SOLUTION MANUAL FOR gg gg
Financial Accounting 11th Edition
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Robert Libby, Patricia Libby, Frank Hodge
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,SOLUTION MANUAL FOR g g g g
Financial Accounting 11th Edition Robert Libby, gg gg gg gg gg
Patricia Libby, Frank Hodge
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Chapter 1 gg
Financial Statements and Business Decisions gg gg gg gg
ANSWERS TO QUESTIONS gg gg
1. Accounting is a system that collects and processes (analyzes, measures, and
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records) financial information about an organization and reports that information
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to decision makers.
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2. Financial accounting involves preparation of the four basic financial statements
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and related disclosures for external decision makers. Managerial accounting
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involves the preparation of detailed plans, budgets, forecasts, and performance
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reports for internal decision makers.
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3. Financial reports are used by both internal and external groups and individuals.
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The internal groups are comprised of the various managers of the entity. The
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external groups include the owners, investors, creditors, governmental agencies,
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other interested parties, and the public at large.
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4. Investors purchase all or part of a business and hope to gain by receiving part
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of what the company earns and/or selling their ownership interest in the
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company in the future at a higher price than they paid. Creditors lend money to
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a company for a specific length of time and hope to gain by charging interest
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on the loan.
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,5. In a society, each organization can be defined as a separate accounting entity.
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An accounting entity is the organization for which financial data are to be
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collected. Typical accounting entities are a business, a church, a governmental
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unit, a university and other nonprofit organizations such as a hospital and a
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welfare organization. A business typically is defined and treated as a separate
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entity because the owners, creditors, investors, and other interested parties need
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to evaluate its performance and its potential separately from other entities and
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from its owners.
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6. Name of Statement gg gg Alternative Title gg
(a) Income Statement gg (a) Statement of Earnings; Statement of
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Income; Statement of Operations gg gg gg
(b) Balance Sheet gg (b) Statement of Financial Position
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(c) Cash Flow Statement gg gg (c) Statement of Cash Flows
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7. The heading of each of the four required financial statements should include
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the following:
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(a) Name of the entity gg gg gg
(b) Name of the statement gg gg gg
(c) Date of the statement, or the period of time
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(d) Unit of measure gg gg
8. (a) The purpose of the income statement is to present information about the
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revenues, expenses, and the net income of an entity for a specified period
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of time.
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(b) The purpose of the balance sheet is to report the financial position of an
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entity at a given date, that is, to report information about the assets,
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liabilities and stockholders’ equity of the entity as of a specific date.
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(c) The purpose of the statement of cash flows is to present information about
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the flow of cash into the entity (sources), the flow of cash out of the entity
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(uses), and the net increase or decrease in cash during the period.
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(d) The statement of stockholders’ equity reports the changes in each of the
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company’s stockholders’ equity accounts during the accounting period,
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including issue and repurchase of stock and the way that net income and
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distribution of dividends affected the retained earnings of the company
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during that period.
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9. The income statement and the statement of cash flows are dated ―For the
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Year Ended December 31‖ because they report the inflows and outflows of
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resources during a period of time. In contrast, the balance sheet is dated ―At
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December 31‖ because it represents the resources, obligations, and
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stockholders’ equity at a specific date.
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, 10. Assets are important to creditors and investors because assets provide a basis
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for judging whether sufficient resources are available to operate the company.
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Assets are also important because they could be sold for cash in the event the
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company goes out of business. Liabilities are important to creditors and
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investors because the company must be able to generate sufficient cash from
gg gg gg gg gg gg gg gg gg gg gg gg
operations or further borrowing to meet the payments required by debt
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agreements. If a business does not pay its creditors, the law may give the
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creditors the right to force the sale of assets sufficient to meet their claims.
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11. Net income is the excess of total revenues over total expenses. Net loss is
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the excess of total expenses over total revenues.
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12. The equation for the income statement is Revenues - Expenses = Net Income
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(or Net Loss if the amount is negative). Thus, the three major items reported
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on the income statement are (1) revenues, (2) expenses, and (3) net income.
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13. The equation for the balance sheet (also known as the basic accounting
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equation) is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable
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(expected) future economic benefits owned by the entity as a result of past
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transactions. They are the resources owned by the business at a given point in
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time such as cash, receivables, inventory, machinery, buildings, land, and
gg gg gg gg gg gg gg gg gg gg
patents. Liabilities are probable (expected) debts or obligations of the entity as a
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result of past transactions that will be paid with assets or services in the future.
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They are the obligations of the entity such as accounts payable, notes payable,
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and bonds payable. Stockholders’ equity is financing provided by owners of the
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business and operations. It is the claim of the owners to the assets of the
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business after the creditors’ claims have been satisfied. It may be thought of as
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the residual interest because it represents assets minus liabilities.
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14. The equation for the statement of cash flows is: Cash flows from operating activities
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+ Cash flows from investing activities + Cash flows from financing activities =
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Change in cash for the period. The net cash flows for the period represent the
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increase or decrease in cash that occurred during the period. Cash flows from
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operating activities are cash flows directly related to earning income (normal
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business activity including interest paid and income taxes paid). Cash flows from
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investing activities include cash flows that are related to the acquisition or sale of
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productive assets used by the company. Cash flows from financing activities are
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directly related to the financing of the enterprise itself.
gg gg gg gg gg gg gg gg gg
15. The retained earnings equation is: Beginning Retained Earnings + Net Income
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- Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
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Retained Earnings which is the prior year’s ending retained earnings reported
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on the balance sheet. The current year's Net Income reported on the income
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statement is added and the current year's Dividends are subtracted from this
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amount. The ending Retained Earnings amount is reported on the end-of-
gg gg gg gg gg gg gg gg gg gg gg
period balance sheet. gg gg
Financial Accounting 11th Edition
gg gg gg gg
Robert Libby, Patricia Libby, Frank Hodge
g g g g g g g g g g
,SOLUTION MANUAL FOR g g g g
Financial Accounting 11th Edition Robert Libby, gg gg gg gg gg
Patricia Libby, Frank Hodge
gg gg gg gg
Chapter 1 gg
Financial Statements and Business Decisions gg gg gg gg
ANSWERS TO QUESTIONS gg gg
1. Accounting is a system that collects and processes (analyzes, measures, and
gg gg gg gg gg gg gg gg gg gg
records) financial information about an organization and reports that information
gg gg gg gg gg gg gg gg gg gg
to decision makers.
gg gg gg
2. Financial accounting involves preparation of the four basic financial statements
gg gg gg gg gg gg gg gg gg
and related disclosures for external decision makers. Managerial accounting
gg gg gg gg gg gg gg gg gg
involves the preparation of detailed plans, budgets, forecasts, and performance
gg gg gg gg gg gg gg gg gg gg
reports for internal decision makers.
gg gg gg gg gg
3. Financial reports are used by both internal and external groups and individuals.
gg gg gg gg gg gg gg gg gg gg gg
The internal groups are comprised of the various managers of the entity. The
gg gg gg gg gg gg gg gg gg gg gg gg gg
external groups include the owners, investors, creditors, governmental agencies,
gg gg gg gg gg gg gg gg gg
other interested parties, and the public at large.
gg gg gg gg gg gg gg gg
4. Investors purchase all or part of a business and hope to gain by receiving part
gg gg gg gg gg gg gg gg gg gg gg gg gg gg
of what the company earns and/or selling their ownership interest in the
gg gg gg gg gg gg gg gg gg gg gg gg
company in the future at a higher price than they paid. Creditors lend money to
gg gg gg gg gg gg gg gg gg gg gg gg gg gg gg
a company for a specific length of time and hope to gain by charging interest
gg gg gg gg gg gg gg gg gg gg gg gg gg gg gg
on the loan.
gg gg gg
,5. In a society, each organization can be defined as a separate accounting entity.
gg gg gg gg gg gg gg gg gg gg gg gg
An accounting entity is the organization for which financial data are to be
gg gg gg gg gg gg gg gg gg gg gg gg gg
collected. Typical accounting entities are a business, a church, a governmental
gg gg gg gg gg gg gg gg gg gg gg
unit, a university and other nonprofit organizations such as a hospital and a
gg gg gg gg gg gg gg gg gg gg gg gg gg
welfare organization. A business typically is defined and treated as a separate
gg gg gg gg gg gg gg gg gg gg gg gg
entity because the owners, creditors, investors, and other interested parties need
gg gg gg gg gg gg gg gg gg gg gg
to evaluate its performance and its potential separately from other entities and
gg gg gg gg gg gg gg gg gg gg gg gg
from its owners.
gg gg gg
6. Name of Statement gg gg Alternative Title gg
(a) Income Statement gg (a) Statement of Earnings; Statement of
gg gg gg gg gg
Income; Statement of Operations gg gg gg
(b) Balance Sheet gg (b) Statement of Financial Position
gg gg gg gg
(c) Cash Flow Statement gg gg (c) Statement of Cash Flows
gg gg gg gg
7. The heading of each of the four required financial statements should include
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the following:
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(a) Name of the entity gg gg gg
(b) Name of the statement gg gg gg
(c) Date of the statement, or the period of time
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(d) Unit of measure gg gg
8. (a) The purpose of the income statement is to present information about the
gg gg gg gg gg gg gg gg gg gg gg
revenues, expenses, and the net income of an entity for a specified period
gg gg gg gg gg gg gg gg gg gg gg gg gg
of time.
gg gg
(b) The purpose of the balance sheet is to report the financial position of an
gg gg gg gg gg gg gg gg gg gg gg gg gg
entity at a given date, that is, to report information about the assets,
gg gg gg gg gg gg gg gg gg gg gg gg gg
liabilities and stockholders’ equity of the entity as of a specific date.
gg gg gg gg gg gg gg gg gg gg gg gg
(c) The purpose of the statement of cash flows is to present information about
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the flow of cash into the entity (sources), the flow of cash out of the entity
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(uses), and the net increase or decrease in cash during the period.
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(d) The statement of stockholders’ equity reports the changes in each of the
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company’s stockholders’ equity accounts during the accounting period,
gg gg gg gg gg gg gg gg
including issue and repurchase of stock and the way that net income and
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distribution of dividends affected the retained earnings of the company
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during that period.
gg gg gg
9. The income statement and the statement of cash flows are dated ―For the
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Year Ended December 31‖ because they report the inflows and outflows of
gg gg gg gg gg gg gg gg gg gg gg gg
resources during a period of time. In contrast, the balance sheet is dated ―At
gg gg gg gg gg gg gg gg gg gg gg gg gg gg
December 31‖ because it represents the resources, obligations, and
gg gg gg gg gg gg gg gg gg
stockholders’ equity at a specific date.
gg gg gg gg gg gg
, 10. Assets are important to creditors and investors because assets provide a basis
gg gg gg gg gg gg gg gg gg gg gg
for judging whether sufficient resources are available to operate the company.
gg gg gg gg gg gg gg gg gg gg gg
Assets are also important because they could be sold for cash in the event the
gg gg gg gg gg gg gg gg gg gg gg gg gg gg gg
company goes out of business. Liabilities are important to creditors and
gg gg gg gg gg gg gg gg gg gg gg
investors because the company must be able to generate sufficient cash from
gg gg gg gg gg gg gg gg gg gg gg gg
operations or further borrowing to meet the payments required by debt
gg gg gg gg gg gg gg gg gg gg gg
agreements. If a business does not pay its creditors, the law may give the
gg gg gg gg gg gg gg gg gg gg gg gg gg gg
creditors the right to force the sale of assets sufficient to meet their claims.
gg gg gg gg gg gg gg gg gg gg gg gg gg gg
11. Net income is the excess of total revenues over total expenses. Net loss is
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the excess of total expenses over total revenues.
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12. The equation for the income statement is Revenues - Expenses = Net Income
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(or Net Loss if the amount is negative). Thus, the three major items reported
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on the income statement are (1) revenues, (2) expenses, and (3) net income.
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13. The equation for the balance sheet (also known as the basic accounting
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equation) is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable
gg gg gg gg gg gg gg gg gg gg gg gg
(expected) future economic benefits owned by the entity as a result of past
gg gg gg gg gg gg gg gg gg gg gg gg gg
transactions. They are the resources owned by the business at a given point in
gg g g gg gg gg gg gg gg gg gg gg gg gg gg
time such as cash, receivables, inventory, machinery, buildings, land, and
gg gg gg gg gg gg gg gg gg gg
patents. Liabilities are probable (expected) debts or obligations of the entity as a
gg gg gg gg gg gg gg gg gg gg gg gg gg
result of past transactions that will be paid with assets or services in the future.
gg gg gg gg gg gg gg gg gg gg gg gg gg gg gg
They are the obligations of the entity such as accounts payable, notes payable,
gg gg gg gg gg gg gg gg gg gg gg gg gg
and bonds payable. Stockholders’ equity is financing provided by owners of the
gg gg gg gg gg gg gg gg gg gg gg gg
business and operations. It is the claim of the owners to the assets of the
gg gg gg gg gg gg gg gg gg gg gg gg gg gg gg
business after the creditors’ claims have been satisfied. It may be thought of as
gg gg gg gg gg gg gg gg gg gg gg gg gg gg
the residual interest because it represents assets minus liabilities.
gg gg gg gg gg gg gg gg gg
14. The equation for the statement of cash flows is: Cash flows from operating activities
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+ Cash flows from investing activities + Cash flows from financing activities =
gg gg gg gg gg gg gg gg gg gg gg gg
Change in cash for the period. The net cash flows for the period represent the
gg gg gg gg gg gg gg gg gg gg gg gg gg gg gg
increase or decrease in cash that occurred during the period. Cash flows from
gg gg gg gg gg gg gg gg gg gg gg gg gg
operating activities are cash flows directly related to earning income (normal
gg gg gg gg gg gg gg gg gg gg gg
business activity including interest paid and income taxes paid). Cash flows from
gg gg gg gg gg gg gg gg gg gg gg gg
investing activities include cash flows that are related to the acquisition or sale of
gg gg gg gg gg gg gg gg gg gg gg gg gg gg
productive assets used by the company. Cash flows from financing activities are
gg gg gg gg gg gg gg gg gg gg gg gg
directly related to the financing of the enterprise itself.
gg gg gg gg gg gg gg gg gg
15. The retained earnings equation is: Beginning Retained Earnings + Net Income
gg gg gg gg gg gg gg gg gg gg
- Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
gg gg gg gg gg gg gg gg gg gg
Retained Earnings which is the prior year’s ending retained earnings reported
gg gg gg gg gg gg gg gg gg gg gg
on the balance sheet. The current year's Net Income reported on the income
gg gg gg gg g g gg gg gg gg gg gg gg gg
statement is added and the current year's Dividends are subtracted from this
gg gg gg gg gg gg gg gg gg gg gg gg
amount. The ending Retained Earnings amount is reported on the end-of-
gg gg gg gg gg gg gg gg gg gg gg
period balance sheet. gg gg
