Solution manual
Fundamentals of financial accounting
6th edition by Fred Phillips and Robert Libby
All Chapters 1-13 Covered
,FundamentalsoOfoFinancialoAccountingo6CEoFredoPhillips,oRobertoLibby,oPatriciaoLibby,oBrandyoMackintosh
Chapter 1-13 o
Chapter 1 o
Business Decisions and Financial Accounting
o o o o
ANSWERSoTOoQUESTIONS
1. Accountingoisoaosystemoofoanalyzing,orecording,oandosummarizingotheoresultsoofoaobusines
s‘soactivitiesoandothenoreportingothemotoodecisionomakers.
2. Anoadvantageoofooperatingoasoaosoleoproprietorship,oratherothanoaocorporation,oisothatoitoisoeasyotoo
establish.oAnotheroadvantageoisothatoincomeofromoaosoleoproprietorshipoisotaxedoonlyoonceoinotheo
handsoofotheoindividualoproprietoro(incomeofromoaocorporationoisotaxedoinotheocorporationoandothe
noagainoinotheohandsoofotheoindividualoproprietor).oAodisadvantageoofooperatingoasoaosoleoproprietor
ship,oratherothanoaocorporation,oisothatotheoindividualoproprietorocanobeoheldoresponsibleoforotheode
btsoofotheobusiness.
3. Financialoaccountingofocusesoonopreparingoandousingotheofinancialostatementsothatoareomadeoavail
ableotooownersoandoexternalousersosuchoasocustomers,ocreditors,oandopotentialoinvestorsowhooareoi
nterestedoinoreadingothem.oManagerialoaccountingofocusesoonootheroaccountingoreportsothatoareon
otoreleasedotootheogeneralopublic,obutoinsteadoareopreparedoandousedobyoemployees,osupervisors,o
andomanagersowhoorunotheocompany.
4. Financialoreportsoareousedobyobothointernaloandoexternalogroupsoandoindividuals.oTheointernalogroup
soareocomprisedoofotheovariousomanagersoofotheobusiness.oTheoexternalogroupsoincludeoinvestors,oc
reditors,ogovernmentaloagencies,ootherointerestedoparties,oandotheopublicoatolarge.
5. Theobusinessoitself,onototheoindividualoshareholdersowhooownotheobusiness,oisoviewedoasoowningothe
oassetsoandoowingotheoliabilitiesoonoitsobalanceosheet.oAobusiness‘sobalanceosheetoincludesotheoass
ets,oliabilities,oandoshareholders‘oequityoofoonlyothatobusinessoandonototheopersonaloassets,oliabilitie
s,oandoequityoofotheoshareholders.o Theofinancialostatementsoofoaocompanyoshowotheoresultsoofotheob
usinessoactivitiesoofoonlyothatocompany.
6. (a)o Operatingo–
oTheseoactivitiesoareodirectlyorelatedotooearningoprofits.oTheyoincludeobuyingosupplies,omakingoproduc
ts,oservingocustomers,ocleaningotheopremises,oadvertising,orentingoaobuilding,orepairingoequipment,oa
ndoobtainingoinsuranceocoverage.
,Chaptero02o-oTheoBalanceoSheet
(b) Investingo–
oTheseoactivitiesoinvolveo buyingoandosellingoproductiveoresourcesowitholongoliveso(suchoasobuildings,ol
and,oequipment,oandotools),opurchasingoinvestments,oandolendingotooothers.
(c) Financingo–
oAnyoborrowingofromobanks,orepayingobankoloans,oreceivingocontributionsofromoshareholders,
ooropayingodividendsotooshareholdersoareoconsideredofinancingoactivities.
7. Theoheadingoofoeachoofotheofouroprimaryofinancialostatementsoshouldoincludeotheofollowing:
(a) Nameoofotheobusiness
(b) Nameoofotheostatement
(c) Dateoofotheostatement,oorotheoperiodoofotime
8. (a)o Theopurposeoofotheobalanceosheetoisotooreportotheofinancialopositiono(assets,o liabilitiesoandoshar
eholders‘oequity)oofoaobusinessoatoaopointoinotime.
(b) Theopurposeoofotheoincomeostatementoisotoopresentoinformationoaboutotheorevenues,oexpens
es,oandonetoincomeoofoaobusinessoforoaospecifiedoperiodoofotime.
(c) Theostatementooforetainedoearningsoreportsotheowayothatonetoincomeoandotheodistributionoofodi
videndsoaffectedotheofinancialopositionoofotheocompanyoduringotheoperiod.
(d) Theopurposeoofotheostatementoofocashoflowsoisotoosummarizeohowoaobusiness‘sooperating,oi
nvesting,oandofinancingoactivitiesocausedoitsocashobalanceotoochangeooveroaoparticularoperiodoofo
time.
9. Theoincomeostatement,ostatementooforetainedoearnings,oandostatementoofocashoflowsowouldobeodate
do―ForotheoYearoEndedoDecembero31,o2020,‖obecauseotheyoreportotheoinflowsoandooutflowsooforeso
urcesoduringoaoperiodoofotime.oInocontrast,otheobalanceosheetowouldobeodatedo―AtoDecembero31,o20
20,‖obecauseoitorepresentsotheoassets,oliabilitiesoandoshareholders‘oequityoatoaospecificodate.
10. Netoincomeoisotheoexcessoofototalorevenuesooverototaloexpenses.oAonetolossooccursoifototaloexpens
esoexceedototalorevenues.
11. Theoaccountingoequationoforotheobalanceosheetois:oAssetso=oLiabilitieso+oShareholders‘oEquity.o A
ssetsoareotheoeconomicoresourcesocontrolledobyotheocompany.
Liabilitiesoareo
amountsoowedobyotheobusiness.o Shareholders‘oequityoisotheoowners‘oclaimsotootheobusiness.oItoi
ncludesoamountsocontributedotootheobusinesso(byoinvestorsothroughopurchasingotheocompany‘so
shares)oandotheoamountsoearnedoandoaccumulatedothroughoprofitableobusinessooperations.
12. TheoequationoforotheoincomeostatementoisoRevenueso–
oExpenseso=oNetoIncome.oRevenuesoareoincreasesoinoaocompany‘soresources,oarisingoprimarilyofro
moitsooperatingoactivities.o Expensesoareodecreasesoinoaocompany‘soresources,oarisingoprimarilyofr
omoitsooperatingoactivities.oNetoIncomeoisoequalotoorevenuesominusoexpenses.o (Ifoexpensesoareogr
eaterothanorevenues,otheocompanyohasoaoNetoLoss.)
Phillipsoetoal.oFundamentalsoofoFinancialoAccounting,o6ce SolutionsoManual
oCopyrightoMcGrawoHill.,o2021 Pageo2-2
, Chaptero02o-oTheoBalanceoSheet
13. Theoequationoforotheostatementooforetainedoearningsois:oBeginningo RetainedoEarningso+oNetoIncomeo
-oDividendso=oEndingoRetainedoEarnings.oItobeginsowithobeginning-of-the-
yearoretainedoearningsowhichoisotheoprioroyear‘soendingoretainedoearningsoreportedoonotheoprioroyear‘
sobalanceosheet.o Theocurrentoyear'sonetoincomeoreportedoonotheoincomeostatementoisoaddedoandoth
eocurrentoyear'sodividendsoareosubtractedofromothisoamount.oTheoendingoretainedoearningsoamountoi
soreportedoonotheoend-of-yearobalanceosheet.
14. Theoequationoforotheostatementoofocashoflowsois:oCashoflowsofromooperatingoactivitieso+oCashoflow
sofromoinvestingoactivitieso+oCashoflowsofromofinancingoactivitieso=oChangeoinocashoforotheoperiod.o
Changeoinocashoforotheoperiodo+oBeginningocashobalanceo=oEndingocashobalance.o Theonetocashoflow
soforotheoperiodorepresentotheoincreaseoorodecreaseoinocashothatooccurredoduringotheoperiod.o Casho
flowsofromooperatingoactivitiesoareocashoflowsodirectlyorelatedotooearningoincomeo(normalobusiness
oactivity).oCashoflowsofromoinvestingoactivitiesoincludeocashoflowsothatoareorelatedotootheoacquisitio
noorosaleoofotheocompany‘solong-
termoassets.oCashoflowsofromofinancingoactivitiesoareodirectlyorelatedotootheofinancingoofotheocomp
any.
15. Currently,otheoCharteredoProfessionaloAccountantsoofoCanadao(CPA)oisogivenotheoprimaryoresponsi
bilityoforosettingotheodetailedorulesothatobecomeoGenerallyoAcceptedoAccountingoPrincipleso(GAAP)
oinoCanada.o(Internationally,otheoInternationaloAccountingoStandardsoBoardo(IASB)ohasotheorespons
ibilityoforosettingoaccountingorulesoknownoasoInternationaloFinancialoReportingoStandardso(IFRS).)
16. Theomainogoaloofoaccountingorulesoisotooensureothatocompaniesoproduceousefulofinancialoinforma
tionoforopresentoandopotentialoinvestors,olenders,oandootherocreditorsoinomakingodecisionsoinotheir
ocapacityoasocapitaloproviders.o Financialoinformationomustoshoworelevanceoandofaithfulorepresen
tation,oasowelloasobeocomparable,overifiable,otimely,oandounderstandable.
17. Anoethicalodilemmaoisoaosituationowhereofollowingooneomoraloprincipleowouldoresultoinoviolati
ngoanother.oThreeostepsothatoshouldobeoconsideredowhenoevaluatingoethicalodilemmasoare:
(a) Identifyowhoowillobenefitofromotheosituationo(often,otheomanagerooroemployee)oandohowootherso
willobeoharmedo(otheroemployees,otheocompany‘soreputation,oowners,ocreditors,oandotheopublicoinog
eneral).
(b) Identifyotheoalternativeocoursesoofoaction.
(c) Chooseotheoalternativeothatoisotheomostoethicalo–
othatowhichoyouowouldobeoproudotoohaveoreportedoinotheonewsomedia.o Often,othereoisonoooneorighto
answeroandohardochoicesowilloneedotoobeomade.oFollowingostrongoethicalopracticesoisoaokeyopartoo
foensuringogoodofinancialoreportingobyobusinessesoofoallosizes.
Phillipsoetoal.oFundamentalsoofoFinancialoAccounting,o6ce SolutionsoManual
oCopyrightoMcGrawoHill.,o2021 Pageo2-3
Fundamentals of financial accounting
6th edition by Fred Phillips and Robert Libby
All Chapters 1-13 Covered
,FundamentalsoOfoFinancialoAccountingo6CEoFredoPhillips,oRobertoLibby,oPatriciaoLibby,oBrandyoMackintosh
Chapter 1-13 o
Chapter 1 o
Business Decisions and Financial Accounting
o o o o
ANSWERSoTOoQUESTIONS
1. Accountingoisoaosystemoofoanalyzing,orecording,oandosummarizingotheoresultsoofoaobusines
s‘soactivitiesoandothenoreportingothemotoodecisionomakers.
2. Anoadvantageoofooperatingoasoaosoleoproprietorship,oratherothanoaocorporation,oisothatoitoisoeasyotoo
establish.oAnotheroadvantageoisothatoincomeofromoaosoleoproprietorshipoisotaxedoonlyoonceoinotheo
handsoofotheoindividualoproprietoro(incomeofromoaocorporationoisotaxedoinotheocorporationoandothe
noagainoinotheohandsoofotheoindividualoproprietor).oAodisadvantageoofooperatingoasoaosoleoproprietor
ship,oratherothanoaocorporation,oisothatotheoindividualoproprietorocanobeoheldoresponsibleoforotheode
btsoofotheobusiness.
3. Financialoaccountingofocusesoonopreparingoandousingotheofinancialostatementsothatoareomadeoavail
ableotooownersoandoexternalousersosuchoasocustomers,ocreditors,oandopotentialoinvestorsowhooareoi
nterestedoinoreadingothem.oManagerialoaccountingofocusesoonootheroaccountingoreportsothatoareon
otoreleasedotootheogeneralopublic,obutoinsteadoareopreparedoandousedobyoemployees,osupervisors,o
andomanagersowhoorunotheocompany.
4. Financialoreportsoareousedobyobothointernaloandoexternalogroupsoandoindividuals.oTheointernalogroup
soareocomprisedoofotheovariousomanagersoofotheobusiness.oTheoexternalogroupsoincludeoinvestors,oc
reditors,ogovernmentaloagencies,ootherointerestedoparties,oandotheopublicoatolarge.
5. Theobusinessoitself,onototheoindividualoshareholdersowhooownotheobusiness,oisoviewedoasoowningothe
oassetsoandoowingotheoliabilitiesoonoitsobalanceosheet.oAobusiness‘sobalanceosheetoincludesotheoass
ets,oliabilities,oandoshareholders‘oequityoofoonlyothatobusinessoandonototheopersonaloassets,oliabilitie
s,oandoequityoofotheoshareholders.o Theofinancialostatementsoofoaocompanyoshowotheoresultsoofotheob
usinessoactivitiesoofoonlyothatocompany.
6. (a)o Operatingo–
oTheseoactivitiesoareodirectlyorelatedotooearningoprofits.oTheyoincludeobuyingosupplies,omakingoproduc
ts,oservingocustomers,ocleaningotheopremises,oadvertising,orentingoaobuilding,orepairingoequipment,oa
ndoobtainingoinsuranceocoverage.
,Chaptero02o-oTheoBalanceoSheet
(b) Investingo–
oTheseoactivitiesoinvolveo buyingoandosellingoproductiveoresourcesowitholongoliveso(suchoasobuildings,ol
and,oequipment,oandotools),opurchasingoinvestments,oandolendingotooothers.
(c) Financingo–
oAnyoborrowingofromobanks,orepayingobankoloans,oreceivingocontributionsofromoshareholders,
ooropayingodividendsotooshareholdersoareoconsideredofinancingoactivities.
7. Theoheadingoofoeachoofotheofouroprimaryofinancialostatementsoshouldoincludeotheofollowing:
(a) Nameoofotheobusiness
(b) Nameoofotheostatement
(c) Dateoofotheostatement,oorotheoperiodoofotime
8. (a)o Theopurposeoofotheobalanceosheetoisotooreportotheofinancialopositiono(assets,o liabilitiesoandoshar
eholders‘oequity)oofoaobusinessoatoaopointoinotime.
(b) Theopurposeoofotheoincomeostatementoisotoopresentoinformationoaboutotheorevenues,oexpens
es,oandonetoincomeoofoaobusinessoforoaospecifiedoperiodoofotime.
(c) Theostatementooforetainedoearningsoreportsotheowayothatonetoincomeoandotheodistributionoofodi
videndsoaffectedotheofinancialopositionoofotheocompanyoduringotheoperiod.
(d) Theopurposeoofotheostatementoofocashoflowsoisotoosummarizeohowoaobusiness‘sooperating,oi
nvesting,oandofinancingoactivitiesocausedoitsocashobalanceotoochangeooveroaoparticularoperiodoofo
time.
9. Theoincomeostatement,ostatementooforetainedoearnings,oandostatementoofocashoflowsowouldobeodate
do―ForotheoYearoEndedoDecembero31,o2020,‖obecauseotheyoreportotheoinflowsoandooutflowsooforeso
urcesoduringoaoperiodoofotime.oInocontrast,otheobalanceosheetowouldobeodatedo―AtoDecembero31,o20
20,‖obecauseoitorepresentsotheoassets,oliabilitiesoandoshareholders‘oequityoatoaospecificodate.
10. Netoincomeoisotheoexcessoofototalorevenuesooverototaloexpenses.oAonetolossooccursoifototaloexpens
esoexceedototalorevenues.
11. Theoaccountingoequationoforotheobalanceosheetois:oAssetso=oLiabilitieso+oShareholders‘oEquity.o A
ssetsoareotheoeconomicoresourcesocontrolledobyotheocompany.
Liabilitiesoareo
amountsoowedobyotheobusiness.o Shareholders‘oequityoisotheoowners‘oclaimsotootheobusiness.oItoi
ncludesoamountsocontributedotootheobusinesso(byoinvestorsothroughopurchasingotheocompany‘so
shares)oandotheoamountsoearnedoandoaccumulatedothroughoprofitableobusinessooperations.
12. TheoequationoforotheoincomeostatementoisoRevenueso–
oExpenseso=oNetoIncome.oRevenuesoareoincreasesoinoaocompany‘soresources,oarisingoprimarilyofro
moitsooperatingoactivities.o Expensesoareodecreasesoinoaocompany‘soresources,oarisingoprimarilyofr
omoitsooperatingoactivities.oNetoIncomeoisoequalotoorevenuesominusoexpenses.o (Ifoexpensesoareogr
eaterothanorevenues,otheocompanyohasoaoNetoLoss.)
Phillipsoetoal.oFundamentalsoofoFinancialoAccounting,o6ce SolutionsoManual
oCopyrightoMcGrawoHill.,o2021 Pageo2-2
, Chaptero02o-oTheoBalanceoSheet
13. Theoequationoforotheostatementooforetainedoearningsois:oBeginningo RetainedoEarningso+oNetoIncomeo
-oDividendso=oEndingoRetainedoEarnings.oItobeginsowithobeginning-of-the-
yearoretainedoearningsowhichoisotheoprioroyear‘soendingoretainedoearningsoreportedoonotheoprioroyear‘
sobalanceosheet.o Theocurrentoyear'sonetoincomeoreportedoonotheoincomeostatementoisoaddedoandoth
eocurrentoyear'sodividendsoareosubtractedofromothisoamount.oTheoendingoretainedoearningsoamountoi
soreportedoonotheoend-of-yearobalanceosheet.
14. Theoequationoforotheostatementoofocashoflowsois:oCashoflowsofromooperatingoactivitieso+oCashoflow
sofromoinvestingoactivitieso+oCashoflowsofromofinancingoactivitieso=oChangeoinocashoforotheoperiod.o
Changeoinocashoforotheoperiodo+oBeginningocashobalanceo=oEndingocashobalance.o Theonetocashoflow
soforotheoperiodorepresentotheoincreaseoorodecreaseoinocashothatooccurredoduringotheoperiod.o Casho
flowsofromooperatingoactivitiesoareocashoflowsodirectlyorelatedotooearningoincomeo(normalobusiness
oactivity).oCashoflowsofromoinvestingoactivitiesoincludeocashoflowsothatoareorelatedotootheoacquisitio
noorosaleoofotheocompany‘solong-
termoassets.oCashoflowsofromofinancingoactivitiesoareodirectlyorelatedotootheofinancingoofotheocomp
any.
15. Currently,otheoCharteredoProfessionaloAccountantsoofoCanadao(CPA)oisogivenotheoprimaryoresponsi
bilityoforosettingotheodetailedorulesothatobecomeoGenerallyoAcceptedoAccountingoPrincipleso(GAAP)
oinoCanada.o(Internationally,otheoInternationaloAccountingoStandardsoBoardo(IASB)ohasotheorespons
ibilityoforosettingoaccountingorulesoknownoasoInternationaloFinancialoReportingoStandardso(IFRS).)
16. Theomainogoaloofoaccountingorulesoisotooensureothatocompaniesoproduceousefulofinancialoinforma
tionoforopresentoandopotentialoinvestors,olenders,oandootherocreditorsoinomakingodecisionsoinotheir
ocapacityoasocapitaloproviders.o Financialoinformationomustoshoworelevanceoandofaithfulorepresen
tation,oasowelloasobeocomparable,overifiable,otimely,oandounderstandable.
17. Anoethicalodilemmaoisoaosituationowhereofollowingooneomoraloprincipleowouldoresultoinoviolati
ngoanother.oThreeostepsothatoshouldobeoconsideredowhenoevaluatingoethicalodilemmasoare:
(a) Identifyowhoowillobenefitofromotheosituationo(often,otheomanagerooroemployee)oandohowootherso
willobeoharmedo(otheroemployees,otheocompany‘soreputation,oowners,ocreditors,oandotheopublicoinog
eneral).
(b) Identifyotheoalternativeocoursesoofoaction.
(c) Chooseotheoalternativeothatoisotheomostoethicalo–
othatowhichoyouowouldobeoproudotoohaveoreportedoinotheonewsomedia.o Often,othereoisonoooneorighto
answeroandohardochoicesowilloneedotoobeomade.oFollowingostrongoethicalopracticesoisoaokeyopartoo
foensuringogoodofinancialoreportingobyobusinessesoofoallosizes.
Phillipsoetoal.oFundamentalsoofoFinancialoAccounting,o6ce SolutionsoManual
oCopyrightoMcGrawoHill.,o2021 Pageo2-3
