Financial Accounting, Sixth Canadian Edition
By Walter T. Harrison Jr., Charles T. Horngren, C. William Thomas, Wendy M. Tietz, Greg Berberich, and Catherine Seguin
Contents:
About the Authors xi
Preface xiii
Prologue xxiii
Chapter 1
The Financial Statements 1
SPOTLIGHT | Canadian Tire 1
Using Accounting Information 2
Explain Why Accounting Is the Language of Business 3
Who Uses Accounting Information? 3
Two Kinds of Accounting: Financial Accounting and
Management Accounting 4
Organizing a Business 5
Describe the Purpose of Each Financial Statement and
Explain the Elements of Each One 7
Generally Accepted Accounting Principles 7
The Income Statement Measures Operating
Performance 8
The Statement of Retained Earnings Reports
Changes in Retained Earnings 10
The Balance Sheet Measures Financial Position 11
The Statement of Cash Flows Measures Cash Receipts and Payments 15
The Notes to the Financial Statements Provide
Additional Information 17
Financial Reporting Responsibilities 17
Explain the Relationships Among the Financial Statements 18
Explain Accounting’s Conceptual Framework and Underlying Assumptions 20
Accounting’s Conceptual Framework 20
Fundamental Qualitative Characteristics 20
Enhancing Qualitative Characteristics 21
The Cost Constraint 22
Assumptions Underlying the Conceptual
Framework 22
Make Ethical Business Decisions 24
Fraud and its Impact 25
End-of-Chapter Summary Problem 30
Chapter 2
Recording Business Transactions 55
SPOTLIGHT | Apple Inc. 55
Describe Common Types of Accounts 56
Asset Accounts 56
Liability Accounts 57
Shareholders’ Equity Accounts 57
Illustrate the Impact of Business Transactions
on the Accounting Equation 58
Transactions and Financial Statements 64
Analyze Business Transactions Using T-Accounts 69
Chart of Accounts 69
The T-Account 70
Increases and Decreases in the Accounts: The Rules
of Debit and Credit 70
The Expanded Accounting Equation 71
Analyzing Transactions Using Only
T-Accounts 72
Record Business Transactions in the Journal and Post
Them to the Ledger 73
Posting from the Journal to the Ledger 74
The Flow of Accounting Data 74
Accounts After Posting to the Ledger 78
Prepare and Use a Trial Balance 79
End-of-Chapter Summary Problem 82
Chapter 3
Accrual Accounting and the
Financial Statements 109
SPOTLIGHT | Le Château 109
Explain How Accrual Accounting Differs from
Cash-Basis Accounting 110
Apply the Revenue and Expense Recognition
Principles 112
The Revenue Recognition Principle 112
The Expense Recognition Principle 113
Record Adjusting Journal Entries 114
Types of Adjusting Entries 115
Deferrals—Prepaid Expenses 115
Deferrals—Unearned Revenues 117
Depreciation of Property, Plant, and Equipment 119
Accruals—Accrued Expenses 120
Accruals—Accrued Revenues 122
Summary of the Adjusting Process 123
The Adjusted Trial Balance 126
Prepare the Financial Statements 127
Formats for the Financial Statements 129
Record Closing Journal Entries 136
Analyze and Evaluate a Company’s
Debt-Paying Ability 138
Net Working Capital 138
Current Ratio 138
Debt Ratio 139
How Do Transactions Affect the Ratios? 139
End-of-Chapter Summary Problem 144
Chapter 4
Cash and Receivables 177
SPOTLIGHT | CGI Group Inc. 177
Account for Cash 178
Prepare and Use a Bank Reconciliation 179
Signature Card 179
Deposit Slip 179
Cheque 179
Bank Statement 180
Bank Reconciliation 180
Preparing the Bank Reconciliation 181
Online Banking 184
Account for Receivables 187
Types of Receivables 187
How Do We Manage the Risk of Not
Collecting? 187
Estimate and Account for Uncollectible
Accounts Receivable 189
Allowance Method 190
Recovery of an Uncollectible Account 193
Summary of Transactions for Accounts
Receivable 193
Computing Cash Collections from Customers 193
Account for Notes Receivable 195
Accounting for Notes Receivable 196
Explain How to Improve Cash Flows from Sales and
Receivables 199
Reporting on the Statement of Cash Flows 200
Evaluate a Company’s Liquidity 201
Acid-Test (or Quick) Ratio 202
Days’ Sales in Receivables 203
End-of-Chapter Summary Problem 205
Chapter 5
Inventory and Cost of
Goods Sold 230
SPOTLIGHT | Leon’s Furniture 230
Account for Inventory Using the Perpetual and
Periodic Inventory Systems 232
Accounting for Inventory 232
Sales Price Versus Cost of Inventory 233
What Goes into Inventory Cost? 234
Accounting for Inventory in the Perpetual
System 234
Apply and Compare Three Inventory Costing
Methods 239
Inventory Costing Methods 239
The Effects of FIFO and Weighted-Average Cost
on Cost of Goods Sold, Gross Profit, and Ending
Inventory 243
Comparison of the Inventory Methods 244
Explain How Accounting Standards Apply
to Inventory 247
Comparability 247
Lower of Cost and Net Realizable Value 248
Compute and Evaluate Gross Profit and
Inventory Turnover 249
Gross Profit Percentage 249
Inventory Turnover 250
Analyze the Effects of Inventory Errors 252
Inventory Errors 252
Reporting on the Statement of
Cash Flows 253
End-of-Chapter Summary Problem 254
Chapter 6
Property, Plant, and Equipment, and
Intangible Assets 278
SPOTLIGHT | Canadian Tire 278
Measure and Account for the Cost of Property, Plant,
and Equipment 280
Land 280
Buildings, Machinery, and Equipment 281
Land Improvements and Leasehold
Improvements 281
Lump-Sum (or Basket) Purchases of Assets 281
Capital Expenditure Versus an Immediate
Expense 282
Measure and Record Depreciation on Property,
Plant, and Equipment 283
How to Measure Depreciation 284
Depreciation Methods 285
Comparing Depreciation Methods 289
Explain Additional Topics in Accounting for Long-Lived
Tangible Assets 293
Depreciation for Partial Years 293
Changing the Useful Life of a Depreciable
Asset 293
Fully Depreciated Assets 294
Derecognition of Property, Plant, and
Equipment 294
T-Accounts for Analyzing Property, Plant, and
Equipment Transactions 297
Special Issues in Accounting for Property, Plant,
and Equipment 297
Depreciation for Tax Purposes 297
Depreciating Significant Components 298
Impairment 298
Revaluation Model 299
Account for Intangible Assets 300
Accounting for Specific Intangibles 301
Accounting for the Impairment of an Intangible
Asset 303
Accounting for Research and Development
Costs 303
Analyze a Company’s Return on Assets 304
Analyze the Cash Flow Impact of Long-Lived
Asset Transactions 305
End-of-Chapter Summary Problem 308
Chapter 7
Investments and the Time Value
of Money 333
SPOTLIGHT | ONEX Corp. 333
Share Investments: A Review 334
Share Prices 334
Reporting Investments on the Balance Sheet 335
Accounting for Investments in Shares 335
Analyze and Report Non-Strategic Investments 336
What Value of an Investment Is Most
Relevant? 337
Selling a Non-Strategic Investment 339
Analyze and Report Strategic Investments 339
Accounting for Investments Using the Equity
Method 339
Analyze and Report Controlling Interests in other
Corporations Using Consolidated Financial
Statements 342
Why Buy Another Company? 342
Consolidation Accounting 342
The Consolidated Balance Sheet and the Related
Work Sheet 342
Goodwill and Non-Controlling Interests 344
Income of a Consolidated Entity 344
Analyze and Report Long-Term Investments
in Bonds 344
Report Investing Activities on the Statement
of Cash Flows 348
Explain the Impact of the Time Value of Money
on Certain Types of Investments 349
Future Value 349
Present Value 350
Present-Value Tables 351
Present Value of an Annuity 352
Using Present Value to Compute the Fair
Value of Investments 353
Using Microsoft Excel to Calculate Present Value 353
Present Value of an Investment in Bonds 355
End-of-Chapter Summary Problem 357
Chapter 8
Liabilities 375
SPOTLIGHT | WestJet Airlines 375
Explain and Account for Current Liabilities 376
Current Liabilities of Known Amount 376
Current Liabilities That Must Be Estimated 383
Contingent Liabilities 385
Are All Liabilities Reported on the Balance Sheet
or Disclosed in the Notes? 385
Summary of Current Liabilities 385
Explain the Types, Features, and Pricing of Bonds Payable 387
Bonds: An Introduction 387
Account for Bonds Payable 390
Issuing Bonds at Face Value 390
Issuing Bonds at a Discount 391
Calculate and Account for Interest Expense on Bonds Payable 392
Interest Expense on Bonds Issued at a Discount 394
Partial-Period Interest Amounts 395
Issuing Bonds at a Premium 396
The Straight-Line Amortization Method 399
Explain the Advantages and Disadvantages of Financing with Debt Versus Equity 400
Analyze and Evaluate a Company’s
Debt-Paying Ability 402
The Leverage Ratio 403
The Times-Interest-Earned Ratio 404
Describe Other Types of Long-Term Liabilities 405
Term Loans 405
Leases 405
Post-Employment Benefits 406
Report Liabilities on the Balance Sheet 406
End-of-Chapter Summary Problem 410
Chapter 9
Shareholders’ Equity 435
SPOTLIGHT | Canadian Tire 435
Explain the Main Features of a Corporation 436
Controlling and Managing a Corporation 438
Shareholders’ Rights 438
Shareholders’ Equity 439
Classes of Shares 439
Account for the Issuance of Shares 440
Explain Why a Company Repurchases Shares 443
Account for Retained Earnings, Dividends,and Stock Splits 444
Declaring and Paying Dividends 444
Cash Dividends 444
Stock Dividends 445
Dividends on Preferred Shares 446
Stock Splits 447
Summary of the Effects on Assets, Liabilities, and
Shareholders’ Equity 448
Distinguish Between Fair Value and Book Value per Share 448
Fair Value 449
Book Value 449
Evaluate a Company’s Return on Assets and Return on Equity 450
Return on Assets 450
Return on Equity 451
Report Equity Transactions and Events in the Financial Statements 453
Reporting Changes in Shareholders’ Equity 453
Reporting in the Balance Sheet and Notes 454
End-of-Chapter Summary Problem 457
Chapter 10
The Statement of Cash Flows 481
SPOTLIGHT | Canadian Tire 481
Explain the Uses of the Statement of Cash Flows 483
How Healthy Is a Company’s Cash Flow? Telltale Signs of Financial Difficulty 485
Explain and Classify Cash Flows from Operating, Investing, and Financing Activities 486
Classifying Interest and Dividends 487
Two Methods of Determining Cash Flows from Operating Activities 488
Prepare a Statement of Cash Flows Using the Indirect Method of Determining
Cash Flows from Operating Activities 489
Cash Flows from Operating Activities 490
Cash Flows from Investing Activities 497
Cash Flows from Financing Activities 499
Non-Cash Investing and Financing Activities 501
Measuring Cash Adequacy: Free Cash Flow 502
End-of-Chapter Summary Problem 505
Chapter 11
Financial Statement Analysis 553
SPOTLIGHT | Empire Company Ltd. 553
How Is a Company Evaluated? 554
Perform Horizontal Analysis 556
Illustration: Empire Company Limited 556
Trend Percentages 559
Perform Vertical Analysis 560
Illustration: Empire Company Limited 560
Prepare Common-Size Financial Statements 563
Benchmarking 563
Benchmarking Against a Key Competitor 563
Analyze the Statement of Cash Flows 564
Use Ratios to Make Business Decisions 569
Remember to Start at the Beginning: Company and Industry Information 569
Measuring the Ability to Pay Current Liabilities 570
Measuring Turnover and the Cash Conversion Cycle 573
Measuring Leverage: Overall Ability to Pay Debts 576
Measuring Profitability 577
Analyzing Shares as an Investment 581
The Limitations of Ratio Analysis 584
Red Flags in Financial Statement Analysis 584
End-of-Chapter Summary Problem 590
Appendix A
Financial Statements from Canadian Tire Annual Report 2014 623
Appendix B
Summary of Differences Between International Financial Reporting
Standards and Accounting Standards for
Private Enterprises 673
Appendix C
Check Figures 679
GLOSSARY 689
INDEX 697