There is a vast body of knowledge that must be mastered before you can account for the activities of an enterprise. Intermediate accounting is the essential course for gaining the technical skills and judgement you need to succeed. These skills are crucial for anyone who hopes to either use or prepare accounting information.
Accounting in general involves a blend of technical know-how and professional judgement. So that’s what Intermediate Accounting appropriately dwells on: technical knowledge and professional judgement, covering the range of corporate reporting topics.
In selecting material to include in this book, we have assessed the realities of Canadian business practice. Accounting practices and policies remain in the public eye, with both fraud and judgement issues causing material restatements. This text reviews many critical issues that have been problematic in the past. Our accounting standards will be migrating to international standards in 2011. Many international standards are similar to Canadian standards, but there are important differences. This text describes and explores the alternatives.
Intermediate Accounting covers the technical elements of financial reporting, but keeps an eye on the critical judgement issues. After you master the contents of Intermediate Accounting, you will be able to account for the wide range of events and transactions found in this unique and challenging business environment.
Accountants have to be able to account for things! There is a base level of expertise that must become part of every accountant’s body of knowledge: how to record a receivable, capitalize a lease, account for a pension, or prepare a cash flow statement. Some of the transactions that we must account for are very complex, and their accounting treatment is equally complex. An affinity for numbers is important.
Judgement, it is often said, is the hallmark of a profession. There are often different ways to account for the same transaction. Professional accountants have to become expert at sizing up the circumstances and establishing the appropriate accounting policy for those circumstances. Once an accounting policy has been established, there are usually estimates that must be made before the numbers can be recorded. Accounting estimates also require the exercise of professional judgement. Professional judgement is not acquired overnight. It is nurtured and slowly grows over a lifetime. In this book, we begin the development process by explicitly examining the variables that companies consider when evaluating their options, and the criteria that accountants use to make choices. Opportunities to practice judgement are provided in the case material.
A Canadian Agenda
Issues that receive the most attention in this book are those that are relevant in a Canadian context. Many times, the topics covered in other intermediate texts are determined by U.S. standards and priorities because those books are adaptations of U.S. texts. However, there are some significant differences between Canadian and U.S. businesses and business environments that dictate a different emphasis and coverage. In addition, Canadian standards are swiftly being harmonized with international accounting standards. While some U.S. standards are also moving to international accounting standards, their strategic direction remains U.S.-based. We hope you appreciate the Canadian emphasis!
An International Perspective
Following a Canadian agenda means that we all must come up to speed on international standards. Every chapter will explain the differences between current Canadian practice and the policies recommended by the International Accounting Standards Board. If there are differences, the alternatives are reviewed and explained in the chapter material.
Other Key Features
Integration of Cash Flow Material throughout the Text
The cash flow statement is covered in Chapter 5, following reviews of the income statement and balance sheet. Students can thus learn how to do the cash flow statement early in the course. Following this chapter, though, the cash flow implications of various complex transactions are reviewed in each relevant chapter. There is cash flow assignment material in most chapters of the book. For those instructors who like to emphasize cash flow material at the end of the course, an appendix has been added to the final chapter that summarizes cash flow statement issues and provides a comprehensive example. This is reinforced with assignment material in the last chapter.
The Accounting Cycle
The basic debit and credit of the accounting world is not really a topic for an intermediate accounting course. It represents the baby steps; we’re trying to learn how to run, or at least jog. For many students, this material was covered in a high school course or an introductory accounting course. Others, who avoided the course in high school and/or who took a conceptually-oriented introductory course in college or university, may need a refresher or further grounding in this area. To answer this need, we have included the accounting cycle as an appendix to Volume I. This provides maximum flexibility to instructors. Some courses may formally devote time to this appendix, and others may use it as a reference only.
The text has been extensively reviewed and proofread prior to publication. Chapter material has been reviewed by professional accountants. All assignment materials have been solved independently by multiple individual “assignment checkers” in addition to the authors. Nevertheless, it is inevitable that errors remain, for which we accept full responsibility. If you find errors, please e-mail the authors at email@example.com or firstname.lastname@example.org. There are thousands of calculations in this text—it’s a daunting task to bring them to the degree of accuracy we’d like to be famous for. Your help will be greatly appreciated.
Each chapter has an introduction that explains the objectives of the chapter in narrative form.
Throughout each chapter, there are periodic questions. Students can stop and think through the answers to these basic questions, covering the previously explained material. This helps comprehension and focus! Answers to these questions can be found on the Online Learning Centre (www.mcgrawhill.ca/olc/beechy).
Charts and Tables
Where appropriate, chapter material is summarized in charts and tables to establish the patterns and help reinforce material.
Pedagogical Use of Colour
Consistently throughout the text, colour has been used to provide emphasis, improve readability, and enhance understanding.
Many chapters discuss accounting issues that raise ethical concerns. These concerns are highlighted in the chapter. Where ethics is particularly problematic, we have included a separate “ethical issues” section to help students focus on the ethical aspects of policy choice.
Ethics assignment material has also been incorporated into the case material. Essentially, when an accountant makes a recommendation on a contentious choice of accounting policy, ethics are tested. Students exercise true-to-life ethical judgement when they have to make a tough judgement call and recommend an accounting policy that is “good” for one group but “bad” for another. These ethical overtones are highlighted in the case solutions to help instructors draw them out in discussion and evaluation.
New to the fourth edition, every chapter includes a review of international accounting policies, highlighting similarities and differences between current Canadian practice and the policies recommended by the International Accounting Standards Board.
At the end of each chapter, there is a comprehensive list of the Canadian and international standards that are relevant to the material in the chapter. We have not quoted the standards directly in chapter material and we have not provided paragraph references to either the CICA Handbook or to international standards. This omission is intentional—the two sources are harmonized but may use different words. The focus is on the application of standards, not the technicalities.
Summary of Key Points
A summary of key points concludes each chapter. This provides a list of the key ideas and reinforces the chapter material.
Key Terms and the Glossary
Every chapter concludes with a list of key terms used in the chapter. These terms are explained in the chapter, and are also defined in the glossary, which is available on the Online Learning Centre (www.mcgrawhill.ca/olc/beechy).
There is a review problem with a solution in each chapter beginning in Chapter 3. This provides additional reinforcement of chapter content.
More than 60 cases are included in Intermediate Accounting, and there is at least one new case in every chapter in the fourth edition. The cases are meant to portray circumstances reflective of real life. Students have to put themselves into the situation and grapple with the facts to arrive at appropriate accounting policies for the circumstances. A blend of professional judgement and technical skills is needed to respond to a case. Case coverage is not limited to “one chapter” bites, but often integrates material learned to date. For those trying to build a base of professionalism, the use of cases consistently over the term is highly recommended. Cases can be assigned for class debriefing, class presentations, or written assignments.
There is an extensive range of assignment material at the end of each chapter. The assignments give students the opportunity to learn by doing.
Stars accompanying each assignment indicate length, with one star being the shortest assignment and three stars being the longest assignment.
Helping students practice on their own, we have selected a few assignments from each chapter and put their solutions on the Online Learning Centre. These selected assignments are highlighted by an icon in the margin.
Excel® templates for selected assignments provide an introduction to basic spreadsheet applications. These assignments are identified with an icon in the margin and are available on the Online Learning Centre.
From time to time, there are integrative problems that formally deal with accounting topics covered in five or six chapters. These problems are a great pre-test review!
Topical Review Identifying Key Changes
Chapters 1 and 2
The book starts with a review of the GAAP (and non-GAAP) world and establishes the common reporting motivations of companies and financial statement users, as well as the basic concepts of accounting. This is fundamental material that supports professional judgement. Chapter 1 has been extensively revised and rewritten for this edition, with the addition of two new exhibits (Exhibits 1.1 and 1.3) to further clarify the material. Chapter 2 includes a summary of the IASB framework of underlying assumptions, qualitative characteristics, constraints and concepts of capital.
Chapters 3 and 4
These chapters review the income statement, retained earnings statement, balance sheet, and disclosure notes. There is a complete explanation of the statement of comprehensive income. Real-life examples show the degree of diversity that exists and how little information some companies provide in their financial statements. The chapters highlight the judgemental issues inherent in the statements and disclosures.
The cash flow statement (CFS) is dealt with in sequence, as a primary financial statement. Again, coverage begins with a real-life example, to analyze the nature of information presented and the judgemental issues involved. The chapter deals with the mechanics of statement preparation, using both a format-free approach and the T-account method. T-accounts have been re-emphasized, because they are widely used in the classroom. The journal-entry-based worksheet is included in an appendix. CFS issues are reviewed in every subsequent chapter of the text and include CFS assignment material. We summarize text topics that impact on the CFS in an appendix to Chapter 21, for those who wish to reinforce this topic as a stand-alone topic later in the course.
Revenue and expense recognition are surely the most judgemental areas of accounting policy choice in the GAAP world. For the fourth edition of the book, we have extensively revised and reorganized the material for greater clarity and better flow. The increasingly important area of multiple-deliverables has been expanded and given more prominence. The emphasis of the text material is on the financial statement impact of these policies on net assets. There is extensive discussion of the criteria to be applied to determine appropriate revenue recognition policy and the numeric implications. Expense recognition is critically reviewed, both from a theoretical and practical perspective.
Issues related to monetary balances—cash, receivables, and payables—are gathered and reviewed together. Important topics such as foreign currency translation (a must, in this age of globalization) and the rules governing the transfer of receivables are incorporated. The material on bank reconciliations has been moved to an appendix. Material covering the mathematical basics of present and future value is available on the Online Learning Centre (www.mcgrawhill.ca/olc/beechy), as is a more extensive set of compound interest tables.
This chapter has been completely revised and reorganized. Introductory accounting texts always cover inventory systems and the cost flow assumptions and so we’ve moved that basic material into an appendix, available for review if needed. This fourth edition is based on the new Canadian inventory standard, which is harmonized with international standards. The chapter includes a review of policy decisions in this critical area, as well as the mechanics of inventory costing methods, lower of cost or market writedowns, and inventory estimation techniques.
Chapters 9 and 10
Accounting for capital assets, both tangible and intangible, follows a common pattern. These chapters systematically look at acquisition, amortization, impairment, and disposal. New accounting standards on the international scene will eliminate most instances of costs being reported as long-term deferred assets, such as startup costs, and coverage has been adjusted to reflect this reality. We have also clarified the material on non-monetary exchanges. We explain and illustrate the accounting standards relating to asset retirement obligations, held-for-sale assets, and asset impairments.
This chapter reflects the financial instrument rules, a joint project of the AcSB, IASB, and FASB, implemented for publicly-accountable enterprises in 2007. Accounting for held-to-maturity, held-for-trading, available-for-sale, significant influence, and control investments is covered. In particular, the fourth edition reflects the new standards for consolidation, to be implemented in 2009. Both policy and numeric issues are thoroughly explored. The chapter includes a number of helpful diagrams and figures, including a comparison of the cost and equity method, to clarify the roadmap through this territory.
Chapters 12 and 13
These chapters deal with straightforward debt and shareholders’ equity issues. The debt chapter looks at the always-challenging long-term debt issues, emphasizing the effective interest method of calculating interest expense. The new standard for accounting for guarantees has been incorporated. The requirement for reporting other comprehensive income, including certain types of unrealized foreign currency gains/losses, is fully explained and assignment material on this topic is included. Summary charts have been incorporated where appropriate.
One major topic in this chapter is classification of debt versus equity and appropriate treatment of hybrid financial instruments. Students learn how to determine the substance of a financial instrument, rather than its legal form, and account for it accordingly. Basic patterns for option accounting are established. A major new section on the various forms of incentive contracts (traditional options, SARs, and various kinds of deferred compensation agreements) has been added, with examples and summary charts to help establish the patterns. The material on derivative instruments has been gathered in this chapter and has been clarified with the addition of an example, which traces the impact of derivatives on accumulated other comprehensive income. We think that the revised material is clear and understandable; this is an important topic in financial reporting!
Chapters 15 and 16
Accounting for income tax remains two separate chapters, to acknowledge that many instructors prefer to spend two blocks of time on this most challenging area. The Chapter 15 material establishes a three-step process for typical situations. The focus of Chapter 16 remains accounting for the tax effect of losses—carrybacks and carryforwards. This is difficult material for students, but the Chapter 16 problems incorporate the prior chapter material and allow solid reinforcement of the steps associated with tax accounting.
The main body of this chapter focuses on the lessee. Most companies lease something as a lessee, and thus lessee accounting is very commonly encountered in practice. Both the judgemental issues of lease classification and the complex calculations are extensively reviewed in this chapter, with examples.
Lessors, on the other hand, are rare. They tend to be quite specialized entities—financial intermediaries. Since lessors comprise a specialized industry, accounting by lessors is presented in a chapter appendix. The appendix includes an overview of the major aspects of lessor accounting and how it contrasts with lessee accounting. The appendix may be omitted if the instructor does not wish to deal with this specialized industry.
Pensions and other post-retirement benefits are complex, long-term arrangements with employees. Accounting issues are also complex and have been structured in a worksheet format to improve clarity and comprehension. In addition, this chapter now contains an example of accounting for other post-retirement benefits and enhanced coverage of defined contribution plans, since the latter are gaining in popularity.
Earnings per share material includes an explanation of basic and diluted EPS. The procedural steps associated with organizing a complex EPS question are emphasized to provide more comfort and support in this complicated area. Differences between Canadian and international approaches are explained and there are a variety of useful summary figures and tables.
Accounting policy changes and error corrections require restatement of one or more prior years’ financial statements. Restatement is surely an important topic, given the number of fraud-based restatements reported in the public press in recent years. Also, the ongoing changes in accounting standards means that companies must often restate their accounts. This chapter deals with the theory and mechanics related to such restatement, reflecting current standards.
The text concludes with a review of financial statement analysis and emphasizes the importance of accounting policy choice and disclosure in the analysis of published financial statements. There is an extensive case illustration, based on a real Canadian company, which demonstrates the importance of accounting policy choice.
An appendix on the cash flow statement follows as a stand-alone review of Chapter 5. The appendix summarizes the impact on the CFS of many types of transactions that the text has covered since the CFS was first discussed. A comprehensive example is provided. This appendix is meant to reinforce the CFS for instructors who like to deal with the statement as a stand-alone topic that reviews many topics within Intermediate Accounting.
The text would not have been possible without the contributions of a great many people. We recognize and appreciate all of their efforts.
Our thanks and gratitude are extended to the outstanding faculty reviewers who provided criticism and constructive suggestions on the text material. It hasn’t been possible to incorporate all of the (sometimes conflicting!) suggestions, but the quality of this book has improved thanks to the people who reviewed it: Mark Binder, Red River College; Esther Deutsch, Ryerson University; George Fisher, CGA-Canada; Stuart H. Jones, University of Calgary; Michelle Loveland, University of Western Ontario; Marie Madill-Payne, George Brown College; Ron Naraine, Fanshawe College; Joe Nemi, University of Guelph/Humber; Joe Pidutti, Durham College; Carmel Robbins, SAIT Polytechnic; Douglas Yee, British Columbia Institute of Technology. To numerous other colleagues and users whose constructive comments and suggestions have led to improvements, our thanks.
In this edition, we were also fortunate in having a team of experienced reviewers who were at the cutting edge in technical and judgemental issues. These individuals carefully reviewed our manuscript to ensure that our interpretations and presentations were balanced, correct, and thorough. The quality of this edition owes much to the efforts of Judy Cumby, FCA; Tashia Batstone, FCA; and Tammy Crowell, CA.
We are grateful to our dedicated team of assignment checkers, Jeff Christian, CA; Kimberly Morse; Cheryl Nachtigal, CGA; Duncan Ferguson, CA; and Douglas Cashin, CA, who have exhaustively checked the accuracy of the assignment material.
We also appreciate the permissions granted by the following organizations for permission to use their problem and case material:
• The Canadian Institute of Chartered Accountants
• The Certified General Accountants’ Association of Canada
• The Society of Management Accountants
• The Ontario Institute of Chartered Accountants
• The Atlantic School of Chartered Accountancy
• The American Institute of Certified Public Accountants
We are grateful to the people at McGraw-Hill Ryerson who guided this manuscript through its development process. We appreciate the strong support of: Rhondda McNabb, our Senior Sponsoring Editor, Marcia Luke, our Developmental Editor, and the production team, led by Kelly Dickson and including Anne Nellis and Erin Moore, who have all contributed in significant ways to this final product. And, of course, Karen Rolfe has been a welcome and active partner in this enterprise, as our copy-editor. She has greatly improved the quality of the final manuscript!
On a personal level, we would like to thank our friends and family members for their support and encouragement throughout the lengthy process of bringing this book to fruition, especially: in Halifax—Peter Conrod and Warren and Carmita Fetterly; and in Toronto—Calvin Luong and Brian McBurney.
Thomas H. Beechy Joan E. D. Conrod
Schulich School of Business Faculty of Management
York University Dalhousie University
Toronto, ON Halifax, NS
Lyryx Assessment for Intermediate Accounting
Lyryx Assessment is a Web-based teaching and learning tool that has captured the attention of post-secondary institutions across the country. Developed specifically for Intermediate Accounting, Fourth Edition by Beechy and Conrod,
Lyryx Assessment is a leading-edge online assessment system that delivers significant benefits to both students and instructors.
After registering their course with McGraw-Hill Ryerson, instructors can create Labs of their choice by selecting problems from our test bank and setting deadlines. Instructors have access to all the students’ marks and can view their best Labs. At any time, instructors can download the class grades for their own programs to analyze individual and class performance.
The assessment takes the form of a homework assignment called a Lab, which corresponds to the chapters in the Intermediate Accounting text. The Labs are algorithmically generated and automatically graded, so students get instant scores and feedback—no need to wait until the next class to get results!
With new Labs randomly generated each time, students have unlimited opportunities to try a type of question. Student motivation is high with these Labs, because they can be tied to assessment and because they can try as many times as they want prior to the due date, with only their best grade being recorded.
If students are doing their intermediate accounting practice and homework, students will improve their performance in the course. Recent research regarding the use of Lyryx has shown when Labs are tied to assessment, even if worth only a small percentage of the total grade for the course, students will do their homework—and more than once. The result is improved student success in intermediate accounting!
Instructors: Please contact your iLearning Sales Specialist for additional information on the Lyryx Assessment for Intermediate Accounting.
Lyryx Quick Start
Developed to address the need to quickly “refresh” student learning from their introductory financial accounting course, Lyryx Quick Start is the perfect solution. This product contains the essential material needed to prepare students for Intermediate Accounting. There are Explorations and Labs reviewing:
The Accounting Cycle
Like Lyryx for Intermediate Accounting, new Labs are generated each time, providing students with unlimited opportunity to practice. The result is students who are well prepared to begin the intermediate accounting course.
Instructors: Please contact your iLearning Sales Specialist for additional information on the Lyryx Quick Start.
For the Students
iStudy Intermediate Accounting
Available 24/7: providing instant feedback when you want, how you want, and where you want. This online iStudy space was developed to help you master concepts and achieve better grades with all the learning tools you’ve come to expect, including chapter summaries, quiz questions, and additional problems. iStudy offers the best, most convenient way to learn, interact, and succeed.
iStudy can be purchased through the Online Learning Centre or by purchasing a PIN code card through the campus bookstore.
Instructors: Please contact your iLearning Sales Specialist for more information on how to make iStudy part of your student’s success.
Online Learning Centre (OLC) www.mcgrawhill.ca/olc/beechy
Updated for the fourth edition, the Beechy/Conrod Intermediate Accounting OLC provides a wealth of additional content and exercises, including
Solutions to Concept Review exercises;
Solutions to selected text assignments;
A glossary of all key terms in the text;
Excel Assignment downloads to help solve selected in-text assignments;
Compound Interest Tables; and
Appendix: Interest—Concepts of Future and Present Value;
Chapter 14 Appendix: Financial Restructuring; and
Chapter 18 Appendix: Actuarial Cost Methods.
For the Instructor
Instructor’s Resource CD-ROM. A one-stop convenient source of supplemental material.
Instructor’s Manual. There is a brief topical outline for each chapter that indicates the topics to discuss in class and an assignment guide that provides, at a glance, the topical content of each exercise, problem, and case.
– Solutions Manual. This comprehensive manual provides solutions to all cases, questions, assignments, and comprehensive problems.
– Computerized Test Bank. With an abundance of objective questions, multiple-choice questions, and short exercises, this supplement is a valuable resource for instructors when preparing quizzes and examinations.
– Microsoft® PowerPoint® Slides. This PowerPoint® presentation can be used to review chapter concepts.
– Excel Template Solutions. Solutions are provided to all Excel Template assignments.
Many of these Instructor resources are also available for download from the Instructor Area of the Online Learning Centre.
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Integrated Learning Sales Specialist
The Integrated Learning Sales Specialists are the McGraw-Hill Ryerson representatives who have the experience, product knowledge, training, and support to help instructors assess and integrate any of the MHR products, technology, and services into courses for optimum teaching and learning performance. Whether it’s using the test bank software, helping students improve their grades, or putting an entire course online, the iLearning Sales Specialist is there to help.
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McGraw-Hill Ryerson takes pride in developing the tools necessary to ensure a rich teaching and learning experience. MHR can assist in integrating technology, events, conferences, training, and more, into the services surrounding the textbook. MHR calls it iServices; for additional information, visit http://www.mcgrawhill.ca/highereducation/iservices.
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COURSE MANAGEMENT The Intermediate Accounting Online Learning Centre content is available for course management systems, such as Blackboard. Ask your iLearning Sales Specialist for details.