intermediate accounting principles and analysis 2nd kieoso

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SECOND EDITION

INTERMEDIATE ACCOUNTING:
PRINCIPLES AND ANALYSIS
TERRY D. WARFIELD, Ph.D.
Associate Professor
Director, Andersen Center for Financial Reporting and Control
University of Wisconsin
Madison, Wisconsin

JERRY J. WEYGANDT, Ph.D., C.P.A.
Arthur Andersen Alumni Professor of Accounting
University of Wisconsin
Madison, Wisconsin

DONALD E. KIESO, Ph.D., C.P.A.
KPMG Emeritus Professor of Accounting
Northern Illinois University
DeKalb, Illinois

JOHN WILEY & SONS, Inc.

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ISBN-13 978 0471737933
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1


ABOUT THE AUTHORS

Terry D. Warfield, Ph.D., is associate professor of
accounting at the University of Wisconsin—Madison. He
received a B.S. and M.B.A. from Indiana University and a
Ph.D. in accounting from the University of Iowa. Professor
Warfield’s area of expertise is financial reporting, and prior
to his academic career, he worked for five years in the banking industry. He served as the Academic Accounting Fellow
in the Office of the Chief Accountant at the U.S. Securities
and Exchange Commission in Washington, D.C. from
1995–1996. Professor Warfield’s primary research interests

concern financial accounting standards and disclosure policies. He has published scholarly articles in The Accounting
Review, Journal of Accounting and Economics, Research in
Accounting Regulation, Review of Accounting Studies, and
Accounting Horizons, and he has served on the editorial
boards of The Accounting Review, Accounting Horizons,

and Issues in Accounting Education. He has served as
president of the Financial Accounting and Reporting
Section, the Financial Accounting Standards Committee of
the American Accounting Association (Chair 1995–1996),
the AAA-FASB Research Conference Committee and the
AAA Regulation Committee, and is a member of
the Financial Accounting Standards Advisory Council to
the FASB. Professor Warfield has received teaching
awards at both the University of Iowa and the University of
Wisconsin, and he was named to the Teaching Academy at
the University of Wisconsin in 1995. Professor Warfield
has developed and published several case studies based on
his research for use in accounting classes. These cases
have been selected for the AICPA Professor-Practitioner
Case Development Program and have been published in
Issues in Accounting Education.

Jerry J. Weygandt, Ph.D., C.P.A., is Arthur Andersen
Alumni 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 books 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 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 Accounting Educator Award.

Donald E. Kieso, Ph.D., C.P.A., received his bachelor’s degree from Aurora University and his doctorate in
accounting from the University of Illinois. He has served
as chairman of the Department of Accountancy and is currently the KPMG Emeritus Professor of Accounting at
Northern Illinois University. He has public accounting

experience with Price Waterhouse & Co. (San Francisco

and Chicago) and Arthur Andersen & Co. (Chicago) and
research experience with the Research Division of the
American Institute of Certified Public Accountants (New
York). He has done postdoctorate work as a Visiting
Scholar at the University of California at Berkeley and is a

v


vi

About the Authors

recipient of NIU’s Teaching Excellence Award and four
Golden Apple Teaching Awards. Professor Kieso is the
author of other accounting and business books and is a
member of the American Accounting Association, the
American Institute of Certified Public Accountants, and
the Illinois CPA Society. He has served as a member of the
Board of Directors of the Illinois CPA Society, the
AACSB’s Accounting Accreditation Committees, the State
of Illinois Comptroller’s Commission, as Secretary-

Treasurer of the Federation of Schools of Accountancy,
and as Secretary-Treasurer of the American Accounting
Association. Professor Kieso served as a charter member
of the national Accounting Education Change
Commission. He is the recipient of the Outstanding
Accounting Educator Award from the Illinois CPA Society,
the FSA’s Joseph A. Silvoso Award of Merit, and the NIU

Foundation’s Humanitarian Award for Service to Higher
Education.


P R E FA C E

Intermediate Accounting: Principles and Analysis, Second Edition, provides a solid foundation for instructors whose goal is to help accounting students build an understanding of
the principles, concepts, and methods of financial accounting and reporting. To that end,
we address the following key themes that users have identified as important in their intermediate accounting courses.

•

Go “beyond the numbers”
The importance of accounting to the capital market and the business community in general
has never been more important. In Intermediate Accounting, Second Edition, boxed stories
entitled “What Do the Numbers Mean?” convey the excitement and ever-changing nature of
accounting, highlighting its importance. We have found that when introduced to the issues involved in the financial reporting of real companies, students genuinely enjoy the subject area.

•

“What’s the principle?”
An important instructional objective in Intermediate Accounting, Second Edition, is to
reinforce students’ understanding of the principles and concepts that are fundamental to
financial reporting. Most students quickly forget procedural details, but they can internalize
principles and concepts that will serve as important cornerstones for decision making
throughout their careers. Concepts are especially important in a world in which the details
are frequently changing. Furthermore, a conceptual orientation is consistent with the evolving orientation toward principles-based, as opposed to rules-based, accounting standards.

• Active learning_“Try it out!”
Students learn best when they are actively engaged. An overriding pedagogical approach

for the book is to provide students opportunities for active learning. Each chapter contains
strategically placed “Try it out!”exercises (with worked-out solutions) that give added opportunities for active learning.
•

“You need to decide”
All business people and accounting professionals must make decisions. Decision making
involves critical evaluation and analysis of information. A new review exercise in each chapter, titled “Accounting, Analysis, Principles,” helps students evaluate and analyze information from the chapter. They review the accounting introduced in the chapter (“Accounting”),
consider how the information provided by the accounting is useful to investors and creditors (“Analysis”), and reflect on how the accounting is related to accounting principles and
concepts (“Principles”). Such exercises, reinforced with end-of-chapter homework activities, give students the practice they will need to build decision-making skills using the
accounting concepts and procedures they are learning.

•

“What can you do?”
Students need to develop competencies that will be useful in their careers. As described
above, the book provides multiple opportunities for students to develop the critical thinking
and analysis skills that will be the backbone of career competency. In addition, explicit writing components in end-of-chapter assignments require students to practice communication
skills. Other assignments for use by students working in groups help develop facility in group
problem solving, a skill useful in the working world.
In addition, for those students who will eventually sit for the CPA exam, we offer interactive integrative problems at the book’s companion website that mirror the new computerized exam. Finally, each chapter also contains stand-alone financial accounting research cases using the Financial Accounting Research System (FARS) database.

vii


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viii

Preface

BOOK RATIONALE AND ORGANIZATION

Some

instructors have expressed a desire for a slightly different type of book for the
intermediate accounting course. They asked for something that would enable them to have
more time to develop various professional competencies, such as analysis and communication skills, and to place more emphasis on applying accounting concepts in various settings, such as in oral and written presentations and with introduction of more technology
and other enhancements. Still others have expressed a need for a book that will better help
students cope with the complexity and rigor of the intermediate course. Intermediate
Accounting: Principles and Analysis, Second Edition, is intended to address those stated
needs.
With 18 chapters, this book meets the needs of various audiences. Instructors who
intend to use the textbook over two semesters can enhance the book with additional readings, cases, exercises, or other professional-competency activities. Instructors who wish to
cover the book in a single semester can do so, by omitting some subject material, but still
have complete treatment of the topics covered. Because the book provides the core concepts
that must be covered in intermediate accounting, instructors can use this textbook in graduate, masters, and MBA courses. The 18-chapter book also provides additional flexibility to
instructors who are interested in teaching a corporate reporting course. For an overview of
the chapter sequence, see the Brief Contents list on page xxi.
The underlying theme around which each chapter is based is to learn the accounting for
various transactions (accounting), to use the accounting in various decision-making contexts
(analysis), and to develop understanding of the concepts or principles underlying the
accounting treatment (principles).

Organization
The book’s organization offers an integrated framework in which to study the essential
concepts of intermediate accounting. The first two chapters discuss the standard-setting
process, starting with the institutional structure and following with the conceptual framework. A review of the accounting process then follows in Chapter 3, as a refresher on basic
understanding of the recording process, which is intended to bring all students up to the
same level.
The next three chapters address the three major financial statements—the balance
sheet, the income statement, and (in a separate chapter) the statement of cash flows.
Revenue recognition is moved up in the “batting order” (relative to its position in

Kieso, ... Intermediate Accounting, Twelfth Edition) and appears next, as Chapter 7.
Chapters 6 and 7 represent a change from the first edition, where cash flows and revenue
recognition were covered in a single chapter (Chapter 6). Separation of these important
topics into two chapters makes possible a more complete discussion of the statement of
cash flows and income measurement concepts that are important to subsequent chapter
topics.
What then follows, in Chapters 8 through 14, is a discussion of the basic issues related to cash and receivables, inventories, plant assets, intangible assets, liabilities, stockholders’ equity, and investments. Following these basic-issues chapters are chapters
(Chapters 15 through 17) on the important topics of income taxes, compensation (including pensions and stock options), and leases. We complete the chapter-length coverage with
discussion in Chapter 18 of other reporting and disclosure issues, including accounting
changes and earnings per share.
Two end-of-book appendices address time value of money concepts and applications
(Appendix A) and reporting cash flows (Appendix B). Another seven appendices dealing
with more specialized accounting topics are available at the book’s companion website. See
the Brief Contents on page xxi for the complete list of online appendices.

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Preface

Throughout all chapters, we balance discussion of concepts and applications so that
these elements are mutually reinforcing. In addition, we focus discussion on explaining the
rationale behind business transactions before addressing the accounting and reporting for
those activities.

Distinctive Content Areas
The following are the distinctive content areas of the book.

Separate Chapters on Cash Flows and Revenue Recognition
Many users requested earlier discussion of the statement of cash flows and revenue

recognition. Intermediate Accounting, Second Edition, provides us the opportunity to
address both these desires. In Chapter 6, we present a substantive discussion of the cash
flow statement. We transition from the discussion of cash flows in Chapter 6 to revenue
recognition in Chapter 7 with its accrual concepts, to provide a perspective on the use
of various performance measurements. Given that many companies report pro-forma
earnings numbers that range from cash flow per share to earnings before interest and
taxes, the logic of discussing cash flow and revenue recognition in sequence seemed
appropriate.
Chapter on Compensation
Intermediate Accounting, Second Edition, features a chapter on compensation, including
the topics of payroll, stock options, and pensions. The content in the area is very similar
to the treatment in Kieso, Intermediate Accounting, Twelfth Edition.

Combined Chapters
One differentiating feature of Warfield, Intermediate Accounting, Second Edition, is that it
combines selected chapters that in Kieso, Intermediate Accounting, Twelfth Edition, are separate chapters. We carefully planned and executed this combination of related topics, which
makes possible a textbook that can be covered in a single semester, in order to provide adequate topic coverage for the second course in financial reporting. The combined chapters
are as follows.

Inventories
Kieso, Intermediate Accounting, Twelfth Edition, covers inventories in two chapters because
of the many complexities associated with the topic. In order to distill coverage of inventories to one chapter, Warfield, Intermediate Accounting, Second Edition, omits certain topics related to managerial accounting. In addition, online appendices discuss specialized industry topics like the retail inventory method, but still permit adequate discussion of the
key concepts related to inventories in the chapter.
Property, Plant, and Equipment
Warfield, Intermediate Accounting, Second Edition, combines two chapters—Property,
Plant, and Equipment, and Depreciation—from the longer book. In order to achieve a
single chapter of manageable length, we streamlined discussions related to interest capitalization and special depreciation methods. We moved the important topic of impairments to the intangibles chapter, so that this subject can be discussed fully in one place.
The subject matter related to depletion appears in an online appendix.
Liabilities
For Warfield, Intermediate Accounting, Second Edition, we streamlined and rewrote the two

chapters on liabilities for presentation in a single chapter on this topic.

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Preface

OTHER FEATURES
Intermediate

Accounting: Principles and Analysis, Second Edition, is packaged with
many pedagogical tools to help students learn more effectively and to help instructors
respond to the changing needs of the course. We developed the following pedagogical
features based on extensive reviews, focus groups, interactions with intermediate accounting instructors and students, and our own experiences with the intermediate
accounting course.

Textbook Features
Chapter-Opening Vignettes
We have updated or added new chapter-opening stories to provide a real-world context that
helps motivate student interest in the chapter topic.
“What Do the Numbers Mean?” Boxes
As described earlier, What Do the Numbers Mean? boxes help students think about the realworld consequences of accounting. In this edition of the book, we have added critical thinking questions (Beyond the Numbers) at the end of each box. These questions encourage students to stretch their thinking about the boxed story and to relate it to underlying accounting
topics and concepts. Guideline answers at the end of the chapter provide immediately available feedback to students’ efforts.

What do the numbers mean?

You Have to Step Back

Should the accounting profession have principles-based standards or rules-based standards? Critics of
the profession today say that over the past three decades, standard-setters have moved away from broad
accounting principles aimed at ensuring that companies’ financial statements are fairly presented.
Instead, these critics say, standard-setters have moved toward drafting voluminous rules that, if
technically followed in “check-box” fashion, may shield auditors and companies from legal liability. That
has resulted in companies creating complex capital structures that comply with GAAP but hide billions
of dollars of debt and other obligations. To add fuel to the fire, the chief accountant of the enforcement
division of the SEC recently noted, “One can violate SEC laws and still comply with GAAP.”
In short, what he is saying is that it is not enough just to check the boxes. You then have to step
back and determine whether the overall impression created by GAAP financial statements fairly
portrays the underlying economics of the company. It is a tough standard, but one that auditors and
corporate management should strive to achieve.
Sources: Adapted from S. Liesman, “SEC Accounting Cop’s Warning: Playing by the Rules May Not Head Off
Fraud Issues,” Wall Street Journal (February 12, 2002), p. C7. See also “Study Pursuant to Section 108(d) of the
Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a PrinciplesBased Accounting System,” SEC (July 25, 2003).

Beyond the Numbers
Do you believe that standard-setters should issue principle-based standards or rule-based standards?

WHAT’S THE PRINCIPLE?
Providing a supplemental schedule
with expense detail helps meet the
objectives of the full disclosure
principle.

“What’s the Principle?”
These marginal notes relate topics covered within each chapter back to the conceptual principles introduced in the beginning of the book. This continual reinforcement
of the essential concepts and principles illustrates how the concepts are applied in
practice and helps students understand the why, as well as the how.

Preface

“Try It Out” Exercises
New in the Second Edition, strategically placed Try It Out exercises, with accompanying
solutions, engage students in active learning as they work their way through a chapter.
Sloan Corporation reported the following income-related information for
the year ended December 31, 2008: Income from continuing operations
$240,000. The following irregular items have not yet been considered by Sloan: Extraordinary loss (net of tax) $20,000; gain on disposal of a component of the business (net of
tax) $35,000; restructuring charge $45,000.

Try it out!

Instructions

Determine the amounts for: (a) income from continuing operations and (b) net income.
Sloan’s tax rate is 30%.
Solution
a

Income from continuing operations
ϭ $240,000 less restructuring, adjusted for taxes
ϭ $240,000 Ϫ [$45,000 ϫ (1 Ϫ .30)] ϭ $208,500

b

Income from continuing operations
Discontinued operations
Extraordinary loss
Net income

$208,500
35,000
(20,000)
$223,500

“Convergence Corners”
Accounting is going global, led by the FASB and the IASB who are working on an ambitious convergence project to result in one set of high-quality accounting standards. Students
need to be informed of this important project. Thus, each chapter of the second edition contains a single-page discussion, called Convergence Corner, of the international accounting issues related to the chapter topics.
Each Convergence Corner consists of four sections: (1) An introduction which typically lists the current international pronouncements related to the chapter topic; (2) “Relevant Facts,” which explains similarities and differences of U.S. GAAP and international
standards (referred to as iGAAP); (3) “About the Numbers,” which provides an example of
application of iGAAP (in many cases, using real international companies); and (4) “On the
Horizon,” which discusses the convergence progress and plans related to that topic.

C O N V E R G E N C E

C O R N E R

International Financial Reporting
Most agree that there is a need for one set of international accounting standards. Here is why:
Multinational corporations. Today companies view the entire world as their market. For example, Coca-Cola,
Intel, and McDonald’s generate more than 50 percent of their sales outside the United States, and many foreign
companies find their largest market to be the United States.
Mergers and acquisitions. The mergers that led to international giants DaimlerChrysler and Vodafone/Mannesmann
suggest that we will see even more such mergers in the future.
Information technology. As communication barriers continue to topple through advances in technology, companies and individuals in different countries and markets are becoming comfortable buying and selling goods and
services from one another.
Financial markets. Financial markets are some of the most significant international markets today. Whether it is
currency, equity securities (stocks), bonds, or derivatives, there are active markets throughout the world trading
these types of instruments.

R E L E VA N T FA C T S
• iGAAP includes the standards, referred to as International Financial Reporting Standards (IFRS), developed by the IASB. The predecessor to the IASB issued
International Accounting Standards (IAS). Both IFRS
and IAS are considered iGAAP.
• The fact that there are differences between U.S.
GAAP and iGAAP should not be surprising because
standard setters have developed standards in
response to different user needs. In some countries,
the primary users of financial statements are private
investors; in others, the primary users are tax
authorities or central government planners. In the
United States, investors and creditors have driven
accounting-standard formulation.

ABOUT THE NUMBERS
The IASB is a relatively new organization (formed in 2001). As a result,
it has looked to the United States to determine the structure it should
follow in establishing iGAAP. Thus, the standard-setting structure
internationally is very similar to the standard-setting structure in the
United States. Presented below is a chart of the international standard
setting structure.

• iGAAP tends to be simpler and less stringent in its
accounting and disclosure requirements. U.S. GAAP is
more detailed. This difference in approach has resulted in a debate about the merits of “principle-based” versus “rule-based” standards.
• Regulators have stated that by 2009 they want to eliminate the need for foreign companies that trade sharees in U.S. markets
to reconcile their accounting with U.S. GAAP.

ON THE HORIZON

Both the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported. In fact, the IASB has stated that no new major
standards will become effective until 2009. The major reason for this policy is to provide companies time to translate
and implement iGAAP into practice.
The international standard-setting environment is changing rapidly. The task will not be easy, but conditions are
conducive to convergence. As Mary Barth, a member of the IASB noted, “There is still a lot to do, but I would never
have dreamed we would be working as closely with the FASB as we do today.”

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xii

Preface

“Accounting, Analysis, Principles” Review
Also new in the Second Edition, the Accounting, Analysis, Principles review exercise, as
the first feature of the chapter-review apparatus, summarizes the three important elements
of each chapter. It helps students to review the accounting introduced in the chapter, to
consider how the information provided by the accounting can be analyzed and used by
investors and creditors, and to reflect on how the accounting is related to underlying
accounting principles and concepts. A full solution is provided.
ACCOUNTING, ANALYSIS, PRINCIPLES
William Murray achieved one of his life-long dreams by opening his own business, The Caddie
Shack Diving Range, on May 1, 2008. He invested $20,000 of his own savings in the business.
He paid $6,000 cash to have a small building constructed to house the operations and spent
$800 on golf clubs, golf balls, and yardage signs. Murray leased 4 acres of land at a cost of
$1,000 per month. (He paid the first month’s rent in cash.) During the first month, advertising costs totaled $750, of which $150 was unpaid at the end of the month. Murray paid his
three nephews $400 for retrieving golf balls. He deposited in the company’s bank account all
revenues from customers ($4,700). On May 15, Murray withdrew $800 in cash for personal
use. On May 31, the company received a utility bill for $100, but did not immediately pay

it. On May 31, the balance in the company bank account was $15,100.
Murray is feeling pretty good about results for the first month, but his estimate of profitability ranges from a loss of $4,900 to a profit of $1,650.
Accounting
a

b

Prepare a balance sheet at May 31, 2008. (Murray appropriately records any depreciation expense on a quarterly basis.) How could Murray have determined that the business operated at a profit of $1,650?
How could Murray conclude that the business operated at a loss of $4,900?

Analysis
c

Assume Murray has asked you to become a partner in his business. Under the partnership agreement, after paying him $10,000, you would share equally in all future
profits. Which of the two income measures above would be more useful in deciding
whether to become a partner? Explain.

Principles
d

What is income according to GAAP? What concepts do the differences in the three
income measures for The Caddie Shack Driving Range illustrate?

Solution
Accounting
a

A balance sheet for The Caddie Shack at May 31, 2008, would be:
Assets
Cash

Building
Equipment

$15,100
6,000
800

Total assets

$21,900

Liabilities and Capital
Advertising payable
$ 150
Utilities payable
100
Original capital
20,000
Change in capital
1,650
$21,900

Murray might conclude that income was $1,650 based on the change in capital from the
beginning of the month to the end of the month.
b

If Murray focused on the change in cash or the balance in the bank account, he would
conclude that the company had a loss of $4,900 ($20,000 – $15,900). This is income
measured on a cash basis.

Analysis
c

The income measure of $1,650 is most relevant for assessing the future profitability
and hence the payoffs to the owners. For example, charging the cost of the building

Review Exercise
Following the list of Key Terms and the Summary of Learning Objectives, a Review Exercise, with solution, gives students another chance to check their understanding of chapter
concepts before they begin end-of-chapter homework assignments.
REVIEW EXERCISE
Presented

below are ten income statements items from Ritter Corporation for the year
ended December 31, 2008.
Sales
$3,200,000
Cost of goods sold
1,650,000
Interest revenue
10,000
Loss from abandonment of plant assets
60,000
Gain from extinguishment of debt
100,000
Selling expenses
340,000
Administrative expenses
280,000
Effect of change in estimated useful
lives of fixed assets

50,000
Loss from earthquake (unusual and infrequent) 40,000
Gain on disposal of a component of
Ritter’s business
90,000

Instructions

Using the information above, prepare a condensed multiple-step income statement. Assume
a tax rate of 30% and 100,000 shares of common stock outstanding during 2008.

Solution
Ritter Corporation
Income Statement
For the Year Ended December 31, 2008
Sales
Cost of goods sold

$3,200,000
1,650,000


Preface

Questions, Brief Exercises, Exercises, and Problems
A full complement of homework materials of varying lengths and difficulty levels gives
instructors a wide variety of class-tested and time-proven materials from which to make assignment selections. Numerous exercises and problems are adapted from professional exams, to give students practice in the type of materials they will encounter in these testing
situations. Special icons identify problems that are good for group work or for writing
assignments. Homework materials that can be solved using the Excel Problems supplement
are identified by a spreadsheet icon. In addition, end-of-chapter Brief Exercises, Exercises,

and Problems are now classified by learning objective.

Exercises
E2-1 (Qualitative Characteristics) SFAC No. 2 identifies the qualitative characteristics that make accounting information useful. Presented below are a number of questions related to these qualitative characteristics and
underlying constraints.

(LO 4, 8)

(a) What is the quality of information that enables users to confirm or correct prior expectations?
(b) Identify the two overall or pervasive constraints developed in SFAC No. 2.

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See the book’s website, at www.wiley.com/college/warfield, for additional
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We have carefully chosen all homework materials to reflect key chapter content and
have triple-checked them for accuracy. Also, new in this edition, we have added a set of
Additional Exercises, which are available at the book’s companion website. These additional materials give instructors an alternate set of exercises to assign.

exercises.

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“Accounting in Action” Section
The Accounting in Action section at the end of each chapter groups problems that require
students to apply their accounting knowledge while expanding student competencies in
analysis and decision-making contexts.
Included in the Accounting in Action section are three sub-sections: Financial Reporting and Analysis, Concepts for Analysis, and Professional Tools. Homework materials in
each sub-section are as follows.

ACCOUNTING IN ACTION
Financial Reporting and Analysis
᭿ Financial Reporting Issues: The Procter & Gamble Company
AIA3-1

The financial statements of Procter & Gamble (P&G) can be accessed at the book’s website.

Instructions
Refer to P&G’s financial statements and the accompanying notes to answer the following questions.
(a)
(b)
(c)
(d)

What were P&G’s total assets at June 30, 2006? At June 30, 2005?
How much cash (and cash equivalents) did P&G have on June 30, 2006?
What were P&G’s research and development costs in 2004? In 2006?
What were P&G’s revenues in 2004? In 2006?

The Financial Reporting and Analysis section includes a Financial Reporting Problem
(focused in this edition on Procter & Gamble), Comparative Analysis (comparing The CocaCola Company to PepsiCo, Inc.), Financial Statement Analysis Cases (using a variety of
real-world companies), and in some chapters, an International Reporting Case. The international cases, based on real companies, are designed to illustrate international accounting
differences. A particular emphasis is on the implications of these differences for analysis,
which reinforces the user orientation of the Accounting in Action elements.
The Concepts for Analysis section contains numerous conceptual cases that focus on
reporting concepts and principles. Many of these cases are adapted from professional exams.

xiii


Preface

Students entering the accounting profession must demonstrate not only accounting
knowledge but also the ability to apply that knowledge and to use the tools that are used in
practice to solve accounting problems. To address these new demands, the Professional
Tools section in the Second Edition includes one or more Ethical Decision Making cases,
Financial Accounting Research (FARs) exercises, and an online Professional Simulation.
Professional Tools
᭿ Ethical Decision Making
AIA4-11 (Presentation of Property, Plant, and Equipment) Andrea Pafko, corporate comptroller for
Nicholson Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet.
She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that
she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a
low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated
depreciation, the age of the assets will be apparent. She proposes the following.

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᭿ Professional Simulation

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The FARs exercises require students to use the Financial Accounting Research System
(FARS) database to perform accounting research of the authoritative literature. This skill is
increasingly required in the professional workplace and is tested on the computerized CPA
exam, so students will experience long-term benefits from the practice they get doing these
exercises as part of the intermediate accounting course.
The Accounting in Action section concludes by referring students to the book’s companion website where they can purchase a Professional Simulation related to the chapter
content. This exercise provides students with an interactive integrative context in which to
apply the concepts introduced in the chapter. The exercises are patterned after the computerized CPA exam that tests a candidate’s ability to read, digest, research, and respond to both
a numeric problem and a short-answer essay, and they expand on the professional competency elements that students will need to apply their accounting knowledge in the professional workplace. (For more on developing professional competencies, see the next section,
Gateway to the Profession Portal.)

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xiv

AIA4-13 Go to the book’s companion website, at www.wiley.com/college/warfield, to find an interactive problem that simulates the computerized CPA exam. The professional simulation for this chapter asks you to address
questions related to the balance sheet.

©

WWK_Professional _Simulation
Balance
Sheet

Time Remaining
3 hours 30 minutes

copy

paste

calculator

sheet

standards

?

help

spliter

done

Gateway to the Profession Portal
The Gateway to the Profession supplement to the textbook content is an electronic gateway at
the book’s companion website (www.wiley.com/college/warfield), to a comprehensive set of
additional materials. These materials include: the Professional Simulation exercises; a database
of annual reports of real companies; professional-competency tools on writing, group work,
and ethics; discussion of additional topics not included in the printed textbook; and student tutorials, self-tests, and a comprehensive glossary. The Gateway to the Profession portal enables
instructors to enrich and custom-design course content using easy-to-access materials.
In addition to the material available via the Gateway to the Profession portal,
WileyPLUS offers students a suite of online homework, with access to an online version of
the text. All Brief Exercises, Exercises, and select Problems are available within
WileyPLUS. Instructor resources include a wealth of presentation and preparation tools,
easy-to-navigate assignment and assessment tools, and a complete system to administer and
manage your course.


Preface

Supplementary Materials

Solutions Manual
The Solutions Manual provides answers to all end-of-chapter Questions, Brief Exercises,
Exercises, Problems, and Accounting in Action materials. Classification tables categorize
solutions by topic, and the new solutions manual also categorizes solutions by textbook
learning objective. The estimated time to complete exercises, problems, and cases is provided. Print is large and bold for easy readability in lecture settings.
Test Bank
The Second Edition Test Bank contains over 500 new testing questions. Exercises, problems, true/false, multiple choice, and conceptual short-answer questions help instructors test
students’ knowledge and communication skills. The Test Bank is designed to allow instructors to tailor examinations according to study objectives, learning skills, and content.
The Test Bank provides a final exam in addition to chapter tests, achievement tests, and
comprehensive tests.
Computerized Test Bank

This easy-to-use program allows instructors to create multiple versions of the same test.
This computerized test bank also has authoring capabilities and randomizing functions.
Solutions Transparencies
These acetate transparencies contain solutions to textbook end-of-chapter material (brief
exercises, exercises, problems, and Accounting in Action materials). The transparencies contain large, bold type for classroom presentation.
PowerPoint™ Presentations
The PowerPoint™ presentations are designed to enhance classroom presentation of chapter topics and examples by emphasizing the key concepts in each chapter. The Second
Edition templates have a new design with review questions and many examples illustrating textbook content. Available for download from the companion website or in CD
format.

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Instructor’s Manual
The online Instructor’s Manual is designed to assist professors in preparing lectures and
assignments. It contains chapter reviews, study objectives for each chapter, sample syllabi,
lecture outlines, and printed teaching transparency masters. Each chapter also provides
quizzing exercises, a Bloom's taxonomy table, and much more.

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The following teaching aids are available to support instructors using Warfield, Intermediate
Accounting: Principles and Analysis, Second Edition.

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Instructor Teaching Aids

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and instructor teaching aids. The Gateway to the Profession portal provides expanded materials, as discussed above, including WileyPLUS, whose resources can help you prepare
class presentations, create assignments, offer help to students, and track student progress.
Other teaching and learning aids to supplement the textbook are described below.

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Accompanying this textbook is an improved and expanded package of student learning aids

xv


xvi

Preface

Teaching Transparencies
These four-color acetates provide illustrations of key concepts for classroom viewing.
Checklist of Key Figures
Available for download from the website or the Instructor’s Resources CD (IR-CD), the
check figures are partial and complete answers (not solutions) to select end-of-chapter
materials.
Instructor’s Resource CD (IR-CD)
This CD-ROM contains the Instructor’s Manual, Solutions Manual, Test Bank, teaching
transparencies, text art, computerized test bank, PowerPoint™ presentations, Excel Workbook solutions, and check figures.

Companion Website
At www.wiley.com/college/warfield, the book’s companion website offers a wealth of content and teaching aids.
Solutions to Rockford Practice Set
This supplement provides solutions to the Rockford Practice Set, which is available in print
form or electronically on a CD-ROM.
Solutions to Excel Workbook Templates
Available for download from the website, these are solutions to the Excel problem templates discussed in the Warfield, Intermediate Accounting Excel Workbook.
Course Management Resources
Course content cartridges are available from both WebCT and Blackboard to support this
textbook.

Student Learning Aids
Working Papers
The working papers are printed templates that can help students correctly format their textbook accounting solutions. Working paper templates are available for all end-of-chapter
Brief Exercises, Exercises, and Problems.
Excel Working Papers
An electronic version of the printed working papers, these Excel-formatted templates help
students properly format and present end-of-chapter textbook solutions.
Problem-Solving Survival Guide, with Excel Working Papers
This study guide provides exercises and problems that will develop students’ problemsolving skills in intermediate accounting. Accompanying the Problem-Solving Survival
Guide is a CD containing the Excel working papers.
Rockford Corporation: An Accounting Practice Set
This revised practice set has been designed as a student review and update of the accounting cycle and the preparation of financial statements.


Acknowledgments

Rockford Corporation: A Computerized Accounting Practice Set
This computerized practice set is a general ledger software version of the printed practice
set. The new computerized Rockford Practice Set is available on CD-ROM.

Excel Workbook and Templates
This workbook contains Excel templates that help students complete selected end-of-chapter
exercises and problems identified by a spreadsheet icon in the margin of the main text. A useful introduction to Excel, this package details how students can work with preprogrammed
spreadsheets, and it explains to students how they can design their own spreadsheets.
Web Quizzing
The Web Quizzes are online true/false and multiple-choice quizzes with grading and feedback.
They can be found at the book’s companion website at />
Acknowledgments
We thank the users of the First Edition and the many instructors who contributed to the
revision through their comments and instructive criticism. Special thanks are extended to
the focus group participants and the primary reviewers of and contributors to our Second
Edition manuscript.
Markus J. Ahrens
St. Louis Community College
June Aono
University of Hawaii–West Oahu
Lisa Bostick
University of Tampa
Greg Brookins
Santa Monica College
Laura Delaune
Louisiana State University
Lynda Dennis
University of Central Florida
Edmond d’Ouville
Indiana University Northwest
Claire Eckstein
CUNY–Baruch
Robert Eskew
Purdue University

Dave Farber
Michigan State University
Clyde Galbraith
West Chester University
Ellen Goldberg
Northern Virginia Community College
Marty Gosman
Quinnipiac College
Konrad Gunderson
Missouri Western University

Julia Higgs
Florida Atlantic University
Geoffrey Horlick
St. Francis College
Allen Hunt
Southern Illinois University
Marilyn Hunt
University of Central Florida
Cynthia Jeffrey
Iowa State University
Mary Jo Jones
Eastern University
Art Joy
University of South Florida
Celina Jozci
University of South Florida
Lisa Koonce
University of Texas at Austin
Christopher Kwak

DeAnza College
Doug Laufer
The Metropolitan State College of Denver
Timothy Lindquist
University of Northern Iowa
Barbara Lippincott
University of Tampa
Gary Luoma
University of Southern California

xvii


Free ebooks ==> www.Ebook777.com
xviii

Acknowledgments

Matt Magilke
University of Utah
Daphne Main
University of New Orleans
R. D. Nair
University of Wisconsin–Madison
Ed Nathan
University of Houston
Hugo Nurnberg
CUNY–Baruch
Ann O’Brien
University of Wisconsin–Madison

Anne Oppegard
Augustana College, SD
Alee Phillips
University of Kansas
Marlene Plumlee
University of Utah
Wing Poon
Montclair State University
Jay Price
Utah State University
Paul (Jep) Robertson
Henderson State University
Larry Roman
Cuyahoga Community College

Bob Rouse
College of Charleston
Tim Shea
University of Wisconsin–Madison
Jerry Siebel
University of South Florida
Douglas Smith
Samford University
Karen Squires
University of Tampa
Gary Taylor
University of Alabama
Lynn Thomas
Kansas State University
Tom Tierney

University of Wisconsin–Madison
Bruce Wampler
Louisiana State University–Shreveport
David Weiner
University of San Francisco
Ken Winter
University of Wisconsin–LaCrosse
Wanda Wong
Chabot College
Steve Zeff
Rice University

In addition, we thank the following colleagues who contributed to development or production of the book:

Gateway to the Profession Portal and FARS Cases
Michelle Ephraim
Worcester Polytechnic Institute
Erick Frederickson
Madison, Wisconsin
Jason Hart
Grant Thornton, Milwaukee
Kayla Hasz
Deloitte, Chicago
Chad Hilgenberg
KPMG, Minneapolis
Kelly Krieg
E & Y, Milwaukee

Jeremy Kunicki
Walgreens

Andrew Prewitt
KPMG, Chicago
Jeff Seymour
KPMG, Minneapolis
Matt Sullivan
Deloitte & Touche, Milwaukee
Jen Vaughn
PricewaterhouseCoopers, Chicago
Erin Viel
PricewaterhouseCoopers, Milwaukee

Ancillary Authors, Contributors, Proofers, and Accuracy Checkers
Mary Ann Benson
Margaret Blais
Rhode Island College
John C. Borke
University of Wisconsin–Platteville

Jack Cathey
University of North Carolina–Charlotte
Betty Connor
University of Colorado at Denver

www.Ebook777.com


Acknowledgments

Robert Derstine
Villanova University

Gregory Dold
Southwestern College
Terry Elliott
Morehead State University
Jim Emig
Villanova University
Larry Falcetto
Emporia State University
Tom Forehand
State University of New York–New Paltz
Rosemary Fullerton
Utah State University
Clyde Galbraith
West Chester University
Edwin Hackleman
Delta Software
Coby Harmon
University of California, Santa Barbara
Wayne Higley
Buena Vista University
Debra R. Hopkins
Northern Illinois University
Judi Hora
University of San Diego
Marilyn F. Hunt
University of Central Florida

Douglas W. Kieso
Aurora University
Mark Kohlbeck

Florida Atlantic University
Jennifer Laudermilch
PricewaterhouseCoopers
Ann Martin
University of Colorado at Denver
Barbara Muller
Arizona State University
Don Newell
Delta Software
Tom Noland
University of Houston
Anne Oppegard
Augustana College
Yvonne Phong
Borough of Manhattan Community College
Paul (Jep) Robertson
Henderson State University
Rex A. Schildhouse
Mianar College
Alice Sineath
Forsyth Technical Community College
Dick D. Wasson
Southwestern College, San Diego University
Bernie Wienrich
Linderwood University

WileyPLUS Developers and Reviewers
Laura McNally
University of Maryland, University College
Jan Mardon

Green River Community College

James Mraz
Melanie Yon

Perspectives and “From Classroom to Career” Interviews
Stuart Weiss
Stuart Weiss Business Writing, Inc., Portland, Oregon

Practicing Accountants and Business Executives
From the fields of corporate and public accounting, we owe thanks to the following practitioners for their technical advice and for consenting to interviews.
Ron Bernard
NFL Enterprises
Mike Crooch
FASB
Tracy Golden
Deloitte & Touche

John Gribble
PricewaterhouseCoopers
Darien Griffin
S.C. Johnson & Son Wax
Michael Lehman
Sun Microsystems, Inc.

xix


xx

Acknowledgements

Tom Linsmeier
FASB
Michele Lippert
Evoke.com
Sue McGrath
Vision Capital Management
David Miniken
Sweeney Conrad
Robert Sack
University of Virginia
Clare Schulte
Deloitte & Touche

Willie Sutton
Mutual Community Savings Bank,
Durham, NC
Lynn Turner
Glass, Lewis, LLP
Gary Valenzuela
Yahoo!
Rachel Woods
PricewaterhouseCoopers
Arthur Wyatt
The University of Illinois–Urbana

In addition, we appreciate the exemplary support and professional commitment given
us by the editorial, marketing, production, and design staffs of John Wiley & Sons, including the following: Chris DeJohn, Mark Bonadeo, Amy Scholz, Julia Flohr, Ed Brislin,
Allie Morris, Kathryn Fraser, Trish McFadden, Maddy Lesure, Anna Melhorn, and Dorothy

Sinclair. Thanks to Ann Torbert for her editorial assistance in pulling together the various
pieces of the manuscript. Thanks, too, to Suzanne Ingrao for her production work, to Steve
Ingle for his indexing, to the management and staff, particularly Jane Shifflet, at Aptara for
their work on the textbook, and to Kim Nichols and the management and staff at Elm Street
Publishing Services for their work on the solutions manual.
We also appreciate the cooperation of the American Institute of Certified Public Accountants and the Financial Accounting Standards Board in permitting us to quote from
their pronouncements. We thank The Procter & Gamble Company, The Coca-Cola Company, and PepsiCo, Inc. for permitting us to use their 2006 annual reports for our specimen
financial statements. We also acknowledge permission from the American Institute of Certified Public Accountants, the Institute of Management Accountants, and the Institute of Internal Auditors to adapt and use material from the Uniform CPA Examinations, the CMA
Examinations, and the CIA Examination, respectively.
If this book helps teachers instill in their students an understanding of the accounting
for various transactions, prepares students to use this accounting in various decision-making
situations, and helps students understand the basic concepts and principles involved in
financial accounting and reporting, then we will have attained our objective.
We will appreciate suggestions and comments from users of this book. You can send
comments to us by email at
Terry D. Warfield
Madison, Wisconsin
Jerry J. Weygandt
Madison, Wisconsin
Donald E. Kieso
Somonauk Illinois


BRIEF CONTENTS

Chapter 16
ACCOUNTING FOR COMPENSATION

Chapter 1
FINANCIAL ACCOUNTING AND ACCOUNTING

STANDARDS 2
Chapter 2
CONCEPTUAL FRAMEWORK UNDERLYING FINANCIAL
ACCOUNTING 34
Chapter 3
THE ACCOUNTING INFORMATION SYSTEM
Chapter 4
BALANCE SHEET

198

Chapter 6
STATEMENT OF CASH FLOWS

250

890

Chapter 18
ADDITIONAL REPORTING ISSUES

1050

᭿

Official Accounting Pronouncements

᭿

ONLINE AT COMPANION WEBSITE

(WWW.WILEY.COM/COLLEGE/WARFIELD) 00

Chapter 7
REVENUE RECOGNITION

302

Chapter 8
CASH AND RECEIVABLES

Appendix C
USING FINANCIAL CALCULATORS

356

Appendix D
RETAIL INVENTORY METHOD

Chapter 9
ACCOUNTING FOR INVENTORIES

418

Chapter 10
ACCOUNTING FOR PROPERTY, PLANT, AND
EQUIPMENT 486
Chapter 11
INTANGIBLE ASSETS

556

Chapter 12
ACCOUNTING FOR LIABILITIES
Chapter 13
STOCKHOLDERS’ EQUITY
Chapter 14
INVESTMENTS

940

Appendix A
ACCOUNTING AND THE TIME VALUE OF MONEY 1000
Appendix B
REPORTING CASH FLOWS
Index I-1

144

Chapter 5
INCOME STATEMENT

76

Chapter 17
ACCOUNTING FOR LEASES

840

P-1

Appendix E
ACCOUNTING FOR NATURAL RESOURCES
Appendix F
ACCOUNTING FOR COMPUTER SOFTWARE
COSTS
Appendix G
ACCOUNTING FOR TROUBLED DEBT

606

670

Appendix H
ACCOUNTING FOR DERIVATIVE INSTRUMENTS
Appendix I
ACCOUNTING ERROR ANALYSIS

730

Chapter 15
ACCOUNTING FOR INCOME TAXES

780

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CONTENTS

Second Level: Fundamental Concepts

Chapter 1
FINANCIAL ACCOUNTING AND ACCOUNTING
STANDARDS 2
The Size of the New York Phone Book, if Necessary 2

Accounting and Capital Allocation 4
The Challenges Facing Financial Accounting
Objectives of Financial Reporting 6
The Need to Develop Standards 7

5

7

14

34

36

The Need for a Conceptual Framework 36
Development of a Conceptual Framework 37

76

76

78

Basic Terminology 78
Debits and Credits 79
Basic Equation 80
Financial Statements and Ownership Structure 82

The Accounting Cycle
15

Chapter 2
CONCEPTUAL FRAMEWORK UNDERLYING
FINANCIAL ACCOUNTING 34

First Level: Basic Objectives

Chapter 3
THE ACCOUNTING INFORMATION SYSTEM

Accounting Information System

Convergence Corner International Financial
Reporting 20

Conceptual Framework

47

Needed: A Reliable Information System

Generally Accepted Accounting Principles
Issues in Financial Reporting 15
Standard Setting in a Political Environment
The Expectations Gap 16
International Accounting Standards 18
Ethics in the Environment of Financial
Accounting 19
Conclusion 19

Basic Assumptions 45
Basic Principles of Accounting
Constraints 53
Summary of the Structure 56

Convergence Corner The Conceptual Framework 57

7

Securities and Exchange Commission (SEC)
American Institute of Certified Public
Accountants (AICPA) 9
Financial Accounting Standards Board
(FASB) 9
Governmental Accounting Standards Board
(GASB) 12
Changing Role of the AICPA 13

Show Me the Earnings!

Qualitative Characteristics of Accounting
Information 39
Basic Elements 42

Third Level: Recognition and Measurement
Concepts 44

Financial Statements and Financial
Reporting 4

Parties Involved in Standard Setting

39

83

Identifying and Recording Transactions and
Other Events 84
Journalizing 84
Posting 85
Trial Balance 89
Adjusting Entries 91
Adjusted Trial Balance 101
Preparing Financial Statements 103
Closing 104
Post-Closing Trial Balance 106
Reversing Entries 107
The Accounting Cycle Summarized 107
Financial Statements for a Merchandising
Company 107

Convergence Corner Accounting Information
Systems 113
Behind the Numbers: Appendix 3A 115

38
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