11th edition

Financial

Accounting

W. Steve Albrecht
PhD, CPA, CIA, CFE
Brigham Young University
•••

Earl K. Stice
PhD
Brigham Young University
•••

James D. Stice
PhD
Brigham Young University


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11th edition

Financial

Accounting

W. Steve Albrecht
PhD, CPA, CIA, CFE
Brigham Young University
•••

Earl K. Stice
PhD
Brigham Young University
•••

James D. Stice
PhD
Brigham Young University

Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States

About the Authors

iii


Financial Accounting, Eleventh Edition

© 2011, 2008 South-Western, Cengage Learning

W. Steve Albrecht, Earl K. Stice, and James D. Stice

ALL RIGHTS RESERVED. No part of this work covered by the copyright herein
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1 2 3 4 5 6 7 13 12 11 10 09



BRIEF CONTENTS

PA R T

ONE

Financial Reporting and the Accounting Cycle 1
1
2
3
4
5

ACCOUNTING INFORMATION: USERS AND USES
FINANCIAL STATEMENTS: AN OVERVIEW
THE ACCOUNTING CYCLE: THE MECHANICS OF ACCOUNTING
COMPLETING THE ACCOUNTING CYCLE
INTERNAL CONTROLS: ENSURING THE INTEGRITY OF FINANCIAL INFORMATION

PA R T

2
24
70
123
179

TWO


Operating Activities 213
6 RECEIVABLES: SELLING A PRODUCT OR SERVICE
7 INVENTORY AND THE COST OF SALES
8 COMPLETING THE OPERATING CYCLE

PA R T

TH REE

Investing and Financing Activities
9
10
11
12

214
269
330

375

INVESTMENTS: PROPERTY, PLANT, AND EQUIPMENT AND INTANGIBLE ASSETS
FINANCING: LONG-TERM LIABILITIES
FINANCING: EQUITY
INVESTMENTS: DEBT AND EQUITY SECURITIES

376
446
505

552

(Continued)
About the
Authors
Brief
Contents

vv


PA RT

FOUR

Other Dimensions of Financial Reporting
13 STATEMENT OF CASH FLOWS
14 ANALYZING FINANCIAL STATEMENTS

Appendix A: Wal-Mart 2009 Annual Report
Appendix B: Present Value Tables
Appendix C: Check Figures
Glossary
Subject Index
Real Company Index

vi

Brief
About

Contents
the Authors

609
610
663

A-1
B-1
C-1
G-1
SI-1
CI-1


CONTENTS

PA R T

ONE

Financial Reporting and the Accounting Cycle
CHAPTER 1

ACCOUNTING INFORMATION: USERS

AND

1


USES

2

What’s the Purpose of Accounting?__________________________________________ 4
The Relationship of Accounting to Business _______________________________ 6
Who Uses Accounting Information?_________________________________________ 7
Lenders ___________________________________________________________ 9
Investors __________________________________________________________ 9
Management ______________________________________________________ 10
Other Users of Financial Information ___________________________________ 10
Within What Kind of Environment Does Accounting Operate? __________________ 11
The Significance and Development of Accounting Standards _________________ 12
The Financial Accounting Standards Board _______________________________ 12
Other Organizations ________________________________________________ 12
International Business _______________________________________________ 13
Ethics in Accounting ________________________________________________ 14
Technology _______________________________________________________ 15
So, Why Should I Study Accounting? _______________________________________ 16
End-of-Chapter Materials________________________________________________ 18

CHAPTER 2

FINANCIAL STATEMENTS: AN OVERVIEW

The Financial Statements ________________________________________________
The Balance Sheet _____________________________________________________
Accounting Equation _______________________________________________
The Income Statement __________________________________________________
The Statement of Cash Flows _____________________________________________

How the Financial Statements Tie Together ______________________________
Notes to the Financial Statements _________________________________________
Summary of Significant Accounting Policies ______________________________
Additional Information about Summary Totals ____________________________
Disclosure of Information Not Recognized _______________________________
Supplementary Information __________________________________________

24
25
26
28
32
37
40
41
41
42
42
42

About the Authors
Contents

vii
vii


The External Audit _____________________________________________________
Fundamental Concepts and Assumptions ____________________________________
The Separate Entity Concept__________________________________________

The Assumption of Arm’s-Length Transactions ____________________________
The Cost Principle _________________________________________________
The Monetary Measurement Concept ___________________________________
The Going Concern Assumption_______________________________________
End-of-Chapter Materials________________________________________________

CHAPTER 3

THE ACCOUNTING CYCLE: THE MECANICS
ACCOUNTING

44
46
46
47
47
47
47
48

OF

70

How Can We Collect All This Information? __________________________________ 71
How Do Transactions Affect the Accounting Equation? _________________________ 73
The Accounting Equation ____________________________________________ 73
Using Accounts to Categorize Transactions _______________________________ 75
Expanding the Accounting Equation to Include Revenues,
Expenses, and Dividends _____________________________________________ 77

How Do We Record the Effects of Transactions? ______________________________ 79
Acquiring Cash, Either from Owners or by Borrowing ______________________ 80
Acquiring Other Assets ______________________________________________ 82
Selling Goods or Providing Services ____________________________________ 85
Collecting Cash and Paying Obligations _________________________________ 87
A Note on Journal Entries ____________________________________________ 89
Posting Journal Entries and Preparing a Trial Balance ___________________________ 92
Determining Account Balances ________________________________________ 93
Illustration of the First Three Steps in the Accounting Cycle __________________ 94
Where Do Computers Fit In All This? ______________________________________ 99
End-of-Chapter Materials_______________________________________________ 101

CHAPTER 4

COMPLETING

THE

ACCOUNTING CYCLE

Accrual Accounting ___________________________________________________
Periodic Reporting ________________________________________________
Accrual- versus Cash-Basis Accounting _________________________________
Adjusting Entries _____________________________________________________
Unrecorded Receivables ____________________________________________
Unrecorded Liabilities ______________________________________________
Prepaid Expenses __________________________________________________
Unearned Revenues________________________________________________

viii

viii

About the Authors
Contents

123
124
125
126
129
130
131
132
134


Preparing Financial Statements ___________________________________________
Financial Statement Preparation ______________________________________
The Notes _______________________________________________________
The Audit _______________________________________________________
Closing the Books ____________________________________________________
Real and Nominal Accounts _________________________________________
Closing Entries ___________________________________________________
Preparing a Post-Closing Trial Balance _________________________________
A Summary of the Accounting Cycle ______________________________________
End-of-Chapter Materials_______________________________________________

CHAPTER 5

INTERNAL C ONTROLS: E NSURING

OF F INANCIAL I NFORMATION

138
138
140
141
144
144
144
146
148
149

THE I NTEGRITY

The Types of Problems That Can Occur ____________________________________
Types of Errors in the Reporting Process ________________________________
Disagreements in Judgment _________________________________________
Fraudulent Financial Reporting_______________________________________
Safeguards Designed to Minimize Problems _________________________________
The Control Environment___________________________________________
Control Activities (Procedures) _______________________________________
Reasons for Earnings Management ________________________________________
Meet Internal Targets ______________________________________________
Meet External Expectations __________________________________________
Income Smoothing ________________________________________________
Window Dressing for an IPO or a Loan ________________________________
The Earnings Management Continuum ________________________________
Is Earnings Management Ethical? _____________________________________
Personal Ethics ___________________________________________________

The Sarbanes-Oxley Act ________________________________________________
Public Company Accounting Oversight Board ___________________________
Constraints on Auditors ____________________________________________
Constraints on Management _________________________________________
The Role of Auditors in the Accounting Process ______________________________
Internal Auditors __________________________________________________
External Auditors _________________________________________________
What Do Auditors Do? _____________________________________________
Are External (Independent) Auditors Independent? _______________________
The Securities and Exchange Commission __________________________________
The Effect of the 1934 Act on Independent Accountants ___________________
End-of-Chapter Materials_______________________________________________
Comprehensive Problem Chapters 1–5 ___________________________________

179
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181
182
183
184
186
186
188
188
189
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192

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200
210

About the Authors
Contents

ix
ix


PA RT

TWO

Operating Activities
CHAPTER 6

213


RECEIVABLES: SELLING

A

P RO D U C T

OR

S E R V I C E 214

Major Activities of a Business ____________________________________________
Recognizing Revenue __________________________________________________
When Should Revenue Be Recognized?_________________________________
Application of the Revenue Recognition Criteria _________________________
Cash Collection ______________________________________________________
Sales Discounts ___________________________________________________
Sales Returns and Allowances ________________________________________
Control of Cash __________________________________________________
Accounting for Credit Customers Who Don’t Pay ____________________________
The Allowance Method _____________________________________________
Real-World Illustration of Accounting for Bad Debts ______________________
Assessing How Well Companies Manage Their Receivables _____________________
Recording Warranty and Service Costs Associated with a Sale ___________________

216
218
218
219
222
222

223
224
225
226
229
231
233

Reconciling the Bank Account ___________________________________________
Foreign Currency Transactions ___________________________________________
Foreign Currency Transaction Example _________________________________
End-of-Chapter Materials_______________________________________________

235
239
240
242

CHAPTER 7

I NVENTORY

AND THE

C OST

OF

SALES


Inventory and Cost of Goods Sold ________________________________________
What is Inventory? ________________________________________________
What Costs Are Included in Inventory Cost? ____________________________
Who Owns the Inventory? __________________________________________
Ending Inventory and Cost of Goods Sold ______________________________
Accounting for Inventory Purchases and Sales _______________________________
Overview of Perpetual and Periodic Systems _____________________________
Perpetual and Periodic Journal Entries _________________________________
Counting Inventory and Calculating Cost of Goods Sold ______________________
Taking a Physical Count of Inventory __________________________________
The Income Effect of an Error in Ending Inventory _______________________

xx

About the Authors
Contents

269
271
272
272
272
273
274
274
275
280
280
282



Inventory Cost Flow Assumptions ________________________________________
Specific Identification Inventory Cost Flow______________________________
FIFO Cost Flow Assumption ________________________________________
LIFO Cost Flow Assumption ________________________________________
Average Cost Flow Assumption _______________________________________
A Comparison of All Inventory Costing Methods _________________________
Assessing How Well Companies Manage Their Inventories _____________________
Evaluating the Level of Inventory _____________________________________
Number of Days’ Purchases in Accounts Payable __________________________

283
284
285
286
286
287
290
290
291

Inventory Errors ______________________________________________________
Complications of the Perpetual Method with LIFO and Average Cost _____________
Reporting Inventory at Amounts Below Cost ________________________________
Inventory Valued at Net Realizable Value _______________________________
Inventory Valued at Lower of Cost or Market ____________________________
Method of Estimating Inventories ________________________________________
The Gross Margin Method __________________________________________
End-of-Chapter Materials_______________________________________________


294
297
298
299
299
302
302
304

CHAPTER 8

COMPLETING

THE

O PERATING C YCLE

Employee Compensation _______________________________________________
Payroll__________________________________________________________
Compensated Absences _____________________________________________
Bonuses_________________________________________________________
Stock Options ____________________________________________________
Postemployment Benefits ___________________________________________
Pensions ________________________________________________________
Postretirement Benefits Other Than Pensions ____________________________
Taxes ______________________________________________________________
Sales Taxes _______________________________________________________
Property Taxes ____________________________________________________
Income Taxes ____________________________________________________
Deferred Tax Example ______________________________________________

Contingencies _______________________________________________________
Environmental Liabilities ___________________________________________
Capitalize versus Expense _______________________________________________
Research and Development __________________________________________
Advertising ______________________________________________________

330
332
332
334
335
335
336
336
338
339
340
340
341
341
344
345
347
348
349

About the Authors
Contents

xi

xi


Summarizing Operations on an Income Statement____________________________
Other Revenues and Expenses ________________________________________
Extraordinary Items _______________________________________________
Earnings per Share ________________________________________________
Differing Income Statement Formats __________________________________
End-of-Chapter Materials_______________________________________________
Comprehensive Problem Chapters 6–8 ___________________________________

PA RT

TH REE

Investing and Financing Activities
CHAPTER 9

xii
xii

350
350
350
352
352
353
373

375


I N V E S T M E N T S : P RO P E R T Y, P L A N T , A N D
EQUIPMENT AND INTANGIBLE ASSETS

376

Nature of Long-Term Operating Assets ____________________________________
Deciding Whether to Acquire a Long-Term Operating Asset ____________________
Accounting for Acquisition of Property, Plant, and Equipment __________________
Assets Acquired by Purchase _________________________________________
Assets Acquired by Leasing __________________________________________
Assets Acquired by Self-Construction __________________________________
Acquisition of Several Assets at Once __________________________________
Calculating and Recording Depreciation Expense ____________________________
Straight-Line Method of Depreciation _________________________________
Units-of-Production Method of Depreciation ____________________________
A Comparison of Depreciation Methods________________________________
Partial-Year Depreciation Calculations _________________________________
Units-of-Production Method with Natural Resources ______________________
Repairing and Improving Property, Plant, and Equipment ______________________
Recording Impairments of Asset Value _____________________________________
Recording Decreases in the Value of Property, Plant, and Equipment __________
Recording Increases in the Value of Property, Plant, and Equipment ___________
Disposal of Property, Plant, and Equipment _________________________________
Discarding Property, Plant, and Equipment _____________________________
Selling Property, Plant, and Equipment_________________________________
Exchanging Property, Plant, and Equipment _____________________________
Accounting for Intangible Assets _________________________________________
Amortization of Intangible Assets _____________________________________
Impairment of Intangible Assets ______________________________________

Measuring Property, Plant, and Equipment Efficiency _________________________
Evaluating the Level of Property, Plant, and Equipment ____________________
Industry Differences in Fixed Asset Turnover ____________________________

378
379
381
381
382
384
385
387
387
389
390
391
391
393
396
396
398
399
399
400
401
402
405
406
407
407

407

About the Authors
Contents


Accelerated Depreciation Methods ________________________________________
Declining-Balance Method of Depreciation _____________________________
Sum-of-the-Years’-Digits Method of Depreciation_________________________
A Comparison of Depreciation Methods________________________________
Changes in Depreciation Estimates and Methods _____________________________
End-of-Chapter Materials_______________________________________________

CHAPTER 10

FINANCING: LONG-TERM LIABILITIES

409
409
411
412
414
416

446

Measuring Long-Term Liabilities _________________________________________
Present Value and Future Value Concepts _______________________________
Computing the Present Value of an Annuity _____________________________
Using Excel Spreadsheets for Time Value of Money Calculations _____________

Accounting for Long-Term Liabilities ______________________________________
Interest-Bearing Notes _____________________________________________
Mortgages Payable_________________________________________________
Accounting for Lease Obligations _________________________________________
Operating Leases __________________________________________________
The Nature of Bonds __________________________________________________
Types of Bonds ___________________________________________________
Characteristics of Bonds ____________________________________________
Determining a Bond’s Issuance Price ___________________________________
Accounting for Bonds Payable Issued at Face Value ________________________
Bond Retirements before Maturity ____________________________________
Using Debt-Related Financial Ratios ______________________________________
Debt Ratio and Debt-to-Equity Ratio __________________________________
Interest Earned Ratio ______________________________________________

447
448
452
453
456
457
458
460
462
463
464
464
465
469
470

472
472
473

Bonds Issued at a Discount or at a Premium ________________________________
Accounting for Bonds Issued at a Discount ______________________________
Accounting for Bonds Issued at a Premium ______________________________
Effective-Interest Amortization _______________________________________
End-of-Chapter Materials_______________________________________________

474
474
476
477
480

CHAPTER 11

FINANCING: EQUITY

505

Raising Equity Financing _______________________________________________ 507
Difference between a Loan and an Investment ___________________________ 508
Proprietorships and Partnerships ______________________________________ 508
About the Authors
Contents

xiii
xiii



Corporations and Corporate Stock ________________________________________
Starting a Corporation _____________________________________________
Common Stock___________________________________________________
Preferred Stock ___________________________________________________
Accounting for Stock __________________________________________________
Issuance of Stock __________________________________________________
Accounting for Stock Repurchases ____________________________________
Balance Sheet Presentation __________________________________________
Retained Earnings ____________________________________________________
Cash Dividends___________________________________________________
Dividend Payout Ratio _____________________________________________
Other Equity Items ___________________________________________________
Equity Items that Bypass the Income Statement __________________________
Statement of Stockholders’ Equity_____________________________________
End-of-Chapter Materials_______________________________________________

CHAPTER 12

xiv
xiv

I NVESTMENTS: DEBT

AND

E QUITY S ECURITIES

509

510
511
511
512
512
514
516
517
518
521
523
523
524
526

552

Why Companies Invest in Other Companies ________________________________
Classifying a Security __________________________________________________
Held-to-Maturity Securities _________________________________________
Equity Method Securities ___________________________________________
Trading and Available-for-Sale Securities ________________________________
Why the Different Classifications? ____________________________________
Accounting for Trading and Available-for-Sale Securities _______________________
Accounting for the Purchase of Securities _______________________________
Accounting for the Return Earned on an Investment ______________________
Accounting for the Sale of Securities ___________________________________
Accounting for Changes in the Value of Securities ____________________________
Changes in the Value of Trading Securities ______________________________
Changes in the Value of Available-for-Sale Securities _______________________

Subsequent Changes in Value ________________________________________

554
556
556
557
558
558
560
560
561
562
563
564
564
565

Accounting for Held-to-Maturity Securities _________________________________
Accounting for the Initial Purchase ____________________________________
Accounting for Bonds Purchased between Interest Dates ___________________
Accounting for the Amortization of Bond Discounts and Premiums ___________
Accounting for the Sale or Maturity of Bond Investments ___________________
Accounting for Equity Investments Using the Equity Method ___________________
Illustrating the Equity Method _______________________________________
Consolidated Financial Statements ________________________________________
End-of-Chapter Materials_______________________________________________
Comprehensive Problem Chapters 9–12 __________________________________

568
568

569
570
572
575
576
578
581
606

About the Authors
Contents


PA R T

FOUR

Other Dimensions of Financial Reporting
CHAPTER 13

STATEMENT

OF

609

CASH FLOWS

What’s the Purpose of a Statement of Cash Flows? ____________________________
What Information Is Reported in the Statement of Cash Flows? _________________

Major Classifications of Cash Flows ___________________________________
Noncash Investing and Financing Activities _____________________________
Cash Flow Patterns ________________________________________________
Preparing a Statement of Cash Flows—A Simple Example ______________________
Analyzing the Other Primary Financial Statements to Prepare a Statement
of Cash Flows ________________________________________________________
A Six-Step Process for Preparing a Statement of Cash Flows _________________
An Illustration of the Six-Step Process __________________________________
Using Information from the Statement of Cash Flows to Make Decisions __________
End-of-Chapter Materials_______________________________________________

CHAPTER 14

ANALYZING F INANCIAL STATEMENTS

The Need for Financial Statement Analysis __________________________________
Widely Used Financial Ratios ____________________________________________
Debt Ratio ______________________________________________________
Current Ratio ____________________________________________________
Return on Sales ___________________________________________________
Asset Turnover ___________________________________________________
Return on Equity _________________________________________________
Price-Earnings Ratio _______________________________________________
Common-Size Financial Statements _______________________________________
DuPont Framework ___________________________________________________
Profitability Ratios ________________________________________________
Efficiency Ratios __________________________________________________
Leverage Ratios ___________________________________________________
More Efficiency Ratios _________________________________________________
Accounts Receivable Efficiency _______________________________________

Inventory Efficiency _______________________________________________
Property, Plant, and Equipment Efficiency ______________________________
More Leverage Ratios __________________________________________________
Debt-to-Equity Ratio ______________________________________________
Times Interest Earned Ratio _________________________________________
Cash Flow Ratios _____________________________________________________
Usefulness of Cash Flow Ratios _______________________________________
Cash Flow to Net Income ___________________________________________
Cash Flow Adequacy _______________________________________________

610
612
613
613
615
616
617
621
622
623
633
634

663
664
666
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667
668
668

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679
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681
681
682
683
684
685
686
687
687
688
688
About the Authors
Contents

xv
xv


Potential Pitfalls ______________________________________________________
Financial Statements Don’t Contain All Information ______________________
Lack of Comparability _____________________________________________
Search for the Smoking Gun _________________________________________
Anchoring, Adjustment, and Timeliness ________________________________

End-of-Chapter Materials_______________________________________________

Appendix A: Wal-Mart 2009 Annual Report
Appendix B: Present Value Tables
Appendix C: Check Figures
Glossary
Subject Index
Real Company Index

xvi
xvi

About the Authors
Contents

690
690
691
691
691
692

A-1
B-1
C-1
G-1
SI-1
CI-1



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P R E FA C E

Financial Accounting, 11e:

Tackling the

What, Why, and How of Accounting
The eleventh edition of Financial Accounting guides you through the what, why, and how of
financial accounting in today’s business world. Through a solid presentation of concepts and procedures blended with a wealth of real company examples and solved exercises, you can ensure your
success!
Financial Accounting, 11e continues to build a stronger foundation with its new what, why, how
framework. At the beginning of each learning objective, you are shown what each section will teach
you, why it is important, and how to use the related accounting practices or methods.

LO

Counting Inventory and Calculating
3 Cost of Goods Sold

WHAT Calculate cost of goods sold using the results of an inventory count and understand the
impact of errors in ending inventory on reported cost of goods sold.
WHY A physical inventory count checks the accuracy of accounting records and allows a business
to follow up on unexplained differences.
HOW Conduct a physical quantity count of inventory, assign each type of merchandise a unit cost,
multiply the quantity by its unit cost, and (for perpetual systems) compare to the recorded
inventory balance.


Praised for their emphasis on decision-making and the real-world, the authors continue to present features that encourage critical thinking, highlight ethical considerations, and consider global
implications by showcasing real companies. Emphasizing the relevancy of accounting to the business
world, this edition is designed to address your diverse learning styles and career needs.
By combining the pedagogical features that help you grasp the numbers with the many opportunities for critical thinking and applying the knowledge you have learned, you will leave your course
ready to compete in the business world!

WHAT
Students like you have told us they benefit from a structured, clear presentation of material. Too
much information at once or an ill-defined learning path can get you off track. If information is
instead provided in digestible chunks and the organization sets the expectation for what you should
learn in each section, you’ll be able to absorb more information.

NEW

This textbook has always engaged its readers with
a lively and accessible writing style, and in this edition, the authors have carefully edited the text to
further enhance the presentation of the material. This edition now provides you with a more concise
explanation of accounting principles without sacrificing topical coverage or quantity of examples.

Streamlined Presentation for superior readability
CHE-ALBRECHT-09-0516-007.indd 280

xviii

Preface

11/20/09 11:47:08 AM

NEW


Visual Presentation In addition to tightening the writing style, the book has been redesigned to
make your job of navigating through the content even easier. The clean, fresh design allows you to
focus on the most important elements and color-coded exhibit references make flipping through the
text to find information a breeze.

NEW

Learning Objective Framework

Now in an easy to read what, why, how format, learning objectives
strategically guide you through mastering the chapter material while reinforcing the relevance and


application of these fundamental concepts. With each learning objective, you understand exactly
what you are expected to learn from each section.
A Review of Learning Objectives This review is located at
the end of the chapter to give you a big-picture glance at the
chapter’s topics. This gives you a valuable starting point for
your study and review.

Caution boxes highlight important points
to consider when contemplating more complex concepts and
emphasize the typical pitfalls associated with those types of
decisions.

Caution Boxes

CAUTION
“Pre
“Prepaid

Expenses” is a tricky name for an asset. Assets are
reported in the balance sheet. Don’t make the mistake of including
Prepaid Expenses with the expenses on the income statement.

WHY
Understanding why a financial accounting concept is important, why it’s necessary, and why it’s
done the way it is allows you to be fully engaged with the topic. Instead of memorizing equations,
this textbook will challenge you to think conceptually and consider how accounting relates to the
business world.
Relevancy in Today’s Business World This text offers multiple features to relate core accounting
concepts to real life. Its unique and realistic approach provides a solid framework for understanding
how an organization performs its primary business activities and accounting’s role in those functions. Every chapter begins with a Setting the Stage narrative that provides a real business example
as a jumping off point for the rest of the chapter concepts.
Updated Real Company Examples Real company data and examples are interspersed throughout
132 financial inthe chapters. Wal-Mart serves as the flagship company forCHE-ALBRECHT-09-0516-004.indd
this edition, with the 10K
formation and notes to the financial statements available in Appendix A. Assignable Real Company
Analysis questions appear in the end of chapter as well.

FYI FYI boxes point out interesting facts about the current business environment that relate to
the topics being discussed.
Ethics and Critical Thinking Skills The need for you to be able to analyze business situations and
make informed, ethical decisions is essential in today’s world. Ethical considerations are woven
throughout the text and in the end-of-chapter materials. Ethics
and Judgment Call questions train you to respond to various
business situations and provide your recommendation, enSTOP & THINK
couraging independent decision making. In addition, Chapter
Who bears the risks associated with a defined contribution
5 is solely devoted to the importance of ethical behavior.


These reminders provide thought-provoking
real business issues and ask you to analyze the situation and
comment with your evaluation.
Stop and Think

plan—the employer or the employee? Which party bears the
risks associated with a defined benefit plan?

As businesses increasingly operate in a global economy, new International
boxes have been included in this edition to compare U.S. accounting standards with practices
abroad and highlight shifts in ideology.

International Feature

NEW

Preface

xix


I N T E R N AT I O N A L
The FASB-IASB Teamwork on Stock Option
Accounting
he FASB has long stated that the fair value
of executive stock options should be reported as part of compensation expense.
Many business executives vehemently have disagreed, arguing that because the granting of the
options does not involve any cash outflow from
the company, the options cannot possibly be an
expense. When the FASB proposed the expensing of stock options in 1994, the U.S. business

community went berserk. The FASB was even
burned in effigy during a protest in Silicon Valley.
So the FASB backed down and said that the value
of stock options did not have to be reported as
an expense in the income statement.

T

A few years later, the International Accounting Standards Board (IASB) took up the exact
same issue and came to the exact same conclusion reached initially by the FASB: executive
stock options are a form of compensation and
should be reported as an expense in the income
statement. In 2004, the IASB adopted its final
rule requiring the expensing of stock options. Because the granting of employee stock options is
much less common outside the United States,
the IASB did not experience nearly as much business community opposition to its stock option
expensing proposal as did the FASB.
By using the IASB standard as a shield, the
FASB was able to get its desired accounting
treatment accepted in the United States as well.

HOW
After you have learned the conceptual meaning behind a topic and have seen how it relates to the real
world, you need to be able to complete calculations and apply what you have learned in a practical
sense. The actual repetition and practice of accounting closes the gap, solidifying your knowledge of
accounting principles.
These summary boxes at the conclusion of each section provide an effective checkpoint to ensure understanding. Summaries use bulleted lists to focus on key information and lead
into a Do This exercise (where applicable).

Remember This


NEW

Do This This edition now directly connects concepts with application by including brief solved
exercises at the end of relevant sections. You are asked to work out a problem and check your work
against the solution. This provides you with an effective framework to apply to similar exercises or
problems in homework assignments.

REMEMBER THIS
The notes to the financial statements
Th
V V V
V

Contain additional information not included in the financial statements themselves
Explain the company’s accounting assumptions and practices
Provide details of financial statement summary numbers and additional disclosure
about complex events
Report supplementary information required by the SEC or the FASB

DO THIS...
Review the notes to Wal-Mart’s financial statements in Appendix A and answer the following questions:
V V
CHE-ALBRECHT-09-0516-008.indd 336

V V

xx

Preface


1 Read Wal-Mart’s note on revenue recognition. When does the company recognize sales revenue?
2 When does Wal-Mart recognize revenue on its Sam’s Club memberships?

SOLUTION…
1 Wal-Mart recognizes revenue when it sells the merchandise to the customer.
2 Revenue on Sam’s Club memberships is recognized over the term of the membership, which is 12 months.

11/20/09 1:35:23 AM


This text’s superior end-of-chapter materials are the best tools to help you understand the what of
accounting. Practice and application are key to your success in accounting!

End-of-Chapter Content
The end-of-chapter material is consistent with the what, why, how framework—further tightening
the connection between concepts and practice.
WHAT Each question lists which learning objective(s) it covers to help you navigate and to show the
relevance of practicing that concept.
WHY An entire section of questions called Analytical Assignments incorporate the real world, ethics, and international considerations.
HOW Exercises and problems help you practice your accounting skills in various ways.

Pedagogical EOC
Practice Excercises offer quick concept checks ideal for in-class practice or
quick reviews before exams.
Practice Exercises

LO 2

PE 3-8


Understanding Credits

Below is a list of accounts. For each account, indicate whether a credit increases or decreases the
account balance.

0.
1.
2.
3.
4.
5.
6.
7.

Account

Credit

Cash
Accounts Receivable
Capital Stock
Equipment
Inventory
Accounts Payable
Building
Notes Payable

Decreases


Exercises and Problems delve deeper into concepts, testing your retention
of critical topics and procedures. Assignments utilizing Excel or Klooster & Allen General Ledger
software are marked with an icon.

Exercises & Problems

LO 4

Accounting for Accounts Receivable

P 6-44

Assume that Dominum Company had the following balances in its receivable accounts on December 31, 2011:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$640,000
20,600 (credit balance)

Cumulative Spreadsheet Projects Cumulative Spreadsheet Projects allow you to build your
spreadsheet proficiency with assignments that progress in difficulty as they move through the text.
CHE-ALBRECHT-09-0516-006.indd 255

11/18/09 6:18:45 PM

Analytical Assignments
Discussion Questions ask you how you would tackle a particular situation—giving you real-world practice.

Discussion Questions


Judgment Call Questions Judgment Call Questions get you to go beyond memorization to critically analyze a situation and provide your recommended course of action.
Real Company Analysis Questions Real Company Analysis Questions ask you to review real
companies’ financial information to answer questions and make decisions.
Preface

xxi


Wal-Mart

AA 5-23

Real Company
Analysis

Locate the 2009 Form 10-K for Wal-Mart in Appendix A and consider the following questions:
1. With respect to the report of the external auditors to “the Board of Directors and Shareholders of Wal-Mart Stores, Inc.”:
a. Who is Wal-Mart’s external auditor?
b. How long after the end of Wal-Mart’s fiscal year did the external auditor complete
the audit?
2. With respect to the report of management concerning the financial statements:
a. Who is responsible for the financial statements?
b. After reading the paragraph on internal control, indicate whether you agree or disagree with the following statement: “The purpose of an internal control system is to
ensure that all transactions are always recorded and that all assets are always completely safeguarded.”
c. After looking at the description of the members of the audit committee (in the second paragraph), do you think that any members of the Walton family are members
of that committee?

International Questions ask you to review the financial information or
philosophy of an international company.


International Questions

Ethics Questions direct you to read a situation, consider the ethical implications,
and make decisions based on your analysis.

Ethics Questions

Should You Go the Extra Mile?

AA 3-58

You work in a small convenience store. The store is very low-tech; you ring up the sales on an oldstyle cash register that merely records the amount of the sale. The store owner uses this cash register
tape at the end of each day to verify that the correct amount of cash is in the cash register drawer.
On a day-to-day basis, no other financial information is collected about store operations.
Since you started studying accounting, you see many ways that store operations could be improved through the gathering and use of financial information. Even though you are not an expert,
you are quite certain that you could help the store owner set up an improved information system.
However, you also know that this will take extra effort on your part, with no real possibility of
receiving an increase in pay.
Should you say anything to the store owner, or should you just keep quiet and save yourself
the trouble?

Ethics

Delivering a Flexible Presentation to Fit
Your Needs
Always a hallmark of this text, expanded coverage within each chapter, in addition to solid basic coverage of essential accounting concepts, allows you to learn more complex concepts.
New to this edition, the corresponding Expanded Materials questions in the end of chapter,
which provide a variety of related assignments, have been placed together in one section for ease of
use so that you can test your comprehension of the additional material.


K e y Te r m s & C o n c e p t s

CHE-ALBRECHT-09-0516-005.indd 208

11/18/09 6:17:04 PM

bank reconciliation, 237
foreign currency transaction, 240
NSF (not sufficient funds) check, 235

Discussion Questions
CHE-ALBRECHT-09-0516-003.indd 122

xxii

Preface

61. What are the major reasons that the balance of a bank statement is usually different from
the cash book balance (Cash per the general ledger)?
62. Why don’t the additions and deductions from the bank balance on a bank reconciliation
require adjustment by the company?
63. Do all transactions by U.S. companies with foreign parties require special accounting
procedures by the U.S. companies? Explain.

11/18/09 8:26:14 PM


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Preface

xxiii


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