Chapter 01 – Financial Statements and Business Decisions
Chapter 1
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
2. Financial accounting involves preparation of the four basic financial statements and
3. Financial reports are used by both internal and external groups and individuals. The
4. Investors purchase all or part of a business and hope to gain by receiving part of
5. In a society each organization can be defined as a separate accounting entity. An
accounting entity is the organization for which financial data are to be collected.
6. Name of Statement Alternative Title
(a) Income Statement (a) Statement of Earnings; Statement of
Chapter 01 – Financial Statements and Business Decisions
13. The equation for the balance sheet (also known as the basic accounting equation)
is: Assets = Liabilities + Stockholders’ Equity. Assets are the probable (expected)
future economic benefits owned by the entity as a result of past transactions. They
14. The equation for the statement of cash flows is: Cash flows from operating activities
+ Cash flows from investing activities + Cash flows from financing activities =
Change in cash for the period. The net cash flows for the period represent the
15. The retained earnings equation is: Beginning Retained Earnings + Net Income –
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
16. Marketing managers and credit managers use customers’ financial statements to
decide whether to extend them credit for their purchases. Purchasing managers
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
which determines the financial statements that public companies must provide to
Chapter 01 – Financial Statements and Business Decisions
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
12
1
45
1
20
2
12
2
45
2
30
3
12
3
45
3
30
4
20
4
45
4
60
5
25
5
30
6
20
6
20
7
15
7
*
8
25
9
25
Continuing Case
10
25
1
45
11
30
12
15
13
12
* Due to the nature of these cases and projects, it is very difficult to estimate the amount
of time students will need to complete the assignment. As with any open–ended project,
it is possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
Chapter 01 – Financial Statements and Business Decisions
MINI-EXERCISES
M1–1.
Element
Financial Statement
B
(1) Expenses
A. Balance sheet
D
(2) Cash flow from investing activities
B. Income statement
A
(3) Assets
C. Statement of stockholders’ equity
C*
(4) Dividends
D. Statement of cash flows
B
(5) Revenues
D
(6) Cash flow from operating activities
A
(7) Liabilities
D
(8) Cash flow from financing activities
M1–2.
SE
(1) Retained earnings
A
(2) Accounts receivable
R
(3) Sales revenue
A
(4) Property, plant, and equipment
E
(5) Cost of goods sold expense
A
(6) Inventories
E
(7) Interest expense
L
(8) Accounts payable
A
(9) Land
M1–3.
Abbreviation
Full Designation
(1)
CPA
Certified Public Accountant
(2)
GAAP
Generally Accepted Accounting Principles
(3)
SEC
Securities and Exchange Commission
(4)
FASB
Financial Accounting Standards Board
Chapter 01 – Financial Statements and Business Decisions
EXERCISES
E1–1.
Term or Abbreviation Definition
J
F
H
E
A
D
I
L
C
K
G
B
M
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
SEC
Audit
Sole proprietorship
Corporation
Accounting
Accounting entity
Audit report
Publicly traded
Partnership
FASB
CPA
Unit of measure
GAAP
A. A system that collects and processes financial
information about an organization and reports that
information to decision makers.
B. Measurement of information about an entity in terms of
the dollar or other national monetary unit.
C. An unincorporated business owned by two or more
persons.
D. The organization for which financial data are to be
collected (separate and distinct from its owners).
E. An incorporated entity that issues shares of stock as
evidence of ownership.
F. An examination of the financial reports to ensure that
they represent what they claim and conform with
generally accepted accounting principles.
G. Certified Public Accountant.
H. An unincorporated business owned by one person.
I. A report that describes the auditor’s opinion of the
fairness of the financial statement presentations and
the evidence gathered to support that opinion.
J. Securities and Exchange Commission.
K. Financial Accounting Standards Board.
L. A company with stock that can be bought and sold by
investors on established stock exchanges.
M. Generally accepted accounting principles.
Chapter 01 – Financial Statements and Business Decisions
E1–4.
Honda Motor Corporation
Balance Sheet
as of March 31, 2011
(in billions of Yen)
Assets
Cash and cash equivalents
¥1,279
Trade accounts, notes, and other receivables
788
Inventories
900
Investments
640
Net property, plant and equipment
1,939
Other assets
6,025
Total assets
¥11,571
Liabilities
Accounts payable and other current liabilities
¥ 3,568
Long-term debt
2,043
Other liabilities
1,377
Total liabilities
6,988
Stockholders’ Equity
Common stock
259
Retained earnings
4,324
Total stockholders’ equity
4,583
Total liabilities and stockholders’ equity
¥11,571
Chapter 01 – Financial Statements and Business Decisions
E1–7.
WALGREEN CO.
Income Statement
For the Year ended August 31, 2011
(in millions)
Revenues:
Net sales
$72,184
Other Income
434
Total revenues/ income
$72,618
Expenses:
Cost of sales
51,692
Selling, general and
administration expense
16,561
Interest Expense
71
Total expenses
68,324
Pretax income
4,294
Income tax expense
1,580
Net earnings
$2,714
*Note that “Provision for income taxes” is a common synonym for “Income tax
expense.”
E1–8.
NEIGHBORHOOD REALTY, INCORPORATED
Income Statement
For the Year Ended December 31, 2015
Revenues:
Chapter 01 – Financial Statements and Business Decisions
E1–11.
PAINTER CORPORATION
Income Statement
For the Month of January 2013
Total revenues $305,000
Common stock (2,600 shares) 62,400
Retained earnings (from income statement above) 81,000
Total stockholders’ equity 143,400
Chapter 01 – Financial Statements and Business Decisions
Financial Accounting, 8/e 1-15
Chapter 01 – Financial Statements and Business Decisions
PROBLEMS
(Note to the instructor: Most students find the Problems in this chapter to be quite
challenging.)
P1–1.
Req. 1
HIGHLIGHT CONSTRUCTION COMPANY
Income Statement
For the Year Ended December 31, 2014
Total sales revenue (given) $128,400
Total expenses (given) 80,200
For the Year Ended December 31, 2014
Common Stock Retained Earnings
Balance December 31, 2013 $ 0 $ 0
Stock issuance (given) 87,000
+Net income (from req. 1) 33,740
Assets
Cash (given) $25,600
Receivables from customers (given) 10,800
Inventory of merchandise (given) 81,000
Equipment (given) 42,000
Stockholders’ Equity