Fundamental Accounting Principles, 24th Edition
By John J. Wild and Ken W. Shaw
Contents
Preface iv
1 Accounting in Business 2
Importance of Accounting 3
Users of Accounting Information 4
Opportunities in Accounting 4
Fundamentals of Accounting 6
Ethics—A Key Concept 6
Generally Accepted Accounting Principles 7
Conceptual Framework 7
Business Transactions and Accounting 9
Accounting Equation 10
Transaction Analysis 11
Summary of Transactions 14
Communicating with Users 15
Income Statement 15
Statement of Owner’s Equity 17
Balance Sheet 17
Statement of Cash Flows 17
Decision Analysis—Return on Assets 18
Appendix 1A Return and Risk 21
Appendix 1B Business Activities 22
2 Analyzing and Recording Transactions 44
Basis of Financial Statements 45
Source Documents 45
The “Account” Underlying Financial Statements 45
Ledger and Chart of Accounts 48
Double-Entry Accounting 49
Debits and Credits 49
Double-Entry System 49
Analyzing and Processing Transactions 51
Journalizing and Posting Transactions 51
Processing Transactions—An Example 52
Summarizing Transactions in a Ledger 57
Trial Balance 58
Preparing a Trial Balance 58
Financial Statements Prepared from Trial Balance 59
Decision Analysis—Debt Ratio 62
3 Adjusting Accounts for Financial
Statements 84
Timing and Reporting 85
The Accounting Period 85
Accrual Basis versus Cash Basis 86
Recognizing Revenues and Expenses 86
Framework for Adjustments 87
Deferral of Expense 87
Prepaid Insurance 87
Supplies 88
Other Prepaid Expenses 89
Depreciation 89
Deferral of Revenue 91
Unearned Consulting Revenue 92
Accrued Expense 93
Accrued Salaries Expense 93
Accrued Interest Expense 94
Future Cash Payment of Accrued Expenses 94
Accrued Revenue 95
Accrued Services Revenue 96
Accrued Interest Revenue 96
Future Cash Receipt of Accrued Revenues 96
Links to Financial Statements 97
Trial Balance and Financial Statements 98
Adjusted Trial Balance 98
Preparing Financial Statements 99
Decision Analysis—Profit Margin 101
Appendix 3A Alternative Accounting for Prepayments 104
4 Completing the Accounting Cycle 128
Work Sheet as a Tool 129
Benefits of a Work Sheet (Spreadsheet) 129
Use of a Work Sheet 129
Work Sheet Applications and Analysis 130
Closing Process 133
Temporary and Permanent Accounts 134
Recording Closing Entries 134
Post-Closing Trial Balance 137
Accounting Cycle 137
Classified Balance Sheet 138
Classification Structure 138
Classification Categories 139
Decision Analysis—Current Ratio 141
Appendix 4A Reversing Entries 143
5 Accounting for Merchandising Operations 166
Merchandising Activities 167
Reporting Income for a Merchandiser 167
Reporting Inventory for a Merchandiser 168
Operating Cycle for a Merchandiser 168
Inventory Systems 168
Accounting for Merchandise Purchases 169
Purchases without Cash Discounts 169
Purchases with Cash Discounts 169
Purchases with Returns and Allowances 171
Purchases and Transportation Costs 172
Accounting for Merchandise Sales 174
Sales without Cash Discounts 174
Sales with Cash Discounts 175
Sales with Returns and Allowances 175
Adjusting and Closing for Merchandisers 177
Adjusting Entries for Merchandisers 177
Preparing Financial Statements 178
Closing Entries for Merchandisers 178
Summary of Merchandising Entries 179
More on Financial Statement Formats 177
Multiple-Step Income Statement 180
Single-Step Income Statement 181
Classified Balance Sheet 182
Decision Analysis—Acid-Test and Gross
Margin Ratios 183
Appendix 5A Periodic Inventory System 187
Appendix 5B Adjusting Entries under New Revenue
Recognition Rules 191
Appendix 5C Net Method for Inventory 192
6 Inventories and Cost of Sales 214
Inventory Basics 215
Determining Inventory Items 215
Determining Inventory Costs 216
Internal Controls and Taking a Physical Count 216
Inventory Costing under a Perpetual System 217
Inventory Cost Flow Assumptions 217
Inventory Costing Illustration 218
Specific Identification 218
First-In, First-Out 219
Last-In, First-Out 219
Weighted Average 220
Financial Statement Effects of Costing Methods 221
Tax Effects of Costing Methods 222
Valuing Inventory at LCM and the Effects of
Inventory Errors 224
Lower of Cost or Market 224
Financial Statement Effects of Inventory Errors 225
Decision Analysis—Inventory Turnover and Days’
Sales in Inventory 227
Appendix 6A Inventory Costing under a Periodic
System 233
Appendix 6B Inventory Estimation Methods 238
7 Accounting Information Systems 258
System Principles 259
System Components 260
Special Journals and Subsidiary
Ledgers 261
Basics of Special Journals 261
Subsidiary Ledgers 261
Sales Journal 263
Cash Receipts Journal 265
Purchases Journal 267
Cash Payments (Disbursements) Journal 268
General Journal Transactions 269
Technology-Based Accounting Systems 270
Technology in Accounting 270
Data Processing in Accounting 270
Computer Networks in Accounting 270
Enterprise Resource Planning Software 271
Data Analytics and Data Visualization 271
Cloud Computing 271
Decision Analysis—Days’ Payable Outstanding 271
8 Cash, Fraud, and Internal Control 290
Fraud and Internal Control 291
Purpose of Internal Control 291
Principles of Internal Control 292
Technology, Fraud, and Internal Control 293
Limitations of Internal Control 293
Control of Cash 294
Cash, Cash Equivalents, and Liquidity 294
Cash Management 295
Control of Cash Receipts 295
Control of Cash Payments 297
Banking Activities as Controls 301
Basic Bank Services 301
Bank Statement 302
Bank Reconciliation 303
Decision Analysis—Days’ Sales Uncollected 306
Appendix 8A Documentation and Verification 308
9 Accounting for Receivables 326
Valuing Accounts Receivable 327
Direct Write-Off Method 330
Allowance Method 331
Estimating Bad Debts 334
Percent of Sales Method 334
Percent of Receivables Method 334
Aging of Receivables Method 335
Notes Receivable 337
Computing Maturity and Interest 338
Recording Notes Receivable 339
Valuing and Settling Notes 339
Disposal of Receivables 341
Decision Analysis—Accounts Receivable Turnover 341
10 Plant Assets, Natural Resources, and
Intangibles 358
SECTION 1—PLANT ASSETS 359
Cost Determination 360
Machinery and Equipment 360
Buildings 360
Land Improvements 360
Land 360
Lump-Sum Purchase 361
Depreciation 361
Factors in Computing Depreciation 361
Depreciation Methods 362
Partial-Year Depreciation 365
Change in Estimates 366
Reporting Depreciation 366
Additional Expenditures 367
Ordinary Repairs 368
Betterments and Extraordinary Repairs 368
Disposals of Plant Assets 368
Discarding Plant Assets 369
Selling Plant Assets 369
SECTION 2—NATURAL RESOURCES 371
Cost Determination and Depletion 371
Plant Assets Tied into Extracting 372
SECTION 3—INTANGIBLE ASSETS 373
Cost Determination and Amortization 373
Types of Intangibles 373
Decision Analysis—Total Asset Turnover 376
Appendix 10A Exchanging Plant Assets 379
11 Current Liabilities and Payroll
Accounting 396
Known Liabilities 397
Characteristics of Liabilities 397
Examples of Known Liabilities 398
Accounts Payable 399
Sales Taxes Payable 399
Unearned Revenues 399
Short-Term Notes Payable 399
Payroll Liabilities 402
Employee Payroll and Deductions 402
Employer Payroll Taxes 403
Internal Control of Payroll 404
Multi-Period Known Liabilities 404
Estimated Liabilities 405
Health and Pension Benefits 405
Vacation Benefits 406
Bonus Plans 406
Warranty Liabilities 406
Multi-Period Estimated Liabilities 407
Contingent Liabilities 408
Accounting for Contingent Liabilities 408
Applying Rules of Contingent Liabilities 409
Uncertainties That Are Not Contingencies 409
Decision Analysis—Times Interest Earned Ratio 409
Appendix 11A Payroll Reports, Records, and
Procedures 412
Appendix 11B Corporate Income Taxes 417
12 Accounting for Partnerships 436
Partnership Formation 437
Characteristics of Partnerships 437
Organizations with Partnership Characteristics 438
Choosing a Business Form 438
Accounting for Partnership Formation 438
Dividing Partnership Income or Loss 439
Partnership Financial Statements 441
Partner Admission 442
Purchase of Partnership Interest 442
Investing Assets in a Partnership 443
Partner Withdrawal 444
No Bonus 444
Bonus to Remaining Partners 445
Bonus to Withdrawing Partner 445
Death of a Partner 445
Liquidation of a Partnership 446
No Capital Deficiency 446
Capital Deficiency 448
Decision Analysis—Partner Return on Equity 449
13 Accounting for Corporations 464
Corporate Form of Organization 465
Corporate Advantages 465
Corporate Disadvantages 465
Corporate Organization and Management 466
Corporate Stockholders 466
Corporate Stock 467
Common Stock 468
Issuing Par Value Stock 468
Issuing No-Par Value Stock 469
Issuing Stated Value Stock 469
Issuing Stock for Noncash Assets 469
Dividends 471
Cash Dividends 470
Stock Dividends 471
Stock Splits 473
Financial Statement Effects of Dividends
and Splits 473
Preferred Stock 474
Issuance of Preferred Stock 474
Dividend Preference of Preferred Stock 475
Reasons for Issuing Preferred Stock 475
Treasury Stock 477
Purchasing Treasury Stock 477
Reissuing Treasury Stock 477
Reporting of Equity 479
Statement of Retained Earnings 479
Statement of Stockholders’ Equity 480
Decision Analysis—Earnings per Share,
Price-Earnings Ratio, Dividend Yield, and
Book Value per Share 480
14 Long-Term Liabilities 500
Basics of Bonds 501
Bond Financing 501
Bond Issuing 502
Bond Trading 502
Par Bonds 502
Discount Bonds 503
Bond Discount or Premium 503
Issuing Bonds at a Discount 504
Premium Bonds 506
Issuing Bonds at a Premium 506
Bond Retirement 508
Long-Term Notes Payable 510
Installment Notes 510
Mortgage Notes and Bonds 511
Decision Analysis—Debt Features and the
Debt-to-Equity Ratio 512
Appendix 14A Bond Pricing 515
Appendix 14B Effective Interest Amortization 517
Appendix 14C Leases and Pensions 518
15 Investments 536
Basics of Investments 537
Purposes and Types of Investments 537
Classification and Reporting 538
Debt Investments 538
Debt Investments—Basics 538
Debt Investments—Trading 539
Debt Investments—Held-to-Maturity 540
Debt Investments—Available-for-Sale 541
Equity Investments 543
Equity Investments—Insignificant Influence,
Under 20% 543
Equity Investments—Significant Influence,
20% to 50% 545
Equity Investments—Controlling Influence,
More Than 50% 547
Accounting Summary for Debt and Equity
Investments 548
Decision Analysis—Components of Return
on Total Assets 549
16 Reporting the Statement of Cash Flows 568
Basics of Cash Flow Reporting 569
Purpose of the Statement of Cash Flows 569
Importance of Cash Flows 569
Measurement of Cash Flows 569
Classification of Cash Flows 570
Noncash Investing and Financing 571
Format of the Statement of Cash Flows 571
Preparing the Statement of Cash Flows 572
Cash Flows from Operating 573
Indirect and Direct Methods of Reporting 573
Applying the Indirect Method 573
Summary of Adjustments for Indirect Method 576
Cash Flows from Investing 577
Three-Step Analysis 577
Analyzing Noncurrent Assets 577
Cash Flows from Financing 579
Three-Step Analysis 579
Analyzing Noncurrent Liabilities 579
Analyzing Equity 580
Proving Cash Balances 580
Summary Using T-Accounts 582
Decision Analysis—Cash Flow Analysis 583
Appendix 16A Spreadsheet Preparation of the
Statement of Cash Flows 586
Appendix 16B Direct Method of Reporting
Operating Cash Flows 588
17 Analysis of Financial Statements 612
Basics of Analysis 613
Purpose of Analysis 613
Building Blocks of Analysis 613
Information for Analysis 614
Standards for Comparisons 614
Tools of Analysis 614
Horizontal Analysis 614
Comparative Statements 614
Trend Analysis 617
Vertical Analysis 618
Common-Size Statements 618
Common-Size Graphics 620
Ratio Analysis 622
Liquidity and Efficiency 622
Solvency 624
Profitability 625
Market Prospects 626
Summary of Ratios 627
Decision Analysis—Analysis Reporting 628
Appendix 17A Sustainable Income 631
18 Managerial Accounting Concepts and
Principles 650
Managerial Accounting Basics 651
Purpose of Managerial Accounting 651
Nature of Managerial Accounting 652
Fraud and Ethics in Managerial Accounting 653
Career Paths 654
Managerial Cost Concepts 655
Types of Cost Classifications 655
Identification of Cost Classifications 657
Cost Concepts for Service Companies 657
Managerial Reporting 658
Manufacturing Costs 658
Nonmanufacturing Costs 658
Prime and Conversion Costs 659
Costs and the Balance Sheet 659
Costs and the Income Statement 659
Cost Flows and Cost of Goods
Manufactured 662
Flow of Manufacturing Activities 662
Schedule of Cost of Goods Manufactured 663
Trends in Managerial Accounting 666
Decision Analysis—Raw Materials Inventory
Turnover and Days’ Sales in Raw Materials
Inventory 668
19 Job Order Costing 686
Job Order Costing 687
Cost Accounting System 687
Job Order Production 687
Job Order vs. Process Operations 688
Production Activities in Job Order Costing 688
Cost Flows 689
Job Cost Sheet 689
Materials and Labor Cost 690
Materials Cost Flows and Documents 690
Labor Cost Flows and Documents 693
Overhead Cost 694
Set Predetermined Overhead Rate 695
Apply Estimated Overhead 695
Record Actual Overhead 697
Summary of Cost Flows 698
Using Job Cost Sheets for Managerial Decisions 699
Schedule of Cost of Goods Manufactured 700
Adjusting Overhead 701
Factory Overhead Account 701
Adjust Underapplied or Overapplied Overhead 701
Job Order Costing of Services 702
Decision Analysis—Pricing for Services 703
20 Process Costing 726
Process Operations 727
Organization of Process Operations 727
Comparing Process and Job Order Costing
Systems 728
Equivalent Units of Production 729
Process Costing Illustration 730
Overview of GenX Company’s Process
Operation 730
Pre-Step: Collect Production and Cost Data 731
Step 1: Determine Physical Flow of Units 732
Step 2: Compute Equivalent Units of Production 732
Step 3: Compute Cost per Equivalent Unit 733
Step 4: Assign and Reconcile Costs 733
Process Cost Summary 735
Accounting for Process Costing 736
Accounting for Materials Costs 737
Accounting for Labor Costs 738
Accounting for Factory Overhead 739
Accounting for Transfers 740
Trends in Process Operations 742
Decision Analysis—Hybrid Costing System 743
Appendix 20A FIFO Method of Process
Costing 747
21 Cost-Volume-Profit Analysis 772
Identifying Cost Behavior 773
Fixed Costs 774
Variable Costs 774
Graphing Fixed and Variable Costs against
Volume 774
Mixed Costs 774
Step-wise Costs 775
Curvilinear Costs 776
Measuring Cost Behavior 777
Scatter Diagram 777
High-Low Method 778
Regression 778
Comparing Cost Estimation Methods 778
Contribution Margin and Break-Even
Analysis 779
Contribution Margin and Its Measures 779
Break-Even Point 780
Cost-Volume-Profit Chart 782
Changes in Estimates 782
Applying Cost-Volume-Profit Analysis 783
Margin of Safety 783
Computing Income from Sales and Costs 784
Computing Sales for a Target Income 785
Evaluating Strategies 786
Sales Mix and Break-Even 787
Assumptions in Cost-Volume-Profit
Analysis 789
Decision Analysis—Degree of Operating
Leverage 790
Appendix 21A Using Excel for Cost
Estimation 792
Appendix 21B Variable Costing and Performance
Reporting 793
Appendix 21C Preparing a CVP Chart 796
22 Master Budgets and Planning 814
Budget Process and Administration 815
Budgeting Process 815
Benefits of Budgeting 816
Budgeting and Human Behavior 816
Budget Reporting and Timing 817
Master Budget Components 817
Operating Budgets 818
Sales Budget 818
Production Budget 818
Direct Materials Budget 820
Direct Labor Budget 821
Factory Overhead Budget 822
Selling Expense Budget 823
General and Administrative Expense Budget 824
Investing and Financing Budgets 825
Capital Expenditures Budget 825
Cash Budget 825
Budgeted Financial Statements 829
Budgeted Income Statement 829
Budgeted Balance Sheet 830
Using the Master Budget 830
Budgeting for Service Companies 830
Decision Analysis—Activity-Based
Budgeting 831
Appendix 22A Merchandise Purchases Budget 839
23 Flexible Budgets and Standard Costs 864
Fixed and Flexible Budgets 865
Fixed Budget Reports 866
Budget Reports for Evaluation 867
Flexible Budget Reports 867
Standard Costing 871
Standard Costs 871
Setting Standard Costs 871
Cost Variance Analysis 872
Materials and Labor Variances 874
Materials Variances 874
Labor Variances 876
Overhead Standards and Variances 877
Flexible Overhead Budgets 877
Standard Overhead Rate 877
Computing Overhead Cost Variances 879
Standard Costing—Management
Considerations 882
Decision Analysis—Sales Variances 883
Appendix 23A Expanded Overhead Variances and
Standard Cost Accounting System 888
24 Performance Measurement and
Responsibility Accounting 912
Responsibility Accounting 913
Performance Evaluation 913
Controllable versus Uncontrollable Costs 914
Responsibility Accounting for Cost Centers 914
Profit Centers 916
Direct and Indirect Expenses 916
Expense Allocations 917
Departmental Income Statements 918
Departmental Contribution to Overhead 921
Investment Centers 922
Return-on-Investment and Residual Income 922
Investment Center Profit Margin and Investment
Turnover 924
Nonfinancial Performance Evaluation
Measures 925
Balanced Scorecard 925
Transfer Pricing 927
Decision Analysis—Cash Conversion Cycle 928
Appendix 24A Cost Allocations 931
Appendix 24B Transfer Pricing 933
Appendix 24C Joint Costs and Their Allocation 934
25 Relevant Costing for Managerial
Decisions 956
Decisions and Information 957
Decision Making 957
Relevant Costs and Benefits 958
Production Decisions 958
Make or Buy 959
Sell or Process Further 960
Sales Mix Selection When Resources Are
Constrained 961
Capacity Decisions 963
Segment Elimination 963
Keep or Replace Equipment 964
Pricing Decisions 965
Normal Pricing 965
Special Offers 967
Decision Analysis—Time and Materials Pricing 969
26 Capital Budgeting and Investment
Analysis 990
Capital Budgeting 991
Capital Budgeting Process 991
Capital Investment Cash Flows 992
Methods Not Using Time Value of Money 992
Payback Period 992
Accounting Rate of Return 995
Methods Using Time Value of Money 996
Net Present Value 996
Internal Rate of Return 1000
Comparison of Capital Budgeting Methods 1002
Postaudit 1002
Decision Analysis—Break-Even Time 1004
Appendix 26A Using Excel to Compute Net Present
Value and Internal Rate of Return 1006
Appendix A Financial Statement Information A-1
Apple A-2
Google A-10
Samsung A-14
Appendix B Time Value of Money B
Appendix C Activity-Based Costing C
Appendix D Lean Principles and Accounting D-1
Index IND-1
Chart of Accounts CA
Brief Review Managerial Analyses and Reports BR-1
Financial Reports and Tables BR-2
Selected Transactions and
Relations BR-3
Fundamentals and Analyses BR-4