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, SOLUTION MANUAL FOR e e
Financial Accounting 11th Edition Robert Libby,
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Patricia Libby, Frank Hodge
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Chapter 1 e
Financial Statements and Business Decisions e e e e
ANSWERS TO QUESTIONS e e
1. Accounting is a system that collects and processes (analyzes, measures, and
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records) financial information about an organization and reports that information to
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decision makers.
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2. Financial accounting involves preparation of the four basic financial statements and
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related disclosures for external decision makers. Managerial accounting involves
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the preparation of detailed plans, budgets, forecasts, and performance reports for
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internal decision makers.
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3. Financial reports are used by both internal and external groups and individuals. The
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internal groups are comprised of the various managers of the entity. The external
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groups include the owners, investors, creditors, governmental agencies, other
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interested parties, and the public at large.
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4. Investors purchase all or part of a business and hope to gain by receiving part of
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what the company earns and/or selling their ownership interest in the company in
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the future at a higher price than they paid. Creditors lend money to a company
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for a specific length of time and hope to gain by charging interest on the loan.
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, 5. In a society, each organization can be defined as a separate accounting entity. An
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accounting entity is the organization for which financial data are to be collected.
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Typical accounting entities are a business, a church, a governmental unit, a
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university and other nonprofit organizations such as a hospital and a welfare
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organization. A business typically is defined and treated as a separate entity
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because the owners, creditors, investors, and other interested parties need to
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evaluate its performance and its potential separately from other entities and from its
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owners.
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6. Name of Statemente e Alternative Title e
(a) Income Statement e (a) Statement of Earnings; Statement of
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Income; Statement of Operations e e e e
(b) Balance Sheet e (b) Statement of Financial Position
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(c) Cash Flow Statement e e (c) Statement of Cash Flows
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7. The heading of each of the four required financial statements should include the
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following:
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(a) Name of the entity e e e e
(b) Name of the statement e e e e
(c) Date of the statement, or the period of time
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(d) Unit of measure e e e
8. (a) The purpose of the income statement is to present information about the
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revenues, expenses, and the net income of an entity for a specified period of
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time.
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(b) The purpose of the balance sheet is to report the financial position of an entity
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at a given date, that is, to report information about the assets, liabilities and
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stockholders’ equity of the entity as of a specific date.
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(c) The purpose of the statement of cash flows is to present information about the
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flow of cash into the entity (sources), the flow of cash out of the entity (uses),
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and the net increase or decrease in cash during the period.
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(d) The statement of stockholders’ equity reports the changes in each of the
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company’s stockholders’ equity accounts during the accounting period,
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including issue and repurchase of stock and the way that net income and
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distribution of dividends affected the retained earnings of the company during
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that period.
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9. The income statement and the statement of cash flows are dated ―For the Year
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Ended December 31‖ because they report the inflows and outflows of resources
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during a period of time. In contrast, the balance sheet is dated ―At December
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31‖because it represents the resources, obligations, and stockholders’ equity at
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a specific date.
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