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. Marketings2managerss2ands2credits2managerss2uses2customers's2financials2stateme
ntss2tos2decides2whethers2tos2extends2thems2credits2fors2theirs2purchases.s2Purchasi
ngs2managerss 2 uses2potentials2suppliers's2financials2statementss2tos2judges2whethe
rs2thes2supplierss2haves2thes2resourcess2necessarys2tos2meets2currents2ands2futures
2demand.s2Humans2resources2managerss2uses2financials2statementss2ass2as2basiss
2fors2contracts2negotiations,s2tos2determines2whats2pays2ratess2thes2companys2cans2
afford.s 2 Thes2nets2incomes2figures2evens2servess2ass2as2basiss2tos2pays2bonusess2
nots2onlys2tos2management,s2buts2tos2others2employeess2throughs2profits2sharings2pl
ans.
17. Thes2Securitiess2ands2Exchanges2Commissions2(SEC)s2iss2thes2U.S.s2governments
2agencys2whichs2determiness2thes2financials2statementss2thats2publics2companiess
2musts2provides2tos2stockholderss2ands2thes2measurements2ruless2useds2ins2produ
cings2thoses2statements.s2Thes2Financials2Accountings2Standardss2Boards2(FASB)
s2iss2thes2privates2sectors2bodys2givens2thes2primarys2responsibilitys2tos2works2outs2
thes2detaileds2ruless2whichs2becomes2generallys2accepteds2accountings2principles.
18. Managements2iss2responsibles2fors2preparings2thes2financials2statementss2ands2othe
rs2informations2containeds2ins2thes2annuals2reports2ands2fors2thes2maintenances2ofs2
Frank
as2systems2ofs2internals2accountings2policies,s2proceduress2ands2controls.s2Theses2
measuress2ares 2 intendeds2tos2provides2reasonables2assurance,s2ats2appropriates2c
ost,s2thats2transactionss2ares2processeds2ins2accordances2withs2companys2authoriza
tions2ass2wells2ass2properlys2recordeds2ands2reporteds2ins2thes2financials2statements
,s2ands2thats2assetss2ares2adequatelys2safeguarded.s 2 Independents2auditorss2exam
ines2thes2financials2reportss2(prepareds2bys2management)s2ands2thes2underlyings2re
cordss2tos2assures2thats2thes2reportss2represents2whats2theys2claims2ands2conforms2
withs2generallys2accepteds2accountings2principless2(GAAP).
19. As2soles2proprietorships2iss2ans2unincorporateds2businesss2owneds2bys2ones2individ
ual.s2As2partnerships2iss2ans2unincorporateds2associations2ofs2twos2ors2mores2individ
ualss2tos2carrys2ons2as2business.s2As2corporations2iss2as2businesss2thats2iss2organize
ds2unders2thes2lawss2ofs2as 2 particulars2states2wherebys2as2charters2iss2granteds2and
s2thes2entitys2iss2authorizeds2tos2issues2sharess2ofs2stocks2ass2evidences2ofs2owners
hips2bys2thes2ownerss2(i.e.,s2stockholders).
20. As2CPAs2firms2normallys2renderss2threes2services:s2auditing,s2managements2adviso
rys2services,s2ands2taxs2services.s2Auditings2involvess2examinations2ofs2thes2record
ss2ands2financials2reportss2tos2determines2whethers2theys2―fairlys2present‖s2thes2finan
cials2positions2ands2resultss2ofs2operationss2ofs2thes2entity.s2Managements2advisory
s2servicess2involves2managements2advices2tos2individuals2businesss2enterprisess2an
ds2others2entities,s2muchs2likes2thoses2provideds2bys2as2consultings2firm.s2Taxs2serv
icess2involves2providings2taxs2plannings2advices2tos2clientss2(boths2individualss2ands
2businesses)s2ands2preparations2ofs2theirs2taxs2returns.
ANSWERSs2TOs2MULTIPLEs2CHOICE
1.s 2 b) 2.s 2 d) 3.s 2 d) 4.s 2 c) 5.s 2 a)
2-4 6.s 2 d) 7.s 2 a) 8.s 2 a) 9.s 2 c) 10.s 2 b) s2 Manu
Solutions
©s2McGraws2Hills2LLC.s 2 Alls2rightss2reserved.s2Nos2reproductions2ors2distributions2withouts2thes2priors2writtens2 al
consents2ofs2McGraws2 Hills2LLC.
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. Marketings2managerss2ands2credits2managerss2uses2customers's2financials2stateme
ntss2tos2decides2whethers2tos2extends2thems2credits2fors2theirs2purchases.s2Purchasi
ngs2managerss 2 uses2potentials2suppliers's2financials2statementss2tos2judges2whethe
rs2thes2supplierss2haves2thes2resourcess2necessarys2tos2meets2currents2ands2futures
2demand.s2Humans2resources2managerss2uses2financials2statementss2ass2as2basiss
2fors2contracts2negotiations,s2tos2determines2whats2pays2ratess2thes2companys2cans2
afford.s 2 Thes2nets2incomes2figures2evens2servess2ass2as2basiss2tos2pays2bonusess2
nots2onlys2tos2management,s2buts2tos2others2employeess2throughs2profits2sharings2pl
ans.
17. Thes2Securitiess2ands2Exchanges2Commissions2(SEC)s2iss2thes2U.S.s2governments
2agencys2whichs2determiness2thes2financials2statementss2thats2publics2companiess
2musts2provides2tos2stockholderss2ands2thes2measurements2ruless2useds2ins2produ
cings2thoses2statements.s2Thes2Financials2Accountings2Standardss2Boards2(FASB)
s2iss2thes2privates2sectors2bodys2givens2thes2primarys2responsibilitys2tos2works2outs2
thes2detaileds2ruless2whichs2becomes2generallys2accepteds2accountings2principles.
18. Managements2iss2responsibles2fors2preparings2thes2financials2statementss2ands2othe
rs2informations2containeds2ins2thes2annuals2reports2ands2fors2thes2maintenances2ofs2
Frank
as2systems2ofs2internals2accountings2policies,s2proceduress2ands2controls.s2Theses2
measuress2ares 2 intendeds2tos2provides2reasonables2assurance,s2ats2appropriates2c
ost,s2thats2transactionss2ares2processeds2ins2accordances2withs2companys2authoriza
tions2ass2wells2ass2properlys2recordeds2ands2reporteds2ins2thes2financials2statements
,s2ands2thats2assetss2ares2adequatelys2safeguarded.s 2 Independents2auditorss2exam
ines2thes2financials2reportss2(prepareds2bys2management)s2ands2thes2underlyings2re
cordss2tos2assures2thats2thes2reportss2represents2whats2theys2claims2ands2conforms2
withs2generallys2accepteds2accountings2principless2(GAAP).
19. As2soles2proprietorships2iss2ans2unincorporateds2businesss2owneds2bys2ones2individ
ual.s2As2partnerships2iss2ans2unincorporateds2associations2ofs2twos2ors2mores2individ
ualss2tos2carrys2ons2as2business.s2As2corporations2iss2as2businesss2thats2iss2organize
ds2unders2thes2lawss2ofs2as 2 particulars2states2wherebys2as2charters2iss2granteds2and
s2thes2entitys2iss2authorizeds2tos2issues2sharess2ofs2stocks2ass2evidences2ofs2owners
hips2bys2thes2ownerss2(i.e.,s2stockholders).
20. As2CPAs2firms2normallys2renderss2threes2services:s2auditing,s2managements2adviso
rys2services,s2ands2taxs2services.s2Auditings2involvess2examinations2ofs2thes2record
ss2ands2financials2reportss2tos2determines2whethers2theys2―fairlys2present‖s2thes2finan
cials2positions2ands2resultss2ofs2operationss2ofs2thes2entity.s2Managements2advisory
s2servicess2involves2managements2advices2tos2individuals2businesss2enterprisess2an
ds2others2entities,s2muchs2likes2thoses2provideds2bys2as2consultings2firm.s2Taxs2serv
icess2involves2providings2taxs2plannings2advices2tos2clientss2(boths2individualss2ands
2businesses)s2ands2preparations2ofs2theirs2taxs2returns.
ANSWERSs2TOs2MULTIPLEs2CHOICE
1.s 2 b) 2.s 2 d) 3.s 2 d) 4.s 2 c) 5.s 2 a)
2-4 6.s 2 d) 7.s 2 a) 8.s 2 a) 9.s 2 c) 10.s 2 b) s2 Manu
Solutions
©s2McGraws2Hills2LLC.s 2 Alls2rightss2reserved.s2Nos2reproductions2ors2distributions2withouts2thes2priors2writtens2 al
consents2ofs2McGraws2 Hills2LLC.
