SOLUTIONS TO END OF CHAPTER MATERIAL

CHAPTER 1

SOLUTIONS TO END OF CHAPTER MATERIAL

QUESTIONS

1.The three general types of business are typically categorized as follows: service, manufacturing and merchandising.

Service example: airline company, e.g. Southwest

Manufacturing example: steel manufacturing company, e.g. US Steel

Merchandising example: wholesaler company, e.g. Costco

2.The three common forms of business organizations are sole proprietorships, partnerships and corporations.The major differences between these forms of business organizations are in terms of ownership, liability and taxation. A sole proprietorship is owned by a single individual, who has unlimited liability; profits of the proprietorship flow through to the owner, who individually pays taxes on those profits. A partnership is owned by two or more individuals, who each have unlimited liability. Profits of the business flow through to the partners, who individually pay taxes on their specific share of those profits. A corporation is owned by stockholders; liability for organizational debts is limited to the amount of funds invested by owners, who cannot be held individually responsible for the debts. A corporation files a tax return and pays taxes. (Stockholders receiving dividends from a corporation commonly must pay taxes on those dividends…even though the corporation paid taxes on the profits from which the dividends are paid. Thus, it is said that corporate

profits are effectively taxed twice: once upon being earned and once upon being

distributed.) The most common form of business in the United States is the sole proprietorship.

3.The primary function of a business’s accounting function is to provide quantitative information, primarily financial in nature, about economic entities. The information is intended to be useful in making economic decisions for internal and external users of the information.

4.The four major financial statements are the balance sheet, income statement, statement of cash flows and statement of stockholder’s equity.Balance Sheet: Summarizes the assets (resources an organization owns), liabilities (debts that the organization owes), and stockholders’ equity (amounts owners have contributed and the net amount that the entity has earned for them) of an entity at a specific time.Income Statement: Summarizes a business’s revenues and expenses for a specific time period.Core Concepts of Accounting 2e Cecily A. Raiborn (Solutions Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

Statement of Cash Flows: Reveals how a business generated and spent cash during a given accounting period.

Businesses issue financial statements because financial statements provide information about an organization’s financial performance over a period of time. These statements are useful to third parties such as investors, bankers, CEOs and management during their decision making.

• This statement is false because a company’s fiscal year may begin on any date. For

example, the Walt Disney Company has a fiscal year that runs from October 1 to September 30.

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

Operating activities: Reflect the day-to-day activities of a business that generate revenues by providing products or services and that create the costs of generating those revenues

Investing activities: Involve the acquisition and sale of (1) long-term assets used in the business and (2) non-operating investment assets

Financing activities: Involve cash inflows and outflows from transactions with creditors and investors.

The Statement of Cash Flows uses the above three business activities as section headings.

• GAAP is a group of accounting rules, concepts and principles that are used as a standard

framework of guidelines in the preparation of financial statements. GAAP’s primary purpose is use as a guideline in conducting and reviewing accounting transactions. The FASB is the principal accounting board in charge of establishing GAAP.

• Private accounting involves internal work within a business entity, not-for-profit

organization, or government agency. Public accounting involves external work as an independent firm with various firms in business.

Individuals in private accounting may have job titles such as controller, internal auditor, financial accountant, cost analyst and tax accountant.

• Public accounting firms offer auditing, tax preparation and advice, certain types of

consulting, and bookkeeping services.

Auditing is the most important service offered by public accounting firms because it involves the determination of the fairness, fullness and compliance with GAAP for financial statements and accounting records of companies. These financial statements provide third parties with vital information in the making of economic decisions.

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• The collapse of the stock market in 1929 led Congress to establish the SEC in the early

1930s with the intent to deter the abusive accounting and financial reporting practices that contributed to the stock market’s collapse. The SEC ensures that publicly owned companies provide third parties with sufficient information to make informed economic decisions regarding the securities these firms sell.

EXERCISES

• (a) T

(b) T (c) F The FASB is the board that issues most of the new accounting rules in the U.S.(d) F Corporations account for the most business revenues each year.(e) T (f) F The Balance Sheet is a statement of position at a specific point in time; the Income Statement and the Statement of Cash Flows cover a fiscal year.(g) T (h) T (i) F Accounting contributes significantly to the success of business organizations by providing useful information on the transactions and results of transactions for those entities.(j) T (k) F Owners of LLPs, LLCs, and Subchapter S corporations pay taxes for their companies.

• (a) (1) M

(2) S (3) S (4) R (5) M (b) (1) Determine the estimated amount of goods needed to be produced to meet the market demand of products. Accountants can provide the inventory accounts balances.(2) Determine the amount of cash from operations. Accountants can provide the Cash Flow from operating activities statement.(3) Determine the ability of a customer to repay loans. Accountants can analyze the customer’s financial statements.(4) Determine the growth in revenues during the last fiscal period. Accountants can compare the income statement of the current fiscal period and the preceding fiscal period.(5) Determine the cost of manufacturing a product. Accountants can calculate the total costs incurred in the manufacturing of a product.

• (a) Proprietorship vs. Corporation

Advantages ▪ no double taxation ▪ easy to start up 3 / 4

▪ cheap to establish ▪ no particular record keeping requirements ▪ no one to share profits with Disadvantages ▪ self-employment tax rate ▪ unlimited liability ▪ lack of financing strength (b) Partnership vs. Corporation Advantages ▪ no double taxation ▪ easy to set up ▪ can establish with friends or relatives Disadvantages ▪ unlimited liability ▪ joint and several liability (c) LLP (limited liability partnership); LLC (limited liability company); and Subchapter S (Sub S) corporation The distinguishing characteristics of these forms of business organizations are that they possess key features of other forms of business. Each of these business types is a hybrid between a corporation and a partnership. Owners are provided with limited liability (as in a corporation) and are only taxed as individuals (as in a partnership).

• (a) Net Income – Management

Inventory cost per unit – Retailer Total liability – Loan Officer Total sales by geographical area of business operations – Marketing department Five-year trend in total sales – Investor Employee salaries by department – Management (b) To measure profitability of company To determine selling price per unit To measure risk of business To understand the market of product To determine stability of company To allocate payroll by department

15. TO: JIM HARDY

FROM: ACCOUNTANT S

DATE: JULY 1, 20X1

SUBJECT: FINANCIAL STATEMENTS

It has come to our attention that your business, Jim’s Bike Shop, has not been keeping any accounting records of its financial activity since operations commenced.

Financial statements are an integral part of any business organization. These statements reflect the company’s revenues and expenses and, thus, profitability, for a specific period.The financial statements also show the company’s financial position through detailing the

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