Solution manual for fundamentals of financial accounting 7th edition phillips

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Chapter1-13 withAppendixC&D n n n n




Chapter 1 n n




BusinessDecisions andFinancial Accounting
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ANSWERS TO QUESTIONS n n




1. Accounting is a system of analyzing, recording, and summarizing the results of a n n n n n n n n n n n n n




business‘s activities and then reporting them to decision makers. n n n n n n n n n




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 then
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again in the hands of the individual shareholder). A disadvantage of operating as a sole
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proprietorship, rather than a corporation, is that the individual proprietor can be held responsible
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for the debts of the business.
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3. Financial accounting focuses on preparing and using the financial statements that are made
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available to owners and external users such as customers, creditors, and potential investors who
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are interested in reading them. Managerial accounting focuses on other accounting reports that
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are not released to the general public, but instead are prepared for internal decision making and
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used by employees, supervisors, 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 stockholders who own the business, is viewed as owning the
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assets and owing the liabilities on its balance sheet. A business‘s balance sheet includes the assets,
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liabilities, and stockholders‘ equity of only that business and not the personal assets, liabilities, and
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equity of the stockholders. The financial statements of a company show the results of the business
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activities of only that company.
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Fundamentals of Financial n n 1-1
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,6. (a) Operating – These activities are directly related to earning profits. They include buying
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supplies, making products, serving customers, cleaning the premises, advertising, renting a
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building, repairing equipment, and obtaining insurance coverage.
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(b) Investing – These activities involve buying and selling productive resources with long lives (such n n n n n n n n n n n n n




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




stockholders,orpayingdividendstostockholdersareconsidered financingactivities.
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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 n n n n




(b) Name of the statement n n n n




(c) Date of the statement, or the period of time that the statement covers
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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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stockholders‘ equity) of a business at a point in time.
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(b) The purpose of the income statement is to present information about the
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revenues, 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
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distribution of dividends affected the financial position of the company during the
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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 income statement, statement of retained earnings, and statement of cash flows would be
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dated ―For the Year Ended December 31, 2021,‖ because they report the inflows and outflows
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of resources over a period of time. In contrast, the balance sheet would be dated ―At December
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31, 2021,‖ because it represents the assets, liabilities and stockholders‘ 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 expenses
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exceed total revenues.
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11. The accounting equation for the balance sheet is: Assets = Liabilities + Stockholders‘ Equity.
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Assets are the economic resources controlled by the company. Liabilities are amounts owed by
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the business. Stockholders‘ equity is the owners‘ claims to the business. It includes amounts
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contributed to the business (by investors through purchasing the company‘s stock) and the
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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 are
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decreases in a company‘s resources, arising primarily from its operating activities. Net Income is
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equal to revenues minus expenses. (If expenses are greater than revenues, the company has a
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Net 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
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which 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. (If a net loss occurs, It would be subtracted, along with
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the dividends, from the prior year‘s ending retained earnings balance.)The ending retained
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earnings amount is reported on the end-of-year balance sheet. 14. The equation for the
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statement of cash flows is: Cash flows from operating activities + Cash flows from investing
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activities + Cash flows from financing activities = Change in cash for the period. Change in cash for
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the period + Beginning cash balance = Ending cash balance. The net cash flows for the period
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represent the increase or decrease in cash that occurred during the period. Cash flows from
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operating activities are cash flows directly related to earning income (normal business activity).
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Cash flows from investing activities include cash flows that are related to the acquisition or sale of
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the company‘s long-term assets. Cash flows from financing activities are directly related to the
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financing of the company.
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15. Currently, the Financial Accounting Standards Board (FASB) 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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the United States. (Internationally, the International Accounting Standards Board (IASB) has the
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responsibility for setting accounting rules known as International Financial Reporting Standards
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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 as be comparable, verifiable, timely, and understandable.
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, 17. An ethical dilemma is a situation where following one moral principle would result in violating
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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) Identifythe alternative courses of action. n n n n n n




(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 be
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made. Following strong ethical practices is a key part of ensuring good financial reporting by
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businesses of all sizes.
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18. Accounting frauds and cases involving academic dishonesty are similar in many respects. Both
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involve deceiving others in an attempt to influence their actions or decisions, often resulting in
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temporary personal gain for the deceiver. For example, when an accounting fraud is committed,
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financial statement users may be misled into making decisions they wouldn‘t have made had the
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fraud not occurred (e.g., creditors might loan money to the company, investors might invest in the
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company, or stockholders might reward top managers with big bonuses). When academic
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dishonesty is committed, instructors might assign a higher grade than is warranted by the student‘s
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individual contribution. Another similarity is that, as a consequence of the deception, innocent
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bystanders may be adversely affected by fraud and academic dishonesty. Fraud may require the
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company to charge higher prices to customers to cover costs incurred as a result of the fraud.
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Academic dishonesty may lead to stricter grading standards, with significant deductions taken for
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inadequate documentation of sources referenced. A final similarity is that if fraud and
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academic dishonesty are ultimately uncovered, both are likely to lead to adverse long-term
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consequences for the perpetrator. Fraudsters may be fined, imprisoned, and encounter an
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abrupt end to their careers. Students who cheat may be penalized through lower course grades or
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expulsion, and might find it impossible to obtain academic references for employment
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applications.
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