,ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
Chapter 1
Financial Statements and Business Decisions
Revised: August 5, 2022
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 basic financial statements and related
disclosures for external decision makers. Reporting is generally on a quarterly and annual
basis. Managerial accounting involves the preparation of detailed plans, budgets, forecasts,
and performance reports for internal decision makers. Reporting is on an ongoing basis.
3. Financial reports are used by both internal and external groups and individuals. The
internal users are the various managers of the entity, e.g. marketing, credit, and
purchasing. 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 by selling their share of 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. 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. A business 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. Statement of earnings Income statement
b. Statement of financial position Balance sheet
c. Statement of cash flows Cash flow statement
7. The heading of each of the four required financial statements should include the following:
(a) Name of the entity
(b) Title of the statement
(c) Specific date or the period of time it covers
(d) Unit of measure
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,ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
8. (a) The purpose of the statement of earnings is to present information about the
revenues, expenses, and the net earnings of the entity for a specified period of time,
in order to help assess its financial performance during that period.
(b) The purpose of the statement of financial position is to report the financial position
of an entity at a given date, that is, to report information about the assets,
obligations, and shareholders’ equity of the entity as at a specific date.
(c) The statement of changes in equity reports the way that net earnings, the
distribution of net earnings (dividends), and other changes to shareholders’ equity
affected the company’s financial position during the accounting period. The focus in
this chapter is on retained earnings. Net earnings for the year increases the balance
of retained earnings whereas the declaration of dividends to the shareholders
decreases retained earnings.
(d) 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.
9. The statement of earnings 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 statement of financial position is dated “At December 31” because
it represents the resources, obligations, and shareholders’ equity as at a specific date,
December 31.
10. Assets are important to investors and creditors because assets provide a basis for judging
whether sufficient resources are available to operate the company. Liabilities are
important to creditors and investors because the company must be able to generate
sufficient cash from operations or seek 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 the creditors’ claims.
11. Net earnings is the excess of total revenues over total expenses. Net loss is the excess of
total expenses over total revenues.
12. The accounting equation for the statement of earnings is Revenues – Expenses = Net
earnings. Revenues result from the sale of goods and services to customers, regardless of
the timing of collection of cash from customers. Expenses represent the monetary value of
resources the entity used up, or consumed, to earn revenues during the period. Net
earnings is simply the excess of revenues over expenses.
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, ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
13. The accounting equation for the statement of financial position is:
Assets = Liabilities + Shareholders’ Equity
Assets are the probable (expected) future 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, accounts receivable, merchandise 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 discharged with assets (usually cash) or services in
the future. They are the obligations of the entity such as accounts payable and notes
payable. Shareholders’ equity is financing provided by owners of the business and by the
net earnings generated from the operations of the business. It is the claim of the owners to
the assets of the business after the creditors’ claims have been satisfied. Shareholders’
equity may be thought of as the residual interest because it represents assets minus
liabilities.
14. The accounting equation for retained earnings is:
Beginning retained earnings + Net earnings – Dividends = Ending retained earnings
The equation begins with beginning-of-the-year retained earnings, i.e., the prior year’s
ending retained earnings reported on the statement of financial position. The current
year's net earnings reported on the statement of earnings is added to this amount and the
dividends declared during the current year are subtracted from this amount. The ending
retained earnings amount is reported on the end-of-period statement of financial position.
15. The accounting 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 comprise cash flows that are directly related to the
acquisition or sale of productive assets used by the company, such as plant and equipment.
Cash flows from financing activities consist of cash flows that are directly related to the
financing of the enterprise, such as issuing shares to investors.
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Chapter 1
Financial Statements and Business Decisions
Revised: August 5, 2022
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 basic financial statements and related
disclosures for external decision makers. Reporting is generally on a quarterly and annual
basis. Managerial accounting involves the preparation of detailed plans, budgets, forecasts,
and performance reports for internal decision makers. Reporting is on an ongoing basis.
3. Financial reports are used by both internal and external groups and individuals. The
internal users are the various managers of the entity, e.g. marketing, credit, and
purchasing. 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 by selling their share of 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. 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. A business 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. Statement of earnings Income statement
b. Statement of financial position Balance sheet
c. Statement of cash flows Cash flow statement
7. The heading of each of the four required financial statements should include the following:
(a) Name of the entity
(b) Title of the statement
(c) Specific date or the period of time it covers
(d) Unit of measure
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8. (a) The purpose of the statement of earnings is to present information about the
revenues, expenses, and the net earnings of the entity for a specified period of time,
in order to help assess its financial performance during that period.
(b) The purpose of the statement of financial position is to report the financial position
of an entity at a given date, that is, to report information about the assets,
obligations, and shareholders’ equity of the entity as at a specific date.
(c) The statement of changes in equity reports the way that net earnings, the
distribution of net earnings (dividends), and other changes to shareholders’ equity
affected the company’s financial position during the accounting period. The focus in
this chapter is on retained earnings. Net earnings for the year increases the balance
of retained earnings whereas the declaration of dividends to the shareholders
decreases retained earnings.
(d) 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.
9. The statement of earnings 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 statement of financial position is dated “At December 31” because
it represents the resources, obligations, and shareholders’ equity as at a specific date,
December 31.
10. Assets are important to investors and creditors because assets provide a basis for judging
whether sufficient resources are available to operate the company. Liabilities are
important to creditors and investors because the company must be able to generate
sufficient cash from operations or seek 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 the creditors’ claims.
11. Net earnings is the excess of total revenues over total expenses. Net loss is the excess of
total expenses over total revenues.
12. The accounting equation for the statement of earnings is Revenues – Expenses = Net
earnings. Revenues result from the sale of goods and services to customers, regardless of
the timing of collection of cash from customers. Expenses represent the monetary value of
resources the entity used up, or consumed, to earn revenues during the period. Net
earnings is simply the excess of revenues over expenses.
Financial Accounting, 8ce, Libby, Libby, Hodge, Kanaan, Sterling © 2023 McGraw-Hill Limited. All rights reserved.
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, ACCESS Test Bank for Financial Accounting 8th Canadian Edition Libby
13. The accounting equation for the statement of financial position is:
Assets = Liabilities + Shareholders’ Equity
Assets are the probable (expected) future 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, accounts receivable, merchandise 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 discharged with assets (usually cash) or services in
the future. They are the obligations of the entity such as accounts payable and notes
payable. Shareholders’ equity is financing provided by owners of the business and by the
net earnings generated from the operations of the business. It is the claim of the owners to
the assets of the business after the creditors’ claims have been satisfied. Shareholders’
equity may be thought of as the residual interest because it represents assets minus
liabilities.
14. The accounting equation for retained earnings is:
Beginning retained earnings + Net earnings – Dividends = Ending retained earnings
The equation begins with beginning-of-the-year retained earnings, i.e., the prior year’s
ending retained earnings reported on the statement of financial position. The current
year's net earnings reported on the statement of earnings is added to this amount and the
dividends declared during the current year are subtracted from this amount. The ending
retained earnings amount is reported on the end-of-period statement of financial position.
15. The accounting 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 comprise cash flows that are directly related to the
acquisition or sale of productive assets used by the company, such as plant and equipment.
Cash flows from financing activities consist of cash flows that are directly related to the
financing of the enterprise, such as issuing shares to investors.
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