SOLUTION MANUAL FOR
FINANCIAL ACCOUNTING 11TH
EDITION
ROBERT LIBBY, PATRICIA LIBBY, FRANK
HODGE
,SOLUTION MANUAL FOR c c
Financial cAccounting c11th cEdition cRobert cLibby,
cPatricia cLibby, cFrank cHodge
Chapter 1 c
Financial Statements and Business Decisions
c c c c
ANSWERS cTO cQUESTIONS
1. Accounting cis ca csystem cthat ccollects cand cprocesses c(analyzes, cmeasures, cand
crecords) cfinancial cinformation cabout can corganization cand creports cthat
cinformation cto cdecision cmakers.
2. Financial caccounting cinvolves cpreparation cof cthe cfour cbasic cfinancial cstatements
cand crelated cdisclosures cfor cexternal cdecision cmakers. cManagerial caccounting
cinvolves cthe cpreparation cof cdetailed cplans, cbudgets, cforecasts, cand
cperformance creports cfor cinternal cdecision cmakers.
3. Financial creports care cused cby cboth cinternal cand cexternal cgroups cand
cindividuals. cThe cinternal cgroups care ccomprised cof cthe cvarious cmanagers cof cthe
centity. cThe cexternal cgroups cinclude cthe cowners, cinvestors, ccreditors,
cgovernmental cagencies, cother cinterested cparties, cand cthe cpublic cat clarge.
4. Investors cpurchase call cor cpart cof ca cbusiness cand chope cto cgain cby creceiving
cpart cof cwhat cthe ccompany cearns cand/or cselling ctheir cownership cinterest cin
cthe ccompany cin cthe cfuture cat ca chigher cprice cthan cthey cpaid. cCreditors clend
cmoney cto ca ccompany cfor ca cspecific clength cof ctime cand chope cto cgain cby
ccharging cinterest con cthe cloan.
,5. In ca csociety, ceach corganization ccan cbe cdefined cas ca cseparate caccounting
centity. cAn caccounting centity cis cthe corganization cfor cwhich cfinancial cdata care cto
cbe ccollected. cTypical caccounting centities care ca cbusiness, ca cchurch, ca
cgovernmental cunit, ca cuniversity cand cother cnonprofit corganizations csuch cas ca
chospital cand ca cwelfare corganization. cA cbusiness ctypically cis cdefined cand
ctreated cas ca cseparate centity cbecause cthe cowners, ccreditors, cinvestors, cand
cother cinterested cparties cneed cto cevaluate cits cperformance cand cits cpotential
cseparately cfrom cother centities cand cfrom cits cowners.
6. Name cof cStatement Alternative cTitle
(a) Income cStatement (a) cStatement cof cEarnings; cStatement cof
Income; cStatement cof cOperations
(b) Balance cSheet (b) cStatement cof cFinancial cPosition
(c) Cash cFlow cStatement (c) c Statement cof cCash cFlows
7. The cheading cof ceach cof cthe cfour crequired cfinancial cstatements cshould
cinclude cthe cfollowing:
(a) Name cof cthe centity
(b) Name cof cthe cstatement
(c) Date cof cthe cstatement, cor c the cperiod cof ctime
(d) Unit cof cmeasure
8. (a) The cpurpose cof cthe cincome cstatement cis cto cpresent cinformation cabout
cthe crevenues, cexpenses, cand cthe cnet cincome cof can centity cfor ca
cspecified cperiod cof ctime.
(b) The cpurpose cof cthe cbalance csheet cis cto creport cthe cfinancial cposition cof can
centity cat ca cgiven cdate, cthat cis, cto creport cinformation cabout cthe cassets,
cliabilities cand cstockholders’ cequity cof cthe centity cas cof ca cspecific cdate.
(c) The cpurpose cof cthe cstatement cof ccash cflows cis cto cpresent cinformation
cabout cthe cflow cof ccash cinto cthe centity c(sources), cthe cflow cof ccash cout cof
cthe centity c(uses), cand cthe cnet cincrease cor cdecrease cin ccash cduring cthe
cperiod.
(d) The cstatement cof cstockholders’ cequity creports cthe cchanges cin ceach cof cthe
ccompany’s cstockholders’ cequity caccounts cduring cthe caccounting cperiod,
cincluding cissue cand crepurchase cof cstock cand cthe cway cthat cnet cincome
cand cdistribution cof cdividends caffected cthe cretained cearnings cof cthe
ccompany cduring cthat cperiod.
9. The cincome cstatement cand cthe cstatement cof ccash cflows care cdated c―For cthe
cYear cEnded cDecember c31‖ cbecause cthey creport cthe cinflows cand coutflows
cof cresources cduring ca cperiod cof ctime. cIn ccontrast, cthe cbalance csheet cis
cdated c―At cDecember c31‖ cbecause cit crepresents cthe cresources, cobligations,
cand cstockholders’ cequity cat ca cspecific cdate.
, 10. Assets care cimportant cto ccreditors cand cinvestors cbecause cassets cprovide ca
cbasis cfor cjudging cwhether csufficient cresources care cavailable cto coperate cthe
ccompany. cAssets care calso cimportant cbecause cthey ccould cbe csold cfor ccash cin
cthe cevent cthe ccompany cgoes cout cof cbusiness. cLiabilities care cimportant cto
ccreditors cand cinvestors cbecause cthe ccompany cmust cbe cable cto cgenerate
csufficient ccash cfrom coperations cor cfurther cborrowing cto cmeet cthe cpayments
crequired cby cdebt cagreements. cIf ca cbusiness cdoes cnot cpay cits ccreditors, cthe
claw cmay cgive cthe ccreditors cthe cright cto cforce cthe csale cof cassets csufficient cto
cmeet ctheir cclaims.
11. Net cincome cis cthe cexcess cof ctotal crevenues cover ctotal cexpenses. cNet closs
cis cthe cexcess cof ctotal cexpenses cover ctotal crevenues.
12. The cequation cfor cthe cincome cstatement cis cRevenues c- cExpenses c= cNet
cIncome c(or cNet cLoss cif cthe camount cis cnegative). cThus, cthe cthree cmajor
citems creported con cthe cincome cstatement care c(1) crevenues, c(2) cexpenses,
cand c(3) cnet cincome.
13. The cequation cfor cthe cbalance csheet c(also cknown cas cthe cbasic caccounting
cequation) cis: cAssets c= cLiabilities c+ cStockholders’ cEquity. cAssets care cthe
cprobable c(expected) cfuture ceconomic cbenefits cowned cby cthe centity cas ca cresult
cof cpast ctransactions. cThey care cthe cresources cowned cby cthe cbusiness cat ca
cgiven cpoint cin ctime csuch cas ccash, creceivables, cinventory, cmachinery,
cbuildings, cland, cand cpatents. cLiabilities care cprobable c(expected) cdebts cor
cobligations cof cthe centity cas ca cresult cof cpast ctransactions cthat cwill cbe cpaid cwith
cassets cor cservices cin cthe cfuture. cThey care cthe cobligations cof cthe centity csuch
cas caccounts cpayable, cnotes cpayable, cand cbonds cpayable. cStockholders’
cequity cis cfinancing cprovided cby cowners cof cthe cbusiness cand coperations. cIt cis
cthe cclaim cof cthe cowners cto cthe cassets cof cthe cbusiness cafter cthe ccreditors’
cclaims chave cbeen csatisfied. cIt cmay cbe cthought cof cas cthe cresidual cinterest
cbecause cit crepresents cassets cminus cliabilities.
14. The cequation cfor cthe cstatement cof ccash cflows cis: cCash cflows cfrom coperating cactivities
+ cCash cflows cfrom cinvesting cactivities c+ cCash cflows cfrom cfinancing cactivities c=
cChange cin ccash cfor cthe cperiod. cThe cnet ccash cflows cfor cthe cperiod crepresent
cthe cincrease cor cdecrease cin ccash cthat coccurred cduring cthe cperiod. cCash cflows
cfrom coperating cactivities care ccash cflows cdirectly crelated cto cearning cincome
c(normal cbusiness cactivity cincluding cinterest cpaid cand cincome ctaxes cpaid). cCash
cflows cfrom cinvesting cactivities cinclude ccash cflows cthat care crelated cto cthe
cacquisition cor csale cof cproductive cassets cused cby cthe ccompany. cCash cflows
cfrom cfinancing cactivities care cdirectly crelated cto cthe cfinancing cof cthe centerprise
citself.
15. The cretained cearnings cequation cis: cBeginning cRetained cEarnings c+ cNet
cIncome c- cDividends c= cEnding cRetained cEarnings. cIt cbegins cwith cbeginning-
of-the-year cRetained cEarnings cwhich cis cthe cprior cyear’s cending cretained
cearnings creported con cthe cbalance csheet. cThe ccurrent cyear's cNet cIncome
creported con cthe cincome cstatement cis cadded cand cthe ccurrent cyear's
cDividends care csubtracted cfrom cthis camount. cThe cending cRetained cEarnings
camount cis creported con cthe cend-of-period cbalance csheet.
FINANCIAL ACCOUNTING 11TH
EDITION
ROBERT LIBBY, PATRICIA LIBBY, FRANK
HODGE
,SOLUTION MANUAL FOR c c
Financial cAccounting c11th cEdition cRobert cLibby,
cPatricia cLibby, cFrank cHodge
Chapter 1 c
Financial Statements and Business Decisions
c c c c
ANSWERS cTO cQUESTIONS
1. Accounting cis ca csystem cthat ccollects cand cprocesses c(analyzes, cmeasures, cand
crecords) cfinancial cinformation cabout can corganization cand creports cthat
cinformation cto cdecision cmakers.
2. Financial caccounting cinvolves cpreparation cof cthe cfour cbasic cfinancial cstatements
cand crelated cdisclosures cfor cexternal cdecision cmakers. cManagerial caccounting
cinvolves cthe cpreparation cof cdetailed cplans, cbudgets, cforecasts, cand
cperformance creports cfor cinternal cdecision cmakers.
3. Financial creports care cused cby cboth cinternal cand cexternal cgroups cand
cindividuals. cThe cinternal cgroups care ccomprised cof cthe cvarious cmanagers cof cthe
centity. cThe cexternal cgroups cinclude cthe cowners, cinvestors, ccreditors,
cgovernmental cagencies, cother cinterested cparties, cand cthe cpublic cat clarge.
4. Investors cpurchase call cor cpart cof ca cbusiness cand chope cto cgain cby creceiving
cpart cof cwhat cthe ccompany cearns cand/or cselling ctheir cownership cinterest cin
cthe ccompany cin cthe cfuture cat ca chigher cprice cthan cthey cpaid. cCreditors clend
cmoney cto ca ccompany cfor ca cspecific clength cof ctime cand chope cto cgain cby
ccharging cinterest con cthe cloan.
,5. In ca csociety, ceach corganization ccan cbe cdefined cas ca cseparate caccounting
centity. cAn caccounting centity cis cthe corganization cfor cwhich cfinancial cdata care cto
cbe ccollected. cTypical caccounting centities care ca cbusiness, ca cchurch, ca
cgovernmental cunit, ca cuniversity cand cother cnonprofit corganizations csuch cas ca
chospital cand ca cwelfare corganization. cA cbusiness ctypically cis cdefined cand
ctreated cas ca cseparate centity cbecause cthe cowners, ccreditors, cinvestors, cand
cother cinterested cparties cneed cto cevaluate cits cperformance cand cits cpotential
cseparately cfrom cother centities cand cfrom cits cowners.
6. Name cof cStatement Alternative cTitle
(a) Income cStatement (a) cStatement cof cEarnings; cStatement cof
Income; cStatement cof cOperations
(b) Balance cSheet (b) cStatement cof cFinancial cPosition
(c) Cash cFlow cStatement (c) c Statement cof cCash cFlows
7. The cheading cof ceach cof cthe cfour crequired cfinancial cstatements cshould
cinclude cthe cfollowing:
(a) Name cof cthe centity
(b) Name cof cthe cstatement
(c) Date cof cthe cstatement, cor c the cperiod cof ctime
(d) Unit cof cmeasure
8. (a) The cpurpose cof cthe cincome cstatement cis cto cpresent cinformation cabout
cthe crevenues, cexpenses, cand cthe cnet cincome cof can centity cfor ca
cspecified cperiod cof ctime.
(b) The cpurpose cof cthe cbalance csheet cis cto creport cthe cfinancial cposition cof can
centity cat ca cgiven cdate, cthat cis, cto creport cinformation cabout cthe cassets,
cliabilities cand cstockholders’ cequity cof cthe centity cas cof ca cspecific cdate.
(c) The cpurpose cof cthe cstatement cof ccash cflows cis cto cpresent cinformation
cabout cthe cflow cof ccash cinto cthe centity c(sources), cthe cflow cof ccash cout cof
cthe centity c(uses), cand cthe cnet cincrease cor cdecrease cin ccash cduring cthe
cperiod.
(d) The cstatement cof cstockholders’ cequity creports cthe cchanges cin ceach cof cthe
ccompany’s cstockholders’ cequity caccounts cduring cthe caccounting cperiod,
cincluding cissue cand crepurchase cof cstock cand cthe cway cthat cnet cincome
cand cdistribution cof cdividends caffected cthe cretained cearnings cof cthe
ccompany cduring cthat cperiod.
9. The cincome cstatement cand cthe cstatement cof ccash cflows care cdated c―For cthe
cYear cEnded cDecember c31‖ cbecause cthey creport cthe cinflows cand coutflows
cof cresources cduring ca cperiod cof ctime. cIn ccontrast, cthe cbalance csheet cis
cdated c―At cDecember c31‖ cbecause cit crepresents cthe cresources, cobligations,
cand cstockholders’ cequity cat ca cspecific cdate.
, 10. Assets care cimportant cto ccreditors cand cinvestors cbecause cassets cprovide ca
cbasis cfor cjudging cwhether csufficient cresources care cavailable cto coperate cthe
ccompany. cAssets care calso cimportant cbecause cthey ccould cbe csold cfor ccash cin
cthe cevent cthe ccompany cgoes cout cof cbusiness. cLiabilities care cimportant cto
ccreditors cand cinvestors cbecause cthe ccompany cmust cbe cable cto cgenerate
csufficient ccash cfrom coperations cor cfurther cborrowing cto cmeet cthe cpayments
crequired cby cdebt cagreements. cIf ca cbusiness cdoes cnot cpay cits ccreditors, cthe
claw cmay cgive cthe ccreditors cthe cright cto cforce cthe csale cof cassets csufficient cto
cmeet ctheir cclaims.
11. Net cincome cis cthe cexcess cof ctotal crevenues cover ctotal cexpenses. cNet closs
cis cthe cexcess cof ctotal cexpenses cover ctotal crevenues.
12. The cequation cfor cthe cincome cstatement cis cRevenues c- cExpenses c= cNet
cIncome c(or cNet cLoss cif cthe camount cis cnegative). cThus, cthe cthree cmajor
citems creported con cthe cincome cstatement care c(1) crevenues, c(2) cexpenses,
cand c(3) cnet cincome.
13. The cequation cfor cthe cbalance csheet c(also cknown cas cthe cbasic caccounting
cequation) cis: cAssets c= cLiabilities c+ cStockholders’ cEquity. cAssets care cthe
cprobable c(expected) cfuture ceconomic cbenefits cowned cby cthe centity cas ca cresult
cof cpast ctransactions. cThey care cthe cresources cowned cby cthe cbusiness cat ca
cgiven cpoint cin ctime csuch cas ccash, creceivables, cinventory, cmachinery,
cbuildings, cland, cand cpatents. cLiabilities care cprobable c(expected) cdebts cor
cobligations cof cthe centity cas ca cresult cof cpast ctransactions cthat cwill cbe cpaid cwith
cassets cor cservices cin cthe cfuture. cThey care cthe cobligations cof cthe centity csuch
cas caccounts cpayable, cnotes cpayable, cand cbonds cpayable. cStockholders’
cequity cis cfinancing cprovided cby cowners cof cthe cbusiness cand coperations. cIt cis
cthe cclaim cof cthe cowners cto cthe cassets cof cthe cbusiness cafter cthe ccreditors’
cclaims chave cbeen csatisfied. cIt cmay cbe cthought cof cas cthe cresidual cinterest
cbecause cit crepresents cassets cminus cliabilities.
14. The cequation cfor cthe cstatement cof ccash cflows cis: cCash cflows cfrom coperating cactivities
+ cCash cflows cfrom cinvesting cactivities c+ cCash cflows cfrom cfinancing cactivities c=
cChange cin ccash cfor cthe cperiod. cThe cnet ccash cflows cfor cthe cperiod crepresent
cthe cincrease cor cdecrease cin ccash cthat coccurred cduring cthe cperiod. cCash cflows
cfrom coperating cactivities care ccash cflows cdirectly crelated cto cearning cincome
c(normal cbusiness cactivity cincluding cinterest cpaid cand cincome ctaxes cpaid). cCash
cflows cfrom cinvesting cactivities cinclude ccash cflows cthat care crelated cto cthe
cacquisition cor csale cof cproductive cassets cused cby cthe ccompany. cCash cflows
cfrom cfinancing cactivities care cdirectly crelated cto cthe cfinancing cof cthe centerprise
citself.
15. The cretained cearnings cequation cis: cBeginning cRetained cEarnings c+ cNet
cIncome c- cDividends c= cEnding cRetained cEarnings. cIt cbegins cwith cbeginning-
of-the-year cRetained cEarnings cwhich cis cthe cprior cyear’s cending cretained
cearnings creported con cthe cbalance csheet. cThe ccurrent cyear's cNet cIncome
creported con cthe cincome cstatement cis cadded cand cthe ccurrent cyear's
cDividends care csubtracted cfrom cthis camount. cThe cending cRetained cEarnings
camount cis creported con cthe cend-of-period cbalance csheet.
