SOLUTIONS MANUAL
FINANCIAL AND MANAGERIAL ACCOUNTING
20TH EDITION
CHAPTER 1: ACCOUNTING: INFORMATION FOR DECISION MAKING
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
Note to instructor: We regularly include discussion questions as part of the assigned homework. One
objective of these questions is to help students develop communications skills; however, we find that
they also increase students’ conceptual understanding of accounting.
1. Accounting is a way of communicating the results of business activity and, therefore, is
sometimes described as the language of business. Among the important accounting measurements
that communicate business activity and justify describing accounting as the language of business
are costs, prices, sales volume, profits, and return on investment.
2. The return of your investment is the repayment to you of the amount you invested earlier. The
return on your investment is what the company pays you for having the use of your money while
it was invested as opposed to you having use of the money while it was invested.
3. The three primary objectives of financial reporting, from general to specific, are to provide:
Information that is useful in making investment and credit decisions.
Information useful in assessing the amount, timing, and uncertainty of future cash flows.
Information about economic resources, claims to resources, and changes in resources and
claims on them.
4. The three primary financial statements that are the means of communicating financial accounting
information are:
Statement of financial position (balance sheet)—A statement that shows where the company
stands in financial terms at a point in time.
Income statement—A statement that details the results of the company’s profit-seeking
activities during a period of time.
Statement of cash flows—A statement that presents details of the company’s cash
balance—how it increased, how it decreased, and how the ending balance compares with the
beginning balance—for a period of time.
5. While financial information has an appearance of precision, it often requires judgment and
estimation and, as a result, is less precise than one might think. For example, to determine certain
information about a company for a certain year, or at a certain point in time, it may be necessary
to make estimates about the future. For example, how many years will a building be used by a
company? At what price will products a company manufactures be sold? These estimates may or
may not turn out, in the long term, to be precisely correct. This results in the information about
the current year to be less precise and accurate than would otherwise be the case.
6. Internal accounting information is primarily oriented toward the future. While some management
accounting information is historical, the purpose of management accounting information is to
facilitate current and future decision making that is in the best interest of the company and that is
consistent with the company’s mission. Financial accounting information, while also used for
current and future decision making, is generally more historical in nature than is management
accounting. Financial accounting information deals primarily with the financial activities of the
enterprise during recent past periods.
7. Generally accepted accounting principles (GAAP) are agreed-upon ways that economic activity
will be captured and reported in monetary terms. GAAP are important in insuring the integrity of
financial accounting information and being able to compare the information of one enterprise with
that of other enterprises.
, 8. Internal control is a process designed to provide reasonable assurance that the organization
produces reliable financial reports, complies with applicable laws and regulations, and
conducts operations in an efficient and effective manner. The five components of internal
control per the COSO framework are the control environment, risk assessment, control
activities, information and communication, and monitoring activities.
9. An audit is an examination of a company’s financial information, including financial
statements, by an independent expert (e.g., a Certified Public Accountant) who issues an
expert opinion that indicates the findings of that examination. the audit opinion adds
assurance for investors, creditors, and other users that the information provided by the
company is accurate and reliable, and that the information is in accordance with generally
accepted accounting principles.
10. CPA. CMA. and CIA are earned designations that signify that the holder has expertise in
various areas of accounting. CPA means Certified Public Accountant. CMA means
Certified Management Accountant. CIA means Certified Internal Auditor. All of these
provide assurance of the competence of the individual. In addition to signifying general
expertise in accounting, the CPA is a legal license to issue opinions on the fairness of
financial statements.
11. The Sarbanes-Oxley Act was passed largely in response to several major financial frauds
that occurred in 2001 and 2002. It is generally viewed as the most important legislation
affecting the accounting profession since the securities acts were passed in the 1930s. It
places increased responsibilities on auditors, boards of directors, audit committees, chief
executive officers, and chief financial officers of public corporations to take specific steps to
insure the integrity of the company’s financial reports.
12. The FASB is the primary standard-setting body in the United States. The FASB is a private-
sector organization that is responsible for establishing generally accepted accounting
principles to guide the preparation of financial statements by companies. It works closely
with the Securities and Exchange Commission, which is a government body, to develop
standards that promote integrity, improve the quality of information reported to external
users, and result in financial information that is comparable from one time period to another
and from one reporting entity to another.
13. The SEC is a government body that has the legal authority to establish generally accepted
accounting principles for publicly held companies. Generally, however, the SEC has
permitted the process of establishing GAAP to be carried out in the private sector and has
accepted the work of the FASB rather than being directly involved in the process of
determining GAAP.
14. The primary role of the PCAOB with respect to audits of financial statements is its
involvement in establishing auditing standards that are used by the Certified Public
Accountants who conduct audits of public companies. The PCAOB also has a number of
different roles, including providing oversight of the public accounting profession.
15. The IASB is the organization that creates and promotes International Financial Reporting
Standards (IFRS). Its goals are to create a single set of global accounting standards and to
work to achieve acceptance of those standards, referred to as convergence, throughout the
world. IASB standards are increasingly accepted throughout the world. For example, IFRS
are required by companies in the European Union, Australia, and Canada, as well as other
countries, and they are acceptable for foreign companies whose securities are sold in the
U.S. capital markets.
,SOLUTIONS TO BRIEF EXERCISES
B. Ex. 1.1 External users of accounting information include investors, creditors, customers, and
regulators.
B. Ex. 1.2 c. Control environment
e. Risk assessment
a. Control activities
d. Information and communication
b. Monitoring activities
B. Ex. 1.3 Accounting relies on inexact or approximate measures because a great deal of financial
information is dependent on judgments about future events and on an assessment of
management intent. For example, a business that sells its goods or services on credit
must make an estimate of the dollar amount of customer receivables that will ultimately
prove uncollectible. The estimation of uncollectible customer receivables involves
significant management judgment. A second example is the estimated useful life of
major assets, such as buildings and equipment. How long these assets will be used, as
well as how management intends to use them, has an impact on important financial
measures about the company.
B. Ex. 1.4 The Securities and Exchange Commission (SEC) is the governmental body that has the
legal authority to establish accounting standards for public companies in the United
States. The SEC has largely delegated its authority for establishing accounting standards
to the Financial Accounting Standards Board (FASB) which is a private-sector
organization. The FASB and SEC work together closely in establishing standards of
financial reporting in the U.S.
B. Ex. 1.5 The FASB's Conceptual Framework sets forth the Board's views on the: (1) objectives of
financial reporting, (2) desired characteristics of accounting information, (3) elements of
financial statements, (4) valuation and measurement criteria for financial statement
elements, and (5) criteria for determining information to include in notes to financial
statements.
B. Ex. 1.6 The PCAOB is a nonprofit organization established by the U.S. Congress to oversee the
audits of public companies. Its primary mission is to protect investors and further the
public interest by promoting informative, accurate, and independent audit reports. The
four primary activities of the PCAOB are: (1) registration, (2) inspections, (3) standard
setting, and (4) enforcement. See http://pcaobus.org/Pages/default.aspx
B. Ex. 1.7 The sponsoring organizations of COSO are the American Accounting Association
(AAA), the American Institute of Certified Public Accountants (AICPA), Financial
Executives International (FEI), Institute of Internal Auditors (IIA), and the Institute of
Management Accountants (IMA). COSO is best known for developing a framework used
in the U.S. for evaluating the effectiveness of an organization's system of internal
control.
, B. Ex. 1.8 Although there are more than three professional certifications offered in accounting,
the three professional certifications that we discuss in this chapter are:
● Certified Public Accountant (CPA) -- each U.S. state and several other jurisdictions
separately licenses CPAs, although the CPA exam is a uniform national exam that
is prepared and graded by the AICPA. It signifies that the holder has general
expertise in accounting and licensed to issue audit opinions on the fairness of a
company's financial statements.
● Certified Management Accountant (CMA) -- This certification is offered by the
Institute of Management Accountants. It signifies that the holder has expertise in
the area of management accounting.
● Certified Internal Auditor (CIA) -- This certification is offered by the Institute of
Internal Auditors. It signifies that the holder has expertise in the area of internal
auditing.
B. Ex. 1.9 e. Responsibilities
d. The Public interest
b. Integrity
c. Objectivity and independence
f. Due care
a. Scope and nature of services
B. Ex. 1.10 Although there are many potential answers to this question, examples of accounting-
related skills useful to many people in their personal lives include: (1) personal
budgeting (2) financial planning for college, (3) financial planning for retirement, (4)
making lease vs. buy decisions (e.g., car purchase). (5) evaluating loan terms (e.g.,
home mortgage), (6) filing income tax returns, and (7) evaluating investment
opportunities.
SOLUTIONS TO EXERCISES
Ex. 1.1 The following are just a few of the ways in which you might use accounting information
as a student:
Deciding which school to go to, and what living accommodations you can afford.
Selecting a major (this involves cost/benefit analysis).
Estimating your monthly living expenses and planning how to pay them.
Planning in advance for major expenditures, such as the deposit on an apartment,
buying textbooks, paying tuition, buying or leasing a car, or taking a vacation.
Balancing your checkbook.
Evaluating employment opportunities—both while you are in school and upon
graduation.
Evaluating how marriage or having a child at this stage of your life might have a
financial effect on your goals.
FINANCIAL AND MANAGERIAL ACCOUNTING
20TH EDITION
CHAPTER 1: ACCOUNTING: INFORMATION FOR DECISION MAKING
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
Note to instructor: We regularly include discussion questions as part of the assigned homework. One
objective of these questions is to help students develop communications skills; however, we find that
they also increase students’ conceptual understanding of accounting.
1. Accounting is a way of communicating the results of business activity and, therefore, is
sometimes described as the language of business. Among the important accounting measurements
that communicate business activity and justify describing accounting as the language of business
are costs, prices, sales volume, profits, and return on investment.
2. The return of your investment is the repayment to you of the amount you invested earlier. The
return on your investment is what the company pays you for having the use of your money while
it was invested as opposed to you having use of the money while it was invested.
3. The three primary objectives of financial reporting, from general to specific, are to provide:
Information that is useful in making investment and credit decisions.
Information useful in assessing the amount, timing, and uncertainty of future cash flows.
Information about economic resources, claims to resources, and changes in resources and
claims on them.
4. The three primary financial statements that are the means of communicating financial accounting
information are:
Statement of financial position (balance sheet)—A statement that shows where the company
stands in financial terms at a point in time.
Income statement—A statement that details the results of the company’s profit-seeking
activities during a period of time.
Statement of cash flows—A statement that presents details of the company’s cash
balance—how it increased, how it decreased, and how the ending balance compares with the
beginning balance—for a period of time.
5. While financial information has an appearance of precision, it often requires judgment and
estimation and, as a result, is less precise than one might think. For example, to determine certain
information about a company for a certain year, or at a certain point in time, it may be necessary
to make estimates about the future. For example, how many years will a building be used by a
company? At what price will products a company manufactures be sold? These estimates may or
may not turn out, in the long term, to be precisely correct. This results in the information about
the current year to be less precise and accurate than would otherwise be the case.
6. Internal accounting information is primarily oriented toward the future. While some management
accounting information is historical, the purpose of management accounting information is to
facilitate current and future decision making that is in the best interest of the company and that is
consistent with the company’s mission. Financial accounting information, while also used for
current and future decision making, is generally more historical in nature than is management
accounting. Financial accounting information deals primarily with the financial activities of the
enterprise during recent past periods.
7. Generally accepted accounting principles (GAAP) are agreed-upon ways that economic activity
will be captured and reported in monetary terms. GAAP are important in insuring the integrity of
financial accounting information and being able to compare the information of one enterprise with
that of other enterprises.
, 8. Internal control is a process designed to provide reasonable assurance that the organization
produces reliable financial reports, complies with applicable laws and regulations, and
conducts operations in an efficient and effective manner. The five components of internal
control per the COSO framework are the control environment, risk assessment, control
activities, information and communication, and monitoring activities.
9. An audit is an examination of a company’s financial information, including financial
statements, by an independent expert (e.g., a Certified Public Accountant) who issues an
expert opinion that indicates the findings of that examination. the audit opinion adds
assurance for investors, creditors, and other users that the information provided by the
company is accurate and reliable, and that the information is in accordance with generally
accepted accounting principles.
10. CPA. CMA. and CIA are earned designations that signify that the holder has expertise in
various areas of accounting. CPA means Certified Public Accountant. CMA means
Certified Management Accountant. CIA means Certified Internal Auditor. All of these
provide assurance of the competence of the individual. In addition to signifying general
expertise in accounting, the CPA is a legal license to issue opinions on the fairness of
financial statements.
11. The Sarbanes-Oxley Act was passed largely in response to several major financial frauds
that occurred in 2001 and 2002. It is generally viewed as the most important legislation
affecting the accounting profession since the securities acts were passed in the 1930s. It
places increased responsibilities on auditors, boards of directors, audit committees, chief
executive officers, and chief financial officers of public corporations to take specific steps to
insure the integrity of the company’s financial reports.
12. The FASB is the primary standard-setting body in the United States. The FASB is a private-
sector organization that is responsible for establishing generally accepted accounting
principles to guide the preparation of financial statements by companies. It works closely
with the Securities and Exchange Commission, which is a government body, to develop
standards that promote integrity, improve the quality of information reported to external
users, and result in financial information that is comparable from one time period to another
and from one reporting entity to another.
13. The SEC is a government body that has the legal authority to establish generally accepted
accounting principles for publicly held companies. Generally, however, the SEC has
permitted the process of establishing GAAP to be carried out in the private sector and has
accepted the work of the FASB rather than being directly involved in the process of
determining GAAP.
14. The primary role of the PCAOB with respect to audits of financial statements is its
involvement in establishing auditing standards that are used by the Certified Public
Accountants who conduct audits of public companies. The PCAOB also has a number of
different roles, including providing oversight of the public accounting profession.
15. The IASB is the organization that creates and promotes International Financial Reporting
Standards (IFRS). Its goals are to create a single set of global accounting standards and to
work to achieve acceptance of those standards, referred to as convergence, throughout the
world. IASB standards are increasingly accepted throughout the world. For example, IFRS
are required by companies in the European Union, Australia, and Canada, as well as other
countries, and they are acceptable for foreign companies whose securities are sold in the
U.S. capital markets.
,SOLUTIONS TO BRIEF EXERCISES
B. Ex. 1.1 External users of accounting information include investors, creditors, customers, and
regulators.
B. Ex. 1.2 c. Control environment
e. Risk assessment
a. Control activities
d. Information and communication
b. Monitoring activities
B. Ex. 1.3 Accounting relies on inexact or approximate measures because a great deal of financial
information is dependent on judgments about future events and on an assessment of
management intent. For example, a business that sells its goods or services on credit
must make an estimate of the dollar amount of customer receivables that will ultimately
prove uncollectible. The estimation of uncollectible customer receivables involves
significant management judgment. A second example is the estimated useful life of
major assets, such as buildings and equipment. How long these assets will be used, as
well as how management intends to use them, has an impact on important financial
measures about the company.
B. Ex. 1.4 The Securities and Exchange Commission (SEC) is the governmental body that has the
legal authority to establish accounting standards for public companies in the United
States. The SEC has largely delegated its authority for establishing accounting standards
to the Financial Accounting Standards Board (FASB) which is a private-sector
organization. The FASB and SEC work together closely in establishing standards of
financial reporting in the U.S.
B. Ex. 1.5 The FASB's Conceptual Framework sets forth the Board's views on the: (1) objectives of
financial reporting, (2) desired characteristics of accounting information, (3) elements of
financial statements, (4) valuation and measurement criteria for financial statement
elements, and (5) criteria for determining information to include in notes to financial
statements.
B. Ex. 1.6 The PCAOB is a nonprofit organization established by the U.S. Congress to oversee the
audits of public companies. Its primary mission is to protect investors and further the
public interest by promoting informative, accurate, and independent audit reports. The
four primary activities of the PCAOB are: (1) registration, (2) inspections, (3) standard
setting, and (4) enforcement. See http://pcaobus.org/Pages/default.aspx
B. Ex. 1.7 The sponsoring organizations of COSO are the American Accounting Association
(AAA), the American Institute of Certified Public Accountants (AICPA), Financial
Executives International (FEI), Institute of Internal Auditors (IIA), and the Institute of
Management Accountants (IMA). COSO is best known for developing a framework used
in the U.S. for evaluating the effectiveness of an organization's system of internal
control.
, B. Ex. 1.8 Although there are more than three professional certifications offered in accounting,
the three professional certifications that we discuss in this chapter are:
● Certified Public Accountant (CPA) -- each U.S. state and several other jurisdictions
separately licenses CPAs, although the CPA exam is a uniform national exam that
is prepared and graded by the AICPA. It signifies that the holder has general
expertise in accounting and licensed to issue audit opinions on the fairness of a
company's financial statements.
● Certified Management Accountant (CMA) -- This certification is offered by the
Institute of Management Accountants. It signifies that the holder has expertise in
the area of management accounting.
● Certified Internal Auditor (CIA) -- This certification is offered by the Institute of
Internal Auditors. It signifies that the holder has expertise in the area of internal
auditing.
B. Ex. 1.9 e. Responsibilities
d. The Public interest
b. Integrity
c. Objectivity and independence
f. Due care
a. Scope and nature of services
B. Ex. 1.10 Although there are many potential answers to this question, examples of accounting-
related skills useful to many people in their personal lives include: (1) personal
budgeting (2) financial planning for college, (3) financial planning for retirement, (4)
making lease vs. buy decisions (e.g., car purchase). (5) evaluating loan terms (e.g.,
home mortgage), (6) filing income tax returns, and (7) evaluating investment
opportunities.
SOLUTIONS TO EXERCISES
Ex. 1.1 The following are just a few of the ways in which you might use accounting information
as a student:
Deciding which school to go to, and what living accommodations you can afford.
Selecting a major (this involves cost/benefit analysis).
Estimating your monthly living expenses and planning how to pay them.
Planning in advance for major expenditures, such as the deposit on an apartment,
buying textbooks, paying tuition, buying or leasing a car, or taking a vacation.
Balancing your checkbook.
Evaluating employment opportunities—both while you are in school and upon
graduation.
Evaluating how marriage or having a child at this stage of your life might have a
financial effect on your goals.
