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Financial and Managerial Accounting: The Basis for Business Decisions, 12/e
Jan R. Williams, University of Tennessee
Susan F. Haka, Michigan State University
Mark S. Bettner, Bucknell University
Robert F. Meigs


Note to Students

The primary focus of this book is uncovering the meaning of accounting information – and how this information is used by decision-makers. Throughout this text, we provide you with financial and managerial accounting concepts to give you an understanding of how accounting information is used to make informed decisions. We introduce you only briefly to actual accounting practices and techniques.

Today, everyone needs a basic understanding of accounting information, not just those students planning careers in business. You will work with accounting information in any career and will use it in managing your personal financial activities. Using accounting information is simply a part of everyday life.

Our Approach

Our goals in this text are to develop your abilities to understand accounting information and to use this information in making economic decisions. To understand accounting information, you must also understand the economic activities that the information describes. In this book, we focus primarily on business activities. However, many of the accounting concepts we discuss also apply to the economic activities of individuals, government, and nonprofit organizations.

The purpose of accounting is to provide information useful to economic decision-makers. Throughout the course, we will cast you in many decision-making roles. We have implemented many new elements to provide a greater understanding of how accounting information is used in decision-making. Refer to our Walkthrough pages in this preface for a detailed look at the features designed to enhance your decision-making skills.

Note to Instructors

The twelfth edition of Financial and Managerial Accounting: The Basis for Business Decisions features a more contemporary design, cutting-edge supplements, and fresh insights based on reviewer feedback.

We scrutinized and reworked the contents of the text for the Twelfth Edition. A few of our content changes include the following: the financial accounting chapters now take a corporate approach, the accounting cycles chapters have been split into three chapters to enable faculty to cover this critical material in more manageable pieces, forms of business organization material has been integrated throughout the text, new chapter 24 covers performance measurement, and Tootsie Roll replaces Toys "R" Us as the annual report referenced throughout the text’s EOC material.

Summary of Contents and Changes

Chapter 1 Accounting: Information for Decision Making

  • Accounting is introduced as a system of information for decision making.
  • Both financial and managerial accounting are introduced in parallel fashion by discussing (1) users of the information, (2) their objectives with regard to the information, (3) the integrity of the information, and (4) specific characteristics of the information.

Chapter 2 Basic Financial Statements

  • This chapter introduces the accounting equation and how a company’s financial statement changes as result of a series of simple business transactions.
  • The chapter ends with an illustration of a simple balance sheet, income statement, and statement of cash flows and a discussion of how these statements articulate.

Chapter 3 The Accounting Cycle: Capturing Economic Events (NEW!)

  • We have split the accounting cycle chapters into three chapter to enable faculty to cover this critical material in more management pieces.
  • This chapter builds on the comprehensive illustration introduced in Chapter 2.
  • Students are introduced to the complete accounting cycle, from analyzing economic events to preparing of financial statements (including a simple statement of cash flows).

Chapter 4 The Accounting Cycle: Accruals and Deferrals (NEW!)

  • This chapter builds on the material covered in Chapter 3. It includes thorough coverage of the adjusting entries.

Chapter 5 The Accounting Cycle: Reporting Financial Results (NEW!)

  • This chapter builds on the material covered in Chapters 3 and 4. It focuses on the relationship of the income statement, statement of retained earnings and the balance sheet. It also focuses on the closing process.
  • A supplemental topic, "The Worksheet", is included at the end of the chapter.

Comprehensive Problem 1 – Tony’s Rentals

Chapter 6 Accounting for Merchandising Activities

  • This chapter introduces students to merchandising businesses, inventories, and the cost of goods sold.
  • Both perpetual and periodic inventory systems are discussed.
  • Various performance measures of merchandising business are introduced and illustrated.

Chapter 7 Financial Assets

  • This chapter addresses accounting and reporting issues related to cash (and cash equivalents), short-term investments, and accounts receivable.
  • Mark-to-market reporting of short-term investments is explained, and the need for estimating uncollectible accounts receivable is discussed and illustrated.

Chapter 8 Inventories and the Cost of Goods

  • This chapter identifies the various cost flow assumptions used by business in accounting for inventories.
  • Both perpetual and period inventory systems are illustrated.
  • FIFO versus LIFO reporting issues are illustrated (including a discussion of a LIFO reserve).

Comprehensive Problem 2 – Guitar Universe

Chapter 9 Plant Assets and Depreciation

  • This chapter focuses on accounting issues related to tangible and intangible long-term fixed assets (including the disposal of plant assets and valuation issues pertaining to certain intangible assets).
  • The widespread use of straight-line depreciation is emphasized.

Chapter 10 Liabilities

  • This chapter covers both current and noncurrent liabilities.
  • Noncurrent liability coverage include issues related to bonds, pensions, and other postretirement benefits.
  • The chapter can be used in conjunction with Appendix B, which covers the time value of money, should an instructor choose to do so.

Chapter 11 Stockholders’ Equity: Paid-in-Capital

  • In this chapter various issues related to contributed capital are discussed.
  • Topics include legal capital, preferred stock, treasury stock, stock splits, book value, and market value.

Chapter 12 Income and Changes in Retained Earnings

  • The presentation of net income and its components is the primary subject of this chapter.
  • Some of the specific topics covered are discontinued operations, extraordinary items, accounting changes, earnings per share, cash and stock dividends, and the statement of changes in stockholders’ equity.

Chapter 13 Statement of Cash Flows

  • The statement of cash flows is covered by emphasizing the different broad classifications of cash flows: operating, investing, and financing.
  • Emphasis is placed on the form and content of the statement of cash flows by both the direct and the indirect method, with particular emphasis on reconciling net income to net cash provided by (or used in) operating activities.

Chapter 14 Financial Statement Analysis

  • General approaches for analyzing financial statements are introduced, as are specific ratios and other procedures for analyzing various aspects of a company’s activities.
  • These activities include liquidity and credit risk, profitability, quality of earnings, and capital structure.

Comprehensive Problem 3 – Tootsie Roll Industries, Inc.

Chapter 15 Global Business and Accounting

  • This chapter provides students with an understanding of the issues that impact accounting in the global business environment. The economic, cultural, political, and technological international differences that result in differences among accounting information systems are identified.
  • International differences in financial and management accounting procedures are discussed and related to variations in cultures, laws, economics, and technological infrastructures across countries.

Chapter 16 Management Accounting: A Business Partner

  • The three basic principles of management accounting system design are introduced and explained. A management accounting system assigns decision-making authority, provides information to support decision making, and furnishes information for performance evaluation and reward assignment.
  • Demonstrates the basic manufacturing process and matching cost flows. Distinguishes period and product costs, direct and indirect costs, raw materials, work in process, and finished goods inventories.

Chapter 17 Accounting Systems for Measuring Costs

  • This chapter covers manufacturing methods and related costs that result in different accounting system designs. Job order, process, and activity-based costing are introduced and demonstrated. Exhibits show how each costing method matches the cost flow with the manufacturing method.
  • The impact of accounting system choices on related information for decision making is discussed as a lead-in to the next chapter. Motivations for cost allocation and choices of cost objects are introduced.

Chapter 18 Costing and the Value Chain

  • Focuses on how decision making across the value chain drives the type of costs created by management. The chapter also shows the need for cost information related to the value chain.
  • Cost procedures that are useful to management over the life cycle of the value chain are introduced. These procedures include target costing, life-cycle costing, just-in-time techniques, and tracking cost of quality.

Chapter 19 Cost-Volume-Profit Analysis

  • This chapter defines fixed, variable, and semivariable costs and also explains the use of contribution margin and breakeven analysis in short-run decision settings.
  • An illustration demonstrates how the assumptions required as inputs to the use of C-V-P can lead managers to different conclusions about a marketing decision.

Chapter 20 Incremental Analysis

  • This chapter covers the definitions and importance of opportunity costs, sunk costs, incremental costs, and revenues for short-run business decisions.
  • This chapter also demonstrates incremental analysis in a variety of business decision settings, including special order, where to produce, resource input mix, and pricing decisions.

Comprehensive Problem 4 – The Gilster Company

Chapter 21 Responsibility Accounting and Performance Evaluation

  • This chapter explains how cost, profit, and investment center structures assign decision-making authority over a firm’s assets.
  • The chapter also shows how top executives use accounting information to hold managers of cost, profit and investment centers responsible for their decisions.
  • The impact of different transfer pricing methods on the accounting outcomes of cost, profit and investment centers is illustrated.

Chapter 22 Operational Budgeting

  • This chapter clarifies how the budgeting process (1) assigns decision-making authority, (2) requires the organization to plan and share information, and (3) is useful for evaluating and rewarding performance.
  • The working of the master budget process is demonstrated, and static and flexible budgets are contrasted.

Chapter 23 Standard Cost Systems

  • This chapter explains the purpose of standard costing as a control mechanism and specifies how standards are determined as well as their motivational impact.
  • Computation of overhead, materials, and labor variances are discussed, along with their usefulness for decision making.

Chapter 24 Rewarding Business Performance (NEW!)

  • This new chapter clarifies the role of incentive systems in the functioning of firms. The chapter presents methods and means that businesses use to motivate, evaluate, and reward good business decision-making.
  • The DuPont method for analyzing the components of return on investment (ROI), residual income, and economic value added concepts are described. The balanced scorecard is introduced as a means for motivating, evaluating and rewarding comprehensive business performance.

Comprehensive Problem 5 – Utease Corporation

Chapter 25Capital Budgeting

  • This chapter considers the role of capital budgeting in the firm’s ability to achieve long-range goals and objectives and also links capital and operational budgets.
  • Capital budgeting procedures that account for the time value of money are illustrated, including payback, internal rate of return, and net present value.

Student-Oriented Text

Today, most careers do not center around the preparation of accounting information. However, every student will be a lifelong user of accounting information. That is, how you use accounting information to make business decisions.

We have worked to make this text more relevant to students’ needs as well as more interesting, thereby motivating students to make the most of this learning opportunity. Evidence of this can be found in every problem and almost every exercise, which now contain an analytical element that asks students to interpret the information they are working with or to use it in some form of business decision.

Our approach is to involve students more directly in the learning process, and we challenge them to express their views. Features aimed at achieving this goal include the interactive Your Turn cases in every chapter, the analytical elements in our assignment material, and our Internet-related features.

Our Internet features encourage students to explore interesting, accounting-related websites on their own. We make this very simple by providing the addresses of these sites in the textbook and by providing links to these sites through the book’s home page. No instructor assistance should be required.

Contemporary Text

Any course is more relevant and more interesting if it is up to date. We have tried to make this text contemporary in all respects, from coverage of real-world companies in the chapter openers to topical coverage to assignment material.

We Have Listened to You

Reviewer comments for this edition and the previous edition have guided us in this revision. We extend our sincere thanks for their efforts to the following people:

Elenito Ayuyao, Los Angeles City College

Sharla Bailey, Southwest Baptist University

Walter Baggett, Manhattan College

Jill Bale, Doane College

Scott Barhight, Northampton County Area Community College

William Barze, St. Petersburg Junior College

John Bayles, Oakton Community College

Janet Becker, University of Pittsburg

Jerard Berardino, Community College of Allegheny

Teri Bernstein, Santa Monica College

Cynthia Bolt-Lee, The Citadel

Nancy Boyd, Middle Tennessee State University

Sallie Branscom, Virginia Western Community College

Russell Bresslauer, Chabot College

R.E. Bryson, University of Alabama

Priscilla Burnaby, Bentley College

Bryan Burks, Harding University

Loring Carlson, Western New England College

David Chu, College of the Holy Cross

Stanley Chu, Borough Manhattan Community College

William Cravey, Jersey City State College

Marcia Croteau, University of Maryland -- Baltimore County

Brian Curtis, Raritan Valley Community College

Steve Czarsty, Mary Washington College

Larry Davis, Southwest Virginia County College

Victoria Doby, Villa Julie College

Carlton Donchess, Bridgewater State College

Steve Driver, Horry-Georgetown Tech

Pamela Druger, Augustana College

Anita Ellzey, Hartford Community College

Emmanuel Emenyonu, Sacred Heart University

David Erlach, CUNY – Queens College

Paul Everson, Northern State University

Mary Lou Gamma, East Tennessee State University

Brother Gerald Fitzgerald, LaSalle University

Ralph Fritsch, Midwestern State University

Mike Fujita, Leeward Community College

Don Van Gieson, Kapiolani Community College

Peter Gilbert, Thomas College

Penny Hanes, Mercyhurst College

Lyle Hicks, Danville Area Community College

Richard Hanna, Ferris State University

Stephen Hano, Rockland Community College

Sara Harris, Arapahoe Community College

Jeannelou Hodgens, Florence-Darlington Technical College

Patricia H. Holmes, Des Moines Area Community College

Michael Holt, Eastern Nazarene College

Evelyn Honaker, Walters State Community College

Dave Jensen, Bucknell University Dewey Martin, Husson College

David Junnola, Eastern Michigan University

Leo Jubb, Essex Community College

Khondkar Karim, Monmouth University

James Kennedy, Texas A&M University

Jane Kingston, Piedmont Virginia Community College

Ed Knudson, Linn Benton Community College

Raymond Krasniewski, Ohio State university

David Lardie, Tunxis Community College

Bill Lasher, Jamestown Community College

Suk Jun Lee, Chapman University

Eric Lewis, Union College

Philip Little, Western Carolina University

J. Thomas Love, Walters State Community College

Josie Miller, Mercer Community College

Merrill Moore, Delaware Tech & Community College

Deborah Most, Dutchess Community College

Haim Mozes, Fordham University

Frank Olive, Nicholas College

Bruce Oliver, Rochester Institute of Technology

Ginger Parker, Creighton University

Michael Prockton, Finger Lakes Community College

Annette M. Leps, Goucher College

Gary Reynolds, Ozard Technical College

Renee Rigoni, Monroe Community College

Earl Roberts, Delaware Tech & Community College

Julie Rosenblatt, Delaware Tech & Community College

Bob Rothenberg, SUNY -- Oneonta

Victoria Rymer, University of Maryland

Francis A. Sakiey, Mercer County Community College

Linda Schain, Hofstra University

Mike Schoderbek, Rutgers University – New Brunswick

Monica Seiler, Queensborough Communityg College

Stan Stanley, Skagit Valley College

Jim Stanton, Mira Costa College

Carolyn Strickler, Ohlone College

Robert Stilson, CUNY

Barbara Sturdevant, SUNY

Gene Sullivan, Liberty University and Central Virginia Community College

Mary Ann Swindlehurst, Carroll Community College

Larry Tartaglino, Cabrillo College

Martin Taylor, University of Texas at Arlington

Anne Tippett, Tarrant County College South

Bruce Toews, Walla Walla College

Cynthia Tomes, Des Moines Area Community College

Harold Wilson, Middle Tennessee State University

Steve Wilts, Bucknell University

Teri Yohn, Georgetown University

We also want to acknowledge the following individuals, each of whom has authored supplements to accompany the text: Charles W. Caldwell, Susan C. Galbreath, and Richard S. Rand, all of Tennessee Technological University, and Jack Terry of Comsource Associates.

Our special thanks goes to Barbara Schnathorst, The Write Solution, Inc., for assisting us with detailed reviews of our chapter and assignment material.

The assistance of Robert Zwicker of Pace University and Alice Sineath of Forsyth Technical Community College was invaluable in preparation of the manuscripts for many supplementary materials.

We appreciate the expert attention given to this project by the staff of McGraw-Hill/Irwin, especially Jeff Shelstad, Stewart Mattson, Jennifer Jackson, Erin Cibula, Ryan Blankenship, Heather Burbridge, Rebecca Nordbrock, David Tietz, Artmeio Ortiz, Becky Szura, and Ed Przyzycki.


Jan R. Williams

Susan F. Haka

Mark S. Bettner

Robert F. Meigs

Walkthrough Main Features

The following special features have been integrated throughout the text to help students develop their decision-making skills.

Chapter Openers (NEW!)

The chapter openers feature vignettes that focus on real-world companies, such as and Nike, that relate to the accounting concepts covered in the chapter.

A Second Look (NEW!)

A Second Look box at the end of each chapter reintroduces the real-world company highlighted in the chapter opener. This second look allows students to relate the accounting topics they have just learned to those practiced by actual businesses.

Cash Effects

Cash Effects sections show how a transaction or method impacts the cash flow of an organization.

Your Turn

Your Turn boxes put students in the role of the decision-maker, requiring him/her to apply chapter concepts to situations faced by investors, creditors, and managers. An ethical icon indicates boxes that require ethical decision.

Case in Point

Case in Point boxes use actual business events to illustrate the relationship between accounting concepts and the real world. An international icon indicates boxes that contain international information.

Financial Analysis

Financial Analysis boxes cover the ratios used for financial statement analysis in the chapters where the ratios’ accounts are introduce. This prepares students for the comprehensive coverage of financial statement analysis found in Chapter 14.

Management Strategy (NEW!)

Management Strategy boxes help students understand how businesspeople use accounting information to make decisions.

The following special features can be found in the end-of-chapter material. They will help students clarify and apply the topics introduced in the chapter.

Key Terms and Self-Test Questions

Defined Key Terms and Self-Test Questions review and reinforce chapter material.

Comprehensive Problems

5 Comprehensive Problems, each ranging from two to five pages in length, review and synthesize text material throughout the book.

Demonstration Problems

Demonstration problems are provided along with solutions to allow students to test their knowledge of key points in the chapter.

Internet Assignments

Internet Assignments at the end of each chapter require you to go to a specific Internet site to answer questions given.

Business Week Assignments

Business Week Assignments are writing assignments appearing at the end of each chapter that reference a current article and require students to answer questions relating accounting concepts to current events.


Icons identify General Ledger Applications Software (GLAS), Spreadsheet Applications Template Software (SPATS), ethical issues, group activities, international issues, and writing exercises.

Annual Report

The 1999 annual report from Tootsie Roll Industries, Inc., is used throughout the text in exercise and problem material to reveal actual business applications of text material.


  • Student CD-ROM

The Student CD-ROM will be packaged with every new copy of the textbook. It will include General Ledger Applications Software (GLAS), Spreadsheet Applications Template Software (SPATS), and Tutorial Software.

General Ledger Applications Software (GLAS) This accounting program saves time and minimizes errors because it operates as an integrated system. Amounts entered in the general journal of special journals can be posted to the general ledger with a single keystroke. GLAS icons in the text show students where this tool can be used to solve end-of-chapter problems.

Spreadsheet Applications Template Software (SPATS) This software allows students to develop important spreadsheet skills by using these templates to solve selected assignments that are identified by an icon in the end-of-chapter material.

Tutorial Software Provides a variety of ways to test students’ knowledge of the material in the text. Students can randomly access different review methods. Explanations of right and wrong answers are provided and scores are tallied.

  • Online Learning Center

This new web site at will support the twelfth edition with the following features:

eLearning Session Study tools are placed strategically within the chapter outline to help students learn the concepts using different sources of information such as PowerPoint®, web links, and online quizzes. Also allows instructors to pull material into their PageOut course syllabus.

Links to Professional Resources These links send students to various sites to gather real-world data and market news.

Quizzes Multiple-choice online quizzes for students to test their knowledge.

Alternate Problems Alternative versions of the end-of-chapter problems to give students more practice at applying their knowledge. Solutions are provided for instructors.

Downloadable Instructor Supplements Instructors can access the following supplements electronically: PowerPoint, Solutions Manual, Instructor’s Manual, and SPATS solutions.

PageOut PageOut is an exclusive McGraw-Hill product that allows an instructor to quickly create a professional course website in less than an hour.

  • (NEW!) NetTutor™ NetTutor is an online, live tutoring service that guides students through their accounting problems step-by-step. Students can also watch as other students’ problems are answered – giving them the opportunity to constantly improve their accounting skills. Students can gain access to NetTutorby purchasing a new textbook with the NetTutor password card. Contact your McGraw-Hill/Irwin sales representative for more information.
  • (NEW!) PowerWeb PowerWeb is a database of online financial and managerial titles – updated weekly. Exercises and teaching suggestions for professors are also provided. Students can gain access to PowerWeb by purchasing a new textbook with the PowerWeb password card.
  • Interactive Financial Accounting Lab by Ralph E. Smith and Rick Birney, both of Arizona State University (ISBN 0072361379)

Interactive Managerial Accounting Lab by Diane Pattison, University of San Diego; Patrick McKenzie and Rick Birney, both of Arizona State University (ISBN 0072361387)

Available in network of stand-alone versions, this innovative software allows students to solve accounting problems and receive feedback in a motivating, interactive, multimedia environment. The Administration Module and Gradebook features allows the instructor to manipulate the "calendar" of assignments students are required to complete and also to track students’ performance. The Financial Accounting Lab provides a comprehensive review of the fundamentals of the accounting cycle, while the Managerial Accounting Lab offers over 15 hours of computerized exercise sets to help students learn management accounting.

  • Computerized Practice Sets

Prepared by Leland Mansuetti and Keith Weidkamp of Sierra College, these business simulations for Windows provide a dynamic educational alternative to manual sets.

Granite Bay Jet Ski, Level 1 (ISBN 0072340886), Instructor’s Manual (ISBN 0072341041)

Granite Bay Jet Ski, Level 2 (ISBN 007234105x), Instructor’s Manual (ISBN 0072341068)

Wheels Exquisite, Inc. Level 1 (ISBN 0075612437), Instructor’s Manual (ISBN 0075612429)

  • Understanding Corporate Annual Reports: A Financial Analysis Project, Fourth Edition, by William R. Pasewark (ISBN 0072387149) This project contains extensive instructions for obtaining and analyzing an annual report from a publicly traded corporation.


For Students

  • Study Guide (Vol. 1 ISBN 0072465905, Vol. 2 ISBN 0072465840) Students can measure their progress through a wealth of self-test material (with solutions) and a summary of chapter key points.
  • Working Papers (Vol. 1 ISBN 0072465824, Vol. 2 ISBN 0072465832) This soft-cover booklet is filled with columnar paper for each Problem and Comprehensive Problem in the textbook. Students encounter Checkpoints throughout the working papers to ensure they are on the right track.

For Instructors

  • Instructor’s Manual (Vol. 1 ISBN 0072465948, Vol. 2 ISBN 007246593x) For each chapter and appendix, you will find:

A brief topical outline that indicates the topics to discuss in class.

An assignment guide that provides at a glance the topical content of each Exercise, Problem, and Case.

Comments and observations concerning the chapter content, methods of presentation and usefulness of specific assignment material.

Many real-world examples not found in the text, including additional Business Week and Internet assignments, sample assignment schedules, and suggestions for using each element of the supplemental package.

  • Solutions Manual with CD-ROM (Vol. 1 ISBN 0072468467, Vol. 2 ISBN 0072468475) This comprehensive manual provides solutions to all Discussion Questions, Exercises, Problems, Cases and Comprehensive Problems. The enclosed CD-ROM contains the manual’s electronic files.
  • Solutions Transparencies (Vol. 1 ISBN 0072465808, Vol. 2 ISBN 0072465913) A complete set of acetates contains the solutions to all of the Exercises and problems found in the Solutions Manual.
  • Test Bank (Vol. 1 ISBN 0072465883, Vol. 2 ISBN 0072465891) With an abundance of objective questions and short exercises, this supplement is a valuable resource for instructors who prepare their own quizzes and examinations.
  • Computerized Test Bank (ISBN 0072465956) This computerized version of the manual test bank is available in Windows® format.
  • Ready Shows (Vol. 1 ISBN 0072468521, Vol. 2 ISBN 007246853x) This comprehensive package is filled with multimedia aids that use PowerPoint software to illustrate chapter concepts.
  • Instructor Spreadsheet Application Template Software (SPATS) (ISBN 0072468548) Solutions to the students SPATS.
  • Case Videos (with Manual) (ISBN 0070434409) Eight vignettes ranging from 5 to 15 cover various accounting topics as applied in real company scenarios. A brief summary, key concepts and topics, suggested homework assignments, student handouts, small group activities, discussion questions, and teaching notes are provided for each vignette. Topical coverage includes external audits, inventory cost flows, ethics and reporting issues, cash versus accrual income, break-even analysis, capital budgeting, corporate bonds, and making investment decisions.
  • Financial Accounting Video Library (ISBN 0072376163) and Managerial/Cost Accounting Video Library (ISBN 0072376171) This diverse array of videos prepared by Dallas County Community College District Telecourse can be used to stimulate classroom discussion, illustrate key concepts, or review critical material.