SUBJECT INDEX
A
Accelerated-depreciation methods, 477
Accounting information system the account, 111–116
accounting transactions and, 102–110
recording process steps and, 116–128
Accounting principle changes, 694
Accounting transactions, 102–110
accuracy and, 109
balancing accounting equation, 103
expanded accounting equation, 104
investment of cash by stockholders, 104–105
new employee hiring, 108
note issued in exchange for cash, 105
payment of cash for employee salaries, 108–109
payment of dividends, 108
payment of rent, 107
purchase of insurance policy for cash, 107
purchase of office equipment for cash, 105
purchase of supplies on account, 108
receipt of cash in advance from customer, 105–106
services performed for cash, 106–107
basic form of, 111
debit and credit procedures and, 112–114
journalizing and, 118
Accounts payable
operating activities and, 11
statement of cash flows and, 638
Accounts receivable, 106–107, 399–407
aging the accounts receivable, 405
allowance method for uncollectible accounts, 402
bad debt expense and, 401
direct write-off method and, 401–402
estimating the allowance and, 404
percentage-of-receivables basis, 404
recording estimated uncollectibles and, 402–403
recording the write-off on an uncollectible account, 403
recovery of an uncollectible account, 404
statement of cash flows and, 637
Accrual accounting concepts
accounting cycle summary and, 191–192
accrual vs. cash basis of accounting, 166–167
adjusted trial balance preparation, 183
automated world and, 195
basics of adjusting entries and, 167–182
expense recognition principle, 165
financial statement preparation, 184–185
international insight and, 167
quality of earnings and, 185–187
revenue recognition principle and, 164–165
Accrual-based ratios, 645
categories and, 168
Accrued expenses
adjusting entries for, 177–180
Accumulated depreciation, 51
Accuracy, importance of, 109
Actual losses, direct write-off method and, 401
Additional cost of borrowing, 518
Additions and improvements, 460
Adjusted cash balance, 356
Adjusted trial balance, 183–185
basic relationships summary, 181–182
categories of, 168
trial balance and, 168
Administrative expenses, 10
Advance receipt of cash from customer, 123
Aging schedule, 414
Aging the accounts receivable, 405
Allowances
for doubtful accounts, 402–405
periodic inventory system and, 254–255
sales and, 255
for uncollectible accounts, 402
Alternative accounting methods, quality of earnings and, 706
Amortization
bonds at discount and, 518
effective-interest method and, 532–536
intangible assets and, 468–469
quality of earnings and, 706
straight-line method and, 530–532
Amount due at maturity, interest-bearing notes and, 410
Annual accounting period, 191
Annual rate, depreciation and, 455
Annually recurring expenditures, equipment and, 451
Annuity
Assets. See also Plant assets
debit and credit procedures for, 112–113
reporting, leasing and, 452
Authorized stock, 576
Automated world, adjusting entries in, 195
Available-for-sale securities, 695, E8, E9–E10
Average collection period, 415–416, 704, 715
B
Background checks, 344
Bad debt expense, 401, 402–405
Bad information, bad loans and, 413
adjusted trial balance and, 185
cost flow methods and, 296
horizontal analysis of, 699
inventory errors and, 309
long-term investments and, E11
short term investments and, E10–E11
stockholders’ equity and, 591–592
user communication and, 11
vertical analysis of, 701
Bank line of credit, 523
bank memoranda and, 355
bank service charges and, 357
book error and, 356
collection of note receivable and, 356
deposits in transit and, 355
electronic funds transfer system and, 357
NSF check and, 357
outstanding checks and, 355
Basic accounting equation, 14
Benford's Law, 703
Board of directors, 572
Bond financing, advantages over common stock and, 595–596
Bonding employees, handling cash and, 344
accounting for redemptions and, 520–521
additional cost of borrowing and, 518
amortizing the discount and, 518
amortizing the premium and, 519–520
bond issues accounting, 515–520
carrying (or book) value and, 518, 521
contractual interest rate and, 513, 516–517
convertible and callable bonds, 512–513
discount or premium on bonds, 516–517
discounting and, 514
effective-interest amortization method and, 532–536
face value and, 513
interest expense and, 518
interest payable as a current liability and, 516
interest payments and, 514
issuing at a discount, 517–518
issuing at face value, 516
issuing procedures and, 513
market interest rates and, 514, 516–517
market price determination and, 513–515
maturity date and, 513
principal and, 514
recording acquisition of, E2–E3
recording bond interest, E3
recording sale of, E3
redeeming at maturity, 520
redeeming before maturity, 521
secured and unsecured bonds, 512
straight-line amortization method, 530–532
zero-coupon bonds, 517
Bonds payable
debt securities and, 9
statement of cash flows (direct method) and, 655
statement of cash flows (indirect method) and, 640–641
Book error, bank reconciliation and, 356
Book (carrying) value
declining-balance method and, 476
Borrowing, additional cost of, 518
Buffett, Warren, 689
construction of, 450
depreciation and, 453
purchasing of, 450
statement of cash flows (direct method) and, 655
statement of cash flows (indirect method) and, 640
investing activities, 10
Business careers, 7
Business documents, recording sales and, 238
Business organizations forms, 4–5
Business size, internal controls and, 346
Buying or leasing, 452
By-laws, corporations and, 574
C
Calculators. See Financial calculators
Canceled checks, 352
Capital acquisition, corporations and, 571
Capital lease, 452
Capital stock, 53
Capitalized expenditures, improper, 449
Captive finance companies, 417
Carrying value. See Book (carrying) value
Cash
adequacy, cash dividends and, 584
advance receipt from customer, 105–106
handling, bonding employees and, 344
increases and decreases in, 112
insurance policy purchase with, 124
investing activities and, 10
investment by stockholders, 104–105, 121
(net) realizable value, 409
note issued in exchange for, 105
payment of employee salaries with, 108–109, 126
payment of rent with, 124
purchase of insurance policy for, 107
purchase of office equipment for, 105
receipt in advance from customer, 123
services performed for, 106–107, 123
Cash-based ratios, 645
Cash basis of accounting, accrual basis compared, 166–167
cash disbursements controls, 350–351
cash receipt controls, 347–349
mail receipts, 349
over-the-counter receipts, 347–349
petty cash fund, 351
voucher system controls, 350–351
Cash debt coverage, 646, 704, 717
Cash disbursements controls, 350–351
check register and, 351
fraudulent disbursements and, 351
internal control principles and, 350
petty cash fund and, 351
voucher system controls and, 350–351
adequate cash and, 584
declaration date and, 585
declared dividends and, 584
entries for, 585
maintaining at current levels, 61
payment date and, 585
payout ratio and, 723
record date and, 585
retained earnings and, 584
Cash flows, 15–16. See also Statement of cash flows
ability to generate future, 626–627
classification of, 627
financing activities and, 627
inventory costing and, 296
negative cash and, 631
operating activities and, 627
product life cycle and, 630–632
Cash fund, depreciation and, 454
Cash payments
for income tax, 654
for interest, 654
major classes of, 651
operating expenses and, 653–654
statement of cash flows and, 652–653
Cash realizable value, 402–403
Cash receipts
cash over and short, 349
internal control principles, 347
mail receipts and, 349
major classes of, 651
over-the-counter receipts, 347–349
statement of cash flows and, 651–652
Cash register documents, 238
cash equivalents and, 359
restricted cash and, 359
Cash sales, credit cards and, 419
Certified public accountant (CPA), 20
Change in accounting principle, 694
Channel stuffing, 707
Chart of accounts, 120
Check register, 351
Checks, outstanding, 355
Chief executive officer (CEO), 572
China, accrual accounting and, 167
Classified balance sheet, 48–53
current liabilities and, 52
debt to assets ratio and, 59–60
intangible assets and, 51
long-term investments and, 50
long-term liabilities and, 53
property, plant, and equipment and, 51
stockholder's equity and, 53
working capital and, 58
Closing the books
closing entries journalized, 189
closing process, 189
post-closing trial balance and, 189–190
preparing closing entries, 188–189
temporary vs. permanent accounts and, 188
Collection agent, 508
Collection monitoring, receivables and, 413–414
Collusion, 346
Combined statement of income and comprehensive income, 695
Commercial paper, 359
Common stock
accounting for issues of, 577–578
bond financing advantages over, 595–596
debit and credit procedures and, 113
earnings per share and, 722
financing activities and, 9
statement of cash flows (direct method) and, 655
statement of cash flows (indirect method) and, 641
stockholder rights and, 574
stockholders’ equity and, 53
Company evaluation, statement of cash flows and, 642–646
Company officers, 6
horizontal analysis and, 698–700
industry averages and, 697
intercompany basis and, 697
intracompany basis and, 697
vertical analysis and, 700–702
Comparative balance sheets, statement of cash flows and, 632
Complete income statement, 696
Composition of current assets, 59
Compound interest, D2
Compound interest table, D3–D4
Compounding periods, financial calculators and, D15
Comprehensive income, 695–696, E12
complete income statement and, 696
components of, 691
illustration of, 695
Concentration of credit risk, 414
Confirmatory value, 64
Consigned goods, 287
Consolidated balance sheets, B2, C2
Consolidated cash flow statement, C3
Consolidated financial statements, stock holdings in another entity and, E7
Consolidated income statement, C1
Consolidated statement of changes in equity, C4
Consolidated statement of comprehensive income, C1
Consolidated statements of cash flows, B3
Consolidated statements of income, B1
Consolidated statements of stockholder's equity, B4
Construction, buildings and, 450
Contingencies, 526
Continuous life, corporations and, 571
Contra stockholders’ equity account, 580
Contractual interest rate, bonds and, 513, 516–517
Controller, 572
Controlling interest, E7
Convention of conservatism, 298
Copyrights, 470
decline phase, 632
introductory phase, 630
ability to acquire capital and, 571
additional taxes and, 573
advantages and disadvantages of, 573
classification by ownership, 570
classification by purpose, 570
common classifications of, 570
continuous life and, 571
controller and, 572
earnings from investment income and, E2
establishing by-laws and, 574
excess cash and, E1
formation of, 574
government regulations and, 572–573
limited liability of stockholders and, 571
management and, 572
obtaining license and, 574
organization chart, 572
separate legal existence and, 571
social responsibility and, 573
stock issue considerations and, 575–579
stockholder rights and, 574–575
strategic reasons for investment, E2
transferable ownership rights and, 571
treasurer and, 572
Correct cash balance, 356
Cost constraint, 66
Cost factors, depreciation and, 454
average-cost method and, 293
balance sheet effects and, 296
first-in, first-out method and, 290–291
income statement effects and, 294–295
last-in, first-out (LIFO) method and, 291–293
tax effects and, 296
Cost method, stock holdings of less than 20% and, E4–E5
Cost of goods available for sale, 290
Cost of goods sold, 10, 230, 243, 246–247
Covenant-lite debt, 527
Credit card sales, 417, 418–419
Credit extension, receivables and, 412–413
Credit risk, concentration of, 414
Credit terms, 236
Current cash debt coverage, 645, 704, 714
Current income statement, 632
characteristics of, 506
current maturities of long-term debt, 509
examples of, 52
interest payable as, 516
notes payable, 507
payroll and payroll taxes payable, 510–511
statement of cash flows and, 638
unearned revenues and, 508–509
Current maturities of long-term debt, 509
Current-period sales, 698
Current ratio, 58–59, 523, 645, 704, 714
Customers
receipt of cash in advance from, 105–106
D
Days in inventory, 399, 704, 715
Debit and credit procedures, 112–114
for assets and liabilities, 112–113
for balance sheet accounts, 116
for stockholders’ equity, 113–114
stockholders’ equity relationships and, 115
summary of, 116
Debit balance
allowance account and, 406
definition of, 111
Debt, economic downturns and, 524
Debt covenants, 527
Debt investments
recording acquisitions for bonds, E2–E3
recording bond interest, E3
recording sale of bonds, E3
Debt masking, 525
Debt to assets ratio, 59–60, 704, 717
Debt to equity ratio, 717
Debt vs. equity decisions, 595–596
Declaration date, cash dividends and, 585
Declared dividends, 584
Decline phase, corporate life cycle and, 632
Declining-balance method, depreciation and, 476–477
Declining book value, 476
Declining-value method, depreciation and, 456
Defaulted notes, 411
categories of, 168
unearned revenues and, 173–174
Delivery trucks, 451
Deposits in transit, 355
accelerated-depreciation methods, 477
adjusting entries for, 171–172
as allocation concept, 171
annual rate and, 455
cash fund and, 454
cost factors and, 454
declining-balance method and, 476–477
declining-value method and, 456
depreciable cost, 455
depreciation schedule, 455
disclosure in notes and, 458–459
double-declining-balance method and, 456, 476
fair value and, 453
income taxes and, 458
land and, 453
patterns of, 458
plant asset classes and, 453
property, plant, and equipment and, 51
proration and, 456
quality of earnings and, 706
revising periodic depreciation, 459–460
salvage value and, 454
statement of cash flows and, 635–636, 653–654
statement presentation and, 171–172
straight-line method and, 454–456
units-of-activity method and, 456–457, 477–478
useful life and, 454
Developing countries, notes receivable and, 409
Direct method (statement of cash flows), 632–633, 649–656
cash payments for income taxes, 654
cash payments for interest, 654
cash payments for operating expenses, 653
cash payments to suppliers, 652–653
cash receipts from customers, 651–652
increase in bonds payable, 655
increase in buildings, 655
increase in common stock, 655
increase in equipment, 655
increase in land, 655
increase in retained earnings, 655
investing and financing activities and, 655–666
loss on disposal of plant assets, 653–654
net cash flows and, 654
net change in cash, 656
operating activities and, 651–654
Direct write-off method for uncollectible accounts, 401–402
Discontinued operations, sustainable income and, 691–692
Discounts
amortization of, 518
discount period, 236
discounting the future amount, D7
effective-interest amortization method and, 533–535
periodic inventory system and, 254
straight-line amortization method and, 530–531
time periods and, D11
Dishonor of notes receivable, 411
Disposals, plant assets, 461–462
Dividend record, measuring corporate performance and, 593–594
in arrears, 583
debit and credit procedures and, 114
guarantee of, 582
reporting of, 584
statement of cash flows and, 627
stock investments between 20% and 50% and, E6–E7
stock investments of less than 20% and, E5
Documentation procedures, 341–342, 461
Dollar-value last-in, first-out, 289
Double-declining-balance method, 456, 476
Double taxation, corporations and, 573
Down payments, leasing and, 452
Duties, segregation of, 339–341
E
Earnings, quality of, 185–187, 706–708
Earnings per share (EPS), 55–56, 705, 708, 722
Earnings performance, measuring corporate performance and, 594–595
Economic downturns, debt risks and, 524
Economic entity assumption, 65
Electronic data processing (EDP) systems, 102
Electronic funds transfer (ETF) system, 357
Employee salaries, payment of cash for, 126
Employees
background checks and, 344
bonding of, 344
hiring of, 108
requiring vacations and, 344
rotating duties of, 344
Entry adjustments. See Adjustment entries
Equation analyses, 176
Equipment
depreciation and, 453
plant assets and, 451
purchase of, 122
statement of cash flows (direct method) and, 655
statement of cash flows (indirect method) and, 640
Equity method, stock investments between 20% and 50% and, E5–E6
Equivalents, cash, 359
Errors, 129
Estimated uncollectibles, 402–403
Ethics
bad debt expense and, 406
cash flow from operations and, 640
changes in accounting principles and, 694
convenient overstatement and, 121
current assets and, 59
depreciation and, 454
economic entity assumption and, 65
employee theft, 351
errors and irregularities, 129
falsifying inventory, 286
fraudulent documents and, 117
income statements and, 12
inflating income figures, 572
lease accounting and, 526
not-for-profit organizations and, 9
overstating bond investment value, E10
petty cash funds and, 367
reporting liabilities and, 522
solving ethical dilemmas, 8
treasury stock purchases and, 581
Euronext, 576
Exclusive rights, 51
Expense recognition principle, 165
Expenses
income statements and, 241
operating activities and, 10
stockholders’ equity and, 114
External users, financial information and, 6–7
F
Face value
notes receivable and, 409
Factoring arrangements, 418, 420
Factory machinery, 451
Fair value, depreciation and, 453
Fair value adjustment, E9
Fair value of securities, E8–E9
Fair value per share, 587
Fair value principle, 66
Faithful representation, 64
Federal Insurance Contribution Act (FICA), 510
Federal Trade Commission, 7
FIFO ending inventory, 291
Finance directors, 6
Financial Accounting Standards Board (FASB), 63, 409
Financial calculators, D14–D16
compounding periods, D15
mortgage loans, D16
plus and minus, D15
present value of annuity, D15
present value of single sum and, D14
rounding, D15
Financial information
internal users and, 6
Financial reporting
assumptions in, 65
cost constraint and, 66
economic entity assumption and, 65
enhancing qualities and, 64–65
fair value principle and, 66
faithful representation and, 64
full disclosure principle and, 66
going concern assumption and, 65
historical cost principle and, 66
measurement principles and, 66
monetary unit assumption and, 65
periodicity assumption and, 65
relevance and, 64
standard-setting environment and, 63
accompanying notes and, A14–A28
adjusted trial balance and, 184–185
classified balance sheet, 48–53, 57–60
notes to, 20
ratio analysis and, 54
retained earnings statement, 13
statement interrelationships, 16–18
statement of cash flows, 15–16
statement of stockholders’ equity, 56–57
Financing activities
primary types of, 130
statement of cash flows (direct method) and, 655–666
statement of cash flows (indirect method) and, 640–641
Finished goods inventory, 284
First-in, first-out (FIFO) method, 290–297, 306, 706
Fiscal year, 64
Fixed assets, 51
Flow of costs, for merchandising company, 231–233
Fraud. See also Internal controls
altered inventory figures and, 288
definition and examples of, 336–337
employee checks and, 511
falsifying bank deposits and, 400
financial pressure and, 337
financial ratios and, 703
internal control systems and, 337–338
net income and, 460
opportunity and, 336
overstated cash and, 639
rationalization and, 337
Sarbanes-Oxley Act and, 337
stealing merchandise and, 239
stock options and, 576
Free cash flow
cash-generating abilities and, 61
company's solvency and, 717
solvency ratios and, 704
statement of cash flows and, 642–643
incurred by buyer, 235
incurred by seller, 235
periodic inventory system and, 254
Full disclosure principle, 66, 628
Future value of a single amount, D2–D4
Future value of an annuity, D4–D6
G
Gain on sale, plant assets and, 462
Generally accepted accounting principles (GAAP), 11, 63, 706
Gift cards, 174
Going concern assumption, 65
Government regulations, corporations and, 572–573
Graham, Benjamin, 689
Green marketing, 250
Gross margin, 243
Gross profit, multi-step income statement and, 242–243
decline in, 248
expression by percentage and, 247
by industry, 248
industry competitiveness and, 721–722
profitability ratios and, 705
Growth phase, corporate life cycle and, 630–631
H
Held-to-maturity securities, E8
High-volume businesses, profit margin and, 720
Hiring of new employees, 108
Historical cost principle, 66, 449
Honor of notes receivable, 410
Human element, internal controls and, 346
background checks and, 344
bonding employees and, 344
employee hirings and, 511
fraud and, 239
limitations of, 345
rotating employee duties and, 344
I
Idle cash, 361
Impairments, plant assets and, 461
Improper adjusting entries, 186
Improper recognition, quality of earnings and, 707
Improperly capitalized expenditures, 449
Improvements, plant assets and, 460
Income from operations, 242, 244
Income measurement process, merchandising company and, 230
Income statements
adjusted trial balance and, 184
complete income statement, 696
components of, 691
cost flow methods and, 294–295
determining cost of good sold under periodic system, 246–247
horizontal analysis of, 699–700
income from operations and, 242
inventory efforts and, 308–309
multiple-step income statements, 242–243
nonoperating activities and, 244–245
operating expenses and, 243
revenues and expenses and, 241
sales revenues and, 243
single-step income statement, 241–242
specific time period and, 12
stock issues and, 12
user communication and, 11
vertical analysis and, 701–702
Income summary, 188
Income taxes
cash payments for, 654
depreciation and, 458
operating activities and, 10
payable to government, 11
statement of cash flows and, 638
Independent internal verification, fraud and, 288, 343–344, 400, 511, 576, 639, 703
Indirect method (statement of cash flows), 632–641
changes in current liabilities, 638
decrease in accounts receivable, 637
decrease in income taxes payable, 638
depreciation expense and, 635–636
increase in accounts payable, 638
increase in bonds payable, 640–641
increase in buildings, 640
increase in common stock, 641
increase in equipment, 640
increase in inventory, 637
increase in land, 640
increase in prepaid expenses, 637–638
increase in retained earnings, 641
investing and financing activities and, 640–641
loss on disposal of plant assets, 636
net change in cash and, 641
net income to net cash conversions, 635
noncash current assets and, 636–637
operating activities and, 635–640
Industries
gross profit rate by, 248
industry-average comparisons, 54, 697
profit margins by, 249
Inflation, cost flow methods and, 295
Insurance, adjustment for, 170–171
copyrights, 470
determining useful life and, 469
goodwill, 471
limited life and, 468
patents, 469
research and development costs, 469–470
trademarks and tradenames, 470
Intent to convert, investments and, E11
Intercompany comparative analysis, 54, 697, 702
Interest
cash payments for, 654
compound interest, D2
compound interest table, D3–D4
coverage, 717
expense, 10
interest-bearing notes, 410–411
interest rates, D1
passing up discount and, 237
payable, 11
payable as a current liability, 516
recording bond interest, E3
revenue, 10
simple interest, D1
Internal auditors, 344
Internal controls. See also Cash controls; Fraud
bank reconciliations and, 352–357
business size and, 346
cash managing and monitoring, 360–364
collusion and, 346
control activities and, 338
control environment and, 337
documentation procedures and, 341–342
human element and, 346
human resource controls, 344–345
independent internal verification and, 343–344
information and communication and, 338
monitoring and, 338
principles of control activities, 338–344
reasonable assurance and, 345
responsibility establishment and, 339
risk assessment and, 338
segregation of duties and, 339–341
segregation of record-keeping from physical custody, 341
segregation of related activities and, 340
sustainability reporting and, 338
Internal users, financial information and, 6
Internal verification, independent, 343–344
International Accounting Standards Board (IASB), 63, 409
International Financial Reporting Standards (IFRS), 11, 43–44, 63, 95–97
Intracompany comparisons, 54, 697
Introductory phase, corporate life cycle and, 630
Inventory
consigned goods and, 287
conversion from LIFO to FIFO, 302
determining ownership of goods and, 286–287
determining quantities and, 286–287
falsifying of, 286
finished goods inventory, 284
just-in-time inventory methods, 285
manufacturing companies and, 284–285
merchandise inventory, 284
perpetual inventory systems, 305–307
raw materials and, 284
statement of cash flows and, 637
taking physical inventory, 286
work in process, 284
computing days in inventory, 399
inventory turnover and, 299–300
recession and, 300
Inventory costing, 288–298. See also Cost flow methods
average-cost method and, 293
balance sheet effects and, 296
change in methods and, 694
cost flow assumptions and, 289–293
first-in, first-out method and, 290–297
income statement effects and, 294–295
last-in, first-out method and, 291–297
lower-of-cost-or-market and, 298
methods, 706
specific identification and, 288–289
tax effects and, 296
using methods consistently, 297
weighted-average unit cost and, 293
Inventory errors
balance sheet effects and, 309
income statement effects and, 308–309
Inventory levels, cash management and, 361
Inventory turnover, 299–300, 704, 715
Investment portfolios, E4
Investments
available-for-sale securities, E8
balance sheet presentation and, E10–E11
excess cash and, 10
held-to-maturity securities, E8
intent to convert and, E11
nonoperating items related to, E12
presentation of realized and unrealized gain or loss, E12
readily marketable, E11
security categories, E8
statement of cash flows (direct method) and, 655–666
statement of cash flows (indirect method) and, 640–641
statement of cash flows presentation, E12–E13
valuing and reporting of, E7–E13
Irregular items, sustainable income and, 691
Irregularity, 129
Issuing procedures, bonds and, 513
J
Just-in-time inventory methods, 285, 299
K
Korean discount, 63
L
Labor unions, 7
Land
depreciation and, 453
improvements and, 450
statement of cash flows (direct method) and, 655
statement of cash flows (indirect method) and, 640
Large stock dividends, 587
Last-in, first-out (LIFO) method, 291–297, 306–307, 706
Legal capital, 577
Legal liability, organizational forms and, 5
Leveraging, 720
Liabilities. See also Bonds
analysis of, 523
balance sheet presentation and, 14, 521–522
bank line of credit and, 523
cash management and, 361
contingencies and, 526
credit balances and, 112
debt covenants, 527
debt masking and, 525
liquidity ratios and, 523
off-balance-sheet financing and, 525–526
solvency ratios and, 524
times interest earned and, 524
Licenses, corporations and, 574
LIFO conformity rule, 296
LIFO ending inventory, 292
Limited liability companies (LLCs), 5, 574
Limited liability of stockholders, corporations and, 571
Limited liability partnerships (LLPs), 574
Limited life, intangible assets and, 468
Limited partnerships, 574
Line of credit, liabilities and, 523
Liquid investments, 361
Liquidation preference, preferred stocks and, 582–583
excessive liquidity, 59
statement of cash flows and, 645
working capital and, 58
accounts receivable turnover, 416
average collection period, 416, 715
current cash debt coverage, 645, 714–715
inventory turnover, 300, 715–716
liabilities and, 523
role of, 54
summary of, 704
working capital, 58
London Stock Exchange, 576
Long-lived assets
financial statement presentation of, 472–473
Long-term debt, current maturities of, 509
Long-term investments
balance sheet presentation and, E11
characteristics of, 50
Long-term liabilities
characteristics of, 53
current liabilities and, 506
Long-term notes, present value of, D11–D13
Long-term notes payable, 536–537
Long-term notes receivable, 409
Loss on disposal of plant assets, 653–654
Loss on sale of plant assets, 462–463
Low-volume businesses, profit margin and, 720
Lower-of-cost-or-market (LCM), 298
M
Madoff, Bernard, 358
Madoff's ponzi scheme, 358
Mail receipts, 349
Major expenditures, cash management and, 361
Management, corporation, 572
Management certifications of financial statements, A30–A31
Management discussion and analysis, 19, A6–A13
Management's report on internal control, A30–A31
Market interest rates, bonds and, 514, 516–517
Market price, stock, 577
Market price determination, bonds and, 513–515
Market-to-market accounting, E8
Marketable securities, E10
Marketing expenses, 10
Marketing managers, 6
Marketing return on investment, 465
Matching principle, 165
Maturity date
bonds and, 513
notes receivable and, 408
redeeming bonds at, 520
redeeming bonds before, 532
Maturity phase, corporate life cycle and, 631–632
Maturity value, interest-bearing notes and, 410
Measurement principles, financial reporting and, 66
Memoranda, bank, 355
Merchandise inventory. See Inventory
Merchandise purchases, 233–237
periodic inventory system and, 254
purchase discounts and, 236–237
purchase invoices and, 233–234
purchase returns and allowances, 235–236
transaction summary, 237
business documents and, 238
cash register documents and, 238
periodic inventory system and, 254
sales accounts and, 238
sales returns and allowances, 239–240
Merchandise transactions, periodic inventory system and, 253–254
Merchandising operations, 230–233
income measurement process for, 230
operating cycles and, 231, 360
periodic inventory system and, 232
perpetual inventory system and, 232–233
Merchandising profit, 243
Modified accelerated cost recovery system (MARCS), 458
Monetary unit assumption, 65
Money market funds, 359
Mortgage loans, D16
Mortgage notes payable, 536
Moving-average method, 307
Multiple-step income statements, 242–243, 245
N
Nasdaq stock market, 576
National credit card sales, 418–419
Negative cash, 631
Net cash flows, statement of cash flows and, 654
Net cash provided by operating activities, 61, 627
Net change in cash
statement of cash flows (direct method) and, 656
statement of cash flows (indirect method) and, 641
Net income
income statements and, 12, 242
to net cash conversions, 635
per share, 722
statement of cash flows and, 627
Net sales
horizontal analysis of, 698
income statement and, 243
New employee hiring, 125
New York Stock Exchange, 576
No-par stock, 578
Nominal accounts, 188
Non-recurring charges, 693
Noncash activities, statement of cash flows and, 628
Noncash current assets, statement of cash flows and, 636–637
Nonoperating items
income statement presentation and, 244–245
related to investments and, E12
Not-for-profit organizations, 9
Note issued in exchange for cash, 105
Notes payable
accounting for, 507
financing activities and, 9
issuance of, 122
accrual of interest receivable, 410–411
cash (net) realizable value and, 409
collection of, 356
computing interest and, 408–409
determining maturity date and, 408
dishonor of, 411
face value and, 409
honor of, 410
recognizing notes receivable, 409
valuing notes receivable, 409
Notes to financial statements, 20
NSF (not sufficient funds) checks, 352, 357
O
Obligations, statement of cash flows and, 627
Obsolescence
equipment and, 180
leasing and, 452
Off-balance sheet financing, liabilities and, 525–526
Office equipment, purchase of for cash, 105
classifying as, 130
statement of cash flows (direct method) and, 651–654
statement of cash flows (indirect method) and, 635–640
Operating cycles
definition of, 50
for merchandising company, 231
for service company, 231
temporary investments and, E1
Operating expenses
cash payments for, 653
improper capitalization of, 707
income statement presentation and, 243
Operating leases, 526
Operations, income from, 242
Ordinary repairs, 460
Organization chart, corporations and, 572
Other expenses and losses, 244
Other revenues and gains, 244
Outstanding checks, 355
Over-the-counter receipts, 347–349
Ownership of goods, determining, 286–287
Ownership rights, corporations and, 571
P
Paid-in capital
stock dividends and, 586
stock splits and, 589
stockholders’ equity and, 577–578
Paper profit, 295
Par or stated value per share, 587
Par value stock, 577
Parent company, E7
Patents, 469
Payment date, cash dividends and, 585
Payment period establishment, receivables and, 413
Payroll taxes payable, 510–511
Pension portfolios, 694
Percentage, gross profit rate as, 247
Percentage of base amount, 700
Percentage of net sales, 701
Percentage-of-receivables basis, 404
Periodic inventory system, 253–256
cost of goods sold under, 232, 246–247
freight costs and, 254
purchase discounts and, 254
purchase returns and allowances, 254
recording merchandise transactions and, 253–254
recording purchases of merchandise, 254
recording sales of merchandise, 254–255
sales discounts and, 255
sales returns and allowances and, 255
Periodicity assumption, 65
Permanent accounts, 188
Permanent decline in fair value, plant assets and, 461
Perpetual inventory systems
average-cost and, 307
determining cost of goods sold under, 232
first-in, first-out and, 306
last-in, first-out and, 306–307
periodic system compared, 246
establishment of, 367
internal controls and, 351
Phantom profit, 295
Physical controls, 239, 342–343
Physical custody, 341
Physical inventory, 286
Plant assets, 448–467. See also Depreciation
additions and improvements and, 460
buying or leasing, 452
capital expenditures and, 460
cash equivalent price and, 449
earnings management and, 461
equipment, 451
expenditures during useful life, 460
expense capitalization and, 449
gain on sale and, 462
historical cost principle and, 449
impairments and, 461
land improvements, 450
loss on disposal of, 636, 653–654
ordinary repairs and, 460
retirement of, 463
Plus and minus, financial calculators and, D15
Ponzi schemes, 358
Post-closing trial balance, 189–190
Post-dated checks, 358
Posting, 120
Predictive value, 64
cumulative dividends and, 582–583
dividend preferences and, 582–583
liquidation preference and, 583
Premiums
effective-interest amortization method and, 535–536
straight-line amortization method and, 531–532
Prenumbered documents, 341
Prepaid expenses
accounting for, 172
adjusting entries for, 169–172
statement of cash flows and, 637–638
Present value of annuity, D9–D11, D15
Present value of long-term note or bond, D11–D13
Present value of single amount, D7–D9
Present value of single sum, D14
Present value variables, D7
Price-earnings (P-E) ratio, 705, 707–708, 722–723
Principal
bonds and, 514
interest rate and, D1
Production supervisors, 6
changes in, 250
gross profit compared, 249
plant assets and, 466
profitability ratios and, 705, 720
variation across industries and, 249
Profitability evaluation, 247–250
Profitability ratios, 705, 719–723
definition of, 54
gross profit rate, 248, 721–722
price-earnings ratio, 707, 722
return on assets, 464, 719–720
return on common stockholders’ equity, 595, 719
Property taxes payable, 11
Proration, depreciation and, 456
Public Company Accounting Oversight Board (PCAOB), 63, 337
credit terms and, 236
discount period and, 236
inventory and, 236
paying interest and, 237
periodic inventory system and, 254
Purchase returns and allowances, 235–236
Purchasing activities, internal controls and, 340
Purchasing on account, 108
Q
Quality of earnings, 185–187, 706–708
alternative accounting methods and, 706
cooking the books and, 186
earnings management and, 185
improper adjusting entries and, 186
improper recognition and, 707
indicators, 251
inflating revenue numbers and, 186
inventory costing and, 297
price-earnings ratio and, 707–708
Sarbanes-Oxley Act and, 186
Quarterly dividend rates, 584
R
Rating agencies, 705
classifications, 54
comprehensive illustration of, 712–723
liquidity ratios and, 704, 714–716
profitability ratios and, 705, 719–723
solvency ratios and, 704, 716–718
Ratios, LIFO reserve and, 302
Raw materials, 284
Readily marketable investments, E11
Real accounts, 188
Realized gain or loss, investments and, E12
Reasonable assurance, internal controls and, 345
Receivables
accounts receivable turnover, 415–416
average collection period and, 415–416
cash management and, 361
cash receipt acceleration and, 417–420
collection monitoring and, 413–414
concentration of credit risk and, 414
financial statement presentation of, 411–412
liquidity evaluation and, 415–416
national credit card sales and, 418–419
payment period establishment and, 413
sale of receivables to a factor, 418
Recession, inventory management and, 300
Reconciliation, bank accounts and, 352–357
Record date, cash dividends and, 585
Record keeping, segregation from physical custody, 341
Recording estimated uncollectibles, 402–403
chart of accounts and, 120
hiring of new employees, 125
investment of cash by stockholders, 121
issue of note payable, 122
payment of cash for employee salaries, 126
payment of dividends, 126
payment of rent with cash, 124
posting and, 120
purchase of equipment, 122
purchase of insurance policy with cash, 124
purchase of supplies on account, 125
receipt of cash in advance from customer, 123
services performed for cash, 123
source document and, 117
summary illustration and, 127–128
Recovery of uncollectible account, 404
Redemptions, bonds and, 520–521
Regulatory agencies, 7
Related activities, segregation of, 340
Relevance, information, 64
Research and development costs (R&D), 469–470
Responsibility establishment, internal controls and, 339
Restricted cash, 359
Restructuring charges, 693
Retailers, 230
adjusted trial balance and, 184
cash dividends and, 584
debit and credit procedures and, 113–114
net losses and, 590
preparing closing entries and, 188
statement of cash flows (direct method) and, 655
statement of cash flows (indirect method) and, 641
stock dividends and, 586
stock splits and, 589
stockholders’ equity and, 53
Retirement of plant assets, 463
Return on assets, 464–465, 705, 719–720
Return on common stockholders’ equity, 594–596, 705, 719
Returns and allowances
periodic inventory system and, 254–255
returns and, 255
Returns policy, 240
Revenues
income statements and, 241
inflating numbers and, 186
operating activities and, 10
revenue recognition principle, 164–165
stockholders’ equity and, 114
Risk-free investments, 361
Rounding, financial calculators and, D15
S
Salaries
payment of cash for, 108–109, 126
Sales
income statement presentation and, 243
internal controls and, 340
merchandising operations and, 230
periodic inventory system and, 255
returns and allowances and, 239–240
revenue from, 10
sale of receivables to a factor, 418
Sales taxes payable, 11, 507–508
Salvage value, depreciation and, 454
Sarbanes-Oxley Act, 8, 109, 186, 337, 345, 572
Secured bonds, 512
Securities
available-for-sale securities, 695, E9–E10
categories of, E8
comprehensive income and, 695–696
trading securities, 695
Securities and Exchange Commission (SEC), 7, 63, 525, 572
Segregation of duties, 339–341, 400
Segregation of record-keeping from physical custody, 341
Segregation of related activities, 340
Selling expenses, 10
Separate legal existence, corporations and, 571
Service company, operating cycles for, 231
Service revenue, accounts after adjustment, 174
Services performed for cash, 106–107
Shoplifting losses, 345
Short-term investments, balance sheet presentation and, E10–E11
Signature requirements, documents and, 341
Simple interest, D1
Single-step income statement, 241–242
Small stock dividends, 587
Social responsibility, corporations and, 573
Social Security taxes, 511
Socially responsive business, 16
Solvency assessment, statement of cash flows and, 646
cash debt coverage, 646, 704, 718
debt to assets ratio, 60, 704, 717
definition of, 54
summary of, 704
times interest earned, 525, 704, 717–718
Source document, recording process and, 117
Specific identification method of inventory costing, 288–289
Standard-setting environment, 63
Statement interrelationships, 16–18
Statement of cash flows, 15–16. See also Direct method; Indirect method
additional information and, 632
cash investing and financing transactions and, 627
classification of cash flows and, 627
company evaluation and, 642–646
comparative balance sheets and, 632
corporate life cycle and, 630–632
current income statement and, 632
direct method and, 632–633, 649–656
format of, 629
future cash flows and, 626–627
liquidity assessment and, 645
major steps in, 633
net cash provided by operating activities and, 627
net income and, 627
paying dividends and meeting obligations and, 627
preparation of, 632
significant noncash activities and, 628
solvency assessment and, 646
user communication and, 11
entries for, 599
fair value per share, 587
large stock dividend, 587
par or stated value per share, 587
purpose and benefits of, 587
small stock dividend, 587
stock splits differentiated, 589
stockholders’ equity and, 587–588
Stock holdings of more than 50%, E7
Stock investments
holdings between 20% and 50%, E5–E7
holdings of less than 20% and, E4–E5
holdings of more than 50% and, E7
Stock investments between 20% and 50%, E5–E7
recording acquisition of stock, E6
recording revenue and dividends, E6–E7
Stock investments of less than 20%, E4–E5
recording acquisition of stock, E4
recording dividends, E5
recording sale of stock, E5
Stock issue considerations, 575–579
authorized stock, 576
market price and, 577
par and no-par value stocks, 577
stock issuance, 576
Stock quotes, reading, 579
Stock value considerations, 577–578
Stockholders
investment of cash by, 104–105, 121
liability and, 571
raising funds and, 5
Stockholders’ equity
accounting for treasury stock, 579–581
additional paid-in capital and, 591
balance sheet presentation and, 14, 591–592
capital stock and, 591
common stock and, 113
corporate form of organization and, 570–575
debit and credit procedures for, 113–114
debt vs. equity decision and, 595–596
earnings performance and, 594–595
expenses and, 107
financial statement presentation of, 591–592
measuring corporate performance and, 593–596
parts of, 53
relationships and, 115
retained earnings and, 113–114, 590–591
return on common stockholders’ equity (ROE), 594–596
revenue and, 106
revenues and expenses and, 114
stock issue considerations and, 575–579
unrealized loss and, 696
Straight-line amortization, 530–532
amortizing bond discount, 530–531
amortizing bond premium, 531–532
Straight-line depreciation, 454–456
Subchapter S corporations, 5
Subsidiary (affiliated) company, E7
Suppliers, cash payments to, 652–653
Supplies
adjusting entries for, 169–170
operating activities and, 10
Sustainability reports, 467
change in accounting principle and, 694
comprehensive income and, 695–696
discontinued operations and, 691–692
extraordinary items and, 692–693
irregular items and, 691
T
T-account approach, statement of cash flows and, 656–658
Tax advantages, leasing and, 452
Taxes. See also Income taxes
corporations and, 573
cost flow methods and, 296
irregular items and, 691
organizational forms and, 5
taxing authorities, 7
Temporary accounts, 188
Temporary investments, operating cycle and, E1
Time periods
discounting and, D11
interest rates and, D1
Time value of money, 513
computing present value of long-term note or bond, D11–D13
future value of a single amount, D2–D4
future value of an annuity, D4–D6
present value of annuity, D9–D11
present value of single amount, D7–D9
present value variables, D7
time diagram, D3
time periods and discounting, D11
using financial calculators and, D14–D16
Times interest earned, 524, 704, 717
accrual vs. cash basis of accounting and, 166–167
expense recognition principle and, 165
revenue recognition principle and, 164–165
Tokyo Stock Exchange, 576
Total cost of trading securities, E8
Total fair value of securities, E8
Trademarks, 470
Tradenames, 470
Trading on the equity, 720
Transferable ownership rights, corporations and, 571
Treasurer, 572
Treasury bills, 359
Treasury stock
limitations of, 129
types of adjusting entries and, 168
True cash balance, 356
U
Uncollectible accounts
allowance method for, 402
direct write-off method for, 401–402
expense, 401
recording estimated uncollectibles, 402–403
recording the write-off of, 403
recovery of, 404
Unearned revenues, 173–174, 508–509
Units-of-activity method, depreciation and, 456–457, 477–478
Units-of-production method. See Units-of-activity method
Unqualified opinions, 20
Unrealized gains or losses
investments and, E12
securities and, E8
stockholders’ equity and, 696
Unsecured bonds, 512
Useful life
depreciation and, 454
intangible assets and, 469
V
Vacations, requiring taking of, 344
Verification, independent internal, 343–344
Voucher register, 351
Voucher system controls, 350–351
W
Wages payable, 11
Weighted-average unit cost, 293
Wholesalers, 230
Work in process, 284
Write-off method, uncollectible accounts and, 401–402
Z
Zero-coupon bonds, 517