SOLUTIONS MANUAL
Financial Accounting for Undergraduates
Fifth Edition
Authors
Wallace • Nelson • Christensen • Ferris
ISBN: 9781618534415
, Table of Contents
Chapter 1. Financial Accounting and Business Decisions
Chapter 2. Processing Accounting Information
Chapter 3. Accrual Basis of Accounting
Chapter 4. Understanding Financial Statements
Chapter 5. Accounting for Merchandising Operations
Chapter 6. Accounting for Inventory
Chapter 7. Internal Control and Cash
Chapter 8. Accounting for Receivables
Chapter 9. Accounting for Long-Lived and Intangible Assets
Chapter 10. Accounting for Liabilities
Chapter 11. Stockholders’ Equity
Chapter 12. Statement of Cash Flows
Chapter 13. Analysis and Interpretation of Financial Statements
CHAPTER NO. 01: FINANCIAL ACCOUNTING AND BUSINESS DECISIONS
QUESTIONS
1. Accounting is the process of measuring the economic activity of an enterprise in monetary
terms and communicating the results to interested parties. The basic purpose of accounting is
to provide financial information that is useful in making economic decisions.
2. The major goal of Financial Accounting is the preparation of a balance sheet, a statement of
stockholders’ equity, a statement of cash flows, and an income statement. These statements
must be prepared in accordance with a well-defined set of conventions and rules called
generally-accepted accounting principles. Managerial Accounting provides the data
necessary for management to plan and control the operations of a business and to make
decisions. No rigid conventions or rules govern managerial accounting; any analytical
approach or mode of accounting may be employed in this area.
3. In addition to stockholders and creditors, the following outside groups may be interested in a
company's financial data: prospective investors and creditors, financial analysts, taxing
agencies, regulatory agencies, labor unions, and economic planners. Prospective investors and
financial analysts desire to evaluate the relative attractiveness of various investments, while
creditors are primarily interested in a firm's financial strength. Taxing and regulatory agencies
are concerned with whether a firm has met its reporting or other legal requirements. Labor
unions are interested in the firm's relations with employees, especially with regard to wages.
Economic planners use reliable financial data in their planning and forecasting activities.
4. Generally-accepted accounting principles (GAAP) are standards that accountants have
developed to guide the accumulation of financial accounting data and the preparation of
financial statements. Many principles have evolved over time and have become entrenched
through general acceptance. Although the SEC has the power to set the accounting principles,
the agency has largely delegated that principle-setting responsibility. The primary non-
governmental body whose pronouncements are authoritative concerning such principles is the
Financial Accounting Standards Board (FASB).
,5. The main advantages of the corporate form of organization are limited liability for
stockholders and the ease of transferring ownership interests. The main disadvantage is the
possibility of double taxation of the corporation’s net income at the company and individual
levels.
6. Financial accounting provides financial information to investors and creditors who need to
make decisions about where to allocate their resources. Financial statements express the
economic activity of business entities in monetary terms and report on the entities'
profitability, financial strength, and cash flow. Financial statements that present the results of
economic activity fairly and completely should contribute significantly to the best possible
allocation decisions by investors and creditors.
7. The accounting equation is Assets = Liabilities + Stockholders' Equity. Assets are the
economic resources of an enterprise that can be expressed in monetary terms. Liabilities are
the obligations, or debts, that an enterprise must pay in cash or services at some time in the
future because of past transactions or events. Stockholders' equity is the interest of the owners
in the assets of the enterprise and is represented as the difference between the enterprise's
assets and liabilities.
8. The three types of business activities are operating activities, investing activities, and
financing activities. Operating activities are the day-to-day business transactions of an
enterprise. Investing activities are those events in which the firm acquires the needed
infrastructure to support the day-to-day operations. Financing activities are those debt or
equity transactions that generate the needed funds to acquire the needed infrastructure of an
enterprise.
9. Corporate social responsibility is a value system that believes that enterprises should focus on
more than just a business’ financial bottom line. Instead, the enterprise should also act socially
responsible and also focus on its environmental bottom line.
10. GAAP are the accounting guidelines promulgated by the FASB to assist companies in the
U.S. to prepare their financial data fairly. IFRS are the accounting guidelines promugated by
the IASB to guide non-U.S. firms in the preparation of their financial statements.
11. Revenues are an increase in stockholders' equity that a firm earns when it provides goods or
services to its customers. Sales revenue is measured by the value of the assets received in
exchange for the goods or services. Expenses are the decreases in stockholders' equity that a
firm incurs in the process of earning revenues. Expenses are measured by the value of the
assets that are used up as a result of a firm’s operating activities.
12. The purpose of an income statement is to report the results of operations for a period. It does
this by listing a firm's revenues and expenses for the period. The purpose of a statement of
stockholders' equity is to report the events causing a change in stockholders' equity for a
period. These events include owner investments and dividends and the earning of net income
or net loss. The purpose of a balance sheet is to present a firm's assets, liabilities, and
stockholders' equity on a given date. The purpose of a statement of cash flows is to report
information about cash inflows and cash outflows during a period of time. The cash flows are
, grouped into three categories: operating activities, investing activities, and financing
activities.
13. A period-of-time statement presents financial information covering a specific period of time.
Examples are the income statement, the statement of stockholders' equity, and the statement
of cash flows.
14. A point-in-time statement presents financial information as of a specific date. An example is
a balance sheet.
15. $800,000 Assets - $230,000 Liabilities = $570,000 Stockholders' equity
(400,000) Common stock
$170,000 Retained earnings
16. The following three aspects of the accounting environment may create ethical pressure on the
accountant.
(1) The output produced by accountants may have significant financial implications for one
or more persons. Examples include calculation of a bonus amount or of income taxes
owed.
(2) Accountants have access to confidential, sensitive information, such as salary data,
income tax returns, and details of various financial arrangements.
(3) U.S. businesses tend to emphasize short-term profits, which may create pressure on
accountants if management engages in unethical procedures to influence profits in the
short run.
17. The Management’s Discussion and Analysis (MD&A) section contain’s management’s
interpretation of a company’s past performance and may also contain forward-looking
statements about a company’s future activities.
18. An auditor’s report provides assurance to financial statement users that the data in the
statements is fairly presented, and therefore is likely to be useful for economic decision-
making purposes.
19. a. False. The accounting process involves both measuring and communicating economic
activities.
b. False. There are many potentail users of financial accounting information including
internal management, taxing agencies, regulatory agencies, investors, creditors,
among others.
c. True. Financial accounting is primarily used to communicate to outside users and
managerial accounting is primarily used for internal communication.
d. False. Because auditors are independent of the companies that they audit, their opinion
helps to provide assurance to financial statement users that the information is
Financial Accounting for Undergraduates
Fifth Edition
Authors
Wallace • Nelson • Christensen • Ferris
ISBN: 9781618534415
, Table of Contents
Chapter 1. Financial Accounting and Business Decisions
Chapter 2. Processing Accounting Information
Chapter 3. Accrual Basis of Accounting
Chapter 4. Understanding Financial Statements
Chapter 5. Accounting for Merchandising Operations
Chapter 6. Accounting for Inventory
Chapter 7. Internal Control and Cash
Chapter 8. Accounting for Receivables
Chapter 9. Accounting for Long-Lived and Intangible Assets
Chapter 10. Accounting for Liabilities
Chapter 11. Stockholders’ Equity
Chapter 12. Statement of Cash Flows
Chapter 13. Analysis and Interpretation of Financial Statements
CHAPTER NO. 01: FINANCIAL ACCOUNTING AND BUSINESS DECISIONS
QUESTIONS
1. Accounting is the process of measuring the economic activity of an enterprise in monetary
terms and communicating the results to interested parties. The basic purpose of accounting is
to provide financial information that is useful in making economic decisions.
2. The major goal of Financial Accounting is the preparation of a balance sheet, a statement of
stockholders’ equity, a statement of cash flows, and an income statement. These statements
must be prepared in accordance with a well-defined set of conventions and rules called
generally-accepted accounting principles. Managerial Accounting provides the data
necessary for management to plan and control the operations of a business and to make
decisions. No rigid conventions or rules govern managerial accounting; any analytical
approach or mode of accounting may be employed in this area.
3. In addition to stockholders and creditors, the following outside groups may be interested in a
company's financial data: prospective investors and creditors, financial analysts, taxing
agencies, regulatory agencies, labor unions, and economic planners. Prospective investors and
financial analysts desire to evaluate the relative attractiveness of various investments, while
creditors are primarily interested in a firm's financial strength. Taxing and regulatory agencies
are concerned with whether a firm has met its reporting or other legal requirements. Labor
unions are interested in the firm's relations with employees, especially with regard to wages.
Economic planners use reliable financial data in their planning and forecasting activities.
4. Generally-accepted accounting principles (GAAP) are standards that accountants have
developed to guide the accumulation of financial accounting data and the preparation of
financial statements. Many principles have evolved over time and have become entrenched
through general acceptance. Although the SEC has the power to set the accounting principles,
the agency has largely delegated that principle-setting responsibility. The primary non-
governmental body whose pronouncements are authoritative concerning such principles is the
Financial Accounting Standards Board (FASB).
,5. The main advantages of the corporate form of organization are limited liability for
stockholders and the ease of transferring ownership interests. The main disadvantage is the
possibility of double taxation of the corporation’s net income at the company and individual
levels.
6. Financial accounting provides financial information to investors and creditors who need to
make decisions about where to allocate their resources. Financial statements express the
economic activity of business entities in monetary terms and report on the entities'
profitability, financial strength, and cash flow. Financial statements that present the results of
economic activity fairly and completely should contribute significantly to the best possible
allocation decisions by investors and creditors.
7. The accounting equation is Assets = Liabilities + Stockholders' Equity. Assets are the
economic resources of an enterprise that can be expressed in monetary terms. Liabilities are
the obligations, or debts, that an enterprise must pay in cash or services at some time in the
future because of past transactions or events. Stockholders' equity is the interest of the owners
in the assets of the enterprise and is represented as the difference between the enterprise's
assets and liabilities.
8. The three types of business activities are operating activities, investing activities, and
financing activities. Operating activities are the day-to-day business transactions of an
enterprise. Investing activities are those events in which the firm acquires the needed
infrastructure to support the day-to-day operations. Financing activities are those debt or
equity transactions that generate the needed funds to acquire the needed infrastructure of an
enterprise.
9. Corporate social responsibility is a value system that believes that enterprises should focus on
more than just a business’ financial bottom line. Instead, the enterprise should also act socially
responsible and also focus on its environmental bottom line.
10. GAAP are the accounting guidelines promulgated by the FASB to assist companies in the
U.S. to prepare their financial data fairly. IFRS are the accounting guidelines promugated by
the IASB to guide non-U.S. firms in the preparation of their financial statements.
11. Revenues are an increase in stockholders' equity that a firm earns when it provides goods or
services to its customers. Sales revenue is measured by the value of the assets received in
exchange for the goods or services. Expenses are the decreases in stockholders' equity that a
firm incurs in the process of earning revenues. Expenses are measured by the value of the
assets that are used up as a result of a firm’s operating activities.
12. The purpose of an income statement is to report the results of operations for a period. It does
this by listing a firm's revenues and expenses for the period. The purpose of a statement of
stockholders' equity is to report the events causing a change in stockholders' equity for a
period. These events include owner investments and dividends and the earning of net income
or net loss. The purpose of a balance sheet is to present a firm's assets, liabilities, and
stockholders' equity on a given date. The purpose of a statement of cash flows is to report
information about cash inflows and cash outflows during a period of time. The cash flows are
, grouped into three categories: operating activities, investing activities, and financing
activities.
13. A period-of-time statement presents financial information covering a specific period of time.
Examples are the income statement, the statement of stockholders' equity, and the statement
of cash flows.
14. A point-in-time statement presents financial information as of a specific date. An example is
a balance sheet.
15. $800,000 Assets - $230,000 Liabilities = $570,000 Stockholders' equity
(400,000) Common stock
$170,000 Retained earnings
16. The following three aspects of the accounting environment may create ethical pressure on the
accountant.
(1) The output produced by accountants may have significant financial implications for one
or more persons. Examples include calculation of a bonus amount or of income taxes
owed.
(2) Accountants have access to confidential, sensitive information, such as salary data,
income tax returns, and details of various financial arrangements.
(3) U.S. businesses tend to emphasize short-term profits, which may create pressure on
accountants if management engages in unethical procedures to influence profits in the
short run.
17. The Management’s Discussion and Analysis (MD&A) section contain’s management’s
interpretation of a company’s past performance and may also contain forward-looking
statements about a company’s future activities.
18. An auditor’s report provides assurance to financial statement users that the data in the
statements is fairly presented, and therefore is likely to be useful for economic decision-
making purposes.
19. a. False. The accounting process involves both measuring and communicating economic
activities.
b. False. There are many potentail users of financial accounting information including
internal management, taxing agencies, regulatory agencies, investors, creditors,
among others.
c. True. Financial accounting is primarily used to communicate to outside users and
managerial accounting is primarily used for internal communication.
d. False. Because auditors are independent of the companies that they audit, their opinion
helps to provide assurance to financial statement users that the information is
