Financial Accounting: J. David Spiceland Wayne Thomas Don Herrmann
Financial Accounting: J. David Spiceland Wayne Thomas Don Herrmann
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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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
All credits appearing on page or at the end of the book are considered to be an extension of the
copyright page.
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.
www.mhhe.com
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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
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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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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.
4
5
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viii
CHAPTER 1
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.
Designated as interactive: Illustrations
21 and 23.
CHAPTER 3
Revised the chapter title to The
Accounting Cycle: End of the Period.
Designated as interactive: Illustrations
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.
CHAPTER 4
Designated as interactive: Illustrations
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.
Added new end-of-chapter items:
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.
Expanded the questions asked in the
Ethics problem (AP45).
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.
Designated as interactive: Illustrations
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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CHAPTER 6
Revised LO62, to cover the multiplestep income statement earlier in the
chapter.
Designated as interactive: Illustrations
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.
Expanded the questions asked in the
Ethics problem (AP65).
CHAPTER 7
Designated as interactive: Illustrations
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.
Added a new illustration (Illustration
719) that summarizes amortization
treatment of intangible assets.
Added a new illustration (Illustration
720) that shows the three methods
of asset disposal.
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.
Updated P89A and P89B for realworld data.
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.
Updated P97A and P97B for realworld data.
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.
CHAPTER 11
Designated as interactive: Illustrations 114 and 1119.
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.
Updated P115A and P115B for realworld data.
CHAPTER 12
Designated as interactive: Illustrations 122 and 124.
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
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.
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
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CHAPTER 1
xi
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
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
xi
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xii
CHAPTER 1
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REVIEW QUESTIONS
LO21
LO21
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
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BRIEF EXERCISES
BE21 Below are the steps in the measurement process of external transactions.
Arrange them from first (1) to last (6).
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Fairfield University
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CHAPTER 1
xiii
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
E21 Listed below are several terms and phrases associated with the measurement
process for external transactions.
1.
2.
3.
4.
5.
6.
Assets
Liabilities
Stockholders Equity
Increase
______
______
______
______
______
No effect
______
______
______
______
______
Increase
______
______
______
______
______
PROBLEMS: SET A
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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
6. Provide services to
customers for cash.
7. Pay for
advertising
for the
PROBLEMS:
SET
B
current month
Assets
Liabilities
Stockholders
Equity
Increase
No effect
Increase
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
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Assets
Liabilities
Stockholders
Equity
Increase
Increase
No effect
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
_______
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xiv
CHAPTER 1
xiv
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.
Financial Analysis
spi25540_ch02_054-105.indd 103
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?
in the income statement increase with a debit? Which increase with a credit?
Comparative
Analysis
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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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xiv
i
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TO SEE AN ADDITIONAL
PERSPECTIVE
greater. Why do you think this might be the case?
Ethics
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.
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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?
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
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.
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Accounts receivable
Estimated percent uncollectible
Allowance for uncollectible accounts
Operating income
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$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
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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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.
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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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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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
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
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
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
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 . . .
The OLC website also serves as a doorway to other technology solutions, like course
management systems.
xxi
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CHAPTER 1
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.
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ASSURANCE OF LEARNING
AND CUSTOMER SUPPORT
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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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
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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
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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
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Contents in Brief
1
54
106
Long-Term Assets
318
Current Liabilities
368
Long-Term Liabilities
410
10
Stockholders Equity
456
11
12
164
212
260
506
562
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Contents
CHAPTER
CHAPTER
Defining Accounting 4
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
An Ethical Foundation 24
Posting 74
Trial Balance 80
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
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