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CORE CONCEPTS OF ACCOUNTING 2ND EDITION BY CECILY A. RAIBORN SOLUTIONS MANUAL

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CORE CONCEPTS OF ACCOUNTING

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CORE CONCEPTS OF ACCOUNTING

CHAPTER 1 SOLUTIONS TO END OF CHAPTER MATERIAL QUESTIONS 1. The three general types of business are typically categorized as follows: service, manufacturing and merchandising. Service example: Manufacturing example: Merchandising example: airline company, e.g. Southwest steel manu...

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core concepts of accounting 2nd edition by cecily

Institution CORE CONCEPTS OF ACCOUNTING
Course CORE CONCEPTS OF ACCOUNTING

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, CHAPTER 1
SOLUTIONS TO END OF CHAPTER MATERIAL
QUESTIONS
1. The three general types of business are typically categorized as follows: service,
manufacturing and merchandising.

Service example: airline company, e.g. Southwest
Manufacturing example: steel manufacturing company, e.g. US Steel
Merchandising example: wholesaler company, e.g. Costco

2. The three common forms of business organizations are sole proprietorships, partnerships
and corporations.

The major differences between these forms of business organizations are in terms of
ownership, liability and taxation. A sole proprietorship is owned by a single individual,
who has unlimited liability; profits of the proprietorship flow through to the owner, who
individually pays taxes on those profits. A partnership is owned by two or more
individuals, who each have unlimited liability. Profits of the business flow through to the
partners, who individually pay taxes on their specific share of those profits. A corporation
is owned by stockholders; liability for organizational debts is limited to the amount of
funds invested by owners, who cannot be held individually responsible for the debts. A
corporation files a tax return and pays taxes. (Stockholders receiving dividends from a
corporation commonly must pay taxes on those dividends…even though the corporation
paid taxes on the profits from which the dividends are paid. Thus, it is said that corporate
profits are effectively taxed twice: once upon being earned and once upon being
distributed.)

The most common form of business in the United States is the sole proprietorship.

3. The primary function of a business’s accounting function is to provide quantitative
information, primarily financial in nature, about economic entities. The information is
intended to be useful in making economic decisions for internal and external users of the
information.

4. The four major financial statements are the balance sheet, income statement, statement of
cash flows and statement of stockholder’s equity.

Balance Sheet: Summarizes the assets (resources an organization owns), liabilities (debts
that the organization owes), and stockholders’ equity (amounts owners have contributed
and the net amount that the entity has earned for them) of an entity at a specific time.

Income Statement: Summarizes a business’s revenues and expenses for a specific time
period.

, Statement of Cash Flows: Reveals how a business generated and spent cash during a
given accounting period.

Businesses issue financial statements because financial statements provide information
about an organization’s financial performance over a period of time. These statements are
useful to third parties such as investors, bankers, CEOs and management during their
decision making.

5. This statement is false because a company’s fiscal year may begin on any date. For
example, the Walt Disney Company has a fiscal year that runs from October 1 to
September 30.

6. The three types of activities are operating, investing, and financing.

Operating activities: Reflect the day-to-day activities of a business that generate revenues
by providing products or services and that create the costs of generating those revenues

Investing activities: Involve the acquisition and sale of (1) long-term assets used in the
business and (2) non-operating investment assets

Financing activities: Involve cash inflows and outflows from transactions with creditors
and investors.

The Statement of Cash Flows uses the above three business activities as section headings.

7. GAAP is a group of accounting rules, concepts and principles that are used as a standard
framework of guidelines in the preparation of financial statements. GAAP’s primary
purpose is use as a guideline in conducting and reviewing accounting transactions. The
FASB is the principal accounting board in charge of establishing GAAP.

8. Private accounting involves internal work within a business entity, not-for-profit
organization, or government agency. Public accounting involves external work as an
independent firm with various firms in business.

Individuals in private accounting may have job titles such as controller, internal auditor,
financial accountant, cost analyst and tax accountant.

9. Public accounting firms offer auditing, tax preparation and advice, certain types of
consulting, and bookkeeping services.

Auditing is the most important service offered by public accounting firms because it
involves the determination of the fairness, fullness and compliance with GAAP for
financial statements and accounting records of companies. These financial statements
provide third parties with vital information in the making of economic decisions.

, 10. The collapse of the stock market in 1929 led Congress to establish the SEC in the early
1930s with the intent to deter the abusive accounting and financial reporting practices
that contributed to the stock market’s collapse. The SEC ensures that publicly owned
companies provide third parties with sufficient information to make informed economic
decisions regarding the securities these firms sell.

EXERCISES
11. (a) T
(b) T
(c) F The FASB is the board that issues most of the new accounting rules in the U.S.
(d) F Corporations account for the most business revenues each year.
(e) T
(f) F The Balance Sheet is a statement of position at a specific point in time; the
Income Statement and the Statement of Cash Flows cover a fiscal year.
(g) T
(h) T
(i) F Accounting contributes significantly to the success of business organizations by
providing useful information on the transactions and results of transactions for
those entities.
(j) T
(k) F Owners of LLPs, LLCs, and Subchapter S corporations pay taxes for their
companies.

12. (a) (1) M
(2) S
(3) S
(4) R
(5) M
(b) (1) Determine the estimated amount of goods needed to be produced to meet the
market demand of products. Accountants can provide the inventory accounts
balances.
(2) Determine the amount of cash from operations. Accountants can provide the
Cash Flow from operating activities statement.
(3) Determine the ability of a customer to repay loans. Accountants can analyze the
customer’s financial statements.
(4) Determine the growth in revenues during the last fiscal period. Accountants can
compare the income statement of the current fiscal period and the preceding
fiscal period.
(5) Determine the cost of manufacturing a product. Accountants can calculate the
total costs incurred in the manufacturing of a product.

13. (a) Proprietorship vs. Corporation
Advantages
▪ no double taxation
▪ easy to start up

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Exam (elaborations)

CORE CONCEPTS OF ACCOUNTING 2ND EDITION BY CECILY A. RAIBORN SOLUTIONS MANUAL

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