Part 1: An Overview of Financial Accounting 1

1 Financial Accounting and Its Economic Context 2

Financial Reporting and Investment Decisions 3

The Demand for Financial Information: A User''s Orientation 5

The Economic Environment in Which Financial Reports Are Prepared and Used 16

Corporate Governance 18

International Perspective: Financial Statement Users Need to Be Bilingual 25

Appendix 1A Three Other Kinds of Accounting 27

Review of Learning Objectives 27

Key Terms 29

Online Research Exercise 29

Issues for Discussion 30

2 A Closer Look at the Financial Statements 32

A Story That Builds a Set of Financial Statements 33

Gone Fishin''s Financial Statements 39

The Classified Balance Sheet 41

The Income Statement 46

The Statement of Cash Flows 49

The Statement of Shareholders'' Equity 50

Financial Statements As a Package and Five Fundamental Performance Metrics 52

Using the Financial Statement Package to Compute Five Fundamental Metrics of Performance 54

Appendix 2A Organizational Form and the Equity Section 57

Review Problem 58

Review of Learning Objectives 62

Key Terms 63

Online Research Exercise 64

Brief Exercises 64

Exercises 65

Problems 68

Issues for Discussion 73

Part 2: Measurement, Mechanics, and Use of Financial Statements 77

3 The Measurement Fundamentals of Financial Accounting 78

Assumptions of Financial Accounting 79

Valuations on the Balance Sheet 83

The Principles of Financial Accounting Measurement 87

Two Exceptions to the Basic Principles: Materiality and Conservatism 93

International Perspective: Fundamental Differences between U.S. GAAP and IFRS 95

Review of Learning Objectives 96

Key Terms 98

Online Research Exercise 98

Brief Exercises 98

Exercises 99

Problems 101

Issues for Discussion 107

4 The Mechanics of Financial Accounting 111

Economic Events 112

The Fundamental Accounting Equation 113

Business Transactions, the Accounting Equation, and the Financial Statements 114

The Journal Entry 119

The Double Entry System 120

The Journal Entry Box 120

Journal Entries and the Accounting Equation: Examples 121

T-Accounts 121

Recognizing Gains and Losses 127

Periodic Adjustments 128

Reporting Difficulties Faced by Multinational Companies 139

Appendix 4A T-Account Analysis and Preparing the Statement of Cash Flows 140

Operating Items 141

Non Operating Items 144

Review Problem 147

Review of Learning Objectives 151

Key Terms 152

Online Research Exercise 153

Brief Exercises 153

Exercises 154

Problems 161

Issues for Discussion 170

5 Using Financial Statement Information 174

Control and Prediction 175

Four Elements of Successful Companies 176

Analyzing the Financial Statements 180

Additional Areas of Financial Statement Analysis 190

Assessing the Business Environment 190

Reading and Studying the Financial Statements and Footnotes 190

Assessing Earnings Quality 193

Annual Report Information, Company Value, and Projected Financial Statements 195

International Perspective: Financial Statement Analysis in an International Setting 196

Appendix 5A Shareholder Value, ROE, and Cash Flow Analyses 199

Determinants of Value Creation: Analyzing Return on Equity 200

Shareholder Value Creation and the ROE Model: Macy''s vs. Kohl''s 203

Cash Flow Analysis 205

Cash Flow Profiles 207

Review Problem 208

Review of Learning Objectives 211

Key Terms 212

Online Research Exercise 213

Brief Exercises 213

Exercises 214

Problems 221

Issues for Discussion 231

Part 3: Assets: A Closer Look 239

6 The Current Asset Classification, Cash, and Accounts Receivable 240

The Current Asset Classification 241

Cash 246

Accounts Receivable 249

Two Fundamental Issues Related to Receivables 259

International Perspective: Receivables, Foreign Currencies, and Hedging 264

ROE Exercise: Management of Working Capital and Receivables and Return on Equity 265

Review Problem 266

Review of Learning Objectives 267

Key Terms 268

Online Research Exercise 269

Brief Exercises 269

Exercises 270

Problems 272

Issues for Discussion 278

7 Merchandise Inventory 283

The Relative Size of Inventories 284

Accounting for Inventory: Four Important Issues 285

Inventory Valuation and Net Income: An Example of Counterbalancing 285

Acquiring Inventory: What Costs to Capitalize? 287

Carrying Inventory: Perpetual Method vs. Periodic Method 291

Selling Inventory: Which Cost Flow Assumption? 293

Ending Inventory: Applying the Lower-of-Cost-or-Market Rule 302

The Lower-of-Cost-or-Market Rule and Hidden Reserves 303

International Perspective: Japanese Business and Inventory Accounting 304

ROE Exercise: Management of Inventory and Return on Equity 305

Inventory Turnover 305 ROE Analysis 305

Review Problem 306

Review of Learning Objectives 309

Key Terms 310

Online Research Exercise 311

Brief Exercises 311

Exercises 311

Problems 315

Issues for Discussion 320

8 Investments in Equity Securities 324

Equity Securities Classified as Current 325

Passive Investments in Equity Securities 327

Long-Term Equity Investments 330

Appendix 8A Consolidated Financial Statements 343

ROE Exercise: Managing Investments in Equity Securities and Return on Equity 343

Review Problem I 349

Review Problem II 350

Review of Learning Objectives 351

Key Terms 352

Online Research Exercise 353

Brief Exercises 353

Exercises 354

Problems 359

Issues for Discussion 366

9 Long-Lived Assets 370

The Relative Size of Long-Lived Assets 371

Long-Lived Asset Accounting: General Issues and Financial Statement Effects 372

An Overview of Long-Lived Asset Accounting 375

Acquisition: What Costs to Capitalize? 376

Postacquisition Expenditures: Betterments or Maintenance? 378

Cost Allocation: Amortizing Capitalized Costs 380

Disposal: Retirements, Impairments, Sales, and Trade-Ins 390

Intangible Assets 393

Copyrights, Patents, and Trademarks 394

The Costs of Developing Computer Software 394

Goodwill 395

Organizational Costs 395

Research and Development Costs 395

IFRS vs. U.S. GAAP: Revaluations to Fair Market Value 397

ROE Exercise: Managing Long-Lived Assets and Return on Equity 399

Review Problem 399

Review of Learning Objectives 400

Key Terms 401

Online Research Exercise 402

Brief Exercises 402

Exercises 403

Problems 408

Issues for Discussion 412

Part 4: Liabilities and Shareholders'' Equity: A Closer Look 415

10 Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies 416

What Is a Liability? 417

The Relative Size of Liabilities on the Balance Sheet 417

Reporting Liabilities on the Balance Sheet: Economic Consequences 418

Current Liabilities 421

Determinable Current Liabilities 423

Contingencies and Contingent Liabilities 430

Provisions vs. Contingent Liabilities: The "Devil Is in the Details" 434

ROE Exercise: Managing Current Liabilities 436

Appendix 10A Retirement Costs: Pensions and Postretirement Healthcare and Insurance 436

Pensions 436

Defined Contribution Plan 436

Defined Benefit Plan 437

Postretirement Healthcare and Insurance Costs 439

Appendix 10B Deferred Income Taxes 441

The Concept of Deferred Income Taxes 441

Accounting Entries for Deferred Income Taxes 442

Deferred Income Taxes: Additional Issues 443

The Conservatism Ratio 444

Review Problem 446

Review of Learning Objectives 448

Key Terms 449

Online Research Exercise 449

Brief Exercises 450

Exercises 450

Problems 454

Issues for Discussion 458

11 Long-Term Liabilities: Notes, Bonds, and Leases 463

The Relative Size of Long-Term Liabilities 464

The Economic Consequences of Reporting Long-Term Liabilities 465

Basic Definitions and Different Contractual Forms 466

Effective Interest Rate 468

Accounting for Long-Term Obligations: The Effective Interest Method 470

Accounting for Long-Term Notes Payable 470

Bonds Payable 472

Financial Instruments, Fair Market Values, and Off-Balance-Sheet Risks 481

Leases 483

International Perspective: The Importance of Debt Financing in Other Countries 487

ROE Exercise: Managing Long-Term Debt 489

Appendix 11A Determination of Bond Prices 489

Appendix 11B Investing in Bonds 491

Review of Learning Objectives 495

Key Terms 496

Online Research Exercise 497

Brief Exercises 497

Exercises 498

Problems 504

Issues for Discussion 510

12 Shareholders'' Equity 515

The Relative Importance of Liabilities, Contributed Capital, and Earned Capital 516

Debt and Equity Distinguished 517

Accounting for Shareholders'' Equity 521

Accounting for Common and Preferred Stock Issuances 527

The Statement of Sharehol