## Financial Accounting, 6th Edition

By Michelle L. Hanlon, Robert P. Magee, Glenn M. Pfeiffer and Thomas R. Dyckman

**Contents:**

About the Authors iii

Preface v

Chapter 1

Introducing Financial

Accounting 2

Demand for Accounting Information 4

Who Uses Financial Accounting Information? 5

Costs and Benefits of Disclosure 7

Business Activities 7

Planning Activities 8

Investing Activities 8

Financing Activities 9

Operating Activities 1 O

Financial Statements 11

Balance Sheet 12

Income Statement 12

Statement of Stockholders’ Equity 13

Statement of Cash Flows 14

Financial Statement Linkages 15

Information Beyond Financial Statements 16

Mid-Chapter Review 16

Financial Reporting Environment 17

Generally Accepted Accounting Principles 17

Regulation and Oversight 18

Role of the Auditor 19

A Global Perspective 20

Analyzing Financial Statements 21

Profitability Analysis 21

Analysis Objective 21

Credit Risk Analysis 23

Analysis Objective 23

Technology and Accounting 24

Organization of the Book 25

Chapter-End Review 25

Appendix 1 A: Conceptual Framework for Financial

Reporting 26

Objective of Financial Reporting 26

Qualitative Characteristics of Useful Financial

Information 26

Enhancing Qualitative Characteristics 27

The Cost Constraint 28

Additional Underlying Basic Assumptions 28

Summary 28

Contents

Guidance Answers … You Make the Call 30

Key Ratios 30

Key Terms 30

Multiple Choice 31

Questions 31

Mini Exercises 32

Exercises 33

Problems 35

Cases and Projects 37

Solutions to Review Problems 39

Chapter 2

Constructing Financial

Statements 42

Reporting Financial Condition 44

Assets 44

Liabilities and Equity 47

Mid-Chapter Review 1 49

Analyzing and Recording Transactions for the Balance

Sheet 49

Mid-Chapter Review 2 53

Reporting Financial Performance 53

Accrual Accounting for Revenues and Expenses 54

Retained Earnings 56

Analyzing and Recording Transactions for the Income

Statement 56

Reporting on Equity 60

Analyzing and Recording Equity Transactions 60

Statement of Stockholders’ Equity 61

Mid-Chapter Review 3 61

Journalizing and Posting Transactions 62

T-Account 62

Debit and Credit System 62

T-Account with Debits and Credits 63

The Journal Entry 64

Analyze, Journalize, and Post 64

Analyzing Financial Statements 71

Analysis Objective 71

Chapter-End Review 73

Summary 73

Guidance Answers … You Make the Call 74

Key Ratios 74

Key Terms 75

Multiple Choice 75

Questions 76

Mini Exercises 76

Exercises 80

Problems 86

Cases and Projects 92

Solutions to Review Problems 93

Chapter 3

Adjusting Accounts for

Financial Statements 100

Accounting Cycle 102

Analyzing and Recording Transactions 103

Review of Accounting Procedures 103

Review of Recording Transactions 103

Adjusting the Accounts 109

Preparing an Unadjusted Trial Balance 11 0

Types of Adjustments 110

Ethics and Adjusting Entries 117

Mid-Chapter Review 117

Constructing Financial Statements from Adjusted

Accounts 118

Preparing an Adjusted Trial Balance 118

Preparing Financial Statements 118

Closing Temporary Accounts 122

Closing Process 123

Closing Steps Illustrated 123

Preparing a Post-Closing Trial Balance 124

Subsequent Events 125

Summarizing the Accounting Cycle 125

Financial Statement Analysis 125

Using Information on Levels and Flows 125

Chapter-End Review 127

Summary 128

Guidance Answers … You Make the Call 128

Key Terms 129

Multiple Choice 129

Questions 130

Mini Exercises 130

Exercises 133

Problems 136

Cases and Projects 145

Solutions to Review Problems 147

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Chapter 4

Reporting and Analyzing

Cash Flows 156

Purpose of the Statement of Cash Flows 158

What Do We Mean by “CASH”? 158

Contents xvii

What Does a Statement of Cash Flows Look Like? 159

Framework for the Statement of Cash Flows 159

Operating Activities 160

Investing Activities 160

Financing Activities 160

Usefulness of Classifications 161

Mid-Chapter Review 1 162

Preparing the Statement of Cash Flows-Operating

Activities 162

Converting Revenues and Expenses to Cash Flows from

Operating Activities 164

Mid-Chapter Review 2 171

Reconciling Net Income and Cash Flow from Operating

Activities 171

Cash Flow from Operating Activities Using the Indirect

Method 173

Mid-Chapter Review 3 174

Preparing the Statement of Cash Flows-Investing and

Financing Activities 174

Cash Flows from Investing Activities 174

Cash Flows from Financing Activities 175

Mid-Chapter Review 4 177

Additional Detail in the Statement of Cash Flows 177

Gains and Losses on Investing and Financing

Activities 179

Noncash Investing and Financing Activities 180

Mid-Chapter Review 5 181

The Effects of Foreign Currencies on the Cash Flow

Statement 181

Supplemental Disclosures 182

Analyzing Financial Statements 182

Interpreting Indirect Method Cash from Operations 182

Analysis Objective 183

Analysis Objective 184

Chapter-End Review 186

Appendix 4A: A Spreadsheet Approach to Preparing the

Statement of Cash Flows 186

Step 1: Classify the balance sheet accounts. 186

Step 2: Compute the changes in the balance sheet

accounts. 187

Step 3: Handle the accounts that have single

classifications. 187

Step 4: Enter the effect of investing/financing transactions

that do not involve cash. 188

Step 5: Analyze the change in retained earnings. 188

Step 6: Analyze the change in plant assets. 188

Step 7: Total the columns. 188

Step 8: Prepare the cash flow statement. 188

Appendix 4A Review 189

Summary 189

Guidance Answers … You Make the Call 190

Key Ratios 191

Key Terms 191

Multiple Choice 191

Questions 192

Mini Exercises 193

Exercises 197

Problems 201

Cases and Projects 209

Solutions to Review Problems 214

Introduction 220

Chapter 5

Analyzing and Interpreting

Financial Statements 218

Assessing the Business Environment 220

Vertical and Horizontal Analysis 221

Mid-Chapter Review 1 223

Return on Investment 225

Return on Equity (ROE) 225

Return on Assets (ROA) 225

Return on Financial Leverage (ROFL) 226

Mid-Chapter Review 2 227

Disaggregating ROA 228

Mid-Chapter Review 3 232

Liquidity and Solvency 233

Liquidity Analysis 235

Solvency Analysis 237

Limitations of Ratio Analysis 239

Chapter-End Review 240

Appendix SA: Analyzing and Interpreting Core

Operating Activities 241

Reporting Operating Activities in the Income

Statement 241

Reporting Operating Activities in the Balance Sheet 242

Disaggregating RNOA 242

Appendix SA Review 243

Appendix 58: Financial Statement Forecasts 243

Step 1. Forecast Sales Revenue 243

Step 2. Forecast Operating Expenses 244

Step 3. Forecast Operating Assets and Liabilities 244

Step 4. Forecast Nonoperating Assets, Liabilities,

Revenues and Expenses 244

Step 5. Forecast Net Income, Dividends, and Retained

Earnings 245

Step 6. Forecast Cash 246

Step 7. Prepare the Cash Flow Statement Forecast 247

Additional Considerations 247

Appendix 58 Review 248

Summary 248

Key Ratios 249

Key Terms 250

Multiple Choice 250

Guidance Answers . . . You Make the Call 251

Questions 251

Mini Exercises 251

Exercises 255

Problems 259

Cases and Projects 265

Solutions to Review Problems 266

Chapter 6

Reporting and Analyzing

Revenues, Receivables, and

Operating Income 270

Reporting Operating Income 272

Revenue Recognition 274

Revenue Recognition Subsequent to Customer

Purchase 276

Mid-Chapter Review 1 279

Mid-Chapter Review 2 283

Reporting Accounts Receivable 283

Determining the Allowance for Uncollectible

Accounts 284

Reporting the Allowance for Uncollectible Accounts 285

Recording Write-offs of Uncollectible Accounts 286

Footnote Disclosures and Interpretations 288

Mid-Chapter Review 3 291

Analyzing Financial Statements 291

Net Operating Profit After Taxes (NO PAT) 292

Analysis Objective 292

Analysis Objective 294

Earnings Management 296

Chapter-End Review 298

Appendix 6A: Reporting Nonrecurring Items 298

Discontinued Operations 299

Exit or Disposal Costs 299

Appendix 6A Review 301

Summary 301

Guidance Answers … You Make the Call 302

Key Ratios 302

Key Terms 303

Multiple Choice 303

Questions 304

Mini Exercises 304

Exercises 308

Problems 314

Cases and Projects 317

Solutions to Review Problems 321

Reporting and Analyzing

Inventory 326

Reporting Operating Expenses 328

Expense Recognition Principles 328

Reporting Inventory Costs in the Financial

Statements 329

Recording Inventory Costs in the Financial

Statements 330

Inventory and the Cost of Acquisition 331

Inventory Reporting by Manufacturing Firms 331

Inventory Costing Methods 332

First-In, First-Out (FIFO) 333

Last-In, First-Out (LIFO) 334

Inventory Costing and Price Changes 336

Average Cost (AC) 336

Lower of Cost or Net Realizable Value 337

Mid-Chapter Review 339

**Financial Statement** Effects and Disclosure 340

Financial Statement Effects of Inventory Costing 341

Analyzing Financial Statements 345

Analysis Objective 345

Analysis Objective 347

Chapter-End Review 350

Appendix 7A: LIFO Liquidation 351

Analysis Implications 352

Appendix 7 A Review 352

Summary 353

Guidance Answers . . . You Make the Call 354

Key Ratios 354

Key Terms 354

Multiple Choice 355

Questions 356

Mini Exercises 356

Exercises 359

Problems 362

Cases and Projects 365

Solutions to Review Problems 366

Introduction 374

Chapter 8

Reporting and Analyzing LongTerm

Operating Assets 372

Property, Plant, and Equipment (PPE) 374

Determining Costs to Capitalize 375

Depreciation 376

Depreciation Methods 3n

Changes in Accounting Estimates 380

Asset Sales and Impairments 381

Footnote Disclosure 383

Analyzing Financial Statements 384

Analysis Objective 384

Analysis Objective 385

Cash Flow Effects 387

Mid-Chapter Review 387

Intangible Assets 388

Research and Development Costs 388

Patents 389

Copyrights 389

Trademarks 389

Franchise Rights 390

Contents xix

Amortization and Impairment of Identifiable Intangible

Assets 390

Goodwill 392

Footnote Disclosures 392

Analysis Implications 393

Chapter-End Review 394

Summary 394

Guidance Answers . . . You Make the Call 395

Key Ratios 395

Key Terms 395

Multiple Choice 396

Questions 396

Mini Exercises 397

Exercises 399

Problems 402

Cases and Projects 405

Solutions to Review Problems 407

Introduction 414

Chapter 9

Reporting and Analyzing

Lia bi I ities 412

Current Liabilities 415

Accounts Payable 415

Mid-Chapter Review 1 417

Accrued Liabilities 417

Other Current Liabilities 421

Mid-Chapter Review 2 422

Current Nonoperating (Financial} Liabilities 422

Mid-Chapter Review 3 424

– Long-Term Liabilities 424

Installment Loans 425

Bonds 427

Pricing of Bonds 427

Effective Cost of Debt 429

Reporting of Bond Financing 430

Effects of Discount and Premium Amortization 432

The Fair Value Option 434

Effects of Bond Repurchase 435

Financial Statement Footnotes 436

Interest and the Statement of Cash Flows 437

Disclosure of Commitments and Contingencies 438

Analyzing Financial Statements 438

Analysis Objective 439

Debt Ratings and the Cost of Debt 441

Chapter-End Review 443

Summary 443

Guidance Answers … You Make the Call 444

Key Ratios 444

Key Terms 444

Multiple Choice 445

Questions 445

Mini Exercises 446

Exercises 449

Problems 452

Cases and Projects 456

Solutions to Review Problems 458

Introduction 464

Leases 465

Chapter 10

Reporting and Analyzing

Leases, Pensions, Income

Taxes, and Commitments

and Contingencies 462

Lessee Reporting of Leases 466

Footnote Disclosures of Leases 473

Mid-Chapter Review 1 476

Pensions 477

Balance Sheet Effects of Defined Benefit Pension

Plans 477

Income Statement Effects of Defined Benefit Pension

Plans 479

Footnote Disclosures-Components of Plan Assets and

PBO 480

Footnote Disclosures-Components of Pension

Expense 481

Footnote Disclosures and Future Cash Flows 483

Other Post-Employment Benefits 485

Mid-Chapter Review 2 486

Accounting For Income Taxes 486

Book-Tax Differences 487

Revaluation of Deferred Tax Assets and Liabilities due to a

Tax Rate Change 493

Income Tax Disclosures 494

Deferred Taxes in the Cash Flow Statement 497

Computation and Analysis of Taxes 497

Mid-Chapter Review 3 497

Commitments and Contengencies and Other

Disclosures 498

Analyzing Financial Statements 499

Analysis Objective 499

Summary 501

Guidance Answers … You Make The Call 502

Key Ratios 502

Key Terms 502

Multiple Choice 502

Questions 503

Mini Exercises 504

Exercises 506

Problems 512

Cases and Projects 518

Solutions to Review Problems 523

Chapter 11

Reporting and Analyzing

Stockholders’ Equity 528

Introduction 530

Contributed Capital 531

Classes of Stock 531

**Accounting for Stock Transactions** 533

Mid-Chapter Review 1 538

Earned Capital 538

Cash Dividends 538

Mid-Chapter Review 2 540

Stock Dividends and Splits 540

Stock Transactions and the Cash Flows Statement 542

Mid-Chapter Review 3 543

Comprehensive Income 543

Summary of Stockholders’ Equity 544

Analyzing Financial Statements 544

Analysis Objective 544

Mid-Chapter Review 4 546

Earnings Per Share 546

Computation and Analysis of EPS 547

Chapter-End Review 549

Appendix 11 A: Dilutive Securities: Accounting for convertible

securities, stock options, and restricted

stock 549

Convertible Securities 549

Stock Rights 550

Employee Stock Options 551

Restricted Stock 552

Appendix 11A Review 555

Summary 555

Guidance Answers … You Make the Call 556

Key Ratios 556

Key Terms 557

Multiple Choice 557

Questions 558

Mini Exercises 558

Exercises 563

Problems 568

Cases and Projects 572

Solutions to Review Problems 576

Introduction 582

Chapter 12

Reporting and Analyzing

Financial Investments 580

Fair Value: An Introduction 584

Passive Investments in Debt Securities 584

Acquisition of the Investment 585

Investments Reported at Cost 585

Investments Marked to Fair Value 586

Sale of the Investment 586

Debt Investments Marked to Fair Value 587

Passive Investments in Equity Securities 591

Financial Statement Disclosures 592

Potential for Earnings Management 595

Mid-Chapter Review 1 595

Investments with Significant Influence 596

Accounting for Investments with Significant Influence 596

Equity Method Accounting and Effects on Ratios 598

Financial Statement Disclosures 598

Mid-Chapter Review 2 600

Investments with Control 600

Accounting for Investments with Control 600

Reporting of Acquired Assets and Liabilities 602

Noncontrolling Interest 606

Financial Statement Analysis 608

Chapter-End Review 609

Appendix 12A: Equity Method Mechanics 609

Appendix 128: Consolidation Accounting Mechanics 611

Appendix 12C: Accounting for Investments in

Derivatives 612

Reporting of Derivatives 612

Disclosure of Derivatives 613

Summary 613

Guidance Answers .. . You Make the Call 615

Key Terms 615

Multiple Choice 615

Questions 616

Mini Exercises 616

Exercises 619

Problems 626

Cases and Projects 630

Solutions to Review Problems 632

Appendix A

Compound Interest and the

Time-Value of Money A-1

Future Value Concepts A-2

Present Value Concepts A-3

Present Value of a Single Amount A-3

Present Value of an Annuity A-4

Installment Loans A-5

Bond Valuation A-5

Calculating Bond Yields A-6

Future Value of Annuities A-6

Using Excel to Compute Time Value A-7

Future Value Calculations A-7

Present Value Calculations A-10

Key Terms A-17

Exercises A-17

Appendix B

Data Analytics and Blockchain

Technology 8-1

Data Analytics B-2

Contents xxi

Data Analytics in the Accounting Profession B-2

Blockchain Technology B3

Summary B-5

Key Terms B-5

Multiple Choice B-5

Exercises B-4

Index 1-1