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1-1 Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Accounting, 7/e, Solutions Manual (For Instructor Use Only)

CHAPTER 1

Introduction to Financial Statements

Learning Objectives

• Identify the forms of business organization and the uses of accounting information.
• Explain the three principal types of business activity.
• Describe the four financial statements, and how they are prepared.

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Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Accounting, 7/e, Solutions Manual (For Instructor Use Only) 1-2

ASSIGNMENT CHARACTERISTICS TABLE

Problem Number

Description Difficulty Level Time Allotted (min.)

1A Determine forms of business organization. Simple 15–20

2A Identify users and uses of financial statements. Simple 15–20

3A Prepare an income statement, retained earnings statement, and balance sheet; discuss results.Medium 40–50

4A Prepare an Income statement, retained earnings statement, and balance sheet Medium 25–35

5A Determine items included in a statement of cash flows, prepare the statement, and comment.Medium 30–40

6A Comment on proper accounting treatment and prepare a corrected balance sheet.Medium 40–50

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1-3 Copyright © 2018 John Wiley & Sons, Inc. Kimmel, Accounting, 7/e, Solutions Manual (For Instructor Use Only)

ANSWERS TO QUESTIONS

• The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and

(3) corporation.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

• Advantages of a corporation are limited liability (stockholders not being personally liable for cor-

porate debts), easy transferability of ownership, and ease of raising funds. Disadvantages of a corporation are increased taxation and government regulations.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

• Proprietorships and partnerships receive favorable tax treatment compared to corporations and are

easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and difficulty in obtaining financing compared to corporations.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA BB: Legal/Regulatory Perspective

• Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or pay

taxes without receiving, using, or dispensing financial information. Accounting provides financial information to interested users through the preparation and distribution of financial statements.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

• Internal users are managers who plan, organize, and run a business. To assist management,

accounting provides timely internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, forecasts of cash needs for the next year, and financial statements.

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

• External users are those outside the business who have either a present or potential direct

financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regu- latory agencies, labor unions, customers, and economic planners).

LO 1 BT: K Difficulty: E TOT: 1 min. AACSB: None AICPA FC: Reporting

• The three types of business activities are financing activities, investing activities, and operating

activities. Financing activities include borrowing money and selling shares of stock. Investing activities include the purchase and sale of property, plant, and equipment. Operating activities include selling goods, performing services, and purchasing inventory.

LO 2 BT: K Difficulty: M TOT: 2 min. AACSB: None AICPA FC: Reporting

• (a) Income statement. (d) Balance sheet.

(b) Balance sheet. (e) Balance sheet.(c) Income statement. (f) Balance sheet.

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