STATEMENT OF CASH FLOWS

4. - SOLUTION MANUAL FOR FINANCIAL ACCOUNTING 2ND EDITION BY SPICELAND 4. - SOLUTION MANUAL FOR FINANCIAL ACCOUNTING 2ND EDITION BY SPICELAND 4. - SOLUTION MANUAL FOR FINANCIAL ACCOUNTING 2ND EDITION BY SPICELAND 4. - SOLUTION MANUAL FOR FINANCIAL ACCOUNTING 2ND EDITION BY SPICELAND
SOLUTION MANUAL FOR FINANCIAL ACCOUNTING 2ND EDITION BY SPICELAND
4. Statement of cash flows: Cash activities related to operating, investing, and financing activitiesduring an interval of time.

Question 1-13

Balances of accounts reported in the income statement, statement of stockholders’ equity, andstatement of cash flows reflect activity from the beginning of the period through the end of the period.Balances of accounts reported in the balance sheet reflect all activity over the life of the company asof a single date, the end of the period.

Answers to Review Questions (continued)

Question 1-14

Basic revenues would include sale of products (such as toys, dolls, and games) and services (suchas theme park tickets). Expenses include cost of merchandise sold, employee salaries, utilities,advertising, taxes, interest, and legal fees.

Question 1-15

The accounting equation is: Assets = Liabilities + Stockholders’ Equity. The format of the balancesheet follows the accounting equation.

Question 1-16

Assets would include items such as merchandise inventory, office supplies, buildings, land, trucks,and equipment. Liabilities would include items such as amounts owed to employees, suppliers, taxingauthorities, and lenders.

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Question 1-17

Retained earnings represent the cumulative amount of net income earned over the life of thecompany that has not been distributed to stockholders as dividends. Net income is shown in theincome statement and retained earnings are reported in the balance sheet. Thus, retained earningsrepresent a balance sheet account which reflects the cumulative income statements over the life ofthe company (less any dividends).The statement of cash flows reports operating, investing, and financing cashflows. Examples of each include:

Question 1-18

Operating – selling merchandise, paying employee salaries, and paying for advertisement.Investing – purchasing land and buildings to open new stores.Financing – Borrowing from lenders or issuing stock to owners to obtain funds necessary toexpand operations.Two other important sources of information are the (1) management discussionand analysis of the company’s activities and (2) footnote disclosures to the

Question 1-19

financial statements.Successful companies use their resources efficiently to sell products andservices for a profit. Unsuccessful companies either offer lower-quality products

Question 1-20

and services or do not efficiently keep their costs low. When a company isunprofitable, investors will neither invest in nor lend to the firm. Without these sources offinancing, eventually the company will fail. When a company is able to make a profit, investorsand creditors are willing to transfer their resources to it, and the company will expand its profitableoperations even further. Investors and creditors rely heavily on financial accounting information inmaking investment and lending decisions.GAAP refers to Generally AcceptedAccounting Principles, or the rules of financialaccounting. The fact that all companies use thesame rules is critical to financial statement users,

Question 1-21

because it allows them to accurately comparefinancial information among companies when they are making decisions about where to lend orinvest their resources.The Financial Accounting Standards Board (FASB) is primarily responsible for

Question 1-22

the establishment of GAAP in the United States. The International AccountingStandards Board (IASB) serves this function on an international basis.

Question 1-23

U.S. GAAP refers to the set of accounting standards being developed in the United States by theFinancial Accounting Standards Board (FASB). IFRS (International Financial Reporting Standards)refers to the set of accounting standards being developed by the International Accounting StandardsBoard (IASB). The IASB promotes the use of IFRS around the world. Today, the IASB and FASBwork closely in an effort to converge the two sets of accounting standards.

Question 1-24

The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restoreinvestor confidence in financial accounting following the stock market crash in 1929 and theensuing Great Depression. The SEC has the power to require companies with publicly tradedsecurities to prepare periodic financial statements for distribution to investors and creditors.The role of auditors is to help ensure that management has in factappropriately applied GAAP in preparing the company’s financial statements.

Question 1-25

They are hired by a company as an independent party to express a professionalopinion of the accuracy of that company’s financial statements. Auditors play a major role ininvestors’ and creditors’ decisions by adding credibility to the financial statements.The three objectives of financial reporting are providing information that:

Question 1-26