j j
,SOLUTION MANUAL FORj j
Financial jAccounting j11th jEdition jRobert
jLibby,jPatricia jLibby, jFrank jHodge
Chapter 1 j
Financial Statements and Business Decisions
j j j j
ANSWERS jTO jQUESTIONS
1. Accounting jis ja jsystem jthat jcollects jand jprocesses j(analyzes, jmeasures, jand
jrecords) jfinancial jinformation jabout jan jorganization jand jreports jthat jinformation
jto jdecision jmakers. j j
2. Financial jaccounting jinvolves jpreparation jof jthe jfour jbasic jfinancial jstatements
jand jrelated jdisclosures jfor jexternal jdecision jmakers. jManagerial jaccounting
jinvolves jthe jpreparation jof jdetailed jplans, jbudgets, jforecasts, jand jperformance
jreports jfor jinternal jdecision jmakers. j j
3. Financial jreports jare jused jby jboth jinternal jand jexternal jgroups jand jindividuals.
jThe jinternal jgroups jare jcomprised jof jthe jvarious jmanagers jof jthe jentity. jThe
jexternal jgroups jinclude jthe jowners, jinvestors, jcreditors, jgovernmental jagencies,
jother jinterested jparties, jand jthe jpublic jat jlarge. j j
4. Investors jpurchase jall jor jpart jof ja jbusiness jand jhope jto jgain jby jreceiving jpart
jof jwhat jthe jcompany jearns jand/or jselling jtheir jownership jinterest jin jthe
jcompany jin jthe jfuture jat ja jhigher jprice jthan jthey jpaid. jCreditors jlend jmoney jto
ja jcompany jfor ja jspecific jlength jof jtime jand jhope jto jgain jby jcharging jinterest jon
jthe jloan. j j
j j
, 5. In ja jsociety, jeach jorganization jcan jbe jdefined jas ja jseparate jaccounting jentity. jAn
jaccounting jentity jis jthe jorganization jfor jwhich jfinancial jdata jare jto jbe jcollected.
jTypical jaccounting jentities jare ja jbusiness, ja jchurch, ja jgovernmental junit, ja
j university jand jother jnonprofit jorganizations jsuch jas ja jhospital jand ja jwelfare
jorganization. jA jbusiness jtypically jis jdefined jand jtreated jas ja jseparate jentity
jbecause jthe jowners, jcreditors, jinvestors, jand jother jinterested jparties jneed jto
jevaluate jits jperformance jand jits jpotential jseparately jfrom jother jentities jand jfrom
jits jowners. j j
6. Name jof jStatement Alternative jTitle
(a) Income jStatement (a) jStatement jof jEarnings; jStatement jof j j
Income; jStatement jof jOperations j j
(b) Balance jSheet (b) jStatement jof jFinancial jPosition j j
(c) Cash jFlow jStatement (c) j Statement jof jCash jFlows j j
7. The jheading jof jeach jof jthe jfour jrequired jfinancial jstatements jshould jinclude
jthe jfollowing: j j
(a) Name jof jthe jentity j j
(b) Name jof jthe jstatement j j
(c) Date jof jthe jstatement, jor jthe jperiod jof jtime j j
(d) Unit jof jmeasure j j
8. (a) The jpurpose jof jthe jincome jstatement jis jto jpresent jinformation jabout jthe
jrevenues, jexpenses, jand jthe jnet jincome jof jan jentity jfor ja jspecified jperiod
jof jtime. j j
(b) The jpurpose jof jthe jbalance jsheet jis jto jreport jthe jfinancial jposition jof jan
jentity jat ja jgiven jdate, jthat jis, jto jreport jinformation jabout jthe jassets,
jliabilities jand jstockholders’ jequity jof jthe jentity jas jof ja jspecific jdate. j j
(c) The jpurpose jof jthe jstatement jof jcash jflows jis jto jpresent jinformation jabout
jthe jflow jof jcash jinto jthe jentity j(sources), jthe jflow jof jcash jout jof jthe jentity
j(uses), jand jthe jnet jincrease jor jdecrease jin jcash jduring jthe jperiod. j j
(d) The jstatement jof jstockholders’ jequity jreports jthe jchanges jin jeach jof jthe
jcompany’s jstockholders’ jequity jaccounts jduring jthe jaccounting jperiod,
jincluding jissue jand jrepurchase jof jstock jand jthe jway jthat jnet jincome jand
jdistribution jof jdividends jaffected jthe jretained jearnings jof jthe jcompany
jduring jthat jperiod. j j
9. The jincome jstatement jand jthe jstatement jof jcash jflows jare jdated j―For jthe jYear
jEnded jDecember j31‖ jbecause jthey jreport jthe jinflows jand joutflows jof
jresources jduring ja jperiod jof jtime. jIn jcontrast, jthe jbalance jsheet jis jdated j―At
jDecember j31‖ jbecause jit jrepresents jthe jresources, jobligations, jand
jstockholders’ jequity jat ja j specific jdate. j j
j j
, 10. Assets jare jimportant jto jcreditors jand jinvestors jbecause jassets jprovide ja jbasis
jfor jjudging jwhether jsufficient jresources jare javailable jto joperate jthe jcompany.
jAssets jare jalso jimportant jbecause jthey jcould jbe jsold jfor jcash jin jthe jevent jthe
jcompany jgoes jout jof jbusiness. jLiabilities jare jimportant jto jcreditors jand
jinvestors jbecause jthe jcompany jmust jbe jable jto jgenerate jsufficient jcash jfrom
joperations jor jfurther jborrowing jto jmeet jthe jpayments jrequired jby jdebt
jagreements. jIf ja jbusiness jdoes jnot jpay jits jcreditors, jthe jlaw jmay jgive jthe
jcreditors jthe jright jto jforce jthe jsale jof jassets jsufficient jto jmeet jtheir jclaims. j j
11. Net jincome jis jthe jexcess jof jtotal jrevenues jover jtotal jexpenses. jNet jloss jis
jthe jexcess jof jtotal jexpenses jover jtotal jrevenues. j j
12. The jequation jfor jthe jincome jstatement jis jRevenues j- jExpenses j= jNet jIncome
j(or jNet jLoss jif jthe jamount jis jnegative). jThus, jthe jthree jmajor jitems jreported jon
jthe jincome jstatement jare j(1) jrevenues, j(2) jexpenses, jand j(3) jnet jincome. j j
13. The jequation jfor jthe jbalance jsheet j(also jknown jas jthe jbasic jaccounting
jequation) jis: jAssets j= jLiabilities j+ jStockholders’ jEquity. jAssets jare jthe jprobable
j(expected) jfuture jeconomic jbenefits jowned jby jthe jentity jas ja jresult jof jpast
jtransactions. jThey jare jthe jresources jowned jby jthe jbusiness jat ja jgiven jpoint jin
jtime jsuch jas jcash, jreceivables, jinventory, jmachinery, jbuildings, jland, jand
jpatents. jLiabilities jare jprobable j(expected) jdebts jor jobligations jof jthe jentity jas ja
jresult jof jpast jtransactions jthat jwill jbe jpaid jwith jassets jor jservices jin jthe jfuture.
jThey jare jthe jobligations jof jthe jentity jsuch jas jaccounts jpayable, jnotes jpayable,
jand jbonds jpayable. jStockholders’ jequity jis jfinancing jprovided jby jowners jof jthe
jbusiness jand joperations. jIt jis jthe jclaim jof jthe jowners jto jthe jassets jof jthe
jbusiness jafter jthe jcreditors’ jclaims jhave jbeen jsatisfied. jIt jmay jbe jthought jof jas
jthe jresidual jinterest jbecause jit jrepresents jassets jminus jliabilities. j j
14. The jequation jfor jthe jstatement jof jcash jflows jis: jCash jflows jfrom joperating jactivities j j
+ jCash jflows jfrom jinvesting jactivities j+ jCash jflows jfrom jfinancing jactivities j=
jChange jin jcash jfor jthe jperiod. jThe jnet jcash jflows jfor jthe jperiod jrepresent jthe
jincrease jor jdecrease jin jcash jthat joccurred jduring jthe jperiod. jCash jflows jfrom
joperating jactivities jare jcash jflows jdirectly jrelated jto jearning jincome j(normal
jbusiness jactivity jincluding jinterest jpaid jand jincome jtaxes jpaid). jCash jflows jfrom
jinvesting jactivities jinclude jcash jflows jthat jare jrelated jto jthe jacquisition jor jsale jof
jproductive jassets jused jby jthe jcompany. jCash jflows jfrom jfinancing jactivities jare
jdirectly jrelated jto jthe jfinancing jof jthe jenterprise jitself. j j
15. The jretained jearnings jequation jis: jBeginning jRetained jEarnings j+ jNet jIncome j-
jDividends j= jEnding jRetained jEarnings. jIt jbegins jwith jbeginning-of-the-year
jRetained jEarnings jwhich jis jthe jprior jyear’s jending jretained jearnings jreported
jon jthe jbalance jsheet. jThe jcurrent jyear's jNet jIncome jreported jon jthe jincome
jstatement jis jadded jand jthe jcurrent jyear's jDividends jare jsubtracted jfrom jthis
jamount. jThe jending jRetained jEarnings jamount jis jreported jon jthe jend-of-
period jbalance jsheet. j j
j j
