Financial and Managerial Accounting

Book Preface

What consistently ranks as one of the top career opportunities in business? What frequently rates among the most popular majors on campus? What was the undergraduate degree chosen by Nike founder Phil Knight, Home Depot co-founder Arthur Blank, former acting director of the Federal Bureau of Investigation (FBI) Thomas Pickard, and numerous members of Congress? Accounting.1 Why did these people choose accounting? They wanted to understand what was happening financially to their organizations. Accounting is the financial information system that provides these insights. In short, to understand your organization, you have to know the numbers.

Accounting consists of three basic activities—it identifi es, records, and communicates the economic events of an organization to interested users. Let’s take a closer look at these three activities.

Three Activities

As a starting point to the accounting process, a company identifi es the economic events relevant to its business. Examples of economic events are the sale of snack chips by PepsiCo, the providing of telephone services by AT&T, and the payment of wages by Ford Motor Company.

Once a company like PepsiCo identifi es economic events, it records those events in order to provide a history of its fi nancial activities. Recording consists of keeping a systematic, chronological diary of events, measured in dollars and cents. In recording, PepsiCo also classifi es and summarizes economic events. Finally, PepsiCo communicates the collected information to interested users by means of accounting reports. The most common of these reports are called fi nancial statements. To make the reported financial information meaningful, PepsiCo reports the recorded data in a standardized way. It accumulates information resulting from similar transactions. For example, PepsiCo accumulates all sales transactions over a certain period of time and reports the data as one amount in the company’s fi nancial statements. Such data are said to be reported in the aggregate. By presenting the recorded data in the aggregate, the accounting process simplifi es a multitude of transactions and makes a series of activities understandable and meaningful.

A vital element in communicating economic events is the accountant’s ability to analyze and interpret the reported information. Analysis involves use of ratios, percentages, graphs, and charts to highlight signifi cant fi nancial trends and relationships. Interpretation involves explaining the uses, meaning, and limitations of reported data. Appendix A of this textbook shows the fi nancial statements of PepsiCo, Inc. Appendix B illustrates the fi nancial statements of The Coca-Cola Company. We refer to these statements at various places throughout the textbook. (In addition, in the A Look at IFRS section at the end of each chapter, the U.K. company Zetar plc is analyzed.) At this point, these fi nancial statements probably strike you as complex and confusing. By the end of this course, you’ll be surprised at your ability to understand, analyze, and interpret them.
Illustration 1-1 summarizes the activities of the accounting process.
You should understand that the accounting process includes the bookkeeping function. Bookkeeping usually involves only the recording of economic events. It is therefore just one part of the accounting process. In total, accounting involves the entire process of identifying, recording, and communicating economic events

Brief Contents
1 Accounting in Action 2
2 The Recording Process 52
3 Adjusting the Accounts 100
4 Completing the Accounting Cycle 162
5 Accounting for Merchandising Operations 218
6 Inventories 270
7 Fraud, Internal Control, and Cash 324
8 Accounting for Receivables 378
9 Plant Assets, Natural Resources, and Intangible
Assets 422
10 Liabilities 474
11 Corporations: Organization, Stock Transactions,
Dividends, and Retained Earnings 536
12 Investments 600
13 Statement of Cash Flows 644
14 Financial Statement Analysis 710
15 Managerial Accounting 764
16 Job Order Costing 808
17 Process Costing 852
18 Activity-Based Costing 900
19 Cost-Volume-Profit 950
20 Cost-Volume-Profit Analysis: Additional Issues 988
21 Incremental Analysis 1042
22 Pricing 1082
23 Budgetary Planning 1130
24 Budgetary Control and Responsibility
Accounting 1180
25 Standard Costs and Balanced Scorecard 1238
26 Planning for Capital Investments 1290
APPENDICES
A Specimen Financial Statements: PepsiCo, Inc.
B Specimen Financial Statements: The Coca-Cola
Company
C Specimen Financial Statements: Zetar plc
D Time Value of Money
E Payroll Accounting*
F Subsidiary Ledgers and Special Journals*
G Other Significant Liabilities*
H Standards of Ethical Conduct for Managerial
Accountants*