SOLUTION MANUAL FOR FINANCIAL
ACCOUNTING 7TH EDITION BY MICHELLE
HANLON, ROBERT MAGEE, GLENN
PFEIFFER LATEST UPDATE 2025/2026 A+
1
, Chapter 1
Introducing Financial Accounting
LEARNING OBJECTIVEs + Coverage By Question
Mini- Cases And
Exercises Problems
Exercises Projects
LO1 + Identify The Users Of Accounting
Information And Discuss The Costs And 25 28, 34 49, 50
Benefits Of Disclosure.
LO2 + Describe A Company‟s Business
Activities And Explain How These
19, 20, 21 27, 29, 32, 33 36, 37, 38, 43 47
Activities Are Represented By The
Accounting Equation.
LO3 + Introduce The Four Key Financial
Statements Including The Balance Sheet, 37, 38, 39,
Income Statement, Statement Of 22, 23, 24 30, 31 40, 41, 42, 46, 47, 49
Stockholders‟ Equity And Statement Of 43, 44, 45
Cash Flows.
LO4 + Describe The Institutions That
Regulate Financial Accounting And Their
26 34 50
Role In Establishing Generally Accepted
Accounting Principles.
LO5 + Compute Two Key Ratios That Are
Commonly Used To Assess Profitability
32, 33 36, 43, 44, 45 46, 47, 48, 49
And Risk + Return On Equity And The
Debt-To-Equity Ratio.
LO6 + Appendix 1A: Explain The
Conceptual Framework For Financial 35
Reporting.
©Cambridge Business Publishers, 2020
4-2 Financial Accounting, 6 th Edition
, QUESTIONS
QUESTION 1-1. Organizations Undertake Planning Activities That Subsequently Shape Three
Major Activities: Financing, Investing, And Operating. Financing Is The Means Used To Pay
For Resources. Investing Refers To The Buying And Selling Of Resources Necessary To
Carry Out The Organization‟s Plans. Operating Activities Are The Actual Carrying Out Of
These Plans. (Planning Is The Glue That Connects These Activities, Including The
Organization‟s Ideas, Goals And Strategies.)
QUESTION 1-2. An Organization‟s Financing Activities (Liabilities And Equity = Sources Of Funds)
Pay For Investing Activities (Assets = Uses Of Funds). An Organization Cannot Have More
Or Less Assets Than Its Liabilities And Equity Combined And, Similarly, It Cannot Have
More Or Less Liabilities And Equity Than Its Total Assets. This Means: Assets = Liabilities +
Equity. This Relation Is Called The Accounting Equation (Sometimes Called The Balance
Sheet Equation, Or BSE), And It Applies To All Organizations At All Times.
QUESTION 1-3. The Four Main Financial Statements Are: Income Statement, Balance Sheet,
Statement Of Stockholders‟ Equity, And Statement Of Cash Flows. The Income Statement
Provides Information Relating To The Company‟s Revenues, Expenses And Profitability
Over A Period Of Time. The Balance Sheet Lists The Company‟s Assets (What It Owns),
Liabilities (What It Owes), And Stockholders‟ Equity (The Residual Claims Of Its Owners) As
Of A Point In Time. The Statement Of Stockholders‟ Equity Reports On The Changes To Each
Stockholders‟ Equity Account During The Year. Some Changes To Stockholders‟ Equity,
Such As Those Resulting From The Payment Of Dividends And Unrealized Gains (Losses)
On Marketable Securities, Can Only Be Found In This Statement As They Are Not Included
In The Computation Of Net Income. The Statement Of Cash Flows Identifies The Sources
(Inflows) And Uses (Outflows) Of Cash, That Is, From What Sources The Company Has
Derived Its Cash And How That Cash Has Been Used. All Four Statements Are Necessary In
Order To Provide A Complete Picture Of The Financial Condition Of The Company.
QUESTION 1-4. The Balance Sheet Provides Information That Helps Users Understand A Company‟s
Resources (Assets) And Claims To Those Resources (Liabilities And Stockholders‟ Equity)
As Of A Given Point In Time.
An Income Statement Reports Whether The Business Has Earned A Net Income (Also
Called Profit Or Earnings) Or A Net Loss. Importantly, The Income Statement Lists The
Types And Amounts Of Revenues And Expenses Making Up Net Income Or Net Loss. The
Income Statement Covers A Period Of Time.
QUESTION 1-5. Your Authors Would Agree With Mr. Buffett. A Recent Study Of Top Financial
Officers Suggests They Find Earnings And The Year-To-Year Changes In Earnings As The
Most Important Items To Report. We Would Add Cash Flows Particularly From Operations,
And The Year-To-Year Changes.
3
, QUESTION 1-6. The Statement Of Cash Flows Reports On The Cash Inflows And Outflows Relating
To A Company‟s Operating, Investing, And Financing Activities Over A Period Of Time. The
Sum Of These Three Activities Yields The Net Change In Cash For The Period. This
Statement Is A Useful Complement To The Income Statement Which Reports On Revenues
And Expenses, But Conveys Relatively Little Information About Cash Flows.
QUESTION 1-7. Articulation Refers To The Updating Of The Balance Sheet By Information Contained
In The Income Statement Or The Statement Of Cash Flows. For Example, Retained Earnings
Is Increased Each Period By Any Profit Earned During The Period (As Reported In The
Income Statement) And Decreased Each Period By The Payment Of Dividends (As Reported
In The Statement Of Cash Flows And The Statement Of Stockholders‟ Equity). It Is By The
Process Of Articulation That The Financial Statements Are Linked.
QUESTION 1-8. Return Refers To Income, And Risk Is The Uncertainty About The Return We Expect
To Earn. The Lower The Risk, The Lower The Expected Return. For Example, Savings
Accounts Pay A Low Return Because Of The Low Risk Of A Bank Not Returning The
Principal With Interest. Higher Returns Are To Be Expected For Common Stocks As There
Is A Greater Uncertainty About The Realized Return Compared With The Expected Return.
Higher Expected Return Offsets This Higher Risk.
QUESTION 1-9. Companies Often Report More Information Than Is Required By GAAP Because The
Benefits Of Doing So Outweigh The Costs. These Benefits Often Include Lower Interest
Rates And Better Terms From Lenders, Higher Stock Prices And Greater Access To Equity
Investors, Improved Relationships With Suppliers And Customers, And Increased Ability To
Attract The Best Employees. All Of These Benefits Arise Because The Increased Disclosure
Reduces Uncertainty About The Company‟s Future Prospects.
QUESTION 1-10. External Users And Their Uses Of Accounting Information Include: (A) Lenders For
Measuring The Risk And Return Of Loans; (B) Shareholders For Assessing The Return And
Risk In Acquiring Shares; And (C) Analysts For Assessing Investment Potential. Other
Users Are Auditors, Consultants, Officers, Directors For Overseeing Management,
Employees For Judging Employment Opportunities, Regulators, Unions, Suppliers, And
Appraisers.
QUESTION 1-11. Managers Deal With A Variety Of Information About Their Employers And Customers
That Is Not Generally Available To The Public. Ethical Issues Arise Concerning The
Possibility That Managers Might Personally Benefit By Using Confidential Information.
There Is Also The Possibility That Their Employers And/Or Customers Might Be Harmed If
Certain Information Is Not Kept Confidential.
©Cambridge Business Publishers, 2020
4-4 Financial Accounting, 6 th Edition
ACCOUNTING 7TH EDITION BY MICHELLE
HANLON, ROBERT MAGEE, GLENN
PFEIFFER LATEST UPDATE 2025/2026 A+
1
, Chapter 1
Introducing Financial Accounting
LEARNING OBJECTIVEs + Coverage By Question
Mini- Cases And
Exercises Problems
Exercises Projects
LO1 + Identify The Users Of Accounting
Information And Discuss The Costs And 25 28, 34 49, 50
Benefits Of Disclosure.
LO2 + Describe A Company‟s Business
Activities And Explain How These
19, 20, 21 27, 29, 32, 33 36, 37, 38, 43 47
Activities Are Represented By The
Accounting Equation.
LO3 + Introduce The Four Key Financial
Statements Including The Balance Sheet, 37, 38, 39,
Income Statement, Statement Of 22, 23, 24 30, 31 40, 41, 42, 46, 47, 49
Stockholders‟ Equity And Statement Of 43, 44, 45
Cash Flows.
LO4 + Describe The Institutions That
Regulate Financial Accounting And Their
26 34 50
Role In Establishing Generally Accepted
Accounting Principles.
LO5 + Compute Two Key Ratios That Are
Commonly Used To Assess Profitability
32, 33 36, 43, 44, 45 46, 47, 48, 49
And Risk + Return On Equity And The
Debt-To-Equity Ratio.
LO6 + Appendix 1A: Explain The
Conceptual Framework For Financial 35
Reporting.
©Cambridge Business Publishers, 2020
4-2 Financial Accounting, 6 th Edition
, QUESTIONS
QUESTION 1-1. Organizations Undertake Planning Activities That Subsequently Shape Three
Major Activities: Financing, Investing, And Operating. Financing Is The Means Used To Pay
For Resources. Investing Refers To The Buying And Selling Of Resources Necessary To
Carry Out The Organization‟s Plans. Operating Activities Are The Actual Carrying Out Of
These Plans. (Planning Is The Glue That Connects These Activities, Including The
Organization‟s Ideas, Goals And Strategies.)
QUESTION 1-2. An Organization‟s Financing Activities (Liabilities And Equity = Sources Of Funds)
Pay For Investing Activities (Assets = Uses Of Funds). An Organization Cannot Have More
Or Less Assets Than Its Liabilities And Equity Combined And, Similarly, It Cannot Have
More Or Less Liabilities And Equity Than Its Total Assets. This Means: Assets = Liabilities +
Equity. This Relation Is Called The Accounting Equation (Sometimes Called The Balance
Sheet Equation, Or BSE), And It Applies To All Organizations At All Times.
QUESTION 1-3. The Four Main Financial Statements Are: Income Statement, Balance Sheet,
Statement Of Stockholders‟ Equity, And Statement Of Cash Flows. The Income Statement
Provides Information Relating To The Company‟s Revenues, Expenses And Profitability
Over A Period Of Time. The Balance Sheet Lists The Company‟s Assets (What It Owns),
Liabilities (What It Owes), And Stockholders‟ Equity (The Residual Claims Of Its Owners) As
Of A Point In Time. The Statement Of Stockholders‟ Equity Reports On The Changes To Each
Stockholders‟ Equity Account During The Year. Some Changes To Stockholders‟ Equity,
Such As Those Resulting From The Payment Of Dividends And Unrealized Gains (Losses)
On Marketable Securities, Can Only Be Found In This Statement As They Are Not Included
In The Computation Of Net Income. The Statement Of Cash Flows Identifies The Sources
(Inflows) And Uses (Outflows) Of Cash, That Is, From What Sources The Company Has
Derived Its Cash And How That Cash Has Been Used. All Four Statements Are Necessary In
Order To Provide A Complete Picture Of The Financial Condition Of The Company.
QUESTION 1-4. The Balance Sheet Provides Information That Helps Users Understand A Company‟s
Resources (Assets) And Claims To Those Resources (Liabilities And Stockholders‟ Equity)
As Of A Given Point In Time.
An Income Statement Reports Whether The Business Has Earned A Net Income (Also
Called Profit Or Earnings) Or A Net Loss. Importantly, The Income Statement Lists The
Types And Amounts Of Revenues And Expenses Making Up Net Income Or Net Loss. The
Income Statement Covers A Period Of Time.
QUESTION 1-5. Your Authors Would Agree With Mr. Buffett. A Recent Study Of Top Financial
Officers Suggests They Find Earnings And The Year-To-Year Changes In Earnings As The
Most Important Items To Report. We Would Add Cash Flows Particularly From Operations,
And The Year-To-Year Changes.
3
, QUESTION 1-6. The Statement Of Cash Flows Reports On The Cash Inflows And Outflows Relating
To A Company‟s Operating, Investing, And Financing Activities Over A Period Of Time. The
Sum Of These Three Activities Yields The Net Change In Cash For The Period. This
Statement Is A Useful Complement To The Income Statement Which Reports On Revenues
And Expenses, But Conveys Relatively Little Information About Cash Flows.
QUESTION 1-7. Articulation Refers To The Updating Of The Balance Sheet By Information Contained
In The Income Statement Or The Statement Of Cash Flows. For Example, Retained Earnings
Is Increased Each Period By Any Profit Earned During The Period (As Reported In The
Income Statement) And Decreased Each Period By The Payment Of Dividends (As Reported
In The Statement Of Cash Flows And The Statement Of Stockholders‟ Equity). It Is By The
Process Of Articulation That The Financial Statements Are Linked.
QUESTION 1-8. Return Refers To Income, And Risk Is The Uncertainty About The Return We Expect
To Earn. The Lower The Risk, The Lower The Expected Return. For Example, Savings
Accounts Pay A Low Return Because Of The Low Risk Of A Bank Not Returning The
Principal With Interest. Higher Returns Are To Be Expected For Common Stocks As There
Is A Greater Uncertainty About The Realized Return Compared With The Expected Return.
Higher Expected Return Offsets This Higher Risk.
QUESTION 1-9. Companies Often Report More Information Than Is Required By GAAP Because The
Benefits Of Doing So Outweigh The Costs. These Benefits Often Include Lower Interest
Rates And Better Terms From Lenders, Higher Stock Prices And Greater Access To Equity
Investors, Improved Relationships With Suppliers And Customers, And Increased Ability To
Attract The Best Employees. All Of These Benefits Arise Because The Increased Disclosure
Reduces Uncertainty About The Company‟s Future Prospects.
QUESTION 1-10. External Users And Their Uses Of Accounting Information Include: (A) Lenders For
Measuring The Risk And Return Of Loans; (B) Shareholders For Assessing The Return And
Risk In Acquiring Shares; And (C) Analysts For Assessing Investment Potential. Other
Users Are Auditors, Consultants, Officers, Directors For Overseeing Management,
Employees For Judging Employment Opportunities, Regulators, Unions, Suppliers, And
Appraisers.
QUESTION 1-11. Managers Deal With A Variety Of Information About Their Employers And Customers
That Is Not Generally Available To The Public. Ethical Issues Arise Concerning The
Possibility That Managers Might Personally Benefit By Using Confidential Information.
There Is Also The Possibility That Their Employers And/Or Customers Might Be Harmed If
Certain Information Is Not Kept Confidential.
©Cambridge Business Publishers, 2020
4-4 Financial Accounting, 6 th Edition
