a company overview accounting paper wk5

Principles of Accounting: Volume I

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Principles of Accounting: Volume I

Editor-in-Chief: Steve Wainwright

Sponsoring Editor: Christina Ganim

Director of Editorial Technology: Peter Galuardi

Development Editors: Denis Ralling and Dan Moneypenny

Assistant Editor: Nick Devine

Editorial Assistant: Laura Wilson

Media Editor: Kimberly Purcell

Composition: Lachina Publishing Services

Cover Image: © T-Pool/Stock4B/Corbis

ISBN-10: 1-62178-014-7

ISBN-13: 978-1-62178-014-4

Copyright © 2012, Bridgepoint Education, Inc.

All rights reserved.

GRANT OF PERMISSION TO PRINT: Bridgepoint Education, Inc., the copyright owner of this material, hereby grants the hold-

er of this publication the right to print these materials for personal use. The holder of this material may print the materials

herein for personal use only. Any print, reprint, reproduction or distribution of these materials for commercial use without

the express written consent of Bridgepoint Education, Inc. constitutes a violation of the Copyright Law of the United States

of 1976 (P.L. 94-553).

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Brief Contents

Chapter 1: Introduction to Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 2: The Accounting System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Chapter 3: Income Measurement and the Accounting Cycle . . . . . . . 53

Chapter 4: Cash, Receivables, and Controls . . . . . . . . . . . . . . . . . . . . . . 89

Chapter 5: Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

Chapter 6: Plant Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

Chapter 7: Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Chapter 8: Corporate and Partnership Equity . . . . . . . . . . . . . . . . . . 175

Chapter 9: Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

Concept Check Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

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Contents

Acknowledgments xi Preface xiii

chapter 1 Introduction to Accounting 1

1.1 Entity Concepts 3

1.2 The Language of Business 4 Disciplines of Accounting 4 Financial Accounting 5

1.3 Key Concepts 5

1.4 The Financial Reporting Model 7 Sources of Capital 9 Comprehensive Illustration 11 Statement of Cash Flows: A Fourth Financial Statement 13

1.5 Usefulness of Accounting in Careers and Life 14

1.6 The Importance of Ethics 15 Concept Check 16 Key Terms 17 Critical Thinking Questions 18 Exercises 19 Problems 22

chapter 2 The Accounting System 27

2.1 System Design 28

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CONTENTS

2.2 Accounts and Debits/Credits 29 Debit and Credit Rules 30 T-Accounts 33

2.3 Transaction Analysis 33 Critical Thinking About Transaction Analysis 34 An Applied Example of Transaction Analysis 35

2.4 General Journal 37

2.5 Chart of Accounts 39 Posting the General Ledger 39 Trial Balance 42 Review of the Sequence of Transaction Recording 42 A Balanced Trial Balance: No Guarantee of Correctness 43 Special Journals 43

2.6 Source Documents 44

2.7 Thinking About Automation 44

2.8 Critical Thinking About Debits and Credits 45 Concept Check 46 Key Terms 47 Critical Thinking Questions 47 Exercises 48 Problems 49

chapter 3 Income Measurement and the Accounting Cycle 53

3.1 An Emphasis on Transactions and Events 54

3.2 The Periodicity Assumption 55

3.3 Revenue Recognition 56

3.4 Expense Recognition 57

3.5 Adjusting Entries 58 The Adjusting Process for Revenues 59 The Adjusting Process for Expenses 60 Understanding When to Adjust 67

3.6 The Accounting Cycle 68 A Comprehensive Example 69 The Adjusted Trial Balance 70 Financial Statement Preparation 71

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CONTENTS

3.7 Reporting Periods and Worksheets 72 Closing the Accounts 73 Classified Balance Sheets 76 Notes to the Financial Statements 78

3.8 Cash Basis of Accounting 79 Concept Check 80 Key Terms 81 Critical Thinking Questions 83 Exercises 83 Problems 86

chapter 4 Cash, Receivables, and Controls 89

4.1 Concepts of Cash 90 Cash Management and Control 90

4.2 Bank Reconciliations 92

4.3 Petty Cash Funds 96

4.4 Accounts Receivable 98

4.5 Direct Write-Off Method 98 Allowance Techniques for Uncollectible Accounts 99 Writing Off an Account Against an Allowance 100 Formalized Receivables and Notes 100 Credit and Debit Card Transactions 101 Concept Check 102 Key Terms 104 Critical Thinking Questions 105 Exercises 105 Problems 107

chapter 5 Inventory 111

5.1 Categories of Inventory 113 Inventory Costs 114 Freight 114 Expanded Income Reporting 115 Consigned Goods 116 Critical Thinking About Inventory Cost 117

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5.2 Cost Assignment 118

5.3 Perpetual Systems 118 First-In, First-Out 119 Last-In, First-Out 122 The Average Cost Approach 124

5.4 Comparing Methods 126 Specific Identification 126 The Retail Method 127 Lower-of-Cost-or-Market Adjustments 127

5.5 The Importance of Accuracy 127 Concept Check 128 Critical Thinking Questions 129 Key Terms 130 Exercises 131 Problems 133

chapter 6 Plant Assets 135

6.1 Ordinary and Necessary Costs 137 Special Rules 138 Materiality Issues 139 Depreciation 139

6.2 Depreciation Methods 139 The Straight-Line Method of Depreciation 140 The Double-Declining-Balance Method of Depreciation 141 The Units-of-Output Method of Depreciation 142 Revisions in Depreciation 142 Two Sets of Books? 143

6.3 Asset-Related Costs Subsequent to Acquisition 143 Sale or Abandonment of Property, Plant, and Equipment 144 Impairment 145 Taking a “Big Bath” 146 Natural Resources 146 Intangible Assets 147 Research and Development Costs 148 Goodwill 148 Concept Check 148 Key Terms 149 Critical Thinking Questions 150 Exercises 151 Problems 152

CONTENTS

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CONTENTS

chapter 7 Current Liabilities 155

7.1 Accounts and Notes Payable 156 Accruals 158 Prepayments, Deposits, and Collections for Others 159 Estimated Liabilities 159 Contingencies 160 Balance Sheet Presentation 161 Being a Better Borrower 161

7.2 Concepts in Payroll Accounting 163 Calculating Gross and Net Pay 164 Payroll Journal Entry 165 Additional Entries for Employer Amounts 166 Accurate Payroll 167 Pension and Other Postretirement Benefits 167 Concept Check 168 Key Terms 169 Critical Thinking Questions 170 Exercises 170 Problems 172

chapter 8 Corporate and Partnership Equity 175

8.1 The Corporation 177

8.2 The Partnership 179

8.3 The Sole Proprietorship 181

8.4 Accounting for Sole Proprietorships and Partnerships 182 Basic Accounting Considerations 182 Initial Investments 183 Income Sharing 184 New Partners 186

8.5 Corporate Equity Transactions 187 Par Value 188 Cash Dividends 188 Treasury Stock 189 Stock Splits and Stock Dividends 190 Income Reporting 191

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CONTENTS

8.6 Corrections of Errors and Changes in an Accounting Method 193 Concept Check 194 Key Terms 195 Critical Thinking Questions 195 Exercise 196 Problem 196

chapter 9 Analysis 197

9.1 Common-Size Financial Statements 198

9.2 Ratio Analysis 202

9.3 Liquidity Analysis 203

9.4 Debt Service Analysis 205

9.5 Turnover Analysis 206

9.6 Profitability Analysis 208

9.7 Other Measures 209

9.8 Recap and Summary Illustration 211 Concept Check 215 Key Terms 215 Critical Thinking Questions 217 Exercises 217 Problems 220

Glossary 225 Concept Check Answer Key 235

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Acknowledgments

The publisher would like to thank all the manuscript reviewers for their feedback . They include Wendy Achilles, Ashford University; Brent Beyer, Ashford University; William Blix, Ashford University; Margaret Diaz-Fugetta, Nicholls State University; Kenneth Edwards, Lincoln University; Laura Lopez, Ashford University; Ronald Pearson, Bay College; and Jess Stern, Ashford University . We would especially like to thank Gregory Gousak of Ash- ford University for his valuable assistance .

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Preface

This text provides students with an essential introduction to financial accounting . Students will develop an appreciation for basic accounting systems and processes and the resulting financial statements . This is followed by a close examination of accounting rules, procedures, and controls that are applicable to cash, receivables, and inventory . Students will also study accounting for investments in long-term productive assets . This background in accounting is essential for proper financial statement analysis, which is the closing unit in this segment .

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