Solution Manual for Fundamentals of Financial Accounting 7th Edition by Fred Phillips, Shana Clor-Proell, Robert Libby & Patricia Libby – Chapters 1–13 Complete Solutions 2026

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Chapter1-13 withAppendixC&D B B B B




Chapter1 B B




BusinessDecisionsandFinancial Accounting
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ANSWERSTOQUESTIONS B B




1. Accountingis a systemof analyzing, recording,and summarizingthe resultsof a B B B B B B B B B B B B B




business‘s activities andthen reporting them to decision makers. B B B B B B B B B




2. An advantageof operating asa sole proprietorship, ratherthan a corporation, isthat it is easy to
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establish.Anotheradvantageis thatincome froma sole proprietorship is taxedonly oncein the
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hands of the individual proprietor (income from a corporation is taxed in the corporation and then
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again inthe handsof the individual shareholder). Adisadvantage of operatingas a sole
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proprietorship, ratherthana corporation, is that theindividual proprietor can be held responsible
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for the debts of thebusiness.
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3. Financialaccounting focuseson preparing and using the financial statements that are made
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available toownersandexternal userssuchascustomers, creditors,and potential investors who are
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interested in reading them. Managerial accounting focuseson otheraccounting reports that arenot
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released to the general public,but instead arepreparedfor internal decision makingand usedby
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employees, supervisors, and managers who run the company.
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4. Financialreportsareused byboth internalandexternalgroupsand individuals.The internalgroups
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are comprisedof thevariousmanagers of thebusiness. The external groupsincludeinvestors,
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creditors,governmental agencies,other interested parties, andthe publicatlarge.
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5. Thebusinessitself,nottheindividualstockholderswhoownthebusiness,isviewed as owning theassets
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andowing the liabilitieson its balance sheet. Abusiness‘s balance sheet includes the assets,liabilities,
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and stockholders‘ equity ofonly that businessand not thepersonal assets,liabilities, andequity of the
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stockholders. The financial statements of a companyshowthe resultsof thebusiness activities of
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onlythat company.
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,6. (a) Operating – Theseactivitiesare directly related to earningprofits. They include buying
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supplies,making products, serving customers, cleaning thepremises, advertising, renting a
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building, repairing equipment,and obtaining insurance coverage.
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(b) Investing – Theseactivities involvebuyingand selling productive resources with long lives (such B B B B B B B B B B B B B




asbuildings, land, equipment, and tools), purchasing investments, and lending to others.
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(c) Financing–Anyborrowingfrombanks,repayingbankloans,receiving contributionsfrom B B B B B B B B B B B




stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
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7. The headingof eachof thefour primaryfinancialstatements shouldincludethe following:
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(a) Name of the business B B B B




(b) Name of the statement B B B B




(c) Dateofthestatement,orthe period oftime thatthestatementcovers B B B B B B B B B B B B B




8. (a) The purpose of the balance sheet is to report the financial position (assets, liabilities and
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stockholders‘ equity)of abusiness at apoint in time.
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(b) The purpose of the income statement is to present information about the revenues,
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expenses,and netincomeof abusinessfora specifiedperiod of time.
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(c) The statement of retained earnings reports the way that net income and the B B B B B B B B B B B B




distribution 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
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period of time.
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9. The incomestatement,statementof retainedearnings, and statementof cashflows would be dated
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―For the Year Ended December 31, 2021,‖ because they report the inflows andoutflowsof
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resources over aperiod of time. In contrast, thebalance sheet would be dated ―At December 31,
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2021,‖ because it represents the assets, liabilities andstockholders‘ equity at a specific date.
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10. Net income is theexcess of total revenues over totalexpenses. Anet loss occurs if totalexpenses
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exceedtotal revenues.
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11. The accountingequation for thebalance sheet is: Assets =Liabilities+ Stockholders‘ Equity. Assets
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are theeconomic resources controlled by the company. Liabilities are amounts owed by the
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business. Stockholders‘ equity is theowners‘claims tothebusiness.It includesamounts contributed
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to the business (by investors throughpurchasing the company‘s stock) andthe amounts earned
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and accumulatedthroughprofitable businessoperations.
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FundamentalsofFinancial B B
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,12. The equation for the income statement is Revenues –Expenses = Net Income. Revenues are
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increases in acompany‘s resources, arising primarily from its operating activities. Expenses are
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decreasesin a company‘s resources, arising primarily from its operating activities. NetIncome is
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equalto revenues minus expenses. (If expenses aregreater than revenues,the company has a
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NetLoss.)
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13. The equation for the statement of retainedearningsis:Beginning Retained Earnings + NetIncome -
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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 reportedontheprior year‘s balance sheet. The current
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year's net income reported on the income statement is added and thecurrent year's dividendsare
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subtractedfrom this amount. (Ifanetloss occurs, It would be subtracted, alongwith thedividends,
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from the prior year‘s ending retainedearningsbalance.)Theending retainedearnings amount is
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reported on the end-of-year balance sheet.14. The equation for the statementof cash flows is: Cash
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flows fromoperating activities + Cash flowsfrominvestingactivities+ Cash flowsfrom financing
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activities= Change in cash for the period. Change in cash for the period +Beginning cash balance =
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Ending cash balance. The net cash flows forthe period represent the increase or decrease in cash
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thatoccurredduring the period. Cash flows from operating activitiesare cash flows directly related
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to earning income (normal business activity).Cash flows from investing activities include cashflows
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thatare relatedto theacquisition or saleof the company‘s long-term assets. Cash flows from
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financing activitiesaredirectly related tothe financing of the company.
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15. Currently,the Financial AccountingStandards Board (FASB) isgiven theprimary responsibility for B B B B B B B B B B B B




setting thedetailedrules that becomeGenerally Accepted AccountingPrinciples(GAAP)inthe
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UnitedStates.(Internationally,the InternationalAccountingStandardsBoard(IASB)hasthe
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responsibilityforsetting accountingrules knownasInternational FinancialReporting Standards
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(IFRS).)
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16. The maingoal of accounting rulesis to ensure that companies produceuseful financialinformationfor
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presentandpotentialinvestors,lenders,andothercreditors in makingdecisions intheir capacityas
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capital providers. Financial information must show relevance and faithful representation, as wellas
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be comparable, verifiable,timely, andunderstandable.
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FundamentalsofFinancial B B 1-3
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, 17. An ethical dilemma isa situation wherefollowingone moralprinciple would result in violating
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another. Three steps that should beconsidered when evaluating ethical dilemmasare:
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(a) Identifywho will benefitfromthe situation(often,themanager oremployee)and howothers will B B B B B B B B B B B B B B B




beharmed (other employees, the company‘s reputation, owners, creditors, and the public in
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general).
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(b) Identifythealternativecourses ofaction. B B B B B B




(c) Choose the alternative that is the most ethical –that which you would be proud to have B B B B B B B B B B B B B B B B




reported in thenews media. Often, there is no one right answer and hard choices will need to be
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made. Following strong ethical practices is akey part of ensuringgood financial reporting by
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businesses of all sizes.
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18. Accounting frauds andcases involving academic dishonesty are similar in many respects. Both
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involvedeceiving others inanattemptto influence theiractions or decisions,often resulting in
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temporarypersonal gain for thedeceiver. Forexample, whenan accounting fraud is committed,
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financial statement usersmay be misled into making decisionsthey wouldn‘t have made hadthe
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fraudnot occurred (e.g., creditors might loanmoney to the company, investors might investin the
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company, orstockholdersmight rewardtop managers withbig bonuses). When academic
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dishonesty is committed, instructorsmightassignahigher grade than is warranted by the student‘s
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individual contribution. Anothersimilarity isthat,asa consequence of thedeception, innocent
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bystandersmay be adverselyaffected byfraudand academic dishonesty.Fraud may require the
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company to chargehigher prices to customers to cover costs incurredas aresult ofthe fraud.
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Academic dishonesty may leadto strictergrading standards,with significant deductions taken for
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inadequate documentation of sources referenced. Afinal similarityis that if fraud and academic
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dishonesty are ultimately uncovered, bothare likely to lead to adverselong-term consequences for
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the perpetrator. Fraudsters maybe fined, imprisoned,and encounter anabruptend to their
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careers.Studentswho cheat may be penalized through lowercourse grades orexpulsion, andmight
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find itimpossible to obtainacademic references foremployment applications.
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FundamentalsofFinancial B B
1-4
Accounting,7/e
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