INTRODUCTION TO BUSINESS ACTIVITIES AND
OVERVIEW OF FINANCIAL STATEMENTS
AND THE REPORTING PROCESS
Questions, Exercises, and Problems: Answers and Solutions
The first question at the end of each chapter asks the student to review the important terms and concepts discussed in the chapter. Students may wish to consult the glossary at the end of the book in addition to the definitions and discussions in the chapter.
Setting Goals and Strategies: Although a charitable organization must obtain sufficient resources to fund its operations, it would not pursue profits or wealth increases as goals. A charitable organization would direct its efforts toward providing services to its constituencies.
Financing: A charitable organization may obtain some or all of its financing from donations (contributions). A charitable organization does not issue common stock or other forms of shareholders’ equity, nor does it have retained earnings.
Investing: Similar to business firms, charitable organizations acquire productive capacity (for example, buildings) to carry out their activities.
Operations: A charitable organization might prepare financial statements that compare inflows (for example, contributions) with outflows. While these statements might appear similar to income statements, there would be no calculation of net income because the purpose of the charitable organization is to provide services to its constituents, not seek profits.
The balance sheet shows assets, liabilities and shareholders’ equity as of a specific date (the balance sheet date), similar to a snapshot. The income statement and statement of cash flows report changes in assets and liabilities over a period of time, similar to a motion picture.
The auditor evaluates the accounting system, including its ability to record transactions properly and its operational effectiveness, and also determines whether the financial reports prepared by the firm’s managers conform to the requirements of the applicable authoritative guidance. The auditor provides an audit opinion that reflects his professional conclusions. For most publicly traded firms in the U.S. the auditor also provides a sepa- 1.4 continued.
rate opinion on the effectiveness of the firm’s internal controls over financial reporting.
Management, under the oversight of the firm’s governing board, prepares the financial statements.
Employees and suppliers of goods such as raw materials or merchandise often provide the services or goods before they are paid. The firm has the benefit of consuming or using the goods or services before it transfers cash to the employees and suppliers. The length of the financing period is the number of days between when the employees and suppliers provide goods and services and when the firm pays cash to those employees and suppliers.
Accounts receivable represent amounts owed by customers for goods and services they have already received. The customer, therefore, has the benefit of the goods and services before it pays cash. The length of the financing period is the number of days between when the customer receives the goods and services and when the customer pays cash to the seller of those goods and services.
Both kinds of capacity represent investments in long-lived assets, with useful lives (or service lives) that can extend for several or many years. They differ in that land, buildings, and equipment represent physical capital, while patents and licenses represent intangible or intellectual capital.
A calendar year ends on December 31. A fiscal year ends on a date that is determined by the firm, perhaps based on its business model (for example, many retailers choose a fiscal year end that is close to the end of January). A firm can choose the calendar year as its fiscal year, and many do. Both calendar years and fiscal years have...
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