Table of Contents

Chapter 1 - The Need for Accounting Information. 1

The Accountancy Concept 1

Financial and Managerial Accounting. 2

Decisions Requiring Accounting Information. 3

The Structure of this Book. 4

Chapter 2 - Introduction to Accounting. 7

Accounting Frameworks. 7

Accounting Principles. 8

The Accounting Cycle. 9

Accounting Transactions. 10

Source Documents. 11

Double Entry Accounting. 11

The Ledger Concept 12

The General Ledger 13

Accounts Receivable Ledger 15

Purchase Ledger 15

Journal Entries. 16

Major Journal Entries. 17

The Accruals Concept 18

The Realization Concept 19

The Trial Balance. 19

Accrual Basis of Accounting. 20

Cash Basis of Accounting. 21

Chapter 3 - The Financial Statements. 24

The Income Statement 24

Income Statement Overview.. 24

The Single-Step Income Statement 27

The Multi-Step Income Statement 28

The Condensed Income Statement 28

The Contribution Margin Income Statement 29

The Multi-Period Income Statement 30

The Balance Sheet 31

Overview of the Balance Sheet 31

The Common Size Balance Sheet 34

The Comparative Balance Sheet 35

The Statement of Cash Flows. 36

Overview of the Statement of Cash Flows. 36

The Direct Method. 37

The Indirect Method. 38

The Statement of Retained Earnings. 39

Overview of the Statement of Retained Earnings. 39

Financial Statement Footnotes. 40

Consolidated Financial Statements. 41

Interim Financial Statements. 42

Pro Forma Financial Statements. 42

Financial Statement Audits, Reviews, and Compilations. 43

Chapter 4 - Interpretation of Financial Statements. 46

Interpretation of Financial Statements. 46

Horizontal Analysis. 47

Vertical Analysis. 49

Cash Coverage Ratio. 50

Current Ratio. 51

Quick Ratio. 52

Liquidity Index. 53

Accounts Payable Turnover Ratio. 54

Accounts Receivable Turnover Ratio. 55

Inventory Turnover Ratio. 56

Fixed Asset Turnover Ratio. 56

Sales to Working Capital Ratio. 57

Debt to Equity Ratio. 58

Fixed Charge Coverage. 59

Breakeven Point 59

Gross Profit Ratio. 60

Net Profit Ratio. 61

Return on Net Assets. 61

Return on Equity. 62

Limitations of Ratio Analysis. 64

Effect of the Number of Days in a Month. 65

Chapter 5 - Evaluation of Responsibility Centers. 69

Responsibility Reporting. 69

Functional Organizational Structure. 70

Divisional Organizational Structure. 71

The Structure of the Chart of Accounts. 73

Three-Digit Chart of Accounts. 73

Five-Digit Chart of Accounts. 75

Seven-Digit Chart of Accounts. 76

Responsibility Center Information Reporting. 79

Transfer Pricing. 81

Market Price Basis. 83

Adjusted Market Price Basis. 83

Negotiated Basis. 84

Contribution Margin Basis. 84

Cost Plus Basis. 85

Cost Anomalies in a Cost-Based Transfer Price. 85

Pricing Problems Caused by Transfer Pricing. 86

Tax Impact of Transfer Prices. 87

Accounting Issues Related to Responsibility Centers. 88

Chapter 6 - Overview of Selected Accounting Standards. 91

Accounting Changes and Error Corrections. 91

Advertising. 92

Capitalized Interest 93

Compensated Absences. 94

Contingencies. 95

Deferred Compensation. 96

Fixed Assets. 96

Inventory. 98

First In, First Out Method. 99

Last In, First Out Method. 101

Weighted Average Method. 102

Specific Identification Method. 103

Research and Development 103

Subsequent Events. 104

Stock-Based Compensation. 105

Taxes. 109

Chapter 7 - Sales and Marketing Decisions. 112

Contribution Margin. 112

Breakeven Point 113

Margin of Safety. 116

Cost-Volume-Profit Analysis. 117

Sales Mix. 119

Accounting Inputs to Price Formulation. 120

Cost Plus Pricing. 120

Time and Materials Pricing. 121

Breakeven Pricing. 123

Price Elasticity of Demand. 124

Cross Price Elasticity of Demand. 125

Non-Price Determinants of Demand. 126

Chapter 8 - Human Resources Decisions. 129

Payroll Cycles. 129

Time Tracking Issues. 131

Time Tracking Scope. 131

Employee Exclusions. 132

Data Collection Scope. 132

Payroll Deduction Issues. 133

Payroll Tax Remittance Issues. 134

Definition of an Employee. 137

Accrued Bonuses. 139

The Common Paymaster Rule. 139

Unemployment Insurance Issues. 140

The Employee Cost Object 143

The True Variability of Direct Labor. 144

Compensation Cost Reduction. 144

Proactive Hiring Solutions. 144

Temporary Cost Reductions. 145

Permanent Cost Reductions. 147

Chapter 9 - Investment Decisions. 150

The Investment Decision. 150

Payback Analysis. 151

Discounted Payback. 152

Accounting Rate of Return. 153

Time Value of Money. 154

Present and Future Value Tables. 155

Net Present Value. 157

Internal Rate of Return. 158

Incremental Internal Rate of Return. 159

Terminal Value. 160

Real Options. 160

Complex Systems Analysis. 161

Research and Development Funding Analysis. 162

Accounting Issues Related to Investment Decisions. 163

Impairment of Fixed Assets. 164

Impairment of Securities. 164

Impairment of Investments in Other Entities. 165

Chapter 10 - Acquisition Decisions. 169

Accounting Due Diligence. 169

Impact on Earnings per Share. 171

Tax Issues in an Acquisition. 172

Tax Issues for the Seller 172

Tax Issues for the Acquirer 172

Issues with Stock Purchases. 173

General IRS Requirements to Avoid Gain Recognition. 173

The Type A Acquisition. 174

The Type B Acquisition. 174

The Type C Acquisition. 175

The Type D Acquisition. 175

Triangular Mergers. 176

The Triangular Merger 176

The Reverse Triangular Merger 177

The Asset Acquisition. 177

Impact of the Acquiree Organizational Form.. 178

Summary of Legal Structures. 178

Accounting Integration. 179

Chapter 11 - Cost Accounting Tools and Concepts. 185

Direct Costing. 185

Direct Costing as a Managerial Tool 186

Automation Investments. 186

Cost Reporting. 187

Customer Profitability. 188

Profit-Volume Relationship. 189

Outsourcing. 190

Direct Costing Pitfalls. 191

The Problem With Overhead Allocation. 193

Activity-Based Costing. 196

Activity-Based Management 201

Chapter 12 - Target Costing. 207

The Basic Steps of Target Costing. 207

Value Engineering Considerations. 208

The Cost Reduction Program.. 209

The Milestone Review Process. 210

Problems with Target Costing. 210

The Members of a Design Team.. 211

The Role of Accounting in Target Costing. 211

Data Sources for Target Costing. 212

The Product Life Cycle and Target Costing. 213

Chapter 13 - Constraint Analysis. 216

Constraint Analysis Operational Terminology. 216

Overview of Constraint Analysis. 216

The Cost of the Bottleneck. 218

Local Optimization. 219

Constraint Analysis Financial Terminology. 220

Constraint Analysis from a Financial Perspective. 220

The Constraint Analysis Model 221

The Decision to Sell at a Lower Price. 223

The Decision to Outsource Production. 224

The Capital Investment Decision. 225

The Decision to Cancel a Product 227

Chapter 14 - Budgeting Concepts. 231

The System of Budgets. 231

The Reasons for Budget Iterations. 235

Overview of the Revenue Budget 235

The Ending Finished Goods Inventory Budget 238

The Production Budget 240

Production Budgeting for Multiple Products. 242

The Direct Materials Budget (Roll up Method) 242

The Direct Materials Budget (Historical Method) 244

The Direct Labor Budget 245

The Manufacturing Overhead Budget 246

The Sales and Marketing Budget 247

Diminishing Returns Analysis. 249

The Research and Development Budget 250

The Administration Budget 252

The Compensation Budget 254

The Budgeted Income Statement 257

The Budgeted Balance Sheet 258

The Financing Budget 264

Chapter 15 - Budgetary Control 269

General Reporting Format 269

Revenue Reporting. 271

Overview of Cost of Goods Sold Variance Reporting. 273

The Purchase Price Variance. 273

Material Yield Variance. 275

Labor Rate Variance. 276

Labor Efficiency Variance. 277

Variable Overhead Spending Variance. 277

Variable Overhead Efficiency Variance. 278

Fixed Overhead Spending Variance. 279

Problems with Variance Analysis. 280

Which Variances to Report 280

Answers to Chapter Questions. 283

Glossary. 310

Index. 313

 

Final Examination ....................................................................................................................................................319