Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 1
, CHAPTER 1 b
Introduction to Financial Statements b b b
Learning Objectives b
1. Identify the forms of business organization and the uses of accounting information.
b b b b b b b b b b b
2. Explain the three principal types of business activity.
b b b b b b b
3. Describe the four financial statements and how they are prepared.
b b b b b b b b b
*4. Explain the career opportunities in accounting.
b b b b b
ANSWERS TO QUESTIONS b b
1. The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and
b b b b b b b b b b b b b
(3) corporation.
b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
2. Advantages of a corporation are limited liability (stockholders not being personally liable for cor-
b b b b b b b b b b b b b
porate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a
b b b b b b b b b b b b b b
corporation are increased taxation and government regulations.
b b b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
3. Proprietorships and partnerships receive favorable tax treatment compared to corporations and are
b b b b b b b b b b b
easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships
b b b b b b b b b b b b b
and partnerships are unlimited liability (proprietors/partners are personally liable for all debts)
b b b b b b b b b b b b
and difficulty in obtaining financing compared to corporations.
b b b b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
4. Yes. Companies can choose one of the hybrid business forms, limited liability corporations
b b b b b b b b b b b b
b(LLCs) or subchapter S corporations, which combine the tax advantages of partnerships with
b b b b b b b b b b b b
the limited liability of corporations.
b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
5. Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay
b b b b b b b b b b b b b b b b
taxes without receiving, using, or dispensing financial information. Accounting provides financial
b b b b b b b b b b b
information to interested users through the preparation and distribution of financial statements.
b b b b b b b b b b b b
LO b1 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
6. Internal users are managers who plan, organize, and run a business. To assist management,
b b b b b b b b b b b b b
baccounting provides timely internal reports. Examples include financial comparisons of operating
b b b b b b b b b b
2 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only)
, alternatives, projections of income from new sales campaigns, forecasts of cash needs for the
b b b b b b b b b b b b b
next year, and financial statements.
b b b b b
LO b1 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
7. External users are those outside the business who have either a present or potential direct
b b b b b b b b b b b b b b
financial interest (investors and creditors) or an indirect financial interest (taxing authorities,
b b b b b b b b b b b b
regu- latory agencies, labor unions, customers, and economic planners).
b b b b b b b b b
LO b1 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
8. The four most common types of data analytics and the basic question each addresses are:
b b b b b b b b b b b b b b
Descriptive (What happened?), Diagnostic (Why did it happen?), Predictive (What is likely to
b b b b b b b b b b b b b
happen?), and Prescriptive (What should we do about it?).
b b b b b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b2 bmin. b AACSB: b nowledge b AICPA b AC: bMeasurement bAnalysis band bInterpretation
Questions Chapter 1 (Continued)
b b b
9. The three types of business activities are financing activities, investing activities, and operating
b b b b b b b b b b b b
activities. Financing activities include borrowing money and selling shares of stock. Investing
b b b b b b b b b b b b
activities include the purchase and sale of property, plant, and equipment. Operating activities
b b b b b b b b b b b b b
include selling goods, performing services, and purchasing inventory.
b b b b b b b b
LO b2 b BT: bC b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
10. Income statement. b (d) Balance sheet. b
b (a)
(b) Balance sheet. b (e) Balance sheet. b
(c) Income statement. b (f) Balance sheet. b
LO b3 b BT: bK b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
11. When a company pays dividends, it reduces the amount of assets available to pay creditors.
b b b b b b b b b b b b b b
Therefore, banks and other creditors monitor dividend payments to ensure they do not put a
b b b b b b b b b b b b b b b
company’s ability to make debt payments at risk.
b b b b b b b b
LO b3 b BT: bC b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bMeasurement bAnallysis band bInterpretation
12. Yes. Net income does appear on the income statement—it is the result of subtracting expenses
b b b b b b b b b b b b b b
from revenues. In addition, net income appears in the retained earnings statement—it is shown as
b b b b b b b b b b b b b b b
an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company
b b b b b b b b b b b b b b
is also included in the balance sheet. It is included in the retained earnings account which appears
b b b b b b b b b b b b b b b b b
in the stockholders’ equity section of the balance sheet.
b b b b b b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
13. The primary purpose of the statement of cash flows is to provide financial information about the
b b b b b b b b b b b b b b b
cash receipts and cash payments of a business for a specific period of time.
b b b b b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 3
, 14. The three categories of the statement of cash flows are operating activities, investing activities,
b b b b b b b b b b b b b
and financing activities. The categories were chosen because they represent the three principal
b b b b b b b b b b b b b
types of business activities.
b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
15. Retained earnings is the net income retained in a corporation. Retained earnings is increased by
b b b b b b b b b b b b b b
net income and is decreased by dividends and a net loss.
b b b b b b b b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
16. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity.
b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
17. (a) b Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more
b b b b b b b b b b b b b b
simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim
b b b b b b b b b b b b b
on net assets.
b b b
(b) The items that affect stockholders’ equity are issuance of common stock
b b b b b b b b b b
and the components of retained earnings (dividends, revenues, and expenses).
b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
18. The liabilities are (b) Accounts payable and (g) Salaries and wages payable.
b b b b b b b b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
19. (a) b Net income from the income statement is reported as an increase to retained earnings on
b b b b b b b b b b b b b b
b the retained earnings statement.
b b b
(b) The ending amount on the retained earnings statement is reported as the retained earnings
b b b b b b b b b b b b b
amount on the balance sheet.
b b b b b
(c) The ending amount on the statement of cash flows is reported as the cash amount on the
b b b b b b b b b b b b b b b b
balance sheet.
b b
LO b3 b BT: bC b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
20. The purpose of the management discussion and analysis section is to provide management’s
b b b b b b b b b b b b
views on its ability to pay short-term obligations, its ability to fund operations and expansion,
b b b b b b b b b b b b b b b
and its results of operations. The MD&A section is a required part of the annual report.
b b b b b b b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
21. An unqualified opinion shows that, in the opinion of an independent auditor, the financial state-
b b b b b b b b b b b b b b
ments have been presented fairly, in conformity with generally accepted accounting principles.
b b b b b b b b b b b b
This gives investors more confidence that they can rely on the figures reported in the financial
b b b b b b b b b b b b b b b b
statements.
b
LO b3 b BT: bC b Difficulty: bE b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
4 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only)
, CHAPTER 1 b
Introduction to Financial Statements b b b
Learning Objectives b
1. Identify the forms of business organization and the uses of accounting information.
b b b b b b b b b b b
2. Explain the three principal types of business activity.
b b b b b b b
3. Describe the four financial statements and how they are prepared.
b b b b b b b b b
*4. Explain the career opportunities in accounting.
b b b b b
ANSWERS TO QUESTIONS b b
1. The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and
b b b b b b b b b b b b b
(3) corporation.
b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
2. Advantages of a corporation are limited liability (stockholders not being personally liable for cor-
b b b b b b b b b b b b b
porate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a
b b b b b b b b b b b b b b
corporation are increased taxation and government regulations.
b b b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
3. Proprietorships and partnerships receive favorable tax treatment compared to corporations and are
b b b b b b b b b b b
easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships
b b b b b b b b b b b b b
and partnerships are unlimited liability (proprietors/partners are personally liable for all debts)
b b b b b b b b b b b b
and difficulty in obtaining financing compared to corporations.
b b b b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
4. Yes. Companies can choose one of the hybrid business forms, limited liability corporations
b b b b b b b b b b b b
b(LLCs) or subchapter S corporations, which combine the tax advantages of partnerships with
b b b b b b b b b b b b
the limited liability of corporations.
b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bBC: bGovernance bPerspective
5. Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay
b b b b b b b b b b b b b b b b
taxes without receiving, using, or dispensing financial information. Accounting provides financial
b b b b b b b b b b b
information to interested users through the preparation and distribution of financial statements.
b b b b b b b b b b b b
LO b1 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
6. Internal users are managers who plan, organize, and run a business. To assist management,
b b b b b b b b b b b b b
baccounting provides timely internal reports. Examples include financial comparisons of operating
b b b b b b b b b b
2 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only)
, alternatives, projections of income from new sales campaigns, forecasts of cash needs for the
b b b b b b b b b b b b b
next year, and financial statements.
b b b b b
LO b1 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
7. External users are those outside the business who have either a present or potential direct
b b b b b b b b b b b b b b
financial interest (investors and creditors) or an indirect financial interest (taxing authorities,
b b b b b b b b b b b b
regu- latory agencies, labor unions, customers, and economic planners).
b b b b b b b b b
LO b1 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
8. The four most common types of data analytics and the basic question each addresses are:
b b b b b b b b b b b b b b
Descriptive (What happened?), Diagnostic (Why did it happen?), Predictive (What is likely to
b b b b b b b b b b b b b
happen?), and Prescriptive (What should we do about it?).
b b b b b b b b b
LO b1 b BT: bK b Difficulty: bE b TOT: b2 bmin. b AACSB: b nowledge b AICPA b AC: bMeasurement bAnalysis band bInterpretation
Questions Chapter 1 (Continued)
b b b
9. The three types of business activities are financing activities, investing activities, and operating
b b b b b b b b b b b b
activities. Financing activities include borrowing money and selling shares of stock. Investing
b b b b b b b b b b b b
activities include the purchase and sale of property, plant, and equipment. Operating activities
b b b b b b b b b b b b b
include selling goods, performing services, and purchasing inventory.
b b b b b b b b
LO b2 b BT: bC b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
10. Income statement. b (d) Balance sheet. b
b (a)
(b) Balance sheet. b (e) Balance sheet. b
(c) Income statement. b (f) Balance sheet. b
LO b3 b BT: bK b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
11. When a company pays dividends, it reduces the amount of assets available to pay creditors.
b b b b b b b b b b b b b b
Therefore, banks and other creditors monitor dividend payments to ensure they do not put a
b b b b b b b b b b b b b b b
company’s ability to make debt payments at risk.
b b b b b b b b
LO b3 b BT: bC b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bMeasurement bAnallysis band bInterpretation
12. Yes. Net income does appear on the income statement—it is the result of subtracting expenses
b b b b b b b b b b b b b b
from revenues. In addition, net income appears in the retained earnings statement—it is shown as
b b b b b b b b b b b b b b b
an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company
b b b b b b b b b b b b b b
is also included in the balance sheet. It is included in the retained earnings account which appears
b b b b b b b b b b b b b b b b b
in the stockholders’ equity section of the balance sheet.
b b b b b b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
13. The primary purpose of the statement of cash flows is to provide financial information about the
b b b b b b b b b b b b b b b
cash receipts and cash payments of a business for a specific period of time.
b b b b b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only) 3
, 14. The three categories of the statement of cash flows are operating activities, investing activities,
b b b b b b b b b b b b b
and financing activities. The categories were chosen because they represent the three principal
b b b b b b b b b b b b b
types of business activities.
b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
15. Retained earnings is the net income retained in a corporation. Retained earnings is increased by
b b b b b b b b b b b b b b
net income and is decreased by dividends and a net loss.
b b b b b b b b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
16. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity.
b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
17. (a) b Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put more
b b b b b b b b b b b b b b
simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim
b b b b b b b b b b b b b
on net assets.
b b b
(b) The items that affect stockholders’ equity are issuance of common stock
b b b b b b b b b b
and the components of retained earnings (dividends, revenues, and expenses).
b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
18. The liabilities are (b) Accounts payable and (g) Salaries and wages payable.
b b b b b b b b b b b
LO b3 b BT: bC b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
19. (a) b Net income from the income statement is reported as an increase to retained earnings on
b b b b b b b b b b b b b b
b the retained earnings statement.
b b b
(b) The ending amount on the retained earnings statement is reported as the retained earnings
b b b b b b b b b b b b b
amount on the balance sheet.
b b b b b
(c) The ending amount on the statement of cash flows is reported as the cash amount on the
b b b b b b b b b b b b b b b b
balance sheet.
b b
LO b3 b BT: bC b Difficulty: bM b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
20. The purpose of the management discussion and analysis section is to provide management’s
b b b b b b b b b b b b
views on its ability to pay short-term obligations, its ability to fund operations and expansion,
b b b b b b b b b b b b b b b
and its results of operations. The MD&A section is a required part of the annual report.
b b b b b b b b b b b b b b b b
LO b3 b BT: bK b Difficulty: bE b TOT: b1 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
21. An unqualified opinion shows that, in the opinion of an independent auditor, the financial state-
b b b b b b b b b b b b b b
ments have been presented fairly, in conformity with generally accepted accounting principles.
b b b b b b b b b b b b
This gives investors more confidence that they can rely on the figures reported in the financial
b b b b b b b b b b b b b b b b
statements.
b
LO b3 b BT: bC b Difficulty: bE b TOT: b2 bmin. b AACSB: bKnowledge b AICPA bAC: bReporting
4 Copyright © John Wiley & Sons, Inc. Solutions Manual (For Instructor Use Only)
