Financial Accounting: An Integrated Statements Approach, 2nd Edition

Preface xxi

department. As businesses become increasingly global, students need to under-

stand how accounting practices affect the global economy. The international icons

encourage students to think about how accounting actions play out globally.

• Analytical Focus!An “Analysis” section is included in each chapter, generally at
  the end of each section of discrete topical material. This feature helps develop stu-
  dents’ analytical thinking skills. By including an “Analysis” section at the end of
  each chapter, the student is challenged to utilize concepts learned within the chap-
  ter to answer difficult business questions.

FROM PAGE 283

International Perspective

ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM

• “Illustrative Accounting Application Problem”This feature has been retained for
  the second edition. Each “Illustrative Application Problem” is patterned after an
  end-of-chapter problem and assists students in reviewing chapter content and
  preparing them for end-of-chapter homework assignments.


• Check for Understanding!A “Question and Answer” is included in the margins
  at appropriate points within each chapter to ensure that students grasp the con-
  cepts as they proceed through the chapter. The questions are designed as a check-
  point and serve to reinforce accounting concepts within the chapter.


• Cash Flow Connection!A “Focus on Cash Flow” box is included in Chapters 6–12
  as a vehicle for students to make the connection between cash flows and the spe-
  cific chapter topic. The Cash Flow Connection reinforces the concept of cash flow
  and how it affects accounting activities and components.

Q.IBM’s balance sheet as
of December 31, 2004,
reported assets of
$109,183 million and lia-
bilities of $79,436 million.
What is IBM’s stockhold-
ers’ equity as of December
31, 2004?

A.$29,747 million
($109,183 million 
$79,436 million)

Inventories and Cash Flows

If a company increases its inventory balances from period to pe-
riod, then the amount of cash invested in inventory is increas-
ing. In contrast, if the inventory balances are decreasing, cash
is being returned to the business. This is why companies use in-
ventory reduction strategies, such as quick response, in order to
capture one-time cash benefits from reducing inventory. On the
other hand, if management grows inventory in anticipation of
sales that do not materialize, then cash will be used.
The impact of changes in inventory balances is shown in
the operating activities section of the statement of cash flows.
For example, Best Buyreported the following (in millions):

Net income $ 984
Inventory, February 28, 2004 2,611
Inventory, February 26, 2005 2,851

The operating section of the statement of cash flows is re-
produced for Best Buy below, with the shaded area showing
the impact of inventory changes.

(in millions)

For the Fiscal Year Ended Feb. 26, 2005

Operating activities:

Net income $ 984

Depreciation 459

Other adjustments to net income (33)

Changes in operating assets and liabilities:

Receivables (30)

Merchandise inventories (240)

Liabilities 891

Other operating activities (190)

Total cash provided by operating activities $1,841

As you can see, the increase in inventory from $2,611 to

$2,851 is reflected as a use of $240 cash on the statement of

cash flows. Best Buy is a growing business; thus, using cash to

increase inventories would be expected.

FOCUS ON CASH FLOW