Professional Documents
Culture Documents
Fundamental Financial
ACCOUNTING
Concepts _
Thomas P. Edmonds
University of Alabama-Birmingham
Frances M. McNair
Mississippi State University
Edward E. Milam
Mississippi State University
Philip R. Olds
Virginia Commonwealth University
Cindy D. Edmonds
Contributing Author
University of Alabama-Birmingham
Nancy W. Schneider
Contributing Author
Lynchburg College
Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis
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T his book is dedicated to our students whose questions have so
frequently caused us to reevaluate our method of presentation
that they have, in fact, become major contributors to the
development of this text.
Thomas P. Edmonds, Ph.D ..
Dr. Edmonds holds the Friends and Alumni Professorship in the Depart-
ment of Accounting at the University of Alabama at Birmingham (UAB).
He has been actively involved in teaching accounting principles through-
out his academic career. Dr. Edmonds has coordinated the accounting
principles courses at the University of Houston and UAB. He currently
teaches introductory accounting in mass sections that frequently inclui::le
more than 180 students. Dr. Edmonds has received five prestigious teach-
ing awards including the UAB President's Excellence in Teaching Award
and the distinguished Ellen Gregg Ingalls Award for excellence in class-
room teaching. He has written a number of articles for many publications including Issues in
Accounting; the Journal of Accounting Education; Advances in Accounting Education; Ac-
counting Education: A Journal of Theory, Practice and Research; the Accounting Review; Ad-
vances in Accounting; the Journal of Accountancy; Management Accounting; the Journal (~f
Commercial Bank Lending; the Banker:~ Magazine; and the Journal of Accounting, Auditing,
and Finance. He has published four textbooks, five practice problems (including two com-
puterized problems), and a variety of supplemental materials including study guides, working
papers, and solutions manuals. Dr. Edmonds's writing is influenced by a wide range of busi-
ness experience. He was a successful entrepreneur, worked as a management accountant for
Refrigerated Transport, a trucking company, and worked in the not-for-profit sector as a com-
merciallending officer for the Federal Home Loan Bank. In addition, he has acted as a con-
sultant to major corporations including First City Bank of Houston, AmSouth Bank in
Birmingham, Texaco, and Cortland Chemicals. Dr. Edmonds began his academic training at
Young Harris Community College in Young Harris, Georgia. He received a B.B.A. degree
with a major in finance from Georgia State University in Atlanta, Georgia. He obtained an
M.B.A. degree with a concentration in finance from St. Mary's University in San Antonio,
Texas. His Ph.D. degree with a major in accounting was awarded by Georgia State University.
Dr. Edmonds's work experience and academic training have enabled him to bring a unique
user perspective to this textbook.
1. The horizontal financial statements model (discussed in the following section of the pref-
ace) is introduced earlier and is emphasized to a greater degree in the first three chapters
of the text. It is now easier for those who want to use the model early in the course to do
so. Problem materials related to the statements model are more abundant in the earlier
chapters. However, those who desire to introduce events and statements through the ac-
counting equation are still able to do so. A liberal supply of exercises and problems that
focus on the accounting equation are available.
2. The matching concept is introduced in Chapter 2 and is referred to throughout the text. As
an example, we have replaced the percent of receivables method of estimating bad debts
expense with the percent of sales method.
3. An expanded discussion of the closing concept has been added in Chapters 1, 2, and 3.
4. Efforts to focus on key concepts have persisted. Specifically, in Chapter 8 we have moved
some of the more advanced topics such as accounting for investment securities to an
appendix.
5. The effort to isolate concepts and introduce them in a stepwise fashion has been ex-
panded. For example, in Chapter 5, we have separated the discussion of purchases dis-
counts from the discussion of sales discounts. Similarly, the discussion of purchases
returns and allowances has been separated from that of sales returns and allowances.
6. The use of real-world terminology has been expanded throughout the text. The term con-
tributed capital has been replaced with the term common stock; the term distributions has
been replaced with dividends, and owners' equity has been replaced with stockholders'
equity. Generic dates such as 20Xl have been replaced with realistic dates such as 2001.
7. Updates related to the latest FASB pronouncements have been included. For example, the
text material relating to accounting for intangible assets has been revised to comply with
FASB Statement Numbers 141 and 142.
8. The end-of-chapter materials have been expanded to include a mirror image "B" set of
exercises in each chapter.
9. Beyond the text itself, we have made a special effort to expand the test bank. In addition,
the number of accuracy checkers has been expanded to ensure exceptionally high quality.
10. Active learning has been enhanced through the insertion of an in-chapter brief exercise
titled Check Yourself that enables students to apply the materials that they are reading.
An example of the Check Yourself exercises is shown on the following page. In addition,
a self-study review problem section has been added at the end of each chapter.
vii
One of the more powerful explanatory features of the horizontal statements model stems
from the fact that individual events are recorded directly in financial statements. Tradition-
ally, a series of events is recorded in accounts, and summative information is presented in the
statements. Accordingly, students do not observe the effects of individual events on finan-
cial statements. The horizontal statements model remedies this condition by requiring stu-
dents to record statement effects transaction by transaction. For example, Event No. 1 in
Exhibit 1 (see following page) demonstrates that the recognition of revenue on account affects
the balance sheet and income statement but not the statement of cash flows. These effects are
visibly isolated from the effects of other events. Accordingly, students can see how a particu-
lar event affects the financial statements. The horizontal statements model also provides an ef-
fective means for comparing the effects of one transaction with the effects of another
transaction. By comparing Event No.1 with Event No.2 in Exhibit 1, students can see how
the recognition of cash revenue differs from the recognition of revenue on account. Similarly,
a comparison of Events No.3 and 4 highlights differences between the effects of cash divi-
dends versus stock dividends. Note that students also are required to identify cash flows as be-
ing financing activities (FA), investing activities (IA), or operating activities (OA) by placing
the appropriate letters in the cash statement column.
The horizontal model also can be used to demonstrate how alternative accounting procedures
affect financial statements. For example, the recognition of unrealized gains on investment
securities affects financial statements differently, depending on whether the securities are clas-
sified as (1) held to maturity, (2) trading, or (3) available for sale. Exhibit 2 demonstrates how
the recognition of a $700 unrealized gain affects financial statements under each of the three al-
ternative accounting treatments.
The vertical statements model enables the instructor to link related events over multiple
accounting cycles. A student can see how expense recognition is spread over an asset's use-
fullife. Furthermore, since a full set of statements is presented on a single page, the student
can visually contrast expense recognition with cash flow. Similarly, the vertical statements
model enables a student to observe the multi-cycle effects of accumulating depreciation or
amortizing a bond discount. An important difference between a vertical stateI?ents model and
the traditional comparative financial statements is that the vertical statements model is pre-
sented in a simplified form on a single page of paper. Students cannot comprehend the linkage
between financial statements as easily when the statements and/or accounting periods are
shown on separate pages.
The statements models are presented for instructional purposes. They are very helpful in
understanding how accounting events affect financial statements. Accordingly, statements
models are used extensively in this text. Notice, however, that the models are not intended to
represent the formal presentation formats that appear in annual reports. For example, although
a full set of four financial statements is normally presented in published financial statements,
the horizontal model shows only a partial set of statements. Similarly, the vertical instructional
model may vary in form and content, depending on the learning task. Since the statements are
presented in aggregate, the description of dates (i.e., "as of' versus "for the period ended")
cannot be used to distinguish periodic from cumulative data. When using this text, keep in
mind that statement models are intended to facilitate learning tasks. They do not conform to
the detailed requirements of formal reporting practices.