SOLUTION
MANUAL FOR
FINANCIAL
ACCOUNTING
11TH EDITION
ROBERT LIBBY,
PATRICIA LIBBY,
FRANK HODGE
,SOLUTION MANUAL FOR
Financial Accounting 11th Edition Robert Libby, Patricia
Libby, Frank Hodge
Chapter 1
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 their ownership interest in the company in the future at a
higher price than they paid. Creditors lend money to a company for a specific length of
time and hope 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 its owners.
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) Cash Flow Statement (c) Statement of Cash Flows
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 an entity for a specified period of time.
(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, liabilities 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 stockholders’ equity reports the changes in each of the company’s
stockholders’ equity accounts during the accounting period, including issue and
repurchase of stock and the way that net income and distribution of dividends
affected the retained earnings of the company during that period.
9. The income statement and the statement of cash flows are dated ―For the Year Ended
December 31‖ because they report the inflows and outflows of resources during a period
of time. In contrast, the balance sheet is dated ―At December 31‖ 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. Assets are 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 (or Net
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.
13. The equation for the balance sheet (also known as the basic accounting equation) is: Assets
= Liabilities + Stockholders’ Equity. Assets are the probable (expected) future economic
benefits owned by the entity as a result of past transactions. They are the resources owned
by the business at a given point in time such as cash, receivables, inventory, machinery,
buildings, land, and patents. Liabilities are probable (expected) debts or obligations of the
entity as a result of past transactions that will be paid with assets or services in the future.
They are the obligations of the entity such as accounts payable, notes payable, and bonds
payable. Stockholders’ equity is financing provided by owners of the business and
operations. It is the claim of the owners to the assets of the business after the creditors’
claims have been satisfied. It may be thought of as the residual interest because it
represents assets minus liabilities.
14. The equation for the statement of cash flows is: Cash flows from operating activities
+ Cash flows from investing activities + Cash flows from financing activities = Change in
cash for the period. The net cash flows for the period represent the increase or decrease in
cash that occurred during the period. Cash flows from operating activities are cash flows
directly related to earning income (normal business activity including interest paid and
income taxes paid). Cash flows from investing activities include cash flows that are related
to the acquisition or sale of productive assets used by the company. Cash flows from
financing activities are directly related to the financing of the enterprise itself.
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
Dividends = Ending Retained Earnings. It begins with beginning-of-the- year Retained
Earnings which is the prior year’s ending retained earnings reported on the balance
sheet. The current year's Net Income reported on the income statement is added and the
current year's Dividends are subtracted from this amount. The ending Retained Earnings
amount is reported on the end-of-period balance sheet.
MANUAL FOR
FINANCIAL
ACCOUNTING
11TH EDITION
ROBERT LIBBY,
PATRICIA LIBBY,
FRANK HODGE
,SOLUTION MANUAL FOR
Financial Accounting 11th Edition Robert Libby, Patricia
Libby, Frank Hodge
Chapter 1
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 their ownership interest in the company in the future at a
higher price than they paid. Creditors lend money to a company for a specific length of
time and hope 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 its owners.
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) Cash Flow Statement (c) Statement of Cash Flows
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 an entity for a specified period of time.
(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, liabilities 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 stockholders’ equity reports the changes in each of the company’s
stockholders’ equity accounts during the accounting period, including issue and
repurchase of stock and the way that net income and distribution of dividends
affected the retained earnings of the company during that period.
9. The income statement and the statement of cash flows are dated ―For the Year Ended
December 31‖ because they report the inflows and outflows of resources during a period
of time. In contrast, the balance sheet is dated ―At December 31‖ 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. Assets are 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 (or Net
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.
13. The equation for the balance sheet (also known as the basic accounting equation) is: Assets
= Liabilities + Stockholders’ Equity. Assets are the probable (expected) future economic
benefits owned by the entity as a result of past transactions. They are the resources owned
by the business at a given point in time such as cash, receivables, inventory, machinery,
buildings, land, and patents. Liabilities are probable (expected) debts or obligations of the
entity as a result of past transactions that will be paid with assets or services in the future.
They are the obligations of the entity such as accounts payable, notes payable, and bonds
payable. Stockholders’ equity is financing provided by owners of the business and
operations. It is the claim of the owners to the assets of the business after the creditors’
claims have been satisfied. It may be thought of as the residual interest because it
represents assets minus liabilities.
14. The equation for the statement of cash flows is: Cash flows from operating activities
+ Cash flows from investing activities + Cash flows from financing activities = Change in
cash for the period. The net cash flows for the period represent the increase or decrease in
cash that occurred during the period. Cash flows from operating activities are cash flows
directly related to earning income (normal business activity including interest paid and
income taxes paid). Cash flows from investing activities include cash flows that are related
to the acquisition or sale of productive assets used by the company. Cash flows from
financing activities are directly related to the financing of the enterprise itself.
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
Dividends = Ending Retained Earnings. It begins with beginning-of-the- year Retained
Earnings which is the prior year’s ending retained earnings reported on the balance
sheet. The current year's Net Income reported on the income statement is added and the
current year's Dividends are subtracted from this amount. The ending Retained Earnings
amount is reported on the end-of-period balance sheet.
