Financial Accounting, 6th Edition
By Michelle L. Hanlon, Robert P. Magee, Glenn M. Pfeiffer and Thomas R. Dyckman
Contents:
About the Authors iii
Preface v
Chapter 1
Introducing Financial
Accounting 2
Demand for Accounting Information 4
Who Uses Financial Accounting Information? 5
Costs and Benefits of Disclosure 7
Business Activities 7
Planning Activities 8
Investing Activities 8
Financing Activities 9
Operating Activities 1 O
Financial Statements 11
Balance Sheet 12
Income Statement 12
Statement of Stockholders’ Equity 13
Statement of Cash Flows 14
Financial Statement Linkages 15
Information Beyond Financial Statements 16
Mid-Chapter Review 16
Financial Reporting Environment 17
Generally Accepted Accounting Principles 17
Regulation and Oversight 18
Role of the Auditor 19
A Global Perspective 20
Analyzing Financial Statements 21
Profitability Analysis 21
Analysis Objective 21
Credit Risk Analysis 23
Analysis Objective 23
Technology and Accounting 24
Organization of the Book 25
Chapter-End Review 25
Appendix 1 A: Conceptual Framework for Financial
Reporting 26
Objective of Financial Reporting 26
Qualitative Characteristics of Useful Financial
Information 26
Enhancing Qualitative Characteristics 27
The Cost Constraint 28
Additional Underlying Basic Assumptions 28
Summary 28
Contents
Guidance Answers … You Make the Call 30
Key Ratios 30
Key Terms 30
Multiple Choice 31
Questions 31
Mini Exercises 32
Exercises 33
Problems 35
Cases and Projects 37
Solutions to Review Problems 39
Chapter 2
Constructing Financial
Statements 42
Reporting Financial Condition 44
Assets 44
Liabilities and Equity 47
Mid-Chapter Review 1 49
Analyzing and Recording Transactions for the Balance
Sheet 49
Mid-Chapter Review 2 53
Reporting Financial Performance 53
Accrual Accounting for Revenues and Expenses 54
Retained Earnings 56
Analyzing and Recording Transactions for the Income
Statement 56
Reporting on Equity 60
Analyzing and Recording Equity Transactions 60
Statement of Stockholders’ Equity 61
Mid-Chapter Review 3 61
Journalizing and Posting Transactions 62
T-Account 62
Debit and Credit System 62
T-Account with Debits and Credits 63
The Journal Entry 64
Analyze, Journalize, and Post 64
Analyzing Financial Statements 71
Analysis Objective 71
Chapter-End Review 73
Summary 73
Guidance Answers … You Make the Call 74
Key Ratios 74
Key Terms 75
Multiple Choice 75
Questions 76
Mini Exercises 76
Exercises 80
Problems 86
Cases and Projects 92
Solutions to Review Problems 93
Chapter 3
Adjusting Accounts for
Financial Statements 100
Accounting Cycle 102
Analyzing and Recording Transactions 103
Review of Accounting Procedures 103
Review of Recording Transactions 103
Adjusting the Accounts 109
Preparing an Unadjusted Trial Balance 11 0
Types of Adjustments 110
Ethics and Adjusting Entries 117
Mid-Chapter Review 117
Constructing Financial Statements from Adjusted
Accounts 118
Preparing an Adjusted Trial Balance 118
Preparing Financial Statements 118
Closing Temporary Accounts 122
Closing Process 123
Closing Steps Illustrated 123
Preparing a Post-Closing Trial Balance 124
Subsequent Events 125
Summarizing the Accounting Cycle 125
Financial Statement Analysis 125
Using Information on Levels and Flows 125
Chapter-End Review 127
Summary 128
Guidance Answers … You Make the Call 128
Key Terms 129
Multiple Choice 129
Questions 130
Mini Exercises 130
Exercises 133
Problems 136
Cases and Projects 145
Solutions to Review Problems 147
Chapter 4
Reporting and Analyzing
Cash Flows 156
Purpose of the Statement of Cash Flows 158
What Do We Mean by “CASH”? 158
Contents xvii
What Does a Statement of Cash Flows Look Like? 159
Framework for the Statement of Cash Flows 159
Operating Activities 160
Investing Activities 160
Financing Activities 160
Usefulness of Classifications 161
Mid-Chapter Review 1 162
Preparing the Statement of Cash Flows-Operating
Activities 162
Converting Revenues and Expenses to Cash Flows from
Operating Activities 164
Mid-Chapter Review 2 171
Reconciling Net Income and Cash Flow from Operating
Activities 171
Cash Flow from Operating Activities Using the Indirect
Method 173
Mid-Chapter Review 3 174
Preparing the Statement of Cash Flows-Investing and
Financing Activities 174
Cash Flows from Investing Activities 174
Cash Flows from Financing Activities 175
Mid-Chapter Review 4 177
Additional Detail in the Statement of Cash Flows 177
Gains and Losses on Investing and Financing
Activities 179
Noncash Investing and Financing Activities 180
Mid-Chapter Review 5 181
The Effects of Foreign Currencies on the Cash Flow
Statement 181
Supplemental Disclosures 182
Analyzing Financial Statements 182
Interpreting Indirect Method Cash from Operations 182
Analysis Objective 183
Analysis Objective 184
Chapter-End Review 186
Appendix 4A: A Spreadsheet Approach to Preparing the
Statement of Cash Flows 186
Step 1: Classify the balance sheet accounts. 186
Step 2: Compute the changes in the balance sheet
accounts. 187
Step 3: Handle the accounts that have single
classifications. 187
Step 4: Enter the effect of investing/financing transactions
that do not involve cash. 188
Step 5: Analyze the change in retained earnings. 188
Step 6: Analyze the change in plant assets. 188
Step 7: Total the columns. 188
Step 8: Prepare the cash flow statement. 188
Appendix 4A Review 189
Summary 189
Guidance Answers … You Make the Call 190
Key Ratios 191
Key Terms 191
Multiple Choice 191
Questions 192
Mini Exercises 193
Exercises 197
Problems 201
Cases and Projects 209
Solutions to Review Problems 214
Introduction 220
Chapter 5
Analyzing and Interpreting
Financial Statements 218
Assessing the Business Environment 220
Vertical and Horizontal Analysis 221
Mid-Chapter Review 1 223
Return on Investment 225
Return on Equity (ROE) 225
Return on Assets (ROA) 225
Return on Financial Leverage (ROFL) 226
Mid-Chapter Review 2 227
Disaggregating ROA 228
Mid-Chapter Review 3 232
Liquidity and Solvency 233
Liquidity Analysis 235
Solvency Analysis 237
Limitations of Ratio Analysis 239
Chapter-End Review 240
Appendix SA: Analyzing and Interpreting Core
Operating Activities 241
Reporting Operating Activities in the Income
Statement 241
Reporting Operating Activities in the Balance Sheet 242
Disaggregating RNOA 242
Appendix SA Review 243
Appendix 58: Financial Statement Forecasts 243
Step 1. Forecast Sales Revenue 243
Step 2. Forecast Operating Expenses 244
Step 3. Forecast Operating Assets and Liabilities 244
Step 4. Forecast Nonoperating Assets, Liabilities,
Revenues and Expenses 244
Step 5. Forecast Net Income, Dividends, and Retained
Earnings 245
Step 6. Forecast Cash 246
Step 7. Prepare the Cash Flow Statement Forecast 247
Additional Considerations 247
Appendix 58 Review 248
Summary 248
Key Ratios 249
Key Terms 250
Multiple Choice 250
Guidance Answers . . . You Make the Call 251
Questions 251
Mini Exercises 251
Exercises 255
Problems 259
Cases and Projects 265
Solutions to Review Problems 266
Chapter 6
Reporting and Analyzing
Revenues, Receivables, and
Operating Income 270
Reporting Operating Income 272
Revenue Recognition 274
Revenue Recognition Subsequent to Customer
Purchase 276
Mid-Chapter Review 1 279
Mid-Chapter Review 2 283
Reporting Accounts Receivable 283
Determining the Allowance for Uncollectible
Accounts 284
Reporting the Allowance for Uncollectible Accounts 285
Recording Write-offs of Uncollectible Accounts 286
Footnote Disclosures and Interpretations 288
Mid-Chapter Review 3 291
Analyzing Financial Statements 291
Net Operating Profit After Taxes (NO PAT) 292
Analysis Objective 292
Analysis Objective 294
Earnings Management 296
Chapter-End Review 298
Appendix 6A: Reporting Nonrecurring Items 298
Discontinued Operations 299
Exit or Disposal Costs 299
Appendix 6A Review 301
Summary 301
Guidance Answers … You Make the Call 302
Key Ratios 302
Key Terms 303
Multiple Choice 303
Questions 304
Mini Exercises 304
Exercises 308
Problems 314
Cases and Projects 317
Solutions to Review Problems 321
Reporting and Analyzing
Inventory 326
Reporting Operating Expenses 328
Expense Recognition Principles 328
Reporting Inventory Costs in the Financial
Statements 329
Recording Inventory Costs in the Financial
Statements 330
Inventory and the Cost of Acquisition 331
Inventory Reporting by Manufacturing Firms 331
Inventory Costing Methods 332
First-In, First-Out (FIFO) 333
Last-In, First-Out (LIFO) 334
Inventory Costing and Price Changes 336
Average Cost (AC) 336
Lower of Cost or Net Realizable Value 337
Mid-Chapter Review 339
Financial Statement Effects and Disclosure 340
Financial Statement Effects of Inventory Costing 341
Analyzing Financial Statements 345
Analysis Objective 345
Analysis Objective 347
Chapter-End Review 350
Appendix 7A: LIFO Liquidation 351
Analysis Implications 352
Appendix 7 A Review 352
Summary 353
Guidance Answers . . . You Make the Call 354
Key Ratios 354
Key Terms 354
Multiple Choice 355
Questions 356
Mini Exercises 356
Exercises 359
Problems 362
Cases and Projects 365
Solutions to Review Problems 366
Introduction 374
Chapter 8
Reporting and Analyzing LongTerm
Operating Assets 372
Property, Plant, and Equipment (PPE) 374
Determining Costs to Capitalize 375
Depreciation 376
Depreciation Methods 3n
Changes in Accounting Estimates 380
Asset Sales and Impairments 381
Footnote Disclosure 383
Analyzing Financial Statements 384
Analysis Objective 384
Analysis Objective 385
Cash Flow Effects 387
Mid-Chapter Review 387
Intangible Assets 388
Research and Development Costs 388
Patents 389
Copyrights 389
Trademarks 389
Franchise Rights 390
Contents xix
Amortization and Impairment of Identifiable Intangible
Assets 390
Goodwill 392
Footnote Disclosures 392
Analysis Implications 393
Chapter-End Review 394
Summary 394
Guidance Answers . . . You Make the Call 395
Key Ratios 395
Key Terms 395
Multiple Choice 396
Questions 396
Mini Exercises 397
Exercises 399
Problems 402
Cases and Projects 405
Solutions to Review Problems 407
Introduction 414
Chapter 9
Reporting and Analyzing
Lia bi I ities 412
Current Liabilities 415
Accounts Payable 415
Mid-Chapter Review 1 417
Accrued Liabilities 417
Other Current Liabilities 421
Mid-Chapter Review 2 422
Current Nonoperating (Financial} Liabilities 422
Mid-Chapter Review 3 424
– Long-Term Liabilities 424
Installment Loans 425
Bonds 427
Pricing of Bonds 427
Effective Cost of Debt 429
Reporting of Bond Financing 430
Effects of Discount and Premium Amortization 432
The Fair Value Option 434
Effects of Bond Repurchase 435
Financial Statement Footnotes 436
Interest and the Statement of Cash Flows 437
Disclosure of Commitments and Contingencies 438
Analyzing Financial Statements 438
Analysis Objective 439
Debt Ratings and the Cost of Debt 441
Chapter-End Review 443
Summary 443
Guidance Answers … You Make the Call 444
Key Ratios 444
Key Terms 444
Multiple Choice 445
Questions 445
Mini Exercises 446
Exercises 449
Problems 452
Cases and Projects 456
Solutions to Review Problems 458
Introduction 464
Leases 465
Chapter 10
Reporting and Analyzing
Leases, Pensions, Income
Taxes, and Commitments
and Contingencies 462
Lessee Reporting of Leases 466
Footnote Disclosures of Leases 473
Mid-Chapter Review 1 476
Pensions 477
Balance Sheet Effects of Defined Benefit Pension Plans 477
Income Statement Effects of Defined Benefit Pension Plans 479
Footnote Disclosures-Components of Plan Assets and PBO 480
Footnote Disclosures-Components of Pension
Expense 481
Footnote Disclosures and Future Cash Flows 483
Other Post-Employment Benefits 485
Mid-Chapter Review 2 486
Accounting For Income Taxes 486
Book-Tax Differences 487
Revaluation of Deferred Tax Assets and Liabilities due to a
Tax Rate Change 493
Income Tax Disclosures 494
Deferred Taxes in the Cash Flow Statement 497
Computation and Analysis of Taxes 497
Mid-Chapter Review 3 497
Commitments and Contengencies and Other
Disclosures 498
Analyzing Financial Statements 499
Analysis Objective 499
Summary 501
Guidance Answers … You Make The Call 502
Key Ratios 502
Key Terms 502
Multiple Choice 502
Questions 503
Mini Exercises 504
Exercises 506
Problems 512
Cases and Projects 518
Solutions to Review Problems 523
Chapter 11
Reporting and Analyzing
Stockholders’ Equity 528
Introduction 530
Contributed Capital 531
Classes of Stock 531
Accounting for Stock Transactions 533
Mid-Chapter Review 1 538
Earned Capital 538
Cash Dividends 538
Mid-Chapter Review 2 540
Stock Dividends and Splits 540
Stock Transactions and the Cash Flows Statement 542
Mid-Chapter Review 3 543
Comprehensive Income 543
Summary of Stockholders’ Equity 544
Analyzing Financial Statements 544
Analysis Objective 544
Mid-Chapter Review 4 546
Earnings Per Share 546
Computation and Analysis of EPS 547
Chapter-End Review 549
Appendix 11 A: Dilutive Securities: Accounting for convertible
securities, stock options, and restricted
stock 549
Convertible Securities 549
Stock Rights 550
Employee Stock Options 551
Restricted Stock 552
Appendix 11A Review 555
Summary 555
Guidance Answers … You Make the Call 556
Key Ratios 556
Key Terms 557
Multiple Choice 557
Questions 558
Mini Exercises 558
Exercises 563
Problems 568
Cases and Projects 572
Solutions to Review Problems 576
Introduction 582
Chapter 12
Reporting and Analyzing
Financial Investments 580
Fair Value: An Introduction 584
Passive Investments in Debt Securities 584
Acquisition of the Investment 585
Investments Reported at Cost 585
Investments Marked to Fair Value 586
Sale of the Investment 586
Debt Investments Marked to Fair Value 587
Passive Investments in Equity Securities 591
Financial Statement Disclosures 592
Potential for Earnings Management 595
Mid-Chapter Review 1 595
Investments with Significant Influence 596
Accounting for Investments with Significant Influence 596
Equity Method Accounting and Effects on Ratios 598
Financial Statement Disclosures 598
Mid-Chapter Review 2 600
Investments with Control 600
Accounting for Investments with Control 600
Reporting of Acquired Assets and Liabilities 602
Noncontrolling Interest 606
Financial Statement Analysis 608
Chapter-End Review 609
Appendix 12A: Equity Method Mechanics 609
Appendix 128: Consolidation Accounting Mechanics 611
Appendix 12C: Accounting for Investments in
Derivatives 612
Reporting of Derivatives 612
Disclosure of Derivatives 613
Summary 613
Guidance Answers .. . You Make the Call 615
Key Terms 615
Multiple Choice 615
Questions 616
Mini Exercises 616
Exercises 619
Problems 626
Cases and Projects 630
Solutions to Review Problems 632
Appendix A
Compound Interest and the
Time-Value of Money A-1
Future Value Concepts A-2
Present Value Concepts A-3
Present Value of a Single Amount A-3
Present Value of an Annuity A-4
Installment Loans A-5
Bond Valuation A-5
Calculating Bond Yields A-6
Future Value of Annuities A-6
Using Excel to Compute Time Value A-7
Future Value Calculations A-7
Present Value Calculations A-10
Key Terms A-17
Exercises A-17
Appendix B
Data Analytics and Blockchain
Technology 8-1
Data Analytics B-2
Contents xxi
Data Analytics in the Accounting Profession B-2
Blockchain Technology B3
Summary B-5
Key Terms B-5
Multiple Choice B-5
Exercises B-4
Index 1-1