Solution Manual for Financial Accounting 11th Edition Robert Libby, Patricia Libby, Complete Chapters 1 - 13, Verified Newest Version

,SOLUTION MANUAL FOR g v g v




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




Patricia Libby, Frank Hodge
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Chapter 1 gv




Financial Statements and Business Decisions gv gv gv gv




ANSWERS TO QUESTIONS gv gv




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



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



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



(b) Name of the statement gv gv gv



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




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
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of time.
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(b) The purpose of the balance sheet is to report the financial position of an
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entity at a given date, that is, to report information about the assets,
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liabilities and 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
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the flow of cash into the entity (sources), the flow of cash out of the entity
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(uses), 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
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during that period.
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9. The income statement and the statement of cash flows are dated ―For the
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Year Ended December 31‖ because they report the inflows and outflows of
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resources during a period of time. In contrast, the balance sheet is dated ―At
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December 31‖ because it represents the resources, obligations, and
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stockholders’ equity at a specific date.
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, 10. Assets are important to creditors and investors because assets provide a basis
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for judging whether sufficient resources are available to operate the company.
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Assets are also important because they could be sold for cash in the event the
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company goes out of business. Liabilities are important to creditors and
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investors because the company must be able to generate sufficient cash from
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operations or further borrowing to meet the payments required by debt
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agreements. If a business does not pay its creditors, the law may give the
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creditors the right to force the sale of 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
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the excess of total expenses over total revenues.
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12. The equation for the income statement is Revenues - Expenses = Net Income
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(or Net Loss if the amount is negative). Thus, the three major items reported
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on the 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
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equation) is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable
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(expected) future economic benefits owned by the entity as a result of past
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transactions. They are the resources owned by the business at a given point in
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time such as cash, receivables, inventory, machinery, buildings, land, and
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patents. Liabilities are probable (expected) debts or obligations of the entity as a
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result of past transactions that will be paid with assets or services in the future.
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They are the obligations of the entity such as accounts payable, notes payable,
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and bonds payable. Stockholders’ equity is financing provided by owners of the
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business and operations. It is the claim of the owners to the assets of the
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business after the creditors’ claims have been satisfied. It may be thought of as
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the residual interest because it represents assets 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 =
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Change in cash for the period. The net cash flows for the period represent the
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increase or decrease in cash that occurred during the period. Cash flows from
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operating activities are cash flows directly related to earning income (normal
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business activity including interest paid and income taxes paid). Cash flows from
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investing activities include cash flows that are related to the acquisition or sale of
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productive assets used by the company. Cash flows from financing activities are
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directly related to the 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
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on 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-
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period balance sheet. gv gv