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Chapter 1 - A Framework for Financial Accounting
Chapter 1
A Framework for Financial Accounting
REVIEW QUESTIONS
Question 1-1 (LO 1-1)
Question 1-2 (LO 1-1)
Question 1-3 (LO 1-1)
Financial accounting seeks to measure business activities of a company and to communicate
Question 1-4 (LO 1-1)
Question 1-5 (LO 1-2)
The three basic business activities are financing, investing, and operating activities. Financing
Question 1-6 (LO 1-2)
Question 1-7 (LO 1-2)
Typical investing activities would include the purchase or disposal of land, casino buildings,
Chapter 1 - A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-8 (LO 1-2)
Question 1-9 (LO 1-2)
The three major legal forms of business organizations include sole proprietorship, partnership,
Question 1-10 (LO 1-2)
Assets: Resources owned.
Liabilities: Amounts owed.
Question 1-11 (LO 1-2)
The major advantage of a corporation is limited liability. Stockholders of a corporation are not
held personally responsible for the financial obligations of the corporation. Owners of sole
Question 1-12 (LO 1-3)
1. Income statement: Reports the company’s revenues and expenses during an interval of time.
If revenues exceed expenses, then the company reports net income. If expenses exceed
Question 1-13 (LO 1-3)
Balances of accounts reported in the income statement, statement of stockholders’ equity, and
Chapter 1 - A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-14 (LO 1-3)
Question 1-15 (LO 1-3)
Question 1-16 (LO 1-3)
Question 1-17 (LO 1-3)
Retained earnings represent the cumulative amount of net income earned over the life of the
Question 1-18 (LO 1-3)
The statement of cash flows reports operating, investing, and financing cash flows. Examples of
Question 1-19 (LO 1-3)
Question 1-20 (LO 1-4)
Successful companies use their resources efficiently to sell products and services for a profit.
Chapter 1 - A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-21 (LO 1-5)
GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting.
Question 1-22 (LO 1-5)
Question 1-23 (LO 1-5)
U.S. GAAP refers to the set of accounting standards being developed in the United States by the
Question 1-24 (LO 1-5)
The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor
Question 1-25 (LO 1-5)
The role of auditors is to help ensure that management has in fact appropriately applied GAAP in
preparing the company’s financial statements. They are hired by a company as an independent party
Question 1-26 (LO 1-5)
The three objectives of financial reporting are providing information that:
Chapter 1 - A Framework for Financial Accounting
Answers to Review Questions (continued)
Question 1-27 (LO 1-6)
The benefits to obtaining a degree in accounting include a wide variety of job opportunities, high
Question 1-28 (LO 1-7)
Question 1-29 (LO 1-7)
The three components/aspects of relevance include:
The three components/aspects of faithful representation include:
Question 1-30 (LO 1-7)
Cost effectiveness and materiality refer to practical boundaries (constraints) to achieving desired
Question 1-31 (LO 1-7)
The four basic assumptions underlying GAAP include:
1. Economic entity assumption – All economic events can be identified with a particular
Chapter 1 - A Framework for Financial Accounting
BRIEF EXERCISES
Brief Exercise 1-1 (LO 1-1)
1.
True
Brief Exercise 1-2 (LO 1-2)
Brief Exercise 1-3 (LO 1-2)
Brief Exercise 1-4 (LO 1-2)
1.
e.
Brief Exercise 1-5 (LO 1-2)
Brief Exercise 1-6 (LO 1-2)
Brief Exercise 1-7 (LO 1-3)
Brief Exercise 1-8 (LO 1-3)
Brief Exercise 1-9 (LO 1-5)
Brief Exercise 1-10 (LO 1-5)
Chapter 1 - A Framework for Financial Accounting
Brief Exercise 1-11 (LO 1-6)
1.
True
2.
True
Brief Exercise 1-12 (LO 1-7)
Brief Exercise 1-13 (LO 1-7)
Chapter 1 - A Framework for Financial Accounting
EXERCISES
Exercise 1-1 (LO 1-2)
Exercise 1-2 (LO 1-2)
Transaction
Account
Activity
Exercise 1-3 (LO 1-2)
Transaction
Account
Activity
Chapter 1 - A Framework for Financial Accounting
Exercise 1-4 (LO 1-2)
Requirement 1
Requirement 2
Assets
=
Liabilities
+
Stockholders’
equity
Exercise 1-5 (LO 1-2)
Requirement 1
Revenues
−
Expenses
=
Net Loss
Requirement 2
Assets
=
Liabilities
+
Stockholders’
equity
Exercise 1-6 (LO 1-3)
Cowboy Law Firm
Income Statement
Service revenue
$9,300
Expenses:
Exercise 1-7 (LO 1-3)
Buffalo Drilling
Statement of Stockholders’ Equity
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Exercise 1-8 (LO 1-3)
Wolfpack Construction
Balance Sheet
Assets
Liabilities
Cash
$ 6,000
Accounts payable
$ 3,000
Stockholders’ Equity
Common stock
11,000
Exercise 1-9 (LO 1-3)
Requirement 1
Beginning balance
$ 5,000
Cash received from sale of products to customers
40,000
Requirement 2
Tiger Trade
Statement of Cash Flows
Cash Flows from Operating Activities
Cash inflows:
From sale of products to customers
$40,000
Cash Flows from Financing Activities
Chapter 1 - A Framework for Financial Accounting
Exercise 1-10 (LO 1-3)
Requirement 1
Fighting Okra Cooking Services
Income Statement
Service revenue
$75,000
Requirement 2
Fighting Okra Cooking Services
Statement of Stockholders’ Equity
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Exercise 1-11 (LO 1-3)
Requirement 1
Artichoke Academy
Statement of Stockholders’ Equity
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Beginning balance
$150,000
$50,000
$200,000
Requirement 2
Artichoke Academy
Balance Sheet
Assets
Liabilities
Cash
$52,600
Accounts payable
$ 9,100
Stockholders’ Equity
Common stock
190,000
Exercise 1-12 (LO 1-3)
Requirement 1
Squirrel Tree Services
Balance Sheet
Assets
Liabilities
Stockholders’ Equity
Requirement 2
Squirrel Tree Services
Statement of Cash Flows
Cash Flows from Operating Activities
Cash inflows from customers
$ 60,000
Cash Flows from Financing Activities
Exercise 1-13 (LO 1-3)
1.
Revenues
−
Expenses
=
Net Income
2.
Change in
stockholders’
equity
=
Issue common
stock
+
Net
Income
−
Dividends
3.
Assets
=
Liabilities
+
Stockholders’
equity
4.
Total change
in cash
=
Operating
cash flows
+
Investing
cash flows
+
Financing
cash flows
Exercise 1-14 (LO 1-3)
Year
Net
Income
Dividends
Retained
Earnings*
Exercise 1-15 (LO 1-3)
($ in billions)
Change in
retained
earnings
=
Net income
−
Dividends
1.
Change in
retained
earnings
=
Net income
−
Dividends
2.
Change in
retained
earnings
=
Net income
−
Dividends
3.
Change in
retained
=
Net income
−
Dividends
4.
Change in
retained
=
Net
income
−
Dividends
5.
Change in
retained
=
Net
income
−
Dividends
Exercise 1-16 (LO 1-3)
($ in billions)
Assets
=
Liabilities
+
Stockholders
’ equity
1.
Assets
=
Liabilities
+
Stockholders’
equity
2.
Assets
=
Liabilities
+
Stockholders’
equity
3.
Assets
=
Liabilities
+
Stockholders’
equity
4.
Change in
assets
=
Change in
liabilities
+
Change in
stockholders’
equity
5.
Change in
assets
=
Change in
liabilities
+
Change in
stockholders’
equity
