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Table of contents
  1. Preface
  2. 1 Role of Accounting in Society
    1. Why It Matters
    2. 1.1 Explain the Importance of Accounting and Distinguish between Financial and Managerial Accounting
    3. 1.2 Identify Users of Accounting Information and How They Apply Information
    4. 1.3 Describe Typical Accounting Activities and the Role Accountants Play in Identifying, Recording, and Reporting Financial Activities
    5. 1.4 Explain Why Accounting Is Important to Business Stakeholders
    6. 1.5 Describe the Varied Career Paths Open to Individuals with an Accounting Education
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
  3. 2 Introduction to Financial Statements
    1. Why It Matters
    2. 2.1 Describe the Income Statement, Statement of Owner’s Equity, Balance Sheet, and Statement of Cash Flows, and How They Interrelate
    3. 2.2 Define, Explain, and Provide Examples of Current and Noncurrent Assets, Current and Noncurrent Liabilities, Equity, Revenues, and Expenses
    4. 2.3 Prepare an Income Statement, Statement of Owner’s Equity, and Balance Sheet
    5. Key Terms
    6. Summary
    7. Multiple Choice
    8. Questions
    9. Exercise Set A
    10. Exercise Set B
    11. Problem Set A
    12. Problem Set B
    13. Thought Provokers
  4. 3 Analyzing and Recording Transactions
    1. Why It Matters
    2. 3.1 Describe Principles, Assumptions, and Concepts of Accounting and Their Relationship to Financial Statements
    3. 3.2 Define and Describe the Expanded Accounting Equation and Its Relationship to Analyzing Transactions
    4. 3.3 Define and Describe the Initial Steps in the Accounting Cycle
    5. 3.4 Analyze Business Transactions Using the Accounting Equation and Show the Impact of Business Transactions on Financial Statements
    6. 3.5 Use Journal Entries to Record Transactions and Post to T-Accounts
    7. 3.6 Prepare a Trial Balance
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  5. 4 The Adjustment Process
    1. Why It Matters
    2. 4.1 Explain the Concepts and Guidelines Affecting Adjusting Entries
    3. 4.2 Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries
    4. 4.3 Record and Post the Common Types of Adjusting Entries
    5. 4.4 Use the Ledger Balances to Prepare an Adjusted Trial Balance
    6. 4.5 Prepare Financial Statements Using the Adjusted Trial Balance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  6. 5 Completing the Accounting Cycle
    1. Why It Matters
    2. 5.1 Describe and Prepare Closing Entries for a Business
    3. 5.2 Prepare a Post-Closing Trial Balance
    4. 5.3 Apply the Results from the Adjusted Trial Balance to Compute Current Ratio and Working Capital Balance, and Explain How These Measures Represent Liquidity
    5. 5.4 Appendix: Complete a Comprehensive Accounting Cycle for a Business
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  7. 6 Merchandising Transactions
    1. Why It Matters
    2. 6.1 Compare and Contrast Merchandising versus Service Activities and Transactions
    3. 6.2 Compare and Contrast Perpetual versus Periodic Inventory Systems
    4. 6.3 Analyze and Record Transactions for Merchandise Purchases Using the Perpetual Inventory System
    5. 6.4 Analyze and Record Transactions for the Sale of Merchandise Using the Perpetual Inventory System
    6. 6.5 Discuss and Record Transactions Applying the Two Commonly Used Freight-In Methods
    7. 6.6 Describe and Prepare Multi-Step and Simple Income Statements for Merchandising Companies
    8. 6.7 Appendix: Analyze and Record Transactions for Merchandise Purchases and Sales Using the Periodic Inventory System
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  8. 7 Accounting Information Systems
    1. Why It Matters
    2. 7.1 Define and Describe the Components of an Accounting Information System
    3. 7.2 Describe and Explain the Purpose of Special Journals and Their Importance to Stakeholders
    4. 7.3 Analyze and Journalize Transactions Using Special Journals
    5. 7.4 Prepare a Subsidiary Ledger
    6. 7.5 Describe Career Paths Open to Individuals with a Joint Education in Accounting and Information Systems
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  9. 8 Fraud, Internal Controls, and Cash
    1. Why It Matters
    2. 8.1 Analyze Fraud in the Accounting Workplace
    3. 8.2 Define and Explain Internal Controls and Their Purpose within an Organization
    4. 8.3 Describe Internal Controls within an Organization
    5. 8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries
    6. 8.5 Discuss Management Responsibilities for Maintaining Internal Controls within an Organization
    7. 8.6 Define the Purpose of a Bank Reconciliation, and Prepare a Bank Reconciliation and Its Associated Journal Entries
    8. 8.7 Describe Fraud in Financial Statements and Sarbanes-Oxley Act Requirements
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  10. 9 Accounting for Receivables
    1. Why It Matters
    2. 9.1 Explain the Revenue Recognition Principle and How It Relates to Current and Future Sales and Purchase Transactions
    3. 9.2 Account for Uncollectible Accounts Using the Balance Sheet and Income Statement Approaches
    4. 9.3 Determine the Efficiency of Receivables Management Using Financial Ratios
    5. 9.4 Discuss the Role of Accounting for Receivables in Earnings Management
    6. 9.5 Apply Revenue Recognition Principles to Long-Term Projects
    7. 9.6 Explain How Notes Receivable and Accounts Receivable Differ
    8. 9.7 Appendix: Comprehensive Example of Bad Debt Estimation
    9. Key Terms
    10. Summary
    11. Multiple Choice
    12. Questions
    13. Exercise Set A
    14. Exercise Set B
    15. Problem Set A
    16. Problem Set B
    17. Thought Provokers
  11. 10 Inventory
    1. Why It Matters
    2. 10.1 Describe and Demonstrate the Basic Inventory Valuation Methods and Their Cost Flow Assumptions
    3. 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method
    4. 10.3 Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method
    5. 10.4 Explain and Demonstrate the Impact of Inventory Valuation Errors on the Income Statement and Balance Sheet
    6. 10.5 Examine the Efficiency of Inventory Management Using Financial Ratios
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  12. 11 Long-Term Assets
    1. Why It Matters
    2. 11.1 Distinguish between Tangible and Intangible Assets
    3. 11.2 Analyze and Classify Capitalized Costs versus Expenses
    4. 11.3 Explain and Apply Depreciation Methods to Allocate Capitalized Costs
    5. 11.4 Describe Accounting for Intangible Assets and Record Related Transactions
    6. 11.5 Describe Some Special Issues in Accounting for Long-Term Assets
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  13. 12 Current Liabilities
    1. Why It Matters
    2. 12.1 Identify and Describe Current Liabilities
    3. 12.2 Analyze, Journalize, and Report Current Liabilities
    4. 12.3 Define and Apply Accounting Treatment for Contingent Liabilities
    5. 12.4 Prepare Journal Entries to Record Short-Term Notes Payable
    6. 12.5 Record Transactions Incurred in Preparing Payroll
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  14. 13 Long-Term Liabilities
    1. Why It Matters
    2. 13.1 Explain the Pricing of Long-Term Liabilities
    3. 13.2 Compute Amortization of Long-Term Liabilities Using the Effective-Interest Method
    4. 13.3 Prepare Journal Entries to Reflect the Life Cycle of Bonds
    5. 13.4 Appendix: Special Topics Related to Long-Term Liabilities
    6. Key Terms
    7. Summary
    8. Multiple Choice
    9. Questions
    10. Exercise Set A
    11. Exercise Set B
    12. Problem Set A
    13. Problem Set B
    14. Thought Provokers
  15. 14 Corporation Accounting
    1. Why It Matters
    2. 14.1 Explain the Process of Securing Equity Financing through the Issuance of Stock
    3. 14.2 Analyze and Record Transactions for the Issuance and Repurchase of Stock
    4. 14.3 Record Transactions and the Effects on Financial Statements for Cash Dividends, Property Dividends, Stock Dividends, and Stock Splits
    5. 14.4 Compare and Contrast Owners’ Equity versus Retained Earnings
    6. 14.5 Discuss the Applicability of Earnings per Share as a Method to Measure Performance
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  16. 15 Partnership Accounting
    1. Why It Matters
    2. 15.1 Describe the Advantages and Disadvantages of Organizing as a Partnership
    3. 15.2 Describe How a Partnership Is Created, Including the Associated Journal Entries
    4. 15.3 Compute and Allocate Partners’ Share of Income and Loss
    5. 15.4 Prepare Journal Entries to Record the Admission and Withdrawal of a Partner
    6. 15.5 Discuss and Record Entries for the Dissolution of a Partnership
    7. Key Terms
    8. Summary
    9. Multiple Choice
    10. Questions
    11. Exercise Set A
    12. Exercise Set B
    13. Problem Set A
    14. Problem Set B
    15. Thought Provokers
  17. 16 Statement of Cash Flows
    1. Why It Matters
    2. 16.1 Explain the Purpose of the Statement of Cash Flows
    3. 16.2 Differentiate between Operating, Investing, and Financing Activities
    4. 16.3 Prepare the Statement of Cash Flows Using the Indirect Method
    5. 16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method
    6. 16.5 Use Information from the Statement of Cash Flows to Prepare Ratios to Assess Liquidity and Solvency
    7. 16.6 Appendix: Prepare a Completed Statement of Cash Flows Using the Direct Method
    8. Key Terms
    9. Summary
    10. Multiple Choice
    11. Questions
    12. Exercise Set A
    13. Exercise Set B
    14. Problem Set A
    15. Problem Set B
    16. Thought Provokers
  18. A | Financial Statement Analysis
  19. B | Time Value of Money
  20. C | Suggested Resources
  21. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
  22. Index
PA 1.

LO 16.2Provide journal entries to record each of the following transactions. For each, also identify *the appropriate section of the statement of cash flows, and **whether the transaction represents a source of cash (S), a use of cash (U), or neither (N).

  1. paid $12,000 of accounts payable
  2. collected $6,000 from a customer
  3. issued common stock at par for $24,000 cash
  4. paid $6,000 cash dividend to shareholders
  5. sold products to customers for $15,000
  6. paid current month’s utility bill, $1,500
PA 2.

LO 16.3Use the following information from Acorn Company’s financial statements to determine operating net cash flows (indirect method).

Income Statement items: Sales $453,000. Cost of Goods Sold (359,000). Operating Expenses, other than depreciation expense (65,000). Depreciation Expense (8,000). Loss on Sale of Plant Assets (11,900). Net Income 9,100. Balance Sheet items: December 31, 2018: Accounts Receivable 29,500. Accounts Payable 13,250. December 31, 2017: Accounts Receivable 26,500. Accounts Payable 11,750.
PA 3.

LO 16.3Use the following information from Berlin Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Cash, Accounts Receivable, Prepaid Assets, Total Assets, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $29,000, 11,500, 1,200, 41,700, 1,700, 33,000, 7,000, 41,700. Additional information: Net Income and Dividends Paid, respectively: 5,800, 4,000. Cash, Accounts Receivable, Prepaid Assets, Total Assets, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $ 24,000, 12,000, 1,000, 37,000, 1,800, 30,000, 5,200, 37,000.
PA 4.

LO 16.3Use the following information from Coconut Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Cash, Accounts Receivable, Inventory, Prepaid Rent, Accounts Payable December 31, 2018, respectively: $201,000, 22,000 33,750, 6,000, 19,500. Additional information: Net Income, Depreciation Expense, respectively: 55,000, 11,500. Cash, Accounts Receivable, Inventory, Prepaid Rent, Accounts Payable December 31, 2017, respectively: $175,000, 21,500, 30,500, 2,000, 28,750.
PA 5.

LO 16.3Use the following information from Dubuque Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

From the December 31, 2018 balance sheet, changes from prior year: Accounts Receivable $7,600, Inventory 3,200, Prepaid Insurance (2,000), Accounts Payable (4,000), Sales Tax Payable 1,900. From the 2018 Income Statement: Gain from sale of investments 12,000, Depreciation Expense 26,500, Net Income 79,300.
PA 6.

LO 16.3Use the following information from Eiffel Company’s financial statements to prepare the operating activities section of the statement of cash flows (indirect method) for the year 2018.

Income Statement items: Sales $299,000. Cost of Goods Sold (135,000). Operating Expenses, other than depreciation expense (27,000). Depreciation Expense (17,000). Gain on Sale of Plant Assets 16,500. Net Income 136,500. Balance Sheet items: December 31, 2018: Accounts Receivable 45,300. Inventory 1,600. Accounts Payable 22,500. Accrued Liabilities 900. December 31, 2017: Accounts Receivable 43,400. Inventory 1,800. Accounts Payable 21,250. Accrued Liabilities 1,150.
PA 7.

LO 16.3Analysis of Forest Company’s accounts revealed the following activity for its Land account, with descriptions added for clarity of analysis. How would these two transactions be reported for cash flow purposes? Note the section of the statement of cash flow, if applicable, and if the transaction represents a cash source, cash use, or noncash transaction.

Land items: Account balance, beginning of year $220,000. Purchase of land this year, for cash 95,000. Purchase of land this year, with note payable 75,000. Account balance, end of year 390,000.
PA 8.

LO 16.4Use the following excerpts from Zowleski Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Cash, Account Receivable, Merchandise Inventory, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $92,300, 22,000, 140,000, 180,000, (25,000), 409,300, 18,500, 135,500, 20,000, 235,300, 409,300. Additional information: Net Income for 2018, Depreciation Expense for 2018 (Accumulated Depreciation increase), Plant Assets purchased (Plant Assets increase), financed by note, Notes Payable increased by amount of plant asset purchase, Notes Payable decreased by amount of principal note payments: 28,400, 4,000, 30,000, 30,000, 14,500. Cash, Account Receivable, Merchandise Inventory, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $85,000, 22,900, 131,000, 150,000, (21,000), 367,900, 21,000,120,000,20,000, 206,900, 367,900.
PA 9.

LO 16.4Use the following excerpts from Yardley Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Income Statement items: Sales $455,000. Cost of goods sold (221,500). Operating expenses, other than depreciation expense (58,600). Depreciation expense (24,000). Gain on sale of plant assets 23,500. Net income 174,400. Balance Sheet items: December 31, 2018: Cash $321,450. Accounts receivable 39,750. Inventory 33,000. Accounts payable 17,550. Accrued liabilities 3,500. December 31, 2017: Cash $133,500. Accounts receivable 36,500. Inventory 35,000. Accounts payable 19,550. Accrued liabilities 2,200. Additional information: Plant assets were sold for $40,000; book value $16,500. Dividends of $25,000 were declared and paid.
PA 10.

LO 16.4Use the following excerpts from Wickham Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Cash, Account Receivable, Merchandise Inventory, Land, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $225,000, 38,350, 59,500, 150,000, 160,000, (49,000), 583,850, 29,100, 15,500, 45,000, 494,250, 583,850. Additional information: Net Income for 2018, Depreciation Expense for 2018, Land purchased, for cash, Stock issued in exchange for cash, at par value, Dividends declared and paid, respectively: 98,000, 12,000, 100,000, 25,000,11,000. Cash, Account Receivable, Merchandise Inventory, Land, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $200,000, 35,350, 58,200, 50,000, 160,000, (37,000), 466,550, 27,300, 12,000, 20,000, 407,250, 466,550.
PA 11.

LO 16.4Use the following excerpts from Tungsten Company’s financial information to prepare a statement of cash flows (indirect method) for the year 2018.

Beginning cash $18,444. Net Income 36,500. Depreciation expense 11,000. Accounts receivable change (8,300). Inventory change 4,900. Prepaid assets change 3,400. Investments change (no asset sales) 10,000. Accounts payable change 450. Note payable principal balance change (no new loans) (9,400). Common stock balance change (due to stock issuance) 20,000.
PA 12.

LO 16.5The following shows excerpts from financial information relating to Aspen Company and Bergamot Company.

Aspen Company Net Cash Flows from Operating Activities $320,000. Total Assets 450,400. Net Income 300,000. Sales Revenue 463,500. Capital Expenditures 120,750. Dividend Payments 25,000. Bergamot Company Net Cash Flows from operating activities $486,900. Total Assets 625,000. Net Income 550,200. Sales Revenue 875,000. Capital Expenditures 250,000. Dividend Payments 65,700.

Compute the following for both companies. Compare your results.

  1. free cash flow
  2. cash flows to sales ratio
  3. cash flows to assets ratio
PA 13.

LO 16.6Use the following excerpts from Fromera Company’s financial information to prepare the operating section of the statement of cash flows (direct method) for the year 2018.

2018 Income Statement items: Sales $299,000. Cost of goods sold (135,000). Operating expenses, other than depreciation expense (27,000). Depreciation expense (17,000). Gain on sale of plant assets 16,500. Net income 136,500. Balance Sheet items: December 31, 2018: Accounts receivable (associated with sales) $45,300. Inventory (associated with inventory) 1,600. Accounts payable (associated with inventory) 22,500. Accrued liabilities (associated with other expenses) 900. December 31, 2017: Accounts receivable (associated with sales) $43,400. Inventory (associated with inventory) 1,800. Accounts payable (associated with inventory) 21,250. Accrued liabilities (associated with other expenses) 1,150.
PA 14.

LO 16.6Use the following excerpts from Victrolia Company’s financial information to prepare a statement of cash flows (direct method) for the year 2018.

2018 Income Statement items: Sales $455,000. Cost of goods sold (221,500). Operating expenses, other than depreciation expense (58,600). Depreciation expense (24,000). Gain on sale of plant assets 23,500. Net income 174,400. Balance Sheet items: December 31, 2018: Cash $321,450. Accounts receivable 39,750. Inventory 33,000. Accounts payable 17,550. Accrued liabilities 3,500. December 31, 2017: Cash $133,500. Accounts receivable 36,500. Inventory 35,000. Accounts payable 19,550. Accrued liabilities 2,200. Additional information: Plant assets were sold for $40,000; book value $16,500. Dividends of $25,000 were declared and paid.
PA 15.

LO 16.6Use the following cash transactions relating to Lucknow Company to determine the cash flows from operating, using the direct method.

Beginning cash balance $122,000. Collected from customers 33,000. Paid dividends to stockholders 3,000. Paid for interest on notes payable 4,750. Collected dividends from stock owned 3,500. Collected cash from sale of land 20,000. Paid principal payments on notes payable 12,000. Collected cash from issuance of stock 40,000. Paid suppliers for merchandise 29,400. Ending cash balance 169,350.
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