Accounting Principles, 12th Edition

Book Preface

Many students who take this course do not plan to be accountants. If you are in that group, you might be thinking, “If I’m not going to be an accountant, why do I need to know accounting?” Well, consider this quote from Harold Geneen, the former chairman of IT&T: “To be good at your business, you have to know the number —cold.” In business, accounting and fi nancial statements are the means for communicating the numbers. If you don’t know how to read financial statements, you can’t really know your business.

Many businesses agree with this view. They see the value of their employees being able to read financial statements and understand how their actions affect the company’s financial results. For example, consider Clif Bar & Company. The original Clif Bar® energy bar was created in 1990 by Gary Erickson and his mother in her kitchen. Today, the company has almost 300 employees.

Clif Bar is guided by what it calls its Five Aspirations— Sustaining Our Business, Our Brands, Our People, Our Community, and the Planet. Its website documents its efforts and accomplishments in these fi ve areas. Just a few examples include the company’s use of organic products to protect soil, water, and biodiversity; the “smart” solar array (the largest in North America), which provides nearly all the electrical needs for its 115,000-square foot building; and the incentives Clif Bar provides to employees to reduce their personal environmental impact, such as $6,500 toward the purchase of an efficient car or $1,000 per year for eco-friendly improvements toward their homes.

One of the company’s proudest moments was the creation of an employee stock ownership plan (ESOP) in 2010. This plan gives its employees 20% ownership of the company (Gary and his wife Kit own the other 80%). The ESOP also resulted in Clif Bar enacting an open-book management program, including the commitment to educate all employee-owners about its finances. Armed with this basic fi nancial knowledge, employees are more aware of the financial impact of their actions, which leads to better decisions.

Many other companies have adopted this open-book management approach. Even in companies that do not practice open-book management, employers generally assume that managers in all areas of the company are “financially literate.”

Taking this course will go a long way to making you fi nancially literate. In this textbook, you will learn how to read and prepare fi nancial statements, and how to use basic tools to evaluate financial results. Throughout this textbook, we attempt to increase your familiarity with fi nancial reporting by providing numerous references, questions, and exercises that encourage you to explore the fi nancial statements of well-known companies.

Brief Contents

1 Accounting in Action 2
2 The Recording Process 48
3 Adjusting the Accounts 92
4 Completing the Accounting Cycle 148
5 Accounting for Merchandising Operations 206
6 Inventories 262
7 Accounting Information Systems 310
8 Fraud, Internal Control, and Cash 354
9 Accounting for Receivables 404
10 Plant Assets, Natural Resources, and Intangible Assets 442
11 Current Liabilities and Payroll Accounting 490
12 Accounting for Partnerships 532
13 Corporations: Organization and Capital Stock Transactions 570
14 Corporations: Dividends, Retained Earnings, and Income Reporting 608
15 Long-Term Liabilities 644
16 Investments 690
17 Statement of Cash Flows 726
18 Financial Statement Analysis 784
19 Managerial Accounting 834
20 Job Order Costing 876
21 Process Costing 916
22 Cost-Volume-Profit 960
23 Budgetary Planning 1004
24 Budgetary Control and Responsibility Accounting 1052
25 Standard Costs and Balanced Scorecard 1100
26 Incremental Analysis and Capital Budgeting 1146
APPENDICES
A Specimen Financial Statements: Apple Inc.
B Specimen Financial Statements: PepsiCo, Inc.
C Specimen Financial Statements: The Coca-Cola Company
D Specimen Financial Statements: Amazon.com, Inc.
E Specimen Financial Statements: Wal-Mart Stores, Inc.
F Specimen Financial Statements: Louis Vuitton
G Time Value of Money
H Standards of Ethical Conduct for Managerial Accountants