1 Accounting in Action 1-1

Knowing the Numbers 1-1

Accounting Activities and Users 1-3

Three Activities 1-3

Who Uses Accounting Data 1-4

The Building Blocks of Accounting 1-6

Ethics in Financial Reporting 1-6

Accounting Standards 1-7

Measurement Principles 1-8

Assumptions 1-8

The Accounting Equation 1-10

Assets 1-11

Liabilities 1-11

Equity 1-11

Analyzing Business Transactions 1-13

Accounting Transactions 1-13

Transaction Analysis 1-14

Summary of Transactions 1-19

Financial Statements 1-20

Income Statement 1-22

Retained Earnings Statement 1-22

Statement of Financial Position 1-22

Statement of Cash Flows 1-23

Comprehensive Income Statement 1-23

Appendix 1A: Career Opportunities in Accounting 1-25

Public Accounting 1-25

Private Accounting 1-26

Governmental Accounting 1-26

Forensic Accounting 1-26

A Look at U.S. GAAP 1-46

2 The Recording Process 2-1

Accidents Happen: Bank of Taiwan 2-1

Accounts, Debits, and Credits 2-2

The Account 2-2

Debits and Credits 2-3

Equity Relationships 2-6

Summary of Debit/Credit Rules 2-6

The Journal 2-7

The Recording Process 2-7

The Journal 2-8

The Ledger and Posting 2-10

The Ledger 2-10

Posting 2-12

Chart of Accounts 2-13

The Recording Process Illustrated 2-13

Summary Illustration of Journalizing and Posting 2-19

The Trial Balance 2-21

Limitations of a Trial Balance 2-22

Locating Errors 2-22

Currency Signs and Underlining 2-22

A Look at U.S. GAAP 2-46

3 Adjusting the Accounts 3-1

What Was Your Profit?: Cadbury 3-1

Accrual-Basis Accounting and Adjusting Entries 3-2

Fiscal and Calendar Years 3-3

Accrual- versus Cash-Basis Accounting 3-3

Recognizing Revenues and Expenses 3-3

The Need for Adjusting Entries 3-5

Types of Adjusting Entries 3-5

Adjusting Entries for Deferrals 3-6

Prepaid Expenses 3-6

Unearned Revenues 3-10

Adjusting Entries for Accruals 3-13

Accrued Revenues 3-13

Accrued Expenses 3-14

Summary of Basic Relationships 3-17

Adjusted Trial Balance and Financial Statements 3-20

Preparing the Adjusted Trial Balance 3-21

Preparing Financial Statements 3-21

Appendix 3A: Alternative Treatment of Deferrals 3-24

Prepaid Expenses 3-25

Unearned Revenues 3-26

Summary of Additional Adjustment Relationships 3-27

Appendix 3B: Financial Reporting Concepts 3-28

Qualities of Useful Information 3-28

Assumptions in Financial Reporting 3-28

Principles in Financial Reporting 3-29

Cost Constraint 3-30

A Look at U.S. GAAP 3-56

4 Completing the Accounting Cycle 4-1

Speaking the Same Language: IASB 4-1

The Worksheet 4-3

Steps in Preparing a Worksheet 4-3

Preparing Financial Statements from a Worksheet 4-10

Preparing Adjusting Entries from a Worksheet 4-11

Closing the Books 4-11

Preparing Closing Entries 4-12

Posting Closing Entries 4-14

Preparing a Post-Closing Trial Balance 4-16

The Accounting Cycle and Correcting Entries 4-19

Summary of the Accounting Cycle 4-19

Reversing Entries-An Optional Step 4-19

Correcting Entries-An Avoidable Step 4-19

Classified Statement of Financial Position 4-23

Intangible Assets 4-24

Property, Plant, and Equipment 4-25

Long-Term Investments 4-25

Current Assets 4-25

Equity 4-26

Non-Current Liabilities 4-27

Current Liabilities 4-27

Appendix 4A: Reversing Entries 4-29

Reversing Entries Example 4-29

A Look at U.S. GAAP 4-57

5 Accounting for Merchandise Operations 5-1

Who Doesn't Shop?: Carrefour 5-1

Merchandising Operations and Inventory Systems 5-3

Operating Cycles 5-3

Flow of Costs 5-4

Recording Purchases Under a Perpetual System 5-6

Freight Costs 5-8

Purchase Returns and Allowances 5-9

Purchase Discounts 5-9

Summary of Purchasing Transactions 5-10

Recording Sales Under a Perpetual System 5-11

Sales Returns and Allowances 5-12

Sales Discounts 5-13

The Accounting Cycle for a Merchandising Company 5-14

Adjusting Entries 5-15

Closing Entries 5-15

Summary of Merchandising Entries 5-16

Financial Statements for a Merchandiser 5-17

Income Statement 5-17

Classified Statement of Financial Position 5-21

Appendix 5A: Worksheet for a Merchandising Company 5-23

Using a Worksheet 5-23

Appendix 5B: Periodic Inventory System 5-24

Determining Cost of Goods Sold Under a Periodic System 5-25

Recording Merchandise Transactions 5-25

Recording Purchases of Merchandise 5-26

Recording Sales of Merchandise 5-27

Journalizing and Posting Closing Entries 5-27

Using a Worksheet 5-29

A Look at U.S. GAAP 5-54

6 Inventories 6-1

"Where is That Spare Bulldozer Blade?": Komatsu 6-1

Classifying and Determining Inventory 6-2

Classifying Inventory 6-2

Determining Inventory Quantities 6-4

Inventory Methods and Financial Effects 6-6

Specific Identification 6-7

Cost Flow Assumptions 6-7

Financial Statement and Tax Effects of Cost Flow Methods 6-11

Using Inventory Cost Flow Methods Consistently 6-12

Effects of Inventory Errors 6-13

Income Statement Effects 6-13

Statement of Financial Position Effects 6-14

Inventory Statement Presentation and Analysis 6-15

Presentation 6-15

Lower-of-Cost-or-Net Realizable Value 6-15

Analysis 6-16

Appendix 6A: Inventory Cost Flow Methods in Perpetual Inventory Systems 6-18

First-In, First-Out (FIFO) 6-18

Average-Cost 6-19

Appendix 6B: Estimating Inventories 6-19

Gross Profit Method 6-20

Retail Inventory Method 6-21

Appendix 6C: LIFO Inventory Method 6-22

A Look at U.S. GAAP 6-44

7 Fraud, Internal Control, and Cash 7-1

Minding the Money at Nick's: Nick's Steakhouse and Pizza 7-1

Fraud and Internal Control 7-2

Fraud 7-3

Internal Control 7-3

Principles of Internal Control Activities 7-4

Limitations of Internal Control 7-10

Cash Controls 7-10

Cash Receipts Controls 7-11

Cash Disbursements Controls 7-13

Petty Cash Fund 7-15

Control Features of a Bank Account 7-18

Making Bank Deposits 7-18

Writing Checks 7-19

Electronic Funds Transfer (EFT) System 7-20

Bank Statements 7-20

Reconciling the Bank Account 7-21

Reporting Cash 7-26

Cash Equivalents 7-26

Restricted Cash 7-26

A Look at U.S. GAAP 7-46

8 Accounting for Receivables 8-1

Are You Going to Pay Me-or Not?: BNP Paribas 8-1

Recognition of Accounts Receivable 8-2

Types of Receivables 8-3

Recognizing Accounts Receivable 8-3

Valuation and Disposition of Accounts Receivable 8-5

Valuing Accounts Receivable 8-5

Disposing of Accounts Receivable 8-11

Notes Receivable 8-13

Determining the Maturity Date 8-14

Computing Interest 8-15

Recognizing Notes Receivable 8-15

Valuing Notes Receivable 8-16

Disposing of Notes Receivable 8-16

Presentation and Analysis 8-18

Presentation 8-19

Analysis 8-19

A Look at U.S. GAAP 8-38

9 Plant Assets, Natural Resources, and Intangible Assets 9-1

How Much for a Ride to the Beach?: Rent-A-Wreck 9-1

Plant Asset Expenditures 9-2

Determining the Cost of Plant Assets 9-3

Expenditures During Useful Life 9-5

Depreciation Methods 9-7

Factors in Computing Depreciation 9-8

Depreciation Methods 9-8

Component Depreciation 9-13

Depreciation and Income Taxes 9-13

Revaluation of Plant Assets 9-13

Revising Periodic Depreciation 9-14

Plant Asset Disposals 9-15

Retirement of Plant Assets 9-16

Sale of Plant Assets 9-16

Natural Resources and Intangible Assets 9-18

Natural Resources and Depletion 9-18

Intangible Assets 9-20

Statement Presentation and Analysis 9-23

Presentation 9-23

Analysis 9-24

Appendix 9A: Exchange of Plant Assets 9-24

Loss Treatment 9-25

Gain Treatment 9-25

A Look at U.S. GAAP 9-47

10 Current Liabilities 10-1

Financing His Dreams: Wilbert Murdock 10-1

Accounting for Current Liabilities 10-2

What is a Current Liability? 10-2

Notes Payable 10-3

Value-Added and Sales Taxes Payable 10-4

Unearned Revenues 10-5

Salaries and Wages 10-5

Current Maturities of Long-Term Debt 10-7

Reporting and Analyzing Current Liabilities 10-8

Reporting Uncertainty 10-8

Reporting of Current Liabilities 10-9

Analysis of Current Liabilities 10-10

A Look at U.S. GAAP 10-26

11 Non-Current Liabilities 11-1

Are We Living on Borrowed Time? 11-1

Overview of Bonds 11-2

Types of Bonds 11-3

Issuing Procedures 11-3

Bond Trading 11-3

Determining the Market Price of a Bond 11-4

Bond Transactions 11-6

Issuing Bonds at Face Value 11-6

Discount or Premium on Bonds 11-7

Issuing Bonds at a Discount 11-8

Issuing Bonds at a Premium 11-9

Redeeming Bonds 11-10

Accounting for Non-Current Liabilities...