Cost Accounting Questions

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1. Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:

 

Superior Markets, Inc. Income Statement For the Quarter Ended September 30
  Total North Store South Store East Store
Sales $ 4,000,000   $ 840,000   $ 1,600,000   $ 1,560,000  
Cost of goods sold   2,200,000     495,000     847,000     858,000  
Gross margin   1,800,000     345,000     753,000     702,000  
Selling and administrative expenses:                        
Selling expenses   837,000     241,400     320,000     275,600  
Administrative expenses   433,000     116,000     165,900     151,100  
Total expenses   1,270,000     357,400     485,900     426,700  
Net operating income (loss) $ 530,000   $ (12,400 ) $ 267,100   $ 275,300  
 

 

The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:

 

a. The breakdown of the selling and administrative expenses that are shown above is as follows:

 

  Total North Store South Store East Store
Selling expenses:                
Sales salaries $ 235,000 $ 55,200 $ 83,000 $ 96,800
Direct advertising   175,000   61,000   82,000   32,000
General advertising*   60,000   12,600   24,000   23,400
Store rent   310,000   95,000   112,000   103,000
Depreciation of store fixtures   21,000   5,600   7,000   8,400
Delivery salaries   24,000   8,000   8,000   8,000
Depreciation of delivery equipment   12,000   4,000   4,000   4,000
Total selling expenses $ 837,000 $ 241,400 $ 320,000 $ 275,600
 

*Allocated on the basis of sales dollars.

 

  Total North Store South Store East Store
Administrative expenses:                
Store managers’ salaries $ 85,000 $ 26,000 $ 35,000 $ 24,000
General office salaries*   60,000   12,600   24,000   23,400
Insurance on fixtures and inventory   35,000   10,500   14,000   10,500
Utilities   92,400   30,630   30,400   31,370
Employment taxes   60,600   15,270   22,500   22,830
General office—other*   100,000   21,000   40,000   39,000
Total administrative expenses $ 433,000 $ 116,000 $ 165,900 $ 151,100
 

*Allocated on the basis of sales dollars.

 

1. The lease on the building housing the North Store can be broken with no penalty.

1. The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.

1. The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $11,600 per quarter. The general manager of the North Store would continue to earn her normal salary of $12,600 per quarter. All other managers and employees in the North store would be discharged.

1. The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person’s salary is $5,000 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.

1. The company pays employment taxes equal to 15% of their employees’ salaries.

1. One-third of the insurance in the North Store is on the store’s fixtures.

1. The “General office salaries” and “General office—other” relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person’s compensation is $6,300 per quarter.

 

Required:

1. How much employee salaries will the company avoid if it closes the North Store?

2. How much employment taxes will the company avoid if it closes the North Store?

3. What is the financial advantage (disadvantage) of closing the North Store?

4. Assuming that the North Store’s floor space can’t be subleased, would you recommend closing the North Store?

5. Assume that the North Store’s floor space can’t be subleased. However, let’s introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?

 

2. Come-Clean Corporation produces a variety of cleaning compounds and solutions for both industrial and household use. While most of its products are processed independently, a few are related, such as the company’s Grit 337 and its Sparkle silver polish.

 

Grit 337 is a coarse cleaning powder with many industrial uses. It costs $1.60 a pound to make, and it has a selling price of $3.40 a pound. A small portion of the annual production of Grit 337 is retained in the factory for further processing. It is combined with several other ingredients to form a paste that is marketed as Sparkle silver polish. The silver polish sells for $4.00 per jar.

 

This further processing requires one-fourth pound of Grit 337 per jar of silver polish. The additional direct variable costs involved in the processing of a jar of silver polish are:

 

     
Other ingredients $ 0.55
Direct labor   1.44
Total direct cost $ 1.99
 

 

Overhead costs associated with processing the silver polish are:

       
Variable manufacturing overhead cost   25 % of direct labor cost
Fixed manufacturing overhead cost (per month)
Production supervisor $ 3,100  
Depreciation of mixing equipment $ 1,500  
 

 

The production supervisor has no duties other than to oversee production of the silver polish. The mixing equipment is special-purpose equipment acquired specifically to produce the silver polish. It can produce up to 3,000 jars of polish per month. Its resale value is negligible and it does not wear out through use.

 

Advertising costs for the silver polish total $2,900 per month. Variable selling costs associated with the silver polish are 5% of sales.

 

Due to a recent decline in the demand for silver polish, the company is wondering whether its continued production is advisable. The sales manager feels that it would be more profitable to sell all of the Grit 337 as a cleaning powder.

 

Required:

1. How much incremental revenue does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your answer to 2 decimal places.)

2. How much incremental contribution margin does the company earn per jar of polish by further processing Grit 337 rather than selling it as a cleaning powder? (Round your intermediate calculations and final answer to 2 decimal places.)

3. How many jars of silver polish must be sold each month to exactly offset the avoidable fixed costs incurred to produce and sell the polish? (Round your intermediate calculations to 2 decimal places.)

4. If the company sells 8,900 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any “disadvantages” as a negative value.  Round your intermediate calculations to 2 decimal places.)

5. If the company sells 10,800 jars of polish, what is the financial advantage (disadvantage) of choosing to further process Grit 337 rather than selling is as a cleaning powder? (Enter any “disadvantages” as a negative value.  Round your intermediate calculations to 2 decimal places.)

 

3. “In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. “At a price of $21 per drum, we would be paying $6.25 less than it costs us to manufacture the drums in our own plant. Since we use 75,000 drums a year, that would be an annual cost savings of $468,750.” Antilles Refining’s current cost to manufacture one drum is given below (based on 75,000 drums per year):

 

     
Direct materials $ 10.65
Direct labor   9.00
Variable overhead   1.60
Fixed overhead ($3.40 general company overhead, $1.90 depreciation, and, $0.70 supervision)   6.00
Total cost per drum $ 27.25
 

 

A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are:

Alternative 1: Rent new equipment and continue to make the drums. The equipment would be rented for $157,500 per year.

 

Alternative 2: Purchase the drums from an outside supplier at $21 per drum.

 

The new equipment would be more efficient than the equipment that Antilles Refining has been using and, according to the manufacturer, would reduce direct labor and variable overhead costs by 25%. The old equipment has no resale value. Supervision cost ($52,500 per year) and direct materials cost per drum would not be affected by the new equipment. The new equipment’s capacity would be 105,000 drums per year.

The company’s total general company overhead would be unaffected by this decision. (Round all intermediate calculations to 2 decimal places.)

 

Required:

1. Assuming that 75,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

2. Assuming that 87,500 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

3. Assuming that 105,000 drums are needed each year, what is the financial advantage (disadvantage) of buying the drums from an outside supplier?

 

(For all requirements, enter any “disadvantages” as a negative value. Do not round intermediate calculations.)

4. Mary Walker, president of Rusco Company, considers $31,000 to be the minimum cash balance for operating purposes. As can be seen from the following statements, only $26,000 in cash was available at the end of this year. Since the company reported a large net income for the year, and also issued both bonds and common stock, the sharp decline in cash is puzzling to Ms. Walker.

 

Rusco Company Comparative Balance Sheet at July 31
  This Year   Last Year
Assets          
Current assets:          
Cash $ 26,000   $ 46,200
Accounts Receivable   235,400     224,300
Inventory   259,900     202,600
Prepaid expenses   14,700     28,200
Total current assets   536,000     501,300
Long-term investments   123,000     175,000
Plant and equipment   882,000     761,000
Less accumulated depreciation   215,500     193,300
Net plant and equipment   666,500     567,700
Total assets $ 1,325,500   $ 1,244,000
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable $ 299,300   $ 242,100
Accrued liabilities   9,100     17,200
Income taxes payable   50,800     44,500
Total current liabilities   359,200     303,800
Bonds Payable   233,000     122,000
Total liabilities   592,200     425,800
Stockholders’ equity:          
Common stock   687,500     655,000
Retained earnings   45,800     163,200
Total stockholders’ equity   733,300     818,200
Total liabilities and stockholders’ equity $ 1,325,500   $ 1,244,000
 

 

Rusco Company Income Statement For This Year Ended July 31
Sales         $ 1,020,000
Cost of goods sold           637,500
Gross margin           382,500
Selling and administrative expenses           272,850
Net operating income           109,650
Nonoperating items:            
Gain on sale of investments $ 25,500        
Loss on sale of equipment   (8,200 )     17,300
Income before taxes           126,950
Income taxes           38,030
Net income         $ 88,920
 

 

The following additional information is available for this year.

 

a. The company declared and paid a cash dividend.

b. Equipment was sold during the year for $52,800. The equipment originally cost $112,000 and had accumulated depreciation of $51,000.

c. Long-term investments that cost $52,000 were sold during the year for $77,500.

d. The company did not retire any bonds payable or repurchase any of its common stock.

 

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for this year.

2. Prepare a statement of cash flows for this year.

3. Compute free cash flow for this year.

5. Joyner Company’s income statement for Year 2 follows:

 

 
Sales $ 708,000
Cost of goods sold   176,000
Gross margin   532,000
Selling and administrative expenses   217,000
Net operating income   315,000
Nonoperating items:    
Gain on sale of equipment   7,000
Income before taxes   322,000
Income taxes   128,800
Net income $ 193,200
 

 

Its balance sheet amounts at the end of Years 1 and 2 are as follows:

 

  Year 2   Year 1
Assets          
Cash $ 134,700   $ 93,600
Accounts receivable   261,000     125,000
Inventory   318,000     277,000
Prepaid expenses   8,000     16,000
Total current assets   721,700     511,600
Property, plant, and equipment   639,000     505,000
Less accumulated depreciation   166,200     130,100
Net property, plant, and equipment   472,800     374,900
Loan to Hymans Company   41,000     0
Total assets $ 1,235,500   $ 886,500
Liabilities and Stockholders’ Equity          
Accounts payable $ 310,000   $ 270,000
Accrued liabilities   42,000     54,000
Income taxes payable   86,000     81,500
Total current liabilities   438,000     405,500
Bonds payable   202,000     114,000
Total liabilities   640,000     519,500
Common stock   341,000     273,000
Retained earnings   254,500     94,000
Total stockholders’ equity   595,500     367,000
Total liabilities and stockholders’ equity $ 1,235,500   $ 886,500
 

 

Equipment that had cost $31,200 and on which there was accumulated depreciation of $11,000 was sold during Year 2 for $27,200. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock.

 

Required:

1. Using the indirect method, compute the net cash provided by/used in operating activities for Year 2.

2. Prepare a statement of cash flows for Year 2.

3. Compute the free cash flow for Year 2.

 

6. A comparative balance sheet and an income statement for Burgess Company are given below:

 

Burgess Company Comparative Balance Sheet (dollars in millions)
  Ending Balance   Beginning Balance
Assets          
Current assets:          
Cash and cash equivalents $ 49   $ 101
Accounts receivable   740     678
Inventory   700     650
Total current assets   1,489     1,429
Property, plant, and equipment   1,605     1,574
Less accumulated depreciation   830     681
Net property,plant, and equipment   775     893
Total assets $ 2,264   $ 2,322
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable $ 280   $ 170
Accrued liabilities   190     160
Income taxes payable   97     82
Total current liabilities   567     412
Bonds payable   465     700
Total liabilities   1,032     1,112
Stockholders’ equity:          
Common stock   195     195
Retained earnings   1,037     1,015
Total stockholders’ equity   1,232     1,210
Total liabilities and stockholders’ equity $ 2,264   $ 2,322
 

 

Burgess Company Income Statement (dollars in millions)
Sales $ 4,000
Cost of goods sold   2,740
Gross margin   1,260
Selling and administrative expenses   900
Net operating income   360
Nonoperating items:    
Gain on sale of equipment   2
Income before taxes   362
Income taxes   132
Net income $ 230
 

 

Burgess also provided the following information:

 

1. The company sold equipment that had an original cost of $32 million and accumulated depreciation of $17 million. The cash proceeds from the sale were $17 million. The gain on the sale was $2 million.

2. The company did not issue any new bonds during the year.

3. The company paid a cash dividend during the year.

4. The company did not complete any common stock transactions during the year.

 

Required:

Using the indirect method, prepare a statement of cash flows for the year. (Enter your answers in millions not in dollars. List any deduction in cash and cash outflows as negative amounts.)

 
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Financial Reporting And The SEC – Paper

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Week 5 – Assignment – Paper template is in attachments – it must be used

PLEASE DO NOT SUBMIT A BID FOR THIS ASSIGNMENT IF YOU DO NOT HAVE EXPERIENCE WITH GRADUATE LEVEL WRITING TERMS AND CONCEPTS. ALL DIRECTIONS MUST BE FOLLOWED AND NO PLAGIARISM. MY SCHOOL USES SOFTWARE TO DETECT COPIED MATERIAL.

Financial Reporting and the SEC

In an eight-page paper (not including the title and reference pages) research and discuss the SEC’s company filings requirements. In your paper:

 

· Describe how investors can use the Securities and Exchange Commission’s (SEC) EDGAR database (https://www.sec.gov/edgar/searchedgar/webusers.htm) to quickly research a company’s financial information filed on Forms 10-K and 10-Q.

· Identify the differences between the Annual Report send to shareholders and the Annual Report on Form 10-K, which must be filed with the SEC.

· Describe the contents of:

o Form 10-K SEC filings

o  Management Discussion and Analysis

o Auditors’ Report

o Selected Financial Data

· Discuss how the SEC”s requirement for domestic and foreign companies using US GAAP to provide their financial statements in the XBRL format can improve financial reporting?

· Most publicly traded companies are examined by numerous analysts. Find analysts’ ratings about a company of your choice by visiting biz.yahoo.com/I.

Provide a comparison over time and across companies in the same industry by answering the following questions:

o How many analysts rated the company?

o What percentage rated it a strong buy?

o What was the average rating for the week?

o  Did the average rating improve or decline relative to the previous week?

The paper should be formatted according to APA style.

Week 5 – Assignment – Paper template is in attachments – it must be used

 

PLEASE DO NOT SUBMIT A BID FOR THIS ASSIGNMENT IF YOU DO NOT HAVE EXPERIENCE WITH GRADUATE LEVEL WRITING TERMS AND CONCEPTS. ALL DIRECTIONS MUST BE FOLLOWED AND NO PLAGIARISM. MY SCHOOL USES SOFTWARE TO DETECT COPIED MATERIAL.

 

Financial Reporting and the SEC

 

In an eight-page paper (not including the title and reference pages) research and discuss the SEC’s company filings requirements. In your paper:

 

· Describe how investors can use the Securities and Exchange Commission’s (SEC) EDGAR database (https://www.sec.gov/edgar/searchedgar/webusers.htm) to quickly research a company’s financial information filed on Forms 10-K and 10-Q.

 

· Identify the differences between the Annual Report send to shareholders and the Annual Report on Form 10-K, which must be filed with the SEC.

 

· Describe the contents of:

 

· Form 10-K SEC filings

·  Management Discussion and Analysis

· Auditors’ Report

· Selected Financial Data

 

· Discuss how the SEC”s requirement for domestic and foreign companies using US GAAP to provide their financial statements in the XBRL format can improve financial reporting?

 

· Most publicly traded companies are examined by numerous analysts. Find analysts’ ratings about a company of your choice by visiting biz.yahoo.com/I. Provide a comparison over time and across companies in the same industry by answering the following questions:

 

· How many analysts rated the company?

· What percentage rated it a strong buy?

· What was the average rating for the week?

·  Did the average rating improve or decline relative to the previous week?

 

The paper should be formatted according to APA style.

 
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Chapter 17 Problems — P17-4 P17-8

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P17-8 A partially completed
P17-4 Sachs Brands’ defined benefit pension plan specifies annual retirement benefits equal to: 1.6% × service years × final year’s salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 1999 and is expected to retire at the end of 2033 after 35 years’ service. Her retirement is expected to span 18 years. Davenport’s salary is $90,000 at the end of 2013 and the company’s actuary projects her salary to be $240,000 at retirement. The actuary’s discount rate is 7%.
At the beginning of 2014, the pension formula was amended to:
The amendment was made retroactive to apply the increased benefits to prior service years.
Required:
1. What is the company’s prior service cost at the beginning of 2014 with respect to Davenport after the amendment described above?
2. Since the amendment occurred at the beginning of 2014, amortization of the prior service cost begins in 2014. What is the prior service cost amortization that would be included in pension expense?
3. What is the service cost for 2014 with respect to Davenport?
4. What is the interest cost for 2014 with respect to Davenport?
5. Calculate pension expense for 2014 with respect to Davenport, assuming plan assets attributable to her of $150,000 and a rate of return (actual and expected) of 10%.
P17-8 A partially completed pension spreadsheet showing the relationships among the elements that constitute Carney, Inc.’s defined benefit pension plan follows. Six years earlier, Carney revised its pension formula and recalculated benefits earned by employees in prior years using the more generous formula. The prior service cost created by the recalculation is being amortized at the rate of $5 million per year. At the end of 2013, the pension formula was amended again, creating an additional prior service cost of $40 million. The expected rate of return on assets and the actuary’s discount rate were 10%, and the average remaining service life of the active employee group is 10 years.
() indicates credit; debits otherwise ($in millions)
PBO
Plan assets
Prior Service cost
Not
Loss
Pension Expense
Cash
Net
pension (liability)
/asset
Balance Jan,1, 2013
(830)
680
20
93
(150)
Service cost
?
74
?
Interest cost
?
?
?
Expected return on asset
?
?
?
Adjust for: Loss on assets
(7)
?
?
Amortization: Price service cost
?
?
Net loss
?
?
?
Loss on BPO
?
?
(13)
Prior service cost
?
?
?
Cash funding
?
?
84
Retiree benefits
?
?
Balance, Dec 31,2013
?
775
?
?
?
?
Required:
1. Copy the incomplete spreadsheet and fill in the missing amounts.
2. Prepare the 2013 journal entry to record pension expense.
3. Prepare the journal entry(s) to record any 2013 gains and losses and new prior service cost in 2013.
4. Prepare the 2013 journal entries to record the cash contribution to plan assets and payment of retiree benefits.
 
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Financial Acounting

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Financial

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

 

 

Using Financial Accounting Information

T H E A L T E R N A T I V E T O D E B I T S A N D C R E D I T S

Gary A. Porter DRAKE UNIVERSITY

Curtis L. Norton ARIZONA STATE UNIVERSITY

10e

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Using Financial Accounting Information: The Alternative to Debits and Credits, 10th edition

Gary A. Porter, Curtis L. Norton

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Printed in Canada

Print Number: 01 Print Year: 2016

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

 

 

To those who really ‘‘count’’ Melissa

Kathy, Amy, Andrew

In memory of Sophie

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

 

 

Brief Contents

Contents v

Preface xi

CHAPTER 1 Accounting as a Form of Communication 2

CHAPTER 2 Financial Statements and the Annual Report 50

CHAPTER 3 Processing Accounting Information 100

CHAPTER 4 Income Measurement and Accrual Accounting 148

CHAPTER 5 Inventories and Cost of Goods Sold 208

CHAPTER 6 Cash and Internal Control 276

CHAPTER 7 Receivables and Investments 310

CHAPTER 8 Operating Assets: Property, Plant, and Equipment, and Intangibles 356

CHAPTER 9 Current Liabilities, Contingencies, and the Time Value of Money 402

CHAPTER 10 Long-Term Liabilities 454

CHAPTER 11 Stockholders’ Equity 500

CHAPTER 12 The Statement of Cash Flows 554

CHAPTER 13 Financial Statement Analysis 622

APPENDIX A International Financial Reporting Standards A-1

APPENDIX B Excerpts from Chipotle Mexican Grill, Inc. Form 10-K for the Fiscal Year Ended December 31, 2015 B-1

APPENDIX C Excerpts from Panera Bread Company Form 10-K for the Fiscal Year Ended December 29, 2015 C-1

Glossary G-1

Index I-1

iv

Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203

 

 

Contents

CHAPTER 1 Accounting as a Form of Communication 2

Chipotle Mexican Grill, Inc.: Making Business Decisions 3

MODULE 1 The Nature of Business 4

Forms of Organization 4 Business Entities 5 Sole Proprietorships 5 Partnerships 5 Corporations 5

Nonbusiness Entities 6 Organizations and Social Responsibility 6

The Nature of Business Activity 6 Financing Activities 6 Investing Activities 7 Operating Activities 7 Summary of Business Activities 7

MODULE 2 Accounting and Financial Statements 9 Users of Accounting Information and Their Needs 9 Internal Users 9 External Users 9

Using Financial Accounting Information 10

Financial Decision Framework 10

Financial Statements: How Accountants Communicate 11

The Accounting Equation 11 The Balance Sheet 12 The Income Statement 13 The Statement of Retained Earnings 14 The Statement of Cash Flows 14 Relationships Among the Financial Statements 15 Looking at Financial Statements for a Real Company: Chipotle 15 Chipotle’s Balance Sheet 15 Chipotle’s Income Statement 18

MODULE 3 Conceptual Framework of Accounting 19

Conceptual Framework for Accounting 19 Economic Entity Concept 20 Asset Valuation: Cost or Fair Value? 20 Going Concern 20 Time Period Assumption 21

Setting Accounting Standards 21 Who Determines the Rules for Financial Statements? 21 The Audit of Financial Statements 22

Introduction to Ethics in Accounting 22

Why Should Accountants Be Concerned with Ethics? 22 Is the Information Relevant and a Faithful Representation? 22 Moral and Social Context of Ethical Behavior 23

Accountants and Ethical Judgments 23 The Changing Face of the Accounting Profession 24

CHAPTER 2 Financial Statements and the Annual Report 50

Panera Bread Company: Making Business Decisions 51

MODULE 1 Financial Reporting Objectives and Characteristics of Useful Information 52

What Makes Accounting Information Useful? Qualitative Characteristics 53

Understandability 53 Relevance 54 Faithful Representation 54 Comparability and Consistency 54 Materiality 55 Conservatism 55 An International Perspective on Qualitative Characteristics 56

MODULE 2 Classified Balance Sheets 56 Understanding the Operating Cycle 57 Current Assets 58 Noncurrent Assets 58 Investments 59 Property, Plant, and Equipment 59 Intangibles 59

Current Liabilities 59 Long-Term Liabilities 60 Stockholders’ Equity 60

Using a Classified Balance Sheet: Introduction to Ratios 62

Working Capital 62 Current Ratio 62

MODULE 3 Income Statements, Statements of Retained Earnings, and Statements of Cash Flows 64

What Appears on the Income Statement? 64 Format of the Income Statement 64 Single-Step Format for the Income Statement 64 Multiple-Step Format for the Income Statement 65

Using an Income Statement 66 The Statement of Retained Earnings 67 The Statement of Cash Flows 68

v

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MODULE 4 Reading and Using the Annual Report 70

Panera Bread’s Balance Sheet 70 Panera Bread’s Income Statement 72

Making Business Decisions: Panera Bread 73 Other Elements of an Annual Report 76 Report of Independent Accountants (Auditors’ Report) 76 The Ethical Responsibility of Management and the Auditors 76 Management Discussion and Analysis 77 Notes to Consolidated Financial Statements 78

CHAPTER 3 Processing Accounting Information 100

Vail Resorts, Inc.: Making Business Decisions 101

MODULE 1 Transactions and the Accounting Equation 102

External and Internal Events 102

The Role of Source Documents in Recording Transactions 102 Analyzing the Effects of Transactions on the Accounting Equation 103

The Cost Principle 105 Balance Sheet and Income Statement for Glengarry Health Club 105

What Is an Account? 107 Chart of Accounts 107 The General Ledger 107 Identify and Analyze 108

MODULE 2 Debits and Credits 111

Accounting Tools: The Double-Entry System 111 The T Account 111

Debits and Credits 112 Debits Aren’t Bad, and Credits Aren’t Good 113 Debits and Credits for Revenues, Expenses, and Dividends 113 Revenues 113 Expenses 113 Dividends 113

Summary of the Rules for Increasing and Decreasing Accounts 113 Normal Account Balances 113 Debits and Credits Applied to Transactions 114 Transactions for Glengarry Health Club 114

MODULE 3 Journal Entries and Trial Balances 117

The Journal: The Firm’s Chronological Record of Transactions 117 The Trial Balance 119

CHAPTER 4 Income Measurement and Accrual Accounting 148

Nordstrom, Inc.: Making Business Decisions 149

MODULE 1 Accrual Accounting Principles 150 Recognition 150 Measurement 150 Choice 1: The Attribute to Be Measured 150 Choice 2: The Unit of Measure 151

Summary of Recognition and Measurement in Financial Statements 151

The Accrual Basis of Accounting 152 Comparing the Cash and Accrual Bases of Accounting 152 What the Income Statement and the Statement of Cash Flows Reveal 154 Accrual Accounting and Time Periods 155

The Revenue Recognition Principle 155

Expense Recognition and the Matching Principle 155

MODULE 2 Adjustments 158 Types of Adjustments 158 (1) Cash Paid Before Expense Is Incurred (Deferred Expense) 159 (2) Cash Received Before Revenue Is Recognized (Deferred Revenue) 161 (3) Expense Incurred Before Cash Is Paid (Accrued Liability) 162 (4) Revenue Recognized Before Cash Is Received (Accrued Asset) 165

Accruals and Deferrals 166 Summary of Adjustments 166 Comprehensive Example of Adjustments 167 Income Statement and Balance Sheet for Duffy Transit 170 Ethical Considerations for a Company on the Accrual Basis 171

MODULE 3 The Accounting Cycle 172 The Use of a Work Sheet 173 The Closing Process 174 Interim Financial Statements 174

CHAPTER 5 Inventories and Cost of Goods Sold 208

Gap Inc.: Making Business Decisions 209

MODULE 1 Sales, Cost of Goods Sold, and Gross Profit 210

Three Types of Inventory Costs and Three Forms of Inventory 210 Three Types of Manufacturing Costs 210 Three Forms of Inventory 210

Net Sales of Merchandise 211 Sales Returns and Allowances 212 Credit Terms and Sales Discounts 212

Cost of Goods Sold 213 The Cost of Goods Sold Model 213 Inventory Systems: Perpetual and Periodic 214

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Beginning and Ending Inventories in a Periodic System 215 Cost of Goods Purchased 216 Purchases 216 Purchase Discounts 216 Purchase Returns and Allowances 217 Shipping Terms and Transportation Costs 217 Shipping Terms and Transfer of Title to Inventory 218

The Gross Profit Ratio 218

Making Business Decisions: Gap Inc. 219

MODULE 2 Inventory Costing Methods 222 Inventory Costs: What Should Be Included? 222

Inventory Costing Methods with a Periodic System 223

Specific Identification Method 224 Weighted Average Cost Method 225 First-In, First-Out Method (FIFO) 226 Last-In, First-Out Method (LIFO) 227

Selecting an Inventory Costing Method 227 Costing Methods and Cash Flow 227 LIFO Liquidation 228 The LIFO Conformity Rule 229 The LIFO Reserve: Estimating LIFO’s Effect on Income and on Taxes Paid for Winnebago Industries 229 Costing Methods and Inventory Profits 230 Changing Inventory Methods 231 Inventory Valuation in Other Countries 231

MODULE 3 Other Inventory Issues 232 Inventory Errors 232

Valuing Inventory at Lower of Cost or Market 235 Why Replacement Cost Is Used as a Measure of Market 235 Application of the LCM Rule 236 Lower-of-Cost-or-Market under International Standards 237

MODULE 4 Inventory Management and Cash Flow Issues 237

Making Business Decisions: Gap Inc. 238

How Inventories Affect the Cash Flows Statement 240

Appendix: MODULE 5 Inventory Costing Methods with a Perpetual System 242

FIFO Costing with a Perpetual System 242 LIFO Costing with a Perpetual System 243 Moving Average with a Perpetual System 244

CHAPTER 6 Cash and Internal Control 276

Regal Entertainment Group: Making Business Decisions 277

MODULE 1 Accounting and Controlling for Cash 278

Cash Equivalents and the Statement of Cash Flows 278

Control Over Cash 278 Cash Management 279 Reading a Bank Statement 279 The Bank Reconciliation 281 The Need for Adjustments to the Records 282 Establishing a Petty Cash Fund 283

MODULE 2 Internal Control 284 The Sarbanes-Oxley Act of 2002 284 The Control Environment 287 The Accounting System 287

Internal Control Procedures 287 Proper Authorizations 287 Segregation of Duties 287 Independent Verification 288 Safeguarding of Assets and Records 288 Independent Review and Appraisal 288 Design and Use of Business Documents 288

Limitations on Internal Control 289

Computerized Business Documents and Internal Control 289

Control Over Cash Receipts 289 Cash Received Over the Counter 289 Cash Received in the Mail 290 Cash Discrepancies 290

The Role of Computerized Business Documents in Controlling Cash Disbursements 290 Purchase Requisition 290 Purchase Order 292 Invoice 292 Receiving Report 293 Invoice Approval Form 294 Check with Remittance Advice 294

CHAPTER 7 Receivables and Investments 310

Apple Inc.: Making Business Decisions 311

MODULE 1 Accounting for Accounts Receivable 312 The Use of a Subsidiary Ledger 312 The Valuation of Accounts Receivable 313 Two Methods to Account for Bad Debts 313 Two Approaches to the Allowance Method of Accounting for Bad Debts 315 Percentage of Net Credit Sales Approach 315 Percentage of Accounts Receivable Approach 316 Aging of Accounts Receivable 317

The Accounts Receivable Turnover Ratio 319

Making Business Decisions: Apple 319

MODULE 2 Accounting for Notes Receivable 322 Important Terms Connected with Promissory Notes 323

Accelerating the Inflow of Cash from Sales 324 Credit Card Sales 325 Discounting Notes Receivable 326

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MODULE 3 Accounting for Investments 327 Investments in Highly Liquid Financial Instruments 327 Investments in Stocks and Bonds 329 No Significant Influence 329 Significant Influence 330 Control 330

Valuing and Reporting Investments on the Financial Statements 332

MODULE 4 How Liquid Assets Affect the Statement of Cash Flows 333

CHAPTER 8 Operating Assets: Property, Plant, and Equipment, and Intangibles 356

Nike: Making Business Decisions 357

MODULE 1 Acquisition of Operating Assets 358

Acquisition of Property, Plant, and Equipment 358 Group Purchase 359 Capitalization of Interest 359 Land Improvements 360

MODULE 2 Depreciation and Disposal of Operating Assets 361

Straight-Line Method 362 Units-of-Production Method 362 Accelerated Depreciation Methods 363 Comparison of Depreciation Methods 364 Depreciation and Income Taxes 364 Choice of Depreciation Method 364 Change in Depreciation Estimate 365

Capital versus Revenue Expenditures 366 Environmental Aspects of Operating Assets 368

Disposal of Property, Plant, and Equipment 368 Gain on Sale of Assets 369 Loss on Sale of Assets 370

IFRS and Property, Plant, and Equipment 370

MODULE 3 Intangible Assets 372 Balance Sheet Presentation 372 Acquisition Cost of Intangible Assets 372 Research and Development Costs 372

Amortization of Intangibles 373 Intangibles with Finite Life 373 Intangibles with Indefinite Life 374 Goodwill and Impairments 374

IFRS and Intangible Assets 375

MODULE 4 Cash Flow and Analysis Issues 376

Analyzing Long-Term Assets for Average Life and Asset Turnover 378

Making Business Decisions: Nike 378

CHAPTER 9 Current Liabilities, Contingencies, and the Time Value of Money 402

Starbucks Corporation: Making Business Decisions 403

MODULE 1 Current Liabilities 404 Accounts Payable 404 Notes Payable 405 Current Maturities of Long-Term Debt 407 Taxes Payable 408 Other Accrued Liabilities 408

IFRS and Current Liabilities 409

MODULE 2 Cash Flow Effects 410

MODULE 3 Contingent Liabilities 411 Contingent Liabilities That Are Recorded 412 Product Warranties and Guarantees: Common Contingent Liabilities That Are Recorded 412 Premiums or Coupons: Other Contingent Liabilities That Are Recorded 413 Some Lawsuits and Legal Claims Are Contingent Liabilities That Must Be Recorded 413

Contingent Liabilities That Are Disclosed 414 Contingent Liabilities versus Contingent Assets 414

IFRS and Contingencies 414

MODULE 4 Time Value of Money 415 Simple Interest 416 Compound Interest 416 Interest Compounding 416

Present Value and Future Value: Single Amounts 417 Future Value of a Single Amount 417 Present Value of a Single Amount 419

Present Value and Future Value of an Annuity 420 Future Value of an Annuity 420 Present Value of an Annuity 421 Solving for Unknowns 421

Appendix: Accounting Tools: Using Excel¤ for Problems Involving Interest Calculations 427

CHAPTER 10 Long-Term Liabilities 454

Coca-Cola: Making Business Decisions 455

MODULE 1 Long-Term Liabilities Including Bonds Payable 456

Bonds Payable: Characteristics 457 Collateral 458

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Due Date 458 Other Features 458

Issuance of Bonds 458 Factors Affecting Bond Price 458

Premium or Discount on Bonds 460

 
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