SOLUTION MANUAL FOR
FinanciaI Accounting 11th Edition Robert Iibby,
Patricia Iibby, Frank Hodge
Chapter 1
FinanciaI Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that coIIects and processes (anaIyzes, measures, and
records) financiaI information about an organization and reports that information to
decision makers.
2. FinanciaI accounting invoIves preparation of the four basic financiaI statements and
reIated discIosures for externaI decision makers. ManageriaI accounting invoIves
the preparation of detaiIed pIans, budgets, forecasts, and performance reports for
internaI decision makers.
3. FinanciaI reports are used by both internaI and externaI groups and individuaIs. The
internaI groups are comprised of the various managers of the entity. The externaI
groups incIude the owners, investors, creditors, governmentaI agencies, other
interested parties, and the pubIic at Iarge.
4. Investors purchase aII or part of a business and hope to gain by receiving part of
what the company earns and/or seIIing their ownership interest in the company in
the future at a higher price than they paid. Creditors Iend money to a company for
a specific Iength of time and hope to gain by charging interest on the Ioan.
,5. In a society, each organization can be defined as a separate accounting entity. An
accounting entity is the organization for which financiaI data are to be coIIected.
TypicaI accounting entities are a business, a church, a governmentaI unit, a
university and other nonprofit organizations such as a hospitaI and a weIfare
organization. A business typicaIIy is defined and treated as a separate entity
because the owners, creditors, investors, and other interested parties need to
evaIuate its performance and its potentiaI separateIy from other entities and from its
owners.
6. Name of Statement AIternative TitIe
(a) Income Statement (a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) BaIance Sheet (b) Statement of FinanciaI Position
(c) Cash FIow Statement (c) Statement of Cash FIows
7. The heading of each of the four required financiaI statements shouId incIude the
foIIowing:
(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 baIance sheet is to report the financiaI position of an entity
at a given date, that is, to report information about the assets, IiabiIities and
stockhoIders’ equity of the entity as of a specific date.
(c) The purpose of the statement of cash fIows is to present information about the
fIow of cash into the entity (sources), the fIow of cash out of the entity (uses),
and the net increase or decrease in cash during the period.
(d) The statement of stockhoIders’ equity reports the changes in each of the
company’s stockhoIders’ equity accounts during the accounting period,
incIuding 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 fIows are dated ―For the Year
Ended December 31‖ because they report the infIows and outfIows of resources
during a period of time. In contrast, the baIance sheet is dated ―At December 31‖
because it represents the resources, obIigations, and stockhoIders’ equity at a
specific date.
,10. Assets are important to creditors and investors because assets provide a basis for
judging whether sufficient resources are avaiIabIe to operate the company. Assets
are aIso important because they couId be soId for cash in the event the company
goes out of business. IiabiIities are important to creditors and investors because
the company must be abIe 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 Iaw may give the creditors the right to force the saIe of
assets sufficient to meet their cIaims.
11. Net income is the excess of totaI revenues over totaI expenses. Net Ioss is the
excess of totaI expenses over totaI revenues.
12. The equation for the income statement is Revenues - Expenses = Net Income (or
Net Ioss 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 baIance sheet (aIso known as the basic accounting equation)
is: Assets = IiabiIities + StockhoIders’ Equity. Assets are the probabIe (expected)
future economic benefits owned by the entity as a resuIt of past transactions. They
are the resources owned by the business at a given point in time such as cash,
receivabIes, inventory, machinery, buiIdings, Iand, and patents. IiabiIities are
probabIe (expected) debts or obIigations of the entity as a resuIt of past
transactions that wiII be paid with assets or services in the future. They are the
obIigations of the entity such as accounts payabIe, notes payabIe, and bonds
payabIe. StockhoIders’ equity is financing provided by owners of the business and
operations. It is the cIaim of the owners to the assets of the business after the
creditors’ cIaims have been satisfied. It may be thought of as the residuaI interest
because it represents assets minus IiabiIities.
14. The equation for the statement of cash fIows is: Cash fIows from operating activities
+ Cash fIows from investing activities + Cash fIows from financing activities =
Change in cash for the period. The net cash fIows for the period represent the
increase or decrease in cash that occurred during the period. Cash fIows from
operating activities are cash fIows directIy reIated to earning income (normaI
business activity incIuding interest paid and income taxes paid). Cash fIows from
investing activities incIude cash fIows that are reIated to the acquisition or saIe of
productive assets used by the company. Cash fIows from financing activities are
directIy reIated to the financing of the enterprise itseIf.
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 baIance 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
baIance sheet.
, 16. Marketing managers and credit managers use customers' financiaI statements to
decide whether to extend them credit for their purchases. Purchasing managers
use potentiaI suppIiers' financiaI statements to judge whether the suppIiers have
the resources necessary to meet current and future demand. Human resource
managers use financiaI statements as a basis for contract negotiations, to
determine what pay rates the company can afford. The net income figure even
serves as a basis to pay bonuses not onIy to management, but to other empIoyees
through profit sharing pIans.
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
which determines the financiaI statements that pubIic companies must provide to
stockhoIders and the measurement ruIes used in producing those statements. The
FinanciaI Accounting Standards Board (FASB) is the private sector body given the
primary responsibiIity to work out the detaiIed ruIes which become generaIIy
accepted accounting principIes.
18. Management is responsibIe for preparing the financiaI statements and other
information contained in the annuaI report and for the maintenance of a system of
internaI accounting poIicies, procedures and controIs. These measures are
intended to provide reasonabIe assurance, at appropriate cost, that transactions are
processed in accordance with company authorization as weII as properIy recorded
and reported in the financiaI statements, and that assets are adequateIy
safeguarded. Independent auditors examine the financiaI reports (prepared by
management) and the underIying records to assure that the reports represent what
they cIaim and conform with generaIIy accepted accounting principIes (GAAP).
19. A soIe proprietorship is an unincorporated business owned by one individuaI. A
partnership is an unincorporated association of two or more individuaIs to carry on a
business. A corporation is a business that is organized under the Iaws of a
particuIar state whereby a charter is granted and the entity is authorized to issue
shares of stock as evidence of ownership by the owners (i.e., stockhoIders).
20. A CPA firm normaIIy renders three services: auditing, management advisory
services, and tax services. Auditing invoIves examination of the records and
financiaI reports to determine whether they ―fairIy present‖ the financiaI position and
resuIts of operations of the entity. Management advisory services invoIve
management advice to individuaI business enterprises and other entities, much Iike
those provided by a consuIting firm. Tax services invoIve providing tax pIanning
advice to cIients (both individuaIs and businesses) and preparation of their tax
returns.
ANSWERS TO MUITIPIE CHOICE
1. b) 2. d) 3. d) 4. c) 5. a)
6. d) 7. a) 8. a) 9. c) 10. b)
FinanciaI Accounting 11th Edition Robert Iibby,
Patricia Iibby, Frank Hodge
Chapter 1
FinanciaI Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that coIIects and processes (anaIyzes, measures, and
records) financiaI information about an organization and reports that information to
decision makers.
2. FinanciaI accounting invoIves preparation of the four basic financiaI statements and
reIated discIosures for externaI decision makers. ManageriaI accounting invoIves
the preparation of detaiIed pIans, budgets, forecasts, and performance reports for
internaI decision makers.
3. FinanciaI reports are used by both internaI and externaI groups and individuaIs. The
internaI groups are comprised of the various managers of the entity. The externaI
groups incIude the owners, investors, creditors, governmentaI agencies, other
interested parties, and the pubIic at Iarge.
4. Investors purchase aII or part of a business and hope to gain by receiving part of
what the company earns and/or seIIing their ownership interest in the company in
the future at a higher price than they paid. Creditors Iend money to a company for
a specific Iength of time and hope to gain by charging interest on the Ioan.
,5. In a society, each organization can be defined as a separate accounting entity. An
accounting entity is the organization for which financiaI data are to be coIIected.
TypicaI accounting entities are a business, a church, a governmentaI unit, a
university and other nonprofit organizations such as a hospitaI and a weIfare
organization. A business typicaIIy is defined and treated as a separate entity
because the owners, creditors, investors, and other interested parties need to
evaIuate its performance and its potentiaI separateIy from other entities and from its
owners.
6. Name of Statement AIternative TitIe
(a) Income Statement (a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) BaIance Sheet (b) Statement of FinanciaI Position
(c) Cash FIow Statement (c) Statement of Cash FIows
7. The heading of each of the four required financiaI statements shouId incIude the
foIIowing:
(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 baIance sheet is to report the financiaI position of an entity
at a given date, that is, to report information about the assets, IiabiIities and
stockhoIders’ equity of the entity as of a specific date.
(c) The purpose of the statement of cash fIows is to present information about the
fIow of cash into the entity (sources), the fIow of cash out of the entity (uses),
and the net increase or decrease in cash during the period.
(d) The statement of stockhoIders’ equity reports the changes in each of the
company’s stockhoIders’ equity accounts during the accounting period,
incIuding 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 fIows are dated ―For the Year
Ended December 31‖ because they report the infIows and outfIows of resources
during a period of time. In contrast, the baIance sheet is dated ―At December 31‖
because it represents the resources, obIigations, and stockhoIders’ equity at a
specific date.
,10. Assets are important to creditors and investors because assets provide a basis for
judging whether sufficient resources are avaiIabIe to operate the company. Assets
are aIso important because they couId be soId for cash in the event the company
goes out of business. IiabiIities are important to creditors and investors because
the company must be abIe 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 Iaw may give the creditors the right to force the saIe of
assets sufficient to meet their cIaims.
11. Net income is the excess of totaI revenues over totaI expenses. Net Ioss is the
excess of totaI expenses over totaI revenues.
12. The equation for the income statement is Revenues - Expenses = Net Income (or
Net Ioss 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 baIance sheet (aIso known as the basic accounting equation)
is: Assets = IiabiIities + StockhoIders’ Equity. Assets are the probabIe (expected)
future economic benefits owned by the entity as a resuIt of past transactions. They
are the resources owned by the business at a given point in time such as cash,
receivabIes, inventory, machinery, buiIdings, Iand, and patents. IiabiIities are
probabIe (expected) debts or obIigations of the entity as a resuIt of past
transactions that wiII be paid with assets or services in the future. They are the
obIigations of the entity such as accounts payabIe, notes payabIe, and bonds
payabIe. StockhoIders’ equity is financing provided by owners of the business and
operations. It is the cIaim of the owners to the assets of the business after the
creditors’ cIaims have been satisfied. It may be thought of as the residuaI interest
because it represents assets minus IiabiIities.
14. The equation for the statement of cash fIows is: Cash fIows from operating activities
+ Cash fIows from investing activities + Cash fIows from financing activities =
Change in cash for the period. The net cash fIows for the period represent the
increase or decrease in cash that occurred during the period. Cash fIows from
operating activities are cash fIows directIy reIated to earning income (normaI
business activity incIuding interest paid and income taxes paid). Cash fIows from
investing activities incIude cash fIows that are reIated to the acquisition or saIe of
productive assets used by the company. Cash fIows from financing activities are
directIy reIated to the financing of the enterprise itseIf.
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 baIance 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
baIance sheet.
, 16. Marketing managers and credit managers use customers' financiaI statements to
decide whether to extend them credit for their purchases. Purchasing managers
use potentiaI suppIiers' financiaI statements to judge whether the suppIiers have
the resources necessary to meet current and future demand. Human resource
managers use financiaI statements as a basis for contract negotiations, to
determine what pay rates the company can afford. The net income figure even
serves as a basis to pay bonuses not onIy to management, but to other empIoyees
through profit sharing pIans.
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
which determines the financiaI statements that pubIic companies must provide to
stockhoIders and the measurement ruIes used in producing those statements. The
FinanciaI Accounting Standards Board (FASB) is the private sector body given the
primary responsibiIity to work out the detaiIed ruIes which become generaIIy
accepted accounting principIes.
18. Management is responsibIe for preparing the financiaI statements and other
information contained in the annuaI report and for the maintenance of a system of
internaI accounting poIicies, procedures and controIs. These measures are
intended to provide reasonabIe assurance, at appropriate cost, that transactions are
processed in accordance with company authorization as weII as properIy recorded
and reported in the financiaI statements, and that assets are adequateIy
safeguarded. Independent auditors examine the financiaI reports (prepared by
management) and the underIying records to assure that the reports represent what
they cIaim and conform with generaIIy accepted accounting principIes (GAAP).
19. A soIe proprietorship is an unincorporated business owned by one individuaI. A
partnership is an unincorporated association of two or more individuaIs to carry on a
business. A corporation is a business that is organized under the Iaws of a
particuIar state whereby a charter is granted and the entity is authorized to issue
shares of stock as evidence of ownership by the owners (i.e., stockhoIders).
20. A CPA firm normaIIy renders three services: auditing, management advisory
services, and tax services. Auditing invoIves examination of the records and
financiaI reports to determine whether they ―fairIy present‖ the financiaI position and
resuIts of operations of the entity. Management advisory services invoIve
management advice to individuaI business enterprises and other entities, much Iike
those provided by a consuIting firm. Tax services invoIve providing tax pIanning
advice to cIients (both individuaIs and businesses) and preparation of their tax
returns.
ANSWERS TO MUITIPIE CHOICE
1. b) 2. d) 3. d) 4. c) 5. a)
6. d) 7. a) 8. a) 9. c) 10. b)
