Solution Manual for Accounting What The Numbers Mean
13th Edition David Marshall
Chapter's 1 - 16
,Full Solution Manual for Accounting What The Numbers Mean 13th Edition David Marshall
CHAPTER
Accounting—Present and Past
1
CHAPTER OUTLINE:
I. What Is Accounting?
A. Definition
B. Uses of Accounting Information
C. Classifications
1. Financial Accounting
2. Managerial Accounting / Cost Accounting
3. Auditing — Public Accounting
4. Internal Auditing
5. Governmental and Not-for-Profit Accounting
6. Income Tax Accounting
II. How Has Accounting Developed?
A. Early History
B. The Accounting Profession in the United States
C. Financial Accounting Standard Setting at the Present Time
1. Financial Accounting Standards Board
2. Standards are Evolving
D. Standards for Other Types of Accounting
1. Managerial Accounting / Cost Accounting
2. Auditing
3. Governmental and Not-for-Profit Accounting
4. Income Tax Accounting
E. International Accounting Standards
F. Ethics and the Accounting Profession
III. The Conceptual Framework
A. Context
B. Summary of Concepts Statement No. 8, Chapter 1 — The Objective of General Purpose
Financial Reporting
C. Objectives of Financial Reporting for Nonbusiness Organizations
IV. Plan of the Book
,TEACHING/LEARNING OBJECTIVES:
Principal:
1. To present a definition of accounting.
2. To identify and describe different classifications of accounting.
3. To emphasize that financial accounting standards are not a ―fixed code of rules,‖ but are
established in response to user needs and business developments. Accountants need to apply
professional judgment in the application of accounting principles.
4. To emphasize the role and sources of ethics for the accounting profession.
Supporting:
5. To summarize how accounting has evolved over time.
6. To identify sources of standards for other types of accounting and to contrast these with
financial accounting standards.
7. To introduce the issues associated with the development of international accounting
standards.
8. To describe the context of the FASB Conceptual Framework project.
9. To summarize Concepts Statement No. 8, Chapter 1 — The Objective of General Purpose
Financial Reporting.
10. To relate the objectives of financial reporting for nonbusiness organizations to those of
business enterprises.
TEACHING OBSERVATIONS/ASSIGNMENT SUGGESTIONS:
1. Students should be put on notice about the jargon of accounting, the use of synonymous
terms, the importance of the context within which a term is used, and the need for precision
in the use of terminology. The first example of jargon is the term entity.
2. When discussing "Auditing — Public Accounting," have students find the auditors' opinion
in the Campbell Soup Company 2020 Annual Report (see pages 87-88 of the Appendix).
Emphasize that a "clean opinion" is not a "clean bill of health."
3. Discuss the Summary of Concepts Statement No. 8, Chapter 1 — The Objective of Financial
Reporting, in detail.
,4. Assign Exercise 1-1. Encourage students to experiment with websites that are of interest. In
addition, or as an alternative to having students request their own annual reports, distribute
reports that have been obtained by the instructor.
5. Use Exercise 1-5 to generate discussion about the importance of ethical standards in general
and independence (in both appearance and fact) in particular. Follow up with a brief look at
Exercise 1-7 concerning audit independence standards.
SOLUTIONS:
E1.3. This exercise provides an opportunity to gauge where the students are in terms of
their prior background in accounting, be it practical or educational, and to clear
up some of the common misconceptions (i.e., to explain that accounting goes
beyond the ―how to‖ aspects of bookkeeping and involves the use of judgment).
E1.4. This exercise provides an opportunity to align student and instructor expectations.
For first-time instructors in this course, or for those having a diverse student
group, you will get a glimpse at the common perceptions students have
concerning the course content, level of difficulty, and methods of presentation,
testing/evaluation, and grading.
E1.5. The principal factors Jim Sandrolini must consider are his competence and
independence. Is he competent to prepare financial statements for a company that
operates in a different industry than the one in which he works? Accepting a
contingent fee arrangement would normally cause an impairment of his
independence because he would directly benefit if the loan were to be approved.
E1.6. Suggested discussion strategy:
Q: Why does a business have value?
A: It provides the owners an opportunity to earn a profit, an opportunity for
personal fulfillment from being in charge, and an opportunity to provide a
product or service that is useful to others.
Q: How can this value be measured?
A: Financial information will have the most to do with evaluating the firm‘s
profitability, and the financial statements include this information.
Q: How is an asking price for the sale of a business established?
A: The asking price should be a function of the profit, resources, and obligations
related to the business as shown in the financial statements.
Note: This exercise also provides an opportunity to point out some of the basic
limitations of the data provided by the accounting process (e.g., historical cost
information — how useful are past earnings results in predicting future earnings
and cash flows?). Be careful not to get too carried away with details. Let the
students lead this discussion.
,E1.7. Answers will vary depending on the search engines used by students to locate the
requested information.
E1.8. Answers will vary depending on the company selected. Note that requirement d
provides an opportunity to discuss some of the financial statement terms that are
introduced in Chapter 2, for those instructors wishing to get a head start.
CHAPTER
2 Financial Statements and
Accounting Concepts/Principles
CHAPTER OUTLINE:
I. Financial Statements
A. From Transactions to Financial Statements
B. Financial Statements Illustrated
1. Explanations and Definitions
a. Balance Sheet
b. Income Statement
c. Statement of Changes in Stockholders' Equity
d. Statement of Cash Flows
2. Comparative Statements in Subsequent Years
3. Illustration of Financial Statement Relationships
II. Accounting Concepts and Principles
A. Schematic Model of Concepts and Principles
B. Concepts/Principles Related to the Entire Model
C. Concepts/Principles Related to Transactions
D. Concepts/Principles Related to Bookkeeping Procedures and the Accounting Process
E. Concepts/Principles Related to Financial Statements
F. Limitations of Financial Statements
III. The Corporation‘s Annual Report
,TEACHING/LEARNING OBJECTIVES:
Principal:
1. To illustrate the four principal financial statements and their basic form.
2. To introduce students to the terminology of financial statements.
3. To present the accounting equation.
4. To explain several of the concepts of financial accounting and financial statement
presentation.
Supporting:
5. To explain that financial statements are the product of financial accounting and that the
statements represent a historical summary of transactions.
6. To explain some of the limitations of financial statements.
7. To illustrate that the financial statements are included in the corporation‘s annual report.
8. To introduce and explain several business procedures and their terminology.
TEACHING OBSERVATIONS:
1. This is the keystone chapter of the text, and the material presented here becomes a foundation
for all subsequent financial accounting topics. The instructor must resist trying to teach
the entire course from this one chapter! Instead, try to help students sort out the key ideas
that must be learned now from those that they should be acquainted with, but that will really
be learned when subsequent material is covered. Items to be learned now include:
a. What a transaction is.
b. The name of each financial statement and what it shows.
c. The accounting equation.
d. Financial statement relationships.
e. Limitations of financial statements.
2. A significant amount of time should be spent illustrating and explaining the purpose and
content—by account category (asset, liability, stockholders' equity, revenue, expense)—of each
financial statement, and how the financial statements tie together. Some instructors may wish to
discuss gains and losses at this point, but the key is to keep it as simple as possible!
,3. It is recommended that the following models be emphasized:
a. Balance Sheet:
Assets = Liabilities + Stockholders' Equity
Beginning of Period $ $ $
Changes During Period +/- +/- +/-
End of Period $ $ $
b. Income Statement: Revenues
- Expenses
= Net Income
c. Statement of Changes in Stockholders’ Equity:
Beginning Balance of Stockholders' Equity
+ Stockholders' Investment
+ Net Income
- Dividends
= Ending Balance of Stockholders' Equity
(As with the discussion of gains and losses, some instructors may wish to acknowledge
―other‖ sources of changes in stockholders‘ equity such as treasury stock, accumulated other
comprehensive income, prior period adjustments, etc. This is a function of instructor
preference and the extent to which students have been previously exposed to real world
financial statements. An early dose of ―reality‖ can be refreshing for graduate students, but
might be distracting to a younger, less experienced audience.)
d. Statement of Cash Flows:
Net Income
+/- Net cash provided (used) by operating activities
+/- Net cash provided (used) by investing activities
+/- Net cash provided (used) by financing activities
= Net increase (decrease) in cash for the year
4. It is helpful to spend time with the concepts and principles model, explaining what each
concept/principle means and showing how it relates to the "Transactions to Financial
Statements" process.
5. It is appropriate to emphasize the limitations of financial statements now, because they can
create a mindset that helps students understand more specific accounting principles when
they are covered later.
6. The Business In Practice boxes are designed to enhance student understanding by removing
some jargon and explanation from the flow of the text material, while providing a context for
that material. These provide good class discussion topics.
,ASSIGNMENT OVERVIEW:
This chapter provides a wide variety of assignments to choose from—ranging from the basic
association-type mini-exercises and exercises, to the more challenging, analytical-type problems.
Be careful not to over-assign or under-assign homework from this chapter.
LEARNING DIFFICULTY & OTHER
NO. OBJECTIVES TIME ESTIMATE COMMENTS
M2.1. 2, 3 Easy, 3-5 min. Similar to E2.11.-E2.16.
M2.2. 2, 3 Easy, 3-5 min. See M2.1. Good in-class demo exercise.
M2.3. 2, 3 Med., 7-10 min. Challenging mini-exercise. Requires clear-cut understanding of
income statement relationships. Encourage use of Exhibit 2-2 as a
solution model.
M2.4. 2, 3 Med., 7-10 min. See M2.3. Good way to review and reinforce the structure of the
income statement in class.
M2.5. 2. 4 Easy, 3-5 min. Emphasize the structure of the statement of cash flows.
M2.6. 2, 4 Easy, 3-5 min. See M2.5. Good in-class demo exercise. Refer to Exhibit 2-4.
M2.7. 2, 4 Easy, 2-3 min. Basic identification of asset accounts.
M2.8. 2, 4 Easy, 2-3 min. Basic identification of income statement accounts.
E2.9. 2, 4 Easy, 3-5 min. Simple account identification exercise.
E2.10. 2, 4 Easy, 3-5 min. See E2.9.
E2.11. 2, 3 Med., 5-8 min. Reinforces the balance sheet equation, and stresses the distinction
between PIC and RE.
E2.12. 2, 3 Med., 5-8 min. See E2.11. Good homework assignment.
E2.13. 2, 3 Easy, 3-5 min. ―RE is affected only by net income (loss) and dividends.‖ This is a
bit of a fiction, but it works effectively in the Chapter 2. Other
effects on retained earnings (i.e., stock dividends, certain treasury
stock transactions, and prior period adjustments) are not discussed
until Chapter 8.
E2.14. 2, 3 Easy, 3-5 min. See E2.13. Good homework assignment.
E2.15. 2, 3 Med., 5-10 min. The worksheet format is used to help students understand financial
statement relationships. Explain that ―net assets‖ = A-L = SE.
E2.16. 2, 3 Med., 5-10 min. See E2.15. Good in-class demonstration exercise.
P2.17. 2, 3, 6 Med., 7-10 min. Not explicitly covered in Chapter 2. Most instructors omit P.2.17.
and P2.18. Can be used to emphasize the difference between cash
and stockholders‘ equity.
P2.18. 2, 3, 6 Hard, 15-20 min. See P2.17. Interesting application of the accounting equation.
P2.19. 2, 3, 4 Med., 15-20 min. Straight-forward problem emphasizing financial statement
relationships. Students respond well.
P2.20. 2, 3, 4 Med., 15-20 min. See P2.19.
P2.21. 2, 3, 4 Med., 20-25 min. Similar to P2.17., P2.186. but requires the preparation of financial
statements. Good for in-class demonstration.
P2.22. 2, 3, 4 Med., 20-25 min. See P2.21. Good homework assignment.
P2.23. 2, 3 Med., 5-8 min. Can use later as a Chapter 4 assignment.
P2.24. 2, 3, 6 Med.-Hard, 15-20. Group learning problem. Good in-class demonstration problem.
P2.25. 2, 3, 5 Med., 7-10 min. Stress the importance of the historical cost principle.
P2.26. 2, 3, 5, 6 Med., 10-12 min. Group learning problem. See P2.25.
P2.27. 2, 4 Med., 10-12 min. Group learning problem. Emphasizes the structure of the income
statement.
P2.28. 2, 4 Med., 10-12 min. Explain why ―Other Income, net‖ is excluded from operating
income.
C2.29. 2, 4, 6, 7 Med., 15-20 min. Excellent conceptual case but be sure to relate student responses
back to the terminology introduced in the chapter.
,SOLUTIONS:
M2.1.
A = L + SE
Beginning: $58,000 = $35,000 + ?
Changes: = +11,000 net income (increase to retained earnings)
-3,000 dividends (decrease to retained earnings)
Ending: = + ?
Solution approach:
Beginning stockholders‘ equity = $58,000 - $35,000 = $23,000. Net income increases
retained earnings and dividends decrease retained earnings. Retained earnings are part
of stockholders‘ equity, so assuming no other changes occurred during the year, ending
stockholders‘ equity = $23,000 + $11,000 - $3,000 = $31,000.
M2.2.
SE
Beginning: $246,000
Changes: +30,000 common stock issued at par value (increase to paid-in capital)
+36,000 net income (increase to retained earnings)
-9,000 dividends (decrease to retained earnings)
Ending: ?
Solution approach:
No information is given about assets or liabilities, so the focus is entirely on
stockholders‘ equity. Beginning stockholders‘ equity +/- changes during the year =
ending stockholders‘ equity. $246,000 + $30,000 + $36,000 - $9,000 = $303,000.
M2.3.
Net sales .............................................................................. $400,000
, Cost of goods sold ... ........... .......... ........... .......... ........... ? = 240,000 (1)
Gross profit .......................................................................... $160,000
Selling, general, and administrative expenses ....................... 73,000
Income from operations....... .......... ........... .......... ........... ? = 87,000 (2)
Interest expense....... ........... .......... ........... .......... ........... ? = 12,000 (4)
Income before taxes ........... .......... ........... .......... ........... $ ? = 75,000 (3)
Income tax expense ............................................................... 15,000
Net income... .......... ........... .......... ........... .......... ........... $ 60,000
Solution approach:
Set up an income statement using the structure and format as shown in Exhibit 2-2, then
solve for missing amounts.
One possible calculation sequence: (1) $400,000 - $160,000 = $240,000 cost of goods
sold. (2) $160,000 - $73,000 = $87,000 income from operations. (3) $60,000 + $15,000
= $75,000 income before taxes. (4) $87,000 - $75,000 = $12,000 interest expense
M2.4.
Net sales....... .......... ........... .......... ........... .......... ........... $ ? = 300,000 (4)
Cost of goods sold ................................................................ 120,000
Gross profit .. .......... ........... .......... ........... .......... ........... $ ? = 180,000 (3)
Selling, general, and administrative expenses ....................... 66,000
Income from operations .......................................................... 114,000
Interest expense.................................................................... 18,000
Income before taxes ........... .......... ........... .......... ........... $ ? = 96,000 (1)
Income tax expense ............................................................... 24,000
Net income... .......... ........... .......... ........... .......... ........... $ ? = 72,000 (2)
Solution approach:
Set up an income statement using the structure and format as shown in Exhibit 2-2, then
solve for missing amounts.
Calculation sequence: (1) $114,000 - $18,000 = $96,000 income before taxes.
(2) $96,000 - $24,000 = $72,000 net income. (3) $114,000 + $66,000 = $180,000 gross
profit. (4) $180,000 + $120,000 = $300,000 net sales.
An alternative calculation sequence would have been to solve for gross profit and net
sales first, and to then solve for income before taxes and net income.
