FINANCIAL AND MANAGERIAL ACCOUNTING - Fifth Edition Solutions Manual
1. What is accounting?
Accounting is the information system that measures business activities, processes f f f f f f f f f
the information into reports, and communicates the results to decision makers.
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Accounting is the language of business. f f f f f
2. Briefly describe the two major fields of accounting.
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Financial accounting provides information for external decision makers, such as
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outside investors, lenders, customers, and the federal government. Managerial
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accounting focuses on information for internal decision makers, such as the f f f f f f f f f f
company’s managers and employees. f f f
3. Describe the various types of individuals who use accounting information and how
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they use that information to make important decisions.
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Individuals use accounting information to help them manage their money, evaluate a
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a new job, and better decide whether they can afford to make a new purchase.
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Business owners use accounting information to set goals, measure progress toward
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those goals, and make adjustments when needed. Investors use accounting
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information to help them decide whether or not a company is a good investment and f f f f f f f f f f f f f f
once they have invested, they use a company’s financial statements to analyze how
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their investment is performing. Creditors use accounting information to decide
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whether to lend money to a business and to evaluate a company’s ability to make
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the loan payments. Taxing authorities use accounting information to calculate the
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amount of income tax that a company has to pay.
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4. What are two certifications available for accountants? Briefly explain each
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certification.
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Certified Public Accountants (CPAs) are licensed professional accountants who
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serve the general public. They work for public accounting firms, businesses,
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government, or educational institutions. To be certified they must meet educational f f f f f f f f f f
and/or experience requirements and pass an exam. Certified Management
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Accountants (CMAs) specialize in accounting and financial management f f f f f f f
knowledge. They work for a single company. f f f f f f
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5. What is the role of the Financial Accounting Standards Board (FASB)?
The FASB oversees the creation and governance of accounting standards. They
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work with governmental regulatory agencies, congressionally created groups, and
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private groups. f
6. Explain the purpose of Generally Accepted Accounting Principles (GAAP),
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including the organization currently responsible for the creation and governance
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of these standards.
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The guidelines for accounting information are called GAAP. It is the main U.S.
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accounting rule book and is currently created and governed by the FASB. Investors
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and lenders must have information that is relevant and has faithful representation in
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order to make decisions and the GAAP provides the framework for this financial
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reporting.
7. Describe the similarities and differences among the four different types of business
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entities discussed in the chapter.
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A sole proprietorship has a single owner, terminates upon the owner’s death or
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choice, the owner has personal liability for the business’s debts, and it is not a
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separate tax entity. A partnership has two or more owners, terminates at partner’s
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choice or death, the partners have personal liability, and it is not a separate tax
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entity. A corporation is a separate legal entity, has one or more owners, has
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indefinite life, the stockholders are not personally liable for the business’s debts,
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and it is a separate tax entity. A limited-liability company has one or more members
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and each is only liable for his or her own actions, has an indefinite life, and is not a
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separate tax entity. f f
8. A business purchases an acre of land for $5,000. The current market value is $5,550
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and the land was assessed for property tax purposes at $5,250. What value should the
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land be recorded at, and which accounting principle supports your answer?
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The land should be recorded at $5,000. The cost principle states that assets should
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be recorded at their historical cost.
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9. What does the going concern assumption mean for a business?
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The going concern assumption assumes that the entity will remain in business for
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the foreseeable future and long enough to use existing resources for their intended
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purpose.
10. Which concept states that accounting information should be complete, neutral, and
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free from material error?
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The faithful representation concept states that accounting information should be
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complete, neutral, and free from material error. f f f f f f
11. Financial statements in the United States are reported in U.S. dollars. What
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assumption supports this statement?
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The monetary unit assumption states that items on the financial statements should
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be measured in terms of a monetary unit.
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12. Explain the role of the International Accounting Standards Board (IASB) in relationto
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International Financial Reporting Standards (IFRS).
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The IASB is the organization that develops and creates IFRS which are a set of
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global accounting standards that would be used around the world.
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13. What is the accounting equation? Briefly explain each of the three parts.
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Assets = Liabilities + Equity. Assets are economic resources that are expected to
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benefit the business in the future. They are things of value that a business owns or
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has control of. Liabilities are debts that are owed to creditors. They are one source
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of claims against assets. Equity is the other source of claims against assets.
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Equity is the stockholders’ claims against assets and is the amount of assets that is
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left over after the company has paid its liabilities. It represents the net worth of the
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corporation.
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14. How do retained earnings increase? What are the two ways that retained earnings
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decreases?
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Retained earnings increases with revenues. Retained earnings decreases with
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expenses and dividends. f f
15. How is net income calculated? Define revenues and expenses.
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Revenues – Expenses = Net Income. Revenues are earnings resulting from
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delivering goods or services to customers. Expenses are the cost of selling goods
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or service.
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16. What are the steps used when analyzing a business transaction?
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Step 1: Identify the accounts and the account type. Step 2: Decide if each account
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increases or decreases. Step 3: Determine if the accounting equation is in balance.
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17. List the four financial statements. Briefly describe each statement.
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Income Statement – Shows the difference between an entity’s revenues and
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expenses and reports the net income or net loss for a specific period.
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Statement of Retained Earnings – Shows the changes in retained earnings for a
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specific period including net income (loss) and dividends.
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Balance Sheet – Shows the assets, liabilities, and stockholders’ equity of the
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business as of a specific date. f f f f f
Statement of Cash Flows – Shows a business’s cash receipts and cash payments
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for a specific period.
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18. What is the calculation for return on assets (ROA)? Explain what ROA measures.
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Return on Assets = Net income / Average total assets. ROA measures how
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profitably a company uses its assets. f f f f f
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