Financial Accounting, 11th Edition

Patricia Libby
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 ELEVENTH EDITION

FINANCIAL
ACCOUNTING
Robert Libby
Cornell University

Patricia A. Libby
Ithaca College

Frank Hodge
University of Washington
 Final PDF to printer

FINANCIAL ACCOUNTING

Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10019. Copyright ©2023 by
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 To: Herman and Doris Hargenrater
Oscar and Selma Libby
Laura Libby, Brian Plummer, and Bennett Plummer
Abby, Grace, Claire, Joanne, and Richard Hodge
Dan Short

We truly appreciate the continued support of all our Financial

Accounting team members, including our special helpers.

Courtesy of Frank Hodge Courtesy of Patricia Libby Courtesy of Noelle Bathurst

Courtesy of Rebecca Olson Courtesy of Jeni McAtee Courtesy of Kelly Delso

Courtesy of Patricia Libby

Courtesy of Angela Norris Courtesy of Lauren Schur

ABOUT THE AUTHORS
ROBERT LIBBY
Robert Libby is the
David A. Thomas Pro-
fessor of Account-
ing and Accounting
Area Coordinator at
Cornell University,
where he teaches the
introductory financial
Courtesy of Robert Libby accounting course.
He previously taught at the University of Illi-
nois, Pennsylvania State University, the Uni-
versity of Texas at Austin, the University of
Chicago, and the University of Michigan. He
received his BS from Pennsylvania State Uni-
versity, where he was selected as the 2018
Outstanding Accounting Alumnus, and his
MAS and PhD from the University of Illinois;
he also completed the CPA exam (Illinois).
Bob was selected as the AAA Outstanding
Educator in 2000 and received the AAA Out-
standing Service Award in 2006 and the AAA
Notable Contributions to the Literature Award
in 1985 and 1996. He has received the Core
Faculty Teaching Award multiple times at Cor-
nell. Bob is a widely published author and
researcher specializing in behavioral account-
ing. He has published numerous articles in
The Accounting Review; Journal of Account-
ing Research; Accounting, Organizations,
and Society; and other accounting journals.
He has held a variety of offices, including vice
president, in the American Accounting Asso-
ciation, and he is a member of the American
Institute of CPAs.
PATRICIA A. LIBBY
Patricia Libby is Pro-
fessor Emeritus of
accounting at Ithaca
College, where she
taught the undergrad-
uate and graduate
financial accounting
courses. She previ-
Courtesy of Patricia Libby ously taught gradu-
ate and undergraduate financial accounting
at Eastern Michigan University and the
University of Texas at Austin. Before enter-
ing academia, she was an auditor with Price
Waterhouse (now PricewaterhouseCoopers)
and a financial administrator at the Univer-
sity of Chicago. She was also faculty advi-
sor to Beta Alpha Psi (Mu Alpha chapter), the
National Association of Black Accountants
(Ithaca College chapter), and Ithaca College
Accounting Association.
Patricia received her BS from Pennsylvania
State University, her MBA from DePaul Univer-
sity, and her PhD from the University of Michi-
gan; she also successfully completed the CPA
exam (Illinois). She has published articles in
The Accounting Review, Issues in Accounting
Education, and The Michigan CPA.
FRANK HODGE
Frank Hodge is the
Orin & Janet Smith
Dean at the Univer-
sity of Washington’s
Foster School of
Business.
Frank joined the fac-
ulty at the Univer-
Christine Moody
sity of Washington in
2000. He earned his MBA and PhD degrees
from Indiana University. He has won over 30
teaching awards at the University of Wash-
ington teaching financial accounting and
financial statement analysis to undergraduate
students, full-time MBA students, executive
MBA students, and intercollegiate athletic
administrators. Frank’s research focuses on
how individuals use accounting information
to make investment decisions and how tech-
nology influences their information choices.
Frank was one of six members of the Finan-
cial Accounting Standards Research Initiative
team and has presented his research at the
Securities and Exchange Commission. He has
published articles in The Accounting Review;
Journal of Accounting Research; Contem-
porary Accounting Research; Accounting,
Organizations, and Society; and several other
journals. Frank lives in Seattle with his wife
and two daughters.
A TRUSTED LEADER FOR
STUDENTS AND INSTRUCTORS
The award-winning author team of Bob Libby, Pat Libby, and Frank Hodge con-
tinue Financial Accounting’s best-selling tradition of helping the instructor and
student become partners in learning. Libby/Libby/Hodge uses a remarkable
learning approach that keeps students engaged and involved in the material
from the first day of class.

Libby/Libby/Hodge’s Financial Accounting maintains its leadership by focusing

on four key attributes:

THE PIONEERING REAL-WORLD COMPANIES APPROACH

The Libby/Libby/Hodge authors’ trademark focus company approach is the best
method for helping students understand financial statements and the real-world
implications of financial accounting for future managers. This approach shows
that accounting is relevant and motivates students by explaining accounting
in a real-world context. Throughout each chapter, the material is integrated
around a familiar focus company, its decisions, and its financial statements.
This provides the perfect setting for discussing the importance of accounting
and how businesses use accounting information. No other book matches this
seamless integration of the real world.

A BUILDING-BLOCK APPROACH TO TEACHING

TRANSACTION ANALYSIS
Faculty agree the accounting cycle is the most critical concept to learn and mas-
ter for students studying financial accounting, regardless of their career aspira-
tions. Libby/Libby/Hodge believes students struggle with the accounting cycle
when transaction analysis is covered in one chapter. If students are exposed to
the accounting equation, journal entries, and T-accounts for both balance sheet
and income statement accounts in a single chapter, many are left behind and
are unable to grasp material in the remaining chapters.

The market-leading Libby/Libby/Hodge approach spreads transaction analysis

coverage over two chapters so that students have the time to master the mate-
rial. In Chapter 2 of Financial Accounting, students are exposed to the account-
ing equation and transaction analysis for investing and financing transactions
that affect only balance sheet accounts. This provides students with the oppor-
tunity to learn the basic structure and tools used in accounting in a simpler set-
ting. In Chapter 3, students are exposed to more complex operating transactions
that also affect income statement accounts. By slowing down the introduction
v
 of transactions and giving students time to practice and gain mastery, this
building-block approach leads to greater student success in their study of
later topics in financial accounting such as adjusting entries. Research has
shown that the accounting cycle approach used in this textbook yields learning
gains that outpace approaches used in other textbooks by a significant margin.

Traditional Accounting Cycle Approach Libby/Libby/Hodge Accounting Cycle Approach

rning
ced lea
e

pa
rv

Steady,
cu
ing
rn

Recording
lea

Transactions
Recording Recording Affecting Both
p

Adjusting Entries Adjusting Entries

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Transactions Transactions Balance Sheet and the Adjusted

and the Adjusted Affecting Only and Income
St

Affecting Both Trial Balance

Trial Balance Balance Sheet Statement
Balance Sheet
and Income Accounts Accounts Financial
Financial
Statement Statement
Statement Prepare Prepare
Accounts Preparation
Financial Preparation Unadjusted Unadjusted
Statements Prepare Overview of Trial Balance Trial Balance Closing Process
Overview of Closing Process
Unadjusted Trial Financial
Financial Ratios Prepare and Prepare and
Balance Statements and
Statements and Evaluate the Evaluate Income
Users Users
Conceptual Balance Sheet Statement
Framework

Plan the Establish the Operate the Evaluate the

Introduction Deeper Dive Debits & Final Steps
Business Business Business Business
(Ch 1) (Ch 2) Credits (Ch 3) (Ch 4)
(Ch 1) (Ch 2) (Ch 3) (Ch 4)

THE RIGHT BALANCE OF TRANSACTION ANALYSIS

AND FINANCIAL STATEMENT ANALYSIS
A clear understanding of how transactions affect financial statements is key for
sound decision-making utilizing these statements. Accountants, auditors, analysts,
managers, creditors, and investors must all be aware of the effect of measuring
and reporting financial activities and the power of financial statement analysis. Our
balanced focus on transaction analysis and financial statement analysis based on
real companies optimally prepares students regardless of their career aspirations.

POWERFUL TECHNOLOGY FOR TEACHING AND STUDY

Students have different learning styles and conflicting time commitments,
so they want technology tools that will help them study more efficiently and
effectively. The eleventh edition includes the best technology available with
Connect’s latest features—Concept Overview Videos, Integrated Excel, General
Ledger problems, and other new study, practice, and assessment materials.
vi
 409

MARKET-LEADING PEDAGOGY
CHAPTER 8 Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

AND CONTENT
Debit Credit
Aircraft (+A) 300
Cash (−A) 300

Assets = Liabilities + Stockholders’ Equity

Aircraft +300
Cash −300

In many cases, no clear line distinguishes improvements (assets) from ordinary repairs and
Financial Accounting, 11e, offers
maintenance a host
(expenses). of pedagogical
In these situations, managers musttools that
exercise complement
professional judgment and
make a subjective decision. Capitalizing expenses will increase assets and net income in the cur-
the different ways you like tolowering
rent year, teach and
future years’the
incomeways yourof students
by the amount like toOn learn.
the annual depreciation. the other
hand, for tax purposes, expensing the amount in the current period will lower taxes immediately.
Some offer information Because
and tips thattohelp
the decision capitalizeyou present
or expense a complex
is subjective, auditors reviewsubject; oth-as
the items reported
Confirming Pages

ers highlight issues relevant to what your students read online and see in their
capital expenditures and ordinary repairs and maintenance closely.
To avoid spending too much time classifying additions and improvements (capital expenditures)
other coursework. Eitherandway, Financial
repair expenses Accounting’s
(revenue expenditures), pedagogical
some companies support
develop simple policies will
to govern the
accounting for these expenditures. For example, one large computer company expenses all indi-
make a real difference invidual
youritemscourse
that cost lessand in your
than $1,000. students’
Such policies learning.
are acceptable because immaterialC(relatively
H A P T E R 1 Financial Statements and Business Decisions
Aviation Images Ltd/Alamy Stock
9
small dollar) amounts will not affect users’ decisions when analyzing financial statements. Confirming Pages
Rev. Confirming Pages Photo
Confirming Pages
A Q U ESTIO N O F ETHICS
FINANCIAL ANALYSIS
WorldCom: Hiding Billions in Expenses C Hthrough
A P T E R 1 Capitalization
Financial Statements and Business Decisions
Rev. Confirming Pages 19
484 CHAPTER 9 Reporting and Interpreting Liabilities
Interpreting Assets, Liabilities, and Stockholders’ Equity on the Balance Sheet
When expenditures that should be recorded as current period expenses are improperly capitalized as part ofRev. Confirming Pages
CHAPTER 5 Communicating and Analyzing Accounting Information 241
the cost of an asset, Assessment
the effectsof onLe-Nature’s
the financial statements assets is important to its creditors,
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the largest Bank and others, and its
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agement
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billion that should Receivables,
Le-Nature’shave been and
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LEARNING OBJECTIVE 9-5 have been made flowyet to reflect
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Explain the importance ability to meet
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of working capital and its them assess theincluding
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impact on capital.
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to material before moving on.
in Exhibit 1.2.
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over websites, information OBJECTIVE 3-6
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3. Loss of competitive
ANALYTICAL QUESTION
Monsanto services,
information
also improperly and financial
toaccounted
other companies. analysts
for additional to gatherrebates and of analyze
more than information.
$56 million as selling, general,Compute and interpret the 09/03/21 08:34 PM
in understanding their meaning. Without referring to Exhibit 1.2, mark each balance sheet
and administrative Companies
expense actually
instead of afile their
reduction SEC netforms
in generating sales. This electronically
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How effective
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the following
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ableCFO through returned the_____ bonuses
mail. EDGAR
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service they had
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on_____
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payable of the at: sec.gov
“Filings”
financial statements earningsand overstatements,
are appropriatethough for anthey introductory
were not found course.
Many working capital accounts Most companies
have a _____ direct also
Common provide
relationship stock totoincome-producing
direct beaccess
involved to intheirpersonal
financialmisconduct.
_____
activities. statements
Retained earnings
Accounts and other informa-
CHIPOTLE MEXICAN GRILL, INC. EXHIBIT 3.7
receivable, for example, tion over the
are related to web.
sales You can Accounts
revenue: view this receivable
information for Apple
increase when at: investor.apple.com
sales are made
Consolidated Statement of Income*
on credit. Cash is collectedInformation services
After you
when customers have allow
paycompletedinvestors
your
their bills. to gather
answers,
Similarly, checktheir
accounts them own information
below.
payable increase whenabout theUnadjusted
company andIncome
UNADJUSTED
Iinventory is purchased on
NT E R NAT I O N Amonitor
Lcredit. the
PER S recommendations
A cash outflow occurs when
PECTIVE of a the
variety of analysts.
account is paid. WeFinancial analysts
discuss how to and Statement
other sophis-
P A U S E useF changes
O R FinEworking
E D B capital
A C Kaccounts
ticated users
For the
Related Quarter
Homework:
to create
obtain much
ended March
M1-1,
the operating
of the
31,
section
2020
M1-2, of
informationE1-2, E1-3
thethey
statement of cash
use from theflows
wideinvariety of commercial
(in millions of dollars)
Chapter 12. online information services. Fee-based services such as S&P Global Market Intelligence pro-
The International Accountingvide broad Standards
access to Board
financialand Globaland
statements Accounting
news information. A growing number of other
In the last section, we learned to analyze the impact of credit card sales, sales discounts, and sales
Standards returns, all of which Restaurant
resources salesarevenue
offering mixture of free and fee-based $ 1,359
information exist on the web. These include:
reduce the amounts reported as net sales. Both credit card discounts and sales or Solution to
discounts finance.google.com,
cash standards
Financial accounting
Restaurant
promote
and 1. Assets
faster
disclosure receipt finance.yahoo.com,
operating
($527.4) expenses:
of cash.
requirements =areLiabilities
Sales returns
adopted and allowances
($407.7)
and marketwatch.com.
+
by national Stockholders’
include
regulatory Equity ($119.7)
refunds
agencies. and (in millions).
adjust-
Exhibit 5.2 SELF-STUDY QUIZ
ments to customers’
Since 2002, 144 jurisdictions Wages
bills
have adopted 2.for A,suggests
expense
L,defective
A, SE,
International orA, the
A, L,
incorrect
Financial wide range of
SEReporting
(reading down
merchandise. information
Standards (IFRS)about
342
the columns). issuedApple
by available on the Yahoo!
P A U S E F O R F E E D B A C K Finance website. It includes stock price and financial statement information,
Before Standards
the International Accounting you move on, Utilities
Boardcompleteexpense
(IASB). theExamples
followingof questions to test
jurisdictions your
requiring 117
understanding
the use of these
of IFRS concepts. news accounts,
and important
Repairs expensefuture events related to Apple. To see 35 what has happened to Apple since this
currently include:
S E L F - S T U D Y Q U I Z chapter wasand
General written, go to finance.yahoo.com
administrative expenses: and search for AAPL to see how Apple has fared
vii
Companies
• European Union classify liabilities
(Germany, as either
France, theits current or long
Netherlands, term. Our
Belgium, discussion
Bulgaria, Poland,to this
etc.)point
and has focused
compared Trainingto competitors.
expense 65
on current liabilities, whichSkechers
1. Assume that Financial
United Kingdom are short-term obligations
sold $30,000
analysts
Loss on disposal assetsworth
ofreceive
that will be paid
of footwear
accounting
in cash (or other
to various
reports
current
9retailers
and other withassets)
information terms 1/10,the company from
about
within the current
n/30 andoperating cycleamount
half of that or one wasyear,paid
whichever
within the is longer.
discountIn period.
the nextGross
section, westore turnand
ouronline
• Australia and New Zealand online information
Total operating services.
expenses They also gather 568 retail
information through conversations with company
attention to sales
long-term liabilities. Before you move on, complete the following questions
were $5,000 for the same period; 80 percent of these sales were paid for with credit cards to test your
• Hong Kong (S.A.R.
understanding of of executives
theChina),
Income
conceptsMalaysia, and
fromandvisits to company
operations
Republic
welib29739_ch01_002-043.indd
have covered. of9 Korea facilities and competitors.
791 The results of their analyses are 08/02/21 04:56 PM
with a 3 percent discount and the rest were paid for with cash. Compute net sales for the period.
 FINANCIAL ANALYSIS BOXES—These features tie important chapter concepts
to real-world decision-making examples. They also highlight alternative view-
points and add to the critical-thinking and decision-making focus of the text.

DATA ANALYTICS BOXES—This feature introduces students to how companies

analyze and use data for both business decisions and accounting applications.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) REPORTING

BOXES—Most large public companies have started to publish an ESG report.
These boxes illustrate how ESG reports help investors assess the long-term
consequences of the company’s broader business strategy.
A QUESTION OF ETHICS BOXES—These boxes appear throughout the text,
conveying the importance and the consequences of acting responsibly in busi-
ness practice.

“Ethics and financial analysis boxes are excellent. Examples with real
companies that students have heard of or even been to are key to their
learning and understanding.”
—Laurie Dahlin, Worcester State University

FOCUS ON CASH FLOWS BOXES—Each of the first 11 chapters includes a

discussion and analysis of changes in the cash flows of the focus company and
explores the decisions that caused those changes.

KEY RATIO ANALYSIS BOXES—Each box presents ratio analysis for the focus
company in the chapter as well as for comparative companies. Cautions also
are provided to help students understand the limitations of certain ratios.

INTERNATIONAL PERSPECTIVE BOXES—These boxes highlight the emer-

gence of global accounting standards (IFRS) at a level appropriate for the intro-
ductory student.

“An excellent introduction to financial accounting that flows in a more logical

manner than most texts. The extensive variety and amount of supporting materials
allows for customization of the course, and the integration of key concepts such as
ethics and cash flows enhance student understanding of the topics.”
—Joy Gray, Bentley University
viii
PRACTICE IS KEY TO SUCCESS
IN FINANCIAL ACCOUNTING
PAUSE FOR FEEDBACK AND
SELF-STUDY QUIZ
Research shows that students learn best when
they are actively engaged in the learning process.
This active learning feature engages the student,
provides interactivity, and promotes efficient learn-
ing. These quizzes ask students to pause at strate-
gic points throughout each chapter to ensure they
understand key points before moving ahead.
SMARTBOOK
Within Connect, SmartBook brings these features
to life by interleaving reading with active practice.
As students read, SmartBook encourages them to
answer questions to demonstrate their knowledge—
then, based on their answers, highlights those areas
where students need more practice.
Confirming Pages
CHAPTER 7 Reporting and Interpreting Cost of Goods Sold and Inventory 349
PAU S E F O R F E E D B AC K
Inventory should include all items owned that are held for resale. Costs flow into inventory when goods
are purchased or manufactured. They flow out (as an expense) when they are sold or disposed of.
The cost of goods sold equation describes these flows.
1. Assume the following facts for Harley-Davidson’s Motorclothes leather baseball jacket
S E LF - STU DY Q U I Z
product line for the year 2022.
Beginning inventory: 400 units at unit cost of $75.
Purchases: 600 units at unit cost of $75.
Sales: 700 units at a sales price of $100 (cost per unit $75).
Using the cost of goods sold equation, compute the dollar amount of goods available for sale,
ending inventory, and cost of goods sold of leather baseball jackets for the period.
Beginning inventory
+ Purchases of merchandise during the year
Goods available for sale
− Ending inventory
Cost of goods sold
2. Assume the following facts for Harley-Davidson’s Motorclothes leather baseball jacket
product line for the year 2023.
Beginning inventory: 300 units at unit cost of $75.
Ending inventory: 600 units at unit cost of $75.
Sales: 1,100 units at a sales price of $100 (cost per unit $75).
Using the cost of goods sold equation, compute the dollar amount of purchases of leather base-
ball jackets for the period. Remember that if three of these four values are known, the cost of
goods sold equation can be used to solve for the fourth value.
Beginning inventory
+ Purchases of merchandise during the year
− Ending inventory
Cost of goods sold
After you have completed your answers, check them below.
GUIDED HELP 7-1
For additional step-by-step video instruction on using the cost of goods sold equation to compute
relevant income statement amounts, go to mhhe.com/libby_gh7-1.
Related Homework: M7-4, E7-2, E7-3, E7-4
Solutions to
1. Beginning inventory (400 × $75) $30,000
+Purchases of merchandise during the year (600 × $75) 45,000 SELF-STUDY QUIZ
Goods available for sale (1,000 × $75) 75,000
−Ending inventory (300 × $75) 22,500
Cost of goods sold (700 × $75) $52,500
2. BI = 300 × $75 = $22,500 BI + P − EI = CGS
EI = 600 × $75 = $45,000 $22,500 + P − $45,000 = $82,500
CGS = 1,100 × $75 = $82,500 P = $105,000 (1,400 × $75)
GUIDED HELP VIDEOS
lib29739_ch07_342-399.indd 349 08/26/21 06:19 AM
To provide students with immediate help under-
standing key concepts, our unique Guided Help
videos provide narrated, animated, step-by-step
walk-throughs for each numerical Self-Study Quiz
that students can view at any time through their
mobile device or online. These videos also save
office hour time! We also include a Related Home-
work list for each Self-Study Quiz to help the stu-
dents move on to their homework assignments.
ix
 Rev. Confirming Pages

CHAPTER 4 Adjustments, Financial Statements, and the Closing Process 225 —

3. Prepare a multiple-step income statement (with a subtotal for Income from Operations, a section on
Other Items) and earnings per share (Note: 4,000 shares outstanding at end of the year), a statement
of stockholder’s equity, and a classified balance sheet (with current assets and liabilities). Round
earnings per share to two decimal places.
4. Prepare the closing entry.

COMPREHENSIVE PROBLEMS ®
COMPREHENSIVE PROBLEMS (CHAPTERS 1–4)

Selected chapters include problems that COMP4-1

Recording Transactions (Including Adjusting and Closing Entries), Preparing Financial
Statements, and Performing Ratio Analysis LO4-1, 4-2, 4-3, 4-4
H & H Tool

cover topics from earlier chapters to refresh,

Brothers Herm and Steve Hargenrater began operations of their tool and die shop (H & H Tool) on Janu-
ary 1, 1987, in Meadville, PA. The annual reporting period ends December 31. Assume that the trial bal-
ance on January 1, 2023, was as follows:

reinforce, and build an integrative understanding

of the course material. For practice with the
completing the accounting cycle, there are Final PDF to printer

two comprehensive problems in Chapter 4

that are complemented in Connect by General CHAPTER 10 Reporting and Interpreting Bond Securities 571

Ledger questions. These help students see Confirming Pages

how transactions flow from the general journal CASES AND PROJECTS
®

through to the financial statements. Annual

396
Report Cases
C H A P T E R 7 Reporting and Interpreting Cost of Goods Sold and Inventory
Finding Financial Information CP10-1
Refer to the financial statements and footnotes of Target given in Appendix B at the end of this book. All LO10-1, 10-2, 10-6, 10-8
Rev. Confirming Pages

CASES AND PROJECTS

dollar amounts are in millions. Target

CASES AND PROJECTS

®

Required:
1. Where does Target report the amount of cash paid for interest during the most recent fiscal year?

This section includes annual report cases,

a. Statement of Operations
b. Statement of Shareholders’ Investment
Transactions during
460 2023
c. Statement ofC H
follow.
APTER
Cash
Annual
All dollars are in millions, exceptReport Cases
number of shares and per share amounts:
Flows8 Reporting and Interpreting Property, Plant, and Equipment; Intangibles; and Natural Resources

financial reporting and analysis cases, critical CP7-1

a. Borrowed $15 cashofon
d. Statement a five-year,
Financial 8 percent note
Position payable,Financial
Finding dated March 1, 2023.
Information
b. Sold e. 4 million
None of additional
the above shares of common stock for cash at $1 market value per share on January 1, 2023.
LO7-1, 7-2, 7-4, 7-5
c. Purchased
2. What island the for a future
amount building
of cash site;
Target paid
paid Refer
forcash, to during
$13.
interest the financial
the moststatements
recent fiscalof Target
year? given in Appendix B at the end of this book. All dollar amounts
Target Corporation
thinking cases, financial reporting and analysis d. Earned a. $939
$215 in revenues for 2023, including $52
b. $1,031
e. Incurred $89 in wages expense and $25 in miscellaneous
c. $2,480
in2.on
theCompute
statements
credit
current
Required:
d. andthethe
$1,343
e. year
$977
expenses
and
(ending
answers
adjustments
rest in cash.
December
for 2023,
are
thatinLakshmi
with $20
millions.Financial Services Corporation would make at the end of the
31)on forcredit
the following
and the items acquired from Sanjeev’s Insurance Company:
rest paid in cash. a. Depreciation of equipment (straight-line), assuming an estimated remaining useful life of eight

projects, and business analytics and data

1. How much inventory does the company hold at the end of the most recent year?
3. What accounts
f. Collected is the amount of long-term
receivable, $34. debt that Target added yearsduring
and nothe most recent
residual value. fiscal year?
a. $4,250 a. $44,949
d. $1,770 d. $10,653
g. Purchased other noncurrent assets, $15 cash. b. Goodwill (an intangible asset with an indefinite life).
b. $8,992 e. None of the above

visualization exercises. The real-world company

b. $2,480
h. Purchased supplies on account for future use, $27. e. $3,607
$3,250payable, $26.
i. Paid c.accounts AP8-8 Computing c. $20,756 Amortization, Book Value, and Asset Impairment Related to Different
4. Target has an LO8-3,
agreement to 8-4,
borrow8-6
money if 2. Estimate
Intangible
needed. What the
Assets
is amount
the (P8-8)
total ofamount
inventory the that
company the company
can bor- purchased during the current year. (Hint: Use the
j. Declared cash dividends on December 1, $25.
cost offacility”?
goods sold equation and ignore “certain buying, occupancy, and warehousing expenses.”)
analysis theme is continued in this section,
k. Signed rowa under what$33
three-year it calls its “unsecured
service contract torevolving
startCarey credit
February 1, 2024. has five different intangible assets to be accounted for and reported on the financial
a.Corporation
$67,838 d. $10,653
l. Paid a.the$2,500
dividends in (j) on December 31. statements.
d. $1,939
The management is concerned about the amortization
b. $3,607 b. $64,516
e. None of the above e. Noneofofthe thecost of each of these intangibles.
above

giving students practice comparing Target

Factsc.about each intangible follow:
$66,177
c. $11,536
3.Goodwill.
5. For the most recent fiscal year, compute thea.debt-to-equity What method Theratio does the started
for Target.
company company use to determine
business in Januarythe costbyofpurchasing
2010 its inventory? another business for a cash
a. 1.39 a. FIFO
lump of $650,000. Included in the purchase price d.
d. 1.16
sum wasSpecific
“Goodwill, Identification
$75,000.” Company executives

and Walmart among other relevant companies. b. 2.55

c. 0.39
lib29739_ch04_170-235.indd 225
b. LIFO
stated
b. Patent.
4.over
What
that
c. Average
is
“the goodwill is an important long-lived assete.toNone
e. 3.55

the
Cost purchased a patent at a cash cost of $18,600 on January09/03/21
The company
inventory turnover ratio and average days to
us.” Itofhas

sell
theanabove

inventory
indefinite life.
1, 2023.
08:42It
AMis amortized
for the current year and what

In each chapter, CP1 presents auto-gradable

its expected useful life of 10 years.
Finding Financial Information does this On
c. Copyright. suggest about1,the
January company?
2023, the company (Roundpurchased
your answeraCP10-2
to two decimal
copyright places.)
for $24,750 cash. It is estimated
Refer to the financial statements and footnotes of Walmart
a. the
that 7.36, suggestingitem
copyrighted
given in Appendix
that,willon average,
C have
at theno end
it takes
value bythe
of this the end of LO10-1,
company
book. 3049.59
years.days 10-2,
to sell10-6,
an item 10-8
of inventory.

questions based on Target’s annual report,

b. 6.21, suggesting
d. Franchise. The company that,obtained
on average, it takes the
a franchise fromcompany 58.78 daystotomake
CirbaWalmart
Company sell an item
and of inventory.
distribute a special
All dollar amounts are in millions.
c. 6.74,
item. suggesting
It obtained that, on average,
the franchise on January it takes the company
1, 2023, at a cash54.15
cost ofdays to sellfor
$19,200 an aitem of inventory.
12-year period.
Required: d. 9.53,
e. License. Onsuggesting
January 1, that,
2022,on the
average,
company it takes the company
secured a license38.30
from days to sell
the city an item aofspecial
to operate inventory.
service

CP2 includes auto-gradable questions based

1. What is the amount of cash Walmart paid for interest during
None
fore.a period ofofthe
the most
above
seven recentTotal
years. fiscalcash
year? expended to obtain the license was $21,700.
2. What is the amount of long-term debt that Walmart issued during the most recent fiscal year?
3. What is the amount of Walmart’s long-termRequired: debt that will mature in fiscal year 2024?
CP7-2 Finding Financial Information
on Walmart’s report, and CP3 provides auto- 4. What is the amount of cash Walmart paid to 1.
LO7-2, 7-4, 7-5, 7-7
5. For the most recent fiscal Walmart Inc. the 2.
year, compute
Compute
retire
Referthe
long-term
to annual
thedebt
the financial
debt-to-equity
Give the book
amount
during
accounting
of amortization
statements
ratiovalue
for Walmart.
the most recent
period, Walmart, 31,
ofDecember
(Round your
of each intangible
that

asset
should
fiscal year?be recorded for each intangible asset at the end of
2023.
given
answer
in Appendix C at the end of this book.
to
on January 1, 2026.

gradable questions comparing key ratio(s) two decimal places) Required:

3. Assume that on January 1, 2026, the franchise was likely impaired in its ability to continue to produce
1. strong
The companyrevenuesuses dueLIFO to accountdemand
to a weakened for its “Walmart U.S. inventory”
for the products. The other and FIFO toassets
intangible accountwerefornot
its
Comparing Companies within an Industry affected. “WalmartCarey International
estimatedinventory.” Is there anything
would bespecialCP10-3
toabout U.S.future
GAAPcash thatflows
may have caused

discussed in the chapter for Target and Walmart.

that the franchise able produce of $13,500.
Walmart
The to select LIFO to account for its Walmart U.S. inventory
LO10-3, on its financial
10-6 statements?
Refer to the financial statements of Target (Appendix B)fairandvalue of the
Walmart franchise
(Appendix wasand
C) determined
the Industry to be $12,000. Compute the amount, if any, of the
a. IFRS does not allow use of LIFO.
Ratio Report (Appendix D) at the end of this book. impairment loss to be recorded.
b. The LIFO conformity rule requires that if LIFO is used on the U.S. tax return, it must be used on
Required: AP8-9 (Chapter theSupplement)
financial statements.Analyzing and Recording Entries related to a Change in
1. Compute the debt-to-equity ratio LO8-3
for both Estimatedc. U.S.for
companies Life
GAAPtheandmostResidual
requires
recent Value
thatfiscal
the year.(P8-9)
LIFO method your
(Round must be used for all inventories.

CONTINUING PROBLEM answer to two decimal places)

Target =
Ramirez
d. U.S. GAAP requires that different methods be used for domestic and foreign inventories.
Walmart
straight-line
would be
Foods
=
basis
Company
2. If the company overstated
theover
acquired
endinga inventory
an eight-year
corrected value for
corn flourbymilling
useful
Income life before
with a residual
machine
$100 million
value of
Income Taxes
for year
for the $20,000
for$3,000.
ended
that year
and
At(in
depreciated
January
themillions)?
it on
31, 2021,
end of the__________
what
prior year,
a

the3. machine
Computehad thebeen depreciated for aratio
full forfive the
years. At theyear.
beginning
(RoundofyourJanuary of theto current year,

The continuing case revolves around Penny’s

inventory turnover current answer two decimal
basedplaces.)
on new__________
information, the total estimated useful life would be 13 years with a residual value of $1,375.
The4. company’s
If Walmart’s accounting
inventoryperiod
turnover ends December
ratio is higher31.this year than last year, what does this suggest about

Pool Service & Supply, Inc., and its largest supplier,

Walmart over time?
Required:
a. It takes(a)
1. Compute the
thecompany
amount more days to sellexpense
of depreciation an itemrecorded
of inventory.
in the prior year and (b) the book value of
b. The
the selling
milling pricesatthat
machine the Walmart charges
end of the have increased.
prior year.
Pool Corporation, Inc. In the first five chapters, lib29739_ch10_522-573.indd 571
c. Inventory
2. Give is moving
the adjusting more
entry for
the ultimate consumer.
quickly through
depreciation the process
at December 31 ofofthepurchasing and11/11/21
current year. delivering
09:55 PM
products to

the continuing case follows the establishment,

d. None of the above.
CONTINUING PROBLEM
®

operations, and financial reporting for Penny’s. In CON8-1

LO8-2, 8-3, 8-5
Asset Acquisition, Depreciation, and Disposal
Pool Corporation, Inc., is the world’s largest wholesale distributor of swimming pool supplies and equip-

Chapter 5, Pool Corporation, a real publicly traded ment. Assume Pool Corporation purchased for cash new loading equipment for the warehouse on January
1 of Year 1, at an invoice price of $72,000. It also paid $2,000 for freight on the equipment, $1,300 to

corporation, is introduced in more detail. The Pool

lib29739_ch07_342-399.indd 396 prepare the equipment for use in the warehouse, and $800 for insurance to cover the equipment
08/26/21 during
06:19 AM
operation in Year 1. The equipment was estimated to have a residual value of $3,300 and be used over
three years or 24,000 hours.

Corporation example is then extended to encom-

pass each new topic in the remaining chapters.
lib29739_ch08_400-471.indd 460 09/03/21 08:34 PM

x
WHAT’S NEW IN THE 11th EDITION?
This edition is new in look, content, features, and resources to enhance learning by students and use by
instructors.

Overall in Each Chapter:

• Greater focus on reporting by students’ favorite tech companies including Google, Facebook, Apple, Tesla, Amazon,
Zoom, Microsoft and others.
• Updated real company information throughout the edition to reflect the most recent annual report data.
• New marginal TIP feature to add clarity and remind students of important information, mostly in the text, but also in
end-of-chapter assignments in early chapters to guide students in problem-solving.
• Moved marginal definitions of key terms to end-of-chapter Key Terms section with “rollover” feature in the ebook.
• New Related Homework after each Pause for Feedback Self-Study Quiz.
• New Guided Help video for each Self-Study Quiz involving numbers or calculations that are similar to popular
assignments.
• New graphic highlighting key formulae.
• New Excel screen shots for trial balances, amortization schedules, and elsewhere.
• Increased use of company and individual names in end-of-chapter content to reflect more diversity.
• New parallel Alternate Problems to Problems that are also now available as algorithmic auto-graded Connect
assignments.
• New end-of-book Annual Report Cases companies: Target and Walmart.
• New questions for Cases and Projects 1 through 3 in each chapter to allow for auto-grading, primarily using multiple-
choice and fill-in-the-blank questions, often requiring an explanation for the choice.
• New structured project questions in You as Analyst: Online Company Research. Flexibility is created to allow
instructors to assign it as an individual or a team project.
• New auto-graded data analytics exercises on Connect titled Business Analytics and Data Visualization for most
chapters.

Chapter 1
• New exhibit illustrating relationship
between the income statement, statement
of stockholders’ equity, and balance sheet.
• New Self-Study Quiz and Guided Help
video on the structure of the income state-
ment, statement of stockholders’ equity,
and balance sheet.
• Added initial discussion of internal con-
trols to Chapter 1.
• New concise discussion of the conceptual
framework (moved from Chapter 2).
• New end-of-chapter Demonstration Case
based on the financial statements of Best Buy.
Chapter 2
• New Chipotle Mexican Grill transactions
for illustration that closely match with the
actual first quarter 2020 results.
• New introductory discussion of operat-
ing lease right-of-use assets and related
liabilities.
• New exhibit on the steps for transaction
analysis for investing and financing activi-
ties that includes an example in the exhibit.
• Modified the accounting cycle graphic to
add clarity.
• New Guided Help video on current ratio
computation and analysis.
• New comparison company: Shake Shack.
• Added an exercise using real company
information for Alphabet, Inc., parent
company of Google.
Chapter 3
• New Chipotle Mexican Grill transactions
for illustration that closely match with the
actual first quarter 2020 results.
• Briefly discussed the impact of the pan-
demic on Chipotle (in opening discussion
and Understanding the Business).
• Renewed focus on accrual basis account-
ing with clarity on businesses that use cash
basis accounting.
• Modified the simplified EPS formula to add
clarity and consistency throughout the text.
• Integrated five-step revenue recognition
principle with examples using real compa-
nies Chipotle Mexican Grill and Apple.
• New Guided Help video on identifying the
accounts and amounts when recognizing
revenues in the proper period.
• New exhibit on the transaction analysis
steps for any transaction, with an example
added to the exhibit.
• Modified several assignments: Added new
transactions and updated real company
information.
• Separated the analysis of cash flow require-
ments from recording of transactions in
several assignments.
Chapter 4
• All Chipotle Mexican Grill illustrations
updated to reflect most recent annual
report data.

xi
 • Modified the Accounting Cycle graphic to
add clarity.
• New Exhibit 4.2 on the types of adjust-
ments, which also lists typical accrual and
deferral accounts.
• New Exhibit 4.3 on the adjustment process,
specifying the accounts to be adjusted and
illustrating journal entries.
• New exhibit on the interrelationships of the
financial statements, combining two graph-
ics from the prior edition.
• New graphic illustrating the closing process.
• Changed E4-2 to the trial balance of Face-
book, Inc. and AP4-1 to the trial balance
of Tesla, Inc.
• Revised the continuing problem (CON4-1)
for Penny’s Pool Service & Supply to start
with an unadjusted trial balance for com-
pleting the accounting cycle, making the
assignment capable of being auto-graded
using Excel and Connect.
Chapter 5
• Updated all internet-based sources of
financial information.
• New Environmental, Social, and Gover-
nance (ESG) Reporting feature added with
discussion of Apple’s ESG report.
• New Yahoo! Finance illustration of infor-
mation available about Apple.
• New Guided Help video providing step-
by-step instruction on how to determine
the effects of transactions on key balance
sheet and income statement subtotals.
• New Guided Help video providing step-by-
step instruction on how to determine the
effects of transactions of key performance
ratios.
• New end-of-chapter Demonstration Case
based on the financial statements of
Microsoft.
• New end-of-chapter exercises and prob-
lems based on the financial statements
of Salesforce.com, Sonos, Inc., Con-
solidated Edison, Nordstrom, Inc., and
other companies.
Chapter 6
• Updated the Focus Company Skechers’
illustrations.
• New Guided Help video providing step-
by-step instruction on accounting for credit
card discounts and sales discounts.
xii
• Revised discussions of errors in bad debt
estimates to include the effects of the pan-
demic on Skechers’ bad debts.
• New end-of-chapter exercises and prob-
lems based on the financial statements of
SAP, Adobe, General Mills, VF Corpo-
ration, and other companies.
• Revised discussion of internal control of cash.
Chapter 7
• Updated the Focus Company Harley-
Davidson’s real company illustrations.
• New simplified discussion of how com-
panies with perpetual inventory systems
report using the LIFO cost flow assumption.
• New Guided Help video providing step-
by-step instruction on converting ending
inventory, cost of goods sold, and pretax
income from LIFO to FIFO.
• New Guided Help video providing step-by-
step instruction on correcting the income
statement for errors in ending inventory.
Chapter 8
• New Focus Company: FedEx Corpora-
tion integrated in the chapter.
• New Understanding the Business section
on package and cargo delivery industry.
• Briefly mentioned impact of pandemic in
Key Ratio analysis.
• New discussion of operating lease right-of-
use assets by airline and other industries as
a method of acquisition.
• New comparison company UPS in fixed
asset turnover ratio analysis.
• Revised Pause for Feedback on acquir-
ing operational assets that more closely
matches end-of-chapter assignments.
• New Guided Help video on recording the
purchase of long-lived assets.
• New block on Environmental, Social,
and Governance (ESG) Reporting with an
excerpt from FedEx’s 2020 Global Citizen-
ship Report.
• New discussion of internal controls for
fixed assets.
• Illustrated depreciation schedules using
Excel spreadsheets.
• Revised asset impairment test steps and
illustrated applying the steps to Delta Air
Lines’ impairment measurement due to the
pandemic.
• New illustration of determining goodwill
using the purchase of Tableau Software,
Inc. by Salesforce.com, Inc.
• Revised section on licenses and operating
rights related to landing and take-off slots
as intangible operating rights of airlines.
Chapter 9
• New and more vibrant real company pic-
tures and illustrations of Focus Company
Starbucks.
• Updated company names used in exam-
ples and end-of-chapter material to reflect
more diversity.
• New comparison company Monster
Beverages.
• Updated discussion of deferred revenue
using Starbucks’s “stored value cards”
account and associated mobile app as an
example.
• New real-world excerpt focused on a
California lawsuit claiming that Starbucks’s
coffee has chemicals in it that requires
a warning, and whether this lawsuit is a
contingent liability.
• Added Peloton and Beyond Meats in
end-of-chapter material.
Chapter 10
• New and more vibrant real company bond
illustrations of Focus Company Amazon.
• Updated company names used in exam-
ples and end-of-chapter material to reflect
more diversity.
• New data analytics box that highlights
the role artificial intelligence plays in bond
investing.
• Added Apple in end-of-chapter material.
Chapter 11
• New Focus Company: Microsoft inte-
grated throughout the chapter with new
pictures and updated illustrations.
• Updated company names used in exam-
ples and end-of-chapter material to reflect
more diversity.
• New Environmental, Social, and Gover-
nance (ESG) Reporting feature added with
discussion of Microsoft’s ESG report.
• New discussion of how some states (e.g.,
the state of Washington) do not allow trea-
sury stock and the effects this has on finan-
cial statements.
• New comparison company IBM.
• New real-world excerpt focused on Micro-
soft’s equity compensation.
• Streamlined the chapter supplement that
covers accounting for the equity of sole
proprietorships and partnerships.
• Added Zoom Video Communications
and Facebook in end-of-chapter material.
Chapter 12
• Updated the Focus Company National
Beverage and all real company illustrations.
Chapter 13
• New and more vibrant real company pic-
tures and illustrations of Focus Company
The Home Depot.
• Updated company names used in exam-
ples and end-of-chapter material to reflect
more diversity.
• Revised ratio titles to succinctly link to titles
used in all previous chapters.
• Changed end-of-chapter material to
include Apple, Peabody Energy, Tesla,
Boeing, Zoom Video Communica-
tions, and A-Mark Precious Metals.
• New Environmental, Social, and Governance
(ESG) Reporting feature added with discus-
sion of The Home Depot’s ESG report.
Appendix A
• Updated the Focus Company The Walt
Disney Company’s illustrations.
• Added marginal illustrations of the timing
of transactions regarding held-to-maturity,
trading securities, and available-for-sale
debt and equity investments.
• New Guided Help video on recording
transactions related to debt investments
as trading securities and available-for-sale
securities.
• New Pause for Feedback with a Self-Study
Quiz on applying the fair value method to
passive investments in equity securities.
• New Guided Help video on recording
transactions related to applying the equity
method for investments when there is sig-
nificant influence.
• Added real world excerpt from The Walt
Disney Company’s annual report regard-
ing the impact of the pandemic and the
impairment of goodwill.
Connect
• New Integrated Excel Activities - pair
the power of Microsoft Excel® with the
power of Connect® in a seamless live
integration.
• New Tableau Dashboard Activities - easily
introduce students to Tableau®. Students
learn to gather the information they need
from a live embedded Tableau dashboard.
No prior knowledge of Tableau® is needed.
• New Alternative Problems - all the alterna-
tive problems in the text can now be found
and auto-graded in Connect®.
xiii
Instructors: Student Success Starts with You
Tools to enhance your unique voice
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Online Assignments
Connect helps students learn more efficiently by providing
feedback and practice material when they need it, where
they need it. Connect grades homework automatically and
gives immediate feedback on any questions students may
have missed. The extensive assignable, gradable end-of-
chapter content includes a general journal application that
looks and feels more like what you would find in a general
ledger software package.
End-of-chapter auto-gradable questions in Connect include
• Mini-Exercises
• Exercises
• Problems
• Alternate Problems
• Comprehensive Problems
• Continuing Problems
• Cases and Projects Courtesy of Noelle Bathurst
• General Ledger Problems
• Excel Application Exercises
• Tableau Dashboard Activities

General Ledger Problems

General Ledger Problems provide a much-improved student experience when working with accounting
cycle questions, offering improved navigation and less scrolling. Students can audit their mistakes by
easily linking back to their original entries and can see how the numbers flow through the various financial
statements. Many General Ledger Problems include an analysis tab that allows students to demonstrate
their critical thinking skills and a deeper understanding of accounting concepts.

xvi
 NEW!
Concept Overview Videos
The Concept Overview Videos provide engaging
narratives of all chapter learning objectives in an
assignable and interactive online format. They follow
the structure of the text and are organized to match
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Financial Accounting. These short presentations provide
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xvii
 ACKNOWLEDGMENTS
Many dedicated instructors have devoted their time and effort to help us make
each edition better. We would like to acknowledge and thank all of our colleagues
who have helped guide our development decisions for this and previous editions.
This text would not be the success it is without the help of all of you.

Reviewers
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Washington
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College
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University
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and Mary
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Texas at Austin
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We are grateful to the following individuals who helped develop, critique, and
shape the extensive ancillary package: LuAnn Bean, Florida Institute of Technology;
Jeannie Folk; Beth Kobylarz, Mark McCarthy, East Carolina University; Barbara
Muller, Arizona State University; Kim Temme; and Teri Zuccaro, Clarke University.

We also have received invaluable input and support through the years from
present and former colleagues and students. We also appreciate the additional
comments, suggestions, and support of our students and our colleagues at
Cornell University, Ithaca College, and University of Washington.
xviii
Last, we applaud the extraordinary efforts of a talented group of individuals
at McGraw Hill who made all of this come together. We would especially like
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xix
 CONTENTS IN BRIEF

CHAPTER 1 CHAPTER 11
Financial Statements and Business Decisions 2 Reporting and Interpreting Stockholders’ Equity 574
Focus Company: Le-Nature’s Inc. Focus Company: Microsoft

CHAPTER 2 CHAPTER 12
Investing and Financing Decisions and the Accounting Statement of Cash Flows 626
System 44 Focus Company: National Beverage Corporation
Focus Company: Chipotle Mexican Grill
CHAPTER 13
CHAPTER 3 Analyzing Financial Statements 686
Operating Decisions and the Accounting System 108 Focus Company: The Home Depot
Focus Company: Chipotle Mexican Grill
APPENDIX A
CHAPTER 4 Reporting and Interpreting Investments in Other
Adjustments, Financial Statements, and the Closing Corporations A-0
Process 170 Focus Company: The Walt Disney Company
Focus Company: Chipotle Mexican Grill
APPENDIX B
CHAPTER 5 Target Corporation, Form 10-K Annual
Communicating and Analyzing Accounting Information 236 Report B-1
Focus Company: Apple Inc.
APPENDIX C
CHAPTER 6 Walmart Inc., Form 10-K Annual Report C-0
Reporting and Interpreting Sales Revenue, Receivables,
and Cash 290 APPENDIX D
Focus Company: Skechers U.S.A. Industry Ratio Report D-0

CHAPTER 7 APPENDIX E
Reporting and Interpreting Cost of Goods Sold and Present and Future Value Tables E-1
Inventory 342
Focus Company: Harley-Davidson, Inc. Glossary G-1
CHAPTER 8 Company Index I-1
Reporting and Interpreting Property, Plant, and Subject Index I-7
Equipment; Intangibles; and Natural Resources 400
Focus Company: FedEx Corporation MBA Companion (Available online in Connect and in
McGraw Hill’s Create)
CHAPTER 9 Leases, Income Taxes, and Retirement Obligations
Reporting and Interpreting Liabilities 472 Focus Company: Under Armour
Focus Company: Starbucks

CHAPTER 10
Reporting and Interpreting Bond Securities 522
Focus Company: Amazon
xxi
 CONTENTS

Preface v CH A P T E R S U P P LE M E N T A : T YP E S OF B U S INE S S
ENTITIES 23
CH A P T E R S U P P LE M E N T B: E M P LOYM E NT IN T HE
CHAPTER ONE AC CO U N T I N G P R O F E S S I O N TODAY 2 4
Financial Statements and Business Decisions 2 Chapter Take-Aways 25
Finding Financial Information 26
Le-Nature’s Inc. Key Terms 26
Understanding the Business 3 Questions 27
The Four Basic Financial Statements: An Overview 6 Multiple-Choice Questions 27
The Balance Sheet 6 Mini-Exercises 28
FI NANC I AL AN A LYSI S: Exercises 29
Interpreting Assets, Liabilities, and Stockholders’ Equity on Problems 36
the Balance Sheet 9 Alternate Problems 37
• Pause for Feedback 9 Continuing Problem 39
Cases and Projects 39
The Income Statement 10
Business Analytics and Data Visualization
FI NANC I AL AN A LYSI S:
with Excel and Tableau 43
Analyzing the Income Statement: Beyond the Bottom
Line 11
CHAPTER TWO
• Pause for Feedback 11 Investing and Financing Decisions and the
Statement of Stockholders’ Equity 12 Accounting System 44
FI NANC I AL AN A LYSI S:
Interpreting Retained Earnings 13 Chipotle Mexican Grill

• Pause for Feedback 13 Understanding the Business 45

Relationships Among the Income Statement, Statement of What Information is Included in the Balance Sheet? 47
Stockholders’ Equity, and Balance Sheet 14 Recognition and Measurement Concepts 47
• Pause for Feedback 14 Elements of the Balance Sheet 47

Statement of Cash Flows 15 • Pause for Feedback 49

FI NANC I AL AN A LYSI S: F I N A N C I A L A N A LYS I S :
Interpreting the Cash Flow Statement 16 Unrecorded but Valuable Assets and Liabilities 50

• Pause for Feedback 16 What Business Activities Cause Changes In Financial

Statement Amounts? 50
Notes and Financial Statement Formats 17
Nature of Business Transactions 50
Summary of the Four Basic Financial Statements 17
Accounts 51
Responsibilities For The Accounting Communication
How Do Transactions Affect Accounts? 52
Process 17
Principles of Transaction Analysis 52
Generally Accepted Accounting Principles 18
Analyzing Common Transactions 53
I NTER NAT I ON A L PER SPE C TIV E :
• Pause for Feedback 57
The International Accounting Standards Board and Global
Accounting Standards 19 How Do Companies Keep Track of Account Balances? 58
The Direction of Transaction Effects 58
Ensuring the Accuracy of Financial Statements 20
Demonstration Case 22 • Pause for Feedback 59

xxiii
xxiv CONTENTS

Analytical Tools 60 DATA A N A LY T I CS :

F INANCI AL ANA LYSI S: Using Data Analytics in the Restaurant Industry to Increase
Revenues and Decrease Costs 115
Inferring Business Activities from T-Accounts 63
How are Operating Activities Recognized and Measured? 115
Transaction Analysis Illustrated 63
Accrual Accounting 116
• Pause for Feedback 67
• Pause for Feedback 118
DATA A NALYTIC S:
• Pause for Feedback 120
Using Data Analytics for Business Expansion 68
A Q U E ST I O N O F E T H I CS :
How is the Balance Sheet Prepared and Analyzed? 68
Classified Balance Sheet 69 Management’s Incentives to Violate Accounting Rules 121

INTERNATIONAL PER SPE C TIVE: The Expanded Transaction Analysis Model 121
Transaction Analysis Rules 121
Understanding Foreign Financial Statements 71
Analyzing Common Transactions 123
Ratio Analysis in Decision Making 72
• Pause for Feedback 128
KEY RAT IO ANALYSIS:
How is the Income Statement Prepared and Analyzed? 129
Current Ratio 72
Classified Income Statement 131
• Pause for Feedback 73 KE Y R AT I O A N A LYS I S :
F OCUS ON CASH FLOW S: Net Profit Margin Ratio 131
Investing and Financing Activities 74 F O CU S O N CAS H F LOW S :
• Pause for Feedback 74 Operating Activities 133
Demonstration Case 75 • Pause for Feedback 133
Chapter Take-Aways 78 Demonstration Case 134
Key Ratio 79 Chapter Take-Aways 138
Finding Financial Information 80 Key Ratio 139
Key Terms 80 Finding Financial Information 140
Questions 81 Key Terms 140
Multiple-Choice Questions 81 Questions 140
Mini-Exercises 83 Multiple-Choice Questions 141
Exercises 86 Mini-Exercises 143
Problems 94 Exercises 146
Alternate Problems 97 Problems 155
Continuing Problem 101 Alternate Problems 159
Cases And Projects 102 Continuing Problem 163
Business Analytics and Data Visualization Comprehensive Problem (Chapters 1–3) 164
with Excel and Tableau 107
Cases And Projects 165
Business Analytics and Data Visualization
with Excel and Tableau 169
CHAPTER THREE
Operating Decisions and the Accounting
System 108 CHAPTER FOUR
Adjustments, Financial Statements, and the
C hipotle M exic an Grill Closing Process 170
Understanding the Business 109
Chipotle Mexican Grill
How do Business Activities Affect the Income
Statement? 110 Understanding the Business 171
The Operating Cycle 110 Adjusting Revenues And Expenses 172
Elements of the Income Statement 112 Accounting Cycle 172

Purpose of Adjustments 172
Adjustment Process 174
• Pause for Feedback 181
A QUESTION OF E T H I C S:
Adjustments and Incentives
Preparing Financial Statements
Income Statement 184
Statement of Stockholders’ Equity 186
Balance Sheet 186
FOCUS ON CASH FLOW S:
Cash Flows from Operations, Net Income, and the Quality of
Earnings 188
KEY R AT I O A N ALYSIS:
Total Asset Turnover Ratio
DATA AN ALYTIC S:
The SEC Uses Data Analytics 189
Closing The Books 190
End of the Accounting Cycle
• Pause for Feedback 192
Post-Closing Trial Balance
Demonstration Case 194
Chapter Take-Aways 198
Key Ratio 199
Finding Financial Information
Key Terms 200
Questions 200
Multiple-Choice Questions
Mini-Exercises 202
Exercises 205
Problems 216
Alternate Problems 220
Continuing Problem 223
Comprehensive Problems (Chapters 1–4)
Cases And Projects 227
Business Analytics and Data Visualization
with Excel and Tableau 235
CHAPTER FIVE
Communicating and Analyzing Accounting
Information 236
Apple I nc .
Understanding the Business
A QUESTION OF E T H I C S:
The Fraud Triangle 238
CONTENTS xxv
Players In The Accounting Communication Process 239
Regulators (SEC, FASB, PCAOB, Stock Exchanges) 239
Managers (CEO, CFO, and Accounting Staff) 239
Board of Directors (Audit Committee) 240
Auditors 240
182
DATA A N A LY T I CS :
183
How Data Analytics Are Affecting What Auditors Do 241
Information Intermediaries: Information Services
and Financial Analysts 241
F I N A N C I A L A N A LYS I S :
Information Services and Your Job Search 243
Users: Institutional and Private Investors, Creditors, and
Others 243
• Pause for Feedback 244
188
The Disclosure Process 244
Press Releases 244
Annual Reports and Form 10-K 245
Quarterly Reports and Form 10-Q 246
190 Other SEC Reports 246
E N V I R O N M E N TA L, S O C I A L , & GOVE RNANCE ( E S G)
R E P O RT I N G :
193
Performance Beyond the Bottom Line 246
A Closer Look At Financial Statement Formats And
Notes 247
Classified Balance Sheet 247
200
Classified Income Statement 247
F I N A N CI A L A N A LYS I S :
Statement of Comprehensive Income 250
201
• Pause for Feedback 250
KE Y R AT I O A N A LYS I S :
Gross Profit Percentage 251
Statement of Stockholders’ Equity 252
Statement of Cash Flows 253
225 Notes to Financial Statements 253
Voluntary Disclosures 256
I N T E R N AT I O N A L P E R S P E CT IVE :
Differences in Accounting Methods Acceptable under IFRS
and U.S. GAAP 256
Return On Assets Analysis: A Framework For Evaluating
Company Performance 257
KE Y R AT I O A N A LYS I S :
Return on Assets (ROA) 257
ROA Profit Driver Analysis and Business Strategy 258
237 How Transactions Affect Ratios 259
• Pause for Feedback 261
Demonstration Case 262
xxvi CONTENTS

Chapter Take-Aways 264 KE Y R AT I O A N A LYS I S :

Key Ratios 265 Receivables Turnover Ratio 304
Finding Financial Information 265 F O CU S O N CAS H F LOW S :
Key Terms 266 Accounts Receivable 305
Questions 266
Multiple-Choice Questions 266
• Pause for Feedback 306
Mini-Exercises 267 Reporting And Safeguarding Cash 307
Cash and Cash Equivalents Defined 307
Exercises 269
Cash Management 308
Problems 275
Internal Control of Cash 308
Alternate Problems 278
A Q U E ST I O N O F E T H I CS :
Continuing Problems 282
Ethics and the Need for Internal Control 308
Cases and Projects 284
Business Analytics and Data Visualization Reconciliation of the Cash Accounts and the Bank
with Excel and Tableau 289 Statements 309
• Pause for Feedback 313
CHAPTER SIX Demonstration Case A 313
Reporting and Interpreting Sales Revenue, Demonstration Case B 314
Receivables, and Cash 290 CH A P T E R S U P P LE M E N T: R E CO R D I N G D IS COU NTS AND
RETURNS 315

Skechers U.S.A. Chapter Take-Aways 316

Key Ratio 317
Understanding the Business 291
Finding Financial Information 317
Accounting For Net Sales Revenue 292
Key Terms 317
Motivating Sales and Collections 293
Questions 318
Credit Card Sales to Consumers 293
Multiple-Choice Questions 318
Sales Discounts to Businesses 293
Mini-Exercises 319
F INANCI AL ANA LYSI S:
Exercises 320
To Take or Not to Take the Discount, That Is the Question 294
Problems 329
Sales Returns and Allowances 295
Alternate Problems 334
Reporting Net Sales 295
Continuing Problem 338
A QU ESTI ON OF E T H I C S:
Cases and Projects 338
Volume Discounts/Rebates and Earnings Misstatements at Business Analytics and Data Visualization
Monsanto 296 with Excel and Tableau 341
• Pause for Feedback 296
Revenue Recognition for Bundled Goods and Services: CHAPTER SEVEN
A Five-Step Process 297
Reporting and Interpreting Cost of Goods Sold
Measuring and Reporting Receivables 297 and Inventory 342
Classifying Receivables 297
INTERNATIONAL PER SPE C TIVE: Harley-Davidson, Inc.
Foreign Currency Receivables 298
Understanding the Business 343
Accounting for Bad Debts 298
Nature of Inventory and Cost of Goods Sold 345
F INANCI AL ANA LYSI S: Items Included in Inventory 345
Bad Debt Recoveries 299 Costs Included in Inventory Purchases 346
Reporting Accounts Receivable and Bad Debts 300 F I N A N C I A L A N A LYS I S :
• Pause for Feedback 301 Applying the Materiality Constraint in Practice 346
Estimating Bad Debts 302 Flow of Inventory Costs 346
Control over Accounts Receivable 304 Cost of Goods Sold Equation 347
 CONTENTS xxvii

• Pause for Feedback 349 Continuing Problem 394

Perpetual and Periodic Inventory Systems 350 Comprehensive Problem (Chapters 6–7) 395
Inventory Costing Methods 350 Cases and Projects 396
Specific Identification Method 351 Business Analytics and Data
Cost Flow Assumptions 351 Visualization with Excel and Tableau 399

I NTER NAT I ON A L PER SPE C TIV E :

CHAPTER EIGHT
LIFO and International Comparisons 354
Reporting and Interpreting Property, Plant,
Financial Statement Effects of Inventory Methods 354 and Equipment; Intangibles; and Natural
Managers’ Choice of Inventory Methods 355 Resources 400
A QUESTION OF E T H I C S:
LIFO and Conflicts Between Managers’ and Owners’ FedEx Corporation
Interests 356
Understanding the Business 401
• Pause for Feedback 357 Acquisition and Maintenance of Plant and Equipment 402
Valuation at Lower of Cost or Net Realizable Value 358 Classifying Long-Lived Assets 403
Control of Inventory 359 KE Y R AT I O A N A LYS I S :
Internal Control of Inventory 359 Fixed Asset Turnover 403
Errors in Measuring Ending Inventory 360
Measuring and Recording Acquisition Cost 404
• Pause for Feedback 360
• Pause for Feedback 407
Evaluating Inventory Management 361
Repairs, Maintenance, and Improvements 408
Measuring Efficiency in Inventory Management 361
A Q U E ST I O N O F E T H I CS :
KEY R AT I O A N ALYSIS:
Worldcom: Hiding Billions in Expenses through
Inventory Turnover 362
Capitalization 409
• Pause for Feedback 362
E N V I R O N M E N TA L, S O C I A L , & GOVE RNANCE ( E S G)
Inventory Methods and Financial Statement Analysis 363 R E P O RT I N G :
FI NANC I AL AN A LYSI S: Being a Global Citizen 409
LIFO and Inventory Turnover Ratio 365
• Pause for Feedback 410
• Pause for Feedback 365
Use, Impairment, and Disposal of Plant and Equipment 411
Inventory and Cash Flows 366 Depreciation Concepts 411
FOCUS ON CASH FLOW S: F I N A N C I A L A N A LYS I S :
Inventory 366 Book Value as an Approximation of Remaining Life 413
Demonstration Case 368 F I N A N C I A L A N A LYS I S :
CHAPTER SUPPL EME N T A: FIFO C O ST O F G O O D S S O LD
Differences in Estimated Lives within a Single Industry 413
UNDER PER I ODI C A N D PER PETUA L I N V E N TO RY SYST E M S
AND END OF PE R I OD ADJUSTME N TS TO LI F O 3 6 9 Alternative Depreciation Methods 414
CHAPTER SUPPL EME N T B : A DDI T I O N A L I S S U E S I N F I N A N C I A L A N A LYS I S :
ME ASUR I N G I N VEN TORY PUR C HAS E S 3 7 1 Impact of Alternative Depreciation Methods 419
Chapter Take-Aways 372
• Pause for Feedback 419
Key Ratio 373
Finding Financial Information 373 F I N A N C I A L A N A LYS I S :
Key Terms 374 Increased Profitability Due to an Accounting Adjustment?
Reading the Notes 420
Questions 374
Multiple-Choice Questions 375 How Managers Choose 420
Mini-Exercises 376 A Q U E ST I O N O F E T H I CS :
Exercises 377 Two Sets of Books 421
Problems 386 Measuring Asset Impairment 421
Alternate Problems 390 Disposal of Property, Plant, and Equipment 422
xxviii CONTENTS

• Pause for Feedback 423 Notes Payable 480

Intangible Assets and Natural Resources 424 Current Portion of Long-Term Debt 481
Acquisition and Amortization of Intangible Assets 424 F I N A N C I A L A N A LYS I S :
Acquisition and Depletion of Natural Resources 429 Refinancing Debt: Current or Long-Term Liability? 482
F OCUS ON CASH FLOW S: Contingent Liabilities Reported on the Balance Sheet 482
Productive Long-lived Assets, Depreciation, and Contingent Liabilities Reported in the Footnotes 482
Amortization 430
I N T E R N AT I O N A L P E R S P E CT I V E :
F INANCI AL ANA LYSI S: It’s a Matter of Degree 483
A Misinterpretation 431 Working Capital Management 484
Demonstration Case A 432 F O CU S O N CAS H F LOW S :
Demonstration Case B 434 Working Capital and Cash Flows 484
CH APTER SUPPL EME N T: C H AN G ES I N D E PR E CI AT I O N
ESTIMATES 435
• Pause for Feedback 484
Long-Term Liabilities 485
• Pause for Feedback 436
Long-Term Notes Payable and Bonds 485
Chapter Take-Aways 436
I N T E R N AT I O N A L P E R S P E CT I V E :
Key Ratio 437
Borrowing in Foreign Currencies 485
Finding Financial Information 437
Lease Liabilities 486
Key Terms 438
Accounting for finance leases and operating leases 486
Questions 438
Accounting for short-term leases 487
Multiple-Choice Questions 439
Computing Present Values 487
Mini-Exercises 440
Present Value of a Single Amount 488
Exercises 442
• Pause for Feedback 489
Problems 451
Present Value of an Annuity 490
Alternate Problems 456
Continuing Problem 460 A Q U E ST I O N O F E T H I CS :

Comprehensive Problem (Chapters 6–8) 461 Truth in Advertising 491

Cases and Projects 464 Accounting Applications of Present Values 492
Business Analytics and Data Demonstration Case 495
Visualization with Excel and Tableau 471 CH A P T E R S U P P LE M E N T A : P R E S E NT VALU E
CO M P U TAT I O N S U S I N G A CA LC U LATOR OR E XCE L 496
CHAPTER NINE CH A P T E R S U P P LE M E N T B: D E F E R R E D TAXE S 499
Reporting and Interpreting Liabilities 472 Chapter Take-Aways 500
Key Ratio 501
Starbucks Finding Financial Information 501
Understanding the Business 472 Key Terms 502
Liabilities Defined and Classified 474 Questions 502
Current Liabilities 474 Multiple-Choice Questions 503
Accounts Payable 475 Mini-Exercises 504
KEY RAT IO ANALYSIS: Exercises 506
Accounts Payable Turnover 475 Problems 511
Accrued Liabilities 476 Alternate Problems 515
Deferred Revenues 479 Continuing Problem 518
BU SINE SS ANALYTIC S: Cases And Projects 519
Using mobile app data to understand customer Business Analytics and Data
behavior 479 Visualization with Excel and Tableau 521
 CONTENTS xxix

CHAPTER TEN Key Terms 555

Reporting and Interpreting Questions 555

Bond Securities 522 Multiple-Choice Questions 556
Mini-Exercises 557
Amazo n Exercises 559
Problems 563
Understanding the Business 523
Alternate Problems 567
Characteristics of Bond Securities 525
Continuing Problem 570
Reasons Why Companies Issue Bonds 525
Bond Terminology 525 Cases and Projects 571
Bond Issuance Process 527 Business Analytics and Data
Visualization with Excel and Tableau 573
FI NANC I AL AN A LYSI S:
Bond Rating Agencies and Their Assessments of Default
Risk 528
CHAPTER ELEVEN
Reporting Bond Transactions 528
Reporting and Interpreting Stockholders’
DATA AN ALYTIC S:
Equity 574
Using Artificial Intelligence (AI) to Invest in Bonds 530

• Pause for Feedback 530 Microsoft

Bonds Issued at Par 531 Understanding the Business 574
• Pause for Feedback 532 E N V I R O N M E N TA L, S O C I A L , & GOVE RNANCE ( E S G)
R E P O RT I N G 5 7 5
KEY R AT I O A N ALYSIS:
Times Interest Earned 533 Ownership of a Corporation 577
Benefits of Stock Ownership 577
Bonds Issued at a Discount 534
Authorized, Issued, and Outstanding Shares 578
• Pause for Feedback 538
KE Y R AT I O A N A LYS I S :
Bonds Issued at a Premium 538
Earnings per Share (EPS) 579
• Pause for Feedback 541
Common Stock Transactions 579
FI NANC I AL AN A LYSI S: Initial Sale of Stock 580
Zero Coupon Bonds 542 Sale of Stock in Secondary Markets 580
Stock Issued for Employee Compensation 581
KEY R AT I O A N ALYSIS:
Repurchase of Stock 582
Debt-to-Equity 544
• Pause for Feedback 583
Early Retirement of Bonds 544
Dividends on Common Stock 584
FOCUS ON CASH FLOW S:
KE Y R AT I O A N A LYS I S :
Bond Transactions and the Statement of Cash Flows 545
Dividend Yield 584
Demonstration Case 546
Key Dividend Dates 585
CHAPTER SUPPL EME N T: AC C OU N T I N G F O R BO N D S
WI THOUT A DI SC OUN T AC C OUN T O R PR E M I U M F I N A N C I A L A N A LYS I S :
ACCOUNT 5 4 6 Impact of Dividends on Stock Price 587
• Pause for Feedback 550 • Pause for Feedback 587
Bonds Issued at a Premium 550 Stock Dividends and Stock Splits 588
• Pause for Feedback 553 Stock Dividends 588
Chapter Take-Aways 553 Stock Splits 589
Key Ratios 554 • Pause for Feedback 590
Finding Financial Information 554 Statement Of Stockholders’ Equity 591
xxx CONTENTS

• Pause for Feedback 592 • Pause for Feedback 640

Preferred Stock Transactions 593 Interpreting Cash Flows from Operating Activities 640
Dividends on Preferred Stock 593 KE Y R AT I O A N A LYS I S :
F INANCI AL ANA LYSI S: Quality of Income Ratio 641
Preferred Stock and Limited Voting Rights 594
A Q U E ST I O N O F E T H I CS :
F OCUS ON CASH FLOW S: Fraud and Cash Flows from Operations 642
Financing Activities 594 Reporting and Interpreting Cash Flows from Investing
Demonstration Case 595 Activities 642
CH APTER SUPPL EME N T: AC C OUN TIN G FO R T H E E Q U I T Y Reporting Cash Flows from Investing Activities 642
O F SOLE PR OPR I ETOR SH I PS A N D PART N E R S H I P S 5 9 6 Interpreting Cash Flows from Investing Activities 643
Chapter Take-Aways 600 KE Y R AT I O A N A LYS I S :
Key Ratio 601 Capital Acquisitions Ratio 644
Finding Financial Information 602
F I N A N C I A L A N A LYS I S :
Key Terms 602
Free Cash Flow 644
Questions 603
Reporting and Interpreting Cash Flows from Financing
Multiple-Choice Questions 603
Activities 645
Mini-Exercises 604
Reporting Cash Flows from Financing Activities 645
Exercises 605
Interpreting Cash Flows from Financing Activities 646
Problems 612
• Pause for Feedback 647
Alternate Problems 616
Completing the Statement and Additional Disclosures 647
Continuing Problem 620
Statement Structure 647
Comprehensive Problem (Chapters 9–11) 620
Supplemental Cash Flow Information 648
Cases and Projects 621
Demonstration Case 649
Business Analytics and Data Visualization
CH A P T E R S U P P LE M E N T A : R E P O RT ING CAS H F LOWS
with Excel and Tableau 624
F R O M O P E R AT I N G ACT I V I T I E S — D I R E CT M E T HOD 6 5 0

• Pause for Feedback 653

CHAPTER TWELVE
CH A P T E R S U P P LE M E N T B: A DJ U ST ME NT F OR GAINS AND
Statement of Cash Flows 626 LO S S E S O N SA LE O F LO N G -T E R M AS S E TS — IND IRE CT
METHOD 654
Na tional Beverage Corporation CH A P T E R S U P P LE M E N T C: T-AC CO UNT AP PROACH
(I N D I R E CT M E T H O D ) 6 5 5
Understanding the Business 627
Chapter Take-Aways 656
Classifications of the Statement of Cash Flows 628
Cash Flows from Operating Activities 629 Key Ratios 657
Cash Flows from Investing Activities 630 Finding Financial Information 658
Cash Flows from Financing Activities 631 Key Terms 658
Net Increase (Decrease) in Cash 631 Questions 658
• Pause for Feedback 631 Multiple-Choice Questions 659
Relationships to the Balance Sheet and Income Statement 632 Mini-Exercises 660
Preliminary Steps in Preparing the Cash Flow Statement 633 Exercises 661
Reporting and Interpreting Cash Flows from Operating Problems 671
Activities 635 Alternate Problems 675
Reporting Cash Flows from Operating Activities—Indirect Continuing Problem 679
Method 635 Cases and Projects 680
INTERNATIONAL PER SPE C TIVE: Business Analytics and Data Visualization
Classification of Interest on the Cash Flow Statement 639 with Excel and Tableau 685
 CONTENTS xxxi

CHAPTER THIRTEEN Exercises 717

Analyzing Financial Statements 686 Problems 722

Alternate Problems 727
The Ho m e Depot Continuing Problem 732
Cases and Projects 733
Understanding the Business 687
The Investment Decision 691
Understanding a Company’s Strategy 692 APPENDIX A
Financial Statement Analysis 693 Reporting and Interpreting Investments in Other
A QUESTION OF E T H I C S:
Corporations A-0
Insider Information 694
The Walt Disney Company A-1
Component Percentages and Ratio Analysis 695
Component Percentages 695
APPENDIX B
B USINE SS AN A LYT I C S:
Target Corporation, Form 10-K Annual
Using Data Visualization Tools to Assess a Company’s
Performance 696
Report B-1
Ratio Analysis 696
Profitability Ratios 697 APPENDIX C
• Pause for Feedback 700 Walmart Inc., Form 10-K Annual Report C-0
Asset Turnover Ratios 701
FI NANC I AL AN A LYSI S: APPENDIX D
ROA Profit Driver Analysis and the DuPont Model 705 Industry Ratio Report D-0
Liquidity Ratios 706
• Pause for Feedback 707 APPENDIX E
Solvency Ratios 708 Present and Future Value Tables E-1
Market Ratios 709
• Pause for Feedback 710 GLOSSARY G-1
Interpreting Ratios and Other Analytical
Considerations 711 COMPANY INDEX I-1
Other Relevant Information 711
ENVIR ON ME N TA L , SOC I AL , & G OV E R N A N CE (E S G ) SUBJECT INDEX I-7
R EPORT I N G 7 1 2

Chapter Take-Aways 713 MBA COMPANION (Available online in Connect

Finding Financial Information 714 and in McGraw Hill’s Create)
Key Terms 715 Leases, Income Taxes, and Retirement
Questions 715 Obligations
Multiple-Choice Questions 715
Mini-Exercises 716 Under Armour

Images used throughout front matter: Question of ethics: mushmello/Shutterstock; Pause for feedback: McGraw Hill; Guided help: McGraw Hill;
Financial analysis: McGraw Hill; Focus on cash flows: Hilch/Shutterstock; Key ratio analysis: guillermain/123RF; Data analytics: Hilch/Shutterstock;
Tip: McGraw Hill; ESG reporting: McGraw Hill; International perspective: Hilch/Shutterstock
 1 Financial Statements
and Business Decisions

L e-Nature’s Inc. designed its business strategy to ride the growing wave of interest
chapter
in noncarbonated beverages. And apparently its strategy was a huge success. Its
financial statements reported growth in sales from $156 to $275 million in just
three years. How did this small family-run business compete with the likes of Coke and
Pepsi in this growing market? The business press suggested the first key to its success
was manufacturing a broad range of products that fit into the fastest growing “healthy”
segments: flavored waters, teas, and fruit drinks. Founder and CEO Gregory Podlucky
said that an obsessive drive for quality and efficiency was just as critical. Matching
customers’ concerns for the environment and healthy living, Le-Nature’s was praised as
one of the first companies to switch to environmentally friendlier PET plastic bottles and to
employ safe in-bottle pasteurization. Its 21st-century manufacturing operation in Latrobe,
Pennsylvania, produced everything that goes into its products, from the injection-molded
PET bottles to the final packaging. Complete control over the whole process assures
quality and provides the flexibility to respond quickly to changes in customers’ demands.
When convenience stores moved to larger-sized drinks or school cafeterias switched
from carbonated beverages to healthier drinks, Le-Nature’s could change its production
to meet the customers’ needs. The company even opened a second new state-of-the-art
manufacturing facility in Arizona to meet the apparent growing demand.
But here is the twist: Just three short months later, investigators discovered that Le-
Nature’s phenomenal sales growth was more fiction than fact. How could this apparent
success story portrayed in the financial statements really be one of the most remark-
able frauds in history?
Chapter 1 concentrates on the key financial statements that businesspeople rely
upon when they evaluate a company’s performance as well as the importance of accu-
rate financial statements in making our economic system work. We discuss these issues
in the context of Le-Nature’s rise and fall.

L EA R NI N G OB J ECTIVES

After studying this chapter, you should be able to:

1-1 Recognize the information conveyed in each of the four basic financial
statements and the way that it is used by different decision makers
(investors, creditors, and managers). p. 6
1-2 Identify the role of generally accepted accounting principles (GAAP)
in determining financial statement content and managers’, directors’,
and auditors’ responsibilities for ensuring the accuracy of the financial
statements. p.17

2
 FOCUS COMPANY

Le-Nature’s Inc.
USING FINANCIAL
STATEMENT
INFORMATION TO
MANAGE GROWTH

James F. Quinn/KRT/Newscom

Accounting knowledge will be valuable to you only if you can apply it in the real
world. Learning is also easier when it takes place in real contexts. So at the beginning
of each chapter, we always provide some background about the business that will pro-
vide the context for the chapter discussion.

UNDERSTANDING THE BUSINESS

Le-Nature’s Inc., our focus company for this chapter, was founded by Gregory Pod-
lucky and his brother Jonathan, who initially were the sole owners or stockholders of
the company. They were also the managers of the company. Using expertise gained
working at their parents’ brewery (Stoney’s Beer), the brothers were early believers in
the trend toward healthier, noncarbonated beverages. Like most entrepreneurs, their
growth ambitions quickly outpaced their own financial resources. So they turned to
banks, including Wells Fargo Bank and other lenders, to finance additional manufactur-
ing facilities and equipment. Different units of Wells Fargo continued to arrange lend-
ing to Le-Nature’s as the need arose, becoming its largest lender or creditor. Creditors
make money on the loans by charging interest. The Podluckys also convinced others to
buy stock in Le-Nature’s. These individuals became part owners or stockholders along
with the Podluckys. The stockholders hoped to receive a portion of what the company
earned in the form of cash payments called dividends and to eventually sell their share
of the company at a higher price than they paid. Creditors are more willing to lend and
stock prices usually rise when creditors and investors expect the company to do well
in the future. Both groups estimate future performance, in part, based on information in
the company’s financial statements. 3
4 CHAPTER 1 Financial Statements and Business Decisions

EXHIBIT 1.1 Accounting System

The Accounting System and
Decision Makers

External Financial Reports Internal Management Reports

Periodic financial statements Detailed plans and
and related disclosures continuous performance reports

provided to

External Decision Makers Internal Decision Makers

Evaluate the company Run the company

Creditors Investors Managers

Micolas/Shutterstock; nirat/iStock/Getty Images Plus; Anton Violin/Shutterstock; Pressmaster/Shutterstock;
kzenon/123RF

The Accounting System

Managers (often called internal decision makers) need information about the compa-
ny’s business activities to manage the operating, investing, and financing activities of
the firm. Stockholders and creditors (often called external decision makers) need infor-
mation about these same business activities to assess whether the company will be
able to pay back its debts with interest and pay dividends. All businesses must have an
accounting system that collects and processes financial information about an organiza-
tion’s business activities and reports that information to decision makers. Le-Nature’s
business activities included:
• Financing Activities: borrowing or paying back money to lenders and receiving
additional funds from stockholders or paying them dividends.
• Investing Activities: buying or selling items such as plant and equipment used in
the production of beverages.
• Operating Activities: the day-to-day process of purchasing raw tea and other
ingredients from suppliers, manufacturing beverages, delivering them to custom-
ers, collecting cash from customers, and paying suppliers.
Exhibit 1.1 outlines the two parts of the accounting system. Internal managers
typically require continuous, detailed information because they must plan and
manage the day-to-day operations of the organization. Developing accounting
information for internal decision makers, called managerial or management
accounting, is the subject of a separate accounting course. The focus of this text is
 CHAPTER 1 Financial Statements and Business Decisions 5

accounting for external decision makers, called financial accounting, and the four
basic financial statements and related disclosures that are periodically produced by
that system.

Why Study Financial Accounting?

No matter what your business career goals, you can’t get away from financial account-
ing. You may want to work for an investment firm, a bank, or an accounting firm that
would be involved in the financing of companies like Le-Nature’s. We will focus much
of our discussion on the perspectives of investors, creditors, and preparers of finan-
cial statements. However, you might not be aware that managers within the firm also
make direct use of financial statements. For example, marketing managers and credit
managers use customers’ financial statements to decide whether to extend credit to
their customers. Supply chain managers analyze suppliers’ financial statements to see
whether the suppliers have the resources to meet demand and invest in future devel-
opment. Both the employees’ unions and company human resource managers use
financial statements as a basis for contract negotiations over pay rates. Financial state-
ment figures even serve as a basis for calculating employee bonuses. Regardless of
the functional area of management in which you are employed, you will use financial
statement data.
We begin with a brief but comprehensive overview of the information reported in
the four basic financial statements and the people and organizations involved in their
preparation and use. This overview provides a context in which you can learn the
more detailed material presented in the chapters that follow. Then we will discuss
the parties that are responsible for the accuracy of financial statements as well as the
consequences of misstated financial statements. Le-Nature’s stockholders and
creditors used its financial statements to learn more about the company before making
their investment and lending decisions. In doing so, they assumed that the statements
accurately represented Le-Nature’s financial condition.

Your Goals for Chapter 1

To understand the way in which creditors and stockholders used Le-Nature’s financial
statements, we must first understand what specific information is presented in the four
basic financial statements for a company such as Le-Nature’s. PLEASE NOTE: Rather
than trying to memorize the definitions of every term used in this chapter, try to
focus your attention on learning the general content, structure, and use of the state-
ments. Specifically:
Content: the categories of items (often called elements) reported on each of the
four statements.
Structure: the equation that shows how the elements within the statement are
organized and related.
Use: how the information is used by stockholders and creditors to make invest-
ment and lending decisions.
The Pause for Feedback–Self-Study Quizzes at key points in the chapter will help
you assess whether you have reached these goals. If you have difficulty with the
Self-Study Quizzes, Guided Help videos provide narrated, animated, step-by-step
walk-throughs at key points to help you with the material. Remember that because
this chapter is an overview, each concept discussed here will be discussed again in
Chapters 2 through 5.
6 CHAPTER 1 Financial Statements and Business Decisions

ORGANIZATION OF THE CHAPTER

Responsibilities for the

The Four Basic Financial
Accounting Communication
Statements: An Overview
Process

• Balance Sheet • Generally Accepted Accounting

• Income Statement Principles
• Statement of Stockholders’ Equity • Ensuring the Accuracy of
• Statement of Cash Flows Financial Statements
• Relationships among the
Statements
• Notes and Financial Statement
Formats

LEARNING OBJECTIVE 1-1 THE FOUR BASIC FINANCIAL STATEMENTS:

Recognize the information
conveyed in each of
the four basic financial
statements and the way
that it is used by different
decision makers (investors,
creditors, and managers).
AN OVERVIEW
Four financial statements are normally prepared by profit-making organizations for use by inves-
tors, creditors, and other external decision makers.
1. On its balance sheet, Le-Nature’s reports the economic resources it owns and the
sources of financing for those resources.
2. On its income statement, Le-Nature’s reports its ability to sell goods for more than their
cost to produce and sell.
3. On its statement of stockholders’ equity, Le-Nature’s reports additional contributions
from or payments to investors and the amount of income the company reinvested for
future growth.
4. On its statement of cash flows, Le-Nature’s reports its ability to generate cash and how it
was used.
The four basic statements can be prepared at any point in time (such as the end of the year,
quarter, or month) and can apply to any time span (such as one year, one quarter, or one month).
Like most companies, Le-Nature’s prepared financial statements for external users (investors
and creditors) at the end of each quarter (known as quarterly reports) and at the end of the year
(known as annual reports).

The Balance Sheet

The purpose of the balance sheet (statement of financial position) is to report the financial posi-
tion (amount of assets, liabilities, and stockholders’ equity) of an accounting entity at a particu-
lar point in time. We can learn a great deal about what the balance sheet reports just by reading
the statement from the top. The balance sheet Le-Nature’s Inc. presented to creditors and
stockholders is shown in Exhibit 1.2.
 CHAPTER 1 Financial Statements and Business Decisions 7

EXPLANATION
LE-NATURE’S INC. Name of the entity EXHIBIT 1.2
Balance Sheet Title of the statement Balance Sheet
At December 31, 20201 Specific date of the statement
(in millions of dollars) Unit of measure

Assets: Resources controlled by the company

Cash $ 10.6 Amount of cash in the company’s bank accounts
Accounts receivable  6.6 Amounts owed by customers from prior sales
Inventories  51.2 Ingredients and beverages ready for sale
Property, plant, and equipment  459.0 Factories, production equipment, and land
Total assets $527.4 Total amount of company’s resources
Liabilities and stockholders’ equity: Sources of financing for company’s resources
Liabilities Financing supplied by creditors
Accounts payable $ 26.0 Amounts owed to suppliers for prior purchases
Notes payable to banks  381.7 Amounts owed to banks on written debt contracts
Total liabilities  407.7
Stockholders’ equity Financing provided by stockholders
Common stock  55.7 Amounts invested in the business by stockholders
Retained earnings  64.0 Past earnings not distributed to stockholders
Total stockholders’ equity  119.7
Total liabilities and stockholders’ equity $527.4 Total sources of financing for company’s resources
The notes are an integral part of these financial statements.

Structure
Balance Sheet
Notice that the heading specifically identifies four significant items related to the statement:
Assets
1. Name of the entity, Le-Nature’s Inc. =
2. Title of the statement, Balance Sheet. Liabilities
+
3. Specific date of the statement, At December 31, 2020. Stockholders’
4. Unit of measure (in millions of dollars). Equity

The organization for which financial data are to be collected, called an accounting entity,
must be precisely defined. On the balance sheet, the business entity itself, not the business own-
ers, is viewed as owning the resources it uses and being responsible for its debts. The heading
of each statement indicates the time dimension of the report. The balance sheet is like a finan-
cial snapshot indicating the entity’s financial position at a specific point in time—in this case,
December 31, 2020—which is stated clearly on the balance sheet. Financial reports are normally
denominated in the currency of the country in which they are located. U.S. companies report
in U.S. dollars, Canadian companies in Canadian dollars, and Mexican companies in Mexican
pesos. Le-Nature’s statements report in millions of dollars. That is, they round the last six digits
to the nearest million dollars. The listing of Cash $10.6 on Le-Nature’s balance sheet actually
means $10,600,000.

1
The Le-Nature’s statements presented are constructed based on a simplified version of its audited 2005 statements.
As we discuss in the section titled “Ensuring the Accuracy of Financial Statements,” Le-Nature’s statements were
later found to be fraudulent. (Thus, 2020 is used in the header for illustration purposes.) The Le-Nature’s fraud
provides an important warning about the importance of accuracy in financial reporting.
8 CHAPTER 1 Financial Statements and Business Decisions

Notice that Le-Nature’s balance sheet has three major captions: assets, liabilities, and stock-
holders’ equity. The basic accounting equation, often called the balance sheet equation, explains
their relationship:

Assets = Liabilities + Stockholders’ Equity

Economic resources Financing from creditors Financing from stockholders

(e.g., cash, inventory, (e.g., amounts owed to (e.g., common stock, retained
buildings) suppliers, employees, banks) earnings)

What the What the company owes to

company owns Creditors + Owners

The basic accounting equation shows what we mean when we refer to a company’s financial
position: the economic resources that the company owns and the sources of financing for those
resources.

Elements
Assets are the economic resources owned by the entity. Le-Nature’s lists four items under
the category Assets. The exact items listed as assets on a company’s balance sheet depend
on the nature of its operations. But these are common names used by many companies.
The four items listed by Le-Nature’s are the economic resources needed to manufacture
and sell beverages to retailers and vending companies. Each of these economic resources
is expected to provide future benefits to the firm. To prepare to manufacture the bever-
ages, Le-Nature’s first needed cash to purchase land on which to build factories and install
production machinery (property, plant, and equipment). Le-Nature’s then began purchas-
ing ingredients and producing beverages, which led to the balance assigned to inventories.
When Le-Nature’s sells its beverages to grocery stores and others, it sells them on credit
and receives promises to pay called accounts receivable, which are collected in cash later.
Every asset on the balance sheet is initially measured at the total cost incurred to acquire
it. Balance sheets do not generally show the amounts for which the assets could currently
be sold.
Liabilities and stockholders’ equity are the sources of financing for the company’s eco-
nomic resources. Liabilities indicate the amount of financing provided by creditors. They
are the company’s debts or obligations. Under the category Liabilities, Le-Nature’s lists two
items. The accounts payable arise from the purchase of goods or services from suppliers on
Adrian Bradshaw/EPA/Newscom credit without a formal written contract (or a note). The notes payable to banks result from
cash borrowings based on a formal written debt contract with banks.
Stockholders’ equity indicates the amount of financing provided by owners of the business and
reinvested earnings.2 The investment of cash and other assets in the business by the stockholders
is called common stock. The amount of earnings (profits) reinvested in the business (and thus not
distributed to stockholders in the form of dividends) is called retained earnings.
In Exhibit 1.2, the Stockholders’ Equity section reports two items. The founders and other
stockholders’ investment of $55.7 million is reported as common stock. Le-Nature’s total earn-
ings (or losses incurred) less all dividends paid to the stockholders since formation of the corpo-
ration equals $64 million and is reported as retained earnings. Total stockholders’ equity is the
sum of the common stock plus the retained earnings.

2
A corporation is a business that is incorporated under the laws of a particular state. The owners are called
stockholders or shareholders. Ownership is represented by shares of capital stock that usually can be bought and
sold freely. The corporation operates as a separate legal entity, separate and apart from its owners. The stockholders
enjoy limited liability; they are liable for the debts of the corporation only to the extent of their investments. Chapter
Supplement A discusses forms of ownership in more detail.
 CHAPTER 1 Financial Statements and Business Decisions 9

FI N A N CIA L A N ALYSIS

Interpreting Assets, Liabilities, and Stockholders’ Equity on the Balance Sheet

Assessment of Le-Nature’s assets is important to its creditors, Wells Fargo Bank and others, and its
stockholders because assets provide a basis for judging whether the company has sufficient resources avail-
able to operate. Assets are also important because they could be sold for cash in the event that Le-Nature’s
goes out of business.
Le-Nature’s debts are important because creditors and stockholders are concerned about whether
the company has sufficient sources of cash to pay its debts. Le-Nature’s debts are also relevant to Wells
Fargo Bank’s decision to lend money to the company because existing creditors share its claim against Le-
Nature’s assets. If a business does not pay its creditors, the creditors may force the sale of assets sufficient
to meet their claims.
Le-Nature’s stockholders’ equity is important to Wells Fargo Bank because creditors’ claims legally
come before those of owners. If Le-Nature’s goes out of business and its assets are sold, the proceeds of
that sale must be used to pay back creditors before the stockholders receive any money. Thus, creditors
consider stockholders’ equity a protective “cushion.”

PAU S E F O R F E E D B AC K

We just learned the balance sheet is a statement of financial position that reports dollar amounts for
a company’s assets, liabilities, and stockholders’ equity at a specific point in time. These elements are
related in the basic accounting equation: Assets = Liabilities + Stockholders’ Equity. Before you move
on, complete the following questions to test your understanding of these concepts.
S E LF - STU DY Q U I Z
1. Le-Nature’s assets are listed in one section and liabilities and stockholders’ equity in
another. Notice that the two sections balance in conformity with the basic accounting equa-
Don’t skip the SELF-
tion. In the following chapters, you will learn that the basic accounting equation is the basic STUDY QUIZZES!
building block for the entire accounting process. Your task here is to verify that total assets They are designed to help
($527.4 million) is correct using the numbers for liabilities and stockholders’ equity presented ensure you understand the
in Exhibit 1.2. material before moving on.

Assets _____ = Liabilities _____ + Stockholders’ Equity _____

2. Learning which items belong in each of the balance sheet categories is an important first step
in understanding their meaning. Without referring to Exhibit 1.2, mark each balance sheet
item in the following list as an asset (A), a liability (L), or a stockholders’ equity (SE) item.

_____ Accounts payable _____ Property, plant, and equipment

_____ Accounts receivable _____ Inventories
_____ Cash _____ Notes payable
_____ Common stock _____ Retained earnings

After you have completed your answers, check them below.

Related Homework: M1-1, M1-2, E1-2, E1-3

Solution to
1. Assets ($527.4) = Liabilities ($407.7) + Stockholders’ Equity ($119.7) (in millions).
SELF-STUDY QUIZ
2. L, A, A, SE, A, A, L, SE (reading down the columns).
10 CHAPTER 1 Financial Statements and Business Decisions

The Income Statement

Structure
The income statement (statement of income, statement of earnings, statement of operations)3
reports the accountant’s primary measure of performance of a business, revenues less expenses
during the accounting period. While the term profit is used widely for this measure of perfor-
mance, accountants prefer to use the technical terms net income or net earnings. Le-Nature’s
net income measures its success in selling beverages for more than the cost to generate
those sales.
A quick reading of Le-Nature’s income statement (Exhibit 1.3) indicates a great deal about its
purpose and content. The heading identifies the name of the entity, the title of the report, and
the unit of measure used in the statement. Unlike the balance sheet, however, which reports as
of a certain date, the income statement reports for a specified period of time (in this case for
the year ended December 31, 2020). The time period covered by the financial statements (one
year in this case) is called an accounting period. Notice that Le-Nature’s income statement has
three major captions: revenues, expenses, and net income. The income statement equation that
describes their relationship is:

Income Revenues – Expenses = Net Income

Statement Resources earned Resources used Revenues earned
Revenues from delivery of (incurred) to earn minus expenses
+Increases goods and services period’s revenue incurred
−Expenses
 Net Income

Elements
Companies earn revenues from the sale of goods or services to customers (in Le-Nature’s case,
from the sale of beverages). Revenues normally are amounts expected to be received for goods
or services that have been delivered to a customer, whether or not the customer has paid for
the goods or services. Retail stores such as Walmart and McDonald’s often receive cash from
consumers at the time of sale. However, when Le-Nature’s delivers its beverages to retail stores,
it receives a promise of future payment called an account receivable, which later is collected
in cash. In either case, the business recognizes total sales (cash and credit) as revenue for the

EXPLANATION
EXHIBIT 1.3 LE-NATURE’S INC. Name of the entity
Income Statement Income Statement Title of the statement
For the Year Ended December 31, 2020 Accounting period
(in millions of dollars) Unit of measure

Revenues
Sales revenue $275.1 Cash and promises received from sale of beverages
Expenses
Cost of goods sold  140.8 Cost to produce beverages sold
Selling, general, and administrative
expenses  77.1 Other operating expenses (utilities, delivery costs, etc.)
Interest expense  17.2 Cost of using borrowed funds
Income before income taxes  40.0
Income tax expense  17.1 Income taxes on period’s income before income taxes
Net income $ 22.9 Revenues earned minus expenses incurred

The notes are an integral part of these financial statements.

3
Comprehensive income is sometimes presented in a separate statement titled Statement of Comprehensive Income,
but may be part of the Income Statement. This advanced topic is discussed in Chapter 5.
 CHAPTER 1 Financial Statements and Business Decisions 11

period. Various terms are used in income statements to describe different sources of revenue
(e.g., provision of services, sale of goods, rental of property). Le-Nature’s lists only one, sales
revenue, in its income statement.
Expenses represent the dollar amount of resources the entity used to earn revenues during the
period. Expenses reported in one accounting period actually may be paid for in another account-
ing period. Some expenses require the payment of cash immediately, while others require payment
at a later date. Some also may require the use of another resource, such as an inventory item, which
may have been paid for in a prior period. Le-Nature’s lists four types of expenses on its income
statement, which are described in Exhibit 1.3. These expenses include income tax expense, which,
as a corporation, Le-Nature’s must pay on the subtotal income before income taxes.
Net income or net earnings (often called “the bottom line”) is the excess of total revenues over
total expenses. If total expenses exceed total revenues, a net loss is reported.4 We noted earlier
that revenues are not necessarily the same as collections from customers and expenses are not
necessarily the same as payments to suppliers. As a result, net income normally does not equal
the net cash generated by operations. This latter amount is reported on the cash flow statement
discussed later in this chapter.

FI N A N CIA L A N ALYSIS

Analyzing the Income Statement: Beyond the Bottom Line

Investors and creditors such as Wells Fargo Bank closely monitor a firm’s net income because it indi-
cates the firm’s ability to sell goods and services for more than they cost to produce and deliver. Investors
buy stock when they believe that future earnings will improve and lead to dividends and the ability to sell
their stock for more than they paid. Lenders also rely on future earnings to provide the resources to repay
loans. The details of the statement also are important. For example, Le-Nature’s had to sell more than
$275 million worth of beverages to make just under $23 million. If a competitor were to lower prices just
10 percent, forcing Le-Nature’s to do the same, its net income could easily turn into a net loss. These fac-
tors and others help investors and creditors estimate the company’s future earnings.

PAU S E F O R F E E D B AC K

As noted above, the income statement is a statement of operations that reports revenues, expenses, and
net income for a stated period of time. To practice your understanding of these concepts, complete the
following questions.
S E LF - STU DY Q U I Z
1. Learning which items belong in each of the income statement categories is an important first
step in understanding their meaning. Without referring to Exhibit 1.3, mark each income
statement item in the following list as a revenue (R) or an expense (E).

_____ Cost of goods sold _____ Sales revenue

_____ Income tax _____ Selling, general, and administrative

2. Assume that during the period 2020, Le-Nature’s delivered beverages for which customers
paid or promised to pay amounts totaling $275.1 million. During the same period, it collected
$250.0 million in cash from its customers. Without referring to Exhibit 1.3, indicate which of
these two amounts will be shown on Le-Nature’s income statement as sales revenue for 2020.
Why did you select your answer? Keith Srakocic/AP Images

4
Net losses are normally noted by parentheses around the income figure.
12 CHAPTER 1 Financial Statements and Business Decisions

3. Assume that during the period 2020, Le-Nature’s produced beverages with a total cost of
production of $142.1 million. During the same period, it delivered to customers beverages that
cost a total of $140.8 million to produce. Without referring to Exhibit 1.3, indicate which of
the two numbers will be shown on Le-Nature’s income statement as cost of goods sold expense
for 2020. Why did you select your answer?
After you have completed your answers, check them below.

Related Homework: M1-1, M1-2, E1-6

Statement of Stockholders’ Equity

Structure
Le-Nature’s prepares a separate statement of stockholders’ equity, shown in Exhibit 1.4. The
heading identifies the name of the entity, the title of the report, and the unit of measure used in
the statement. Like the income statement, the statement of stockholders’ equity covers a speci-
fied period of time (the accounting period), which in this case is one year. The statement reports
the changes in each of the company’s stockholders’ equity accounts during that period.
Le-Nature’s had no changes in common stock during the period. Had it issued or repurchased
common stock during the year, the transactions would be reported on separate lines. The retained
earnings column reports the way that net income and the distribution of dividends affected the
company’s financial position during the accounting period. Net income earned during the year
increases the balance of retained earnings, showing the relationship of the income statement to
the balance sheet.5 Declaring dividends to the stockholders decreases retained earnings.
The retained earnings equation that describes these relationships is:

Beginning Retained Earnings + Net Income − Dividends = Ending Retained Earnings

EXPLANATION
EXHIBIT 1.4 LE-NATURE’S INC. Name of the entity
Statement of Stockholders’ Statement of Stockholders’ Equity Title of the statement
Equity For the Year Ended December 31, 2020 Accounting period
(in millions of dollars) Unit of measure

Common Retained
Stock Earnings
Balance December 31, 2019 $55.7 $43.1 Last period’s ending balances
Net income for 2020   22.9 Net income reported on the income statement
Dividends for 2020   (2.0) Dividends declared during the period
Balance December 31, 2020 $55.7 $64.0 Ending balances on the balance sheet
The notes are an integral part of these financial statements.

Solution to
1. E, E, R, E (reading down the columns).
SELF-STUDY QUIZ
2. Sales revenue in the amount of $275.1 million is recognized. Sales revenue is normally reported on the
income statement when goods or services have been delivered to customers who have either paid or prom-
ised to pay for them in the future.
3. Cost of goods sold expense is $140.8 million. Expenses are the dollar amount of resources used up to earn
revenues during the period. Only those beverages that have been delivered to customers have been used up.

5
Net losses are subtracted.
 CHAPTER 1 Financial Statements and Business Decisions 13

Elements
Statement of
The statement starts with the beginning balances in the stockholders’ equity accounts, lists Stockholders’
the increases and decreases, and reports the resulting ending balances. The retained earnings Equity
portion of the statement in Exhibit 1.4 begins with Le-Nature’s beginning-of-the-year retained Beginning balance
earnings. The current year’s net income reported on the income statement is added and the +Increases
current year’s dividends are subtracted from this amount. During 2020, Le-Nature’s earned −Decreases
$22.9 million, as shown on the income statement (Exhibit 1.3). This amount was added to Ending balances
the beginning-of-the-year retained earnings. Also, during 2020, Le-Nature’s declared and
paid a total of $2.0 million in dividends to its stockholders. This amount was subtracted
in computing end-of-the-year retained earnings on the balance sheet. Note that retained
earnings increased by the portion of income reinvested in the business ($22.9 million −
$2.0 million = $20.9 million). The ending retained earnings amount of $64.0 million is
the same as that reported in Exhibit 1.2 on Le-Nature’s balance sheet. Thus, the retained
earnings portion of the statement indicates the relationship of the income statement to the
balance sheet.

FI N A N CIA L A N ALYSIS

Interpreting Retained Earnings

Reinvestment of earnings, or retained earnings, is an important source of financing for Le-Nature’s,
representing more than 12 percent of its financing. Creditors such as Wells Fargo Bank closely
monitor a firm’s statement of stockholders’ equity because the firm’s policy on dividend payments to
the stockholders affects its ability to repay its debts. Every dollar Le-Nature’s pays to stockholders as
a dividend is not available for use in paying back its debt to Wells Fargo. Investors examine retained
earnings to determine whether the company is reinvesting a sufficient portion of earnings to support
future growth.

PAU S E F O R F E E D B AC K

The statement of stockholders’ equity explains changes in stockholders’ equity accounts, including the
change in the retained earnings balance caused by net income and dividends during the reporting
period. Check your understanding of these relationships by completing the following question.

S E LF - STU DY Q U I Z
Assume that a company’s financial statements reported the following amounts: beginning retained
earnings, $5,510; total assets, $20,450; dividends, $900; cost of goods sold expense, $19,475; and net
income, $1,780. Without referring to Exhibit 1.4, compute ending retained earnings.

After you have completed your answer, check it below.

Related Homework: E1-13

Solution to
Beginning Retained Earnings ($5,510) + Net Income ($1,780) − Dividends ($900) = Ending Retained Earn-
ings ($6,390). SELF-STUDY QUIZ
14 CHAPTER 1 Financial Statements and Business Decisions

Relationships Among the Income Statement, Statement of

Stockholders’ Equity, and Balance Sheet
Our discussion of the basic financial statements has focused on what elements are reported in
each statement, how the elements are related by the equation for each statement, and how the
information is important to the decisions of investors, creditors, and others. We also have dis-
covered how the statements, all of which are outputs from the same system, are related to one
another. In particular, we learned:
1. Net income from the income statement results in an increase in ending retained earn-
ings on the statement of stockholders’ equity.
2. Ending retained earnings from the statement of stockholders’ equity is one of the two
components of stockholders’ equity on the balance sheet.
Thus, we can think of the income statement as explaining, through the statement of stockholders’
equity, how the operations of the company improved or harmed the financial position of the company
during the year. These relationships are illustrated in Exhibit 1.5 for Le-Nature’s financial statements.

EXHIBIT 1.5 Relationships Among LeNature’s Statements

Statement of Stockholders’ Equity Balance Sheet

Income Statement (in millions) (in millions)
(in millions) Common Retained Cash $ 10.6
Stock Earnings Other Assets 516.8
Revenues $275.1
Total Assets $527.4
— Expenses 252.2 1 Beginning $55.7 $43.1
Net Income $ 22.9 + Net Income 22.9 Liabilities $407.7
— Dividends (2.0) 2 Common Stock 55.7
Ending $55.7 $64.0 Retained Earnings 64.0
Total Liabilities and
Stockholders’ Equity $527.4

PAU S E F O R F E E D B AC K

Thus far, we have covered the content (elements), structure (equation), and relationships among the
income statement, statement of stockholders’ equity, and balance sheet that is illustrated in Exhibit 1.5.
Check your understanding of these key points by completing the following questions.

S E LF - STU DY Q U I Z
Assume that you are the president of Brightlight Mobile Games Company. At the end of the first year of
operations (December 31), the following financial data for the company are available:
Accounts payable owed to suppliers $ 8,000 Common stock (December 31) $ 43,600
Cash  26,300 Dividends declared and paid during
Equipment owned, at cost less used portion  41,900 the current year  11,600
Receivables from customers (all considered Expenses (excluding income taxes)  82,000
collectible)  11,800 Income tax expense at 20 percent × pretax
Salary payable (on December 31, will be income; all paid this year ?
paid on January 10)  12,000 Sales revenue  117,000
(Note: The beginning balances in Common stock and Retained earnings are zero because it is the first year of operations.)

Required:
1. Prepare a summarized income statement for the year.
2. Prepare a statement of stockholders’ equity for the year.
3. Prepare a balance sheet at December 31.
Another random document with
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 The Caucus.

Both the “Independents” of Pennsylvania and the “Half-Breeds” of

New York at first proclaimed their opposition to the caucus system of
nominating candidates for U. S. Senators, and the newspapers in
their interest wrote as warmly for a time against “King Caucus” as
did the dissatisfied Democratic journals in the days of De Witt
Clinton. The situation, however, was totally different, and mere
declamation could not long withstand the inevitable. In Pennsylvania
almost nightly “conferences” were held by the Independents, as
indeed they were in New York, though in both States a show of
hostility was kept up to nominating in party caucus men who were to
be elected by representative, more plainly legislative votes. It was at
first claimed that in the Legislature each man ought to act for himself
or his constituents, but very shortly it was found that the caucuses of
the separate wings were as binding upon the respective wings as they
could have been upon the whole. Dead-locks were interminable as
long as this condition of affairs obtained, and hostility to the caucus
system was before very long quietly discouraged and finally flatly
abandoned, for each struggle was ended by the ratification of a
general caucus, and none of them could have been ended without it.
The several attempts to find other means to reach a result, only led
the participants farther away from the true principle, under
republican forms at least, of the right of the majority to rule. In
Pennsylvania, when Mr. Oliver withdrew, fifty of his friends
assembled and informally named General Beaver, and by this action
sought to bind the original 95 friends of Oliver. Their conduct was
excused by the plea that they represented a majority of their faction.
It failed to bind all of the original number, though some of the
Independents were won. The Independents, rather the original 44,
bound themselves in writing not to change their course of action
unless there was secured the previous concurrence of two-thirds, and
this principle was extended to the 56 who supported Mr. Bayne.
Then when the joint committee of 24 was agreed upon, it was bound
by a rule requiring three-fourths to recommend a candidate. All of
these were plain departures from a great principle, and the deeper
the contest became, the greater the departure. True, these were but
voluntary forms, but they were indefensible, and are only referred to
now to show the danger of mad assaults upon great principles when
personal and factious aims are at stake. Opposition to the early
Congressional caucus was plainly right, since one department of the
Government was by voluntary agencies actually controlling another,
while the law gave legal forms which could be more properly
initiated through voluntary action. The writer believes, and past
contests all confirm the view that the voluntary action can only be
safely employed by the power by the law with the right of selection.
Thus the people elect township, county and State officers, and it is
their right and duty by the best attainable voluntary action to
indicate their choice. This is done through the caucus or convention,
the latter not differing from the former save in extent and possibly
breadth of representation. The same rule applies to all offices elective
by the people. It cannot properly apply to appointive offices, and
while the attempt to apply it to the election of U. S. Senators shows a
strong desire on the part, frequently of the more public-spirited
citizens, to exercise a greater share in the selection of these officers
than the law directly gives them, yet their representatives can very
properly be called upon to act as they would act if they had direct
power in the premises, and such action leads them into a party
caucus, where the will of the majority of their respective parties can
be fairly ascertained, and when ascertained respected. The State
Legislatures appoint U. S. Senators, and the Representatives and
Senators of the States are bound to consider in their selection the
good of the entire State. If this comports with the wish of their
respective districts, very well; if it does not, their duty is not less
plain. Probably the time will never come when the people will elect
United States Senators; to do that is to radically change the Federal
system, and to practically destroy one of the most important
branches of the Government; yet he is not a careful observer who
does not note a growing disposition on the part of the people, and
largely the people of certain localities, and imaginary political sub-
divisions, to control these selections. The same is true of Presidential
nominations, where masses of people deny the right of State
Conventions to instruct their delegates-at-large. In many States the
people composing either of the great parties now select their own
representative delegates to National Conventions, and where their
selections are not respected, grave party danger is sure to follow.
There is nothing wrong in this, since it points to, and is but paving
the way for a more popular selection of Presidents and Vice-
Presidents—to an eventual selection of Presidential electors probably
by Congressional districts. Yet those to be selected at large must
through practical voluntary forms be nominated in that way, and the
partisan State Convention is the best method yet devised for this
work, and its instructions should be as binding as those of the people
upon their representatives. In this government of ours there is
voluntary and legal work delegated to the people directly; there is
legal work delegated to appointing powers, and an intelligent
discrimination should ever be exercised between the two. “Render
unto Cæsar those things which are Cæsar’s,” unless there be a plain
desire, backed by a good reason, to promote popular reforms as
enduring as the practices and principles which they are intended to
support.
Fredrick W. Whitridge, in an able review of the caucus system
published[39] in Lalor’s Encyclopædia of Political Science, says:
“A caucus, in the political vocabulary of the United States, is
primarily a private meeting of voters holding similar views, held
prior to an election for the purpose of furthering such views at the
election. With the development of parties, and the rule of majorities,
the caucus or some equivalent has become an indispensable adjunct
to party government, and it may now be defined as a meeting of the
majority of the electors belonging to the same party in any political
or legislative body held preliminary to a meeting thereof, for the
purpose of selecting candidates to be voted for, or for the purpose of
determining the course of the party at the meeting of the whole body.
The candidates of each party are universally selected by caucus,
either directly or indirectly through delegates to conventions chosen
in caucuses. In legislative bodies the course of each party is often
predetermined with certainty in caucus, and often discussion
between parties has been, in consequence, in some degree
superseded. The caucus system is, in short, the basis of a complete
electoral system which has grown up within each party, side by side
with that which is alone contemplated by the laws. This condition
has in recent years attracted much attention, and has been bitterly
announced as an evil. It was, however, early foreseen. John Adams,
in 1814, wrote in the “Tenth Letter on Government:” “They have
invented a balance to all balance in their caucuses. We have
congressional caucuses, state caucuses, county caucuses, city
caucuses, district caucuses, town caucuses, parish caucuses, and
Sunday caucuses at church doors, and in these aristocratical
caucuses elections have been decided.” The caucus is a necessary
consequence of majority rule. If the majority is to define the policy of
a party, there must be some method within each party of ascertaining
the mind of the majority, and settling the party programme, before it
meets the opposing party at the polls. The Carlton and Reform clubs
discharge for the Tories and Liberals many of the functions of a
congressional caucus. Meetings of the members of the parties in the
reichstag, the corps legislatif and the chamber of deputies are not
unusual, although they have generally merely been for consultation,
and neither in England, France, Germany or Italy, has any such
authority been conceded to the wish of the majority of a party as we
have rested in the decision of a caucus. What has been called a
caucus has been established by the Liberals of Birmingham, England,
as to which, see a paper by W. Fraser Rae, in the “International
Review” for August, 1880. The origin of the term caucus is obscure.
It has been derived from the Algonquin word Kaw-kaw-wus—to
consult, to speak—but the more probable derivation makes it a
corruption of caulkers. In the early politics of Boston, and
particularly during the early difficulties between the townsmen and
the British troops, the seafaring men and those employed about the
ship yards were prominent among the town-people, and there were
numerous gatherings which may have very easily come to be called
by way of reproach a meeting of caulkers, after the least influential
class who attended them, or from the caulking house or caulk house
in which they were held. What was at first a derisive description,
came to be an appellation, and the gatherings of so-called caulkers
became a caucus. John Pickering, in a vocabulary of words and
phrases peculiar to the United States (Boston, 1816), gives this
derivation of the word, and says several gentlemen mentioned to him
that they had heard this derivation. Gordon, writing in 1774, says:
“More than fifty years ago Mr. Samuel Adams’ father and twenty
others, one or two from the north end of the town where all the ship
business is carried on, used to meet, make a caucus and lay their plan
for introducing certain persons into places of trust and power. When
they had settled it they separated, and each used their particular
influence within his own circle. He and his friends would furnish
themselves with ballots, including the names of the parties fixed
upon, which they distributed on the days of election. By acting in
concert, together with a careful and extensive distribution of ballots,
they generally carried their elections to their own mind. In like
manner it was that Mr. Samuel Adams first became a representative
for Boston.” (History of the American Revolution, vol. i., p. 365.)
February, 1763, Adams writes in his diary: “This day I learned that
the caucus club meets at certain times in the garret of Tom Dawes,
the adjutant of the Boston regiment. He has a large house and he has
a movable partition in his garret which he takes down and the whole
club meets in his room. There they smoke tobacco until they cannot
see one end of the room from another. There they drink flip, I
suppose, and there they choose a moderator who puts questions to
the vote regularly; and selectmen, assessors, collectors, wardens, fire
wards and representatives are regularly chosen in the town. Uncle
Fairfield, Story, Ruddock, Adams, Cooper, and a rudis indigestaques
moles of others, are members. They send committees to wait on the
merchants’ club, and to propose in the choice of men and measures.
Captain Cunningham says, they have often solicited him to go to the
caucuses; they have assured him their benefit in his business, etc.”
(Adams’ Works, vol. ii., p. 144.) Under the title caucus should be
considered the congressional nominating caucus; the caucuses of
legislative assemblies; primary elections, still known outside the
larger cities as caucuses; the evils which have been attributed to the
latter, and the remedies which have been proposed. These will
accordingly be mentioned in the order given.
“The democratic system is the result of the reorganization of the
various anti-Tammany democratic factions, brought about, in 1881,
by a practically self-appointed committee of 100. Under this system
primary elections are to be held annually in each of 678 election
districts, at which all democratic electors resident in the respective
districts may participate, provided they were registered at the last
general election. The persons voting at any primary shall be
members of the election district association for the ensuing year,
which is to be organized in January of each year. The associations
may admit democratic residents in their respective districts, who are
not members, to membership, and they have general supervision of
the interests of the party within their districts. Primaries are held on
not less than four days’ public notice, through the newspapers, of the
time and place, and at the appointed time the meeting is called to
order by the chairman of the election district association, provided
twenty persons be present; if that number shall not be present, the
meeting may be called to order with a less number, at the end of
fifteen minutes. The first business of the meeting is to select a
chairman, and all elections of delegates or committeemen shall take
place in open meeting. Each person, as he offers to vote, states his
name and residence, which may be compared with the registration
list at the last election, and each person shall state for whom he
votes, or he may hand to the judges an open ballot, having
designated thereon the persons for whom he votes, and for what
positions. Nominations are all made by conventions of delegates
from the districts within which the candidate to be chosen is to be
voted for. There is an assembly district committee in each assembly
district, composed of one delegate for each 100 votes or fraction
thereof, from each election district within the assembly district.
There is also a county committee composed of delegates from each of
the assembly district committees. The function of these committees
is generally to look after the interests of the parties within their
respective spheres. This system is too new for its workings to be as
yet fairly criticised. It may prove a really popular system, or it may
prove only an inchoate form of the other systems. At present it can
only be said that the first primaries under it were participated in by
27,000 electors.
“The evils of the caucus and primary election systems lie in the
stringent obligation which is attached to the will of a formal
majority; in the fact that the process of ascertaining what the will of
the majority is, has been surrounded with so many restrictions that
the actual majority of votes are disfranchised, and take no part in
that process, so that the formal majority is in consequence no longer
the majority in fact, although it continues to demand recognition of
its decisions as such.
 “The separation between the organization and the party, between
those who nominate and those who elect, is the sum of the evils of
the too highly organized caucus system. It has its roots in the notion
that the majority is right, because it is the majority, which is the
popular view thus expressed by Hammond: ‘I think that when
political friends consent to go into caucus for the nomination of
officers, every member of such caucus is bound in honor to support
and carry into effect its determination. If you suspect that
determination will be so preposterous that you cannot in conscience
support it, then you ought on no account to become one of its
members. To try your chance in a caucus, and then, because your
wishes are not gratified, to attempt to defeat the result of the
deliberation of your friends, strikes me as a palpable violation of
honor and good faith. You caucus for no other possible purpose than
under the implied argument that the opinion and wishes of the
minority shall be yielded to the opinions of the majority, and the sole
object of caucusing is to ascertain what is the will of the majority. I
repeat that unless you intend to carry into effect the wishes of the
majority, however contrary to your own, you have no business at a
caucus.’ (Political History of New York, vol. i., p. 192).—In
accordance with this theory, the will of the majority becomes
obligatory as soon as it is made known, and one cannot assist at a
caucus in order to ascertain the will of the majority, without thereby
being bound to follow it; and the theory is so deeply rooted that,
under the caucus and primary election system, it has been extended
to cases in which the majorities are such only in form.
“The remedies as well as the evils of the caucus and nominating
system have been made the subject of general discussion in
connection with civil service reform. It is claimed that that reform,
by giving to public officers the same tenure of their positions which is
enjoyed by the employes of a corporation or a private business
house, or during the continuance of efficiency or good behaviour,
would abolish or greatly diminish the evils of the caucus system by
depriving public officers of the illegitimate incentive to maintain it
under which they now act. Other more speculative remedies have
been suggested. It is proposed, on the one hand, to very greatly
diminish the number of elective officers, and, in order to do away
with the predetermination of elections, to restrict the political action
of the people in their own persons to districts so small that they can
meet together and act as one body, and that in all other affairs than
those of these small districts the people should act by delegates. The
theory here seems to be to get rid of the necessity for election and
nominating machinery. (See ‘A True Republic,’ by Albert Strickney,
New York, 1879; and a series of articles in Scribner’s Monthly for
1881, by the same writer). On the other hand, it is proposed to
greatly increase the number of elections, by taking the whole primary
system under the protection of the law.[40] This plan proposes: 1. The
direct nomination of candidates by the members of the respective
political parties in place of nominations by delegates in conventions.
2. To apply the election laws to primary elections. 3. To provide that
both political parties shall participate in the same primary election
instead of having a different caucus for each party. 4. To provide for
a final election to be held between two candidates, each
representative of a party who have been selected by means of the
primary election. This plan would undoubtedly do away with the
evils of the present caucus system, but it contains no guarantee that a
new caucus system would not be erected for the purpose of
influencing ‘the primary election’ in the same manner in which the
present primary system now influences the final election. (See
however ‘The Elective Franchise in the United States,’ New York,
1880, by D. C. McClellan.)—The effective remedy for the evils of the
caucus system will probably be found in the sanction of primary
elections by law. * * * Bills for this purpose were introduced by the
Hon. Erastus Brooks in the New York Legislature in 1881, which
provided substantially for the system proposed by Mr. McClellan, but
they were left unacted upon, and no legislative attempt to regulate
primaries, except by providing for their being called, and for their
procedure, has been made elsewhere. In Ohio what is known as the
Baber law provides that where any voluntary political association
orders a primary, it must be by a majority vote of the central or
controlling committee of such party or association; that the call must
be published for at least five days in the newspapers, and state the
time and place of the meeting, the authority by which it was called,
and the name of the person who is to represent that authority at each
poll. The law also provides for challenging voters, for punishment of
illegal voting, and for the bribery or intervention of electors or
judges. (Rev. Stat. Ohio, secs. 2916–2921.) A similar law in Missouri
is made applicable to counties only of over 100,000 inhabitants, but
by this law it is made optional with the voluntary political association
whether it will or not hold its primaries under the law, and if it does,
it is provided that the county shall incur no expense in the conduct of
such elections. (Laws of Missouri, 1815, p. 54.) A similar law also
exists in California. (Laws of California, 1865–1866, p. 438.) These
laws comprise all the existing legislation on the subject, except what
is known as the Landis Bill of 1881, which requires primary officers
to take an oath, and which punishes fraud.”
 Assassination of President Garfield.

At 9 o’clock on the morning of Saturday, July 2d, 1881, President

Garfield, accompanied by Secretary Blaine, left the Executive
Mansion to take a special train from the Baltimore and Potomac
depot for New England, where he intended to visit the college from
which he had graduated. Arriving at the depot, he was walking arm-
in-arm through the main waiting-room, when Charles J. Guiteau, a
persistent applicant for an office, who had some time previously
entered through the main door, advanced to the centre of the room,
and having reached within a few feet of his victim, fired two shots,
one of which took fatal effect. The bullet was of forty-four calibre,
and striking the President about four inches to the right of the spinal
column, struck the tenth and badly shattered the eleventh rib. The
President sank to the floor, and was conveyed to a room where
temporary conveniences were attainable, and a couch was
improvised. Dr. Bliss made an unsuccessful effort to find the ball.
The shock to the President’s system was very severe, and at first
apprehensions were felt that death would ensue speedily. Two hours
after the shooting, the physicians decided to remove him to the
Executive Mansion. An army ambulance was procured, and the
removal effected. Soon after, vomiting set in, and the patient
exhibited a dangerous degree of prostration, which threatened to end
speedily in dissolution. This hopeless condition of affairs continued
until past midnight, when more favorable symptoms were exhibited.
Dr. Bliss was on this Sunday morning designated to take charge of
the case, and he called Surgeon-General Barnes, Assistant Surgeon-
General Woodward, and Dr. Reyburn as consulting physician. To
satisfy the demand of the country, Drs. Agnew, of Philadelphia, and
Hamilton, of New York, were also summoned by telegraph, and
arrived on a special train over the Pennsylvania Railroad, Sunday
afternoon. For several days immediately succeeding the shooting, the
patient suffered great inconvenience and pain in the lower limbs.
This created an apprehension that the spinal nerves had been
injured, and death was momentarily expected. On the night of July
4th a favorable turn was observed, and the morning of the 5th
brought with it a vague but undefined hope that a favorable issue
might ensue. Under this comforting conviction, Drs. Agnew and
Hamilton, after consultation with the resident medical attendants,
returned to their homes; first having published to the country an
endorsement of the treatment inaugurated. During July 5th and 6th
the patient continued to improve, the pulse and respiration showing
a marked approach to the condition of healthfulness, the former
being reported on the morning of the 6th at 98, and in the evening it
only increased to 104. On the 7th Dr. Bliss became very confident of
ultimate triumph over the malady. In previous bulletins meagre hope
was given, and the chances for recovery estimated at one in a
hundred.
From July 7th to the 16th there was a slight but uninterrupted
improvement, and the country began to entertain a confident hope
that the patient would recover.
Hope and fear alternated from day to day, amid the most painful
excitement. On the 8th of August Drs. Agnew and Hamilton had to
perform their second operation to allow a free flow of pus from the
wound. This resulted in an important discovery. It was ascertained
that the track of the bullet had turned from its downward deflection
to a forward course. The operation lasted an hour, and ether was
administered, the effect of which was very unfortunate. Nausea
succeeded, and vomiting followed every effort to administer
nourishment for some time. However, he soon rallied, and the
operation was pronounced successful, and, on the following day, the
President, for the first time, wrote his name. On the 10th he signed
an important extradition paper, and on the 11th wrote a letter of
hopefulness to his aged mother. On the 12th Dr. Hamilton expressed
the opinion that the further attendance of himself and Dr. Agnew
was unnecessary. The stomach continued weak, however, and on the
15th nausea returned, and the most menacing physical prostration
followed the frequent vomiting, and the evening bulletin announced
that “the President’s condition, on the whole, is less satisfactory.”
Next a new complication forced itself upon the attention of the
physicians. This was described as “inflammation of the right parotid
gland.” On August 24th it was decided to make an incision below and
forward of the right ear, in order to prevent suppuration. Though this
operation was pronounced satisfactory, the patient gradually sank,
until August 25th, when all hope seemed to have left those in
attendance.
Two days of a dreary watch ensued; on the 27th an improvement
inspired new hope. This continued throughout the week, but failed to
build up the system. Then it was determined to remove the patient to
a more favorable atmosphere. On the 6th of September this design
was executed, he having been conveyed in a car arranged for the
purpose to Long Branch, where, in a cottage at Elberon, it was hoped
vigor would return. At first, indications justified the most sanguine
expectations. On the 9th, however, fever returned, and a cough came
to harass the wasted sufferer. It was attended with purulent
expectoration, and became so troublesome as to entitle it to be
regarded as the leading feature of the case. The surgeons attributed it
to the septic condition of the blood. The trouble increased until
Saturday, September 10th, when it was thought the end was reached.
He rallied, however, and improved rapidly, during the succeeding
few days, and on Tuesday, the 13th, was lifted from the bed and
placed in a chair at the window. The improvement was not enduring,
however, and on Saturday, September 17th, the rigor returned.
During the nights and days succeeding, until the final moment, hope
rose and fell alternately, and though the patient’s spirits fluctuated to
justify this change of feeling, the improvement failed to bring with it
the strength necessary to meet the strain.
President Garfield died at 10.35 on the night of Sept. 19th, 1881,
and our nation mourned, as it had only done once before, when
Abraham Lincoln also fell by the hand of an assassin. The assassin
Guiteau was tried and convicted, the jury rejecting his plea of
insanity.
 President Arthur.

Vice-President Arthur, during the long illness of the President, and

at the time of his death, deported himself so well that he won the
good opinion of nearly all classes of the people, and happily for
weeks and months all factious or partisan spirit was hushed by the
nation’s great calamity. At midnight on the 19th of September the
Cabinet telegraphed him from Long Branch to take the oath of office,
and this he very properly did before a local judge. The Government
cannot wisely be left without a head for a single day. He was soon
afterwards again sworn in at Washington, with the usual ceremonies,
and took occasion to make a speech which improved the growing
better feeling. The new President requested the Cabinet to hold on
until Congress met, and it would have remained intact had Secretary
Windom not found it necessary to resume his place in the Senate.
The vacancy was offered to ex-Governor Morgan, of New York, who
was actually nominated and confirmed before he made up his mind
to decline it. Judge Folger now fills the place. The several changes
since made will be found in the Tabulated History, Book VII.
It has thus far been the effort of President Arthur to allay whatever
of factious bitterness remains in the Republican party. In his own
State of New York the terms “Half-Breed” and “Stalwart” are passing
into comparative disuse, as are the terms “Regulars” and
“Independents” in Pennsylvania.
 “Boss Rule.”

The complaint of “Boss Rule” in these States—by which is meant

the control of certain leaders—still obtains to some extent. Wayne
MacVeagh was the author of this very telling political epithet, and he
used it with rare force in his street speeches at Chicago when
opposing the nomination of Grant. It was still further cultivated by
Rufus E. Shapley, Esq., of Philadelphia, the author of “Solid for
Mulhooly,” a most admirable political satire, which had an immense
sale. Its many hits were freely quoted by the Reformers of
Philadelphia, who organized under the Committee of One Hundred,
a body of merchants who first banded themselves together to
promote reforms in the municipal government. This organization,
aided by the Democrats, defeated Mayor Wm. S. Stokley for his third
term, electing Mr. King, theretofore a very popular Democratic
councilman. In return for this support, the Democrats accepted John
Hunter, Committee’s nominee for Tax Receiver, and the combination
succeeded. In the fall of 1881 it failed on the city ticket, but in the
spring of 1882 secured material successes in the election of
Councilmen, who were nominees of both parties, but aided by the
endorsement of the Committee of One Hundred. A similar
combination failed as between Brown (Rep.) and Eisenbrown (Dem.)
for Magistrate. On this part of the ticket the entire city voted, and the
regular Republicans won by about 500 majority.
The following is the declaration of principles of the Citizens’
Republican Association of Philadelphia, which, under the banner of
Mr. Wolfe, extended its organization to several counties:
I. We adhere to the platform of the National Convention of the
Republican party, adopted at Chicago, June 2d, 1880, and we
proclaim our unswerving allegiance to the great principles upon
which that party was founded, to wit: national supremacy, universal
liberty, and governmental probity.
 II. The Republican party, during its glorious career, having
virtually established its principles of national supremacy and
universal liberty as the law of the land, we shall, while keeping a
vigilant watch over the maintenance of those principles, regard the
third one, viz.: governmental probity, as the living issue to be
struggled for in the future; and as the pure administration of
government is essential to the permanence of Republican
institutions, we consider this issue as in no way inferior in
importance to any other.
III. The only practical method of restoring purity to administration
is through the adoption of a system of civil service, under which
public officials shall not be the tools of any man or of any clique,
subject to dismissal at their behest, or to assessment in their service;
nor appointment to office be “patronage” at the disposal of any man
to consolidate his power within the party.
IV. It is the abuse of this appointing power which has led to the
formation of the “machine,” and the subjection of the party to
“bosses.” Our chosen leader, the late President Garfield, fell a martyr
in his contest with the “bosses.” We take up the struggle where he left
it, and we hereby declare that we will own no allegiance to any
“boss,” nor be subservient to any “machine;” but that we will do our
utmost to liberate the party from the “boss” domination under which
it has fallen.
V. Recognizing that political parties are simply instrumentalities
for the enforcement of certain recognized principles, we shall
endeavor to promote the principles of the Republican party by means
of that party, disenthralled and released from the domination of its
“bosses.” But should we fail in this, we shall have no hesitation in
seeking to advance the principles of the party through movements
and organizations outside of the party lines.
The idea of the Committee of One Hundred is to war against “boss
rule” in municipal affairs. James McManes has long enjoyed the
leadership of the Republican party in Philadelphia, and the reform
element has directed its force against his power as a leader, though
he joined at Chicago in the MacVeagh war against the form of “boss
rule,” which was then directed against Grant, Conkling, Logan and
Cameron. This episode has really little, if anything, to do with
Federal politics, but the facts are briefly recited with a view to
explain to the reader the leading force which supported Mr. Wolfe in
his independent race in Pennsylvania. Summed up, it is simply one
of those local wars against leadership which precede and follow
factions.
The factious battles in the Republican party, as we have stated,
seem to have spent their force. The assassination of President
Garfield gave them a most serious check, for men were then
compelled to look back and acknowledge that his plain purpose was
to check divisions and heal wounds. Only haste and anger assailed,
and doubtless as quickly regretted the assault. President Arthur, with
commendable reticence and discretion, is believed to be seeking the
same end. He has made few changes, and these reluctantly. His
nomination of ex-Senator Conkling to a seat in the Supreme Bench,
which, though declined, is generally accepted as an assurance to New
Yorkers that the leader hated by one side and loved by the other,
should be removed from partisan politics peculiar to his own State,
but removed with the dignity and honor becoming his high abilities.
It has ever been the policy of wise administrations, as with wise
generals, to care for the wounded, and Conkling was surely and
sorely wounded in his battle against the confirmation of Robertson
and his attempted re-election to the Senate. He accepted the
situation with quiet composure, and saw his friend Arthur unite the
ranks which his resignation had sundered. After this there remained
little if any cause for further quarrel, and while in writing history it is
dangerous to attempt a prophecy, the writer believes that President
Arthur will succeed in keeping his party, if not fully united, at least as
compact as the opposing Democratic forces.
 The Readjusters.

This party was founded in 1878 by Gen’l William Mahone, a noted

Brigadier in the rebel army. He is of Scotch-Irish descent, a man of
very small stature but most remarkable energy, and acquired wealth
in the construction and development of Southern railroads. He
sounded the first note of revolt against what he styled the Bourbon
rule of Virginia, and being classed as a Democrat, rapidly divided
that party on the question of the Virginia debt. His enemies charge
that he sought the repudiation of this debt, but in return he not only
denied the charge, but said the Bourbons were actually repudiating it
by making no provision for its payment, either in appropriations or
the levying of taxes needed for the purpose. Doubtless his views on
this question have undergone some modification, and that earlier in
the struggle the uglier criticisms were partially correct. Certain it is
that he and his friends now advocate full payment less the
proportion equitably assigned to West Virginia, which separated
from the parent State during the war, and in her constitution evaded
her responsibility by declaring that the State should never contract a
debt except one created to resist invasion or in a war for the
government. This fact shows how keenly alive the West Virginians
were to a claim which could very justly be pressed in the event of
Virginia being restored to the Union, and this claim Gen’l Mahone
has persistently pressed, and latterly urged a funding of the debt of
his State at a 3 per cent. rate, on the ground that the State is unable
to pay more and that this is in accord with proper rates of interest on
the bonds of State governments—a view not altogether fair or sound,
since it leaves the creditors powerless to do otherwise than accept.
The regular or Bourbon Democrats proclaimed in favor of full
payment, and in this respect differed from their party associates as to
ante-war debts in most other Southern States.
Gen. Mahone rapidly organized his revolt, and as the Republican
party was then in a hopeless minority in Virginia, publicly invited an
alliance by the passage of a platform which advocated free schools
for the blacks and a full enforcement of the National laws touching
their civil rights. The Legislature was won, and on the 16th of
December, 1880, Gen’l Mahone was elected to the U. S. Senate to
succeed Senator Withers, whose term expired March 4, 1881.
In the Presidential campaign of 1880, the Readjusters supported
Gen’l Hancock, but on a separate electoral ticket, while the
Republicans supported Garfield on an electoral ticket of their own
selection. This division was pursuant to an understanding, and at the
time thought advisable by Mahone, who, if his electors won, could go
for Hancock or not, as circumstances might suggest; while if he failed
the Republicans might profit by the separation. There was, however,
a third horn to this dilemma, for the regular Democratic electors
were chosen, but the political complexion of the Legislature was not
changed. Prior to the Presidential nominations Mahone’s Readjuster
Convention had signified their willingness to support Gen’l Grant if
he should be nominated at Chicago, and this fact was widely quoted
by his friends in their advocacy of Grant’s nomination, and in
descanting upon his ability to carry Southern States.
The Readjuster movement at first had no other than local designs,
but about the time of its organization there was a great desire on the
part of the leading Republicans to break the “Solid South,” and every
possible expedient to that end was suggested. It was solid for the
Democratic party, and standing thus could with the aid of New York,
Indiana and New Jersey (them all Democratic States) assure the
election of a Democratic President.
One of the favorite objects of President Hayes was to break the
“Solid South.” He first obtained it by conciliatory speeches, which
were so conciliatory in fact that they angered radical Republicans,
and there were thus threatened division in unexpected quarters. He
next tried it through Gen’l Key, whom he made Postmaster-General
in the hope that he could resurrect and reorganize the old Whig
elements of the South. Key was to attend to Southern postal
patronage with this end in view, while Mr. Tener, his able First
Assistant, was to distribute Northern or Republican patronage. So far
as dividing the South was concerned, the scheme was a flat failure.
The next and most quiet and effectual effort was made by Gen’l
Simon Cameron, Ex-Senator from Pennsylvania. He started on a
brief Southern tour, ostensibly for health and enjoyment, but really
to meet Gen’l Mahone, his leading Readjuster friends, and the
leading Republicans. Conferences were held, and the union of the
two forces was made to embrace National objects. This was in the
Fall of 1879. Not long thereafter Gen’l Mahone consulted with
Senator J. Don. Cameron, who was of course familiar with his
father’s movements, and he actively devised and carried out schemes
to aid the new combination by which the “Solid South” was to be
broken. In the great State campaign of 1881, when the Bourbon and
anti-Bourbon candidates for Governor, were stumping the State,
Gen’l Mahone found that a large portion of his colored friends were
handicapped by their inability to pay the taxes imposed upon them
by the laws of Virginia, and this threatened defeat. He sought aid
from the National administration. President Garfield favored the
combination, as did Secretary Windom, but Secretary Blaine
withheld his support for several months, finally, however, acceding
to the wishes of the President and most of the Cabinet.
Administration influences caused the abandonment of a straight-out
Republican movement organized by Congressman Jorgensen and
others, and a movement which at one time threatened a disastrous
division was overcome. The tax question remained, and this was first
met by Senator J. Don. Cameron, who while summering at
Manhattan Island, was really daily engaged in New York City raising
funds for Mahone, with which to pay their taxes. Still, this aid was
insufficient, and in the heat of the battle the revenue officers
throughout the United States, were asked to contribute. Many of
them did so, and on the eve of election all taxes were paid and the
result was the election of William E. Cameron (Readjuster) as
Governor by about 20,000 majority, with other State officers divided
between the old Readjusters and Republicans. The combination also
carried the Legislature.
In that great struggle the Readjusters became known as the anti-
Bourbon movement, and efforts are now being made to extend it to
other Southern States. It has taken root in South Carolina, Georgia,
Tennessee, Arkansas, Mississippi, and more recently in Kentucky,
where the Union War Democrats in State Convention as late as
March 1, 1882, separated from the Bourbon wing of the party. For a
better idea of these two elements in the South, the reader is referred
to the recent speeches of Hill and Mahone in the memorable Senate
scene directly after the latter took the oath of office, and cast his vote
with the Republicans. These speeches will be found in Book III of
this volume.