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Information for Decisions

Financial & Managerial Accounting

8th edition

JOHN J. WILD KEN W. SHAW

Financial & Managerial Accounting

8thedition

John J. Wild University of Wisconsin at Madison

Ken W. Shaw University of Missouri at Columbia

INFORMATION FOR DECISIONS

To my students and family, especially Kimberly, Jonathan, Stephanie, and Trevor. To my wife Linda and children Erin, Emily, and Jacob.

FINANCIAL AND MANAGERIAL ACCOUNTING: INFORMATION FOR DECISIONS, EIGHTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright ©2019 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions ©2018, 2016, and 2013. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LWI 21 20 19 18

ISBN 978-1-260-24785-5 (bound edition) MHID 1-260-24785-6 (bound edition) ISBN 978-1-260-41719-7 (loose-leaf edition) MHID 1-260-41719-0 (loose-leaf edition)

Executive Portfolio Manager: Steve Schuetz Product Developers: Michael McCormick, Christina Sanders Marketing Manager: Michelle Williams Content Project Managers: Lori Koetters, Brian Nacik Buyer: Sandy Ludovissy Design: Debra Kubiak Content Licensing Specialist: Melissa Homer Cover Image: Runner: ©Maridav/Shutterstock; Statistics icons: ©A-spring/Shutterstock; Background image: ©Vector work/Shutterstock Compositor: Aptara®, Inc.

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 Names: Wild, John J., author. | Shaw, Ken W., author. Title: Financial and managerial accounting : information for decisions / John J. Wild, University of Wisconsin at Madison, Ken W. Shaw, University of Missouri at Columbia. Description: 8th Edition. | Dubuque, IA : McGraw-Hill Education, [2018] | Revised edition of Financial and managerial accounting, [2018] | Includes bibliographical references and index. Identifiers: LCCN 2018035310| ISBN 9781260247855 (alk. paper) | ISBN 1260247856 (alk. paper) Subjects: LCSH: Accounting. | Managerial accounting. Classification: LCC HF5636 .W674b 2018 | DDC 658.15/11—dc23 LC record available at https://lccn.loc.gov/2018035310

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate 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.

mheducation.com/highered

iii

About the Authors JOHN J. WILD is a distinguished pro- fessor of accounting at the University of Wisconsin at Madison. He previously held appointments at Michigan State University and the University of Manchester in England. He received his BBA, MS, and PhD from the University of Wisconsin.

John teaches accounting courses at both the undergraduate and graduate levels. He has received numerous teaching honors, in- cluding the Mabel W. Chipman Excellence-in-

Teaching Award and the departmental Excellence-in-Teaching Award, and he is a two-time recipient of the Teaching Excellence Award from business graduates at the University of Wisconsin. He also received the Beta Alpha Psi and Roland F. Salmonson Excellence-in-Teaching Award from Michigan State University. John has received several research honors, is a past KPMG Peat Marwick National Fellow, and is a recipient of fellowships from the American Accounting Association and the Ernst and Young Foundation.

John is an active member of the American Accounting Association and its sections. He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees. John is author of Financial Accounting, Managerial Accounting, Fundamental Accounting Principles, and College Accounting, all published by McGraw-Hill Education.

John’s research articles on accounting and analysis appear in The Accounting Review; Journal of Accounting Research; Journal of Accounting and Economics; Contemporary Accounting Research; Journal of Accounting, Auditing and Finance; Journal of Accounting and Public Policy; Accounting Horizons; and other journals. He is past associate editor of Contemporary Accounting Research and has served on several editorial boards including The Accounting Review and the Journal of Accounting and Public Policy.

In his leisure time, John enjoys hiking, sports, boating, travel, people, and spending time with family and friends.

Courtesy of John J. Wild

KEN W. SHAW is an associate profes- sor of accounting and the KPMG/Joseph A. Silvoso Distinguished Professor of Accounting at the University of Missouri. He previously was on the faculty at the University of Maryland at College Park. He has also taught in international programs at the University of Bergamo (Italy) and the University of Alicante (Spain). He received an accounting degree from Bradley University and an MBA and PhD from the

University of Wisconsin. He is a Certified Public Accountant with work experience in public accounting.

Ken teaches accounting at the undergraduate and graduate levels. He has received numerous School of Accountancy, College of Business, and university-level teaching awards. He was voted the “Most Influential Professor” by four School of Accountancy graduating classes and is a two-time recipient of the O’Brien

Excellence in Teaching Award. He is the advisor to his school’s chapter of the Association of Certified Fraud Examiners.

Ken is an active member of the American Accounting Association and its sections. He has served on many committees of these organizations and presented his research papers at na- tional and regional meetings. Ken’s research appears in the Journal of Accounting Research; The Accounting Review; Contemporary Accounting Research; Journal of Financial and Quantitative Analysis; Journal of the American Taxation Association; Strategic Management Journal; Journal of Accounting, Auditing, and Finance; Journal of Financial Research; and other journals. He has served on the editorial boards of Issues in Accounting Education; Journal of Business Research; and Research in Accounting Regulation. Ken is co-author of Fundamental Accounting Principles, Managerial Accounting, and College Accounting, all published by McGraw-Hill Education.

In his leisure time, Ken enjoys tennis, cycling, music, and coaching his children’s sports teams.

Courtesy of Ken W. Shaw

Author Letter Using Learning Science and Data Analytics We use data to make decisions and maximize performance. Like the runner on the cover who uses data to track her progress, we used stu- dent performance data to identify content areas that can be made more direct, concise, and systematic.

Learning science reveals that students do not read large chunks of text, so we streamlined this edition to present it in a more focused, succinct, blocked format to improve student learning and retention. Our new edition delivers the same content in 112 fewer pages. Visual aids and numer- ous videos offer additional learning aids. New summary Cheat Sheets conclude each chapter to visually reinforce key concepts and procedures.

Our new edition has over 1,500 videos to engage students and improve outcomes: •   Concept Overview Videos—cover each chapter’s learning objectives with multimedia presentations that include Knowledge Checks to

engage students and assess comprehension. •  Need-to-Know Demos—walk-through demonstrations of key procedures and analysis to ensure success with assignments and tests. •  Guided Examples (Hints)—step-by-step walk-through of assignments that mimic Quick Studies, Exercises, and General Ledger.

iv

Difference Makers in Teaching . . . Learning Science Learning analytics show that students learn better when material is broken into “blocks” of content. Each chapter opens with a visual preview. Learning objective numbers highlight the location of re- lated content. Each “block” of content concludes with a Need-to-Know (NTK) to aid and reinforce student learning. Visual aids and concise, bullet-point dis- cussions further help students learn.

Learning Objectives

CONCEPTUAL C1 Explain the steps in processing

transactions and the role of source documents.

C2 Describe an account and its use in recording transactions.

C3 Describe a ledger and a chart of accounts.

PROCEDURAL P1 Record transactions in a journal and post

entries to a ledger.

P2 Prepare and explain the use of a trial balance.

P3 Prepare financial statements from business transactions.

C4 Define debits and credits and explain double-entry accounting.

ANALYTICAL A1 Analyze the impact of transactions on

accounts and financial statements.

A2 Compute the debt ratio and describe its use in analyzing financial condition.

Chapter Preview

2 Recording Transactions

NTK 2-4

TRIAL BALANCE

P2 Trial balance preparation and use

Error identification

NTK 2-5

FINANCIAL STATEMENTS

P3 Financial statement preparation

A2 Debt ratio

NTK 2-3

RECORDING TRANSACTIONS

P1 Journalizing and posting

A1 Processing transactions— Examples

NTK 2-1

SYSTEM OF ACCOUNTS

Using financial statements

C1 Source documents

C2 Types of accounts C3 General ledger

NTK 2-2

DEBITS AND CREDITS

T-account

C4 Debits and credits

Normal balance

wiL16960_ch02_044-083.indd 44 5/3/18 2:14 PM

New Revenue Recognition •   Wild uses  the popular gross method 

for merchandising transactions (net method is covered in an appendix). The gross method is widely used in practice and best for student success.

•   Adjusting entries for new revenue rec- ognition rules are included in an ap- pendix.  Assignments  are  clearly  marked and separated. Wild is GAAP  compliant.

154 Chapter 4 Accounting for Merchandising Operations

Z-Mart’s Merchandise Inventory account at the end of the year has a balance of $21,250, but a physical count shows only $21,000 of inventory exists. The adjusting entry to record this $250 shrinkage is

Dec . 31 Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . 250

Adjust for $250 shrinkage.

Assets = Liabilities + Equity −250 −250

Sales Discounts, Returns, and Allowances—Adjusting Entries Revenue recognition rules require sales to be reported at the amount expected to be received. This means that period-end adjusting entries are commonly made for Expected sales discounts. Expected returns and allowances (revenue side). Expected returns and allowances (cost side).

These three adjustments produce three new accounts: Allowance for Sales Discounts, Sales Refund Payable, and Inventory Returns Estimated. Appendix 4B covers these accounts and the adjusting entries.

Preparing Financial Statements The financial statements of a merchandiser are similar to those for a service company described in prior chapters. The income statement mainly differs by the addition of cost of goods sold and gross profit. Net sales is affected by discounts, returns and allowances, and some additional expenses such as delivery expense and loss from defective merchandise. The balance sheet dif- fers by the addition of merchandise inventory as part of current assets. (Appendix 4B explains inventory returns estimated as part of current assets and sales refund payable as part of current liabilities.) The statement of retained earnings is unchanged.

Closing Entries for Merchandisers Closing entries are similar for service companies and merchandising companies. The difference is that we close some new temporary accounts that come from merchandising activities. Z-Mart has temporary accounts unique to merchandisers: Sales (of goods), Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold. The third and fourth closing entries are identical for a mer- chandiser and a service company. The differences are in red in the closing entries of Exhibit 4.11.

EXHIBIT 4.11 Closing Entries for a Merchandiser

Step 1: Close Credit Balances in Temporary Accounts to Income Summary.

Step 2: Close Debit Balances in Temporary Accounts to Income Summary.

Dec . 31 Income Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308,100 Sales Discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300 Sales Returns and Allowances . . . . . . . . . . . . . . . . . . . 2,000 Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230,400 Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,700 Salaries Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,800 Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300 Close debit balances in temporary accounts.

Step 3: Close Income Summary.

Dec . 31 Income Summary . . . . . . 12,900 Retained Earnings . . 12,900

Step 4: Close Dividends.

Dec . 31 Retained Earnings . . . . . . . . . 4,000 Dividends . . . . . . . . . . . . 4,000

Dec . 31 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,000 Income Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,000 Close credit balances in temporary accounts.

wiL47856_ch04_142-189.indd 154 9/20/18 9:12 AM

Up-to-Date This book reflects changes in accounting for revenue recognition, investments, leases, and extraordinary items. It is important that students learn GAAP accounting.

Less Is More Wild has markedly fewer pages than competing books covering the same material. •  The text is to the point and uses visuals to aid student learning. •  Bullet-point discussions and active writing aid learning. •  The 8th edition has 112 fewer pages than the 7th edition—a 10% reduction!

Visual Learning •   Learning  analytics  tell  us  to-

day’s students do not read large blocks of text. Wild has adapted  to student needs by having in- formative visual aids through- out. Many visuals and exhibits are new to this edition.

$180 3

= $60 each

2. Last-in, first-out (LIFO) Costs flow in the reverse

order incurred.

3. Weighted average Costs flow at an average

of costs available.

1. First-in, first-out (FIFO) Costs flow in the order

incurred.

× 2× 1

Income Statement Net sales.................... $100

Cost of goods sold.. 45

Gross profit................ $ 55

Balance Sheet Inventory.................... $135

Income Statement Net sales.................... $100

Cost of goods sold.. 70

Gross profit................ $ 30

Balance Sheet Inventory.................... $1 10

Income Statement Net sales.................... $100

Cost of goods sold.. 60

Gross profit................ $ 40

Balance Sheet Inventory.................... $120

$65 May 3

$45 May 1 G

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G o o d s

s o l d

G o o d s

s o l d

G o o d s

l e f t

G o o d s

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G o o d s

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$70 May 6

$65 May 3

$45 May 1

$70 May 6

$70 May 6

$65 May 3

$45 May 1

v

Videos •   A growing number of students now learn 

accounting online. Wild offers over 1,500 videos designed to increase student en- gagement and improve outcomes.

•   Hundreds  of  hint  videos  or  Guided  Examples provide a narrated, animated, step-by-step walk-through of select exer- cises similar to those assigned. These short presentations, which can be turned on or off by instructors, provide reinforcement when students need it most. (Exercise PowerPoints are available for instructors.)

•   Concept  Overview  Videos  cover  each  chapter’s learning objectives with nar- rated, animated presentations that fre- quently  assess  comprehension.  Wild’s  concept overview presentations cover learning objectives broken down into over 700 videos. 

Chapter 7 Accounting for Receivables 277

Recovering a Bad Debt If an account that was written off is later collected, two en- tries are made. The first is to reverse the write-off and reinstate the customer’s account. The second is to record the collection of the reinstated account. If on March 11 Kent pays in full his account previously written off, the entries are

Exhibit 7.6 portrays the allowance method. It shows the creation of the allowance for future write-offs—adding to a cookie jar. It also shows the decrease of the allowance through write- offs—taking cookies from the jar.

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us tin

g en

tr ie

s

Adjusting entries add to allowance for doubtful accounts.

Allowance for doubtful accounts

Write-o�s

Allowance for doubtful accounts

Bad debt write-o�s subtract from allowance for doubtful accounts.

Increase Allowance Decrease Allowance

Bad Debts Expense… # Allow. for Doubtful Accts… #

Allow. for Doubtful Accts… # Accts Receivable—J.Kent… #

EXHIBIT 7.6 Increases and Decreases to the Allowance for Doubtful Accounts

Assets = Liabilities + Equity +520 −520

Assets = Liabilities + Equity +520 −520

Mar . 11 Accounts Receivable—J . Kent . . . . . . . . . . . . . . . . . . . . . . . . . . 520

Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . 520

Reinstate account previously written off.

Mar . 11 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520

Accounts Receivable—J . Kent . . . . . . . . . . . . . . . . . . . . . 520

Record full payment of account.

Kent paid the entire amount previously written off, but sometimes a customer pays only a por- tion. If we believe this customer will later pay in full, we return the entire amount owed to accounts receivable (in the first entry only). If we expect no further collection, we return only the amount paid.

A retailer uses the allowance method. Record the following transactions.

Dec. 31 The retailer estimates $3,000 of its accounts receivable are uncollectible at its year-end. Feb. 14 The retailer determines that it cannot collect $400 of its accounts receivable from a customer

named ZZZ Company. Apr. 1 ZZZ Company unexpectedly pays its account in full to the retailer, which then records its

recovery of this bad debt.

Solution

P2

Entries under Allowance Method

NEED-TO-KNOW 7-3

Dec . 31 Bad Debts Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000

Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . 3,000

Record estimated bad debts.

Feb . 14 Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . . . . 400

Accounts Receivable—ZZZ Co . . . . . . . . . . . . . . . . . . . . . 400

Write off an account.

Apr . 1 Accounts Receivable—ZZZ Co . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . 400

Reinstate an account previously written off.

Apr . 1 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Accounts Receivable—ZZZ Co . . . . . . . . . . . . . . . . . . . . . 400

Record cash received on account. Do More: QS 7-4, QS 7-5, E 7-5

wiL47856_ch07_270-301.indd 277 9/21/18 10:06 AM

Need-to-Know Demos Need-to-Know demonstrations are located at key junctures in each chapter. These demonstrations pose questions about the material just presented—content that students “need to know” to learn  accounting. Accompanying solutions walk students through key procedures and analysis neces- sary to be successful with homework and test materials. Need-to-Know demonstrations are supplemented with narrated, animated, step-by-step walk- through videos led by an instructor and available via Connect.

Comprehensive Need-to-Know Comprehensive Need-to-Knows are problems that draw  on material from the entire chapter. They include a complete solution, allowing students to review the entire problem-solving process and achieve success.

vi

504 Chapter 13 Analysis of Financial Statements

EXHIBIT 13.9 Common-Size Comparative Income Statements

APPLE

as representing one sales dollar, the remaining items show how each revenue dollar is distrib- uted among costs, expenses, and income.

Exhibit 13.9 shows common-size comparative income statements for each dollar of Apple’s net sales. The past two years’ common-size numbers are similar with two exceptions. One is the increase of 0.4 cents in research and development costs, which can be a positive development if these costs lead to future revenues. Another is the increase in cost of sales of 0.6 cent and increase in selling, general and administrative costs of 0.1 cent. We must monitor the growth in these expenses.

Common-Size Graphics Exhibit 13.10 is a graphic of Apple’s current-year common-size income statement. This pie chart shows the contribution of each cost component of net sales for net income.

Exhibit 13.11 takes data from Apple’s Segments footnote. The exhibit shows the level of net sales for each of Apple’s five operating seg- ments. Its Americas segment gener-

ates $96.6 billion net sales, which is roughly 42% of its total sales. Within each bar is that segment’s operating income margin (Operating income/Segment net sales). The Americas seg- ment has a 32% operating income margin. This type of graphic can raise questions about the profitability of each segment and lead to discussion of further expansions into more profitable segments. For example, the Japan segment has an operating margin of 46%. A natural question for management is what potential is there to expand sales into the Japan segment and maintain

Cost of sales 61.5%

Selling, general, administrative,

and other income 6.7%

Research and development

5.1%

Income taxes 6.9%

Net income, excluding non-

operating income and expenses

19.8%

EXHIBIT 13.10 Common-Size Graphic of Income Statement

N et

S al

es (i

n bi

l.)

$0

$20

$40

$100

$80

$60

35%46%30%32%

$15.2$17.7

$54.9

$96.6

38%

$44.8

Americas Europe China Japan Asia Pacific

Segment percentages based on: Operating income/Net sales

EXHIBIT 13.11 Sales and Operating Income Margin Breakdown by Segment

APPLE INC. Common-Size Comparative Income Statements

Common-Size Percents* $ millions Current Yr Prior Yr Current Yr Prior Yr

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229,234 $215,639 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,048 131,376 61.5 60.9 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,186 84,263 38.5 39.1 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,581 10,045 5.1 4.7 Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . 15,261 14,194 6.7 6.6 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,842 24,239 11.7 11.2 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,344 60,024 26.8 27.8 Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,745 1,348 1.2 0.6 Income before provision for income taxes . . . . . . . . . . . . . . . . 64,089 61,372 28.0 28.5 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,738 15,685 6.9 7.3 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,351 $ 45,687 21.1% 21.2%

*Percents are rounded to tenths and thus may not exactly sum to totals and subtotals.

wiL47856_ch13_496-533.indd 504 9/22/18 3:23 PM

504 Chapter 13 Analysis of Financial Statements

EXHIBIT 13.9 Common-Size Comparative Income Statements

APPLE

as representing one sales dollar, the remaining items show how each revenue dollar is distrib- uted among costs, expenses, and income.

Exhibit 13.9 shows common-size comparative income statements for each dollar of Apple’s net sales. The past two years’ common-size numbers are similar with two exceptions. One is the increase of 0.4 cents in research and development costs, which can be a positive development if these costs lead to future revenues. Another is the increase in cost of sales of 0.6 cent and increase in selling, general and administrative costs of 0.1 cent. We must monitor the growth in these expenses.

Common-Size Graphics Exhibit 13.10 is a graphic of Apple’s current-year common-size income statement. This pie chart shows the contribution of each cost component of net sales for net income.

Exhibit 13.11 takes data from Apple’s Segments footnote. The exhibit shows the level of net sales for each of Apple’s five operating seg- ments. Its Americas segment gener-

ates $96.6 billion net sales, which is roughly 42% of its total sales. Within each bar is that segment’s operating income margin (Operating income/Segment net sales). The Americas seg- ment has a 32% operating income margin. This type of graphic can raise questions about the profitability of each segment and lead to discussion of further expansions into more profitable segments. For example, the Japan segment has an operating margin of 46%. A natural question for management is what potential is there to expand sales into the Japan segment and maintain

Cost of sales 61.5%

Selling, general, administrative,

and other income 6.7%

Research and development

5.1%

Income taxes 6.9%

Net income, excluding non-

operating income and expenses

19.8%

EXHIBIT 13.10 Common-Size Graphic of Income Statement

N et

S al

es (i

n bi

l.)

$0

$20

$40

$100

$80

$60

35%46%30%32%

$15.2$17.7

$54.9

$96.6

38%

$44.8

Americas Europe China Japan Asia Pacific

Segment percentages based on: Operating income/Net sales

EXHIBIT 13.11 Sales and Operating Income Margin Breakdown by Segment

APPLE INC. Common-Size Comparative Income Statements

Common-Size Percents* $ millions Current Yr Prior Yr Current Yr Prior Yr

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229,234 $215,639 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,048 131,376 61.5 60.9 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,186 84,263 38.5 39.1 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,581 10,045 5.1 4.7 Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . 15,261 14,194 6.7 6.6 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,842 24,239 11.7 11.2 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,344 60,024 26.8 27.8 Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,745 1,348 1.2 0.6 Income before provision for income taxes . . . . . . . . . . . . . . . . 64,089 61,372 28.0 28.5 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,738 15,685 6.9 7.3 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,351 $ 45,687 21.1% 21.2%

*Percents are rounded to tenths and thus may not exactly sum to totals and subtotals.

wiL47856_ch13_496-533.indd 504 9/22/18 3:23 PM

Difference Makers in Teaching . . . Driving Decisions Whether we prepare, analyze, or apply accounting infor- mation, one skill remains essential: decision making. To help develop good decision-making habits and to show the relevance of accounting, we use a learning framework. •   Decision Insight provides context for business decisions. •   Decision Ethics and Decision Maker are role-playing

scenarios that show the relevance of accounting. •   Decision Analysis provides key tools to assess company

performance.

260 Chapter 7 Accounting Information Systems

The five components of accounting systems are source documents, input devices, information processors, information storage, and output devices. These components apply whether a system is computerized or manual. Exhibit 7.2 shows these components.

SYSTEM COMPONENTS Point: Computerized systems provide more accuracy and speed than manual.

Output Devices

Source Document

Input Devices

Information Processor

Information Storage

Cloud Storage

AppleApple

EXHIBIT 7.2 Accounting System Components

Source Documents Source documents provide the information processed by an ac- counting system. Examples include bank statements and checks, invoices from suppliers, cus- tomer bills, sales receipts, and employee earnings records. Accurate source documents are crucial to accounting information systems. Input of wrong information damages the reliability of the information system.

Input Devices Input devices take information from source documents and transfer it to information processing. These devices convert data on source documents to a form usable by the system. Journal entries are a type of input device. Keyboards and scanners are the most com- mon input devices in business.

Information Processors Information processors summarize information for use in analysis and reporting. An information processor includes journals, ledgers, working papers, and posting procedures. Each assists in transforming raw data to useful information.

Information Storage Information storage keeps data accessible to information pro- cessors. After being input and processed, data are stored for use in future analyses and reports. Auditors rely on this database when they audit both financial statements and a company’s con- trols. Modern systems depend increasingly on cloud storage.

Output Devices Output devices make accounting information available to users. Common output devices are printers, monitors, and smartphones. Output devices provide users a variety of items including customer bills, financial statements, and internal reports.

Point: Control procedures limit the possibility of entering wrong data.

Point: Controls ensure that only authorized individuals input data into the system.

©Amble Design/Shutterstock

Match each of the numbered descriptions with the principle, component, or descriptor that it best reflects. Indicate your answer by entering the letter A through J in the blank provided.

System Principles and Components

NEED-TO-KNOW 7-1

C1

A. Control principle B. Relevance principle C. Compatibility principle D. Flexibility principle

E. Cost-benefit principle F. Source documents G. Input devices H. Information processors

I. Information storage J. Output devices

System’s Fine Print Nintendo’s stock increased greatly after the huge success of Pokémon Go. However, few investors read Nintendo’s disclosures that said it owned less than one-third of the company that developed the app. When investors realized this, the stock dropped 17%, representing over $6 billion in value. ■

Decision Insight

©Eric Audras/Getty Images

the benefits of producing a specific report must outweigh the costs of time and effort to produce that report. Decisions regarding other system principles (control, relevance, compatibility, and flexibility) are also affected by the cost-benefit principle.

wiL16960_ch07_258-289.indd 260 8/1/18 1:04 PM

When a buyer is responsible for paying transportation costs, the payment is made to a carrier or directly to the seller. The cost principle requires that transportation costs of a buyer (often called transportation-in or freight-in) be part of the cost of merchandise inventory. Z-Mart’s entry to record a $75 freight charge from UPS for merchandise purchased FOB shipping point is

Point: If we place an order online and receive free shipping, we have terms FOB destination.

(d) Nov . 24 Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Paid freight costs on goods.

Assets = Liabilities + Equity +75 −75

When a seller is responsible for paying shipping costs, it records these costs in a Delivery Expense account. Delivery expense, also called transportation-out or freight-out, is reported as a selling expense in the seller’s income statement.

Itemized Costs of Purchases In summary, purchases are recorded as debits to Merchandise Inventory (or Inventory). Purchases discounts, returns, and allowances are credited to (subtracted from) Merchandise Inventory. Transportation-in is debited (added) to Merchandise Inventory. Z-Mart’s itemized costs of merchandise purchases for the year are in Exhibit 5.8.

The accounting system described here does not provide separate records (accounts) for total purchases, total pur- chases discounts, total purchases returns and allowances, and total transportation-in. Many companies collect this information in supple- mentary records to evaluate these costs. Supplementary records, or supplemental records, refer to information outside the usual ledger accounts.

Point: INcoming freight costs are charged to INventory. When inventory EXits, freight costs are charged to EXpense.

Itemized Costs of Merchandise Purchases

Invoice cost of merchandise purchases . . . . . . . . . $ 235,800

Less: Purchases discounts received . . . . . . . . . . . . (4,200)

Purchases returns and allowances . . . . . . . . . (1,500)

Add: Costs of transportation-in . . . . . . . . . . . . . . . . 2,300

Total net cost of merchandise purchases . . . . . . $232,400

EXHIBIT 5.8 Itemized Costs of Merchandise Purchases

Point: Some companies have separate accounts for purchases discounts, returns and allowances, and transportation-in. These accounts are then transferred to Merchandise Inventory at period- end. This is a hybrid system of perpetual and periodic. That is, Merchandise Inventory is updated on a perpetual basis but only for purchases and cost of goods sold.

Payables Manager As a new accounts payable manager, you are being trained by the outgoing manager. She explains that the system prepares checks for amounts net of favorable cash discounts, and the checks are dated the last day of the discount period. She tells you that checks are not mailed until five days later, adding that “the company gets free use of cash for an extra five days, and our department looks better.” Do you continue this policy? ■ Answer: One point of view is that the late payment policy is unethical. A deliberate plan to make late payments means the company lies when it pretends to make payment within the discount period. Another view is that the late payment policy is acceptable. Some believe attempts to take discounts through late payments are accepted as “price negotiation.”

Decision Ethics

Prepare journal entries to record each of the following purchases transactions of a merchandising com- pany. Assume a perpetual inventory system using the gross method for recording purchases.

Oct. 1 Purchased $1,000 of goods. Terms of the sale are 4∕10, n∕30, and FOB shipping point; the in- voice is dated October 1.

3 Paid $30 cash for freight charges from UPS for the October 1 purchase. 7 Returned $50 of the $1,000 of goods from the October 1 purchase and received full credit. 11 Paid the amount due from the October 1 purchase (less the return on October 7). 31 Assume the October 11 payment was never made. Instead, payment of the amount due, less the

return on October 7, occurred on October 31.

Solution

P1 Merchandise Purchases

NEED-TO-KNOW 5-2

Oct . 1 Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

Purchased goods, terms 4∕10, n∕30. Oct . 3 Merchandise Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Paid freight on purchases FOB shipping point.

[continued on next page]

wiL16960_ch05_166-213.indd 173 8/2/18 7:20 AM

Chapter 2 Analyzing and Recording Transactions 61

sheet lists its assets: cash, supplies, prepaid insurance, and equipment. The upper right side of the balance sheet shows that it owes $6,200 to creditors and $3,000 in services to customers who paid in advance. The equity section shows an ending capital balance of $33,195. Note the link between the ending balance of the statement of owner’s equity and the capital balance. (This presentation of the balance sheet is called the account form: assets on the left and liabili- ties and equity on the right. Another presentation is the report form: assets on top, followed by liabilities and then equity. Either presentation is acceptable.)

Entrepreneur You open a wholesale business selling entertainment equipment to retail outlets. Most of your cus- tomers want to buy on credit. How can you use the balance sheets of customers to decide which ones to extend credit to? ■ Answer: We use the accounting equation (Assets = Liabilities + Equity) to identify risky customers to whom we would not want to extend credit. A balance sheet provides amounts for each of these key components. The lower a customer’s equity is relative to liabilities, the less likely you would be to extend credit. A low equity means the business already has many creditor claims to it.

Decision Maker

©REDPIXEL.PL/Shutterstock

Presentation Issues Dollar signs are not used in journals and ledgers. They do appear in financial statements and other reports such as trial balances. We usually put dollar signs be- side only the first and last numbers in a column. Apple’s financial statements in Appendix A show this. Companies commonly round amounts in reports to the nearest dollar, or even to a higher level. Apple, like many large companies, rounds its financial statement amounts to the nearest million. This decision is based on the impact of rounding for users’ decisions.

Prepare a trial balance for Apple using the following condensed data from its recent fiscal year ended September 30 ($ in millions).

Preparing Trial Balance

NEED-TO-KNOW 2-4

P2Owner, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . $128,249 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 49,049

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 192,223

Cost of sales (and other expenses) . . . . . . . . . . 141,048

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,289

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,234

Owner, Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,553

Investments and other assets. . . . . . . . . . . . . . . . . . 303,373

Land and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 33,783

Selling and other expense . . . . . . . . . . . . . . . . . . . . 39,835

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 17,874

Solution ($ in millions)

APPLE Trial Balance

September 30

Do More: E 2-8, E 2-10

APPLE

Debit Credit

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,289

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,874

Land and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,783

Investments and other assets . . . . . . . . . . . . . . . . . . . . . . 303,373

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,049

Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,223

Owner, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,249

Owner, Withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,553

Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,234

Cost of sales (and other expenses) . . . . . . . . . . . . . . . . . . 141,048

Selling and other expense . . . . . . . . . . . . . . . . . . . . . . . . . 39,835

Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $598,755 $598,755

wiL16960_ch02_044-083.indd 61 5/3/18 2:15 PM

It is important to assess a company’s risk of failing to pay its debts. Companies finance their assets with either liabilities or equity. A company that finances a relatively large portion of its assets with liabilities is said to have higher financial leverage. Higher financial leverage means greater risk because liabilities must be repaid and often require regular interest payments (equity financing does not). One measure of the risk associated with liabilities is the debt ratio as defined in Exhibit 2.17.

Costco’s total liabilities, total assets, and debt ratio for the past three years are shown in Exhibit 2.18. Costco’s debt ratio ranges from a low of 0.63 to a high of 0.70. Its ratio exceeds Walmart’s in each of the last three years, suggesting a higher than average risk from financial leverage. So, is financial leverage good or bad for Costco? The answer: If Costco is making more money with this debt than it is paying the lenders, then it is successfully borrowing money to make more money. A company’s use of debt can turn unprofitable quickly if its return from that money drops below the rate it is paying lenders.

This problem extends Need-To-Know 1-6 from Chapter 1: Jasmine Worthy started a haircutting business called Expressions. The following events occurred during its first month. a. Aug. 1 Worthy invested $3,000 cash and $15,000 of equipment in Expressions. b. 2 Expressions paid $600 cash for furniture for the shop. c. 3 Expressions paid $500 cash to rent space in a strip mall for August. d. 4 Expressions purchased $1,200 of equipment on credit for the shop (recorded as accounts

payable). e. 15 Expressions opened for business on August 5. Cash received from haircutting services in the

first week and a half of business (ended August 15) was $825. f. 16 Expressions provided $100 of haircutting services on account. g. 17 Expressions received a $100 check for services previously rendered on account. h. 18 Expressions paid $125 to an assistant for hours worked for the grand opening. i. 31 Cash received from services provided during the second half of August was $930. j. 31 Expressions paid $400 cash toward the account payable entered into on August 4. k. 31 Worthy made a $900 cash withdrawal from the company for personal use.

Required

1. Open the following ledger accounts in balance column format (account numbers are in parentheses): Cash (101); Accounts Receivable (102); Furniture (161); Store Equipment (165); Accounts Payable (201); J. Worthy, Capital (301); J. Worthy, Withdrawals (302); Haircutting Services Revenue (403); Wages Expense (623); and Rent Expense (640). Prepare general journal entries for the transactions.

COMPREHENSIVE

Journalizing and Posting Transactions, Statement Preparation, and Debt Ratio

NEED-TO-KNOW 2-5

EXHIBIT 2.17 Debt Ratio Debt ratio =

Total liabilities Total assets

62 Chapter 2 Analyzing and Recording Transactions

A2 Compute the debt ratio and describe its use in analyzing financial condition.

Debt RatioDecision Analysis

Investor You consider buying stock in Converse. As part of your analysis, you compute the company’s debt ratio for 2017, 2018, and 2019 as 0.35, 0.74, and 0.94, respectively. Based on the debt ratio, is Converse a low-risk investment? Has the risk of buying Converse stock changed over this period? (The industry debt ratio averages 0.40.) ■ Answer: The debt ratio suggests that Converse’s stock is of higher risk than normal and that this risk is rising. The average industry ratio of 0.40 supports this conclusion. The 2019 debt ratio for Converse is twice the industry norm. Also, a debt ratio approaching 1.0 indicates little to no equity.

Decision Maker

EXHIBIT 2.18 Computation and Analysis of Debt Ratio

Company $ millions Current Year 1 Year Ago 2 Years Ago

Costco Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $25,268 $20,831 $22,174 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,347 $33,163 $33,017 Debt ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.70 0.63 0.67 Walmart Debt ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 .59 0 .58 0 .58

wiL16960_ch02_044-083.indd 62 7/12/18 5:20 AM

Accounting Analytics New to this edition, Accounting Analysis  assignments have students evaluate the most current financial statements from Apple, Google, and Samsung. Students  compute key metrics and compare perfor- mance between companies and industry. These assignments are auto-gradable in Connect and are included after Problem  Set B in the text.

Chapter 7 Accounting for Receivables 299

Required

1. Prepare the adjusting entry to record bad debts expense on March 31, 2020, under each separate assumption. There is a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31.

a. Bad debts are estimated to be 1% of total revenues. b. Bad debts are estimated to be 2% of accounts receivable. (Round to the dollar.) 2. Assume that Business Solutions’s Accounts Receivable balance at June 30, 2020, is $20,250 and that

one account of $100 has been written off against the Allowance for Doubtful Accounts since March 31, 2020. If Rey uses the method in part 1b, what adjusting journal entry is made to recognize bad debts expense on June 30, 2020?

3. Should Rey consider adopting the direct write-off method of accounting for bad debts expense rather than one of the allowance methods considered in part 1? Explain. ©Alexander Image/Shutterstock

Check (2) Dr. Bad Debts Expense, $48

GENERAL LEDGER PROBLEM

The General Ledger tool in Connect automates several of the procedural steps in accounting so that the financial professional can focus on the impacts of each transaction on various financial reports and perfor- mance measures.

GL 7-1 General Ledger assignment GL 7-1, based on Problem 7-5A, focuses on transactions related to accounts and notes receivable and highlights the impact each transaction has on interest revenue.

GL

COMPANY ANALYSIS A1

Accounting Analysis

AA 7-1 Use Apple’s financial statements in Appendix A to answer the following. 1. What is the amount of Apple’s accounts receivable as of September 30, 2017? 2. Compute Apple’s accounts receivable turnover as of September 30, 2017. 3. How long does it take, on average, for the company to collect receivables for the fiscal year ended

September 30, 2017? 4. Apple’s most liquid assets include (a) cash and cash equivalents, (b) short-term marketable securities,

(c) accounts receivable, and (d ) inventory. Compute the percentage that these liquid assets (in total) make up of current liabilities as of September 30, 2017, and as of September 24, 2016.

5. Did Apple’s liquid assets as a percentage of current liabilities improve or worsen as of its fiscal 2017 year-end compared to its fiscal 2016 year-end?

APPLE

AA 7-2 Comparative figures for Apple and Google follow.

Apple Google

Current One Year Two Years Current One Year Two Years $ millions Year Prior Prior Year Prior Prior

Accounts receivable, net . . $ 17,874 $ 15,754 $ 16,849 $ 18,336 $14,137 $11,556

Net sales . . . . . . . . . . . . . . . 229,234 215,639 233,715 110,855 90,272 74,989

COMPARATIVE ANALYSIS A1 P2

APPLE GOOGLE

Required

1. Compute the accounts receivable turnover for (a) Apple and (b) Google for each of the two most recent years using the data shown.

2. Compute how many days, on average, it takes to collect receivables for the two most recent years for (a) Apple and (b) Google.

3. Which company more quickly collects its accounts receivable in the current year?

Hint: Average collection period equals 365 divided by the accounts receivable turnover.

wiL47856_ch07_270-301.indd 299 9/21/18 10:06 AM

Keep It Real Research shows that students learn best when using current data from real companies. Wild uses  the most current data from real companies for assignments, examples, and analysis in the text. See  Chapter 13 for use of real data.

APPLE

Samsung GOOGLE

504 Chapter 13 Analysis of Financial Statements

EXHIBIT 13.9 Common-Size Comparative Income Statements

APPLE

as representing one sales dollar, the remaining items show how each revenue dollar is distrib- uted among costs, expenses, and income.

Exhibit 13.9 shows common-size comparative income statements for each dollar of Apple’s net sales. The past two years’ common-size numbers are similar with two exceptions. One is the increase of 0.4 cents in research and development costs, which can be a positive development if these costs lead to future revenues. Another is the increase in cost of sales of 0.6 cent and increase in selling, general and administrative costs of 0.1 cent. We must monitor the growth in these expenses.

Common-Size Graphics Exhibit 13.10 is a graphic of Apple’s current-year common-size income statement. This pie chart shows the contribution of each cost component of net sales for net income.

Exhibit 13.11 takes data from Apple’s Segments footnote. The exhibit shows the level of net sales for each of Apple’s five operating seg- ments. Its Americas segment gener-

ates $96.6 billion net sales, which is roughly 42% of its total sales. Within each bar is that segment’s operating income margin (Operating income/Segment net sales). The Americas seg- ment has a 32% operating income margin. This type of graphic can raise questions about the profitability of each segment and lead to discussion of further expansions into more profitable segments. For example, the Japan segment has an operating margin of 46%. A natural question for management is what potential is there to expand sales into the Japan segment and maintain

Cost of sales 61.5%

Selling, general, administrative,

and other income 6.7%

Research and development

5.1%

Income taxes 6.9%

Net income, excluding non-

operating income and expenses

19.8%

EXHIBIT 13.10 Common-Size Graphic of Income Statement

N et

S al

es (i

n bi

l.)

$0

$20

$40

$100

$80

$60

35%46%30%32%

$15.2$17.7

$54.9

$96.6

38%

$44.8

Americas Europe China Japan Asia Pacific

Segment percentages based on: Operating income/Net sales

EXHIBIT 13.11 Sales and Operating Income Margin Breakdown by Segment

APPLE INC. Common-Size Comparative Income Statements

Common-Size Percents* $ millions Current Yr Prior Yr Current Yr Prior Yr

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229,234 $215,639 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,048 131,376 61.5 60.9 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,186 84,263 38.5 39.1 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,581 10,045 5.1 4.7 Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . 15,261 14,194 6.7 6.6 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,842 24,239 11.7 11.2 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,344 60,024 26.8 27.8 Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,745 1,348 1.2 0.6 Income before provision for income taxes . . . . . . . . . . . . . . . . 64,089 61,372 28.0 28.5 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,738 15,685 6.9 7.3 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,351 $ 45,687 21.1% 21.2%

*Percents are rounded to tenths and thus may not exactly sum to totals and subtotals.

wiL47856_ch13_496-533.indd 504 9/22/18 3:23 PM

504 Chapter 13 Analysis of Financial Statements

EXHIBIT 13.9 Common-Size Comparative Income Statements

APPLE

as representing one sales dollar, the remaining items show how each revenue dollar is distrib- uted among costs, expenses, and income.

Exhibit 13.9 shows common-size comparative income statements for each dollar of Apple’s net sales. The past two years’ common-size numbers are similar with two exceptions. One is the increase of 0.4 cents in research and development costs, which can be a positive development if these costs lead to future revenues. Another is the increase in cost of sales of 0.6 cent and increase in selling, general and administrative costs of 0.1 cent. We must monitor the growth in these expenses.

Common-Size Graphics Exhibit 13.10 is a graphic of Apple’s current-year common-size income statement. This pie chart shows the contribution of each cost component of net sales for net income.

Exhibit 13.11 takes data from Apple’s Segments footnote. The exhibit shows the level of net sales for each of Apple’s five operating seg- ments. Its Americas segment gener-

ates $96.6 billion net sales, which is roughly 42% of its total sales. Within each bar is that segment’s operating income margin (Operating income/Segment net sales). The Americas seg- ment has a 32% operating income margin. This type of graphic can raise questions about the profitability of each segment and lead to discussion of further expansions into more profitable segments. For example, the Japan segment has an operating margin of 46%. A natural question for management is what potential is there to expand sales into the Japan segment and maintain

Cost of sales 61.5%

Selling, general, administrative,

and other income 6.7%

Research and development

5.1%

Income taxes 6.9%

Net income, excluding non-

operating income and expenses

19.8%

EXHIBIT 13.10 Common-Size Graphic of Income Statement

N et

S al

es (i

n bi

l.)

$0

$20

$40

$100

$80

$60

35%46%30%32%

$15.2$17.7

$54.9

$96.6

38%

$44.8

Americas Europe China Japan Asia Pacific

Segment percentages based on: Operating income/Net sales

EXHIBIT 13.11 Sales and Operating Income Margin Breakdown by Segment

APPLE INC. Common-Size Comparative Income Statements

Common-Size Percents* $ millions Current Yr Prior Yr Current Yr Prior Yr

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $229,234 $215,639 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,048 131,376 61.5 60.9 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88,186 84,263 38.5 39.1 Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,581 10,045 5.1 4.7 Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . 15,261 14,194 6.7 6.6 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,842 24,239 11.7 11.2 Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,344 60,024 26.8 27.8 Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,745 1,348 1.2 0.6 Income before provision for income taxes . . . . . . . . . . . . . . . . 64,089 61,372 28.0 28.5 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,738 15,685 6.9 7.3 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48,351 $ 45,687 21.1% 21.2%

*Percents are rounded to tenths and thus may not exactly sum to totals and subtotals.

wiL47856_ch13_496-533.indd 504 9/22/18 3:23 PM

vii

852 Chapter 21 Flexible Budgets and Standard Costs

Refer to the information in QS 21-14. Compute the overhead volume variance for November and classify it as favorable or unfavorable.

QS 21-15 Volume variance P4

Alvarez Company’s output for the current period yields a $20,000 favorable overhead volume variance and a $60,400 unfavorable overhead controllable variance. Standard overhead applied to production for the period is $225,000. What is the actual total overhead cost incurred for the period?

QS 21-16 Overhead cost variances

P4

Refer to the information in QS 21-16. Alvarez records standard costs in its accounts. Prepare the journal entry to charge overhead costs to the Work in Process Inventory account and to record any variances.

QS 21-17A Preparing overhead entries

P6

Refer to the information from QS 21-18. Compute the variable overhead spending variance and the vari- able overhead efficiency variance and classify each as favorable or unfavorable.

QS 21-19A Overhead spending and efficiency variances P5

Farad, Inc., specializes in selling used trucks. During the month, Farad sold 50 trucks at an average price of $9,000 each. The budget for the month was to sell 45 trucks at an average price of $9,500 each. Compute the dealership’s sales price variance and sales volume variance for the month and classify each as favor- able or unfavorable.

QS 21-20 Computing sales price and volume variances A1

AirPro Corp. reports the following for November. Compute the total overhead variance and controllable overhead variance for November and classify each as favorable or unfavorable.

QS 21-14 Controllable overhead variance

P4 Actual total factory overhead incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28,175 Standard factory overhead:

Variable overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3 .10 per unit produced

Fixed overhead ($12,000∕12,000 predicted units to be produced) . . . . $1 per unit Predicted units to produce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 units

Actual units produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,800 units

QS 21-18A Total variable overhead cost variance

P5

Mosaic Company applies overhead using machine hours and reports the following information. Compute the total variable overhead cost variance and classify it as favorable or unfavorable.

Actual machine hours used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,700 hours

Standard machine hours (for actual production) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 hours

Actual variable overhead rate per hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4 .15

Standard variable overhead rate per hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4 .00

In a recent year, BMW sold 182,158 of its 1 Series cars. Assume the company expected to sell 191,158 of these cars during the year. Also assume the budgeted sales price for each car was $30,000 and the actual sales price for each car was $30,200. Compute the sales price variance and the sales volume variance.

QS 21-21 Sales variances A1

MM Co. uses corrugated cardboard to ship its product to customers. Management believes it has found a more efficient way to package its products and use less cardboard. This new approach will reduce shipping costs from $10.00 per shipment to $9.25 per shipment. (1) If the company forecasts 1,200 shipments this year, what amount of total direct materials costs would appear on the shipping depart- ment’s flexible budget? (2) How much is this sustainability improvement predicted to save in direct materials costs for this coming year?

QS 21-22 Sustainability and standard costs

P1

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Doing What’s Right Companies increasingly issue sustainability reports, and accountants are being asked to prepare, analyze, and audit them.  Wild includes brief sections in the managerial chapters. This material focuses on the importance of sustainability within the  context of accounting, including standards from the Sustainability Accounting Standards Board (SASB). Sustainability assign- ments cover chapter material with a social responsibility twist.

Chapter 18 Managerial Accounting Concepts and Principles 667

Value Chain The value chain refers to the series of activities that add value to a company’s products or services. Exhibit 18.18 illustrates a possible value chain for a retail cookie company. Companies can use lean practices across the value chain to increase efficiency and profits.

Acquire raw materials Baking Sales Service

EXHIBIT 18.18 Typical Value Chain (cookie retailer)

How Lean Principles Impact the Value Chain Adopting lean principles can be challenging because systems and procedures that a company follows must be realigned. Managerial account- ing has an important role in providing accurate cost and performance information. Developing such a system is important to measuring the “value” provided to customers. The price that cus- tomers pay for acquiring goods and services is a key determinant of value. In turn, the costs a company incurs are key determinants of price.

Corporate Social Responsibility In addition to maximizing shareholder value, cor- porations must consider the demands of other stakeholders, including employees, suppliers, and society in general. Corporate social responsibility (CSR) is a concept that goes beyond fol- lowing the law. For example, to reduce its impact on the environment, Three Twins Ice Cream uses only cups and spoons made from organic ingredients. United By Blue, an apparel and jewelry company, removes one pound of trash from waterways for every product sold. Many companies extend the concept of CSR to include sustainability, which considers fu- ture generations when making business decisions.

Triple Bottom Line Triple bottom line focuses on three measures: financial (“profits”), social (“people”), and environmental (“planet”). Adopting a triple bottom line impacts how businesses report. In response to a growing trend of such reporting, the Sustainability Accounting Standards Board (SASB) was established to develop report- ing standards for businesses’ sustainability activities. Some of the business sectors for which the SASB has developed reporting standards include health care, nonrenewable re- sources, and renewable resources and alternative energy.

Point: Companies like Microsoft, Google, and Walt Disney, ranked at the top of large multinational companies in terms of CSR, disclose CSR results on their websites.

Economic

EnvironmentalSo ci

al

Triple Bottom Line

Balanced Scorecard The balanced scorecard aids continuous improvement by augmenting financial measures with information on the “drivers” (indicators) of future financial performance along four dimensions: (1) financial—profitabil- ity and risk, (2) customer—value creation and product and service differentiation, (3) internal business processes— business activities that create customer and owner satisfaction, and (4) learning and growth— organizational change, innovation, and growth. ■

Decision Insight

In creating sustainability accounting standards, the Sustainability Accounting Standards Board (SASB) has created reporting guidelines. The SASB considers sustainability information as material if its disclosure would affect the views of equity investors on a company’s financial condition or operating performance.

Material information can vary across industries; for example, while environmental “planet” issues such as air quality, wastewater management, and biodiversity impacts are important for investments in companies in the nonrenewable resources sectors, such issues are likely not as important for investments in banks. In contrast, “people” issues such as diversity and inclusion, fair labor practices, and employee health are considered material for most sectors, particularly those that use considerable direct labor.

SUSTAINABILITY AND ACCOUNTING

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Cheat Sheets New to this edition, Cheat Sheets are provided at the end of each chapter. Cheat Sheets are roughly one page in length and  include key procedures, concepts, journal entries, and formulas.

194 Chapter 5 Accounting for Merchandising Operations

If the invoice is paid on (or before) November 12 within the discount period, it records

Gross Method—Periodic Net Method—Periodic

Accounts Payable . . . . . . . . . . . . 500 Accounts Payable . . . . . . . . . . . . . . . . 490

Purchases Discounts . . . . . 10

Cash . . . . . . . . . . . . . . . . . . 490 Cash . . . . . . . . . . . . . . . . . . . . . . 490

Gross Method—Periodic

Accounts Payable . . . . . . . . . . . . 500 Accounts Payable . . . . . . . . . . . . . . . . 490

Discounts Lost . . . . . . . . . . . . . . . . . . . 10

Cash . . . . . . . . . . . . . . . . . . 500 Cash . . . . . . . . . . . . . . . . . . . . . . 500

If the invoice is paid after the discount period, it records

SALES—Periodic For sales transactions, the perpetual and periodic entries are identical except that under the periodic system the cost-side entries are not made at the time of each sale nor for any subsequent returns. Instead, the cost of goods sold is computed at period-end based on a physical count of inventory. This entry is shown in Exhibit 5A.1.

APPENDIX

Work Sheet—Perpetual System5D This appendix along with assignments is available online.

MERCHANDISING ACTIVITIES Merchandise: Goods a company buys to resell. Cost of goods sold: Costs of merchandise sold. Gross profit (gross margin): Net sales minus cost of goods sold. Computing net income (service company vs. merchandiser):

EqualsMinusEqualsMinus Expenses Netincome

Net sales

Merchandiser

Expenses NetincomeRevenues

Service Company Minus Equals

Gross profit

Cost of goods sold

Inventory: Costs of merchandise owned, but not yet sold. It is a current asset on the balance sheet. Merchandise Cost Flows:

Net purchases

Merchandise available for sale

Cost of goods sold

Ending inventory

Beginning inventory

Perpetual inventory system: Updates accounting records for each pur- chase and each sale of inventory. Periodic inventory system: Updates accounting records for purchases and sales of inventory only at the end of a period.

Summary: Cheat Sheet

MERCHANDISING PURCHASES Cash discount: A purchases discount on the price paid by the buyer; or, a sales discount on amount received for the seller. Credit terms example: “2/10, n/60” means full payment is due within 60 days, but the buyer can deduct 2% of the invoice amount if payment is made within 10 days. Gross method: Initially record purchases at gross (full) invoice amounts. Purchasing Merchandise for Resale Entries:

Transportation Costs and Ownership Transfer Rules:

Purchasing merchandise Merchandise Inventory . . . . . . . . 500 on credit Accounts Payable . . . . . . . . 500

Paying within discount period Accounts Payable . . . . . . . . . . . . 500 (Inventory reduced by Merchandise Inventory . . . 10 discount taken) Cash . . . . . . . . . . . . . . . . . . 490

Paying outside discount Accounts Payable . . . . . . . . . . . . 500 period Cash . . . . . . . . . . . . . . . . . . 500

Recording purchases Cash or Accounts Payable . . . . . 30 returns or allowances Merchandise Inventory . . . 30

Ownership Transfers at

Goods in Transit Owned by

FOB shipping point Shipping point

Transportation Costs Paid byShipping Terms

FOB destination Destination

Buyer

Seller

Buyer Merchandise Inventory . . . # Cash . . . . . . . . . . . . . . . #

Seller Delivery Expense . . . . . . . . # Cash . . . . . . . . . . . . . . . . #

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SUPERIOR ASSIGNMENTS

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xii

Content Revisions Enhance Learning

Chapter 1 Updated opener—Apple and entrepreneurial assignment. Updated salary info for accountants. Revised business entity section along with adding LLC. Updated section on FASB objectives and accounting constraints. New layout for introducing the expanded accounting equation. New layout for introducing financial statements. Updated Apple numbers for NTK 1-5. New Cheat Sheet reinforces chapter content. Updated return on assets analysis using Nike and Under Armour. Added a new Exercise assignment and Quick Study assignment. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 2 NEW opener—Fitbit and entrepreneurial assignment. New visual for process to get from transactions to financial statements. New layout on four types of accounts that determine equity. Improved presentation of “Double-Entry System” section. Updated Apple data for NTK 2-4. Updated debt ratio analysis using Costco and Walmart. New Cheat Sheet reinforces chapter content. Added four new Quick Studies. Added three new Exercises. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 3 NEW opener—Snapchat and entrepreneurial assignment. Revised learning objectives and chapter preview—each type of adjusting entry is assigned its own learning objective. Updated “Recognizing Revenues and Expenses” section. New streamlined “Framework for Adjustments” section. Enhanced Exhibit 3.12 on summary of adjustments. Enhanced Exhibit 3.19 on steps of accounting cycle with images. Streamlined section on classified balance sheet. Updated profit margin analysis using Visa and Mastercard. Updated current ratio analysis using Costco and Walmart. Improved layouts for Exhibits 3A.1 through 3A.5. New Cheat Sheet reinforces chapter content. Added three new Quick Studies. Added two new Exercises. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 4 NEW opener—Build-A-Bear and entrepreneurial assignment. Updated introduction for servicers vs. merchandisers using Liberty Tax and Nordstrom. Revised NTK 4-1 covers basics of merchandising. Reorganized “Purchases” section to aid learning. New Decision Insight on growing number of returns for businesses. Enhanced entries on payment of purchases within discount period vs. after discount period. Improved discussion of entries for sales with discounts vs. sales without discounts. Color-coded Exhibit 4.12 highlights different merchandising transactions. Updated acid-test ratio and gross margin analysis using Nike and Under Armour. Appendix 4B explains adjusting entries for future sales discounts, returns, and allowances. Appendix 4C covers the net method. Appendix 4D moved to online only. New Cheat Sheet reinforces chapter content. Added three new Quick Studies. Added four new Exercises. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 5 NEW opener—Shake Shack and entrepreneurial assignment. New Ethical Risk on the alleged fraud of Homex. Simplified introduction to inventory costing. Shortened explanation for specific identification. Enhanced layout to explain effects of inventory errors across years. Updated inventory turnover and days’ sales in inventory analysis using Costco and Walmart. Added colored arrow lines to Exhibits 5A.3 and 5A.4 to show cost flows from purchases to sales. New Cheat Sheet reinforces chapter content. Added one new Quick Study. Added two new Exercises. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 6 NEW opener—Care.com and entrepreneurial assignment. New COSO framework to guide internal control, including COSO cube. New discussion of internal control failure at Amazon that cost customers $150 million. Simplified bank statement for learning. Revised “Bank Reconciliation” section to separate bank balance adjustments and book balance adjustments.

New summary image on adjustments for bank balance and for book balance. Removed collection expenses and NSF fees—most are immaterial and covered in advanced courses. Updated days’ sales uncollected analysis using Starbucks and Jack in the Box. New Cheat Sheet reinforces chapter content. Added three new Quick Studies. Added eight new Exercises. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 7 NEW opener—Facebook and entrepreneurial assignment. Updated company data in Exhibit 7.1. Streamlined direct write-off method. Enhanced Exhibit 7.6 showing allowances set aside for future bad debts along with journal entries. New calendar graphic added as learning aid with Exhibit 7.12. New Excel demo to compute maturity dates. Updated accounts receivable analysis using Visa and Mastercard. New Cheat Sheet reinforces chapter content. Added five new Quick Studies. Added one new Exercise. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 8 NEW opener—New Glarus Brewery and entrepreneurial assignment. Updated company data in Exhibit 8.1. Added entry with Exhibit 8.3 and Exhibit 8.4. Simplified “Partial-Year Depreciation” section. Added margin table to Exhibit 8.14 as a learning aid. New Decision Insight box on extraordinary repairs to SpaceX’s reusable orbital rocket. New simple introduction to finance leases and operating leases for the new standard. Updated asset turnover analysis using Starbucks and Jack in the Box. Simplified Appendix 8A by postponing exchanges without commercial substance to advanced courses. New Cheat Sheet reinforces chapter content. Added two new Quick Studies. Added one new Exercise. Added two new Problems. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

Chapter 9 NEW opener—Pandora and entrepreneurial assignment. Updated data in Exhibit 9.2. Streamlined “Short-Term Notes Payable” section. Simplified explanation of FICA taxes.

Updated payroll tax rates and explanations. Revised NTK 9-4. New W-4 form added to Appendix 9A. New Cheat Sheet reinforces chapter content. Added two new Quick Studies. Added four new Exercises. Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.