Solutions
Manual
l Want to earn $1,500
extra per year?
, CHAPTER 1
DISCUSSION QUESTIONS
1. The three functions of an accounting system Obviously, this list is not exhaustive. Fur-
are to (1) analyze transactions, (2) handle thermore, selecting from among these alter-
routine bookkeeping tasks, and (3) structure natives—like making most decisions—
information so it can be used to evaluate the involves many factors besides accounting
performance and health of a business. considerations.
2. The objective of decision making is to de- 4. The term “business” refers to the general
termine an appropriate course of action. The process of producing or distributing goods or
essential elements in the decision-making providing services. It also may refer to an
process generally include the following: entity that has been organized to earn a
problem identification, accumulation and profit.
analysis of facts, consideration of alternative
5. Accounting is considered the “language of
courses of action, formulation of a judgment,
business” because it provides the means of
and action. Accounting assists in this pro-
accumulating, measuring, and recording the
cess by providing and interpreting many of
successes and failures of business opera-
the facts (the financial data) to be consid-
tions. Accounting also provides a mecha-
ered in making decisions.
nism for communicating the financial results
3. Many personal decisions involve the use of of businesses to the decision makers (e.g.,
accounting data. Some examples of student- investors, creditors, managers, government,
related decisions follow: labor unions, etc.).
a. Whether to borrow money from a uni- 6. Internal and external users of accounting
versity or from a bank for tuition assis- information have similar needs in that both
tance. groups are required to make financial deci-
b. Whether to buy or lease a car. sions. Managers (internal users) are re-
c. Whether to rent or to buy a house while quired to make many day-to-day decisions
going to school. in running their organizations; they generally
d. Whether to invest $200 on an elaborate need more detailed and timelier information.
dinner date. The information supplied to managers can
e. Whether to put a new set of tires on the be in any form that fits the specific questions
car for a spring vacation trip. and circumstances facing the manager. In-
f. Whether to invest summer earnings in vestors and creditors, the primary external
certificates of deposit or in the stock users, need summarized data to assist in
market. making investing and lending decisions. The
g. Whether to trade in the 10-speed bicycle information supplied to external users
on a new 21-speed model. should follow generally accepted accounting
h. Whether to buy a season ski pass or principles (GAAP) so that the information is
pay as you go. consistent and comparable and, therefore,
i. Whether to eat at the cafeteria or at more useful for decision making.
home.
7. (1) IFRS refers to international financial re-
j. Whether to pay cash for a new stereo or
porting standards.
to purchase it on a time contract.
k. Whether to purchase a laptop computer (2) The IFRS is issued by the International
for schoolwork. Accounting Standards Board (IASB). Cur-
l. Whether to go to a private or a state rently, there are more than 100 countries in
school, given different tuition and other the world adopting IFRS. These countries
cost structures. include the European Union, Hong Kong,
m. Whether to live in the dormitory or Australia, Canada, Taiwan, Singapore,
commute to school. South Korea, China, etc.
, Chapter 1
(3) It is believed that adopting IFRS can 11. Since preparing U.S. GAAP reconciliation
help investors to compare financial state- increases the costs for the foreign compa-
ments across countries. nies to raise capital from the public in the
U.S. capital market, which may decrease the
8. (1) Generally accepted accounting principles
attraction and competitiveness of the U.S.
(GAAP) are accounting standards recog-
market on the global scale. The waiver of
nized by the accounting profession and the
this requirement may alleviate such concern.
business community. These standards must
But such waiver only applies to foreign com-
be followed when preparing financial state-
panies whose financial reporting quality is
ments.
high. The IFRS issued by IASB presumably
(2) The purpose of GAAP is to allow compa- is regarded by the U.S. SEC as a set of
rability among firms and provides users of high-quality accounting standards.
external reports with the foundation for
12. When different countries have different
sound decision making.
accounting standards, the ability to compare
(3) It is the Financial Accounting Standards financial statements across countries be-
Board (FASB) that develops and issues the comes extremely difficult. Some countries
U.S. GAAP. prohibit certain accounting procedures, while
other countries allow a wide variety of ac-
9. Financial reports are prepared primarily for
counting alternatives. As a potential investor,
external users, mainly investors and credi-
these differences make the comparability of
tors. It is important that the financial reports
results increasingly difficult. As the president
of different companies be based on the
of a multinational company, you would have
same set of generally accepted accounting
difficulty comparing your company’s perfor-
principles (GAAP) so that the results are
mance to the performance of foreign com-
comparable. Thus, investors can choose
petitors who report using different account-
from among several companies the ones in
ing standards.
which they wish to invest, and lenders can
select those entities that they feel are credit- 13. Accountants are responsible to the public
worthy. If there were no general guidelines and the companies that they work for to en-
upon which financial reports were based, the sure that financial statements are in accord-
reports of companies would likely be so dif- ance with GAAP and are reported in an un-
ferent that comparisons and meaningful biased manner. Thus, accountants must
analysis of company results would be im- maintain the reputation of being ethical to
possible. meet their professional responsibilities.
10. In the U.S., the Securities and Exchange 14. No. Although the role of accountants may
Commission (SEC) holds legal authority to change in the future, the need for judgment,
set accounting standards. The SEC, howev- which is provided by accountants, will not
er, delegates its authority to the Financial decrease. While technology has aided ac-
Accounting Standards Board (FASB). The countants in the everyday bookkeeping
SEC can, at any time, take over the ac- tasks, computers cannot analyze and inter-
counting standard-setting process. pret financial information as an accountant
can. In the future, accountants could be re-
The Internal Revenue Service (IRS) is an-
quired to perform all the financial tasks for a
other government agency in the U.S. that
business. These include tax preparation,
prescribes the rules and regulations that
auditing, and financial planning.
govern the collection of tax revenues. The
rules and regulations, however, are often dif- 15. Accounting is necessary to make wise fi-
ferent from GAAP because they are de- nancial decisions. Almost without exception,
signed for different purposes. everyone will be faced with some type of
decision requiring financial analysis. Ac-
counting provides the needed tools to make
sound decisions. Furthermore, in selecting
investments, working within the business
environment, and budgeting for a household,
accounting concepts can prove very useful.
, Chapter 1
EXERCISES
Note: Because Chapter 1 is fairly general and is intended to be a brief introduc-
tion to important accounting concepts, these exercises can be used most effec-
tively to initiate class discussion.
PE 1-1 (LO1) The Role and Importance of Accounting
Every organization, regardless of its size or purpose, should have a means of
monitoring its activities and measuring how well it is accomplishing its objectives.
Accounting provides such a mechanism by helping organizations to determine
the optimal use of resources and to analyze the costs and benefits of decision al-
ternatives. Accounting helps a retailer make such decisions as which lines of
clothing to carry and what prices to charge. Numerous other examples are possi-
ble.
PE 1-2 (LO1) Bookkeeping Is Everywhere
Bookkeeping is “the preservation of a systematic, quantitative record of an activi-
ty.” As such, bookkeeping is applied in many settings, not just in maintaining fi-
nancial records. This point is illustrated with the following examples:
a. Your college English class. Even though most English professors claim that
the only numbers they ever look at are on the bottoms of the pages of the
books they read, they must use numbers to record performance on assign-
ments and papers in order to fairly assign final grades.
b. The National Basketball Association. The NBA—and sports in general—is a
record keeper’s delight. Official statisticians record every turnover, every as-
sist, every foul, every three-point attempt, etc. In addition, with teams always
struggling to sign key players and still remain under the “salary cap,” the
most valuable player in the franchise is often the accountant.
c. A hospital emergency room. Most emergency rooms have a status board
where the status of the patient in each room is posted. This ensures that
everyone can easily see where the high-risk patients are so that they can be
given priority treatment. In addition, when you receive your bill from the
emergency room, you realize that someone has been doing a lot of
bookkeeping.
d. Jury selection for a major murder trial. Juror pools typically come from lists
of registered voters. That list must be maintained, a random selection must
be made, and the potential jurors must be tracked as they report for jury duty.
The rival lawyer teams also study all potential jurors and rank them as to
how sympathetic each might be to the team’s legal arguments.
Manual
l Want to earn $1,500
extra per year?
, CHAPTER 1
DISCUSSION QUESTIONS
1. The three functions of an accounting system Obviously, this list is not exhaustive. Fur-
are to (1) analyze transactions, (2) handle thermore, selecting from among these alter-
routine bookkeeping tasks, and (3) structure natives—like making most decisions—
information so it can be used to evaluate the involves many factors besides accounting
performance and health of a business. considerations.
2. The objective of decision making is to de- 4. The term “business” refers to the general
termine an appropriate course of action. The process of producing or distributing goods or
essential elements in the decision-making providing services. It also may refer to an
process generally include the following: entity that has been organized to earn a
problem identification, accumulation and profit.
analysis of facts, consideration of alternative
5. Accounting is considered the “language of
courses of action, formulation of a judgment,
business” because it provides the means of
and action. Accounting assists in this pro-
accumulating, measuring, and recording the
cess by providing and interpreting many of
successes and failures of business opera-
the facts (the financial data) to be consid-
tions. Accounting also provides a mecha-
ered in making decisions.
nism for communicating the financial results
3. Many personal decisions involve the use of of businesses to the decision makers (e.g.,
accounting data. Some examples of student- investors, creditors, managers, government,
related decisions follow: labor unions, etc.).
a. Whether to borrow money from a uni- 6. Internal and external users of accounting
versity or from a bank for tuition assis- information have similar needs in that both
tance. groups are required to make financial deci-
b. Whether to buy or lease a car. sions. Managers (internal users) are re-
c. Whether to rent or to buy a house while quired to make many day-to-day decisions
going to school. in running their organizations; they generally
d. Whether to invest $200 on an elaborate need more detailed and timelier information.
dinner date. The information supplied to managers can
e. Whether to put a new set of tires on the be in any form that fits the specific questions
car for a spring vacation trip. and circumstances facing the manager. In-
f. Whether to invest summer earnings in vestors and creditors, the primary external
certificates of deposit or in the stock users, need summarized data to assist in
market. making investing and lending decisions. The
g. Whether to trade in the 10-speed bicycle information supplied to external users
on a new 21-speed model. should follow generally accepted accounting
h. Whether to buy a season ski pass or principles (GAAP) so that the information is
pay as you go. consistent and comparable and, therefore,
i. Whether to eat at the cafeteria or at more useful for decision making.
home.
7. (1) IFRS refers to international financial re-
j. Whether to pay cash for a new stereo or
porting standards.
to purchase it on a time contract.
k. Whether to purchase a laptop computer (2) The IFRS is issued by the International
for schoolwork. Accounting Standards Board (IASB). Cur-
l. Whether to go to a private or a state rently, there are more than 100 countries in
school, given different tuition and other the world adopting IFRS. These countries
cost structures. include the European Union, Hong Kong,
m. Whether to live in the dormitory or Australia, Canada, Taiwan, Singapore,
commute to school. South Korea, China, etc.
, Chapter 1
(3) It is believed that adopting IFRS can 11. Since preparing U.S. GAAP reconciliation
help investors to compare financial state- increases the costs for the foreign compa-
ments across countries. nies to raise capital from the public in the
U.S. capital market, which may decrease the
8. (1) Generally accepted accounting principles
attraction and competitiveness of the U.S.
(GAAP) are accounting standards recog-
market on the global scale. The waiver of
nized by the accounting profession and the
this requirement may alleviate such concern.
business community. These standards must
But such waiver only applies to foreign com-
be followed when preparing financial state-
panies whose financial reporting quality is
ments.
high. The IFRS issued by IASB presumably
(2) The purpose of GAAP is to allow compa- is regarded by the U.S. SEC as a set of
rability among firms and provides users of high-quality accounting standards.
external reports with the foundation for
12. When different countries have different
sound decision making.
accounting standards, the ability to compare
(3) It is the Financial Accounting Standards financial statements across countries be-
Board (FASB) that develops and issues the comes extremely difficult. Some countries
U.S. GAAP. prohibit certain accounting procedures, while
other countries allow a wide variety of ac-
9. Financial reports are prepared primarily for
counting alternatives. As a potential investor,
external users, mainly investors and credi-
these differences make the comparability of
tors. It is important that the financial reports
results increasingly difficult. As the president
of different companies be based on the
of a multinational company, you would have
same set of generally accepted accounting
difficulty comparing your company’s perfor-
principles (GAAP) so that the results are
mance to the performance of foreign com-
comparable. Thus, investors can choose
petitors who report using different account-
from among several companies the ones in
ing standards.
which they wish to invest, and lenders can
select those entities that they feel are credit- 13. Accountants are responsible to the public
worthy. If there were no general guidelines and the companies that they work for to en-
upon which financial reports were based, the sure that financial statements are in accord-
reports of companies would likely be so dif- ance with GAAP and are reported in an un-
ferent that comparisons and meaningful biased manner. Thus, accountants must
analysis of company results would be im- maintain the reputation of being ethical to
possible. meet their professional responsibilities.
10. In the U.S., the Securities and Exchange 14. No. Although the role of accountants may
Commission (SEC) holds legal authority to change in the future, the need for judgment,
set accounting standards. The SEC, howev- which is provided by accountants, will not
er, delegates its authority to the Financial decrease. While technology has aided ac-
Accounting Standards Board (FASB). The countants in the everyday bookkeeping
SEC can, at any time, take over the ac- tasks, computers cannot analyze and inter-
counting standard-setting process. pret financial information as an accountant
can. In the future, accountants could be re-
The Internal Revenue Service (IRS) is an-
quired to perform all the financial tasks for a
other government agency in the U.S. that
business. These include tax preparation,
prescribes the rules and regulations that
auditing, and financial planning.
govern the collection of tax revenues. The
rules and regulations, however, are often dif- 15. Accounting is necessary to make wise fi-
ferent from GAAP because they are de- nancial decisions. Almost without exception,
signed for different purposes. everyone will be faced with some type of
decision requiring financial analysis. Ac-
counting provides the needed tools to make
sound decisions. Furthermore, in selecting
investments, working within the business
environment, and budgeting for a household,
accounting concepts can prove very useful.
, Chapter 1
EXERCISES
Note: Because Chapter 1 is fairly general and is intended to be a brief introduc-
tion to important accounting concepts, these exercises can be used most effec-
tively to initiate class discussion.
PE 1-1 (LO1) The Role and Importance of Accounting
Every organization, regardless of its size or purpose, should have a means of
monitoring its activities and measuring how well it is accomplishing its objectives.
Accounting provides such a mechanism by helping organizations to determine
the optimal use of resources and to analyze the costs and benefits of decision al-
ternatives. Accounting helps a retailer make such decisions as which lines of
clothing to carry and what prices to charge. Numerous other examples are possi-
ble.
PE 1-2 (LO1) Bookkeeping Is Everywhere
Bookkeeping is “the preservation of a systematic, quantitative record of an activi-
ty.” As such, bookkeeping is applied in many settings, not just in maintaining fi-
nancial records. This point is illustrated with the following examples:
a. Your college English class. Even though most English professors claim that
the only numbers they ever look at are on the bottoms of the pages of the
books they read, they must use numbers to record performance on assign-
ments and papers in order to fairly assign final grades.
b. The National Basketball Association. The NBA—and sports in general—is a
record keeper’s delight. Official statisticians record every turnover, every as-
sist, every foul, every three-point attempt, etc. In addition, with teams always
struggling to sign key players and still remain under the “salary cap,” the
most valuable player in the franchise is often the accountant.
c. A hospital emergency room. Most emergency rooms have a status board
where the status of the patient in each room is posted. This ensures that
everyone can easily see where the high-risk patients are so that they can be
given priority treatment. In addition, when you receive your bill from the
emergency room, you realize that someone has been doing a lot of
bookkeeping.
d. Jury selection for a major murder trial. Juror pools typically come from lists
of registered voters. That list must be maintained, a random selection must
be made, and the potential jurors must be tracked as they report for jury duty.
The rival lawyer teams also study all potential jurors and rank them as to
how sympathetic each might be to the team’s legal arguments.
