Chapter 1 -A Framework for Financial Accounting
Chapter 1
AFramework for Financial Accounting
REVIEW QUESTIONS
Question 1-1(LO 1-1)
Accounting is the language of business. Whereas a basic math class might involve adding,
subtracting, and solving for unknown variables, accounting involves learning to measure business
transactions and communicatingthose measurements in a format that is generally understood by
decision makers.
Question 1-2(LO 1-1)
Those interested in making decisions about a company include investors, creditors, customers,
suppliers, managers, employees, competitors, regulators, tax authorities, and local communities.
Question 1-3(LO 1-1)
Financial accounting seeks to measure business activities of a company and to communicate
those measurements to external parties for decision-making purposes.The two primary external, or
outside the firm, users of financial accounting information are investors and creditors. Managerial
accounting deals with the methods accountants use to provide information to an organization’s
internal users, that is, its own managers.
Question 1-4(LO 1-1)
The two primary functions of financial accounting are to measure business activities of a
company and to communicate information about those activities to investors and creditors for
decision-making purposes.
Question 1-5(LO 1-2)
The three basic business activities are financing, investing, and operating activities. Financing
activities are transactions that raise cash needed to operate the business, such as issuing stock and
borrowing money from a bank. Investing activities typically include the purchase or disposal of
long-term resources that are expected to benefit the company for several years, such as land,
buildings, equipment, and machinery. Operating activities include the primary operations of the
company, providing products and services to customers and the associated costs of doing so, like
utilities, taxes, advertising, wages, rent, and maintenance.
Question 1-6(LO 1-2)
Typical financing activities for UPS would include selling stock and paying dividends to
investors, as well as borrowing and repaying debt to creditors.
Question 1-7(LO 1-2)
Typical investing activities for Caesars Entertainment would include the purchase ordisposal of
land, casino buildings, hotels, gaming tables, chairs, cleaning equipment, and food preparation
machines.
Solutions Manual, Chapter 1 1-1
,Chapter 1 -A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-8(LO 1-2)
Typical operating activities for Oracle would include the sale of software and consulting
services, as well as costs related to salaries, research, utilities, advertising, rent, and taxes.
Question 1-9(LO 1-2)
The three major legal forms of business organizations include sole proprietorship, partnership,
and corporation. A corporation is chosen by most of the largest companies in the United States.
Question 1-10(LO 1-2)
Assets: Resources owned.
Liabilities: Amounts owed.
Stockholders’ equity: Owners’ claims to resources.
Dividends: Distributions to stockholders.
Revenues:Sales of products or services to customers.
Expenses: Costs of selling products or services.
Question 1-11(LO 1-2)
The major advantage of a corporation is limited liability. Stockholders of a corporation are not
held personally responsible for the financial obligations of the corporation. Owners of sole
proprietorships or partnerships remain personally liable for activities of the business. Corporations
have the disadvantage of double taxation compared to sole proprietorships and partnerships.Sole
proprietorship and partnership forms of business have the advantage that income istaxed only once.
However, there could be other tax advantages for certain types of corporations, such as a lower
overall tax rate compared to partnerships and sole proprietorships.Sole proprietorships and
partnerships are often limited in the amount of funds they can raise to start a business.
Question 1-12(LO 1-3)
1. Income statement:Reports the company’s revenues and expenses during an interval of time.If
revenues exceed expenses, then the company reports net income. If expenses exceed revenues,
then the company reports a net loss.
2. Statement of stockholders’ equity:Summarizes the changes in stockholders’ equity from net
income, dividends, and stock issuances during an interval of time.
3. Balance sheet:Presents the financial position of the company on a particular date. It shows
that assets equal liabilities plus stockholders’ equity.
4. Statement of cash flows:Reports cash inflows and outflows related to operating, investing,
and financing activities during an interval of time.
Question 1-13(LO 1-3)
Balances of accounts reported in the income statement, statement of stockholders’ equity, and
statement of cash flows reflect activity from the beginning of the period through the end of the
period. Balances of accounts reported in the balance sheet reflect the financial position of the
company as of a single date, the end of the period. The income statement, statement of stockholders’
equity and statement of cash flows is like a video (shows events over time), whereas the balance
sheet is like a photograph (shows events at a point in time).
1-2 Financial Accounting, 2025 Release
,Chapter 1 -A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-14(LO 1-3)
Basic revenues would include sale of products (such as toys, dolls, and games) and services
(such as theme park tickets). Expenses include cost of merchandise sold, employee salaries, utilities,
advertising, taxes, interest, and legal fees.
Question 1-15(LO 1-3)
The accounting equation is: Assets = Liabilities + Stockholders’ Equity. The format of the
balance sheet follows the accounting equation.
Question 1-16(LO 1-3)
Assets would include items such as merchandise inventory, office supplies, buildings, land,
trucks, and equipment. Liabilities would include items such as amounts owed to employees,
suppliers, taxing authorities, and lenders.
Question 1-17(LO 1-3)
Retained earnings represent the cumulative amount of net income earned over the life of the
company that has not been distributed to stockholders as dividends. Net income is shown in the
income statement and retained earnings are reported in the balance sheet.Thus, retained earnings
represent a balance sheet account which reflects the cumulative result of income statements over the
life of the company (less any dividends). Any net losses reduce the amount of retained earnings.
Question 1-18(LO 1-3)
The statement of cash flows reports operating, investing, and financingactivities involving cash
receipts and cash payments over an interval of time. Examples of each include:
Operating – selling merchandise, paying employee salaries, and paying for advertisement.
Investing – purchasing land and buildings to open new factories and selling equipment for cash.
Financing – Borrowing from lenders, issuing stock to owners to obtain funds necessary to
expand operations, and paying dividends to stockholders.
Question 1-19(LO 1-5)
Two other important sources of information are the (1) management discussion and analysis
(MD&A) of the company’s activities and (2) note disclosures to the financial statements.
Question 1-20(LO 1-4)
Successful companies use their resources efficiently to sell products and services for a profit.
Unsuccessful companies either offer lower-quality products and services or do not efficiently keep
their costs low.When a company is unprofitable, investors will neither invest in nor lend to the firm.
Without these sources of financing, eventually the company will fail. When a company is able to
make a profit, investors and creditors are willing to transfer their resources to it, and the company
will expand its profitable operations even further.Investors and creditors rely heavily on financial
accounting information in making investment and lending decisions.
Solutions Manual, Chapter 1 1-3
, Chapter 1 -A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-21(LO 1-5)
GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting.
The fact that all companies use the same rules is critical to financial statement users, because it
allows them to accuratelycompare financial information among companies when they are making
decisions about where to lend or invest their resources. The U.S. Securities and Exchange
Commission requires that all public companies listed on stock exchanges follow GAAP. Private
companies must follow GAAP in many contractual relationships with lenders and investors.
Question 1-22(LO 1-5)
The Financial Accounting Standards Board (FASB) is primarily responsible for the
establishment of GAAP in the United States. The International Accounting Standards Board (IASB)
serves this function on an international basis by establishing International Financial Reporting
Standards (IFRS).
Question 1-23(LO 1-5)
U.S. GAAP refers to the set of accounting standards being developed in the United States by the
Financial Accounting Standards Board (FASB). IFRS (International Financial Reporting Standards)
refers to the set of accounting standards being developed by the International Accounting Standards
Board (IASB). The IASB promotes the use of IFRS around the world. Today, the IASB and FASB
work closely in an effort to converge the two sets of accounting standards.
Question 1-24(LO 1-5)
The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor
confidence in financial accounting following the stock market crash in 1929 and the ensuing Great
Depression. The SEC has the power to require companies with publicly traded securities to prepare
periodic financial statements for distribution to investors and creditors.
Question 1-25(LO 1-5)
The role of auditors is to help ensure that management has in fact appropriately applied GAAP in
preparing the company’s financial statements.They are hired by a company as an independent party
to express a professional opinion of the conformity of that company’s financial statements with
GAAP.Auditorsplay a major role in investors’ and creditors’ decisions by adding credibility to the
financial statements.
Question 1-26(LO 1-5)
According to FASB, the three primary objectives of financial reporting are providing
information that:
1. is useful to investors and creditors in making decisions.
2. helps to predict cash flows.
3. tells about economic resources, claims to resources, and changes in resources and claims.
1-4 Financial Accounting, 2025 Release
Chapter 1
AFramework for Financial Accounting
REVIEW QUESTIONS
Question 1-1(LO 1-1)
Accounting is the language of business. Whereas a basic math class might involve adding,
subtracting, and solving for unknown variables, accounting involves learning to measure business
transactions and communicatingthose measurements in a format that is generally understood by
decision makers.
Question 1-2(LO 1-1)
Those interested in making decisions about a company include investors, creditors, customers,
suppliers, managers, employees, competitors, regulators, tax authorities, and local communities.
Question 1-3(LO 1-1)
Financial accounting seeks to measure business activities of a company and to communicate
those measurements to external parties for decision-making purposes.The two primary external, or
outside the firm, users of financial accounting information are investors and creditors. Managerial
accounting deals with the methods accountants use to provide information to an organization’s
internal users, that is, its own managers.
Question 1-4(LO 1-1)
The two primary functions of financial accounting are to measure business activities of a
company and to communicate information about those activities to investors and creditors for
decision-making purposes.
Question 1-5(LO 1-2)
The three basic business activities are financing, investing, and operating activities. Financing
activities are transactions that raise cash needed to operate the business, such as issuing stock and
borrowing money from a bank. Investing activities typically include the purchase or disposal of
long-term resources that are expected to benefit the company for several years, such as land,
buildings, equipment, and machinery. Operating activities include the primary operations of the
company, providing products and services to customers and the associated costs of doing so, like
utilities, taxes, advertising, wages, rent, and maintenance.
Question 1-6(LO 1-2)
Typical financing activities for UPS would include selling stock and paying dividends to
investors, as well as borrowing and repaying debt to creditors.
Question 1-7(LO 1-2)
Typical investing activities for Caesars Entertainment would include the purchase ordisposal of
land, casino buildings, hotels, gaming tables, chairs, cleaning equipment, and food preparation
machines.
Solutions Manual, Chapter 1 1-1
,Chapter 1 -A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-8(LO 1-2)
Typical operating activities for Oracle would include the sale of software and consulting
services, as well as costs related to salaries, research, utilities, advertising, rent, and taxes.
Question 1-9(LO 1-2)
The three major legal forms of business organizations include sole proprietorship, partnership,
and corporation. A corporation is chosen by most of the largest companies in the United States.
Question 1-10(LO 1-2)
Assets: Resources owned.
Liabilities: Amounts owed.
Stockholders’ equity: Owners’ claims to resources.
Dividends: Distributions to stockholders.
Revenues:Sales of products or services to customers.
Expenses: Costs of selling products or services.
Question 1-11(LO 1-2)
The major advantage of a corporation is limited liability. Stockholders of a corporation are not
held personally responsible for the financial obligations of the corporation. Owners of sole
proprietorships or partnerships remain personally liable for activities of the business. Corporations
have the disadvantage of double taxation compared to sole proprietorships and partnerships.Sole
proprietorship and partnership forms of business have the advantage that income istaxed only once.
However, there could be other tax advantages for certain types of corporations, such as a lower
overall tax rate compared to partnerships and sole proprietorships.Sole proprietorships and
partnerships are often limited in the amount of funds they can raise to start a business.
Question 1-12(LO 1-3)
1. Income statement:Reports the company’s revenues and expenses during an interval of time.If
revenues exceed expenses, then the company reports net income. If expenses exceed revenues,
then the company reports a net loss.
2. Statement of stockholders’ equity:Summarizes the changes in stockholders’ equity from net
income, dividends, and stock issuances during an interval of time.
3. Balance sheet:Presents the financial position of the company on a particular date. It shows
that assets equal liabilities plus stockholders’ equity.
4. Statement of cash flows:Reports cash inflows and outflows related to operating, investing,
and financing activities during an interval of time.
Question 1-13(LO 1-3)
Balances of accounts reported in the income statement, statement of stockholders’ equity, and
statement of cash flows reflect activity from the beginning of the period through the end of the
period. Balances of accounts reported in the balance sheet reflect the financial position of the
company as of a single date, the end of the period. The income statement, statement of stockholders’
equity and statement of cash flows is like a video (shows events over time), whereas the balance
sheet is like a photograph (shows events at a point in time).
1-2 Financial Accounting, 2025 Release
,Chapter 1 -A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-14(LO 1-3)
Basic revenues would include sale of products (such as toys, dolls, and games) and services
(such as theme park tickets). Expenses include cost of merchandise sold, employee salaries, utilities,
advertising, taxes, interest, and legal fees.
Question 1-15(LO 1-3)
The accounting equation is: Assets = Liabilities + Stockholders’ Equity. The format of the
balance sheet follows the accounting equation.
Question 1-16(LO 1-3)
Assets would include items such as merchandise inventory, office supplies, buildings, land,
trucks, and equipment. Liabilities would include items such as amounts owed to employees,
suppliers, taxing authorities, and lenders.
Question 1-17(LO 1-3)
Retained earnings represent the cumulative amount of net income earned over the life of the
company that has not been distributed to stockholders as dividends. Net income is shown in the
income statement and retained earnings are reported in the balance sheet.Thus, retained earnings
represent a balance sheet account which reflects the cumulative result of income statements over the
life of the company (less any dividends). Any net losses reduce the amount of retained earnings.
Question 1-18(LO 1-3)
The statement of cash flows reports operating, investing, and financingactivities involving cash
receipts and cash payments over an interval of time. Examples of each include:
Operating – selling merchandise, paying employee salaries, and paying for advertisement.
Investing – purchasing land and buildings to open new factories and selling equipment for cash.
Financing – Borrowing from lenders, issuing stock to owners to obtain funds necessary to
expand operations, and paying dividends to stockholders.
Question 1-19(LO 1-5)
Two other important sources of information are the (1) management discussion and analysis
(MD&A) of the company’s activities and (2) note disclosures to the financial statements.
Question 1-20(LO 1-4)
Successful companies use their resources efficiently to sell products and services for a profit.
Unsuccessful companies either offer lower-quality products and services or do not efficiently keep
their costs low.When a company is unprofitable, investors will neither invest in nor lend to the firm.
Without these sources of financing, eventually the company will fail. When a company is able to
make a profit, investors and creditors are willing to transfer their resources to it, and the company
will expand its profitable operations even further.Investors and creditors rely heavily on financial
accounting information in making investment and lending decisions.
Solutions Manual, Chapter 1 1-3
, Chapter 1 -A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-21(LO 1-5)
GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting.
The fact that all companies use the same rules is critical to financial statement users, because it
allows them to accuratelycompare financial information among companies when they are making
decisions about where to lend or invest their resources. The U.S. Securities and Exchange
Commission requires that all public companies listed on stock exchanges follow GAAP. Private
companies must follow GAAP in many contractual relationships with lenders and investors.
Question 1-22(LO 1-5)
The Financial Accounting Standards Board (FASB) is primarily responsible for the
establishment of GAAP in the United States. The International Accounting Standards Board (IASB)
serves this function on an international basis by establishing International Financial Reporting
Standards (IFRS).
Question 1-23(LO 1-5)
U.S. GAAP refers to the set of accounting standards being developed in the United States by the
Financial Accounting Standards Board (FASB). IFRS (International Financial Reporting Standards)
refers to the set of accounting standards being developed by the International Accounting Standards
Board (IASB). The IASB promotes the use of IFRS around the world. Today, the IASB and FASB
work closely in an effort to converge the two sets of accounting standards.
Question 1-24(LO 1-5)
The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor
confidence in financial accounting following the stock market crash in 1929 and the ensuing Great
Depression. The SEC has the power to require companies with publicly traded securities to prepare
periodic financial statements for distribution to investors and creditors.
Question 1-25(LO 1-5)
The role of auditors is to help ensure that management has in fact appropriately applied GAAP in
preparing the company’s financial statements.They are hired by a company as an independent party
to express a professional opinion of the conformity of that company’s financial statements with
GAAP.Auditorsplay a major role in investors’ and creditors’ decisions by adding credibility to the
financial statements.
Question 1-26(LO 1-5)
According to FASB, the three primary objectives of financial reporting are providing
information that:
1. is useful to investors and creditors in making decisions.
2. helps to predict cash flows.
3. tells about economic resources, claims to resources, and changes in resources and claims.
1-4 Financial Accounting, 2025 Release
