SOLUTION MANUAL FOR
f f
FinancialAccounting 11th Edition
f f f f
Robert Libby, Patricia Libby, Frank Hodge
f f f f f
f
, SOLUTION MANUAL FOR f f
Financial Accounting 11th Edition Robert Libby,P
f f f f f f
atricia Libby, Frank Hodge
f f f
Chapter 1 f
Financial Statements and Business Decisions
f f f f
ANSWERS TO QUESTIONS
f f
1. Accountingfisfafsystemfthatfcollectsfandfprocessesf(analyzes,fmeasures,fandfrecords)f
financialfinformationfaboutfanforganizationfandfreportsfthatfinformationftofdecisionfma
kers.f
2. Financialfaccountingfinvolvesfpreparationfofftheffourfbasicffinancialfstatementsfandfrel
atedfdisclosuresfforfexternalfdecisionfmakers.fManagerialfaccountingfinvolvesfthefprep
arationfoffdetailedfplans,fbudgets,fforecasts,fandfperformancefreportsfforfinternalfdecis
ionfmakers.f
3. Financialfreportsfarefusedfbyfbothfinternalfandfexternalfgroupsfandfindividuals.fThefinter
nalfgroupsfarefcomprisedfoffthefvariousfmanagersfoffthefentity.fThefexternalfgroupsfincl
udefthefowners,finvestors,fcreditors,fgovernmentalfagencies,fotherfinterestedfparties,fa
ndfthefpublicfatflarge.f
4. Investorsfpurchasefallforfpartfoffafbusinessfandfhopeftofgainfbyfreceivingfpartfoffwhatft
hefcompanyfearnsfand/orfsellingftheirfownershipfinterestfinfthefcompanyfinftheffuturef
atfafhigherfpricefthanftheyfpaid.fCreditorsflendfmoneyftofafcompanyfforfafspecificflengt
hfofftimefandfhopeftofgainfbyfchargingfinterestfonfthefloan.f
f
, 5. Infafsociety,feachforganizationfcanfbefdefinedfasfafseparatefaccountingfentity.fAnfaccou
ntingfentityfisftheforganizationfforfwhichffinancialfdatafareftofbefcollected.fTypicalfaccou
ntingfentitiesfarefafbusiness,fafchurch,fafgovernmentalfunit,fafuniversityfandfotherfnonpr
ofitforganizationsfsuchfasfafhospitalfandfafwelfareforganization.fAfbusinessftypicallyfisfd
efinedfandftreatedfasfafseparatefentityfbecausefthefowners,fcreditors,finvestors,fandfoth
erfinterestedfpartiesfneedftofevaluatefitsfperformancefandfitsfpotentialfseparatelyffromfo
therfentitiesfandffromfitsfowners.f
6. NamefoffStatement AlternativefTitle
(a) IncomefStatement (a)fStatementfoffEarnings;fStatementfoff
Income;fStatementfoffOperationsf
(b) BalancefSheet (b)fStatementfoffFinancialfPositionf
(c) CashfFlowfStatement (c)f StatementfoffCashfFlowsf
7. Thefheadingfoffeachfofftheffourfrequiredffinancialfstatementsfshouldfincludeftheffollo
wing:f
(a) Namefoffthefentityf
(b) Namefoffthefstatementf
(c) Datefoffthefstatement,forfthefperiodfofftimef
(d) Unitfoffmeasuref
8. (a)
Thefpurposefoffthefincomefstatementfisftofpresentfinformationfaboutfthefre
venues,fexpenses,fandfthefnetfincomefoffanfentityfforfafspecifiedfperiodfofftime.f
(b) Thefpurposefoffthefbalancefsheetfisftofreportftheffinancialfpositionfoffanfentityfatfafg
ivenfdate,fthatfis,ftofreportfinformationfaboutfthefassets,fliabilitiesfandfstockholder
s’fequityfoffthefentityfasfoffafspecificfdate.f
(c) Thefpurposefoffthefstatementfoffcashfflowsfisftofpresentfinformationfaboutfthefflowf
offcashfintofthefentityf(sources),fthefflowfoffcashfoutfoffthefentityf(uses),fandfthefnetf
increaseforfdecreasefinfcashfduringfthefperiod.f
(d) Thefstatementfoffstockholders’fequityfreportsfthefchangesfinfeachfoffthefcompan
y’sfstockholders’fequityfaccountsfduringfthefaccountingfperiod,fincludingfissuefa
ndfrepurchasefoffstockfandfthefwayfthatfnetfincomefandfdistributionfoffdividendsfa
ffectedfthefretainedfearningsfoffthefcompanyfduringfthatfperiod.f
9. Thefincomefstatementfandfthefstatementfoffcashfflowsfarefdatedf―ForfthefYearfEnde
dfDecemberf31‖fbecauseftheyfreportfthefinflowsfandfoutflowsfoffresourcesfduringfafp
eriodfofftime.fInfcontrast,fthefbalancefsheetfisfdatedf―AtfDecemberf31‖fbecausefitfrepr
esentsfthefresources,fobligations,fandfstockholders’fequityfatfa f specificfdate.f
f
, 10. Assetsfarefimportantftofcreditorsfandfinvestorsfbecausefassetsfprovidefafbasisfforfjudg
ingfwhetherfsufficientfresourcesfarefavailableftofoperatefthefcompany.fAssetsfarefalsof
importantfbecauseftheyfcouldfbefsoldfforfcashfinfthefeventfthefcompanyfgoesfoutfoffbus
iness.fLiabilitiesfarefimportantftofcreditorsfandfinvestorsfbecausefthefcompanyfmustfb
efableftofgeneratefsufficientfcashffromfoperationsforffurtherfborrowingftofmeetfthefpay
mentsfrequiredfbyfdebtfagreements.fIffafbusinessfdoesfnotfpayfitsfcreditors,ftheflawfma
yfgivefthefcreditorsfthefrightftofforcefthefsalefoffassetsfsufficientftofmeetftheirfclaims.f
11. Netfincomefisfthefexcessfofftotalfrevenuesfoverftotalfexpenses.fNetflossfisfthefexce
ssfofftotalfexpensesfoverftotalfrevenues.f
12. ThefequationfforfthefincomefstatementfisfRevenuesf-
fExpensesf=fNetfIncomef(orfNetfLossfiffthefamountfisfnegative).fThus,fthefthreefmajorfi
temsfreportedfonfthefincomefstatementfaref(1)frevenues,f(2)fexpenses,fandf(3)fnetfinc
ome.f
13. Thefequationfforfthefbalancefsheetf(alsofknownfasfthefbasicfaccountingfequation)fis:fAs
setsf=fLiabilitiesf+fStockholders’fEquity.fAssetsfarefthefprobablef(expected)ffuturefecon
omicfbenefitsfownedfbyfthefentityfasfafresultfoffpastftransactions.fTheyfarefthefresource
sfownedfbyfthefbusinessfatfafgivenfpointfinftimefsuchfasfcash,freceivables,finventory,fm
achinery,fbuildings,fland,fandfpatents.fLiabilitiesfarefprobablef(expected)fdebtsforfoblig
ationsfoffthefentityf asfafresultfoff pastftransactionsfthatfwillfbefpaidfwithfassetsforfservice
sfinftheffuture.fTheyfarefthefobligationsfoffthefentityfsuchfasfaccountsfpayable,fnotesfpa
yable,fandfbondsfpayable.fStockholders’fequityfisffinancingfprovidedfbyfownersfoffthefb
usinessfandfoperations.fItfisfthefclaimfoffthefownersftofthefassetsfoffthefbusinessfafterfth
efcreditors’fclaimsfhavefbeenfsatisfied.fItfmayfbefthoughtfoffasfthefresidualfinterestfbeca
usefitfrepresentsfassetsfminusfliabilities.f
14. Thefequationfforfthefstatementfoffcashfflowsfis:fCashfflowsffromfoperatingfactivitiesf
+fCashfflowsffromfinvestingfactivitiesf+fCashfflowsffromffinancingfactivitiesf=fChangefi
nfcashfforfthefperiod.fThefnetfcashfflowsfforfthefperiodfrepresentfthefincreaseforfdecre
asefinfcashfthatfoccurredfduringfthefperiod.fCashfflowsffromfoperatingfactivitiesfarefc
ashfflowsfdirectlyfrelatedftofearningfincomef(normalfbusinessfactivityfincludingfintere
stfpaidfandfincomeftaxesfpaid).fCashfflowsffromfinvestingfactivitiesfincludefcashfflows
fthatfarefrelatedftofthefacquisitionforfsalefoffproductivefassetsfusedfbyfthefcompany.fC
ashfflowsffromffinancingfactivitiesfarefdirectlyfrelatedftoftheffinancingfoffthefenterprisef
itself.f
15. Thefretainedfearningsfequationfis:fBeginningfRetainedfEarningsf+fNetfIncomef-
fDividendsf=fEndingfRetainedfEarnings.fItfbeginsfwithfbeginning-of-the-
yearfRetainedfEarningsfwhichfisfthefpriorfyear’sfendingfretainedfearningsfreportedfo
nfthefbalancefsheet.fThefcurrentfyear'sfNetfIncomefreportedfonfthefincomefstatemen
tfisfaddedfandfthefcurrentfyear'sfDividendsfarefsubtractedffromfthisfamount.fThefendi
ngfRetainedfEarningsfamountfisfreportedfonfthefend-of-periodfbalancefsheet.f
f
f f
FinancialAccounting 11th Edition
f f f f
Robert Libby, Patricia Libby, Frank Hodge
f f f f f
f
, SOLUTION MANUAL FOR f f
Financial Accounting 11th Edition Robert Libby,P
f f f f f f
atricia Libby, Frank Hodge
f f f
Chapter 1 f
Financial Statements and Business Decisions
f f f f
ANSWERS TO QUESTIONS
f f
1. Accountingfisfafsystemfthatfcollectsfandfprocessesf(analyzes,fmeasures,fandfrecords)f
financialfinformationfaboutfanforganizationfandfreportsfthatfinformationftofdecisionfma
kers.f
2. Financialfaccountingfinvolvesfpreparationfofftheffourfbasicffinancialfstatementsfandfrel
atedfdisclosuresfforfexternalfdecisionfmakers.fManagerialfaccountingfinvolvesfthefprep
arationfoffdetailedfplans,fbudgets,fforecasts,fandfperformancefreportsfforfinternalfdecis
ionfmakers.f
3. Financialfreportsfarefusedfbyfbothfinternalfandfexternalfgroupsfandfindividuals.fThefinter
nalfgroupsfarefcomprisedfoffthefvariousfmanagersfoffthefentity.fThefexternalfgroupsfincl
udefthefowners,finvestors,fcreditors,fgovernmentalfagencies,fotherfinterestedfparties,fa
ndfthefpublicfatflarge.f
4. Investorsfpurchasefallforfpartfoffafbusinessfandfhopeftofgainfbyfreceivingfpartfoffwhatft
hefcompanyfearnsfand/orfsellingftheirfownershipfinterestfinfthefcompanyfinftheffuturef
atfafhigherfpricefthanftheyfpaid.fCreditorsflendfmoneyftofafcompanyfforfafspecificflengt
hfofftimefandfhopeftofgainfbyfchargingfinterestfonfthefloan.f
f
, 5. Infafsociety,feachforganizationfcanfbefdefinedfasfafseparatefaccountingfentity.fAnfaccou
ntingfentityfisftheforganizationfforfwhichffinancialfdatafareftofbefcollected.fTypicalfaccou
ntingfentitiesfarefafbusiness,fafchurch,fafgovernmentalfunit,fafuniversityfandfotherfnonpr
ofitforganizationsfsuchfasfafhospitalfandfafwelfareforganization.fAfbusinessftypicallyfisfd
efinedfandftreatedfasfafseparatefentityfbecausefthefowners,fcreditors,finvestors,fandfoth
erfinterestedfpartiesfneedftofevaluatefitsfperformancefandfitsfpotentialfseparatelyffromfo
therfentitiesfandffromfitsfowners.f
6. NamefoffStatement AlternativefTitle
(a) IncomefStatement (a)fStatementfoffEarnings;fStatementfoff
Income;fStatementfoffOperationsf
(b) BalancefSheet (b)fStatementfoffFinancialfPositionf
(c) CashfFlowfStatement (c)f StatementfoffCashfFlowsf
7. Thefheadingfoffeachfofftheffourfrequiredffinancialfstatementsfshouldfincludeftheffollo
wing:f
(a) Namefoffthefentityf
(b) Namefoffthefstatementf
(c) Datefoffthefstatement,forfthefperiodfofftimef
(d) Unitfoffmeasuref
8. (a)
Thefpurposefoffthefincomefstatementfisftofpresentfinformationfaboutfthefre
venues,fexpenses,fandfthefnetfincomefoffanfentityfforfafspecifiedfperiodfofftime.f
(b) Thefpurposefoffthefbalancefsheetfisftofreportftheffinancialfpositionfoffanfentityfatfafg
ivenfdate,fthatfis,ftofreportfinformationfaboutfthefassets,fliabilitiesfandfstockholder
s’fequityfoffthefentityfasfoffafspecificfdate.f
(c) Thefpurposefoffthefstatementfoffcashfflowsfisftofpresentfinformationfaboutfthefflowf
offcashfintofthefentityf(sources),fthefflowfoffcashfoutfoffthefentityf(uses),fandfthefnetf
increaseforfdecreasefinfcashfduringfthefperiod.f
(d) Thefstatementfoffstockholders’fequityfreportsfthefchangesfinfeachfoffthefcompan
y’sfstockholders’fequityfaccountsfduringfthefaccountingfperiod,fincludingfissuefa
ndfrepurchasefoffstockfandfthefwayfthatfnetfincomefandfdistributionfoffdividendsfa
ffectedfthefretainedfearningsfoffthefcompanyfduringfthatfperiod.f
9. Thefincomefstatementfandfthefstatementfoffcashfflowsfarefdatedf―ForfthefYearfEnde
dfDecemberf31‖fbecauseftheyfreportfthefinflowsfandfoutflowsfoffresourcesfduringfafp
eriodfofftime.fInfcontrast,fthefbalancefsheetfisfdatedf―AtfDecemberf31‖fbecausefitfrepr
esentsfthefresources,fobligations,fandfstockholders’fequityfatfa f specificfdate.f
f
, 10. Assetsfarefimportantftofcreditorsfandfinvestorsfbecausefassetsfprovidefafbasisfforfjudg
ingfwhetherfsufficientfresourcesfarefavailableftofoperatefthefcompany.fAssetsfarefalsof
importantfbecauseftheyfcouldfbefsoldfforfcashfinfthefeventfthefcompanyfgoesfoutfoffbus
iness.fLiabilitiesfarefimportantftofcreditorsfandfinvestorsfbecausefthefcompanyfmustfb
efableftofgeneratefsufficientfcashffromfoperationsforffurtherfborrowingftofmeetfthefpay
mentsfrequiredfbyfdebtfagreements.fIffafbusinessfdoesfnotfpayfitsfcreditors,ftheflawfma
yfgivefthefcreditorsfthefrightftofforcefthefsalefoffassetsfsufficientftofmeetftheirfclaims.f
11. Netfincomefisfthefexcessfofftotalfrevenuesfoverftotalfexpenses.fNetflossfisfthefexce
ssfofftotalfexpensesfoverftotalfrevenues.f
12. ThefequationfforfthefincomefstatementfisfRevenuesf-
fExpensesf=fNetfIncomef(orfNetfLossfiffthefamountfisfnegative).fThus,fthefthreefmajorfi
temsfreportedfonfthefincomefstatementfaref(1)frevenues,f(2)fexpenses,fandf(3)fnetfinc
ome.f
13. Thefequationfforfthefbalancefsheetf(alsofknownfasfthefbasicfaccountingfequation)fis:fAs
setsf=fLiabilitiesf+fStockholders’fEquity.fAssetsfarefthefprobablef(expected)ffuturefecon
omicfbenefitsfownedfbyfthefentityfasfafresultfoffpastftransactions.fTheyfarefthefresource
sfownedfbyfthefbusinessfatfafgivenfpointfinftimefsuchfasfcash,freceivables,finventory,fm
achinery,fbuildings,fland,fandfpatents.fLiabilitiesfarefprobablef(expected)fdebtsforfoblig
ationsfoffthefentityf asfafresultfoff pastftransactionsfthatfwillfbefpaidfwithfassetsforfservice
sfinftheffuture.fTheyfarefthefobligationsfoffthefentityfsuchfasfaccountsfpayable,fnotesfpa
yable,fandfbondsfpayable.fStockholders’fequityfisffinancingfprovidedfbyfownersfoffthefb
usinessfandfoperations.fItfisfthefclaimfoffthefownersftofthefassetsfoffthefbusinessfafterfth
efcreditors’fclaimsfhavefbeenfsatisfied.fItfmayfbefthoughtfoffasfthefresidualfinterestfbeca
usefitfrepresentsfassetsfminusfliabilities.f
14. Thefequationfforfthefstatementfoffcashfflowsfis:fCashfflowsffromfoperatingfactivitiesf
+fCashfflowsffromfinvestingfactivitiesf+fCashfflowsffromffinancingfactivitiesf=fChangefi
nfcashfforfthefperiod.fThefnetfcashfflowsfforfthefperiodfrepresentfthefincreaseforfdecre
asefinfcashfthatfoccurredfduringfthefperiod.fCashfflowsffromfoperatingfactivitiesfarefc
ashfflowsfdirectlyfrelatedftofearningfincomef(normalfbusinessfactivityfincludingfintere
stfpaidfandfincomeftaxesfpaid).fCashfflowsffromfinvestingfactivitiesfincludefcashfflows
fthatfarefrelatedftofthefacquisitionforfsalefoffproductivefassetsfusedfbyfthefcompany.fC
ashfflowsffromffinancingfactivitiesfarefdirectlyfrelatedftoftheffinancingfoffthefenterprisef
itself.f
15. Thefretainedfearningsfequationfis:fBeginningfRetainedfEarningsf+fNetfIncomef-
fDividendsf=fEndingfRetainedfEarnings.fItfbeginsfwithfbeginning-of-the-
yearfRetainedfEarningsfwhichfisfthefpriorfyear’sfendingfretainedfearningsfreportedfo
nfthefbalancefsheet.fThefcurrentfyear'sfNetfIncomefreportedfonfthefincomefstatemen
tfisfaddedfandfthefcurrentfyear'sfDividendsfarefsubtractedffromfthisfamount.fThefendi
ngfRetainedfEarningsfamountfisfreportedfonfthefend-of-periodfbalancefsheet.f
f
