SOLUTION MANUAL FOR c c
Fundamentals of Financial Accounting 7e Phillips
c c c c c c
Chapter 1-13 with Appendix C&D
c c c c
Chapter c1 c
Business cDecisions cand cFinancial cAccounting
ANSWERS cTO cQUESTIONS
1. Accounting cis ca csystem cof canalyzing, crecording, cand csummarizing cthe cresults cof ca c
business‘s cactivities cand cthen creporting cthem cto cdecision cmakers. c
2. An cadvantage cof coperating cas ca csole cproprietorship, crather cthan ca ccorporation, cis cthat c it cis
ceasy cto cestablish. cAnother cadvantage cis cthat cincome cfrom ca csole cproprietorship cis c taxed
conly conce cin cthe chands cof cthe cindividual cproprietor c(income cfrom ca c c c c corporation cis ctaxed
cin cthe ccorporation cand cthen cagain cin cthe chands cof cthe cindividual c shareholder). cA
cdisadvantage cof coperating cas ca csole cproprietorship, crather cthan ca c corporation, cis cthat cthe
cindividual cproprietor ccan cbe cheld cresponsible cfor cthe cdebts cof c the cbusiness. c
3. Financial caccounting cfocuses con cpreparing cand cusing cthe cfinancial cstatements cthat c are cmade
cavailable cto cowners cand cexternal cusers csuch cas ccustomers, ccreditors, cand c potential cinvestors
cwho care cinterested cin creading cthem. cManagerial caccounting c focuses con cother caccounting
creports cthat care cnot creleased cto cthe cgeneral cpublic, cbut c instead care cprepared cfor cinternal
cdecision cmaking cand cused cby cemployees, c supervisors, cand cmanagers cwho crun cthe ccompany.
c
4. Financial creports care cused cby cboth cinternal cand cexternal cgroups cand cindividuals. cThe
c internal cgroups care ccomprised cof cthe cvarious cmanagers cof cthe cbusiness. cThe c external
cgroups cinclude cinvestors, ccreditors, cgovernmental cagencies, cother c interested cparties, cand
cthe cpublic cat clarge. c
5. The cbusiness citself, cnot cthe cindividual cstockholders cwho cown cthe cbusiness, cis cviewed c as cowning
cthe cassets cand cowing cthe cliabilities con cits cbalance csheet. cA cbusiness‘s c balance csheet cincludes
cthe cassets, cliabilities, cand cstockholders‘ cequity cof conly cthat c business cand cnot cthe cpersonal
cassets, cliabilities, cand cequity cof cthe cstockholders. cThe c financial cstatements cof ca ccompany
cshow cthe cresults cof cthe cbusiness cactivities cof c c c only cthat ccompany. c
Fundamentals cof cFinancial 1-1
cAccounting, c7/e
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
,6. (a) c Operating c– cThese cactivities care cdirectly crelated cto cearning cprofits. cThey cinclude
c buying csupplies, cmaking cproducts, cserving ccustomers, ccleaning cthe cpremises, c advertising,
crenting ca cbuilding, crepairing cequipment, cand cobtaining cinsurance c coverage. c
(b) Investing c– cThese cactivities cinvolve cbuying cand cselling cproductive cresources cwith c long
clives c(such cas cbuildings, cland, cequipment, cand ctools), cpurchasing cinvestments, c and c lending
c to c others. c
(c) Financing c– cAny cborrowing cfrom cbanks, crepaying cbank cloans, creceiving c contributions
cfromcstockholders,corcpayingcdividendsctocstockholderscarecconsidered c financing cactivities. c
7. The cheading cof ceach cof cthe cfour cprimary cfinancial cstatements cshould cinclude cthe
c following: c
(a) Name cof cthe cbusiness c
(b) Name cof cthe cstatement c
(c) Date cof cthe cstatement, cor cthe cperiod cof ctime cthat cthe cstatement ccovers c
8. (a) c The cpurpose cof cthe cbalance csheet cis cto creport cthe cfinancial cposition c(assets,
c liabilities cand cstockholders‘ cequity) cof ca cbusiness cat ca cpoint cin ctime. c
(b) The c purpose c of c the c income c statement c is c to c present c information c about c the
c revenues, cexpenses, cand cnet cincome cof ca cbusiness cfor ca cspecified cperiod cof ctime. c
(c) The c statement c of c retained c earnings c reports c the c way c that c net c income c and c the
c distribution c of c dividends c affected c the c financial c position c of c the c company c during c the
c period. c
(d) The c purpose c of c the c statement c of c cash c flows c is c to c summarize c how c a c business‘s
c operating, c investing, c and c financing c activities c caused c its c cash c balance c to c change
c over ca cparticular cperiod cof ctime. c
9. The cincome cstatement, cstatement cof cretained cearnings, cand cstatement cof ccash cflows c would
cbe cdated c―For cthe cYear cEnded cDecember c31, c2021,‖ cbecause cthey creport cthe c inflows
cand coutflows cof cresources cover ca cperiod cof ctime. cIn ccontrast, cthe cbalance c sheet cwould cbe
cdated c―At cDecember c31, c2021,‖ cbecause cit crepresents cthe cassets, c liabilities cand
cstockholders‘ cequity cat ca cspecific cdate. c
10. Net cincome cis cthe cexcess cof ctotal crevenues cover ctotal cexpenses. cA cnet closs coccurs cif c total
cexpenses cexceed ctotal crevenues. c
11. The caccounting cequation cfor cthe cbalance csheet cis: cAssets c= cLiabilities c+ c Stockholders‘
cEquity. c Assets care cthe ceconomic cresources ccontrolled cby cthe c company. c c Liabilities care
camounts cowed cby cthe cbusiness. c Stockholders‘ cequity cis c the cowners‘ cclaims cto cthe cbusiness.
cIt cincludes camounts ccontributed cto cthe cbusiness c (by cinvestors cthrough cpurchasing cthe
ccompany‘s cstock) cand cthe camounts cearned c and caccumulated cthrough cprofitable cbusiness
coperations. c
Fundamentals cof cFinancial 1-2
cAccounting, c7/e
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
,12. The cequation cfor cthe cincome cstatement cis cRevenues c– cExpenses c= cNet cIncome. c Revenues
care cincreases cin ca ccompany‘s cresources, carising cprimarily cfrom cits c operating cactivities.
c Expenses care cdecreases cin ca ccompany‘s cresources, carising c primarily cfrom cits coperating
cactivities. cNet cIncome cis cequal cto crevenues cminus c expenses. c (If cexpenses care cgreater
cthan crevenues, cthe ccompany chas ca cNet cLoss.) c
13. The cequation cfor cthe cstatement cof cretained cearnings cis: cBeginning c Retained cEarnings c + c Net
cIncome c- cDividends c= cEnding cRetained cEarnings. cIt cbegins cwith c beginning-of-the-year
cretained cearnings cwhich cis cthe cprior cyear‘s cending cretained c earnings creported con cthe cprior
cyear‘s cbalance csheet. c The ccurrent cyear's cnet cincome c reported con cthe cincome cstatement cis
cadded cand cthe ccurrent cyear's cdividends care c subtracted cfrom cthis camount. c(If ca cnet closs
coccurs, cIt cwould cbe csubtracted, calong cwith c the cdividends, cfrom cthe cprior cyear‘s cending
cretained cearnings cbalance.)The cending c retained cearnings camount cis creported con cthe cend-
of-year cbalance csheet. c14. c c c The c equation cfor cthe cstatement cof ccash cflows cis: cCash cflows
cfrom coperating cactivities c+ c Cash cflows cfrom cinvesting cactivities c+ cCash cflows cfrom cfinancing
cactivities c= cChange c in ccash cfor cthe cperiod. cChange cin ccash cfor cthe cperiod c+ cBeginning ccash
cbalance c= c Ending ccash cbalance. c The cnet ccash cflows cfor cthe cperiod crepresent cthe cincrease
cor c decrease cin ccash cthat coccurred cduring cthe cperiod. c Cash cflows cfrom coperating c activities
care ccash cflows cdirectly crelated cto cearning cincome c(normal cbusiness c c activity). cCash cflows
cfrom cinvesting cactivities cinclude ccash cflows cthat care crelated cto c the cacquisition cor csale cof cthe
ccompany‘s clong-term cassets. cCash cflows cfrom cfinancing c activities care cdirectly crelated cto cthe
cfinancing cof cthe ccompany. c
15. Currently, cthe cFinancial cAccounting cStandards cBoard c(FASB) cis cgiven cthe cprimary
c responsibility cfor csetting cthe cdetailed crules cthat cbecome cGenerally cAccepted c Accounting
cPrinciples c(GAAP) cin cthe cUnited cStates. c(Internationally, cthe c International cAccounting
cStandards cBoard c(IASB) chas cthe cresponsibility cfor csetting c accounting crules cknown cas
cInternational cFinancial cReporting cStandards c(IFRS).) c
16. The cmain cgoal cof caccounting crules cis cto censure cthat ccompanies cproduce cuseful c financial
cinformation cfor cpresent cand cpotential cinvestors, clenders, cand cother ccreditors c in cmaking
cdecisions cin ctheir ccapacity cas ccapital cproviders. c c Financial cinformation c must cshow crelevance
cand cfaithful crepresentation, cas cwell cas cbe ccomparable, c verifiable, ctimely, cand
cunderstandable. c
Fun
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
, damentals cof cFinancial
cAccounting, c7/e 1-3
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
Fundamentals of Financial Accounting 7e Phillips
c c c c c c
Chapter 1-13 with Appendix C&D
c c c c
Chapter c1 c
Business cDecisions cand cFinancial cAccounting
ANSWERS cTO cQUESTIONS
1. Accounting cis ca csystem cof canalyzing, crecording, cand csummarizing cthe cresults cof ca c
business‘s cactivities cand cthen creporting cthem cto cdecision cmakers. c
2. An cadvantage cof coperating cas ca csole cproprietorship, crather cthan ca ccorporation, cis cthat c it cis
ceasy cto cestablish. cAnother cadvantage cis cthat cincome cfrom ca csole cproprietorship cis c taxed
conly conce cin cthe chands cof cthe cindividual cproprietor c(income cfrom ca c c c c corporation cis ctaxed
cin cthe ccorporation cand cthen cagain cin cthe chands cof cthe cindividual c shareholder). cA
cdisadvantage cof coperating cas ca csole cproprietorship, crather cthan ca c corporation, cis cthat cthe
cindividual cproprietor ccan cbe cheld cresponsible cfor cthe cdebts cof c the cbusiness. c
3. Financial caccounting cfocuses con cpreparing cand cusing cthe cfinancial cstatements cthat c are cmade
cavailable cto cowners cand cexternal cusers csuch cas ccustomers, ccreditors, cand c potential cinvestors
cwho care cinterested cin creading cthem. cManagerial caccounting c focuses con cother caccounting
creports cthat care cnot creleased cto cthe cgeneral cpublic, cbut c instead care cprepared cfor cinternal
cdecision cmaking cand cused cby cemployees, c supervisors, cand cmanagers cwho crun cthe ccompany.
c
4. Financial creports care cused cby cboth cinternal cand cexternal cgroups cand cindividuals. cThe
c internal cgroups care ccomprised cof cthe cvarious cmanagers cof cthe cbusiness. cThe c external
cgroups cinclude cinvestors, ccreditors, cgovernmental cagencies, cother c interested cparties, cand
cthe cpublic cat clarge. c
5. The cbusiness citself, cnot cthe cindividual cstockholders cwho cown cthe cbusiness, cis cviewed c as cowning
cthe cassets cand cowing cthe cliabilities con cits cbalance csheet. cA cbusiness‘s c balance csheet cincludes
cthe cassets, cliabilities, cand cstockholders‘ cequity cof conly cthat c business cand cnot cthe cpersonal
cassets, cliabilities, cand cequity cof cthe cstockholders. cThe c financial cstatements cof ca ccompany
cshow cthe cresults cof cthe cbusiness cactivities cof c c c only cthat ccompany. c
Fundamentals cof cFinancial 1-1
cAccounting, c7/e
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
,6. (a) c Operating c– cThese cactivities care cdirectly crelated cto cearning cprofits. cThey cinclude
c buying csupplies, cmaking cproducts, cserving ccustomers, ccleaning cthe cpremises, c advertising,
crenting ca cbuilding, crepairing cequipment, cand cobtaining cinsurance c coverage. c
(b) Investing c– cThese cactivities cinvolve cbuying cand cselling cproductive cresources cwith c long
clives c(such cas cbuildings, cland, cequipment, cand ctools), cpurchasing cinvestments, c and c lending
c to c others. c
(c) Financing c– cAny cborrowing cfrom cbanks, crepaying cbank cloans, creceiving c contributions
cfromcstockholders,corcpayingcdividendsctocstockholderscarecconsidered c financing cactivities. c
7. The cheading cof ceach cof cthe cfour cprimary cfinancial cstatements cshould cinclude cthe
c following: c
(a) Name cof cthe cbusiness c
(b) Name cof cthe cstatement c
(c) Date cof cthe cstatement, cor cthe cperiod cof ctime cthat cthe cstatement ccovers c
8. (a) c The cpurpose cof cthe cbalance csheet cis cto creport cthe cfinancial cposition c(assets,
c liabilities cand cstockholders‘ cequity) cof ca cbusiness cat ca cpoint cin ctime. c
(b) The c purpose c of c the c income c statement c is c to c present c information c about c the
c revenues, cexpenses, cand cnet cincome cof ca cbusiness cfor ca cspecified cperiod cof ctime. c
(c) The c statement c of c retained c earnings c reports c the c way c that c net c income c and c the
c distribution c of c dividends c affected c the c financial c position c of c the c company c during c the
c period. c
(d) The c purpose c of c the c statement c of c cash c flows c is c to c summarize c how c a c business‘s
c operating, c investing, c and c financing c activities c caused c its c cash c balance c to c change
c over ca cparticular cperiod cof ctime. c
9. The cincome cstatement, cstatement cof cretained cearnings, cand cstatement cof ccash cflows c would
cbe cdated c―For cthe cYear cEnded cDecember c31, c2021,‖ cbecause cthey creport cthe c inflows
cand coutflows cof cresources cover ca cperiod cof ctime. cIn ccontrast, cthe cbalance c sheet cwould cbe
cdated c―At cDecember c31, c2021,‖ cbecause cit crepresents cthe cassets, c liabilities cand
cstockholders‘ cequity cat ca cspecific cdate. c
10. Net cincome cis cthe cexcess cof ctotal crevenues cover ctotal cexpenses. cA cnet closs coccurs cif c total
cexpenses cexceed ctotal crevenues. c
11. The caccounting cequation cfor cthe cbalance csheet cis: cAssets c= cLiabilities c+ c Stockholders‘
cEquity. c Assets care cthe ceconomic cresources ccontrolled cby cthe c company. c c Liabilities care
camounts cowed cby cthe cbusiness. c Stockholders‘ cequity cis c the cowners‘ cclaims cto cthe cbusiness.
cIt cincludes camounts ccontributed cto cthe cbusiness c (by cinvestors cthrough cpurchasing cthe
ccompany‘s cstock) cand cthe camounts cearned c and caccumulated cthrough cprofitable cbusiness
coperations. c
Fundamentals cof cFinancial 1-2
cAccounting, c7/e
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
,12. The cequation cfor cthe cincome cstatement cis cRevenues c– cExpenses c= cNet cIncome. c Revenues
care cincreases cin ca ccompany‘s cresources, carising cprimarily cfrom cits c operating cactivities.
c Expenses care cdecreases cin ca ccompany‘s cresources, carising c primarily cfrom cits coperating
cactivities. cNet cIncome cis cequal cto crevenues cminus c expenses. c (If cexpenses care cgreater
cthan crevenues, cthe ccompany chas ca cNet cLoss.) c
13. The cequation cfor cthe cstatement cof cretained cearnings cis: cBeginning c Retained cEarnings c + c Net
cIncome c- cDividends c= cEnding cRetained cEarnings. cIt cbegins cwith c beginning-of-the-year
cretained cearnings cwhich cis cthe cprior cyear‘s cending cretained c earnings creported con cthe cprior
cyear‘s cbalance csheet. c The ccurrent cyear's cnet cincome c reported con cthe cincome cstatement cis
cadded cand cthe ccurrent cyear's cdividends care c subtracted cfrom cthis camount. c(If ca cnet closs
coccurs, cIt cwould cbe csubtracted, calong cwith c the cdividends, cfrom cthe cprior cyear‘s cending
cretained cearnings cbalance.)The cending c retained cearnings camount cis creported con cthe cend-
of-year cbalance csheet. c14. c c c The c equation cfor cthe cstatement cof ccash cflows cis: cCash cflows
cfrom coperating cactivities c+ c Cash cflows cfrom cinvesting cactivities c+ cCash cflows cfrom cfinancing
cactivities c= cChange c in ccash cfor cthe cperiod. cChange cin ccash cfor cthe cperiod c+ cBeginning ccash
cbalance c= c Ending ccash cbalance. c The cnet ccash cflows cfor cthe cperiod crepresent cthe cincrease
cor c decrease cin ccash cthat coccurred cduring cthe cperiod. c Cash cflows cfrom coperating c activities
care ccash cflows cdirectly crelated cto cearning cincome c(normal cbusiness c c activity). cCash cflows
cfrom cinvesting cactivities cinclude ccash cflows cthat care crelated cto c the cacquisition cor csale cof cthe
ccompany‘s clong-term cassets. cCash cflows cfrom cfinancing c activities care cdirectly crelated cto cthe
cfinancing cof cthe ccompany. c
15. Currently, cthe cFinancial cAccounting cStandards cBoard c(FASB) cis cgiven cthe cprimary
c responsibility cfor csetting cthe cdetailed crules cthat cbecome cGenerally cAccepted c Accounting
cPrinciples c(GAAP) cin cthe cUnited cStates. c(Internationally, cthe c International cAccounting
cStandards cBoard c(IASB) chas cthe cresponsibility cfor csetting c accounting crules cknown cas
cInternational cFinancial cReporting cStandards c(IFRS).) c
16. The cmain cgoal cof caccounting crules cis cto censure cthat ccompanies cproduce cuseful c financial
cinformation cfor cpresent cand cpotential cinvestors, clenders, cand cother ccreditors c in cmaking
cdecisions cin ctheir ccapacity cas ccapital cproviders. c c Financial cinformation c must cshow crelevance
cand cfaithful crepresentation, cas cwell cas cbe ccomparable, c verifiable, ctimely, cand
cunderstandable. c
Fun
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
, damentals cof cFinancial
cAccounting, c7/e 1-3
© c2022 cby cMcGraw cHill cLLC. c All crights creserved. cNo creproduction cor cdistribution cwithout cthe cprior cwritten cconsent cof cMcGraw
cHill cLLC.
