Accounting: Trial Balance, Matching Concept, Conceptual Framework, Credit Cards and Bad Debts
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This article covers topics such as trial balance, matching concept, conceptual framework, credit cards and bad debts in accounting. It includes explanations, examples, and journal entries.
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Running head: ACCOUNTING Accounting Name of the Student: Name of the University: Author’s Note:
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3 ACCOUNTING Question 1 Requirement A A trial balance is a statement which is prepared with taking the closing balance of the different ledger accounts where the debit total balance matches the credit total balance. In simple words, a trial balance uses closing balance of different ledger accounts which have debit or credit balances and the statement tallies. If the statement does not tally then there may be certain errors in the statement. The main use of a trial balance is to check the mathematical accuracy of the transactionsasrecordedintheledgeraccounts.Everybusinesspreparesatrialbalance periodically to ensure that the books of accounts which are made following double entry system are free from errors which may be due to calculations. This is possible because under double entry system, the total of debit side will always be equal to the total of credit side. This the principle which is followed by a trial balance(Needles, Powers and Crosson 2013). If the trial matches it only means that the mathematical accuracy is there but it does not mean that their may not be any accounting errors. The matching of trial balance only shows that there are no calculation errors but there still maty be material errors present in the books of accounts. For example, an error of omission of an entry will not be identifiable as the trial balance will match. Another example which can be given is that of bookkeeping error which means that equal debit and credit been entered into wrong accounts. In this case also, the trial balance will match but still there is an error in the financial statements.
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4 ACCOUNTING Requirement B YesNoDebitCredit 1. The Accrued Wages account with a balance of $500 was omitted from the Trial Balance YesAccrued WagesAccrued Wages of $500 should be paosted in the credit side of trial balance500 2. A payment of $490 for Prepaid Rent was only posted to the Cash at Bank account and not to Prepaid Rent YesPrepaid RentDebit side of Prepaid Rent should be increased by $490 490 3. A debit of $458 to Cash at Bank was posted as $485. The credit entry was correct. YesCash at BankDebit Side of Cash at Bank should be reduced by ($485 - $458) $27 -27 4. A credit of $600 to Accounts Payable should have been made to Fees Revenue NoAccounts Payable, Fees Revenue Accounts Payable should be debited and Fees Revenue should be credited by $600 5. A Dr. for a cash receipt of $500 from customers in settlement their accounts was posted twice as a Dr. to the Cash at Bank and a Dr. to Accounts Receivable accounts YesCash at Bank, Accounts Receivable Debit side of Cash at Bank should be decreased by $500, whereas, the debit balance of accounts receivable should be reduced by ($500 x 2) $1000 -1500 6. The Prepaid Expense balance of $7280 was listed in the Trial Balance as $7820 YesPrepaid ExpenseThe prepaid expense balance in Trial Balance should be reduced by ($7820 - $7280) $540-540 7. A $5210 credit to Fees Revenue was posted as a $521 credit. The debit entry to Accounts Receivable was made correctly. YesFees RevenueThe credit side of Fees Revenue should be increased by ($5210-$521) $4689.4689 8. A purchase of offi ce equipment for $3300 on credit was not recorded. NoOffi ce Equipment, Accounts Payable Offi ce Equipment should be debited and Accounts Payable should be credited by $3300 9. A purchase of Furniture for $7500 using a loan was posted as a debit to the Loan Payable account and a debit to the Equipment account. YesLoan PayableCredit side should be increased by ($7500 x 2) $15000 15000 10. The drawings account balance was listed as a credit for $1500 YesDrawingsDrawings account should be replaced to debit side of trial balance for $1500 1500 Would the error cause the Trial Balance not to balance Which accounts would be affected and how? How would the error be corrected Effect on Trial Balance totals Question 2 Requirement A As per the matching concept of account all the expenses should be reported in the same period in which the income which is related to such an expense is realized. In other words, this is an accounting principle which requires to recognize expenses and income in a related way (Shipman, Swanquist and Whited 2016).As per the matching concept two methods which are
5 ACCOUNTING popularlyusedinaccountingareAccrualsystemofrecognizingandCashsystemof Recognizing. Under the accrual system of accounting the expenses are recognizes in the year in which such an expense has been incurred and it does not matter whether cash is paid for such transaction. In other words, accrual basis of accounting is not dependent on the cash received or cash paid for recognizing and recording of transactions. Whereas in the case of cash basis of accounting expenses are recorded when cash is actually paid by the business irrespective of the fact when the expenses was incurred. Therefore, the major difference between cash basis and accrual basis is the timing of recognition of transactions. Requirement B Part (i)
6 ACCOUNTING Part (ii)
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7 ACCOUNTING ParticularsAmountAmount Profit before Adjustments$32,81,001 Add: Revenue from Commission not recorded$1,520 Unadjusted Prepaid Rent$21,000 Interest Revenue Due$375 Wrongly Debited Offi ce Expenses$6,000$28,895 $33,09,896 Less: Accrued Wages Expenses$12,000 Unearned Revenue$8,400 Offcie Supplies Expenses$4,500$24,900 Profit after Adjustments$32,84,996 Profit Adjustment: Question 3 Requirement A Conceptual Framework refers to a system which is followed by organizations in reporting accounting items and is important in the preparation of the annual reports of a business while considering the rules and regulations which are universally established(Weil, Schipper and Francis 2013). The enhancing qualities characteristics of the financial statements are given below: 1.Comparability: This principle states that the financial statements should be prepared by following such principles which facilitates the users of the financial statements to compare the results of the performance of the business with other organization as well as different periods for the same organization. This principle helps business and the users to ascertain the overall growth in the business.
8 ACCOUNTING 2.Verifiability: The principle suggest that the information which are presented in the financial statements of the company should be such that it can be easily be verified by the business. Any financial information is verifiable if the shareholders of the company can confirm that the financial information are fairly represented. 3.Timeliness:The principlestatesthatfinancialinformationif not presented to the shareholders in time of their decision-making process, then it is not at all useful. The principle makes it clear that the information should be provided to the investors before they are able to take decisions. 4.Understandability: As per this principle, the financial information which are depicted in the annual reports should be simple and easy to understand and no such information should be included without appropriate notes and explanations which are complex in nature and difficult to understand. Requirement B Part (i)
9 ACCOUNTING Part (ii)
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10 ACCOUNTING Question 4 Requirement A a.The use of credit cards will definitely reduce the risks which are associated with normal credit facilities. The loan amount can directly be dealt with the credit card company. the process of credit which was previously available will change due to the new credit card facilities. The credit card facilities will be making the e-commerce facility much easier. The cost which are to be incurred in case of credit card is related to interest which is charged at the end of the month. The credit cards are normally protected with a pin code which is different for different individuals. b.Account Receivables forms a major part of the financial statements of the company as it is related to credit sales of the business.The recording and monitoring of account receivable will not be affected by the introduction of credit cards in the business(Hope, Thomas and Vyas 2013). This because credit card can be used up to a certain limit which is not that much in most of the cases, however account receivables transaction may be of lumpsum amount due to a big order. Therefore, it is necessary for the business to keep track of the account receivables as effective management of such items results in increased generation of sales. Factoring may be defined as a source of financing wherein the account receivables of the business are sold to financial intermediary who are known as factors at a discount. In simple words, it is a source of procuring funds by selling off the receivables of the business. It is to be clearly understood that factoring is not same as a loan and the funds which are received are not to be considered as debt capital of the business(Michalski 2014).
11 ACCOUNTING c.Provision for bad debt are allowed in financial statements in order to estimate the losses which the business might incur. As per the principle of Conservatism, a business must always recognize probable losses or liabilities and record the same ahead of income or assets. Therefore, the business has to recognize such a doubtful debt as a provision. If the provision is not allowed than it will affect the profit which is generated by the business which will be showing profits in excess and also impact the value of debtors in the balance sheet of the company. Requirement B Part (i)
12 ACCOUNTING Dr.Cr. DateAmountAmount Jun-18Bad Debts Expenses A/c.Dr.11510 To,Allowance for Doubtful Debts A/c.11510 Allowance for Doubtful Debts A/c.Dr.11510 To,Accounts Receivable A/c.11510 Cash at Bank A/c.Dr.19910 Accounts Receivable A/c.Dr.79640 To,Sales A/c.90500 To,GST Collected A/c.9050 Cash at Bank A/c.Dr.121600 To,Accounts Receivable A/c.121600 Accounts Receivable A/c.Dr.1870 To,Allowance for Doubtful Debts A/c.1870 Cash at Bank A/c.Dr.1870 To,Accounts Receivable A/c.1870 Accounts Receivable A/c.Dr.2200 To,Sales A/c.2000 To,GST Collected A/c.200 Profit & Loss A/c.Dr.1565 To,Allowance for Doubtful Debts A/c.1565 Journal Entries (Being the balance of allowance for doubtful debts increased) Particulars (Being Bad debt expenses recorded) (Being accounts receivable written off as bad debt) (Being sales made in cash and credit both) (Being dues received from customers) (Being receivables, writted off previously, reinstated) (Being dues received from reinstated receivables) (Being unrecorded credit sales recorded properly) In the books of Homewares Company Ltd. Part (ii)
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13 ACCOUNTING Accounts Receivable A/c. DateParticularsDebitCreditBalance Jun-18Opening Balance265400Dr. Allowance for Doubtful Debts A/c.11510253890Dr. Sales A/c.72400326290Dr. GST Collected A/c.7240333530Dr. Cash A/c.121600211930Dr. Allowance for Doubtful Debts A/c.1870213800Dr. Cash at Bank A/c.1870211930Dr. Sales A/c.2000213930Dr. GST Collected A/c.200214130Dr. Allowance for Doubtful Debts A/c. DateParticularsDebitCreditBalance Jun-18Opening Balance15565Cr. Bad Debts Expenses A/c.1151027075Cr. Accounts Receivable A/c.1151015565Cr. Accounts Receivable A/c.187017435Cr. Profit & Loss Adjustment A/c.156519000Cr. Cash at Bank A/c. DateParticularsDebitCreditBalance Jun-18Opening Balance106000Dr. Sales A/c.18100124100Dr. GST Collected A/c.1810125910Dr. Accounts Receivable A/c.121600247510Dr. Accounts Receivable A/c.1870249380Dr. Sales A/c. DateParticularsDebitCreditBalance Jun-18Opening Balance878490Cr. Cash at Bank A/c.18100896590Cr. Accounts Receivable A/c.72400968990Cr. Accounts Receivable A/c.2000970990Cr. Profit & Loss Adjustment A/c.9709900Cr. Bad Debt Expenses A/c. DateParticularsDebitCreditBalance Jun-18Allowance for Doubtful Debts A/c.1151011510Dr. Profit & Loss Adjustment A/c.115100
14 ACCOUNTING Part (iii) ParticularsAmount REVENUE: Sales Revenue970990 OPERATING EXPENSES: Allowance for Doubtful Debts1565 Bad Debts Expenses11510 ParticularsAmount ASSETS: Current Assets: Cash at Bank249380 Accounts Receivable214130 Allowance for Doubtful Debts-19000 In the books of Homewares Company Ltd. Income Statement for the period ended 30 June 2018 In the books of Homewares Company Ltd. Balance Sheet as on 30 June 2018 Part (iv) The two methods which are used for estimating bad debt allowances are given below in details: 1.Percentage of Sales Method: The method estimates the amounts which are uncollectible from the credit sales of a period. The method is based on the percentage of previous year’s actual uncollectible amounts to previous year’s credit sales(Jassaud and Kang 2015). Under this method any existing balance in the allowance when year end adjustment is being calculated are ignored.
15 ACCOUNTING 2.Percentage of Receivables Method: In this method an estimation is made in order to determine the desired size of allowance for uncollectible accounts. it is basically the expenses which the business expects to incur in terms of percentage. This the mostly used technique where allowance of doubtful debts are shown and in contra entry effect the amount is deducted from account receivables. Question 5 Requirement A Part (i) ParticularsAmount Initial Price paid to Supplier65000 Cost to deliver the machine to the site3500 Amount paid to an engineer to fit the machine ready for work14500 Repairs made to replace bolts which had dislodged during transit1500 Depreciable Value of the Machine84500 For the purpose of calculating the value of depreciation, the initial cost of the machinery is taken which is shown at 65,000. The other items which are included in the cost of machine are cost to deliver the machine to site which is shown at 3500. In addition to this, the installation costs and the repair made to the machinery are also a part of the cost of the machinery. The reason for this because such costs incurred on the machinery is increasing the useful life of the asset and thereby is to be capitalized. The depreciable value of the machinery as shown in the above table comes to 84500. The amount which is paid for painting the name of the company on the machinery and the expenses incurred on the damaged door which was due to machinery
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16 ACCOUNTING entering the factory will not be considered as a part of the cost of the machinery as such expenses does not increasing the useful life of the machine or adds any value to the machinery. Part (ii) The two most popular methods which are used for the purpose of calculating the depreciation are Straight line method and Diminishing value method. In case of straight line method of depreciation, a fixed amount is charged as depreciation. In the case of Diminishing value method, depreciation is charged on the value of the asset and is on the basis of certain rate of depreciation. The amount which is charged as depreciation is changing and variable in nature (Del Giudice, Manganelli and De Paola 2016). In the case of straight line method, the net profit will be deducted by the same amount of depreciation and the amount under this method remains fixed. If the company uses Diminishing value method then the amount of depreciation charged by the company diminishes with every year. The profit in case of diminishing value method will be more in comparison to straight line method of depreciation. Part (iii) The revaluation of assets is done when the market value of the assets is more than the historical cost of the asset. The asset’s value can either be appreciated or depreciated depending on the type of revaluation which is the company is planning on the assets(Tabari and Adi 2014). Normally in any business assets are recorded on the basis of historical costs. The market value of the assets is always fluctuating and therefore there is a high probability that the market value of the asset will be more than the historical cost of the assets. Therefore, it is up to the choice of the management whether to value the asset at historical cost or revalue the asset and show the same at revalued cost. The revaluation of the asset allows the companies to ensure that the asset value
17 ACCOUNTING is up to date with the market value of the asset. It is also to be remembered that the method of revaluation allows both upward and downward revaluation which is appreciation of the assets as well as depreciation of the assets.
18 ACCOUNTING Requirement B – Journal Entries Dr.Cr. DateAmountAmount 01-07-2014Truck 2 A/c.Dr.108000 To,Cash at Bank A/c.108000 30-06-2015Depreciation Expenses A/c.Dr.$27,000 To,Accum Dep. - Truck 2 A/c.$27,000 Profit & Loss A/c.Dr.$27,000 To,Depreciation Expenses A/c.$27,000 30-06-2016Depreciation Expenses A/c.Dr.$20,250 To,Accum Dep. - Truck 2 A/c.$20,250 Repairs Expenses A/c.Dr.7000 To,Cash at Bank A/c.7000 Profit & Loss A/c.Dr.$27,250 To,Depreciation Expenses A/c.$20,250 To,Repairs Expenses A/c.7000 30-06-2017Depreciation Expenses A/c.Dr.$15,188 To,Accum Dep. - Truck 2 A/c.$15,188 Profit & Loss A/c.Dr.$15,188 To,Depreciation Expenses A/c.$15,188 01-03-2018Truck 3 A/c.Dr.130000 GST Paid A/c.Dr.13000 To,Cash at Bank A/c.143000 31-03-2018Depreciation Expenses A/c.Dr.$8,543 To,Accum Dep. - Truck 2 A/c.$8,543 Cash at Bank A/c.Dr.44000 Accum Dep. - Truck 2 A/c.Dr.$70,980 Loss on Sale of Assets A/c.Dr.$33,020 To,Truck 2 A/c.108000 To,GST Collected A/c.40000 30-06-2018Depreciation Expenses A/c.Dr.$3,900 To,Accum Dep. - Truck 2 A/c.$3,900 Profit & Loss A/c.Dr.$45,463 To,Depreciation Expenses A/c.$12,443 To,Loss on Sale of Assets A/c.$33,020 Particulars
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19 ACCOUNTING Journal Entries DateAmountAmount 01-07-2014Truck 2 A/c.Dr.108000 To,Cash at Bank A/c.108000 30-06-2015Depreciation Expenses A/c.Dr.$12,000 To,Accum Dep. - Truck 2 A/c.$12,000 Profit & Loss A/c.Dr.$12,000 To,Depreciation Expenses A/c.$12,000 30-06-2016Depreciation Expenses A/c.Dr.$12,000 To,Accum Dep. - Truck 2 A/c.$12,000 Repairs Expenses A/c.Dr.7000 To,Cash at Bank A/c.7000 Profit & Loss A/c.Dr.$19,000 To,Depreciation Expenses A/c.$12,000 To,Repairs Expenses A/c.7000 30-06-2017Depreciation Expenses A/c.Dr.$12,000 To,Accum Dep. - Truck 2 A/c.$12,000 Profit & Loss A/c.Dr.$12,000 To,Depreciation Expenses A/c.$12,000 01-03-2018Truck 3 A/c.Dr.130000 GST Paid A/c.Dr.13000 To,Cash at Bank A/c.143000 31-03-2018Depreciation Expenses A/c.Dr.$9,000 To,Accum Dep. - Truck 2 A/c.$9,000 Cash at Bank A/c.Dr.44000 Accum Dep. - Truck 2 A/c.Dr.$45,000 Loss on Sale of Assets A/c.Dr.$59,000 To,Truck 2 A/c.108000 To,GST Collected A/c.40000 30-06-2018Depreciation Expenses A/c.Dr.$3,900 To,Accum Dep. - Truck 2 A/c.$3,900 Profit & Loss A/c.Dr.$71,900 To,Depreciation Expenses A/c.$12,900 To,Loss on Sale of Assets A/c.$59,000 Particulars
20 ACCOUNTING Opening DateValue Residual Value Estimated Life Depreciation Rate/Value p.a. Period (in months) Depreciation Amount Closing Balance Closing Date 01-07-2014$1,08,000$12,000825%12$27,000$81,00030-06-2015 01-07-2015$81,000$12,000725%12$20,250$60,75030-06-2016 01-07-2016$60,750$12,000625%12$15,188$45,56330-06-2017 01-07-2017$45,563$12,000525%9$8,543$37,02031-03-2018 01-03-2018$1,30,000$13,00010$11,7004$3,900$1,26,10030-06-2018 Depreciation Schedule: TRUCK 2 TRUCK 3 Opening DateValue Residual Value Estimated Life Depreciation Rate/Value p.a. Period (in months) Depreciation Amount Closing Balance Closing Date 01-07-2014$1,08,000$12,0008$12,00012$12,000$96,00030-06-2015 01-07-2015$96,000$12,0007$12,00012$12,000$84,00030-06-2016 01-07-2016$84,000$12,0006$12,00012$12,000$72,00030-06-2017 01-07-2017$72,000$12,0005$12,0009$9,000$63,00031-03-2018 01-03-2018$1,30,000$13,00010$11,7004$3,900$1,26,10030-06-2018 Depreciation Schedule: TRUCK 2 TRUCK 3 ParticularsScenario 1Scenario 2 Revenue$2,12,000$2,12,000 Depreciation Expense$15,188$12,000 Profit on 2017$1,96,813$2,00,000 Question 6 Requirement A Part (i)
21 ACCOUNTING PerpetualPeriodic TransactionParticularsDR.CR.TransactionParticularsDR.CR. 1Inventory A/c……Dr.17601Purchases A/c……Dr.1760 To, Accounts Payable A/c.1760To, Accounts Payable A/c.1760 2Accounts Payable A/c….Dr.1102Accounts Payable A/c….Dr.110 To, Inventory A/c.110To, Purchase Return A/c.110 3Accounts Receivable A/c….Dr.104403Accounts Receivable A/c….Dr.10440 To, Sales A/c.10440To, Sales A/c.10440 Cost of Goods Sold A/c….Dr.2784 To, Inventory A/c.2784 4Sales Return A/c…..Dr.3604Sales Return A/c…..Dr.360 To, Accounts Receivable A/c.360To, Accounts Receivable A/c.360 Inventory A/c….Dr.96Loss on Damage A/c…Dr.99 To, Cost of Goods Sold A/c.96To, Inventory A/c.99 Loss on Damage A/c…Dr.96 To, Inventory A/c.96 5Loss of Inventory A/c…..Dr.965Loss of Inventory A/c…..Dr.99 To, Inventory A/c.96To, Inventory A/c.99 Part (ii) INCOME STATEMENT (under Perpetual Method): ParticularsAmountAmount Sales Revenue10440 Less: Sales Return360 Net Sales10080 Cost of Goods Sold2784 Less: Purchase Return96 Net Cost of Goods Sold-2688 GROSS PROFIT7392 Loss on Damage-96 Loss of Inventory due to Theft-96 NET OPERATING PROFIT7200
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22 ACCOUNTING INCOME STATEMENT (under Periodic Method): ParticularsAmountAmount Sales Revenue10440 Less: Sales Return360 Net Sales10080 Purchases1760 Less: Purchase Return110 Net Purchase1650 Add: Opening Inventory4800 Cost of Goods Available for Sales6450 Less: Closing Stock3473 Cost of Goods Sold-2977 GROSS PROFIT7103 Loss on Damage-99 Loss of Inventory due to Theft-99 NET OPERATING PROFIT6905 Part (iii) As per the tables which are shown above perpetual system for measuring inventory is more suitable as the profit under the method is more than the profit generated under periodic system of inventory measurement. In addition to this, the perpetual system has its own advantage as it continuously updates the inventory records of the business to ensure that everything is up to date. As shown by the table above the net profit under perpetual inventory system is 7200 whereas the net profit under periodic inventory system is 6905 and hence perpetual system of inventory is to be followed. Part (iv) The lower of cost or net realizable value is a principle which is widely followed concept which is used in inventory valuation. The concept states that the inventory should be valued at
23 ACCOUNTING cost or net realizable value of the inventory which ever is lower. Net realizable value means the value at which the inventory is expected to be sold. Requirement B Part (i) a.The revenues of the company are recognized at fair value of the consideration received or receivable. The revenues of the business are recognized following accrual basis of accounting which allows business to recognize revenues as and when the transaction take place. b.The inventories of the company were recognized on lower of cost and net realizable value based on the rolling average selling price of the business. The inventory of the company has a stock loss provision as identified in key audit matters. c.Depreciation amount of the company is calculated on the basis of straight line method of depreciation as mentioned in the notes to accounts of the company. The amount of depreciation was reported as accumulated depreciation and the notes to accounts shows the break-up of accumulated depreciation. Part (ii) The company has made a sustainability report which shows that the company has shown in the financial statements and the company has won Climate Leadership Award and has the title of the most profitable business in carbon reduction activity. The company is committed to making the working environment as efficient as possible in global supply chain and also ensure that the products which are provided by the company qre of ethical in nature and sustainable. An ethical sourcing policy was implemented in 2017 across the group.
24 ACCOUNTING Reference Del Giudice, V., Manganelli, B. and De Paola, P., 2016, July. Depreciation methods for firm’s assets. InInternational Conference on Computational Science and Its Applications(pp. 214-227). Springer, Cham. Hope, O.K., Thomas, W.B. and Vyas, D., 2013. Financial reporting quality of US private and public firms.The Accounting Review,88(5), pp.1715-1742. Jassaud, N. and Kang, M.K., 2015.A strategy for developing a market for nonperforming loans in Italy(No. 15-24). International Monetary Fund. Michalski, G., 2014. Factoring and the firm value. Needles,B.E.,Powers,M.andCrosson,S.V.,2013.Principlesofaccounting.Cengage Learning. Shipman, J.E., Swanquist, Q.T. and Whited, R.L., 2016. Propensity score matching in accounting research.The Accounting Review,92(1), pp.213-244. Tabari, N.Y. and Adi, M., 2014. Factors Affecting the Decision to Revaluation of Assets in ListedCompaniesofTehranStockExchange(TSE).InternationalJournalofScientific Management and Development,2(8). Weil, R.L., Schipper, K. and Francis, J., 2013.Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.