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Copyright, ii
Students Will “Get it” Anytime, Anywhere With Horngren/Harrison/Oliver’s Student Learning System!, xiv
About the Authors, xxvii
Chapter 1. Accounting and the Business Environment, 1
Accounting Vocabulary: The Language of Business, 2
Decision Makers: The Users of Accounting Information, 2
Individuals, 2
Businesses, 2
Investors, 3
Creditors, 3
Taxing Authorities, 3
Financial Accounting and Management Accounting, 3
The Accounting Profession and the Organizations that Govern it, 3
Governing Organizations, 4
Ethics in Accounting and Business, 5
Standards of Professional Conduct, 5
Types of Business Organizations, 5
Four Types of Business Organizations, 5
Distinguishing Characteristics and Organization of a Corporation, 7
Separate Legal Entity, 7
Continuous Life and Transferability of Ownership, 7
No Mutual Agency, 8
Limited Liability of Stockholders, 8
Separation of Ownership and Management, 8
Corporate Taxation, 8
Government Regulation, 8
Organization of a Corporation, 9
Accounting Concepts and Principles, 9
The Entity Concept, 10
The Reliability (Objectivity) Principle, 10
The Cost Principle, 10
The Going-Concern Concept, 10
The Stable Monetary Unit Concept, 11
The Accounting Equation, 11
Assets and Liabilities, 11
Owners’ Equity, 12
Accounting for Business Transactions, 13
Transactions Analysis for Smart Touch Learning, 14
Preparing the Financial Statements—the User Perspective of Accounting, 18
The Financial Statements, 20
Headings, 20
Using Financial Statements to Evaluate Business Performance, 23
Relationships Among the Financial Statements, 23
Decision Guidelines, 25
Summary Problem, 26
Review, 28
Chapter 1 Demo Doc: Transaction Analysis Using Accounting Equation/Financial Statement Preparation, 54
Chapter 2. Recording Business Transactions, 63
The Account, the Journal, and the Ledger, 64
Assets, 64
Liabilities, 65
Stockholders’ Equity, 66
Chart of Accounts, 66
Debits, Credits, and Double-Entry Accounting, 68
The T-Account, 68
Increases and Decreases in the Accounts, 69
List the Steps of the Transaction Recording Process, 70
Posting (Copying Information) from the Journal to the Ledger, 71
Expanding the Rules of Debit and Credit: Revenues and Expenses, 72
The Normal Balance of An Account, 73
Source Documents—The Origin of the Steps, 74
Journalizing Transactions and Posting to the Ledger, 74
Practice Journalizing with Specific Examples, 74
The Ledger Accounts After Posting, 80
Preparing the Trial Balance from the T-Accounts, 81
Correcting Trial Balance Errors, 82
Details of Journals and Ledgers, 83
The Four-Column Account: An Alternative to the T-Account, 84
Decision Guidelines, 85
Summary Problem, 86
Review, 90
Chapter 2 Demo Doc: Debit/Credit Transaction Analysis, 123
Chapter 3. The Adjusting Process, 133
Accrual Accounting Versus Cash-Basis Accounting, 134
Other Accounting Principles, 135
The Accounting Period, 135
The Revenue Principle, 136
The Matching Principle, 137
The Time-Period Concept, 137
Why We Adjust the Accounts, 138
Two Categories of Adjusting Entries, 139
Prepaid Expenses, 139
Depreciation, 142
Accrued Expenses, 144
Accrued Revenues, 146
Unearned Revenues, 146
Summary of the Adjusting Process, 149
The Adjusted Trial Balance, 152
The Financial Statements, 153
Preparing the Statements, 153
Relationships Among the Financial Statements, 153
Ethical Issues in Accrual Accounting, 155
Decision Guidelines, 156
Summary Problem, 157
Review, 162
Appendix 3A: Alternative Treatment of Prepaid Expenses and Unearned Revenues, 190
Chapter 3 Demo Doc: Preparation of Adjusting Entries, Adjusted Trial Balance, and Financial Statements, 194
Chapter 4. Completing the Accounting Cycle, 206
The Work Sheet, 207
Net Income, 210
Net Loss, 210
Summary Problem 1, 211
Completing the Accounting Cycle, 213
Preparing the Financial Statements from a Work Sheet, 213
Recording the Adjusting Entries from a Work Sheet, 213
Closing the Accounts, 216
Closing Temporary Accounts, 217
Postclosing Trial Balance, 219
Classifying Assets and Liabilities, 219
Assets, 220
Liabilities, 220
The Classified Balance Sheet, 221
Balance Sheet Forms, 221
Accounting Ratios, 222
Current Ratio, 223
Debt Ratio, 223
Decision Guidelines, 224
Summary Problem 2, 225
Review, 229
Appendix 4A: Reversing Entries: An Optional Step, 256
Comprehensive Problem for Chapters 1-4: Journalizing, Posting, Work Sheet, Adjusting, Closing the Financial Statements, 260
Chapter 4 Demo Doc: Accounting Work Sheets and Closing Entries, 262
Chapter 5. Merchandising Operations, 270
What Are Merchandising Operations?, 272
The Operating Cycle of a Merchandising Business, 272
Inventory Systems: Perpetual and Periodic, 273
Perpetual Inventory Systems, 273
Accounting for Inventory in the Perpetual System, 274
Purchase of Inventory, 274
Sale of Inventory, 279
Summary Problem 1, 284
Adjusting and Closing the Accounts of a Merchandiser, 286
Adjusting Inventory Based on a Physical Count, 286
Closing the Accounts of a Merchandiser, 287
Preparing a Merchandiser’s Financial Statements, 288
Income Statement Formats: Multi-Step and Single-Step, 290
Two Ratios for Decision Making, 290
The Gross Profit Percentage, 290
The Rate of Inventory Turnover, 291
Decision Guidelines, 292
Summary Problem 2, 294
Review, 297
Appendix 5A: Work Sheet for a Merchandising Business, 319
Appendix 5B: Accounting for Merchandise in a Periodic Inventory System, 323
Comprehensive Problem for Chapters 1-5: Completing a Merchandiser’s Accounting Cycle, 329
Chapter 6. Merchandise Inventory, 331
Accounting Principles and Inventories, 332
Inventory Costing Methods, 333
Inventory Accounting in a Perpetual System, 336
First-In, First-Out (FIFO) Method, 336
Last-In, First-Out (LIFO) Method, 338
Average Cost Method, 340
Comparing FIFO, LIFO, and Average Cost, 341
Summary Problem 1, 343
Lower-of-Cost-or-Market Rule, 346
Effects of Inventory Errors, 347
Estimating Ending Inventory, 348
Ethical Issues, 349
Decision Guidelines, 350
Summary Problem 2, 351
Review, 352
Appendix 6A: Accounting for Inventory in a Periodic System, 371
Chapter 7. Internal Control and Cash, 378
Internal Control, 379
The Sarbanes-Oxley Act (SOX), 380
The Components of Internal Control, 380
Internal Control Procedures, 381
Internal Controls for E-Commerce, 384
The Limitations of Internal Control—Costs and Benefits, 385
The Bank Account as a Control Device, 386
The Bank Reconciliation, 388
Preparing the Bank Reconciliation, 389
Online Banking, 392
Summary Problem 1, 394
Internal Control over Cash Receipts, 396
Internal Control over Cash Payments, 397
Controls over Payment by Check, 397
Controlling Small Cash Payments, 399
The Petty Cash Fund, 399
Ethics and Accounting, 402
Corporate and Professional Codes of Ethics, 402
Ethical Issues in Accounting, 402
Decision Guidelines, 404
Summary Problem 2, 405
Review, 406
Chapter 8. Receivables, 429
Receivables: An Introduction, 430
Types of Receivables, 430
Internal Control over Collection of Receivables, 431
Decision Guidelines, 432
Accounting for Uncollectibles (Bad Debts), 433
The Allowance Method, 433
Estimating Uncollectibles, 434
Identifying and Writing Off Uncollectible Accounts, 437
Recovery of Accounts Previously Written Off—Allowance Method, 437
The Direct Write-Off Method, 439
Recovery of Accounts Previously Written Off—Direct Write-Off Method, 439
Reporting Receivables on the Balance Sheet, 440
Credit-Card, Bankcard, and Debit-Card Sales, 441
Credit-Card Sales, 441
Bankcard Sales, 442
Debit-Card Sales, 442
Summary Problem 1, 443
Notes Receivable, 445
Identifying Maturity Date, 445
Computing Interest on a Note, 446
Accruing Interest Revenue, 447
Dishonored Notes Receivable, 449
Computers and Receivables, 450
Using Accounting Information for Decision Making, 450
Acid-Test (or Quick) Ratio, 451
Days’ Sales in Receivables, 451
Decision Guidelines, 453
Summary Problem 2, 454
Review, 455
Appendix 8A: Discounting a Note Receivable, 477
Chapter 9. Plant Assets and Intangibles, 480
Measuring the Cost of a Plant Asset, 482
Land and Land Improvements, 482
Buildings, 484
Machinery and Equipment, 484
Furniture and Fixtures, 484
A Lump-Sum (Basket) Purchase of Assets, 484
Capital Expenditures, 486
Depreciation, 487
Causes of Depreciation, 487
Measuring Depreciation, 487
Depreciation Methods, 488
Comparing Depreciation Methods, 491
Other Issues in Accounting for Plant Assets, 493
Summary Problem 1, 495
Disposing of a Plant Asset, 497
Situation A – Scrap the Truck, 499
Accounting for Natural Resources, 502
Accounting for Intangible Assets, 502
Specific Intangibles, 503
Accounting for Research and Development Costs, 505
Ethical Issues, 505
Decision Guidelines, 506
Summary Problem 2, 507
Review, 508
Chapter 10. Current Liabilities, Payroll, and Long-Term Liabilities, 524
Current Liabilities of Known Amount, 525
Accounts Payable, 525
Short-Term Notes Payable, 526
Sales Tax Payable, 526
Current Portion of Long-Term Notes Payable, 527
Accrued Expenses (Accrued Liabilities), 527
Unearned Revenues, 528
Current Liabilities that must be Estimated, 528
Estimated Warranty Payable, 528
Contingent Liabilities, 529
Decision Guidelines, 531
Summary Problem 1, 532
Accounting for Payroll, 533
Gross Pay and Net (Take-Home) Pay, 533
Payroll Withholding Deductions, 534
Employer Payroll Taxes, 536
Journalizing Payroll Transactions, 537
Internal Control over Payroll, 538
Decision Guidelines, 539
Summary Problem 2, 540
Bonds: An Introduction, 542
Types of Bonds, 542
Bond Prices, 542
Present Value, 544
Bond Interest Rates, 544
Accounting for Bonds Payable - Straight Line Method, 545
Issuing Bonds Payable at Maturity (Par) Value, 545
Issuing Bonds Payable at a Discount, 546
Decision Guidelines, 548
Issuing Bonds Payable at a Premium, 549
Adjusting Entries for Bonds Payable, 550
Issuing Bonds Payable Between Interest Dates, 551
Reporting Liabilities on the Balance Sheet, 552
Issuing Bonds Versus Stock, 552
Ethical Issues in Reporting Liabilities, 553
Decision Guidelines, 554
Summary Problem 3, 555
Review, 556
Appendix 10A: The Time Value of Money: Present Value of a Bond and Effective-Interest Amortization, 576
Appendix 10B: Retiring and Converting Bonds Payable, 589
Comprehensive Problem for Chapters 7-10: Comparing Two Businesses, 593
Chapter 11. Corporations: Paid-In Capital and the Balance Sheet, 595
Corporations: An Overview, 596
Capital Stock, 596
Stockholders’ Equity Basics, 597
Stockholders’ Rights, 598
Classes of Stock, 598
Issuing Stock, 599
Issuing Common Stock, 600
Issuing Preferred Stock, 603
Ethical Considerations, 603
Review of Accounting for Paid-In Capital, 604
Decision Guidelines, 605
Summary Problem 1, 606
Retained Earnings, 608
Accounting for Cash Dividends, 609
Dividend Dates, 609
Declaring and Paying Dividends, 610
Dividing Dividends Between Preferred and Common, 611
Dividends on Cumulative and Noncumulative Preferred, 611
Different Values of Stock, 612
Market Value, 612
Liquidation Value, 613
Book Value, 613
Evaluating Operations, 614
Rate of Return on Total Assets, 614
Rate of Return on Common Stockholders’ Equity, 615
Accounting for Income Taxes by Corporations, 616
Decision Guidelines, 617
Summary Problem 2, 618
Review, 620
Chapter 12. Corporations: Effects on Retained Earnings and the Income Statement, 641
Stock Dividends, 642
Stock Splits, 645
Stock Dividends and Stock Splits Compared, 647
Treasury Stock, 647
Treasury Stock Basics, 647
Purchase of Treasury Stock, 648
Sale of Treasury Stock, 648
Retirement of Stock, 650
Restrictions on Retained Earnings, 650
Variations in Reporting Stockholders’ Equity, 651
Decision Guidelines, 652
Summary Problem 1, 654
The Corporate Income Statement, 656
Continuing Operations, 656
Special Items, 657
Earnings per Share, 658
Statement of Retained Earnings, 659
Combined Statement of Income and Retained Earnings, 660
Prior-Period Adjustments, 660
Reporting Comprehensive Income, 661
Decision Guidelines, 662
Summary Problem 2, 663
Review, 665
Chapter 13. The Statement of Cash Flows, 681
Introduction: The Statement of Cash Flows, 682
Cash Equivalents, 682
Operating, Investing, and Financing Activities, 683
Two Formats for Operating Activities, 684
Preparing the Statement of Cash Flows by the Indirect Method, 684
Cash Flows from Operating Activities, 686
Cash Flows from Investing Activities, 689
Cash Flows from Financing Activities, 691
Net Change in Cash and Cash Balances, 693
Noncash Investing and Financing Activities, 694
Measuring Cash Adequacy: Free Cash Flow, 696
Decision Guidelines, 697
Summary Problem, 698
Review, 701
Appendix 13A: Preparing The Statement Of Cash Flows By The Direct Method, 721
Appendix 13B: Preparing the Indirect Statement of Cash Flows Using a Spreadsheet, 739
Chapter 14. Financial Statement Analysis, 745
Horizontal Analysis, 746
Illustration: Smart Touch Learning, Inc., 747
Horizontal Analysis of the Income Statement, 748
Horizontal Analysis of the Balance Sheet, 748
Trend Percentages, 748
Vertical Analysis, 749
How Do We Compare One Company with Another?, 751
Benchmarking, 752
Benchmarking Against a Key Competitor, 752
Benchmarking Against the Industry Average, 752
Summary Problem 1, 753
Using Ratios to Make Decisions, 755
Measuring Ability to Pay Current Liabilities, 755
Measuring Ability to Sell Inventory and Collect Receivables, 757
Measuring Ability to Pay Long-Term Debt, 759
Measuring Profitability, 760
Analyzing Stock Investments, 762
Red Flags in Financial Statement Analysis, 764
Decision Guidelines, 765
Summary Problem 2, 767
Review, 769
Comprehensive Problem for Chapters 13 and 14: Analyzing a Company for its Inventment Potential, 790
Chapter 15. Introduction to Management Accounting, 791
Management Accountability, 792
Today’s Business Environment, 794
Service Companies, 795
Merchandising Companies, 796
Summary Problem 1, 799
Manufacturing Companies, 801
Types of Costs, 801
Ethical Standards, 807
Decision Guidelines, 809
Summary Problem 2, 811
Review, 812
Chapter 16. Job Order and Process Costing, 831
How Much Does it Cost to Make a Product? Two Approaches, 832
Job Order Costing, 832
Process Costing, 832
How Job Costs Flow Through the Accounts: An Overview, 833
Decision Guidelines, 839
Summary Problem 1, 840
Job Order Costing: Allocating Manufacturing Overhead, 842
Accounting for Completion and Sale of Finished Goods and Adjusting Manufacturing Overhead, 845
Accounting for the Completion and Sale of Finished Goods, 846
Job Order Costing in a Service Company, 848
Decision Guidelines, 851
Summary Problem 2, 852
Review, 855
Appendix 16A: Process Costing—Weighted-Average Method, 877
Chapter 17. Activity-Based Costing and Other Cost Management Tools, 901
Refining Cost Systems, 902
Sharpening the Focus: Assigning Costs Based on the Activities That Caused the Costs, 902
Developing an Activity-Based Costing System, 904
Traditional Versus Activity-Based Costing Systems: Smart Touch Learning, 905
Activity-Based Management: Using ABC for Decision Making, 907
Pricing and Product Mix Decisions, 908
Cutting Costs, 909
Decision Guidelines, 912
Summary Problem 1, 913
Just-In-Time (JIT) Systems, 915
Just-in-Time Costing, 916
JIT Costing Illustrated: Smart Touch Learning, 917
Continuous Improvement and the Management of Quality, 919
The Four Types of Quality Costs, 920
Deciding Whether to Adopt a New Quality Program, 921
Decision Guidelines, 922
Summary Problem 2, 923
Review, 924
Chapter 18. Cost-Volume-Profit Analysis, 947
Cost Behavior, 948
Variable Costs, 948
Fixed Costs, 949
Mixed Costs, 950
High-Low Method to Separate Fixed Cost from Variable Costs, 951
Relevant Range, 952
Basic CVP Analysis: What Must We Sell To Break Even?, 953
Assumptions, 953
How Much Must Greg Sell to Break Even? Three Approaches, 954
Using CVP To Plan Profits, 957
How Much Must Greg’s Sell to Earn a Profit?, 957
Graphing Cost-Volume-Profit Relations, 958
Summary Problem 1, 960
Using CVP For Sensitivity Analysis, 962
Changing the Selling Price, 962
Changing Variable Costs, 962
Changing Fixed Costs, 963
Margin of Safety, 964
Information Technology and Sensitivity Analysis, 964
Effect of Sales Mix on CVP Analysis, 965
Decision Guidelines, 967
Summary Problem 2, 969
Review, 971
Appendix 18A: Variable Costing and Absorption Costing, 986
Chapter 19. Short-Term Business Decisions, 994
How Managers Make Decisions, 995
Relevant Information, 995
Relevant Nonfinancial Information, 997
Keys to Making Short-Term Special Decisions, 997
Special Sales Order and Regular Pricing Decisions, 998
When to Accept a Special Sales Order, 998
How to Set Regular Prices, 1001
Decision Guidelines, 1006
Summary Problem 1, 1007
When to Drop Products, Departments, or Territories, 1009
Dropping Products Under Various Assumptions, 1010
Product Mix: Which Product to Emphasize?, 1012
Outsourcing and Sell as is or Process Further Decisions, 1014
When to Outsource, 1014
Sell As Is or Process Further?, 1018
Decision Guidelines, 1020
Summary Problem 2, 1021
Review, 1023
Chapter 20. Capital Investment Decisions and the Time Value of Money, 1042
Capital Budgeting, 1043
Four Popular Methods of Capital Budgeting Analysis, 1043
Focus on Cash Flows, 1043
Capital Budgeting Process, 1044
Using Payback and Accounting Rate of Return to Make Capital Investment Decisions, 1045
Payback Period, 1045
Accounting Rate of Return (ARR), 1048
Decision Guidelines, 1051
Summary Problem 1, 1052
A Review of the Time Value of Money, 1053
Factors Affecting the Time Value of Money, 1053
Future Values and Present Values: Points Along the Time Line, 1054
Future Value and Present Factors, 1055
Calculating Future Values of Single Sums and Annuities Using FV Factors, 1055
Calculating Present Values of Single Sums and Annuities Using PV Factors, 1056
Using Discounted Cash Flow Models to Make Capital Budgeting Decisions, 1058
Net Present Value (NPV), 1058
Internal Rate of Return (IRR), 1063
Comparing Capital Budgeting Methods, 1066
Decision Guidelines, 1068
Summary Problem 2, 1069
Review, 1070
Chapter 21. The Master Budget and Responsibility Accounting, 1083
Why Managers Use Budgets, 1084
Using Budgets to Plan and Control, 1085
Benefits of Budgeting, 1086
Understanding the Components of the Master Budget, 1087
Components of the Master Budget, 1088
Data for Greg’s Groovy Tunes, 1089
Preparing the Operating Budget, 1091
The Sales Budget, 1091
The Inventory, Purchases, and Cost of Goods Sold Budget, 1091
The Operating Expenses Budget, 1092
The Budgeted Income Statement, 1093
Summary Problem 1, 1094
Preparing the Financial Budget, 1096
Preparing the Cash Budget, 1096
The Budgeted Balance Sheet, 1099
The Budgeted Statement of Cash Flows, 1100
Getting Employees to Accept the Budget, 1100
Using Information Technology for Sensitivity Analysis and Rolling Up Unit Budgets, 1101
Sensitivity Analysis, 1101
Rolling Up Individual Unit Budgets into the Companywide Budget, 1102
Responsibility Accounting, 1103
Four Types of Responsibility Centers, 1103
Responsibility Accounting Performance Reports, 1104
Decision Guidelines, 1108
Summary Problem 2, 1109
Review, 1113
Chapter 22. Flexible Budgets and Standard Costs, 1131
How Managers Use Flexible Budgets, 1132
What Is a Flexible Budget?, 1133
Using The Flexible Budget: Why Do Actual Results Differ From The Static Budget?, 1134
Decision Guidelines, 1137
Summary Problem 1, 1138
Standard Costing, 1139
Price Standards, 1139
Application, 1140
Quantity Standards, 1140
Why Do Companies Use Standard Costs?, 1141
Variance Analysis, 1142
How Smart Touch Uses Standard Costing: Analyzing The Flexible Budget Variance, 1143
Direct Material Variances, 1143
Direct Labor Variances, 1146
Manufacturing Overhead Variances, 1147
Allocating Overhead in a Standard Cost System, 1147
Overhead Flexible Budget Variance, 1149
Overhead Production Volume Variance, 1149
Summary of Overhead Variances, 1150
Standard Cost Accounting Systems, 1150
Journal Entries, 1150
Standard Cost Income Statement for Management, 1152
Decision Guidelines, 1154
Summary Problem 2, 1155
Review, 1158
Chapter 23. Performance Evaluation and the Balanced Scorecard, 1176
Decentralized Operations, 1177
Advantages of Decentralization, 1178
Disadvantages of Decentralization, 1178
Responsibility Centers, 1179
Performance Measurement, 1180
Goals of Performance Evaluation Systems, 1180
The Balanced Scorecard, 1181
The Four Perspectives of the Balanced Scorecard, 1182
Decision Guidelines, 1187
Summary Problem 1, 1188
Measuring the Financial Performance of Cost, Revenue, and Profit Centers, 1189
Measuring the Financial Performance of Investment Centers, 1191
Return on Investment (ROI), 1193
Residual Income (RI), 1195
Limitations of Financial Performance Measures, 1199
Decision Guidelines, 1201
Summary Problem 2, 1202
Review, 1204
Appendix 23A: Allocating Service Department Costs, 1216
Appendix A. Amazon.com Annual Report, A-1
Appendix B. Present Value Tables, B-1
Appendix C. Check Figures (Provided for Quick Check through A problems only), C-1
Glindex (Combined Glossary/Index), G-1
Company Index, I-1

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