SOLUTION MANUAL FOR
u u
Financial Accounting 11th Edition
u u u u
Robert Libby, Patricia Libby, Frank Hodge
u u u u u
u
, SOLUTION MANUAL FOR u u
Financial Accounting 11th Edition Robert Libby,P
u u u u u u
atricia Libby, Frank Hodge
u u u
Chapter 1 u
Financial Statements and Business Decisions
u u u u
ANSWERS TO QUESTIONS
u u
1. Accountinguisuausystemuthatucollectsuanduprocessesu(analyzes,umeasures,uandurecor
ds)ufinancialuinformationuaboutuanuorganizationuandureportsuthatuinformationutoudecisi
onumakers.u
2. Financialuaccountinguinvolvesupreparationuofutheufourubasicufinancialustatementsuandur
elatedudisclosuresuforuexternaludecisionumakers.uManagerialuaccountinguinvolvesutheu
preparationuofudetaileduplans,ubudgets,uforecasts,uanduperformanceureportsuforuintern
aludecisionumakers.u
3. Financialureportsuareuusedubyubothuinternaluanduexternalugroupsuanduindividuals.uTheui
nternalugroupsuareucompriseduofutheuvariousumanagersuofutheuentity.uTheuexternalugro
upsuincludeutheuowners,uinvestors,ucreditors,ugovernmentaluagencies,uotheruintereste
duparties,uandutheupublicuatularge.u
4. Investorsupurchaseualluorupartuofuaubusinessuanduhopeutougainubyureceivingupartuofuw
hatutheucompanyuearnsuand/orusellingutheiruownershipuinterestuinutheucompanyuinuth
eufutureuatuauhigherupriceuthanutheyupaid.uCreditorsulendumoneyutouaucompanyuforuaus
pecificulengthuofutimeuanduhopeutougainubyucharginguinterestuonutheuloan.u
u
, 5. Inuausociety,ueachuorganizationucanubeudefineduasuauseparateuaccountinguentity.uAnuac
countinguentityuisutheuorganizationuforuwhichufinancialudatauareutoubeucollected.uTypical
uaccountinguentitiesuareuaubusiness,uauchurch,uaugovernmentaluunit,uauuniversityuanduo
therunonprofituorganizationsusuchuasuauhospitaluanduauwelfareuorganization.uAubusines
sutypicallyuisudefineduandutreateduasuauseparateuentityubecauseutheuowners,ucreditors,ui
nvestors,uanduotheruinterestedupartiesuneedutouevaluateuitsuperformanceuanduitsupoten
tialuseparatelyufromuotheruentitiesuandufromuitsuowners.u
6. NameuofuStatement AlternativeuTitle
(a) IncomeuStatement (a)uStatementuofuEarnings;uStatementuofu
Income;uStatementuofuOperationsu
(b) BalanceuSheet (b)uStatementuofuFinancialuPositionu
(c) CashuFlowuStatement (c)u StatementuofuCashuFlowsu
7. Theuheadinguofueachuofutheufoururequiredufinancialustatementsushoulduincludeutheuf
ollowing:u
(a) Nameuofutheuentityu
(b) Nameuofutheustatementu
(c) Dateuofutheustatement,uorutheuperioduofutimeu
(d) Unituofumeasureu
8. (a)
Theupurposeuofutheuincomeustatementuisutoupresentuinformationuaboututh
eurevenues,uexpenses,uandutheunetuincomeuofuanuentityuforuauspecifieduperioduo
futime.u
(b) Theupurposeuofutheubalanceusheetuisutoureportutheufinancialupositionuofuanuentityu
atuaugivenudate,uthatuis,utoureportuinformationuaboututheuassets,uliabilitiesuandusto
ckholders’uequityuofutheuentityuasuofuauspecificudate.u
(c) Theupurposeuofutheustatementuofucashuflowsuisutoupresentuinformationuaboututheufl
owuofucashuintoutheuentityu(sources),utheuflowuofucashuoutuofutheuentityu(uses),uand
utheunetuincreaseuorudecreaseuinucashuduringutheuperiod.u
(d) Theustatementuofustockholders’uequityureportsutheuchangesuinueachuofutheucomp
any’sustockholders’uequityuaccountsuduringutheuaccountinguperiod,uincludinguiss
ueuandurepurchaseuofustockuandutheuwayuthatunetuincomeuandudistributionuofudivi
dendsuaffectedutheuretaineduearningsuofutheucompanyuduringuthatuperiod.u
9. Theuincomeustatementuandutheustatementuofucashuflowsuareudatedu―ForutheuYearuE
ndeduDecemberu31‖ubecauseutheyureportutheuinflowsuanduoutflowsuofuresourcesudu
ringuauperioduofutime.uInucontrast,utheubalanceusheetuisudatedu―AtuDecemberu31‖ubec
auseuiturepresentsutheuresources,uobligations,uandustockholders’uequityuatua u specifi
cudate.u
u
, 10. Assetsuareuimportantutoucreditorsuanduinvestorsubecauseuassetsuprovideuaubasisuforuj
udginguwhetherusufficienturesourcesuareuavailableutouoperateutheucompany.uAssetsua
reualsouimportantubecauseutheyucouldubeusolduforucashuinutheueventutheucompanyugoe
suoutuofubusiness.uLiabilitiesuareuimportantutoucreditorsuanduinvestorsubecauseutheuco
mpanyumustubeuableutougenerateusufficientucashufromuoperationsuorufurtheruborrowin
gutoumeetutheupaymentsurequiredubyudebtuagreements.uIfuaubusinessudoesunotupayuits
ucreditors,utheulawumayugiveutheucreditorsutheurightutouforceutheusaleuofuassetsusufficie
ntutoumeetutheiruclaims.u
11. Netuincomeuisutheuexcessuofutotalurevenuesuoverutotaluexpenses.uNetulossuisutheu
excessuofutotaluexpensesuoverutotalurevenues.u
12. TheuequationuforutheuincomeustatementuisuRevenuesu-
uExpensesu=uNetuIncomeu(oruNetuLossuifutheuamountuisunegative).uThus,utheuthreeum
ajoruitemsureporteduonutheuincomeustatementuareu(1)urevenues,u(2)uexpenses,uandu(
3)unetuincome.u
13. Theuequationuforutheubalanceusheetu(alsouknownuasutheubasicuaccountinguequation)uis
:uAssetsu=uLiabilitiesu+uStockholders’uEquity.uAssetsuareutheuprobableu(expected)ufutu
reueconomicubenefitsuownedubyutheuentityuasuauresultuofupastutransactions.uTheyuareut
heuresourcesuownedubyutheubusinessuatuaugivenupointuinutimeusuchuasucash,ureceivabl
es,uinventory,umachinery,ubuildings,uland,uandupatents.uLiabilitiesuareuprobableu(expe
cted)udebtsuoruobligationsuofutheuentityuasuauresultuofupastutransactionsuthatuwillubeupai
duwithuassetsuoruservicesuinutheufuture.uTheyuareutheuobligationsuofutheuentityusuchuasu
accountsupayable,unotesupayable,uandubondsupayable.uStockholders’uequityuisufinanci
nguprovidedubyuownersuofutheubusinessuanduoperations.uItuisutheuclaimuofutheuownersut
outheuassetsuofutheubusinessuafterutheucreditors’uclaimsuhaveubeenusatisfied.uItumayube
uthoughtuofuasutheuresidualuinterestubecauseuiturepresentsuassetsuminusuliabilities.u
14. Theuequationuforutheustatementuofucashuflowsuis:uCashuflowsufromuoperatinguactivitiesu
+uCashuflowsufromuinvestinguactivitiesu+uCashuflowsufromufinancinguactivitiesu=uCha
ngeuinucashuforutheuperiod.uTheunetucashuflowsuforutheuperiodurepresentutheuincrease
uorudecreaseuinucashuthatuoccurreduduringutheuperiod.uCashuflowsufromuoperatinguac
tivitiesuareucashuflowsudirectlyurelatedutouearninguincomeu(normalubusinessuactivityui
ncludinguinterestupaiduanduincomeutaxesupaid).uCashuflowsufromuinvestinguactivitiesu
includeucashuflowsuthatuareurelatedutoutheuacquisitionuorusaleuofuproductiveuassetsuu
sedubyutheucompany.uCashuflowsufromufinancinguactivitiesuareudirectlyurelatedutoutheu
financinguofutheuenterpriseuitself.u
15. Theuretaineduearningsuequationuis:uBeginninguRetaineduEarningsu+uNetuIncomeu-
uDividendsu=uEndinguRetaineduEarnings.uItubeginsuwithubeginning-of-the-
yearuRetaineduEarningsuwhichuisutheuprioruyear’suendinguretaineduearningsureporte
duonutheubalanceusheet.uTheucurrentuyear'suNetuIncomeureporteduonutheuincomeusta
tementuisuaddeduandutheucurrentuyear'suDividendsuareusubtractedufromuthisuamount
.uTheuendinguRetaineduEarningsuamountuisureporteduonutheuend-of-
periodubalanceusheet.u
u
u u
Financial Accounting 11th Edition
u u u u
Robert Libby, Patricia Libby, Frank Hodge
u u u u u
u
, SOLUTION MANUAL FOR u u
Financial Accounting 11th Edition Robert Libby,P
u u u u u u
atricia Libby, Frank Hodge
u u u
Chapter 1 u
Financial Statements and Business Decisions
u u u u
ANSWERS TO QUESTIONS
u u
1. Accountinguisuausystemuthatucollectsuanduprocessesu(analyzes,umeasures,uandurecor
ds)ufinancialuinformationuaboutuanuorganizationuandureportsuthatuinformationutoudecisi
onumakers.u
2. Financialuaccountinguinvolvesupreparationuofutheufourubasicufinancialustatementsuandur
elatedudisclosuresuforuexternaludecisionumakers.uManagerialuaccountinguinvolvesutheu
preparationuofudetaileduplans,ubudgets,uforecasts,uanduperformanceureportsuforuintern
aludecisionumakers.u
3. Financialureportsuareuusedubyubothuinternaluanduexternalugroupsuanduindividuals.uTheui
nternalugroupsuareucompriseduofutheuvariousumanagersuofutheuentity.uTheuexternalugro
upsuincludeutheuowners,uinvestors,ucreditors,ugovernmentaluagencies,uotheruintereste
duparties,uandutheupublicuatularge.u
4. Investorsupurchaseualluorupartuofuaubusinessuanduhopeutougainubyureceivingupartuofuw
hatutheucompanyuearnsuand/orusellingutheiruownershipuinterestuinutheucompanyuinuth
eufutureuatuauhigherupriceuthanutheyupaid.uCreditorsulendumoneyutouaucompanyuforuaus
pecificulengthuofutimeuanduhopeutougainubyucharginguinterestuonutheuloan.u
u
, 5. Inuausociety,ueachuorganizationucanubeudefineduasuauseparateuaccountinguentity.uAnuac
countinguentityuisutheuorganizationuforuwhichufinancialudatauareutoubeucollected.uTypical
uaccountinguentitiesuareuaubusiness,uauchurch,uaugovernmentaluunit,uauuniversityuanduo
therunonprofituorganizationsusuchuasuauhospitaluanduauwelfareuorganization.uAubusines
sutypicallyuisudefineduandutreateduasuauseparateuentityubecauseutheuowners,ucreditors,ui
nvestors,uanduotheruinterestedupartiesuneedutouevaluateuitsuperformanceuanduitsupoten
tialuseparatelyufromuotheruentitiesuandufromuitsuowners.u
6. NameuofuStatement AlternativeuTitle
(a) IncomeuStatement (a)uStatementuofuEarnings;uStatementuofu
Income;uStatementuofuOperationsu
(b) BalanceuSheet (b)uStatementuofuFinancialuPositionu
(c) CashuFlowuStatement (c)u StatementuofuCashuFlowsu
7. Theuheadinguofueachuofutheufoururequiredufinancialustatementsushoulduincludeutheuf
ollowing:u
(a) Nameuofutheuentityu
(b) Nameuofutheustatementu
(c) Dateuofutheustatement,uorutheuperioduofutimeu
(d) Unituofumeasureu
8. (a)
Theupurposeuofutheuincomeustatementuisutoupresentuinformationuaboututh
eurevenues,uexpenses,uandutheunetuincomeuofuanuentityuforuauspecifieduperioduo
futime.u
(b) Theupurposeuofutheubalanceusheetuisutoureportutheufinancialupositionuofuanuentityu
atuaugivenudate,uthatuis,utoureportuinformationuaboututheuassets,uliabilitiesuandusto
ckholders’uequityuofutheuentityuasuofuauspecificudate.u
(c) Theupurposeuofutheustatementuofucashuflowsuisutoupresentuinformationuaboututheufl
owuofucashuintoutheuentityu(sources),utheuflowuofucashuoutuofutheuentityu(uses),uand
utheunetuincreaseuorudecreaseuinucashuduringutheuperiod.u
(d) Theustatementuofustockholders’uequityureportsutheuchangesuinueachuofutheucomp
any’sustockholders’uequityuaccountsuduringutheuaccountinguperiod,uincludinguiss
ueuandurepurchaseuofustockuandutheuwayuthatunetuincomeuandudistributionuofudivi
dendsuaffectedutheuretaineduearningsuofutheucompanyuduringuthatuperiod.u
9. Theuincomeustatementuandutheustatementuofucashuflowsuareudatedu―ForutheuYearuE
ndeduDecemberu31‖ubecauseutheyureportutheuinflowsuanduoutflowsuofuresourcesudu
ringuauperioduofutime.uInucontrast,utheubalanceusheetuisudatedu―AtuDecemberu31‖ubec
auseuiturepresentsutheuresources,uobligations,uandustockholders’uequityuatua u specifi
cudate.u
u
, 10. Assetsuareuimportantutoucreditorsuanduinvestorsubecauseuassetsuprovideuaubasisuforuj
udginguwhetherusufficienturesourcesuareuavailableutouoperateutheucompany.uAssetsua
reualsouimportantubecauseutheyucouldubeusolduforucashuinutheueventutheucompanyugoe
suoutuofubusiness.uLiabilitiesuareuimportantutoucreditorsuanduinvestorsubecauseutheuco
mpanyumustubeuableutougenerateusufficientucashufromuoperationsuorufurtheruborrowin
gutoumeetutheupaymentsurequiredubyudebtuagreements.uIfuaubusinessudoesunotupayuits
ucreditors,utheulawumayugiveutheucreditorsutheurightutouforceutheusaleuofuassetsusufficie
ntutoumeetutheiruclaims.u
11. Netuincomeuisutheuexcessuofutotalurevenuesuoverutotaluexpenses.uNetulossuisutheu
excessuofutotaluexpensesuoverutotalurevenues.u
12. TheuequationuforutheuincomeustatementuisuRevenuesu-
uExpensesu=uNetuIncomeu(oruNetuLossuifutheuamountuisunegative).uThus,utheuthreeum
ajoruitemsureporteduonutheuincomeustatementuareu(1)urevenues,u(2)uexpenses,uandu(
3)unetuincome.u
13. Theuequationuforutheubalanceusheetu(alsouknownuasutheubasicuaccountinguequation)uis
:uAssetsu=uLiabilitiesu+uStockholders’uEquity.uAssetsuareutheuprobableu(expected)ufutu
reueconomicubenefitsuownedubyutheuentityuasuauresultuofupastutransactions.uTheyuareut
heuresourcesuownedubyutheubusinessuatuaugivenupointuinutimeusuchuasucash,ureceivabl
es,uinventory,umachinery,ubuildings,uland,uandupatents.uLiabilitiesuareuprobableu(expe
cted)udebtsuoruobligationsuofutheuentityuasuauresultuofupastutransactionsuthatuwillubeupai
duwithuassetsuoruservicesuinutheufuture.uTheyuareutheuobligationsuofutheuentityusuchuasu
accountsupayable,unotesupayable,uandubondsupayable.uStockholders’uequityuisufinanci
nguprovidedubyuownersuofutheubusinessuanduoperations.uItuisutheuclaimuofutheuownersut
outheuassetsuofutheubusinessuafterutheucreditors’uclaimsuhaveubeenusatisfied.uItumayube
uthoughtuofuasutheuresidualuinterestubecauseuiturepresentsuassetsuminusuliabilities.u
14. Theuequationuforutheustatementuofucashuflowsuis:uCashuflowsufromuoperatinguactivitiesu
+uCashuflowsufromuinvestinguactivitiesu+uCashuflowsufromufinancinguactivitiesu=uCha
ngeuinucashuforutheuperiod.uTheunetucashuflowsuforutheuperiodurepresentutheuincrease
uorudecreaseuinucashuthatuoccurreduduringutheuperiod.uCashuflowsufromuoperatinguac
tivitiesuareucashuflowsudirectlyurelatedutouearninguincomeu(normalubusinessuactivityui
ncludinguinterestupaiduanduincomeutaxesupaid).uCashuflowsufromuinvestinguactivitiesu
includeucashuflowsuthatuareurelatedutoutheuacquisitionuorusaleuofuproductiveuassetsuu
sedubyutheucompany.uCashuflowsufromufinancinguactivitiesuareudirectlyurelatedutoutheu
financinguofutheuenterpriseuitself.u
15. Theuretaineduearningsuequationuis:uBeginninguRetaineduEarningsu+uNetuIncomeu-
uDividendsu=uEndinguRetaineduEarnings.uItubeginsuwithubeginning-of-the-
yearuRetaineduEarningsuwhichuisutheuprioruyear’suendinguretaineduearningsureporte
duonutheubalanceusheet.uTheucurrentuyear'suNetuIncomeureporteduonutheuincomeusta
tementuisuaddeduandutheucurrentuyear'suDividendsuareusubtractedufromuthisuamount
.uTheuendinguRetaineduEarningsuamountuisureporteduonutheuend-of-
periodubalanceusheet.u
u
