Financial Accounting, 11/e
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,FULL SOLUTION MANUAL FOR zl zl zl
Financial Accounting 11th Edition Robert Libby, Patrici zl zl zl zl zl zl
a Libby, Frank Hodge
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Chapter 1 zl
Financial Statements and Business Decisions zl zl zl zl
ANSWERS TO QUESTIONS zl zl
1. Accounting is a system that collects and processes (analyzes, measures, and record zl zl zl zl zl zl zl zl zl zl zl
s) financial information about an organization and reports that information to decision
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makers.
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2. Financial accounting involves preparation of the four basic financial statements and re
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lated disclosures for external decision makers. Managerial accounting involves the p
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reparation of detailed plans, budgets, forecasts, and performance reports for internal
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decision makers. zl
3. Financial reports are used by both internal and external groups and individuals. The int
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ernal groups are comprised of the various managers of the entity. The external groups
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include the owners, investors, creditors, governmental agencies, other interested par
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ties, and the public at large. zl zl zl zl zl
4. Investors purchase all or part of a business and hope to gain by receiving part of wha
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t the company earns and/or selling their ownership interest in the company in the fut
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ure at a higher price than they paid. Creditors lend money to a company for a specifi
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c length of time and hope to gain by charging interest on the loan.
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2-2 Solutions Manual zl
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,5. In a society, each organization can be defined as a separate accounting entity. An acc
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ounting entity is the organization for which financial data are to be collected. Typical a
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ccounting entities are a business, a church, a governmental unit, a university and othe
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r nonprofit organizations such as a hospital and a welfare organization. A business ty
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pically is defined and treated as a separate entity because the owners, creditors, inve
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stors, and other interested parties need to evaluate its performance and its potential s
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eparately from other entities and from its owners. zl zl zl zl zl zl zl
6. Name of Statement zl zl Alternative Title zl
(a) Income Statement zl (a) Statement of Earnings; Statement of
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Income; Statement of Operations zl zl zl
(b) Balance Sheet zl (b) Statement of Financial Position
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(c) Cash Flow Statement zl zl (c) Statement of Cash Flows
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7. The heading of each of the four required financial statements should include the fol
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lowing:
(a) Name of the entity zl zl zl
(b) Name of the statement zl zl zl
(c) Date of the statement, or the period of time zl zl zl zl zl zl zl zl
(d) Unit of measure zl zl
8. (a)
The purpose of the income statement is to present information about the reve
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nues, expenses, and the net income of an entity for a specified period of time.
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(b) The purpose of the balance sheet is to report the financial position of an entity at
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a given date, that is, to report information about the assets, liabilities and stockh
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olders’ equity of the entity as of a specific date. zl zl zl zl zl zl zl zl zl
(c) The purpose of the statement of cash flows is to present information about the flo
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w of cash into the entity (sources), the flow of cash out of the entity (uses), and th
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e net increase or decrease in cash during the period.
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(d) The statement of stockholders’ equity reports the changes in each of the compa
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ny’s stockholders’ equity accounts during the accounting period, including issu
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e and repurchase of stock and the way that net income and distribution of divide
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nds affected the retained earnings of the company during that period.
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9. The income statement and the statement of cash flows are dated ―For the Year En
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ded December 31‖ because they report the inflows and outflows of resources durin
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g a period of time. In contrast, the balance sheet is dated ―At December 31‖ becaus
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e it represents the resources, obligations, and stockholders’ equity at a specific dat
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e.
Financial Accounting, 11/ezl zl 2-3
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, 10. Assets are important to creditors and investors because assets provide a basis for ju
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dging whether sufficient resources are available to operate the company. Assets are
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also important because they could be sold for cash in the event the company goes o
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ut of business. Liabilities are important to creditors and investors because the compa
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ny must be able to generate sufficient cash from operations or further borrowing to m
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eet the payments required by debt agreements. If a business does not pay its credito
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rs, the law may give the creditors the right to force the sale of assets sufficient to meet
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their claims.
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11. Net income is the excess of total revenues over total expenses. Net loss is the ex
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cess of total expenses over total revenues. zl zl zl zl zl zl
12. The equation for the income statement is Revenues -
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Expenses = Net Income (or Net Loss if the amount is negative). Thus, the three maj
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or items reported on the income statement are (1) revenues, (2) expenses, and (3)
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net income. zl
13. The equation for the balance sheet (also known as the basic accounting equation) is:
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Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected) future
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economic benefits owned by the entity as a result of past transactions. They are the r zl zl zl zl zl zl zl zl zl zl zl z l zl zl zl
esources owned by the business at a given point in time such as cash, receivables, in zl zl zl zl zl zl zl zl zl zl zl zl zl zl zl
ventory, machinery, buildings, land, and patents. Liabilities are probable (expected) d
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ebts or obligations of the entity as a result of past transactions that will be paid with as
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sets or services in the future. They are the obligations of the entity such as accounts p
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ayable, notes payable, and bonds payable. Stockholders’ equity is financing provide
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d by owners of the business and operations. It is the claim of the owners to the assets
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of the business after the creditors’ claims have been satisfied. It may be thought of as
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the residual interest because it represents assets minus liabilities.
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14. The equation for the statement of cash flows is: Cash flows from operating activities
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+ Cash flows from investing activities + Cash flows from financing activities = Change i
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n cash for the period. The net cash flows for the period represent the increase or decre
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ase in cash that occurred during the period. Cash flows from operating activities are c
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ash flows directly related to earning income (normal business activity including interes
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t paid and income taxes paid). Cash flows from investing activities include cash flows t
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hat are related to the acquisition or sale of productive assets used by the company. Ca
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sh flows from financing activities are directly related to the financing of the enterprise it
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self.
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
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Dividends = Ending Retained Earnings. It begins with beginning-of-the-
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year Retained Earnings which is the prior year’s ending retained earnings reported
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on the balance sheet. The current year's Net Income reported on the income state
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ment is added and the current year's Dividends are subtracted from this amount. T
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he ending Retained Earnings amount is reported on the end-of-
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period balance sheet. zl zl
2-4 Solutions Manual zl
©zlMcGrawzlHillzlLLC.z l Allzlrightszlreserved.zlNozlreproductionzlorzldistributionzlwithoutzlthezlpriorzlwrittenzlconsentzlofzlMcGrawz l HillzlLLC.
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©zlMcGrawzlHillzlLLC.z l Allzlrightszlreserved.zlNozlreproductionzlorzldistributionzlwithoutzlthezlpriorzlwrittenzlconsentzlofzlMcGrawz l HillzlLLC.
,FULL SOLUTION MANUAL FOR zl zl zl
Financial Accounting 11th Edition Robert Libby, Patrici zl zl zl zl zl zl
a Libby, Frank Hodge
zl zl zl
Chapter 1 zl
Financial Statements and Business Decisions zl zl zl zl
ANSWERS TO QUESTIONS zl zl
1. Accounting is a system that collects and processes (analyzes, measures, and record zl zl zl zl zl zl zl zl zl zl zl
s) financial information about an organization and reports that information to decision
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makers.
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2. Financial accounting involves preparation of the four basic financial statements and re
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lated disclosures for external decision makers. Managerial accounting involves the p
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reparation of detailed plans, budgets, forecasts, and performance reports for internal
zl zl zl zl zl zl zl zl zl zl zl
decision makers. zl
3. Financial reports are used by both internal and external groups and individuals. The int
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ernal groups are comprised of the various managers of the entity. The external groups
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include the owners, investors, creditors, governmental agencies, other interested par
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ties, and the public at large. zl zl zl zl zl
4. Investors purchase all or part of a business and hope to gain by receiving part of wha
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t the company earns and/or selling their ownership interest in the company in the fut
zl zl zl zl zl zl zl zl zl zl zl zl zl zl
ure at a higher price than they paid. Creditors lend money to a company for a specifi
zl zl zl zl zl zl zl z l zl zl zl zl zl zl zl zl
c length of time and hope to gain by charging interest on the loan.
zl zl zl zl zl zl zl zl zl zl zl zl zl
2-2 Solutions Manual zl
©zlMcGrawzlHillzlLLC.z l Allzlrightszlreserved.zlNozlreproductionzlorzldistributionzlwithoutzlthezlpriorzlwrittenzlconsentzlofzlMcGrawz l HillzlLLC.
,5. In a society, each organization can be defined as a separate accounting entity. An acc
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ounting entity is the organization for which financial data are to be collected. Typical a
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ccounting entities are a business, a church, a governmental unit, a university and othe
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r nonprofit organizations such as a hospital and a welfare organization. A business ty
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pically is defined and treated as a separate entity because the owners, creditors, inve
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stors, and other interested parties need to evaluate its performance and its potential s
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eparately from other entities and from its owners. zl zl zl zl zl zl zl
6. Name of Statement zl zl Alternative Title zl
(a) Income Statement zl (a) Statement of Earnings; Statement of
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Income; Statement of Operations zl zl zl
(b) Balance Sheet zl (b) Statement of Financial Position
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(c) Cash Flow Statement zl zl (c) Statement of Cash Flows
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7. The heading of each of the four required financial statements should include the fol
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lowing:
(a) Name of the entity zl zl zl
(b) Name of the statement zl zl zl
(c) Date of the statement, or the period of time zl zl zl zl zl zl zl zl
(d) Unit of measure zl zl
8. (a)
The purpose of the income statement is to present information about the reve
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nues, expenses, and the net income of an entity for a specified period of time.
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(b) The purpose of the balance sheet is to report the financial position of an entity at
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a given date, that is, to report information about the assets, liabilities and stockh
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olders’ equity of the entity as of a specific date. zl zl zl zl zl zl zl zl zl
(c) The purpose of the statement of cash flows is to present information about the flo
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w of cash into the entity (sources), the flow of cash out of the entity (uses), and th
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e net increase or decrease in cash during the period.
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(d) The statement of stockholders’ equity reports the changes in each of the compa
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ny’s stockholders’ equity accounts during the accounting period, including issu
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e and repurchase of stock and the way that net income and distribution of divide
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nds affected the retained earnings of the company during that period.
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9. The income statement and the statement of cash flows are dated ―For the Year En
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ded December 31‖ because they report the inflows and outflows of resources durin
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g a period of time. In contrast, the balance sheet is dated ―At December 31‖ becaus
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e it represents the resources, obligations, and stockholders’ equity at a specific dat
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e.
Financial Accounting, 11/ezl zl 2-3
©zlMcGrawzlHillzlLLC.z l Allzlrightszlreserved.zlNozlreproductionzlorzldistributionzlwithoutzlthezlpriorzlwrittenzlconsentzlofzlMcGrawz l HillzlLLC.
, 10. Assets are important to creditors and investors because assets provide a basis for ju
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dging whether sufficient resources are available to operate the company. Assets are
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also important because they could be sold for cash in the event the company goes o
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ut of business. Liabilities are important to creditors and investors because the compa
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ny must be able to generate sufficient cash from operations or further borrowing to m
zl zl zl zl zl zl zl zl zl zl zl zl zl zl
eet the payments required by debt agreements. If a business does not pay its credito
zl zl zl zl zl zl z l zl zl zl zl zl zl zl
rs, the law may give the creditors the right to force the sale of assets sufficient to meet
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their claims.
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11. Net income is the excess of total revenues over total expenses. Net loss is the ex
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cess of total expenses over total revenues. zl zl zl zl zl zl
12. The equation for the income statement is Revenues -
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Expenses = Net Income (or Net Loss if the amount is negative). Thus, the three maj
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or items reported on the income statement are (1) revenues, (2) expenses, and (3)
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net income. zl
13. The equation for the balance sheet (also known as the basic accounting equation) is:
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Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected) future
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economic benefits owned by the entity as a result of past transactions. They are the r zl zl zl zl zl zl zl zl zl zl zl z l zl zl zl
esources owned by the business at a given point in time such as cash, receivables, in zl zl zl zl zl zl zl zl zl zl zl zl zl zl zl
ventory, machinery, buildings, land, and patents. Liabilities are probable (expected) d
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ebts or obligations of the entity as a result of past transactions that will be paid with as
zl zl zl zl zl zl zl zl zl zl zl zl zl zl zl zl zl
sets or services in the future. They are the obligations of the entity such as accounts p
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ayable, notes payable, and bonds payable. Stockholders’ equity is financing provide
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d by owners of the business and operations. It is the claim of the owners to the assets
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of the business after the creditors’ claims have been satisfied. It may be thought of as
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the residual interest because it represents assets minus liabilities.
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14. The equation for the statement of cash flows is: Cash flows from operating activities
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+ Cash flows from investing activities + Cash flows from financing activities = Change i
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n cash for the period. The net cash flows for the period represent the increase or decre
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ase in cash that occurred during the period. Cash flows from operating activities are c
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ash flows directly related to earning income (normal business activity including interes
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t paid and income taxes paid). Cash flows from investing activities include cash flows t
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hat are related to the acquisition or sale of productive assets used by the company. Ca
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sh flows from financing activities are directly related to the financing of the enterprise it
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self.
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
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Dividends = Ending Retained Earnings. It begins with beginning-of-the-
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year Retained Earnings which is the prior year’s ending retained earnings reported
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on the balance sheet. The current year's Net Income reported on the income state
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ment is added and the current year's Dividends are subtracted from this amount. T
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he ending Retained Earnings amount is reported on the end-of-
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period balance sheet. zl zl
2-4 Solutions Manual zl
©zlMcGrawzlHillzlLLC.z l Allzlrightszlreserved.zlNozlreproductionzlorzldistributionzlwithoutzlthezlpriorzlwrittenzlconsentzlofzlMcGrawz l HillzlLLC.
