Solution Manual For Financial Accounting, 8th
Canadian Edition by Libby, Hodge, Kanaan,
Sterling Chapters 1 - 13, Complete
1-1
,TABLE OF CONTENTS
CHAPTER ONE
Financial Statements and Business Decisions
CHAPTER TWO
Investing and Financing Decisions and the Accounting System
CHAPTER THREE
Operating Decisions and the Accounting System
CHAPTER FOUR
Adjustments, Financial Statements, and the Closing Process
CHAPTER FIVE
Reporting and Interpreting Sales Revenue, Receivables, and Cash
CHAPTER SIX
Reporting and Interpreting Cost of Sales and Inventory
CHAPTER SEVEN
Reporting and Interpreting Long-Lived Assets
CHAPTER EIGHT
Reporting and Interpreting Current Liabilities
CHAPTER NINE
Reporting and Interpreting Non-current Liabilities
CHAPTER TEN
Reporting and Interpreting Shareholders' Equity
CHAPTER ELEVEN
Statement of Cash Flows
CHAPTER TWELVE
Communicating Accounting Information and Analyzing Financial Statements
CHAPTER THIRTEEN
Reporting and Interpreting Investments in Other Corporations
1-2
,CHAPTER ONE
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and records)
financial information about an organization and reports that information to decision makers.
2. Financial accounting involves preparation of the four basic financial statements and related
disclosures for external decision makers. Managerial accounting involves the preparation of
detailed plans, budgets, forecasts, and performance reports for internal decision makers.
3. Financial reports are used by both internal and external groups and individuals. The internal
groups are comprised of the various managers of the entity. The external groups include the
owners, investors, creditors, governmental agencies, other interested parties, and the public
at large.
4. Investors purchase all or part of a business and hope to gain by receiving part of what the
company earns and/or selling the company in the future at a higher price than they paid.
Creditors lend money to a company for a specific length of time andhope to gain by
charging interest on the loan.
5. In a society each organization can be defined as a separate accounting entity. An
accounting entity is the organization for which financial data are to be collected. Typical
accounting entities are a business, a church, a governmental unit, a university and other
nonprofit organizations such as a hospital and a welfare organization. A business typically is
defined and treated as a separate entity because the owners, creditors, investors, and other
interested parties need to evaluate its performance and its potential separately from other
entities and from itsowners.
6. Name of Statement Alternative Title
(a) Income Statement (a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) Balance Sheet (b) Statement of Financial Position
(c) Audit Report (c) Report of Independent Accountants
1-3
, 7. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
8. (a) The purpose of the income statement is to present information about the revenues,
expenses, and the net income of the entity for a specified period oftime.
(b) The purpose of the balance sheet is to report the financial position of an entity at a
given date, that is, to report information about the assets, obligations and
stockholders’ equity of the entity as of a specific date.
(c) The purpose of the statement of cash flows is to present information about the flow of
cash into the entity (sources), the flow of cash out of the entity (uses), and the net
increase or decrease in cash during the period.
(d) The statement of retained earnings reports the way that net income and distribution
of dividends affected the retained earnings of the company during the accounting
period.
9. The income statement and the statement of cash flows are dated “For the YearEnded
December 31, 2010,” because they report the inflows and outflows of resources during
a period of time. In contrast, the balance sheet is dated “At December 31, 2010,”
because it represents the resources, obligations and stockholders’ equity at a specific
date.
10. Assets are important to creditors and investors because assets provide a basis for judging
whether sufficient resources are available to operate the company. Assetsare also
important because they could be sold for cash in the event the company goes out of
business. Liabilities are important to creditors and investors because the company must be
able to generate sufficient cash from operations or further borrowing to meet the payments
required by debt agreements. If a business does not pay its creditors, the law may give the
creditors the right to force the sale of assets sufficient to meet their claims.
11. Net income is the excess of total revenues over total expenses. Net loss is the excess of
total expenses over total revenues.
12. The equation for the income statement is Revenues - Expenses = Net Income (orNet Loss if
the amount is negative). Thus, the three major items reported on the income statement are
(1) revenues, (2) expenses, and (3) net income.
1-4
Canadian Edition by Libby, Hodge, Kanaan,
Sterling Chapters 1 - 13, Complete
1-1
,TABLE OF CONTENTS
CHAPTER ONE
Financial Statements and Business Decisions
CHAPTER TWO
Investing and Financing Decisions and the Accounting System
CHAPTER THREE
Operating Decisions and the Accounting System
CHAPTER FOUR
Adjustments, Financial Statements, and the Closing Process
CHAPTER FIVE
Reporting and Interpreting Sales Revenue, Receivables, and Cash
CHAPTER SIX
Reporting and Interpreting Cost of Sales and Inventory
CHAPTER SEVEN
Reporting and Interpreting Long-Lived Assets
CHAPTER EIGHT
Reporting and Interpreting Current Liabilities
CHAPTER NINE
Reporting and Interpreting Non-current Liabilities
CHAPTER TEN
Reporting and Interpreting Shareholders' Equity
CHAPTER ELEVEN
Statement of Cash Flows
CHAPTER TWELVE
Communicating Accounting Information and Analyzing Financial Statements
CHAPTER THIRTEEN
Reporting and Interpreting Investments in Other Corporations
1-2
,CHAPTER ONE
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and records)
financial information about an organization and reports that information to decision makers.
2. Financial accounting involves preparation of the four basic financial statements and related
disclosures for external decision makers. Managerial accounting involves the preparation of
detailed plans, budgets, forecasts, and performance reports for internal decision makers.
3. Financial reports are used by both internal and external groups and individuals. The internal
groups are comprised of the various managers of the entity. The external groups include the
owners, investors, creditors, governmental agencies, other interested parties, and the public
at large.
4. Investors purchase all or part of a business and hope to gain by receiving part of what the
company earns and/or selling the company in the future at a higher price than they paid.
Creditors lend money to a company for a specific length of time andhope to gain by
charging interest on the loan.
5. In a society each organization can be defined as a separate accounting entity. An
accounting entity is the organization for which financial data are to be collected. Typical
accounting entities are a business, a church, a governmental unit, a university and other
nonprofit organizations such as a hospital and a welfare organization. A business typically is
defined and treated as a separate entity because the owners, creditors, investors, and other
interested parties need to evaluate its performance and its potential separately from other
entities and from itsowners.
6. Name of Statement Alternative Title
(a) Income Statement (a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) Balance Sheet (b) Statement of Financial Position
(c) Audit Report (c) Report of Independent Accountants
1-3
, 7. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
8. (a) The purpose of the income statement is to present information about the revenues,
expenses, and the net income of the entity for a specified period oftime.
(b) The purpose of the balance sheet is to report the financial position of an entity at a
given date, that is, to report information about the assets, obligations and
stockholders’ equity of the entity as of a specific date.
(c) The purpose of the statement of cash flows is to present information about the flow of
cash into the entity (sources), the flow of cash out of the entity (uses), and the net
increase or decrease in cash during the period.
(d) The statement of retained earnings reports the way that net income and distribution
of dividends affected the retained earnings of the company during the accounting
period.
9. The income statement and the statement of cash flows are dated “For the YearEnded
December 31, 2010,” because they report the inflows and outflows of resources during
a period of time. In contrast, the balance sheet is dated “At December 31, 2010,”
because it represents the resources, obligations and stockholders’ equity at a specific
date.
10. Assets are important to creditors and investors because assets provide a basis for judging
whether sufficient resources are available to operate the company. Assetsare also
important because they could be sold for cash in the event the company goes out of
business. Liabilities are important to creditors and investors because the company must be
able to generate sufficient cash from operations or further borrowing to meet the payments
required by debt agreements. If a business does not pay its creditors, the law may give the
creditors the right to force the sale of assets sufficient to meet their claims.
11. Net income is the excess of total revenues over total expenses. Net loss is the excess of
total expenses over total revenues.
12. The equation for the income statement is Revenues - Expenses = Net Income (orNet Loss if
the amount is negative). Thus, the three major items reported on the income statement are
(1) revenues, (2) expenses, and (3) net income.
1-4
