SOLUTION MANUAL FOR
Financial Accounting 12th Edition
Robert Libby, Patricia Libby, Frank Hodge
,SOLUTION MANUAL FOR
Financial Accounting12th Edition RobertLibby, Patricia Libby,
Frank Hodge
Chapter1
FinancialStatementsandBusinessDecisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and records)
financial
informationaboutan organizationand reportsthatinformationto decision makers.
2. Financial accountinginvolvespreparationof thefour basicfinancialstatementsand 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 reportsareusedby bothinternaland externalgroupsand 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
thewhat
company earnsand/or selling their ownership interestin thecompanyin thefutureat a higher
price thantheypaid. Creditorslend moneyto a companyfor 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 its
evaluate
performanceand its potentialseparatelyfrom otherentitiesand from its owners.
6. Nameof Statement AlternativeTitle
(a) Income Statement (a) Statementof Earnings;Statementof
Income;Statementof Operations
(b) BalanceSheet (b) Statementof Financial Position
(c) Cash Flow Statement (c) Statementof Cash Flows
7. The headingof eachof thefour requiredfinancial statements
shouldincludethe following:
(a) Name of theentity
(b) Nameof thestatement
(c) Dateof thestatement,or theperiodof time
(d) Unit of measure
8. (a) The purpose of the income statement is to present information about the revenues,
expenses,and the netincomeof anentityfor aspecifiedperiod oftime.
(b) The purposeof thebalancesheetis to reportthefinancialpositionof an entity at a given
date, that is, to report information about the assets, liabilities and stockholders’ equity of the
entity as of a specific date.
(c) The purposeof thestatementof cashflowsis to presentinformationaboutthe 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) The statement of stockholders’ equity reports the changes in each of the company’s
stockholders’ equity accounts during the accounting period, including issue and
repurchase of stock and the way that net income and distribution of dividendsaffectedthe
retainedearnings ofthecompanyduring that period.
9. The income statement and the statement of cash flows are―For datedthe Year Ended
December 31‖ because they report theinflows and outflows of resources during
a periodof
time.In contrast,thebalancesheetis dated―At December31‖ because it represents the
resources, obligations, and stockholders’ equity at a specific date.
, 10. Assetsareimportantto creditorsand investorsbecauseassetsprovidea basisfor judgingwhether
sufficientresourcesare availableto operatethecompany. Assets are also important because they
could be soldfor 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 incomeis theexcessof totalrevenuesover total expenses.
Net lossis the excess of total
expenses over total revenues.
12. The equationfor theincomestatementis 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 =
Liabilities + Stockholders’ Equity. Assets are the probable (expected) future
economicbenefits
ownedby theentityas a resultof pasttransactions.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
entity such as accounts payable, notes payable, and bonds payable. Stockholders’ equity is
financing provided by owners of the business and operations. It is the claim of the owners to the
assets of the business after the creditors’ claims have been satisfied. It may be thought of as the
residual interest because it represents assets minus liabilities.
14. The equationfor thestatementof cashflowsis: Cash flowsfrom operatingactivities
+ 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 activityincluding interestpaid and incometaxespaid). Cash
flowsfrom investingactivitiesincludecashflowsthatarerelatedto theacquisitionor saleof
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 RetainedEarnings which is the
prior year’sendingretainedearningsreportedon 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-of- end
period balance sheet.
Financial Accounting 12th Edition
Robert Libby, Patricia Libby, Frank Hodge
,SOLUTION MANUAL FOR
Financial Accounting12th Edition RobertLibby, Patricia Libby,
Frank Hodge
Chapter1
FinancialStatementsandBusinessDecisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and records)
financial
informationaboutan organizationand reportsthatinformationto decision makers.
2. Financial accountinginvolvespreparationof thefour basicfinancialstatementsand 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 reportsareusedby bothinternaland externalgroupsand 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
thewhat
company earnsand/or selling their ownership interestin thecompanyin thefutureat a higher
price thantheypaid. Creditorslend moneyto a companyfor 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 its
evaluate
performanceand its potentialseparatelyfrom otherentitiesand from its owners.
6. Nameof Statement AlternativeTitle
(a) Income Statement (a) Statementof Earnings;Statementof
Income;Statementof Operations
(b) BalanceSheet (b) Statementof Financial Position
(c) Cash Flow Statement (c) Statementof Cash Flows
7. The headingof eachof thefour requiredfinancial statements
shouldincludethe following:
(a) Name of theentity
(b) Nameof thestatement
(c) Dateof thestatement,or theperiodof time
(d) Unit of measure
8. (a) The purpose of the income statement is to present information about the revenues,
expenses,and the netincomeof anentityfor aspecifiedperiod oftime.
(b) The purposeof thebalancesheetis to reportthefinancialpositionof an entity at a given
date, that is, to report information about the assets, liabilities and stockholders’ equity of the
entity as of a specific date.
(c) The purposeof thestatementof cashflowsis to presentinformationaboutthe 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) The statement of stockholders’ equity reports the changes in each of the company’s
stockholders’ equity accounts during the accounting period, including issue and
repurchase of stock and the way that net income and distribution of dividendsaffectedthe
retainedearnings ofthecompanyduring that period.
9. The income statement and the statement of cash flows are―For datedthe Year Ended
December 31‖ because they report theinflows and outflows of resources during
a periodof
time.In contrast,thebalancesheetis dated―At December31‖ because it represents the
resources, obligations, and stockholders’ equity at a specific date.
, 10. Assetsareimportantto creditorsand investorsbecauseassetsprovidea basisfor judgingwhether
sufficientresourcesare availableto operatethecompany. Assets are also important because they
could be soldfor 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 incomeis theexcessof totalrevenuesover total expenses.
Net lossis the excess of total
expenses over total revenues.
12. The equationfor theincomestatementis 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 =
Liabilities + Stockholders’ Equity. Assets are the probable (expected) future
economicbenefits
ownedby theentityas a resultof pasttransactions.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
entity such as accounts payable, notes payable, and bonds payable. Stockholders’ equity is
financing provided by owners of the business and operations. It is the claim of the owners to the
assets of the business after the creditors’ claims have been satisfied. It may be thought of as the
residual interest because it represents assets minus liabilities.
14. The equationfor thestatementof cashflowsis: Cash flowsfrom operatingactivities
+ 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 activityincluding interestpaid and incometaxespaid). Cash
flowsfrom investingactivitiesincludecashflowsthatarerelatedto theacquisitionor saleof
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 RetainedEarnings which is the
prior year’sendingretainedearningsreportedon 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-of- end
period balance sheet.
