SMCH01 - SOLUTIONS MANUAL to accompany FINANCIAL ACCOUNTING...

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Unformatted text preview: SOLUTIONS MANUAL to accompany FINANCIAL ACCOUNTING A Business Perspective 9e Hermanson n Edwards Solutions Manual, Chapter 1 1 1 ACCOUNTING AND ITS USE IN BUSINESS DECISIONS ANSWERS TO QUESTIONS 1. This statement is partially true because a business is concerned with matters such as assets, liabilities, stockholders' equity, revenues, expenses, net income, dividends, and taxes, and because it is the function of accounting to provide information on these. The statement is deficient in several respects: (1) business is concerned with other matters such as pollution, political affairs, social conditions, and the legal environment, matters that cannot be easily expressed in accounting terms; and (2) many entities other than business organizations hold and use economic resources with the result that accounting plays an important role in nonbusiness entities such as in the various levels of government and in churches. 2. Simply stated, an asset is a thing of value to its owner. More strictly, the accountant records as assets resources, such as cash, possessing service potential that can be measured. A liability is a debt of an entity, usually arising from past events or transactions. Stockholders' equity is the claim or interest of the stockholders in the assets of a business and is the residual equity or interest in the entity. 3. Liabilities and stockholders' equity differ in that the former usually have a maturity date, while the items comprising the latter do not. They are similar in that they are both sources of the assets of the entity. 4. Accounts payable and notes payable differ primarily with respect to the nature of the evidence supporting the debt. A loose agreement, typically supported only by an invoice, supports the account payable, while a formal promissory note supports the note payable. Also, a note payable generally carries a specified interest rate, whereas an account payable does not. They are similar in that both will require payment in the near future. 5. Revenues are the inflows of new assets into a firm from the services it renders or the goods it sells. Typically, revenues are measured by the prices agreed upon in the exchanges in which goods are sold or services are rendered. 6. Expenses are the costs incurred or the sacrifices made to generate revenues or, more simply, the costs of operating the business. Expenses are measured by the costs of the assets consumed to produce revenues. 7. The balance sheet contains a listing of a firm's assets, liabilities, and stockholders' equity as of a specific time. Such information is used to appraise the solvency of the firm. 8. The income (or earnings) statement reports on the revenues, expenses, and net income of a business. Such information is essentially a report on the profitability of the business....
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SMCH01 - SOLUTIONS MANUAL to accompany FINANCIAL ACCOUNTING...

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