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Corporate Financial
Accounting 16e
Carl S. Warren
Professor Emeritus of Accounting
University of Georgia, Athens
Jefferson P. Jones
Associate Professor of Accounting
Auburn University
Australia • Brazil • Mexico • Singapore • United Kingdom • United States
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Carl S. Warren WCN: 02-300
Jefferson P. Jones
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Throughout this text, real-world companies are used in the narrative, illustrations, and end-of-chapter assignments. These companies
are identified in boldface color type, and any data presented was adapted from or based upon annual reports, Securities and Exchange
Commission filings, or other publicly available sources. Any other individuals or companies used in illustrations and homework are
fictional, and any resemblance to actual persons, living or dead, businesses or companies is entirely coincidental.
Printed in the United States of America

Print Number: 01 Print Year: 2020
Preface
Roadmap for Success

Warren/Jones Corporate Financial Accounting, 16e, provides a sound pedagogy for giving s tudents
a solid foundation in business and accounting. Warren/Jones covers the fundamentals in an inclu-
sive manner that motivates students to learn by showing how accounting is important to their
careers and business.
Inclusivity
A major objective of Warren/Jones Corporate Financial Accounting, 16e, is to create an inclusive
learning experience for all students that recognizes the wide diversity in student demographics,
abilities, and experiences. This edition has been revised with a learner-centric approach that
understands and acknowledges that a student’s learning experience may be influenced by a vari-
ety of mental, sensory, and physical factors. As a result, this edition and its ancillaries have been
designed to create an accessible learning experience for all students.
This edition also recognizes that students have unique backgrounds and perspectives. As a result,
chapter content, illustrations, and homework are designed to be respectful and inclusive of differ-
ences in student race, ethnicity, sexual orientation, gender, religion, age, and culture. The authors
welcome suggestions and comments on how to be even more inclusive in future editions.
New Features
This revision includes a range of new features that help Warren/Jones provide students with the
context to see how accounting is valuable to their careers and business. These new features include:
▪▪ Using Data Analytics
▪▪ Take It Further data analytic cases
▪▪ Journal entries with T accounts
▪▪ Illustration of why accrual accounting is required by GAAP
iii
Customer Refunds Payable is a liability account
for estimated refunds and allowances.
The account receivable was paid in cash

iv Preface within the 30-day credit period.
c. Jan. 6 Cash 9,000
The remaining account receivable
Data Analytics
Accounts Receivable—Wall Company 9,000
($12,000 – $3,000) is paid in cash.
Using Data Analytics examples have been added to each chapter, which describe an application
Check Up Corner
of data analytics to each chapter’s content.
Using Data Analytics

Sales
Retail businesses, such as Target Corporation (TGT), use data analytics to answer questions such
as the following:
l What are our best-selling products?
l What products are generating returns?
l What percent of our customers are using self-checkouts? USING DATA
l What time of the day do we have the most sales? ANALYTICS
l What percent of our customers use credit cards?
l What percent of our customers use debit cards?
Target has used data (predictive) analytics to improve the retail experience of its customers as well
as to increase its sales. For example, Target uses data analytics to decide which products should
earn shelf space in its brick-and-mortar stores and which are best serviced with its online sales app.
See TIF 5-8 for a homework assignment using data analytics.
Source: Dina Gerdeman, “On Target: Rethinking the Retail Website,” Forbes, December 4, 2018, www.forbes.com/sites/
hbsworkingknowledge/2018/12/04/on-target-rethinking-the-retail-website/#2690a20916fb.
Take It Further Data Analytic Cases

Chapter 5 Accounting for Retail Businesses 307
Take It Further data analytic cases have been added to several chapters. These TIF cases use
a dataset related to the chapter content that requires a student to analyze and develop reports
Mark: Krista, I don’t know what to do about buying my new stereo.
using Excel and Tableau. The chapters with TIF data analytic cases are as follows:
Krista: What’s the problem?
Mark: Well,5:
Chapter I can buy it locally
Accounting foratRetail
Tru-Sound Systems for $1,175.00. However, Wholesale Stereo
Businesses
has the same system listed for $1,200.00.
TIF 5-8 “Sales analysis” (Excel application)
Krista: What’s the big deal? Buy it from Tru-Sound Systems.
Chapter 6: quite
Mark: It’s not Inventories
that simple. Wholesale Stereo charges $49.99 for shipping and handling.
If I have Wholesale Stereo senditems”
TIF 6-5 “Out-of-stock it next-day
(Excelair, it’ll cost $89.99 for shipping and handling.
application)
Krista: So?
Chapter 7: Internal Control and Cash
Mark: But, that’s not all. Tru-Sound Systems will give an additional 2% discount if I pay cash.
TIF 7-6
Otherwise, they“Inventory
will let me losses
use myandVisa,potential
or I can controls” (Tableau
pay it off in application)
three monthly installments. In
addition, if I buy it from Tru-Sound Systems, I have to pay 9% sales tax. I won’t have to pay
Chapter 8: Receivables
sales tax if I buy it from Wholesale Stereo, since they are out of state.
TIF
Krista: 8-6 “Collectability
Anything else??? of receivables by customer type” (Excel application)
Mark: Well 9:
Chapter . . . Wholesale
Long-TermStereo saysFixed
Assets: I haveand
to charge it on my Visa. They don’t accept checks.
Intangible
Krista: I am not surprised. Many online stores don’t accept checks.
TIF 9-5 “Equipment maintenance, downtime, and costs” (Excel and Tableau applications)
Mark: I give up. What would you do?
Chapter 10: Liabilities: Current, Installment Notes, and Contingencies”
1. Assuming that Wholesale Stereo doesn’t charge sales tax on the sale to Mark, which
TIF 10-6is offering
company “Supplier the(vendor)
best buy?analyses” (Excel application)
2. What might be
The following is the data analytic some considerations other than
case for Chapter 5. price that influence Mark’s decision
on where to buy the stereo system?
TIF 5-8 Data Analytics: Sales analysis

Michelle Horowitz is the manager of AAAA Office Supplies, a locally owned office supply store
for schools and businesses. Michelle is concerned about the large variety of products the store
USING DATA carries, which ties up storage space and working capital. Michelle has asked you to analyze the
ANALYTICS
store’s inventory and sales to determine if there are products that may be worth discontinuing.
Michelle has asked you for the following:
1. A list of the quantity of each product sold for a recent month.
2. Recommendations for any products that should be discontinued.
Go to CengageNOWv2 to complete this assignment.
Pathways Challenge
Preface v
Journal Entries with T Accounts

T accounts with debit and credit postings are included with journal entries throughout
Corporate Financial Accounting, 16e. The accounting equation and T accounts are shown in a
smaller font so that the presentation is still focused on the journal entry. That is, the presentation
is designed to subtly reinforce student learning without detracting from a journal entry focus.
Examples of this new presentation follow:
Purchase of $9,250 of inventory on account.
Inventory 9,250
Accounts Payable—Thomas Corporation 9,250
Purchased inventory on account.
Assets 5 Liabilities 1 Stockholders’ Equity

Inventory Accounts Payable
9,250 9,250
Discarding of fully depreciated equipment.
Accumulated Depreciation—Equipment 4,800

Loss on Disposal of Equipment 1,200
Equipment 6,000
To write off equipment discarded.

Accumulated Loss on Disposal of
Equipment Depreciation Equipment
6,000 4,800 1,200
Issuance of preferred stock and common stock at par value for cash.
Cash 1,500,000
Preferred Stock 500,000
Common Stock 1,000,000
Issued preferred stock and common
stock at par for cash.
Cash Preferred Stock Common Stock
1,500,000 500,000 1,000,000
The preceding presentation has the following pedagogical advantages:

▪▪ Students can see the impact of the journal entry on the elements of the accounting equation.
▪▪ Students can see the impact of the journal entry on the financial statements.
The impact on the balance sheet is shown by the accounting equation.
The impact on the income statement is shown by revenue and expense T accounts under
Stockholders’ Equity.
The impact on the statement of stockholders’ equity is shown by common stock, retained
earnings, and dividend T accounts under Stockholders’ Equity.
The impact on the statement of cash flows is shown by the cash T account under Assets.
▪▪ The presentation reinforces the rules of debit and credit.
▪▪ The accounting equation is illustrated as the foundation (framework) for all financial account-
ing systems.
▪▪ The presentation is consistent with today’s accounting systems where posting to accounts is
often done at the same time journal entries are recorded.
vi Preface
Why Accrual Accounting is Required

Why the accrual basis of accounting is required by GAAP has been added to Chapter 4. This
192 section uses the NetSolutions illustrations from Chapters 1–4 as a basis for the following exhibit.
Chapter 4 The Accounting Cycle
Exhibit 20
Accrual versus Cash Accrual Basis of Accounting
Basis of Accounting Increase (Decrease) Interpretation
for NetSolutions December November Amount Percent
Revenues $9,460 $7,500 $1,960 26.1%
NetSolutions is profitable and rapidly
Expenses (5,405) (4,450) 955 21.5%
expanding.
Net income (loss) $4,055 $3,050 1,005 33.0%
Cash Basis of Accounting

Increase (Decrease) Interpretation
December November Amount Percent NetSolutions is in trouble with declining
Revenues $6,980 $7,500 $ (520) (6.9)% revenues and increasing expenses, which
generated a net loss. This suggests that
Expenses (7,915) (4,600) 3,315 72.1%
NetSolutions may not be able to continue
Net income (loss) $ (935) $2,900 (3,835) (132.2)% as a viable company without significant
operational changes.
Under the accrual basis of accounting, revenues increased by 26.1% in December, while
This exhibit illustrates that accrual
expenses increased accounting
by only 21.5%. As aisresult,
required by GAAP
net income because
increased it These
by 33.0%. betterresults
matches
sug-
revenues and expenses and, thus, is a better indicator of a company’s
gest that NetSolutions is a profitable, rapidly expanding company. profitability.
Under the cash basis of accounting, revenues decreased by (6.9)%, while expenses increased
by 72.1%. As a result, NetSolutions reported a net loss of $(935) or a decrease of (132.2)% from
Existing Features
November’s net income of $2,900. These results suggest that NetSolutions is in trouble and may
not be able to continue as a viable company.
As shown in Exhibit 20, accrual accounting better reports the underlying operating perfor-
Some existing features
mance offrom previous
NetSolutions. editions
It does include:
this by better matching revenues and expenses. This is why accrual
accountingto
▪▪ Stepwise approach is accounting
required by generally
cycle accepted accounting principles (GAAP).
▪▪ Presentation style designed around the way students learn
▪▪ A Schema, or roadmap, at the start of each chapter.
▪▪ Links to theAnalysis
Opening Company for Decision Making
▪▪ Pathway Challenges
Objective
Describe ▪and
Working Capital and Current Ratio
▪▪ 7Check Up Corners
illustrate for Decision Making
▪ Analysis
the use of working The ability to convert assets into cash is called liquidity, while the ability of a business to
▪▪the
capital and Make a Decision
current pay its debts is called solvency. Two financial measures for evaluating a business’s short-term
ratio in evaluating a liquidity and solvency are working capital and the current ratio.
company’s financial
Working capital is the excess of the current assets of a business over its current liabilities:
condition.
Schema Working Capital = Current Assets – Current Liabilities
Each chapter begins with a schema that shows students what they are going to learn and how
Current assets are more liquid than long-term assets, because they can be more readily
it is connected turned
to theintolarger
cash picture. In the early
to meet short-term chapters,
obligations. Thus,the schemainillustrates
an increase a company’show theassets
current steps
in the accounting cycle or
increases areimproves
interrelated. In later
its liquidity chapters,
because the are
these assets schema shows
available how
for uses each
other thanchapter’s
paying
current to
topics are connected liabilities.
the financial statements. The following are examples of the schema for
Chapters 4, 5, and A9.positive working capital implies that the business is able to pay its current liabilities and
is solvent. Thus, an increase in working capital increases or improves a company’s short-term
solvency.
To illustrate, NetSolutions’ working capital at the end of 20Y3 is $6,355, computed as fol-
lows from Exhibit 1:
Working Capital = Current Assets – Current Liabilities
= $7,745 – $1,390
= $6,355
This amount of working capital implies that NetSolutions is able to pay its current liabilities.
Preface vii
Chapter
4 The Accounting Cycle
Chapter 1 Chapter 3
Transactions
ADJUSTING ENTRIES
Unadjusted Adjusting Adjusted

Accounts Journal Entries Accounts
XXX XXX Accrued Revenues Unadj. Balances XXX XXX
Accrued Expenses Adjustments XXX XXX
Unearned Revenues Adj. Balances XXX XXX
ACCOUNTING SYSTEM Unadjusted Prepaid Expenses
Accounting Equation Trial Balance Depreciation
Adjusted Trial Balance
Assets = Liabilities + Equity
Total Debit Total Credit
Balances
= Balances
Chapter 2 Account
Debits Credits
Chapter 4 Adjusted Accounts
RULES OF DEBIT AND CREDIT XXX XXX
Balance Sheet Accounts
Adjusted Balances
AS S ETS = L IABIL ITIES + STOCKHOL DER S ' E Q U IT Y

Asset Accounts Liability Accounts Common Stock + Retained Earnings
FINANCIAL STATEMENTS
Debit for Credit for Debit for Credit for Debit for Credit for Debit for Credit for Income Statement Statement of Stockholders’ Equity Balance Sheet
increases decreases decreases increases decreases increases decreases increases
(+) (–) (–) (+) (–) (+) (–) (+)
Balance Balance Balance Balance CLOSING ENTRIES
Adjusted Closing Income Statement
Accounts Journal Entries and Dividend Accounts
Income Statement
XXX XXX 0 0
Accounts
Dividends Revenue Accounts
Adjusted Zero Balances
Debit for Credit for Debit for Credit for Balances
increases decreases decreases increases
(+) (–) (–) (+) Balance Sheet
Balance Accounts
Balance
XXX XXX
Expense Accounts
Debit for Credit for
increases decreases Post-Closing
(+) (–) Trial Balance
Balance
Unadjusted Trial Balance

160 Tota l De bit Ba la nc e s = Tota l Cre dit Ba la nces 161
5 Accounting for
9 Long-Term Assets:
Chapter
Chapter
Retail Businesses Fixed and Intangible
STATEMENT OF STATEMENT OF CASH FLOWS

STOCKHOLDERS’ EQUITY For the Year Ended December 31, 20Y5
STATEMENT OF STATEMENT OF CASH FLOWS For the Year Ended December 31, 20Y5
Cash flows from (used for)
STOCKHOLDERS’ EQUITY For the Year Ended December 31, 20Y5
Common Retained operating activities $XXX
For the Year Ended December 31, 20Y5
Cash flows from (used for) Stock Earnings Total Cash flows from (used for)
operating activities $XXX Balances, Jan. 1, 20Y5 $XXX $ XXX $ XXX investing activities XXX
Common Retained
Cash flows from (used for) Issued common stock XXX XXX Cash flows from (used for)
Stock Earnings Total
investing activities XXX Net income XXX XXX financing activities XXX
Balances, Jan. 1, 20Y5 $XXX $ XXX $ XXX
Cash flows from (used for) Dividends (XXX) (XXX) Net increase (decrease) in cash $XXX
Issued common stock XXX XXX
financing activities XXX Balances, Dec. 31, 20Y5 $XXX $ XXX $ XXX Cash balance, January 1, 20Y5 XXX
Net income XXX XXX
Net increase (decrease) in cash $XXX Cash balance, December 31, 20Y5 $XXX
Dividends (XXX) (XXX)
Balances, Dec. 31, 20Y5 $XXX $ XXX $ XXX Cash balance, January 1, 20Y5 XXX
Cash balance, December 31, 20Y5 $XXX
INCOME STATEMENT BALANCE SHEET
For the Year Ended December 31, 20Y5 December 31, 20Y5
INCOME STATEMENT
For the Year Ended December 31, 20Y5 BALANCE SHEET Sales $ XXX Assets
December 31, 20Y5 Cost of goods sold (XXX) Current assets:
Sales $ XXX Gross profit $ XXX Cash $XXX
Assets Operating expenses: Accounts receivable XXX
Cost of goods sold (XXX)
Current assets: Wages expense $XXX Inventory XXX
Gross profit $ XXX
Cash $XXX Advertising expense XXX Total current assets $XXX
Operating expenses:
Accounts receivable XXX Utilities expense XXX Long-term assets:
Wages expense $XXX
Inventory XXX Depreciation expense XXX Property, plant, and equipment $ XXX
Advertising expense XXX
Total current assets $XXX Amortization expense XXX Accumulated depreciation (XXX)
Utilities expense XXX
Property, plant, and equipment XXX Depletion expense XXX Book value $XXX
Depreciation expense XXX
Total assets $XXX … XXX Natural resources $ XXX
… XXX Liabilities
Total operating expenses (XXX) Total operating expenses (XXX) Accumulated depletion (XXX)
Current liabilities $XXX
Operating income $ XXX Operating income $ XXX Net natural resources XXX
Long-term liabilities XXX
Other revenue and expense XXX Other revenue and expense XXX Intangible assets XXX
Total liabilities $XXX
Net income $ XXX Net income $ XXX Total long-term assets XXX
Stockholders’ Equity
Total assets $XXX
Common stock $XXX
Liabilities
Retained earnings XXX
Current liabilities $XXX
Total stockholders’ equity XXX
Long-term liabilities XXX
Total liabilities and stockholders’ equity $XXX
Total liabilities $XXX
Common stock $XXX
Retained earnings XXX
Total stockholders’ equity XXX
Total liabilities and stockholders’ equity $XXX
236
454
Link to Opening Company

Links to the “opening company” of each chapter calls out examples of how the concepts intro-
duced in the chapter are connected to the opening company. This shows how accounting is used
in the real world by companies. When a real-world public company is first mentioned, its stock
(ticker) symbol is shown in parentheses. Doing so facilitates students’ ability to access additional
information about the company, including its stock price and website.
Assets expenses 5
LiabilitiesCost of goods
(XXX)
Operating 1 sold Stockholders’
(XXX)Equity
Cash Sales
$ XXX
Operating income Gross profit $ XXX
1,800 1,800
Operating expenses (XXX)
Using the perpetual inventory system, the cost Operating income
of goods sold and the$ XXX
decrease in inventory
The also
are revenue activitiesInofthis
recorded. a service
way, business involveaccount
the inventory providing services to
indicates thecustomers.
amount On the incomeon
of inventory state-
hand
mentsold).
(not for a service business, the revenues from services are reported as fees earned. The operating expenses
viii Preface incurred in providing
To illustrate, assumethe services
that theare subtracted
cost of goodsfrom soldthe onfees earned
March 3 isto$1,200.
arrive atTheoperating
entry to income.
record the
costInofcontrast, the revenue
goods sold and theactivities
decrease ofin
a retail business involve
the inventory the buying and selling of merchandise.
is as follows:
A retail business first purchases merchandise to sell to its customers. When this merchandise is sold, the
revenue is reported as sales, and its cost is recognized as an expense. This expense is called the cost of
goods soldMar.or cost
3 ofCost
merchandise sold. The cost of goods sold is subtracted from
of Goods Sold 1,200sales to arrive at gross
254 profit.Chapter
This amount Inventory
is called
5 Accounting gross
for Retailprofit because it is the profit before deducting operating
Businesses 1,200 expenses.
The operating expenses areTosubtracted
record the from
cost ofgross
goods sold. to arrive at operating income.
Dollar Tree, Inc. profit
Merchandise on hand (not sold) at the end of an accounting period is called inventory or
Assets
SalesLiabilities Stockholders’ Equity
W
Exhibit 7 Journal Entries 5
for Customer Returns, Refunds,1 and Allowances
hen you are low on cash but need to pick up party supplies, must design its accounting system to not only record the receipt merchandise inventory. Inventory
Inventory
is reported as a current asset on the balance sheet.
Cost of Goods Sold
housewares, or other consumer items, where do you go? Many of goods for resale, but also to keep track of what merchandise is
1,200 1,200
shoppers are turning to Dollar Tree, Inc. (DLTR), a leading available for sale as well as where the merchandise is located. In
operator of discount variety stores with more than 15,000 stores in addition, Dollar Tree must record the sales and cost of the goods
SalesSales
may . .be
End-of-Period
On a recent income statement, Dollar Tree reported
be made to customers
Adjusting
the following Entries
(in billions):
using debit cards, sometimes XXX called bank cards. When
Link to
. . . . . . . . . . . . . . . . . . . . .Sales
North America. Its stores operate under the brand names Dollar Tree
and Family Dollar. All merchandise is $1 at Dollar Tree stores, while
sold for each of its stores. Finally, Dollar Tree must record such
data as delivery costs, merchandise discounts, and merchandise a customerCost uses
of goods a debit sold .card, . . . . . . the
$ 22 .8
money Refunds
. . Customer
(15 .9) required Payable by the purchase is deductedXXX instantly from the Dollar Tree
Family Dollar offers merchandise for $10 or less. The stores typically returns. customer’s bank
Gross profitaccount. . . . . . . . . .For
. . . . .this $reason,
. .Estimated debitInventory
6 .9 Returns card sales are recorded XXXas cash sales.
carry more than 7,000 items, consisting of basic, everyday items as This chapter focuses on the accounting principles and SalesOperating
may also expenses be made . . . . to
. . . customers
(7 .9)
Cost of Goods using Sold credit cards such as Mastercard XXX or Visa. Credit
well as seasonal, closeout, and promotional items. concepts for a retail business. ln doing so, the basic differences card salesOperating
are normally income (loss) processed . . . $ by(1 .0)a clearinghouse that contacts the bank that issued the card.
The accounting for a retailer, like Dollar Tree, is more between retail and service company activities are highlighted. Cash Refund Paid to the retailer’s bank account. Credit Memorandum Issued
TheOnissuing bank
its balance sheet, then electronically
it reported inventorytransfers
of $3 .5 billion . cash directly 4
Since
complex than for a service company. This is because a service The financial statements of a retail business and accounting for
company sells only services and has no inventory. Dollar Tree merchandise transactions are also described and illustrated. the retailer normally
Customer returns receives cashCustomer within Refunds
a few days Payable of making the sale, credit
. . . . . XXX card sales
Customer arePayable
Refunds also . . . . . XXX
recordedmerchandise
as cash sales. Cash . . . . . . . . . . . . . . . . . . . . . . . . XXX Accounts Receivable . . . . . . . . . . XXX
Business Insight Inventory . Estimated

Dollar Tree normally receives cash
. . . . . . . . . . . . . . . . . . . . . XXX
Returns
from credit card Inventory sales within . . . threeXXX
Inventory . . . . . . . . . . . . . . . . . . . . . . XXX
Estimated
business days, and Returns
thus records InventoryLink . . . to XXX
credit card Versus
Comcast sales as cash
Customer does not
sales.
Lowe’s
return Customer Refunds Payable . . . . . XXX Customer Refunds Payable . . . . . XXX Dollar Tree
C
merchandise Cash . is
. . a . .service
. . . . . . .business
. . . . . . . . . . . . XXX Lowe’s Companies,
Accounts Receivable . Inc. . . . . . . . . . XXX
omcast Corporation (CMCSA)
If a that offersallows
retailer cable communications,
customers to use broadcast debit or televisioncredit cards to pay for purchases, Condensed Income the retailer Statement
may be(NBC television),
charged filmed entertainment
processing fees by the (Universal
clearinghouse Pictures), or issuing bank. Such fees are (in periodically
millions)
and themeasparks
recorded (UniversalTo
an expense. Parks) to its customers .
illustrate, assume that Lowe’s a companySales pays . . .credit
. . . . . . . card
. . . . . .processing
. . . . . . . . . . . . . fees
. . . . . .of . . . . . . . . . . . $ 71,309
Companies, Inc. (LOW) is a large
fees home
wouldimprovement retailer . Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48,401)
$4,150
Link to
on October 31. These
Although
The differences in the operations all sales
of a service andare
be recorded
retailfinal, business Dollar
as follows:
are Tree Grosswill
profit “exchange”
. . . . . . . . . . .any
. . . . .unopened
. . . . . . . . . . . .item
. . . . . .with
. . . . . the original
. $ 22,908
Dollar Tree receipt .
illustrated in their recent income statements, as follows: Selling, general, and administrative expenses . . . . . . . . . . . . (17,413)
Oct. 31 Comcast
Credit Card Expense
Corporation Depreciation expense
4,150 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,477)
CashIncome Statement
Condensed Operating income . . . . . . 4,150
. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,018
(inTo record service charges on credit
millions) Source: Lowe's Companies, Inc ., Form 10-K for a Recent Fiscal Year Ended February 1.
Revenue . . . . . . . . . . . . . . . . . . . . .card
. . . . sales
. . . . . for
. . . the
. . . .month.
. . . . . . . $108,942
Assets Ethics in Action
Programming and production expenses . . . . . . . . . . . . . . . (34,440)
5 Liabilities 1 As a retail company,
Stockholders’Lowe’s
Equity subtracts cost of goods sold from sales to
©KIT LEONG/SHUTTERSTOCK.COM
Selling and administrative Cashexpenses . . . . . . . . . . . . . . . . . . . (40,424) disclose gross profit .
Credit As a service company, Comcast does not show
Card Expense
ETHICS
The Case
Depreciation and amortization of the 4,150 Fraudulent
expenses . . . . . . . . Price Tags
. . . . . . (12,953) merchandise
cost of goods sold, nor abought
4,150 or obtained
gross profit elsewhere .
line . Rather, The couple then
service expenses
Chapter 9 Long-Term Assets: Fixed and Intangible
Operating
One of 467
incomethe challenges . . . . . . . . . . . .for
. . . .a . .retailer
. . . . . . . . is . . . . . . $ its
. . .policing 21,125
sales return returned
are subtracted the cheaper
from revenue goods
straight and received
to operating income . the substantially
Instead of using Mastercard or Visa, a customer may use a credit card that is not issued by a bank.
Source:policy .
ComcastThere areForm
Corporation, many
10-K ways in Fiscal
for a Recent which Yearcustomers
Ended Decembercan
31 . unethi- higher refund amount . Company security officials discovered
Exhibit 13 summarizes the characteristics of intangible assets. For example, a customer might use an American Express card. If the seller uses a clearinghouse, the
cally or illegally abuse such policies . In one case, a couple was the fraud and had the couple arrested after they had allegedly
clearinghouse will collect the receivable and transfer the cash to the retailer’s bank account, similar
accused of attaching a company’s store price tags to cheaper bilked the company for more than $1 million .
to the way it would have if the customer had used Mastercard or Visa. Large businesses, however,
Source: Jack L . Hayes International, Inc ., 28th Annual Retail Theft Survey, 2016 .
Exhibit 13
Intangible CyberSource is one of the major credit card clearinghouses. For a more detailed description of how credit card sales are processed, see the
4
Comparisonfollowing
of CyberSource web page: www.cybersource.com, click on Products, and under Payment Processing, click on Payment Cards, and then on
Asset Description Amortization Period Periodic Expense
Link to Dollar Tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Pages 239, 241, 247, 248, 251, 254, 265, 268 Intangible Assets
How it Works.
Patent Exclusive right to benefit Estimated useful life not Amortization expense
Analysis for Decision Making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 269–270
from an innovation to exceed legal life Check Up Corner 5-2 Sales Transactions
Make a Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 304
Copyright Exclusive right to benefit Estimated useful life not Amortization expense
On December 30, Burrows Inc . sold $12,000 of merchandise to Wall Company on account, with terms n/30 . The
from a literary, artistic, or to exceed legal life merchandise cost Burrows $8,000 . On January 3, Wall determines that a portion of the merchandise received does
musical composition not operate properly, and Burrows issues a credit memo for the returned items . The invoice amount of the returned
merchandise is $3,000, which cost Burrows $2,000 . Journalize the entries by Burrows to record (a) the December 30 sale,
Trademark Exclusive use of a name, None Impairment loss if fair 237 (b) the January 3 return, and (c) the receipt of the amount due from Wall on January 6 .
term, or symbol value less than carrying
value (impaired)
Goodwill Excess of purchase price of None Impairment loss if fair
a business over the fair value less than carrying
value of its net assets
(assets ] liabilities) Pathways Challenges value (impaired)
Pathways Challenge encourages students’ interest in accounting and emphasizes the critical
thinking aspect of accounting. A suggested answer to the Pathways Challenge is provided at
the end of the chapter.
Pathways Challenge
This is Accounting!
Economic Activity
Verizon Communications Inc. (VZ) is the largest wireless service provider in the United States
with over 114 million retail subscribers. To deliver its products and services, Verizon must have access to
spectrum—the radio frequencies that carry sound, data, and video to wireless devices. However, spectrum
is a limited resource that the Federal Communications Commission (FCC) licenses to businesses for a period
of 10 years, subject to renewal. In a recent year, Verizon acquired almost $10 billion in wireless licenses.
Critical Thinking/Judgment
How should Verizon account for its acquisition of wireless licenses?
What is the useful life of a wireless license?
Should Verizon expense (amortize) the cost of its wireless licenses?
Suggested answer at end of chapter.
Chapter 9 Long-Term Assets: Fixed and Intangible 493
Pathways Challenge
This is Accounting!
Information/Consequences
Because a wireless license does not exist physically, Verizon’s (VZ) wireless licenses are intangible assets.
All of the costs of acquiring a wireless license should be recorded as an asset. In a recent year, Verizon report-
ed almost $87 billion of wireless licenses, representing 35% of its total assets.
Even though the FCC license is granted for a 10-year period, Verizon considers this license to have an indef-
inite useful life. This is because the license is subject to renewal at a low cost and, historically, the FCC has
renewed Verizon’s licenses.
Verizon does not expense (amortize) the cost of its wireless licenses. Instead, the licenses are reviewed for
any impaired value.
25/09/17 5:38 PM
Suggested Answer
Preface ix
Check Up Corners
Throughout each chapter, Check Up Corners provide students with step-by-step guidance on
how
462 to Chapter
solve problems. Problem-solving
9 Long-Term Assets: Fixed and Intangibletips help students avoid common errors.
Check Up Corner 9-2 Selling Fixed Assets

On the first day of the year, Firefall Company purchased equipment at a cost of $340,000. The equipment
was expected to have a useful life of four years, a residual value of $20,000, and is depreciated at a straight-
line rate of 25%. Firefall sold the equipment at the beginning of the fourth year when the balance in the
accumulated depreciation account was $240,000. Journalize the entry to record the sale if the equipment
was sold for:
a. $95,000
b. $105,000
Solution:
a. Equipment sold for $95,000:
Cash 95,000
Accumulated Depreciation—Equipment 240,000
Loss on Sale of Equipment 5,000 Long-Term Assets: Fixed and Intangible
Equipment 340,000
McDonald’s Corporation
Balance Sheet
Selling Price – Book Value = Link to
Accumulated
December 31
$95,000 – $100,000
McDonald’s
Depreciation at
the End of Year 3
b. Equipment sold for $105,000: (in millions)
Assets
Cash 105,000
Accumulated
Property Depreciation—Equipment
and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
$ 39,050.9
Equipment
Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,890.9)340,000
Gain
Net on Saleand
property of equipment.
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
$24,160.0 Selling Price – Book Value =
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,677.4 $105,000 – $100,000
Note to Financial Statements:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,026.4
Check Up Corner
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,609.6
Equipment and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,414.9
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,050.9
Analysis for Decision Making
Source: McDonald’s Corporation, Form 10-K for a Recent Year Ended December 31 (adapted).
Analysis for Decision Making highlights how businesses use accounting information to make
The4cost and relatedNatural
the health Resources
Objective accumulated depletion
decisions
Describe
and evaluate ofofamineral rights are normally shown as part of the
business. This provides students with context of why
theassets” section of the balance sheet. The mineral rights may be shown net of depletion on
“Fixed
accounting
accounting is
forof
the face important
natural
the to
balance sheet. In a business.
such cases, a supporting note discloses
Some businesses own natural resources such the accumulated
as timber,depletion.
minerals, or oil. The characteristics of
resources, including natural resources are as follows:
the journal entry for
depletion. Analysis for Decision
▪▪ Naturally Making
Occurring: An asset that is created through natural growth or naturally through
the passage of time. For example, timber is a natural resource that naturally grows over time.
▪▪ Removed for Sale: The asset is consumed by removing it from its land source. For
Fixed Asset Turnover example, timberRatio is removed for use when it is harvested, and minerals Objective 7
are removed when
Describe and illustrate
The fixed asset turnover they are measures
ratio mined. the number of sales dollars earned per dollar of the fixed asset
▪▪ Removed
fixed assets. The higher and
the ratio, the Sold
more over More
efficiently Than isOne
a company Year:
using Theassets
its fixed natural
in resource
turnoverisratio
removed
to and sold
generating sales. The ratio is computed
over a period asof follows:
more than one year. assess the efficiency
of a company’s use of
Sales
FixedNatural resources
Asset Turnover Ratio = are classified as a type of fixed asset. The cost ofits
a fixed
natural resource includes
assets.
the cost of obtaining Average Book Value of
and preparing itFixed
for Assets
use. For example, legal fees incurred in purchasing a
To illustrate, the natural
followingresource are included
data (in millions) were as part
taken of its
from cost. financial statement
a recent
of McDonald’s Corporation As natural resources
(MCD) : are harvested or mined and then sold, a portion of their cost is debited to an
e account called depletion$21,076.5
expensSales expense.
Fixed assets (net):
Beginning of year 22,842.7
End of year 24.160.0
McDonald’s fixed asset turnover ratio for the year is computed as follows (rounded to one
decimal place):
Sales
Fixed Asset Turnover Ratio =
Average Book Value of Fixed Assets
$21,076.5
=
($22,842.7 + $24,160.0) ÷ 2
$21,076.5
= = 0.9
98169_ch09_rev02_442-493.indd 462 $23,501.4 16/08/17 5:12 pm
Is 0.9 efficient? To answer this question, McDonald’s fixed asset turnover ratio can be com-
pared to other quick-service restaurant companies, as shown in Exhibit 13. Yum! Brands (YUM)
operates KFC, Pizza Hut, and Taco Bell quick-service restaurants. The other restaurants are likely
familiar by name.
x Preface
Make a Decision
Make a Decision in the end-of-chapter material gives students a chance to analyze and compare
real 502
companies.
Chapter 9 Long-Term Assets: Fixed and Intangible
Make a Decision
Fixed Asset Turnover Ratio
MAD 9-1 Analyze and compare Amazon.com and Netflix Obj. 7

REAL Amazon.com, Inc. (AMZN) is the world’s leading Internet retailer of merchandise and
WORLD
media. Amazon also designs and sells electronic products, such as e-readers. Netflix, Inc.
(NFLX) is one of the world’s leading Internet television networks. Both companies compete
in the digital media and streaming space. However, Netflix is more narrowly focused in the
digital streaming business than is Amazon.
Sales and average book value of fixed assets information (in millions) are provided for
Amazon and Netflix for a recent year as follows:
Amazon.com Netflix
Sales $177,866 $20,156
Average book value of fixed assets 67,251 492
a. Compute the fixed asset turnover ratio for each company. Round to one decimal place.
b. Which company is more efficient in generating sales from fixed assets?
c. Interpret your results.
MAD 9-2 Analyze and compare Alaska Air, Delta Air Lines, and Southwest Airlines Obj. 7
REAL Alaska Air Group (ALK), Delta Air Lines (DAL), and Southwest Airlines (LUV) reported
WORLD
the following financial information (in millions) in a recent year:
Alaska Air Group Delta Air Lines Southwest Airlines

Sales $8,781 $47,007 $22,428
Average book value of fixed assets 6,842 29,823 18,275
a. Determine the fixed asset turnover ratio for each airline. Round to one decimal place.
b. Based on the fixed asset turnover ratio, which airline appears to be the most ef-
ficient in the use of its fixed assets?
c. The most important fixed asset to an airline is the aircraft. Given this, what factors
might influence the efficient use of fixed assets for an airline?
MAD 9-3 Analyze Verizon Obj. 7

REAL Verizon Communications Inc. (VZ) is a major telecommunications company in the
WORLD
United States. Two recent balance sheets for Verizon disclosed the following information
Student Learning Aids regarding fixed assets:
End of Year
Beginning of
Year
(in millions) (in millions)
This edition includes a variety of Property,
student learning
plant, and equipment aids in $ 265,734
addition $to the Check Up Corners,
252,835
Accumulated depreciation (173,819) (163,549)
including the following: Property, plant, and equipment (net) $ 91,915 $ 89,286
▪▪ At the end of each chapter,

Verizon’s Let’s
revenueReview
for the yeariswas
a $131,868
new chapter summary
million. Assume and
the fixed assetself-assessment
turnover ratio for feature
the telecommunications industry averages approximately 1.1.
that is designed to help busy students prepare for an exam. It includes a summary of each
a. Determine Verizon’s fixed asset turnover ratio. Round to one decimal place.
learning objective’s key
b. points, key this
Interpret terms, multiple-choice
ratio with questions,
respect to the industry average. exercises, and a sample
problem that students may use to practice.
▪▪ Sample multiple-choice questions allow students to practice with the type of assessments they
are likely to see on an exam.
▪▪ Short exercises and a longer problem allow students to apply their knowledge.
▪▪ Answers provided at the end of the Let’s Review section let students check their knowledge
immediately.
Instructor and Student Resources

Additional instructor and student resources for this product are available online. Instructor assets
include an Educator’s Guide, PowerPoint® slides, and a test bank powered by Cognero®. Student
assets include data sets and online appendices. Sign up or sign in at www.cengage.com to search
for and access this product and its online resources.
Preface xi
New Appendixes
Two new end-of-text appendixes have been added to this Each topic is designed as a self-contained learning module
edition. with its own assignment materials. The modules have been
written so that instructors have the flexibility of covering one
Appendix B: Selected Topics. This appendix allows instruc-
or more of the modules at a variety of different places in
tors the flexibility to cover a variety of topics that might be
their course depending upon their students’ needs.
relevant to their students. The topics include the following:
Topic 1: Investments Appendix C: Nike Annual Report (10-K). This appendix
Topic 2: Foreign Currency Transactions includes excerpts from a recent Nike annual report (10-K).
Topic 3: Corporate Taxes New to this appendix are student assignments for each
Topic 4: Reporting Unusual Items and Comprehensive chapter. An instructor could use all of the chapter assignments
Income as an “annual report” project. The annual report assignments
Topic 5: Revenue Recognition are referenced at the end of each chapter following the Take
Topic 6: International Accounting Standards It Further section.
Chapter Changes and Improvements

The following chapter changes and improvements have been Chapter 5
made in this edition:
▪▪ The discussion of the Nature of Retail Businesses has
been changed to reference business-to-business (B2B)
Chapter 1 and business-to-customer (B2C) transactions.
▪▪ Why It Matters boxes from prior edition have been rela- ▪▪ The accounting for purchase discounts has been changed
beled as Business Insight boxes. to use the gross method of accounting for purchase dis-
▪▪ New section on Business Activities has been added, counts.
including a related exhibit. ▪▪ The accounting for sales to customers using debit cards
▪▪ Exhibit 3 has been updated with new and more current has been added to this edition.
examples of accounting and business frauds. ▪▪ The accounting for sales coupons and rebates has been
▪▪ New Business Insight box on “Business Strategies” has added to the chapter. This discussion replaces the prior
been added. edition’s discussion of the accounting for sales discounts,
▪▪ Exhibit 11 is new and illustrates the interrelationships which has been moved to an end-of-chapter appendix.
of the financial statements with the balance sheet as the ▪▪ The end-of-chapter Appendix 1 illustrates the account-
connecting link. ing for sales discounts for gross and net methods. This
discussion has been simplified so that adjusting entries
Chapter 3 are not required.
▪▪ The opening company has been changed from Pandora ▪▪ The discussion of sales returns, refunds, and allowances
Media, Inc., which is now a subsidiary of Sirius XM, to has been revised so that the end-of-period adjusting
Netflix, Inc. entry is illustrated before examples illustrating customer
▪▪ The chapter Links have been changed to relate to Netflix. returns, refunds, and allowances.
▪▪ A new exhibit (Exhibit 7) has been added that summarizes
Chapter 4 the journal entries for customer sales returns, refunds,
▪▪ The discussion of NetSolutons’ financial statements has and allowances.
been changed to include a brief discussion of the state-
ment of cash flows, which is shown in a new appendix Chapter 6
to the chapter. This provides instructors the flexibility to ▪▪ New Business Insight box on radio frequency identifica-
cover all four of NetSolutions’ financial statements if they tion (RFID) has been added.
choose to do so. ▪▪ Revised section on the effect of inventory errors on finan-
▪▪ A new section and learning objective have been added cial statements.
to the end of the chapter on why the accrual basis of
accounting is required by GAAP.
▪▪ The appendix on reversing entries has been moved to an
online appendix.
xii Preface
Chapter 7 Chapter 12
▪▪ Updated Ethics in Action box on employee fraud. ▪▪ New exhibit on the effects of dividends and stock splits
▪▪ Updated Business Insight box to include remote deposits. has been added.
Chapter 8 Chapter 14
▪▪ Updated discussion of the allowance method for uncol- ▪▪ The opening company has been changed from Nike to
lectible accounts to reflect the new standard on current The Walt Disney Company.
expected credit losses. ▪▪ Appendix on the reporting of unusual items was moved
to Appendix B: Special Topics.
Chapter 10 ▪▪ Appendix on the concepts of fair value and comprehen-
▪▪ Updated W-4 Form to reflect recent changes. sive income was moved to Appendix B: Special Topics.
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About the Authors
Carl S. Warren
Dr. Carl S. Warren is Professor Emeritus of Accounting at the University of Georgia, Athens. Dr.
©TERRY R. SPRAY INHISIMAGE STUDIOS

Warren has taught classes at the University of Georgia, University of Iowa, Michigan State Univer-
sity, and University of Chicago. He has focused his teaching efforts on principles of accounting
and auditing. Dr. Warren received his PhD from Michigan State University and his BBA and MA
from the University of Iowa. During his career, Dr. Warren published numerous articles in pro-
fessional journals, including The Accounting Review, Journal of Accounting Research, Journal of
Accountancy, The CPA Journal, and Auditing: A Journal of Practice and Theory. Dr. Warren has
served on numerous committees of the American Accounting Association, the American Institute of
Certified Public Accountants, and the Institute of Internal Auditors. He has consulted with numer-
ous companies and public accounting firms. His outside interests include handball, golfing, skiing,
backpacking, motorcycling, and fly-fishing. He also enjoys interacting with his five grandchildren,
Bella and Mila (twins), Jeremy, and Brooke and Robbie (twins).
Jefferson P. Jones
©THOMAS BOUTWELL, T2PHOTOGRAPHY

Dr. Jefferson P. Jones is an Associate Professor of Accounting in the School of Accountancy at
Auburn University where he teaches financial accounting and applied financial research. He
received his Bachelor’s in Accounting and Master of Accountancy degrees from Auburn Univer-
sity and his PhD from Florida State University. Dr. Jones has received numerous teaching awards,
including the Auburn University Beta Alpha Psi Outstanding Teaching Award (eight times); the
Auburn University Outstanding Master of Accountancy Professor Teaching Award (five times); the
Auburn University Outstanding Distance Master of Accountancy Teaching Award (three times);
and the Auburn University College of Business McCartney Teaching Award. In addition, he has
made numerous presentations around the country on research and pedagogical issues. Dr. Jones
has public accounting experience as an auditor with Deloitte and Touche, holds a CPA certificate
in the state of Alabama (inactive), and is a member of the American Accounting Association, the
American Institute of Certified Public Accountants (AICPA), and the Alabama Society of CPAs
(ASCPA). His research interests focus on financial accounting, specifically investigating the quality
of reported accounting information, and accounting education. He has published articles in numer-
ous journals, including Advances in Accounting, Review of Quantitative Finance and Accounting,
Issues in Accounting Education, International Journal of Forecasting, and The CPA Journal. When
not at work, Dr. Jones enjoys playing golf and watching college football.
xiii
Brief Contents
1 Introduction to Accounting and Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2 Analyzing Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3 The Adjusting Process. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
4 The Accounting Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
5 Accounting for Retail Businesses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236
6 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308
7 Internal Control and Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
8 Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408
9 Long-Term Assets: Fixed and Intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 454
10 Liabilities: Current, Installment Notes, and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506
11 Liabilities: Bonds Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556
12 Corporations: Organization, Stock Transactions, and Dividends . . . . . . . . . . . . . . . . . . . . . . . . 596
13 Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 644
14 Financial Statement Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704
Appendix A Interest Tables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-2

Appendix B Selected Topics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Appendix C Nike Inc., Form 10-K for the Fiscal Year Ended May 31, 2020 Selected Excerpts. . . . C-1
Appendix D Reversing Entries (online). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-1
Appendix E Special Journals and Subsidiary Ledgers (online) . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1
xiv
Contents
1 Introduction to Accounting
and Business 2
Analysis for Decision Making 82
Horizontal Analysis 82
Continuing Problem 105

Nature of Business and Accounting 4 Make a Decision 106
Types of Businesses 4 Take It Further 108
Business Activities 5
Role of Accounting in Business 5 Pathways Challenge 77, 109
Role of Ethics in Accounting and Business 7
3
Opportunities for Accountants 8
Generally Accepted Accounting

Principles (GAAP) 10 The Adjusting Process 110
Characteristics of Financial Information 11
Assumptions 12
Principles 14 Nature of the Adjusting Process 113
Accrual and Cash Bases of Accounting 113
The Accounting Equation 14 Revenue and Expense Recognition 114
Business Transactions and the Accounting Equation 15 The Adjusting Process 114
Summary 19 Types of Accounts Requiring Adjustment 115
Classifications of Stockholders’ Equity 20 Adjusting Entries for Accruals 116
Financial Statements 21 Accrued Revenues 116
Income Statement 23 Accrued Expenses 117
Statement of Stockholders’ Equity 23 Adjusting Entries for Deferrals 120
Balance Sheet 24 Unearned Revenues 120
Statement of Cash Flows 25 Prepaid Expenses 121
Interrelationships Among Financial Statements 26
Adjusting Entries for Depreciation 124
Ratio of Liabilities to Stockholders’ Equity 29 Summary of Adjusting Process 126
Continuing Problem 54 Adjusted Trial Balance 130
Make a Decision 55 Analysis for Decision Making 132
Vertical Analysis 132
Take It Further 56
Pathways Challenge 13, 57
Make a Decision 155
2
Take It Further 157
Analyzing Pathways Challenge 131, 159
Transactions 58
Using Accounts to Record Transactions 61
Chart of Accounts 62
Double-Entry Accounting System 64

4 The Accounting Cycle 160
Balance Sheet Accounts 64 Flow of Accounting Information 163
Income Statement Accounts 64
Statement of Stockholders’ Equity Accounts (Dividends) 65 Financial Statements 165
Normal Balances 65 Income Statement 165
Journalizing 66 Statement of Stockholders’ Equity 165
Balance Sheet 167
Posting Journal Entries to Accounts 70 Statement of Cash Flows 168
Trial Balance 80 Closing Entries 170
Errors Affecting the Trial Balance 80 Journalizing and Posting Closing Entries 171
Errors Not Affecting the Trial Balance 81 Post-Closing Trial Balance 176
xv
xvi Contents
Accounting Cycle 177 The Adjusting Process 261

Inventory Shrinkage 261
Illustration of the Accounting Cycle 180 Customer Returns, Refunds, and Allowances 262
Step 1. Analyzing and Recording Transactions
Adjusted Trial Balance 263
in the Journal 180
Step 2. Posting Transactions to the Ledger 181 Financial Statements and Closing Entries for
Step 3. Preparing an Unadjusted Trial Balance 181 a Retail Business 264
Step 4. Assembling and Analyzing Adjustment Data 181 Multiple-Step Income Statement 264
Step 5. Preparing an Optional End-of-Period Spreadsheet 183 Single-Step Income Statement 266
Step 6. Journalizing and Posting Adjusting Entries 184 Statement of Stockholders’ Equity 266
Step 7. Preparing an Adjusted Trial Balance 184 Balance Sheet 267
Step 8. Preparing the Financial Statements 184 The Closing Process 268
Step 9. Journalizing and Posting Closing Entries 187
Step 10. Preparing a Post-Closing Trial Balance 187 Analysis for Decision Making 269
Asset Turnover Ratio 269
Why Is the Accrual Basis of Accounting Required by
GAAP? 190 Appendix 1 Sales Discounts 270
Gross Method 270
Analysis for Decision Making 192 Net Method 272
Working Capital and Current Ratio 192 Comparison of Gross and Net Methods 273
Appendix 1 End-of-Period Spreadsheet 194 Appendix 2 The Periodic Inventory System 273
Step 1. Enter the Title 194 Chart of Accounts Under the Periodic Inventory System 273
Step 2. Enter the Unadjusted Trial Balance 194 Recording Merchandise Transactions Under the Periodic
Step 3. Enter the Adjustments 195 Inventory System 274
Step 4. Enter the Adjusted Trial Balance 196 Adjusting Process Under the Periodic Inventory System 275
Step 5. Extend the Accounts to the Income Financial Statements Under the Periodic Inventory System 276
Statement and Balance Sheet Columns 197 Closing Entries Under the Periodic Inventory System 276
Step 6. Total the Income Statement and Balance Sheet
Columns, Compute the Net Income or Net Loss, and Comprehensive Problem 2 302
Complete the Spreadsheet 198 Make a Decision 303
Preparing the Financial Statements
from the Spreadsheet 199 Take It Further 305
Appendix 2 Statement of Cash Flows Pathways Challenge 246, 307
for NetSolutions 199
6
Comprehensive Problem 1 229
Inventories 308
Make a Decision 231
Take It Further 233 Control of Inventory 310
Pathways Challenge 177, 235 Safeguarding Inventory 310
Reporting Inventory 311
5
Inventory Cost Flow Assumptions 311
Accounting for Retail Inventory Costing Methods Under
Businesses 236 a Perpetual Inventory System 313
First-In, First-Out Method 313
Last-In, First-Out Method 315
Nature of Retail Businesses 238 Weighted Average Cost Method 317
Operating Cycle 238
Financial Statements 239 Inventory Costing Methods Under
Merchandise Transactions 240 a Periodic Inventory System 319
First-In, First-Out Method 319
Chart of Accounts for Retail Business 240
Last-In, First-Out Method 319
Subsidiary Ledgers 241
Weighted Average Cost Method 320
Purchases Transactions 241
Sales Transactions 246 Comparing Inventory Costing Methods 323
Freight 256
Summary: Recording Inventory Transactions 258 Reporting Inventory in the Financial
Dual Nature of Merchandise Transactions 259 Statements 324
Sales Taxes and Trade Discounts 259 Valuation at Lower of Cost or Market 324
Contents xvii
Inventory on the Balance Sheet 326 Direct Write-Off Method for Uncollectible
Effects of Inventory Errors on the Financial Statements 327 Accounts 412
Analysis for Decision Making 330 Allowance Method for Uncollectible Accounts 413
Inventory Turnover and Days’ Sales in Inventory 330 Write-Offs to the Allowance Account 413
Appendix Estimating Inventory Cost 332 Estimating Uncollectibles 415
Retail Method of Inventory Costing 332 Comparing Direct Write-Off and Allowance Methods 422
Gross Profit Method of Inventory Costing 333
Notes Receivable 423
Make a Decision 355 Characteristics of Notes Receivable 423
Take It Further 356 Accounting for Notes Receivable 424
Pathways Challenge 327, 358 Reporting Receivables on the Balance Sheet 427
7
Accounts Receivable Turnover and Days’ Sales in Receivables 428
Make a Decision 450

Internal Control and Cash 360 Take It Further 452
Sarbanes-Oxley Act 362
9
Internal Control 364
Objectives of Internal Control 364
Long-Term Assets:
Elements of Internal Control 364 Fixed and Intangible 454
Control Environment 365
Risk Assessment 366
Control Procedures 366
Nature of Fixed Assets 456
Classifying Costs 456
Monitoring 368
The Cost of Fixed Assets 458
Information and Communication 368
Leasing Fixed Assets 459
Limitations of Internal Control 369
Cash Controls over Receipts and Payments 370 Accounting for Depreciation 460
Factors in Computing Depreciation Expense 460
Control of Cash Receipts 370
Straight-Line Method 461
Control of Cash Payments 373
Units-of-Activity Method 463
Bank Accounts 374 Double-Declining-Balance Method 465
Bank Statement 374 Comparing Depreciation Methods 466
Using the Bank Statement as a Control over Cash 376 Partial-Year Depreciation 469
Revising Depreciation Estimates 470
Bank Reconciliation 377
Repair and Improvements 471
Special-Purpose Cash Funds 381
Disposal of Fixed Assets 473
Financial Statement Reporting of Cash 382 Discarding Fixed Assets 473
Selling Fixed Assets 474
Days’ Cash on Hand 383 Natural Resources 475
Make a Decision 403 Intangible Assets 477
Patents 477
Take It Further 404 Copyrights and Trademarks 478
Pathways Challenge 383, 406 Goodwill 478
Financial Reporting for Long-Term Assets:
8
Fixed and Intangible 480
Receivables 408 Fixed Asset Turnover Ratio 481
Appendix Exchanging Similar Fixed Assets 483

Classification of Receivables 410 Gain on Exchange 483
Accounts Receivable 410 Loss on Exchange 484
Notes Receivable 410
Make a Decision 502
Other Receivables 411
Take It Further 503
Uncollectible Receivables 411
xviii Contents
10 Liabilities: Current, Reporting Bonds Payable 569

Installment Notes, and Analysis for Decision Making 570
Times Interest Earned 570
Contingencies 506
Appendix 1 Present Value Concepts and
Pricing Bonds Payable 572
Current Liabilities 508 Present Value Concepts 572
Accounts Payable and Accruals 508 Pricing Bonds 575
Short-Term Notes Payable 509 Computing Present Values 576
Current Portion of Long-Term Debt 511
Appendix 2 Effective Interest Rate Method
Payroll Liabilities 511
of Amortization 576
Liability for Employee Earnings 512
Amortization of Discount by the Interest Method 577
Deductions from Employee Earnings 512
Amortization of Premium by the Interest Method 578
Computing Employee Net Pay 513
Employer’s Payroll Taxes 514 Make a Decision 593
Recording Payroll 515
Paying Payroll 517
Take It Further 594
Internal Controls for Payroll 517 Pathways Challenge 568, 595
Employees’ Fringe Benefits 517
12 Corporations: Organization,
Vacation Pay 517
Pensions 518
Postretirement Benefits Other than Pensions 520 Stock Transactions, and
Installment Notes 520 Dividends 596
Issuance 520
Periodic Payments 520
Nature of a Corporation 598
Contingent Liabilities 523 Characteristics of a Corporation 598
Probable and Estimable 523 Forming a Corporation 599
Probable and Not Estimable 523
Reasonably Possible 524 Paid-In Capital from Stock 601
Remote 524 Characteristics of Stock 601
Types of Stock 602
Reporting Liabilities 526 Issuing Stock 604
Analysis for Decision Making 527 Premium on Stock 605
Short-Term Liquidity Analysis 527 No-Par Stock 606
Comprehensive Problem 3 547 Accounting for Dividends 607

Cash Dividends 608
Make a Decision 549 Stock Dividends 609
Take It Further 552 Stock Splits 611
Pathways Challenge 525, 554 Treasury Stock Transactions 612
11
Reporting Stockholders’ Equity 614
Liabilities: Bonds Stockholders’ Equity on the Balance Sheet 614
Payable 556 Reporting Retained Earnings 615
Statement of Stockholders’ Equity 617
Reporting Stockholders’ Equity for Alphabet 618
Nature of Bonds Payable 558 Analysis for Decision Making 619
Bond Characteristics and Terminology 558
Earnings per Share 619
Proceeds from Issuing Bonds 559
Comprehensive Problem 4 637
Accounting for Bonds Payable 561
Bonds Issued at Face Amount 561 Make a Decision 639
Bonds Issued at a Discount 562
Take It Further 640
Amortizing a Bond Discount 562
Bonds Issued at a Premium 564 Pathways Challenge 604, 643
Amortizing a Bond Premium 565
Bond Redemption 567
Contents xix
13 Statement of Cash Analyzing Liquidity 713

Current Position Analysis 713
Flows 644 Accounts Receivable Analysis 714
Inventory Analysis 715
Reporting Cash Flows 646 Analyzing Solvency 718
Cash Flows: Operating Activities 647 Ratio of Fixed Assets to Long-Term Liabilities 718
Cash Flows: Investing Activities 649 Ratio of Liabilities to Stockholders’ Equity 718
Cash Flows: Financing Activities 649 Times Interest Earned 719
Noncash Investing and Financing Activities 650
Format of the Statement of Cash Flows 650
Analyzing Profitability 720
Asset Turnover 721
No Cash Flow per Share 651
Return on Total Assets 721
Cash Flows: Operating Activities 651 Return on Stockholders’ Equity 722
Net Income 653 Return on Common Stockholders’ Equity 723
Adjustments to Net Income 653 Earnings per Share on Common Stock 724
Price-Earnings Ratio 725
Cash Flows: Investing Activities 657
Dividends per Share 726
Land 657
Dividend Yield 726
Building and Accumulated Depreciation—Building 658
Summary of Analytical Measures 728
Cash Flows: Financing Activities 659
Corporate Annual Reports 729
Bonds Payable 659
Management Discussion and Analysis 729
Common Stock 659
Report on Internal Control 730
Dividends and Dividends Payable 660
Report on Fairness of the Financial Statements 730
Preparing the Statement of Cash Flows 661
Make a Decision 757
Take It Further 758
Free Cash Flow 663
Appendix 1 Spreadsheet (Work Sheet) for Statement
of Cash Flows—The Indirect Method 664
Analyzing Accounts 665 Appendix A: Interest Tables A-2
Retained Earnings 666
Appendix B: Selected Topics B-1
Other Accounts 666
Topic 1: Investments
Preparing the Statement of Cash Flows 667
Topic 2: Foreign Currency Transactions
Appendix 2 Preparing the Statement Topic 3: Corporate Taxes
of Cash Flows—The Direct Method 667 Topic 4: Reporting Unusual Items and Comprehensive Income
Cash Received from Customers 668 Topic 5: Revenue Recognition
Cash Payments for Merchandise 668 Topic 6: International Accounting Standards
Cash Payments for Operating Expenses 669 Appendix C: Nike Inc., Form 10-K for the Fiscal Year
Gain on Sale of Land 669
Ended May 31, 2020 Selected Excerpts C-1
Interest Expense 670
Cash Payments for Income Taxes 670 Appendix D: Reversing Entries (online) D-1
Reporting Cash Flows from (Used for) Operating
Activities—Direct Method 670 Appendix E: Special Journals and Subsidiary
Ledgers (online) E-1
Make a Decision 698
Glossary G-1
Take It Further 701
Index I-1
14 Financial Statement
Analysis 704
Analyzing and Interpreting Financial Statements 706
The Value of Financial Statement Information 706
Techniques for Analyzing Financial Statements 707
Analytical Methods 707

Horizontal Analysis 707
Vertical Analysis 709
Common-Sized Statements 711
Corporate Financial
Accounting 16e
1 Introduction to
Chapter
Accounting and Business
Chapter 1
Transactions
ACCOUNTING SYSTEM
Accounting Equation
Assets = Liabilities + Equity
Chapter 2
ANALYZING TRANSACTIONS
Chapter 3
THE ADJUSTING PROCESS
Chapter 4
THE ACCOUNTING CYCLE
Twitter, Inc.
W hen two teams pair up for a game of f ootball, there is often a lot
of noise. The band plays, the fans cheer, and fireworks light up
the scoreboard. Obviously, the fans are committed and care about the
Twitter, Inc. (TWTR) is one of the most visible com-
panies on the Internet. It provides a real-time information net-
work where members can post messages, called tweets, for free.
outcome of the game. Just like fans at a football game, the owners of Millions post tweets every day throughout the world.
a business want their business to “win” against their competitors in the Do you think Twitter is a successful company? Does it make
marketplace. While having your football team win can be a source of money? How would you know? Accounting helps to answer these
pride, winning in the marketplace goes beyond pride and has many questions.
tangible benefits. Companies that are winners are better able to serve This textbook introduces you to accounting, the language of
customers, provide good jobs for employees, and make money for business. Chapter 1 begins by discussing what a business is, how it
their owners. operates, and the role that accounting plays.
©CJG – TECHNOLOGY/ALAMY STOCK PHOTO

Link to Twitter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pages 4, 6, 7, 8, 12, 13, 15, 23, 25
Analysis for Decision Making. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 29
4 Chapter 1 Introduction to Accounting and Business
What's Covered
Introduction to Accounting and Business
Nature of Business Nature of Accounting Analyzing Business Financial Statements
▪▪ Types of Business (Obj. 1) ▪▪ Managerial and Financial Transactions ▪▪ Income Statement (Obj. 5)
▪▪ Role of Accounting (Obj. 1) Accounting (Obj. 1) ▪▪ Generally Accepted Accounting ▪▪ Statement of Stockholders’
▪▪ Ethics (Obj. 1) ▪▪ Career Opportunities (Obj. 1) Principles (Obj. 2) Equity (Obj. 5)
▪▪ Accounting Equation (Obj. 3) ▪▪ Balance Sheet (Obj. 5)
▪▪ Transactions (Obj. 4) ▪▪ Statement of Cash Flows
(Obj. 5)
Learning Objectives
Obj. 1 Describe the nature of business and the role of Obj. 4 Describe and illustrate how business transactions can be
accounting and ethics in business. recorded in terms of the resulting change in the elements
Obj. 2 Describe generally accepted accounting principles, of the accounting equation.
including the underlying assumptions and principles. Obj. 5 Describe the financial statements of a corporation and
Obj. 3 State the accounting equation and define each explain how they interrelate.
element of the equation.
Analysis for Decision Making

Obj. 6 Describe and illustrate the use of the ratio of liabilities to stockholders’ equity in evaluating a company’s financial condition.
Objective 1 Nature of Business and Accounting

Describe the nature of
business and the role of A business1 is an organization in which basic resources (inputs), such as materials and labor, are
accounting and ethics assembled and processed to provide goods or services (outputs) to customers. Businesses come in
in business. all sizes, from a local coffee house to Starbucks (SBUX), which sells over $15 billion of coffee
and related products each year.
The objective of most businesses is to earn a profit. Profit is the difference between the amounts
received from customers for goods or services and the amounts paid for the inputs used to provide
the goods or services. This text focuses on businesses operating to earn a profit. However, many
of the same concepts and principles also apply to not-for-profit organizations such as hospitals,
churches, and government agencies.
Types of Businesses
Three types of businesses operating for profit include service, retail, and manufacturing businesses.
Some examples of each type of business follow:
▪▪ Service businesses provide services rather than products to customers.
Delta Air Lines (DAL) (transportation services)
The Walt Disney Company (DIS) (entertainment services)
▪▪ Retail businesses sell products they purchase from other businesses to customers.
Walmart Inc. (WMT) (general merchandise)
Target Corporation (TGT) (general merchandise)
▪▪ Manufacturing businesses change basic inputs into products that are sold to customers.
Ford Motor Company (F) (cars, trucks, vans)
Merck & Co., Inc. (MRK) (pharmaceutical drugs)
Link to Twitter Twitter is a service company that provides a platform for individuals to send text messages called tweets.
1
A complete glossary of terms appears at the end of the text.
Chapter 1 Introduction to Accounting and Business 5
Business Activities
Businesses engage in the following three types of activities:
▪▪ Operating activities
▪▪ Investing activities
▪▪ Financing activities
Operating activities are those activities by which the company generates revenues from cus-
tomers. Operating activities include producing, marketing, and distributing a product or service to
customers. For example, operating activities of Dell Technologies Inc. (DVMT) include product
development, acquiring component parts, assembly, marketing, and distribution of its products.
Investing activities are those activities by which a company acquires long-term assets for
use in the operating activities of the company. For example, the acquisition by Delta Air
Lines, Inc. (DAL) of Boeing 787 and Airbus 321 airplanes is an investing activity. Likewise,
the purchase of land and the construction of buildings to use for training, maintenance, flight
monitoring, and corporate offices are investing activities.
Financing activities include activities by which the company obtains funds to start and op-
erate the company. Funds are normally obtained from creditors and owners. For example, com-
panies can obtain funds by issuing stock to the public. The payments to creditors and owners
are also classified as financing activities.
The preceding business activities are summarized in Exhibit 1.
Exhibit 1
Business Activities
Business
Activities
Financing Investing
Activities Activities
Operating
Activities
Creditors and/or Owners Building and

Equipment Contractors
Customers and Suppliers
note:
Accounting is an information
Role of Accounting in Business system that provides reports
The role of accounting in business is to provide information for managers to use in operating the to users about the economic
business. In addition, accounting provides information to other users in assessing the economic activities and condition of a
performance and condition of the business. business.
Thus, accounting can be defined as an information system that provides reports to users about
the economic activities and condition of a business. You could think of accounting as the “language
of business.” This is because accounting is the means by which businesses’ financial information is
communicated to users.
Link to Twitter Twitter communicates to investors in an annual report that includes accounting information.
The process by which accounting provides information to users is as follows:

1. Identify users.
2. Assess users’ information needs.
3. Design the accounting information system to meet users’ needs.
4. Record economic data about business activities and events.
5. Prepare accounting reports for users.
As illustrated in Exhibit 2, users of accounting information can be divided into two groups:
internal users and external users.
Exhibit 2
Accounting as an
Information System 1
Identify
Users
Internal External
Company Company
2
Assess
Users’
Information
Managers, Needs Investors, Creditors,
Employees Customers, Government
3 4
Design Record
Accounting Economic
System Data
5
Prepare
Accounting
Reports
Managerial Accounting Internal users of accounting information include managers and

employees. These users are directly involved in managing and operating the business. The area
of accounting that provides internal users with information is called managerial accounting, or
management accounting.
The objective of managerial accounting is to provide relevant and timely information for m
anagers’
and employees’ decision-making needs. Often, such information is sensitive and is not distributed out-
side the business. Examples of sensitive information might include information about customers, prices,
and plans to expand the business. Managerial accountants employed by a business are employed in
private accounting.
Financial Accounting External users of accounting information include investors, creditors,

customers, and the government. These users are not directly involved in managing and operat-
ing the business. The area of accounting that provides external users with information is called
financial accounting.
The objective of financial accounting is to provide relevant and timely information for the
decision-making needs of users outside of the business. For example, financial reports on the
operations and condition of the business are useful for banks and other creditors in deciding
whether to lend money to the business. General-purpose financial statements are one type of
financial accounting report that is distributed to external users. The term general-purpose refers
to the wide range of decision-making needs that these reports are designed to serve. Later in this
chapter, general-purpose financial statements are described and illustrated.
Twitter uses financial accounting to prepare and distribute general-purpose financial statements. Link to Twitter
Role of Ethics in Accounting and Business

The objective of accounting is to provide relevant, timely information for user decision making.
Accountants must behave in an ethical manner so that the information they provide users will be ETHICS
trustworthy and, thus, useful for decision making. Managers and employees must also behave in an
ethical manner in managing and operating a business. Otherwise, no one will be willing to invest
in or loan money to the business.
Ethics are moral principles that guide the conduct of individuals. Unfortunately, business man-
agers and accountants sometimes behave in an unethical manner. Many of the managers of the
companies listed in Exhibit 3 engaged in accounting or business fraud. These ethical violations led
to fines, firings, and lawsuits. In some cases, managers were criminally prosecuted, convicted, and
sent to prison.
Business Insight Using a low-cost strategy, a company offers product(s) to custom-

ers at a lower cost (price) than its competitors. The low-cost strategy
is normally used for products that are uniform in nature, and thus the
Business Strategies company cannot use a product-differentiation strategy. For example,
B
usinesses normally use a (1) product-differentiation or (2) low-cost Southwest Airlines Co. (LUV) uses a low-cost strategy in pro-
strategy to gain a competitive advantage and maximize their profits. viding airline services to passengers.
Using a product-differentiation strategy, a company distin- Risks of a product-differentiation strategy are that customers may
guishes its product(s) in such a way that it is desirable to customers and not value the uniqueness of the company’s product, competitors may
uniquely different from its competitor’s. Using this strategy, a company duplicate the product’s uniqueness, or that competitors may develop
tries to win over customers to its product(s) and establish customer loy- even more desirable attributes for their products. Risks of the low-cost
alty. If successful, the company can charge premium prices for its prod- strategy are that competitors may duplicate the company’s low-cost
ucts. For example, Apple Inc. (AAPL) uses a product-differentiation processes or that competitors may develop new processes for achiev-
strategy in developing and marketing its products. ing even lower costs.
Exhibit 3 Accounting and Business Frauds
Nature of Accounting
Company or Business Fraud Result
Countrywide CEO misled investors. CEO paid $22.5 million penalty and was permanently
banned from serving as an officer or director of a
public company.
Enron Fraudulently inflated its financial results. Bankruptcy. Senior executives criminally convicted.
More than $60 billion in stock market losses.
Goldman Sachs Misstated and omitted key facts from investors. Company agreed to pay $550 million fine and
reformed business practices.
Wells Fargo Improperly opened customer accounts without their CEO fined $17.5 million and banned from banking
permission. industry for life.
Xerox Corporation Recognized $3 billion in sales prior to when $10 million fine to SEC. Six executives
it should have been recorded. forced to pay $22 million.
What went wrong for the managers and companies listed in Exhibit 3? The answer normally
involved one or both of the following two factors:
▪▪ Failure of Individual Character: Ethical managers and accountants are honest and fair. How-
ever, managers and accountants often face pressures from supervisors to meet company and
investor expectations. In many of the cases in Exhibit 3, managers and accountants justified
small ethical violations to avoid such pressures. However, these small violations became big
violations as the company’s financial problems became worse.
▪▪ Culture of Greed and Ethical Indifference: By their behavior and attitude, senior managers
set the company culture. In most of the companies listed in Exhibit 3, the senior managers cre-
ated a culture of greed and indifference to the truth.
As a result of the accounting and business frauds shown in Exhibit 3, Congress passed laws
to monitor the behavior of accounting and business. For example, the Sarbanes-Oxley Act (SOX)
was enacted. SOX established a new oversight body for the accounting profession called the Public
Company Accounting Oversight Board (PCAOB). In addition, SOX established standards for
independence, corporate responsibility, and disclosure.
How does one behave ethically when faced with financial or other types of pressure? Guide-
lines for behaving ethically follow:2
1. Identify an ethical decision by using your personal ethical standards of honesty and fairness.
2. Identify the consequences of the decision and its effect on others.
3. Consider your obligations and responsibilities to those who will be affected by your decision.
4. Make a decision that is ethical and fair to those affected by it.
Link to Twitter Twitter’s “Code of Business Conduct and Ethics” can be found at https://investor.twitterinc.com/
corporate-governance.cfm.
Opportunities for Accountants

Numerous career opportunities are available for students majoring in accounting. Currently, the
demand for accountants exceeds the number of new graduates entering the job market. This is
2
Many companies have ethical standards of conduct for managers and employees. In addition, the Institute of Management
Accountants and the American Institute of Certified Public Accountants have professional codes of c onduct, which can be obtained from their
websites at www.imanet.org and www.aicpa.org, respectively.
partly due to the increased regulation of business caused by the accounting and business frauds
shown in Exhibit 3. Also, more and more businesses have come to recognize the importance and
value of accounting information.
As indicated earlier, accountants employed by a business are employed in private accounting.
Private accountants have a variety of possible career options within a company. Some of these
career options are shown in Exhibit 4 along with their starting salaries. As shown in Exhibit 4, sev-
eral private accounting careers have certification options. Accountants who provide audit services,
called auditors, verify the accuracy of financial records, accounts, and systems.
Exhibit 4 Accounting Career Paths and Salaries
Accounting Annual Starting

Career Track Description Career Options Salaries* Certification
Private Accounting Accountants employed Bookkeeper $40,000
by companies, govern- Payroll clerk $40,000 Certified Payroll Professional (CPP)
ment, and not-for-profit General accountant $49,000
entities. Budget analyst $53,000
Cost accountant $65,000 Certified Management Accountant (CMA)
Internal auditor $48,000 Certified Internal Auditor (CIA)
Information technology $53,000 Certified Information Systems Auditor (CISA)
auditor
Public Accounting Accountants employed $49,000 Certified Public Accountant (CPA)

individually or within a
public accounting firm in
audit and tax services.
*Average salaries rounded to the nearest thousand. Salaries may vary by size of company and region.
Source: Robert Half 2020 U.S. Salary Guide (Finance and Accounting), Robert Half International, Inc. (RHI) (https://www.roberthalf.com/salary-guide/accounting-and-finance).
Accountants and their staff who provide services on a fee basis are said to be employed in
ublic accounting. In public accounting, an accountant may practice as an individual or as a mem-
p
ber of a public accounting firm. Public accountants who have met a state’s education, experience,
and examination requirements may become Certified Public Accountants (CPAs). CPAs typically
perform general accounting, audit, or tax services. CPAs often have slightly better starting salaries
than private accountants. Career statistics indicate, however, that these salary differences tend to
disappear over time. The American Institute of Certified Public Accountants (AICPA) provides in-
formation and resources for students interested in accounting at www.startheregoplaces.com.
Ethics in Action
ETHICS
Bernie Madoff rather than basing returns on the investments’ actual perfor-
Bernard L. “Bernie” Madoff was sentenced to 150 years in prison mance. As long as the investment manager is able to attract new
for defrauding thousands of investors in one of the biggest frauds investors, he or she will have new funds to pay existing investors
in American history. Madoff’s fraud started several decades ear- and continue the fraud. While most Ponzi schemes collapse
lier when he began a “Ponzi scheme” in his investment manage- quickly when the investment manager runs out of new investors,
ment firm, Bernard L. Madoff Investment Securities LLC. Madoff’s reputation, popularity, and personal contacts provided a
In a Ponzi scheme, the investment manager uses funds steady stream of investors, which a llowed the fraud to survive for
received from new investors to pay a return to existing investors, decades.
Because all functions within a business use accounting information, experience in private or
public accounting provides a solid foundation for a career. Many positions in industry and in gov-
ernment agencies are held by individuals with accounting backgrounds.
Objective 2
Describe generally
Generally Accepted Accounting
accepted accounting Principles (GAAP)
principles, including the
underlying assumptions Financial information in the United States is based on generally accepted accounting principles
and principles. (GAAP). GAAP is a collection of accounting standards, principles, and assumptions that define
how financial information will be reported.
▪▪ Accounting standards are the rules that determine the accounting for individual business
transactions.
▪▪ Accounting principles and assumptions provide the framework upon which accounting stan-
dards are constructed.
Within the United States, the Financial Accounting Standards Board (FASB) has the primary
responsibility for developing accounting standards. The FASB maintains an electronic database,
called the Accounting Standards Codification, that contains all the accounting standards that
make up GAAP. Changes in the FASB Codification are made using Accounting Standards Updates.
The Securities and Exchange Commission (SEC), an agency of the U.S. government, has
authority over the accounting and financial disclosures for companies whose shares of ownership
(stock) are traded and sold to the public. The SEC normally accepts the accounting standards set
forth by the FASB. However, the SEC may issue Staff Accounting Bulletins on accounting matters
that may not have been addressed by the FASB.
Outside the United States, most countries use accounting standards and principles adopted by
the International Accounting Standards Board (IASB). The IASB issues International Financial
Reporting Standards (IFRS). In some cases, differences exist between FASB and IASB accounting
principles. These differences are identified throughout the chapters of this text and in Appendix A.
Business Insight
Pathways Commission
T
he Pathways Commission issued its study titled Charting a
National Strategy for the Next Generation of Accountants. The
Commission was made up of diverse members and was jointly
sponsored by the American Institute of Certified Public Accoun-
tants (AICPA) and the American Accounting Association (AAA). The
Commission emphasized the importance of accounting for a prosper-
ous society and good decision making. The Commission also empha-
sized that accountants must be critical thinkers who are comfortable
addressing the shades of gray required by accounting judgments.
Source: Charting a National Strategy for the Next Generation of

Accountants, The Pathways Commission, July 2012.
Using Data Analytics

What Is It?
A company’s success will increasingly rely on the ability to collect, interpret, and gather insights from massive
volumes of data. Data analytics is the science of analyzing raw data to discover patterns, identify anomalies,
or gain other useful insights. The four basic types of data analytics are as follows:
Descriptive analytics Describes and summarizes outcomes.

Example: a sales report by product, region of country, and customer.
Diagnostic analytics Tries to explain results by identifying relationships among data.
USING DATA
Example: determining whether a YouTube video featuring a product increased sales within 48 hours after ANALYTICS
its first showing.
Predictive analytics Uses statistical methods to predict future outcomes.
Example: predicting the effects of methods for creating customer satisfaction on future sales.
Prescriptive analytics Recommends future actions for achieving company goals and objectives.
Example: analyzing the effects of energy saving alternatives on meeting the company’s goal of reducing
greenhouse gas emissions by 25%.
Data analytics is conducted using a variety of mathematical models, algorithms, and visualizations. Because
of accounting’s role in providing useful information, accountants are increasingly using data analytics to
help businesses make better decisions. For this reason, we provide suggestions for the use of data analytics
throughout the remainder of this text.
Characteristics of Financial Information

The primary goal of financial accounting is to provide information that is useful for decision mak-
ing. To be useful, financial reports must possess two important characteristics: relevance and faith-
ful representation.
▪▪ Relevant information has the potential to impact decision making.
▪▪ Faithful representation means that the information accurately reflects an entity’s economic
activity or condition.
The characteristics of relevant and faithful representation are enhanced by the following:
▪▪ Comparability, which includes consistent reporting, allows users to identify similarities and
differences among reported items.
▪▪ Verifiability allows users to agree on the meaning of reported items.
▪▪ Timeliness requires distribution of financial reports in time to influence a user’s decision.
▪▪ Understandability requires clear and concise financial reports that facilitate user interpretation
and analysis.
Business Insight date of several accounting standards and is considering how to ap-
ply generally accepted accounting principles (GAAP) to a variety of
issues generated by the pandemic. For example, companies with
Covid-19 Pandemic
less than 500 employees may have received payroll loans under the
T
he coronavirus (COVID-19) pandemic is causing significant Payroll Protection Program (PPP). Some or all of these loans may be
disruptions to companies and their business operations in the forgiven if certain conditions are met. Currently, GAAP does not have
United States and throughout the world. As a result, the Finan- specific guidance on the accounting and disclosures for this type of
cial Accounting Standards Board (FASB) has delayed the effective government assistance.
Assumptions
Financial accounting and generally accepted accounting principles are based upon the following
assumptions:
▪▪ Monetary unit
▪▪ Time period
▪▪ Business entity
▪▪ Going concern
The monetary unit assumption requires that financial reports be expressed in a single money
unit, or currency. This provides a common measurement of the effects of economic events and trans-
actions on an entity. The monetary unit used is normally determined by the country in which the
company operates. For example, in the United States, the U.S. dollar is used as the monetary unit.
The time period assumption allows a company to report its economic activities on a regular
basis for a specific period of time. In doing so, financial condition and changes in financial con-
dition are reported periodically on a consistent basis. In the United States, reports are normally
required on a yearly basis supplemented with quarterly reports.
Link to Twitter Twitter publishes quarterly as well as yearly financial reports that are available at https://investor.
twitterinc.com.
The annual accounting period adopted by a company is called its fiscal year. The fiscal year
most commonly used is the calendar year beginning January 1 and ending December 31. H owever,
other periods are not unusual, especially for companies organized as corporations. For example,
a corporation may adopt a fiscal year that ends when business activities have reached the lowest
point in its annual operating cycle, which allows more time to prepare financial reports. Such a
fiscal year is called the natural business year. For example, a company’s fiscal year could begin
August 1, 20Y7, and end on July 31, 20Y8, as follows:
20Y7 20Y8
Aug. 1 Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July 31
Fiscal Year
August 1, 20Y7 to July 31, 20Y8
The business entity assumption limits the economic data in financial reports to that directly
related to the activities of the business. In other words, the business is viewed as an entity separate
from its owners, creditors, or other businesses. For example, the accountant for a business with
one owner would record the activities of the business only and would not record the personal
activities, property, or debts of the owner.
A business entity may take the form of a proprietorship, partnership, corporation, or limited
liability company (LLC). Each of these forms and their major characteristics are listed in Exhibit 5.
The three types of businesses discussed earlier—service, retail, and manufacturing—may be
organized as proprietorships, partnerships, corporations, or limited liability companies.
International Connection
IFRSInternational Financial contrast, IFRS allow more judgment in deciding how business
Reporting Standards (IFRS) transactions are recorded. Many believe that the strong reg-
IFRS are considered to be more “principles-based” than U.S. ulatory and litigation environment in the United States is the
GAAP, which is considered to be more “rules-based.” For cause for the more rules-based GAAP approach. Regardless,
example, U.S. GAAP consists of approximately 17,000 pages, IFRS and GAAP share many common principles.*
which include numerous industry-specific accounting rules. In *Differences between U.S. GAAP and IFRS are further discussed and illustrated in Appendix B.
Exhibit 5 Forms of Business Entities
Form of Business Entity Characteristics and Advantages Examples
Proprietorship is owned • 70% of business entities in the United States. • A & B Painting
by one individual. • Easy and inexpensive to organize.
• Resources are limited to those of the owner.
• Used by small businesses.
Partnership is owned by • 10% of business organizations in the United States • Jones & Smith, Architects
two or more individuals. (combined with limited liability companies).
• Combines the skills and resources of more than one
person.
Corporation is organized • Generates 90% of business revenues. • Alphabet Inc. (GOOG)

under state or federal stat- • 20% of the business organizations in the United States. • Apple Inc. (AAPL)
utes as a separate legal • Ownership is divided into shares called stock. • Ford Motor Company (F)
taxable entity. • Can obtain large amounts of resources by issuing stock.
• Used by large businesses.
Limited liability • 10% of business organizations in the United States • Boston Basketball Partners, LLC
company (LLC) combines (combined with partnerships).
the attributes of a partner- • Often used as an alternative to a partnership.
ship and a corporation. • Has tax and legal liability advantages for owners.
Because of the large amount of resources required to operate a manufacturing business, most
manufacturers such as Ford Motor Company (F) are corporations. Most large retailers such as
Walmart (WMT) and The Home Depot (HD) are also corporations. Companies organized as
corporations often include Inc. as part of their name to indicate that they are incorporated. For
example, Twitter’s legal name is Twitter, Inc.
Although Twitter is organized as a corporation in Delaware, its principal offices are in San Francisco. Link to Twitter
The going concern assumption requires that financial reports be prepared assuming that the e ntity
will continue operating into the future. This assumption justifies reporting items such as equipment,
buildings, and land at their initial or historical cost rather than liquidation or forced sale values.
Pathways Challenge
This is Accounting!
Economic Activity
Over 20 years ago, Starbucks (SBUX) and Pepsi (PEP) created a business called The North
American Coffee Partnership. The business combined Starbucks’ expertise in coffee with Pepsi’s
ability to manufacture, market, and sell ready-to-drink coffee products. Its first product, Frappuccino, took
off and today the business dominates the ready-to-drink market with over $2 billion in annual sales.
Critical Thinking/Judgment
Should the $2 billion in annual sales be reported as part of Starbucks’ annual report?
Should the $2 billion in annual sales be reported as part of Pepsi’s annual report?
Should the $2 billion in annual sales be reported as part of a separate business’s annual report?
Suggested answer at end of chapter.
Principles
In addition to the preceding characteristics and assumptions, the following four principles are an
integral part of financial accounting:
▪▪ Measurement
▪▪ Historical cost
▪▪ Revenue recognition
▪▪ Expense recognition
The measurement principle determines the amount that will be recorded and reported. The
measurement principle requires that amounts be objective and verifiable. An amount is objective
if it is based upon independent, unbiased evidence. An amount is verifiable if it can be confirmed
by a third party. Transactions between two independent parties, called arm’s-length transactions,
provide amounts that are objective and verifiable.
To illustrate, assume that Aaron Publishers purchased the following building from Schenk
Enterprises on February 20, 20Y1, for $150,000:
Price listed by Schenk Enterprises on January 1, 20Y1 $160,000

Aaron Publishers’ initial offer to buy on January 31, 20Y1 140,000
Aaron Publishers’ purchase price on February 20, 20Y1 150,000
Estimated selling price on December 31, 20Y3 220,000
Assessed value for property taxes, December 31, 20Y3 190,000
Aaron Publishers would record the building at the February 20, 20Y1, purchase price of
$150,000. This amount is both objective and verifiable, as it was the result of a transaction between
two independent parties. Recording an item at its initial transaction price is called the historical
cost principle or cost principle. Under the historical cost principle, amounts do not normally
change until another transaction occurs.
To illustrate, the fact that the preceding building has an estimated selling price of $220,000
on December 31, 20Y3, indicates that the building’s value has increased. However, the $220,000
is not recorded in the accounting records because Aaron Publishers has not sold the building. If,
however, Aaron sells the building on January 9, 20Y4, for $240,000, a profit of $90,000 ($240,000 −
$150,000) would be recorded by Aaron Publishers.
Revenue is the amount earned (received) from providing services or selling goods to custom-
ers. The revenue recognition principle determines when revenue is recorded in the accounting
records. Normally, revenue is recorded when the services have been performed or goods are deliv-
ered to the customer.
Expenses are amounts used to generate revenue. The expense recognition principle, some-
times called the matching principle, requires expenses to be recorded in the same period as the
related revenue. Doing so allows the reporting of a profit or loss for the period.
Objective 3 The Accounting Equation

State the accounting
equation and define The resources owned by a business are its assets. Examples of assets include cash, land, build-
each element of the ings, and equipment. The rights or claims to the assets are divided into two types: (1) the rights of
equation. creditors and (2) the rights of owners. The rights of creditors are the debts of the business and are
called liabilities. The rights of owners are called equity. Since stockholders own a corporation,
equity is called stockholders’ equity. For a proprietorship, partnership, or limited liability com-
pany, equity is called owner’s equity.
The following equation shows the relationship among assets, liabilities, and equity:
Assets 5 Liabilities 1 Equity
This equation is called the accounting equation. Liabilities usually are shown before equity in the
accounting equation because creditors have first rights to the assets.
Throughout this text, we use the corporate form of business. However, most of the concepts
and principles described and illustrated also apply to proprietorships, partnerships, and limited
liability companies.
Given any two amounts, the accounting equation may be solved for the third unknown amount. To
illustrate, if the assets owned by a corporation amount to $100,000 and the liabilities amount to $30,000, the
stockholders’ equity is equal to $70,000, computed as follows:
$100,000 2 $30,000 5 $70,000
Twitter’s accounting equation for a recent year is: Assets ($10,163 million) = Liabilities ($3,357 million) +
Stockholders’ Equity ($6,806 million). Link to Twitter
The accounting equation is useful for reporting the financial condition and changes in financial
condition of a company. For this reason, the accounting equation serves as the basis for designing
financial accounting and reporting systems.
Business Transactions and the Objective 4

Describe and illustrate
Accounting Equation how business
transactions can be
Paying a monthly bill, such as a telephone bill of $168, affects a business’s financial condition recorded in terms of
because it now has less cash on hand. Such an economic event or condition that directly changes the resulting change
an entity’s financial condition or its results of operations is a business transaction. For example, in the elements of the
purchasing land for $50,000 is a business transaction. In contrast, a change in a business’s credit accounting equation.
rating does not directly affect cash or any other asset, liability, or stockholders’ equity amount.
Business Insight
The Accounting Equation
T
he accounting equation serves as the basic foundation local convenience store, to the largest business, such as The
for the accounting systems of all companies. The account- Coca-Cola C ompany (KO). Some examples taken from recent
ing equation is used by the smallest business, such as the financial reports of well-known companies follow:
Company Assets* 5 Liabilities 1 Stockholders’ Equity

3 Alphabet
To simplify, we assume that Inc. (GOOG)
NetSolutions issued
$232,792
5 values are discussed in Chapter 12.
no-par stock. Types of stock as well as par and stated
$55,164 1 $177,628
The Coca-Cola Company (KO) $83,216 5 $64,158 1 $19,058
DuPont (DD) $187,855 5 $93,563 1 $94,292
eBay (EBAY) $22,819 5 $16,538 1 $6,281
Ford Motor Company (F) $256,540 5 $220,608 1 $35,932
Microsoft Corporation (MSFT) $286,556 5 $184,226 1 $102,330
Southwest Airlines Co. (LUV) $25,895 5 $16,063 1 $9,832
Walmart Inc. (WMT) $219,295 5 $146,799 1 $72,496
*Amounts are shown in millions of dollars.
note: All business transactions can be stated in terms of changes in the elements of the accounting
equation. How business transactions affect the accounting equation can be illustrated by using
All business transactions can
be stated in terms of changes some typical transactions. As a basis for illustration, a business organized by Chris Clark is used.
in the elements of the Assume that on November 1, 20Y3, Chris Clark organizes a corporation that will be known as
accounting equation. NetSolutions. The first phase of Chris’s business plan is to operate NetSolutions as a service busi-
ness assisting individuals and small businesses in developing web pages and installing computer
software. Chris expects this initial phase of the business to last one to two years. During this
period, Chris plans on gathering information on the software and hardware needs of customers.
During the second phase of the business plan, Chris plans to expand NetSolutions into a personal-
ized retailer of software and hardware for individuals and small businesses.
Each transaction during NetSolutions’ first month of operations is described in the following
paragraphs. The effect of each transaction on the accounting equation is then shown.
Transaction a Nov. 1, 20Y3 Chris Clark deposited $25,000 in a bank account in the name of
NetSolutions in exchange for shares of common stock in the corporation.
A corporation issues common stock to investors as proof of their ownership rights.3

This transaction increases Cash under Assets (on the left side of the equation) by $25,000. To
balance the equation, Common Stock under Stockholders’ Equity (on the right side of the equa-
tion) increases by the same amount.
The effect of this transaction on NetSolutions’ accounting equation is as follows:
Assets 5 Stockholders’ Equity

Cash Common Stock
a. 25,000 5 25,000
The preceding accounting equation is only for the business, NetSolutions. Under the business
entity assumption, Chris’s personal assets, such as a home or personal bank account, and personal
liabilities are excluded from the equation.
Transaction b Nov. 5, 20Y3 NetSolutions paid $20,000 for the purchase of land as a future
building site.
The land is located in a business park with access to transportation facilities. Chris Clark plans to
rent office space and equipment during the first phase of the business plan. During the second
phase, Chris plans to build an office and a warehouse for NetSolutions on the land.
The purchase of the land changes the makeup of the assets, but it does not change the total
assets. The items in the equation prior to this transaction and the effect of the transaction follow.
The new amounts are called balances.
Assets 5 Stockholders’ Equity

Cash 1 Land Common Stock
Bal. 25,000 5 25,000
b. 220,000 120,000
Bal. 5,000 20,000 25,000
25,000 5 25,000
Transaction c Nov. 10, 20Y3 NetSolutions purchased supplies for $1,350 and agreed to pay the supplier
in the near future.
You have probably used a credit card to buy clothing or other merchandise. In this type of transaction,
you received clothing for a promise to pay your credit card bill in the future. That is, you received an asset
and incurred a liability to pay a future bill. NetSolutions entered into a similar transaction by purchasing
3
To simplify, we assume that NetSolutions issued no-par stock. Types of stock as well as par and stated values are discussed in Chapter 12.
supplies for $1,350 and agreeing to pay the supplier in the near future. This type of transaction is called a
purchase on account and is often described as follows: Purchased supplies on account, $1,350.
The liability created by a purchase on account is called an account payable. Items such as sup-
plies that will be used in the business in the future are called prepaid expenses, which are assets.
Thus, the effect of this transaction is to increase assets (Supplies) and liabilities (Accounts Payable)
by $1,350, as follows:

Accounts Common
Cash 1 Supplies 1 Land Payable 1 Stock
Bal. 5,000 20,000 5 25,000
c. 11,350 11,350
Bal. 5,000 1,350 20,000 1,350 25,000
26,350 5 26,350
Nov. 18, 20Y3 NetSolutions received cash of $7,500 for providing services to customers. Transaction d
You may have earned money by painting houses or mowing lawns. If so, you received money for
rendering services to a customer. Likewise, a business earns money by selling goods or services to
its customers. This amount is called revenue.
During its first month of operations, NetSolutions received cash of $7,500 for providing services to
customers. The receipt of cash increases NetSolutions’ assets and also increases stockholders’ equity in
the business. The revenues of $7,500 are recorded in a Fees Earned column to the right of Common
Stock. The effect of this transaction is to increase Cash and Fees Earned by $7,500, as follows:

Accounts Common Fees
Cash 1 Supplies 1 Land Payable 1 Stock 1 Earned
Bal. 5,000 1,350 20,000 5 1,350 25,000
d. 17,500 17,500
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
33,850 5 33,850
Different terms are used for the various types of revenues. As illustrated for NetSolutions, revenue
from providing services is recorded as fees earned. Revenue from the sale of merchandise is recorded
as sales. Other examples of revenue include rent, which is recorded as rent revenue, and interest,
which is recorded as interest revenue.
Instead of receiving cash at the time services are provided or goods are sold, a business may
accept payment at a later date. Such revenues are described as fees earned on account or sales on
account. For example, if NetSolutions had provided services on account instead of for cash, trans-
action (d) would have been described as follows: Fees earned on account, $7,500.
In such cases, the firm has an asset, called an account receivable, which is a claim against the
customer. The effect of the transaction increases Accounts Receivable and Fees Earned. When cus-
tomers pay their accounts, Cash increases and Accounts Receivable decreases.
Business Insight
company and then, under a prearranged agreement, the customer
Round-Tripping
resells the exact same goods and services back to the original com-
A
ccounting principles require that a transaction have commercial pany. Round-tripping has been used by companies to artificially
substance. Commercial substance means that the transaction inflate their sales. However, such agreements do not have commercial
has an economic impact on the entity. An example of a transac- substance, since there is no economic change to either company after
tion lacking commercial substance is round-tripping. Round-tripping the round-trip. Thus, round-tripped sales are not transactions from an
is a situation whereby a company “sells” goods and services to another accounting perspective.
Transaction e Nov. 30, 20Y3 NetSolutions paid the following expenses during the month: wages, $2,125; rent,
$800; utilities, $450; and miscellaneous, $275.
During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in
this process of earning revenue are called expenses. Expenses include supplies used and payments for
employee wages, utilities, and other services.
NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275. Miscellaneous expenses include small amounts paid for such items as
postage, coffee, and newspapers. The effect of expenses is the opposite of revenues in that expenses
reduce assets and stockholders’ equity. Like fees earned, the expenses are recorded in columns to
the right of Common Stock. However, since expenses reduce stockholders’ equity, the expenses are
entered as negative amounts. The effect of this transaction is as follows:
Accounts Common Fees Wages Rent Utilities Misc.
Cash 1 Supplies 1 Land Payable 1 Stock 1 Earned 2 Exp. 2 Exp. 2 Exp. 2 Exp.
Bal. 12,500 1,350 20,000 5 1,350 25,000 7,500
e. 23,650 22,125 2800 2450 2275
Bal. 8,850 1,350 20,000 1,350 25,000 7,500 22,125 2800 2450 2275
30,200 5 30,200
Businesses usually record each revenue and expense transaction as it occurs. However, to simplify,
NetSolutions’ revenues and expenses are summarized for the month in transactions (d) and (e).
Transaction f Nov. 30, 20Y3 NetSolutions paid creditors on account, $950.
When you pay your monthly credit card bill, you decrease the cash and decrease the amount you
owe to the credit card company. Likewise, when NetSolutions paid $950 to creditors during the
month, it reduced assets and liabilities, as follows:

Accounts Common Fees Wages Rent Utilities Misc.
Cash 1 Supplies 1 Land Payable 1 Stock 1 Earned 2 Exp. 2 Exp. 2 Exp. 2 Exp.
Bal. 8,850 1,350 20,000 5 1,350 25,000 7,500 22,125 2800 2450 2275
f. 2950 2950
Bal. 7,900 1,350 20,000 400 25,000 7,500 22,125 2800 2450 2275
29,250 5 29,250
Paying an amount on account is different from paying an expense. The paying of an expense
reduces stockholders’ equity, as illustrated in transaction (e). Paying an amount on account reduces
the amount owed on a liability.
Transaction g Nov. 30, 20Y3 Chris Clark determined that the cost of supplies on hand at the end of the
month was $550.
The cost of the supplies on hand (not yet used) at the end of the month is $550. Thus, $800
($1,350 2 $550) of supplies must have been used during the month. This decrease in supplies is
recorded as an expense, as follows:

Accounts Common Fees Wages Rent Supplies Utilities Misc.
Cash 1 Supplies 1 Land Payable 1 Stock 1 Earned 2 Exp. 2 Exp. 2 Exp. 2 Exp. 2 Exp.
Bal. 7,900 1,350 20,000 5 400 25,000 7,500 22,125 2800 2450 2275
g. 2800 2800
Bal. 7,900 550 20,000 400 25,000 7,500 22,125 2800 2800 2450 2275
28,450 5 28,450
Nov. 30, 20Y3 Paid dividends, $2,000. Transaction h
Dividends are distributions of earnings to stockholders. The payment of dividends decreases cash
and stockholders’ equity. Like expenses, dividends are recorded in a separate column to the right
of Common Stock as a negative amount. The effect of the payment of dividends of $2,000 is as
follows:

Cash 1 Supp. 1 Land Payable 1 Stock 2 Dividends 1 Earned 2 Exp. 2 Exp. 2 Exp. 2 Exp. 2 Exp.
Bal. 7,900 550 20,000 5 400 25,000 7,500 22,125 2800 2800 2450 2275
h. 22,000 22,000
Bal. 5,900 550 20,000 400 25,000 22,000 7,500 22,125 2800 2800 2450 2275
26,450 5
26,450
Dividends should not be confused with expenses. Dividends do not represent assets or ser-
vices used in the process of earning revenues. Instead, dividends are considered a distribution of
earnings to stockholders.
Summary
The transactions of NetSolutions are summarized in Exhibit 6. Each transaction is identified by
letter, and the balance of each accounting equation element is shown after every transaction.
Exhibit 6 Summary of Transactions for NetSolutions

Cash 1 Supp. 1 Land 5 Payable 1 Stock 2 Dividends 1 Earned 2 Exp. 2 Exp. 2 Exp. 2 Exp. 2 Exp.
a. 125,000 125,000
b. 220,000 120,000
Bal. 5,000 20,000 25,000
c. 11,350 11,350
Bal. 5,000 11,350 20,000 11,350 25,000
d. 17,500 17,500
Bal. 12,500 1,350 20,000 1,350 25,000 7,500
e. 23,650 22,125 2800 2450 2275
Bal. 8,850 1,350 20,000 1,350 25,000 7,500 22,125 2800 2450 2275
f. 2950 2950
Bal. 7,900 1,350 20,000 400 25,000 7,500 22,125 2800 2450 2275
g. 2800 2800
Bal. 7,900 550 20,000 400 25,000 7,500 22,125 2800 2800 2450 2275
h. 22,000 22,000
Bal. 5,900 550 20,000 400 25,000 22,000 7,500 22,125 2800 2800 2450 2275
26,450 5 26,450
You should note the following:

▪▪ The effect of every transaction is an increase or a decrease in one or more of the accounting
equation elements.
▪▪ The two sides of the accounting equation are always equal.
▪▪ The stockholders’ equity is increased by amounts invested by stockholders (common stock).
▪▪ The stockholders’ equity is increased by revenues and decreased by expenses.
▪▪ The stockholders’ equity is decreased by dividends paid to stockholders.
Classifications of Stockholders’ Equity

Stockholders’ equity is classified as:
▪▪ Common Stock
▪▪ Retained Earnings
Common stock is shares of ownership distributed to investors of a corporation. It represents
the portion of stockholders’ equity contributed by investors. For NetSolutions, shares of common
stock of $25,000 were distributed to Chris Clark in exchange for investing in the business.
Retained earnings is the stockholders’ equity created from business operations through rev-
enue and expense transactions. For NetSolutions, retained earnings of $3,050 were created by its
November operations (revenue and expense transactions), computed as follows:
NetSolutions Retained Earnings

November Operations
(Revenue and Expense Transactions)
Fees Wages Rent Supplies Utilities Misc.
    
Earned Exp. Exp. Exp. Exp. Exp.
Transaction d. 17,500
Transaction e. 22,125 2800 2450 2275
Transaction g. 2800
______ ______ ______ ______ _____ _____
Balance, Nov. 30 7,500 22,125 2800 2800 2450 2275
______
______ ______
______ _______
_____ _______
_____ ______
____ __
_____
___
$3,050
Stockholders’ equity created by investments by stockholders (common stock) and by business

operations (retained earnings) are reported separately. Since dividends are distributions of earn-
ings to stockholders, dividends reduce retained earnings. NetSolutions paid $2,000 in dividends
during November, thus reducing retained earnings to $1,050 ($3,050 2 $2,000).
The effects of investments by stockholders, dividends, revenues, and expenses on stockholders’
equity are illustrated in Exhibit 7.
Exhibit 7 Stockholders’ Equity

Effects of Transactions
on Stockholders’ Equity
Types of Stockholders’ Distributions of
Revenues Expenses
Investments Earnings to
Transactions Stockholders’
Common Stock Dividends Net Income (Net Loss)
Common Stock Retained Earnings
Check Up Corner 1-1 Business Transactions and the Accounting Equation

Drive Time Delivery is a local delivery service operating in Cleveland, Ohio. On F ebruary 1, Drive Time has the
following balances: Cash, $32,500; Accounts Receivable, $5,000; Accounts Payable, $2,500; Common Stock,
$32,500; Fees Earned, $5,000; Wages Expense, $2,500.
Drive Time Delivery completed the following transactions during February:
a. Received cash from owner as an additional investment in common stock, $20,000.
b. Paid creditors on account, $2,000.
c. Received cash from customers on account, $5,000.
d. Billed customers for delivery services on account, $18,000.
e. Paid wages expense, $10,000.
f. Paid utilities expense, $3,000.
g. Paid dividends, $4,500.
Indicate the effect that each of these transactions has on the following accounting equation elements: Cash,
Accounts Receivable, Accounts Payable, Common Stock, Dividends, Fees Earned, Wages Expense, Utilities Expense.
Solution:
Each transaction affects one or more accounting equation elements.

Accounts Accounts Common Fees Wages Utilities
Cash 1 Receivable 5 Payable 1 Stock − Dividends 1 Earned − Expense − Expense
Bal. 32,500 5,000 2,500 32,500 5,000 −2,500
a. 20,000 20,000
b. −2,000 −2,000
c. 5,000 −5,000
d. 18,000 18,000
e. −10,000 −10,000
f. −3,000 −3,000
g. −4,500 −4,500
Bal. 38,000 18,000 500 1 52,500 −4,500 23,000 −12,500 −3,000
56,000 5 56,000
Check Up Corner
Financial Statements Objective 5

Describe the financial
After transactions have been recorded and summarized, reports are prepared for users. The accounting statements of a
reports providing this information are called financial statements. The primary financial statements of a corporation and explain
how they interrelate.
corporation are the income statement, statement of stockholders’ equity, balance sheet, and statement
of cash flows. The order in which the financial statements are prepared and the nature of each statement
are described in Exhibit 8.
Exhibit 8
Order
Financial Statements
Prepared Financial Statement Description of Statement
1. Income statement A summary of the revenue and expenses for a specific
period of time, such as a month or a year.
2. Statement of stockholders’ A summary of the changes in stockholders’ equity
equity that have occurred during a specific period of time,
such as a month or a year.
3. Balance sheet A list of the assets, liabilities, and stockholders’ equity
as of a specific date, usually at the close of the last day
of a month or a year.
4. Statement of cash flows A summary of the cash receipts and cash payments
for a specific period of time, such as a month or a year.
The four financial statements and their interrelationships are illustrated in Exhibit 9, The data for
the statements are taken from the summary of NetSolutions’ transactions in Exhibit 6.
All financial statements are identified by the name of the business, the title of the statement,
and the date or period of time. The data presented in the income statement, the statement of stock-
holders’ equity, and the statement of cash flows are for a period of time. The data presented in the
balance sheet are for a specific date.
Exhibit 9 NetSolutions
Income Statement
Financial For the Month Ended November 30, 20Y3
Statements for
NetSolutions Fees earned $ 7,500
Expenses:
Wages expense $2,125
Rent expense 800
Supplies expense 800
Utilities expense 450
Miscellaneous expense 275
Total expenses (4,450)
Net income $ 3,050
NetSolutions
Statement of Stockholders’ Equity
For the Month Ended November 30, 20Y3
Common Retained
Stock Earning Total
Balances, November 1, 20Y3 $ 0 $ 0 $ 0
Issued common stock 25,000 25,000
Net income 3,050 3,050
Dividends (2,000) (2,000)
Balances, November 30, 20Y3 $ 25,000 $ 1,050 $ 26,050
NetSolutions
Balance Sheet
November 30, 20Y3
Assets
Cash $ 5,900
Supplies 550
Land 20,000
Total assets $26,450
Liabilities
Accounts payable $ 400
Common stock $25,000
Retained earnings 1,050
Total stockholders’ equity 26,050
Total liabilities and stockholders’ equity $26,450
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 20Y3
Cash flows from (used for) operating activities:

Cash received from customers $ 7,500
Cash paid for expenses and to creditors (4,600)
Net cash flows from operating activities $ 2,900
Cash flows from (used for) investing activities:
Cash paid for acquisition of land (20,000)
Cash flows from (used for) financing activities:
Cash received from issuing common stock $ 25,000
Cash dividends (2,000 )
Net cash flows from financing activities 23,000
Net increase in cash $ 5,900
Cash balance, November 1, 20Y3 0
Cash balance, November 30, 20Y3 $ 5,900
Income Statement note:

The income statement reports the revenues and expenses for a period of time, based on the When revenues exceed
revenue and expense recognition principles. These principles match revenues and their related expenses, it is referred to as net
income, net profit, or earnings.
e xpenses so that they are reported in the same period. The excess of the revenue over the
When expenses exceed revenues,
expenses is called net income, net profit, or earnings. If the e
xpenses exceed the r evenue,
it is referred to as net loss.
the excess is a net loss.
For a recent year, Twitter reported net income of $1,206 million. Link to Twitter
The revenue and expenses for NetSolutions were shown in Exhibit 6 as separate increases and
ecreases. Net income for a period increases the stockholders’ equity (retained earnings) for the
d
period. A net loss decreases stockholders’ equity (retained earnings) for the period.
The revenue, expenses, and net income of $3,050 for NetSolutions are reported on the income
statement in Exhibit 9. The order in which the expenses are listed in the income statement varies
among businesses. Most businesses list expenses in order of size, beginning with the larger items.
Miscellaneous expense is usually shown as the last item, regardless of the amount.
Business Insight a company that practices inclusivity has as an objective that

every person should have equal rights, support, consideration,
and opportunities to achieve their full potential. To achieve this
Inclusivity
objective, an inclusive company will enact policies and procedures
I
nvestors and other business stakeholders are increasingly that are accommodating and respectful of a person’s race, ethnicity,
concerned not only about whether a company earns a net income, sexual orientation, gender identity, physical abilities, religion, age,
but also about a company’s impact on society. For example, and culture.
Statement of Stockholders’ Equity

The statement of stockholders’ equity reports the changes in stockholders’ equity for a period
of time. It is prepared after the income statement, because the net income or net loss for the
period is reported in the Retained Earnings column. It is prepared before the balance sheet,
because the amount of common stock and retained earnings at the end of the period is
reported on the balance sheet. Because of this, the statement of stockholders’ equity is viewed
as the connecting link between the income statement and the balance sheet.
NetSolutions had three types of transactions during November that affected its stockhold-
ers’ equity:
▪▪ Common stock of $25,000 issued to Chris Clark.
▪▪ Revenues and expenses, which resulted in net income of $3,050.
▪▪ Dividends of $2,000 paid to stockholders (Chris Clark).
These transactions are summarized in the statement of stockholders’ equity for NetSolutions
shown in Exhibit 9.
Changes in each stockholders’ equity element are reported in a separate column on the
statement of stockholders’ equity. Since NetSolutions was organized on November 1, there are
no beginning balances for Common Stock or Retained Earnings. During November, common
stock of $25,000 was issued and, thus, is entered in the Common Stock c olumn. Net income
of $3,050 and dividends of $2,000 are entered in the Retained Earnings c olumn, yielding an
ending balance of $1,050. Each change is carried over to the Total column. After all changes
are entered, the columns are totaled, representing the final balances as of November 30.
Another random document with
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American war, from an Eirish corporal, of the name of Dochart
O’Flaucherty, at Dalkeith fair, when he was at his ’prenticeship; he,
not being accustomed to malt-liquor, having got fouish and frisky—
which was not his natural disposition—over half-a-bottle of porter.
From this it will easily be seen, in the first place, that it would be with
a fecht that his master would get him off, by obliging the corporal to
take back the trepan money; in the second place, how long a date
back it is since the Eirish began to be the death of us; and in
conclusion, that my honoured faither got such a fleg as to spane him
effectually, for the space of ten years, from every drinkable stronger
than good spring-well water. Let the unwary take caution; and may
this be a wholesome lesson to all whom it may concern.
In this family history it becomes me, as an honest man, to make
passing mention of my faither’s sister, auntie Mysie, that married a
carpenter and undertaker in the town of Jedburgh; and who, in the
course of nature and industry, came to be in a prosperous and
thriving way; indeed so much so, as to be raised from the rank of a
private head of a family, and at last elected, by a majority of two
votes over a famous cow-doctor, a member of the town-council itself.
There is a good story, howsoever, connected with this business,
with which I shall make myself free to wind up this somewhat fusty
and fuzzionless chapter.
Well, ye see, some great lord,—I forget his name, but no matter,—
that had made a most tremendous sum of money, either by foul or
fair means, among the blacks in the East Indies, had returned before
he died, to lay his bones at home, as yellow as a Limerick glove, and
as rich as Dives in the New Testament. He kept flunkies with plush
small-clothes, and sky-blue coats with scarlet-velvet cuffs and
collars,—lived like a princie, and settled, as I said before, in the
neighbourhood of Jedburgh.
The body, though as brown as a toad’s back, was as pridefu’ and
full of power as auld king Nebuchadneisher; and how to exhibit all
his purple and fine linen, he aye thought and better thought, till at
last the happy determination came ower his mind like a flash of
lightning, to invite the bailies, deacons, and town-council, all in a
body, to come in and dine with him.
Save us! what a brushing of coats, such a switching of stoury
trousers, and bleaching of white cotton stockings, as took place
before the catastrophe of the feast, never before happened since
Jeddart was a burgh. Some of them that were forward, and geyan
bold in the spirit, crawed aloud for joy at being able to boast that
they had received an invitation letter to dine with a great lord; while
others, as proud as peacocks of the honour, yet not very sure as to
their being up to the trade of behaving themselves at the tables of the
great, were mostly dung stupid with not kenning what to think. A
council meeting or two was held in the gloamings, to take such a
serious business into consideration; some expressing their fears and
inward down-sinking, while others cheered them up with a fillip of
pleasant consolation. Scarcely a word of the matter for which they
were summoned together by the town-offisher—and which was about
the mending of the old bell-rope—was discussed by any of them. So,
after a sowd of toddy was swallowed, with the hopes of making them
brave men, and good soldiers of the magistracy, they all plucked up a
proud spirit, and, do or die, determined to march in a body up to the
gate, and forward to the table of his lordship.
My uncle, who had been one of the ringleaders of the chicken-
hearted, crap away up among the rest, with his new blue coat on,
shining fresh from the ironing of the goose, but keeping well among
the thick, to be as little kenspeckle as possible; for all the folk of the
town were at their doors and windows to witness the great occasion
of the town-council going away up like gentlemen of rank to take
their dinner with his lordship. That it was a terrible trial to all cannot
be for a moment denied; yet some of them behaved themselves
decently; and if we confess that others trembled in the knees, as if
they were marching to a field of battle, it was all in the course of
human nature.
Yet ye would wonder how they came on by degrees; and, to cut a
long tale short, at length found themselves in a great big room, like a
palace in a fairy tale, full of grand pictures with gold frames, and
looking-glasses like the side of a house, where they could see down to
their very shoes. For a while they were like men in a dream, perfectly
dazzled and dumfoundered; and it was five minutes before they
could either see a seat, or think of sitting down. With the reflection of
the looking-glasses, one of the bailies was so possessed within
himself that he tried to chair himself where chair was none, and
landed, not very softly, on the carpet; while another of the deacons, a
fat and dumpy man, as he was trying to make a bow, and throw out
his leg behind him, tramped on a favourite Newfoundland dog’s tail,
that, wakening out of his slumbers with a yell that made the roof
ring, played drive against my uncle, who was standing abaft, and
wheeled him like a butterflee, side foremost, against a table with a
heap o’ flowers on’t, where, in trying to kep himself, he drove his
head, like a battering ram, through a looking-glass, and bleached
back on his hands and feet on the carpet.
Seeing what had happened, they were all frightened; but his
lordship, after laughing heartily, was politer, and kent better about
manners than all that; so, bidding the flunkies hurry away with the
fragments of the china jugs and jars, they found themselves,
sweating with terror and vexation, ranged along silk settees, cracking
about the weather and other wonderfuls.
Such a dinner! The fume of it went round about their hearts like
myrrh and frankincense. The landlord took the head of the table, the
bailies the right and left of him; the deacons and councillors were
ranged along the sides like files of sodgers; and the chaplain, at the
foot, said grace. It is entirely out of the power of man to set down on
paper all that they got to eat and drink; and such was the effect of
French cookery, that they did not ken fish from flesh. Howsoever, for
all that, they laid their lugs in everything that lay before them, and
what they could not eat with forks, they supped with spoons; so it
was all to one purpose.
When the dishes were removing, each had a large blue glass bowl
full of water, and a clean calendered damask towel, put down by a
smart flunkey before him; and many of them that had not helped
themselves well to the wine while they were eating their steaks and
French frigassees, were now vexed to death on that score, imagining
that nothing remained for them but to dight their nebs and flee up.
Ignorant folk should not judge rashly, and the worthy town-
council were here in error; for their surmises, however feasible, did
the landlord wrong. In a minute they had fresh wine decanters
ranged down before them, filled with liquors of all variety of colours,
red, green, and blue; and the table was covered with dishes full of
jargonelles and pippins, raisins and almonds, shell walnuts and
plum-damases, with nutcrackers, and everything else they could
think of eating; so that after drinking “The King, and long life to
him,” and “The constitution of the country at home and abroad,” and
“Success to trade,” and “A good harvest,” and “May ne’er waur be
among us,” and “Botheration to the French,” and “Corny toes and
short shoes to the foes of old Scotland,” and so on, their tongues
began at length not to be so tacked; and the weight of their own
dignity, that had taken flight before his lordship, came back and
rested on their shoulders.
In the course of the evening, his lordship whispered to one of the
flunkies to bring in some things—they could not hear what—as the
company might like them. The wise ones thought within themselves
that the best aye comes hindmost; so in brushed a powdered valet,
with three dishes on his arm of twisted black things, just like sticks of
Gibraltar-rock, but different in the colour.
Bailie Bowie helped himself to a jargonelle, and Deacon Purves to
a wheen raisins; and my uncle, to show that he was not frightened,
and kent what he was about, helped himself to one of the long black
things, which, without much ceremony, he shoved into his mouth,
and began to. Two or three more, seeing that my uncle was up to
trap, followed his example, and chewed away like nine-year olds.
Instead of the curious-looking black thing being sweet as honey,—
for so they expected,—they soon found they had catched a Tartar; for
it had a confounded bitter tobacco taste. Manners, however, forbade
them laying it down again, more especially as his lordship, like a man
dumfoundered, was aye keeping his eye on them. So away they
chewed, and better chewed, and whammelled them round in their
mouths, first in one cheek, and then in the other, taking now and
then a mouthful of drink to wash the trash down, then chewing away
again, and syne another whammel from one cheek to the other, and
syne another mouthful, while the whole time their een were staring
in their heads like mad, and the faces they made may be imagined,
but cannot be described. His lordship gave his eyes a rub, and
thought he was dreaming, but no—there they were bodily, chewing
and whammelling, and making faces; so no wonder that, in keeping
in his laugh, he sprung a button from his waistcoat, and was like to
drop down from his chair, through the floor, in an ecstasy of
astonishment, seeing they were all growing sea-sick, and as pale as
stucco-images.
Frightened out of his wits at last, that he would be the death of the
whole council, and that more of them would poison themselves, he
took up one of the cigars,—every one knows cigars now, for they are
fashionable among the very sweeps,—which he lighted at the candle,
and commenced puffing like a tobacco-pipe.
My uncle and the rest, if they were ill before, were worse now; so
when they got to the open air, instead of growing better, they grew
sicker and sicker, till they were waggling from side to side like ships
in a storm; and, no kenning whether their heels or heads were
uppermost, went spinning round about like peeries.
“A little spark may make muckle wark.” It is perfectly wonderful
what great events spring out of trifles, or what seem to common eyes
but trifles. I do not allude to the nine days’ deadly sickness, that was
the legacy of every one that ate his cigar, but to the awful truth, that
at the next election of councillors, my poor uncle Jamie was
completely blackballed—a general spite having been taken to him in
the townhall, on account of having led the magistracy wrong, by
doing what he ought to have let alone, thereby making himself and
the rest a topic of amusement to the world at large, for many and
many a month.
Others, to be sure, it becomes me to mention, have another version
of the story, and impute the cause of his having been turned out to
the implacable wrath of old Bailie Bogie, whose best black coat,
square in the tails, that he had worn only on the Sundays for nine
years, was totally spoiled, on their way home in the dark from his
lordship’s, by a tremendous blash that my unfortunate uncle
happened, in the course of nature, to let flee in the frenzy of a deadly
upthrowing.—The Life of Mansie Wauch, Tailor in Dalkeith.
JOHN BROWN;
OR, THE HOUSE IN THE MUIR.
John Brown, the Ayr, or as he was more commonly designated by

the neighbours, the Religious, Carrier, had been absent, during the
month of January (1685), from his home in the neighbourhood of
Muirkirk, for several days. The weather, in the meantime, had
become extremely stormy, and a very considerable fall of snow had
taken place. His only daughter, a girl of about eleven years of age,
had frequently, during the afternoon of Saturday, looked out from
the cottage door into the drift, in order to report to her mother, who
was occupied with the nursing of an infant brother, the anxious
occurrences of the evening. “Help,” too, the domestic cur, had not
remained an uninterested spectator of the general anxiety, but by
several fruitless and silent excursions into the night, had given
indisputable testimony that the object of his search had not yet
neared the solitary shieling. It was a long, and a wild road, lying over
an almost trackless muir, along which John Brown had to come; and
the cart track, which even in better weather, and with the advantage
of more daylight, might easily be mistaken, had undoubtedly, ere
this, become invisible. Besides, John had long been a marked bird,
having rendered himself obnoxious to the “powers that were,” by his
adherence to the Sanquhar declaration, his attending field-
preachings, or as they were termed “conventicles,” his harbouring of
persecuted ministers, and, above all, by a moral, a sober, and a
proverbially devout and religious conduct.
In an age when immorality was held to be synonymous with
loyalty, and irreligion with non-resistance and passive obedience, it
was exceedingly dangerous to wear such a character, and,
accordingly, there had not been wanting information to the prejudice
of this quiet and godly man. Clavers, who, ever since the affair of
Drumclog, had discovered more of the merciless and revengeful
despot than of the veteran or hero, had marked his name, according
to report, in his black list; and when once Clavers had taken his
resolution and his measures, the Lord have mercy upon those against
whom these were pointed! He seldom hesitated in carrying his plans
into effect, although his path lay over the trampled and lacerated
feelings of humanity. Omens, too, of an unfriendly and evil-boding
import, had not been wanting in the cottage of John to increase the
alarm. The cat had mewed suspiciously, had appeared restless, and
had continued to glare in hideous indication from beneath the
kitchen bed. The death-watch, which had not been noticed since the
decease of the gudeman’s mother, was again, in the breathless pause
of listening suspense, heard to chick distinctly; and the cock, instead
of crowing, as on ordinary occasions, immediately before day-dawn,
had originated a sudden and alarming flap of his wings, succeeded by
a fearful scream, long before the usual bedtime.
It was a gloomy crisis; and after a considerable time spent in dark
and despairing reflection, the evening lamp was at last trimmed, and
the peat fire repaired into something approaching to a cheerful
flame. But all would not do; for whilst the soul within is disquieted
and in suspense, all external means and appliances are inadequate to
procure comfort, or impart even an air of cheerfulness. At last Help
suddenly lifted his head from the hearth, shook his ears, sprung to
his feet, and with something betwixt a growl and a bark, rushed
towards the door, at which the yird drift was now entering copiously.
It was, however, a false alarm. The cow had moved beyond the
“hallan,” or the mice had come into sudden contact, and squeaked
behind the rafters. John, too, it was reasoned betwixt mother and
daughter, was always so regular and pointed in his arrivals, and this
being Saturday night, it was not a little or an insignificant
obstruction that could have prevented him from being home, in due
time, at least, for family worship. His cart, in fact, had usually been
pitched up, with the trams supported against the peat-stack, by two
o’clock in the afternoon; and the evening of his arrival from his
weekly excursion to Ayr was always an occasion of affectionate
intercourse, and more than ordinary interest. Whilst his disconsolate
wife, therefore, turned her eyes towards her husband’s chair, and to
the family Bible, which lay in a “bole” within reach of his hand, and
at the same time listened to the howling and intermitting gusts of the
storm, she could not avoid—it was not in nature that she should—
contrasting her present with her former situation; thus imparting
even to objects of the most kindly and comforting association, all the
livid and darkening hues of her disconsolate mind. But there is a
depth and a reach in true and genuine piety, which the plummet of
sorrow may never measure. True religion sinks into the heart as the
refreshing dew does into the chinks and the crevices of the dry and
parched soil; and the very fissures of affliction, the cleavings of the
soul, present a more ready and inviting, as well as efficient access, to
the softening influence of piety.
This poor woman began gradually to think less of danger, and
more of God—to consider as a set-off against all her fruitless
uneasiness, the vigilance and benevolence of that powerful Being, to
whom, and to whose will, the elements, in all their combinations and
relations, are subservient; and having quieted her younger child in
the cradle, and intimated her intention by a signal to her daughter,
she proceeded to take down the family Bible, and to read out in a
soft, and subdued, but most devout and impressive voice, the
following lines:—
I waited for the Lord my God,
And patiently did bear;
At length to me he did incline
My voice and cry to hear.
These two solitary worshippers of Him whose eyes are on the just,
and whose ear is open to their cry, had proceeded to the beginning of
the fourth verse of this psalm, and were actually employed in singing
with an increased and increasing degree of fervour and devotion, the
following trustful and consolatory expressions—
O blessed is the man whose trust
Upon the Lord relies,
when the symphony of another and a well-known voice was felt to be

present, and they became at once assured that the beloved object of
their solicitude had joined them, unseen and unperceived, in the
worship. This was felt by all to be as it ought to have been; nor did
the natural and instinctive desire to accommodate the weary and
snow-covered traveller with such conveniences and appliances as his
present condition manifestly demanded, prevent the psalm-singing
from going on, and the service from being finished with all suitable
decency. Having thus, in the first instance, rendered thanks unto
God, and blessed and magnified that mercy which pervades, and
directs, and over-rules every agent in nature, no time was lost in
attending to the secondary objects of inquiry and manifestation, and
the kind heart overflowed, whilst the tongue and the hand were
busied in “answer meet” and in “accommodation suitable.”
In all the wide range of Scotland’s muirs and mountains, straths
and glens, there was not to be found this evening a happier family
than that over which John Brown, the religious carrier, now
presided. The affectionate inquiries and solicitous attentions of his
wife,—of his partner trusty and tried, not only under the cares and
duties of life, but in the faith, in the bonds of the covenant, and in all
the similarity of sentiment and apprehension upon religious
subjects, without which no matrimonial union can possibly ensure
happiness,—were deeply felt and fully appreciated. They two had sat
together in the “Torwood,” listening to the free and fearless accents
of excommunication, as they rolled in dire and in blasting destiny
from the half-inspired lips of the learned and intrepid Mr Donald
Cargill. They had, at the risk of their lives, harboured for a season,
and enjoyed the comfortable communion and fellowship of Mr
Richard Cameron, immediately previous to his death in the
unfortunate rencounter at “Airsmoss.” They had followed into and
out the shire of Ayr, the zealous and eloquent Mr John King, and that
even in spite of the interdict of council, and after that a price had
been set upon the preacher’s head. Their oldest child had been
baptised by a Presbyterian and ejected minister under night, and in
the midst of a wreath of snow, and the youngest was still awaiting the
arrival of an approven servant of God, to receive the same sanctified
ordinance. And if at times a darker thought passed suddenly across
the disc of their sunny hearts, and if the cause of a poor persecuted
remnant, the interests of a reformed, and suffering, and bleeding
church, supervened in cloud upon the general quietude and
acquiescence of their souls, this was instantly relieved and dispersed
by a deeper, and more sanctified and more trustful tone of feeling;
whilst amidst the twilight beams of prophecy, and the invigorating
exercise of faith, the heart was disciplined and habituated into hope,
and reliance, and assurance. And if at times the halloo, and the yells,
and the clatter of persecution, were heard upon the hill-side, or up
the glen, where the Covenanters’ Cave was discovered, and five
honest men were butchered under a sunny morning, and in cold
blood,—and if the voice of Clavers, or of his immediate deputy in the
work of bloody oppression, “Red Rob,” came occasionally in the
accents of vindictive exclamation, upon the breeze of evening; yet
hitherto the humble “Cottage in the Muir” had escaped notice, and
the tread and tramp of man and horse had passed mercifully, and
almost miraculously by. The general current of events closed in upon
such occasional sources of agitation and alarm, leaving the house in
the muir in possession of all that domestic happiness, and even
quietude, which its retirement and its inmates were calculated to
ensure and to participate.
Early next morning the cottage of John Brown was surrounded by
a troop of dragoons, with Clavers at their head. John, who had
probably a presentiment of what might happen, urged his wife and
daughter to remain within doors, insisting that as the soldiers were,
in all likelihood, in search of some other individual, he should soon
be able to dismiss them. By this time the noise, occasioned by the
trampling and neighing of horses, commingled with the hoarse and
husky laugh and vociferations of the dragoons, had brought John,
half-dressed and in his night-cap, to the door. Clavers immediately
accosted him by name; and in a manner peculiar to himself, intended
for something betwixt the expression of fun and irony, he proceeded
to make inquiries respecting one “Samuel Aitkin, a godly man, and a
minister of the word, one outrageously addicted to prayer, and
occasionally found with the sword of the flesh in one hand, and that
of the spirit in the other, disseminating sedition, and propagating
disloyalty among his Majesty’s lieges.”
John admitted at once that the worthy person referred to was not
unknown to him, asserting, however, at the same time, that of his
present residence or place of hiding he was not free to speak. “No
doubt, no doubt,” rejoined the questioner, “you, to be sure, know
nothing!—how should you, all innocence and ignorance as you are?
But here is a little chip of the old block, which may probably recollect
better, and save us the trouble of blowing out her father’s brains, just
by way of making him remember a little more accurately.” “You, my
little farthing rush-light,” continued “Red Rob,”[2] alighting from his
horse, and seizing the girl rudely, and with prodigious force by the
wrists,—“you remember an old man with a long beard and a bald
head, who was here a few days ago, baptizing your sister, and giving
many good advices to father and mother, and who is now within a
few miles of this house, just up in a nice snug cave in the glen there,
to which you can readily and instantly conduct us, you know?” The
girl looked first at her mother, who had now advanced into the
doorway, then at her father, and latterly drooped her head, and
continued to preserve a complete silence.
2. “Red Rob,” the “Bothwell,” probably, of “Old Mortality,” was, in fact, the
right hand man of Clavers on all occasions, and has caused himself long to be
remembered amidst the peasantry of the West of Scotland, not only by the
dragoon’s red cloak, which he wore, but still more by his hands, crimsoned in the
blood of his countrymen!
“And so,” continued the questioner, “you are dumb; you cannot
speak; your tongue is a little obstinate or so, and you must not tell
family secrets. But what think you, my little chick, of speaking with
your fingers, of having a pat and a proper and a pertinent answer just
ready, my love, at your finger ends, as one may say. As the Lord lives,
and as my soul lives, but this will make a dainty nosegay” (displaying
a thumbikin or fingerscrew) “for my sweet little Covenanter; and
then” (applying the instrument of torture, meanwhile, and adjusting
it to the thumb) “you will have no manner of trouble whatever in
recollecting yourself; it will just come to you like the lug of a stoup,
and don’t knit your brows so” (for the pain had become insufferable);
“then we shall have you quite chatty and amusing, I warrant.” The
mother, who could stand this no longer, rushed upon the brutal
executioner, and with expostulations, threats, and the most
impassioned entreaties, endeavoured to relax the questioner’s twist.
“Can you, mistress, recollect anything of this man we are in quest
of?” resumed Clavers, haughtily. “It may save us both some trouble,
and your daughter a continuance and increase of her present
suffering, if you will just have the politeness to make us acquainted
with what you happen to know upon the subject.” The poor woman
seemed for an instant to hesitate; and her daughter looked most
piteously and distractedly into her countenance, as if expectant and
desirous of respite, through her mother’s compliance. “Woman!”
exclaimed the husband, in a tone of indignant surprise, “hast thou so
soon forgot thy God? And shall the fear of anything which man can
do induce thee to betray innocent blood?” He said no more; but he
had said enough, for from that instant the whole tone of his wife’s
feelings was changed, and her soul was wound up as if by the hand of
Omnipotence, into resolution and daring. “Bravo!” exclaimed the
arch persecutor, “Bravo! old Canticles; thou word’st it well; and so
you three pretty innocents have laid your holy heads together, and
you have resolved to die, should it so please God and us, with a secret
in your breast, and a lie in your mouth, like the rest of your psalm-
singing, hypocritical, canting sect, rather than discover gude Mr
Aitken!—pious Mr Aitken!—worthy Mr Aitken! But we shall try what
light this little telescope of mine will afford upon the subject,”
pointing at the same time to a carabine or holster pistol, which hung
suspended from the saddle of his horse. “This cold frosty morning,”
continued Clavers, “requires that one should be employed, were it for
no other purpose than just to gain heat by the exercise. And so, old
pragmatical, in order that you may not catch cold, by so early an
exposure to the keen air, we will take the liberty,” (hereupon the
whole troop gathered round, and presented muskets), “for the
benefit of society, and for the honour and safety of the King, never to
speak of the glory of God and the good of souls,—simply and
unceremoniously, and in the neatest and most expeditious manner
imaginable, to blow out your brains.” John Brown dropped down
instantly, and as it were instinctively, upon his knees, whilst his wife
stood by in seeming composure, and his daughter had happily
become insensible to all external objects and transactions whatever.
“What!” exclaimed Clavers, “and so you must pray too, to be sure,
and we shall have a last speech and a dying testimony lifted up in the
presence of peat-stack and clay walls and snow wreaths; but as these
are pretty staunch and confirmed loyalists, I do not care though we
entrust you with five minutes of devotional exercise, provided you
steer clear of King, Council, and Richard Cameron,—so proceed,
good John, but be short and pithy. My lambs are not accustomed to
long prayers, nor will they readily soften under the pathetic whining
of your devotions.” But in this last surmise Clavers was for once
mistaken; for the prayer of this poor and uneducated man ascended
that morning in expressions at once so earnest, so devout, and so
overpoweringly pathetic, that deep silence succeeded at last to oaths
and ribaldry; and as the following concluding sentences were
pronounced, there were evident marks of better and relenting
feelings:—“And now, gude Lord,” continued this death-doomed and
truly Christian sufferer, “since Thou hast nae mair use for Thy
servant in this world, and since it is Thy good and rightful pleasure
that I should serve Thee better and love Thee more elsewhere, I leave
this puir widow woman, with the helpless and fatherless children,
upon Thy hands. We have been happy in each other here, and now
that we are to part for awhile, we maun e’en look forward to a more
perfect and enduring happiness hereafter. As for the puir blindfolded
and infatuated creatures, the present ministers of Thy will, Lord,
reclaim them from the error and the evil of their courses ere it be too
late; and may they who have sat in judgment and in oppression in
this lonely place, and on this blessed morning, and upon a puir weak
defenceless fellow-creature, find that mercy at last from Thee which
they have this day refused to Thy unworthy but faithful servant.”
“Now, Isbel,” continued this defenceless and amiable martyr, “the
time is come at last, of which, you know, I told you on that day when
first I proposed to unite hand and heart with yours; and are you
willing, for the love of God and His rightful authority, to part with me
thus?” To which the poor woman replied with perfect composure,
“The Lord gave, and He taketh away. I have had a sweet loan of you,
my dear John, and I can part with you for His sake, as freely as ever I
parted with a mouthful of meat to the hungry, or a night’s lodging to
the weary and benighted traveller.” So saying, she approached her
still kneeling and blindfolded husband, clasped him round the neck,
kissed and embraced him closely, and then lifting up her person into
an attitude of determined endurance, and eyeing from head to foot
every soldier who stood with his carabine levelled, she retired slowly
and firmly to the spot which she had formerly occupied. “Come,
come, let’s have no more of this whining work,” interrupted Clavers
suddenly. “Soldiers! do your duty.” But the words fell upon a circle of
statues; and though they all stood with their muskets presented,
there was not a finger which had power to draw the fatal trigger.
Then ensued an awful pause, through which a “God Almighty bless
your tender hearts,” was heard coming from the lips of the now
agitated and almost distracted wife. But Clavers was not in the habit
of giving his orders twice, or of expostulating with disobedience. So,
extracting a pistol from the holster of his saddle, he primed and
cocked it, and then walking firmly and slowly up through the circle
close to the ear of his victim.
There was a momentary murmur of discontent and of
disapprobation amongst the men as they looked upon the change
which a single awful instant had effected; and even “Red Rob,”
though a Covenanting slug still stuck smarting by in his shoulder,
had the hardihood to mutter, loud enough to be heard, “By God, this
is too bad!” The widow of John Brown gave one, and but one shriek
of horror as the fatal engine exploded; and then, addressing herself
leisurely, as if to the discharge of some ordinary domestic duty, she
began to unfold a napkin from her neck. “What think ye, good
woman, of your bonny man now?” vociferated Clavers, returning, at
the same time, the pistol, with a plunge, into the holster from which
it had been extracted. “I had always good reason,” replied the woman
firmly and deliberately, “to think weel o’ him, and I think mair o’ him
now than ever. But how will Graham of Claverhouse account to God
and man for this morning’s work?” continued the respondent firmly.
“To man,” answered the ruffian, “I can be answerable; and as to God,
I will take Him in my own hands.” He then marched off, and left her
with the corpse. She spread the napkin leisurely upon the snow,
gathered up the scattered fragments of her husband’s head, covered
his body with a plaid, and sitting down with her youngest and yet
unbaptised infant, wept bitterly.
The cottage, and the kail-yard, and the peat-stack, and the whole
little establishment of John Brown, the religious carrier, have long
disappeared from the heath and the muir; but the little spot, within
one of the windings of the burn, where the “House in the Muir”
stood, is still green amidst surrounding heath; and in the very centre
of that spot there lies a slab, or flat stone, now almost covered over
with grass, upon which, with a little clearing away of the moss from
the faded characters, the following rude but expressive lines may still
be read:—
Clavers might murder godly Brown,
But could not rob him of his crown;
Here in this place from earth he took departure,
Now he has got the garland of the martyr.
Blackwood’s Magazine, 1822.
TRADITIONS OF THE OLD TOLBOOTH OF
EDINBURGH.
By Robert Chambers, LL.D.
Chapter I.
Whosoever is fortunate enough to have seen Edinburgh previous
to the year 1817—when as yet the greater part of its pristine character
was entire, and before the stupendous grandeur, and dense old-
fashioned substantiality, which originally distinguished it, had been
swept away by the united efforts of fire and foolery—must remember
the Old Tolbooth. At the north-west corner of St Giles’s Church, and
almost in the very centre of a crowded street, stood this tall, narrow,
antique, and gloomy-looking pile, with its black stancheoned
windows opening through its dingy walls, like the apertures of a
hearse, and having its western gable penetrated by sundry
suspicious-looking holes, which occasionally served—horresco
referens—for the projection of the gallows. The fabric was four
stories high, and might occupy an area of fifty feet by thirty. At the
west end there was a low projection of little more than one story,
surmounted by a railed platform, which served for executions. This,
as well as other parts of the building, contained shops.
On the north side, there remained the marks of what had once
been a sort of bridge communicating between the Tolbooth and the
houses immediately opposite. This part of the building got the name
of the “Purses,” on account of its having been the place where, in
former times, on the King’s birthday, the magistrates delivered
donations of as many pence as the King was years old to the same
number of beggars or “blue-gowns.” There was a very dark room on
this side, which was latterly used as a guard-house by the right
venerable military police of Edinburgh, but which had formerly been
the fashionable silk-shop of the father of the celebrated Francis
Horner. At the east end there was nothing remarkable, except an iron
box, attached to the wall, for the reception of small donations in
behalf of the poor prisoners, over which was a painted board,
containing some quotations from Scripture. In the lower flat of the
south and sunny side, besides a shop, there was a den for the
accommodation of the outer door-keeper, and where it was necessary
to apply when admission was required, and the old gray-haired man
was not found at the door. The main door was at the bottom of the
great turret or turnpike stair, which projected from the south-east
corner. It was a small but very strong door, full of large headed nails,
and having an enormous lock, with a flap to conceal the keyhole,
which could itself be locked, but was generally left open.
One important feature in the externals of the Tolbooth was, that
about one third of the building, including the turnpike, was of ashlar
work—that is, smooth freestone—while the rest seemed of coarser
and more modern construction, besides having a turnpike about the
centre, without a door at the bottom. The floors of the “west end,” as
it was always called, were somewhat above the level of those in the
“east end,” and in recent times the purposes of these different
quarters was quite distinct—the former containing the debtors, and
the latter the criminals. As the “east end” contained the hall in which
the Scottish Parliament formerly met, we may safely suppose it to
have been the oldest part of the building—an hypothesis which
derives additional credit from the various appearance of the two
quarters—the one having been apparently designed for a more noble
purpose than the other. The eastern division must have been of vast
antiquity, as James the Third fenced a Parliament in it, and the
magistrates of Edinburgh let the lower flat for booths or shops, so
early as the year 1480.
On passing the outer door, where the rioters of 1736 thundered
with their sledge-hammers, and finally burnt down all that
interposed between them and their prey, the keeper instantly
involved the entrant in darkness by reclosing the gloomy portal. A
flight of about twenty steps then led to an inner door, which, being
duly knocked, was opened by a bottle-nosed personage denominated
“Peter,” who, like his sainted namesake, always carried two or three
large keys. You then entered “the hall,” which, being free to all the
prisoners except those of the “east end,” was usually filled with a
crowd of shabby-looking, but very merry loungers. This being also
the chapel of the jail, contained an old pulpit of singular fashion,—
such a pulpit as one could imagine John Knox to have preached
from; which, indeed, he was traditionally said to have actually done.
At the right-hand side of the pulpit was a door leading up the large
turnpike to the apartments occupied by the criminals, one of which
was of plate-iron. This door was always shut, except when food was
taken up to the prisoners.
On the north side of the hall was the “Captain’s Room,” a small
place like a counting-room, but adorned with two fearful old muskets
and a sword, together with the sheath of a bayonet, and one or two
bandeliers, alike understood to hang there for the defence of the jail.
On the west end of the hall hung a board, on which—the production,
probably, of some insolvent poetaster—were inscribed the following
emphatic lines:—
A prison is a house of care,
A place where none can thrive,
A touchstone true to try a friend,
A grave for men alive—
Sometimes a place of right,
Sometimes a place of wrong,
Sometimes a place for jades and thieves,
And honest men among.
The historical recollections connected with “the hall” ought not to

be passed over. Here Mary delivered what Lindsay and other old
historians call her “painted orations.” Here Murray wheedled, and
Morton frowned. This was the scene of Charles’s ill-omened attempts
to revoke the possessions of the Church; and here, when his
commissioner, Nithsdale, was deputed to urge that measure, did the
Presbyterian nobles prepare to set active violence in opposition to
the claims of right and the royal will. On that occasion, old Belhaven,
under pretence of infirmity, took hold of his neighbour, the Earl of
Dumfries, with one hand, while with the other he grasped a dagger
beneath his clothes, ready, in case the act of revocation were passed,
to plunge it into his bosom.
From the hall a lobby extended to the bottom of the central
staircase already mentioned, which led to the different apartments—
about twelve in number—appropriated to the use of the debtors. This
stair was narrow, spiral, and steep—three bad qualities, which the
stranger found but imperfectly obviated by the use of a greasy rope
that served by way of balustrade. This nasty convenience was not
rendered one whit more comfortable by the intelligence, usually
communicated by some of the inmates, that it had hanged a man! In
the apartments to which this stair led, there was nothing remarkable,
except that in one of them part of the wall seemed badly plastered.
This was the temporary covering of the square hole through which
the gallows-tree was planted. We remember communing with a
person who lodged in this room at the time of an execution. He had
had the curiosity, in the impossibility of seeing the execution, to try if
he could feel it. At the time when he heard the psalms and other
devotions of the culprit concluded, and when he knew, from the
awful silence of the crowd, that the signal was just about to be given,
he sat down upon the end of the beam, and soon after distinctly felt
the motion occasioned by the fall of the unfortunate person, and
thus, as it were, played at “see-saw” with the criminal.
The annals of crime are of greater value than is generally
supposed. Criminals form an interesting portion of mankind. They
are entirely different from us—divided from us by a pale which we
will not, dare not overleap, but from the safe side of which we may
survey, with curious eyes, the strange proceedings which go on
beyond. They are interesting, often, on account of their courage—on
account of their having dared something which we timorously and
anxiously avoid. A murderer or a robber is quite as remarkable a
person, for this reason, as a soldier who has braved some flesh-
shaking danger. He must have given way to some excessive passion;
and all who have ever been transported beyond the bounds of reason
by the violence of any passion whatever, are entitled to the wonder, if
not the admiration, of the rest of the species. Among the inmates of
the Old Tolbooth, some of whom had inhabited it for many years,
there were preserved a few legendary particulars respecting
criminals of distinction, who had formerly been within its walls.
Some of these I have been fortunate enough to pick up.
One of the most distinguished traits in the character of the Old
Tolbooth was, that it had no power of retention over people of
quality. It had something like that faculty which Falstaff attributes to
the lion and himself—of knowing men who ought to be respected on
account of their rank. Almost every criminal of more than the
ordinary rank ever yet confined in it, somehow or other contrived to
get free. An insane peer, who, about the time of the Union,
assassinated a schoolmaster that had married a girl to whom he had
paid improper addresses, escaped while under sentence of death. We
are uncertain whether the following curious fact relates to that
nobleman, or to some other titled offender. It was contrived that the
prisoner should be conveyed out of the Tolbooth in a trunk, and
carried by a porter to Leith, where some sailors were to be ready with
a boat to take him aboard a vessel about to leave Scotland. The plot
succeeded so far as the escape from jail was concerned, but was
knocked on the head by an unlucky and most ridiculous
contretemps. It so happened that the porter, in arranging the trunk
upon his back, placed the end which corresponded with the feet of
the prisoner uppermost. The head of the unfortunate nobleman was
therefore pressed against the lower end of the box, and had to
sustain the weight of the whole body. The posture was the most
uneasy imaginable. Yet life was preferable to ease. He permitted
himself to be taken away. The porter trudged along the Krames with
the trunk, quite unconscious of its contents, and soon reached the
High Street, which he also traversed. On reaching the Netherbow, he
met an acquaintance, who asked him where he was going with that
large burden. To Leith, was the answer. The other enquired if the job
was good enough to afford a potation before proceeding farther upon
so long a journey. This being replied to in the affirmative, and the
carrier of the box feeling in his throat the philosophy of his friend’s
enquiry, it was agreed that they should adjourn to a neighbouring
tavern. Meanwhile, the third party, whose inclinations had not been
consulted in this arrangement, felt in his neck the agony of ten
thousand decapitations, and almost wished that it were at once well
over with him in the Grassmarket. But his agonies were not destined
to be of long duration. The porter, in depositing him upon the
causeway, happened to make the end of the trunk come down with
such precipitation, that, unable to bear it any longer, the prisoner
fairly roared out, and immediately after fainted. The consternation of
the porter, on hearing a noise from his burden, was of course
excessive; but he soon acquired presence of mind enough to conceive
the occasion. He proceeded to unloose and to burst open the trunk,
when the hapless nobleman was discovered in a state of insensibility;
and as a crowd collected immediately, and the City Guard were not
long in coming forward, there was of course no farther chance of
escape. The prisoner did not revive from his swoon till he had been
safely deposited in his old quarters. But, if we recollect aright, he
eventually escaped in another way.
Of Porteous, whose crime—if crime existed—was so sufficiently
atoned for by the mode of his death, an anecdote which has the
additional merit of being connected with the Old Tolbooth, may here
be acceptable. One day, some years before his trial, as he was walking
up Liberton’s Wynd, he encountered one of the numerous hens,
which, along with swine, then haunted the streets of the Scottish
capital. For some reason which has not been recorded, he struck this
hen with his cane, so that it immediately died. The affair caused the
neighbours to gather round, and it was universally thought that the
case was peculiarly hard, inasmuch as the bird was a “clocker,” and
left behind it a numerous brood of orphan chickens. Before the
captain had left the spot, the proprietrix of the hen, an old woman
who lived in the upper flat of a house close by, looked over her
window, and poured down upon the slayer’s head a whole “gardeloo”
of obloquy and reproach, saying, among other things, that “she
wished he might have as many witnesses present at his hinder-end as
there were feathers in that hen.”[3]
3. It is but charity to suppose Porteous might, in this case, be only
endeavouring to introduce a better system of street police than had formerly
prevailed. It is not many years since the magistrates of a southern burgh drew
down the unqualified wrath of all the good women there by attempting to
confiscate and remove the filth which had been privileged to grace the causeway
from time immemorial.
Porteous went away, not unaffected, as it would appear, by these
idle words. On the night destined to be his last on earth, he told the
story of the hen to the friends who then met in the jail to celebrate
his reprieve from the execution which was to have taken place that
day; and the prophetess of Liberton’s Wynd was honoured with

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