Type
Solution Manual
Book Title
Financial Accounting Fundamentals 5th Edition
ISBN 13
978-0078025754

978-0078025754 Chapter 1 Solution Manual Part 1

March 26, 2020
Chapter 1
Accounting in Business
QUESTIONS
1. The purpose of accounting is to provide decision makers with relevant and reliable
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,
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,
4. Business owners and managers use accounting information to help answer
5. Service businesses include: Standard and Poor’s, Dun & Bradstreet, Merrill Lynch,
6. The internal role of accounting is to serve the organization’s internal operating
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,
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,
11. Ethics rules require that auditors avoid auditing clients in which they have a direct
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
13. The objectivity concept means that financial statement information is supported by
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
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:
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
18. Equity is increased by investments from the owner and by net income (which is the
19. Accounting principles consist of (a) general and (b) specific principles. General
principles are the basic assumptions, concepts, and guidelines for preparing
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
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
25. The statement of retained earnings explains the changes in equity from net income
or loss, and from any dividends over a period of time.
26. The balance sheet describes a company’s financial position (types and amounts of
assets, liabilities, and equity) at a point in time.
27. The statement of cash flows reports on the cash inflows and outflows from a
company’s operating, investing, and financing activities.
28. Return on assets, also called return on investment, is a profitability measure that is
useful in evaluating management, analyzing and forecasting profits, and planning
activities. It is computed as net income divided by the average total assets. For
example, if we have an average annual balance of $100 in a bank account and it
liabilities and equity combined and, similarly, it cannot have more or less liabilities
and equity than its total assets. This means: assets = liabilities + equity. This
relation is called the accounting equation (also called the balance sheet equation),
and it applies to organizations at all times.
32. The dollar amounts in Apple’s financial statements are rounded to the nearest million
33. At December 31, 2013, Google had ($ in millions) assets of $110,920, liabilities of
$23,611, and equity of $87,309.
34. Confirmation of Samsung’s accounting equation follows (numbers in KRW millions):
35. The independent auditor for Apple, is Ernst & Young, LLP. The auditor expressly
states that “our responsibility is to express an opinion on these consolidated
QUICK STUDIES
Quick Study 1-1 (10 minutes)
1. f. Technology
2. c. Recording
3. e. Recordkeeping (bookkeeping)
Quick Study 1-2 (10 minutes)
a.
E
g.
Quick Study 1-3 (10 minutes)
a. The choice of an accounting method when more than one alternative
method is acceptable often has ethical implications. This is because
accounting information can have major impacts on individuals’ (and
video cameras, security guards, and many others.
Quick Study 1-4 (5 minutes)
1. c. constraint
2. b. assumption
3. c. constraint
4. a. principle
Quick Study 1-5 (10 minutes)
Attribute Present
Proprietorship
Partnership
Corporation
1.
Business taxed
no
no
yes
2.
Business entity
yes
yes
yes
3.
Legal entity
no
no
yes
Quick Study 1-6 (10 minutes)
Quick Study 1-7 (5 minutes)
Quick Study 1-8 (10 minutes)
1.
Assets = Liabilities + Equity
2.
Assets =
Liabilities
+ Common Stock
- Dividends
+ Revenues
- Expenses
Quick Study 1-9 (10 minutes)
(1)
Assets
=
214,075,018
(2)
Liabilities
=
64,059,008
(3)
Equity
=
150,016,010
Quick Study 1-10 (15 minutes)
Assets
=
Liabilities
+
Equity
Cash
+
Accounts
=
Accounts
+
Common
-
Dividends
+
Revenues
-
Expenses
Quick Study 1-11 (15 minutes)
Assets
=
Liabilities
+
Equity
Bal.
14,500
+
500
=
+
15,000
Quick Study 1-12 (10 minutes)
[Code: Income statement (I), Balance sheet (B), Statement of retained earnings (E), or
Quick Study 1-13 (5 minutes)
1. EX
Quick Study 1-14 (5 minutes)
1. A
Quick Study 1-15 (10 minutes)
Quick Study 1-16 (10 minutes)
Quick Study 1-17 (10 minutes)
$3,338
Net income
EXERCISES
Exercise 1-1 (10 minutes)
C 1. Analyzing and interpreting reports
C 2. Presenting financial information
Exercise 1-2 (20 minutes)
Part A.
1.
I
5.
I
Part B.
1.
I
5.
I
Exercise 1-3 (10 minutes)
Exercise 1-4 (10 minutes)
Exercise 1-5 (20 minutes)
a. Auditing professionals with competing audit clients are likely to learn
valuable information about each client that the other clients would
benefit from knowing. In this situation the auditor must take care to
returning reference materials so others can enjoy them, and to
properly preparing for class to efficiently use the time and question
period to not detract from others’ instructional benefits.
Exercise 1-6 (10 minutes)
a.
(C) Corporation
e.
(C) Corporation
Exercise 1-7 (10 minutes)
Code
Description
Principle/Assumption
H.
1.
A company reports details behind financial
statements that would impact users' decisions.
Full disclosure
principle
Exercise 1-8 (10 minutes)
Assets
=
Liabilities
+
Equity
Exercise 1-9 (20 minutes)
a. Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
$300,000
=
?
+
$100,000
$190,000
=
$70,000 - $5,000
+
?
$190,000
=
$65,000
+
$125,000
Using the accounting equation at the beginning of the year:
Assets
=
Liabilities
+
Equity
Exercise 1-10 (20 minutes)
a. Started the business with the owner investing $40,000 cash in the
Exercise 1-11 (20 minutes)
a. Purchased land for $4,000 cash.
Exercise 1-12 (15 minutes)
Examples of transactions that fit each case include:
a. Cash dividends (or some other asset) paid to the owner of the
business; OR, the business incurs an expense paid in cash.
Exercise 1-13 (30 minutes)
Assets
=
Liabilities
+
Equity
Cash
+
Accounts
Receivable
+
Equip-
ment
=
Accounts
Payable
+
Common
Stock
Dividends
+
Revenues
Expenses
a.
+$60,000
+
$15,000
=
+
$75,000
b.
1,500
______
______
$1,500
Bal.
58,500
+
+
15,000
=
+
75,000
1,500

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