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Unformatted text preview: 1-1Odd-numbered SolutionsCHAPTER 1INTRODUCTION TO BUSINESS ACTIVITIES ANDOVERVIEW OF FINANCIAL STATEMENTSAND THE REPORTING PROCESSQuestions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions1.1The first question at the end of each chapter requires the student to reviewthe important concepts or terms discussed in the chapter. In addition tothe definitions or descriptions in the chapter, a glossary appears at the endof the book.1.3A balance sheet reports the assets, liabilities, and shareholders’ equity of afirm at a moment in time (similar to a snapshot), whereas the incomestatement and statement of cash flows report amounts for a period of time(similar to a motion picture).1.5As Chapter 3 makes clear, firms do not necessarily recognize revenueswhen they receive cash or recognize expenses when they disburse cash.Thus, net income will not necessarily equal cash flow from operations eachperiod. Furthermore, firms disburse cash to acquire property, plant andequipment, repay debt, and pay dividends. Thus, net income and cash flowsusually differ. A profitable firm will likely borrow funds in order to remain inbusiness, but eventually operations must generate cash to repay theborrowing.1.7A wide range of individuals and entities (creditors, investors, securityanalysts, governmental agencies) use financial accounting reports for abroad range of purposes. If each firm selected whatever format andcontent of financial reports it deemed best, the resulting reporting processwould probably be incomprehensible to many users. Accounting reportsgenerated for internal management purposes, on the other hand, satisfythe information needs of a more limited set of users. Standardization is,therefore, not as necessary.1.9The accounting method would be uniform but the resulting information inthe financial statements may not provide uniform measures of financialposition or results of operations. If the economic characteristics of firms’activities differ, then different accounting methods may be needed to reflectthese differences.Odd-numbered Solutions1-21.11We would disagree. Within capital market settings, someone must analyzeand interpret financial accounting reports if market prices are toincorporate information from those reports. The principal message ofefficient market research is that digestion of such information occurs veryquickly. In addition, there are many users and uses of financial accountingreports outside of a capital market setting (lending, antitrust regulation,competitor analysis).1.13(Mattel; balance sheet relations.) (Amounts in Millions)Share-Current+ Noncurrent = Current+ Noncurrent +holders’AssetsAssetsLiabilitiesLiabilitiesEquity?+$2,071=$1,649+$832+$1,979Current assets total $2,389 million....
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This note was uploaded on 05/31/2008 for the course ORIE 310 taught by Professor Callister during the Fall '07 term at Cornell University (Engineering School).
- Fall '07