Financial accounting 11th edition robert libby patricia libby frank hodge complete solution manual

FULL SOLUTION MANUAL FOR n n n




Financial Accounting 11th Edition Robert Libby, n n n n n




Patricia Libby, Frank Hodge
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ANATASHIA
Chapter 1 n




Financial Statements and Business Decisions n n n n




ANSWERS TO QUESTIONS n n




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 information to
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decision makers.
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2. Financial accounting involves preparation of the four basic financial statements and
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related disclosures for external decision makers. Managerial accounting involves
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the preparation of detailed plans, budgets, forecasts, and performance reports for
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internal decision makers.
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3. Financial reports are used by both internal and external groups and individuals. The
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internal groups are comprised of the various managers of the entity. The external
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groups include the owners, investors, creditors, governmental agencies, other
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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 part of
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what the company earns and/or selling their ownership interest in the company in
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the future at a higher price than they paid. Creditors lend money to a company for a
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specific length of time and hope to gain by charging interest on the loan.
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Financial Accounting, 11/e
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,5. In a society, each organization can be defined as a separate accounting entity. An
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accounting entity is the organization for which financial data are to be collected.
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Typical accounting entities are a business, a church, a governmental unit, a
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university and other nonprofit organizations such as a hospital and a welfare
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organization. A business typically is defined and treated as a separate entity
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because the owners, creditors, investors, and other interested parties need to
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evaluate its performance and its potential separately from other entities and from its




ANATASHIA
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owners.
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6. Name of Statement n n Alternative Title n



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



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



(b) Name of the statement n n n



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




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 period of
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time.
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(b) The purpose of the balance sheet is to report the financial position of an entity at
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a given date, that is, to report information about the assets, liabilities and
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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 about the
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flow of cash into the entity (sources), the flow of cash out of the entity (uses),
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and the net increase or decrease in cash during the 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 and
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distribution of dividends affected the retained earnings of the company during
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that period.
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9. The income statement and the statement of cash flows are dated ―For the Year
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Ended December 31‖ because they report the inflows and outflows of resources
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during a period of time. In contrast, the balance sheet is dated ―At December 31‖
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because it represents the resources, obligations, and stockholders’ equity at a
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specific date.
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,10. Assets are important to creditors and investors because assets provide a basis for
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judging whether sufficient resources are available to operate the company. Assets
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are also important because they could be sold for cash in the event the company
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goes out of business. Liabilities are important to creditors and investors because the
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company must be able to generate sufficient cash from operations or further
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borrowing to meet the payments required by debt agreements. If a business does
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not pay its creditors, the law may give the creditors the right to force the sale of




ANATASHIA
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assets sufficient to meet their claims.
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11. Net income is the excess of total revenues over total expenses. Net loss is the
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excess of total expenses over total revenues.
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12. The equation for the income statement is Revenues - Expenses = Net Income (or
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Net Loss if the amount is negative). Thus, the three major items reported on the
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income statement are (1) revenues, (2) expenses, and (3) net income.
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13. The equation for the balance sheet (also known as the basic accounting equation) is:
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Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
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future economic benefits owned by the entity as a result of past transactions. They
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are the resources owned by the business at a given point in time such as cash,
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receivables, inventory, machinery, buildings, land, and patents. Liabilities are
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probable (expected) debts or obligations of the entity as a result of past transactions
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that will be paid with assets or services in the future. They are the obligations of the
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entity such as accounts payable, notes payable, and bonds payable. Stockholders’
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equity is financing provided by owners of the business and operations. It is the claim
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of the 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 assets
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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 = Change
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in cash for the period. The net cash flows for the period represent the increase or
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decrease in cash that occurred during the period. Cash flows from operating
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activities are cash flows directly related to earning income (normal business activity
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including interest paid and income taxes paid). Cash flows from investing activities
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include cash flows that are related to the acquisition or sale of productive assets used
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by the company. Cash flows from financing activities are directly related to the
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financing of the enterprise itself.
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15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
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Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
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Retained Earnings which is the prior year’s ending retained earnings reported on
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the balance sheet. The current year's Net Income reported on the income
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statement is added and the current year's Dividends are subtracted from this
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amount. The ending Retained Earnings amount is reported on the end-of-period
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balance sheet.
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Financial Accounting, 11/e
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nLLC.

, 16. Marketing managers and credit managers use customers' financial statements to
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decide whether to extend them credit for their purchases. Purchasing managers use
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potential suppliers' financial statements to judge whether the suppliers have the
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resources necessary to meet current and future demand. Human resource
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managers use financial statements as a basis for contract negotiations, to determine
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what pay rates the company can afford. The net income figure even serves as a
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basis to pay bonuses not only to management, but to other employees through profit




ANATASHIA
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sharing plans.
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17. The Securities and Exchange Commission (SEC) is the U.S. government agency
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which determines the financial statements that public companies must provide to
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stockholders and the measurement rules used in producing those statements. The
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Financial Accounting Standards Board (FASB) is the private sector body given the
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primary responsibility to work out the detailed rules which become generally
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accepted accounting principles.
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18. Management is responsible for preparing the financial statements and other n n n n n n n n n



information contained in the annual report and for the maintenance of a system of
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internal accounting policies, procedures and controls. These measures are intended
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to provide reasonable assurance, at appropriate cost, that transactions are processed
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in accordance with company authorization as well as properly recorded and reported
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in the financial statements, and that assets are adequately safeguarded.
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Independent auditors examine the financial reports (prepared by management) and
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the underlying records to assure that the reports represent what they claim and
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conform with generally accepted accounting principles (GAAP).
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19. A sole proprietorship is an unincorporated business owned by one individual. A
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partnership is an unincorporated association of two or more individuals to carry on a
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business. A corporation is a business that is organized under the laws of a particular
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state whereby a charter is granted and the entity is authorized to issue shares of
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stock as evidence of ownership by the owners (i.e., stockholders).
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20. A CPA firm normally renders three services: auditing, management advisory
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services, and tax services. Auditing involves examination of the records and
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financial reports to determine whether they ―fairly present‖ the financial position and
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results of operations of the entity. Management advisory services involve
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management advice to individual business enterprises and other entities, much like
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those provided by a consulting firm. Tax services involve providing tax planning
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advice to clients (both individuals and businesses) and preparation of their tax
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returns.
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ANSWERS TO MULTIPLE CHOICE n n n




1. b) n 2. d) n 3. d) n 4. c) n 5. a) n



6. d) n 7. a) n 8. a) n 9. c) n 10. b) n




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© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.