Fundamentals liof liFinancial liAccounting, li7/e 1-1
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
,SOLUTION l i MANUAL l i FOR
Fundamentals liof liFinancial liAccounting li7e liPhillips
Chapter li1-13 with liAppendix
liC&D
Chapter li1
Business liDecisions liand liFinancial liAccounting
ANSWERS liTO liQUESTIONS
1. Accounting liis lia lisystem liof lianalyzing, lirecording, liand lisummarizing lithe
liresults liof liab
li usiness‘s liactivities liand lithen lireporting lithem lito lidecision
limakers.
2. An liadvantage liof lioperating lias lia lisole liproprietorship, lirather lithan lia licorporation,
liis lithatili t liis lieasy lito liestablish. liAnother liadvantage liis lithat liincome lifrom lia lisole
liproprietorship liis litaxed lionly lionce liin lithe lihands liof lithe liindividual liproprietor
li(income lifrom lia licorporation liis litaxed liin lithe licorporation liand lithen liagain liin lithe
lihands liof lithe liindividual lishareholder). liA lidisadvantage liof lioperating lias lia lisole
liproprietorship, lirather lithan lia licorporation, liis lithat lithe liindividual liproprietor lican
libe liheld liresponsible lifor lithe lidebts liof lithe libusiness.
3. Financial liaccounting lifocuses lion lipreparing liand liusing lithe lifinancial listatements
lithat liare limade liavailable lito liowners liand liexternal liusers lisuch lias licustomers,
licreditors, liandlpi otential liinvestors liwho liare liinterested liin lireading lithem.
liManagerial liaccounting lifocuses lion liother liaccounting lireports lithat liare linot
lireleased lito lithe ligeneral lipublic, libut liinstead liare liprepared lifor liinternal lidecision
limaking liand liused liby liemployees, lisupervisors, liand limanagers liwho lirun lithe
licompany.
4. Financial lireports liare liused liby liboth liinternal liand liexternal ligroups liand
liindividuals. liTheili nternal ligroups liare licomprised liof lithe livarious limanagers liof lithe
libusiness. liThe liexternal ligroups liinclude liinvestors, licreditors, ligovernmental
liagencies, liother liinterested liparties, liand lithe lipublic liat lilarge.
5. The libusiness liitself, linot lithe liindividual listockholders liwho liown lithe libusiness, liis
livieweda li s liowning lithe liassets liand liowing lithe liliabilities lion liits libalance lisheet. liA
libusiness‘s libalance lisheet liincludes lithe liassets, liliabilities, liand listockholders‘
liequity liof lionly lithat libusiness liand linot li the li personal liassets, liliabilities, liand
liequity li of lithe listockholders. liThe lifinancial listatements liof lia licompany lishow lithe
liresults liof lithe libusiness liactivities lioflo
i nly lithat licompany.
Fundamentals liof liFinancial liAccounting, li7/e 1-2
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
,6. (a) li Operating li– liThese liactivities liare lidirectly lirelated lito liearning liprofits. liThey
liincludelb
i uying lisupplies, limaking liproducts, liserving licustomers, licleaning lithe
lipremises, liadvertising, lirenting lia libuilding, lirepairing liequipment, liand liobtaining
liinsurance licoverage.
(b) Investing li– liThese liactivities liinvolve libuying liand liselling liproductive
li resources liwithlli ong lilives li(such lias libuildings, liland, liequipment, liand litools),
lipurchasing liinvestments, liand lilending lito liothers.
(c) Financing li– liAny liborrowing lifrom libanks, lirepaying libank liloans, lireceiving
licontributions lifrom listockholders, lior lipaying lidividends lito listockholders liare
liconsideredlfi inancing liactivities.
7. The liheading liof lieach liof lithe lifour liprimary lifinancial listatements lishould
liinclude lithefli ollowing:
(a) Name liof lithe libusiness
(b) Name liof lithe listatement
(c) Date liof lithe listatement, lior lithe liperiod liof litime lithat lithe listatement licovers
8. (a) liThe lipurpose liof lithe libalance lisheet liis lito lireport lithe lifinancial liposition
li(assets, lli iabilities liand listockholders‘ liequity) liof lia libusiness liat lia lipoint liin
litime.
(b) The lipurpose liof lithe liincome listatement liis lito lipresent liinformation liabout
lithe lirevenues, liexpenses, liand linet liincome liof lia libusiness lifor lia lispecified
liperiod liof litime.
(c) The listatement liof liretained liearnings lireports lithe liway lithat linet liincome liand
lithe lidistribution liof lidividends liaffected lithe lifinancial liposition liof lithe licompany
liduring lithe liperiod.
(d) The lipurpose liof lithe listatement liof licash liflows liis lito lisummarize lihow lia
libusiness‘s lioperating, liinvesting, liand lifinancing liactivities licaused liits licash
libalance l i to l i changelo i ver lia liparticular liperiod liof litime.
9. The liincome listatement, listatement liof liretained liearnings, liand listatement liof licash
liflowslw
i ould libe lidated li―For lithe liYear liEnded liDecember li31, li2021,‖ libecause
lithey lireport lithelii nflows liand lioutflows liof liresources liover lia liperiod liof litime. liIn
licontrast, lithe libalance lisheet liwould libe lidated li―At liDecember li31, li2021,‖
libecause liit lirepresents lithe liassets, liliabilities liand listockholders‘ liequity liat lia
lispecific lidate.
10. Net liincome liis lithe liexcess liof litotal lirevenues liover litotal liexpenses. liA linet liloss
lioccurs liiftli otal liexpenses liexceed litotal lirevenues.
11. The liaccounting liequation lifor lithe libalance lisheet liis: liAssets li= liLiabilities li+
liStockholders‘ liEquity. liAssets liare lithe lieconomic liresources licontrolled liby lithe
licompany. l i Liabilities liare liamounts liowed liby lithe libusiness. l i Stockholders‘
liequity liis lithe liowners‘ liclaims lito lithe libusiness. liIt liincludes liamounts licontributed
lito lithe libusinessl(i by liinvestors lithrough lipurchasing lithe licompany‘s listock) liand
lithe liamounts liearned liand liaccumulated lithrough liprofitable libusiness lioperations.
Fundamentals liof liFinancial liAccounting, li7/e 1-3
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
, 12. The liequation lifor lithe liincome listatement liis liRevenues li– liExpenses li= liNet
liIncome. liRevenues liare liincreases liin lia licompany‘s liresources, liarising liprimarily
lifrom liits lioperating liactivities. liExpenses liare lidecreases liin lia licompany‘s
liresources, liarising liprimarily lifrom liits lioperating liactivities. liNet liIncome liis liequal
lito lirevenues liminus liexpenses. li(If liexpenses liare ligreater lithan lirevenues, lithe
licompany lihas lia liNet liLoss.)
13. The liequation lifor lithe listatement liof liretained liearnings liis: liBeginning l i Retained
liEarnings li+ liNet liIncome li- liDividends li= liEnding liRetained liEarnings. liIt libegins
liwith libeginning-of-the-year liretained liearnings liwhich liis lithe liprior liyear‘s liending
liretained liearnings lireported lion lithe liprior liyear‘s libalance lisheet. liThe licurrent
liyear's linet liincome lireported lion lithe liincome listatement liis liadded liand lithe licurrent
liyear's lidividends liare lisubtracted lifrom lithis liamount. li(If lia linet liloss lioccurs, liIt
liwould libe lisubtracted, lialong liwithlti he lidividends, lifrom lithe liprior liyear‘s liending
liretained liearnings libalance.)The liending liretained liearnings liamount liis lireported
lion lithe liend-of-year libalance lisheet. li14. The
liequation lifor lithe listatement liof licash liflows liis: liCash liflows lifrom lioperating
liactivities li+ liCash liflows lifrom liinvesting liactivities li+ liCash liflows lifrom lifinancing
liactivities li= liChangelii n licash lifor lithe liperiod. liChange liin licash lifor lithe liperiod li+
liBeginning licash libalance li= liEnding licash libalance. liThe linet licash liflows lifor lithe
liperiod lirepresent lithe liincrease lior lidecrease liin licash lithat lioccurred liduring lithe
liperiod. liCash liflows lifrom lioperating liactivities liare licash liflows lidirectly lirelated lito
liearning liincome li(normal libusiness liactivity). liCash liflows lifrom liinvesting liactivities
liinclude licash liflows lithat liare lirelated lito lithe liacquisition lior lisale liof lithe
licompany‘s lilong-term liassets. liCash liflows lifrom lifinancing liactivities liare lidirectly
lirelated lito lithe lifinancing liof lithe licompany.
15. Currently, lithe liFinancial liAccounting liStandards liBoard li(FASB) liis ligiven lithe
liprimary liresponsibility lifor lisetting lithe lidetailed lirules lithat libecome liGenerally
liAccepted liAccounting liPrinciples li(GAAP) liin lithe liUnited liStates.
li(Internationally, lithe liInternational liAccounting liStandards liBoard li(IASB) lihas
lithe liresponsibility lifor lisettingla
i ccounting lirules liknown lias liInternational liFinancial
liReporting liStandards li(IFRS).)
16. The limain ligoal liof liaccounting lirules liis lito liensure lithat licompanies liproduce liuseful
lifinancial liinformation lifor lipresent liand lipotential liinvestors, lilenders, liand liother
licreditorslii n limaking lidecisions liin litheir licapacity lias licapital liproviders. l i Financial
liinformation limust lishow lirelevance liand lifaithful lirepresentation, lias liwell lias libe
licomparable, liverifiable, litimely, liand liunderstandable.
Fundamentals liof liFinancial liAccounting, li7/e 1-4
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
,SOLUTION l i MANUAL l i FOR
Fundamentals liof liFinancial liAccounting li7e liPhillips
Chapter li1-13 with liAppendix
liC&D
Chapter li1
Business liDecisions liand liFinancial liAccounting
ANSWERS liTO liQUESTIONS
1. Accounting liis lia lisystem liof lianalyzing, lirecording, liand lisummarizing lithe
liresults liof liab
li usiness‘s liactivities liand lithen lireporting lithem lito lidecision
limakers.
2. An liadvantage liof lioperating lias lia lisole liproprietorship, lirather lithan lia licorporation,
liis lithatili t liis lieasy lito liestablish. liAnother liadvantage liis lithat liincome lifrom lia lisole
liproprietorship liis litaxed lionly lionce liin lithe lihands liof lithe liindividual liproprietor
li(income lifrom lia licorporation liis litaxed liin lithe licorporation liand lithen liagain liin lithe
lihands liof lithe liindividual lishareholder). liA lidisadvantage liof lioperating lias lia lisole
liproprietorship, lirather lithan lia licorporation, liis lithat lithe liindividual liproprietor lican
libe liheld liresponsible lifor lithe lidebts liof lithe libusiness.
3. Financial liaccounting lifocuses lion lipreparing liand liusing lithe lifinancial listatements
lithat liare limade liavailable lito liowners liand liexternal liusers lisuch lias licustomers,
licreditors, liandlpi otential liinvestors liwho liare liinterested liin lireading lithem.
liManagerial liaccounting lifocuses lion liother liaccounting lireports lithat liare linot
lireleased lito lithe ligeneral lipublic, libut liinstead liare liprepared lifor liinternal lidecision
limaking liand liused liby liemployees, lisupervisors, liand limanagers liwho lirun lithe
licompany.
4. Financial lireports liare liused liby liboth liinternal liand liexternal ligroups liand
liindividuals. liTheili nternal ligroups liare licomprised liof lithe livarious limanagers liof lithe
libusiness. liThe liexternal ligroups liinclude liinvestors, licreditors, ligovernmental
liagencies, liother liinterested liparties, liand lithe lipublic liat lilarge.
5. The libusiness liitself, linot lithe liindividual listockholders liwho liown lithe libusiness, liis
livieweda li s liowning lithe liassets liand liowing lithe liliabilities lion liits libalance lisheet. liA
libusiness‘s libalance lisheet liincludes lithe liassets, liliabilities, liand listockholders‘
liequity liof lionly lithat libusiness liand linot li the li personal liassets, liliabilities, liand
liequity li of lithe listockholders. liThe lifinancial listatements liof lia licompany lishow lithe
liresults liof lithe libusiness liactivities lioflo
i nly lithat licompany.
Fundamentals liof liFinancial liAccounting, li7/e 1-2
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
,6. (a) li Operating li– liThese liactivities liare lidirectly lirelated lito liearning liprofits. liThey
liincludelb
i uying lisupplies, limaking liproducts, liserving licustomers, licleaning lithe
lipremises, liadvertising, lirenting lia libuilding, lirepairing liequipment, liand liobtaining
liinsurance licoverage.
(b) Investing li– liThese liactivities liinvolve libuying liand liselling liproductive
li resources liwithlli ong lilives li(such lias libuildings, liland, liequipment, liand litools),
lipurchasing liinvestments, liand lilending lito liothers.
(c) Financing li– liAny liborrowing lifrom libanks, lirepaying libank liloans, lireceiving
licontributions lifrom listockholders, lior lipaying lidividends lito listockholders liare
liconsideredlfi inancing liactivities.
7. The liheading liof lieach liof lithe lifour liprimary lifinancial listatements lishould
liinclude lithefli ollowing:
(a) Name liof lithe libusiness
(b) Name liof lithe listatement
(c) Date liof lithe listatement, lior lithe liperiod liof litime lithat lithe listatement licovers
8. (a) liThe lipurpose liof lithe libalance lisheet liis lito lireport lithe lifinancial liposition
li(assets, lli iabilities liand listockholders‘ liequity) liof lia libusiness liat lia lipoint liin
litime.
(b) The lipurpose liof lithe liincome listatement liis lito lipresent liinformation liabout
lithe lirevenues, liexpenses, liand linet liincome liof lia libusiness lifor lia lispecified
liperiod liof litime.
(c) The listatement liof liretained liearnings lireports lithe liway lithat linet liincome liand
lithe lidistribution liof lidividends liaffected lithe lifinancial liposition liof lithe licompany
liduring lithe liperiod.
(d) The lipurpose liof lithe listatement liof licash liflows liis lito lisummarize lihow lia
libusiness‘s lioperating, liinvesting, liand lifinancing liactivities licaused liits licash
libalance l i to l i changelo i ver lia liparticular liperiod liof litime.
9. The liincome listatement, listatement liof liretained liearnings, liand listatement liof licash
liflowslw
i ould libe lidated li―For lithe liYear liEnded liDecember li31, li2021,‖ libecause
lithey lireport lithelii nflows liand lioutflows liof liresources liover lia liperiod liof litime. liIn
licontrast, lithe libalance lisheet liwould libe lidated li―At liDecember li31, li2021,‖
libecause liit lirepresents lithe liassets, liliabilities liand listockholders‘ liequity liat lia
lispecific lidate.
10. Net liincome liis lithe liexcess liof litotal lirevenues liover litotal liexpenses. liA linet liloss
lioccurs liiftli otal liexpenses liexceed litotal lirevenues.
11. The liaccounting liequation lifor lithe libalance lisheet liis: liAssets li= liLiabilities li+
liStockholders‘ liEquity. liAssets liare lithe lieconomic liresources licontrolled liby lithe
licompany. l i Liabilities liare liamounts liowed liby lithe libusiness. l i Stockholders‘
liequity liis lithe liowners‘ liclaims lito lithe libusiness. liIt liincludes liamounts licontributed
lito lithe libusinessl(i by liinvestors lithrough lipurchasing lithe licompany‘s listock) liand
lithe liamounts liearned liand liaccumulated lithrough liprofitable libusiness lioperations.
Fundamentals liof liFinancial liAccounting, li7/e 1-3
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
, 12. The liequation lifor lithe liincome listatement liis liRevenues li– liExpenses li= liNet
liIncome. liRevenues liare liincreases liin lia licompany‘s liresources, liarising liprimarily
lifrom liits lioperating liactivities. liExpenses liare lidecreases liin lia licompany‘s
liresources, liarising liprimarily lifrom liits lioperating liactivities. liNet liIncome liis liequal
lito lirevenues liminus liexpenses. li(If liexpenses liare ligreater lithan lirevenues, lithe
licompany lihas lia liNet liLoss.)
13. The liequation lifor lithe listatement liof liretained liearnings liis: liBeginning l i Retained
liEarnings li+ liNet liIncome li- liDividends li= liEnding liRetained liEarnings. liIt libegins
liwith libeginning-of-the-year liretained liearnings liwhich liis lithe liprior liyear‘s liending
liretained liearnings lireported lion lithe liprior liyear‘s libalance lisheet. liThe licurrent
liyear's linet liincome lireported lion lithe liincome listatement liis liadded liand lithe licurrent
liyear's lidividends liare lisubtracted lifrom lithis liamount. li(If lia linet liloss lioccurs, liIt
liwould libe lisubtracted, lialong liwithlti he lidividends, lifrom lithe liprior liyear‘s liending
liretained liearnings libalance.)The liending liretained liearnings liamount liis lireported
lion lithe liend-of-year libalance lisheet. li14. The
liequation lifor lithe listatement liof licash liflows liis: liCash liflows lifrom lioperating
liactivities li+ liCash liflows lifrom liinvesting liactivities li+ liCash liflows lifrom lifinancing
liactivities li= liChangelii n licash lifor lithe liperiod. liChange liin licash lifor lithe liperiod li+
liBeginning licash libalance li= liEnding licash libalance. liThe linet licash liflows lifor lithe
liperiod lirepresent lithe liincrease lior lidecrease liin licash lithat lioccurred liduring lithe
liperiod. liCash liflows lifrom lioperating liactivities liare licash liflows lidirectly lirelated lito
liearning liincome li(normal libusiness liactivity). liCash liflows lifrom liinvesting liactivities
liinclude licash liflows lithat liare lirelated lito lithe liacquisition lior lisale liof lithe
licompany‘s lilong-term liassets. liCash liflows lifrom lifinancing liactivities liare lidirectly
lirelated lito lithe lifinancing liof lithe licompany.
15. Currently, lithe liFinancial liAccounting liStandards liBoard li(FASB) liis ligiven lithe
liprimary liresponsibility lifor lisetting lithe lidetailed lirules lithat libecome liGenerally
liAccepted liAccounting liPrinciples li(GAAP) liin lithe liUnited liStates.
li(Internationally, lithe liInternational liAccounting liStandards liBoard li(IASB) lihas
lithe liresponsibility lifor lisettingla
i ccounting lirules liknown lias liInternational liFinancial
liReporting liStandards li(IFRS).)
16. The limain ligoal liof liaccounting lirules liis lito liensure lithat licompanies liproduce liuseful
lifinancial liinformation lifor lipresent liand lipotential liinvestors, lilenders, liand liother
licreditorslii n limaking lidecisions liin litheir licapacity lias licapital liproviders. l i Financial
liinformation limust lishow lirelevance liand lifaithful lirepresentation, lias liwell lias libe
licomparable, liverifiable, litimely, liand liunderstandable.
Fundamentals liof liFinancial liAccounting, li7/e 1-4
© li2022 liby liMcGraw liHill liLLC. l i All lirights lireserved. liNo lireproduction lior lidistribution liwithout lithe liprior liwritten liconsent
liof liMcGraw liHill liLLC.
