SOLUTION MANUAL FOR
v v
Financial Accounting 11th Edition
v v v v
Robert Libby, Patricia Libby, Frank Hodge
v v v v v
v
, SOLUTION MANUAL FOR v v
Financial Accounting 11th Edition Robert Libby,P
v v v v v v
atricia Libby, Frank Hodge
v v v
Chapter 1 v
Financial Statements and Business Decisions
v v v v
ANSWERS TO QUESTIONS
v v
1. Accountingvisvavsystemvthatvcollectsvandvprocessesv(analyzes,vmeasures,vandvrecor
ds)vfinancialvinformationvaboutvanvorganizationvandvreportsvthatvinformationvtovdecisi
onvmakers.v
2. Financialvaccountingvinvolvesvpreparationvofvthevfourvbasicvfinancialvstatementsvandvr
elatedvdisclosuresvforvexternalvdecisionvmakers.vManagerialvaccountingvinvolvesvthev
preparationvofvdetailedvplans,vbudgets,vforecasts,vandvperformancevreportsvforvintern
alvdecisionvmakers.v
3. Financialvreportsvarevusedvbyvbothvinternalvandvexternalvgroupsvandvindividuals.vThevi
nternalvgroupsvarevcomprisedvofvthevvariousvmanagersvofvtheventity.vThevexternalvgrou
psvincludevthevowners,vinvestors,vcreditors,vgovernmentalvagencies,vothervinterestedv
parties,vandvthevpublicvatvlarge.v
4. Investorsvpurchasevallvorvpartvofvavbusinessvandvhopevtovgainvbyvreceivingvpartvofvwh
atvthevcompanyvearnsvand/orvsellingvtheirvownershipvinterestvinvthevcompanyvinvthevf
uturevatvavhighervpricevthanvtheyvpaid.vCreditorsvlendvmoneyvtovavcompanyvforvavspe
cificvlengthvofvtimevandvhopevtovgainvbyvchargingvinterestvonvthevloan.v
v
, 5. Invavsociety,veachvorganizationvcanvbevdefinedvasvavseparatevaccountingventity.vAnvacc
ountingventityvisvthevorganizationvforvwhichvfinancialvdatavarevtovbevcollected.vTypicalva
ccountingventitiesvarevavbusiness,vavchurch,vavgovernmentalvunit,vavuniversityvandvoth
ervnonprofitvorganizationsvsuchvasvavhospitalvandvavwelfarevorganization.vAvbusinessvt
ypicallyvisvdefinedvandvtreatedvasvavseparateventityvbecausevthevowners,vcreditors,vinv
estors,vandvothervinterestedvpartiesvneedvtovevaluatevitsvperformancevandvitsvpotentialv
separatelyvfromvotherventitiesvandvfromvitsvowners.v
6. NamevofvStatement AlternativevTitle
(a) IncomevStatement (a)vStatementvofvEarnings;vStatementvofv
Income;vStatementvofvOperationsv
(b) BalancevSheet (b)vStatementvofvFinancialvPositionv
(c) CashvFlowvStatement (c)v StatementvofvCashvFlowsv
7. Thevheadingvofveachvofvthevfourvrequiredvfinancialvstatementsvshouldvincludevthevf
ollowing:v
(a) Namevofvtheventityv
(b) Namevofvthevstatementv
(c) Datevofvthevstatement,vorvthevperiodvofvtimev
(d) Unitvofvmeasurev
8. (a)
Thevpurposevofvthevincomevstatementvisvtovpresentvinformationvaboutvthe
vrevenues,vexpenses,vandvthevnetvincomevofvanventityvforvavspecifiedvperiodvofvti
me.v
(b) Thevpurposevofvthevbalancevsheetvisvtovreportvthevfinancialvpositionvofvanventityvat
vavgivenvdate,vthatvis,vtovreportvinformationvaboutvthevassets,vliabilitiesvandvstock
holders’vequityvofvtheventityvasvofvavspecificvdate.v
(c) Thevpurposevofvthevstatementvofvcashvflowsvisvtovpresentvinformationvaboutvthevfl
owvofvcashvintovtheventityv(sources),vthevflowvofvcashvoutvofvtheventityv(uses),vandv
thevnetvincreasevorvdecreasevinvcashvduringvthevperiod.v
(d) Thevstatementvofvstockholders’vequityvreportsvthevchangesvinveachvofvthevcomp
any’svstockholders’vequityvaccountsvduringvthevaccountingvperiod,vincludingviss
uevandvrepurchasevofvstockvandvthevwayvthatvnetvincomevandvdistributionvofvdivi
dendsvaffectedvthevretainedvearningsvofvthevcompanyvduringvthatvperiod.v
9. Thevincomevstatementvandvthevstatementvofvcashvflowsvarevdatedv―ForvthevYearvEn
dedvDecemberv31‖vbecausevtheyvreportvthevinflowsvandvoutflowsvofvresourcesvdurin
gvavperiodvofvtime.vInvcontrast,vthevbalancevsheetvisvdatedv―AtvDecemberv31‖vbecau
sevitvrepresentsvthevresources,vobligations,vandvstockholders’vequityvatva v specificvd
ate.v
v
, 10. Assetsvarevimportantvtovcreditorsvandvinvestorsvbecausevassetsvprovidevavbasisvforvju
dgingvwhethervsufficientvresourcesvarevavailablevtovoperatevthevcompany.vAssetsvar
evalsovimportantvbecausevtheyvcouldvbevsoldvforvcashvinvtheveventvthevcompanyvgoesv
outvofvbusiness.vLiabilitiesvarevimportantvtovcreditorsvandvinvestorsvbecausevthevcom
panyvmustvbevablevtovgeneratevsufficientvcashvfromvoperationsvorvfurthervborrowingvt
ovmeetvthevpaymentsvrequiredvbyvdebtvagreements.vIfvavbusinessvdoesvnotvpayvitsvcr
editors,vthevlawvmayvgivevthevcreditorsvthevrightvtovforcevthevsalevofvassetsvsufficientvt
ovmeetvtheirvclaims.v
11. Netvincomevisvthevexcessvofvtotalvrevenuesvovervtotalvexpenses.vNetvlossvisvtheve
xcessvofvtotalvexpensesvovervtotalvrevenues.v
12. ThevequationvforvthevincomevstatementvisvRevenuesv-
vExpensesv=vNetvIncomev(orvNetvLossvifvthevamountvisvnegative).vThus,vthevthreevma
jorvitemsvreportedvonvthevincomevstatementvarev(1)vrevenues,v(2)vexpenses,vandv(3)v
netvincome.v
13. Thevequationvforvthevbalancevsheetv(alsovknownvasvthevbasicvaccountingvequation)vis:v
Assetsv=vLiabilitiesv+vStockholders’vEquity.vAssetsvarevthevprobablev(expected)vfuture
veconomicvbenefitsvownedvbyvtheventityvasvavresultvofvpastvtransactions.vTheyvarevthevr
esourcesvownedvbyvthevbusinessvatvavgivenvpointvinvtimevsuchvasvcash,vreceivables,vi
nventory,vmachinery,vbuildings,vland,vandvpatents.vLiabilitiesvarevprobablev(expected)
vdebtsvorv obligationsvofvtheventityv asvavresultvofv pastvtransactionsvthatvwillvbevpaidvwithv
assetsvorvservicesvinvthevfuture.vTheyvarevthevobligationsvofvtheventityvsuchvasvaccount
svpayable,vnotesvpayable,vandvbondsvpayable.vStockholders’vequityvisvfinancingvprovi
dedvbyvownersvofvthevbusinessvandvoperations.vItvisvthevclaimvofvthevownersvtovthevass
etsvofvthevbusinessvaftervthevcreditors’vclaimsvhavevbeenvsatisfied.vItvmayvbevthoughtvo
fvasvthevresidualvinterestvbecausevitvrepresentsvassetsvminusvliabilities.v
14. Thevequationvforvthevstatementvofvcashvflowsvis:vCashvflowsvfromvoperatingvactivitiesv
+vCashvflowsvfromvinvestingvactivitiesv+vCashvflowsvfromvfinancingvactivitiesv=vChan
gevinvcashvforvthevperiod.vThevnetvcashvflowsvforvthevperiodvrepresentvthevincreasevo
rvdecreasevinvcashvthatvoccurredvduringvthevperiod.vCashvflowsvfromvoperatingvactivi
tiesvarevcashvflowsvdirectlyvrelatedvtovearningvincomev(normalvbusinessvactivityvinclu
dingvinterestvpaidvandvincomevtaxesvpaid).vCashvflowsvfromvinvestingvactivitiesvinclu
devcashvflowsvthatvarevrelatedvtovthevacquisitionvorvsalevofvproductivevassetsvusedvb
yvthevcompany.vCashvflowsvfromvfinancingvactivitiesvarevdirectlyvrelatedvtovthevfinanc
ingvofvtheventerprisevitself.v
15. Thevretainedvearningsvequationvis:vBeginningvRetainedvEarningsv+vNetvIncomev-
vDividendsv=vEndingvRetainedvEarnings.vItvbeginsvwithvbeginning-of-the-
yearvRetainedvEarningsvwhichvisvthevpriorvyear’svendingvretainedvearningsvreported
vonvthevbalancevsheet.vThevcurrentvyear'svNetvIncomevreportedvonvthevincomevstate
mentvisvaddedvandvthevcurrentvyear'svDividendsvarevsubtractedvfromvthisvamount.vT
hevendingvRetainedvEarningsvamountvisvreportedvonvthevend-of-
periodvbalancevsheet.v
v
v v
Financial Accounting 11th Edition
v v v v
Robert Libby, Patricia Libby, Frank Hodge
v v v v v
v
, SOLUTION MANUAL FOR v v
Financial Accounting 11th Edition Robert Libby,P
v v v v v v
atricia Libby, Frank Hodge
v v v
Chapter 1 v
Financial Statements and Business Decisions
v v v v
ANSWERS TO QUESTIONS
v v
1. Accountingvisvavsystemvthatvcollectsvandvprocessesv(analyzes,vmeasures,vandvrecor
ds)vfinancialvinformationvaboutvanvorganizationvandvreportsvthatvinformationvtovdecisi
onvmakers.v
2. Financialvaccountingvinvolvesvpreparationvofvthevfourvbasicvfinancialvstatementsvandvr
elatedvdisclosuresvforvexternalvdecisionvmakers.vManagerialvaccountingvinvolvesvthev
preparationvofvdetailedvplans,vbudgets,vforecasts,vandvperformancevreportsvforvintern
alvdecisionvmakers.v
3. Financialvreportsvarevusedvbyvbothvinternalvandvexternalvgroupsvandvindividuals.vThevi
nternalvgroupsvarevcomprisedvofvthevvariousvmanagersvofvtheventity.vThevexternalvgrou
psvincludevthevowners,vinvestors,vcreditors,vgovernmentalvagencies,vothervinterestedv
parties,vandvthevpublicvatvlarge.v
4. Investorsvpurchasevallvorvpartvofvavbusinessvandvhopevtovgainvbyvreceivingvpartvofvwh
atvthevcompanyvearnsvand/orvsellingvtheirvownershipvinterestvinvthevcompanyvinvthevf
uturevatvavhighervpricevthanvtheyvpaid.vCreditorsvlendvmoneyvtovavcompanyvforvavspe
cificvlengthvofvtimevandvhopevtovgainvbyvchargingvinterestvonvthevloan.v
v
, 5. Invavsociety,veachvorganizationvcanvbevdefinedvasvavseparatevaccountingventity.vAnvacc
ountingventityvisvthevorganizationvforvwhichvfinancialvdatavarevtovbevcollected.vTypicalva
ccountingventitiesvarevavbusiness,vavchurch,vavgovernmentalvunit,vavuniversityvandvoth
ervnonprofitvorganizationsvsuchvasvavhospitalvandvavwelfarevorganization.vAvbusinessvt
ypicallyvisvdefinedvandvtreatedvasvavseparateventityvbecausevthevowners,vcreditors,vinv
estors,vandvothervinterestedvpartiesvneedvtovevaluatevitsvperformancevandvitsvpotentialv
separatelyvfromvotherventitiesvandvfromvitsvowners.v
6. NamevofvStatement AlternativevTitle
(a) IncomevStatement (a)vStatementvofvEarnings;vStatementvofv
Income;vStatementvofvOperationsv
(b) BalancevSheet (b)vStatementvofvFinancialvPositionv
(c) CashvFlowvStatement (c)v StatementvofvCashvFlowsv
7. Thevheadingvofveachvofvthevfourvrequiredvfinancialvstatementsvshouldvincludevthevf
ollowing:v
(a) Namevofvtheventityv
(b) Namevofvthevstatementv
(c) Datevofvthevstatement,vorvthevperiodvofvtimev
(d) Unitvofvmeasurev
8. (a)
Thevpurposevofvthevincomevstatementvisvtovpresentvinformationvaboutvthe
vrevenues,vexpenses,vandvthevnetvincomevofvanventityvforvavspecifiedvperiodvofvti
me.v
(b) Thevpurposevofvthevbalancevsheetvisvtovreportvthevfinancialvpositionvofvanventityvat
vavgivenvdate,vthatvis,vtovreportvinformationvaboutvthevassets,vliabilitiesvandvstock
holders’vequityvofvtheventityvasvofvavspecificvdate.v
(c) Thevpurposevofvthevstatementvofvcashvflowsvisvtovpresentvinformationvaboutvthevfl
owvofvcashvintovtheventityv(sources),vthevflowvofvcashvoutvofvtheventityv(uses),vandv
thevnetvincreasevorvdecreasevinvcashvduringvthevperiod.v
(d) Thevstatementvofvstockholders’vequityvreportsvthevchangesvinveachvofvthevcomp
any’svstockholders’vequityvaccountsvduringvthevaccountingvperiod,vincludingviss
uevandvrepurchasevofvstockvandvthevwayvthatvnetvincomevandvdistributionvofvdivi
dendsvaffectedvthevretainedvearningsvofvthevcompanyvduringvthatvperiod.v
9. Thevincomevstatementvandvthevstatementvofvcashvflowsvarevdatedv―ForvthevYearvEn
dedvDecemberv31‖vbecausevtheyvreportvthevinflowsvandvoutflowsvofvresourcesvdurin
gvavperiodvofvtime.vInvcontrast,vthevbalancevsheetvisvdatedv―AtvDecemberv31‖vbecau
sevitvrepresentsvthevresources,vobligations,vandvstockholders’vequityvatva v specificvd
ate.v
v
, 10. Assetsvarevimportantvtovcreditorsvandvinvestorsvbecausevassetsvprovidevavbasisvforvju
dgingvwhethervsufficientvresourcesvarevavailablevtovoperatevthevcompany.vAssetsvar
evalsovimportantvbecausevtheyvcouldvbevsoldvforvcashvinvtheveventvthevcompanyvgoesv
outvofvbusiness.vLiabilitiesvarevimportantvtovcreditorsvandvinvestorsvbecausevthevcom
panyvmustvbevablevtovgeneratevsufficientvcashvfromvoperationsvorvfurthervborrowingvt
ovmeetvthevpaymentsvrequiredvbyvdebtvagreements.vIfvavbusinessvdoesvnotvpayvitsvcr
editors,vthevlawvmayvgivevthevcreditorsvthevrightvtovforcevthevsalevofvassetsvsufficientvt
ovmeetvtheirvclaims.v
11. Netvincomevisvthevexcessvofvtotalvrevenuesvovervtotalvexpenses.vNetvlossvisvtheve
xcessvofvtotalvexpensesvovervtotalvrevenues.v
12. ThevequationvforvthevincomevstatementvisvRevenuesv-
vExpensesv=vNetvIncomev(orvNetvLossvifvthevamountvisvnegative).vThus,vthevthreevma
jorvitemsvreportedvonvthevincomevstatementvarev(1)vrevenues,v(2)vexpenses,vandv(3)v
netvincome.v
13. Thevequationvforvthevbalancevsheetv(alsovknownvasvthevbasicvaccountingvequation)vis:v
Assetsv=vLiabilitiesv+vStockholders’vEquity.vAssetsvarevthevprobablev(expected)vfuture
veconomicvbenefitsvownedvbyvtheventityvasvavresultvofvpastvtransactions.vTheyvarevthevr
esourcesvownedvbyvthevbusinessvatvavgivenvpointvinvtimevsuchvasvcash,vreceivables,vi
nventory,vmachinery,vbuildings,vland,vandvpatents.vLiabilitiesvarevprobablev(expected)
vdebtsvorv obligationsvofvtheventityv asvavresultvofv pastvtransactionsvthatvwillvbevpaidvwithv
assetsvorvservicesvinvthevfuture.vTheyvarevthevobligationsvofvtheventityvsuchvasvaccount
svpayable,vnotesvpayable,vandvbondsvpayable.vStockholders’vequityvisvfinancingvprovi
dedvbyvownersvofvthevbusinessvandvoperations.vItvisvthevclaimvofvthevownersvtovthevass
etsvofvthevbusinessvaftervthevcreditors’vclaimsvhavevbeenvsatisfied.vItvmayvbevthoughtvo
fvasvthevresidualvinterestvbecausevitvrepresentsvassetsvminusvliabilities.v
14. Thevequationvforvthevstatementvofvcashvflowsvis:vCashvflowsvfromvoperatingvactivitiesv
+vCashvflowsvfromvinvestingvactivitiesv+vCashvflowsvfromvfinancingvactivitiesv=vChan
gevinvcashvforvthevperiod.vThevnetvcashvflowsvforvthevperiodvrepresentvthevincreasevo
rvdecreasevinvcashvthatvoccurredvduringvthevperiod.vCashvflowsvfromvoperatingvactivi
tiesvarevcashvflowsvdirectlyvrelatedvtovearningvincomev(normalvbusinessvactivityvinclu
dingvinterestvpaidvandvincomevtaxesvpaid).vCashvflowsvfromvinvestingvactivitiesvinclu
devcashvflowsvthatvarevrelatedvtovthevacquisitionvorvsalevofvproductivevassetsvusedvb
yvthevcompany.vCashvflowsvfromvfinancingvactivitiesvarevdirectlyvrelatedvtovthevfinanc
ingvofvtheventerprisevitself.v
15. Thevretainedvearningsvequationvis:vBeginningvRetainedvEarningsv+vNetvIncomev-
vDividendsv=vEndingvRetainedvEarnings.vItvbeginsvwithvbeginning-of-the-
yearvRetainedvEarningsvwhichvisvthevpriorvyear’svendingvretainedvearningsvreported
vonvthevbalancevsheet.vThevcurrentvyear'svNetvIncomevreportedvonvthevincomevstate
mentvisvaddedvandvthevcurrentvyear'svDividendsvarevsubtractedvfromvthisvamount.vT
hevendingvRetainedvEarningsvamountvisvreportedvonvthevend-of-
periodvbalancevsheet.v
v
