Solution Manual for Financial Accounting 11th Edition Robert Libby, Patricia Libby, Complete Chapters 1 - 13, Verified Newest Version

SOLUTION MANUAL FOR . S . S




FinancialAccounting11thEditionRobertLibby, ji




PatriciaLibby,FrankHodge
.S .S .S .S




Chapter1 .S




FinancialStatementsandBusinessDecisions


ANSWERSTOQUESTIONS

1. Accounting is a system that collects and processes (analyzes, measures, and
.S .S .S .S .S .S .S .S .S .S




records)financialinformationaboutanorganizationandreportsthatinformationto
.S .S .S .S .S .S .S




decision makers.
.S .S




2. Financialaccounting involvespreparation of the four basicfinancialstatements and .S .S .S .S .S .S .S .S




related disclosures for external decision makers. Managerial accounting involves the
.S .S .S .S .S .S .S .S .S .S




preparation of detailed plans, budgets, forecasts, and performance reports for
.S .S .S .S .S .S .S .S .S .S




internal decision makers.
.S .S .S




3. Financialreportsareusedbybothinternalandexternalgroupsandindividuals.The
.S .S .S .S .S .S .S .S .S .S




internalgroupsare comprised ofthe variousmanagers ofthe entity.The external
.S .S .S .S .S .S .S .S .S .S .S .S .S




groups include the owners, investors, creditors, governmental agencies, other
.S .S .S .S .S .S .S .S .S




interested parties, and the public at large.
.S .S .S .S .S .S .S




4. Investors purchase all or part of a business and hope to gain by receiving part of
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




whatthe company earnsand/orselling theirownershipinterest inthecompanyin
.S .S .S .S .S .S .S .S .S ji .S .S .S




thefutureata higherpricethantheypaid. Creditorslendmoneytoacompanyfor a
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




specific length of time and hope to gain by charging interest on the loan.
.S .S .S .S .S .S .S .S .S .S .S .S .S .S

,5. In a society, each organization can be defined as a separate accounting entity. An
.S .S .S .S .S .S .S .S .S .S .S .S .S




accounting entity is the organization for which financial data are to be collected. Typical
.S .S .S .S .S .S .S .S .S .S .S .S .S .S




accounting entities are a business, a church, a governmental unit, a university and
.S .S .S .S .S .S .S .S .S .S .S .S .S




other nonprofit organizations such as a hospital and a welfare organization. A business
.S .S .S .S .S .S .S .S .S .S .S .S .S




typically is defined and treated as a separate entity because the owners, creditors,
.S .S .S .S .S .S .S .S .S .S .S .S .S




investors, and other interested parties need to evaluateits
.S .S .S .S .S .S .S .S .S




performanceanditspotentialseparatelyfromother entitiesandfrom its owners.
.S .S .S .S .S .S .S .S .S .S .S .S




6. Name ofStatement .S .S AlternativeTitle
(a) Income Statement .S (a) Statement ofEarnings;Statement of
.S .S .S .S .S




Income; Statementof Operations .S .S .S




(b) BalanceSheet .S (b) Statement ofFinancial Position
.S .S .S .S




(c) CashFlowStatement .S (c) StatementofCashFlows . S .S .S .S




7. Theheadingofeachofthefourrequiredfinancial statementsshouldincludethe
.S .S .S .S .S .S .S .S .S .S .S .S




following:
.S




(a) Nameof the entity .S .S .S




(b) Nameofthestatement .S .S .S




(c) Dateofthestatement, or theperiodoftime .S .S .S .S .S .S .S




(d) Unitofmeasure .S .S




8. (a) The purpose of the income statement is to present information about the
.S .S .S .S .S .S .S .S .S .S .S




revenues,expenses,andthenetincomeofanentityforaspecifiedperiodof
.S .S .S .S .S .S .S .S .S .S .S .S .S




time.
.S




(b) Thepurposeofthebalancesheetistoreportthefinancialpositionofanentityata
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




given date, that is, to report information about the assets, liabilities and
.S .S .S .S .S .S .S .S .S .S .S .S




stockholders’ equity of the entity as of a specific date.
.S .S .S .S .S .S .S .S .S .S




(c) The purpose of the statement of cash flows is to present information about the
.S .S .S .S .S .S .S .S .S .S .S .S ji



flow of cash into the entity (sources), the flow of cash out of the entity (uses), and
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




the net increase or decrease in cash during the period.
.S .S .S .S .S .S .S .S .S .S




(d) The statement of stockholders’ equity reports the changes in each of the
.S .S .S .S .S .S .S .S .S .S .S




company’s stockholders’ equity accounts during the accounting period,
.S .S .S .S .S .S .S .S




including issue and repurchase of stock and the way that net income and
.S .S .S .S .S .S .S .S .S .S .S .S .S




distributionofdividendsaffectedtheretainedearningsofthecompanyduring
.S .S .S .S .S .S .S .S .S .S




that period.
.S .S




9. The income statement and the statement of cash flows are dated ―For the Year
.S .S .S .S .S .S .S .S .S .S .S .S .S




Ended December 31‖ because they report the inflows and outflows of resources
.S .S .S .S .S .S .S .S .S .S .S .S




during aperiodof time. In contrast,thebalance sheet isdated ―At December 31‖
.S .S .S .S .S .S ji .S .S .S




because it represents the resources, obligations, and stockholders’ equity at a
.S .S .S .S .S .S .S .S .S .S .S




specific date.
.S .S

,10. Assetsareimportanttocreditorsandinvestorsbecauseassetsprovideabasisfor
.S .S .S .S .S .S .S .S .S .S .S .S




judgingwhethersufficientresourcesareavailabletooperatethecompany.Assets
.S .S .S .S .S .S .S .S .S .S




are also important because they could be soldfor cash in the event the company
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




goesout of business. Liabilitiesare important to creditorsand investors because the
.S .S .S .S .S .S .S .S .S .S .S .S .S




company must be able to generate sufficient cash from operations or further
.S .S .S .S .S .S .S .S .S .S .S .S




borrowing to meet the payments required bydebt agreements. If a business does
.S .S .S .S .S .S .S .S .S .S .S .S .S




not pay its creditors, the law may give the creditors the right to force the sale of assets
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




sufficient to meet their claims.
.S .S .S .S .S




11. Netincomeistheexcessoftotalrevenuesovertotalexpenses.Net lossisthe
.S .S .S .S .S .S .S .S .S .S .S ji .S




excess of total expenses over total revenues.
.S .S .S .S .S .S .S




12. The equation for theincome statement is Revenues - Expenses =Net Income (or
.S .S .S .S .S .S .S .S .S ji .S




Net Loss if the amount is negative). Thus, the three major items reported on the
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




income statement are (1) revenues, (2) expenses, and (3) net income.
.S .S .S .S .S .S .S .S .S .S .S




13. The equation forthe balance sheet(also known asthebasicaccounting equation)is:
.S .S .S .S .S .S .S .S .S .S .S .S .S




Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected) future
.S .S .S .S .S .S .S .S .S .S .S .S




economicbenefitsowned by theentityasaresultofpasttransactions. They are the
.S .S .S .S .S .S .S .S .S .S .S .S . S .S .S




resources owned by the business at a given point in time such as cash, receivables,
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




inventory, machinery, buildings, land, and patents. Liabilities are probable
.S .S .S .S .S .S .S .S .S




(expected) debts or obligations of the entity as a result of past transactions that will
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




be paid with assets or services in the future. They are the obligations of the entity
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




such as accounts payable, notes payable, and bonds payable. Stockholders’ equity
.S .S .S .S .S .S .S .S .S .S .S




is financing provided by owners of the business and operations. It is the claim of the
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




ownersto theassetsofthebusinessafterthe creditors’claimshavebeensatisfied.It may
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




be thought of as the residual interest because it represents assets minus liabilities.
.S .S .S .S .S .S .S .S .S .S .S .S .S




14. Theequationfor the statementofcashflowsis:Cash flowsfromoperating activities
.S .S .S .S .S .S .S .S .S .S .S .S .S




+Cash flows frominvestingactivities+Cash flows fromfinancingactivities =Change
.S .S .S .S .S .S .S .S .S .S .S .S .S




in cash for the period. The net cash flows for the period represent the increase or
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




decreasein cashthatoccurredduringtheperiod.Cashflowsfromoperating activities are
.S .S .S .S .S .S .S .S .S .S .S .S .S .S




cash flows directly related to earning income (normal businessactivityincluding
.S .S .S .S .S .S .S .S .S .S .S




interestpaidandincometaxespaid).Cashflowsfrom investingactivitiesincludecash
.S .S .S .S .S .S .S .S .S .S .S .S .S




flowsthatarerelatedtotheacquisitionorsaleof productive assets used by the company.
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




Cash flows from financing activities are directly related to the financing of the enterprise
.S .S .S .S .S .S .S .S .S .S .S .S .S .S




itself.
.S




15. The retained earningsequation is: BeginningRetained Earnings + Net Income -
.S .S .S .S .S .S .S .S .S .S .S




Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
.S .S .S .S .S .S .S .S .S




RetainedEarningswhichistheprioryear’sendingretainedearningsreportedon
.S .S .S .S .S .S .S .S .S .S .S .S




the balance sheet. The current year's Net Income reported on the income
.S .S .S . S .S .S .S .S .S .S .S .S




statement is added and the current year's Dividends are subtracted from this
.S .S .S .S .S .S .S .S .S .S .S .S




amount.The ending Retained Earnings amount is reported on the end-of-period
.S .S .S .S .S .S .S .S .S .S .S




balance sheet.
.S .S

, 16. Marketing managers and credit managers use customers' financial statements to
.S .S .S .S .S .S .S .S .S




decidewhetherto extend themcreditfortheirpurchases.Purchasingmanagers use
.S .S .S .S .S .S .S .S .S .S .S . S




potentialsuppliers' financialstatements tojudge whether the suppliershave the
.S .S .S .S .S .S .S .S .S .S




resources necessary to meet current and future demand. Human resource managers
.S .S .S .S .S .S .S .S .S .S .S




use financial statements as a basis for contract negotiations, to determine what pay
.S .S .S .S .S .S .S .S .S .S .S .S .S




rates the company can afford. The net income figure even serves as a basis to pay
.S .S .S .S .S . S .S .S .S .S .S .S .S .S .S .S




bonuses not only to management, but to other employees through profit sharing plans.
.S .S .S .S .S .S .S .S .S .S .S .S .S




17. The SecuritiesandExchange Commission (SEC) is the U.S. government agency
.S .S .S .S .S .S .S .S .S .S




which determinesthe financialstatementsthat publiccompaniesmust provideto
.S .S .S .S .S .S .S .S .S .S .S




stockholdersandthemeasurementrulesusedinproducingthosestatements.The
.S .S .S .S .S .S .S .S .S .S




FinancialAccountingStandardsBoard(FASB) istheprivate sectorbodygiventhe
.S .S .S .S .S .S .S .S .S .S .S .S




primary responsibility to work out the detailed rules which become generally
.S .S .S .S .S .S .S .S .S .S .S




accepted accounting principles.
.S .S .S




18. Management is responsible for preparing the financial statements and other .S .S .S .S .S .S .S .S .S




information contained in the annual report andfor the maintenance of a system of
.S .S .S .S .S .S .S .S .S .S .S .S .S .S




internalaccounting policies,proceduresand controls.Thesemeasuresare intended
.S .S .S .S .S .S .S .S .S . S




toprovidereasonable assurance,at appropriate cost,thattransactionsare processed
.S .S .S .S ji .S .S .S .S .S




in accordance with company authorization as well as properly recorded and reported
.S .S .S .S .S .S .S .S .S .S .S .S




in thefinancialstatements, andthatassetsareadequatelysafeguarded. Independent
.S .S .S .S .S .S .S .S .S .S .S




auditorsexaminethe financialreports (prepared bymanagement)andthe underlying
.S .S .S .S .S .S .S .S .S .S .S




records to assure that the reports represent what they claim and conform with generally
.S .S .S .S .S .S .S .S .S .S .S .S .S .S




accepted accounting principles (GAAP).
.S .S .S .S




19. A sole proprietorship is an unincorporated business owned by one individual. A
.S .S .S .S .S .S .S .S .S .S .S




partnershipisanunincorporated associationof twoormoreindividualsto carryona
.S .S .S .S .S .S .S .S .S .S .S .S .S .S




business.Acorporationisa businessthatisorganizedunderthelawsofa particular
.S .S .S .S .S .S .S .S .S .S .S .S .S .S . S




state whereby a charter is granted and the entity is authorized to issue shares of stock as
.S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S .S




evidence of ownership by the owners (i.e., stockholders).
.S .S .S .S .S .S .S .S




20. A CPA firm normally renders three services: auditing, management advisory
.S .S .S .S .S .S .S .S .S




services,andtaxservices.Auditinginvolvesexaminationoftherecords andfinancial
.S .S .S .S .S .S .S .S .S .S .S .S




reportstodeterminewhetherthey―fairlypresent‖thefinancialpositionand results of
.S .S .S .S .S .S .S




operations of theentity. Managementadvisoryservices involve managementadvice
.S .S .S .S .S .S .S .S .S .S




toindividualbusinessenterprisesandotherentities,muchlike those provided by a
.S .S .S .S .S .S .S .S .S .S .S .S .S




consulting firm. Tax services involve providing tax planning advice to clients (both
.S .S .S .S .S .S .S .S .S .S .S .S




individuals and businesses) and preparation of their tax returns.
.S .S .S .S .S .S .S .S .S




ANSWERSTOMULTIPLECHOICE .S




1. . S b) 2. . S d) 3. . S d) 4. . S c) 5. . S a)
6. . S d) 7. . S a) 8. . S a) 9. . S c) 10. b)