FULL SOLUTION MANUAL FOR n n n
Financial Accounting 11th Edition Robert Libby, n n n n n
Patricia Libby, Frank Hodge
n n n n
ANATASHIA
Chapter 1 n
Financial Statements and Business Decisions n n n n
ANSWERS TO QUESTIONS n n
1. Accounting is a system that collects and processes (analyzes, measures, and
n n n n n n n n n n
records) financial information about an organization and reports that information to
n n n n n n n n n n n
decision makers.
n n
2. Financial accounting involves preparation of the four basic financial statements and
n n n n n n n n n n
related disclosures for external decision makers. Managerial accounting involves
n n n n n n n n n
the preparation of detailed plans, budgets, forecasts, and performance reports for
n n n n n n n n n n n
internal decision makers.
n n n
3. Financial reports are used by both internal and external groups and individuals. The
n n n n n n n n n n n n
internal groups are comprised of the various managers of the entity. The external
n n n n n n n n n n n n n
groups include the owners, investors, creditors, governmental agencies, other
n n n n n n n n n
interested parties, and the public at large.
n n n n n n n
4. Investors purchase all or part of a business and hope to gain by receiving part of
n n n n n n n n n n n n n n n
what the company earns and/or selling their ownership interest in the company in
n n n n n n n n n n n n n
the future at a higher price than they paid. Creditors lend money to a company for a
n n n n n n n n n n n n n n n n n
specific length of time and hope to gain by charging interest on the loan.
n n n n n n n n n n n n n n
Financial Accounting, 11/e
n n 2-1
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
,5. In a society, each organization can be defined as a separate accounting entity. An
n n n n n n n n n n n n n
accounting entity is the organization for which financial data are to be collected.
n n n n n n n n n n n n n
Typical accounting entities are a business, a church, a governmental unit, a
n n n n n n n n n n n n
university and other nonprofit organizations such as a hospital and a welfare
n n n n n n n n n n n n
organization. A business typically is defined and treated as a separate entity
n n n n n n n n n n n n
because the owners, creditors, investors, and other interested parties need to
n n n n n n n n n n n
evaluate its performance and its potential separately from other entities and from its
ANATASHIA
n n n n n n n n n n n n n
owners.
n
6. Name of Statement n n Alternative Title n
(a) Income Statement n (a) Statement of Earnings; Statement of
n n n n n
Income; Statement of Operations n n n
(b) Balance Sheet n (b) Statement of Financial Position
n n n n
(c) Cash Flow Statement n n (c) Statement of Cash Flows
n n n n
7. The heading of each of the four required financial statements should include the
n n n n n n n n n n n n
following:
n
(a) Name of the entity n n n
(b) Name of the statement n n n
(c) Date of the statement, or the period of time
n n n n n n n n
(d) Unit of measure n n
8. (a) The purpose of the income statement is to present information about the
n n n n n n n n n n n
revenues, expenses, and the net income of an entity for a specified period of
n n n n n n n n n n n n n n
time.
n
(b) The purpose of the balance sheet is to report the financial position of an entity at
n n n n n n n n n n n n n n n
a given date, that is, to report information about the assets, liabilities and
n n n n n n n n n n n n n
stockholders’ equity of the entity as of a specific date.
n n n n n n n n n n
(c) The purpose of the statement of cash flows is to present information about the
n n n n n n n n n n n n n
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
n n n n n n n n n n n n n n n n
and the net increase or decrease in cash during the period.
n n n n n n n n n n n
(d) The statement of stockholders’ equity reports the changes in each of the
n n n n n n n n n n n
company’s stockholders’ equity accounts during the accounting period,
n n n n n n n n
including issue and repurchase of stock and the way that net income and
n n n n n n n n n n n n n
distribution of dividends affected the retained earnings of the company during
n n n n n n n n n n n
that period.
n n
9. The income statement and the statement of cash flows are dated ―For the Year
n n n n n n n n n n n n n
Ended December 31‖ because they report the inflows and outflows of resources
n n n n n n n n n n n n
during a period of time. In contrast, the balance sheet is dated ―At December 31‖
n n n n n n n n n n n n n n n
because it represents the resources, obligations, and stockholders’ equity at a
n n n n n n n n n n n
specific date.
n n
2-2 Solutions Manual n
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
,10. Assets are important to creditors and investors because assets provide a basis for
n n n n n n n n n n n n
judging whether sufficient resources are available to operate the company. Assets
n n n n n n n n n n n
are also important because they could be sold for cash in the event the company
n n n n n n n n n n n n n n n
goes out of business. Liabilities are important to creditors and investors because the
n n n n n n n n n n n n n
company must be able to generate sufficient cash from operations or further
n n n n n n n n n n n n
borrowing to meet the payments required by debt agreements. If a business does
n n n n n n n n n n n n n
not pay its creditors, the law may give the creditors the right to force the sale of
ANATASHIA
n n n n n n n n n n n n n n n n n
assets sufficient to meet their claims.
n n n n n n
11. Net income is the excess of total revenues over total expenses. Net loss is the
n n n n n n n n n n n n n n
excess of total expenses over total revenues.
n n n n n n n
12. The equation for the income statement is Revenues - Expenses = Net Income (or
n n n n n n n n n n n n n
Net Loss if the amount is negative). Thus, the three major items reported on the
n n n n n n n n n n n n n n n
income statement are (1) revenues, (2) expenses, and (3) net income.
n n n n n n n n n n n
13. The equation for the balance sheet (also known as the basic accounting equation) is:
n n n n n n n n n n n n n
Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
n n n n n n n n n n n
future economic benefits owned by the entity as a result of past transactions. They
n n n n n n n n n n n n n n
are the resources owned by the business at a given point in time such as cash,
n n n n n n n n n n n n n n n n
receivables, inventory, machinery, buildings, land, and patents. Liabilities are
n n n n n n n n n
probable (expected) debts or obligations of the entity as a result of past transactions
n n n n n n n n n n n n n n
that will be paid with assets or services in the future. They are the obligations of the
n n n n n n n n n n n n n n n n n
entity such as accounts payable, notes payable, and bonds payable. Stockholders’
n n n n n n n n n n n
equity is financing provided by owners of the business and operations. It is the claim
n n n n n n n n n n n n n n n
of the owners to the assets of the business after the creditors’ claims have been
n n n n n n n n n n n n n n n
satisfied. It may be thought of as the residual interest because it represents assets
n n n n n n n n n n n n n n
minus liabilities.
n n
14. The equation for the statement of cash flows is: Cash flows from operating activities
n n n n n n n n n n n n n
+ Cash flows from investing activities + Cash flows from financing activities = Change
n n n n n n n n n n n n n
in cash for the period. The net cash flows for the period represent the increase or
n n n n n n n n n n n n n n n n
decrease in cash that occurred during the period. Cash flows from operating
n n n n n n n n n n n n
activities are cash flows directly related to earning income (normal business activity
n n n n n n n n n n n n
including interest paid and income taxes paid). Cash flows from investing activities
n n n n n n n n n n n n
include cash flows that are related to the acquisition or sale of productive assets used
n n n n n n n n n n n n n n n
by the company. Cash flows from financing activities are directly related to the
n n n n n n n n n n n n n
financing of the enterprise itself.
n n n n n
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
n n n n n n n n n n n
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
n n n n n n n n n
Retained Earnings which is the prior year’s ending retained earnings reported on
n n n n n n n n n n n n
the balance sheet. The current year's Net Income reported on the income
n n n n n n n n n n n n
statement is added and the current year's Dividends are subtracted from this
n n n n n n n n n n n n
amount. The ending Retained Earnings amount is reported on the end-of-period
n n n n n n n n n n n
balance sheet.
n n
Financial Accounting, 11/e
n n 2-3
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
, 16. Marketing managers and credit managers use customers' financial statements to
n n n n n n n n n
decide whether to extend them credit for their purchases. Purchasing managers use
n n n n n n n n n n n n
potential suppliers' financial statements to judge whether the suppliers have the
n n n n n n n n n n n
resources necessary to meet current and future demand. Human resource
n n n n n n n n n n
managers use financial statements as a basis for contract negotiations, to determine
n n n n n n n n n n n n
what pay rates the company can afford. The net income figure even serves as a
n n n n n n n n n n n n n n n
basis to pay bonuses not only to management, but to other employees through profit
ANATASHIA
n n n n n n n n n n n n n n
sharing plans.
n n
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
n n n n n n n n n n
which determines the financial statements that public companies must provide to
n n n n n n n n n n n
stockholders and the measurement rules used in producing those statements. The
n n n n n n n n n n n
Financial Accounting Standards Board (FASB) is the private sector body given the
n n n n n n n n n n n n
primary responsibility to work out the detailed rules which become generally
n n n n n n n n n n n
accepted accounting principles.
n n n
18. Management is responsible for preparing the financial statements and other n n n n n n n n n
information contained in the annual report and for the maintenance of a system of
n n n n n n n n n n n n n n
internal accounting policies, procedures and controls. These measures are intended
n n n n n n n n n n
to provide reasonable assurance, at appropriate cost, that transactions are processed
n n n n n n n n n n n
in accordance with company authorization as well as properly recorded and reported
n n n n n n n n n n n n
in the financial statements, and that assets are adequately safeguarded.
n n n n n n n n n n
Independent auditors examine the financial reports (prepared by management) and
n n n n n n n n n n
the underlying records to assure that the reports represent what they claim and
n n n n n n n n n n n n n
conform with generally accepted accounting principles (GAAP).
n n n n n n n
19. A sole proprietorship is an unincorporated business owned by one individual. A
n n n n n n n n n n n
partnership is an unincorporated association of two or more individuals to carry on a
n n n n n n n n n n n n n n
business. A corporation is a business that is organized under the laws of a particular
n n n n n n n n n n n n n n n
state whereby a charter is granted and the entity is authorized to issue shares of
n n n n n n n n n n n n n n n
stock as evidence of ownership by the owners (i.e., stockholders).
n n n n n n n n n n
20. A CPA firm normally renders three services: auditing, management advisory
n n n n n n n n n
services, and tax services. Auditing involves examination of the records and
n n n n n n n n n n n
financial reports to determine whether they ―fairly present‖ the financial position and
n n n n n n n n n n n n
results of operations of the entity. Management advisory services involve
n n n n n n n n n n
management advice to individual business enterprises and other entities, much like
n n n n n n n n n n n
those provided by a consulting firm. Tax services involve providing tax planning
n n n n n n n n n n n n
advice to clients (both individuals and businesses) and preparation of their tax
n n n n n n n n n n n n
returns.
n
ANSWERS TO MULTIPLE CHOICE n n n
1. b) n 2. d) n 3. d) n 4. c) n 5. a) n
6. d) n 7. a) n 8. a) n 9. c) n 10. b) n
2-4 Solutions Manual n
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
Financial Accounting 11th Edition Robert Libby, n n n n n
Patricia Libby, Frank Hodge
n n n n
ANATASHIA
Chapter 1 n
Financial Statements and Business Decisions n n n n
ANSWERS TO QUESTIONS n n
1. Accounting is a system that collects and processes (analyzes, measures, and
n n n n n n n n n n
records) financial information about an organization and reports that information to
n n n n n n n n n n n
decision makers.
n n
2. Financial accounting involves preparation of the four basic financial statements and
n n n n n n n n n n
related disclosures for external decision makers. Managerial accounting involves
n n n n n n n n n
the preparation of detailed plans, budgets, forecasts, and performance reports for
n n n n n n n n n n n
internal decision makers.
n n n
3. Financial reports are used by both internal and external groups and individuals. The
n n n n n n n n n n n n
internal groups are comprised of the various managers of the entity. The external
n n n n n n n n n n n n n
groups include the owners, investors, creditors, governmental agencies, other
n n n n n n n n n
interested parties, and the public at large.
n n n n n n n
4. Investors purchase all or part of a business and hope to gain by receiving part of
n n n n n n n n n n n n n n n
what the company earns and/or selling their ownership interest in the company in
n n n n n n n n n n n n n
the future at a higher price than they paid. Creditors lend money to a company for a
n n n n n n n n n n n n n n n n n
specific length of time and hope to gain by charging interest on the loan.
n n n n n n n n n n n n n n
Financial Accounting, 11/e
n n 2-1
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
,5. In a society, each organization can be defined as a separate accounting entity. An
n n n n n n n n n n n n n
accounting entity is the organization for which financial data are to be collected.
n n n n n n n n n n n n n
Typical accounting entities are a business, a church, a governmental unit, a
n n n n n n n n n n n n
university and other nonprofit organizations such as a hospital and a welfare
n n n n n n n n n n n n
organization. A business typically is defined and treated as a separate entity
n n n n n n n n n n n n
because the owners, creditors, investors, and other interested parties need to
n n n n n n n n n n n
evaluate its performance and its potential separately from other entities and from its
ANATASHIA
n n n n n n n n n n n n n
owners.
n
6. Name of Statement n n Alternative Title n
(a) Income Statement n (a) Statement of Earnings; Statement of
n n n n n
Income; Statement of Operations n n n
(b) Balance Sheet n (b) Statement of Financial Position
n n n n
(c) Cash Flow Statement n n (c) Statement of Cash Flows
n n n n
7. The heading of each of the four required financial statements should include the
n n n n n n n n n n n n
following:
n
(a) Name of the entity n n n
(b) Name of the statement n n n
(c) Date of the statement, or the period of time
n n n n n n n n
(d) Unit of measure n n
8. (a) The purpose of the income statement is to present information about the
n n n n n n n n n n n
revenues, expenses, and the net income of an entity for a specified period of
n n n n n n n n n n n n n n
time.
n
(b) The purpose of the balance sheet is to report the financial position of an entity at
n n n n n n n n n n n n n n n
a given date, that is, to report information about the assets, liabilities and
n n n n n n n n n n n n n
stockholders’ equity of the entity as of a specific date.
n n n n n n n n n n
(c) The purpose of the statement of cash flows is to present information about the
n n n n n n n n n n n n n
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
n n n n n n n n n n n n n n n n
and the net increase or decrease in cash during the period.
n n n n n n n n n n n
(d) The statement of stockholders’ equity reports the changes in each of the
n n n n n n n n n n n
company’s stockholders’ equity accounts during the accounting period,
n n n n n n n n
including issue and repurchase of stock and the way that net income and
n n n n n n n n n n n n n
distribution of dividends affected the retained earnings of the company during
n n n n n n n n n n n
that period.
n n
9. The income statement and the statement of cash flows are dated ―For the Year
n n n n n n n n n n n n n
Ended December 31‖ because they report the inflows and outflows of resources
n n n n n n n n n n n n
during a period of time. In contrast, the balance sheet is dated ―At December 31‖
n n n n n n n n n n n n n n n
because it represents the resources, obligations, and stockholders’ equity at a
n n n n n n n n n n n
specific date.
n n
2-2 Solutions Manual n
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
,10. Assets are important to creditors and investors because assets provide a basis for
n n n n n n n n n n n n
judging whether sufficient resources are available to operate the company. Assets
n n n n n n n n n n n
are also important because they could be sold for cash in the event the company
n n n n n n n n n n n n n n n
goes out of business. Liabilities are important to creditors and investors because the
n n n n n n n n n n n n n
company must be able to generate sufficient cash from operations or further
n n n n n n n n n n n n
borrowing to meet the payments required by debt agreements. If a business does
n n n n n n n n n n n n n
not pay its creditors, the law may give the creditors the right to force the sale of
ANATASHIA
n n n n n n n n n n n n n n n n n
assets sufficient to meet their claims.
n n n n n n
11. Net income is the excess of total revenues over total expenses. Net loss is the
n n n n n n n n n n n n n n
excess of total expenses over total revenues.
n n n n n n n
12. The equation for the income statement is Revenues - Expenses = Net Income (or
n n n n n n n n n n n n n
Net Loss if the amount is negative). Thus, the three major items reported on the
n n n n n n n n n n n n n n n
income statement are (1) revenues, (2) expenses, and (3) net income.
n n n n n n n n n n n
13. The equation for the balance sheet (also known as the basic accounting equation) is:
n n n n n n n n n n n n n
Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
n n n n n n n n n n n
future economic benefits owned by the entity as a result of past transactions. They
n n n n n n n n n n n n n n
are the resources owned by the business at a given point in time such as cash,
n n n n n n n n n n n n n n n n
receivables, inventory, machinery, buildings, land, and patents. Liabilities are
n n n n n n n n n
probable (expected) debts or obligations of the entity as a result of past transactions
n n n n n n n n n n n n n n
that will be paid with assets or services in the future. They are the obligations of the
n n n n n n n n n n n n n n n n n
entity such as accounts payable, notes payable, and bonds payable. Stockholders’
n n n n n n n n n n n
equity is financing provided by owners of the business and operations. It is the claim
n n n n n n n n n n n n n n n
of the owners to the assets of the business after the creditors’ claims have been
n n n n n n n n n n n n n n n
satisfied. It may be thought of as the residual interest because it represents assets
n n n n n n n n n n n n n n
minus liabilities.
n n
14. The equation for the statement of cash flows is: Cash flows from operating activities
n n n n n n n n n n n n n
+ Cash flows from investing activities + Cash flows from financing activities = Change
n n n n n n n n n n n n n
in cash for the period. The net cash flows for the period represent the increase or
n n n n n n n n n n n n n n n n
decrease in cash that occurred during the period. Cash flows from operating
n n n n n n n n n n n n
activities are cash flows directly related to earning income (normal business activity
n n n n n n n n n n n n
including interest paid and income taxes paid). Cash flows from investing activities
n n n n n n n n n n n n
include cash flows that are related to the acquisition or sale of productive assets used
n n n n n n n n n n n n n n n
by the company. Cash flows from financing activities are directly related to the
n n n n n n n n n n n n n
financing of the enterprise itself.
n n n n n
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
n n n n n n n n n n n
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
n n n n n n n n n
Retained Earnings which is the prior year’s ending retained earnings reported on
n n n n n n n n n n n n
the balance sheet. The current year's Net Income reported on the income
n n n n n n n n n n n n
statement is added and the current year's Dividends are subtracted from this
n n n n n n n n n n n n
amount. The ending Retained Earnings amount is reported on the end-of-period
n n n n n n n n n n n
balance sheet.
n n
Financial Accounting, 11/e
n n 2-3
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
, 16. Marketing managers and credit managers use customers' financial statements to
n n n n n n n n n
decide whether to extend them credit for their purchases. Purchasing managers use
n n n n n n n n n n n n
potential suppliers' financial statements to judge whether the suppliers have the
n n n n n n n n n n n
resources necessary to meet current and future demand. Human resource
n n n n n n n n n n
managers use financial statements as a basis for contract negotiations, to determine
n n n n n n n n n n n n
what pay rates the company can afford. The net income figure even serves as a
n n n n n n n n n n n n n n n
basis to pay bonuses not only to management, but to other employees through profit
ANATASHIA
n n n n n n n n n n n n n n
sharing plans.
n n
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
n n n n n n n n n n
which determines the financial statements that public companies must provide to
n n n n n n n n n n n
stockholders and the measurement rules used in producing those statements. The
n n n n n n n n n n n
Financial Accounting Standards Board (FASB) is the private sector body given the
n n n n n n n n n n n n
primary responsibility to work out the detailed rules which become generally
n n n n n n n n n n n
accepted accounting principles.
n n n
18. Management is responsible for preparing the financial statements and other n n n n n n n n n
information contained in the annual report and for the maintenance of a system of
n n n n n n n n n n n n n n
internal accounting policies, procedures and controls. These measures are intended
n n n n n n n n n n
to provide reasonable assurance, at appropriate cost, that transactions are processed
n n n n n n n n n n n
in accordance with company authorization as well as properly recorded and reported
n n n n n n n n n n n n
in the financial statements, and that assets are adequately safeguarded.
n n n n n n n n n n
Independent auditors examine the financial reports (prepared by management) and
n n n n n n n n n n
the underlying records to assure that the reports represent what they claim and
n n n n n n n n n n n n n
conform with generally accepted accounting principles (GAAP).
n n n n n n n
19. A sole proprietorship is an unincorporated business owned by one individual. A
n n n n n n n n n n n
partnership is an unincorporated association of two or more individuals to carry on a
n n n n n n n n n n n n n n
business. A corporation is a business that is organized under the laws of a particular
n n n n n n n n n n n n n n n
state whereby a charter is granted and the entity is authorized to issue shares of
n n n n n n n n n n n n n n n
stock as evidence of ownership by the owners (i.e., stockholders).
n n n n n n n n n n
20. A CPA firm normally renders three services: auditing, management advisory
n n n n n n n n n
services, and tax services. Auditing involves examination of the records and
n n n n n n n n n n n
financial reports to determine whether they ―fairly present‖ the financial position and
n n n n n n n n n n n n
results of operations of the entity. Management advisory services involve
n n n n n n n n n n
management advice to individual business enterprises and other entities, much like
n n n n n n n n n n n
those provided by a consulting firm. Tax services involve providing tax planning
n n n n n n n n n n n n
advice to clients (both individuals and businesses) and preparation of their tax
n n n n n n n n n n n n
returns.
n
ANSWERS TO MULTIPLE CHOICE n n n
1. b) n 2. d) n 3. d) n 4. c) n 5. a) n
6. d) n 7. a) n 8. a) n 9. c) n 10. b) n
2-4 Solutions Manual n
© nMcGraw nHill nLLC. n All nrights nreserved. nNo nreproduction nor ndistribution nwithout nthe nprior nwritten nconsent nof nMcGraw n Hill
nLLC.
