1 Accounting in Action 1-1

Accounting Keeps Aritzia Fashionably in the Black 1-1

Why Is Accounting Important? 1-3

Using Accounting Information 1-5

Objective of Financial Reporting 1-6

Forms of Business Organization 1-7

Proprietorship 1-8

Partnership 1-8

Corporation 1-8

Generally Accepted Accounting Principles 1-9

Ethics in Financial Reporting 1-9

Conceptual Framework 1-11

Accounting Standards 1-14

The Accounting Model 1-16

Financial Statements 1-16

The Expanded Accounting Equation 1-20

Transaction Analysis 1-21

Preparing Financial Statements 1-28

Income Statement 1-28

Statement of Owner’s Equity 1-30

Balance Sheet 1-30

Cash Flow Statement 1-30

Understanding the Information in the Financial Statements 1-30

2 The Recording Process 2-1

Slaying the Dragons to Brew Up Sales 2-2

The Account 2-3

Debits and Credits 2-4

Double-Entry Accounting 2-7

Analyzing and Recording Transactions 2-8

The Accounting Cycle and Steps in the Recording Process 2-8

The Journal 2-10

The Ledger 2-12

Posting 2-13

The Recording Process Illustrated 2-15

Summary Illustration of Journalizing and Posting 2-19

The Trial Balance 2-21

Limitations of a Trial Balance 2-23

Locating Errors 2-23

Some Process Explanations 2-24

3 Adjusting the Accounts 3-1

Advance Sports Revenue Is Just the Ticket 3-2

Timing Issues 3-3

Accrual Versus Cash Basis Accounting 3-4

Revenue and Expense Recognition 3-5

Adjusting Entries and Prepayments 3-7

The Basics of Adjusting Entries 3-7

Adjusting Entries for Prepayments 3-8

Adjusting Entries for Accruals 3-15

The Adjusted Trial Balance and Financial

Statements 3-22

Preparing the Adjusted Trial Balance 3-23

Preparing Financial Statements 3-23

4 Completion of the Accounting Cycle 4-1

Getting a Good “Handle” on Accounting Information 4-2

Closing the Books 4-3

Preparing Closing Entries 4-4

Posting Closing Entries 4-8

Preparing a Post-Closing Trial Balance 4-9

Summary of the Accounting Cycle 4-11

Steps in the Accounting Cycle 4-11

Correcting Entries—An Avoidable Step 4-13

Classified Balance Sheet 4-15

Standard Balance Sheet Classifications 4-15

Alternative Balance Sheet Presentation 4-20

Using the Information in the Financial Statements 4-22

Working Capital 4-22

Current Ratio 4-22

Acid-Test Ratio 4-23

Appendix 4A: Work Sheets 4-24

Steps in Preparing a Work Sheet 4-24

Preparing Financial Statements from a Work Sheet 4-27

Appendix 4B: Reversing Entries 4-28

Accounting with and Without Reversing Entries 4-28

5 Accounting for Merchandising Operations 5-1

A “Frank” Look at Tracking Inventory 5-1

Merchandising Operations 5-3

Inventory Systems 5-5

Recording Purchases of Merchandise 5-7

Subsidiary Inventory Records 5-8

Freight Costs 5-8

Purchase Returns and Allowances 5-9

Discounts 5-10

Summary of Purchase Transactions 5-11

Recording Sales of Merchandise—Earnings Approach 5-12

Revenue Recognition 5-12

Freight Costs 5-15

Sales Returns and Allowances 5-15

Discounts 5-16

Summary of Sales Transactions 5-17

Sales Taxes 5-17

Completing the Accounting Cycle 5-18

Adjusting Entries 5-18

Closing Entries 5-19

Post-Closing Trial Balance 5-20

Summary of Merchandising Entries in a Perpetual Inventory System 5-20

Merchandising Financial Statements 5-22

Single-Step Income Statement 5-22

Multiple-Step Income Statement 5-23

Classified Balance Sheet 5-26

Using the Information in the Financial

Statements 5-27

Gross Profit Margin 5-27

Profit Margin 5-27

Appendix 5A: Periodic Inventory System 5-28

Recording Purchases of Merchandise 5-29

Recording Sales of Merchandise 5-30

Comparison of Entries—Perpetual versus Periodic 5-31

Calculating Cost of Goods Sold 5-31

Multiple-Step Income Statement 5-33

Completing the Accounting Cycle 5-34

Appendix 5B: Recording Sales of Merchandise— Contract-Based Approach 5-36

Recording Sales with Sales Returns 5-36

Recording Sales with Sales Discounts 5-39

Freight Costs 5-40

Summary of Sales Transactions 5-40

Sales Taxes 5-41

Adjusting Entries 5-41

Financial Statements 5-41

Completing the Accounting Cycle 5-41

6 Inventory Costing 6-1

A Fresh Approach to Costing Inventory 6-2

Determining Inventory Quantities 6-3

Taking a Physical Inventory 6-4

Determining Ownership of Goods 6-4

Inventory Cost Determination Methods 6-7

Specific Identification 6-7

Cost Formulas: FIFO and Weighted Average 6-8

Financial Statement Effects 6-15

Choice of Cost Determination Method 6-16

Inventory Errors 6-18

Presentation and Analysis of Inventory 6-22

Valuing Inventory at the Lower of Cost and Net Realizable Value 6-22

Reporting and Analyzing Inventory 6-25

Presenting Inventory in the Financial Statements 6-25

Appendix 6A: Inventory Cost Formulas in Periodic Systems 6-27

Periodic System—First-In, First-Out (FIFO) 6-28

Periodic System—Weighted Average 6-29

Appendix 6B: Estimating Inventories 6-31

Gross Profit Method 6-31

Retail Inventory Method 6-32

7 Internal Control and Cash 7-1

Keeping a Tight Lid on Cash 7-1

Cash and Internal Control 7-3

What Is Cash? 7-3

Internal Control 7-4

Control Activities 7-4

Limitations of Internal Control 7-8

Cash Controls 7-9

Internal Control over Cash Receipts 7-10

Internal Control over Cash Payments 7-13

Petty Cash Fund 7-14

Establishing the Fund 7-14

Making Payments from the Fund 7-15

Replenishing the Fund 7-15

Bank Accounts 7-17

Use of a Bank Account 7-17

Reconciling the Bank Account 7-20

Reporting Cash 7-26

8 Accounting for Receivables 8-1

Last Call for Customer Payments 8-1

Accounts Receivable 8-2

Types of Receivables 8-3

Recognizing Accounts Receivable 8-3

Valuing Accounts Receivable 8-6

Notes Receivable 8-15

Recognizing Notes Receivable 8-16

Disposing of Notes Receivable 8-17

Statement Presentation and Management of Receivables 8-19

Presentation 8-19

Analysis 8-21

Accelerating Cash Receipts from Receivables 8-23

9 Long-Lived Assets 9-1

Capitalizing on Education 9-2

Property, Plant, and Equipment 9-3

Determining the Cost of Property, Plant, and Equipment 9-3

Depreciation 9-7

Factors in Calculating Depreciation 9-8

Depreciation Methods 9-9

Comparison of Depreciation Methods 9-13

Partial Period Depreciation 9-13

Depreciation and Income Tax 9-15

Revising Periodic Depreciation 9-16

Capital Expenditures During Useful Life 9-17

Impairments 9-17

Cost Model Versus Revaluation Model 9-18

Changes in Depreciation Method, Estimated Useful Life, or Residual Value 9-19

Revised Depreciation Calculations 9-19

Disposal of Property, Plant, and Equipment 9-21

Steps in Recording Disposals of Property, Plant, and Equipment 9-21

Retirement of Property, Plant, and Equipment 9-22

Sale of Property, Plant, and Equipment 9-24

Exchanges of Property, Plant, and Equipment 9-25

Natural Resources 9-28

Cost 9-29

Depletion 9-29

Disposal 9-30

Intangible Assets and Goodwill 9-31

Accounting for Intangible Assets 9-31

Intangible Assets with Finite Lives 9-32

Intangible Assets with Indefinite Lives 9-33

Goodwill 9-34

Statement Presentation and Analysis 9-35

Presentation 9-35

Analysis 9-36

10 Current Liabilities and Payroll 10-1

Butterflies Bring About Better Banknotes 10-2

Determinable (Certain) Current Liabilities 10-3

Accounts Payable 10-3

Unearned Revenues 10-4

Operating Line of Credit and Bank Overdraft 10-5

Short-Term Notes Payable 10-5

Sales Taxes 10-6

Property Taxes 10-7

Current Maturities of Long-Term Debt 10-8

Uncertain Liabilities 10-9

Provisions 10-9

Contingencies 10-13

Payroll 10-15

Employee Payroll Costs 10-16

Employer Payroll Costs 10-18

Recording the Payroll 10-19

Financial Statement Presentation 10-23

Appendix 10A: Payroll Deductions 10-24

Mandatory Payroll Deductions 10-24

Using Payroll Deduction Tables 10-26

Appendix A Specimen Financial Statements: Aritzia Inc. A-1

Appendix B Sales Taxes B-1

Appendix C Subsidiary Ledgers and Special Journals C-1

Company Index / Subject Index I-1

• Current Topics: Accounting changes frequently and with each revision Accounting Principles updates its content. Accounting standard updates are included in the course and align with students’ next course in accounting, Intermediate Accounting. Both Accounting Principles and Intermediate Accounting follow the same pedagogy. In fact, many of the same authors work on both courses and all authors collaborate to provide accounting students with a firm foundation in accounting and the tools to succeed in the field of accounting.
• Additional Problem Material: In order to get accounting, you have to do accounting. With each course update, we continue to increase the number of problems per chapter so instructors never have to worry about running out of materials to assign.

• Opportunities for Practice: A complete range of materials guide students through the basic levels of understanding—starting with questions, followed by brief exercises, exercises, problems and then integrative cases to broaden their perspectives. Questions can also be filtered by CPA competencies.
• Accounting Weekly Updates: Stay updated and informed on the very latest in accounting news stories. Each week, instructors receive links to 3-5 new articles, video clips, business news stories, and so much more with discussion questions to elaborate on the stories during class.
• Bloom’s Taxonomy: Questions, exercises and problems at the end of each chapter have been classified by the knowledge level required in answering each one.
• Excel Template and Tutorial:  Accompanying the continuing Santé Smoothie chronicle are the spreadsheets needed.