Financial accounting 11e by needles

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Financial
accounting
eleVentH eDItIon

Belverd E. needles, jr.,  Ph.d., C.P.a., C.m.a.
Depaul University

marian Powers,  Ph.d.
northwestern University

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Financial Accounting, 11th Edition
Belverd E. Needles, Jr.

Marian Powers
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BrIeF Contents

SuPPlEmEnT TO ChaPTER

SuPPlEmEnT TO ChaPTER

SuPPlEmEnT TO ChaPTER

1

Uses of Accounting Information and the Financial Statements

1

How to Read an Annual Report

2

Analyzing Business Transactions

3

Measuring Business Income

3

Closing Entries and the Work Sheet

4

Financial Reporting and Analysis

4

The Annual Report Project

5

The Operating Cycle and Merchandising Operations

6

Inventories

7

Cash and Receivables

8

Current Liabilities and Fair Value Accounting

9

Long-Term Assets

3

46
89

137
184

197

242
245

291
327
363

401

10

Long-Term Liabilities

11

Stockholders’ Equity

12

The Statement of Cash Flows

13

Financial Performance Measurement

14

Investments

443
487
537
585

635

aPPEndIx

A

Accounting for Unincorporated Businesses

aPPEndIx

B

Present Value Tables

674

684

iii
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


Contents
Preface xii
about the authors xxv

ChaPTER 1

Uses of Accounting Information and the Financial statements
DeCisiON POiNT A User’s fOCUs CVs CAreMArK 2

Accounting as an Information System 4
Business Goals and Activities 4
Financial and Management Accounting 6
Ethical Financial Reporting 7

Decision Makers: The Users of Accounting
Information 8
Management 9
Users with a Direct Financial Interest 9
Users with an Indirect Financial Interest 10
Governmental and Not-for-Profit Organizations 10

Accounting Measurement 11
Business Transactions 11

Money Measure 12
Separate Entity 12

The Corporate Form of Business 13
Forms of Business 13
Formation and Organization of a Corporation 14

The Financial Statements and Their
Elements 15
Income Statement 15
Statement of Retained Earnings 16
Balance Sheet 16
Statement of Cash Flows 18
Relationships Among the Financial Statements 19
Focus on Financial Statement Elements: Financial
Ratios 19

Generally Accepted Accounting Principles 22
GAAP and the Independent CPA’s Report 23
Organizations That Issue Accounting Standards 24
Other Organizations That Influence GAAP 24
Professional Conduct 25
A LOOK BACK AT CVs CAreMArK 27

STOP & REVIEW 29
ChaPTER aSSIgnmEnTS 30

46

SuPPlEmEnT TO ChaPTER 1 hOW TO REad an annual REPORT

The Components of an Annual Report 46
Letter to the Stockholders 46
Financial Highlights 47
Description of the Company 47
Management’s Discussion and Analysis 47

ChaPTER 2

Financial Statements 47
Notes to the Financial Statements 50
Reports of Management’s Responsibilities 53
Reports of Certified Public Accountants 53

Analyzing Business transactions
DeCisiON POiNT A User’s fOCUs THe BOeiNG
COMPANY 88

Measurement Issues 90
Recognition 90
Valuation 91
Classification 92
Ethics and Measurement Issues 92

3

89
Double-Entry System 93
Accounts 93
The T Account 94
The T Account Illustrated 94

Rules of Double-Entry Accounting 94
Normal Balance 95
Stockholders’ Equity Accounts 96

v
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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vi

Contents
The Accounting Cycle  96

Business Transaction Analysis  98
Owner’s Investment in the Business  98
Economic Event That Is Not a Business
Transaction  99
Prepayment of Expenses in Cash  99
Purchase of an Asset on Credit  100
Purchase of an Asset Partly in Cash and Partly
on Credit  100
Payment of a Liability  101
Revenue in Cash  101
Revenue on Credit  102
Revenue Received in Advance  102
Collection on Account  102
Expense Paid in Cash  103
Expense to Be Paid Later  103

CHAPTeR 3

Dividends  104
Summary of Transactions  104

The Trial Balance  106
Preparation and Use of a Trial Balance  106
Finding Trial Balance Errors  107

Recording and Posting Transactions  108
Chart of Accounts  108
General Journal  108
General Ledger  110
Some Notes on Presentation  111

Cash Flows and the Timing of
Transactions  112
A LOOK BACK AT  THE BOEING COMPANY  114

STOP & REVIEW  118
Chapter Assignments  119

Measuring Business Income
Decision Point  A User’s Focus Netflix, Inc.  136

Profitability Measurement Issues and
Ethics  138
Net Income  138
Income Measurement Assumptions  138
Ethics and the Matching Rule  140

Accrual Accounting  141
Recognizing Revenues  142
Recognizing Expenses  142
Adjusting the Accounts  143
Adjustments and Ethics  143

The Adjustment Process  144
Type 1 Adjustment: Allocating Recorded Costs
(Deferred Expenses)  145
Type 2 Adjustment: Recognizing Unrecorded
Expenses (Accrued Expenses)  148

137
Type 3 Adjustment: Allocating Recorded,
Unearned Revenues (Deferred Revenues)  150
Type 4 Adjustment: Recognizing Unrecorded,
Earned Revenues (Accrued Revenues)  151
A Note About Journal Entries  152

Using the Adjusted Trial Balance to Prepare
Financial Statements  152
Closing Entries  154
Cash Flows from Accrual-Based
Information  156
A LOOK BACK AT  Netflix, Inc.  158

STOP & REVIEW  163
Chapter Assignments  164

Supplement to CHAPTeR 3  Closing Entries and the Work Sheet

184

Preparing Closing Entries  184

The Accounts After Closing  187

Step 1: Closing the Credit Balances  184
Step 2: Closing the Debit Balances  184
Step 3: Closing the Income Summary Account
Balance  187
Step 4: Closing the Dividends Account Balance  187

The Work Sheet: An Accountant’s Tool  188
Preparing the Work Sheet  188
Using the Work Sheet  191
Supplement Assignments  192

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


vii

Contents

CHAPTeR 4

Financial Reporting and Analysis

Decision Point  A User’s Focus Dell Computer
Corporation  196

Foundations of Financial Reporting  198
Objective of Financial Reporting  198
Qualitative Characteristics of Accounting
Information  199
Accounting Conventions  200
Ethical Financial Reporting  200

Accounting Conventions for Preparing
Financial Statements  201
Consistency  202
Full Disclosure (Transparency)  202
Materiality  202
Conservatism  203
Cost-Benefit  203

Classified Balance Sheet  204

197
Stockholders’ Equity  207
Owner’s Equity and Partners’ Equity  207
Dell’s Balance Sheets  208

Forms of the Income Statement  210
Multistep Income Statement  210
Dell’s Income Statements  213
Single-Step Income Statement  214

Using Financial Ratios for Performance
Evaluation  215
Critical Financial Ratios and Financial Statement
Elements  215
Beyond the Basics: Additional Financial
Ratios  219
A LOOK BACK AT  Dell Computer Corporation  223

STOP & REVIEW  226
Chapter Assignments  228

Assets  206
Liabilities  207

242

Supplement to CHAPTeR 4  The Annual Report Project
Instructions  242

CHAPTeR 5

The Operating Cycle and Merchandising Operations
Decision Point  A User’s Focus Best
Buy Co., Inc.  244

Managing Merchandising Businesses  246
Evaluation of Liquidity  246
Operating Cycle  247
Choice of Inventory System  248
Foreign Business Transactions  249

The Need for Internal Controls  250
Management’s Responsibility for Internal
Control  251

Terms of Sale  252
Sales and Purchases Discounts  252
Transportation Costs  253
Terms of Debit and Credit Card Sales  253

245

Periodic Inventory System  258
Purchases of Merchandise  259
Sales of Merchandise  261

Internal Control: Components, Activities,
and Limitations  263
Components of Internal Control  263
Control Activities  263
Limitations on Internal Control  264

Internal Control over Merchandising
Transactions  265
Internal Control and Management Goals  265
Control of Cash Receipts  266
Control of Purchases and Cash Disbursements  267
A LOOK BACK AT  Best Buy Co., Inc.  270

Perpetual Inventory System  254

STOP & REVIEW  272

Purchases of Merchandise  254
Sales of Merchandise  256

Chapter Assignments  274

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


viii

Contents

CHAPTeR 6

Inventories
Decision Point  A User’s Focus Cisco
Systems, Inc.  290

Managing Inventories  292
Inventory Decisions  292
Financial Ratios: Inventory Turnover and Days’
Inventory on Hand  293
Inventory Management  294
Effects of Inventory Misstatements on Income
Measurement  295
Inventory Misstatements and Fraud  295

Inventory Cost and Valuation  297
Goods Flows and Cost Flows  297
Lower-of-Cost-or-Market (LCM) Rule  298
Disclosure of Inventory Methods  299

Inventory Cost Under the Periodic
Inventory System  299
Specific Identification Method  300

CHAPTeR 7

Average-Cost Method  300
First-In, First-Out (FIFO) Method  301
Last-In, First-Out (LIFO) Method  301
Summary of Inventory Costing Methods  302

Impact of Inventory Decisions  302
Effects on the Financial Statements  303
Effects on Income Taxes  304
Effects on Cash Flows  305

Inventory Cost Under the Perpetual
Inventory System  305
Valuing Inventory by Estimation  308
Retail Method  308
Gross Profit Method  308
A LOOK BACK AT  Cisco Systems, Inc.  310

STOP & REVIEW  313
Chapter Assignments  314

Cash and Receivables
Decision Point  A User’s Focus Hewlett-Packard
Company   326

Management Issues Related to Cash and
Receivables  328
Cash Management  328
Accounts Receivable and Credit Policies   329
Evaluating the Level of Accounts Receivable  330
Financing Receivables  331
Ethics and Estimates in Accounting for
Receivables  333

Cash Equivalents and Cash Control  334
Cash Equivalents  334
Cash Control Methods  334

Uncollectible Accounts  337
The Allowance Method  338

CHAPTeR 8

291

327
Disclosure of Uncollectible Accounts  338
Estimating Uncollectible Accounts Expense  339
Writing Off Uncollectible Accounts  342

Notes Receivable  343
Maturity Date  344
Duration of a Note  344
Interest and Interest Rate   345
Maturity Value  345
Accrued Interest  346
Dishonored Note  346
A LOOK BACK AT  Hewlett-Packard Company
(HP)  347

STOP & REVIEW  348
Chapter Assignments 350

Current Liabilities and Fair Value Accounting
Decision Point  A User’s Focus Microsoft  362

Management Issues Related to Current
Liabilities  364
Managing Liquidity and Cash Flows   364
Evaluating Accounts Payable  365
Reporting Liabilities  366

Common Types of Current Liabilities  368

363

Definitely Determinable Liabilities  368
Estimated Liabilities  373

Contingent Liabilities and Commitments  376

Valuation Approaches to Fair Value
Accounting  377
Interest, the Time Value of Money, and Future
Value  378

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


ix

Contents

CHAPTeR 9

Calculating Present Value  379

Other Applications  383

Applications Using Present Value  382

A LOOK BACK AT  Microsoft  384

Valuing an Asset  382
Deferred Payment  383

STOP & REVIEW  387

Long-Term Assets
Decision Point  A User’s Focus Apple

Computer, Inc.  400

Management Issues Related to Long-Term
Assets  402
Acquiring Long-Term Assets  404
Financing Long-Term Assets   405
Applying the Matching Rule  406

Acquisition Cost of Property, Plant, and
Equipment  407
General Approach to Acquisition Costs  408
Specific Applications  408

Depreciation  411
Factors in Computing Depreciation  411
Methods of Computing Depreciation  412
Special Issues in Depreciation  415

Disposal of Depreciable Assets  417

CHAPTeR 10

Chapter Assignments 388

401
Discarded Plant Assets  417
Plant Assets Sold for Cash  418
Exchanges of Plant Assets  419

Natural Resources  419

Depletion  419
Depreciation of Related Plant Assets  420
Development and Exploration Costs in the Oil and
Gas Industry  421

Intangible Assets  422
Research and Development Costs  424
Computer Software Costs  425
Goodwill  425
A LOOK BACK AT  Apple Computer, Inc.  426

STOP & REVIEW  428
Chapter Assignments 429

Long-Term Liabilities
Decision Point  A User’s Focus McDonald’s
Corporation  442

Management Issues Related to Long-Term
Debt Financing  444
Deciding to Issue Long-Term Debt  444
Evaluating Long-Term Debt  445
Types of Long-Term Debt  446
Cash Flow Information  451

The Nature of Bonds  452
Bond Issue: Prices and Interest Rates  452
Characteristics of Bonds  453

Accounting for the Issuance of Bonds  455

Bonds Issued at Face Value  455
Bonds Issued at a Discount  455
Bonds Issued at a Premium  456

443
Bond Issue Costs  457

Using Present Value to Value a Bond  457
Market Rate Above Face Rate  458
Market Rate Below Face Rate  458

Amortization of Bond Discounts and
Premiums  459
Amortizing a Bond Discount  459
Amortizing a Bond Premium  464

Retirement and Conversion of Bonds  468
Retirement of Bonds  468
Conversion of Bonds  469
A LOOK BACK AT  McDonald’s Corporation  470

STOP & REVIEW  472
Chapter Assignments 474

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


x

Contents

CHAPTeR 11

Stockholders’ Equity
Decision Point  A User’s Focus Google, Inc.  486

Accounting for Treasury Stock  505

Management Issues Related to Contributed
Capital  488

Purchase of Treasury Stock  505
Sale of Treasury Stock  506
Retirement of Treasury Stock  507

The Corporate Form of Business  488
Equity Financing  490
Dividend Policies  491
Measuring Performance Using Financial Ratios  493
Stock Options as Compensation  495
Cash Flow Information  496

Components of Stockholders’ Equity  497
Characteristics of Preferred Stock   498

CHAPTeR 12

Stock Dividends and Stock Splits  508
Stock Dividends  508

Stock Splits  510

The Statement of Stockholders’ Equity and
Book Value per Share  512
Statement of Stockholders’ Equity  512
Book Value per Share  514

Issuance of Stock for Cash and Other
Assets  501

A LOOK BACK AT  Google, Inc.  515

Par Value Stock  501
No-Par Stock  502
Issuance of Stock for Noncash Assets  503

Chapter Assignments 521

STOP & REVIEW  519

The Statement of Cash Flows
Decision Point  A User’s Focus
Amazon.com, Inc.  536

Overview of the Statement of Cash
Flows  538
Purposes and Uses of the Statement of Cash
Flows  538
Classification of Cash Flows  538
Required Disclosure of Noncash Investing and

Financing Transactions   541
Ethical Considerations and the Statement of Cash
Flows  541

Analyzing Cash Flows  542
Cash Flow Ratios  542
Free Cash Flow   544
Asking the Right Questions About the Statement
of Cash Flows  545

Step One: Determining Cash Flows from
Operating Activities  546
Depreciation, Amortization, and Depletion  549
Gains and Losses  550

CHAPTeR 13

487

537
Changes in Current Assets  550
Changes in Current Liabilities  551
Schedule of Cash Flows from Operating
Activities  552

Step Two: Determining Cash Flows from
Investing Activities   553
Investments   554
Plant Assets  554

Step Three: Determining Cash Flows from
Financing Activities  556
Bonds Payable   557
Common Stock  557
Retained Earnings  558
Treasury Stock   558

Step Four: Preparing the Statement of Cash
Flows   559
A LOOK BACK AT  Amazon.com, Inc.  560

STOP & REVIEW  564
Chapter Assignments 565

Financial Performance Measurement
Decision Point  A User’s Focus STARBUCKS
CORPORATION  584

Foundations of Financial Performance
Measurement  586
Financial Performance Measurement:
Management’s Objectives  586

585
Management Compensation  586
Financial Performance Measurement: Creditors’
and Investors’ Objectives  587
Standards of Comparison  587
Sources of Information   589

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


xi

Contents
Evaluating Quality of Earnings  590
Accounting Methods   590
Accounting Estimates  591
One-Time Items  592

Tools and Techniques of Financial
Analysis  594
Horizontal Analysis  594
Trend Analysis  597
Vertical Analysis  598
Financial Ratio Analysis  600

Comprehensive Illustration of Financial
Ratio Analysis  600

CHAPTeR 14

Management Issues Related to
Investments  636
Recognition  636
Valuation  636
Classification  636
Disclosure  638

Ethics of Investing  638

Short-Term Investments in Equity
Securities   639
Trading Securities  639
Available-for-Sale Securities  642

Long-Term Investments in Equity
Securities  643

A LOOK BACK AT  Starbucks Corporation  612

STOP & REVIEW  616
Chapter Assignments  617

635
Noninfluential and Noncontrolling Investment  643
An Influential but Noncontrolling Investment  646
A Controlling Investment   648

Consolidated Financial Statements  649
Consolidated Balance Sheet  649
Consolidated Income Statement  654
Restatement of Foreign Subsidiary Financial
Statements  654

Investments in Debt Securities  656
Held-to-Maturity Securities  656
Long-Term Investments in Bonds  657
A LOOK BACK AT  Intel corporation  658

STOP & REVIEW  660
Chapter Assignments  662

Accounting for Unincorporated Businesses
Accounting for Sole Proprietorships  674
Accounting for Partnerships  675
Accounting for Partners’ Equity  676

Appendix B

Evaluating Liquidity  604
Evaluating Financial Risk  605
Evaluating Operating Asset Management   607
Supplemental Financial Ratios for Assessing
Operating Asset Management and Liquidity  609
Evaluating Market Strength with Financial
Ratios  610

Investments
Decision Point  A User’s Focus Intel
Corporation  634

Appendix A

Evaluating Profitability and Total Asset
Management  601

674

Distribution of Partnership Income and Losses  676
Dissolution of a Partnership  679
Liquidation of a Partnership  681

Present Value Tables
Endnotes  689
Company Name Index  693
Subject Index  695

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

684


preFACe
Making the Complex simple!
Financial Accounting, 11th edition, continues a distinguished tradition of combining academic needs with professional thought to prepare students for a dynamic business world. Through market-leading integration of International Financial Reporting
Standards coverage and real-world data, trusted pedagogy, and a clear writing style that
simplifies complex concepts, Financial Accounting, develops the judgment and criticalthinking skills students will need to succeed.

NEW

superior readability and Clarity for Complex Topics through enhanced
Presentation The revised and refocused content makes this edition accessible to a broad range of interests and levels of reading ability. Building on its proven
418

NEW

Chapter to

9: Long-Term
Assets
strength of making the complex simple, extra care has been taken
clarify the
topics
with which students traditionally struggle most—including the accounting cycle, longIf an asset remains in use beyond the end of its estimated life, its cost and accumulated
term liabilities, contributed
capital, and the statement of cash flows—to make them easy
depreciation remain in the ledger accounts. Proper records will thus be available for
to comprehend. Whenever
possible,
detailed
information
has isbeen
made
more
concise
maintaining
control over
plant assets.
If the residual value
zero, the
carrying
value of
a
fully depreciated
asset is zero
until the asset
disposed of. lists
If suchand

an asset
is discarded,
by shortening paragraphs
and breaking
sentences
intois bulleted
additional
headno gain or loss results. In our example, however, the discarded equipment has a carryers have been added to
students
navigate
the
content.
inghelp
value of
$3,700 at the
time of its
disposal.
The carrying value is computed from the
T accounts as machinery of $13,000 less accumulated depreciation of $9,300. A loss

equal to the
should be recorded
when the more
machine manageable
is discarded, as follows:
streamlined Coverage
Tocarrying
makevalue
Financial
Accounting

for one-

term courses,
this edition
now includes 14 chapters instead of 15. All topics related to
A
‫؍‬
L ؉ SE
2016
ϩ9,300
Ϫ3,700
stockholders’
equity
(previously
split Depreciation—Machinery
between Chapters 11 and 12)
Jan. 2
Accumulated
9,300have been comϪ13,000
Loss on Disposal of Machinery
3,700
bined into a single chapter. Other
topics
previously
covered
in
these
chapters
(corporate
Machinery

13,000
income statement, deferred income
taxes,
comprehensive
income, etc.) have been made
Disposal
of machine
no longer in use
more concise and are included in chapters covering related topics.
Gains and losses on disposals of plant assets are classified as other revenues and expenses

on therelationships
income statement.
Accounting equation
To help students understand how account-

ing works and how business
transactions
impact
the financial statements, accounting
Plant Assets
Sold for
Cash
equations are shown next to important journal entries.
The entry to record a plant asset sold for cash is similar to the one just illustrated, except
that the receipt of cash should also be recorded. The following journal entries show how
to record the sale of a machine under three assumptions about the selling price.

STUDY NOTE: When an asset is sold
for cash, the gain or loss equals cash

received minus the carrying value.

Cash Received Equal to Carrying Value Assume that $3,700 cash is received and is
exactly equal to the $3,700 carrying value of the machine; therefore, no gain or loss occurs:

A
ϩ3,700
ϩ9,300
Ϫ13,000

‫؍‬

L

؉

SE

2016
Jan. 2

Cash
Accumulated Depreciation—Machinery
Machinery
Sale of machine for carrying value; no gain or loss

3,700
9,300
13,000

Cash Received Less Than Carrying Value Assume that $2,000 cash is received,

NEW

which is less than the carrying value of $3,700, resulting in a loss of $1,700.

strengthened
Transaction
Analysis Using walk-Through Method MaintainA
‫؍‬
L ؉ SE
2016

Ϫ1,700
2
Cash
ing aϩ2,000
solid foundation
inJan.
double-entry
accounting is critical in the first2,000
financial accountϩ9,300
Accumulated Depreciation—Machinery
9,300
ing Ϫ13,000
course. This edition logically
guides
students
step-by-step
through

Loss on Sale of Machinery
1,700 accounting for
13,000
business transactions as follows:Machinery

•
•
•
•

Sale of machine at less than carrying value;

Statement of the transaction loss of $1,700 ($3,700 Ϫ $2,000) recorded
Analysis of the effect on the accounts
Cash Received More Than Carrying Value Assume that $4,000 cash is received,
which exceedsaccounting
the carrying value
resulting in a gain of $300.
Application of double-entry
inofT$3,700,
accounts
Illustration
the journal
A
‫؍‬
L
؉of SE
2016 entry (linked to the T account in a way that allows students
ϩ300
Jan. between

2
Cash
4,000
toϩ4,000
see
the
relationships
the methods)
ϩ9,300
Accumulated Depreciation—Machinery
9,300
Ϫ13,000
Machinery
• Comments
that offer supporting
explanations regarding the significance of the13,000
transaction

xii

Gain on Sale of Machinery
Sale of machine at more than the carrying value;
gain of $300 ($4,000 – $3,700) recorded

300

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xiii

preface

100

This walk-through method is continued in future chapters where transaction analysis is critical, such as merchandising accounting, long-term liabilities, contributed capital,
and investments. In every case where it will help student comprehension, more in-text
journal entries have been included.
Chapter 2: Analyzing Business Transactions

Purchase of an Asset on Credit
July 5: Receives office supplies ordered on July 2 and an invoice for $5,200.
Analysis: The purchase of office supplies on credit
▲ increases the asset account Office Supplies with a debit and
▲ increases the liability account Accounts Payable with a credit.
Application
Application of Double Entry:
Assets
OFFICE SUPPLIES

July
July 5

=

Liabilities

+

Stockholders’
Equity

ACCOUNTS PAYABLE

5,200

July 5

5,200

Journal Entry:
July 5

Office Supplies
Accounts Payable

Dr.
5,200

Cr.
5,200

Comment: Office supplies in this transaction are considered an asset (prepaid expense)
because they will not be used up in the current month and thus will benefit future periods. Accounts Payable is used when there is a delay between the time of the purchase
and the time of payment.

Purchase of an Asset Partly in Cash
Highlighting
importance of the financial

and Partlythe
on Credit
statements

July 6: Purchases office equipment, $16,320; pays $13,320 in cash and agrees to pay the

Highlighting
financial
rest next
month.statements allows students to hone their decision-making skills to
provide them with real-world experience.

Analysis: The purchase of office equipment in cash and on credit
increases the asset account Office Equipment with a debit,
Organizing▲
Chapter
Content with focus on financial statements The Focus
▼ decreases the asset account Cash with a credit, and
on Financial▲Statements
graphicaccount
foundAccounts
at the Payable
beginning
each chapter reinforces the
increases the liability
with aof
credit.

connection between the financial statements and each chapter’s topics.

Application
Application of Double Entry:
introducing
and integrating financial statements In Financial
Accounting,
Stockholders’

NEW

CHE-NEEDLES-10-0401-002.indd 100

students are introduced
to financial= statements
in Chapter 1.
early introduction
Assets
Liabilities
+ ThisEquity
emphasizes the importance
of studying accounting
while it also provides students with
CASH
ACCOUNTS PAYABLE
the big picture
whichJuly
to 3frame
Beginning with the How to
July
July 1in 40,000
3,200the remaining chapters.

July 5 5,200
Read an Annual Report 6Supplement
to Chapter 1,
compare and examine
13,320
6 students
3,000
EQUIPMENT
the CVs financialOFFICE
statements
with the southwest Airlines annual report. The Annual
July
July 6 after
16,320 Chapter 4 solidifies this critical skill. In addition, students can
Report Project
practice using these annual reports with the Annual Report and Comparison Analysis
Entry:
cases, whichJournal
require
students to reference major portions of the reports.
Dr.

Cr.

July 6
Office Equipment
16,320
Teaching ratios
with
focus on financial

statement
elements In this edition
Cash
13,320

of Financial Accounting,
the
authors present an exciting
new framework for teaching
Accounts
Payable
3,000
how to analyze company information and make informed decisions using ratio analysis.
In a simplified approach based on extensive research regarding high-performing companies, students learn that finding just six elements on the financial statements and computing four strategic financial ratios will allow them to determine how well or poorly
a company is performing. Comprehensive coverage of all ratios related to evaluating
liquidity, financial risk, operating asset management, and market strength is included
as a way of further analyzing why one of the four strategic ratios may be good or bad.
In addition, all end-of-chapter assignments involving ratio analysis are identified with
a
10/21/10
ratio icon.

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

7:05 AM


of goods sold.)
The profit margin uses two elements of the income statement—net income and

revenue (often called net sales or net revenue). For Martin Auto Parts, it is computed as
Preface
shown below.

xiv

F O C U S
Revenue
R

O N

F I N A N C I A L

S T A T E M E N T S

Net Income
NI

Cash Flows
from
Operating
Activities
COFA

Total
Assets
TA

Total

Liablities
TL

Profit
Margin
NI
R

Asset
Turnover
R
avg TA

Cash Flow
Yield
COFA
NI

Debt to
Equity
TL
TE

Total Equity
TE

Net Income
Revenue
$58,000
ϭ

$1,248,624

Profit Margin ϭ

ϭ 0.046, or 4.6%
Advertising

2.5

Interstate Trucking

1.9

Auto and Home Supply

2.3

Grocery Stores

2.2

Machinery

3.6

Computers

2.8
0

Service Industries

1
2
3
Merchandising Industries

4
5
6
Manufacturing Industries

Source: Data from Dun & Bradstreet, Industry Norms and Key Business Ratios, 2008–2009

Demonstrating
Relevance
in Today’s
Martin Auto Parts’ profit
margin of 4.6 percent
means that the company earns
4.6
cents
on
each
dollar
of
sales.
Is
this
a

satisfactory
profit? The answer requires a
Business World

comparison with the profit margin ratios of other companies in the same industry. As

Students
need
context
understand
theprofit
importance
and
of accounting
in
shown
in the
graph to
above,
the average
margin for
therelevance
auto and home
supply
industry
is 2.3
percent.
althoughAccounting
a profit margin
of 4.6

percent of
mayways
not seem
like core
the real
world.
That’s
whySo,
Financial
offers
a variety
to relate
much, concepts
it is doubleto
thereal
industry
accounting
life. average of 2.3 percent. A difference of 1 or 2 percent in
a company’s profit margin can be the difference between a fair year and a very profit-

able one.Real-World Examples from Start to Finish  Each chapter begins with
Prominent

a Decision
Point
thatAsset
shows
how a real,
easilyturnover
recognizable

company
uses
accounting
Financial
Ratio:
Turnover
The asset
ratio measures
how
efficiently
information
to
make
decisions.
Excerpts
from
the
company’s
financial
statements
assets are used to produce sales. In other words, how much revenue is generated by each are
included
in of
the
Financial
Highlights
section.
At the end
A Look Back
dollar

assets?
A company
with a high
asset turnover
uses of
its each
assetschapter,
more productively
than one
a low asset
turnover.
At revisits
thewith
Decision
Point
company and prompts students to refine their criticalThe asset
turnover ratio
revenue
from
the income
statement
andcompany.
total assetsThese
thinking skills
by examining
theuses
impact
of the
chapter
concepts

on the
fromPoint
the balance
sheet.
It isfeatures
computed
by dividing
revenue
by average
totalchapter
assets. conDecision
and Look
Back
create
real-world
bookends
for the
cepts. In addition, examples from the Decision Point company are integrated throughout the chapter.
158

Chapter 3: Measuring Business Income

A look back at Netflix, Inc.
In the Decision Point at the beginning of the chapter, we noted that Netflix has many
transactions that span accounting periods. We asked these questions:

CHAPTER 3
CHE-NEEDLES-10-0401-004.indd 216

1. What assumptions must Netflix make to account for transactions that span

accounting periods?
2. How does Netflix assign its revenues and expenses to the proper accounting period
so that net income is properly measured?
3. Why are the adjustments that these transactions require important to Netflix’s
financial performance?

DECISION POINT

A User’s Focus Netflix, Inc.
Netflix is the world’s largest online enter-

Similar misstatements can occur when a

tainment subscription service. For a monthly

company has received revenue that it has

fee, its subscribers have access to more than

not yet earned or has earned revenue but

90,000 DVD titles, which are shipped free
of charge; with certain plans, they also have
access to more than 5,000 movies online. At
the end of any accounting period, Netflix has
many transactions that will affect future periods. Two examples appear in the Financial
Highlights that follow: prepaid expenses, which,
though paid in the period just ended, will benefit future periods and are therefore recorded
as assets, and accrued expenses, which the
company has incurred but will not pay until a

future period.1 If prepaid and accrued expenses
are not accounted for properly at the end of
a period, Netflix’s income will be misstated.

Two of the assumptions Netflix must make are that it will continue as a going concern
for an indefinite time (the continuity assumption) and that it can make useful estimates of
its income in terms of accounting periods (the periodicity assumption). These assumptions
enable the company to apply the matching rule—that is, revenues are assigned to the
accounting period in which goods are sold or services are performed, and expenses are
assigned to the accounting period in which they are used to produce revenue. Adjusting
entries for deferred and accrued expenses and for deferred and accrued revenues have an
impact on a company’s earnings.

not yet received it. If misstatements are
made, investors will be misled about the
company’s financial performance.
NETFLIX’S FINANCIAL HIGHLIGHTS:
SELECTED BALANCE SHEET ITEMS
(in thousands)
Assets
Prepaid expenses
Liabilities
Accrued expenses

Financial Ratio: Cash Flow Yield

2009
$12,491

2008

$ 8,122

$33,387

$31,394

Netflix’s earnings are an important measure of performance, but more can be learned about a company’s profitability
by calculating cash flow yield. This ratio helps to evaluate whether or not the company’s income-producing operations are also generating sufficient cash to maintain the company’s liquidity. For example, if a company is not successful in collecting its receivables, its liquidity will be adversely affected. A rule of thumb is that a company should
generate at least $1 dollar of cash flows from operating activities for each $1 of net income—a cash flow yield of
1.0 times. To calculate Netflix’s cash flow yield, we use the following data (in thousands) from the company’s 2009
annual report:

Questions

Net Income
Cash Flows from Operations

1. What assumptions must Netflix
make to account for transactions
that span accounting periods?

2009
$ 115,860
$ 325,063

2008
$ 83,026
$ 284,037

The company’s cash flow yield is computed as follows:

2. How does Netflix assign its
revenues and expenses to the
proper accounting period so that
net income is properly measured?

Cash Flows from
Operating Activities
Net Income
Cash Flow Yield:

3. Why are the adjustments that
these transactions require
important to Netflix’s financial
performance?

2009
$ 115,860
$325,063

2008
$ 83,026
$284,037

$ 325,063
$115,860

$ 284,037
$ 83,026

2.8 times

3.4 times

CW Hanley/The Image Bank /Getty Images

These are very strong results for Netflix. Even though there was a decrease from 3.4 times in 2008 to 2.8 times in
2009, Netflix far exceeds the minimum benchmark of 1.0 times. Not only is Netflix profitable, it achieves a high
level of liquidity.

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

21/10/10 4:45 PM


xv

preface

seeing Accounting in Motion with focus on Business Practice Boxes Each
chapter includes several Focus on Business Practice boxes, which illustrate accounting
concepts and practices in the context of the general business world.
294

Chapter 6: Inventories

Dell Computer Corporation turns its inventory over every five
days. How can it do this when other computer companies have inventory on hand for 60 days or even longer? Technology and good inventory
management are a big part of the answer.

Dell’s speed from order to delivery sets the standard for the computer
industry. Consider that a computer ordered by 9 A.M. can be delivered the
next day by 9 P.M. How can Dell do this when it does not start ordering
components and assembling computers until a customer places an order?
First, Dell’s suppliers keep components warehoused just minutes from

Dell’s factories, making efficient, just-in-time (JIT) operations possible.
Further, computer monitors are no longer shipped first to Dell and then
on to buyers. Dell sends an email message to a shipper, such as United
Parcel Service, and the shipper picks up a monitor from a supplier
and schedules it to arrive with the PC. In addition to contributing to a
high inventory turnover, this practice saves Dell about $30 per monitor
in freight costs. Dell is showing the world how to run a business in the
cyber age by selling more than $1 million worth of computers a day on
its website.3

iStock Photo

A Whirlwind Inventory Turnover—How Does Dell Do It?

Days’ Inventory on Hand Days’ inventory on hand is the average number of days it
engaging students with
Numerous
examples
More
230using
pubtakes
a company to sellin-Chapter
an amount equal to
its average inventory.

It isthan
computed

turnover. Forgovernmental,
Cisco Systems, it is computed
as follows:
licly held companies as welltheasinventory
international,
and not-for-profit
organizations are used as illustrative examples. All companies were carefully selected from one
of the following rankings: Top 100 Brands, the 25 Most Innovative Companies, The
Infotech 100, World’s Most Ethical Companies, Top 50 Companies to Work for, Most
365
Admired Companies, or Customer
Service
Champs.
This selection process ensures that
Days’ Inventory
on Hand �
Inventory Turnover
students will be able to immediately recognize the companies used as examples.
�

365 days
11.1 times

Keeping Up-to-Date with integrated
international Coverage
� 32.9 days

Auto and Home Supply

74.5

Grocery Stores

23.1

Machinery

61.8

91.2
The growing acceptance of International Financial0 Reporting
Standards
(IFRS) presents
10 20 30 40 50 60 70 80 90 100
Merchandising Industries
Manufacturing Industries
challenges for current and future U.S. accountants. Every business student needs some
Source: Data from Dun & Bradstreet, Industry Norms and Key Business Ratios, 2008–2009.
basic knowledge and awareness
of IFRS. This edition provides three ways to cover this
current issue, so instructors can select the coverage that is right for the course.
Computers

NEW

STUDY NOTE: Inventory turnover will

Cisco turned its inventory over 11.1 times in 2009 or, on average, every 32.9 days.

be systematically higher if year-end
Thus,financial
on average, products
are held in inventory
for a littleCoverage
over one month In
before
extensive
international
reporting
standards
this
inventory levels are low.
For example,
being sold. Until the products are sold, Cisco either has to tie up its own money or

many merchandisers’ year-end is
edition
of Financial Accounting,
every
chapter
least one
highobtain outside
financing.
Cisco’sincludes
efficiency is at
demonstrated
by feature

the fact thatthat
its invenJanuary 31 when inventories are lower
tory ratios
areGAAP
much better
than
the ratios for the computer industry. Although inventhan at any
time of the year. between
lights
theotherdifferences
U.S.
and
IFRS.

378

tory turnover and days’ inventory
on 8:
hand
vary Liabilities
by industry,
companies
like
Cisco that
Chapter
Current
and
Fair Value
Accounting
maintain their inventories at low levels and still satisfy customers’ needs are the most

successful.

Inventory Management
supply-chain
management,
a company
the Internet
and track date
goods
is to establish
what theuses
transaction
price is to
on order
the measurement
in
In contrast to U.S. GAAP, the IASB definesWith
fair value
as a single concept
that
needsanimmediately.
(JIT) operating
is one
in which
arm’s length exchange
motivated environment
by normal business
considerations.
based on exit value. Specifically, fair value is
the it

amount
asset may be Aanjust-in-time
goods
arrive just
at the
timeValuation
they aretechniques
needed. include using arm’s length market transactions
exchanged for, or a liability settled, between
knowledgeable
parties
in an
Cisco
supply-chain
management
to increase
inventory
turnover.
It tomanages
knowledgeable,
willing parties,
if available;
reference
the curarm’s length transaction. The best evidence of fair
valueuses
is quoted
prices between
rent fair
value of another instrument
that is substantially

the same;over
disin an active market. If the market for a financial
instrument is
not active, athrough
its inventory
purchases
business-to-business
transactions
that it conducts
14
valuation technique must be used. The objective of a valuation technique counted cash flow analysis; and options pricing models.

NEW

iStock Photo

To reduce their levels of inventory, many merchandisers and manufacturers use
How Does
the IASBmanagement
Define Fair inValue?
supply-chain
conjunction with a just-in-time operating environment.

The following sections, which focus on the income or cash flow approach, require
Added Coverage with
International
Reporting
Standards:
An
knowledge

of interest and theFinancial
time value of money
and present value
techniques.
Overview Automatically bundled with every new book and available on the product
Interest,
the Time
Value of
Money,
website, supplementary material
provides
an overview
of IFRS
and the proposed presenand
Future
Value
tation of financial statements.

CHE-NEEDLES-10-0401-006.indd 294

“Time is money” is a common expression. It derives from the concept of the time value

in-Depth Treatment in
International
of money,
which refers to theFinancial
costs or benefitsReporting
of holding or not Standards:
holding money overAn
time. Interest is the cost of using money for a specific period.

For
instructors
who
want more
Introduction, 2e (isBN:
978-0-538-47680-5)
The interest associated with the time value of money is an important consideration

thorough coverage, this separate
ofand
IFRS
coverage
in any kind64-page
of business booklet
decision. Fordelivers
example, ifthe
you basics
have $100
hold that
amount in
for one year without putting it in a savings account, you have forgone the interest that
a few hours of study. It offers
review
questions
for
students
and
an
Instructor’s
Resource

the money would have earned. However, if you put the $100 in an interest-bearing
CD-ROM with solutions,checking
a Test
Bank,
and
account,
you will
havePowerPoint
the $100 plus theslides.
interest atInternational
the end of the year. FinanThe amount of principle plus interest after one or more periods is known as
cial Reporting Standards introduces
accounting
students
to
the
status
of IFRS and the
future value. Future value may be computed using either simple interest or comimpact on the financial reporting
environment. In addition, a new section on IFRS for
pound interest.
• Simple interest is the interest cost for one or more periods when the principal sum—
the amount on which interest is computed—stays the same from period to period.
• Compound interest is the interest cost for two or more periods when, after each
STUDY NOTE: Compound interest
Copyright 2011 Cengage Learning. All Rights Reserved. May not be
scanned,
or duplicated,
whole or in part. Due
to electronic

some third
partyin
content
be suppressed
fromto
the the
eBook
and/or eChapter(s).
period,
therights,
interest
earned
thatmay
period
is added
amount
on which interest is
is copied,
useful in
business
because itinhelps
Editorial review has deemed that any suppressed content does not materially
affectmakers
the overall
learning
experience. Cengage Learning
reserves the
to remove
additional
content words,

at any timethe
if subsequent
rights
restrictions
require it.at the end
decision
choose
among
computed
in right
future
periods.
In other
principal
sum
is increased

17/09/10 4:25 PM


xvi

preface
small to medium-sized entities (SMEs) has been added. IFRS for SMEs, a complete set
of accounting standards, are now acceptable for use in the United States by private entities as an alternative to U.S. GAAP or full IFRS. The AICPA endorses the use of IFRS
for SMEs. This booklet delivers the relevant content, trusted authorship, and appropriate scope for learners new to the subject.

solid student Pedagogy
The pedagogical features in Financial Accounting reflect the authors’ active teaching
and researching experience.

Clear Learning Objectives Refined over many editions, clearly presented learning
objectives guide students through mastering the chapter’s material. Based on Bloom’s
taxonomy, the learning objectives that structure each chapter teach concepts before proceeding to applications, ensuring that readers have a solid understanding of the accounting concept and its importance before they attempt calculations.

stop & Apply Revised and enhanced Stop & Apply features follow each learning

objective section and review key concepts and information by providing discussion questions or solved exercises. These features provide students with an effective framework
they can use to apply to similar examples and homework assignments.
501

Issuance of Stock for Cash and Other Assets

Nicea Corporation has 2,000 shares of $100 par value, 7 percent cumulative preferred stock outstanding and 200,000 shares of $1 par value common stock
outstanding. In the corporation’s first three years of operation, its board of directors declared cash dividends as follows. (Note: No dividends were declared
in Nicea’s first year of operation.)
2011: $20,000
2012: $30,000
Determine the total cash dividends paid to the preferred and common stockholders during each of the three years.

iStock Photo

SOLUTION
2011:

Preferred dividends in arrears (2,000 shares ϫ $100 ϫ 0.07)
Current year remainder to preferred ($20,000 Ϫ $14,000)
Total to preferred stockholders

$14,000

6,000
$20,000

2012:

Preferred dividends in arrears ($14,000 Ϫ $6,000)
Current year to preferred (2,000 shares ϫ $100 ϫ 0.07)
Total to preferred stockholders
Total to common stockholders ($30,000 Ϫ $22,000)
Total dividends in 2012

$ 8,000
14,000
$22,000
8,000
$30,000

ISSUANCE OF STOCK FOR CASH

STUDY NOTE: On the income
statement, freight-in is included as
part of cost of goods sold, and delivery
expense (freight-out) is included as an
operating (selling) expense.

study Notes Marginal Study AND
Note features
highlight
important information and proOTHER
ASSETS

vide useful Account
tips on
ways to avoidAcommon
mistakes.
for the issuance of
share of capital stock may be either par or no par. The value of par stock is stated in
stock for cash and other assets.

the corporate charter. It can be $0.01, $1, $5, $100, or any other amount established

by the
organizers of The
the corporation.
For instance,
the parto
value
of Googlebusiness
’s common
Developing ethical Business
Leaders
need for
students
analyze

is $0.001. The par values of common stock tend to be lower than those of
situations and make informed, stock
ethical
decisions is essential in today’s world. Finanpreferred stock.
As noted earlier, par
value is the amount

per chapter
share that when
times the
cial Accounting
considerations
throughout
the
so multiplied
that students
STUDY NOTE:weaves
Legal capital isethical
the
number of shares issued is recorded in a corporation’s Capital Stock accounts, and it
minimum amount a corporation can
learn to consistently
think
of theconstitutes
ethicala implications
of their
actions.
In declare
addition,
Ethicorporation’s legal capital.
A corporation
cannot
a dividend
that
report as contributed capital.
To protect
creditors, a corporation cannot declare

cause stockholders’ equity to fall below the firm’s legal capital. Par value is thus
cal Dilemma
the
end ofwould
the
chapters
ask
students
to
consider
issues
they
may
a dividend cases
that wouldat
reduce
capital
a minimum cushion of capital that protects a corporation’s creditors. Any amount in
below the amount of legal capital.
encounter
in their future careers.excess of par value that a corporation receives from a stock issue is recorded in its Additional Paid-In Capital account and represents a portion of its contributed capital.
No-par stock does not have a par value. A corporation may issue stock without a par
The endvalue for several reasons. For one thing, rather than recognizing par value as an arbitrary
figure,
may confuse
it withTerms
the stock’sand
marketRatios
value. Forallow
another,students

most states
of-chapter Review Problems, Stop
&investors
Review,
and Key
do not allow a stock issue below par value, and this limits a corporation’s flexibility in
to check their understanding of obtaining
core chapter
concepts
before
attempting
the
homework
capital.
State and
laws often
require corporations
to place
a stated value
on each
share of stock
assignments. The Review Problems
solutions
provide
students
with
a model
for
that they issue, but even when this is not required, a corporation’s board of directors
how to work through problems before

they
are
required
to
complete
similar
assignments
may do so as a matter of convenience. The stated value can be any value set by the board
unless the state specifies a minimum amount, which is sometimes the case. The stated
on their own. Stop & Review provides
an overview of the learning objectives covered in
value can be set before or after the shares are issued if the state law is not specific.

ensuring Comprehension with end-of-Chapter review Materials

the chapter to help students identify critical concepts. In addition, the Key Terms and
Par Value
Stock ratios, including page references, to
Ratios section lists important terms
and financial
When a corporation issues par value stock, the appropriate Capital Stock account (usually
make sure students are comfortable
with
essential
terminology.
Common Stock or Preferred Stock) is credited for the par value regardless of whether
the proceeds are more or less than the par value. When a corporation issues stock at a

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

xvii

preface

Developing Decision-Making and
Critical-Thinking skills
Trusted end-of-chapter short exercises, exercises, problems, and cases provide a rich
variety to satisfy any approach.

enhanced end-of-Chapter Assignments

NEW

• More Short Exercises: Based on market and syllabi research for financial accounting
courses, more short exercises have been added to the 11th edition for every chapter.
• Exercises, Problems, and Alternate Problems: End-of-chapter assignments have
been updated throughout with new numbers and current data where applicable.
• Market-Leading Case Material: The rich assortment of case material offers plenty of
opportunities to engage and challenge students. The following types of cases appear
in this edition:
• Conceptual Understanding
• Interpreting Financial Reports
• Annual Report Case
Chapter 2: Analyzing Business Transactions
• Comparison Analysis
Comparison
Analysis: Financial Ratio: Asset Turnover
• Ethical

Dilemma
C 6. Refer to the financial statements of CVS and Southwest Airlines Co. in the
• Business Communication
Supplement to Chapter 1. Compute asset turnover for the past two years for both
• Decision
Analysis
Using Excel
companies
and comment
on the results. (Note: Round to one decimal place.) Total

134

assets in fiscal 2007 were $54,722 million for CVS and $16,772 million for Southwest.

LO 1

Ethical Dilemma: Recognition Point and Ethical Considerations
C 7. Robert Shah, a sales representative for Quality Office Supplies Corporation, will
receive a substantial bonus if he meets his annual sales goal. The company’s recognition
point for sales is the day of shipment. On December 31, Shah realizes he needs sales
of $2,000 to reach his sales goal and receive the bonus. He calls a purchaser for a local
insurance company, whom he knows well, and asks him to buy $2,000 worth of copier
paper today. The purchaser says, “But Bob, that’s more than a year’s supply for us.”
Shah says, “Buy it today. If you decide it’s too much, you can return however much
you want for full credit next month.” The purchaser says, “Okay, ship it.” The paper is
shipped on December 31 and recorded as a sale. On January 15, the purchaser returns
$1,750 worth of paper for full credit (approved by Shah) against the bill. Should the
shipment on December 31 be recorded as a sale? Discuss the ethics of Shah’s action.

LO 1, 2, 3, 4

Decision Analysis Using Excel: Transaction Analysis

and Evaluation
of a Trial You
Balance
easily identify
Assignments
want to Cover

C 8. Irena Takla hired an attorney to help her start Takla Delivery Service Corporation. On

Marchthat
1, Takla
deposited
in a bank
account aincompany’s
the name of performance
the corporationare
Assignments
involve
using$14,375
financialcash
ratios
to measure
in exchange for 575 shares of $25 par value common stock. When she paid the attorney’s
highlighted with a ratio icon.

bill of $875, the attorney advised her to hire an accountant to keep her records. Takla was

so busy that it was March 31 before she hired you to straighten out her records.
Assignments After
that assess
a company’s
profitability
and liquidity
are noted
a cash flow
icon.
investing
in her business
and paying
her attorney,
Taklawith
borrowed
$6,250
from the bank. She later paid $325, including interest of $75, on this loan. She also purAssignments
canpickup
be completed
General
Ledger
are marked
with a
chasedthat
a used
truck in theusing
company’s
name,
payingsoftware
$3,125 down

and financing
The first payment
on the
truck
is dueformat
April 15.
then rented an
office
andfor
GL icon.$9,250.
This software
is available
in an
online
inTakla
CengageNOW
(see
p. xx
paid three months’
$1,125, in
Creditthe
purchases
of office equipment of
more information)
and as arent,
CD-ROM
to advance.
bundle with
textbook.
$1,000 and material handling equipment of $625 must be paid by April 10.

In March,
Takla Delivery
completed
deliveries
of $1,625,
of which
$500 were
The User Insight
requirements
of Service
select items
develop
students’
abilities
to make
sound
cash transactions. Of the credit transactions, $375 was collected during March, and $750
business remained
decisionstobased
on
financial
information.
be collected at the end of March. The company paid wages of $562 to its
employees. On March 31, the company received a $93 bill for the March utilities expense
Cases that
students
work infor
Excel
withto
preformatted

templates
are requested
noted with
andrequire
a $62 check
from to
a customer
deliveries
be made in April.
A customer
an Excelaicon.
Inon
addition,
working
papers
fortostudents
provided
in an
delivery
March 31allforelectronic
the following
week and
agreed
pay $250.are
Takla
is considering recording
thisformula
agreement
as revenue in March to make the business look better.
Excel format

(without
functionality).

Uncollectible accounts
expense: percentage of
net sales method, $4,488;
accounts receivable aging
method, $3,925

1. Prepare journal entries for all of the transactions for March that are described in the

New to this three
edition,
Check above.
Figures
for each
problems
added to the margins where
paragraphs
Label
of the have
entriesbeen
alphabetically.
applicable.2. Set up T accounts. Then post the entries to the T accounts. Identify each posting

with the letter corresponding to the transaction.
3. Determine the balance of each account.
4. Prepare a trial balance for Takla Delivery Service Corporation as of March 31, 2011.
(Hint:in whole
Trial

Balance
total rights,
is $33,030.)
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated,
or in
part. Due to electronic
some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall
Learning reserves
rightevaluate
to remove additional
any time if subsequent
restrictions
require it. balance
5. learning
Irenaexperience.
TaklaCengage
is unsure
howtheto
thecontent
trialat balance.
Therights
Cash
account


onlIne solUtIons For
eVerY leArnInG stYle

South-Western, a division of Cengage Learning, offers a vast array of online solutions to

suit your course and your students’ learning styles. Choose the product that best meets
your classroom needs and course goals. Please check with your sales representative for
more details and ordering information.

CenGAGenoW™
CengageNOW for Needles/Powers’ Financial Accounting, 11th edition, is a powerful
and fully integrated online teaching and learning system that provides you with flexibility and control. This complete digital solution offers a comprehensive set of digital tools
to power your course. CengageNOW offers:
• Homework, including algorithmic variations.
• Integrated E-book.
• Personalized Study Plans, which include a pre- and post-test for each chapter and a
variety of multimedia assets (from author demonstration videos to QuizBowl). These
help students master the chapter materials.
• Assessment options which include the full test bank.
• Reporting capability based on AACSB, AICPA, and ACBSP-APC competencies and
standards.
• Course Management tools, including grade book.
• WebCT and Blackboard Integration.

CengageNOw Upgrades

xviii

NEW

New Design CengageNOW has been redesigned to enhance your experience.

NEW

new Cengage online General ledger (ClGl) CLGL offers the best general ledger

educational product in a new online format. Your students can solve selected end-ofchapter and practice set assignments in a format that emulates commercial general ledger
software. Students make entries into the general journal or special journals, track the

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


online solutions for every learning style

xix

posting of the entries to the general ledger, and create financial statements or reports.
This gives students important exposure to similar commercial accounting software, yet
in a manner that is more forgiving of student errors. Assignments are automatically
graded online and included in the CNOW grade book.

improved smart entry Smart Entry challenges students to enter an account title

without the guidance of drop-down menus. Instructors can change the setting to turn
Smart Entry on or off depending on the preference.

NEW

enhanced feedback More robust feedback is included with selected questions to
help students complete homework assignments. Instructors can customize how much
feedback students receive.

• A boarding pass on the homepage allows the instructor to provide CengageNOW
login instructions to the entire class by printing off a flyer or emailing students.

• Study tools are more prominent for students to use when taking homework assignments. The instructor can turn these on or off!
• Longer problems have been sequenced in parts to help students move at an easier
pace, offering better feedback and navigation.
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


xx

online solutions for every learning style
• Students can highlight, take notes, and search the textbook easily and efficiently in
the enhanced eBook.
For a CengageNOW demo, visit www.cengage.com/community/needles

AplIA
Aplia is a premier online homework product that successfully engages students and
maximizes the amount of effort they put forth, creating more efficient learners. Aplia’s
advantages are as follows:
• In addition to static and algorithmic end-of-chapter homework, Aplia offers an extra
problem set to give you more options!
• Students can receive unique, detailed feedback and the complete solution after each
attempt on homework.
• Grade It Now maximizes student effort on each attempt and ensures students do
their own work. Students have three attempts. Each attempt produces an algorithmic
variety. The final score is an average of the three attempts.
• Smart Entry helps eliminate common data entry errors and prevents students from
guessing their way through the homework. It challenges students to enter an account
title without the guidance of drop-down menus.

Aplia Upgrades

NEW

• Increased Instructor Control: Instructors now have more options in how they
assign materials from the question banks.
• ApliaText: Interactive ApliaText shows students how to use eBooks in a new way.
This unique flip-book also includes a Chapter Recap that helps students craft their
own personal study guide.
For an Aplia demo, please visit www.cengage.com/community/needles

WeBtUtor™ on BlACKBoArD®
AnD WeBCt™
WebTutor™ is available packaged with Needles/Powers’ Financial Accounting,
11th edition, or for individual student purchase. Improve students’ grades with online
review and test preparation tools in an easy-to-use course cartridge.
Visit www.cengage.com/webtutor for more information.
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


teACHInG tools For InstrUCtors

instructor’s resource CD (isBN: 1-111-52702-4) Place all of the key teaching
resources you need at your fingertips with this all-in-one source. Find everything you
need to plan, teach, grade, and assess student understanding and progress. This CD
includes the Solutions Manual, a Test Bank in Word and ExamView®, PowerPoint®
slides, and Spreadsheet Solutions.

NEW

• Solutions Manual: Author-written and carefully verified multiple times to ensure
accuracy and consistency with the text, the Solutions Manual contains answers to all
short exercises, exercises, problems, and cases that appear in the text. These solutions
help you plan, assign, and grade assignments.
• Test Bank: New to this edition, a matching problem type has been added for each
chapter and the short answer and problem question types have been reclassified and
expanded when appropriate. Also, new difficulty level ratings, AICPA tagging, and
ABCSP-APO tagging have been added (in addition to AACSB tagging). This is particularly valuable during the accreditation process or when your school wants to standardize assessment.
• ExamView: This easy-to-use test-creation program for Microsoft® Windows or
Macintosh contains all questions from the printed Test Bank, including true/false,
multiple choice, short answer, and problem questions. Each question provides an
answer, a learning objective, a key concept, a level of difficulty, a learning type, and
AACSB, AICPA, and ACBSP-APC standards. It’s simple to customize tests to your
specific class needs as you edit or create questions and store customized exams. This
is an ideal tool for online testing.
• PowerPoint Slides: Bring your lectures to life and clarify difficult concepts with concise slides designed to capture and keep your students’ attention. Ideal as guides for
student note taking and study, print the slides or simply use with a projector.

Companion website This robust companion website provides immediate access to a
rich array of teaching and interactive learning resources—including chapter-by-chapter
online tutorial quizzes, a final exam, online learning games, and flashcards. Easily download the instructor resources you need from the password-protected, instructor-only
section of the site. Visit www.cengage.com/accounting/needles.
Peachtree CD-rOM (isBN: 1-111-52881-0) Teach your students how to use leading commercial software with Peachtree. Students will gain experience working with real
computerized accounting software, an employable skill.

xxi
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

leArnInG resoUrCes For stUDents

Companion website This robust companion website provides immediate access to a
rich array of teaching and interactive learning resources—including chapter-by-chapter
online tutorial quizzes, a final exam, online learning games, and flashcards. Visit www.
cengage.com/accounting/needles.
electronic working Papers Verified to ensure accuracy and quality consistent with
the text, the working papers for the problems are provided in Excel® format to provide students with a starting point for completing end-of-chapter problems and journal
entries from the textbook.

xxii
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.


ACKnoWleDGeMents

A successful textbook is a collaborative effort. We are grateful to the many professors,
other professional colleagues, and students who have taught and studied from our book,
and we thank all of them for their constructive comments. In the space available, we
cannot possibly mention everyone who has been helpful, but we do want to recognize
those who made special contributions to our efforts in preparing the eleventh edition of
Financial Accounting.
We wish to express deep appreciation to our colleagues at DePaul University, who
have been extremely supportive and encouraging. We also wish to thank our Editorial Assistant, Joanna Dabrowska, for her thorough, diligent, and timely work with the
manuscript and Mary Roth for her unwavering professionalism in managing our office.
Very important to the quality of this book are our Developmental Editor, Krista
Kellman; Senior Acquisitions Editor, Sharon Oblinger; and Senior Marketing Manager,
Kristen Hurd.
Others who have had a major impact on this book through their reviews, suggestions, and participation in surveys and reviews are listed below. We cannot begin to say

how grateful we are for the feedback from the many instructors who have generously
shared their responses and teaching experiences with us.
Arinola O. Adebayo
University of South Carolina Aiken

Bea Chiang
The College of New Jersey

Jay Ballantine
University of Colorado at Boulder

Linda Christiansen
Indiana University Southeast

Benjamin W. Bean
Utah Valley University

Robin D’Agati
Palm Beach Community College

John Bedient
Albion College
Chris Bjornson
Indiana University Southeast
Cynthia Bolt-Lee
The Citadel
Michael Bootsma
Kirkwood Community College
Kevin Bosner
Medaille College

Rada Brooks
University of California, Berkeley
Amy Browning
Ivy Tech Community College
Sandra Byrd
Missouri State University
Kevin Carduff
Case Western Reserve University

Rosemond Desir
Colorado State University
Austin Emeagwai
LeMoyne-Owen College
Harlan Etheridge
University of Louisiana at Lafayette
Sara Fernandez
The Citadel
Marvin Gordon
University of Illinois at Chicago
Cynthia Beier Greeson
Ivy Tech Community College
Philip M. Hanley
University of Southern Indiana
Rhonda Harbeson
Lone Star College University Park
Florence W. Harrison
Becker College

xxiii
Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).

Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.