Solution Manual for Introductory Financial Accounting for Business, 2nd Edition

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IFAB 2e–Chapter 1–Solutions Manual1-1ANSWERS TO QUESTIONS–CHAPTER 11.Stakeholdersare the parties that use accounting information.Stakeholders with adirect interestinclude owners, managers,creditors, suppliers, and employees. These individuals are directlyaffected by what happens to the business.Stakeholders with anindirect interestinclude financial analysts,brokers, attorneys, government regulators, and news reporters.These individuals use information in the financial reports to adviseand influence their clients.Students may give many different answers under the abovecategories depending on their level of experience in business.All students are direct users of accounting information related totuition and fees, financial aid, and account balances.2.Accounting provides information that is useful in making decisionsby all participants in the market for resource goods and services,both profit-oriented and nonprofit oriented. Because accounting’srole is so important, it is often called the language of business.3.The primary mechanism used to allocate resources in the U.S. iscompetition for resources in the open market.4.A market is a group of people or organizations that come togetherfor the purpose of exchanging items of value.5.The market for business resources involves three distinctparticipants: consumers, businesses, and resource owners. SeeExhibit 1.1 that illustrates how market trilogy is involved in resourceallocation.

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IFAB 2e–Chapter 1–Solutions Manual1-26.Financial Resource: moneyPhysical Resource: natural resources (i.e. land, forests, mine ore,petroleum, etc.), buildings, machinery and equipment, furniture andfixtures.Labor Resource: includes both intellectual and physical labor; i.e.employees.7.Investors expect a distribution of the business’s profits as a returnon their financial investment (capital allocation).Creditors lend financial resources to businesses and receiveinterestas a return or profit on the loan.8.Financial accountingprovides information that is useful to externalresource providers.Managerial accountingprovides information that is useful tomanagers in operating an organization (i.e., internal users).9.Not-for-profit or nonprofit entities provide goods or services toconsumers forhumanitarian or special reasonsrather than to earn aprofit for owners. For example, certain not-for-profit entitiesallocate resources to provide for research of diseases orsocial/environmental welfare; others allocate resources to promotethe arts and provide education.10.The U.S. rules of accounting information measurement are calledgenerally accepted accounting principles (GAAP).

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IFAB 2e–Chapter 1–Solutions Manual1-311.Careers in public accounting consist of providing services to thegeneral public from a public accounting firm. These services includeauditing, tax, and consulting services. Careers in private accountingusually consist of working for a specific company (which would be aclient of the public accounting firm) providing a wide variety ofservices to the company including recording transactions, preparingfinancial statements, internal auditing, and others.12.Items reported on the financial statements are organized intoclasses or categories called elements. The ten elements of financialstatements are:1.Assets2.Liabilities3.Equity (Stockholders’ Equity)4.Investments by Owners (ContributedCapital)5.Revenue6.Expenses7.Distributions (Dividends)8.Net Income9.Gains10.LossesAccounts are specific items or subclassifications of the elements.Examples of accounts include cash, land, and common stock.13.Assets, the economic resources of a business, are used to produceearnings.14.The assets of a business belong to that business entity and theremay be claims on the assets. Claims on the assets belong toresource providers.

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IFAB 2e–Chapter 1–Solutions Manual1-415.Creditors are individuals and/or institutions that have providedgoods or services to the business which are not yet paid for, orloaned money to the business. These parties have first claim to theassets of the business, and the investors have a residual interest inthe assets.16.The term “liabilities” is used to describe creditors' claims on theassets of a business.17. The accounting equation is:ASSETS–LIABILITIES = STOCKHOLDERS’ EQUITYorASSETS = LIABILITIES + STOCKHOLDERS’ EQUITYAssetsare the economic resources used by a business for theproduction of revenue.Liabilitiesare obligations of a business torelinquish assets, provide services, or accept other obligations.Equity, also called “residual interest” or “net assets,” is the portionof the assets remaining after the creditors' claims have beensatisfied (i.e., Assets–Liabilities).18.Theownersultimately bear the risk and collect the rewardsassociated with operating a business.19.The right side of the accounting equation can be viewed as eithersources of assets or as obligations and commitments of thebusiness. Assets originating from liabilities can be viewed assources or obligations of the business. Assets originating fromissuing stock or retaining earnings can be viewed as sources ofassets and commitments of the business.20.The business could make a distribution of $1,000, but only $800 of itwould be classified as a dividend. A distribution can only be adividend to the extent of retained earnings.21.Capital is acquired from owners by issuing stock to them. Whenstock is issued, the assets of the business increase and thestockholders’ equity increases.

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IFAB 2e–Chapter 1–Solutions Manual1-522.Assets that are acquired by issuing common stock are the result ofinvestments by owners. Assets that are acquired by using retainedearnings are assets the business acquires through its earningsactivities.23.Revenueincreases the asset side of the accounting equation andalso increases the retained earnings account in the stockholders’equity section of the equation.24.The three primary sources of assets are (1) investments by owners(issue of stock), (2) borrowing from creditors, and (3) earningsactivities.25.Retained earnings are a result of a business retaining its earnedassets, rather than distributing those earnings to its owners.26.Distributions to owners, called dividends, decrease the asset side ofthe accounting equation and also decrease the retained earningsaccount in the stockholders’ equity section of the equation.27.Dividends and expenses are similar in that they both decrease assetsand affect the accounting equation in the same way (i.e. reduction ofretained earnings). However, dividends differ from expensesbecause of the nature of the decline in assets. Expenses reduceassets as the result of a firm's efforts to earn revenue. Dividendsreduce assets because of a transfer of wealth to the owners.

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IFAB 2e–Chapter 1–Solutions Manual1-628.(1)Income Statement-measures the difference between the assetincreases and the asset decreases that were associated withoperating a business during a particular accounting period.(2)Statement of Changes in Stockholders’ Equity-explains theeffects of transactions on stockholders’ equity during theaccounting period.(3)Balance Sheet-lists the assets and the corresponding claimsagainst the entity as of a particular date.(4)Statement of Cash Flows-explains how a company obtainedand used cash during the accounting period.29.The Balance sheet provides information about the enterprise at aparticular point in time.30.A net loss is caused when the company’s expenses exceed theamount of revenues generated during a period.31.The matching concept is the practice of pairing revenues andexpenses on the income statement.

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IFAB 2e–Chapter 1–Solutions Manual1-732.(1)Operating activities-explain the cash generated from revenueand the cash paid for expenses.(2)Investing activities-include cash received or spent by thebusiness on productive assets used in the business, andinvestments in debt or equity of other companies.(3)Financing activities-include cash inflows and outflows fromthe company's transactions with its owners and inflows andoutflows from its borrowing activities.33.Asset accounts are arranged on the balance sheet in accordancewith their level ofliquidity(those that can be most quickly convertedto cash are listed first).34.Articulation refers to the interrelationships among the variouselements of the financial statements.35.The historical cost concept requires that most assets be reported atthe amount paid for them regardless of their increase or decrease invalue. It is related to the qualitative characteristic of verifiability inthat information can be independentlyverified. The historical cost isverified, while a change in value is subjective.

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IFAB 2e–Chapter 1–Solutions Manual1-836.Anasset sourcetransaction results in an increase in an assetaccount and an increase in one of the claims accounts; i.e.,investments by owners (equity), borrowing funds from creditors(liabilities), or earnings activities (revenue).Anasset usetransaction results in a decrease in an asset accountand a decrease in either liabilities or equity; i.e., the payment of aliability, the payment of an expense, or a dividend.Anasset exchangetransaction is a transaction in which one asset isexchanged for another; i.e., purchase of land with cash.Aclaims exchangetransaction will be covered in a later chapter.37.While the contents of annual reports vary from company tocompany, all annual reports contain:Management’s discussion and analysis (MD&A)Financial statementsNotes to the financial statementsAuditor’s report38.U.S. GAAP, generally accepted accounting principles in the UnitedStates, are the measurement rules established by the (FASB)Financial Accounting Standards Board. The FASB is aprivatelyfunded organization with the primary authority for establishingaccounting standards in the United States. International FinancialReporting Standards (IFRS) are issued by the InternationalAccounting Standards Board and are an attempt to set acommonstandard to be used in different countries. IFRS is used by globalcompanies and there is a move underway to merge GAAP and IFRSor to lessen the differences between them.

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IFAB 2e–Chapter 1–Solutions Manual1-9SOLUTIONS TO EXERCISES-SERIES A-CHAPTER 1EXERCISE 1-1AThethree participants in the free business market are:1.Resource owners2.Businesses3.ConsumersNote to instructor:The memo should discuss the fact that the resource owners are thosewho own resources that are desired by others, either in the original formor in a converted form. The businesses are the parties that acquire theresource and supply it to consumers either in the original form or in aconverted form with value added by the conversion. The consumers arethe ultimate users of the resources.It should also include a discussion of the public accountant and theallocation of resources. For example, public accountants audit the annualreports that businessesuse to communicate information to investors andcreditors (financial resource providers). Based on their findings they maycertify or deny that the reports fairly represent the financial condition ofthe business. In other words, public accountants provide assurance thatthe information providedbythebusiness is trustworthy. Publicaccountants usually gain the professional designation of Certified PublicAccountant (CPA).

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IFAB 2e–Chapter 1–Solutions Manual1-10EXERCISE 1-2Aa.The most common designation held by a public accountant is theCPA license. CPA stands for certified public accountant. CPAs arelicensed by the state government (or other jurisdiction). Althoughthe requirements vary from state to state (jurisdiction),CPAcandidates normally must have a college degree, pass a demandingtechnical examination, and obtain relevant work experience.b.Designations thatprivate accountants may hold include the CMA,Certified Management Accountant, and the CIA, Certified InternalAuditor. Both require meeting educational requirements, passing atechnical examination and obtaining relevant work experience.These designations are not professional licenses and are notgovernment regulated.

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IFAB 2e–Chapter 1–Solutions Manual1-11EXERCISE 1-3AEntities mentioned:Effect on cash:Vicky Hill Recovery FundIncrease for cash contributions, $21,000Decrease for payment of advertising, $1,000Decreasepayment for hospital bills, $12,000Decrease for donation to National CyclistFund, $8,000Karen WhiteDecrease by contribution, $1,000WKUXIncrease for advertising revenue, $1,000PublicDecrease for contributions, $20,000MercyHospitalIncrease for medical care, $12,000National Cyclist FundIncrease for donation, $8,000

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IFAB 2e–Chapter 1–Solutions Manual1-12EXERCISE 1-4Aa.TermDefinitiona7b3c6d5e4f1g2

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IFAB 2e–Chapter 1–Solutions Manual1-13EXERCISE 1-5Aa.Accounting EquationStockholders’ EquityCommonRetainedCompanyAssets=Liabilities+Stock+EarningsA$123,000=$25,000+$48,000+$50,000B40,000=3,000+7,000+30,000C75,000=15,000+18,000+42,000D125,000=45,000+60,000+20,000

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IFAB 2e–Chapter 1–Solutions Manual1-14EXERCISE 1-6Aa.Assets=Liabilities+Stockholders’ EquityComputersAccounts PayableOperating ExpensesBuildingGasoline ExpenseCashRent RevenueLandRetained EarningsTrucksSalaries ExpenseSuppliesCommon StockOffice FurnitureService RevenueDividendsb.No. Thetype ofaccounts will vary depending on thetype ofbusiness.Some businesses will have only one revenue account;other businesses may have more thanone type of revenue account.For instance, a business may have both service revenue and interestrevenue. Also, the expense accounts that a business has aresomewhat dependent on the type and complexity of the business.For instance, if a business ownsits own building, it will not haverent expense. If a business does not have employees, it will nothave salaries expense. The level of detail desired by the businesswill also affect the type of revenue and expense accounts that abusiness will have.

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IFAB 2e–Chapter 1–Solutions Manual1-15EXERCISE 1-7Aa.Assets=Liabilities+Stockholders’ EquityCash=Note Payable+Common Stock+Retained Earnings195,000=90,500+84,500+?Retained Earnings = $195,000–$90,500–$84,500 = $20,000b. & c.Moss CompanyEffect of Year 2 Transactions on the Accounting EquationAssets=Liabilities+Stockholders’ EquityNotesCommonRetainedEventCash=Payable+Stock+EarningsBeginning Balances195,00090,50084,50020,0001. Earned Revenue42,000NANA42,0002. Paid expenses(24,000)NANA(24,000)3. Paid dividend(3,000)NANA(3,000)Ending Balance210,000=90,500+84,500+35,000d.Cash=Note Payable+Common Stock+Retained Earnings210,000=90,500+84,500+35,000Liabilities + Stockholders’ Equity = $90,500 + $84,500 + $35,000 = $210,000Assets= Liabilities + Stockholders’ Equity$210,000=$210,000

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