Hopitality accounting


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Hopitality accounting

  1. 1. Jerry J. Weygandt Ph.D., C.P.A.Arthur Andersen Alumni Professor of AccountingUniversity of WisconsinDonald E. Kieso Ph.D., C.P.A.KPMG Emeritus Professor of AccountingNorthern Illinois UniversityPaul D. Kimmel Ph.D., C.P.A.Associate Professor of AccountingUniversity of Wisconsin–MilwaukeeAgnes L. DeFranco Ed.D., C.H.E., C.H.A.E.Professor of HospitalityUniversity of HoustonHospitalityFinancialAccountingHospitalityFinancialAccountingJOHN WILEY & SONS, INC.S E C O N D E D I T I O N15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page iii
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  3. 3. HospitalityFinancialAccountingHospitalityFinancialAccounting15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page i
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  5. 5. Jerry J. Weygandt Ph.D., C.P.A.Arthur Andersen Alumni Professor of AccountingUniversity of WisconsinDonald E. Kieso Ph.D., C.P.A.KPMG Emeritus Professor of AccountingNorthern Illinois UniversityPaul D. Kimmel Ph.D., C.P.A.Associate Professor of AccountingUniversity of Wisconsin–MilwaukeeAgnes L. DeFranco Ed.D., C.H.E., C.H.A.E.Professor of HospitalityUniversity of HoustonHospitalityFinancialAccountingHospitalityFinancialAccountingJOHN WILEY & SONS, INC.S E C O N D E D I T I O N15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page iii
  6. 6. The specimen financial statements (Appendix A) are printed with permission of PepsiCo, Inc.The information and trademarks offered herein are the property of PepsiCo, Inc.is a registered trademark of PepsiCo, Inc. All rights reserved. Used with permission.This book is printed on acid-free paper. ϱ᭺Copyright © 2009 by John Wiley & Sons, Inc. All rights reserved.Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form orby any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except aspermitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the priorwritten permission of the Publisher, or authorization through payment of the appropriate per-copy feeto the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400,fax 978-646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission shouldbe addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken,NJ 07030, 201-748-6011, fax 201-748-6008, or online at www.wiley.com/go/permissions.Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best effortsin preparing this book, they make no representations or warranties with respect to the accuracy orcompleteness of the contents of this book and specifically disclaim any implied warranties ofmerchantability or fitness for a particular purpose. No warranty may be created or extended by salesrepresentatives or written sales materials. The advice and strategies contained herein may not be suitablefor your situation. You should consult with a professional where appropriate. Neither the publisher norauthor shall be liable for any loss of profit or any other commercial damages, including but not limited tospecial, incidental, consequential, or other damages.For general information on our other products and services, or technical support, please contact ourCustomer Care Department within the United States at 800-762-2974, outside the United States at317-572-3993 or fax 317-572-4002.Wiley also publishes its books in a variety of electronic formats. Some content that appears in print maynot be available in electronic books.For more information about Wiley products, visit our Web site at www.wiley.com.Library of Congress Cataloging-in-Publication Data:Hospitality financial accounting / Jerry L. Weygandt … et al.—2nd ed.p. cm.Includes index.ISBN 978-0-470-08360-4 (cloth)1. Hospitality industry—Accounting. I. Weygandt, Jerry J.HF5686.H75H66 2008657’.837—dc222007019890Printed in the United States of America10 9 8 7 6 5 4 3 2 115339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page iv
  7. 7. It is just as important for a hospitality manager to understandand manage financial resources as it is to manage humanresources. Although accounting is not a simple subject, it is amuch needed language in running any type of successfulbusiness. There is a reason why accounting is often referred toas the language of business. As instructors, it is important forus not only to teach this business language to our students butalso to impart its importance in building and maintaining ahealthy business. Hospitality Financial Accounting, SecondEdition, presents financial accounting through a foundation ofsolid theories and practical step-by-step hospitality examples.We want to simulate a learning environment by providing ex-amples in all facets of the hospitality industry that the studentscan identify with, relate to, and use to understand the impactof financial decisions on the business.STUDENTS ARE THE KEYOur goal for this second edition of Hospitality FinancialAccounting is to make it an even more useful and effectivetext. Information was solicited from professors and studentswho have used the text, as well as practitioners in theindustry. All effort has been made to thoroughly illustrateconcepts in every chapter to reinforce the principles beingdiscussed. Additionally, extensive examples are given toassist students in understanding the concepts; and demon-stration problems with answers are provided for students tocheck their own level of comprehension, applications, andknowledge transfers.It is important in working with hospitality students to alwaysbear in mind that each student needs to be in the driver’s seat.The job of the professor is not to simply “profess” but to facil-itate, to act as the conduit of knowledge, to present ideas andprinciples, and then to solicit students’ viewpoints to either con-firm if correct or to lead students to the correct solution if theyhave made a mistake. It is important for all students to be ex-posed to all facets of this wonderful industry and to learn tospeak the language of business.ORGANIZATION OF THE SECOND EDITIONStudents and professors who used the first edition of Hospi-tality Financial Accounting commented very positively onthe design and layout of the materials. There is always roomfor improvement; and based on feedback from the users ofthis text, there is now a dedicated chapter on financial state-ment analysis. The text remains organized so that the studentlearns the basics of financial accounting first. Students aretaken through the entire accounting cycle, but now they putthat information together to analyze a set of financial state-ments. In addition, it is important for students to know howto perform some basic analysis to determine the financialhealth of a business.Hospitality Financial Accounting, Second Edition, alsopresents financial accounting in three major sections: thevT O T H E I N S T R U C T O Raccounting cycle, financial statements and analyses, and theuse of financial accounting data. The first five chapters focuson understanding an accounting cycle, from analyzing trans-actions to recording, posting, trial balance, and adjustments,all the way to closing and postclosing trial balance. The sec-ond section focuses on the makeup and analyses of financialstatements. These chapters are placed right after the account-ing cycle in the first section in order to take accounting to thenext logical step. The final section of the text stresses the var-ious daily issues faced by the hospitality owner or operator,from how one should structure one’s company to start a busi-ness, to cash and inventory controls, to paying bills and col-lecting receivables in a timely fashion.The information on subsidiary ledgers and special journalsis now presented in an appendix to the book. It is importantfor students to know about such journals in order to under-stand and use computer software to assist in their accountingwork, as well as to understand the workings behind the scene.Most important, if a computerized system goes down, theknowledge base is there to recreate the transactions by fol-lowing the paper trail.HIGHLIGHTS OF THE NEW EDITIONNew cases on ethics are included, and new Accounting inAction boxes from hospitality and online companies are pre-sented as short vignettes to support the concepts that are be-ing discussed.The specimen financial statements for PepsiCo, Inc., havebeen chosen for this second edition of Hospitality FinancialAccounting to reinforce the idea that the hospitality indus-try is not strictly restaurants and hotels. Often we narrow thefocus of hospitality to concentrate only on hotels and restau-rants. Yet there are also country clubs, city clubs, yacht clubs,and spas. There are resorts, travel agencies, cruise lines, andairlines.There are the Expedias and Hotel.coms of the world.Third-party bookings are everywhere and available aroundthe clock. And then there is this “other” side—the purveyorsand venders from which traditional hospitality firms purchasemany of their goods and services in order to resell and pro-vide to their final consumers. PepsiCo provides many prod-ucts for the hospitality industry. In fact, many hospitality grad-uates work for purveyors such as PepsiCo, Sysco Foods,Coca-Cola, Frito Lay, and many more. Without purveyors tosupply the food and beverage, bread and dry goods, and of-fice equipment and furniture, a hotel or restaurant will havenothing to offer its customers.Therefore, we decided it wouldbe practical to introduce a multinational and multidimen-sional company such as PepsiCo as the feature company ofthis text.CHAPTER 1 Hospitality Accounting in Action• New Feature Story on the importance of accurate and eth-ical financial accounting in today’s business world• New international insight on Chinese accounting policies• New insight feature on e-business15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page v
  8. 8. • Accounting cycle now introduced in this chapter• New discussion of accounting and financial managementin hotels, restaurants, clubs, and spas• Detailed coverage on the Uniform Systems of Accounts• Updated and revised end-of-chapter problemsCHAPTER 2 Accounting Principles• New Feature Story on the matching principle and how itrelates to stockholders’ wealth• New business insight on a gaming casino• Step-by-step illustration of an expanded accountingequation• Updated and revised end-of-chapter problemsCHAPTER 3 The Recording Process• Feature Story on the real world of accounting• Additional reinforcement of the accounting cycle• Updated and revised end-of-chapter problemsCHAPTER 4 Adjusting the Accounts• Feature Story on why adjustments are crucial in providingaccurate accounting information• New insight feature on exceptionally large outlays by com-panies on advertising• New ethics insight on earnings reporting• Updated and revised end-of-chapter problemsCHAPTER 5 Completion of the Accounting Cycle• Updated Feature Story on Rhino’s Foods, Inc., about edu-cating employees on the financial health of the companyas a motivational tool• Transparency inlays illustrating the information flow of aworksheet• Updated and revised end-of-chapter problemsCHAPTER 6 Financial Statements• Feature Story on how adequate cash flow can make orbreak a business• New illustration on the relationship between the incomestatement and the balance sheet• New chart of net income and cash from operations fromfive restaurants and five hotel companies• Updated and revised end-of-chapter problemsCHAPTER 7 Financial Statement Analysis• A new chapter to the Second Edition, featuring BrinkerInternational as an illustration of financial ratios• An example of a small independent restaurant providedfor statement analyses and ratio comparisons• A summary of ratios table included to group importantconcepts together• The data of Landry’s Restaurants, Inc., used as a demon-stration problemCHAPTER 8 Accounting for MerchandisingOperations in Hospitality• New Feature Story on e-commerce• New insight feature on sales returns• New ethics insight in the wake of Enron• Updated and revised end-of-chapter problemsCHAPTER 9 Inventories and Cost of GoodsCalculation• New Feature Story on inventory valuation• Updated and detailed examples and calculations illustrat-ing all methods of inventory valuation• Extensive discussion on the effects of errors in the inven-tory valuation process• Updated and revised end-of-chapter problemsCHAPTER 10 Internal Control and Cash• Feature Story on cash control in a coffee shop• New insight feature on fraud• New insight feature on computer fraud• New insight feature on results reported by the Associationof Certified Fraud Examiners• Updated and revised end-of-chapter problemsCHAPTER 11 Payroll• New Feature Story on managing payroll• New regulations in the Fair Labor Standards Act, includ-ing Web sites• Now includes Sample Form 8027 Employer’s Annual In-formation Return of Tip Income and Allocated Tips• Now includes Sample Form 4070 Employee’s Report ofTips to Employer• Illustration of eight percent tip allocation calculation• Updated and revised end-of-chapter problemsCHAPTER 12 Accounting for Receivables andPayables• New Feature Story on credit-card financing• New insight feature on guests and city ledgers• New insight feature on credit-card usage by consumers• New insight feature on the interest rate on notes• New insight feature on hotels and notes receivables• Updated and revised end-of-chapter problemsCHAPTER 13 Long-Term and Intangible Assets• New Feature Story on the building of luxury spa Trellis atthe Houstonian• New insight feature of depreciation practices• New illustrations of depreciation calculations• New insight feature of Internet use in the hospitality in-dustry and domain name disputes• Updated and revised end-of-chapter problemsCHAPTER 14 Sole Proprietorships, Partnerships,and Corporations• Updated Feature Story on McDonald’s growth and its con-tinued success in the quick-service industryAPPENDIX A Specimen Financial Statements:PepsiCo, Inc.• PepsiCo financial statements are featured in this new edition.APPENDIX B Subsidiary Ledgers and SpecialJournals• The information on subsidiary ledgers and special journalsis now an appendix to this text.vi To the Instructor15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page vi
  9. 9. PEDAGOGICAL FRAMEWORKHospitality Financial Accounting, Second Edition, providestools to help students learn accounting concepts and proce-dures and apply them to the real world. It places increasedemphasis on the processes students undergo as they learn.Learning How to Use the Text• A Student Owner’s Manual begins the text to help studentsunderstand the value of the text’s learning aids and how touse them.• Chapter 1 contains notes that explain each learning aid thefirst time it appears.• Finally, The Navigator pulls all the learning aids togetherinto a learning system designed to guide students througheach chapter and help them succeed in learning the mate-rial.It consists of (1) a checklist at the beginning of the chap-ter, which outlines text features and study skills they willneed, and (2) a series of check boxes that prompt studentsto use the learning aids in the chapter and set priorities asthey study.At the end of the chapter,students are remindedto return to The Navigator to check off their completedwork. An example of The Navigator is atthe right.Understanding the Context• Concepts for Review, listed at the beginning of each chap-ter, identify concepts that will apply in the chapter to come.In this way, students see the relevance to the current chap-ter of concepts covered earlier.• The Feature Story helps students picture how the chaptertopic relates to the real world of accounting and business.It serves as a running example in the chapter and is thetopic of a series of review questions called A Look Backat Our Feature Story, toward the end of the chapter.• Study Objectives form a learning framework throughoutthe text, with each objective repeated in the margin at theappropriate place in the main body of the chapter and againin the Summary. Further, end-of-chapter assignment mate-rials are linked to the Study Objectives.• A chapter Preview links the chapter-opening Feature Storyto the major topics of the chapter. First, an introductoryparagraph explains how the Feature Story relates to thetopic to be discussed; then, a graphic outline of the chap-ter provides a “visual road map” useful for seeing the bigpicture, as well as the connections between subtopics.Learning the Material• Financial statements appear regularly throughout thebook. Often, numbers or categories are highlighted in col-ored type to draw attention to key information.• Key ratios, using data from PepsiCo, Inc., 2006 Annual Re-port, are examined in appropriate spots throughout thetext. Integration of ratios enables students to see in a sin-gle presentation two important pieces of informationabout financial data: how they are presented in financialstatements and how users of financial information analyzethem.• The Accounting Equation appears in the margin next tokey journal entries throughout the text. This feature rein-forces the students’ understanding of the impacts of an ac-counting transaction on the financial statements.• Key terms and concepts are printed in blue where they arefirst explained in the text and are defined again in the end-of-chapter glossary.• Helpful Hints boxes help clarify concepts being discussed.• Accounting in Action (AIA) boxes give students insight intohow real companies use accounting in practice.TheAIA boxes,some of which are highlighted with striking photographs,coverbusiness, ethics, and international issues. Of particular interestare the e-Business Insight boxes reporting on how businesstechnology is expanding the service provided by accountants.• Technology in Action boxes show how users of accountinginformation use computers.• Color illustrations visually reinforce important concepts ofthe text.• Infographics, a special type of illustration, help students vi-sualize and apply accounting concepts to the real world.They provide entertaining and memorable visual re-minders of key concepts.• Marginal AlternativeTerminology notes present synonymousterms, since terminology may differ in the business world.• Before You Go On sections occur at the end of each keytopic and often consist of two parts:* Review It questions serve as a learn-ing check by asking students to stopand answer questions about the mate-rial covered. Review It questionsmarked with the Pepsi icon (see right)To the Instructor viiTHE NAVIGATOR ✓• Understand Concepts for Review ❑• Read Feature Story ❑• Scan Study Objectives ❑• Read Preview ❑• Read text and answer Before You Go Onp. 212 ❑ p. 222 ❑ p. 223 ❑• Work Demonstration Problem ❑• Review Summary of Study Objectives ❑• Complete Assignments ❑15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page vii
  10. 10. send students to find information in the PepsiCo 2006Annual Report (excerpted in the Appendix at the endof the text). These exercises help cement students’ un-derstanding of how topics covered in the chapter are re-ported in real-world financial statements. Answers ap-pear at the end of the chapter.* A mini-demonstration problem, in a section called DoIt, gives immediate practice of the material just coveredand is keyed to homework exercises. An Action Planlists the steps necessary to complete the task, and aSolution is provided to help students understand the rea-soning involved in reaching an answer.* The last Before You Go On exercise in the chapter takesstudents back for a critical look at the chapter-openingFeature Story.• Marginal International Notes introduce international is-sues and problems in accounting.• Marginal Ethics Notes help sensitize students to the real-world ethical dilemmas of accounting and business.Putting It Together• Demonstration Problems give students the opportunity torefer to a detailed solution to a representative problem asthey do homework assignments. Action Plans list strate-gies to assist students in understanding similar types ofproblems.• The Summary of Study Objectives relates the study objec-tives to the key points of the chapter. It gives students an-other opportunity to review, as well as to see how all thekey topics within the chapter are related.• The Glossary defines all the key terms and concepts intro-duced in the chapter.Developing Skills through Practice• Exercises build students’ confidence and test their basicskills. Some take a little longer to complete and presentmore of a challenge. Several exercises stress the applica-tion of the concepts presented in the chapter. Each exer-cise is keyed to one or more study objective(s).Expanding and Applying KnowledgeOne or two exercises in each chapter offer a wealth of re-sources to help instructors and students pull together thelearning for the chapter. These exercises offer projects forthose instructors who want to broaden the learning experi-ence by bringing in more real-world decision-making andcritical-thinking activities. The exercises are describedbelow:• A Financial Reporting Problem directs students to studyvarious aspects of the financial statements in Pepsi’s 2006Annual Report, which is excerpted in the Appendix at theend of the text.• Exploring the Web exercises guide students to InternetWeb sites where they can find and analyze informationrelating to the chapter topic.• The Group Decision Case helps build decision-makingskills by analyzing accounting information in a less-struc-tured situation. These cases require evaluation of a man-ager’s decision or lead to a decision among alternativecourses of action. As group activities, they promote team-work.• Ethics Cases describe typical ethical dilemmas and ask stu-dents to analyze situations, identify the stakeholders andthe ethical issues involved, and decide on appropriatecourses of action.SUPPLEMENTARY MATERIALS ANDTEACHING AIDSHospitality Financial Accounting, Second Edition, featuresa full line of teaching and learning resources developed andrevised to help you create a more dynamic and innovativelearning environment.Student success is a major theme of the supplements pack-age. These resources—including print and Internet-based ma-terials—also take an active learning approach to help buildstudents’ skills and analytical abilities.• Web site at www.wiley.com/college. Recognizing that theInternet is a valuable resource for students and instructors,we have developed a Web site at www.wiley.com/college toprovide a variety of additional resources.Instructor’s ResourcesFor the instructor, we have designed a support package to helpyou maximize your teaching effectiveness.Instructor’s Manual. The Instructor’s Manual is a compre-hensive resource guide designed to assist professors in prepar-ing lectures and assignments, including sample syllabi for thehospitality financial accounting course; evaluating homeworkassignments; and preparing quizzes and exams. (Also avail-able at www.wiley.com/college.) Each chapter contains the fol-lowing information:• Chapter Review and Lecture Outline: Chapter reviewscover the significant topics and points contained in eachchapter. Teaching tips and references to text materials arein the enhanced lecture outlines. Further, a twenty-minutequiz in the form of ten true/false and five multiple-choicequestions (with solutions) is provided.• Solutions: These are detailed solutions to all exercises in thetextbook. Suggested answers to the questions found on theWeb site are also included. Each chapter includes a table toidentify the difficulty level and estimated completion timeof each exercise.• Test Bank: The test bank allows instructors to tailor exam-inations according to study objectives and content. Eachchapter includes exercises as well as multiple-choice,matching, and true/false questions.PowerPoint Presentation Material. The PowerPoint lectureaid contains a combination of key concepts, illustrations, andviii To the Instructor15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page viii
  11. 11. problems from the textbook for use in the classroom. Easilycustomizable for classroom use, the presentations are designedaccording to the organization of the material in the textbookto reinforce hospitality financial accounting principles visuallyand graphically. (Available at www.wiley.com/college.)Additional Exercises and Solutions. Additional exercisessimilar to the end-of-chapter exercises are provided atwww.wiley.com/college. These exercises can be used for addi-tional homework assigments or for quizzing and testing pur-poses. Solutions for these exercise are also available online.WebCT and Blackboard. WebCT and Blackboard onlinecourses are available for this text. Visit www.wiley.com/college and click on Technology Solutions for more informa-tion, or contact your Wiley representative.Student Active Learning AidsIn addition to innovative pedagogy included in the text, weoffer a number of valuable learning aids for students. Theseare intended to enhance true understanding so that studentswill be able to apply hospitality financial accounting concepts.Working Papers. Working Papers are accounting forms for allend-of-chapter exercises. A convenient resource for organizingand completing homework assignments, they demonstrate howto correctly set up solution formats and are directly tied to text-book assignments.Excel Working Papers. Available on CD-ROM, these Excel-formatted forms can be used for end-of-chapter exercises.TheExcel Working Papers provide students with the option ofprinting forms and completing them manually or entering dataelectronically and then printing out a completed form. By en-tering data electronically, students can paste homework to anew file and e-mail the worksheet to their instructor.Self-Study Questions. These online practice tests enable stu-dents to check their understanding of important concepts. Lo-cated at www.wiley.com/college, the self-study questions arekeyed to the study objectives; and students can go back andreview sections of the chapter in which they find they needfurther work. The quizzes are graded to give students imme-diate feedback.Questions. These questions, located at www.wiley.com/col-lege, provide a full online review of chapter content and helpstudents prepare for class discussions and testing situations.Students answer the questions online; and then their work ise-mailed directly to their instructor. Instructors can find theanswers to these questions in the Instructor’s Manual and withthe online instructor resources.To the Instructor ix15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page ix
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  13. 13. During the development of this second edition of Hospital-ity Financial Accounting, I benefited greatly from the man-uscript reviewers.The constructive suggestions and innovativeideas of the reviewers in trying to make the text material prac-tical and applicable are greatly appreciated.ReviewersRichard F. Ghiselli, Purdue UniversityYang H. Huo, Roosevelt UniversityFred Hurvitz, Pennsylvania State UniversityRonald L. Jordan, University of HoustonHyung-il Jung, University of Central FloridaLee M. Kreul, Purdue UniversityStephen M. Lebruto, University of Central FloridaPatricia McCaughey, Endicott CollegeMichael J. Petrillose, State University of New York at DelhiKevin W. Poirier, Johnson & Wales UniversityM. Jeff Quinlan, Madison Area Technical CollegeRichard Savich, California State Polytechnic University, PomonaDon St. Hilaire, California State Polytechnic University, PomonaDarrell Van Loenen, University of Wisconsin-StoutAncillary AuthorThe input of the ancillary author in her thoroughness and ac-curacy has created a valuable package of materials to supportthis text:Tanya Venegas, University of HoustonA Final Note of ThanksJust as in the first edition, Jerry Weygandt, Don Kieso, andPaul Kimmel provided the inspiration and foundation for thisnew text. Therefore, my deepest and most sincere thanks goto these three gentlemen. In addition, Frank Wolfe, executivevice president and chief executive officer of the HospitalityFinancial and Technology Professionals, and Arlene Ramirez,of the Conrad N. Hilton College of the University of Hous-ton, also made available resources and valuable advice to up-date this project with practical examples to complement thetheories. Of course, it is a blessing to be able once again towork with my dear friend and editor, Julie Kerr—she makesthis endeavor a true delight.xiA C K N O W L E D G M E N T S15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xi
  14. 14. 3THE NAVIGATOR • Understand Concepts for Review K• Read Feature Story K• Scan Study Objectives K• Read Preview K• Read text and answer Before You Go Onp. 74 K p. 77 K p. 87 K p. 90 Kp. 91 K• Work Demonstration Problem K• Review Summary of Study Objectives K• Complete Assignments KBefore studying this chapter, you should know or, if necessary, review:a. What assets, liabilities, stockholders’ equity, retained earnings,dividends, revenues, and expenses are. (Ch. 1, pp. 11–12)b. Why assets equal liabilities plus stockholders’ equity. (Ch. 1, p. 11)c. What transactions are and how they affect the basic accountingequation. (Ch. 2, pp. 44–51)THE RECORDINGPROCESSCO N C E P T S F O R R E V I E WTHENAVIGATORxiiThe Navigator is a learningsystem designed to guide youthrough each chapter and helpyou succeed in learning thematerial. It consists of (1) achecklist at the beginning ofthe chapter, which outlines textfeatures and study skills you willneed, and (2) a series of checkboxes that prompt you to usethe learning aids in the chapterand set priorities as you study.The Feature Story helps you picturehow the chapter topic relates to thereal world of accounting and business.Throughout the chapter, references tothe Feature Story will help you put newideas in context, organize them, andremember them. The problem called ALook Back at Our Feature Story towardthe end of the chapter helps you pulltogether the ideas learned in thechapter. Many Feature Stories end withthe URL of the company cited in thestory.Concepts for Review, listed at thebeginning of each chapter, are theaccounting concepts you learnedin previous chapters that you willneed to know in order to understandthe topics you are about to learn.Page references are provided if youneed to review before reading thechapter.Study Objectives at the beginning ofeach chapter give you a frameworkfor learning the specific concepts andprocedures covered in the chapter.Each study objective reappears in themargin at the point where theconcept is discussed. Finally, you canreview all the study objectives in theSummary at the end of the chapter.STUDENT OWNER’S MANUALHOW TO USE THE STUDY AIDS IN THIS BOOKAfter studying this chapter, you should be able to1. Explain what an account is and how it helps in the recording process.2. Define debits and credits and explain how they are used to record business transactions.3. Identify the basic steps in the recording process.4. Explain what a journal is and how it helps in the recording process.5. Explain what a ledger is and how it helps in the recording process.6. Explain what posting is and how it helps in the recording process.7. Prepare a trial balance and explain its purposes.8. Identify the advantages of manual and computerized accounting systems.No Such Thing as aPerfect WorldWhen she got a job doing theaccounting for Forster’s Restau-rants, Tanis Anderson had almostfinished her business administrationdegree at Simon Fraser University.But even after Tanis completed herdegree requirements, her educationstill continued—this time, in the realworld.Tanis’s responsibilities includepaying the bills, tracking food andlabor costs, and managing the pay-roll for The Mug and Musket,a popular destination restaurant inSurrey, British Columbia. “My titleis Director of Finance,” she laughs,“but really that means I take care ofwhatever needs doing!”The use ofjudgment is abig part of thejob. As Tanissays, “I learnedall the funda-mentals in mybusiness classes;but schoolprepares you for aperfect world, andthere is no such thing.”She feels fortunate thather boss understands that herjob is a learning experience as wellas a responsibility. “Sometimes he’slet me do something he knewperfectly well was a mistake so Ican learn something throughexperience,” she admits.To help others gain the benefitsof her real-world learning, Tanis isalways happy to help students in thearea who want to use Forster’s asthe subject of a project or a report.“It’s the least I cando,” she says.ST U D Y O B J E C T I V E STHENAVIGATORTHENAVIGATORFE A T U R E S T O R Y15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xii
  15. 15. Student Owner’s Manual xiii68P R E V I E W O F C H A P T E R 1In Chapter 2 we analyzed business transactions in terms of the accounting equation. The cumulativeeffects of these transactions were presented in tabular form. Imagine a restaurant and gift shop suchas The Mug and Musket using the same tabular format as Best Caterers, Inc., to keep track of everyone of its transactions. In a single day, this restaurant and gift shop engages in hundreds of businesstransactions. To record each transaction this way would be impractical, expensive, and unnecessary. In-stead, procedures and records are used to keep track of transaction data more easily.This chapter introduces and illustrates these basic procedures and records. The content and organ-ization of Chapter 3 are as follows:P R E V I E W O F C H A P T E R 3THENAVIGATORTHE RECORDING PROCESSThe AccountSteps in theRecording ProcessDebits and creditsDebit and creditprocedureStockholders’ equityrelationshipsExpansion of basicequationJournalLedgerElectronic DataProcessingComparativeadvantages ofmanual versuscomputerized systemsThe FutureThe RecordingProcess IllustratedSummary illustrationof journalizing andpostingThe Trial BalanceLimitations of atrial balanceLocating errorsUse of dollar signsTH E A C C O U N TAn account is an individual accounting record of increases and decreases in a spe-cific asset, liability, or stockholders’ equity item. For example, Best Caterers, Inc.(the company discussed in Chapter 2), would have separate accounts for Cash,Accounts Receivable, Accounts Payable, Service Revenue, Salaries Expense, andso on. In its simplest form, an account consists of three parts: (1) the title of theaccount, (2) a left, or debit, side, and (3) a right, or credit, side. Because the align-ment of these parts of an account resembles the letter T, it is referred to as aT account. The basic form of an account is shown in Illustration 3-1.STUDY OBJECTIVE 1Explain what an account isand how it helps in therecording process.Illustration 3-1Basic form of accountLeft, or debit, sideDebit balanceRight, or credit, sideCredit balanceTitle of AccountT AccountDebitCreditThe basic steps in the recording process occur repeatedly. The analysis of trans-actions was illustrated in Chapter 1. Further examples will be given in this andlater chapters. The other steps in the recording process are explained in the nextsections.Steps in the Recording Process 75Computerized and manual accounting systems basically parallel one another.Most of the procedures are handled by electronic circuitry in computerizedsystems. They seem to occur invisibly. But, to fully comprehend how comput-erized systems operate, you need to understand manual approaches for processingaccounting data.TECHNOLOGY IN ACTIONTechnology in Action exam-ples show how computertechnology is used inaccounting and business.THE JOURNALTransactions are recorded initially in chronological order in a journal before be-ing transferred to the accounts. Thus the journal is referred to as the book of orig-inal entry. For each transaction, the journal shows the debit and credit effects onspecific accounts. Companies may use various kinds of journals, but every com-pany has the most basic form of journal, a general journal. Typically, a generaljournal has spaces for dates, account titles and explanations, references, and twoamount columns. Whenever we use the term journal in this textbook without amodifying adjective, we mean the general journal.The journal makes several significant contributions to the recording process:1. It discloses in one place the complete effects of a transaction.2. It provides a chronological record of transactions.3. It helps to prevent or locate errors because the debit and credit amounts foreach entry can be readily compared.Entering transaction data in the journal is known as journalizing. Separate jour-nal entries are made for each transaction. A complete entry consists of (1) thedate of the transaction, (2) the accounts and amounts to be debited and credited,and (3) a brief explanation of the transaction.Illustration 3-14 shows the technique of journalizing, using the first two trans-actions of Best Caterers, Inc. These transactions were: September 1, stockholdersinvested $15,000 cash in the corporation in exchange for shares of stock, andSTUDY OBJECTIVE 4Explain what a journal isand how it helps in therecording process.The Preview begins by linking theFeature Story with the major topics ofthe chapter. It is followed by a graphicoutline of major topics and subtopicsthat will be discussed. This narrativeand visual preview gives you a mentalframework upon which to arrange thenew information you are learning.Study Objectives reappear in themargins at the point where the topic isdiscussed. End-of-chapter assignmentsare keyed to study objectives.Technology in Action boxes show howcomputers are used by accountantsand by users of accountinginformation.Key terms and concepts are printed inblue where they are first explained inthe text, and they are defined againin the end-of-chapter glossary.15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xiii
  16. 16. xiv Student Owner’s ManualThe ledger provides management with the balances in various accounts. Forexample, the Cash account shows the amount of cash that is available to meetcurrent obligations. Amounts due from customers can be found by examiningAccounts Receivable, and amounts owed to creditors can be found by examiningAccounts Payable.In his autobiography, Sam Walton described the double-entry accountingsystem with which he began the Wal-Mart empire: “We kept a little pigeonholeon the wall for the cash receipts and paperwork of each [Wal-Mart] store. I hada blue binder ledger book for each store. When we added a store, we added apigeonhole. We did this at least up to twenty stores. Then once a month, the bookkeeperand I would enter the merchandise, enter the sales, enter the cash, and balance it.”Why did Sam Walton keep separate pigeonholes and blue binders for each store?Why bother to keep separate records for each store?SOURCE: Sam Walton, Made in America (New York: Doubleday, 1992), p. 53.ACCOUNTING IN ACTION B u s i n e s s I n s i g h tDecember 31. Hargrove has legal title to both the units sold and the units pur-chased. If units in transit are ignored, inventory quantities would be understatedby 4,000 units (1,500 ϩ 2,500).Inventory Basics 265Illustration 9-1Terms of sale.FOB Shipping Point FOB DestinationPublicCarrierCo.Seller BuyerOwnershippasses tobuyer herePublicCarrierCo.Seller BuyerOwnershippasses tobuyer hereDividends. When a company is successful, it generates net income. Net incomerepresents an increase in net assets, which are then available to distribute to stock-holders. The distribution of cash or other assets to stockholders is called a dividend.Dividends reduce retained earnings. However, dividends are not an expense of acorporation. A corporation first determines its revenues and expenses and thencomputes net income or net loss. At this point, a corporation may decide to dis-tribute a dividend.In summary, the principal sources (increases) of stockholders’ equity are(1) investments by stockholders and (2) revenues from business operations. Incontrast, reductions (decreases) in stockholders’ equity are a result of (1) expensesand (2) dividends. These relationships are shown in Illustration 1-6.Illustration 1-6Increases and decreases instockholders’ equityInvestments by stockholdersRevenuesDividends to stockholdersExpensesStockholdersEquityDECREASESINCREASESMMB E F O R E Y O U G O O N . . .REVIEW IT1. Why is ethics a fundamental business concept?2. What are generally accepted accounting principles? Give an example.3. Explain the monetary unit and the economic entity assumptions.4. The accounting equation is: Assets ϭ Liabilities ϩ Stockholders’ equity. Replacing thewords in that equation with dollar amounts, what is PepsiCo’s accounting equation onDecember 31, 2006?5. What are assets, liabilities, and stockholders’ equity?DO ITClassify the following items as issuance of stock (I), dividends (D), revenues (R), or ex-penses (E). Then indicate whether the following items increase or decrease stockholders’equity: (1) rent expense, (2) service revenue, (3) dividends, and (4) salaries expense.ACTION PLAN• Review the rules for changes in stockholders’ equity: Investments and revenues in-crease stockholders’ equity. Expenses and dividends decrease stockholders’ equity.• Understand the sources of revenue: the sale of merchandise, performance of serv-ices, rental of property, and lending of money.• Understand what causes expenses: the consumption of assets or services.• Recognize that dividends are distributions of cash or other assets to stockholders.SOLUTION1. Rent expense is classified as an expense (E); it decreases stockholders’ equity.2. Service revenue is classified as revenue (R); it increases stockholders’ equity.3. Dividends is classified as dividends (D); it decreases stockholders’ equity.4. Salaries expense is classified as an expense (E); it decreases stockholders’ equity.MMTHENAVIGATORReview It questions markedwith this icon require that youuse the PepsiCo 2006 AnnualReport.Do It exercises give youimmediate practice of thematerial just covered.Color illustrations visually reinforceimportant concepts and thereforeoften contain material that mayappear on exams.Accounting in Action boxes give you moreglimpses into the real world of business. Thesehigh-interest boxes are classified by three typesof issues—business, ethics, and international—each identified by its own icon. New in thisedition, e-Business Insights describe howe-business technology is expanding the servicesprovided by accountants.Before You Go On sections follow each keytopic. Review It questions prompt you to stopand review the key points you have just studied.If you cannot answer these questions, youshould go back and read the section again.Review It questions marked with the PepsiCoicon ask you to find information in the PepsiCo2006 Annual Report, which is excerpted in theAppendix at the end of the text.Brief Do It exercises ask you to put your newlyacquired knowledge to work. They outline anAction Plan necessary to complete the exercise,and the accompanying Solution helps you seehow the problem should be solved. (The Do Itexercises are keyed to similar homeworkexercises.)Infographics, a special type ofillustration, pictorially link concepts tothe real world and provide visualreminders of key concepts.15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xiv
  17. 17. Student Owner’s Manual xvAdjustments for accrued expenses are needed for two purposes: (1) to recordthe obligations that exist at the balance sheet date and (2) to recognize the ex-penses that apply to the current accounting period. Prior to adjustment, both lia-bilities and expenses are understated. Therefore, as shown in Illustration 4-13, theadjusting entry for accrued expenses results in a debit (increase) to an expenseaccount and a credit (increase) to a liability account.The Basics of Adjusting Entries 117Face Valueof NoteAnnualInterestRateInterestx x =x x =$5,000 12% 1/12 $50Timein Terms ofOne YearIllustration 4-14Formula for computinginterestHELPFUL HINTInterest is a cost of borrowingmoney that accumulates withthe passage of time.A = L + SE+50 –50Illustration 4-15Interest accounts afteradjustmentACCRUED INTEREST. Premier Staffing Agency, Inc., signed a $5,000, three-month notepayable on October 1. The note requires interest at an annual rate of 12 percent.The amount of the interest accumulation is determined by three factors: (1) the facevalue of the note; (2) the interest rate, which is always expressed as an annual rate;and (3) the length of time the note is outstanding. In this instance, the total interestdue on the $5,000 note at its due date three months hence is $150 ($5,000 ϫ 12%ϫ 3/12); the interest for one month is $50. The formula for computing interest2andits application to Premier Staffing Agency, Inc., for the month of October is shownin Illustration 4-14. Note that the time period is expressed as a fraction of a year.2The computation of interest will be considered in more depth in later chapters.Accrued ExpensesExpense LiabilityDebitAdjustingEntry (+)CreditAdjustingEntry (+)Illustration 4-13Adjusting entries foraccrued expenses.The accrued expense adjusting entry at October 31 isAfter this adjusting entry is posted, the accounts look like Illustration 4-15.Oct. 31 Interest Expense 50Interest Payable 50(To record interest on notes payable)Interest Expense Interest Payable10/31 Adj. 50 10/31 Adj. 50In a service enterprise, it is customary to recognize four types of current as-sets: (1) cash, (2) short-term investments, such as U.S. government bonds, (3) re-ceivables (notes receivable, accounts receivable, and interest receivable), and(4) prepaid expenses (insurance and supplies). These items are listed in the orderof liquidity; that is, they are listed in the order in which they are expected to beconverted into cash. This arrangement is illustrated in Illustration 5-17 in the pre-sentation of UAL, Inc. (United Airlines).UAL, INC. (UNITED AIRLINES)Balance Sheet (partial)(in millions)Current assetsCash $1,348Short-term investments 388Receivables 788Aircraft fuel, spare parts, and supplies 310Prepaid expenses 219Other current assets 254Total current assets $3,307Illustration 5-17Current assets sectionHelpful Hints in the margins are likehaving an instructor with you as youread. They further clarify conceptsbeing discussed.Accounting equation analyses havebeen inserted in the margin next tokey journal entries. They help youunderstand the impact of anaccounting transaction on the financialstatements.Financial statements appearthroughout the book. Often, numbersor categories are highlighted incolored type to draw your attention tokey information.15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xv
  18. 18. xvi Student Owner’s ManualTHENAVIGATORMMB E F O R E Y O U G O O N . . .REVIEW IT1. What are the income statement, retained earnings statement, balance sheet, and state-ment of cash flows?2. How are the financial statements interrelated?AA L O O K B A C K AT O U R F E AT U R E S T O R YRefer back to the Feature Story about PepsiCo at the beginning of Chapter 1, andanswer the following questions.1. If you were interested in investing in PepsiCo, what would the balance sheet andincome statement tell you?2. Would you request audited financial statements? Explain.3. Will the financial statements show the market value of the company? Explain.SOLUTION1. The balance sheet reports the assets, liabilities, and stockholders’ equity of the com-pany. The income statement presents the revenues and expenses and resulting netincome (or net loss) for a specific period of time. The balance sheet is like a snap-shot of the company’s financial condition at a point in time. The income statementindicates the profitability of the company. Also, the sources of the company’s rev-enues and its expenses are provided in the income statement.2. You should request audited financial statements—statements that a CPA has exam-ined and expressed an opinion as to the fairness of presentation. You should notmake decisions without having audited financial statements.3. The financial statements will not show the market value of the company. Oneimportant principle of accounting is the cost principle, which states that assetsshould be recorded at cost. Cost has an important advantage over other valuations:It is reliable.A Look Back exercises referto the chapter-opening Fea-ture Story. These exerciseshelp you to analyze that real-world situation in terms of theaccounting topic of thechapter.56 CHAPTER 2 Accounting PrinciplesDE M O N S T R A T I O N P R O B L E MHospitality Legal Services, Inc., which provides contract services for caterers and their clients,was incorporated on July 1, 2008. During the first month of operations, the followingtransactions occurred:1. Stockholders invested $10,000 in cash in exchange for shares of stock.2. Paid $800 for July rent on office space.3. Purchased office equipment on account, $3,000.4. Provided legal services to clients for cash, $1,500 (use Service Revenue).5. Borrowed $700 cash from a bank on a note payable.6. Performed legal services for client on account, $2,000.7. Paid monthly expenses: salaries $500; utilities $300; and telephone $100.Instructions(a) Prepare a tabular summary of the transactions.(b) Prepare the income statement, retained earnings statement, and balance sheet at July31 for Hospitality Legal Services, Inc.S O L U T I O N T O D E M O N S T R AT I O N P R O B L E M(a) Assets ‫؍‬ Liabilities ؉ Stockholders’ EquityTrans- Accounts Notes Accounts Common Retainedaction Cash ؉ Receivable ؉ Equipment ‫؍‬ Payable ؉ Payable ؉ Stock ؉ Earnings(1) ϩ$10,000 ϩ$10,000(2) Ϫ800 Ϫ$800 Rent Expense9,200 ϭ 10,000 ϩ Ϫ800(3) ϩ$3,000 ϩ$3,0009,200 ϩ 3,000 ϭ 3,000 ϩ 10,000 ϩ Ϫ800(4) ϩ1,500 ϩ1,500 Service Revenue10,700 ϩ 3,000 ϭ 3,000 ϩ 10,000 ϩ 700(5) ϩ700 ϩ$70011,400 ϩ 3,000 ϭ 700 ϩ 3,000 ϩ 10,000 ϩ 700(6) ϩ$2,000 ϩ2,000 Service Revenueϩ11,400 ϩ 2,000 ϩ 3,000 ϭ 700 ϩ 3,000 ϩ 10,000 ϩ 2,700(7) Ϫ900 Ϫ500 Salaries ExpenseϪ300 Utilities ExpenseϪ100 Telephone Expense$10,500 ϩ $2,000 ϩ $3,000 ϭ $700 ϩ $3,000 ϩ $10,000 ϩ $1,800$15,500 $15,500(b)HOSPITALITY LEGAL SERVICES, INC.Income StatementFor the Month Ended July 31, 2008RevenuesService revenue $3,500ExpensesRent expense $800Salaries expense 500Utilities expense 300Telephone expense 100Total expenses 1,700Net income $1,800⎫⎪⎪⎪⎪⎪⎪⎪⎪⎪⎬⎪⎪⎪⎪⎪⎪⎪⎪⎭⎫⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎬⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎪⎭A C T I O N P L A N• Remember that assetsmust equal liabilities plusstockholders’ equity aftereach transaction.• Investments and revenuesincrease stockholders’equity.• Dividends and expensesdecrease stockholders’equity.• The income statementshows revenues andexpenses for a periodof time.• The retained earningsstatement shows thechanges in retained earn-ings for a period of time.• The balance sheet reportsassets, liabilities, andstockholders’ equity at aspecific date.Demonstration Problems area final review of the chapter.The Action Plan gives tipsabout how to approach theproblem, and the Solutiondemonstrates both the formand the content of completeanswers.Many of the last Before You Go Onexercises take you back for a criticallook at the chapter-opening FeatureStory.Demonstration Problems review thechapter material. These sampleproblems provide you with ActionPlans, which that list the strategiesneeded to solve the problem, and withSolutions.15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xvi
  19. 19. Student Owner’s Manual xvii1. Explain what accounting is. Accounting is an informationsystem that identifies, records, and communicates the eco-nomic events of an organization to interested users.2. Identify the users and uses of accounting. (a) Managementuses accounting information in planning, controlling, andevaluating business operations. (b) Investors (owners) decidewhether to buy, hold, or sell their financial interests on thebasis of accounting data. (c) Creditors (suppliers andbankers) evaluate the risks of granting credit or lendingmoney on the basis of accounting information. Other groupsthat use accounting information are taxing authorities, regu-latory agencies, customers, labor unions, and economicplanners.3. Understand why ethics is a fundamental business concept.Ethics is the standards of conduct by which actions are judgedas right or wrong. If you cannot depend on the honesty ofthe individuals you deal with, effective communication andeconomic activity would be impossible, and information wouldhave no credibility.4. Explain the meaning of generally accepted accountingprinciples and the cost principle. Generally accepted ac-counting principles are a common set of standards used by ac-countants. The cost principle states that assets should berecorded at their cost.5. Explain the meaning of the monetary unit assumption andthe economic entity assumption. The monetary unit assump-tion requires that only transaction data capable of being ex-pressed in terms of money be included in the accountingrecords. The economic entity assumption requires that the ac-tivities of each economic entity be kept separate from the ac-tivities of its owners and other economic entities.6. State the basic accounting equation; and explain the mean-ing of assets, liabilities, and stockholders’ equity. The basicaccounting equation is:Assets ϭ Liabilities ϩ Stockholders’ EquityAssets are resources owned by a business. Liabilities are cred-itorship claims on total assets. Stockholders’ equity is the own-ership claim on total assets.7. Explain the accounting cycle and flow of information. Thenine steps of the accounting cycle are transaction analysis, jour-nalizing, posting, trial balance, adjustments, adjusted trial bal-ance, closing, postclosing trial balance, and financial state-ments. Information flows from both the front and the back ofthe house, through point-of-sales systems, property manage-ment systems, and other means, to the accounting office.8. Identify the various systems of accounting procedures usedin the hospitality industry. There are currently three systems:The Uniform System of Accounts for the Lodging Industry,The Uniform System of Accounts for Restaurants, and TheUniform System of Financial Reporting for Clubs. Each hasa long history, and their purpose is to provide users of finan-cial information with comparable data and meaningfulanalyses.9. Understand accounting and financial management in ahotel. Proper accounting and financial management of a ho-tel is crucial to its success. The chief accounting officer isknown as the controller. The controller is part of the hotel’sexecutive committee, which includes the general manager andall department heads. The controller interacts with all the de-partment heads, assisting and consulting with them on allfinancial matters so each department head makes sounddecisions.10. Understand accounting and financial management in afoodservice operation and a club. The controller of a food-service operation focuses on food, beverage, and labor costs.Food and beverage cost analyses are of particular importancedue to the amount of money spent and the perishable natureof the products. The club industry is unique in that its cus-tomers are all members of the club. Members pay dues to theclub and in return have a decision-making role in club oper-ations. Members also spend money on food and beverage,merchandising, and other amenities. Therefore, a club con-troller must account for revenues by looking at different costcenters such as golf, tennis, spa, and food and beverages toprovide solid information for management.SU M M A RY O F S T U D Y O B J E C T I V E STHENAVIGATORExercises 163GL O S S A RYClassified balance sheet A balance sheet that contains anumber of standard classifications or sections (p. 154).Closing entries Entries made at the end of an accounting periodto transfer the balances of temporary accounts to a permanentstockholders’ equity account, Retained Earnings (p. 145).Correcting entries Entries to correct errors made in record-ing transactions (p. 151).Current assets Cash and other resources that are reasonablyexpected to be realized in cash or to be sold or consumed inthe business within one year or the operating cycle, whicheveris longer (p. 154).Current liabilities Obligations reasonably expected to bepaid from existing current assets or through the creation ofother current liabilities within the next year or operating cy-cle, whichever is longer (p. 156).Income summary A temporary account used in closing rev-enue and expense accounts (p. 145).Intangible assets Noncurrent resources that do not havephysical substance (p. 156).Liquidity The ability of a company to pay obligations thatare expected to become due within the next year or operat-ing cycle (p. 157).Long-term investments Resources not expected to be real-ized in cash within the next year or operating cycle (p. 155).Long-term liabilities (long-term debt) Obligations expectedto be paid after more than one year (p. 157).Operating cycle The average time required to go from cashto cash in producing revenues (p. 155).Permanent (real) accounts Balance sheet accounts whose bal-ances are carried forward to the next accounting period (p. 144).Postclosing trial balance A list of permanent accounts andtheir balances after closing entries have been journalized andposted (p. 149).Property, plant, and equipment Assets of a relatively per-manent nature that are being used in the business and notintended for resale (p. 156).Stockholders’ equity The ownership claim of shareholderson total assets (p. 158).Temporary (nominal) accounts Revenue, expense, and div-idends accounts whose balances are transferred to RetainedEarnings at the end of an accounting period (p. 144).Work sheet A multiple-column form that may be used in theadjustment process and in preparing financial statements(p. 138).5-1 Indicate which of the following statements are true or false regarding the work sheet._____ The work sheet is essentially a working tool of the accounting._____ The work sheet cannot be used as a basis for posting to ledgers._____ The work sheet is distributed to management and other interested parties._____ Financial statements can be prepared directly from the work sheet before jour-nalizing and posting the adjusting entries.5-2 The ledger of W. S. Juice Bar includes the following unadjusted balances: Service Rev-enue $60,000; Salaries Expense $28,950; and Prepaid Rent $6,000. Adjusting entries are requiredfor (a) services provided for $1,000 but not yet billed and collected; (b) accrued salaries payableof $1,350; and (c) expired rent of $2,000. Enter the unadjusted balances and adjustments intoa work sheet, and complete the work sheet for all accounts. (Hint: You will need to add the fol-lowing accounts: Accounts Receivable, Salaries Payable, and Rent Expense.)5-3 The income statement of Health 24 City Club for the month ending August 31 shows Mem-bership Dues Revenues of $25,000; Salaries Expense of $9,300; Repairs and Maintenance Expenseof $2,400; and Net Income of $6,950. Prepare the entries to close the revenue and expense accounts,and complete the closing process for these accounts using the three-column form of account.5-4 Using the data in Exercise 5-3, identify the accounts that would be included in a post-closing trial balance.5-5 Sam Perroni, owner of Perroni’s Harbor Cruise, found the following errors that his book-keeper made after the transactions had been journalized and posted. Prepare the correcting entries.1. A collection on account from a customer for $1,280 was recorded as a debit to AccountsReceivable of $1,280 and a credit to Service Revenue of $1,280.2. The purchase of supplies for the boats on account for $3,570 was recorded as a debit toSupplies of $3,750 and credit to Accounts Payable of $3,750.5-6 At Fred’s Fish Chips, the following errors were discovered after the transactions had beenjournalized and posted. Prepare the correcting entries.1. A collection on account from a customer for $850 was recorded as a debit to Cash of $850and a credit to Service Revenue of $850.EX E R C I S E SUse of a work sheet.(SO 1)Prepare partial work sheet.(SO 1)Journalize and post closingentries using the three-columnform of account.(SO 2)Identify postclosing trialbalance accounts.(SO 3)Prepare correcting entries.(SO 5)Prepare correcting entries.(SO 5)The Summary of Study Objectivesrelates the study objectives to the keypoints in the chapter. It gives youanother opportunity to review as wellas to see how all the key topics withinthe chapter are related.Exercises range in difficulty, helpingyou focus on one study objective at atime. This will help you buildconfidence in your basic skills andknowledge to use the material learnedin the chapter. More difficult exerciseshelp you pull together several conceptsfrom the chapter.The Glossary defines all the key termsand concepts introduced in thechapter. Page references help you findany terms you need to study further.15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xvii
  20. 20. WorkingMonths Number Days per MonthJanuary–March 2 20April–May 3 25June–October 2 18November–December 3 23InstructionsWith the class divided into groups, answer the following:(a) Prepare a report showing the comparative payroll expense of continuing to employ per-manent workers compared to adopting the Harrington Services, Inc., plan.(b) What other factors should Martha consider before finalizing her decision?ETHICS CASE11-13 Harry Smith owns and manages Harry’s Restaurant, a twenty-four-hour restaurant nearthe city’s medical complex. Harry employs nine full-time employees and sixteen part-timeRemember to go back to the Navigator box on the chapter-opening page andcheck off your completed work.IIFINANCIAL REPORTING PROBLEM: PepsiCo6-14 Refer to the financial statements of PepsiCo, presented in Appendix A, and answerthe following questions:(a) What was the amount of net cash provided by operating activities for the year ended De-cember 30, 2006? For the year ended December 31, 2005?(b) What was the amount of increase or decrease in cash and cash equivalents for the yearended December 30 2006? For the year ended December 31, 2005?(c) Which method of computing net cash provided by operating activities does PepsiCo use?(d) F l i f th 2006 t t t f h fl did th h i t dEXPLORING THE WEB9-11 A company’s annual report usually will identify the inventory method used. Knowingthat, you can analyze the effects of the inventory method on the income statement and the bal-ance sheet.Address: www. darden.comSteps1. From Darden Restaurants’ home page, choose Investor Relations.2. Choose Annual Report Financials.3. Choose Annual Report 2006—HTML version.4. Click on Financial Renew under the Table of Contents.5. Click on Consolidated Balance Sheets.InstructionsAnswer the following questions based on the 2006 Annual Report.(a) At Darden’s fiscal year-end, what was the net inventory on the balance sheet?(b) How has this changed from the previous fiscal year-end?(c) What inventory method does Darden use (See notes to Consolidated Financial Statements)?ETHICS CASE9-12 J. K. Leask Wholesale Corp. uses the LIFO method of inventory costing. In the currentyear, profit at J. K. Leask is running unusually high. The corporate tax rate is also high thisyear, but it is scheduled to decline significantly next year. In an effort to lower the current year’snet income and to take advantage of the changing income tax rate, the president of J. K. LeaskWholesale instructs the accountant to recommend to the purchasing department a large purchaseof inventory for delivery three days before the end of the year. The price of the inventory tobe purchased has doubled during the year, and the purchase will represent a major portion of theending inventory value.Instructions(a) What is the effect of this transaction on this year’s and next year’s income statement andincome tax expense? Why?(b) If J. K. Leask Wholesale had been using the FIFO method of inventory costing, would thepresident give the same directive?(c) Should the plant accountant order the inventory purchase to lower income? What are theethical implications of this order?After you complete your homeworkassignments, it’s a good idea to goback to The Navigator checklist at thestart of the chapter to see if you haveused all the study aids of the chapter.Group Decision Cases require teams ofstudents to evaluate a manager’sdecision or choose from amongalternative courses of action. They helpprepare you for the business world bygiving you practice in solving problemswith colleagues.Exploring the Web exercises guide youto Internet sites where you can findand analyze information related to thechapter topic.Financial Reporting Exercises direct youto study various aspects of the financialstatements in the PepsiCo 2006 AnnualReport, which is excerpted in theAppendix at the end of the text.Through the Ethics Cases, you willreflect on typical ethical dilemmas,learn how to analyze such situations,and decide on an appropriate courseof action.xviii Student Owner’s Manual15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xviii
  21. 21. xixTO THE INSTRUCTORSTUDENT OWNER’S MANUAL1 Hospitality Accounting in Action 12 Accounting Principles 303 The Recording Process 664 Adjusting the Accounts 1025 Completion of the Accounting Cycle 1366 Financial Statements 1687 Financial Statement Analysis 2048 Accounting for Merchandising Operations in Hospitality 2329 Inventories and Cost of Goods Calculation 26010 Internal Control and Cash 28811 Payroll 31812 Accounting for Receivables and Payables 34613 Long-Term and Intangible Assets 38014 Sole Proprietorships, Partnerships, and Corporations 410APPENDIX ASpecimen Financial Statements: PepsiCo, Inc. 454APPENDIX BSubsidiary Ledgers and Special Journals 482B R I E F C O N T E N T S15339_Weygandt_FM111.qxp 12/18/07 4:22 PM Page xix
  22. 22. C H A P T E R 1HOSPITALITY ACCOUNTINGIN ACTION 1FE AT U R E S T O RY: Financial Reporting: A Matter ofTrust 1What Is Accounting? 2Who Uses Accounting Data? 4Brief History of Accounting 5Distinguishing between Bookkeeping andAccounting 6Accounting and You 6The Building Blocks of Accounting 7Ethics—A Fundamental Business Concept 8Generally Accepted Accounting Principles 8Assumptions 9Basic Accounting Equation 11The Accounting Cycle and the Flow ofInformation 14The Uniform System of Accounts andFinancial Reporting 15Lodging Industry 16Foodservice Industry 16Club Industry 16Spa Industry 16Gaming Industry 17Accounting and Financial Management inHospitality 17Hotel Operations 17Hotel Accounting DepartmentOrganization 20Foodservice Operations 22Club Operations 23Appendix The AccountingProfession 25Public Accounting 26Private Accounting 26Not-for-Profit Accounting 26C H A P T E R 2ACCOUNTING PRINCIPLES 30FE AT U R E S T O RY: Certainly Worth Investigating! 31The Conceptual Framework ofAccounting 32Objectives of Financial Reporting 33Qualitative Characteristics of AccountingInformation 34Elements of Financial Statements 35Operating Guidelines 36Assumptions 36Monetary Unit Assumption 37Economic Entity Assumption 37Time Period Assumption 37Going Concern Assumption 37Principles 37Revenue Recognition Principle 38Matching Principle (Expense Recognition) 38Full Disclosure Principle 40Cost Principle 40Constraints in Accounting 41Materiality 42Conservatism 42Summary of Conceptual Framework 42Financial Statement Presentation—AnInternational Perspective 43Using the Building Blocks 44Transaction Analysis 45Summary of Transactions 50Financial Statements 52Income Statement 52Retained Earnings Statement 52Balance Sheet 54Statement of Cash Flows 54C H A P T E R 3THE RECORDING PROCESS 66FE AT U R E S T O RY: No Such Thing as a PerfectWorld 67The Account 68Debits and Credits 69Debit and Credit Procedures 69Stockholders’ Equity Relationships 72Expansion of the Basic Equation 73The Accounting Cycle 73Steps in the Recording Process 74The Journal 75The Ledger 77The Recording Process Illustrated 81Summary Illustration of Journalizing andPosting 87The Trial Balance 88Limitations of a Trial Balance 89Locating Errors 91Use of Dollar Signs 91D E T A I L E D C O N T E N T Sxx15339_Weygandt_F TOC.qxp 12/14/07 5:26 PM Page xx
  23. 23. Electronic Data Processing 92Comparative Advantages of Manual versusComputerized Systems 92A Look into the Future 93C H A P T E R 4ADJUSTING THE ACCOUNTS 102FE AT U R E S T O RY: Timing Is Everything 103Timing Issues 104Selecting an Accounting Time Period 105Fiscal and Calendar Years 105Accrual- versus Cash-Basis Accounting 105Recognizing Revenues and Expenses 106The Basics of Adjusting Entries 107Types of Adjusting Entries 108Adjusting Entries for Prepayments 108Adjusting Entries for Accruals 115Summary of Basic Relationships 120The Adjusted Trial Balance and FinancialStatements 122Preparing the Adjusted Trial Balance 122Preparing Financial Statements 122Alternative Treatment of Prepaid Expensesand Unearned Revenues 124Prepaid Expenses 124Unearned Revenues 126Summary of Additional AdjustmentRelationships 127C H A P T E R 5COMPLETION OF THEACCOUNTING CYCLE 136FE AT U R E S T O RY: Everyone Likes to Win 137Using a Work Sheet 138Steps in Preparing a Work Sheet 138Preparing Financial Statements from aWork Sheet 141Preparing Adjusting Entries from aWork Sheet 144Closing the Books 144Preparing Closing Entries 145Closing Entries, Illustrated 147Posting of Closing Entries 147Preparing a Postclosing Trial Balance 149Summary of the Accounting Cycle 150Correcting Entries—An Avoidable Step 151Classified Balance Sheet 154Standard Classifications 154Classified Balance Sheet, Illustrated 158C H A P T E R 6FINANCIAL STATEMENTS 168FE AT U R E S T O RY: Cash Is King 169The Income Statement 170Multiple-Step Income Statement 170Single-Step Income Statement 174Departmental Income Statement 175Consolidated Income Statement 176Classified Balance Sheet 176Relationship between the Income Statementand the Balance Sheet 177The Statement of Cash Flows:Purpose and Format 178Purpose of the Statement of Cash Flows 178Meaning of Cash Flows 179Classification of Cash Flows 179Significant Noncash Activities 180Format of the Statement of Cash Flows 181Usefulness of the Statement of Cash Flows 182Preparing the Statement of Cash Flows 183Indirect and Direct Methods 183Indirect Method for Statementof Cash Flows 185First Year of Operations—2008 185Second Year of Operations—2009 189C H A P T E R 7FINANCIAL STATEMENT ANALYSIS 204FE AT U R E S T O RY: “Follow That Stock!” 205Basics of Financial Statement Analysis 206Need for Comparative Analysis 206Tools of Financial Statement Analysis 207Horizontal Analysis 207Balance Sheet 208Income Statement 208Retained Earnings Statement 210Vertical Analysis 210Balance Sheet 210Income Statement 211Detailed Contents xxi15339_Weygandt_F TOC.qxp 12/14/07 5:26 PM Page xxi
  24. 24. Ratio Analysis 213Liquidity Ratios 214Profitability Ratios 217Solvency Ratios 220Summary of Ratios 221Limitations of Financial StatementAnalysis 222Estimates 222Cost 222Alternative Accounting Methods 223Atypical Data 223Diversification of Firms 223C H A P T E R 8ACCOUNTING FOR MERCHANDISINGOPERATIONS IN HOSPITALITY 232FE AT U R E S T O RY: Selling Dollars for 85 Cents 233Merchandising Operations 234Operating Cycles 235Inventory Systems 236Recording Purchases of Merchandise 238Purchase Returns and Allowances 240Freight Costs 241Purchase Discounts 241Recording Sales of Merchandise 243Sales Returns and Allowances 244Sales Discounts 245Completing the Accounting Cycle 246Adjusting Entries 246Closing Entries 247Summary of Merchandising Entries 247Work Sheet for a Merchandiser 248Using a Work Sheet 248C H A P T E R 9INVENTORIES AND COST OF GOODSCALCULATION 260FE AT U R E S T O RY: $12,800 Worth of BlueberryMuffins! 261Inventory Basics 262Classifying Inventory 263Determining Inventory Quantities 263Inventory Accounting Systems 265Periodic Inventory System 266Recording Transactions 266Recording Purchases of Merchandise 266Recording Sales of Merchandise 267Cost of Goods Sold 268Determining Cost of Goods Purchased 268Transfers In and Out 270Food Cost Calculations 271Beverage Cost Calculations 271Income Statement Presentation 272Inventory Costing under a PeriodicInventory System 273Using Actual Physical Flow Costing—Specific Identification 273Using Assumed Cost-Flow Methods—FIFO,LIFO, and Average Cost 274Financial Statement Effects of Cost-FlowMethods 278Using Inventory Cost-Flow MethodsConsistently 280Inventory Errors 281Income Statement Effects 281Balance Sheet Effects 282Statement Presentation and Analysis 282Presentation 282Analysis 283C H A P T E R 1 0INTERNAL CONTROL AND CASH 288FE AT U R E S T O RY: Minding the Money in MooseJaw 289Internal Control 290Principles of Internal Control 291Limitations of Internal Control 296Cash Controls 296Internal Control over Cash Receipts 297Internal Control over CashDisbursements 300Use of a Bank 302Making Bank Deposits 302Writing Checks 302Bank Statements 304Reconciling the Bank Account 305C H A P T E R 1 1PAYROLL 318FE AT U R E S T O RY: Payroll: A Manageable Cost in theHospitality Industry 319xxii Detailed Contents15339_Weygandt_F TOC.qxp 12/14/07 5:26 PM Page xxii
  25. 25. Detailed Contents xxiiiPayroll Defined 320Internal Control of Payroll 320Hiring Employees 321Timekeeping 321Preparing the Payroll 323Paying the Payroll 323Fair Labor Standards Act 323Determining the Payroll 324Gross Earnings 324Payroll Deductions 325Net Pay 327Recording the Payroll 327Maintaining Payroll Department Records 327Recognizing Payroll Expenses andLiabilities 329Recording Payment of the Payroll 329Tipped Employees 330Tip Reporting 331Employer Payroll Taxes 336FICA Taxes 336Federal Unemployment Taxes 336State Unemployment Taxes 337Recording Employer Payroll Taxes 337Filing and Remitting Payroll Taxes 338C H A P T E R 1 2ACCOUNTING FOR RECEIVABLESAND PAYABLES 346FE AT U R E S T O RY: Financing His Dreams 347Accounts Receivable 348Types of Receivables 348Recognizing Accounts Receivable 349Valuing Accounts Receivable 350Disposing of Accounts Receivable 357Credit Policies 360The Credit Department 360The Credit Policy before, during, andafter the Event 360City Ledger of a Hotel 361Notes Receivable 361Determining the Maturity Date 362Computing Interest 363Recognizing Notes Receivable 364Valuing Notes Receivable 364Disposing of Notes Receivable 364What Is a Current Liability? 367Notes Payable 367Sales Tax Payable 368Payroll and Payroll Taxes Payable 369Unearned Revenues 371Current Maturities of Long-Term Debt 371C H A P T E R 1 3LONG-TERM ANDINTANGIBLE ASSETS 380FE AT U R E S T O RY: Time to Relax 381Long-Term Assets 383Determining the Cost of Long-Term Assets 383Land 384Land Improvements 384Buildings 384Equipment 385Depreciation 386Revising Periodic Depreciation 394Expenditures during Useful Life 395Long-Term Asset Disposals 396Intangible Assets 401Patents 402Copyrights 402Trademarks and Trade Names 402Franchises and Licenses 403Goodwill 403C H A P T E R 1 4SOLE PROPRIETORSHIPS,PARTNERSHIPS, ANDCORPORATIONS 410FE AT U R E S T O RY: “Two All Beef Patties,Special Sauce, Lettuce, Cheese, Pickles,Onions on a Sesame Seed Bun” 411Sole Proprietorships 412Partnerships 413Association of Individuals 413Mutual Agency 413Limited Life 414Unlimited Liability 414Co-ownership of Property 414Advantages and Disadvantages of aPartnership 414The Partnership Agreement 415Formation of a Partnership 415Division of Net Income or Net Loss 416Partnership Financial Statements 41915339_Weygandt_F TOC.qxp 12/14/07 5:26 PM Page xxiii
  26. 26. The Corporate Form of Organization andStock Transactions 420Characteristics of a Corporation 420Forming a Corporation 424Corporate Capital 424Accounting for Common Stock Issues 429Accounting for Treasury Stock 432Preferred Stock 436Dividends 438Cash Dividends 438Stock Dividends 441Entries for Stock Dividends 442Effects of Stock Dividends 443Stock Splits 443Retained Earnings 445Retained Earnings Restrictions 446Prior Period Adjustments 447Retained Earnings Statement 447A P P E N D I X ASPECIMEN FINANCIAL STATEMENTS:PepsiCo, Inc. 454A P P E N D I X BSUBSUDIARY LEDGERS ANDSPECIAL JOURNALS 482FE AT U R E S T O RY: Different Roads for DifferentFolks 483Expanding the Ledger—SubsidiaryLedgers 484Nature and Purpose of SubsidiaryLedgers 484Example 485Advantages of Subsidiary Ledgers 486Expanding the Journal—SpecialJournals 487Sales Journal 488Cash Receipts Journal 490Purchases Journal 495Cash Payments Journal 496Effects of Special Journals on the GeneralJournal 498Photo Credits 505Index 507xxiv Detailed Contents15339_Weygandt_F TOC.qxp 12/14/07 5:26 PM Page xxiv
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  28. 28. 1THE NAVIGATOR ✓• Understand Concepts for Review ❑• Read Feature Story ❑• Scan Study Objectives ❑• Read Preview ❑• Read text and answer Before You Go Onp. 7 ❑ p. 13 ❑• Review Summary of Study Objectives ❑• Complete Assignments ❑Before studying this chapter, you should know or, if necessary, reviewa. How to use the study aids in this book. (Student Owner’s Manual,pages xii–xviii)b. The nature of the special student supplements that accompany thistextbook. (Student Owner’s Manual, page xii)The Navigator is alearning system de-signed to prompt youto use the learningaids in the chapterand set priorities asyou study.Concepts for Reviewhighlight concepts fromyour earlier reading thatyou need to understandbefore starting the newchapter.HOSPITALITYACCOUNTINGIN ACTIONTHENAVIGATOR✓✓CO N C E P T S F O R R E V I E W15339_Weygandt_01.qxp 12/14/07 3:50 PM Page B
  29. 29. After studying this chapter, you should be able to1. Explain what accounting is.2. Identify the users and uses of accounting.3. Understand why ethics is a fundamental business concept.4. Explain the meaning of generally accepted accounting principlesand the cost principle.ContinuedStudy Objectives give you aframework for learning thespecific concepts covered inthe chapter.Financial Reporting:A Matter of TrustIn recent years the financial presshas been full of articles about finan-cial scandals and accounting mis-deeds. It started with Enron, butthen spread to Xerox, Qwest,Global Crossing, andWorldCom, among others. Manyof the articles expressed concernthat as an increasing number ofmisdeeds came to public attention,a mistrust of financial reporting ingeneral was developing. These arti-cles made clear just how importantaccounting and financial reportingare to the U.S. and world financialmarkets and to society as a whole.Without financial reports, managerswould not be able to eveluate howwell their company is doing or tomake decisions about the best wayto make their company grow in thefuture. Without financial reports,investors and lenders could notmake informed decisions about howto allocate their funds. There is nodoubt that a sound, well-functioningeconomy depends on accurate anddependable financial reporting—accounting matters!In order to make financial deci-sions as either an investor or aThe Feature Story helps you picture how the chapter topic relates to the real worldof accounting and business. You will find references to the story throughoutthe chapter.manager, youneed to knowhow to readfinancialreports. In thisbook you willlearn about fi-nancial report-ing and somebasic tools used toevaluate financialreports. In the firstchapter we introduce youto the real financial state-ments of a company whose prod-ucts most of you probably are famil-iar with—PepsiCo, Inc. We havechosen the financial statements ofPepsiCo because they are a goodexample from the real world. Ap-pendix A contains the statements intheir entirety, and a copy of thePepsiCo, Inc., 2006 Annual Reportaccompanies this text.PepsiCo manufactures Pepsi-Cola, the number two soft-drinkbeverage in the world. PepsiCo alsomanufactures the number one bot-tled water (Aquafina), the numberone sports drink (Gatorade), thenumber one ready-to-drink tea(Lipton), and the number one ready-to-drink coffee (Frappuccino). Inaddition, PepsiCo is the largestmanufacturer of snack foods in theworld. Its Frito-Lay chips dominatethe U.S. market with 59% of allsnack-chip sales and the world mar-ket with over 32%. In all, PepsiCoranks among the world’s largestpackaged goods and beveragecompanies, with over $25 billion insales, $23 billion in assets, and140,000 employees. PepsiCo is notonly large; it is also quite profitable,ranking twenty-eighth among allU.S. companies, with $3.3 billion innet income.1ST U D Y O B J E C T I V E STHENAVIGATOR✓✓THENAVIGATOR✓✓Chapter-openingvignettes end withthe Internet addressof the companies citedin the story to helpyou connect with thesereal businesses andexplore them further.www.pepsico.comFE A T U R E S T O R Y15339_Weygandt_01.qxp 12/14/07 3:50 PM Page 1
  30. 30. The Preview describes andoutlines the major topics andsubtopics you will see in thechapter.WH AT I S A C C O U N T I N G ?Accounting is an information system that identifies, records, and communicatesthe economic events of an organization to interested users. Let’s take a closer lookat these three activities.1. Identifying economic events involves selecting the economic activities relevantto a particular organization. The sale of goods and services by PepsiCo, Inc.,the providing of services by Disney, the payment of wages by The ClubCorporation of America, and the collection of ticket and broadcast money2P R E V I E W O F C H A P T E R 1The opening story about PepsiCo, Inc., highlights the importance of having good financial informationto make effective business decisions. Whatever one’s pursuits or occupation, the need for financial in-formation is inescapable. You cannot earn a living, spend money, buy on credit, make an investment,or pay taxes without receiving, using, or providing financial information. Good decision making de-pends on good information.The purpose of this chapter is to show you that accounting is the system used to provide useful fi-nancial information. The content and organization of Chapter 1 are as follows:P R E V I E W O F C H A P T E R 1THENAVIGATOR✓✓HOSPITALITY ACCOUNTING IN ACTIONWhat IsAccounting?Who uses accounting dataBrief history of accountingBookkeeping and accountingAccounting and youEthics—a fundamentalbusiness conceptGenerally acceptedaccounting principlesAssumptionsBasic accounting equationThe BuildingBlocks ofAccountingUsing theBuilding BlocksTransaction analysisSummary of transactionsFinancialStatementsIncome statementRetained earnings statementBalance sheetStatement of cash flows5. Explain the meaning of the monetary unit assumption and the economic entity assumption.6. State the basic accounting equation, and explain the meaning of assets, liabilities, andstockholders’ equity.7. Explain the accounting cycle and flow of information.8. Identify the various systems of accounting procedures used in the hospitality industry.9. Understand accounting and financial management in a hotel.10. Understand accounting and financial management in a foodservice operation and a club.ST U D Y O B J E C T I V E S ( C O N T I N U E D )STUDY OBJECTIVE 1Explain what accounting is.Essential terms are printed inblue when they first appearand are defined in the end-of-chapter glossary.15339_Weygandt_01.qxp 12/14/07 3:50 PM Page 2
  31. 31. and the payment of expenses by major league sports teams are examples ofeconomic events.2. Once identified, economic events are recorded to provide a history of the or-ganization’s financial activities. Recording consists of keeping a systematic,chronological diary of events, measured in dollars and cents. In recording, eco-nomic events are also classified and summarized.3. The identifying and recording activities are of little use unless the infor-mation is communicated to interested users. Financial information is com-municated through accounting reports, the most common of which are calledfinancial statements. To make the reported financial information meaning-ful, accountants report the recorded data in a standardized way. Informa-tion resulting from similar transactions is accumulated and totaled. Forexample, all sales transactions of PepsiCo are accumulated over a certainperiod of time and reported as one amount in the company’s financial state-ments. Such data are said to be reported in the aggregate. By presenting therecorded data in the aggregate, the accounting process simplifies a multi-tude of transactions and makes a series of activities understandable andmeaningful.A vital element in communicating economic events is the accountant’s abilityto analyze and interpret the reported information.Analysis involves the use of ra-tios, percentages, graphs, and charts to highlight significant financial trends and re-lationships. Interpretation involves explaining the uses, meaning, and limitationsof reported data. Appendix A at the end of this textbook illustrates the financialstatements and accompanying notes and graphs from PepsiCo. We refer to thesestatements at various places throughout the text.At this point they probably strikeyou as complex and confusing. By the end of this course, you’ll be surprised atyour ability to understand and interpret them.The accounting process is summarized in Illustration 1-1.What Is Accounting? 3Illustration 1-1Accounting processIdentification RecordingCommunicationSelect economic events (transactions) Record, classify, and summarizePrepare accounting reportsAnalyze and interpret for usersFOODBEST CATERERSBEST CATERERSAccounting should consider the needs of the users of financial information.Therefore, you should know who those users are and something about their in-formation needs.References throughout thechapter tie the accountingconcepts you are learning tothe story that opened thechapter.15339_Weygandt_01.qxp 12/14/07 3:50 PM Page 3
  32. 32. WHO USES ACCOUNTING DATA?Because it communicates financial information, accounting is often called the lan-guage of business. The information that a user of financial information needs de-pends on the kinds of decisions the user makes. The differences in the decisionsdivide the users of financial information into two broad groups: internal users andexternal users.Internal UsersInternal users of accounting information are managers who plan, organize, andrun a business. These include foodservice managers, housekeeping supervisors,rooms division managers, and others. In running a business, managers must an-swer many important questions, as shown in Illustration 1-2.To answer these and other questions, users need detailed information on atimely basis. For internal users, accounting provides internal reports. Examples arefinancial comparisons of operating alternatives, projections of income from newsales campaigns, and forecasts of cash needs for the next year. In addition, sum-marized financial information is presented in the form of financial statements.External UsersThere are several types of external users of accounting information. Investors(owners) use accounting information to make decisions to buy, hold, or sell stock.Creditors such as suppliers and bankers use accounting information to evaluatethe risks of granting credit or lending money. Some questions that may be askedby investors and creditors about a company are shown in Illustration 1-3.The information needs and questions of other external users vary consider-ably. Taxing authorities, such as the Internal Revenue Service (IRS), want to knowwhether the company complies with the tax laws. Regulatory agencies, such as theSecurities and Exchange Commission and the Federal Trade Commission, want to4 CHAPTER 1 Hospitality Accounting in ActionSTUDY OBJECTIVE 2Identify the users and usesof accounting.Illustration 1-2Questions asked byinternal usersWhich product line is the most profitable?Can we afford to give employee pay raises this year?What is the cost of manufacturing each unit of product?Is cash sufficient to pay bills?Questions Asked by Internal UsersGUMBALLMACHINEBILLCOLLECTORFRONT DESKFRONT DESK CONCIERGECONCIERGEHOTELACME CORP. SERVICES INC.CAFEHELPFUL HINTThe IRS requires businessesto retain records that can beaudited. Also, the ForeignCorrupt Practices Act requirespublic companies to keeprecords.15339_Weygandt_01.qxp 12/14/07 3:50 PM Page 4
  33. 33. BRIEF HISTORY OF ACCOUNTINGThe origins of accounting are generally attributed to the work of Luca Pacioli, anItalian Renaissance mathematician.Pacioli was a close friend and tutor to LeonardodaVinci and a contemporary of Christopher Columbus.In his text,Summa deArith-metica, Geometria, Proportione et Proportionalite, Pacioli described a system to en-sure that financial information was recorded efficiently and accurately.With the advent of the Industrial Age in the nineteenth century and, later, theemergence of large corporations, a separation of the owners from the managersknow whether the company is operating within prescribed rules. Customers areinterested in whether a company will continue to honor product warranties andsupport its product lines. Labor unions want to know whether the owners can payincreased wages and benefits. Economic planners use accounting information toforecast economic activity.What Is Accounting? 5Illustration 1-3Questions asked byexternal usersHOTELWill the company be able to pay its debts as they come due?How does the company compare in sizeand profitability with competitors?HotelsHotelsIs the company earning satisfactory income?Questions Asked by External UsersWhat do we doif they catch us?Yea!Concern over the quality and integrity of financial reporting is not limited tothe United States. Recently, the Chinese Ministry of Finance reprimanded alarge accounting firm for preparing fraudulent financial reports for a numberof its publicly traded companies. Afterward, the state-run news agency notedthat investors and analysts actually felt that the punishment of the firm was not adequate.In fact, a 2001 survey of investors in China found that fewer than 10% had full confidencein companies’ annual reports. As a result of these concerns, the Chinese Institute of Cer-tified Public Accountants vowed to strengthen its policing of its members.ACCOUNTING IN ACTION I n t e r n a t i o n a l I n s i g h tAccounting in Actionexamples illustrate importantand interesting accountingsituations in business.15339_Weygandt_01.qxp 12/14/07 3:50 PM Page 5
  34. 34. of businesses took place. As a result, the need to report the financial status of theenterprise became more important, to ensure that managers acted in accord withowners’ wishes.Also,transactions between businesses became more complex,mak-ing it necessary to improve approaches for reporting financial information.Our economy has now evolved into a postindustrial age—the informationage—in which many “products” are information services. The computer has beenthe driver of the information age.DISTINGUISHING BETWEEN BOOKKEEPINGAND ACCOUNTINGMany individuals mistakenly consider bookkeeping and accounting to be the same.This confusion is understandable because the accounting process includes the book-keeping function. However, accounting also includes much more. Bookkeepingusually involves only the recording of economic events. It is therefore just one partof the accounting process. In total, accounting involves the entire process of iden-tifying, recording, and communicating economic events.Accounting may be further divided into financial accounting and managerialaccounting. Financial accounting is the field of accounting that provides economicand financial information for investors, creditors, and other external users.Managerial accounting provides economic and financial information for managersand other internal users. Financial accounting is covered in this textbook.ACCOUNTING AND YOUOne question frequently asked by students of accounting is, “How will the studyof accounting help me?” It should help you a great deal, because a working knowl-edge of accounting is desirable for virtually every field of endeavor. Some exam-ples of how accounting is used in other careers includeGeneral management: Imagine running a theme park, a major resort, aschool, a foodservice facility, a McDonald’s franchise. All general managersneed to understand accounting data in order to make wise business decisions.Marketing: A marketing specialist develops strategies to help the sales forcebe successful. But making a sale is meaningless unless it is a profitable sale.Marketing people must be sensitive to costs and benefits, which accountinghelps them quantify and understand.6 CHAPTER 1 Hospitality Accounting in ActionE-Business Insights provideexamples of how e-businesstechnology has influencedaccounting and financialreporting.The surge of Internet usage has affected the hotel industry tremendously—somuch so that there are new revenue and expense items that hotels did not havebefore. On the one hand, revenues earned by hotels now include a fee thatcould either be charged separately or built into the room cost for use of the In-ternet, business center usage, and banquet facilities, which are associated with conven-tion services and presentations. Other revenues also include rental and installation ofequipment, computers, ethernet cards, hubs, patch cables, and even the setup of mini-LAN systems. Expenses, on the other hand, include the cost of leasing lines, Internetprovider fees, telephone charges, equipment leases, and wages and salary of hotel andcontract personnel, to name a few.SOURCE: Henry A. Weeks, “Internet Revenue and Expense,” Bottomline 15(4) (2000):73–74.ACCOUNTING IN ACTION ^ B u s i n e s s I n s i g h t15339_Weygandt_01.qxp 12/14/07 3:50 PM Page 6