,ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
f f f f f f f f f
Chapter 1 f
Financial Statements and Business Decisions
f f f f
Revised:fAugustf5,f2022
ANSWERS TO QUESTIONS
f f
1. Accountingfisfafsystemfthatfcollectsfandfprocessesf(analyzes,fmeasures,fandfrecords)ffin
ancialfinformationfaboutfanforganizationfandfreportsfthatfinformationftofdecisionfmak
ers.
2. Financialfaccountingfinvolvesfpreparationfoffthefbasicffinancialfstatementsfandfrelatedfdisclos
uresfforfexternalfdecisionfmakers.fReportingfisfgenerallyfonfafquarterlyfandfannualfbasis.fMan
agerialfaccountingfinvolvesfthefpreparationfoffdetailedfplans,fbudgets,fforecasts,fandfperform
ancefreportsfforfinternalfdecisionfmakers.fReportingfisfonfanfongoingfbasis.
3. Financialfreportsfarefusedfbyfbothfinternalfandfexternalfgroupsfandfindividuals.fThefintern
alfusersfarefthefvariousfmanagersfoffthefentity,fe.g.fmarketing,fcredit,fandfpurchasing.fThef
externalfgroupsfincludefthefowners,finvestors,fcreditors,fgovernmentalfagencies,fotherfint
erestedfparties,fandfthefpublicfatflarge.
4. Investorsfpurchasefallforfpartfoffafbusinessfandfhopeftofgainfbyfreceivingfpartfoffwhatfthefcom
panyfearnsfand/orfbyfsellingftheirfsharefoffthefcompanyfinftheffuturefatfafhigherfpricefthanfthe
yfpaid.fCreditorsflendfmoneyftofafcompanyfforfafspecificflengthfofftimefandfhopeftofgainfbyfch
argingfinterestfonfthefloan.
5. Anfaccountingfentityfisftheforganizationfforfwhichffinancialfdatafareftofbefcollected.fTypicalfacc
ountingfentitiesfarefafbusiness,fafchurch,fafgovernmentalfunit,fafuniversity,fandfotherfnonprof
itforganizationsfsuchfasfafhospital.fAfbusinessfisfdefinedfandftreatedfasfafseparatefentityfbecau
sefthefowners,fcreditors,finvestors,fandfotherfinterestedfpartiesfneedftofevaluatefitsfperform
ancefandfitsfpotentialfseparatelyffromfotherfentitiesfandffromfitsfowners.
6. NamefoffStatement AlternativefTitle
a. Statementfoffearnings Incomefstatement
b. Statementfofffinancialfposition Balancefsheet
c. Statementfoffcashfflows Cashfflowfstatement
7. Thefheadingfoffeachfofftheffourfrequiredffinancialfstatementsfshouldfincludeftheffollowing:
(a) Namefoffthefentity
(b) Titlefoffthefstatement
(c) Specificfdateforfthefperiodfofftimefitfcovers
(d) Unitfoffmeasure
FinancialfAccounting,f8ce,fLibby,fLibby,fHodge,fKanaan,fSterling ©f2023fMcGraw-HillfLimited.fAllfrightsfreserved.
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,ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
f f f f f f f f f
8. (a)
Thefpurposefoffthefstatementfoffearningsfisftofpresentfinformationfaboutfthefreven
ues,fexpenses,fandfthefnetfearningsfoffthefentityfforfafspecifiedfperiodfofftime,finforderft
ofhelpfassessfitsffinancialfperformancefduringfthatfperiod.
(b) Thefpurposefoffthefstatementfofffinancialfpositionfisftofreportftheffinancialfpositionfoff
anfentityfatfafgivenfdate,fthatfis,ftofreportfinformationfaboutfthefassets,fobligations,fa
ndfshareholders’fequityfoffthefentityfasf atfafspecificfdate.
(c) Thefstatementfoffchangesfinfequityfreportsfthefwayfthatfnetfearnings,fthefdistributionf
offnetfearningsf(dividends),fandfotherfchangesftofshareholders’fequityfaffectedfthefco
mpany’sffinancialfpositionfduringfthefaccountingfperiod.fTheffocusfinfthisfchapterfisfonf
retainedfearnings.fNetfearningsfforfthefyearfincreasesfthefbalancefoffretainedfearningsf
whereasfthefdeclarationfoffdividendsftofthefshareholdersfdecreasesfretainedfearnings
.
(d) Thefpurposefoffthefstatementfoffcashfflowsfisftofpresentfinformationfaboutfthefflowfoffc
ashfintofthefentityf(sources),fthefflowfoffcashfoutfoffthefentityf(uses),fandfthefnetfincreas
eforfdecreasefinfcashfduringfthefperiod.
9. Thefstatementfoffearningsfandfthefstatementfoffcashfflowsfarefdatedf“ForfthefYearfEndedfDec
emberf31”fbecauseftheyfreportfthefinflowsfandfoutflowsfoffresourcesfduringfafperiodfofftime.f
Infcontrast,fthefstatementfofffinancialfpositionfisfdatedf“AtfDecemberf31”fbecausefitfrepresen
tsfthefresources,fobligations,fandfshareholders’fequityfasfatfafspecificfdate,fDecemberf31.
10. Assetsfarefimportantftofinvestorsfandfcreditorsfbecausefassetsfprovidefafbasisfforfjudgingfwhe
therfsufficientfresourcesfarefavailableftofoperatefthefcompany.fLiabilitiesfarefimportantftofcre
ditorsfandfinvestorsfbecausefthefcompanyfmustfbefableftofgeneratefsufficientfcashffromfoper
ationsforfseekffurtherfborrowingftofmeetfthefpaymentsfrequiredfbyfdebtfagreements.ffIffafbusi
nessfdoesfnotfpayfitsfcreditors,ftheflawfmayfgivefthefcreditorsfthefrightftofforcefthefsalefoffasset
sfsufficientftofmeetfthef creditors’fclaims.
11. Netfearningsfisfthefexcessfofftotalfrevenuesfoverftotalfexpenses.fNetflossfisfthefexcessfofftot
alfexpensesfoverftotalfrevenues.
12. ThefaccountingfequationfforfthefstatementfoffearningsfisfRevenuesf–
fExpensesf=fNetfearnings.fRevenuesfresultffromfthefsalefoffgoodsfandfservicesftofcustomers,fr
egardlessfofftheftimingfoffcollectionfoffcashffromfcustomers.fExpensesfrepresentfthefmonetar
yfvaluefoffresourcesfthefentityfusedfup,forfconsumed,ftofearnfrevenuesfduringfthefperiod.fNetf
earningsfisfsimplyfthefexcessfoffrevenuesfoverfexpenses.
FinancialfAccounting,f8ce,fLibby,fLibby,fHodge,fKanaan,fSterling ©f2023fMcGraw-HillfLimited.fAllfrightsfreserved.
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, ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
f f f f f f f f f
13. Thefaccountingfequationfforfthefstatementfofffinancialfpositionfis:
Assetsf=fLiabilitiesf+fShareholders’fEquity
Assetsfarefthefprobablef(expected)ffuturefeconomicfbenefitsfownedfbyfthefentityfasfafresultfo
ffpastftransactions.fTheyfarefthefresourcesfownedfbyfthefbusinessfatfafgivenfpointfinftimefsuchf
asfcash,faccountsfreceivable,fmerchandisefinventory,fmachinery,fbuildings,fland,fandfpatents
.fLiabilitiesfarefprobablef(expected)fdebtsforfobligationsfoffthefentityfasfafresultfoffpastftransact
ionsfthatfwillfbefdischargedfwithfassetsf(usuallyfcash)forfservicesfinftheffuture.fTheyfarefthefobl
igationsfoffthefentityfsuchfasf accountsfpayablefandfnotes
payable.fShareholders’fequityfisffinancingfprovidedfbyfownersfoffthefbusinessfandfbyfthefnetfe
arningsfgeneratedffromfthefoperationsfoffthefbusiness.fItfisfthefclaimfoffthefownersftofthefasset
sfoffthefbusinessfafterfthefcreditors’fclaimsfhavefbeenfsatisfied.fShareholders’fequityfmayfbeft
houghtfoffasfthefresidualfinterestfbecausefitfrepresentsfassetsfminusfliabilities.
14. Thefaccountingfequationfforfretainedfearningsfis:
Beginningfretainedfearningsf+fNetfearningsf–fDividendsf=fEndingfretainedfearnings
Thefequationfbeginsfwithfbeginning-of-the-
yearfretainedfearnings,fi.e.,fthefpriorfyear’sfendingfretainedfearningsfreportedfonfthefstateme
ntfofffinancialfposition.fThefcurrentfyear'sfnetfearningsfreportedfonfthefstatementfoffearningsf
isfaddedftofthisfamountfandfthefdividendsfdeclaredfduringfthefcurrentfyearfarefsubtractedffro
mfthisfamount.fThefendingfretainedfearningsfamountfisfreportedfonfthefend-of-
periodfstatementfofffinancialfposition.
15. Thefaccountingfequationfforfthefstatementfoffcashfflowsfis:fC
ashfflowsffromfoperatingfactivities
+/–fCashfflowsffromfinvestingfactivities
+/–fCashfflowsffromffinancingfactivities
=fChangefinfcashfforfthefperiod.
Thefnetfcashfflowsfforfthefperiodfrepresentfthefincreaseforfdecreasefinfcashfthatfoccurredfduri
ngfthefperiod.fCashfflowsffromfoperatingfactivitiesfarefcashfflowsfdirectlyfrelatedftofearningfinc
omef(normalfbusinessfactivityfincludingfinterestfpaidfandfincomeftaxesfpaid).fCashfflowsffromfi
nvestingfactivitiesfcomprisefcashfflowsfthatfarefdirectlyfrelatedftofthefacquisitionforfsalefoffpro
ductivefassetsfusedfbyfthefcompany,fsuchfasfplantfandfequipment.fCashfflowsffromffinancingfac
tivitiesfconsistfoffcashfflowsfthatfarefdirectlyfrelatedftoftheffinancingfoffthefenterprise,fsuchfasfi
ssuingfsharesftofinvestors.
FinancialfAccounting,f8ce,fLibby,fLibby,fHodge,fKanaan,fSterling ©f2023fMcGraw-HillfLimited.fAllfrightsfreserved.
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f f f f f f f f f
Chapter 1 f
Financial Statements and Business Decisions
f f f f
Revised:fAugustf5,f2022
ANSWERS TO QUESTIONS
f f
1. Accountingfisfafsystemfthatfcollectsfandfprocessesf(analyzes,fmeasures,fandfrecords)ffin
ancialfinformationfaboutfanforganizationfandfreportsfthatfinformationftofdecisionfmak
ers.
2. Financialfaccountingfinvolvesfpreparationfoffthefbasicffinancialfstatementsfandfrelatedfdisclos
uresfforfexternalfdecisionfmakers.fReportingfisfgenerallyfonfafquarterlyfandfannualfbasis.fMan
agerialfaccountingfinvolvesfthefpreparationfoffdetailedfplans,fbudgets,fforecasts,fandfperform
ancefreportsfforfinternalfdecisionfmakers.fReportingfisfonfanfongoingfbasis.
3. Financialfreportsfarefusedfbyfbothfinternalfandfexternalfgroupsfandfindividuals.fThefintern
alfusersfarefthefvariousfmanagersfoffthefentity,fe.g.fmarketing,fcredit,fandfpurchasing.fThef
externalfgroupsfincludefthefowners,finvestors,fcreditors,fgovernmentalfagencies,fotherfint
erestedfparties,fandfthefpublicfatflarge.
4. Investorsfpurchasefallforfpartfoffafbusinessfandfhopeftofgainfbyfreceivingfpartfoffwhatfthefcom
panyfearnsfand/orfbyfsellingftheirfsharefoffthefcompanyfinftheffuturefatfafhigherfpricefthanfthe
yfpaid.fCreditorsflendfmoneyftofafcompanyfforfafspecificflengthfofftimefandfhopeftofgainfbyfch
argingfinterestfonfthefloan.
5. Anfaccountingfentityfisftheforganizationfforfwhichffinancialfdatafareftofbefcollected.fTypicalfacc
ountingfentitiesfarefafbusiness,fafchurch,fafgovernmentalfunit,fafuniversity,fandfotherfnonprof
itforganizationsfsuchfasfafhospital.fAfbusinessfisfdefinedfandftreatedfasfafseparatefentityfbecau
sefthefowners,fcreditors,finvestors,fandfotherfinterestedfpartiesfneedftofevaluatefitsfperform
ancefandfitsfpotentialfseparatelyffromfotherfentitiesfandffromfitsfowners.
6. NamefoffStatement AlternativefTitle
a. Statementfoffearnings Incomefstatement
b. Statementfofffinancialfposition Balancefsheet
c. Statementfoffcashfflows Cashfflowfstatement
7. Thefheadingfoffeachfofftheffourfrequiredffinancialfstatementsfshouldfincludeftheffollowing:
(a) Namefoffthefentity
(b) Titlefoffthefstatement
(c) Specificfdateforfthefperiodfofftimefitfcovers
(d) Unitfoffmeasure
FinancialfAccounting,f8ce,fLibby,fLibby,fHodge,fKanaan,fSterling ©f2023fMcGraw-HillfLimited.fAllfrightsfreserved.
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,ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
f f f f f f f f f
8. (a)
Thefpurposefoffthefstatementfoffearningsfisftofpresentfinformationfaboutfthefreven
ues,fexpenses,fandfthefnetfearningsfoffthefentityfforfafspecifiedfperiodfofftime,finforderft
ofhelpfassessfitsffinancialfperformancefduringfthatfperiod.
(b) Thefpurposefoffthefstatementfofffinancialfpositionfisftofreportftheffinancialfpositionfoff
anfentityfatfafgivenfdate,fthatfis,ftofreportfinformationfaboutfthefassets,fobligations,fa
ndfshareholders’fequityfoffthefentityfasf atfafspecificfdate.
(c) Thefstatementfoffchangesfinfequityfreportsfthefwayfthatfnetfearnings,fthefdistributionf
offnetfearningsf(dividends),fandfotherfchangesftofshareholders’fequityfaffectedfthefco
mpany’sffinancialfpositionfduringfthefaccountingfperiod.fTheffocusfinfthisfchapterfisfonf
retainedfearnings.fNetfearningsfforfthefyearfincreasesfthefbalancefoffretainedfearningsf
whereasfthefdeclarationfoffdividendsftofthefshareholdersfdecreasesfretainedfearnings
.
(d) Thefpurposefoffthefstatementfoffcashfflowsfisftofpresentfinformationfaboutfthefflowfoffc
ashfintofthefentityf(sources),fthefflowfoffcashfoutfoffthefentityf(uses),fandfthefnetfincreas
eforfdecreasefinfcashfduringfthefperiod.
9. Thefstatementfoffearningsfandfthefstatementfoffcashfflowsfarefdatedf“ForfthefYearfEndedfDec
emberf31”fbecauseftheyfreportfthefinflowsfandfoutflowsfoffresourcesfduringfafperiodfofftime.f
Infcontrast,fthefstatementfofffinancialfpositionfisfdatedf“AtfDecemberf31”fbecausefitfrepresen
tsfthefresources,fobligations,fandfshareholders’fequityfasfatfafspecificfdate,fDecemberf31.
10. Assetsfarefimportantftofinvestorsfandfcreditorsfbecausefassetsfprovidefafbasisfforfjudgingfwhe
therfsufficientfresourcesfarefavailableftofoperatefthefcompany.fLiabilitiesfarefimportantftofcre
ditorsfandfinvestorsfbecausefthefcompanyfmustfbefableftofgeneratefsufficientfcashffromfoper
ationsforfseekffurtherfborrowingftofmeetfthefpaymentsfrequiredfbyfdebtfagreements.ffIffafbusi
nessfdoesfnotfpayfitsfcreditors,ftheflawfmayfgivefthefcreditorsfthefrightftofforcefthefsalefoffasset
sfsufficientftofmeetfthef creditors’fclaims.
11. Netfearningsfisfthefexcessfofftotalfrevenuesfoverftotalfexpenses.fNetflossfisfthefexcessfofftot
alfexpensesfoverftotalfrevenues.
12. ThefaccountingfequationfforfthefstatementfoffearningsfisfRevenuesf–
fExpensesf=fNetfearnings.fRevenuesfresultffromfthefsalefoffgoodsfandfservicesftofcustomers,fr
egardlessfofftheftimingfoffcollectionfoffcashffromfcustomers.fExpensesfrepresentfthefmonetar
yfvaluefoffresourcesfthefentityfusedfup,forfconsumed,ftofearnfrevenuesfduringfthefperiod.fNetf
earningsfisfsimplyfthefexcessfoffrevenuesfoverfexpenses.
FinancialfAccounting,f8ce,fLibby,fLibby,fHodge,fKanaan,fSterling ©f2023fMcGraw-HillfLimited.fAllfrightsfreserved.
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, ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
f f f f f f f f f
13. Thefaccountingfequationfforfthefstatementfofffinancialfpositionfis:
Assetsf=fLiabilitiesf+fShareholders’fEquity
Assetsfarefthefprobablef(expected)ffuturefeconomicfbenefitsfownedfbyfthefentityfasfafresultfo
ffpastftransactions.fTheyfarefthefresourcesfownedfbyfthefbusinessfatfafgivenfpointfinftimefsuchf
asfcash,faccountsfreceivable,fmerchandisefinventory,fmachinery,fbuildings,fland,fandfpatents
.fLiabilitiesfarefprobablef(expected)fdebtsforfobligationsfoffthefentityfasfafresultfoffpastftransact
ionsfthatfwillfbefdischargedfwithfassetsf(usuallyfcash)forfservicesfinftheffuture.fTheyfarefthefobl
igationsfoffthefentityfsuchfasf accountsfpayablefandfnotes
payable.fShareholders’fequityfisffinancingfprovidedfbyfownersfoffthefbusinessfandfbyfthefnetfe
arningsfgeneratedffromfthefoperationsfoffthefbusiness.fItfisfthefclaimfoffthefownersftofthefasset
sfoffthefbusinessfafterfthefcreditors’fclaimsfhavefbeenfsatisfied.fShareholders’fequityfmayfbeft
houghtfoffasfthefresidualfinterestfbecausefitfrepresentsfassetsfminusfliabilities.
14. Thefaccountingfequationfforfretainedfearningsfis:
Beginningfretainedfearningsf+fNetfearningsf–fDividendsf=fEndingfretainedfearnings
Thefequationfbeginsfwithfbeginning-of-the-
yearfretainedfearnings,fi.e.,fthefpriorfyear’sfendingfretainedfearningsfreportedfonfthefstateme
ntfofffinancialfposition.fThefcurrentfyear'sfnetfearningsfreportedfonfthefstatementfoffearningsf
isfaddedftofthisfamountfandfthefdividendsfdeclaredfduringfthefcurrentfyearfarefsubtractedffro
mfthisfamount.fThefendingfretainedfearningsfamountfisfreportedfonfthefend-of-
periodfstatementfofffinancialfposition.
15. Thefaccountingfequationfforfthefstatementfoffcashfflowsfis:fC
ashfflowsffromfoperatingfactivities
+/–fCashfflowsffromfinvestingfactivities
+/–fCashfflowsffromffinancingfactivities
=fChangefinfcashfforfthefperiod.
Thefnetfcashfflowsfforfthefperiodfrepresentfthefincreaseforfdecreasefinfcashfthatfoccurredfduri
ngfthefperiod.fCashfflowsffromfoperatingfactivitiesfarefcashfflowsfdirectlyfrelatedftofearningfinc
omef(normalfbusinessfactivityfincludingfinterestfpaidfandfincomeftaxesfpaid).fCashfflowsffromfi
nvestingfactivitiesfcomprisefcashfflowsfthatfarefdirectlyfrelatedftofthefacquisitionforfsalefoffpro
ductivefassetsfusedfbyfthefcompany,fsuchfasfplantfandfequipment.fCashfflowsffromffinancingfac
tivitiesfconsistfoffcashfflowsfthatfarefdirectlyfrelatedftoftheffinancingfoffthefenterprise,fsuchfasfi
ssuingfsharesftofinvestors.
FinancialfAccounting,f8ce,fLibby,fLibby,fHodge,fKanaan,fSterling ©f2023fMcGraw-HillfLimited.fAllfrightsfreserved.
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