E1FFIRS 08/13/2009 11:22:50 Page6 E1FFIRS 08/13/2009 11:22:50 Page1 Mastering Financial Accounting Essentials E1FFIRS 08/13/2009 11:22:50 Page2 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, AustraliaandAsia,Wileyisgloballycommittedtodevelopingandmarket- ingprintandelectronic products and services for our customers’ profes- sional and personal knowledge and understanding. TheWileyFinanceseriescontainsbookswrittenspecificallyforfinance and investment professionals as well as sophisticated individual investors andtheirfinancialadvisors.Booktopicsrangefromportfoliomanagement to e-commerce, risk management, financial engineering, valuation and fi- nancialinstrumentanalysis,aswellasmuchmore. For a list of available titles, please visit our Web site at www. WileyFinance.com. E1FFIRS 08/13/2009 11:22:50 Page3 Mastering Financial Accounting Essentials The Critical Nuts and Bolts STUART A. M CRARY C John Wiley & Sons, Inc. E1FFIRS 08/13/2009 11:22:50 Page4 Copyright#2010byStuartMcCrary.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright Act,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthrough paymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222 RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,oronthewebat www.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothe PermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030, (201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions. LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbest effortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttothe accuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreated orextendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategies containedhereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessional whereappropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitorany othercommercialdamages,includingbutnotlimitedtospecial,incidental,consequential,or otherdamages. Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,please contactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outside theUnitedStatesat(317)572-3993orfax(317)572-4002. Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts, visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: McCrary,StuartA. Masteringfinancialaccountingessentials:thecriticalnutsandbolts / StuartA.McCrary. p.cm.– (Wileyfinanceseries) Includesindex. ISBN978-0-470-39332-1(cloth) 1. Accounting.2. Financialstatements. I. Title. HF5636.M422010 657–dc22 2009017159 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 E1FFIRS 08/13/2009 11:22:50 Page5 Tomylovingwife,Nancy E1FFIRS 08/13/2009 11:22:50 Page6 E1FTOC 09/03/2009 15:47:57 Page7 Contents Preface xi Acknowledgments xiii CHAPTER1 CreatingLedgerAccounting 1 CountEverything 4 TheBeginningsofDouble-EntryAccounting 5 Double-EntryRecordingofBusinessTransactions 7 HandlingDebitsandCredits 7 KeepingTrackofData 9 AMathematicalDescriptionofDouble-EntryConventions 10 HandlingIncomeItems 11 DeterminingProfitintheSimpleAccountingModel 11 PermanentAccountsOverview 11 TemporaryAccountsOverview 12 Conclusion 12 Questions 13 CHAPTER2 AccountingConventions 15 ReasonsAccountantsDevelopConventions 15 AccountingCycle 16 Classification 16 Comparability 16 Conservatism 16 Double-Entry 17 FullDisclosure 17 FocusonAddition 18 GenerallyAcceptedAccountingPrinciples(GAAP) 18 Going-ConcernValue 19 JournalEntry 19 Matching 20 vii E1FTOC 09/03/2009 15:47:57 Page8 viii CONTENTS Materiality 20 Recognition 20 Understandability 21 Usefulness 21 Valuation 21 Verifiability 22 Conclusion 22 Questions 23 CHAPTER3 BalanceSheet 25 BalanceSheetContainsPermanentAccounts 25 TimeLineofCashFlows 25 TypesofBalanceSheetAccounts 27 PresentingtheClassifiedBalanceSheet 35 Conclusion 36 Question 37 CHAPTER4 AddinganIncomeStatement 39 TemporaryAccounts 39 UsingTemporaryAccounts 40 TypesofTransactionsInvolvingTemporaryAccounts 42 IncomeAccounts 44 Single-StepIncomeStatement 46 MultistepIncomeStatement 46 Conclusion 47 Questions 49 CHAPTER5 TimingandAccrualAccounting 51 JournalingAccountingTransactions 51 CashBasisAccounting 51 AccrualBasisAccounting 52 Conclusion 62 Questions 63 CHAPTER6 TheStatementofCashFlows 67 ImportanceofCash 67 AnIntuitiveWaytoTrackCash 68