Corporate Financial Accounting, 16th Edition
By Carl S. Warren and Jefferson P. Jones
Contents:
1 Introduction to Accounting and Business 2
Nature of Business and Accounting 4
Types of Businesses 4
Business Activities 5
Role of Accounting in Business 5
Role of Ethics in Accounting and Business 7
Opportunities for Accountants 8
Generally Accepted Accounting
Principles (GAAP) 10
Characteristics of Financial Information 11
Assumptions 12
Principles 14
The Accounting Equation 14
Business Transactions and the Accounting Equation 15
Summary 19
Classifications of Stockholders’ Equity 20
Financial Statements 21
Income Statement 23
Statement of Stockholders’ Equity 23
Balance Sheet 24
Statement of Cash Flows 25
Interrelationships Among Financial Statements 26
Analysis for Decision Making 29
Ratio of Liabilities to Stockholders’ Equity 29
Continuing Problem 54
Make a Decision 55
Take It Further 56
Pathways Challenge 13, 57
2 Analyzing Transactions 58
Using Accounts to Record Transactions 61
Chart of Accounts 62
Double-Entry Accounting System 64
Balance Sheet Accounts 64
Income Statement Accounts 64
Statement of Stockholders’ Equity Accounts (Dividends) 65
Normal Balances 65
Journalizing 66
Posting Journal Entries to Accounts 70
Trial Balance 80
Errors Affecting the Trial Balance 80
Errors Not Affecting the Trial Balance 81
Analysis for Decision Making 82
Horizontal Analysis 82
Continuing Problem 105
Make a Decision 106
Take It Further 108
Pathways Challenge 77, 109
3 The Adjusting Process 110
Nature of the Adjusting Process 113
Accrual and Cash Bases of Accounting 113
Revenue and Expense Recognition 114
The Adjusting Process 114
Types of Accounts Requiring Adjustment 115
Adjusting Entries for Accruals 116
Accrued Revenues 116
Accrued Expenses 117
Adjusting Entries for Deferrals 120
Unearned Revenues 120
Prepaid Expenses 121
Adjusting Entries for Depreciation 124
Summary of Adjusting Process 126
Adjusted Trial Balance 130
Analysis for Decision Making 132
Vertical Analysis 132
Continuing Problem 154
Make a Decision 155
Take It Further 157
Pathways Challenge 131, 159
4 The Accounting Cycle 160
Flow of Accounting Information 163
Financial Statements 165
Income Statement 165
Statement of Stockholders’ Equity 165
Balance Sheet 167
Statement of Cash Flows 168
Closing Entries 170
Journalizing and Posting Closing Entries 171
Post-Closing Trial Balance 176
Accounting Cycle 177
Illustration of the Accounting Cycle 180
Step 1. Analyzing and Recording Transactions in the Journal 180
Step 2. Posting Transactions to the Ledger 181
Step 3. Preparing an Unadjusted Trial Balance 181
Step 4. Assembling and Analyzing Adjustment Data 181
Step 5. Preparing an Optional End-of-Period Spreadsheet 183
Step 6. Journalizing and Posting Adjusting Entries 184
Step 7. Preparing an Adjusted Trial Balance 184
Step 8. Preparing the Financial Statements 184
Step 9. Journalizing and Posting Closing Entries 187
Step 10. Preparing a Post-Closing Trial Balance 187
Why Is the Accrual Basis of Accounting Required by GAAP? 190
Analysis for Decision Making 192
Working Capital and Current Ratio 192
Appendix 1 End-of-Period Spreadsheet 194
Step 1. Enter the Title 194
Step 2. Enter the Unadjusted Trial Balance 194
Step 3. Enter the Adjustments 195
Step 4. Enter the Adjusted Trial Balance 196
Step 5. Extend the Accounts to the Income
Statement and Balance Sheet Columns 197
Step 6. Total the Income Statement and Balance Sheet
Columns, Compute the Net Income or Net Loss, and
Complete the Spreadsheet 198
Preparing the Financial Statements
from the Spreadsheet 199
Appendix 2 Statement of Cash Flows for NetSolutions 199
Continuing Problem 228
Comprehensive Problem 1 229
Make a Decision 231
Take It Further 233
Pathways Challenge 177, 235
5 Accounting for Retail Businesses 236
Nature of Retail Businesses 238
Operating Cycle 238
Financial Statements 239
Merchandise Transactions 240
Chart of Accounts for Retail Business 240
Subsidiary Ledgers 241
Purchases Transactions 241
Sales Transactions 246
Freight 256
Summary: Recording Inventory Transactions 258
Dual Nature of Merchandise Transactions 259
Sales Taxes and Trade Discounts 259
The Adjusting Process 261
Customer Returns, Refunds, and Allowances 262
Adjusted Trial Balance 263
Financial Statements and Closing Entries for
a Retail Business 264
Multiple-Step Income Statement 264
Single-Step Income Statement 266
Statement of Stockholders’ Equity 266
Balance Sheet 267
The Closing Process 268
Analysis for Decision Making 269
Asset Turnover Ratio 269
Appendix 1 Sales Discounts 270
Gross Method 270
Net Method 272
Comparison of Gross and Net Methods 273
Appendix 2 The Periodic Inventory System 273
Chart of Accounts Under the Periodic Inventory System 273
Recording Merchandise Transactions Under the Periodic Inventory System 274
Adjusting Process Under the Periodic Inventory System 275
Financial Statements Under the Periodic Inventory System 276
Closing Entries Under the Periodic Inventory System 276
Comprehensive Problem 2 302
Make a Decision 303
Take It Further 305
Pathways Challenge 246, 307
6 Inventories 308
Control of Inventory 310
Safeguarding Inventory 310
Reporting Inventory 311
Inventory Cost Flow Assumptions 311
Inventory Costing Methods Under a Perpetual Inventory System 313
First-In, First-Out Method 313
Last-In, First-Out Method 315
Weighted Average Cost Method 317
Inventory Costing Methods Under a Periodic Inventory System 319
First-In, First-Out Method 319
Last-In, First-Out Method 319
Weighted Average Cost Method 320
Comparing Inventory Costing Methods 323
Reporting Inventory in the Financial
Statements 324
Valuation at Lower of Cost or Market 324
Inventory on the Balance Sheet 326
Effects of Inventory Errors on the Financial Statements 327
Analysis for Decision Making 330
Inventory Turnover and Days’ Sales in Inventory 330
Appendix Estimating Inventory Cost 332
Retail Method of Inventory Costing 332
Gross Profit Method of Inventory Costing 333
Make a Decision 355
Take It Further 356
Pathways Challenge 327, 358
7 Internal Control and Cash 360
Sarbanes-Oxley Act 362
Internal Control 364
Objectives of Internal Control 364
Elements of Internal Control 364
Control Environment 365
Risk Assessment 366
Control Procedures 366
Monitoring 368
Information and Communication 368
Limitations of Internal Control 369
Cash Controls over Receipts and Payments 370
Control of Cash Receipts 370
Control of Cash Payments 373
Bank Accounts 374
Bank Statement 374
Using the Bank Statement as a Control over Cash 376
Bank Reconciliation 377
Special-Purpose Cash Funds 381
Financial Statement Reporting of Cash 382
Analysis for Decision Making 383
Days’ Cash on Hand 383
Make a Decision 403
Take It Further 404
Pathways Challenge 383, 406
8 Receivables 408
Classification of Receivables 410
Accounts Receivable 410
Notes Receivable 410
Other Receivables 411
Uncollectible Receivables 411
Direct Write-Off Method for Uncollectible Accounts 412
Allowance Method for Uncollectible Accounts 413
Write-Offs to the Allowance Account 413
Estimating Uncollectibles 415
Comparing Direct Write-Off and Allowance Methods 422
Notes Receivable 423
Characteristics of Notes Receivable 423
Accounting for Notes Receivable 424
Reporting Receivables on the Balance Sheet 427
Analysis for Decision Making 428
Accounts Receivable Turnover and Days’ Sales in Receivables 428
Make a Decision 450
Take It Further 452
Pathways Challenge 426, 453
9 Long-Term Assets:
Fixed and Intangible 454
Nature of Fixed Assets 456
Classifying Costs 456
The Cost of Fixed Assets 458
Leasing Fixed Assets 459
Accounting for Depreciation 460
Factors in Computing Depreciation Expense 460
Straight-Line Method 461
Units-of-Activity Method 463
Double-Declining-Balance Method 465
Comparing Depreciation Methods 466
Partial-Year Depreciation 469
Revising Depreciation Estimates 470
Repair and Improvements 471
Disposal of Fixed Assets 473
Discarding Fixed Assets 473
Selling Fixed Assets 474
Natural Resources 475
Intangible Assets 477
Patents 477
Copyrights and Trademarks 478
Goodwill 478
Financial Reporting for Long-Term Assets:
Fixed and Intangible 480
Analysis for Decision Making 481
Fixed Asset Turnover Ratio 481
Appendix Exchanging Similar Fixed Assets 483
Gain on Exchange 483
Loss on Exchange 484
Make a Decision 502
Take It Further 503
Pathways Challenge 479, 505
10 Liabilities: Current,
Installment Notes, and
Contingencies 506
Current Liabilities 508
Accounts Payable and Accruals 508
Short-Term Notes Payable 509
Current Portion of Long-Term Debt 511
Payroll Liabilities 511
Liability for Employee Earnings 512
Deductions from Employee Earnings 512
Computing Employee Net Pay 513
Employer’s Payroll Taxes 514
Recording Payroll 515
Paying Payroll 517
Internal Controls for Payroll 517
Employees’ Fringe Benefits 517
Vacation Pay 517
Pensions 518
Postretirement Benefits Other than Pensions 520
Installment Notes 520
Issuance 520
Periodic Payments 520
Contingent Liabilities 523
Probable and Estimable 523
Probable and Not Estimable 523
Reasonably Possible 524
Remote 524
Reporting Liabilities 526
Analysis for Decision Making 527
Short-Term Liquidity Analysis 527
Comprehensive Problem 3 547
Make a Decision 549
Take It Further 552
Pathways Challenge 525, 554
11 Liabilities: Bonds Payable 556
Nature of Bonds Payable 558
Bond Characteristics and Terminology 558
Proceeds from Issuing Bonds 559
Accounting for Bonds Payable 561
Bonds Issued at Face Amount 561
Bonds Issued at a Discount 562
Amortizing a Bond Discount 562
Bonds Issued at a Premium 564
Amortizing a Bond Premium 565
Bond Redemption 567
Reporting Bonds Payable 569
Analysis for Decision Making 570
Times Interest Earned 570
Appendix 1 Present Value Concepts and
Pricing Bonds Payable 572
Present Value Concepts 572
Pricing Bonds 575
Computing Present Values 576
Appendix 2 Effective Interest Rate Method
of Amortization 576
Amortization of Discount by the Interest Method 577
Amortization of Premium by the Interest Method 578
Make a Decision 593
Take It Further 594
Pathways Challenge 568, 595
12 Corporations: Organization,
Stock Transactions, and
Dividends 596
Nature of a Corporation 598
Characteristics of a Corporation 598
Forming a Corporation 599
Paid-In Capital from Stock 601
Characteristics of Stock 601
Types of Stock 602
Issuing Stock 604
Premium on Stock 605
No-Par Stock 606
Accounting for Dividends 607
Cash Dividends 608
Stock Dividends 609
Stock Splits 611
Treasury Stock Transactions 612
Reporting Stockholders’ Equity 614
Stockholders’ Equity on the Balance Sheet 614
Reporting Retained Earnings 615
Statement of Stockholders’ Equity 617
Reporting Stockholders’ Equity for Alphabet 618
Analysis for Decision Making 619
Earnings per Share 619
Comprehensive Problem 4 637
Make a Decision 639
Take It Further 640
Pathways Challenge 604, 643
13 Statement of Cash
Flows 644
Reporting Cash Flows 646
Cash Flows: Operating Activities 647
Cash Flows: Investing Activities 649
Cash Flows: Financing Activities 649
Noncash Investing and Financing Activities 650
Format of the Statement of Cash Flows 650
No Cash Flow per Share 651
Cash Flows: Operating Activities 651
Net Income 653
Adjustments to Net Income 653
Cash Flows: Investing Activities 657
Land 657
Building and Accumulated Depreciation—Building 658
Cash Flows: Financing Activities 659
Bonds Payable 659
Common Stock 659
Dividends and Dividends Payable 660
Preparing the Statement of Cash Flows 661
Analysis for Decision Making 663
Free Cash Flow 663
Appendix 1 Spreadsheet (Work Sheet) for Statement
of Cash Flows—The Indirect Method 664
Analyzing Accounts 665
Retained Earnings 666
Other Accounts 666
Preparing the Statement of Cash Flows 667
Appendix 2 Preparing the Statement
of Cash Flows—The Direct Method 667
Cash Received from Customers 668
Cash Payments for Merchandise 668
Cash Payments for Operating Expenses 669
Gain on Sale of Land 669
Interest Expense 670
Cash Payments for Income Taxes 670
Reporting Cash Flows from (Used for) Operating
Activities—Direct Method 670
Make a Decision 698
Take It Further 701
Pathways Challenge 661, 702
14 Financial Statement Analysis 704
Analyzing and Interpreting Financial Statements 706
The Value of Financial Statement Information 706
Techniques for Analyzing Financial Statements 707
Analytical Methods 707
Horizontal Analysis 707
Vertical Analysis 709
Common-Sized Statements 711
Analyzing Liquidity 713
Current Position Analysis 713
Accounts Receivable Analysis 714
Inventory Analysis 715
Analyzing Solvency 718
Ratio of Fixed Assets to Long-Term Liabilities 718
Ratio of Liabilities to Stockholders’ Equity 718
Times Interest Earned 719
Analyzing Profitability 720
Asset Turnover 721
Return on Total Assets 721
Return on Stockholders’ Equity 722
Return on Common Stockholders’ Equity 723
Earnings per Share on Common Stock 724
Price-Earnings Ratio 725
Dividends per Share 726
Dividend Yield 726
Summary of Analytical Measures 728
Corporate Annual Reports 729
Management Discussion and Analysis 729
Report on Internal Control 730
Report on Fairness of the Financial Statements 730
Make a Decision 757
Take It Further 758
Pathways Challenge 725, 760
Appendix A: Interest Tables A-2
Appendix B: Selected Topics B-1
Topic 1: Investments
Topic 2: Foreign Currency Transactions
Topic 3: Corporate Taxes
Topic 4: Reporting Unusual Items and Comprehensive Income
Topic 5: Revenue Recognition
Topic 6: International Accounting Standards
Appendix C: Nike Inc., Form 10-K for the Fiscal Year
Ended May 31, 2020 Selected Excerpts C-1
Appendix D: Reversing Entries (online) D-1
Appendix E: Special Journals and Subsidiary
Ledgers (online) E-1
Glossary G-1
Index I-1