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,t
o,establish.,Another,advantage,is,that,income,from,a,sole,proprietorship,is, taxed,only,once,in,th
e,hands,of,the,individual,proprietor,(income,from,a,,,, corporation,is,taxed,in,the,corporation,an
d,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,responsib
le,for,the,debts,of, the,business.,
3. Financial,accounting,focuses,on,preparing,and,using,the,financial,statements,that, are,made,ava
ilable,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,gr
oups,are,comprised,of,the,various,managers,of,the,business.,The, external,groups,include,investo
rs,,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,asset
s,,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,bu
siness,activities,of,, , only,that,company.,
Fundamentals,of,Financial,Account 1-1
ing,,7/e
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
,6. (a), Operating,–
,These,activities,are,directly,related,to,earning,profits.,They,include, buying,supplies,,making,p
roducts,,serving,customers,,cleaning,the,premises,, advertising,,renting,a,building,,repairing,eq
uipment,,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,an
d,stockholders‘,equity),of,a,business,at,a,point,in,time.,
(b) The, purpose, of, the, income, statement, is, to, present, information, about, the, revenues,,e
xpenses,,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,, in
vesting,, 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,d
ated,―For,the,Year,Ended,December,31,,2021,‖,because,they,report,the, inflows,and,outflo
ws,of,resources,over,a,period,of,time.,In,contrast,,the,balance, sheet,would,be,dated,―At,Dec
ember,31,,2021,‖,because,it,represents,the,assets,, liabilities,and,stockholders‘,equity,at,a,spe
cific,date.,
10. Net,income,is,the,excess,of,total,revenues,over,total,expenses.,A,net,loss,occurs,if, total,expens
es,exceed,total,revenues.,
11. The,accounting,equation,for,the,balance,sheet,is:,Assets,=,Liabilities,+, Stockholders‘,Equity., As
sets,are,the,economic,resources,controlled,by,the, company.,, Liabilities,are,amounts,owed,by,th
e,business., Stockholders‘,equity,is, the,owners‘,claims,to,the,business.,It,includes,amounts,contrib
uted,to,the,business, (by,investors,through,purchasing,the,company‘s,stock),and,the,amounts,ear
ned, and,accumulated,through,profitable,business,operations.,
Fundamentals,of,Financial,Account 1-2
ing,,7/e
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
,12. The,equation,for,the,income,statement,is,Revenues,–
,Expenses,=,Net,Income., Revenues,are,increases,in,a,company‘s,resources,,arising,primarily,fr
om,its, operating,activities., Expenses,are,decreases,in,a,company‘s,resources,,arising, primaril
y,from,its,operating,activities.,Net,Income,is,equal,to,revenues,minus, expenses., (If,expenses,a
re,greater,than,revenues,,the,company,has,a,Net,Loss.),
13. The,equation,for,the,statement,of,retained,earnings,is:,Beginning, Retained,Earnings, +, Net,Inco
me,-,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.)T
he,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,operat
ing,activities,+, Cash,flows,from,investing,activities,+,Cash,flows,from,financing,activities,=,Chan
ge, in,cash,for,the,period.,Change,in,cash,for,the,period,+,Beginning,cash,balance,=, Ending,cas
h,balance., The,net,cash,flows,for,the,period,represent,the,increase,or, decrease,in,cash,that,occu
rred,during,the,period., Cash,flows,from,operating, activities,are,cash,flows,directly,related,to,e
arning,income,(normal,business,, activity).,Cash,flows,from,investing,activities,include,cash,flows,th
at,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,comp
any.,
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,Stand
ards,(IFRS).),
16. The,main,goal,of,accounting,rules,is,to,ensure,that,companies,produce,useful, financial,informati
on,for,present,and,potential,investors,,lenders,,and,other,creditors, in,making,decisions,in,their,c
apacity,as,capital,providers.,, Financial,information, must,show,relevance,and,faithful,represent
ation,,as,well,as,be,comparable,, verifiable,,timely,,and,understandable.,
ing,
Fundamentals,of,Financial,Account ,7/
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
, e
1-3
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
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,t
o,establish.,Another,advantage,is,that,income,from,a,sole,proprietorship,is, taxed,only,once,in,th
e,hands,of,the,individual,proprietor,(income,from,a,,,, corporation,is,taxed,in,the,corporation,an
d,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,responsib
le,for,the,debts,of, the,business.,
3. Financial,accounting,focuses,on,preparing,and,using,the,financial,statements,that, are,made,ava
ilable,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,gr
oups,are,comprised,of,the,various,managers,of,the,business.,The, external,groups,include,investo
rs,,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,asset
s,,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,bu
siness,activities,of,, , only,that,company.,
Fundamentals,of,Financial,Account 1-1
ing,,7/e
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
,6. (a), Operating,–
,These,activities,are,directly,related,to,earning,profits.,They,include, buying,supplies,,making,p
roducts,,serving,customers,,cleaning,the,premises,, advertising,,renting,a,building,,repairing,eq
uipment,,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,an
d,stockholders‘,equity),of,a,business,at,a,point,in,time.,
(b) The, purpose, of, the, income, statement, is, to, present, information, about, the, revenues,,e
xpenses,,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,, in
vesting,, 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,d
ated,―For,the,Year,Ended,December,31,,2021,‖,because,they,report,the, inflows,and,outflo
ws,of,resources,over,a,period,of,time.,In,contrast,,the,balance, sheet,would,be,dated,―At,Dec
ember,31,,2021,‖,because,it,represents,the,assets,, liabilities,and,stockholders‘,equity,at,a,spe
cific,date.,
10. Net,income,is,the,excess,of,total,revenues,over,total,expenses.,A,net,loss,occurs,if, total,expens
es,exceed,total,revenues.,
11. The,accounting,equation,for,the,balance,sheet,is:,Assets,=,Liabilities,+, Stockholders‘,Equity., As
sets,are,the,economic,resources,controlled,by,the, company.,, Liabilities,are,amounts,owed,by,th
e,business., Stockholders‘,equity,is, the,owners‘,claims,to,the,business.,It,includes,amounts,contrib
uted,to,the,business, (by,investors,through,purchasing,the,company‘s,stock),and,the,amounts,ear
ned, and,accumulated,through,profitable,business,operations.,
Fundamentals,of,Financial,Account 1-2
ing,,7/e
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
,12. The,equation,for,the,income,statement,is,Revenues,–
,Expenses,=,Net,Income., Revenues,are,increases,in,a,company‘s,resources,,arising,primarily,fr
om,its, operating,activities., Expenses,are,decreases,in,a,company‘s,resources,,arising, primaril
y,from,its,operating,activities.,Net,Income,is,equal,to,revenues,minus, expenses., (If,expenses,a
re,greater,than,revenues,,the,company,has,a,Net,Loss.),
13. The,equation,for,the,statement,of,retained,earnings,is:,Beginning, Retained,Earnings, +, Net,Inco
me,-,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.)T
he,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,operat
ing,activities,+, Cash,flows,from,investing,activities,+,Cash,flows,from,financing,activities,=,Chan
ge, in,cash,for,the,period.,Change,in,cash,for,the,period,+,Beginning,cash,balance,=, Ending,cas
h,balance., The,net,cash,flows,for,the,period,represent,the,increase,or, decrease,in,cash,that,occu
rred,during,the,period., Cash,flows,from,operating, activities,are,cash,flows,directly,related,to,e
arning,income,(normal,business,, activity).,Cash,flows,from,investing,activities,include,cash,flows,th
at,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,comp
any.,
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,Stand
ards,(IFRS).),
16. The,main,goal,of,accounting,rules,is,to,ensure,that,companies,produce,useful, financial,informati
on,for,present,and,potential,investors,,lenders,,and,other,creditors, in,making,decisions,in,their,c
apacity,as,capital,providers.,, Financial,information, must,show,relevance,and,faithful,represent
ation,,as,well,as,be,comparable,, verifiable,,timely,,and,understandable.,
ing,
Fundamentals,of,Financial,Account ,7/
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
, e
1-3
©,2022,by,McGraw,Hill,LLC., All,rights,reserved.,No,reproduction,or,distribution,without,the,prior,written,consent,of,McGraw,Hill,L
LC.
