Chapter 03 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 3 UNDERSTANDING  FINANCIAL STATEMENTS I. Questions 1. A financial statement is a means of communicating information about an enterprise in financial (i.e., peso) terms. It represents information that the accountant believes is a true and fair representation of the financial activity of the enterprise. 2. Every financial statement relates to time in one way or another. A statement of financial position, or balance sheet, represent a “picture” of the enterprise at a point in time (e.g., the end of a month or year). An income statement and a statement of cash flows, on the other hand, cover activity that took place over a period of time (e.g., a month or year). 3. a. Creditors are interested in financial statements to assist them in evaluating the ability of a business to repay its debts. No one wants to extend credit to a company that is unable to meet its obligations as they come due. b. Potential investors use financial statements in selecting among alternative investment opportunities. They are interested in investing in companies in which the value of their investment will increase as a result of future profitable operations. c. Labor unions are interested in financial statements because the financial position of a company and its profits are important factors in the company’s ability to pay higher wages and to employ more people. 4. Business transactions affect a company’s financial position, and as a result they change the statement of financial position or balance sheet. The other financial statements – the income statement and the statement of cash flows – are detailed expansions of certain aspects of the statement of financial position and help explain how the company’s position changed over time. 5. The cost principle indicates that many assets are included in the financial records, and therefore, in the statement of financial position, at their original cost to the reporting enterprise. This principle affects 3-1
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Chapter 3 Understanding Financial Statements accounting for assets in several ways, one of which is that the amount of most assets is not adjusted periodically for changes in the market value of the assets. Instead, cost is retained as the basic method of accounting, regardless of changes in the market value of those assets. 6. The going concern assumption states that in the absence of evidence to the contrary (i.e., bankruptcy proceedings), an enterprise is expected to continue to operate in the foreseeable future. This means, for example, that it will continue to use the assets it has in its financial statements for the purpose for which they were acquired. 7. The three categories and the information included in each are: Operating activities – Cash provided by and used in revenue and expense transactions. Investing activities – Cash provided by and used as a result of
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Chapter 03 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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