Intermediate Accounting - Pearson

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Intermediate AccountingSecond EditionElizabeth A. GordonFox School of Business, Temple UniversityJana S. RaedyKenan-Flagler Business School, University of North Carolina at Chapel HillAlexander J. SannellaRutgers Business School, Rutgers UniversityNew York, NYA01 GORD0370 02 SE FM.indd 111/23/17 1:47 AM

Vice President, Business, Economics, and UK Courseware:Donna BattistaDirector of Portfolio Management: Adrienne D’AmbrosioSpecialist Portfolio Manager: Lacey VitettaDevelopment Editor: Rebecca CarusoEditorial Assistant: Elisa MarksVice President, Product Marketing: Roxanne McCarleySenior Product Marketer: Tricia MurphyProduct Marketing Assistant: Marianela SilvestriManager of Field Marketing, Business Publishing: Adam GoldsteinExecutive Field Marketing Manager: Nayke PopovichVice President, Production and Digital Studio, Arts and Business:Etain O’DeaDirector of Production, Business: Jeff HolcombManaging Producer, Business: Melissa FeimerContent Producer: Emily ThroneOperations Specialist: Carol MelvilleDesign Lead: Kathryn FootManager, Learning Tools: Brian SuretteContent Developer, Learning Tools: Sarah PetersonManaging Producer, Digital Studio and GLP, Media Productionand Development: Ashley SantoraManaging Producer, Digital Studio: Diane LombardoDigital Studio Producer: Mary Kate MurrayDigital Studio Producer: Alana ColesDigital Content Team Lead: Noel LotzDigital Content Project Lead: Martha LaChanceProject Manager: Patty Donovan, SPi GlobalInterior Design: Anthony Gemmellaro, Denise Hoffman, SPi GlobalCover Design: SPi GlobalCover Art: Excellent backgrounds/ShutterstockPrinter/Binder: LSC Communications, Inc./Courier KendallvilleCover Printer: Phoenix Color/HagerstownMicrosoft and/or its respective suppliers make no representations about the suitability of the information contained in the documents andrelated graphics published as part of the services for any purpose. All such documents and related graphics are provided “as is” without warranty of any kind. Microsoft and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information,including all warranties and conditions of merchantability, whether express, implied or statutory, fitness for a particular purpose, title andnon-infringement. In no event shall Microsoft and/or its respective suppliers be liable for any special, indirect or consequential damages orany damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arisingout of or in connection with the use or performance of information available from the services.The documents and related graphics contained herein could include technical inaccuracies or typographical errors. Changes are periodicallyadded to the information herein. Microsoft and/or its respective suppliers may make improvements and/or changes in the product(s) and/orthe program(s) described herein at any time. Partial screen shots may be viewed in full within the software version specified.Microsoft and Windows are registered trademarks of the Microsoft Corporation in the U.S.A. and other countries. This book is not sponsoredor endorsed by or affiliated with the Microsoft Corporation.Copyright 2019, 2016 by Pearson Education, Inc. or its affiliates. All Rights Reserved. Manufactured in the United States of America. Thispublication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in aretrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise. For informationregarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department,please visit www.pearsoned.com/permissions/.Acknowledgments of third-party content appear on the appropriate page within the text.PEARSON, ALWAYS LEARNING, and MYLAB are exclusive trademarks owned by Pearson Education, Inc. or its affiliates in the U.S. and/or other countries.Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respectiveowners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only.Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners ofsuch marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors.Library of Congress Cataloging-in-Publication DataNames: Gordon, Elizabeth A. (Associate professor), author. Raedy, JanaSmith, author. Sannella, Alexander John, author.Title: Intermediate accounting / Elizabeth A. Gordon, TempleUniversity, Jana S. Raedy, University of North Carolina at Chapel Hill, Alexander J.Sannella, Rutgers University.Description: Second edition. Hoboken, NJ : Pearson Education, [2019]Identifiers: LCCN 2017050146 ISBN 9780134730370 ISBN 0134730372Subjects: LCSH: Accounting.Classification: LCC HF5636 .G67 2019 DDC 657/.044—dc23LC recordavailable at https://lccn.loc.gov/2017050146118ISBN 10: 0-13-473037-2ISBN 13: 978-0-13-473037-0A01 GORD0370 02 SE FM.indd 211/23/17 1:47 AM

For Paul, Andrew, Mary, and my parentsEAGFor Nicholas, Aidan, and KevinJSRFor Ayden Alexander and Chloe MikenzieAJSA01 GORD0370 02 SE FM.indd 311/23/17 1:47 AM

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About the AuthorsElizabeth A. Gordon, Ph.D., MBA, CPAELIZABETH A. GORDON IS ASSOCIATE PROFESSOR OF ACCOUNTING at the Fox Schoolof Business at Temple University and a Merves Research Fellow. She received her doctorate fromColumbia University, master’s degree in business administration from Yale University, and bachelor’s of science degree in accounting with highest distinction from Indiana University.Dr. Gordon specializes in the areas of financial accounting and international financial reporting and investigates topics such as international financial reporting standards, corporate disclosure, executive compensation, related-party disclosures, and market development. Her research ispublished in top journals in her field including Journal of Accounting Research, The AccountingReview; Review of Accounting Studies, Journal of Accounting, Auditing and Finance; and Journalof Accounting and Public Policy. She serves as an editor of Journal of International FinancialManagement and Accounting and an associate editor of Journal of International AccountingResearch. Dr. Gordon is a past president of the International Accounting Section of the AmericanAccounting Association and serves as the vice president, finance and administration of the International Association for Accounting Education and Research.Dr. Gordon has taught courses in financial accounting and international accounting at thegraduate and undergraduate levels, receiving a number of teaching awards. She has coauthoredaccounting readings for the CFA Institute, integrating IFRS and U.S. GAAP. She was an auditorwith PricewaterhouseCoopers, LLP, and interned at the U.S. Office of Management and Budgetbefore entering academia. Dr. Gordon is a CPA in the State of Maryland. She has been on thefaculty of the Graduate School of Business at the University of Chicago, the Rutgers BusinessSchool, and a visiting professor at the University of Pennsylvania.Jana S. Raedy, Ph.D., CPAJANA RAEDY IS ASSOCIATE PROFESSOR OF ACCOUNTING, associate dean of the Master of Accounting Program, and the Ernst & Young Scholar in Accounting at the Kenan-FlagerBusiness School at the University of North Carolina at Chapel Hill. She received her bachelor ofscience and master of science degrees from the University of Kentucky and her doctorate fromthe Pennsylvania State University.Dr. Raedy’s research is primarily focused on issues in international financial reporting as wellas areas in which financial reporting and taxation intersect. Her research is published in top journalssuch as Journal of Accounting Research, Journal of Accounting and Economics, The AccountingReview, Contemporary Accounting Research, and Journal of the American Taxation Association.Dr. Raedy has taught a number of courses in financial reporting at the graduate level, including core financial reporting (both introductory and intermediate accounting), international financial reporting, and forensic accounting. For over 15 years, she has taught a self-developed coursein applied financial accounting research with a heavy emphasis on judgment and decision making. During her academic career, she has received a number of different teaching awards. Shecurrently is a team member of the Ernst & Young Academic Resource Center, which providesfaculty nationwide with comprehensive teaching materials related to topics such as judgment,IFRS, and fair value.vA01 GORD0370 02 SE FM.indd 511/23/17 1:47 AM

viAbout the AuthorsAlexander J. Sannella, Ph.D., CPAALEXANDER J. SANNELLA IS CURRENTLY AN ASSOCIATE PROFESSOR of Accountingat the Rutgers Business School and is the Director of the MBA in Professional Accounting Program, Director of the Master of Accountancy in Professional Accounting and the Director of theRutgers Business School Teaching Excellence Center. He earned a BBA in Finance and an MBAin Accounting from Iona College. He received his doctorate in accounting and finance from NewYork University and is a New York State Certified Public Accountant.During his years at Rutgers Business School, Dr. Sannella has taught at both the graduateand undergraduate levels and served as Associate Dean of the Business School and Vice Chair ofthe Department of Accounting and Information Systems. Previously, Dr. Sannella served on thefaculty of New York University as instructor of accounting at the Stern School of Business and asan Associate Professor of Accounting at Iona College’s Hagan School of Business.He has public accounting experience as an auditor for PricewaterhouseCoopers, LLP andKPMG, LLP. Dr. Sannella was also an independent consultant working on many projects withother public accounting firms, bankruptcy trustees, and leasing divisions of major insurance companies. He also served as a consultant to the Line of Business Program at the Federal Trade Commission in Washington.Dr. Sannella has over 40 years of teaching experience at the university level and over 30 yearsof experience in developing and teaching commercial and investment bank training programs. Hisclients have included eight major investment banks and four of the world’s largest commercialbanks. His training programs include courses designed to train financial analysts and associatesas well as special programs for sales and trading professionals.The author of many scholarly journal articles and three books, Dr. Sannella’s articles havefocused on accounting education and market-based accounting research. His books focus on theeffects of accounting alternatives on the judgment of analysts and other statement users. Many ofthe books’ topics are included on training videos and CPE courses.Dr. Sannella has been interviewed by several publications including the Newark Star Ledgerand NJ Biz.A01 GORD0370 02 SE FM.indd 611/23/17 1:47 AM

Brief ContentsPrefacexxviCHAPTER 1The Financial Reporting EnvironmentCHAPTER 2Financial Reporting TheoryCHAPTER 3Judgment and Applied Financial Accounting ResearchCHAPTER 4Review of the Accounting CycleCHAPTER 5Statements of Net Income and Comprehensive IncomeCHAPTER 6 tatements of Financial Position and Cash Flows and theSAnnual Report 235CHAPTER 7Accounting and the Time Value of Money315CHAPTER 8Revenue Recognition (Current Standard)3731235591171Revenue Recognition (Previous Standards) ONLINECHAPTER 9Short-Term Operating Assets: Cash and Receivables 443CHAPTER 10 Short-Term Operating Assets: Inventory 507CHAPTER 11 L ong-Term Operating Assets: Acquisition, Cost Allocation,and Derecognition 587CHAPTER 12 L ong-Term Operating Assets: Departures from HistoricalCost 665CHAPTER 13 Operating Liabilities and ContingenciesCHAPTER 14 Financing Liabilities735787CHAPTER 15 Accounting for Stockholders’ Equity859CHAPTER 16 Investments in Financial Assets 915CHAPTER 17 Accounting for Income Taxes 991CHAPTER 18 Accounting for Leases (New Standard) 1063Accounting for Leases (Current Standards) ONLINECHAPTER 19 Accounting for Employee Compensation and Benefits1151CHAPTER 20 Earnings per Share 1221CHAPTER 21 Accounting Changes and Error Analysis 1265CHAPTER 22 The Statement of Cash Flows 1303Glossary/Index I-1A01 GORD0370 02 SE FM.indd 7vii11/23/17 1:47 AM

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ContentsPrefaceOverview of the Conceptual Framework 24Conceptual Framework Components 24xxviCHAPTER 1Interview: Paul Pacter, Former Member of IASBThe Financial Reporting EnvironmentIntroductionConceptual Framework: IFRSThe Standard-Setting ProcessStandard Setting 9IFRS Standard Setting 12History of Global Standard Setting: IFRS 1213The Global Standard-Setting Structure: IFRSStandard-Setting Process: IFRS15Standard Setting as a Political Process15Trends in Standard Setting 15Rules- versus Principles-Based StandardsAsset/Liability Approach 17Fair Value Measurements 17Summary by Learning Objectives303414Assumptions in Financial Reporting 42Going Concern Concept 43Business or Economic Entity Concept 43Monetary Unit Assumption 43Periodicity Assumption 43Assumptions in Financial Reporting: IFRS1636Summary by Learning ObjectivesQuestions 47Brief Exercises47 4344Exercises5118CHAPTER 3 Exercises21Judgment and Applied Financial Accounting Research 5523IntroductionCHAPTER 2Financial Reporting Theory236Elements of Financial ReportingElements 32Principles of Recognition and MeasurementGeneral Recognition Principles 36Revenue and Expense Recognition 37Bases of Measurement 38Recognition and Measurement: IFRS 40Cash versus Accrual Accounting 419Interview: Daniel J. Noll, AICPA27The Qualitative Characteristics of FinancialInformation 27Fundamental Characteristics 27Enhancing Characteristics 29Cost Constraint 30Elements: IFRSRole of Standard Setters 8The Importance of Understanding InternationalAccounting Standards 8Questions 19Brief Exercises 2027The Objective of Financial Reporting1Overview of Financial Reporting 2Financial Information 2Economic Entity 3Financial Statement User Groups 4Other Parties Involved in the Preparationand Use of Financial Information 6Legal, Economic, Political, and Social EnvironmentIntroduction12655The Importance and Prevalence of Judgment in Financial Reporting 56ixA01 GORD0370 02 SE FM.indd 911/23/17 1:47 AM

xContentsJudgment and the Accountant 56Judgment: Use and Abuse 56Judgment and Financial Statement ComparisonsThe Accounting CycleStep 1: Analyze the TransactionThe Accounting Equation 9256The Role of Assumptions and Estimates 57Assumptions and Estimates in the Financial Statements 57Judgment-Related Disclosures 57Key Judgment Areas in Practice 61Judgment Obstacles in Preparing FinancialInformation 62Factors Influencing Management Behavior 62Cognitive Biases 63Complexity of the Business Environment andTransactions 64Basis for Conclusions78 Step 6: Prepare the Adjusted Trial Balance6875ExercisesReview of the Accounting Cycle9191105113115117Step 9: Prepare Post-Closing Trial BalanceComprehensive Example 119118Interview: John Foristall, ShoeBuy 135Summary by Learning Objectives136Questions 140Multiple-Choice Questions Becker Professional Education* 140 Brief Exercises 142 Exercises 144 Problems 150Appendix A: Alternative Treatment of Deferred Revenues and Expenses 159161168CHAPTER 585Statements of Net Income and Comprehensive Income 171Introduction88CHAPTER 4IntroductionStep 8: Close Temporary AccountsAppendix C: Reversing Entries80CASES 81Judgment Cases 81 Surfing the StandardsCases 83 Basis for Conclusions Cases 83Appendix B: IFRS StandardsStep 7: Prepare Financial StatementsAppendix B: Using a WorksheetAppendix A: Structure of U.S. GAAP Codification101Step 5: Prepare Adjusting Journal Entries 106Cash versus Accrual Bases of Accounting 106Deferrals 106Accruals 110Steps in the Applied Financial Accounting ResearchProcess 69Step 1: Establish and Understand the Facts 69Step 2: Identify the Issue: What is the ResearchQuestion? 69Step 3: Search the Authoritative Literature 70Step 4: Evaluate the Results of the Search 70Step 5: Develop Conclusions 70Step 6: Communicate the Results of the Research 70Applying the Research Process 71Questions 78Brief ExercisesStep 2: Journalize the Transactions 97Accounts 98Debits and Credits: A Review 99Journal Entries 99Step 4: Prepare the Unadjusted Trial Balance69Summary by Learning Objectives92Step 3: Post to the General LedgerThe T-Account 104Authoritative Literature Used in Applied FinancialAccounting Research 64Authoritative Literature 64Authoritative Literature: IFRS 67Interview: Robert Herz, Chairman, FASB (Retired)92171Overview of the Income Statements 172Income Statement Terminology 172Reporting Income 173THE CONCEPTUAL FRAMEWORK CONNECTION:Usefulness and Limitations of the IncomeStatements 173In partnershipwith:*Multiple-ChoiceQuestionsBecker Professional EducationA01 GORD0370 02 SE FM.indd 1011/23/17 1:47 AM

xiContentsEarnings Quality 174Permanent and Transitory EarningsAppendix A: Financial Statement Analysis174Appendix B: Profitability AnalysisJUDGMENTS IN ACCOUNTING:Earnings Management 174228231CHAPTER 6Statement of Net Income Elements andClassifications 176Statement of Net Income Elements 176Statement of Net Income Classifications 177Statements of Financial Position and CashFlows and the Annual Report 235Statement of Net Income Presentation 178Multiple-Step Net Income Statement 178Condensed Statement of Net Income 179Single-Step Statement of Net Income 181The Statement of Financial PositionStatement of Net Income Presentation: IFRSIncome from Continuing OperationsOperating Income 186Non-Operating Income 186Income Tax Provision 187Introduction183Discontinued Operations 187Characteristics of a Discontinued Operation 187Discontinued Operations Reporting Requirements 188Discontinued Operations: IFRS 192Net Income, Noncontrolling Interest andEarnings per Share 193Balance Sheet Classifications 237Assets 238Liabilities 239Stockholders’ Equity 240IFRS Balance Sheet ClassificationsThe Statement of Stockholders’ Equity 198Stockholders’ Equity Requirements 198Statement of Stockholders’ Equity Accounts 198199203Questions 207Multiple-Choice Questions Becker Professional Education* 208 Brief Exercises 209 Exercises 214 Problems 220CASES 224Judgment Cases 224 Financial Statement Analysis Cases 225 Surfing the StandardsCases 226 Basis for Conclusions Cases 227241Balance Sheet Presentation and Format 241Asset Presentation 241Liabilities Presentation 242Balance Sheet Format 242Balance Sheet Presentation: IFRS 244Judgment and the Balance Sheet 244The Statement of Cash FlowsThe Statement of Comprehensive Income 194Statement of Comprehensive Income Elements 194Statement of Comprehensive Income Elements: IFRS 195Statement of Comprehensive Income Format 195Summary by Learning Objectives236THE CONCEPTUAL FRAMEWORK CONNECTION:Usefulness and Limitations of the Balance Sheet 236184Interview: Greg Tierney, MillerCoors235244THE CONCEPTUAL FRAMEWORK CONNECTION:Purpose of the Statement of Cash Flows 246Statement of Cash Flows Classifications 246Classification of Dividends, Interest, and Taxes:IFRS 248Format for Cash Flows from OperatingActivities 249Financial Statement Articulation252Notes to the Financial Statements255THE CONCEPTUAL FRAMEWORK CONNECTION:Notes to the Financial Statements 256Interview: Michael Cohen, CohnReznick 261The Annual Report 262Management Discussion and AnalysisAuditors’ Report 263Management Report 264Board of Directors 265262In partnershipwith:*Multiple-ChoiceQuestionsBecker Professional EducationA01 GORD037

ing core financial reporting (both introductory and intermediate accounting), international finan-cial reporting, and forensic accounting. For over 15 years, she has taught a self-developed course in applied financial accounting research with a heavy emphasis on judgment and decision mak-ing.

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