ACCT1021 Chapter Notes - Chapter 1: Deloitte, Common Stock, Certified Public Accountant

59 views33 pages
Chapter 01 - Financial Statements and Business Decisions
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
related disclosures for external decision makers. Managerial accounting involves
the preparation of detailed plans, budgets, forecasts, and performance reports for
internal decision makers.
3. Financial reports are used by both internal and external groups and individuals. The
internal groups are comprised of the various managers of the entity. The external
groups include the owners, investors, creditors, governmental agencies, other
interested parties, and the public at large.
4. Investors purchase all or part of a business and hope to gain by receiving part of
what the company earns and/or selling the company in the future at a higher price
than they paid. Creditors lend money to a company for a specific length of time and
hope to gain by charging interest on the loan.
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.
Typical accounting entities are a business, a church, a governmental unit, a
university and other nonprofit organizations such as a hospital and a welfare
organization. A business typically is defined and treated as a separate entity
because the owners, creditors, investors, and other interested parties need to
evaluate its performance and its potential separately from other entities and from its
owners.
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
Financial Accounting, 8/e 1- 1
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website,
in whole or part.
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 33 pages and 3 million more documents.

Already have an account? Log in
Chapter 01 - Financial Statements and Business Decisions
7. The heading of each of the four required financial statements should include the
following:
(a) Name of the entity
(b) Name of the statement
(c) Date of the statement, or the period of time
(d) Unit of measure
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
at a given date, that is, to report information about the assets, obligations and
stockholders’ equity of the entity as of a specific date.
(c) The purpose of the statement of cash flows is to present information about the
flow of cash into the entity (sources), the flow of cash out of the entity (uses),
and the net increase or decrease in cash during the period.
(d) The statement of stockholders’ equity reports the changes in each of the
company’s stockholders’ equity accounts during the accounting period
including issue and repurchase of stock and the way that net income and
distribution of dividends affected the retained earnings of the company during
that period.
9. The income statement and the statement of cash flows are dated “For the Year
Ended December 31, 2013,” because they report the inflows and outflows of
resources during a period of time. In contrast, the balance sheet is dated “At
December 31, 2013,” 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
are also important because they could be sold for cash in the event the company
goes out of business. Liabilities are important to creditors and investors because
the company must be able to generate sufficient cash from operations or further
borrowing to meet the payments required by debt agreements. If a business does
not pay its creditors, the law may give the creditors the right to force the sale of
assets sufficient to meet their claims.
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
Net Loss if the amount is negative). Thus, the three major items reported on the
income statement are (1) revenues, (2) expenses, and (3) net income.
1- 2 Solutions Manual
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website,
in whole or part.
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 33 pages and 3 million more documents.

Already have an account? Log in
Chapter 01 - Financial Statements and Business Decisions
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
are the resources owned by the business at a given point in time such as cash,
receivables, inventory, machinery, buildings, land, and patents. Liabilities are
probable (expected) debts or obligations of the entity as a result of past
transactions which will be paid with assets or services in the future. They are the
obligations of the entity such as accounts payable, notes payable, and bonds
payable. Stockholders’ equity is financing provided by owners of the business and
operations. It is the claim of the owners to the assets of the business after the
creditor claims have been satisfied. It may be thought of as the residual interest
because it represents assets minus liabilities.
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
operating activities are cash flows directly related to earning income (normal
business activity including interest paid and income taxes paid). Cash flows from
investing activities include cash flows that are related to the acquisition or sale of
productive assets used by the company. Cash flows from financing activities are
directly related to the financing of the enterprise itself.
15. The retained earnings equation is: Beginning Retained Earnings + Net Income -
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year
Retained Earnings which is the prior year’s ending retained earnings reported on
the balance sheet. The current year's Net Income reported on the income
statement is added and the current year's Dividends are subtracted from this
amount. The ending Retained Earnings amount is reported on the end-of-period
balance sheet.
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
stockholders and the measurement rules used in producing those statements. The
Financial Accounting Standards Board (FASB) is the private sector body given the
primary responsibility to work out the detailed rules which become generally
accepted accounting principles.
Financial Accounting, 8/e 1- 3
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for
sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website,
in whole or part.
Unlock document

This preview shows pages 1-3 of the document.
Unlock all 33 pages and 3 million more documents.

Already have an account? Log in

Get access

Grade+
$10 USD/m
Billed $120 USD annually
Homework Help
Class Notes
Textbook Notes
40 Verified Answers
Study Guides
Booster Classes
Class+
$8 USD/m
Billed $96 USD annually
Homework Help
Class Notes
Textbook Notes
30 Verified Answers
Study Guides
Booster Classes