Financial Accounting for Decision Makers, 3e

by DeFond

| ISBN: 978-1-61853-443-9 | Copyright 2023

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Road Map
LO Learning Objective Page eLecture Guided Example Assignments
LO1

Explain how inventories differ between merchandisers, manufacturers, and wholesalers.

216

SE1, E2

LO2

Describe inventory costing under specific identification, weighted-average cost, FIFO, and LIFO.

221

SE4, SE8, SE9, SE11, E3, E5, E8, E9, P2, P4, P5

LO3

Analyze the effects of different inventory costing methods on company profit.

225

SE12, E13, P4, P6

LO4

Apply the lower of cost or net realizable value rule.

230

SE3, SE6, E7, E12

LO5

Define the gross profit percentage and explain its use.

231

SE2, E1, P1 

LO6

Define inventory turnover and days’ sales in inventory and explain their use.

233

SE7, E10, E12, P7 

LO7

Appendix 7A: Describe inventory costing under a perpetual inventory system.

235

SE10, E4, E6, P3 

LO8

Appendix 7B: Define the LIFO reserve and explain its use.

239

SE5, E11, P8 



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Data Analytics & Excel Skill Development for Career Readiness

The basics of accounting havent changed much in hundreds of years, but businesses have experienced significant change in the last decade due to the increased use of new technologies ranging from data analytics and Blockchain to machine learning and artificial intelligence. Technology is rapidly altering how accounting is performed and what can be done with the data once they are collected. In response to the changing demands of the business world, the AACSB has incorporated data analytics requirements within its educational framework. More recently, the AICPA and NASBA have underscored the importance of data analytics by making it a significant element in the CPA Evolution Model Curriculum. The consensus suggests that todays business students need an understanding and working knowledge of data analytics and data visualization to compete for the best jobs.

In addition to data analytics skills, employers expect prospective employees to be proficient with Excel. In recognition of the increasing importance of data analytics and the need for Excel proficiency, the Third Edition includes several new features to enhance students’ career readiness.

  • We include Data Analytics boxes throughout the text to expose students to techniques that are used by businesses in areas related to the topic being discussed. The following box appears in the chapter on inventory.


  • Each chapter includes assignments that require students to use Excel and Tableau to hone data analysis and data visualization skills.


  • Appendix F at the end of the book provides an overview of data analytics, data visualization, and best practices for the effective display of data.


  •  myBusinessCourse (MBC) now contains a series of short videos that demonstrate the basic functions of Excel. These videos can be accessed within MBC as part of your MBC course. 


Welcome to Financial Accounting for Decision Makers 3e by Mark DeFond.

It is difficult to imagine being successful in todays business world without having a solid understanding of how to read and understand financial accounting reports. The overarching objective of this text is to prepare students for careers in business by providing them with a solid foundation in financial accounting and reporting without overloading them with the mechanics and procedures more appropriate for future accountants. This book makes extensive use of real-world companies to help students understand how to use accounting information. To further aid student success in the course, we provide a wealth of resources through our online learning and homework system, myBusinessCourse (MBC). Access to MBC is included for free with the purchase of each new copy of the text and can be purchased separately. (For more information on MBC see page x of the preface.)

Target Audience

Financial Accounting for Decision Makers is an ideal text for use in the first financial accounting course at both the undergraduate and the graduate level. With a strong emphasis on the interpretation of real-world financial statements, the book teaches students how to read, analyze, and interpret financial accounting data to make informed business decisions without using the traditional debit/credit paradigm. The book is filled with examples that use financial reports from actual companies, an approach that students find engaging.

Transaction Analysis Template

The most important difference between this textbook and traditional introductory financial accounting texts is that this textbook does not use debits and credits to teach accounting. While Appendix C, The Language of Accountants: Debits and Credits, describes the system of debits and credits, students are not required to learn this system and it is not discussed in the body of the text. Knowledge of debits and credits is not required because the focus is on teaching students how to understand and analyze the financial statements. This contrasts sharply with traditional introductory textbooks, which focus primarily on teaching students how to prepare financial statements.

In place of debits and credits, the book uses a creative new tool that is designed to teach students how economic transactions translate into the financial reports. This tool is called the Transaction Analysis Template, or TAT for short. The TAT is an abbreviated version of a horizontal worksheet and provides students with a “shorthand” way of understanding and interpreting accounting reports. Once students learn the basic structure of a balance sheet and income statement, the TAT becomes a simple and highly intuitive technique for learning financial accounting.


Dropping the use of debits and credits in an introductory class has many advantages. One is that it frees up time for the instructor to focus on what the financial reports and accounting actually mean. Learning the system of debits and credits is time consuming for even the brightest student, and a significant amount of the instructors time can be spent explaining mechanical rules. Replacing debits and credits with the TAT allows time for deeper class discussions of important accounting concepts. Most students will not go on to become accountants, and for them, learnings the system of debits and credits is of limited value. The TAT is a mechanism that allows these students to get much more out of their introductory financial accounting course. Rather than take up precious course time learning a set of mechanical rules, students are allowed to concentrate on the concepts that underlie the accounting, and what the accounting information means.

The author stopped teaching debits and credits in his introductory accounting classes many years ago. Over the years, he has used versions of the TAT for undergraduate students, graduate students, and executive audiences. As compared with teaching using debits and credits, his experience is that students learn much more, and learn it more quickly, using the TAT. Importantly, they also seem to gain a much greater understanding of the “big picture” concepts that underlie the financial reports.

Real Companies' Financial Statements

feature that really brings accounting alive for students is seeing the accounting practices and reports of companies with which they are familiar. To this end, each chapter incorporates examples using real companies that students know. For example, we discuss accounting issues related to Google, Apple, Microsoft, Amazon, Target, Krispy Kreme, MGM Resorts, and many others.


Real Data and Examples

Each chapter includes an assignment called Beyond the Numbers that requires students to use year-end financial statements of Columbia Sportswear and Under Armour.


Accounting in Practice

Boxed inserts are included throughout the text to help bridge the gap between the classroom and what students encounter in the real world. Accounting In Practice illustrations document situations a reader is likely to encounter and present the choices that companies make in reporting financial results.


Environmental, Social, and Governance (ESG)

Increasingly, companies have found that “doing good” leads to a more successful, profitable enterprise. These boxed inserts help students understand how corporate reporting on ESG is being embraced by forward-thinking enterprises as part of their long-term business models.

    Organizing for Student Success

    To help students succeed in the course, we include many features that provide direction to students and require them to recall and apply the financial accounting techniques and concepts described in each chapter.


    Putting Each Chapter in Context

    Often, students lose sight of the big picture. The Past/Present/Future feature provides students with an overview of where the chapter fits within the whole course.


    Mapping Each Chapter

    Each chapter begins with a Road Map highlighting the chapters learning objectives and corresponding eLecture videos, Guided Example videos, and assignments. The Chapter Organization chart provides an overview that visually depicts the layout of the chapter.



    Review

    Review boxes are integrated throughout each chapter as a means of reinforcing the material just presented. Solutions are provided at the end of the chapter so students can check their work. The reviews are also illustrated through “Guided Example” videos accessible directly from the eBook and via MBC.



    A.K.A. Sidebars

    A.K.A. (Also Known As) notations inform students of commonly used alternative terms that they may encounter.


    Takeaways

    These in-chapter summaries ensure that students grasp key concepts before proceeding to the next topic.


    Ethics

    Today's post-Sarbanes-Oxley world, ethical decision-making has never been more pertinent to business and students studying accounting. We discuss ethics where appropriate in the text, and we have included at least one assignment in each chapter that raises an ethical issue. Assignments involving ethics are identified by the icon in the margin.


    Thinking Globally

    Thinking Globally inserts emphasize the similarities and differences in accounting practices between the United States and other countries.



    New to the Third Edition

    • myBusinessCourse: We have increased the number of assignments and videos in myBusinessCourse (MBC).
    • Chapter 1 has been updated: Due to the increasing interest in data analysis technology, the section on Big Data has been expanded to include discussion and descriptions of Business Intelligence, Data Analytics, and Data Visualization. In order to eliminate redundancies, the Conceptual Framework appendix has been removed from this chapter and much of that discussion is now included in Chapter 4.
    • Chapter 2 has been revised: The horizontal worksheet used to record transactions and adjustments now includes columns that identify the impact of transactions on the income statement. This not only improves students’ understanding of the spreadsheet, it also allows for an easier and more intuitive transition to the Transaction Analysis Template (TAT).
    • Chapter 3 has been revised: The discussion of deferrals and accruals has been reorganized and refined. Students should now find it easier to conceptually link these concepts to the end-of-period adjustments shown in the examples.
    • Chapter 8 has been revised: The straight-line depreciation method is now emphasized as the depreciation method used by most companies, while discussion of the declining balance and units of production methods have been retained along with numerical examples and end of chapter materials.
    • Chapter 9 has been expanded: Discussion of the amortization of bond discounts and premiums has been expanded to include a section on the straight-line method. The expanded section includes numerical examples and new end of chapter materials. The discussion and examples of the effective interest method have been retained.
    • Chapter 10 has been expanded: The discussion of stock repurchases has been expanded to include discussion of the retirement of stock. This reflects a current trend in which many companies are retiring stock rather than holding the repurchased stock in treasury.
    • Chapter 12 has been revised: The summary of the ratios is better integrated with the rest of the text by including a reference to the chapter of original discussion for each ratio.
    • Appendix C has been revised: The debit and credit discussion of adjusting entries has been reorga- nized to reflect and mirror the adjustments in Chapter 3.
    • Appendix D has been revised: The accounting for investment securities has been updated to include the most recent authoritative pronouncements (ASU 2016-01).
    • For an expanded introduction to Data Analytics and Blockchain Technology, we added a neAppendix F that provides more detail and assignments that require the use of Excel and Tableau.



    Teaching Supplements

    Solutions Manual: Created by the author, the solutions manual contains complete solutions to all assignments.

    Test Bank: Written by the author, the test bank includes multiple-choice items, true/false, exercises, and problems.  

    PowerPoint: Created by the author, the PowerPoint slides outline key elements of each chapter.

    myBusinessCourse: An online learning and assessment program intended to complement your textbook and classroom instruction. Access to myBusinessCourse is FREE with the purchase of a new textbook and can also be purchased separately.



    Expand/Collapse All
    About the Author (pg. iii)
    Preface (pg. iv)
    Brief Contents (pg. xii)
    Contents (pg. xiii)
    Chapter 1: Financial Accounting and Business Decisions (pg. 2)
    What the Numbers Mean (pg. 2)
    Business Organization (pg. 4)
    Review 1.1 (pg. 5)
    Activities of a Business (pg. 5)
    Operating Activities (pg. 5)
    Investing Activities (pg. 5)
    Financing Activities (pg. 6)
    Review 1.2 (pg. 6)
    Accounting Information and Its Use (pg. 6)
    External Users of Accounting (pg. 7)
    Internal Users of Accounting (pg. 8)
    Review 1.3 (pg. 8)
    Ethics and Accounting (pg. 8)
    Review 1.4 (pg. 9)
    The Accounting Process (pg. 10)
    Generally Accepted Accounting Principles (pg. 10)
    International Financial Reporting Standards (pg. 11)
    Review 1.5 (pg. 11)
    Financial Statements (pg. 12)
    Balance Sheet (pg. 12)
    Income Statement (pg. 13)
    Statement of Stockholders’ Equity (pg. 14)
    Statement of Cash Flows (pg. 16)
    Relations Among the Financial Statements (pg. 17)
    Review 1.6 (pg. 18)
    Additional Information (pg. 18)
    Management Discussion and Analysis (pg. 18)
    Notes to Financial Statements (pg. 19)
    Auditor’s Report (pg. 19)
    Review 1.7 (pg. 20)
    Accounting and Technology (pg. 20)
    Data Analytics and Data Visualization (pg. 20)
    Blockchain (pg. 20)
    Review 1.8 (pg. 21)
    Summary of Learning Objectives (pg. 21)
    Key Terms (pg. 23)
    Self-Study Questions (pg. 24)
    Questions (pg. 25)
    Data Analytics (pg. 26)
    Short Exercises (pg. 26)
    Exercises (pg. 28)
    Problems (pg. 30)
    Serial Problem: Angel City Greetings (pg. 34)
    Beyond The Numbers (pg. 34)
    Answers to Self-Study Questions (pg. 37)
    Review Solutions (pg. 37)
    Chapter 2: Processing Accounting Information (pg. 40)
    Score! (pg. 40)
    Accounting Cycle (pg. 42)
    Review 2.1 (pg. 43)
    Analyze Transactions (pg. 43)
    Accounting Equation Expanded (pg. 43)
    Record Transactions (pg. 44)
    Transaction 1. Issued Stock (pg. 44)
    Transaction 2. Paid Rent in Advance (pg. 45)
    Transaction 3. Purchased Office Supplies on Account (pg. 45)
    Transaction 4. Signed Bank Note in Exchange for Cash (pg. 45)
    Transaction 5. Purchased Equipment with Cash (pg. 46)
    Transaction 6. Received Customer Prepayment (pg. 46)
    Transaction 8. Performed Services for Both Cash and on Account (pg. 47)
    Non-Accounting Transaction. Hired an Employee (pg. 47)
    Transaction 9. Paid Employee Wages (pg. 47)
    Transaction 10. Received Payment on Account from Customer (pg. 48)
    Transaction 11. Paid Cash Dividend (pg. 48)
    Transaction Summary (pg. 48)
    Review 2.2 (pg. 50)
    Transaction Analysis Template (pg. 51)
    Horizontal Worksheet for Transaction 7 (pg. 51)
    Transaction Analysis Template (TAT) for Transaction 7 (pg. 51)
    Review 2.3 (pg. 52)
    The “Account” System (pg. 52)
    Source Documents (pg. 52)
    Chart of Accounts (pg. 53)
    The General Ledger (pg. 53)
    Review 2.4 (pg. 53)
    Summary of Learning Objectives (pg. 54)
    Key Terms (pg. 54)
    Self-Study Questions (pg. 54)
    Questions (pg. 55)
    Data Analytics (pg. 56)
    Short Exercises (pg. 56)
    Exercises (pg. 57)
    Problems (pg. 60)
    Serial Problem: Angel City Greetings (pg. 64)
    Beyond the Numbers (pg. 65)
    Answers to Self-Study Questions (pg. 67)
    Review Solutions (pg. 68)
    Chapter 3: Accrual Basis of Accounting (pg. 70)
    Making Dough (pg. 70)
    Accrual Basis of Accounting (pg. 72)
    Revenue Recognition Principle (pg. 72)
    Expense Recognition (Matching) Principle (pg. 74)
    Review 3.1 (pg. 76)
    Accounting Adjustments (pg. 76)
    Types of Adjustments (pg. 77)
    Recognizing Previously Deferred Revenue (pg. 78)
    Recognizing Previously Deferred Expenses (pg. 79)
    Recognizing Accrued Revenue (pg. 81)
    Recognizing Accrued Expenses (pg. 82)
    Summary of Accounting Adjustments (pg. 83)
    Review 3.2 (pg. 84)
    Preparing The Financial Statements (pg. 84)
    Income Statement (pg. 86)
    Statement of Stockholders’ Equity (pg. 86)
    Balance Sheet (pg. 86)
    Statement of Cash Flows (pg. 86)
    Review 3.3 (pg. 87)
    Quality of Accounting Numbers (pg. 87)
    Close Temporary Accounts (pg. 88)
    Summary of the Accounting Cycle (pg. 88)
    Review 3.4 (pg. 89)
    Summary of Learning Objectives (pg. 89)
    Key Terms (pg. 90)
    Self-Study Questions (pg. 90)
    Questions (pg. 91)
    Data Analytics (pg. 92)
    Short Exercises (pg. 92)
    Exercises (pg. 93)
    Problems (pg. 96)
    Serial Problem: Angel City Greetings (pg. 100)
    Beyond The Numbers (pg. 101)
    Answers to Self-Study Questions (pg. 103)
    Review Solutions (pg. 103)
    Chapter 4: Understanding Accounting Information (pg. 108)
    Identifying a Win-Win Company (pg. 108)
    Financial Reporting Quality (pg. 110)
    Objectives of Financial Reporting (pg. 110)
    Qualities of Useful Accounting Information (pg. 111)
    Review 4.1 (pg. 112)
    Finding Financial Accounting Information (pg. 112)
    Review 4.2 (pg. 113)
    Balance Sheet Classification (pg. 113)
    Current Assets (pg. 113)
    Long-Term Assets (pg. 114)
    Current Liabilities (pg. 115)
    LongTerm Liabilities (pg. 116)
    Stockholders’ Equity (pg. 116)
    Presentation Format (pg. 116)
    Review 4.3 (pg. 117)
    Income Statement Classification (pg. 118)
    Review 4.4 (pg. 120)
    Working with Financial Statements (pg. 120)
    Ratio Analysis (pg. 120)
    Working with the Balance Sheet (pg. 121)
    Working with the Income Statement (pg. 123)
    Review 4.5 (pg. 124)
    Working with the Statement of Stockholders’ Equity (pg. 124)
    Review 4.6 (pg. 125)
    Working with the Statement of Cash Flows (pg. 125)
    Review 4.7 (pg. 126)
    Summary of Learning Objectives (pg. 127)
    Key Terms (pg. 128)
    Self-Study Questions (pg. 128)
    Questions (pg. 130)
    Data Analytics (pg. 130)
    Short Exercises (pg. 131)
    Exercises (pg. 133)
    Problems (pg. 134)
    Serial Problem: Angel City Greetings (pg. 137)
    Beyond the Numbers (pg. 138)
    Answers to Self-Study Questions (pg. 140)
    Review Solutions (pg. 140)
    Chapter 5: Internal Control and Cash (pg. 144)
    Wirecard Fraud (pg. 144)
    Fraud (pg. 146)
    Pressure (pg. 146)
    Rationalization (pg. 146)
    Opportunity (pg. 147)
    Review 5.1 (pg. 147)
    Internal Control (pg. 147)
    COSO Framework (pg. 147)
    Control Failures (pg. 149)
    The Sarbanes-Oxley Act (pg. 149)
    Review 5.2 (pg. 150)
    Accounting for Cash (pg. 150)
    Reporting Cash (pg. 151)
    Cash and Cash Equivalents (pg. 151)
    Review 5.3 (pg. 151)
    Internal Controls over Cash (pg. 151)
    Payments from Customers (pg. 152)
    Cash Disbursements (pg. 153)
    Bank Reconciliation (pg. 153)
    Review 5.4 (pg. 154)
    Effective Cash Management (pg. 154)
    Monitoring Cash (pg. 154)
    Primary Activities of Effective Cash Management (pg. 155)
    Review 5.5 (pg. 155)
    Appendix 5A: Auditing and Internal Control (pg. 156)
    Financial Statement Audits (pg. 156)
    Audit Procedures (pg. 156)
    The Audit Report (pg. 156)
    Operational Audits (pg. 157)
    Review 5.6 (pg. 157)
    Appendix 5B: Preparing the Bank Reconciliation (pg. 158)
    Bank Reconciliation Illustrated (pg. 159)
    Review 5.7 (pg. 162)
    Summary of Learning Objectives (pg. 162)
    Key Terms (pg. 164)
    Self-Study Questions (pg. 164)
    Questions (pg. 165)
    Data Analytics (pg. 166)
    Short Exercises (pg. 167)
    Exercises (pg. 168)
    Problems (pg. 169)
    Serial Problem: Angel City Greetings (pg. 172)
    Beyond The Numbers (pg. 173)
    Answers to Self-Study Questions (pg. 175)
    Review Solutions (pg. 175)
    Chapter 6: Receivables (pg. 178)
    MGM Resorts International-Managing Credit for Bigger Profits (pg. 178)
    Receivables (pg. 180)
    Accounts Receivable (pg. 180)
    Losses from Valuing Accounts Receivable (pg. 181)
    Allowance Method (pg. 182)
    Recording Estimated Bad Debt Expense Under the Allowance Method (pg. 182)
    Review 6.1 (pg. 183)
    Estimating Credit Losses (pg. 184)
    Percentage of Net Sales Method (pg. 184)
    Review 6.2 (pg. 185)
    Accounts Receivable Aging Method (pg. 185)
    Writing Off Specific Accounts Receivable under the Allowance Method (pg. 187)
    Review 6.3 (pg. 188)
    Recoveries of Accounts Written Off under the Allowance Method (pg. 188)
    Credit Card Sales (pg. 189)
    Review 6.4 (pg. 190)
    Notes Receivable (pg. 191)
    Interest on Notes Receivable (pg. 191)
    Adjusting Entry for Interest (pg. 193)
    Review 6.5 (pg. 193)
    Reporting Notes Receivable on the Balance Sheet (pg. 194)
    Review 6.6 (pg. 194)
    Analyzing and Managing Receivables (pg. 195)
    Review 6.7 (pg. 196)
    Summary of Learning Objectives (pg. 196)
    Key Terms (pg. 198)
    Self-Study Questions (pg. 198)
    Questions (pg. 199)
    Data Analytics (pg. 200)
    Short Exercises (pg. 201)
    Exercises (pg. 202)
    Problems (pg. 204)
    Serial Problem: Angel City Greetings (pg. 207)
    Beyond the Numbers (pg. 208)
    Answers to Self-Study Questions (pg. 210)
    Review Solutions (pg. 210)
    Chapter 7: Inventory (pg. 214)
    COSTCO (pg. 214)
    The Nature of Inventory (pg. 216)
    Categories of Inventory (pg. 217)
    Costs Included in Inventory (pg. 217)
    Inventory Management (pg. 218)
    Cost of Goods Sold (pg. 218)
    Physical Count of Inventory (pg. 219)
    Inventory Costing Systems (pg. 219)
    Review 7.1 (pg. 221)
    Inventory Costing Methods (pg. 221)
    Goods Flow vs. Cost Flow (pg. 221)
    Data for Illustration of Cost Flow Assumptions (pg. 222)
    Specific Identification Method (pg. 222)
    FirstIn, FirstOut (FIFO) Method (pg. 223)
    LastIn, FirstOut (LIFO) Method (pg. 223)
    Weighted-Average Cost Method (pg. 224)
    Inventory Costing Under the Perpetual Versus the Periodic Method (pg. 225)
    How Inventory Methods Affect the Financial Statements (pg. 225)
    How Managers Choose an Inventory Method (pg. 225)
    The Effects of Inventory Method Choice on Gross Profit Analysis (pg. 226)
    Review 7.2 (pg. 228)
    Lower of Cost or Net Realizable Value (pg. 230)
    Net Realizable Value (pg. 230)
    Review 7.3 (pg. 231)
    Inventory Analysis (pg. 231)
    Gross Profit Analysis (pg. 231)
    Review 7.4 (pg. 232)
    Inventory Turnover and Days’ Sales in Inventory (pg. 233)
    Review 7.5 (pg. 234)
    Review 7.6 (pg. 234)
    Appendix 7A: Inventory Costing using a Perpetual Inventory System (pg. 235)
    Specific Identification Method (pg. 235)
    FirstIn, FirstOut (FIFO) Method (pg. 236)
    LastIn, FirstOut (LIFO) Method (pg. 237)
    Weighted-Average Cost Method (pg. 238)
    Comparison of Inventory Costing Methods (pg. 239)
    Appendix 7B: LIFO Reserve (pg. 239)
    Summary of Learning Objectives (pg. 240)
    Key Terms (pg. 242)
    Self-Study Questions (pg. 242)
    Questions (pg. 243)
    Data Analytics (pg. 244)
    Short Exercises (pg. 245)
    Exercises (pg. 247)
    Problems (pg. 249)
    Serial Problem: Angel City Greetings (pg. 251)
    Beyond the Numbers (pg. 251)
    Answers to Self-Study Questions (pg. 253)
    Review Solutions (pg. 254)
    Chapter 8: Long-Lived Assets (pg. 256)
    Tesla Motors INc. (pg. 256)
    Overview of Long-Lived Assets (pg. 258)
    Accounting for Long-lived Assets (pg. 259)
    Acquisition Cost of Property, Plant and Equipment (pg. 259)
    Review 8.1 (pg. 261)
    Nature of Depreciation (pg. 261)
    Allocation versus Valuation: Depreciation Accounting (pg. 261)
    Calculating Depreciation Expense (pg. 262)
    Alternative Depreciation Methods (pg. 263)
    A Comparison of Depreciation Methods (pg. 265)
    Depreciation Method Estimate Changes (pg. 266)
    Revenue Expenditures Versus Capital Expenditures (pg. 267)
    Maintenance and Repairs (pg. 267)
    LowCost Items (pg. 267)
    Capital Expenditures (pg. 268)
    Review 8.3 (pg. 268)
    Disposals Of Property, Plant and Equipment (pg. 269)
    Sale of Property, Plant and Equipment (pg. 269)
    Review 8.4 (pg. 271)
    Intangible Assets (pg. 271)
    Measurement of Intangible Assets (pg. 271)
    Amortization refers to the periodic expensing of an intangible asset over its expected useful life. (pg. 272)
    Examples of Intangible Assets (pg. 272)
    Patents (pg. 272)
    Copyright (pg. 272)
    Franchises (pg. 272)
    Trademarks (pg. 273)
    Goodwill (pg. 273)
    Review 8.5 (pg. 274)
    Balance Sheet Presentation (pg. 274)
    Review 8.6 (pg. 274)
    Return on Assets and Asset Turnover (pg. 275)
    Review 8.7 (pg. 276)
    Summary of Learning Objectives (pg. 276)
    Key Terms (pg. 277)
    Self-Study Questions (pg. 278)
    Questions (pg. 279)
    Data Analytics (pg. 279)
    Short Exercises (pg. 281)
    Exercises (pg. 282)
    Problems (pg. 283)
    Serial Problem: Angel City Greetings (pg. 286)
    Beyond the Numbers (pg. 286)
    Answers to Self-Study Questions (pg. 289)
    Review Solutions (pg. 289)
    Chapter 9: Liabilities (pg. 290)
    Microsoft Corporation (pg. 290)
    Current Liabilities (pg. 292)
    Accounts Payable (pg. 292)
    Notes Payable and Interest (pg. 292)
    Accrued Interest Payable (pg. 294)
    Review 9.1 (pg. 295)
    Current Portion of LongTerm Debt (pg. 295)
    Income Taxes Payable (pg. 295)
    Unearned Revenue (pg. 295)
    Long-Term Liabilities (pg. 296)
    Advantages of Bonds and Long-Term Notes (pg. 296)
    Disadvantages of Bonds and Long-Term Notes (pg. 297)
    Types of Bonds (pg. 297)
    Bond Features (pg. 298)
    Bond Prices (pg. 299)
    Financial Statement Effect of Issuing Bonds (pg. 301)
    Review 9.2 (pg. 307)
    Review 9.3 (pg. 308)
    Long-Term Notes (Term Loans) (pg. 308)
    Leases (pg. 309)
    Accounting for Leases (pg. 309)
    Finance Leases (pg. 310)
    Operating Leases (pg. 310)
    Contingent Liabilities (pg. 310)
    Examples of Contingent Liabilities (pg. 311)
    Review 9.4 (pg. 314)
    Analyzing Liabilities (pg. 314)
    Current Ratio and Quick Ratio (pg. 314)
    Times-Interest-Earned Ratio (pg. 315)
    Review 9.5 (pg. 316)
    Appendix 9A: Interest Calculations Using Excel (pg. 316)
    Using an Electronic Spreadsheet (pg. 316)
    Summary of Learning Objectives (pg. 318)
    Key Terms (pg. 320)
    Self-Study Questions (pg. 320)
    Questions (pg. 321)
    Data Analytics (pg. 321)
    Short Exercises (pg. 322)
    Exercises (pg. 324)
    Problems (pg. 327)
    Serial Problem: Angel City Greetings (pg. 329)
    Beyond the Numbers (pg. 329)
    Answers to Self-Study Questions (pg. 332)
    Review Solutions (pg. 332)
    Chapter 10: Stockholders’ Equity (pg. 334)
    Amazon (pg. 334)
    Nature and Formation of a Corporation (pg. 336)
    Advantages of the Corporate Form of Organization (pg. 336)
    Disadvantages of the Corporate Form of Organization (pg. 338)
    Accounting for Equity in Alternative Organizational Forms (pg. 338)
    Review 10.1 (pg. 339)
    Par Value Stock and NoPar Value Stock (pg. 339)
    Types of Capital Stock (pg. 340)
    Common Stock (pg. 340)
    Preferred Stock (pg. 341)
    Review 10.2 (pg. 343)
    Stock Issuances for Cash (pg. 343)
    Issuing Stock at a Premium (pg. 343)
    Issuing No-Par Stock (pg. 344)
    Noncash Stock Issuances (pg. 344)
    Review 10.3 (pg. 345)
    Stock Splits (pg. 345)
    Accounting For Stock Repurchases (pg. 346)
    Accounting for Treasury Stock (pg. 346)
    Accounting for Repurchase and Retirement of Stock (pg. 347)
    Review 10.4 (pg. 348)
    Cash Dividends and Stock Dividends (pg. 349)
    Cash Dividends (pg. 349)
    Stock Dividends (pg. 350)
    Review 10.5 (pg. 351)
    Retained Earnings and the Statement of Stockholders’ Equity (pg. 351)
    Statement of Stockholders’ Equity (pg. 351)
    Review 10.6 (pg. 352)
    Review 10.7 (pg. 353)
    Analyzing Stockholders’ Equity (pg. 353)
    Return on Common Stockholders’ Equity (pg. 353)
    Dividend Yield and Dividend Payout Ratio (pg. 354)
    Review 10.8 (pg. 355)
    Summary of Learning Objectives (pg. 355)
    Key Terms (pg. 357)
    Self-Study Questions (pg. 357)
    Questions (pg. 358)
    Data Analytics (pg. 359)
    Short Exercises (pg. 360)
    Exercises (pg. 361)
    Problems (pg. 363)
    Serial Problem: Angel City Greetings (pg. 367)
    Beyond the Numbers (pg. 368)
    Answers to Self-Study Questions (pg. 370)
    Review Solutions (pg. 370)
    Chapter 11: Statement of Cash Flows (pg. 372)
    The Home Depot: A Company with a Vision (pg. 372)
    Cash and Cash Equivalents (pg. 374)
    Activity Classifications in the Statement of Cash Flows (pg. 375)
    Operating Activities (pg. 375)
    Investing Activities (pg. 376)
    Financing Activities (pg. 376)
    An Illustration of Activity Classification Usefulness (pg. 377)
    Noncash Investing and Financing Activities (pg. 377)
    Using the Statement of Cash Flows (pg. 378)
    Cash Flow from Operating Activities (pg. 378)
    Review 11.1 (pg. 379)
    Preparing the Statement of cash flows Using the Indirect Method (pg. 380)
    Five Steps to Preparing a Statement of Cash Flows (pg. 381)
    Review 11.2 (pg. 386)
    Review 11.3 (pg. 387)
    Analyzing Cash Flows (pg. 388)
    Free Cash Flow (pg. 388)
    Operating-Cash-Flow-to-Current-Liabilities Ratio (pg. 389)
    Operating-Cash-Flow-to-Capital-Expenditures Ratio (pg. 389)
    Review 11.4 (pg. 390)
    Appendix 11: Preparing the Statement of Cash Flows Under the Direct Method (pg. 391)
    Review 11.5 (pg. 392)
    Summary of Learning Objectives (pg. 393)
    Key Terms (pg. 394)
    Self-Study Questions (pg. 395)
    Questions (pg. 396)
    Data Analytics (pg. 397)
    Short Exercises (pg. 399)
    Exercises (pg. 400)
    Problems (pg. 402)
    Serial Problem: Angel City Greetings (pg. 407)
    Beyond the Numbers (pg. 408)
    Answers to Self-Study Questions (pg. 410)
    Review Solutions (pg. 410)
    Chapter 12: Analysis and Interpretation of Financial Statements (pg. 414)
    FMCG (pg. 414)
    Persistent Earnings and the Income Statement (pg. 416)
    Discontinued Operations (pg. 418)
    Changes in Accounting Principles (pg. 418)
    Comprehensive Income (pg. 418)
    Review 12.1 (pg. 419)
    Sources of Information (pg. 419)
    Analytical Techniques (pg. 419)
    Horizontal Analysis (pg. 420)
    Trend Analysis (pg. 422)
    Review 12.2 (pg. 424)
    Vertical Analysis (pg. 424)
    Review 12.3 (pg. 425)
    Ratio Analysis (pg. 425)
    Analyzing Firm Profitability (pg. 427)
    Review 12.4 (pg. 429)
    Analyzing ShortTerm Firm Liquidity (pg. 429)
    Review 12.5 (pg. 434)
    Analyzing LongTerm Firm Solvency (pg. 434)
    Review 12.6 (pg. 436)
    Financial Ratios for Common Stockholders (pg. 436)
    Review 12.7 (pg. 438)
    Limitations of Financial Statement Analysis (pg. 438)
    Review 12.8 (pg. 439)
    Appendix 12A: Financial Statement Disclosures (pg. 440)
    Parenthetical Disclosures (pg. 440)
    Notes to the Financial Statements (pg. 440)
    Supplementary Information (pg. 442)
    Summary of Learning Objectives (pg. 443)
    Summary of Financial Statement Ratios (pg. 444)
    Key Terms (pg. 445)
    Self-Study Questions (pg. 446)
    Questions (pg. 447)
    Data Analytics (pg. 448)
    Short Exercises (pg. 449)
    Exercises (pg. 451)
    Problems (pg. 453)
    Serial Problem: Angel City Greetings (pg. 459)
    Beyond the Numbers (pg. 460)
    Answers to Self-Study Questions (pg. 465)
    Review Solutions (pg. 465)
    Appendix A: Columbia Sportswear: Financial Statements (pg. A-1)
    Report of Independent Auditors (pg. A-3)
    Financial Statements (pg. A-6)
    Notes to Financial Statements (pg. A-11)
    Report on Internal Control (pg. A-36)
    Management’s Certification of Financial Statements (pg. A-37)
    Supplemental Information (pg. A-38)
    Selected Financial Data Including Earnings Per Share (pg. A-39)
    Appendix B: Under Armour Financial Statements (pg. B-1)
    Appendix C: The Language of Accountants: Debits and Credits (pg. C-1)
    System of Debits and Credits (pg. C-2)
    Illustration of the Recording Process (pg. C-3)
    Summary Illustration of Journalizing and Posting Transactions (pg. C-7)
    Trial Balance (pg. C-9)
    Review C.1 (pg. C-10)
    Accounting Adjustments (pg. C-11)
    Recognizing Previously Deferred Revenue (pg. C-11)
    Recognizing Previously Deferred Expenses (pg. C-11)
    Recognizing Accrued Revenue (pg. C-13)
    Recognizing Accrued Expenses (pg. C-13)
    Summary of Accounting Adjustments (pg. C-14)
    Review C.2 (pg. C-16)
    Adjusted Trial Balance and Financial Statements (pg. C-16)
    Preparing the Adjusted Trial Balance (pg. C-17)
    Preparing Financial Statements (pg. C-17)
    Review C.3 (pg. C-19)
    Closing Process (pg. C-19)
    Journalizing and Posting the Closing Entries (pg. C-20)
    Summary of the Accounting Cycle (pg. C-22)
    Review C.4 (pg. C-22)
    Summary of Learning Objectives (pg. C-23)
    Questions (pg. C-24)
    Short Exercises (pg. C-25)
    Exercises (pg. C-26)
    Problems (pg. C-27)
    Answers to Self-Study Questions (pg. C-33)
    Review Solutions (pg. C-33)
    Appendix D: Accounting for Investments and Consolidated Financial Statements (pg. D-1)
    Investments (pg. D-2)
    Debt and Equity Securities (pg. D-2)
    Investments in Debt Securities (pg. D-2)
    Purchase (pg. D-3)
    Recognition of Interest Income (pg. D-4)
    Balance Sheet Valuation (pg. D-5)
    Sale or Redemption at Maturity (pg. D-7)
    Investments in Equity Securities (pg. D-8)
    Purchase (pg. D-9)
    Recognition of Investment Income (pg. D-9)
    Balance Sheet Valuation (pg. D-10)
    Sale (pg. D-11)
    Current and Noncurrent Classifications (pg. D-12)
    ParentSubsidiary Relationship (pg. D-12)
    Consolidated Financial Statements (pg. D-13)
    Limitations of Consolidated Statements (pg. D-14)
    Summary of Learning Objectives (pg. D-14)
    Key Terms (pg. D-15)
    Self-Study Questions (pg. D-15)
    Questions (pg. D-16)
    Exercises (pg. D-17)
    Problems (pg. D-19)
    Answers to Self-Study Questions (pg. D-20)
    Appendix E: Accounting and the Time Value of Money (pg. E-1)
    Time Value of Money Concept (pg. E-2)
    Time Value of Money: Simple Interest Model (pg. E-2)
    Time Value of Money: Compound Interest Model (pg. E-2)
    Future Value of an Amount (pg. E-3)
    Future Value of an Annuity (pg. E-5)
    Present Value of an Amount (pg. E-6)
    Present value of an annuity (pg. E-8)
    Calculations Using A Spreadsheet (pg. E-10)
    Summary of Learning Objectives (pg. E-10)
    Key Terms (pg. E-10)
    Self-Study Questions (pg. E-11)
    Exercises (pg. E-11)
    Answers to Self-Study Questions (pg. E-12)
    Appendix F: Data Analytics and Blockchain Technology (pg. F-1)
    Data Analytics (pg. F-2)
    Big Data (pg. F-2)
    Types of Data Analytics (pg. F-2)
    Data Analytics in the Accounting Profession (pg. F-3)
    The Analytics Mindset (pg. F-4)
    Data Analytic Tools (pg. F-5)
    Data Visualization (pg. F-6)
    Blockchain Technology (pg. F-10)
    Summary (pg. F-12)
    Key Concepts and Terms (pg. F-12)
    Video Resources For Tableau (pg. F-13)
    Multiple Choice (pg. F-13)
    Exercises (pg. F-14)
    Problems (pg. F-14)
    Index (pg. I-1)

    Mark DeFond

    Leventhal School of Accounting Marshall School of Business University of Southern California

    Mark DeFond is A. N. Mosich Chair in Accounting and Professor of Accounting in the Leventhal School of Accounting at University of Southern California Marshall School of Business. He has taught financial accounting to a variety of audiences, including undergraduates, MBAs, and Executive MBAs. Professor DeFond earned his Ph.D. from the University of Washington and his B.A. from San Franicsco State University. He is widely published and his research is highly cited. Professor DeFond has served on the editorial boards of several leading academic journals and is a recipient of several research awards, including the Notable Contribution to Auditing Literature Award and the Mellon Award for Excellence in Mentoring Faculty. He has held visiting professorships at universities in Hong Kong and Singapore. He is also a CPA (inactive), a four time winner of the MBA Golden Apple teaching award, and was ranked among the ten most outstanding USC MBA faculty by BusinessWeek.



    Errata
    Last Updated: Aug 5 2022

    Corrections to identified errors in the first printing. 

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