Type:
Solution Manual
Resource:
Horngren_s Financial & Managerial Accounting
Edition:
7th Edition
Author(s):
Tracie Miller-Nobles Brenda Mattison
Chapter 1 Accounting and the Business Environment Review Questions 1. Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. Accounting is the language of business. 2. Financial accounting provides information for external decision makers, such as outside investors, lenders, customers, and the federal government. Managerial accounting focuses on information for internal decision makers, such as the company’s managers and employees. 3. Individuals use accounting information to help them manage their money, evaluate a new job, and better decide whether they can afford to make a new purchase. Business owners use accounting information to set goals, measure progress toward those goals, and make adjustments when needed. Investors use accounting information to help them decide whether or not a company is a good investment and once they have invested, they use a company’s financial statements to analyze how their investment is performing. Creditors use accounting information to decide whether to lend money to a business and to evaluate a company’s ability to make the loan payments. Taxing authorities use accounting information to calculate the amount of income tax that a company has to pay. 4. Certified Public Accountants (CPAs) are licensed professional accountants who serve the general public. They work for public accounting firms, businesses, government, or educational institutions. A Chartered Global Management Accountant (CGMA) is an accountant who has advanced knowledge in finance, operations, strategy, and management. Certified Management Accountants (CMAs) specialize in accounting and financial management knowledge. They work for a single company. Certified Financial Planners (CFPs) work with individuals to help them budget, plan for retirement, save for education, and manage their finances. 5. The FASB oversees the creation and governance of accounting standards. They work with governmental regulatory agencies, congressionally created groups, and private groups. 6. The guidelines for accounting information are called GAAP. It is the main U.S. accounting rule book and is currently created and governed by the FASB. Investors and lenders must have information that is relevant and has faithful representation in order to make decisions and GAAP provides the framework for this financial reporting. 7. A sole proprietorship has a single owner, terminates upon the owner’s death or choice, the owner has personal liability for the business’s debts, and it is not a separate tax entity. A partnership has two or more owners, terminates at partner’s choice or death, the partners have personal liability, and it is not a separate tax entity. A corporation is a separate legal entity, has one or more owners, has indefinite life, the stockholders are not personally liable for the business’s debts, and it is a separate tax entity. A limited-liability company has one or more members and each is only liable for his or her own actions, has an indefinite life, and is not a separate tax entity. ..
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8. The land should be recorded at $5,000. The cost principle states that assets should be recorded at their historical cost. 9. The going concern assumption assumes that the entity will remain in business for the foreseeable future and long enough to use existing resources for their intended purpose. 10. The faithful representation concept states that accounting information should be complete, neutral, and free from material error. 11. The monetary unit assumption states that items on the financial statements should be measured in terms of a monetary unit. 12. The IASB is the organization that develops and creates IFRS which are a set of global accounting standards that would be used around the world. 13. Assets = Liabilities + Equity. Assets are economic resources that are expected to benefit the business in the future. They are things of value that a business owns or has control of. Liabilities are debts that are owed to creditors. They are one source of claims against assets. Equity is the other source of claims against assets. Equity is the stockholders’ claims against assets and is the amount of assets that is left over after the company has paid its liabilities. It represents the net worth of the corporation. 14. Retained earnings increases with revenues. Retained earnings decreases with expenses and dividends. 15. Revenues – Expenses = Net Income. Revenues are earnings resulting from delivering goods or services to customers. Expenses are the cost of selling goods or service. 16. Step 1: Identify the accounts and the account type. Step 2: Decide if each account increases or decreases. Step 3: Determine if the accounting equation is in balance. 17. Income Statement – Shows the difference between an entity’s revenues and expenses and reports the net income or net loss for a specific period. Statement of Retained Earnings – Shows the changes in retained earnings for a specific period including net income (loss) and dividends. Balance Sheet – Shows the assets, liabilities, and stockholders’ equity of the business as of a specific date. Statement of Cash Flows – Shows a business’s cash receipts and cash payments for a specific period. 18. Return on Assets = Net income / Average total assets. ROA measures how profitably a company uses its assets.
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E-F:1-22 Requirement 1
Beginning of 2024
End of 2024
Assets $19,000 $19,000
= = =
Liabilities $14,000 $14,000
+ + +
Equity ? $5,000
$12,000 $12,000
= =
$9,000 $9,000
+ +
? $3,000
Stockholders’ equity decreased in 2024 by $2,000 ($5,000 – $3,000). Requirement 2 a. Increase through issuance of common stock. b. Increase through net income. c. Decrease through dividend payment. d. Decrease through net loss.
E-F:1-23 Requirement 1 Revenues $30,000
– –
Expenses $15,000
= =
Net Income $15,000
Requirement 2 Flowing Rivers Spa’s equity increased by $15,000 ($29,000 - $14,000) or the amount of the net income.
Beginning of 2024
Ending of 2024
Assets $28,000 $28,000
= Liabilities + Equity = $14,000 + ? = $14,000 + $14,000
$43,000 $43,000
= =
$14,000 $14,000
+ ? + $29,000
.
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E-F:1-24 Requirement 1 Assets $67,000 $46,000
Beginning of 2024 Ending of 2024 Retained Earnings: Retained Earnings, Jan. 1, 2024 Plus: Revenues Less: Expenses Less: Dividends Retained Earnings, Dec. 31, 2024
− Liabilities − $11,000 − $34,000
= = =
Equity $56,000 $12,000
$
45,000 205,000 (241,000) (8,000) $ 1,000
Stockholders’ Equity: Common Stock Retained Earnings Total Stockholders’ Equity
$ $
11,000 1,000 12,000
Requirement 2 Felix Company suffered (or reported) a net loss of ($36,000). Revenue $205,000
− −
Expenses $241,000
= =
Net Income (Loss) ($36,000)
E-F:1-25 Student responses will vary. Examples include: a. Cash purchase of office supplies. b. Cash dividends paid to stockholders. c. Paid cash on accounts payable. d. Received cash for services provided. e. Borrowed cash from the bank. E-F:1-26 a. Increase asset (Cash); Increase equity (Common Stock) b. Increase asset (Accounts Receivable); Increase equity (Rental Revenue) c. Increase asset (Office Furniture); Increase liability (Accounts Payable) d. Increase asset (Cash); Decrease asset (Accounts Receivable) e. Decrease asset (Cash); Decrease liability (Accounts Payable) f. Increase asset (Cash); Increase equity (Rental Revenue) g. Decrease asset (Cash); Decrease equity (Rent Expense) h. Decrease asset (Cash); Increase asset (Office Supplies).
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