TEST BANK: Solution Manual for Financial Accounting 11th Edition Robert Libby, Patricia
Libby, Complete Chapters 1 - 13, Verified Newest Version||2024/2025.
,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 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
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)
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
, 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 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 =
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
financing provided by owners of the business and operations. It is the claim of the owners to 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 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.
Libby, Complete Chapters 1 - 13, Verified Newest Version||2024/2025.
,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 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
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)
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
, 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 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 =
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
financing provided by owners of the business and operations. It is the claim of the owners to 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 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.
