Chapter 1 (2).docx - Chapter 1 Introducing Financial...

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Chapter 1 Introducing Financial Accounting Learning Objectives – Coverage by Question Mini- Exercises Exercises Problems Cases and Projects LO1 Identify the users of accounting information and discuss the costs and benefits of disclosure. 25 28, 34 49, 50 LO2 – Describe a company’s business activities and explain how these activities are represented by the accounting equation. 19, 20, 21 27, 29, 32, 33 36, 37, 38 47 LO3 – Introduce the four key financial statements including the balance sheet, income statement, statement of stockholders’ equity and statement of cash flows. 22, 23, 24 29, 30, 31 37, 38, 39, 40, 41, 42, 43, 44, 45 46, 47, 49 LO4 Describe the institutions that regulate financial accounting and their role in establishing generally accepted accounting principles. 26 34 50 LO5 – Compute two key ratios that are commonly used to assess profitability and risk – return on equity and the debt-to-equity ratio. 32, 33 36, 43, 44, 45 46, 47, 48, 49 LO6 – Appendix 1A – Explain the conceptual framework for financial reporting. 35 ©Cambridge Business Publishers, 2018 Solutions Manual, Chapter 1 1-1
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QUESTIONS Q1-1. Organizations undertake planning activities that subsequently shape three major activities: financing, investing, and operating. Financing is the means used to pay for resources. Investing refers to the buying and selling of resources necessary to carry out the organization’s plans. Operating activities are the actual carrying out of these plans. (Planning is the glue that connects these activities, including the organization’s ideas, goals and strategies.) Q1-2. An organization’s financing activities (liabilities and equity = sources of funds) pay for investing activities (assets = uses of funds). An organization cannot have more or less assets than its liabilities and equity combined and, similarly, it cannot have more or less liabilities and equity than its total assets. This means: assets = liabilities + equity. This relation is called the accounting equation (sometimes called the balance sheet equation , or BSE), and it applies to all organizations at all times. Q1-3. The four main financial statements are: income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows. The income statement provides information relating to the company’s revenues, expenses and profitability over a period of time. The balance sheet lists the company’s assets (what it owns), liabilities (what it owes), and stockholders’ equity (the residual claims of its owners) as of a point in time. The statement of stockholders’ equity reports on the changes to each stockholders’ equity account during the year. Some changes to stockholders’ equity, such as those resulting from the payment of dividends and unrealized gains (losses) on marketable securities, can only be found in this statement as they are not included in the computation of net income. The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash, that is, from what sources the company has derived its cash and how that cash has been used.
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