SOLUTION MANUAL
Financial Accounting
,TABLE OF CONTENTS
CHAPTER 1: Financial Statements And Business Decisions
Focus Company: Le-Nature’s Inc.
CHAPTER 2: Investing And Financing Decisions And The Accounting
System
Focus Company: Chipotle Mexican Grill
CHAPTER 3: Operating Decisions And The Accounting System
Focus Company: Chipotle Mexican Grill
CHAPTER 4: Adjustments, Financial Statements, And The Closing Process
Focus Company: Chipotle Mexican Grill
CHAPTER 5: Communicating And Analyzing Accounting Information
Focus Company: Apple Inc.
CHAPTER 6: Reporting And Interpreting Sales Revenue, Receivables, And
Cash
Focus Company: Skechers U.S.A.
CHAPTER 7: Reporting And Interpreting Cost Of Goods Sold And
Inventory
Focus Company: Harley-Davidson, Inc.
CHAPTER 8: Reporting And Interpreting Property, Plant, And Equipment;
Intangibles; And Natural Resources
Focus Company: Fedex Corporation
CHAPTER 9: Reporting And Interpreting Liabilities
Focus Company: Starbucks
CHAPTER 10: Reporting And Interpreting Bond Securities
Focus Company: Amazon
CHAPTER 11: Reporting And Interpreting Stockholders’ Equity
Focus Company: Microsoft
CHAPTER 12: Statement Of Cash Flows
Focus Company: National Beverage Corporation
CHAPTER 13: Analyzing Financial Statements
Focus Company: The Home Depot
,SOLUTION MANUAL FOR
Financial Accounting 11th Edition Robert
Libby, Patricia Libby, Frank Hodge
Chapter 1
Financial Statements And Business Decisions
ANSWERS TO QUESTIONS
Accounting Is A System That Collects And Processes (Analyzes, Measures, And
Records) Financial Information About An Organization And Reports That
Information To Decision Makers.
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.
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.
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.
, 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) Statement Of Earnings; Statement
(A) Income Statement Of
Income; Statement Of Operations
(B) Balance Sheet (B) Statement Of Financial Position
(C) Cash Flow Statement (C) Statement Of Cash Flows
The Heading Of Each Of The Four Required Financial Statements Should
Include The Following:
Name Of The Entity
Name Of The Statement
Date Of The Statement, Or The Period Of Time
Unit Of Measure
(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.
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.
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.
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.
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.
,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.
Net Income Is The Excess Of Total Revenues Over Total Expenses. Net Loss
Is The Excess Of Total Expenses Over Total Revenues.
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.
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.
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.
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 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.
, Marketing Managers And Credit Managers Use Customers' Financial Statements
To Decide Whether To Extend Them Credit For Their Purchases. Purchasing
Managers Use Potential Suppliers' Financial Statements To Judge Whether The
Suppliers Have The Resources Necessary To Meet Current And Future Demand.
Human Resource Managers Use Financial Statements As A Basis For Contract
Negotiations, To Determine What Pay Rates The Company Can Afford. The Net
Income Figure Even Serves As A Basis To Pay Bonuses Not Only To
Management, But To Other Employees Through Profit Sharing Plans.
The Securities And Exchange Commission (SEC) Is The U.S. Government
Agency Which Determines The Financial Statements That Public Companies
Must Provide To Stockholders And The Measurement Rules Used In Producing
Those Statements. The Financial Accounting Standards Board (FASB) Is The
Private Sector Body Given The Primary Responsibility To Work Out The Detailed
Rules Which Become Generally Accepted Accounting Principles.
Management Is Responsible For Preparing The Financial Statements And Other
Information Contained In The Annual Report And For The Maintenance Of A
System Of Internal Accounting Policies, Procedures And Controls. These Measures
Are Intended To Provide Reasonable Assurance, At Appropriate Cost, That
Transactions Are Processed In Accordance With Company Authorization As Well
As Properly Recorded And Reported In The Financial Statements, And That Assets
Are Adequately Safeguarded. Independent Auditors Examine The Financial
Reports (Prepared By Management) And The Underlying Records To Assure That
The Reports Represent What They Claim And Conform With Generally Accepted
Accounting Principles (GAAP).
A Sole Proprietorship Is An Unincorporated Business Owned By One Individual. A
Partnership Is An Unincorporated Association Of Two Or More Individuals To Carry
On A Business. A Corporation Is A Business That Is Organized Under The Laws Of
A Particular State Whereby A Charter Is Granted And The Entity Is Authorized To
Issue Shares Of Stock As Evidence Of Ownership By The Owners (I.E.,
Stockholders).
A CPA Firm Normally Renders Three Services: Auditing, Management Advisory
Services, And Tax Services. Auditing Involves Examination Of The Records And
Financial Reports To Determine Whether They ―Fairly Present‖ The Financial
Position And Results Of Operations Of The Entity. Management Advisory Services
Involve Management Advice To Individual Business Enterprises And Other
Entities, Much Like Those Provided By A Consulting Firm. Tax Services Involve
Providing Tax Planning Advice To Clients (Both Individuals And Businesses) And
Preparation Of Their Tax Returns.
ANSWERS TO MULTIPLE CHOICE
1. B) 2. D) 3. D) 4. C) 5. A)
6. D) 7. A) 8. A) 9. C) 10. B)
, Authors' Recommended Solution Time
(Time In Minutes)
Alternate Cases And
Mini-Exercises Exercises Problems Problems Projects
No. Time No. Time No. Time No. Time No. Time
1 5 1 12 1 45 1 45 1 20
2 5 2 12 2 45 2 45 2 30
3 5 3 12 3 45 3 45 3 30
4 20 4 45
5 25 5 60
6 20 6 30
7 15 7 20
8 25 Continuing 8 *
9 25 Problem
10 25 1 45
30
30
15
35
12
Due To The Nature Of These Cases And Projects, It Is Very Difficult To Estimate The
Amount Of Time Students Will Need To Complete The Assignment. As With Any Open-
Ended Project, It Is Possible For Students To Devote A Large Amount Of Time To These
Assignments. While Students Often Benefit From The Extra Effort, We Find That Some
Become Frustrated By The Perceived Difficulty Of The Task. You Can Reduce Student
Frustration And Anxiety By Making Your Expectations Clear. For Example, When Our
Goal Is To Sharpen Research Skills, We Devote Class Time To Discussing Research
Strategies. When We Want The Students To Focus On A Real Accounting Issue, We
Offer Suggestions About Possible Companies Or Industries.
Financial Accounting
,TABLE OF CONTENTS
CHAPTER 1: Financial Statements And Business Decisions
Focus Company: Le-Nature’s Inc.
CHAPTER 2: Investing And Financing Decisions And The Accounting
System
Focus Company: Chipotle Mexican Grill
CHAPTER 3: Operating Decisions And The Accounting System
Focus Company: Chipotle Mexican Grill
CHAPTER 4: Adjustments, Financial Statements, And The Closing Process
Focus Company: Chipotle Mexican Grill
CHAPTER 5: Communicating And Analyzing Accounting Information
Focus Company: Apple Inc.
CHAPTER 6: Reporting And Interpreting Sales Revenue, Receivables, And
Cash
Focus Company: Skechers U.S.A.
CHAPTER 7: Reporting And Interpreting Cost Of Goods Sold And
Inventory
Focus Company: Harley-Davidson, Inc.
CHAPTER 8: Reporting And Interpreting Property, Plant, And Equipment;
Intangibles; And Natural Resources
Focus Company: Fedex Corporation
CHAPTER 9: Reporting And Interpreting Liabilities
Focus Company: Starbucks
CHAPTER 10: Reporting And Interpreting Bond Securities
Focus Company: Amazon
CHAPTER 11: Reporting And Interpreting Stockholders’ Equity
Focus Company: Microsoft
CHAPTER 12: Statement Of Cash Flows
Focus Company: National Beverage Corporation
CHAPTER 13: Analyzing Financial Statements
Focus Company: The Home Depot
,SOLUTION MANUAL FOR
Financial Accounting 11th Edition Robert
Libby, Patricia Libby, Frank Hodge
Chapter 1
Financial Statements And Business Decisions
ANSWERS TO QUESTIONS
Accounting Is A System That Collects And Processes (Analyzes, Measures, And
Records) Financial Information About An Organization And Reports That
Information To Decision Makers.
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.
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.
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.
, 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) Statement Of Earnings; Statement
(A) Income Statement Of
Income; Statement Of Operations
(B) Balance Sheet (B) Statement Of Financial Position
(C) Cash Flow Statement (C) Statement Of Cash Flows
The Heading Of Each Of The Four Required Financial Statements Should
Include The Following:
Name Of The Entity
Name Of The Statement
Date Of The Statement, Or The Period Of Time
Unit Of Measure
(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.
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.
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.
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.
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.
,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.
Net Income Is The Excess Of Total Revenues Over Total Expenses. Net Loss
Is The Excess Of Total Expenses Over Total Revenues.
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.
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.
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.
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 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.
, Marketing Managers And Credit Managers Use Customers' Financial Statements
To Decide Whether To Extend Them Credit For Their Purchases. Purchasing
Managers Use Potential Suppliers' Financial Statements To Judge Whether The
Suppliers Have The Resources Necessary To Meet Current And Future Demand.
Human Resource Managers Use Financial Statements As A Basis For Contract
Negotiations, To Determine What Pay Rates The Company Can Afford. The Net
Income Figure Even Serves As A Basis To Pay Bonuses Not Only To
Management, But To Other Employees Through Profit Sharing Plans.
The Securities And Exchange Commission (SEC) Is The U.S. Government
Agency Which Determines The Financial Statements That Public Companies
Must Provide To Stockholders And The Measurement Rules Used In Producing
Those Statements. The Financial Accounting Standards Board (FASB) Is The
Private Sector Body Given The Primary Responsibility To Work Out The Detailed
Rules Which Become Generally Accepted Accounting Principles.
Management Is Responsible For Preparing The Financial Statements And Other
Information Contained In The Annual Report And For The Maintenance Of A
System Of Internal Accounting Policies, Procedures And Controls. These Measures
Are Intended To Provide Reasonable Assurance, At Appropriate Cost, That
Transactions Are Processed In Accordance With Company Authorization As Well
As Properly Recorded And Reported In The Financial Statements, And That Assets
Are Adequately Safeguarded. Independent Auditors Examine The Financial
Reports (Prepared By Management) And The Underlying Records To Assure That
The Reports Represent What They Claim And Conform With Generally Accepted
Accounting Principles (GAAP).
A Sole Proprietorship Is An Unincorporated Business Owned By One Individual. A
Partnership Is An Unincorporated Association Of Two Or More Individuals To Carry
On A Business. A Corporation Is A Business That Is Organized Under The Laws Of
A Particular State Whereby A Charter Is Granted And The Entity Is Authorized To
Issue Shares Of Stock As Evidence Of Ownership By The Owners (I.E.,
Stockholders).
A CPA Firm Normally Renders Three Services: Auditing, Management Advisory
Services, And Tax Services. Auditing Involves Examination Of The Records And
Financial Reports To Determine Whether They ―Fairly Present‖ The Financial
Position And Results Of Operations Of The Entity. Management Advisory Services
Involve Management Advice To Individual Business Enterprises And Other
Entities, Much Like Those Provided By A Consulting Firm. Tax Services Involve
Providing Tax Planning Advice To Clients (Both Individuals And Businesses) And
Preparation Of Their Tax Returns.
ANSWERS TO MULTIPLE CHOICE
1. B) 2. D) 3. D) 4. C) 5. A)
6. D) 7. A) 8. A) 9. C) 10. B)
, Authors' Recommended Solution Time
(Time In Minutes)
Alternate Cases And
Mini-Exercises Exercises Problems Problems Projects
No. Time No. Time No. Time No. Time No. Time
1 5 1 12 1 45 1 45 1 20
2 5 2 12 2 45 2 45 2 30
3 5 3 12 3 45 3 45 3 30
4 20 4 45
5 25 5 60
6 20 6 30
7 15 7 20
8 25 Continuing 8 *
9 25 Problem
10 25 1 45
30
30
15
35
12
Due To The Nature Of These Cases And Projects, It Is Very Difficult To Estimate The
Amount Of Time Students Will Need To Complete The Assignment. As With Any Open-
Ended Project, It Is Possible For Students To Devote A Large Amount Of Time To These
Assignments. While Students Often Benefit From The Extra Effort, We Find That Some
Become Frustrated By The Perceived Difficulty Of The Task. You Can Reduce Student
Frustration And Anxiety By Making Your Expectations Clear. For Example, When Our
Goal Is To Sharpen Research Skills, We Devote Class Time To Discussing Research
Strategies. When We Want The Students To Focus On A Real Accounting Issue, We
Offer Suggestions About Possible Companies Or Industries.
