Table of Contents

1 The Environment and Conceptual Framework of Financial Reporting

1.1 Financial Reporting Environment 1-2

1.2 Conceptual Framework 1-11

1.3 Assumptions and Principles 1-18

1.4 Major Challenges in Financial Reporting 1-27

Analytics in Action Big Data for Big Decisions 1-30

2 The Accounting Information System

2.1 Accounting Information System 2-2

2.2 Analyze and Record Business Transactions 2-8

Analytics in Action This System Is Full of Data 2-19

2.3 Adjusting Entries 2-23

2.4 Preparing Financial Statements 2-37

2.5 Financial Statements for a Merchandising Company 2-45

Appendix 2A: Cash-Basis Accounting versus Accrual-Basis Accounting 2-48

Appendix 2B: Using Reversing Entries 2-54

Appendix 2C: Using a Worksheet: The Accounting Cycle Revisited 2-56

3 Income Statement, Related Information, and Revenue Recognition

3.1 Income Statement 3-2

Analytics in Action Income Statement Dashboards 3-8

3.2 Reporting Special Income Items 3-11

3.3 Stockholders’ Equity Statements 3-19

3.4 Revenue Recognition—The Fundamentals 3-21

3.5 Quality of Earnings 3-29

Appendix 3A: Accounting Changes and Errors 3-33

4 Balance Sheet and Statement of Cash Flows

4.1 Balance Sheet 4-1

4.2 Statement of Cash Flows 4-16

Appendix 4A: Additional Information 4-26

Appendix 4B: Ratio Analysis—A Reference 4-33

5 Accounting and the Time Value of Money

5.1 Basic Time Value Concepts 5-2

5.2 Single-Sum Problems 5-8

5.3 Annuities (Future Value) 5-14

5.4 Annuities (Present Value) 5-21

5.5 Other Time Value of Money Issues 5-27

Analytics in Action Using Present Value for Investment Analysis 5-31

Appendix 5A: Technology Tools for Time Value of Money Problems 5-34

Time Value of Money Tables 5-60

6 Cash and Receivables

6.1 Cash 6-1

6.2 Receivables 6-6

6.3 Valuation of Accounts Receivable 6-13

Analytics in Action Predicting the Future 6-19

6.4 Notes Receivable 6-20

6.5 Other Issues 6-28

Appendix 6A: Cash Controls 6-36

Appendix 6B: Collectibility Assessment Based on Expected Cash Flows 6-42

7 Valuation of Inventories: A Cost-Basis Approach

7.1 Inventory Issues 7-2

7.2 Goods and Costs Included in Inventory 7-8

7.3 Which Cost Flow Assumption to Adopt? 7-14

7.4 Special Issues Related to LIFO 7-24

7.5 Effect of Inventory Errors 7-32

Analytics in Action Inventory Matters 7-35

8 Inventories: Additional Valuation Issues

8.1 Lower-of-Cost-or-Net Realizable Value 8-2

8.2 Lower-of-Cost-or-Market 8-7

Analytics in Action Role of Big Data in Inventory 8-11

8.3 Other Valuation Approaches 8-13

8.4 The Gross Profit Method of Estimating Inventory 8-19

8.5 Retail Inventory Method 8-22

8.6 Presentation and Decision Analysis 8-31

9 Acquisition and Disposition of Property, Plant, and Equipment

9.1 Property, Plant, and Equipment 9-2

9.2 Interest Costs During Construction 9-10

9.3 Valuation of Property, Plant, and Equipment 9-16

9.4 Costs Subsequent to Acquisition 9-26

9.5 Disposition of Property, Plant, and Equipment 9-32

Analytics in Action Capital Expenditure Trends 9-34

Appendix 9A: Accounting for Contributions 9-35

10 Depreciation, Impairments, and Depletion

10.1 Depreciation—A Method of Cost Allocation 10-2

10.2 Impairments 10-15

10.3 Depletion 10-20

10.4 Presentation and Decision Analysis 10-25

Analytics in Action A Better Way to Estimate 10-28

Appendix 10A: Income Tax Depreciation 10-29

11 Intangible Assets

11.1 Intangible Asset Issues 11-2

11.2 Types and Presentation of Intangible Assets 11-8

11.3 Goodwill 11-17

Analytics in Action Goodwill Hunting? 11-21

11.4 Research and Development Costs 11-25

12 Current Liabilities and Contingencies

12.1 Current Liabilities 12-2

12.2 Unearned Revenues 12-14

12.3 Contingencies 12-19

12.4 Presentation and Decision Analysis 12-29

Analytics in Action Current Ratio Analysis Can Lead to Innovation 12-34

13 Long-Term Liabilities

13.1 Bonds Payable 13-2

13.2 Extinguishment of Debt 13-17

13.3 Long-Term Notes Payable 13-19

13.4 Reporting and Analyzing Liabilities 13-28

Analytics in Action Helping to Put Debt into Perspective 13-34

Appendix 13A: Troubled-Debt Restructuring 13-34

14 Stockholders’ Equity

14.1 Corporate Capital 14-2

14.2 Reacquisition of Shares 14-17

14.3 Dividend Policy 14-24

14.4 Presentation and Decision Analysis of Stockholders’ Equity 14-36

Analytics in Action Track Those Ratios! 14-40

Appendix 14A: Dividend Preferences and Book Value per Share 14-40

15 Dilutive Securities and Earnings per Share

15.1 Dilutive Securities 15-2

15.2 Stock Warrants 15-7

15.3 Stock Compensation Plans 15-11

15.4 Basic Earnings per Share 15-23

15.5 Diluted Earnings per Share 15-28

Analytics in Action Earnings per Share versus Net Income 15-37

Appendix 15A: Accounting for Stock-Appreciation Rights 15-39

Appendix 15B: Comprehensive Earnings per Share Example 15-42

16 Investments

16.1 Investments in Debt Securities 16-1

16.2 Investments in Equity Securities 16-14

16.4 Other Financial Reporting Issues 16-23

Analytics in Action Risky Retirement 16-33

Appendix 16A: Accounting for Derivative Instruments 16-34

Appendix 16B: Fair Value Disclosures 16-50

17 Revenue Recognition

17.1 Fundamentals of Revenue Recognition 17-2

17.2 The Five-Step Process Revisited 17-6

17.3 Accounting for Revenue Recognition Issues 17-21

Analytics in Action Are You Going to Keep That? 17-23

17.4 Presentation and Disclosure 17-34

Appendix 17A: Long-Term Construction Contracts 17-39

Appendix 17B: Revenue Recognition for Franchises 17-51

18 Accounting for Income Taxes

18.1 Fundamentals of Accounting for Income Taxes 18-2

18.2 Additional Considerations 18-15

18.3 Accounting for Net Operating Losses 18-23

18.4 Financial Statement Presentation 18-30

Analytics in Action Visualizing Taxes 18-36

Appendix 18A: Comprehensive Example of Interperiod Tax Allocation 18-38

Appendix 18B: Accounting for Net Operating Loss Carrybacks 18-44

19 Accounting for Pensions and Postretirement Benefits

19.1 Fundamentals of Pension Plan Accounting 19-2

19.2 Using a Pension Worksheet 19-12

19.3 Prior Service Cost (PSC) 19-16

19.4 Gains and Losses 19-20

19.5 Reporting Pension Plans in Financial Statements 19-29

Analytics in Action Pension De-Risking 19-37

Appendix 19A: Accounting for Postretirement Benefits 19-39

20 Accounting for Leases

20.1 The Leasing Environment 20-2

20.2 Accounting for Finance Leases 20-12

20.3 Accounting for Operating Leases 20-22

20.4 Special Lease Accounting Problems 20-29

Appendix 20A: Sale-Leasebacks 20-41

Appendix 20B: Direct Financing Lease (Lessor) 20-45

21 Accounting Changes and Error Analysis

21.1 Accounting Changes 21-1

21.2 Other Accounting Changes 21-14

21.3 Accounting Errors 21-18

21.4 Error Analysis 21-25

Appendix 21A: Changing from or to the Equity Method 21-36

22 Statement of Cash Flows

22.1 Overview of Statement of Cash Flows 22-2

22.2 Preparing the Statement of Cash Flows 22-6

22.3 Net Cash Flow from Operating Activities—Direct Method 22-19

22.4 Special Problems in Statement Preparation 22-26

Analytics in Action Cash Flow Analysis 22-35

22.5 Use of a Worksheet 22-37

23 Full Disclosure in Financial Reporting

23.1 Full Disclosure Principle 23-2

23.2 Disclosure Issues 23-7

23.3 Auditor’s and Management’s Reports 23-22

23.4 Current Reporting Issues 23-29

Appendix 23A: Basic Financial Statement Analysis 23-34

Appendix A Private Company Accounting A-1

A.1 The Private Company Council (PCC) A-1

A.2 Private Company Alternatives for Intangible Assets and Goodwill A-2

A.3 Summary A-6

Appendix B Specimen Financial Statements: The Procter & Gamble Company B-1

Appendix C Specimen Financial Statements: The Coca-Cola Company C-1

Appendix D Specimen Financial Statements: PepsiCo, Inc. D-1

Company Index

Subject Index

List of Accounts