Financial and Managerial Accounting for MBAs, 5e

by Easton, Halsey, McAnally, Hartgraves, Morse

ISBN: 978-161853-232-9 | Copyright 2018


Welcome to Financial & Managerial Accounting for MBAs!

Our main goal in writing this book was to satisfy the needs of today's business manager by creating a contemporary, engaging, and user-oriented textbook. This book is the product of extensive market research including focus groups, market surveys, class tests, manuscript reviews, and interviews with faculty from across the country. We are grateful to the students and faculty who provided us with useful feedback during the preparation of this book.

Target Audience

Financial & Managerial Accounting for MBAs is intended for use in full-time, part-time, executive, and evening MBA programs that include a combined financial and managerial accounting course as part of the curriculum, and one in which managerial decision making and analysis are emphasized. This book easily accommodates mini-courses lasting several days as well as extended courses lasting a full semester.

Innovative Approach 

Financial & Managerial Accounting for MBAs is managerially oriented and focuses on the most salient aspects of accounting. It teaches MBA students how to read, analyze, and interpret accounting data to make informed business decisions. This textbook makes accounting engaging, relevant, and contemporary. To that end, it consistently incorporates real company data, both in the body of each module and throughout assignment material.

Flexible Structure

The MBA curricula, instructor preferences, and course lengths vary across colleges. Accordingly and to the extent possible, the 25 modules that make up Financial & Managerial Accounting for MBAs were designed independently of one another. This modular presentation enables each college and instructor to “customize” the book to best fit the needs of their students. Our introduction and discussion of financial statements constitute Modules 1, 2, and 3. Module 4 presents the analysis of financial statements with an emphasis on profitability analysis. Modules 5 through 10 highlight major financial accounting topics including assets, liabilities, equity, and off-balance-sheet financing. Module 11 details the process for preparing and analyzing the statement of cash flow. Module 12 explains forecasting financial statements, and Module 13 introduces simple valuation models. At the end of each financial accounting module (Modules 1 through 13), we present an ongoing analysis project that can be used as a guide for an independent project. Like the rest of the book, the project is independent across the various modules. Module 14 introduces managerial accounting and is followed by a discussion of cost behavior and cost estimation in Module 15. Module 16 explains cost-volume-profit analysis while Module 17 focuses on using relevant costs to make business decisions. Job and process costing are covered in a single module, Module 18, followed by activity-based costing in Module 19 and the assignment of indirect costs in Module 20. The remaining modules, 21 through 25, highlight managerial accounting topics ranging from operational budgets and variance analysis to segment reporting, product pricing, and capital budgeting. At the end of the book, we include several useful resources. Appendix A contains compound interest tables and formulas. Appendix B is a chart of accounts used in the book. Appendix C is an illustrative case that applies the techniques described in Modules 1 through 13 to an actual company, Harley‑Davidson. Appendix C can be used as a guide, in conjunction with the module‑end project questions, by students required to prepare a company analysis.

Managerial Emphasis

As MBA instructors, we recognize that the core MBA accounting course is not directed toward accounting majors. Financial & Managerial Accounting for MBAs embraces this reality. This book highlights reporting, analysis, interpretation, and decision making. In the financial accounting modules, we incorporate the following financial statement effects template when relevant to train MBA students in understanding the economic ramifications of transactions and their impact on all key financial statements. This analytical tool is a great resource for MBA students in learning accounting and applying it to their future courses and careers. Each transaction is identified in the “Transaction” column. Then, the dollar amounts (positive or negative) of the financial statement effects are recorded in the appropriate balance sheet or income statement columns. The template also reflects the statement of cash flow effects (via the cash column) and the statement of stockholders’ equity effects (via the contributed capital and earned capital columns). The earned capital account is immediately updated to reflect any income or loss arising from each transaction (denoted by the arrow line from net income to earned capital). This template is instructive as it reveals the financial impacts of transactions, and it provides insights into the effects of accounting choices.


Innovative Pedagogy

Focus Companies for Each Module

In the financial accounting portion of the book, each module’s content is explained through the accounting and reporting activities of real companies. To that end, each module incorporates a “focus company” for special emphasis and demonstration. The enhanced instructional value of focus companies comes from the way they engage MBA students in real analysis and interpretation. Focus companies were selected based on the industries that MBA students typically enter upon graduation. We apply a similar approach to the managerial accounting modules, but limited access to internal accounting information prevents us from illustrating all managerial accounting topics using real company data. We do, however, incorporate real world examples throughout each module. Each managerial accounting module is presented in context using real world scenarios from a variety of service, retail, and manufacturing companies. The following table lists focus companies by module.


Real Company Data Throughout

Market research and reviewer feedback tell us that one of instructors’ greatest frustrations with other MBA textbooks is their lack of real company data. We have gone to great lengths to incorporate real company data throughout each module to reinforce important concepts and engage MBA students. We engage nonaccounting MBA students specializing in finance, marketing, management, real estate, operations, and so forth, with companies and scenarios that are relevant to them. For representative examples, SEE PAGES 4‑23, 5‑3, 5‑19, 6‑23, 7‑16, 8‑5, 9‑20, 10‑6, 11‑25, and 12‑17.

Decision Making Orientation

One primary goal of a MBA accounting course is to teach students the skills needed to apply their accounting knowledge to solving real business problems and making informed business decisions. With that goal in mind, Managerial Decision boxes in each module encourage students to apply the material presented to solving actual business scenarios. For representative examples, SEE PAGES 2‑14, 4‑28, 7‑25, 8‑11, 9‑14, and 10‑6.

Reviews for Each Learning Objective

Accounting can be challenging—especially for MBA students lacking business experience or previous exposure to business courses. To reinforce concepts presented in each module and to ensure student comprehension, we include reviews that require students to recall and apply the accounting techniques and concepts described in each module. For representative examples, SEE PAGES 4‑14, 7‑7, 8‑12, 9‑9, and 10‑23.

Excellent, Class-Tested Assignment Materials

Excellent assignment material is a must-have component of any successful textbook (and class). In keeping with the rest of the book, we used real company data extensively. We also ensured that assignments reflect our belief that MBA students should be trained in analyzing accounting information to make business decisions, as opposed to working on mechanical bookkeeping tasks. Assignments encourage students to analyze accounting information, interpret it, and apply the knowledge gained to a business decision. For representative examples, SEE PAGES 4‑43, 5‑36, 7‑41, 7‑45, and 9‑52.

Based on classroom use and reviewer feedback, a number of substantive changes have been made in this edition to further enhance the MBA students’ experiences:

Financial Accounting Modules (1-13)

  • Table of Contents is reorganized to facilitate eLearning, with additional in‑module Reviews and Guided Example videos for all modules (each Learning Objective has a Review/Guided Example, as well as a corresponding eLecture). Content is also revised to be more streamlined and pointed.
  • New regulations: This edition covers new standards on Revenue Recognition, Leases, Discontinued Operations, and Marketable Securities.
  • DuPont Model:
    • Module 4 opens with DuPont Analysis (moved from an appendix) as a simple, yet powerful, analysis framework. For those instructors interested, a disaggregation of ROE that separates operating and nonoperating items is shown later in the module as a natural extension of DuPont analysis.
    • Analysis of financial performance in later modules relies on the DuPont model. However, text boxes include deeper discussion of analyses that gleaned from the operating / nonoperating distinction. Cash flows: Measures of cash flow are incorporated into the body of the book as new Module 11 (formerly Appendix B).
  • Cash flow computations are simplified, and there is detailed explanation of how to use and analyze cash flow statements, including cash‑based ratios and life cycle notions.
  • IFRS: Global Accounting sections are updated to include new developments.
  • Revenue, Operating Expenses, and Receivables: Module 5 is reorganized and streamlined to reduce its length and focus its discussion on revenue, operating expenses, and receivables.
  • Receivables and Payables: Module 5 now includes accounts receivable which are naturally paired with revenues. Accounts payable is moved to Module 6 and presented with inventories. A new section on days to collect receivables, days sales in inventory, days to pay accounts payable, and the cash conversion cycle is added.
  • R&D Costs: Module 6 now includes R&D facilities along with restructuring as they are part of operations.
  • Module 8 includes a complete rewrite of share‑based compensation with an initial overview of accounting for such compensation that simplifies this complex topic. There is a greater emphasis on restricted stock-type plans that are now more prevalent.
  • Equity Carve‑Outs: Moved to Module 9 because carve‑outs can be viewed as a divestiture of a subsidiary investment, and set as a new appendix (to reflect their reduced occurrence).
  • Revised forecasting module: Module 12 is shortened and rewritten for clarity. It begins with a concrete example of forecasting mechanics (as the opening section for those wishing to cover just the mechanics). Module 12 uses a new Procter & Gamble analyst report from Morgan Stanley and set as an appendix.
  • Updated financial data and assignments: Data and financial statements are updated throughout the book to reflect each company’s latest available financial statement filings and disclosures for Verizon.
  • Expanded analysis of allowances accounts: Added section in Module 6 on accounting for sales allowances, including accounting and analysis of Schedule II allowance disclosures (including effects on sales and adequacy of the allowance account).
  • Pension accounting: Revised discussion of pension accounting, including a new section on fair valuation of pension obligations, the treatment of pension plans in bankruptcy, and an analysis of pension plans disclosures such as what is operating versus nonoperating (Module 10).
  • Updated Comprehensive Case: Appendix C (available on the book’s website) shows a case analysis using Harley‑Davidson financial statements and notes.
  • Foreign currency: New section on foreign currency effects for revenues, profit, and cash flow.
  • Mechanics: Transaction analysis revised, streamlined, and covered entirely in Module 3.
  • Derivatives: Revised derivatives discussion for simpler exposition with new illustrative examples. Added new section on analysis of derivatives to provide MBAs with a tangible take‑away.

Managerial Accounting Modules (14-25)

  • Contemporary Topics and Examples: The authors have revised and added new Business Insight boxes throughout each module to bring the accounting to life for students using current, real‑world examples. Several new Research Insight boxes have been incorporated throughout the text to emphasize the important relationship between research and modern business.
  • Real Company Examples: Dozens of new, real company examples have been integrated throughout the text.
  • Added In‑Module Reviews for each Learning Objective with corresponding Guided Example videos to test students’ understanding of the topics covered.
  • Learning Objectives have been refined and written at the granular level, in order to ensure coverage of all topics. Each Learning Objective now contains a Review and corresponding Guided Example video.
  • Revised Assignments: Nearly two‑thirds of the assignments in each module have been revised and updated.
  • Updated Design to enhance student understanding of topics, and enhanced several graphics for student comprehension.
  • All 12 Opening Vignettes have been updated.

Introducing myBusinessCourse

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eLecture Videos

eLecture Videos

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  • Ideal for remediation
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Narrated demonstration videos

Guided Example Videos

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  • Provide problem solving strategies as well as solutions
  • Offer clear, step-by-step demonstrations of how to solve select problems from the textbook

Auto-graded assignments

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  • Additional randomized versions of assignments provide extra practice
  • Ideal for remediation
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Expand/Collapse All
Preface (pg. iii)
Brief Contents (pg. ix)
Contents (pg. x)
Module 1: Financial Accounting (pg. 1-1)
UA (pg. 1-1)
Reporting on Business Activities (pg. 1-3)
Review 1-1 (pg. 1-5)
Financial Statements: Demand and Supply (pg. 1-5)
Demand for Information (pg. 1-5)
Supply of Information (pg. 1-8)
International Accounting Standards (pg. 1-9)
Review 1-2 (pg. 1-10)
Structure of Financial Statements (pg. 1-10)
Balance Sheet (pg. 1-11)
Income Statement (pg. 1-13)
Statement of Stockholders’ Equity (pg. 1-15)
Information Beyond Financial Statements (pg. 1-17)
Managerial Choices in Financial Accounting (pg. 1-18)
Review 1-3 (pg. 1-19)
Analysis of Financial Statements (pg. 1-19)
Return on Assets (pg. 1-19)
Components of Return on Assets (pg. 1-19)
Return on Equity (pg. 1-21)
Are Financial Statements Relevant? (pg. 1-21)
Review 1-4 (pg. 1-22)
Financial Statements and Business Analysis (pg. 1-22)
Analyzing Competitive Advantage (pg. 1-22)
SWOT Analysis of the Business Environment (pg. 1-23)
Analyzing Competitive Advantage (pg. 1-24)
Review 1-5 (pg. 1-25)
Book Road Map (pg. 1-26)
Global Accounting (pg. 1-26)
 Appendix 1A: Accessing SEC Filings  (pg. 1-27)
 Appendix 1B: Accounting Principles and Governance (pg. 1-29)
Audit Report (pg. 1-30)
Guidance Answers  (pg. 1-34)
Questions  (pg. 1-34)
Mini Exercises (pg. 1-35)
Exercises (pg. 1-37)
Problems (pg. 1-38)
IFRS Applications  (pg. 1-44)
 Management Applications (pg. 1-45)
 Ongoing Project (pg. 1-45)
Solutions to Review Problems (pg. 1-46)
Module 2: Introducing Financial Statements (pg. 2-1)
AAPL (pg. 2-1)
Balance Sheet (pg. 2-3)
Balance Sheet and the Flow of Costs (pg. 2-3)
Assets (pg. 2-4)
Liabilities and Equity (pg. 2-6)
Review 2-1 (pg. 2-12)
Income Statement (pg. 2-12)
Recognizing Revenues and Expenses (pg. 2-14)
Reporting of Transitory Items (pg. 2-14)
Analyzing the Income Statement (pg. 2-15)
Review 2-2 (pg. 2-16)
Statement of Stockholders’ Equity (pg. 2-16)
Review 2-3 (pg. 2-17)
Statement of Cash Flows (pg. 2-17)
Statement Format and Data Sources (pg. 2-17)
Review 2-4 (pg. 2-19)
Articulation of Financial Statements (pg. 2-19)
Retained Earnings Reconciliation (pg. 2-19)
Financial Statement Linkages (pg. 2-19)
Review 2-5 (pg. 2-21)
Additional Information Sources (pg. 2-21)
Form 10-K (pg. 2-21)
Form 20-F and Form 40-F (pg. 2-23)
Form 8-K (pg. 2-24)
Analyst Reports (pg. 2-24)
Credit Services (pg. 2-25)
Data Services (pg. 2-25)
Review 2-6 (pg. 2-25)
Global Accounting (pg. 2-25)
Guidance Answers  (pg. 2-26)
 Questions  (pg. 2-26)
Mini Exercises (pg. 2-27)
Exercises (pg. 2-28)
Problems (pg. 2-33)
 IFRS Applications (pg. 2-35)
Management Applications  (pg. 2-36)
 Ongoing Project (pg. 2-37)
Solutions to Review Problems (pg. 2-37)
Module 3: Transactions, Adjustments, and Financial Statements (pg. 3-1)
AAPL (pg. 3-1)
Basics of Accounting (pg. 3-3)
Four-Step Accounting Cycle (pg. 3-3)
Financial Statement Effects Template (pg. 3-4)
Review 3-1 (pg. 3-5)
Accounting Cycle Step 1—Analyze Transactions and Prepare Entries (pg. 3-6)
Apple’s Transactions (pg. 3-6)
Applying the Financial Statement Effects Template (pg. 3-6)
Applying the Journal Entry and T-Account (pg. 3-6)
Review 3-2 (pg. 3-9)
Accounting Cycle Step 2—Prepare Accounting Adjustments (pg. 3-9)
Prepaid Expenses (pg. 3-10)
Unearned Revenues (pg. 3-11)
Accrued Expenses (pg. 3-11)
Accrued Revenues (pg. 3-12)
Review 3-3 (pg. 3-13)
Accounting Cycle Step 3—Prepare Financial Statements (pg. 3-13)
Income Statement (pg. 3-13)
Balance Sheet (pg. 3-14)
Statement of Stockholders’ Equity (pg. 3-15)
Review 3-4 (pg. 3-16)
Accounting Cycle Step 4—Close the Books (pg. 3-16)
Review 3-5 (pg. 3-18)
Global Accounting (pg. 3-18)
Global Accounting (pg. 3-18)
Appendix 3A: FASB’s Financial Statement Presentation Project (pg. 3-18)
 Guidance Answers (pg. 3-19)
 Questions (pg. 3-19)
Mini Exercises (pg. 3-20)
Exercises (pg. 3-23)
Problems (pg. 3-27)
IFRS Applications (pg. 3-32)
 Management Applications (pg. 3-33)
Solutions to Review Problems (pg. 3-35)
Module 4: Analyzing and Interpreting Financial Statements (pg. 4-1)
INTC (pg. 4-1)
Return on Equity (ROE) (pg. 4-3)
Review 4-1 (pg. 4-4)
ROE Disaggregation: DuPont Analysis (pg. 4-4)
Review 4-2 (pg. 4-6)
Return on Assets and its Disaggregation (pg. 4-6)
Analysis of Profitability and Productivity (pg. 4-7)
Analysis of Profitability (pg. 4-8)
Analysis of Productivity (pg. 4-9)
Analysis of Financial Leverage (pg. 4-12)
Review 4-3 (pg. 4-14)
Operating Focus on Financial Condition (pg. 4-14)
Net Operating Assets (NOA) (pg. 4-15)
Review 4-4 (pg. 4-19)
Operating Focus on Financial Performance (pg. 4-20)
Net Operating Profit After Tax (NOPAT ) (pg. 4-22)
Review 4-5 (pg. 4-24)
Return on Net Operating Assets (RNOA) (pg. 4-24)
Review 4-6 (pg. 4-26)
RNOA Disaggregation into Margin and Turnover (pg. 4-26)
Net Operating Profit Margin (pg. 4-27)
Net Operating Asset Turnover (pg. 4-27)
Trade-Off between Margin and Turnover (pg. 4-28)
Review 4-7 (pg. 4-30)
Global Accounting (pg. 4-30)
 Appendix 4A: Nonoperating Return Component of ROE   (pg. 4-31)
Nonoperating Return (pg. 4-31)
Nonoperating Return—with Debt Financing (pg. 4-31)
Nonoperating Return—With Debt Financing and Nonoperating Assets (pg. 4-32)
Nonoperating Return— Without Debt Financing, but withNonoperating Assets (pg. 4-33)
Nonoperating Return— With Debt Financing, NonoperatingAssets, and Noncontrolling Interest (pg. 4-34)
Review 4-8 (pg. 4-35)
 Appendix 4B: Liquidity and Solvency Analysis  (pg. 4-36)
Liquidity Analysis (pg. 4-36)
Solvency Analysis (pg. 4-37)
Vertical and Horizontal Analysis (pg. 4-39)
Limitations of Ratio Analysis (pg. 4-41)
Review 4-9 (pg. 4-42)
Guidance Answers  (pg. 4-42)
Questions  (pg. 4-42)
Mini Exercises (pg. 4-43)
Exercises (pg. 4-46)
Problems (pg. 4-50)
 IFRS Applications (pg. 4-59)
Management Applications  (pg. 4-62)
 Ongoing Project (pg. 4-63)
Solutions to Review Problems (pg. 4-64)
Module 5: Revenues, Receivables, and Operating Expenses (pg. 5-1)
PFE (pg. 5-1)
Revenue (pg. 5-3)
Revenue Recognition Rules (pg. 5-4)
Complications of Revenue Recognition (pg. 5-5)
Performance Obligations Satisfied Over Time (pg. 5-6)
Review 5-1 (pg. 5-9)
Sales Allowances (pg. 5-9)
Accounting for Sales Allowances (pg. 5-9)
Reporting Sales Allowances (pg. 5-10)
Analysis of Sales Allowances (pg. 5-11)
Review 5-2 (pg. 5-11)
Unearned (Deferred) Revenue (pg. 5-12)
Review 5-3 (pg. 5-13)
Foreign Currency Effects on Revenue (pg. 5-13)
Foreign Currency and Cash Flows (pg. 5-14)
Foreign Currency and Income (pg. 5-14)
Foreign Currency and Future Results (pg. 5-15)
Review 5-4 (pg. 5-15)
Accounts Receivable (pg. 5-16)
Aging Analysis of Receivables (pg. 5-16)
Accounting for Accounts Receivable (pg. 5-17)
Analysis of Accounts Receivable–Magnitude (pg. 5-18)
Analysis of Accounts Receivable—Quality (pg. 5-20)
Review 5-5 (pg. 5-21)
Expenses and Losses (pg. 5-22)
Deductions from Income (pg. 5-22)
Research and Development Expense (pg. 5-23)
Discontinued Operations (pg. 5-25)
Review 5-6 (pg. 5-26)
Pro Forma Income Reporting (pg. 5-27)
Regulation G Reconciliation (pg. 5-28)
SEC Warnings about Pro Forma Numbers (pg. 5-28)
Disclosures and Market Assessments (pg. 5-29)
Review 5-7 (pg. 5-31)
Global Accounting (pg. 5-31)
Guidance Answers  (pg. 5-32)
Questions  (pg. 5-32)
Mini Exercises (pg. 5-33)
Exercises (pg. 5-36)
Problems (pg. 5-42)
 IFRS Applications (pg. 5-47)
 Management Applications (pg. 5-49)
Ongoing Project  (pg. 5-50)
Solutions to Review Problems (pg. 5-51)
Module 6: Inventories, Accounts Payable, and Long-Term Assets (pg. 6-1)
HD (pg. 6-1)
Inventory—Costing Methods (pg. 6-3)
Capitalization of Inventory Cost (pg. 6-3)
Inventory Cost Flows (pg. 6-4)
First-In, First-Out (FIFO) (pg. 6-5)
Last-In, First-Out (LIFO) (pg. 6-5)
Average Cost (AC) (pg. 6-6)
Financial Statement Effects of Inventory Costing (pg. 6-7)
Review 6-1 (pg. 6-8)
Inventory—Reporting (pg. 6-8)
Lower of Cost or Market (LCM) (pg. 6-8)
LIFO Reserve Adjustments to Financial Statements (pg. 6-9)
LIFO Liquidations (pg. 6-10)
Review 6-2 (pg. 6-11)
Inventory—Analysis Tools (pg. 6-11)
Gross Profit Analysis (pg. 6-11)
Days Inventory Outstanding and Inventory Turnover (pg. 6-12)
Days Payable Outstanding (pg. 6-14)
Cash Conversion Cycle (pg. 6-14)
Review 6-3 (pg. 6-15)
PPE Assets—Capitalization And Depreciation (pg. 6-16)
Plant and Equipment (pg. 6-16)
Research and Development Facilities and Equipment (pg. 6-19)
Review 6-4 (pg. 6-20)
PPE Assets—Sales, Impairments, and Restructuring (pg. 6-20)
Asset Sales (pg. 6-20)
Asset Impairments (pg. 6-21)
Restructuring Costs (pg. 6-22)
Review 6-5 (pg. 6-24)
PPE Assets—Analysis Tools (pg. 6-25)
PPE Turnover (pg. 6-25)
PPE Useful Life (pg. 6-26)
PPE Percent Used Up (pg. 6-27)
Review 6-6 (pg. 6-27)
Global Accounting (pg. 6-28)
 Guidance Answers (pg. 6-29)
 Questions (pg. 6-29)
Mini Exercises (pg. 6-30)
Exercises (pg. 6-32)
Problems (pg. 6-36)
 IFRS Applications (pg. 6-39)
 Management Applications (pg. 6-41)
 Ongoing Project (pg. 6-41)
Solutions to Review Problems (pg. 6-42)
Module 7: Current and Long-Term Liabilities (pg. 7-1)
VZ (pg. 7-1)
Accrued Liabilities (pg. 7-3)
Accrued Liabilities Defined (pg. 7-3)
Accruals for Contractual Liabilities—Wages Payable Example (pg. 7-4)
Accruals for Contractual Liabilities—Deferred Revenue Example (pg. 7-5)
Accruals for Contingent Liabilities Defined (pg. 7-5)
Accruals for Contingent Liabilities—Warranties Example (pg. 7-5)
Review 7-1 (pg. 7-7)
Short-Term Debt (pg. 7-7)
Accounting for Short-Term Debt (pg. 7-7)
Current Maturities of Long-Term Debt (pg. 7-8)
Review 7-2 (pg. 7-9)
Long-Term Debt—Pricing (pg. 7-10)
Pricing of Bonds Issued at Par (pg. 7-11)
Pricing of Bonds Issued at a Discount (pg. 7-11)
Pricing of Bonds Issued at a Premium (pg. 7-12)
Effective Cost of Debt (pg. 7-12)
Long-Term Debt—Reporting (pg. 7-14)
Financial Statement Disclosure of Debt Issuance (pg. 7-14)
Income Statement Reporting (pg. 7-15)
Income Statement Reporting (pg. 7-16)
Amortization of Discount (pg. 7-17)
Amortization of Premium (pg. 7-17)
Financial Statement Effects of Bond Repurchase (pg. 7-18)
Fair Value Disclosures (pg. 7-19)
Review 7-4 (pg. 7-20)
Quality of Debt (pg. 7-20)
What Are Credit Ratings? (pg. 7-21)
What Determines Credit Ratings? (pg. 7-22)
Verizon Credit Rating Example (pg. 7-23)
Why Credit Ratings Matter (pg. 7-25)
Review 7-5 (pg. 7-26)
Global Accounting (pg. 7-26)
Appendix 7A: Time Value of Money  (pg. 7-26)
Present Value Concepts (pg. 7-26)
Future Value Concepts (pg. 7-31)
 Guidance Answers  (pg. 7-32)
Questions  (pg. 7-32)
Mini Exercises (pg. 7-33)
Exercises (pg. 7-37)
Problems (pg. 7-41)
 IFRS Applications (pg. 7-45)
Management Applications  (pg. 7-48)
Ongoing Project  (pg. 7-48)
Solutions to Review Problems (pg. 7-49)
Module 8: Stock Transactions, Dividends, and EPS (pg. 8-1)
JNJ (pg. 8-1)
Stockholders’ Equity and Classes of Stock (pg. 8-3)
Stockholders’ Equity Accounts (pg. 8-3)
Statement of Stockholders’ Equity (pg. 8-5)
Preferred Stock (pg. 8-6)
Common Stock (pg. 8-7)
Review 8-1 (pg. 8-8)
Stock Transactions (pg. 8-8)
Stock Issuance (pg. 8-8)
Stock Repurchase (Treasury Stock) (pg. 8-10)
Review 8-2 (pg. 8-12)
Stock-Based Compensation (pg. 8-12)
Accounting for Stock-Based Compensation (pg. 8-14)
Footnote Disclosures for Stock-Based Compensation (pg. 8-15)
Review 8-3 (pg. 8-16)
Cash Dividends (pg. 8-16)
Cash Dividend Disclosures (pg. 8-17)
Dividend Payout and Yield (pg. 8-17)
Cash Dividends Financial Effects (pg. 8-17)
Review 8-4 (pg. 8-18)
Stock Splits and Dividends (pg. 8-19)
Stock Split (pg. 8-19)
Stock Dividend (pg. 8-19)
Review 8-5 (pg. 8-20)
Accumulated Other Comprehensive Income (pg. 8-20)
AOCI Components (pg. 8-21)
AOCI Disclosures and Interpretation (pg. 8-21)
Review 8-6 (pg. 8-22)
Convertible Securities (pg. 8-23)
Review 8-7 (pg. 8-24)
Earnings per Share (EPS) (pg. 8-24)
Review 8-8 (pg. 8-26)
Global Accounting (pg. 8-26)
 Appendix 8A: Stock-Based Compensation: Reporting and Analyzing  (pg. 8-27)
Guidance Answers  (pg. 8-30)
 Questions (pg. 8-31)
Mini Exercises (pg. 8-32)
Exercises (pg. 8-35)
IFRS Applications  (pg. 8-48)
Ongoing Project  (pg. 8-52)
Solutions to Review Problems (pg. 8-52)
Module 9: Intercorporate Investments (pg. 9-1)
GOOG (pg. 9-1)
Intercorporate Equity Investments (pg. 9-3)
Passive Investments in Marketable Securities (pg. 9-4)
Investments in Debt Securities (pg. 9-8)
Review 9-1 (pg. 9-9)
Equity Investments with Significant Influence (pg. 9-10)
Accounting for Investments with Significant Influence (pg. 9-10)
Equity Method Accounting and ROE Effects (pg. 9-12)
Review 9-2 (pg. 9-14)
Equity Investments with Control (pg. 9-15)
Accounting for Investments with Control (pg. 9-15)
Review 9-3 (pg. 9-25)
Global Accounting (pg. 9-26)
 Appendix 9A: Accounting for Derivatives  (pg. 9-27)
Fair Value Hedge Example (pg. 9-28)
Cash Flow Hedge Example (pg. 9-28)
Analysis of Derivatives (pg. 9-30)
Review 9-4 (pg. 9-31)
Appendix 9B: Equity Carve-Outs  (pg. 9-32)
Sell-Offs (pg. 9-32)
Spin-Offs (pg. 9-32)
Split-Offs (pg. 9-33)
Analysis of Equity Carve-Outs (pg. 9-34)
Review 9-5 (pg. 9-34)
 Guidance Answers (pg. 9-35)
 Questions (pg. 9-35)
Mini Exercises (pg. 9-35)
Exercises (pg. 9-38)
Problems (pg. 9-47)
 IFRS Applications (pg. 9-49)
 Management Applications  (pg. 9-52)
 Ongoing Project (pg. 9-53)
Solutions to Review Problems (pg. 1-37)
Module 10: Leases, Pensions, and Income Taxes (pg. 10-1)
LUV (pg. 10-1)
Leases (pg. 10-3)
Lessee Reporting of Leases (pg. 10-3)
New Lease Accounting Rules (pg. 10-4)
Footnote Disclosure of Leases (pg. 10-5)
Capitalization of Operating Leases (pg. 10-6)
Review 10-1 (pg. 10-11)
Pensions (pg. 10-11)
Reporting of Defined Benefit Pension Plans (pg. 10-12)
Balance Sheet Effects (pg. 10-12)
Income Statement Effects (pg. 10-14)
Fair Value Accounting for Pensions (pg. 10-16)
Footnote Disclosure—Pension Plan Assets and PBO (pg. 10-17)
Footnote Disclosure—Future Cash Flows (pg. 10-19)
Footnote Disclosure—Key Assumptions (pg. 10-20)
Analysis Implications (pg. 10-21)
Other Post-Employment Benefits (OPEB) (pg. 10-22)
Review 10-2 (pg. 10-23)
Income Taxes (pg. 10-24)
Timing Differences Create Deferred Tax Assets and Liabilities (pg. 10-24)
Disclosures for Income Taxes (pg. 10-27)
Analysis of Income Tax Disclosures (pg. 10-29)
Review 10-3 (pg. 10-30)
Global Accounting (pg. 10-31)
Appendix 10A: Lease Capitalization Using a Calculator and Present Value Tables (pg. 10-31)
 Appendix 10B: Amortization Component of Pension Expense (pg. 10-33)
 Appendix 10C: Expanded Explanation of Deferred Taxes (pg. 10-35)
 Guidance Answers (pg. 10-37)
 Questions (pg. 10-37)
Mini Exercises (pg. 10-38)
Exercises (pg. 10-43)
Problems (pg. 10-51)
 IFRS Applications (pg. 10-59)
 Ongoing Project (pg. 10-63)
Solutions to Review Problems (pg. 10-64)
Module 11: Cash Flows (pg. 11-1)
SBUX (pg. 11-1)
Framework for the Statement of Cash Flows (pg. 11-3)
Relation Among Financial Statements (pg. 11-3)
Statement of Cash Flows Structure (pg. 11-4)
Operating Activities Preview (pg. 11-7)
Investing Activities Preview (pg. 11-8)
Financing Activities Preview (pg. 11-8)
Review 11-1 (pg. 11-9)
Cash Flow from Operating Activities (pg. 11-9)
Steps to Compute Net Cash Flow from Operating Activities (pg. 11-10)
Java House Case Illustration (pg. 11-12)
Review 11-2 (pg. 11-15)
Computing Cash Flows from Investing Activities (pg. 11-16)
Analyze Remaining Noncash Assets (pg. 11-16)
Java House Case Illustration (pg. 11-16)
Review 11-3 (pg. 11-17)
Cash Flows from Financing Activities (pg. 11-18)
Analyze Remaining Liabilities and Equity (pg. 11-18)
Java House Case Illustration (pg. 11-18)
Review 11-4A (pg. 11-19)
Computing Cash Flows from Balance Sheet Accounts (pg. 11-19)
Supplemental Disclosures for the Indirect Method (pg. 11-20)
Review 11-4B (pg. 11-21)
Analysis of Cash Flow Information (pg. 11-21)
Cash Flow Components (pg. 11-21)
Cash Flow Patterns (pg. 11-22)
Usefulness of the Statement of Cash Flows (pg. 11-25)
Review 11-5 (pg. 11-27)
Ratio Analyses of Cash Flows (pg. 11-27)
Free Cash Flow (pg. 11-28)
Review 11-6 (pg. 11-29)
Appendix 11A: Direct Method Reporting for the Statement of Cash Flows (pg. 11-29)
Cash Flows from Operating Activities (pg. 11-29)
Review 11-7 (pg. 11-32)
Guidance Answers  (pg. 11-32)
Questions  (pg. 11-32)
Mini Exercises (pg. 11-34)
Exercises (pg. 11-36)
Problems (pg. 11-42)
IFRS Applications  (pg. 11-54)
Solutions to Review Problems (pg. 11-56)
Module 12: Financial Statement Forecasting (pg. 12-1)
PG (pg. 12-1)
Forecasting Process (pg. 12-3)
Review 12-1 (pg. 12-5)
Forecasting the Income Statement (pg. 12-6)
Review 12-2 (pg. 12-8)
Forecasting the Balance Sheet (pg. 12-9)
Review 12-3 (pg. 12-12)
The Forecasted Cash Balance (pg. 12-12)
Review 12-4 (pg. 12-13)
Forecasting Multiple Years Ahead (pg. 12-13)
Review 12-5 (pg. 12-15)
Refining Financial Statement Forecasts (pg. 12-15)
Company Guidance (pg. 12-15)
Segment Data (pg. 12-17)
Impact of Acquisitions (pg. 12-18)
Impact of Divestitures (pg. 12-19)
Reassessing Financial Statement Forecasts (pg. 12-19)
Review 12-6 (pg. 12-20)
Appendix 12A: Forecasting the Statement of Cash Flows (pg. 12-20)
Review 12-7 (pg. 12-22)
Appendix 12B: Parsimonious Method for Forecasting NOPAT and NOA  (pg. 12-22)
Multiyear Forecasting with Parsimonious Method (pg. 12-22)
Review 12-8 (pg. 12-23)
 Appendix 12C: Morgan Stanley’s Forecast Report on Procter & Gamble (pg. 12-23)
 Questions (pg. 12-45)
Mini Exercises (pg. 12-45)
Exercises (pg. 12-51)
Problems (pg. 12-60)
 IFRS Applications (pg. 12-67)
Ongoing Project  (pg. 12-68)
Solutions to Review Problems (pg. 12-68)
Module 13: Using Financial Statements for Valuation (pg. 13-1)
PG (pg. 13-1)
Equity Valuation Models (pg. 13-3)
Dividend Discount Model (pg. 13-3)
Discounted Cash Flow Model (pg. 13-3)
Residual Operating Income Model (pg. 13-4)
Valuation Model Inputs (pg. 13-4)
Review 13-1 (pg. 13-5)
Discounted Cash Flow (DCF) Model (pg. 13-5)
DCF Model Structure (pg. 13-6)
Steps in Applying the DCF Model (pg. 13-6)
Illustrating the DCF Model (pg. 13-7)
Review 13-2 (pg. 13-8)
Residual Operating Income (ROPI) Model (pg. 13-9)
ROPI Model Structure (pg. 13-9)
Steps in Applying the ROPI Model (pg. 13-10)
Illustrating the ROPI Model (pg. 13-10)
Review 13-3 (pg. 13-11)
Further Considerations Involving Valuation Models (pg. 13-11)
Managerial Insights from the ROPI Model (pg. 13-11)
Assessment of Valuation Models (pg. 13-13)
Review 13-4 (pg. 13-14)
Global Accounting (pg. 13-14)
 Appendix 13A: Derivation of Free Cash Flow Formula (pg. 13-15)
 Appendix 13B:  Deutsche Bank Valuation of Procter & Gamble (pg. 13-15)
Financial Statement Forecasts (pg. 13-23)
Valuation Model (pg. 13-26)
Concluding Observations of Analyst Report (pg. 13-27)
Guidance Answers  (pg. 13-27)
 Questions (pg. 13-28)
Mini Exercises (pg. 13-28)
Exercises (pg. 13-29)
Problems (pg. 13-34)
Management Applications  (pg. 13-39)
Ongoing Project  (pg. 13-39)
Solutions to Review Problems (pg. 13-40)
Module 14: Managerial Accounting for MBAs (pg. 14-1)
ModCloth (pg. 14-1)
Uses of Accounting Information (pg. 14-3)
Financial Accounting (pg. 14-3)
Managerial Accounting (pg. 14-4)
Review 14-1 (pg. 14-6)
Strategic Cost Management (pg. 14-6)
Review 14-2 (pg. 14-6)
Missions, Goals, and Strategies (pg. 14-7)
An Organization’s Mission and Goals (pg. 14-7)
Strategic Position Analysis (pg. 14-8)
Managerial Accounting and Goal Attainment (pg. 14-10)
Planning, Organizing, and Controlling (pg. 14-11)
Review 14-3 (pg. 14-13)
Changing Environment of Business (pg. 14-13)
Global Competition and Its Key Dimensions (pg. 14-13)
Big Data and Analysis (pg. 14-13)
Enterprise Risk Management (ERM) (pg. 14-14)
Review 14-4 (pg. 14-14)
Ethics in Managerial Accounting (pg. 14-14)
Codes of Ethics (pg. 14-15)
Corporate Governance (pg. 14-16)
Sustainability Accounting and Corporate Social Responsibility (pg. 14-17)
Review 14-5 (pg. 14-17)
Cost Drivers (pg. 14-18)
Organizational Cost Drivers (pg. 14-19)
Activity Cost Drivers (pg. 14-20)
Review 14-6 (pg. 14-21)
Guidance Answers (pg. 14-21)
Questions (pg. 14-21)
Mini Exercises (pg. 14-22)
Exercises (pg. 14-24)
 Management Applications (pg. 14-25)
Solutions to Review Problems (pg. 14-27)
Module 15: Cost Behavior, Activity Analysis, and Cost Estimation (pg. 15-1)
Square, Inc. (pg. 15-1)
Cost Behavior Analysis (pg. 15-3)
Factors Affecting Cost Behavior Patterns (pg. 15-5)
Review 15-1 (pg. 15-6)
Total Cost Function for an Organization or Segment (pg. 15-6)
Relevant Range (pg. 15-7)
Additional Cost Behavior Patterns (pg. 15-9)
Committed and Discretionary Fixed Costs (pg. 15-11)
Review 15-2 (pg. 15-11)
Cost Estimation (pg. 15-11)
High-Low Cost Estimation (pg. 15-12)
Scatter Diagrams (pg. 15-13)
Least-Squares Regression (pg. 15-14)
Review 15-3 (pg. 15-17)
Additional Issues in Cost Estimation (pg. 15-17)
Changes in Technology and Prices (pg. 15-17)
Matching Activity and Costs (pg. 15-18)
Identifying Activity Cost Drivers (pg. 15-18)
Review 15-4 (pg. 15-18)
Alternative Cost Driver Classifications (pg. 15-18)
Manufacturing Cost Hierarchy (pg. 15-19)
Customer Cost Hierarchy (pg. 15-20)
Review 15-5 (pg. 15-21)
Guidance Answers  (pg. 15-22)
Questions  (pg. 15-22)
Mini Exercises (pg. 15-22)
Exercises (pg. 15-25)
Problems (pg. 15-28)
 Management Applications  (pg. 15-30)
Solutions to Review Problems (pg. 15-33)
Module 16: Cost-Volume-Profit Analysis and Planning (pg. 16-1)
Razor USA, LLC (pg. 16-1)
Cost-Volume-Profit Analysis (pg. 16-3)
Key Assumptions (pg. 16-4)
Profit Formula (pg. 16-5)
Review 16-1 (pg. 16-7)
Contribution and Functional Income Statements (pg. 16-7)
Contribution Income Statement (pg. 16-7)
Functional Income Statement (pg. 16-8)
Analysis Using Contribution Margin Ratio (pg. 16-8)
Review 16-2 (pg. 16-9)
Break-Even Point and Profit Planning (pg. 16-9)
Determining Break-Even Point in Units (pg. 16-9)
Profit Planning (pg. 16-11)
Cost-Volume-Profit Graph (pg. 16-12)
Profit-Volume Graph (pg. 16-12)
Impact of Income Taxes (pg. 16-14)
Review 16-3 (pg. 16-15)
Multiple-Product Cost-Volume-Profit Analysis (pg. 16-15)
Determining Break-Even and Target Profit Sales Dollars (pg. 16-15)
Sales Mix Analysis (pg. 16-17)
Review 16-4 (pg. 16-19)
Analysis of Operating Leverage (pg. 16-19)
Review 16-5 (pg. 16-21)
 Appendix 16A: Profitability Analysis with Unit and Nonunit Cost Drivers (pg. 16-21)
Review 16-6 (pg. 16-24)
Guidance Answers (pg. 16-24)
 Questions (pg. 16-25)
Mini Exercises (pg. 16-25)
Exercises (pg. 16-27)
Problems (pg. 16-31)
Management Applications  (pg. 16-36)
Solutions to Review Problems (pg. 16-37)
Module 17: Relevant Costs and Benefits for Decision Making (pg. 17-1)
Uber (pg. 17-1)
Identifying Relevant Costs (pg. 17-3)
Relevance of Future Revenues (pg. 17-4)
Relevance of Outlay Costs (pg. 17-4)
Irrelevance of Sunk Costs (pg. 17-5)
Sunk Costs Can Cause Ethical Dilemmas (pg. 17-5)
Relevance of Disposal and Salvage Values (pg. 17-6)
Relevance of Opportunity Costs (pg. 17-6)
Review 17-1 (pg. 17-7)
Differential Analysis of Relevant Costs (pg. 17-7)
Review 17-2 (pg. 17-8)
Applying Differential Analysis (pg. 17-8)
Multiple Changes in Profit Plans (pg. 17-9)
Review 17-3 (pg. 17-10)
Special Orders (pg. 17-10)
Review 17-4 (pg. 17-13)
Outsourcing Decisions (Make or Buy) (pg. 17-13)
Review 17-5 (pg. 17-17)
Sell or Process Further (pg. 17-17)
Review 17-6 (pg. 17-19)
Use of Limited Resources (pg. 17-19)
Single Constraint (pg. 17-19)
Multiple Constraints (pg. 17-20)
Theory of Constraints (pg. 17-21)
Limitations of Decision Analysis Models (pg. 17-22)
Review 17-7 (pg. 17-22)
Guidance Answers (pg. 17-22)
 Questions (pg. 17-23)
Mini Exercises (pg. 17-23)
Exercises (pg. 17-26)
Problems (pg. 17-29)
Management Applications (pg. 17-33)
Solutions to Review Problems (pg. 17-37)
Module 18: Product Costing: Job and Process Operations (pg. 18-1)
Samsung (pg. 18-1)
Inventory Costs in Various Organizations (pg. 18-3)
Review 18-1 (pg. 18-5)
Inventory Costs for Financial Reporting (pg. 18-5)
Product Costs and Period Costs (pg. 18-5)
Three Components of Product Costs (pg. 18-5)
A Closer Look at Manufacturing Overhead (pg. 18-7)
Review 18-2 (pg. 18-9)
The Production Environment (pg. 18-9)
Production Files and Records (pg. 18-10)
Review 18-3 (pg. 18-11)
Job Costing for Products and Services (pg. 18-11)
Job Costing Illustrated (pg. 18-12)
Statement of Cost of Goods Manufactured (pg. 18-16)
Overapplied and Underapplied Overhead (pg. 18-18)
Job Costing in Service Organizations (pg. 18-19)
Review 18-4 (pg. 18-20)
Process Costing (pg. 18-21)
Cost of Production Report (pg. 18-22)
Weighted Average and First-In, First-Out Process Costing (pg. 18-25)
Process Costing in Service Organizations (pg. 18-25)
Review 18-5 (pg. 18-26)
 Appendix 18A: Absorption and Variable Costing (pg. 18-27)
Review 18-6 (pg. 18-32)
Guidance Answers (pg. 18-32)
Questions (pg. 18-32)
Mini Exercises (pg. 18-33)
Exercises (pg. 18-34)
Problems (pg. 18-39)
Management Applications  (pg. 18-46)
Solutions to Review Problems (pg. 18-48)
Module 19: Activity-Based Costing, Customer Profitability, and Activity-Based Management (pg. 19-1)
Unilever (pg. 19-1)
Activity-Based Costing (ABC) (pg. 19-3)
Changing Cost Environment (pg. 19-3)
Review 19-1 (pg. 19-4)
Activity-Based Costing Concepts (pg. 19-4)
ABC Product Costing Model (pg. 19-5)
Review 19-2 (pg. 19-6)
Traditional Product Costing and ABC Compared (pg. 19-7)
Applying Overhead with a Plantwide Rate (pg. 19-7)
Applying Overhead with Department Rates (pg. 19-7)
Applying Overhead with Activity-Based Costing (pg. 19-9)
Review 19-3 (pg. 19-12)
Implementation of ABC (pg. 19-13)
Limitations of ABC Illustration (pg. 19-13)
Comparing Traditional and Activity-Based Costing (pg. 19-13)
ABC Implementation Issues (pg. 19-14)
Review 19-4 (pg. 19-15)
ABC and Customer Profitability Analysis (pg. 19-16)
Customer Profitability Profile (pg. 19-16)
ABC Customer Profitability Analysis Illustrated (pg. 19-16)
Review 19-5 (pg. 19-19)
Activity-Based Management (pg. 19-19)
The Difference Between ABC and Activity-Based Management (pg. 19-19)
Review 19-6 (pg. 19-20)
Guidance Answers (pg. 19-20)
 Questions (pg. 19-21)
Mini Exercises (pg. 19-21)
Exercises (pg. 19-24)
Problems (pg. 19-28)
 Management Applications (pg. 19-33)
Solutions to Review Problems (pg. 19-37)
Module 20: Additional Topics in Product Costing (pg. 20-1)
Whole Foods (pg. 20-1)
Production and Service Department Costs (pg. 20-3)
Review 20-1 (pg. 20-4)
Service Department Cost Allocation (pg. 20-4)
Direct Method (pg. 20-5)
Step Method (pg. 20-6)
Linear Algebra (Reciprocal) Method (pg. 20-8)
Dual Rates (pg. 20-9)
Review 20-2 (pg. 20-10)
Lean Production and Just-in-Time Inventory Management (pg. 20-10)
Reducing Incoming Materials Inventory (pg. 20-11)
Reducing Work-in-Process Inventory (pg. 20-11)
Reducing Finished Goods Inventory (pg. 20-13)
Review 20-3 (pg. 20-13)
Performance Evaluation and Recordkeeping with Lean Production and JIT (pg. 20-13)
Performance Evaluation (pg. 20-13)
Simplified Recordkeeping (pg. 20-15)
Review 20-4 (pg. 20-16)
Increased Focus on Data-Driven Decision Making (pg. 20-16)
Review 20-5 (pg. 20-17)
Guidance Answers (pg. 20-17)
Questions  (pg. 20-18)
Mini Exercises (pg. 20-18)
Exercises (pg. 20-20)
Problems (pg. 20-22)
Mangement Applications  (pg. 20-26)
Solutions to Review Problems (pg. 20-27)
Module 21: Pricing and Other Product Management Decisions (pg. 21-1)
Roku (pg. 21-1)
Understanding the Value Chain (pg. 21-3)
Usefulness of a Value Chain Perspective (pg. 21-5)
Value-Added and Value Chain Perspectives (pg. 21-7)
Review 21-1 (pg. 21-7)
The Pricing Decision (pg. 21-7)
Economic Approaches to Pricing (pg. 21-7)
Cost-Based Approaches to Pricing (pg. 21-8)
Review 21-2 (pg. 21-11)
Target Costing (pg. 21-12)
Target Costing Encourages Design for Production (pg. 21-13)
Target Costing Reduces Time to Introduce Products (pg. 21-14)
Target Costing Requires Cost Information (pg. 21-14)
Target Costing Requires Coordination (pg. 21-14)
Target Costing is Key for Products with Short Life Cycles (pg. 21-15)
Target Costing Helps Manage Life Cycle Costs (pg. 21-16)
Review 21-3 (pg. 21-17)
Continuous Improvement Costing (pg. 21-17)
Review 21-4 (pg. 21-18)
Benchmarking (pg. 21-19)
Review 21-5 (pg. 21-20)
Guidance Answers (pg. 21-20)
Questions  (pg. 21-20)
Mini Exercises (pg. 21-21)
Exercises (pg. 21-22)
Problems (pg. 21-24)
Management Applications  (pg. 21-26)
Solutions to Review Problems (pg. 21-27)
Module 22: Operational Budgeting and Profit Planning (pg. 22-1)
Pinterest (pg. 22-1)
Reasons for Budgeting (pg. 22-3)
Compel Planning (pg. 22-3)
Promote Communication and Coordination (pg. 22-3)
Provide a Guide to Action and Basis of Evaluation (pg. 22-4)
Aid in Risk Management (pg. 22-4)
Review 22-1 (pg. 22-4)
General Approaches to Budgeting (pg. 22-4)
Output/Input Approach (pg. 22-4)
Activity-Based Approach (pg. 22-5)
Incremental Approach (pg. 22-5)
Minimum Level Approach (pg. 22-6)
Review 22-2 (pg. 22-7)
Master Budget (pg. 22-7)
Sales Budget (pg. 22-9)
Purchases Budget (pg. 22-10)
Selling Expense Budget (pg. 22-11)
General and Administrative Expense Budget (pg. 22-11)
Cash Budget (pg. 22-12)
Budgeted Financial Statements (pg. 22-14)
Finalizing the Budget (pg. 22-15)
Review 22-3 (pg. 22-16)
Budget Development in Manufacturing Organizations (pg. 22-16)
Production Budget (pg. 22-17)
Manufacturing Cost Budget (pg. 22-18)
Review 22-4 (pg. 22-20)
Budget Development and Manager Behavior (pg. 22-21)
Employee Participation (pg. 22-21)
Budgeting Periods (pg. 22-22)
Forecasts (pg. 22-22)
Ethics (pg. 22-23)
Open Book Management (pg. 22-23)
Review 22-5 (pg. 22-24)
Guidance Answers  (pg. 22-24)
Questions  (pg. 22-24)
Mini Exercises (pg. 22-25)
Exercises (pg. 22-27)
Problems (pg. 22-31)
Management Applications  (pg. 22-36)
Solutions to Review Problems (pg. 22-38)
Module 23: Standard Costs and Performance Reports (pg. 23-1)
Southwest Airlines (pg. 23-1)
Responsibility Accounting (pg. 23-3)
Performance Reporting and Organization Structures (pg. 23-4)
Types of Responsibility Centers (pg. 23-4)
Financial and Nonfinancial Performance Measures (pg. 23-6)
Review 23-1 (pg. 23-6)
Performance Reporting for Cost Centers (pg. 23-6)
Flexible Budgets Emphasize Performance (pg. 23-7)
Standard Costs and Performance Reports (pg. 23-8)
Review 23-2 (pg. 23-9)
Variance Analysis for Costs (pg. 23-9)
Components of Standard Cost Analysis (pg. 23-9)
Establishing and Using Standards for Direct Materials (pg. 23-10)
Review 23-3 (pg. 23-13)
Establishing and Using Standards for Direct Labor (pg. 23-13)
Review 23-4 (pg. 23-15)
Establishing and Using Standards for Variable Overhead (pg. 23-16)
Fixed Overhead Variances (pg. 23-18)
Review 23-5 (pg. 23-18)
Performance Reports for Revenue Centers (pg. 23-19)
Inclusion of Controllable Costs (pg. 23-20)
Revenue Centers as Profit Centers (pg. 23-21)
Review 23-6 (pg. 23-22)
Appendix 23A: Fixed Overhead Variances (pg. 23-22)
Review 23-7 (pg. 23-24)
Appendix 23B: Reconciling Budgeted and Actual Income (pg. 23-24)
Review 23-8 (pg. 23-25)
Guidance Answers  (pg. 23-26)
Questions  (pg. 23-26)
Mini Exercises (pg. 23-26)
Exercises (pg. 23-28)
Problems (pg. 23-30)
Management Applications  (pg. 23-36)
Solutions to Review Problems (pg. 23-39)
Module 24: Segment Reporting, Transfer Pricing, and Balanced Scorecard (pg. 24-1)
Volkswagen (pg. 24-1)
Strategic Business Segments and Segment Reporting (pg. 24-3)
Multilevel Segment Income Statements (pg. 24-5)
Interpreting Segment Reports (pg. 24-5)
Review 24-1 (pg. 24-7)
Transfer Pricing (pg. 24-8)
Management Considerations (pg. 24-8)
Determining Transfer Prices (pg. 24-10)
Review 24-2 (pg. 24-13)
Investment Center Evaluation Measures (pg. 24-13)
Return on Investment (pg. 24-13)
Investment Center Income (pg. 24-16)
Investment Center Asset Base (pg. 24-17)
Other Valuation Issues (pg. 24-17)
Residual Income (pg. 24-17)
Economic Value Added (pg. 24-18)
Which Measure Is Best? (pg. 24-19)
Review 24-3 (pg. 24-20)
Balanced Scorecard (pg. 24-21)
Balanced Scorecard Framework (pg. 24-21)
Balanced Scorecard and Strategy (pg. 24-23)
Review 24-4 (pg. 24-24)
 Guidance Answers (pg. 24-25)
 Questions (pg. 24-25)
Mini Exercises (pg. 24-25)
Exercises (pg. 24-29)
Problems (pg. 24-32)
 Management Applications (pg. 24-37)
Solutions to Review Problems (pg. 24-39)
Module 25: Capital Budgeting Decisions (pg. 25-1)
Amazon (pg. 25-1)
Long-Range Planning and Capital Budgeting (pg. 25-4)
Review 25-1 (pg. 25-6)
Capital Budgeting Models that Consider Time Value of Money (pg. 25-7)
Expected Cash Flows (pg. 25-7)
Manager Behavior and Expected Cash Flows (pg. 25-8)
Net Present Value (pg. 25-8)
Internal Rate of Return (pg. 25-10)
Cost of Capital (pg. 25-11)
Review 25-2 (pg. 25-11)
Capital Budgeting Models That Do Not Consider Time Value of Money (pg. 25-12)
Payback Period (pg. 25-12)
Accounting Rate of Return (pg. 25-13)
Review 25-3 (pg. 25-14)
Evaluation of Capital Budgeting Models (pg. 25-14)
Review 25-4 (pg. 25-16)
Additional Aspects of Capital Budgeting (pg. 25-17)
Using Multiple Investment Criteria (pg. 25-17)
Evaluating Risk (pg. 25-17)
Differential Analysis of Project Cash Flows (pg. 25-18)
Predicting Differential Costs and Revenues for High-Tech Investments (pg. 25-19)
Review 25-5 (pg. 25-21)
Taxes in Capital Budgeting Decisions (pg. 25-21)
Depreciation Tax Shield (pg. 25-21)
Investment Tax Credit (pg. 25-24)
Review 25-6 (pg. 25-24)
Appendix 25A: Time Value of Money  (pg. 25-24)
Review 25-7 (pg. 25-29)
 Appendix 25B: Table Approach to Determining Internal Rate of Return (pg. 25-29)
Review 25-8 (pg. 25-31)
 Guidance Answers (pg. 25-31)
 Questions (pg. 25-31)
Mini Exercises (pg. 25-32)
Exercises (pg. 25-33)
Problems (pg. 25-36)
Management Applications  (pg. 25-38)
Solutions to Review Problems (pg. 25-43)
Appendix A: Compound Interest Tables (pg. A-1)
Appendix B: Chart of Accounts (with Acronyms) (pg. B-1)
Appendix C: Comprehensive Case (pg. C-1)
HOG (pg. C-1)
Reviewing Financial Statements (pg. C-3)
Business Environment for Financial Reporting (pg. C-3)
Income Statement Reporting and Analysis (pg. C-4)
Balance Sheet Reporting and Analysis (pg. C-9)
Statement of Cash Flows Reporting and Analysis (pg. C-22)
Independent Audit Opinion (pg. C-23)
Assessing Profitability and Creditworthiness (pg. C-24)
ROE Disaggregation—DuPont Analysis (pg. C-24)
ROE Disaggregation—Operating Focus (pg. C-25)
Disaggregation of RNOA—Margin and Turnover (pg. C-26)
Credit Analysis (pg. C-26)
Summarizing Profitability and Creditworthiness (pg. C-27)
Forecasting Financial Statements (pg. C-28)
Valuing Equity Securities (pg. C-31)
Discounted Cash Flow Valuation (pg. C-32)
Residual Operating Income Valuation (pg. C-32)
Assessment of the Valuation Estimate (pg. C-33)
Summary Observations (pg. C-33)
Glossary (pg. G-1)
Index (pg. I-1)
Peter D. Easton

Peter D. Easton

Peter D. Easton is an expert in accounting and valuation and holds the Notre Dame Alumni Chair in Accountancy in the Mendoza College of Business.

Professor Easton’s expertise is widely recognized by the academic research community and by the legal community. Professor Easton frequently serves as a consultant on accounting and valuation issues in federal and state courts.

Professor Easton holds undergraduate degrees from the University of Adelaide and the University of South Australia. He holds a graduate degree from the University of New England and a PhD in Business Administration (majoring in accounting and finance) from the University of California, Berkeley.

Professor Easton’s research on corporate valuation has been published in the Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Contemporary Accounting Research, Review of Accounting Studies, and Journal of Business Finance and Accounting.

Professor Easton has served as an associate editor for 11 leading accounting journals and he is currently an associate editor for the Journal of Accounting Research, Journal of Business Finance and Accounting, and Journal of Accounting, Auditing, and Finance. He is an editor of the Review of Accounting Studies.

Professor Easton has held appointments at the University of Chicago, the University of California at Berkeley, Ohio State University, Macquarie University, the Australian Graduate School of Management, the University of Melbourne, Tilburg University, National University of Singapore, Seoul National University, and Nyenrode University. He is the recipient of numerous awards for excellence in teaching and in research. Professor Easton regularly teaches accounting analysis and security valuation to MBAs. In addition, Professor Easton has taught managerial accounting at the graduate level.

Robert F. Halsey

Robert F. Halsey

Robert F. Halsey is Professor of Accounting and Associate Dean of the Undergraduate School at Babson College. He received his MBA and PhD from the University of Wisconsin.

Prior to obtaining his PhD he worked as the chief financial officer (CFO) of a privately held retailing and manufacturing company and as the vice president and manager of the commercial lending division of a large bank.

Professor Halsey teaches courses in financial and managerial accounting at both the graduate and undergraduate levels, including a popular course in financial statement analysis for second year MBA students. He has also taught numerous executive education courses for large multinational companies through Babson’s school of Executive Education as well as for a number of stock brokerage firms in the Boston area. He is regarded as an innovative teacher and has been recognized for outstanding teaching at both the University of Wisconsin and Babson College.

Professor Halsey co-authors Advanced Accounting published by Cambridge Business Publishers. Professor Halsey’s research interests are in the area of financial reporting, including firm valuation, financial statement analysis, and disclosure issues. He has publications in Advances in Quantitative Analysis of Finance and Accounting, The Journal of the American Taxation Association, Issues in Accounting Education, The Portable MBA in Finance and Accounting, the CPA Journal, AICPA Professor/Practitioner Case Development Program, and in other accounting and analysis journals.

Professor Halsey is an active member of the American Accounting Association and other accounting, analysis, and business organizations. He is widely recognized as an expert in the areas of financial reporting, financial analysis, and business valuation.

Mary Lea McAnally

Mary Lea McAnally

Mary Lea McAnally is the Philip Ljundahl Professor of Accounting at the Mays Business School at Texas A&M. She obtained her Ph.D. from Stanford University and B. Comm. from the University of Alberta.

She worked as a Chartered Accountant (in Canada) and is a Certified Internal Auditor. Prior to arriving at Texas A&M in 2002, Professor McAnally held positions at University of Texas at Austin, Canadian National Railways, and Dunwoody and Company.

Her research interests include accounting and disclosure in regulated environments, executive compensation, and accounting for risk. She has published articles in the leading academic journals including Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, and Contemporary Accounting Research. Professor McAnally received the Mays Business School Research Achievement Award in 2005. She was Associate Editor at Accounting Horizons, served on the editorial board of Contemporary Accounting Research, and was Guest Editor for the MBA-teaching volume of Issues in Accounting Education. She is active in the American Accounting Association and its FARS section.

At Texas A&M, Professor McAnally teaches financial reporting, analysis, and valuation in the full-time, Professional, and Executive MBA programs. Through the Mays Center for Executive Development, she works with corporate clients. She has also taught at University of Alberta, University of Calgary, IMADEC (in Austria) and at the Indian School of Business at the Hyderabad and Mohali campuses. She has received numerous faculty-determined and student-initiated teaching awards at the MBA and executive levels. Those awards include the Beazley Award, the Trammell Foundation Award, the MBA Teaching Award (multiple times), the MBA Association Distinguished Faculty Award (three times), the Award for Outstanding and Memorable Faculty Member, and the Distinguished Achievement Award.

Al L. Hartgraves

Al L. Hartgraves

Al L. Hartgraves is Professor Emeritus of Accounting at the Goizueta Business School at Emory University in Atlanta, Georgia. He has been a frequent Guest Professor at Johannes Kepler University in Linz, Austria and at the Helsinki School of Economics and Business Administration in Finland.

His published scholarly and professional articles have appeared in The Accounting Review, Accounting Horizons, Management Accounting, Journal of Accountancy, Journal of Accounting and Public Policy and many other journals. Students at Goizueta Business School have selected him on six occasions to receive the Distinguished Educator Award. In 2002 he received Emory University’s highest teaching award, The Scholar/Teacher Award, and in 2003 he was recognized as the Accounting Educator of the Year by the Georgia Society of CPAs. He has been recognized as an Outstanding Faculty Member in two editions of The Business Week Guide to the Best Business Schools. He is a Certified Public Accountant (inactive) and a Certified Management Accountant, having received the Certificate of Distinguished Performance on the CMA exam. He received his Ph.D. from Georgia State University.

Wayne J. Morse

Wayne J. Morse

Wayne J. Morse, a hiking and canoeing enthusiast, is Professor Emeritus at the Saunders College of Business at Rochester Institute of Technology.

An author or coauthor of more than fifty published papers, monographs, and textbooks, he was a founding member of the Management Accounting section of the American Accounting Association. His most notable writings are in the areas of learning curves, human resource accounting, and quality costs. He was a member of the IMA Committee on Research and an AICPA Board of Examiners subcommittee, and he has served on the editorial boards of Advances in Accounting, Trends in Accounting Education, Issues in Accounting Education, and Management Accounting Research. A Certified Public Accountant, he received his Ph.D. from Michigan State University. Prior to joining RIT, he was on the faculty of the University of Illinois, Duke University, the University of Tennessee, Clarkson University, and the University of Alabama-Huntsville.

Appendix C PDF
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