FINANCIALpANDpMANAGERIALpACCOUNTINGp-pFifthpEdition SolutionspManual
1. Whatpispaccounting?
Accountingpispthepinformationpsystempthatpmeasurespbusinesspactivities,pprocesses
thepinformationpintopreports,pandpcommunicatespthepresultsptopdecisionpmakers.
Accountingpisptheplanguagepofpbusiness.
2. Brieflypdescribeptheptwopmajorpfieldspofpaccounting.
Financialpaccountingpprovidespinformationpforpexternalpdecisionpmakers,psuchpas
outsidepinvestors,plenders,pcustomers,pandpthepfederalpgovernment.pManagerial
accountingpfocusesponpinformationpforpinternalpdecisionpmakers,psuchpaspthe
company’spmanagerspandpemployees.
3. Describepthepvariousptypespofpindividualspwhopusepaccountingpinformationpandphowpt
heypusepthatpinformationptopmakepimportantpdecisions.
Individualspusepaccountingpinformationptophelppthempmanageptheirpmoney,pevaluatepa
apnewpjob,pandpbetterpdecidepwhetherptheypcanpaffordptopmakepapnewppurchase.
Businesspownerspusepaccountingpinformationptopsetpgoals,pmeasurepprogressptoward
thosepgoals,pandpmakepadjustmentspwhenpneeded.pInvestorspusepaccounting
informationptophelppthempdecidepwhetherporpnotpapcompanypispapgoodpinvestmentpand
onceptheyphavepinvested,ptheypusepapcompany’spfinancialpstatementsptopanalyzephow
theirpinvestmentpispperforming.pCreditorspusepaccountingpinformationptopdecide
whetherptoplendpmoneyptopapbusinesspandptopevaluatepapcompany’spabilityptopmake
theploanppayments.pTaxingpauthoritiespusepaccountingpinformationptopcalculatepthe
amountpofpincomeptaxpthatpapcompanyphasptoppay.
4. Whatpareptwopcertificationspavailablepforpaccountants?pBrieflypexplainpeachpc
ertification.
CertifiedpPublicpAccountantsp(CPAs)pareplicensedpprofessionalpaccountantspwho
servepthepgeneralppublic.pTheypworkpforppublicpaccountingpfirms,pbusinesses,
government,porpeducationalpinstitutions.pTopbepcertifiedptheypmustpmeetpeducational
and/orpexperienceprequirementspandppasspanpexam.pCertifiedpManagement
Accountantsp(CMAs)pspecializepinpaccountingpandpfinancialpmanagement
knowledge.pTheypworkpforpapsinglepcompany.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep1pofp84
,FINANCIALpANDpMANAGERIALpACCOUNTINGp-pFifthpEdition SolutionspManual
5. WhatpisptheprolepofpthepFinancialpAccountingpStandardspBoardp(FASB)?
ThepFASBpoverseespthepcreationpandpgovernancepofpaccountingpstandards.pThey
workpwithpgovernmentalpregulatorypagencies,pcongressionallypcreatedpgroups,pand
privatepgroups.
6. ExplainptheppurposepofpGenerallypAcceptedpAccountingpPrinciplesp(GAAP),pinclud
ingptheporganizationpcurrentlypresponsiblepforpthepcreationpandpgovernancepofpthes
epstandards.
ThepguidelinespforpaccountingpinformationparepcalledpGAAP.pItpispthepmainpU.S.
accountingprulepbookpandpispcurrentlypcreatedpandpgovernedpbypthepFASB.pInvestors
andplenderspmustphavepinformationpthatpisprelevantpandphaspfaithfulprepresentationpin
orderptopmakepdecisionspandpthepGAAPpprovidespthepframeworkpforpthispfinancial
reporting.
7. Describepthepsimilaritiespandpdifferencespamongpthepfourpdifferentptypespofpbusinesspe
ntitiespdiscussedpinpthepchapter.
Apsolepproprietorshipphaspapsinglepowner,pterminatespuponpthepowner’spdeathpor
choice,pthepownerphasppersonalpliabilitypforpthepbusiness’spdebts,pandpitpispnotpa
separateptaxpentity.pAppartnershipphasptwoporpmorepowners,pterminatespatppartner’s
choiceporpdeath,ptheppartnersphaveppersonalpliability,pandpitpispnotpapseparateptax
entity.pApcorporationpispapseparateplegalpentity,phasponeporpmorepowners,phas
indefiniteplife,pthepstockholdersparepnotppersonallypliablepforpthepbusiness’spdebts,
andpitpispapseparateptaxpentity.pAplimited-liabilitypcompanyphasponeporpmorepmembers
andpeachpisponlypliablepforphisporpherpownpactions,phaspanpindefiniteplife,pandpispnotpa
separateptaxpentity.
8. Apbusinessppurchasespanpacrepofplandpforp$5,000.pThepcurrentpmarketpvaluepisp$5,550pa
ndptheplandpwaspassessedpforppropertyptaxppurposespatp$5,250.pWhatpvaluepshouldpthepl
andpbeprecordedpat,pandpwhichpaccountingpprinciplepsupportspyourpanswer?
Theplandpshouldpbeprecordedpatp$5,000.pThepcostpprinciplepstatespthatpassetspshould
beprecordedpatptheirphistoricalpcost.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep2pofp84
,FINANCIALpANDpMANAGERIALpACCOUNTINGp-pFifthpEdition SolutionspManual
9. Whatpdoespthepgoingpconcernpassumptionpmeanpforpapbusiness?
Thepgoingpconcernpassumptionpassumespthatpthepentitypwillpremainpinpbusinesspfor
thepforeseeablepfuturepandplongpenoughptopusepexistingpresourcespforptheirpintended
purpose.
10. Whichpconceptpstatespthatpaccountingpinformationpshouldpbepcomplete,pneutral,pandpfr
eepfrompmaterialperror?
Thepfaithfulprepresentationpconceptpstatespthatpaccountingpinformationpshouldpbe
complete,pneutral,pandpfreepfrompmaterialperror.
11. FinancialpstatementspinpthepUnitedpStatesparepreportedpinpU.S.pdollars.pWhatpa
ssumptionpsupportspthispstatement?
Thepmonetarypunitpassumptionpstatespthatpitemsponpthepfinancialpstatementspshould
bepmeasuredpinptermspofpapmonetarypunit.
12. ExplainptheprolepofpthepInternationalpAccountingpStandardspBoardp(IASB)pinprelationpt
opInternationalpFinancialpReportingpStandardsp(IFRS).
ThepIASBpisptheporganizationpthatpdevelopspandpcreatespIFRSpwhichparepapsetpof
globalpaccountingpstandardspthatpwouldpbepusedparoundpthepworld.
13. Whatpispthepaccountingpequation?pBrieflypexplainpeachpofpthepthreepparts.
Assetsp=pLiabilitiesp+pEquity.pAssetsparepeconomicpresourcespthatparepexpectedpto
benefitpthepbusinesspinpthepfuture.pTheyparepthingspofpvaluepthatpapbusinesspownspor
haspcontrolpof.pLiabilitiesparepdebtspthatparepowedptopcreditors.ppTheypareponepsource
ofpclaimspagainstpassets.pEquitypispthepotherpsourcepofpclaimspagainstpassets.
Equitypispthepstockholders’pclaimspagainstpassetspandpispthepamountpofpassetspthatpis
leftpoverpafterpthepcompanyphasppaidpitspliabilities.pItprepresentspthepnetpworthpofpthe
corporation.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep3pofp84
, FINANCIALpANDpMANAGERIALpACCOUNTINGp-pFifthpEdition SolutionspManual
14. Howpdopretainedpearningspincrease?pWhatpareptheptwopwayspthatpretainedpearningspd
ecreases?
Retainedpearningspincreasespwithprevenues.pRetainedpearningspdecreasespwith
expensespandpdividends.
15. Howpispnetpincomepcalculated?pDefineprevenuespandpexpenses.
Revenuesp–pExpensesp=pNetpIncome.pRevenuesparepearningspresultingpfrom
deliveringpgoodsporpservicesptopcustomers.pExpensesparepthepcostpofpsellingpgoods
orpservice.
16. Whatparepthepstepspusedpwhenpanalyzingpapbusinessptransaction?
Stepp1:pIdentifypthepaccountspandpthepaccountptype.pStepp2:pDecidepifpeachpaccount
increasesporpdecreases.pStepp3:pDeterminepifpthepaccountingpequationpispinpbalance.
17. Listpthepfourpfinancialpstatements.pBrieflypdescribepeachpstatement.
IncomepStatementp–pShowspthepdifferencepbetweenpanpentity’sprevenuespand
expensespandpreportspthepnetpincomeporpnetplosspforpapspecificpperiod.
StatementpofpRetainedpEarningsp–pShowspthepchangespinpretainedpearningspforpa
specificpperiodpincludingpnetpincomep(loss)pandpdividends.
BalancepSheetp–pShowspthepassets,pliabilities,pandpstockholders’pequitypofpthe
businesspaspofpapspecificpdate.
StatementpofpCashpFlowsp–pShowspapbusiness’spcashpreceiptspandpcashppayments
forpapspecificpperiod.
18. Whatpispthepcalculationpforpreturnponpassetsp(ROA)?pExplainpwhatpROApmeasures.
ReturnponpAssetsp=pNetpincomep/pAverageptotalpassets.pROApmeasuresphow
profitablypapcompanypusespitspassets.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep4pofp84
1. Whatpispaccounting?
Accountingpispthepinformationpsystempthatpmeasurespbusinesspactivities,pprocesses
thepinformationpintopreports,pandpcommunicatespthepresultsptopdecisionpmakers.
Accountingpisptheplanguagepofpbusiness.
2. Brieflypdescribeptheptwopmajorpfieldspofpaccounting.
Financialpaccountingpprovidespinformationpforpexternalpdecisionpmakers,psuchpas
outsidepinvestors,plenders,pcustomers,pandpthepfederalpgovernment.pManagerial
accountingpfocusesponpinformationpforpinternalpdecisionpmakers,psuchpaspthe
company’spmanagerspandpemployees.
3. Describepthepvariousptypespofpindividualspwhopusepaccountingpinformationpandphowpt
heypusepthatpinformationptopmakepimportantpdecisions.
Individualspusepaccountingpinformationptophelppthempmanageptheirpmoney,pevaluatepa
apnewpjob,pandpbetterpdecidepwhetherptheypcanpaffordptopmakepapnewppurchase.
Businesspownerspusepaccountingpinformationptopsetpgoals,pmeasurepprogressptoward
thosepgoals,pandpmakepadjustmentspwhenpneeded.pInvestorspusepaccounting
informationptophelppthempdecidepwhetherporpnotpapcompanypispapgoodpinvestmentpand
onceptheyphavepinvested,ptheypusepapcompany’spfinancialpstatementsptopanalyzephow
theirpinvestmentpispperforming.pCreditorspusepaccountingpinformationptopdecide
whetherptoplendpmoneyptopapbusinesspandptopevaluatepapcompany’spabilityptopmake
theploanppayments.pTaxingpauthoritiespusepaccountingpinformationptopcalculatepthe
amountpofpincomeptaxpthatpapcompanyphasptoppay.
4. Whatpareptwopcertificationspavailablepforpaccountants?pBrieflypexplainpeachpc
ertification.
CertifiedpPublicpAccountantsp(CPAs)pareplicensedpprofessionalpaccountantspwho
servepthepgeneralppublic.pTheypworkpforppublicpaccountingpfirms,pbusinesses,
government,porpeducationalpinstitutions.pTopbepcertifiedptheypmustpmeetpeducational
and/orpexperienceprequirementspandppasspanpexam.pCertifiedpManagement
Accountantsp(CMAs)pspecializepinpaccountingpandpfinancialpmanagement
knowledge.pTheypworkpforpapsinglepcompany.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep1pofp84
,FINANCIALpANDpMANAGERIALpACCOUNTINGp-pFifthpEdition SolutionspManual
5. WhatpisptheprolepofpthepFinancialpAccountingpStandardspBoardp(FASB)?
ThepFASBpoverseespthepcreationpandpgovernancepofpaccountingpstandards.pThey
workpwithpgovernmentalpregulatorypagencies,pcongressionallypcreatedpgroups,pand
privatepgroups.
6. ExplainptheppurposepofpGenerallypAcceptedpAccountingpPrinciplesp(GAAP),pinclud
ingptheporganizationpcurrentlypresponsiblepforpthepcreationpandpgovernancepofpthes
epstandards.
ThepguidelinespforpaccountingpinformationparepcalledpGAAP.pItpispthepmainpU.S.
accountingprulepbookpandpispcurrentlypcreatedpandpgovernedpbypthepFASB.pInvestors
andplenderspmustphavepinformationpthatpisprelevantpandphaspfaithfulprepresentationpin
orderptopmakepdecisionspandpthepGAAPpprovidespthepframeworkpforpthispfinancial
reporting.
7. Describepthepsimilaritiespandpdifferencespamongpthepfourpdifferentptypespofpbusinesspe
ntitiespdiscussedpinpthepchapter.
Apsolepproprietorshipphaspapsinglepowner,pterminatespuponpthepowner’spdeathpor
choice,pthepownerphasppersonalpliabilitypforpthepbusiness’spdebts,pandpitpispnotpa
separateptaxpentity.pAppartnershipphasptwoporpmorepowners,pterminatespatppartner’s
choiceporpdeath,ptheppartnersphaveppersonalpliability,pandpitpispnotpapseparateptax
entity.pApcorporationpispapseparateplegalpentity,phasponeporpmorepowners,phas
indefiniteplife,pthepstockholdersparepnotppersonallypliablepforpthepbusiness’spdebts,
andpitpispapseparateptaxpentity.pAplimited-liabilitypcompanyphasponeporpmorepmembers
andpeachpisponlypliablepforphisporpherpownpactions,phaspanpindefiniteplife,pandpispnotpa
separateptaxpentity.
8. Apbusinessppurchasespanpacrepofplandpforp$5,000.pThepcurrentpmarketpvaluepisp$5,550pa
ndptheplandpwaspassessedpforppropertyptaxppurposespatp$5,250.pWhatpvaluepshouldpthepl
andpbeprecordedpat,pandpwhichpaccountingpprinciplepsupportspyourpanswer?
Theplandpshouldpbeprecordedpatp$5,000.pThepcostpprinciplepstatespthatpassetspshould
beprecordedpatptheirphistoricalpcost.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep2pofp84
,FINANCIALpANDpMANAGERIALpACCOUNTINGp-pFifthpEdition SolutionspManual
9. Whatpdoespthepgoingpconcernpassumptionpmeanpforpapbusiness?
Thepgoingpconcernpassumptionpassumespthatpthepentitypwillpremainpinpbusinesspfor
thepforeseeablepfuturepandplongpenoughptopusepexistingpresourcespforptheirpintended
purpose.
10. Whichpconceptpstatespthatpaccountingpinformationpshouldpbepcomplete,pneutral,pandpfr
eepfrompmaterialperror?
Thepfaithfulprepresentationpconceptpstatespthatpaccountingpinformationpshouldpbe
complete,pneutral,pandpfreepfrompmaterialperror.
11. FinancialpstatementspinpthepUnitedpStatesparepreportedpinpU.S.pdollars.pWhatpa
ssumptionpsupportspthispstatement?
Thepmonetarypunitpassumptionpstatespthatpitemsponpthepfinancialpstatementspshould
bepmeasuredpinptermspofpapmonetarypunit.
12. ExplainptheprolepofpthepInternationalpAccountingpStandardspBoardp(IASB)pinprelationpt
opInternationalpFinancialpReportingpStandardsp(IFRS).
ThepIASBpisptheporganizationpthatpdevelopspandpcreatespIFRSpwhichparepapsetpof
globalpaccountingpstandardspthatpwouldpbepusedparoundpthepworld.
13. Whatpispthepaccountingpequation?pBrieflypexplainpeachpofpthepthreepparts.
Assetsp=pLiabilitiesp+pEquity.pAssetsparepeconomicpresourcespthatparepexpectedpto
benefitpthepbusinesspinpthepfuture.pTheyparepthingspofpvaluepthatpapbusinesspownspor
haspcontrolpof.pLiabilitiesparepdebtspthatparepowedptopcreditors.ppTheypareponepsource
ofpclaimspagainstpassets.pEquitypispthepotherpsourcepofpclaimspagainstpassets.
Equitypispthepstockholders’pclaimspagainstpassetspandpispthepamountpofpassetspthatpis
leftpoverpafterpthepcompanyphasppaidpitspliabilities.pItprepresentspthepnetpworthpofpthe
corporation.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep3pofp84
, FINANCIALpANDpMANAGERIALpACCOUNTINGp-pFifthpEdition SolutionspManual
14. Howpdopretainedpearningspincrease?pWhatpareptheptwopwayspthatpretainedpearningspd
ecreases?
Retainedpearningspincreasespwithprevenues.pRetainedpearningspdecreasespwith
expensespandpdividends.
15. Howpispnetpincomepcalculated?pDefineprevenuespandpexpenses.
Revenuesp–pExpensesp=pNetpIncome.pRevenuesparepearningspresultingpfrom
deliveringpgoodsporpservicesptopcustomers.pExpensesparepthepcostpofpsellingpgoods
orpservice.
16. Whatparepthepstepspusedpwhenpanalyzingpapbusinessptransaction?
Stepp1:pIdentifypthepaccountspandpthepaccountptype.pStepp2:pDecidepifpeachpaccount
increasesporpdecreases.pStepp3:pDeterminepifpthepaccountingpequationpispinpbalance.
17. Listpthepfourpfinancialpstatements.pBrieflypdescribepeachpstatement.
IncomepStatementp–pShowspthepdifferencepbetweenpanpentity’sprevenuespand
expensespandpreportspthepnetpincomeporpnetplosspforpapspecificpperiod.
StatementpofpRetainedpEarningsp–pShowspthepchangespinpretainedpearningspforpa
specificpperiodpincludingpnetpincomep(loss)pandpdividends.
BalancepSheetp–pShowspthepassets,pliabilities,pandpstockholders’pequitypofpthe
businesspaspofpapspecificpdate.
StatementpofpCashpFlowsp–pShowspapbusiness’spcashpreceiptspandpcashppayments
forpapspecificpperiod.
18. Whatpispthepcalculationpforpreturnponpassetsp(ROA)?pExplainpwhatpROApmeasures.
ReturnponpAssetsp=pNetpincomep/pAverageptotalpassets.pROApmeasuresphow
profitablypapcompanypusespitspassets.
Chapterp1:pAccoutingpandpthepBusinesspEnvironment Pagep4pofp84
