Accounting Principles: A Business Perspective Volume 1 ...

Accounting Principles:

A Business Perspective

Volume 1 Financial Accounting

Accounting Principles:

A Business Perspective

First Global Text Edition, Volume 1

Financial Accounting

James Don Edwards, PhD, D.H.C.

J.M. Tull Professor Emeritus of Accounting

Terry College of Business

University of Georgia

Roger H. Hermanson, PhD

Regents Professor Emeritus of Accounting

Ernst & Young-J. W. Holloway Memorial Professor Emeritus

Georgia State University

Funding for the first Global Text edition was provided by

Endeavour International Corporation, Houston, Texas, USA.

The Global Text Project is funded by the Jacobs Foundation, Zurich, Switzerland.

This book is licensed under a Creative Commons Attribution 3.0 License

Acknowledgments for the Global Text First Edition:

Revision Editor: Donald J. McCubbrey, PhD

Clinical Professor, Daniels College of Business

University of Denver

Life member, American Institute of Certified Public Accountants

Revision Assistants

Emily Anderson

Kyle Block

Assistant Editor

Jackie Sharman

Associate Editor

Marisa Drexel

Conversion Specialist

Varun Sharma

This book is licensed under a Creative Commons Attribution 3.0 License

Table of Contents

Accounting principles:A business perspective.................................................................................................6

The accounting environment..........................................................................................................................18

Accounting defined.........................................................................................................................................19

Financial accounting versus managerial accounting.....................................................................................23

Development of financial accounting standards............................................................................................25

Ethical behavior of accountants.....................................................................................................................27

1. Accounting and its use in business decisions.......................................................................30

Forms of business organizations....................................................................................................................31

Types of activities performed by business organizations..............................................................................33

Financial statements of business organizations............................................................................................33

The financial accounting process...................................................................................................................37

Analyzing and using the financial results¡ªthe equity ratio...........................................................................47

2. Recording business transactions..........................................................................................68

The account and rules of debit and credit......................................................................................................69

The accounting cycle.......................................................................................................................................75

The journal......................................................................................................................................................76

The ledger........................................................................................................................................................79

The accounting process in operation.............................................................................................................80

3. Adjustments for financial reporting....................................................................................123

Cash versus accrual basis accounting...........................................................................................................124

Classes and types of adjusting entries..........................................................................................................127

Adjustments for deferred items....................................................................................................................129

Adjustments for accrued items.....................................................................................................................137

4. Completing the accounting cycle.........................................................................................159

The accounting cycle summarized................................................................................................................160

The work sheet..............................................................................................................................................160

Preparing financial statements from the work sheet...................................................................................166

Journalizing adjusting entries......................................................................................................................167

The closing process.......................................................................................................................................168

Accounting systems: From manual to computerized...................................................................................174

A classified balance sheet..............................................................................................................................179

Analyzing and using the financial results ¡ª the current ratio.....................................................................185

5. Accounting theory................................................................................................................210

Traditional accounting theory.......................................................................................................................211

Other basic concepts.....................................................................................................................................213

The measurement process in accounting.....................................................................................................214

The major principles.....................................................................................................................................215

Modifying conventions (or constraints).......................................................................................................221

The financial accounting standards board's conceptual framework project...............................................224

Objectives of financial reporting..................................................................................................................224

Qualitative characteristics............................................................................................................................226

Recognition and measurement in financial statements...............................................................................231

6. Merchandising transactions................................................................................................250

Introduction to inventories and the classified income statement...............................................................250

Two income statements compared¡ª Service company and merchandising company...............................251

Accounting Principles: A Business Perspective

4

A Global Text

Sales revenues...............................................................................................................................................252

Cost of goods sold.........................................................................................................................................258

Classified income statement.........................................................................................................................267

Analyzing and using the financial results¡ªGross margin percentage.........................................................271

7. Measuring and reporting inventories.................................................................................296

Inventories and cost of goods sold...............................................................................................................297

Determining inventory cost.........................................................................................................................300

Departures from cost basis of inventory measurement..............................................................................320

Analyzing and using financial results¡ªinventory turnover ratio................................................................325

8. Control of cash.....................................................................................................................353

Internal control.............................................................................................................................................354

Controlling cash............................................................................................................................................361

The bank checking account..........................................................................................................................364

Bank reconciliation.......................................................................................................................................369

Petty cash funds............................................................................................................................................374

Analyzing and using the financial results¡ªThe quick ratio.........................................................................377

9. Receivables and payables....................................................................................................395

Accounts receivable......................................................................................................................................396

Current liabilities..........................................................................................................................................405

Notes receivable and notes payable..............................................................................................................412

Short-term financing through notes payable...............................................................................................417

Analyzing and using the financial results¡ªAccounts receivable turnover and number of days' sales in

accounts receivable............................................................................................................................................420

10. Property, plant, and equipment........................................................................................437

Nature of plant assets...................................................................................................................................438

Initial recording of plant assets....................................................................................................................439

Depreciation of plant assets.........................................................................................................................443

Subsequent expenditures (capital and revenue) on assets..........................................................................456

Subsidiary records used to control plant assets...........................................................................................459

Analyzing and using the financial results¡ªRate of return on operating assets..........................................461

11. Plant asset disposals, natural resources, and intangible assets........................................478

Disposal of plant assets................................................................................................................................479

Intangible assets............................................................................................................................................491

Analyzing and using the financial results¡ªTotal assets turnover...............................................................499

12. Stockholders' equity: Classes of capital stock....................................................................519

The corporation............................................................................................................................................520

Documents, books, and records relating to capital stock............................................................................524

Par value and no-par capital stock...............................................................................................................525

Other values commonly associated with capital stock.................................................................................526

Capital stock authorized and outstanding....................................................................................................527

Classes of capital stock.................................................................................................................................528

Types of preferred stock...............................................................................................................................528

Balance sheet presentation of stock..............................................................................................................531

Stock issuances for cash...............................................................................................................................532

Capital stock issued for property or services................................................................................................533

Balance sheet presentation of paid-in capital in excess of par (or stated) value¡ªCommon or preferred..534

Analyzing and using the financial results¡ªReturn on average common stockholders' equity..................536

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