SOLUTION MANUAL
Fundamentals of Financial Accounting
7th Edition
Fred Phillips, Robert Libby, All Chapters 1 - 13
, 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
,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.
, (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.)
Fundamentals of Financial Accounting
7th Edition
Fred Phillips, Robert Libby, All Chapters 1 - 13
, 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
,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.
, (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.)
