REVIEW QUESTIONS - Solutions Manual, Chapter 1 1-1 Chapter 1 A Fr...

© McGraw-Hill Education 2016 Solutions Manual, Chapter 1 1-1 Chapter 1 A Framework for Financial Accounting

REVIEW QUESTIONS

Question 1-1 (LO 1-1) Accounting is the language of business. Whereas a basic math class might involve adding, subtracting, and solving for unknown variables, accounting involves learning to measure business transactions and communicating those measurements in a format that is generally understood by decision makers.Question 1-2 (LO 1-1) Those interested in making decisions about a company include investors, creditors, customers, suppliers, managers, employees, competitors, regulators, tax authorities, and local communities.Question 1-3 (LO 1-1) Financial accounting seeks to measure business activities of a company and to communicate those measurements to external parties for decision-making purposes. The two primary external, or outside the firm, users of financial accounting information are investors and creditors. Managerial accounting deals with the methods accountants use to provide information to an organization’s internal users, that is, its own managers.Question 1-4 (LO 1-1) The two primary functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors for decision-making purposes.Question 1-5 (LO 1-2) The three basic business activities are financing, investing, and operating activities. Financing activities are transactions that raise cash needed to operate the business. Investing activities typically include the purchase or disposal of long-term resources such as land, buildings, equipment, and machinery. Operating activities include the primary operations of the company, providing products and services to customers and the associated costs of doing so, like utilities, taxes, advertising, wages, rent, and maintenance.Question 1-6 (LO 1-2) Typical financing activities would include selling stock and paying dividends to investors, as well as borrowing and repaying debt to creditors.Question 1-7 (LO 1-2) Typical investing activities would include the purchase or disposal of land, casino buildings, hotels, gaming tables, chairs, cleaning equipment, and food preparation machines.Financial Accounting, 4e David Spiceland Wayne Thomas Don Herrmann (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

Chapter 1 - A Framework for Financial Accounting © The McGraw-Hill Companies, Inc., 2014 1-2 Financial Accounting, 3e Answers to Review Questions (continued) Question 1-8 (LO 1-2) Typical operating activities would include the sale of software and consulting services, as well as costs related to salaries, research, utilities, advertising, rent, and taxes.Question 1-9 (LO 1-2) The three major legal forms of business organizations include sole proprietorship, partnership, and corporation? A corporation is chosen by most of the largest companies in the United States.Question 1-10 (LO 1-2)

Assets: Resources owned.

Liabilities: Amounts owed.

Stockholders’ equity: Owners’ claims to resources.

Dividends: Distributions to stockholders.

Revenues: Sales of products or services to customers.

Expenses: Costs of selling products or services.

Question 1-11 (LO 1-2) The major advantage of a corporation is limited liability. Stockholders of a corporation are not held personally responsible for the financial obligations of the corporation. Owners of sole proprietorships or partnerships remain personally liable for activities of the business. Corporations have the disadvantages of double taxation and generally higher tax rates compared to sole proprietorships and partnerships. The advantage of the sole proprietorship and partnership forms of business is that income is taxed only once, and at the personal income tax rate.Question 1-12 (LO 1-3) 1.Income statement: Reports the company’s revenues and expenses during an interval of time.If revenues exceed expenses, then the company reports net income. If expenses exceed revenues, then the company reports a net loss.

2.Statement of stockholders’ equity: Summarizes the changes in stockholders’ equity from net income, dividends, and stock issuances during an interval of time.

3.Balance sheet: Presents the financial position of the company on a particular date. It shows that assets equal liabilities plus stockholders’ equity.

4.Statement of cash flows: Cash activities related to operating, investing, and financing activities during an interval of time.Question 1-13 (LO 1-3) Balances of accounts reported in the income statement, statement of stockholders’ equity, and statement of cash flows reflect activity from the beginning of the period through the end of the period. Balances of accounts reported in the balance sheet reflect the financial position of the company as of a single date, the end of the period. 2 / 4

Chapter 1 - A Framework for Financial Accounting © McGraw-Hill Education 2016 Solutions Manual, Chapter 1 1-3 Answers to Review Questions (continued) Question 1-14 (LO 1-3) Basic revenues would include sale of products (such as toys, dolls, and games) and services (such as theme park tickets). Expenses include cost of merchandise sold, employee salaries, utilities, advertising, taxes, interest, and legal fees.Question 1-15 (LO 1-3) The accounting equation is: Assets = Liabilities + Stockholders’ Equity. The format of the balance sheet follows the accounting equation.Question 1-16 (LO 1-3) Assets would include items such as merchandise inventory, office supplies, buildings, land, trucks, and equipment. Liabilities would include items such as amounts owed to employees, suppliers, taxing authorities, and lenders.Question 1-17 (LO 1-3) Retained earnings represent the cumulative amount of net income earned over the life of the company that has not been distributed to stockholders as dividends. Net income is shown in the income statement and retained earnings are reported in the balance sheet. Thus, retained earnings represent a balance sheet account which reflects the cumulative result of income statements over the life of the company (less any dividends).Question 1-18 (LO 1-3) The statement of cash flows reports operating, investing, and financing cash flows. Examples of

each include:

Operating – selling merchandise, paying employee salaries, and paying for advertisement.Investing – purchasing land and buildings to open new factories.Financing – Borrowing from lenders or issuing stock to owners to obtain funds necessary to expand operations.Question 1-19 (LO 1-3) Two other important sources of information are the (1) management discussion and analysis of the company’s activities and (2) note disclosures to the financial statements.Question 1-20 (LO 1-4) Successful companies use their resources efficiently to sell products and services for a profit.Unsuccessful companies either offer lower-quality products and services or do not efficiently keep their costs low. When a company is unprofitable, investors will neither invest in nor lend to the firm.Without these sources of financing, eventually the company will fail. When a company is able to make a profit, investors and creditors are willing to transfer their resources to it, and the company will expand its profitable operations even further. Investors and creditors rely heavily on financial accounting information in making investment and lending decisions.

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Chapter 1 - A Framework for Financial Accounting © The McGraw-Hill Companies, Inc., 2014 1-4 Financial Accounting, 3e Answers to Review Questions (continued) Question 1-21 (LO 1-5) GAAP refers to Generally Accepted Accounting Principles, or the rules of financial accounting.The fact that all companies use the same rules is critical to financial statement users, because it allows them to accurately compare financial information among companies when they are making decisions about where to lend or invest their resources.Question 1-22 (LO 1-5) The Financial Accounting Standards Board (FASB) is primarily responsible for the establishment of GAAP in the United States. The International Accounting Standards Board (IASB) serves this function on an international basis.Question 1-23 (LO 1-5) U.S. GAAP refers to the set of accounting standards being developed in the United States by the Financial Accounting Standards Board (FASB). IFRS (International Financial Reporting Standards) refers to the set of accounting standards being developed by the International Accounting Standards Board (IASB). The IASB promotes the use of IFRS around the world. Today, the IASB and FASB work closely in an effort to converge the two sets of accounting standards.Question 1-24 (LO 1-5) The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence in financial accounting following the stock market crash in 1929 and the ensuing Great Depression. The SEC has the power to require companies with publicly traded securities to prepare periodic financial statements for distribution to investors and creditors.Question 1-25 (LO 1-5) The role of auditors is to help ensure that management has in fact appropriately applied GAAP in preparing the company’s financial statements. They are hired by a company as an independent party to express a professional opinion of the conformity of that company’s financial statements with GAAP. Auditors play a major role in investors’ and creditors’ decisions by adding credibility to the financial statements.Question 1-26 (LO 1-5)

The three objectives of financial reporting are providing information that:

• is useful to investors and creditors in making decisions.
• helps to predict cash flows.
• tells about economic resources, claims to resources, and changes in resources and claims.
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