Financial Accounting: J. David Spiceland Wayne Thomas Don Herrmann

Rev.
Confirming Pages
Financial Accounting
THI RD
ED I TI ON
J. DAVID SPICELAND
University of Memphis
WAYNE THOMAS
University of Oklahoma
DON HERRMANN
Oklahoma State University
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Rev. Confirming Pages
Dedicated to:
Davids wife Charlene, daughters Denise and Jessica, and three sons Michael David,
Michael, and David
Waynes wife Julee, daughter Olivia, and three sons Jake, Eli, and Luke
Dons wife Mary, daughter Rachel, and three sons David, Nathan, and Micah
FINANCIAL ACCOUNTING, THIRD EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright 2014 by
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Library of Congress Cataloging-in-Publication Data
Spiceland, J. David, 1949
Financial accounting/J. David Spiceland, University of Memphis, Wayne Thomas,
University of Oklahoma, Don Herrmann, Oklahoma State University. Third edition.
pages cm
Includes index.
ISBN 978-0-07-802554-9 (alk. paper) ISBN 0-07-802554-0 (alk. paper)
1. Accounting. I. Thomas, Wayne, 1969 II. Herrmann, Don. III. Title.
HF5636.S77 2014
657dc23
2013013128
The Internet addresses listed in the text were accurate at the time of publication. The inclusion
of a website does not indic.ate an endorsement by the authors or McGraw-Hill Education, and
McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.
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About the Authors

DAVID SPICELAND
David Spiceland is professor of accounting at the University of Memphis, where he
teaches intermediate accounting
and other financial accounting
courses at the undergraduate
and masters levels. He received
his BS degree in finance from the University of Tennessee, his MBA from Southern Illinois University, and
his PhD in accounting from the University of Arkansas.
Professor Spicelands primary research interests are
in earnings management and educational research. He
has published articles in a variety of journals including The Accounting Review, Accounting and Business
Research, Journal of Financial Research, and Journal
of Accounting Education. David has received university
and college awards and recognition for his teaching,
research, and technological innovations in the classroom. David is lead author of McGraw-Hills best-selling
Intermediate Accounting text.
David is the Memphis Tigers No. 1 basketball fan.
He enjoys playing basketball, is a former all-state linebacker, and an avid fisherman. Cooking is a passion
for David, who served as sous chef for Paula Deen at a
Mid-South Fair cooking demonstration.
WAYNE THOMAS
Wayne Thomas is the John T.
Steed Chair in Accounting at the
University of Oklahoma, where
he teaches introductory financial
accounting to nearly 600 students
per year. He received his bachelors degree in accounting from
Southwestern Oklahoma State
University, and his masters and PhD in accounting
from Oklahoma State University.
Professor Thomass primary research interests
are in markets-based accounting research, financial
disclosures, financial statement analysis, and international accounting issues. He previously served as an
editor of The Accounting Review and has published
articles in a variety of journals including The Accounting Review, Journal of Accounting and Economics,
Journal of Accounting Research, Review of Accounting
spi25540_fm_i-1.indd v
Studies, and Contemporary Accounting Research. He

has won several research awards, including theAmerican Accounting Associations Competitive Manuscript
Award. Professor Thomas has won teaching awards at
the university, college, and departmental levels, and
has received the Outstanding Educator Award from
the Oklahoma Society of CPAs.
Wayne enjoys playing sports (basketball, tennis, golf,
and ping pong), solving crossword puzzles, and coaching
little league sports. He has participated in several adventure races, like youll read about in the Great Adventures
continuing problem at the end of each chapter.
DON HERRMANN
Don Herrmann is the Deloitte Professor of Accounting at Oklahoma
State University, where he teaches
financial accounting and intermediate accounting, and is director of the doctoral program.
He received his bachelors degree
in business from John Brown
University, his masters degree in accounting from
Kansas State University, and his PhD in accounting
from Oklahoma State University.
Professor Herrmanns research interests are in
earnings forecasts, segment reporting, financial statement analysis, and international accounting issues.
He is past president of the American Accounting Association International Section and has served on the
editorial and review board of the top research journal
in the field of accounting, The Accounting Review. He
has published articles in a variety of journals including The Accounting Review, Journal of Accounting
Research, Accounting Horizons, Journal of Business,
Finance, and Accounting, and the Journal of Accounting and Public Policy. Don Herrmann and Wayne
Thomas often work together, having co-authored over
15 research articles. Professor Herrmann has received
teaching awards at the department, college, and university levels, including Professor of the Year in the
University Greek System.
Don, like his co-authors, is a big sports fan. He
played tennis on scholarship in college and enjoys
playing soccer, basketball, running, biking, and swimming. He also coaches soccer, basketball, and little
league baseball in his home town.
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CELEBRATING STUDENT SUCCESS

This is simply an outstanding text.
It combines an interesting, engaging,
and highly readable writing style with
excellent, comprehensive, up-to-date, and
conceptually rich discussions.Marianne
James, California State UniversityLos Angeles
Thi ttextt iis written

This
itt iin a
conversational style and
focuses on delivering the material
in a format that makes students
want to keep reading.Amy Ford,
Western Illinois University
You have created a text that is likely to

become the gold standard of Intro
texts.Christian Wurst, Temple University
ave you experienced those moments in your

course when students became fully engaged?
When the Aha! revelations are bursting
l
like
fireworks? David Spiceland, Wayne Thomas,
a Don Herrmann have developed a unique text
and
b
based
on over 60 collective years of experience in the
c
classroom.
Theyve brought together best practices
like highlighting Common Mistakes, offering frequent
Lets Review exercises, integrating the course with
a running Continuing Problem, demonstrating
the relevance of the course with a Career Corner,
and communicating it all in a student-friendly
conversational writing style. After the proven success
o the first two editions of Financial Accounting, were
of
c
confident
that the new and improved third edition will
n only motivate, engage, and challenge studentsit
not
w illuminate the financial accounting course like
will
n
never
before.
The text is very well

written, readable, accurate,
up-to-date, and very well
organized. The coverage of
major topics and end-of-chapter
materials are outstanding.
Abo-El-Yazeed T. Habib, Minnesota State
University, Mankato
If you like Spicelands

intermediate text, you
will be thrilled with the
financial accounting
principles text. It is written
in the same conversational
style, addresses topics directly
and clearly, and the illustrations
are terrific too.Nancy L. Snow,
University of Toledo
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Keys to Financial Accountings success

are the five core precepts
around which the content is built
successfully employ
humor and a conversational
writing style in developing scenarios,
The authors
CONVERSATIONAL WRITING STYLE The authors took special care to write chapters that
foster a friendly dialogue between the text and
each individual student. The tone of the presentation is intentionally conversationalcreating
the impression of speaking with the student,
as opposed to teaching to the student.
examples and explanations which

remain in the readers mind and make
these oftentimes complicated subjects
understandable.Dennis L. Kovach,
Community College of Allegheny County
Very good use of real company data

and examples throughout . . .
INNOVATIVE PEDAGOGY Reviewers enthusiastically embraced the innovative pedagogy

used throughout, including Common Mistake
trivialized.Alan Cherry, Loyola Marymount
boxes that help students avoid common pitfalls
University
of beginning students, Key Points that highlight important insights within each learning
REAL-WORLD FOCUS Students learn best objective, and Flip Side problems and scenarios that show students the two sides of various
when they see how concepts are applied
accounting transactions. New in this edition,
in the real world. For that reason, realworld examples from companies, such as Interactive Illustrations walk students stepBest Buy and Apple, are used extensively by-step through the content of the most important illustrations in the chapter.
and routinely to enhance the presentation. The real-world focus adds realism to
discussions and serves as the foundation
This text has a
for exercises, problems, and cases. At the
logical layout and
end of topical chapters (411), the ratios of
incorporates tools
two real companies are analyzed to enrich
to keep the students
that chapters material; in Chapter 12, full
attention. It makes the
financial statement analysis is provided
student think about
for Nike versus Under Armour.
They really do breathe life

into a topic that is too often
4
5
DECISION MAKERS PERSPECTIVE Each chapter

includes one or more distinctive Decision Makers
Perspective sections, which offer insights into how
the information discussed in the chapters affects
decisions made by investors, creditors, managers, and
others. Each chapter also contains Decision Points
highlighting specific decisions in the chapter that can
be made using financial accounting information.
the impact on the

financials based upon
the different principles
and estimates selected.
Victor Stanton, University of
CaliforniaBerkeley
A STRONG SUPPLEMENTS PACKAGE The authors write

e all of the major supplements for
Financial Accounting, including the Testbank, Solutions Manual, and the Instructors Manual.
With Guided Examples, Interactive Presentations, narrated PowerPoints, online quizzing,
Excel templates, and QuickBooks templates integrated into the end-of-chapter material,
plus LearnSmart adaptive learning modules, Spicelands Financial Accounting provides the
cutting-edge technology demanded by todays accounting instructors and students.
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viii
CHAPTER 1
Chapter Title Runs In Here
NEW IN THE THIRD EDITION

We have received an incredible amount
of feedback from over 480 reviewers and focus group participants. The
following list of changes and improvements is testament to the many hours
that reviewers spent thinking about and
analyzing our earlier editions, helping
us to make Financial Accounting the
best book of its kind.
THROUGHOUT
Added 26 Interactive Illustrations
throughout the text. (Details noted in
the chapter-by-chapter list below.)
Added 22 narrated Lets Review
exercises.
Revised the line art for a newer look.
Updated the real-world data in the
analysis sections in all chapters.
Revised all EOC numbers, including
all real-world data.
CHAPTER 1
Revised the chapter title to A Framework for Financial Accounting.
Replaced the Feature Story with one
about Berkshire Hathaway and
Warren Buffett.
Designated as interactive: Illustrations
12 and 19.
Revised the section on measuring business activities, including
upgrading the key headings (Assets,
Liabilities, and Stockholders Equity;
Revenue, Expenses, and Dividends).
For examples used in the chapter,
changed the reporting period from
January to December.
Updated the real-world amounts
in Illustration 111 (previous
Illustration 113).
Revised the discussion on Role of the
Auditor under LO15.
Replaced the sample real-world auditors report in the chapter.
Reformatted the table about career
options, for better clarity.
Revised the discussion of the conceptual framework to include recent
changes to qualitative characteristics.
Added new end-of-chapter items:
SSQ3, SSQ4, BE15, BE16, E110,
E111, E112, E118.
CHAPTER 2
Revised the chapter title to The
Accounting Cycle: During the Period.
21 and 23.
Defined accounting cycle in the first

section of the chapter.
Reformatted all transaction illustrations for greater clarity and consistency from chapter to chapter.
Revisedsimplified and shortened
the section on effects of account
balances on the basic accounting
equation.
Transaction effects on basic accounting equation now show the cumulative impact of all transactions in order, including detailed account names.
Journal entries for all 10 transactions
are now displayed and discussed,
along with cumulative effects in
T-account balances.
Omitted (moved to the Instructors
Manual) the entire Summary of the
Measurement Process (Illustrations
214 through 223, pp. 7781, in 2e),
to streamline the chapter.
Added transaction numbers to
Illustration 211 (previous 224) to
better link the amounts posted to the
general ledger in Illustration 212
(previous 225).
Added new glossary terms: accounting cycle, credit, debit, journal entry,
and revenue recognition principle.
E212, E213, E214, E216. P29A,
P29B.
CHAPTER 3
Revised the chapter title to The
Accounting Cycle: End of the Period.
39, 310, and 317.
Changed the heading Matching Principle to Expense Recognition.
Revised the accounting cycle in
Illustration 34, for greater clarity.
Changed the section on the adjusted
trial balance; revised the sequencing
of some accounts.
Revised the discussion of a classified
balance sheet.
Updated the real-world amounts in
Illustrations 37 and 316.
In Lets Review, added a requirement
asking students to post closing entries
to the Retained Earnings T-account.
Added depreciation and book value as
key terms. Deleted operating cycle as
a key term.
In E316, added a requirement asking students to prepare a statement
of stockholders equity.
In E317 and E318, added a requirement asking students to calculate the

ending balance in Retained Earnings.
Added new end-of-chapter item: E320.
In Great Adventures problem, repeated the list of transactions from
Chapter 2, for student convenience.
Expanded the questions asked in the
Ethics problem (AP35).
CHAPTER 4
42 and 49.
Revised the opening text discussion
to include discussion of occupational
fraud and the fraud triangle, which
lead to the need for internal control.
Deleted discussion of the Arthur
Andersen failure.
Added e-commerce controls as fifth
type of prevention controls.
Added audits as third type of detective controls.
Replaced the Ethical Dilemma with a
new one about the story in The Shawshank Redemption.
Revised the discussion of the Common Mistake dealing with NSF
checks, to provide greater clarity.
Broke the adjusting entries for bank
reconciliation items into two smaller
bites, for greater clarity and ease of
student learning.
Added fraud triangle as key term.
RQ5, E411, E419.
In BE45, added calculation for debit
card sales.
Repurposed exercises for use as
BE49, BE410, and BE411.
In revised E49 and E410, added requirement asking students to record
entries to adjust the cash balance.
CHAPTER 5
Added a discussion of the costs and
benefits to credit sales.
Moved the Sales Discounts section
to follow the section on Sales Returns and Allowances.
55 and 56.
Moved the Aging of Accounts
Receivable section forward, just
before Writing Off Accounts
Receivable.
Transposed LO54 and LO55.
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Revised the accounts receivable aging

schedule in new Illustration 56 to
show individual accounts.
BE53, BE55, BE59, P59A,
P59B.
CHAPTER 6
Revised LO62, to cover the multiplestep income statement earlier in the
chapter.
66, 67, and 69.
Revised Illustration 62 to better
show the flow of inventory costs.
Added a new Decision Makers Perspective, about Ford Motor Company,
in the multiple-step income statement discussion.
Revised Illustration 69 for greater
clarity.
Added new Illustration 615 and
discussion of shipping terms.
Added new Illustration 617 to calculate gross profit for Marios Game
Shop after additional inventory
transactions.
Deleted finished goods inventory, raw
materials, and work-in-process as key
terms.
CHAPTER 7
711, 713, and 715.
Deleted the discussion on capitalization of interest.
Revised the illustration on the worlds
top 10 brands.
Added a new Lets Review exercise on
expenditures after acquisition.
Clarified the introduction of the three
depreciation methods, by adding a
numbered list that cites the advantages of each method.
Added a new illustration (Illustration
717) that shows depreciation expense over time for each of the three
depreciation methods.
719) that summarizes amortization
treatment of intangible assets.
720) that shows the three methods
of asset disposal.
Added a footnote referring to a new

standard (FASB ASC 846) on nonmonetary transactions.
Added new end-of-chapter item: E74
Updated P79A and P79B for realworld data.
CHAPTER 8
Added new Illustration 82.
Added a reference to IRS Publication
(Circular E).
Added a footnote about the temporary payroll tax holiday in 2011 and
2012.
Added a new Common Mistake box
explaining that the account Sales Tax
Expense does not exist.
Added a formula to show calculation
for sales tax payable.
Deleted discussion of deferred taxes.
Added new Illustration 87.
Revised the discussion of liquidity
management.
CHAPTER 9
Designated as interactive: Illustrations 913, 914, and 916.
Shortened the discussion on bond
characteristics.
Revised Illustration 912 for greater
clarity.
Revised Illustration 915 to a nonlinear relationship, showing changes in
carrying value over time.
Added new Illustrations 917 and
918.
Added new end-of-chapter item:
E917.
CHAPTER 10
Designated as interactive: Illustrations 106 and 1018.
Simplified Illustration 104 to omit
the preemptive right.
Reconfigured Illustration 106 for
greater clarity on the differences
between authorized, issued, and outstanding shares of stock.
Added new Illustration 108 showing allocation of dividends between
preferred and common stock.
Revised Illustrations 1011 and 1012
to show Before and After columns for
repurchase of treasury stock.
Added a new Common Mistake

box related to the recording of
dividends.
Added a brief discussion on property
dividends and added property dividend as a key term.
Added a Decision Makers Perspective about the reasons for declaring a
stock split.
Added new Illustration 1015 showing the effects of a stock split and a
stock dividend.
Revised the discussion on the stockholders equity section for American
Eagle in LO107.
In the Equity Analysis section,
replaced Timberland with Wolverine
World Wide as a comparison company to Deckers Outdoor.
Added new end-of-chapter item:
E1010.
CHAPTER 11
Reformatted the operating section
of the statement of cash flows
using the indirect method to better
reflect the format used in actual
practice.
Removed the marginal accountingequation analyses in this chapter.
Changed Revenues to Net sales
for consistency with other chapters.
Updated the cash flow analysis for
Apple and Dell.
Changed E1112 and E1115 to
fictional companies to allow for algorithmic alternatives.
CHAPTER 12
Updated all data and discussion for
the two comparison companies
Under Armour and Nike.
In the Quality of Earnings section,
changed the CFOs names to Nadal
and Djokovic.
Deleted the second Ethical Dilemma
box.
Replaced the Internet Research activity (AP126).
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CHAPTER 1
UNIQUE PEDAGOGICAL ELEMENTS . . .

Common Mistakes made by financial accounting students are
highlighted throughout each of the chapters. With greater awareness of the pitfalls the average student will find in a first accounting class, students can avoid making the same mistakes and gain
a deeper understanding of the chapter material.
Easy to read, love the Key Points and Common Mistakesthese sound
like me talking to my students and are exactly the points I make in
class! Really!Christa Morgan, Georgia Perimeter College
New in this edition, Interactive Illustrations provide online explanations of key illustrations in the
chapter, walking students step-by-step through the
illustration, to deepen students understanding of
the concept or the calculation shown.
A solid understanding of accounting can lead to
a wide variety of job opportunities. The Career
Corner boxes highlight a link between a particular
topic in the chapter and a business career, and thus
are intended for both accounting majors and nonmajors.
Because of the widespread adoption of international
financial reporting standards issued by the International Accounting Standards Board (IASB), differences between international standards and U.S.
GAAP are highlighted throughout the text in International Financial Reporting Standards boxes. Appendix E provides a summary of differences highlighted
throughout the chapters plus a more comprehensive
discussion of differences.
Most importantly, it offers
opportunities for students to

have insights into accounting
careers via Career Corners.
Chuo-Hsuan Lee, SUNYPlattsburgh
International accounting
standards are very
relevant today. Students
need to be aware of
them... .Richard Moellenberndt,
Washburn University
The Key Points provide quick synopses of the critical pieces of information
presented throughout each chapter. Key Points within each chapters Learning
Objectives are also summarized at the end of each chapter, providing students
with a convenient study guide.
Very easy to read!!! I like the Key Points and Common Mistakes
segments in each chapter. These features would really help my
students as they read the text and study for exams. I also like the
simplicity of each chapter.David Juriga, St. Louis Community College

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CHAPTER 1
xi
HELP IGNITE THE LEARNING PROCESS

Ethical Dilemma boxes acquaint students with ethical implications of chapter
topics and provide opportunities to address ethics in accounting.
This is a good approach because it will give students an opportunity

to develop their critical thinking ability by comparing situations that
they have not experienced before.Seleshi Sisaye, Duquesne University
The Flip Side and Common

Mistakes sections are outstanding
and are likely to be among
the favorite parts of the

content for students.Christian
Wurst, Temple University
The Flip Side feature demonstrates

how various transactions are viewed
by each side. Including the flip side
of a transactionin contextenhances
the students understanding of both
the initial and the related transaction.
Selected homework materials also
include the Flip Side transactions, to
reinforce student understanding.
Each chapter contains Lets Review sections that test students comprehension
of key concepts. These short review exercises, with solutions, are intended to
reinforce understanding of specific chapter material and allow students to
apply concepts and procedures learned in the chapter prior to attempting their
homework assignment. Each Lets Review exercise also contains Suggested
Homework, which enables instructors to easily assign corresponding homework.
New in 3e, online narrated explanations of 22 key Lets Review sections walk
students through how to solve the exercise and model that approach for related
homework.
Lets Review
mhhe.com/3fa6
Lets Review
Bogey Incorporated has the following transactions during May:

May 1 Purchase a storage building by obtaining a loan of $5,000.
May 6 Provide services on account to customers, $1,800.
May 12 Pay $1,200 cash for advertising in May.
May 17 Repay $1,000 of the amount borrowed on May 1.
May 25 Purchase office supplies for $800 cash.
Required:
Indicate how each transaction affects the accounting equation.

Solution:
Assets
Liabilities
Stockholders Equity
Common
Stock
Suggested Homework:
BE22, BE24;
E22, E23, E24;
P21A&B, P22A&B
May 1
May 6
May 12
May 17
May 25
+$5,000
+$1,800
$1,200
$1,000
+$ 800
$ 800
+$4,600
Retained
Earnings
+$5,000
+$1,800
$1,200
$1,000
+$4,000
+$ 600
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xii
CHAPTER 1
PRACTICE MAKES PERFECT WITH . . .

SELF-STUDY QUESTIONS
1. Which of the following represents an external
transaction? (LO21)
a. Lapse of insurance due to passage of time.
b. Use of office supplies by employees over time.
c. Payment of utility bill.
d. Salaries earned by employees but not yet paid.
5. Which of the following causes the accoun

equation not to balance? (LO22)
a. Increase assets; increase liabilities.
b. Decrease assets; increase expenses.
c. Increase assets; increase dividends.
d. Decrease liabilities; increase revenues
2. Which of the following is not a step in the process

of measuring external transactions? (LO21)
a. Analyze the impact of the transaction on the
accounting equation.
b. Record the transaction using debits and
credits.
c. Post the transaction to the T-account
nt in the
general ledger.
d. All of the above are steps in the measurement
asurement
process of external transactions.
6. A debit is used to increase which of the fo

accounts? (LO23)
a. Utilities Expense.
b. Accounts Payable.
c. Service Revenue.
d. Common Stock.
Self-Study Questions consist of 10 multiplechoice questions in each chapter. Answers

appear at the end of the respective chapters.
Students also are directed to the course
website, where additional questions are
available in the form of self-grading online
quizzes with a more detailed analysis of
correct and incorrect answers.
7. A credit is used to increase which of the f

accounts? (LO3
((LO33)
3)
3))
a. Dividends.
c. Cash.
In making an adoption decision, recognizing the topical coverage is most critical,

I would not hesitate to adopt this text from the perspective of the assignments.
Ron Burrows, University of Dayton
Review Questions are provided

for each of the major concepts
in each chapter, providing
students with an opportunity to
review key parts of the chapter
and answer key questions
about what they have learned.
spi25540_ch02_054-105.indd 83
REVIEW QUESTIONS
LO21
1. Explain the difference between external transactions and internal transactions.

If a company purchases supplies from a local vendor, would this be classified
as an external or internal transaction?
LO21
2. List the steps we use to measure external transactions.
LO22
3. Each external transaction will have a dual effect on the accounting equation.
Explain what this means.
LO22
4. Describe the impact of each of these external transactions on the accounting equation.
a. Receive a loan from the bank.
b. Pay employee salaries for the current period.
c. Receive cash from customers for services provided in tthe current period.
d. Purchase equipment by paying cash.
LO22
5. Jerry believes that dual effect indicates that, for all transactions,
one account
tran
correct? Explain.
will increase and one account will decrease. Is Jerry corre
09/05/13 4:29 PM
Well-written book with excellent features throughout each chapter. Plenty of

material at the end of the chapter to give students extra practice.Chris McNamara,
Finger Lakes Community College
BRIEF EXERCISES
BE21 Below are the steps in the measurement process of external transactions.
Arrange them from first (1) to last (6).
List steps in the

measurement
process(LO21)
a. Post the transaction to the T-accounts in the general ledger.

b. Assess whether the impact of the transaction results in a debit or credit
to the account balance.
Brief Exercises address single concepts

from a single perspective. These exercises
are ideal for quick demonstrations of
simple topics in class or short take-home
assignments.
c. Use source documents to identify accounts affected by external

transactions.
d. Analyze the impact of the transaction on the accounting equation.
e. Prepare a trial balance.
f. Record transactions using debits and credits.
BE22 Using the notion that the accounting equation (Assets=Liabilities+ Stockholders Balance the accounting
g
equation(LO22)
Equity) must remain in balance, indicate whether each of the following transactions is
possible.
a. Cash increases; Accounts Payable decreases.
spi25540_ch02_054-105.indd 84
b. Service Revenue increases; Salaries Payable increases.
c. Advertising Expense increases; Cash decreases.
Brief exercises are an important part of

student learning (particularly given the
learning style of todays student).Dawn Massey,
09/05/13 4:29 PM
Fairfield University
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CHAPTER 1
xiii
A WIDE VARIETY OF ASSIGNMENT MATERIAL

Exercises typically add one or more
additional dimensions to the same topics
covered with Brief Exercises. An additional
set of Exercises (Set B) created by the
authors can be found on the books website.
In McGraw-Hill Connect, instructors can
allow students to view Guided Examples,
which provide step-by-step video
instructions to solving a similar exercise.
EXERCISES
Identify terms associated
with the measurement
process(LO21)
List A
List B
a. Record of all transactions affecting a firm.
b. Determine the dual effect of economic events on
the accounting equation.
c. List of accounts and their balances.
d. Summary of the effects of all transactions related
to a particular item over a period of time.
e. Transfer balances from the journal to the ledger.
1. Account
2. Analyze transactions
3. Journal
4. Post
5. Trial balance
Required:
Pair each item from List A with the item from List B to which it is most appropriately
associated.
Analyze the impact
of transactions on
the accounting
This text is very complete, readable, with several exercise
equation(LO22)
equation(LO22)
and problem possibilities. It has some new and
innovative features, including the Key Point, Common
Mistake, and Career Corner boxes. This text also introduces
the Cash Flow Statement fundamentals early in the text, to
enhance learning the difference between cash and accrual
basis.Mary Hollars, Vincennes University
Problems typically address

multiple concepts from the chapter
or multiple levels of analytical
perspective within the given
scenarios. Where feasible, problems
are built around real companies and
business situations.
E21 Listed below are several terms and phrases associated with the measurement
process for external transactions.
E22 Below are the external transactions for Shockers Incorporated.

1. Issue common stock in exchange for cash.
2. Purchase equipment by signing a note payable.
3. Provide services to customers on account.
4. Pay rent for the current month.
5. Pay insurance for the current month.
6. Collect cash from customers on account.
1.
2.
3.
4.
5.
6.
Assets
Liabilities
Stockholders Equity
Increase
______
______
______
______
______
No effect
______
______
______
______
______
Increase
______
______
______
______
______
PROBLEMS: SET A
spi25540_ch02_054-105.indd 88
Each chapter provides twin sets

of problems to offer instructors
flexibility in presentation and
assignment. The material in Problem
Set A is similar in format to the
material in Problem Set B, and each
set reinforces the other. Both sets of
problems appear in McGraw-Hill
Connect. A third set of Problems
(Set C) created by the authors can be
found on the books website.
09/05/13 4:29 PM
P21A Below is a list of activities for Jayhawk Corporation.
Analyze the impact

of transactions on
the accounting
equation(LO22)
Transaction
1. Issue common stock in
exchange for cash.
2. Purchase business
supplies on account.
3. Pay for legal services for
the current month.
4. Provide services to
customers on account.
5. Pay employee salaries for
the current month.
p
customers for cash.
7. Pay for
advertising
for the
PROBLEMS:
SET
B
current month
Assets
Liabilities
Stockholders
Equity
Increase
No effect
Increase
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
P21B Below is a list of activities for Tigers Corporation.

Transaction
1. Obtain a loan at the bank.
2. Purchase a machine to use
in operations for cash.
customers for cash.
4. Pay employee salaries for
the current month.
5. Repay loan from the bank
in (1) above.
6. Customers pay cash in
advance of services.
maintenance costs
7. Pay for m
current month.
in the cur
d
h
f
spi25540_ch02_054-105.indd 94
Assets
Liabilities
Stockholders
Equity
Increase
Increase
No effect
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
Analyze the impact

of transactions on
the accounting
equation(LO22)
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This text is very well written and offers

a set of end-of-chapter problems that
progressively challenges students and

directs them to build problem-solving
skills.Gregg S. Woodruff, Western Illinois University
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xiv
CHAPTER 1
Chapter Title Runs In CHAPTER

Here
1
xiv
END-OF-CHAPTER CASES CHALLENGE

STUDENTS . . .
The Additional Perspectives section of each chapter offers the most distinctive variety
of case material available in financial accounting texts. Cases and activities are designed
to allow students to apply the knowledge and skills theyve learned to real, realistic, or
provocative situations. Students are placed in the role of decision maker, presented with
a set of information, and asked to draw conclusions that test their understanding of the
issues discussed in the chapters. Each chapter offers an engaging mix of activities and
opportunities to perform real-world financial accounting analysis:
For additional problems, visit www.mhhe.com/succeed for Problems: Set C.
ADDITIONAL PERSPECTIVES
Great Adventures
(This is a continuation of the Great Adventures problem from Chapter 1.)
AP21 Tony and Suzie graduate from college in May 2015 and begin developing
their new business. They begin by offering clinics for basic outdoor activities such
as mountain biking or kayaking. Upon developing a customer base, theyll hold
their first adventure races. These races will involve four-person teams that race
from one checkpoint to the next using a combination of kayaking, mountain biking,
orienteering, and trail running. In the long run, they plan to sell outdoor gear and
develop a ropes course for outdoor enthusiasts.
On July 1, 2015, Tony and Suzie organize their new company as a corporation,
Great Adventures Inc. The articles of incorporation state that the corporation will sell
20,000 shares of common stock for $1 each. Each share of stock represents a unit of
ownership. Tony and Suzie will act as co-presidents of the company. The following
business activities occur during July for Great Adventures.
July 1
1
1
Continuing
Problem
C
Continuing ProblemThe story of Great Adventures
p
progresses from chapter to chapter, encompassing
tthe accounting issues of each new chapter as the
sstory unfolds. This problem allows students to see
h
how each chapters topics can be integrated into the
o
operations of a single company; this problem is also
a
available in McGraw-Hill Connect.
Sell $10,000 of common stock to Suzie.

Sell $10,000 of common stock to Tony.
Purchase a one-year insurance policy for $4,800 ($400 per month) to
The text is very detailed, but not overly

technical. It is written at a level and in a way
that is highly user friendly.Peter Woodlock, Youngstown
State University
3. Prepare a trial balance.
American Eagle Outfitters, Inc.
Financial Analysis
AP22 Financial information for American Eagle is presented in Appendix A at the

end of the book.
Required:
1. Is American Eagles company size increasing? To answer, calculate the percentage
change in total assets and percentage change in net sales for the most recent year
2. Is American Eagles total profitability increasing? Determine your answer by
calculating the percentage change in net income for the most recent year.
in theEagle
income
statement
increase
withinathe
debit?
Which
increase
3. Did American
issue
any common
stock
most
recent
year? with a credit?
spi25540_ch02_054-105.indd 103
Financial Analysis: American Eagle Outfitters,

Inc.Students are asked to gather information from
the annual report of American Eagle, located in
Appendix A.
09/05/13 4:29 PM
Financial Analysis: The Buckle, Inc.

Students are asked to gather information
from the annual report of Buckle, located
in Appendix B.
4. Do you see the term debit or credit listed in the balance sheet? Which account
Financial Analysis
The Buckle, Inc.
types in the balance sheet increase with a debit and which ones increase with
credit?AP23 Financial information for Buckle is presented in Appendix B at the end of the book.
5 D
h
d bi
di li d i h i
? Whi h
Required:
1. Is Buckles company size increasing? Determine your answer by calculating the
percentage change in total assets and percentage change in net sales for the most
recent year.
2. Is Buckles total profitability increasing? Determine your answer by calculating the
percentage change in net income for the most recent year.
3. Did Buckle issue any common stock in the most recent year?
4. Do you see the term debit or credit listed in the balance sheet? Which account
unt types
in the balance sheet increase with a debit and which ones increase with a credit?
5. Do you see the term debit or credit listed in the income statement? Which account
unt types
in the income statement increase with a debit? Which increase with a credit?
A new, promising text in financial

accounting is emerging.Ahmed
Ebrahim, State University of New YorkNew Paltz
in the income statement increase with a debit? Which increase with a credit?
Comparative
Analysis
American Eagle Outfitters, Inc., vs. The Buckle, Inc.

AP24 Financial information for American Eagle is presented in Appendix A at the
end of the book, and financial information for Buckle is presented in Appendix B at
the end of the book.
Required:
Determine which companys growth rate in total assets, net sales, and net income is
greater. Why do you think this might be the case?
Comparative AnalysisIn addition to separately

analyzing the financial information of American
Eagle and Buckle, students are asked to
compare financial information between the two
companies.
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09/05/13 4:29 PM
Difficult topics are handled in a manner to facilitate the students learning. Overall the text is
very good and worth considering.Tommy Moores, University of NevadaLas Vegas
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09/05/13 4:29 PM
09/05/13 4:29 PM
xiv
i
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TO SEE AN ADDITIONAL
PERSPECTIVE
greater. Why do you think this might be the case?
Ethics
EthicsEncourage consideration of ethical issues as

they pertain to accounting decisions including the
outcome of those decisions on various stakeholders.
spi25540_ch02_054-105.indd 104
Students are given opportunities for feedback of

their understanding of concepts and procedures
by taking quizzes and working review problems
at break points within the chapter. The text has
a large quantity and variety of quality end-
AP25 Larry has been the chief financial officer (CFO) of Maxima Auto Service fo
the past 10 years. The company has reported profits each year its been in busines
However, this year has been a tough one. Increased competition and the rising co
labor have reduced the companys profits. On December 30, Larry informs Robert
companys president and Larrys closest friend for the past 10 years, that it looks l
the company will report a net loss (total expenses will be greater than total revenu
of about $50,000 this year.
The next day, December 31, while Larry is preparing the year-end reports, Rob
stops by Larrys office to tell him that an additional $75,000 of revenues needs to
be reported and that the company can now report a profit. When Larry asks abou
the source of the $75,000, Robert tells him, Earlier in the month some customer
paid for auto services with cash, and with this cash I bought additional assets for
the company. Thats why the $75,000 never showed up in the bank statement. I ju
forgot to tell you about this earlier. When Larry asks for more specifics about th
transactions, Robert mumbles, I cant recall where I placed the customer sales
invoices or the purchase receipts for the assets, but dont worry; I know theyre h
Weve been friends for a lot of years and you can trust me. Now, lets hurry and fi
those reports and Ill treat you to dinner tonight at the restaurant of your choice.
09/05/13 4:29 PM
Required:
Discuss the ethical dilemma Larry faces: What is the issue? Who are the parties
affected? What factors should Larry consider in making his decision?
of-chapter assignment material.Tommy Moores,

University of NevadaLas Vegas
affected? What factors should Larry consider in making his decision?
Internet ResearchAllow students to develop and

practice research skills by requiring them to locate
and extract relevant information from available
resource material such as financial reports or official
standards on the Internet, perhaps identifying the
appropriate resources to support a decision.
Internet Research
AP26 Obtain a copy of the annual report of Apple Inc. for the most recent year. You
can find the annual report at the companys website (www.apple.com) in the investor
information section or at the Securities and Exchange Commissions website (www.sec
.gov) using EDGAR (Electronic Data Gathering, Analysis, and Retrieval). Form 10-K,
which includes the annual report, is required to be filed on EDGAR. Search or scroll
within the annual report to find the financial statements.
Required:
Determine the following from the companys financial statements:
1. What amount does the company report for accounts receivable? What does this
amount represent?
2. What amount does the company report for accounts payable? What does this
amount represent?
3 The company reports a single amount for accrued expenses in the liability section
With the wide range of EOC materials, the book

can be adapted to many different levels.Joshua
Herbold, University of Montana
Written Communication
Written CommunicationProvide the opportunity

to not only apply analysis and judgment skills but
also to express information or persuade by means
of a writing assignment.
Earnings ManagementProvide challenging
earnings management situations where students analyze the implications of their
accounting decisions on a companys earnings.
AP27 Barth Interior provides decorating advice to its clients. Three recent transactions
of the company include:
a. Providing decorating services of $500 on account to one of its clients.
b. Paying $1,200 for an employees salary in the current period.
c. Purchasing office equipment for $2,700.
Required:
spi25540_ch02_054-105.indd 105
Write a memo to your instructor describing each step of the six-step measurement
process presented in Illustration 21 for each of the three transactions.
Earnings Management
AP58 Ernie Upshaw is the supervising manager of Sleep Tight Bedding. At the end
of the year, the companys accounting manager provides Ernie with the following
information, before any adjustment.
spi25540_ch02_054-105.indd 105
spi25540_ch02_054-105.indd 105
Accounts receivable
Estimated percent uncollectible
Allowance for uncollectible accounts
Operating income
09/05/13 4:29 PM
09/05/13 4:29 PM
$500,000
9%
$20,000 (debit)
$320,000
This book has the largest quantity of exercises and problems of any text that Ive
reviewed. I think it is very important for students to work incrementally on some of the more difficult
concepts. I usually dont have such an impressive quantity from which to select.Kathleen M. Metcalf,
Muscatine Community College
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xvi
CHAPTER 1
RICH ONLINE LEARNING OPPORTUNITIES . . .
McGraw-Hill Connect Plus Accounting and Connect Accounting provide a complete online assignment,
learning, and eBook (with Connect Plus) assessment solution that provides your students with the tools
and resources needed to achieve success through faster learning, more efcient studying, and higher
retention of knowledge. Key features found in Connect Plus Accounting and Connect Accounting include:
INTELLIGENT RESPONSE
TECHNOLOGY
Intelligent Response Technology is Connect
Plus Accounting and Connect Accountings
new student interface for end-of-chapter assessment content. Intelligent Response Technology provides a general journal application
that looks and feels more like what you would
nd in a general ledger software package, improves answer acceptance to reduce student
frustration with formatting issues (such as
rounding), and, for select questions, provides an expanded table that guides students
through the process of solving the problem.
ONLINE ASSIGNMENTS
Connect Plus Accounting and Connect
Accounting help students learn more efciently by providing feedback and practice material when they need it, where they need it.
Connect grades homework automatically and
gives immediate feedback on any questions
students may have missed.
GUIDED EXAMPLES
Guided Examples provide narrated, animated, and step-by-step walkthroughs of
algorithmic versions of assigned exercises
in Connect Plus Accounting and Connect
Accounting, allowing the student to identify, review, or reinforce the concepts and
activities covered in class. Guided Examples provide immediate feedback and
focus on the areas where students need the
most guidance.
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ACCOMMODATE A VARIETY OF LEARNING STYLES
INTERACTIVE PRESENTATIONS
Connect Plus Accounting and Connect Accountings Interactive Presentations teach
each chapters core learning objectives and
concepts through an engaging, hands-on
presentation, bringing the text content to
life. Interactive Presentations harness the
full power of technology to truly engage
and appeal to all learning styles. Interactive Presentations are ideal in all class
formatsonline, face-to-face, or hybrid.
STUDENT RESOURCE LIBRARY

The Connect Plus Accounting and Connect
Accounting Student Study Center gives
access to additional resources such as recorded lectures, online practice materials,
an eBook, and more.
INTEGRATED EBOOKS
Connect Plus includes a media-rich
eBook. With it, you can share your notes
with your students, and they can insert
their own notes, highlight the text, search
for specic information, and review their
materials. Using an eBook with Connect
gives students a complete digital solution
that allows them to access their materials from any computer. And over time, as
more and more students use mobile devices, our eBooks will even enable them
to learn on the go.
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GIVE STUDENTS ADAPTIVE LEARNING

TECHNOLOGY
SMARTBOOK
SmartBook is the rst and only adaptive reading experience available for the
higher education market. Powered by the
intelligent adaptive LearnSmart engine,
SmartBook facilitates the reading process
by identifying what content a student
knows and doesnt know. As a student
reads, the material constantly adapts
to ensure the student is focused on the
content he or she needs the most to close
specic knowledge gaps.
Key Student Benets
SmartBook is available with Connect Plus Accounting.
Personalizes the reading experience for
students in order to help them study efficiently.
Includes individual reports that reinforce specific topics and learning objectives to
help the student study.
Students can access SmartBook anytime via a computer and soon via the
iPhone, iPad, and latest Android devices.
Key Instructor Benets
Students will come to class better prepared because SmartBook personalizes the reading experience,
allowing instructors to focus their valuable class time on higher-level topics.
Provides instructors with a comprehensive set of reports to help them quickly see how individual students are performing, identify class trends, and tailor their lectures to cover specific learning objectives.
How does SmartBook work?
Students start off by Previewing the content. They are asked to browse the chapter content to get an idea
of what the major topics are. Once they have Previewed the content, students are prompted to Read. As
they read, SmartBook will introduce LearnSmart questions in order to identify what content each student
knows and doesnt know. As students answer the questions, SmartBook tracks their progress in order to
determine when they are ready to Practice. As the students Practice in SmartBook, the program identies
what content they are most likely to forget and when. That content is brought back during the Recharge
process to ensure retention of the material.
LEARNSMART
LearnSmart adaptive self-study technology within
Connect Accounting helps students make the best use
of their study time. LearnSmart provides a seamless
combination of practice, assessment, and remediation
for every concept in the textbook. LearnSmarts intelligent software adapts to students by supplying questions on a new concept when they are ready to learn it.
With LearnSmart, students will spend less time on topics they understand and practice more on those they
have yet to master.
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MANAGE YOUR CLASSROOM WITH

CONNECT ACCOUNTING
Connect Plus Accounting and Connect Accounting offer a number of
powerful tools and features that help faculty assign McGraw-Hills
world-class content, assess student performance, and make managing your course easier, so you can spend more time teaching.
TEGRITY: LECTURES 24/7

Make your classes available anytime, anywhere. With simple oneclick recording, instructors can record lectures, presentations,
and step-by-step problem solutions with Tegrity. Using Tegrity
with Connect Accounting, instructors can post recordings directly to Connect for
student viewing. Students can also search for a word or phrase and be taken to the
exact place in your lecture that they need to review. To learn more about Tegrity,
watch a two-minute Flash demo at http://tegritycampus.mhhe.com.
SIMPLE ASSIGNMENT MANAGEMENT AND SMART GRADING

Connect Plus Accounting enables you to:
Create and deliver assignments easily with select end-of-chapter questions and
test bank items.
Have assignments scored automatically, giving students immediate feedback on
their work and side-by-side comparisons with correct answers.
Reinforce classroom concepts with practice tests and instant quizzes.
Go paperless with the eBook and online submission and grading of student assignments.
STUDENT REPORTING
Connect Plus Accounting and Connect Accounting keep
instructors informed about how each student, section,
and class is performing, allowing for more productive use
of lecture and ofce hours. The reporting function enables
you to:
View scored work immediately and track individual or
group performance with assignment and grade reports.

Access an instant view of student or class performance
relative to learning objectives.
Collect data and generate reports required by many accreditation organizations, such as AACSB and AICPA.
Identify low-performance students with the At Risk
student report.
INSTRUCTOR LIBRARY
The Connect Plus Accounting and Connect Accounting Instructor Library is your
repository for additional resources to improve student engagement in and out of
class. You can select and use any asset that enhances your lecture. The Instructor
Library includes: access to the eBook version of the text, PowerPoint les, Solutions Manual, Instructors Resource Manual, and Testbank.
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xx
CHAPTER 1
AUTHOR-WRITTEN SUPPLEMENTS TO ENSURE

QUALITY AND CONSISTENCY
The textbook is well organized and noticeably
written by individuals who have an

excellent understanding of accounting,
the accounting profession, and the issues
confronting the accounting profession. A
large number of supplements for students and
instructors are available, including high-tech
supplements.Richard A. Moellenberndt, Washburn
University
ONLINE SOLUTIONS MANUAL

The Solutions Manual includes detailed solutions
for every question, exercise, problem, and case in
the text.
Theres a surprise (extra or expanded

coverage not often found in other texts)
in virtually every chapter. If youve been
teaching this course for years and long for
something new and fresh, you owe it to
yourself to take a look at this text.
Lowell Mooney, Georgia Southern University
ONLINE INSTRUCTORS RESOURCE MANUAL

This manual provides for each chapter: (a) a chapter overview; (b) a comprehensive lecture outline;
(c) a variety of suggested class activities (real world,
ethics, annual report, professional development activities including research, analysis, communication
and judgment, and others); and (d) an assignment
chart indicating topic, learning objective, and estimated completion time for every question, exercise,
problem, and case.
Excellent introductory textbook. It covers

the essential material in an interesting
and engaging manner. It fits well with
Spiceland et al.s intermediate

text.Rodney Smith, California State University
Long Beach
ONLINE TESTBANK
Written by the authors, this comprehensive Testbank contains over 2,000 questions including true/
false, matching, multiple-choice, problems, and essay questions.
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CHAPTER 1
xxi
ONLINE RESOURCES FOR STUDENTS

AND INSTRUCTORS
ONLINE LEARNING CENTER (OLC)
We offer an Online Learning Center (OLC) that follows Financial Accounting chapter by chapter. It requires no building or maintenance on your part. Its ready to go
the moment you and your students type in the URL:
www.mhhe.com/spicelandfa3e
As students study and learn from Financial Accounting, they can visit the Student
Edition of the OLC website to work with a multitude of helpful tools:
Interactive Chapter Quizzes
Excel Template Assignments
PowerPoint Presentations
Alternative Problems, Set C

Alternative Exercises, Set B
QuickBooks Templates
A secured Instructor Edition stores essential course materials to save you prep
time before class. Everything you need to run a lively classroom and an efcient
course is included. All resources available to students, plus . . .
Instructors Resource Manual

Solutions Manual
Solutions to Excel Template Assignments
Testbank
Instructor PowerPoints
QuickBooks Template Solutions
Solutions to Alternative Problems, Set C
Solutions to Alternative Exercises, Set B
The OLC website also serves as a doorway to other technology solutions, like course
management systems.
Try a New eBook Option!

COURSESMART
CourseSmart is a new way to nd and buy eTextbooks. CourseSmart has the
largest selection of eTextbooks available anywhere, offering thousands of the
most commonly adopted textbooks from a wide variety of higher education
publishers. CourseSmart eTextbooks are available in one standard online reader with full text search,
notes, highlighting, and e-mail tools for sharing between classmates. Visit www.CourseSmart.com
for more information on ordering.
xxi
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xxii
CHAPTER 1
ONLINE COURSE MANAGEMENT OPTIONS

Online Course
Management
MCGRAW-HILL HIGHER EDUCATION AND BLACKBOARD HAVE

TEAMED UP. WHAT DOES THIS MEAN FOR YOU?
1. Single sign-on. Now you and your students can access McGraw-Hills
Connect and Create right from within your Blackboard courseall with
one single sign-on.
2. Deep integration of content and tools. You get single sign-on with Connect
and Create; you also get integration of McGraw-Hill content and content engines right in Blackboard. Whether youre choosing a book for your course or
building Connect assignments, all the tools you need are right where you want
theminside Blackboard.
3. One grade book. Keeping several grade books and manually synchronizing
grades in Blackboard is no longer necessary. When a student completes an integrated Connect assignment, the grade for that assignment automatically (and
instantly) feeds your Blackboard grade center.
4. A solution for everyone. Whether your institution is already using Blackboard
or you just want to try Blackboard on your own, we have a solution for you.
McGraw-Hill and Blackboard can now offer you easy access to industry-leading
technology and content, whether your campus hosts it, or we do. Be sure to ask
your local McGraw-Hill representative for details.
MCGRAW-HILL CAMPUSTM
McGraw-Hill Campus is a new one-stop teaching and learning experience available to users of any learning management system. This complimentary integration
allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill
Higher Education materials and synchronized grade book with our award-winning
McGraw-Hill Connect platform. McGraw-Hill Campus provides faculty with instant
access to all McGraw-Hill Higher Education teaching materials (eTextbooks, test
banks, PowerPoint slides, animations and learning objects, and so on), allowing
them to browse, search, and use any instructor ancillary content in our vast library at no additional cost to instructor or students. Students enjoy SSO access
to a variety of free (quizzes, ash cards, narrated presentations, and so on) and
subscription-based products (McGraw-Hill Connect). With this integration enabled,
faculty and students will never need to create another account to access McGrawHill products and services. For more information on McGraw-Hill Campus please
visit our website at www.mhcampus.com.
EZ TEST ONLINE
McGraw-Hills EZ Test Online is a exible and easy-to-use electronic testing program that allows instructors to create tests from book-specic items. EZ Test Online
accommodates a wide range of question types and allows instructors to add their
own questions. Multiple versions of the test can be created, and any test can be
exported for use with course management systems such as Blackboard/WebCT. EZ
Test Online gives instructors a place to easily administer exams and quizzes online.
The program is available for Windows and Macintosh environments.
xxii
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CHAPTER 1
xxiii
ASSURANCE OF LEARNING
AND CUSTOMER SUPPORT
ASSURANCE OF LEARNING READY

Many educational institutions today are focused on the notion of assurance of learning, an important
element of some accreditation standards. Financial Accounting is designed specifically to support your
assurance of learning initiatives with a simple, yet powerful solution.
Each Testbank question for Financial Accounting maps to a specific chapter learning objective listed in
the text. You can use our Testbank software, EZ Test and EZ Test Online, or Connect Plus Accounting
and Connect Accounting to easily query for learning objectives that directly relate to the learning objectives for your course. You can then use the reporting features of EZ Test to aggregate student results in
similar fashion, making the collection and presentation of assurance of learning data simple and easy.
AACSB STATEMENT
The McGraw-Hill Companies is a proud corporate member of AACSB International. Understanding the importance and value of AACSB
accreditation, Financial Accounting recognizes
the curricula guidelines detailed in the AACSB
standards for business accreditation by connecting selected questions in the text and the
Testbank to the six general knowledge and skill
guidelines in the AACSB standards.
The statements contained in Financial Accounting are provided only as a guide for the users of
this textbook. The AACSB leaves content coverage and assessment within the purview of individual schools, the mission of the school, and
the faculty. While Financial Accounting and the
teaching package make no claim of any specific
AACSB qualification or evaluation, we have
within Financial Accounting labeled selected
questions according to the six general knowledge and skills areas.
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xxiii
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xxiv
CHAPTER 1
A HEARTFELT THANKS TO THE MANY VOICES . . .

The version of Financial Accounting you
are reading would not be the same book
without the valuable suggestions, keen
insights, and constructive criticisms of
the list of reviewers below. Each professor listed here contributed in substantive ways to the organization of chapters, coverage of topics, and selective
use of pedagogy. We are grateful to them
for taking the time to read each chapter
and offer their insights.
Dawn Addington, Central New Mexico
Community College
Peter Aghimien, Indiana University
South Bend
Nasrollah Ahadiat, California State Poly
UniversityPomona
James J. Aitken, Central Michigan University
Charles Aldridge, Western Kentucky University
Dave Alldredge, Salt Lake Community College
Fouad Alnajjar, Baker College
Janice Ammons, Quinnipiac University
Mark Anderson, University of Texas at Dallas
Steven Ault, Montana State Unviersity
Bozeman
Craig Bain, Northern Arizona University
Kashi Balachandran, New York University
Patricia C. Bancroft, Bridgewater State College
Randall P. Bandura, Frostburg State University
Lisa Banks, Mott Community College
Joyce Barden, DeVry University
Michael Barendse, Grossmont College
Carroll Barnes, Milwaukee Area Technical
College
Cheryl Bartlett, Central New Mexico
Community College
Ellen Bartley, Saint Josephs CollegeSuffolk
Glenellyn Barty, Northern Kentucky University
Ira W. Bates, Florida A&M University
Mohammad S. Bazaz, Oakland University
Stephen Benner, Eastern Illinois University
Amy Bentley, Tallahassee Community College
Larry Bergin, Winona State University
Mark Bezik, Concordia University
Brenda Bindschatel, Green River Community
CollegeAuburn
Cynthia Birk, University of NevadaReno
Eddy Birrer, Gonzaga University
Sandra Bitenc, University of Texas at Arlington
Claude Black, Seattle Central Community
College
Janell Blazovich, University of Saint Thomas
David Bojarsky, California State University
Long Beach
Charlie Bokemeier, Michigan State University
Jack Borke, University of WisconsinPlatteville
Lisa N. Bostick, The University of Tampa
Amy Bourne, Oregon State University
Benoit Boyer, Sacred Heart University
Thomas Brady, University of Dayton

Jerold K. Braun, Daytona State College
Molly Brown, James Madison University
Linnae Bryant, Chicago State University
R. Eugene Bryson, University of Alabama
Huntsville
Georgia Buckles, Manchester Community
College
Charles I. Bunn, Wake Tech Community College
Esther Bunn, Stephen F. Austin State
University
Jacqueline Burke, Hofstra University
Sandra Byrd, Missouri State University
Edward J. Bysiek, Saint Bonaventure
University
Scott Cairns, Shippensburg University of PA
Ernest Carraway, North Carolina State
University
Pat Carter, Green River Community
CollegeAuburn
Bruce Cassel, Dutchess Community College
Gayle Chaky, Dutchess Community College
Valrie Chambers, Texas A&M University
Kam C. Chan, Pace University
Mike Chatham, Radford University
Betty Chavis, California State University
Fullerton
Al Chen, North Carolina State University
Raleigh
Xiaoyan Cheng, University of Nebraska at
Omaha
Alan Cherry, Loyola Marymount University
Bea Chiang, The College of New Jersey
Carolyn Christesen, Westchester Community
College
Cal Christian, East Carolina University
Tony Cioffi, Lorain County Community College
Jay Cohen, Oakton Community College
Leslie Cohen, University of Arizona
Taleah Collum, Jacksonville State University
Norman Colter, University of New Mexico
Albuquerque
Elizabeth Conner, University of ColoradoDenver
Jackie Conrecode, Florida Gulf Coast University
Debora Constable, Georgia Perimeter College
Pat Cook, Manchester Community College
Betty Cossitt, University of NevadaReno
Meg Costello Lambert, Oakland Community
College
Samantha Cox, Wake Tech Community College
Leonard Cronin, Rochester Community &
Technical College
Jim Crowther, Kirkwood Community College
Jill Cunningham, Santa Fe College
Wagih Dafashy, George Mason University
Karl Dahlberg, Rutgers University
Dori Danko, Grand Valley State University
Kreag Danvers, Clarion University of PA
Alan Davis, Community College of
Philadelphia
Harold Davis, Southeastern Louisiana

University
Mark DeFond, University of Southern
California
Guenther DerManelian, Johnson & Wales
University
Patricia Derrick, Salisbury University
Mike Deschamps, Miracosta College
Rosemond Desir, Colorado State University
Carlton Donchess, Bridgewater State College
Alex Dontoh, New York University
Jamie Doran, Muhlenberg College
John Draut, Saint Xavier University
Lisa Dutchik, Kirkwood Community College
Carol Dutton, South Florida Community
College
Tammy Duxbury, Bryant University
Cynthia Eakin, University of the Pacific
Jeff Edwards, Portland Community College
Sylvania
Susan Eldridge, University of Nebraska
Omaha
Ryan Enlow, University of NevadaLas Vegas
Sheri Erickson, Minnesota State University
Moorhead
Harlan Etheridge, University of Louisiana
Lafayette
Robert Everett, Lewis & Clark Community
College
Alan Falcon, Loyola Marymount University
Darius Fatemi, Northern Kentucky University
Andrew Felo, Penn State University
Janice Fergusson, University of South Carolina
Kathleen Fitzpatrick, University of Toledo
Scott Park
Linda Flaming, Monmouth University
Amy Ford, Western Illinois University
John Fortner, Daytona State CollegeDaytona
Beach
Brenda Fowler, Alamance Community College
Martha Lou Fowler, Missouri Western State
University
Tom Fuhrmann, Missouri Western State
University
Harlan Fuller, Illinois State University
Ed Furticella, Purdue University
Mohamed Gaber, SUNY Plattsburgh
John Gardner, University of Wisconsin
Lacrosse
Roger Gee, San Diego Mesa College
Daniel Gibbons, Waubonsee Community
College
Michael Gilkey, Palomar College
Lisa Gillespie, Loyola University
Marc Giullian, Montana State University
Bozeman
Ruth Goran, Northeastern Illinois University
Sherry Gordon, Palomar College
M. David Gorton, Eastern Washington
UniversitySpokane
xxiv
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CHAPTER 1
xxv
WHO SHAPED THIS BOOK

Jill Goslinga, University of FloridaGainesville
Janet Grange, Chicago State University
Tony Greig, Purdue University
Andrew Griffith, Iona CollegeNew Rochelle
Sanjay Gupta, Valdosta State University
Geoffrey Gurka, Mesa State College
Jeffry Haber, Iona College
Abo-El-Yazeed Habib, Minnesota State
UniversityMankato
Ronald Halsac, Community College of
Allegheny County
Heidi Hansel, Kirkwood Community College
Thomas Bowe Hansen, University of New
Hampshire
Sheldon Hanson, Chippewa Valley Technical
College
Coby Harmon, University of CaliforniaSanta
Barbara
Randall Hartman, Lock Haven University of
Pennsylvania
Syd Hasan, George Mason University
Erskine Hawkins, Georgia Perimeter College
Laurie Hays, Western Michigan University
Daniel He, Monmouth University
Haihong He, California State University
Los Angeles
Kevin Hee, San Diego State University
Sheri Henson, Western Kentucky University
Joshua Herbold, University of Montana
Joyce Hicks, Saint Marys College
Margaret Hicks, Howard University
Dan Hinchliffe, University of North Carolina
Asheville
Frank Hodge, University of Washington
Anthony Holder, Case Western Reserve
University
Mary Hollars, Vincennes University
Cynthia Hollenbach, University of Denver
Linda Holmes, University of Wisconsin
Whitewater
Sharon Hoover-Dice, Clinton Community
College
Steven Hornik, University of Central Florida
Kathy Hsiao Yu Hsu, University of Louisiana
Lafayette
Marsha Huber, Otterbein College
Robert Huddleston, Dixie State College
Peggy Ann Hughes, Montclair State University
Laura Ilcisin, University of Nebraska at Omaha
Paula Irwin, Muhlenberg College
Steve Jablonsky, Colorado State University
Cynthia Jackson, Northeastern University
Norma Jacobs, Austin Community College
Marianne James, California State University
Los Angeles
Todd Jensen, Sierra College
Cathy Jeppson, California State University
Northridge
Raymond Johnson, Guilford College
Shondra Johnson, Bradley University
Rita Jones, Columbus State University

Sandra F. Jordan, Florida State College
Mark Judd, University of San Diego
David Juriga, Saint Louis Community
CollegeForest Park
Robert Kachur, Richard Stockton College
of New Jersey
Elliot Kamlet, Binghamton University
Shelley Kane, Wake Tech Community College
Kathryn Kapka, University of TexasTyler
Loisanne Kattelman, Weber State University
Ann Kelley, Providence College
Rebecca A. Kerr, University of South Carolina
Stephen Kerr, Bradley University
Lara Kessler, Grand Valley State University
Tim Kizirian, California State University
Chico
Janice Klimek, University of Central Missouri
Christine Kloezeman, Glendale Community
College
John Koeplin, University of San Francisco
Stephen A. Kolenda, Hartwick College
Emil Koren, Saint Leo University
Dennis Kovach, Community College of
Allegheny County
Sudha Krishnan, California State University
Long Beach
Tal Kroll, Ozarks Technical Community College
Joan Lacher, Nassau Community College
Steven J. LaFave, Augsburg College
Bradley Lail, North Carolina State University
Raleigh
Sheldon Langsam, Western Michigan University
Cathy Larson, Middlesex Community College
Douglas A. Larson, Salem State College
Laurie Larson-Gardner, Valencia Community
College
Doug Laufer, Metropolitan State College of
Denver
Michael D. Lawrence, Portland Community
College
Suzanne Lay, Mesa State College
Chuo-Hsuan Lee, SUNY Plattsburgh
Deborah Lee, Northeastern State University
Christy Lefevers-Land, Catawba Valley
Community College
Pamela Legner, College of DuPage
Stacy LeJeune, Nicholls State University
Elliott Levy, Bentley College
Xu Li, University of Texas at Dallas
Beixin Lin, Montclair State University
Joseph Lipari, Montclair State University
Jane Livingstone, Western Carolina University
William Lloyd, Lock Haven University of
Pennsylvania
Joseph Lupino, Saint Marys College of
California
Anna Lusher, Slippery Rock University of PA
Kirk Lynch, Sandhills Community College
Nancy Lynch, West Virginia University
Mostafa Maksy, Northeastern Illinois

University
Sal Marino, Westchester Community College
Diane Marker, University of Toledo
Scott Park
Angie Martin, Tarrant County College
James Martin, Washburn University
Peter Martino, Johnson & Wales University
Christian Mastilak, Xavier University
Josephine Mathias, Mercer County
Community College
Betsy Mayes, University of North Carolina
Asheville
Lynn Mazzola, Nassau Community College
Maureen McBeth, College of DuPage
Florence McGovern, Bergen Community
College
Brian L. McGuire, University of Southern
Indiana
Allison McLeod, University of North Texas
Chris McNamara, Finger Lakes Community
College
Sara Melendy, Gonzaga University
Terri Meta, Seminole Community College
Kathleen M. Metcalf, Muscatine Community
College
Jean Meyer, Loyola University
Pam Meyer, University of LouisianaLafayette
James Miller, Gannon University
Julie Miller, Chippewa Valley Technical College
Claudette Milligan, Trident Technical College
Tim Mills, Eastern Illinois University
Richard Minot, University of CaliforniaIrvine
Susan Minton, Prairie View A&M University
Laurel Bond Mitchell, University of Redlands
Laura Mizaur, Creighton University
Richard A. Moellenberndt, Washburn University
Kathy Moffeit, West Georgia University
J. Lowell Mooney, Georgia Southern University
Tommy Moores, University of NevadaLas Vegas
Arabian Morgan, Orange Coast College
Michelle Moshier, University at Albany
Gerald Motl, Xavier University
Matthew Muller, Adirondack Community
College
Lisa Murawa, Mott Community College
Volkan Muslu, University of Texas at Dallas
Al Nagy, John Carroll University
Lisa Nash, Vincennes University
Sia Nassiripour, William Paterson University
Presha Neidermeyer, West Virginia University
Micki Nickla, Ivy Tech Community College
of Indiana
Tracie Nobles, Austin Community College
Kelly Noe, Stephen F. Austin State University
Hossein Noorian, Wentworth Institute of
Technology
Rosemary Nurre, College of San Mateo
Barbara Nyden, Missouri State University
West Plains
xxv
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xxvi
CHAPTER 1
THANKS . . .
Dan OBrien, North Central Technical College
Ron OBrien, Fayetteville Tech Community
College
Kanalis Ockree, Washburn University
Karen Osterheld, Bentley College
Robert A. Pacheco, Massasoit Community
College
Don Pagach, North Carolina State University
Raleigh
Janet Papiernik, Indiana University/Purdue
UniversityFt Wayne
Glenn Pate, Palm Beach Community College
Rukshad Patel, College of DuPage
Keith F. Patterson, Brigham Young University
Mary B. Pearson, Southern Utah University
Nori Pearson, Washington State University
Reed Peoples, Austin Community College
Northridge
Richard J. Pettit, Mountain View College
Jan Pitera, Broome Community College
John Plouffe, California State University
Los Angeles
Linda Poulson, Elon University
Matthew Probst, Ivy Tech Community College
of Indiana
John Purisky, Salem State University
William Quilliam, Florida Southern College
Atul Rai, Wichita State University
Richard Rand, Tennessee Tech University
David Randolph, Xavier University
July Ratley, Shasta College
Donald J. Raux, Siena College
Aaron Reeves, Saint Louis Community
CollegeForest Park
Patrick Reihing, Nassau Community College
Raymond Reisig, Pace University
Gayle Richardson, Bakersfield College
Laura Rickett, Kent State University
Jean Riley-Schultz, University of Nebraska
Lincoln
Jennifer Robinson, Trident Technical College
Sharon Robinson, Frostburg State University
Joanne Rockness, University of North
CarolinaWilmington
Leroy Rogero, University of Dayton
Carol Rogers, Central New Mexico Community
College
Miles Romney, University of San Diego
Richard Roscher, University of North
CarolinaWilmington
Mark Ross, Western Kentucky University
John A. Rude, Bloomsburg University of PA
Robert Russ, Northern Kentucky University
Huldah A. Ryan, Iona College
Anwar Salimi, California State Poly
UniversityPomona
Angela Sandberg, Jacksonville State University
Amy Santos, State College of Florida
Noema Santos, Manatee Community
CollegeBradenton
Lynn Saubert, Radford University

Mary Scarborough, Tyler Junior College
Gary Schader, Kean University
Linda Schain, Hofstra University
Megan Schaupp, West Virginia University
Arnold Schneider, Georgia Institute of
Technology
Michael Scott, Glendale Community College
Tony Scott, Norwalk Community College
Ali Sedaghat, Loyola University Maryland
Steve Sefcik, University of Washington
Joann Segovia, Minnesota State University
Moorhead
Ann E. Selk, University of WisconsinGreen Bay
Michael Serif, Dowling College
Randall Serrett, University of Houston
Downtown
Suzanne Sevalstad, University of Nevada
Kathy Sevigny, Bridgewater State College
Sheila Shain, Santa Ana College
Geeta Shankar, University of Dayton
Robbie Sheffy, Tarrant County College
Deanna M. Shively, Saint Marys College
Lori Simonsen, University of Nebraska at
Omaha
Margie Sinclair-Parish, Lewis & Clark
Community College
Mike Skaff, College of the Sequoias
Mike Slaubaugh, Indiana University/Purdue
UniversityFt Wayne
Nathan Slavin, Hofstra University
Erik Slayter, California Polytechnic University
G. Phillip Smilanick, Truckee Meadows
Community College
Becky L. Smith, York College of PA
Gene Smith, Eastern New Mexico University
Gerald A. Smith, University of Northern Iowa
Peggy Smith, Baker CollegeFlint
Sondra Smith, West Georgia University
Warren Smock, Ivy Tech Community College
of Indiana
Kenneth Snow, Florida State College
Dale Spencer, New Mexico State University
Las Cruces
Mary Speth, Sandhills Community College
Barbara Squires, Corning Community College
Victor Stanton, University of California,
Berkeley
Diane Stark, Phoenix College
Jenny Staskey, Northern Arizona University
Maureen Stefanini, Worcester State College
Dean A. Steria, SUNY Plattsburgh
Charles Stivason, Marshall University
Ron Stone, California State University
Northridge
Dennis Stovall, Grand Valley State University
Arlene Strawn, Tallahassee Community
College
Edith Strickland, Tallahassee Community
College
Ron Strittmater, North Hennepin Community

College
Gloria Stuart, Georgia Southern University
Diane Sturek, IUPUIIndianapolis
Alan Styles, California State UniversitySan
Marcos
John Surdick, Xavier University
Jan Sweeney, Bernard M. Baruch College
Paulette Tandy, University of NevadaLas Vegas
Linda Tarrago, Hillsborough Community
College
Karen Teitel, College of the Holy Cross
Sue Terzian, Wright State UniversityDayton
Peter Theuri, Northern Kentucky University
Michael F. Thomas, Humboldt State
University
Robin Thomas, North Carolina State
UniversityRaleigh
Amanda Thompson, Marshall University
Dorothy Thompson, North Central Texas
College
Lisa Thornton Buehler, Truckee Meadows
Community College
Paula Tigerman, Black Hawk College
Theresa Tiggeman, University of the Incarnate
Word
Melanie Torborg, Minnesota School of Business
Yvette Travis, Bishop State Community College
Mario Tripaldi, Hudson County Community
College
Jinhee Trone, Santa Ana College
Nancy Uddin, Monmouth University
Karen Varnell, Tarleton State University
Stacy R. Wade, Western Kentucky University
Elisabeth Peltier Wagner, Bernard M. Baruch
College
Mary Jeanne Walsh, La Salle University
Stephen Walsh, Clark College
Li Wang, University of Akron
Larry Watkins, Northern Arizona University
Olga Dupuis Watts, McNeese State University
Andrea Weickgenannt, Northern Kentucky
University
Patti Weiss, John Carroll University
Mary Ann Welden, Wayne State University
Kristin Wentzel, La Salle University
Cathy West, University of Massachusetts
Amherst
Cheryl Westen, Western Illinois University
Sally Whitney, Colorado State University
Jane Wiese, Valencia Community College East
Gayle Williams, Sacramento City College
Gideon Wray, Pennsylvania College of
Technology
Allen Wright, Hillsborough Community College
Christine Wright, Seminole State College
Sanford
Lorraine Wright, North Carolina State
UniversityRaleigh
Christian Wurst, Temple University
xxvi
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CHAPTER 1
xxvii
ACKNOWLEDGMENTS
THANKS
...
Tom Fuhrmann, Missouri Western State
University
Mohamed Gaber, State University of New York
Plattsburgh
Rena Galloway, State Fair Community
College
Margaret Garnsey, Siena College
David L. Gilbertson, Western Washington
University
Lisa Gillespie, Loyola UniversityChicago
FIRST EDITION REVIEWERS
Ruth Goran, Northeastern Illinois University
Jeffry Haber, Iona CollegeNew Rochelle
James J. Aitken, Central Michigan University
Heidi Hansel, Kirkwood Community College
Christie P. Anderson, Whitworth University
Marjorie Ashton, Truckee Meadows Community Sheldon Hanson, Chippewa Valley Tech
College
College
Al Hartgraves, Emory University
Steven Ault, Montana State University
Bob Hartman, University of IowaIowa City
Bozeman
Tim Baker, California State UniversityFresno K.D. Hatheway-Dial, University of Idaho
John Hathorn, Metro State College of Denver
Joyce Barden, DeVry UniversityPhoenix
Byron K. Henry, Howard University
Deborah F. Beard, Southeast Missouri State
Joshua Herbold, University of Montana
University
Margaret Hicks, Howard University
Judy Benish, Fox Valley Tech College
Mary Hollars, Vincennes University
Joseph Berlinski, Prairie State College
Sharon Hoover-Dice, Clinton Community
Eddy Birrer, Gonzaga University
College
Jack Borke, University of Wisconsin
Steven Hornik, University of Central Florida
Platteville
Marsha Huber, Otterbein College
Lisa N. Bostick, The University of Tampa
David Hurtt, Baylor University
Bruce Bradford, Fairfield University
Laura Ilcisin, University of NebraskaOmaha
Thomas Brady, University of Dayton
Paula Irwin, Muhlenberg College
Linda Bressler, University of Houston
Marianne James, California State University
Downtown
Los Angeles
Madeline Brogan, North Harris College
Raymond Johnson, Guilford College
Carol Brown, Oregon State University
Melissa Jordan, College of DuPage
Helen Brubeck, San Jose State University
David Juriga, St. Louis Community College
R. Eugene Bryson, University of Alabama
Forest Park
Huntsville
Dennis L. Kovach, Community College of
Charles I. Bunn, Wake Tech Community
Allegheny County
College
Steven J. LaFave, Augsburg College
Ron Burrows, University of Dayton
Phillip D. Landers, Pennsylvania College of
Thane Butt, Champlain College
Technology
Sandra Byrd, Missouri State University
Douglas A. Larson, Salem State College
Kay C. Carnes, Gonzaga University
Laurie Larson-Gardner, Valencia Community
Bea Bih-Horng Chiang, The College of
College East
New Jersey
Daniel Law, Gonzaga University
Cal Christian, East Carolina University
Suzanne Lay, Mesa State College
John Coulter, Western New England College
Christy Lefevers-Land, Catawba Valley
Sue Cullers, Tarleton State University
Community College
Kreag Danvers, Clarion University of PA
Joseph Lipari, Montclair State University
Peggy Dejong, Kirkwood Community College
Chao-Shin Liu, University of Notre Dame
Laura Delaune, Louisiana State University
Mostafa Maksy, Northeastern Illinois University
Baton Rouge
S. A. Marino, SUNY/Westchester Community
Shannon Donovan, Bridgewater State College
College
Allan Drebin, Northwestern University
Dawn Massey, Fairfield University
Ahmed Ebrahim, State University of
Joyce Matthews, Central New Mexico
NYNew Paltz
Community College
Thomas Finnegan, University of Illinois
Mark McCarthy, East Carolina University
Champaign
Robert W. McGee, Barry University
Linda Flaming, Monmouth University
Chris McNamara, Finger Lakes Community
Martha Lou Fowler, Missouri Western State
College
University
Kathryn Yarbrough, Appalachian State
University
Gregory C. Yost, University of West Florida
Thomas M. Young, Lone Star College
Marjorie Yuschak, Sacred Heart University
Tom Zeller, Loyola UniversityChicago
Emmanuel Zur, Bernard M. Baruch College
Robert Zwicker, Pace University
Kathleen M. Metcalf, Muscatine Community

College
Herbert L. Meyer, Scott Community College
Davenport
Jean Meyer, Loyola University
Pam Meyer, University of LouisianaLafayette
Laurel Bond Mitchell, University of Redlands
Richard A. Moellenberndt, Washburn
University
Dennis P. Moore, Worcester State College
Tommy Moores, University of Nevada
Las Vegas
Ron OBrien, Fayetteville Tech Community
College
George Pate, Robeson Community College
Keith Patterson, Brigham Young University
Idaho
Susanna Pendergast, Western Illinois
University
Jan Pitera, Broome Community College
John Plouffe, California State University
Los Angeles
Alan Ransom, Cypress College
Laura Rickett, Kent State University
John A. Rude, Bloomsburg University of PA
Amy Santos, Manatee Community College
Bradenton
Dick Schroeder, University of North Carolina
Charlotte
Ann E. Selk, University of Wisconsin
Green Bay
Seleshi Sisaye, Duquesne University
Rodney Smith, California State University
Long Beach
Nancy L. Snow, University of Toledo
Victor Stanton, University of California
Berkeley
Gracelyn Stuart, Palm Beach Community
College
John J. Surdick, Xavier University
G. A. Swanson, Tennessee Tech University
Aida Sy, University of Bridgeport
Christine Tan, Baruch College
Steve Teeter, Utah Valley State College
Peter Theuri, Northern Kentucky University
Ada Till, Prairie View A&M University
Michael Tyler, Barry University
Joan Van Hise, Fairfield University
Marcia R. Veit, University of Central Florida
Stacy R. Wade, Western Kentucky University
Susan Wessels, Meredith College
Peter Woodlock, Youngstown State University
Gregg S. Woodruff, Western Illinois University
Christian Wurst, Temple University
Philadelphia
Thomas M. Young, Lone Star CollegeTomball
Benny Zachry, Nicholls State University
Lin Zheng, Georgia College and State
University
Robert Zwicker, Pace University
xxvii
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. . . AND MORE THANKS

We also would like to acknowledge the many talented people who contributed to the creation of this third edition and thank them for their valuable
contributions. Ilene Persoff of Long Island University/C. W. Post Campus did
a wonderful job accuracy checking our manuscript. Mark McCarthy of East
Carolina University contributed a helpful accuracy check of the page proofs;
we thank him for his speedy and insightful comments. Carol Yacht and Jack
Terry contributed the QuickBooks templates and Excel templates (respectively) that accompany the end-of-chapter material. We also appreciate the
willingness of The Buckle, Inc., and American Eagle Outfitters, Inc., to allow
us to use their companies annual reports.
We appreciate the excellent Connect accuracy checking work completed by
Amy Santos, Beth Woods, Teressa Farough, Peter Theuri from Northern
Kentucky University, and all of the staff at ANSR Source. Janice Fergusson at
the University of South Carolina did an excellent job accuracy checking our
Testbank.
We also appreciate the expert attention given to this project by the staff at
McGraw-Hill/Irwin, especially Tim Vertovec, Director; James Heine, Executive Brand Manager; Ann Torbert, Executive Director of Development;
Kathleen Klehr, Senior Marketing Manager; Danielle Andries, Development
Editor; Patricia Plumb, Director of Digital Content; Julie Hankins, Digital
Development Editor; Pat Frederickson and Rachel Townsend, Content Project Managers; Ron Nelms, Media Product Manager; Matthew Baldwin and
Laurie Entringer, Designers; and Michael McCormick, Senior Buyer. Thanks,
too, to Sarah Wood, of Agate Publishing, for so ably stepping in to complete
work on the supplements.
xxviii
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xxix
ASSURANCE OF ACCURACY
Dear Colleague,
As textbook authors, and more importantly, as instructors of financial accounting, we recognize the great importance placed on accuracynot only
in the text itself but in the supplements as well. With this in mind, we have
taken the following steps to ensure that Financial Accounting is error-free:
1. We received detailed feedback from over 130 instructor reviews of the second edition. Each review contributed in significant ways to the accuracy
of the content developed for the third edition.
2. We personally class-tested the manuscript with our students.
3. Each of us wrote, reviewed, and carefully checked all of the end-of-chapter
material.
4. A developmental writer went through each sentence to ensure that our
language was as clear as possible.
5. Multiple accuracy checkers reviewed each chapter and its accompanying end-of-chapter materialonce when the final manuscript was submitted to the publisher, and again when our final formatted pages were
completed.
6. A copyeditor checked the grammar of the final manuscript.
7. A proofreader reviewed each page to ensure no errors remained.
8. Our Solutions Manual and Testbank were created by the authors and
reviewed by multiple independent accuracy checkers.
Given the steps taken above, we have the utmost confidence that you and
your students will have a great experience using Financial Accounting.
Sincerely,
David Spiceland
Wayne Thomas
Don Herrmann
xxix
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Contents in Brief
1
A Framework for Financial Accounting
The Accounting Cycle: During the Period
54
The Accounting Cycle: EndofthePeriod
106
Cash and Internal Controls
Receivables and Sales
Inventory and Cost of Goods Sold
Long-Term Assets
318
Current Liabilities
368
Long-Term Liabilities
410
10
Stockholders Equity
456
11
Statement of Cash Flows
12
Financial Statement Analysis
164
212
260
506
562
Appendix A: American Eagle Outfitters, Inc., 2012 Annual Report A1

Appendix B: The Buckle, Inc., 2012 Annual Report B1
Appendix C: Time Value of Money C1
Appendix D: Investments D1
Appendix E: International Financial Reporting Standards E1
Credits Cr0
Index I1
Future Value and Present Value Tables P1
Summary of Ratios Used in This Book
Framework for Financial Accounting
Representative Chart of Accounts
xxxi
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Contents
CHAPTER
A Framework for Financial

Accounting 2
CHAPTER
The Accounting Cycle:

During the Period 54
Berkshire Hathaway:Speaking the Language of Business 3
Walmart:Shelves of Business Transactions 55
Part A: Accounting as a Measurement/

Communication Process 4
Part A: Measuring Business Activities 56
Defining Accounting 4
Effects of Transactions on the Basic Accounting Equation 57
Measuring Business Activities 5
Communicating through Financial Statements 10

Income Statement 10
Statement of Stockholders Equity 11
Balance Sheet 13
Statement of Cash Flows 14
Decision Makers Perspective 15
The Links Among Financial Statements 16
Other Information Reported to Outsiders 16
Making Decisions with Accounting Information 18
External Transactions 56
Transaction(1): Issue Common Stock 59
Transaction(2): Borrow from the Bank 60
Transaction(3): Purchase Equipment 61
Transactions(4) and (5): Incur Costs for Rent and Supplies 61
Effects of Transactions on the Expanded

Accounting Equation 62
Transactions(6) and (7): Provide Services to Customers 63
Transaction(8): Receive Cash in Advance from Customers 65
Transaction(9): Incur Costs for Salaries 66
Transaction(10): Pay Dividends 67
Part B: Financial Accounting Information 21
Part B: Debits and Credits 69
Rules of Financial Accounting 21
Effects on Account Balances in the Basic

Current Standard Setting 21

Historical Perspective on Standard Setting 22
The Role of the Auditor 22
Objectives of Financial Accounting 23
Effects on Account Balances in the Expanded

Recording Transactions 72
An Ethical Foundation 24
Posting 74
Part C: Careers in Accounting 25
Trial Balance 80
Demand for Accounting 25
Order of Accounts 81
Key Points by Learning Objective 82
Glossary 83
Self-Study Questions 83
Review Questions 84
Brief Exercises 85
Exercises 88
Problems: Set A 94
Problems: Set B 99
Additional Perspectives 103
Career Options in Accounting 26

Public Accounting 26
Private Accounting 26
Appendix: Conceptual Framework 27

Glossary 32
Review Questions 34
Brief Exercises 36
Exercises 38
Problems: Set A 44
Problems: Set B 47
xxxii
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CONTENTS
CHAPTER
The Accounting Cycle:

EndofthePeriod 106
Federal Express:Delivering Profits to Investors 107
Part A: Accrual-Basis Accounting 108

Revenue and Expense Reporting 108
Revenue Recognition 108
Expense Recognition 108
Accrual-Basis Compared with Cash-Basis Accounting 110
Part B: The Measurement Process 112

Adjusting Entries 112
Prepaid Expenses 113
Unearned Revenues 118
Accrued Expenses 119
Accrued Revenues 121
No Adjustment Necessary 122
Adjusted Trial Balance 124
Part C: The Reporting Process: Financial

Statements 127
Income Statement 127
xxxiii
Cash Controls 174

Controls over Cash Receipts 174
Controls over Cash Disbursements 176
Bank Reconciliation 177

Step 1: Reconciling the Banks Cash Balance 179
Step 2: Reconciling the Companys Cash Balance 180
Step 3: Adjusting the Companys Cash Account Balance 180
Petty Cash 183

Reporting Cash 184
Balance Sheet 184
Analysis: Cash Analysis 187

Krispy Kreme vs. Starbucks 187
Comparing Net Income to Cash Flow 188
Glossary 190
Review Questions 192
Brief Exercises 193
Exercises 196
Problems: Set A 201
Problems: Set B 204
Balance Sheet 129

Part D: The Closing Process 131

Closing Entries 131
Post-Closing Trial Balance 134
Glossary 138
Brief Exercises 142
Exercises 144
Problems: Set A 150
Problems: Set B 155
CHAPTER
Receivables and Sales 212
Tenet Healthcare:Bad Debts Cause Pain to Investors 213
Part A: Recognizing Accounts Receivable 214

Credit Sales and Accounts Receivable 214
Other Types of Receivables 215
Net Revenues 215

Trade Discounts 215
Sales Returns and Allowances 216
Sales Discounts 217
Part B: Valuing Accounts Receivable 219
Allowance Method 220
CHAPTER
Cash and Internal Controls 164
Regal Entertainment:Internal Controls Are

a Box-Office Hit 165
Part A: Internal Controls 166

Accounting Scandals and Response by Congress 167
Sarbanes-Oxley Act of 2002 167
Framework for Internal Control 168

Components of Internal Control 168
Responsibilities for Internal Control 171
Limitations of Internal Control 172
Estimating Uncollectible Accounts 221

Aging of Accounts Receivable 223
Writing Off Accounts Receivable 225
Collection of Accounts Previously Written Off 226
Estimating Uncollectible Accounts in the Following Year 227
Direct Write-Off Method 230

Decision Makers Perspective: Managing Bad Debt
Estimates 231
Part C: Notes Receivable 232

Accounting for Notes Receivable 232
Interest Calculation 234
Collection of Notes Receivable 234
Accrued Interest 235
Part B: Cash 173
Analysis: Receivables Analysis 236
Cash and Cash Equivalents 173
Tenet vs. LifePoint 236
Decision Makers Perspective: How Much

Cash Is Enough? 173
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Receivables Turnover Ratio 237

Average Collection Period 237
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xxxiv
CONTENTS
Appendix: Percentage-of-Credit-Sales Method 239

Glossary 241
Brief Exercises 244
Exercises 246
Problems: Set A 250
Problems: Set B 253
CHAPTER
Inventory and Cost

of Goods Sold 260
Best Buy:Taking Inventory of Electronics Sold 261
Part A: Understanding Inventory and Cost

of Goods Sold 262
Inventory 262
Merchandising Companies 262
Manufacturing Companies 263
Flow of Inventory Costs 263
Cost of Goods Sold 264

Multiple-Step Income Statement 265
Decision Makers Perspective: Investors Understand
One-Time Gains 267
Inventory Cost Methods 267

Specific Identification 267
First-In, First-Out 268
Last-In, First-Out 269
Weighted-Average Cost 270
Effects of Managers Choice of Inventory

Reporting Methods 273
Decision Makers Perspective:
FIFO or LIFO? 274
Reporting the LIFO Difference 274
Consistency in Reporting 275
Part B: Recording Inventory Transactions 276

Perpetual Inventory System 276
Inventory Purchases and Sales 277
Additional Inventory Transactions 280
Sales Transactions: The Other Side
of Purchase Transactions 284
Part C: Lower-of-Cost-or-Market Method 284

Decision Makers Perspective: Conservatism and the
Lower-of-Cost-or-Market Method 286
Analysis: Inventory Analysis 288

Best Buy vs. RadioShack 288
Inventory Turnover Ratio 288
Average Days in Inventory 288
Gross Profit Ratio 289
Appendix A: Recording Inventory Transactions

Using a Periodic Inventory System 291
Appendix B: Inventory Errors 294
Glossary 297
spi25540_fm_i-1.indd xxxiv

Brief Exercises 300
Exercises 302
Problems: Set A 307
Problems: Set B 310
CHAPTER
Long-Term Assets 318
WorldCom:Expenses Called Assets 319
Part A: Acquisitions 320

Property, Plant, and Equipment 321
Land 321
Land Improvements 322
Buildings 322
Equipment 322
Basket Purchases 323
Natural Resources 323
Intangible Assets 324

Patents 325
Copyrights 326
Trademarks 326
Franchises 326
Goodwill 327
Expenditures after Acquisition 328

Repairs and Maintenance 328
Additions 328
Improvements 328
Legal Defense of Intangible Assets 328
Materiality 329
Part B: Cost Allocation 330

Depreciation of Property, Plant, and
Equipment 330
Accumulated Depreciation 331
Straight-Line Depreciation 333
Declining-Balance Depreciation 335
Activity-Based Depreciation 336
Decision Makers Perspective: Selecting a
Depreciation Method 337
Tax Depreciation 338
Amortization of Intangible Assets 340

Intangible Assets Subject to Amortization 340
Intangible Assets Not Subject to
Amortization 340
Part C: Asset Disposition: Sale, Retirement,

or Exchange 341
Sale of Long-Term Assets 342
Retirement of Long-Term Assets 343
Exchange of Long-Term Assets 344
Analysis: Asset Analysis 344

Walmart vs. Target 344
Return on Assets 345
Profit Margin and Asset Turnover 346
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CONTENTS
Decision Makers Perspective: Strategies for

Increasing Return on Assets 346
Appendix: Asset Impairment 347

Decision Makers Perspective: Taking a Big Bath 349
Glossary 350
Brief Exercises 353
Exercises 355
Problems: Set A 359
Problems: Set B 362
xxxv
CHAPTER
Long-Term Liabilities 410
Six Flags:The Ups and Downs of Borrowing 411
Part A: Overview of Long-Term Debt 412

Financing Alternatives 412
What Are Bonds? 413
Bond Characteristics 413
Secured and Unsecured Bonds 414
Term and Serial Bonds 414
Callable Bonds 414
Convertible Bonds 414
Part B: Pricing a Bond 416
CHAPTER
Current Liabilities 368
United Airlines:A Future Up in the Air 369
Part A: Current Liabilities 370

Current vs. Long-Term Classification 370
Notes Payable 371
Bonds Issued at Face Amount 416

Bonds Issued at a Discount 418
Bonds Issued at a Premium 419
Part C: Recording Bonds Payable 423

Bonds Issued at Face Value 423
Bonds Issued at a Discount 424
Decision Makers Perspective:
Carrying Value and Market Value 426
Accounts Payable 375
Bonds Issued at a Premium 426
Payroll Liabilities 375
Accounting for Bond Retirements 429
Employee Costs 375

Employer Costs 376
Other Current Liabilities 378

Unearned Revenues 378
Sales Tax Payable 380
Current Portion of Long-Term Debt 381
Decision Makers Perspective: Current or Long-Term? 381
Part B: Contingencies 382

Contingent Liabilities 382
Litigation and Other Causes 382
Warranties 384
Contingent Gains 385
Analysis: Liquidity Analysis 386

American Airlines vs. United Airlines 386
Working Capital 386
Current Ratio 386
Acid-Test Ratio 387
Decision Makers Perspective: Indicators
of Liquidity 389
Effect of Transactions on Liquidity

Ratios 389
Liquidity Management 390
Glossary 391
Brief Exercises 394
Exercises 395
Problems: Set A 399
Problems: Set B 402
spi25540_fm_i-1.indd xxxv
Bond Retirements at Maturity 429

Bond Retirements Before Maturity 429
Decision Makers Perspective: Why Buy Back Debt Early? 430
Part D: Other Long-Term Liabilities 431

Installment Notes 431
Leases 432
Decision Makers Perspective: Why Do Some
Companies Lease Rather Than Buy? 434
Analysis: Debt Analysis 434

Coca-Cola vs. PepsiCo 434
Debt to Equity Ratio 435
Times Interest Earned Ratio 437
Key Points By Learning Objective 439
Glossary 439
Brief Exercises 442
Exercises 444
Problems: Set A 448
Problems: Set B 450
10
CHAPTER
Stockholders Equity 456
Deckers Outdoor:From Down Under to Top Ten 457
Part A: Invested Capital 458

Corporations 459
Stages of Equity Financing 459
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xxxvi
CONTENTS
Public or Private 460

Stockholder Rights 461
Advantages of a Corporation 461
Disadvantages of a Corporation 461
Decision Makers Perspective: Limited Liability
and Beneficial Tax Treatment 462
Common Stock 463

Authorized, Issued, and Outstanding Stock 463
Par Value 464
Accounting for Common Stock Issues 464
Preferred Stock 465

Comparison of Financing Alternatives 465
Features of Preferred Stock 466
Accounting for Preferred Stock Issues 467
Treasury Stock 468

Decision Makers Perspective: Why Corporations
Repurchase Their Stock 468
Accounting for Treasury Stock 469
Part B: Earned Capital 471

Retained Earnings and Dividends 471
Decision Makers Perspective: Why Dont Some
Companies Pay Dividends? 472
Stock Dividends and Stock Splits 475

Decision Makers Perspective: Why Declare a Stock Split? 475
Stock Splits/Large Stock Dividends 476
Small Stock Dividends 477
Part C: Reporting Stockholders Equity 478
Operating ActivitiesIndirect and Direct Methods 512
Part B: Preparing the Statement of Cash Flows 512

Steps in Preparing the Statement of Cash Flows 512
Basic Format 514
Operating ActivitiesIndirect Method 514
Adjustments for Noncash Effects 515
Adjustments for Nonoperating Effects 515
Changes in Current Assets and Current Liabilities 516
Investing and Financing Activities 520

Investing Activities 520
Financing Activities 521
Analysis: Cash Flow Analysis 525

Apple vs. Dell 525
Decision Makers Perspective: Cash Flow Ratios 525
Cash Return on Assets 526
Components of Cash Return on Assets 527
Appendix: Operating ActivitiesDirect Method 528

Glossary 537
Brief Exercises 539
Exercises 541
Problems: Set A 546
Problems: Set B 550
Stockholders Equity in the Balance Sheet 478

Analysis: Equity Analysis 482

Deckers Outdoor vs. Wolverine World Wide 482
Return on Equity 482
Return on the Market Value of Equity 483
Decision Makers Perspective: Why Doesnt Stockholders
Equity Equal the Market Value of Equity? 484
Earnings Per Share 484
Price-Earnings Ratio 485
Glossary 487
Brief Exercises 490
Exercises 491
Problems: Set A 495
Problems: Set B 498
11
CHAPTER
Apple, Inc.:Cash Flows at the Core 507
Part A: Formatting the Statement of Cash Flows 508

Classification of Transactions 508
Cash Flow Activities 508
Noncash Activities 511
spi25540_fm_i-1.indd xxxvi
12
CHAPTER
Financial Statement Analysis 562
Under Armour:Making the Competition Sweat 563
Part A: Comparison of Financial

Accounting Information 564
Vertical Analysis 564
Vertical Analysis of the Income Statement 564
Vertical Analysis of the Balance Sheet 566
Horizontal Analysis 567

Horizontal Analysis of the Income Statement 567
Horizontal Analysis of the Balance Sheet 568
Part B: Using Ratios to Assess Risk

and Profitability 570
Risk Analysis 571
Receivables Turnover Ratio 572
Average Collection Period 572
Inventory Turnover Ratio 573
Average Days in Inventory 573
Current Ratio 574
Acid-Test Ratio 575
Debt to Equity Ratio 575
Times Interest Earned Ratio 575
Profitability Analysis 578

Gross Profit Ratio 578
Decision Makers Perspective: How Warren Buffett Interprets
Financial Statements 579
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CONTENTS

Profit Margin 580
Asset Turnover 580
Return on Equity 580
Price-Earnings Ratio 581
Part C: Earnings Persistence and

Earnings Quality 583
Earnings Persistence and One-Time Income Items 583
Discontinued Operations 583
Extraordinary Items 584
Other Revenues and Expenses 586
Decision Makers Perspective: Does Location in the Income
Statement Matter? 586
Quality of Earnings 587
xxxvii
Nadal Retires and Djokovic Is Hired 588

Financial Statements by Mr. Djokovic 589
Decision Makers Perspective: Look Out for Earnings
Management at Year-End 589
Symbolism Revealed 591
Glossary 592
Brief Exercises 595
Exercises 597
Problems: Set A 602
Problems: Set B 606
Financial Statements by Mr. Nadal 587
Appendix A: American Eagle Outfitters, Inc., 2012 Annual Report A1

Appendix B: The Buckle, Inc., 2012 Annual Report B1
Appendix C: Time Value of Money C1
Appendix D: Investments D1
Appendix E: International Financial Reporting Standards E1
Credits Cr0
Index I1
Future Value and Present Value Tables P1
Summary of Ratios Used in This Book
Framework for Financial Accounting
Representative Chart of Accounts
spi25540_fm_i-1.indd xxxvii
06/06/13 12:28 PM

Financial Accounting: J. David Spiceland Wayne Thomas Don Herrmann

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FINANCIAL ACCOUNTING, THIRD EDITION

Content Project Manager: Rachel Townsend

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About the Authors

Studies, and Contemporary Accounting Research. He

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CELEBRATING STUDENT SUCCESS

Thi ttextt iis written

You have created a text that is likely to

texts.Christian Wurst, Temple University

ave you experienced those moments in your

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If you like Spicelands

Keys to Financial Accountings success

examples and explanations which

Very good use of real company data

INNOVATIVE PEDAGOGY Reviewers enthusiastically embraced the innovative pedagogy

They really do breathe life

DECISION MAKERS PERSPECTIVE Each chapter

the impact on the

A STRONG SUPPLEMENTS PACKAGE The authors write

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NEW IN THE THIRD EDITION

Defined accounting cycle in the first

In E317 and E318, added a requirement asking students to calculate the

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Revised the accounts receivable aging

Added a footnote referring to a new

Added a new Common Mistake

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UNIQUE PEDAGOGICAL ELEMENTS . . .

Most importantly, it offers

opportunities for students to

simplicity of each chapter.David Juriga, St. Louis Community College

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HELP IGNITE THE LEARNING PROCESS

This is a good approach because it will give students an opportunity

The Flip Side and Common

the favorite parts of the

The Flip Side feature demonstrates

Bogey Incorporated has the following transactions during May:

Indicate how each transaction affects the accounting equation.

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PRACTICE MAKES PERFECT WITH . . .

5. Which of the following causes the accoun

2. Which of the following is not a step in the process

6. A debit is used to increase which of the fo

Self-Study Questions consist of 10 multiplechoice questions in each chapter. Answers

7. A credit is used to increase which of the f

In making an adoption decision, recognizing the topical coverage is most critical,

Review Questions are provided

1. Explain the difference between external transactions and internal transactions.

2. List the steps we use to measure external transactions.

Well-written book with excellent features throughout each chapter. Plenty of

List steps in the

a. Post the transaction to the T-accounts in the general ledger.

Brief Exercises address single concepts