SOLUTION MANUALFORj j
FinancialAccounting11thEdition
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Robert Libby, Patricia Libby, Frank Hodge
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j
, SOLUTION MANUAL FOR j j
Financial Accounting 11thEdition Robert Libby,P
j j j j j j
atricia Libby, Frank Hodge
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Chapter 1 j
Financial Statements and Business Decisions
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ANSWERS TO QUESTIONS
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1. Accountingjisjajsystemjthatjcollectsjandjprocessesj(analyzes,jmeasures,jandjrecords)jf
inancialjinformationjaboutjanjorganizationjandjreportsjthatjinformationjtojdecisionjmak
ers.j
2. Financialjaccountingjinvolvesjpreparationjofjthejfourjbasicjfinancialjstatementsjandjrela
tedjdisclosuresjforjexternaljdecisionjmakers.jManagerialjaccountingjinvolvesjthejprepa
rationjofjdetailedjplans,jbudgets,jforecasts,jandjperformancejreportsjforjinternaljdecisio
njmakers.j
3. Financialjreportsjarejusedjbyjbothjinternaljandjexternaljgroupsjandjindividuals.jThejinter
naljgroupsjarejcomprisedjofjthejvariousjmanagersjofjthejentity.jThejexternaljgroupsjinclu
dejthejowners,jinvestors,jcreditors,jgovernmentaljagencies,jotherjinterestedjparties,jan
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ejcompanyjearnsjand/orjsellingjtheirjownershipjinterestjinjthejcompanyjinjthejfuturejatj
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ntingjentityjisjthejorganizationjforjwhichjfinancialjdatajarejtojbejcollected.jTypicaljaccoun
tingjentitiesjarejajbusiness,jajchurch,jajgovernmentaljunit,jajuniversityjandjotherjnonprofi
tjorganizationsjsuchjasjajhospitaljandjajwelfarejorganization.jAjbusinessjtypicallyjisjdefin
edjandjtreatedjasjajseparatejentityjbecausejthejowners,jcreditors,jinvestors,jandjotherjin
terestedjpartiesjneedjtojevaluatejitsjperformancejandjitsjpotentialjseparatelyjfromjotherj
entitiesjandjfromjitsjowners.j
6. NamejofjStatement AlternativejTitle
(a) IncomejStatement (a)jStatementjofjEarnings;jStatementjofj
Income;jStatementjofjOperationsj
(b) BalancejSheet (b)jStatementjofjFinancialjPositionj
(c) CashjFlowjStatement (c)j StatementjofjCashjFlowsj
7. Thejheadingjofjeachjofjthejfourjrequiredjfinancialjstatementsjshouldjincludejthejfollo
wing:j
(a) Namejofjthejentityj
(b) Namejofjthejstatementj
(c) Datejofjthejstatement,jorjthejperiodjofjtimej
(d) Unitjofjmeasurej
8. (a)
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venues,jexpenses,jandjthejnetjincomejofjanjentityjforjajspecifiedjperiodjofjtime.j
(b) Thejpurposejofjthejbalancejsheetjisjtojreportjthejfinancialjpositionjofjanjentityjatjajgi
venjdate,jthatjis,jtojreportjinformationjaboutjthejassets,jliabilitiesjandjstockholders’j
equityjofjthejentityjasjofjajspecificjdate.j
(c) Thejpurposejofjthejstatementjofjcashjflowsjisjtojpresentjinformationjaboutjthejflowj
ofjcashjintojthejentityj(sources),jthejflowjofjcashjoutjofjthejentityj(uses),jandjthejnetji
ncreasejorjdecreasejinjcashjduringjthejperiod.j
(d) Thejstatementjofjstockholders’jequityjreportsjthejchangesjinjeachjofjthejcompany’
sjstockholders’jequityjaccountsjduringjthejaccountingjperiod,jincludingjissuejandj
repurchasejofjstockjandjthejwayjthatjnetjincomejandjdistributionjofjdividendsjaffec
tedjthejretainedjearningsjofjthejcompanyjduringjthatjperiod.j
9. Thejincomejstatementjandjthejstatementjofjcashjflowsjarejdatedj―ForjthejYearjEnded
jDecemberj31‖jbecausejtheyjreportjthejinflowsjandjoutflowsjofjresourcesjduringjajperi
odjofjtime.jInjcontrast,jthejbalancejsheetjisjdatedj―AtjDecemberj31‖jbecausejitjrepres
entsjthejresources,jobligations,jandjstockholders’jequityjatja j specificjdate.j
j
, 10. Assetsjarejimportantjtojcreditorsjandjinvestorsjbecausejassetsjprovidejajbasisjforjjudgi
ngjwhetherjsufficientjresourcesjarejavailablejtojoperatejthejcompany.jAssetsjarejalsoji
mportantjbecausejtheyjcouldjbejsoldjforjcashjinjthejeventjthejcompanyjgoesjoutjofjbusi
ness.jLiabilitiesjarejimportantjtojcreditorsjandjinvestorsjbecausejthejcompanyjmustjbej
ablejtojgeneratejsufficientjcashjfromjoperationsjorjfurtherjborrowingjtojmeetjthejpayme
ntsjrequiredjbyjdebtjagreements.jIfjajbusinessjdoesjnotjpayjitsjcreditors,jthejlawjmayjgi
vejthejcreditorsjthejrightjtojforcejthejsalejofjassetsjsufficientjtojmeetjtheirjclaims.j
11. Netjincomejisjthejexcessjofjtotaljrevenuesjoverjtotaljexpenses.jNetjlossjisjthejexce
ssjofjtotaljexpensesjoverjtotaljrevenues.j
12. ThejequationjforjthejincomejstatementjisjRevenuesj-
jExpensesj=jNetjIncomej(orjNetjLossjifjthejamountjisjnegative).jThus,jthejthreejmajorjit
emsjreportedjonjthejincomejstatementjarej(1)jrevenues,j(2)jexpenses,jandj(3)j netjinco
me.j
13. Thejequationjforjthejbalancejsheetj(alsojknownjasjthejbasicjaccountingjequation)jis:jAs
setsj=jLiabilitiesj+jStockholders’jEquity.jAssetsjarejthejprobablej(expected)jfuturejecon
omicjbenefitsjownedjbyjthejentityjasjajresultjofjpastjtransactions.jTheyjarejthejresources
jownedjbyjthejbusinessjatjajgivenjpointjinjtimejsuchjasjcash,jreceivables,jinventory,jmac
hinery,jbuildings,jland,jandjpatents.jLiabilitiesjarejprobablej(expected)jdebtsjorj obligati
onsjofjthejentityj asjajresultjofjpastjtransactionsjthatjwilljbejpaidjwithjassetsjorjservicesjinjt
hejfuture.jTheyjarejthejobligationsjofjthejentityjsuchjasjaccountsjpayable,jnotesjpayable
,jandjbondsjpayable.jStockholders’jequityjisjfinancingjprovidedjbyjownersjofjthejbusine
ssjandjoperations.jItjisjthejclaimjofjthejownersjtojthejassetsjofjthejbusinessjafterjthejcredi
tors’jclaimsjhavejbeenjsatisfied.jItjmayjbejthoughtjofjasjthejresidualjinterestjbecausejitjre
presentsjassetsjminusjliabilities.j
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+jCashjflowsjfromjinvestingjactivitiesj+jCashjflowsjfromjfinancingjactivitiesj=jChangeji
njcashjforjthejperiod.jThejnetjcashjflowsjforjthejperiodjrepresentjthejincreasejorjdecrea
sejinjcashjthatjoccurredjduringjthejperiod.jCashjflowsjfromjoperatingjactivitiesjarejcas
hjflowsjdirectlyjrelatedjtojearningjincomej(normaljbusinessjactivityjincludingjinterestjp
aidjandjincomejtaxesjpaid).jCashjflowsjfromjinvestingjactivitiesjincludejcashjflowsjthat
jarejrelatedjtojthejacquisitionjorjsalejofjproductivejassetsjusedjbyjthejcompany.jCashjfl
owsjfromjfinancingjactivitiesjarejdirectlyjrelatedjtojthejfinancingjofjthejenterprisejitself.j
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yearjRetainedjEarningsjwhichjisjthejpriorjyear’sjendingjretainedjearningsjreportedjonj
thejbalancejsheet.jThejcurrentjyear'sjNetjIncomejreportedjonjthejincomejstatementjis
jaddedjandjthejcurrentjyear'sjDividendsjarejsubtractedjfromjthisjamount.jThejendingj
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j
FinancialAccounting11thEdition
j j j j
Robert Libby, Patricia Libby, Frank Hodge
j j j j j
j
, SOLUTION MANUAL FOR j j
Financial Accounting 11thEdition Robert Libby,P
j j j j j j
atricia Libby, Frank Hodge
j j j
Chapter 1 j
Financial Statements and Business Decisions
j j j j
ANSWERS TO QUESTIONS
j j
1. Accountingjisjajsystemjthatjcollectsjandjprocessesj(analyzes,jmeasures,jandjrecords)jf
inancialjinformationjaboutjanjorganizationjandjreportsjthatjinformationjtojdecisionjmak
ers.j
2. Financialjaccountingjinvolvesjpreparationjofjthejfourjbasicjfinancialjstatementsjandjrela
tedjdisclosuresjforjexternaljdecisionjmakers.jManagerialjaccountingjinvolvesjthejprepa
rationjofjdetailedjplans,jbudgets,jforecasts,jandjperformancejreportsjforjinternaljdecisio
njmakers.j
3. Financialjreportsjarejusedjbyjbothjinternaljandjexternaljgroupsjandjindividuals.jThejinter
naljgroupsjarejcomprisedjofjthejvariousjmanagersjofjthejentity.jThejexternaljgroupsjinclu
dejthejowners,jinvestors,jcreditors,jgovernmentaljagencies,jotherjinterestedjparties,jan
djthejpublicjatjlarge.j
4. Investorsjpurchasejalljorjpartjofjajbusinessjandjhopejtojgainjbyjreceivingjpartjofjwhatjth
ejcompanyjearnsjand/orjsellingjtheirjownershipjinterestjinjthejcompanyjinjthejfuturejatj
ajhigherjpricejthanjtheyjpaid.jCreditorsjlendjmoneyjtojajcompanyjforjajspecificjlengthjofj
timejandjhopejtojgainjbyjchargingjinterestjonjthejloan.j
j
, 5. Injajsociety,jeachjorganizationjcanjbejdefinedjasjajseparatejaccountingjentity.jAnjaccou
ntingjentityjisjthejorganizationjforjwhichjfinancialjdatajarejtojbejcollected.jTypicaljaccoun
tingjentitiesjarejajbusiness,jajchurch,jajgovernmentaljunit,jajuniversityjandjotherjnonprofi
tjorganizationsjsuchjasjajhospitaljandjajwelfarejorganization.jAjbusinessjtypicallyjisjdefin
edjandjtreatedjasjajseparatejentityjbecausejthejowners,jcreditors,jinvestors,jandjotherjin
terestedjpartiesjneedjtojevaluatejitsjperformancejandjitsjpotentialjseparatelyjfromjotherj
entitiesjandjfromjitsjowners.j
6. NamejofjStatement AlternativejTitle
(a) IncomejStatement (a)jStatementjofjEarnings;jStatementjofj
Income;jStatementjofjOperationsj
(b) BalancejSheet (b)jStatementjofjFinancialjPositionj
(c) CashjFlowjStatement (c)j StatementjofjCashjFlowsj
7. Thejheadingjofjeachjofjthejfourjrequiredjfinancialjstatementsjshouldjincludejthejfollo
wing:j
(a) Namejofjthejentityj
(b) Namejofjthejstatementj
(c) Datejofjthejstatement,jorjthejperiodjofjtimej
(d) Unitjofjmeasurej
8. (a)
Thejpurposejofjthejincomejstatementjisjtojpresentjinformationjaboutjthejre
venues,jexpenses,jandjthejnetjincomejofjanjentityjforjajspecifiedjperiodjofjtime.j
(b) Thejpurposejofjthejbalancejsheetjisjtojreportjthejfinancialjpositionjofjanjentityjatjajgi
venjdate,jthatjis,jtojreportjinformationjaboutjthejassets,jliabilitiesjandjstockholders’j
equityjofjthejentityjasjofjajspecificjdate.j
(c) Thejpurposejofjthejstatementjofjcashjflowsjisjtojpresentjinformationjaboutjthejflowj
ofjcashjintojthejentityj(sources),jthejflowjofjcashjoutjofjthejentityj(uses),jandjthejnetji
ncreasejorjdecreasejinjcashjduringjthejperiod.j
(d) Thejstatementjofjstockholders’jequityjreportsjthejchangesjinjeachjofjthejcompany’
sjstockholders’jequityjaccountsjduringjthejaccountingjperiod,jincludingjissuejandj
repurchasejofjstockjandjthejwayjthatjnetjincomejandjdistributionjofjdividendsjaffec
tedjthejretainedjearningsjofjthejcompanyjduringjthatjperiod.j
9. Thejincomejstatementjandjthejstatementjofjcashjflowsjarejdatedj―ForjthejYearjEnded
jDecemberj31‖jbecausejtheyjreportjthejinflowsjandjoutflowsjofjresourcesjduringjajperi
odjofjtime.jInjcontrast,jthejbalancejsheetjisjdatedj―AtjDecemberj31‖jbecausejitjrepres
entsjthejresources,jobligations,jandjstockholders’jequityjatja j specificjdate.j
j
, 10. Assetsjarejimportantjtojcreditorsjandjinvestorsjbecausejassetsjprovidejajbasisjforjjudgi
ngjwhetherjsufficientjresourcesjarejavailablejtojoperatejthejcompany.jAssetsjarejalsoji
mportantjbecausejtheyjcouldjbejsoldjforjcashjinjthejeventjthejcompanyjgoesjoutjofjbusi
ness.jLiabilitiesjarejimportantjtojcreditorsjandjinvestorsjbecausejthejcompanyjmustjbej
ablejtojgeneratejsufficientjcashjfromjoperationsjorjfurtherjborrowingjtojmeetjthejpayme
ntsjrequiredjbyjdebtjagreements.jIfjajbusinessjdoesjnotjpayjitsjcreditors,jthejlawjmayjgi
vejthejcreditorsjthejrightjtojforcejthejsalejofjassetsjsufficientjtojmeetjtheirjclaims.j
11. Netjincomejisjthejexcessjofjtotaljrevenuesjoverjtotaljexpenses.jNetjlossjisjthejexce
ssjofjtotaljexpensesjoverjtotaljrevenues.j
12. ThejequationjforjthejincomejstatementjisjRevenuesj-
jExpensesj=jNetjIncomej(orjNetjLossjifjthejamountjisjnegative).jThus,jthejthreejmajorjit
emsjreportedjonjthejincomejstatementjarej(1)jrevenues,j(2)jexpenses,jandj(3)j netjinco
me.j
13. Thejequationjforjthejbalancejsheetj(alsojknownjasjthejbasicjaccountingjequation)jis:jAs
setsj=jLiabilitiesj+jStockholders’jEquity.jAssetsjarejthejprobablej(expected)jfuturejecon
omicjbenefitsjownedjbyjthejentityjasjajresultjofjpastjtransactions.jTheyjarejthejresources
jownedjbyjthejbusinessjatjajgivenjpointjinjtimejsuchjasjcash,jreceivables,jinventory,jmac
hinery,jbuildings,jland,jandjpatents.jLiabilitiesjarejprobablej(expected)jdebtsjorj obligati
onsjofjthejentityj asjajresultjofjpastjtransactionsjthatjwilljbejpaidjwithjassetsjorjservicesjinjt
hejfuture.jTheyjarejthejobligationsjofjthejentityjsuchjasjaccountsjpayable,jnotesjpayable
,jandjbondsjpayable.jStockholders’jequityjisjfinancingjprovidedjbyjownersjofjthejbusine
ssjandjoperations.jItjisjthejclaimjofjthejownersjtojthejassetsjofjthejbusinessjafterjthejcredi
tors’jclaimsjhavejbeenjsatisfied.jItjmayjbejthoughtjofjasjthejresidualjinterestjbecausejitjre
presentsjassetsjminusjliabilities.j
14. Thejequationjforjthejstatementjofjcashjflowsjis:jCashjflowsjfromjoperatingjactivitiesj
+jCashjflowsjfromjinvestingjactivitiesj+jCashjflowsjfromjfinancingjactivitiesj=jChangeji
njcashjforjthejperiod.jThejnetjcashjflowsjforjthejperiodjrepresentjthejincreasejorjdecrea
sejinjcashjthatjoccurredjduringjthejperiod.jCashjflowsjfromjoperatingjactivitiesjarejcas
hjflowsjdirectlyjrelatedjtojearningjincomej(normaljbusinessjactivityjincludingjinterestjp
aidjandjincomejtaxesjpaid).jCashjflowsjfromjinvestingjactivitiesjincludejcashjflowsjthat
jarejrelatedjtojthejacquisitionjorjsalejofjproductivejassetsjusedjbyjthejcompany.jCashjfl
owsjfromjfinancingjactivitiesjarejdirectlyjrelatedjtojthejfinancingjofjthejenterprisejitself.j
15. Thejretainedjearningsjequationjis:jBeginningjRetainedjEarningsj+jNetjIncomej-
jDividendsj=jEndingjRetainedjEarnings.jItjbeginsjwithjbeginning-of-the-
yearjRetainedjEarningsjwhichjisjthejpriorjyear’sjendingjretainedjearningsjreportedjonj
thejbalancejsheet.jThejcurrentjyear'sjNetjIncomejreportedjonjthejincomejstatementjis
jaddedjandjthejcurrentjyear'sjDividendsjarejsubtractedjfromjthisjamount.jThejendingj
RetainedjEarningsjamountjisjreportedjonjthejend-of-periodjbalancejsheet.j
j
