ANSWERS TO QUESTIONS - CHAPTER 1

Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

ANSWERS TO QUESTIONS - CHAPTER 1

• Stakeholders are the parties that use accounting information.

Stakeholders with a direct interest include owners, managers, creditors, suppliers, and employees. These individuals are directly affected by what happens to the business.

Stakeholders with an indirect interest include financial analysts, brokers, attorneys, government regulators, and news reporters.These individuals use information in the financial reports to advise and influence their clients.

Students may give many different answers under the above categories depending on their level of experience in business.

All students are direct users of accounting information related to tuition and fees, financial aid, and account balances.

• Accounting provides information that is useful in making

decisions by all participants in the market for resource goods and services, both profit-oriented and nonprofit oriented.Because accounting’s role is so important, it is often called the language of business.

• The primary mechanism used to allocate resources in the U.S. is

competition for resources in the open market.

• A market is a group of people or organizations that come

together for the purpose of exchanging items of value.

• The market for business resources involves three distinct

participants: consumers, conversion agents, and resource

owners. See Exhibit 1-1 that illustrates how market trilogy is involved in resource allocation.

Fundamental Financial Accounting Concepts 10th Edition Edmonds Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

6. Financial Resource: money

Physical Resource: natural resources (i.e. land, forests, mine

ore, petroleum, etc.), buildings, machinery and equipment, furniture and fixtures

Labor Resource: includes both intellectual and physical labor;

i.e. employees

• Investors expect a distribution of the business’s profits as a

return on their financial investment (capital allocation).

Creditors lend financial resources to businesses and receive interest as a return or profit on the loan.

• Financial accounting provides information that is useful to

external resource providers.

Managerial accounting provides information that is useful to managers in operating an organization (i.e., internal users).

• Not-for-profit or nonprofit entities provide goods or services to

consumers for humanitarian or special reasons rather than to earn a profit for owners. For example, certain not-for-profit entities allocate resources to provide for research of diseases or social/environmental welfare; others allocate resources to promote the arts and provide education.

• The U.S. rules of accounting information measurement are

called generally accepted accounting principles (GAAP).

• Careers in public accounting consist of providing services to the

general public from a public accounting firm. These services include auditing, tax, and consulting services. Careers in private accounting usually consist of working for a specific company (which would be a client of the public accounting firm) providing a wide variety of services to the company including recording transactions, preparing financial statements, internal auditing, and others.

Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• Items reported on the financial statements are organized into

classes or categories called elements. The ten elements of

financial statements are:

• Assets
• Liabilities
• Equity (Stockholders’ Equity)
• Investments by Owners (Contributed Capital)
• Revenue
• Expenses
• Distributions (Dividends)
• Net Income
• Gains
• Losses

Accounts are specific items or subclassifications of the elements. Examples of accounts include cash, land, and common stock.

• Assets, the economic resources of a business, are used to

produce earnings.

• The assets of a business belong to that business entity and

there may be claims on the assets. Claims on the assets belong to resource providers.

• Creditors are individuals and/or institutions that have provided

goods or services to the business which are not yet paid for, or loaned money to the business. These parties have first claim to the assets of the business, and the investors have a residual interest in the assets.

Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

• The term “liabilities” is used to describe creditors' claims on the

assets of a business.

17. The accounting equation is:

ASSETS – LIABILITIES = STOCKHOLDERS’ EQUITY

or

ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY

Assets are the economic resources used by a business for the production of revenue. Liabilities are obligations of a business to relinquish assets, provide services, or accept other obligations. Equity, also called “residual interest” or “net assets”, is the portion of the assets remaining after the creditors' claims have been satisfied (i.e., Assets – Liabilities).

• The owners ultimately bear the risk and collect the rewards

associated with operating a business.

• A double-entry bookkeeping system is one in which every

transaction affects at least two accounts. A transaction can affect both assets and claims (liabilities and equity) or only assets or only claims. In order to “balance” the accounting equation, every transaction requires a “double entry.”

• The right side of the accounting equation can be viewed as

either sources of assets or as obligations and commitments of the business. Assets originating from liabilities can be viewed as sources or obligations of the business. Assets originating from issuing stock or retaining earnings can be viewed as sources of assets and commitments of the business.

• The business could make a distribution of $1,000, but only $800

of it would be classified as a dividend. A distribution can only be a dividend to the extent of retained earnings.

• Capital is acquired from owners by issuing stock to them. When

stock is issued, the assets of the business increase and the stockholders’ equity increases.