1 Financial Accounting and Its Economic Context

PART 1 AN OVERVIEW OF FINANCIAL ACCOUNTING

1 FINANCIAL ACCOUNTING AND ITS ECONOMIC CONTEXT

PART 1 AN OVERVIEW OF FINANCIAL ACCOUNTING

Consumption and Investment

THE DEMAND FOR FINANCIAL INFORMATION: A USER S ORIENTATION

The Demand for Documentation

Where to Invest?

The Auditor s Report，the Management Letter，and the Financial Statements

Martin and the CPA：Different Perspectives

The Demand for an Independent Audit

The Financial Statements: Definitions and Preliminary Analysis

What Form of Investment: Debt or Equity?

A Decision Is Made but Important Questions Still Remain

Financial Accounting Information: More Than the Financial Statements

THE ENVIRONMENT OF FINANCIAL ACCOUNTING

Providers of Capital：Investors and Creditors

Companies (Managers)

Independent Auditors

Contracts

Legal Liability

Relationships Among the Capital Providers，Management，and the Independent Auditor

Ethics and Professional Reputation

ECONOMIC CONSEQUENCES: MANAGEMENT S PERSPECTIVE

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The Securities and Exchange Commission

ACCOUNTING STANDARD SETTING: A POLITICAL PROCESS

The Financial Accounting Standards Board

Reactions to Economic Consequences: Lobbying Accounting Numbers

INTERNATIONAL PERSPECTIVE: ACCOUNTING PRACTICES AND STANDARDS THROUGHOUT THE WORLD

British-American-Dutch Model

Continental Model

South American Model

Communist Model

International Accounting Standard Setting

Appendix 1A Three Other Kinds of Accounting

NOT-FOR-PROFIT ACCOUNTING

MANAGERIAL ACCOUNTING

TAX ACCOUNTING

COMPARING THE FOUR KINDS OF ACCOUNTING

The Role of the Accounting Profession

2 THE FINANCIAL STATEMENTS

2 The Financial Statements

BUSINESSES ARE LIKE FRUIT TREES

Three Activities of a Business

Businesses

Fruit Trees

THE CLASSIFIED BALANCE SHEET

A Photograph of Financial Condition

Balance Sheet Classifications

Assets

Liabilities

Stockholders Equity

THE INCOME STATEMENT

Revenues

Expenses

THE STATEMENT OF RETAINED EARNINGS

THE STATEMENT OF CASH FLOWS

Cash Flows From Operating Activities

Cash Flows From Financing Activities

Cash Flows From Investing Activities

RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS

INTERNATIONAL PERSPECTIVE: FINANCIAL STATEMENTS AND ANALYSES IN OTHER COUNTRIES

3 Using Financial Statement Information

PART 2 USE，MEASUREMENT，AND MECHANICS OF FINANCIAL STATEMENTS

3 USING FINANCIAL STATEMENT INFORMATION

PART 2 USE，MEASUREMENT AND MECHANICS OF FINANCIAL STATEMENTS

PREDICTION AND CONTROL

Financial Accounting Numbers as Prediction Aids

Financial Accounting Numbers and Management Control

The Audit Report

ASSESSING EARNING POWER AND SOLVENCY

Significant Transactions

The Credit Rating

Analyzing the Financial Statements

Solvency Assessment

LIMITATIONS OF FINANCIAL ACCOUNTING INFORMATION

Management Biases

Inherent GAAP Limitations

INTERNATIONAL PERSPECTIVE: FINANCIAL STATEMENT ANALYSIS IN AN INTERNATIONAL SETTING

ANALYZING THE FINANCIAL STATEMENTS OF ALBERTSONS AND SAFEWAY

A Word of Caution

ASSUMPTIONS OF FINANCIAL ACCOUNTING

Economic Entity Assumption

4 THE MEASUREMENT FUNDAMENTALS OF FINANCIAL ACCOUNTING

4 The Measurement Fundamentals of Financial Accounting

Fiscal Period Assumption

Going Concern Assumption

Stable Dollar Assumption

VALUATIONS ON THE BALANCE SHEET

Four Alternative Valuation Bases

Valuation Bases Used on the Balance Sheet

THE PRINCIPLES OF FINANCIAL ACCOUNTING MEASUREMENT

The Principle of Objectivity

The Principles of Matching and Revenue Recognition

The Principle of Consistency

TWO EXCEPTIONS TO THE BASIC PRINCIPLES: MATERIALITY AND CONSERVATISM

Materiality

Conservatism

INTERNATIONAL PERSPECTIVE: AN EXTREME FORM OF CONSERVATISM THAT ENCOURAGES INCOME MANIPULATION

Appendix 4A The Time Value of Money

INTEREST: THE PRICE OF MONEY

TIME VALUE

Size of Time Value

Inflation

TIME VALUE COMPUTATIONS

Future Value

Present Value

An Illustration

PRESENT VALUE AND FINANCIAL ACCOUNTING

5 THE MECHANICS OF FINANCIAL ACCOUNTING

5 The Mechanics of Financial Accounting

ECONOMIC EVENTS

Relevant Events

Objectivity

THE FUNDAMENTAL ACCOUNTING EQUATION

Assets

Stockholders Equity

BUSINESS TRANSACTIONS，THE ACCOUNTING EQUATION，AND THE FINANCIAL STATEMENTS

Liabilities

Transactions and the Accounting Equation

The Accounting Equation and the Financial Statements

THE JOURNAL ENTRY

RECOGNIZING GAINS AND LOSSES

PERIODIC ADJUSTMENTS

Accruals

Cost Expirations

Revaluation Adjustments

FINANCIAL STATEMENT PRESENTATION IN A MULTINATIONAL ENVIRONMENT

Appendix 5A The Accounting Cycle: An Overview

The Journal

The Ledger

The Work Sheet

Preparation of the Financial Statements

A COMPREHENSIVE EXAMPLE OF THE ACCOUNTING CYCLE

Appendix 5B Mechanics: A User s Perspective

PART 3 ASSETS: A CLOSER LOOK

6 THE CURRENT ASSET CLASSIFICATION，CASH，AND ACCOUNTS RECEIVABLE

6 The Current Asset Classification，Cash，and Accounts Receivable

PART 3 ASSETS：A CLOSER LOOK

THE CURRENT ASSET CLASSIFICATION

The Relative Size of Current Assets Across Industries

Measures Using Current Assets: Working Capital，Current Ratio，and Quick Ratio

The Economic Consequences of Working Capital，the Current Ratio，and the Quick Ratio

Limitations of the Current Asset Classification

CASH

Restrictions on the Use of Cash

Proper Management of Cash

Control of Cash

ACCOUNTS RECEIVABLE

Importance of Accounts Receivable

Net Realizable Value: The Valuation Base for Accounts Receivable

Cash Discounts

Accounting for Uncollectibles (Bad Debts)

Accounting for Sales Returns

ACCOUNTS RECEIVABLE FROM A USER S PERSPECTIVE

When Should a Receivable Be Recorded?

Balance Sheet Valuation of Receivables

THE COLLECTION PERIOD FOR ACCOUNTS RECEIVABLE

Appendix 6A Short-Term Notes Receivable

ACCOUNTING FOR SHORT-TERM NOTES RECEIVABLE

Example: Housing Finance Company

Methods 1 and 2 Compared

Financial Institutions and Uncollectible Loans

Appendix 6B

Accounting for Receivables and Payables Expressed in Foreign Currencies

Exchange Rates Among Currencies

Receivables and Payables Held in Other Currencies

Hedging and the Economic Consequences of Fluctuating Exchange Rates

7 MERCHANDISE INYENTORY

7 Merchandise Inventory

THE RELATIVE SIZE OF INVENTORIES

ACCOUNTING FOR INVENTORY: FOUR IMPORTANT ISSUES

ACQUIRING INVENTORY: WHAT COSTS TO CAPITALIZE?

What Items or Units to Include?

Determining the Costs of Manufacturing Inventories

CARRYING INVENTORY: THE PERPETUAL OR PERIODIC METHOD?

Perpetual and Periodic Methods: Costs and Benefits

Errors in the Inventory Count

SELLING INVENTORY: WHICH COST FLOW ASSUMPTION?

Specific Identification

Three Inventory Cost Flow Assumptions: Averaging，FIFO，and LIFO

Inventory Cost Flow Assumptions：Effects on the Financial Statements

Inventory Cost Flow Assumptions: Effects on Federal Income Taxes

Choosing an Inventory Cost Flow Assumption: Trade-Offs

ENDING INVENTORY: APPLYING THE LOWER-OF-COST-OR-MARKET RULE

The Lower-of-Cost-or-Market Rule and Hidden Reserves

INTERNATIONAL PERSPECTIVE: JAPANESE BUSINESS AND INVENTORY ACCOUNTING

Appendix 7A

Determining Market Values for Inventories and Applying the Lower-of-Cost-or-Market Rule

8 INVESTMENTS IN EQUITY SECURITIES

8 Investments in Equity Securities

EQUITY SECURITIES CLASSIFIED AS CURRENT

The Intention to Convert: Another Area of Subjectivity

The Existence of a Ready Market

TRADING AND AVAILABLE-FOR-SALE SECURITIES

Declaration and Receipt of Cash Dividends

Purchasing Trading and Available-for-Sale Securities

Price Changes of Securities on Hand at the End of the Accounting Period

Sale of Securities

Discussion of Mark-to-Market Accounting

Reclassifications and Permanent Market Value Declines

Accounting for Long-Term Equity Investments

LONG-TERM EQUITY INVESTMENTS

The Cost Method

The Equity Method

Some Cautions to Financial Statement Users About the Equity Method

Business Acquisitions，Mergers，and Consolidated Financial Statements

The Equity Method or Consolidated Statements?

Accounting for Equity Investments: A Summary

GOODWILL ACCOUNTING: CONTROVERSY AND INTERNATIONAL IMPLICATIONS

Appendix 8A

Consolidated Financial Statements

Accounting for Business Acquisitions and Mergers: The Purchase Method

Preparing Consolidated Financial Statement for Multinational

Quality of Earnings Cases A Comprehensive Review

CASE 1: LIBERTY MANUFACTURING

CASE 2: MICROLINE CORPORATION

CASE 3: TECHNIC ENTERPRISES AND SONAR-SUN INC．

9 Long-Lived Assets

9 LONG-LIVED ASSETS

THE RELATIVE SIZE OF LONG-LIVED ASSETS

LONG-LIVED ASSET ACCOUNTING: GENERAL ISSUES AND FINANCIAL STATEMENT EFFECTS

AN OVERVIEW OF LONG-LIVED ASSET ACCOUNTING

ACQUISITION: WHAT COSTS TO CAPITALIZE?

The Acquisition of Land

Lump-Sum Purchases

Construction of Long-Lived Assets

POSTACQUISITION EXPENDITURES: BETTERMENTS OR MAINTENANCE?

COST ALLOCATION: AMORTIZING CAPITALIZED COSTS

Estimating the Useful Life and Salvage Value

Revising the Useful-Life Estimate

Cost Allocation (Depreciation) Methods

Cost Allocation Methods and the Matching Principle

How Does Management Choose an Acceptable Cost Allocation Method?

Depreciation Methods for Income Tax Purposes

DISPOSAL: RETIREMENTS，SALES，AND TRADE-INS

Retirement of Long-Lived Assets

Trade-Ins of Long-Lived Assets

Sale of Long-Lived Assets

INTERNATIONAL PERSPECTIVE: LONG-LIVED ASSETS AND CURRENT VALUES

Appendix 9A

Intangible Assets and Deferred Costs

COPYRIGHTS，PATENTS，AND TRADEMARKS

THE COSTS OF DEVELOPING COMPUTER SOFTWARE

GOODWILL

ORGANIZATIONAL COSTS

RESEARCH AND DEVELOPMENT COSTS

Appendix 9B

Accounting for Long-Lived Assets—A Review and Critique

PROBLEMS WITH HISTORICAL COST

PROBLEMS WITH COST ALLOCATION

MISCONCEPTIONS ABOUT COST ALLOCATION

PART 4 LIABILITIES AND STOCKHOLDERS EQUITY：A CLOSER LOOK

10 Introduction to Liabilities：Economic Consequences，Current Liabilities，and Contingencies

10 INTRODUCTION TO LIABILITIES: ECONOMIC CONSEQUENCES，CURRENT LIABILITIES，AND CONTINGENCIES

PART 4 LIABILITIES AND STOCKHOLDERS EQUITY: A CLOSER LOOK

WHAT IS A LIABILITY?

THE RELATIVE SIZE OF LIABILITIES ON THE BALANCE SHEET

REPORTING LIABILITIES ON THE BALANCE SHEET: ECONOMIC CONSEQUENCES

Stockholders and Investors

Creditors

Management

Auditors

CURRENT LIABILITIES

The Relative Size of Current Liabilities on the Balance Sheet

Valuing Current Liabilities on the Balance Sheet

Reporting Current Liabilities: An Economic Consequence

ACCOUNTING FOR CURRENT LIABILITIES

Determinable Current Liabilities

Contingent Liabilities: A Scenario

CONTINGENCIES AND CONTINENT LIABILITIES

Accounting for Contingencies

INTERNATIONAL PERSPECTIVE: EXECUTIVE COMPENSATION AND U．S．BUSINESS IN THE GLOBAL MARKETPLACE

Appendix 10A

Retirement Costs: Pensions and Postretirement Health Care and Insurance

PENSIONS

Defined-Contribution Plan

Defined-Benefit Plan

POSTRETIREMENT HEALTH CARE AND INSURANCE COSTS

Deferred Income Taxes

THE CONCEPT OF DEFERRED INCOME TAXES

Appendix 10B

ACCOUNTING ENTRIES FOR DEFERRED INCOME TAXES

DEFERRED INCOME TAXES: ADDITIONAL ISSUES

THE CONSERVATISM RATIO

11 Long-Term Liabilities: Notes，Bonds，and Leases

11 LONG-TERM LIABILITIES: NOTES，BONDS，AND LEASES

THE RELATIVE SIZE OF LONG-TERM LIABILITIES

THE ECONOMIC CONSEQUENCES OF REPORTING LONG-TERM LIABILITIES

BASIC DEFINITIONS AND DIFFERENT CONTRACTUAL FORMS

EFFECTIVE INTEREST RATE

Installment and Non-Interest-Bearing Obligations

Interest-Bearing Obligations

ACCOUNTING FOR LONG-TERM OBLIGATIONS: THE EFFECTIVE INTEREST METHOD

ACCOUNTING FOR LONG-TERM NOTES PAYABLE

Equipment Exchanged for a Non-Interest-Bearing Note

BONDS PAYABLE

Bond Terminology

The Price of a Bond

The Effective Rate and the Stated Rate

Accounting for Bonds Payable

The Effective Interest Method and Changing Interest Rates

Bond Redemptions

Financial Instruments and Off-Balance-Sheet Risks

LEASES

Operating Leases

Capital Leases

Operating Leases，Capital Leases，and Off Balance-Sheet Financing

INTERNATIONAL PERSPECTIVE: THE IMPORTANCE OF DEBT FINANCING IN OTHER COUNTRIES

Appendix 11A

Accounting for Long-Term Investments in Debt Securities

Long-Term Notes Receivable

Accounting for Long-Term Notes Receivable

Investments in Corporate Bonds

Accounting for Investments in Corporate Bonds

The Determination of Bond Prices

Appendix 11B

Determine the Effective (Actual)Rate of Return

Determine the Required Rate of Return

Compare the Effective Rate to the Required Rate

Factors Determining Bond Prices

12 Stockholders Equity

12 STOCKHOLDERS EQUITY

THE RELATIVE IMPORTANCE OF LIABILITIES，CONTRIBUTED CAPITAL，AND EARNED CAPITAL

Characteristics of Debt

DEBT AND EQUITY DISTINGUISHED

Characteristics of Equity

Why Is It Important to Distinguish Debt From Equity

THE ECONOMIC CONSEQUENCES ASSOCIATED WITH ACCOUNTING FOR STOCKHOLDERS EQUITY

ACCOUNTING FOR STOCKHOLDERS EQUITY

Preferred Stock

Common Stock

Treasury Stock

Stock Options

Retained Earnings

THE STATEMENT OF STOCKHOLDERS EQUITY

INTERNATIONAL PERSPECTIVE: THE RISE OF INTERNATIONAL EQUITY MARKETS

Appendix 12A

Forms of Business

THE CORPORATE FORM OF ORGANIZATION

Corporate Income Taxes

Stockholder Returns: Capital Appreciation and Dividends

Limited Liability

PROPRIETORSHIPS AND PARTNERSHIPS

Legal Liability of Partners: Unlimited

Income Taxes: Personal Rates and Unaffected by Withdrawals

Returns to Partners: Limited Markets but Relatively Free Withdrawals

CHOOSING A FORM OF BUSINESS: A SUMMARY

PART 5 INCOME AND FLOWS

13 The Complete Income Statement

13 THE COMPLETE INCOME STATEMENT

PART 5 INCOME AND FLOWS

THE ECONOMIC CONSEQUENCES ASSOCIATED WITH INCOME MEASUREMENT AND DISCLOSURE

THE MEASUREMENT OF INCOME: DIFFERENT MEASURES FOR DIFFERENT OBJECTIVES

Capital and Operating Transactions: A Framework

Classifying Operating Transactions

A COMPLETE INCOME STATEMENT DISCLOSURE AND PRESENTATION

(1)Operating Revenues and Expenses: Usual and Frequent

(2)Other Revenues and Expenses: Unusual or Infrequent

(3)Disposal of a Business Segment

(4)Extraordinary Items: Unusual and Infrequent

(5)Changes in Accounting Principles

EARNINGS-PER-SHARE DISCLOSURE

INTRAPERIOD TAX ALLOCATIOIN

INCOME STATEMENT CATEGORIES: USEFUL FOR DECISIONS BUT SUBJECTIVE

RETAINED EARNINGS AND PRIOR ADJUSTMENTS

INTERNATIONAL PERSPECTIVE: INVESTMENTS AND INCOME STATEMENT DISCLOSURE

14 THE STATEMENT OF CASH FLOWS

14 The Statement of Cash Flows

THE DEFINITON OF CASH

A GENERAL DESCRIPTION OF THE STATEMENT OF CASH FLOWS

Cash Provided (Used) by Operating Activities

Cash Provided (Used)by Investing Activities

Cash Provided (Used)by Financing Activities

HOW THE STATEMENT OF CASH FLOWS COMPLEMENTS THE INCOME STATEMENT AND BALANCE SHEET

HOW THE STATEMENT OF CASH FLOWS CAN BE USED

Analyzing the Statement of Cash Flows

The Importance of Cash From Operating Activities

The Importance of Significant Noncash Transactions

THE STATEMENT OF CASH FLOWS: ECONOMIC CONSEQUENCES

THE MECHANICS OF PREPARING THE STATEMENT OF CASH FLOWS

A Conceptual Description of the Statement of Cash Flows

Deriving Cash Flow From Accrual Financial Statements，

Cash Provided (Used)by Operating Activities，

Cash Provided (Used)by Investing Activities

Cash Provided (Used)by Financing Activities

THE COMPLETE STATEMENT OF CASH FLOWS

The Direct Method

The Indirect Method

The Direct and Indirect Methods: A Reconciliation

ANALYZING THE STATEMENT OF CASH FLOWS: AN APPLICATION

Explaining the Changes in the Cash Balance

Summarizing the Cash Effects of Operating Transactions

INTERNATIONAL PRESPECTIVE: THE STATEMENT OF CASH FLOWS

Summarizing the Cash Effect of Investing and Financing Transactions

Quality of Earnings Cases

A Comprehensive Review

CASE 1: AVERY CORPORATION

CASE 2: ZENITH SERVICES

CASE 3: PIERCE AND SNOWDEN

APPENDICES

A CONVERTING ACCRUAL NUMBERS TO CASH FLOWS: THE DIRECT AND INDIRECT FORMS OF PRESENTATION

APPENDICES

A Converting Accrual Numbers to Cash Flows：The Direct and Indirect Forms of Presentation

PRESENTING THE OPERATING SECTION OF THE STATEMENT OF CASH FLOWS: DIRECT AND INDIRECT METHODS

T-ACCOUNT ANALYSIS: ANOTHER METHOD TO CONVERT ACCRUAL NUMBERS TO CASH FLOWS

B FINANCIAL ACCOUNTING SIMULATION PROJECT

B Financial Accounting Simulation Project

C THE ANNUAL REPORT OF MCI CORPORATION

C The Annual Report of MCI Corporation