

261

(2)

Accounting For Cash

263

(12)

Controlling Cash

264

(1)

Checking Account Documents

265

(4)

Illustration of the Reconciliation Schedule

269

(4)

Petty Cash Funds

273

(2)

Assessing the Level of Liquidity

275

(6)

Current Versus Noncurrent

275

(2)

Liquidity Versus Solvency

277

(1)

Current Ratio

278

(2)

Real-World Data

280

(1)

Glossary

281

(1)

Questions

282

(1)

Exercises

283

(6)

Problems

289

(12)

Case Studies

301

(3)

Accounting for Accruals---Advanced Topics: Receivables and Payables

Introduction

304

(1)

Accounting Events Affecting the 19X1 Period

305

(5)

Ledger T-Accounts

308

(1)

Financial Statements

309

(1)

Estimating Bad Debts Expense

310

(1)

Accounting Events Afecting the 19X2 Period

310

(6)

Ledger T-Accounts

314

(1)

Analysis of Financial Statements

315

(1)

Recognizing Bad Debts Under the Direct Write-Off Method

316

(1)

Accounting for Credit Card Sales

317

(1)

Warranty Obligations

318

(3)

Ledger T-Accounts and Financial Statements

320

(1)

Accounting for Discount Notes

321

(3)

Ledger T-Accounts and Financial Statements

323

(1)

Accounting Events Affecting the 19X2 Period

324

(3)

Ledger T-Accounts and Financial Statements

327

(1)

Real-World Credit Costs

327

(5)

Managing Accounts Receivable

327

(1)

Costs of Making Credit Sales

327

(2)

Average Days to Collect Accounts Receivable

329

(2)

Real-World Data

331

(1)

Glossary

332

(1)

Questions

333

(1)

Exercises

334

(6)

Problems

340

(12)

Case Studies

352

(3)

Asset Valuation: Accounting for Investments and Inventories

Introduction

355

(1)

Types of Investment Securities

356

(2)

Reporting Events That Affect Investment Securities

358

(3)

Financial Statements Under the Three Classification Alternatives

361

(4)

Alternative Reporting Practices for Equity Securities

363

(2)

The Valuation of Inventory Assets

365

(1)

Inventory Cost Flow Methods

365

(2)

Specific Identification

365

(1)

First-In, First-Out (FIFO)

366

(1)

Last-In, First-Out (LIFO)

366

(1)

Weighted Average

366

(1)

Physical Flow

366

(1)

Effect of Cost Flow on Financial Statements

367

(1)

Effect on Income Statement

367

(1)

Effect on Balance Sheet

367

(1)

Inventory Cost Flow Under a Perpetual System

368

(6)

Multiple Layers with Multiple Quantities

368

(3)

Effect of Cost Flow on Financial Statements

371

(3)

Inventory Cost Flow When Sales and Purchases Occur Intermittently

374

(1)

FIFO Cost Flow

374

(1)

Weighted-Average and LIFO Cost Flows

374

(1)

Inventory Cost Flow in a Periodic System

375

(2)

Lower-of-Cost-or-Market Rule

377

(1)

Estimating the Ending Inventory Balance

378

(1)

Effect of Inventory Errors on Financial Statements

379

(3)

Errors Under a Periodic System

380

(1)

Errors Under a Perpetual System

381

(1)

Understanding How the Length of the Operating Cycle Affects Profitability

382

(4)

Average Days to Sell Inventory

382

(1)

Real-World Data

383

(2)

Effects of Cost Flow on Ratio Analysis

385

(1)

Glossary

386

(1)

Questions

387

(1)

Exercises

388

(8)

Problems

396

(11)

Case Studies

407

(3)

Long-Term Operational Assets

Introduction

410

(1)

Classifications of Long-Term Operational Assets

410

(2)

Tangible Long-Term Assets

411

(1)

Intangible Assets

411

(1)

Determining the Cost of Long-Term Assets

412

(2)

Basket Purchase Allocation

413

(1)

Life Cycle of Operational Assets

414

(1)

Accounting for Operational Assets Throughout the Life Cycle

414

(1)

Methods of Depreciation

415

(10)

Straight-Line Depreciation

416

(3)

Double-Declining-Balance Depreciation

419

(3)

Units-of-Production Depreciation

422

(1)

Comparing the Methods

423

(2)

Income Tax Considerations

425

(2)

Revision of Estimates

427

(1)

Revision of Life

427

(1)

Revision of Salvage

428

(1)

Continuing Expenditures for Plant Assets

428

(2)

Costs That Are Expensed

428

(1)

Costs That Are Capitalized

428

(2)

Natural Resources

430

(1)

Intangible Assets

431

(4)

Specifically Identifiable Intangibles

431

(3)

Goodwill

434

(1)

Balance Sheet Presentation

435

(1)

Understanding How Expense Recognition Affects Financial Performance Measures

436

(4)

Effect of Judgment and Estimation

437

(2)

Effect of Industry Characteristics

439

(1)

Glossary

440

(1)

Questions

441

(2)

Exercises

443

(6)

Problems

449

(12)

Case Studies

461

(4)

Accounting for Long-Term Debt

Introduction

465

(1)

Long-Term Notes Payable

466

(3)

Security for Bank Loan Agreements

468

(1)

Line of Credit

469

(1)

Bond Liabilities

470

(4)

Characteristics of Bonds

472

(1)

Security of Bonds

472

(1)

Manner of Interest Payment

472

(1)

Timing of Maturity

473

(1)

Special Features

473

(1)

Bond Rating

474

(1)

Bonds Issued at Face Value

474

(4)

Fixed-Rate, Fixed-Term, Annual Interest Bonds

474

(1)

Effect of Events on Financial Statements

475

(1)

Financial Statements

476

(1)

Recording Procedures

477

(1)

Bonds Issued at a Discount

478

(7)

Effective Interest Rate

478

(1)

Bond Prices

479

(1)

Mason Company Revisited

479

(3)

Effect on Financial Statements

482

(2)

Effect of Semiannual Interest Payments

484

(1)

Bonds Issued at a Premium

485

(1)

Bond Redemptions

486

(1)

Tax Advantage Associated with Debt Financing

487

(3)

EBIT and Ratio Analysis

488

(1)

Times-Interest-Earned Ratio

489

(1)

Appendix

490

(11)

Time Value of Money

490

(4)

Business Applications

494

(7)

Glossary

501

(2)

Questions

503

(1)

Exercises

504

(6)

Problems

510

(10)

Case Studies

520

(4)

Accounting for Equity Transactions

Introduction

524

(1)

Formation of Business Organizations

525

(1)

Ownership Agreements

525

(1)

Regulation

526

(1)

Advantages and Disadvantages of Different Forms of Business Organization

526

(4)

Double Taxation

527

(1)

Regulation

528

(1)

Limited Liability

528

(1)

Continuity

528

(1)

Transferability

529

(1)

Management Structure

529

(1)

Ability to Raise Capital

529

(1)

Appearance of Capital Structure in Financial Statements

530

(2)

Presentation of Equity in Proprietorships

530

(1)

Presentation of Equity in Partnerships

531

(1)

Presentation of Equity in Corporations

531

(1)

Characteristics of Capital Stock

532

(4)

Par Value

532

(1)

Stated Value

533

(1)

Other Valuation Terminology

533

(1)

Stock: Authorized, Issued, and Outstanding

533

(1)

Classes of Stock

533

(1)

Preferred Stock

534

(2)

Accounting for Stock Transactions on the Day of Issue

536

(3)

Stock Issued at Par Value

536

(1)

Stock Classification

536

(1)

Stock Issued at Stated Value

537

(1)

Stock Issued at No-Par Value

538

(1)

Financial Statement Presentation

538

(1)

Stockholder Equity Transactions After the Day of Issue

539

(5)

Treasury Stock

539

(1)

Cash Dividend

540

(2)

Stock Dividend

542

(1)

Stock Split

543

(1)

Appropriation of Retained Earnings

544

(1)

Financial Statement Presentation

544

(1)

Assessment of Potential Investment Returns

545

(3)

Receiving Dividends

546

(1)

Increasing the Price of Stock

546

(1)

Understanding the Price Earnings Ratio

547

(1)

Exercising Control

548

(1)

Appendix

548

(5)

Accounting for Not-for-Profit (NFP) Organizations

548

(4)

Government Accounting

552

(1)

Glossary

553

(2)

Questions

555

(2)

Exercises

557

(4)

Problems

561

(10)

Case Studies

571

(3)

Statement of Cash Flows

Introduction

574

(1)

Statement of Cash Flow

574

(2)

Operating Activities

575

(1)

Investing Activities

575

(1)

Financing Activities

575

(1)

Noncash Investing and Financing Transactions

576

(1)

Reporting Format for Statement of Cash Flows

576

(1)

Converting from Accrual to Cash Basis Accounting

576

(6)

Operating Activities

577

(4)

Investing Activities

581

(1)

Financing Activities

582

(1)

Comprehensive Example Using the T-Account Approach

582

(9)

Preparation of Statement of Cash Flows

583

(1)

Cash Flows from Operating Activities

584

(5)

Cash Flows from Investing Activities

589

(1)

Cash Flows from Financing Activities

590

(1)

Presenting Information in the Statement of Cash Flows

591

(1)

Statement of Cash Flows Presented Under the Indirect Method

591

(2)

Consequences of Growth on Cash Flow

593

(4)

Real-World Data

594

(3)

Glossary

597

(1)

Questions

598

(1)

Exercises

599

(3)

Problems

602

(12)

Case Studies

614

(2)

Appendix A Accessing the EDGAR Database Through the Internet

616

(2)

Appendix B Reynolds Financial Statements

618

(42)

Index

660

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Fundamental Financial Accounting Concepts

Table of Contents

Supplemental Materials