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15th Edition

Financial &
Managerial
Accounting
THE BASIS FOR BUSINESS DECISIONS

Jan R. Williams
University of Tennessee

Susan F. Haka
Michigan State University

Mark S. Bettner
Bucknell University

Joseph V. Carcelio
University of Tennessee

McGraw-Hill
Irwin
Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis
Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City
Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

Contents
Accounting: Information
for Decision Making
Accounting Information: A Means to an End

Owners' Equity

45

The Accounting Equation

45

The Effects of Business Transactions: An Illustration

46

Effects of These Business Transactions


on the Accounting Equation

50

Accounting from a User's Perspective

Types of Accounting Information

Income Statement

Statement of Cash Flows

Determining Information Needs

Relationships among Financial Statements

The Cost of Producing Accounting Information

Financial Analysis and Decision Making

Basic Functions of an Accounting System

Forms of Business Organization

Who Designs and Installs Accounting Systems?

Components of Internal Control

Financial Accounting Information

Accounting Systems

External Users of Accounting Information

Objectives of External Financial Reporting

10

Characteristics of Externally Reported Information

12

51
53
54
57
57

Sole Proprietorships

57

Partnerships

58

Corporations

58

Reporting Ownership Equity in the


Statement of Financial Position

58

Management Accounting Information

13

The Use of Financial Statements by


External Parties

59

Users of Internal Accounting Information

13

The Need for Adequate Disclosure

60

Objectives of Management Accounting Information

14

Management's Interest in Financial Statements

60

Characteristics of Management
Accounting Information

15

Integrity of Accounting Information


Institutional Features

16
17

Professional Organizations

19

Competence, Judgment, and Ethical Behavior

21

Careers in Accounting

23

Public Accounting

23

Management Accounting

24

Governmental Accounting

24

Accounting Education

24

What about Bookkeeping?

25

Accounting as a Stepping-Stone

25

But What about Me? I'm Not an Accounting Major

25

Ethics^ Fraud & Corporate Governance .

26

Concluding Remarks

26

End-of-Chapter Review

27

Assignment Material

Concluding Remarks

61
62

End-of-Chapter Review

63

Assignment Material

66

Ethics, Fraud & Corporate Governance

30

The Accounting Cycle:


Capturing Economic
Events
The Accounting Cycle
The Role of Accounting Records

The Ledger
The Use of Accounts
Debit and Credit Entries
Double-Entry AccountingThe Equality of
Debits and Credits

The Journal
Posting Journal Entries to the Ledger Accounts
(and How to "Read" a Journal Entry)

Basic Financial
Statements

Recording Balance Sheet Transactions:


An Illustration

89
89
90

91
92

92

Introduction to Financial Statements

40

What Is Net Income?

96
98

A Starting Point: Statement of Financial Position

41

Retained Earnings

98

Assets

42

The Income Statement: A Preview

Liabilities

44

Revenue

Ledger Accounts after Posting

98
100

100
102

Relationships among the Financial Statements

The Accrual Basis of Accounting

Drafting the Notes That Accompany Financial Statements

198

Debit and Credit Rules for Revenue and Expenses

102

What Types of Information Must Be Disclosed?

199

Expenses

103

Dividends
Recording Income Statement Transactions:
An Illustration

The Trial Balance

201

103

Closing Entries for Expense Accounts

201

109

Closing the Income Summary Account

202

109
111

Closing the Dividends Account

203

Summary of the Closing Process

204

112

After-Closing Trial Balance

205

Uses and Limitations of the Trial Balance

Ethics, Fraud & Corporate Governance

112

Concluding Remarks

113
113

The Accounting Cycle in Perspective

End-of-Chapter Review

114

Assignment Material

119

The Accounting Cycle:


Accruals and Deferrals
Adjusting Entries

142

A Last Look at Overnight: Was 2009 a Good Year?

Financial Analysis and Decision Making "


Preparing Financial Statements Covering Different
Periods of Time

210

Isn't This Really a Spreadsheet?

210

How Is a Worksheet Used?

210

The Mechanics: How It's Done

210

What If: A Special Application of Worksheet Software

142
142

Assignment Material

Adjusting Entries and Timing Differences

143

Characteristics of Adjusting Entries

144

Year-End at Overnight Auto Service

145

Converting Assets to Expenses

146

The Concept of Depreciation

148

Converting Liabilities to Revenue

151

Accruing Unpaid Expenses

152

Accruing Uncollected Revenue

154

Accruing Income Taxes Expense:


The Final Adjusting Entry

155

Susquehanna Equipmental Rentals

Merchandising Companies

248
248
249

Effects of the Adjusting Entries

158

Companies

161
161
162
167

Two Approaches Used in Accounting for Merchandise


Inventories

250
251

Perpetual Inventory Systems

251

Taking a Physical Inventory

253

Closing Entries in a Perpetual Inventory System

254

Periodic Inventory Systems

The Accounting Cycle:


Reporting Financial
Results

244

Income Statement of a Merchandising Company


Accounting System Requirements for Merchandising

Assignment Material

218

The Operating Cycle of a Merchandising Company

157

End-of-Chapter Review

213

214

Merchandising
Activities

The Concept of Materiality

Concluding Remarks

208

Supplemental Topic: The Worksheet

Types of Adjusting Entries

Ethics, Fraud & Corporate Governance

206

209
209

The Need for Adjusting Entries

156

205

Concluding Remarks

Ethics, Fraud & Corporate Governance

End-of-Chapter Review

Adjusting Entries and Accounting Principles

254

Operation of a Periodic Inventory System

254

Closing Process in a Periodic Inventory System

255

Comparison of Perpetual and Periodic Inventory Systems 257


Selecting an Inventory System

258

194

Transactions Relating to Purchases

The Income Statement

194

Credit Terms and Cash Discounts

259

The Statement of Retained Earnings

197

Returns of Unsatisfactory Merchandise

261

The Balance Sheet

197

Transportation Costs on Purchases

261

Preparing Financial Statements

XXIV

200

Closing Entries for Revenue Accounts

The Journal

February's Ledger Balances

Closing the Temporary Accounts

198

259

Financial Analysis and Decision Making

314

Sales Returns and Allowances

262

Ethics, Fraud & Corporate Governance

316

Sales Discounts

263

Concluding Remarks

316

Delivery Expenses

263

Accounting for Sales Taxes

264

End-of-Chapter Review

317

Assignment Material

321

Transactions Relating to Sales

262

Modifying an Accounting System


Special Journals Provide Speed and Efficiency

264
264

Financial Analysis and Decision Making


Net Sales
Gross Profit Margins
Ethics, Fraud & Corporate Governance
Concluding Remarks

265
265
265
267
267

End-of-Chapter Review
Assignment Material

268
272

The Valuation of Financial Assets

Cash

346

346

Which Unit Did We Sell?

347

Data for an Illustration

347

Specific Identification

348

Cost Flow Assumptions

348

Average-Cost Method

348

First-ln, First-Out Method

349

Last-In, First-Out Method

350

292

Evaluation of the Methods

351

292

Do Inventory Methods Really Affect


Performance?

353

The Principle of Consistency

353

Just-in-Time (JIT) Inventory Systems

353

293

Reporting Cash in the Balance Sheet

Inventory Defined

The Flow of Inventory Costs

Financial Assets

How Much Cash Should a Business Have?

Inventories and the


Cost of Goods Sold

293

The Statement of Cash Flows ';

294

Cash Management

294

Taking a Physical Inventory

355

294

Recording Shrinkage Losses

355

295

LCM and Other Write-Downs of Inventory

355

Reconciling the Bank Statement

295

The Year-End Cutoff of Transactions

356

Petty Cash Funds

299

Periodic Inventory Systems

357

International Financial Reporting Standards

360

Importance of an Accurate Valuation


of Inventory

361
362

Internal Control over Cash


Bank Statements

Short-Term Investments
Accounting for Marketable Securities

299
300

Purchase of Marketable Securities

300

Recognition of Investment Revenue

301

Techniques for Estimating the Cost of


Goods Sold and the Ending Inventory

Sale of Investments

301

The Gross Profit Method

362

Adjusting Marketable Securities to Market Value

302

The Retail Method

363
363

364

Accounts Receivable

303

Uncollectible Accounts

303

"Textbook" Inventory Systems Can Be


Modified... and They Often Are

The Allowance for Doubtful Accounts

305

Financial Analysis and Decision Making

Writing Off an Uncollectible Account Receivable

305

Monthly Estimates of Credit Losses


Concentrations of Credit Risk

Inventory Turnover

364

306

Receivables Turnover

365

308

Accounting Methods Can Affect


Financial Ratios

365

Recovery of an Account Receivable Previously Written Off

308

Direct Write-Off Method

309

Internal Controls for Receivables

310

Management of Accounts Receivable

310

Factoring Accounts Receivable


Credit Card Sales

Notes Receivable and Interest Revenue

Ethics, Fraud & Corporate Governance


Concluding Remarks

366

310

End-of-Chapter Review

366
367

310

Assignment Material

370

311

Nature of Interest

312

Accounting for Notes Receivable

312

Guitar Universe, Inc.

388
XXV

Plant and Intangible


Assets
Plant Assets as a "Stream of Future Services"
Major Categories of Plant Assets
Accountable Events in the Lives of Plant Assets

Acquisitions of Plant Assets


Some Special Considerations

393

End-of-Chapter Review

416

Assignment Material

419

394

395

10 Liabilities
The Nature of Liabilities

Current Liabilities

436

437

Accounts Payable

437

Motes Payable

437

Allocating the Cost of Plant and


Equipment over the Years of Use

395

The Current Portion of Long-Term Debt

438

Causes of Depreciation

396

Accrued Liabilities

439

Methods of Computing Depreciation

396

Payroll Liabilities

439

The Straight-Line Method

397

Unearned Revenue

441

The Declining-Balance Method

399

Which Depreciation Methods Do Most


Businesses Use?

401

Financial Statement Disclosures

402

The Impairment of Plant Assets

403

Other Depreciation Methods

403

Long-Term Liabilities

441

Maturing Obligations Intended to Be Refinanced

441

Installment Notes Payable

442

Bonds Payable

444

What Are Bonds?

444

Tax Advantage of Bond Financing

446

The Units-of-Output Method

404

Accounting for Bonds Payable

446

MACRS

404

Bonds Issued at a Discount or a Premium

448

Sum-of-the-Years' Digits

404

Accounting for a Bond Discount: An Illustration

449

Decelerated Depreciation Methods

404

Accounting fora Bond Premium: An Illustration

451

Depreciation Methods in Use: A Survey

405

Bond Discount and Premium in Perspective

454

The Concept of Present Value

454

Bond Prices after Issuance

455

Early Retirement of Bonds Payable

456

Disposal of Plant and Equipment

405

Gains and Losses on the Disposal


of Plant and Equipment

405

Trading in Used Assets for New Ones

406

International Financial Reporting Standards

407

Estimated Liabilities, Loss Contingencies,


and Commitments

457

407

Estimated Liabilities

457

Characteristics

407

Loss Contingencies

457

Operating Expenses versus Intangible Assets

408

Amortization

408

Evaluating the Safety of Creditors' Claims

458

Goodwill

408

Methods of Determining Creditworthiness

459

Patents

410

Trademarks and Trade Names

411

Franchises

411

Copyrights

411

Other Intangibles and Deferred Charges

411

Research and Development (R&D) Costs

Intangible Assets

Financial Analysis and Decision Making


Natural Resources
Accounting for Natural Resources
Depreciation, Amortization, and Depletion
A Common Goal

Plant Transactions and the


Statement of Cash Flows
Ethics, Fraud & Corporate Governance
XXVI

392

392
393

Depreciation

415

392
392

Determining Cost: An Example

Capital Expenditures and Revenue Expenditures

Concluding Remarks

Commitments

How Much Debt Should a Business Have?

458

459

Special Types of Liabilities

460
461
462

411

Lease Payment Obligations

462

412
413

Operating Leases

462

Capital Leases

462

413
413

414
414

Financial Analysis and Decision Making


Ethics, Fraud & Corporate Governance

Liabilities for Pensions and Other


Postretirement Benefits

463

Deferred Income Taxes

465

Concluding Remarks

465

End-of-Chapter Review

466
470

Assignment Material

Stockholders' Equity:
Paid-in Capital
Corporations

490

Why Businesses Incorporate

490

Publicly Owned Corporations

491

Formation of a Corporation
Stockholder Records in a Corporation

Paid-in Capital of a Corporation

492
494

494

Authorization and Issuance of Capital Stock

494

Common Stock and Preferred Stock

496

Characteristics of Preferred Stock

497

Book Value per Share of Common Stock

499

Market Value

500

Statement of Retained Earnings

538

Prior Period Adjustments

539

Comprehensive Income

539

Statement of Stockholders' Equity

540

Stockholders' Equity Section of the Balance Sheet

540

Ethics, Fraud & Corporate Governance

542

Concluding Remarks

543

End-of-Chapter Review

544

Assignment Material

548

13 Statement of Cash Flows


Statement of Cash Flows

570

Market Price of Preferred Stock

501

Purposes of the Statement

570

Market Price of Common Stock

501

Example of a Statement of Cash Flows

570

Book Value and Market Price

502

Classification of Cash Flows

570

Stock Splits

502

Treasury Stock

Preparing a Statement of Cash Flows

573

502

Operating Activities

Recording Purchases of Treasury Stock

503

Investing Activities

574

Reissuance of Treasury Stock

503

Financing Activities

575

Stock Buyback Programs

504

Cash and Cash Equivalents

575

505

Cash Flows from Operating Activities

576

506

Cash Payments for Merchandise and for Expenses

577

Cash Flows from Investing Activities

579

Cash Flows from Financing Activities

581

Financial Analysis and Decision Making


Ethics, Fraud & Corporate Governance
Concluding Remarks

506

574

End-of-Chapter Review

507

Relationship between the Statement of

Assignment Material

510

Cash Flows and the Balance Sheet

582 ,

Reporting Operating Cash Flows by the Indirect Method

583

McMinn Retail, Inc.

525

12 Income and Changes


in Retained Earnings
Reporting the Results of Operations

528

Developing Predictive Information

528

Reporting Irregular Items: An Illustration

Reconciling Net Income with Net Cash Flows

584

The Indirect Method: A Summary

585

Indirect Method May Be Required in


a Supplementary Schedule

585

The Statement of Cash Flows: A Second Look

585

Financial Analysis and Decision Making

587

Managing Cash Flows

589

Budgeting: The Primary Cash Management Tool

589

528

What Priority Should Managers Give to


Increasing Net Cash Flows?

589

Continuing Operations

528

Some Strategies for Permanent Improvements

Discontinued Operations

529

in Cash Flow

590

Extraordinary Items

529

Ethics, Fraud & Corporate Governance

591

Earnings per Share (EPS)

531

A Worksheet for Preparing a Statement


of Cash Flows

592

Financial Analysis and Decision Making


Basic and Diluted Earnings per Share

Other Transactions Affecting Retained Earnings


Cash Dividends
Dividend Dates
Liquidating Dividends
Stock Dividends

533
534

534
534
535
_ 536
536

Data for an Illustration

592

The Worksheet

593

Entry

595

Concluding Remarks
End-of-Chapter Review
Assignment Material

596
.'

598
603
XXVII

15 Global Business
and Accounting

14 Financial Statement
Analysis

Globalization

Financial Statements Are Designed


for Analysis

630

Tools of Analysis

631

Dollar and Percentage Changes

631

694

Economic Systems

694
695

632

Culture

Component Percentages

633

Technology and Infrastructure

Ratios

633

Standards of Comparison

633

Quality of Earnings

634

Quality of Assets and the Relative


Amount of Debt

635

A Classified Balance Sheet


Working Capital

International Financial Reporting


Standards: Adoption or Convergence

699
700

635

Currency FluctuationsWho Wins and Who Loses?

704

637

Consolidated Financial Statements That Include


Foreign Subsidiaries

706

637

Debt Ratio

638

Evaluating Financial Ratios

638

Liquidity, Credit Risk, and the Law

640

640

Classifications in the Income Statement

641

Multiple-Step Income Statements

642

706

Global Sourcing
Foreign Corrupt Practices Act

708

End-of-Chapter Review

709
709
710

Assignment Material

713

Ethics, Fraud & Corporate Governance


Concluding Remarks

644

Price-Earnings Ratio

644

Single-Step Income Statements

645

Evaluating the Adequacy of Net Income

645

Return on Investment (ROI)

645

Return on Assets (ROA)

646

Management Accounting: Basic Framework

Return on Equity (ROE)

646

Management Accounting's Role in Assigning

Comprehensive Illustration: Seacliff Company

699

Accounting for Transactions with Foreign Companies

638

697

635

Quick Ratio

Measures of Profitability

696

697

Exchange Rates

Current Ratio

Earnings per Share

Harmonization of Financial Reporting Standards

Foreign Currencies and Exchange Rates

692
693

Political and Legal Systems

Trend Percentages

Measures of Liquidity and Credit Risk

647

Management
Accounting: A Business
Partner
730

Decision-Making Authority

730

Analysis by Common Stockholders

650

Management Accounting's Role in Decision Making

730

Return on Investment (ROI)

652

Leverage

653

Management Accounting's Role in Performance


Evaluation and Rewards

731

Analysis by Long-Term Creditors

654

Accounting Systems: A Business Partner

731

Accounting for Manufacturing Operations

733

Analysis by Short-Term Creditors

654

Cash Flow Analysis

658

Classifications of Manufacturing Costs

Statements

659

Ethics, Fraud & Corporate Governance

735

Product Costs and the Matching Principle

736

Product Costs versus Period Costs

Usefulness of Notes to Financial

734
734

International Financial Reporting Standards

659

Summary of Analytical Measurements

660

Inventories of a Manufacturing Business

736

Ethics, Fraud & Corporate Governance

662

The Flow of Costs Parallels the Flow of Physical Goods

736

Concluding Remarks

663

Accounting for Manufacturing Costs: An Illustration

737

End-of-Chapter Review
Assignment Material

Home Depot, Inc.


XXVIII

Environmental Forces Shaping Globalization

664
668

688

Direct Materials

737

Direct Labor

738

Manufacturing Overhead

739

Direct and Indirect Manufacturing Costs

740

Work in Process Inventory, Finished Goods


Inventory, and the Cost of Goods Sold

740

The Need for Per-Unit Cost Data

741

Ethics, Fraud & Corporate Governance

826

Determining the Cost of Finished Goods Manufactured

741

Concluding Remarks

826

Financial Statements of a Manufacturing Company

742

End-of-Chapter Review

827

Assignment Material

830

International Financial Reporting Standards


and Inventories

Concluding Remarks

743

744

End-of-Chapter Review

745

Assignment Material

748

Costing and the


Value Chain

17 Job Order Cost


Systems and Overhead
Allocations
Cost Accounting Systems
Job Order Cost Systems and the Creation
of Goods and Services
Overhead Application Rates
What "Drives" Overhead Costs?

770

The Value Chain

771
779

852

Value- and Non-Value-Added Activities

852

Activity-Based Management
Activity-Based Management across the Value Chain

770

ABC: A Subset of Activity-Based Management

The Target Costing Process

tic.

852

International Financial Reporting


Standards and the Value Chain

854
854
857

857

Components of the Target Costing Process

858

ltd

Target Costing: An Illustration

859

The Job Cost Sheet

773

Characteristics of the Target Costing Process

861

Flow of Costs in Job Costing: An Illustration

774

Accounting for Direct Materials

71A
1 14

Accounting for Direct Labor Costs

775

Accounting for Overhead Costs

776

Accounting for Completed Jobs'

779

Job Order Costing

Job Order Costing in Service Industries

Activity-Based Costing (ABC)

-7-70

Just-in-Time Inventory Procedures

862

Measures of Efficiency in a JIT System

863

Total Quality Management and the Value Chain

779

779

864

Measuring the Cost of Quality

865

Productivity and Quality

866

782

Stage 2: Allocate Activity Cost Pools to the Products

783

Ethics, Fraud & Corporate Governance

Determining Unit Costs Using ABC

786

Concluding Remarks
End-of-Chapter Review

Ethics, Fraud & Corporate Governance

788
788

Concluding Remarks

789

End-of-Chapter Review

790

Assignment Material

792

Assignment Material

Production of Goods and Services and Costing


Systems

814

Process Costing

815

Tracking the Physical Flow and Related Production Costs


Process Costing and Equivalent Units
Cost per Equivalent Unit

866
867
868
871

i E r < V 20 Cost-Volume-Profit
Wmff
Analysis
Cost-Volume Relationships

18 Process Costing

863

Components of the Cost of Quality

Stage 1: Separate Activity Cost Pools

The Trend toward More Informative


Cost Accounting Systems

862

JIT, Supplier Relationships, and Product Quality

890

Fixed Costs (and Fixed Expenses)

890

Cost-Volume Relationships: A Graphic Analysis

891

The Behavior of Per-Unit Costs 895

893

Economies of Scale

894

Additional Cost Behavior Patterns

895

Cost Behavior and Operating Income

896

815

Cost-Volume-Profit Analysis: An Illustration

896

817

Preparing and Using a Cost-Volume-Profit Graph

897

819

Contribution Margin: A Key Relationship

898

How Many Units Must We Sell?

899

Tracking Costs Using a Process Costing


Production Report

821

How Many Dollars in Sales Must We Generate?

900

Evaluating Departmental Efficiency

825

What Is Our Margin of Safety?

900
XXIX

968

900

Business Applications of CVP

900

Responsibility Accounting: An Illustration

968

Additional Considerations in CVP

903

CVP Analysis When a Company Sells Many Products

903

Assigning Revenue and Costs


to Responsibility Centers

969

Variable Costs

970

Determining Semivariable Cost Elements:


The High-Low Method

904

Contribution Margin

970

Assumptions Underlying Cost-Volume-Profit Analysis

905

Fixed Costs

971

Summary of Basic Cost-Volume-Profit Relationships

905

Traceable Fixed Costs

971

906

Common Fixed Costs

971

Responsibility Margin

972

When Is a Responsibility Center "Unprofitable"?

974

Evaluating Responsibility Center Managers

974

Ethics, Fraud & Corporate Governance


Concluding Remarks

906

End-of-Chapter Review

907

Assignment Material

910

21 Incremental Analysis
The Challenge of Changing Markets
The Concept of Relevant Cost Information

928
928

Arguments against Allocating Common Fixed


Costs to Business Centers

975

Transfer Prices

975

Nonfinancial Objectives and Information

978

Ethics, Fraud & Corporate Governance

979

Responsibility Center Reporting in


Financial Statements

979

International Financial Reporting Standards


and Responsibility Center Reporting

Relevant Information in Business Decisions

930

International Financial Reporting Standards


and Relevant Costs

930

End-of-Chapter Review

A Simple Illustration Of Relevant Costs

930

Assignment Material

Opportunity Costs

931

Ethics, Fraud & Corporate Governance

Concluding Remarks

979

980
981
983

931

Sunk Costs versus Out-of-Pocket Costs

'

Incremental Analysis in Common


Business Decisions
Special Order Decisions

931

I; 23 Operational Budgeting

932
932

Profit Rich, Yet Cash Poor

1002
1002

1003

Production Constraint Decisions

933

Operating Cash Flows: The Lifeblood of Survival

Make or Buy Decisions

935

Budgeting: The Basis for Planning and Control

Sell, Scrap, or Rebuild Decisions

936

Benefits Derived from Budgeting

1004

938

Establishing Budgeted Amounts

1004

Joint Product Decisions

Concluding Remarks
End-of-Chapter Review
Assignment Material

The Gilster Company

939
940
943

960

22 Responsibility
Accounting and
Transfer Pricing
Responsibility Centers

XXX

Responsibility Accounting Systems

What Change in Operating Income Do We Anticipate?

964

The Need for Information about Responsibility


Center Performance

964

Cost Centers, Profit Centers,


and Investment Centers

965

Ethics, Fraud & Corporate Governance

1006

The Budget Period

1006

The Master Budget: A Package of Related Budgets

1007

Steps in Preparing a Master Budget

1007

Preparing the Master Budget: An Illustration

1009

Operating Budget Estimates

1009

Budgeted Income Statement

1013

Cash Budget Estimates

1014

The Cash Budget

1017

Budgeted Balance Sheets

1020

International Financial Reporting:


Standards and Budgeting

1020

Using Budgets Effectively

1021

Flexible Budgeting

1022

Concluding Remarks

1024

End-of-Chapter Review

1025

Assignment Material

1028

Management Compensation

24 Standard Cost Systems

Components of Management Compensation

Ethics, Fraud & Corporate Governance


Standard Cost Systems

1048

1102

Direct Labor Standards

1050

Design Choices for Management


Compensation

Manufacturing Overhead Standards

1050

Goals and Rewards in Life

Standard Costs and Variance Analysis:


An Illustration

1050

Materials Price and Quantity Variances

1052

Labor Rate and Efficiency Variances

1054

1058

Evaluating Cost Variances from Different


Perspectives

1058

A Final Note: JIT Systems and Variance


Analysis

1102

End-of-Chapter Review

1103

Assignment Material

1106

Ethics, Fraud & Corporate Governance

1062

End-of-Chapter Review

1063

26 Capital Budgeting
Capital Investment Decisions

1066

25 Rewarding Business
Performance
Motivation and Aligning Goals and Objectives

1088

Communicating Goals and Objectives

1088

Accounting Information and Feedback about


Goal Achievement
Rewarding Goal Achievement

The DuPont System

1126

Evaluating Capital Investment Proposals:


An Illustration

1126

Payback Period

1127

Return on Average Investment

1128

Discounting Future Cash Flows

1129

Replacing Assets

1132

Behavioral Considerations in Capital Budgeting

1134

1135

1088

Ethics, Fraud & Corporate Governance

1135

1088

A Concluding Comment from the Authors

1136

End-of-Chapter Review

1137

Assignment Material

1140

1089
1089

The Components of Return on Investment

1091

Return on Sales

1091

Capital Turnover

1092

Criticisms of ROI

1093

The Short Horizon Problem

1093

Failing to Undertake Profitable Investments

1093

Measurement Problems

1094

1094

Residual Income

1094

Economic Value Added

1095

The Balanced Scorecard

1126

Financial and Nonfinancial Considerations

Concluding Remarks

Return on Investment

Residual Income and Economic


Value Added

1122

1061

1061

Assignment Material

Concluding Remarks

Utease Corporation

Concluding Remarks

'

1101

1050

1055

1100
1101

1048

Direct Materials Standards

Manufacturing Overhead Variances

1099

International Financial Reporting Standards


and Management Compensation

Establishing and Revising Standard Costs

Valuation of Finished Goods

1099

1095

ra
m
mM
B

Home Depot 2007 Financial


Statements

The Time Value of Money: Future


Amounts and Present Values
The Concept

B-1

Relationships between Present Values


and Future Amounts

B-1

Compound Interest

B-2

Applications of the Time Value of Money Concept

B-2
B-2

The Financial Perspective

1097

The Customer Perspective

1098

The Business Process Perspective

1098

The Tables Approach

B-3

The Learning and Growth Perspective

1098

The Future Amount of an Annuity

B-4

Difficulties with the Balanced Scorecard

1098

Interest Periods of Less than One Year

B-5

Future Amounts

XXXI

Present Values

B-6

Using Present Value Tables

B-7

What Is the Appropriate Discount Rate?

B-7

The Present Value of an Annuity

B-8
B-10

Discount Periods of Less than One Year

B-10

Valuation of Financial Instruments


Interest-Bearing Receivables and Payables

B-10

"Non-Interest-Bearing" Notes

B-10

Market Prices of Bonds

B-12

Capital Leases

B-13
B-14

Obligations for Postretirement Benefits

B-14

Assignment Material

Evaluating the Financial Statements


of a Partnership

Corporations

C-6

C-6

What Is a Corporation?

C-7

Stockholders' Liability for Debts of a Corporation

C-8

What Types of Businesses Choose the


Corporate Form of Organization?

C-8

Accounting for Corporate Income Taxes

C-8

Salaries Paid to Owners

C-10

Owners' Equity in a Corporate Balance Sheet

C-10

The Issuance of Capital Stock

C-10

Retained Earnings

C-10

Accounting for Dividends

C-11

Closing Entries and the Statement

Forms of Business Organization


Importance of Business Form

C-1

Sole Proprietorships

C-1

The Concept of the Separate Business Entity

C-1

Characteristics of a Sole Proprietorship

C-1

Unlimited Personal Liability

C-2

Accounting Practices of Sole Proprietorships

C-2

Evaluating the Financial Statements


of a Proprietorship

C-2

Partnerships
General Partnerships

XXXII

C-3

C-4

Partnerships That Limit Personal Liability

C-4

Accounting Practices of Partnerships

C-5

of Retained Earnings

C-11

Evaluating the Financial Statements of a Corporation

C-12

The Conceptand the Problemof "Double Taxation"

C-13

S Corporations

C-13

Selecting an Appropriate Form of Business


Organization
Incorporating an Established Business

Supplemental Topic: Partnership Accounting


A Closer Look

C-14
C-14

C-16

Opening the Accounts of a New Partnership

C-16

Allocating Partnership Net Income among


the Partners

C-18

Assignment Material

Index

C-22