PRINCIPLESOF A C C O U N T I N G FOURTH EDITION Volume I 'A* Version Chapters 1-14 1 Belverd E. Needles, Jr. Ị PhlX, CP.A., C.M.A. Arthur Andersen & Co. AJumni Distin cmished Professor oi Accoi DePaul University Henry R. Anderson Ph.D., CP.A., CM.A. Professor of Accounting Director, School of Accounting University of Central Florida James c, Caldwell Ph.D.. CP A Partner, Change Management Service Andersen Consulting Dallas/Fort Worth GIFT FROM FEED THE CHILDREN NOT FOR RESALE Houghton Mifflin Company Boston Dallas Geneva, Illinois Palo Alto PrinCQtoft* NÉ#4i
CONTENTS Note: The topic of income tax is integrated throughout the book- It it covered at those points where it is relevant to the discussion. PART ONE The Basic Accounting Model 1 Accounting Ễl ấn Information System Accounting Defined Accounting Information and Decision Making Decision Makers: The Users of Accounting Information Management 6/ Users with Dừect Financial Interest 8/ Users with an ỉndứect Financial Interest 8 Financial and Management Accounting Generally Accepted Accounting Principles 10/ Organizations That Influence Current Practice 10 Accounting Measurement What Is to Be Measured? 12/ Business Transactions as the Object of Measurement 13 Money Measure 13/ The Concept of Separate Entity 13 Forms of Business Organization Sole Proprietorships 15/ Partnerships 15 Corporations 15 Financial Position and the Accounting Equation Assets 16/ Liabilities 16 Owner's Equity 17 Some Illustrative Transactions 18 Accounting Communication Through Financial Statements The Income Statement 24' The Statement of Owner's Equity 24 The Balance Sheet 26/ The Statement of Cash Flows 26 Relationships Among the Four Statements 26 Professional Ethics and the Accounting Profession Management Accounting 28/ Public Accounting 29/ Government and Other Not-for- Profit Accounting 32' Accounting Education 32 Merrill Lynch & Co. 44 Murphy Lawn Services Company 48 2 4 12 14 16 22 27 33 39 XI
xu Contents 2 The Double-Entry System S 1 Measurement Issues The Recognition Issue 51/ The Valuation Issue 52/ The Classification Issue 53 Accounts Types of Commonly Used Accounts 55/ Titles of Accounts 58 The Double-Entry System: The Basic Method of 59 Accounting The T Account 59/ The T Account Illustrated 60/ Analysis of Transactions 60/ Transaction Analysis Illustrated 62/ Summary of Transactions 67 Recording Transactions 68 The Journal 68/ The General Journal 68/ The Ledger Account Form 70/ Relationship Between the Journal and the Ledger 71 The Trial Balance 73 Some Notes on Presentation Techniques 75 82 First Chicago Corporation 88 Ruiz Repair Service Company 92 The following computer-assisted practice sets may be started after Chapter 2: Parks Computer Company Matthew Sports Company Cooks Solar Energy Systems, Second Edition Sounds Abound 3 Business Income and Adjusting Entries 98 The Measurement of Business Income 98 Net Income 99/ The Accounting Period Issue 100/ The Continuity Issue 101/ The Matching Issue 102/ Accrual Accounting 102 The Adjustment Process 103 Apportioning Recorded Expenses Between Two or More Accounting Periods (Deferrals) 105/ Apportioning Recorded Revenues Between Two or More Accounting Periods (Deferrals) 109/ Unrecorded or Accrued Revenues 110/ Unrecorded or Accrued Expenses 111/ Using the Adjusted Trial Balance to Prepare Financial Statements 112 The Importance of Adjustments in Accounting 113 Correcting Errors 115 ^ 53
Cont A Note About Journa! Entries Walt Disney Produd Ịp^ỆỊP Financial I >ei ^^h^ệsê Lockyer Systems Company 135 116 116 125 4 PART TWO Extensions of the Basic Accounting Model 4 Completing the Accounting Cycle Overview of the Accounting System The Work Sheet: A Tool of Accountants Steps in Preparing the Work Sheet Uses of the Work Sheet Preparing the Financial Statements 151/ Recording the Adjusting Entries 153/ Recording the Closing Entries 153 Required Closing Entries Closing the Credit Balances from Income Statement Accounts to the Income Summary 155 Closing the Debit Balances from Income Statement Accounts to the Income Summary 156/ Closing the Income Summary Account to the Capital Account 157/ Closing the Withdrawals Account to the Capital Account 158/ The Accounts After Closing 159 The Post-Closing Trial Balance Reversing Entries: Optional First Step of the Next Accounting Period City of Chicago 172 Donna's Quik-Type 178 Comprehensive Problem: Joan Miller Advertising Agency 5 Accounting for Merchandising Operations Income Statement for a Merchandising Concern Revenue from Sales Gross Sales 188/ Trade Discounts 189/ Sales Returns and Allowances 189/ Sales Discounts 189 Cost of Goods Sold u repurchases 192/ Control o purchases Discounts Using t^^^hillh 142 142 143 144 151 155 159 159 164 167 CPA 186 186 188 191
Merchandise Inventory 196/ Inventory Losses 198 Operating Expenses Handling Merchandise Inventory at the End of the Accounting Period Work Sheet for a Merchandising Concern The Adjusting Entry Method 202/ The Closing Entry Method 204 Income Statement Illustrated Sears vs. K mart 222 Jefferson Jeans Company 227 6 Accounting Systems and Special-Purpose Journals Accounting Systems Installation Principles of Systems Design Cost-Benefit Principle 234/ Control Principle 235/ Compatibility Principle 235/ Flexibility Principle 235 Data Processing: Three Perspectives Computer Data Processing Elements of a Computer System 237/ Mainframe Accounting Systems 239/ Microcomputer Accounting Systems 239 Manual Data Processing: Journals and Procedures Sales Journal 242/ Purchases Journal 247/ Cash Receipts Journal 249/ Cash Payments Journal 253/ General Journal 255/ Flexibility of Special-Purpose Journals 256 B. Dalton and Waldenbooks 267 Buy-Rite Foods Company 272 The following practice set may be used after Chapter 6: Micro-Tec Practice Set, Third Edition Comprehensive Problem: Fenwick Fashions Internal Control and Merchandising Transactions
Contents XV Internal Control structure: Basic Elements and Procedures.SflSI! Internal Control Defined 280/ Limitations of Internal Control 281 -.. Internal Control Over Merchandising Transactions 282 Control of Cash Sale*pfc%i* 2IH/ Control oi Purchases and Cash Disbursements 285 Banking Transactions 290 Bank Account 290/ Deposits 291/ Bank Statement 291/ Preparing a Bank Reconciliation 292 Petty Cash Procedures 296 Establishing the Petty Cash Fund 297/ Making Disbursements from the Petty Cash Fund 297/ Reimbursing the Petty Cash Fund 297 The Voucher System 298 Vouchers 299/ Voucher Checks 299/ Voucher Register 299/ Check Register 301/ Operation of a Voucher System 301 305 312 J. Walter Thompson 316 Gabhart's 321 8 Accounting Concepts and Classified Financial Statements 327 Objectives of Financial Information 327 Qualitative Characteristics of Accounting Information 329 Conventions to Aid Interpretation of Financial Information Comparability and Consistency 331/ Materiality 332/ Conservatism 332/ Full Disclosure 333/ Cost-Benefit 333 Financial Accounting Concepts and Ethical Reporting 334 Summary of Financial Accounting Concepts 334/ Ethics and Financial Reporting 336 Classified Balance Sheet Assets 337/ Liabilities 341/ Owner's Equity 341 Forms of the Income Statements Other Financial Statements Using Classified Financial Statements Evaluation of Liquidity 346/ Evaluation of Profitability 347 337 342 345 346
XV í Contents The Annual Report of a Major Corporation Letter to the Stockholders 350/ Financial Highlights (Figure 8-4) 351/ Statements of Consolidated Earnings (Figure 8-5) 351/ Consolidated Balance Sheets (Figure 8-6) 353/ The Statement of Consolidated Stockholders' Equity 355/ The Statement of Consolidated Cash Flows (Figure 8-7) 355/ Notes to Consolidated Financial Statements 357/ Report of Management's Responsibilities 359/ Management's Discussion and Analysis 359/ Report of Certified Public Accountants (Figure 8-8) 360 Toys "R"Us, Inc. 373 Josephina Tapestries Company 377 350 361 368 PART THREE Measuring and Reporting Assets and Current Liabilities 9 Short-Term Liquid Assets Accounting for Cash and Short-Term Investments Accounting for Accounts Receivable Credit Policies and Uncollectible Accounts 387/ Matching Losses on Uncollectible Accounts with Sales 388/ Estimating Uncollectible Accounts Expense 389/ Writing Off an Uncollectible Account 394/ Other Issues Related to Receivables 395 Accounting for Notes Receivable Computations for Promissory Notes 398/ Illustrative Accounting Entries 402 Winton Sharrer Co. 415 Golina Christmas Tree Company 419 384 384 387 397 405 411 10 Inventories Inventories and Income Determination Review of Gross Margin and Cost of Goods Sold Computations 425/ Effects of Errors in Inventory Measurement 425 Inventory Measurement Merchandise in Transit 429/ Merchandise on Hand Not Included in Inventory 429 424 424 428
Contents Pricing the Inventory at Cost Cost Defined 429/ Methods of Pricing Inventory at Cost 430/ Comparison and Effects of the Alternative Methods of Pricing Inventory 433 Application of the Perpetual Inventory System Handling the Perpetual Inventory System in the Accounting Recor<^4 SV Maintaining the Detailed Perp^pi inventory Records 438/ Need for Physical Inventories Under the Perpetual Inventory System 439 Valuing the Inventory at the Lower of Cost or Market (LCM) Methods of Applying LCM 440 Valuing Inventory by Estimation Retail Method of Inventory Estimation 441/ Gross Profit Method of Inventory Estimation 442 General Motors 453 RTS Company 456 11 Current Liabilities and Payroll Accounting Nature and Measurement of Liabilities Recognition of Liabilities 460/ Valuation of Liabilities 461/ Classification of Liabilities 461/ Disclosure of Liabilities 461 Common Categories of Current Liabilities Definitely Determinable Liabilities 462/ Estimated Liabilities 466 Contingent Liabilities Introduction to Payroll Accounting Liabilities for Employee Compensation 471/ Liabilities for Employee Payroll Withholdings 472 Computation of an Employee's Take-Home Pay: An Illustration Liabilities for Employer Payroll Taxes 476/ Payment of Payroll and Payroll Taxes 477 Texaco, Inc. 486 Highland Television Repair 489 The following practice set may be used after Chapter 11: College Words and Sounds Store, Third Edition
* XVI li Contents 12 Long-Term Assets: Acquisition and Depreciation ^93 Long-Term Assets life of Long-Term Assets 494/ Types of Long- Term Assets 494/ Issues of Accounting for Long- Term Assets 495 Acquisition Cost of Property, Plant, and Equipment ffp Land 496/ Land Improvements 497/ Buildings 497/ Equipment 497/ Group Purchases 497 Accounting for Depreciation 498 Factors That Affect the Computation of Depreciation 499 Methods of Computing Depreciation 500 Straight-Line Method 500/ Production Method 500/ Accelerated Methods 501/ Comparing the Four Methods 503 Special Problems of Depreciating Plant Assets 504 Depreciation for Partial Years 505/ Revision of Depreciation Rates 506/ Accounting for Assets of Low Unit Cost 507/ Group Depreciation 508/ Cost Recovery for Federal Tax Purposes 508 Control of Plant Assets 511 513 518 Inland Steel 521 Hyde Computer Company 526 13 Long-Term Assets: Other Issues and Types 530 Capital Expenditures and Revenue Expenditures 530 Disposal of Depreciable Assets 532 Assumptions for the Comprehensive Illustration 532/ Depreciation for Partial Year Prior to Disposal 533/ Recording Discarded Plant Assets 533/ Recording Plant Assets Sold for Cash 534/ Recording Exchanges of Plant Assets 534
Contents xix Accounting for Natural Resources Depletion 53Ểt^epreciatiàtt jôf Closely Related Plant Assets 539/ Development and Exploration Costs in the Oil and Gas Industry 539 Accounting for Intangible Assets Research and Development Costs 541/ Goodwill 543/ Computer Software Costs 545 Ocean Drilling and Exploration Company (ODECO) 555 Conway Enterprises 559 538 540 545 552 PART FOUR Accounting for Partnerships and Corporations 14 Accounting for Partnerships Partnership Characteristics Voluntary Association 566/ Partnership Agreement 566/ Limited Life 567/ Mutual Agency 567/ Unlimited Liability 567/ Co-ownership of Partnership Property 568/ Participation in Partnership Income 568/ Summary of the Advantages and Disadvantages of Partnerships 568 Accounting for Partners' Equity Distribution of Partnership Income and Losses Stated Ratio 570/ Capital Investment Ratio 571/ Salaries, Interest, and Stated Ratio 573 Dissolution of a Partnership Admission of a New Partner 576/ Withdrawal of a Partner 580/ Death of a Partner 582 Liquidation of a Partnership Gain on Sale of Assets 584/ Loss on Sale of Assets 585 Burlington Clinic 597 Perfect Fitness Center 601 566 566 568 570 576 583 588 594
XX Contents Appendix A The Time Value of Money Simple Interest and Compound Interest Future ^^ỆPệỊẶ^ÍỈ^ Invested Sum at Compound Interest A-2/ Future Value of an Ordinary Annuity A-3 Present Value Present Value of a Single Sum Due in the Future A-5/ Present Value of an Ordinary Annuity A-6 Time Periods Applications of Present Value to Accounting Imputing Interest on Noninterest-Bearing Notes A-8/ Valuing an Asset A-9/ Other Accounting Applications A-10 Exercises Appendix B Future Value and Present Value Tables Appendix c Overview of Income Taxes for Individuals Some Basic Concepts Related to Federal Income Taxes Taxable Income and Accounting Income C-2/ Tax Planning and Tax Evasion C-2/ Cash Basis and Accrual Basis C-2/ Classifications of Taxpayers C-3 Income Tax for Individuals Gross Income C-4/ Deductions from Gross Income C-4/ Deductions from Adjusted Gross Income C-4/ Computing Tax Liability C-5/ Capital Gains and Losses C-5/ Credit Against the Tax Liability C-7/ Withholding and Estimated Tax C-7 Discussion Questions and Writing Assignments Exercise C-l Appendix D Overview of Governmental and Not-for-Profit Accounting Governmental, Not-for-Profit, and Business Accounting Financial Reporting Objectives of Governmental Units D-1/ Modified Accrual Accounting D-3/ Financial Reporting System D-5
Contents xxi Not-for-Profit Organizations Colleges and universities D-6/ Hospitals D-7/ Voluntary Health and Welfare Organizations D-7 Summary D_9 Discussion Questions and Writing Assignments D-10 Exercises D-10 Problem D-ll Appendix E The Just-in-Time Philosophy Computer-Integrated Manufacturing Systems E-l The Just-in-Time Philosophy Defined E-2 Traditional Versus JIT Factory Layout E-3 The Traditional Manufacturing Environment E-3/ The JIT Production Environment E-6/ JIT: Capital Intensive Versus Labor Intensive Manufacturing E-8 Elements Supporting the JIT Philosophy E-9 Maintain Minimum Inventory Levels E-9/ Develop Pull-Through Production Planning and Scheduling Procedures E-10/ Purchase Materials and Produce Products as Needed in Smaller Lot Sizes E-10/ Perform Simple, Inexpensive Machine Setups E-10/ Develop a Multiskilled Work Force E-10/ Create a Flexible Manufacturing System E-10/ Maintain High Levels of Product Quality E-11/ Enforce a System of Effective Preventive Facility Maintenance E-11/ Encourage Continuous Work Environment Improvement E-ll Product Costing in a JIT Environment E-12 JIT's Influence on Product Costing E-12/ New Cost Drivers E-14/ Standard Costs E-15/ Direct Versus Indirect Costs E-15/ The IBM Approach E-16 The Raw-in-Process Inventory Account JIT and Process Costing Illustrative Problem: JIT/Process Costing E-18/ Solution E-19 Discussion Questions and Writing Assignments Exercises Problems E-l E" 18 E-22 E-24 Glossary G "* Index l-l