Solution Manual for Financial Accounting, 5th Edition

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-1Chapter1AFramework for Financial AccountingREVIEWQUESTIONSQuestion1-1(LO 1-1)Accounting is the language of business. Whereas a basic math class might involve adding,subtracting, and solving for unknown variables, accounting involves learning tomeasure businesstransactions andcommunicatingthose measurements in a format that is generally understood bydecision makers.Question 1-2(LO 1-1)Those interested in makingdecisionsabout a company includeinvestors,creditors,customers,suppliers,managers,employees,competitors,regulators,tax authorities, andlocal communities.Question 1-3(LO 1-1)Financial accounting seeksto measure business activities of a company and to communicatethose measurements toexternalparties for decision-making purposes.The two primary external, oroutside the firm, users of financial accounting information are investors and creditors.Managerialaccountingdeals with the methodsaccountantsuse to provide information to an organization’sinternalusers, that is, itsownmanagers.Question 1-4(LO 1-1)Thetwo primaryfunctions of financial accounting are to measure business activities of acompany and to communicate information about those activities to investors and creditors fordecision-making purposes.Question 1-5(LO 1-2)The three basic business activities are financing, investing, and operating activities. Financingactivitiesare transactionsthatraise cashneeded to operate the business.Investing activitiestypicallyinclude the purchaseor disposalof long-term resources such as land, buildings, equipment, andmachinery.Operating activitiesinclude the primary operations of the company,providing productsand services to customers and the associated costs of doing so, like utilities, taxes, advertising,wages, rent, and maintenance.Question 1-6(LO 1-2)Typicalfinancing activitieswould include selling stock and paying dividends to investors, aswell as borrowing and repaying debt to creditors.Question 1-7(LO 1-2)Typical investing activities would includethepurchaseordisposalof land,casinobuildings,hotels, gaming tables, chairs, cleaning equipment, and food preparation machines.

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Chapter 1-A Framework for Financial Accounting1-2Financial Accounting, 5eAnswers toReviewQuestions (continued)Question 1-8(LO 1-2)Typicaloperating activities would include the sale of software and consulting services, as well ascosts related to salaries, research, utilities, advertising, rent, and taxes.Question 1-9(LO 1-2)The three major legal forms of business organizations include sole proprietorship, partnership,and corporation? A corporation is chosen by most of the largest companies in the United States.Question 1-10(LO 1-2)Assets: Resources owned.Liabilities: Amounts owed.Stockholders’ equity: Owners’ claims to resources.Dividends: Distributions to stockholders.Revenues:Sales ofproducts or servicesto customers.Expenses: Costs of selling products or services.Question 1-11(LO 1-2)The major advantage of a corporation is limited liability. Stockholders of a corporationare notheldpersonally responsibleforthe financialobligationsofthecorporation.Ownersofsoleproprietorships or partnerships remain personally liable for activities of the business. Corporationshave the disadvantages of double taxation compared to sole proprietorships and partnerships.Soleproprietorship and partnership forms of business is that incomeistaxed only once. However, therecould be other tax advantages for certain types of corporations, such as a lower overall tax rate.Question 1-12(LO 1-3)1.Income statement:Reports the company’s revenues and expensesduringan interval of time.If revenues exceed expenses, then the company reports net income. If expenses exceedrevenues, then the company reports a net loss.2.Statement of stockholders’ equity:Summarizes the changes in stockholders’ equityfrom netincome, dividends, and stock issuancesduringan interval of time.3.Balance sheet:Presents the financial position of the company on a particular date.It showsthat assets equal liabilities plus stockholders’ equity.4.Statement of cash flows: Cash activities related to operating, investing, and financingactivitiesduring an interval of time.Question 1-13(LO 1-3)Balances of accounts reported in the income statement, statement of stockholders’ equity, andstatement of cash flows reflect activityfrom the beginning of the period through the end of theperiod.Balances of accounts reported in the balance sheet reflectthe financial positionof thecompany as of a single date, the end of the period.

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-3Answers toReviewQuestions (continued)Question 1-14(LO 1-3)Basic revenues would include sale of products (such as toys, dolls, and games) and services(such as theme park tickets). Expenses include cost of merchandise sold, employeesalaries, utilities,advertising, taxes, interest, and legal fees.Question 1-15(LO 1-3)The accounting equationis: Assets = Liabilities + Stockholders’Equity. The format of thebalance sheet follows the accounting equation.Question 1-16(LO 1-3)Assets would include items such as merchandise inventory, office supplies, buildings, land,trucks, and equipment. Liabilities would include items such as amounts owed to employees,suppliers, taxing authorities, and lenders.Question 1-17(LO 1-3)Retained earningsrepresent the cumulative amount of net income earned over the life of thecompany that hasnotbeen distributed to stockholders as dividends.Net income is shown in theincome statement and retained earnings are reported in the balance sheet.Thus, retained earningsrepresent a balance sheet account which reflects the cumulativeresult ofincome statements over thelife of the company (less any dividends).Question 1-18(LO 1-3)The statement of cash flows reports operating, investing, and financing cash flows. Examples ofeach include:Operating–selling merchandise, paying employeesalaries, and paying for advertisement.Investing–purchasing land and buildings to open newfactories.Financing–Borrowing from lenders or issuing stock to owners to obtain funds necessary toexpand operations.Question 1-19(LO 1-3)Two other important sources of information are the (1) management discussion and analysis ofthe company’s activities and (2) note disclosures to the financial statements.Question 1-20(LO 1-4)Successful companies use their resources efficiently to sell products and services for a profit.Unsuccessful companies either offer lower-quality products and services or do not efficiently keeptheir costs low.When a company is unprofitable, investors will neither invest in nor lend to the firm.Without these sources of financing, eventually the company will fail.When a companyisable tomake a profit, investors and creditors are willing to transfer their resources to it, and the companywill expand its profitable operations even further.Investors and creditors rely heavily on financialaccounting information in making investment and lending decisions.

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Chapter 1-A Framework for Financial Accounting1-4Financial Accounting, 5eAnswers toReviewQuestions (continued)Question 1-21(LO 1-5)GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting.The fact thatallcompanies use the samerulesiscriticalto financial statement users, because itallows themtoaccuratelycomparefinancial information among companieswhen they are makingdecisions about where to lend or invest their resources.Question 1-22(LO 1-5)TheFinancialAccountingStandardsBoard(FASB)isprimarilyresponsiblefortheestablishment of GAAP in the United States. The International Accounting Standards Board (IASB)serves this function on an international basis.Question 1-23(LO 1-5)U.S. GAAPrefers to the set of accounting standards being developed in the United States by theFinancial Accounting Standards Board (FASB). IFRS (International Financial Reporting Standards)refers to the set of accounting standards being developed by the International Accounting StandardsBoard (IASB). The IASB promotes the use of IFRS around the world. Today, the IASB and FASBwork closely in an effort to converge the two sets of accounting standards.Question 1-24(LO 1-5)The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investorconfidence in financial accountingfollowing the stock market crash in 1929 and theensuing GreatDepression.TheSEChas the powerto requirecompanies with publicly traded securities to prepareperiodic financial statements for distribution to investors and creditors.Question 1-25(LO 1-5)The role ofauditorsis to helpensure that management has in fact appropriately applied GAAP inpreparing the company’s financial statements.They are hired by a company as an independent partytoexpress a professional opinionof theconformityof that company’s financial statementswithGAAP.Auditorsplay a major role in investors’ and creditors’ decisions byaddingcredibility to thefinancial statements.Question 1-26(LO 1-5)The three objectives offinancialreporting areproviding informationthat:1.is useful to investors and creditors in making decisions.2. helps to predict cash flows.3.tells about economic resources, claims to resources, and changes in resources and claims.

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-5Answers toReviewQuestions (continued)Question 1-27(LO 1-6)The benefits to obtaining a degree in accounting include a wide variety of job opportunities, highdemand, and high salaries. Public accounting firms are professional service firms that traditionallyhave focused on three areas: auditing, tax preparation/planning, and business consulting.Privateaccounting means providing accounting services to the company that employs you. Traditionalcareers include auditor, tax preparer, consultant, and basic accounting services. Accountants are nowexpandingto work asfinancial analysts, forensic accountants, tax lawyers, FBI agents, and manyothers.Question 1-28(LO 1-7)Relevanceandfaithfulrepresentationarethe twofundamentalqualitativecharacteristics.Relevance implies that information is useful to the decision at hand. Faithful representation indicatesthat information accurately represents the underlying activity.Question1-29(LO 1-7)Thethreecomponents/aspectsof relevanceinclude:1.Predictive value–Information is useful in helping to forecast future outcomes.2.Confirmatory value–Information provides feedback on past activities.3. Materiality–The nature or amount of an item has the ability to affect decisions.The three components/aspectsof faithful representation include:1.Completeness–All information necessary to describe an item is reported.2.Verifiability–Measurements that independent parties would agree upon.3.Free from error–Reported amounts reflect the best available information.Question 1-30(LO 1-7)Costeffectivenessreferstopracticalboundaries(constraints)toachievingdesiredqualitative characteristics.Cost effectivenesssuggeststhat financialaccounting informationisprovided only when the benefits of doing soexceed the costs.Question 1-31(LO 1-7)The four basic assumptions underlyingGAAP include:1.Economicentityassumption–All economic events canbe identified with a particulareconomic entity.2.Monetaryunitassumption-A common denominator is needed to measure all elements.The dollar in the United States is the most appropriate common denominator to expressinformation about financial statement elements and changes in those elements.3.Periodicityassumption–The economic life of an enterprise (presumed to be indefinite)canbe divided into artificial time periods for financial reporting.4.Goingconcernassumption–In the absence of information to the contrary, it is anticipatedthat a business entity will continue to operate indefinitely.

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Chapter 1-A Framework for Financial Accounting1-6Financial Accounting, 5eBRIEF EXERCISESBrief Exercise 1-1(LO 1-1)1.True2.True3.FalseBrief Exercise 1-2(LO 1-2)1.b.2.c.3.a.Brief Exercise 1-3(LO 1-2)1.c.2.a.3.b.Brief Exercise 1-4(LO 1-2)1.e.2.f.3.b.4.c.5.a.6.d.

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-7Brief Exercise 1-5(LO 1-2)1.e.2.d.3.f.4.a.5.b.Brief Exercise 1-6(LO 1-2)1.b.2.a.3.e.4.c.5.d.Brief Exercise 1-7(LO 1-3)1.b.2.a.3.d.4.c.Brief Exercise 1-8(LO 1-3)1.c.2.a.3.d.4.b.

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Chapter 1-A Framework for Financial Accounting1-8Financial Accounting, 5eBrief Exercise 1-9(LO 1-5)1.b.2.d.3.a.4.c.Brief Exercise 1-10(LO 1-5)1.Yes.2.No.3.Yes.4.No.5.Yes.6.No.

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-9Brief Exercise 1-11(LO 1-6)1.True2.True3.True4.True5.True6.True7.True8.True9.True10.True11.True12.TrueBrief Exercise 1-12(LO 1-7)1.b.2.a.3.c.Brief Exercise 1-13(LO 1-7)1.c.2.b.3.a.

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Chapter 1-A Framework for Financial Accounting1-10Financial Accounting, 5eEXERCISESExercise 1-1(LO 1-2)1.a.2.c.3.a.4.b.5.c.6.a.7.b.Exercise 1-2(LO 1-2)TransactionFinancialStatementAccountActivity1.Falconpurchases common stock ofWildcat.Balance sheetAssetInvesting2.Falconborrows fromWildcatbysigning a note.Balance sheetLiabilityFinancing3.Falconprovides services toWildcat.Income statementRevenueOperating4.Falconpays interest toWildcatonborrowing.Income statementExpenseOperatingExercise 1-3(LO 1-2)TransactionFinancialStatementAccountActivity1.Wildcat issues common stock toFalcon.Balance sheetEquityFinancing2.Wildcat lends to Falconbyacceptinga note.Balance sheetAssetInvesting3.Wildcat receives services fromFalcon.Income statementExpenseOperating4.Wildcat receives interest fromFalcononlending.Income statementRevenueOperating

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-11Exercise 1-4(LO 1-2)Requirement 1Revenues−Expenses=Net Income$14,000−$9,000=$5,000Requirement2Assets=Liabilities+Stockholders’equity$50,000=$27,000+$X$50,000−$27,000=$23,000Exercise 1-5(LO 1-2)Requirement 1Revenues−Expenses=Net Loss$28,000−$33,000=($5,000)Requirement2Assets=Liabilities+Stockholders’equity$19,000=$15,000+$X$19,000−$15,000=$4,000

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Chapter 1-A Framework for Financial Accounting1-12Financial Accounting, 5eExercise 1-6(LO 1-3)CowboyLaw FirmIncome StatementFor the periodended December 31Service revenue$9,300Expenses:Salaries2,200Utilities1,200Total expenses3,400Net income$5,900Exercise 1-7(LO 1-3)BuffaloDrillingStatement of Stockholders’ EquityFor the year ended December 31CommonStockRetainedEarningsTotalStockholders’EquityBeginning balance, Jan. 1$11,000$8,200$19,200Issuance of common stock8,0008,000Add:Net income8,5008,500Less: Dividends(3,200)(3,200)Ending balance, Dec. 31$19,000$13,500$32,500

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-13Exercise 1-8(LO 1-3)WolfpackConstructionBalance SheetDecember 31AssetsLiabilitiesCash$6,000Accounts payable$3,000Land18,000Notes payable20,000Equipment26,000Total liabilities23,000Stockholders’ EquityCommon stock11,000Retained earnings16,000*Total stockholders’ equity27,000Total liabilities andstockholders’ equity$50,000Total assets$50,000*Assets=Liabilities+Stockholders’ equity$50,000=$23,000+($11,000 + Retained earnings)$50,000−$23,000−$11,000=Retained earnings$16,000=Retained earnings

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Chapter 1-A Framework for Financial Accounting1-14Financial Accounting, 5eExercise 1-9(LO 1-3)Requirement 1Beginning balance$5,000Cash received from sale ofproductsto customers40,000Cash received from the bankfor long-term loan45,000Cash paid to purchase factory equipment(50,000)Cash paid to merchandise suppliers(12,000)Cash received from the sale of an unused warehouse13,000Cash paid to workers(24,000)Cash paid for advertisement(4,000)Cash received for sale of services to customers30,000Cash paid for dividends to stockholders(6,000)Ending balance$37,000Requirement2TigerTradeStatement of Cash FlowsCash Flows from Operating ActivitiesCash inflows:From sale of products to customers$40,000From sale of services to customers30,000Cash outflows:For merchandise suppliers(12,000)For workers(24,000)For advertisement(4,000)Net cash flows from operating activities$30,000Cash Flows from Investing ActivitiesPurchase factory equipment(50,000)Sale of warehouse13,000Net cash flowsfrominvesting activities(37,000)Cash Flows from FinancingActivitiesBorrow from bank45,000Pay dividends(6,000)Net cash flows from financing activities39,000Net increase in cash32,000Cash at the beginning of the year5,000Cash at the end of the year$37,000

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Chapter 1-A Framework for Financial AccountingSolutions Manual, Chapter 11-15Exercise 1-10(LO 1-3)Requirement1Fighting Okra Cooking ServicesIncome StatementFor the year ended December 31, 2021Service revenue$75,000Expenses:Salaries$24,000Supplies14,500Rent10,600Legalfees2,400Postage1,500Total expenses53,000Net income$22,000Requirement2Fighting Okra Cooking ServicesStatement of Stockholders’ EquityFor the year ended December 31, 2021CommonStockRetainedEarningsTotalStockholders’EquityBeginning balance$200,000$32,000$232,000Issuance of common stock25,00025,000Add:Net income22,00022,000Less: Dividends(10,000)(10,000)Ending balance$225,000$44,000$269,000

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