Financial Accounting, Eleventh Edition
By Robert Libby, Patricia A. Libby and Frank Hodge
Contents:
Preface v
CHAPTER ONE
Financial Statements and Business Decisions 2
Le-Nature’s Inc.
Understanding the Business 3
The Four Basic Financial Statements: An Overview 6
The Balance Sheet 6
FINANCIAL ANALYSIS:
Interpreting Assets, Liabilities, and Stockholders’ Equity on the Balance Sheet 9
- Pause for Feedback 9
The Income Statement 10
FINANCIAL ANALYSIS:
Analyzing the Income Statement: Beyond the Bottom Line 11
- Pause for Feedback 11
Statement of Stockholders’ Equity 12
FINANCIAL ANALYSIS:
Interpreting Retained Earnings 13
- Pause for Feedback 13
Relationships Among the Income Statement, Statement of Stockholders’ Equity, and Balance Sheet 14
- Pause for Feedback 14
Statement of Cash Flows 15
FINANCIAL ANALYSIS:
Interpreting the Cash Flow Statement 16
- Pause for Feedback 16
Notes and Financial Statement Formats 17
Summary of the Four Basic Financial Statements 17
Responsibilities For The Accounting Communication Process 17
Generally Accepted Accounting Principles 18
INTERNATIONAL PERSPECTIVE:
The International Accounting Standards Board and Global Accounting Standards 19
Ensuring the Accuracy of Financial Statements 20
Demonstration Case 22
Chapter Supplement A: Types Of Business Entities 23
Chapter Supplement B: Employment In The Accounting Profession Today 24
Chapter Take-Aways 25
Finding Financial Information 26
Key Terms 26
Questions 27
Multiple-Choice Questions 27
Mini-Exercises 28
Exercises 29
Problems 36
Alternate Problems 37
Continuing Problem 39
Cases and Projects 39
Business Analytics and Data Visualization with Excel and Tableau 43
CHAPTER TWO
Investing and Financing Decisions and the Accounting System 44
Chipotle Mexican Grill
Understanding the Business 45
What Information is Included in the Balance Sheet? 47
Recognition and Measurement Concepts 47
Elements of the Balance Sheet 47
- Pause for Feedback 49
FINANCIAL ANALYSIS:
Unrecorded but Valuable Assets and Liabilities 50
What Business Activities Cause Changes In Financial Statement Amounts? 50
Nature of Business Transactions 50
Accounts 51
How Do Transactions Affect Accounts? 52
Principles of Transaction Analysis 52
Analyzing Common Transactions 53
- Pause for Feedback 57
How Do Companies Keep Track of Account Balances? 58
The Direction of Transaction Effects 58
- Pause for Feedback 59
Analytical Tools 60
FINANCIAL ANALYSIS:
Inferring Business Activities from T-Accounts 63
Transaction Analysis Illustrated 63
- Pause for Feedback 67
DATA ANALYTICS:
Using Data Analytics for Business Expansion 68
How is the Balance Sheet Prepared and Analyzed? 68
Classified Balance Sheet 69
INTERNATIONAL PERSPECTIVE:
Understanding Foreign Financial Statements 71
Ratio Analysis in Decision Making 72
KEY RATIO ANALYSIS:
Current Ratio 72
- Pause for Feedback 73
FOCUS ON CASH FLOWS:
Investing and Financing Activities 74
- Pause for Feedback 74
Demonstration Case 75
Chapter Take-Aways 78
Key Ratio 79
Finding Financial Information 80
Key Terms 80
Questions 81
Multiple-Choice Questions 81
Mini-Exercises 83
Exercises 86
Problems 94
Alternate Problems 97
Continuing Problem 101
Cases And Projects 102
Business Analytics and Data Visualization with Excel and Tableau 107
CHAPTER THREE
Operating Decisions and the Accounting System 108
Chipotle Mexican Grill
Understanding the Business 109
How do Business Activities Affect the Income Statement? 110
The Operating Cycle 110
Elements of the Income Statement 112
DATA ANALYTICS:
Using Data Analytics in the Restaurant Industry to Increase
Revenues and Decrease Costs 115
How are Operating Activities Recognized and Measured? 115
Accrual Accounting 116
- Pause for Feedback 118
- Pause for Feedback 120
A QUESTION OF ETHICS:
Management’s Incentives to Violate Accounting Rules 121
The Expanded Transaction Analysis Model 121
Transaction Analysis Rules 121
Analyzing Common Transactions 123
- Pause for Feedback 128
How is the Income Statement Prepared and Analyzed? 129
Classified Income Statement 131
KEY RATIO ANALYSIS:
Net Profit Margin Ratio 131
FOCUS ON CASH FLOWS:
Operating Activities 133
- Pause for Feedback 133
Demonstration Case 134
Chapter Take-Aways 138
Key Ratio 139
Finding Financial Information 140
Key Terms 140
Questions 140
Multiple-Choice Questions 141
Mini-Exercises 143
Exercises 146
Problems 155
Alternate Problems 159
Continuing Problem 163
Comprehensive Problem (Chapters 1–3) 164
Cases And Projects 165
Business Analytics and Data Visualization
with Excel and Tableau 169
CHAPTER FOUR
Adjustments, Financial Statements, and the Closing Process 170
Chipotle Mexican Grill
Understanding the Business 171
Adjusting Revenues And Expenses 172
Accounting Cycle 172
Purpose of Adjustments 172
Adjustment Process 174
- Pause for Feedback 181
A QUESTION OF ETHICS:
Adjustments and Incentives 182
Preparing Financial Statements 183
Income Statement 184
Statement of Stockholders’ Equity 186
Balance Sheet 186
FOCUS ON CASH FLOWS:
Cash Flows from Operations, Net Income, and the Quality of Earnings 188
KEY RATIO ANALYSIS:
Total Asset Turnover Ratio 188
DATA ANALYTICS:
The SEC Uses Data Analytics 189
Closing The Books 190
End of the Accounting Cycle 190
- Pause for Feedback 192
Post-Closing Trial Balance 193
Demonstration Case 194
Chapter Take-Aways 198
Key Ratio 199
Finding Financial Information 200
Key Terms 200
Questions 200
Multiple-Choice Questions 201
Mini-Exercises 202
Exercises 205
Problems 216
Alternate Problems 220
Continuing Problem 223
Comprehensive Problems (Chapters 1–4) 225
Cases And Projects 227
Business Analytics and Data Visualization with Excel and Tableau 235
CHAPTER FIVE
Communicating and Analyzing Accounting Information 236
Apple Inc.
Understanding the Business 237
A QUESTION OF ETHICS:
The Fraud Triangle 238
Players In The Accounting Communication Process 239
Regulators (SEC, FASB, PCAOB, Stock Exchanges) 239
Managers (CEO, CFO, and Accounting Staff) 239
Board of Directors (Audit Committee) 240
Auditors 240
DATA ANALYTICS:
How Data Analytics Are Affecting What Auditors Do 241
Information Intermediaries: Information Services and Financial Analysts 241
FINANCIAL ANALYSIS:
Information Services and Your Job Search 243
Users: Institutional and Private Investors, Creditors, and Others 243
- Pause for Feedback 244
The Disclosure Process 244
Press Releases 244
Annual Reports and Form 10-K 245
Quarterly Reports and Form 10-Q 246
Other SEC Reports 246
Environmental, Social, & Governance (Esg) Reporting:
Performance Beyond the Bottom Line 246
A Closer Look At Financial Statement Formats And Notes 247
Classified Balance Sheet 247
Classified Income Statement 247
FINANCIAL ANALYSIS:
Statement of Comprehensive Income 250
- Pause for Feedback 250
KEY RATIO ANALYSIS:
Gross Profit Percentage 251
Statement of Stockholders’ Equity 252
Statement of Cash Flows 253
Notes to Financial Statements 253
Voluntary Disclosures 256
INTERNATIONAL PERSPECTIVE:
Differences in Accounting Methods Acceptable under IFRS and U.S. GAAP 256
Return On Assets Analysis: A Framework For Evaluating Company Performance 257
KEY RATIO ANALYSIS:
Return on Assets (ROA) 257
ROA Profit Driver Analysis and Business Strategy 258
How Transactions Affect Ratios 259
- Pause for Feedback 261
Demonstration Case 262
Chapter Take-Aways 264
Key Ratios 265
Finding Financial Information 265
Key Terms 266
Questions 266
Multiple-Choice Questions 266
Mini-Exercises 267
Exercises 269
Problems 275
Alternate Problems 278
Continuing Problems 282
Cases and Projects 284
Business Analytics and Data Visualization
with Excel and Tableau 289
CHAPTER SIX
Reporting and Interpreting Sales Revenue,
Receivables, and Cash 290
Skechers U.S.A.
Understanding the Business 291
Accounting For Net Sales Revenue 292
Motivating Sales and Collections 293
Credit Card Sales to Consumers 293
Sales Discounts to Businesses 293
FINANCIAL ANALYSIS:
To Take or Not to Take the Discount, That Is the Question 294
Sales Returns and Allowances 295
Reporting Net Sales 295
A QUESTION OF ETHICS:
Volume Discounts/Rebates and Earnings Misstatements at Monsanto 296
- Pause for Feedback 296
Revenue Recognition for Bundled Goods and Services: A Five-Step Process 297
Measuring and Reporting Receivables 297
Classifying Receivables 297
INTERNATIONAL PERSPECTIVE:
Foreign Currency Receivables 298
Accounting for Bad Debts 298
FINANCIAL ANALYSIS:
Bad Debt Recoveries 299
Reporting Accounts Receivable and Bad Debts 300
- Pause for Feedback 301
Estimating Bad Debts 302
Control over Accounts Receivable 304
KEY RATIO ANALYSIS:
Receivables Turnover Ratio 304
FOCUS ON CASH FLOWS:
Accounts Receivable 305
- Pause for Feedback 306
Reporting And Safeguarding Cash 307
Cash and Cash Equivalents Defined 307
Cash Management 308
Internal Control of Cash 308
A QUESTION OF ETHICS:
Ethics and the Need for Internal Control 308
Reconciliation of the Cash Accounts and the Bank Statements 309
- Pause for Feedback 313
Demonstration Case A 313
Demonstration Case B 314
Chapter Supplement: Recording Discounts And Returns 315
Chapter Take-Aways 316
Key Ratio 317
Finding Financial Information 317
Key Terms 317
Questions 318
Multiple-Choice Questions 318
Mini-Exercises 319
Exercises 320
Problems 329
Alternate Problems 334
Continuing Problem 338
Cases and Projects 338
Business Analytics and Data Visualization
with Excel and Tableau 341
CHAPTER SEVEN
Reporting and Interpreting Cost of Goods Sold and Inventory 342
Harley-Davidson, Inc.
Understanding the Business 343
Nature of Inventory and Cost of Goods Sold 345
Items Included in Inventory 345
Costs Included in Inventory Purchases 346
FINANCIAL ANALYSIS:
Applying the Materiality Constraint in Practice 346
Flow of Inventory Costs 346
Cost of Goods Sold Equation 347
- Pause for Feedback 349
Perpetual and Periodic Inventory Systems 350
Inventory Costing Methods 350
Specific Identification Method 351
Cost Flow Assumptions 351
INTERNATIONAL PERSPECTIVE:
LIFO and International Comparisons 354
Financial Statement Effects of Inventory Methods 354
Managers’ Choice of Inventory Methods 355
A QUESTION OF ETHICS:
LIFO and Conflicts Between Managers’ and Owners’ Interests 356
- Pause for Feedback 357
Valuation at Lower of Cost or Net Realizable Value 358
Control of Inventory 359
Internal Control of Inventory 359
Errors in Measuring Ending Inventory 360
- Pause for Feedback 360
Evaluating Inventory Management 361
Measuring Efficiency in Inventory Management 361
KEY RATIO ANALYSIS:
Inventory Turnover 362
- Pause for Feedback 362
Inventory Methods and Financial Statement Analysis 363
FINANCIAL ANALYSIS:
LIFO and Inventory Turnover Ratio 365
- Pause for Feedback 365
Inventory and Cash Flows 366
FOCUS ON CASH FLOWS:
Inventory 366
Demonstration Case 368
Chapter Supplement A: Fifo Cost Of Goods Sold Under Periodic And Perpetual
Inventory Systems And End Of Period Adjustments To Lifo 369
Chapter Supplement B: Additional Issues In Measuring Inventory Purchases 371
Chapter Take-Aways 372
Key Ratio 373
Finding Financial Information 373
Key Terms 374
Questions 374
Multiple-Choice Questions 375
Mini-Exercises 376
Exercises 377
Problems 386
Alternate Problems 390
Continuing Problem 394
Comprehensive Problem (Chapters 6–7) 395
Cases and Projects 396
Business Analytics and Data
Visualization with Excel and Tableau 399
CHAPTER EIGHT
Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources 400
FedEx Corporation
Understanding the Business 401
Acquisition and Maintenance of Plant and Equipment 402
Classifying Long-Lived Assets 403
KEY RATIO ANALYSIS:
Fixed Asset Turnover 403
Measuring and Recording Acquisition Cost 404
- Pause for Feedback 407
Repairs, Maintenance, and Improvements 408
A QUESTION OF ETHICS:
Worldcom: Hiding Billions in Expenses through Capitalization 409
Environmental, Social, & Governance (Esg) Reporting:
Being a Global Citizen 409
- Pause for Feedback 410
Use, Impairment, and Disposal of Plant and Equipment 411
Depreciation Concepts 411
FINANCIAL ANALYSIS:
Book Value as an Approximation of Remaining Life 413
FINANCIAL ANALYSIS:
Differences in Estimated Lives within a Single Industry 413
Alternative Depreciation Methods 414
FINANCIAL ANALYSIS:
Impact of Alternative Depreciation Methods 419
- Pause for Feedback 419
FINANCIAL ANALYSIS:
Increased Profitability Due to an Accounting Adjustment?
Reading the Notes 420
How Managers Choose 420
A QUESTION OF ETHICS:
Two Sets of Books 421
Measuring Asset Impairment 421
Disposal of Property, Plant, and Equipment 422
- Pause for Feedback 423
Intangible Assets and Natural Resources 424
Acquisition and Amortization of Intangible Assets 424
Acquisition and Depletion of Natural Resources 429
FOCUS ON CASH FLOWS:
Productive Long-lived Assets, Depreciation, and
Amortization 430
FINANCIAL ANALYSIS:
A Misinterpretation 431
Demonstration Case A 432
Demonstration Case B 434
Chapter Supplement: Changes In Depreciation Estimates 435
- Pause for Feedback 436
Chapter Take-Aways 436
Key Ratio 437
Finding Financial Information 437
Key Terms 438
Questions 438
Multiple-Choice Questions 439
Mini-Exercises 440
Exercises 442
Problems 451
Alternate Problems 456
Continuing Problem 460
Comprehensive Problem (Chapters 6–8) 461
Cases and Projects 464
Business Analytics and Data
Visualization with Excel and Tableau 471
CHAPTER NINE
Reporting and Interpreting Liabilities 472
Starbucks
Understanding the Business 472
Liabilities Defined and Classified 474
Current Liabilities 474
Accounts Payable 475
KEY RATIO ANALYSIS:
Accounts Payable Turnover 475
Accrued Liabilities 476
Deferred Revenues 479
BUSINESS ANALYTICS:
Using mobile app data to understand customer behavior 479
Notes Payable 480
Current Portion of Long-Term Debt 481
FINANCIAL ANALYSIS:
Refinancing Debt: Current or Long-Term Liability? 482
Contingent Liabilities Reported on the Balance Sheet 482
Contingent Liabilities Reported in the Footnotes 482
INTERNATIONAL PERSPECTIVE:
It’s a Matter of Degree 483
Working Capital Management 484
FOCUS ON CASH FLOWS:
Working Capital and Cash Flows 484
- Pause for Feedback 484
Long-Term Liabilities 485
Long-Term Notes Payable and Bonds 485
INTERNATIONAL PERSPECTIVE:
Borrowing in Foreign Currencies 485
Lease Liabilities 486
Accounting for finance leases and operating leases 486
Accounting for short-term leases 487
Computing Present Values 487
Present Value of a Single Amount 488
- Pause for Feedback 489
Present Value of an Annuity 490
A QUESTION OF ETHICS:
Truth in Advertising 491
Accounting Applications of Present Values 492
Demonstration Case 495
Chapter Supplement A: Present Value
Computations Using A Calculator Or Excel 496
Chapter Supplement B: Deferred Taxes 499
Chapter Take-Aways 500
Key Ratio 501
Finding Financial Information 501
Key Terms 502
Questions 502
Multiple-Choice Questions 503
Mini-Exercises 504
Exercises 506
Problems 511
Alternate Problems 515
Continuing Problem 518
Cases And Projects 519
Business Analytics and Data
Visualization with Excel and Tableau 521
CHAPTER TEN
Reporting and Interpreting
Bond Securities 522
Amazon
Understanding the Business 523
Characteristics of Bond Securities 525
Reasons Why Companies Issue Bonds 525
Bond Terminology 525
Bond Issuance Process 527
FINANCIAL ANALYSIS:
Bond Rating Agencies and Their Assessments of Default Risk 528
Reporting Bond Transactions 528
DATA ANALYTICS:
Using Artificial Intelligence (AI) to Invest in Bonds 530
- Pause for Feedback 530
Bonds Issued at Par 531
- Pause for Feedback 532
KEY RATIO ANALYSIS:
Times Interest Earned 533
Bonds Issued at a Discount 534
- Pause for Feedback 538
Bonds Issued at a Premium 538
- Pause for Feedback 541
FINANCIAL ANALYSIS:
Zero Coupon Bonds 542
KEY RATIO ANALYSIS:
Debt-to-Equity 544
Early Retirement of Bonds 544
FOCUS ON CASH FLOWS:
Bond Transactions and the Statement of Cash Flows 545
Demonstration Case 546
Chapter Supplement: Accounting For Bonds
Without A Discount Account Or Premium Account 546
- Pause for Feedback 550
Bonds Issued at a Premium 550
- Pause for Feedback 553
Chapter Take-Aways 553
Key Ratios 554
Finding Financial Information 554
Key Terms 555
Questions 555
Multiple-Choice Questions 556
Mini-Exercises 557
Exercises 559
Problems 563
Alternate Problems 567
Continuing Problem 570
Cases and Projects 571
Business Analytics and Data Visualization with Excel and Tableau 573
CHAPTER ELEVEN
Reporting and Interpreting Stockholders’ Equity 574
Microsoft Understanding the Business 574
Environmental, Social, & Governance (Esg) Reporting 575
Ownership of a Corporation 577
Benefits of Stock Ownership 577
Authorized, Issued, and Outstanding Shares 578
Key Ratio Analysis:
Earnings per Share (EPS) 579
Common Stock Transactions 579
Initial Sale of Stock 580
Sale of Stock in Secondary Markets 580
Stock Issued for Employee Compensation 581
Repurchase of Stock 582
- Pause for Feedback 583
Dividends on Common Stock 584
KEY RATIO ANALYSIS:
Dividend Yield 584
Key Dividend Dates 585
FINANCIAL ANALYSIS:
Impact of Dividends on Stock Price 587
- Pause for Feedback 587
Stock Dividends and Stock Splits 588
Stock Dividends 588
Stock Splits 589
- Pause for Feedback 590
Statement Of Stockholders’ Equity 591
- Pause for Feedback 592
Preferred Stock Transactions 593
Dividends on Preferred Stock 593
FINANCIAL ANALYSIS:
Preferred Stock and Limited Voting Rights 594
FOCUS ON CASH FLOWS:
Financing Activities 594
Demonstration Case 595
Chapter Supplement: Accounting For The Equity Of Sole Proprietorships And Partnerships 596
Chapter Take-Aways 600
Key Ratio 601
Finding Financial Information 602
Key Terms 602
Questions 603
Multiple-Choice Questions 603
Mini-Exercises 604
Exercises 605
Problems 612
Alternate Problems 616
Continuing Problem 620
Comprehensive Problem (Chapters 9–11) 620
Cases and Projects 621
Business Analytics and Data Visualization with Excel and Tableau 624
CHAPTER TWELVE
Statement of Cash Flows 626
National Beverage Corporation Understanding the Business 627
Classifications of the Statement of Cash Flows 628
Cash Flows from Operating Activities 629
Cash Flows from Investing Activities 630
Cash Flows from Financing Activities 631
Net Increase (Decrease) in Cash 631
- Pause for Feedback 631
Relationships to the Balance Sheet and Income Statement 632
Preliminary Steps in Preparing the Cash Flow Statement 633
Reporting and Interpreting Cash Flows from Operating Activities 635
Reporting Cash Flows from Operating Activities—Indirect Method 635
INTERNATIONAL PERSPECTIVE:
Classification of Interest on the Cash Flow Statement 639
- Pause for Feedback 640
Interpreting Cash Flows from Operating Activities 640
KEY RATIO ANALYSIS:
Quality of Income Ratio 641
A QUESTION OF ETHICS:
Fraud and Cash Flows from Operations 642
Reporting and Interpreting Cash Flows from Investing Activities 642
Reporting Cash Flows from Investing Activities 642
Interpreting Cash Flows from Investing Activities 643
KEY RATIO ANALYSIS:
Capital Acquisitions Ratio 644
FINANCIAL ANALYSIS:
Free Cash Flow 644
Reporting and Interpreting Cash Flows from Financing Activities 645
Reporting Cash Flows from Financing Activities 645
Interpreting Cash Flows from Financing Activities 646
- Pause for Feedback 647
Completing the Statement and Additional Disclosures 647
Statement Structure 647
Supplemental Cash Flow Information 648
Demonstration Case 649
Chapter Supplement A: Reporting Cash Flows
From Operating Activities—Direct Method 650
- Pause For Feedback 653
Chapter Supplement B: Adjustment For Gains And
Losses On Sale Of Long-Term Assets—Indirect Method 654
Chapter Supplement C: T-Account Approach (Indirect Method) 655
Chapter Take-Aways 656
Key Ratios 657
Finding Financial Information 658
Key Terms 658
Questions 658
Multiple-Choice Questions 659
Mini-Exercises 660
Exercises 661
Problems 671
Alternate Problems 675
Continuing Problem 679
Cases and Projects 680
Business Analytics and Data Visualization with Excel and Tableau 685
CHAPTER THIRTEEN
Analyzing Financial Statements 686
The Home Depot
Understanding the Business 687
The Investment Decision 691
Understanding a Company’s Strategy 692
Financial Statement Analysis 693
A QUESTION OF ETHICS:
Insider Information 694
Component Percentages and Ratio Analysis 695
Component Percentages 695
BUSINESS ANALYTICS:
Using Data Visualization Tools to Assess a Company’s Performance 696
Ratio Analysis 696
Profitability Ratios 697
- Pause for Feedback 700
Asset Turnover Ratios 701
FINANCIAL ANALYSIS:
ROA Profit Driver Analysis and the DuPont Model 705
Liquidity Ratios 706
- Pause for Feedback 707
Solvency Ratios 708
Market Ratios 709
- Pause for Feedback 710
Interpreting Ratios and Other Analytical
Considerations 711
Other Relevant Information 711
Environmental, Social, & Governance (Esg) Reporting 712
Chapter Take-Aways 713
Finding Financial Information 714
Key Terms 715
Questions 715
Multiple-Choice Questions 715
Mini-Exercises 716
Exercises 717
Problems 722
Alternate Problems 727
Continuing Problem 732
Cases and Projects 733
APPENDIX A
Reporting and Interpreting Investments in Other
Corporations A-0
The Walt Disney Company A-1
APPENDIX B
Target Corporation, Form 10-K Annual
Report B-1
APPENDIX C
Walmart Inc., Form 10-K Annual Report C-0
APPENDIX D
Industry Ratio Report D-0
APPENDIX E
Present and Future Value Tables E-1
GLOSSARY G-1
COMPANY INDEX I-1
SUBJECT INDEX I-7
MBA COMPANION (Available online in Connect and in McGraw Hill’s Create)
Leases, Income Taxes, and Retirement
Obligations
Under Armour