1 Introduction to Financial Statements 1-1

Knowing the Numbers: Columbia Sportswear Company 1-1

Business Organization and Accounting Information Uses 1-2

Forms of Business Organization 1-3

Users and Uses of Financial Information 1-4

Ethics in Financial Reporting 1-6

The Three Types of Business Activity 1-8

Financing Activities 1-8

Investing Activities 1-9

Operating Activities 1-9

The Four Financial Statements 1-11

Income Statement 1-11

Retained Earnings Statement 1-12

Balance Sheet 1-14

Statement of Cash Flows 1-15

Interrelationships of Statements 1-16

Elements of an Annual Report 1-19

2 A Further Look at the Balance Sheet 2-1

Just Fooling Around?: The Motley Fool 2-2

The Classified Balance Sheet 2-3

Current Assets 2-3

Long-Term Investments 2-5

Property, Plant, and Equipment 2-5

Intangible Assets 2-6

Current Liabilities 2-7

Long-Term Liabilities 2-8

Stockholders’ Equity 2-8

Analyzing the Balance Sheet Using Ratios 2-9

Ratio Analysis 2-9

Using a Classified Balance Sheet 2-10

3 The Accounting Information System 3-1

Accidents Happen: MF Global Holdings Ltd 3-1

Financial Reporting Concepts 3-2

The Standard-Setting Environment 3-3

Qualities of Useful Information 3-3

Assumptions in Financial Reporting 3-5

Principles in Financial Reporting 3-5

Cost Constraint 3-6

Using the Accounting Equation to Analyze Transactions 3-7

Accounting Transactions 3-8

Analyzing Transactions 3-8

Summary of Transactions 3-15

Preparing Financial Statements 3-16

Income Statement 3-17

Retained Earnings Statement 3-17

Classified Balance Sheet 3-17

4 Accrual Accounting Concepts 4-1

Keeping Track of Groupons: Groupon 4-1

Accrual-Basis Accounting and Adjustments 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 Adjustments 4-6

Types of Adjustments 4-6

Adjustments for Deferrals 4-8

Prepaid Expenses 4-8

Unearned Revenues 4-12

Adjustments for Accruals 4-14

Accrued Revenues 4-14

Accrued Expenses 4-16

Summary of Basic Relationships 4-19

Preparing Financial Statements 4-20

5 Fraud, Internal Control, and Cash 5-1

Minding the Money in Madison: Barriques 5-1

Fraud and Internal Control 5-3

Fraud 5-3

The Sarbanes-Oxley Act 5-3

Internal Control 5-4

Principles of Internal Control Activities 5-4

Data Analytics and Internal Controls 5-10

Limitations of Internal Control 5-11

Cash Controls 5-12

Cash Receipts Controls 5-12

Cash Disbursements Controls 5-14

Petty Cash Fund 5-16

Control Features of a Bank Account 5-17

Electronic Funds Transfer (EFT) System 5-17

Bank Statements 5-18

Reconciling the Bank Account 5-19

Reporting Cash and Cash Management 5-24

Reporting Cash 5-24

Managing and Monitoring Cash 5-26

Cash Budgeting 5-28

6 Merchandising Operations and the Multiple-Step Income Statement 6-1

Buy Now, Vote Later: REI 6-1

Merchandising Operations and Inventory Purchases 6-3

Flow of Costs 6-3

Recording Purchases Under a Perpetual Inventory System 6-5

Freight Costs 6-5

Purchase Returns and Allowances 6-6

Purchase Discounts 6-7

Summary of Purchasing Transactions 6-8

Recording Sales Under a Perpetual Inventory System 6-9

Recording Sales 6-9

Sales Returns and Allowances 6-10

Sales Discounts 6-11

Data Analytics and Credit Sales 6-12

Multiple-Step Income Statement 6-12

Format of the Multiple-Step Income Statement 6-12

Components of the Multiple-Step Income Statement 6-13

Gross Profit Rate and Profit Margin 6-16

Gross Profit Rate 6-16

Profit Margin 6-18

7 Reporting and Analyzing Inventory and Receivables 7-1

“Where Is That Spare Bulldozer Blade?”: Caterpillar 7-1

Classifying and Determining Inventory 7-3

Classifying Inventory 7-3

Determining Inventory Quantities 7-3

Inventory Methods and Financial Effects 7-6

Specific Identification 7-6

Cost Flow Assumptions 7-7

Financial Statement and Tax Effects of Cost Flow Methods 7-13

Reporting Receivables 7-14

Types of Receivables 7-14

Recognizing Accounts Receivable 7-15

Valuing Accounts Receivable 7-15

Data Analytics and Receivables Management 7-19

Inventory Presentation and Analysis 7-20

Presentation 7-20

Analysis 7-20

8 Reporting and Analyzing Long-Lived Assets 8-1

A Tale of Two Airlines: American Airlines 8-1

Plant Asset Expenditures 8-3

Determining the Cost of Plant Assets 8-3

Expenditures During Useful Life 8-6

Depreciation Methods 8-8

Factors in Computing Depreciation 8-9

Depreciation Methods 8-9

Revising Periodic Depreciation 8-14

Impairments 8-15

Plant Asset Disposals 8-16

Sale of Plant Assets 8-16

Retirement of Plant Assets 8-18

Intangible Assets 8-18

Accounting for Intangible Assets 8-19

Types of Intangible Assets 8-20

Statement Presentation and Analysis 8-23

Presentation 8-23

Analysis 8-25

9 Reporting and Analyzing Liabilities and Stockholders’ Equity 9-1

And Then There Were Two: Maxwell Car Company 9-1

Accounting for Current Liabilities 9-3

What Is a Current Liability? 9-3

Notes Payable 9-3

Sales Taxes Payable 9-4

Unearned Revenues 9-5

Current Maturities of Long-Term Debt 9-6

Payroll and Payroll Taxes Payable 9-6

Accounting for Bond Transactions 9-9

Issuing Bonds at Face Value 9-9

Discount or Premium on Bonds 9-10

Issuing Bonds at a Discount 9-11

Issuing Bonds at a Premium 9-13

Redeeming Bonds at Maturity 9-14

Accounting for Common, Preferred, and Treasury Stock 9-15

Stockholder Rights 9-16

Corporate Capital 9-17

Accounting for Common Stock 9-18

Accounting for Preferred Stock 9-19

Accounting for Treasury Stock 9-20

Accounting for Cash Dividends 9-23

Cash Dividends 9-23

Dividend Preferences 9-25

Presentation and Analysis of Stockholders’ Equity 9-27

Balance Sheet Presentation of Stockholders’ Equity 9-27

Analysis of Stockholders’ Equity 9-27

Debt versus Equity Decision 9-29

10 Financial Analysis: The Big Picture 10-1

It Pays to Be Patient: Warren Buffett 10-2

Sustainable Income and Quality of Earnings 10-3

Sustainable Income 10-3

Quality of Earnings 10-7

Horizontal Analysis and Vertical Analysis 10-9

Horizontal Analysis 10-10

Vertical Analysis 10-12

Ratio Analysis 10-15

Liquidity Ratios 10-16

Solvency Ratios 10-17

Profitability Ratios 10-17

Financial Analysis and Data Analytics 10-18

Comprehensive Example of Ratio

Analysis 10-18

11 Managerial Accounting 11-1

Just Add Water … and Paddle: Current Designs 11-1

Managerial Accounting Basics 11-3

Comparing Managerial and Financial Accounting 11-3

Management Functions 11-4

Organizational Structure 11-5

Managerial Cost Concepts 11-7

Manufacturing Costs 11-8

Product versus Period Costs 11-9

Illustration of Cost Concepts 11-9

Manufacturing Costs in Financial Statements 11-11

Income Statement 11-11

Cost of Goods Manufactured 11-12

Cost of Goods Manufactured Schedule 11-13

Balance Sheet 11-14

Managerial Accounting Today 11-15

Service Industries 11-16

Focus on the Value Chain 11-17

Balanced Scorecard 11-18

Business Ethics 11-19

Corporate Social Responsibility 11-20

12 Job Order Costing 12-1

Profiting from the Silver Screen: Disney 12-1

Cost Accounting Systems 12-3

Process Cost System 12-3

Job Order Cost System 12-4

Job Order Cost Flow 12-5

Accumulating Manufacturing Costs 12-5

Assigning Manufacturing Costs 12-8

Raw Materials Costs 12-8

Factory Labor Costs 12-11

Predetermined Overhead Rates 12-13

Jobs Completed and Sold 12-16

Assigning Costs to Finished Goods 12-16

Assigning Costs to Cost of Goods Sold 12-17

Summary of Job Order Cost Flows 12-17

Job Order Costing for Service Companies 12-18

Advantages and Disadvantages of Job

Order Costing 12-20

Applied Manufacturing Overhead 12-21

Cost of Goods Manufactured Schedule 12-21

Under- or Overapplied Manufacturing Overhead 12-22

13 Cost-Volume-Profit 13-1

Don’t Worry—Just Get Big: Amazon.com 13-1

Cost Behavior Analysis 13-2

Variable Costs 13-3

Fixed Costs 13-4

Relevant Range 13-5

Mixed Costs 13-6

Mixed Costs Analysis 13-7

High-Low Method 13-8

Importance of Identifying Variable and Fixed Costs 13-10

Cost-Volume-Profit Analysis 13-11

Basic Components 13-11

CVP Income Statement 13-11

Break-Even Analysis 13-15

Mathematical Equation 13-15

Contribution Margin Technique 13-16

Graphic Presentation 13-17

Target Net Income and Margin of Safety 13-19

Target Net Income 13-19

Margin of Safety 13-21

Appendix 13A: Regression Analysis 13-23

14 Incremental Analysis 14-1

Keeping It Clean: Method Products 14-1

Decision-Making and Incremental Analysis 14-3

Incremental Analysis Approach 14-3

How Incremental Analysis Works 14-4

Qualitative Factors 14-5

Types of Incremental Analysis 14-5

Special Orders 14-6

Make or Buy 14-8

Opportunity Cost 14-9

Sell or Process Further 14-10

Single-Product Case 14-11

Multiple-Product Case 14-11

Repair, Retain, or Replace Equipment 14-14

Eliminate Unprofitable Segment or Product 14-15

15 Budgetary Planning 15-1

What’s in Your Cupcake?: BabyCakes NYC 15-1

Effective Budgeting and the Master Budget 15-3

Budgeting and Accounting 15-3

The Benefits of Budgeting 15-3

Essentials of Effective Budgeting 15-4

The Master Budget 15-7

Sales, Production, and Direct Materials Budgets 15-8

Sales Budget 15-8

Production Budget 15-10

Direct Materials Budget 15-10

Direct Labor, Manufacturing Overhead, and S&A Expense Budgets 15-14

Direct Labor Budget 15-14

Manufacturing Overhead Budget 15-15

Selling and Administrative Expense Budget 15-15

Budgeted Income Statement 15-16

Cash Budget and Budgeted Balance Sheet 15-18

Cash Budget 15-18

Budgeted Balance Sheet 15-20

Budgeting in Nonmanufacturing Companies 15-23

Merchandisers 15-23

Service Companies 15-24

Not-for-Profit Organizations 15-25

16 Budgetary Control and Responsibility Accounting 16-1

Pumpkin Madeleines and a Movie: Tribeca Grand 16-1

Budgetary Control and Static Budget Reports 16-3

Budgetary Control 16-3

Static Budget Reports 16-4

Flexible Budget Reports 16-7

Why Flexible Budgets? 16-7

Developing the Flexible Budget 16-9

Flexible Budget—A Case Study 16-10

Flexible Budget Reports 16-12

Responsibility Accounting and Responsibility Centers 16-14

Controllable versus Noncontrollable Revenues and Costs 16-16

Principles of Performance Evaluation 16-16

Responsibility Reporting System 16-18

Types of Responsibility Centers 16-19

Investment Centers 16-24

Return on Investment (ROI) 16-24

Responsibility Report 16-25

Judgmental Factors in ROI 16-26

Improving ROI 16-26

Appendix 16A: ROI vs. Residual Income 16-30

Residual Income Compared to ROI 16-31

Residual Income Weakness 16-31

17 Standard Costs and Balanced Scorecard 17-1

80,000 Different Caffeinated Combinations: Starbucks 17-2

Overview of Standard Costs 17-3

Distinguishing Between Standards and Budgets 17-4

Setting Standard Costs 17-4

Direct Materials Variances 17-8

Calculating Direct Materials Variances 17-10

Direct Labor and Manufacturing Overhead Variances 17-12

Direct Labor Variances 17-13

Manufacturing Overhead Variances 17-15

Variance Reports and Balanced Scorecards 17-17

Reporting Variances 17-17

Income Statement Presentation of Variances 17-18

Balanced Scorecard 17-19

Appendix 17A: Overhead Controllable and Volume Variances 17-23

Overhead Controllable Variance 17-23

Overhead Volume Variance 17-24

18 Planning for Capital Investments 18-1

Floating Hotels: Holland America Line 18-2

Capital Budgeting and Cash Payback 18-3

Cash Flow Information 18-3

Illustrative Data 18-4

Cash Payback 18-5

Net Present Value Method 18-6

Equal Annual Cash Flows 18-7

Unequal Annual Cash Flows 18-8

Choosing a Discount Rate 18-9

Simplifying Assumptions 18-10

Comprehensive Example 18-10

Capital Budgeting Challenges and Refinements 18-12

Intangible Benefits 18-12

Profitability Index for Mutually Exclusive Projects 18-14

Risk Analysis 18-15

Post-Audit of Investment Projects 18-16

Internal Rate of Return 18-17

Comparing Discounted Cash Flow Methods 18-18

Annual Rate of Return 18-19

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 Double-Entry Accounting System D-1

Appendix E Time Value of Money E-1

* Appendix F Activity-Based Costing F-1

* Appendix G Cost-Volume-Profit Analysis: Additional Issues G-1

*Appendix H Pricing H-1

COMPANY INDEX / SUBJECT INDEX I-1

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