KEY FEATURES

• A building block approach based on a strong conceptual foundation. For each major topic area, students are provided with a thorough conceptual understanding before advancing to the procedures. The discussion begins with the fundamental concepts and why they are important. These fundamentals are then illustrated, giving students a basic example before progressing. Once this conceptual foundation is established, the complexities are layered gradually in successive steps. The authors developed this methodology through years of teaching advanced accounting. Many adopters have commented favorably on the effectiveness of this approach.
• The use of a continuous case for each major subject matter area. The comprehensive case of Peerless Products Corporation and its subsidiary, Special Foods Inc., has been continued in the for-profit chapters. For the governmental chapters, the Sol City case has been used to facilitate the development of governmental accounting and reporting concepts and procedures. Using a continuous case provides several benefits. First, students need only become familiar with one set of data and can then move more quickly through the subsequent discussions and illustrations without having to absorb a new set of data. Second, the case adds realism to the study of advanced accounting and permits students to see the effects of each successive step on the financial reports of a company. Finally, comparing and contrasting alternative methods using a continuous case allows students to evaluate different methods and outcomes more readily.
• Extensive illustrations of key concepts. The book is heavily illustrated with complete, not partial, workpapers, financial statements, and other computations and comparisons useful for demonstrating each topic. The illustrations are cross-referenced to the relevant text discussion. In the consolidations portion of the text, the focus is on the basic equity method of accounting for an investment in a subsidiary. However, two other methods— the cost method and the fully adjusted equity method—are fully discussed and illustrated in chapter appendices. Workpaper entries presented in the consolidations chapters are separately identified with an (E) and are shaded to differentiate them clearly from book entries. The extensive use of illustrations makes the learning process more efficient by allowing students to see quickly and readily the applications of the concepts. In addition, the illustrations reinforce understanding of the concepts by demonstrating the effects on the financial statements. In this manner, students understand that the many workpaper procedures typically covered in advanced accounting are the means to a desired end, not the end themselves.
• Comprehensive coverage with significant flexibility. The subject matter of advanced accounting is expanding at an unprecedented rate. New topics are being added, and traditional topics require more extensive coverage. Flexibility is therefore essential in an advanced accounting text. Most one-term courses are unable to cover all the topics included in this text. In recognition of time constraints, this text is structured to provide the most efficient use of the time available. The self-contained units of subject matter allow for substantial flexibility in sequencing the course materials. In addition, individual chapters are organized to allow for opportunities to go into greater depth on some topics through the use of the “Additional Considerations” sections. Several chapters include appendices containing discussions of alternative accounting procedures or illustrations of procedures or concepts that are of a supplemental nature.
• Contemporary topical coverage. Today’s dynamic business environment requires accountants to continually learn about new types of transactions, new technologies available to the profession, and new requirements and standards for accounting and financial reporting. This textbook integrates the most recent professional standards and includes cases and examples from current practice. For example, because of the importance of the Sarbanes-Oxley Act, coverage of SOX has been extended in this edition. Due to the significance, and notoriety, of special-purpose entities (SPEs) in recent years, coverage of this important topic has been included. Discussion of the FASB’s interpretation relating to variable-rate interest entities (VIEs) is included and illustrated along with a discussion and illustration of the consolidation of VIEs. The text also includes a discussion of the FASB’s deliberations and proposals relating to business combinations and important consolidation issues, such as the treatment of noncontrolling interests and full recognition of fair values and goodwill (entity approach). While the textbook reflects contemporary professional issues, it also continues to provide updated discussion and extensive illustrations of the continuing conceptual foundations for each of the topics. Students are presented with an abundance of current information and learning opportunities to see that the topics in their advanced financial accounting are a significant part of today’s profession of accountancy.
• Extensive end-of-chapter materials. A large number of questions, cases, exercises, and problems at the end of each chapter provides students an opportunity to solidify their understanding of the chapter material and assess their mastery of the subject matter. The end-of-chapter materials progress from simple, focused exercises to more complex, integrated problems. Cases provide opportunities for extending thought and for gaining exposure to different sources of accounting-related information. These cases include Financial Accounting Research System (FARS) database searches, company data using the Internet, and Kaplan CPA Review simulations. The AICPA has identified five skills to be examined as part of the CPA exam: ( a ) analysis, ( b ) judgment, ( c ) communication, ( d ) research, and ( e ) understanding. The end-of-chapter materials provide abundant opportunities for students to enhance those skills with realistic and real-world applications of advanced financial accounting topics.

ORGANIZATION: THE STORY OF PEERLESS PRODUCTS CORPORATION AND SPECIAL FOODS INC.

Business Combinations, Intercorporate Equity Investments, and Consolidation Concepts
Chapters 1 and 2 of the textbook introduce the issues of complex organizational structures and accounting for business combinations and intercorporate equity investments. Chapter 3 provides a conceptual foundation for the study of consolidated financial statements.

Consolidation of Wholly Owned Subsidiaries
Chapter 4 initiates the story of Peerless Products Corporation, which purchases all of the stock of Special Foods Inc. and maintains Special Foods as a subsidiary. The consolidation workpaper is presented, with a discussion of both a simple workpaper as of the date of combination and a three-part workpaper for consolidation subsequent to acquisition. Basic consolidation procedures for consolidation at the date of combination and subsequent to combination are presented. The preparation of consolidated financial statements for Peerless Products and its wholly owned subsidiary Special Foods is illustrated for two years of combined operations.

Consolidation of Less-than-Wholly Owned Subsidiaries
Chapter 5 builds on the consolidation concepts introduced in Chapters 3 and 4 with an examination of the complexities added by a parent acquiring less than 100 percent ownership of a subsidiary. The consolidation of less-than-wholly owned subsidiaries is illustrated for two years of operations by assuming that Peerless Products acquires 80 percent of Special Foods’ stock.

Intercompany Transactions
As is common for affiliated companies, Peerless Products and Special Foods engage in a number of intercompany transactions. Chapters 6, 7, and 8 discuss intercorporate transfers of services, noncurrent assets, and inventory, as well as intercompany debt transactions.

Complex Ownership Issues
Chapter 9 examines the special consolidation problems that arise from complex ownership structures. Included are the accounting issues that arise if: (1) Special Foods issues preferred stock, (2) Peerless decreases its percentage ownership in Special Foods by selling some of its stock investment in Special Foods to a party outside the consolidated entity, or increases its ownership percentage by acquiring additional stock of Special Foods, (3) Special Foods purchases a subsidiary of its own, (4) Special Foods acquires some of Peerless Products’ stock, and (5) Special Foods issues stock dividends.

Consolidation Reporting Issues
Chapter 10 completes the discussion of consolidated reporting by presenting several additional consolidation issues encountered by Peerless and Special Foods. First, the preparation of a consolidated cash flow statement is discussed and illustrated for Peerless Products and Special Foods. Second, the impact of interim acquisitions on consolidated financial statements is examined. Third, the chapter discusses tax considerations related to consolidated entities. The chapter concludes with a discussion of the computation of consolidated earnings per share.

Multinational Accounting
Chapters 11 and 12 present the accounting and reporting issues that arise when Peerless enters the multinational business environment. First, Peerless extends its sales to international customers and begins dealing in foreign currency transactions. To manage its risk, Peerless uses forward exchange contracts and other financial derivatives for hedging purposes. Comprehensive appendices are presented that discuss using the time value of derivatives and accounting for other forms of derivatives. In Chapter 12, Peerless acquires a subsidiary located in Germany. The German company reports its operations in euros, and Peerless must translate the subsidiary’s trial balance into U.S. dollars to consolidate the operations of its German subsidiary.

Segment and Interim Reporting
Chapter 13 discusses segment reporting requirements and examines the segment and related disclosures that Peerless must make in its consolidated financial statements. Interim financial reporting also is discussed in this chapter and is illustrated with Peerless’s interim reports.

SEC Reporting
Chapter 14 presents a discussion of the issues that Peerless must understand if it wishes to “go public” and issue stock or debt in the capital markets. The Securities and Exchange Commission has many specific rules, procedures, and reporting requirements that companies must follow if their securities are going to trade publicly. Coverage of the Sarbanes-Oxley Act is presented in this chapter so that students can gain some insight into this significant act.

Partnership Accounting
Chapters 15 and 16 step back in chronology to review the origins of Peerless Products. The process begins with C. Alt starting a software development business. Alt then forms a partnership with Blue, and, after operating for a year, the two partners bring Cha into the partnership because they need her business expertise. Accounting issues associated with partnership accounting are presented in these two chapters. After operating the partnership for several years, the partners incorporate their business under the name of Peerless Products Corporation.

Governmental and Nonprofit Accounting
Chapters 17 and 18 present the accounting and financial reporting for Sol City, the city in which Peerless Products is located. C. Alt serves on the city council, and the chapters present the accounting information needed by Alt to represent his constituents. Chapter 19 presents the accounting and financial reporting requirements for Sol City University and Sol City Community Hospital, along with several other nonprofit agencies located in Sol City.

Corporation in Financial Difficulty
Chapter 20 closes the story of Peerless Products and Special Foods. Because of the poor health of C. Alt, the consolidated entity experiences a variety of financial problems. Attempts are made to restructure its debt and to reorganize with the help of a court-appointed receiver. However, the company has too many financial problems and is forced to enter into bankruptcy.

Supplemental Chapters
The text’s Website at www.mhhe.com/baker7e contains two supplemental chapters. The first, Accounting for Branch Operations, presents illustrations and discusses the issues of accounting and reporting for home offices and branches. The second supplemental chapter, Estates and Trusts, presents the accounting for C. Alt’s estate by Blue, the administrator of the estate and also the first partner brought into the Peerless Products partnership. These chapters include end-of-chapter material for which solutions may be obtained online by instructors.