SOLUTION MANUAL FOR f f
Fundamentals of Financial Accounting 7e Phillips f f f f f f
Chapter1-13 withAppendixC&D f f f f
Chapter 1 f f
Business Decisions and Financial Accounting
f f f f
ANSWERS TO QUESTIONS f f
1. Accounting is a system of analyzing, recording, and summarizing the results of a
f f f f f f f f f f f f f
business‘s activities and then reporting them to decision makers. f f f f f f f f f
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy
f f f f f f f f f f f f f f f f
to establish. Another advantage is that income from a sole proprietorship is taxed only once in
f f f f f f f f f f f f f f f f
the hands of the individual proprietor (income from a corporation is taxed in the corporation
f f f f f f f f f f f f f f f f f f
and then again in the hands of the individual shareholder). A disadvantage of operating as a
f f f f f f f f f f f f f f f f
sole proprietorship, rather than a corporation, is that the individual proprietor can be held
f f f f f f f f f f f f f f
responsible for the debts of the business.
f f f f f f f f
3. Financial accounting focuses on preparing and using the financial statements that are made
f f f f f f f f f f f f
available to owners and external users such as customers, creditors, and potential investors
f f f f f f f f f f f f f
who are interested in reading them. Managerial accounting focuses on other accounting
f f f f f f f f f f f f
reports that are not released to the general public, but instead are prepared for internal
f f f f f f f f f f f f f f f
decision making and used by employees, supervisors, and managers who run the company.
f f f f f f f f f f f f f f
4. Financial reports are used by both internal and external groups and individuals. The internal
f f f f f f f f f f f f f
groups are comprised of the various managers of the business. The external groups include
f f f f f f f f f f f f f f
investors, creditors, governmental agencies, other interested parties, and the public at large.
f f f f f f f f f f f f f
5. The business itself, not the individual stockholders who own the business, is viewed as owning the
f f f f f f f f f f f f f f f
assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the
f f f f f f f f f f f f f f f
assets, liabilities, and stockholders‘ equity of only that business and not the personal assets,
f f f f f f f f f f f f f f
liabilities, and equity of the stockholders. The financial statements of a company show the
f f f f f f f f f f f f f f
results of the business activities of only that company.
f f f f f f f f f f f f
Fundamentals of Financial f f 1-1
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
,6. (a) Operating – These activities are directly related to earning profits. They include buying
f f f f f f f f f f f f f
supplies, making products, serving customers, cleaning the premises, advertising, renting a
f f f f f f f f f f f
building, repairing equipment, and obtaining insurance coverage.
f f f f f f f f
(b) Investing – These activities involve buying and selling productive resources with long lives
f f f f f f f f f f f f
(such as buildings, land, equipment, and tools), purchasing investments, and lending to others.
f f f f f f f f f f f f f f
(c) Financing– Any borrowing from banks, repaying bank loans, receiving contributionsfrom f f f f f f f f f f f
stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
f f f f f f f f f f f
7. The heading of each of the four primary financial statements should include the following:
f f f f f f f f f f f f f f
(a) Name of the business f f f f
(b) Name of the statement f f f f
(c) Date of the statement, or the period of time that the statement covers
f f f f f f f f f f f f f
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
f f f f f f f f f f f f f f
and stockholders‘ equity) of a business at a point in time.
f f f f f f f f f f f f
(b) The purpose of the income statement is to present information about the
f f f f f f f f f f f
revenues, expenses, and net income of a business for a specified period of time.
f f f f f f f f f f f f f f f
(c) The statement of retained earnings reports the way that net income and the
f f f f f f f f f f f f
distribution of dividends affected the financial position of the company during the
f f f f f f f f f f f f
period.
f f
(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
f f f f f f f f f f f f f f
investing, and financing activities caused its cash balance to change over a
f f f f f f f f f f f f
particular period of time.
f f f f f
9. The income statement, statement of retained earnings, and statement of cash flows would be
f f f f f f f f f f f f f
dated ―For the Year Ended December 31, 2021,‖ because they report the inflows and
f f f f f f f f f f f f f f
outflows of resources over a period of time. In contrast, the balance sheet would be dated
f f f f f f f f f f f f f f f f
―At December 31, 2021,‖ because it represents the assets, liabilities and stockholders‘
f f f f f f f f f f f f
equity at a specific date.
f f f f f f
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
f f f f f f f f f f f f f f f f
expenses exceed total revenues.
f f f f f
11. The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders‘ Equity.
f f f f f f f f f f f f f
Assets are the economic resources controlled by the company. Liabilities are amounts owed
f f f f f f f f f f f f f f
by the business. Stockholders‘ equity is the owners‘ claims to the business. It includes amounts
f f f f f f f f f f f f f f f
contributed to the business (by investors through purchasing the company‘s stock) and the
f f f f f f f f f f f f f
amounts earned and accumulated through profitable business operations.
f f f f f f f f f
Fundamentals of Financial f f 1-2
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
,12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
f f f f f f f f f f f f f f
increases in a company‘s resources, arising primarily from its operating activities. Expenses
f f f f f f f f f f f f
are decreases in a company‘s resources, arising primarily from its operating activities. Net
f f f f f f f f f f f f f
Income is equal to revenues minus expenses. (If expenses are greater than revenues, the
f f f f f f f f f f f f f f
company has a Net Loss.)
f f f f f f
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net
f f f f f f f f f f f f f
Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained
f f f f f f f f f f f f
earnings which is the prior year‘s ending retained earnings reported on the prior year‘s
f f f f f f f f f f f f f f
balance sheet. The current year's net income reported on the income statement is added and
f f f f f f f f f f f f f f f
the current year's dividends are subtracted from this amount. (If a net loss occurs, It would be
f f f f f f f f f f f f f f f f f
subtracted, along with the dividends, from the prior year‘s ending retained earnings
f f f f f f f f f f f f
balance.)The ending retained earnings amount is reported on the end-of-year balance sheet.
f f f f f f f f f f f f
14. The equation for the statement of cash flows is: Cash flows from operating activities +
f ff f f f f f f f f f f f f f f f
Cash flows from investing activities + Cash flows from financing activities = Change in cash for
f f f f f f f f f f f f f f f f
the period. Change in cash for the period + Beginning cash balance = Ending cash balance.
f f f f f f f f f f f f f f f f
The net cash flows for the period represent the increase or decrease in cash that occurred
f f f f f f f f f f f f f f f f
during the period. Cash flows from operating activities are cash flows directly related to
f f f f f f f f f f f f f f
earning income (normal business activity). Cash flows from investing activities include cash flows
f f f f f f f f f f f f f f
that are related to the acquisition or sale of the company‘s long-term assets. Cash flows from
f f f f f f f f f f f f f f f f
financing activities are directly related to the financing of the company.
f f f f f f f f f f f f
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary
f f f f f f f f f f
responsibility for setting the detailed rules that become Generally Accepted Accounting
f f f f f f f f f f f
Principles (GAAP) in the United States. (Internationally, the International Accounting
f f f f f f f f f f
Standards Board (IASB) has the responsibility for setting accounting rules known as
f f f f f f f f f f f f
International Financial Reporting Standards (IFRS).)
f f f f f f
16. The main goal of accounting rules is to ensure that companies produce useful financial
f f f f f f f f f f f f f
information for present and potential investors, lenders, and other creditors in making
f f f f f f f f f f f f
decisions in their capacity as capital providers. Financial information must show relevance and
f f f f f f f f f f f f f f
faithful representation, as well as be comparable, verifiable, timely, and understandable.
f f f f f f f f f f f f
Fundamentals of Financial f f 1-3
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
, 17. An ethical dilemma is a situation where following one moral principle would result in violating
f f f f f f f f f f f f f f
another. Three steps that should be considered when evaluating ethical dilemmas are:
f f f f f f f f f f f f f
(a) Identify who will benefit from the situation (often, the manager or employee) and how
f f f f f f f f f f f f f
others will be harmed (other employees, the company‘s reputation, owners, creditors, and the
f f f f f f f f f f f f f
public in general).
f f f f
(b) Identify the alternative courses of action. f f f f f f
(c) Choose the alternative that is the most ethical – that which you would be proud to have
f f f f f f f f f f f f f f f f
reported in the news media. Often, there is no one right answer and hard choices will need
f f f f f f f f f f f f f f f f f
to be made. Following strong ethical practices is a key part of ensuring good financial
f f f f f f f f f f f f f f f
reporting by businesses of all sizes.
f f f f f f f
18. Accounting frauds and cases involving academic dishonesty are similar in many respects. Both
f f f f f f f f f f f f
involve deceiving others in an attempt to influence their actions or decisions, often resulting in
f f f f f f f f f f f f f f f
temporary personal gain for the deceiver. For example, when an accounting fraud is
f f f f f f f f f f f f f
committed, financial statement users may be misled into making decisions they wouldn‘t have
f f f f f f f f f f f f f
made had the fraud not occurred (e.g., creditors might loan money to the company, investors
f f f f f f f f f f f f f f f
might invest in the company, or stockholders might reward top managers with big bonuses).
f f f f f f f f f f f f f f
When academic dishonesty is committed, instructors might assign a higher grade than is
f f f f f f f f f f f f f
warranted by the student‘s individual contribution. Another similarity is that, as a consequence
f f f f f f f f f f f f f
of the deception, innocent bystanders may be adversely affected by fraud and academic
f f f f f f f f f f f f f
dishonesty. Fraud may require the company to charge higher prices to customers to cover costs
f f f f f f f f f f f f f f f
incurred as a result of the fraud. Academic dishonesty may lead to stricter grading standards,
f f f f f f f f f f f f f f f f
with significant deductions taken for inadequate documentation of sources referenced. A final
f f f f f f f f f f f f
similarity is that if fraud and academic dishonesty are ultimately uncovered, both are likely to
f f f f f f f f f f f f f f f
lead to adverse long-term consequences for the perpetrator. Fraudsters may be fined,
f f f f f f f f f f f f
imprisoned, and encounter an abrupt end to their careers. Students who cheat may be
f f f f f f f f f f f f f f
penalized through lower course grades or expulsion, and might find it impossible to obtain
f f f f f f f f f f f f f f
academic references for employment applications.
f f f f f f
Fundamentals of Financial f f 1-4
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
Fundamentals of Financial Accounting 7e Phillips f f f f f f
Chapter1-13 withAppendixC&D f f f f
Chapter 1 f f
Business Decisions and Financial Accounting
f f f f
ANSWERS TO QUESTIONS f f
1. Accounting is a system of analyzing, recording, and summarizing the results of a
f f f f f f f f f f f f f
business‘s activities and then reporting them to decision makers. f f f f f f f f f
2. An advantage of operating as a sole proprietorship, rather than a corporation, is that it is easy
f f f f f f f f f f f f f f f f
to establish. Another advantage is that income from a sole proprietorship is taxed only once in
f f f f f f f f f f f f f f f f
the hands of the individual proprietor (income from a corporation is taxed in the corporation
f f f f f f f f f f f f f f f f f f
and then again in the hands of the individual shareholder). A disadvantage of operating as a
f f f f f f f f f f f f f f f f
sole proprietorship, rather than a corporation, is that the individual proprietor can be held
f f f f f f f f f f f f f f
responsible for the debts of the business.
f f f f f f f f
3. Financial accounting focuses on preparing and using the financial statements that are made
f f f f f f f f f f f f
available to owners and external users such as customers, creditors, and potential investors
f f f f f f f f f f f f f
who are interested in reading them. Managerial accounting focuses on other accounting
f f f f f f f f f f f f
reports that are not released to the general public, but instead are prepared for internal
f f f f f f f f f f f f f f f
decision making and used by employees, supervisors, and managers who run the company.
f f f f f f f f f f f f f f
4. Financial reports are used by both internal and external groups and individuals. The internal
f f f f f f f f f f f f f
groups are comprised of the various managers of the business. The external groups include
f f f f f f f f f f f f f f
investors, creditors, governmental agencies, other interested parties, and the public at large.
f f f f f f f f f f f f f
5. The business itself, not the individual stockholders who own the business, is viewed as owning the
f f f f f f f f f f f f f f f
assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the
f f f f f f f f f f f f f f f
assets, liabilities, and stockholders‘ equity of only that business and not the personal assets,
f f f f f f f f f f f f f f
liabilities, and equity of the stockholders. The financial statements of a company show the
f f f f f f f f f f f f f f
results of the business activities of only that company.
f f f f f f f f f f f f
Fundamentals of Financial f f 1-1
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
,6. (a) Operating – These activities are directly related to earning profits. They include buying
f f f f f f f f f f f f f
supplies, making products, serving customers, cleaning the premises, advertising, renting a
f f f f f f f f f f f
building, repairing equipment, and obtaining insurance coverage.
f f f f f f f f
(b) Investing – These activities involve buying and selling productive resources with long lives
f f f f f f f f f f f f
(such as buildings, land, equipment, and tools), purchasing investments, and lending to others.
f f f f f f f f f f f f f f
(c) Financing– Any borrowing from banks, repaying bank loans, receiving contributionsfrom f f f f f f f f f f f
stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
f f f f f f f f f f f
7. The heading of each of the four primary financial statements should include the following:
f f f f f f f f f f f f f f
(a) Name of the business f f f f
(b) Name of the statement f f f f
(c) Date of the statement, or the period of time that the statement covers
f f f f f f f f f f f f f
8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities
f f f f f f f f f f f f f f
and stockholders‘ equity) of a business at a point in time.
f f f f f f f f f f f f
(b) The purpose of the income statement is to present information about the
f f f f f f f f f f f
revenues, expenses, and net income of a business for a specified period of time.
f f f f f f f f f f f f f f f
(c) The statement of retained earnings reports the way that net income and the
f f f f f f f f f f f f
distribution of dividends affected the financial position of the company during the
f f f f f f f f f f f f
period.
f f
(d) The purpose of the statement of cash flows is to summarize how a business‘s operating,
f f f f f f f f f f f f f f
investing, and financing activities caused its cash balance to change over a
f f f f f f f f f f f f
particular period of time.
f f f f f
9. The income statement, statement of retained earnings, and statement of cash flows would be
f f f f f f f f f f f f f
dated ―For the Year Ended December 31, 2021,‖ because they report the inflows and
f f f f f f f f f f f f f f
outflows of resources over a period of time. In contrast, the balance sheet would be dated
f f f f f f f f f f f f f f f f
―At December 31, 2021,‖ because it represents the assets, liabilities and stockholders‘
f f f f f f f f f f f f
equity at a specific date.
f f f f f f
10. Net income is the excess of total revenues over total expenses. A net loss occurs if total
f f f f f f f f f f f f f f f f
expenses exceed total revenues.
f f f f f
11. The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders‘ Equity.
f f f f f f f f f f f f f
Assets are the economic resources controlled by the company. Liabilities are amounts owed
f f f f f f f f f f f f f f
by the business. Stockholders‘ equity is the owners‘ claims to the business. It includes amounts
f f f f f f f f f f f f f f f
contributed to the business (by investors through purchasing the company‘s stock) and the
f f f f f f f f f f f f f
amounts earned and accumulated through profitable business operations.
f f f f f f f f f
Fundamentals of Financial f f 1-2
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
,12. The equation for the income statement is Revenues – Expenses = Net Income. Revenues are
f f f f f f f f f f f f f f
increases in a company‘s resources, arising primarily from its operating activities. Expenses
f f f f f f f f f f f f
are decreases in a company‘s resources, arising primarily from its operating activities. Net
f f f f f f f f f f f f f
Income is equal to revenues minus expenses. (If expenses are greater than revenues, the
f f f f f f f f f f f f f f
company has a Net Loss.)
f f f f f f
13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net
f f f f f f f f f f f f f
Income - Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained
f f f f f f f f f f f f
earnings which is the prior year‘s ending retained earnings reported on the prior year‘s
f f f f f f f f f f f f f f
balance sheet. The current year's net income reported on the income statement is added and
f f f f f f f f f f f f f f f
the current year's dividends are subtracted from this amount. (If a net loss occurs, It would be
f f f f f f f f f f f f f f f f f
subtracted, along with the dividends, from the prior year‘s ending retained earnings
f f f f f f f f f f f f
balance.)The ending retained earnings amount is reported on the end-of-year balance sheet.
f f f f f f f f f f f f
14. The equation for the statement of cash flows is: Cash flows from operating activities +
f ff f f f f f f f f f f f f f f f
Cash flows from investing activities + Cash flows from financing activities = Change in cash for
f f f f f f f f f f f f f f f f
the period. Change in cash for the period + Beginning cash balance = Ending cash balance.
f f f f f f f f f f f f f f f f
The net cash flows for the period represent the increase or decrease in cash that occurred
f f f f f f f f f f f f f f f f
during the period. Cash flows from operating activities are cash flows directly related to
f f f f f f f f f f f f f f
earning income (normal business activity). Cash flows from investing activities include cash flows
f f f f f f f f f f f f f f
that are related to the acquisition or sale of the company‘s long-term assets. Cash flows from
f f f f f f f f f f f f f f f f
financing activities are directly related to the financing of the company.
f f f f f f f f f f f f
15. Currently, the Financial Accounting Standards Board (FASB) is given the primary
f f f f f f f f f f
responsibility for setting the detailed rules that become Generally Accepted Accounting
f f f f f f f f f f f
Principles (GAAP) in the United States. (Internationally, the International Accounting
f f f f f f f f f f
Standards Board (IASB) has the responsibility for setting accounting rules known as
f f f f f f f f f f f f
International Financial Reporting Standards (IFRS).)
f f f f f f
16. The main goal of accounting rules is to ensure that companies produce useful financial
f f f f f f f f f f f f f
information for present and potential investors, lenders, and other creditors in making
f f f f f f f f f f f f
decisions in their capacity as capital providers. Financial information must show relevance and
f f f f f f f f f f f f f f
faithful representation, as well as be comparable, verifiable, timely, and understandable.
f f f f f f f f f f f f
Fundamentals of Financial f f 1-3
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
, 17. An ethical dilemma is a situation where following one moral principle would result in violating
f f f f f f f f f f f f f f
another. Three steps that should be considered when evaluating ethical dilemmas are:
f f f f f f f f f f f f f
(a) Identify who will benefit from the situation (often, the manager or employee) and how
f f f f f f f f f f f f f
others will be harmed (other employees, the company‘s reputation, owners, creditors, and the
f f f f f f f f f f f f f
public in general).
f f f f
(b) Identify the alternative courses of action. f f f f f f
(c) Choose the alternative that is the most ethical – that which you would be proud to have
f f f f f f f f f f f f f f f f
reported in the news media. Often, there is no one right answer and hard choices will need
f f f f f f f f f f f f f f f f f
to be made. Following strong ethical practices is a key part of ensuring good financial
f f f f f f f f f f f f f f f
reporting by businesses of all sizes.
f f f f f f f
18. Accounting frauds and cases involving academic dishonesty are similar in many respects. Both
f f f f f f f f f f f f
involve deceiving others in an attempt to influence their actions or decisions, often resulting in
f f f f f f f f f f f f f f f
temporary personal gain for the deceiver. For example, when an accounting fraud is
f f f f f f f f f f f f f
committed, financial statement users may be misled into making decisions they wouldn‘t have
f f f f f f f f f f f f f
made had the fraud not occurred (e.g., creditors might loan money to the company, investors
f f f f f f f f f f f f f f f
might invest in the company, or stockholders might reward top managers with big bonuses).
f f f f f f f f f f f f f f
When academic dishonesty is committed, instructors might assign a higher grade than is
f f f f f f f f f f f f f
warranted by the student‘s individual contribution. Another similarity is that, as a consequence
f f f f f f f f f f f f f
of the deception, innocent bystanders may be adversely affected by fraud and academic
f f f f f f f f f f f f f
dishonesty. Fraud may require the company to charge higher prices to customers to cover costs
f f f f f f f f f f f f f f f
incurred as a result of the fraud. Academic dishonesty may lead to stricter grading standards,
f f f f f f f f f f f f f f f f
with significant deductions taken for inadequate documentation of sources referenced. A final
f f f f f f f f f f f f
similarity is that if fraud and academic dishonesty are ultimately uncovered, both are likely to
f f f f f f f f f f f f f f f
lead to adverse long-term consequences for the perpetrator. Fraudsters may be fined,
f f f f f f f f f f f f
imprisoned, and encounter an abrupt end to their careers. Students who cheat may be
f f f f f f f f f f f f f f
penalized through lower course grades or expulsion, and might find it impossible to obtain
f f f f f f f f f f f f f f
academic references for employment applications.
f f f f f f
Fundamentals of Financial f f 1-4
Accounting, 7/e
f f
© f2022 fby fMcGraw fHill fLLC. f All frights freserved. fNo freproduction for fdistribution fwithout fthe fprior fwritten fconsent fof fMcGraw fHill fLLC.
