SOLUTION MANUAL FOR
t t
FinancialAccounting11thEdition
t t t t
Robert Libby, Patricia Libby, Frank Hodge
t t t t t
t
, SOLUTION MANUAL FOR t t
Financial Accounting 11th Edition Robert Libby,P
t t t t t t
atricia Libby, Frank Hodge
t t t
Chapter 1 t
Financial Statements and Business Decisions
t t t t
ANSWERS TO QUESTIONS
t t
1. Accountingtistatsystemtthattcollectstandtprocessest(analyzes,tmeasures,tandtrecords)t
financialtinformationtabouttantorganizationtandtreportstthattinformationttotdecisiontma
kers.t
2. Financialtaccountingtinvolvestpreparationtoftthetfourtbasictfinancialtstatementstandtrel
atedtdisclosurestfortexternaltdecisiontmakers.tManagerialtaccountingtinvolvestthetprep
arationtoftdetailedtplans,tbudgets,tforecasts,tandtperformancetreportstfortinternaltdecis
iontmakers.t
3. Financialtreportstaretusedtbytbothtinternaltandtexternaltgroupstandtindividuals.tThetinter
naltgroupstaretcomprisedtoftthetvarioustmanagerstoftthetentity.tThetexternaltgroupstincl
udetthetowners,tinvestors,tcreditors,tgovernmentaltagencies,tothertinterestedtparties,ta
ndtthetpublictattlarge.t
4. Investorstpurchasetalltortparttoftatbusinesstandthopettotgaintbytreceivingtparttoftwhattt
hetcompanytearnstand/ortsellingttheirtownershiptinteresttintthetcompanytintthetfuturet
attathighertpricetthanttheytpaid.tCreditorstlendtmoneyttotatcompanytfortatspecifictlengt
htofttimetandthopettotgaintbytchargingtinteresttontthetloan.t
t
, 5. Intatsociety,teachtorganizationtcantbetdefinedtastatseparatetaccountingtentity.tAntaccou
ntingtentitytistthetorganizationtfortwhichtfinancialtdatatarettotbetcollected.tTypicaltaccou
ntingtentitiestaretatbusiness,tatchurch,tatgovernmentaltunit,tatuniversitytandtothertnonpr
ofittorganizationstsuchtastathospitaltandtatwelfaretorganization.tAtbusinessttypicallytistd
efinedtandttreatedtastatseparatetentitytbecausetthetowners,tcreditors,tinvestors,tandtoth
ertinterestedtpartiestneedttotevaluatetitstperformancetandtitstpotentialtseparatelytfromto
thertentitiestandtfromtitstowners.t
6. NametoftStatement AlternativetTitle
(a) IncometStatement (a)tStatementtoftEarnings;tStatementtoft
Income;tStatementtoftOperationst
(b) BalancetSheet (b)tStatementtoftFinancialtPositiont
(c) CashtFlowtStatement (c)t StatementtoftCashtFlowst
7. Thetheadingtofteachtoftthetfourtrequiredtfinancialtstatementstshouldtincludetthetfollo
wing:t
(a) Nametoftthetentityt
(b) Nametoftthetstatementt
(c) Datetoftthetstatement,tortthetperiodtofttimet
(d) Unittoftmeasuret
8. (a)
Thetpurposetoftthetincometstatementtisttotpresenttinformationtabouttthetre
venues,texpenses,tandtthetnettincometoftantentitytfortatspecifiedtperiodtofttime.t
(b) Thetpurposetoftthetbalancetsheettisttotreporttthetfinancialtpositiontoftantentitytattatg
iventdate,tthattis,ttotreporttinformationtabouttthetassets,tliabilitiestandtstockholder
s’tequitytoftthetentitytastoftatspecifictdate.t
(c) Thetpurposetoftthetstatementtoftcashtflowstisttotpresenttinformationtabouttthetflowt
oftcashtintotthetentityt(sources),tthetflowtoftcashtouttoftthetentityt(uses),tandtthetnett
increasetortdecreasetintcashtduringtthetperiod.t
(d) Thetstatementtoftstockholders’tequitytreportstthetchangestinteachtoftthetcompan
y’ststockholders’tequitytaccountstduringtthetaccountingtperiod,tincludingtissueta
ndtrepurchasetoftstocktandtthetwaytthattnettincometandtdistributiontoftdividendsta
ffectedtthetretainedtearningstoftthetcompanytduringtthattperiod.t
9. Thetincometstatementtandtthetstatementtoftcashtflowstaretdatedt―FortthetYeartEnde
dtDecembert31‖tbecausettheytreporttthetinflowstandtoutflowstoftresourcestduringtatp
eriodtofttime.tIntcontrast,tthetbalancetsheettistdatedt―AttDecembert31‖tbecausetittrepr
esentstthetresources,tobligations,tandtstockholders’tequitytatta t specifictdate.t
t
, 10. Assetstaretimportantttotcreditorstandtinvestorstbecausetassetstprovidetatbasistfortjudg
ingtwhethertsufficienttresourcestaretavailablettotoperatetthetcompany.tAssetstaretalsot
importanttbecausettheytcouldtbetsoldtfortcashtinttheteventtthetcompanytgoestouttoftbus
iness.tLiabilitiestaretimportantttotcreditorstandtinvestorstbecausetthetcompanytmusttb
etablettotgeneratetsufficienttcashtfromtoperationstortfurthertborrowingttotmeettthetpay
mentstrequiredtbytdebttagreements.tIftatbusinesstdoestnottpaytitstcreditors,tthetlawtma
ytgivetthetcreditorstthetrightttotforcetthetsaletoftassetstsufficientttotmeetttheirtclaims.t
11. Nettincometistthetexcesstofttotaltrevenuestoverttotaltexpenses.tNettlosstistthetexce
sstofttotaltexpensestoverttotaltrevenues.t
12. ThetequationtfortthetincometstatementtistRevenuest-
tExpensest=tNettIncomet(ortNettLosstiftthetamounttistnegative).tThus,tthetthreetmajorti
temstreportedtontthetincometstatementtaret(1)trevenues,t(2)texpenses,tandt(3)tnettinc
ome.t
13. Thetequationtfortthetbalancetsheett(alsotknowntastthetbasictaccountingtequation)tis:tAs
setst=tLiabilitiest+tStockholders’tEquity.tAssetstaretthetprobablet(expected)tfuturetecon
omictbenefitstownedtbytthetentitytastatresulttoftpastttransactions.tTheytaretthetresource
stownedtbytthetbusinesstattatgiventpointtinttimetsuchtastcash,treceivables,tinventory,tm
achinery,tbuildings,tland,tandtpatents.tLiabilitiestaretprobablet(expected)tdebtstortoblig
ationstoftthetentityt astatresulttoft pastttransactionstthattwilltbetpaidtwithtassetstortservice
stintthetfuture.tTheytaretthetobligationstoftthetentitytsuchtastaccountstpayable,tnotestpa
yable,tandtbondstpayable.tStockholders’tequitytistfinancingtprovidedtbytownerstoftthetb
usinesstandtoperations.tIttistthetclaimtoftthetownersttotthetassetstoftthetbusinesstaftertth
etcreditors’tclaimsthavetbeentsatisfied.tIttmaytbetthoughttoftastthetresidualtinteresttbeca
usetittrepresentstassetstminustliabilities.t
14. Thetequationtfortthetstatementtoftcashtflowstis:tCashtflowstfromtoperatingtactivitiest
+tCashtflowstfromtinvestingtactivitiest+tCashtflowstfromtfinancingtactivitiest=tChangeti
ntcashtfortthetperiod.tThetnettcashtflowstfortthetperiodtrepresenttthetincreasetortdecre
asetintcashtthattoccurredtduringtthetperiod.tCashtflowstfromtoperatingtactivitiestaretc
ashtflowstdirectlytrelatedttotearningtincomet(normaltbusinesstactivitytincludingtintere
sttpaidtandtincomettaxestpaid).tCashtflowstfromtinvestingtactivitiestincludetcashtflows
tthattaretrelatedttotthetacquisitiontortsaletoftproductivetassetstusedtbytthetcompany.tC
ashtflowstfromtfinancingtactivitiestaretdirectlytrelatedttotthetfinancingtoftthetenterpriset
itself.t
15. Thetretainedtearningstequationtis:tBeginningtRetainedtEarningst+tNettIncomet-
tDividendst=tEndingtRetainedtEarnings.tIttbeginstwithtbeginning-of-the-
yeartRetainedtEarningstwhichtistthetpriortyear’stendingtretainedtearningstreportedto
ntthetbalancetsheet.tThetcurrenttyear'stNettIncometreportedtontthetincometstatemen
ttistaddedtandtthetcurrenttyear'stDividendstaretsubtractedtfromtthistamount.tThetendi
ngtRetainedtEarningstamounttistreportedtontthetend-of-periodtbalancetsheet.t
t
t t
FinancialAccounting11thEdition
t t t t
Robert Libby, Patricia Libby, Frank Hodge
t t t t t
t
, SOLUTION MANUAL FOR t t
Financial Accounting 11th Edition Robert Libby,P
t t t t t t
atricia Libby, Frank Hodge
t t t
Chapter 1 t
Financial Statements and Business Decisions
t t t t
ANSWERS TO QUESTIONS
t t
1. Accountingtistatsystemtthattcollectstandtprocessest(analyzes,tmeasures,tandtrecords)t
financialtinformationtabouttantorganizationtandtreportstthattinformationttotdecisiontma
kers.t
2. Financialtaccountingtinvolvestpreparationtoftthetfourtbasictfinancialtstatementstandtrel
atedtdisclosurestfortexternaltdecisiontmakers.tManagerialtaccountingtinvolvestthetprep
arationtoftdetailedtplans,tbudgets,tforecasts,tandtperformancetreportstfortinternaltdecis
iontmakers.t
3. Financialtreportstaretusedtbytbothtinternaltandtexternaltgroupstandtindividuals.tThetinter
naltgroupstaretcomprisedtoftthetvarioustmanagerstoftthetentity.tThetexternaltgroupstincl
udetthetowners,tinvestors,tcreditors,tgovernmentaltagencies,tothertinterestedtparties,ta
ndtthetpublictattlarge.t
4. Investorstpurchasetalltortparttoftatbusinesstandthopettotgaintbytreceivingtparttoftwhattt
hetcompanytearnstand/ortsellingttheirtownershiptinteresttintthetcompanytintthetfuturet
attathighertpricetthanttheytpaid.tCreditorstlendtmoneyttotatcompanytfortatspecifictlengt
htofttimetandthopettotgaintbytchargingtinteresttontthetloan.t
t
, 5. Intatsociety,teachtorganizationtcantbetdefinedtastatseparatetaccountingtentity.tAntaccou
ntingtentitytistthetorganizationtfortwhichtfinancialtdatatarettotbetcollected.tTypicaltaccou
ntingtentitiestaretatbusiness,tatchurch,tatgovernmentaltunit,tatuniversitytandtothertnonpr
ofittorganizationstsuchtastathospitaltandtatwelfaretorganization.tAtbusinessttypicallytistd
efinedtandttreatedtastatseparatetentitytbecausetthetowners,tcreditors,tinvestors,tandtoth
ertinterestedtpartiestneedttotevaluatetitstperformancetandtitstpotentialtseparatelytfromto
thertentitiestandtfromtitstowners.t
6. NametoftStatement AlternativetTitle
(a) IncometStatement (a)tStatementtoftEarnings;tStatementtoft
Income;tStatementtoftOperationst
(b) BalancetSheet (b)tStatementtoftFinancialtPositiont
(c) CashtFlowtStatement (c)t StatementtoftCashtFlowst
7. Thetheadingtofteachtoftthetfourtrequiredtfinancialtstatementstshouldtincludetthetfollo
wing:t
(a) Nametoftthetentityt
(b) Nametoftthetstatementt
(c) Datetoftthetstatement,tortthetperiodtofttimet
(d) Unittoftmeasuret
8. (a)
Thetpurposetoftthetincometstatementtisttotpresenttinformationtabouttthetre
venues,texpenses,tandtthetnettincometoftantentitytfortatspecifiedtperiodtofttime.t
(b) Thetpurposetoftthetbalancetsheettisttotreporttthetfinancialtpositiontoftantentitytattatg
iventdate,tthattis,ttotreporttinformationtabouttthetassets,tliabilitiestandtstockholder
s’tequitytoftthetentitytastoftatspecifictdate.t
(c) Thetpurposetoftthetstatementtoftcashtflowstisttotpresenttinformationtabouttthetflowt
oftcashtintotthetentityt(sources),tthetflowtoftcashtouttoftthetentityt(uses),tandtthetnett
increasetortdecreasetintcashtduringtthetperiod.t
(d) Thetstatementtoftstockholders’tequitytreportstthetchangestinteachtoftthetcompan
y’ststockholders’tequitytaccountstduringtthetaccountingtperiod,tincludingtissueta
ndtrepurchasetoftstocktandtthetwaytthattnettincometandtdistributiontoftdividendsta
ffectedtthetretainedtearningstoftthetcompanytduringtthattperiod.t
9. Thetincometstatementtandtthetstatementtoftcashtflowstaretdatedt―FortthetYeartEnde
dtDecembert31‖tbecausettheytreporttthetinflowstandtoutflowstoftresourcestduringtatp
eriodtofttime.tIntcontrast,tthetbalancetsheettistdatedt―AttDecembert31‖tbecausetittrepr
esentstthetresources,tobligations,tandtstockholders’tequitytatta t specifictdate.t
t
, 10. Assetstaretimportantttotcreditorstandtinvestorstbecausetassetstprovidetatbasistfortjudg
ingtwhethertsufficienttresourcestaretavailablettotoperatetthetcompany.tAssetstaretalsot
importanttbecausettheytcouldtbetsoldtfortcashtinttheteventtthetcompanytgoestouttoftbus
iness.tLiabilitiestaretimportantttotcreditorstandtinvestorstbecausetthetcompanytmusttb
etablettotgeneratetsufficienttcashtfromtoperationstortfurthertborrowingttotmeettthetpay
mentstrequiredtbytdebttagreements.tIftatbusinesstdoestnottpaytitstcreditors,tthetlawtma
ytgivetthetcreditorstthetrightttotforcetthetsaletoftassetstsufficientttotmeetttheirtclaims.t
11. Nettincometistthetexcesstofttotaltrevenuestoverttotaltexpenses.tNettlosstistthetexce
sstofttotaltexpensestoverttotaltrevenues.t
12. ThetequationtfortthetincometstatementtistRevenuest-
tExpensest=tNettIncomet(ortNettLosstiftthetamounttistnegative).tThus,tthetthreetmajorti
temstreportedtontthetincometstatementtaret(1)trevenues,t(2)texpenses,tandt(3)tnettinc
ome.t
13. Thetequationtfortthetbalancetsheett(alsotknowntastthetbasictaccountingtequation)tis:tAs
setst=tLiabilitiest+tStockholders’tEquity.tAssetstaretthetprobablet(expected)tfuturetecon
omictbenefitstownedtbytthetentitytastatresulttoftpastttransactions.tTheytaretthetresource
stownedtbytthetbusinesstattatgiventpointtinttimetsuchtastcash,treceivables,tinventory,tm
achinery,tbuildings,tland,tandtpatents.tLiabilitiestaretprobablet(expected)tdebtstortoblig
ationstoftthetentityt astatresulttoft pastttransactionstthattwilltbetpaidtwithtassetstortservice
stintthetfuture.tTheytaretthetobligationstoftthetentitytsuchtastaccountstpayable,tnotestpa
yable,tandtbondstpayable.tStockholders’tequitytistfinancingtprovidedtbytownerstoftthetb
usinesstandtoperations.tIttistthetclaimtoftthetownersttotthetassetstoftthetbusinesstaftertth
etcreditors’tclaimsthavetbeentsatisfied.tIttmaytbetthoughttoftastthetresidualtinteresttbeca
usetittrepresentstassetstminustliabilities.t
14. Thetequationtfortthetstatementtoftcashtflowstis:tCashtflowstfromtoperatingtactivitiest
+tCashtflowstfromtinvestingtactivitiest+tCashtflowstfromtfinancingtactivitiest=tChangeti
ntcashtfortthetperiod.tThetnettcashtflowstfortthetperiodtrepresenttthetincreasetortdecre
asetintcashtthattoccurredtduringtthetperiod.tCashtflowstfromtoperatingtactivitiestaretc
ashtflowstdirectlytrelatedttotearningtincomet(normaltbusinesstactivitytincludingtintere
sttpaidtandtincomettaxestpaid).tCashtflowstfromtinvestingtactivitiestincludetcashtflows
tthattaretrelatedttotthetacquisitiontortsaletoftproductivetassetstusedtbytthetcompany.tC
ashtflowstfromtfinancingtactivitiestaretdirectlytrelatedttotthetfinancingtoftthetenterpriset
itself.t
15. Thetretainedtearningstequationtis:tBeginningtRetainedtEarningst+tNettIncomet-
tDividendst=tEndingtRetainedtEarnings.tIttbeginstwithtbeginning-of-the-
yeartRetainedtEarningstwhichtistthetpriortyear’stendingtretainedtearningstreportedto
ntthetbalancetsheet.tThetcurrenttyear'stNettIncometreportedtontthetincometstatemen
ttistaddedtandtthetcurrenttyear'stDividendstaretsubtractedtfromtthistamount.tThetendi
ngtRetainedtEarningstamounttistreportedtontthetend-of-periodtbalancetsheet.t
t
