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Unformatted text preview: Problem Solutions Chapter 1 9 PROBLEM SOLUTIONS 1-1 Using Accounting Information 1. The external users of financial accounting information are the current and potential owners (shareholders), the current and potential creditors, and other individuals and entities that are not managers or employees of the business. 2. The basic types of decisions made by external users are investing and lending decisions. These are both resource allocation decisions, and they involve whether those external to the business are willing to entrust funds to the business. 3. The four financial statements and the information they contain are: The balance sheet: lists the resources (assets) of the business and the claims on the resources by outsiders (liabilities) and the owners (shareholders equity) at a point in time. The income statement: lists the revenues and expenses of the business for a period of time and shows the difference between these as net income. The statement of cash flows: lists the cash inflows and outflows for the business for a period of time categorized as operating cash flows, investing cash flows, and financing cash flows. The statement of retained earnings: shows the changes that occurred in the balance in retained earnings during a period of time due to net income and dividends. 4. The information in the balance sheet lets users estimate whether the business has the short-term resources to pay its liabilities and the long-term resources to continue to earn profits; the changes in the long-term assets also let users see whether the business is growing or shrinking and whether additional assets will be required in the future. The information in the income statement lets users see the results of operations of the business during the current period and whether the business is able to provide goods and services to customers for a profit. The statement of cash flows lets the users see the primary sources and uses of cash and whether the business is generating cash for dividends (investors) and to pay interest and repay loans (creditors); inability to pay interest and loans is a common reason businesses fail. The statement of retained earnings lets the owners (shareholders) see at a glance the two items that are important to themnet income and dividends. INTRODUCTION TO FINANCIAL REPORTING AND ANALYSIS 4 TH EDITION 10 1-2 The Balance Sheet W.R. G RACE 1. W.R. G RACE Balance Sheet December 31, 2006 (All amounts in millions) Assets Liabilities Cash and equivalents $ 536.3 Accounts Payable $ 172.7 Accounts Receivable 426.3 Debt Payable 3.3 Inventories 284.6 Other Current Liabilities 272.6 Other Current Assets 121.6 Total Current Liabilities $ 448.6 Total Current Assets $1,368.8 Long-term Obligations 3,221.6 Property and Equipment 664.5 Other Liabilities 517.0 Intangible Assets 116.5 Total Liabilities $4,187.2 Other Assets 1,612.0 Total Assets $3,761.8 Shareholders Equity Contributed Capital 62.2 Retained deficit (487.6)(487....
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- Winter '08
- Financial Accounting