662 58 30MB
English Pages 1344 Year 2012
Accounting NINTH EDITION
Charles T. Horngren Stanford University
Walter T. Harrison Jr. Baylor University
M. Suzanne Oliver University of West Florida
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Library of Congress Cataloging-in-Publication Data Horngren, Charles T. Financial & managerial accounting / Charles T. Horngren, Walter T. Harrison Jr., M. Suzanne Oliver.—3rd ed. p. cm. Rev. ed. of: Financial and managerial accounting. 2nd ed. 2009.
Includes index. ISBN 978-0-13-249799-2 (casebound)—ISBN 978-0-13-249794-7 (pbk.)—ISBN 978-0-13-249792-3 (pbk.) 1. Accounting. 2. Managerial accounting. I. Harrison, Walter T. II. Oliver, M. Suzanne. III. Title. IV. Title: Financial and managerial accounting. HF5636.H67
2012
657—dc22
2010047843
10 9 8 7 6 5 4 3 2 1
ISBN-13: 978-0-13-256905-7 ISBN-10: 0-13-256905-1
About the Authors Charles T. Horngren is the Edmund W. Littlefield professor of accounting, emeritus, at Stanford University. A graduate of Marquette University, he received his MBA from Harvard University and his PhD from the University of Chicago. He is also the recipient of honorary doctorates from Marquette University and DePaul University. A CPA, Horngren served on the Accounting Principles Board for six years, the Financial Accounting Standards Board (FASB) Advisory Council for five years, and the Council of the AICPA for three years. For six years he served as a trustee of the Financial Accounting Foundation, which oversees the FASB and the Government Accounting Standards Board. Horngren is a member of the Accounting Hall of Fame. A member of the AAA, Horngren has been its president and its director of research. He received its first annual Outstanding Accounting Educator Award. The California Certified Public Accountants Foundation gave Horngren its Faculty Excellence Award and its Distinguished Professor Award. He is the first person to have received both awards. The AICPA presented its first Outstanding Educator Award to Horngren. Horngren was named Accountant of the Year, in Education, by the national professional accounting fraternity, Beta Alpha Psi. Professor Horngren is also a member of the IMA, from whom he has received its Distinguished Service Award. He was a member of the institute’s Board of Regents, which administers the CMA examinations. Walter T. Harrison, Jr., is professor emeritus of accounting at the Hankamer School of Business, Baylor University. He received his BBA degree from Baylor University, his MS from Oklahoma State University, and his PhD from Michigan State University. Professor Harrison, recipient of numerous teaching awards from student groups as well as from university administrators, has also taught at Cleveland State Community College, Michigan State University, the University of Texas, and Stanford University. A member of AAA and the AICPA, Professor Harrison has served as chairman of the Financial Accounting Standards Committee of AAA, on the Teaching/Curriculum Development Award Committee, on the Program Advisory Committee for Accounting Education and Teaching, and on the Notable Contributions to Accounting Literature Committee. Professor Harrison has lectured in several foreign countries and published articles in numerous journals, including Journal of Accounting Research, Journal of Accountancy, Journal of Accounting and Public Policy, Economic Consequences of Financial Accounting Standards, Accounting Horizons, Issues in Accounting Education, and Journal of Law and Commerce. Professor Harrison has received scholarships, fellowships, and research grants or awards from PriceWaterhouse Coopers, Deloitte & Touche, the Ernst & Young Foundation, and the KPMG Foundation. M. Suzanne Oliver is an accounting instructor at the University of West Florida in Pensacola, Florida. She received her BA in accounting information systems and her MA in accountancy from the University of West Florida. Oliver began her career in the tax department of a regional accounting firm, specializing in benefit plan administration. She has served as a software analyst for a national software development firm and as the Oracle fixed assets analyst for Spirit Energy, formerly part of Unocal. A CPA, Oliver is a member of the AAA, AICPA, FICPA, IAAER, IMA, TACTYC, and the Florida Association of Accounting Educators. Oliver has taught accounting courses of all levels for the University of West Florida, state colleges, community colleges, and to practitioners since 1988. She has developed and instructed online courses using MyAccountingLab, WebCT, D2L, and other proprietary software. Oliver lives in Niceville, FL, with her husband, Greg, and son, CJ. She especially thanks her husband, Greg, her son, CJ, and her uncle and aunt, Jimmy and Lida Lewis, for their unwavering support and encouragement. Oliver donates a portion of royalties to www.raffieskids.org, a charitable organization that assists children. iii
Brief Contents CHAPTER 1
Accounting and the Business Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CHAPTER 2
Recording Business Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
CHAPTER 3
The Adjusting Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
CHAPTER 4
Completing the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
CHAPTER 5
Merchandising Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
CHAPTER 6
Merchandise Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311
CHAPTER 7
Internal Control and Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
CHAPTER 8
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404
CHAPTER 9
Plant Assets and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452
CHAPTER 10
Current Liabilities and Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496
CHAPTER 11
Long-Term Liabilities, Bonds Payable, and Classification of Liabilities on the Balance Sheet . . . . . . . . . . . 529
CHAPTER 12
Corporations: Paid-In Capital and the Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581
CHAPTER 13
Corporations: Effects on Retained Earnings and the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 623
CHAPTER 14
The Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661
CHAPTER 15
Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722
CHAPTER 16
Introduction to Managerial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773
CHAPTER 17
Job Order and Process Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813
CHAPTER 18
Activity-Based Costing and Other Cost Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880
CHAPTER 19
Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924
CHAPTER 20
Short-Term Business Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962
CHAPTER 21
Capital Investment Decisions and the Time Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1010
CHAPTER 22
The Master Budget and Responsibility Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1050
CHAPTER 23
Flexible Budgets and Standard Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1105
CHAPTER 24
Performance Evaluation and the Balanced Scorecard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1151
CHAPTER P
Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P-1
APPENDIX A
2009 Amazon.com Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B
Present Value Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 Glindex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1 Company Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
ONLINE MATERIAL: located at pearsonhighered.com/horngren APPENDIX C—Check Figures SPECIAL JOURNALS INVESTMENTS
iv
Contents 1
CHAPTER Accounting and the Business Environment
2
1
Accounting Vocabulary: The Language of Business 2 Decision Makers: The Users of Accounting Information 2 Individuals 2 Businesses 3 Investors 3 Creditors 3 Taxing Authorities
CHAPTER Recording Business Transactions The Account, the Journal, and the Ledger Assets 63 Liabilities 64 Owner’s Equity 64 Chart of Accounts 65
Debits, Credits, and Double-Entry Accounting 3
The Accounting Profession and the Organizations that Govern It 4
The T-Account 67 Increases and Decreases in the Accounts
Journalizing Transactions and Posting to the Ledger
Preparing the Trial Balance from the T-Accounts
䊏
9
3
CHAPTER The Adjusting Process
Why We Adjust the Accounts 135 Two Categories of Adjusting Entries 136
20
Prepaid Expenses 136 Depreciation 138 Accrued Expenses 140 Accrued Revenues 142 Unearned Revenues 143
Using Financial Statements to Evaluate Business Performance 23 25
The Adjusted Trial Balance 147 The Financial Statements 149
26
䉴 Chapter 1: Demo Doc: Transaction Analysis Using
Review and Assignment Material
36
131
The Accounting Period Concept 132 The Revenue Recognition Principle 133 The Matching Principle 134 The Time-Period Concept 134
Preparing the Financial Statements—The User Perspective of Accounting 18
Accounting Equation/Financial Statement Preparation
130
Accrual Accounting Versus Cash-Basis Accounting Other Accounting Principles 132
11
Transaction Analysis for Smart Touch Learning 14
䉴 Summary Problem 1-1
89
Review and Assignment Material 98
Accounting for Business Transactions 13
Decision Guidelines 1-1
84 85
䉴 Chapter 2: Demo Doc: Debit/Credit Transaction Analysis
11
The Financial Statements Headings 20
Decision Guidelines 2-1
䉴 Summary Problem 2-1
The Entity Concept 10 The Faithful Representation Principle 10 The Cost Principle 10 The Going-Concern Concept 10 The Stable Monetary Unit Concept 11 Assets and Liabilities Equity 12
80
Correcting Trial Balance Errors 81 Details of Journals and Ledgers 81 The Four-Column Account: An Alternative to the T-Account 82
Separate Legal Entity 7 No Continuous Life or Transferability of Ownership 8 Unlimited Liability of Owner 8 Unification of Ownership and Management 8 Business Taxation 8 Government Regulation 8 Organization of a Corporation 9
The Accounting Equation
73
Practice Journalizing with Specific Examples 73 The Ledger Accounts After Posting 79
Distinguishing Characteristics and Organization of a Proprietorship 7
Accounting Concepts and Principles
68
Posting (Copying Information) from the Journal to the Ledger 70 Expanding the Rules of Debit and Credit: Revenues and Expenses 71 The Normal Balance of an Account 72 Source Documents—The Origin of the Steps 73
Types of Business Organizations 5 Proprietorships 6 Partnerships 6 Corporations 6 Limited-Liability Partnerships (LLPs) and Limited-Liability Companies (LLCs) 6 Not-for-Profits 6
67
List the Steps of the Transaction Recording Process 69
Governing Organizations 4 Ethics in Accounting and Business 5 Standards of Professional Conduct 5
䊏
62 63
Preparing the Statements 149 Relationships Among the Financial Statements
28
Ethical Issues in Accrual Accounting 䊏
Decision Guidelines 3-1
149
151
152
v
vi
Contents
䉴 Summary Problem 3-1
Preparing a Merchandiser’s Financial Statements
153
䉴 Chapter 3: Demo Doc: Preparation of Adjusting Entries,
Adjusted Trial Balance, and Financial Statements 157
Review and Assignment Material
The Gross Profit Percentage 274 The Rate of Inventory Turnover 274 Days in Inventory 275 䊏
4
198
The Worksheet 200 Net Income 202 Net Loss 202 䉴 Summary Problem 4-1
䉴 Summary Problem 5-2
276 278
207
Closing Temporary Accounts
208
Comparing FIFO, LIFO, and Average Cost 321 䉴 Summary Problem 6-1
Current Ratio 214 Debt Ratio 214 Decision Guidelines 4-1
215
Estimating Ending Inventory Ethical Issues 327
216
Entries 220
䊏
Review and Assignment Material
329
Review and Assignment Material 330 APPENDIX 6A: Accounting for Inventory in a Periodic System 349
355
Internal Control 356 The Sarbanes-Oxley Act (SOX) 357 The Components of Internal Control 357
255 256
The Operating Cycle of a Merchandising Business Inventory Systems: Perpetual and Periodic 257
328
CHAPTER Internal Control and Cash
5
What Are Merchandising Operations?
326
7
APPENDIX 4A: Reversing Entries: An Optional Step online at pearsonhighered.com/horngren
CHAPTER Merchandising Operations
Decision Guidelines 6-1
䉴 Summary Problem 6-2
228
COMPREHENSIVE PROBLEM FOR CHAPTERS 1–4: Journalizing, Posting, Worksheet, Adjusting, Closing the Financial Statements 253
Internal Control Procedures 257
Accounting for Inventory in the Perpetual System 258 258
263
䉴 Summary Problem 5-1
322
Lower-of-Cost-or-Market Rule 324 Effects of Inventory Errors 325
䉴 Chapter 4: Demo Doc: Accounting Worksheets and Closing
Purchase of Inventory
311
First-In, First-Out (FIFO) Method 316 Last-In, First-Out (LIFO) Method 318 Average-Cost Method 319
211
Accounting Ratios 213
䉴 Summary Problem 4-2
6
CHAPTER Merchandise Inventory
Accounting Principles and Inventories 313 Inventory Costing Methods 314 Inventory Accounting in a Perpetual System 316
Post-Closing Trial Balance 210 Classifying Assets and Liabilities 210 Assets 210 Liabilities 211 The Classified Balance Sheet Balance Sheet Forms 212
COMPREHENSIVE PROBLEM FOR CHAPTERS 1–5: Completing a Merchandiser’s Accounting Cycle 309
204
Preparing the Financial Statements from a Worksheet 204 Recording the Adjusting Entries from a Worksheet 204
Closing the Accounts
APPENDIX 5A: Accounting for Merchandise in a Periodic Inventory System 303
APPENDIX 5B: Worksheet for a Merchandising Business— Perpetual online at pearsonhighered.com/horngren
202
Completing the Accounting Cycle
Sale of Inventory
Decision Guidelines 5-1
Review and Assignment Material 281
CHAPTER Completing the Accounting Cycle
䊏
273
Three Ratios for Decision Making 274
166
APPENDIX 3A: Alternative Treatment of Prepaid Expenses and Unearned Revenues online at pearsonhighered.com/horngren
271
Income Statement Formats: Multi-Step and Single-Step
267
Adjusting and Closing the Accounts of a Merchandiser 269 Adjusting Inventory Based on a Physical Count 269 Closing the Accounts of a Merchandiser 270
358
Internal Controls for E-Commerce 360 The Limitations of Internal Control—Costs and Benefits 361
The Bank Account as a Control Device 362 The Bank Reconciliation 364 Preparing the Bank Reconciliation Online Banking 368 䉴 Summary Problem 7-1
364
369
Internal Control over Cash Receipts
371
Contents
Internal Control over Cash Payments
Depreciation 458
372
Causes of Depreciation 459 Measuring Depreciation 459 Depreciation Methods 459 Comparing Depreciation Methods 463 Other Issues in Accounting for Plant Assets
Controls over Payment by Check 372 Controlling Small Cash Payments 374
The Petty Cash Fund 374 Ethics and Accounting 377 Corporate and Professional Codes of Ethics Ethical Issues in Accounting 377 䊏
Decision Guidelines 7-1
䉴 Summary Problem 7-2
377
䉴 Summary Problem 9-1
380
381
Specific Intangibles 473 Accounting for Research and Development Costs
8
CHAPTER Receivables
475
Ethical Issues 476 䊏
404
Receivables: An Introduction
405
CHAPTER Current Liabilities and Payroll
496
Current Liabilities of Known Amount 497 Accounts Payable 497 Short-Term Notes Payable 498 Sales Tax Payable 498 Current Portion of Long-Term Notes Payable Accrued Liabilities 499 Unearned Revenues 500
The Direct Write-Off Method 413 Recovery of Accounts Previously Written Off—Direct Write-Off Method 413
Credit-Card and Debit-Card Sales 414
Current Liabilities that Must Be Estimated
Credit-Card Sales 415 Debit-Card Sales 415 Credit-/Debit-Card Sales 415
Estimated Warranty Payable Contingent Liabilities 501
416
䊏
Decision Guidelines 10-1
䉴 Summary Problem 10-1
Notes Receivable 418 Identifying Maturity Date 419 Computing Interest on a Note 419 Accruing Interest Revenue 420 Dishonored Notes Receivable 422 Computers and Receivables 423 Acid-Test (or Quick) Ratio 424 Days’ Sales in Receivables 424 Accounts Receivable Turnover Ratio
499
500
500
503 504
Accounting for Payroll 505 Gross Pay and Net (Take-Home) Pay 505 Payroll Withholding Deductions 506 Employer Payroll Taxes 508
Using Accounting Information for Decision Making
䉴 Summary Problem 8-2
479
10
Estimating Uncollectibles 408 Identifying and Writing Off Uncollectible Accounts 411 Recovery of Accounts Previously Written Off—Allowance Method 411
Decision Guidelines 8-1
477 478
Review and Assignment Material
Accounting for Uncollectibles (Bad Debts) 407 The Allowance Method 407
䉴 Summary Problem 8-1
Decision Guidelines 9-1
䉴 Summary Problem 9-2
Types of Receivables 405 Internal Control over Receivables 406
䊏
465
466
Disposing of a Plant Asset 468 Accounting for Natural Resources 472 Accounting for Intangible Assets 473
379
Review and Assignment Material
vii
423
Journalizing Payroll Transactions 509 Internal Control over Payroll 511 䊏
Decision Guidelines 10-2
䉴 Summary Problem 10-2
425
512 513
Review and Assignment Material 515
426 427
Review and Assignment Material
428
APPENDIX 8A: Discounting a Note Receivable 450
9
CHAPTER Plant Assets and Intangibles Measuring the Cost of a Plant Asset
452 454
Land and Land Improvements 454 Buildings 455 Machinery and Equipment 455 Furniture and Fixtures 456 A Lump-Sum (Basket) Purchase of Assets Capital Expenditures 457
11
CHAPTER Long-Term Liabilities, Bonds Payable, and Classification of Liabilities on the Balance Sheet 529 Long-Term Notes Payable and Mortgages Payable 530 Long-Term Notes Payable Mortgages Payable 532
530
Bonds: An Introduction 535
456
Types of Bonds 536 Bond Prices 537 Present Value 538 Bond Interest Rates 538
viii
Contents
13
Accounting for Bonds Payable: Straight-Line Method 539 Issuing Bonds Payable at Maturity (Par) Value Issuing Bonds Payable at a Discount 540 䊏
Decision Guidelines 11-1
539
543
Issuing Bonds Payable at a Premium 544 Adjusting Entries for Bonds Payable 545 Issuing Bonds Payable Between Interest Dates
Reporting Liabilities on the Balance Sheet 䊏
Decision Guidelines 11-2
䉴 Summary Problem 11-1
CHAPTER Corporations: Effects on Retained Earnings and the Income Statement 623 Stock Dividends 624 Stock Splits 627
546
Stock Dividends and Stock Splits Compared
546
Treasury Stock
548
Treasury Stock Basics 629 Purchase of Treasury Stock 629 Sale of Treasury Stock 630 Retirement of Stock 631
549
Review and Assignment Material 550 APPENDIX 11A: The Time Value of Money: Present Value of a Bond and Effective-Interest Amortization 565 APPENDIX 11B: Retiring Bonds Payable 577
Restrictions on Retained Earnings 632 Variations in Reporting Stockholders’ Equity 䊏
COMPREHENSIVE PROBLEM FOR CHAPTERS 7–11: Comparing Two Businesses 579
635
Continuing Operations 637 Special Items 637 Earnings per Share 639 Statement of Retained Earnings 640 Combined Statement of Income and Retained Earnings Prior-Period Adjustments 640 Reporting Comprehensive Income 641
Corporations: An Overview 582 Stockholders’ Equity Basics 583
䊏
Decision Guidelines 13-2
䉴 Summary Problem 13-2
Stockholders’ Rights 584 Classes of Stock 584
640
642 643
Review and Assignment Material 645
585
Issuing Common Stock 585 Issuing Preferred Stock 588 Review of Accounting for Paid-In Capital 589 Decision Guidelines 12-1
䉴 Summary Problem 12-1
14
CHAPTER The Statement of Cash Flows
590
Operating, Investing, and Financing Activities
593
Rate of Return on Total Assets 598 Rate of Return on Common Stockholders’ Equity 599
Accounting for Income Taxes by Corporations
663
664
Preparing the Statement of Cash Flows by the Indirect Method 664 Cash Flows from Operating Activities 666 Cash Flows from Investing Activities 669 Cash Flows from Financing Activities 671 Net Change in Cash and Cash Balances 674
Noncash Investing and Financing Activities 674 Measuring Cash Adequacy: Free Cash Flow 676
Evaluating Operations 598
Decision Guidelines 12-2
Two Formats for Operating Activities
596
Market Value 596 Liquidation Value 597 Book Value 597
䉴 Summary Problem 12-2
662
Cash Equivalents 663
Dividend Dates 593 Declaring and Paying Dividends 594 Dividing Dividends Between Preferred and Common 595 Dividends on Cumulative and Noncumulative Preferred 595
Different Values of Stock
661
Introduction: The Statement of Cash Flows
591
Retained Earnings 592 Accounting for Cash Dividends
䊏
633
634
The Corporate Income Statement 636
12
䊏
Decision Guidelines 13-1
䉴 Summary Problem 13-1
CHAPTER Corporations: Paid-In Capital and the Balance Sheet 581
Issuing Stock
628
629
600
601 602
Review and Assignment Material 603 APPENDIX 12A: Compare Issuing Bonds to Issuing Stocks online at pearsonhighered.com/horngren
䊏
Decision Guidelines 14-1
䉴 Summary Problem 14-1
677 678
Review and Assignment Material 681 APPENDIX 14A: Preparing the Statement of Cash Flows by the Direct Method 701 APPENDIX 14B: Preparing the Indirect Statement of Cash Flows Using a Spreadsheet 717
Contents
15
CHAPTER Financial Statement Analysis
Job Order Costing: Allocating Manufacturing Overhead 822 Accounting for Completion and Sale of Finished Goods and Adjusting Manufacturing Overhead 825
722
Horizontal Analysis 723
Accounting for the Completion and Sale of Finished Goods 825 Adjusting Manufacturing Overhead at the End of the Period 826
Illustration: Smart Touch Learning, Inc. 724 Horizontal Analysis of the Income Statement 726 Horizontal Analysis of the Balance Sheet 726 Trend Analysis 726
Vertical Analysis 727 How Do We Compare One Company with Another? 728 Benchmarking
729
䉴 Summary Problem 15-1
731
Decision Guidelines 15-1
䊏
䉴 Summary Problem 17-2
745
Refining Cost Systems
747
16
773
Management Accountability: Financial vs. Managerial Accounting 774 Today’s Business Environment 776 Ethical Standards 777 Service Companies 779 Merchandising Companies 780 783
895
Continuous Improvement and the Management of Quality 897
Decision Guidelines 18-2
899
900 901
19
813
How Much Does It Cost to Make a Product? Two Approaches 814 Job Order Costing 814 Process Costing 814
How Job Costs Flow Through the Accounts: An Overview 815 821
893
Just-in-Time Costing 895 JIT Costing Illustrated: Smart Touch
CHAPTER Cost-Volume-Profit Analysis
17
䉴 Summary Problem 17-1
892
Review and Assignment Material 902
793
820
891
Just-in-Time (JIT) Systems
䉴 Summary Problem 18-2
791
CHAPTER Job Order and Process Costing
Decision Guidelines 18-1
䉴 Summary Problem 18-1
䊏
Review and Assignment Material 794
Decision Guidelines 17-1
䊏
886
The Four Types of Quality Costs 898 Deciding Whether to Adopt a New Quality Program
Types of Costs 784
䊏
Pricing and Product Mix Decisions Cutting Costs 887
782
Manufacturing Companies
䉴 Summary Problem 16-2
881
Sharpening the Focus: Assigning Costs Based on the Activities That Caused the Costs 881 Developing an Activity-Based Costing System 883 Traditional Versus Activity-Based Costing Systems: Smart Touch Learning 883
Activity-Based Management: Using ABC for Decision Making 886
CHAPTER Introduction to Managerial Accounting
Decision Guidelines 16-1
831
18
COMPREHENSIVE PROBLEM FOR CHAPTER 15: Analyzing a Company for Its Investment Potential 772
䊏
828
830
CHAPTER Activity-Based Costing and Other Cost Management Tools 880
Review and Assignment Material 749
䉴 Summary Problem 16-1
Decision Guidelines 17-2
APPENDIX 17A: Process Costing—Weighted-Average Method 856
Evaluating the Ability to Pay Current Liabilities 733 Evaluating the Ability to Sell Inventory and Collect Receivables 735 Evaluating the Ability to Pay Long-Term Debt 737 Evaluating Profitability 739 Evaluating Stock Investments 741 Red Flags in Financial Statement Analyses 744 䉴 Summary Problem 15-2
Job Order Costing in a Service Company
Review and Assignment Material 834
Using Ratios to Make Decisions 732
䊏
ix
Cost Behavior
924
925
Variable Costs 925 Fixed Costs 926 Mixed Costs 927 High-Low Method to Separate Fixed Costs from Variable Costs 927 Relevant Range 929
Basic CVP Analysis: What Must We Sell to Break Even? 929 Assumptions 930 How Much Must Greg Sell to Break Even? Three Approaches 930
x
Contents
Future Values and Present Values: Points Along the Time Line 1022 Future Value and Present Value Factors 1023 Calculating Future Values of Single Sums and Annuities Using FV Factors 1023 Calculating Present Values of Single Sums and Annuities Using PV Factors 1024
Using CVP to Plan Profits 933 How Much Must Greg’s Sell to Earn a Profit? 933 Graphing Cost-Volume-Profit Relations 934 䉴 Summary Problem 19-1
935
Using CVP for Sensitivity Analysis 937 Changing the Selling Price 937 Changing Variable Costs 938 Changing Fixed Costs 938 Margin of Safety 939
Effect of Sales Mix on CVP Analysis 䊏
Decision Guidelines 19-1
䉴 Summary Problem 19-2
Using Discounted Cash Flow Models to Make Capital Investment Decisions 1026 Net Present Value (NPV) 1026 Internal Rate of Return (IRR) 1031
940
942
Comparing Capital Budgeting Methods
944
䊏
Review and Assignment Material 946 APPENDIX 19A: Variable Costing and Absorption Costing online at pearsonhighered.com/horngren
962
Why Managers Use Budgets
Relevant Information 963 Relevant Nonfinancial Information 964 Keys to Making Short-Term Special Decisions
966
When to Accept a Special Sales Order 966 How to Set Regular Prices 969
Understanding the Components of the Master Budget 1055 Components of the Master Budget 1055 Data for Greg’s Tunes 1056
974
Preparing the Operating Budget 1058
975
The Sales Budget 1058 The Inventory, Purchases, and Cost of Goods Sold Budget 1058 The Operating Expenses Budget 1059 The Budgeted Income Statement 1060
When to Drop Products, Departments, or Territories 977 Dropping Products Under Various Assumptions 978 Product Mix: Which Product to Emphasize? 980
Outsourcing and Sell as Is or Process Further Decisions 982 When to Outsource 982 Sell As Is or Process Further? 䊏
Decision Guidelines 20-2
䉴 Summary Problem 20-2
䉴 Summary Problem 22-1
Preparing the Cash Budget 1063 The Budgeted Balance Sheet 1067 The Budgeted Statement of Cash Flows 1067 Getting Employees to Accept the Budget 1068
988 989
䉴 Summary Problem 22-2
21
Sensitivity Analysis 1072 Rolling Up Individual Unit Budgets into the Companywide Budget 1073
Responsibility Accounting 1074 Four Types of Responsibility Centers 1074 Responsibility Accounting Performance Reports
Capital Budgeting 1011 Four Methods of Capital Budgeting Analysis Focus on Cash Flows 1012 Capital Budgeting Process 1012
1011
Payback Period 1013 Rate of Return (ROR) 1016
Decision Guidelines 22-1
䉴 Summary Problem 22-3
1075
1076
1081 1082
Review and Assignment Material 1084
23
1019 1020
A Review of the Time Value of Money
Learn about Service Departments 䊏
Using Payback Period and Rate of Return to Make Capital Investment Decisions 1013
Decision Guidelines 21-1
1069
Using Information Technology for Sensitivity Analysis and Rolling Up Unit Budgets 1072
CHAPTER Capital Investment Decisions and the Time Value of Money 1010
䉴 Summary Problem 21-1
1061
Preparing the Financial Budget 1063
985
Review and Assignment Material 991
䊏
1051
Using Budgets to Plan and Control 1052 Benefits of Budgeting 1053
965
Special Sales Order and Regular Pricing Decisions
Decision Guidelines 20-1
Review and Assignment Material 1037
CHAPTER The Master Budget and Responsibility Accounting 1050
How Managers Make Decisions 963
䉴 Summary Problem 20-1
1035 1036
22
20
CHAPTER Short-Term Business Decisions
䊏
Decision Guidelines 21-2
䉴 Summary Problem 21-2
1033
1021
Factors Affecting the Time Value of Money
1021
CHAPTER Flexible Budgets and Standard Costs How Managers Use Flexible Budgets 1106 What Is a Flexible Budget?
1106
1105
Contents
Using the Flexible Budget: Why Do Actual Results Differ from the Static Budget? 1108 䊏
Decision Guidelines 23-1
䉴 Summary Problem 23-1
1111 1112
P
CHAPTER Partnerships
Standard Costing 1113
The Start-Up of a Partnership P-6 Sharing Profits and Losses, and Partner Drawings P-7
1115
Direct Materials Variances 1117 Direct Labor Variances 1120 Allocating Overhead in a Standard Cost System Variable Overhead Variances 1122 Fixed Overhead Variances 1123 Summary of Overhead Variances 1125
1121
1125
Journal Entries 1125 Standard Cost Income Statement for Management 1128 Decision Guidelines 23-2
䉴 Summary Problem 23-2
1129
1133
24
Decentralized Operations 1152 Advantages of Decentralization 1152 Disadvantages of Decentralization 1153 Responsibility Centers 1153
Performance Measurement
1154
Goals of Performance Evaluation Systems 1154 Limitations of Financial Performance Measurement 1155
The Balanced Scorecard 1155 The Four Perspectives of the Balanced Scorecard 1156 Decision Guidelines 24-1
䉴 Summary Problem 24-1
1160 1161
Measuring the Financial Performance of Cost, Revenue, and Profit Centers 1162 Measuring the Financial Performance of Investment Centers 1164 Return on Investment (ROI) 1166 Residual Income (RI) 1168 Limitations of Financial Performance Measures 1171 䊏
Decision Guidelines 24-2
䉴 Summary Problem 24-2
P-11
Withdrawal of a Partner P-14 Revaluation of Assets P-14 Withdrawal at Book Value P-16 Withdrawal at Less Than Book Value P-16 Withdrawal at More Than Book Value P-16
Liquidation of a Partnership
P-17
Sale of Assets at a Gain P-18 Sale of Assets at a Loss P-19 䊏
1173 1174
Review and Assignment Material 1176
P-20
Decision Guidelines P-1 P-21
䉴 Summary Problem P-1
P-22
Review and Assignment Material
CHAPTER Performance Evaluation and the Balanced Scorecard 1151
䊏
Admission of a Partner
Partnership Financial Statements
1130
Review and Assignment Material
Sharing Based on a Stated Fraction P-8 Sharing Based on Capital Balances and on Service P-8 Partner Drawings of Cash and Other Assets P-10 Admission by Purchasing an Existing Partner’s Interest Admission by Investing in the Partnership P-12
Manufacturing Overhead Variances 1121
Standard Cost Accounting Systems
P-2
Partnership Characteristics P-2 Types of Partnerships P-4
How Smart Touch Uses Standard Costing: Analyzing the Flexible Budget Variance 1117
䊏
P-1
Characteristics and Types of Partnerships
Price Standards 1113 Application 1114 Quantity Standards 1114 Why Do Companies Use Standard Costs? Variance Analysis 1115
xi
P-25
APPENDIX A: 2009 Amazon.com Annual Report APPENDIX B: PRESENT VALUE TABLES GLINDEX
G-1
COMPANY INDEX
I-1
ONLINE MATERIAL: located at pearsonhighered.com/horngren APPENDIX C—CHECK FIGURES SPECIAL JOURNALS INVESTMENTS
B-1
A-1
P-11
Changes to This Edition Students and Instructors will both benefit from a variety of new content and features in the ninth edition of Accounting: ADDED impairment coverage to Chapter 9, Plant Assets and Intangibles. IMPROVED Liabilities Coverage: Now Split into Two Chapters. Based on reviewer demand, we split Chapter 10 into two chapters: • Chapter 10: Current Liabilities and Payroll • New Chapter 11: Long-Term Liabilities, Bonds Payable, and Classification of Liabilities on the Balance Sheet We also added long-term notes payable, mortgages payable, and allocation of payments between principal and interest coverage to new Chapter 11. ADDED Ratio Coverage. Based on reviewer demand, we added more ratio coverage to the Financial Statement Analysis, Chapter 15, and additional individual chapters. ADDED Excel Formulas in Chapter 21, Capital Budgeting, to complement the blue/green formula boxes. REVISED Budget Coverage. Chapter 22: The Master Budget and Responsibility Accounting was rewritten to use the variable costing approach. Also, added coverage on traceable and untraceable costs. ADDED more detailed coverage of overhead variances in Chapter 23. Flexible Budgets and Standard Costs. UPDATED Full MyAccountingLab Coverage: Special Purpose Journals, Investments, and Partnerships. The three online chapters have been posted in MyAccountingLab. The special purpose journals chapter covers the streamlined journalizing process using the continuing company, Smart Touch. The investments chapter covers classification and treatment of stock investments, also using Smart Touch. The streamlined partnership chapter covers all the basics, including partnership creation, adding a partner/removing a partner, allocating P&L, and liquidation. New examples were also written to retain consistency and match the rest of the text (Sheena Bright of Smart Touch creates a partnership). These three chapters contain full MyAccountingLab coverage and supplements for instructors who wish to have it. These decisions have been widely supported by reviewers. NEW and IMPROVED Chapter Openers. All of the chapter openers have been redesigned and rewritten. The financial chapter openers include a visual of a balance sheet, highlighting the specific section of the balance sheet that will be covered within the chapter. The managerial chapter openers include a visual of a smartphone device, complete with decision-making tools as apps. As students progress through these chapters, the decision being discussed is highlighted on the first page of the chapter. These visuals help set the stage while providing students with direction as they navigate through the material.
FOCUSED on Student Success. We’ve made it easy for students to identify what their focal point should be in every chapter: • NEW Key Takeaway Feature. At the end of each main topic throughout the book, we’ve included a brief takeaway feature. This marginal feature hones in on the key point of that section so students will know exactly what they should have understood before moving on. • NEW Translation Guides. We’ve included “translation guides” throughout the text, set off by a different font style/treatment, in which accounting terminology is translated into a language students can easily understand. In doing so, we aim to make accounting more approachable (for example: Assets are resources that provide future economic benefits to a company. An asset is something you own that has value, like your iPod.). • NEW Connect To Boxes. We’ve included a marginal “Connect To” box in each chapter that focuses on topics such as IFRS, Ethics, Technology, and Accounting Information Systems. Each contains a subtitle so instructors can easily see what each box features. • IMPROVED Stop & Think Boxes. We’ve refined many of the existing Stop & Think boxes, making them less technical. EXTENSIVE REVISION of the End-of-Chapter Materials: • NEW End-of-Chapter Student Success Section. We’ve added a new half-page, end-ofchapter “Student Success” section that does the following: - Lists hints on some common trouble spots/mistakes students make when taking a test on the chapter. - Tells students exactly where to go in the chapter and MyAccountingLab to get help related to a particular topic covered within that chapter. • IMPROVED End-of-Chapter Material. We’ve improved the end-of-chapter exercises, while retaining the exercises often used in MyAccountingLab. • NEW End-of-Chapter Fraud Activity. We’ve added a short end-of-chapter activity that asks students to look at a fraud issue related to the chapter. • NEW End-of-Chapter Communication Activity. We’ve added a short end-of-chapter activity that asks students to restate key chapter content in their own words, encouraging them to learn and use chapter vocabulary. ACCURACY. To ensure the level of accuracy instructors expect and require, accuracy checkers verified the in-chapter content, figures, and illustrations while additional accuracy checkers worked through the end-of-chapter material.
pearsonhighered.com/horngren
Students will have more “I Get It!” moments Students understand (or “get it”) right after the instructor does a problem in class. Once they leave the classroom, however, students often struggle to complete the homework on their own. This frustration can cause them to give up on the material altogether and fall behind in the course, resulting in an entire class falling behind as the instructor attempts to keep everyone on the same page. Text Study Resources
MyLab
With the Accounting, Ninth Edition Student Learning System, all the features of the student textbook, study resources, and online homework system are designed to work together to provide students with the consistency and repetition that will keep both the instructor and students on track by providing more “I Get It!” moments inside and outside the classroom.
Replicating the Classroom Experience with Demo Doc Examples The Demo Doc Examples, available in chapters 1 through 4 of the text, consist of entire problems, worked through step-by-step and narrated with the kind of comments that instructors would say in class. Demo Docs will aid students when they are trying to solve exercises and problems on their own, duplicating the classroom experience outside of class.
Gear art © ArtyFree | iStockphoto.com
with Accounting and MyAccountingLab! Consistency and Repetition Throughout the Learning Process The concepts, materials, and practice problems are presented with clarity and consistency across all mediums—textbook, study resources, and online homework system. No matter which platform students use, they will continually experience the same look, feel, and language, minimizing confusion and ensuring clarity.
Experiencing the Power of Practice with MyAccountingLab: myaccountinglab.com MyAccountingLab is an online homework system that gives students more “I Get It!” moments through the power of practice. With MyAccountingLab students can: • work on the exact end-of-chapter material and/or similar problems assigned by the instructor. • use the Study Plan for self-assessment and customized study outlines. • use the Help Me Solve This tool for a step-by-step tutorial. • watch a video to see additional information pertaining to the lecture. • open the etext to the exact section of the book that will provide help on the specific problems.
Accounting... With its tried-and-true framework and respected author team, Horngren/Harrison/Oliver’s Accounting is the trusted choice for instructors and students of Introductory Accounting. The ninth edition preserves the classic, solid foundation of the previous editions, while also including a modern and fresh teaching approach that helps students understand the complexities of accounting and achieve more “I Get It” moments.
NEW Off to the right start: Chapter Openers Redesigned and rewritten, the chapter openers in this edition are focused on preparing students for the reading. The financial chapter openers include a visual of a balance sheet that highlights what will be covered within the chapter. The managerial chapter openers include a visual of a smartphone—complete with decision-making tools as apps—that visually displays the concepts and decision-making tools students will encounter.
NEW Interpret the terms with ease: Translation Guides Translation guides, found throughout the chapters, translate accounting terminology in a way students can understand. For example, Current assets are items that will be used up in a year, like your notebook paper for this class or the change in your pocket.
The trusted choice for “I Get It” moments! NEW Link today’s topics to the fundamentals: Connect To The Connect To marginal boxes in each chapter highlight hot topics such as IFRS, Ethics, and Accounting Information Systems as they pertain to the material being presented.
NEW Highlight what matters: Key Takeaway At the end of each learning objective, the authors added a new marginal feature that emphasizes the key points covered within the section so students can see what they need to understand before reading further.
IMPROVED Put the concepts in context: Stop & Think Boxes Improved Stop & Think boxes relate accounting concepts to students’ everyday lives by presenting them with relevant examples of the topic in practice.
Keep it consistent: Consistent Examples Rather than learn about a new company each time an example is presented, this text provides two sets of company data that are carried through all of the in-chapter examples. As a result, students gain a sense of familiarity with the context of these examples and can focus their energy on learning the accounting principles in question.
Illustrate the concepts: Decision Guidelines Decision Guidelines explain why the accounting concepts addressed in the chapter are important in a business setting. The left-hand side of the Decision Guidelines table explains the decision or action asked of the student in sim