,ACCESS3Test3Bank3for3Financial3Accounting38th3Canadian3Edition3Libby
Chapter 1 3
Financial Statements and Business Decisions
3 3 3 3
Revised:3August35,32022
ANSWERS3TO3QUESTIONS
1. Accounting3is3a3system3that3collects3and3processes3(analyzes,3measures,3and3record
s)3financial3information3about3an3organization3and3reports3that3information3to3deci
sion3makers.
2. Financial3accounting3involves3preparation3of3the3basic3financial3statements3and3related3di
sclosures3for3external3decision3makers.3Reporting3is3generally3on3a3quarterly3and3annual3
basis.3Managerial3accounting3involves3the3preparation3of3detailed3plans,3budgets,3forecast
s,3and3performance3reports3for3internal3decision3makers.3Reporting3is3on3an3ongoing3basi
s.
3. Financial3reports3are3used3by3both3internal3and3external3groups3and3individuals.3The3i
nternal3users3are3the3various3managers3of3the3entity,3e.g.3marketing,3credit,3and3purc
hasing.3The3external3groups3include3the3owners,3investors,3creditors,3governmental3ag
encies,3other3interested3parties,3and3the3public3at3large.
4. Investors3purchase3all3or3part3of3a3business3and3hope3to3gain3by3receiving3part3of3what3t
he3company3earns3and/or3by3selling3their3share3of3the3company3in3the3future3at3a3higher
3price3than 3they3paid.3 Creditors3lend 3money3to3a 3company3for3a 3specific3length 3of3time3
and3hope3to3gain3by3charging3interest3on3the3loan.
5. An3accounting3entity3is3the3organization3for3which3financial3data3are3to3be3collected.3Typi
cal3accounting3entities3are3a3business,3a3church,3a3governmental3unit,3a3university,3and3o
ther3nonprofit3organizations3such3as3a3hospital.3A3business3is3defined3and3treated3as3a3se
parate3entity3because3the3owners,3creditors,3investors,3and3other3interested3parties3nee
d3to3evaluate3its3performance3and3its3potential3separately3from3other3entities3and3from3i
ts3owners.
6. Name3of3Statement Alternative3Title
a. Statement3of3earnings Income3statement
b. Statement3of3financial3position Balance3sheet
c. Statement3of3cash3flows Cash3flow3statement
7. The3heading3of3each3of3the3four3required3financial3statements3should3include3the3following:
(a) Name3of3the3entity
(b) Title3of3the3statement
(c) Specific3date3or3the3period3of3time3it3covers
(d) Unit3of3measure
Financial3Accounting, 38ce,3Libby,3Libby,3Hodge, 3Kanaan, 3Sterli ©320233McGraw-
ng Hill3Limited. 3All3rights3reserved.
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,ACCESS3Test3Bank3for3Financial3Accounting38th3Canadian3Edition3Libby
8. (a)
The3purpose3of3the3statement3of3earnings3is3to3present3information3about3the3r
evenues,3expenses,3and3the3net3earnings3of3the3entity3for3a3specified3period3of3tim
e,3in3order3to3help3assess3its3financial3performance3during3that3period.
(b) The3purpose3of3the3statement3of3financial3position3is3to3report3the3financial3positi
on3of3an3entity3at3a3given3date,3that3is,3to3report3information3about3the3assets,3o
bligations,3and3shareholders’3equity3of3the3entity3as3at3a3specific3date.
(c) The3statement3of3changes3in3equity3reports3the3way3that3net3earnings,3the3distrib
ution3of3net3earnings3(dividends),3and3other3changes3to3shareholders’3equity3affec
ted3the3company’s3financial3position3during3the3accounting3period.3The3focus3in3thi
s3chapter3is3on3retained3earnings.3Net3earnings3for3the3year3increases3the3balance3
of3retained3earnings3whereas3the3declaration3of3dividends3to3the3shareholders3de
creases3retained3earnings.
(d) The3purpose3of3the3statement3of3cash3flows3is3to3present3information3about3the3flo
w3of3cash3into3the3entity3(sources),3the3flow3of3cash3out3of3the3entity3(uses),3and3th
e3net3increase3or3decrease3in3cash3during3the3period.
9. The3statement3of3earnings3and3the3statement3of3cash3flows3are3dated3“For3the3Year3Ende
d3December331”3because3they3report3the3inflows3and3outflows3of3resources3during3a3peri
od3of3time.3In3contrast,3the3statement3of3financial3position3is3dated3“At3December331”3be
cause3it3represents3the3resources,3obligations,3and3shareholders’3equity3as3at3a3specific3d
ate,3December331.
10. Assets3are3important3to3investors3and3creditors3because3assets3provide3a3basis3for3judgin
g3whether3sufficient3resources3are3available3to3operate3the3company.3Liabilities3are3impo
rtant3to3creditors3and3investors3because3the3company3must3be3able3to3generate3sufficien
t3cash3from3operations3or3seek3further3borrowing3to3meet3the3payments3required3by3deb
t3agreements.3 If3a3business3does3not3pay3its3creditors,3the3law3may3give3the3creditors3the3
right3to3force3the3sale3of3assets3sufficient3to3meet3the3creditors’3claims.
11. Net3earnings3is3the3excess3of3total3revenues3over3total3expenses.3Net3loss3is3the3excess
3of3total 3expenses3over3total 3revenues.
12. The3accounting3equation3for3the3statement3of3earnings3is3Revenues3–
3Expenses3=3Net3earnings.3Revenues3result3from3the3sale3of3goods3and 3services3to3custo
mers,3regardless3of3the3timing3of3collection3of3cash3from3customers.3Expenses3represent3
the3monetary3value3of3resources3the3entity3used3up,3or3consumed,3to3earn3revenues3duri
ng3the3period.3Net3earnings3is3simply3the3excess3of3revenues3over3expenses.
Financial3Accounting, 38ce,3Libby,3Libby,3Hodge, 3Kanaan, 3Sterli ©320233McGraw-
ng Hill3Limited. 3All3rights3reserved.
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, ACCESS3Test3Bank3for3Financial3Accounting38th3Canadian3Edition3Libby
13. The3accounting3equation3for3the3statement3of3financial3position3is:
Assets3=3Liabilities3+3Shareholders’3Equity
Assets3are3the3probable3(expected)3future3economic3benefits3owned3by3the3entity3as3a3re
sult3of3past3transactions.3 They3are3the3resources3owned3by3the3business3at3a3given3point3
in3time3such3as3cash,3accounts3receivable,3merchandise3inventory,3machinery,3buildings,3l
and,3and3patents.3Liabilities3are3probable3(expected)3debts3or3obligations3of3the3entity3as3
a3result3of3past3transactions3that3will3be3discharged3with3assets3(usually3cash)3or3services3
in3the3future.3They3are3the3obligations3of3the3entity3such3as3accounts3payable3and3notes3
payable.3Shareholders’3equity3is3financing3provided3by3owners3of3the3business3and3by3the
3net3earnings3generated 3from3the3operations3of3the3business.3It3is3the3claim3of3the3owner
s3to3the3assets3of3the3business3after3the3creditors’3claims3have3been3satisfied.3 Shareholde
rs’3equity3may3be3thought3of3as3the3residual3interest3because3it3represents3assets3minus3l
iabilities.
14. The3accounting3equation3for3retained3earnings3is:
Beginning3retained3earnings3+3Net3earnings3–3Dividends3=3Ending3retained3earnings
The3equation3begins3with3beginning-of-the-
year3retained3earnings,3i.e.,3the3prior3year’s3ending3retained3earnings3reported3on3the3sta
tement3of3financial3position.3 The3current3year's3net3earnings3reported3on3the3statement3
of3earnings3is3added3to3this3amount3and3the3dividends3declared3during3the3current3year3a
re3subtracted3from3this3amount.3The3ending3retained3earnings3amount3is3reported3on3the
3end-of-period 3statement3of3financial 3position.
15. The3accounting3equation3for3the3statement3of3cash3flows3i
s:3Cash3flows3from3operating3activities
+/–3Cash3flows3from3investing3activities
+/–3Cash3flows3from3financing3activities
=3Change3in3cash3for3the3period.
The3net3cash3flows3for3the3period3represent3the3increase3or3decrease3in3cash3that3occurre
d3during3the3period.3 Cash3flows3from3operating3activities3are3cash3flows3directly3related3t
o3earning3income3(normal3business3activity3including3interest3paid3and3income3taxes3paid
).3Cash3flows3from3investing3activities3comprise3cash3flows3that3are3directly3related3to3the
3acquisition 3or3sale3of3productive3assets3used 3by3the3company,3such 3as3plant3and 3equipme
nt.3Cash3flows3from3financing3activities3consist3of3cash3flows3that3are3directly3related3to3t
he3financing3of3the3enterprise,3such3as3issuing3shares3to3investors.
Financial3Accounting, 38ce,3Libby,3Libby,3Hodge, 3Kanaan, 3Sterli ©320233McGraw-
ng Hill3Limited. 3All3rights3reserved.
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mynursytest.store
Chapter 1 3
Financial Statements and Business Decisions
3 3 3 3
Revised:3August35,32022
ANSWERS3TO3QUESTIONS
1. Accounting3is3a3system3that3collects3and3processes3(analyzes,3measures,3and3record
s)3financial3information3about3an3organization3and3reports3that3information3to3deci
sion3makers.
2. Financial3accounting3involves3preparation3of3the3basic3financial3statements3and3related3di
sclosures3for3external3decision3makers.3Reporting3is3generally3on3a3quarterly3and3annual3
basis.3Managerial3accounting3involves3the3preparation3of3detailed3plans,3budgets,3forecast
s,3and3performance3reports3for3internal3decision3makers.3Reporting3is3on3an3ongoing3basi
s.
3. Financial3reports3are3used3by3both3internal3and3external3groups3and3individuals.3The3i
nternal3users3are3the3various3managers3of3the3entity,3e.g.3marketing,3credit,3and3purc
hasing.3The3external3groups3include3the3owners,3investors,3creditors,3governmental3ag
encies,3other3interested3parties,3and3the3public3at3large.
4. Investors3purchase3all3or3part3of3a3business3and3hope3to3gain3by3receiving3part3of3what3t
he3company3earns3and/or3by3selling3their3share3of3the3company3in3the3future3at3a3higher
3price3than 3they3paid.3 Creditors3lend 3money3to3a 3company3for3a 3specific3length 3of3time3
and3hope3to3gain3by3charging3interest3on3the3loan.
5. An3accounting3entity3is3the3organization3for3which3financial3data3are3to3be3collected.3Typi
cal3accounting3entities3are3a3business,3a3church,3a3governmental3unit,3a3university,3and3o
ther3nonprofit3organizations3such3as3a3hospital.3A3business3is3defined3and3treated3as3a3se
parate3entity3because3the3owners,3creditors,3investors,3and3other3interested3parties3nee
d3to3evaluate3its3performance3and3its3potential3separately3from3other3entities3and3from3i
ts3owners.
6. Name3of3Statement Alternative3Title
a. Statement3of3earnings Income3statement
b. Statement3of3financial3position Balance3sheet
c. Statement3of3cash3flows Cash3flow3statement
7. The3heading3of3each3of3the3four3required3financial3statements3should3include3the3following:
(a) Name3of3the3entity
(b) Title3of3the3statement
(c) Specific3date3or3the3period3of3time3it3covers
(d) Unit3of3measure
Financial3Accounting, 38ce,3Libby,3Libby,3Hodge, 3Kanaan, 3Sterli ©320233McGraw-
ng Hill3Limited. 3All3rights3reserved.
1-1
mynursytest.store
,ACCESS3Test3Bank3for3Financial3Accounting38th3Canadian3Edition3Libby
8. (a)
The3purpose3of3the3statement3of3earnings3is3to3present3information3about3the3r
evenues,3expenses,3and3the3net3earnings3of3the3entity3for3a3specified3period3of3tim
e,3in3order3to3help3assess3its3financial3performance3during3that3period.
(b) The3purpose3of3the3statement3of3financial3position3is3to3report3the3financial3positi
on3of3an3entity3at3a3given3date,3that3is,3to3report3information3about3the3assets,3o
bligations,3and3shareholders’3equity3of3the3entity3as3at3a3specific3date.
(c) The3statement3of3changes3in3equity3reports3the3way3that3net3earnings,3the3distrib
ution3of3net3earnings3(dividends),3and3other3changes3to3shareholders’3equity3affec
ted3the3company’s3financial3position3during3the3accounting3period.3The3focus3in3thi
s3chapter3is3on3retained3earnings.3Net3earnings3for3the3year3increases3the3balance3
of3retained3earnings3whereas3the3declaration3of3dividends3to3the3shareholders3de
creases3retained3earnings.
(d) The3purpose3of3the3statement3of3cash3flows3is3to3present3information3about3the3flo
w3of3cash3into3the3entity3(sources),3the3flow3of3cash3out3of3the3entity3(uses),3and3th
e3net3increase3or3decrease3in3cash3during3the3period.
9. The3statement3of3earnings3and3the3statement3of3cash3flows3are3dated3“For3the3Year3Ende
d3December331”3because3they3report3the3inflows3and3outflows3of3resources3during3a3peri
od3of3time.3In3contrast,3the3statement3of3financial3position3is3dated3“At3December331”3be
cause3it3represents3the3resources,3obligations,3and3shareholders’3equity3as3at3a3specific3d
ate,3December331.
10. Assets3are3important3to3investors3and3creditors3because3assets3provide3a3basis3for3judgin
g3whether3sufficient3resources3are3available3to3operate3the3company.3Liabilities3are3impo
rtant3to3creditors3and3investors3because3the3company3must3be3able3to3generate3sufficien
t3cash3from3operations3or3seek3further3borrowing3to3meet3the3payments3required3by3deb
t3agreements.3 If3a3business3does3not3pay3its3creditors,3the3law3may3give3the3creditors3the3
right3to3force3the3sale3of3assets3sufficient3to3meet3the3creditors’3claims.
11. Net3earnings3is3the3excess3of3total3revenues3over3total3expenses.3Net3loss3is3the3excess
3of3total 3expenses3over3total 3revenues.
12. The3accounting3equation3for3the3statement3of3earnings3is3Revenues3–
3Expenses3=3Net3earnings.3Revenues3result3from3the3sale3of3goods3and 3services3to3custo
mers,3regardless3of3the3timing3of3collection3of3cash3from3customers.3Expenses3represent3
the3monetary3value3of3resources3the3entity3used3up,3or3consumed,3to3earn3revenues3duri
ng3the3period.3Net3earnings3is3simply3the3excess3of3revenues3over3expenses.
Financial3Accounting, 38ce,3Libby,3Libby,3Hodge, 3Kanaan, 3Sterli ©320233McGraw-
ng Hill3Limited. 3All3rights3reserved.
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13. The3accounting3equation3for3the3statement3of3financial3position3is:
Assets3=3Liabilities3+3Shareholders’3Equity
Assets3are3the3probable3(expected)3future3economic3benefits3owned3by3the3entity3as3a3re
sult3of3past3transactions.3 They3are3the3resources3owned3by3the3business3at3a3given3point3
in3time3such3as3cash,3accounts3receivable,3merchandise3inventory,3machinery,3buildings,3l
and,3and3patents.3Liabilities3are3probable3(expected)3debts3or3obligations3of3the3entity3as3
a3result3of3past3transactions3that3will3be3discharged3with3assets3(usually3cash)3or3services3
in3the3future.3They3are3the3obligations3of3the3entity3such3as3accounts3payable3and3notes3
payable.3Shareholders’3equity3is3financing3provided3by3owners3of3the3business3and3by3the
3net3earnings3generated 3from3the3operations3of3the3business.3It3is3the3claim3of3the3owner
s3to3the3assets3of3the3business3after3the3creditors’3claims3have3been3satisfied.3 Shareholde
rs’3equity3may3be3thought3of3as3the3residual3interest3because3it3represents3assets3minus3l
iabilities.
14. The3accounting3equation3for3retained3earnings3is:
Beginning3retained3earnings3+3Net3earnings3–3Dividends3=3Ending3retained3earnings
The3equation3begins3with3beginning-of-the-
year3retained3earnings,3i.e.,3the3prior3year’s3ending3retained3earnings3reported3on3the3sta
tement3of3financial3position.3 The3current3year's3net3earnings3reported3on3the3statement3
of3earnings3is3added3to3this3amount3and3the3dividends3declared3during3the3current3year3a
re3subtracted3from3this3amount.3The3ending3retained3earnings3amount3is3reported3on3the
3end-of-period 3statement3of3financial 3position.
15. The3accounting3equation3for3the3statement3of3cash3flows3i
s:3Cash3flows3from3operating3activities
+/–3Cash3flows3from3investing3activities
+/–3Cash3flows3from3financing3activities
=3Change3in3cash3for3the3period.
The3net3cash3flows3for3the3period3represent3the3increase3or3decrease3in3cash3that3occurre
d3during3the3period.3 Cash3flows3from3operating3activities3are3cash3flows3directly3related3t
o3earning3income3(normal3business3activity3including3interest3paid3and3income3taxes3paid
).3Cash3flows3from3investing3activities3comprise3cash3flows3that3are3directly3related3to3the
3acquisition 3or3sale3of3productive3assets3used 3by3the3company,3such 3as3plant3and 3equipme
nt.3Cash3flows3from3financing3activities3consist3of3cash3flows3that3are3directly3related3to3t
he3financing3of3the3enterprise,3such3as3issuing3shares3to3investors.
Financial3Accounting, 38ce,3Libby,3Libby,3Hodge, 3Kanaan, 3Sterli ©320233McGraw-
ng Hill3Limited. 3All3rights3reserved.
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