Financial Accounting, 7e

by Hanlon, Magee, Pfeiffer

| ISBN: 978-1-61853-431-6 | Copyright 2023

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Road Map
LO Learning Objective Page eLecture Guided Example Assignments
LO2.1

Describe and construct the balance sheet and understand how it can be used for analysis.

44

14, 15, 16, 17, 19, 21, 24, 25, 26, 27, 29, 30, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43, 46, 49, 50, 51, 52, 53, 54, 55, 56, 59, 60, 66

LO2.2

Use the financial statement effects template (FSET) to analyze transactions.

49

18, 29, 30, 31, 44, 45, 47, 57, 62, 67, 69

LO2.3

Describe and construct the income statement and discuss how it can be used to evaluate management performance.

53


19, 20, 21, 22, 23, 28, 31, 35, 37, 39, 40, 41, 42, 43, 44, 47, 49, 50, 51, 54, 57, 61, 62, 64, 65, 66, 67, 69, 71, 72

LO2.4

Explain revenue recognition, accrual accounting, and their effects on retained earnings.

54


18, 19, 20, 22, 23, 25, 26, 28, 29, 31, 39, 44, 47, 57, 62, 67, 69, 71

LO2.5

Illustrate equity transactions and the statement of stockholders' equity.

60

18, 21, 22, 23, 24, 27, 31, 35, 36, 37, 53, 66, 67, 69, 71

LO2.6

Use journal entries and T-accounts to analyze and record transactions.

62


32, 33, 45, 48, 58, 63, 68, 70

LO2.7

Compute net working capital, the current ratio, and the quick ratio, and explain how they reflect liquidity.

71

34, 36, 38, 41, 42, 46, 52, 55, 56, 59, 60

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 Seventh Edition includes several new features to enhance students’ career readiness

  • In each chapter, we use data visualizations to depict financial information. It is important for students to become comfortable interpreting visual depictions of data.


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


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


  • 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.





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Welcome to the Seventh Edition of Financial Accounting!


We wrote this book to equip students with the accounting techniques and insights necessary to succeed in todays business environment. It reflects our combined experience in teaching financial accounting to college students at all levels. For anyone who pursues a career in business, the ability to read, analyze, and interpret published financial reports is an essential skill. Financial Accounting is written for future business leaders who want to understand how financial statements are prepared and how the information in published financial reports is used by investors, creditors, financial analysts, and managers. Our goal is to provide the most engaging, relevant, and accessible textbook available.


Target Audience

Financial Accounting is intended for use in the first financial accounting course at either the under- graduate or graduate level; one that balances the preparation of financial statements with their analysis and interpretation. This book accommodates mini-courses lasting only a few days as well as extended courses lasting a full semester.

Financial Accounting is real-world oriented and focuses on the most salient aspects of accounting. It teaches students how to read, analyze, and interpret financial accounting data to make informed business decisions. To that end, it consistently incorporates real company data, both in the body of each chapter and throughout the assignment material.


Real Data Incorporated Throughout

Today's business students must be skilled in using real financial statements to make business decisions. We feel strongly that the more exposure students get to real financial statements, the more comfortable they become with the variety in financial statements that exists across companies and industries. Through their exposure to various financial statements, students will learn that, while financial statements do not all look the same, they can readily understand and interpret them to make business decisions. Because we update all of the examples throughout the chapters with the most recently available information, students will see the impact of recent events on financial statements, such as the impact of the COVID-19 pandemic. Furthermore, todays students must have the skills to go beyond basic financial statements to interpret and apply nonfinancial disclosures, such as note disclosures and supplementary reports. We expose students to the analysis and interpretation of real company data and nonfinancial disclosures through the use of focus companies in each chapter, the generous incorporation of note disclosures, financial analysis discussions in nearly every chapter, and an abundance of assignments that draw on real company data and disclosure.


Focus Companies for Each Chapter

Each chapters content is explained through the accounting and reporting activities of real companies. Each chapter incorporates a “focus company for special emphasis and demonstration. The enhanced instructional value of focus companies comes from the way they engage students in real analysis and interpretation. Focus companies were selected based on student appeal and the diversity of industries.


Road Maps

Each chapter opens with an Action Plan that identifies each learning objective for the chapter, the related page numbers, the reviews, and the assignments. This table allows students and faculty to quickly grasp the chapter contents and to efficiently navigate the desired topic.



Note Disclosures and Management Disclosures

We incorporate note disclosure and other management disclosures, where appropriate, throughout the book. We explain the significance of the note disclosure and then demonstrate how to use the disclosed information to make managerial inferences and decisions. A representative sample follows:



Financial Analysis Discussions

Each chapter includes a financial analysis discussion that introduces key ratios and applies them to the financial statements of the chapters focus company. By weaving some analysis into each chapter, we try to instill in students a deeper appreciation for the significance of the accounting methods being discussed. One such analysis discussion follows:



Assignments that Draw on Real Data

It is essential for students to be able to apply what they have learned to real financial statements. There- fore, we have included an abundance of assignments in each chapter that draw on recent, real data and disclosures. These assignments are readily identified by an icon in the margin that includes the companys ticker symbol and the exchange on which the companys stock trades. A representative example follows:



Balanced Approach

As instructors of introductory financial accounting, we recognize that the first financial accounting course serves the general business students as well as potential accounting majors. Financial Accounting embraces this reality. This book balances financial reporting, analysis, interpretation, and decision making with the more standard aspects of accounting such as journal entries, T-accounts, and the preparation of financial statements.


3-Step Process: Analyze, Journal, Post

One technique we use throughout the book to maintain a balanced approach is the incorporation of 3-step process to analyze and record transactions. Step 1 analyzes the impact of various transactions on the financial statements using the financial statement effects template (FSET). Step 2 records the transaction using journal entries, and Step 3 requires students to post the journal entries to T-accounts.


The FSET captures each transactions effects on the four financial statements: the balance sheet, income statement, statement of stockholders’ equity, and statement of cash f lows. For the balance sheet, we differentiate between cash and noncash assets to identify the cash effects of transactions. Likewise, equity is separated into the contributed and earned capital components (the latter includes retained earnings as its major element). Finally, income statement effects are separated into revenues, expenses, and net income (the updating of retained earnings is denoted with an arrow line running from net income to earned capital). The FSET provides a convenient means to represent financial accounting transactions and events in a simple, concise manner for assessing their effects on financial statements. To provide faculty flexibility to tailor instruction, all relevant end of chapter materials can be assigned using the journal entry approach or the FSET approach.


Innovative Pedagogy

Business Insights

Students appreciate and become more engaged when they can see the real-world relevance of what they are learning in the classroom. We have included a generous number of current, real-world examples throughout each chapter in Business Insight boxes. The following is a representative example:


Decision Making Orientation

One primary goal of a financial accounting course is to teach students the skills needed to apply their accounting knowledge to solving real business problems. With that goal in mind, You Make the Call boxes in each chapter encourage students to apply the material presented to solving actual business scenarios.


Learning Objective Reviews

Financial accounting can be challenging—especially for students lacking business experience or previous exposure to business courses. To reinforce concepts presented in each chapter and to ensure student comprehension, we include a review problem at the conclusion of each learning objective. Answers to the review problems are included at the end of the chapter. Each review has a corresponding Guided Example video, available to students in myBusinessCourse (MBC), our online learning and homework system. In addition, each Review is assignable in MBC.


Research Insights for Business Students

Academic research plays an important role in the way business is conducted, accounting is performed, and students are taught. It is important for students to recognize how modern research and modern business practice interact. Therefore, we periodically incorporate relevant research to help students understand the important relation between research and modern business.


Flexibility For Courses Of Varying Lengths

Many instructors have approached us to ask about suggested chapter coverage based on courses of varying length. To that end, we provide the following table of possible course designs:



New to the Seventh Edition

  • We have expanded the coverage, resources, and assignments related to data analytics and Excel skill development in an effort to enhance career readiness.
  • Chapter Updates: As appropriate, the text and assignments have been updated to ref lect the latest FASB standards and other current information:
    • Chapter 4 incorporates restricted cash as part of total cash presented on the statement of cash flows.
    • Chapter 5 includes updated information on industry ratios that is referenced in real life examples not only in this chapter, but throughout the text.
    • Chapter 8 includes a discussion on digital assets with a supporting end of chapter assignment.
    • Chapter 10 discusses the election in lease accounting to not separate lease and non-lease components.
    • Chapter 11 ref lects the new guidance on accounting for convertible instruments (including the impact on diluted EPS).
    • Chapter 12 brief ly discusses the recording of credit losses on available-for-sale debt securities and new guidance on the amortization of goodwill for private companies.
    • Expanded the FSET presentation in Chapter 4 (transactions that impact the statement of cash flows) and in Chapter 10 (accounting for operating leases by the lessee).
  • Deere & Co. replaced Delta Air Lines as the focus company of Chapter 10.
  • In addition to the chapter-specific changes, there have been several changes that span the entire book. Some of these global changes include:
    • Added a Road Map to each chapter that summarizes the reviews and assignments for each learning objective in the chapter.
    • Added review problems to the end of each learning objective, replacing the mid-chapter and end of chapter reviews.
    • Expanded all end of chapter materials to allow for the assigning of either the journal entry approach or the FSET approach.
    • Updated numbers for examples, illustrations, and assignments that use real data.
    • Updated note disclosures and other nonfinancial disclosures.
    • Updated excerpts from the business and popular press.
    • Nearly all of the assignments in each chapter have been revised with updated data or replaced with a new company focus.


Teaching Supplements

  • 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.
  • Solutions Manual: Created by the authors, the Solutions Manual contains complete solutions to all the assignment material in the text.
  • PowerPoint: The PowerPoint slides outline key elements of each chapter.
  • Test Bank: The Test Bank includes multiple-choice items, short essay questions, and problems.


Additional Resources

Financial Accounting Bootcamp

This interactive tutorial is intended for use in programs that either require or would like to offer a tutorial that can be used as a refresher of topics introduced in the first financial accounting course. It is designed as an asynchronous, interactive, self-paced experience for students. Available Learning Modules (You Select) follow.

  1. Introducing Financial Accounting (approximate completion time 2 hours)
  2. Constructing Financial Statements (approximate completion time 4 hours)
  3. Adjusting Entries and Completing the Accounting Cycle (approximate completion time 4 hours)
  4. Reporting and Analyzing Cash Flows (approximate completion time 3.5 hours)
  5. Analyzing and Interpreting Financial Statements (approximate completion time 3.5 hours)
  6. Excel and Time-Value of Money Basics (approximate completion time 2 hours)

This is a separate, saleable item. Contact your sales representative to receive more information or email customerservice@cambridgepub.com.



Expand/Collapse All
About the Authors (pg. iii)
Preface (pg. iv)
Brief Contents (pg. xvi)
Contents (pg. xvii)
Chapter 1: Introducing Financial Accounting (pg. 1-1)
Nike (pg. 1-2)
Demand for Accounting Information (pg. 1-3)
Who Uses Financial Accounting Information? (pg. 1-4)
Costs and Benefits of Disclosure (pg. 1-6)
Review 1-1 (pg. 1-6)
Business Activities (pg. 1-7)
Planning Activities (pg. 1-7)
Investing Activities (pg. 1-8)
Financing Activities (pg. 1-9)
Operating Activities (pg. 1-10)
Review 1-2 (pg. 1-10)
Financial Statements (pg. 1-11)
Balance Sheet (pg. 1-11)
Income Statement (pg. 1-12)
Statement of Stockholders’ Equity (pg. 1-13)
Statement of Cash Flows (pg. 1-13)
Financial Statement Linkages (pg. 1-14)
Information Beyond Financial Statements (pg. 1-15)
Review 1-3 (pg. 1-16)
Financial Reporting Environment (pg. 1-16)
Generally Accepted Accounting Principles (pg. 1-17)
Regulation and Oversight (pg. 1-17)
Role of the Auditor (pg. 1-19)
A Global Perspective (pg. 1-19)
Review 1-4 (pg. 1-20)
Analyzing Financial Statements (pg. 1-21)
Profitability Analysis (pg. 1-21)
Analysis Objective (pg. 1-21)
Credit Risk Analysis (pg. 1-23)
Analysis Objective (pg. 1-23)
Technology and Accounting (pg. 1-24)
Organization of the Book (pg. 1-24)
Review 1-5 (pg. 1-25)
Appendix 1A: Conceptual Framework for Financial Reporting (pg. 1-25)
Objective of Financial Reporting (pg. 1-25)
Qualitative Characteristics of Useful Financial Information (pg. 1-26)
Enhancing Qualitative Characteristics (pg. 1-27)
The Cost Constraint (pg. 1-27)
Additional Underlying Basic Assumptions (pg. 1-27)
Review 1-6 (pg. 1-28)
Summary (pg. 1-28)
Guidance Answers . . . You Make the Call (pg. 1-29)
Key Ratios (pg. 1-30)
Multiple Choice (pg. 1-30)
Questions (pg. 1-31)
Data Analytics (pg. 1-32)
Data Visualization (pg. 1-33)
Mini Exercises (pg. 1-33)
Exercises (pg. 1-34)
Problems (pg. 1-35)
Cases and Projects (pg. 1-37)
Solutions to Review Problems (pg. 1-39)
Chapter 2: Constructing Financial Statements (pg. 2-1)
Walgreens (pg. 2-2)
Reporting Financial Condition (pg. 2-3)
Assets (pg. 2-3)
Liabilities and Equity (pg. 2-6)
Review 2-1 (pg. 2-8)
Analyzing and Recording Transactions for the Balance Sheet (pg. 2-8)
Review 2-2 (pg. 2-12)
Reporting Financial Performance (pg. 2-12)
Review 2-3 (pg. 2-13)
Accrual Accounting for Revenues and Expenses (pg. 2-14)
Retained Earnings (pg. 2-15)
Analyzing and Recording Transactions for the Income Statement (pg. 2-16)
Review 2-4 (pg. 2-19)
Reporting on Equity (pg. 2-19)
Analyzing and Recording Equity Transactions (pg. 2-19)
Statement of Stockholders’ Equity (pg. 2-20)
Review 2-5 (pg. 2-21)
Journalizing and Posting Transactions (pg. 2-21)
T-Account (pg. 2-21)
Debit and Credit System (pg. 2-22)
T-Account with Debits and Credits (pg. 2-23)
The Journal Entry (pg. 2-23)
Analyze, Journalize, and Post (pg. 2-24)
Review 2-6 (pg. 2-29)
Analyzing Financial Statements (pg. 2-30)
Analysis Objective (pg. 2-30)
Review 2-7 (pg. 2-32)
Summary (pg. 2-33)
Guidance Answers . . . You Make the Call (pg. 2-33)
Key Ratios (pg. 2-34)
Multiple Choice (pg. 2-34)
Questions (pg. 2-34)
Data Analytics (pg. 2-35)
Data Visualization (pg. 2-36)
Mini Exercises (pg. 2-36)
Exercises (pg. 2-40)
Problems (pg. 2-45)
Cases and Projects (pg. 2-52)
Solutions to Review Problems (pg. 2-53)
Chapter 3: Adjusting Accounts for Financial Statements (pg. 3-1)
Walgreens (pg. 3-2)
Accounting Cycle (pg. 3-3)
Analyzing, Recording, and Posting (pg. 3-4)
Review of Accounting Procedures (pg. 3-4)
Review of Recording Transactions (pg. 3-4)
Review 3-1 (pg. 3-11)
Adjusting the Accounts (pg. 3-11)
Preparing an Unadjusted Trial Balance (pg. 3-11)
Types of Adjustments (pg. 3-12)
Ethics and Adjusting Entries (pg. 3-18)
Review 3-2 (pg. 3-19)
Constructing Financial Statements from Adjusted Accounts (pg. 3-19)
Preparing an Adjusted Trial Balance (pg. 3-19)
Preparing Financial Statements (pg. 3-21)
Review 3-3 (pg. 3-23)
Closing Temporary Accounts (pg. 3-24)
Closing Process (pg. 3-24)
Closing Steps Illustrated (pg. 3-25)
Preparing a Post-Closing Trial Balance (pg. 3-26)
Subsequent Events (pg. 3-26)
Summarizing the Accounting Cycle (pg. 3-26)
Review 3-4 (pg. 3-27)
Financial Statement Analysis (pg. 3-27)
Using Information on Levels and Flows (pg. 3-27)
Review 3-5 (pg. 3-28)
Summary (pg. 3-29)
Guidance Answers . . . You Make the Call (pg. 3-29)
Multiple Choice (pg. 3-29)
Questions (pg. 3-30)
Data Analytics (pg. 3-31)
Data Visualization (pg. 3-32)
Mini Exercises (pg. 3-32)
Exercises (pg. 3-35)
Problems (pg. 3-38)
Cases and Projects (pg. 3-48)
Solutions to Review Problems (pg. 3-50)
Chapter 4: Reporting and Analyzing Cash Flows (pg. 4-1)
CVS Health Corporation (pg. 4-2)
Purpose of the Statement of Cash Flows (pg. 4-3)
What Do We Mean by “CASH”? (pg. 4-3)
What Does a Statement of Cash Flows Look Like? (pg. 4-4)
Framework for the Statement of Cash Flows (pg. 4-4)
Operating Activities (pg. 4-5)
Investing Activities (pg. 4-5)
Financing Activities (pg. 4-5)
Usefulness of Classifications (pg. 4-6)
Review 4-1 (pg. 4-7)
Preparing the Statement of Cash Flows-Operating Activities (pg. 4-7)
Converting Revenues and Expenses to Cash Flows from Operating Activities (pg. 4-10)
Review 4-2 (pg. 4-16)
Reconciling Net Income and Cash Flow from Operating Activities (pg. 4-17)
Cash Flow from Operating Activities Using the Indirect Method (pg. 4-18)
Review 4-3 (pg. 4-19)
Preparing the Statement of Cash Flows-Investing and Financing Activities (pg. 4-19)
Cash Flows from Investing Activities (pg. 4-20)
Cash Flows from Financing Activities (pg. 4-20)
Review 4-4 (pg. 4-22)
Additional Detail in the Statement of Cash Flows (pg. 4-23)
Case Illustration (pg. 4-23)
Gains and Losses on Investing and Financing Activities (pg. 4-24)
Noncash Investing and Financing Activities (pg. 4-25)
The Effects of Foreign Currencies on the Statement of Cash Flows (pg. 4-27)
Supplemental Disclosures (pg. 4-28)
Review 4-5 (pg. 4-28)
Analyzing Financial Statements (pg. 4-29)
Interpreting Indirect Method Cash from Operations (pg. 4-29)
Analysis Objective (pg. 4-29)
Analysis Objective (pg. 4-31)
Review 4-6 (pg. 4-32)
Appendix 4A: A Spreadsheet Approach to Preparing the Statement of Cash Flows (pg. 4-33)
Step 1: Classify the balance sheet accounts. (pg. 4-33)
Step 2: Compute the changes in the balance sheet accounts. (pg. 4-33)
Step 3: Handle the accounts that have single classifications. (pg. 4-34)
Step 4: Enter the effect of investing/financing transactions that do not involve cash. (pg. 4-34)
Step 5: Analyze the change in retained earnings. (pg. 4-34)
Step 6: Analyze the change in plant assets. (pg. 4-34)
Step 7: Total the columns. (pg. 4-35)
Step 8: Prepare the statement of cash flows. (pg. 4-35)
Review 4-7 (pg. 4-35)
Summary (pg. 4-35)
Guidance Answers . . . You Make the Call (pg. 4-36)
Key Ratios (pg. 4-37)
Multiple Choice (pg. 4-37)
Questions (pg. 4-38)
Data Analytics (pg. 4-39)
Data Visualization (pg. 4-40)
Mini Exercises (pg. 4-40)
Exercises (pg. 4-44)
Problems (pg. 4-49)
Cases and Projects (pg. 4-56)
Solutions to Review Problems (pg. 4-60)
Chapter 5: Analyzing and Interpreting Financial Statements (pg. 5-1)
Pepsico (pg. 5-2)
Introduction (pg. 5-3)
Assessing the Business Environment (pg. 5-3)
Vertical and Horizontal Analysis (pg. 5-4)
Review 5-1 (pg. 5-6)
Return on Investment (pg. 5-8)
Return on Equity (ROE) (pg. 5-8)
Return on Assets (ROA) (pg. 5-8)
Return on Financial Leverage (ROFL) (pg. 5-9)
Review 5-2 (pg. 5-10)
Disaggregating ROA (pg. 5-11)
Review 5-3 (pg. 5-15)
Appendix 5A: Analyzing and Interpreting Core Operating Activities (pg. 5-23)
Reporting Operating Activities in the Income Statement (pg. 5-23)
Reporting Operating Activities in the Balance Sheet (pg. 5-24)
Disaggregating RNOA (pg. 5-24)
Review 5-5 (pg. 5-25)
Appendix 5B: Financial Statement Forecasts (pg. 5-25)
Step 1. Forecast Sales Revenue (pg. 5-25)
Step 2. Forecast Operating Expenses (pg. 5-26)
Step 3. Forecast Operating Assets and Liabilities (pg. 5-26)
Step 4. Forecast Nonoperating Assets, Liabilities, Revenues, and Expenses (pg. 5-27)
Step 5. Forecast Net Income, Dividends, and Retained Earnings (pg. 5-27)
Step 6. Forecast Cash (pg. 5-28)
Step 7. Prepare the Statement of Cash Flows Forecast (pg. 5-29)
Additional Considerations (pg. 5-29)
Review 5-6 (pg. 5-30)
Summary (pg. 5-30)
Key Ratios (pg. 5-31)
Multiple Choice (pg. 5-31)
Guidance Answers . . . You Make the Call (pg. 5-32)
Questions (pg. 5-32)
Data Analytics (pg. 5-33)
Data Visualization (pg. 5-35)
Mini Exercises (pg. 5-35)
Exercises (pg. 5-38)
Problems (pg. 5-42)
Cases and Projects (pg. 5-48)
Solutions to Review Problems (pg. 5-49)
Chapter 6: Reporting and Analyzing Revenues, Receivables, and Operating Income (pg. 6-1)
MICROSOFT CORPORATION (pg. 6-2)
Reporting Operating Income (pg. 6-3)
Revenue Recognition (pg. 6-5)
Review 6-1 (pg. 6-8)
Revenue Recognition Subsequent to Customer Purchase (pg. 6-8)
Review 6-2 (pg. 6-11)
Review 6-3 (pg. 6-14)
Reporting Accounts Receivable (pg. 6-14)
Determining the Allowance for Uncollectible Accounts (pg. 6-15)
Reporting the Allowance for Uncollectible Accounts (pg. 6-16)
Recording Write-Offs of Uncollectible Accounts (pg. 6-17)
Disclosure Notes and Interpretations (pg. 6-19)
Review 6-4 (pg. 6-21)
Analyzing Financial Statements (pg. 6-22)
Net Operating Profit After Taxes (NOPAT) (pg. 6-22)
Analysis Objective (pg. 6-22)
Analysis Objective (pg. 6-25)
Review 6-5 (pg. 6-26)
Earnings Management (pg. 6-27)
Review 6-6 (pg. 6-28)
Appendix 6A: Reporting Nonrecurring Items (pg. 6-29)
Discontinued Operations (pg. 6-29)
Exit or Disposal Costs (pg. 6-30)
Review 6-7 (pg. 6-31)
Summary (pg. 6-31)
Guidance Answers . . . You Make the Call (pg. 6-32)
Key Ratios (pg. 6-33)
Multiple Choice (pg. 6-33)
Questions (pg. 6-34)
Data Analytics (pg. 6-34)
Data Visualization (pg. 6-36)
Mini Exercises (pg. 6-36)
ExerciseS (pg. 6-39)
Problems (pg. 6-46)
Cases and Projects (pg. 6-49)
Solutions to Review Problems (pg. 6-53)
Chapter 7: Reporting and Analyzing Inventory (pg. 7-1)
Home Depot (pg. 7-2)
Reporting Operating Expenses (pg. 7-3)
Expense Recognition Principles (pg. 7-3)
Reporting Inventory Costs in the Financial Statements (pg. 7-4)
Recording Inventory Costs in the Financial Statements (pg. 7-5)
Inventory and the Cost of Acquisition (pg. 7-6)
Inventory Reporting by Manufacturing Firms (pg. 7-6)
Review 7-1 (pg. 7-7)
Inventory Costing Methods (pg. 7-7)
First-In, First-Out (FIFO) (pg. 7-8)
Last-In, First-Out (LIFO) (pg. 7-9)
Inventory Costing and Price Changes (pg. 7-11)
Average Cost (AC) (pg. 7-11)
Review 7-2 (pg. 7-12)
Lower of Cost or Net Realizable Value (pg. 7-13)
Review 7-3 (pg. 7-14)
Financial Statement Effects and Disclosure (pg. 7-14)
Financial Statement Effects of Inventory Costing (pg. 7-16)
Review 7-4 (pg. 7-19)
Analyzing Financial Statements (pg. 7-20)
Analysis Objective (pg. 7-20)
Analysis Objective (pg. 7-21)
Review 7-5 (pg. 7-25)
Appendix 7A: LIFO Liquidation (pg. 7-25)
Analysis Implications (pg. 7-26)
Review 7-6 (pg. 7-27)
Summary (pg. 7-27)
Guidance Answers . . . You Make the Call (pg. 7-28)
Key Ratios (pg. 7-28)
Multiple Choice (pg. 7-29)
Questions (pg. 7-29)
Data Analytics (pg. 7-30)
Data Visualization (pg. 7-31)
Mini Exercises (pg. 7-31)
Exercises (pg. 7-34)
Problems (pg. 7-37)
Cases and Project (pg. 7-40)
Solutions to Review Problems (pg. 7-42)
Chapter 8: Reporting and Analyzing Long-Term Operating Assets (pg. 8-1)
Procter & Gamble (pg. 8-2)
Introduction (pg. 8-3)
Property, Plant, and Equipment (PPE) (pg. 8-3)
Determining Costs to Capitalize (pg. 8-4)
Review 8-1 (pg. 8-5)
Depreciation (pg. 8-5)
Depreciation Methods (pg. 8-6)
Changes in Accounting Estimates (pg. 8-9)
Review 8-2 (pg. 8-10)
Asset Sales and Impairments (pg. 8-10)
Note Disclosure (pg. 8-12)
Review 8-3 (pg. 8-13)
Analyzing Financial Statements (pg. 8-13)
Analysis Objective (pg. 8-13)
Analysis Objective (pg. 8-14)
Cash Flow Effects (pg. 8-16)
Review 8-4 (pg. 8-17)
Intangible Assets (pg. 8-17)
Research and Development Costs (pg. 8-17)
Patents (pg. 8-18)
Copyrights (pg. 8-19)
Trademarks (pg. 8-19)
Franchise Rights (pg. 8-19)
Amortization and Impairment of Identifiable Intangible Assets (pg. 8-19)
Digital Assets (pg. 8-21)
Goodwill (pg. 8-21)
Note Disclosures (pg. 8-22)
Review 8-5 (pg. 8-23)
Analysis Implications (pg. 8-23)
Review 8-6 (pg. 8-24)
Summary (pg. 8-25)
Guidance Answers . . . You Make the Call (pg. 8-25)
Key Ratios (pg. 8-25)
Multiple Choice (pg. 8-26)
Questions (pg. 8-26)
Data Analytics (pg. 8-27)
Data Visualization (pg. 8-28)
Mini Exercises (pg. 8-28)
Exercises (pg. 8-30)
Problems (pg. 8-34)
Cases and Projects (pg. 8-37)
Solutions to Review Problems (pg. 8-40)
Chapter 9: Reporting and Analyzing Liabilities (pg. 9-1)
Verizon (pg. 9-2)
Introduction (pg. 9-3)
Current Liabilities (pg. 9-4)
Accounts Payable (pg. 9-4)
Accrued Liabilities (pg. 9-6)
Other Current Liabilities (pg. 9-10)
Review 9-1 (pg. 9-10)
Current Nonoperating (Financial) Liabilities (pg. 9-10)
Review 9-2 (pg. 9-13)
Long-Term Liabilities (pg. 9-13)
Installment Loans (pg. 9-13)
Bonds (pg. 9-15)
Pricing of Bonds (pg. 9-15)
Effective Cost of Debt (pg. 9-17)
Review 9-3 (pg. 9-18)
Reporting of Bond Financing (pg. 9-18)
Effects of Discount and Premium Amortization (pg. 9-20)
The Fair Value Option (pg. 9-22)
Effects of Bond Repurchase (pg. 9-24)
Financial Statement Disclosure Notes (pg. 9-24)
Interest and the Statement of Cash Flows (pg. 9-26)
Disclosure of Commitments and Contingencies (pg. 9-26)
Review 9-4 (pg. 9-27)
Analyzing Financial Statements (pg. 9-27)
Analysis Objective (pg. 9-27)
Debt Ratings and the Cost of Debt (pg. 9-29)
Review 9-5 (pg. 9-31)
Summary (pg. 9-32)
Guidance Answers . . . You Make the Call (pg. 9-33)
Key Ratios (pg. 9-33)
Multiple Choice (pg. 9-33)
Questions (pg. 9-34)
Data Analytics (pg. 9-34)
Data Visualization (pg. 9-36)
Mini Exercises (pg. 9-36)
Exercises (pg. 9-40)
Problems (pg. 9-43)
Cases and Projects (pg. 9-46)
Solutions to Review Problems (pg. 9-48)
Chapter 10: Reporting and Analyzing Leases, Pensions, Income Taxes, and Commitments and Contingencie (pg. 10-1)
Deere & Company (pg. 10-2)
Introduction (pg. 10-3)
Leases (pg. 10-3)
Lessee Reporting of Leases (pg. 10-5)
Lease Disclosures (pg. 10-12)
Review 10-1 (pg. 10-14)
Pensions (pg. 10-15)
Balance Sheet Effects of Defined Benefit Pension Plans (pg. 10-15)
Income Statement Effects of Defined Benefit Pension Plans (pg. 10-18)
Note Disclosures-Components of Plan Assets and PBO (pg. 10-18)
Note Disclosures-Components of Pension Expense (pg. 10-20)
Note Disclosures and Future Cash Flows (pg. 10-21)
Other Post-Employment Benefits (pg. 10-23)
Review 10-2 (pg. 10-24)
Accounting For Income Taxes (pg. 10-25)
Book-Tax Differences (pg. 10-25)
Revaluation of Deferred Tax Assets and Liabilities Due to a Tax Rate Change (pg. 10-31)
Income Tax Disclosures (pg. 10-32)
Deferred Taxes in the Statement of Cash Flows (pg. 10-35)
Computation and Analysis of Taxes (pg. 10-35)
Review 10-3 (pg. 10-36)
Commitments and Contengencies and Other Disclosures (pg. 10-36)
Analyzing Financial Statements (pg. 10-38)
Analysis Objective (pg. 10-38)
Review 10-4 (pg. 10-39)
Summary (pg. 10-39)
Guidance Answers . . . You Make The Call (pg. 10-40)
Key Ratios (pg. 10-41)
Multiple Choice (pg. 10-41)
Questions (pg. 10-41)
Data Analytics (pg. 10-42)
Data Visualization (pg. 10-44)
Mini Exercises (pg. 10-44)
Exercises (pg. 10-47)
Problems (pg. 10-53)
Cases and Projects (pg. 10-58)
Solutions to Review Problems (pg. 10-64)
Chapter 11: Reporting and Analyzing Stockholders’ Equity (pg. 11-1)
Pfizer (pg. 11-2)
Introduction (pg. 11-3)
Contributed Capital (pg. 11-4)
Classes of Stock (pg. 11-4)
Accounting for Stock Transactions (pg. 11-7)
Review 11-1 (pg. 11-11)
Earned Capital (pg. 11-11)
Cash Dividends (pg. 11-11)
Stock Dividends and Splits (pg. 11-13)
Stock Transactions and the Statement of Cash Flows (pg. 11-15)
Review 11-2 (pg. 11-15)
Comprehensive Income (pg. 11-16)
Summary of Stockholders’ Equity (pg. 11-17)
Analyzing Financial Statements (pg. 11-17)
Analysis Objective (pg. 11-17)
Review 11-3 (pg. 11-19)
Earnings Per Share (pg. 11-19)
Computation and Analysis of EPS (pg. 11-20)
Review 11-4 (pg. 11-22)
Appendix 11A: Dilutive Securities: Accounting for Convertible Securities, Stock Options, and Restr (pg. 11-22)
Convertible Securities (pg. 11-22)
Stock Rights (pg. 11-23)
Employee Stock Options (pg. 11-24)
Restricted Stock (pg. 11-25)
Review 11-5 (pg. 11-27)
Summary (pg. 11-28)
Guidance Answers . . . You Make the Call (pg. 11-29)
Key Ratios (pg. 11-29)
Multiple Choice (pg. 11-29)
Questions (pg. 11-30)
Data Analytics (pg. 11-31)
Data Visualization (pg. 11-32)
Mini Exercises (pg. 11-32)
Exercises (pg. 11-37)
Problems (pg. 11-43)
Cases and Projects (pg. 11-48)
Solutions to Review Problems (pg. 11-51)
Chapter 12: Reporting and Analyzing Financial Investments (pg. 12-1)
Alphabet (pg. 12-2)
Introduction (pg. 12-3)
Review 12-1 (pg. 12-5)
Fair Value: An Introduction (pg. 12-5)
Review 12-2 (pg. 12-6)
Passive Investments in Debt Securities (pg. 12-6)
Acquisition of the Investment (pg. 12-6)
Investments Reported at Cost (pg. 12-7)
Investments Marked to Fair Value (pg. 12-8)
Sale of the Investment (pg. 12-8)
Debt Investments Marked to Fair Value (pg. 12-9)
Passive Investments in Equity Securities (pg. 12-12)
Financial Statement Disclosures (pg. 12-14)
Potential for Earnings Management (pg. 12-16)
Review 12-3 (pg. 12-17)
Investments with Significant Influence (pg. 12-17)
Accounting for Investments with Significant Influence (pg. 12-18)
Equity Method Accounting and Effects on Ratios (pg. 12-20)
Financial Statement Disclosures (pg. 12-20)
Review 12-4 (pg. 12-21)
Investments with Control (pg. 12-22)
Accounting for Investments with Control (pg. 12-22)
Reporting of Acquired Assets and Liabilities (pg. 12-24)
Noncontrolling Interest (pg. 12-28)
Financial Statement Analysis (pg. 12-30)
Review 12-5 (pg. 12-31)
Appendix 12A: Equity Method Mechanics (pg. 12-31)
Review 12-6 (pg. 12-33)
Appendix 12B: Consolidation Accounting Mechanics (pg. 12-33)
Review 12-7 (pg. 12-34)
Appendix 12C: Accounting for Investments in Derivatives (pg. 12-35)
Review 12-8 (pg. 12-36)
Summary (pg. 12-37)
Guidance Answers . . . You Make the Call (pg. 12-39)
Multiple Choice (pg. 12-39)
Data Analytics (pg. 12-40)
Data Visualization (pg. 12-40)
Mini Exercises (pg. 12-41)
Exercises (pg. 12-44)
Problems (pg. 12-51)
Cases and Projects (pg. 12-54)
Solutions to Review Problems (pg. 12-57)
Appendix A: Compound Interest and the TimeValue of Money (pg. A-1)
Future Value Concepts (pg. A-2)
Present Value Concepts (pg. A-3)
Present Value of a Single Amount (pg. A-3)
Present Value of an Annuity (pg. A-4)
Installment Loans (pg. A-5)
Bond Valuation (pg. A-5)
Calculating Bond Yields (pg. A-6)
Future Value of Annuities (pg. A-6)
Using Excel to Compute Time-Value (pg. A-7)
Future Value Calculations (pg. A-7)
Present Value Calculations (pg. A-10)
Exercises (pg. A-17)
Appendix B: Data Analytics and Blockchain Technology (pg. B-1)
Data Analytics (pg. B-2)
Big Data (pg. B-2)
Types of Data Analytics (pg. B-2)
Data Analytics in the Accounting Profession (pg. B-3)
The Analytics Mindset (pg. B-4)
Data Analytic Tools (pg. B-5)
Data Visualization (pg. B-6)
Blockchain Technology (pg. B-10)
Summary (pg. B-12)
Video Resources For Tableau (pg. B-13)
Multiple Choice (pg. B-13)
Exercises (pg. B-14)
Problems (pg. B-15)
Index (pg. I-1)
Michelle L. Hanlon

Michelle L. Hanlon

Michelle L. Hanlon is the Howard W. Johnson Professor at the MIT Sloan School of Management. She earned her doctorate at the University of Washington.

Prior to joining MIT, she was a faculty member at the University of Michigan. Professor Hanlon has taught financial accounting to undergraduates, MBA students, executive MBA students, and Masters of Finance students. Professor Hanlon also teaches Taxes and Business Strategy to MBA students. She is the winner of the 2013 Jamieson Prize for Excellence in Teaching at MIT Sloan.

Professor Hanlon’s research focuses primarily on the intersection of taxation and financial accounting. Her recent work examines the capital market effects of the accounting for income tax, the reputational effects of corporate tax avoidance, and the economic consequences of U.S. international tax policies for multinational corporations. She has published research studies in the Journal of Accounting and Economics, the Journal of Accounting Research, The Accounting Review, the Review of Accounting Studies, the Journal of Finance, the Journal of Financial Economics, the Journal of Public Economics, and others. She has won several awards for her research and has presented her work at numerous universities and conferences. Professor Hanlon has served on several editorial boards and currently serves as an editor at the Journal of Accounting and Economics. 

Professor Hanlon has testified in front of the U.S. Senate Committee on Finance and the U.S. House of Representatives Committee on Ways and Means about the interaction of financial accounting and tax policy. She served as a U.S. delegate to the American-Swiss Young Leaders Conference in 2010 and worked as an Academic Fellow at the U.S. House Ways and Means Committee in 2015.


Robert P. Magee

Robert P. Magee

Robert P. Magee is Keith I. DeLashmutt Professor of Accounting Information and Management at the Kellogg School of Management at Northwestern University.

He received his A.B., M.S. and Ph.D. from Cornell University. Prior to joining the Kellogg faculty in 1976, he was a faculty member at the University of Chicago's Graduate School of Business. For academic year 1980-81, he was a visiting faculty member at IMEDE (now IMD) in Lausanne, Switzerland.

Professor Magee's research focuses on the use of accounting information to facilitate decision-making and control within organizations. He has published articles in The Accounting Review, the Journal of Accounting Research, the Journal of Accounting and Economics, and a variety of other journals. He is the author of Advanced Managerial Accounting and co-author (with Thomas R. Dyckman and David H. Downes) of Efficient Capital Markets and Accounting: A Critical Analysis. The latter book received the Notable Contribution to the Accounting Literature Award from the AICPA in 1978. Professor Magee has served on the editorial boards of The Accounting Review, the Journal of Accounting Research, the Journal of Accounting and Economics and the Journal of Accounting, Auditing and Finance. From 1994-96, he served as Editor of The Accounting Review, the quarterly research journal of the American Accounting Association. He received the American Accounting Association's Outstanding Accounting Educator Award in 1999 and the Illinois CPA Society Outstanding Educator Award in 2000.

Professor Magee teaches financial accounting to MBA and Executive MBA students. He has received several teaching awards at the Kellogg School, including the Alumni Choice Outstanding Professor Award in 2003.


Glenn M. Pfeiffer

Glenn M. Pfeiffer

Glenn M. Pfeiffer is Professor of Accounting at the George L. Argyros School of Business and Economics at Chapman University.

He received his M.S. and Ph.D. from Cornell University after he earned a bachelor's degree from Hope College. Prior to joining the faculty at the Argyros School, he held appointments at the University of Washington, Cornell University, the University of Chicago, the University of Arizona, and San Diego State University.

Professor Pfeiffer’s research focuses on financial reporting and capital markets. He has investigated issues relating to lease accounting, LIFO inventory liquidation, earnings per share, employee stock options, corporate reorganization, and technology investments. He has published articles in The Accounting Review, the Financial Analysts Journal, the International Journal of Accounting Information Systems, the Journal of Applied Business Research, the Journal of High Technology Management Research, the Journal of Accounting Education, and several other academic journals. In addition, he has published numerous case studies in financial accounting and reporting.

Professor Pfeiffer teaches financial accounting and financial analysis to undergraduate, MBA, and Executive students. He has also taught managerial accounting for MBAs. He has won several teaching awards at both the undergraduate and graduate levels.