Financial Accounting gives readers a solid foundation in the fundamentals of accounting and the basics of finan-
cial statements, and then builds upon that foundation to offer more advanced and challenging concepts and
problems. This scaffolded approach helps students to better understand the meaning and relevance of financial
information, see its significance within a real-world context, as well as develop the skills needed to analyze
financial information in both their courses and career.
Financial Accounting has a long-standing reputation in the marketplace for being readable and easy to
understand. It drives home fundamental concepts using relevant examples from real-world companies in a
reader-friendly way without adding unnecessary complexity. While maintaining hallmark features of accuracy,
readability, and ease of understanding, the Eleventh Edition includes updated explanations, coverage, and ratio
analysis with decision-making guidelines. These time-tested methodologies with the latest technology ensures
that students learn basic concepts in accounting in a way that is relevant, stimulating, and fun, while exercises
and examples from real-world companies help students gain a better grasp of the course material.
Changes for the eleventh edition1. The first three chapters of the book cover the accounting cycle and how financial statements are constructed.
In previous editions of the book, we used separate companies in each of Chapters 1, 2, and 3 to illustrate
various phases of the accounting cycle. In the Eleventh Edition, we switched to using a single, very
familiar company (The Walt Disney Company) to illustrate all phases of the accounting cycle. In Chapter
1, we give an overview of the company¡¯s financial statements and explain what each contains. In Chapter
2, we cover transactions¡ªhow they impact the accounting equation and how they are journalized, posted,
and summarized. In Chapter 3, we discuss the latter stages of the accounting cycle for the same company
and what goes on at the end of the cycle to convert the books into financial statements¡ªadjusting entries,
closing entries, and financial statement preparation. Thus, the Eleventh Edition should have more
continuity in the early chapters; tell a more integrated, unified story; and cover the accounting cycle in a
chronological sequence. The hypothetical company (Alladin Travel, Inc.) that we have created in Chapter 1
and carried through Chapter 3 is a company that conceivably fits into Disney¡¯s business model.
2. A scaffolding approach has been implemented in the book and its resources. Chapter content and the end-
of-chapter material builds from the basic short exercise featuring one basic concept to more advanced
problems featuring multiple learning objectives. This allows the student to practice at the basic level and
then build upon that success to advance to more challenging problems.
3. The ethical component of accounting has been enhanced in the Eleventh Edition by adding a section on
the AICPA¡¯s Code of Professional Conduct, located at the end of Chapter 1. The principles section of the
code is included, explaining CPAs¡¯ responsibilities to act in the public interest, to have integrity and
objectivity, and to exercise due professional care. In each chapter, there are short exercises that demonstrate
the application of these principles.
4. Short exercises, exercises, and problems are more clearly labeled by learning objective (LO). Short
exercises have been shortened and simplified in this edition to cover only one LO each. They can be used
better to briefly cover single concepts as illustrations or class exercises. Exercises might cover two or three
LOs, and problems cover multiple LOs.
5. In Chapters 3, 5, and 11, we have updated and provided complete coverage of the revised FASB account-
ing standard on revenue recognition, impacting the accounting for sales returns and sales discounts. We
provide the most accurate up-to-the-minute information available for this critical area. End-of-chapter
short exercises, exercises, and problems have also been revised to reflect application of the new revenue
recognition standard at an appropriate and understandable level for beginning students in accounting.
6. Chapter 4 contains a new hypothetical case study to introduce the concepts of fraud and how it can be
prevented by internal control. This fictionalized case study is based on an actual company in Texas whose
highly trusted and loyal controller and his wife systematically stole $16 million over the space of 10 years
by issuing company checks to pay off their personal credit card bills. The scheme was enabled by weak
internal controls. Executives of the company allowed the controller to have access to the check-signing
PreFACexvA01_
xvi Prefacemachine and electronic signature of the company president. Chapter 4 also contains updated
illustrations of electronic bank statements.
7. In Chapter 5, using Apple Inc. as the book¡¯s Appendix A focus company, we emphasize
proper revenue recognition, accounting for accounts and notes receivable, and measuring
and evaluating collectability through the allowance for doubtful accounts. The coverage of
the days¡¯ sales outstanding (DSO) ratio has been updated, improved, and made more
consistent with the coverage of days¡¯ inventory outstanding (DIO) in Chapter 6 and days¡¯
payable outstanding (DPO) in Chapter 9. We first introduce the computation of accounts
receivable turnover (net sales/average accounts receivable) and explain its meaning. We
then convert the turnover to DSO by dividing the turnover by 365. In previous editions, the
primary computation was average daily sales (net sales/365), followed by division of
average AR by average daily sales.
8. In Chapter 6, the coverage of inventory and cost of goods sold has been updated, using
Under Armour, Inc., the textbook¡¯s Appendix B focus company. The products sold by
Under Armour should be highly familiar to college students, and the study of inventory is
made more interesting by applying it to this fascinating and fast-growing company.
9. In Chapter 9, based on feedback we received from adopters who only have time to cover
straight-line amortization for bond premium or discount, we added a new self-contained
section at the beginning of the coverage for bonds payable: Accounting for Bonds Payable
Using Straight-Line Amortization. We moved the coverage of amortization by the
effective-interest method back one section. Thus, users who only want to cover issuance of
bonds and recognition of interest expense based on straight-line amortization of bond
premium or discount may use only that section. Separate problems using the straight-line
method or amortization at the end of the chapter allow these users to easily skip the more
complex effective-interest method altogether.
10. In every chapter, after relevant concepts are covered, a text box labeled ¡°Try it¡± is introduced.
This employs the following learning philosophy: 1. read it; 2. try it; 3. practice it.
11. In many cases, we add ¡°Try It in Excel¡± to illustrate use of Excel and a business
problem-solving tool. We feel that students should be exposed early and frequently in their
business education to Excel applications. At the beginning of every chapter, we give
students instructions as to how to access the most current financial statements of the
chapter¡¯s focus company in Excel format from the Securities and Exchange Commission
(SEC) website (http://www.sec.gov). Throughout the book, most exhibits and journal
entries are formatted as Excel worksheets. In addition, at certain points throughout the text,
we include examples that show students step-by-step how to build Excel templates to
facilitate the solutions of specific accounting problems. The following provides examples
of these applications by chapter:
Chapter 1: Preparing basic financial statements (income statement, retained earnings
statement, balance sheet)
Chapter 2: Processing business transactions, preparation of trial balanceChapter 3: Adjusting journal entries, preparation of adjusted trial balance, final
financial statementsChapter 4: Preparation of bank reconciliation, cash budgetChapter 5: Accounts receivable aging analysisChapter 6: Computation of cost of goods sold and gross profitChapter 7: Calculation of depreciation expense and accumulated depreciation by three
methods: straight-line, units-of-production, and double-declining balanceChapter 8: Calculation of present valueChapter 9: Calculation of bond discount and premium amortization tables using
effective-interest methodChapter 13: Horizontal and vertical analysis of financial statementsA01_xvi Prefacemachine and electronic signature of the company president. Chapter 4 also contains updated
illustrations of electronic bank statements.
7. In Chapter 5, using Apple Inc. as the book¡¯s Appendix A focus company, we emphasize
proper revenue recognition, accounting for accounts and notes receivable, and measuring
and evaluating collectability through the allowance for doubtful accounts. The coverage of
the days¡¯ sales outstanding (DSO) ratio has been updated, improved, and made more
consistent with the coverage of days¡¯ inventory outstanding (DIO) in Chapter 6 and days¡¯
payable outstanding (DPO) in Chapter 9. We first introduce the computation of accounts
receivable turnover (net sales/average accounts receivable) and explain its meaning. We
then convert the turnover to DSO by dividing the turnover by 365. In previous editions, the
primary computation was average daily sales (net sales/365), followed by division of
average AR by average daily sales.
8. In Chapter 6, the coverage of inventory and cost of goods sold has been updated, using
Under Armour, Inc., the textbook¡¯s Appendix B focus company. The products sold by
Under Armour should be highly familiar to college students, and the study of inventory is
made more interesting by applying it to this fascinating and fast-growing company.
9. In Chapter 9, based on feedback we received from adopters who only have time to cover
straight-line amortization for bond premium or discount, we added a new self-contained
section at the beginning of the coverage for bonds payable: Accounting for Bonds Payable
Using Straight-Line Amortization. We moved the coverage of amortization by the
effective-interest method back one section. Thus, users who only want to cover issuance of
bonds and recognition of interest expense based on straight-line amortization of bond
premium or discount may use only that section. Separate problems using the straight-line
method or amortization at the end of the chapter allow these users to easily skip the more
complex effective-interest method altogether.
10. In every chapter, after relevant concepts are covered, a text box labeled ¡°Try it¡± is introduced.
This employs the following learning philosophy: 1. read it; 2. try it; 3. practice it.
11. In many cases, we add ¡°Try It in Excel¡± to illustrate use of Excel and a business
problem-solving tool. We feel that students should be exposed early and frequently in their
business education to Excel applications. At the beginning of every chapter, we give
students instructions as to how to access the most current financial statements of the
chapter¡¯s focus company in Excel format from the Securities and Exchange Commission
(SEC) website (http://www.sec.gov). Throughout the book, most exhibits and journal
entries are formatted as Excel worksheets. In addition, at certain points throughout the text,
we include examples that show students step-by-step how to build Excel templates to
facilitate the solutions of specific accounting problems. The following provides examples
of these applications by chapter:
Chapter 1: Preparing basic financial statements (income statement, retained earnings
statement, balance sheet)
Chapter 2: Processing business transactions, preparation of trial balanceChapter 3: Adjusting journal entries, preparation of adjusted trial balance, final
financial statementsChapter 4: Preparation of bank reconciliation, cash budgetChapter 5: Accounts receivable aging analysisChapter 6: Computation of cost of goods sold and gross profitChapter 7: Calculation of depreciation expense and accumulated depreciation by three
methods: straight-line, units-of-production, and double-declining balanceChapter 8: Calculation of present valueChapter 9: Calculation of bond discount and premium amortization tables using
effective-interest methodChapter 13: Horizontal and vertical analysis of financial statementsA01_
Preface xvii12. Ethics is a vital part of accounting. Several sections of the text are dedicated to discussing
potential ethical problems that can arise in dealing with that particular subject matter and
how they should be properly handled.
13. In all chapters, we emphasize how accounting information covered in that chapter is ana-
lyzed and used to help managers make various kinds of business decisions. User-relevant
information and key ratios that are covered in various chapters include the following:
Chapter 3: Debt-paying ability: net working capital, current ratio, debt ratioChapter 4: Internal control: importance of internal control to preserve the integrity of
financial information; the significance of cash and cash flowChapter 5: Liquidity: quick (acid-test) ratio, accounts receivable turnover, days¡¯ sales
in receivablesChapter 6: Profitability: gross profit percentage, inventory turnover, days¡¯ inventory
outstandingChapter 7: Profitability: introduction rate of return on total assets (ROA) using Du
Pont Analysis (profit margin ¡Á asset turnover)
Chapter 8: Time value: time value of money and how it impacts investing and lending
decisionsChapter 9: Liquidity: accounts payable turnover, days¡¯ payable outstanding, cash
collection cycle (days¡¯ sales in receivables + days inventory outstanding ¨C days¡¯
payable outstanding). Leverage: continuation of Du Pont Analysis by introducing
leverage ratio (average total assets/average stockholders¡¯ equity)
Chapter 10: Profitability: rate of return on common stockholders¡¯ equity using
expanded Du Pont Analysis Model (ROA [introduced in Chapter 7] ¡Á leverage ratio
[introduced in Chapter 9])
Chapter 11: Evaluating performance: earnings quality, earnings per share, book value
per share, dividend yield, capitalization of earnings from operations to estimate future
profitability and stock priceChapter 12: Cash flow: use of cash flow information by creditors and investors; free
cash flowChapter 13: Statement analysis: comprehensive financial statement analysis, incorpo-
rating all of the ratios covered in the previous chapters, applying them to the book¡¯s
two appendix focus companies, Under Armour, Inc. and Apple Inc.
xvi Prefacemachine 7. 8. 9. 10. 11.
