SOLUTIONS MANUAL FOR
FINANCIAL ACCOUNTING 17TH
EDITION WILLIAMS
,Chapter 02—Basic Financial Statements
Chapter 02—Basic Financial Statements
2 BASIC FINANCIAL STATEMENTS
Chapter Summary
Financial statements are the primary means of communicating financial information to
users. Chapter 2 covers the income statement, balance sheet, and statement of cash flows.
Chapter 1 set forth the objectives of the financial reporting process, and indicated that these
objectives are met in large part by a set of general purpose financial statements. In this chapter, we
take up the task of introducing the balance sheet, income statement, and the statement of cash
flows.
The presentation is organized around the accounting equation. The equation serves as the
basis for elementary transaction analysis. A continuing illustration examines the impact of a
number of simple transactions upon the balance sheet of a simple service business. Revenue and
expense transactions have been included so that we might introduce the income statement and
statement of cash flows at an elementary level. This in turn has provided the opportunity to discuss
and illustrate statement articulation.
Before closing, the chapter emphasizes the importance of adequate disclosure regarding
both financial and nonfinancial information, thereby reinforcing the Chapter 1 theme that the
financial reporting process is broader than the financial statements.
The chapter also covers accounting principles dealing with asset valuation, as well as an
introduction to forms of business organization.
Learning Objectives
1. Explain the nature and general purposes of financial statements.
2. Explain certain accounting principles that are important for an understanding of financial
statements and how professional judgment by accountants may affect the application of those
principles.
3. Demonstrate how certain business transactions affect the elements of the accounting equation:
Assets = Liabilities + Owners’ Equity.
4. Explain how the statement of financial position, often referred to as the balance sheet, is an
expansion of the basic accounting equation.
5. Explain how the income statement reports an enterprise’s financial performance for a period
of time in terms of the relationship of revenues and expenses.
6. Explain how the statement of cash flows presents the change in cash for a period of time in
terms of the company’s operating, investing, and financing activities.
7. Explain how the statement of financial position (balance sheet), income statement, and
statement of cash flows relate to each other.
,Chapter 02—Basic Financial Statements
Financial Accounting, 17e 2-1
8. Explain common forms of business ownership—sole proprietorship, partnership, and
corporation—and demonstrate how they differ in terms of their statements of financial position.
9. Discuss the importance of financial statements to a company and its investors and creditors and
why management may take steps to improve the appearance of the company in its financial
statements.
Brief Topical Outline
A. Introduction to financial statements
B. A starting point: statement of financial position
1. The concept of the business entity
2. Assets
a. The cost principle
b. The going-concern assumption
c. The objectivity principle—see Your Turn (page 46)
d. The stable-dollar assumption—see International Case in Point (page 46)
3. Liabilities
4. Owners’ equity
a. Increases in owners’ equity
b. Decreases in owners’ equity
5. The accounting equation
6. The effects of business transactions: an illustration
a. The business entity
b. Overnight’s accounting policies
c. The company’s first transaction
d. Purchase of an asset for cash
e. Purchase of an asset and financing part of the cost
f. Purchase of an asset on account
g. Sale of an asset
h. Collection of an account receivable
i. Payment of a liability
j. Earning of revenue
k. Payment of expenses
7. Effects of these business transactions on the accounting equation
C. Income statement (illustrated on pages 54 & 55)
D. Statement of cash flows (illustrated on page 56)—see Case in Point (page 56 )
E. Relationships among financial statements—see Pathways Connection and Your
Turn (page 59)
F. Forms of business organization
1. Sole proprietorships
2. Partnerships
3. Corporations
, Chapter 02—Basic Financial Statements
4. Reporting ownership equity in the statement of financial position (illustrated on
pages 60 & 61)
a. Sole proprietorships
b. Partnerships
c. Corporations
G. The use of financial statements by external parties
1. The short run versus the long run
2. Evaluating short-term liquidity
3. The need for adequate disclosure
4. Management’s interest in financial statements—see Ethics, Fraud, & Corporate
Governance (page 63)
H. Concluding remarks
Topical Coverage and Suggested Assignments
Class Topical Critical
Discussion Brief
Meetings Outline Exercises* Problems* Thinking
Questions* Exercises*
on Chapter Coverage Cases*
1 A–D 3, 4, 5, 8 1, 3, 4 1, 4, 6 1, 3, 6 1
2 E–I 9, 14, 15 7, 9, 10 11, 12, 13 7, 8, 9 3
*Homework assignment (to be completed prior to class)
Comments and Observations
Teaching Objectives for Chapter 2
The chapter introduces technical material, including the balance sheet, income statement, statement
of cash flows, several generally accepted accounting principles, the accounting equation, and the
effects of business transactions upon assets, liabilities, and owners’ equity. Our objectives in
presenting this chapter are:
1. Describe the nature of financial statements. Explain the role of generally accepted accounting
principles in this process.
2. Illustrate and explain a balance sheet. Define the terms assets, liabilities, and owners’ equity,
and discuss the basic accounting principles relating to asset valuation. Discuss the uses and
limitations of this financial statement.
3. Introduce the accounting equation and illustrate the effects of business transactions upon this
equation and upon a balance sheet.
4. Introduce the income statement, emphasizing the nature of revenues and expenses.
5. Introduce the statement of cash flows and distinguish among operating, investing, and
financing activities.
6. Explain and illustrate the concept of financial statement articulation.
FINANCIAL ACCOUNTING 17TH
EDITION WILLIAMS
,Chapter 02—Basic Financial Statements
Chapter 02—Basic Financial Statements
2 BASIC FINANCIAL STATEMENTS
Chapter Summary
Financial statements are the primary means of communicating financial information to
users. Chapter 2 covers the income statement, balance sheet, and statement of cash flows.
Chapter 1 set forth the objectives of the financial reporting process, and indicated that these
objectives are met in large part by a set of general purpose financial statements. In this chapter, we
take up the task of introducing the balance sheet, income statement, and the statement of cash
flows.
The presentation is organized around the accounting equation. The equation serves as the
basis for elementary transaction analysis. A continuing illustration examines the impact of a
number of simple transactions upon the balance sheet of a simple service business. Revenue and
expense transactions have been included so that we might introduce the income statement and
statement of cash flows at an elementary level. This in turn has provided the opportunity to discuss
and illustrate statement articulation.
Before closing, the chapter emphasizes the importance of adequate disclosure regarding
both financial and nonfinancial information, thereby reinforcing the Chapter 1 theme that the
financial reporting process is broader than the financial statements.
The chapter also covers accounting principles dealing with asset valuation, as well as an
introduction to forms of business organization.
Learning Objectives
1. Explain the nature and general purposes of financial statements.
2. Explain certain accounting principles that are important for an understanding of financial
statements and how professional judgment by accountants may affect the application of those
principles.
3. Demonstrate how certain business transactions affect the elements of the accounting equation:
Assets = Liabilities + Owners’ Equity.
4. Explain how the statement of financial position, often referred to as the balance sheet, is an
expansion of the basic accounting equation.
5. Explain how the income statement reports an enterprise’s financial performance for a period
of time in terms of the relationship of revenues and expenses.
6. Explain how the statement of cash flows presents the change in cash for a period of time in
terms of the company’s operating, investing, and financing activities.
7. Explain how the statement of financial position (balance sheet), income statement, and
statement of cash flows relate to each other.
,Chapter 02—Basic Financial Statements
Financial Accounting, 17e 2-1
8. Explain common forms of business ownership—sole proprietorship, partnership, and
corporation—and demonstrate how they differ in terms of their statements of financial position.
9. Discuss the importance of financial statements to a company and its investors and creditors and
why management may take steps to improve the appearance of the company in its financial
statements.
Brief Topical Outline
A. Introduction to financial statements
B. A starting point: statement of financial position
1. The concept of the business entity
2. Assets
a. The cost principle
b. The going-concern assumption
c. The objectivity principle—see Your Turn (page 46)
d. The stable-dollar assumption—see International Case in Point (page 46)
3. Liabilities
4. Owners’ equity
a. Increases in owners’ equity
b. Decreases in owners’ equity
5. The accounting equation
6. The effects of business transactions: an illustration
a. The business entity
b. Overnight’s accounting policies
c. The company’s first transaction
d. Purchase of an asset for cash
e. Purchase of an asset and financing part of the cost
f. Purchase of an asset on account
g. Sale of an asset
h. Collection of an account receivable
i. Payment of a liability
j. Earning of revenue
k. Payment of expenses
7. Effects of these business transactions on the accounting equation
C. Income statement (illustrated on pages 54 & 55)
D. Statement of cash flows (illustrated on page 56)—see Case in Point (page 56 )
E. Relationships among financial statements—see Pathways Connection and Your
Turn (page 59)
F. Forms of business organization
1. Sole proprietorships
2. Partnerships
3. Corporations
, Chapter 02—Basic Financial Statements
4. Reporting ownership equity in the statement of financial position (illustrated on
pages 60 & 61)
a. Sole proprietorships
b. Partnerships
c. Corporations
G. The use of financial statements by external parties
1. The short run versus the long run
2. Evaluating short-term liquidity
3. The need for adequate disclosure
4. Management’s interest in financial statements—see Ethics, Fraud, & Corporate
Governance (page 63)
H. Concluding remarks
Topical Coverage and Suggested Assignments
Class Topical Critical
Discussion Brief
Meetings Outline Exercises* Problems* Thinking
Questions* Exercises*
on Chapter Coverage Cases*
1 A–D 3, 4, 5, 8 1, 3, 4 1, 4, 6 1, 3, 6 1
2 E–I 9, 14, 15 7, 9, 10 11, 12, 13 7, 8, 9 3
*Homework assignment (to be completed prior to class)
Comments and Observations
Teaching Objectives for Chapter 2
The chapter introduces technical material, including the balance sheet, income statement, statement
of cash flows, several generally accepted accounting principles, the accounting equation, and the
effects of business transactions upon assets, liabilities, and owners’ equity. Our objectives in
presenting this chapter are:
1. Describe the nature of financial statements. Explain the role of generally accepted accounting
principles in this process.
2. Illustrate and explain a balance sheet. Define the terms assets, liabilities, and owners’ equity,
and discuss the basic accounting principles relating to asset valuation. Discuss the uses and
limitations of this financial statement.
3. Introduce the accounting equation and illustrate the effects of business transactions upon this
equation and upon a balance sheet.
4. Introduce the income statement, emphasizing the nature of revenues and expenses.
5. Introduce the statement of cash flows and distinguish among operating, investing, and
financing activities.
6. Explain and illustrate the concept of financial statement articulation.
