SOLUTION MANUAL FOR
Fundamentals of Financial Accounting 7e Phillips
Chapter 1-13 with Appendix C&D
Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business‘s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy to
establish. Another advantage is that income from a sole proprietorship is taxed only once in the hands
of the individual proprietor (income from a corporation is taxed in the corporation and then again in
the hands of the individual shareholder). A disadvantage of operating as a sole proprietorship, rather
than a corporation, is that the individual proprietor can be held responsible for the debts of the
business.
3. Financial accounting focuses on preparing and using the financial statements that are made available
to owners and external users such as customers, creditors, and potential investors who are interested
in reading them. Managerial accounting focuses on other accounting reports that are not released to
the general public, but instead are prepared for internal decision making and used by employees,
supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The internal groups
are comprised of the various managers of the business. The external groups include investors,
creditors, governmental agencies, other interested parties, and the public at large.
5. The business itself, not the individual stockholders who own the business, is viewed as owning the
assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the assets,
liabilities, and stockholders‘ equity of only that business and not the personal assets, liabilities, and
equity of the stockholders. The financial statements of a company show the results of the business
activities of only that company.
Fundamentals of Financial 1-1
Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,6. (a) Operating – These activities are directly related to earning profits. They include buying supplies,
making products, serving customers, cleaning the premises, advertising, renting a building, repairing
equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive resources with long lives (such
as buildings, land, equipment, and tools), purchasing investments, and lending to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving contributions from
stockholders, or paying dividends to stockholders are considered financing activities.
7. The heading of each of the four primary financial statements should include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time that the statement covers
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
stockholders‘ equity) of a business at a point in time.
(b) The purpose of the income statement is to present information about the revenues,
expenses, and net income of a business for a specified period of time.
(c) The statement of retained earnings reports the way that net income and the distribution of
dividends affected the financial position of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
investing, and financing activities caused its cash balance to change over a particular period of
time.
9. The income statement, statement of retained earnings, and statement of cash flows would be dated
―For the Year Ended December 31, 2021,ǁ because they report the inflows and outflows of
resources over a period of time. In contrast, the balance sheet would be dated ―At December 31,
2021,ǁ because it represents the assets, liabilities and stockholders‘ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total expenses
exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders‘ Equity. Assets
are the economic resources controlled by the company. Liabilities are amounts owed by the
business. Stockholders‘ equity is the owners‘ claims to the business. It includes amounts contributed
to the business (by investors through purchasing the company‘s stock) and the amounts earned and
accumulated through profitable business operations.
Fundamentals of Financial 1-2
Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
increases in a company‘s resources, arising primarily from its operating activities. Expenses are
decreases in a company‘s resources, arising primarily from its operating activities. Net Income is
equal to revenues minus expenses. (If expenses are greater than revenues, the company has a
Net Loss.)
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net Income -
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings which is
the prior year‘s ending retained earnings reported on the prior year‘s balance sheet. The current
year's net income reported on the income statement is added and the current year's dividends are
subtracted from this amount. (If a net loss occurs, It would be subtracted, along with the dividends,
from the prior year‘s ending retained earnings balance.)The ending retained earnings amount is
reported on the end-of-year balance sheet. 14. The equation for the statement of cash flows is: Cash
flows from operating activities + Cash flows from investing activities + Cash flows from financing
activities = Change in cash for the period. Change in cash for the period + Beginning cash balance =
Ending cash balance. The net cash flows for the period represent the increase or decrease in cash
that occurred during the period. Cash flows from operating activities are cash flows directly related to
earning income (normal business activity). Cash flows from investing activities include cash flows that
are related to the acquisition or sale of the company‘s long-term assets. Cash flows from financing
activities are directly related to the financing of the company.
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary responsibility for
setting the detailed rules that become Generally Accepted Accounting Principles (GAAP) in the
United States. (Internationally, the International Accounting Standards Board (IASB) has the
responsibility for setting accounting rules known as International Financial Reporting Standards
(IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial information for
present and potential investors, lenders, and other creditors in making decisions in their capacity as
capital providers. Financial information must show relevance and faithful representation, as well as
be comparable, verifiable, timely, and understandable.
Acc
Fundamentals of Financial oun
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, ting, 7/e
1-3
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Fundamentals of Financial Accounting 7e Phillips
Chapter 1-13 with Appendix C&D
Chapter 1
Business Decisions and Financial Accounting
ANSWERS TO QUESTIONS
1. Accounting is a system of analyzing, recording, and summarizing the results of a
business‘s activities and then reporting them to decision makers.
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy to
establish. Another advantage is that income from a sole proprietorship is taxed only once in the hands
of the individual proprietor (income from a corporation is taxed in the corporation and then again in
the hands of the individual shareholder). A disadvantage of operating as a sole proprietorship, rather
than a corporation, is that the individual proprietor can be held responsible for the debts of the
business.
3. Financial accounting focuses on preparing and using the financial statements that are made available
to owners and external users such as customers, creditors, and potential investors who are interested
in reading them. Managerial accounting focuses on other accounting reports that are not released to
the general public, but instead are prepared for internal decision making and used by employees,
supervisors, and managers who run the company.
4. Financial reports are used by both internal and external groups and individuals. The internal groups
are comprised of the various managers of the business. The external groups include investors,
creditors, governmental agencies, other interested parties, and the public at large.
5. The business itself, not the individual stockholders who own the business, is viewed as owning the
assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the assets,
liabilities, and stockholders‘ equity of only that business and not the personal assets, liabilities, and
equity of the stockholders. The financial statements of a company show the results of the business
activities of only that company.
Fundamentals of Financial 1-1
Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,6. (a) Operating – These activities are directly related to earning profits. They include buying supplies,
making products, serving customers, cleaning the premises, advertising, renting a building, repairing
equipment, and obtaining insurance coverage.
(b) Investing – These activities involve buying and selling productive resources with long lives (such
as buildings, land, equipment, and tools), purchasing investments, and lending to others.
(c) Financing – Any borrowing from banks, repaying bank loans, receiving contributions from
stockholders, or paying dividends to stockholders are considered financing activities.
7. The heading of each of the four primary financial statements should include the following:
(a) Name of the business
(b) Name of the statement
(c) Date of the statement, or the period of time that the statement covers
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
stockholders‘ equity) of a business at a point in time.
(b) The purpose of the income statement is to present information about the revenues,
expenses, and net income of a business for a specified period of time.
(c) The statement of retained earnings reports the way that net income and the distribution of
dividends affected the financial position of the company during the period.
(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
investing, and financing activities caused its cash balance to change over a particular period of
time.
9. The income statement, statement of retained earnings, and statement of cash flows would be dated
―For the Year Ended December 31, 2021,ǁ because they report the inflows and outflows of
resources over a period of time. In contrast, the balance sheet would be dated ―At December 31,
2021,ǁ because it represents the assets, liabilities and stockholders‘ equity at a specific date.
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total expenses
exceed total revenues.
11. The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders‘ Equity. Assets
are the economic resources controlled by the company. Liabilities are amounts owed by the
business. Stockholders‘ equity is the owners‘ claims to the business. It includes amounts contributed
to the business (by investors through purchasing the company‘s stock) and the amounts earned and
accumulated through profitable business operations.
Fundamentals of Financial 1-2
Accounting, 7/e
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
,12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
increases in a company‘s resources, arising primarily from its operating activities. Expenses are
decreases in a company‘s resources, arising primarily from its operating activities. Net Income is
equal to revenues minus expenses. (If expenses are greater than revenues, the company has a
Net Loss.)
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net Income -
Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings which is
the prior year‘s ending retained earnings reported on the prior year‘s balance sheet. The current
year's net income reported on the income statement is added and the current year's dividends are
subtracted from this amount. (If a net loss occurs, It would be subtracted, along with the dividends,
from the prior year‘s ending retained earnings balance.)The ending retained earnings amount is
reported on the end-of-year balance sheet. 14. The equation for the statement of cash flows is: Cash
flows from operating activities + Cash flows from investing activities + Cash flows from financing
activities = Change in cash for the period. Change in cash for the period + Beginning cash balance =
Ending cash balance. The net cash flows for the period represent the increase or decrease in cash
that occurred during the period. Cash flows from operating activities are cash flows directly related to
earning income (normal business activity). Cash flows from investing activities include cash flows that
are related to the acquisition or sale of the company‘s long-term assets. Cash flows from financing
activities are directly related to the financing of the company.
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary responsibility for
setting the detailed rules that become Generally Accepted Accounting Principles (GAAP) in the
United States. (Internationally, the International Accounting Standards Board (IASB) has the
responsibility for setting accounting rules known as International Financial Reporting Standards
(IFRS).)
16. The main goal of accounting rules is to ensure that companies produce useful financial information for
present and potential investors, lenders, and other creditors in making decisions in their capacity as
capital providers. Financial information must show relevance and faithful representation, as well as
be comparable, verifiable, timely, and understandable.
Acc
Fundamentals of Financial oun
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
, ting, 7/e
1-3
© 2022 by McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
