SOLUTION MANUAL FOR t t
Fundamentals of Financial Accounting 7e Phillips
t t t t t t
Chapter 1-13 with Appendix C&D
t t t t
Chapter t1 t
Business tDecisions tand tFinancial tAccounting
ANSWERS tTO tQUESTIONS
1. Accounting tis ta tsystem tof tanalyzing, trecording, tand tsummarizing tthe tresults tof ta t
business‘s tactivities tand tthen treporting tthem tto tdecision tmakers. t
2. An tadvantage tof toperating tas ta tsole tproprietorship, trather tthan ta tcorporation, tis tthat t it tis
teasy tto testablish. tAnother tadvantage tis tthat tincome tfrom ta tsole tproprietorship tis t taxed
tonly tonce tin tthe thands t of tthe tindividual tproprietor t(income tfrom ta t t t t corporation tis ttaxed
tin tthe tcorporation tand tthen tagain tin tthe thands tof tthe tindividual t shareholder). tA
tdisadvantage tof toperating tas ta tsole tproprietorship, trather tthan ta t corporation, tis tthat tthe
tindividual tproprietor tcan tbe theld tresponsible tfor tthe tdebts tof t the tbusiness. t
3. Financial taccounting tfocuses ton tpreparing tand tusing tthe tfinancial tstatements tthat t are
tmade tavailable tto towners tand texternal tusers tsuch tas tcustomers, tcreditors, tand t potential
tinvestors twho tare tinterested tin treading tthem. tManagerial taccounting t focuses ton tother
taccounting treports tthat tare tnot treleased tto tthe tgeneral tpublic, tbut t instead tare tprepared
tfor tinternal tdecision tmaking tand tused tby temployees, t supervisors, tand tmanagers twho trun
tthe tcompany. t
4. Financial treports tare tused tby tboth tinternal tand texternal tgroups tand tindividuals. tThe
t internal tgroups tare tcomprised tof tthe tvarious tmanagers tof tthe tbusiness. tThe t external
tgroups tinclude tinvestors, tcreditors, tgovernmental tagencies, tother t interested tparties, tand
tthe tpublic tat tlarge. t
5. The tbusiness titself, tnot tthe tindividual tstockholders twho town tthe tbusiness, tis tviewed t as
towning tthe tassets tand towing tthe tliabilities ton tits tbalance tsheet. tA tbusiness‘s t balance tsheet
tincludes tthe tassets, tliabilities, tand tstockholders‘ tequity tof tonly tthat t business tand tnot tthe
tpersonal tassets, tliabilities, tand tequity tof tthe tstockholders. tThe t financial tstatements tof ta
tcompany tshow tthe tresults tof tthe tbusiness tactivities tof t t t only tthat tcompany. t
Fundamentals tof tFinancial 1-1
tAccounting, t7/e
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
,6. (a) t Operating t– tThese tactivities tare tdirectly trelated tto tearning tprofits. tThey tinclude
t buying tsupplies, tmaking tproducts, tserving tcustomers, tcleaning tthe tpremises, t advertising,
trenting ta tbuilding, trepairing tequipment, tand tobtaining tinsurance t coverage. t
(b) Investing t– tThese tactivities tinvolve tbuying tand tselling tproductive tresources twith t long
tlives t(such tas tbuildings, tland, tequipment, tand ttools), tpurchasing tinvestments, t and t lending
t to t others. t
(c) Financing t– tAny tborrowing tfrom tbanks, trepaying tbank tloans, treceiving t contributions
tfromtstockholders,tortpayingtdividendsttotstockholderstaretconsidered t financing tactivities. t
7. The theading tof teach tof tthe tfour tprimary tfinancial tstatements tshould tinclude tthe
t following: t
(a) Name tof tthe tbusiness t
(b) Name tof tthe tstatement t
(c) Date tof tthe tstatement, tor tthe tperiod tof ttime tthat tthe tstatement tcovers t
8. (a) t The tpurpose tof tthe tbalance tsheet tis tto treport tthe tfinancial tposition t(assets,
t liabilities tand tstockholders‘ tequity) tof ta tbusiness tat ta tpoint tin ttime. t
(b) The t purpose t of t the t income t statement t is t to t present t information t about
t the t revenues, texpenses, tand tnet tincome tof ta tbusiness tfor ta tspecified tperiod tof ttime. t
(c) The t statement t of t retained t earnings t reports t the t way t that t net t income t and
t the t distribution t of t dividends t affected t the t financial t position t of t the t company
t during t the t period. t
(d) The t purpose t of t the t statement t of t cash t flows t is t to t summarize t how t a t business‘s
t operating, t investing, t and t financing t activities t caused t its t cash t balance t to
t change t over ta tparticular tperiod tof ttime. t
9. The tincome tstatement, tstatement tof tretained tearnings, tand tstatement tof tcash tflows t would
tbe tdated t―For tthe tYear tEnded tDecember t31, t2021,‖ tbecause tthey treport tthe t inflows
tand toutflows tof tresources tover ta tperiod tof ttime. tIn tcontrast, tthe tbalance t sheet twould tbe
tdated t―At tDecember t31, t2021,‖ tbecause tit trepresents tthe tassets, t liabilities tand
tstockholders‘ tequity tat ta tspecific tdate. t
10. Net tincome tis tthe texcess tof ttotal trevenues tover ttotal texpenses. tA tnet tloss toccurs tif t total
texpenses texceed ttotal trevenues. t
11. The taccounting tequation tfor tthe tbalance tsheet tis: tAssets t= tLiabilities t+ t Stockholders‘
tEquity. t Assets tare tthe teconomic tresources tcontrolled tby tthe t company. t t Liabilities tare
tamounts towed tby tthe tbusiness. t Stockholders‘ tequity tis t the towners‘ tclaims tto tthe tbusiness.
tIt tincludes tamounts tcontributed tto tthe tbusiness t (by tinvestors tthrough tpurchasing tthe
tcompany‘s tstock) tand tthe tamounts tearned t and taccumulated tthrough tprofitable tbusiness
toperations. t
Fundamentals tof tFinancial 1-2
tAccounting, t7/e
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
,12. The tequation tfor tthe tincome tstatement tis tRevenues t– tExpenses t= tNet tIncome. t Revenues
tare tincreases tin ta tcompany‘s tresources, tarising tprimarily tfrom tits t operating tactivities.
t Expenses tare tdecreases tin ta tcompany‘s tresources, tarising t primarily tfrom tits toperating
tactivities. tNet tIncome tis tequal tto trevenues tminus t expenses. t (If texpenses tare tgreater
tthan trevenues, tthe tcompany thas ta tNet tLoss.) t
13. The tequation tfor tthe tstatement tof tretained tearnings tis: tBeginning t Retained tEarnings t +
t Net tIncome t- tDividends t= tEnding tRetained tEarnings. tIt tbegins twith t beginning-of-the-year
tretained tearnings twhich tis tthe tprior tyear‘s tending tretained t earnings treported ton tthe tprior
tyear‘s tbalance tsheet. t The tcurrent tyear's tnet tincome t reported ton tthe tincome tstatement tis
tadded tand tthe tcurrent tyear's tdividends tare t subtracted tfrom tthis tamount. t(If ta tnet tloss
toccurs, tIt twould tbe tsubtracted, talong twith t the tdividends, tfrom tthe tprior tyear‘s tending
tretained tearnings tbalance.)The tending t retained tearnings tamount tis treported ton tthe tend-
of-year tbalance tsheet. t14. t t t The t equation tfor tthe tstatement tof tcash tflows tis: tCash tflows
tfrom toperating tactivities t+ t Cash tflows tfrom tinvesting tactivities t+ tCash tflows tfrom tfinancing
tactivities t= tChange t in tcash tfor tthe tperiod. tChange tin tcash tfor tthe tperiod t+ tBeginning
tcash tbalance t= t Ending tcash tbalance. t The tnet tcash tflows tfor tthe tperiod trepresent tthe
tincrease tor t decrease tin tcash tthat toccurred tduring tthe tperiod. t Cash tflows tfrom toperating
t activities tare tcash tflows tdirectly trelated tto tearning tincome t(normal tbusiness t t activity).
tCash tflows tfrom tinvesting tactivities tinclude tcash tflows tthat tare trelated tto t the tacquisition tor
tsale tof tthe tcompany‘s tlong-term tassets. tCash tflows tfrom tfinancing t activities tare tdirectly
trelated tto tthe tfinancing tof tthe tcompany. t
15. Currently, tthe tFinancial tAccounting tStandards tBoard t(FASB) tis tgiven tthe tprimary
t responsibility tfor tsetting tthe tdetailed trules tthat tbecome tGenerally tAccepted t Accounting
tPrinciples t(GAAP) tin tthe tUnited tStates. t(Internationally, tthe t International tAccounting
tStandards tBoard t(IASB) thas tthe tresponsibility tfor tsetting t accounting trules tknown tas
tInternational tFinancial tReporting tStandards t(IFRS).) t
16. The tmain tgoal tof taccounting trules tis tto tensure tthat tcompanies tproduce tuseful t financial
tinformation tfor tpresent tand tpotential tinvestors, tlenders, tand tother tcreditors t in tmaking
tdecisions tin ttheir tcapacity tas tcapital tproviders. t t Financial tinformation t must tshow
trelevance tand tfaithful trepresentation, tas twell tas tbe tcomparable, t verifiable, ttimely, tand
tunderstandable. t
Fun
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
, damentals tof tFinancial
tAccounting, t7/e 1-3
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
Fundamentals of Financial Accounting 7e Phillips
t t t t t t
Chapter 1-13 with Appendix C&D
t t t t
Chapter t1 t
Business tDecisions tand tFinancial tAccounting
ANSWERS tTO tQUESTIONS
1. Accounting tis ta tsystem tof tanalyzing, trecording, tand tsummarizing tthe tresults tof ta t
business‘s tactivities tand tthen treporting tthem tto tdecision tmakers. t
2. An tadvantage tof toperating tas ta tsole tproprietorship, trather tthan ta tcorporation, tis tthat t it tis
teasy tto testablish. tAnother tadvantage tis tthat tincome tfrom ta tsole tproprietorship tis t taxed
tonly tonce tin tthe thands t of tthe tindividual tproprietor t(income tfrom ta t t t t corporation tis ttaxed
tin tthe tcorporation tand tthen tagain tin tthe thands tof tthe tindividual t shareholder). tA
tdisadvantage tof toperating tas ta tsole tproprietorship, trather tthan ta t corporation, tis tthat tthe
tindividual tproprietor tcan tbe theld tresponsible tfor tthe tdebts tof t the tbusiness. t
3. Financial taccounting tfocuses ton tpreparing tand tusing tthe tfinancial tstatements tthat t are
tmade tavailable tto towners tand texternal tusers tsuch tas tcustomers, tcreditors, tand t potential
tinvestors twho tare tinterested tin treading tthem. tManagerial taccounting t focuses ton tother
taccounting treports tthat tare tnot treleased tto tthe tgeneral tpublic, tbut t instead tare tprepared
tfor tinternal tdecision tmaking tand tused tby temployees, t supervisors, tand tmanagers twho trun
tthe tcompany. t
4. Financial treports tare tused tby tboth tinternal tand texternal tgroups tand tindividuals. tThe
t internal tgroups tare tcomprised tof tthe tvarious tmanagers tof tthe tbusiness. tThe t external
tgroups tinclude tinvestors, tcreditors, tgovernmental tagencies, tother t interested tparties, tand
tthe tpublic tat tlarge. t
5. The tbusiness titself, tnot tthe tindividual tstockholders twho town tthe tbusiness, tis tviewed t as
towning tthe tassets tand towing tthe tliabilities ton tits tbalance tsheet. tA tbusiness‘s t balance tsheet
tincludes tthe tassets, tliabilities, tand tstockholders‘ tequity tof tonly tthat t business tand tnot tthe
tpersonal tassets, tliabilities, tand tequity tof tthe tstockholders. tThe t financial tstatements tof ta
tcompany tshow tthe tresults tof tthe tbusiness tactivities tof t t t only tthat tcompany. t
Fundamentals tof tFinancial 1-1
tAccounting, t7/e
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
,6. (a) t Operating t– tThese tactivities tare tdirectly trelated tto tearning tprofits. tThey tinclude
t buying tsupplies, tmaking tproducts, tserving tcustomers, tcleaning tthe tpremises, t advertising,
trenting ta tbuilding, trepairing tequipment, tand tobtaining tinsurance t coverage. t
(b) Investing t– tThese tactivities tinvolve tbuying tand tselling tproductive tresources twith t long
tlives t(such tas tbuildings, tland, tequipment, tand ttools), tpurchasing tinvestments, t and t lending
t to t others. t
(c) Financing t– tAny tborrowing tfrom tbanks, trepaying tbank tloans, treceiving t contributions
tfromtstockholders,tortpayingtdividendsttotstockholderstaretconsidered t financing tactivities. t
7. The theading tof teach tof tthe tfour tprimary tfinancial tstatements tshould tinclude tthe
t following: t
(a) Name tof tthe tbusiness t
(b) Name tof tthe tstatement t
(c) Date tof tthe tstatement, tor tthe tperiod tof ttime tthat tthe tstatement tcovers t
8. (a) t The tpurpose tof tthe tbalance tsheet tis tto treport tthe tfinancial tposition t(assets,
t liabilities tand tstockholders‘ tequity) tof ta tbusiness tat ta tpoint tin ttime. t
(b) The t purpose t of t the t income t statement t is t to t present t information t about
t the t revenues, texpenses, tand tnet tincome tof ta tbusiness tfor ta tspecified tperiod tof ttime. t
(c) The t statement t of t retained t earnings t reports t the t way t that t net t income t and
t the t distribution t of t dividends t affected t the t financial t position t of t the t company
t during t the t period. t
(d) The t purpose t of t the t statement t of t cash t flows t is t to t summarize t how t a t business‘s
t operating, t investing, t and t financing t activities t caused t its t cash t balance t to
t change t over ta tparticular tperiod tof ttime. t
9. The tincome tstatement, tstatement tof tretained tearnings, tand tstatement tof tcash tflows t would
tbe tdated t―For tthe tYear tEnded tDecember t31, t2021,‖ tbecause tthey treport tthe t inflows
tand toutflows tof tresources tover ta tperiod tof ttime. tIn tcontrast, tthe tbalance t sheet twould tbe
tdated t―At tDecember t31, t2021,‖ tbecause tit trepresents tthe tassets, t liabilities tand
tstockholders‘ tequity tat ta tspecific tdate. t
10. Net tincome tis tthe texcess tof ttotal trevenues tover ttotal texpenses. tA tnet tloss toccurs tif t total
texpenses texceed ttotal trevenues. t
11. The taccounting tequation tfor tthe tbalance tsheet tis: tAssets t= tLiabilities t+ t Stockholders‘
tEquity. t Assets tare tthe teconomic tresources tcontrolled tby tthe t company. t t Liabilities tare
tamounts towed tby tthe tbusiness. t Stockholders‘ tequity tis t the towners‘ tclaims tto tthe tbusiness.
tIt tincludes tamounts tcontributed tto tthe tbusiness t (by tinvestors tthrough tpurchasing tthe
tcompany‘s tstock) tand tthe tamounts tearned t and taccumulated tthrough tprofitable tbusiness
toperations. t
Fundamentals tof tFinancial 1-2
tAccounting, t7/e
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
,12. The tequation tfor tthe tincome tstatement tis tRevenues t– tExpenses t= tNet tIncome. t Revenues
tare tincreases tin ta tcompany‘s tresources, tarising tprimarily tfrom tits t operating tactivities.
t Expenses tare tdecreases tin ta tcompany‘s tresources, tarising t primarily tfrom tits toperating
tactivities. tNet tIncome tis tequal tto trevenues tminus t expenses. t (If texpenses tare tgreater
tthan trevenues, tthe tcompany thas ta tNet tLoss.) t
13. The tequation tfor tthe tstatement tof tretained tearnings tis: tBeginning t Retained tEarnings t +
t Net tIncome t- tDividends t= tEnding tRetained tEarnings. tIt tbegins twith t beginning-of-the-year
tretained tearnings twhich tis tthe tprior tyear‘s tending tretained t earnings treported ton tthe tprior
tyear‘s tbalance tsheet. t The tcurrent tyear's tnet tincome t reported ton tthe tincome tstatement tis
tadded tand tthe tcurrent tyear's tdividends tare t subtracted tfrom tthis tamount. t(If ta tnet tloss
toccurs, tIt twould tbe tsubtracted, talong twith t the tdividends, tfrom tthe tprior tyear‘s tending
tretained tearnings tbalance.)The tending t retained tearnings tamount tis treported ton tthe tend-
of-year tbalance tsheet. t14. t t t The t equation tfor tthe tstatement tof tcash tflows tis: tCash tflows
tfrom toperating tactivities t+ t Cash tflows tfrom tinvesting tactivities t+ tCash tflows tfrom tfinancing
tactivities t= tChange t in tcash tfor tthe tperiod. tChange tin tcash tfor tthe tperiod t+ tBeginning
tcash tbalance t= t Ending tcash tbalance. t The tnet tcash tflows tfor tthe tperiod trepresent tthe
tincrease tor t decrease tin tcash tthat toccurred tduring tthe tperiod. t Cash tflows tfrom toperating
t activities tare tcash tflows tdirectly trelated tto tearning tincome t(normal tbusiness t t activity).
tCash tflows tfrom tinvesting tactivities tinclude tcash tflows tthat tare trelated tto t the tacquisition tor
tsale tof tthe tcompany‘s tlong-term tassets. tCash tflows tfrom tfinancing t activities tare tdirectly
trelated tto tthe tfinancing tof tthe tcompany. t
15. Currently, tthe tFinancial tAccounting tStandards tBoard t(FASB) tis tgiven tthe tprimary
t responsibility tfor tsetting tthe tdetailed trules tthat tbecome tGenerally tAccepted t Accounting
tPrinciples t(GAAP) tin tthe tUnited tStates. t(Internationally, tthe t International tAccounting
tStandards tBoard t(IASB) thas tthe tresponsibility tfor tsetting t accounting trules tknown tas
tInternational tFinancial tReporting tStandards t(IFRS).) t
16. The tmain tgoal tof taccounting trules tis tto tensure tthat tcompanies tproduce tuseful t financial
tinformation tfor tpresent tand tpotential tinvestors, tlenders, tand tother tcreditors t in tmaking
tdecisions tin ttheir tcapacity tas tcapital tproviders. t t Financial tinformation t must tshow
trelevance tand tfaithful trepresentation, tas twell tas tbe tcomparable, t verifiable, ttimely, tand
tunderstandable. t
Fun
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
, damentals tof tFinancial
tAccounting, t7/e 1-3
© t2022 tby tMcGraw tHill tLLC. t All trights treserved. tNo treproduction tor tdistribution twithout tthe tprior twritten tconsent tof tMcGraw
tHill tLLC.
