Skip to content
Textbook Guides

Solution Manual for Financial Accounting, 5th Edition

Solution Manual for Financial Accounting, 5th Edition is your ideal study partner, offering concise textbook guides.

Preview 16 of 920 pages

See the first 16 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 1 Chapter 1 A Framework for Financial A ccounting REVIEW QUESTIONS Question 1 - 1 (LO 1 - 1) Accounting is the language of business. Whereas a basic math class might involve adding, subtracting, and solving for unknown variables, accounting involves learning to measure business transactions and communicat ing those measurements in a format that is generally understood by decision makers. Question 1 - 2 (LO 1 - 1) Those interested in making decisions about a company include i nvestors , creditors , customers , suppliers , managers , employees , competitors , regulators , tax authorities , and local communit ies . Question 1 - 3 (LO 1 - 1) Financial accounting seeks to measure business activities of a company and to communicate those measurements to external parties for decision - making purposes. The two primary external, or outside the firm, users of financial accounting information are investors and creditors. Managerial accounting deals with the methods accountants use to provide information to an organization’s internal users, that is, its own managers. Question 1 - 4 (LO 1 - 1) The two primary functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors for decision - making purposes. Question 1 - 5 (LO 1 - 2) The three basic business activities are financing, investing, and operating activities. Financing activities are transactions that raise cash needed to operate the business. Investing activities typically include the purchase or disposal of long - term resources such as land, buildings, equipment, and machinery. Operating activities include the primary operations of the company , providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance. Question 1 - 6 (LO 1 - 2) Typical financing activities would include selling stock and paying dividends to investors, as well as borrowing and repaying debt to creditors. Question 1 - 7 (LO 1 - 2) Typical investing activities would include the purchase or disposal of land, casino buildings, hotels, gaming tables, chairs, cleaning equipment, and food preparation machines.

  2. Page 2
  3. Page 3
    Read page 3 as text

    Chapter 1 - A Framework for Financial Accounting 1 - 2 Financial Accounting, 5e Answers to Review Questions (continued) Question 1 - 8 (LO 1 - 2) Typical operating activities would include the sale of software and consulting services, as well as costs related to salaries, research, utilities, advertising, rent, and taxes. Question 1 - 9 (LO 1 - 2) The three major legal forms of business organizations include sole proprietorship, partnership, and corporation? A corporation is chosen by most of the largest companies in the United States. Question 1 - 10 (LO 1 - 2) Assets : Resources owned. Liabilities : Amounts owed. Stockholders’ equity : Owners’ claims to resources. Dividends : Distributions to stockholders. Revenues : S ales of products or services to customers . Expenses : Costs of selling products or services. 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 proprietorships or partnerships remain personally liable for activities of the business. Corporations have the disadvantages of double taxation compared to sole proprietorships and partnerships. S ole proprietorship and partnership forms of business is that income is taxed only once . However, there could be other tax advantages for certain types of corporations, such as a lower overall tax rate . Question 1 - 12 (LO 1 - 3) 1. Income statement : R eports the company’s revenues and expenses during a n interval of time . If revenues exceed expenses, then the company reports net income. If expenses exceed revenues, then the company reports a net loss. 2. Statement of stockholders’ equity : S ummarizes the changes in stockholders’ equity from net income, dividends, and stock issuances during an interval of time . 3. Balance sheet : P resents the financial position of the company on a particular date. It shows that assets equal liabilities plus stockholders’ equity. 4. Statement of cash flows : Cash activities related to operating, investing, and financing activities during an interval of time . Question 1 - 13 (LO 1 - 3) Balances of accounts reported in the income statement, statement of stockholders’ equity, and statement of cash flows reflect activity from the beginning of the period through the end of the period. Balances of accounts reported in the balance sheet reflect the financial position of the company as of a single date, the end of the period.

  4. Page 4
    Read page 4 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 3 Answers to Review Questions (continued) Question 1 - 14 (LO 1 - 3) Basic revenues would include sale of products (such as toys, dolls, and games) and services (such as theme park tickets). Expenses include cost of merchandise sold, employee salaries , utilities, advertising, taxes, interest, and legal fees. Question 1 - 15 (LO 1 - 3) The accounting equa tion is: Assets = Liabilities + Stockholders’ E quity. The format of the balance sheet follows the accounting equation. Question 1 - 16 (LO 1 - 3) Assets would include items such as merchandise inventory, office supplies, buildings, land, trucks, and equipment. Liabilities would include items such as amounts owed to employees, suppliers, taxing authorities, and lenders. Question 1 - 17 (LO 1 - 3) Retained earnings represent the cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends. Net income is shown in the income statement and retained earnings are reported in the balance sheet. Thus, retained earnings represent a balance sheet account which reflects the cumulative result of income statements over the life of the company (less any dividends). Question 1 - 18 (LO 1 - 3) The statement of cash flows reports operating, investing, and financing cash flows. Examples of each include: Operating – selling merchandise, paying employee salaries , and paying for advertisement. Investing – purchasing land and buildings to open new factories . Financing – Borrowing from lenders or issuing stock to owners to obtain funds necessary to expand operations. Question 1 - 19 (LO 1 - 3) Two other important sources of information are the (1) management discussion and analysis of the company’s activities and (2) note disclosures to the financial statements. Question 1 - 20 (LO 1 - 4) Successful companies use their resources efficiently to sell products and services for a profit. Unsuccessful companies either offer lower - quality products and services or do not efficiently keep their costs low. When a company is unprofitable, investors will neither invest in nor lend to the firm. Without these sources of financing, eventually the company will fail. When a company is able to make a profit, investors and creditors are willing to transfer their resources to it, and the company will expand its profitable operations even further. Investors and creditors rely heavily on financial accounting information in making investment and lending decisions.

  5. Page 5
    Read page 5 as text

    Chapter 1 - A Framework for Financial Accounting 1 - 4 Financial Accounting, 5e Answers to Review Questions (continued) Question 1 - 2 1 (LO 1 - 5) GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting. The fact that all companies use the same rules is critical to financial statement users , because it allows them to accurately compare financial information among companies when they are making decisions about where to lend or invest their resources . Question 1 - 2 2 (LO 1 - 5) The Financial Accounting Standards Board (FASB) is primarily responsible for the establishment of GAAP in the United States. The International Accounting Standards Board (IASB) serves this function on an international basis. Question 1 - 23 (LO 1 - 5) U.S. GAAP refers to the set of accounting standards being developed in the United States by the Financial Accounting Standards Board (FASB). IFRS (International Financial Reporting Standards) refers to the set of accounting standards being developed by the International Accounting Standards Board (IASB ). The IASB promotes the use of IFRS around the world. Today, the IASB and FASB work closely in an effort to converge the two sets of accounting standards. Question 1 - 2 4 (LO 1 - 5) The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929 and the ensu ing Great Depression . T he SEC has the power to require companies with publicly traded securities to prepare periodic financial statements for distribution to investors and creditors. 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 to express a professional opinion of the conformity of that company’s financial statements with GAAP . A uditor s play a major role in investors’ and creditors’ decisions by add ing credibility to the financial statements . Question 1 - 26 (LO 1 - 5) The three objectives of financial reporting are providing information that : 1. is u seful to investors and creditors in making decisions. 2. helps to predict cash flows . 3. tells a bout economic resources, claims to resources, and changes in resources and claims .

  6. Page 6
    Read page 6 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 5 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 demand, and high salaries. Public accounting firms are professional service firms that traditionally have focused on three areas: auditing, tax preparation/planning, and business consulting. Private accounting means providing accounting services to the company that employs you. Traditional careers include auditor, tax preparer, consultant, and basic accounting services. Accountants are now expanding to work as financial analysts, forensic accountants, tax lawyers, FBI agents, and many others. Question 1 - 28 (LO 1 - 7) Relevance and faithful representation are the two fundamental qualitative characteristics. Relevance implies that information is useful to the decision at hand. Faithful representation indicates that information accurately represents the underlying activity. Question 1 - 2 9 (LO 1 - 7) The three c o mponents /aspects of relevance include: 1. Predictive value – Information is useful in helping to forecast future outcomes. 2. Confirmatory value – I nformation provides feedback on past activities. 3. Materiality – The nature or amount of an item has the ability to affect decisions. The three components /aspects of faithful representation include: 1. Completeness – All information necessary to describe an item is reported. 2. Verifiability – Measurements that independent parties would agree upon . 3 . Free from error – Reported amounts reflect the best available information . Question 1 - 30 (LO 1 - 7) Cost effectiveness refer s to practical boundaries (constraints) to achieving desired qualitative characteristics . Cost effectiveness suggests that financial accounting information is provided only when the benefits of doing so exceed the costs. Question 1 - 3 1 (LO 1 - 7) The four basic assumptions underlying GAAP include: 1. Economic e ntity a ssumption – A ll economic events can be identified with a particular economic entity. 2. Monetary u nit a ssumption - A common denominator is needed to measure all elements. The dollar in the United States is the most appropriate common denominator to express information about financial statement elements and changes in those elements. 3. Periodicity a ssumption – T he economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for financial reporting. 4. Going c oncern a ssumption – I n the absence of information to the contrary, it is anticipated that a business entity will continue to operate indefinitely.

  7. Page 7
    Read page 7 as text

    Chapter 1 - A Framework for Financial Accounting 1 - 6 Financial Accounting, 5e BRIEF EX E RCISES Brief Exercise 1 - 1 (LO 1 - 1 ) 1. True 2. True 3. False Brief Exercise 1 - 2 (LO 1 - 2) 1. b. 2. c. 3. a. Brief Exercise 1 - 3 (LO 1 - 2) 1. c. 2. a. 3. b. Brief Exercise 1 - 4 (LO 1 - 2) 1. e . 2. f . 3. b. 4. c. 5. a. 6. d.

  8. Page 8
    Read page 8 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 7 Brief Exercise 1 - 5 (LO 1 - 2 ) 1. e. 2. d . 3. f . 4. a . 5. b . Brief Exercise 1 - 6 (LO 1 - 2) 1. b . 2. a . 3. e . 4. c . 5. d . Brief Exercise 1 - 7 (LO 1 - 3) 1. b. 2. a. 3. d. 4. c. B rief Exercise 1 - 8 (LO 1 - 3) 1. c. 2. a. 3. d . 4. b .

  9. Page 9
    Read page 9 as text

    Chapter 1 - A Framework for Financial Accounting 1 - 8 Financial Accounting, 5e Brief Exercise 1 - 9 (LO 1 - 5) 1. b. 2. d. 3. a. 4. c. Brief Exercise 1 - 10 (LO 1 - 5) 1. Yes. 2. No. 3. Yes. 4. No. 5. Yes. 6. No.

  10. Page 10
    Read page 10 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 9 Brief Exercise 1 - 11 (LO 1 - 6) 1. True 2. True 3. True 4. True 5. True 6. True 7. True 8. True 9. True 10. True 11. True 12. True Brief Exercise 1 - 1 2 (LO 1 - 7) 1. b . 2. a. 3. c. Brief Exercise 1 - 1 3 (LO 1 - 7) 1. c. 2. b. 3. a.

  11. Page 11
    Read page 11 as text

    Chapter 1 - A Framework for Financial Accounting 1 - 10 Financial Accounting, 5e EXERCISES E xercise 1 - 1 (LO 1 - 2) 1. a . 2. c . 3. a . 4. b . 5. c . 6. a . 7. b. Exercise 1 - 2 (LO 1 - 2) Transaction Financial Statement Account Activity 1. Falcon purchases common stock of Wildcat . Balance sheet Asset Investing 2. Falcon borrows from Wildcat by signing a note. Balance sheet Liability Financing 3 . Falcon provides services to Wildcat . Income statement Revenue Operating 4 . Falcon pays interest to Wildcat on borrowing. Income statement Expense Operating Exercise 1 - 3 (LO 1 - 2) Transaction Financial Statement Account Activity 1. Wildcat issues common stock to Falcon . Balance sheet Equity Financing 2. Wildcat lends to Falcon by accepting a note. Balance sheet Asset Investing 3 . Wildcat receives services from Falcon . Income statement Expense Operating 4 . Wildcat receives interest from Falcon on lending . Income statement Revenue Operating

  12. Page 12
    Read page 12 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 11 Exercise 1 - 4 (LO 1 - 2) Requirement 1 Revenues − Expenses = Net Income $1 4 ,000 − $ 9 ,000 = $ 5 ,000 Requirement 2 Assets = Liabilities + Stockholders’ equity $ 5 0,000 = $2 7 ,000 + $X $ 5 0,000 − $2 7 ,000 = $ 23 ,000 Exercise 1 - 5 (LO 1 - 2) Requirement 1 Revenues − Expenses = Net Loss $ 28 ,000 − $ 33 ,000 = ( $ 5 ,000 ) Requirement 2 Assets = Liabilities + Stockholders’ equity $ 19 ,000 = $1 5 ,000 + $X $1 9 ,000 − $1 5 ,000 = $ 4 ,000

  13. Page 13
    Read page 13 as text

    Chapter 1 - A Framework for Financial Accounting 1 - 12 Financial Accounting, 5e Exercise 1 - 6 (LO 1 - 3) Cowboy Law Firm Income Statement For the p eriod ended December 31 Service revenue $ 9 ,300 Expenses: Salaries 2 , 2 00 Utilities 1, 2 00 Total expenses 3 , 4 00 Net income $5, 9 00 Exercise 1 - 7 (LO 1 - 3) Buffalo Drilling Statement of Stockholders’ Equity For the year ended December 31 Common Stock Retained Earnings Total Stockholders’ Equity Beginning b alance , Jan. 1 $1 1 ,000 $ 8 ,200 $1 9 ,200 Issuance of common stock 8 ,000 8 ,000 Add: Net income 8 ,500 8 ,500 Less: Dividends ( 3 ,200) ( 3 ,200) Ending b alance , Dec. 31 $ 19 ,000 $ 13 ,500 $ 32 ,500

  14. Page 14
    Read page 14 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 13 Exercise 1 - 8 (LO 1 - 3) Wolfpack Construction Balance Sheet December 31 Assets Liabilities Cash $ 6 ,000 Accounts payable $ 3 ,000 Land 1 8 ,000 Notes payable 20 ,000 Equipment 2 6 ,000 Total liabilities 23 , 0 00 Stockholders’ Equity Common stock 1 1 ,000 Retained earnings 1 6 ,000 * Total stockholders’ equity 27 ,000 Total liabilities and stockholders’ equity $ 50 ,000 Total assets $ 50 , 0 00 * Assets = Liabilities + Stockholders’ equity $ 50 ,000 = $ 23 ,000 + ($ 11 ,000 + Retain ed earnings) $ 50 ,000 − $ 23 ,000 − $ 11 ,000 = Retained earnings $1 6 ,000 = Retained earnings

  15. Page 15
    Read page 15 as text

    Chapter 1 - A Framework for Financial Accounting 1 - 14 Financial Accounting, 5e 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 4 5 ,000 Cash paid to purchase factory equipment ( 50 ,000) Cash paid to merchandise suppliers ( 1 2 ,000) Cash received from the sale of an unused warehouse 1 3 ,000 Cash paid to workers (2 4 ,000) Cash paid for advertisement ( 4 ,000) Cash received for sale of services to customers 30 ,000 Cash paid for dividends to stockholders ( 6 ,000) Ending balance $ 37 ,000 Requirement 2 Tiger Trade St atement of Cash Flows Cash Flows from Operating Activities Cash inflows: From sale of products to customers $ 40 ,000 From sale of services to customers 30 ,000 Cash outflows: For merchandise suppliers ( 1 2 ,000) For workers (2 4 ,000) For advertisement ( 4 ,000) Net cash flows from operating activities $ 30 ,000 Cash Flows from Investing Activities Purchase factory equipment ( 50 ,000) Sale of warehouse 1 3 ,000 Net cash flows from investing activities ( 37 ,000) Cash Flows from Financing Activities Borrow from bank 4 5 ,000 Pay dividends ( 6 ,000) Net cash flows from financing activities 3 9 ,000 Net increase in cash 32 ,000 Cash at the beginning of the year 5 ,000 Cash at the end of the year $ 37 ,000

  16. Page 16
    Read page 16 as text

    Chapter 1 - A Framework for Financial Accounting Solutions Manual, Chapter 1 1 - 15 Exercise 1 - 10 (LO 1 - 3) Requirement 1 Fighting Okra Cooking Services Income Statement For the year ended December 31, 2021 Service revenue $ 75 , 0 00 Expenses: Salaries $24 , 0 00 Supplies 14,500 Rent 10,600 Legal f ees 2,400 Postage 1, 5 00 Total expenses 53 , 0 00 Net income $22,000 Requirement 2 Fighting Okra Cooking Services Statement of Stockholders’ Equity For the year ended December 31, 2021 Common Stock Retained Earnings Total Stockholders’ Equity Beginning b alance $ 200 ,000 $ 32 , 0 00 $ 232 , 0 00 Issuance of common stock 25 ,000 25 ,000 Add: Net income 22,000 22 , 0 00 Less: Dividends ( 10 , 0 00) ( 10 , 0 00) Ending b alance $225 ,000 $ 44 , 0 00 $ 269 , 0 00

904 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Accounting study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.