Introductory Financial Accounting for Business, Second Edition
By Christopher T. Edmonds, Thomas P. Edmonds, Mark A. Edmonds, Jennifer E. Edmonds And Philip R. Olds
Contents:
Chapter 1 An Introduction to Accounting 2
SECTION 1: Collecting and Organizing Information 3
Role of Accounting in Society 4
Using Free Markets to Set Resource Priorities 4
Accounting Provides Information 5
Types of Accounting Information 5
Nonbusiness Resource Usage 6
Careers in Accounting 7
Measurement Rules 7
Reporting Entities 8
Creating an Accounting Equation 9
Types of Transactions 11
Recording Business Events under the Accounting Equation 12
Asset Source Transactions 12
Asset Exchange Transactions 13
Another Asset Source Transaction 14
Asset Use Transactions 14
Summary of Transactions 15
Preparing a Balance Sheet 15
Second Accounting Cycle 16
Interpreting Information Shown in a Balance Sheet 18
Two Views of the Liabilities and Stockholders’ Equity Sections of the Balance Sheet 19
SECTION 2: Reporting Information 20
Preparing an Income Statement 21
Income Statement and the Matching Concept 22
Statement of Changes in Stockholders’ Equity 23
Preparing a Statement of Cash Flows 25
Financial Statement Articulation 28
The Financial Analyst 30
Reporting Order 30
Real-World Financial Reports 30
Annual Report for Target Corporation 32
Special Terms in Real-World Reports 32
A Look Back 33
A Look Forward 34
Self-Study Review Problem 34
Key Terms 37
Questions 37
Section 1 Exercises– Series A 38
Section 2 Exercises– Series A 43
Sections 1 and 2 Problems– Series A 48
Section 1 Exercises– Series B 53
Section 2 Exercises– Series B 58
Sections 1 and 2 Problems– Series B 63
Analyze, Think, Communicate 67
Chapter 2 Accounting for Accruals 72
Chapter 3 Accounting for Deferrals 126
Chapter Opening 72
The Horizontal Financial Statements Model 74
Accounting for Receivables 75
Accounting for Accounts Receivable 76
Other Events 76
Accounting for Payables 77
Summary of Events and Their Effects on the Accounting Equation 78
Preparing Financial Statements 79
Balance Sheet 81
Income Statement 81
Statement of Changes in
Stockholders’ Equity 81
Statement of Cash Flows 81
Comparing Cash Flow from Operating Activities with Net Income 81
The Matching Concept 82
Accounting for Notes Payable 83
Accounting Events for Notes Payable at Maturity Date 87
Causal Factors for Changes in Account Balances 91
The Financial Analyst 92
Corporate Governance 92
Importance of Ethics 92
The Sarbanes–Oxley Act 92
Common Features of Criminal and Ethical Misconduct 93
A Look Back 95
A Look Forward 96
Self-Study Review Problem 96
Key Terms 98
Questions 98
Exercises–Series A 99
Problems–Series A 106
Exercises–Series B 110
Problems–Series B 118
Analyze, Think, Communicate 122
Chapter Opening 126
Alvarado Advisory Services
Illustration for Year 1 127
Accounting for Supplies 127
Accounting for Prepaid Items 129
Accounting for Unearned Revenue 131
Prepare Financial Statements 132
Deferral Accounts on the Balance Sheet 135
Comparing the Income Statement with the Statement of Cash Flows 135
Alvarado Advisory Services Illustration for Year 2 139
Accounting for Depreciation 139
Other Year 2 Events 142
Prepare Financial Statements 142
Effect of Depreciation on Financial Statements 143
The Financial Analyst 145
Assessing the Effective Use of Assets 145
Assessing Debt Risk 145
Real-World Data 146
A Look Back 148
A Look Forward 148
Self-Study Review Problem 149
Key Terms 151
Questions 151
Exercises—Series A 151
Problems—Series A 159
Exercises—Series B 164
Problems—Series B 173
Analyze, Think, Communicate 178
Chapter 4 Accounting for Merchandising Businesses 182
Chapter 5 Accounting for Inventories 238
Chapter Opening 182
Accounting for Inventory Transactions 185
Allocating Inventory Cost between
Asset and Expense Accounts 186
Perpetual Inventory System 186
Effects of Year 1 Events on Financial Statements 186
Financial Statements for Year 1 188
Transportation Cost, Purchase
Returns and Allowances, and
Cash Discounts Related to
Inventory Purchases 189
Effects of the Year 2 Events on
Financial Statements 189
Accounting for Purchase Returns
and Allowances 190
Purchase Discounts 190
The Cost of Financing Inventory 192
Accounting for Transportation Costs 192
FOB Destination 192
Adjustment for Lost, Damaged, or Stolen Inventory 196
Gains, Losses, and a Multistep Income Statement 197
Events Affecting Sales 200
Accounting for Sales Returns and Allowances 201
Accounting for Sales Discounts 202
The Financial Analyst 203
Common Size Financial Statements 203
Ratio Analysis 203
Real-World Data 205
A Look Back 206
A Look Forward 207
Appendix 207
Periodic Inventory System 207
Self-Study Review Problem 208
Key Terms 210
Questions 210
Exercises—Series A 211
Problems—Series A 219
Exercises—Series B 222
Problems—Series B 230
Analyze, Think, Communicate 233
Chapter Opening 238
Inventory Cost Flow
Methods 239
Specific Identification 239
First-In, First-Out (FIFO) 240
Last-In, First-Out (LIFO) 240
Weighted Average 240
Physical Flow 240
Effect of Cost Flow on Financial Statements 240
Multiple Layers with Multiple
Quantities 241
Allocating Cost of Goods Available for Sale 242
Financial Statements 243
Multiple Layers 245
Inventory Cost Flow When Sales and Purchases Occur Intermittently 246
Lower-of-Cost-or-Market Rule 248
Avoiding Fraud in Merchandising Businesses 250
Estimating the Ending Inventory Balance 252
The Financial Analyst 253
Average Number of Days to Sell Inventory 254
Is It a Marketing or an Accounting Decision? 254
The Wallet Company Illustration 254
Real-World Data 255
Effects of Cost Flow on Ratio Analysis 256
A Look Back 256
A Look Forward 256
Self-Study Review Problem 257
Key Terms 258
Questions 258
Exercises—Series A 258
Problems—Series A 264
Exercises—Series B 268
Problems—Series B 273
Analyze, Think, Communicate 277
Chapter 6 Internal Control and Accounting for Cash 280
Chapter Opening 280
Key Features of Internal Control Systems 281
Segregation of Duties 282
Quality of Employees 282
Bonded Employees 283
Required Absences 283
Procedures Manual 283
Authority and Responsibility 283
Prenumbered Documents 283
Physical Control 284
Performance Evaluations 284 Limitations 284
Accounting for Cash 285
Controlling Cash 285
Checking Account Documents 287
Reconciling the Bank Account 289
Determining True Cash Balance 289
Adjustments to the Bank Balance 289
Adjustments to the Book Balance 289
Correction of Errors 290
Certified Checks 290
Illustrating a Bank Reconciliation 291
Updating GSRI’s Accounting Records 292
Cash Short and Over 293
Using Petty Cash Funds 294
Establishing a Petty Cash Fund 294
Disbursing Petty Cash Funds 294
Recognizing Petty Cash Expenses 294
Replenishing the Petty Cash Fund 295
Alternative Approach to Petty Cash Expense Recognition and Replenishment 296
The Financial Analyst 296
Notes to the Financial Statements 296
Management’s Discussion and Analysis 296
Role of the Independent Auditor 296
The Securities and Exchange Commission 299
A Look Back 299
A Look Forward 300
Self-Study Review Problem 300
Key Terms 302
Questions 303
Exercises—Series A 303
Problems—Series A 307
Exercises—Series B 311
Problems—Series B 315
Analyze, Think, Communicate 320
Chapter 7 Accounting for Receivables 324
Chapter 8 Accounting for Long-Term Operational Assets 376
Chapter Opening 324
Estimating Uncollectible Accounts Expense Using the Percent of Revenue Method 326
Accounting Events Affecting the Year 1 Period 326
Analysis of the Year 1 Financial Statements 328
Accounting Events Affecting the Year 2 Period 329
Analysis of the Year 2 Financial Statements 331
Estimating Uncollectible Accounts Expense Using the Percent of Receivables Method 333
Aging Accounts Receivable 334
Matching Revenues and Expenses versus Asset Measurement 335
Recognizing Uncollectible Accounts Expense Using the Direct Write-Off Method 335
Accounting for Notes Receivable 336
Reporting Transactions Related to Notes Receivable 337
Financial Statements 339
Accounting for Credit Card Sales 340
The Financial Analyst 341
Average Number of Days to Collect Accounts Receivable 342
Real-World Data 343
A Look Back 345
A Look Forward 346
Self-Study Review Problem 346
Key Terms 348
Questions 348
Exercises—Series A 349
Problems—Series A 355
Exercises—Series B 360
Problems—Series B 366
Analyze, Think, Communicate 372
Chapter Opening 376
Tangible versus Intangible Assets 378
Tangible Long-Term Assets 378
Intangible Assets 378
Determining the Cost of Long-Term Assets 379
Basket Purchase Allocation 379
Methods of Recognizing Depreciation Expense 380
Dryden Enterprises Illustration 381
Straight-Line Depreciation 381
Financial Statements 383
Double-Declining-Balance Depreciation 384
Effects on the Financial Statements 385
Units-of-Production Depreciation 386
Accounting for the Disposal of Long-Term Operational Assets 388
Comparing the Depreciation Methods 388
Income Tax Considerations 389
Revision of Estimates 391
Revision of Life 391
Revision of Salvage 391
Continuing Expenditures for Plant Assets 391
Costs That Are Expensed 391
Costs That Are Capitalized 392
Natural Resources 394
Intangible Assets 394
Trademarks 395
Patents 395
Copyrights 395
Franchises 396
Goodwill 396
Expense Recognition for Intangible Assets 397
Balance Sheet Presentation 398
The Financial Analyst 398
Effect of Judgment and Estimation 399
A Look Back 400
A Look Forward 401
Self-Study Review Problem 401
Key Terms 402
Questions 403
Exercises—Series A 403
Problems—Series A 411
Exercises—Series B 416
Problems—Series B 423
Analyze, Think, Communicate 428
Chapter 9 Accounting for Current Liabilities and Payroll 432
Chapter Opening 432
Accounting for Notes Payable 434
Accounting for Sales Tax 436
Contingent Liabilities 437
Warranty Obligations 438
Financial Statements 440
Accounting for Payroll 441
Identifying Employees 442
Employees’ Gross Earnings 442
Deductions from Employees’ Gross Earnings 442
Federal Income Taxes 442
Federal Income Tax Documents 443
Social Security and Medicare Taxes (FICA) 444
Voluntary Withholdings (Deductions) 445
Computing Employee Net Pay 446
Employer Payroll Taxes 446
Recording and Reporting Payroll Taxes 447
Employee Fringe Benefits 447
The Financial Analyst 448
Preparing a Classified Balance Sheet 448
Liquidity versus Solvency 449
Real-World Data 450
A Look Back 452
A Look Forward 452
Appendix 452
Accounting for Discount Notes 452
Accounting Events Affecting Year 2 454
Self-Study Review Problem 457
Key Terms 458
Questions 459
Exercises—Series A 459
Problems—Series A 466
Exercises—Series B 470
Problems—Series B 476
Analyze, Think, Communicate 481
Komenton/Shutterstock
Chapter 10 Accounting for Long-Term Debt 484
Chapter Opening 484
Installment Notes Payable 486
Line of Credit 488
Bond Liabilities 490
Advantages of Issuing Bonds 490
Security of Bonds 491
Timing of Maturity 491
Special Features 492
Bond Ratings 492
Restrictive Covenants 492
Bonds Issued at Face Value 492
Financial Statement Effects 493
Financial Statements 494
Amortization Using the Straight- Line Method 495
Bonds Issued at a Discount 495
Bonds Issued at a Premium 500
Bond Redemptions 501
Amortization Using the Effective Interest Rate Method 501
Amortizing Bond Discounts 502
Amortizing Bond Premiums 504
The Financial Analyst 505
Financial Leverage and Tax Advantage of Debt Financing 505
EBIT and Ratio Analysis 506
Times-Interest-Earned Ratio 506
A Look Back 507
A Look Forward 508
Self-Study Review Problem 508
Key Terms 509
Questions 509
Exercises—Series A 510
Problems—Series A 517
Exercises—Series B 521
Problems—Series B 528
Analyze, Think, Communicate 531
Chapter 11 Proprietorships, Partnerships, and Corporations 536
Chapter Opening 536
Forms of Business Organizations 537
Regulation 538
Double Taxation 539
Limited Liability 539
Continuity 539
Transferability of Ownership 540
Management Structure 540
Ability to Raise Capital 540
Appearance of Capital Structure in Financial Statements 540
Accounting for Capital Stock 542
Par Value 542
Stated Value 542
Stock: Authorized, Issued, and Outstanding 543
Other Valuation Terminology 543
Common versus Preferred Stock 543
Common Stock 543
Preferred Stock 543
Other Classes of Stock 545
Accounting for Stock Transactions on the Day of Issue 545
Issuing Par Value Stock 545
Stock Classification 546
Stock Issued at Stated Value 546
Stock Issued with No Par Value 547
Financial Statement Presentation 547
Treasury Stock 547
Cash Dividends 550
Declaration Date 550
Date of Record 550
Payment Date 550
Stock Dividends and Splits 551
Stock Dividends 551
Stock Splits 552
Appropriation of Retained Earnings 552
Financial Statement Presentation 553
The Financial Analyst 554
Stock Investment Decisions 554
Receiving Dividends 554
Increasing the Price of Stock 554
Price-Earnings Ratio 555
Exercising Control through Stock Ownership 556
Business Liquidations 556
Business Liquidations Resulting from Net Losses 556
Business Liquidations Resulting from the Mismanagement of Assets 558
A Look Back 559
A Look Forward 560
Self-Study Review Problem 560
Key Terms 561
Questions 561
Exercises—Series A 562
Problems—Series A 568
Exercises—Series B 572
Problems—Series B 578
Analyze, Think, Communicate 582
Chapter 12 Statement of Cash Flows 586
Chapter Opening 586
An Overview of the Statement of Cash Flows 587
Operating Activities 587
Investing Activities 588
Financing Activities 589
Noncash Investing and Financing Activities 589
Reporting Format for the Statement of Cash Flows 589
Preparing a Statement of Cash Flows 590
Preparing the Operating Activities Section of a Statement of Cash Flows Using the Indirect Method 591
Indirect Method—Reconciliation Approach 593
Indirect Method—Rule-Based Approach 597
Preparing the Operating Activities Section of a Statement of Cash Flows Using the Direct Method 600
Preparing the Investing Activities Section of a Statement of Cash Flows 600
Reconciliation of Investment Securities 601
Reconciliation of Store Fixtures 601
Reconciliation of Land 602
Preparing the Financing Activities Section of a Statement of Cash Flows 603
Reconciliation of Mortgage Payable 603
Reconciliation of Bonds Payable 604
Reconciliation of Common Stock 604
Reconciliation of Retained Earnings 604
Reconciliation of Treasury Stock 605
Preparing the Schedule of Noncash Investing and Financing Activities 607
The Financial Analyst 608
Real-World Data 608
A Look Back 609
A Look Forward 610
Self-Study Review Problem 610
Key Terms 612
Questions 613
Exercises—Series A 613
Problems—Series A 617
Exercises—Series B 623
Problems—Series B 627
Analyze, Think, Communicate 633
Chapter 13 The Double-Entry Accounting System 640
Chapter Opening 640
Debit/Credit Terminology 641
Rules for Debits and Credits 641
Recording Transactions in T-Accounts 642
Asset Source Transactions 642
Asset Exchange Transactions 645
Asset Use Transactions 646
Claims Exchange Transactions 648
Adjusting the Accounts 648
The General Journal 651
Trial Balance and Financial Statements 653
Permanent versus Temporary Accounts 655
Closing Entries 656
Post-Closing Trial Balance 657
Recording Debits and Credits in T-Accounts for Other Events 658
T-Account Entries for the Purchase and Sale of Merchandise Inventory 658
T-Account Entries for Long-Term Assets and Depreciation 660
Journal Entries for Notes Payable and Interest Expense 662
General Ledger and Adjusted Trial Balance 663
Adjusted Trial Balance 663
Financial Statements 663
Closing Entries 665
A Look Back 665
A Look Forward 666
Self-Study Review Problem 666
Key Terms 669
Questions 670
Exercises—Series A 670
Problems—Series A 679
Exercises—Series B 685
Problems—Series B 694
Chapter 14 Financial Statement Analysis
(Available online in Connect) 14-0
Chapter Opening 14-0
Factors in Communicating Useful Information 14-1
The Users 14-1
The Types of Decisions 14-2
Information Analysis 14-2
Methods of Analysis 14-2
Horizontal Analysis 14-2
Vertical Analysis 14-4
Ratio Analysis 14-7
Objectives of Ratio Analysis 14-7
Measures of Debt-Paying Ability 14-1
Liquidity Ratios 14-7
Solvency Ratios 14-10
Measures of Profitability 14-13
Measures of Managerial Effectiveness 14-13
Stock Market Ratios 14-15
Limitations of Financial Statement Analysis 14-18
Different Industries 14-18
Changing Economic Environment 14-18
Accounting Principles 14-19
A Look Back 14-19
Self-Study Review Problem 14-20
Key Terms 14-22
Questions 14-22
Exercises—Series A 14-22
Problems—Series A 14-27
Exercises—Series B 14-33
Problems—Series B 14-38
Analyze, Think, Communicate 14-44
Appendix A Accessing the EDGAR Database through the Internet 702
Appendix B Portion of the Form 10-K for Target Corporation 703
Appendix C Summary of Financial Ratios 711
Appendix D General Ledger Capstone Project 714
Appendix E Capstone Financial Statement Analysis and Annual Report Projects 725
Appendix F Accounting for Investment Securities 732
Appendix G Time Value of Money 741
Appendix H Big Data and Data Visualizations Overview 749
Appendix I Chart of Accounts 753
Glossary 756
Index 765