Chapter 1
Financial Statements and Business Decisions
ANSWERS TO QUESTIONS
1. Accounting is a system that collects and processes (analyzes, measures, and
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
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 an 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
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
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
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
20. A CPA firm normally renders three services: auditing, management advisory
services, and tax services. Auditing involves examination of the records and
financial reports to determine whether they “fairly present” the financial position and
ANSWERS TO MULTIPLE CHOICE
1. b)
2. d)
3. d)
4. c)
5. a)
6. d)
7. a)
8. a)
9. c)
Financial Accounting, 10/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.
1
5
1
12
1
45
1
45
1
20
2
5
2
12
2
45
2
45
2
30
3
5
3
12
3
45
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
10
25
1
45
11
30
12
30
13
15
14
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
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
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
(3)
Securities and Exchange Commission
(4)
FASB
Financial Accounting Standards Board
Financial Accounting, 10/e 1-7
EXERCISES
E1–1.
Term or Abbreviation Definition
J
F
(1)
(2)
SEC
Audit
A. A system that collects and processes financial
information about an organization and reports that
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.
E1–2.
A
(1) Accounts receivable
A
(2) Cash and cash equivalents
(3) Net sales
L
(4) Debt due within one year
L
(5) Taxes payable
(6) Retained earnings
(7) Cost of products sold
(8) Selling, general and administrative expense
(9) Income taxes
L
(10) Accounts payable
(11) Trademarks and other intangible assets
(12) Property, plant, and equipment
L
(13) Long-term debt
(14) Inventories
(15) Interest expense
E1–3.
L
(1) Bank loans
A
(10) Machinery and equipment
E
L
(3) Accounts payable
A
(12) Inventories
L
(4) Dividends payable
A
(13) Trademarks
(5) Retained earnings
A
(14) Buildings
(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)
(2) Selling, marketing and
R
(11) Net product sales
Financial Accounting, 10/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
¥ 2,106
Trade accounts, notes, and other receivables
Inventories
Investments
Net property, plant and equipment
Other assets
Liabilities
Accounts payable and other current liabilities
¥ 5,429
Long-term debt
Other liabilities
Total liabilities
Common stock
Retained earnings
E1–5.
Req. 1
COLE VALLEY 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
STOCKHOLDERS’ EQUITY
Common stock
Retained earnings
172,300
Total assets
Req. 2
Net income for the year was $12,300. This is the first year of operations and no
dividends were declared or paid to stockholders; therefore, the ending retained earnings
of $12,300 includes net income for one year.
E1–6.
CAMPUS CONNECTION
Income Statement
For the Month of January, Current Year
Revenues:
Sales: Cash $150,000
Financial Accounting, 10/e 1-11
E1–7.
SYSCO CORP.
Income Statement
For the Year ended June 30, Current Year
(in millions)
Revenues:
Sales
$55,371
Other revenues
16
Total revenues
$55,387
Expenses:
Cost of sales
Interest expense
Total expenses
Earnings before income taxes
Income taxes
Net earnings
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
Expenses
Salaries expense 62,740
E1–9.
Net Income (or Loss) = Revenues – Expenses
Assets = Liabilities + Stockholders’ Equity
A Net Income = $93,500 – $75,940 = $17,560;
Stockholders’ Equity = $140,200 – $56,500 = $83,700.
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.
Financial Accounting, 10/e 1-13
E1–11.
PAINTER CORPORATION
Income Statement
For the Month of January, Current Year
Total revenues $305,000
Less: Total expenses (excluding income tax) 189,000
PAINTER CORPORATION
Balance Sheet
At January 31, Current Year
Assets
Liabilities
Payables to suppliers $25,950
Stockholders’ Equity
Common stock 62,400
E1–12.
ANALYTICS CORPORATION
Income Statement
For the Year Ended December 31, Current Year
Total revenues $299,000
ANALYTICS CORPORATION
Balance Sheet
At December 31, Current Year
Assets
Cash $70,150
Stockholders’ equity
Common stock 59,800
Financial Accounting, 10/e 1-15
E1–13.
PLUMMER STONEWORK CORPORATION
Statement of Stockholders’ Equity
For the Year Ended December 31, 2018
Common Stock Retained Earnings
Balance December 31, 2017* $100,000 $16,800
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
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
Total sales revenue (given) $128,400
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
Liabilities
Accounts payable (given) $46,140
Salary payable (given) 2,520