Decision Makers, 4e - Solutions Manual, Chapter 1 1-1 Chapter 1 Intr...

Financial & Managerial Accounting for Decision Makers, 4e Hanlon, Magee, Pfeiffer, Dyckman (Solutions Manual All Chapters) 1 / 4

©Cambridge Business Publishers, 2021 Solutions Manual, Chapter 1 1-1 Chapter 1

Introducing Financial Accounting

Learning Objectives – coverage by question

Mini- Exercises Exercises Problems Cases and Projects LO1 – Identify the users of accounting information and discuss the costs and benefits of disclosure.

25 28, 34 49, 50

LO2 – Describe a company’s business activities and explain how these activities are represented by the accounting equation.

19, 20, 21 27, 29, 32, 33 36, 37, 38, 43 47

LO3 – Introduce the four key financial statements including the balance sheet, income statement, statement of stockholders’ equity and statement of cash flows.

22, 23, 24 30, 31

37, 38, 39,

40, 41, 42,

43, 44, 45

46, 47, 49

LO4 – Describe the institutions that regulate financial accounting and their role in establishing generally accepted accounting principles.

26 34 50

LO5 – Compute two key ratios that are commonly used to assess profitability and risk – return on equity and the debt-to-equity ratio.

32, 33 36, 43, 44, 45 46, 47, 48, 49

LO6 – Appendix 1A: Explain the

conceptual framework for financial reporting.35

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©Cambridge Business Publishers, 2021 1-2 Financial & Managerial Accounting for Decision Makers, 4 th Edition

QUESTIONS

Q1-1. Organizations undertake planning activities that subsequently shape three

major activities: financing, investing, and operating. Financing is the means

used to pay for resources. Investing refers to the buying and selling of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. (Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies.) Q1-2. An organization’s financing activities (liabilities and equity = sources of funds) pay for investing activities (assets = uses of funds). An organization cannot have more or less assets than its liabilities and equity combined and, similarly, it cannot have more or less liabilities and equity than its total assets. This

means: assets = liabilities + equity. This relation is called the accounting

equation (sometimes called the balance sheet equation, or BSE), and it applies to all organizations at all times.

Q1-3. The four main financial statements are: income statement, balance sheet,

statement of stockholders’ equity, and statement of cash flows. The income statement provides information relating to the company’s revenues, expenses and profitability over a period of time. The balance sheet lists the company’s assets (what it owns), liabilities (what it owes), and stockholders’ equity (the residual claims of its owners) as of a point in time. The statement of stockholders’ equity reports on the changes to each stockholders’ equity account during the year. Some changes to stockholders’ equity, such as those resulting from the payment of dividends and unrealized gains (losses) on marketable securities, can only be found in this statement as they are not included in the computation of net income. The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash, that is, from what sources the company has derived its cash and how that cash has been used.All four statements are necessary in order to provide a complete picture of the financial condition of the company.Q1-4. The balance sheet provides information that helps users understand a company’s resources (assets) and claims to those resources (liabilities and stockholders’ equity) as of a given point in time.An income statement reports whether the business has earned a net income (also called profit or earnings) or a net loss. Importantly, the income statement lists the types and amounts of revenues and expenses making up net income or net loss. The income statement covers a period of time.Q1-5. Your authors would agree with Mr. Buffett. A recent study of top financial officers suggests they find earnings and the year-to-year changes in earnings as the most important items to report. We would add cash flows particularly from operations, and the year-to-year changes. 3 / 4

©Cambridge Business Publishers, 2021 Solutions Manual, Chapter 1 1-3 Q1-6. The statement of cash flows reports on the cash inflows and outflows relating to a company’s operating, investing, and financing activities over a period of time.The sum of these three activities yields the net change in cash for the period.This statement is a useful complement to the income statement which reports on revenues and expenses, but conveys relatively little information about cash flows.Q1-7. Articulation refers to the updating of the balance sheet by information contained in the income statement or the statement of cash flows. For example, retained earnings is increased each period by any profit earned during the period (as reported in the income statement) and decreased each period by the payment of dividends (as reported in the statement of cash flows and the statement of stockholders’ equity). It is by the process of articulation that the financial statements are linked.Q1-8. Return refers to income, and risk is the uncertainty about the return we expect to earn. The lower the risk, the lower the expected return. For example, savings accounts pay a low return because of the low risk of a bank not returning the principal with interest. Higher returns are to be expected for common stocks as there is a greater uncertainty about the realized return compared with the expected return. Higher expected return offsets this higher risk.Q1-9. Companies often report more information than is required by GAAP because the benefits of doing so outweigh the costs. These benefits often include lower interest rates and better terms from lenders, higher stock prices and greater access to equity investors, improved relationships with suppliers and customers, and increased ability to attract the best employees. All of these benefits arise because the increased disclosure reduces uncertainty about the company’s future prospects.Q1-10. External users and their uses of accounting information include: (a) lenders for measuring the risk and return of loans; (b) shareholders for assessing the return and risk in acquiring shares; and (c) analysts for assessing investment potential. Other users are auditors, consultants, officers, directors for overseeing management, employees for judging employment opportunities, regulators, unions, suppliers, and appraisers.Q1-11. Managers deal with a variety of information about their employers and customers that is not generally available to the public. Ethical issues arise concerning the possibility that managers might personally benefit by using confidential information. There is also the possibility that their employers and/or customers might be harmed if certain information is not kept confidential.

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