Solution Manual for Horngren’s Financial & Managerial Accounting, The Financial Chapters, 7th Edition by Tracie Miller-Nobles, Brenda Mattison Chapter 1-15

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Solution Manual for
Horngren’s Financial & Managerial Accounting The Financial
Chapters, 7th edition Tracie Miller-Nobles, Brenda Mattison
Chapter 1-15
Chapter 1
Accounting and the Business Environment
Review Questions

1. What is accounting?
   Accounting is the information system that measures business activities, processes the information
   into reports, and communicates the results to decision makers. Accounting is the language of
   business.
2. Briefly describe the two major fields of accounting.
   Financial accounting provides information for external decision makers, such as outside investors,
   lenders, customers, and the federal government. Managerial accounting focuses on information for
   internal decision makers, such as the company’s managers and employees.
3. Describe the various types of individuals who use accounting information and how they use that
   information to make important decisions.
   Individuals use accounting information to help them manage their money, evaluate a new job, and
   better decide whether they can afford to make a new purchase. Business owners use accounting
   information to set goals, measure progress toward those goals, and make adjustments when needed.
   Investors use accounting information to help them decide whether or not a company is a good
   investment and once they have invested, they use a company’s financial statements to analyze how
   their investment is performing. Creditors use accounting information to decide whether to lend
   money to a business and to evaluate a company’s ability to make the loan payments. Taxing
   authorities use accounting information to calculate the amount of income tax that a company has to
   pay.
4. What are the various certifications available for accountants? Breifly explain each certification.
   Certified Public Accountants (CPAs) are licensed professional accountants who serve the general
   public. They work for public accounting firms, businesses, government, or educational institutions.
   A Chartered Global Management Accountant (CGMA) is an accountant who has advanced
   knowledge in finance, operations, strategy, and management. Certified Management Accountants
   (CMAs) specialize in accounting and financial management knowledge. They work for a single
   company. Certified Financial Planners (CFPs) work with individuals to help them budget, plan for
   retirement, save for education, and manage their finances.

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5. What is the role of the Financial Accounting Standards Board (FASB)?
   The FASB oversees the creation and governance of accounting standards. They work with
   governmental regulatory agencies, congressionally created groups, and private groups.
6. Explain the purpose of Generally Accepted Accounting Principles (GAAP), including the
   organization currently responsible for the creation and governance fo these standards.
   The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule
   book and is currently created and governed by the FASB. Investors and lenders must have
   information that is relevant and has faithful representation in order to make decisions and GAAP
   provides the framework for this financial reporting.
7. Describe the similarities and differences among the four different types of business entities discussed
   in the chapter.
   A sole proprietorship has a single owner, terminates upon the owner’s death or choice, the owner has
   personal liability for the business’s debts, and it is not a separate tax entity. A partnership has two or
   more owners, terminates at partner’s choice or death, the partners have personal liability, and it is
   not a separate tax entity. A corporation is a separate legal entity, has one or more owners, has
   indefinite life, the stockholders are not personally liable for the business’s debts, and it is a separate
   tax entity. A limited-liability company has one or more members and each is only liable for his or
   her own actions, has an indefinite life, and is not a separate tax entity.
8. A business purchases an acre of land for $5,000. The current market value is $5,500, and the land
   was assessed for property tax purposes at $5,250. What value should the land be recorded at, and
   which accounting principle supports your answer?
   The land should be recorded at $5,000. The cost principle states that assets should be recorded at
   their historical cost.
9. What does the going concern assumption mean for a business?
   The going concern assumption assumes that the entity will remain in business for the foreseeable
   future and long enough to use existing resources for their intended purpose.
10. Which concept states that accounting information should be complete, neutral, and free from
    material error?
    The faithful representation concept states that accounting information should be complete, neutral,
    and free from material error.
11. Financial statements in the United States are reported in U.S. dollars. What assumption supports this
    statement?
    The monetary unit assumption states that items on the financial statements should be measured in
    terms of a monetary unit.
12. Explain the role of the International Accounting Standards Board (IASB) in relation to International

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Financial Reporting Standards (IFRS).
The IASB is the organization that develops and creates IFRS which are a set of global accounting
standards that would be used around the world.

13. What is the accounting equation? Briefly explain each of the three parts.
    Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the
    business in the future. They are things of value that a business owns or has control of. Liabilities
    are debts that are owed to creditors. They are one source of claims against assets. Equity is the
    other source of claims against assets. Equity is the stockholders’ claims against assets and is the
    amount of assets that is left over after the company has paid its liabilities. It represents the net worth
    of the corporation.
14. How does retained earnings increase? What are the two ways that retained earnings decreases?
    Retained earnings increases with revenues. Retained earnings decreases with expenses and
    dividends.
15. How is net income calculated? Define revenues and expenses.
    Revenues – Expenses = Net Income. Revenues are earnings resulting from delivering goods or
    services to customers. Expenses are the cost of selling goods or service.
16. What are the steps used when analyzing a business transaction?
    What Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases or
    decreases. Step 3: Determine if the accounting equation is in balance.
17. List the four financial statements. Briefly describe each statement.
    Income Statement – Shows the difference between an entity’s revenues and expenses and reports the
    net income or net loss for a specific period.
    Statement of Retained Earnings – Shows the changes in retained earnings for a specific period
    including net income (loss) and dividends.
    Balance Sheet – Shows the assets, liabilities, and stockholders’ equity of the business as of a specific
    date.
    Statement of Cash Flows – Shows a business’s cash receipts and cash payments for a specific period.
18. What is the calculation for ROA? Explain what ROA measures.
    Return on Assets = Net income / Average total assets. ROA measures how profitably a company
    uses its assets.

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Short Exercises
S-F:1-1 Identifying users of accounting information
Learning Objective 1
For each user of accounting information, identify if the user would use financial accounting or
managerial accounting
a. investor e. controller
b. banker f. stockholder
c. IRS g. human resources director
d. manager of the business h. creditor
SOLUTION
a. FA e. MA
b. FA f. FA
c. FA g. MA
d. MA h. FA
S-F:1-2 Determining organizations that govern accounting
Learning Objective 2
Suppose you are starting a business, Wholly Shirts, to imprint logos on T-shirts. In organizing the
business and setting up its accounting records, you take your information to a CPA to prepare financial
statements for the bank. Name the organization that governs the majority of the guidelines that the CPA
will use to prepare financial statements for Wholly Shirts. What are those guidelines called?
SOLUTION
The Financial Accounting Standards Board governs the majority of guidelines, called Generally
Accepted Accounting Principles (GAAP), that the CPA will use to prepare financial statements for
Wholly Shirts.
S-F:1-3 Identifying types of business organizations
Learning Objective 2
Chloe Michaels plans on opening Chloe Michaels Floral Designs. She is considering the various types of
business organizations and wishes to organize her business with unlimited life and wants owners of the
business to not be held personally liable for the business’s debts. Additionally, Chloe wants the business
to be a separate taxable entity. Which type of business organization will meet Chloe’s needs best?
SOLUTION
Chloe’s needs will best be met by organizing a corporation since a corporation has an unlimited life and
is a separate tax entity. In addition, the owners (stockholders) have limited liability. Chloe could also