FA Ch01 SM PLL5e.docx
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FACh01SMPLL5e
Chapter1
BusinessDecisionsandFinancialAccounting
ANSWERSTOQUESTIONS
1.Accountingisasystemofanalyzing,recording,andsummarizingtheresultsofabusiness’sactivitiesandthenreportingthemtodecisionmakers.
2.Anadvantageofoperatingasasoleproprietorship,ratherthanacorporation,isthatitiseasytoestablish.Anotheradvantageisthatincomefromasoleproprietorshipistaxedonlyonceinthehandsoftheindividualproprietor（incomefromacorporationistaxedinthecorporationandthenagaininthehandsoftheindividualshareholder）.Adisadvantageofoperatingasasoleproprietorship,ratherthanacorporation,isthattheindividualproprietorcanbeheldresponsibleforthedebtsofthebusiness.
3.Financialaccountingfocusesonpreparingandusingthefinancialstatementsthataremadeavailabletoownersandexternaluserssuchascustomers,creditors,andpotentialinvestorswhoareinterestedinreadingthem.Managerialaccountingfocusesonotheraccountingreportsthatarenotreleasedtothegeneralpublic,butinsteadarepreparedforinternaldecisionmakingandusedbyemployees,supervisors,andmanagerswhorunthecompany.
4.Financialreportsareusedbybothinternalandexternalgroupsandindividuals.Theinternalgroupsarecomprisedofthevariousmanagersofthebusiness.Theexternalgroupsincludeinvestors,creditors,governmentalagencies,otherinterestedparties,andthepublicatlarge.
5.Thebusinessitself,nottheindividualstockholderswhoownthebusiness,isviewedasowningtheassetsandowingtheliabilitiesonitsbalancesheet.Abusiness’sbalancesheetincludestheassets,liabilities,andstockholders’equityofonlythatbusinessandnotthepersonalassets,liabilities,andequityofthestockholders.Thefinancialstatementsofacompanyshowtheresultsofthebusinessactivitiesofonlythatcompany.
6.（a）Operating–Theseactivitiesaredirectlyrelatedtoearningprofits.Theyincludebuyingsupplies,makingproducts,servingcustomers,cleaningthepremises,advertising,rentingabuilding,repairingequipment,andobtaininginsurancecoverage.
（b）Investing–Theseactivitiesinvolvebuyingandsellingproductiveresourceswithlonglives（suchasbuildings,land,equipment,andtools）,purchasinginvestments,andlendingtoothers.
（c）Financing–Anyborrowingfrombanks,repayingbankloans,receivingcontributionsfromstockholders,orpayingdividendstostockholdersareconsideredfinancingactivities.
7.Theheadingofeachofthefourprimaryfinancialstatementsshouldincludethefollowing:
（a）Nameofthebusiness
（b）Nameofthestatement
（c）Dateofthestatement,ortheperiodoftimethatthestatementcovers
8.（a）Thepurposeofthebalancesheetistoreportthefinancialposition（assets,liabilitiesandstockholders’equity）ofabusinessatapointintime.
（b）Thepurposeoftheincomestatementistopresentinformationabouttherevenues,expenses,andnetincomeofabusinessforaspecifiedperiodoftime.
（c）Thestatementofretainedearningsreportsthewaythatnetincomeandthedistributionofdividendsaffectedthefinancialpositionofthecompanyduringtheperiod.
（d）Thepurposeofthestatementofcashflowsistosummarizehowabusiness’soperating,investing,andfinancingactivitiescauseditscashbalancetochangeoveraparticularperiodoftime.
9.Theincomestatement,statementofretainedearnings,andstatementofcashflowswouldbedated“FortheYearEndedDecember31,2015,”becausetheyreporttheinflowsandoutflowsofresourcesoveraperiodoftime.Incontrast,thebalancesheetwouldbedated“AtDecember31,2015,”becauseitrepresentstheassets,liabilitiesandstockholders’equityataspecificdate.
10.Netincomeistheexcessoftotalrevenuesovertotalexpenses.Anetlossoccursiftotalexpensesexceedtotalrevenues.
11.Theaccountingequationforthebalancesheetis:
Assets=Liabilities+Stockholders’Equity.Assetsaretheeconomicresourcescontrolledbythecompany.Liabilitiesareamountsowedbythebusiness.Stockholders’equityistheowners’claimstothebusiness.Itincludesamountscontributedtothebusiness（byinvestorsthroughpurchasingthecompany’sstock）andtheamountsearnedandaccumulatedthroughprofitablebusinessoperations.
12.TheequationfortheincomestatementisRevenues–Expenses=NetIncome.Revenuesareincreasesinacompany’sresources,arisingprimarilyfromitsoperatingactivities.Expensesaredecreasesinacompany’sresources,arisingprimarilyfromitsoperatingactivities.NetIncomeisequaltorevenuesminusexpenses.（Ifexpensesaregreaterthanrevenues,thecompanyhasaNetLoss.）
13.Theequationforthestatementofretainedearningsis:
BeginningRetainedEarnings+NetIncome-Dividends=EndingRetainedEarnings.Itbeginswithbeginning-of-the-yearretainedearningswhichistheprioryear’sendingretainedearningsreportedontheprioryear’sbalancesheet.Thecurrentyear'snetincomereportedontheincomestatementisaddedandthecurrentyear'sdividendsaresubtractedfromthisamount.Theendingretainedearningsamountisreportedontheend-of-yearbalancesheet.
14.Theequationforthestatementofcashflowsis:
Cashflowsfromoperatingactivities+Cashflowsfrominvestingactivities+Cashflowsfromfinancingactivities=Changeincashfortheperiod.Changeincashfortheperiod+Beginningcashbalance=Endingcashbalance.Thenetcashflowsfortheperiodrepresenttheincreaseordecreaseincashthatoccurredduringtheperiod.Cashflowsfromoperatingactivitiesarecashflowsdirectlyrelatedtoearningincome（normalbusinessactivity）.Cashflowsfrominvestingactivitiesincludecashflowsthatarerelatedtotheacquisitionorsaleofthecompany’slong-termassets.Cashflowsfromfinancingactivitiesaredirectlyrelatedtothefinancingofthecompany.
15.Currently,theFinancialAccountingStandardsBoard（FASB）isgiventheprimaryresponsibilityforsettingthedetailedrulesthatbecomeGenerallyAcceptedAccountingPrinciples（GAAP）intheUnitedStates.（Internationally,theInternationalAccountingStandardsBoard（IASB）hastheresponsibilityforsettingaccountingrulesknownasInternationalFinancialReportingStandards（IFRS）.）
16.Themaingoalofaccountingrulesistoensurethatcompaniesproduceusefulfinancialinformationforpresentandpotentialinvestors,lenders,andothercreditorsinmakingdecisionsintheircapacityascapitalproviders.Financialinformationmustshowrelevanceandfaithfulrepresentation,aswellasbecomparable,verifiable,timely,andunderstandable.
17.Anethicaldilemmaisasituationwherefollowingonemoralprinciplewouldresultinviolatinganother.Threestepsthatshouldbeconsideredwhenevaluatingethicaldilemmasare:
（a）Identifywhowillbenefitfromthesituation（often,themanageroremployee）andhowotherswillbeharmed（otheremployees,thecompany’sreputation,owners,creditors,andthepublicingeneral）.
（b）Identifythealternativecoursesofaction.
（c）Choosethealternativethatisthemostethical–thatwhichyouwouldbeproudtohavereportedinthenewsmedia.Often,thereisnoonerightanswerandhardchoiceswillneedtobemade.Followingstrongethicalpracticesisakeypartofensuringgoodfinancialreportingbybusinessesofallsizes.
18.Accountingfraudsandcasesinvolvingacademicdishonestyaresimilarinmanyrespects.Bothinvolvedeceivingothersinanattempttoinfluencetheiractionsordecisions,oftenresultingintemporarypersonalgainforthedeceiver.Forexample,whenanaccountingfraudiscommitted,financialstatementusersmaybemisledintomakingdecisionstheywouldn’thavemadehadthefraudnotoccurred（e.g.,creditorsmightloanmoneytothecompany,investorsmightinvestinthecompany,orstockholdersmightrewardtopmanagerswithbigbonuses）.Whenacademicdishonestyiscommitted,instructorsmightassignahighergradethaniswarrantedbythestudent’sindividualcontribution.Anothersimilarityisthat,asaconsequenceofthedeception,innocentbystandersmaybeadverselyaffectedbyfraudandacademicdishonesty.Fraudmayrequirethecompanytochargehigherpricestocustomerstocovercostsincurredasaresultofthefraud.Academicdishonestymayleadtostrictergradingstandards,withsignificantdeductionstakenforinadequatedocumentationofsourcesreferenced.Afinalsimilarityisthatiffraudandacademicdishonestyareultimatelyuncovered,botharelikelytoleadtoadverselong-termconsequencesfortheperpetrator.Fraudstersmaybefined,imprisoned,andencounteranabruptendtotheircareers.Studentswhocheatmaybepenalizedthroughlowercoursegradesorexpulsion,andmightfinditimpossibletoobtainacademicreferencesforemploymentapplications.
Authors'RecommendedSolutionTime
（Timeinminutes）
Mini-exercises
Exercises
Problems
SkillsDevelopmentCases*
ContinuingCase
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
3
1
10
CP1-1
45
1
20
1
45
2
12
2
10
CP1-2
10
2
20
3
12
3
15
CP1-3
50
3
30
4
6
4
25
CP1-4
5
4
30
5
4
5
25
PA1-1
45
5
20
6
6
6
10
PA1-2
10
6
30
7
6
7
15
PA1-3
50
7
45
8
4
8
10
PA1-4
5
9
4
9
20
PB1-1
45
10
3
10
10
PB1-2
10
11
3
11
3
PB1-3
50
12
6
12
3
PB1-4
5
13
5
14
5
15
4
16
12
*Duetothenatureofcases,itisverydifficulttoestimatetheamountoftimestudentswillneedtocompletethem.As
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