Solution Manual For Fundamentals of Financial Accounting 7th Edition Phillips.

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Solution Manual for Fundamentals of Financial Accounting
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6CE Fred Phillips, Robert Libby, Patricia Libby, Brandy
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ty ty Mackintosh Chapter 1-13 ty ty




Chapter 1 Business Decisions and Financial Accounting ty ty ty ty ty ty




ANSWERS TO QUESTIONS ty ty




1. Accounting is a system of analyzing, recording, and summarizing the results of a business‘s
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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 to
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establish. Another advantage is that income from a sole proprietorship is taxed only once in the
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hands of the individual proprietor (income from a corporation is taxed in the corporation and
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then again in the hands of the individual proprietor). A disadvantage of operating as a sole
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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 available
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t to owners and external users such as customers, creditors, and potential investors who are
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interested in reading them. Managerial accounting focuses on other accounting reports that are
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not released to the general public, but instead are prepared and used by employees, supervisors,
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and managers who run the company.
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4. Financial reports are used by both internal and external groups and individuals. The internal
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groups are comprised of the various managers of the business. The external groups include
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investors, creditors, governmental agencies, other interested parties, and the public at large.
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5. The business itself, not the individual shareholders who own the business, is viewed as owning
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the 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
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activities of only that company.
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6. (a) Operating – These activities are directly related to earning profits. They include buying supplies,
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making products, serving customers, cleaning the premises, advertising, renting a building,
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repairing equipment, and obtaining insurance coverage.
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(b) Investing – These activities involve buying and selling productive resources with long lives (such
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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 from
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t shareholders,or payingdividendst oshareholdersarec onsideredfinancingactivities.
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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 and
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shareholders‘ equity) of a business at a point in time. 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.
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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 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 resources
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during a period of time. In contrast, the balance sheet would be dated ―At December 31, 2020,‖
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because it represents the assets, liabilities and shareholders‘ equity at a 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‘ Equity.
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Assets are the economic resources controlled by the company.
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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
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equal to revenues minus expenses. (If expenses are greater than revenues, the company has a Net
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Loss.)
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13. The equation for the statement of retained earnings is: Beginning Retained Earnings + Net Income -
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Dividends = Ending Retained Earnings. It begins with beginning-of-the-year retained earnings which
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is the prior year‘s ending retained earnings reported on the prior year‘s balance sheet. The
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current year's net income reported on the income statement is added and the current year's
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dividends are subtracted from this amount. The ending retained earnings amount is reported on
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the end-of-year balance sheet.
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14. The equation for the statement of cash flows is: Cash flows from operating activities + Cash flows
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from investing activities + Cash flows from financing activities = Change in cash for the period.
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Change in cash for the period + Beginning cash balance = Ending cash balance. The net cash
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flows for the period represent the increase or decrease in cash that occurred during the period.
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Cash flows from operating activities are cash flows directly related to earning income (normal
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business activity). Cash flows from investing activities include cash flows that are related to the
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acquisition or sale of the company‘s long-
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directly related to the financing of the company.
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15. Currently, the Chartered Professional Accountants of Canada (CPA) is given the primary responsibility
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for setting the detailed rules that become Generally Accepted Accounting Principles (GAAP) in
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Canada.
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responsibility for setting
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(IFRS).)
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16. The main goal of accounting rules is to ensure that companies produce useful financial information
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for present and potential investors, lenders, and other creditors in making decisions in their
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capacity as capital providers. Financial information must show relevance and faithful
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representation, as well
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17. An ethical dilemma is a situation where following one moral principle would result in violating
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t another. Three steps that should be considered when evaluating ethical dilemmas are:
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(a) Identify who will benefit from the situation (often, the manager or employee) and how others
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will be harmed (other employees, the company‘s reputation, owners, creditors, and the public in
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general).
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(b) Identify the alternative courses of action. ty ty ty ty ty


(c) Choose the alternative that is the most ethical – that which you would be proud to have
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reported in the news media. Often, there is no one right answer and hard choices will need to
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be made. Following strong ethical practices is a key part of ensuring good financial reporting by
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businesses of
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18. Accounting frauds and cases involving academic dishonesty are similar in many respects. Both involve
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deceiving others in an attempt to influence their actions or decisions, often resulting in temporary
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t personal gain for the deceiver. For example, when an accounting fraud is committed, financial
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statement users may be misled into making decisions they wouldn‘t have made had the fraud not
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occurred (e.g., creditors might loan money to the company, investors might invest in the company,
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or shareholders might reward top managers with big bonuses). When academic dishonesty is
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committed, instructors might assign a higher grade than is warranted by the student‘s individual
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contribution. Another
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be adversely affected by fraud and academic dishonesty. Fraud may require the company to charge
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higher prices to customers to cover costs incurred as a result of the fraud. Academic dishonesty may
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lead to stricter grading standards, with significant deductions taken for inadequate documentation of
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sources referenced. A final similarity
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uncovered, both are likely to lead to adverse long- term consequences for the perpetrator.
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Fraudsters may be fined, imprisoned, and encounter an abrupt end to their careers. Students who
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cheat may be penalized through lower course grades or expulsion, and might find it impossible to
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obtain academic references for employment applications.
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Authors' Recommended Solution Time (Time in ty ty ty ty ty


minutes) t y




Skills
Mini-exercises Exercises Problems Development Cases* Continuing Case ty
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No. Time No. Time No. Time No. Time No. Time
1 3 1 10 CP1-1 45 1 20 1 45
2 11 2 10 CP1-2 10 2 20
3 12 3 15 CP1-3 60 3 30
4 6 4 25 CP1-4 5 4 30
5 6 5 25 PA1-1 45 5 20
6 6 6 10 PA1-2 10 6 30
7 6 7 15 PA1-3 50 7 45
8 4 8 10 PA1-4 45
9 4 9 20 PA1-5 50
10 3 10 10 PB1-1 45
11 3 11 3 PB1-2 10
12 6 12 3 PB1-3 45
13 6 PB1-4 10
14 6 PB1-5 50
15 6
16 12




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