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xContentsWhat Is the Role of Adjusting Entries, and When Are TheyPrepared? 104How Do You Prepare a Merchandiser’s FinancialStatements? 176Accruing Revenues 105The Income Statement 176Accruing Expenses 106Statement of Retained Earnings 179Adjusting Deferred Revenues 107Balance Sheet 179Adjusting Deferred Expenses 108SUMMARY 183How Are Financial Statements Prepared from an AdjustedTrial Balance? 113The Adjusted Trial Balance 113ACCOUNTING PRACTICE 186APPLY YOUR KNOWLEDGE 209KNOW YOUR BUSINESS 209Preparing the Financial Statements 115How Does a Company Prepare for a New AccountingPeriod? 117Chapter 5InventoryCompleting the Accounting Cycle 117Three Closing Entries: Revenues, Expenses, and Dividends 118Business, Accounting, and You 212Post-Closing Trial Balance 120What Inventory Costing Methods Are Allowed? 213Summary of the Adjusting and Closing Processes 120Cost Flow versus Physical Flow of Inventory 214How Are the Four Inventory Costing Methods Applied? 216SUMMARY 123ACCOUNTING PRACTICE 125Inventory Cost Flows 216APPLY YOUR KNOWLEDGE 154Specific Identification Method 217KNOW YOUR BUSINESS 154First-In, First-Out (FIFO) Method 217COMPREHENSIVE PROBLEM 157Last-In, First-Out (LIFO) Method 219Average Cost Method 220Chapter 4Accounting for a Merchandising Business212Journalizing Inventory Transactions 221159What Effect Do the Different Costing Methods Have on NetIncome? 222Business, Accounting, and You 159What Else Determines How Inventory Is Valued? 224What Are the Relationships Among Manufacturers, Wholesalers, Retailers, and Customers? 160How Is Inventory Reported on a Balance Sheet? 225How Do Periodic and Perpetual Inventory SystemsDiffer? 160How Do Inventory Errors Affect Financial Statements? 226How Do You Account for the Purchase of Inventory? 161Cash and Credit Purchases 161Purchase Discounts 162Purchase Returns and Allowances 164How Do You Account for the Sale of Inventory? 165Cash Sales 165Inventory Shrinkage 226Is It Possible to Estimate the Value of Inventory If the InventoryIs Accidentally Destroyed? 228SUMMARY 231ACCOUNTING PRACTICE 233APPLY YOUR KNOWLEDGE 255KNOW YOUR BUSINESS 256COMPREHENSIVE PROBLEM 258Credit Sales 166Sales Discounts 167Sales Returns and Allowances 168Adjusting Entry to Record Estimated Returns and Allowances 169Sales Returns 169Sales Allowances 170How Do You Account for Freight Charges and Other SellingExpenses? 171Chapter 6The Challenges of Accounting: Standards, Internal Control, Audits,Fraud, and Ethics260Business, Accounting, and You 260What Are the Rules That Govern Accounting? 261Costs Related to the Receipt of Goods from Suppliers 172Understandable 261Costs Related to Delivering Goods to Customers 174Relevant 261Other Selling Costs 175Reliable 261A01 KEMP7790 05 SE FM.indd 1012/9/17 1:49 AM

ContentsGenerally Accepted Accounting Principles (GAAP) in theUnited States 262How Are Accounts Receivable Reported on the BalanceSheet? 311Generally Accepted Accounting Principles Around theWorld: IFRS 263How Do You Account for Notes Receivable? 311Identifying the Maturity Date 312Differences Between FASB and IFRS 263Origination of Notes Receivable 313What Is Internal Control? 265Computing Interest on a Note 313Elements of an Internal Control System 265Accruing Interest Revenue 314What Is Fraud, and Who Commits It? 268SUMMARY 318Management Fraud 268ACCOUNTING PRACTICE 320Employee Embezzlement 269APPLY YOUR KNOWLEDGE 346Factors Usually Present When Fraud Is Committed 269KNOW YOUR BUSINESS 347What Is a Certified Public Accountant (CPA)? 271Appendix 7A 349Audits 271What Is a Petty Cash Fund? 349External Auditor Responsibilities 272Setting Up a Petty Cash Fund 349What Are the Legal and Ethical Responsibilitiesof Accountants? 274Replenishing the Petty Cash Fund 350Legal Responsibilities of Accountants 274Changing the Petty Cash Fund 351Ethical Responsibilities of Accountants 275ACCOUNTING PRACTICE 352SUMMARY 278Chapter 8ACCOUNTING PRACTICE 280APPLY YOUR KNOWLEDGE 287Long-Term and Other AssetsKNOW YOUR BUSINESS 290Business, Accounting, and You 355293How Is the Cost of a Fixed Asset Calculated? 356Land and Land Improvements 357Business, Accounting, and You 293Buildings 358What Internal Control Procedures Should Be Usedfor Cash? 294Machinery and Equipment 358Furniture and Fixtures 359Internal Controls over Cash Receipts 294Lump-Sum (Basket) Purchase of Assets 359Internal Control over Cash Payments 295How Are Fixed Assets Depreciated? 360Purchase and Payment Processes 295Measuring Depreciation 361The Bank Reconciliation 296Depreciation Methods 362Preparing a Bank Reconciliation 297Comparing Depreciation Methods 365Online Banking 302Partial-Year Depreciation 366How Is Cash Reported on a Balance Sheet? 303Changing the Useful Life of a Depreciable Asset 367How Do You Account for Receivables? 303Using Fully Depreciated Assets 368Types of Receivables 303How Are Costs of Repairing Fixed Assets Recorded? 369Internal Control over Accounts Receivable 304Ordinary Repairs 369Accounting for Uncollectible Accounts Receivable 304Extraordinary Repairs 369How Do You Account for Uncollectible Accounts? 304Betterments 369The Direct Write-Off Method 304What Happens When a Fixed Asset Is Disposed? 370Direct Write-Off Method: Recovering Accounts Previously Written Off 305How Do You Account for Intangible Assets? 373The Allowance Method 305Specific Intangibles 373Estimating the Amount of Uncollectible Accounts 306Accounting for Research and Development Costs 375Writing Off Uncollectible Accounts Under the Allowance Method 309How Are Natural Resources Accounted For? 375Allowance Method: Recovering Accounts Previously Written Off 310What Are Other Assets? 376A01 KEMP7790 05 SE FM.indd 11355What Are the Different Types of Long-Term Assets? 356Chapter 7Cash and Receivablesxi12/9/17 1:49 AM

xiiContentsHow Are Long-Term Assets Reported on the Balance Sheet? 377Dividend Dates 460SUMMARY 380Declaring and Paying Dividends 461ACCOUNTING PRACTICE 382Dividing Dividends between Preferred and Common Shareholders 462APPLY YOUR KNOWLEDGE 402Dividends on Cumulative and Noncumulative Preferred Stock 463KNOW YOUR BUSINESS 403How Are Stock Dividends and Stock Splits AccountedFor? 464Chapter 9Current Liabilities andLong-Term DebtHow Are Cash Dividends Accounted For? 460Stock Dividends 464406Recording Stock Dividends 465Stock Splits 467Business, Accounting, and You 406What Are the Differences Among Known, Estimated, and Contingent Liabilities? 407Stock Dividends and Stock Splits Compared 469How Is Treasury Stock Accounted For? 469Treasury Stock Basics 469How Do You Account for Current Liabilities of aKnown Amount? 407Purchase of Treasury Stock 470Sale of Treasury Stock 470Accounts Payable 407Sales Tax Payable 409How Is Stockholders’ Equity Reported on the BalanceSheet? 473Accrued Expenses (Accrued Liabilities) 410SUMMARY 475Unearned Revenues 410ACCOUNTING PRACTICE 477Current Portion of Long-Term Debt 410APPLY YOUR KNOWLEDGE 501Notes Payable 408How Do You Account for Current Liabilities of anUncertain Amount? 411KNOW YOUR BUSINESS 502Estimated Warranty Liability 411Chapter 11Estimated Refund Liability 412How Do You Account for a Contingent Liability? 412The Statement of Cash FlowsHow Do You Account for Long-Term Debt? 413Business, Accounting, and You 504Notes Payable 413504What Is the Statement of Cash Flows? 505Bonds Payable 415How Does a Business Create a Statement of Cash Flows? 507Lease Liabilities 422How Are Liabilities Reported on the Balance Sheet? 423The Logic of How the Statement of Cash Flows Is Prepared 507SUMMARY 427Sources and Uses of Cash: Categorizing Changes as Operating, Investing,or Financing 508ACCOUNTING PRACTICE 429Statement of Cash Flows: Two Formats 510APPLY YOUR KNOWLEDGE 450How Is the Statement of Cash Flows Prepared Using the Indirect Method? 511KNOW YOUR BUSINESS 451Cash Flows from Operating Activities 513Chapter 10Corporations: Paid-In Capital andRetained EarningsCash Flows from Investing Activities 515454Business, Accounting, and You 454How Are Corporations Organized? 455What Makes Up the Stockholders’ Equity of a Corporation? 456Stockholders’ Rights 456Cash Flows from Financing Activities 517Net Change in Cash and Cash Balances 519Noncash Investing and Financing Activities 519How Is the Statement of Cash Flows Prepared Using theDirect Method? 522Cash Flows from Operating Activities 523Classes of Stock 457SUMMARY 529Par Value, Stated Value, and No-Par Stock 457ACCOUNTING PRACTICE 531How Is the Issuance of Stock Recorded? 458APPLY YOUR KNOWLEDGE 558Issuing Common Stock 458KNOW YOUR BUSINESS 559Issuing Preferred Stock 460COMPREHENSIVE PROBLEM 561A01 KEMP7790 05 SE FM.indd 1212/9/17 1:49 AM

ContentsChapter 12Financial Statement Analysis564Business, Accounting, and You 564What Is Financial Analysis? 565Step One: Understand a Business’s Model and Strategy 565Step Two: Understand the Environment in Which the BusinessOperates 566Step Three: Analyze the Content of the Financial Statements and OtherInformation, Making Adjustments If Desired 567Step Four: Analyze the Business’s Operations 567Step Five: Use the Financial Analysis to Make Decisions 568What Measures Does Someone Use to Analyze the Performance of a Business? 568Financial Analysis Techniques 569Vertical Analysis 571Horizontal Analysis 572Trend Percentages 574Question One: Is the Business a Going Concern? 574An Example: Bold City Brewery, Inc. 575Question Two: How Is the Business Earning a Net Income or Loss? 576How Do You Put Everything Together to MakeDecisions? 585Seeing the Impact of Decisions 587What Are Red Flags in Financial Statement Analysis? 587SUMMARY 590ACCOUNTING PRACTICE 592APPLY YOUR KNOWLEDGE 617KNOW YOUR BUSINESS 618Appendix AColumbia Sportswear Company AnnualReport 2016 to Shareholders621Appendix BTime Value of Money—Future and Present Value ConceptsFuture-Value Tables 698Future Value of an Annuity 699Present Value 700Present-Value Tables 701Question Three: Where Is the Business Getting Its Money? Can It Pay ItsDebt Obligations? 579Present Value of an Annuity 701Question Four: How Is the Business Investing Its Money? Is It Using ItsAssets Efficiently? 580An Example: Bold City Brewery, Inc. 581Question Five: Is the Business Generating Enough Net Income to Rewardthe Stockholders for the Use of Their Money? 582An Example: Bold City Brewery, Inc. 583A01 KEMP7790 05 SE FM.indd 13697Future Value 697An Example: Bold City Brewery, Inc. 578An Example: Bold City Brewery, Inc. 579xiiiACCOUNTING PRACTICE 703Appendix CFASB Update—Revenue Recognition 705Company Index 707Glindex 715Credits 73112/9/17 1:49 AM

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PrefaceChanges to This EditionChapter 1Business, Accounting, and You Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 2Analyzing and Recording Business Transactions Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 3Adjusting and Closing Entries Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 4Accounting for a Merchandising Business Fully integrated the new revenue recognition standard in text, exercises andproblems. Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem.xvA01 KEMP7790 05 SE FM.indd 1512/9/17 1:49 AM

xviPreface Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 5Inventory Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 6 The Challenges of Accounting: Standards, InternalControl, Audits, Fraud, and Ethics Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the auditor’s responsibilities with regard to auditing internal controls. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 7Cash and Receivables Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 8Long-Term and Other Assets Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.A01 KEMP7790 05 SE FM.indd 1612/9/17 1:49 AM

PrefaceChapter 9xviiCurrent Liabilities and Long-Term Debt Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 10Corporations: Paid-In Capital and Retained Earnings Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 11The Statement of Cash Flows Expanded the use of Bold City Brewery, a real-life successful entrepreneurial venture,to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.Chapter 12Financial Statement Analysis Expanded the use of the Bold City Brewery, a real-life successful entrepreneurial venture, to demonstrate the use and importance of accounting. Updated the “Try It!” problem. Updated the examples used in “How They Do It: A Look at Business.” Updated the Continuing Financial Statement Analysis Problem featuring Dick’sSporting Goods using the 2016 annual report. Updated end-of-chapter material related to Columbia Sportswear and UnderArmour using the 2016 annual reports.A01 KEMP7790 05 SE FM.indd 1712/9/17 1:49 AM

Solving Teaching and Learning ChallengesDear Colleagues,We are very excited about the newest edition of Kemp and Waybright’s Financial Accounting. Afteryou have had a chance to look at this edition’s changes, we think you will be as excited about our latestedition as we are.Practical Approach: Accounting from a Business PerspectiveAs has been our goal in past editions, the fifth edition of Financial Accounting is all about helping students learn. We believe the text and supporting materials tackle challenging topics in a pragmatic, easilyunderstood manner so that students understand not only accounting but its critical role in the businessworld. We want to help you help your students master the basic concepts of financial accounting andapply them to everyday business decisions.To help with this goal, we’ve focused the fifth edition on businesses to which students can better relate.First, we use Bold City Brewery—a successful, entrepreneurial business—to introduce, develop, anddemonstrate the topic of each chapter. We conclude each chapter by showing the importance of thechapter topic to Bold City Brewery and larger firms. Second, throughout the chapter and at the endof the chapter, we use examples and problems that reflect typical businesses that students encounter intheir real lives. This means smaller and more manageable numbers.Execution: Ensuring Student SuccessEvery feature in Financial Accounting is about helping you, the faculty, help your students achieve thisgoal. Based on our years of teaching, we believe we have created a complete package of instructionalmaterials using traditional and digital methods. For example, examine how each topic is introduced,explained, and demonstrated. Notice how students not only learn the topic, but also see how it is appliedin the real world. Moreover, the end-of-chapter exercises, problems, and cases, all prepared by us, createa progressive and appropriately challenging learning experience. Included in this edition are more than18 live examples so students can test their understanding of the relationship between the general journal,journal entries, and the impact on the accounting equation. These materials were all crafted carefully tohelp you ensure your students have more of those “I get it” moments.Assessment: Ensuring Your SuccessWe are first and foremost teachers. It’s our passion. We understand the challenges you face as teachers. For example, to assure continuity between the text and the assessments, we prepared the solutionsmanual and contributed to the algorithmic test bank, which we also checked for accuracy. In additionto these supplements, there are automatically graded homewor

accounting, including financial, managerial, computerized, and payroll accounting, as well as the disciplines of entrepreneurship, economics, business math, and general business. Mr. Waybright developed online courses in accounting, teaches online and traditional courses for financial and managerial