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Paul Kimmel’s
Accounting Course Design
with WileyPLUS
Paul Kimmel, author of several Wiley courses, teaches at The University
of Wisconsin—Madison and uses WileyPLUS in a flipped classroom
format.
Ignite student potential
with WileyPLUS
See how Paul uses four key elements to focus
his course on developing his students’ success.
Guided Learning
Information Retention
Personalized Practice
Just-in-Time Homework Help
EXAMPLE:
Paul sets up his learning path to
highlight and structure preassignments, post-assignments
and discussions, adaptive
assignments, exam practice, and
quizzing.
EXAMPLE:
Paul assigns Interactive Tutorial
Assignments ahead of pre-lecture
activities so students come to
class ready to actively participate.
EXAMPLE:
Paul uses Adaptive Assignments
as a capstone activity at the end
of each week to improve
retention.
EXAMPLE:
Paul assigns post-assignment
problems supported by Solution
Walkthrough Videos.
Interactive Tutorial
Assignments provide students
with self-paced lecture walkthroughs of each chapter. Broken
into smaller chunks with
Knowledge Check questions and
Do It!s, students must watch the
videos and respond to associated
questions correctly or exhaust
attempts before moving on,
enhancing the retention of
information. Trying to solve a
problem before being taught
the solution is frustrating but
improves retention.
Adaptive Assignments
effectively close knowledge gaps
through personalized adaptive
experiences that provide just-intime instruction, immediate
feedback, and remediation to
previous learning objectives. To
improve learning, employ
dynamic (adaptive) testing
rather than static testing.
Without feedback, students
often overestimate their
competence and don’t see a
need to try to improve.
A guided learning path enables
you to control what your students
see, when they see it, and in what
order. This makes it very clear for
students to understand what
they’re supposed to complete. This
is especially vital for online classes.
Having a clear path to learning
reduces the risk of “losing”
students, keeping them engaged
and on track in your course.
Solution Walkthrough Videos
provide students with 24/7
just-in-time homework support and
enable you to assign more difficult
homework questions. Longer,
multi-learning objective
problems with video support
help students consolidate their
understanding.
Paul Kimmel’s
Accounting Course Design with WileyPLUS
Course Design Suggestions from Make It Stick*
Trying to solve a problem before being taught the solution improves retention.
Testing (active retrieval) doesn’t just measure learning, it strengthens memory.
Spaced “testing” results in greater retention.
Providing feedback strengthens learning more than testing alone.
*Make It Stick; Brown, Roediger, and McDaniel, 2014.
Considerations for a Flipped Classroom
Based on Paul Kimmel’s course with two in-person lectures per week.
EXAMPLE WEEKLY SCHEDULE
SUNDAY
Online
Complete first pre-assignment.
Due Monday before class.
MONDAY
In Class
Students do at least two exercises in class on
blank sheet (i.e., conditions faced in a test).
TUESDAY
Online
Complete second pre-assignment.
Due Wednesday before class.
WEDNESDAY
In Class
Students do at least two exercises in class on
blank sheet.
THURSDAY/FRIDAY
Online
Complete post-assignment.
Due Friday night.
FRIDAY/SATURDAY
Online
Complete adaptive assignment.
Due Saturday night.
Want to learn more about Paul Kimmel’s course?
Scan this QR code to sign up for a
WileyPLUS demo
Accounting
Tools for Business Decision Making
Eighth Edition
PAUL D. KIMMEL Ph D, CPA
University of Wisconsin—Madison
Madison, Wisconsin
JERRY J. WEYGANDT Ph D, CPA
University of Wisconsin—Madison
Madison, Wisconsin
JILL E. MITCHELL MS , MEd, CIA
Northern Virginia Community College
Annandale, Virginia
D E D I C AT E D T O
Our spouses, Enid, Merlynn, and Sean,
for their love, support, and encouragement.
VICE PRESIDENT, EDITORIAL PRODUCT MANAGEMENT
ASSOCIATE EDITORIAL DIRECTOR
SENIOR COURSE CONTENT DEVELOPER
INSTRUCTIONAL DESIGNER
SENIOR PRODUCT MARKETING MANAGER
EDITORIAL SUPERVISOR
PROGRAM ASSISTANT
SENIOR MANAGER, COURSE DEVELOPMENT AND PRODUCTION
EXECUTIVE MANAGING EDITOR
SENIOR PRODUCTION EDITOR
SENIOR DESIGNER
COVER IMAGE
Michael McDonald
Zoe Craig
Jenny Welter
Matt Origoni
Christina Koop Minarik
Terry Ann Tatro
Natalie Munoz
Ed Brislin
Karen Staudinger
Rachel Conrad
Jon Boylan
© Annika Gültzow/EyeEm/Getty Images
This book was set in 9.5/12 STIX Two Text by Lumina Datamatics, Inc.
Founded in 1807, John Wiley & Sons, Inc. has been a valued source of knowledge and understanding for more than 200 years,
helping people around the world meet their needs and fulfill their aspirations. Our company is built on a foundation of principles
that include responsibility to the communities we serve and where we live and work. In 2008, we launched a Corporate Citizenship
Initiative, a global effort to address the environmental, social, economic, and ethical challenges we face in our business. Among
the issues we are addressing are carbon impact, paper specifications and procurement, ethical conduct ­within our business and
among our vendors, and community and charitable support. For more information, please visit our website: www.wiley.com/go/
citizenship.
Copyright © 2022 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except
as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the
Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the
Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008,
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ISBN-13: 978-1-119-79103-4
The inside back cover will contain printing identification and country of origin if omitted from this page. In addition, if the ISBN on
the back cover differs from the ISBN on this page, the one on the back cover is correct.
Printed in America.
10
9
8
7
6
5
4
3
2
1
Brief Contents
1
Introduction to Financial Statements 1-1
20
Incremental Analysis 20-1
2
A Further Look at Financial Statements 2-1
21
Pricing 21-1
3
The Accounting Information System 3-1
22
Budgetary Planning 22-1
4
Accrual Accounting Concepts 4-1
23
Budgetary Control and Responsibility
Accounting 23-1
24
Standard Costs and Balanced
Scorecard 24-1
25
Planning for Capital Investments 25-1
5Merchandising Operations and the
Multiple-Step Income Statement 5-1
6
Reporting and Analyzing Inventory 6-1
7
Fraud, Internal Control, and Cash 7-1
8
Reporting and Analyzing Receivables 8-1
9Reporting and Analyzing Long-Lived
Assets 9-1
10
A PPE NDIX A Specimen Financial Statements:
Apple Inc. A-1
A PPE NDIX B Specimen Financial Statements:
Columbia Sportswear
Company B-1
Reporting and Analyzing Liabilities 10-1
11Reporting and Analyzing Stockholders’
Equity 11-1
12
Statement of Cash Flows 12-1
13
Financial Analysis: The Big Picture 13-1
14
Managerial Accounting 14-1
15
Job Order Costing 15-1
16
Process Costing
17
Activity-Based Costing 17-1
18
Cost-Volume-Profit 18-1
19
Cost-Volume-Profit Analysis: Additional
Issues 19-1
16-1
A PPE NDIX C Specimen Financial Statements:
Under Armour, Inc. C-1
A PPE NDIX D Specimen Financial Statements:
Amazon.com, Inc. D-1
A PPE NDIX E Specimen Financial Statements:
Walmart Inc. E-1
A PPE NDIX F
Time Value of Money F-1
A PPE NDIX G Reporting and Analyzing
Investments G-1
COMPANY INDEX I-1
SUBJECT INDEX I-5
RAPID REVIEW: CHAPTER CONTENT
v
vi
B RIEF CO N TEN TS
Available in Wiley Course Resources and Wiley Custom:
C H APT E R 15A
Job Order Costing (non-debit-and-credit approach) 15A-1
C H APT E R 16A Process Costing (non-debit-and-credit approach)
AP P E N D I X H
Payroll Accounting
H-1
AP P E N D I X I
Subsidiary Ledgers and Special Journals I-1
AP P E N D I X J
Accounting for Partnerships J-1
AP P E N D I X K
Accounting for Sole Proprietorships K-1
Cases for Management Decision Making
16A-1
From the Authors
Dear Student,
Why This Course? Remember your biology course in high school? Did you have one of
those “invisible man” models (or maybe something more high-tech than that) that gave you
the opportunity to look “inside” the human body? This accounting course offers something
similar. To understand a business, you have to understand the financial insides of a business
organization. An accounting course will help you understand the essential financial components of businesses. Whether you are looking at a large multinational company like Apple or
Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of accounting will help you understand what is happening. As an
employee, a manager, an investor, a business owner, or a director of your own
“Whether you are looking at a large multinapersonal finances—any of which roles you will have at some point in your
tional company like Apple or Starbucks or
life—you will make better decisions for having taken this course.
a single-owner software consulting business
or coffee shop, knowing the fundamentals of
Why This Text? Your instructor has chosen this text for you because of its
accounting will help you understand what is
trusted reputation. We have worked hard to provide instructional material
happening.”
that is engaging, timely, and accurate.
How to Succeed? We’ve asked many students and many instructors whether there is a secret for success in this course. The nearly unanimous answer turns out to be
not much of a secret: “Do the homework.” This is one course where doing is learning. The
more time you spend on the homework assignments—using the various tools that this text
provides—the more likely you are to learn the essential concepts, techniques, and methods
of accounting.
Good luck in this course. We hope you enjoy the experience and that you put to good use
throughout a lifetime of success the knowledge you obtain in this course. We are sure you
will not be disappointed.
Paul D. Kimmel
Jerry J. Weygandt
Jill E. Mitchell
vii
Author Commitment
Paul D. Kimmel
PA U L D. K I M M E L , P h D, C PA , ­received
his bachelor’s degree from the University of
Minnesota and his doctorate in accounting
from the University of Wisconsin. He was an
Associate Professor at the University of
Wisconsin—Milwaukee for more than 25
years and is now a Senior Lecturer at the
University of Wisconsin—Madison. He has
public accounting experience with Deloitte
& Touche (Minneapolis). He was the recipient of the UWM School of Business Advisory Council Teaching Award and the Reggie
Taite Excellence in Teaching Award, and
a three-time winner of the Outstanding
Teaching Assistant Award at the University
of Wisconsin. He is also a recipient of the Elijah Watts Sells Award for Honorary Distinction for his results on the CPA exam. He is
a member of the American Accounting Association and the Institute of Management
Accountants and has published articles in
Accounting Review, Accounting ­Horizons,
Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, and Journal of Accounting Education, as well as other journals. His research
interests include accounting for financial
instruments and innovation in accounting
education.
viii
Jerry J. Weygandt
JERRY J. WEYGANDT, PhD, CPA, is Arthur
Andersen Alumni Emeritus Professor of
Accounting at the University of Wisconsin—
Madison. He holds a Ph.D. in ­accounting
from the University of Illinois. ­Articles by
Professor Weygandt have ­appeared in The
Accounting Review, Journal of Accounting
Research, Accounting Horizons, Journal
of Accountancy, and other academic and
professional journals. These articles have
examined such financial reporting issues as
accounting for price-level adjustments, pensions, convertible securities, stock option
contracts, and ­interim reports. Professor
Weygandt is author of other accounting and
financial ­reporting texts and is a member
of the American ­Accounting Association,
the ­American Institute of Certified Public
Accountants, and the Wisconsin Society of
Certified Public ­Accountants. He has served
on numerous committees of the American
Accounting Association and as a member
of the editorial board of the ­Accounting
­Review; he also has served as President
and Secretary-Treasurer of the ­American
­Accounting Association. In addition, he has
been actively involved with the American
­Institute of Certified Public Accountants
and has been a member of the Accounting
Standards Executive Committee (AcSEC)
of that organization. He has served on the
FASB task force that ­examined the ­reporting
issues related to ­accounting for income taxes and served as a trustee of the Financial
Accounting Foundation. Professor Weygandt
has received the Chancellor’s Award for Excellence in Teaching and the Beta Gamma
Sigma Dean’s Teaching Award. He is on the
board of directors of M & I Bank of Southern
Wisconsin. He is the recipient of the Wisconsin Institute of CPA’s Outstanding Educator’s Award and the Lifetime Achievement
Award. In 2001 he received the American
Accounting Association’s Outstanding Educator Award.
Jill E. Mitchel
JILL E. MITCHELL, MS, MEd, CIA, is a Professor of Accounting at Northern Virginia Community College (NOVA), where she has taught
face-to-face, hybrid, and online courses since
2008. Since 2009, she has been an adjunct instructor at George Mason University (GMU).
She is a past president of the Washington,
D.C. Chapter of the Accounting and Financial
Women’s Alliance (AFWA), and she served
on the board of directors of the Virginia Society of CPAs (VSCPA). She is a member of the
American Accounting Association (AAA) and
the Institute of Internal Auditors. Jill serves
on the AAA Education Committee and is the
co-chair for the Conference on Teaching and
Learning in Accounting (CTLA). Prior to
joining the faculty at NOVA, Jill was a senior
auditor with Ernst & Young’s Business Risk
Services practice in Miami, Florida. She is a
certified internal auditor and earned an MS in
Accountancy from the University of Virginia
and a BBA in Management Information Systems from the University of Georgia honors
program. Recently, she earned an MEd in
Instructional Design Technology from GMU.
Jill is a recipient of the Outstanding Faculty
Award, the Commonwealth’s highest honor
for faculty of Virginia’s universities and colleges presented by the State Council of Higher Education for Virginia; the Virginia Community
College System Chancellor’s Award for Teaching Excellence; the AFWA’s Women Who
Count Award; the AAA Two-Year College
Educator of the Year Award; and the AAA/J.
Michael and Mary Anne Cook/Deloitte Foundation Prize, the foremost recognition of an
individual who consistently demonstrates the
attributes of a superior teacher in the discipline
of accounting.
New to This Edition: Data Analytics
The authors carefully considered how to thoughtfully and meaningfully integrate data analytics into the accounting course, and are pleased to provide the following data analytics
resources.
Data Analytics and Decision-Making
The text provides numerous discussions on how decision-makers are increasingly relying on
data analytics to make decisions using accounting information.
Accounting software systems collect vast amounts of data about a company’s economic
events as well as its suppliers and customers. Business decision-makers take advantage of
this wealth of data by using data analytics to gain insights and therefore make more informed business decisions.
• Data analytics involves analyzing data, often employing both software and statistics, to draw inferences.
• As both data access and analytical software improve, the use of data analytics to
support decisions is becoming increasingly common at virtually all types of companies.
Data Analytics in the Real World
Real-world examples that illustrate engaging situations in companies are provided throughout
the text.
Data Analytics Insight Netflix
Using Data Science to
Create Art
Technology provides decision-makers and
problem-solvers with access to a large volBogdan Glisik/
Bogdan
Glisik/
Shutterstock.com
ume of information called “big data.” And
Shutterstock.com
Netflix, the world’s leading subscription
streaming entertainment service, is tapping into this big data as
part of its efforts to ramp up its original content production.
In a recent year, Netflix planned to spend $8 billion on
content creation. Producing content involves a blend of creativity, technology, and business decisions, all of which result
in costs. And by analyzing the large amounts of data from
past ­productions, such as filming locations and production
s­ chedules, Netflix can more precisely estimate costs for future
productions. Further, consider that the production of a TV
show or film involves hundreds of tasks. Here again, Netflix
uses data science, in this case to visualize where bottlenecks
might occur or where opportunities might exist to increase the
efficiency of the production process.
Source: Ritwik Kumar et. al., “Data Science and the Art of Producing Entertainment at Netflix,” The Netflix Tech Blog (March 26,
2018).
How can “big data” improve decision-making? (Answer
is available at the end of the chapter.)
ix
x
NE W TO TH IS EDITION : DATA AN ALYTICS
Data Analytics in Action
Data Analytics in Action problems provide students with the opportunity to see how to use
data analytics to help solve realistic business problems. Excel templates for each Data Analytics in Action problem provide students a framework for solving the problem. Data Analytics in
Excel videos provide students with step-by-step guidance to perform theData
Excel
skills they need
Analytics in Action 6-49
to solve these problems.
Data Analytics in Action
Using Data Visualization to Analyze Changes over Time
DA6.1 Data visualization can be used to analyze company changes over time.
Example: Recall the Feature Story “Where Is That Spare Bulldozer Blade?” presented in the chapter.
Caterpillar continues to enhance its inventory management by improving its product sustainability in
two ways. First, it is rebuilding used parts to like-new condition. Second, the company is remanufacturing
usable inventory parts when customers trade-in or dispose of their used equipment. These actions not only
reduce inventory costs but also enable Caterpillar to participate in the circular economy, where manufacturers take responsibility for their products at the end of the product lives. As noted in its 2019 sustainability report, Caterpillar has a goal of 20% growth in both rebuilding and remanufacturing.
Has Caterpillar reached this goal? A line chart can help you visualize the company’s progress
over time. What information can you obtain by examining the following chart?
Excel
Caterpillar Remanufacturing and Rebuilding Changes
25%
20
15
10
Percentage
Changes
5
0
−5
−10
−15
2016
Goal 20%
2017
2018
Remanufacturing % change from 2013
2019
Rebuild % change from 2013
Source: Data from “ESG Data Center,” Caterpillar 2019 Sustainability Report.
The chart indicates that while Caterpillar’s goal has remained at 20%, the remanufacturing
and rebuilding businesses are growing. The biggest increase in the growth of rebuilding occurred
from 2016 to 2017. There was a decline from 2018 to 2019 in these initiatives as Caterpillar may have
reached a peak that is leveling off due to new production that is more sustainable.
For this case, you will look more closely at specific Caterpillar data regarding its end-of-life
returned materials and the percentage usable for recycling. You will create and analyze a combination
column and line chart to determine how Caterpillar can increase its gross profit as it relates to these
end-of-life materials.
Go to Wiley Course Resources for complete case details and instructions.
Using Data Analytics to Compare Companies’ Inventory Turnover
DA6.2 Inventory turnover shows the number of times during the period a firm sells the entire dollar
amount of its inventory. It is advantageous to turn over inventory more quickly to reduce the risk of
obsolescence and spoilage. As such, companies often have a goal of increasing inventory turnover. For
this case, you will use inventory turnover data for Costco, Walmart, Target, and Amazon to create
and analyze scatter plots, as well as to calculate days’ sales in inventory, to determine which company
is managing its inventory levels most effectively.
Excel
Go to Wiley Course Resources for complete case details and instructions.
Data Visualization Homework Assignments
PowerBI and Tableau visualizations accompanied by assignable questions are available
with most chapters. PowerBI and Tableau visualizations allow students to interpret visualizations and think critically about data.
Data Analytics Module
An accounting-specific data analytics module with interactive lessons, case studies,
and videos is part of the Wiley online course. The module has been prepared using industry-­
validated content to help students develop the professional competencies needed for the
changing workforce.
New to This Edition:
Chapter-by-Chapter Changes
Chapter 1: Introduction to Financial Statements
• NEW discussions of hybrid forms of organization and
critical audit matters.
Chapter 5: Merchandising Operations and the MultipleStep Income Statement
• EXPANDED discussion of FOB shipping/destination for
improved student understanding.
• NEW section on overview of data analytics, including
Data Analytics Insight box on how Netflix relies on data
science to streamline production costs on content creation.
• ADDED discussion of new technology, such as use of artificial intelligence and algorithms, to Data Analytics and
Credit Sales section.
• NEW DO IT!s on using financial information and components of annual reports.
• UPDATED People, Planet, and Profit Insight box to focus
on REI, for greater continuity throughout chapter.
• NEW chapter appendix on career opportunities in accounting.
• MOVED discussion of the comprehensive income statement to Chapter 13.
• ADDED Questions, Do It’s, Exercises, and Ethics Case to
end-of-chapter (EOC) problem material.
• ADDED Exercises, Ethics Case, and Data Analytics in Action to EOC problem material.
Chapter 2: A Further Look at Financial Statements
Chapter 6: Reporting and Analyzing Inventory
• MOVED discussion of free cash flow/using a statement of
cash flows to Chapter 12.
• ADDED separate DO IT’s after each cost flow method discussion.
• NEW discussion of why receivables are considered more
liquid than inventory.
• NEW illustration on the impact on cost flow assumptions
when costs change.
• DELETED partial balance sheet illustrations showing
classifications for more streamlined presentation.
• NEW discussion of how companies can use data analytics
when determining NRV of products.
• NEW Investor Insight box, on reliability of investor bulletin board postings.
• UPDATED definitions of materiality and the full disclosure principle per recent FASB actions.
• NEW illustrations on (1) world view of the standard-setting environment, (2) enhancing qualities of accounting
information, and (3) summary of the conceptual framework.
• ADDED Exercises to EOC problem material.
Chapter 3: The Accounting Information System
• NEW discussion of recent technologies used, such as
cloud-based storage and data automation tools.
• NEW DO IT! on accounts, debits, and credits.
• ADDED Practice Brief Exercise, DO IT!, Exercises, and
Ethics Case to EOC problem material.
Chapter 4: Accrual Accounting Concepts
• NEW discussion of recent technologies used, such as the
use of robotic process automation (RPA) in the closing
process.
• NEW illustration of a post-closing trial balance.
• NEW Data Analytics Insight box on value of dashboards.
• ADDED Exercises, Critical Thinking Case, and Data Analytics in Action to EOC problem material.
Chapter 7: Fraud, Internal Control, and Cash
• UPDATED discussion and illustrations of cash receipts
controls, to reflect current practices and technology.
• NEW section on electronic banking.
• NEW illustration on how to determine outstanding
checks in a bank reconciliation.
• ADDED Real-World Focus Case and Data Analytics in
Action to EOC problem material.
Chapter 8: Reporting and Analyzing Receivables
• NEW Data Analytics Insight box on how companies are
making increasingly more sophisticated credit decisions
using data analytics.
• NEW illustration on the use of Tableau dashboards to
provide tracking and analysis of a company’s receivables.
• ADDED Exercises Data Analytics in Action to EOC problem material.
• ADDED Exercises and Problem to EOC problem material.
xi
xii
NE W TO THIS EDITION : CHAPTER- BY- CHA PT E R CH A N G E S
Chapter 9: Reporting and Analyzing Long-Lived Assets
• UPDATED People, Planet, and Profit Insight box to now
focus on Nike’s sustainability report.
• ADDED Exercises, Critical Thinking Case, and Data Analytics in Action to EOC problem material.
Chapter 10: Reporting and Analyzing Liabilities
• NEW Investor Insight box on how Ford issued bonds to
raise cash for operations and new products.
• ADDED Tesla as comparative company in analyzing the
liquidity and solvency of General Motors.
• ADDED Critical Thinking Case to EOC problem material.
Chapter 11: Reporting and Analyzing Stockholders’ Equity
• UPDATED People, Planet, and Profit Insight box to highlight latest information on corporate social responsibility
proposals.
• ADDED new discussion of liquidating dividends.
• NEW Investor Insight box on stock dividends.
• ADDED Exercises, Critical Thinking Case, and Data Analytics in Action to EOC problem material.
Chapter 12: Statement of Cash Flows
• ADDED Data Analytics in Action to EOC problem material.
Chapter 13: Financial Analysis: The Big Picture
• NEW presentation of discontinued operations on the income statement (previously on the statement of comprehensive income) as well as discussion and format of the
statement of comprehensive income.
• ADDED Critical Thinking Case to EOC problem material.
Chapter 14: Managerial Accounting
• NEW section on the value of data analytics in helping
managers understand the relationship between CVP variables and business trends.
• NEW Data Analytics Insight box on how Disney uses its
MagicBands as a source of data to analyze the behavior
of its customers.
• EXPANDED discussion within “Manufacturing Costs” section to ensure student understanding of raw materials versus
direct materials as well as what is considered to be manufacturing overhead. Also updated Illustration 1.4 (assignment
of costs to cost categories) to include an explanation for each
cost classification, again to ensure student understanding.
• MOVED UP discussion of balance sheet (before income
statement) in “Manufacturing Costs in Financial Statements” section for more logical presentation of topics.
• UPDATED each “Managerial Accounting Today” section
subtopic for the latest information on service industries,
lean manufacturing, balanced scorecard, ethics, and social responsibility.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Chapter 15: Job Order Costing
• NEW Data Analytics Insight box on how Autodesk uses
data analytics to improve its software and profitability.
• ADDED discussion on assigning raw materials costs and
assigning factory labor costs, to improve student understanding.
• UPDATED time ticket discussion for more recent process
involving scanning of employee identification codes.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Chapter 16: Process Costing
• UPDATED production cost report so that the “Cost Reconciliation Schedule” section now includes costs to be
accounted for, not just costs accounted for.
• EDITED discussion throughout to ensure complete student understanding. For example, in the “Transfer to
Next Department” section, have added explanation of
what department transfers entail.
Chapter 17: Activity-Based Costing
• NEW data analytics discussion added to section of identifying cost drivers.
• NEW Data Analytics Insight box on how companies such
as GE and UPS use data analytics to help reduce non–
value-added activities.
• NEW section (“Assigning Nonmanufacturing Overhead
Costs”) and income statement presentations, to help highlight differences between traditional costing and activitybased costing.
Chapter 18: Cost-Volume-Profit
• NEW discussion on CVP and the use of data analytics,
using DHL Express as an example.
• NEW expanded highlighted equations, to show more
detailed calculations for improved understanding.
• NEW expanded explanation of what CVP analysis is.
• NEW illustration and discussion on how a GAAP income
statement differs from a CVP income statement.
• NEW discussion on the variable cost ratio.
• UPDATED Service Company Insight box to feature more recent information on the business of music promotion (and
using Drake as an example instead of the Rolling Stones)
and computing the break-even point.
• ENHANCED EOC assignments by offering students more
opportunities to prepare CVP income statements, as well
as a new problem on regression analysis.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Chapter 19: Cost-Volume-Profit Analysis: Additional Issues
• NEW Data Analytics Insight box on how Caesars Entertainment uses data analytics to determine how to maximize profits from its customers.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Chapter 20: Incremental Analysis
• HIGHLIGHTED the decision rules, as well as additional
factors to consider, for incremental analysis decisions.
N E W TO T H I S E D I T I O N : C H A PT E R- BY- C HA PTER C HA NGES
Chapter 21: Pricing
• NEW Data Analytics Insight box on how Big Data
Pricing helps customers use data analytics to improve
dynamic pricing practices.
• NEW Data Analytics in Action problem allows students
to perform basic data analytics and data visualization.
Chapter 22: Budgetary Planning
• NEW Data Analytics Insight box on how Dickey’s Barbecue Pit uses data analytics to improve restaurant sales
performance.
• NEW Data Analytics in Action problem allows students
to perform basic data analytics and data visualization.
Chapter 23: Budgetary Control and Responsibility
Accounting
• NEW Data Analytics Insight boxes on rolling forecasts
and zero-based budgeting.
• UPDATED section on “Judgmental Factors in ROI” with
“Alternative Measures of ROI Inputs” for more precise
discussion and improved student understanding.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Chapter 24: Standard Costs and Balanced Scorecard
• NEW Data Analytics Insight box on how manufacturing
companies are using technology such as 5G cellular to
improve the amount and speed of data collection to improve operations.
xiii
• NEW highlighted applications of determining standard
costs in “A Case Study” section, for improved student understanding.
• NEW Data Analytics in Action problem allows students
to perform basic data analytics and data visualization.
Chapter 25: Planning for Capital Investments
• NEW Data Analytics Insight box on how Electronic Arts
uses data from its current online video games to help it
develop future products.
• IMPROVED illustration showing computation of cash payback period by including detailed steps and computations.
• NEW Management Insight box on 5G and how it presents
a risky investment to telecom companies.
• NEW Data Analytics in Action problems allow students
to perform basic data analytics and data visualization.
Appendix F: Time Value of Money (previously
Appendix G)
• NEW discussion of using Excel function to solve time value of money problems.
Appendix G: Reporting and Analyzing Investments
(previously Appendix H)
• NEW DO IT!s added to appendix discussion as well as
EOC problem material.
• NEW Review and Practice section includes multiplechoice questions followed by annotated solutions, practice brief exercises with solutions, practice exercises with
solutions, and a practice problem with solution.
New to This Edition in Your Wiley Course
Lecture Videos
Lecture Videos, narrated by an accounting instructor for every section in the text, talk through the PowerPoint slides,
including embedded application videos where applicable, providing support for online courses, flipped classrooms, and
student study and review.
Interactive Tutorial Assignments
Interactive Tutorial Assignments provide students a guided walkthrough and review of the chapter content and topics,
including Chapter Overview Videos, Lecture Videos for each learning objective, and selected Real World Videos. Interactive Knowledge Check and Do It! questions in the assignments check student understanding and knowledge acquisition.
In applicable questions, values change algorithmically, to support student practice and integrity. The Interactive Tutorial
Assignments are available to students as practice, and may be separately customized and assigned by instructors.
Animations
Short, animated videos engage students and simplify major concepts in the text, making the concepts easier to understand.
They offer an alternative approach to understanding the written material.
Brief Exercise Solution Walkthrough Videos
Additional Solution Walkthrough Videos developed for this edition, now also including selected Brief Exercises, continue
to build scaffolding for student understanding and 24/7 problem-solving support.
Proven Pedagogical Features
When you think of accounting, you probably don’t think of athletics. So why do we have a
photo of bicycles on our cover? It’s because this image represents active learning that’s best
accomplished through full engagement, commitment, and practice.
In this new edition, all content has been carefully reviewed and revised to ensure
maximum student understanding. At the same time, the time-tested features that have
proven to be of most help to students have been retained, such as the following.
Infographic Learning
Over half of the text is visual, providing students alternative ways of learning about accounting.
ILLUSTRATION 6.4 Specific identification method
$750
$700
Sold
+
$800
Transaction
Date
Inventory
06-01-2025 Sold
06-01-2025 Sold
In Stock
Price
$700
$800
$750
Sold
Cost of goods sold = $700 + $800 = $1,500
Ending inventory = $750
Real-World Decision-Making
Real-world examples, which illustrate engaging situations in companies, are provided
throughout the text. Answers to the critical thinking questions posed to readers within the
real-world examples are now available at the end of each chapter.
People, Planet, and Profit Insight
Got Junk?
Do you have an old computer or two in
your garage? How about an old TV
that needs replacing? Many people do.
Approximately 163,000 computers and
televisions become obsolete each day.
Yet, in a recent year, only 11% of com© Nathan Gleave/
njgphoto/Getty
Images
puters were recycled.
iStockphoto
It is estimated that 75% of all
computers ever sold are sitting in storage somewhere, waiting
xiv
to be disposed of. Each of these old TVs and computers is loaded
with lead, cadmium, mercury, and other toxic chemicals. If you
have one of these electronic gadgets, you have a responsibility, and
a probable cost, for disposing of it. Companies have the same problem, but their discarded materials may include lead paint, asbestos, and other toxic chemicals.
What accounting issue might this cause for companies?
(Answer is available at the end of the chapter.)
• This agrees with our calculation of the cost of ending inventory, where 50 of these units
were assumed unsold and thus included in ending inventory.
ILLUSTRATION 6.7
Date
Jan. 1
Apr. 15
Aug. 24
Proof of cost of goods sold—
FIFO method
DO IT! Exercises
PROV E N PE DAG OG I C A L FEATU RES
Unit Cost
Total Cost
$10
$1,000
11
2,200
12
3,000
Units
100
200
250
xv
DO IT! Exercises in the body of the text prompt students to stop
Totaland review
550 key concepts. They
$6,200
US INGa detailed
T H E D ECsolution.
IS ION TOOLS Eastman Chemical
outline the Action Plan necessary to complete the exercise as well as show
Eastman Chemical is a global specialty materials company that produces a broad range of products found in items people use every day. Eastman employs approximately 14,500 people around
the world and serves customers in more than 100 countries. The company is headquartered in
Kingsport, Tennessee. Here is the inventory note taken from recent financial statements.
DO IT! 2a
ACTION PLAN
• Understand the
periodic inventory
system.
Cost Flow Methods—FIFO Method
The accounting records of Shumway Ag Implements show the following data.
Eastman Chemical Company
Notes4,000
to the Financial
Beginning inventory
units atStatements
$3
Inventories: The components
inventories
Purchases
6,000of units
at are
$4summarized as follows:
(in millions)
Sales
7,000 units at $12
• Allocate costs
between goods sold
and goods on hand
(ending inventory) for
the FIFO method.
Inventories—gross:
Raw period
materials under a periodic inventory system $using
576 the
Determine the cost of goods sold during the
Work in process
220
FIFO method.
Finished goods
1,114
• Compute cost of goods
sold for the FIFO
method.
Total inventories—at FIFO or average cost
Less: LIFO reserve
Solution
1,910
248
Inventories—net (as reported on balance sheet)
$1,662
Eastman
determines
the cost
of most
raw materials, work in process, and finished goods
Cost of goods available for sale = (4,000
× $3)
+ (6,000
× $4)
= $36,000
inventories in the United States and Switzerland by the LIFO method. The cost of all other inven-
is determined
Ending inventory = 10,000 – 7,000tories
= 3,000
unitsby the average-cost method, which approximates the FIFO method.
Additional facts (amounts in millions):
Cost of goods sold FIFO: $36,000 – (3,000 × $4) = $24,000
Related exercise material: BE6.3, BE6.4, BE6.5,
Decision Tools
Last-In, First-Out (LIFO)
Current liabilities
Current assets (as reported)
Cost of goods sold
BE6.6,
DO IT! 6.2, E6.5,
Beginning inventory
E.6.6,
$1,789
3,321
7,039
E6.7,
and
1,583
E6.8.
Instructions
Answer the following questions.
a. Why does the company report its inventory in three components?
The last-in, first-out (LIFO) method
assumes that the latest goods purchased are the first
b. Why might the company use three methods (LIFO, FIFO and average-cost) to account for its
inventory?are highlighted
to befor
sold.management decision-making
Accounting concepts that are useful
c. Perform each of the following.
throughout the text. A summary of Decision Tools is included in each
chapter as well as a
1. Calculate the inventory turnover and days in inventory using the LIFO inventory.
•
LIFO
seldom
coincides
with
the
actual physical flow of inventory. (Exceptions include
practice exercise and solution called Using the Decision Tools.
2.Decision
Calculate
the current
Tools
6-23 ratio using LIFO and the current ratio using FIFO. Discuss the
goods stored in piles, suchUsing
as the
coal
or hay,
where
goods are removed from the top of the
difference.
pile
as
they
are
sold.)
However,
the
actual
physical
flow does not dictate that a company
USING T HE DECIS ION TOOLS Eastman Chemical
Solution
must chose FIFO or LIFO. a. Eastern Chemical is a manufacturer, so it purchases raw materials and makes them into
finished products. At the end of each period, it has some goods that have been started but are
• Under the LIFO method, the costs
of the latest goods purchased are the first to be recognot yet complete (work in process).
reporting all three components of inventory, a company reveals important informanized in determining cost of goodsBysold.
Eastman Chemical is a global specialty materials company that produces a broad range of products found in items people use every day. Eastman employs approximately 14,500 people around
the world and serves customers in more than 100 countries. The company is headquartered in
Kingsport, Tennessee. Here is the inventory note taken from recent financial statements.
tion about its inventory position. For example, if amounts of raw materials have increased significantly compared to the previous year, we might assume the company is planning to step
up production. On the other hand, if levels of finished goods have increased relative to last
year and raw materials have declined, we might conclude that sales are slowing down—that
the company has too much inventory on hand and is cutting back production.
Illustration 6.8 shows the allocation of the cost of goods available for sale at Houston
Electronics under LIFO.
Eastman Chemical Company
Notes to the Financial Statements
Inventories: The components of inventories are summarized as follows:
(in millions)
6-24
Inventories—gross:
Raw materials
Work in process
Finished goods
CH A PTE R 6
b. Companies are free to choose different cost flow assumptions for different types of inventory.
A company might choose to use FIFO for a product that is expected to decrease in price over
time. One common reason for choosing a method other than LIFO is that many foreign countries do not allow LIFO; thus, the company cannot use LIFO for its foreign operations.
Reporting and Analyzing Inventory
$ 576
220
1,114
Total inventories—at FIFO or average cost
Less: LIFO reserve
c. 1. Inventory turnover =
Days in
365
365
=
=
= 84.9 days
inventory Inventory turnover
4.3
1,910
248
Inventories—net (as reported on balance sheet)
Cost of goods sold
$7,039
= 4.3 times
=
($1,583 + $1,662) ÷ 2
Average inventory
2. Current ratio
$1,662
Eastman determines the cost of most raw materials, work in process, and finished goods
inventories in the United States and Switzerland by the LIFO method. The cost of all other inventories is determined by the average-cost method, which approximates the FIFO method.
LIFO
Current assets
$3,321
=
= 1.86:1
Current liabilities
$1,789
FIFO
$3,321 + $248
= 1.99:1
$1,789
This represents a 7% increase in the current ratio [(1.99 − 1.86) ÷ 1.86].
Additional facts (amounts in millions):
Current liabilities
Current assets (as reported)
Cost of goods sold
Beginning inventory
$1,789
3,321
7,039
1,583
Instructions
Answer the following questions.
a. Why does the company report its inventory in three components? Appendix 6A
Inventory Cost Flow Methods in Perpetual
Inventory Systems
b. Why might the company use three methods (LIFO, FIFO and average-cost) to account for its
inventory?
c. Perform each of the following.
1. Calculate the inventory turnover and days in inventory using the LIFO inventory.
2. Calculate the current ratio using LIFO and the current ratio using FIFO. Discuss the
difference.
LEA RN IN G OBJ ECT IV E *4
Apply the inventory cost flow methods to perpetual inventory records.
Solution
a. Eastern Chemical is a manufacturer, so it purchases raw materials and makes them into
finished products. At the end of each period, it has some goods that have been started but are
What inventory cost flow methods can companies employ if they use a perpetual inventory system? Simple—they can use any of the inventory cost flow methods described in the
Using the D
means that companies value assets at the original cost, (c) materiality
average of unit costs, not an average of unit costs; and (c) a new avermeans that an amount is large enough to
affect a decision-maker,
and the effect
Companies
can determine
ending under
inventory
errors on the
balance
using
age is of
computed
the average-cost
method
aftersheet
each by
purchase,
(d) economic entity means to keep thethe
company’s
transactionsequation:
sepabasic accounting
Assets
not sale.= Liabilities + Stockholders’ Equity. Errors in the endxvi ratePROVE
N PEDAGOGICAL
F EATU
Ring
ES inventory have the effects shown in Illustration 6B.4.
from the
transactions of other
entities.
*16. b. Because ending inventory is too low, cost of goods sold will be
11. d. Decreasing the amount of inventoryThe
on hand
cause
thein ending
effectwill
of an
error
inventory
on the
periodsold
was(anshown
in Illustoo high
(overstated)
and subsequent
since cost of goods
expense)
is too
denominator to decrease, causing inventory
turnover
tothat
increase.
tration 6B.3.
Note
if the error
is not
corrected,
combined
total net income
for the
theother
two
high,
net income
willthe
be too
low (understated).
Therefore,
Increasing sales will cause the numerator
of the
ratiobetocorrect.
increase
periods
would
Thus, choices
total stockholders’
are incorrect. equity reported on the balance sheet at the
(higher sales means higher COGS), thus
turnoend causing
of 2025 inventory
will also be
correct.
b. Stockholders’
is overstated
by $15,000
at December
chapter
concludes
with a *17.
Review
and Practiceequity
section
which includes
a review
of learnver to increase even more. The otherEach
choices
are incorrect
because
31, 2024, and is properly stated at December 31, 2025. An ending
ing
objectives,
Decision
Tools
review,
key
terms
glossary,
practice
multiple-choice
questions
(a)
increasing
the
amount
of
inventory
on
hand
causes
the
denomILLUSTRATION 6B.4
inventory error in one period will have an equal and opposite effect
Ending
inator of the ratio to increase whilewith
the numerator
the same,
annotatedstays
solutions,
practice
brief exercises with solutions, practice
exercises after
withtwo
soluonAssets
cost of goods sold and net income
in the next period;
Effects
of
ending
inventory
Inventory
Error
Stockholders’
Equity
causing inventory turnover to decrease;
(b)and
keeping
the amount
of with a solution. Liabilities
tions,
a
practice
problem
years, the errors have
other choices are incorerrors
on balance
sheet but increasing sales willOverstated
Overstated
No offset
effect each other. The
Overstated
inventory
on hand constant
cause inventory
rect
because
stockholders’
equity
(a)
is
properly
stated, not underUnderstated
Understated
No effect
Understated
turnover to increase because the numerator of the ratio
will increase
stated, at December 31, 2025; (c) is overstated, not understated,
(higher sales means higher COGS) while the denominator stays the
by $15,000 at December 31, 2024, and is properly stated, not
same, which will result in a lesser inventory turnover increase than
understated, at December 31, 2025; and (d) is properly stated at
decreasing amount of inventory on hand and increasing sales; and
December 31, 2025, not overstated.
(c) keeping the amount of inventory on hand constant but decreasing
sales will cause inventory turnover to decrease because the numerator
Review and Practice
Review and Practice
Practice Brief
Exercises
Learning
Objectives
Review
Determine ending inventory amount.
1
1. (LO 1) Fylus Company took a physical inventory on December 31 and determined that goods
Discuss how to classify and determine
Applyininventory
cost
flowwere
methods
and
their
costing inventory.
$180,000 were on hand. Not 2included
the physical
count
$18,000
ofdiscuss
goods purchased
financial
from Rake Corporation, FOB destination,
andeffects.
$27,000 of goods sold to Shovel Company for $40,000,
destination.merchandise
Both the Rake purchase and the Shovel sale were in transit year-end. What amount
Merchandisers need only one inventoryFOB
classification,
should
as its
December
31primary
inventory?
inventory, to describe the different items
that Fylus
makereport
up total
invenThe
basis of accounting for inventories is cost. Cost includes
tory. Manufacturers, on the other hand, usually classify inventory into
all expenditures necessary to acquire goods and place them in a conthree categories: finished goods, work in process, and raw materials.
dition ready for sale. Cost of goods available for sale includes (a) cost
Solution
To determine inventory quantities, companies (1) take a physical
of beginning inventory and (b) cost of goods purchased. The inven1. Physical
inventoryof goods
$180,000are specific identification and three assumed
inventory of goods on hand and (2) determine
the ownership
tory cost flow methods
Add: Goods sold to Shovel
27,000 LIFO, and average-cost.
in transit or on consignment.
cost flow methods—FIFO,
Fylus ending inventory
$207,000
The $18,000 of goods purchased from Rake are excluded from ending inventory because the terms
are FOB destination which means Fylus takes title at the time the goods are received. Goods sold to
Shovel FOB destination means that the goods are still Fylus’s until delivered.
Compute ending inventory using FIFO
and LIFO.
2. (LO 2) In its first month of operations, Moncada Company made three purchases of merchandise
in the following sequence: (1) 200 units at $7, (2) 300 units at $8, and (3) 150 units at $9. Assuming
there are 220 units on hand, compute the cost of the ending inventory under the (a) FIFO method and
(b) LIFO method. Moncada use a periodic inventory system.
Engaging Digital Tools
Digital study tools in Wiley’s online course include the following.
Lecture Videos
Lecture Videos, narrated by an accounting instructor for every section in the text, talk through
the PowerPoint slides, including embedded application videos where applicable, providing
support for online courses, flipped classrooms, and student study and review.
Interactive Tutorial Assignments
Interactive Tutorial Assignments provide students with guided instruction of the chapter content and topics, including Chapter Overview Videos, Lecture Videos for each learning objective,
and selected Real World Videos. Knowledge Check questions in the assignments check student
understanding and knowledge acquisition. The Interactive Tutorial Assignments are available to
students as practice, and may be separately customized and assigned by instructors.
xvii
xviii
E NGAGING DIGITAL TOOLS
Animations
Short, animated videos engage students and simplify major concepts in the text, making the
concepts easier to understand. They offer an alternative approach to understanding the written material.
Real-World Company Videos
Real-world company videos feature both small businesses and larger companies to help
students apply content and see how business owners apply concepts from the text in the real
world. Many of the videos have associated questions available to be assigned.
Source: YouTube.
Source: YouTube.
E N GAG I N G D I G I TA L TOOLS
Solution Walkthrough Videos
Solution Walkthrough Videos are available as question assistance and to help students develop problem-solving techniques. These videos walk students through solutions step-by-step
and are based on the most regularly assigned exercises and problems in the text.
Source: YouTube.
Source: YouTube.
Gradable Excel Questions
Gradable Excel questions for each chapter provide students an opportunity to practice Excel
skills in the context of solving accounting problems.
AutoSave
fx
A
B
C
D
1
2
Function: IF; Formula: Subtract, Multiply; Cell Referencing
3
4
5
6
Brief Exercise - Using Excel to Determine Variances
PROBLEM
In October, Pine Company was determining its overhead
variance. Its predetermined overhead rate is based on
direct labor hours. The following
7
E
F
G
Manufacturing overhead costs incurred
Actual direct labor hours
$ 118,000
21,000
Actual overhead
Overhead applied
11
12
Standard hours allowed for work done
Predetermined overhead rate
20,600
$
6.00
Total overhead variance
Nature of variance
Compute the amount of the total overhead variance and
designate if the variance is favorable or unfavorable using
Excel’s IF function.
Sheet1
I
J
Student Work Area
Required: Provide input into cells shaded in yellow in this
template. Use cell references to the Problem area with
mathematical formulas in the input cells. In the last input
field, input an IF function with cell references to your work area.
8
9
10
13
14
15
16
H
Answer Field
15.4% of your score.
Formula: Multiply; Cell reference.
Use a mathematical formula and
cell referencing to the Problem area
to determine the overhead applied.
xix
xx
E NGAG ING DIGITAL TOOLS
Data Visualization Homework Assignments
PowerBI and Tableau visualizations accompanied by questions are available with most
chapters. PowerBI and Tableau visualizations allow students to interpret visualizations and
think critically about data.
Other Learning Opportunities
Other learning opportunities in Wiley’s online course include the following.
• Accounting-Specific Data Analytics Module offers interactive lessons, case studies,
and videos. The module has been prepared using industry-validated content to help
students develop the professional competencies needed for the changing workforce.
• Cookie Creations is a continuing case that spans across the financial accounting chapters
and offers students the opportunity to see how a small business might use financial accounting to operate effectively.
• Waterways Corporation is a continuing case that spans across the managerial accounting chapters and offers students the opportunity to see how a small business might use
managerial accounting to operate effectively.
• Wiley Accounting Updates (wileyaccountingupdates.com) provide faculty and students with weekly curated news articles and suggested discussion questions.
• Flashcards and Crossword Puzzles help students study and master basic vocabulary
and concepts.
• Student Practice quickly and effectively assesses student understanding of the material
they have just covered.
• Adaptive Assignments encourage students to persist so that they can succeed in this
course and beyond. By continuously adapting to each student’s needs and providing
achievable goals with just-in-time instruction, Adaptive Assignments close knowledge
gaps to accelerate learning.
Contents
1 Introduction to Financial
Statements
1-1
Knowing the Numbers: Columbia Sportswear Company 1-1
1.1 Business Organization and Accounting
Information Uses 1-2
Forms of Business Organization 1-3
Users and Uses of Financial Information 1-4
Data Analytics 1-6
Ethics in Financial Reporting 1-7
1.2 The Three Types of Business Activity 1-8
Financing Activities 1-9
Investing Activities 1-9
Operating Activities 1-10
1.3 The Four Financial Statements 1-11
Income Statement 1-12
Retained Earnings Statement 1-13
Balance Sheet 1-14
Statement of Cash Flows 1-16
Interrelationships of Statements 1-17
Elements of an Annual Report 1-20
Appendix 1A: Career Opportunities in Accounting 1-23
“Show Me the Money” 1-24
2 A Further Look at Financial
Statements
2-1
Just Fooling Around?: The Motley Fool 2-2
2.1 The Classified Balance Sheet 2-3
Current Assets 2-3
Long-Term Investments 2-5
Property, Plant, and Equipment 2-5
Intangible Assets 2-5
Current Liabilities 2-7
Long-Term Liabilities 2-7
Stockholders’ Equity 2-7
2.2 Analyzing the Financial Statements
Using Ratios 2-8
Ratio Analysis 2-8
Using the Income Statement 2-9
Using a Classified Balance Sheet 2-10
2.3 Financial Reporting Concepts 2-14
The Standard-Setting Environment 2-14
Qualities of Useful Information 2-16
Assumptions in Financial Reporting 2-17
Principles in Financial Reporting 2-18
Cost Constraint 2-18
3 The Accounting Information
System
3-1
Accidents Happen: MF Global Holdings Ltd 3-1
3.1 Using the Accounting Equation to Analyze
Transactions 3-3
Accounting Transactions 3-3
Analyzing Transactions 3-4
Summary of Transactions 3-10
3.2 Accounts, Debits, and Credits 3-11
Debits and Credits 3-11
Debit and Credit Procedures 3-12
Stockholders’ Equity Relationships 3-15
Summary of Debit/Credit Rules 3-16
3.3 Using a Journal 3-17
The Recording Process 3-17
The Journal 3-18
3.4 The Ledger and Posting 3-20
The Ledger 3-20
Chart of Accounts 3-21
Posting 3-21
The Recording Process Illustrated 3-22
Summary Illustration of Journalizing and Posting 3-28
3.5 The Trial Balance 3-30
Limitations of a Trial Balance 3-31
4 Accrual Accounting Concepts
4-1
Keeping Track of Groupons: Groupon 4-1
4.1 Accrual-Basis Accounting and Adjusting Entries 4-2
The Revenue Recognition Principle 4-3
The Expense Recognition Principle 4-4
Accrual versus Cash Basis of Accounting 4-5
The Need for Adjusting Entries 4-5
Types of Adjusting Entries 4-6
4.2 Adjusting Entries for Deferrals 4-7
Prepaid Expenses 4-7
Unearned Revenues 4-12
4.3 Adjusting Entries for Accruals 4-15
Accrued Revenues 4-15
Accrued Expenses 4-17
Summary of Basic Relationships 4-20
4.4 The Adjusted Trial Balance and Closing Entries 4-23
Preparing the Adjusted Trial Balance 4-23
Preparing Financial Statements 4-24
Quality of Earnings 4-24
Closing the Books 4-27
xxi
xxii
CONTE N TS
Summary of the Accounting Cycle 4-30
Appendix 4A: Using a Worksheet 4-34
5 Merchandising Operations
and the Multiple-Step Income
Statement 5-1
Buy Now, Vote Later: REI 5-1
5.1 Merchandising Operations and Inventory Systems 5-2
Operating Cycles 5-3
Flow of Costs 5-4
5.2 Recording Purchases Under a Perpetual System 5-6
Freight Costs 5-8
Purchase Returns and Allowances 5-9
Purchase Discounts 5-10
Summary of Purchasing Transactions 5-11
5.3 Recording Sales Under a Perpetual System 5-11
Sales Returns and Allowances 5-13
Sales Discounts 5-14
Data Analytics and Credit Sales 5-15
5.4 Preparing the Multiple-Step Income Statement 5-16
Single-Step Income Statement 5-16
Multiple-Step Income Statement 5-17
5.5 Cost of Goods Sold Under a Periodic System 5-21
5.6 Gross Profit Rate and Profit Margin 5-23
Gross Profit Rate 5-23
Profit Margin 5-24
Appendix 5A: Periodic Inventory System 5-27
Recording Merchandise Transactions 5-27
Recording Purchases of Merchandise 5-28
Freight Costs 5-28
Recording Sales of Merchandise 5-28
Comparison of Entries—Perpetual vs. Periodic 5-29
Appendix 5B: Adjusting Entries for Credit Sales with
Returns and Allowances 5-30
Data Analytics in Action 5-52
6 Reporting and Analyzing
Inventory
6-1
“Where Is That Spare Bulldozer Blade?”: Caterpillar 6-1
6.1 Classifying and Determining Inventory 6-2
Classifying Inventory 6-2
Determining Inventory Quantities 6-4
6.2 Inventory Methods and Financial Effects 6-7
Specific Identification 6-7
Cost Flow Assumptions 6-8
Financial Statement and Tax Effects of Cost Flow
Methods 6-13
Using Inventory Cost Flow Methods Consistently 6-15
6.3 Inventory Presentation and Analysis 6-17
Presentation 6-17
Lower-of-Cost-or-Net Realizable Value 6-17
Financial Analysis and Data Analytics 6-18
Adjustments for LIFO Reserve 6-21
Appendix 6A: Inventory Cost Flow Methods in Perpetual
Inventory Systems 6-24
First-In, First-Out (FIFO) 6-24
Last-In, First-Out (LIFO) 6-25
Average-Cost 6-26
Appendix 6B: Effects of Inventory Errors 6-27
Income Statement Effects 6-27
Balance Sheet Effects 6-28
Data Analytics in Action 6-49
7 Fraud, Internal Control,
and Cash
7-1
Minding the Money in Madison: Barriques 7-1
7.1 Fraud and Internal Control 7-3
Fraud 7-3
The Sarbanes-Oxley Act 7-3
Internal Control 7-4
Principles of Internal Control Activities 7-5
Data Analytics and Internal Controls 7-10
Limitations of Internal Control 7-11
7.2 Cash Controls 7-12
Cash Receipts Controls 7-12
Cash Disbursements Controls 7-14
Petty Cash Fund 7-16
7.3 Control Features of a Bank Account 7-17
Electronic Banking 7-18
Bank Statements 7-18
Reconciling the Bank Account 7-20
7.4 Reporting Cash 7-25
Cash Equivalents 7-26
Restricted Cash 7-26
Managing and Monitoring Cash 7-27
Cash Budgeting 7-29
Appendix 7A: Operation of a Petty Cash Fund 7-32
Establishing the Petty Cash Fund 7-33
Making Payments from the Petty Cash Fund 7-33
Replenishing the Petty Cash Fund 7-34
Data Analytics in Action 7-56
8 Reporting and Analyzing
Receivables
8-1
What’s Cooking?: Nike 8-1
8.1 Recognition of Accounts Receivable 8-3
Types of Receivables 8-3
Recognizing Accounts Receivable 8-3
8.2 Valuation and Disposition of Accounts Receivable 8-5
Valuing Accounts Receivable 8-5
Disposing of Accounts Receivable 8-13
CONTENTS
8.3 Notes Receivable 8-15
Determining the Maturity Date 8-16
Computing Interest 8-16
Recognizing Notes Receivable 8-17
Valuing Notes Receivable 8-17
Disposing of Notes Receivable 8-17
8.4 Receivables Presentation and Management 8-20
Financial Statement Presentation of Receivables 8-20
Managing Receivables 8-21
Evaluating Liquidity of Receivables 8-23
Accelerating Cash Receipts 8-24
Data Analytics and Receivables Management 8-25
Data Analytics in Action 8-46
9 Reporting and Analyzing
Long-Lived Assets
9-1
A Tale of Two Airlines: American Airlines 9-1
9.1 Plant Asset Expenditures 9-3
Determining the Cost of Plant Assets 9-3
Expenditures During Useful Life 9-6
To Buy or Lease? 9-7
9.2 Depreciation Methods 9-8
Factors in Computing Depreciation 9-9
Depreciation Methods 9-9
Revising Periodic Depreciation 9-14
Impairments 9-15
9.3 Plant Asset Disposals 9-16
Sale of Plant Assets 9-16
Retirement of Plant Assets 9-18
9.4 Intangible Assets 9-19
Accounting for Intangible Assets 9-19
Types of Intangible Assets 9-20
Research and Development Costs 9-22
9.5 Statement Presentation and Analysis 9-23
Presentation 9-23
Analysis 9-25
Appendix 9A: Other Depreciation Methods 9-30
Declining-Balance Method 9-30
Units-of-Activity Method 9-31
Data Analytics in Action 9-55
10 Reporting and Analyzing
Liabilities
10-1
And Then There Were Two: Maxwell Car Company 10-1
10.1 Accounting for Current Liabilities 10-3
What Is a Current Liability? 10-3
Notes Payable 10-3
Sales Taxes Payable 10-4
Unearned Revenues 10-5
Current Maturities of Long-Term Debt 10-6
Payroll and Payroll Taxes Payable 10-6
xxiii
10.2 Characteristics of Bonds 10-9
Types of Bonds 10-9
Issuing Procedures 10-10
Bond Trading 10-10
Determining the Market Price of a Bond 10-11
10.3 Accounting for Bond Transactions 10-14
Issuing Bonds at Face Value 10-14
Discount or Premium on Bonds 10-14
Issuing Bonds at a Discount 10-15
Issuing Bonds at a Premium 10-17
Redeeming Bonds at Maturity 10-19
Redeeming Bonds Before Maturity 10-19
10.4 Presentation and Analysis 10-20
Presentation 10-20
Analysis 10-22
Appendix 10A: Straight-Line Amortization 10-26
Amortizing Bond Discount 10-26
Amortizing Bond Premium 10-28
Appendix 10B: Effective-Interest Amortization 10-29
Amortizing Bond Discount 10-29
Amortizing Bond Premium 10-31
Appendix 10C: Accounting for Long-Term
Notes Payable 10-32
11 Reporting and Analyzing
Stockholders’ Equity
11-1
Oh Well, I Guess I’ll Get Rich: Facebook 11-1
11.1 Corporate Form of Organization 11-3
Characteristics of a Corporation 11-3
Forming a Corporation 11-6
Stockholder Rights 11-7
Stock Issue Considerations 11-8
Corporate Capital 11-10
11.2 Accounting for Common, Preferred, and
Treasury Stock 11-12
Accounting for Common Stock 11-12
Accounting for Preferred Stock 11-13
Accounting for Treasury Stock 11-14
11.3 Accounting for Dividends and Stock Splits 11-16
Cash Dividends 11-16
Dividend Preferences 11-19
Stock Dividends 11-21
Stock Splits 11-22
11.4 Presentation and Analysis 11-24
Retained Earnings 11-24
Retained Earnings Restrictions 11-25
Balance Sheet Presentation of Stockholders’ Equity 11-26
Analysis of Stockholders’ Equity 11-28
Debt versus Equity Decision 11-29
Appendix 11A: Entries for Stock Dividends 11-32
Data Analytics in Action 11-55
xxiv
CONTENTS
12 Statement of Cash Flows
12-1
Got Cash?: Microsoft 12-2
12.1 Usefulness and Format of the Statement of
Cash Flows 12-3
Usefulness of the Statement of Cash Flows 12-3
Classification of Cash Flows 12-3
Significant Noncash Activities 12-4
Format of the Statement of Cash Flows 12-5
12.2 Preparing the Statement of Cash Flows—
Indirect Method 12-6
Indirect and Direct Methods 12-7
Indirect Method—Computer Services Company 12-7
Step 1: Operating Activities 12-9
Summary of Conversion to Net Cash Provided by Operating
Activities—Indirect Method 12-12
Step 2: Investing and Financing Activities 12-13
Step 3: Net Change in Cash 12-15
12.3 Analyzing the Statement of Cash Flows 12-17
The Corporate Life Cycle 12-17
Free Cash Flow 12-19
Appendix 12A: Statement of Cash Flows—Direct
Method 12-22
Step 1: Operating Activities 12-24
Step 2: Investing and Financing Activities 12-28
Step 3: Net Change in Cash 12-30
Appendix 12B: Worksheet for the Indirect Method 12-30
Preparing the Worksheet 12-31
Appendix 12C: Statement of Cash Flows—T-Account
Approach 12-35
Data Analytics in Action 12-61
13 Financial Analysis: The Big
Picture
13-1
It Pays to Be Patient: Warren Buffett 13-2
13.1 Sustainable Income and Quality of Earnings 13-3
Sustainable Income 13-3
Quality of Earnings 13-7
13.2 Horizontal Analysis and Vertical Analysis 13-9
Horizontal Analysis 13-10
Vertical Analysis 13-12
13.3 Ratio Analysis 13-15
Liquidity Ratios 13-16
Solvency Ratios 13-17
Profitability Ratios 13-17
Financial Analysis and Data Analytics 13-18
Comprehensive Example of Ratio Analysis 13-18
14 Managerial Accounting
14-1
Just Add Water . . . and Paddle: Current Designs 14-1
14.1 Managerial Accounting Basics 14-3
Comparing Managerial and Financial Accounting 14-3
Management Functions 14-4
Organizational Structure 14-5
14.2 Managerial Cost Concepts 14-7
Manufacturing Costs 14-8
Product versus Period Costs 14-9
Illustration of Cost Concepts 14-10
14.3 Manufacturing Costs in Financial Statements 14-12
Balance Sheet 14-12
Income Statement 14-13
Cost of Goods Manufactured 14-14
Cost of Goods Manufactured Schedule 14-15
14.4 Managerial Accounting Today 14-16
Service Industries 14-16
Focus on the Value Chain 14-17
Balanced Scorecard 14-19
Business Ethics 14-19
Corporate Social Responsibility 14-20
The Value of Data Analytics 14-20
Data Analytics in Action 14-45
15 Job Order Costing
15-1
Profiting from the Silver Screen: Disney 15-1
15.1 Cost Accounting Systems 15-3
Process Cost System 15-3
Job Order Cost System 15-4
Job Order Cost Flow 15-5
Accumulating Manufacturing Costs 15-6
15.2 Assigning Manufacturing Costs 15-8
Raw Materials Costs 15-8
Factory Labor Costs 15-11
15.3 Predetermined Overhead Rates 15-13
15.4 Entries for Jobs Completed and Sold 15-16
Assigning Costs to Finished Goods 15-17
Assigning Costs to Cost of Goods Sold 15-17
Summary of Job Order Cost Flows 15-18
Job Order Costing for Service Companies 15-19
Advantages and Disadvantages of Job
Order Costing 15-20
15.5 Applied Manufacturing Overhead 15-22
Under- or Overapplied Manufacturing Overhead 15-22
Data Analytics in Action 15-43
16 Process Costing
16-1
The Little Guy Who Could: Jones Soda 16-1
16.1 Overview of Process Cost Systems 16-3
Uses of Process Cost Systems 16-3
Process Costing for Service Companies 16-4
Similarities and Differences Between Job Order Cost
and Process Cost Systems 16-4
16.2 Process Cost Flow and Assigning Costs 16-6
CONTENTS
xxv
Process Cost Flow 16-6
Assigning Manufacturing Costs—Journal Entries 16-7
16.3 Equivalent Units 16-10
Weighted-Average Method 16-10
Refinements on the Weighted-Average Method 16-11
16.4 The Production Cost Report 16-13
Compute the Physical Unit Flow (Step 1) 16-14
Compute the Equivalent Units of Production (Step 2) 16-15
Compute Unit Production Costs (Step 3) 16-15
Prepare a Cost Reconciliation Schedule (Step 4) 16-16
Preparing the Production Cost Report 16-17
Costing Systems—Final Comments 16-18
Appendix 16A: FIFO Method for Equivalent Units 16-21
Equivalent Units Under FIFO 16-21
Comprehensive Example 16-22
FIFO and Weighted-Average 16-26
Mixed Costs 18-7
18.2 Mixed Costs Analysis 18-8
High-Low Method 18-8
Importance of Identifying Variable and Fixed Costs 18-10
18.3 Cost-Volume-Profit Analysis 18-11
Basic Components 18-11
CVP Income Statement 18-12
18.4 Break-Even Analysis 18-16
Mathematical Equation 18-16
Contribution Margin Techniques 18-17
Graphic Presentation 18-19
18.5 Target Net Income and Margin of Safety 18-20
Target Net Income 18-20
Margin of Safety 18-21
CVP and Data Analytics 18-22
Appendix 18A: Regression Analysis 18-24
Data Analytics in Action 18-46
17 Activity-Based Costing
19 Cost-Volume-Profit Analysis:
17-1
Precor Is on Your Side: Precor­ 17-1
17.1 Traditional vs. Activity-Based Costing 17-3
Traditional Costing Systems 17-3
Illustration of a Traditional Costing System 17-3
The Need for a New Approach 17-4
Activity-Based Costing 17-5
17.2 ABC and Manufacturers 17-7
Identify and Classify Activities and Allocate Overhead
to Cost Pools (Step 1) 17-8
Identify Cost Drivers (Step 2) 17-8
Compute Activity-Based Overhead Rates (Step 3) 17-9
Assign Overhead Costs to Products (Step 4) 17-10
Comparing Unit Costs 17-10
17.3 ABC Benefits and Limitations 17-13
The Advantage of Multiple Cost Pools 17-13
The Advantage of Enhanced Cost Control 17-15
The Advantage of Better Management Decisions 17-18
Some Limitations and Knowing When
to Use ABC 17-18
17.4 ABC and Service Industries 17-20
Traditional Costing Example 17-20
Activity-Based Costing Example 17-21
Appendix 17A: Just-in-Time Processing 17-24
Objective of JIT Processing 17-25
Elements of JIT Processing 17-26
Benefits of JIT Processing 17-26
18 Cost-Volume-Profit
18-1
Don’t Worry—Just Get Big: Amazon.com 18-1
18.1 Cost Behavior Analysis 18-3
Variable Costs 18-3
Fixed Costs 18-4
Relevant Range 18-5
Additional Issues
19-1
Not Even a Flood Could Stop It: Whole Foods Market 19-1
19.1 Basic CVP Concepts 19-3
Basic Concepts 19-3
CVP and Changes in the Business Environment 19-5
19.2 Sales Mix and Break-Even Sales 19-7
Break-Even Sales in Units 19-8
Break-Even Sales in Dollars 19-10
19.3 Sales Mix with Limited Resources 19-13
19.4 Operating Leverage and Profitability 19-15
Effect on Contribution Margin Ratio 19-16
Effect on Break-Even Point 19-17
Effect on Margin of Safety Ratio 19-17
Operating Leverage 19-17
Appendix 19A: Absorption Costing versus
Variable Costing 19-20
Example Comparing Absorption Costing with
Variable Costing 19-21
Net Income Effects 19-23
Decision-Making Concerns 19-28
Potential Advantages of Variable Costing 19-30
Data Analytics in Action 19-51
20 Incremental Analysis
20-1
Keeping It Clean: Method Products 20-1
20.1 Decision-Making and Incremental Analysis 20-3
Incremental Analysis Approach 20-3
How Incremental Analysis Works 20-4
Qualitative Factors 20-5
Relationship of Incremental Analysis
and Activity-Based Costing 20-5
Types of Incremental Analysis 20-6
xxvi
CONTENTS
20.2 Special Orders 20-6
20.3 Make or Buy 20-8
Opportunity Cost 20-9
20.4 Sell or Process Further 20-11
Single-Product Case 20-11
Multiple-Product Case 20-12
20.5 Repair, Retain, or Replace Equipment 20-14
20.6 Eliminate Unprofitable Segment or Product 20-16
21 Pricing
23 Budgetary Control and
Responsibility Accounting
21-1
They’ve Got Your Size—and Color: Zappos.com 21-1
21.1 Target Costing 21-3
Establishing a Target Cost 21-4
21.2 Cost-Plus and Variable-Cost Pricing 21-5
Cost-Plus Pricing 21-5
Limitations of Cost-Plus Pricing 21-7
Variable-Cost Pricing 21-8
21.3 Time-and-Material Pricing 21-10
21.4 Transfer Prices 21-13
Negotiated Transfer Prices 21-14
Cost-Based Transfer Prices 21-18
Market-Based Transfer Prices 21-19
Effect of Outsourcing on Transfer Pricing 21-19
Transfers Between Divisions in Different Countries 21-20
Appendix 21A: Absorption-Cost and
Variable-Cost Pricing 21-22
Absorption-Cost Pricing 21-23
Variable-Cost Pricing 21-24
Appendix 21B: Transfers Between Divisions in
Different Countries 21-26
Data Analytics in Action 21-45
22 Budgetary Planning
Budgeted Balance Sheet 22-21
22.5 Budgeting in Nonmanufacturing Companies 22-23
Merchandisers 22-23
Service Companies 22-24
Not-for-Profit Organizations 22-25
Data Analytics in Action 22-48
22-1
What’s in Your Cupcake?: Erin McKennaʼs Bakery NYC 22-1
22.1 Effective Budgeting and the Master Budget 22-3
Budgeting and Accounting 22-3
The Benefits of Budgeting 22-3
Essentials of Effective Budgeting 22-4
The Master Budget 22-7
22.2 Sales, Production, and Direct Materials Budgets 22-8
Sales Budget 22-8
Production Budget 22-10
Direct Materials Budget 22-10
22.3 Direct Labor, Manufacturing Overhead, and S&A
Expense Budgets 22-14
Direct Labor Budget 22-14
Manufacturing Overhead Budget 22-15
Selling and Administrative Expense Budget 22-15
Budgeted Income Statement 22-16
22.4 Cash Budget and Budgeted Balance Sheet 22-18
Cash Budget 22-18
23-1
Pumpkin Madeleines and a Movie: The Roxy Hotel
Tribeca 23-1
23.1 Budgetary Control and Static Budget Reports 23-3
Budgetary Control 23-3
Static Budget Reports 23-4
23.2 Flexible Budget Reports 23-7
Why Flexible Budgets? 23-7
Developing the Flexible Budget 23-9
Flexible Budget—A Case Study 23-10
Flexible Budget Reports 23-12
23.3 Responsibility Accounting and Responsibility
Centers 23-14
Controllable versus Noncontrollable Revenues
and Costs 23-16
Principles of Performance Evaluation 23-16
Responsibility Reporting System 23-18
Types of Responsibility Centers 23-19
23.4 Investment Centers 23-24
Return on Investment (ROI) 23-24
Responsibility Report 23-25
Alternative Measures of ROI Inputs 23-26
Improving ROI 23-26
Appendix 23A: ROI versus Residual Income 23-30
Residual Income Compared to ROI 23-31
Residual Income Weakness 23-31
Data Analytics in Action 23-52
24 Standard Costs and Balanced
Scorecard
24-1
80,000 Different Caffeinated Combinations: Starbucks 24-2
24.1 Overview of Standard Costs 24-3
Distinguishing Between Standards and Budgets 24-4
Setting Standard Costs 24-4
24.2 Direct Materials Variances 24-8
Analyzing and Reporting Variances 24-8
Calculating Direct Materials Variances 24-10
24.3 Direct Labor and Manufacturing Overhead
Variances 24-13
Direct Labor Variances 24-13
Manufacturing Overhead Variances 24-16
CONTENTS
24.4 Variance Reports and Balanced Scorecards 24-18
Reporting Variances 24-18
Income Statement Presentation of Variances 24-19
Balanced Scorecard 24-20
Appendix 24A: Standard Cost Accounting System 24-24
Journal Entries 24-24
Ledger Accounts 24-26
Appendix 24B: Overhead Controllable
and Volume Variances 24-26
Overhead Controllable Variance 24-27
Overhead Volume Variance 24-28
Data Analytics in Action 24-47
25 Planning for Capital
Investments
25-1
Floating Hotels: Holland America Line 25-2
25.1 Capital Budgeting and Cash Payback 25-3
Cash Flow Information 25-3
Illustrative Data 25-4
Cash Payback 25-4
25.2 Net Present Value Method 25-6
Equal Annual Cash Flows 25-7
Unequal Annual Cash Flows 25-8
Choosing a Discount Rate 25-9
Simplifying Assumptions 25-10
Comprehensive Example 25-10
25.3 Capital Budgeting Challenges and
Refinements 25-12
Intangible Benefits 25-12
Profitability Index for Mutually Exclusive
Projects 25-14
Risk Analysis 25-15
Post-Audit of Investment Projects 25-16
25.4 Internal Rate of Return 25-17
Comparing Discounted Cash Flow
Methods 25-18
25.5 Annual Rate of Return 25-20
Data Analytics in Action 25-38
AP P E ND IX A Specimen Financial Statements:
Apple Inc.
A-1
AP P E ND IX B Specimen Financial Statements:
Columbia Sportswear Company B-1
xxvii
A PPE NDIX C Specimen Financial Statements:
Under Armour, Inc.
C-1
A PPE NDIX D Specimen Financial Statements:
Amazon.com, Inc. D-1
A PPE NDIX E Specimen Financial Statements:
Walmart Inc. E-1
A PPE NDIX F Time Value of Money
F-1
F.1 Interest and Future Values F-2
Nature of Interest F-2
Future Value of a Single Amount F-3
Future Value of an Annuity F-5
F.2 Present Values F-8
Present Value Variables F-8
Present Value of a Single Amount F-9
Present Value of an Annuity F-11
Time Periods and Discounting F-13
Present Value of a Long-Term Note or Bond F-13
F.3 Capital Budgeting Situations F-16
F.4 Using Technological Tools F-18
Present Value of a Single Sum F-19
Present Value of an Annuity F-20
Future Value of a Single Sum F-21
Future Value of an Annuity F-22
Internal Rate of Return F-22
Useful Applications F-23
A PPE NDIX G Reporting and Analyzing
Investments G-1
G.1 Accounting for Debt Investments G-2
Why Corporations Invest G-2
Accounting for Debt Investments G-2
G.2 Accounting for Stock Investments G-4
Holdings of Less Than 20% G-5
Holdings Between 20% and 50% G-6
Holdings of More Than 50% G-7
G.3 Reporting Investments in Financial Statements G-9
Debt Securities G-9
Equity Securities G-12
Balance Sheet Presentation G-13
Presentation of Realized and Unrealized Gain
or Loss G-14
Company Index I-1
Subject Index I-5
RAPID REVIEW: CHAPTER CONTENT
xxviii
CONTENTS
Available in Wiley Course Resources and Wiley Custom:
* A PPEN DIX
H
Payroll Accounting
H-1
H.1 Recording the Payroll H-1
Determining the Payroll H-2
Recording the Payroll H-5
H.2 Employer Payroll Taxes H-8
FICA Taxes H-8
Federal Unemployment Taxes H-8
State Unemployment Taxes H-9
Recording Employer Payroll Taxes H-10
Filing and Remitting Payroll Taxes H-10
H.3 Internal Control for Payroll H-11
* A PPEN DIX
I
* A P P END IX K Accounting for Sole
Subsidiary Ledgers and
Special Journals
I-1
I.1 Subsidiary Ledgers I-1
Subsidiary Ledger Example I-2
Advantages of Subsidiary Ledgers I-3
I.2 Special Journals I-4
Sales Journal I-4
Cash Receipts Journal I-7
Purchases Journal I-10
Cash Payments Journal I-12
Effects of Special Journals on the General Journal I-15
Cybersecurity: A Final Comment I-16
* A PPEN DIX
J
J.2 Accounting for Partnership Net Income or
Net Loss J-6
Dividing Net Income or Net Loss J-6
Partnership Financial Statements J-10
J.3 Accounting for Partnership Liquidation J-11
No Capital Deficiency J-11
Capital Deficiency J-13
J.4 Admission and Withdrawal of Partners J-15
Admission of a Partner J-15
Withdrawal of a Partner J-19
Accounting for
Partnerships J-1
J.1 Forming a Partnership J-1
Characteristics of Partnerships J-1
Organizations with Partnership Characteristics J-3
Advantages and Disadvantages of Partnerships J-4
The Partnership Agreement J-5
Accounting for a Partnership Formation J-5
Proprietorships K-1
K.1 Corporation versus Sole Proprietorship Equity
Accounts K-1
K.2 Accounts that Change Owner’s Equity K-2
Owner’s Equity in a Sole Proprietorship K-2
Recording Transactions of a Sole Proprietorship K-3
K.3 Retained Earnings Statement versus Owner’s
Equity Statement K-4
K.4 Closing the Books for a Sole Proprietorship K-5
Preparing a Post-Closing Trial Balance for a
Proprietorship K-7
Job Order Costing (nondebit-and-credit approach)
CH A PTER 15A
Process Costing (nondebit-and-credit-approach)
CH A PTER 16A
Cases for Management Decision
Making
Acknowledgments
Accounting has benefitted greatly from the input of focus group participants, manuscript reviewers, those who have sent comments by letter or e-mail, ancillary authors, and proofers. We greatly appreciate the constructive suggestions and innovative ideas
of reviewers and the creativity and accuracy of the ancillary authors and checkers.
Dawn Addington
Central New Mexico Community College
Joe Atallah
Coastline Community College
Dennis Avola
Northeastern University
Melody Barta
Evergreen Valley College
Ellen Bartley
Farmingdale State College
Thomas Bednarcik
Robert Morris University Illinois
Linda Bell
Park University
Martin Blaine
Columbus State Community College
Bradley Blaylock
Oklahoma State University
Isaac Bonaparte
Towson University
Gary Bower
Community College of Rhode Island
Bruce Bradford
Fairfield University
Robert Braun
Southeastern Louisiana University
Lou Bravo
North Lake College
Ann K. Brooks
University of New Mexico
Robert Brown
Evergreen Valley College
Myra Bruegger
Southeastern Community College
Barry Buchoff
Towson University
Leroy Bugger
Edison State College
Brian Bunce
Bellevue University
Melodi Bunting
Edgewood College
Jacqueline Burke
Hofstra University
Matthew Calderisi
Fairleigh Dickinson University
Julia Camp
Providence College
Marian Canada
Ivy Tech Community College at Franklin
Lisa Capozzoli
College of DuPage
Renee Castrigano
Cleveland State University
Wanda Causseaux
Siena College
Sandy Cereola
James Madison University
Gayle Chaky
Dutchess Community College
Julie Chenier
Louisiana State University—Baton Rouge
James Chiafery
University of Massachusetts—Boston
Bea Chiang
The College of New Jersey
Carolyn Christesen
Westchester Community College
Colleen Chung
Miami Dade College
Shifei Chung
Rowan University
Tony Cioffi
Lorain County Community College
Cheryl Clark
Point Park University
Toni Clegg
Delta College
Leslie Cohen
University of Arizona
Maxine Cohen
Bergen Community College
Stephen Collins
University of Massachusetts—Lowell
Solveg Cooper
Cuesta College
William Cooper
North Carolina A&T State University
Cheryl Copeland
California State University, Fresno
Jim Coughlin
Robert Morris University
Patricia Crenny
Villanova University
Dori Danko
Grand Valley State University
Alan E. Davis
Community College of Philadelphia
Larry DeGaetano
Montclair State University
Mingcherng Deng
Baruch College
Michael Deschamps
MiraCosta College
Bettye Desselle
Texas Southern University
Judy Dewitt
Central Michigan University
Cyril Dibie
Tarrant County College—Arlington
Jean Dunn
Rady School of Management at University of
California—San Diego
Kathy Dunne
Rider University
Barbara Durham
University of Central Florida
Ron Dustin
Fresno City College
Jeanne Eibes
Creighton University
Barbara Eide
University of Wisconsin—La Crosse
David Emerson
Salisbury University
Dennis Elam
Texas A&M University—San Antonio
James Emig
Villanova University
Caroline Falconetti
Nassau Community College
Nancy Fan
California State Polytechnic University,
Pomona
Magdy Farag
California State Polytechnic University,
Pomona
Linda Flaming
Monmouth University
Janet Farler
Pima Community College
Anthony Fortini
Camden County College
Joseph Fournier
University of Rhode Island
Jeanne Franco
Paradise Valley Community College
Chad Frawley
Viterbo University
Patrick Geer
Hawkeye Community College
Amy Geile
University of Arizona
Alan Glaser
Franklin & Marshall College
J. D. Golub
Northeastern University
Liz Grant
Northern Illinois University
Rita Grant
Grand Valley State University
xxix
ACK NOWLE DG MENTS
xxx
Steve Groves
Ivy Tech Community College
Konrad Gunderson
Missouri Western State University
Marcye Hampton
University of Central Florida
Deborah Hanks
Cardinal Stritch University
Qian Hao
Wilkes University
Jacory Hickerson
University of Phoenix
Huong Higgins
Worcester Polytechnic Institute
John Hogan
Fisher College
Yongtao Hong
North Dakota State University
Bambi Hora
University of Central Oklahoma
Jana Hosmer
Blue Ridge Community College
M.A. Houston
Wright State University
Jeff Hsu
St. Louis Community College—Meramec
Robert Hurst
Franklin University
Wayne Ingalls
University of Maine
K. Harold Jackson
Tarrant County College
Janet Jamieson
University of Dubuque
Jennifer Joe
University of Delaware
James B. Johnson
Community College of Philadelphia
Patricia Johnson
Canisius College
Kevin Jones
Drexel University
Jordan Kanter
University of Rhode Island
Ann Galligan Kelley
Providence College
Robert Kenny
The College of New Jersey
Don Kovacic
California State University—San Marcos
Emil Koren
Saint Leo University
Leah Kratz
Eastern Mennonite University
Lynn Krausse
Bakersfield College
Craig Krenek
Elmhurst College
Steven LaFave
Augsburg College
Faith Lamprey
Providence College
Claudia Larocque
Manchester Community College
Gary Laycock
Ivy Tech Community College
Eric Lee
University of Northern Iowa
Jason Lee
SUNY Plattsburgh
Charles Leflar
University of Arkansas
Jennifer LeSure
Ivy Tech Community College
Harold Little
Western Kentucky University
Dennis Lopez
University of Texas—San Antonio
Claudia Lubaski
Lorain County Community College
Susan Lynn
University of Baltimore
Yuanyuan Ma
University of Minnesota
Suneel Maheshwari
Marshall University
Lois Mahoney
Eastern Michigan University
Diane Marker
University of Toledo
Tom Marsh
Northern Virginia Community College
Christian Mastilak
Xavier University
Josephine Mathias
Mercer County Community College
Don McFall
Hiram College
Edward McGinnis
American River College
Florence McGovern
Bergen Community College
Allison McLeod
University of North Texas
Pamela Meyer
University of Louisiana—Lafayette
Mary Michel
Manhattan College
Joan Miller
William Paterson University
Don Minyard
University of Alabama—Tuscaloosa
Jill Misuraca
University of Tampa
Earl Mitchell
Santa Ana College
Maha Mitrelis
Providence College
Louella Moore
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Syed Moiz
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Linda Mullins
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Johnna Murray
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Sia Nassiripour
William Paterson University
Joseph Nesi
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Michael Newman
University of Houston
Lee Nicholas
University of Northern lowa
Cindy Nye
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Suzy Pearse
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Joe Pecore
Rady School of Management at University of
California—San Diego
Rachel Pernia
Essex County College
Dawn Peters
Southwestern Illinois College
DeAnne Peterson
University of Wisconsin—Eau Claire
Judy Peterson
Monmouth College
Timothy Peterson
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Bob Picard
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AC K N OWL ED GMENTS
Maria Roxas
Central Connecticut State University
John Rude
Bloomsburg University
Martin Rudnick
William Paterson University
Christina Ryan
College of New Jersey
Susan Sadowski
Shippensburg University
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Richard Sarkisian
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Karl Schindl
University of Wisconsin—Manitowoc
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Debbie Seifert
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Mike Shapeero
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Karyn Smith
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Patrick Stegman
College of Lake County
Richard Steingart
San Jose State University
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Monmouth University
Gracelyn Stuart-Tuggle
Palm Beach State University
Karen Tabak
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Diane Tanner
University of North Florida
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Manuel Valle
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University at Buffalo
Ancillary Authors,
Contributors, Proofers,
and Accuracy Checkers
Ellen Bartley
St. Joseph’s College
LuAnn Bean
Florida Institute of Technology
Debby Bloom
Queens University
Jack Borke
University of Wisconsin—Platteville
Ann K. Brooks
University of New Mexico
Melodi Bunting
Edgewood College
Bea Chiang
The College of New Jersey
Lawrence Chui
University of St. Thomas (Minnesota)
Laura De Luca
Fanshawe College
xxxi
Judy Dewitt
Central Michigan University
Carleton Donchess
Bridgewater State University
Dina El Mahdy
Morgan State University
James Emig
Villanova University
Mary Ewanechko
Monroe Community College
Larry Falcetto
Emporia State University
Michael P. Griffin
University of Massachusetts Dartmouth
Vicki Greshik
University of Jamestown
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Kirkwood Community College
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University of California—Santa Barbara
William Heninger
Brigham Young University
Lisa Hewes
Northern Arizona University
Kimberly J. Hurt
Central Community College
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St. Mary’s University of Minnesota
Craig Krenek
Elmhurst College
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California State University—East Bay
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Elmhurst College and Utica College
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University of Tampa
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Shorter University
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St. John’s University
Margaret Shackell
Forsyth Technical Community College
Alice Sineath
Forsyth Technical Community College
xxxii
ACKNOWLEDGMEN TS
Teresa Speck
St. Mary’s University of Minnesota
Lynn Stallworth
Appalachian State University
Diane Tanner
University of North Florida
Sheila Viel
University of Wisconsin—Milwaukee
Dick Wasson
Southwestern College
Catherine Wyatt
Lumina Datamatics
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We also thank Margaret Shackell of Forsyth Technical
Community College and Diane Tanner of University of North
Florida for their creativity and efforts in the development of
the Data Analytics in Action problems. We thank Benjamin
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Lori Grady Zaher
Bucks County Community College
Aleksandra Zimmerman
Florida State University
related to Current Designs. We also appreciate the considerable support provided to us by the following people at Current
Designs: Mike Cichanowski, Jim Brown, Diane Buswell, and
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materials related to sustainability.
Finally, we appreciate suggestions and comments from
users—instructors and students alike. We welcome your
thoughts and ideas about the text.
Paul D. Kimmel
Jerry J. Weygandt
Jill E. Mitchell
Cedarburg, Wisconsin Madison, Wisconsin Annandale, Virginia
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CHAPTER 1
Introduction to Financial
Statements
Chapter Preview
If you own a business, how do you determine whether it is making or losing money? How
should you finance expansion—should you borrow, should you issue stock, should you use
your own funds? How do you convince banks to lend you money or investors to buy your
stock? Success in business requires making countless decisions, and decisions require financial information.
The purpose of this chapter is to show you what role accounting plays in providing financial information.
Feature Story
Knowing the Numbers
Many students who take this course do not plan to be
accountants. If you are in that group, you might be thinking, “If I’m not going to be an accountant, why do I need to
The Chapter Preview describes
the purpose of the chapter and
highlights major topics.
The Feature Story helps you
picture how the chapter topic
relates to the real world of
accounting and business.
­ arold
know accounting?” Well, consider this quote from H
Geneen, the former chairman of IT&T: “To be good at
your business, you have to know the numbers—cold.” In
­business, accounting financial statements are the means
for communicating the numbers. If you don’t know how
to read financial statements, you can’t really know your
­business.
1-1
1-2
CH A PT ER 1
Introduction to Financial Statements
Knowing the numbers is sometimes even a matter of corporate survival. Consider the story of Columbia Sportswear
Company, headquartered in Portland, Oregon. Gert Boyle’s
family fled Nazi Germany when she was 13 years old and then
purchased a small hat company in Oregon, Columbia Hat
Company. In 1971, Gert’s husband, who was then running
the company, died suddenly. Gert took over the small, struggling company with help from her son Tim, who was then a
senior at the University of Oregon. Somehow, they kept the
Chapter Outline
c­ ompany afloat. Today, Columbia has more than 4,000 employees and annual sales in excess of $1 billion. Its brands include
­Columbia, Mountain Hardwear, Sorel, and Montrail.
Employers such as Columbia Sportswear generally
assume that managers in all areas of the company are “financially literate.” To help prepare you for that, in this text you
will learn how to read and prepare financial statements, and
how to use key tools to evaluate financial results using basic
data analytics.
The Chapter Outline presents the chapter’s topics and subtopics, as well as practice opportunities.
LEARNING OBJECTIVES
REVIEW
LO 1 Identify the forms of business
organization and the uses of
accounting information.
• Forms of business organization
• Users and uses of financial
information
PRACTICE
DO IT! 1a Business Organization
Forms
1b Using Financial Information
• Data analytics
• Ethics in financial reporting
LO 2 Explain the three principal
types of business activity.
• Financing activities
DO IT! 2 Business Activities
• Investing activities
• Operating activities
LO 3 Describe the four financial
statements and how they are
prepared.
• Income statement
• Retained earnings statement
• Balance sheet
• Statement of cash flows
DO IT! 3a Financial Statements:
Parts 1–4
3b Components of Annual
Reports
• Interrelationships of statements
• Elements of an annual report
Go to the Review and Practice section at the end of the chapter for a targeted summary
and practice applications with solutions.
Visit Wiley Course Resources for additional tutorials and practice opportunities.
1.1
Business Organization and Accounting Information Uses
LEARNING OBJECTIVE 1
Identify the forms of business organization and the uses of accounting information.
Suppose you graduate with a business degree and decide you want to start your own business.
But what kind of business? You enjoy working with people, especially teaching them new
skills. You spend most of your free time outdoors, kayaking, backpacking, skiing, rock climbing, and mountain biking. You think you might successfully combine your teaching skills and
outdoor interest by starting an outdoor guide service.
1.1 Business Organization and Accounting Information Uses
1-3
Forms of Business Organization
What organizational form should you choose for your business? You have three choices—sole
proprietorship, partnership, or corporation.
Sole Proprietorship
You might choose the sole proprietorship form for your outdoor guide service.
Sole Proprietorship
Simple to establish
Owner-controlled
Tax advantages
• A business owned by one person is a sole proprietorship.
• It is simple to set up and gives you control over the business.
Small owner-operated businesses such as barber shops, law offices, and auto repair shops are
often sole proprietorships, as are farms and small retail stores.
Partnership
Partnership
Another possibility is for you to join forces with other individuals to form a partnership.
• A business owned by two or more persons associated as partners is a partnership.
• Partnerships often are formed because one individual does not have enough economic
resources or other unique skills or resources to initiate or expand the business.
You and your partners should formalize your duties and contributions in a written partnership agreement. Retail and service-type businesses, including professional practices
(lawyers, doctors, architects, and certified public accountants), often organize as partnerships.
Simple to establish
Shared control
Broader skills and resources
Tax advantages
Corporation
Corporation
As a third alternative, you might organize as a corporation.
• A business organized as a separate legal entity owned by stockholders is a corporation.
• Investors in a corporation receive shares of stock to indicate their ownership claim.
Buying stock in a corporation is often more attractive than investing in a partnership because
shares of stock are easy to sell (transfer ownership). Selling a proprietorship or partnership
interest is much more involved. Also, individuals can become stockholders by investing relatively small amounts of money (see Alternative Terminology).
Therefore, it is easier for corporations to raise funds compared to sole proprietorships
or partnerships. Successful corporations often have thousands of stockholders, and their stock
is traded on organized stock exchanges like the New York Stock Exchange. Many businesses
start as sole proprietorships or partnerships and eventually incorporate.
Other factors to consider in deciding which organizational form to choose are taxes
and legal liability. Sole proprietorships or partnerships, generally receive more favorable
tax treatment than corporations. However, proprietors and partners are personally liable
for all debts and legal obligations of the business; corporate stockholders are not. In other
words, corporate stockholders generally pay higher taxes but have no personal legal liability. We will discuss these issues in more depth in a later chapter.
Hybrid Forms of Organization
Finally, while sole proprietorships, partnerships, and corporations represent the main types of
business organizations, hybrid forms are now allowed in all states.
• Hybrid business forms combine the tax advantages of partnerships with the limited liability of corporations.
• Probably the most common among these hybrid types are limited liability companies (LLCs)
and subchapter S corporations (these forms are discussed extensively in business law classes).
The combined number of proprietorships and partnerships in the United States far exceeds
the number of corporations. However, the revenue produced by corporations is many times
greater. Most of the largest businesses in the United States—for example, Apple, G
­ oogle,
Verizon, Visa, and Microsoft—are corporations. Because the majority of U.S. business is
done by corporations, the emphasis in this text is on the corporate form of organization.
Easier to transfer ownership
Easier to raise funds
No personal liability
ALTERNATIVE
TERMINOLOGY
Stockholders are sometimes
called shareholders.
Alternative Terminology notes
present synonymous terms that
you may come across in practice.
1-4
CH A PT ER 1
Introduction to Financial Statements
DO IT! exercises prompt you to stop and review the key points you have just studied. The Action
Plan offers you tips about how to approach the problem.
ACTION PLAN
• Know which
organizational form
best matches the
business type, size,
and preferences of the
owner(s).
DO IT! 1a
Business Organization Forms
In choosing the organizational form for your outdoor guide service, you should consider the pros
and cons of each. Identify each of the following organizational characteristics with the organizational form or forms with which it is associated (sole proprietorship, partnership, or corporation).
1. Easier to raise funds.
4. Tax advantages.
2. Simple to establish.
5. Easier to transfer ownership.
3. No personal legal liability.
Solution
1. Easier to raise funds: Corporation.
2. Simple to establish: Sole proprietorship and partnership.
3. No personal legal liability: Corporation.
4. Tax advantages: Sole proprietorship and partnership.
5. Easier to transfer ownership: Corporation.
Related exercise material: BE1.1, DO IT! 1.1a, and E1.2.
Users and Uses of Financial Information
The purpose of financial information is to provide inputs for decision-making.
• Accounting is the information system that identifies, records, and communicates the
economic events of an organization to interested users.
• Users of accounting information can be divided broadly into two groups: internal users
and external users.
Internal Users
Internal users of accounting information are managers who plan, organize, and run a business. These include marketing managers, production supervisors, finance directors,
and company officers. In running a business, managers must answer many important questions, as shown in Illustration 1.1.
ILLUSTRATION 1.1 Questions
that internal users ask
Questions Asked by Internal Users
Is cash sufficient to
pay dividends to our
stockholders?
Finance
What price should we
charge for our newest
smartphone model
to maximize the
company's net income?
Marketing
Can we afford to give
our employees pay
raises this year?
Human Resources
Which product line is
the most profitable?
Should any product
lines be eliminated?
Management
1.1 Business Organization and Accounting Information Uses
1-5
To answer these and other questions, you need detailed information on a timely basis. For
internal users, accounting provides internal reports, such as financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs
for the next year. In addition, companies present summarized financial information in the
form of financial statements.
Accounting Across the Organization boxes show applications of accounting information in various
business functions.
Accounting Across the Organization Clif Bar & Company
Owning a Piece of the Bar
The original Clif Bar® energy bar was created
in 1990 after six months of experimentation
by Gary Erickson and his mother in her
kitchen. Today, the company has approximately 1,000 employees and was named one
of Landor’s Breakaway Brands®. One of Clif
carterdayne/Getty Images
Bar & Company’s proudest moments was
the creation of an employee stock ownership plan (ESOP). This plan
gives its employees 20% ownership of the company. The ESOP also
resulted in Clif Bar enacting an open-book management program,
including the commitment to educate all employee-owners about
its finances. Armed with basic accounting knowledge, employees
are more aware of the financial impact of their actions, which leads
to better decisions.
What are the benefits to the company and to the employees
of making the financial statements available to all employees? (Answer is available at the end of the chapter.)
External Users
There are several types of external users of accounting information. Investors (owners)
use accounting information to make decisions to buy, hold, or sell stock. Creditors, such as
suppliers and bankers, use accounting information to evaluate the risks of selling on credit
or lending money. Some questions that investors and creditors may ask about a company are
shown in Illustration 1.2.
Questions Asked by External Users
Is Apple
earning
satisfactory
income?
How does Apple
compare in size and
profitability with
Samsung?
Headquarters
ILLUSTRATION 1.2 Questions
that external users ask
Will Apple be
able to pay its
debts as they
come due?
The information needs and questions of other external users vary considerably.
• Taxing authorities, such as the Internal Revenue Service, want to know whether the
company complies with the tax laws.
• Customers are interested in whether a company like Tesla will be able to honor product
warranties and otherwise support its product lines.
• Labor unions, such as the Major League Baseball Players Association, want to know
whether the owners have the ability to pay increased wages and benefits.
• Regulatory agencies, such as the Securities and Exchange Commission or the Federal
Trade Commission, want to know whether the company is operating within prescribed rules.
1-6
CH A PT ER 1
Introduction to Financial Statements
For example, Enron, Dynegy, Duke Energy, and other big energy-trading companies reported
record profits at the same time as California was paying extremely high prices for energy and
suffering from blackouts. This disparity caused regulators to investigate the energy traders to
make sure that the profits were earned by legitimate and fair practices.
Data Analytics
Helpful Hints further clarify
concepts being discussed.
HELPFUL HINT
Throughout this text, we
will highlight examples
where accounting
information is used to
support business decisions
using data analytics.
Accounting software systems collect vast amounts of data about a company’s economic events
as well as its suppliers and customers. Business decision-makers take advantage of this wealth of
data by using data analytics to gain insights and therefore make more informed business decisions.
• Data analytics involves analyzing data, often employing both software and statistics, to
draw inferences.
• As both data access and analytical software improve, the use of data analytics to support decisions is becoming increasingly common at virtually all types of companies (see
­Helpful Hint).
Illustration 1.3 shows the four most common types of data analytics that help answer questions ranging from what happened and why did it happen, to what is likely to happen and
what should we do about it? Analytics range from simple analysis that can be performed using
spreadsheets with tools like pivot tables and graphs, to complex statistical software and even
artificial intelligence. More complex analysis provides greater value to the business.
Four Types of Data Analytics
ILLUSTRATION 1.3
Four types of data
analytics
Future
Prescriptive
Greater
Predictive
Past
What should we
do about it?
What is likely
to happen?
Diagnostic
Value
Why did it happen?
Foresight
Descriptive
What happened?
Insight
Hindsight
Less
Less
Greater
Complexity
Insight boxes provide examples of business situations from various perspectives—ethics, investor, i­ nternational, corporate social
responsibility, and data analytics.
Data Analytics Insight Netflix
Using Data Science to Create Art
Bogdan Glisik/
Bogdan
Glisik/
Shutterstock.com
Shutterstock.com
Technology provides decision-makers and
problem-solvers with access to a large volume of information called “big data.” And
Netflix, the world’s leading subscription
streaming entertainment service, is tapping
into this big data as part of its efforts to ramp up its original content production.
In a recent year, Netflix planned to spend $8 billion on
content creation. Producing content involves a blend of creativity, technology, and business decisions, all of which result
in costs. And by analyzing the large amounts of data from past
­productions, such as filming locations and production ­schedules,
1.1 Business Organization and Accounting Information Uses
Netflix can more precisely estimate costs for future productions. Further, consider that the production of a TV show or film
involves hundreds of tasks. Here again, Netflix uses data science,
in this case to visualize where bottlenecks might occur or where
opportunities might exist to increase the efficiency of the production process.
1-7
Source: Based on Ritwik Kumar et. al., “Data Science and the Art of
Producing Entertainment at Netflix,” The Netflix Tech Blog (March 26,
2018).
How can “big data” improve decision-making? (Answer is
available at the end of the chapter.)
Ethics in Financial Reporting
People won’t gamble in a casino if they think it is “rigged.” Similarly, people won’t “play”
the stock market if they think stock prices are rigged. At one time, major financial scandals
at Enron, WorldCom, HealthSouth, and AIG led to a mistrust of financial reporting in
general.
A Wall Street Journal article noted that “repeated disclosures about questionable accounting practices have bruised investors’ faith in the reliability of earnings reports, which in turn
has sent stock prices tumbling.” Imagine trying to carry on a business or invest money if you
could not depend on the financial statements to be honestly prepared. Information would
have no credibility. A well-functioning economy depends on accurate and reliable financial
­reporting.
U.S. regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.
• Congress passed the Sarbanes-Oxley Act (SOX) to reduce unethical corporate behavior
and decrease the likelihood of future corporate scandals (see Ethics Note).
• As a result of SOX, top management must now certify the fairness of financial information.
• In addition, penalties for fraudulent financial activity are much more severe.
• Also, SOX increased both the independence of the outside auditors who review the accuracy of corporate financial statements and the oversight role of boards of directors.
Effective financial reporting depends on sound ethical behavior. When analyzing ethics cases
and your own ethical experiences, you should apply the three steps outlined in Illustration 1.4.
ETHICS NOTE
Circus-founder P.T.
Barnum is alleged to have
said, “Trust everyone,
but cut the deck.” What
Sarbanes-Oxley does is to
provide measures that (like
cutting the deck of playing
cards) help ensure that
fraud will not occur.
Ethics Notes help sensitize you
to some of the ethical issues
in accounting.
ILLUSTRATION 1.4 Steps in analyzing ethics cases
Solving an Ethical Dilemma
ALT 1
ALT 2
1
2
3
Recognize an ethical
situation and the ethical
issues involved.
Use your personal ethics to
identify ethical situations and
issues. Some businesses and
professional organizations
provide written codes of
ethics for guidance in some
business situations.
Identify and analyze
the principal elements
in the situation.
Identify the stakeholders—
persons or groups who may
be harmed or benefited. Ask
the question: What are the
responsibilities and
obligations of the parties
involved?
Identify the alternatives,
and weigh the impact of
each alternative on various
stakeholders.
Select the most ethical
alternative, considering all the
consequences. Sometimes there
will be one right answer. Other
situations involve more than
one right solution; these
situations require you to
evaluate each alternative and
select the best one.
1-8
CH A PT ER 1
Introduction to Financial Statements
Ethics Insight Dewey & LeBoeuf LLP
I Felt the Pressure—Would You?
Alliance Images/
Shutterstock.com
“I felt the pressure.” That’s what some of
the employees of the now-defunct law firm
of Dewey & LeBoeuf LLP indicated when
they helped to overstate revenue and use
accounting tricks to hide losses and cover up
cash shortages. These employees worked for
the former finance director and former chief
financial officer (CFO) of the firm. Here are
some of their comments:
• “ I was instructed by the CFO to create invoices, knowing they
would not be sent to clients. When I created these invoices,
I knew that it was inappropriate.”
• “ I intentionally gave the auditors incorrect information in
the course of the audit.”
ACTION PLAN
• Review forms of
business organization,
users of financial
information, approach
to ethical dilemmas,
and definition of data
analytics.
DO IT! 1b
What happened here is that a small group of lower-level
employees over a period of years carried out the instructions
of their bosses. Their bosses, however, seemed to have no concern about unethical practices as evidenced by various e-mails
with one another in which they referred to their financial
manipulations as accounting tricks, cooking the books, and fake
income.
Sources: Ashby Jones, “Guilty Pleas of Dewey Staff Detail the Alleged
Fraud,” Wall Street Journal (March 28, 2014); and Sara Randazzo,
“Dewey CFO Escapes Jail Time in Fraud Case Sentencing,” Wall Street
Journal (October 10, 2017).
Why did these employees lie, and what do you believe
should be their penalty for these lies? (Answer is available
at the end of the chapter.)
Using Financial Information
There are a variety of users and uses of financial information. Match each of the following terms
with its definition, classification type, or associated phrase.
a. ____ Data analytics.
1. Marketing managers, finance directors.
Management must certify the fairness of
b. ____ Internal users of financial information. 2. financial information.
c. ____ Element of Sarbanes-Oxley Act.
d. ____ External users of financial information. 3. Often employs both software and statistics to
draw inferences.
e. ____ Steps in solving an ethical dilemma.
4. Identify the alternatives and weigh the impact
of each alternative on various stakeholders.
5. Investors, labor unions.
Solution
a. 3 b. 1 c. 2 d. 5 e. 4
Related exercise material: BE1.2, DO IT! 1.1b, and E1.3.
1.2
The Three Types of Business Activity
LEARNING OBJECTIVE 2
Explain the three principal types of business activity.
Businesses engage in three types of activity—financing, investing, and operating. For example, consider Gert Boyle’s parents, the founders of Columbia Sportswear.
1. The Boyles obtained cash through financing (from personal savings and outside sources
like banks) to start and grow their business.
1.2 The Three Types of Business Activity 1-9
2. The family then invested the cash in equipment to run the business, such as sewing
equipment and delivery vehicles.
3. Once this equipment was in place, they began the operating activities of making and
selling clothing.
The accounting information system keeps track of the results of each of the various
business activities—financing, investing, and operating. Let’s look at each type of business
activity in more detail.
Financing Activities
It takes money to make money. Financing activities involve raising money from outside sources. The two primary sources of outside funds for corporations are borrowing
money (debt financing) and issuing (selling) shares of stock in exchange for cash (equity
financing).
Columbia Sportswear may borrow money in a variety of ways. For example, it can take
out a loan at a bank or borrow directly from investors by issuing debt securities called bonds.
Persons or entities to whom Columbia owes money are its creditors.
• Amounts owed to creditors—in the form of debt and other obligations—are called
liabilities.
The Stock Exchange
Equity Financing
• Specific names are given to different types of liabilities, depending on their source.
Columbia may have a note payable to a bank for the money borrowed to purchase delivery trucks.
• Debt securities sold to investors that must be repaid at a particular date some years in the
future are bonds payable.
Debt Financing
Corporations also obtain funds by selling shares of stock to investors. Common stock
is the term used to describe the total amount paid in by stockholders for the shares they
purchase.
The claims of creditors differ from those of stockholders. If you loan money to a company, you are one of its creditors. In lending money, you specify a payment schedule (e.g.,
payment at the end of three months). As a creditor, you have a legal right to be paid at the
agreed time. In the event of nonpayment, you may legally force the company to sell property
to pay its debts. In the case of financial difficulty, creditor claims must be paid before stockholders’ claims.
Stockholders, on the other hand, have no claim to corporate cash until the claims of
creditors are satisfied. Suppose you buy a company’s stock instead of loaning it money.
You have no legal right to expect any payments from your stock ownership until all of
the company’s creditors are paid amounts currently due. However, many corporations
make payments to stockholders on a regular basis as long as there is sufficient cash to cover
required payments to creditors. These cash payments to stockholders are called dividends.
Investing Activities
Once the company has raised cash through financing activities, it uses that cash in investing
activities. Investing activities involve the purchase of the resources a company needs
in order to operate. Resources owned by a business are called assets. A growing company
purchases many assets, such as computers, delivery trucks, furniture, and buildings.
• Different types of assets are given different names; Columbia Sportswear’s sewing equipment is a type of asset referred to as property, plant, and equipment (see Alternative
Terminology).
• Cash is one of the more important assets owned by Columbia or any other business.
• If a company has excess cash that it does not need for a while, it might choose to invest
in securities (stocks or bonds) of other corporations, a type of asset referred to as
investments.
Investing
ALTERNATIVE
TERMINOLOGY
Property, plant, and
equipment is sometimes
called fixed assets.
1-10
C H A PT E R 1
Introduction to Financial Statements
Operating Activities
Once a business has the assets it needs to get started, it begins operating activities. Operating activities are the day-to-day actions taken by a company to produce and sell a
product, or provide a service. Columbia Sportswear is in the business of selling outdoor
clothing and footwear. It sells TurboDown jackets, Millennium snowboard pants, Sorel® snow
boots, Bugaboots™, rainwear, and anything else you might need to protect you from the elements. We call amounts earned from the sale of these products revenues.
Operating
• Revenue is the increase in assets or decrease in liabilities resulting from the sale of goods
or the performance of services in the normal course of business; Columbia records revenue when it sells a footwear product.
• Revenues arise from different sources and are identified by various names depending on
the nature of the business; Columbia’s primary source of revenue is the sale of sportswear
(but it also generates interest revenue on debt securities held as investments).
• Sources of revenue common to many businesses are sales revenue, service revenue,
and interest revenue.
The company purchases its longer-lived assets through investing activities as described earlier.
Other assets with shorter lives, however, result from operating activities.
• Supplies are assets used in day-to-day operations (rather than sold to customers).
• Goods available for future sales to customers are assets called inventory.
• The right to receive money in the future is called an account receivable. If Columbia
sells goods to a customer and does not receive cash immediately, then the company has a
right to expect payment from that customer in the near future.
Before Columbia can sell a single Sorel® boot, it must purchase wool, rubber, leather, metal lace
loops, laces, and other materials. It then must process, wrap, and ship the finished product. It
also incurs costs like salaries, rents, and utilities. All of these costs, referred to as expenses,
are necessary to produce and sell the product.
• In accounting language, expenses are the cost of assets consumed or services used in the
process of generating revenues.
• Expenses take many forms and are identified by various names depending on the type of
asset consumed or service used.
For example, Columbia keeps track of these types of expenses: cost of goods sold (such as the
cost of materials), selling expenses (such as the cost of salespersons’ salaries), marketing
expenses (such as the cost of advertising), administrative expenses (such as the salaries of
administrative staff, and telephone and heating costs incurred at the corporate office), interest
expense (amounts of interest paid on various debts), and income tax expense (corporate
taxes paid to the government).
Columbia may also have liabilities arising from these expenses.
• For example, Columbia may purchase goods on credit from suppliers. The obligations to
pay for these goods are called accounts payable.
• Additionally, Columbia may have interest payable on the outstanding amounts owed
to the bank.
• It may also have wages payable to its employees and sales taxes payable, property
taxes payable, and income taxes payable to the government.
Columbia compares the revenues of a period with the expenses of that period to determine
whether it earned a profit. When revenues exceed expenses, net income results. When
expenses exceed revenues, a net loss results.
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1.3 The Four Financial Statements 1-11
DO IT! 2
Business Activities
Classify each item as an asset, liability, common stock, revenue, or expense.
1. Cost of renting property.
4. Issuance of ownership shares.
2. Truck purchased.
5. Amount recorded from performing services.
3. Notes payable.
6. Amounts owed to suppliers.
ACTION PLAN
• Classify each item
based on its economic
characteristics. Proper
classification of items
is critical if accounting
is to provide useful
information.
Solution
1. Cost of renting property: Expense.
2. Truck purchased: Asset.
3. Notes payable: Liability.
4. Issuance of ownership shares: Common stock.
5. Amount recorded from performing services: Revenue.
6. Amounts owed to suppliers: Liability.
Related exercise material: BE1.3, DO IT! 1.2, and E1.7.
1.3
The Four Financial Statements
LEARNING OBJECTIVE 3
Describe the four financial statements and how they are prepared.
Assets, liabilities, expenses, and revenues are of interest to users of accounting information.
This information is arranged in the format of four different financial statements, which
form the backbone of financial accounting:
1. Income statement. Shows how successfully your business performed during a period of
time, by subtracting expenses from revenues.
2. Retained earnings statement. Indicates how much of previous income was distributed
to owners of your business in the form of dividends, and how much was retained in the
business to allow for future growth.
3. Balance sheet. Presents a picture at a point in time of what your business owns (its
assets) and what it owes (its liabilities).
4. Statement of cash flows. Shows where your business obtained cash during a period of
time and how that cash was used.
To introduce you to these statements, we have prepared the financial statements for your
outdoor guide service, Sierra Corporation, after your first month of operations (see International Note).
To summarize, you officially started your business in Truckee, California, on October
1, 2025. Sierra provides guide services in the Lake Tahoe area of the Sierra Nevada mountains. Its promotional materials describe outdoor day trips, such as rafting, snowshoeing,
and hiking, as well as multi-day backcountry experiences. To minimize your initial investment, your customers either bring their own equipment or rent equipment through local
outfitters. The financial statements for Sierra’s first month of business are provided in the
following pages.
International Note
The primary types of
financial statements
required by International
Financial Reporting
Standards (IFRS) and
U.S. generally accepted
accounting principles
(GAAP) are the same.
However, in practice,
some format differences
do exist in presentations
commonly employed
by IFRS companies as
compared to GAAP
companies.
International Notes highlight
differences between U.S.
and international accounting
standards.
1-12
C H A PTE R 1
Introduction to Financial Statements
Income Statement
HELPFUL HINT
The financial statement
heading identifies the
company, the type of
statement, and the time
period covered.
The income statement reports a company’s revenues and expenses and resulting net income
or loss for a period of time (see Decision Tools). To indicate that its income statement reports
the results of operations for a specific period of time, Sierra Corporation dates the income
statement “For the Month Ended October 31, 2025.” The income statement lists the company’s revenues followed by its expenses. Finally, Sierra determines the net income (or net loss)
by deducting expenses from revenues. Sierra’s income statement is shown in Illustration 1.5
(see Helpful Hint). Congratulations, you are already showing a profit!
Sierra Corporation
ILLUSTRATION 1.5
Sierra Corporation’s income
statement
Decision Tools
The income statement
helps users determine if
the company’s operations
are profitable.
Decision Tools that are useful
for business decision-making are
highlighted throughout the text.
A summary of the Decision Tools
is also provided in each chapter.
Income Statement
For the Month Ended October 31, 2025
Revenues
Service revenue
Expenses
Salaries and wages expense
Supplies expense
Rent expense
Interest expense
Insurance expense
Depreciation expense
Total expenses
Net income
$10,600
$5,200
1,500
900
50
50
40
7,740
$ 2,860
Why are financial statement users interested in net income?
• Investors are interested in a company’s past net income because it provides useful information for predicting future net income. Investors buy and sell stock based
on their beliefs about a company’s future performance. If investors believe that Sierra
will be successful in the future and that this will result in a higher stock price, they will
buy its stock.
ETHICS NOTE
When companies find
errors in previously
released income
statements, they restate
those numbers. Perhaps
because of the increased
scrutiny shortly after
Sarbanes-Oxley was
implemented, companies
filed a record 1,195
restatements.
ACTION PLAN
• Report the revenues
and expenses for a
period of time in an
income statement.
• Creditors use the income statement to predict future earnings. When a bank loans
money to a company, it believes that it will be repaid in the future. If it didn’t think it
would be repaid, it wouldn’t loan the money. Therefore, prior to making the loan the bank
loan officer uses the income statement as a source of information to predict whether the
company will be profitable enough to repay its loan.
Thus, reporting a strong profit will make it easier for Sierra to raise additional cash either by
issuing shares of stock or borrowing.
Amounts received from issuing stock are not revenues, and amounts paid out
as dividends are not expenses. As a result, they are not reported on the income statement.
For example, Sierra Corporation does not treat as revenue the $10,000 of cash received from
issuing new stock (see Illustration 1.8), nor does it regard as a business expense the $500 of
dividends paid (see Illustration 1.6) (see Ethics Note).
DO IT! 3a Part 1 Financial Statements—The Income Statement
Part 1: CSU Corporation began operations on January 1, 2025. The following information is available for CSU on December 31, 2025.
Accounts receivable
Accounts payable
Rent expense
Notes payable
Common stock
$ 1,800
2,000
9,000
5,000
10,000
Prepare an income statement.
Retained earnings
Equipment
Insurance expense
Service revenue
Supplies
$ 0
16,000
1,000
17,000
4,000
Supplies expense
Cash
Dividends
$ 200
1,400
600
1.3 The Four Financial Statements 1-13
Solution
CSU Corporation
Income Statement
For the Year Ended December 31, 2025
Revenues
Service revenue
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
Net income
$17,000
$9,000
1,000
200
10,200
$ 6,800
Related exercise material: BE1.6, BE1.7, BE1.8, DO IT! 1.3a, E1.9, E1.10, E1.14, E1.15, E1.16, E1.18,
and E1.19.
Retained Earnings Statement
Decision Tools
If Sierra Corporation is profitable, at the end of each period it must decide what portion of profits to pay to shareholders in dividends. In theory, it could pay all of its current-period profits, but few companies do this. Why? Because they want to retain part of
the profits to allow for further expansion. High-growth companies, such as Google and
Facebook, often pay no dividends. Retained earnings is the net income retained in the
corporation.
The retained earnings statement shows the amounts and causes of changes in retained
earnings for a specific time period (see Decision Tools). The time period is the same as that
covered by the income statement. The beginning retained earnings amount appears on the
first line of the statement. Then, the company adds net income and deducts dividends to determine the retained earnings at the end of the period. If a company has a net loss, it deducts
(rather than adds) that amount in the retained earnings statement. Illustration 1.6 presents
Sierra’s retained earnings statement (see Helpful Hint).
The heading of this
statement identifies the
company, the type of
statement, and the time
period covered by the
statement.
Sierra Corporation’s retained
earnings statement
Retained Earnings Statement
For the Month Ended October 31, 2025
Less: Dividends
Retained earnings, October 31
HELPFUL HINT
ILLUSTRATION 1.6
Sierra Corporation
Retained earnings, October 1
Add: Net income
The retained earnings
statement helps users
determine the company’s
policy toward dividends
and growth.
$ 0
2,860
2,860
500
$2,360
By monitoring the retained earnings statement, financial statement users can evaluate
dividend payment practices.
• Some investors seek companies, such as Dow Chemical, that have a history of paying
high dividends.
• Other investors seek companies, such as Amazon.com, that reinvest earnings to increase
the company’s growth instead of paying dividends.
• Lenders monitor their corporate customers’ dividend payments because any money paid
in dividends reduces a company’s ability to repay its debts.
1-14
C H A PTE R 1
Introduction to Financial Statements
ACTION PLAN
• Show the amounts and
causes (net income and
dividends) of changes
in retained earnings
during the period in
the retained earnings
statement.
DO IT! 3a Part 2 Financial Statements—The Retained
Earnings Statement
Part 2: CSU Corporation began operations on January 1, 2025. The following information is available for CSU on December 31, 2025.
Accounts receivable
Accounts payable
Rent expense
Notes payable
Common stock
$ 1,800
2,000
9,000
5,000
10,000
Retained earnings
Equipment
Insurance expense
Service revenue
Supplies
$ 0
16,000
1,000
17,000
4,000
Supplies expense
Cash
Dividends
$ 200
1,400
600
Prepare a retained earnings statement. Refer to DO IT! 3a Part 1 for net income.
Solution
CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2025
Retained earnings, January 1
Add: Net income
Less: Dividends
Retained earnings, December 31
$ 0
6,800
6,800
600
$6,200
Related exercise material: BE1.7, BE1.10, DO IT! 1.3a, E1.9, E1.10, E1.13, E1.16, E1.17, and E1.18.
Balance Sheet
Decision Tools
The balance sheet helps
users determine whether
the company relies on
debt or stockholders’
equity to finance its assets.
The balance sheet reports assets and claims to assets at a specific point in time (see Decision
Tools). Claims to assets are subdivided into two categories: claims of creditors and claims of
owners. As noted earlier, claims of creditors are called liabilities. The owners’ claim to assets
is called stockholders’ equity.
Illustration 1.7 shows the relationship among the categories on the balance sheet in
equation form.
• This equation is referred to as the basic accounting equation.
• This relationship is where the name “balance sheet” comes from. Assets must balance
with the claims to assets.
ILLUSTRATION 1.7
Basic accounting equation
Assets = Liabilities + Stockholders’ Equity
HELPFUL HINT
The heading of a balance
sheet must identify the
company, the statement,
and the date.
ALTERNATIVE
TERMINOLOGY
Liabilities are also referred
to as debt.
As you can see from looking at Sierra Corporation’s balance sheet in Illustration 1.8, the
balance sheet presents the company’s financial position as of a specific date—in this case,
October 31, 2025 (see Helpful Hint). It lists assets first. Assets are listed in the order of their
liquidity, that is, how quickly they could be converted to cash.
Assets are followed by liabilities and stockholders’ equity (see Alternative Terminology). Stockholders’ equity is comprised of two parts: (1) common stock and (2) retained earnings. As noted earlier, common stock results when the company sells new shares of stock;
1.3 The Four Financial Statements 1-15
retained earnings is the net income retained in the corporation. Sierra has common stock of
$10,000 and retained earnings of $2,360, for total stockholders’ equity of $12,360.
ILLUSTRATION 1.8
Sierra Corporation
Sierra Corporation’s balance
sheet
Balance Sheet
October 31, 2025
Assets
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment, net
Total assets
$15,200
200
1,000
550
4,960
$21,910
Liabilities and Stockholders’ Equity
Liabilities
Notes payable
$ 5,000
Accounts payable
2,500
Unearned service revenue
800
Salaries and wages payable
1,200
50
Interest payable
Total liabilities
Stockholders’ equity
Common stock
10,000
2,360
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 9,550
12,360
$21,910
Creditors analyze a company’s balance sheet to determine the likelihood that they will
be repaid.
• Creditors carefully evaluate the nature of the company’s assets and liabilities.
• In operating Sierra’s guide service, the balance sheet will be used to determine whether
cash on hand is sufficient for immediate cash needs.
• The balance sheet will also be used to evaluate the relationship between debt and stockholders’ equity to determine whether the company has a satisfactory proportion of debt
and common stock financing.
DO IT! 3a Part 3
Financial Statements—The Balance Sheet
Part 3: CSU Corporation began operations on January 1, 2025. The following information is available for CSU on December 31, 2025.
Accounts receivable $ 1,800
Accounts payable
2,000
Rent expense
9,000
Notes payable
5,000
Common stock
10,000
Retained earnings
Equipment
Insurance expense
Service revenue
Supplies
$ 0
16,000
1,000
17,000
4,000
Supplies expense
Cash
Dividends
$ 200
1,400
600
Prepare a balance sheet. Refer to DO IT! 3a Part 2 for the ending balance in Retained Earnings.
ACTION PLAN
• Present the assets and
claims to those assets
(liabilities and equity)
at a specific point in
time in the balance
sheet.
1-16
C H A PTE R 1
Introduction to Financial Statements
Solution
CSU Corporation
Balance Sheet
December 31, 2025
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$ 1,400
1,800
4,000
16,000
$23,200
Liabilities and Stockholders’ Equity
Liabilities
Notes payable
$ 5,000
2,000
Accounts payable
Total liabilities
Stockholders’ equity
Common stock
10,000
6,200
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 7,000
16,200
$23,200
Related exercise material: BE1.5, BE1.6, BE1.7, BE1.8, BE1.9, BE1.10, DO IT! 1.3a, E1.12, E1.16, E1.17,
and E1.22.
Statement of Cash Flows
Decision Tools
The statement of cash
flows helps users
determine if the company
generates enough cash
from operations to fund
its investing activities.
HELPFUL HINT
The heading of this
statement identifies
the company, the type
of statement, and the
time period covered by
the statement. Negative
numbers are shown in
parentheses.
ILLUSTRATION 1.9
Sierra Corporation’s statement
of cash flows
The primary purpose of a statement of cash flows is to provide financial information about
the cash receipts and cash payments of a business for a specific period of time (see Decision
Tools). To help investors, creditors, and others in their analysis of a company’s cash position,
the statement of cash flows reports the cash effects of a company’s operating, investing, and
financing activities. In addition, the statement shows the net increase or decrease in cash
during the period, and the amount of cash at the end of the period.
Users are interested in the statement of cash flows because they want to know what is
happening to a company’s most important resource. The statement of cash flows provides
answers to these simple but important questions:
• Where did cash come from during the period?
• How was cash used during the period?
• What was the change in the cash balance during the period?
The statement of cash flows for Sierra Corporation, in Illustration 1.9, shows that cash
increased $15,200 during the month (see Helpful Hint). This increase resulted because operating activities (services to clients) increased cash $5,700, and financing activities increased
cash $14,500. Investing activities used $5,000 of cash for the purchase of equipment.
Sierra Corporation
Statement of Cash Flows
For the Month Ended October 31, 2025
Cash flows from operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash provided by operating activities
$11,200
(5,500)
$ 5,700
1.3 The Four Financial Statements 1-17
Cash flows from investing activities
Purchased office equipment
Net cash used by investing activities
Cash flows from financing activities
Issuance of common stock
Issuance of note payable
Payment of dividend
Net cash provided by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
ILLUSTRATION 1.9
(5,000)
(5,000)
(continued)
10,000
5,000
(500)
14,500
15,200
0
$15,200
People, Planet, and Profit Insight
Beyond Financial ­Statements
Columbia Sportswear doesn’t just focus
on financial success. Several of its factories continue to participate in a project
to increase health awareness of female
marekuliasz/Getty
factory workers in developing countries.
Images
Columbia is also a founding member of
the Sustainable Apparel Coalition, which strives to reduce the
environmental and social impact of the apparel industry. In
addition, the company monitors all of the independent factories that produce its products to ensure that they comply with
the company’s Standards of Manufacturing Practices. These
standards address such issues as forced labor, child labor,
harassment, wages and benefits, health and safety, and the
environment.
With that in mind, should we expand our financial statements to take into account ecological and social performance,
in addition to financial results, in evaluating a company? The
idea is that a company’s responsibility lies with anyone who is
influenced by its actions. In other words, a company should be
interested in benefiting many different parties, instead of only
maximizing stockholders’ interests.
A socially responsible business does not exploit or endanger
any group of individuals. It follows fair trade practices, provides
safe environments for workers, and bears responsibility for environmental damage. Measurement of these factors is difficult, but
many interesting and useful efforts are underway.
Why might a company’s stockholders be interested in its
environmental and social performance? (Answer is available at the end of the chapter.)
Interrelationships of Statements
Illustration 1.10 shows the financial statements of Sierra Corporation (see Helpful Hints).
Because the results on some financial statements become inputs to other statements, the
­statements are interrelated. These interrelationships can be seen in Sierra’s financial statements, as follows.
1. The retained earnings statement uses the results of the income statement. Sierra
reported net income of $2,860 for the period. Net income is added to the beginning
amount of retained earnings to determine ending retained earnings.
2. The balance sheet and retained earnings statement are also interrelated. Sierra
reports the ending amount of $2,360 on the retained earnings statement as the retained
earnings amount on the balance sheet.
3. The statement of cash flows relates to information on the balance sheet. The statement of cash flows shows how the Cash account changed during the period. It shows the
amount of cash at the beginning of the period, the sources and uses of cash during the
period, and the $15,200 of cash at the end of the period. The ending amount of cash shown
on the statement of cash flows must agree with the amount of cash on the balance sheet.
Study these interrelationships carefully. To prepare financial statements, you must understand the sequence in which these amounts are determined and how each statement
impacts the next.
ILLUSTRATION 1.10
Sierra Corporation
Sierra Corporation’s financial
statements
HELPFUL HINT
Note that final sums are
double-underlined.
Income Statement
For the Month Ended October 31, 2025
Revenues
Service revenue
Expenses
Salaries and wages expense
Supplies expense
Rent expense
Interest expense
Insurance expense
Depreciation expense
Total expenses
Net income
$10,600
$5,200
1,500
900
50
50
40
7,740
$ 2,860
Sierra Corporation
Retained Earnings Statement
For the Month Ended October 31, 2025
HELPFUL HINT
The arrows in this
illustration show the
interrelationships of the
four financial statements.
Retained earnings, October 1
Add: Net income
$ 0
2,860
2,860
500
$2,360
Less: Dividends
Retained earnings, October 31
Sierra Corporation
Balance Sheet
October 31, 2025
Cash
Accounts receivable
Supplies
Prepaid insurance
Equipment, net
Total assets
Assets
Liabilities and Stockholders’ Equity
Liabilities
Notes payable
$ 5,000
Accounts payable
2,500
Unearned service revenue
800
Salaries and wages payable
1,200
Interest payable
50
Total liabilities
Stockholders’ equity
Common stock
10,000
Retained earnings
2,360
Total stockholders’ equity
Total liabilities and stockholders’ equity
$15,200
200
1,000
550
4,960
$21,910
$ 9,550
12,360
$21,910
Sierra Corporation
Statement of Cash Flows
For the Month Ended October 31, 2025
HELPFUL HINT
Negative amounts are
presented in parentheses.
Cash flows from operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash provided by operating activities
Cash flows from investing activities
Purchased office equipment
Net cash used by investing activities
Cash flows from financing activities
Issuance of common stock
Issuance of note payable
Payment of dividend
Net cash provided by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
$11,200
(5,500)
(5,000)
10,000
5,000
(500)
$ 5,700
(5,000)
14,500
15,200
0
$15,200
1.3 The Four Financial Statements 1-19
DO IT! 3a Part 4
Financial Statements
ACTION PLAN
Part 4: BRB Corporation began operations on January 1, 2025. The following information is available for BRB on December 31, 2025.
Accounts receivable
Accounts payable
Rent expense
Notes payable
Common stock
$ 1,600
3,000
7,000
4,000
12,000
Retained earnings $ 0
Equipment
21,000
Insurance expense
2,000
Service revenue
21,000
Supplies
5,000
Supplies expense
Cash
Dividends
$ 300
2,400
700
Prepare an income statement, a retained earnings statement, and a balance sheet.
Solution
Income Statement
For the Year Ended December 31, 2025
$21,000
$7,000
2,000
300
9,300
$11,700
BRB Corporation
Retained Earnings Statement
For the Year Ended December 31, 2025
Retained earnings, January 1
Add: Net income
$ 0
11,700
11,700
700
$11,000
Less: Dividends
Retained earnings, December 31
BRB Corporation
Balance Sheet
December 31, 2025
Cash
Accounts receivable
Supplies
Equipment
Total assets
• Show the amounts and
causes (net income and
dividends) of changes
in retained earnings
during the period in
the retained earnings
statement.
• Present the assets and
claims to those assets
(liabilities and equity)
at a specific point in
time in the balance
sheet.
BRB Corporation
Revenues
Service revenue
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
Net income
• Report the revenues
and expenses for a
period of time in an
income statement.
Assets
Liabilities and Stockholders’ Equity
Liabilities
Notes payable
$ 4,000
Accounts payable
3,000
Total liabilities
Stockholders’ equity
Common stock
12,000
Retained earnings
11,000
Total stockholders’ equity
Total liabilities and stockholders’ equity
$ 2,400
1,600
5,000
21,000
$30,000
$ 7,000
23,000
$30,000
Related exercise material: BE1.5, BE1.6, BE1.7, BE1.8, BE1.9, BE1.10, DO IT! 1.3a, E1.9, E1.10, E1.11,
E1.12, E1.13, E1.14, E1.15, E1.16, E1.17, E1.18, E1.19, and E1.22.
1-20
C H A PTE R 1
Introduction to Financial Statements
Elements of an Annual Report
Publicly traded U.S. companies must provide shareholders with an annual report. The
annual report always includes the financial statements introduced in this chapter. The
annual report also includes other important information such as a management discussion
and analysis section, notes to the financial statements, and an independent auditor’s report.
No analysis of a company’s financial situation and performance is complete without a review
of these items.
Management Discussion and Analysis
The management discussion and analysis (MD&A) section presents management’s views
on the company’s:
• Ability to pay near-term obligations.
• Ability to fund operations and expansion.
• Results of operations.
Management must highlight favorable or unfavorable trends and identify significant events
and uncertainties that affect these three factors. This discussion obviously involves a number of subjective estimates and opinions. A brief excerpt from the MD&A section of a recent
Columbia Sportswear annual report, which addresses its liquidity requirements, is presented in ­Illustration 1.11.
ILLUSTRATION 1.11
Columbia Sportswear’s
management discussion and
analysis
Real World
Columbia Sportswear Company
Management’s Discussion and Analysis of
Seasonality and Variability of Business
Our business is affected by the general seasonal trends common to the industry, including
discretionary consumer shopping and spending patterns, as well as seasonal weather. Our products
are marketed on a seasonal basis, and our sales are weighted substantially toward the third and
fourth quarters, while our operating costs are more equally distributed throughout the year.
Notes to the Financial Statements
Explanatory notes and supporting schedules accompany every set of financial statements and
are an integral part of the statements. The notes to the financial statements clarify the
financial statements and provide additional detail. Information in the notes does not have to
be quantifiable (numeric). Examples of notes are:
• Descriptions of the significant accounting policies and methods used in preparing the
statements.
• Explanations of uncertainties and contingencies.
• Various statistics and details too voluminous to be included in the statements.
The notes are essential to understanding a company’s operating performance and financial
position.
Illustration 1.12 is an excerpt from the notes to recent Columbia Sportswear financial
statements. It describes the methods that the company uses to account for revenues.
1.3 The Four Financial Statements 1-21
Columbia Sportswear Company
Notes to Financial Statements
Revenue Recognition
Revenues are recognized when our performance obligations are satisfied as evidenced by transfer
of control of promised goods to our customers, in an amount that reflects the consideration we
expect to be entitled to receive in exchanges for those goods or services. Within our wholesale
channel, control generally transfers to the customer upon shipment to, or upon receipt by, the
customer depending on the terms of sale with the customer. Within our DTC channel, control
generally transfers to the customer at the time of sale within our retail stores and concessionbased arrangements and upon shipment to the customer with respect to e-commerce transactions.
ILLUSTRATION 1.12
Notes to Columbia
Sportswear’s financial
statements
Real World
Auditor’s Report
An auditor’s report is prepared by an independent outside auditor. It states the auditor’s
opinion as to the fairness of the presentation of the financial position and results of operations
and their conformance with generally accepted accounting principles.
An auditor is an accounting professional who conducts an independent examination of
a company’s financial statements. Only accountants who meet certain criteria and thereby
attain the designation certified public accountant (CPA) may certify audits.
• If the auditor is satisfied that the financial statements provide a fair representation of
the company’s financial position and results of operations in accordance with generally
accepted accounting principles, then the auditor expresses an unqualified opinion.
• If the auditor expresses anything other than an unqualified opinion, then readers should
only use the financial statements with caution.
• That is, without an unqualified opinion, we cannot have complete confidence that the
financial statements give a fair picture of the company’s financial health.
• A new auditing standard requires the auditor to report any critical audit matters. These
are items that are material in size that involve challenging, subjective, or complex auditor
judgment.
For example, Blockbuster once dominated movie rentals in the United States with over 9,000
stores. But it faltered when the upstart Netflix rapidly took over the movie-rental business.
Blockbuster’s auditor then stated that its financial situation raised “substantial doubt about
the Company’s ability to continue as a going concern.” Shortly after that, the company filed
for bankruptcy.
Illustration 1.13 is an excerpt from the auditor’s report from Columbia Sportswear’s 2019
annual report. Columbia received an unqualified opinion from its auditor, Deloitte & Touche.
Columbia Sportswear Company
Excerpt from Auditor’s Report
We have audited the accompanying consolidated balance sheets of Columbia Sportswear
Company and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related
consolidated statements of operations, comprehensive income, equity, and cash flows for each of
the three years in the period ended December 31, 2019, and the related notes and schedule listed
in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company
as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each
of the three years ended December 31, 2019, in conformity with accounting principles generally
accepted in the United States of America.
ILLUSTRATION 1.13
Excerpt from auditor’s report
on Columbia Sportswear’s
financial statements
Real World
1-22
C H A PTE R 1
Introduction to Financial Statements
Accounting Across the Organization
Spinning the Career Wheel
Prostock-studio/Shutterstock.com
How will the study of accounting
help you? A working knowledge of
accounting is desirable for virtually
every field of business. Some examples of how accounting is used in
business careers include the following.
General management: Managers of Harley-Davidson, a Qdoba
franchise, and a Trek bike shop all need to understand accounting
data in order to make wise business decisions.
Marketing: Marketing specialists at Hulu must be sensitive to
costs and benefits to ensure that marketing efforts increase company profits.
Finance: Do you want to work for Robinhood, E-Trade, or
Goldman Sachs? Financial fields rely heavily on accounting
knowledge to analyze financial statements. In fact, it is difficult to
ACTION PLAN
• Realize that financial
statements provide
information about a
company’s performance
and financial position.
• Be familiar with the
other elements of
the annual report in
order to gain a fuller
understanding of a
company.
DO IT! 3b
get a good job in a finance function without two or three courses
in accounting.
Real estate: Because a third party—the bank—is almost always
involved in financing a real estate transaction, brokers at Prudential Real Estate must understand the numbers involved.
Accounting: Certified public accountants (CPAs) examine
(audit) the financial statements and issue opinions on the accuracy of the financial presentation. Some CPAs offer tax advice
and planning. Others work for for-profit companies such as Starbucks or Google, or for non-profit entities such as the Red Cross,
where they manage the accounting information systems and prepare financial statements. Opportunities also exist in government,
including the Federal Bureau of Investigation (FBI). Finally,
forensic accountants conduct investigations into theft and fraud.
How might accounting help you? (Answer is available at the
end of the chapter.)
Components of Annual Reports
State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
1. Descriptions of significant accounting policies.
2. Unqualified opinion.
3. Explanations of uncertainties and contingencies.
4. Description of ability to fund operations and expansion.
5. Description of results of operations.
6. Certified public accountant (CPA).
Solution
1. Descriptions of significant accounting policies: Notes.
2. Unqualified opinion: Auditor’s report.
3. Explanations of uncertainties and contingencies: Notes.
4. Description of ability to fund operations and expansion: MD&A.
5. Description of results of operations: MD&A.
6. Certified public accountant (CPA): Auditor’s report.
Related exercise material: BE1.11, DO IT! 1.3b, and E1.25.
USING T H E D EC I S I O N TO O LS
Using the Decision Tools
comprehensive exercises
ask you to apply business
information and the decision
tools presented in the chapter.
Most of these exercises are
based on the companies
highlighted in the Feature Story.
Under Armour, Inc.
There is a good chance that you are wearing one of Under Armour, Inc.’s products right now.
Under Armour is a competitor to Columbia Sportswear. Suppose that you are considering
investing in shares of Under Armour’s common stock.
Instructions
Answer these questions related to your decision whether to invest.
a. What financial statements should you evaluate?
b. What should these financial statements tell you?
Appendix 1A: Career Opportunities in Accounting 1-23
c. Do you care if the financial statements have been audited? Explain.
d. Appendix B contains financial statements for Columbia, and Appendix C contains those for
Under Armour. You can make many comparisons between Columbia and Under Armour
in terms of their respective results from operations and financial position. Compare their
respective total assets, total revenues, and net cash provided by operating activities for 2020.
Solution
a. Before you invest, you should evaluate the income statement, retained earnings statement,
balance sheet, and statement of cash flows.
b. You would probably be most interested in the income statement because it summarizes past
performance and thus gives an indication of future performance. The retained earnings statement provides a record of the company’s dividend history. The balance sheet reveals the relationship between assets and liabilities. The statement of cash flows reveals where the company
is getting and spending its cash. This is especially important for a company that wants to grow.
c. You would want audited financial statements. These statements indicate that a CPA (certified
public accountant) has examined and expressed an opinion whether the statements present
fairly the financial position and results of operations of the company. Investors and creditors
should not make decisions without studying audited financial statements.
d. Many interesting comparisons can be made between the two companies (all numbers are in
thousands). Columbia is smaller, with total assets of $2,836,571 versus $5,030,628 for Under
Armour, and it has lower revenue—$2,501,554 versus $4,474,667 for Under Armour. However,
Columbia’s net cash provided by operating activities of $276,077 is greater than Under Armour’s
$212,864. However, while useful, these basic measures are not enough to determine whether
one company is a better investment than the other. In later chapters, you will learn tools that will
allow you to compare the relative profitability and financial health of these and other companies.
Appendix 1A
Career Opportunities in Accounting
LEARNING OBJECTIVE *4
Explain the career opportunities in accounting.
Why is accounting such a popular major and career choice?
1. There are a lot of jobs. In many cities in recent years, the demand for accountants exceeded
the supply. Not only are there a lot of jobs, but there are a wide array of opportunities.
As one accounting organization observed, “accounting is one degree with 360 degrees of
opportunity.”
2. Accounting matters. Interest in accounting has increased, ironically, because of the
attention caused by the accounting failures of companies such as Enron and WorldCom.
These widely publicized scandals revealed the important role that accounting plays in
society. Most people want to make a difference, and an accounting career provides many
opportunities to contribute to society.
3. The Sarbanes-Oxley Act (SOX) significantly increased the accounting and internal control requirements for corporations. This dramatically increased demand for
professionals with accounting training.
4. Emerging technologies such as automation, blockchain, and data analytics are
changing the way accountants work. With those skills, accountants add value to business decision-making.
Accountants are in such demand that it is not uncommon for accounting students to have
accepted a job offer a year before graduation. As Illustration 1A.1 reveals, the job options of
people with accounting degrees are virtually unlimited.
1-24
C H A PTE R 1
Introduction to Financial Statements
ILLUSTRATION 1A.1 Career options in accounting
Areas of Accounting
Type of Work
Careers
Public accounting
• In auditing, accountants examine (audit) the
­financial statements and issue opinions on the
fairness of the financial presentation.
Deloitte, EY, KPMG, PwC,
Grant Thornton, BDO,
Baker Tilly
Certification
Opportunities
Certified public
accountants (CPAs),
enrolled agent (EA),
certified information
systems auditor (CISA)
For-profit: Starbucks,
Google, Under Armour
Non-profit: Salvation Army,
Red Cross
Certified management
accountant (CMA),
certified internal auditor
(CIA)
Examples of Employers
• In taxation, CPAs offer tax advice and planning.
• In management consulting, accountants design
and install accounting software and enterprise
resource planning systems and support mergers and
acquisitions.
Private accounting
• Financial accountants manage the accounting
information system and prepare financial
­statements.
• Managerial accountants manage costs and budgets.
• Internal auditors ensure compliance with policies
and regulations.
Governmental
accounting
• There are opportunities in government at the local,
state, and federal levels.
Internal Revenue Service
(IRS), Federal Bureau of
Investigation (FBI)
Certified government
financial manager
(CGFM)
Forensic accounting
• In forensic accounting, accountants conduct
­investigations into theft and fraud.
Insurance companies, law
firms, FBI
Certified fraud examiner
(CFE)
“Show Me the Money”
How much can a new accountant make? Take a look at the average salaries for college graduates in public and private accounting shown in Illustration 1A.2.1 Keep in mind if you also
have a CPA license, you’ll make 10–15% more when you start out.
ILLUSTRATION 1A.2
Salary estimates for jobs
in public and corporate
accounting
Employer
Jr. Level (0–3 yrs.)
Sr. Level (4–6 yrs.)
Public accounting (large firm)
Public accounting (medium firm)
Public accounting (small company)
Corporate accounting (large company)
$63,250–$83,250
$56,500–$67,750
$51,500–$60,500
$53,750–$69,500
$78,500–$106,500
$70,500–$96,000
$63,750–$81,500
$68,750–$87,750
Illustration 1A.3 lists some examples of upper-level salaries for managers in corporate
accounting. Note that geographic region, experience, education, CPA certification, and company size each play a role in determining salary.
ILLUSTRATION 1A.3
Position
Upper-level management
salaries in corporate
accounting
Chief financial officer
Corporate controller
Tax manager
1
Large Company
Small to Medium Company
$207,000–$465,750
$140,000–$224,750
$112,000–$158,250
$105,250–$208,750
$92,000–$161,250
$88,000–$124,750
See startheregoplaces.com/students/why-accounting/salary-and-demand/ for information regarding the salaries listed
in Illustrations 1A.2 and 1A.3.
Decision Tools Review
1-25
The Review and Practice section provides opportunities for students to review key concepts
and terms as well as complete multiple-choice questions, brief exercises, exercises, and a
comprehensive problem. Detailed solutions are also included.
Review and Practice
Learning Objectives Review
1 Identify the forms of business organization and the
uses of accounting information.
A sole proprietorship is a business owned by one person. A partnership is a business owned by two or more people associated as partners.
A corporation is a separate legal entity for which evidence of ownership is provided by shares of stock.
Internal users are managers who need accounting information
to plan, organize, and run business operations. The primary external users are investors and creditors. Investors (stockholders) use
accounting information to decide whether to buy, hold, or sell shares
of a company’s stock. Creditors (suppliers and bankers) use accounting
information to assess the risk of granting credit or loaning money to a
business. Other groups who have an indirect interest in a business are
taxing authorities, customers, labor unions, and regulatory agencies.
2 Explain the three principal types of business activity.
Financing activities involve collecting the necessary funds to support
the business. Investing activities involve acquiring the resources necessary to run the business. Operating activities involve putting the
resources of the business into action to generate a profit.
3 Describe the four financial statements and how they
are prepared.
An income statement presents the revenues and expenses of a company for a specific period of time. A retained earnings statement
summarizes the changes in retained earnings that have occurred
for a specific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity of a business at a specific date.
A statement of cash flows summarizes information concerning
the cash inflows (receipts) and outflows (payments) for a specific
period of time.
Assets are resources owned by a business. Liabilities are the debts
and obligations of the business. Liabilities represent claims of creditors on the assets of the business. Stockholders’ equity represents the
claims of owners on the assets of the business. Stockholders’ equity
is subdivided into two parts: common stock and retained earnings.
The basic accounting equation is Assets = Liabilities + Stockholders’
Equity.
Within the annual report, the management discussion and analysis provides management’s interpretation of the company’s results
and financial position as well as a discussion of plans for the future.
Notes to the financial statements provide additional explanation or
detail to make the financial statements more informative. The auditor’s report expresses an opinion as to whether the financial statements present fairly the company’s results of operations and financial
position.
*4 Explain the career opportunities in accounting.
Accounting offers many different jobs in fields such as public and private accounting, governmental, and forensic accounting. Accounting
is a popular major because there are many different types of jobs, with
unlimited potential for career advancement.
Decision Tools Review
Decision Checkpoints
Info Needed for Decision
Tool to Use for Decision
How to Evaluate Results
Are the company’s
operations profitable?
Income statement
The income statement reports a
company’s revenues and expenses
and resulting net income or loss
for a period of time.
If the company’s revenues exceed its
expenses, it will report net income;
otherwise, it will report a net loss.
What is the company’s
policy toward dividends
and growth?
Retained earnings statement
The retained earnings statement
reports how much of this year’s
income the company paid out in
dividends to shareholders.
A company striving for rapid growth
will pay a low (or no) dividend.
(continues)
1-26
C H A PTE R 1
Introduction to Financial Statements
(continued)
Decision Checkpoints
Info Needed for Decision
Tool to Use for Decision
How to Evaluate Results
Does the company rely
primarily on debt or
stockholders’ equity to
finance its assets?
Balance sheet
The balance sheet reports the
company’s resources and claims
to those resources; there are two
types of claims: liabilities and
stockholders’ equity.
Compare the amount of debt versus
the amount of stockholders’ equity to
determine whether the company relies
more on creditors or owners for its
financing.
Does the company
generate sufficient cash
from operations to fund its
investing activities?
Statement of cash flows
The statement of cash flows
shows the amount of net cash
provided or used by operating
activities, investing activities, and
financing activities.
Compare the amount of net cash
provided by operating activities
with the amount of net cash used by
investing activities. Any deficiency in
cash from operating activities must
be made up with cash from financing
activities.
Glossary Review
Accounting The information system that identifies, records, and communicates the economic events of an organization to interested users.
(p. 1-4).
Annual report A report prepared by corporate management that presents
financial information including financial statements, a management discussion and analysis section, notes, and an independent auditor’s report.
(p. 1-20).
Assets Resources owned by a business. (p. 1-9).
*Auditing The examination of financial statements by a certified public
accountant in order ro express an opinion as to the fairness of presentation. (p. 1-24).
Auditor’s report A report prepared by an independent outside auditor
stating the auditor’s opinion as to the fairness of the presentation of the
financial position and results of operations and their conformance with
generally accepted accounting principles. (p. 1-21).
Balance sheet A financial statement that reports the assets and claims to
those assets at a specific point in time. (p. 1-14).
Basic accounting equation Assets = Liabilities + Stockholders’ Equity.
(p. 1-14).
Certified public accountant (CPA) An individual who has met certain
criteria and is thus allowed to perform audits of corporations. (p. 1-21).
Common stock Term used to describe the total amount paid in by stockholders for the shares they purchase. (p. 1-9).
Corporation A business organized as a separate legal entity owned by
stockholders. (p. 1-3).
Data analytics The evaluation of data, often employing both software
and statistics, to draw inferences. (p. 1-6).
Dividends Payments of cash from a corporation to its stockholders.
(p. 1-9).
Expenses The cost of assets consumed or services used in the process of
generating revenues. (p. 1-10).
*Forensic accounting An area of accounting that uses accounting,
auditing, and investigative skills to conduct investigations into theft and
fraud. (p. 1-24).
Income statement A financial statement that reports a company’s revenues and expenses and resulting net income or net loss for a specific
period of time. (p. 1-12).
Liabilities Amounts owed to creditors in the form of debts and other
obligations. (p. 1-9).
*Management consulting An area of public accounting ranging from
development of accounting and computer systems to support services for
marketing projects and merger and acquisition activities. (p. 1-24).
Management discussion and analysis (MD&A) A section of the
annual report that presents management’s views on the company’s ability
to pay near-term obligations, its ability to fund operations and expansion,
and its results of operations. (p. 1-20).
Net income The amount by which revenues exceed expenses. (p. 1-10).
Net loss The amount by which expenses exceed revenues. (p. 1-10).
Notes to the financial statements Notes that clarify information presented in the financial statements and provide additional detail. (p. 1-20).
Partnership A business owned by two or more persons associated as
partners. (p. 1-3).
Retained earnings The amount of net income retained in the corporation. (p. 1-13).
Retained earnings statement A financial statement that summarizes
the amounts and causes of changes in retained earnings for a specific time
period. (p. 1-13).
Revenue The increase in assets or decrease in liabilities resulting from
the sale of goods or the performance of services in the normal course of
business. (p. 1-10).
Sarbanes-Oxley Act (SOX) Regulations passed by Congress to reduce
unethical corporate behavior. (p. 1-7).
Sole proprietorship A business owned by one person. (p. 1-3).
Statement of cash flows A financial statement that provides financial
information about the cash receipts and cash payments of a business for a
specific period of time. (p. 1-16).
Stockholders’ equity The owners’ claim to assets. (p. 1-14).
*Taxation An area of public accounting involving tax advice, tax plan-
ning, preparing tax returns, and representing clients before governmental
agencies. (p. 1-24).
Practice Multiple-Choice Questions
1-27
Practice Multiple-Choice Questions
1. (LO 1) Which is not one of the three forms of business
­organization?
a. Sole proprietorship.
c. Partnership.
b. Creditorship.
d. Corporation.
2. (LO 1) Which is an advantage of corporations relative to partnerships and sole proprietorships?
a. Lower taxes.
What was Macias Corporation’s net income?
a. $60,000.
c. $65,000.
b. $15,000.
d. $45,000.
9. (LO 3) What section of a statement of cash flows indicates the
cash spent on new equipment during the past accounting period?
a. The investing activities section.
b. The operating activities section.
b. Harder to transfer ownership.
c. The financing activities section.
c. Reduced legal liability for investors.
d. The statement of cash flows does not give this information.
d. Most common form of organization.
3. (LO 1) Which statement about users of accounting information
is incorrect?
a. Management is considered an internal user.
b. Taxing authorities are considered external users.
c. Present creditors are considered external users.
d. Regulatory authorities are considered internal users.
4. (LO 1) Which of the following did not result from the Sarbanes-­
Oxley Act?
a. Top management must now certify the accuracy of financial information.
b. Penalties for fraudulent activity increased.
c. Independence of auditors increased.
10. (LO 3) Which statement presents information as of a specific
point in time?
a. Income statement.
b. Balance sheet.
c. Statement of cash flows.
d. Retained earnings statement.
11. (LO 3) Which financial statement reports assets, liabilities, and
stockholders’ equity?
a. Income statement.
b. Retained earnings statement.
c. Balance sheet.
d. Statement of cash flows.
12. (LO 3) Stockholders’ equity represents:
d. Tax rates on corporations increased.
5. (LO 2) Which is not one of the three primary business activities?
a. Financing.
c. Advertising.
b. Operating.
d. Investing.
6. (LO 2) Which of the following is an example of a financing
activity?
a. Issuing shares of common stock.
b. Selling goods on account.
c. Buying delivery equipment.
d. Buying inventory.
7. (LO 2) Net income will result during a time period when:
a. claims of creditors.
b. claims of employees.
c. the difference between revenues and expenses.
d. claims of owners.
13. (LO 3) As of December 31, 2025, Rockford Corporation has
assets of $3,500 and stockholders’ equity of $1,500. What are the
liabilities for Rockford as of December 31, 2025?
a. $1,500.
c. $2,500.
b. $1,000.
d. $2,000.
14. (LO 3) The element of a corporation’s annual report that describes
the corporation’s accounting methods is/are the:
a. assets exceed liabilities.
a. notes to the financial statements.
b. assets exceed revenues.
b. management discussion and analysis.
c. expenses exceed revenues.
c. auditor’s report.
d. revenues exceed expenses.
d. income statement.
8. (LO 3) The financial statements for Macias Corporation contained the following information.
Accounts receivable
Sales revenue
Cash
Salaries and wages expense
Rent expense
$ 5,000
75,000
15,000
20,000
10,000
15. (LO 3) The element of the annual report that presents an opinion regarding the fairness of the presentation of the financial position and results of operations is/are the:
a. income statement.
b. auditor’s opinion.
c. balance sheet.
d. comparative statements.
1-28
C H A PTE R 1
Introduction to Financial Statements
8. d. Net income = Sales revenue ($75,000) − Salaries and wages
expense ($20,000) − Rent expense ($10,000) = $45,000. The other
choices are therefore incorrect.
Solutions
1. b. Creditorship is not a form of business organization. The other
choices are incorrect because (a) sole proprietorship, (c) partnership,
and (d) corporation are all forms of business organization.
9. a. The investing activities section of the statement of cash flows
provides information about property, plant, and equipment accounts,
not (b) the operating activities section or (c) the financing activities
section. Choice (d) is incorrect as the statement of cash flows does
provide this information.
2. c. An advantage of corporations is that investors are not personally liable for debts of the business. The other choices are incorrect
because (a) lower taxes, (b) harder to transfer ownership, and (d) most
common form of organization are not true of corporations.
10. b. The balance sheet presents information as of a specific point
in time. The other choices are incorrect because the (a) income statement, (c) statement of cash flows, and (d) retained earnings statement
all cover a period of time.
3. d. Regulatory authorities are considered external, not internal,
users. The other choices are true statements.
4. d. The Sarbanes-Oxley Act (SOX) was created to reduce unethical corporate behavior and decrease the likelihood of future corporate scandals, not to address tax rates. The other choices are
incorrect because (a) top management must now certify the accuracy of financial information, (b) penalties for fraudulent activity
increased, and (c) increased independence of auditors all resulted
from SOX.
11. c. The balance sheet is a formal presentation of the accounting
equation, such that Assets = Liabilities + Stockholders’ Equity, not
the (a) income statement, (b) retained earnings statement, or (d)
statement of cash flows.
12. d. Stockholders’ equity represents claims of owners. The other
choices are incorrect because (a) claims of creditors and (b) claims of
employees are liabilities. Choice (c) is incorrect because the difference
between revenues and expenses is net income.
5. c. Advertising is a type of operating activity. The other choices are
incorrect because (a) financing, (b) operating, and (d) investing are
the three primary business activities.
13. d. Using the accounting equation, liabilities can be computed
by subtracting stockholders’ equity from assets, or $3,500 − $1,500 =
$2,000, not (a) $1,500, (b) $1,000, or (c) $2,500.
6. a. Issuing shares of common stock is a financing activity. The
other choices are incorrect because (b) selling goods on account is
an operating activity, (c) buying delivery equipment is an investing
activity, and (d) buying inventory is an operating activity.
14. a. The corporation’s accounting methods are described in the
notes to the financial statements, not in the (b) management discussion and analysis, (c) auditor’s report, or (d) income statement.
7. d. When a company earns more revenues than expenses, it will
report net income during a time period. The other choices are incorrect because (a) assets and liabilities are on the balance sheet, not the
income statement; (b) assets are on the balance sheet, not the income
statement; and (c) net income results when revenues exceed expenses,
not when expenses exceed revenues.
15. b. The element of the annual report that presents an opinion
regarding the fairness of the presentation of the financial position
and results of operations is the auditor’s opinion, not the (a) income
statement, (c) balance sheet, or (d) comparative statements.
Practice Brief Exercises
Use basic accounting equation.
1. (LO 3) At the beginning of the year, Ortiz Company had total assets of $900,000 and total liabilities of $440,000. Answer the following questions.
a. If total assets decreased $100,000 during the year and total liabilities increased $80,000 during
the year, what is the amount of stockholders’ equity at the end of the year?
b. During the year, total liabilities decreased $100,000 during the year and stockholders’ equity
increased $200,000. What is the amount of total assets at the end of the year?
c. If total assets increased $50,000 during the year and stockholders’ equity increased $60,000
during the year, what is the amount of total liabilities at the end of the year?
Solution
Determine where items appear on
financial statements.
1. a.
Assets
($900,000 – $100,000)
–
–
Liabilities
($440,000 + $80,000)
=
=
Stockholders’ Equity
$280,000
b.
Liabilities
($440,000 – $100,000)
+
+
Stockholders’ Equity
($900,000 – $440,000 + $200,000)
=
=
Assets
$1,000,000
c.
Assets
($900,000 + $50,000)
–
–
Stockholders’ Equity
($900,000 – $440,000 + $60,000)
=
=
Liabilities
$430,000
2. (LO 3) Indicate whether the following items would appear on the income statement (IS), balance
sheet (BS), or retained earnings statement (RES).
a. ______ Common stock.
d. ______ Service revenue.
b. ______ Cash.
e. ______ Accounts payable.
c. ______ Salaries and wages expense.
Practice Brief Exercises
Solution
2. a.
BS
Common stock.
d. IS Service revenue.
b.
BS
Cash.
e.
Accounts payable.
c. IS BS
Salaries and wages expense.
3. (LO 3) Presented below in alphabetical order are balance sheet items for Feagler Company at
December 31, 2025. Prepare a balance sheet following the format of Illustration 1.8.
Accounts receivable
Cash
Common stock
Notes payable
Retained earnings
Prepare a balance sheet.
$12,500
38,000
5,000
40,000
5,500
Solution
3.
Feagler Company
Balance Sheet
December 31, 2025
Cash
Accounts receivable
Assets
$38,000
12,500
$50,500
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Notes payable
$40,000
Total liabilities
$40,000
Stockholders’ equity
Common stock
Retained earnings
5,000
5,500
10,500
Total stockholders’ equity
$50,500
Total liabilities and stockholders’ equity
4. (LO 3) Identify whether the following items would appear on the balance sheet (BS) or income
statement (IS) of a corporation.
a. ______ Income taxes payable.
f. ______ Service revenue.
b. ______ Cost of goods sold.
g. ______ Depreciation expense.
c. ______ Supplies.
h. ______ Prepaid insurance.
d. ______ Notes payable.
i. ______ Interest payable.
e. ______ Salaries and wages expense.
Solution
4. a.
Income taxes payable.
f. IS Service revenue.
b. IS BS
Cost of goods sold.
g. IS Depreciation expense.
c.
BS
Supplies.
h.
BS
Prepaid insurance.
d.
BS
Notes payable.
i.
BS
Interest payable.
e. IS Salaries and wages expense.
Determine where items appear on
financial statements.
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1-30
C H A PTE R 1
Introduction to Financial Statements
Practice Exercises
Prepare an income statement.
1. (LO 3) The following items and amounts were taken from Ricardo Inc.’s 2025 income statement
and balance sheet.
Cash
Retained earnings
Cost of goods sold
Salaries and wages expense
Prepaid insurance
Interest expense
$ 84,700
123,192
483,854
125,000
7,818
994
Inventory
Accounts receivable
Sales revenue
Income taxes payable
Accounts payable
Service revenue
$ 64,618
88,419
693,485
6,499
49,384
8,998
Instructions
Prepare an income statement for Ricardo Inc. for the year ended December 31, 2025.
Solution
1.
Ricardo Inc.
Income Statement
For the Year Ended December 31, 2025
Revenues
Sales revenue
Service revenue
Total revenues
Expenses
Cost of goods sold
Salaries and wages expense
Interest expense
Total expenses
Net income
Compute net income and prepare a
balance sheet.
$693,485
8,998
483,854
125,000
994
$702,483
609,848
$ 92,635
2. (LO 3) Cozy Bear is a private camping ground near the Mountain Home Recreation Area. It has
compiled the following financial information as of December 31, 2025.
Service revenue (from camping fees)
Sales revenue (from general store)
Accounts payable
Cash
Equipment
$148,000
35,000
16,000
18,500
129,000
Dividends
Bonds payable
Expenses during 2025
Supplies
Common stock
Retained earnings (1/1/2025)
$ 9,000
50,000
135,000
12,500
40,000
15,000
Instructions
a. Determine net income from Cozy Bear for 2025.
b. Prepare a retained earnings statement and a balance sheet for Cozy Bear as of December 31,
2025.
Solution
2. a. Service revenue
Sales revenues
$148,000
35,000
Total revenue
183,000
Expenses
135,000
Net income
$ 48,000
Practice Problem
b.
Cozy Bear
Retained Earnings Statement
For the Year Ended December 31, 2025
Retained earnings, January 1
$15,000
Add: Net income
48,000
63,000
9,000
$54,000
Less: Dividends
Retained earnings, December 31
Cozy Bear
Balance Sheet
December 31, 2025
Assets
Cash
Supplies
Equipment
Total assets
$ 18,500
12,500
129,000
$160,000
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable
Bonds payable
Total liabilities
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$16,000
50,000
40,000
54,000
$ 66,000
94,000
$160,000
Practice Problem
(LO 3) Jeff Andringa, a former college hockey player, quit his job and started Ice Camp, a hockey camp
for kids ages 8 to 18. Eventually, he would like to open hockey camps nationwide. Jeff has asked you
to help him prepare financial statements at the end of 2025, his first year of operations. He relates the
following facts about his business activities.
In order to get the business off the ground, Jeff decided to incorporate. He sold shares of common
stock to a few close friends, as well as bought some of the shares himself. He initially raised $25,000
through the sale of these shares. In addition, the company took out a $10,000 loan at a local bank.
Ice Camp purchased, for $12,000 cash, a bus for transporting kids. The company also bought
hockey goals and other miscellaneous equipment with $1,500 cash. The company earned camp tuition
of $100,000 during the year but had collected only $80,000 of this amount. Thus, at the end of the
year, its customers still owed $20,000. The company rents time at a local rink for $50 per hour. Total
rink rental costs during the year were $8,000, insurance was $10,000, salary expense was $20,000, and
supplies used totaled $9,000, all of which were paid in cash. The company incurred $800 in interest
expense on the bank loan, which it still owed at the end of the year.
The company paid dividends during the year of $5,000 cash. The balance in the corporate bank
account at December 31, 2025, was $49,500.
Prepare financial statements.
1-31
1-32
C H A PTE R 1
Introduction to Financial Statements
Instructions
Using the format of the Sierra Corporation statements in this chapter, prepare an income statement,
retained earnings statement, balance sheet, and statement of cash flows. (Hint: Prepare the statements in the order stated to take advantage of the flow of information from one statement to the next,
as shown in Illustration 1.10.)
Solution
Ice Camp
Income Statement
For the Year Ended December 31, 2025
Revenues
Service revenue
Expenses
Salaries and wages expense
Insurance expense
Supplies expense
Rent expense
Interest expense
Total expenses
Net income
$100,000
$20,000
10,000
9,000
8,000
800
47,800
$ 52,200
Ice Camp
Retained Earnings Statement
For the Year Ended December 31, 2025
Retained earnings, January 1, 2025
Add: Net income
$ 0
52,200
52,200
5,000
$47,200
Less: Dividends
Retained earnings, December 31, 2025
Ice Camp
Balance Sheet
December 31, 2025
Cash
Accounts receivable
Equipment ($12,000 + $1,500)
Total assets
Assets
Liabilities and Stockholders’ Equity
Liabilities
Notes payable
$10,000
Interest payable
800
Total liabilities
Stockholders’ equity
Common stock
25,000
Retained earnings
47,200
Total stockholders’ equity
Total liabilities and stockholders’ equity
$49,500
20,000
13,500
$83,000
$10,800
72,200
$83,000
Questions
1-33
Ice Camp
Statement of Cash Flows
For the Year Ended December 31, 2025
Cash flows from operating activities
Cash receipts from operating activities
Cash payments for operating activities
Net cash provided by operating activities
Cash flows from investing activities
Purchase of equipment
Net cash used by investing activities
Cash flows from financing activities
Issuance of common stock
Issuance of notes payable
Dividends paid
Net cash provided by financing activities
Net increase in cash
Cash at beginning of period
Cash at end of period
$80,000
(47,000)
$33,000
(13,500)
25,000
10,000
(5,000)
(13,500)
30,000
49,500
0
$49,500
Brief Exercises, DO IT! Exercises, Exercises, Problems, Data Analytics Activities, A Look at
IFRS, and many additional resources are available for practice in Wiley Course Resources.
Questions
1. What are the three basic forms of business organizations?
2. What are the advantages to a business of being formed as a corporation? What are the disadvantages?
3. What are the advantages to a business of being formed as a partnership or sole proprietorship? What are the disadvantages?
4. Is it possible to create a company using an organizational form that
has the advantages of both a partnership and a corporation? Explain.
5. “Accounting is ingrained in our society and is vital to our economic
system.” Do you agree? Explain.
6. Who are the internal users of accounting data? How does accounting provide relevant data to the internal users?
7. Who are the external users of accounting data? Give examples.
11. Why would a bank want to monitor the dividend payment practices of the corporations to which it lends money?
12. “A company’s net income appears directly on the income statement and the retained earnings statement, and it is included indirectly in the company’s balance sheet.” Do you agree? Explain.
13. What is the primary purpose of the statement of cash flows?
14. What are the three main categories of the statement of cash
flows? Why do you think these categories were chosen?
15. What is retained earnings? What items increase the balance
in retained earnings? What items decrease the balance in retained
earnings?
16. What is the basic accounting equation?
8. What are the four most common types of data analytics, and what
basic question does each address?
17. a. Define the terms assets, liabilities, and stockholders’ equity.
9. What are the three main types of business activity? Give examples
of each activity.
18. Which of these items are liabilities of White Glove Cleaning
­Service?
10. Listed here are some items found in the financial statements of
Finzelberg. Indicate in which financial statement(s) each item would
appear.
a. Service revenue.
b. Equipment.
c. Advertising expense.
d. Accounts receivable.
e. Common stock.
f. Interest payable.
b. What items affect stockholders’ equity?
a. Cash.
f. Equipment.
b. Accounts payable.
g. Salaries and wages
e. Supplies.
i. Rent expense.
c. Dividends. payable.
h. Service revenue.
d. Accounts receivable.
19. How are each of the following financial statements interrelated?
(a) Retained earnings statement and income statement. (b) Retained
earnings statement and balance sheet. (c) Balance sheet and statement of cash flows.
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C H A PTE R 1
Introduction to Financial Statements
20. What is the purpose of the management discussion and analysis
section (MD&A)?
23. The accounting equation is Assets = Liabilities + Stockholders’ Equity. Appendix A reproduces Apple’s financial statements.
Replacing words in the equation with dollar amounts, what is Apple’s
accounting equation at September 26, 2020?
21. Why is it important for financial statements to receive an unqualified auditor’s opinion?
24. What are the characteristics of a “critical audit matter”?
22. What types of information are presented in the notes to the financial statements?
Brief Exercises
Describe forms of business organization.
BE1.1 (LO 1), K Match each of the following forms of business organization with a set of characteristics:
sole proprietorship (SP), partnership (P), and corporation (C).
a. _____ Shared control, tax advantages, increased skills and resources.
b. _____ Simple to set up and maintains control with owner.
c. _____ Easier to transfer ownership and raise funds, no personal liability.
Identify users of accounting
information.
BE1.2 (LO 1), K The following lists situations that require the use of accounting information.
1. Trying to determine whether the company complied with tax laws.
2. Trying to determine whether the company can pay its obligations.
3. Trying to determine whether an advertising proposal will be cost-effective.
4. Trying to determine whether the company’s net income will result in a stock price increase.
5. Trying to determine whether the company should employ debt or equity financing.
Match each of the situations with the following users of accounting information.
a. _____ Investors in common stock.
d. _____ Chief financial officer.
b. _____ Marketing managers.
e. _____ Internal Revenue Service.
c. _____ Creditors.
Classify items by activity.
BE1.3 (LO 2), K Indicate to which business activity, operating activity (O), investing activity (I), or
financing activity (F), each item relates.
a. _____ Cash received from customers.
b. _____ Cash paid to stockholders (dividends).
c. _____ Cash received from issuing new common stock.
d. _____ Cash paid to suppliers.
e. _____ Cash paid to purchase a new office building.
Determine effect of transactions on
stockholders’ equity.
BE1.4 (LO 3), C Presented below are a number of transactions. Determine whether each transaction
affects common stock (C), dividends (D), revenues (R), expenses (E), or does not affect stockholders’
equity (NSE). Provide titles for the revenues and expenses.
a. _____ Costs incurred for advertising.
b. _____ Cash received for services performed.
c. _____ Costs incurred for insurance.
d. _____ Amounts paid to employees.
e. _____ Cash distributed to stockholders.
f. _____ Cash received in exchange for allowing the use of the company’s building.
g. _____ Costs incurred for utilities used.
h. _____ Cash purchase of equipment.
i. _____ Cash received from investors.
Prepare a balance sheet.
BE1.5 (LO 3), AP In alphabetical order below are balance sheet items for Karol Company at December
31, 2025. Prepare a balance sheet following the format of Illustration 1.8.
Accounts payable
Accounts receivable
Cash
Common stock
Retained earnings
$65,000
71,000
22,000
18,000
10,000
DO IT! Exercises
BE1.6 (LO 3), K Eskimo Pie Corporation markets a broad range of frozen treats, including its
famous Eskimo Pie ice cream bars. The following items were taken from a recent income statement
and balance sheet. In each case, identify whether the item would appear on the balance sheet (BS) or
income statement (IS).
a. _____ Income tax expense.
f. _____ Sales revenue.
b. _____ Inventory.
g. _____ Cost of goods sold.
c. _____ Accounts payable.
h. _____ Common stock.
d. _____ Retained earnings.
i. _____ Accounts receivable.
e. _____ Equipment.
j. _____ Interest expense.
BE1.7 (LO 3), K Indicate which statement you would examine to find each of the following items: income
statement (IS), balance sheet (BS), retained earnings statement (RES), or statement of cash flows (SCF).
1-35
Determine where items appear on
financial statements.
Determine proper financial statement.
a. _____ Revenue during the period.
b. _____ Supplies on hand at the end of the year.
c. _____ Cash received from issuing new bonds during the period.
d. _____ Total debts outstanding at the end of the period.
BE1.8 (LO 3), AP Use the basic accounting equation to answer these questions.
Use basic accounting equation.
a. The liabilities of Lantz Company are $90,000 and the stockholders’ equity is $230,000. What is the
amount of Lantz’s total assets?
b. The total assets of Salley Company are $170,000 and its stockholders’ equity is $80,000. What is the
amount of its total liabilities?
c. The total assets of Brandon Co. are $800,000 and its liabilities are equal to one-fourth of its total
assets. What is the amount of Brandon’s stockholders’ equity?
BE1.9 (LO 3), AP At the beginning of the year, Morales Company had total assets of $800,000 and total
liabilities of $500,000. (Treat each item independently.)
Use basic accounting equation.
a. If total assets increased $150,000 during the year and total liabilities decreased $80,000, what is the
amount of stockholders’ equity at the end of the year?
b. During the year, total liabilities increased $100,000 and stockholders’ equity decreased $70,000.
What is the amount of total assets at the end of the year?
c. If total assets decreased $80,000 and stockholders’ equity increased $110,000 during the year, what
is the amount of total liabilities at the end of the year?
BE1.10 (LO 3), K Indicate whether each of these items is an asset (A), a liability (L), or part of stockholders’ equity (SE).
a. _____ Accounts receivable.
d. _____ Supplies.
b. _____ Salaries and wages payable.
e. _____ Common stock.
c. _____ Equipment.
f. _____ Notes payable.
BE1.11 (LO 3), K Which is not a required part of an annual report of a publicly traded company?
a. Statement of cash flows.
c. Management discussion and analysis.
b. Notes to the financial statements.
d. All of these are required.
Identify assets, liabilities, and
stockholders’ equity.
Determine required parts of annual
report.
DO IT! Exercises
DO IT! 1.1a (LO 1), C Identify each of the following organizational characteristics with the business
organizational form or forms with which it is associated.
a. Easier to transfer ownership.
d. Tax advantages.
b. Easier to raise funds.
e. No personal legal liability.
Identify benefits of business
organization forms.
c. More owner control.
DO IT 1.1b (LO 1), C Match each of the following terms with its definition, classification type, or
associated phrase.
a. _____ Accounting.
1. Creditors, regulatory authorities.
b. _____ Internal users of financial information.
2. Increased independence of outside auditors.
Identify accounting terms.
1-36
C H A PTE R 1
Introduction to Financial Statements
c. _____ Element of Sarbanes-Oxley Act.
3.Information system that identifies, records, and
communicates the economic events of an organization to interested users.
d. _____ External users of financial information. 4. Identify the stakeholders.
e. _____ Steps in solving an ethical dilemma. 5. Production supervisors, company officers.
Classify financial statement elements.
Prepare financial statements.
DO IT! 1.2 (LO 2), K Classify each item as an asset, liability, common stock, revenue, or expense.
a. Issuance of ownership shares.
d. Bonds payable.
b. Land purchased.
e. Amount recorded from selling a product.
c. Amounts owed to suppliers.
f. Cost of advertising.
DO IT! 1.3a (LO 3), AP Gray Corporation began operations on January 1, 2025. The following information is available for Gray on December 31, 2025.
Accounts payable
Accounts receivable
Advertising expense
Cash
Common stock
Dividends
Equipment
$ 5,000
2,000
4,000
3,100
15,000
2,500
26,800
Notes payable
Rent expense
Retained earnings
Service revenue
Supplies
Supplies expense
$ 7,000
10,000
?
25,000
1,900
1,700
Prepare an income statement, a retained earnings statement, and a balance sheet for Gray Corporation.
Identify components of annual reports.
DO IT! 1.3b (LO 3), K Indicate whether each of the following items is most closely associated with
the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.
a. Description of ability to pay near-term obligations.
b. Unqualified opinion.
c. Details concerning liabilities, too voluminous to be included in the statements.
d. Description of favorable and unfavorable trends.
e. Certified public accountant (CPA).
f. Descriptions of significant accounting policies.
Exercises
Match items with descriptions.
E1.1 (LO 1, 2, 3), K Here is a list of words or phrases discussed in this chapter:
1. Corporation.
4. Partnership.
7. Accounts payable.
2. Creditor.
5. Stockholder.
8. Auditor’s opinion.
3. Accounts receivable.
6. Common stock.
9. Hybrid organizational forms.
Instructions
Match each word or phrase above with the best description of it.
______ a.An expression about whether financial statements conform with generally accepted accounting principles.
______ b.A business that raises money by issuing shares of stock.
______ c.The portion of stockholders’ equity that results from receiving cash from investors.
______ d.Obligations to suppliers of goods.
______ e. Amounts due from customers.
______ f. A party to whom a business owes money.
______ g. Combines tax advantages with limited liability.
______ h. A party that invests in common stock.
______ i. A business that is owned jointly by two or more individuals but does not issue stock.
Exercises 1-37
E1.2 (LO 1), C Consider the following statements.
Identify forms of business organization.
Sole Proprietorship Partnership
1. No personal liability.
Corporation
2. Owners pay personal income tax on
company income.
3. Generally the easiest form of organization
to raise capital.
4. Ownership indicated by shares.
5. Owned by one person.
6. Limited life.
7. Usually the easiest form of organization
to set up.
Instructions
Complete the above by indicating if each of the statements is normally true (T) or false (F) for each type
of business organization: sole proprietorship, partnership, and corporation.
E1.3 (LO 1), C The following list presents different types of evaluations made by various users of
accounting information.
Identify users of accounting
information.
1. Determining if the company can pay for purchases made on account.
2. Determining if the company has complied with income tax regulations.
3. Determining if the company might afford a 1% hourly wage increase.
4. Determining if an advertising campaign was cost-effective.
5. Determining if the company’s net income might result in a share price increase.
6. Determining if the company should use debt or equity financing.
Instructions
Complete the following by indicating (a) the number of the evaluation (1 to 6) that the user would most
likely make, and (b) if the user is internal or external.
Investor
(a) Type of Evaluation (b) Type of User
Marketing manager
Creditor
Chief financial officer
Internal Revenue Service
Labor union
E1.4 (LO 1, 2, 3), K The following terms or phrases are discussed in this chapter.
1. Certified public accountant (CPA).
7. Sole proprietorship.
2. Management discussion and analysis (MD&A).
8. Basic accounting equation.
3. Revenue.
9. Expenses.
4. Dividends.
10. Liabilities.
5. Stockholders’ equity.
11. Sarbanes-Oxley Act (SOX).
6. Net loss.
Instructions
Match each term or phrase to its description below.
a. ______ Assets = Liabilities + Stockholders’ Equity.
b. ______An individual who has met certain criteria and is thus allowed to perform audits of
corporations.
Match items with descriptions.
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C H A PTE R 1
Introduction to Financial Statements
c. ______ Payments of cash from a corporation to its stockholders.
d. ______ The cost of assets consumed or services used in the process of generating revenues.
e. ______ Amounts owed to creditors in the form of debts and other obligations.
f. ______A section of the annual report that presents management’s views on the company’s ability
to pay near-term obligations, its ability to fund operations and expansion, and its results of
operations.
g. ______ The amount by which expenses exceed revenues.
h. ______The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business.
i. ______ Regulations passed by Congress to reduce unethical corporate behavior.
j. ______ A business owned by one person.
k. ______ The owners’ claim to assets.
Identify business activities.
E1.5 (LO 2), C All businesses are involved in three types of activities—financing, investing, and operating. Listed below are the names and descriptions of companies in several different industries.
Abitibi-Consolidated Inc.—manufacturer and marketer of newsprint
California State University—Northridge Student Union—university student union
Oracle Corporation—computer software developer and retailer
Aquilini Investment Group—owner of the Vancouver Canucks ice hockey team
Grant Thornton LLP—professional accounting and business advisory firm
Southwest Airlines—low-cost airline
Instructions
a. For each of the above companies, provide examples of (1) a financing activity, (2) an investing activity, and (3) an operating activity that the company likely engages in.
b. Which of the activities that you identified in (a) are common to most businesses? Which activities
are not?
Classify business activities.
E1.6 (LO 2), K Consider the following business activities that occur at a Colorado ski area.
1. ______ Cash receipts from customers paying for daily ski passes.
2. ______ Payments made to purchase additional snow-making equipment.
3. ______ Payments made to repair the snow-grooming machines.
4. ______ Receipt of funds from the bank to finance the purchase of additional snow-making equipment.
5. ______ Issue of shares to raise funds for a planned expansion.
6. ______ Repayment of a portion of the bank loan (see item 4).
7. ______ Payment of salaries to the ski-lift operators.
8. ______ Payment of dividend to shareholders.
Instructions
Classify each of the above items by type of business activity: operating (O), investing (I), or financing (F).
Classify accounts.
E1.7 (LO 2, 3), C The Bonita Vista Golf & Country Club details the following accounts in its financial
statements.
Accounts payable
Accounts receivable
Equipment
Sales revenue
Service revenue
Inventory
Mortgage payable
Supplies expense
Rent expense
Salaries and wages expense
_____
_____
_____
_____
_____
_____
_____
_____
_____
_____
Instructions
Classify each of the accounts as an asset (A), liability (L), stockholders’ equity (SE), revenue (R), or
expense (E) item.
Exercises 1-39
Identify financial statements.
E1.8 (LO 3), K Consider the following typical accounts and statement items.
1. ______ Interest income.
2. ______ Cash.
3. ______ Cash provided by operating activities.
4. ______ Service revenue.
5. ______ Common stock.
6. ______ Dividends.
7. ______ Retained earnings, beginning of period.
8. ______ Accounts receivable.
9. ______ Inventory.
10. ______ Income tax expense.
11. ______ Interest expense.
12. ______ Net cash used by investing activities.
13. ______ Equipment.
14. ______ Total stockholders’ equity.
15. ______ Bank loan payable.
Instructions
Indicate on which statement—income statement (IS), balance sheet (BS), retained earning statement
(RE), and/or statement of cash flows (SCF)—you would find each of the above accounts or items.
E1.9 (LO 3), AP This information relates to Benser Co. for the year 2025.
Prepare income statement and retained
earnings statement.
$67,000
1,800
6,000
10,400
58,000
2,400
30,000
Retained earnings, January 1, 2025
Advertising expense
Dividends
Rent expense
Service revenue
Utilities expense
Salaries and wages expense
Instructions
Prepare an income statement and a retained earnings statement for the year ending December 31, 2025.
E1.10 (LO 3), AP Suppose the following information was taken from the 2025 financial statements of
pharmaceutical giant Merck & Co. (All dollar amounts are in millions.)
Retained earnings, January 1, 2025
Cost of goods sold
Selling and administrative expenses
Dividends
Sales revenue
Research and development expense
Income tax expense
Prepare income statement and retained
earnings statement.
$43,698.8
9,018.9
8,543.2
3,597.7
38,576.0
5,845.0
2,267.6
Instructions
a. After analyzing the data, prepare an income statement and a retained earnings statement for the
year ending December 31, 2025.
b. Suppose that Merck decided to reduce its research and development expense by 50%. What would
be the short-term implications? What would be the long-term implications? How do you think the
stock market would react?
E1.11 (LO 3), AP Presented here is information for Zheng Inc. for 2025.
Prepare a retained earnings statement.
$130,000
400,000
175,000
65,000
Retained earnings, January 1
Service revenue
Total expenses
Dividends
Instructions
Prepare the 2025 retained earnings statement for Zheng Inc.
E1.12 (LO 3), AP The following information is available for Randall Inc.
Accounts receivable
Accounts payable
Interest payable
Salaries and wages expense
Notes payable
Common stock
Inventory
$ 2,400
3,700
580
4,500
31,500
50,700
2,840
Cash
Supplies
Unearned service revenue
Salaries and wages payable
Depreciation expense
Equipment (net)
Prepare a balance sheet.
$ 6,250
3,760
850
745
670
108,200
1-40
C H A PTE R 1
Introduction to Financial Statements
Instructions
Using the information above, prepare a balance sheet as of December 31, 2025. (Hint: Solve for the missing retained earnings amount after first determining total assets and total liabilities.)
Interpret financial data.
E1.13 (LO 3), AN Consider each of the following independent situations.
a. The retained earnings statement of Lee Corporation shows dividends of $68,000, while net income
for the year was $75,000.
b. The statement of cash flows for Steele Corporation shows that cash provided by operating activities
was $10,000, cash used in investing activities was $110,000, and cash provided by financing activities
was $130,000.
Instructions
For each company, provide a brief discussion interpreting these financial data. For example, you might
discuss the company’s financial health or its apparent growth philosophy.
Identify financial statement
components and prepare income
statement.
E1.14 (LO 3), AP The following items and amounts were taken from Lonyear Inc.’s 2025 income statement and balance sheet.
______ Cash
______ Retained earnings
______ Cost of goods sold
______ Salaries and wages expense
______ Prepaid insurance
______ Inventory
$ 84,700
123,192
438,458
115,131
7,818
64,618
______ Accounts receivable
______ Sales revenue
______ Notes payable
______ Accounts payable
______ Service revenue
______ Interest expense
$ 88,419
584,951
6,499
49,384
4,806
1,882
Instructions
a. In each, case, identify on the blank line whether the item is an asset (A), liability (L), stockholders’
equity (SE), revenue (R), or expense (E) item.
b. Prepare an income statement for Lonyear Inc. for the year ended December 31, 2025.
Identify financial statement
components and prepare income
statement.
E1.15 (LO 3), AP The following items and amounts were taken from Familia Inc.’s 2025 income statement and balance sheet, the end of its first year of operations.
______ Interest expense
______ Interest payable
______ Notes payable
______ Sales revenue
______ Cash
______ Salaries and wages expense
$ 2,200
700
11,800
44,300
2,900
15,600
______ Equipment, net
______ Depreciation expense
______ Supplies
______ Common stock
______ Supplies expense
$54,700
3,200
4,100
26,800
900
Instructions
a. In each case, identify on the blank line whether the item is an asset (A), liability (L), stockholders’
equity (SE), revenue (R), or expense (E) item.
b. Prepare an income statement for Familia Inc. for December 31, 2025.
Calculate missing amounts.
E1.16 (LO 3), AN Here are incomplete financial statements for Donavan, Inc.
Donavan, Inc.
Balance Sheet
Assets
Liabilities and Stockholders’ Equity
Cash
Inventory
Buildings (net)
$ 7,000
10,000
45,000
Total assets
$62,000
Liabilities
Accounts payable
Stockholders’ equity
Common stock
Retained earnings
Total liabilities and
stockholders’ equity
$ 5,000
(a)
(b)
$62,000
Exercises 1-41
Income Statement
Revenues
Cost of goods sold
Salaries and wages expense
$85,000
(c)
10,000
Net income
$ (d)
Retained Earnings Statement
Beginning retained earnings
Add: Net income
Less: Dividends
$12,000
(e)
5,000
Ending retained earnings
$27,000
Instructions
Calculate the missing amounts.
E1.17 (LO 3), AN Here are incomplete financial statements for Oway Corporation.
Calculate missing amounts.
Oway Corporation
Balance Sheet
Assets
Liabilities and Stockholders’ Equity
Cash
Supplies
Equipment (net)
$ 29,000
(a)
65,000
Total assets
$ (b)
Liabilities
Notes payable
$22,000
Stockholders’ equity
Common stock 38,000
Retained earnings
(c)
Total liabilities and
stockholders’ equity
$ (d)
Income Statement
Revenues
Depreciation expense
Salaries and wages expense
Interest expense
$53,000
(e)
10,000
1,000
Net income
$25,000
Retained Earnings Statement
Beginning retained earnings
Add: Net income
Less: Dividends
$ (f)
(g)
6,000
Ending retained earnings
$37,000
Instructions
Calculate the missing amounts.
E1.18 (LO 3), AP Otay Lakes Park is a private camping ground near the Mount Miguel Recreation Area.
It has compiled the following financial information as of December 31, 2025.
$132,000
Service revenue (from camping fees)
Sales revenue (from general store)
25,000
Accounts payable
11,000
Cash
8,500
Equipment
114,000
Dividends
Notes payable
Expenses during 2025
Supplies
Common stock
Retained earnings (1/1/2025)
$ 9,000
50,000
126,000
5,500
40,000
5,000
Compute net income and prepare
a retained earnings statement and
balance sheet.
1-42
C H A PTE R 1
Introduction to Financial Statements
Instructions
a. Determine Otay Lakes Park’s net income for 2025.
b. Prepare a retained earnings statement and a balance sheet for Otay Lakes Park as of December 31, 2025.
c. Upon seeing this income statement, Walt Jones, the campground manager, immediately concluded,
“The general store is more trouble than it is worth—let’s get rid of it.” The marketing director isn’t
so sure this is a good idea. What do you think?
Identify financial statement
components and prepare an income
statement.
E1.19 (LO 3), AP Kellogg Company is the world’s leading producer of ready-to-eat cereal and a
leading producer of grain-based convenience foods such as frozen waffles and cereal bars. Suppose
the following items were taken from its 2025 income statement and balance sheet. (All dollars are in
millions.)
____ Retained earnings
$5,481
7,184
____ Cost of goods sold
____ Selling and
administrative expenses
3,390
334
____ Cash
____ Notes payable
44
295
____ Interest expense
____ Bonds payable
____ Inventory
____ Sales revenue
____ Accounts payable
____ Common stock
____ Income tax expense
$ 4,835
910
12,575
1,077
105
498
Instructions
a. In each case, identify whether the item is an asset (A), liability (L), stockholders’ equity (SE), revenue (R), or expense (E).
b. Prepare an income statement for Kellogg Company for the year ended December 31, 2025.
Prepare a statement of cash flows.
E1.20 (LO 3), AP This information is for Williams Corporation for the year ended December 31, 2025.
Cash received from lenders
Cash received from customers
Cash paid for new equipment
Cash dividends paid
Cash paid to suppliers
Cash balance 1/1/25
$20,000
50,000
28,000
8,000
16,000
12,000
Instructions
a. Prepare the 2025 statement of cash flows for Williams Corporation.
b. Suppose you are one of Williams’ creditors. Referring to the statement of cash flows, evaluate
Williams’ ability to repay its creditors.
Prepare a statement of cash flows.
E1.21 (LO 3), AP Suppose the following data are derived from the 2025 financial statements of
­Southwest Airlines. (All dollars are in millions.) Southwest has a December 31 year-end.
$1,390
Cash balance, January 1, 2025
Cash paid for repayment of debt
122
144
Cash received from issuance of common stock
Cash received from issuance of long-term debt
500
Cash received from customers
9,823
Cash paid for property and equipment
1,529
Cash paid for dividends
14
Cash paid for repurchase of common stock
1,001
Cash paid for goods and services
6,978
Instructions
a. After analyzing the data, prepare a statement of cash flows for Southwest Airlines for the year ended
December 31, 2025.
b. Discuss whether the company’s net cash provided by operating activities was sufficient to finance its
investing activities. If it was not, how did the company finance its investing activities?
Correct an incorrectly prepared balance
sheet.
E1.22 (LO 3), AP Wayne Holtz is the bookkeeper for Beeson Company. Wayne has been trying to
get the balance sheet of Beeson Company to balance. It finally balanced, but now he’s not sure it is
correct.
Exercises 1-43
Beeson Company
Balance Sheet
December 31, 2025
Assets
Liabilities and Stockholders’ Equity
Cash
Supplies
Equipment
Dividends
$18,000
9,500
40,000
8,000
Total assets
$75,500
Accounts payable
Accounts receivable
Common stock
Retained earnings
Total liabilities and
stockholders’ equity
$16,000
(12,000)
40,000
31,500
$75,500
Instructions
Prepare a correct balance sheet.
E1.23 (LO 3), AP Suppose the following items were taken from the balance sheet of Nike, Inc. (All
dollars are in millions.)
1.
2.
3.
4.
5.
6.
____ Cash
$2,291.1
____ Accounts receivable 2,883.9
____ Common stock
2,874.2
____ Notes payable
342.9
____ Buildings
3,759.9
____ Mortgage payable
1,311.5
7.
8.
9.
10.
11.
____ Inventory
____ Income taxes payable
____ Equipment
____ Retained earnings
____ Accounts payable
$2,357.0
86.3
1,957.7
5,818.9
2,815.8
Classify items as assets, liabilities,
and stockholders’ equity, and prepare
accounting equation.
Excel
Instructions
Perform each of the following.
a. Classify each of these items as an asset (A), liability (L), or stockholders’ equity (SE) item.
b. Determine Nike’s accounting equation by calculating the value of total assets, total liabilities, and
total stockholders’ equity.
c. To what extent does Nike rely on debt versus equity financing?
E1.24 (LO 3), AN The summaries of data from the balance sheet, income statement, and retained
earnings statement for two corporations, Walco Corporation and Gunther Enterprises, are presented as
­follows for 2025.
Walco Corporation
Gunther Enterprises
Beginning of year
Total assets
$110,000
$150,000
Total liabilities
70,000
(d)
Total stockholders’ equity
(a)
70,000
End of year
Total assets
(b)
180,000
Total liabilities
120,000
55,000
Total stockholders’ equity
60,000
(e)
Changes during year in retained
earnings
Dividends
(c)
5,000
Total revenues
215,000
(f )
Total expenses
165,000
80,000
Use financial statement relationships to
determine missing amounts.
Instructions
Determine the missing amounts. Assume all changes in stockholders’ equity are due to changes in
retained earnings.
E1.25 (LO 3), K The annual report provides financial information in a variety of formats, including the
following.
Management discussion and analysis (MD&A)
Financial statements
Notes to the financial statements
Auditor’s opinion
Classify various items in an annual
report.
1-44
C H A PTE R 1
Introduction to Financial Statements
Instructions
For each of the following, state in what area of the annual report the item would be presented. If the item
would probably not be found in an annual report, state “Not disclosed.”
a. The total cumulative amount received from stockholders in exchange for common stock.
b. An independent assessment concerning whether the financial statements present a fair depiction of
the company’s results and financial position.
c. The interest rate that the company is being charged on all outstanding debts.
d. Total revenue from operating activities.
e. Management’s assessment of the company’s results.
f. The names and positions of all employees hired in the last year.
Classify accounts and prepare balance
sheet.
E1.26 (LO 3), AP The following list of accounts, in alphabetical order, is for Aventura Inc. at November
30, 2025.
____ Accounts payable
$ 26,200
____ Inventory
$18,000
19,500
____ Land
44,000
____ Accounts receivable
100,000
____ Mortgage payable
97,500
____ Buildings
____ Cash
20,000
____ Notes payable
34,000
20,000
____ Retained earnings
48,500
____ Common stock
____ Equipment, net
30,000
____ Supplies 700
____ Income taxes payable
6,000
Instructions
a. For each of the above accounts, identify whether it is an asset (A), liability (L), or stockholders’
equity (SE) item.
b. Prepare a balance sheet at November 30, 2025.
Problems
Determine forms of business
organization.
P1.1 (LO 1), C Writing Presented below are five independent situations.
a. Three physics professors at MIT have formed a business to improve the speed of information transfer over the Internet for stock exchange transactions. Each has contributed an equal amount of cash
and knowledge to the venture. Although their approach looks promising, they are concerned about
the legal liability that their business might confront.
b. Bob Colt, a college student looking for summer employment, opened a bait shop in a small shed at
a local marina.
c. Alma Ortiz and Jaime Falco each owned separate shoe manufacturing businesses. They have
decided to combine their businesses. They expect that within the coming year they will need
significant funds to expand their operations.
d. Alice, Donna, and Sam recently graduated with marketing degrees. They have been friends since
childhood. They have decided to start a consulting business focused on marketing sporting goods
over the Internet.
e. Don Rolls has developed a low-cost GPS device that can be implanted into pets so that they can be
easily located when lost. He would like to build a small manufacturing facility to make the devices
and then sell them to veterinarians across the country. Don has no savings or personal assets. He
wants to maintain control over the business.
Instructions
In each case, explain what form of organization the business is likely to take—sole proprietorship, partnership, or corporation. Give reasons for your choice.
Identify users and uses of financial
statements.
P1.2 (LO 3), C Writing Financial decisions often place heavier emphasis on one type of financial
statement over the others. Consider each of the following hypothetical situations independently.
a. The North Face is considering extending credit to a new customer. The terms of the credit would
require the customer to pay within 30 days of receipt of goods.
b. An investor is considering purchasing common stock of Amazon.com. The investor plans to hold
the investment for at least 5 years.
Problems 1-45
c. JPMorgan Chase is considering extending a loan to a small company. The company would be
required to make interest payments at the end of each year for 5 years, and to repay the loan at the
end of the fifth year.
d. The president of Campbell Soup is trying to determine whether the company is generating
enough cash to increase the amount of dividends paid to investors in this and future years, and
still have enough cash to buy equipment as it is needed.
Instructions
In each situation, state whether the decision-maker would be most likely to place primary emphasis on
information provided by the income statement, balance sheet, or statement of cash flows. In each case
provide a brief justification for your choice. Choose only one financial statement in each case.
P1.3 (LO 3), AP On June 1, 2025, Elite Service Co. was started with an initial investment in the company
of $22,100 cash. Here are the assets, liabilities, and common stock of the company at June 30, 2025, and
the revenues and expenses for the month of June, its first month of operations:
Cash
Accounts receivable
Service revenue
Supplies
Advertising expense
Equipment
Common stock
$ 4,600
4,000
7,500
2,400
400
26,000
22,100
Notes payable
Accounts payable
Supplies expense
Maintenance and repairs expense
Utilities expense
Salaries and wages expense
$12,000
500
1,000
600
300
1,400
Prepare an income statement, retained
earnings statement, and balance sheet;
discuss results.
Excel
Check figures provide a key
number to let you know you are
on the right track.
During June, the company issued no additional stock but paid dividends of $1,400.
Instructions
a. Prepare an income statement and a retained earnings statement for the month of June and a balance
sheet at June 30, 2025.
b. Briefly discuss whether the company’s first month of operations was a success.
a. Net income
Ret. earnings
Tot. assets
$ 3,800
$ 2,400
$37,000
c. Discuss the company’s decision to distribute a dividend.
P1.4 (LO 3), AP Reese Inc., a provider of consulting services, was founded on October 1, 2025. At the
end of the first month of operations, the company decided to prepare an income statement, retained
earnings statement, and balance sheet using the following information.
Accounts payable
Interest expense
Equipment (net)
Salaries and wages expense
Bonds payable
Unearned service revenue
Accounts receivable
Cash
$ 3,300
410
48,200
2,500
21,500
4,065
1,300
3,950
Supplies
Supplies expense
Depreciation expense
Service revenue
Salaries and wages payable
Common stock
Interest payable
Prepare an income statement, retained
earnings statement, and balance sheet.
$ 2,460
380
270
20,920
445
9,100
140
Instructions
Using the information, prepare an income statement and retained earnings statement for the month of
October 2025 and a balance sheet as of October 31, 2025.
End. retained earnings$17,360
P1.5 (LO 3), AP Presented below is selected financial information for Rojo Corporation for December 31,
2025.
Determine items included in a
statement of cash flows, prepare the
statement, and comment.
Inventory
Cash paid to suppliers
Buildings
Common stock
Cash dividends paid
Cash at beginning of period
$ 25,000
Cash paid to purchase equipment
104,000
Equipment
200,000
Service revenue
50,000
Cash received from customers
7,000
Cash received from issuing
9,000 common stock
$ 12,000
40,000
100,000
132,000
22,000
Instructions
a. Prepare the statement of cash flows for Rojo Corporation.
b. Comment on the adequacy of net cash provided by operating activities to fund the company’s investing activities and dividend payments.
a. Net cash increase
$31,000
1-46
C H A PTE R 1
Introduction to Financial Statements
Comment on proper accounting
treatment and prepare a corrected
balance sheet.
P1.6 (LO 3), AN
Micado Corporation was formed on January 1, 2025. At December 31, 2025,
Miko Liu, the president and sole stockholder, decided to prepare a balance sheet, which appeared as
follows.
Micado Corporation
Balance Sheet
December 31, 2025
Assets
Cash
Accounts receivable
Inventory
Boat
Liabilities and Stockholders’ Equity
$20,000
50,000
36,000
24,000
Accounts payable
Notes payable
Boat loan
Stockholders’ equity
$30,000
15,000
22,000
63,000
Miko willingly admits that she is not an accountant by training. She is concerned that her balance sheet
might not be correct. She has provided you with the following additional information.
1.The boat actually belongs to Miko, not to Micado Corporation. However, because she thinks she
might take customers out on the boat occasionally, she decided to list it as an asset of the company.
To be consistent, she also listed as a liability of the corporation her personal loan that she took out
at the bank to buy the boat.
2.The inventory was originally purchased for $25,000, but due to a surge in demand Miko now thinks
she could sell it for $36,000. She thought it would be best to record it at $36,000.
3.Included in the accounts receivable balance is $10,000 that Miko loaned to her brother 5 years ago.
Miko included this in the receivables of Micado Corporation so she wouldn’t forget that her brother
owes her money.
Instructions
a. Comment on the proper accounting treatment of the three items above.
b. Tot. assets
$85,000
Provide a corrected balance sheet for Micado Corporation. (Hint: To get the balance sheet to balance,
b. adjust stockholders’ equity.)
Continuing Case
The Cookie Creations case
starts in Chapter 1 and continues in every chapter. Complete
case details and instructions
are available in Wiley Course
Resources.
leungchopan/
leungchopan/
Shutterstock.com
Shutterstock.com
Cookie Creations
CC1 Natalie Koebel spent much of her childhood learning the art of cookie-making from her grandmother. They spent many happy hours mastering every type of cookie imaginable and later devised new
recipes that were both healthy and delicious. Now at the start of her second year in college, Natalie is
investigating possibilities for starting her own business as part of the entrepreneurship program in which
she is enrolled.
A long-time friend insists that Natalie has to include cookies in her business plan. After a series of
brainstorming sessions, Natalie settles on the idea of operating a cookie-making school. She will start
on a part-time basis and offer her services in people’s homes. Now that she has started thinking about
it, the possibilities seem endless. During the fall, she will concentrate on holiday cookies. She will offer
group sessions (which will probably be more entertainment than education) and individual lessons.
Natalie also decides to include children in her target market. The first difficult decision is coming up
with the perfect name for her business. She settles on “Cookie Creations,” and then moves on to more
important issues.
Instructions
a. What form of business organization—proprietorship, partnership, or corporation—do you recommend that Natalie use for her business? Discuss the benefits and weaknesses of each form that
Natalie might consider.
b. Will Natalie need accounting information? If yes, what information will she need and why? How
often will she need this information?
c. Identify specific asset, liability, revenue, and expense accounts that Cookie Creations will likely use
to record its business transactions.
Expand Your Critical Thinking
d. Should Natalie open a separate bank account for the business? Why or why not?
e. Natalie expects she will have to use her car to drive to people’s homes and to pick up supplies, but
she also needs to use her car for personal reasons. She recalls from her first-year accounting course
something about keeping business and personal assets separate. She wonders what she should do for
accounting purposes. What do you recommend?
Expand Your Critical Thinking
Financial Reporting Problem: Apple Inc.
CT1.1 The financial statements of Apple Inc. are presented in Appendix A.
Instructions
Refer to Apple’s financial statements and answer the following questions.
a. What were Apple’s total assets at September 26, 2020? At September 28, 2019?
b. How much cash (and cash equivalents) did Apple have on September 26, 2020?
c. What amount of accounts payable did Apple report on September 26, 2020? On September 28, 2019?
d. What were Apple’s net sales in the year ending September 26, 2020? In the year ending September
28, 2019? In the year ending September 29, 2018?
e. What is the amount of the change in Apple’s net income from 2019 to 2020?
Comparative Analysis Problem: Columbia Sportswear Company vs. Under
Armour, Inc.
CT1.2 Columbia Sportswear Company’s financial statements are presented in Appendix B. Financial
statements of Under Armour, Inc. are presented in Appendix C.
Instructions
a. Based on the information in these financial statements, determine the following for each company.
1. Total liabilities at December 31, 2020.
2. Net property, plant, and equipment at December 31, 2020.
3. Net cash provided or (used) in investing activities for 2020.
4. Net income for 2020.
b. What conclusions concerning the two companies can you draw from these data?
Comparative Analysis Problem: Amazon.com, Inc. vs. Walmart Inc.
CT1.3 Amazon.com, Inc.’s financial statements are presented in Appendix D. Financial statements of
Walmart Inc. are presented in Appendix E.
Instructions
a. Based on the information contained in these financial statements, determine the following for each
company.
1. Total assets at December 31, 2020, for Amazon and for Walmart at January 31, 2021.
2. Receivables (net) at December 31, 2020, for Amazon and for Walmart at January 31, 2021.
3. Net sales (product only) for the year ended in 2020 (2021 for Walmart).
4. Net income for year ended in 2020 (2021 for Walmart).
b. What conclusions concerning these two companies can be drawn from these data?
Interpreting Financial Statements
CT1.4 Xerox was not having a particularly pleasant year. The company’s stock price had already fallen
in the previous year from $60 per share to $30. Just when it seemed things couldn’t get worse, Xerox’s
stock fell to $4 per share. The following data were taken from the statement of cash flows of Xerox. (All
dollars are in millions.)
1-47
1-48
C H A PTE R 1
Introduction to Financial Statements
Cash used in operating activities
Cash used in investing activities
Financing activities
Dividends paid
$ (587)
Net cash received from issuing debt
3,498
$ (663)
(644)
Cash provided by financing activities
2,911
Instructions
Analyze the information and then answer the following questions.
a. If you were a creditor of Xerox, what reaction might you have to the above information?
b. If you were an investor in Xerox, what reaction might you have to the above information?
c. If you were evaluating the company as either a creditor or a stockholder, what other information
would you be interested in seeing?
d. Xerox decided to pay a cash dividend. This dividend was approximately equal to the amount paid in
the previous year. Discuss the issues that were probably considered in making this decision.
Real-World Focus
CT1.5 You can easily search the Internet to find summary information about companies. This information includes basic descriptions of the company’s location, activities, industry, financial health, and
financial performance.
Instructions
Go to the Yahoo! Finance website, type in a company name, and then use the links (such as Financials)
to locate the information necessary to answer the following questions.
a. What is the company’s net income? Over what period was this measured?
b. What is the company’s total sales? Over what period was this measured?
c. What is the company’s industry?
d. What are the names of four companies in this industry?
e. Choose one of the competitors. What is this competitor’s name? What is its total sales? What is its
net income?
CT1.6 The Wall Street Journal published an article by Michael Rapoport entitled “Coming Soon: What
Auditors Really Think About Company Numbers.” It provides a discussion about changes to be made to
the auditor’s report.
Instructions
Read the article and then answer the following questions.
a. What did the old auditor’s report primarily focus on?
b. What does the new report provide beyond the old report? What are some examples of items that
might be discussed?
c. How do the requirements of the new report compare to the requirements of auditor reports in other
countries?
d. What criteria must be met in other for an item to be disclosed in the new report?
Decision-Making Across the Organization
CT1.7 Sylvia Ayala recently accepted a job in the production department at Johnson & Johnson. Before
she starts work, she decides to review the company’s annual report to better understand its operations.
The content and organization of corporate annual reports have become fairly standardized. Excluding the public relations part of the report (pictures, products, etc.), the following are the traditional financial portions of the annual report.
• Financial Highlights
• Letter to the Stockholders
• Management’s Discussion and Analysis
• Financial Statements
• Notes to the Financial Statements
• Management’s Responsibility for Financial Reporting
• Management’s Report on Internal Control over Financial Reporting
Expand Your Critical Thinking
• Report of Independent Registered Public Accounting Firm
• Selected Financial Data
The official SEC filing of the annual report is called a Form 10-K, which often omits the public relations
pieces found in most standard annual reports.
Instructions
Search the Internet to find Johnson & Johnson’s 10-K report dated for the year ended January 3, 2021, to
answer the following questions.
a. What CPA firm performed the audit of Johnson & Johnson’s financial statements?
b.What was the amount of Johnson & Johnson’s basic earnings per share for the year ended January 3,
2021?
c. What are the company’s net sales in foreign countries during the year ended January 3, 2021?
d. What were net sales during the year ended December 30, 2018?
e. How many shares of common stock have been authorized?
f. How much cash was spent on capital expenditures during the year ended January 3, 2021?
g. Over what life does the company depreciate its buildings?
h. What was the value of inventory on December 29, 2019?
Communication Activity
CT1.8 Marci Ling is the bookkeeper for Samco Company, Inc. Marci has been trying to get the com­
pany’s balance sheet to balance. She finally got it to balance, but she still isn’t sure that it is correct.
Samco Company, Inc.
Balance Sheet
For the Month Ended December 31, 2025
Assets
Equipment
Cash
Supplies
Accounts payable
Liabilities and Stockholders’ Equity
$18,000
9,000
1,000
(4,000)
Common stock
Accounts receivable
Dividends
Notes payable
Retained earnings
$12,000
(6,000)
(2,000)
10,000
10,000
Total assets
$24,000
Total liabilities and
stockholders’ equity
$24,000
Instructions
Explain to Marci Ling in a memo (a) the purpose of a balance sheet, and (b) why this balance sheet is
incorrect and what she should do to correct it.
Ethics Cases
CT1.9 Rules governing the investment practices of individual certified public accountants prohibit them
from investing in the stock of a company that their firm audits. The Securities and Exchange Commission
(SEC) became concerned that some accountants were violating this rule. In response to an SEC investigation, PricewaterhouseCoopers (PwC) fired 10 people and spent $25 million educating employees
about the investment rules and installing an investment tracking system.
Instructions
Answer the following questions.
a. Why do you think rules exist that restrict auditors from investing in companies that are audited by
their firms?
b. Some accountants argue that they should be allowed to invest in a company’s stock as long as they themselves aren’t involved in working on the company’s audit or consulting. What do you think of this idea?
c. Today, a very high percentage of publicly traded companies are audited by only four very large public
accounting firms. These firms also do a high percentage of the consulting work that is done for publicly traded companies. How does this fact complicate the decision regarding whether CPAs should
be allowed to invest in companies audited by their firm?
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Introduction to Financial Statements
d. Suppose you were a CPA and you had invested in IBM when IBM was not one of your firm’s clients.
Two years later, after IBM’s stock price had fallen considerably, your firm won the IBM audit contract. You will be involved in working with the IBM audit. You know that your firm’s rules require
that you sell your shares immediately. If you do sell immediately, you will sustain a large loss. Do
you think this is fair? What would you do?
e. Why do you think PwC took such extreme steps in response to the SEC investigation?
CT1.10 Ethical behavior is fundamental to communications between investors and companies. However, it is difficult for company founders to control their enthusiasm in discussions related to their company,
such that sometimes new companies overstate their potential for future success, either intentionally or
unintentionally, in order to generate investor interest.
For example, Nikola Corporation, a pioneer in electric semi-trucks, was investigated by U.S. securities regulators because critics claimed that the company’s chairperson made false claims about the
company’s progress in his efforts to make Nikola “the Tesla of semi-trucks.” Shortly after its stock began
trading publicly, the company was estimated to be worth $30 billion, even though it had yet to produce its first electric truck. Similarly, Tesla’s founder and CEO, Elon Musk, has been investigated by the
Securities and Exchange Commission a number of times regarding the accuracy of his communications,
including Tweets.
Instructions
In groups, discuss the following topics.
a. Should companies be held accountable for the fairness of their communications, or instead should
it be the responsibility of investors to determine whether company statements are true and fair?
b. Suppose that you founded a new company. What steps would you take to ensure that your communications were accurate, while still generating enthusiasm with investors?
c. Search the Internet to find information about the allegations and any results of regulatory investigations regarding the accuracy of Elon Musk’s communications about Tesla. Provide a brief summary
of your findings.
d. What are the potential costs to society of inaccurate company communications to investors?
All About You
CT1.11 Some people are tempted to make their finances look worse to get financial aid. Companies
sometimes also manage their financial numbers in order to accomplish certain goals. Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.
In managing earnings, companies’ actions vary from being within the range of ethical activity, to being
both unethical and illegal attempts to mislead investors and creditors.
Instructions
Provide responses for each of the following questions.
a. Discuss whether you think each of the following actions (adapted from the FinAid website) to increase the chances of receiving financial aid is ethical.
1.Spend down the student’s assets and income first, before spending parents’ assets and income.
2.Accelerate necessary expenses to reduce available cash. For example, if you need a new car, buy
it before applying for financial aid.
3. State that a truly financially dependent child is independent.
4.Have a parent take an unpaid leave of absence for long enough to get below the “threshold” level
of income.
b. What are some reasons why a company might want to overstate its earnings?
c. What are some reasons why a company might want to understate its earnings?
d. Under what circumstances might an otherwise ethical person decide to illegally overstate or understate earnings?
FASB Codification Activity
CT1.12 The FASB has developed the Financial Accounting Standards Board Accounting Standards
Codification (or more simply “the Codification”). The FASB’s primary goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic. To provide easy
access to the Codification, the FASB also developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online, real-time database that provides easy access to the
Expand Your Critical Thinking
Codification. The Codification and the related CRS provide a topically organized structure, subdivided
into topic, subtopics, sections, and paragraphs, using a numerical index system.
You may find this system useful in your present and future studies, and so we have provided an
opportunity to use this online system as part of the Expand Your Critical Thinking section.
Instructions
Academic access to the FASB Codification is available through university subscriptions, obtained from
the American Accounting Association. This subscription covers an unlimited number of students
within a single institution. Once this access has been obtained by your school, you should log in and
familiarize yourself with the resources that are accessible at the FASB Codification site.
Considering People, Planet, and Profit
CT1.13 Although Clif Bar & Company is not a public company, it does share its financial information
with its employees as part of its open-book management approach. Further, although it does not publicly
share its financial information, it does provide a different form of an annual report to external users. In
this report, the company provides information regarding its sustainability efforts.
Instructions
Go to the “Who We Are” page at the Clif Bar website and then identify the company’s five aspirations.
Answers to Insight and Accounting Across the Organization Questions
Owning a Piece of the Bar Q: What are the benefits to the company and to the employees of making
the financial statements available to all employees? A: If employees can read and use financial reports,
a company will benefit in the following ways. The marketing department will make better decisions
about products to offer and prices to charge. The finance department will make better decisions about
debt and equity financing and how much to distribute in dividends. The production department will
make better decisions about when to buy new equipment and how much inventory to produce. The
human resources department will be better able to determine whether employees can be given raises.
Finally, all employees will be better informed about the basis on which they are evaluated, which will
increase employee morale.
Using Data Science to Create Art Q: How can “big data” improve decision-making? A: Companies
analyze the large amounts of data now available to improve cost estimation for future projects as well as
identify bottlenecks and opportunities to increase the efficiency of production processes.
I Felt the Pressure—Would You? Q: Why did these employees lie, and what do you believe should be
their penalty for these lies? A: They felt pressured by their supervisors to make the company’s financial
statements look better than warranted. They should be prosecuted for fraudulent activities under the
Sarbanes-Oxley Act, as they knowingly misstated financial statement data.
Beyond Financial Statements Q: Why might a company’s stockholders be interested in its environmental and social performance? A: Many companies now recognize that being a socially responsible
organization is not only the right thing to do, but it also is good for business. Many investment professionals understand, for example, that environmental, social, and proper corporate governance of companies affects the performance of their investment portfolios. For example, British Petroleum’s oil spill
disaster is a classic example of the problems that can occur for a company and its stockholders. BP’s stock
price was slashed, its dividend reduced, its executives replaced, and its reputation badly damaged. It is
interesting that socially responsible investment funds are now gaining momentum in the marketplace
such that companies now recognize this segment as an important investment group.
Spinning the Career Wheel Q: How might accounting help you? A: You will need to understand
financial reports in any enterprise with which you are associated. Whether you become a manager, a
doctor, a lawyer, a social worker, a teacher, an engineer, an architect, or an entrepreneur, a working
knowledge of accounting is relevant.
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