SolutionjManualjforjFinancialjAccountingj11thjEditionj
jj Robertj Libby,jPatriciajLibby,jCompletejChaptersj1j–j13
j j
, TABLEjOFjCONTENTS
CHAPTERj1:jFinancialjStatementsjandjBusinessjDecisions
CHAPTERj2:jInvestingjandjFinancingjDecisionsjandjthejAccountingjSystem
CHAPTERj3:jOperatingjDecisionsjandjthejAccountingjSystem
CHAPTERj4:jAdjustments,jFinancialjStatements,jandjthejClosingjProcess
CHAPTERj5:jCommunicatingjandjAnalyzingjAccountingjInformation
CHAPTERj6:jReportingjandjInterpretingjSalesjRevenue,jReceivables,jandjCash
CHAPTERj7:jReportingjandjInterpretingjCostjofjGoodsjSoldjandjInventory
CHAPTERj8:jReportingjandjInterpretingjProperty,jPlant,jandjEquipment;jIntangibles;jandjNaturalj Resources
CHAPTERj9:jReportingjandjInterpretingjLiabilities
CHAPTERj10:jReportingjandjInterpretingjBondjSecurities
CHAPTERj11:jReportingjandjInterpretingjStockholders'jEquity
CHAPTERj12:jStatementjofjCashjFlows
CHAPTERj13:jAnalyzingjFinancialjStatements
Chapter 1 Financial Statements and Business
j j j j j
Decisions
ANSWERSjTOjQUESTIONS
j j
, 1. Accountingjisjajsystemjthatjcollectsjandjprocessesj(analyzes,jmeasures,jandjrecords)j financialjin
formationjaboutjanjorganizationjandjreportsjthatjinformationjtoj decisionj makers.
2. Financialjaccountingjinvolvesjpreparationjofjthejfourjbasicjfinancialjstatementsjandj relatedjdiscl
osuresjforjexternaljdecisionjmakers.jManagerialjaccountingjinvolvesjthej preparationjofjdetaile
djplans,jbudgets,jforecasts,jandjperformancejreportsjforj internalj decisionjmakers.
3. Financialjreportsjarejusedjbyjbothjinternaljandjexternaljgroupsjandjindividuals.jThej internaljg
roupsjarejcomprisedjofjthejvariousjmanagersjofjthejentity.jThejexternalj groupsjincludejthejow
ners,jinvestors,jcreditors,jgovernmentaljagencies,jotherj interestedjparties,jandjthejpublicjatjla
rge.
4. Investorsjpurchasejalljorjpartjofjajbusinessjandjhopejtojgainjbyjreceivingjpartjofj whatjthejcom
panyjearnsjand/orjsellingjtheirjownershipjinterestjinjthejcompanyjinj thejfuturejatjajhigherjpric
ejthanjtheyjpaid.jCreditorsjlendjmoneyjtojajcompanyjforjaj specificjlengthjofjtimejandjhopejtoj
gainjbyjchargingjinterestjonjthejloan.
5. Injajsociety,jeachjorganizationjcanjbejdefinedjasjajseparatejaccountingjentity.jAnj accountingjent
ityjisjthejorganizationjforjwhichjfinancialjdatajarejtojbejcollected.j Typicaljaccountingjentitiesjarej
ajbusiness,jajchurch,jajgovernmentaljunit,jajuniversityj andjotherjnonprofitjorganizationsjsuchjasjaj
hospitaljandjajwelfarejorganization.jAj businessjtypicallyjisjdefinedjandjtreatedjasjajseparateje
ntityjbecausejthejowners,j creditors,jinvestors,jandjotherjinterestedjpartiesjneedjtojevaluatejitsjpe
rformancejandj itsjpotentialjseparatelyjfromjotherjentitiesjandjfromjitsjowners.
6. NamejofjStatement AlternativejTitle
(a) IncomejStatement (a)jStatementjofjEarnings;jStatementjof
Income;jStatementjofjOperations
(b) BalancejSheet (b)jStatementjofjFinancialjPosition
(c) CashjFlowjStatement (c)j StatementjofjCashjFlows
7. Thejheadingjofjeachjofjthejfourjrequiredjfinancialjstatementsjshouldjincludejthej following:
(a) Namejofjthejentity
(b) Namejofjthejstatement
(c) Datejofjthejstatement,jorjthejperiodjofjtime
(d) Unitjofjmeasure
8. (a)
Thejpurposejofjthejincomejstatementjisjtojpresentjinformationjaboutjthej revenu
es,jexpenses,jandjthejnetjincomejofjanjentityjforjajspecifiedjperiodjofj time.
(b) Thejpurposejofjthejbalancejsheetjisjtojreportjthejfinancialjpositionjofjanjentityjatj ajgivenjda
te,jthatjis,jtojreportjinformationjaboutjthejassets,jliabilitiesjandj stockholders’jequityjofjtheje
ntityjasjofjajspecificjdate.
(c) Thejpurposejofjthejstatementjofjcashjflowsjisjtojpresentjinformationjaboutjthej flowjofjcashji
ntojthejentityj(sources),jthejflowjofjcashjoutjofjthejentityj(uses),j andj thejnetjincreasejorjdecre
asejinjcashjduringjthejperiod.
(d) Thejstatementjofjstockholders’jequityjreportsjthejchangesjinjeachjofjthej company’sjstock
holders’jequityjaccountsjduringjthejaccountingjperiod,j includingjissuejandjrepurchasejofj
stockjandjthejwayjthatjnetjincomejandj distributionjofjdividendsjaffectedjthejretainedjea
rningsjofjthejcompanyjduringj thatjperiod.
j j
, 9. Thejincomejstatementjandjthejstatementjofjcashjflowsjarejdatedj―ForjthejYearj EndedjDec
emberj31‖jbecausejtheyjreportjthejinflowsjandjoutflowsjofjresourcesj duringjajperiodjofjti
me.jInjcontrast,jthejbalancejsheetjisjdatedj―AtjDecemberj31‖j becausejitjrepresentsjthejre
sources,jobligations,jandjstockholders’jequityjatj aj specificjdate.
10. Assetsjarejimportantjtojcreditorsjandjinvestorsjbecausejassetsjprovidejajbasisjforj judgingjwheth
erjsufficientjresourcesjarejavailablejtojoperatejthejcompany.jAssetsjarej alsojimportantjbecausej
theyjcouldjbejsoldjforjcashjinjthejeventjthejcompanyjgoesjoutj ofjbusiness.jLiabilitiesjarejimportan
tjtojcreditorsjandjinvestorsjbecausejthejcompanyj mustjbejablejtojgeneratejsufficientjcashjfromjo
perationsjorjfurtherjborrowingjtojj meetjthejpaymentsjrequiredjbyjdebtjagreements.jIfjajbusiness
jdoesjnotjpayjitsj creditors,jthejlawjmayjgivejthejcreditorsjthejrightjtojforcejthejsalejofjassetsjsuffic
ientj tojmeetjtheirjclaims.
11. Netjincomejisjthejexcessjofjtotaljrevenuesjoverjtotaljexpenses.jNetjlossjisjthej excessjofjt
otaljexpensesjoverjtotaljrevenues.
12. ThejequationjforjthejincomejstatementjisjRevenuesj-
jExpensesj=jNetjIncomej(orjNetj Lossjifjthejamountjisjnegative).jThus,jthejthreejmajorjitemsjrepo
rtedjonjthejincomej statementjarej(1)jrevenues,j(2)jexpenses,jandj(3)jnetjincome.
13. Thejequationjforjthejbalancejsheetj(alsojknownjasjthejbasicjaccountingjequation)jis:j Assetsj=jLiab
ilitiesj+jStockholders’jEquity.jAssetsjarejthejprobablej(expected)j futurej economicjbenefitsjown
edjbyjthejentityjasjajresultjofjpastjtransactions.jTheyjarejthej resourcesjownedjbyjthejbusinessjatja
jgivenjpointjinjtimejsuchjasjcash,jreceivables,j inventory,jmachinery,jbuildings,jland,jandjpatents.jL
iabilitiesjarejprobablej(expected)j debtsjorjobligationsjofjthejentityjasjajresultjofjpastjtransacti
onsjthatjwilljbejpaidjwithj assetsjorjservicesjinjthejfuture.jTheyjarejthejobligationsjofjthejentityjsuc
hjasjaccountsj payable,jnotesjpayable,jandjbondsjpayable.jStockholders’jequityjisjfinancingjpr
ovidedj byjownersjofjthejbusinessjandjoperations.jItjisjthejclaimjofjthejownersjtojthejassetsjofj thej
businessjafterjthejcreditors’jclaimsjhavejbeenjsatisfied.jItjmayjbejthoughtjofjasjthej residualjinter
estjbecausejitjrepresentsjassetsjminusjliabilities.
14. Thejequationjforjthejstatementjofjcashjflowsjis:jCashjflowsjfromjoperatingjactivities
+jCashjflowsjfromjinvestingjactivitiesj+jCashjflowsjfromjfinancingjactivitiesj=j Changejinjcashjf
orjthejperiod.jThejnetjcashjflowsjforjthejperiodjrepresentjthej increasejorjdecreasejinjcashjthatj
occurredjduringjthejperiod.jCashjflowsjfromj operatingjactivitiesjarejcashjflowsjdirectlyjrelate
djtojearningjincomej(normalj businessjactivityjincludingjinterestjpaidjandjincomejtaxesjpaid).j
Cashjflowsjfromj investingjactivitiesjincludejcashjflowsjthatjarejrelatedjtojthejacquisitionjorjsal
ejofj productivejassetsjusedjbyjthejcompany.jCashjflowsjfromjfinancingjactivitiesjarej directlyj
relatedjtojthejfinancingjofjthejenterprisejitself.
15. Thejretainedjearningsjequationjis:jBeginningjRetainedjEarningsj+jNetjIncomej-
j Dividendsj=jEndingjRetainedjEarnings.jItjbeginsjwithjbeginning-of-the-
yearj RetainedjEarningsjwhichjisjthejpriorjyear’sjendingjretainedjearningsjreportedjonj thejba
lancejsheet.jThejcurrentjyear'sjNetjIncomejreportedjonjthejincomejstatementj isjaddedjandjthej
currentjyear'sjDividendsjarejsubtractedjfromjthisjamount.jThej endingjRetainedjEarningsjamou
ntjisjreportedjonjthejend-of-periodjbalancejsheet.
16. Marketingjmanagersjandjcreditjmanagersjusejcustomers'jfinancialjstatementsjtoj decidejwhetherj t
oj extendj themjcreditj forj theirjpurchases.jPurchasingjmanagersjusej potentialjsuppliers'jfinancialjs
tatementsjtojjudgejwhetherjthejsuppliersjhavejthej resourcesjnecessaryjtojmeetjcurrentjandjfuturej
demand.jHumanjresourcejmanagersj usejfinancialj statementsjasjajbasisjforjcontractjnegotiations,j
j j
jj Robertj Libby,jPatriciajLibby,jCompletejChaptersj1j–j13
j j
, TABLEjOFjCONTENTS
CHAPTERj1:jFinancialjStatementsjandjBusinessjDecisions
CHAPTERj2:jInvestingjandjFinancingjDecisionsjandjthejAccountingjSystem
CHAPTERj3:jOperatingjDecisionsjandjthejAccountingjSystem
CHAPTERj4:jAdjustments,jFinancialjStatements,jandjthejClosingjProcess
CHAPTERj5:jCommunicatingjandjAnalyzingjAccountingjInformation
CHAPTERj6:jReportingjandjInterpretingjSalesjRevenue,jReceivables,jandjCash
CHAPTERj7:jReportingjandjInterpretingjCostjofjGoodsjSoldjandjInventory
CHAPTERj8:jReportingjandjInterpretingjProperty,jPlant,jandjEquipment;jIntangibles;jandjNaturalj Resources
CHAPTERj9:jReportingjandjInterpretingjLiabilities
CHAPTERj10:jReportingjandjInterpretingjBondjSecurities
CHAPTERj11:jReportingjandjInterpretingjStockholders'jEquity
CHAPTERj12:jStatementjofjCashjFlows
CHAPTERj13:jAnalyzingjFinancialjStatements
Chapter 1 Financial Statements and Business
j j j j j
Decisions
ANSWERSjTOjQUESTIONS
j j
, 1. Accountingjisjajsystemjthatjcollectsjandjprocessesj(analyzes,jmeasures,jandjrecords)j financialjin
formationjaboutjanjorganizationjandjreportsjthatjinformationjtoj decisionj makers.
2. Financialjaccountingjinvolvesjpreparationjofjthejfourjbasicjfinancialjstatementsjandj relatedjdiscl
osuresjforjexternaljdecisionjmakers.jManagerialjaccountingjinvolvesjthej preparationjofjdetaile
djplans,jbudgets,jforecasts,jandjperformancejreportsjforj internalj decisionjmakers.
3. Financialjreportsjarejusedjbyjbothjinternaljandjexternaljgroupsjandjindividuals.jThej internaljg
roupsjarejcomprisedjofjthejvariousjmanagersjofjthejentity.jThejexternalj groupsjincludejthejow
ners,jinvestors,jcreditors,jgovernmentaljagencies,jotherj interestedjparties,jandjthejpublicjatjla
rge.
4. Investorsjpurchasejalljorjpartjofjajbusinessjandjhopejtojgainjbyjreceivingjpartjofj whatjthejcom
panyjearnsjand/orjsellingjtheirjownershipjinterestjinjthejcompanyjinj thejfuturejatjajhigherjpric
ejthanjtheyjpaid.jCreditorsjlendjmoneyjtojajcompanyjforjaj specificjlengthjofjtimejandjhopejtoj
gainjbyjchargingjinterestjonjthejloan.
5. Injajsociety,jeachjorganizationjcanjbejdefinedjasjajseparatejaccountingjentity.jAnj accountingjent
ityjisjthejorganizationjforjwhichjfinancialjdatajarejtojbejcollected.j Typicaljaccountingjentitiesjarej
ajbusiness,jajchurch,jajgovernmentaljunit,jajuniversityj andjotherjnonprofitjorganizationsjsuchjasjaj
hospitaljandjajwelfarejorganization.jAj businessjtypicallyjisjdefinedjandjtreatedjasjajseparateje
ntityjbecausejthejowners,j creditors,jinvestors,jandjotherjinterestedjpartiesjneedjtojevaluatejitsjpe
rformancejandj itsjpotentialjseparatelyjfromjotherjentitiesjandjfromjitsjowners.
6. NamejofjStatement AlternativejTitle
(a) IncomejStatement (a)jStatementjofjEarnings;jStatementjof
Income;jStatementjofjOperations
(b) BalancejSheet (b)jStatementjofjFinancialjPosition
(c) CashjFlowjStatement (c)j StatementjofjCashjFlows
7. Thejheadingjofjeachjofjthejfourjrequiredjfinancialjstatementsjshouldjincludejthej following:
(a) Namejofjthejentity
(b) Namejofjthejstatement
(c) Datejofjthejstatement,jorjthejperiodjofjtime
(d) Unitjofjmeasure
8. (a)
Thejpurposejofjthejincomejstatementjisjtojpresentjinformationjaboutjthej revenu
es,jexpenses,jandjthejnetjincomejofjanjentityjforjajspecifiedjperiodjofj time.
(b) Thejpurposejofjthejbalancejsheetjisjtojreportjthejfinancialjpositionjofjanjentityjatj ajgivenjda
te,jthatjis,jtojreportjinformationjaboutjthejassets,jliabilitiesjandj stockholders’jequityjofjtheje
ntityjasjofjajspecificjdate.
(c) Thejpurposejofjthejstatementjofjcashjflowsjisjtojpresentjinformationjaboutjthej flowjofjcashji
ntojthejentityj(sources),jthejflowjofjcashjoutjofjthejentityj(uses),j andj thejnetjincreasejorjdecre
asejinjcashjduringjthejperiod.
(d) Thejstatementjofjstockholders’jequityjreportsjthejchangesjinjeachjofjthej company’sjstock
holders’jequityjaccountsjduringjthejaccountingjperiod,j includingjissuejandjrepurchasejofj
stockjandjthejwayjthatjnetjincomejandj distributionjofjdividendsjaffectedjthejretainedjea
rningsjofjthejcompanyjduringj thatjperiod.
j j
, 9. Thejincomejstatementjandjthejstatementjofjcashjflowsjarejdatedj―ForjthejYearj EndedjDec
emberj31‖jbecausejtheyjreportjthejinflowsjandjoutflowsjofjresourcesj duringjajperiodjofjti
me.jInjcontrast,jthejbalancejsheetjisjdatedj―AtjDecemberj31‖j becausejitjrepresentsjthejre
sources,jobligations,jandjstockholders’jequityjatj aj specificjdate.
10. Assetsjarejimportantjtojcreditorsjandjinvestorsjbecausejassetsjprovidejajbasisjforj judgingjwheth
erjsufficientjresourcesjarejavailablejtojoperatejthejcompany.jAssetsjarej alsojimportantjbecausej
theyjcouldjbejsoldjforjcashjinjthejeventjthejcompanyjgoesjoutj ofjbusiness.jLiabilitiesjarejimportan
tjtojcreditorsjandjinvestorsjbecausejthejcompanyj mustjbejablejtojgeneratejsufficientjcashjfromjo
perationsjorjfurtherjborrowingjtojj meetjthejpaymentsjrequiredjbyjdebtjagreements.jIfjajbusiness
jdoesjnotjpayjitsj creditors,jthejlawjmayjgivejthejcreditorsjthejrightjtojforcejthejsalejofjassetsjsuffic
ientj tojmeetjtheirjclaims.
11. Netjincomejisjthejexcessjofjtotaljrevenuesjoverjtotaljexpenses.jNetjlossjisjthej excessjofjt
otaljexpensesjoverjtotaljrevenues.
12. ThejequationjforjthejincomejstatementjisjRevenuesj-
jExpensesj=jNetjIncomej(orjNetj Lossjifjthejamountjisjnegative).jThus,jthejthreejmajorjitemsjrepo
rtedjonjthejincomej statementjarej(1)jrevenues,j(2)jexpenses,jandj(3)jnetjincome.
13. Thejequationjforjthejbalancejsheetj(alsojknownjasjthejbasicjaccountingjequation)jis:j Assetsj=jLiab
ilitiesj+jStockholders’jEquity.jAssetsjarejthejprobablej(expected)j futurej economicjbenefitsjown
edjbyjthejentityjasjajresultjofjpastjtransactions.jTheyjarejthej resourcesjownedjbyjthejbusinessjatja
jgivenjpointjinjtimejsuchjasjcash,jreceivables,j inventory,jmachinery,jbuildings,jland,jandjpatents.jL
iabilitiesjarejprobablej(expected)j debtsjorjobligationsjofjthejentityjasjajresultjofjpastjtransacti
onsjthatjwilljbejpaidjwithj assetsjorjservicesjinjthejfuture.jTheyjarejthejobligationsjofjthejentityjsuc
hjasjaccountsj payable,jnotesjpayable,jandjbondsjpayable.jStockholders’jequityjisjfinancingjpr
ovidedj byjownersjofjthejbusinessjandjoperations.jItjisjthejclaimjofjthejownersjtojthejassetsjofj thej
businessjafterjthejcreditors’jclaimsjhavejbeenjsatisfied.jItjmayjbejthoughtjofjasjthej residualjinter
estjbecausejitjrepresentsjassetsjminusjliabilities.
14. Thejequationjforjthejstatementjofjcashjflowsjis:jCashjflowsjfromjoperatingjactivities
+jCashjflowsjfromjinvestingjactivitiesj+jCashjflowsjfromjfinancingjactivitiesj=j Changejinjcashjf
orjthejperiod.jThejnetjcashjflowsjforjthejperiodjrepresentjthej increasejorjdecreasejinjcashjthatj
occurredjduringjthejperiod.jCashjflowsjfromj operatingjactivitiesjarejcashjflowsjdirectlyjrelate
djtojearningjincomej(normalj businessjactivityjincludingjinterestjpaidjandjincomejtaxesjpaid).j
Cashjflowsjfromj investingjactivitiesjincludejcashjflowsjthatjarejrelatedjtojthejacquisitionjorjsal
ejofj productivejassetsjusedjbyjthejcompany.jCashjflowsjfromjfinancingjactivitiesjarej directlyj
relatedjtojthejfinancingjofjthejenterprisejitself.
15. Thejretainedjearningsjequationjis:jBeginningjRetainedjEarningsj+jNetjIncomej-
j Dividendsj=jEndingjRetainedjEarnings.jItjbeginsjwithjbeginning-of-the-
yearj RetainedjEarningsjwhichjisjthejpriorjyear’sjendingjretainedjearningsjreportedjonj thejba
lancejsheet.jThejcurrentjyear'sjNetjIncomejreportedjonjthejincomejstatementj isjaddedjandjthej
currentjyear'sjDividendsjarejsubtractedjfromjthisjamount.jThej endingjRetainedjEarningsjamou
ntjisjreportedjonjthejend-of-periodjbalancejsheet.
16. Marketingjmanagersjandjcreditjmanagersjusejcustomers'jfinancialjstatementsjtoj decidejwhetherj t
oj extendj themjcreditj forj theirjpurchases.jPurchasingjmanagersjusej potentialjsuppliers'jfinancialjs
tatementsjtojjudgejwhetherjthejsuppliersjhavejthej resourcesjnecessaryjtojmeetjcurrentjandjfuturej
demand.jHumanjresourcejmanagersj usejfinancialj statementsjasjajbasisjforjcontractjnegotiations,j
j j
