Index
AAA, see American Accounting Association
accounting, 2–6
assumptions made in, 6–7
definition of, 139
and external users, 3–5
GAAP for, 8–9
and internal users, 2
management, 144
managerial, 2
see also financial accounting
accounting cycles, 6
accounting policies and practices, in notes to financial statements, 34
The Accounting Review, 5
Accounting Series Releases (ASRs), 4
accounting standards
FASB’s review and establishment of, 4
groups and organizations influencing, 5
accounts payable
as current liabilities, 25, 58
definition of, 139
accounts receivable, 43
definition of, 139
requiring valuation adjustment, 79
accounts receivable turnover ratio, 99
accrual accounting, 8
cash basis accounting vs., 77
for guarantee and warranty costs, 60
accrued liabilities
as current liabilities, 59
definition of, 140
accrued revenues, 78–79
accumulated depreciation, 49
acid-test (quick) ratio, 95–97
activity ratios
definition of, 139
types of, 97–103
additional paid-in capital
on balance sheet, 26–27
definition of, 139
as part of owners’ equity, 64
adjusting entries, 139
AICPA, see American Institute of Certified Public Accountants
allowance for doubtful accounts, 43, 140
Almanac of Business and Industrial Financial Ratios, 94
American Accounting Association (AAA), 147
accounting standards influenced by, 5
definition of, 140
American Institute of Certified Public Accountants (AICPA), 147
definition of, 140
depreciation defined by, 49
amortization, 51
annual reports, 3
Annual Statement Studies (Robert Morris Associates), 94
ASRs (Accounting Series Releases), 4
assets, 20
categories of, 41
intangible, 50–52
long-term investments as, 24, 46–48
other, 53
property, plant and equipment as, 24, 48–53
tangible fixed, 48–50
wasting, 52–53
assumptions, 6–7
audit
purpose of, 8–9
audited financial statements, 3, 5
auditors’ reports, 9–11
available-for-sale securities, 43
average collection period ratio, 99, 100
average cost method, 44–45
Balanced scorecard, 12
balance sheet, 22–28
definition of, 140
elements of, 21–22
equity on, 21
expenses on, 21
limitations of, 12
and off-balance-sheet financing, 63
revenue on, 21
balance sheet analysis, 93–108
ratios in, 94–105
vertical and horizontal, 106–107
bank loans, 25
bearer bonds, 62
bond(s), 25
definition of, 140
as long-term investment, 46
maturity patterns of, 35
as trading securities, 42
types of, 62
bonds payable, 61–63
brand equity, 12
break-even analysis, see cost-volume-profit analysis
break-even point
calculation of, 125–127
definition of, 140
graphic presentation of, 127–128
uses of, 128–129
Capital stock
on balance sheet, 26–27
definition of, 140
in notes to financial statements, 35
as part of owners’ equity, 64
cash, as current asset, 42
cash basis of accounting
accrual accounting vs., 77
definition of, 141
for guarantee and warranty costs, 60
cash dividends payable, 59
cash flows from financing activities, 84
definition of, 141
examples of, 85
cash flows from investing activities, 85
definition of, 141
examples of, 85
cash flows from operating activities, 84
definition of, 141
examples of, 85
Certificate in Management Accounting (CMA), 5
closing accounts, 21–22
common stock, 26–27
competitiveness, measures of, 12
consolidation, 47
contingent liabilities, 13, 34
contra-asset accounts, 43
contribution margin, 129–131, 141
convertible bonds, 62
copyrights, 51
cost allocation, 29
cost behavior, 124–125
cost method of valuation, 47
cost of goods sold
definition of, 141
on income statement, 30–31
in income statement analysis, 111–112
cost of sales, see cost of goods sold
cost-volume-profit (CVP) analysis, 125–132
advantages of, 131
break-even graph in, 127–128
break-even point calculation in, 125–127
contribution margin in, 129–131
limitations of, 132
using, 128–129
coupon bonds, 62
CPAs, state societies of, 4
cumulative bond interest, 62
cash as, 42
definition of, 141
inventories as, 44–46
marketable securities as, 42–43
prepaid expenses as, 46
receivables as, 43–44
current liabilities, 25, 58–61
definition of, 141
types of, 58–61
current maturities of long-term debt, 58
CVP analysis, see cost-volume-profit analysis
debt
installment, 61
long-term, see long-term liabilities
as trading securities, 42
debt ratio, 104
debt-to-equity ratio, 104–105
deep discount bonds, 62
depreciation, 49
accumulated, 49
definition of, 141
diluted EPS (earnings per share), 116
direct method, 86–87
disclosure, 7
discussion memorandum (FASB), 4
distributions to owners, 20
dividends, 142
dividends payable, 59
Dun & Bradstreet, 94
Earnings
restricted, 65
end-of-period adjustments, 77–78
equity, 20
on balance sheet, 21
as trading securities, 42
see also owners’ equity
equity method of valuation, 47
expense recognition, 29
expense(s), 21
in accrual accounting, 8
on balance sheet, 21
on income statement, 73, 77–80
operating, 32, 73, 113, 114, 145
other, 32
external users, 3–5
FactSheets Express, 94
fair market value, 42
FASB, see Financial Accounting Standards Board
definition of, 142
for statement of cash flows, 83–86
FASB interpretations, 4
FASB standards, 4
FCF, see free cash flow
FIFO (first in, first out), 45
financial accounting
basic principles of, 7
for external users, 3
Financial Accounting Standards Board (FASB), 3–4, 147
definition of, 142
goal of, 3–4
task force of, 4
financial analyst, 142
financial information
external users of, 3–5
historic, 12
internal users of, 2
reliability and usefulness of, 1–2
financial ratios, 94–105
activity, 97–103
leverage, 104–105
liquidity, 95–97
financial statement analysis
aim of, 93
notes in, 36
purpose of, 10
ratios in, 94–106
see also balance sheet analysis; income statement analysis
financial statement(s), 1–3, 19–37
assumptions used in creating, 6–8
balance sheet as, 22–28
elements of, 20–22
income statement as, 28–32
limitations of, 12–13
and MD&A, 36
notes to, 34–36
statement of cash flows as, 34, 35
statement of retained earnings as, 32–33
supplemental information for, 34–36
see also individual types of statements
financing activities
noncash, 85–86
finished goods account, 44
first in, first out (FIFO), 45
fixed assets, see property, plant and equipment
fixed costs
cost behavior of, 124
definition of, 142
franchises, 51
free cash flow (FCF), 89–90
calculating, 89
definition of, 142
GAAP, see generally accepted accounting principles
GAAP opinion, 11
gain(s), 21
definition of, 143
on income statement, 75
generally accepted accounting principles (GAAP), 8–9
and audits, 9–10
definition of, 143
statement users’ knowledge of, 3
Generally Accepted Auditing Standards, 10
going-concern assumption, 6, 143
goodwill, 51–52
goodwill impairment, 51–52
grading policy, xii
gross profit margin, 115
gross-profit-margin ratio, 112
gross profit ratio, 112–113
guarantee costs, 59–60
guaranteed bonds, 62
Held-to-maturity securities, 43
definition of, 143
of investments, 47
of tangible assets, 48–49
horizontal analysis, 106
of balance sheets, 101, 106–107
of income statements, 101, 118–119
human resources measures, 12
IFRS (International Financial Reporting Standards), 9
IMA, see Institute of Management Accountants
income
operating, 114
other, 32
income bonds, 62
income statement, 28–32, 71–80
apportionment of revenues and expenses on, 77–80
and cash vs. accrual basis of accounting, 77
cost of goods sold on, 30–31
definition of, 143
format for, 71–74
information not available from, 84
net income on, 32
operating expenses on, 32
other income (other expenses) on, 32
sales on, 29
single-step, 71–73
income statement analysis, 111–120
cost of goods sold in, 111–112
gross profit in, 112–114
horizontal and vertical, 101, 118–119
operating expenses in, 113, 114
operating income in, 114
profitability ratios in, 115–118
sales in, 111
income taxes payable, 59
indentures, 61
indirect method, 87–88
Industry Norms and Business Ratios (Dun & Bradstreet), 94
inflation, 13
Institute of Management Accountants (IMA), 147
accounting standards influenced by, 5
definition of, 143
intangible assets, 50–52
internal controls, 9
Internal Revenue Code (IRC), 143
Internal Revenue Service (IRS)
accounting standards influenced by, 5
definition of, 143
internal users, 2
International Financial Reporting Standards (IFRS), 9
International Financial Reporting Standards Foundation, 147
international standards, 9
inventory(-ies)
as current asset, 44–46
definition of, 143
vertical and horizontal analysis of, 106
inventory turnover ratio, 100–102
investing activities
noncash, 85–86
investments
definition of, 143
by owners, 20
requiring valuation adjustment, 79
short-term, see marketable securities
IRC (Internal Revenue Code), 143
IRS, see Internal Revenue Service
Joint ventures, 46
Land
and depreciation, 49
as long-term investment, 46
last in, first out (LIFO), 45
leases/leaseholds
as intangible assets, 51
operating, 63
liabilities, 20
on balance sheet, 21, 25, 57–63
licenses, 51
life insurance policies, 46
LIFO (last in, first out), 45
limitations of financial statements, 12–13
liquidity, 42
long-term investments, 24, 46–48
on balance sheet, 24
cost method of valuing, 47
equity method of valuing, 47
long-term liabilities, 25
current maturities of, 58
definition of, 144
types of, 61–63
losses, 21
definition of, 144
on income statement, 75
Management accounting, 144
Management Discussion and Analysis (MD&A), 36
managerial accounting, internal users of, 2
manufacturing overhead, 44
marketable securities
as current asset, 42–43
definition of, 144
requiring valuation adjustment, 79
matching concept, 29
material events, in notes to financial statements, 34
MD&A (Management Discussion and Analysis), 36
mixed cost(s)
cost behavior of, 124–125
definition of, 144
monetary units, 6
mortgages, 25
mortgage(s) payable
definition of, 144
as long-term liabilities, 61
multi-step income statement, 72, 74
Natural resources, 52–53
net income, 75
definition of, 144
on income statement, 32
net realizable value, 44
noncash financing activities, 85–86
noncash investing activities, 85–86
nonmonetary facts, 12
notes payable
as current liabilities, 58
definition of, 145
as trading securities, 42
notes receivable, 43
notes to financial statements, 7, 34–36
number of days’ inventory ratio, 102
Off-balance-sheet financing, 63
operating activities, cash flows from, 84, 85, 141
operating expenses, 73
definition of, 145
on income statement, 32
in income statement analysis, 113, 114
operating income, 114
operating leases, 63
operating profit margin, 115
operational results analysis, 123–134
contribution margin in, 129–131
cost behavior in, 124–125
cost-volume-profit analysis in, 125–132
graphic presentation of break-even in, 127–128
profit-volume graph in, 132–133
using break-even analysis in, 128–129
other assets, 53
other income (other expenses), 32
other receivables, 43
owners, distributions to, 20
owners’ equity, 20
definition of, 145
parts of, 64–66
Par value, 26
patents, 51
PCAOB, see Public Company Accounting and Oversight Board
pension plans, 34
period costs, 7
periodicity assumption, 6–7
pre-emptive right, 145
preferred stock, 145
prepaid expense(s)
as current asset, 46
definition of, 145
requiring adjustment, 78
product costs, 7
profitability, evaluating, 114
profitability ratios
definition of, 145
in income statement analysis, 115–118
profit line, plotting, 132–133
profit-volume graph, 132–133
property, plant and equipment, 48–53
on balance sheet, 24
definition of, 145
intangible assets as, 50–52
in notes to financial statements, 35
tangible fixed assets as, 48–50
wasting assets as, 52–53
Public Company Accounting and Oversight Board (PCAOB), 147
creation of, 4
definition of, 145
purpose of, 4–5
purchase price of inventory, 44
Qualitative variables, 12
quarterly reports, 3
quick (acid-test) ratio, 95–97
Ratios, see financial ratios
raw materials account, 44
real estate, as long-term investment, 46
receivables, 43–44, see also specific types of receivables
registered bonds, 62
restricted earnings, 65
retained earnings
on balance sheet, 27
definition of, 145
as part of owners’ equity, 65
retirement programs, 34
return on assets, 116
return on equity, 116
revenue recognition, 7, 29, 146
revenue(s), 21
in accrual accounting, 8
accrued, 78–79
on balance sheet, 21
on income statement, 73, 77–80
requiring adjustment, 78–79
review questions, xii
review reports, 9–11
risks, in notes to financial statements, 36
Robert Morris Associates, 94
Sales
components of, 111
on income statement, 29
in income statement analysis, 111
sales allowances, 29
sales discounts, 29
sales returns, 29
Sarbanes–Oxley Act of 2002, 4, 9, 146
Securities and Exchange Commission (SEC), 147
definition of, 146
FASB support from, 4
role of, 4
separate-entity assumption, 6
serial bonds, 62
shareholders’ equity, see owner’s equity
short-term investments, see marketable securities
single-step income statement, 71–73
specific identification method, 44
Standard and Poor’s Industry Surveys Ratios, 147
standards
accounting, 4
auditing, 5
international, 9
statement of cash flows, 34, 35, 83–90
definition of, 146
format alternatives for, 86–88
and free cash flow calculation, 89–90
nature of, 84–86
usefulness of, 84
Statement of Financial Accounting No. 3, 20
statement of financial position, see balance sheet
statement of retained earnings, 32–33, 146
state societies of CPAs, 4
stock
as long-term investment, 46
preferred, 145
as trading securities, 42
stock options, 35
straight-line depreciation, 29, 49
supplemental information, for financial statements, 34–36
Tangible fixed assets, 48–50
temporary accounts, 21
term bonds, 62
“Think About It...” exercises, xii
Thomson ONE, 94
time period assumption, 6–7
times interest earned ratio, 105
total asset turnover ratio, 102
total-debt-to-total-assets ratio, 104
trade accounts pay, see accounts payable
trademarks, 51
trade receivables, 43
trading securities, 42
treasury stock
on balance sheet, 27
definition of, 146
as part of owners’ equity, 65
trends, on income statements, 113, 114
Uncertainties
with intangibles, 52
in notes to financial statements, 35
unearned revenue
as current liability, 59
definition of, 146
unrealized losses, 75
unrecorded accrued expenses, 79
unrecorded accrued revenues, 78–79
U.S. GAAP, 9
Value Line Investment Survey, 147
variable costs
cost behavior of, 124
definition of, 146
vertical analysis, 106
of balance sheets, 101, 106–107
of income statements, 101, 118–119
Wages payable, 25
warranty costs, 59–60
wasting assets, 52–53
work in process account, 44
write-offs
of natural resources, 52–53
of receivables, 43–44
Year-end adjustments, 78–79