,
,SOLUTION il MANUAL i l FOR
Financial ilAccounting il11th ilEdition ilRobert ilLibby,
ilPatricia ilLibby, ilFrank ilHodge
Chapter 1 il
Financial Statements and Business Decisions
il il il il
ANSWERS ilTO ilQUESTIONS
1. Accounting ilis ila ilsystem ilthat ilcollects iland ilprocesses il(analyzes, ilmeasures,
iland ilrecords) ilfinancial ilinformation ilabout ilan ilorganization iland ilreports ilthat
ilinformation ilto ildecision ilmakers.
2. Financial ilaccounting ilinvolves ilpreparation ilof ilthe ilfour ilbasic ilfinancial ilstatements
iland ilrelated ildisclosures ilfor ilexternal ildecision ilmakers. ilManagerial ilaccounting
ilinvolves ilthe ilpreparation ilof ildetailed ilplans, ilbudgets, ilforecasts, iland
ilperformance ilreports ilfor ilinternal ildecision ilmakers.
3. Financial ilreports ilare ilused ilby ilboth ilinternal iland ilexternal ilgroups iland ilindividuals.
ilThe ilinternal ilgroups ilare ilcomprised ilof ilthe ilvarious ilmanagers ilof ilthe ilentity. ilThe
ilexternal ilgroups ilinclude ilthe ilowners, ilinvestors, ilcreditors, ilgovernmental
ilagencies, ilother ilinterested ilparties, iland ilthe ilpublic ilat illarge.
4. Investors ilpurchase ilall ilor ilpart ilof ila ilbusiness iland ilhope ilto ilgain ilby ilreceiving
ilpart ilof ilwhat ilthe ilcompany ilearns iland/or ilselling iltheir ilownership ilinterest ilin
ilthe ilcompany ilin ilthe ilfuture ilat ila ilhigher ilprice ilthan ilthey ilpaid. ilCreditors illend
ilmoney ilto ila ilcompany ilfor ila ilspecific illength ilof iltime iland ilhope ilto ilgain ilby
ilcharging ilinterest ilon ilthe illoan.
, 5. In ila ilsociety, ileach ilorganization ilcan ilbe ildefined ilas ila ilseparate ilaccounting
ilentity. ilAn ilaccounting ilentity ilis ilthe ilorganization ilfor ilwhich ilfinancial ildata ilare ilto
ilbe ilcollected. ilTypical ilaccounting ilentities ilare ila ilbusiness, ila ilchurch, ila
ilgovernmental ilunit, ila iluniversity iland ilother ilnonprofit ilorganizations ilsuch ilas ila
ilhospital iland ila ilwelfare ilorganization. ilA ilbusiness iltypically ilis ildefined iland
iltreated ilas ila ilseparate ilentity ilbecause ilthe ilowners, ilcreditors, ilinvestors, iland
ilother ilinterested ilparties ilneed ilto ilevaluate ilits ilperformance iland ilits ilpotential
ilseparately ilfrom ilother ilentities iland ilfrom ilits ilowners.
6. Name ilof ilStatement Alternative ilTitle
(a) Income ilStatement (a) ilStatement ilof ilEarnings; ilStatement ilof
Income; ilStatement ilof ilOperations
(b) Balance ilSheet (b) ilStatement ilof ilFinancial ilPosition
(c) Cash ilFlow ilStatement (c) i l Statement ilof ilCash ilFlows
7. The ilheading ilof ileach ilof ilthe ilfour ilrequired ilfinancial ilstatements ilshould
ilinclude ilthe ilfollowing:
(a) Name ilof ilthe ilentity
(b) Name ilof ilthe ilstatement
(c) Date ilof ilthe ilstatement, ilor ilthe ilperiod ilof iltime
(d) Unit ilof ilmeasure
8. (a) The ilpurpose ilof ilthe ilincome ilstatement ilis ilto ilpresent ilinformation ilabout
ilthe ilrevenues, ilexpenses, iland ilthe ilnet ilincome ilof ilan ilentity ilfor ila ilspecified
ilperiod ilof iltime.
(b) The ilpurpose ilof ilthe ilbalance ilsheet ilis ilto ilreport ilthe ilfinancial ilposition ilof ilan
ilentity ilat ila ilgiven ildate, ilthat ilis, ilto ilreport ilinformation ilabout ilthe ilassets,
illiabilities iland ilstockholders’ ilequity ilof ilthe ilentity ilas ilof ila ilspecific ildate.
(c) The ilpurpose ilof ilthe ilstatement ilof ilcash ilflows ilis ilto ilpresent ilinformation
ilabout ilthe ilflow ilof ilcash ilinto ilthe ilentity il(sources), ilthe ilflow ilof ilcash ilout ilof
ilthe ilentity il(uses), iland ilthe ilnet ilincrease ilor ildecrease ilin ilcash ilduring ilthe
ilperiod.
(d) The ilstatement ilof ilstockholders’ ilequity ilreports ilthe ilchanges ilin ileach ilof
ilthe ilcompany’s ilstockholders’ ilequity ilaccounts ilduring ilthe ilaccounting
ilperiod, ilincluding ilissue iland ilrepurchase ilof ilstock iland ilthe ilway ilthat ilnet
ilincome iland ildistribution ilof ildividends ilaffected ilthe ilretained ilearnings ilof
ilthe ilcompany ilduring ilthat ilperiod.
9. The ilincome ilstatement iland ilthe ilstatement ilof ilcash ilflows ilare ildated il―For ilthe
ilYear ilEnded ilDecember il31‖ ilbecause ilthey ilreport ilthe ilinflows iland iloutflows
ilof ilresources ilduring ila ilperiod ilof iltime. ilIn ilcontrast, ilthe ilbalance ilsheet ilis ildated
il―At ilDecember il31‖ ilbecause ilit ilrepresents ilthe ilresources, ilobligations, iland
ilstockholders’ ilequity ilat ila ilspecific ildate.
