Answers to Questions

Financial Accoun�ng v.

2.0 Joe Ben Hoyle Skender (Solu�ons Manual All Chapters, 100% Original Verified, A+ Grade)

Part 1: Page 1-443

Part 2: Page 444-742 1 / 4

Chapter 1 Solutions Answers to Questions 1)Financial accounting is the communication of information about a business or other type of organization (such as a charity or government) so that individuals and any other interested groups can evaluate its financial health and future prospects. Financial accounting provides data needed by decision makers to arrive at wise decisions about an organization as a whole 2)Financial accounting information is used to assess the financial health and future prospects of an organization. Therefore, this information is often analyzed by investors as part of the process of deciding whether to buy (or possibly sell) the capital (ownership) shares of a business. Strong financial results often lead to an increase in the market price of such shares and additional dividend distributions. Financial accounting information can also help determine whether an organization deserves to receive a loan or other forms of credit. If cash inflows seem adequate, a bank or creditor can hope to receive repayment of a loan or liability when due plus a reasonable rate of interest. Financial accounting helps such lenders judge the risk they are taking.3)Financial accounting encompasses all steps in the process of providing information to those outside of an organization so that they can make decisions about that entity when viewed as a whole. Financial accounting decisions are rather limited – should capital shares be bought or sold and should a loan or other credit be extended? Managerial accounting provides information for those inside of an organization so that they can make decisions on behalf of that organization. There are hundreds, if not thousands, of decisions that can be made using managerial accounting information. Should a new truck be bought with cash or by taking out a loan? Should employee pay raises this year be 3 percent or 4 percent? Should a new computer system be acquired immediately or in two years?4)Possible users of financial accounting information include potential and current shareholders, potential and current lenders and creditors, potential and current employees of the organization, governments, customers, contractors, and suppliers.5)Ligando and Zvyvco have been told that they should incorporate their new business.They need to understand the ramifications of that decision so they can make it appropriately.A corporation is a business or other organization that has been formally recognized by a state government as a separate legal entity. It has certain rights such as the right to sell stock to raise funds and the right to form contracts. Therefore, for example, a corporation can borrow money from a bank and not create a liability for its owners.Part 1 2 / 4

6) An unincorporated business with more than one owner is automatically labeled as a partnership. Partnerships have certain advantages. For example, they are simple to create, often requiring no more than a general understanding between the partners. In addition, as discussed later in the textbook, they provide certain income tax advantages.However, each partner has what is referred to as “unlimited liability.” In other words, each partner might be held liable for all debts and other obligations incurred by the business. There is no monetary limit to what that amount might be. In addition, because of unlimited liability, partnerships often have difficulty getting new owners unless the person can work as part of management to oversee operations and ensure that liabilities remain reasonable. Thus, partnerships rarely grow into large businesses.

7) In order to become a corporation, the owners of a business must apply to a state government for recognition. A business in the state of Missouri, for example, will probably incorporate according to the laws of Missouri although that does not always happen. Many larger companies incorporate in Delaware because of the simplicity of the process and because of favorable laws.

Articles of Incorporation and other required documentation are filed with the state to disclose specific information about such things as the capital stock to be issued and the line of business. Rules for incorporation vary by state. Information about forming a corporation in the state of Illinois can be found at the following Internet site. Most states have similar information available.

http://www.citmedialaw.org/legal-guide/illinois/forming-corporation-illinois

8) The owners of a business would want to become a corporation for several reasons.The corporation can issue capital shares to bring in money from new owners and help the business grow. In addition, the owners of a corporation are not faced with unlimited liability like the owners of a partnership or sole proprietorship.

9) The Board of Directors of a corporation is a representative group elected by the shareholders to oversee the management of the business. The Board reviews operating, financing, and investing activities and approval may be required for a number of actions. Future plans and other significant events might also require approval of the Board. The distribution of dividends can only be made through the authorization of the Board.

10) Waters probably hopes to make an investment because he believes that the stock price of the shares issued by the chosen organization (such as Walmart) will go up in value.He could then sell some or all of the shares and earn a profit. He might also believe that the corporation is in a strong financial position and will pay a large cash dividend in the future. Perhaps by studying the financial accounting information published by the business, he has come to believe that a good rate of return can be earned through stock price appreciation and/or through dividends. 3 / 4

11) An investor in a corporation’s capital stock is looking for the possibility of stock price appreciation and/or cash dividends. Thus, an investor hopes to find financial accounting information that indicates future growth or profitability that will cause the stock price to rise or put the business into a position where additional dividends are likely. A creditor or lender simply wants to be paid the amount owed when the debt comes due plus the required amount of interest. Therefore, a creditor or lender is interested in the business’s ability to generate adequate cash inflows in the future to satisfy debt requirements. Growth potential and profitability are only interesting to the creditor or lender in that they can affect the rate of future cash flows.

12) Financial information is data that can be measured in monetary terms.

13) A dividend is a distribution from a corporation to its shareholders from any profits earned by that business. Basically, the corporation earns a profit as a result of operations and then shares a portion with the owners of the company. Dividends can only be distributed by approval of a corporation’s board of directors. A dividend is a payment made to the owners of the capital stock of a corporation as a reward for investing in a business that proves to be profitable.

14) An annual report is the most common vehicle for distributing financial accounting information to owners and other outside parties interested in assessing the financial health and future prospects of an organization. An annual report often contains additional information such as the identity of management and the board of directors.However, the most important section of the annual report is the financial information and the verbal explanations to accompany those monetary balances.

15) Tattaro earned a profit on the savings account of $15 ($515 less $500) in one year from an investment of $500. That is an annual return of 3 percent ($15/$500). In connection with the capital shares, he now has $642 ($4 dividend plus the $638 received from the sale of the investment). That is a total profit of $42 over the original investment of $600 or a 7 percent annual rate of return ($42/$600).

Answers to True or False Questions

__F__ 1)

Financial accounting provides information to individuals and groups outside of an organization to help them make decisions about that organization. Managerial accounting helps with decisions that are made inside an organization.

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