Financial Accounng The

Financial Accoun�ng The Cornerstone of Business Decision-Making 5e Jay Rich, Jeff Jones, Linda Ann Myers (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) All Chapters Solutions Manual Supplement files download link at the end of this file. 1 / 4

Financial Accounting: The Cornerstone of Business Decision Making, 5e [978-0-357-13278-4], Chapter 1: Accounting and the Financial Statements 1 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.1

ACCOUNTING AND THE FINANCIAL

STATEMENTS

DISCUSSION QUESTIONS

• Accounting is an information system that identifies, measures, records, and

communicates financial information about a company's business activities to permit informed decisions by users of the information. Accounting is often referred to as the language of business because it communicates relevant and reliable information about economic activities of a company that helps people make better decisions.

• Accounting information is demanded (or needed) by decision-makers both inside and

outside the business to provide information about business activities and finances so that informed decisions can be made. Six groups that create the demand for accounting information and their uses of accounting information are described next: (1) Managers use accounting information to help decide which actions to take, predict the consequences of their actions, and evaluate the effectiveness of their past decisions. They also use accounting information to control the operations of the company.(2) Investors (owners) need accounting information about a business to evaluate the future prospects of a business and to decide where to invest their money.(3) Creditors (lenders) need accounting information to decide whether or not to lend money (extend credit) to a business.(4) Governments need accounting information about businesses to determine taxes owed by businesses, to implement a variety of regulatory objectives, and to make national economic policy decisions.(5) Labor unions use accounting information when negotiating wage increases for its members.(6) Financial analysts use accounting information when offering buy or sell recommendations to clients.

• An accounting entity is a business that has an identity separate from that of its

owners and managers and for which accounting records are kept. There are three main forms that accounting entities take: a sole proprietorship, a partnership, and a corporation.

• A sole proprietorship is a business entity owned by one person. A partnership is a

business entity owned jointly by two or more individuals. The owner of a sole proprietorship and the partners in a partnership are responsible for the debts of the business. A corporation is a separate legal entity formed by one or more persons called stockholder(s). A corporation is legally separate from the affairs of its owners, which limits the stockholders’ legal responsibility for the debt of the business to the amount that the stockholders invested in the business. Corporate shareholders 2 / 4

Financial Accounting: The Cornerstone of Business Decision Making, 5e [978-0-357-13278-4], Chapter 1: Accounting and the Financial Statements 2 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.generally pay more taxes than owners of sole proprietorships or partnerships.Although the combined number of sole proprietorships and partnerships largely outnumbers the number of corporations, the majority of business in the United States is conducted by corporations.

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

operating activities. Financing activities involve obtaining the funds necessary to begin and operate a business. These funds come from either issuing stock or borrowing money. Investing activities involve buying and selling assets that enable a corporation to operate. Operating activities are the normal business activities that a company engages in as it conducts its business. These activities involve selling products or services, purchasing inventory, collecting amounts due from customers, and paying suppliers.

• Assets are the economic resources (or future economic benefits) obtained or

controlled by a business. Liabilities are the creditors’ claims on the resources of a business. Stockholders’ equity is the ownership claim on the resources of a business.Stockholders’ equity is considered a residual interest in the assets of a business that remain after deducting the business’s liabilities.

• Revenues are the increases in assets that result from the sale of products or services.

Expenses are the costs of assets used, or the liabilities created, in the operation of the business. If revenues are greater than expenses, a business has earned net income. If expenses are greater than revenues, a business has incurred a net loss.

8. The four primary financial statements are as follows:

(1) Balance sheet: A presentation of information about a company’s economic

resources (assets) and the claims against those resources by creditors and owners (liabilities and stockholders’ equity) at a specific point in time.

(2) Income statement: A report on how well a company has performed over a

period of time.

(3) Retained earnings statement: A report on how much of the company’s income

was retained in the business and how much was distributed to owners over a period of time.(4) Statement of cash flows: A report on the changes in a company’s cash during a period of time. The statement of cash flows provides information about the company’s sources (inflows) and uses (outflows) of cash.

• There are many questions that can be answered based on each of the financial

statements:

(1) Balance sheet:

• What is the total amount of assets (economic resources) of a corporation?

What is the total amount of liabilities (claims against the resources) for a corporation?

• How much equity do the owners of the corporation have in its assets?
• Is the corporation able to pay its debts as they become due? 3 / 4

Financial Accounting: The Cornerstone of Business Decision Making, 5e [978-0-357-13278-4], Chapter 1: Accounting and the Financial Statements 3 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

(2) Income statement:

• How much revenue was earned last month? Last quarter? Last year?
• What was the total amount of expenses incurred to earn that revenue?
• How much better-off is the corporation at the end of the year than it was at

the beginning of the year?

• Was the corporation profitable, and what are the prospects for the

corporation’s future profitability?

• What are the prospects for the future growth of the corporation?

(3) Retained earnings statement:

• How much income was distributed in dividends by the corporation?
• What amount of equity in the business has been generated internally?

(4) Statement of cash flows:

• How much cash was taken in or paid out as a result of operations?
• How much cash was invested in new equipment?
• How much cash was used to pay off business debt?
• Point-in-time measurement means as of a particular date. The balance sheet is a

point-in-time measurement. The period-of-time description applies to what has happened over a time interval. The income statement is a period-of-time measurement that explains the business activities between balance sheet dates. The statement of cash flows and the statement of retained earnings are also period-of- time measurements.

11. The fundamental accounting equation is:

Assets = Liabilities + Stockholders’ Equity The equation is significant because it means that the balance sheet must always balance. This implies that what a company owns (its resources) must always be equal to the claims of its creditors (liabilities) and investors (stockholders’ equity).

• Each financial statement includes a heading that is comprised of (a) the name of the

company, (b) the title of the financial statement, and (c) the time period covered— either a point-in-time measurement (an exact date) or a period-of-time description (e.g., a year ended in a specific date).

• Current assets are cash and other assets that are reasonably expected to be

converted to cash within 1 year or the operating cycle, whichever is longer. Current liabilities are obligations that will be satisfied within 1 year or the operating cycle, whichever is longer.Since current assets are presented separately from other assets, statement users can see if the firm is likely to have enough resources available to meet its current liabilities as they become due. If current assets were presented among other assets, such a determination would be difficult.Current liabilities are separated from long-term liabilities because current liabilities will require asset outflows (or replacement with another liability) much

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