,SOLUTION MANUAL FOR p p
Financial Accounting 11th Edition Robert Libby, p p p p p
Patricia Libby, Frank Hodge
p p p p
Chapter 1 p
Financial Statements and Business Decisions p p p p
ANSWERS TO QUESTIONS p p
1. Accounting is a system that collects and processes (analyzes, measures, and
p p p p p p p p p p
records) financial information about an organization and reports that information to
p p p p p p p p p p p
decision makers.
p p
2. Financial accounting involves preparation of the four basic financial statements and
p p p p p p p p p p
related disclosures for external decision makers. Managerial accounting involves
p p p p p p p p p
the preparation of detailed plans, budgets, forecasts, and performance reports for
p p p p p p p p p p p
internal decision makers.
p p p
3. Financial reports are used by both internal and external groups and individuals. The
p p p p p p p p p p p p
internal groups are comprised of the various managers of the entity. The external
p p p p p p p p p p p p p
groups include the owners, investors, creditors, governmental agencies, other
p p p p p p p p p
interested parties, and the public at large.
p p p p p p p
4. Investors purchase all or part of a business and hope to gain by receiving part of
p p p p p p p p p p p p p p p
what the company earns and/or selling their ownership interest in the company
p p p p p p p p p p p p
in the future at a higher price than they paid. Creditors lend money to a company
p p p p p p p p p p p p p p p p
for a specific length of time and hope to gain by charging interest on the loan.
p p p p p p p p p p p p p p p p
,5. In a society, each organization can be defined as a separate accounting entity. An
p p p p p p p p p p p p p
accounting entity is the organization for which financial data are to be collected.
p p p p p p p p p p p p p
Typical accounting entities are a business, a church, a governmental unit, a
p p p p p p p p p p p p
university and other nonprofit organizations such as a hospital and a welfare
p p p p p p p p p p p p
organization. A business typically is defined and treated as a separate entity
p p p p p p p p p p p p
because the owners, creditors, investors, and other interested parties need to
p p p p p p p p p p p
evaluate its performance and its potential separately from other entities and from its
p p p p p p p p p p p p p
owners.
p
6. Name of Statement p p Alternative Title p
(a) Income Statement p (a) Statement of Earnings; Statement of
p p p p p
Income; Statement of Operations p p p
(b) Balance Sheet p (b) Statement of Financial Position
p p p p
(c) Cash Flow Statement p p (c) Statement of Cash Flows
p p p p
7. The heading of each of the four required financial statements should include the
p p p p p p p p p p p p
following:
p
(a) Name of the entity p p p
(b) Name of the statement p p p
(c) Date of the statement, or the period of time
p p p p p p p p
(d) Unit of measure p p
8. (a) The purpose of the income statement is to present information about the
p p p p p p p p p p p
revenues, expenses, and the net income of an entity for a specified period of
p p p p p p p p p p p p p p
time.
p
(b) The purpose of the balance sheet is to report the financial position of an entity
p p p p p p p p p p p p p p
at a given date, that is, to report information about the assets, liabilities and
p p p p p p p p p p p p p p
stockholders’ equity of the entity as of a specific date.
p p p p p p p p p p
(c) The purpose of the statement of cash flows is to present information about the
p p p p p p p p p p p p p
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
p p p p p p p p p p p p p p p p
and the net increase or decrease in cash during the period.
p p p p p p p p p p p
(d) The statement of stockholders’ equity reports the changes in each of the
p p p p p p p p p p p
company’s stockholders’ equity accounts during the accounting period,
p p p p p p p p
including issue and repurchase of stock and the way that net income and
p p p p p p p p p p p p p
distribution of dividends affected the retained earnings of the company during
p p p p p p p p p p p
that period.
p p
9. The income statement and the statement of cash flows are dated ―For the Year
p p p p p p p p p p p p p
Ended December 31‖ because they report the inflows and outflows of resources
p p p p p p p p p p p p
during a period of time. In contrast, the balance sheet is dated ―At December 31‖
p p p p p p p p p p p p p p p
because it represents the resources, obligations, and stockholders’ equity at a
p p p p p p p p p p p
specific date.
p p
, 10. Assets are important to creditors and investors because assets provide a basis for
p p p p p p p p p p p p
judging whether sufficient resources are available to operate the company. Assets
p p p p p p p p p p p
are also important because they could be sold for cash in the event the company
p p p p p p p p p p p p p p p
goes out of business. Liabilities are important to creditors and investors because
p p p p p p p p p p p p
the company must be able to generate sufficient cash from operations or further
p p p p p p p p p p p p p
borrowing to meet the payments required by debt agreements. If a business does
p p p p p p p p p p p p p
not pay its creditors, the law may give the creditors the right to force the sale of
p p p p p p p p p p p p p p p p p
assets sufficient to meet their claims.
p p p p p p
11. Net income is the excess of total revenues over total expenses. Net loss is the
p p p p p p p p p p p p p p
excess of total expenses over total revenues.
p p p p p p p
12. The equation for the income statement is Revenues - Expenses = Net Income (or
p p p p p p p p p p p p p
Net Loss if the amount is negative). Thus, the three major items reported on the
p p p p p p p p p p p p p p p
income statement are (1) revenues, (2) expenses, and (3) net income.
p p p p p p p p p p p
13. The equation for the balance sheet (also known as the basic accounting equation)
p p p p p p p p p p p p
is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
p p p p p p p p p p p p
future economic benefits owned by the entity as a result of past transactions.
p p p p p p p p p p p p p
pThey are the resources owned by the business at a given point in time such as
p p p p p p p p p p p p p p p
cash, receivables, inventory, machinery, buildings, land, and patents. Liabilities
p p p p p p p p p
are probable (expected) debts or obligations of the entity as a result of past
p p p p p p p p p p p p p p
transactions that will be paid with assets or services in the future. They are the
p p p p p p p p p p p p p p p
obligations of the entity such as accounts payable, notes payable, and bonds
p p p p p p p p p p p p
payable. Stockholders’ equity is financing provided by owners of the business and
p p p p p p p p p p p p
operations. It is the claim of the owners to the assets of the business after the
p p p p p p p p p p p p p p p p
creditors’ claims have been satisfied. It may be thought of as the residual interest
p p p p p p p p p p p p p p
because it represents assets minus liabilities.
p p p p p p
14. The equation for the statement of cash flows is: Cash flows from operating activities
p p p p p p p p p p p p p
+ Cash flows from investing activities + Cash flows from financing activities =
p p p p p p p p p p p p
Change in cash for the period. The net cash flows for the period represent the
p p p p p p p p p p p p p p p
increase or decrease in cash that occurred during the period. Cash flows from
p p p p p p p p p p p p p
operating activities are cash flows directly related to earning income (normal
p p p p p p p p p p p
business activity including interest paid and income taxes paid). Cash flows from
p p p p p p p p p p p p
investing activities include cash flows that are related to the acquisition or sale of
p p p p p p p p p p p p p p
productive assets used by the company. Cash flows from financing activities are
p p p p p p p p p p p p
directly related to the financing of the enterprise itself.
p p p p p p p p p
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
p p p p p p p p p p p
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
p p p p p p p p p
Retained Earnings which is the prior year’s ending retained earnings reported on
p p p p p p p p p p p p
the balance sheet. The current year's Net Income reported on the income
p p p p p p p p p p p p
statement is added and the current year's Dividends are subtracted from this
p p p p p p p p p p p p
amount. The ending Retained Earnings amount is reported on the end-of-period
p p p p p p p p p p p
balance sheet.
p p
Financial Accounting 11th Edition Robert Libby, p p p p p
Patricia Libby, Frank Hodge
p p p p
Chapter 1 p
Financial Statements and Business Decisions p p p p
ANSWERS TO QUESTIONS p p
1. Accounting is a system that collects and processes (analyzes, measures, and
p p p p p p p p p p
records) financial information about an organization and reports that information to
p p p p p p p p p p p
decision makers.
p p
2. Financial accounting involves preparation of the four basic financial statements and
p p p p p p p p p p
related disclosures for external decision makers. Managerial accounting involves
p p p p p p p p p
the preparation of detailed plans, budgets, forecasts, and performance reports for
p p p p p p p p p p p
internal decision makers.
p p p
3. Financial reports are used by both internal and external groups and individuals. The
p p p p p p p p p p p p
internal groups are comprised of the various managers of the entity. The external
p p p p p p p p p p p p p
groups include the owners, investors, creditors, governmental agencies, other
p p p p p p p p p
interested parties, and the public at large.
p p p p p p p
4. Investors purchase all or part of a business and hope to gain by receiving part of
p p p p p p p p p p p p p p p
what the company earns and/or selling their ownership interest in the company
p p p p p p p p p p p p
in the future at a higher price than they paid. Creditors lend money to a company
p p p p p p p p p p p p p p p p
for a specific length of time and hope to gain by charging interest on the loan.
p p p p p p p p p p p p p p p p
,5. In a society, each organization can be defined as a separate accounting entity. An
p p p p p p p p p p p p p
accounting entity is the organization for which financial data are to be collected.
p p p p p p p p p p p p p
Typical accounting entities are a business, a church, a governmental unit, a
p p p p p p p p p p p p
university and other nonprofit organizations such as a hospital and a welfare
p p p p p p p p p p p p
organization. A business typically is defined and treated as a separate entity
p p p p p p p p p p p p
because the owners, creditors, investors, and other interested parties need to
p p p p p p p p p p p
evaluate its performance and its potential separately from other entities and from its
p p p p p p p p p p p p p
owners.
p
6. Name of Statement p p Alternative Title p
(a) Income Statement p (a) Statement of Earnings; Statement of
p p p p p
Income; Statement of Operations p p p
(b) Balance Sheet p (b) Statement of Financial Position
p p p p
(c) Cash Flow Statement p p (c) Statement of Cash Flows
p p p p
7. The heading of each of the four required financial statements should include the
p p p p p p p p p p p p
following:
p
(a) Name of the entity p p p
(b) Name of the statement p p p
(c) Date of the statement, or the period of time
p p p p p p p p
(d) Unit of measure p p
8. (a) The purpose of the income statement is to present information about the
p p p p p p p p p p p
revenues, expenses, and the net income of an entity for a specified period of
p p p p p p p p p p p p p p
time.
p
(b) The purpose of the balance sheet is to report the financial position of an entity
p p p p p p p p p p p p p p
at a given date, that is, to report information about the assets, liabilities and
p p p p p p p p p p p p p p
stockholders’ equity of the entity as of a specific date.
p p p p p p p p p p
(c) The purpose of the statement of cash flows is to present information about the
p p p p p p p p p p p p p
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
p p p p p p p p p p p p p p p p
and the net increase or decrease in cash during the period.
p p p p p p p p p p p
(d) The statement of stockholders’ equity reports the changes in each of the
p p p p p p p p p p p
company’s stockholders’ equity accounts during the accounting period,
p p p p p p p p
including issue and repurchase of stock and the way that net income and
p p p p p p p p p p p p p
distribution of dividends affected the retained earnings of the company during
p p p p p p p p p p p
that period.
p p
9. The income statement and the statement of cash flows are dated ―For the Year
p p p p p p p p p p p p p
Ended December 31‖ because they report the inflows and outflows of resources
p p p p p p p p p p p p
during a period of time. In contrast, the balance sheet is dated ―At December 31‖
p p p p p p p p p p p p p p p
because it represents the resources, obligations, and stockholders’ equity at a
p p p p p p p p p p p
specific date.
p p
, 10. Assets are important to creditors and investors because assets provide a basis for
p p p p p p p p p p p p
judging whether sufficient resources are available to operate the company. Assets
p p p p p p p p p p p
are also important because they could be sold for cash in the event the company
p p p p p p p p p p p p p p p
goes out of business. Liabilities are important to creditors and investors because
p p p p p p p p p p p p
the company must be able to generate sufficient cash from operations or further
p p p p p p p p p p p p p
borrowing to meet the payments required by debt agreements. If a business does
p p p p p p p p p p p p p
not pay its creditors, the law may give the creditors the right to force the sale of
p p p p p p p p p p p p p p p p p
assets sufficient to meet their claims.
p p p p p p
11. Net income is the excess of total revenues over total expenses. Net loss is the
p p p p p p p p p p p p p p
excess of total expenses over total revenues.
p p p p p p p
12. The equation for the income statement is Revenues - Expenses = Net Income (or
p p p p p p p p p p p p p
Net Loss if the amount is negative). Thus, the three major items reported on the
p p p p p p p p p p p p p p p
income statement are (1) revenues, (2) expenses, and (3) net income.
p p p p p p p p p p p
13. The equation for the balance sheet (also known as the basic accounting equation)
p p p p p p p p p p p p
is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
p p p p p p p p p p p p
future economic benefits owned by the entity as a result of past transactions.
p p p p p p p p p p p p p
pThey are the resources owned by the business at a given point in time such as
p p p p p p p p p p p p p p p
cash, receivables, inventory, machinery, buildings, land, and patents. Liabilities
p p p p p p p p p
are probable (expected) debts or obligations of the entity as a result of past
p p p p p p p p p p p p p p
transactions that will be paid with assets or services in the future. They are the
p p p p p p p p p p p p p p p
obligations of the entity such as accounts payable, notes payable, and bonds
p p p p p p p p p p p p
payable. Stockholders’ equity is financing provided by owners of the business and
p p p p p p p p p p p p
operations. It is the claim of the owners to the assets of the business after the
p p p p p p p p p p p p p p p p
creditors’ claims have been satisfied. It may be thought of as the residual interest
p p p p p p p p p p p p p p
because it represents assets minus liabilities.
p p p p p p
14. The equation for the statement of cash flows is: Cash flows from operating activities
p p p p p p p p p p p p p
+ Cash flows from investing activities + Cash flows from financing activities =
p p p p p p p p p p p p
Change in cash for the period. The net cash flows for the period represent the
p p p p p p p p p p p p p p p
increase or decrease in cash that occurred during the period. Cash flows from
p p p p p p p p p p p p p
operating activities are cash flows directly related to earning income (normal
p p p p p p p p p p p
business activity including interest paid and income taxes paid). Cash flows from
p p p p p p p p p p p p
investing activities include cash flows that are related to the acquisition or sale of
p p p p p p p p p p p p p p
productive assets used by the company. Cash flows from financing activities are
p p p p p p p p p p p p
directly related to the financing of the enterprise itself.
p p p p p p p p p
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
p p p p p p p p p p p
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
p p p p p p p p p
Retained Earnings which is the prior year’s ending retained earnings reported on
p p p p p p p p p p p p
the balance sheet. The current year's Net Income reported on the income
p p p p p p p p p p p p
statement is added and the current year's Dividends are subtracted from this
p p p p p p p p p p p p
amount. The ending Retained Earnings amount is reported on the end-of-period
p p p p p p p p p p p
balance sheet.
p p
