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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 holder 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
Preface xiii

xi

chapter 1
Introduction to Accounting
1.1 Entity Concepts 3
1.2 The Language of Business

Disciplines of Accounting 4
Financial Accounting 5

1.3 Key Concepts 5


1.4 The Financial Reporting Model

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


1.6 The Importance of Ethics 15

14

Concept Check 16
Key Terms 17
Critical Thinking Questions 18
Exercises 19
Problems 22

chapter 2
The Accounting System
2.1 System Design

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27

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
3.2 The Periodicity Assumption 55
3.3 Revenue Recognition 56
3.4 Expense Recognition 57
3.5 Adjusting Entries 58

54

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
4.1 Concepts of Cash

89

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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CONTENTS

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

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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

8.6Corrections 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

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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 Ashford 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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