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Financial Accounting: A Business Process Approach, Second Edition
by
Jane L. Reimers
Publisher: Prentice Hall
Publishing Date: 2007/05/31
eText ISBN-10
0-13-235569-8
eText ISBN-13
978-0-13-235569-8
Print ISBN-10
0-13-147386-7
Print ISBN-13
978-0-13-147386-7
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Financial Accounting: A Business Process Approach, Second Edition
by
Jane L. Reimers
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Copyright, iv
Preface, xvii
About the Author, xxi
Chapter 1. Business: What...
Chapter 2. Qualities of A...
Chapter 3. Accruals and D...
Chapter 4. Acquisition an...
Chapter 5. The Purchase a...
Chapter 6. Payment for Go...
Chapter 7. Accounting for...
Chapter 8. Accounting for...
Chapter 9. Preparing and ...
Chapter 10. Using Financi...
Chapter 11. Quality of Ea...
Appendix A. Staples Finan...
Appendix B. The Mechanics...
Glossary, 621
Index, 627
Table of Contents
Copyright, iv
Preface, xvii
About the Author, xxi
Chapter 1. Business: What’s It All About?, 1
Purpose and Organization of a Business, 2
What Is Business All About?, 3
The Nature of Business Operations, 3
Ownership Structure of a Business, 4
Sole Proprietorships, 5
Partnerships, 6
Corporations, 7
Business Activities and the Flow of Goods and Services, 9
Information Needs for Decision Making in Business, 10
Who Needs Information About Transactions of the Business?, 11
Accounting Information: A Part of the Firm’s Information System, 13
Overview of the Financial Statements, 13
Balance Sheet, 14
Income Statement, 18
News Flash, 18
The Difference between the Balance Sheet and the Income Statement, 19
Statement of Changes in Shareholders’ Equity, 20
Statement of Cash Flows, 21
Flow of Information and the Financial Statements, 24
Real Company Financial Statements, 24
Business Risk, Control, and Ethics, 27
Chapter Summary Points, 29
Chapter Summary Problems, 29
Key Terms, 30
Answers to YOUR TURN Questions, 31
Financial Statement Analysis, 46
Critical Thinking Problems, 48
Internet Exercise: Disney Corporation, 48
Chapter 2. Qualities of Accounting Information, 49
Information for Decision Making, 50
Characteristics of Accounting Information, 51
What Makes Information Useful?, 51
Relevant, 51
Reliable, 51
Comparable, 51
Consistent, 52
Assumptions and Principles Underlying Financial Reporting, 52
Elements of the Financial Statements, 53
Transactions for the Second Month of Business, 54
Assets, 59
Liabilities, 61
Shareholders’ Equity, 61
Measurement and Recognition in Financial Statements, 61
Measuring Assets, 61
Recognizing Revenue and Expenses, 62
News Flash, 62
Accruals and Deferrals, 64
Accrual Basis Accounting, 64
Cash Basis Versus Accrual Basis Accounting, 65
Accounting Periods and Cutoff Issues, 65
How Investors—Owners and Creditors—Use Accrual Accounting Information, 66
An Example to Illustrate the Information Financial Statements Provide, 67
Putting It All Together—the Objectives of Financial Statements, 70
Real Company Financial Statements, 72
Applying Your Knowledge: Ratio Analysis, 74
Business Risk, Control, and Ethics, 74
Internal Controls—Definition and Objectives, 75
Special Internal Control Issues Related to Financial Statements, 75
Preventive Controls, 75
News Flash, 76
Detective Controls, 76
Corrective Controls, 76
Chapter Summary Points, 76
Chapter Summary Problems, 77
Key Terms, 80
Answers to YOUR TURN Questions, 80
Financial Statement Analysis, 94
Critical Thinking Problems, 96
Internet Exercise: MSN Money and Merck, 96
Chapter 3. Accruals and Deferrals: Timing Is Everything in Accounting, 97
Measuring Income, 98
Accruals, 100
Accruals for Interest Expense and Interest Revenue, 100
Accruals for Other Revenues and Expenses, 102
Deferrals, 104
Deferrals Related to Revenue, 105
Unearned Revenue, 105
Gift Certificates, 105
Deferrals Related to Expenses, 107
Insurance, 107
News Flash, 107
Rent, 108
Supplies, 109
Equipment, 110
Effects of Accruals and Deferrals on Financial Statements, 113
Tom’s Wear Transactions for March, 113
Adjustments to the Accounting Records, 117
Preparing the Financial Statements, 118
Accruals and Deferrals on Real Firms’ Financial Statements, 120
Applying Your Knowledge: Ratio Analysis, 122
Working Capital, 122
Quick Ratio, 123
Business Risk, Control, and Ethics, 124
Errors in Recording and Updating the Accounting Records, 124
Unauthorized Access to the Accounting Information, 125
Loss or Destruction of Accounting Data, 125
Chapter Summary Points, 125
Chapter Summary Problems, 126
Key Terms, 128
Answers to YOUR TURN Questions, 128
Financial Statement Analysis, 150
Critical Thinking Problems, 151
Internet Exercise: Darden, 152
Chapter 4. Acquisition and Use of Long-Term Operational Assets, 153
Acquiring Plant Assets, 154
News Flash, 155
Types of Long-Lived Assets: Tangible and Intangible, 155
Acquisition Costs, 155
Basket Purchase Allocation, 156
Using Long-Term Tangible Assets: Depreciation and Depletion, 158
Straight-Line Depreciation, 159
Activity (Units-of-Production) Depreciation, 162
Declining Balance Depreciation, 164
Depletion, 166
Using Intangible Assets: Amortization, 167
Copyrights, 167
Patents, 168
Trademarks, 168
Franchises, 168
Goodwill, 168
Research and Development Costs, 169
Changes after the Purchase of the Asset, 169
Asset Impairment, 169
Expenditures to Improve an Asset or Extend Its Useful Life, 170
Revising Estimates of Useful Life and Salvage Value, 170
Selling Long-Term Assets, 171
Presentation of Long-Term Assets on the Financial Statements, 173
Reporting Long-Term Assets, 173
Preparing Statements for Tom’s Wear, 173
Applying Your Knowledge—Ratio Analysis, 176
Return on Assets, 176
Asset Turnover Ratio, 179
Business Risk, Control, and Ethics, 180
News Flash, 180
Chapter Summary Points, 181
Chapter Summary Problems, 181
Key Terms, 185
Answers to YOUR TURN Questions, 185
Financial Statement Analysis, 205
Critical Thinking Problems, 206
Internet Exercise: Best Buy, 207
Appendix 4, 208
Chapter 5. The Purchase and Sale of Inventory, 209
Acquiring and Selling Merchandise, 210
An Operating Cycle, 210
Acquiring Merchandise for Sale, 210
Acquisition Process for Inventory, 211
Recording Purchases, 212
Who Pays the Freight Costs to Obtain Inventory?, 212
Purchase Returns and Allowances, 214
Purchase Discounts, 214
Summary of Purchases for Quality Lawn Mowers, 215
Selling Merchandise, 216
Sales Process, 216
Recording Sales, 217
Sales Returns and Allowances, 217
Sales Discounts and Shipping Terms, 217
Summary of Purchases and Sales for Quality Lawn Mowers, 218
Sales Taxes, 218
Recording Inventory: Perpetual Versus Periodic Record Keeping, 219
Differences between Perpetual and Periodic Inventory Systems, 219
Inventory Cost Flow Assumptions, 220
Specific Identification, 221
Weighted Average Cost, 221
First-In, First-Out Method (FIFO), 223
Last-In, First-Out Method (LIFO), 223
How Inventory Cost Flow Assumptions Affect the Financial Statements, 226
Differences in Reported Inventory and Cost of Goods Sold Under Different Cost Flow Assumptions, 226
Conclusions About Inventory Cost Flow Assumptions, 230
Income Tax Effects of LIFO and FIFO, 231
How Do Firms Choose an Inventory Cost Flow Method?, 232
Applying Inventory Assumptions to Tom’s Wear, 233
Complications in Valuing Inventory: Lower-of-Cost-or-Market Rule, 238
Financial Statement Analysis, 238
Gross Profit Ratio, 238
Inventory Turnover Ratio, 241
News Flash, 241
Business Risk, Control, and Ethics, 242
Chapter Summary Points, 244
Chapter Summary Problems, 244
Key Terms, 247
Answers to YOUR TURN Questions, 247
Financial Statement Analysis, 270
Critical Thinking Problems, 272
Internet Exercise: GAP, 272
Appendix 5A, 274
Appendix 5B, 276
Chapter 6. Payment for Goods and Services: Cash and Accounts Receivable, 277
Controlling Cash, 278
Assignment of Responsibilities for Cash, 278
News Flash, 278
Bank Reconciliations, 279
Steps in the Reconciliation, 280
Reconciling Items, 280
An Example of a Bank Reconciliation and the Adjustments, 281
Reporting Cash, 285
Cash Equivalents, 285
The Statement of Cash Flows, 285
Accounts Receivable and Bad Debts Expense, 286
Extending Credit, 286
Recording Uncollectible Accounts, 286
Methods of Estimating Bad Debts Expense, 288
Allowance Method—Percentage of Sales Method, 288
Allowance Method—Accounts Receivable Method, 288
Writing Off a Specific Account, 290
The Direct Write-off Method, 293
Credit Card Sales, 294
News Flash, 295
Notes Receivable, 295
Warranties, 296
Tom’s Wear for June, 297
Applying Your Knowledge: Ratio Analysis, 301
Business Risk, Control, and Ethics, 303
Clear Assignment of Responsibility, 303
Specific Procedures for Documentation, 303
Independent Internal Verification of Data, 304
Chapter Summary Points, 304
Chapter Summary Problems, 305
Key Terms, 306
Answers to YOUR TURN Questions, 306
Financial Statement Analysis, 326
Critical Thinking Problems, 328
Internet Exercise: Intel Corporation, 328
Chapter 7. Accounting for Liabilities, 331
Types of Liabilities, 332
Definitely Determinable Liabilities, 332
Payroll, 334
Long-Term Notes Payable and Mortgages, 335
Long-Term Liabilities: Raising Money by Issuing Bonds, 339
What Is a Bond?, 339
More about Bonds, 340
Issuing Bonds Payable: Getting the Money, 341
Bonds Issued at Par, 342
Bonds Issued at a Discount, 342
Bonds Issued at a Premium, 343
Paying the Bondholders, 344
Amortizing Bond Discounts and Premiums: Effective Interest Method, 344
Straight-Line Amortization of Bond Discounts and Premiums, 347
News Flash, 347
Tom’s Wear for July, 348
Applying Your Knowledge: Financial Statement Analysis, 352
Business Risk, Control, and Ethics, 354
News Flash, 354
Chapter Summary Points, 355
Chapter Summary Problems, 355
Key Terms, 357
Answers to YOUR TURN Questions, 357
Financial Statement Analysis, 372
Critical Thinking Problems, 374
Internet Exercise: Starbucks, 375
Appendix 7A, 376
Chapter 8. Accounting for Shareholders’ Equity, 383
Components of Shareholders’ Equity in a Corporation—Contributed Capital, 384
Stock—Authorized, Issued, and Outstanding, 384
Common Stock, 385
Preferred Stock, 387
Cash Dividends, 388
Important Dates Related to Dividends, 389
Declaration Date, 389
Date of Record, 389
Payment Date, 390
Distribution of Dividends between Common and Preferred Shareholders, 390
An Example of Dividend Payment, 390
Treasury Stock, 391
Why Do Firms Buy Their Own Stocks?, 391
Accounting for the Purchase, 392
Selling Treasury Stock, 393
News Flash, 393
Reporting Treasury Stock, 394
Stock Dividends and Stock Splits, 394
Stock Dividends, 394
Stock Splits, 395
Retained Earnings, 396
Tom’s Wear Issues New Stock, 397
Applying Your Knowledge: Ratio Analysis, 401
Return on Equity, 401
Earnings Per Share, 401
Business Risk, Control, and Ethics, 402
Risks Faced by Owners, 402
Public or Private?, 403
News Flash, 403
Chapter Summary Points, 404
Chapter Summary Problems, 404
Key Terms, 406
Answers to YOUR TURN Questions, 406
Financial Statement Analysis, 423
Critical Thinking Problems, 425
Internet Exercise: Hershey Foods Corporation, 425
Chapter 9. Preparing and Analyzing the Statement of Cash Flows, 427
The Importance of the Statement of Cash Flows, 428
News Flash, 428
Two Methods of Preparing and Presenting the Statement of Cash Flows, 429
Accrual Accounting Versus Cash Basis Accounting, 431
Preparing the Statement of Cash Flows: Direct Method, 432
Preparing the Statement of Cash Flows: Indirect Method, 435
Cash from Investing and Financing Activities, 436
Summary of Direct and Indirect Methods, 437
Applying Your Knowledge: Financial Statement Analysis, 438
Business Risk, Control, and Ethics, 441
News Flash, 441
Chapter Summary Points, 442
Chapter Summary Problems, 442
Key Terms, 445
Answers to YOUR TURN Questions, 446
Financial Statement Analysis, 470
Critical Thinking Problems, 473
Internet Exercise: Carnival Corp., 473
Chapter 10. Using Financial Statement Analysis to Evaluate Firm Performance, 475
A Closer Look at the Income Statement, 476
Discontinued Operations, 476
Extraordinary Items, 477
News Flash, 478
Reporting Taxes, 479
Horizontal and Vertical Analysis of Financial Information, 479
Horizontal Analysis, 479
Vertical Analysis, 480
Ratio Analysis, 480
A Review of All Ratios, 480
Market Indicator Ratios, 481
News Flash, 482
Understanding Ratios, 484
Using Ratio Analysis, 484
Financial Statement Analysis—More than Numbers, 485
Business Risk, Control, and Ethics, 489
Chapter Summary Points, 490
Chapter Summary Problems, 490
Key Terms, 493
Answers to YOUR TURN Questions, 493
Critical Thinking Problems, 519
Internet Exercise: Papa John’s International, 520
Appendix 10A, 521
Appendix 10B, 523
Chapter 11. Quality of Earnings and Corporate Governance, 525
Why Are Earnings Important?, 526
The Quality of Earnings, 527
Common Ways to Manipulate Earnings, 528
Big Bath Charges, 528
Cookie Jar Reserves, 528
Revenue Recognition, 529
What We Learned from the Business Scandals of the Early 2000s, 530
News Flash, 531
The Sarbanes-Oxley Act of 2002, 531
Key Players in Corporate Governance, 531
News Flash, 534
Outlook for the Future, 534
Evaluating Corporate Governance, 535
Defining and Measuring Good Corporate Governance, 535
How Can We Evaluate a Firm’s Corporate Governance?, 535
You Have Come a Long Way, 536
Chapter Summary Points, 537
Key Terms, 537
Answers to YOUR TURN Questions, 537
Internet Exercises, 539
Appendix A. Staples Financial Reports, 541
Appendix B. The Mechanics of an Accounting System, 575
Glossary, 621
Index, 627
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