Chapter 1 - The Environment and Theoretical Structure of Financial Accounting
The political process section has been updated to include a discussion of the recent debate that occurred on the issue of accounting for business combinations

Chapter 2
Revised material

Chapters 3, 4 and 5
The order of these three chapters has been changed. In the second edition, these chapters contained the following content:

Chapter 3 The income statement and statement of cash flows
Chapter 4 Income measurement and profitability analysis
Chapter 5 The balance sheet and financial disclosures

The new sequence is as follows:

Chapter 3 The balance sheet and financial disclosures
Chapter 4 The income statement and statement of cash flows
Chapter 5 Income measurement and profitability analysis

The reasons for this revision include the following:
The basic financial statements are now presented contiguously in chapters 3 and 4.
The balance sheet is now covered before presenting the material on the balance sheet treatment of long-term contract accounting (in the chapter on income measurement)

As with 2e, the topic of revenue recognition (Chapter 5) again follows immediately after the income statement coverage (Chapter 4).

Chapter 3 - The balance sheet and financial disclosures
Revised material

Chapter 4 - The income statement and statement of cash flows
Part A of this chapter, the income statement, has been restructured by framing the discussion of income statement presentation within the context of earnings quality/earnings management. All of the content in the second edition is still there, but the text discusses and illustrates income statement issues relative to earnings quality. This issue is not just a hot topic likely to lose its luster in the near future. Note the upcoming AAA conference devoted to earnings quality. The restructure provides an appropriate and interesting way to walk students through the income statement. In most chapters that follow, the issue of earnings quality/earnings management is revisited, in most cases within the context of decision makers' perspectives

The discontinued operations section has been revised to reflect the impact of SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" on accounting for discontinued operations.

Chapter 5 - Income measurement and profitability analysis
This chapter has also been reorganized. The two main headings within part A are now:

a. Revenue Recognition at a Point in Time, and
b. Revenue Recognition Over Time

We believe this is a much more logical way to present the information to students. Any specific revenue recognition issue falls nicely into one of these two logical categories.

The revised chapter includes a discussion of the SEC's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," and the impact this pronouncement has had on company revenue recognition policies.

Chapter 6 - The Time Value of Money
The chapter has been updated to include a discussion of SFAC No. 7, "Using Cash Flow Information and Present Value in Accounting Measurements."

Chapter 7 - Cash and Receivables
Financing with receivables has become an increasingly popular method used by companies to accelerate their cash flows. The entire section on financing with receivables has been revised and updated to incorporate SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." We believe this revision provides a better flow to the material. In addition, we have added some real world examples to increase the relevance of the material.

A decision makers' perspective section on cash management has been added.

Chapter 8 - Inventories: Measurement
A decision makers' perspective section on inventory management has been added.

Chapter 9 - Inventories: Additional Issues
The introduction to Part A, The Lower of Cost or Market, has been revised to provide increased real-world relevance to the topic.

Chapters 10 and 11 - Operational Assets
These two chapters cover accounting for operational assets. In 2e, Chapter 10 covered valuation at acquisition, including exchanges. Chapter 11 dealt with utilization and disposition through sale or abandonment. As more than one reviewer pointed out, it is impossible to cover nonmonetary exchanges without first addressing monetary exchanges, i.e., disposition through sale. To compensate for this, we have changed the title of Chapter 10 to "Acquisition and Disposition" and Chapter 11 to "Utilization and Impairment." A new Part B has been added to Chapter 10 entitled "Dispositions and Exchanges." The small section on disposition through sale or abandonment has been moved from Chapter 11 to this Part of Chapter 10 along with all of the material on exchanges.

These chapters have been updated to include the following new pronouncements:

SFAS No. 141 - "Business Combinations"
SFAS No. 142 - "Goodwill and Other Intangible Assets"
SFAS No. 143 - "Accounting for Asset Retirement Obligations"
SFAS No. 144 - "Accounting for the Impairment or Disposal of Long-Lived Assets"

Chapter 12 - Investments
Part A: Graphic 12-1 was added to provide an overview of the six approaches to accounting for investments.

Accounting for held-to-maturity securities has been expanded. We revisit our discussion of investments in debt securities to be held to maturity in Chapter 14, "Bonds and Long-term Notes" in order to more readily see that accounting by the company that issues bonds and by the company that invests in those bonds is opposite but parallel. That is, each side of the transaction is the mirror image of the other. However, an Illustration was added to the discussion in this chapter to help students understand what it means to report these securities at amortized cost in the balance sheet and to contrast that with accounting for available-for-sale and trading securities at fair value. When we resume our discussion of bond investments in Chapter 14, we continue the same numerical illustration we began in this chapter.
After illustrations on accounting for available-for-sale securities we added a T-account analysis to reinforce the effect of the accounting treatment on the accounts affected.
We added numerical demonstrations of the effects on the balance sheet, income statement, and SCF.
An expanded discussion of comprehensive income is added, particularly as it relates to available-for-sale securities.
Part B: We modified our discussion, illustrations, and end-of-chapter materials pertaining to the equity method to conform with the new FASB standards eliminating the amortization of goodwill and thus the effects of that elimination on previously required adjustments in the equity method.
We moved our introduction to financial instruments and investment derivatives to follow the Decision-Makers' Perspective.

Chapter 13 - Current Liabilities
In Chapter 6, we described a framework for taking into account any uncertainty concerning the amounts and timing of the cash flows, introduced with Statement of Financial Accounting Concepts No. 7, "Using Cash Flow Information and Present Value in Accounting Measurements." We added a demonstration of that approach in this chapter as it relates to measuring a warranty obligation and compare it with the traditional way of measuring a warranty obligation.
We expanded the Decision Makers' Perspective section to consider the possibility of management efforts to manipulate the ratios that measure liquidity including timing strategies that manipulate the timing of revenue and expense recognition in order to "smooth" income over time.

Chapters 14 - Bonds and Long-Term Notes
We reorganized the topics in this chapter to create a more logical flow and to provide instructors greater flexibility in the choice of topics to be covered. One result is apportioning the material into three parts rather than the two parts in 2e.

Part A. Bonds
Part B. Notes
Part C. Debt Retired Early, Convertible Into Stock, or Providing an Option to Buy Stock
We moved the primary Derivatives coverage from this chapter to an Addendum to the text, complete with typical end of "chapter" material. The topic is introduced in Chapter 12:
In the aftermath of Enron and other financial losses that have grabbed headlines in recent years, we expanded the Decision Makers' Perspective section to consider risks associated with "off-balance-sheet" financing and other commitments that don't show up on the face of financial statements but nevertheless expose a company to risk and attempts to actively manage the risk associated with these and other obligations.

Chapter 15 - Leases
We reorganized the topics in this chapter to create a more logical flow and to provide instructors greater flexibility in the choice of topics to be covered. One result is apportioning the material into four parts rather than the two parts in 2e.

Part A. Accounting by the Lessor and Lessee
Part B. Residual Value and Bargain Purchase Options
Part C. Other Lease Accounting issues
Part D. Special Leasing Arrangements

We clarified and expanded our discussion of the cash flow impact of each type of lease.

Chapter 16 - Accounting for Income Taxes
Based on reviewer input, we eliminated our coverage of the tax effects of accounting changes and error correction and the Appendix "Investment Revenue from Equity Method Investees."
We expanded the Decision Makers' Perspective section to consider the implications for earnings quality assessment of the discretionary nature of the valuation allowance.

Chapter 17 - Pensions
We expanded the Decision Makers' Perspective section to consider the implications for earnings quality assessment of amounts reported in pension disclosures.
Based on reviewer input, the service method of allocating prior service cost is moved to an appendix in 3e, with only brief mention in the chapter.
Coverage of the Transition Cost is eliminated in 3e, based on the fact that most companies have fully amortized it by now.

Chapter 18 - Employee Benefit Plans
We reorganized the topics in this chapter to create a more logical flow and to provide instructors greater flexibility in the choice of topics to be covered. One result is apportioning the material into three parts rather than the two parts in 2e.

Part A. Postretirement Benefits Other than Pensions
Part B. Stock-Based Compensation Plans
Part C. Other Compensation Prior to Retirement
Employee Stock Ownership Plans is moved to an appendix.

We expanded two Decision Makers' Perspective sections to consider:
The effect on ratio computations (such as the debt to equity ratio or return on assets) of the postretirement benefit obligation not being part of the balance sheet and how interested analysts can modify their analysis.
The stock-based compensation plans we discuss in this chapter as another motive managers sometimes have to manipulate income. If a manager's personal compensation includes company stock, stock options, or other compensation based on the value of the firm's stock, it's not hard to imagine an increased desire to ensure that market expectations are met and that reported earnings have a positive effect on stock prices.

Chapter 19 - Shareholders' Equity
An expanded discussion of comprehensive income is added. The discussion and illustrations focus on (a) comprehensive income created during the reporting reported as part of the statement of shareholders' equity and (b) comprehensive income accumulated over the current and prior periodsreported as a separate component of shareholders' equity.
The section on receivables from share purchase contracts is rewritten using Enron's infamous experience as the backdrop for the discussion.
The section on stock buybacks is rewritten to focus on accounting for treasury stock by the "cost method," limiting coverage of the "par value method" to brief comment only. The rationale is that the par value method has virtually disappeared from practice. The result is a more concise and clear discussion.

Chapter 20 - Earnings Per Share
We expanded the Decision Makers' Perspective section to consider the recent and controversial practice of companies reporting "pro forma" earnings per share and the possibility that companies judiciously use share buybacks to enhance the appearance of EPS numbers.

Chapter 21 - Accounting Changes and Errors
We expanded the section on accounting errors using Enron's error correction experience as the backdrop for the discussion.

Chapters 22 - The Statement of Cash Flows Revisited
We reorganized the topics in this chapter into three parts rather than the one part in 2e. In the third edition, the chapter is divided into three parts:

Part A: The Content and Value of the Statement of Cash Flows
Part B: The Direct Method of Reporting Cash Flows from Operating Activities
Part C: The Indirect Method of Reporting Cash Flows from Operating Activities
A key advantage of this division is to provide instructors greater flexibility in the choice of topics to be covered, particularly in the relative focus on the direct and indirect methods of reporting operating activities.