Compute stanley black & decker's gross profit margin

FINANCIAL ACCOUNTING Tools for Business Decision Making

E IGHTH EDIT ION

CHART OF ACCOUNTS

The following is a sample chart of accounts. It does not represent a comprehensive chart of all the accounts used in this textbook but rather those accounts that are commonly used. This sample chart of accounts is for a company that generates both service revenue as well as sales revenue. It uses the perpetual approach to inventory. If a periodic system was used, the following temporary accounts would be needed to record inventory purchases: Purchases, Freight-In, Purchase Returns and Allowances, and Purchase Discounts.

Assets Cash

Accounts Receivable

Allowance for Doubtful Accounts

Interest Receivable

Inventory

Supplies

Prepaid Insurance

Prepaid Rent

Land

Equipment

Accumulated Depreciation— Equipment

Buildings

Accumulated Depreciation— Buildings

Copyrights

Goodwill

Patents

Liabilities Notes Payable

Accounts Payable

Unearned Service Revenue

Salaries and Wages Payable

Interest Payable

Dividends Payable

Income Taxes Payable

Bonds Payable

Discount on Bonds Payable

Premium on Bonds Payable

Mortgage Payable

Stockholders’ Equity Common Stock

Paid-in Capital in Excess of Par Value—Common Stock

Preferred Stock

Paid-in Capital in Excess of Par Value—Preferred Stock

Treasury Stock

Retained Earnings

Dividends

Income Summary

Revenues Service Revenue

Sales Revenue

Sales Discounts

Sales Returns and Allowances

Interest Revenue

Gain on Disposal of Plant Assets

Expenses Administrative Expenses

Amortization Expense

Bad Debt Expense

Cost of Goods Sold

Depreciation Expense

Freight-Out

Income Tax Expense

Insurance Expense

Interest Expense

Loss on Disposal of Plant Assets

Maintenance and Repairs Expense

Rent Expense

Salaries and Wages Expense

Selling Expenses

Supplies Expense

Utilities Expense

ACCOUNT CLASSIFICATION AND PRESENTATION

Account Title Classification Financial Statement Normal Balance

A Accounts Payable Current Liability Balance Sheet Credit

Accounts Receivable Current Asset Balance Sheet Debit

Accumulated Depreciation—Buildings Plant Asset—Contra Balance Sheet Credit

Accumulated Depreciation—Equipment Plant Asset—Contra Balance Sheet Credit

Administrative Expenses Operating Expense Income Statement Debit

Allowance for Doubtful Accounts Current Asset—Contra Balance Sheet Credit

Amortization Expense Operating Expense Income Statement Debit

B Bad Debt Expense Operating Expense Income Statement Debit

Bonds Payable Long-Term Liability Balance Sheet Credit

Buildings Plant Asset Balance Sheet Debit

C Cash Current Asset Balance Sheet Debit

Common Stock Stockholders’ Equity Balance Sheet Credit

Copyrights Intangible Asset Balance Sheet Debit

Cost of Goods Sold Cost of Goods Sold Income Statement Debit

D Debt Investments Current Asset/

Long-Term Investment Balance Sheet Debit

Depreciation Expense Operating Expense Income Statement Debit

Discount on Bonds Payable Long-Term Liability—Contra Balance Sheet Debit

Dividend Revenue Other Income Income Statement Credit Dividends Temporary account closed

to Retained Earnings Retained Earnings Statement

Debit

Dividends Payable Current Liability Balance Sheet Credit

E Equipment Plant Asset Balance Sheet Debit

F Freight-Out Operating Expense Income Statement Debit

G Gain on Disposal of Plant Assets Other Income Income Statement Credit

Goodwill Intangible Asset Balance Sheet Debit

I Income Summary Temporary account closed

to Retained Earnings Not Applicable (1)

Income Tax Expense Income Tax Expense Income Statement Debit

Income Taxes Payable Current Liability Balance Sheet Credit

Insurance Expense Operating Expense Income Statement Debit

Interest Expense Other Expense Income Statement Debit

Interest Payable Current Liability Balance Sheet Credit

Interest Receivable Current Asset Balance Sheet Debit

Interest Revenue Other Income Income Statement Credit

Inventory Current Asset Balance Sheet (2) Debit

Account Title Classification Financial Statement Normal Balance

L Land Plant Asset Balance Sheet Debit

Loss on Disposal of Plant Assets Other Expense Income Statement Debit

M Maintenance and Repairs Expense Operating Expense Income Statement Debit

Mortgage Payable Long-Term Liability Balance Sheet Credit

N Notes Payable Current Liability/

Long-Term Liability Balance Sheet Credit

P Patents Intangible Asset Balance Sheet Debit

Paid-in Capital in Excess of Par Value—Common Stock

Stockholders’ Equity Balance Sheet Credit

Paid-in Capital in Excess of Par Value—Preferred Stock

Stockholders’ Equity Balance Sheet Credit

Preferred Stock Stockholders’ Equity Balance Sheet Credit

Premium on Bonds Payable Long-Term Liability—Contra Balance Sheet Credit

Prepaid Insurance Current Asset Balance Sheet Debit

Prepaid Rent Current Asset Balance Sheet Debit

R Rent Expense Operating Expense Income Statement Debit Retained Earnings Stockholders’ Equity Balance Sheet and Retained

Earnings Statement Credit

S Salaries and Wages Expense Operating Expense Income Statement Debit

Salaries and Wages Payable Current Liability Balance Sheet Credit

Sales Discounts Revenue—Contra Income Statement Debit

Sales Returns and Allowances Revenue—Contra Income Statement Debit

Sales Revenue Revenue Income Statement Credit

Selling Expenses Operating Expense Income Statement Debit

Service Revenue Revenue Income Statement Credit

Stock Investments Current Asset/Long-Term Investment

Balance Sheet Debit

Supplies Current Asset Balance Sheet Debit

Supplies Expense Operating Expense Income Statement Debit

T Treasury Stock Stockholders’ Equity Balance Sheet Debit

U Unearned Service Revenue Current Liability Balance Sheet Credit

Utilities Expense Operating Expense Income Statement Debit

(1) The normal balance for Income Summary will be credit when there is a net income, debit when there is a net loss. The Income Summary account does not appear on any financial statement.

(2) If a periodic system is used, Inventory also appears on the income statement in the calculation of cost of goods sold.

FINANCIAL ACCOUNTING Tools for Business Decision Making

E IGHTH EDIT ION

Paul D. Kimmel PhD, CPA University of Wisconsin—Milwaukee

Milwaukee, Wisconsin

Jerry J. Weygandt PhD, CPA University of Wisconsin—Madison

Madison, Wisconsin

Donald E. Kieso PhD, CPA Northern Illinois University

DeKalb, Illinois

Vice President and Director George Hoffman Executive Editor Michael McDonald Development Editor Ed Brislin Editorial Supervisor Terry Ann Tatro Editorial Associate Margaret Thompson Senior Content Manager Dorothy Sinclair Senior Production Editor Suzie Pfister Executive Marketing Manager Karolina Zarychta Hons Product Design Manager Allison Morris Product Designer Matt Origoni Media Specialist Elena Santa Maria Design Director Harry Nolan Cover Design Maureen Eide Interior Design Maureen Eide Senior Photo Editor Mary Ann Price Market Solutions Assistant Elizabeth Kearns Cover Credit Susanna Price/Getty Images, Inc.

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1 Introduction to Financial Statements 2 2 A Further Look at Financial Statements 44 3 The Accounting Information System 90 4 Accrual Accounting Concepts 150 5 Merchandising Operations and the

Multiple-Step Income Statement 214 6 Reporting and Analyzing Inventory 266 7 Fraud, Internal Control, and Cash 316 8 Reporting and Analyzing Receivables 374 9 Reporting and Analyzing Long-Lived Assets 422 10 Reporting and Analyzing Liabilities 478 11 Reporting and Analyzing Stockholders’

Equity 536 12 Statement of Cash Flows 590 13 Financial Analysis: The Big Picture 646

APPENDICES A Specimen Financial Statements:

Apple Inc. A-1 B Specimen Financial Statements:

Columbia Sportswear Company B-1 C Specimen Financial Statements:

VF Corporation C-1 D Specimen Financial Statements: Amazon.com, Inc. D-1 E Specimen Financial Statements: Wal-Mart Stores, Inc. E-1 F Specimen Financial Statements: Louis Vuitton F-1 G Time Value of Money G-1 H Reporting and Analyzing Investments H-1

COMPANY INDEX I-1 SUBJECT INDEX I-5

iii

Brief Contents

iv

Dear Student,

Why This Course? Remember your biology course in high school? Did you have one of those “invisible man” models (or maybe something more high-tech than that) that gave you the opportunity to look “inside” the human body? This accounting course offers something similar. To understand a business, you have to understand the financial insides of a business organization. A financial accounting course will help you understand the essential financial components of businesses. Whether you are looking at a large multinational company like Apple or Starbucks or a single- owner software consulting business or coffee shop, knowing the fundamentals of financial accounting will help you understand what is happening. As an employee, a manager, an investor,a business owner, or a director of your own personal finances—any of which roles you will have at some point in your life—you will make better decisions for having taken this course.

Why This Book? Hundreds of thousands of students have used this textbook. Your instructor has chosen it for you because of its trusted reputation. The authors have worked hard to keep the book fresh, timely, and accurate.

How to Succeed? We’ve asked many students and many instructors whether there is a secret for success in this course. The nearly unanimous answer turns out to be not much of a secret: “Do the homework.” This is one course where doing is learn- ing. The more time you spend on the homework assignments—using the various tools that this textbook provides—the more likely you are to learn the essential concepts, techniques, and methods of accounting. Besides the textbook itself, WileyPLUS and the book’s companion website also offer various support resources.

Good luck in this course. We hope you enjoy the experience and that you put to good use throughout a lifetime of success the knowledge you obtain in this course. We are sure you will not be disappointed.

Paul D. Kimmel Jerry J. Weygandt

Donald E. Kieso

“Whether you are looking at a large multinational company like Apple or Starbucks or a single-owner software consulting business or coffee shop, knowing the fundamentals of financial accounting will help you understand what is happening.”

From the Authors

Jerry Weygandt JERRY J. WEYGANDT, PhD, CPA, is Arthur Andersen Alumni Emeritus Professor of Accounting at the University of Wisconsin— Madison. He holds a Ph.D. in accounting from the University of Illinois. Articles by Professor Weygandt have appeared in the Accounting Review, Journal of Accounting Research, Accounting Horizons, Journal of Accountancy, and other academic and professional journals. These articles have examined such financial reporting issues as accounting for price-level adjustments, pensions, convertible securities, stock option contracts, and interim reports. Professor Weygandt is author of other accounting and financial reporting books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Wisconsin Society of Certified Public Accountants. He has served on numerous committees of the American Accounting Association and as a member of the editorial board of the Accounting Review; he also has served as President and Secretary-Treasurer of the American Accounting Association. In addition, he has been actively involved with the American Institute of Certified Public Accountants and has been a member of the Accounting Standards Executive Committee (AcSEC) of that organization. He has served on the FASB task force that examined the reporting issues related to accounting for income taxes and served as a trustee of the Financial Accounting Foundation. Professor Weygandt has received the Chancellor’s Award for Excellence in Teaching and the Beta Gamma Sigma Dean’s Teaching Award. He is on the board of directors of M & I Bank of Southern Wisconsin. He is the recipient of the Wisconsin Institute of CPA’s Outstanding Educator’s Award and the Lifetime Achievement Award. In 2001 he received the American Accounting Association’s Outstanding Educator Award.

Paul Kimmel PAUL D. KIMMEL, PhD, CPA, received his bachelor’s degree from the University of Minnesota and his doctorate in account- ing from the University of Wisconsin. He is an Associate Professor at the University of Wisconsin—Milwaukee, and has pub- lic accounting experience with Deloitte & Touche (Minneapolis). He was the recipient of the UWM School of Business Advisory Council Teaching Award, the Reggie Taite Excellence in Teaching Award and a three-time winner of the Outstanding Teaching Assistant Award at the University of Wisconsin. He is also a recipient of the Elijah Watts Sells Award for Honorary Distinction for his results on the CPA exam. He is a member of the American Accounting Association and the Institute of Management Accountants and has published articles in Accounting Review, Accounting Horizons, Advances in Management Accounting, Managerial Finance, Issues in Accounting Education, Journal of Accounting Education, as well as other journals. His research interests include accounting for financial instruments and innovation in accounting education. He has published papers and given numerous talks on incorporating critical thinking into accounting education, and helped prepare a catalog of critical thinking resources for the Federated Schools of Accountancy.

Don Kieso DONALD E. KIESO, PhD, CPA, received his bachelor’s degree from Aurora University and his doctorate in accounting from the University of Illinois. He has served as chair- man of the Department of Accountancy and is currently the KPMG Emeritus Professor of Accountancy at Northern Illinois University. He has public accounting experience with Price Waterhouse & Co. (San Francisco and Chicago) and Arthur Andersen & Co. (Chicago) and research experience with the Research Division of the American Institute of Certified Public Accountants (New York). He has done postdoctoral work as a Visiting Scholar at the University of California at Berkeley and is a recipient of NIU’s Teaching Excellence Award and four Golden Apple Teaching Awards. Professor Kieso is the author of other accounting and business books and is a member of the American Accounting Association, the American Institute of Certified Public Accountants, and the Illinois CPA Society. He has served as a member of the Board of Directors of the Illinois CPA Society, then AACSB’s Accounting Accreditation Committees, the State of Illinois Comptroller’s Commission, as Secretary- Treasurer of the Federation of Schools of Accountancy, and as Secretary-Treasurer of the American Accounting Association. Professor Kieso is currently serving on the Board of Trustees and Executive Committee of Aurora University, as a member of the Board of Directors of Kishwaukee Community Hospital, and as Treasurer and Director of Valley West Community Hospital. From 1989 to 1993 he served as a charter member of the national Accounting Education Change Commission. He is the recipient of the Outstanding Accounting Educator Award from the Illinois CPA Society, the FSA’s Joseph A. Silvoso Award of Merit, the NIU Foundation’s Humanitarian Award for Service to Higher Education, a Distinguished Service Award from the Illinois CPA Society, and in 2003 an honorary doctorate from Aurora University.

Author Commitment

Quickly identify areas of strength and weakness before the first exam, and use the information to build a learning path to success.

A little time with ORION goes a long way. Based on usage data, students who engage in ORION adaptive practice—just a few minutes per week—get better outcomes. In fact, students who used ORION five or more times over the course of a semester reported the following results:

Developing effective problem solving skills requires practice, relevant feedback, and insightful examples.

Solutions to practice multiple-choice questions, exercises, and problems are now available at the end of each chapter.

LEARNING OBJECTIVES REVIEW

REVIEW AND PRACTICE

1 Discuss how to classify and determine inventory. Merchandisers need only one inventory classifi cation, merchandise inventory, to describe the different items that make up total inventory. Manufacturers, on the other hand, usually classify inventory into three catego- ries: fi nished goods, work in process, and raw materi- als. To determine inventory quantities, manufactur- ers (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment.

2 Apply inventory cost fl ow methods and discuss their fi nancial effects. The primary basis of accounting for inventories is cost. Cost includes all expenditures neces- sary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes (a) cost of beginning inventory and (b) cost of goods purchased. The inventory cost fl ow methods are specifi c identifi cation and three assumed cost fl ow methods—FIFO, LIFO, and average-cost. The cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specifi c identifi cation or by a method based on an assumed cost fl ow. When prices are rising, the fi rst-in, fi rst-out (FIFO) method results in lower cost of goods sold and higher net income than the average-cost and the last-in, fi rst-out (LIFO) methods. The reverse is true when prices are fall- ing. In the balance sheet, FIFO results in an ending inven- tory that is closest to current value, whereas the inven- tory under LIFO is the farthest from current value. LIFO

lt i th l t i t (b f l t

Inventory turnover is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover. A higher inventory turnover or lower average days in inventory suggests that management is trying to keep inventory levels low relative to its sales level. The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were employed instead. For some companies this differ- ence can be signifi cant, and ignoring it can lead to inappro- priate conclusions when using the current ratio or inven- tory turnover.

*4 Apply inventory cost fl ow methods to perpetual inven- tory records. Under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average- cost method, a new average cost is computed after each purchase.

*5 Indicate the effects of inventory errors on the fi nan- cial statements. In the income statement of the current year: (1) An error in beginning inventory will have a reverse effect on net income (e.g., overstatement of inventory results in understatement of net income, and vice versa). (2) An error in ending inventory will have a similar effect on net income (e.g., overstatement of inventory results in overstatement of net income). If ending inventory errors are not corrected in the follow-

▼

c06ReportingAndAnalyzingInventory.indd Page 291 01/06/15 8:11 PM f-0161 /202/WB01539/9781118552551/ch06/text_s

SOLUTION

1. Ending inventory—as reported $650,000

1. Subtract from inventory: The goods belong to Bosnia Corporation. Sergei is merely holding them for Bosnia. (200,000)

2. Add to inventory: The goods belong to Sergei when they were shipped. 40,000

3. Subtract from inventory: Offi ce supplies should be carried in a separate account. They are not considered inventory held for resale. (15,000)

4. Add to inventory: The goods belong to Sergei until they are shipped (Jan. 1). 30,000

p p

INSTRUCTIONS

Prepare a schedule to determine the correct inventory amount. Provide explanations for each item above, saying why you did or did not make an adjustment for each item.

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SOLUTIONS 1. (d) A physical inventory is usually taken when a limited number of goods are being sold or received, and at the end

of the company’s fi scal year. Choice (a) is incorrect because a physical inventory count is usually taken when the com- pany has the least, not greatest, amount of inventory. Choices (b) and (c) are correct, but (d) is the better answer.

2. (a) Goods held on consignment should not be included because another company has title (ownership) to the goods. The other choices are incorrect because (b) goods shipped on consignment to another company and (c) goods in transit from another company shipped FOB shipping point should be included in a company’s ending inventory. Choice (d) is incorrect because (a) is not included in the physical inventory.

3. (b) The inventory held on consignment by Rogers should be included in Railway’s inventory balance at cost ($35,000). The purchased goods of $13,000 should not be included in inventory until January 3 because the goods are shipped FOB destination. Therefore, the correct amount of inventory is $215,000 ($180,000 + $35,000), not (a) $230,000, (c) $228,000, or (d) $193,000.

4. (c) Under FIFO, ending inventory will consist of 5,000 units from the Nov. 8 purchase and 4,000 units from the June 19 purchase. Therefore, ending inventory is (5,000 × $13) + (4,000 × $12) = $113,000, not (a) $99,000, (b) $108,000, or (d) $117,000.

5. (d) Under LIFO, ending inventory will consist of 8,000 units from the inventory at Jan. 1 and 1,000 units from the June 19 purchase. Therefore, ending inventory is (8,000 × $11) + (1,000 × $12) = $100,000, not (a) $113,000, (b) $108,000, or (c) $99,000.

6 (d) Under the average-cost method total cost of goods available for sale needs to be calculated in order to deter-

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S l ti t ti lti l

New PRACTICE QUESTIONS WITH SOLUTIONS include:

• BRIEF EXERCISES

• EXERCISES

• DO IT! Exercises

• PROBLEMS

All new practice questions provide

assessment, helping students see what

they understand and where they can

improve.

Algorithmic versions of the questions

allow students to revisit practice

questions until they understand a

topic completely.

Focus on the Accounting Cycle To help students master accounting cycle concepts, we added (1) new, recurring illustrations that show students the big picture of the accounting cycle, (2) new comprehensive accounting cycle exercises and problems, and (3) new accounting cycle questions in the Test Bank and .

Student Practice and Solutions New practice opportunities with solutions are integrated throughout the textbook and WileyPLUS course. Each textbook chapter now provides students with a Review and Practice section that includes learning objective sum- maries, multiple-choice questions with feedback for each answer choice, practice exercises with solutions, and a prac- tice problem with a solution. Also, all learning objective modules in the textbook are followed by a DO IT! exercise with an accompanying solution.

In WileyPLUS, two brief exercises, two DO IT! exercises, two exercises, and a new problem are available for practice with each chapter. All of the new practice questions are algorithmic, providing students with multiple opportunities for advanced practice. WileyPLUS assessment now includes new narrative student feedback.

Over 3,500 questions, including new medium-level, computational, and accounting-cycle-based questions, are avail- able for practice and review. is an adaptive study and practice tool that helps students build proficiency in course topics.

Updated Content and Design We scrutinized all content to find new ways to engage students and help them learn accounting concepts. A new learning objective structure helps students practice their understanding of concepts with DO IT! exercises before they move on to different topics in other learning objectives. Coupled with a new interior design, revised infographics, and the newly designed interactive chapter tutorials, the new outcomes-oriented approach motivates students and helps them make the best use of their time.

WileyPLUS Videos Over 150 videos are available in WileyPLUS. More than 80 of the videos are new to the Eighth Edition. The videos walk students through relevant homework problems and solutions, review important concepts, provide overviews of Excel skills, and explore topics in a real-world context.

Real World Context: Feature Stories and Comprehensive Problems New feature stories frame chapter topics in a real-world company example. Also, the feature stories now closely cor- relate with the Using Decision Tools problem at the end of each chapter. In WileyPLUS, real-world Insight boxes now have questions that can be assigned as homework.

More information about the Eighth Edition is available on the book’s website at www.wiley.com/college/kimmel.

viii

What’s New?

2Introduction to FinancialStatements1

Knowing the Numbers 3 LO 1: Study the forms of business organization and

the uses of accounting information. 4 Forms of Business Organization 4 Users and Uses of Financial Information 5 Ethics in Financial Reporting 7

LO 2: Explain the three principal types of business activity. 8

Financing Activities 9 Investing Activities 9 Operating Activities 9

LO 3: Describe the four financial statements and how they are prepared. 11

Income Statement 11 Retained Earnings Statement 12 Balance Sheet 13 Statement of Cash Flows 14 Interrelationships of Statements 15 Other Elements of an Annual Report 18

A Look at IFRS 42

46A Further Look at Financial Statements2

Just Fooling Around? 45 LO 1: Identity the sections of a classified

balance sheet. 46 Current Assets 46 Long-Term Investments 48 Property, Plant, and Equipment 48 Intangible Assets 48 Current Liabilities 50 Long-Term Liabilities 50 Stockholders’ Equity 50

LO 2: Use ratios to evaluate a company’s profitability, liquidity, and solvency. 51

Ratio Analysis 51 Using the Income Statement 52 Using a Classified Balance Sheet 53 Using the Statement of Cash Flows 57