Chapter 1
Accounting in Business
QUESTIONS
1. The purpose of accounting is to provide decision makers with relevant and reliable
information to help them make better decisions. Examples include information for
people making investments, loans, and business plans.
2. Technology reduces the time, effort, and cost of recordkeeping. There is still a
demand for people who can design accounting systems, supervise their operation,
analyze complex transactions, and interpret reports. Demand also exists for people
who can effectively use computers to prepare and analyze accounting reports.
Technology will never substitute for qualified people with abilities to prepare, use,
analyze, and interpret accounting information.
3. External users and their uses of accounting information include: (a) lenders, to
measure the risk and return of loans; (b) shareholders, to assess whether to buy,
sell, or hold their shares; (c) directors, to oversee their interests in the organization;
(d) employees and labor unions, to judge the fairness of wages and assess future
employment opportunities; and (e) regulators, to determine whether the organization
is complying with regulations. Other users are voters, legislators, government
officials, contributors to nonprofits, suppliers and customers.
4. Business owners and managers use accounting information to help answer
questions such as: What resources does an organization own? What debts are
owed? How much income is earned? Are expenses reasonable for the level of sales?
Are customers’ accounts being promptly collected?
5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch,
Southwest Airlines, CitiCorp, Humana, Charles Schwab, and Prudential. Businesses
offering products include Nike, Reebok, Gap, Apple, Ford Motor Co., Philip Morris,
Coca-Cola, Best Buy, and WalMart.
6. The internal role of accounting is to serve the organization’s internal operating
functions. It does this by providing useful information for internal users in
completing their tasks more effectively and efficiently. By providing this information,
accounting helps the organization reach its overall goals.
7. Accounting professionals offer many services including auditing, management
advice, tax planning, business valuation, and money management.
8. Marketing managers are likely interested in information such as sales volume,
advertising costs, promotion costs, salaries of sales personnel, and sales
commissions.
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Solutions Manual, Chapter 1
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9. Accounting is described as a service activity because it serves decision makers by
providing information to help them make better business decisions.
10. Some accounting-related professions include consultant, financial analyst,
underwriter, financial planner, appraiser, FBI investigator, market researcher, and
system designer.
11. Ethics rules require that auditors avoid auditing clients in which they have a direct
investment, or if the auditor’s fee is dependent on the figures in the client’s reports.
This will help prevent others from doubting the quality of the auditor’s report.
12. In addition to preparing tax returns, tax accountants help companies and individuals
plan future transactions to minimize the amount of tax to be paid. They are also
actively involved in estate planning and in helping set up organizations. Some tax
accountants work for regulatory agencies such as the IRS or the various state
departments of revenue. These tax accountants help to enforce tax laws.
13. The objectivity concept means that financial statement information is supported by
independent, unbiased evidence other than someone’s opinion or imagination. This
concept increases the reliability and verifiability of financial statement information.
14. This treatment is justified by both the cost principle and the going-concern
assumption.
15. The revenue recognition principle provides guidance for managers and auditors so
they know when to recognize revenue. If revenue is recognized too early, the
business looks more profitable than it is. On the other hand, if revenue is
recognized too late the business looks less profitable than it is. This principle
demands that revenue be recognized when it is both earned (when service or
product provided) and can be measured reliably. The amount of revenue should
equal the value of the assets received or expected to be received from the
business’s operating activities covering a specific time period.
16. Business organizations can be organized in one of three basic forms: sole
proprietorship, partnership, or corporation. These forms have implications for legal
liability, taxation, continuity, number of owners, and legal status as follows:
Proprietorship Partnership Corporation
Business entity yes yes yes
Legal entity no no yes
Limited liability no* no* yes
Unlimited life no no yes
Business taxed no no yes
One owner allowed yes no yes
*Proprietorships and partnerships that are set up as LLCs provide limited liability.
17. (a) Assets are resources owned or controlled by a company that are expected to
yield future benefits. (b) Liabilities are creditors’ claims on assets that reflect
obligations to provide assets, products or services to others. (c) Equity is the
owner’s claim on assets and is equal to assets minus liabilities. (d) Net assets refer
to equity.
18. Equity is increased by investments from the owner and by net income (which is the
excess of revenues over expenses). It is decreased by dividends to the owner and
by a net loss (which is the excess of expenses over revenues).
©2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned,
duplicated, forwarded, distributed, or posted on a website, in whole or part.
Financial Accounting Fundamentals, 5th Edition
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19. Accounting principles consist of (a) general and (b) specific principles. General
principles are the basic assumptions, concepts, and guidelines for preparing
financial statements. They stem from long-used accounting practices. Specific
principles are detailed rules used in reporting on business transactions and events.
They usually arise from the rulings of authoritative and regulatory groups such as
the Financial Accounting Standards Board or the Securities and Exchange
Commission.
20. Revenue (or sales) is the amount received from selling products and services.
21. Net income (also called income, profit or earnings) equals revenues minus expenses
(if revenues exceed expenses). Net income increases equity. If expenses exceed
revenues, the company has a net loss. Net loss decreases equity.
22. The four basic financial statements are: income statement, statement of retained
earnings, balance sheet, and statement of cash flows.
23. An income statement reports a company’s revenues and expenses along with the
resulting net income or loss over a period of time.
24. Rent expense, utilities expense, administrative expenses, advertising and promotion
expenses, maintenance expense, and salaries and wages expenses are some
