Fundamental Accounting Principles, 24th Edition PDF by John J. Wild and Ken W. Shaw

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Fundamental Accounting Principles, 24th Edition

By John J. Wild and Ken W. Shaw

Fundamental Accounting Principles 24th Edition

Contents

Preface iv

1 Accounting in Business 2

Importance of Accounting 3

Users of Accounting Information 4

Opportunities in Accounting 4

Fundamentals of Accounting 6

Ethics—A Key Concept 6

Generally Accepted Accounting Principles 7

Conceptual Framework 7

Business Transactions and Accounting 9

Accounting Equation 10

Transaction Analysis 11

Summary of Transactions 14

Communicating with Users 15

Income Statement 15

Statement of Owner’s Equity 17

Balance Sheet 17

Statement of Cash Flows 17

Decision Analysis—Return on Assets 18

Appendix 1A Return and Risk 21

Appendix 1B Business Activities 22

2 Analyzing and Recording Transactions 44

Basis of Financial Statements 45

Source Documents 45

The “Account” Underlying Financial Statements 45

Ledger and Chart of Accounts 48

Double-Entry Accounting 49

Debits and Credits 49

Double-Entry System 49

Analyzing and Processing Transactions 51

Journalizing and Posting Transactions 51

Processing Transactions—An Example 52

Summarizing Transactions in a Ledger 57

Trial Balance 58

Preparing a Trial Balance 58

Financial Statements Prepared from Trial Balance 59

Decision Analysis—Debt Ratio 62

3 Adjusting Accounts for Financial

Statements 84

Timing and Reporting 85

The Accounting Period 85

Accrual Basis versus Cash Basis 86

Recognizing Revenues and Expenses 86

Framework for Adjustments 87

Deferral of Expense 87

Prepaid Insurance 87

Supplies 88

Other Prepaid Expenses 89

Depreciation 89

Deferral of Revenue 91

Unearned Consulting Revenue 92

Accrued Expense 93

Accrued Salaries Expense 93

Accrued Interest Expense 94

Future Cash Payment of Accrued Expenses 94

Accrued Revenue 95

Accrued Services Revenue 96

Accrued Interest Revenue 96

Future Cash Receipt of Accrued Revenues 96

Links to Financial Statements 97

Trial Balance and Financial Statements 98

Adjusted Trial Balance 98

Preparing Financial Statements 99

Decision Analysis—Profit Margin 101

Appendix 3A Alternative Accounting for Prepayments 104

4 Completing the Accounting Cycle 128

Work Sheet as a Tool 129

Benefits of a Work Sheet (Spreadsheet) 129

Use of a Work Sheet 129

Work Sheet Applications and Analysis 130

Closing Process 133

Temporary and Permanent Accounts 134

Recording Closing Entries 134

Post-Closing Trial Balance 137

Accounting Cycle 137

Classified Balance Sheet 138

Classification Structure 138

Classification Categories 139

Decision Analysis—Current Ratio 141

Appendix 4A Reversing Entries 143

5 Accounting for Merchandising Operations 166

Merchandising Activities 167

Reporting Income for a Merchandiser 167

Reporting Inventory for a Merchandiser 168

Operating Cycle for a Merchandiser 168

Inventory Systems 168

Accounting for Merchandise Purchases 169

Purchases without Cash Discounts 169

Purchases with Cash Discounts 169

Purchases with Returns and Allowances 171

Purchases and Transportation Costs 172

Accounting for Merchandise Sales 174

Sales without Cash Discounts 174

Sales with Cash Discounts 175

Sales with Returns and Allowances 175

Adjusting and Closing for Merchandisers 177

Adjusting Entries for Merchandisers 177

Preparing Financial Statements 178

Closing Entries for Merchandisers 178

Summary of Merchandising Entries 179

More on Financial Statement Formats 177

Multiple-Step Income Statement 180

Single-Step Income Statement 181

Classified Balance Sheet 182

Decision Analysis—Acid-Test and Gross

Margin Ratios 183

Appendix 5A Periodic Inventory System 187

Appendix 5B Adjusting Entries under New Revenue

Recognition Rules 191

Appendix 5C Net Method for Inventory 192

6 Inventories and Cost of Sales 214

Inventory Basics 215

Determining Inventory Items 215

Determining Inventory Costs 216

Internal Controls and Taking a Physical Count 216

Inventory Costing under a Perpetual System 217

Inventory Cost Flow Assumptions 217

Inventory Costing Illustration 218

Specific Identification 218

First-In, First-Out 219

Last-In, First-Out 219

Weighted Average 220

Financial Statement Effects of Costing Methods 221

Tax Effects of Costing Methods 222

Valuing Inventory at LCM and the Effects of

Inventory Errors 224

Lower of Cost or Market 224

Financial Statement Effects of Inventory Errors 225

Decision Analysis—Inventory Turnover and Days’

Sales in Inventory 227

Appendix 6A Inventory Costing under a Periodic

System 233

Appendix 6B Inventory Estimation Methods 238

7 Accounting Information Systems 258

System Principles 259

System Components 260

Special Journals and Subsidiary

Ledgers 261

Basics of Special Journals 261

Subsidiary Ledgers 261

Sales Journal 263

Cash Receipts Journal 265

Purchases Journal 267

Cash Payments (Disbursements) Journal 268

General Journal Transactions 269

Technology-Based Accounting Systems 270

Technology in Accounting 270

Data Processing in Accounting 270

Computer Networks in Accounting 270

Enterprise Resource Planning Software 271

Data Analytics and Data Visualization 271

Cloud Computing 271

Decision Analysis—Days’ Payable Outstanding 271

8 Cash, Fraud, and Internal Control 290

Fraud and Internal Control 291

Purpose of Internal Control 291

Principles of Internal Control 292

Technology, Fraud, and Internal Control 293

Limitations of Internal Control 293

Control of Cash 294

Cash, Cash Equivalents, and Liquidity 294

Cash Management 295

Control of Cash Receipts 295

Control of Cash Payments 297

Banking Activities as Controls 301

Basic Bank Services 301

Bank Statement 302

Bank Reconciliation 303

Decision Analysis—Days’ Sales Uncollected 306

Appendix 8A Documentation and Verification 308

9 Accounting for Receivables 326

Valuing Accounts Receivable 327

Direct Write-Off Method 330

Allowance Method 331

Estimating Bad Debts 334

Percent of Sales Method 334

Percent of Receivables Method 334

Aging of Receivables Method 335

Notes Receivable 337

Computing Maturity and Interest 338

Recording Notes Receivable 339

Valuing and Settling Notes 339

Disposal of Receivables 341

Decision Analysis—Accounts Receivable Turnover 341

10 Plant Assets, Natural Resources, and

Intangibles 358

SECTION 1—PLANT ASSETS 359

Cost Determination 360

Machinery and Equipment 360

Buildings 360

Land Improvements 360

Land 360

Lump-Sum Purchase 361

Depreciation 361

Factors in Computing Depreciation 361

Depreciation Methods 362

Partial-Year Depreciation 365

Change in Estimates 366

Reporting Depreciation 366

Additional Expenditures 367

Ordinary Repairs 368

Betterments and Extraordinary Repairs 368

Disposals of Plant Assets 368

Discarding Plant Assets 369

Selling Plant Assets 369

SECTION 2—NATURAL RESOURCES 371

Cost Determination and Depletion 371

Plant Assets Tied into Extracting 372

SECTION 3—INTANGIBLE ASSETS 373

Cost Determination and Amortization 373

Types of Intangibles 373

Decision Analysis—Total Asset Turnover 376

Appendix 10A Exchanging Plant Assets 379

11 Current Liabilities and Payroll

Accounting 396

Known Liabilities 397

Characteristics of Liabilities 397

Examples of Known Liabilities 398

Accounts Payable 399

Sales Taxes Payable 399

Unearned Revenues 399

Short-Term Notes Payable 399

Payroll Liabilities 402

Employee Payroll and Deductions 402

Employer Payroll Taxes 403

Internal Control of Payroll 404

Multi-Period Known Liabilities 404

Estimated Liabilities 405

Health and Pension Benefits 405

Vacation Benefits 406

Bonus Plans 406

Warranty Liabilities 406

Multi-Period Estimated Liabilities 407

Contingent Liabilities 408

Accounting for Contingent Liabilities 408

Applying Rules of Contingent Liabilities 409

Uncertainties That Are Not Contingencies 409

Decision Analysis—Times Interest Earned Ratio 409

Appendix 11A Payroll Reports, Records, and

Procedures 412

Appendix 11B Corporate Income Taxes 417

12 Accounting for Partnerships 436

Partnership Formation 437

Characteristics of Partnerships 437

Organizations with Partnership Characteristics 438

Choosing a Business Form 438

Accounting for Partnership Formation 438

Dividing Partnership Income or Loss 439

Partnership Financial Statements 441

Partner Admission 442

Purchase of Partnership Interest 442

Investing Assets in a Partnership 443

Partner Withdrawal 444

No Bonus 444

Bonus to Remaining Partners 445

Bonus to Withdrawing Partner 445

Death of a Partner 445

Liquidation of a Partnership 446

No Capital Deficiency 446

Capital Deficiency 448

Decision Analysis—Partner Return on Equity 449

13 Accounting for Corporations 464

Corporate Form of Organization 465

Corporate Advantages 465

Corporate Disadvantages 465

Corporate Organization and Management 466

Corporate Stockholders 466

Corporate Stock 467

Common Stock 468

Issuing Par Value Stock 468

Issuing No-Par Value Stock 469

Issuing Stated Value Stock 469

Issuing Stock for Noncash Assets 469

Dividends 471

Cash Dividends 470

Stock Dividends 471

Stock Splits 473

Financial Statement Effects of Dividends

and Splits 473

Preferred Stock 474

Issuance of Preferred Stock 474

Dividend Preference of Preferred Stock 475

Reasons for Issuing Preferred Stock 475

Treasury Stock 477

Purchasing Treasury Stock 477

Reissuing Treasury Stock 477

Reporting of Equity 479

Statement of Retained Earnings 479

Statement of Stockholders’ Equity 480

Decision Analysis—Earnings per Share,

Price-Earnings Ratio, Dividend Yield, and

Book Value per Share 480

14 Long-Term Liabilities 500

Basics of Bonds 501

Bond Financing 501

Bond Issuing 502

Bond Trading 502

Par Bonds 502

Discount Bonds 503

Bond Discount or Premium 503

Issuing Bonds at a Discount 504

Premium Bonds 506

Issuing Bonds at a Premium 506

Bond Retirement 508

Long-Term Notes Payable 510

Installment Notes 510

Mortgage Notes and Bonds 511

Decision Analysis—Debt Features and the

Debt-to-Equity Ratio 512

Appendix 14A Bond Pricing 515

Appendix 14B Effective Interest Amortization 517

Appendix 14C Leases and Pensions 518

15 Investments 536

Basics of Investments 537

Purposes and Types of Investments 537

Classification and Reporting 538

Debt Investments 538

Debt Investments—Basics 538

Debt Investments—Trading 539

Debt Investments—Held-to-Maturity 540

Debt Investments—Available-for-Sale 541

Equity Investments 543

Equity Investments—Insignificant Influence,

Under 20% 543

Equity Investments—Significant Influence,

20% to 50% 545

Equity Investments—Controlling Influence,

More Than 50% 547

Accounting Summary for Debt and Equity

Investments 548

Decision Analysis—Components of Return

on Total Assets 549

16 Reporting the Statement of Cash Flows 568

Basics of Cash Flow Reporting 569

Purpose of the Statement of Cash Flows 569

Importance of Cash Flows 569

Measurement of Cash Flows 569

Classification of Cash Flows 570

Noncash Investing and Financing 571

Format of the Statement of Cash Flows 571

Preparing the Statement of Cash Flows 572

Cash Flows from Operating 573

Indirect and Direct Methods of Reporting 573

Applying the Indirect Method 573

Summary of Adjustments for Indirect Method 576

Cash Flows from Investing 577

Three-Step Analysis 577

Analyzing Noncurrent Assets 577

Cash Flows from Financing 579

Three-Step Analysis 579

Analyzing Noncurrent Liabilities 579

Analyzing Equity 580

Proving Cash Balances 580

Summary Using T-Accounts 582

Decision Analysis—Cash Flow Analysis 583

Appendix 16A Spreadsheet Preparation of the

Statement of Cash Flows 586

Appendix 16B Direct Method of Reporting

Operating Cash Flows 588

17 Analysis of Financial Statements 612

Basics of Analysis 613

Purpose of Analysis 613

Building Blocks of Analysis 613

Information for Analysis 614

Standards for Comparisons 614

Tools of Analysis 614

Horizontal Analysis 614

Comparative Statements 614

Trend Analysis 617

Vertical Analysis 618

Common-Size Statements 618

Common-Size Graphics 620

Ratio Analysis 622

Liquidity and Efficiency 622

Solvency 624

Profitability 625

Market Prospects 626

Summary of Ratios 627

Decision Analysis—Analysis Reporting 628

Appendix 17A Sustainable Income 631

18 Managerial Accounting Concepts and

Principles 650

Managerial Accounting Basics 651

Purpose of Managerial Accounting 651

Nature of Managerial Accounting 652

Fraud and Ethics in Managerial Accounting 653

Career Paths 654

Managerial Cost Concepts 655

Types of Cost Classifications 655

Identification of Cost Classifications 657

Cost Concepts for Service Companies 657

Managerial Reporting 658

Manufacturing Costs 658

Nonmanufacturing Costs 658

Prime and Conversion Costs 659

Costs and the Balance Sheet 659

Costs and the Income Statement 659

Cost Flows and Cost of Goods

Manufactured 662

Flow of Manufacturing Activities 662

Schedule of Cost of Goods Manufactured 663

Trends in Managerial Accounting 666

Decision Analysis—Raw Materials Inventory

Turnover and Days’ Sales in Raw Materials

Inventory 668

19 Job Order Costing 686

Job Order Costing 687

Cost Accounting System 687

Job Order Production 687

Job Order vs. Process Operations 688

Production Activities in Job Order Costing 688

Cost Flows 689

Job Cost Sheet 689

Materials and Labor Cost 690

Materials Cost Flows and Documents 690

Labor Cost Flows and Documents 693

Overhead Cost 694

Set Predetermined Overhead Rate 695

Apply Estimated Overhead 695

Record Actual Overhead 697

Summary of Cost Flows 698

Using Job Cost Sheets for Managerial Decisions 699

Schedule of Cost of Goods Manufactured 700

Adjusting Overhead 701

Factory Overhead Account 701

Adjust Underapplied or Overapplied Overhead 701

Job Order Costing of Services 702

Decision Analysis—Pricing for Services 703

20 Process Costing 726

Process Operations 727

Organization of Process Operations 727

Comparing Process and Job Order Costing

Systems 728

Equivalent Units of Production 729

Process Costing Illustration 730

Overview of GenX Company’s Process

Operation 730

Pre-Step: Collect Production and Cost Data 731

Step 1: Determine Physical Flow of Units 732

Step 2: Compute Equivalent Units of Production 732

Step 3: Compute Cost per Equivalent Unit 733

Step 4: Assign and Reconcile Costs 733

Process Cost Summary 735

Accounting for Process Costing 736

Accounting for Materials Costs 737

Accounting for Labor Costs 738

Accounting for Factory Overhead 739

Accounting for Transfers 740

Trends in Process Operations 742

Decision Analysis—Hybrid Costing System 743

Appendix 20A FIFO Method of Process

Costing 747

21 Cost-Volume-Profit Analysis 772

Identifying Cost Behavior 773

Fixed Costs 774

Variable Costs 774

Graphing Fixed and Variable Costs against

Volume 774

Mixed Costs 774

Step-wise Costs 775

Curvilinear Costs 776

Measuring Cost Behavior 777

Scatter Diagram 777

High-Low Method 778

Regression 778

Comparing Cost Estimation Methods 778

Contribution Margin and Break-Even

Analysis 779

Contribution Margin and Its Measures 779

Break-Even Point 780

Cost-Volume-Profit Chart 782

Changes in Estimates 782

Applying Cost-Volume-Profit Analysis 783

Margin of Safety 783

Computing Income from Sales and Costs 784

Computing Sales for a Target Income 785

Evaluating Strategies 786

Sales Mix and Break-Even 787

Assumptions in Cost-Volume-Profit

Analysis 789

Decision Analysis—Degree of Operating

Leverage 790

Appendix 21A Using Excel for Cost

Estimation 792

Appendix 21B Variable Costing and Performance

Reporting 793

Appendix 21C Preparing a CVP Chart 796

22 Master Budgets and Planning 814

Budget Process and Administration 815

Budgeting Process 815

Benefits of Budgeting 816

Budgeting and Human Behavior 816

Budget Reporting and Timing 817

Master Budget Components 817

Operating Budgets 818

Sales Budget 818

Production Budget 818

Direct Materials Budget 820

Direct Labor Budget 821

Factory Overhead Budget 822

Selling Expense Budget 823

General and Administrative Expense Budget 824

Investing and Financing Budgets 825

Capital Expenditures Budget 825

Cash Budget 825

Budgeted Financial Statements 829

Budgeted Income Statement 829

Budgeted Balance Sheet 830

Using the Master Budget 830

Budgeting for Service Companies 830

Decision Analysis—Activity-Based

Budgeting 831

Appendix 22A Merchandise Purchases Budget 839

23 Flexible Budgets and Standard Costs 864

Fixed and Flexible Budgets 865

Fixed Budget Reports 866

Budget Reports for Evaluation 867

Flexible Budget Reports 867

Standard Costing 871

Standard Costs 871

Setting Standard Costs 871

Cost Variance Analysis 872

Materials and Labor Variances 874

Materials Variances 874

Labor Variances 876

Overhead Standards and Variances 877

Flexible Overhead Budgets 877

Standard Overhead Rate 877

Computing Overhead Cost Variances 879

Standard Costing—Management

Considerations 882

Decision Analysis—Sales Variances 883

Appendix 23A Expanded Overhead Variances and

Standard Cost Accounting System 888

24 Performance Measurement and

Responsibility Accounting 912

Responsibility Accounting 913

Performance Evaluation 913

Controllable versus Uncontrollable Costs 914

Responsibility Accounting for Cost Centers 914

Profit Centers 916

Direct and Indirect Expenses 916

Expense Allocations 917

Departmental Income Statements 918

Departmental Contribution to Overhead 921

Investment Centers 922

Return-on-Investment and Residual Income 922

Investment Center Profit Margin and Investment

Turnover 924

Nonfinancial Performance Evaluation

Measures 925

Balanced Scorecard 925

Transfer Pricing 927

Decision Analysis—Cash Conversion Cycle 928

Appendix 24A Cost Allocations 931

Appendix 24B Transfer Pricing 933

Appendix 24C Joint Costs and Their Allocation 934

25 Relevant Costing for Managerial

Decisions 956

Decisions and Information 957

Decision Making 957

Relevant Costs and Benefits 958

Production Decisions 958

Make or Buy 959

Sell or Process Further 960

Sales Mix Selection When Resources Are

Constrained 961

Capacity Decisions 963

Segment Elimination 963

Keep or Replace Equipment 964

Pricing Decisions 965

Normal Pricing 965

Special Offers 967

Decision Analysis—Time and Materials Pricing 969

26 Capital Budgeting and Investment

Analysis 990

Capital Budgeting 991

Capital Budgeting Process 991

Capital Investment Cash Flows 992

Methods Not Using Time Value of Money 992

Payback Period 992

Accounting Rate of Return 995

Methods Using Time Value of Money 996

Net Present Value 996

Internal Rate of Return 1000

Comparison of Capital Budgeting Methods 1002

Postaudit 1002

Decision Analysis—Break-Even Time 1004

Appendix 26A Using Excel to Compute Net Present

Value and Internal Rate of Return 1006

Appendix A Financial Statement Information A-1

Apple A-2

Google A-10

Samsung A-14

Appendix B Time Value of Money B

Appendix C Activity-Based Costing C

Appendix D Lean Principles and Accounting D-1

Index IND-1

Chart of Accounts CA

Brief Review Managerial Analyses and Reports BR-1

Financial Reports and Tables BR-2

Selected Transactions and

Relations BR-3

Fundamentals and Analyses BR-4

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