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SOLUTION MANUAL
Financi al Accounting with Confidence: Solution Manual for the 11th Edition
Elevate your grasp of financial accounting fundamentals with the Solution Manual for Financial
Accounting, 11th Edition by Robert Libby, Patricia Libby, and Frank Hodge. This essential companion
unravels the complexities of balance sheets, income statements, cash flows, and revenue recognition
through meticulously crafted, step-by-step solutions to all chapter exercises and problems. From
transaction analysis and adjusting entries to financial statement preparation and ratio analysis, it bridges
theory and practice with clear explanations, journal entries, and T-accounts.
Authored by renowned educators, the manual mirrors the textbook's real-world focus, incorporating
IFRS/GAAP insights, ethical considerations, and decision-making tools. Perfect for introductory
accounting students, it eliminates guesswork, reinforces learning, and preps you for exams like CPA or
ACCA. Ditch the stress of unsolved problems—unlock deeper insights and build a solid foundation for
career success in auditing, consulting, or corporate finance.
Exclusively on Stuvia, get instant digital access to transform your study routine. Your path to accounting
excellence starts here!
Financial Accounting, 11/e 2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,FULL SOLUTION MANUAL FOR
Financial Accounting 11th Edition Robert Libby,
Patricia Libby, Frank Hodge
Chapter 1
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and
records) financial information about an organization and reports that information
to decision makers.
2. 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.
3. 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.
4. 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.
5. 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
2-2 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 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) Income Statement (a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) Balance Sheet (b) Statement of Financial Position
(c) Cash Flow Statement (c) Statement of Cash Flows
7. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
8. (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.
(b) 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.
(c) 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.
(d) 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.
9. 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.
10. 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
Financial Accounting, 11/e 2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 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.
11. Net income is the excess of total revenues over total expenses. Net loss is the
excess of total expenses over total revenues.
12. 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.
13. 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.
14. 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.
15. 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.
16. Marketing managers and credit managers use customers' financial statements
to decide whether to extend them credit for their purchases. Purchasing
2-4 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
SOLUTION MANUAL
Financi al Accounting with Confidence: Solution Manual for the 11th Edition
Elevate your grasp of financial accounting fundamentals with the Solution Manual for Financial
Accounting, 11th Edition by Robert Libby, Patricia Libby, and Frank Hodge. This essential companion
unravels the complexities of balance sheets, income statements, cash flows, and revenue recognition
through meticulously crafted, step-by-step solutions to all chapter exercises and problems. From
transaction analysis and adjusting entries to financial statement preparation and ratio analysis, it bridges
theory and practice with clear explanations, journal entries, and T-accounts.
Authored by renowned educators, the manual mirrors the textbook's real-world focus, incorporating
IFRS/GAAP insights, ethical considerations, and decision-making tools. Perfect for introductory
accounting students, it eliminates guesswork, reinforces learning, and preps you for exams like CPA or
ACCA. Ditch the stress of unsolved problems—unlock deeper insights and build a solid foundation for
career success in auditing, consulting, or corporate finance.
Exclusively on Stuvia, get instant digital access to transform your study routine. Your path to accounting
excellence starts here!
Financial Accounting, 11/e 2-1
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,FULL SOLUTION MANUAL FOR
Financial Accounting 11th Edition Robert Libby,
Patricia Libby, Frank Hodge
Chapter 1
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and
records) financial information about an organization and reports that information
to decision makers.
2. 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.
3. 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.
4. 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.
5. 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
2-2 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 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) Income Statement (a) Statement of Earnings; Statement of
Income; Statement of Operations
(b) Balance Sheet (b) Statement of Financial Position
(c) Cash Flow Statement (c) Statement of Cash Flows
7. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
8. (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.
(b) 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.
(c) 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.
(d) 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.
9. 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.
10. 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
Financial Accounting, 11/e 2-3
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, 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.
11. Net income is the excess of total revenues over total expenses. Net loss is the
excess of total expenses over total revenues.
12. 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.
13. 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.
14. 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.
15. 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.
16. Marketing managers and credit managers use customers' financial statements
to decide whether to extend them credit for their purchases. Purchasing
2-4 Solutions Manual
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
