SOLUTION MANUAL FOR
m m
Financial Accounting 11th Edition
m m m m
Robert Libby, Patricia Libby, Frank Hodge
m m m m m
m
, SOLUTION MANUAL FOR m m
Financial Accounting 11th Edition Robert Libby,
m m m m m m
Patricia Libby, Frank Hodge
m m m
Chapter 1 m
Financial Statements and Business Decisions
m m m m
ANSWERS TO QUESTIONS
m m
1. Accountingmismamsystemmthatmcollectsmandmprocessesm(analyzes,mmeasures,mandmre
cords)mfinancialminformationmaboutmanmorganizationmandmreportsmthatminformationmtom
decisionmmakers.m
2. Financialmaccountingminvolvesmpreparationmofmthemfourmbasicmfinancialmstatementsman
dmrelatedmdisclosuresmformexternalmdecisionmmakers.mManagerialmaccountingminvolve
smthempreparationmofmdetailedmplans,mbudgets,mforecasts,mandmperformancemreportsmf
orminternalmdecisionmmakers.m
3. Financialmreportsmaremusedmbymbothminternalmandmexternalmgroupsmandmindividuals.mT
heminternalmgroupsmaremcomprisedmofmthemvariousmmanagersmofmthementity.mThemexter
nalmgroupsmincludemthemowners,minvestors,mcreditors,mgovernmentalmagencies,motherm
interestedmparties,mandmthempublicmatmlarge.m
4. Investorsmpurchasemallmormpartmofmambusinessmandmhopemtomgainmbymreceivingmpartm
ofmwhatmthemcompanymearnsmand/ormsellingmtheirmownershipminterestminmthemcompa
nyminmthemfuturematmamhighermpricemthanmtheympaid.mCreditorsmlendmmoneymtomamcom
panymformamspecificmlengthmofmtimemandmhopemtomgainmbymchargingminterestmonmtheml
oan.m
m
, 5. Inmamsociety,meachmorganizationmcanmbemdefinedmasmamseparatemaccountingmentity.mAn
maccountingmentitymismthemorganizationmformwhichmfinancialmdatamaremtombemcollected.m
Typicalmaccountingmentitiesmaremambusiness,mamchurch,mamgovernmentalmunit,mamunive
rsitymandmothermnonprofitmorganizationsmsuchmasmamhospitalmandmamwelfaremorganizati
on.mAmbusinessmtypicallymismdefinedmandmtreatedmasmamseparatementitymbecausemthemo
wners,mcreditors,minvestors,mandmotherminterestedmpartiesmneedmtomevaluatemitsmperfor
mancemandmitsmpotentialmseparatelymfrommothermentitiesmandmfrommitsmowners.m
6. NamemofmStatement AlternativemTitle
(a) IncomemStatement (a)mStatementmofmEarnings;mStatementmofm
Income;mStatementmofmOperationsm
(b) BalancemSheet (b)mStatementmofmFinancialmPositionm
(c) CashmFlowmStatement (c)m StatementmofmCashmFlowsm
7. Themheadingmofmeachmofmthemfourmrequiredmfinancialmstatementsmshouldmincludemt
hemfollowing:m
(a) Namemofmthementitym
(b) Namemofmthemstatementm
(c) Datemofmthemstatement,mormthemperiodmofmtimem
(d) Unitmofmmeasurem
8. (a)
Thempurposemofmthemincomemstatementmismtompresentminformationmaboutm
themrevenues,mexpenses,mandmthemnetmincomemofmanmentitymformamspecifiedmper
iodmofmtime.m
(b) Thempurposemofmthembalancemsheetmismtomreportmthemfinancialmpositionmofmanment
itymatmamgivenmdate,mthatmis,mtomreportminformationmaboutmthemassets,mliabilitiesma
ndmstockholders’mequitymofmthementitymasmofmamspecificmdate.m
(c) Thempurposemofmthemstatementmofmcashmflowsmismtompresentminformationmaboutmt
hemflowmofmcashmintomthementitym(sources),mthemflowmofmcashmoutmofmthementitym(u
ses),mandmthemnetmincreasemormdecreaseminmcashmduringmthemperiod.m
(d) Themstatementmofmstockholders’mequitymreportsmthemchangesminmeachmofmthemco
mpany’smstockholders’mequitymaccountsmduringmthemaccountingmperiod,mincludi
ngmissuemandmrepurchasemofmstockmandmthemwaymthatmnetmincomemandmdistributi
onmofmdividendsmaffectedmthemretainedmearningsmofmthemcompanymduringmthatmp
eriod.m
9. Themincomemstatementmandmthemstatementmofmcashmflowsmaremdatedm―FormthemYea
rmEndedmDecemberm31‖mbecausemtheymreportmtheminflowsmandmoutflowsmofmresourc
esmduringmamperiodmofmtime.mInmcontrast,mthembalancemsheetmismdatedm―AtmDecemb
erm31‖mbecausemitmrepresentsmthemresources,mobligations,mandmstockholders’mequit
ymatma m specificmdate.m
m
, 10. Assetsmaremimportantmtomcreditorsmandminvestorsmbecausemassetsmprovidemambasismf
ormjudgingmwhethermsufficientmresourcesmaremavailablemtomoperatemthemcompany.mAs
setsmaremalsomimportantmbecausemtheymcouldmbemsoldmformcashminmthemeventmthemco
mpanymgoesmoutmofmbusiness.mLiabilitiesmaremimportantmtomcreditorsmandminvestorsm
becausemthemcompanymmustmbemablemtomgeneratemsufficientmcashmfrommoperationsm
ormfurthermborrowingmtommeetmthempaymentsmrequiredmbymdebtmagreements.mIfmambus
inessmdoesmnotmpaymitsmcreditors,mthemlawmmaymgivemthemcreditorsmthemrightmtomforcem
themsalemofmassetsmsufficientmtommeetmtheirmclaims.m
11. Netmincomemismthemexcessmofmtotalmrevenuesmovermtotalmexpenses.mNetmlossmismt
hemexcessmofmtotalmexpensesmovermtotalmrevenues.m
12. ThemequationmformthemincomemstatementmismRevenuesm-
mExpensesm=mNetmIncomem(ormNetmLossmifmthemamountmismnegative).mThus,mthemthre
emmajormitemsmreportedmonmthemincomemstatementmarem(1)mrevenues,m(2)mexpenses
,mandm(3)m netmincome.m
13. Themequationmformthembalancemsheetm(alsomknownmasmthembasicmaccountingmequation
)mis:mAssetsm=mLiabilitiesm+mStockholders’mEquity.mAssetsmaremthemprobablem(expecte
d)mfuturemeconomicmbenefitsmownedmbymthementitymasmamresultmofmpastmtransactions.m
Theymaremthemresourcesmownedmbymthembusinessmatmamgivenmpointminmtimemsuchmasmc
ash,mreceivables,minventory,mmachinery,mbuildings,mland,mandmpatents.mLiabilitiesmare
mprobablem(expected)mdebtsmorm obligationsmofmthementitym asmamresultmofm pastmtransact
ionsmthatmwillmbempaidmwithmassetsmormservicesminmthemfuture.mTheymaremthemobligation
smofmthementitymsuchmasmaccountsmpayable,mnotesmpayable,mandmbondsmpayable.mSto
ckholders’mequitymismfinancingmprovidedmbymownersmofmthembusinessmandmoperations.
mItmismthemclaimmofmthemownersmtomthemassetsmofmthembusinessmaftermthemcreditors’mclai
msmhavembeenmsatisfied.mItmmaymbemthoughtmofmasmthemresidualminterestmbecausemitmr
epresentsmassetsmminusmliabilities.m
14. Themequationmformthemstatementmofmcashmflowsmis:mCashmflowsmfrommoperatingmactivitiesm
+mCashmflowsmfromminvestingmactivitiesm+mCashmflowsmfrommfinancingmactivitiesm=mC
hangeminmcashmformthemperiod.mThemnetmcashmflowsmformthemperiodmrepresentmthemin
creasemormdecreaseminmcashmthatmoccurredmduringmthemperiod.mCashmflowsmfrommop
eratingmactivitiesmaremcashmflowsmdirectlymrelatedmtomearningmincomem(normalmbusin
essmactivitymincludingminterestmpaidmandmincomemtaxesmpaid).mCashmflowsmfromminv
estingmactivitiesmincludemcashmflowsmthatmaremrelatedmtomthemacquisitionmormsalemofm
productivemassetsmusedmbymthemcompany.mCashmflowsmfrommfinancingmactivitiesmar
emdirectlymrelatedmtomthemfinancingmofmthementerprisemitself.m
15. Themretainedmearningsmequationmis:mBeginningmRetainedmEarningsm+mNetmIncomem
-mDividendsm=mEndingmRetainedmEarnings.mItmbeginsmwithmbeginning-of-the-
yearmRetainedmEarningsmwhichmismthempriormyear’smendingmretainedmearningsmrepo
rtedmonmthembalancemsheet.mThemcurrentmyear'smNetmIncomemreportedmonmtheminco
memstatementmismaddedmandmthemcurrentmyear'smDividendsmaremsubtractedmfrommth
ismamount.mThemendingmRetainedmEarningsmamountmismreportedmonmthemend-of-
periodmbalancemsheet.m
m
m m
Financial Accounting 11th Edition
m m m m
Robert Libby, Patricia Libby, Frank Hodge
m m m m m
m
, SOLUTION MANUAL FOR m m
Financial Accounting 11th Edition Robert Libby,
m m m m m m
Patricia Libby, Frank Hodge
m m m
Chapter 1 m
Financial Statements and Business Decisions
m m m m
ANSWERS TO QUESTIONS
m m
1. Accountingmismamsystemmthatmcollectsmandmprocessesm(analyzes,mmeasures,mandmre
cords)mfinancialminformationmaboutmanmorganizationmandmreportsmthatminformationmtom
decisionmmakers.m
2. Financialmaccountingminvolvesmpreparationmofmthemfourmbasicmfinancialmstatementsman
dmrelatedmdisclosuresmformexternalmdecisionmmakers.mManagerialmaccountingminvolve
smthempreparationmofmdetailedmplans,mbudgets,mforecasts,mandmperformancemreportsmf
orminternalmdecisionmmakers.m
3. Financialmreportsmaremusedmbymbothminternalmandmexternalmgroupsmandmindividuals.mT
heminternalmgroupsmaremcomprisedmofmthemvariousmmanagersmofmthementity.mThemexter
nalmgroupsmincludemthemowners,minvestors,mcreditors,mgovernmentalmagencies,motherm
interestedmparties,mandmthempublicmatmlarge.m
4. Investorsmpurchasemallmormpartmofmambusinessmandmhopemtomgainmbymreceivingmpartm
ofmwhatmthemcompanymearnsmand/ormsellingmtheirmownershipminterestminmthemcompa
nyminmthemfuturematmamhighermpricemthanmtheympaid.mCreditorsmlendmmoneymtomamcom
panymformamspecificmlengthmofmtimemandmhopemtomgainmbymchargingminterestmonmtheml
oan.m
m
, 5. Inmamsociety,meachmorganizationmcanmbemdefinedmasmamseparatemaccountingmentity.mAn
maccountingmentitymismthemorganizationmformwhichmfinancialmdatamaremtombemcollected.m
Typicalmaccountingmentitiesmaremambusiness,mamchurch,mamgovernmentalmunit,mamunive
rsitymandmothermnonprofitmorganizationsmsuchmasmamhospitalmandmamwelfaremorganizati
on.mAmbusinessmtypicallymismdefinedmandmtreatedmasmamseparatementitymbecausemthemo
wners,mcreditors,minvestors,mandmotherminterestedmpartiesmneedmtomevaluatemitsmperfor
mancemandmitsmpotentialmseparatelymfrommothermentitiesmandmfrommitsmowners.m
6. NamemofmStatement AlternativemTitle
(a) IncomemStatement (a)mStatementmofmEarnings;mStatementmofm
Income;mStatementmofmOperationsm
(b) BalancemSheet (b)mStatementmofmFinancialmPositionm
(c) CashmFlowmStatement (c)m StatementmofmCashmFlowsm
7. Themheadingmofmeachmofmthemfourmrequiredmfinancialmstatementsmshouldmincludemt
hemfollowing:m
(a) Namemofmthementitym
(b) Namemofmthemstatementm
(c) Datemofmthemstatement,mormthemperiodmofmtimem
(d) Unitmofmmeasurem
8. (a)
Thempurposemofmthemincomemstatementmismtompresentminformationmaboutm
themrevenues,mexpenses,mandmthemnetmincomemofmanmentitymformamspecifiedmper
iodmofmtime.m
(b) Thempurposemofmthembalancemsheetmismtomreportmthemfinancialmpositionmofmanment
itymatmamgivenmdate,mthatmis,mtomreportminformationmaboutmthemassets,mliabilitiesma
ndmstockholders’mequitymofmthementitymasmofmamspecificmdate.m
(c) Thempurposemofmthemstatementmofmcashmflowsmismtompresentminformationmaboutmt
hemflowmofmcashmintomthementitym(sources),mthemflowmofmcashmoutmofmthementitym(u
ses),mandmthemnetmincreasemormdecreaseminmcashmduringmthemperiod.m
(d) Themstatementmofmstockholders’mequitymreportsmthemchangesminmeachmofmthemco
mpany’smstockholders’mequitymaccountsmduringmthemaccountingmperiod,mincludi
ngmissuemandmrepurchasemofmstockmandmthemwaymthatmnetmincomemandmdistributi
onmofmdividendsmaffectedmthemretainedmearningsmofmthemcompanymduringmthatmp
eriod.m
9. Themincomemstatementmandmthemstatementmofmcashmflowsmaremdatedm―FormthemYea
rmEndedmDecemberm31‖mbecausemtheymreportmtheminflowsmandmoutflowsmofmresourc
esmduringmamperiodmofmtime.mInmcontrast,mthembalancemsheetmismdatedm―AtmDecemb
erm31‖mbecausemitmrepresentsmthemresources,mobligations,mandmstockholders’mequit
ymatma m specificmdate.m
m
, 10. Assetsmaremimportantmtomcreditorsmandminvestorsmbecausemassetsmprovidemambasismf
ormjudgingmwhethermsufficientmresourcesmaremavailablemtomoperatemthemcompany.mAs
setsmaremalsomimportantmbecausemtheymcouldmbemsoldmformcashminmthemeventmthemco
mpanymgoesmoutmofmbusiness.mLiabilitiesmaremimportantmtomcreditorsmandminvestorsm
becausemthemcompanymmustmbemablemtomgeneratemsufficientmcashmfrommoperationsm
ormfurthermborrowingmtommeetmthempaymentsmrequiredmbymdebtmagreements.mIfmambus
inessmdoesmnotmpaymitsmcreditors,mthemlawmmaymgivemthemcreditorsmthemrightmtomforcem
themsalemofmassetsmsufficientmtommeetmtheirmclaims.m
11. Netmincomemismthemexcessmofmtotalmrevenuesmovermtotalmexpenses.mNetmlossmismt
hemexcessmofmtotalmexpensesmovermtotalmrevenues.m
12. ThemequationmformthemincomemstatementmismRevenuesm-
mExpensesm=mNetmIncomem(ormNetmLossmifmthemamountmismnegative).mThus,mthemthre
emmajormitemsmreportedmonmthemincomemstatementmarem(1)mrevenues,m(2)mexpenses
,mandm(3)m netmincome.m
13. Themequationmformthembalancemsheetm(alsomknownmasmthembasicmaccountingmequation
)mis:mAssetsm=mLiabilitiesm+mStockholders’mEquity.mAssetsmaremthemprobablem(expecte
d)mfuturemeconomicmbenefitsmownedmbymthementitymasmamresultmofmpastmtransactions.m
Theymaremthemresourcesmownedmbymthembusinessmatmamgivenmpointminmtimemsuchmasmc
ash,mreceivables,minventory,mmachinery,mbuildings,mland,mandmpatents.mLiabilitiesmare
mprobablem(expected)mdebtsmorm obligationsmofmthementitym asmamresultmofm pastmtransact
ionsmthatmwillmbempaidmwithmassetsmormservicesminmthemfuture.mTheymaremthemobligation
smofmthementitymsuchmasmaccountsmpayable,mnotesmpayable,mandmbondsmpayable.mSto
ckholders’mequitymismfinancingmprovidedmbymownersmofmthembusinessmandmoperations.
mItmismthemclaimmofmthemownersmtomthemassetsmofmthembusinessmaftermthemcreditors’mclai
msmhavembeenmsatisfied.mItmmaymbemthoughtmofmasmthemresidualminterestmbecausemitmr
epresentsmassetsmminusmliabilities.m
14. Themequationmformthemstatementmofmcashmflowsmis:mCashmflowsmfrommoperatingmactivitiesm
+mCashmflowsmfromminvestingmactivitiesm+mCashmflowsmfrommfinancingmactivitiesm=mC
hangeminmcashmformthemperiod.mThemnetmcashmflowsmformthemperiodmrepresentmthemin
creasemormdecreaseminmcashmthatmoccurredmduringmthemperiod.mCashmflowsmfrommop
eratingmactivitiesmaremcashmflowsmdirectlymrelatedmtomearningmincomem(normalmbusin
essmactivitymincludingminterestmpaidmandmincomemtaxesmpaid).mCashmflowsmfromminv
estingmactivitiesmincludemcashmflowsmthatmaremrelatedmtomthemacquisitionmormsalemofm
productivemassetsmusedmbymthemcompany.mCashmflowsmfrommfinancingmactivitiesmar
emdirectlymrelatedmtomthemfinancingmofmthementerprisemitself.m
15. Themretainedmearningsmequationmis:mBeginningmRetainedmEarningsm+mNetmIncomem
-mDividendsm=mEndingmRetainedmEarnings.mItmbeginsmwithmbeginning-of-the-
yearmRetainedmEarningsmwhichmismthempriormyear’smendingmretainedmearningsmrepo
rtedmonmthembalancemsheet.mThemcurrentmyear'smNetmIncomemreportedmonmtheminco
memstatementmismaddedmandmthemcurrentmyear'smDividendsmaremsubtractedmfrommth
ismamount.mThemendingmRetainedmEarningsmamountmismreportedmonmthemend-of-
periodmbalancemsheet.m
m
