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) 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) 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
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.
, 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.
2-4 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
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) 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) 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
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.
, 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.
2-4 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill
LLC.
