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,Financial & ManagerialAccounting
THIRD EDITION
Charles T. Horngren
Stanford University
Walter T. Harrison Jr.
Baylor University
M. Suzanne Oliver
University of West Florida
Prentice Hall
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Copyright © 2012, 2009, 2008 Pearson Education, Inc., publishing as Pearson Prentice Hall, Upper Saddle
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Library of Congress Cataloging-in-Publication Data
Horngren, Charles T.
Financial & managerial accounting / Charles T. Horngren, Walter T. Harrison Jr., M. Suzanne Oliver.—3rd ed.
p. cm.
Rev. ed. of: Financial and managerial accounting. 2nd ed. 2009.
Includes index.
ISBN 978-0-13-249799-2 (casebound)—ISBN 978-0-13-249794-7 (pbk.)—ISBN 978-0-13-249792-3 (pbk.)
1. Accounting. 2. Managerial accounting. I. Harrison, Walter T. II. Oliver, M. Suzanne. III. Title. IV. Title: Financial
and managerial accounting.
HF5636.H67 2012
657—dc22 2010047843
10 9 8 7 6 5 4 3 2 1
ISBN-13: 978-0-13-249799-2
ISBN-10: 0-13-249799-9
,About the Authors
Charles T. Horngren is the Edmund W. Littlefield professor of accounting, emeritus, at
Stanford University. A graduate of Marquette University, he received his MBA from Harvard
University and his PhD from the University of Chicago. He is also the recipient of honorary doctor-
ates from Marquette University and DePaul University.
A CPA, Horngren served on the Accounting Principles Board for six years, the Financial
Accounting Standards Board (FASB) Advisory Council for five years, and the Council of the AICPA for
three years. For six years he served as a trustee of the Financial Accounting Foundation, which oversees
the FASB and the Government Accounting Standards Board.
Horngren is a member of the Accounting Hall of Fame.
A member of the AAA, Horngren has been its president and its director of research. He
received its first annual Outstanding Accounting Educator Award.
The California Certified Public Accountants Foundation gave Horngren its Faculty
Excellence Award and its Distinguished Professor Award. He is the first person to have received
both awards.
The AICPA presented its first Outstanding Educator Award to Horngren.
Horngren was named Accountant of the Year, in Education, by the national professional
accounting fraternity, Beta Alpha Psi.
Professor Horngren is also a member of the IMA, from whom he has received its
Distinguished Service Award. He was a member of the institute’s Board of Regents, which adminis-
ters the CMA examinations.
Walter T. Harrison, Jr., is professor emeritus of accounting at the Hankamer School of
Business, Baylor University. He received his BBA degree from Baylor University, his MS from
Oklahoma State University, and his PhD from Michigan State University.
Professor Harrison, recipient of numerous teaching awards from student groups as well as
from university administrators, has also taught at Cleveland State Community College, Michigan
State University, the University of Texas, and Stanford University.
A member of AAA and the AICPA, Professor Harrison has served as chairman of the
Financial Accounting Standards Committee of AAA, on the Teaching/Curriculum Development
Award Committee, on the Program Advisory Committee for Accounting Education and Teaching,
and on the Notable Contributions to Accounting Literature Committee.
Professor Harrison has lectured in several foreign countries and published articles in numer-
ous journals, including Journal of Accounting Research, Journal of Accountancy, Journal of
Accounting and Public Policy, Economic Consequences of Financial Accounting Standards,
Accounting Horizons, Issues in Accounting Education, and Journal of Law and Commerce.
Professor Harrison has received scholarships, fellowships, and research grants or awards
from PriceWaterhouse Coopers, Deloitte & Touche, the Ernst & Young Foundation, and the
KPMG Foundation.
M. Suzanne Oliver is an accounting instructor at the University of West Florida in
Pensacola, Florida. She received her BA in accounting information systems and her MA in accoun-
tancy from the University of West Florida.
Oliver began her career in the tax department of a regional accounting firm, specializing in
benefit plan administration. She has served as a software analyst for a national software develop-
ment firm and as the Oracle fixed assets analyst for Spirit Energy, formerly part of Unocal. A CPA,
Oliver is a member of the AAA, AICPA, FICPA, IAAER, IMA, TACTYC, and the Florida
Association of Accounting Educators.
Oliver has taught accounting courses of all levels for the University of West Florida, state col-
leges, community colleges, and to practitioners since 1988. She has developed and instructed online
courses using MyAccountingLab, WebCT, D2L, and other proprietary software.
Oliver lives in Niceville, FL, with her husband, Greg, and son, CJ. She especially thanks her
husband, Greg, her son, CJ, and her uncle and aunt, Jimmy and Lida Lewis, for their unwavering
support and encouragement. Oliver donates a portion of royalties to www.raffieskids.org, a chari-
table organization that assists children.
iii
,Brief Contents
CHAPTER 1 Accounting and the Business Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CHAPTER 2 Recording Business Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
CHAPTER 3 The Adjusting Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
CHAPTER 4 Completing the Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
CHAPTER 5 Merchandising Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
CHAPTER 6 Merchandise Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311
CHAPTER 7 Internal Control and Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355
CHAPTER 8 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404
CHAPTER 9 Plant Assets and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452
CHAPTER 10 Current Liabilities and Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 496
CHAPTER 11 Long-Term Liabilities, Bonds Payable, and Classification of Liabilities on the Balance Sheet . . . . . . . . . . . 529
CHAPTER 12 Corporations: Paid-In Capital and the Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581
CHAPTER 13 Corporations: Effects on Retained Earnings and the Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . 623
CHAPTER 14 The Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661
CHAPTER 15 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722
CHAPTER 16 Introduction to Managerial Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 773
CHAPTER 17 Job Order and Process Costing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 813
CHAPTER 18 Activity-Based Costing and Other Cost Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880
CHAPTER 19 Cost-Volume-Profit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924
CHAPTER 20 Short-Term Business Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962
CHAPTER 21 Capital Investment Decisions and the Time Value of Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1010
CHAPTER 22 The Master Budget and Responsibility Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1050
CHAPTER 23 Flexible Budgets and Standard Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1105
CHAPTER 24 Performance Evaluation and the Balanced Scorecard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1151
APPENDIX A 2009 Amazon.com Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
APPENDIX B Present Value Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Glindex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Company Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
ONLINE MATERIAL: located at pearsonhighered.com/horngren
APPENDIX C—Check Figures
SPECIAL JOURNALS
INVESTMENTS
PARTNERSHIPS
iv
,Contents
CHAPTER 1 CHAPTER 2
Accounting and the Business Recording Business Transactions 62
Environment 1 The Account, the Journal, and the Ledger 63
Accounting Vocabulary: The Language of Business 2 Assets 63
Liabilities 64
Decision Makers: The Users of Accounting Stockholders’ Equity 64
Information 2 Chart of Accounts 65
Individuals 2
Businesses 3 Debits, Credits, and Double-Entry Accounting 67
Investors 3 The T-Account 67
Creditors 3 Increases and Decreases in the Accounts 68
Taxing Authorities 3 List the Steps of the Transaction Recording Process 69
The Accounting Profession and the Organizations that Posting (Copying Information) from the Journal to the
Govern It 4 Ledger 70
Governing Organizations 4 Expanding the Rules of Debit and Credit: Revenues
Ethics in Accounting and Business 5 and Expenses 71
Standards of Professional Conduct 5 The Normal Balance of an Account 72
Source Documents—The Origin of the Steps 73
Types of Business Organizations 5
Proprietorships 6 Journalizing Transactions and Posting 73
Partnerships 6 Practice Journalizing with Specific Examples 73
Corporations 6 The Ledger Accounts After Posting 79
Limited-Liability Partnerships (LLPs) and Limited- Preparing the Trial Balance from the T-Accounts 80
Liability Companies (LLCs) 6 Correcting Trial Balance Errors 81
Not-for-Profits 6 Details of Journals and Ledgers 81
Distinguishing Characteristics and Organization of a The Four-Column Account: An Alternative to the
Corporation 7 T-Account 82
Separate Legal Entity 7 ! Decision Guidelines 2-1 84
Continuous Life and Transferability of Ownership 8 " Summary Problem 2-1 85
No Mutual Agency 8 " Chapter 2: Demo Doc: Debit/Credit Transaction Analysis 89
Limited Liability of Stockholders 8
Review and Assignment Material 98
Separation of Ownership and Management 8
Corporate Taxation 8
Government Regulation 8
Organization of a Corporation 9 CHAPTER 3
Accounting Concepts and Principles 9 The Adjusting Process 130
The Entity Concept 10
Accrual Accounting Versus Cash-Basis Accounting 131
The Faithful Representation Principle 10
The Cost Principle 10 Other Accounting Principles 132
The Going-Concern Concept 10 The Accounting Period Concept 132
The Stable Monetary Unit Concept 11 The Revenue Recognition Principle 133
The Matching Principle 134
The Accounting Equation 11
The Time-Period Concept 134
Assets and Liabilities 11
Equity 12 Why We Adjust the Accounts 135
Accounting for Business Transactions 13 Two Categories of Adjusting Entries 136
Transaction Analysis for Smart Touch Learning 14 Prepaid Expenses 136
Depreciation 138
Preparing the Financial Statements—The User
Accrued Expenses 140
Perspective of Accounting 18
Accrued Revenues 142
The Financial Statements 20
Unearned Revenues 143
Headings 20
The Adjusted Trial Balance 147
Using Financial Statements to Evaluate Business
Performance 23 The Financial Statements 149
! Decision Guidelines 1-1 25 Preparing the Statements 149
" Summary Problem 1-1 26
Relationships Among the Financial Statements 149
" Chapter 1: Demo Doc: Transaction Analysis Using Ethical Issues in Accrual Accounting 151
Accounting Equation/Financial Statement Preparation 28
Review and Assignment Material 36
v
,vi Contents
! Decision Guidelines 3-1 152 Adjusting and Closing the Accounts of a
" Summary Problem 3-1 153 Merchandiser 269
Adjusting Inventory Based on a Physical Count 269
" Chapter 3: Demo Doc: Preparation of Adjusting Entries,
Closing the Accounts of a Merchandiser 270
Adjusted Trial Balance, and Financial Statements 157
Review and Assignment Material 166 Preparing a Merchandiser’s Financial Statements 271
Income Statement Formats: Multi-Step and
APPENDIX 3A: Alternative Treatment of Prepaid Expenses Single-Step 273
and Unearned Revenues online at
Three Ratios for Decision Making 274
pearsonhighered.com/horngren
The Gross Profit Percentage 274
The Rate of Inventory Turnover 274
CHAPTER 4 !
Days in Inventory 275
Decision Guidelines 5-1 276
Completing the Accounting Cycle 198 " Summary Problem 5-2 278
The Worksheet 200 Review and Assignment Material 281
Net Income 202 APPENDIX 5A: Accounting for Merchandise in a Periodic
Net Loss 202 Inventory System 303
" Summary Problem 4-1 202
COMPREHENSIVE PROBLEM FOR CHAPTERS 1–5: Completing
Completing the Accounting Cycle 204 a Merchandiser’s Accounting Cycle 309
Preparing the Financial Statements from a
Worksheet 204 APPENDIX 5B: Worksheet for a Merchandising Business—
Recording the Adjusting Entries from a Worksheet 204 Perpetual online at pearsonhighered.com/horngren
Closing the Accounts 207
Closing Temporary Accounts 208
Post-Closing Trial Balance 210
CHAPTER 6
Classifying Assets and Liabilities 210 Merchandise Inventory 311
Assets 210 Accounting Principles and Inventories 313
Liabilities 211 Inventory Costing Methods 314
The Classified Balance Sheet 211
Balance Sheet Forms 212 Inventory Accounting in a Perpetual System 316
First-In, First-Out (FIFO) Method 316
Accounting Ratios 213 Last-In, First-Out (LIFO) Method 318
Current Ratio 214 Average-Cost Method 319
Debt Ratio 214
! Decision Guidelines 4-1 215
Comparing FIFO, LIFO, and Average Cost 321
" Summary Problem 6-1 322
" Summary Problem 4-2 216
" Chapter 4: Demo Doc: Accounting Worksheets Lower-of-Cost-or-Market Rule 324
and Closing Entries 220 Effects of Inventory Errors 325
Review and Assignment Material 228 Estimating Ending Inventory 326
Ethical Issues 327
COMPREHENSIVE PROBLEM FOR CHAPTERS 1–4:
! Decision Guidelines 6-1 328
Journalizing, Posting, Worksheet, Adjusting, Closing the
Financial Statements 253 " Summary Problem 6-2 329
Review and Assignment Material 330
APPENDIX 4A: Reversing Entries: An Optional Step
online at pearsonhighered.com/horngren APPENDIX 6A: Accounting for Inventory in a Periodic System 349
CHAPTER 5 CHAPTER 7
Merchandising Operations 255 Internal Control and Cash 355
What Are Merchandising Operations? 256 Internal Control 356
The Operating Cycle of a Merchandising Business 257 The Sarbanes-Oxley Act (SOX) 357
Inventory Systems: Perpetual and Periodic 257
The Components of Internal Control 357
Accounting for Inventory in the Perpetual System 258 Internal Control Procedures 358
Purchase of Inventory 258
Internal Controls for E-Commerce 360
Sale of Inventory 263 The Limitations of Internal Control—Costs and
" Summary Problem 5-1 267 Benefits 361
, Contents vii
The Bank Account as a Control Device 362
The Bank Reconciliation 364 CHAPTER 9
Preparing the Bank Reconciliation 364 Plant Assets and Intangibles 452
Online Banking 368
Measuring the Cost of a Plant Asset 454
" Summary Problem 7-1 369 Land and Land Improvements 454
Internal Control over Cash Receipts 371 Buildings 455
Machinery and Equipment 455
Internal Control over Cash Payments 372
Furniture and Fixtures 456
Controls over Payment by Check 372
A Lump-Sum (Basket) Purchase of Assets 456
Controlling Small Cash Payments 374
Capital Expenditures 457
The Petty Cash Fund 374
Depreciation 458
Ethics and Accounting 377 Causes of Depreciation 459
Corporate and Professional Codes of Ethics 377 Measuring Depreciation 459
Ethical Issues in Accounting 377 Depreciation Methods 459
! Decision Guidelines 7-1 379 Comparing Depreciation Methods 463
" Summary Problem 7-2 380 Other Issues in Accounting for Plant Assets 465
" Summary Problem 9-1 466
Review and Assignment Material 381
Disposing of a Plant Asset 468
CHAPTER 8 Accounting for Natural Resources 472
Accounting for Intangible Assets 473
Receivables 404 Specific Intangibles 473
Accounting for Research and Development Costs 475
Receivables: An Introduction 405
Types of Receivables 405 Ethical Issues 476
Internal Control over Receivables 406 ! Decision Guidelines 9-1 477
Accounting for Uncollectibles (Bad Debts) 407 " Summary Problem 9-2 478
The Allowance Method 407 Review and Assignment Material 479
Estimating Uncollectibles 408
10
Identifying and Writing Off Uncollectible
Accounts 411 CHAPTER
Recovery of Accounts Previously Written Off—
Allowance Method 411 Current Liabilities and Payroll 496
The Direct Write-Off Method 413 Current Liabilities of Known Amount 497
Recovery of Accounts Previously Written Off—Direct Accounts Payable 497
Write-Off Method 413 Short-Term Notes Payable 498
Sales Tax Payable 498
Credit-Card and Debit-Card Sales 414 Current Portion of Long-Term Notes Payable 499
Credit-Card Sales 415 Accrued Liabilities 499
Debit-Card Sales 415 Unearned Revenues 500
Credit-/Debit-Card Sales 415
Current Liabilities that Must Be Estimated 500
" Summary Problem 8-1 416
Estimated Warranty Payable 500
Notes Receivable 418
Contingent Liabilities 501
Identifying Maturity Date 419
Computing Interest on a Note 419 ! Decision Guidelines 10-1 503
Accruing Interest Revenue 420 " Summary Problem 10-1 504
Dishonored Notes Receivable 422 Accounting for Payroll 505
Computers and Receivables 423 Gross Pay and Net (Take-Home) Pay 505
Using Accounting Information for Decision Payroll Withholding Deductions 506
Making 423 Employer Payroll Taxes 508
Acid-Test (or Quick) Ratio 424 Journalizing Payroll Transactions 509
Days’ Sales in Receivables 424 Internal Control over Payroll 511
Accounts Receivable Turnover Ratio 425
! Decision Guidelines 10-2 512
! Decision Guidelines 8-1 426
" Summary Problem 10-2 513
" Summary Problem 8-2 427
Review and Assignment Material 515
Review and Assignment Material 428
APPENDIX 8A: Discounting a Note Receivable 450
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