Financial Accounting for Decision Makers, 2e

by DeFond

| ISBN: 978-1-61853-314-2 | Copyright 2020

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Welcome to Financial Accounting for Decision Makers 2e by Mark DeFond.

It is difficult to imagine being successful in today’s business world without having a solid understanding of how to read and understand financial accounting reports. The overarching objective of this text is to prepare students for careers in business by providing them with a solid foundation in financial without having a solid understanding of how to read and understand financial accounting reports. The overarching objective of this text is to prepare students for careers in business by providing them with a solid foundation in financial accounting and reporting without overloading them with the mechanics and procedures more appropriate for future accountants. This book makes extensive use of real-world companies to help students understand how to use accounting information. To further aid student success in the course, we provide a wealth of resources through our online learning and homework system, myBusinessCourse (MBC). Access to MBC is included for free with the purchase of each new copy.

Target Audience

This book is an ideal text for use in the first financial accounting course at both the undergraduate and the graduate level. With a strong emphasis on the interpretation of real-world financial statements, the book teaches students how to read, analyze, and interpret financial accounting data to make informed business decisions without using the traditional debit/credit paradigm. The book is filled with examples that use financial reports from actual companies, an approach that students find engaging.

Transaction Analysis Template

A major innovation in this text is that, unlike traditional introductory financial accounting textbooks, we do not focus on debits and credits. Because our objective is to help students understand how to read and interpret financial statements, we do not emphasize financial statement preparation, which requires knowledge of the system of debits and credits. While we describe debits and credits in Appendix C (The Language of Accountants: Debits and Credits), the book does not require students to learn the system of debits and credits. Dropping the emphasis on debits and credits frees up time for instructors to focus on teaching students to understand how to interpret and analyze financial reports. This contrasts sharply with traditional introductory textbooks which focus primarily on teaching students how to prepare financial statements.

In place of debits and credits, the book uses a creative new tool that is designed to teach students how economic transactions translate into the financial reports. This tool is called the “Transaction Analysis Template” (or TAT, for short). The TAT is an abbreviated version of a horizontal worksheet and provides students with a "shorthand" way of understanding and interpreting accounting reports. Once students learn the basic structure of a balance sheet and income statement, the TAT becomes a simple and highly intuitive technique for learning financial accounting,


Appendix C

For faculty who want students to be conversant in the mechanics of accounting, debits and credits are discussed in Appendix C, The Language of Accountants: Debits and Credits.

Real Companies' Financial Statements

A feature that really brings accounting alive for students is seeing the accounting practices and reports of companies with which they are familiar. To this end, each chapter incorporates examples using real companies that students know. For example, we discuss accounting issues related to GoogleAppleMicrosoftAmazonTargetKrispy KremeMGM Resorts, and many others.

Real Data and Examples

Each chapter includes an assignment called Beyond the Numbers that requires students to use year-end financial statements of Columbia Sportswear and Under Armour.

Accounting in Practice

Boxed inserts are included throughout the text to help bridge the gap between the classroom and what students encounter in the real world. Accounting In Practice illustrations document situations a reader is likely to encounter and present the choices that companies make in reporting financial results.

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Forensic Accounting

These boxed inserts help students understand how financial accounting knowledge can be used to aid in the prevention and detection of accounting errors and fraud.

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Corporate Social Responsibility

Increasingly, companies have found that “doing good” leads to a more successful, profitable enterprise. These boxed inserts help students understand how corporate social responsibility is being embraced by forward-thinking enterprises as part of their long-term business models.

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Organized for Student Success

To help students succeed in the course, we include many features that provide direction to students and require them to recall and apply the financial accounting techniques and concepts described in each chapter. 

Putting Each Chapter in Context

Often students lose sight of the big picture. The Past/Present/Future feature provides students with an overview of where the chapter fits within the whole course.


Mapping Each Chapter

Each chapter begins with a Road Map highlighting the chapter's learning objectives and corresponding eLecture videos, Guided Example videos, and assignments. The Chapter Organization provides an overview that visually depicts the layout of the chapter.


Rview

Review boxes are integrated throughout each chapter as a means of reinforcing the material just presented. Solutions are provided at the end of the chapter so students can check their work. Each Review has a corresponding Guided Example video created by the author, walking through how to solve the problem for students.


A.K.A. Notations

A.K.A., Also Known As, Notations inform students of commonly used alternative terms that they may encounter. 


Takeaways

These in-chapter summaries ensure that students grasp key concepts before proceeding to the next topic.


Ethics

In today's post-Sarbanes-Oxley world, ethical decision-making has never been more pertinent to business and students studying accounting. We discuss ethics where appropriate in the text, and we have included at least one assignment in each chapter that raises an ethical issue. Assignments involving ethics are identified by the icon in the margin.


International Financial Reporting Standards (IFRS)

IFRS Alerts

Most public companies outside of the U.S. use International Financial Reporting Standards in preparing their financial reports, including many companies that list on U.S. stock exchanges. Thus, it is important to provide students with a basic understanding of the similarities and differences in the current reporting requirements and methods under U.S. GAAP and IFRS. Consequently, we incorporate discussions that examine these similarities and differences where appropriate throughout the book in IFRS Alert! boxes. 


Thinking Globally

In addition to IFRS Alert! boxes, these Thinking Globally inserts emphasize the similarities and differences between the United States and other countries that are not necessarily related to reporting standards. 

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  • myBusinessCourse: Our online learning and assessment program intended to complement textbook and faculty instruction. See below for more information about myBusinessCourse (MBC).
  • Chapter 1 has been updated and streamlined: Due to the increased interest in Big Data and Block Chain technology, a new section has been added that describes and discusses these topics. In order to eliminate redundancies the Conceptual Framework appendix has been removed from this chapter and much of that discussion is now included in Chapter 4.
  • Transaction analysis template revision: The template, first introduced in chapter 2, has been updated to better reflect the separation of the balance sheet and income statement. The stockholders’ equity section has been refined and now clearly distinguishes contributed capital from retained earnings.
  • Revenue recognition principle: This discussion has been updated and expanded to reflect the new revenue recognition standards.
  • Chapter 5 has been updated and streamlined: Discussion about SOX has been expanded and the discussion on COSO Control Activities has been streamlined and condensed.
  • Chapter 7 has been updated: To reflect changes in accounting standards, the discussion of lower of cost or market (LCM) has been replaced with a discussion of lower of cost or net realizable value (LCNRV). Additionally, the section on errors in inventory count has been expanded to include a discussion of a bloated balance sheet.
  • Chapter 8 has been streamlined: Discussions of Depreciation Method Changes and Impairment Losses have been streamlined and the section on Package Purchases has been deleted.
  • Chapter 9 has been updated and streamlined: Accounting for Leases has been updated to reflect recent rule changes, including the capitalization of virtually all leases and the “right to use” terminology. Discussions and examples of Sales and Excise Taxes Payable and Payroll-related Liabilities have been removed for a more concise discussion of current liabilities. Also deleted are discussions of the issuance of bonds between interest dates and the retirement of bonds before maturity.
  • Appendix C Financial Statements for Tesco PLC have been deleted: The discussion of IFRS has been streamlined throughout the text. IFRS Alerts are still included where applicable.
  • Appendix F has moved to Appendix C: The debits and credits appendix has been expanded to include the entire accounting cycle.


myBusinessCourse: A web-based learning and assessment program intended to complement your textbook and classroom instruction. This easy-to-use course management system grades homework automatically and provides students with eLecture and Guided Example videos to assist them in mastering the material.  In addition, detailed diagnostic tools assess class and individual performance. myBusinessCourse is ideal for online courses or traditional face-to-face courses for which you want to offer students more resources to succeed. MBC integrates with Canvas, BlackBoard, D2L, Sakai, and other LMS platforms.

Solutions Manual: Created by the author, the Solutions Manual contains complete solutions to all the assignment material in the text.

Test Bank/Computerized Test Bank: The test bank includes multiple-choice items, matching questions, short-essay questions, and problems.  The computerized version of the test bank enables an instructor to add and edit questions; create up to 99 versions of each test; attach graphic files to questions; import and export AsCii files; and select questions based on type or learning objective.  It provides password protection for saved tests and question databases and is able to run on a network.

PowerPoint: Created by the author, the PowerPoint slides outline key elements of each chapter.

Expand/Collapse All
About the Author (pg. iii)
Preface (pg. iv)
Brief Contents (pg. xii)
Contents (pg. xiii)
Chapter 1 Financial Accounting and Business Decisions (pg. 2)
Business Organization (pg. 4)
Review 1.1 (pg. 5)
Activities of a Business (pg. 5)
Financing Activities (pg. 5)
Investing Activities (pg. 5)
Operating Activities (pg. 5)
Review 1.2 (pg. 6)
Accounting Information and Its Use (pg. 6)
External Users of Accounting (pg. 6)
Internal Users of Accounting (pg. 7)
Review 1.3 (pg. 8)
Ethics and Accounting (pg. 8)
Review 1.4 (pg. 9)
The Accounting Process (pg. 9)
Generally Accepted Accounting Principles (pg. 10)
International Financial Reporting Standards (pg. 11)
Financial Statements (pg. 11)
Balance Sheet (pg. 11)
Income Statement (pg. 13)
Statement of Stockholders’ Equity (pg. 14)
Statement of Cash Flows (pg. 15)
Relations Among the Financial Statements (pg. 16)
Review 1.5 (pg. 17)
Additional Information (pg. 18)
Management Discussion and Analysis (pg. 18)
Notes to Financial Statements (pg. 18)
Auditor’s Report (pg. 19)
Review 1.6 (pg. 19)
Accounting and Technology (pg. 19)
Big Data (pg. 19)
Blockchain (pg. 20)
Summary of Learning Objectives (pg. 20)
Key Terms (pg. 22)
Self-Study Questions (pg. 23)
Questions (pg. 24)
Short Exercises (pg. 25)
Exercises-Set A (pg. 27)
Exercises-Set B (pg. 29)
Problems-Set A (pg. 32)
Problems-Set B (pg. 35)
Serial Problem: Angel City Greetings (pg. 38)
Beyond The Numbers (pg. 39)
Answers to Self-Study Questions: (pg. 42)
Review Solutions (pg. 42)
Chapter 2 Processing Accounting Information (pg. 46)
Accounting Cycle (pg. 48)
Analyzing Transactions (pg. 49)
Accounting Equation Expanded (pg. 49)
Review 2.1 (pg. 50)
Transactions and the Accounting Equation: An Illustration (pg. 50)
Transaction Summary (pg. 54)
Review 2.2 (pg. 56)
Transaction Analysis Template (pg. 56)
The “Account” System (pg. 57)
Recording Transactions (pg. 58)
Chart of Accounts (pg. 58)
The General Ledger (pg. 59)
Review 2.3 (pg. 59)
Summary of Learning Objectives (pg. 60)
Key Terms (pg. 61)
Self-Study Questions (pg. 61)
Questions (pg. 62)
Short Exercises (pg. 62)
Exercises-Set A (pg. 63)
Exercises-Set B (pg. 67)
Problems-Set A (pg. 70)
Problems-Set B (pg. 74)
Serial Problem: Angel City Greetings (pg. 78)
Beyond the Numbers (pg. 79)
Answers to Self-Study Questions: (pg. 81)
Review Solutions (pg. 82)
Chapter 3 Accrual Basis of Accounting (pg. 84)
Accrual Basis of Accounting (pg. 86)
Revenue Recognition Principle (pg. 86)
Expense Recognition (Matching) Principle (pg. 88)
Accounting Adjustments (pg. 89)
Types of Adjustments (pg. 90)
Allocating Previously Recorded Assets to Expenses (pg. 90)
Allocating Previously Recorded Unearned Revenue to Revenue (pg. 92)
Recording Previously Unrecorded Expenses (pg. 93)
Recording Previously Unrecorded Revenues (pg. 95)
Summary of Accounting Adjustments (pg. 96)
Review 3.1 (pg. 96)
Preparing The Financial Statements (pg. 97)
Income Statement (pg. 97)
Statement of Stockholders’ Equity (pg. 97)
Balance Sheet (pg. 97)
Statement of Cash Flows (pg. 97)
Review 3.2 (pg. 99)
Quality of Accounting Numbers (pg. 100)
Closing Process (pg. 100)
Summary of the Accounting Cycle (pg. 100)
Review 3.3 (pg. 101)
Summary of Learning Objectives (pg. 102)
Key Terms (pg. 103)
Self-Study Questions (pg. 103)
Questions (pg. 104)
Short Exercises (pg. 105)
Exercises-Set A (pg. 106)
Exercises-Set B (pg. 108)
Problems-Set A (pg. 111)
Problems-Set B (pg. 115)
Serial Problem: Angel City Greetings (pg. 120)
Beyond The Numbers (pg. 121)
Answers to Self-Study Questions: (pg. 124)
Review Solutions (pg. 124)
Chapter 4 Understanding Accounting Information (pg. 128)
Financial Reporting Quality (pg. 130)
Objectives of Financial Reporting (pg. 130)
Qualities of Useful Accounting Information (pg. 130)
Finding Financial Accounting Information (pg. 132)
Balance Sheet Classification (pg. 132)
Current Assets (pg. 133)
Long-Term Assets (pg. 133)
Current Liabilities (pg. 134)
LongTerm Liabilities (pg. 135)
Stockholders’ Equity (pg. 135)
Presentation Format (pg. 135)
Review 4.1 (pg. 136)
Income Statement Classification (pg. 137)
Review 4.2 (pg. 139)
Working with Financial Statements (pg. 139)
Ratio Analysis (pg. 139)
Working with the Balance Sheet (pg. 140)
Working with the Income Statement (pg. 142)
Working with the Statement of Stockholders’ Equity (pg. 143)
Working with the Statement of Cash Flows (pg. 144)
Review 4.4 (pg. 145)
Summary of Learning Objectives (pg. 146)
Key Terms (pg. 147)
Self-Study Questions (pg. 148)
Questions (pg. 150)
Short Exercises (pg. 150)
Exercises-Set A (pg. 152)
Exercises-Set B (pg. 153)
Problems-Set A (pg. 155)
Problems-Set B (pg. 158)
Serial Problem: Angel City Greetings (pg. 160)
Beyond the Numbers (pg. 161)
Answers to Self-Study Questions: (pg. 163)
Review Solutions (pg. 164)
Chapter 5 Internal Control and Cash (pg. 168)
Fraud (pg. 170)
Pressure (pg. 170)
Rationalization (pg. 170)
Opportunity (pg. 170)
Internal Control (pg. 171)
COSO Framework (pg. 171)
Control Failures (pg. 173)
The Sarbanes-Oxley Act (pg. 173)
Review 5.1 (pg. 174)
Accounting for Cash (pg. 174)
Reporting Cash (pg. 174)
Cash and Cash Equivalents (pg. 175)
Internal Controls for Cash (pg. 175)
Payments from Customers (pg. 176)
Cash Disbursements (pg. 177)
Bank Reconciliation (pg. 177)
Effective Cash Management (pg. 177)
Monitoring Cash (pg. 178)
Primary Activities of Effective Cash Management (pg. 178)
Appendix 5A: Auditing and Internal Control (pg. 179)
Financial Statement Audits (pg. 179)
Audit Procedures (pg. 180)
The Audit Report (pg. 180)
Operational Audits (pg. 180)
Review 5.2 (pg. 181)
Appendix 5B: Preparing the Bank Reconciliation (pg. 181)
Bank Reconciliation Illustrated (pg. 182)
Review 5.3 (pg. 185)
Summary of Learning Objectives (pg. 185)
Key Terms (pg. 187)
Self-Study Questions (pg. 188)
Questions (pg. 189)
Short Exercises (pg. 189)
Exercises-Set A (pg. 191)
Exercises-Set B (pg. 192)
Problems-Set A (pg. 193)
Problems-Set B (pg. 197)
Serial Problem: Angel City Greetings (pg. 199)
Beyond The Numbers (pg. 200)
Answers to Self-Study Questions: (pg. 202)
Review Solutions (pg. 203)
Chapter 6 Receivables (pg. 206)
Receivables (pg. 208)
Accounts Receivable (pg. 208)
Losses from Valuing Accounts Receivable (pg. 209)
Allowance Method (pg. 210)
Estimating Credit Losses (pg. 212)
Percentage of Net Sales Method (pg. 212)
Review 6.1 (pg. 213)
Accounts Receivable Aging Method (pg. 213)
Writing Off Specific Accounts Receivable under the Allowance Method (pg. 215)
Review 6.2 (pg. 216)
Recoveries of Accounts Written Off under the Allowance Method (pg. 216)
Credit Card Sales (pg. 217)
Review 6.3 (pg. 218)
Notes Receivable (pg. 218)
Interest on Notes Receivable (pg. 219)
Adjusting Entry for Interest (pg. 220)
Review 6.4 (pg. 221)
Reporting Notes Receivable on the Balance Sheet (pg. 222)
Review 6.5 (pg. 222)
Analyzing and Managing Receivables (pg. 223)
Review 6.6 (pg. 224)
Factoring and Discounting (pg. 224)
Summary of Learning Objectives (pg. 225)
Key Terms (pg. 226)
Self-Study Questions (pg. 226)
Questions (pg. 227)
Short Exercises (pg. 228)
Exercises-Set A (pg. 230)
Exercises-Set B (pg. 232)
Problems-Set A (pg. 235)
Problems-Set B (pg. 238)
Serial Problem: Angel City Greetings (pg. 241)
Beyond the Numbers (pg. 242)
Answers to Self-Study Questions: (pg. 244)
Review Solutions (pg. 244)
Chapter 7 Inventory (pg. 248)
The Nature of Inventory (pg. 250)
Categories of Inventory (pg. 250)
Costs Included in Inventory (pg. 251)
Inventory Management (pg. 251)
Cost of Goods Sold (pg. 252)
Physical Count of Inventory (pg. 252)
Inventory Costing Systems (pg. 253)
Inventory Costing Methods (pg. 255)
Goods Flow vs. Cost Flow (pg. 255)
Data for Illustration of Cost Flow Assumptions (pg. 255)
Specific Identification Method (pg. 256)
FirstIn, FirstOut (FIFO) Method (pg. 256)
LastIn, FirstOut (LIFO) Method (pg. 257)
Weighted-Average Cost Method (pg. 257)
Inventory Costing Under the Perpetual Versus the Periodic Method (pg. 258)
How Inventory Methods Affect the Financial Statements (pg. 259)
How Managers Choose an Inventory Method (pg. 259)
The Effects of Inventory Method Choice on Gross Profit Analysis (pg. 260)
Review 7.1 (pg. 262)
Lower of Cost or Net Realizable Value (pg. 264)
Net Realizable Value (pg. 264)
Inventory Analysis (pg. 265)
Gross Profit Analysis (pg. 265)
Review 7.2 (pg. 266)
Inventory Turnover and Days’ Sales in Inventory (pg. 266)
Review 7.3 (pg. 267)
Review 7.4 (pg. 268)
Appendix 7A: Inventory Costing using a Perpetual Inventory System (pg. 268)
Specific Identification Method (pg. 269)
FirstIn, FirstOut (FIFO) Method (pg. 269)
LastIn, FirstOut (LIFO) Method (pg. 270)
Weighted-Average Cost Method (pg. 271)
Appendix 7B: LIFO Reserve (pg. 272)
Summary of Learning Objectives (pg. 273)
Key Terms (pg. 275)
Self-Study Questions (pg. 276)
Questions (pg. 277)
Short Exercises (pg. 278)
Exercises-Set A (pg. 280)
Exercises-Set B (pg. 282)
Problems-Set A (pg. 284)
Problems-Set B (pg. 286)
Serial Problem: Angel City Greetings (pg. 288)
Beyond the Numbers (pg. 289)
Answers to Self-Study Questions: (pg. 291)
Review Solutions (pg. 291)
Chapter 8 Property, Plant and Equipment and Intangible Assets (pg. 294)
Overview of Long-Lived Assets (pg. 296)
Accounting for Long-lived Assets (pg. 296)
Acquisition Cost of Property, Plant and Equipment (pg. 297)
Review 8.1 (pg. 299)
Nature of Depreciation (pg. 299)
Allocation versus Valuation: Depreciation Accounting (pg. 299)
Calculating Depreciation Expense (pg. 300)
A Comparison of Alternative Depreciation Methods (pg. 303)
Depreciation Method Estimate Changes (pg. 304)
Review 8.2 (pg. 306)
Revenue Expenditures Versus Capital Expenditures (pg. 306)
Maintenance and Repairs (pg. 306)
LowCost Items (pg. 306)
Capital Expenditures (pg. 306)
Review 8.3 (pg. 307)
Disposals Of Property, Plant and Equipment (pg. 307)
Sale of Property, Plant and Equipment (pg. 308)
Review 8.4 (pg. 309)
Intangible Assets (pg. 309)
Measurement of Intangible Assets (pg. 310)
Amortization of Intangibles (pg. 310)
Examples of Intangible Assets (pg. 310)
Patents (pg. 310)
Copyright (pg. 311)
Franchises (pg. 311)
Trademarks (pg. 311)
Goodwill (pg. 312)
Balance Sheet Presentation (pg. 312)
Return on Assets and Asset Turnover (pg. 313)
Review 8.6 (pg. 314)
Summary of Learning Objectives (pg. 314)
Key Terms (pg. 315)
Self-Study Questions (pg. 316)
Questions (pg. 317)
Short Exercises (pg. 317)
Exercises-Set A (pg. 318)
Exercises-Set B (pg. 320)
Problems-Set A (pg. 321)
Problems-Set B (pg. 324)
Serial Problem: Angel City Greetings (pg. 327)
Beyond the Numbers (pg. 327)
Answers to Self-Study Questions: (pg. 330)
Review Solutions (pg. 330)
Chapter 9 Liabilities (pg. 332)
Current Liabilities (pg. 334)
Accounts Payable (pg. 334)
Notes Payable and Interest (pg. 334)
Accrued Interest Payable (pg. 335)
Current Portion of LongTerm Debt (pg. 336)
Review 9.1 (pg. 336)
Income Taxes Payable (pg. 336)
Advance Payments-Unearned Revenue (pg. 337)
Long-Term Liabilities (pg. 338)
Advantages and Disadvantages of Long-Term Bonds and Notes (pg. 338)
Types of Bonds (pg. 339)
Bond Features (pg. 339)
Bond Prices (pg. 340)
Financial Statement Effect of Issuing Bonds (pg. 342)
Review 9.2 (pg. 347)
Review 9.3 (pg. 348)
Long-Term Notes (Term Loans) (pg. 348)
Leases (pg. 349)
The Evolution of Lease Accounting (pg. 349)
Finance Leases (pg. 349)
Operating Leases (pg. 350)
Contingent Liabilities (pg. 350)
Examples of Contingent Liabilities (pg. 351)
Review 9.4 (pg. 353)
Analyzing Liabilities (pg. 354)
Current Ratio and Quick Ratio (pg. 354)
Times-Interest-Earned Ratio (pg. 355)
Review 9.5 (pg. 356)
Appendix 9A: Interest Calculations using Calculators and/or Excel (pg. 356)
Using a Financial Calculator (pg. 356)
Using an Electronic Spreadsheet (pg. 357)
Summary of Learning Objectives (pg. 358)
Key Terms (pg. 360)
Self-Study Questions (pg. 360)
Questions (pg. 361)
Short Exercises (pg. 362)
Exercises-Set A (pg. 363)
Exercises-Set B (pg. 366)
Problems-Set A (pg. 369)
Problems-Set B (pg. 371)
Serial Problem: Angel City Greetings (pg. 373)
Beyond the Numbers (pg. 373)
Answers to Self-Study Questions: (pg. 375)
Review Solutions (pg. 375)
Chapter 10 Stockholders’ Equity (pg. 378)
Nature and Formation of a Corporation (pg. 380)
Advantages of the Corporate Form of Organization (pg. 380)
Disadvantages of the Corporate Form of Organization (pg. 381)
Accounting for Equity in Alternative Organizational Forms (pg. 382)
Review 10.1 (pg. 382)
Par Value Stock and NoPar Value Stock (pg. 383)
Types of Capital Stock (pg. 383)
Common Stock (pg. 384)
Preferred Stock (pg. 384)
Review 10.2 (pg. 387)
Stock Issuances for Cash (pg. 387)
Issuing Stock at a Premium (pg. 387)
Issuing No-Par Stock (pg. 388)
Noncash Stock Issuances (pg. 388)
Review 10.3 (pg. 389)
Stock Splits (pg. 389)
Treasury Stock (pg. 390)
Accounting for Treasury Stock (pg. 390)
Review 10.4 (pg. 391)
Cash Dividends and Stock Dividends (pg. 391)
Cash Dividends (pg. 392)
Stock Dividends (pg. 393)
Retained Earnings and the Statement of Stockholders’ Equity (pg. 394)
Statement of Stockholders’ Equity (pg. 394)
Review 10.6 (pg. 395)
Analyzing Stockholders’ Equity (pg. 395)
Return on Common Stockholders’ Equity (pg. 395)
Dividend Yield and Dividend Payout Ratio (pg. 396)
Review 10.7 (pg. 397)
Summary of Learning Objectives (pg. 398)
Key Terms (pg. 399)
Questions (pg. 400)
Short Exercises (pg. 401)
Exercises-Set A (pg. 402)
Exercises-Set B (pg. 404)
Problems-Set A (pg. 406)
Problems-Set B (pg. 409)
Serial Problem: Angel City Greetings (pg. 411)
Beyond the Numbers (pg. 412)
Answers to Self-Study Questions: (pg. 414)
Review Solutions (pg. 415)
Chapter 11 Statement of Cash Flows (pg. 416)
Cash and Cash Equivalents (pg. 418)
Activity Classifications in the Statement of Cash Flows (pg. 419)
Operating Activities (pg. 419)
Investing Activities (pg. 420)
Financing Activities (pg. 420)
An Illustration of Activity Classification Usefulness (pg. 421)
Noncash Investing and Financing Activities (pg. 421)
Using the Statement of Cash Flows (pg. 422)
Cash Flow from Operating Activities (pg. 422)
Review 11.1 (pg. 423)
Preparing the Statement of cash flows Using the Indirect Method (pg. 423)
Five Steps to Preparing a Statement of Cash Flows (pg. 425)
Review 11.2 (pg. 430)
Review 11.3 (pg. 430)
Analyzing Cash Flows (pg. 431)
Free Cash Flow (pg. 431)
Operating-Cash-Flow-to-Current-Liabilities Ratio (pg. 432)
Operating-Cash-Flow-to-Capital-Expenditures Ratio (pg. 432)
Review 11.4 (pg. 433)
Appendix 11A: Preparing the Statement of Cash Flows Under the Direct Method (pg. 434)
Review 11.5 (pg. 435)
Summary of Learning Objectives (pg. 436)
Key Terms (pg. 437)
Self-Study Questions (pg. 438)
Questions (pg. 439)
Short Exercises (pg. 440)
Exercises-Set A (pg. 441)
Exercises-Set B (pg. 444)
Problems-Set A (pg. 447)
Problems-Set B (pg. 452)
Serial Problem: Angel City Greetings (pg. 456)
Beyond the Numbers (pg. 457)
Answers to Self-Study Questions: (pg. 460)
Review Solutions (pg. 460)
Chapter 12 Analysis and Interpretation of Financial Statements (pg. 464)
Persistent Earnings and the Income Statement (pg. 466)
Discontinued Operations (pg. 467)
Changes in Accounting Principles (pg. 468)
Comprehensive Income (pg. 468)
Review 12.1 (pg. 469)
Sources of Information (pg. 469)
Analytical Techniques (pg. 469)
Horizontal Analysis (pg. 470)
Trend Analysis (pg. 472)
Review 12.2 (pg. 474)
Vertical Analysis (pg. 474)
Review 12.3 (pg. 475)
Ratio Analysis (pg. 475)
Analyzing Firm Profitability (pg. 477)
Review 12.4 (pg. 479)
Analyzing ShortTerm Firm Liquidity (pg. 480)
Review 12.5 (pg. 484)
Analyzing LongTerm Firm Solvency (pg. 484)
Review 12.6 (pg. 486)
Financial Ratios for Common Stockholders (pg. 486)
Review 12.7 (pg. 488)
Limitations of Financial Statement Analysis (pg. 489)
Review 12.8 (pg. 490)
Appendix 12A: Financial Statement Disclosures (pg. 491)
Parenthetical Disclosures (pg. 491)
Notes to the Financial Statements (pg. 491)
Supplementary Information (pg. 493)
Summary of Learning Objectives (pg. 494)
Summary of Financial Statement Ratios (pg. 495)
Key Terms (pg. 497)
Self-Study Questions (pg. 497)
Questions (pg. 498)
Short Exercises (pg. 499)
Exercises-Set A (pg. 501)
Exercises-Set B (pg. 503)
Problems-Set A (pg. 506)
Problems-Set B (pg. 511)
Serial Problem: Angel City Greetings (pg. 517)
Beyond the Numbers (pg. 518)
Answers to Self-Study Questions: (pg. 523)
Review Solutions (pg. 523)
Appendix A Columbia Sportswear Company: Annual Report and Corporate Responsibility Report (pg. A-1)
Letter to the Shareholders (pg. A-3)
Management Discussion and Analysis (pg. A-7)
Report of Independent Auditors (pg. A-21)
Financial Statements (pg. A-22)
Notes to Financial Statements (pg. A-27)
Report on Internal Control (pg. A-56)
Management’s Certification of Financial Statements (pg. A-57)
Supplemental Information (pg. A-58)
Earnings Per Share Data (pg. A-59)
Corporate Responsibility Report (pg. A-60)
The Columbia Approach (pg. A-60)
Collaboration (pg. A-62)
Community (pg. A-63)
Appendix B Financial Statements for Under Armour (pg. B-1)
Appendix C The Language of Accountants: Debits and Credits (pg. C-1)
System of Debits and Credits (pg. C-2)
Illustration of the Recording Process (pg. C-3)
Summary Illustration of Journalizing and Posting Transactions (pg. C-7)
Trial Balance (pg. C-9)
Review C.1 (pg. C-10)
Accounting Adjustments (pg. C-11)
Allocating Previously Recorded Assets to Expenses (pg. C-11)
Recording Previously Unrecorded Expenses (pg. C-13)
Recording Previously Unrecorded Revenues (pg. C-14)
Summary of Accounting Adjustments (pg. C-14)
Review C.2 (pg. C-16)
Adjusted Trial Balance and Financial Statements (pg. C-16)
Preparing the Adjusted Trial Balance (pg. C-17)
Preparing Financial Statements (pg. C-17)
Review C.3 (pg. C-19)
Closing Process (pg. C-19)
Journalizing and Posting the Closing Entries (pg. C-20)
Summary of the Accounting Cycle (pg. C-22)
Review C.4 (pg. C-22)
Summary of Learning Objectives (pg. C-23)
Key Terms (pg. C-23)
Self-Study Questions (pg. C-23)
Questions (pg. C-24)
Short Exercises (pg. C-25)
Exercises-Set A (pg. C-26)
Exercises-Set B (pg. C-27)
Problems-Set A (pg. C-28)
Problems-Set B (pg. C-33)
Answers to Self-Study Questions: (pg. C-39)
Review Solutions (pg. C-39)
Appendix D Accounting for Investments and Consolidated Financial Statements (pg. D-1)
Investments (pg. D-2)
Debt and Equity Securities (pg. D-2)
Investment Categories (pg. D-2)
Investments in Debt Securities (pg. D-3)
Purchase (pg. D-4)
Recognition of Interest Income (pg. D-5)
Balance Sheet Valuation (pg. D-6)
Sale or Redemption at Maturity (pg. D-7)
Investments in Equity Securities (pg. D-9)
Purchase (pg. D-9)
Recognition of Investment Income (pg. D-10)
Balance Sheet Valuation (pg. D-12)
Sale (pg. D-13)
Current and Noncurrent Classifications (pg. D-14)
ParentSubsidiary Relationship (pg. D-15)
Consolidated Financial Statements (pg. D-15)
Summary of Learning Objectives (pg. D-16)
Key Terms (pg. D-17)
Self-Study Questions (pg. D-17)
Questions (pg. D-19)
Exercises-Set A (pg. D-20)
Exercises-Set B (pg. D-22)
Problems-Set A (pg. D-24)
Problems-Set B (pg. D-26)
Answers to Self-Study Questions: (pg. D-28)
Appendix E Accounting and the Time Value of Money (pg. E-1)
Time Value of Money Concept (pg. E-2)
Time Value of Money: Simple Interest Model (pg. E-2)
Time Value of Money: Compound Interest Model (pg. E-2)
Future Value of an Amount (pg. E-3)
Future Value of an Annuity (pg. E-5)
Present Value of an Amount (pg. E-6)
Present value of an annuity (pg. E-8)
Calculations Using a Calculator And A Spreadsheet (pg. E-10)
Summary of Learning Objectives (pg. E-10)
Key Terms (pg. E-10)
Self-Study Questions (pg. E-11)
Exercises-Set A (pg. E-11)
Exercises-Set B (pg. E-12)
Answers to Self-Study Questions: (pg. E-13)
Index (pg. I-1)

Mark DeFond

Leventhal School of Accounting Marshall School of Business University of Southern California

Mark DeFond is A. N. Mosich Chair in Accounting and Professor of Accounting in the Leventhal School of Accounting at University of Southern California Marshall School of Business. He has taught financial accounting to a variety of audiences, including undergraduates, MBAs, and Executive MBAs. Professor DeFond earned his Ph.D. from the University of Washington and his B.A. from San Franicsco State University. He is widely published and his research is highly cited. Professor DeFond has served on the editorial boards of several leading academic journals and is a recipient of several research awards, including the Notable Contribution to Auditing Literature Award and the Mellon Award for Excellence in Mentoring Faculty. He has held visiting professorships at universities in Hong Kong and Singapore. He is also a CPA (inactive), a four time winner of the MBA Golden Apple teaching award, and was ranked among the ten most outstanding USC MBA faculty by BusinessWeek.



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