CHAPTER 1
Introduction to Financial Statements
Learning Objectives
1. Identify the forms of business organization and the uses of accounting information.
2. Explain the three principal types of business activity.
3. Describe the four financial statements, and how they are prepared.
1-1 Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only)
,ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time
Number Description Level Allotted (min.)
1A Determine forms of business organization. Simple 15–20
2A Identify users and uses of financial statements. Simple 15–20
3A Prepare an income statement, retained earnings Medium 40–50
statement, and balance sheet; discuss results.
4A Prepare an Income statement, retained earnings Medium 25–35
statement, and balance sheet
5A Determine items included in a statement of cash flows, Medium 30–40
prepare the statement, and comment.
6A Comment on proper accounting treatment and prepare Medium 40–50
a corrected balance sheet.
Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only) 1-2
, ANSWERS TO QUESTIONS
1. The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and
(3) corporation.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective
2. Advantages of a corporation are limited liability (stockholders not being personally liable for cor-
porate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a
corporation are increased taxation and government regulations.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective
3. Proprietorships and partnerships receive favorable tax treatment compared to corporations and are
easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships
and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and
difficulty in obtaining financing compared to corporations.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective
4. Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay
taxes without receiving, using, or dispensing financial information. Accounting provides financial
information to interested users through the preparation and distribution of financial statements.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
5. Internal users are managers who plan, organize, and run a business. To assist management,
accounting provides timely internal reports. Examples include financial comparisons of operating
alternatives, projections of income from new sales campaigns, forecasts of cash needs for the
next year, and financial statements.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
6. External users are those outside the business who have either a present or potential direct
financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regu-
latory agencies, labor unions, customers, and economic planners).
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
7. The three types of business activities are financing activities, investing activities, and operating
activities. Financing activities include borrowing money and selling shares of stock. Investing
activities include the purchase and sale of property, plant, and equipment. Operating activities
include selling goods, performing services, and purchasing inventory.
LO 2 BT: K Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting
8. (a) Income statement.(d) Balance sheet.
(b) Balance sheet. (e) Balance sheet.
(c) Income statement.(f) Balance sheet.
LO 3 BT: K Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting
1-3 Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only)
, Questions Chapter 1 (Continued)
9. When a company pays dividends, it reduces the amount of assets available to pay creditors.
Therefore, banks and other creditors monitor dividend payments to ensure they do not put a
company’s ability to make debt payments at risk.
LO 3 BT: AN Difficulty: M TOT: 2 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking
10. Yes. Net income does appear on the income statement—it is the result of subtracting expenses
from revenues. In addition, net income appears in the retained earnings statement—it is shown as
an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company
is also included in the balance sheet. It is included in the retained earnings account which appears
in the stockholders’ equity section of the balance sheet.
LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
11. The primary purpose of the statement of cash flows is to provide financial information about the
cash receipts and cash payments of a business for a specific period of time.
LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
12. The three categories of the statement of cash flows are operating activities, investing activities,
and financing activities. The categories were chosen because they represent the three principal
types of business activities.
LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
13. Retained earnings is the net income retained in a corporation. Retained earnings is increased by
net income and is decreased by dividends and a net loss.
LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
14. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity.
LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
15. (a) Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put
more simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownership
claim on net assets.
(b) The items that affect stockholders’ equity are common stock, retained earnings,
dividends, revenues, and expenses.
LO 3 BT: K Difficulty: E TOT: 2 min. AACSB: None AICPA FC: Reporting
16. The liabilities are (b) Accounts payable and (g) Salaries and wages payable.
LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only) 1-4
Introduction to Financial Statements
Learning Objectives
1. Identify the forms of business organization and the uses of accounting information.
2. Explain the three principal types of business activity.
3. Describe the four financial statements, and how they are prepared.
1-1 Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only)
,ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time
Number Description Level Allotted (min.)
1A Determine forms of business organization. Simple 15–20
2A Identify users and uses of financial statements. Simple 15–20
3A Prepare an income statement, retained earnings Medium 40–50
statement, and balance sheet; discuss results.
4A Prepare an Income statement, retained earnings Medium 25–35
statement, and balance sheet
5A Determine items included in a statement of cash flows, Medium 30–40
prepare the statement, and comment.
6A Comment on proper accounting treatment and prepare Medium 40–50
a corrected balance sheet.
Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only) 1-2
, ANSWERS TO QUESTIONS
1. The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and
(3) corporation.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective
2. Advantages of a corporation are limited liability (stockholders not being personally liable for cor-
porate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a
corporation are increased taxation and government regulations.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective
3. Proprietorships and partnerships receive favorable tax treatment compared to corporations and are
easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships
and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and
difficulty in obtaining financing compared to corporations.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective
4. Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay
taxes without receiving, using, or dispensing financial information. Accounting provides financial
information to interested users through the preparation and distribution of financial statements.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
5. Internal users are managers who plan, organize, and run a business. To assist management,
accounting provides timely internal reports. Examples include financial comparisons of operating
alternatives, projections of income from new sales campaigns, forecasts of cash needs for the
next year, and financial statements.
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
6. External users are those outside the business who have either a present or potential direct
financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regu-
latory agencies, labor unions, customers, and economic planners).
LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
7. The three types of business activities are financing activities, investing activities, and operating
activities. Financing activities include borrowing money and selling shares of stock. Investing
activities include the purchase and sale of property, plant, and equipment. Operating activities
include selling goods, performing services, and purchasing inventory.
LO 2 BT: K Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting
8. (a) Income statement.(d) Balance sheet.
(b) Balance sheet. (e) Balance sheet.
(c) Income statement.(f) Balance sheet.
LO 3 BT: K Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting
1-3 Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only)
, Questions Chapter 1 (Continued)
9. When a company pays dividends, it reduces the amount of assets available to pay creditors.
Therefore, banks and other creditors monitor dividend payments to ensure they do not put a
company’s ability to make debt payments at risk.
LO 3 BT: AN Difficulty: M TOT: 2 min. AACSB: Reflective Thinking AICPA BB: Critical Thinking
10. Yes. Net income does appear on the income statement—it is the result of subtracting expenses
from revenues. In addition, net income appears in the retained earnings statement—it is shown as
an addition to the beginning-of-period retained earnings. Indirectly, the net income of a company
is also included in the balance sheet. It is included in the retained earnings account which appears
in the stockholders’ equity section of the balance sheet.
LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
11. The primary purpose of the statement of cash flows is to provide financial information about the
cash receipts and cash payments of a business for a specific period of time.
LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
12. The three categories of the statement of cash flows are operating activities, investing activities,
and financing activities. The categories were chosen because they represent the three principal
types of business activities.
LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
13. Retained earnings is the net income retained in a corporation. Retained earnings is increased by
net income and is decreased by dividends and a net loss.
LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
14. The basic accounting equation is Assets = Liabilities + Stockholders’ Equity.
LO 3 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
15. (a) Assets are resources owned by a business. Liabilities are amounts owed to creditors. Put
more simply, liabilities are existing debts and obligations. Stockholders’ equity is the ownership
claim on net assets.
(b) The items that affect stockholders’ equity are common stock, retained earnings,
dividends, revenues, and expenses.
LO 3 BT: K Difficulty: E TOT: 2 min. AACSB: None AICPA FC: Reporting
16. The liabilities are (b) Accounts payable and (g) Salaries and wages payable.
LO 3 BT: C Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting
Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 9/e, Solutions Manual (For Instructor Use Only) 1-4
