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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
PB 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. reacquired $30,000 treasury stock
  2. purchased inventory for $20,000
  3. issued common stock of $40,000 at par
  4. purchased land for $25,000
  5. collected $22,000 from customers for accounts receivable
  6. paid $33,000 principal payment toward note payable to bank
PB 2.

LO 16.3Use the following information from Grenada 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 $286,000. Cost of Goods Sold (159,000). Operating Expenses, other than depreciation expense (77,500). Depreciation Expense (9,500). Gain on Sale of Investments 14,200. Net Income 54,200. Balance Sheet items: December 31, 2018: Accounts Receivable 16,500. Accounts Payable 7,400. December 31, 2017: Accounts Receivable 18,250. Accounts Payable 8,800.
PB 3.

LO 16.3Use the following information from Honolulu 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: $275,000, 143,000, 8,500, 426,500, 120,000, 285,000, 21,500, 426,500. Additional information: Net Income, Dividends paid, respectively: 20,500, 12,000. Cash, Accounts Receivable, Prepaid Assets, Total Assets, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $254,000, 132,000, 9,000, 395,000, 112,000, 270,000, 13,000, 395,000.
PB 4.

LO 16.3Use the following information from Isthmus 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, Accounts Payable, Salaries Payable December 31, 2018, respectively: $295,000, 45,300, 92,200, 23,000, 1,700. Additional information: Net Income, Depreciation Expense: 45,200, 33,300. Cash, Accounts Receivable, Inventory, Accounts Payable, Salaries Payable December 31, 2017, respectively: $259,000, 48,700, 91,000, 26,300, 1,500.
PB 5.

LO 16.3Use the following information from Juniper 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 4,000, Inventory (5,500), Prepaid Insurance 4,000, Accounts Payable 3,000, Sales Tax Payable (200). From the 2018 Income Statement: Loss from sale of land 4,200, Depreciation Expense 17,250, Net Income 22,222.
PB 6.

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

Income Statement items: Sales $777,000. Cost of Goods Sold (555,000). Operating Expenses, other than depreciation expense (22,000). Depreciation Expense (44,000). Loss on Sale of Plant Assets (11,000). Net Income 145,000. Balance Sheet items: December 31, 2018: Accounts Receivable 63,300. Inventory 2,400. Accounts Payable 35,000. Accrued Liabilities 2,100. December 31, 2017: Accounts Receivable 63,000. Inventory 2,800. Accounts Payable 37,400. Accrued Liabilities 2,650.
PB 7.

LO 16.3Analysis of Longmind Company’s accounts revealed the following activity for Equipment, 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.

Equipment items: Account balance, beginning of year $88,000; Purchase of equipment this year, for cash 29,500; Purchase of equipment this year, with note payable 34,750; Account balance, end of year 152,250.
Equipment
Account balance, beginning of year $ 88,000
  •  Purchase of equipment this year, for cash 29,500
  •  Purchase of equipment this year, with note payable 34,750
Account balance, end of year 152,250
PB 8.

LO 16.4Use the following excerpts from Stern 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, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $121,000, 37,200, 120,000, 304,000, (85,000), 497,200, 23,200, 179,500, 30,000, 264,500, 497,200. 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, respectively: 3,400, 21,000, 50,000, 50,000, 14,500. Cash, Account Receivable, Merchandise Inventory, Land, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Notes Payable, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $101,000, 35,3000, 128,700, 254,000, (64,000), 455,000, 19,900, 144,000, 30,000, 261,100, 455,000.
PB 9.

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

2018 Income Statement items: Sales $777,000. Cost of goods sold (555,000). Operating expenses, other than depreciation expense (22,000). Depreciation expense (44,000). Loss on sale of plant assets (11,000). Net income 145,000. Balance Sheet items: December 31, 2018: Cash 429,850. Accounts receivable 63,300. Inventory 2,400. Accounts payable 35,000. Accrued liabilities 2,100. December 31, 2017: Cash 228,700. Accounts receivable 63,000. Inventory 2,800. Accounts payable 37,400. Accrued liabilities 2,650. Additional information: Plant assets were sold for $22,000; book value $33,000. Dividends of $18,000 were declared and paid.
PB 10.

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

Cash, Account Receivable, Merchandise Inventory, Investments, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2018, respectively: $100,000, 19,000, 29,000, 132,000, 90,000, (37,000), 333,000, 12,100, 2,400, 81,000, 237,500, 333,000. Additional information: Net Income (loss) for 2018, Depreciation Expense for 2018, Investments purchased, Common Stock issued for cash, at par value for cash, Dividends declared and paid, respectively: (5,700), 14,000, 12,000, 18,000, 8,000. Cash, Account Receivable, Merchandise Inventory, Investments, Plant Assets, Accumulated Depreciation, Total Assets, Accounts Payable, Accrued Liabilities, Common Stock, Retained Earnings, Total Liabilities and Equity December 31, 2017, respectively: $93,000, 18,000, 31,500, 120,000, 90,000, (23,000), 329,500, 13,400, 1,900, 63,000, 251,200, 329,500.
PB 11.

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

Beginning cash $120,000. Net Income 87,500. Depreciation expense 22,000. Accounts Receivable change 8,900. Inventory change (6,500). Prepaid assets change 2,400. Investments change (no asset sales) 30,000. Accounts payable change (800). Note payable principal balance change (no new loans) (21,000). Common stock balance change (due to stock issuance) 36,000.
PB 12.

LO 16.5The following shows excerpts from financial information relating to Stanwell Company and Thodes Company.

Stanwell Company Net Cash Flows from Operating Activities $138,000. Total Assets 272,000. Net Income 35,000. Sales Revenue 385,000. Capital Expenditures 28,000. Dividend Payments 17,000. Thodes Company Net Cash Flows from Operating Activities $115,000. Total Assets 350,000. Net Income 32,000. Sales Revenue 250,000. Capital Expenditures 60,000. Dividend Payments 13,000.

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
PB 13.

LO 16.6Use the following excerpts from Swansea 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 $777,000. Cost of goods sold (555,000). Operating expenses, other than depreciation expense (22,000). Depreciation expense (44,000). Loss on sale of plant assets (11,000). Net income 145,000. Balance Sheet items: December 31, 2018: Accounts receivable (associated with sales) 63,300. Inventory (associated with inventory) 2,400. Accounts payable (associated with inventory) 35,000. Accrued liabilities (associated with other expenses) 2,100. December 31, 2017: Accounts receivable (associated with sales) $63,000. Inventory (associated with inventory) 2,800. Accounts payable (associated with inventory) 37,400. Accrued liabilities (associated with other expenses) 2,650.
PB 14.

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

2018 Income Statement items: Sales $777,000. Cost of goods sold (555,000). Operating expenses, other than depreciation expense (22,000). Depreciation expense (44,000). Loss on sale of plant assets (11,000). Net income 145,000. Balance Sheet items: December 31, 2018: Cash $429,850. Accounts receivable 63,300. Inventory 2,400. Accounts payable 35,000. Accrued liabilities 2,100. December 31, 2017: Cash $228,700. Accounts receivable 63,000. Inventory 2,800. Accounts payable 37,400. Accrued liabilities 2,650.
PB 15.

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

Beginning cash balance $45,000. Collected from customers 24,500. Paid dividends to stockholders 5,000. Paid for interest on notes payable 3,200. Collected dividends from stock owned 1,800. Collected cash from sale of land 15,000. Pain principal payments on notes payable 18,800. Collected cash from issuance of stock 25,000. Paid suppliers for merchandise 31,000. Ending cash balance 53,300.
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