HORNGREN’S Financial & Managerial Accounting, The Financial Chapters, Seventh Edition
By Tracie Miller-Nobles and Brenda Mattison
Contents:
CHAPTER 1
Accounting and the Business Environment 19
Why Is Accounting Important? 20
Decision Makers: The Users of Accounting Information 21
Accounting Matters 22
What Are the Organizations and Rules that Govern Accounting? 24
Governing Organizations 24
Generally Accepted Accounting Principles 24
The Economic Entity Assumption 25
The Cost Principle 28
The Going Concern Assumption 28
The Monetary Unit Assumption 28
International Financial Reporting Standards 28
Ethics in Accounting and Business 29
What Is the Accounting Equation? 30
Assets 30
Liabilities 30
Equity 30
How Do You Analyze a Transaction? 31
Transaction Analysis for Smart Touch Learning 32
How Do You Prepare Financial Statements? 37
Income Statement 38
Statement of Retained Earnings 38
Balance Sheet 39
Statement of Cash Flows 40
How Do You Use Financial Statements to Evaluate Business Performance? 42
Kohl’s Corporation 42
Return on Assets (ROA) 42
Review 44
Assess Your Progress 50
Critical Thinking 70
CHAPTER 2
Recording Business Transactions 75
What Is an Account? 76
Assets 76
Liabilities 76
Equity 78
Chart of Accounts 78
Ledger 79
What Is Double-Entry Accounting? 80
The T-Account 80
Increases and Decreases in the Accounts 80
Expanding the Rules of Debit and Credit 81
The Normal Balance of an Account 81
Determining the Balance of a T-Account 83
How Do You Record Transactions? 83
Source Documents—The Origin of the Transactions 83
Journalizing and Posting Transactions 84
The Ledger Accounts After Posting 94
The Four-Column Account: An Alternative to the T-Account 96
What Is the Trial Balance? 98
Preparing Financial Statements from the Trial Balance 98
Correcting Trial Balance Errors 99
How Do You Use the Debt Ratio to Evaluate Business Performance? 100
Review 102
Assess Your Progress 109
Critical Thinking 132
CHAPTER 3
The Adjusting Process 137
What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? 138
What Concepts and Principles Apply to Accrual Basis Accounting? 140
The Time Period Concept 140
The Revenue Recognition Principle 140
The Matching Principle 141
What Are Adjusting Entries, and How Do We Record Them? 142
Deferred Expenses 143
Deferred Revenues 149
Accrued Expenses 150
Accrued Revenues 154
What Is the Purpose of the Adjusted Trial Balance, and How Do We Prepare It? 158
What Is the Impact of Adjusting Entries on the Financial Statements? 160
How Could a Worksheet Help in Preparing Adjusting
Entries and the Adjusted Trial Balance? 162
APPENDIX 3A: Alternative Treatment of Recording Deferred Expenses and Deferred Revenues 164
What Is an Alternative Treatment of Recording Deferred Expenses and Deferred Revenues? 164
Deferred Expenses 164
Deferred Revenues 166
Review 167
Assess Your Progress 174
Critical Thinking 197
CHAPTER 4
Completing the Accounting Cycle 203
How Do We Prepare Financial Statements? 204
Relationships Among the Financial Statements 205
Classified Balance Sheet 206
How Could a Worksheet Help in Preparing Financial Statements? 209
Section 5—Income Statement 209
Section 6—Balance Sheet 209
Section 7—Determine Net Income or Net Loss 210
What Is the Closing Process, and How Do We Close the Accounts? 211
Closing Temporary Accounts—Net Income for the Period 212
Closing Temporary Accounts—Net Loss for the Period 215
Closing Temporary Accounts—Summary 215
How Do We Prepare a Post-Closing Trial Balance? 218
What Is the Accounting Cycle? 219
How Do We Use the Current Ratio to Evaluate Business Performance? 221
APPENDIX 4A: Reversing Entries: An Optional Step 223
What Are Reversing Entries? 223
Accounting for Accrued Expenses 223
Accounting Without a Reversing Entry 224
Accounting with a Reversing Entry 224
Review 226
Assess Your Progress 234
Critical Thinking 259
Comprehensive Problem F:4-1 for Chapters F:1–F:4 260
Comprehensive Problem F:4-2 for Chapters F:1–F:4 262
CHAPTER 5
Merchandising Operations 265
What Are Merchandising Operations? 266
The Operating Cycle of a Merchandising Business 266
Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems 268
How Are Purchases of Merchandise Inventory Recorded in a Perpetual Inventory System? 269
Purchase of Merchandise Inventory 270
Purchase Returns and Allowances 271
Purchase Discounts 272
Transportation Costs 274
Net Cost of Inventory Purchased 275
How Are Sales of Merchandise Inventory Recorded in a Perpetual Inventory System? 276
Cash and Credit Card Sales 276
Sales on Account, No Discount 277
Sales Returns and Allowances 278
Sales on Account, with Discount 280
Transportation Costs—Freight Out 282
What Are the Adjusting and Closing Entries for a Merchandiser? 282
Adjusting Merchandise Inventory for Inventory Shrinkage 283
Adjusting Sales Revenue and Merchandise Inventory for Estimated Sales Returns 283
Closing the Accounts of a Merchandiser 284
How Are a Merchandiser’s Financial Statements Prepared? 287
Income Statement 287
Multi-Step Income Statement 288
Statement of Retained Earnings and the Balance Sheet 290
How Do We Use the Gross Profit Percentage to Evaluate Business Performance? 291
APPENDIX 5A: Accounting for Multiple Performance Obligations 292
How Are Multiple Performance Obligations Recorded in a Perpetual Inventory System? 292
APPENDIX 5B: Accounting for Merchandise Inventory in a Periodic Inventory System 294
How Are Merchandise Inventory Transactions Recorded in a Periodic Inventory System? 294
Purchases of Merchandise Inventory—Periodic Inventory System 294
Purchase Returns and Allowances—Periodic Inventory System 294
Purchase Discounts—Periodic Inventory System 295
Transportation Costs—Periodic Inventory System 296
Net Cost of Inventory Purchased 296
Sale of Merchandise Inventory—Periodic Inventory System 296
Preparing Financial Statements—Periodic Inventory System 297
Adjusting and Closing Entries—Periodic Inventory System 297
Review 301
Assess Your Progress 314
Critical Thinking 339
CHAPTER 6
Merchandise Inventory 345
What Are the Accounting Principles and Controls that Relate to Merchandise Inventory? 346
Accounting Principles 346
Control Over Merchandise Inventory 347
How Are Merchandise Inventory Costs Determined Under
a Perpetual Inventory System? 349
Specific Identification Method 350
First-In, First-Out (FIFO) Method 351
Last-In, First-Out (LIFO) Method 353
Weighted-Average Method 355
How Are Financial Statements Affected by Using Different Inventory Costing Methods? 358
Income Statement 358
Balance Sheet 359
How Is Merchandise Inventory Valued When Using the
Lower-of-Cost-or-Market Rule? 361
Computing the Lower-of-Cost-or-Market 361
Recording the Adjusting Journal Entry to Adjust Merchandise Inventory 361
What Are the Effects of Merchandise Inventory Errors on the Financial Statements? 363
How Do We Use Inventory Turnover and Days’
Sales in Inventory to Evaluate Business
Performance? 365
Inventory Turnover 366
Days’ Sales in Inventory 366
Evaluating Kohl’s Corporation 366
APPENDIX 6A: Merchandise Inventory Costs Under a
Periodic Inventory System 367
How Are Merchandise Inventory Costs Determined Under
a Periodic Inventory System? 367
First-In, First Out (FIFO) Method 369
Last-In, First-Out (LIFO) Method 370
Weighted-Average Method 370
Review 371
Assess Your Progress 378
Critical Thinking 393
Comprehensive Problem for Chapters F:5 and F:6 395
CHAPTER 7
Internal Control and Cash 401
What Is Internal Control, and How Can It Be Used to
Protect a Company’s Assets? 402
Internal Control and the Sarbanes-Oxley Act 402
The Components of Internal Control 403
Internal Control Procedures 404
The Limitations of Internal Control—Costs and Benefits 406
What Are the Internal Control Procedures with Respect to
Cash Receipts? 407
Cash Receipts Over the Counter 408
Cash Receipts by Mail 408
What Are the Internal Control Procedures with Respect to
Cash Payments? 409
Controls Over Payment by Check 409
What Are the Internal Control Procedures Needed for
Petty Cash and How Are Petty Cash Transactions
Recorded? 411
Setting Up the Petty Cash Fund 412
Replenishing the Petty Cash Fund 412
Changing the Amount of the Petty Cash Fund 414
What Are the Internal Controls Needed with Debit and
Credit Card Sales and How Are These Types of Sales
Recorded? 414
How Can the Bank Account Be Used as a Control
Device? 417
Signature Card 417
Deposit Ticket 417
Check 417
Bank Statement 418
Electronic Funds Transfers 418
Bank Reconciliation 419
Examining a Bank Reconciliation 422
Journalizing Transactions from the Bank Reconciliation 423
How Can the Cash Ratio Be Used to Evaluate Business Performance? 424
Review 425
Assess Your Progress 433
Critical Thinking 449
CHAPTER 8
Receivables 455
What Are Common Types of Receivables, and How Are Credit Sales Recorded? 456
Types of Receivables 456
Exercising Internal Control Over Receivables 457
Recording Sales on Credit 457
Decreasing Collection Time and Credit Risk 458
How Are Uncollectibles Accounted for When Using the
Direct Write-Off Method? 460
Recording and Writing Off Uncollectible Accounts—Direct Write-off Method 460
Recovery of Accounts Previously Written Off—Direct Write-off Method 460
Limitations of the Direct Write-off Method 461
How Are Uncollectibles Accounted for When Using the Allowance Method? 462
Recording Bad Debts Expense—Allowance Method 462
Writing Off Uncollectible Accounts—Allowance Method 463
Recovery of Accounts Previously Written Off—Allowance Method 464
Comparison of Recording Transactions for Uncollectibles Using the
Direct Write-Off Method versus the Allowance Method 465
Estimating and Recording Bad Debts Expense—Allowance Method 466
Comparison of Income Statement Approach versus Balance Sheet Approach 471
How Are Notes Receivable Accounted for? 472
Identifying Maturity Date 473
Computing Interest on a Note 474
Accruing Interest Revenue and Recording Honored Notes Receivable 475
Recording Dishonored Notes Receivable 477
How Do We Use the Acid-Test Ratio, Accounts Receivable
Turnover Ratio, and Days’ Sales in Receivables to
Evaluate Business Performance? 478
Acid-Test (or Quick) Ratio 479
Accounts Receivable Turnover Ratio 480
Days’ Sales in Receivables 480
Review 481
Assess Your Progress 488
Critical Thinking 506
CHAPTER 9
Plant Assets, Natural Resources, and Intangibles 511
How Does a Business Measure the Cost of Property, Plant, and Equipment? 512
Land and Land Improvements 513
Buildings 514
Machinery and Equipment 514
Furniture and Fixtures 515
Lump-Sum Purchase 515
Capital and Revenue Expenditures 516
What Is Depreciation, and How Is It Computed? 518
Factors in Computing Depreciation 518
Depreciation Methods 519
Partial-Year Depreciation 524
Changing Estimates of a Depreciable Asset 524
Reporting Property, Plant, and Equipment 525
How Are Disposals of Plant Assets Recorded? 526
Discarding Plant Assets 527
Selling Plant Assets 529
How Are Natural Resources Accounted for? 534
How Are Intangible Assets Accounted for? 535
Accounting for Intangibles 535
Specific Intangibles 535
Reporting of Intangible Assets 538
How Do We Use the Asset Turnover Ratio to Evaluate Business Performance? 539
APPENDIX 9A: Exchanging Plant Assets 540
How Are Exchanges of Plant Assets Accounted for? 540
Exchange of Plant Assets–Gain Situation 540
Exchange of Plant Assets–Loss Situation 541
Review 542
Assess Your Progress 548
Critical Thinking 561
Comprehensive Problem for Chapters F:7, F:8, and F:9 562
CHAPTER 10
Investments 567
Why Do Companies Invest? 568
Debt Securities Versus Equity Securities 568
Reasons to Invest 568
Classification and Reporting of Investments 569
How Are Investments in Debt Securities Accounted for? 571
Purchase of Debt Securities 571
Interest Revenue 572
Disposition at Maturity 572
Other Accounting Issues for Debt Investments 572
How Are Investments in Equity Securities Accounted for? 573
Equity Securities with No Significant Influence (Fair Value Method) 573
Equity Securities with Significant Influence (Equity Method) 574
Equity Securities with Controlling Interest (Consolidation Method) 576
How Are Debt and Equity Securities Reported? 576
Trading Debt Investments (Fair Value Method) 576
Available-for-Sale Debt Investments (Fair Value Method) 578
Held-to-Maturity Debt Investments (Amortized Cost) 580
Equity Investments with No Significant Influence (Fair Value Method) 580
How Do We Use the Rate of Return on Total Assets to Evaluate Business Performance? 582
Review 583
Assess Your Progress 588
Critical Thinking 596
CHAPTER 11
Current Liabilities and Payroll 601
How Are Current Liabilities of Known Amounts Accounted for? 602
Accounts Payable 602
Sales Tax Payable 603
Income Tax Payable 603
Unearned Revenue 604
Short-term Notes Payable 604
Current Portion of Long-term Notes Payable 606
How Do Companies Account for and Record Payroll? 606
Gross Pay and Net (Take-Home) Pay 607
Employee Payroll Withholding Deductions 607
Payroll Register 610
Journalizing Employee Payroll 611
Employer Payroll Taxes 611
Payment of Employer Payroll Taxes and Employees’ Withholdings 613
Internal Control Over Payroll 613
How Are Current Liabilities That Must Be Estimated Accounted for? 614
Bonus Plans 614
Vacation, Health, and Pension Benefits 615
Warranties 615
How Are Contingent Liabilities Accounted for? 617
Remote Contingent Liability 618
Reasonably Possible Contingent Liability 618
Probable Contingent Liability 618
How Do We Use the Times-Interest-Earned Ratio to
Evaluate Business Performance? 619
Review 620
Assess Your Progress 626
Critical Thinking 639
CHAPTER 12
Long-Term Liabilities 643
How Are Long-Term Notes Payable and Mortgages
Payable Accounted for? 644
Long-term Notes Payable 644
Mortgages Payable 645
What Are Bonds? 647
Types of Bonds 648
Bond Prices 649
Present Value and Future Value 649
Bond Interest Rates 650
Issuing Bonds Versus Issuing Stock 651
How Are Bonds Payable Accounted for Using the Straight-
Line Amortization Method? 652
Issuing Bonds Payable at Face Value 652
Issuing Bonds Payable at a Discount 653
Issuing Bonds Payable at a Premium 656
How Is the Retirement of Bonds Payable Accounted for? 658
Retirement of Bonds at Maturity 658
Retirement of Bonds Before Maturity 659
How Are Liabilities Reported on the Balance Sheet? 660
How Do We Use the Debt to Equity Ratio to Evaluate Business Performance? 662
APPENDIX 12A: The Time Value of Money 663
What Is the Time Value of Money, and How Are Present
Value and Future Value Calculated? 663
Time Value of Money Concepts 664
Present Value of a Lump Sum 666
Present Value of an Annuity 666
Present Value of Bonds Payable 667
Future Value of a Lump Sum 668
Future Value of an Annuity 669
APPENDIX 12B: Effective-Interest Method of Amortization 670
How Are Bonds Payable Accounted for Using the Effective- Interest Amortization Method? 670
Effective-Interest Amortization for a Bond Discount 670
Effective-Interest Amortization of a Bond Premium 671
Review 673
Assess Your Progress 678
Critical Thinking 692
CHAPTER 13
Stockholders’ Equity 695
What Is a Corporation? 696
Characteristics of Corporations 696
Stockholders’ Equity Basics 697
How Is the Issuance of Stock Accounted for? 700
Issuing Common Stock at Par Value 701
Issuing Common Stock at a Premium 701
Issuing No-Par Common Stock 702
Issuing Stated Value Common Stock 703
Issuing Common Stock for Assets Other Than Cash 703
Issuing Preferred Stock 704
How Is Treasury Stock Accounted for? 705
Treasury Stock Basics 705
Purchase of Treasury Stock 705
Sale of Treasury Stock 705
Retirement of Stock 709
How Are Dividends and Stock Splits Accounted for? 709
Cash Dividends 709
Stock Dividends 712
Stock Splits 716
Cash Dividends, Stock Dividends, and Stock Splits Compared 716
How Is the Complete Corporate Income Statement Prepared? 717
Continuing Operations 717
Discontinued Operations 718
Earnings per Share 718
How Is Equity Reported for a Corporation? 719
Statement of Retained Earnings 719
Statement of Stockholders’ Equity 720
How Do We Use Stockholders’ Equity Ratios to Evaluate Business Performance? 721
Earnings per Share 721
Price/Earnings Ratio 722
Rate of Return on Common Stockholders’ Equity 722
Review 723
Assess Your Progress 731
Critical Thinking 749
Comprehensive Problem for Chapters F:11, F:12, and F:13 750
CHAPTER 14
The Statement of Cash Flows 757
What Is the Statement of Cash Flows? 758
Purpose of the Statement of Cash Flows 758
Classification of Cash Flows 759
Two Formats for Operating Activities 761
How Is the Statement of Cash Flows Prepared Using the Indirect Method? 761
Cash Flows from Operating Activities 764
Cash Flows from Investing Activities 768
Cash Flows from Financing Activities 770
Net Change in Cash and Cash Balances 774
Non-cash Investing and Financing Activities 774
How Do We Use Free Cash Flow to Evaluate Business Performance? 776
APPENDIX 14A: Preparing the Statement of Cash Flows by the Direct Method 777
How Is the Statement of Cash Flows Prepared Using the Direct Method? 777
Cash Flows from Operating Activities 778
APPENDIX 14B: Preparing the Statement of Cash
Flows Using the Indirect Method and a Spreadsheet 784
How Is the Statement of Cash Flows Prepared Using the
Indirect Method and a Spreadsheet? 784
Review 788
Assess Your Progress 794
Critical Thinking 820
CHAPTER 15
Financial Statement Analysis 825
How Are Financial Statements Used to Analyze a Business? 826
Purpose of Analysis 826
Tools of Analysis 826
Corporate Financial Reports 826
How Do We Use Horizontal Analysis to Analyze a Business? 828
Horizontal Analysis of the Income Statement 829
Horizontal Analysis of the Balance Sheet 830
Trend Analysis 831
How Do We Use Vertical Analysis to Analyze a Business? 832
Vertical Analysis of the Income Statement 833
Vertical Analysis of the Balance Sheet 834
Common-Size Statements 835
Benchmarking 836
How Do We Use Ratios to Analyze a Business? 837
Evaluating the Ability to Pay Current Liabilities 838
Evaluating the Ability to Sell Merchandise Inventory and Collect Receivables 841
Evaluating the Ability to Pay Long-term Debt 843
Evaluating Profitability 845
Evaluating Stock as an Investment 848
Red Flags in Financial Statement Analyses 850
Review 852
Assess Your Progress 860
Critical Thinking 879
APPENDIX A—Present Value Tables and Future Value Tables 883
APPENDIX B—Accounting Information Systems 887
GLOSSARY 941
INDEX 949
PHOTO CREDITS 963