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Note to Financial Statements:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,465.0
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,207.1
Equipment and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,771.3
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,443.4 Preface vii
Source: Adapted from McDonald’s Corporation’s 2016 annual report.
▪▪ Analysis for Decision Making highlights how companies use accounting information to make
The cost and
decisions andrelated accumulated
evaluate theirdepletion
business.of mineral
This rights are normally
provides shown with
students as partcontext
of the of why accounting
“Fixed assets” section of the balance sheet. The mineral rights may be shown net of depletion on
is important to companies.
the face of the balance sheet. In such cases, a supporting note discloses the accumulated depletion.
Analysis for Decision Making
Fixed Asset Turnover Ratio Objective 7

Describe and illustrate
The fixed asset turnover ratio measures the number of sales dollars earned per dollar of the fixed asset
fixed assets. The higher the ratio, the more efficiently a company is using its fixed assets in turnover ratio to
generating sales. The ratio is computed as follows: assess the efficiency
of a company’s use of
Sales its fixed assets.
Fixed Asset Turnover Ratio =
Average Book Value of Fixed Assets
To illustrate, the following data (in millions) were taken from a recent financial statement
of McDonald’s Corporation (MCD):
Sales $24,621.9
Fixed assets (net):
Beginning of year 21,257.6
End of year 23,117.6
McDonald’s fixed asset turnover ratio for the year is computed as follows (rounded to one
decimal place):
Sales
Fixed Asset Turnover Ratio =
Average Book Value of Fixed Assets
$24,621.9
=
($21,257.6 + $23,117.6) ÷ 2
$24,621.9
= = 1.1
$22,187.6
Is 1.1 efficient? To answer this question, McDonald’s fixed asset turnover ratio can be com-
pared to other quick-service restaurant companies, as shown in Exhibit 14. Yum! Brands (YUM)
operates KFC, Pizza Hut, and Taco Bell quick-service restaurants. The other restaurants are likely
familiar by name.
▪▪ Make a Decision in the end-of-chapter material gives students a chance to analyze real-world
business decisions.
98169_ch09_ptg01_442-493.indd 469 25/09/17 5:20 PM
Make a Decision
Fixed Asset Turnover Ratio
MAD 9-1 Analyze and compare Amazon.com to Netflix Obj. 7

Amazon.com, Inc. (AMZN) is the world’s leading Internet retailer of merchandise and
REAL WORLD
media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc.
(NFLX) is one of the world’s leading Internet television networks. Both companies compete
in the digital media and streaming space. However, Netflix is more narrowly focused in the
digital streaming business than is Amazon.
Sales and average book value of fixed assets information (in millions) are provided for
Amazon and Netflix for a recent year as follows:
Amazon.com Netflix
Sales $135,987 $8,830
Average book value of fixed assets 25,476 212
a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.
b. Which company is more efficient in generating sales from fixed assets?
c. Interpret your results.
MAD 9-2 Analyze and compare Alaska Air, Delta Air Lines, and Southwest Airlines Obj. 7
Alaska Air Group (ALK), Delta Air Lines (DAL), and Southwest Airlines (LUV) reported
the following financial information (in millions) in a recent year:
REAL WORLD
Alaska Air Group Delta Air Lines Southwest Airlines

Sales $5,931 $39,639 $20,425
Average book value of fixed assets 5,234 23,707 16,323
a. Determine the fixed asset turnover ratio for each airline. Round to one decimal place.
b. Based on the fixed asset turnover ratio, which airline appears to be the most ef-
ficient in the use of its fixed assets?
c. The most important fixed asset to an airline is the aircraft. Given this, what factors
might influence the efficient use of fixed assets for an airline?
MAD 9-3 Analyze Verizon Obj. 7

Verizon Communications Inc. (VZ) is a major telecommunications company in the
United States. Two recent balance sheets for Verizon disclosed the following information
REAL WORLD
regarding fixed assets:
viii Preface
▪▪ At the end of each chapter, Let’s Review is a new chapter summary and self-assessment feature
that is designed to help busy students prepare for an exam. It includes a summary of each
learning objective’s key points, key terms, multiple-choice questions, exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
▪ Take It Further in the end-of-chapter activities allows instructors to assign other special activi-
ties related to ethics, communication, and teamwork.
▪ NEW! Certified Management Accountant (CMA®) Examination Questions help students
prepare for the CMA exam so they can earn CMA certification.
CengageNOWv2
CengageNOWv2 is a powerful course management and online homework resource that provides
control and customization to optimize the student learning experience. Included are many proven
resources, such as algorithmic activities, a test bank, course management tools, reporting and
assessment options, and much more.
NEW! Excel Online

Cengage and Microsoft have partnered in CNOWv2 to provide students with a uniform, authentic
Excel experience. It provides instant feedback, built-in video tips, and easily accessible spreadsheet
work. These features allow you to spend more time teaching college accounting applications, and
less time troubleshooting Excel.
These new algorithmic activities offer pre-populated data directly in Microsoft Excel Online. Each
student receives his or her own version of the problem to perform the necessary data calculations
in Excel Online. Their work is constantly saved in Cengage cloud storage as a part of homework
assignments in CNOWv2. It’s easily retrievable so students can review their answers without cumber-
some file management and numerous downloads/uploads.
Motivation: Set Expectations and Prepare Students

for the Course
CengageNOWv2 helps motivate students and get them ready to learn by reshaping their misconcep-
tions about the introductory accounting course and providing a powerful tool to engage students.
CengageNOWv2 Start-Up Center

Students are often surprised by the amount of time they need to spend outside of class working
through homework assignments in order to succeed. The CengageNOWv2 Start-Up Center will help
students identify what they need to do and where they need to focus in order to be successful
with a variety of new resources.
▪▪ What Is Accounting? Module ensures students understand course expectations and how to be
successful in the introductory accounting course. This module consists of two assignable vid-
eos: Introduction to Accounting and Success Strategies. The Student Advice Videos offer advice
from real students about what it takes to do well in the course.
▪▪ Math Review Module, designed to help students get up to speed with necessary math skills,
includes math review assignments and Show Me How math review videos to ensure that stu-
dents have an understanding of basic math skills.
▪▪ How to Use CengageNOWv2 Module focuses on learning accounting, not on a particular soft-
ware system. Quickly familiarize your students with CengageNOWv2 and direct them to all of
its built-in student resources.
Preface ix
Motivation: Prepare Them for Class

With all the outside obligations accounting students have, finding time to read the textbook before
class can be a struggle. Point students to the key concepts they need to know before they attend
class.
▪▪ Video: Tell Me More. Short Tell Me More lecture activities explain the core concepts of the
chapter through an engaging auditory and visual presentation. Available either on a stand-
alone basis or as an assignment, they are ideal for all class formats—flipped model, online,
hybrid, or face-to-face.
Provide Help Right When Students Need It

The best way to learn accounting is through practice, but students often get stuck when attempt-
ing homework assignments on their own.
▪▪ Video: Show Me How. Created for the most frequently assigned end-of-chapter items,
Show Me How problem demonstration videos provide a step-by-step model of a similar prob-
lem. Embedded tips help students avoid common mistakes and pitfalls.
SHOW ME HOW
x Preface
Help Students Go Beyond Memorization to True

Understanding
Students often struggle to understand how concepts relate to one another. For most students, an
introductory accounting course is their first exposure to both business transactions and the account-
ing system. While these concepts are already difficult to master individually, their combination
and interdependency in the introductory accounting course often pose a challenge for students.
▪▪ Mastery Problems. Mastery Problems enable you to assign problems and activities designed to
test students’ comprehension and mastery of difficult concepts.
MindTap eReader
The MindTap eReader for Warren/Jones/Tayler’s Financial and Managerial Accounting is the
most robust digital reading experience available. Hallmark features include:
▪▪ Fully optimized for the iPad.
▪▪ Note taking, highlighting, and more.
▪▪ Embedded digital media.
▪▪ The MindTap eReader also features ReadSpeaker®, an online text-to-speech application that
vocalizes, or “speech-enables,” online educational content. This feature is ideally suited for both
instructors and learners who would like to listen to content instead of (or in addition to) reading it.
Cengage Unlimited
Cengage Unlimited is a first of-its-kind digital subscription designed specifically to lower costs.
Students get total access to everything Cengage has to offer on demand—in one place. That’s
20,000 eBooks, 2,300 digital learning products, and dozens of study tools across 70 disciplines and
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New to This Edition

In all chapters, the following improvements have been made: ▪▪ New items have been added to the Take It Further sec-
▪▪ Chapter schemas have been revised throughout. tion of the chapter.
▪▪ Link to, Analysis for Decision Making, and Make a Deci- ▪▪ New Certified Management Accountant (CMA®) Examina-
sion page references added at the beginning of the tion Questions help students prepare for the CMA exam
chapter, as appropriate, allow students to easily locate so they can earn CMA certification.
the ties to the opening company throughout the chapter.
▪▪ New learning objective for Analysis for Decision Making. Chapter 1
▪▪ Stock ticker symbol has been inserted for all real-world ▪▪ Enhancing characteristics added to discussion of GAAP.
(publicly listed) companies. This helps students to use ▪▪ Discussion of fiscal year added to time period discussion of
financial websites to locate real company data. GAAP (moved from Chapter 6). This is consistent with use
▪▪ Years are now identified as 20Y1, 20Y2, …., 20Y9. of fiscal years throughout Chapters 1–4 and with the fact that
▪▪ New Pathways Challenge feature added, consistent with the many publicly traded companies use fiscal years not ending
work of the Pathways Commission. This feature empha- in December 31.
sizes the critical thinking aspect of accounting. A Suggested ▪▪ The statement of stockholders’ equity replaces the
Answer to the Pathways Challenge is provided at the end retained earnings statement. This is consistent with the
of the chapter. financial reporting of publicly held companies that report
▪▪ New Make a Decision section at the end of the Analysis for a statement of stockholders’ equity rather than a retained
Decision Making directs students and instructors to the real- earnings statement.
world company end-of-chapter materials related to Analysis ▪▪ Exhibit 8 revised to show the interrelationships of the
for Decision Making. Also, the continuing company analysis statement of stockholders’ equity with the income state-
is identified and referenced in this Make a Decision section. ment and balance sheet.
▪▪ New exercise based on Analysis for Decision Making has
been added to the Let’s Review section of the chapter.
Preface xi
Chapter 2 a statement of stockholders’ equity rather than a retained

earnings statement.
▪▪ Revised the discussion of correcting entries and inserted
new exhibit to better enhance student understanding.
Chapter 6
Chapter 3 ▪▪ New Check Up Corner on weighted average inventory
method has been added.
▪▪ Exhibit 1 (Accruals) has been revised to make it consistent
▪▪ New exhibit on weighted average flow of costs has been
with Exhibit 2 (Deferrals).
added.
▪▪ The chapter has been changed so that accruals are discussed
▪▪ Weighted average illustration has been added to Check
and illustrated first, followed by deferrals. Accruals are the
Up Corner 6-3.
simplest adjustment (no entry has been made). Thus, the
▪▪ Added an illustration of the lower of cost or net realiza-
chapter discussion now goes from simple to complex, which
ble for inventory applied by different classes of inventory
facilitates student understanding of this complex topic.
(Exhibit 10).
Chapter 4
Chapter 7
▪▪ New learning objectives for Appendices 1 and 2.
▪▪ The statement of stockholders’ equity replaces the retained ▪▪ Presentation of bank reconciliation has been reformatted.
earnings statement. This is consistent with the financial
reporting of publicly held companies that report a state- Chapter 9
ment of stockholders’ equity rather than a retained earnings ▪▪ New Check Up Corner on selling fixed assets was added.
statement. ▪▪ Lease discussion was modified to reflect the latest account-
▪▪ Exhibit 1 revised to show the interrelationships of the ing standard.
statement of stockholders’ equity with the income state-
ment and balance sheet. Chapter 10
▪▪ Simplified and updated the closing process so that two
▪▪ Simplified Exhibit 1 by removing cash/sales discounts.
rather than four closing entries are required. Doing so
eliminates the temporary (clearing) account Income Sum-
mary, which students have difficulty understanding. Chapter 11
▪▪ Exhibit 8 (Accounting Cycle) revised and made more ▪▪ Present value formulas have been added to Appendix 1,
readable. “Present Value Concepts and Pricing Bonds Payable.”
Chapter 5 Chapter 12
▪▪ Chapter has been retitled as “Accounting for Retail Busi- ▪▪ Added brief discussion of different classes of common
nesses.” Using Retail in the title rather than Merchandising stock (Classes A, B, and C).
is more current terminology that students can identify with.
▪▪ Schema revised to only focus on the financial statements and Chapter 15
the key accounts that will be discussed within the chapter. ▪▪ “Managerial Accounting in the Organization” section
▪▪ New learning objective and separate discussion for the significantly revised to discuss horizonal and vertical busi-
adjusting process of a retail business. ness units; McAfee, Inc., is used as an illustration.
▪▪ New learning objective and Appendix “Gross Method of ▪▪ New Why It Matters features the IMA and CMA.
Recording Sales Discounts.” This gives instructors flexi- ▪▪ New Why It Matters features vertical and horizontal func-
bility as to whether to cover the net or gross methods of tions for service companies.
accounting for sales discounts. ▪▪ Discussion of sustainability and accounting moved to new
▪▪ Chart of Accounts for NetSolutions as a Retail Business Chapter 28.
(Exhibit 2) has been moved earlier in the chapter so that
students can focus on the new accounts specific to retail
businesses.
Chapter 16
▪▪ Customer refunds, allowances, and returns discussion has ▪▪ Discussion of sustainability and accounting moved to new
been simplified to progress from simple to complex, as Chapter 28.
summarized in Exhibit 7. ▪▪ Added one new Analysis for Decision Making item.
▪▪ Closing process for a retail business has been revised to
use a two-entry closing process. Chapter 17
▪▪ The statement of stockholders’ equity replaces the
▪▪ Why It Matters feature (Sustainable Papermaking) moved
retained earnings statement. This is consistent with the
to Chapter 28.
financial reporting of publicly held companies that report
xii Preface
▪▪ Lean manufacturing discussion with related homework Chapter 24

items moved to Chapter 27.
▪▪ Balanced scorecard discussion moved to Chapter 28.
▪▪ Added one new Analysis for Decision Making item.
Chapter 18 Chapter 25
▪▪ Added Learning Objective 7: Describe and illustrate the use
▪▪ Total cost and variable cost concepts for product pricing
of activity-based costing information in decision making.
were moved to an end-of-chapter appendix.
▪▪ Added one new Make a Decision item.
Chapter 19—NEW Chapter
▪▪ Learning Objectives: Chapter 26
•• Describe support departments and support department ▪▪ Analysis for Decision Making on capital investment for
costs. sustainability has been moved to Chapter 28.
•• Describe the allocation of support department costs ▪▪ Added new Analysis for Decision Making entitled “Uncer-
using a single plantwide rate, multiple department tainty: Sensitivity and Expected Value Analyses.”
rates, and activity-based costing. ▪▪ Added six new Make a Decision items.
•• Allocate support department costs to production depart-
ments using the direct method, sequential method, and Chapter 27
reciprocal services method.
▪▪ Added Objective 4: Describe and illustrate the use of lean
•• Describe joint products and joint costs.
principles and activity analysis in a service or administra-
•• Allocate joint costs using the physical units, weighted
tive setting.
average, market value at split-off, and net realizable
value methods.
Chapter 28—NEW Chapter
•• Describe and illustrate the use of support department
and joint cost allocations to evaluate the performance ▪▪ Learning Objectives:
of production managers. •• Describe the concept of a performance measurement
system.
Chapter 20 •• Describe and illustrate the basic elements of a balanced
▪▪ Added one new Analysis for Decision Making item. scorecard.
•• Describe and illustrate the balance scorecard, including
Chapter 21 the use and impact of strategy maps, measure maps,
strategic learning, scorecard cascading, and cognitive
▪▪ Contribution margin analysis deleted from chapter.
biases.
▪▪ Revenue variance portion added as an appendix to
•• Describe corporate social responsibility (CSR), includ-
Chapter 23.
ing methods of measuring and encouraging social
responsibility using the balanced scorecard.
Chapter 22 •• Use capital investment analysis to evaluate CSR projects.
Appendix D Investments
Chapter 23 ▪▪ The investments appendix has been updated to be con-
▪▪ Added new appendix on revenue variances. sistent with Financial Instruments, Subtopic 825-10, FASB
▪▪ Nonfinancial performance measures (previously Learning Accounting Standards Update, Financial Accounting Stan-
Objective 6) moved to Chapter 28. dards Board, Norwalk, CT, January 2016.
▪▪ Added four new revenue variance exercises.
Acknowledgements
The many enhancements to this edition of Financial and Managerial Accounting are the direct result of reviews, surveys,
and focus groups with instructors at institutions across the country. We would like to take this opportunity to thank those
who have helped us better understand the challenge of the financial accounting course and provided valuable feedback on
our content and digital assets.
John Alpers, Tennessee Wesleyan Dave Fitzgerald, Jackson College Dr. April Poe, University of the
Anne Marie Anderson, Raritan Valley Kenneth Flug, St. Thomas Aquinas Incarnate Word
Community College College Francisco Rangel, Riverside City
Rick Andrews, Sinclair Community John Giles, North Carolina State College
College University Jeffery Reinking, University of Central
Maureen Baker, Long Beach City Marcye Hampton, University of Central Florida – Orlando
College Florida Jenny Resnick, Santa Monica College
Surasakdi Bhamornsiri, University of Christopher Harper, Grand Valley State Benjamin Reyes, Long Beach City
North Carolina at Charlotte University College
Alan Blankley, University of North Thomas Heikkinen, Jackson College Vernon Richardson, University of
Carolina at Charlotte Melanie Hicks, Liberty University Arkansas
Cindy Bolt, The Citadel Susanne Holloway, Salisbury Patrick Rogan, Cosumnes River
Julie Bonner, Central Washington University College
University Jose Hortensi, Miami Dade College Lauran B. Schmid, The University of
Charles Boster, Salisbury University Md Safayat Hossain, Florida Texas Rio Grande Valley
Salma Boumediene, Montana State International University Jennifer Schneider, University of North
University – Billings Su-Jane Hsieh, San Francisco State Georgia
Jerold K. Braun, Daytona State College University Mary Sheil, Kennesaw State University
Louise Burney, University of Mississippi Aileen Huang, Santa Monica College Meghna Singhvi, Loyola Marymount
Shauna Butler, St. Thomas Aquinas Julie Ying Huang, University of University
College Louisville Margie Snow, Norco College
James N. Cannon, Iowa State University Ann Kelley, Providence College Mona Stephens, Southern New
Kirk Canzano, Long Beach City College Daniel Kim, Midlands Technical College Hampshire University
Jack Cathey, University of North Angela Kirkendall, South Puget Sound Linda Stoller, Bentley University
Carolina at Charlotte Community College Michael Stoots, UCLA extension
Donna Chadwick, Sinclair Community Satoshi Kojima, East Los Angeles Nirmalee Summers, University of
College College Wisconsin – La Crosse
Ming Lu Chun, Santa Monica College Charles Leflar, University of Arkansas Dominique Svarc, Harper College
Anne Clem, Iowa State University Tara Maciel, San Diego Mesa College Patricia Tupaj, Quinsigamond
Dixon Cooper, Ouachita Baptist Annette Maddox, Georgia Highlands Community College
University College Bill Urquhart, Florida Atlantic
Bryan Corsnitz, Long Beach City LuAnn Bean Mangold, Florida Institute University
College of Technology Rodney Vogt, Kansas State University
Pat Creech, Northeastern Oklahoma A&M Eric Martin, University of Tennessee Rick Warne, University of Cincinnati
Stephan Davenport, University of Robert A. Martin, Kennesaw State Randi Watts, Baker College
Tennessee – Chattanooga University Cammy Wayne, Harper College
David Deboskey, San Diego State Michelle McFeaters, Grove City College Vivian Winston, Indiana University
Daniel De La Rosa, Fullerton College Dawn McKinley, Harper College Jan Workman, East Carolina University
Heather Demshock, Lycoming College Allison McLeod, University of North Glen Young, Texas A&M University –
Scott Dotson, Tennessee Wesleyan Texas College Station
University Rodney Michael Mellissa Youngman, National Technical
Hong Duong, Salisbury University Shawn Miller, Lone Star College Institute for the Deaf, RIT
Desiree Elias, Florida International Jill Mitchell, Northern Virginia Mustafa Younis, Tulane University
University Community College – Alexandria Fang Zhao, Florida International
James Emig, Villanova University DeeAnne Lynn Peterson-Meyer, University
Valerie Evans, Kansas State University University of Wisconsin – Eau Claire Terri Ziegler, Ohio State University
xiii
xiv Acknowledgements
Special thanks to our Financial Accounting Advisory Board Members:
Reb Beatty, Anne Arundel Community Steven Hegemann, University of Don Minyard, University of Alabama
College Nebraska – Lincoln Micki Nickla, Ivy Tech Community
Amy Bourne, Oregon State University Todd Jensen, Sierra College College – Gary
Rachel Brassine, East Carolina Sergey Komissarov, University of John Robertson, Arkansas State
University Wisconsin – La Crosse University
Gregory Brookins, Santa Monica Anthony Kurek, Eastern Michigan Philip Slater, Forsyth Technical
College University Community College
Marci Butterfield, University of Utah Joseph Larkin, Saint Joseph’s University Bob Urell, Irvine Valley College
Lawrence Chui, University of St. Gary Laycock, Ivy Tech Community Alycia Marie Winegardner, University of
Thomas College – Terre Haute Tennessee – Knoxville
Jerrilyn Eisenhauer, Tulsa Community Kristy McAuliffe, San Jacinto College
College – Southeast Melanie McCoskey, University of Akron
Shari Fowler, Indiana University – East Allison McLeod, University of North
Micah Frankel, California State Texas
University – East Bay
About the Authors
Carl S. Warren
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
©Terry R. Spray InHisImage Studios

Warren has taught classes at the University of Georgia, University of Iowa, Michigan State Univer-
sity, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his Ph.D. from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in pro-
fessional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numer-
ous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
Jefferson P. Jones
Dr. Jefferson P. Jones is an Associate Professor of Accounting in the School of Accountancy at
Auburn University where he teaches financial accounting and applied financial research courses.
He received his Bachelor’s in Accounting and Master of Accountancy degrees from Auburn Uni-
© Thomas Boutwell, T2PHOTOGRAPHY

versity and his Ph.D. from Florida State University. Dr. Jones has received numerous teaching
awards, including the Auburn University Beta Alpha Psi Outstanding Teaching Award (ten times);
the Auburn University Outstanding Master of Accountancy Professor Teaching Award (five times);
the Auburn University Outstanding Distance Master of Accountancy Teaching Award (three times);
and the Auburn University College of Business McCartney Teaching Award. In addition, he has
made numerous presentations around the country on research and pedagogical issues. Dr. Jones
has public accounting experience as an auditor with Deloitte and Touche, holds a CPA certificate
in the state of Alabama (inactive), and is a member of the American Accounting Association, the
American Institute of Certified Public Accountants (AICPA), and the Alabama Society of CPAs
(ASCPA). His research interests focus on financial accounting, specifically investigating the quality
of reported accounting information, and accounting education. He has published articles in numer-
ous journals, including Advances in Accounting, Review of Quantitative Finance and Accounting,
Issues in Accounting Education, International Journal of Forecasting, and The CPA Journal. When
not at work, Dr. Jones enjoys playing golf and watching college football.
William B. Tayler
Dr. William B. Tayler is the Robert J. Smith Professor of Accountancy in the Marriott School of
Business at Brigham Young University (BYU). Dr. Tayler is an internationally renowned, award-
winning accounting researcher and instructor. He has presented his research as an invited speaker
at universities and conferences across the globe. Dr. Tayler earned his Ph.D. and master’s degree
at Cornell University. He teaches in BYU’s Executive MBA Program and in BYU’s School of
Accountancy, one of the top ranked accounting programs in the world. Dr. Tayler has also taught
at Cornell University and Emory University and has received multiple teaching awards. Dr. Tayler
is a Certified Management Accountant and consultant specializing in cost accounting, perfor-
© EMORY UNIVERSITY
mance measurement, the assignment of decision rights, and incentive compensation. His work
has been published in top journals, including Accounting Horizons, Accounting, Organizations
and Society, The Accounting Review, Contemporary Accounting Research, IMA Educational Case
Journal, Journal of Accounting Research, Journal of Behavioral Finance, Journal of Finance,
Review of Financial Studies, and Strategic Finance. Dr. Tayler serves on the editorial boards of
The Accounting Review, Management Accounting Research, and Accounting, Organizations and
Society. He is also director of the Institute of Management Accountants Research Foundation.
xv
Brief Contents
1 Introduction to Accounting and Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2 Analyzing Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3 The Adjusting Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
4 The Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
5 Accounting for Retail Businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
6 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298
7 Internal Control and Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350
8 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396
9 Long-Term Assets: Fixed and Intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442
10 Liabilities: Current, Installment Notes, and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
11 Liabilities: Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542
12 Corporations: Organization, Stock Transactions, and Dividends . . . . . . . . . . . . . . . . . . . . . . . . 580
13 Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626
14 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 686
15 Introduction to Managerial Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748
16 Job Order Costing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792
17 Process Cost Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840
18 Activity-Based Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 896
19 Support Department and Joint Cost Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950
20 Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994
21 Variable Costing for M anagement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1048
22 Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1098
23 Evaluating Variances from Standard Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1156
24 Evaluating Decentralized Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1206
25 Differential Analysis and Product Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1256
26 Capital Investment Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1310
27 Lean Manufacturing and Activity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1358
28 The Balanced Scorecard and Corporate Social Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . 1400
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Appendix B Revenue Recognition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C International Financial Reporting Standards (IFRS). . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
Appendix D Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Appendix E Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2017 Selected Excerpts. . . . E-1
Appendix F Special Journals and Subsidiary Ledgers (online). . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
xvi
Contents
1 Introduction to Accounting
and Business 2
Analysis for Decision Making 80
Horizontal Analysis 80
Make a Decision 104

Nature of Business and Accounting 4 Take It Further 106
Types of Businesses 4 Pathways Challenge 75, 107
Role of Accounting in Business 5
Role of Ethics in Accounting and Business 6
3
Opportunities for Accountants 7
Generally Accepted Accounting

Principles (GAAP) 9 The Adjusting Process 108
Characteristics of Financial Information 9
Assumptions 10 Nature of the Adjusting Process 111
Principles 12 Accrual and Cash Basis of Accounting 111
The Accounting Equation 12 Revenue and Expense Recognition 112
The Adjusting Process 112
Business Transactions and the Accounting Equation 13 Types of Accounts Requiring Adjustment 113
Summary 17
Classifications of Stockholders’ Equity 18 Adjusting Entries for Accruals 114
Accrued Revenues 114
Financial Statements 19 Accrued Expenses 115
Income Statement 21
Statement of Stockholders’ Equity 21 Adjusting Entries for Deferrals 118
Balance Sheet 22 Unearned Revenues 118
Statement of Cash Flows 23 Prepaid Expenses 119
Interrelationships Among Financial Statements 24 Adjusting Entries for Depreciation 122
Analysis for Decision Making 26 Summary of Adjusting Process 124
Ratio of Liabilities to Stockholders’ Equity 26
Adjusted Trial Balance 128
Make a Decision 52
Take It Further 53 Vertical Analysis 129
Pathways Challenge 11, 55 Make a Decision 153
2
Take It Further 155
Pathways Challenge 128, 157
Analyzing Transactions 56
Using Accounts to Record Transactions 59
Chart of Accounts 60
Double-Entry Accounting System 62

4 The Accounting Cycle 158
Balance Sheet Accounts 62 Flow of Accounting Information 161
Income Statement Accounts 62
Statement of Stockholders’ Equity Accounts (Dividends) 63 Financial Statements 163
Normal Balances 63 Income Statement 163
Journalizing 64 Statement of Stockholders’ Equity 163
Balance Sheet 165
Posting Journal Entries to Accounts 68
Closing Entries 168
Trial Balance 77 Journalizing and Posting Closing Entries 169
Errors Affecting the Trial Balance 78 Post-Closing Trial Balance 174
Errors Not Affecting the Trial Balance 79
Accounting Cycle 175
xvii
xviii Contents
Illustration of the Accounting Cycle 178 Financial Statements and Closing Entries for a Retail
Step 1. Analyzing and Recording Transactions Business 254
in the Journal 178 Multiple-Step Income Statement 254
Step 2. Posting Transactions to the Ledger 179 Single-Step Income Statement 256
Step 3. Preparing an Unadjusted Trial Balance 179 Statement of Stockholders’ Equity 256
Step 4. Assembling and Analyzing Adjustment Data 179 Balance Sheet 257
Step 5. Preparing an Optional End-of-Period Spreadsheet 181 The Closing Process 258
Step 6. Journalizing and Posting Adjusting Entries 182
Step 7. Preparing an Adjusted Trial Balance 182 Analysis for Decision Making 259
Step 8. Preparing the Financial Statements 182 Asset Turnover Ratio 259
Step 9. Journalizing and Posting Closing Entries 185 Appendix 1 Gross Method of
Step 10. Preparing a Post-Closing Trial Balance 185
Recording Sales Discounts 260
Analysis for Decision Making 188 Transactions 260
Working Capital and Current Ratio 188 Adjusting Entry 261
Subsequent Period 262
Appendix 1 End-of-Period Spreadsheet 190 Comparison with the Net Method 262
Step 1. Enter the Title 190
Step 2. Enter the Unadjusted Appendix 2 The Periodic Inventory System 263
Trial Balance 190 Chart of Accounts Under the Periodic Inventory System 263
Step 3. Enter the Adjustments 191 Recording Merchandise Transactions Under the
Step 4. Enter the Adjusted Trial Balance 192 Periodic Inventory System 264
Step 5. Extend the Accounts to the Income Statement and Balance Adjusting Process Under the Periodic Inventory System 265
Sheet Columns 193 Financial Statements Under the Periodic Inventory System 266
Step 6. Total the Income Statement and Balance Sheet Closing Entries Under the Periodic Inventory System 266
Columns, Compute the Net Income or Net Loss, and
Complete the Spreadsheet 194 Comprehensive Problem 2 291
Preparing the Financial Statements Make a Decision 293
from the Spreadsheet 195
Take It Further 294
Appendix 2 Reversing Entries 195
Comprehensive Problem 1 226
Make a Decision 227
Take It Further 229
Pathways Challenge 175, 231 6 Inventories 298
5
Control of Inventory 300
Accounting for Retail Safeguarding Inventory 300
Businesses 232 Reporting Inventory 301
Inventory Cost Flow Assumptions 301

Nature of Retail Businesses 234 Inventory Costing Methods Under
Operating Cycle 234 a Perpetual Inventory System 303
Financial Statements 235 First-In, First-Out Method 303
Last-In, First-Out Method 305
Merchandise Transactions 236
Weighted Average Cost Method 307
Chart of Accounts for Retail Business 236
Subsidiary Ledgers 237 Inventory Costing Methods Under
Purchases Transactions 237 a Periodic Inventory System 309
Sales Transactions 242 First-In, First-Out Method 309
Freight 246 Last-In, First-Out Method 309
Summary: Recording Inventory Transactions 249 Weighted Average Cost Method 311
Dual Nature of Merchandise Transactions 249
Sales Taxes and Trade Discounts 249 Comparing Inventory Costing Methods 313
The Adjusting Process 251 Reporting Inventory in the
Adjusting Entry for Inventory Shrinkage 251 Financial Statements 314
Adjusting Entries for Customer Refunds, Valuation at Lower of Cost or Market 314
Allowances, and Returns 252 Inventory on the Balance Sheet 316
Adjusted Trial Balance 253 Effect of Inventory Errors on the
Financial Statements 317
Contents xix
Analysis for Decision Making 320 Allowance Method for Uncollectible Accounts 400
Inventory Turnover and Number of Days’ Sales in Inventory 320 Write-Offs to the Allowance Account 401
Estimating Uncollectibles 403
Appendix Estimating Inventory Cost 322
Retail Method of Inventory Costing 322 Comparing Direct Write-Off and Allowance Methods 409
Gross Profit Method of Inventory Costing 323 Notes Receivable 410
Make a Decision 345 Characteristics of Notes Receivable 410
Accounting for Notes Receivable 412
Take It Further 346
Reporting Receivables on the Balance Sheet 414
7
Accounts Receivable Turnover and Number of Days’ Sales in
Receivables 415
Internal Control and Cash 350 Make a Decision 437

Take It Further 439
Sarbanes-Oxley Act 352 Pathways Challenge 413, 440
Internal Control 354
9
Objectives of Internal Control 354
Elements of Internal Control 354 Long-Term Assets: Fixed and
Control Environment 355
Risk Assessment 356
Intangible 442
Control Procedures 356
Monitoring 358 Nature of Fixed Assets 444
Information and Communication 358 Classifying Costs 444
Limitations of Internal Control 359 The Cost of Fixed Assets 446
Cash Controls over Receipts and Payments 360 Leasing Fixed Assets 447
Control of Cash Receipts 360 Accounting for Depreciation 448
Control of Cash Payments 362 Factors in Computing Depreciation Expense 448
Bank Accounts 363 Straight-Line Method 449
Bank Statement 363 Units-of-Activity Method 451
Using the Bank Statement as a Control over Cash 365 Double-Declining-Balance Method 453
Comparing Depreciation Methods 454
Bank Reconciliation 366 Partial-Year Depreciation 457
Revising Depreciation Estimates 457
Special-Purpose Cash Funds 370
Repair and Improvements 458
Financial Statement Reporting of Cash 371
Disposal of Fixed Assets 460
Analysis for Decision Making 372 Discarding Fixed Assets 460
Days’ Cash on Hand 372 Selling Fixed Assets 461
Make a Decision 392 Natural Resources 462

Take It Further 394 Intangible Assets 464
Patents 464
Pathways Challenge 372, 395 Copyrights and Trademarks 465
Goodwill 465
8
Financial Reporting for Long-Term Assets:
Fixed and Intangible 468
Receivables 396 Analysis for Decision Making 469
Fixed Asset Turnover Ratio 469
Classification of Receivables 398
Accounts Receivable 398
Appendix Exchanging Similar Fixed Assets 471
Gain on Exchange 471
Notes Receivable 398
Loss on Exchange 472
Other Receivables 399
Uncollectible Receivables 399 Make a Decision 490
Direct Write-Off Method for Uncollectible Take It Further 491

Accounts 400 Pathways Challenge 467, 493
xx Contents
10 Liabilities: Current,
Installment Notes, and
Contingencies 494
Appendix 1 Present Value Concepts and
Pricing Bonds Payable 556
Present Value Concepts 556
Pricing Bonds 559
Computing Present Values 560

Current Liabilities 496 Appendix 2 Effective Interest Rate Method
Accounts Payable and Accruals 496
Short-Term Notes Payable 497 of Amortization 561
Current Portion of Long-Term Debt 498 Amortization of Discount by the Interest Method 561
Amortization of Premium by the Interest Method 562
Payroll Liabilities 499
Liability for Employee Earnings 499 Make a Decision 577
Deductions from Employee Earnings 500 Take It Further 578
Computing Employee Net Pay 501
Employer’s Payroll Taxes 501 Pathways Challenge 553, 579
Recording Payroll 502
12
Paying Payroll 504
Internal Controls for Payroll 504 Corporations: Organization,
Employees’ Fringe Benefits 504 Stock Transactions, and
Vacation Pay 504 Dividends 580
Pensions 505
Postretirement Benefits Other than Pensions 506
Nature of a Corporation 582
Installment Notes 507 Characteristics of a Corporation 582
Issuance 507 Forming a Corporation 583
Periodic Payments 507
Paid-In Capital from Stock 585
Contingent Liabilities 510 Characteristics of Stock 585
Probable and Estimable 510 Types of Stock 586
Probable and Not Estimable 510 Issuing Stock 588
Reasonably Possible 511 Premium on Stock 589
Remote 511 No-Par Stock 590
Reporting Liabilities 513 Accounting for Dividends 591
Analysis for Decision Making 513 Cash Dividends 592
Quick Ratio 513 Stock Dividends 593
Comprehensive Problem 3 534 Stock Splits 594

Make a Decision 536 Treasury Stock Transactions 595
Take It Further 539 Reporting Stockholders’ Equity 597
Stockholders’ Equity on the Balance Sheet 597
Pathways Challenge 512, 541 Reporting Retained Earnings 598
11
Statement of Stockholders’ Equity 600
Reporting Stockholders’ Equity for Alphabet 601
Liabilities: Bonds Payable 542 Analysis for Decision Making 602

Earnings per Share 602
Nature of Bonds Payable 544 Comprehensive Problem 4 619

Bond Characteristics and Terminology 544 Make a Decision 621
Proceeds from Issuing Bonds 545
Take It Further 622
Accounting for Bonds Payable 547
Bonds Issued at Face Amount 547 Pathways Challenge 588, 625
Bonds Issued at a Discount 547
13
Amortizing a Bond Discount 548
Bonds Issued at a Premium 550
Amortizing a Bond Premium 551 Statement of Cash Flows 626
Bond Redemption 552
Reporting Bonds Payable 554 Reporting Cash Flows 628

Analysis for Decision Making 555 Cash Flows from Operating Activities 629
Times Interest Earned 555 Cash Flows from Investing Activities 631
Contents xxi
Cash Flows from Financing Activities 631 Analyzing Solvency 700

Noncash Investing and Financing Activities 632 Ratio of Fixed Assets to Long-Term Liabilities 700
Format of the Statement of Cash Flows 632 Ratio of Liabilities to Stockholders’ Equity 700
No Cash Flow per Share 633 Times Interest Earned 701
Cash Flows from Operating Activities— Analyzing Profitability 702
The Indirect Method 633 Asset Turnover 703
Net Income 635 Return on Total Assets 703
Adjustments to Net Income 635 Return on Stockholders’ Equity 704
Return on Common Stockholders’ Equity 705
Cash Flows from Investing Activities 638 Earnings per Share on Common Stock 706
Land 638
Price-Earnings Ratio 707
Building and Accumulated Depreciation—Building 639
Dividends per Share 708
Cash Flows from Financing Activities 640 Dividend Yield 708
Bonds Payable 640 Summary of Analytical Measures 710
Common Stock 640
Corporate Annual Reports 711
Dividends and Dividends Payable 641
Management Discussion and Analysis 711
Preparing the Statement of Cash Flows 642
Report on Internal Control 712
Analysis for Decision Making 644 Report on Fairness of the Financial Statements 712
Free Cash Flow 644
Appendix 1 Unusual Items on the Income
Appendix 1 Spreadsheet (Work Sheet) for Statement of Statement 713
Cash Flows—The Indirect Method 645 Unusual Items Affecting the Current Period’s
Analyzing Accounts 646 Income Statement 713
Retained Earnings 647 Unusual Items Affecting the Prior Period’s
Other Accounts 647 Income Statement 714
Preparing the Statement of Cash Flows 648 Appendix 2 Fair Value and Comprehensive
Appendix 2 Preparing the Statement of Cash Flows—The Income 714
Direct Method 648 Fair Value 715
Cash Received from Customers 649 Comprehensive Income 715
Cash Payments for Merchandise 649 Make a Decision 743
Cash Payments for Operating Expenses 650
Gain on Sale of Land 650 Take It Further 744
Interest Expense 651 Pathways Challenge 707, 746
Cash Payments for Income Taxes 651
Reporting Cash Flows from Operating
Activities—Direct Method 651
15
Make a Decision 680
Take It Further 683 Introduction to Managerial
Accounting 748
Managerial Accounting 750
Differences Between Managerial and Financial Accounting 751
14
Managerial Accounting in the Organization 752
Financial Statement The Management Process 754
Analysis 686 Uses of Managerial Accounting Information 755
Manufacturing Operations 757

Nature of Manufacturing 757
Analyzing and Interpreting Financial Statements 688 Direct and Indirect Costs 757
The Value of Financial Statement Information 688
Manufacturing Costs 758
Techniques for Analyzing Financial Statements 689
Financial Statements for a Manufacturing
Analytical Methods 689
Horizontal Analysis 689
Business 763
Balance Sheet 763
Vertical Analysis 691
Income Statement 764
Common-Sized Statements 693
Analyzing Liquidity 694 Analysis for Decision Making 767

Utilization Rates 767
Current Position Analysis 695
Accounts Receivable Analysis 696 Make a Decision 787
Inventory Analysis 697
xxii Contents
Take It Further 789 Appendix Weighted Average Method 864

Determining Costs Using the Weighted Average Method 864
Certified Management Accountant (CMA®) Examination The Cost of Production Report 866
Questions (Adapted) 791
Make a Decision 888
Take It Further 891
16
Certified Management Accountant (CMA®) Examination
Job Order Costing 792 Pathways Challenge 858, 895
Cost Accounting Systems Overview 794

Job Order Cost Systems 794
Process Cost Systems 794
Job Order Cost Systems for Manufacturing

18
Activity-Based Costing 896
Businesses 795 Product Costing Allocation Methods 898

Materials 796 Single Plantwide Factory Overhead Rate Method 899
Factory Labor 798
Factory Overhead 800 Multiple Production Department Factory Overhead
Work in Process 806 Rate Method 901
Finished Goods 807 Department Overhead Rates and Allocation 902
Sales and Cost of Goods Sold 807 Distortion of Product Costs 903
Period Costs 808
Summary of Cost Flows for Legend Guitars 808 Activity-Based Costing Method 906
Activity Rates 908
Job Order Cost Systems for Service Businesses 810 Allocating Costs 909
Types of Service Businesses 810 Distortion in Product Costs 911
Flow of Costs in a Service Job Order Cost System 810 Dangers of Product Cost Distortion 911
Analysis for Decision Making 812 Activity-Based Costing for Selling and Administrative
Analyzing Job Costs 812 Expenses 913
Make a Decision 832 Activity-Based Costing in Service Businesses 914
Take It Further 835 Analysis for Decision Making 919
Certified Management Accountant (CMA®) Examination Using ABC Product Cost Information to Reduce Costs 919
Questions (Adapted) 838 Make a Decision 945
Pathways Challenge 805, 839 Take It Further 947
17
Process Cost Systems 840
Process Manufacturers 842
Comparing Job Order and Process Cost Systems 843
Cost Flows for a Process Manufacturer 844
19 Support Department and
Joint Cost Allocation 950
Cost of Production Report 847 Support Departments 952
Step 1: Determine the Units to Be Assigned Costs 848
Step 2: Compute Equivalent Units of Production 848 Support Department Cost Allocation 953
Step 3: Determine the Cost per Equivalent Unit 852 Single Plantwide Rate 954
Step 4: Allocate Costs to Units Transferred Multiple Production Department Rates 954
Out and Partially Completed Units 853 Activity-Based Costing 955
Preparing the Cost of Production Report 855
Allocating Support Department Costs to Production
Journal Entries for a Process Cost System 858 Departments 956
Direct Method 957
Using the Cost of Production Report 862
The Sequential Method 959
Analysis for Decision Making 862 The Reciprocal Services Method 963
Analyzing Process Costs 862 Comparison of Support Department Cost Allocation Methods 967
Contents xxiii
Joint Costs 968

Joint Cost Allocation 968
The Physical Units Method 968
The Weighted Average Method 969
21 Variable Costing for
Management Analysis 1048
The Market Value at Split-Off Method 969 Operating Income: Absorption and Variable Costing 1050
The Net Realizable Value Method 970 Absorption Costing 1050
Comparison of Joint Cost Allocation Methods 971 Variable Costing 1051
By-Products 973 Effects of Inventory 1053
Analysis for Decision Making 973 Analyzing Operating Income Using

Using Support Department and Joint Cost Allocations for Absorption and Variable Costing 1056
Performance Evaluation 973
Using Absorption and Variable Costing 1061
Make a Decision 989 Controlling Costs 1061
Pricing Products 1061
Take It Further 991 Planning Production 1062
Certified Management Accountant (CMA®) Examination Analyzing Market Segments 1062
Questions (Adapted) 992 Analyzing Market Segments 1062
Pathways Challenge 967, 993 Sales Territory Profitability Analysis 1064
Product Profitability Analysis 1065
Salesperson Profitability Analysis 1065
20 Cost-Volume-Profit
Analysis 994
Variable Costing for Service Businesses 1067
Reporting Income 1067
Analyzing Segments 1068
Cost Behavior 996 Segment Analysis and EBITDA 1070
Variable Costs 997
Make a Decision 1092
Fixed Costs 998
Mixed Costs 1000 Take It Further 1094
Summary of Cost Behavior Concepts 1002 Certified Management Accountant (CMA®) Examination
Cost-Volume-Profit Relationships 1004 Questions (Adapted) 1095
Contribution Margin 1004
Contribution Margin Ratio 1004
22
Unit Contribution Margin 1005
Mathematical Approach to Cost-Volume-Profit

Analysis 1007 Budgeting 1098
Break-Even Point 1007
Target Profit 1011
Nature and Objectives of Budgeting 1100
Graphic Approach to Objectives of Budgeting 1100
Cost-Volume-Profit Analysis 1012 Human Behavior and Budgeting 1101
Cost-Volume-Profit (Break-Even) Chart 1012
Budgeting Systems 1102
Profit-Volume Chart 1014
Static Budget 1103
Use of Spreadsheets in Cost-Volume-Profit Analysis 1015
Flexible Budget 1104
Assumptions of Cost-Volume-Profit Analysis 1016
Master Budget 1106
Special Cost-Volume-Profit Relationships 1018
Sales Mix Considerations 1018 Operating Budgets 1107
Operating Leverage 1020 Sales Budget 1107
Margin of Safety 1021 Production Budget 1108
Direct Materials Purchases Budget 1109
Analysis for Decision Making 1023 Direct Labor Cost Budget 1110
Cost-Volume-Profit Analysis for Service Companies 1023 Factory Overhead Cost Budget 1112
Make a Decision 1043 Cost of Goods Sold Budget 1112
Selling and Administrative Expenses Budget 1114
Take It Further 1044 Budgeted Income Statement 1115
Certified Management Accountant (CMA®) Examination Financial Budgets 1116
Questions (Adapted) 1046 Cash Budget 1116
Capital Expenditures Budget 1121
Budgeted Balance Sheet 1121
xxiv Contents
Analysis for Decision Making 1122 Responsibility Accounting for Cost Centers 1210
Nonmanufacturing Staffing Budgets 1122
Responsibility Accounting for Profit Centers 1214
Make a Decision 1150 Support Department Allocations 1214
Profit Center Reporting 1216
Take It Further 1151
Responsibility Accounting for Investment
Centers 1218
Questions (Adapted) 1153 Return on Investment 1218
Pathways Challenge 1116, 1154 Residual Income 1222
Transfer Pricing 1225
23
Market Price Approach 1226
Evaluating Variances from Negotiated Price Approach 1226
Standard Costs 1156 Cost Price Approach 1229

Standards 1158 Franchise Operations 1229
Setting Standards 1158 Make a Decision 1250
Types of Standards 1159
Reviewing and Revising Standards 1159 Take It Further 1252
Criticisms of Standard Costs 1159 Certified Management Accountant (CMA®) Examination
Budgetary Performance Evaluation 1160 Questions (Adapted) 1254
Budget Performance Report 1160
Manufacturing Cost Variances 1161
Direct Materials and

Direct Labor Variances 1162
Direct Materials Variances 1162
Direct Labor Variances 1165
Factory Overhead Variances 1168

25 Differential Analysis and
Product Pricing 1256
The Factory Overhead Flexible Budget 1169 Differential Analysis 1258
Variable Factory Overhead Controllable Variance 1170 Lease or Sell 1260
Fixed Factory Overhead Volume Variance 1170 Discontinue a Segment or Product 1261
Reporting Factory Overhead Variances 1172 Make or Buy 1262
Factory Overhead Account 1173 Replace Equipment 1264
Process or Sell 1265
Recording and Reporting Variances Accept Business at a Special Price 1265
from Standards 1176
Setting Normal Product Selling Prices 1268
Analysis for Decision Making 1178 Cost-Plus Methods 1269
Service Staffing Variances 1178 Product Cost Method 1269
Appendix Revenue Variances 1179 Illustration 1270
Target Costing Method 1271
Comprehensive Problem 5 1199
Production Bottlenecks 1273
Make a Decision 1201 Managing Bottlenecks 1274
Pricing Bottleneck Products 1274
Certified Management Accountant (CMA®) Examination Analysis for Decision Making 1275
Yield Pricing in Service Businesses 1275
Appendix Total and Variable Cost Methods to Setting
Normal Price 1276
Total Cost Method 1276
24
Variable Cost Method 1279
Evaluating Decentralized
Operations 1206
Centralized and Decentralized Operations 1208 Certified Management Accountant (CMA®) Examination
Advantages of Decentralization 1208 Questions (Adapted) 1307
Disadvantages of Decentralization 1209
Responsibility Accounting 1210
Contents xxv
26 Capital Investment
Analysis 1310
Nature of Capital Investment Analysis 1312 Questions (Adapted) 1398
Methods Not Using Present Values 1313 Pathways Challenge 1365, 1399
Average Rate of Return Method 1313
Cash Payback Method 1314
Methods Using Present Values 1316
Present Value Concepts 1317
Net Present Value Method and Index 1319
Internal Rate of Return Method 1322
28 The Balanced Scorecard
and Corporate Social
Responsibility 1400
Factors That Complicate Capital
Investment Analysis 1325 Performance Measurement Systems 1402
Income Tax 1325
The Balanced Scorecard 1403
Unequal Proposal Lives 1325
Performance Perspectives 1403
Lease Versus Capital Investment 1327
Strategic Objectives 1405
Uncertainty 1327
Performance Metrics 1405
Changes in Price Levels 1328
Strategic Initiatives 1406
Qualitative Considerations 1329
Performance Targets 1407
Capital Rationing 1329
Using the Balanced Scorecard 1407
Analysis for Decision Making 1330 Strategy Maps 1407
Uncertainty: Sensitivity and Expected Value Analyses 1330 Measure Maps 1409
Strategic Learning 1411
Make a Decision 1351 Scorecard Cascading 1413
Take It Further 1353 Cognitive Biases 1413
Certified Management Accountant (CMA®) Examination Corporate Social Responsibility 1416

Questions (Adapted) 1355 CSR Reporting 1417
Corporate Social Responsibility and the Balanced Scorecard 1418
Pathways Challenge 1321, 1356 Encouraging Corporate Social Responsibility 1420
27
Lean Manufacturing and Capital Investment in CSR 1420
Activity Analysis 1358 Make a Decision 1438

Lean Principles 1360 Certified Management Accountant (CMA®) Examination
Reducing Inventory 1361
Reducing Lead Times 1361
Reducing Setup Time 1363 Pathways Challenge 1415, 1442
Emphasizing Product-Oriented Layout 1366
Emphasizing Employee Involvement 1366
Emphasizing Pull Manufacturing 1366 Appendix A: Interest Tables A-1
Emphasizing Zero Defects 1367 Appendix B: Revenue Recognition B-1
Emphasizing Supply Chain Management 1367
Appendix C: International Financial Reporting
Lean Accounting 1369 Standards (IFRS) C-1
Fewer Transactions 1369
Combined Accounts 1369 Appendix D: Investments D-1
Nonfinancial Performance Measures 1371
Direct Tracing of Overhead 1371
Appendix E: Nike Inc., Form 10-K for the Fiscal Year
Ended May 31, 2017 Selected Excerpts E-1
Activity Analysis 1372
Costs of Quality 1372 Appendix F: Special Journals and Subsidiary
Quality Activity Analysis 1373 Ledgers (online) F-1
Value-Added Activity Analysis 1375
Glossary G-1
Process Activity Analysis 1376
Index I-1
Lean Performance for Nonmanufacturing 1378
1 Introduction to
Chapter
Accounting and Business
Chapter 1
Transactions
Accounting System
Accounting Equation
Assets = Liabilities + Equity
Chapter 2
Analyzing Transactions
Chapter 3
The Adjusting Process
Chapter 4
The Accounting Cycle
2
Twitter, Inc.
W hen two teams pair up for a game of f ootball, there is often a lot
of noise. The band plays, the fans cheer, and fireworks light up
the scoreboard. Obviously, the fans are committed and care about the
Twitter, Inc. (TWTR) is one of the most visible com-
panies on the Internet. It provides a real-time information net-
work where members can post messages, called tweets, for free.
outcome of the game. Just like fans at a football game, the owners of Millions post tweets every day throughout the world.
a business want their business to “win” against their competitors in the Do you think Twitter is a successful company? Does it make
marketplace. While having your football team win can be a source of money? How would you know? Accounting helps to answer these
pride, winning in the marketplace goes beyond pride and has many questions.
tangible benefits. Companies that are winners are better able to serve This textbook introduces you to accounting, the language of
customers, provide good jobs for employees, and make money for business. Chapter 1 begins by discussing what a business is, how it
their owners. operates, and the role that accounting plays.
©CJG – TECHNOLOGY/ALAMY STOCK PHOTO

Link to Twitter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 4, 5, 6, 7, 10, 11, 13, 21, 23
Analysis for Decision Making. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 26
3
4 Chapter 1 Introduction to Accounting and Business
What's Covered
Introduction to Accounting and Business
Nature of Business Nature of Accounting Analyzing Business Financial Statements
▪▪ Types of Business (Obj. 1) ▪▪ Managerial and Financial Transactions ▪▪ Income Statement (Obj. 5)
▪▪ Role of Accounting (Obj. 1) Accounting (Obj. 1) ▪▪ Generally Accepted Accounting ▪▪ Statement of Stockholders’
▪▪ Ethics (Obj. 1) ▪▪ Career Opportunities (Obj. 1) Principles (Obj. 2) Equity (Obj. 5)
▪▪ Accounting Equation (Obj. 3) ▪▪ Balance Sheet (Obj. 5)
▪▪ Transactions (Obj. 4) ▪▪ Statement of Cash Flows
(Obj. 5)
Learning Objectives
Obj. 1 Describe the nature of business and the role of Obj. 4 Describe and illustrate how business transactions can be
accounting and ethics in business. recorded in terms of the resulting change in the elements
Obj. 2 Describe generally accepted accounting principles, of the accounting equation.
including the underlying assumptions and principles. Obj. 5 Describe the financial statements of a corporation and
Obj. 3 State the accounting equation and define each explain how they interrelate.
element of the equation.
Analysis for Decision Making

Obj. 6 Describe and illustrate the use of the ratio of liabilities to stockholders’ equity in evaluating a company’s financial condition.
Objective 1 Nature of Business and Accounting

Describe the nature of
business and the role of A business1 is an organization in which basic resources (inputs), such as materials and labor, are
accounting and ethics assembled and processed to provide goods or services (outputs) to customers. Businesses come in
in business. all sizes, from a local coffee house to Starbucks (SBUX), which sells over $15 billion of coffee
and related products each year.
The objective of most businesses is to earn a profit. Profit is the difference between the amounts
received from customers for goods or services and the amounts paid for the inputs used to provide
the goods or services. This text focuses on businesses operating to earn a profit. However, many
of the same concepts and principles also apply to not-for-profit organizations such as hospitals,
churches, and government agencies.
Types of Businesses
Three types of businesses operating for profit include service, retail, and manufacturing businesses.
Some examples of each type of business follow:
▪▪ Service businesses provide services rather than products to customers.
Delta Air Lines (DAL) (transportation services)
The Walt Disney Company (DIS) (entertainment services)
▪▪ Retail businesses sell products they purchase from other businesses to customers.
Wal-Mart Stores, Inc. (WMT) (general merchandise)
Amazon.com (AMZN) (Internet books, music, videos, ...)
▪▪ Manufacturing businesses change basic inputs into products that are sold to customers.
Ford Motor Company (F) (cars, trucks, vans)
Merck & Co., Inc. (MRK) (pharmaceutical drugs)
Link to Twitter Twitter is a service company that provides a platform for individuals to send text messages called tweets.
1
A complete glossary of terms appears at the end of the text.
Chapter 1 Introduction to Accounting and Business 5
Role of Accounting in Business note:

The role of accounting in business is to provide information for managers to use in operating the Accounting is an information
business. In addition, accounting provides information to other users in assessing the economic system that provides reports
performance and condition of the business. to users about the economic
Thus, accounting can be defined as an information system that provides reports to users about activities and condition of a
business.
the economic activities and condition of a business. You could think of accounting as the “lan-
guage of business.” This is because accounting is the means by which businesses’ financial infor-
mation is communicated to users.
Twitter communicates to investors in an annual report that includes accounting information. Link to Twitter
The process by which accounting provides information to users is as follows:
1. Identify users.
2. Assess users’ information needs.
3. Design the accounting information system to meet users’ needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
As illustrated in Exhibit 1, users of accounting information can be divided into two groups:
internal users and external users.
Exhibit 1
1 Accounting as an
Identify
Users Information System
Internal External
Company Company
2
Assess
Users’
Information
Managers, Needs Investors, Creditors,
Employees Customers, Government
3 4
Design Record
Accounting Economic
System Data
5
Prepare
Accounting
Reports
Managerial Accounting Internal users of accounting information include managers and

mployees. These users are directly involved in managing and operating the business. The area
e
of accounting that provides internal users with information is called managerial accounting, or
management accounting.
The objective of managerial accounting is to provide relevant and timely information for m
anagers’
and employees’ decision-making needs. Often, such information is sensitive and is not distributed out-
side the business. Examples of sensitive information might include information about customers, prices,
and plans to expand the business. Managerial accountants employed by a business are employed in
private accounting.
Financial Accounting External users of accounting information include investors, creditors,

customers, and the government. These users are not directly involved in managing and operat-
ing the business. The area of accounting that provides external users with information is called
financial accounting.
The objective of financial accounting is to provide relevant and timely information for the
decision-making needs of users outside of the business. For example, financial reports on the
operations and condition of the business are useful for banks and other creditors in deciding
whether to lend money to the business. General-purpose financial statements are one type of
financial accounting report that is distributed to external users. The term general-purpose refers
to the wide range of decision-making needs that these reports are designed to serve. Later in this
chapter, general-purpose financial statements are described and illustrated.
Link to Twitter Twitter is a service company that provides a platform for individuals to send text messages called tweets.
Role of Ethics in Accounting and Business

The objective of accounting is to provide relevant, timely information for user decision making.
ETHICS Accountants must behave in an ethical manner so that the information they provide users will be
trustworthy and, thus, useful for decision making. Managers and employees must also behave in an
ethical manner in managing and operating a business. Otherwise, no one will be willing to invest
in or loan money to the business.
Ethics are moral principles that guide the conduct of individuals. Unfortunately, business man-
agers and accountants sometimes behave in an unethical manner. Many of the managers of the
companies listed in Exhibit 2 engaged in accounting or business fraud. These ethical violations led
to fines, firings, and lawsuits. In some cases, managers were criminally prosecuted, convicted, and
sent to prison.
Exhibit 2 Accounting and Business Frauds
Nature of Accounting
Company or Business Fraud Result
Computer Associates Fraudulently inflated its financial results. CEO and senior executives indicted.
International, Inc. Five executives pled guilty. $225 million fine.
Enron Fraudulently inflated its financial results. Bankrupcty. Senior executives criminally con-
victed. More than $60 billion in stock market
losses.
HealthSouth Overstated performance by $4 billion in false entries. Senior executives criminally convicted.
Qwest Communications Improperly recognized $3 billion in false receipts. CEO and six other executives criminally convicted
International, Inc. of “massive financial fraud.” $250 million SEC fine.
Xerox Corporation Recognized $3 billion in sales prior to when $10 million fine to SEC. Six executives
it should have been recorded. forced to pay $22 million.
What went wrong for the managers and companies listed in Exhibit 2? The answer normally
involved one or both of the following two factors:
▪▪ Failure of Individual Character: Ethical managers and accountants are honest and fair. How-
ever, managers and accountants often face pressures from supervisors to meet company and
investor expectations. In many of the cases in Exhibit 2, managers and accountants justified
small ethical violations to avoid such pressures. However, these small violations became big
violations as the company’s financial problems became worse.
▪▪ Culture of Greed and Ethical Indifference: By their behavior and attitude, senior managers
set the company culture. In most of the companies listed in Exhibit 2, the senior managers cre-
ated a culture of greed and indifference to the truth.
As a result of the accounting and business frauds shown in Exhibit 2, Congress passed laws
to monitor the behavior of accounting and business. For example, the Sarbanes-Oxley Act (SOX)
was enacted. SOX established a new oversight body for the accounting profession called the Public
Company Accounting Oversight Board (PCAOB). In addition, SOX established standards for
independence, corporate responsibility, and disclosure.
How does one behave ethically when faced with financial or other types of pressure? Guide-
lines for behaving ethically follow:2
1. Identify an ethical decision by using your personal ethical standards of honesty and fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those who will be affected by your decision.
4. Make a decision that is ethical and fair to those affected by it.
Twitter ’s “Code of Business Conduct and Ethics” can be found at https://investor.twitterinc.com/

corporate-governance.cfm. Link to Twitter
Opportunities for Accountants

Numerous career opportunities are available for students majoring in accounting. Currently, the
demand for accountants exceeds the number of new graduates entering the job market. This is
partly due to the increased regulation of business caused by the accounting and business frauds
shown in Exhibit 2. Also, more and more businesses have come to recognize the importance and
value of accounting information.
As indicated earlier, accountants employed by a business are employed in private accounting.
Private accountants have a variety of possible career options within a company. Some of these
career options are shown in Exhibit 3 along with their starting salaries. As shown in Exhibit 3, sev-
eral private accounting careers have certification options. Accountants who provide audit services,
called auditors, verify the accuracy of financial records, accounts, and systems.
Ethics: Don’t Do It!

ETHICS
Bernie Madoff investors, rather than basing returns on the investments’ actual
Bernard L. “Bernie” Madoff was sentenced to 150 years in performance. As long as the investment manager is able to
prison for defrauding thousands of investors in one of the attract new investors, he or she will have new funds to pay
b iggest frauds in American history. Madoff’s fraud started existing investors and continue the fraud. While most Ponzi
several d ecades earlier when he began a “Ponzi scheme” in his schemes collapse quickly when the investment manager runs
investment management firm, Bernard L. Madoff Investment out of new investors, Madoff’s reputation, popularity, and per-
Securities LLC. sonal contacts provided a steady stream of investors, which
In a Ponzi scheme, the investment manager uses funds allowed the fraud to survive for decades.
r eceived from new investors to pay a return to existing Source: Bernie Madoff
2
Many companies have ethical standards of conduct for managers and employees. In addition, the Institute of Management
Accountants and the American Institute of Certified Public Accountants have professional codes of c onduct, which can be obtained from their
Web sites at www.imanet.org and www.aicpa.org, respectively.
Exhibit 3 Accounting Career Paths and Salaries
Accounting Annual Starting

Career Track Description Career Options Salaries* Certification
Private Accounting Accountants employed Bookkeeper $40,000
by companies, govern- Payroll clerk $40,000 Certified Payroll Professional (CPP)
ment, and not-for-profit General accountant $51,000
entities. Budget analyst $53,000
Cost accountant $55,000 Certified Management Accountant (CMA)
Internal auditor $62,000 Certified Internal Auditor (CIA)
Information technology $71,000 Certified Information Systems Auditor (CISA)
auditor
Public Accounting Accountants employed Large firms (over $250 $68,000 Certified Public Accountant (CPA)
individually or within a million in revenue)
public accounting firm Mid-size firms $61,000 Certified Public Accountant (CPA)
in audit, tax, or manage- ($25–$250 million in
ment advisory services. revenue)
Small firms (less than $56,000 Certified Public Accountant (CPA)
$25 million in revenue)
*Average salaries rounded to the nearest thousand. Salaries may vary by size of company and region.
Source: Robert Half 2017 U.S. Salary Guide (Finance and Accounting), Robert Half International, Inc. (www.roberthalf.com/workplace-research/salary-guides).
Accountants and their staff who provide services on a fee basis are said to be employed in
ublic accounting. In public accounting, an accountant may practice as an individual or as a
p
member of a public accounting firm. Public accountants who have met a state’s education, expe-
rience, and examination requirements may become Certified Public Accountants (CPAs). CPAs
typically perform general accounting, audit, or tax services. As can be seen in Exhibit 3, CPAs have
slightly better starting salaries than private accountants. Career statistics indicate, however, that
these salary differences tend to disappear over time. The American Institute of Certified Public
Accountants (AICPA) provides information and resources for students interested in accounting at
www.startheregoplaces.com.
Because all functions within a business use accounting information, experience in private or
public accounting provides a solid foundation for a career. Many positions in industry and in gov-
ernment agencies are held by individuals with accounting backgrounds.
Why It Matters
CONCEPT CLIP
Pathways Commission
T
he Pathways Commission recently issued its study titled Chart-
ing a National Strategy for the Next Generation of Accountants.
The Commission was made up of diverse members and was
jointly sponsored by the American Institute of Certified Public Accoun-
tants (AICPA) and the American Accounting Association (AAA). The
Commission emphasized the importance of accounting for a prosper-
ous society and good decision making. The Commission also empha-
sized that accountants must be critical thinkers who are comfortable
addressing the shades of gray required by accounting judgments.
Source: Charting a National Strategy for the Next Generation of

Accountants, The Pathways Commission, July 2012.
Generally Accepted Accounting Objective 2

Describe generally
Principles (GAAP) accepted accounting
principles, including the
Financial information in the United States is based on generally accepted accounting principles underlying assumptions
(GAAP). GAAP is a collection of accounting standards, principles, and assumptions that define and principles.
how financial information will be reported.
▪▪ Accounting standards are the rules that determine the accounting for individual business
transactions.
▪▪ Accounting principles and assumptions provide the framework upon which accounting stan-
dards are constructed.
Within the United States, the Financial Accounting Standards Board (FASB) has the primary
responsibility for developing accounting standards. The FASB maintains an electronic database,
called the Accounting Standards Codification, that contains all the accounting standards that
make up GAAP. Changes in the FASB Codification are made using Accounting Standards Updates.
The Securities and Exchange Commission (SEC), an agency of the U.S. government, has
authority over the accounting and financial disclosures for companies whose shares of ownership
(stock) are traded and sold to the public. The SEC normally accepts the accounting standards set
forth by the FASB. However, the SEC may issue Staff Accounting Bulletins on accounting matters
that may not have been addressed by the FASB.
Outside the United States, most countries use accounting standards and principles adopted by
the International Accounting Standards Board (IASB). The IASB issues International Financial
Reporting Standards (IFRS). Major differences between FASB and IASB accounting principles are
identified throughout the chapters of this text and in Appendix C.
Characteristics of Financial Information

The primary goal of financial accounting is to provide information that is useful for decision mak-
ing. To be useful, financial reports must possess two important characteristics: relevance and faith-
ful representation.
▪▪ Relevant information has the potential to impact decision making.
▪▪ Faithful representation means that the information accurately reflects an entity’s economic
activity or condition.
The characteristics of relevant and faithful representation are enhanced by the following:
▪▪ Comparability allows users to identify similarities and differences among reported items.
▪▪ Verifiability allows users to agree on the meaning of reported items.
▪▪ Timeliness requires distribution of financial reports in time to influence a user’s decision.
▪▪ Understandability requires clear and concise financial reports that facilitate user interpretation
and analysis.
International Connection
IFRSInternational Financial contrast, IFRS allow more judgment in deciding how business
Reporting Standards (IFRS) transactions are recorded. Many believe that the strong reg-
IFRS are considered to be more “principles-based” than U.S. ulatory and litigation environment in the United States is the
GAAP, which is considered to be more “rules-based.” For cause for the more rules-based GAAP approach. Regardless,
example, U.S. GAAP consists of approximately 17,000 pages, IFRS and GAAP share many common principles.*
which include numerous industry-specific accounting rules. In *Differences between U.S. GAAP and IFRS are further discussed and illustrated in Appendix C.
Assumptions
Financial accounting and generally accepted accounting principles are based upon the following
assumptions:
▪▪ Monetary unit
▪▪ Time period
▪▪ Business entity
▪▪ Going concern
The monetary unit assumption requires that financial reports be expressed in a single
money unit, or currency. This provides a common measurement of the effects of economic events
and transactions on an entity. The monetary unit used is normally determined by the country in
which the company operates. For example, in the United States, the U.S. dollar is used as the
monetary unit.
The time period assumption allows a company to report its economic activities on a regular
basis for a specific period of time. In doing so, financial condition and changes in financial con-
dition are reported periodically on a consistent basis. In the United States, reports are normally
required on a yearly basis supplemented with quarterly reports.
Link to Twitter Twitter publishes quarterly as well as yearly financial reports that are available at https://investor.
twitterinc.com.
The annual accounting period adopted by a company is called its fiscal year. The fiscal year
most commonly used is the calendar year beginning January 1 and ending December 31. H owever,
other periods are not unusual, especially for companies organized as corporations. For example,
a corporation may adopt a fiscal year that ends when business activities have reached the lowest
point in its annual operating cycle, which allows more time to prepare financial reports. Such a
fiscal year is called the natural business year. For example, a company’s fiscal year could begin
August 1, 20Y7, and end on July 31, 20Y8, as follows:
20Y7 20Y8
Aug. 1 Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July 31
Fiscal Year
August 1, 20Y7 to July 31, 20Y8
The business entity assumption limits the economic data in financial reports to that directly
related to the activities of the business. In other words, the business is viewed as an entity separate
from its owners, creditors, or other businesses. For example, the accountant for a business with
one owner would record the activities of the business only and would not record the personal
activities, property, or debts of the owner.
A business entity may take the form of a proprietorship, partnership, corporation, or limited
liability company (LLC). Each of these forms and their major characteristics are listed in Exhibit 4.
The three types of businesses discussed earlier—service, retail, and manufacturing—may be
organized as proprietorships, partnerships, corporations, or limited liability companies.
Because of the large amount of resources required to operate a manufacturing business, most
manufacturers such as Ford Motor Company (F) are corporations. Most large retailers such
as Wal-Mart Stores (WMT) and The Home Depot (HD) are also corporations. Companies
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DANCE ON STILTS AT THE GIRLS’ UNYAGO, NIUCHI
Newala, too, suffers from the distance of its water-supply—at least

the Newala of to-day does; there was once another Newala in a lovely
valley at the foot of the plateau. I visited it and found scarcely a trace
of houses, only a Christian cemetery, with the graves of several
missionaries and their converts, remaining as a monument of its
former glories. But the surroundings are wonderfully beautiful. A
thick grove of splendid mango-trees closes in the weather-worn
crosses and headstones; behind them, combining the useful and the
agreeable, is a whole plantation of lemon-trees covered with ripe
fruit; not the small African kind, but a much larger and also juicier
imported variety, which drops into the hands of the passing traveller,
without calling for any exertion on his part. Old Newala is now under
the jurisdiction of the native pastor, Daudi, at Chingulungulu, who,
as I am on very friendly terms with him, allows me, as a matter of
course, the use of this lemon-grove during my stay at Newala.
FEET MUTILATED BY THE RAVAGES OF THE “JIGGER”
(Sarcopsylla penetrans)
The water-supply of New Newala is in the bottom of the valley,

some 1,600 feet lower down. The way is not only long and fatiguing,
but the water, when we get it, is thoroughly bad. We are suffering not
only from this, but from the fact that the arrangements at Newala are
nothing short of luxurious. We have a separate kitchen—a hut built
against the boma palisade on the right of the baraza, the interior of
which is not visible from our usual position. Our two cooks were not
long in finding this out, and they consequently do—or rather neglect
to do—what they please. In any case they do not seem to be very
particular about the boiling of our drinking-water—at least I can
attribute to no other cause certain attacks of a dysenteric nature,
from which both Knudsen and I have suffered for some time. If a
man like Omari has to be left unwatched for a moment, he is capable
of anything. Besides this complaint, we are inconvenienced by the
state of our nails, which have become as hard as glass, and crack on
the slightest provocation, and I have the additional infliction of
pimples all over me. As if all this were not enough, we have also, for
the last week been waging war against the jigger, who has found his
Eldorado in the hot sand of the Makonde plateau. Our men are seen
all day long—whenever their chronic colds and the dysentery likewise
raging among them permit—occupied in removing this scourge of
Africa from their feet and trying to prevent the disastrous
consequences of its presence. It is quite common to see natives of
this place with one or two toes missing; many have lost all their toes,
or even the whole front part of the foot, so that a well-formed leg
ends in a shapeless stump. These ravages are caused by the female of
Sarcopsylla penetrans, which bores its way under the skin and there
develops an egg-sac the size of a pea. In all books on the subject, it is
stated that one’s attention is called to the presence of this parasite by
an intolerable itching. This agrees very well with my experience, so
far as the softer parts of the sole, the spaces between and under the
toes, and the side of the foot are concerned, but if the creature
penetrates through the harder parts of the heel or ball of the foot, it
may escape even the most careful search till it has reached maturity.
Then there is no time to be lost, if the horrible ulceration, of which
we see cases by the dozen every day, is to be prevented. It is much
easier, by the way, to discover the insect on the white skin of a
European than on that of a native, on which the dark speck scarcely
shows. The four or five jiggers which, in spite of the fact that I
constantly wore high laced boots, chose my feet to settle in, were
taken out for me by the all-accomplished Knudsen, after which I
thought it advisable to wash out the cavities with corrosive
sublimate. The natives have a different sort of disinfectant—they fill
the hole with scraped roots. In a tiny Makua village on the slope of
the plateau south of Newala, we saw an old woman who had filled all
the spaces under her toe-nails with powdered roots by way of
prophylactic treatment. What will be the result, if any, who can say?
The rest of the many trifling ills which trouble our existence are
really more comic than serious. In the absence of anything else to
smoke, Knudsen and I at last opened a box of cigars procured from
the Indian store-keeper at Lindi, and tried them, with the most
distressing results. Whether they contain opium or some other
narcotic, neither of us can say, but after the tenth puff we were both
“off,” three-quarters stupefied and unspeakably wretched. Slowly we
recovered—and what happened next? Half-an-hour later we were
once more smoking these poisonous concoctions—so insatiable is the
craving for tobacco in the tropics.
Even my present attacks of fever scarcely deserve to be taken
seriously. I have had no less than three here at Newala, all of which
have run their course in an incredibly short time. In the early
afternoon, I am busy with my old natives, asking questions and
making notes. The strong midday coffee has stimulated my spirits to
an extraordinary degree, the brain is active and vigorous, and work
progresses rapidly, while a pleasant warmth pervades the whole
body. Suddenly this gives place to a violent chill, forcing me to put on
my overcoat, though it is only half-past three and the afternoon sun
is at its hottest. Now the brain no longer works with such acuteness
and logical precision; more especially does it fail me in trying to
establish the syntax of the difficult Makua language on which I have
ventured, as if I had not enough to do without it. Under the
circumstances it seems advisable to take my temperature, and I do
so, to save trouble, without leaving my seat, and while going on with
my work. On examination, I find it to be 101·48°. My tutors are
abruptly dismissed and my bed set up in the baraza; a few minutes
later I am in it and treating myself internally with hot water and
lemon-juice.
Three hours later, the thermometer marks nearly 104°, and I make
them carry me back into the tent, bed and all, as I am now perspiring
heavily, and exposure to the cold wind just beginning to blow might
mean a fatal chill. I lie still for a little while, and then find, to my
great relief, that the temperature is not rising, but rather falling. This
is about 7.30 p.m. At 8 p.m. I find, to my unbounded astonishment,
that it has fallen below 98·6°, and I feel perfectly well. I read for an
hour or two, and could very well enjoy a smoke, if I had the
wherewithal—Indian cigars being out of the question.
Having no medical training, I am at a loss to account for this state
of things. It is impossible that these transitory attacks of high fever
should be malarial; it seems more probable that they are due to a
kind of sunstroke. On consulting my note-book, I become more and
more inclined to think this is the case, for these attacks regularly
follow extreme fatigue and long exposure to strong sunshine. They at
least have the advantage of being only short interruptions to my
work, as on the following morning I am always quite fresh and fit.
My treasure of a cook is suffering from an enormous hydrocele which
makes it difficult for him to get up, and Moritz is obliged to keep in
the dark on account of his inflamed eyes. Knudsen’s cook, a raw boy
from somewhere in the bush, knows still less of cooking than Omari;
consequently Nils Knudsen himself has been promoted to the vacant
post. Finding that we had come to the end of our supplies, he began
by sending to Chingulungulu for the four sucking-pigs which we had
bought from Matola and temporarily left in his charge; and when
they came up, neatly packed in a large crate, he callously slaughtered
the biggest of them. The first joint we were thoughtless enough to
entrust for roasting to Knudsen’s mshenzi cook, and it was
consequently uneatable; but we made the rest of the animal into a
jelly which we ate with great relish after weeks of underfeeding,
consuming incredible helpings of it at both midday and evening
meals. The only drawback is a certain want of variety in the tinned
vegetables. Dr. Jäger, to whom the Geographical Commission
entrusted the provisioning of the expeditions—mine as well as his
own—because he had more time on his hands than the rest of us,
seems to have laid in a huge stock of Teltow turnips,[46] an article of
food which is all very well for occasional use, but which quickly palls
when set before one every day; and we seem to have no other tins
left. There is no help for it—we must put up with the turnips; but I
am certain that, once I am home again, I shall not touch them for ten
years to come.
Amid all these minor evils, which, after all, go to make up the
genuine flavour of Africa, there is at least one cheering touch:
Knudsen has, with the dexterity of a skilled mechanic, repaired my 9
× 12 cm. camera, at least so far that I can use it with a little care.
How, in the absence of finger-nails, he was able to accomplish such a
ticklish piece of work, having no tool but a clumsy screw-driver for
taking to pieces and putting together again the complicated
mechanism of the instantaneous shutter, is still a mystery to me; but
he did it successfully. The loss of his finger-nails shows him in a light
contrasting curiously enough with the intelligence evinced by the
above operation; though, after all, it is scarcely surprising after his
ten years’ residence in the bush. One day, at Lindi, he had occasion
to wash a dog, which must have been in need of very thorough
cleansing, for the bottle handed to our friend for the purpose had an
extremely strong smell. Having performed his task in the most
conscientious manner, he perceived with some surprise that the dog
did not appear much the better for it, and was further surprised by
finding his own nails ulcerating away in the course of the next few
days. “How was I to know that carbolic acid has to be diluted?” he
mutters indignantly, from time to time, with a troubled gaze at his
mutilated finger-tips.
Since we came to Newala we have been making excursions in all
directions through the surrounding country, in accordance with old
habit, and also because the akida Sefu did not get together the tribal
elders from whom I wanted information so speedily as he had
promised. There is, however, no harm done, as, even if seen only
from the outside, the country and people are interesting enough.
The Makonde plateau is like a large rectangular table rounded off
at the corners. Measured from the Indian Ocean to Newala, it is
about seventy-five miles long, and between the Rovuma and the
Lukuledi it averages fifty miles in breadth, so that its superficial area
is about two-thirds of that of the kingdom of Saxony. The surface,
however, is not level, but uniformly inclined from its south-western
edge to the ocean. From the upper edge, on which Newala lies, the
eye ranges for many miles east and north-east, without encountering
any obstacle, over the Makonde bush. It is a green sea, from which
here and there thick clouds of smoke rise, to show that it, too, is
inhabited by men who carry on their tillage like so many other
primitive peoples, by cutting down and burning the bush, and
manuring with the ashes. Even in the radiant light of a tropical day
such a fire is a grand sight.
Much less effective is the impression produced just now by the
great western plain as seen from the edge of the plateau. As often as
time permits, I stroll along this edge, sometimes in one direction,
sometimes in another, in the hope of finding the air clear enough to
let me enjoy the view; but I have always been disappointed.
Wherever one looks, clouds of smoke rise from the burning bush,
and the air is full of smoke and vapour. It is a pity, for under more
favourable circumstances the panorama of the whole country up to
the distant Majeje hills must be truly magnificent. It is of little use
taking photographs now, and an outline sketch gives a very poor idea
of the scenery. In one of these excursions I went out of my way to
make a personal attempt on the Makonde bush. The present edge of
the plateau is the result of a far-reaching process of destruction
through erosion and denudation. The Makonde strata are
everywhere cut into by ravines, which, though short, are hundreds of
yards in depth. In consequence of the loose stratification of these
beds, not only are the walls of these ravines nearly vertical, but their
upper end is closed by an equally steep escarpment, so that the
western edge of the Makonde plateau is hemmed in by a series of
deep, basin-like valleys. In order to get from one side of such a ravine
to the other, I cut my way through the bush with a dozen of my men.
It was a very open part, with more grass than scrub, but even so the
short stretch of less than two hundred yards was very hard work; at
the end of it the men’s calicoes were in rags and they themselves
bleeding from hundreds of scratches, while even our strong khaki
suits had not escaped scatheless.
NATIVE PATH THROUGH THE MAKONDE BUSH, NEAR

MAHUTA
I see increasing reason to believe that the view formed some time
back as to the origin of the Makonde bush is the correct one. I have
no doubt that it is not a natural product, but the result of human
occupation. Those parts of the high country where man—as a very
slight amount of practice enables the eye to perceive at once—has not
yet penetrated with axe and hoe, are still occupied by a splendid
timber forest quite able to sustain a comparison with our mixed
forests in Germany. But wherever man has once built his hut or tilled
his field, this horrible bush springs up. Every phase of this process
may be seen in the course of a couple of hours’ walk along the main
road. From the bush to right or left, one hears the sound of the axe—
not from one spot only, but from several directions at once. A few
steps further on, we can see what is taking place. The brush has been
cut down and piled up in heaps to the height of a yard or more,
between which the trunks of the large trees stand up like the last
pillars of a magnificent ruined building. These, too, present a
melancholy spectacle: the destructive Makonde have ringed them—
cut a broad strip of bark all round to ensure their dying off—and also
piled up pyramids of brush round them. Father and son, mother and
son-in-law, are chopping away perseveringly in the background—too
busy, almost, to look round at the white stranger, who usually excites
so much interest. If you pass by the same place a week later, the piles
of brushwood have disappeared and a thick layer of ashes has taken
the place of the green forest. The large trees stretch their
smouldering trunks and branches in dumb accusation to heaven—if
they have not already fallen and been more or less reduced to ashes,
perhaps only showing as a white stripe on the dark ground.
This work of destruction is carried out by the Makonde alike on the
virgin forest and on the bush which has sprung up on sites already
cultivated and deserted. In the second case they are saved the trouble
of burning the large trees, these being entirely absent in the
secondary bush.
After burning this piece of forest ground and loosening it with the
hoe, the native sows his corn and plants his vegetables. All over the
country, he goes in for bed-culture, which requires, and, in fact,
receives, the most careful attention. Weeds are nowhere tolerated in
the south of German East Africa. The crops may fail on the plains,
where droughts are frequent, but never on the plateau with its
abundant rains and heavy dews. Its fortunate inhabitants even have
the satisfaction of seeing the proud Wayao and Wamakua working
for them as labourers, driven by hunger to serve where they were
accustomed to rule.
But the light, sandy soil is soon exhausted, and would yield no
harvest the second year if cultivated twice running. This fact has
been familiar to the native for ages; consequently he provides in
time, and, while his crop is growing, prepares the next plot with axe
and firebrand. Next year he plants this with his various crops and
lets the first piece lie fallow. For a short time it remains waste and
desolate; then nature steps in to repair the destruction wrought by
man; a thousand new growths spring out of the exhausted soil, and
even the old stumps put forth fresh shoots. Next year the new growth
is up to one’s knees, and in a few years more it is that terrible,
impenetrable bush, which maintains its position till the black
occupier of the land has made the round of all the available sites and
come back to his starting point.
The Makonde are, body and soul, so to speak, one with this bush.
According to my Yao informants, indeed, their name means nothing
else but “bush people.” Their own tradition says that they have been
settled up here for a very long time, but to my surprise they laid great
stress on an original immigration. Their old homes were in the
south-east, near Mikindani and the mouth of the Rovuma, whence
their peaceful forefathers were driven by the continual raids of the
Sakalavas from Madagascar and the warlike Shirazis[47] of the coast,
to take refuge on the almost inaccessible plateau. I have studied
African ethnology for twenty years, but the fact that changes of
population in this apparently quiet and peaceable corner of the earth
could have been occasioned by outside enterprises taking place on
the high seas, was completely new to me. It is, no doubt, however,
correct.
The charming tribal legend of the Makonde—besides informing us
of other interesting matters—explains why they have to live in the
thickest of the bush and a long way from the edge of the plateau,
instead of making their permanent homes beside the purling brooks
and springs of the low country.
“The place where the tribe originated is Mahuta, on the southern
side of the plateau towards the Rovuma, where of old time there was
nothing but thick bush. Out of this bush came a man who never
washed himself or shaved his head, and who ate and drank but little.
He went out and made a human figure from the wood of a tree
growing in the open country, which he took home to his abode in the
bush and there set it upright. In the night this image came to life and
was a woman. The man and woman went down together to the
Rovuma to wash themselves. Here the woman gave birth to a still-
born child. They left that place and passed over the high land into the
valley of the Mbemkuru, where the woman had another child, which
was also born dead. Then they returned to the high bush country of
Mahuta, where the third child was born, which lived and grew up. In
course of time, the couple had many more children, and called
themselves Wamatanda. These were the ancestral stock of the
Makonde, also called Wamakonde,[48] i.e., aborigines. Their
forefather, the man from the bush, gave his children the command to
bury their dead upright, in memory of the mother of their race who
was cut out of wood and awoke to life when standing upright. He also
warned them against settling in the valleys and near large streams,
for sickness and death dwelt there. They were to make it a rule to
have their huts at least an hour’s walk from the nearest watering-
place; then their children would thrive and escape illness.”
The explanation of the name Makonde given by my informants is
somewhat different from that contained in the above legend, which I
extract from a little book (small, but packed with information), by
Pater Adams, entitled Lindi und sein Hinterland. Otherwise, my
results agree exactly with the statements of the legend. Washing?
Hapana—there is no such thing. Why should they do so? As it is, the
supply of water scarcely suffices for cooking and drinking; other
people do not wash, so why should the Makonde distinguish himself
by such needless eccentricity? As for shaving the head, the short,
woolly crop scarcely needs it,[49] so the second ancestral precept is
likewise easy enough to follow. Beyond this, however, there is
nothing ridiculous in the ancestor’s advice. I have obtained from
various local artists a fairly large number of figures carved in wood,
ranging from fifteen to twenty-three inches in height, and
representing women belonging to the great group of the Mavia,
Makonde, and Matambwe tribes. The carving is remarkably well
done and renders the female type with great accuracy, especially the
keloid ornamentation, to be described later on. As to the object and
meaning of their works the sculptors either could or (more probably)
would tell me nothing, and I was forced to content myself with the
scanty information vouchsafed by one man, who said that the figures
were merely intended to represent the nembo—the artificial
deformations of pelele, ear-discs, and keloids. The legend recorded
by Pater Adams places these figures in a new light. They must surely
be more than mere dolls; and we may even venture to assume that
they are—though the majority of present-day Makonde are probably
unaware of the fact—representations of the tribal ancestress.
The references in the legend to the descent from Mahuta to the
Rovuma, and to a journey across the highlands into the Mbekuru
valley, undoubtedly indicate the previous history of the tribe, the
travels of the ancestral pair typifying the migrations of their
descendants. The descent to the neighbouring Rovuma valley, with
its extraordinary fertility and great abundance of game, is intelligible
at a glance—but the crossing of the Lukuledi depression, the ascent
to the Rondo Plateau and the descent to the Mbemkuru, also lie
within the bounds of probability, for all these districts have exactly
the same character as the extreme south. Now, however, comes a
point of especial interest for our bacteriological age. The primitive
Makonde did not enjoy their lives in the marshy river-valleys.
Disease raged among them, and many died. It was only after they
had returned to their original home near Mahuta, that the health
conditions of these people improved. We are very apt to think of the
African as a stupid person whose ignorance of nature is only equalled
by his fear of it, and who looks on all mishaps as caused by evil
spirits and malignant natural powers. It is much more correct to
assume in this case that the people very early learnt to distinguish
districts infested with malaria from those where it is absent.
This knowledge is crystallized in the
ancestral warning against settling in the
valleys and near the great waters, the
dwelling-places of disease and death. At the
same time, for security against the hostile
Mavia south of the Rovuma, it was enacted
that every settlement must be not less than a
certain distance from the southern edge of the
plateau. Such in fact is their mode of life at the
present day. It is not such a bad one, and
certainly they are both safer and more
comfortable than the Makua, the recent
intruders from the south, who have made USUAL METHOD OF
good their footing on the western edge of the CLOSING HUT-DOOR
plateau, extending over a fairly wide belt of
country. Neither Makua nor Makonde show in their dwellings
anything of the size and comeliness of the Yao houses in the plain,
especially at Masasi, Chingulungulu and Zuza’s. Jumbe Chauro, a
Makonde hamlet not far from Newala, on the road to Mahuta, is the
most important settlement of the tribe I have yet seen, and has fairly
spacious huts. But how slovenly is their construction compared with
the palatial residences of the elephant-hunters living in the plain.
The roofs are still more untidy than in the general run of huts during
the dry season, the walls show here and there the scanty beginnings
or the lamentable remains of the mud plastering, and the interior is a
veritable dog-kennel; dirt, dust and disorder everywhere. A few huts
only show any attempt at division into rooms, and this consists
merely of very roughly-made bamboo partitions. In one point alone
have I noticed any indication of progress—in the method of fastening
the door. Houses all over the south are secured in a simple but
ingenious manner. The door consists of a set of stout pieces of wood
or bamboo, tied with bark-string to two cross-pieces, and moving in
two grooves round one of the door-posts, so as to open inwards. If
the owner wishes to leave home, he takes two logs as thick as a man’s
upper arm and about a yard long. One of these is placed obliquely
against the middle of the door from the inside, so as to form an angle
of from 60° to 75° with the ground. He then places the second piece
horizontally across the first, pressing it downward with all his might.
It is kept in place by two strong posts planted in the ground a few
inches inside the door. This fastening is absolutely safe, but of course
cannot be applied to both doors at once, otherwise how could the
owner leave or enter his house? I have not yet succeeded in finding
out how the back door is fastened.
MAKONDE LOCK AND KEY AT JUMBE CHAURO

This is the general way of closing a house. The Makonde at Jumbe
Chauro, however, have a much more complicated, solid and original
one. Here, too, the door is as already described, except that there is
only one post on the inside, standing by itself about six inches from
one side of the doorway. Opposite this post is a hole in the wall just
large enough to admit a man’s arm. The door is closed inside by a
large wooden bolt passing through a hole in this post and pressing
with its free end against the door. The other end has three holes into
which fit three pegs running in vertical grooves inside the post. The
door is opened with a wooden key about a foot long, somewhat
curved and sloped off at the butt; the other end has three pegs
corresponding to the holes, in the bolt, so that, when it is thrust
through the hole in the wall and inserted into the rectangular
opening in the post, the pegs can be lifted and the bolt drawn out.[50]
MODE OF INSERTING THE KEY
With no small pride first one householder and then a second

showed me on the spot the action of this greatest invention of the
Makonde Highlands. To both with an admiring exclamation of
“Vizuri sana!” (“Very fine!”). I expressed the wish to take back these
marvels with me to Ulaya, to show the Wazungu what clever fellows
the Makonde are. Scarcely five minutes after my return to camp at
Newala, the two men came up sweating under the weight of two
heavy logs which they laid down at my feet, handing over at the same
time the keys of the fallen fortress. Arguing, logically enough, that if
the key was wanted, the lock would be wanted with it, they had taken
their axes and chopped down the posts—as it never occurred to them
to dig them out of the ground and so bring them intact. Thus I have
two badly damaged specimens, and the owners, instead of praise,
come in for a blowing-up.
The Makua huts in the environs of Newala are especially
miserable; their more than slovenly construction reminds one of the
temporary erections of the Makua at Hatia’s, though the people here
have not been concerned in a war. It must therefore be due to
congenital idleness, or else to the absence of a powerful chief. Even
the baraza at Mlipa’s, a short hour’s walk south-east of Newala,
shares in this general neglect. While public buildings in this country
are usually looked after more or less carefully, this is in evident
danger of being blown over by the first strong easterly gale. The only
attractive object in this whole district is the grave of the late chief
Mlipa. I visited it in the morning, while the sun was still trying with
partial success to break through the rolling mists, and the circular
grove of tall euphorbias, which, with a broken pot, is all that marks
the old king’s resting-place, impressed one with a touch of pathos.
Even my very materially-minded carriers seemed to feel something
of the sort, for instead of their usual ribald songs, they chanted
solemnly, as we marched on through the dense green of the Makonde
bush:—
“We shall arrive with the great master; we stand in a row and have
no fear about getting our food and our money from the Serkali (the
Government). We are not afraid; we are going along with the great
master, the lion; we are going down to the coast and back.”
With regard to the characteristic features of the various tribes here
on the western edge of the plateau, I can arrive at no other
conclusion than the one already come to in the plain, viz., that it is
impossible for anyone but a trained anthropologist to assign any
given individual at once to his proper tribe. In fact, I think that even
an anthropological specialist, after the most careful examination,
might find it a difficult task to decide. The whole congeries of peoples
collected in the region bounded on the west by the great Central
African rift, Tanganyika and Nyasa, and on the east by the Indian
Ocean, are closely related to each other—some of their languages are
only distinguished from one another as dialects of the same speech,
and no doubt all the tribes present the same shape of skull and
structure of skeleton. Thus, surely, there can be no very striking
differences in outward appearance.
Even did such exist, I should have no time
to concern myself with them, for day after day,
I have to see or hear, as the case may be—in
any case to grasp and record—an
extraordinary number of ethnographic
phenomena. I am almost disposed to think it
fortunate that some departments of inquiry, at
least, are barred by external circumstances.
Chief among these is the subject of iron-
working. We are apt to think of Africa as a
country where iron ore is everywhere, so to
speak, to be picked up by the roadside, and
where it would be quite surprising if the
inhabitants had not learnt to smelt the
material ready to their hand. In fact, the
knowledge of this art ranges all over the
continent, from the Kabyles in the north to the
Kafirs in the south. Here between the Rovuma
and the Lukuledi the conditions are not so
favourable. According to the statements of the
Makonde, neither ironstone nor any other
form of iron ore is known to them. They have
not therefore advanced to the art of smelting
the metal, but have hitherto bought all their
THE ANCESTRESS OF
THE MAKONDE
iron implements from neighbouring tribes.
Even in the plain the inhabitants are not much
better off. Only one man now living is said to
understand the art of smelting iron. This old fundi lives close to
Huwe, that isolated, steep-sided block of granite which rises out of
the green solitude between Masasi and Chingulungulu, and whose
jagged and splintered top meets the traveller’s eye everywhere. While
still at Masasi I wished to see this man at work, but was told that,
frightened by the rising, he had retired across the Rovuma, though
he would soon return. All subsequent inquiries as to whether the
fundi had come back met with the genuine African answer, “Bado”
(“Not yet”).
BRAZIER
Some consolation was afforded me by a brassfounder, whom I

came across in the bush near Akundonde’s. This man is the favourite
of women, and therefore no doubt of the gods; he welds the glittering
brass rods purchased at the coast into those massive, heavy rings
which, on the wrists and ankles of the local fair ones, continually give
me fresh food for admiration. Like every decent master-craftsman he
had all his tools with him, consisting of a pair of bellows, three
crucibles and a hammer—nothing more, apparently. He was quite
willing to show his skill, and in a twinkling had fixed his bellows on
the ground. They are simply two goat-skins, taken off whole, the four
legs being closed by knots, while the upper opening, intended to
admit the air, is kept stretched by two pieces of wood. At the lower
end of the skin a smaller opening is left into which a wooden tube is
stuck. The fundi has quickly borrowed a heap of wood-embers from
the nearest hut; he then fixes the free ends of the two tubes into an
earthen pipe, and clamps them to the ground by means of a bent
piece of wood. Now he fills one of his small clay crucibles, the dross
on which shows that they have been long in use, with the yellow
material, places it in the midst of the embers, which, at present are
only faintly glimmering, and begins his work. In quick alternation
the smith’s two hands move up and down with the open ends of the
bellows; as he raises his hand he holds the slit wide open, so as to let
the air enter the skin bag unhindered. In pressing it down he closes
the bag, and the air puffs through the bamboo tube and clay pipe into
the fire, which quickly burns up. The smith, however, does not keep
on with this work, but beckons to another man, who relieves him at
the bellows, while he takes some more tools out of a large skin pouch
carried on his back. I look on in wonder as, with a smooth round
stick about the thickness of a finger, he bores a few vertical holes into
the clean sand of the soil. This should not be difficult, yet the man
seems to be taking great pains over it. Then he fastens down to the
ground, with a couple of wooden clamps, a neat little trough made by
splitting a joint of bamboo in half, so that the ends are closed by the
two knots. At last the yellow metal has attained the right consistency,
and the fundi lifts the crucible from the fire by means of two sticks
split at the end to serve as tongs. A short swift turn to the left—a
tilting of the crucible—and the molten brass, hissing and giving forth
clouds of smoke, flows first into the bamboo mould and then into the
holes in the ground.
The technique of this backwoods craftsman may not be very far
advanced, but it cannot be denied that he knows how to obtain an
adequate result by the simplest means. The ladies of highest rank in
this country—that is to say, those who can afford it, wear two kinds
of these massive brass rings, one cylindrical, the other semicircular
in section. The latter are cast in the most ingenious way in the
bamboo mould, the former in the circular hole in the sand. It is quite
a simple matter for the fundi to fit these bars to the limbs of his fair
customers; with a few light strokes of his hammer he bends the
pliable brass round arm or ankle without further inconvenience to
the wearer.
SHAPING THE POT
SMOOTHING WITH MAIZE-COB
CUTTING THE EDGE

FINISHING THE BOTTOM
LAST SMOOTHING BEFORE

BURNING
FIRING THE BRUSH-PILE

LIGHTING THE FARTHER SIDE OF
THE PILE
TURNING THE RED-HOT VESSEL
NYASA WOMAN MAKING POTS AT MASASI

Pottery is an art which must always and everywhere excite the
interest of the student, just because it is so intimately connected with
the development of human culture, and because its relics are one of
the principal factors in the reconstruction of our own condition in
prehistoric times. I shall always remember with pleasure the two or
three afternoons at Masasi when Salim Matola’s mother, a slightly-
built, graceful, pleasant-looking woman, explained to me with
touching patience, by means of concrete illustrations, the ceramic art
of her people. The only implements for this primitive process were a
lump of clay in her left hand, and in the right a calabash containing
the following valuables: the fragment of a maize-cob stripped of all
its grains, a smooth, oval pebble, about the size of a pigeon’s egg, a
few chips of gourd-shell, a bamboo splinter about the length of one’s
hand, a small shell, and a bunch of some herb resembling spinach.
Nothing more. The woman scraped with the
shell a round, shallow hole in the soft, fine
sand of the soil, and, when an active young
girl had filled the calabash with water for her,
she began to knead the clay. As if by magic it
gradually assumed the shape of a rough but
already well-shaped vessel, which only wanted
a little touching up with the instruments
before mentioned. I looked out with the
MAKUA WOMAN closest attention for any indication of the use
MAKING A POT. of the potter’s wheel, in however rudimentary
SHOWS THE a form, but no—hapana (there is none). The
BEGINNINGS OF THE embryo pot stood firmly in its little
POTTER’S WHEEL
depression, and the woman walked round it in
a stooping posture, whether she was removing
small stones or similar foreign bodies with the maize-cob, smoothing
the inner or outer surface with the splinter of bamboo, or later, after
letting it dry for a day, pricking in the ornamentation with a pointed
bit of gourd-shell, or working out the bottom, or cutting the edge
with a sharp bamboo knife, or giving the last touches to the finished
vessel. This occupation of the women is infinitely toilsome, but it is
without doubt an accurate reproduction of the process in use among
our ancestors of the Neolithic and Bronze ages.
There is no doubt that the invention of pottery, an item in human
progress whose importance cannot be over-estimated, is due to
women. Rough, coarse and unfeeling, the men of the horde range
over the countryside. When the united cunning of the hunters has
succeeded in killing the game; not one of them thinks of carrying
home the spoil. A bright fire, kindled by a vigorous wielding of the
drill, is crackling beside them; the animal has been cleaned and cut
up secundum artem, and, after a slight singeing, will soon disappear
under their sharp teeth; no one all this time giving a single thought
to wife or child.
To what shifts, on the other hand, the primitive wife, and still more
the primitive mother, was put! Not even prehistoric stomachs could
endure an unvarying diet of raw food. Something or other suggested
the beneficial effect of hot water on the majority of approved but
indigestible dishes. Perhaps a neighbour had tried holding the hard
roots or tubers over the fire in a calabash filled with water—or maybe
an ostrich-egg-shell, or a hastily improvised vessel of bark. They
became much softer and more palatable than they had previously
been; but, unfortunately, the vessel could not stand the fire and got
charred on the outside. That can be remedied, thought our
ancestress, and plastered a layer of wet clay round a similar vessel.
This is an improvement; the cooking utensil remains uninjured, but
the heat of the fire has shrunk it, so that it is loose in its shell. The
next step is to detach it, so, with a firm grip and a jerk, shell and
kernel are separated, and pottery is invented. Perhaps, however, the
discovery which led to an intelligent use of the burnt-clay shell, was
made in a slightly different way. Ostrich-eggs and calabashes are not
to be found in every part of the world, but everywhere mankind has
arrived at the art of making baskets out of pliant materials, such as
bark, bast, strips of palm-leaf, supple twigs, etc. Our inventor has no
water-tight vessel provided by nature. “Never mind, let us line the
basket with clay.” This answers the purpose, but alas! the basket gets
burnt over the blazing fire, the woman watches the process of
cooking with increasing uneasiness, fearing a leak, but no leak
appears. The food, done to a turn, is eaten with peculiar relish; and
the cooking-vessel is examined, half in curiosity, half in satisfaction
at the result. The plastic clay is now hard as stone, and at the same
time looks exceedingly well, for the neat plaiting of the burnt basket
is traced all over it in a pretty pattern. Thus, simultaneously with
pottery, its ornamentation was invented.
Primitive woman has another claim to respect. It was the man,
roving abroad, who invented the art of producing fire at will, but the
woman, unable to imitate him in this, has been a Vestal from the
earliest times. Nothing gives so much trouble as the keeping alight of
the smouldering brand, and, above all, when all the men are absent
from the camp. Heavy rain-clouds gather, already the first large
drops are falling, the first gusts of the storm rage over the plain. The
little flame, a greater anxiety to the woman than her own children,
flickers unsteadily in the blast. What is to be done? A sudden thought
occurs to her, and in an instant she has constructed a primitive hut
out of strips of bark, to protect the flame against rain and wind.
This, or something very like it, was the way in which the principle
of the house was discovered; and even the most hardened misogynist
cannot fairly refuse a woman the credit of it. The protection of the
hearth-fire from the weather is the germ from which the human
dwelling was evolved. Men had little, if any share, in this forward
step, and that only at a late stage. Even at the present day, the
plastering of the housewall with clay and the manufacture of pottery
are exclusively the women’s business. These are two very significant
survivals. Our European kitchen-garden, too, is originally a woman’s
invention, and the hoe, the primitive instrument of agriculture, is,
characteristically enough, still used in this department. But the
noblest achievement which we owe to the other sex is unquestionably
the art of cookery. Roasting alone—the oldest process—is one for
which men took the hint (a very obvious one) from nature. It must
have been suggested by the scorched carcase of some animal
overtaken by the destructive forest-fires. But boiling—the process of
improving organic substances by the help of water heated to boiling-
point—is a much later discovery. It is so recent that it has not even
yet penetrated to all parts of the world. The Polynesians understand
how to steam food, that is, to cook it, neatly wrapped in leaves, in a
hole in the earth between hot stones, the air being excluded, and
(sometimes) a few drops of water sprinkled on the stones; but they
do not understand boiling.
To come back from this digression, we find that the slender Nyasa
woman has, after once more carefully examining the finished pot,
put it aside in the shade to dry. On the following day she sends me
word by her son, Salim Matola, who is always on hand, that she is
going to do the burning, and, on coming out of my house, I find her
already hard at work. She has spread on the ground a layer of very
dry sticks, about as thick as one’s thumb, has laid the pot (now of a
yellowish-grey colour) on them, and is piling brushwood round it.
My faithful Pesa mbili, the mnyampara, who has been standing by,
most obligingly, with a lighted stick, now hands it to her. Both of
them, blowing steadily, light the pile on the lee side, and, when the
flame begins to catch, on the weather side also. Soon the whole is in a
blaze, but the dry fuel is quickly consumed and the fire dies down, so
that we see the red-hot vessel rising from the ashes. The woman
turns it continually with a long stick, sometimes one way and
sometimes another, so that it may be evenly heated all over. In
twenty minutes she rolls it out of the ash-heap, takes up the bundle
of spinach, which has been lying for two days in a jar of water, and
sprinkles the red-hot clay with it. The places where the drops fall are
marked by black spots on the uniform reddish-brown surface. With a
sigh of relief, and with visible satisfaction, the woman rises to an
erect position; she is standing just in a line between me and the fire,
from which a cloud of smoke is just rising: I press the ball of my
camera, the shutter clicks—the apotheosis is achieved! Like a
priestess, representative of her inventive sex, the graceful woman
stands: at her feet the hearth-fire she has given us beside her the
invention she has devised for us, in the background the home she has
built for us.
At Newala, also, I have had the manufacture of pottery carried on
in my presence. Technically the process is better than that already
described, for here we find the beginnings of the potter’s wheel,
which does not seem to exist in the plains; at least I have seen
nothing of the sort. The artist, a frightfully stupid Makua woman, did
not make a depression in the ground to receive the pot she was about
to shape, but used instead a large potsherd. Otherwise, she went to
work in much the same way as Salim’s mother, except that she saved
herself the trouble of walking round and round her work by squatting
at her ease and letting the pot and potsherd rotate round her; this is
surely the first step towards a machine. But it does not follow that
the pot was improved by the process. It is true that it was beautifully
rounded and presented a very creditable appearance when finished,
but the numerous large and small vessels which I have seen, and, in
part, collected, in the “less advanced” districts, are no less so. We
moderns imagine that instruments of precision are necessary to
produce excellent results. Go to the prehistoric collections of our
museums and look at the pots, urns and bowls of our ancestors in the
dim ages of the past, and you will at once perceive your error.
MAKING LONGITUDINAL CUT IN
BARK
DRAWING THE BARK OFF THE LOG
REMOVING THE OUTER BARK

BEATING THE BARK
WORKING THE BARK-CLOTH AFTER BEATING, TO MAKE IT

SOFT
MANUFACTURE OF BARK-CLOTH AT NEWALA

To-day, nearly the whole population of German East Africa is
clothed in imported calico. This was not always the case; even now in
some parts of the north dressed skins are still the prevailing wear,
and in the north-western districts—east and north of Lake
Tanganyika—lies a zone where bark-cloth has not yet been
superseded. Probably not many generations have passed since such
bark fabrics and kilts of skins were the only clothing even in the
south. Even to-day, large quantities of this bright-red or drab
material are still to be found; but if we wish to see it, we must look in
the granaries and on the drying stages inside the native huts, where
it serves less ambitious uses as wrappings for those seeds and fruits
which require to be packed with special care. The salt produced at
Masasi, too, is packed for transport to a distance in large sheets of
bark-cloth. Wherever I found it in any degree possible, I studied the
process of making this cloth. The native requisitioned for the
purpose arrived, carrying a log between two and three yards long and
as thick as his thigh, and nothing else except a curiously-shaped
mallet and the usual long, sharp and pointed knife which all men and
boys wear in a belt at their backs without a sheath—horribile dictu!
[51]
Silently he squats down before me, and with two rapid cuts has
drawn a couple of circles round the log some two yards apart, and
slits the bark lengthwise between them with the point of his knife.
With evident care, he then scrapes off the outer rind all round the
log, so that in a quarter of an hour the inner red layer of the bark
shows up brightly-coloured between the two untouched ends. With
some trouble and much caution, he now loosens the bark at one end,
and opens the cylinder. He then stands up, takes hold of the free
edge with both hands, and turning it inside out, slowly but steadily
pulls it off in one piece. Now comes the troublesome work of
scraping all superfluous particles of outer bark from the outside of
the long, narrow piece of material, while the inner side is carefully
scrutinised for defective spots. At last it is ready for beating. Having
signalled to a friend, who immediately places a bowl of water beside
him, the artificer damps his sheet of bark all over, seizes his mallet,
lays one end of the stuff on the smoothest spot of the log, and
hammers away slowly but continuously. “Very simple!” I think to
myself. “Why, I could do that, too!”—but I am forced to change my
opinions a little later on; for the beating is quite an art, if the fabric is
not to be beaten to pieces. To prevent the breaking of the fibres, the
stuff is several times folded across, so as to interpose several
thicknesses between the mallet and the block. At last the required
state is reached, and the fundi seizes the sheet, still folded, by both
ends, and wrings it out, or calls an assistant to take one end while he
holds the other. The cloth produced in this way is not nearly so fine
and uniform in texture as the famous Uganda bark-cloth, but it is
quite soft, and, above all, cheap.
Now, too, I examine the mallet. My craftsman has been using the
simpler but better form of this implement, a conical block of some
hard wood, its base—the striking surface—being scored across and
across with more or less deeply-cut grooves, and the handle stuck
into a hole in the middle. The other and earlier form of mallet is
shaped in the same way, but the head is fastened by an ingenious
network of bark strips into the split bamboo serving as a handle. The
observation so often made, that ancient customs persist longest in
connection with religious ceremonies and in the life of children, here
finds confirmation. As we shall soon see, bark-cloth is still worn
during the unyago,[52] having been prepared with special solemn
ceremonies; and many a mother, if she has no other garment handy,
will still put her little one into a kilt of bark-cloth, which, after all,
looks better, besides being more in keeping with its African
surroundings, than the ridiculous bit of print from Ulaya.
MAKUA WOMEN

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Analysis for Decision Making

Fixed Asset Turnover Ratio Objective 7

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1 Introduction to Accounting and Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

Make a Decision 104

Generally Accepted Accounting

Double-Entry Accounting System 62

Businesses 232 Reporting Inventory 301

Inventory Cost Flow Assumptions 301

Internal Control and Cash 350 Make a Decision 437

Make a Decision 392 Natural Resources 462

Uncollectible Receivables 399 Make a Decision 490

Direct Write-Off Method for Uncollectible Take It Further 491

Computing Present Values 560

Comprehensive Problem 3 534 Stock Splits 594

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Nature of Bonds Payable 544 Comprehensive Problem 4 619

Reporting Bonds Payable 554 Reporting Cash Flows 628

Cash Flows from Financing Activities 631 Analyzing Solvency 700

Manufacturing Operations 757

Analyzing Liquidity 694 Analysis for Decision Making 767

Take It Further 789 Appendix Weighted Average Method 864

Cost Accounting Systems Overview 794

Job Order Cost Systems for Manufacturing

Businesses 795 Product Costing Allocation Methods 898

Joint Costs 968

Analysis for Decision Making 973 Analyzing Operating Income Using

Mathematical Approach to Cost-Volume-Profit 

Transfer Pricing 1225

Analysis for Decision Making 1229

Direct Materials and

Factory Overhead Variances 1168

Certified Management Accountant (CMA®) Examination Corporate Social Responsibility 1416

Activity Analysis 1358 Make a Decision 1438

Accounting and Business

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Analysis for Decision Making

Objective 1 Nature of Business and Accounting

Role of Accounting in Business note:

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Liabilities: Bonds Payable 542 Analysis for Decision Making 602

Mathematical Approach to Cost-Volume-Profit