Solutions Manual for Cornerstones of Financial Accounting, 3e Jay Rich, Jefferson Jones, Maryanne Mowen,
Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
1 FINANCIAL STATEMENTS AND MAKING BUSINESS DECISIONS
DISCUSSION QUESTIONS
Accounting is a system for identifying, measuring, recording, and communicating financial information about
an organization’s activities to permit informed decisions by decision-makers of the information. Bookkeeping
is the process—made up of mechanical “steps”—of recording transactions and maintaining accounting
records. While bookkeeping is part of accounting, accounting is viewed as the complete informatio n system
that communicates the economic activities of a company to interested parties. Accounting is often referred to
as the “language of business” because it communicates information about economic activities of a company
that help people make decisions.
Accounting information is demanded or needed by decision-makers both inside and outside the business to
provide information about business activities and finances so that informed decisions can be made. Five
groups that create the demand for accounting information and their uses of accounting information are
described below.
(1) Managers need accounting information to plan and make decisions about the business (e.g.,
predicting the consequences of their actions and deciding on which actions to take) and to con trol its
operations (e.g., evaluating the effectiveness of their past decisions).
(2) Employees use accounting information about their employer to aid in planning their careers (e.g.,
judging the future prospects of the company).
(3) Investors (owners) need accounting information about a business to evaluate the future prospects of a
business and to decide where to invest their money.
(4) Creditors (lenders) need accounting information to decide whether or not to lend money or extend
credit to a business.
(5) Governments need accounting information about businesses to determine taxes owed by businesses,
to implement a variety of regulatory objectives, and to make national economic policy decisions.
An accounting entity is a company that has an identity separate from that of its owners and managers and for
which accounting records are kept. There are three main forms that accounting entities take: a sole
proprietorship, a partnership, and a corporation.
A sole proprietorship is a business entity owned by one person. A partnership is a business entity owned
jointly by two or more individuals. Proprietorships and partnerships are not legally separate from the personal
affairs of the owners. That is, the owners are responsible for the debts of the business. A corporation is a
separate legal entity formed by one or more persons called shareholders. A corporation is legally separate
from the affairs of its owners, which limits the shareholders’ legal responsibility for the debts of the business
to the amount that the shareholders invested in the business. Corporate shareholders may pay more taxes
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,Solutions Manual for Cornerstones of Financial Accounting, 3e Jay Rich, Jefferson Jones, Maryanne Mowen,
Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
than owners of sole proprietorships or partnerships. The majority of business in Canada is conducted by
corporations.
The three main types of business activities are financing activities, investing activities, and operating activities.
Financing activities involve obtaining the funds necessary to begin and operate a business. These funds come
from either issuing shares or borrowing money. Investing activities involve buying and selling assets that enable a
corporation to operate. Operating activities are the normal business activities that a company engages in as it
conducts its business. These activities involve selling products or services, purchasing inventory, collecting
amounts due from customers, and paying suppliers.
Assets are the economic resources or future economic benefits obtained or controlled by a business. Liabilities are
the creditors’ claims on the resources of a business. Shareholders’ equity is the ownership claims on the resources
of a business. Shareholders’ equity is considered a residual interest in the assets of a business that remain after
deducting the business’s liabilities. All three items appear on the statement of financial position, forming the
following equation:
Assets = Liabilities + Shareholders’ Equity
Revenues are the increases in assets (resources) that result from the sale of products or services. Expenses are
the costs of assets (resources) used, or the liabilities created, in the operation of the business. If revenues are
greater than expenses, a corporation has earned net income. If expenses are greater than revenues, a corporation
has incurred a net loss.
The four primary financial statements are:
(1) The statement of financial position: a presentation of information about a company’s economic resources
(its assets) and the claims against those resources by creditors and owners (liabilities and shareholders’
equity) at a specific point in time.
(2) The statement of earnings: a report on how well a company has performed its operations— the profitability
of a company—over a period of time.
(3) The statement of retained earnings: a report on how much of the company’s income was retained in the
business and how much was distributed to owners over a period of time.
(4) The statement of cash flows: a report on the changes in a company’s cash during a period of time. The
statement of cash flows provides information about the company’s cash inflows (sources) and outflows
(uses/generated) from operating, investing, and financing activities.
There are many questions that can be answered based on each of the financial statements:
(1) The statement of financial position:
What is the total amount of assets (economic resources) of a corporation? What is the total
amount of liabilities (claims against the resources) for a corporation?
How much equity do the owners of the corporation have in its assets?
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,Solutions Manual for Cornerstones of Financial Accounting, 3e Jay Rich, Jefferson Jones, Maryanne Mowen,
Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
Is the corporation able to pay its debts as they become due?
(2) The statement of earnings:
How much revenue was earned last month? Last quarter? Last year?
What was the total amount of expenses incurred to earn that revenue?
How much better off is the corporation at the end of the year than it was at the beginning of the year?
Was the corporation profitable, and what are the prospects for the corporation’s future profitability?
What are the prospects for the future growth of the corporation?
(3) The statement of retained earnings:
How much income was distributed in dividends by the corporation?
What amount of equity in the business has been generated internally?
(4) The statement of cash flows:
How much cash was taken in or paid out as a result of operations?
How much cash was invested in new equipment?
How much cash was used to pay off business debt?
Point-in-time measurement means as of a particular date. The statement of financial position is a point-in-
time measurement. The period-of-time description applies to what has happened over a time interval. The
statement of earnings is a period-of-time measurement that explains the business activities between
statement of financial position dates. The statement of cash flows and the statement of retained earnings are
also period-of-time measurements.
The basic accounting equation is:
Assets = Liabilities + Shareholders’ Equity
The equation is significant because it means that the statement of financial position must always balance.
This implies that what a company owns (its resources) must always be equal to the claims of its creditors
(liabilities) and investors (shareholders’ equity).
Each financial statement includes a heading that is comprised of (a) the name of the company, (b) the title of
the financial statement, and (c) the time period covered—either a point-in-time measurement (an exact date)
or a period-of-time description (e.g., a year ended on a specific date).
Current assets are cash and other assets that are reasonably expected to be converted to cash within one
year or the operating cycle, whichever is longer. Current liabilities are obligations that will be satisfied within
one year or the operating cycle, whichever is longer.
Since current assets are presented separately from other assets, statement users can see if the firm is
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, Solutions Manual for Cornerstones of Financial Accounting, 3e Jay Rich, Jefferson Jones, Maryanne Mowen,
Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
likely to have enough resources available to meet its current liabilities as they come due. If current assets
were presented among other assets, such a determination would be difficult.
Current liabilities are separated from long-term liabilities because current liabilities will require asset
outflows (or replacement with another liability) much sooner than will long-term liabilities. If all liabilities were
presented together, financial statement decision-makers would have difficulty in determining the assets
(economic resources) required in the near future to satisfy the current liabilities.
Current assets are generally listed on the statement of financial position in order of liquidity or nearness to
cash, whereas current liabilities are usually listed in the order in which they will be paid.
The two main components of equity are contributed capital and retained earnings. Contributed capital is
increased by investments of new capital in a company by its owners (the issue of common shares and
preferred shares to shareholders). Retained earnings is the accumulated net income of a company that has not
been distributed to owners. Retained earnings is increased by net income and decreased by net losses and
dividends.
Net Income = Total Revenues − Total Expenses
The single-step statement of earnings format takes into account only two categories: total revenues and total
expenses. Total expenses are subtracted from total revenues in a single step to arrive at net income. The multiple-
step statement of earnings format contains three important subtotals: gross margin (gross profit), income from
operations, and net income. Gross margin is the difference between net sales and cost of sales (or cost of goods
sold). Income from operations is the difference between gross margin and operating expenses. Net income is the
difference between income from operations and any nonoperating revenues and expenses.
A statement of retained earnings summarizes and explains the changes in retained earnings during an accounting
period. Retained earnings is the income earned by the company but not paid to the owners in the form of
dividends. The statement of retained earnings starts with the balance in retained earnings at the beginning of the
period. To this balance, add net income (or subtract the net loss) obtained from the statement of earnings. Next,
subtract any dividends the company declared during the period. The total is the retained earnings at the end of the
period that is reported on the statement of financial position.
The statement of cash flows classifies cash flows into three categories: (1) cash flows from operating activities, (2)
cash flows from investing activities, and (3) cash flows from financing activities. Cash flows from operating
activities are the cash flows related to the normal operations of the business in earning income, and include cash
sales and collections of accounts receivable less cash paid for goods, services, wages, salaries, and interest.
Cash flows from investing activities are cash flows related to the acquisition or sale of investments and long-term
assets, including cash received from the sales of property, plant, and equipment; investments; and other long-lived
assets less the cash spent to purchase long-term assets. The cash flows from investing activities by a healthy,
growing business will usually represent an excess of expenditures over receipts. Cash flows from financing
activities are the cash flows related to obtaining the capital of the company, including the cash contributed by
owners and borrowed from creditors less amounts paid as dividends and repayments of liabilities. A business can
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Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
1 FINANCIAL STATEMENTS AND MAKING BUSINESS DECISIONS
DISCUSSION QUESTIONS
Accounting is a system for identifying, measuring, recording, and communicating financial information about
an organization’s activities to permit informed decisions by decision-makers of the information. Bookkeeping
is the process—made up of mechanical “steps”—of recording transactions and maintaining accounting
records. While bookkeeping is part of accounting, accounting is viewed as the complete informatio n system
that communicates the economic activities of a company to interested parties. Accounting is often referred to
as the “language of business” because it communicates information about economic activities of a company
that help people make decisions.
Accounting information is demanded or needed by decision-makers both inside and outside the business to
provide information about business activities and finances so that informed decisions can be made. Five
groups that create the demand for accounting information and their uses of accounting information are
described below.
(1) Managers need accounting information to plan and make decisions about the business (e.g.,
predicting the consequences of their actions and deciding on which actions to take) and to con trol its
operations (e.g., evaluating the effectiveness of their past decisions).
(2) Employees use accounting information about their employer to aid in planning their careers (e.g.,
judging the future prospects of the company).
(3) Investors (owners) need accounting information about a business to evaluate the future prospects of a
business and to decide where to invest their money.
(4) Creditors (lenders) need accounting information to decide whether or not to lend money or extend
credit to a business.
(5) Governments need accounting information about businesses to determine taxes owed by businesses,
to implement a variety of regulatory objectives, and to make national economic policy decisions.
An accounting entity is a company that has an identity separate from that of its owners and managers and for
which accounting records are kept. There are three main forms that accounting entities take: a sole
proprietorship, a partnership, and a corporation.
A sole proprietorship is a business entity owned by one person. A partnership is a business entity owned
jointly by two or more individuals. Proprietorships and partnerships are not legally separate from the personal
affairs of the owners. That is, the owners are responsible for the debts of the business. A corporation is a
separate legal entity formed by one or more persons called shareholders. A corporation is legally separate
from the affairs of its owners, which limits the shareholders’ legal responsibility for the debts of the business
to the amount that the shareholders invested in the business. Corporate shareholders may pay more taxes
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Distribution of this document is illegal extra per year?
,Solutions Manual for Cornerstones of Financial Accounting, 3e Jay Rich, Jefferson Jones, Maryanne Mowen,
Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
than owners of sole proprietorships or partnerships. The majority of business in Canada is conducted by
corporations.
The three main types of business activities are financing activities, investing activities, and operating activities.
Financing activities involve obtaining the funds necessary to begin and operate a business. These funds come
from either issuing shares or borrowing money. Investing activities involve buying and selling assets that enable a
corporation to operate. Operating activities are the normal business activities that a company engages in as it
conducts its business. These activities involve selling products or services, purchasing inventory, collecting
amounts due from customers, and paying suppliers.
Assets are the economic resources or future economic benefits obtained or controlled by a business. Liabilities are
the creditors’ claims on the resources of a business. Shareholders’ equity is the ownership claims on the resources
of a business. Shareholders’ equity is considered a residual interest in the assets of a business that remain after
deducting the business’s liabilities. All three items appear on the statement of financial position, forming the
following equation:
Assets = Liabilities + Shareholders’ Equity
Revenues are the increases in assets (resources) that result from the sale of products or services. Expenses are
the costs of assets (resources) used, or the liabilities created, in the operation of the business. If revenues are
greater than expenses, a corporation has earned net income. If expenses are greater than revenues, a corporation
has incurred a net loss.
The four primary financial statements are:
(1) The statement of financial position: a presentation of information about a company’s economic resources
(its assets) and the claims against those resources by creditors and owners (liabilities and shareholders’
equity) at a specific point in time.
(2) The statement of earnings: a report on how well a company has performed its operations— the profitability
of a company—over a period of time.
(3) The statement of retained earnings: a report on how much of the company’s income was retained in the
business and how much was distributed to owners over a period of time.
(4) The statement of cash flows: a report on the changes in a company’s cash during a period of time. The
statement of cash flows provides information about the company’s cash inflows (sources) and outflows
(uses/generated) from operating, investing, and financing activities.
There are many questions that can be answered based on each of the financial statements:
(1) The statement of financial position:
What is the total amount of assets (economic resources) of a corporation? What is the total
amount of liabilities (claims against the resources) for a corporation?
How much equity do the owners of the corporation have in its assets?
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Distribution of this document is illegal extra per year?
,Solutions Manual for Cornerstones of Financial Accounting, 3e Jay Rich, Jefferson Jones, Maryanne Mowen,
Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
Is the corporation able to pay its debts as they become due?
(2) The statement of earnings:
How much revenue was earned last month? Last quarter? Last year?
What was the total amount of expenses incurred to earn that revenue?
How much better off is the corporation at the end of the year than it was at the beginning of the year?
Was the corporation profitable, and what are the prospects for the corporation’s future profitability?
What are the prospects for the future growth of the corporation?
(3) The statement of retained earnings:
How much income was distributed in dividends by the corporation?
What amount of equity in the business has been generated internally?
(4) The statement of cash flows:
How much cash was taken in or paid out as a result of operations?
How much cash was invested in new equipment?
How much cash was used to pay off business debt?
Point-in-time measurement means as of a particular date. The statement of financial position is a point-in-
time measurement. The period-of-time description applies to what has happened over a time interval. The
statement of earnings is a period-of-time measurement that explains the business activities between
statement of financial position dates. The statement of cash flows and the statement of retained earnings are
also period-of-time measurements.
The basic accounting equation is:
Assets = Liabilities + Shareholders’ Equity
The equation is significant because it means that the statement of financial position must always balance.
This implies that what a company owns (its resources) must always be equal to the claims of its creditors
(liabilities) and investors (shareholders’ equity).
Each financial statement includes a heading that is comprised of (a) the name of the company, (b) the title of
the financial statement, and (c) the time period covered—either a point-in-time measurement (an exact date)
or a period-of-time description (e.g., a year ended on a specific date).
Current assets are cash and other assets that are reasonably expected to be converted to cash within one
year or the operating cycle, whichever is longer. Current liabilities are obligations that will be satisfied within
one year or the operating cycle, whichever is longer.
Since current assets are presented separately from other assets, statement users can see if the firm is
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, Solutions Manual for Cornerstones of Financial Accounting, 3e Jay Rich, Jefferson Jones, Maryanne Mowen,
Don Hansen, Donald Jones, Ralph Tassone (All Chapters Download Link at the end of this file)
likely to have enough resources available to meet its current liabilities as they come due. If current assets
were presented among other assets, such a determination would be difficult.
Current liabilities are separated from long-term liabilities because current liabilities will require asset
outflows (or replacement with another liability) much sooner than will long-term liabilities. If all liabilities were
presented together, financial statement decision-makers would have difficulty in determining the assets
(economic resources) required in the near future to satisfy the current liabilities.
Current assets are generally listed on the statement of financial position in order of liquidity or nearness to
cash, whereas current liabilities are usually listed in the order in which they will be paid.
The two main components of equity are contributed capital and retained earnings. Contributed capital is
increased by investments of new capital in a company by its owners (the issue of common shares and
preferred shares to shareholders). Retained earnings is the accumulated net income of a company that has not
been distributed to owners. Retained earnings is increased by net income and decreased by net losses and
dividends.
Net Income = Total Revenues − Total Expenses
The single-step statement of earnings format takes into account only two categories: total revenues and total
expenses. Total expenses are subtracted from total revenues in a single step to arrive at net income. The multiple-
step statement of earnings format contains three important subtotals: gross margin (gross profit), income from
operations, and net income. Gross margin is the difference between net sales and cost of sales (or cost of goods
sold). Income from operations is the difference between gross margin and operating expenses. Net income is the
difference between income from operations and any nonoperating revenues and expenses.
A statement of retained earnings summarizes and explains the changes in retained earnings during an accounting
period. Retained earnings is the income earned by the company but not paid to the owners in the form of
dividends. The statement of retained earnings starts with the balance in retained earnings at the beginning of the
period. To this balance, add net income (or subtract the net loss) obtained from the statement of earnings. Next,
subtract any dividends the company declared during the period. The total is the retained earnings at the end of the
period that is reported on the statement of financial position.
The statement of cash flows classifies cash flows into three categories: (1) cash flows from operating activities, (2)
cash flows from investing activities, and (3) cash flows from financing activities. Cash flows from operating
activities are the cash flows related to the normal operations of the business in earning income, and include cash
sales and collections of accounts receivable less cash paid for goods, services, wages, salaries, and interest.
Cash flows from investing activities are cash flows related to the acquisition or sale of investments and long-term
assets, including cash received from the sales of property, plant, and equipment; investments; and other long-lived
assets less the cash spent to purchase long-term assets. The cash flows from investing activities by a healthy,
growing business will usually represent an excess of expenditures over receipts. Cash flows from financing
activities are the cash flows related to obtaining the capital of the company, including the cash contributed by
owners and borrowed from creditors less amounts paid as dividends and repayments of liabilities. A business can
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