SOLUTION MANUAL ty
Fundamentals of Financial Accounting
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ty 7thEdition
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Fred Phillips, Robert Libby, All Chapters 1 - 13
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, TABLE OF CONTENTS ty ty t y
CHAPTER 1: Business Decisions and Financial Accounting
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t y CHAPTER 2: The Balance Sheet
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CHAPTER 3: The Income Statement
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CHAPTER 4: Adjustments, Financial Statements, and Financial Results
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ty CHAPTER 5: Fraud, Internal Control, and Cash
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CHAPTER 6: Merchandising Operations and the Multi-step Income Statement
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t y CHAPTER 7: Inventory and Cost of Goods Sold
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CHAPTER 8: Receivables, Bad Debt Expense, and Interest Revenue
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CHAPTER 9: Long-Lived Tangible and Intangible Assets
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CHAPTER 10: Liabilities
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CHAPTER 11: Shareholders' Equity
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ty CHAPTER 12: Statement of Cash Flows
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CHAPTER 13: Measuring and Evaluating Financial Performance
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,Chapter 1 ty
Business Decisions and Financial Accounting ty ty ty ty
ANSWERS TO QUESTIONS ty ty
1. Accounting is a system of analyzing, recording, and summarizing the results of
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a business‘s activities and then reporting them to decision makers.
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2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy
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to establish. Another advantage is that income from a sole proprietorship is taxed only once
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in the hands of the individual proprietor (income from a corporation is taxed in the corporation
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and then again in the hands of the individual proprietor). A disadvantage of operating as a
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sole proprietorship, rather than a corporation, is that the individual proprietor can be held
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responsible for the debts of the business.
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3. Financial accounting focuses on preparing and using the financial statements that are made
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available to owners and external users such as customers, creditors, and potential investors
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who are interested in reading them. Managerial accounting focuses on other accounting
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reports that are not released to the general public, but instead are prepared and used by
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employees, supervisors, and managers who run the company.
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4. Financial reports are used by both internal and external groups and individuals. The
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internal groups are comprised of the various managers of the business. The external
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groups include investors, creditors, governmental agencies, other interested parties, and
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the public at large.
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5. The business itself, not the individual shareholders who own the business, is viewed as owning the
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assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the
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assets, liabilities, and shareholders‘ equity of only that business and not the personal assets,
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liabilities, and equity of the shareholders. The financial statements of a company show the
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results of the business activities of only that company.
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6. (a) Operating – These activities are directly related to earning profits. They include buying
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supplies, making products, serving customers, cleaning the premises, advertising, renting a
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building, repairing equipment, and obtaining insurance coverage.
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, (b) Investing – These activities involve buying and selling productive resources with long lives
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(such as buildings, land, equipment, and tools), purchasing investments, and lending to others.
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(c) Financing – Any borrowing from banks, repaying bank loans, receiving contributions
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from shareholders, or paying dividends to shareholders are considered financing
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activities.
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7. The heading of each of the four primary financial statements should include the following:
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(a) Name of the business ty ty ty
(b) Name of the statement ty ty ty
(c) Date of the statement, or the period of time
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8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
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and shareholders‘ equity) of a business at a point in time.
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(b) The purpose of the income statement is to present information about the revenues,
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expenses, and net income of a business for a specified period of time.
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(c) The statement of retained earnings reports the way that net income and the distribution
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of dividends affected the financial position of the company during the period.
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(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
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investing, and financing activities caused its cash balance to change over a particular period
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of time.
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9. The income statement, statement of retained earnings, and statement of cash flows would be dated
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―For the Year Ended December 31, 2020,‖ because they report the inflows and outflows of
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resources during a period of time. In contrast, the balance sheet would be dated ―At
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December 31, 2020,‖ because it represents the assets, liabilities and shareholders‘ equity at a
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specific date.
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10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
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expenses exceed total revenues.
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11. The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders‘
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Equity. Assets are the economic resources controlled by the company. Liabilities are
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amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the business. It
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includes amounts contributed to the business (by investors through purchasing the company‘s
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shares) and the amounts earned and accumulated through profitable business operations.
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12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
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increases in a company‘s resources, arising primarily from its operating activities. Expenses
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are decreases in a company‘s resources, arising primarily from its operating activities. Net
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Income is equal to revenues minus expenses. (If expenses are greater than revenues, the
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company has a Net Loss.)
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Fundamentals of Financial Accounting
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ty 7thEdition
ty
Fred Phillips, Robert Libby, All Chapters 1 - 13
ty ty ty ty ty ty ty ty
, TABLE OF CONTENTS ty ty t y
CHAPTER 1: Business Decisions and Financial Accounting
ty ty ty ty ty ty
t y CHAPTER 2: The Balance Sheet
ty ty ty ty
CHAPTER 3: The Income Statement
ty ty ty ty
CHAPTER 4: Adjustments, Financial Statements, and Financial Results
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ty CHAPTER 5: Fraud, Internal Control, and Cash
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CHAPTER 6: Merchandising Operations and the Multi-step Income Statement
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t y CHAPTER 7: Inventory and Cost of Goods Sold
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CHAPTER 8: Receivables, Bad Debt Expense, and Interest Revenue
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CHAPTER 9: Long-Lived Tangible and Intangible Assets
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CHAPTER 10: Liabilities
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CHAPTER 11: Shareholders' Equity
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ty CHAPTER 12: Statement of Cash Flows
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CHAPTER 13: Measuring and Evaluating Financial Performance
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,Chapter 1 ty
Business Decisions and Financial Accounting ty ty ty ty
ANSWERS TO QUESTIONS ty ty
1. Accounting is a system of analyzing, recording, and summarizing the results of
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a business‘s activities and then reporting them to decision makers.
ty ty ty ty ty ty ty ty ty ty
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy
ty ty ty ty ty ty ty ty ty ty ty ty ty ty ty t y
to establish. Another advantage is that income from a sole proprietorship is taxed only once
ty ty ty ty ty ty ty ty ty ty ty ty ty t y ty
in the hands of the individual proprietor (income from a corporation is taxed in the corporation
ty ty ty ty ty ty ty ty ty ty ty ty ty ty t y ty
and then again in the hands of the individual proprietor). A disadvantage of operating as a
ty ty ty ty ty ty ty ty ty ty ty ty ty ty ty ty
sole proprietorship, rather than a corporation, is that the individual proprietor can be held
ty ty ty ty ty ty ty ty ty ty t y ty ty ty
responsible for the debts of the business.
ty ty ty ty ty ty ty
3. Financial accounting focuses on preparing and using the financial statements that are made
ty ty ty ty ty ty ty ty ty ty ty t y
available to owners and external users such as customers, creditors, and potential investors
ty ty ty ty ty ty ty ty ty ty ty ty t y
who are interested in reading them. Managerial accounting focuses on other accounting
ty ty ty ty ty ty ty ty ty ty ty t y
reports that are not released to the general public, but instead are prepared and used by
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employees, supervisors, and managers who run the company.
ty ty ty ty ty ty ty ty
4. Financial reports are used by both internal and external groups and individuals. The
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internal groups are comprised of the various managers of the business. The external
t y ty ty ty ty ty ty ty ty ty ty ty ty
groups include investors, creditors, governmental agencies, other interested parties, and
t y ty ty ty ty ty ty ty ty ty
the public at large.
t y ty ty ty
5. The business itself, not the individual shareholders who own the business, is viewed as owning the
ty ty ty ty ty ty ty ty ty ty ty ty ty ty ty
assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the
ty ty ty ty ty ty ty ty ty ty ty ty t y ty ty
assets, liabilities, and shareholders‘ equity of only that business and not the personal assets,
ty ty ty ty ty ty ty ty ty ty t y ty ty ty
liabilities, and equity of the shareholders. The financial statements of a company show the
ty ty ty ty ty ty ty ty t y ty ty ty ty ty
results of the business activities of only that company.
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6. (a) Operating – These activities are directly related to earning profits. They include buying
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supplies, making products, serving customers, cleaning the premises, advertising, renting a
ty ty ty ty ty ty ty ty ty ty t y
building, repairing equipment, and obtaining insurance coverage.
ty ty ty ty ty ty ty
, (b) Investing – These activities involve buying and selling productive resources with long lives
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(such as buildings, land, equipment, and tools), purchasing investments, and lending to others.
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(c) Financing – Any borrowing from banks, repaying bank loans, receiving contributions
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from shareholders, or paying dividends to shareholders are considered financing
ty ty ty ty ty ty ty ty ty t y
activities.
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7. The heading of each of the four primary financial statements should include the following:
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(a) Name of the business ty ty ty
(b) Name of the statement ty ty ty
(c) Date of the statement, or the period of time
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8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
t y ty ty ty ty ty ty ty ty ty ty ty ty t y
and shareholders‘ equity) of a business at a point in time.
t y ty ty ty ty ty ty ty ty ty ty
(b) The purpose of the income statement is to present information about the revenues,
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expenses, and net income of a business for a specified period of time.
t y t y ty ty ty ty ty ty ty ty ty ty ty
(c) The statement of retained earnings reports the way that net income and the distribution
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of dividends affected the financial position of the company during the period.
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(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
ty ty ty ty ty ty ty ty ty ty ty ty ty t y
investing, and financing activities caused its cash balance to change over a particular period
ty ty ty ty ty ty ty ty ty ty ty ty t y ty
of time.
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9. The income statement, statement of retained earnings, and statement of cash flows would be dated
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―For the Year Ended December 31, 2020,‖ because they report the inflows and outflows of
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resources during a period of time. In contrast, the balance sheet would be dated ―At
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December 31, 2020,‖ because it represents the assets, liabilities and shareholders‘ equity at a
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specific date.
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10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
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expenses exceed total revenues.
t y ty ty ty
11. The accounting equation for the balance sheet is: Assets = Liabilities + Shareholders‘
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Equity. Assets are the economic resources controlled by the company. Liabilities are
t y ty ty ty ty ty ty ty ty ty ty
amounts owed by the business. Shareholders‘ equity is the owners‘ claims to the business. It
ty ty ty ty ty ty ty ty ty ty ty ty ty ty ty
includes amounts contributed to the business (by investors through purchasing the company‘s
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shares) and the amounts earned and accumulated through profitable business operations.
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12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
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increases in a company‘s resources, arising primarily from its operating activities. Expenses
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are decreases in a company‘s resources, arising primarily from its operating activities. Net
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Income is equal to revenues minus expenses. (If expenses are greater than revenues, the
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company has a Net Loss.)
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