Financial Accounting for Managers

1 Introduction to Financial Statements 1-1
Knowing the Numbers: Columbia Sportswear Company 1-1

1.1 Business Organization and Accounting Information Uses 1-2

Forms of Business Organization 1-3

Users and Uses of Financial Information 1-4

Data Analytics 1-6

Ethics in Financial Reporting 1-7

1.2 The Three Types of Business Activity 1-8

Financing Activities 1-9

Investing Activities 1-9

Operating Activities 1-10

1.3 The Four Financial Statements 1-11

Income Statement 1-12

Retained Earnings Statement 1-13

Balance Sheet 1-14

Statement of Cash Flows 1-16

ESG Reporting: Beyond the Four Financial Statements 1-17

Interrelationships of Statements 1-17

Elements of an Annual Report 1-20

Appendix 1A: Career Opportunities in Accounting 1-23

“Show Me the Money” 1-24

2 A Further Look at the Balance Sheet 2-1
Just Fooling Around?: The Motley Fool 2-2

2.1 The Classified Balance Sheet 2-2

Current Assets 2-4

Long-Term Investments 2-5

Property, Plant, and Equipment 2-5

Intangible Assets 2-5

Current Liabilities 2-7

Long-Term Liabilities 2-7

Stockholders’ Equity 2-7

2.2 Analyzing the Balance Sheet Using Ratios 2-8

Ratio Analysis 2-8

Using a Classified Balance Sheet 2-9

3 The Accounting Information System 3-1
Accidents Happen: MF Global Holdings Ltd 3-1

3.1 Financial Reporting Concepts 3-2

The Standard-Setting Environment 3-2

Qualities of Useful Information 3-4

Assumptions in Financial Reporting 3-5

Principles in Financial Reporting 3-6

Cost Constraint 3-6

3.2 Using the Accounting Equation to Analyze Transactions 3-8

Accounting Transactions 3-8

Analyzing Transactions 3-9

Summary of Transactions 3-16

Preparing Financial Statements 3-16

4 Accrual Accounting Concepts 4-1
Keeping Track of Groupons: Groupon 4-1

4.1 Accrual-Basis Accounting and Adjustments 4-2

The Revenue Recognition Principle 4-3

The Expense Recognition Principle 4-3

Accrual versus Cash Basis of Accounting 4-5

The Need for Adjustments 4-6

Types of Adjustments 4-6

4.2 Adjustments for Deferrals 4-8

Prepaid Expenses 4-8

Unearned Revenues 4-12

4.3 Adjustments for Accruals 4-15

Accrued Revenues 4-15

Accrued Expenses 4-16

Summary of Basic Relationships 4-19

4.4 Preparing Financial Statements 4-21

Preparing Financial Statements from the Adjusted Tabular Summary 4-21

Quality of Earnings 4-21

5 Fraud, Internal Control, and Cash 5-1
Minding the Money in Madison: Barriques 5-1

5.1 Fraud and Internal Control 5-3

Fraud 5-3

The Sarbanes-Oxley Act 5-3

Internal Control 5-4

Principles of Internal Control Activities 5-5

Data Analytics and Internal Controls 5-10

Limitations of Internal Control 5-11

5.2 Cash Controls 5-12

Cash Receipts Controls 5-12

Cash Disbursements Controls 5-14

Petty Cash Fund 5-16

5.3 Control Features of a Bank Account 5-17

Electronic Banking 5-17

Bank Statements 5-18

Reconciling the Bank Account 5-20

5.4 Reporting Cash 5-26

Cash Equivalents 5-26

Restricted Cash 5-26

Managing and Monitoring Cash 5-27

Cash Budgeting 5-29

Data Analytics in Action 5-51

6 Merchandising Operations and the Multiple-Step Income Statement 6-1
Buy Now, Vote Later: REI 6-1

6.1 Merchandising Operations and Inventory Purchases 6-2

Flow of Costs 6-3

Recording Purchases Under a Perpetual Inventory System 6-4

Freight Costs 6-5

Purchase Returns and Allowances 6-7

Purchase Discounts 6-7

Summary of Purchasing Transactions 6-8

6.2 Recording Sales Under a Perpetual Inventory System 6-9

Recording Sales 6-10

Sales Returns and Allowances 6-10

Sales Discounts 6-11

Data Analytics and Credit Sales 6-11

6.3 Multiple-Step Income Statement 6-13

Format of the Multiple-Step Income Statement 6-13

Components of the Multiple-Step Income Statement 6-13

6.4 Gross Profit Rate and Profit Margin 6-17

Gross Profit Rate 6-17

Profit Margin 6-18

Data Analytics in Action 6-33

7 Reporting and Analyzing Inventory and Receivables 7-1
“Where Is That Spare Bulldozer Blade?”: Caterpillar 7-1

7.1 Classifying and Determining Inventory 7-3

Classifying Inventory 7-3

Determining Inventory Quantities 7-3

7.2 Inventory Methods and Financial Effects 7-6

Specific Identification 7-7

Cost Flow Assumptions 7-7

Financial Statement and Tax Effects of Cost Flow Methods 7-13

7.3 Reporting Receivables 7-15

Types of Receivables 7-16

Recognizing Accounts Receivable 7-16

Valuing Accounts Receivable 7-16

Data Analytics and Receivables Management 7-21

7.4 Inventory Presentation and Analysis 7-23

Presentation 7-23

Analysis 7-23

Data Analytics in Action 7-46

8 Reporting and Analyzing Long-Lived Assets 8-1
A Tale of Two Airlines: American Airlines 8-1

8.1 Plant Asset Expenditures 8-3

Determining the Cost of Plant Assets 8-3

Expenditures During Useful Life 8-6

8.2 Depreciation Methods 8-8

Factors in Computing Depreciation 8-8

Depreciation Methods 8-9

Revising Periodic Depreciation 8-14

Impairments 8-15

8.3 Plant Asset Disposals 8-16

Sale of Plant Assets 8-16

Retirement of Plant Assets 8-18

8.4 Intangible Assets 8-18

Accounting for Intangible Assets 8-19

Types of Intangible Assets 8-20

Research and Development Costs 8-22

8.5 Statement Presentation and Analysis 8-23

Presentation 8-23

Analysis 8-25

Data Analytics in Action 8-45

9 Reporting and Analyzing Liabilities 9-1
And Then There Were Two: Maxwell Car Company 9-1

9.1 Accounting for Current Liabilities 9-3

What Is a Current Liability? 9-3

Notes Payable 9-3

Sales Taxes Payable 9-4

Unearned Revenues 9-5

Current Maturities of Long-Term Debt 9-6

Payroll and Payroll Taxes Payable 9-6

9.2 Characteristics of Bonds 9-9

Types of Bonds 9-9

Issuing Procedures 9-10

Bond Trading 9-10

Determining the Market Price of a Bond 9-11

9.3 Accounting for Bond Transactions 9-14

Issuing Bonds at Face Value 9-14

Discount or Premium on Bonds 9-15

Issuing Bonds at a Discount 9-16

Issuing Bonds at a Premium 9-17

Redeeming Bonds at Maturity 9-19

9.4 Accounting for Long-Term Notes Payable 9-20

9.5 Presentation and Analysis 9-21

Presentation 9-21

Analysis 9-22

10 Reporting and Analyzing Stockholders’ Equity 10-1
Oh Well, I Guess I’ll Get Rich: Meta 10-1

10.1 Corporate Form of Organization 10-3

Characteristics of a Corporation 10-3

Forming a Corporation 10-6

Stockholder Rights 10-7

Stock Issue Considerations 10-8

Corporate Capital 10-10

10.2 Accounting for Common, Preferred, and Treasury Stock 10-11

Accounting for Common Stock 10-11

Accounting for Preferred Stock 10-13

Accounting for Treasury Stock 10-14

10.3 Accounting for Cash Dividends, Stock Dividends, and Stock Splits 10-16

Cash Dividends 10-17

Dividend Preferences 10-18

Stock Dividends 10-20

Stock Splits 10-21

10.4 Presentation and Analysis of Stockholders’ Equity 10-24

Balance Sheet Presentation of Stockholders’ Equity 10-24

Analysis of Stockholders’ Equity 10-24

Debt versus Equity Decision 10-27

Data Analytics in Action 10-47

11 Statement of Cash Flows 11-1
Got Cash?: Microsoft 11-1

11.1 Usefulness and Format of the Statement of Cash Flows 11-3

Usefulness of the Statement of Cash Flows 11-3

Classification of Cash Flows 11-3

Significant Noncash Activities 11-4

Format of the Statement of Cash Flows 11-5

11.2 Preparing the Statement of Cash Flows—Indirect Method 11-6

Indirect and Direct Methods 11-7

Indirect Method—Computer Services Company 11-7

Step 1: Operating Activities 11-9

Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method 11-13

Step 2: Investing and Financing Activities 11-14

Step 3: Net Change in Cash 11-16

11.3 Analyzing the Statement of Cash Flows 11-18

The Corporate Life Cycle 11-18

Free Cash Flow 11-20

Data Analytics in Action 11-42

12 Financial Analysis: The Big Picture 12-1
It Pays to Be Patient: Warren Buffett 12-2

12.1 Sustainable Income and Quality of Earnings 12-3

Sustainable Income 12-3

Quality of Earnings 12-7

12.2 Horizontal Analysis and Vertical Analysis 12-9

Horizontal Analysis 12-10

Vertical Analysis 12-12

12.3 Ratio Analysis 12-15

Liquidity Ratios 12-16

Solvency Ratios 12-17

Profitability Ratios 12-17

Financial Analysis and Data Analytics 12-18

Comprehensive Example of Ratio Analysis 12-18

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

Appendix B Specimen Financial Statements: Columbia Sportswear Company B- 1

Appendix C Specimen Financial Statements: Under Armour, Inc. C- 1

Appendix D Double-Entry Accounting System D- 1

D.1 Accounts, Debits, and Credits D- 2

Debits and Credits D- 2

Debit and Credit Procedures D- 3

Summary of Debit/Credit Rules D- 5

D.2 Using a Journal and Ledger D- 6

The Recording Process D- 6

The Journal D- 6

The Ledger D- 7

Chart of Accounts D- 7

Posting D- 7

The Recording Process Illustrated D- 7

D.3 The Trial Balance D- 10

D.4 Adjusting Entries D- 11

The Need for Adjusting Entries D- 11

The Adjusting Process Illustrated D- 12

Preparing Financial Statements D- 13

Appendix E Time Value of Money E- 1

E.1 Interest and Future Values E- 2

Nature of Interest E- 2

Future Value of a Single Amount E- 3

Future Value of an Annuity E- 5

E.2 Present Values E- 8

Present Value Variables E- 8

Present Value of a Single Amount E- 9

Present Value of an Annuity E- 11

Time Periods and Discounting E- 13

Present Value of a Long-Term Note or Bond E- 13

E.3 Capital Budgeting Situations E- 16

E.4 Using Technological Tools E- 18

Present Value of a Single Sum E- 19

Present Value of an Annuity E- 20

Future Value of a Single Sum E- 21

Future Value of an Annuity E- 22

Internal Rate of Return E- 22

Useful Applications E- 23

Appendix F Reporting and Analyzing Investments F- 1

F.1 Accounting for Debt Investments F- 2

Why Corporations Invest F- 2

Accounting for Debt Investments F- 2

F.2 Accounting for Stock Investments F- 4

Holdings of Less Than 20% F- 5

Holdings Between 20% and 50% F- 6

Holdings of More Than 50% F- 7

F.3 Reporting Investments in Financial Statements F- 9

Debt Securities F- 9

Equity Securities F- 13

Balance Sheet Presentation F- 14

Presentation of Realized and Unrealized Gain or Loss F- 15

Company Index / Subject Index I- 1

Rapid Review