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❯❯ CONTENTS

Preface xv Chapter 2
Visual Walk-Through xviii Transaction Analysis 53
Spotlight: Whole Foods Market, Inc. 53
Chapter 1
Explain What a Transaction Is 55
The Financial Statements 1
Define “Account,” and List and Differentiate
Spotlight: The Gap, Inc. 1 Between Different Types of Accounts 55
Explain Why Accounting Is the Language of Assets 55
Business 3
Liabilities 56
Who Uses Accounting Information? 4
Stockholders’ (Owners’) Equity 56
Two Kinds of Accounting: Financial Accounting and
Management Accounting 4 Show the Impact of Business Transactions on the
Accounting Equation 57
Organizing a Business 5
Example: Freddy’s Auto Service, Inc. 57
Explain and Apply Underlying Accounting Concepts,
Assumptions, and Principles 6 Transactions and Financial Statements 63

The Entity Assumption 8 Mid-Chapter Summary Problem 66

The Continuity (Going-Concern) Assumption 8 Analyze the Impact of Business Transactions
on Accounts 68
The Historical Cost Principle 8
The T-Account 68
The Stable-Monetary-Unit Assumption 9
Increases and Decreases in the Accounts: The Rules
Apply the Accounting Equation to Business
of Debit and Credit 68
Organizations 11
Additional Stockholders’ Equity Accounts: Revenues
Assets and Liabilities 11
and Expenses 70
Owners’ Equity 12
Record ( Journalize and Post) Transactions in
Evaluate Business Operations Through the Books 71
the Financial Statements 14
Copying Information (Posting) from the Journal
The Income Statement Measures Operating to the Ledger 72
Performance 14
The Flow of Accounting Data 73
The Statement of Retained Earnings Shows What a
Accounts after Posting to the Ledger 77
Company Did with Its Net Income 16
The Balance Sheet Measures Financial Construct and Use a Trial Balance 78
Position 17 Analyzing Accounts 79
The Statement of Cash Flows Measures Cash Receipts Correcting Accounting Errors 80
and Payments 20 Chart of Accounts 80
Construct Financial Statements and Analyze the The Normal Balance of an Account 81
Relationships Among Them 21
Account Formats 81
Evaluate Business Decisions Ethically 23 Analyzing Transactions Using Only T-Accounts 82
End-of-Chapter Summary Problem 26 End-of-Chapter Summary Problem 84

vii

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Chapter 3 Chapter 4
Accrual Accounting & Income 113 Internal Control & Cash 192
Spotlight: Starbucks Corporation 113 Spotlight: Cooking the Books: Mid-Atlantic
Explain How Accrual Accounting Manufacturing Company Takes a Hit 192
Differs from Cash-Basis Describe Fraud and Its Impact 195
Accounting 115
Fraud and Ethics 197
Accrual Accounting and Cash Flows 116
Explain the Objectives and Components of
The Time-Period Concept 116 Internal Control 197
Apply the Revenue and Expense Recognition The Sarbanes-Oxley Act (SOX) 198
Principles 116
The Components of Internal Control 199
The Revenue Principle 116
Internal Control Procedures 200
The Expense Recognition Principle 118
Information Technology 202
Ethical Issues in Accrual Accounting 119
Safeguard Controls 203
Adjust the Accounts 119 Internal Controls for E-Commerce 203
Which Accounts Need to Be Updated Security Measures 203
(Adjusted)? 119
The Limitations of Internal Control—Costs
Categories of Adjusting Entries 120 and Benefits 204
Prepaid Expenses 120
Design and Use a Bank Reconciliation 204
Depreciation of Plant Assets 123
Signature Card 205
Accrued Expenses 125
Deposit Ticket 205
Accrued Revenues 127
Check 205
Unearned Revenues 128
Bank Statement 206
Summary of the Adjusting Process 129
Bank Reconciliation 207
The Adjusted Trial Balance 132
Preparing the Bank Reconciliation 208
Construct the Financial Online Banking 211
Statements 133
Mid-Chapter Summary Problem 213
Mid-Chapter Summary Problem 135
Evaluate Internal Controls Over Cash Receipts
Close the Books 141 and Cash Payments 215
Classifying Assets and Liabilities Based Cash Receipts Over the Counter 215
on Their Liquidity 142
Cash Receipts by Mail 215
Reporting Assets and Liabilities: Starbucks
Corporation 143 Controls Over Payment by Check 216

Formats for the Financial Construct and Use a Cash Budget 218
Statements 143 Report Cash on the Balance Sheet 220
Analyze and Evaluate a Company’s Compensating Balance Agreements 220
Debt-Paying Ability 145
End-of-Chapter Summary Problem 221
Net Working Capital 145
Current Ratio 145 Chapter 5
Debt Ratio 146 Short-Term Investments & Receivables 245
How Do Transactions Affect the Spotlight: Amazing Apple! Short-term
Ratios? 146
investments and accounts receivable are 37 times as
End-of-Chapter Summary Problem 150 large as inventories! 245

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Account for Short-Term Investments 247 Apply and Compare Various Inventory
Reasons to Invest in Other Companies 247 Cost Methods 308

Trading Securities 248 What Goes into Inventory Cost? 308

Reporting on the Balance Sheet and the Income Apply the Various Inventory Costing Methods 309
Statement 252 Compare the Effects of FIFO, LIFO, and Average
Ethics and the Current Ratio 252 Cost on Cost of Goods Sold, Gross Profit, and
Ending Inventory 311
Mid-Chapter Summary Problem 253 Keeping Track of Perpetual Inventories under LIFO
Apply GAAP for Proper Revenue and Weighted-Average Cost Methods 312
Recognition 254 The Tax Advantage of LIFO 313
Shipping Terms, Sales Discounts, and Sales
Returns 255 Mid-Chapter Summary Problem 314
Explain and Apply Underlying GAAP for
Account for and Control Accounts
Inventory 316
Receivable 256
Disclosure Principle 316
Types of Receivables 256
Lower-of-Cost-or-Market Rule 316
Internal Controls Over Cash Collections on
Account 257 Inventory and the Detailed Income
Statement 318
How Do We Manage the Risk of Not
Collecting? 257 Compute and Evaluate Gross Profit (Margin)
Percentage and Inventory Turnover 318
Evaluate Collectibility Using the Allowance for
Uncollectible Accounts 258 Gross Profit Percentage 318
Allowance Method 259 Inventory Turnover 319
Direct Write-Off Method 265 Use the COGS Model to Make Management
Computing Cash Collections from Customers 265 Decisions 320
Computing Budgeted Purchases 321
Account for Notes Receivable 266
Estimating Inventory by the Gross Profit
Accounting for Notes Receivable 267
Method 321
Show How to Speed Up Cash Flow from
Analyze Effects of Inventory Errors 322
Receivables 269
End-of-Chapter Summary Problem 325
Credit Card or Bankcard Sales 269
Selling (Factoring) Receivables 270
Reporting on the Statement of Cash Flows 270 Chapter 7
Plant Assets, Natural Resources, &
Evaluate Liquidity Using Two New Ratios 271
Intangibles 362
Quick (Acid-Test) Ratio 271
Spotlight: FedEx Corporation 362
Days’ Sales in Receivables 271
Measure and Account for the Cost of Plant
End-of-Chapter Summary Problem 273 Assets 365
Land 365
Chapter 6 Buildings, Machinery, and Equipment 365
Inventory & Cost of Goods Sold 300 Land Improvements and Leasehold
Improvements 366
Spotlight: Family Dollar Stores, Inc. 300
Lump-Sum (or Basket) Purchases of
Show How to Account for Inventory 303
Assets 366
Sale Price vs. Cost of Inventory 304
Distinguish a Capital Expenditure from an
Accounting for Inventory in the Perpetual Immediate Expense 367
System 306

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Measure and Record Depreciation on Plant Stock and Bond Prices 430
Assets 369 Reporting Investments on the Balance Sheet 430
How to Measure Depreciation 370
Analyze and Report Investments in
Depreciation Methods 370 Held-to-Maturity Debt Securities 431
Comparing Depreciation Methods 375 Analyze and Report Investments in
Mid-Chapter Summary Problem 377 Available-for-Sale Securities 433
Other Issues in Accounting for Accounting Methods for Long-Term Stock
Plant Assets 378 Investments 433
Depreciation for Tax Purposes 378 The Fair Value Adjustment 435
Depreciation for Partial Years 380 Selling an Available-for-Sale Investment 436
Changing the Useful Life of a Depreciable Analyze and Report Investments in Affiliated
Asset 380 Companies Using the Equity Method 437
Fully Depreciated Assets 382 Buying a Large Stake in Another Company 437

Analyze the Effect of a Plant Asset Accounting for Equity-Method Investments 438
Disposal 382 Analyze and Report Controlling Interests
Disposing of a Fully Depreciated Asset for in Other Corporations Using Consolidated
No Proceeds 383 Financial Statements 440
Selling a Plant Asset 383 Why Buy Controlling Interest in Another
Company? 440
Exchanging a Plant Asset 384
Consolidation Accounting 440
T-Accounts for Analyzing Plant Asset
Transactions 385 The Consolidated Balance Sheet and the Related
Work Sheet 441
Apply GAAP for Natural Resources
and Intangible Assets 387 Goodwill and Noncontrolling Interest 442

Accounting for Natural Resources 387 Income of a Consolidated Entity 442

Accounting for Intangible Assets 388 Mid-Chapter Summary Problem 444

Accounting for Specific Intangibles 388 Consolidation of Foreign Subsidiaries 446
Accounting for Research and Development Foreign Currencies and Exchange Rates 446
Costs 390 The Foreign-Currency Translation
Explain the Effect of an Asset Impairment Adjustment 447
on the Financial Statements 390 Report Investing Activities on the Statement
Analyze Rate of Return on Assets 392 of Cash Flows 448
DuPont Analysis: A More Detailed View of Explain the Impact of the Time Value of Money
ROA 393 on Certain Types of Investments 449
Analyze the Cash Flow Impact of Long-Lived Present Value 450
Asset Transactions 394 Present-Value Tables 451
End-of-Chapter Summary Problem 397 Present Value of an Ordinary Annuity 452
Using Microsoft Excel to Calculate Present
Chapter 8 Value 454
Using the PV Model to Compute Fair Value of
Long-Term Investments &
the Time Value of Money 428 Available-for-Sale Investments 455
Present Value of an Investment in Bonds 456
Spotlight: Intel Holds Several Different
Types of Investments 428 End-of-Chapter Summary Problems 457

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Chapter 9 Reporting on the Balance Sheet 516

Disclosing the Fair Value of Long-Term
Liabilities 482
Debt 517
Spotlight: Southwest Airlines: Still Flying Reporting Financing Activities on the Statement
High! 482 of Cash Flows 517
Account for Current and Contingent End-of-Chapter Summary Problems 518
Liabilities 484
Current Liabilities of Known Amount 484
Current Liabilities That Must Be Estimated 490
Chapter 10
Stockholders’ Equity 550
Contingent Liabilities 491
Are All Liabilities Reported on the Balance
Spotlight: The Home Depot: Building Toward
Sheet? 492 Success 550

Summary of Current Liabilities 493 Explain the Features of a Corporation 552

Organizing a Corporation 553
Mid-Chapter Summary Problem 493
Stockholders’ Rights 554
Account for Bonds Payable, Notes Payable,
and Interest Expense 494 Stockholders’ Equity 555

Bonds: An Introduction 494 Classes of Stock 555

Issuing Bonds Payable at Par (Face Value) 497 Account for the Issuance of Stock 557
Issuing Bonds Payable at a Discount 499 Common Stock 557
What Is the Interest Expense on These Bonds A Stock Issuance for Other Than Cash Can Create
Payable? 499 an Ethical Challenge 560
Interest Expense on Bonds Issued at a Preferred Stock 561
Discount 501
Mid-Chapter Summary Problem 562
Partial-Period Interest Amounts 504 Authorized, Issued, and Outstanding Stock 564
Issuing Bonds Payable at a Premium 504
Show how Treasury Stock Affects a Company 564
The Straight-Line Amortization Method: A
How Is Treasury Stock Recorded? 564
Quick and Dirty Way to Measure Interest
Expense 508 Retirement of Treasury Stock 566
Should We Retire Bonds Payable Before Their Resale of Treasury Stock 566
Maturity? 509 Issuing Stock for Employee Compensation 566
Convertible Bonds and Notes 509 Summary of Treasury-Stock Transactions 567
Analyze and Differentiate Financing with Debt Account for Retained Earnings, Dividends,
Versus Equity 510 and Splits 567
The Leverage Ratio 512 Should the Company Declare and Pay Cash
The Times-Interest-Earned Ratio 513 Dividends? 568

Understand Other Long-Term Liabilities 513 Cash Dividends 568

Leases 513 Analyzing the Stockholder’s Equity Accounts 569

Types of Leases 513 Dividends on Preferred Stock 570

Do Lessees Prefer Operating Leases or Capital Stock Dividends 571

Leases? 514 Stock Splits 572
Pensions and Postretirement Liabilities 515 Summary of the Effects on Assets, Liabilities,
and Stockholders’ Equity 573
Report Liabilities 516

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Use Stock Values in Decision Making 573 Compute Earnings per Share 630
Market, Redemption, Liquidation, Analyze the Statement of Comprehensive Income,
and Book Value 573 Footnotes, and Supplemental Disclosures 631
ROE: Relating Profitability to Stockholder Reporting Comprehensive Income 631
Investment 575
For Additional Details, Don’t Forget the
Report Stockholders’ Equity Transactions Footnotes 632
in the Financial Statements 577 Nonfinancial Reports 634
Statement of Cash Flows 577
Differentiate Management’s and Auditors’
Statement of Stockholders’ Equity 578 Responsibilities in Financial Reporting 634
A Detailed Stockholders’ Equity Section of the Management’s Responsibility 634
Balance Sheet 579
Auditor Report 634
End-of-Chapter Summary Problems 581
End-of-Chapter Summary Problems 637

Chapter 11 Chapter 12
Evaluating Performance: Earnings Quality, The Statement of Cash Flows 664
the Income Statement, & the Statement of
Comprehensive Income 617 Spotlight: Google: The Ultimate Answer
Spotlight: The Gap, Inc.: What a Difference (and Cash) Machine 664
a Year Makes! 617 Identify the Purposes of the Statement of Cash
Flows 666
Evaluate Quality of Earnings 619
How’s Your Cash Flow? Telltale Signs of Financial
Revenue Recognition 620
Difficulty 667
Cost of Goods Sold and Gross Profit
(Gross Margin) 621 Distinguish Among Operating, Investing,
and Financing Activities 668
Operating and Other Expenses 622
Two Formats for Operating Activities 669
Operating Income (Earnings) 622
Prepare a Statement of Cash Flows by the
Account for Foreign-Currency Gains Indirect Method 669
and Losses 623
Cash Flows from Operating Activities 671
Dollars versus Foreign Currency 623
Cash Flows from Investing Activities 675
Reporting Foreign-Currency Gains and Losses on
the Income Statement 624 Cash Flows from Financing Activities 676

Reporting Foreign-Currency Exchange Gains and Noncash Investing and Financing Activities 680
Losses on Cash and Cash Equivalents in the Mid-Chapter Summary Problem 681
Statement of Cash Flows 624
Prepare a Statement of Cash Flows by the
Should We Hedge Our Foreign-Currency- Direct Method 684
Transaction Risk? 625
Cash Flows from Operating Activities 685
Account for Other Items on the Income Depreciation, Depletion, and Amortization
Statement 625
Expense 687
Interest Expense and Interest Income 625
Cash Flows from Investing Activities 687
Corporate Income Taxes 625
Cash Flows from Financing Activities 688
Which Income Number Predicts Future
Noncash Investing and Financing Activities 688
Profits? 627
Computing Operating Cash Flows by the Direct
Discontinued Operations 628
Method 689
Accounting Changes 629

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Computing Investing and Financing Cash Measuring Profitability 766

Flows 693 Analyzing Stock as an Investment 771
Measuring Cash Adequacy: Free Cash Flow 694 The Limitations of Ratio Analysis 773
End-of-Chapter Summary Problems 696 Use Other Measures to Make Investment
Decisions 773
Chapter 13 Economic Value Added (EVA®) 773
Financial Statement Analysis 739 Red Flags in Financial Statement
Analysis 774
Spotlight: How Well Is Amazon.com Doing? 739
It Starts with the Big Picture 741 Efficient Markets 775
End-of-Chapter Summary Problems 778
Perform Horizontal Analysis 743
Illustration: Amazon.com, Inc. 743 Appendix A:
Trend Percentages 748 Amazon.com 2012 Annual Report 821

Perform Vertical Analysis 749 Appendix B:

Illustration: Amazon.com, Inc. 749 Yum! Brands, Inc. Annual Report 2012 845

Prepare Common-Size Financial Statements 752 Appendix C:

Typical Charts of Accounts for Different Types
Benchmarking 753
of Businesses 863
Benchmarking Against a Key Competitor 753
Appendix D:
Analyze the Statement of Cash Flows 753
Summary of Generally Accepted Accounting
Mid-Chapter Summary Problem 756 Principles (GAAP) 865
Use Ratios to Make Business Decisions 757 Appendix E:
Remember to Start at the Beginning: Company and Summary of Differences Between
Industry Information 758 U.S. GAAP and IFRS Cross Referenced to
Now Let’s Do the Numbers 759 Chapter 867

Measuring Ability to Pay Current Liabilities 759 Company Index 871

Measuring Turnover and the Cash Conversion Glindex 875
Cycle 762
Measuring Leverage: Overall Ability to Pay
Debts 765

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❯❯ Preface

Changes for The Tenth Edition

In general, the Tenth Edition content has been substantially redesigned and enhanced:
■ The text font has been enlarged from the Ninth Edition to Tenth Edition to make the text easier to read.
■ Chapter openers now only take up one or two pages, with a small silhouetted image of the spotlight
company.
■ Most financial statements, general ledger, and journal entries have been converted to Excel.
■ Special sections called Try It in Excel have been added to every chapter, giving students explicit instruc-
tions as to how to access the chapter focus company’s most recent financial statements in Excel from the
website of the U.S. Securities and Exchange Commission (www.sec.gov).
■ Other sections of most chapters give explicit instructions on how to build Excel templates that streamline
and simplify various accounting tasks. These tasks include preparation of the adjusted trial balance work-
sheet, preparation of financial statements, computation of depreciation by various methods, and computa-
tion of effective-interest bond discount and premium amortization.
■ In all chapters, a new “focus on analysis” company, Yum! Brands, Inc., was selected to replace Radio Shack.
Selections of the financial statement appear in Appendix B.
■ Demo Docs are removed from the text and are now relocated to MyAccountingLab.
Within Chapters 1 through 3:
■ Chapter discussions were revised to be more integrative, using a continuing example of one company that
carries through all three chapters.
■ Excel is used as a facilitating tool to both prepare and analyze financial statements. Excel data files are
available for problems in the end of chapter material for these chapters, also incorporating them into
MyAccountingLab.
■ Summary problems for each of these three chapters are reworked using the Excel format.
Below are the content changes to the Tenth Edition, listed chapter-by-chapter:
Chapter 1
■ Chapter Opener: Spotlight company changed to The Gap, Inc.
■ Provides detailed instructions as to how to access current financial statements of The Gap, Inc. in Excel
on the website of the U. S. Securities and Exchange Commission (SEC).
■ Real World Financial Statement changed to The Gap, Inc. and used to illustrate the interrelationships of
the financial statements.
■ Added coverage of the new financial reporting framework for small and midsize entities that are not public
and that have no intention of going public.
■ Updated information on international financial reporting standards (IFRS) in light of the more recent
trend toward convergence rather than adoption of IFRS on the part of U.S. public companies.
■ Chapter contains eight simulated Excel exercises and problems, gradable Excel exercises and problems in
MyAccountingLab.
Chapter 2
■ Chapter Opener: Spotlight company changed to Whole Foods Market, Inc.
■ Real World company, Freddy’s Auto Service, Inc., is used to illustrate recording of hypothetical transac-
tions and posting entries.
■ Provides instructions on how to access current financial statements of Whole Foods Market, Inc. in Excel
on the website of the U. S. Securities and Exchange Commission (SEC).
xv

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xvi   Preface

■ Provides detailed instructions as to how to prepare a financial statement in worksheet format using Excel.
■ Detailed instructions provided as to how to prepare a trial balance using Excel.
■ End of Chapter Summary Problem: Transactional analysis company name changed from Genie Car Wash,
Inc. to Magee Service Center, Inc.
■ Simulated Excel exercises and problems increased from two to six.

Chapter 3
■ Provides instructions on how to access current financial statements of Starbucks Corporation in Excel on
the website of the U. S. Securities and Exchange Commission (SEC).
■ Provides detailed instructions as to how to prepare an adjusted trial balance worksheet using Excel.
■ End of Chapter Summary Problem: Transactional analysis company name changed from Genie Car Wash,
Inc. to Badger Ranch, Inc.
■ Simulated Excel exercises and problems increased from 9 to 11.

Chapter 4
■ Chapter Opener: Changed name of Spotlighted Cooking the Books company to Mid-Atlantic Manufac-
turing Company.
■ Updated internal control discussion.
■ Emphasized use of electronic bank reconciliations.
■ Detailed instructions provided on how to prepare a cash budget using Excel.
■ Two simulated Excel problems have been added.

Chapter 5
■ Chapter Opener: Spotlight company changed to Apple, Inc.
■ Provides detailed instructions on how to access current financial statements of Apple, Inc. in Excel on the
website of the U. S. Securities and Exchange Commission (SEC).
■ Updated and clarified discussion of accounting for short-term investments, illustrating distinction ­between
accounting for trading securities and accounting for available-for-sale securities.
■ Updated discussion on revenue recognition to correspond with new GAAP/IFRS standard.
■ Simulated Excel exercises and problems increased from seven to eight.

Chapter 6
■ Chapter Opener: Changed Spotlight company to Family Dollar Stores, Inc.
■ Provides detailed instructions as to how to access current financial statements of Family Dollar Stores, Inc.
in Excel on the website of the U. S. Securities and Exchange Commission (SEC).
■ Expanded coverage (including journal entries) of how to account for purchase returns and discounts.
■ Simulated Excel exercises and problems increased from 9 to 10.

Chapter 7
■ Chapter Opener: Retained Spotlight company, FedEx Corporation, and updated information used in
chapter using the FedEx Corporation 2012 Annual Report.
■ Provides detailed instructions as to how to access current financial statements of FedEx Corporation in
Excel on the website of the U. S. Securities and Exchange Commission (SEC).
■ Changed exhibits on three depreciation methods to Excel format, with detailed instructions as to how to
use Excel to compute depreciation expense, accumulated depreciation, and asset book value.
■ Simulated Excel exercises and problems increased from 9 to 11.

Chapter 8
■ Chapter Opener: Retained spotlight company, Intel Corporation and updated information in chapter
­using the 2012 Intel Corporation Annual Report.

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■ Provides detailed instructions as to how to access current financial statements of Intel Corporation in
Excel on the website of the U. S. Securities and Exchange Commission (SEC).
■ Simulated Excel exercises and problems increased from 9 to 10.

Chapter 9
■ Chapter Opener: Retained Spotlight company, Southwest Airlines, and updated information in chapter
using the Southwest Airlines 2012 Annual Report.
■ Provides detailed instructions as to how to access current financial statements of Southwest Airlines Com-
pany in Excel on the website of the U. S. Securities and Exchange Commission (SEC).
■ Modified chapter exhibits for bond discount and premium amortization to Excel format, and provided
detailed instructions as to how to prepare effective-interest amortization tables in Excel format.
■ Simulated Excel exercises and problems increased from eight to nine.

Chapter 10
■ Chapter Opener: Changed Spotlight company to The Home Depot, Inc., and updated information in
chapter using the Home Depot, Inc. 2012 Annual Report.
■ Provides detailed instructions as to how to access current financial statements of The Home Depot, Inc. in
Excel on the website of the U. S. Securities and Exchange Commission (SEC).
■ Relocated coverage of Statement of Stockholders’ Equity from Chapter 11 to Chapter 10 and changed end
of chapter material to reflect this modified coverage.
■ Simulated Excel exercises and problems increased from five to six.

Chapter 11
■ Chapter Opener: Retained Spotlight company, The Gap, Inc. and updated information in chapter using
the The Gap, Inc. 2012 Annual Report.
■ Provides detailed instructions as to how to access current financial statements of The Gap, Inc. in Excel on
the website of the U. S. Securities and Exchange Commission (SEC).
■ Moved coverage of Statement of Stockholders’ Equity to Chapter 10 and deleted related end of chapter
material in Chapter 11.
■ Added a section on non-financial measures of performance, such as corporate social responsibility.
■ Added a section on use of footnote disclosures in financial analysis, including segment information. Added
end-of-chapter materials to reflect this expanded coverage.
■ Simulated Excel exercises and problems increased from five to seven.

Chapter 12
■ Chapter Opener: Retained Spotlight company, Google, Inc. and updated information in chapter using the
Google 2012 Annual Report.
■ Provides detailed instructions as to how to access current financial statements of Google, Inc. in Excel on
the website of the U. S. Securities and Exchange Commission (SEC).
■ Simulated Excel exercises and problems increased from four to seven.

Chapter 13
■ Chapter Opener: Retained Spotlight company, Amazon.com, Inc. and updated information in chapter
using the Amazon.com 2012 Annual Report.
■ Provides detailed instructions as to how to access current financial statements of Amazon.com, Inc. in
Excel on the website of the U. S. Securities and Exchange Commission (SEC).
■ Provided detailed instructions as to how to use Excel to perform both horizontal and vertical analyses of
comparative financial statements.
■ Expanded analysis of Amazon.com, Inc., providing comprehensive tables of key financial ratios in Excel format.
■ Simulated Excel exercises and problems increased from six to nine.

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 Plant Assets, Natural Resources, & Intangibles 373

Assume that FedEx expects to drive the truck 20,000 miles during the first year, 30,000 dur-
ing the second, 25,000 during the third, 15,000 during the fourth, and 10,000 during the fifth.
Exhibit 7-6 shows the UOP depreciation schedule.

Exhibit 7-6 | Units-of-Production (UOP) Depreciation Schedule for Truck

A1

❯❯ Visual Walk-Through 1
2
Date
A B C
Cost Rate per unit
1/1/2011 41,000
D
Number Units
E F G
Yearly Expense Accum. Deprec. Book Value
41,000
3 12/31/2011 0.4 20,000 8,000 8,000 33,000
4 12/31/2012 0.4 30,000 12,000 20,000 21,000
5 12/31/2013 0.4 25,000 10,000 30,000 11,000
6 12/31/2014 0.4 15,000 6,000 36,000 5,000
7 12/31/2015 0.4 10,000 4,000 40,000 1,000
8
Try It in Excel
NEW!
Describes line-by-line how to retrieve and prepare accounting information (such as
adjusted trial
The balance
amount ofworksheets, ratio computations,
UOP depreciation depreciation
varies with the number of unitsschedules, bond In
the asset produces.
our and
discount example, the total
premium number of units
amortization (miles) produced
schedules, is 100,000.
and financial UOP depreciation
statement analysis)does not
in Excel.
depend directly on time, as with the other methods.

Try It in
❯❯ Excel If you built the straight-line depreciation schedule in Exhibit 7-5 with Excel,
changing the spreadsheet for units-of-production depreciation is a snap.
Steps 1–3 and 6–8 are identical. Only steps 4 and 5, dealing with columns C and D, change. You
might want to start by opening the straight-line schedule you prepared and saving it under another
name: “units-of-production depreciation.” Next, change the column headings for column C and
column D. Column C should be labeled “Rate per unit.” Column D should be labeled “Number
Units.” Assuming you do this, here are the modified steps 4 and 5 of the process we used before:

4. In column C, calculate a per-unit (rather than per-year as we did with straight-line) de-
preciation rate by dividing the depreciable cost ($41,000  $1,000 in Exhibit 7-4) by the
number of units (100,000 miles) to get a fixed depreciation rate per mile ($0.40). Enter
.4 in cell C3 and copy down through cell C7.
5. In cells D3 through D7, respectively, enter the number of miles driven in years 1 through
5 of the asset’s useful life. These are 20,000, 30,000, 25,000, 15,000, and 10,000,
respectively.
All of the other amounts in the table will automatically recalculate to reflect units-of-production
depreciation, exactly as shown in Exhibit 7-6. ■

Double-Declining-Balance Method. An accelerated depreciation method writes off a

larger amount of the asset’s cost near the start of its useful life than the straight-line method
does. Double-declining-balance (DDB) is the most frequently used accelerated depreciation
method. It computes annual depreciation by multiplying the asset’s declining book value at the

xviii

DESIGN SERVICES OF
#149446 Cust: Pearson Au: Harrison Pg. No. xviii
Title: Financial Accounting Server:
C/M/Y/K
Short / Normal
S4carlisle
Publishing Services
⑦
Preface    xix

Excel! Integrated Throughout Text!

NEW!
Excel-based financial statements are used so that students will familiarize themselves
Plant Assets, Natural Resources, & Intangibles 363
with the accounting information format actually used in the business world.

A1
A B C
FedEx Corporation
1 Consolidated Balance Sheets (Partial, Adapted)
2 (In millions of $) May 31, 2012 May 31, 2011
3 CURRENT ASSETS
4 Cash and cash equivalents $ 2,843 $ 2,328
5 Receivables, less allowances of $178 and $182 4,704 4,581
6 Spare parts, supplies and fuel, less allowances 440 437
7 Deferred income taxes 533 610
8 Prepaid expenses and other 536 329
9 Total current assets 9,056 8,285
10 PROPERTY AND EQUIPMENT, AT COST
11 Aircraft and related equipment 14,360 13,146
12 Package handling and ground support equipment 5,912 5,591
13 Computer and electronic equipment 4,646 4,408
14 Vehicles 3,654 3,294
15 Facilities and other 7,592 7,247
16 Gross property and equipment 36,164 33,686
17 Less accumulated depreciation and amortization (18,916) (18,143)
18 Net property and equipment 17,248 15,543
19 OTHER LONG-TERM ASSETS
20 Goodwill 2,387 2,326
21 Other assets 1,212 1,231
22 Total other long-term assets
TOTAL ASSETS $
Plant Assets, Natural
3,599
29,903 $
3,557Resources, & Intangibles
27,385
395
23
24

❯❯
Exhibit 7-13 | Reporting Investing Activities on FedEx Corporation’s Statement of Cash Flows
This chapter covers the measurement and reporting principles for
long-term
A1 tangible fixed assets (also known as plant assets or property and
equipment) as well as intangible assets A . Unlike inventories that are typically
B

bought, manufactured, and sold, fixed tangible and intangible assets are used
FedEx Corporation
Statement of Cash Flows (Partial, Adapted)
in the
1 business to earn a profit. This
Year Ended chapter
May 31, 2012 also briefly covers measure-
ment2 and reporting principles for natural resources, which begin as(In long-term
millions)
3 Cash Flows from Operang Acvies:
assets.
4 Then, as they are extracted or depleted, their cost is transferred
Net income $ to the
2,032
income
5 statement
Adjustments as an expense.
to reconcile net income
6 to net cash provided by operang acvies:
7 Depreciaon and amorzaon 2,113
8 Other items (summarized) 690
9 Net cash provided by operang acvies 4,835
10 Cash Flows from Invesng Acvies:
11 Capital expenditures (4,007)
Learning Objectives
12 Other asset acquisions and disposions, net (42)
1.13Measure
Net cashand account
(used for the
in) invesng cost of plant assets
acvies 6. Explain the effect(4,049)
of an asset impairment on the
14 Cash Flows from Financing Acvies:
15 Net cash (used in) financing acvies financial statements(244)
2.16Distinguish a capitalrate
Effect of exchange expenditure from an immediate
changes on cash (27)
17expense
Net (increase) in cash and cash equivalents 7. Analyze rate of return
515on assets
18 Cash and cash equivalents, beginning of period 2,328

20Measure and record depreciation on plant assets 8. Analyze the cash flow impact of long-lived asset
Cash and cash equivalents, end of period
3.19
$ 2,843

transactions
4. Analyze the effect of a plant asset disposal

Apply
5.Let’s GAAP for
examine naturalinvesting
FedEx’s resourcesactivities
and intangible assets 2012, FedEx invested $4,007 million
first. During
in capital expenditures (line 11). FedEx also engaged in net acquisition and disposition of other
long-term assets, spending another $42 million (line 12). FedEx’s statement of cash flows reports
Depreciation and amortization (line 7) of $2,113 million. Observe that “Depreciation and amor-
tization” is listed as a positive item under “adjustments to reconcile net income to net cash pro-
vided by operating activities.” Since depreciation and amortization do not affect cash, you may be
wondering why these amounts appear on the statement of cash flows. In this format, the operat-
ing activities section of the statement of cash flows starts with net income (line 4) and reconciles
to net cash provided by operating activities (line 9). Depreciation and amortization decrease net
income but do not affect cash. Depreciation and amortization are therefore added back to net
income to measure cash flow from operations. The add-back of depreciation and amortization to
net income offsets the earlier subtraction of these expenses. The sum of net income plus deprecia-
tion and amortization, therefore, helps to reconcile net income (on the accrual basis) to cash flow
from operations (a cash-basis amount). We revisit this topic in the full context of the statement
of cash flows in Chapter 12.
FedEx’s cash flows are strong. Net cash provided by operating activities exceeds net income
by $2.8 billion. With this excess, the company has made sizeable capital expenditures, signaling
that it has invested in new plant and equipment and other long-term assets needed to expand
and run its business. The company has also had to borrow money in the past to help finance these
purchases. The company used cash in financing activities ($244 million) to help pay off this debt.
The company’s cash and cash equivalents position at the end of 2012, in the amount of $2,843
DESIGN SERVICES OF
million, is#149446 Cust: Pearson Au: Harrison Pg. No. xix
very strong.
Title: Financial Accounting Server:
C/M/Y/K
Short / Normal
S4carlisle
Publishing Services
 22 Chapter 1

MyAccountingLab 4. The statement of cash flows for the 12 months ended January 28, 2012
a. Reports cash flows from operating, investing, and financing activities. Each category
results in net cash provided (an increase) or used (a decrease).
b. Reports whether cash and cash equivalents increased (or decreased) during the year.
The statement shows the ending cash and cash equivalents balance, as reported on
xx   Preface the balance sheet (arrow 3 in Exhibit 1-11).

MyAccountingLab
Exhibit 1-11 | Relationships among the Financial Statements (in millions of $)
Accounting Cycle
NEW!
Examples Simplified A1
A
The Gap, Inc.
B C D E

Consolidated Statement of Income (Adapted)

Accounting Cycle Tutorial (ACT) 1

2 Net sales
12 Months Ended January 28, 2012
$ 14,549
3 Expenses 13,716
4 Net income $ 833
For more practice and review 5

of accounting cycle concepts in A1

A B C D E
1

chapters 1 through 3, use ACT, the 1

2
Consolidated Statement of Retained Earnings (Adapted)
Beginning retained earnings $ 11,767

Accounting Cycle Tutorial, online 3

4
5
Net income
Cash dividends declared
Ending retained earnings balance $
833
(236)
12,364
at www.myaccountinglab.com. The 6

Tutorial portion of ACT reviews A1

A B C D E

major concepts, the Application 1

2 Assets
Consolidated Balance Sheet (Adapted)
2

provides practice exercises, and the 3 Cash and cash equivalents $ 1,885
4 All other assets 5,537
5 Total assets $ 7,422
Glossary reviews important terms. 6 Liabilities
7 Total liabilities $ 4,667
8 Stockholders’ Equity
9 Common stock and additional paid-in capital 2,922
10 Retained earnings 12,364
11 Other equity (12,531)
12 Total stockholders' equity 2,755
13 Total liabilities and stockholders' equity $ 7,422
14
3

A1
A B C D E
1 Consolidated Statement of Cash Flows (Adapted)
2 Net cash provided by operating activities $ 1,363
3 Net cash used in investing activities (454)
4 Net cash used in financing activities (602)
5 Effect of foreign exchange rate fluctuations on cash 17
6 Net increase (decrease) in cash and cash equivalents 324
7 Cash and cash equivalents, beginning of year 1,561
8 Cash and cash equivalents, end of year $ 1,885
9

Excel Opportunities in MyAccountingLab Increased

NEW!
Now students can get even more real-world Excel practice in their classes in every
chapter:
■ Instructors have the option to assign students end-of-chapter questions that can
be completed in an Excel-simulated environment. These selected questions are
indicated with a green Excel marginal icon.
■ Questions will be auto-graded, reported to, and visible in the grade book.
■ Excel remediation will be available to students.
468 Chapter 8 Internal Control & Cash 235

E8-29B. (Learning Objective 4: Prepare a consolidated balance sheet) Zeta, Inc., owns Theta P4-49A (Learning Objective 5: Construct and use a cash budget) Herman Knorr, chief financial
Corp. These two companies’ individual balance sheets follow: officer of Dallas Wireless, is responsible for the company’s budgeting process. Knorr’s staff is
preparing the Dallas Wireless cash budget for 2015. A key input to the budgeting process is last
year’s statement of cash flows, which follows (amounts in thousands):
A1
A B C D E
Zeta, Inc.
1 Consolidation Work Sheet A1
Theta Elimination A B C
2 Zeta, Inc. Corp. Debit Credit Dallas Wireless
3 Cash $ 48,000 $ 18,000 Statement of Cash Flows
4 Accounts receivable, net 82,000 58,000 1 For the Year Ended December 31, 2014
5 Note receivable from Zeta — 33,000 2 (In thousands)
6 Inventory 54,000 83,000 3 Cash Flows from Operating Activities
7 Investment in Theta 119,000 — 4 Collections from customers $ 61,000
8 Plant assets, net 288,000 98,000 5 Interest received 400
9 Other assets 29,000 11,000 6 Cash payments for inventory (46,000)
10 Total $ 620,000 $ 301,000 7 Cash payments for operating expenses (13,200)
11 8 Net cash provided by operating activities 2,200
12 9 Cash Flows from Investing Activities
13 Accounts payable $ 49,000 $ 35,000 10 Purchases of equipment (4,500)
14 Notes payable 152,000 23,000 11 Purchases of investments (800)
15 Other liabilities 78,000 124,000 12 Sales of investments 900
16 Common stock 107,000 82,000 13 Net cash used for investing activities (4,400)
17 Retained earnings 234,000 37,000 14 Cash Flows from Financing Activities
18 Total $ 620,000 $ 301,000 15 Payment of long-term debt (200)
19 16 Issuance of stock 1,400
17 Payment of cash dividends (500)
18 Net cash provided by financing activities 700
19 Cash
Requirements 20
21
Increase (decrease) in Cash
Cash, beginning of year
(1,500)
3,100
1. Prepare a consolidated balance sheet of Zeta, Inc. It is sufficient to complete the consolida- 22 Cash, end of year $ 1,600
tion work sheet. Use Exhibit 8-7 as a model. 23
2. What is the amount of stockholders’ equity for the consolidated entity?

E8-30B. (Learning Objective 1: Analyze and report held-to-maturity security transac- Requirements
tions) Assume that on September 30, 2014, Rentex, Inc., paid 96 for 7% bonds of Oleander 1. Prepare the Dallas Wireless cash budget for 2015. Date the budget simply “2015,” and
Corporation as a long-term held-to-maturity investment. The maturity value of the bonds will denote the beginning and ending cash balances as “beginning” and “ending.” Assume the
be $80,000 on September 30, 2019. The bonds pay interest on March 31 and September 30. company expects 2015 to be the same as 2014, but with the following changes:
Requirements a. In 2015, the company expects a 25% increase in collections from customers and a 26%
increase in purchases of inventory.
1. What method should Rentex use to account for its investment in the Oleander Corp.
b. There will be no sales of investments in 2015.
bonds?
c. Dallas Wireless plans to issue no stock in 2015.
2. Using the straight-line method of amortizing the discount on bonds, journalize all of
d. Dallas Wireless plans to end the year with a cash balance of $4,675.
Rentex’s transactions on the bonds for 2014.
3. Show how Rentex would report everything related to the bond investment on its balance
sheet at December 31, 2014. Group B
E8-31B. (Learning Objective 6: Calculate the present value of a bond investment) Itaska Corp. P4-50B (Learning Objectives 1, 4: Describe fraud and its impact; evaluate internal controls)
purchased 20 $1,000 4% bonds of Citigroup when the market rate of interest was 3%. Interest Finnish Imports is an importer of silver, brass, and furniture items from Finland. Lois Ferguson
is paid semiannually, and the bonds will mature in five years. Using the PV function in Excel, is the general manager of Finnish Imports. Ferguson employs two other people in the business.
compute the price Itaska paid (the present value) for the bond investment. Mandy Martin serves as the buyer for Finnish Imports. In her work, Martin travels throughout
Finland to find interesting new products. When Martin finds a new product, she arranges for
Finnish Imports to purchase and pay for the item. She helps the artisans prepare their invoices
and then faxes the invoices to Ferguson inDESIGN SERVICES
the company office. OF
#149446 Cust: Pearson Au: Harrison Pg. No. xx
Title: Financial Accounting Server:
C/M/Y/K
Short / Normal
S4carlisle
Ferguson operates out of an office in Brooklyn, New York. The office is managed by Sandra
Moore, who handles the mail, keeps the accounting records, makes bank deposits, and prepares
Publishing Services
the monthly bank reconciliation. Virtually all of Finnish Imports’ cash receipts arrive by mail—
from sales made to Target, Crate and Barrel, and Williams-Sonoma.
Exploring the Variety of Random
Documents with Different Content
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