Financial Accounting, 9/e 1-1
Chapter 1
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and
records) financial information about an organization and reports that information to
decision makers.
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
Income; Statement of Operations
(b) Balance Sheet (b) Statement of Financial Position
(c) Audit Report (c) Report of Independent Accountants
7. The heading of each of the four required financial statements should include the
following:
8. (a) The purpose of the income statement is to present information about the
revenues, expenses, and the net income of the entity for a specified period of
time.
(b) The purpose of the balance sheet is to report the financial position of an entity
9. The income statement and the statement of cash flows are dated “For the Year
Ended December 31,” because they report the inflows and outflows of resources
during a period of time. In contrast, the balance sheet is dated “At December 31,”
because it represents the resources, obligations and stockholders’ equity at a
specific date.
10. Assets are important to creditors and investors because assets provide a basis for
judging whether sufficient resources are available to operate the company. Assets
11. Net income is the excess of total revenues over total expenses. Net loss is the
excess of total expenses over total revenues.
12. The equation for the income statement is Revenues – Expenses = Net Income (or
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
increase or decrease in cash that occurred during the period. Cash flows from
16. Marketing managers and credit managers use customers’ financial statements to
decide whether to extend them credit for their purchases. Purchasing managers
use potential suppliers’ financial statements to judge whether the suppliers have the
resources necessary to meet current and future demand. Human resource
managers use financial statements as a basis for contract negotiations, to
determine what pay rates the company can afford. The net income figure even
serves as a basis to pay bonuses not only to management, but to other employees
through profit sharing plans.
17. The Securities and Exchange Commission (SEC) is the U.S. government agency
which determines the financial statements that public companies must provide to
18. Management is responsible for preparing the financial statements and other
information contained in the annual report and for the maintenance of a system of
internal accounting policies, procedures and controls. These measures are
19. A sole proprietorship is an unincorporated business owned by one individual. A
partnership is an unincorporated association of two or more individuals to carry on a
business. A corporation is a business that is organized under the laws of a
particular state whereby a charter is granted and the entity is authorized to issue
shares of stock as evidence of ownership by the owners (i.e., stockholders).
20. A CPA firm normally renders three services: auditing, management advisory
services, and tax services. Auditing involves examination of the records and
ANSWERS TO MULTIPLE CHOICE
Financial Accounting, 9/e 1-5
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
* 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
5
25
5
30
7
15
7
8
25
9
25
10
25
1
45
11
30
12
30
13
15
14
12
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
(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
*Dividends paid in cash are also subtracted in the Financing section of the Statement of
Cash Flows
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
(8) Accounts payable
A
(9) Land
M1–3.
Abbreviation
Full Designation
(1)
CPA
Certified Public Accountant
(2)
GAAP
Generally Accepted Accounting Principles
(4)
FASB
Financial Accounting Standards Board
Financial Accounting, 9/e 1-7
EXERCISES
E1–1.
Term or Abbreviation Definition
J
F
H
E
A
(1)
(2)
(3)
(4)
(5)
SEC
Audit
Sole proprietorship
Corporation
Accounting
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.
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.
E1–2.
A
(1)Accounts receivable
A
(2)Cash and cash equivalents
R
(3)Net sales
L
(4)Debt due within one year
L
(5)Taxes payable
(6)Retained earnings
E
(7)Cost of products sold
E
(8)Selling, general and administrative expense
E
(9)Income taxes
L
(10)Accounts payable
A
(11)Trademarks and other intangible assets
A
(12)Property, plant, and equipment
L
(13)Long-term debt
A
(14)Inventories
E
(15)Interest expense
E1–3.
L
(1)Bank loans
A
(10)Machinery and equipment
E
(2)Selling, marketing and
administrative expenses
R
(11)Net product sales
L
(3)Accounts payable
A
(12)Inventories
L
(4)Dividends payable
A
(13)Trademarks
(5)Retained earnings
A
(6)Cash and cash equivalents
A
(15)Land
(7)Accounts receivable
(16)Income taxes payable
(8)Provision for income taxes*
E
(17)Rental and royalty costs
(9)Product cost of goods sold
A
(18)Investments (in other companies)
Financial Accounting, 9/e 1-9
E1–4.
Honda Motor Corporation
Balance Sheet
as of March 31, Current Year
(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
¥ 3,568
Long-term debt
2,043
Other liabilities
1,377
Total liabilities
6,988
Common stock
259
Retained earnings
4,324
4,583
¥11,571
E1–5.
Req. 1
NEW WORLD BOOK STORE
Balance Sheet
At December 31, Current Year
ASSETS
LIABILITIES
Cash
$75,600
Accounts payable
$12,000
Accounts receivable
Note payable
Store and office equipment
Interest payable
Total liabilities
STOCKHOLDERS’ EQUITY
Common stock
160,000
Retained earnings
12,300
Total stockholders’ equity
172,300
Total assets
$187,600
Total liabilities and
stockholders’ equity
$187,600
E1–6.
CAMPUS CONNECTION
Income Statement
For the Month of January Current Year
Revenues:
Sales: Cash $150,000
On credit 2,500
Financial Accounting, 9/e 1-11
E1–7.
WALGREEN CO.
Income Statement
For the Year ended August 31, Current Year
(in millions)
Revenues:
Net sales
$72,184
Other Income
434
Total revenues/ income
$72,618
Expenses:
E1–8.
NEIGHBORHOOD REALTY, INCORPORATED
Income Statement
For the Year Ended December 31, Current Year
Revenues:
Commissions earned ($150,900+$16,800) $167,700
Rental service fees 20,000
Total revenues $187,700
Pretax income 74,580
Income tax expense 24,400
Net Income $50,180
*$2,475 has been paid for 11 months ($225 per month) plus $225 owed for December.
Cost of sales
Interest Expense
Total expenses
Pretax income
Income tax expense
Net earnings
E1–9.
Net Income (or Loss) = Revenues – Expenses
Assets = Liabilities + Stockholders’ Equity
A Net Income = $93,500 – $76,940 = $16,560;
Stockholders’ Equity = $140,200 – $66,500 = $73,700.
E1–10.
Net Income (or Loss) = Revenues – Expenses
Assets = Liabilities + Stockholders’ Equity
A Net Income = $242,300 – $196,700 = $45,600;
Stockholders’ Equity = $253,500 – $75,000 = $178,500.
B Total Revenues = $176,500 + $29,920 = $206,420;
Total Liabilities = $590,000 – $350,600 = $239,400.
Financial Accounting, 9/e 1-13
E1–11.
PAINTER CORPORATION
Income Statement
For the Month of January Current Year
Total revenues $305,000
PAINTER CORPORATION
Balance Sheet
At January 31, Current Year
Assets
Cash $ 65,150
Receivables from customers 44,700
Merchandise inventory 94,500
Total assets $204,350
E1–12.
CLAY CORPORATION
Income Statement
For the Year Ended December 31, Current Year
Total revenues $299,000
Less: Total expenses (excluding income tax) 184,000
CLAY CORPORATION
Balance Sheet
At December 31, Current Year
Assets:
Cash $70,150
Receivables from customers 34,500
Merchandise inventory 96,600
Total assets $201,250
Financial Accounting, 9/e 1-15
E1–13.
CLINT’S STONEWORK CORPORATION
Statement of Stockholders’ Equity
For the Year Ended December 31, 2016
Common Stock Retained Earnings
Balance December 31, 2015* $100,000 $16,800
Net income 42,000
E1–14.
(I)
(1)Purchases of property, plant, and equipment
(2)Cash received from customers
(3)Cash paid for dividends to stockholders
(4)Cash paid to suppliers
(5)Income taxes paid
(6)Cash paid to employees
(7)Cash proceeds received from sale of investment in another company
(8)Repayment of borrowings
1-16 Solutions Manual
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, Current Year
Req. 2
HIGHLIGHT CONSTRUCTION COMPANY
Statement of Stockholders’ Equity
For the Year Ended December 31, Current Year
Common Stock Retained Earnings
Balance January 1, Current year $ 0 $ 0
Req. 3
HIGHLIGHT CONSTRUCTION COMPANY
Balance Sheet
At December 31, Current Year
Assets
Cash (given) $25,600
Receivables from customers (given) 10,800
Inventory of merchandise (given) 81,000