SOLUTION MANUAL FOR
r r
FinancialAccounting 11th Edition
r r r r
Robert Libby, Patricia Libby, Frank Hodge
r r r r r
r
, SOLUTION MANUAL FOR r r
Financial Accounting 11th Edition Robert Libby,P
r r r r r r
atricia Libby, Frank Hodge
r r r
Chapter 1 r
Financial Statements and Business Decisions
r r r r
ANSWERS TO QUESTIONS
r r
1. Accountingrisrarsystemrthatrcollectsrandrprocessesr(analyzes,rmeasures,randrrecords
)rfinancialrinformationraboutranrorganizationrandrreportsrthatrinformationrtordecisionrm
akers.r
2. Financialraccountingrinvolvesrpreparationrofrtherfourrbasicrfinancialrstatementsrandrrel
atedrdisclosuresrforrexternalrdecisionrmakers.rManagerialraccountingrinvolvesrtherpre
parationrofrdetailedrplans,rbudgets,rforecasts,randrperformancerreportsrforrinternalrdec
isionrmakers.r
3. Financialrreportsrarerusedrbyrbothrinternalrandrexternalrgroupsrandrindividuals.rTherinte
rnalrgroupsrarercomprisedrofrthervariousrmanagersrofrtherentity.rTherexternalrgroupsrin
cludertherowners,rinvestors,rcreditors,rgovernmentalragencies,rotherrinterestedrparties
,randrtherpublicratrlarge.r
4. Investorsrpurchaserallrorrpartrofrarbusinessrandrhopertorgainrbyrreceivingrpartrofrwhatrt
hercompanyrearnsrand/orrsellingrtheirrownershiprinterestrinrthercompanyrinrtherfuturer
atrarhigherrpricerthanrtheyrpaid.rCreditorsrlendrmoneyrtorarcompanyrforrarspecificrleng
throfrtimerandrhopertorgainrbyrchargingrinterestronrtherloan.r
r
, 5. Inrarsociety,reachrorganizationrcanrberdefinedrasrarseparateraccountingrentity.rAnracco
untingrentityrisrtherorganizationrforrwhichrfinancialrdatararertorbercollected.rTypicalracco
untingrentitiesrarerarbusiness,rarchurch,rargovernmentalrunit,raruniversityrandrotherrnon
profitrorganizationsrsuchrasrarhospitalrandrarwelfarerorganization.rArbusinessrtypicallyri
srdefinedrandrtreatedrasrarseparaterentityrbecausertherowners,rcreditors,rinvestors,rand
rotherrinterestedrpartiesrneedrtorevaluateritsrperformancerandritsrpotentialrseparatelyrfr
omrotherrentitiesrandrfromritsrowners.r
6. NamerofrStatement AlternativerTitle
(a) IncomerStatement (a)rStatementrofrEarnings;rStatementrofr
Income;rStatementrofrOperationsr
(b) BalancerSheet (b)rStatementrofrFinancialrPositionr
(c) CashrFlowrStatement (c)r StatementrofrCashrFlowsr
7. Therheadingrofreachrofrtherfourrrequiredrfinancialrstatementsrshouldrincludertherfoll
owing:r
(a) Namerofrtherentityr
(b) Namerofrtherstatementr
(c) Daterofrtherstatement,rorrtherperiodrofrtimer
(d) Unitrofrmeasurer
8. (a)
Therpurposerofrtherincomerstatementrisrtorpresentrinformationraboutrtherr
evenues,rexpenses,randrthernetrincomerofranrentityrforrarspecifiedrperiodrofrtime.
r
(b) Therpurposerofrtherbalancersheetrisrtorreportrtherfinancialrpositionrofranrentityratrar
givenrdate,rthatris,rtorreportrinformationraboutrtherassets,rliabilitiesrandrstockhold
ers’requityrofrtherentityrasrofrarspecificrdate.r
(c) Therpurposerofrtherstatementrofrcashrflowsrisrtorpresentrinformationraboutrtherflow
rofrcashrintortherentityr(sources),rtherflowrofrcashroutrofrtherentityr(uses),randrtherne
trincreaserorrdecreaserinrcashrduringrtherperiod.r
(d) Therstatementrofrstockholders’requityrreportsrtherchangesrinreachrofrthercompan
y’srstockholders’requityraccountsrduringrtheraccountingrperiod,rincludingrissuera
ndrrepurchaserofrstockrandrtherwayrthatrnetrincomerandrdistributionrofrdividendsr
affectedrtherretainedrearningsrofrthercompanyrduringrthatrperiod.r
9. Therincomerstatementrandrtherstatementrofrcashrflowsrarerdatedr―ForrtherYearrEnd
edrDecemberr31‖rbecausertheyrreportrtherinflowsrandroutflowsrofrresourcesrduringrar
periodrofrtime.rInrcontrast,rtherbalancersheetrisrdatedr―AtrDecemberr31‖rbecauseritrre
presentsrtherresources,robligations,randrstockholders’requityratra r specificrdate.r
r
, 10. Assetsrarerimportantrtorcreditorsrandrinvestorsrbecauserassetsrproviderarbasisrforrjud
gingrwhetherrsufficientrresourcesrareravailablertoroperaterthercompany.rAssetsrareral
sorimportantrbecausertheyrcouldrbersoldrforrcashrinrthereventrthercompanyrgoesroutrofr
business.rLiabilitiesrarerimportantrtorcreditorsrandrinvestorsrbecauserthercompanyrm
ustrberablertorgeneratersufficientrcashrfromroperationsrorrfurtherrborrowingrtormeetrthe
rpaymentsrrequiredrbyrdebtragreements.rIfrarbusinessrdoesrnotrpayritsrcreditors,rtherla
wrmayrgiverthercreditorsrtherrightrtorforcerthersalerofrassetsrsufficientrtormeetrtheirrclai
ms.r
11. Netrincomerisrtherexcessrofrtotalrrevenuesroverrtotalrexpenses.rNetrlossrisrtherexc
essrofrtotalrexpensesroverrtotalrrevenues.r
12. TherequationrforrtherincomerstatementrisrRevenuesr-
rExpensesr=rNetrIncomer(orrNetrLossrifrtheramountrisrnegative).rThus,rtherthreermajorr
itemsrreportedronrtherincomerstatementrarer(1)rrevenues,r(2)rexpenses,randr(3)r netrin
come.r
13. Therequationrforrtherbalancersheetr(alsorknownrasrtherbasicraccountingrequation)ris:rA
ssetsr=rLiabilitiesr+rStockholders’rEquity.rAssetsrarertherprobabler(expected)rfuturerec
onomicrbenefitsrownedrbyrtherentityrasrarresultrofrpastrtransactions.rTheyrarertherresou
rcesrownedrbyrtherbusinessratrargivenrpointrinrtimersuchrasrcash,rreceivables,rinventor
y,rmachinery,rbuildings,rland,randrpatents.rLiabilitiesrarerprobabler(expected)rdebtsrorr
obligationsrofrtherentityrasrarresultrofr pastrtransactionsrthatrwillrberpaidrwithrassetsrorrse
rvicesrinrtherfuture.rTheyrarertherobligationsrofrtherentityrsuchrasraccountsrpayable,rnot
esrpayable,randrbondsrpayable.rStockholders’requityrisrfinancingrprovidedrbyrownersro
frtherbusinessrandroperations.rItrisrtherclaimrofrtherownersrtortherassetsrofrtherbusinessr
afterrthercreditors’rclaimsrhaverbeenrsatisfied.rItrmayrberthoughtrofrasrtherresidualrinter
estrbecauseritrrepresentsrassetsrminusrliabilities.r
14. Therequationrforrtherstatementrofrcashrflowsris:rCashrflowsrfromroperatingractivitiesr
+rCashrflowsrfromrinvestingractivitiesr+rCashrflowsrfromrfinancingractivitiesr=rChange
rinrcashrforrtherperiod.rThernetrcashrflowsrforrtherperiodrrepresentrtherincreaserorrdecr
easerinrcashrthatroccurredrduringrtherperiod.rCashrflowsrfromroperatingractivitiesrarer
cashrflowsrdirectlyrrelatedrtorearningrincomer(normalrbusinessractivityrincludingrinter
estrpaidrandrincomertaxesrpaid).rCashrflowsrfromrinvestingractivitiesrincludercashrflo
wsrthatrarerrelatedrtortheracquisitionrorrsalerofrproductiverassetsrusedrbyrthercompan
y.rCashrflowsrfromrfinancingractivitiesrarerdirectlyrrelatedrtortherfinancingrofrtherenter
priseritself.r
15. Therretainedrearningsrequationris:rBeginningrRetainedrEarningsr+rNetrIncomer-
rDividendsr=rEndingrRetainedrEarnings.rItrbeginsrwithrbeginning-of-the-
yearrRetainedrEarningsrwhichrisrtherpriorryear’srendingrretainedrearningsrreportedro
nrtherbalancersheet.rThercurrentryear'srNetrIncomerreportedronrtherincomerstateme
ntrisraddedrandrthercurrentryear'srDividendsrarersubtractedrfromrthisramount.rTheren
dingrRetainedrEarningsramountrisrreportedronrtherend-of-periodrbalancersheet.r
r
r r
FinancialAccounting 11th Edition
r r r r
Robert Libby, Patricia Libby, Frank Hodge
r r r r r
r
, SOLUTION MANUAL FOR r r
Financial Accounting 11th Edition Robert Libby,P
r r r r r r
atricia Libby, Frank Hodge
r r r
Chapter 1 r
Financial Statements and Business Decisions
r r r r
ANSWERS TO QUESTIONS
r r
1. Accountingrisrarsystemrthatrcollectsrandrprocessesr(analyzes,rmeasures,randrrecords
)rfinancialrinformationraboutranrorganizationrandrreportsrthatrinformationrtordecisionrm
akers.r
2. Financialraccountingrinvolvesrpreparationrofrtherfourrbasicrfinancialrstatementsrandrrel
atedrdisclosuresrforrexternalrdecisionrmakers.rManagerialraccountingrinvolvesrtherpre
parationrofrdetailedrplans,rbudgets,rforecasts,randrperformancerreportsrforrinternalrdec
isionrmakers.r
3. Financialrreportsrarerusedrbyrbothrinternalrandrexternalrgroupsrandrindividuals.rTherinte
rnalrgroupsrarercomprisedrofrthervariousrmanagersrofrtherentity.rTherexternalrgroupsrin
cludertherowners,rinvestors,rcreditors,rgovernmentalragencies,rotherrinterestedrparties
,randrtherpublicratrlarge.r
4. Investorsrpurchaserallrorrpartrofrarbusinessrandrhopertorgainrbyrreceivingrpartrofrwhatrt
hercompanyrearnsrand/orrsellingrtheirrownershiprinterestrinrthercompanyrinrtherfuturer
atrarhigherrpricerthanrtheyrpaid.rCreditorsrlendrmoneyrtorarcompanyrforrarspecificrleng
throfrtimerandrhopertorgainrbyrchargingrinterestronrtherloan.r
r
, 5. Inrarsociety,reachrorganizationrcanrberdefinedrasrarseparateraccountingrentity.rAnracco
untingrentityrisrtherorganizationrforrwhichrfinancialrdatararertorbercollected.rTypicalracco
untingrentitiesrarerarbusiness,rarchurch,rargovernmentalrunit,raruniversityrandrotherrnon
profitrorganizationsrsuchrasrarhospitalrandrarwelfarerorganization.rArbusinessrtypicallyri
srdefinedrandrtreatedrasrarseparaterentityrbecausertherowners,rcreditors,rinvestors,rand
rotherrinterestedrpartiesrneedrtorevaluateritsrperformancerandritsrpotentialrseparatelyrfr
omrotherrentitiesrandrfromritsrowners.r
6. NamerofrStatement AlternativerTitle
(a) IncomerStatement (a)rStatementrofrEarnings;rStatementrofr
Income;rStatementrofrOperationsr
(b) BalancerSheet (b)rStatementrofrFinancialrPositionr
(c) CashrFlowrStatement (c)r StatementrofrCashrFlowsr
7. Therheadingrofreachrofrtherfourrrequiredrfinancialrstatementsrshouldrincludertherfoll
owing:r
(a) Namerofrtherentityr
(b) Namerofrtherstatementr
(c) Daterofrtherstatement,rorrtherperiodrofrtimer
(d) Unitrofrmeasurer
8. (a)
Therpurposerofrtherincomerstatementrisrtorpresentrinformationraboutrtherr
evenues,rexpenses,randrthernetrincomerofranrentityrforrarspecifiedrperiodrofrtime.
r
(b) Therpurposerofrtherbalancersheetrisrtorreportrtherfinancialrpositionrofranrentityratrar
givenrdate,rthatris,rtorreportrinformationraboutrtherassets,rliabilitiesrandrstockhold
ers’requityrofrtherentityrasrofrarspecificrdate.r
(c) Therpurposerofrtherstatementrofrcashrflowsrisrtorpresentrinformationraboutrtherflow
rofrcashrintortherentityr(sources),rtherflowrofrcashroutrofrtherentityr(uses),randrtherne
trincreaserorrdecreaserinrcashrduringrtherperiod.r
(d) Therstatementrofrstockholders’requityrreportsrtherchangesrinreachrofrthercompan
y’srstockholders’requityraccountsrduringrtheraccountingrperiod,rincludingrissuera
ndrrepurchaserofrstockrandrtherwayrthatrnetrincomerandrdistributionrofrdividendsr
affectedrtherretainedrearningsrofrthercompanyrduringrthatrperiod.r
9. Therincomerstatementrandrtherstatementrofrcashrflowsrarerdatedr―ForrtherYearrEnd
edrDecemberr31‖rbecausertheyrreportrtherinflowsrandroutflowsrofrresourcesrduringrar
periodrofrtime.rInrcontrast,rtherbalancersheetrisrdatedr―AtrDecemberr31‖rbecauseritrre
presentsrtherresources,robligations,randrstockholders’requityratra r specificrdate.r
r
, 10. Assetsrarerimportantrtorcreditorsrandrinvestorsrbecauserassetsrproviderarbasisrforrjud
gingrwhetherrsufficientrresourcesrareravailablertoroperaterthercompany.rAssetsrareral
sorimportantrbecausertheyrcouldrbersoldrforrcashrinrthereventrthercompanyrgoesroutrofr
business.rLiabilitiesrarerimportantrtorcreditorsrandrinvestorsrbecauserthercompanyrm
ustrberablertorgeneratersufficientrcashrfromroperationsrorrfurtherrborrowingrtormeetrthe
rpaymentsrrequiredrbyrdebtragreements.rIfrarbusinessrdoesrnotrpayritsrcreditors,rtherla
wrmayrgiverthercreditorsrtherrightrtorforcerthersalerofrassetsrsufficientrtormeetrtheirrclai
ms.r
11. Netrincomerisrtherexcessrofrtotalrrevenuesroverrtotalrexpenses.rNetrlossrisrtherexc
essrofrtotalrexpensesroverrtotalrrevenues.r
12. TherequationrforrtherincomerstatementrisrRevenuesr-
rExpensesr=rNetrIncomer(orrNetrLossrifrtheramountrisrnegative).rThus,rtherthreermajorr
itemsrreportedronrtherincomerstatementrarer(1)rrevenues,r(2)rexpenses,randr(3)r netrin
come.r
13. Therequationrforrtherbalancersheetr(alsorknownrasrtherbasicraccountingrequation)ris:rA
ssetsr=rLiabilitiesr+rStockholders’rEquity.rAssetsrarertherprobabler(expected)rfuturerec
onomicrbenefitsrownedrbyrtherentityrasrarresultrofrpastrtransactions.rTheyrarertherresou
rcesrownedrbyrtherbusinessratrargivenrpointrinrtimersuchrasrcash,rreceivables,rinventor
y,rmachinery,rbuildings,rland,randrpatents.rLiabilitiesrarerprobabler(expected)rdebtsrorr
obligationsrofrtherentityrasrarresultrofr pastrtransactionsrthatrwillrberpaidrwithrassetsrorrse
rvicesrinrtherfuture.rTheyrarertherobligationsrofrtherentityrsuchrasraccountsrpayable,rnot
esrpayable,randrbondsrpayable.rStockholders’requityrisrfinancingrprovidedrbyrownersro
frtherbusinessrandroperations.rItrisrtherclaimrofrtherownersrtortherassetsrofrtherbusinessr
afterrthercreditors’rclaimsrhaverbeenrsatisfied.rItrmayrberthoughtrofrasrtherresidualrinter
estrbecauseritrrepresentsrassetsrminusrliabilities.r
14. Therequationrforrtherstatementrofrcashrflowsris:rCashrflowsrfromroperatingractivitiesr
+rCashrflowsrfromrinvestingractivitiesr+rCashrflowsrfromrfinancingractivitiesr=rChange
rinrcashrforrtherperiod.rThernetrcashrflowsrforrtherperiodrrepresentrtherincreaserorrdecr
easerinrcashrthatroccurredrduringrtherperiod.rCashrflowsrfromroperatingractivitiesrarer
cashrflowsrdirectlyrrelatedrtorearningrincomer(normalrbusinessractivityrincludingrinter
estrpaidrandrincomertaxesrpaid).rCashrflowsrfromrinvestingractivitiesrincludercashrflo
wsrthatrarerrelatedrtortheracquisitionrorrsalerofrproductiverassetsrusedrbyrthercompan
y.rCashrflowsrfromrfinancingractivitiesrarerdirectlyrrelatedrtortherfinancingrofrtherenter
priseritself.r
15. Therretainedrearningsrequationris:rBeginningrRetainedrEarningsr+rNetrIncomer-
rDividendsr=rEndingrRetainedrEarnings.rItrbeginsrwithrbeginning-of-the-
yearrRetainedrEarningsrwhichrisrtherpriorryear’srendingrretainedrearningsrreportedro
nrtherbalancersheet.rThercurrentryear'srNetrIncomerreportedronrtherincomerstateme
ntrisraddedrandrthercurrentryear'srDividendsrarersubtractedrfromrthisramount.rTheren
dingrRetainedrEarningsramountrisrreportedronrtherend-of-periodrbalancersheet.r
r
