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Financial Accounting: In an Economic Context

Book Description

Grounded in financial statements, Financial Accounting allows accountants to see not only the impact of financial transactions in financial statements, but also the impact of transactions on overall business decisions. The eighth edition offers new elements designed to sharpen Pratt's economic decision-making foundation with a more timely, real-world focus. Up-to-date, expanded, and detailed IFRS coverage is now included. The SEC 2014 roadmap is explored in all chapters. Comprehensive coverage of real-world financial crisis issues is presented. Accountants will also find more discussions on the increasing role of management's assessment of internal controls over financial reporting.

Table of Contents

  1. Cover Page
  2. Title Page
  3. Copyright
  4. Brief Contents
  5. Contents
  6. Preface
    1. CONTINUING TO CHANGE THE WAY STUDENTS LEARN
    2. CONTINUING THE APPROACH
    3. SUCCESSFUL FEATURES RETAINED FROM PREVIOUS EDITIONS
    4. STUDENT LEARNING AIDS
    5. SUPPLEMENTS FOR THE INSTRUCTOR
  7. Acknowledgments
  8. About the Author
  9. PART 1: An Overview of Financial Accounting
    1. CHAPTER 1: Financial Accounting and Its Economic Context
      1. FINANCIAL REPORTING AND INVESTMENT DECISIONS
      2. THE DEMAND FOR FINANCIAL INFORMATION: A USER'S ORIENTATION
      3. THE ECONOMIC ENVIRONMENT IN WHICH FINANCIAL REPORTS ARE PREPARED AND USED
      4. CORPORATE GOVERNANCE
      5. INTERNATIONAL PERSPECTIVE: MOVEMENT TOWARD A SINGLE GLOBAL FINANCIAL REPORTING SYSTEM
      6. APPENDIX 1A
      7. SUMMARY OF KEY POINTS
      8. KEY TERMS
    2. CHAPTER 2: The Financial Statements
      1. CAPITAL FLOWS AND OPERATING, INVESTING, AND FINANCIAL ACTIVITIES
      2. THE CLASSIFIED BALANCE SHEET
      3. THE INCOME STATEMENT
      4. THE STATEMENT OF SHAREHOLDERS' EQUITY
      5. THE STATEMENT OF CASH FLOWS
      6. RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS
      7. INTERNATIONAL PERSPECTIVE: AN EXAMPLE OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
      8. REVIEW PROBLEM
      9. SUMMARY OF KEY POINTS
      10. KEY TERMS
      11. INTERNET RESEARCH EXERCISE
      12. BRIEF EXERCISES
      13. EXERCISES
      14. PROBLEMS
  10. PART 2: Measurement, Mechanics, and Use of Financial Statements
    1. CHAPTER 3: The Measurement Fundamentals of Financial Accounting
      1. ASSUMPTIONS OF FINANCIAL ACCOUNTING
      2. VALUATIONS ON THE BALANCE SHEET
      3. THE PRINCIPLES OF FINANCIAL ACCOUNTING MEASUREMENT
      4. TWO EXCEPTIONS TO THE BASIC PRINCIPLES: MATERIALITY AND CONSERVATISM
      5. INTERNATIONAL PERSPECTIVE: FUNDAMENTAL DIFFERENCES BETWEEN U.S. GAAP AND IFRS
      6. SUMMARY OF KEY POINTS
      7. KEY TERMS
    2. CHAPTER 4: The Mechanics of Financial Accounting
      1. ECONOMIC EVENTS
      2. THE FUNDAMENTAL ACCOUNTING EQUATION
      3. BUSINESS TRANSACTIONS, THE ACCOUNTING EQUATION, AND THE FINANCIAL STATEMENTS
      4. THE JOURNAL ENTRY
      5. RECOGNIZING GAINS AND LOSSES
      6. PERIODIC ADJUSTMENTS
      7. REPORTING DIFFICULTIES FACED BY MULTINATIONAL COMPANIES
      8. T-ACCOUNT ANALYSIS AND PREPARING THE STATEMENT OF CASH FLOWS
      9. OPERATING ITEMS
      10. REVIEW PROBLEM
      11. SUMMARY OF KEY POINTS
      12. KEY TERMS
    3. CHAPTER 5: Using Financial Statement Information
      1. CONTROL AND PREDICTION
      2. FRAMEWORK FOR USING FINANCIAL STATEMENTS TO PREDICT FUTURE EARNINGS AND CASH FLOWS
      3. ELEMENTS OF FINANCIAL STATEMENT ANALYSIS
      4. ASSESSING THE BUSINESS ENVIRONMENT
      5. READING AND STUDYING THE FINANCIAL STATEMENTS AND FOOTNOTES
      6. ASSESSING EARNINGS QUALITY
      7. ANALYZING THE FINANCIAL STATEMENTS
      8. PREDICT FUTURE EARNINGS AND/OR CASH FLOW
      9. ANNUAL REPORT INFORMATION AND PREDICTING STOCK PRICES
      10. INTERNATIONAL PERSPECTIVE: FINANCIAL STATEMENT ANALYSIS IN AN INTERNATIONAL SETTING
      11. SHAREHOLDER VALUE, ROE, AND CASH FLOW ANALYSES
      12. DETERMINANTS OF VALUE CREATION: ANALYZING RETURN ON EQUITY
      13. SHAREHOLDER VALUE CREATION AND THE ROE MODEL: JCPENNEY VS. KOHL'S
      14. CASH FLOW ANALYSIS
      15. CASH FLOW PROFILES
      16. PROJECTING FUTURE FINANCIAL STATEMENTS
      17. REVIEW PROBLEM
      18. SUMMARY OF KEY POINTS
      19. KEY TERMS
      20. PROBLEMS
  11. PART 3: Assets: A Closer Look
    1. CHAPTER 6: The Current Asset Classification, Cash, and Accounts Receivable
      1. THE CURRENT ASSET CLASSIFICATION
      2. CASH
      3. ACCOUNTS RECEIVABLE
      4. ACCOUNTS RECEIVABLE FROM A USER'S PERSPECTIVE
      5. INTERNATIONAL PERSPECTIVE: RECEIVABLES, FOREIGN CURRENCIES, AND HEDGING
      6. ROE EXERCISE: MANAGEMENT OF WORKING CAPITAL AND RECEIVABLES AND RETURN ON EQUITY
      7. REVIEW PROBLEM
      8. SUMMARY OF KEY POINTS
      9. KEY TERMS
      10. INTERNET RESEARCH EXERCISE
      11. BRIEF EXERCISES
      12. EXERCISES
      13. PROBLEMS
      14. ISSUES FOR DISCUSSION
    2. CHAPTER 7: Merchandise Inventory
      1. THE RELATIVE SIZE OF INVENTORIES
      2. ACCOUNTING FOR INVENTORY: FOUR IMPORTANT ISSUES
      3. ACQUIRING INVENTORY: WHAT COSTS TO CAPITALIZE?
      4. CARRYING INVENTORY: PERPETUAL METHOD
      5. SELLING INVENTORY: WHICH COST FLOW ASSUMPTION?
      6. ENDING INVENTORY: APPLYING THE LOWER-OF-COST-OR-MARKET RULE
      7. THE LOWER-OF-COST-OR-MARKET RULE AND HIDDEN RESERVES
      8. INTERNATIONAL PERSPECTIVE: JAPANESE BUSINESS AND INVENTORY ACCOUNTING
      9. ROE EXERCISE: MANAGEMENT OF INVENTORY AND RETURN ON EQUITY
      10. REVIEW PROBLEM
      11. SUMMARY OF KEY POINTS
      12. KEY TERMS
      13. INTERNET RESEARCH EXERCISE
      14. BRIEF EXERCISES
      15. EXERCISES
      16. PROBLEMS
      17. ISSUES FOR DISCUSSION
    3. CHAPTER 8: Investments in Equity Securities
      1. EQUITY SECURITIES CLASSIFIED AS CURRENT
      2. TRADING AND AVAILABLE-FOR-SALE SECURITIES
      3. LONG-TERM EQUITY INVESTMENTS
      4. ROE EXERCISE: MANAGING INVESTMENTS IN EQUITY SECURITIES AND RETURN ON EQUITY
      5. ROE ANALYSIS
      6. APPENDIX 8A
      7. CONSOLIDATED FINANCIAL STATEMENTS
      8. REVIEW PROBLEM I
      9. REVIEW PROBLEM II
      10. SUMMARY OF KEY POINTS
      11. KEY TERMS
      12. INTERNET RESEARCH EXERCISE
      13. BRIEF EXERCISES
      14. EXERCISES
      15. PROBLEMS
      16. ISSUES FOR DISCUSSION
    4. CHAPTER 9: Long-Lived Assets
      1. THE RELATIVE SIZE OF LONG-LIVED ASSETS
      2. LONG-LIVED ASSET ACCOUNTING: GENERAL ISSUES AND FINANCIAL STATEMENT EFFECTS
      3. AN OVERVIEW OF LONG-LIVED ASSET ACCOUNTING
      4. ACQUISITION: WHAT COSTS TO CAPITALIZE?
      5. POSTACQUISITION EXPENDITURES: BETTERMENTS OR MAINTENANCE?
      6. COST ALLOCATION: AMORTIZING CAPITALIZED COSTS
      7. DISPOSAL: RETIREMENTS, IMPAIRMENTS, SALES, AND TRADE-INS
      8. INTANGIBLE ASSETS
      9. COPYRIGHTS, PATENTS, AND TRADEMARKS
      10. THE COSTS OF DEVELOPING COMPUTER SOFTWARE
      11. GOODWILL
      12. ORGANIZATIONAL COSTS
      13. RESEARCH AND DEVELOPMENT COSTS
      14. IFRS VS. U.S. GAAP: REVALUATIONS TO FAIR MARKET VALUE
      15. ROE EXERCISE: MANAGING LONG-LIVED ASSETS AND RETURN ON EQUITY
      16. ROE ANALYSIS
      17. REVIEW PROBLEM
      18. SUMMARY OF KEY POINTS
      19. KEY TERMS
      20. INTERNET RESEARCH EXERCISE
      21. BRIEF EXERCISES
      22. EXERCISES
      23. PROBLEMS
      24. ISSUES FOR DISCUSSION
  12. PART 4: Liabilities and Shareholders' Equity: A Closer Look
    1. CHAPTER 10: Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies
      1. WHAT IS A LIABILITY?
      2. THE RELATIVE SIZE OF LIABILITIES ON THE BALANCE SHEET
      3. REPORTING LIABILITIES ON THE BALANCE SHEET: ECONOMIC CONSEQUENCES
      4. CURRENT LIABILITIES
      5. DETERMINABLE CURRENT LIABILITIES
      6. CONTINGENCIES AND CONTINGENT LIABILITIES
      7. PROVISIONS VS. CONTINGENT LIABILITIES: THE “DEVIL IS IN THE DETAILS”
      8. ROE EXERCISE: MANAGING CURRENT LIABILITIES
      9. ROE ANALYSIS
      10. APPENDIX 10A
      11. RETIREMENT COSTS: PENSIONS AND POSTRETIREMENT HEALTHCARE AND INSURANCE
      12. PENSIONS
      13. POSTRETIREMENT HEALTHCARE AND INSURANCE COSTS
      14. APPENDIX 10B
      15. DEFERRED INCOME TAXES
      16. THE CONCEPT OF DEFERRED INCOME TAXES
      17. ACCOUNTING ENTRIES FOR DEFERRED INCOME TAXES
      18. DEFERRED INCOME TAXES: ADDITIONAL ISSUES
      19. THE CONSERVATISM RATIO
      20. REVIEW PROBLEM
      21. SUMMARY OF KEY POINTS
      22. KEY TERMS
    2. CHAPTER 11: Long-Term Liabilities: Notes, Bonds, and Leases
      1. THE RELATIVE SIZE OF LONG-TERM LIABILITIES
      2. THE ECONOMIC CONSEQUENCES OF REPORTING LONG-TERM LIABILITIES
      3. BASIC DEFINITIONS AND DIFFERENT CONTRACTUAL FORMS
      4. EFFECTIVE INTEREST RATE
      5. ACCOUNTING FOR LONG-TERM OBLIGATIONS: THE EFFECTIVE INTEREST METHOD
      6. ACCOUNTING FOR LONG-TERM NOTES PAYABLE
      7. BONDS PAYABLE
      8. FINANCIAL INSTRUMENTS, FAIR MARKET VALUES, AND OFF-BALANCE SHEET RISKS
      9. LEASES
      10. INTERNATIONAL PERSPECTIVE: THE IMPORTANCE L OF DEBT FINANCING IN OTHER COUNTRIES
      11. ROE EXERCISE: MANAGING LONG-TERM DEBT
      12. ROE ANALYSIS
      13. APPENDIX 11A
      14. THE DETERMINATION OF BOND PRICES
      15. APPENDIX 11B
      16. INVESTING IN BONDS
      17. APPENDIX 11C
      18. INTEREST RATE SWAPS AND HEDGING
      19. REVIEW PROBLEM
      20. SUMMARY OF KEY POINTS
      21. KEY TERMS
      22. INTERNET RESEARCH EXERCISE
      23. BRIEF EXERCISES
      24. EXERCISES
      25. PROBLEMS
      26. ISSUES FOR DISCUSSION
    3. CHAPTER 12: Shareholders'Equity
      1. THE RELATIVE IMPORTANCE OF LIABILITIES, CONTRIBUTED CAPITAL, AND EARNED CAPITAL
      2. DEBT AND EQUITY DISTINGUISHED
      3. THE ECONOMIC CONSEQUENCES ASSOCIATED WITH ACCOUNTING FOR SHAREHOLDERS' EQUITY
      4. ACCOUNTING FOR SHAREHOLDERS' EQUITY
      5. ACCOUNTING FOR COMMON AND PREFERRED STOCK ISSUANCES
      6. THE STATEMENT OF SHAREHOLDERS' EQUITY
      7. INTERNATIONAL PERSPECTIVE: THE RISE OF INTERNATIONAL EQUITY MARKETS
      8. ROE EXERCISE: RETURN ON EQUITY AND VALUE CREATION
      9. ROE ANALYSIS
      10. REVIEW PROBLEM
      11. SUMMARY OF KEY POINTS
      12. KEY TERMS
      13. INTERNET RESEARCH EXERCISE
      14. BRIEF EXERCISES
      15. EXERCISES
      16. PROBLEMS
      17. ISSUES FOR DISCUSSION
  13. PART 5: Income and Cash Flows
    1. CHAPTER 13: The Complete Income Statement
      1. THE ECONOMIC CONSEQUENCES ASSOCIATED WITH INCOME MEASUREMENT AND DISCLOSURE
      2. THE MEASUREMENT OF INCOME: DIFFERENT MEASURES FOR DIFFERENT OBJECTIVES
      3. A COMPLETE INCOME STATEMENT: DISCLOSURE AND PRESENTATION
      4. INTRAPERIOD TAX ALLOCATION
      5. EARNINGS-PER-SHARE DISCLOSURE
      6. INCOME STATEMENT CATEGORIES: USEFUL FOR DECISIONS BUT SUBJECTIVE
      7. INTERNATIONAL PERSPECTIVE: INVESTMENTS AND INCOME STATEMENT DISCLOSURE
      8. ROE EXERCISE: USING THE RIGHT EARNINGS NUMBER
      9. ROE ANALYSIS
      10. REVIEW PROBLEM
      11. SUMMARY OF KEY POINTS
      12. KEY TERMS
    2. CHAPTER 14: The Statement of Cash Flows
      1. THE DEFINITION OF CASH
      2. A GENERAL DESCRIPTION OF THE STATEMENT OF CASH FLOWS
      3. HOW THE STATEMENT OF CASH FLOWS CAN BE USED
      4. THE STATEMENT OF CASH FLOWS: ECONOMIC CONSEQUENCES
      5. DERIVING CASH FLOW FROM ACCRUAL FINANCIAL STATEMENTS
      6. THE COMPLETE STATEMENT OF CASH FLOWS
      7. ANALYZING THE STATEMENT OF CASH FLOWS: AN APPLICATION
      8. INTERNATIONAL PERSPECTIVE: THE STATEMENT OF CASH FLOWS
      9. REVIEW PROBLEM
      10. SUMMARY OF KEY POINTS
      11. KEY TERMS
      12. PROBLEMS
  14. APPENDIX A: The Time Value of Money
    1. INTEREST: THE PRICE OF MONEY
    2. TIME VALUE
    3. TIME VALUE COMPUTATIONS
    4. COMPUTING IMPLICIT RATES OF RETURN AND INTEREST RATES
    5. PRESENT VALUE AND FINANCIAL ACCOUNTING
  15. APPENDIX B: Quality of Earnings Cases: A Comprehensive Review
    1. CASE 1: LIBERTY MANUFACTURING
    2. CASE 2: MICROLINE CORPORATION
    3. CASE 3: TECHNIC ENTERPRISES AND SONAR-SUN INC.
    4. CASE 4: AVERY CORPORATION
    5. CASE 5: ZENITH CREATIONS
    6. CASE 6: PIERCE AND SNOWDEN
  16. APPENDIX C: NIKE, Inc.-SEC Form 10-K
  17. Glossary
  18. Subject Index
  19. Company Index