FULL 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.
Financial Accounting, 11/e 2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,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)
Frank
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.
2-2 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,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)
Frank
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.
Financial Accounting, 11/e 2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 16. Marketing managers and credit managers use customers' financial statements to
decided4whetherd4tod4extendd4themd4creditd4ford4theird4purchases.d4Purchasingd4ma
nagersd 4 used4potentiald4suppliers'd4financiald4statementsd4tod4judged4whetherd4thed
4suppliersd4haved4thed4resourcesd4necessaryd4tod4meetd4currentd4andd4futured4dem
and.d4Humand4resourced4managersd4used4financiald4statementsd4asd4ad4basisd4ford
4contractd4negotiations,d4tod4determined4whatd4payd4ratesd4thed4companyd4cand4aff
ord.d 4 Thed4netd4incomed4figured4evend4servesd4asd4ad4basisd4tod4payd4bonusesd4no
td4onlyd4tod4management,d4butd4tod4otherd4employeesd4throughd4profitd4sharingd4pla
ns.
17. Thed4Securitiesd4andd4Exchanged4Commissiond4(SEC)d4isd4thed4U.S.d4government
d4agencyd4whichd4determinesd4thed4financiald4statementsd4thatd4publicd4companie
sd4mustd4provided4tod4stockholdersd4andd4thed4measurementd4rulesd4usedd4ind4pro
ducingd4thosed4statements.d4Thed4Financiald4Accountingd4Standardsd4Boardd4(FA
SB)d4isd4thed4privated4sectord4bodyd4givend4thed4primaryd4responsibilityd4tod4workd4
outd4thed4detailedd4rulesd4whichd4becomed4generallyd4acceptedd4accountingd4prin
ciples.
18. Managementd4isd4responsibled4ford4preparingd4thed4financiald4statementsd4andd4oth
erd4informationd4containedd4ind4thed4annuald4reportd4andd4ford4thed4maintenanced4of
Frank
d4ad4systemd4ofd4internald4accountingd4policies,d4proceduresd4andd4controls.d4These
d4measuresd4ared 4 intendedd4tod4provided4reasonabled4assurance,d4atd4appropriated
4cost,d4thatd4transactionsd4ared4processedd4ind4accordanced4withd4companyd4author
izationd4asd4welld4asd4properlyd4recordedd4andd4reportedd4ind4thed4financiald4statem
ents,d4andd4thatd4assetsd4ared4adequatelyd4safeguarded.d 4 Independentd4auditorsd4
examined4thed4financiald4reportsd4(preparedd4byd4management)d4andd4thed4underlyi
ngd4recordsd4tod4assured4thatd4thed4reportsd4representd4whatd4theyd4claimd4andd4co
nformd4withd4generallyd4acceptedd4accountingd4principlesd4(GAAP).
19. Ad4soled4proprietorshipd4isd4and4unincorporatedd4businessd4ownedd4byd4oned4individ
ual.d4Ad4partnershipd4isd4and4unincorporatedd4associationd4ofd4twod4ord4mored4indivi
dualsd4tod4carryd4ond4ad4business.d4Ad4corporationd4isd4ad4businessd4thatd4isd4organi
zedd4underd4thed4lawsd4ofd4ad 4 particulard4stated4wherebyd4ad4charterd4isd4grantedd4
andd4thed4entityd4isd4authorizedd4tod4issued4sharesd4ofd4stockd4asd4evidenced4ofd4ow
nershipd4byd4thed4ownersd4(i.e.,d4stockholders).
20. Ad4CPAd4firmd4normallyd4rendersd4threed4services:d4auditing,d4managementd4advis
oryd4services,d4andd4taxd4services.d4Auditingd4involvesd4examinationd4ofd4thed4reco
rdsd4andd4financiald4reportsd4tod4determined4whetherd4theyd4―fairlyd4present‖d4thed4fi
nanciald4positiond4andd4resultsd4ofd4operationsd4ofd4thed4entity.d4Managementd4advi
soryd4servicesd4involved4managementd4adviced4tod4individuald4businessd4enterprise
sd4andd4otherd4entities,d4muchd4liked4thosed4providedd4byd4ad4consultingd4firm.d4Tax
d4servicesd4involved4providingd4taxd4planningd4adviced4tod4clientsd4(bothd4individual
sd4andd4businesses)d4andd4preparationd4ofd4theird4taxd4returns.
ANSWERSd4TOd4MULTIPLEd4CHOICE
2-4 1.d 4 b) 2.d 4 d) 3.d 4 d) 4.d 4 c) 5.Solutions
d 4 a) d4 Manu
©d4McGrawd4Hilld4LLC.d 4 Alld4rightsd4reserved.d4Nod4reproductiond4ord4distributiond4withoutd4thed4priord4writt al
end4consentd4ofd4McGrawd4 Hilld4LLC.
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.
Financial Accounting, 11/e 2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,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)
Frank
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.
2-2 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,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)
Frank
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.
Financial Accounting, 11/e 2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 16. Marketing managers and credit managers use customers' financial statements to
decided4whetherd4tod4extendd4themd4creditd4ford4theird4purchases.d4Purchasingd4ma
nagersd 4 used4potentiald4suppliers'd4financiald4statementsd4tod4judged4whetherd4thed
4suppliersd4haved4thed4resourcesd4necessaryd4tod4meetd4currentd4andd4futured4dem
and.d4Humand4resourced4managersd4used4financiald4statementsd4asd4ad4basisd4ford
4contractd4negotiations,d4tod4determined4whatd4payd4ratesd4thed4companyd4cand4aff
ord.d 4 Thed4netd4incomed4figured4evend4servesd4asd4ad4basisd4tod4payd4bonusesd4no
td4onlyd4tod4management,d4butd4tod4otherd4employeesd4throughd4profitd4sharingd4pla
ns.
17. Thed4Securitiesd4andd4Exchanged4Commissiond4(SEC)d4isd4thed4U.S.d4government
d4agencyd4whichd4determinesd4thed4financiald4statementsd4thatd4publicd4companie
sd4mustd4provided4tod4stockholdersd4andd4thed4measurementd4rulesd4usedd4ind4pro
ducingd4thosed4statements.d4Thed4Financiald4Accountingd4Standardsd4Boardd4(FA
SB)d4isd4thed4privated4sectord4bodyd4givend4thed4primaryd4responsibilityd4tod4workd4
outd4thed4detailedd4rulesd4whichd4becomed4generallyd4acceptedd4accountingd4prin
ciples.
18. Managementd4isd4responsibled4ford4preparingd4thed4financiald4statementsd4andd4oth
erd4informationd4containedd4ind4thed4annuald4reportd4andd4ford4thed4maintenanced4of
Frank
d4ad4systemd4ofd4internald4accountingd4policies,d4proceduresd4andd4controls.d4These
d4measuresd4ared 4 intendedd4tod4provided4reasonabled4assurance,d4atd4appropriated
4cost,d4thatd4transactionsd4ared4processedd4ind4accordanced4withd4companyd4author
izationd4asd4welld4asd4properlyd4recordedd4andd4reportedd4ind4thed4financiald4statem
ents,d4andd4thatd4assetsd4ared4adequatelyd4safeguarded.d 4 Independentd4auditorsd4
examined4thed4financiald4reportsd4(preparedd4byd4management)d4andd4thed4underlyi
ngd4recordsd4tod4assured4thatd4thed4reportsd4representd4whatd4theyd4claimd4andd4co
nformd4withd4generallyd4acceptedd4accountingd4principlesd4(GAAP).
19. Ad4soled4proprietorshipd4isd4and4unincorporatedd4businessd4ownedd4byd4oned4individ
ual.d4Ad4partnershipd4isd4and4unincorporatedd4associationd4ofd4twod4ord4mored4indivi
dualsd4tod4carryd4ond4ad4business.d4Ad4corporationd4isd4ad4businessd4thatd4isd4organi
zedd4underd4thed4lawsd4ofd4ad 4 particulard4stated4wherebyd4ad4charterd4isd4grantedd4
andd4thed4entityd4isd4authorizedd4tod4issued4sharesd4ofd4stockd4asd4evidenced4ofd4ow
nershipd4byd4thed4ownersd4(i.e.,d4stockholders).
20. Ad4CPAd4firmd4normallyd4rendersd4threed4services:d4auditing,d4managementd4advis
oryd4services,d4andd4taxd4services.d4Auditingd4involvesd4examinationd4ofd4thed4reco
rdsd4andd4financiald4reportsd4tod4determined4whetherd4theyd4―fairlyd4present‖d4thed4fi
nanciald4positiond4andd4resultsd4ofd4operationsd4ofd4thed4entity.d4Managementd4advi
soryd4servicesd4involved4managementd4adviced4tod4individuald4businessd4enterprise
sd4andd4otherd4entities,d4muchd4liked4thosed4providedd4byd4ad4consultingd4firm.d4Tax
d4servicesd4involved4providingd4taxd4planningd4adviced4tod4clientsd4(bothd4individual
sd4andd4businesses)d4andd4preparationd4ofd4theird4taxd4returns.
ANSWERSd4TOd4MULTIPLEd4CHOICE
2-4 1.d 4 b) 2.d 4 d) 3.d 4 d) 4.d 4 c) 5.Solutions
d 4 a) d4 Manu
©d4McGrawd4Hilld4LLC.d 4 Alld4rightsd4reserved.d4Nod4reproductiond4ord4distributiond4withoutd4thed4priord4writt al
end4consentd4ofd4McGrawd4 Hilld4LLC.
