SOLUTIONS MANUAL
FUNDAMENTAL FINANCIAL ACCOUNTING CONCEPTS
2024 EVERGREEN RELEASE
CHAPTER NO. 01: AN INTRODUCTION TO ACCOUNTING
ANSWERS TO QUESTIONS
1. Stakeholders are the parties that use accounting information.
Stakeholders with a direct interest include owners, managers, creditors, suppliers,
and employees. These individuals are directly affected by what happens to the
business.
Stakeholders with an indirect interest include financial analysts, brokers,
attorneys, government regulators, and news reporters. These individuals use
information in the financial reports to advise and influence their clients.
Students may give many different answers under the above categories depending
on their level of experience in business.
2. Accounting provides information that is useful in making decisions by all
participants in the market for resource goods and services, both profit-oriented
and nonprofit oriented. Because accounting’s role is so important, it is often
called the language of business.
3. The primary mechanism used to allocate resources in the U.S. is competition for
resources in the open market.
4. A market is a group of people or organizations that come together for the purpose
of exchanging items of value.
5. The market for business resources involves three distinct participants: consumers,
businesses, and resource owners. See Exhibit 1-1 that illustrates how market
trilogy is involved in resource allocation.
6. Financial Resource: money
, Physical Resource: natural resources (i.e. land, forests, mine ore, petroleum, etc.),
buildings, machinery and equipment, furniture and fixtures
Labor Resource: includes both intellectual and physical labor; i.e. employees
7. Investors expect a distribution of the business’s profits as a return on their
financial investment (capital allocation).
Creditors lend financial resources to businesses and receive interest as a return or
profit on the loan.
8. Financial accounting provides information that is useful to external resource
providers.
Managerial accounting provides information that is useful to managers in
operating an organization (i.e., internal users).
9. Not-for-profit or nonprofit entities provide goods or services to consumers for
humanitarian or special reasons rather than to earn a profit for owners. For
example, certain not-for-profit entities allocate resources to provide for research
of diseases or social/environmental welfare; others allocate resources to promote
the arts and provide education.
10. The U.S. rules of accounting information measurement are called generally
accepted accounting principles (GAAP).
11. Careers in public accounting consist of providing services to the general public
from a public accounting firm. These services include auditing, tax, and
consulting services. Careers in private accounting usually consist of working for
a specific company (which would be a client of the public accounting firm)
providing a wide variety of services to the company including recording
transactions, preparing financial statements, internal auditing, and others.
12. Items reported on the financial statements are organized into classes or categories
called elements. The ten elements of financial statements are:
1. Assets
, 2. Liabilities
3. Equity (Stockholders’ Equity)
4. Investments by Owners (Contributed Capital)
5. Revenue
6. Expenses
7. Distributions (Dividends)
8. Net Income
9. Gains
10. Losses
Accounts are specific items or subclassifications of the elements. Examples of
accounts include cash, land, and common stock.
13. Assets, the economic resources of a business, are used to produce earnings.
14. The assets of a business belong to that business entity and there may be claims on
the assets. Claims on the assets belong to resource providers.
15. Creditors are individuals and/or institutions that have provided goods or services
to the business which are not yet paid for, or loaned money to the business.
These parties have first claim to the assets of the business, and the investors have
a residual interest in the assets.
16. The term “liabilities” is used to describe creditors' claims on the assets of a
business.
17. The accounting equation is:
ASSETS – LIABILITIES = STOCKHOLDERS’ EQUITY
or
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
Assets are the economic resources used by a business for the production of
revenue. Liabilities are obligations of a business to relinquish assets, provide
services, or accept other obligations. Equity, also called “residual interest” or
“net assets”, is the portion of the assets remaining after the creditors' claims have
been satisfied (i.e., Assets – Liabilities).
, 18. The owners ultimately bear the risk and collect the rewards associated with
operating a business.
19. A double-entry bookkeeping system is one in which every transaction affects at
least two accounts. A transaction can affect both assets and claims (liabilities and
equity) or only assets or only claims. In order to “balance” the accounting
equation, every transaction requires a “double entry.”
20. The right side of the accounting equation can be viewed as either sources of
assets or as obligations and commitments of the business. Assets originating
from liabilities can be viewed as sources or obligations of the business. Assets
originating from issuing stock or retaining earnings can be viewed as sources of
assets and commitments of the business.
21. The business could make a distribution of $1,000, but only $800 of it would be
classified as a dividend. A distribution can only be a dividend to the extent of
retained earnings.
22. Capital is acquired from owners by issuing stock to them. When stock is issued,
the assets of the business increase and the stockholders’ equity increases.
23. Assets that are acquired by issuing common stock are the result of investments by
owners. Assets that are acquired by using retained earnings are assets the
business acquires through its earnings activities.
24. Revenue increases the asset side of the accounting equation and also increases the
retained earnings account in the stockholders’ equity section of the equation.
25. The three primary sources of assets are (1) investments by owners (issue of
stock), (2) borrowing from creditors, and (3) earnings activities.
26. Retained earnings are a result of a business retaining its earned assets, rather than
distributing those earnings to its owners.
27. Distributions to owners, called dividends, decrease the asset side of the
accounting equation and also decrease the retained earnings account in the
stockholders’ equity section of the equation.
FUNDAMENTAL FINANCIAL ACCOUNTING CONCEPTS
2024 EVERGREEN RELEASE
CHAPTER NO. 01: AN INTRODUCTION TO ACCOUNTING
ANSWERS TO QUESTIONS
1. Stakeholders are the parties that use accounting information.
Stakeholders with a direct interest include owners, managers, creditors, suppliers,
and employees. These individuals are directly affected by what happens to the
business.
Stakeholders with an indirect interest include financial analysts, brokers,
attorneys, government regulators, and news reporters. These individuals use
information in the financial reports to advise and influence their clients.
Students may give many different answers under the above categories depending
on their level of experience in business.
2. Accounting provides information that is useful in making decisions by all
participants in the market for resource goods and services, both profit-oriented
and nonprofit oriented. Because accounting’s role is so important, it is often
called the language of business.
3. The primary mechanism used to allocate resources in the U.S. is competition for
resources in the open market.
4. A market is a group of people or organizations that come together for the purpose
of exchanging items of value.
5. The market for business resources involves three distinct participants: consumers,
businesses, and resource owners. See Exhibit 1-1 that illustrates how market
trilogy is involved in resource allocation.
6. Financial Resource: money
, Physical Resource: natural resources (i.e. land, forests, mine ore, petroleum, etc.),
buildings, machinery and equipment, furniture and fixtures
Labor Resource: includes both intellectual and physical labor; i.e. employees
7. Investors expect a distribution of the business’s profits as a return on their
financial investment (capital allocation).
Creditors lend financial resources to businesses and receive interest as a return or
profit on the loan.
8. Financial accounting provides information that is useful to external resource
providers.
Managerial accounting provides information that is useful to managers in
operating an organization (i.e., internal users).
9. Not-for-profit or nonprofit entities provide goods or services to consumers for
humanitarian or special reasons rather than to earn a profit for owners. For
example, certain not-for-profit entities allocate resources to provide for research
of diseases or social/environmental welfare; others allocate resources to promote
the arts and provide education.
10. The U.S. rules of accounting information measurement are called generally
accepted accounting principles (GAAP).
11. Careers in public accounting consist of providing services to the general public
from a public accounting firm. These services include auditing, tax, and
consulting services. Careers in private accounting usually consist of working for
a specific company (which would be a client of the public accounting firm)
providing a wide variety of services to the company including recording
transactions, preparing financial statements, internal auditing, and others.
12. Items reported on the financial statements are organized into classes or categories
called elements. The ten elements of financial statements are:
1. Assets
, 2. Liabilities
3. Equity (Stockholders’ Equity)
4. Investments by Owners (Contributed Capital)
5. Revenue
6. Expenses
7. Distributions (Dividends)
8. Net Income
9. Gains
10. Losses
Accounts are specific items or subclassifications of the elements. Examples of
accounts include cash, land, and common stock.
13. Assets, the economic resources of a business, are used to produce earnings.
14. The assets of a business belong to that business entity and there may be claims on
the assets. Claims on the assets belong to resource providers.
15. Creditors are individuals and/or institutions that have provided goods or services
to the business which are not yet paid for, or loaned money to the business.
These parties have first claim to the assets of the business, and the investors have
a residual interest in the assets.
16. The term “liabilities” is used to describe creditors' claims on the assets of a
business.
17. The accounting equation is:
ASSETS – LIABILITIES = STOCKHOLDERS’ EQUITY
or
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
Assets are the economic resources used by a business for the production of
revenue. Liabilities are obligations of a business to relinquish assets, provide
services, or accept other obligations. Equity, also called “residual interest” or
“net assets”, is the portion of the assets remaining after the creditors' claims have
been satisfied (i.e., Assets – Liabilities).
, 18. The owners ultimately bear the risk and collect the rewards associated with
operating a business.
19. A double-entry bookkeeping system is one in which every transaction affects at
least two accounts. A transaction can affect both assets and claims (liabilities and
equity) or only assets or only claims. In order to “balance” the accounting
equation, every transaction requires a “double entry.”
20. The right side of the accounting equation can be viewed as either sources of
assets or as obligations and commitments of the business. Assets originating
from liabilities can be viewed as sources or obligations of the business. Assets
originating from issuing stock or retaining earnings can be viewed as sources of
assets and commitments of the business.
21. The business could make a distribution of $1,000, but only $800 of it would be
classified as a dividend. A distribution can only be a dividend to the extent of
retained earnings.
22. Capital is acquired from owners by issuing stock to them. When stock is issued,
the assets of the business increase and the stockholders’ equity increases.
23. Assets that are acquired by issuing common stock are the result of investments by
owners. Assets that are acquired by using retained earnings are assets the
business acquires through its earnings activities.
24. Revenue increases the asset side of the accounting equation and also increases the
retained earnings account in the stockholders’ equity section of the equation.
25. The three primary sources of assets are (1) investments by owners (issue of
stock), (2) borrowing from creditors, and (3) earnings activities.
26. Retained earnings are a result of a business retaining its earned assets, rather than
distributing those earnings to its owners.
27. Distributions to owners, called dividends, decrease the asset side of the
accounting equation and also decrease the retained earnings account in the
stockholders’ equity section of the equation.
