Q1-1. Organizations undertake four major activities: planning, financing, investing, and
operating. Financing is the means a company uses to pay for resources. Investing
refers to the buying and selling of resources necessary to carry out the organization’s
plans. Operating activities are the actual carrying out of these plans. Planning is the
glue that connects these activities, including the organization’s ideas, goals and
strategies. Financial accounting information provides valuable input into the planning
process, and, subsequently, reports on the results of plans so that corrective action
can be taken, if necessary.
Q1-2. An organization’s financing activities (liabilities and equity = sources of funds) pay for
investing activities (assets = uses of funds). An organization’s assets cannot be more
or less than its liabilities and equity combined. This means: assets = liabilities +
equity. This relation is called the accounting equation (sometimes called the balance
sheet equation), and it applies to all organizations at all times.
Q1-3. The four main financial statements are: income statement, balance sheet, statement
of stockholders’ equity, and statement of cash flows. The income statement provides
information about the company’s revenues, expenses and profitability over a period
of time. The balance sheet lists the company’s assets (what it owns), liabilities (what
it owes), and stockholders’ equity (the residual claims of its owners) as of a point in
time. The statement of stockholders’ equity reports on the changes to each
stockholders’ equity account during the period. The statement of cash flows identifies
the sources (inflows) and uses (outflows) of cash, that is, where the company got its
cash from and what it did with it. Together, the four statements provide a complete
picture of the financial condition of the company.
Q1-4. The balance sheet provides information that helps users understand a company’s
resources (assets) and claims to those resources (liabilities and stockholders’ equity)
as of a given point in time.
Solutions Manual, Module 1 1-1
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