Valley company’s adjusted trial balance on august 31, 2017, its fiscal year-end, follows.

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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s o l d

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

l e f t

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.