Solution Manual for Financial Accounting 11th Edition Robert Libby, Patricia Libby, Complete Chapters 1 - 13, Verified Newest Version

,SOLUTION MANUAL FOR k p k p




Financial Accounting 11th Edition Robert Libby,
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Patricia Libby, Frank Hodge
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Chapter 1 kp




Financial Statements and Business Decisions
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ANSWERS TO QUESTIONS kp kp




1. Accounting is a system that collects and processes (analyzes, measures, and
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records) financial information about an organization and reports that
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information to decision makers.
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2. Financial accounting involves preparation of the four basic financial statements
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and related disclosures for external decision makers. Managerial accounting
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involves the preparation of detailed plans, budgets, forecasts, and
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performance reports for internal decision makers.
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3. Financial reports are used by both internal and external groups and individuals.
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The internal groups are comprised of the various managers of the entity. The
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external groups include the owners, investors, creditors, governmental
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agencies, other interested parties, and the public at large.
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4. Investors purchase all or part of a business and hope to gain by receiving
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part of what the company earns and/or selling their ownership interest in the
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company in the future at a higher price than they paid. Creditors lend money
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to a company for a specific length of time and hope to gain by charging
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interest on the loan.
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,5. In a society, each organization can be defined as a separate accounting entity.
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An accounting entity is the organization for which financial data are to be
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collected. Typical accounting entities are a business, a church, a
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governmental unit, a university and other nonprofit organizations such as a
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hospital and a welfare organization. A business typically is defined and
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treated as a separate entity because the owners, creditors, investors, and
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other interested parties need to evaluate its performance and its potential
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separately from other entities and from its owners.
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6. Name of Statement kp kp Alternative Title kp


(a) Income Statement kp (a) Statement of Earnings; Statement of
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Income; Statement of Operations kp kp kp


(b) Balance Sheet kp (b) Statement of Financial Position
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(c) Cash Flow Statement kp kp (c) Statement of Cash Flows
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7. The heading of each of the four required financial statements should include
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the following:
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(a) Name of the entity kp kp kp


(b) Name of the statement kp kp kp


(c) Date of the statement, or the period of time
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(d) Unit of measure kp kp




8. (a) The purpose of the income statement is to present information about the
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revenues, expenses, and the net income of an entity for a specified
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period of time.
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(b) The purpose of the balance sheet is to report the financial position of an
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entity at a given date, that is, to report information about the assets,
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liabilities and stockholders’ equity of the entity as of a specific date.
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(c) The purpose of the statement of cash flows is to present information
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about the flow of cash into the entity (sources), the flow of cash out of
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the entity (uses), and the net increase or decrease in cash during the
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period.
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(d) The statement of stockholders’ equity reports the changes in each of the
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company’s stockholders’ equity accounts during the accounting period,
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including issue and repurchase of stock and the way that net income
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and distribution of dividends affected the retained earnings of the
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company during that period.
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9. The income statement and the statement of cash flows are dated ―For the
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Year Ended December 31‖ because they report the inflows and outflows of
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resources during a period of time. In contrast, the balance sheet is dated
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―At December 31‖ because it represents the resources, obligations, and
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stockholders’ equity at a specific date.
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, 10. Assets are important to creditors and investors because assets provide a
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basis for judging whether sufficient resources are available to operate the
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company. Assets are also important because they could be sold for cash in
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the event the company goes out of business. Liabilities are important to
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creditors and investors because the company must be able to generate
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sufficient cash from operations or further borrowing to meet the payments
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required by debt agreements. If a business does not pay its creditors, the
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law may give the creditors the right to force the sale of assets sufficient to
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meet their claims.
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11. Net income is the excess of total revenues over total expenses. Net loss
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is the excess of total expenses over total revenues.
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12. The equation for the income statement is Revenues - Expenses = Net
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Income (or Net Loss if the amount is negative). Thus, the three major items
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reported on the income statement are (1) revenues, (2) expenses, and (3)
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net income.
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13. The equation for the balance sheet (also known as the basic accounting
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equation) is: Assets = Liabilities + Stockholders’ Equity. Assets are the
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probable (expected) future economic benefits owned by the entity as a result
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of past transactions. They are the resources owned by the business at a
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given point in time such as cash, receivables, inventory, machinery, buildings,
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land, and patents. Liabilities are probable (expected) debts or obligations of
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the entity as a result of past transactions that will be paid with assets or
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services in the future. They are the obligations of the entity such as accounts
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payable, notes payable, and bonds payable. Stockholders’ equity is financing
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provided by owners of the business and operations. It is the claim of the
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owners to the assets of the business after the creditors’ claims have been
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satisfied. It may be thought of as the residual interest because it represents
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assets minus liabilities.
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14. The equation for the statement of cash flows is: Cash flows from operating activities
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+ Cash flows from investing activities + Cash flows from financing activities =
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Change in cash for the period. The net cash flows for the period represent
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the increase or decrease in cash that occurred during the period. Cash flows
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from operating activities are cash flows directly related to earning income
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(normal business activity including interest paid and income taxes paid). Cash
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flows from investing activities include cash flows that are related to the
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acquisition or sale of productive assets used by the company. Cash flows from
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financing activities are directly related to the financing of the enterprise itself.
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15. The retained earnings equation is: Beginning Retained Earnings + Net
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Income - Dividends = Ending Retained Earnings. It begins with beginning-
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of-the-year Retained Earnings which is the prior year’s ending retained
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earnings reported on the balance sheet. The current year's Net Income
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reported on the income statement is added and the current year's
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Dividends are subtracted from this amount. The ending Retained Earnings
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amount is reported on the end-of-period balance sheet.
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