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Ch_01 - CHAPTER 1 INTRODUCTION TO BUSINESS ACTIVITIES AND...

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1-1 Solutions CHAPTER 1 INTRODUCTION TO BUSINESS ACTIVITIES AND OVERVIEW OF FINANCIAL STATEMENTS AND THE REPORTING PROCESS Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions 1.1 The first question at the end of each chapter requires the student to review the important concepts or terms discussed in the chapter. In addition to the definitions or descriptions in the chapter, a glossary appears at the end of the book. 1.2 Setting Goals and Strategies : A charitable organization would not pursue profit or increasing wealth as goals. Instead, it would direct its efforts at providing some type of service to particular constituencies. Financing : Charitable organizations generally obtain the majority of their financing from contributions, although they may engage in borrowing in some situations. Charitable organizations do not issue common stock or other forms of owners’ equity. Because they do not operate for a profit, charitable organizations do not have retained earnings. Investing : Charitable organizations may acquire supplies, buildings, equipment and other assets to carry out their charitable activities. Operations : A charitable organization might prepare a financial statement each period that compares contributions received with operating expenses. Although such a financial statement might resemble an income statement, the organization would probably not label the difference between contributions received and operating expenses as net income or net loss. 1.3 A balance sheet reports the assets, liabilities, and shareholders’ equity of a firm at a moment in time (similar to a snapshot), whereas the income statement and statement of cash flows report amounts for a period of time (similar to a motion picture).
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Solutions 1-2 1.4 Revenues measure the increase in net assets (assets minus liabilities) and expenses measure the decrease in net assets from selling goods and providing services. An asset such as inventory generally appears on the balance sheet at acquisition cost while it is held. Thus, the asset valuation remains the same and the firm recognizes no revenue. When the firm sells the inventory, the inventory item leaves the firm and cash or a receivable from a customer comes in. If more assets flow in than flow out, total assets increase and the firm recognizes income (revenue minus expense). 1.5 As Chapter 3 makes clear, firms do not necessarily recognize revenues when they receive cash or recognize expenses when they disburse cash. Thus, net income will not necessarily equal cash flow from operations each period. Furthermore, firms disburse cash to acquire property, plant and equipment, repay debt, and pay dividends. Thus, net income and cash flows usually differ. A profitable firm will likely borrow funds in order to remain in business, but eventually operations must generate cash to repay the borrowing.
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