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
2.
True
3.
False
Brief Exercise 1-2 (LO 1-2)
1.
b.
2.
3.
Brief Exercise 1-3 (LO 1-2)
1.
2.
3.
b.
Brief Exercise 1-4 (LO 1-2)
1.
e.
2.
f.
3.
b.
4.
5.
6.
d.
Brief Exercise 1-5 (LO 1-2)
1.
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
3.
True
4.
5.
True
6.
True
7.
True
8.
True
9.
True
10.
True
11.
True
12.
True
Brief Exercise 1-12 (LO 1-7)
1.
2.
3.
Brief Exercise 1-13 (LO 1-7)
1.
2.
b.
3.
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
Revenues
−
Expenses
=
−
=
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:
Net income
Exercise 1-7 (LO 1-3)
Buffalo Drilling
Statement of Stockholders’ Equity
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
8,000
8,500
Exercise 1-8 (LO 1-3)
Wolfpack Construction
Balance Sheet
Assets
Liabilities
Cash
$ 6,000
Accounts payable
$ 3,000
Equipment
Total liabilities
Stockholders’ Equity
Common stock
11,000
Total stockholders’ equity
Exercise 1-9 (LO 1-3)
Requirement 1
Beginning balance
$ 5,000
Cash received from sale of products to customers
40,000
Cash received from the bank for long-term loan
Cash paid to purchase factory equipment
Cash paid to merchandise suppliers
Cash received from the sale of an unused warehouse
Cash paid to workers
Cash received for sale of services to customers
Cash paid for dividends to stockholders
Ending balance
Requirement 2
Tiger Trade
Statement of Cash Flows
Cash Flows from Operating Activities
Cash inflows:
From sale of products to customers
$40,000
Cash outflows:
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Net increase in cash
Cash at the beginning of the year
Cash at the end of the year
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
Ending balance
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
Issuance of common stock
Add: Net income
Less: Dividends
Ending balance
$260,000
Requirement 2
Artichoke Academy
Balance Sheet
Assets
Liabilities
Cash
$52,600
Accounts payable
$ 9,100
Supplies
Utilities payable
Prepaid rent
Salaries payable
Land
Notes payable
Total liabilities
Stockholders’ Equity
Common stock
190,000
260,000
Total assets
$290,000
Exercise 1-12 (LO 1-3)
Requirement 1
Squirrel Tree Services
Balance Sheet
Assets
Liabilities
Total liabilities
Stockholders’ Equity
Total stockholders’ equity
Total assets
Requirement 2
Squirrel Tree Services
Statement of Cash Flows
Cash Flows from Operating Activities
Cash inflows from customers
$ 60,000
Cash outflows for salaries
Cash outflows for supplies
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Net decrease in cash
Cash at the beginning of the year*
Cash at the end of the year
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*
$1,700
Exercise 1-15 (LO 1-3)
($ 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.
earnings
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
$4.7
4.
Change in
assets
=
Change in
liabilities
+
Change in
stockholders’
equity
5.
Change in
assets
=
Change in
liabilities
+
Change in
stockholders’
equity