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Solution Manual for Fundamentals of Financial Accounting (7th Edition)
ISBN:9781260771381
Edition by Fred Phillips, Robert Libby & Patricia Libby | Complete Solutions for
Chapters 1–13 | Multiple-Choice Questions With Answers And Detailed Explanations
|| Complete A+ Guide
ACADEMICACHIEVER STUVIA
,https://www.stuvia.com/en-us/user/AcademicACHIEVER
TABLE OF CONTENTS
CHAPTER 1: Business Decisions and Financial Accounting CHAPTER 2: The
Balance Sheet
CHAPTER 3: The Income Statement
CHAPTER 4: Adjustments, Financial Statements, and Financial Results CHAPTER 5:
Fraud, Internal Control, and Cash
CHAPTER 6: Merchandising Operations and the Multi-step Income Statement CHAPTER 7:
Inventory and Cost of Goods Sold
CHAPTER 8: Receivables, Bad Debt Expense, and Interest Revenue CHAPTER 9: Long-
Lived Tangible and Intangible Assets
CHAPTER 10: Liabilities
CHAPTER 11: Shareholders' Equity
CHAPTER 12: Statement of Cash Flows
CHAPTER 13: Measuring and Evaluating Financial Performance
,https://www.stuvia.com/en-us/user/AcademicACHIEVER
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 proprietor). 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 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 shareholders 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
shareholders‘ equity of only that business and not the personal assets, liabilities, and equity of the
shareholders. The financial statements of a company show the results of the business activities of only that
company.
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.
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(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
shareholders, or paying dividends to shareholders 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
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
shareholders‘ 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, 2020,‖ because they report the inflows and outflows of resources
during a period of time. In contrast, the balance sheet would be dated ―At December 31, 2020,‖ because
it represents the assets, liabilities and shareholders‘ 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 + Shareholders‘ Equity. Assets are
the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the business. It includes
amounts contributed to the business (by investors through purchasing the company‘s shares) and the
amounts earned and accumulated through profitable business operations.
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.)
Solution Manual for Fundamentals of Financial Accounting (7th Edition)
ISBN:9781260771381
Edition by Fred Phillips, Robert Libby & Patricia Libby | Complete Solutions for
Chapters 1–13 | Multiple-Choice Questions With Answers And Detailed Explanations
|| Complete A+ Guide
ACADEMICACHIEVER STUVIA
,https://www.stuvia.com/en-us/user/AcademicACHIEVER
TABLE OF CONTENTS
CHAPTER 1: Business Decisions and Financial Accounting CHAPTER 2: The
Balance Sheet
CHAPTER 3: The Income Statement
CHAPTER 4: Adjustments, Financial Statements, and Financial Results CHAPTER 5:
Fraud, Internal Control, and Cash
CHAPTER 6: Merchandising Operations and the Multi-step Income Statement CHAPTER 7:
Inventory and Cost of Goods Sold
CHAPTER 8: Receivables, Bad Debt Expense, and Interest Revenue CHAPTER 9: Long-
Lived Tangible and Intangible Assets
CHAPTER 10: Liabilities
CHAPTER 11: Shareholders' Equity
CHAPTER 12: Statement of Cash Flows
CHAPTER 13: Measuring and Evaluating Financial Performance
,https://www.stuvia.com/en-us/user/AcademicACHIEVER
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 proprietor). 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 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 shareholders 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
shareholders‘ equity of only that business and not the personal assets, liabilities, and equity of the
shareholders. The financial statements of a company show the results of the business activities of only that
company.
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.
, https://www.stuvia.com/en-us/user/AcademicACHIEVER
(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
shareholders, or paying dividends to shareholders 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
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
shareholders‘ 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, 2020,‖ because they report the inflows and outflows of resources
during a period of time. In contrast, the balance sheet would be dated ―At December 31, 2020,‖ because
it represents the assets, liabilities and shareholders‘ 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 + Shareholders‘ Equity. Assets are
the economic resources controlled by the company. Liabilities are
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the business. It includes
amounts contributed to the business (by investors through purchasing the company‘s shares) and the
amounts earned and accumulated through profitable business operations.
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.)
