ACCOUNTING. Fundamental Financial. Concepts FIFTH EDITION. Thomas P. Edmonds. Cindy D. Edmonds. Frances M. McNair. Philip R. Olds. Nancy W.

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1 edm89432_fm.qxd 9/30/04 3:17 PM Page i FIFTH EDITION Fundamental Financial ACCOUNTING Concepts Thomas P. Edmonds University of Alabama Birmingham Cindy D. Edmonds University of Alabama-Birmingham Frances M. McNair Mississippi State University Philip R. Olds Virginia Commonwealth University Nancy W. Schneider Lynchburg College Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis Bangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

2 edm89432_fm.qxd 10/8/04 5:53 AM Page ii FUNDAMENTAL FINANCIAL ACCOUNTING CONCEPTS Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, Copyright 2006, 2003, 2000, 1998, 1996 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper VNH/VNH ISBN Editorial director: Brent Gordon Publisher: Stewart Mattson Sponsoring editor: Steve Schuetz Managing developmental editor: Gail Korosa Marketing manager: Richard Kolasa Media producer: Elizabeth Mavetz Lead project manager: Pat Frederickson Senior production supervisor: Michael R. McCormick Senior designer: Mary E. Kazak Photo research coordinator: Jeremy Cheshareck Photo researcher: David Tietz Supplement producer: Matthew Perry Senior digital content specialist: Brian Nacik Cover design: Lodge Design Cover image: Joseph Sohm; ChromoSohm Inc./Corbis Interior design: Ellen Pettengell Typeface: 10/12 Times Compositor: Cenveo Printer: Von Hoffmann Corporation Library of Congress Cataloging-in-Publication Data Fundamental financial accounting concepts / Thomas P. Edmonds... [et al.] 5th ed. p. cm. Includes index. ISBN Accounting. I. Edmonds, Thomas P. HF5635.F dc

3 edm89432_fm.qxd 9/30/04 3:17 PM Page iii Edmonds / Edmonds / McNair / Olds NOTE FROM THE AUTHORS Over the past 15 years, major changes in accounting education have impacted the way most college and university professors teach introductory accounting. We are gratified that our concepts approach has been so effective it has become a market leader in the change movement. The concepts approach takes traditional accounting to the next level. We not only cover debits and credits, but more importantly explain how those debits and credits impact financial statements. The text is well organized, covers the critical topics, achieves the advertised balance between theory and practice, and is an appropriate introductory financial accounting text for BOTH the future accounting major and non-accounting major. It gets away from the historic pure preparer s approach but doesn t go off the deep end. Robert Derstine Villanova University It has totally changed my attitude about teaching the first accounting course. Subject matter is much more teachable and easier to learn. Elizabeth V. Mulig Louisiana State University/Shreveport How have we become market leaders in the introductory accounting course? We look at ourselves as innovative traditionalists. We don t aim to radically transform accounting education, but instead to make it more effective. Students who use this text follow a different path toward the accomplishment of a conventional set of learning objectives. However, the path is easier to walk; and students complete the journey with a far greater understanding of accounting. In contrast to traditional textbooks, this is a concepts-based text that focuses on the big picture. Recording procedures and other details are presented after a conceptual foundation has been established. This approach enables students to understand rather than memorize. Just as a stable house rests on a solid foundation, technical competence and decision making skills must be supported by a strong conceptual framework. What do we mean by a concepts-based textbook? We mean the text stresses the relationships between business events and financial statements. The primary objective is to develop students who can explain how any given business event affects the income statement, balance sheet, and statement of cash flows. Do assets increase, decrease, or remain unchanged? What effect does the event have on liabilities, equity, revenue, expense, gains, losses, net income, and dividends? Furthermore, how does the event affect cash flows? In summary, the focus is on learning how business events affect financial statements. Balance Between Theory and Practice This text addresses the issues raised by advocates for change in accounting education. The big picture approach enables professors to focus on developing skills as well as covering content. Students who understand concepts are better able to communicate ideas and more effective at solving unstructured problems. Students who understand concepts are also better prepared to learn technical content. Students using this text will learn the basics of double-entry bookkeeping including debits and credits, journal entries, T-accounts, and trial balances. This text maintains an appropriate balance between skill development and technical competence. This is not a user or preparer approach. Indeed, the concepts approach serves both users and preparers. In order to function effectively in today s business world both preparers and users must understand event/statement relationships. By teaching concepts, you no longer have to choose between the interests of accounting majors and those of other business students. The conceptsapproach serves both groups. Implementing the concepts approach is surprisingly simple. Instead of teaching students to record transactions in journals or T-accounts, teach them to record transactions directly into financial statements. While this shift is easy for instructors, it represents a dramatic change from how students have traditionally studied accounting. Making a direct connection between business events and financial statements encourages students to analyze conceptual relationships rather than memorize procedures. Early in the course students develop a conceptual framework that supports critical thinking and communication. Students become interested in accounting issues and are motivated to learn. But don t take our word for it. With over 200 colleges and universities successfully making the change to the concepts approach, we feel confident you will experience the same success as many of your colleagues have across the country. We would like to thank all of those who have been supportive of our teaching philosophy, and we highly encourage you to contact the author team or your local McGraw-Hill/Irwin representative to learn more about our texts. Tom Edmonds Cindy Edmonds Frances McNair Phil Olds Nancy Schneider iii

4 edm89432_fm.qxd 9/30/04 3:17 PM Page iv Fundamental Financial Accounting Concepts ABOUT THE Thomas P. Edmonds Dr. Edmonds holds the Friends and Alumni Professorship in the Department of Accounting at the University of Alabama at Birmingham (UAB). He has been actively involved in teaching accounting principles throughout his academic career. Dr. Edmonds has coordinated the accounting principles courses at the University of Houston and UAB. He currently teaches introductory accounting in mass sections that frequently include more than 180 students. Dr. Edmonds has received five prestigious teaching awards including the UAB President s Excellence in Teaching Award and the distinguished Ellen Gregg Ingalls Award for excellence in classroom teaching. He has written a number of articles for many publications including Issues in Accounting; the Journal of Accounting Education; Advances in Accounting Education; Accounting Education: A Journal of Theory, Practice and Research; the Accounting Review; Advances in Accounting; the Journal of Accountancy; Management Accounting; the Journal of Commercial Bank Lending; the Banker s Magazine; and the Journal of Accounting, Auditing, and Finance. He has published four textbooks, five practice problems (including two computerized problems), and a variety of supplemental materials including study guides, working papers, and solutions manuals. Dr. Edmonds s writing is influenced by a wide range of business experience. He was a successful entrepreneur, worked as a management accountant for Refrigerated Transport, a trucking company, and worked in the not-for-profit sector as a commercial lending officer for the Federal Home Loan Bank. In addition, he has acted as a consultant to major corporations including First City Bank of Houston, AmSouth Bank in Birmingham, Texaco, and Cortland Chemicals. Dr. Edmonds began his academic training at Young Harris Community College in Young Harris, Georgia. He received a B.B.A. degree with a major in finance from Georgia State University in Atlanta, Georgia. He obtained an M.B.A. degree with a concentration in finance from St. Mary s University in San Antonio, Texas. His Ph.D. degree with a major in accounting was awarded by Georgia State University. Dr. Edmonds s work experience and academic training have enabled him to bring a unique user perspective to this textbook. Cindy D. Edmonds Cindy D. Edmonds, Ph.D., is an Associate Professor of Accounting at the University of Alabama at Birmingham. She serves as the coordinator of the introductory accounting courses at UAB. Dr. Edmonds received the 2001 Loudell Ellis Robinson Excellence in Teaching Award. Also, in 2000 and 2001 she was one of two School of Business faculty members nominated for the Ellen Gregg Ingalls Award for excellence in classroom teaching. She has written a variety of supplemental text materials including practice problems, a study guide, work papers, and test banks. Dr. Edmonds articles appear in numerous publications including Advances in Accounting Education, Journal of Education for Business, Journal of Accounting Regulation, Advances in Accounting, Management Accounting, CMA Journal, Disclosures, and Business & Professional Ethics Journal. Her manuscript "Running a City on a Shoe String" received a certificate of merit award from the Institute of Management Accountants. The manuscript was used by the City of Vestavia in its application for Moody's Municipal Bond Rating. Dr. Edmonds is heavily involved in service activities. She is the 2001 president of the Birmingham Chapter of the American Society of Women Accountants. Dr. Edmonds has worked in the insurance industry, in a manufacturing company, and in a governmental agency. This work experience has enabled her to bring a real-world flavor to her writing. Dr. Edmonds holds a B.S. degree from Auburn University, an M.B.A degree from the University of Houston and a Ph.D. degree from the University of Alabama. iv

5 edm89432_fm.qxd 10/5/04 4:05 PM Page v Edmonds / Edmonds / McNair / Olds AUTHORS Frances M. McNair Dr. McNair holds the KPMG Peat Marwick Professorship in Accounting at Mississippi State University (MSU). She has been involved in teaching principles of accounting for the past 12 years and currently serves as the coordinator for the principles of accounting courses at MSU. She joined the MSU faculty in 1987 after receiving her Ph.D. from the University of Mississippi. The author of various articles that have appeared in the Journal of Accountancy, Management Accounting, Business and Professional Ethics Journal, The Practical Accountant, Taxes, and other publications, she also coauthored the book The Tax Practitioner with Dr. Denzil Causey. Dr. McNair is currently serving on committees of the American Taxation Association, the American Accounting Association, and the Institute of Management Accountants as well as numerous School of Accountancy and MSU committees. Philip R. Olds Professor Olds is Associate Professor of Accounting at Virginia Commonwealth University (VCU). He serves as the coordinator of the introduction to accounting courses at VCU. Professor Olds received his A.S. degree from Brunswick Junior College in Brunswick, Georgia (now Costal Georgia Community College). He received a B.B.A. in Accounting from Georgia Southern College (now Georgia Southern University) and his M.P.A. and Ph.D. degrees are from Georgia State University. After graduating from Georgia Southern, he worked as an auditor with the U.S. Department of Labor in Atlanta, Georgia. A CPA in Virginia, Professor Olds has published articles in various professional journals and presented papers at national and regional conferences. He also served as the faculty adviser to the VCU chapter of Beta Alpha Psi for five years. In 1989, he was recognized with an Outstanding Faculty Vice- President Award by the national Beta Alpha Psi organization. Nancy Schneider Professor Schneider is Associate Professor of Accounting at Lynchburg College in central Virginia where she has served for many years as the lead instructor for the accounting principles courses. Since attending graduate school she has participated in the writing, reviewing, editing, checking, and revising of college-level accounting and finance textbooks, textbook supplements, and related teaching materials. She has a deep personal commitment to student learning and to finding and sharing ways to improve college teaching. She is a recipient of the Sydnor Award for Teaching Excellence in Business at Lynchburg College and is frequently nominated by students for the College Excellence in Teaching Award. Professor Schneider initiated and organizes a highly popular annual symposium in which professors across all disciplines at the College exchange good teaching ideas. She has made numerous presentations at local and regional conferences, often related to teaching strategies, and is the coauthor of articles published in professional journals. Professor Schneider s professional activities also include active membership on the board of her local chapter of the Institute of Management Accountants where she regularly involves students in professional accounting educational meetings. Prior to teaching accounting, she was an auditor with an international public accounting firm in Atlanta and an internal auditor for a large integrated oil and gas company in Houston. Professor Schneider has maintained an active license to practice as a certified public accountant since 1980, and became a certified management accountant in She is a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants. Professor Schneider received a Bachelor s degree in Mathematics Education with High Honors from the University of Florida in 1973, and a Master s degree in Professional Accountancy from Georgia State University in v

6 edm89432_fm.qxd 9/30/04 3:17 PM Page vi Fundamental Financial Accounting Concepts HOW DOES THE BOOK HELP STUDENTS SEE THE BIG PICTURE? Greatly benefited our students. They learn how business transactions affect financial position of a business without the debit/credits nuances. I think this is a great learning tool for intro students. They have no difficulty making the transition to Dr/Cr later in Chapter 4. Peter Theuri Northern Kentucky University I am a big supporter of the horizontal model! It is amazing what students know only by the end of chapter three. If a student were to drop the course at that point, they still would have a good foundational understanding of the four basic financial statements and accounting events. Linda Bell William Jewell College PRINCIPAL FEATURES Horizontal Financial Statements Model A horizontal financial statements model replaces the accounting equation as the predominant teaching platform in this text. The model arranges the balance sheet, income statement and statement of cash flows horizontally across a single line of text as shown below. The statements model approach enables students to more clearly see how accounting relates to real-world decision making. Under the traditional approach students learn to journalize a series of events and to present summarized information in financial statements. They never see how individual transactions affect financial statements. When students record transactions into a statements model, they see a direct connection between business events and financial statements. Most business people think if I take this particular action, how will it affect my financials, not if I do these fifteen things how will they be journalized. Accordingly, the statements model approach provides a learning experience that is more intuitive and relevant than the one provided by traditional teaching methodology. vi

7 edm89432_fm.qxd 9/30/04 3:17 PM Page vii Edmonds / Edmonds / McNair / Olds Establishing the Conceptual Framework Chapter 1 introduces the key components of the conceptual framework for financial accounting. Accruals are introduced in Chapter 2, deferrals in Chapter 3. The first three chapters use only non-technical terms (increase/decrease rather than debit/credit) to discuss the effects of events on the financial statements. Chapter 4 introduces recording procedures, including debits and credits. By the end of the first four chapters, students using this text will have been exposed to the same accounting content as those who use traditional books. After Chapter 4, the text demonstrates both the conceptual structure and the recording procedures in tandem. For example, the purchase of treasury stock would be shown as follows: For the most part students are very visual and it is important to see how events impact the various statements. As stated, this approach is simplified, but I can see that it would be easier for a student to understand a concept like buying and depreciating an asset using this format as opposed to having to look at several complete financial statements. Patricia Lopez Valencia Community College The Effects of Cash Flows Are Shown Through the Entire Text The statement of cash flows is introduced in the first chapter and included throughout the text. Students learn to prepare a statement of cash flows in the first chapter by learning to analyze each increase and decrease in the cash account. They can prepare a statement of cash flows by classifying each entry in the cash account as an operating, investing, or financing activity. Effects on Financial Statements Over Multiple Accounting Cycles The text also uses a vertical statements model that shows financial statements from top to bottom on a single page. This model displays financial results for consecutive accounting cycles in adjacent columns, thereby enabling the instructor to show how related events are reported over multiple accounting cycles. This is absolutely the best way to teach the SCF. Paul Clikeman University of Richmond Great; very logical. SCF is the least understood and appreciated by students. This focus keeps cash flows ever present and helps show relationship to other financial statements. George R. Violette University of Southern Maine Excellent! Many books don t talk about cash flows until the end of the book. James M. Lukawitz University of Memphis It is easy for students to follow and presents the information in a natural approach. Bruce Chase Radford University I agree with it completely. This is how it should be taught. You cannot understand accrual accounting without comparing/ contrasting cash flow. Irvin T. Nelson Utah State University vii

8 edm89432_fm.qxd 9/30/04 3:17 PM Page viii Fundamental Financial Accounting Concepts WHAT S NEW THIS EDITION? Revisions for Fundamental Financial Accounting Concepts are in response to extensive feedback from instructors and students. Through formal reviews, instructor and student comments and suggestions, and focus groups, we have responded with constructive changes. There are three significant features. Annual Report Projects Two annual reports accompany the text. The 2003 annual report for Harley-Davidson, Inc. is packaged separately with the text. The 2003 annual report for The Topps Company, Inc. is printed in Appendix B. In the Annual Report and Financial Statement Analysis Projects section (Appendix D) projects for each of these companies are included as well as a general purpose annual report project instructors can assign for any company s annual report. Comprehensive Problem to Integrate Concepts Across Chapters Chapters 5 through 11 include a comprehensive problem designed to integrate concepts across chapters. These problems help students understand interrelationships between various accounting concepts. The problem builds in each successive chapter, with the ending account balances in one chapter becoming the beginning account balances in the next chapter. The new manuscript exhibits a more personal approach in its writing style. This makes a big difference in it being readable. I compare it to the difference between reading a factual and informative textbook, to reading a personal letter or even an interesting novel. Steve Muller, Valencia Community College User-Friendly Writing Style Every chapter of the text has been completely rewritten in an easy to read and easy to comprehend writing style. The revised, student-friendly writing style is designed to encourage students to read the book. Overall revisions The presentation of material has been simplified. We have expanded coverage of the matching concept throughout the text. The text has been thoroughly updated to include all relevant changes in authoritative pronouncements. The exercises and problems have been thoroughly revised. Financial statement analysis is highlighted in each chapter under the heading The Financial Analyst. All real world data have been updated to reflect information contained in the companies most recent annual reports. There is an ethics case in the Analyze, Think, Communicate section of the end-of-chapter materials for each chapter. Check figures added to Problems Series A. viii

9 edm89432_fm.qxd 9/30/04 3:17 PM Page ix Edmonds / Edmonds / McNair / Olds Chapter specific changes Chapter 1 Curious Accountant vignette now features Coca-Cola Company. Coverage of the closing process and the vertical statements model moved from Chapter 1 to Chapter 2. Chapter 2 Curious Accountant vignette features Union Pacific Railroad. Coverage of the closing process and the vertical statements model moved from Chapter 1 to Chapter 2. We have included coverage of the Sarbanes-Oxley Act. New Reality Bytes on Enron Corporation. Chapter 3 Revised end-of-chapter material. Chapter 4 Change of title from The Recording Process to The Double-Entry Accounting System. We have included coverage of the Sarbanes-Oxley Act. New Reality Bytes on filing Form 8-K with the SEC related to American Airlines and September 11 World Trade Center attacks. Chapter 5 We have changed the coverage of cash discounts from the gross method to the net method. While most texts use the gross method, the net method is more intuitive and theoretically preferable, not to mention that it is the method used more frequently in practice. We have moved coverage of the periodic method to the appendix. As a result of advances in technology, the perpetual method is the dominent approach used in practice today. Chapter 6 (Formerly chapter 8) Chapter 5 is now followed immediately by coverage of advanced inventory topics (cost flow methods, lower of cost or market, and inventory errors). This change facilitates the growing practice of covering these two subjects back-to-back. Innocent inventory errors that are material in amount are highly unlikely in today s business environment. We have changed the write-up on inventory errors so as to couch the subject in terms of fraud prevention. Chapter 7 (Formerly chapter 6) Curious Accountant vignette now features WorldCom. Chapter 8 (Formerly chapter 7) Change in title from Advanced Topics: Receivables and Payables to Advanced Topics Related to Receivables. Curious Accountant now features Costco and Procter & Gamble. Coverage of accounting for discount notes moved to the appendix. Reviewers suggested that this subject is too technical for most professors to cover in an introductory accounting course. Chapter 9 New Reality Byes on Hewlett-Packard Company and Compaq Computer Corporation. Chapter 10 Curious Accountant now features Time Warner. Chapter 11 New Realty Bytes on Sarbanes-Oxley Act. Chapter 12 Updated Priceline Exhibit New Appendix B Topps Company Annual Report New Appendix C Summary of Financial Ratios New Appendix D Annual Report and Financial Statement Analysis Projects ix

10 edm89432_fm.qxd 9/30/04 3:17 PM Page x Fundamental Financial Accounting Concepts HOW DOES THE BOOK Real World Examples The Edmonds text provides a variety of thought-provoking, realworld examples of financial accounting as an essential part of the management process. There are descriptions of accounting practices from real organizations such as Coca-Cola, Union Pacific Railroad, Enron, General Motors, JCPenney, and Amazon.com. These companies are highlighted in blue in the text. The Curious Accountant Each chapter opens with a short vignette that sets the stage and helps pique student interest. These vignettes pose a question about a real-world accounting issue related to the topic of the chapter. The answer to the question appears in a separate sidebar a few pages further into the chapter. Focus on International Issues These boxed inserts expose students to international issues in accounting. Check Yourself These short question/answer features occur at the end of each main topic and ask students to stop and think about the material just covered. The answer follows to provide immediate feedback before students go on to a new topic. THE curious ACCOUNTANT If a person wishes to subscribe to Reader s Digest for one year (12 issues), the subscriber must pay for the magazines before they are actually published. Suppose Paige Long sends $12 to the Reader s Digest Association in September 2007 for a one-year subscription; she will receive her first issue in October. How should Reader s Digest account for the receipt of this cash? How would this event be reported on Reader s Digest s December 31, 2007, financial statements? (Answers on page 115.) CHAPTER opening In Chapter 2, we defined accruals as the recognition of revenue and expense before the receipt or payment of cash. In this chapter, you will learn that accrual accounting involves deferrals and allocations as well as accruals. A deferral involves recognizing a revenue or expense at some time after cash has been collected or paid. For example, if a business collects cash in 2001 for services it will perform in 2002, the revenue is recognized in 2002 even though the cash was collected in When recognition comes before cash is exchanged, the event is an accrual. When focus on INTERNATIONAL recognition comes after cash ISSUES is exchanged, the event is a deferral. Deferred amounts may referred be recognized to as generally over accepted several accounting principles. periods. The process of assigning the total deferral to Is There Global GAAP? different accounting periods accounting is called rules allocation. described in To this illustrate, text are based assume on GAAP an attorney used received a retainer fee of $30,000 As explained in this chapter, financial reporting is a in the United States. Not all economies throughout the world use from a client at the beginning of In exchange for the cash, the attorney agreed to act as a trustee for the client s measurement and communication discipline based on rules the same accounting rules. Although there are many similarities children for the years 2001, among 2002, the accounting and principles The recognition used in different of the $30,000 countries, of revenue would be deferred until it was earned. A portion of the revenue would then be allocated to each of the three accounting periods based on the amount there also are major differences. Accountants have made attempts to create international accounting standards, but individual countries have retained the authority to establish their own GAAP. Simply put, each country has its own GAAP; there is no single global GAAP. Examples of how financial reporting in other countries differs from that in the United States are presented throughout this book. Accounting rules differ among countries for a variety of reasons, including the economic and legal environments in each country and how the GAAP in that country is established. Generally accepted accounting principles in the United States are primarily established by the Financial Accounting Standards Board (FASB). The FASB is a nongovernment rule-making body established by the accounting profession. In countries such as Germany and Japan, for example, the GAAP is established by government bodies. In these countries GAAP is established more like the way federal laws and regulations are established in the United States. Furthermore, in the United States any connection between GAAP established by the FASB and tax accounting rules established by Congress and the Internal Revenue Service (IRS) is coincidental, not deliberate. In some countries there is a close connection between tax accounting rules and GAAP. $1,500 of the $18,000 cash received is recognized as revenue in 2006 ($1,500 is included in the $168,500 of revenue reported on the income statement) but the entire $18,000 is reported in the operating activities section of the statement of cash flows ($18,000 is included in the $147,000 cash receipts from customers). Trace the effects of these transactions to the financial statements. x These are very effective and I have used some of them for class discussions these boxes capture the interest of the students since they see the application to the real world. Jacqueline Burke Hofstra University On January 1, 2002, Lambert Company paid $28,000 cash to purchase office furniture. The furniture has a $3,000 salvage value and a five-year useful life. Explain how Lambert would report this asset purchase on the 2002 statement of cash flows. Also, determine the amount of depreciation expense and accumulated depreciation Lambert would report in the 2004 financial statements. Answer Lambert would report a $28,000 cash outflow in the investing activities section of the 2002 statement of cash flows. During 2004 and every other year of the asset s useful life, Lambert would report $5,000 ([$28,000 $3,000] 5) of depreciation expense on the income statement. The accumulated depreciation would increase by $5,000 each year of the asset s useful life. As of December 31, 2004, Lambert would report accumulated depreciation on the balance sheet of $15,000 (3 years $5,000 per year). THE FINANCIAL ANALYST Check Yourself 3 3

11 edm89432_fm.qxd 9/30/04 3:17 PM Page xi Edmonds / Edmonds / McNair / Olds MOTIVATE STUDENTS? business that you pursue. This chapter introduced the role of accounting in society and business: to provide information helpful to operating and evaluating the performance of organizations. Accounting is a measurement discipline. To communicate effectively, users of accounting must agree on the rules of measurement. Generally accepted accounting principles (GAAP) constitute the rules used by the accounting profession in the United States to govern financial reporting. GAAP is a work in progress that continues to evolve. This chapter has discussed eight elements of financial statements: assets, liabilities, equity, common stock (contributed capital), revenue, expenses, dividends (distributions), and net income. The elements represent broad classifications reported on financial statements. Four basic financial statements appear in the reports of public companies: the balance sheet, the income statement, the statement of changes in stockholders equity, and the statement of cash flows. The chapter discussed the form and content of each statement as well as the interrelationships among the statements. This chapter introduced a come horizontal statement, financial the statement statements of model changes as in a tool stockholders to help you equity, understand how business events and the statement of cash flows. affect The a set chapter of financial discussed statements the form This and model content is of used each through- statement as well as the interrelationships among the statements. This chapter introduced a horizontal financial statements model as a tool to help you understand how business events affect a set of financial statements. This model is used throughout the text. You should carefully study this model before proceeding to Chapter 2. a look back,, As noted in the text discussion, independent auditors are primarily responsible to the investing public, not to the company that hires and pays them. In 2002 numerous accounting scandals involving some very large public companies caused investors to question whether or not the external auditors really were independent. The public learned that external audit firms were often also serving as consultants to the companies they audited. The fees earned for consulting services were sometimes significantly higher than the fees earned auditing the same company. These arrangements caused many people, including members of Congress, to doubt that auditors would take a tough stance with a company s management over financial reporting issues if doing so might threaten future consulting fees. No situation demonstrated this concern more than that of Enron. The well-publicized accounting problems that led to Enron s downfall were equally devastating for its auditor, Arthur Andersen. Within six months after Enron s troubles became public knowledge, Arthur Andersen lost over half its public company audit clients and almost two-thirds of its employees. Further, Andersen was convicted of obstruction of justice by a Houston jury and was told by the SEC that it could no p longer audit public p companies. The partner in charge of the $15,000 (3 years $5,000 per Enron year). audit was fired and pled guilty to obstruction of justice charges; the previous year, his compensation exceeded $1 million. In addition to the consequences mentioned above, civil lawsuits were filed against Arthur Andersen, and legal experts believe its partners, even those not involved in the Enron audit, will likely be held personally liable for any damages resulting from inadequate THE FINANCIAL audits. Congress ANALYST has given CPAs a legal monopoly to provide independent audits for public companies. However, their protected Suppose a company earned net income of $1,000,000. Is the company s performance good or status does not shelter them from the consequences of their actions. As poor? If the company is General Motors, the performance is poor. If it is a small shoe store, Topic Tackler the performance is outstanding. So, how do financial analysts compare the performance of differing size companies? Financial ratios are very helpful in this regard. PLUS 3 2 a look forward To keep matters as simple as possible and to focus on the interrelationships among financial statements, this chapter considered only cash events. Obviously, many real-world events do not involve an immediate exchange of cash. For example, customers use telephone service throughout the month without paying for it until the next month. Such phone usage represents an expense in one month with a cash exchange in the following month. Events such as this are called accruals. Understanding the effects that accrual events have on the financial statements is the subject of Chapter 2. Reality Bytes This feature provides examples or expansions of the topics presented by highlighting companies and showing how they use the accounting concepts discussed in the chapter to make business decisions. The Financial Analyst Financial statement analysis is highlighted in each chapter under this heading. Topic Tackler Plus A logo indicates a topic explained on the Topic Tackler Plus DVD. The DVD includes two hard-to-learn topics for each chapter explained with video, PowerPoint, practice quizzes, self tests, and a demonstration problem walkthrough. A Look Back/A Look Forward Students need a roadmap to make sense of where the chapter topics fit into the whole picture. A Look Back reviews the chapter material and a Look Forward introduces new material to come in the next chapter. xi

12 edm89432_fm.qxd 9/30/04 3:17 PM Page xii Fundamental Financial Accounting Concepts HOW CAN TECHNOLOGY Our technology resources help students and instructors focus on learning success. By using the Internet and multimedia students get book-specific help at their convenience. Compare our technology to those of any other book and we re confident you ll agree that Fundamental Financial Accounting Concepts has the best in the market. Teaching aids make in-class presentations easy and stimulating. These aids give you more power than ever to teach your class the way you want. ONEpass OnePass McGraw-Hill/Irwin offers a complete range of technology to support and complement Fundamental Financial Accounting Concepts. OnePass integrates all of the text s multimedia resources. With just one access code, students can obtain state of the art study aids, including Homework Manager, Net Tutor and an online version of the text. McGraw-Hill s Homework Manager is a Web-based supplement that duplicates problem structures directly from the end-of-chapter material in your textbook, using algorithms to provide a limitless supply of online self-graded practice for students, or assignments and tests with unique versions of every problem. Say goodbye to cheating in your classroom; say hello to the power and flexibility you ve been waiting for in creating assignments. All Exercises and Problems in Series A are available with Homework Manager. McGraw-Hill s Homework Manager is also a useful grading tool. All assignments can be delivered over the Web and are graded automatically, with the results stored in your private grade book. Detailed results let you see at a glance how each student does on an assignment or an individual problem you can even see how many tries it took them to solve it. Students receive full access to McGraw-Hill s Homework Manager when they purchase One Pass. xii

13 edm89432_fm.qxd 9/30/04 3:17 PM Page xiii Edmonds / Edmonds / McNair / Olds HELP STUDENT SUCCESS? Topic Tackler Plus DVD This software is a complete tutorial focusing on areas in the course that give students the most trouble. It provides help on two key topics for each chapter by use of Video clips PowerPoint slide shows Interactive exercises Self-grading quizzes The DVD also includes the Self-Study Review Problems in the book presented in an audio-narrated PowerPoint slide presentation. A logo in the text marks the topic given further coverage in Topic Tackler Plus. Online Learning Center (OLC) More and more students are studying online. That s why we offer an Online Learning Center (OLC) that follows Fundamental Financial Accounting Concepts chapter by chapter. The OLC now includes the following: Excel Spreadsheets Spreadsheet Tips Text Updates Glossary Key Term Flashcards Chapter Learning Objectives Interactive Quizzes E Lectures (audio-narrated PowerPoints) Additional Check Figures Mobile Resources Topic Tackler Plus For instructors, the book s secured OLC contains essential course materials. You can pull all of this material into your PageOut course syllabus or use it as part of another online course management system. It doesn t require any building or maintenance on your part. It s ready to go the moment you type in the URL. Instructor s Manual Solutions Manual Solutions to Excel Template Assignments Sample Syllabi Transition Notes Text Updates xiii

14 edm89432_fm.qxd 9/30/04 3:17 PM Page xiv Fundamental Financial Accounting Concepts NetTutor Many students work or have other commitments outside of class, making it difficult for them to get help with their questions during regular school hours. NetTutor is a breakthrough program that connects your students with qualified tutors online so they can get help at their convenience. Students can communicate with tutors in a variety of ways: The Live Tutor Center, where students can view tutorcreated spreadsheets, T-accounts, and instant responses to their questions The Q&A Center, which allows students to submit questions anytime and receive answers within 24 hours. ALEKS ALEKS for the Accounting Cycle and ALEKS for Financial Accounting ALEKS (Assessment and Learning in Knowledge Spaces) provides precise assessment and individualized instruction in the fundamental skills your students need to succeed in accounting. ALEKS motivates your students because it can tell what a student knows, doesn t know, and is most ready to learn next. ALEKS uses an artificial intelligence engine to exactly identify a student s knowledge of accounting. To learn more about adding ALEKS to your accounting course, visit The Archive Center that lets students browse for answers to previously asked questions. They can also search for questions pertinent to a particular topic. With OnePass, students receive unlimited access to NetTutor for the length of the course. Carol Yacht s General Ledger & Peachtree Complete 2005 CD The CD-ROM includes fully functioning versions of McGraw-Hill s General Ledger Application software as well as Peachtree Complete Problem templates are included that allow you to assign text problems for working in either Yacht s General Ledger or Peachtree Complete These problems are indicated by the GL logo. xiv

15 edm89432_fm.qxd 9/30/04 3:17 PM Page xv Edmonds / Edmonds / McNair / Olds CPS Classroom Performance System This is a revolutionary system that brings ultimate interactivity to the classroom. CPS is a wireless response system that gives you immediate feedback from every student in the class. CPS units include easy-to-use software for creating and delivering questions and assessments to your class. With CPS you can ask subjective and objective questions. Then every student simply responds with their individual, wireless response pad, providing instant results. CPS is the perfect tool for engaging students while gathering important assessment data. Instructor s Resource CD This CD includes electronic versions of the Instructor s Manual, Solutions Manual, Test Bank, and Computerized Test Bank, as well as PowerPoint slides, video clips, and all exhibits in the text in a PowerPoint format. Online Course Management WebCT, ecollege, and Blackboard We offer Fundamental Financial Accounting Concepts content for complete online courses. You can customize the Online Learning Center content and author your own course materials. No matter which online course solution you choose, you can count on the highest level of support. Our specialists offer free training and answer any question you have through the life of your adoption. PageOut McGraw-Hill s Course Management System Pageout is the easiest way to create a Website for your accounting course. Just fill in a series of boxes with plain English and click on one of our professional designs. In no time your course is online with a Website that contains your syllabus. If you need help, our team of specialists is ready to take your course materials and build a custom website to your specifications. To learn more visit Knowledge Gateway Knowledge Gateway is an all-purpose service and resource center for instructors teaching online. While training programs from WebCT and Blackboard will help teach you their software, only McGraw-Hill/Irwin has services to help you actually manage and teach your online course, as well as run and maintain the software. To see how these platforms can assist your online course, visit xv

16 edm89432_fm.qxd 9/30/04 3:17 PM Page xvi Fundamental Financial Accounting Concepts HOW ARE CHAPTER Regardless of the instructional approach, there is no shortcut to learning accounting. Students must practice to master basic accounting concepts. The text includes a prodigious supply of practice materials and exercises and problems. Self-Study Review Problem These representative example problems include a detailed, worked-out solution and provide another level of support for students before they work problems on their own. These review problems are included on the Topic Tackler Plus DVD in an animated audio presentation. Exercise Series A & B and Problem Series A & B There are two sets of problems and exercises, Series A and B. Instructors can assign one set for homework and another set for classwork. Check figures The figures provide a quick reference for students to check on their progress in solving the problem. These are included for all problems in Series A. Excel Many exercises and problems can be solved using the Excel spreadsheet templates contained on the text s Online Learning Center. A logo appears in the margins next to these exercises and problems for easy identification. General Ledger and Peachtree Software If a problem can be solved using our General Ledger or Peachtree software, a logo is shown. SELF-STUDY REVIEW PROBLEM Walberg Company experienced the following accounting events during Started operations in January 2003 when it acquired $22,000 cash by issuing common stock. 2. During the 2003 period, recognized $246,000 of revenue on account. 3. Collected $222,000 cash from accounts receivable. 4. Paid operating expenses of $205,000 in cash. 5. Paid a $14,000 cash dividend to stockholders. 6. On April 1, 2003, borrowed $18,000 by issuing a note to National Bank. 7. On December 31, 2003, adjusted the accounting records to recognize interest expense incurred on the note it had issued to National bank. The note had a 10 percent annual interest rate and a one-year term to maturity. Interest is due in cash on the maturity date (March 31, 2004). Walberg Company experienced the following accounting events during The Double-Entry Accounting System 191 PROBLEM 4 29A Two Complete Accounting Cycles L.O. 3 7 Pacific Machining experienced the following events during Started operations by acquiring $50,000 of cash from the issue of common stock. 2. Paid $6,000 cash in advance for rent during the period from February 1, 2004, to February 1, Received $4,800 cash in advance for services to be performed evenly over the period from September 1, 2004, to September 1, b. Ending Cash Balance, 2004: CHECK FIGURES $55, Performed services for customers on account for $65,200. g. Net Income, 2005: $28, Incurred operating expenses on account of $31, Collected $56,900 cash from accounts receivable. 7. Paid $22,000 cash for salaries expense. 8. Paid $28,000 cash as a partial payment on accounts payable. Adjusting Entries 9. Made the adjusting entry for the expired rent. (See Event 2.) 10. Recognized revenue for services performed in accordance with Event Recorded $2,100 of accrued salaries at the end of Events for Paid $2,100 cash for the salaries accrued at the end of the previous year. 2. Performed services for cash, $40, Borrowed $20,000 cash from the local bank by issuing a note. 4. Paid $25,000 cash to purchase land. 5. Paid $5,400 cash in advance for rent during the period from February 1, 2005, to February 1, Performed services for customers on account for $82, Incurred operating expenses on account of $49, Collected $76,300 cash from accounts receivable. 9. Paid $48,000 cash as a partial payment on accounts payable. 10. Paid $41,000 cash for salaries expense. 11. Paid a $5,000 cash dividend to the stockholders. Adjusting Entries 12. Recognized revenue for services performed in accordance with Event 3 in Made the adjusting entry for the expired rent. (Hint: Part of the rent was paid in 2004.) 14. Recorded accrued interest. The note was issued on March 1, 2005, for a one-year term and had an interest rate of 9 percent (see Event 3). Required a. Record the events and adjusting entries for 2004 in general journal form. b. Post the events for 2004 to T-accounts. c. Prepare a trial balance for d. Prepare an income statement, statement of changes in stockholders equity, balance sheet, and statement of cash flows for e. Record the entries to close the 2004 temporary accounts to Retained Earnings in the general journal and post to the T-accounts. f. Prepare an after-closing trial balance for December 31, g. Repeat Requirements a through f for PROBLEM 4 30A Identifying Accounting Events From Journal Entries Required The following information is from the records of Swan Design. Write a brief description of the accounting event represented in each of the general journal entries. Date Account Titles Debit Credit Jan. 12,500 1 Cash Common Stock 12,500 Supplies Feb. 10 1,550 Accounts Payable 1,550 Cash Mar. 1 13,000 Unearned Revenue 13,000 ex cel L.O. 2, 7 continued xvi

17 edm89432_fm.qxd 9/30/04 3:17 PM Page xvii Edmonds / Edmonds / McNair / Olds CONCEPTS REINFORCED? 48 Chapter 1 c. Calculate the company s price-earnings ratio for all three years. d. Based on the data shown in Exhibit 1 16, classify the price-earnings ratio as high, medium, or low. e. Explain the size of the price-earnings ratio. ANALYZE, THINK, COMMUNICATE ATC 1 1 BUSINESS APPLICATIONS CASE Understanding Real World Annual Reports Analyze, Think, Communicate (ATC) Each chapter includes an innovative section entitled Analyze, Think, Communicate (ATC). This section contains: The Topps Company, Inc. Harley-Davidson, Inc. ATC 1 2 Required Part 1 Use the Topps Company s annual report in Appendix B to answer the following questions. a. What was Topps net income for 2003? b. Did Topps net income increase or decrease from 2002 to 2003, and by how much? c. What was Topps accounting equation for 2003? d. Which of the following had the largest percentage increase from 2002 to 2003: net sales, cost of sales, or selling, general, and administrative expenses? Show all computations. Required Part 2 Use the Harley-Davidson s annual report that came with this book to answer the following questions. a. What was Harley-Davidson s net income for 2003? b. Did Harley-Davidson s net income increase or decrease from 2002 to 2003, and by how much? c. What was Harley-Davidson s accounting equation for 2003? d. Which of the following had the largest percentage increase from 2002 to 2003: net revenue, cost of goods sold, or selling, general, and engineering expenses? Show all computations. GROUP ASSIGNMENT Missing Information The following selected financial information is available for J&G, Inc. Amounts are in millions of dollars. Harley-Davidson, Inc. The Topps Company, Inc. Business application cases related to the annual reports from Harley- Davidson and Topps Company Income Statements Revenue $ 661 $1,307 (a) 894 $ $ Cost and (a) (a) (1,859) (769) Expenses Income from Continuing Operations (b) (a) Unusual Items (b) (b) Net Income 7 (b) $ $ $ $ Writing assignments Balance Sheets Assets Cash and Marketable Securities $ 249 $1,247 $ (c) $ 419 Other Assets 1,661 (c) 1,226 (c) Total Assets 1,910 $2,904 $(d) $1,418 Liabilities $(c) $(d) $907 $(d) Stockholders Equity Common Stock (e) 313 Retained Earnings (d) (e) 684 (e) Total Stockholders Equity 1,062 1,342 (f) 1,040 Total Liabilities and Stockholders Equity $1,910 $(f) $1,906 $1,418 Group exercises Required a. Divide the class into groups of four or five students each. Organize the groups into four sections. Assign Task 1 to the first section of groups, Task 2 to the second section, Task 3 to the third section, and Task 4 to the fourth section. Group Tasks (1) Fill in the missing information for (2) Fill in the missing information for (3) Fill in the missing information for (4) Fill in the missing information for Ethics cases Internet assignments column for each company. Note the new calculated amounts on the income statement and in the ratios. Which company s profits and returns are more sensitive to inventory price hikes? Excel spreadsheet applications COMPREHENSIVE PROBLEM The following information is available for Pacilio Security Systems Sales and Service for 2005, its first year of operations. Pacilio sells security systems and provides 24-hour alarm monitoring service. Pacilio sells two types of alarm systems, standard and deluxe. The following summary transactions occurred during (Round calculations to the nearest whole dollar.) 1. Acquired $50,000 cash from the issue of common stock. 2. Rented a building for a period of 12 months. On March 2, 2005, paid $6,000 for one year s rent in advance. 3. Purchased $800 of supplies with cash to be used over the next several months by the business. 4. Purchased 50 standard alarm systems for resale at a list price of $12,245 and 20 deluxe alarm systems at a list price of $10,204. The alarm systems were purchased on account with the terms 2/10 n/30. Comprehensive Problem Beginning in Chapter 5, a comprehensive problem builds in each successive chapter, with the ending account balances in one chapter becoming the beginning account balances in the next chapter. xvii

18 edm89432_fm.qxd 9/30/04 3:17 PM Page xviii Fundamental Financial Accounting Concepts SUPPLEMENTS for Instructors Instructor s Resource CD ISBN This CD includes electronic versions of the Instructor s Manual, Solutions Manual, Test Bank, and computerized Test Bank, as well as PowerPoint slides, video clips, all exhibits in the text in PowerPoint, and spreadsheet templates with solutions. This CD-ROM makes it easy for instructors to create multimedia presentations. Instructor s Transition CD ISBN How do I get started teaching with this innovative material? We ve provided help with this transition CD-ROM. It includes a video of Tom Edmonds explaining how he teaches the course and uses the horizontal statements model. It also demonstrates how to integrate the technology available with the text, and provides transition notes on how to convert your notes from other financial texts. Solutions Transparencies ISBN Transparencies are prepared in easy-to-read 14-point bold type. They are exact images of the answers provided in the solutions manual and are consistent with the forms contained in the working papers. This ensures congruence between your class presentations and the follow-up exposure that students attain when they view the solutions manual or use the working papers. Instructor s Manual ISBN (Also available on the password-protected Instructor Online Learning Center (OLC) and Instructor s Resource CD.) This comprehensive manual includes step-by-step, explicit instructions on how the text can be used to implement alternative teaching methods. It also provides guidance for instructors who use the traditional lecture method. The guide includes lesson plans and demonstration problems with student work papers, as well as solutions. It was prepared by Tom Edmonds and Nancy Schneider. Solutions Manual ISBN (Also available on the password-protected Instructor Online Learning Center (OLC) and Instructor Resource CD) Prepared by the authors, the manual contains complete solutions to all the text s end-of-chapter exercises, problems, and cases. Test Bank ISBN (Also available on the Instructor s Resource CD) This test bank in Word format contains multiple-choice questions, essay questions, and short problems. Each test item is coded for level of difficulty and learning objective. In addition to an expansive array of traditional test questions, the test bank includes new types of questions that focus exclusively on how business events affect financial statements. It was prepared by Steve Muller of Valencia Community College. Computerized Test Bank (Available on the Instructor s Resource CD) This test bank utilizes McGraw-Hill s testing software to quickly create customized exams. This user-friendly program allows instructors to sort questions by format; edit existing questions or add new ones. It also can scramble questions for multiple versions of the same test. PowerPoint Presentation (Available on the Online Learning Center and Instructor s Resource CD-ROM) These audio-narrated slides can serve as interactive class discussions and were prepared by Jon A. Booker and Charles W. Caldwell of Tennessee Technological University and Susan Galbreath of David Lipscomb University. xviii

19 edm89432_fm.qxd 9/30/04 3:17 PM Page xix Edmonds / Edmonds / McNair / Olds SUPPLEMENTS for Students One Pass One Pass integrates all of the text s multimedia resources. With just one access code, students can obtain state of the art study aids, including Homework Manager, NetTutor and an online version of the text. Homework Manager This web-based software duplicates problem structures directly from the end-of-chapter material in the textbook. It uses algorithms to provide a limitless supply of self-graded practice for students. It shows students where they made errors. All Exercises and Problems in Series A are available with Homework Manager. Study Guide ISBN Each chapter contains a review and explanation of the chapter s learning objectives, as well as multiple-choice problems and short exercises. Unique to this Study Guide is a series of problems that require students to indicate how accounting events affect the elements of financial statements. The guide includes appropriate working papers and a complete set of solutions. Working Papers ISBN Working papers are available to direct students in solving text assignments. Computerized Practice Sets Wheels Exquisite, Level 1 Student ISBN Instructor ISBN Gold Run Snowmobile Student ISBN Instructor ISBN Topic Tackler Plus DVD This tutorial offers a virtual helping hand in understanding the most challenging topics in the financial accounting course. Through a step-by-step sequence of video clips, PowerPoint slides, interactive practice exercises, and self tests, Topic Tackler Plus offers help on two key topics for each chapter. These topics are indicated by a logo in the text. Another component on the DVD takes the Self-Study Review Problem in the book and demonstrates how to solve it in an animated audio presentation. Carol Yacht s General Ledger & Peachtree Complete 2005 CD ISBN This software package includes both an easy-to-use general ledger software tool and a real-world accounting package on one CD-ROM. It will help students learn how to record transactions and create financial statements. Logos in the text highlight selected end-of-chapter problems where both the general ledger software and Peachtree Complete 2005 software are available to help students work through the problem. Excel Templates (Available on the Online Learning Center (OLC) These templates allow students to develop spreadsheet skills to solve selected assignments identified by an icon in the endof-chapter material. E Lectures (Available on the Online Learning Center (OLC) These PowerPoint slides cover key chapter topics in an audionarrated presentation sure to help students learn. These were prepared by Jon A. Booker and Charles W. Caldwell of Tennessee Technological University and Susan Galbreath of David Lipscomb University. ALEKS for Financial Accounting ISBN ALEKS for the Accounting Cycle ISBN Online Learning Center (OLC) See page xi for details Granite Bay Jet Ski, Level 2 Student ISBN Instructor ISBN xix

20 edm89432_fm.qxd 9/30/04 3:17 PM Page xx Fundamental Financial Accounting Concepts ACKNOWLEDGEMENTS Our grateful appreciation is extended to those who reviewed previous editions: Special thanks to the talented people who prepared the supplements. These take a great deal of time and effort to write and we appreciate their efforts. Steve Muller of Valencia Community College prepared the Test Bank and Self-Review Problem PowerPoint slides. Leonard Stokes of Siena College wrote the online quizzes. Linda Schain of Hofstra University developed the Topic Tackler Plus DVD. Jack Terry of ComSource Associates prepared the Excel templates and General Ledger Accounting Software. Carol Yacht prepared the Peachtree templates. Jon Booker and Charles W. Caldwell both of Tennessee Technological University, and Susan C. Galbreath of David Lipscomb University did the PowerPoint presentation. We also thank our accuracy checkers for checking the text manuscript and solutions manual. They include Kim Temme of Maryville University and Nina Collum of Mississippi University for Women. A special thanks to Linda Bell of William Jewell College for her contribution to the Financial Statement Analysis material that appears in Appendix D. We are deeply indebted to our sponsoring editor, Steve Schuetz. His direction and guidance have added clarity and quality to the text. We especially appreciate the efforts of our developmental editor, Gail Korosa. Gail has coordinated the exchange of ideas among our class testers, reviewers, copy editor, and error checkers; she has done far more than simply pass along ideas. She has contributed numerous original suggestions that have enhanced the quality of the text. Our editors have certainly facilitated our efforts to prepare a book that will facilitate a meaningful understanding of accounting. Even so, their contributions are to no avail unless the text reaches its intended audience. We are most grateful to Rich Kolasa and Jackie Powers and the sales staff for providing the informative advertising that has so accurately communicated the unique features of the concepts approach to accounting educators. Many others at McGraw-Hill/Irwin at a moment s notice redirected their attention to focus their efforts on the development of this text. We extend our sincere appreciation to Pat Fredrickson, Elizabeth Mavetz, Michael McCormick, Mary Kazak, Jeremy Cheshareck, Matt Perry and Erwin Llereza. We deeply appreciate the long hours that you committed to the formation of a high-quality text. Thomas P. Edmonds Cindy D. Edmonds Frances M. McNair Philip R. Olds Nancy W. Schneider We would like to express our appreciation to the people who have provided assistance in the development of this textbook. We express our sincere thanks to the following individuals who provided extensive reviews for the fifth edition: Reviewers Mary Allen, Boise State University Charles Baril, James Madison University Linda Bell, William Jewell College Rodger Brannan, University of Minnesota, Duluth Radie Bunn, Southwest Missouri State University Jacqueline Burke, Hofstra University Bruce Chase, Radford University Ginger Clark, University of Cincinnati Paul Clikeman, University of Richmond Wagih Dafashy, College of William & Mary Laura DeLaune, Louisiana State University Robert Derstine, Villanova University Lola Dudley, Eastern Illinois University David Fordham, James Madison University Ken Fowler, San Jose State University Lucille Genduso, Nova Southeastern University John Gould, Western Carolina University Jan Holmes, Louisiana State University Scott Jerris, San Francisco State University. William Link, University of Missouri, St. Louis Patricia Lopez, Valencia Community College James Lukawitz, University of Memphis Dwight McIntyre, Clemson University Dawn McKinley, William Rainey Harper College Elizabeth Minbiole, Northwood University Elizabeth Mulig, Louisiana State University, Shreveport Steven Muller, Valencia Community College Carol Murphy, Quinsigamond Community College Irvin Nelson, Utah State University Ashton Oravetz, Tyler Junior College Craig Reeder, Florida A&M University Patricia Robinson, Johnson and Wales University Cindy Seipel, New Mexico State University Talitha Smith, Auburn University Barbara Squires, Corning Community College Sue Stickland, University of Texas, Arlington Ellen Sweatt, Georgia Perimeter College Peter Theuri, Northern Kentucky University Donna Ulmer, St. Louis Community College, Meramec Denise Dickins Veitch, Florida Atlantic University George Violette, University of Southern Maine Sharon Walters, Morehead State University Andrea Weickgenannt, Northern Kentucky University T. Sterling Wetzel, Oklahoma State University, Stillwater Alan Winters, Clemson University Gail Wright, Bryant College Haiwen Zhang, University of Minnesota xx