Financial Accounting with International Financial Reporting Standards

1 Accounting in Action 1-1

Knowing the Numbers 1-1

1.1 Accounting Activities and Users 1-3

Who Uses Accounting Data 1-4

Data Analytics 1-5

1.2 The Building Blocks of Accounting 1-7

Ethics in Financial Reporting 1-7

Accounting Standards 1-8

Measurement Principles 1-9

Assumptions 1-9

1.3 The Accounting Equation 1-12

Assets 1-12

Liabilities 1-13

Equity 1-13

1.4 Analyzing Business Transactions 1-14

Accounting Transactions 1-15

Transaction Analysis 1-16

Summary of Transactions 1-21

1.5 Financial Statements 1-22

Income Statement 1-24

Retained Earnings Statement 1-24

Statement of Financial Position 1-24

Statement of Cash Flows 1-25

Comprehensive Income Statement 1-25

Appendix 1A: Career Opportunities in Accounting 1-27

Public Accounting 1-27

Private Accounting 1-28

Governmental Accounting 1-28

Forensic Accounting 1-28

A Look at U.S. GAAP 1-48

2 The Recording Process 2-1

Accidents Happen: Bank of Taiwan 2-1

2.1 Accounts, Debits, and Credits 2-2

The Account 2-2

Debits and Credits 2-3

Equity Relationships 2-7

Summary of Debit/Credit Rules 2-7

2.2 The Journal 2-8

The Recording Process 2-8

The Journal 2-9

2.3 The Ledger and Posting 2-11

The Ledger 2-11

Posting 2-13

Chart of Accounts 2-14

The Recording Process Illustrated 2-14

Summary Illustration of Journalizing and Posting 2-20

2.4 The Trial Balance 2-22

Limitations of a Trial Balance 2-23

Locating Errors 2-23

Currency Signs and Underlining 2-23

A Look at U.S. GAAP 2-47

3 Adjusting the Accounts 3-1

What Was Your Profit? 3-1

3.1 Accrual-Basis Accounting and Adjusting Entries 3-2

Fiscal and Calendar Years 3-3

Accrual- versus Cash-Basis Accounting 3-3

Recognizing Revenues and Expenses 3-3

The Need for Adjusting Entries 3-6

Types of Adjusting Entries 3-6

3.2 Adjusting Entries for Deferrals 3-7

Prepaid Expenses 3-7

Unearned Revenues 3-11

3.3 Adjusting Entries for Accruals 3-14

Accrued Revenues 3-14

Accrued Expenses 3-16

Summary of Basic Relationships 3-19

3.4 Adjusted Trial Balance and Financial Statements 3-22

Preparing the Adjusted Trial Balance 3-23

Preparing Financial Statements 3-23

Appendix 3A: Alternative Treatment of Deferrals 3-26

Prepaid Expenses 3-27

Unearned Revenues 3-28

Summary of Additional Adjustment Relationships 3-29

Appendix 3B: Financial Reporting Concepts 3-30

Qualities of Useful Information 3-30

Assumptions in Financial Reporting 3-31

Principles in Financial Reporting 3-31

Cost Constraint 3-32

A Look at U.S. GAAP 3-58

4 Completing the Accounting Cycle 4-1

Speaking the Same Language: IASB 4-1

4.1 The Worksheet 4-3

Steps in Preparing a Worksheet 4-3

Preparing Financial Statements from a Worksheet 4-11

Preparing Adjusting Entries from a Worksheet 4-12

4.2 Closing the Books 4-13

Preparing Closing Entries 4-13

Posting Closing Entries 4-15

Preparing a Post-Closing Trial Balance 4-17

4.3 The Accounting Cycle and Correcting Entries 4-20

Summary of the Accounting Cycle 4-20

Reversing Entries—An Optional Step 4-20

Correcting Entries—An Avoidable Step 4-20

4.4 Classified Statement of Financial Position 4-24

Intangible Assets 4-25

Property, Plant, and Equipment 4-26

Long-Term Investments 4-26

Current Assets 4-26

Equity 4-27

Non-Current Liabilities 4-27

Current Liabilities 4-28

Appendix 4A: Reversing Entries 4-30

Reversing Entries Example 4-30

A Look at U.S. GAAP 4-59

5 Accounting for Merchandise Operations 5-1

Who Doesn’t Shop?: Carrefour 5-1

5.1 Merchandising Operations and Inventory Systems 5-3

Operating Cycles 5-3

Flow of Costs 5-4

5.2 Recording Purchases Under a Perpetual System 5-7

Freight Costs 5-8

Purchase Returns and Allowances 5-9

Purchase Discounts 5-10

Summary of Purchasing Transactions 5-11

5.3 Recording Sales Under a Perpetual System 5-11

Sales Returns and Allowances 5-13

Sales Discounts 5-14

Data Analytics and Credit Sales 5-15

5.4 The Accounting Cycle for a Merchandising Company 5-16

Adjusting Entries 5-16

Closing Entries 5-17

Summary of Merchandising Entries 5-17

5.5 Financial Statements for a Merchandiser 5-19

Income Statement 5-19

Classified Statement of Financial Position 5-23

Appendix 5A: Worksheet for a Merchandising Company 5-25

Using a Worksheet 5-25

Appendix 5B: Periodic Inventory System 5-26

Determining Cost of Goods Sold Under a Periodic System 5-27

Recording Merchandise Transactions 5-28

Recording Purchases of Merchandise 5-28

Recording Sales of Merchandise 5-29

Journalizing and Posting Closing Entries 5-29

Using a Worksheet 5-31

Appendix 5C: Adjusting Entries for Credit Sales with Returns and Allowances 5-33

Data Analytics in Action 5-54

A Look at U.S. GAAP 5-58

6 Inventories 6-1

“Where Is That Spare Bulldozer Blade?”:

Komatsu 6-1

6.1 Classifying and Determining Inventory 6-2

Classifying Inventory 6-2

Determining Inventory Quantities 6-4

6.2 Inventory Methods and Financial Effects 6-7

Specific Identification 6-7

Cost Flow Assumptions 6-8

Financial Statement and Tax Effects of Cost Flow Methods 6-11

Using Inventory Cost Flow Methods Consistently 6-13

6.3 Effects of Inventory Errors 6-14

Income Statement Effects 6-14

Statement of Financial Position Effects 6-15

6.4 Inventory Statement Presentation and Analysis 6-16

Presentation 6-16

Lower of Cost or Net Realizable Value 6-16

Financial Analysis and Data Analytics 6-17

Appendix 6A: Inventory Cost Flow Methods in Perpetual Inventory Systems 6-21

First-In, First-Out (FIFO) 6-21

Average-Cost 6-22

Appendix 6B: Estimating Inventories 6-23

Gross Profit Method 6-23

Retail Inventory Method 6-24

Appendix 6C: LIFO Inventory Method 6-25

Data Analytics in Action 6-47

A Look at U.S. GAAP 6-50

7 Fraud, Internal Control, and Cash 7-1

Minding the Money at Nick’s: Nick’s Steakhouse and Pizza 7-1

7.1 Fraud and Internal Control 7-2

Fraud 7-3

Internal Control 7-3

Principles of Internal Control Activities 7-4

Data Analytics and Internal Controls 7-10

Limitations of Internal Control 7-10

7.2 Cash Controls 7-11

Cash Receipts Controls 7-11

Cash Disbursements Controls 7-14

Petty Cash Fund 7-16

7.3 Control Features of a Bank Account 7-19

Making Bank Deposits 7-19

Writing Checks 7-20

Electronic Banking 7-21

Bank Statements 7-21

Reconciling the Bank Account 7-22

7.4 Reporting Cash 7-27

Cash Equivalents 7-27

Restricted Cash 7-28

Data Analytics in Action 7-46

A Look at U.S. GAAP 7-49

Appendix 9A: Exchange of Plant Assets 9-26

Loss Treatment 9-27

Gain Treatment 9-27

Data Analytics in Action 9-47

A Look at U.S. GAAP 9-50

8 Accounting for Receivables 8-1

Are You Going to Pay Me—or Not?: BNP Paribas 8-1

8.1 Recognition of Accounts Receivable 8-2

Types of Receivables 8-3

Recognizing Accounts Receivable 8-3

8.2 Valuation and Disposition of Accounts Receivable 8-5

Valuing Accounts Receivable 8-5

Disposing of Accounts Receivable 8-12

8.3 Notes Receivable 8-15

Determining the Maturity Date 8-16

Computing Interest 8-16

Recognizing Notes Receivable 8-17

Valuing Notes Receivable 8-17

Disposing of Notes Receivable 8-17

8.4 Presentation and Analysis 8-20

Presentation 8-20

Analysis 8-20

Data Analytics and Receivables Management 8-21

Data Analytics in Action 8-38

A Look at U.S. GAAP 8-41

9 Plant Assets, Natural Resources, and Intangible Assets 9-1

How Much for a Ride to the Beach?: Rent-A-Wreck 9-1

9.1 Plant Asset Expenditures 9-2

Determining the Cost of Plant Assets 9-3

Expenditures During Useful Life 9-6

9.2 Depreciation Methods 9-7

Factors in Computing Depreciation 9-8

Depreciation Methods 9-9

Component Depreciation 9-13

Depreciation and Income Taxes 9-14

Revaluation of Plant Assets 9-14

Revising Periodic Depreciation 9-15

9.3 Plant Asset Disposals 9-16

Retirement of Plant Assets 9-17

Sale of Plant Assets 9-18

9.4 Natural Resources and Intangible Assets 9-19

Natural Resources and Depletion 9-20

Intangible Assets 9-21

9.5 Statement Presentation and Analysis 9-25

Presentation 9-25

Analysis 9-26  

10 Current Liabilities 10-1

Financing His Dreams: Wilbert Murdock 10-1

10.1 Accounting for Current Liabilities 10-2

What Is a Current Liability? 10-2

Notes Payable 10-3

Value-Added and Sales Taxes Payable 10-4

Unearned Revenues 10-5

Salaries and Wages 10-6

Current Maturities of Long-Term Debt 10-8

10.2 Reporting and Analyzing Current Liabilities 10-8

Reporting Uncertainty 10-8

Reporting of Current Liabilities 10-10

Analysis of Current Liabilities 10-11

A Look at U.S. GAAP 10-27

11 Non-Current Liabilities 11-1

Are We Living on Borrowed Time? 11-1

11.1 Overview of Bonds 11-2

Types of Bonds 11-3

Issuing Procedures 11-3

Bond Trading 11-4

Determining the Market Price of a Bond 11-5

11.2 Accounting for Bond Transactions 11-7

Issuing Bonds at Face Value 11-7

Discount or Premium on Bonds 11-8

Issuing Bonds at a Discount 11-9

Issuing Bonds at a Premium 11-10

Redeeming Bonds 11-12

11.3 Accounting for Non-Current Liabilities 11-13

Long-Term Notes Payable 11-13

Lease Liabilities 11-15

11.4 Reporting and Analyzing Non-Current Liabilities 11-16

Presentation 11-16

Analysis 11-16

Debt and Equity Financing 11-17

Appendix 11A: Effective-Interest Method of Bond Amortization 11-19

Amortizing Bond Discount 11-19

Amortizing Bond Premium 11-21

Appendix 11B: Straight-Line Amortization 11-22

Amortizing Bond Discount 11-22

Amortizing Bond Premium 11-23

A Look at U.S. GAAP 11-40

12 Corporations: Organization, Share Transactions, and Equity 12-1

To the Victor Go the Spoils: adidas 12-1

12.1 The Corporate Form of Organization 12-2

Characteristics of a Corporation 12-3

Forming a Corporation 12-6

Shareholder Rights 12-6

Share Issue Considerations 12-8

Corporate Capital 12-10

12.2 Accounting for Share Transactions 12-12

Accounting for Ordinary Shares 12-12

Accounting for Preference Shares 12-14

Accounting for Treasury Shares 12-15

12.3 Accounting for Dividends and Splits 12-19

Accounting for Cash Dividends 12-19

Dividend Preferences 12-21

Accounting for Share Dividends 12-24

Accounting for Share Splits 12-26

12.4 Reporting and Analyzing Equity 12-28

Retained Earnings 12-28

Presentation of Statement of Financial Position 12-29

Analysis 12-31

Appendix 12A: Statement of Changes in Equity 12-32

Appendix 12B: Book Value—Another per Share Amount 12-33

Book Value per Share 12-33

Book Value versus Market Price 12-34

Data Analytics in Action 12-58

A Look at U.S. GAAP 12-61

13 Investments 13-1

Playing for Fun and Profit: Sony 13-1

13.1 Debt Investments 13-2

Why Companies Invest 13-3

Classification and Measurement of Investments 13-4

Accounting for Debt Investments 13-4

13.2 Share Investments 13-7

Holdings of Less than 20% 13-7

Holdings Between 20% and 50% 13-9

Holdings of More than 50% 13-10

13.3 Valuing and Reporting Investments 13-12

Categories of Securities 13-12

Statement of Financial Position Presentation 13-18

Presentation of Realized and Unrealized Gain or Loss 13-19

Classified Statement of Financial Position 13-20

Appendix 13A: Preparing Consolidated Financial Statements 13-22

Consolidated Statement of Financial Position 13-22

Consolidated Income Statement 13-26

A Look at U.S. GAAP 13-43

14 Statement of Cash Flows 14-1

What Should We Do with This Cash?: Keyence 14-1

14.1 Statement of Cash Flows: Usefulness and Format 14-3

Usefulness of the Statement of Cash Flows 14-3

Classification of Cash Flows 14-3

Significant Non-Cash Activities 14-5

Format of the Statement of Cash Flows 14-5

14.2 Preparing the Statement of Cash Flows—Indirect Method 14-7

Indirect and Direct Methods 14-7

Indirect Method—Computer Services International 14-8

Step 1: Operating Activities 14-9

Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method 14-12

Step 2: Investing and Financing Activities 14-13

Step 3: Net Change in Cash 14-14

14.3 Using Cash Flows to Evaluate a Company 14-17

Free Cash Flow 14-17

Appendix 14A: Statement of Cash Flows—Direct Method 14-19

Step 1: Operating Activities 14-21

Step 2: Investing and Financing Activities 14-25

Step 3: Net Change in Cash 14-26

Appendix 14B: Statement of Cash Flows—T-Account Approach 14-26

Data Analytics in Action 14-48

A Look at U.S. GAAP 14-51

15 Financial Analysis: The Big Picture 15-1

Making Money the Old-Fashioned Way: Li Ka-shing 15-1

15.1 Basics of Financial Statement Analysis 15-2

Need for Comparative Analysis 15-3

Tools of Analysis 15-3

Horizontal Analysis 15-3

Vertical Analysis 15-6

15.2 Ratio Analysis 15-9

Liquidity Ratios 15-9

Profitability Ratios 15-13

Solvency Ratios 15-16

Summary of Ratios 15-18

15.3 Sustainable Income 15-20

Discontinued Operations 15-21

Changes in Accounting Principle 15-22

Comprehensive Income 15-22

A Look at U.S. GAAP 15-48

Appendix A Specimen Financial Statements: Taiwan Semiconductor Manufacturing Company, Limited A-1

Appendix B Specimen Financial Statements: Nestlé SA B-1

Appendix C Specimen Financial Statements: Delfi Limited C-1

Appendix D Specimen Financial Statements: Apple Inc. D-1

Appendix E Time Value of Money E-1

E.1 Interest and Future Values E-1

Nature of Interest E-1

Future Value of a Single Amount E-3

Future Value of an Annuity E-5

E.2 Present Value Concepts E-7

Present Value Variables E-7

Present Value of a Single Amount E-8

Present Value of an Annuity E-10

Time Periods and Discounting E-12

Present Value of a Long-Term Note or Bond E-12

E.3 Using Financial Calculators E-15

Present Value of a Single Sum E-15

Present Value of an Annuity E-16

Useful Applications of the Financial Calculator E-17

Appendix F Accounting for Partnerships F-1

F.1 Forming a Partnership F-1

Characteristics of Partnerships F-2

Organizations with Partnership Characteristics F-3

Advantages and Disadvantages of Partnerships F-4

The Partnership Agreement F-5

Accounting for a Partnership Formation F-5

F.2 Accounting for Net Income or Net Loss F-6

Dividing Net Income or Net Loss F-6

Partnership Financial Statements F-9

F.3 Liquidation of a Partnership F-10

No Capital Deficiency F-11

Capital Deficiency F-12

F.4 Admissions and Withdrawals of Partners F-14

Admission of a Partner F-15

Withdrawal of a Partner F-18

Appendix G Subsidiary Ledgers and Special Journals G-1

G.1 Subsidiary Ledgers G-1

Subsidiary Ledger Example G-2

Advantages of Subsidiary Ledgers G-3

G.2 Special Journals G-4

Sales Journal G-5

Cash Receipts Journal G-7

Purchases Journal G-11

Cash Payments Journal G-13

Effects of Special Journals on the General Journal G-16

Cybersecurity: A Final Comment G-17

Subject Index I-1

Company Index I-13